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Why I’d ignore the UKOG share price and focus on this small-cap growth company

The 133% uplift in the share price of UK Oil & Gas Investments (LSE: UKOG) since the beginning of June looks good, but to put that in context, it comes after an 88% decline since the shares peaked in September 2017.

Movements like that have the potential to win or lose investors a fortune, and depending on individual buy and sell decisions, I’m sure that fortunes have been won or lost on this volatile stock. There’s oil in the ground, but the big question is, can the company get it out?

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A long and winding road ahead

In last month’s interim report covering the trading period to 31 March, chairman Stephen Sanderson said he is “very confident” that the firm’s comprehensive long-term testing campaign will provide the necessary data to fully assess Horse Hill’s Portland and Kimmeridge commerciality and help move the project towards timely production in 2019.

Maybe the company’s oil finds will prove to be commercially viable, but the directors’ language sounds to me like they are bedding down for a long and grinding process in order to establish that. Meanwhile, the firm has no earned-income and during the period raised £10m in a convertible loan note, of which £1.75m is outstanding. On top of that, a further £5.5m came in from institutional investors via a share placing after the period ended. Let’s hope that UKOG can commercialise its assets and get them earning cash inflow before existing investors are diluted into oblivion. However, I’m avoiding the stock and would rather take my chances with Zoo Digital Group (LSE: ZOO).

The company is generating fast-growing revenue by providing technology and services to producers of TV series and feature films so that their content can be subtitled and dubbed in any language and prepared for sale with online platforms such as Amazon, iTunes, Google and Hulu. The company claims that “this allows Zoo’s clients to leverage their original content to reach audiences worldwide.”

Building a competitive advantage

That may sound like a commodity-style business with little to differentiate Zoo’s services from those provided by other firms, but it reckons its strategy is to develop and employ “innovative,” proprietary cloud computing systems that “deliver significant competitive advantage and clearly differentiate the company from other providers of similar services.”

Today’s full-year results show good progress. Revenue increased 78% compared to the year before to $28.6m, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 35% to $2.4m and adjusted profit before tax shot up 400% to $0.5m. There’s clear evidence in the figures that Zoo is edging towards meaningful profits from its escalating revenue.

Chief executive Stuart Green said in the report that Zoo is becoming a “significant player in the media localisation market,” and with the recent introduction of dubbing services the company has achieved a “key milestone on our journey towards becoming a one-stop shop for all media localisation and digital packaging services across all languages.” I think Zoo Digital is one to watch closely with a view to buying some of the company’s shares.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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