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Is the UKOG share price heading for 7p again?

The share price of UK Oil & Gas Investments (LSE: UKOG) has staged a recovery over the last month, doubling from lows of about 1p to around 2.2p. Although the shares are still down by around 33% this year, investors appear to have new optimism about the company.

One problem that’s been solved for now is UKOG’s cash shortage. The firm’s half-year results showed a net debt position of £0.7m at the end of March. But over the last month, it’s raised £12.5m through share placings. This is expected to provide enough cash for “core projects over the next 18 months”.

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Good news on the horizon?

At the top of the list of core projects is appraising and developing the Horse Hill-1 well in the south of England. UKOG has a 32.4% beneficial interest in the PEDL137 licence area containing this oil discovery.

Operations have recently begun on an extended well test programme. This is designed to establish the well’s potential for commercial production and provide information for a potential second well, HH-2.

This testing is expected to last 150 days, suggesting that we could see results during the final quarter of this year. Management hopes that HH-1 will be converted into a production well following the tests, providing a much-needed source of revenue.

Cheap at this level?

The well test is expected to provide the data needed to produce estimated oil reserve figures for Horse Hill. This could be a major step forward in terms of cementing a valuation for the company.

However, we still don’t know very much about the flow rates achievable from HH-1. In my view the stock’s valuation reflects this risk. This situation is too speculative for me, but I think it’s looking more promising than it did a few weeks ago.

A 140% profit in 18 months

One growth stock that has impressed me greatly is IT infrastructure provider Softcat (LSE: SCT). This FTSE 250 firm has risen by around 140% over the last 18 months.

Softcat stock rose by 7% today, after the company said that profits for the year to 31 July would be “materially ahead of its prior expectations”. Market conditions during the latter part of the year have “been very favourable” and growth versus the previous year “has accelerated”.

It’s the second such upgrade in less than two months. Although no financial figures were provided, such rapid growth suggests to me that Softcat might be taking market share from rivals in this sector.

Is there more to come?

I estimate that today’s gains are likely to leave the stock trading at about 28 times forecast profits for the current year.

That’s not cheap, but the firm’s capital-light business model has allowed it to generate an exceptional 50%+ return on capital employed in recent years. My impression is that this is at least partly down to the firm being able to resell expensive IT equipment to its customers and collect payment before it has to pay its own suppliers.

This model means that despite a modest operating margin of around 6%, cash generation is very strong. The stock offers an attractive forecast dividend yield of 2.6%.

With further profit growth expected next year, I share my colleague Edward Sheldon’s view that shareholders should sit tight.

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Roland Head 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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