The Motley Fool

Are you tempted by the UKOG share price? Here’s what I’d buy instead

Image source: Getty Images.

The UK Oil & Gas (LSE: UKOG) share price has fallen by almost 75% over the last year. But with the company in the final stages of flow testing its Horse Hill-1 Portland oil discovery, is this sell-off a buying opportunity for patient investors?

Today I want to explain why I’m concerned about the outlook for UKOG shareholders. I’ll also consider another oil stock which I believe could beat the market over the next few years.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

These numbers worry me

UKOG recently published the results of short-term flow tests from its Portland oil discovery. The HH-1 well flowed 401 barrels of oil per day (bopd) over a six-hour period and 414 bopd over a two-hour period.

However, the company warned that these flow rates “are not the long-term sustainable flow rates that will be utilised to assess the Portland’s commercial viability”.

Those long-term tests are still ongoing. But to be honest, I don’t understand why UKOG published the results of the short-term ones. In my view, they suggest that longer-term flow rates are likely to disappoint shareholders.

Positive cash flow?

The company hopes to generate positive cash flow in 2019. The key challenge it faces is to convert some of the group’s 13.2m barrels of discovered resources into commercial reserves. The drilling and testing operations required to attempt this are not expected to complete until the end of 2019.

In my view this is a risky situation. I’m not encouraged by the evidence so far and would prefer to invest in a company with proven reserves and production.

This stock could double

One possible choice in this sector is North Sea operator Enquest (LSE: ENQ). During the six months to 30 June, production rose by 46% to 53,990 barrels of oil equivalent per day (boepd). This increase was mainly due to the ramp up of production from the firm’s flagship Kraken field.

Higher oil prices and higher production lifted revenue for the first half by 86% to $548m. Operating profit for the period tripled to $105.2m.

The company also announced a deal to acquire a further 75% of the Magnus oil field from BP. Enquest’s debt-laden state means that this will have to be funded by shareholders, so today the firm launched a rights issue to raise $138m (£107m).

Good and bad news

The Magnus deal should add 60m barrels of reserves to Enquest’s assets, which the firm says will have a net present value of $500m. Expanding its ownership of Magnus should also deliver meaningful increases to production and cash flow.

However, the rights issue shares are being sold at 21p each, which is a 45% discount to yesterday’s closing price of 39p. Enquest’s share price is 13% lower at the time of writing, in response to this news.

The problem is the firm’s massive net debt, which was down $18m but was still at a hefty $1,973m at the end of June. To put this in context, analysts’ forecasts suggest that full-year profits for 2019 will be $239m.

I think shareholders face the risk that the company will be run only for the benefit of its lenders. But cash generated from operations rose by 132% to $318m during the first half. If this trend continues, debt could soon start to fall.

The stock currently trades on just 2.3 times forecast earnings for 2019. If debt starts to fall, I believe the shares could easily double from current levels.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.