This is what I’d do about the UKOG share price right now

If you’re tempted by the UK Oil & Gas plc (LON: UKOG) share price, read this.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Since my previous article about UK Oil & Gas (LSE: UKOG) in early November, the share price has dropped around 37%. But will 2019 be the year it shoots up again, perhaps back to the heady heights it achieved during 2017?

More assets

In mid-December, UKOG agreed to buy Solo Oil’s 30% shareholding in the PEDL331 onshore Isle of Wight licence, which includes the Arreton conventional oil discovery. The deal completed last week and UKOG has a 95% operated interest in the licence. UKOG paid just over £90k in cash and issuing more shares to cover the balance of the £350k total consideration. So that’s more dilution for existing shareholders, which is something we’ve become used to from the firm following a long line of similar transactions as it built up its assets.

Chief executive Stephen Sanderson said in the news release the first Arreton appraisal well is scheduled to be “drilled, cored and tested in the first quarter of 2020.” Meanwhile, the extended well test going on at Horse Hill has continued to produce oil. In an update on the 16 January, UKOG told us it has exported 114 road tankers full of the stuff to Perenco’s Hamble oil terminal and sold it at prevailing Brent crude oil prices, less a small deduction for handling and marketing.” The company announced its exciting development and production schedule last Wednesday.

Cash flow versus expenses

However, I’m sceptical that UKOG’s near-50% financial interest in Horse Hill will deliver enough incoming cash flow to offset the development and drilling expenses it will face on all its licences. It takes a lot of money to develop an oil field, and UKOG is a serial fundraiser. It has a history of coming back to the stock market repeatedly for more money to cover trading expenses and to buy into exploration and development licences. Every time it issues more shares, existing shareholders see their interests diluted.

Despite the firm’s fledgeling revenue from oil production, my Foolish colleague G A Chester pointed out in December that the current share price could already be over-valuing the company by more than 100%, based on the prices it paid for its oil assets. I reckon the firm has a long way to go and must invest a lot more capital before revenue from oil production will be capable of funding ongoing operational expenses.

We could see fast multi-bagging of the share price again if ongoing drilling and operational activity shows up oil reserves or gets the black stuff flowing faster to the surface. But, set against that possibility is the firm’s ongoing need for cash to keep things running, and I believe there’s a lot of pressure to the downside for the share price right now. So, for me, the stock is highly speculative and risky and that’s why I’d avoid the shares and look for growth opportunities elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »