Should I buy the UKOG share price? Or is this cheap FTSE 100 dividend stock a better buy?

Royston Wild considers whether UK Oil & Gas plc (LON: UKOG) is a better buy than this FTSE 100 (INDEXFTSE: UKX) income hero.

| 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.

It’s safe to say that UK Oil & Gas (LSE: UKOG) is a share only for the bravest of souls. Its share price has dropped by around two-thirds over the past 12 months, due chiefly to a series of disappointing testing updates at its gigantic Horse Hill asset

Uncertainty over the possible payloads at its West Sussex site isn’t its only problem, though. Once it finally begins pulling oil out the ground with gusto, there’s no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.

Uncertainty over the possible payloads at its West Sussex isn’t the only problem facing UKOG, though. Once it finally begins pulling oil out the ground with gusto, there is no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.

Fears of surging supply from the US, Canada and Brazil, a theme which has long been doing the rounds, are only likely to get worse as industry investment clicks through the gears. Latest data from Baker Hughes illustrates the scale of the problem, its weekly rig count showing another 10 oil units plugged into the ground in the last full week of January, taking the total to 862.

Too much risk?

Make no mistake though, the probability of a yawning supply/demand imbalance as global production heats up is an afterthought for UKOG investors right now. Right now, questions concerning whether the company is spreading itself too thinly is the major headache for investors. The acquisition of assets in the Isle of Wight last month also require yet another heavy cash call to the tune of around £260,000.

With the profits column predicted to remain barren until the beginning of the 2020s, additional cash raisings represent a very real threat to shareholders over the next couple of years, possibly longer should development work at Horse Hill disappoint in terms of either cost or timeframe.

There’s no doubting the quality of UKOG’s assets. They give the business all the potential in the world, but potential doesn’t create shareholder returns. Whether related to the balance sheet, the quality of its assets, or the business of bringing its oil to the surface, there are plenty of risks that investors need to consider today. And this makes the stock an unappealing destination for my cash, to say the least.

Blue chip beauty

Why splash the cash on such a speculative stock, then, when there’s plenty of great shares on the FTSE 100 with great growth and dividend prospects? Whitbread (LSE: WTB) is one such business that I’m convinced can generate great returns in the years ahead and without the stress that UKOG brings to the party.

Admittedly the Premier Inn owner isn’t having the best of it right now. A weak regional market is offsetting strong trading conditions for its London hotels and, added to this, its cost reduction programme is running below expectations. This is expected to contribute to zero profits growth in the next fiscal year to February 2020.

I prefer to concentrate on the excellent profits potential of Premier Inn’s expansion across the UK and into Germany in the coming years, a strategy I’m confident should get profits firing again following predicted short-term turbulence. And this means that Whitbread should keep its mega progressive dividend policy in business, too.

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.

Royston Wild 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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 »