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Forget UKOG! I’d invest in this small-cap opportunity instead

In my view, G A Chester put together an excellent article recently that demolishes the case for investing in UK Oil & Gas  (LSE: UKOG), the unprofitable oil explorer focused on operations onshore in England.

UKOG made the headlines around three years ago with its so-called Gatwick Gusher. But far from the Weald Basin soon being awash with the black stuff, the company has encountered several disappointments leading to delays. By my reading between the lines, I reckon the company has been navel-gazing and back-peddling from its earlier enthusiastic announcements when the Horse Hill well gushed.

Unsustainable gushing?

Indeed, Chester builds a good case for the ‘gushing’ being just a short-term, transient anomaly, and I urge you to read his article for more colour. The bottom line is he thinks UKOG is probably worth around half the £59m market capitalisation it currently sports.

I think even that valuation could be generous. Based on the company’s performance to date, and the highly speculative nature of operations, I reckon there’s a good chance UKOG could be one of those stocks that eventually runs its shareholders’ investments to the ground – a big, fat zero.

That’s the risk you run by ‘investing’ in highly speculative situations. On the other hand, the shares could multi-bag if things go well from here, of course, and that’s what keeps some investors interested. But I’m too focused on protecting my portfolio from downside risk to be one of them.

Frustrating oil exploration history of the Weald

According to a 2014 report produced by the British Geological Survey (BGS), hydrocarbon exploration of the Weald “entered its first major phase” between the 1930s and the 1960s. Several wells were drilled, and then the discovery of the Wytch Farm Oilfield in 1973 in the adjacent Wessex-Channel Basin “led to a resurgence of interest and activity in the Weald Basin.”

Yet, despite all this exploration over the years and a few relatively minor oil and gas producing wells being established in the region, no company, big or small, has so far managed to bring blockbusting torrents of oil to the surface. It’s hard work getting hydrocarbons out of the Weald Basin it seems, because the geology is difficult.

Call me sceptical, but I doubt whether a tiddly firm such as UKOG, with its limited resources, is likely to triumph where bigger enterprises have failed or encountered disappointment before.

I reckon the individual-company risk you take on by investing in UKOG is enormous. However, I’m keen to invest in the small-cap sector because the growth potential overall is attractive when it comes to smaller firms.

A promising small-cap investment

One investment vehicle I like the look of is the Vanguard Global Small-Cap Index Fund – Accumulation. This tracker has a stake in around 4,425 small-cap companies globally. It’s a neat way of getting instant diversification across small-cap companies, mitigating the risks from any one share performing badly, and getting exposure to the upside potential of the small-cap sector.

If you are sold on the idea of investing in small-cap trackers, why not use this article as a starting point and research some of the other small-cap trackers available as well?

Hidden Opportunity

The Alternative Investment Market (AIM) boasts the enviable record of being the most successful growth market in the world – so it makes sense to go digging for gold there, right? Well, plenty of companies have listed there and lost…

However, one strategy for capturing capital gains is to invest in expanding firms that have already proven their mettle with rising revenues, earnings and cash inflow – and we believe we’ve identified a small-cap winner with lots of ongoing growth potential in our recently refreshed report, “A Top Small-Cap Share From The Motley Fool”.

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Kevin Godbold has no position in any share 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.