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Can Tullow Oil beat the UKOG share price, as both head upwards?

A 75% fall over 10 years is hardly a great result, but it’s what’s happened to the Tullow Oil (LSE: TLW) share price. We have seen a bit of a pick-up recently with a 30% gain since 7 August, though we’re still looking at a 4% fall over the past 12 months.

The reason for Tullow’s fall from grace is its debt, fuelled by those horribly low oil prices during the crisis when a barrel dropped to around $30. Prices seem to be settled at around the $60 mark, and I can see further upside over the next five years.

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Down, but not much

But for now, the impact on Tullow’s debt is what concerns me, and it was down at the halfway point this year at $2.95bn — though that’s really not a big drop from the $3.08bn figure of a year previously.

I also wonder if investors are missing Tullow’s actual exploration operations, as the firm announced a new oil discovery in the Guyana basin. The firm’s Joe-1 exploration well encountered 14 metres of net oil pay in high-quality oil bearing sandstone, and that provides cautious optimism for the Orinduik block where the company has identified a number of other prospects.

But Tullow’s exploration is seriously hampered by that debt — my colleague Roland Head has pointed out how Tullow has already been struggling with the costs of Orinduik exploration and development.

I like Tullow’s oil prospects, but while it’s being held back by that debt — and it’s set to pay dividends that account for 40% of forecast earnings, which I think is madness — I’m still staying away.

Another price rally

In the couple of weeks since I explained why I wouldn’t touch UK Oil & Gas (LSE: UKOG) shares with a bargepole, the price has ticked up noticeably — up nearly 18% so far in September, to add to August’s 13% gain. So what’s happening, and have I got UKOG all wrong?

We’re still looking at a two-year loss of nearly 85%, so it’s not exactly a millionaire-maker yet, but recent news has been sparking interest.

The company has completed the acquisition of Magellan Petroleum Investment Holdings, for £12m in a combination of cash and UKOG shares, meaning it now has an 85.6% stake in the Horse Hill oil field — up from 50.6%. On top of that, UKOG has been granted long-term oil production planning consent at the site, and it’s been making moves to accelerate its test drilling.

One of the firm’s lenders has also decided to convert £600,000 of its £5.5m loan into UKOG shares, which might be seen as a vote of confidence. It does add yet more to the massive dilution that’s pretty much wiped out early investors’ stakes, mind.

Good to buy?

On the face if it — owning most of the assets, planning permission in place, drilling progressing — it might sound tempting. But it comes down to whether we’re convinced UKOG really is sitting on the vast commercial reserves that have sustained speculation for years.

And I’m not. Not when there’s still no sign of a Competent Persons Report, and no interest whatsoever from the big oil companies. No, I’m keeping hold of my bargepole — and I might even get a longer one.

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Alan Oscroft 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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