A contrarian pick

ChatGPT picked Enwell Energy (LSE:ENW). It’s an oil and gas exploration company that operates exclusively in Ukraine. The stock is down 10% over the past year.

It generates revenue in the same manner as many companies in the energy sector. After it finds a new site and makes it commercially viable, the sale of natural gas provides revenue for the business.

However, a big problem is that Ukrainian authorities have suspended some of the company’s licences. These were suspended a year ago, and although Enwell is pursuing legal challenges, there doesn’t seem to have been much progress so far.

Regarding the reasoning behind Enwell’s selection, ChatGPT noted that the group has initiated arbitration regarding the suspended assets. It’s seeking reinstatement, along with monetary damages. If the arbitration is successful, it will materially change Enwell’s cash-flow outlook and valuation. The AI bot feels it’s a classic small-cap, high-upside catalyst, which is why it was picked.

Struggling to get onboard

I’m really not sure about this penny share pick. For a start, oil and gas exploration companies are notoriously volatile. They often rely on heavy debt and funding to explore projects, with the hope of hitting it big on a particular one. For Enwell, the Q2 figures reported zero production from the summer. It simply doesn’t have a business unless it can either find new sites outside of Ukraine or resolve the situation in the country.

Furthermore, penny shares are already high-risk investments without adding one that operates in an active war zone. Although we all hope for peace in Ukraine, putting a date on it is impossible. So I struggle to see how any resolution regarding getting new licenses is going to be a priority. Even if they do acquire them, can the company really maximise potential when there’s a threat of enemy troops nearby?

Of course, I could be missing the point here. It had cash resources of $99.9m as of the end of September. Therefore, it can continue to operate even without generating a profit for some time. Further, I’m looking for small-cap stocks with huge potential. Therefore, it’s likely that if Enwell’s issues are suddenly resolved, the share price would skyrocket on optimism.

Ultimately, Enwell is too high-risk for me to consider investing. For others with a larger tolerance, it could be something to look at. But I think it highlights how AI can sometimes miss the mark when it comes to risk management, by not looking at the bigger picture.

The post I asked ChatGPT for the penny share with the biggest potential and this is what it found! appeared first on The Motley Fool UK.

As such, now could be a good time to buy oil and gas stocks such as BP (LSE: BP). The company’s financial performance is due to improve, while it continues to offer a relatively low valuation. However, it’s not the only company in the industry which could deliver improving share price performance in future.

Improving performance

Reporting on Tuesday was oil and gas exploration and production company Regal Petroleum (LSE: RPT). It was able to increase annual production by 65% in 2017 versus the prior year, with production of 2,800 barrels of oil equivalent per day (boepd). This was largely because of the significant contributions of the new MEX-109 well, in addition to the successful workover of the SV-2 well.

Due in part to higher production, the company’s profit for the year was $2.3m. This is a significant improvement on the previous year when the business made a loss of $1.3m. Cash generated from operations of $18m should help to fund the company’s 2018 development programme and is set to provide it with greater financial flexibility over the medium term.

With a focus for the current year on the completion of geophysical studies at the MEX-GOL and SV fields, Regal Petroleum seems to have a positive outlook. With a cash position of $14.2m and the potential for improving investor sentiment from a buoyant oil price, it could prove to be a strong performer in a rising sector.

Total return potential

Clearly, BP offers a lower-risk investment opportunity than its smaller sector peer. While it may have experienced significant difficulties in the last decade as a result of the 2010 oil spill, it now seems to offer an enticing risk/reward ratio.

The higher oil price is expected to boost profitability for the company and means that it trades on a forward price-to-earnings (P/E) ratio of around 14. This suggests that it offers a wide margin of safety at a time when the wider stock market is still trading at a relatively high level. And with profitability set to improve, dividend growth could be on the horizon. Dividend coverage of 1.1 times in the current year could prompt a higher payout that could increase the appeal of the stock at a time when it yields 6%.

Of course, a falling oil price would be likely to hurt the performance of BP and its sector peers. But with demand growth set to be higher than supply growth during the current year, the near-term prospects for the industry appear to be bright. And with efficiencies having been made in recent years, profitability across the sector could improve and make it a worthwhile place to invest for the long run.  

The post BP plc isn’t the only growth stock I’d consider buying appeared first on The Motley Fool UK.