Theres been much talk aboutOil & Gas Investments (LSE: UKOG) and Solo Oil (LSE: SOLO)in recent weeks. These two high-risk oil investments may deliver stellar returns, but there are a few things you must pay attention to in order to avoidhefty capital losses, too.
Solo Oil has traded in the 0.18p-1.31p range in the last 52 weeks, and currently changes hands at 0.55p. The stock is down 20% for the year, but has risen 192% over the last 12 months.
At the end of April, Solo Oilannouncedan asset swap deal that allowed it to take a 15.9% stake inBurj Petroleum Africa Limited (BPAL), with the option to increase its holding in BPAL to 20%. A few pundits praised management, yet the deal hasnt moved the needle, asSolos recent stock performance showed.
Its mission is to acquire and develop a diverse global portfolio of oil and gas assets, but the group is burning cash and seems to have limited funding options, which means investors may have to take into account meaningful dilution risk at least until Solo Oil generates some revenues.
Solo Oil has not generated any revenues over the last four years and, based on its current market cap of 31m, it trades at 15x the value of its current assets (as at30 June2014), while the multiple drops to 3x when intangibles are included, which is not ideal for value investors.
UK Oil & Gas Investments
UK Oil & Gas Investmentshas traded in the 0.30p-4.75p range over the last 12 months, andis up 517% in 2015.It currently changes hands at 2.60p, but has lost almost 50% of value since 9 April, when it hit 4.75p a share.
Its hard to determine how much oil will come fromitsHorse Hill-1well in the Weald Basin near Gatwick, whichmade the headlinesin the first half of April.Meanwhile, significant upgrades for estimates associated to its Upper Portland Sandstone oil discovery are encouraging, but it remains unclear whether this is going to be a game-changer for its valuation.
Big questions also hinge over funding requirements backing the development phase: where will the cash actually come from? Oil & Gas Investmentstrades at about 15x the trailing value of its current assets, which is not unusual for similar businesses, but if the group hasnt managed to secure therelevant permissionsto beginflow-testing its Horse Hill-1 well just asseveral reports have suggestedin recent weeks it could take a lot of time before the investment pays any dividends.
In short, if you buy Oil & Gas Investments at this price, you must be prepared to run the risk of being left empty-handed, in my view.
Frankly, I’d rather consider stocks such as those of the companiesmentioned in this value report by our analysts at The Motley Fool.
Alternatively, if you are eager to participate in the possible upside offered byOil & Gas InvestmentsandSolo Oil and similar speculative oil investments, I strongly advise you to include them in a defensive portfolio that could easily deliverone-year pre-tax gains north of 20%.
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