Which Should You Buy: UK Oil & Gas Investments PLC Or Solo Oil PLC?

There’s been much talk about Oil & 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 avoid hefty capital losses, too. 

Solo Oil

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 Oil announced an asset swap deal that allowed it to take a 15.9% stake in Burj Petroleum Africa Limited (BPAL), with the option to increase its holding in BPAL to 20%. A few pundits praised management, yet the deal hasn’t moved the needle, as Solo’s 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 at 30 June 2014), while the multiple drops to 3x when intangibles are included, which is not ideal for value investors. 

UK Oil & Gas Investments 

UK Oil & Gas Investments has traded in the 0.30p-4.75p range over the last 12 months, and is 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.

It’s hard to determine how much oil will come from its Horse Hill-1 well in the Weald Basin near Gatwick, which made the headlines in 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 Investments trades at about 15x the trailing value of its current assets, which is not unusual for similar businesses, but if the group hasn’t managed to secure the relevant permissions to begin flow-testing its Horse Hill-1 well — just as several reports have suggested in 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.