It’s safe to say that UK Oil & Gas (LSE: UKOG) is a share only for the bravest of souls. Its share price has dropped by around two-thirds over the past 12 months, due chiefly to a series of disappointing testing updates at its gigantic Horse Hill asset
Uncertainty over the possible payloads at its West Sussex site isn’t its only problem, though. Once it finally begins pulling oil out the ground with gusto, there’s no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.
Uncertainty over the possible payloads at its West Sussex isn’t the only problem facing UKOG, though. Once it finally begins pulling oil out the ground with gusto, there is no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.
Fears of surging supply from the US, Canada and Brazil, a theme which has long been doing the rounds, are only likely to get worse as industry investment clicks through the gears. Latest data from Baker Hughes illustrates the scale of the problem, its weekly rig count showing another 10 oil units plugged into the ground in the last full week of January, taking the total to 862.
Too much risk?
Make no mistake though, the probability of a yawning supply/demand imbalance as global production heats up is an afterthought for UKOG investors right now. Right now, questions concerning whether the company is spreading itself too thinly is the major headache for investors. The acquisition of assets in the Isle of Wight last month also require yet another heavy cash call to the tune of around £260,000.
With the profits column predicted to remain barren until the beginning of the 2020s, additional cash raisings represent a very real threat to shareholders over the next couple of years, possibly longer should development work at Horse Hill disappoint in terms of either cost or timeframe.
There’s no doubting the quality of UKOG’s assets. They give the business all the potential in the world, but potential doesn’t create shareholder returns. Whether related to the balance sheet, the quality of its assets, or the business of bringing its oil to the surface, there are plenty of risks that investors need to consider today. And this makes the stock an unappealing destination for my cash, to say the least.
Blue chip beauty
Why splash the cash on such a speculative stock, then, when there’s plenty of great shares on the FTSE 100 with great growth and dividend prospects? Whitbread (LSE: WTB) is one such business that I’m convinced can generate great returns in the years ahead and without the stress that UKOG brings to the party.
Admittedly the Premier Inn owner isn’t having the best of it right now. A weak regional market is offsetting strong trading conditions for its London hotels and, added to this, its cost reduction programme is running below expectations. This is expected to contribute to zero profits growth in the next fiscal year to February 2020.
I prefer to concentrate on the excellent profits potential of Premier Inn’s expansion across the UK and into Germany in the coming years, a strategy I’m confident should get profits firing again following predicted short-term turbulence. And this means that Whitbread should keep its mega progressive dividend policy in business, too.