How do you approach stocks like UK Oil & Gas(LSE: UKOG) and Sirius Minerals(LSE: SXX)? Both are ground-breaking operations that have excited British investors like few others in recent years, and disappointed them in equal measure. They remain high-risk, high-reward stocks today.
Drill, baby drill
Right now, both are in the doldrums. These are long-term projects that were always going to hit hurdles, and the going has been slow lately. However, as I have previously suggested, the time to buy stocks like these is when they are down rather than when they are up. So do I think now could be the right time?
Today, you can buy shares in UK Oil & Gas for 1.60p each, well down on their 52-week high of 4.68p. Similarly, you can buy Sirius at 22.62p, well down from its year high of 39.78p. At least you’re not getting swept up in some short-lived, sentiment-fuelled spike.
Breaking new ground
Both companies are potentially massive. AIM-listed UK Oil & Gas could lead an onshore UK fracking revolution with a portfolio of eight exploration, appraisal, development and production assets. Sirius owns the largest and highest-grade deposit of polyhalite fertiliser in the world, and is now listed on the main market.
UK Oil & Gas is the more controversial. It owns Broadford Bridge in West Sussex and is a leading investor at Horse Hill, dubbed the ‘Gatwick Gusher’. But anti-fracking activists are warning local residents that fracking will pollute the air, poison the land, cause cancer and industrialise the countryside.
The group has now won an injunction against the activists, but the campaign will no doubt continue. Sirius has more goodwill, having secured its planning permissions, but faces other challenges.
It has to fund a 23-mile tunnel to transport facilities in Teeside, the second longest in the UK, only three miles shorter than Crossrail, and deeper than the Eiffel Tower. Although digging began in June, investors grew nervous when management lifted its stage 2 capital funding requirement, from $3bn to between $3.4bn and $3.6bn in September. That sparked fears of further equity fundraising, which will dilute existing stock.
Many investors are standing clear until they know what that means in practice. Although Sirius is aiming to deliver 10m tonnes of potash a year, the money won’t arrive in until 2022 at the earliest. The tunnel is designed to last for 100 years, so this is only for very long-term investors. I hold stocks in Sirius and will continue to do so. The rewards will be a long time coming, but I believe they will eventually flow.
As Rupert Hargreaves points out here, UK Oil & Gas has made tremendous progress lately, after declaring its Horse Hill oil field commercially viable following an extended well test. He also warned it’s running dangerously low on cash and is reliant on placings to raise funds, again, diluting existing shareholders.
With no revenues likely until the end of 2019, expect a tense year ahead. If you haven’t bought, yet further dilution could offer a buying opportunity – but a risky one.
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harveyj owns shares in Sirius Minerals but has no position in any other stocks 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.