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Typically, penny shares carry a higher level of risk than larger peers. That’s why I need to conduct more in-depth research when seeking smart options. On this occasion, I thought I’d ask the AI chatbot ChatGPT what it believed was a good pick right now, with a surprising result.
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.
