The last time I covered LGO Energy (LSE: LGO) (18 June) – the AIM listed oil and gas producer – the share price was 3.6p.
Today’s share price at the time of writing is 1.5p, down a massive 58.33% in little over two months.
So what ‘went wrong’ at LGO during this time period?
What’s Wrong With LGO
Back in June three key issues were highlighted:
1. The way LGO Energy values its assets
costs associated with finding oil and gas end up as tangible assets if everything turns out well and as an expense and a drag on earnings if they do not.
2. The estimated intrinsic valuation of LGO Energy
without going into more detail regarding line by line asset values I estimate LGO Energy’s total assets to be worth £10 million: taking current assets at full value and counting as zero intangibles and goodwill and reducing PPE and oil and gas assets from £14.5 million down to £5 million (fire sale prices). With total liabilities of £11,490,000 that leaves a tangible book value of minus £1,490,000. Investors therefore have no asset protection in the classic Grahamite sense.
3. The amount of cash from placings that end up in LGO’s coffers
The fact that such a huge amount of cash inflows (£11,809,000) are from placings together with a lack of asset backing precludes LGO Energy from even entering my watch list.
What’s Happened Since?
Operationally, LGO has been very busy indeed.
- An updated resource assessment – a five-fold increase in best estimate oil in place and an increase in proven oil reserves of 110%
- A slight delay to the timing of testing – wells GY-672, 673 and 674 and on drilling Pad 4 have been slightly delayed leading to the Pad 4 production of oil beginning in mid July
- The confirmation of recoverable hydrocarbons – ‘Net hydrocarbon bearing pay in the C-sand interval is estimated as 260 feet. These observed net pay zones are in line with expectations for this well’
- A payment for the purchase of oil and gas lease rights – US$200,000 in part payment of remaining consideration of US$2.1 million. The final payment due at closing under the agreements is reduced to US$1.9 million.
- A testing update on the Goudron Pad 4 – ‘tests on GY-672 are continuing whilst the preliminary results of tests on GY-673 are being used to determine how best to balance production and reservoir management. The tests on GY-674 have been completed, and production will commence once surface facilities are in place’
- The confirmation of recoverable hydrocarbons – net hydrocarbon pay in the main C-sand target estimated as 222 feet. The well has been successfully cased for future production.
There have been further recoverable hydrocarbon updates and LGO looks set to begin the next stage of production in late August.
Is LGO’s Share Price Decline A Green Light To Get In?
One can only assume that LGO’s share price has been influenced by the declining oil price and a lack of meaningful forward guidance on production to date.
One thing that LGO has going for it is it’s low cost of production – at $10 a barrel that is very cheap indeed.
My view is that it will take an exceptionally long time for LGO to wean itself off of placings and onto cash inflows from oil production due to the operational position it finds itself in as well as it’s lack of asset backing.
LGO Energy just does not represent a safe long-term investment at today’s share price.
Sub 1p is about about where I’d take a look at LGO again.