LGO Energy (LSE: LGO) is an AIM listed oil and gas producer with onshore assets in Trinidad and Spain.
During 2014, as in 2013, the operational management of LGO concentrated primarily on advancing the field development operations in trinidad. this involved drilling the first operated well in LGO’s history, followed by seven additional successful wells, revolutionising the Company’s capability and production potential.
Management state that activities in Spain were managed in a ‘care and maintenance mode’ to allow LGO to concentrate on developing it’s proven reserves in Trinidad.
The LGO Balance Sheet
Moving straight to note 11 of the accounts we see that the intangible evaluation assets give no indication as to their intrinsic value whatsoever but LGO should not be singled out for this as it is a common practice.
Instead we are greeted with:
The Directors carried out an impairment review of the intangible assets and goodwill, and determined that a write down is currently not required.
Well I’m glad that’s cleared that up then.
The trouble with statements like this – and again LGO should not be singled out – is that at some future moment in time a write down is likely to occur. How likely is anyone’s guess but then again that is one of the fundamental flaws of intangible assets; their value can contract and expand at the stroke of a pen.
Just to hammer the point home, in the summary of significant accounting policies management have this to say about intangibles:
all licence acquisition, exploration and evaluation costs are initially capitalised as intangible fixed assets in cost centres by field or by exploration area, as appropriate, pending determination of commerciality of the relevant property
‘Pending determination of commerciality of the relevant property’.
Certain admin and finance costs are also capitalised in the same way.
The summary to the accounts continues:
if prospects are deemed to be impaired (‘unsuccessful’) on completion of the evaluation, the associated costs are charged to the income statement. If the field is determined to be commercially viable, the attributable costs are transferred to development/production assets within property, plant and equipment in single field cost centres
This is a nice and convenient way to make sure that 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.
Better to discount intangibles to zero for intrinsic valuation purposes as all else being equal those same intangibles will turn up either as reclassified assets on the balance sheet anyway or on the income statement which will necessitate an analysis of the quality of LGO’s earnings.
Anyhow 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.
LGO Energy Cash Flow Statement
The thing that jumped out at me the most from the cash flow statement was the amount of cash LGO Energy received throughout 2014 from the issue of share capital.
I’m not sure how may placings LGO got away but here’s a clue as to the magnitude of the equity dilution in 2014:
The fact that such a huge amount of cash inflows are from placings together with a lack of asset backing precludes LGO Energy from even entering my watch list.
It is yet another AIM listed oil and gas vampire feasting on the lifeblood of shareholder cash.