Why Shorting (AIM:LGO) Leni Gas & Oil is a Very Bad Idea

It is pretty common knowledge that there is a raft of traders out there that survive by shorting AIM oil and gas stocks. Typically, the market cap threshold floor that would allow investors to short an AIM stock by way of a CFD, is 10 million STG.

Leni Gas and Oil has a market cap of 26 million STG and therefore places itself in line for investors to short the stock.

Over the years I have studied numerous books on investment strategy where I learned a lot about the art of hedge fund management techniques. Diary of a Hedge Fund Manager by Keith McCullough is a particularly good read.

Typically a hedge fund manager will look to discover the ideal investment horizon for a stock and determine the realisation horizon hopefully without any mental framing. If the stock keeps performing well, they will hold it.

When a fund manager shorts a stock, they base the decision on a range of factors, these normally include whether they think a stock is over valued, that the prognosis for the sector the stock is in looks bearish and where they have identified other factors such as board changes or other strategic events that they feel may serve to place a downward price pressure on the stock. In most cases a fund manager will look to place these sets of events onto a time line so a perspective can be secured to determine the key periods of reporting and news events that would serve to impact on the stock and then the short strategy can begin.

Timing is everything when it comes to making investment decisions. Which leads me nicely into Leni Gas and Oil. (AIM: LGO)

In April 2014 LGO received approval for a 30 well drill programme on its 100% owned onshore Goudron acreage in Trinidad, a proven oil production jurisdiction and paving the way for extensive future news-flow. Since the announcement, LGO has commenced delivering on its programme and has sunk its first well GY-664 where oil has been found and where the move into commercial production is underway. A second well GY-665 is now being planned.

LGO shares have risen 36% in April and are so far up by 18% this month. Clearly some shorters of the stock have been caught out by this positive news and I predict that many more could head the same way, Why?

LGO is currently a shorters nightmare stock, the company is grossly under-valued a factor that many fund managers would have to recognize and agree with, and also because of the fact that the company has served to lower its idiosyncratic risks in the following way when it comes to shorting.

1, It is generating cash and is unlikely to have to come back to the market for financing that would significantly dilute shareholders. Remember, LGO is one of the few companies on AIM that has withdrawn a SEDA facility, that was and still is unprecedented!!!!!!!!!

2, LGO is one of the most liquid oil and gas stocks on AIM, average daily volume is around 39 million shares trading about 390,000 STG in value each day meaning for your average trader you can get into and out of the stock quite easily, ideal for an investor who wants to go long.

3, News-flow. Shorters hate positive news-flow and LGO is full of it and will be for some time ahead

4, Sector and Operational risks have been massively lowered. The recent success at Goudron has proven LGO’s technical and operational ability to deliver. Oil production is always impacted by errors in geological assessment. LGO has proven that it really understands the proven oil bearing geology of Goudron and just where to sink a well. Oil is still trading at above 100 USD per barrel and there is little to suggest a pricing and sector risk. In terms of geopolitical risk, they are pretty low in Trinidad and LGO is proving now that it can monetize Goudron with its proven pipeline to refinery infrastructure.

Summary

Given the year ahead, you would be silly to short LGO, simply because the news flow will almost certainly catch you out, as it has done in April and May with the Goudron news and with 30 more wells planned could you afford to risk shorting against all this potentially good news flow, I think not