Shorting LGO Energy From Today’s News... It’s a Very Bad Idea...... Remember What Happened in May 2014

Shorting LGO Energy

From Today’s News It’s a Very Bad Idea

Remember What Happened in May 2014

But This Time LGO Energy is De Risked & Potential Takeover Target

Back on the 20^th May 2014 I wrote an article that shed some light on the shorting of oil and gas equities by using CFD’s. I made a point about the market cap threshold of £10 million and highlighted some points about the strategy in shorting oil and gas equities. I chose to analyse the case of Leni Gas & Oil (Now LGO Energy). I commented at that time that shorting LGO was a particularly bad idea, given the headwind of future news flow that was pent up in the company as a result of the commencement of the re-development of the Goudron oil field in Trinidad.

I was highly confident that LGO’s Goudron field would deliver positive results for LGO. My assessment was based on the proven geology and oil-bearing qualities of Goudron, it was as simple as that. LGO went on to produce some amazing results from the first seven wells.

On the 20^th May 2014 when I released the article, LGO’s shares closed at 1.08p. since that date the shares have never traded lower. As predicted, just like the positive news flow, there was positive oil flow.

Today LGO Energy released details of the planned 2015 Goudron development program where the first drawdown of funds from a US$25 million oil swap finance facility provided by BNP Paribas.

Like back in May 2014, I am predicting that shorting LGO Energy from today is again a bad idea. I base this view again on the fact that I am confident, like before that Goudron will again throw up some great results from this latest program. But this time its different, LGO Energy have behind them a significant oil production flow that is coming in from “Goudron Phase 1”. The flow rates of Goudron’s wells have been properly managed by LGO Energy to prevent flow rates from dropping off from the initial production flow.

There are a number of factors that will serve to seriously hurt shorters of LGO in 2015.

Potential Takeover Target: LGO Energy is de-risked, what I mean by that, is that LGO is an infrastructure supported sustainable producer of oil from the Goudron field, where the petroleum geological system is properly understood and reserves internationally classified and verified. Financing for development is in place.

For an oil company looking to add production inventory to its portfolio, particularly a US company, then investing in Trinidad and LGO’s proven production, would be a no brainer, particularly given the production upside and also the low onshore production costs. At the moment there are a number of oil companies that are looking to re-balance production away from costly offshore production to more lower cost onshore production. We can see that happening today in the UK North Sea market.

Newsflow:  Combined with potential suitors for LGO, which I suspect will begin to emerge this year, will be the news flow and it will be considerable. AIM stocks thrive on news flow. Under AIM reporting rules, the major activities surrounding well development from Goudron will have to be reported. From mobilization of rigs, movement of drill pads, drilling, spudding, flow rates etc, all activities that will contribute to deliver positive news flow, from a raft of wells that will be developed at Goudron in 2015. Neil Ritson has a very strong track record of transparent reporting of operational activities and they will be abundant in 2015 for LGO.

Financials: LGO Energy are paid to manage Goudron no matter what the oil price is, but the cost per barrel of production for these low cost onshore wells is sub circa $40 per barrel. So here is the deal. In May 2014, the price of Brent Crude was circa $105 per barrel, however by August 2014 LGO had begun producing oil from the first six wells of its phase 1 Goudron program where the oil sold would have been at a profitable margin.

It was not until November 2014 that the oil price had dropped to $80 a barrel.  I would estimate that LGO Energy enjoyed net oil price revenues of around $90 a barrel from production flowing from the first six wells of the phase 1 Goudron program. And so for the reporting period to December 2014, I would estimate LGO Energy will produce some pretty good financial results. Some evidence of this can be seen in the unaudited Interim results to the 30th June 2014

Revenue for period increased by 40%, to £3,230,000 (1H 2013 £2,308,000).

Gross profit for period increased by over 150% to £797,000 (1H 2013 £310,000). Pre-tax group loss for period of £2,489,000 (1H 2013 loss of £1,389,000).

Pre-tax group loss excluding exceptional legal costs, for the period was £1,242,000 (£1,304,000 in 1H 2013)

Summary

It would be really silly to short LGO Energy at the moment in the same way it was back in May 2014. I would expect a stream of really positive production and financial news flows over the course of 2015 that will catch out shorters in a very big way. Clearly BNP Paribas, who would have done considerable due diligence on LGO as part of the process of arranging the recent financing package for Goudron, like what they see in both the company and Goudron. Experience suggests going long on LGO from today may not be such a bad idea.