LGO Energy (AIM:LGO) Shares at a ten year low. Are we in the investment horizon?

LGO Energy (AIM:LGO)

Shares at a ten year low

But with the commencement of a turnaround strategy now under way, are we now in the investment horizon?

There is no secret to successful stock trading, it really is just a matter of buying low and selling high. Naturally the trick therefore is working out when is a low a low and when is a high a high.

It may come as a shock to some, but circa 50% of global stock market trading is undertaken through high-frequency trades on electronic algorithmic trading systems. Fund managers through their IT team, set certain criteria in a trading program based around market fundamental indicators such as currency strength, commodity pricing, weather, financial market indicator reporting news and even factors such as elections.

These factors are programmed into algorithms that are then aligned to stock portfolio’s that are often spit into sectors and where these underlying market indicators impact these sectors, the fund is then programmed to buy or sell.

So for instance, if a fund manager believes the oil price and its underlying value is likely to fall, that event is likely to impact on the stock price of oil companies and so the algorithm will be programmed to sell off that section of their portfolio and or sell short those oil stocks in the portfolio. 

The reverse is also true should the fund manager believe the underlying value of oil is likely to increase then the algorithm will be programmed to buy the oil section of their portfolio.

Last week my colleague had a series of meetings with London stockbrokers and he reported back that there was a real mood upswing underway in the market related to the oil and gas sector……..why I said?

The upside price increase exposure could be significant with a positive swing upwards in the oil price.

Well the view on the street is that the oil price is likely to bounce back and bounce back big. Investors believe that there are real bargains to be had in the market at the moment, particularly with the funding / IPO of decent oil and gas stocks, where pricing will be on the low side, but where the upside price increase exposure could be significant with a positive swing upwards in the oil price.

So this leads me nicely into LGO Energy. It is fair to say that following the exogenous economic and technical shock LGO suffered back in September 2015, caused by the Trinidad Goudron oilfield GY-678 well bore, obstruction and abandonment, LGO's share price took a hit.

The fallout from this shock saw the subsequent suspension of the banking arrangements put in place by BNP Paribas, (designed to help fund LGO's Goudron oilfield expansion and production) and the share price of LGO Energy fell sharply.

LGO’s share price was trading at around 1.35p during September 2015, having come off a high of 6p around September 2014.

One should not forget that in April 2014, LGO’s share price traded at circa 0.6p and then went on a bull run that saw the shares reach a price of 6p on the 29th September 2014, a bull run that coincided with very positive development activities underway at Goudron and one that certainly caught the shorters by surprise.

Whilst the bull run on oil started to slow in June 2014, it was not until mid September 2014 that the price slipped below the psychological level of $100.

For those that had invested in LGO in April 2014 and got out of the stock in September 2014, they would have made a return on their investment of a staggering 900%

Investing is about picking your investment and realisation horizons. Fundamentals are important and we should not forget that LGO, prior to the GY-678 incident, had actually been doing very well.

For 6 month financial reporting period ending 30 June 2015, LGO posted revenue of £6,610,000 (1H 2014 £3,230,000), an increase of over 100% and posted a gross profit in that period of £2,062,000 (1H 2014 £797,000), a rise of over 150% and had narrowed pre-tax losses for the group to just £187,000, not bad considering the huge investments the company was making in sinking new wells at Goudron.

Are we now in the investment horizon for LGO?

I think we are and the reasons for this are as follows

1, The oil price is starting to recover and this should signal sector improvements as funds aligned to algorithmic trading push buying volume back into the oil sector. For example, April was a good month for BP, their shares have now started to post gains from losses in February and March. This momentum will inhibit the shorting of oil stocks. If oil goes on another bull run, which is likely given the fact the International Energy Agency is now commenting that oil oversupply will shrink dramatically in 2016, and a tightening of the market is now on the cards, oil stocks like LGO’s should see  a sector positive investor sentiment return into their stock.

2, LGO’s turnaround program at Goudron is underway and is starting to see production rise to 500 bopd and with more well recompletions, this production level should continue to rise. With bopd all in costs at Goudron of circa $27 bopd and with rising oil prices, fundamentals are looking better. The BNP debt is only $4.8 million and should be possible for re-structuring. On that front it is important to remind the market that LGO has two very positive independent technical and geological reports on Goudron, by respected consultants such as LR Senergy (http://www.lr-senergy.com), these reports will help in any debt restructuring process.

3, LGO’s shares are trading at 0.2p. This is a five year low and has seen the market cap of the company fall to just above £10 million ($14 million)

If Brent can hit $50, LGO will net circa $23 bopd. I anticipate production volumes through the re-development program to hit 650 bopd, over 12 months this should deliver circa $5 million in revenue, which is 35% of LGO’s current market cap valuation. Accordingly, the prognosis for an LGO share price recovery looks pretty good.

With these factors in mind it may be time for LGO to take investors on another run, like they did between April 2014 and September 2014. The fundamentals for this bull run are now lining up very nicely.