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.
