LGO Energy - Overvalued and falling

PUBLISHED: Aug 26 2015 @ 07:56 | Comments (0) | More info about Long Over Short

The darling stock of the bulletin boards is (LSE:LGO) LGO Energy, but the transformational time for them is coming to an end. The share price is now way off highs last year of 6.95p (which gave the company a laughable market cap of over £200 million) and is now at 1.3p (a still overvalued £40m market cap). This is still grossly overvalued and will fall under 1p and stay there before the end of the year.

Its flagship Goudon field in Trinidad isn’t ‘world class’ no matter how many ‘expert’ bulletin board members say so. In classic PR ramping style the all awaited reserves update on Goudon led with the upside case STOIIP value and the 60% increase in 2P reserves to 11.37 mmbbls was far less than shareholders expected. This highlighted that their valuation on an EV/2P basis was way off and subsequently shares fell hard on this news.

Production is struggling due to high decline rates onshore Trinidad and is currently at 951 bopd, way down from highs of >2000 bopd at the start of this year. With re-payments starting soon on their $11 million drawn from their $25 million facility from BNP Paribas I believe there will be a cash shortage soon enough and another placing will be carried out. To keep production high there needs to be constant drilling which in turn chews up capital and in this low oil price environment the cash just isn’t building up in the bank like it would have 18 months ago. This isn’t the time to be drilling and bringing on new wells but LGO have to as they need to start paying BNP back.

This highlights the tough spot LGO are in and this is why the shares will fall under 1p by Christmas barring any major uplift in the oil price. For my stance to change on the stock I would need to see detailed financials of the company with an accurate cash balance.

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