Shares in LGO Energy (LSE: LGO) saw heavy trading and fell by as much as 10% when markets opened this morning, before recovering to trade largely unchanged.
The cause of this activity was the publication of the firm’s final results for 2014.
1. Sales up 55%
Rising production drove LGO’s gross revenue up by 55% to £9.21m last year, despite falling oil prices.
That’s an encouraging performance. Gross profits rose by 163% to £2.95m, but this didn’t translate into an operating profit. LGO reported an operating loss of £4.2m and a pre-tax loss of £5.11m.
That’s a big increase from 2013, when the operating loss was £2.5m and the pre-tax loss £2.8m.
Operating cash flow was just about positive, with net cash flow from operating activities of £503,000. This excludes the eight wells drilled last year, which were funded by new debt and included in the firm’s £10m capex bill for 2014.
2. Production up 496%
According to today’s results, LGO’s monthly average production rose by 496% last year. Monthly output rose from 261 barrels of oil per day (bopd) in April 2014 to 1,557 bopd in December 2014.
In today’s results, Mr Ritson says that “a similar ramp-up” in production will occur in 2015. However, he also comments that this growth will be “tempered by the underlying decline of existing wells”.
It appears that Goudron wells are currently producing under natural pressure, without any artificial assistance. The firm’s plan is that when output from a well falls to zero, it will be recompleted using a pump in order to restart production.
LGO admits that due to a lack of production history using modern techniques in this field, “it is not yet possible” to forecast decline rates or plateau periods.
In my opinion, this makes it very hard to forecast the true production potential of LGO’s Goudron field, or its likely profitability.
3. This number rose by 93%!
One reason LGO made a loss last year is that the firm’s administrative expenses, which includes pay and benefits, rose by 78% to £4.9m in 2014. This dwarfed the firm’s gross profit of £2.9m.
Depreciation and amortisation charges rose from £324m to £1,480m, due to increased production. However, director pay and benefits also rose dramatically, climbing by 93% to £1.3m.
In total, LGO’s three non-executive directors received £61,000 cash and £276,000 worth of shares last year. This would probably have been higher, but two non-execs were only appointed in August.
The three executive directors (excluding David Lenigas) collectively received £253,000 in cash and £500,000 of shares, for a joint total of about 17 months’ service.
In my view, LGO shareholders might want to ask whether their board’s approach to remuneration is appropriate for a company with only 31 full-time equivalent employees and turnover of less than £10m.
Is LGO a buy?
I believe LGO is doing a decent job of extracting oil from Goudron in the face of the collapse in oil prices, which has affected the whole industry.
However, I reckon the market cap of £100m is pretty generous for a loss-making firm with a turnover of just £9.1m. I’m also concerned that director remuneration is too generous for such a small business.
At 3.4p per share, I don’t see much upside at LGO.
