Lgo Energy PLC Slumps On New Fundraising

Lgo Energy PLC (LON: LGO) is falling but is it time to buy?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lgo Energy (LSE: LGO) has slumped today after the company announced that it had raised £1m before expenses by way of a company arranged placing. 

Lgo placed 111,111,110 new ordinary shares at 0.9p per share, taking the total number of shares in issue to 3,165,164,156. The funds used from the placing will be used as working capital in Lgo’s Trinidad businesses including initiating work on Lgo’s Goudron Sandstone programme.

Lgo is looking to fast-track the development of its Goudron sandstone program after an upbeat set of results from the first sandstone well, which was completed at the end of September. The well exceeded management’s expectations for production, and now, Lgo is looking to drill a further 10 sandstone wells in the near future.

A number of new wells are planned by the end of 2015. Management estimates that due to the relative ease of drilling in the sandstone, Lgo can drill the shallow wells at a cost of $400,000 per well in less than ten days. 

It’s believed that the Goudron Sandstone reservoir totals 343 million barrels of reserves. The Goudron Sandstone reservoir represents over 40% of the overall current Goudron Field’s estimated gross 805 mmbbls oil in place. 

Hard to value 

Bringing ten new, low-cost wells with daily production in the region of 60 barrels per day online during the next few months will certainly boost Lgo’s production. However, it’s difficult to value the company’s shares at present. 

Lgo’s shares closed at 1.1p at the end of last week, so today’s placing has been conducted at an 18% discount to the market price. This is a big red flag. Companies that undertake deeply discounted share placings do so at the expense of existing shareholders. What’s more, a deeply discounted placing can indicate that the company is struggling to raise the cash from other sources.

Lgo has already made heavy use of placings to bolster its balance sheet this year. Back in January, the company raised £1.58m via a placing of 52.5m shares, and a further £6.7m was raised in February. This capital raising was part of the company’s new debt arrangement with BNP Paribas. 

Still, overall Lgo looks to be heading in the right direction. For the six months ending 30 June 2015, the company reported a gross profit of £2.1m, up 150% year on year. The group’s pre-tax loss excluding non-cash items for the period was £187,000, a huge improvement on the figure of -£2.2m as reported for the first half of 2015. This growth is even more impressive when you consider the fact that the price of oil was roughly 50% lower year-on-year. Lgo’s gross oil sales increased 200% year-on-year. 

Despite these impressive figures, however, it’s difficult to value Lgo. It’s clear that the company has limited cash reserves and is struggling to turn a profit. Also, the volatile price of oil means that Lgo is at the mercy of the market. 

The bottom line 

If the price of oil recovers and Lgo turns profitable, the company could be a great long-term investment. 

So, if you already own the company’s shares, it might be sensible to sit back and ignore Lgo for a few years while keeping an eye on your other investments. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Is Avon Protection the best stock to buy in the FTSE All-Share index right now?

Here’s a stock I’m holding for recovery and growth from the FTSE All-Share index. Can it be crowned as the…

Read more »

Investing Articles

Down 8.5% this month, is the Aviva share price too attractive to ignore?

It’s time to look into Aviva and the insurance sector while the share price is pulling back from year-to-date highs.

Read more »

Investing Articles

Here’s where I see Vodafone’s share price ending 2024

Valued at just twice its earnings, is the Vodafone share price a bargain or value trap? Our writer explores where…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

The Darktrace share price jumped 20% today. Here’s why!

After the Darktrace share price leapt by a fifth in early trading, our writer explains why -- and what it…

Read more »

Dividend Shares

850 shares in this dividend giant could make me £1.1k in passive income

Jon Smith flags up one dividend stock for passive income that has outperformed its sector over the course of the…

Read more »

Investing Articles

Unilever shares are flying! Time to buy at a 21% ‘discount’?

Unilever shares have been racing higher this week after a one-two punch of news from the company. Here’s whether I…

Read more »

artificial intelligence investing algorithms
Market Movers

The Microsoft share price surges after results. Is this the best AI stock to buy?

Jon Smith flags up the jump in the Microsoft share price after the latest results showed strong demand for AI…

Read more »

Google office headquarters
Investing Articles

A dividend announcement sends the Alphabet share price soaring. Here’s what investors need to know

As the Alphabet share price surges on the announcement of a dividend, Stephen Wright outlines what investors should really be…

Read more »