Leni Gas & Oil (LSE: LGO) has surged into the limelight this month. Thanks to the company’s success at the drill bit, Leni’s shares have racked up a gain of 222% during the last 30 days alone.
With this success behind it, it would seem that the sky is the limit for Leni’s shares, but should you invest?
Success
Leni’s first success came at the beginning of June, when the company struck oil at its GY-664 prospect in Trinidad’s Gros Morne formation. GY-664 took the company by surprise as the well’s initial production stood at 326 barrels of oil per day, three times more than estimates.
After this success, the company’s next well, GY-665, drilled only a few days later, encountered oil sooner than expected, and the company actually halted drilling early to bring forward the start of production. Leni is confident that GY-665’s production will match that of GY-644.
With the success of these two wells, Leni has decided to accelerate drilling and has sent out a second rig to help complete the company’s 30 well drilling program. What’s more, initial indications strongly suggest that there is more oil available in the Gros Morne Goudron sandstone formation than originally thought.
What does this mean for the company?
So, based on the results from these two initial wells, Leni is currently producing in the region of 500 barrels of oil equivalent per day.
This estimate is based on the fact that GY-664’s production stabilized at 240 barrels per day, and GY-665’s production to settle around the same level. Production from these two wells alone will give Leni annual sales of around $18m.
However, with another 28 wells to drill in the region, Leni’s production could grow further still.
But is it worth it?
There’s no doubt that drilling for oil is a risky business and while Leni has had success so far, plenty of risks remain.
With this in mind, it’s often best to value an oil exploration company on what we know now, rather than what could happen in the future.
Unfortunately, Leni’s current market capitalization of £80m looks slightly expensive based on the company’s production forecasts. In particular, Leni is targeting 2,000 barrels of oil production per day within 18 months, which equates to annual revenue of $73m or £45m. The company reported a gross profit margin of 13% within its last financial update, which indicates a gross profit of £5.6m based on production forecasts. However, net income is likely to be much lower.
For example, Leni reported administration expenses of £1.4m for the six months to 30 June 2013, so it’s reasonable to assume that full year costs will be in the region of £2.8m.
Plenty of oil left
Having said all of the above, Leni still has plenty of potential. The company has independently verified proven and probable original oil-in-place reserves of 126m barrels, of which only approximately 4m barrels have been recovered to date.
And it is possible that the company’s oil reserves could be even greater than these estimates, as according to the company’s CEO Neil Ritson:
“The results of modern electric logs acquired so far in the Goudron sandstones strongly suggest that there is greater net sand than was previously thought and this is likely to increase the previously estimated oil-in-place. When combined with improved drilling techniques we believe that greater potential exists in the Goudron sandstone and hence the decision to look at mobilization of a second drilling rig.“
So, it would appear that Leni has plenty of potential but risks remain. With this in mind, I’d strongly suggest you look a little closer at the company before making any trading decision.
