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Should I Invest In Leni Gas & Oil PLC Now?

oil rigJudging by the amount of investor bulletin board chatter about Leni Gas & Oil (LSE: LGO) recorded on page after page of virtual internet forum, the firm has been popular for the last couple of years.

Those tuned in to the company’s ‘story’, and who invested, saw the potential. There’s no doubt about that.

A bear market for oil shares

In recent years, things have been torrid for small-cap oil shares. Capital markets affecting the industry almost ground to a halt, and many firms found their carefully negotiated asset deals evaporating to nothing as bigger partners pulled the plug, or when the capital needed to go it alone with development failed to materialise.

The speculative oil-game became all about cash. If a company had cash, it could progress its projects. If a firm found itself a bit strapped, it couldn’t, and then faced a slow, grinding downward spiral as fixed costs consumed what little cash sat in the bank. Prime examples of lack-of-cash induced suffocation exist in Trap Oil and Aminex. Typically, share-price progress has been down, rather than up.

Yet, when near-term production potential starts to dangle the carrot of revenue and cash flow, beaten-down shares can spring back up with quite a kick. I had some luck with Aminex earlier in the year, trebling my investment, but that’s nothing compared to the multi-bagging returns enjoyed by Leni shareholders who were early to the party during 2013. From finding themselves in a gradually falling share for months, Leni shareholders’ fortunes changed radically mid-way through 2014, when the shares took off.

Production is key

Leni Gas & Oil has been ramping up oil production for some time. The firm’s prime project is its 30-well re-development of the Goudron Field in Trinidad, which first produced oil decades ago. In recent news, the company says it has just spudded the sixth well of the programme. What’s more, Leni plans to drill four wells using the same drilling pad and expects resulting production to be on-stream by the end of 2014.

The Goudron field contains 7.2m barrels of proven and probable reserves, and by reactivating old wells and drilling new ones, Leni expects to improve its production steadily. The strategy is going well and all the shareholder excitement this year seems to revolve around the project reaching a critical mass that looks set remove all the firm’s on-going funding headaches.

The revenue trend is up for Leni, with 2014 set to show even further progress:

Year to Dec

2009

2010

2011

2012

2013

Revenue (£m)

2.13

2.26

3.42

3.35

5.91

Unlike many other small oil companies, Leni Oil & Gas is starting to look capable of self-supporting its operations and forward project plans. Getting oil in the ground to market is the key, and those eying near-term production, but who aren’t there yet, such as Aminex, can only look on with envy.

What next?

Leni the business and Leni the shares are two different beasts. It’s often a mistake to hold onto shares regardless of valuation just to be a business-like investor. The firm enjoys a big private-investor following, which can generate some wild share-price swings capable of over-shooting a reasonable valuation.

Leni may not be overvalued at today’s 5.4p, but if I held them from six months ago when they traded at about 0.75p, I’d be tempted to invoke one of my own trading rules — the faster the rise, the faster the sale — and to take at least some, and maybe all, profits now. Although business progress seems set to continue for the firm.

I reckon the share price is likely to be volatile from now on, so buying the inevitable dips could be a smart forward tactic. Although Leni Gas Oil's prospects seem appealing, the Motley Fool team is excited about a different growth story.

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The potential for outstanding investor returns increases when value and growth converge, as with this under-appreciated gem of a firm.

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Kevin Godbold 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.