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Is LGO Energy PLC Shrugging Off Oil Price Woes?

Most oil company share prices are up this morning as the price of oil bounces off recent lows. That seems most apparent with those firms actually producing oil. However, some share prices have shot up high above the crowd, suggesting another factor at work: good, old-fashioned, positive news flow.

LGO Energy (LSE: LGO) is one notable outperformer, seeing a good response to news from its producing Gouldron field.

Lift Off!

As I write, LGO Energy’s share price is up around 55% today to 3.7p. That’s a massive change in sentiment sparked by an announcement that oil is flowing better than expected. Indeed, the news flow suggests that recent share-price weakness proved to be a great buying opportunity for investors eying the production story at LGO Energy.

So what does an exciting oil company announcement read like? Well, this morning the firm said its most recently completed well, GY-670, at the Goudron Field in Trinidad was perforated on 12 December over a 177-foot interval of oil pay in the C-sands and is now flowing at a stabilised, but highly restricted, rate of 1,085 barrels of oil per day (“bopd”) of 37 degree API water-free oil through a 9/32″ choke with a well-head flowing pressure of 1,290 psi.  Over the last 48 hours, the well has flowed at an average rate of 1,104 bopd. The initial open-hole flow rate calculated for the well exceeds 6,000 bopd.

That’s great news, and the chief executive said this result is the firm’s best initial oil rate to date.  Higher reservoir pressures in this area of the field combined with further improvements in drilling and completion techniques to produce the highest flow rate ever seen in the Goudron Field.  No wonder the shares are soaring.

More to come

This latest result is from the first of three wells on Pad-3, and the sixth completion in the eight wells LGO Energy drilled in 2014. Two further wells, GY-671 and GY-699, have yet to move to production on Pad-3.  Results from the firm’s prime project, a 30-well redevelopment of the Gouldron Field in Trinidad, have been encouraging for some time, making LGO Energy something of an investors’ favourite during 2014.

The story seemed to sour a little recently with the plunge in the price of oil that took so many by surprise. However, a great story is a great story, and LGO Energy proves, today, that the quality of an asset can overcome short- to medium-term worries about volatile commodity prices. The Gouldron field contains 7.2m barrels of proven and probable reserves, and first produced oil many years ago. LGO Energy took over the field and its strategy of reactivating old wells and drilling new ones is proving to be a great success.

I think it’s safe to predict that LGO Energy will add to an impressive record of revenue generation this year. Here’s how the firm has grown its income, lately:

Year to Dec

2009

2010

2011

2012

2013

Revenue (£m)

2.13

2.26

3.42

3.35

5.91

Having increasing oil production generating steady revenue and cash flow is the prize for most oil explorers. It’s okay finding the stuff, but if small oilers can’t move through the cost-barrier to production, cash can become constrained, putting such firms at the mercy of the capital markets.

With oil flowing, and production rates going up, LGO Energy is in a strong position, unlike many other small oil companies that find themselves crippled due to lack of funds.

What next?

LGO Energy is developing a strong oil field, which underpins the firm’s existence. Any further share-price weakness could present another buying opportunity; however, I’d be cautious about chasing the share price higher on a robust up-day like today, even if the news is good.

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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.