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Why 2015 Could Be Lgo Energy PLC’s Year

Lgo Energy (LSE: LGO) is surging this morning, up 33% at the time of writing after the company revealed that the flow rate of its Goudron GY-670 well, has exceeded 1,000 barrels of oil per day.

The GY-670 well is the latest well to be completed at LGO’s Goudron Field in Trinidad. The well is flowing at a stabilised, but highly restricted rate of 1,085 bopd. Over the last 48 hours, the well has flowed at an average rate of 1,104 bopd. What’s more, according to LGO’s press release on the matter, GY-670’s open-hole flow rate exceeds 6,000 bopd.

Neil Ritson, LGO’s Chief Executive, commented:

“The first of the three wells on Pad-3, and the sixth completion in the eight wells we have drilled in 2014 has provided our best initial oil rate to date. Higher reservoir pressures in this area of the field combined with further improvements in drilling and completion techniques have given us the highest flow rate ever seen in the Goudron Field. Two further wells, GY-671 and GY-699, have yet to be placed on production on Pad-3.”

More to come 

There’s no doubt that today’s news from LGO is game changing, and comes only a few days after LGO’s management announced that overall production had exceeded 1,250 bopd for the first time. A flow rate in excess of 1,000 bopd from the GY-670 wells will help the company nearly double production. 

But that’s not all, further production increases are likely to occur over the next few weeks and months. Indeed, as mentioned above, two additional well in the Goudron Field, GY-671 and GY-699, have yet to be placed on production. These two wells could add yet another boost to LGO’s output. 

LGO’s year 

With production surging, I believe 2015 really will be a great year for LGO, and the company could now offer one of the best growth opportunities around. 

However, as of yet there are no City analysts that cover LGO, so it’s difficult to try and place a valuation on the company’s shares. Still, with the company now producing in excess of 2,000 bopd, at current prices, it’s reasonable to assume that LGO will generate revenue of at least £29 million next year. That’s a four-fold increase on the company’s reported revenue for 2013.

All in all, it looks as if LGO is well placed to report its maiden profit next year, and the company’s production could rise further as additional wells come online. 

Nevertheless, having said all of the above, like the rest of the oil and gas industry, at present LGO’s future is threatened by low oil prices. However, with production surging, increased output should offset much of the decline in oil prices. The 2015 revenue figure above is based on the current oil price of $62/bbl. If the price of oil reverted back to $100/bbl, LGO’s annual revenue could hit nearly £50m next year. 

High-risk high-reward 

So 2015 could be LGO's year but risks remain and for the time being, while LGO's production is rising, risks remain.   

That's why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night.

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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.