Why LGO Energy PLC Is Up 503% This Year

It’s been a year to remember for many LGO Energy (LSE: LGO) shareholders, who have seen the value of their stock rise by more than 500% in 2014.

The acquisition of the Goudron field in Trinidad in 2012 has proved an inspired move by LGO’s founder, David Lenigas.

In May this year, LGO’s share price was ignited when the firm issued a statement confirming audited proved and probable reserves of 7.2m barrels of oil, with a further 15.9m barrels of contingent resources.

Impressive production growth

Since then, LGO has drilled a series of new production wells, reinvesting all of its cash flow into production, with impressive results.

As of 4 December, group production had risen above 1,250 barrels of oil per day — but this figure almost doubled on 15 December, when LGO announced that its most recently completed well, GY-670, was flowing at more than 1,000 bopd.

Two more wells are currently being brought on line, suggesting that group production may be close to 2,500 bopd by the end of the 2014 — an increase of more than 100% in just three months.

Is LGO profitable?

LGO chief executive Neil Ritson has made it clear in media interviews that all of the firm’s cash flow has been reinvested to fund the firm’s 30-well drilling plan for the Goudron field.

That’s fair enough, but the firm’s interim accounts for this year showed a substantial operating loss, too, suggesting to me that the company needs to benefit from economies of scale in order to reduce its costs per barrel produced.

In the light of the falling oil price, it’s not yet clear to me how profitable LGO will be in 2015, as rising production will partially be cancelled out by lower oil prices.

What’s next?

LGO is continuing to drill and making good progress — if the firm can find a few more 1,000 bopd wells, its production profile could be transformed in the next year.

However, many of the firm’s wells produce much less oil, and LGO currently looks quite generously valued to me: the firm has a market cap of more than £110m, but sales for the last twelve months were just £6.8m.

Buy, sell or hold?

Given LGO’s generous valuation, the need for significant capex in 2015, plus the risks presented by the falling price of oil, I think it’s time for investors to lock-in some gains: I rate LGO as a sell.

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Roland Head 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.