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Should Ophir Energy Plc Buy Up LGO Energy PLC?

There are more ways to make money as an oil explorer other than just discovering it and pumping it yourself. For one thing, it takes a lot of cash to progress a discovery to the production phase, and it can make more sense to sell up once you’ve found the stuff and leave the production work to someone else. Dragon Oil, for example, is currently being pursued by majority shareholder Emirates National Oil Company.

Lots of oil

A company that really doesn’t have a lot of cash is LGO Energy (LSE: LGO), formerly known as Leni Gas and Oil. The company last went looking for funding in February, when it raised £4.3m through an equity issue and took on an oil-swap debt facility with BNP Paribas. Raising the cash was easy, because LGO is sitting on some impressive reserves and its regular drilling reports have been exciting.

The firm just keeps on finding fresh oil in its ongoing drilling programme at its Goudron field in Trinidad, and all the signs suggest it will be highly profitable even at current price levels — Brent crude has slipped below $65 a barrel again today, but LGO’s production costs could be little more than half that.

Investors have, of course, noticed and pushed the price up, and at 3.1p today we’ve had a 170% rise over the past 12 months, albeit a little erratically. But even at today’s market cap of £97m, LGO could be a tasty takeover target for someone with cash.

Bags of cash

Ophir Energy (LSE: OPHR) is one of those rare explorers which is not yet profitable, but which has bags of cash. Valued at a market cap of £923m, Ophir had almost $1.2bn in cash and equivalents as of 31 December. A chunk of that will have been used up since, and with the share price having fallen 49% over the past 12 months to 131p, a rosy future is by no means certain for Ophir.

Ophir is focused on Africa, but like LGO it’s registered and headquartered in London, so could it beef up its prospects by trying to snap up LGO’s assets?

Well, Ophir has actually divested some of its own assets, having offloaded its 20% interest in several blocks in Tanzania to Pavilion Energy during the past year. But as a further part of its target of of “a sustainable financing strategy” it did buy out Salamander Energy in March after eyeing up its low break-even costs of production.

Could it happen?

So we have one company getting rid of higher-costs assets and buying up lower-cost assets, and another that’s sitting on substantial low-cost oil reserves that are almost sure to be pumping profitably before too long. Would a takeover attempt by Ophir for LGO make sense? I think it’s unlikely, but stranger things have happened.

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Alan Oscroft 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.