LGO Energy (LSE: LGO) has become one of AIM’s most followed companies over the past 12 months. Investors have been drawn in by LGO’s progress at its Goudron oil field in Trinidad, where production currently stands at around 1,000 barrels of oil per day (bopd).
However, despite an extensive drilling program, LGO’s oil production has hardly increased over the past year. At the end of September 2014, LGO’s management announced that the group’s oil production had reached a record 1,080 bopd, with
“… further increases expected in due course as new wells are drilled, completed and brought online as part of the Company’s development plans in Trinidad.“
But these increases have so far failed to materialize.
Steady production growth
At the end of last year production briefly surpassed 2,000 bopd and averaged 1,685 bopd for the month of December. However, current year-on-year production figures show only moderate growth, even after including potential production from new wells.
A recent press release from the company announced that group oil production averaged 951 bopd during the second quarter 2015. Still, this figure doesn’t fully reflect LGO’s current production. Production numbers from four additional wells only brought online at the end of the period were not included in the end-of-July update.
Management intends to update production guidance once all seven new wells completed during 2015 wells have been brought online. The four new wells, not included in current production figures, are labeled GY-672, 673 and 674. LGO’s 2015 drilling programme has been highly successful. All wells drilled have encountered hydrocarbons and LGO is nearing the end of its drilling programme with one well left to be drilled this year.
When tested, GY-674, in particular, delivered a natural flow rate of approximately 240 bopd, and LGO estimates that the well could achieve an absolute open-hole flow rate of approximately 500 bopd. Simply put, the additional production from these wells could increase overall group production by more than 25%.
Is LGO set for the big time?
The key question is, will LGO ever be able to make it to the big time? Well, the company has all of the tools needed to maintain growth at its disposal.
Management announced earlier this year that the estimated oil in place at the Goudron field in Trinidad has increased by over five-fold, to 805m barrels of oil after a new independent review was carried out. Moreover, group oil production is steady, and LGO has the finance in place to fund its development plans. Specifically, the company signed a $25m complex pre-paid swap facility with BNP Paribas during March.
$11.8m has already been drawn from this facility to fund the seven new Goudron wells and upgrade the field’s oil handling infrastructure, and $13.3m remains to fund LGO’s future development plans.
However, there’s one big red flag that jumps out when looking through LGO’s financial statements: cash flow.
Cash is king
For example, for full-year 2014 LGO reported net oil sales of 203,712 barrels but only reported a net cash inflow from operations of £503,000. As oil prices are currently trading near a six-year low, LGO’s financial position is unlikely to have improved this year.
In business, cash is king, and unless Lgo can improve its cash generation, a certain amount of uncertainty will cloud the company’s outlook. Overall, it’s not possible to estimate Lgo’s future potential with any degree of certainty at present.
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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.