Shares in oil & gas minnow Lgo Energy (LSE: LGO) have slumped by more than 45% today at the time of writing, after the company revealed that it was in discussions over additional funding with its bank.
Lgo has been forced to take this drastic action following unforeseen circumstances in the company’s drilling programme.
The company has been obliged to plug and abandon well GY-678, the last of the seven wells Lgo had planned for 2015, targeting the C-Sand formation at Goudron onshore Trinidad. Lgo was forced to take this action after drilling equipment became lodged in the well. Lgo flagged the problem in September but was unable to find a solution to the problem.
Now, Lgo has been left with an enormous bill for the recovery operation, and the group is potentially liable for the cost of the downhole equipment. Recovery costs have amounted to $1.9m so far while replacement equipment is expected to cost in the region of $1.5m.
According to Lgo, in addition to the unforeseen recovery costs, the loss of GY-678 will also affect cash flows, meaning that Lgo will breach the loan covenants on its arrangement with BNP Paribas.
Talks are under way with BNP Paribas to renegotiate the terms of the loan, but until these talks are complete, no further amounts can be drawn against the facility. Lgo has $12m outstanding under this facility and the fall in the oil price now means that the repayments over the life of the loan won’t cover the amount borrowed.
However, it’s not all bad news. Although Lgo’s financial position is concerning, the company’s management remains upbeat about the future. Management has stated that despite the funding setback, Lgo will continue to develop the Goudron Sandstone prospect.
Unfortunately, it has become clear over the past few months that, like many of its peers, Lgo is suffering from the low oil price. At the beginning of October, Lgo was forced to raise £1m by way of a placing, to be used as working capital.
And now Lgo’s access to its facility with BNP Paribas is limited, it is likely that the company will have to raise more cash by the way of placings to fund operations.
Still, Lgo isn’t alone. The oil industry is currently under an unprecedented level of stress and many oil producers, both large and small are struggling with debt.
With this being the case, there’s a chance that BNP could decide to give Lgo more time. After all, over the past two years the company has shown that it can successfully operate and manage its production assets.
The bottom line
Overall, today’s news from Lgo is extremely disappointing. Nevertheless, the company isn’t out of options just yet. Year to date, Lgo has had a relatively successful drilling programme and the group is still producing oil which is generating cash.
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.