LGO - WHAT NEXT

The "CPR" has come and gone, but there was just a brief spike before a sell down. Perhaps many were disappointed that the 1P and 2P reserves were not high enough as many were expecting 20x more for 1P reserves at the very least.

Admittedly, I was also expecting similar results; ie: 20x increase in 1P reserves.

However, when Challenge Energy's CPR (2012) is compared against the recent Synergy's CPR, there exist a deep contrast between the two (a fact that was highlighted by an LSE member).

First an foremost, there is no mention of any contingent reserves in the Synergy report.

Secondly, the new report is only based on the 8 wells drilled in 2014 and ignored the 30-well fully funded programme in Goudron.

Perhaps those were the reasons why the Synergy's Report is described as an Upgrade in Reserves and not a full CPR.

Nevertheless, the most positive indication is the potential of Goudron Field which has a five fold increase in oil in place, amounting to 805 million barrels.

But what does this mean actually?

LGO's current net back per barrel is in the region of US$14 per barrel. Let us take a very conservative approach and assume US$10 per barrel.

We adopt a 10% potential recovery by conventional means and 18% recovery via water flood. The 18% is based on the previous recovery method via water flood estimated by Challenge Energy in 2012

So 28% of 805 million x US$10 =  US$2.254 billion

The Pound equivalent is 2.254 billion/1.52 = 1.483 billion Pounds

This is equivalent to 14.3x current market cap or 45.76 pence

This value will gradually increase if the price of oil increases. Not to forget that the high estimate could be 1.335 billion barrels instead of 805 million barrels. Also this is solely based on the Goudron Field. LGO has an oilfield in Spain which could have its licence renewed prior to 2017 and of course, the ever tempting Cedros Peninsula which rests right in the middle of the rich Venezuelan Basin.

Therefore, ignore the current noise from the Greece crisis, and the CPR setback (which has been explained above) and concentrate on the potential prize.

Important news in coming weeks and months:

1) Pad 4 production. There are 3 wells on the pad.
2) Pad 5 drilling update and production. There are 4 wells on this pad.
3) Completion and commissioning of of 5,000 barrels storage tank at Goudron
4) Progress report on permission to construct Pad 6 and 7 (5 wells per pad), LACT meter, 4" pipeline, additional 5,000 barrels storage tank  and commencing on drilling and production from the upper Goudron Sandstones.

So you can imagine the many positives that could potentially raise LGO's share price. At the end of the day, you look at the massive infrastructures underway to support a boost in production. Total storage capacity  to increase to 12,750 barrels from 2,750 barrels, new 4' pipeline besides existing 2.5" pipeline, and inclusion of LACT meter to ensure continuous flow of oil to Petrotrin.

To really reap the rewards from LGO you need to have a longer time view in investment of 2- 3 years.

My disclosure: I am long LGO.