Some might wonder why UKOG, a negligible producer, has a share price which is above LGO, which is producing more than 1,000 bopd (951 bopd + Pad 4 240 bopd + Pad 5 325 bopd).
I will attempt to differentiate between the two.
UKOG is more stable and less volatile due to the following reasons:
1) It has not ready started on any well development leading to production. It costs money when a well is developed. This include drilling, completing and maintaining it. So at this juncture UKOG cash burn is very little.
2) UKOG has a large reserve of Oil In Place. Easily more than 10 times LGO's. There is a value to this asset and in a stock broker note recently, easily command a value of 13 pence
3) UKOG has the following news due
- Horse Hill flow test
- Oil In Place reserve in the Isles of Wight
- Drilling at Brockham which is next to Horse Hill
4) All of UKOG's activities will reinforced the view that it holds billions of barrels of oil in areas which it hold licenses.
Conversely, LGO's price is undervalued due to the heavy shorting by traders in view of the depressed oil price. Also the vendor of the Taba oilfield, TRIN with whom LGO signed an agreement in 2014 is threatening to sue LGO as LGO had not gone ahead with the deal. According to LGO, this is because TRIN had not met the conditions vital to the execution of the contract. TRIN is now going into administration due to heavy losses. This is the negative news that provide the opportunity for shorters to short LGO.
LGO current challenges are:
1) Continue to operate amidst the low price of oil. LGO's lifting cost is less than US$10 per barrel but the low crude price it impacting its ability to generate high revenue.
2) LGO has a loan with BNP. This give shorters opportunity to short the stock by claiming the fall in revenue is insufficient to serve the loan and that a new placing of shares will come further diluting the shareholders base. This is scare mongering but it works to the benefit of the shorters.
3) LGO's production is restricted by its infrastructure. The good news is that LGO is upgrading the infrastructure, so this is a sign that they are going to expand production.
4) So far 7 wells have been drilled but only 2 put on production. This could be due to the lack of infrastructure to further improve its production.
5) LGO is restricting the output from previous wells to better managed the reserve due to the depletion of pressure. So that is why there is a sharp decline in production. But many interpret is a a natural depletion. I believe LGO wants to preserve the natural flow of the oil and thus better managed the resource.
At this juncture the price of crude oil will continue to weigh on LGO and provide shorters with opportunity to bring down the price of the stock due to its high liquidity.
Owing to this, it is best to stay on the sidelines rather than having additional capital tied up. The price war between OPEC and US shale oil producers will continue indefinitely and as long as oil remains bearish, it is unlikely we will see an uplift of LGO's share price.
Owing to this, it is best to stay on the sidelines rather than having additional capital tied up. The price war between OPEC and US shale oil producers will continue indefinitely and as long as oil remains bearish, it is unlikely we will see an uplift of LGO's share price.
However, the OPEC countries and US shale oil producers are hurting. So we can expect that oil price will eventually turn positive. My view would be towards year end 2015. In 2016, LGO will start a pilot water flood project and drill the Cedros. This could potentially lead to an increase in the production massively.
My disclosure: I am long LGO and UKOG.
My disclosure: I am long LGO and UKOG.
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