Wednesday, August 12, 2015

LGO DRILLING UPDATE

LGO today announced that its latest well, GY677 has reached total depth and encountered 355 feet of net oil pay at the Goudron Sandstone and another 130 feet of net oil pay at the C-Sands. Total net oil pay is 485 feet.

This is in line with the Management's expectations.

Some important key points in the announcement are:

1) Drilling times have been shortened significantly.
2) Management will allocate capital efficiently in view of the current depressed price which could continue for a long period. A low operating cost combined with careful deployment of capital will allow the Goudron field to be developed profitably despite the low oil price.
3) All production infrastructure necessary for the production from Pad 5 is already in place and production is expected to commence in late August.
4) Company hopes to commence a pilot water flood project in 2016.

The share price continued to stay in the 1.50 - 1.70 pence range, due to the depressed oil price but LGO is a low cost producer so this is the plus point. Besides that, it is sitting on a large oil field with 800m barrels of oil in reserve. I am expectant that the reserves will be upgraded as more drilling takes place.

The fundamentals remain sound but patience is required as LGO puts more wells into production.

I would expect a wave of mergers and bankruptcies happening after October upon completion of the semi annual assessment of US oil companies by financial institutions. Many are already facing a cash crunch in the current situation.  

Things to look forward to for LGO:

1) Completion of the 2 x 250 and 2 x 5,000 barrels tanks
2) Commencement of production from the Goudron Sandstones (12 - 15 wells)
3) Approval by the Ministry to drill an additional 30 wells in the Goudron field
4) Positive development in the drilling campaign in the Cedros which LGO has earmarked to commence in 2016.

My disclosure: I am long LGO.

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