LGO and a 2000bopd question

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A researched piece on the real reason why LGO is holding back production!!

I hereby declare I am not invested in LGO nor do I intend to invest in LGO within the next 48 hours of this article being published.


Today we are going to be looking at (LSE:LGO) and the 2000bopd Gourdron field threshold

This story began in early 2011 when the company declared it intended to increase its portfolio in Trinidad.

In October 2011 they did just that by buying out Sorgenia’s share s in GEPL for US $1million. Little did they know the significance of that deal in both the growth and the restrictions on LGO as a company.

So firstly, lets look closer at the deal. (for your own reference the title of the RNS was Major Acquisition In Trinidad *3rd October 2011 7am*)

GEPL owned the Gourdron field in Trinidad and all research pointed to a overall predicted production capability of around 1000-4000bopd. By buying out GEPL LGO took over the ownership of the Gourdron field but the $1million was not the whole story.

Fast forwards to 24th March 2014 7am.

A rig to drill the first of the 30 well program (well GY-664) is declared as scheduled to be mobilised on the 15th of April  2014.

Now lets take a moment, the low end of the OVERALL production capability prediction of the Gourdron field was 1000bopd……. GY-664 produced….. 326bopd un aided!!! That’s almost a third of the lower end and about 8% of the upper end estimate of the whole field!!!!

Fast forwards again to the 25th of September 2014 and the trouble begins, LGO finally produce over 1000bopd. So why is that a problem? Well although no RNS was released to state it, US $1 million was now due to be paid to Sorgenia almost three years after the buyout. What very few people realised is that the deal (as stated in the RNS) included a Consideration in which if 1000bopd was achieved at Gourdron LGO would pay Sorgenia US $1 million.

But that’s in the past now the US $1 million has been paid (confirmed by phone call today) and is included in the 2014 loss. Yet the 2011 story still continues.

Fast forward to 15th December 2014.

GY-670 produced 6000bopd open hole flow rate yet got chocked back to 1000bopd?? Why??

Fast Forward to today and we can start getting excited. Today the field has the potential to produce well over 2000bopd and although the price of oil is still low it’s cheap to produce oil in Trinidad. So why isn’t LGO jumping at the chance to produce more oil?? Why are they choking back the wells so much?

The answer is partly to do with the price of oil but mostly to do with the other part of the Sorgenia buyout deal.

Once more than 2000bopd is being produced (this must be verified and must be achieved consistently) the conditions decree that LGO must pay Sorgenia US $2 million. Now that doesn’t sound much in the bigger scheme of things but lets just think about it from a business prospective.

If LGO produced exactly 1990bopd from Gourdron choking back their wells to avoid going over the 2000bopd threshold, which I have been informed they haven’t continually done yet, they would avoid the US $2 million payout. Now as full pads must now be declared as in production and not each individual well they have a great opportunity.

200bopd at current oil prices would see LGO pay off the US $2 million in a single year but that’s still not good business logic. LGO need to do more. When the next pad comes online I expect LGO will open the taps on the other wells and up production hugely in an attempt to counter the cost of paying Sorgenia.

It would not shock me at all to see production exceed 3000bopd when the next pad is put into production.

Cash flow is king in Business and if LGO have to pay US $2 million then they will want to make it worth going over the 2000bopd threshold.

In my opinion LGO is soon going to be the most traded share on AIM soon and is potentially about raise its production by well over 50%.

My 6-12 month share price target for LGO is 8pps

I hope you enjoyed this.

Good luck to all holders and as always,

All in my opinion and not to be taken as fact nor advice.

Always seek professional advice before investing in any company


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