Leni Gas & Oil - Potential Base Forming

http://www.lenigasandoil.com/


It has been six months since I last covered Leni Gas & Oil - a small cap oil and gas producer in Trinidad. The company has made good, albeit slow progress at its Goudron field, yet the share price has failed to react. The price action is subdued, as is investor sentiment, despite improved production rates. I strongly recommend re-reading the interview with CEO Neil Ritson from May of this year and analysing whether the company is in a stronger or weaker position. Since the interview he has met most of his outlined aims and consequently the company is in a strong position. However, oil and gas stocks are largely sentiment driven and Leni is no exception. The shares have fallen down investors' pecking order over the last few months although at this level the company represents better value than most producing oil companies, once again. The shares are significantly lower than the original 1.09p review price at 0.735p - unlike Range Resources, I see no reason to change my initial stance at the current point in time, and reckon that the downside from this level is capped. At the current share price the company is valued at dead on £15m.

This article is a follow-on from the below posts. For full context and information, read these articles first:
http://www.theel1tetrader.com/2013/05/leni-gas-oil-ceo-q.html
http://www.theel1tetrader.com/2013/05/leni-gas-oil-focused-on-trinidad.html


The first point to note are the waves of buying and selling, as shown via the 50 day moving average. Since the sharp move up in late 2012, the company has almost become a trading stock. The shares failed to break out of the leg higher quite soon after the original review, and have only re-visited 1.09p once since. The majority of the time it has been under 1p, which is disappointing. The fundamentals have also only improved over this period, and perhaps that is shown by the relative decline in the gradient - it is now a lot shallower than back in June which represents a dissipation of selling pressure. There has been a clustering of lows around 0.70p recently which bodes well, but the sheer size of the spread and intra-day volatility means that could be false. In an ideal world, the shares would stop sliding and form a medium term higher low at 0.70p, following on from the 0.67p low just after H1. The recent downtrend does mean that you have to adjust target prices though, so I have lowered them to 1.1p - 1.25p for the time being.

The shares did try to break through the overriding downtrend earlier in the year also, but a sharp retrace halted the rise. Resistance at 1p also capped the rise. However, what that does mean is that overlying downtrend has continued, and the price movements have been depressed. Interestingly, the stock seems vulnerable to sharp moves down intra-day, only to finish higher than the low. That has happened numerous times, and in some occasions, on consecutive days. That is driven by lower liquidity caused by a lack of buying interest (even with the huge 2 billion shares in issue). The ongoing trend line decline actually bodes well. Given the good fundamentals, it is becoming increasingly likely that this downtrend will eventually be broken. For that to happen, the share price now only needs to surpass 0.92p and maintain that break. Previously is has been a lot higher. A break of that downward trend would signal one of two things - either a shallower downtrend, or a break higher. Neither would be particularly bad given that it would be an improvement on the current trading performance. Realistically, the shares could also consolidate sideways out of the downtrend although that signals that it wouldn't be broken through until mid H1 2013. That would still be positive though as it would show the formation of a price base.

I do remain of the view that reducing the number of shares in issue would be highly positive in the long run, not only in terms of investor perception, but in terms of impacting the price movements. In the short run it is often the case that shares with low real share prices often move a lot faster than those with higher share prices. Once again that may be down to perception, but most of the larger multi-baggers originally had share prices in the decimals, or at least in the low tens. That's a small point though and not one that is too important.

Leni's main asset, the Goudron Field, is located in Trinidad
The directors have an incentive to try and raise the share price as well. They reset their options packages to a lower exercise price, although that still remains at 1p/each which is around 36% higher than the current share price. The first tranches of shares have become eligible to be exercised after the group met the required production target, although the second tranche has not yet. The expiry date is perhaps a bit generous, but given the low number of board members, I'd consider it acceptable.

I won't cover the old ground about the asset details (Those details can be found in the initial review). For a quick reminder though, the Goudron field has 2P reserves of 7.2mmnls and 60+mmbls of contingent resources (those will likely be transferred down the chain as further wells are successful). Here is a quick summary of all the news points since the end of May:

- June 2013: Total Group production exceeded 450bopd (315bopd from Trinidad and 143bopd from Spain)
- June 2013: Leni signs a letter of intent with Beach Oilfield to explore deep zones spanning both of the companies acreages
- June 2013: Unfortunately a sentiment damager. Leni raised funds in the market totalling £1.3m at 0.80p as bridge finance pending the competion of the signing of the $50m debt facility. That has been a point of issue for Leni - the market has not been too pleased that the debt facility has not been signed yet, but the reason is that Leni believes it can secure financing on better terms given the impressive feats in Trinidad
- June 2013: Leni allieviates any immediate funding need with a $15m debt facility with YA Global Master. $2m was immediately drawn down. The terms of the facility are typical for a company of Leni's size, carrying a coupon of 9% and carrying no early repayment premium. It is repayable in either cash or shares. CEO Neil Ritson noted: "LGO now has a facility in place to ensure there is no hiatus in our program of production growth.  Our current focus at Goudron is to double the oil sales tank capacity and put on production a further 20 wells for which we have pumps available or on order.  Preparations for the drilling of the first of the planned new wells later in 2013 will also be advanced with the available funding."

- August 2013: Leni announced a general operational update which included the expansion of oil sales facilities to 535bopd. This was followed up by a general update of the Trinidad Icacos field in which production rates were restored and another well brought online. Normally I am not interested in company's whose operations involve re-tapping older wells, but the workovers are 'light' in nature and it seems to be working well
- August 2013: A delay was noted in respect of the Maxim agreement. An extension to the agreement was negotiated with Maxim in September
- August 2013: An important update which saw Leni reduce the royalty rates payable on its Trinidad oil production. Production above 150 bopd, which Goudron is already exceeding, has been granted a more significant reduction equivalent to approximately 45% of the previously applicable rate at the current oil price. Production rates were up by over 750% since Leni became the field operator

- September 2013: Leni notes the positive impact of CAPEX tax rate reductions on the company's cash flow. The positive impact is expected to amount to $1m per annum over a period of 3 years
- September 2013: Leni confirms the court date for the legal claim against Mediterranean Oil and Gas (LSE:MOG). Leni's Chairman, David Lenigas, said: "LGO has steadfastly maintained that it was misled by MOG in July 2012. While we remain open to settlement discussions, we are resolved to vigorously pursue our multi-million pound claim to trial if necessary."
- September 2013: As at June 30th 2013, revenues were up at £2.3m with a gross profit of £310,000. A pre-tax loss was booked due to administrative costs that were abnormally high due to legal costs and financing costs. Following the earlier placing, cash stood at £1.5m. Operating outflows fell

- October 2013: Group production exceeds 500bopd from both Spain and Trinidad. Post-tax profits now amount to $300,000 which translate to much strengthened cash flows. That should be evident in the H2 accounts
- November 2013: Leni announces its first plans to drill its first new wells at Goudron (to date it has just been activating old wells). These new wells will carry a higher element of risk, but carry the promise of much higher flow rates compared to what are currently being sought. Each new well should take 7-10 days to drill. They have substantial data on the field from the current wells, so should be well placed to analyse the risks. CEO Neil Ritson commented: "We are delighted that the next phase of our field re-development at Goudron is about to get underway. Drilling of new wells will result in a greatly accelerated increase in oil production. We have so far reactivated 58 wells of the 90 or so available wells and we are on schedule to bring on stream a further 10 wells by early 2014. The drilling of new infill wells however presents by far the greatest potential for production enhancement in the short to medium term."
- December 2013: Agreements signed with Beach Oil

On the whole, I reckon it's fair to say that the operational movements have been positive. The dampener has been the financial arrangements, not because of the change of heart in light of better production figures, but because it is a deviation from the original plan. The lack of funding is somewhat delaying proceedings although that bottleneck may start to be cleared using the $15m facility. That does carry a 9% coupon though so prudent use is necessary. The one thing that investors would not like to see is a discounted placing. It is not likely as debt seems the way forward, but it is something to bear in mind. The 0.8p placing earlier in the year did little to instill confidence. Since the end of H1, the oil price has averaged a higher price by a few percent so that should aid the next set of results.

[On a side note at this point, one thing I was impressed by whilst following another one of my buy reviews (Serabi Gold) is an initiative to produce on-site videos which actually show the company's facilities. Given that Serabi is a gold miner, stockpiles were shown as were the inside of mines and processing machinery. I think that's a neat idea as it brings investors closer to reality and is reassuring. That's something that doesn't take long and can be invaluable for investors in my opinion.]

Looking forward, the company is still pursuing options in relation to its Ayoluengo field. The sales process from 2012 did not bear fruit, but a partner is still being sought - potential remains, but it is unlikely to be tapped unless a well capitalised third party enters the fray. Spain is certainly not Leni's focus and I'm sure the company would prefer it to not be a distraction. The 2014 group end of year production target is 1000 bopd. To achieve that figure, the remaining 30 or so wells will need to be brought online, but also a couple of 'new wells' will need to be successful, and that will require financing. Nonetheless, should that target draw closer the company will be in a very lucrative position. At the end of the day, it is all about cashflows and Nighthawk Energy (LSE:HAWK) is a prime example of that. They have aggressively been increasing their production rates through a series of wells, and that figure currently amounts to 1467bopd. They are consequently cash generative and that is increasing rapidly (at a much faster rate than can be expected of Leni). Nighthawk's share price stands at almost 12p, yet investors will recall that it was treading water around 2-3p for many years with little or no promise. That has obviously changed and now the company is valued at £112.5m.

Looking elsewhere in the Oil and gas sector (which has been out of favour for the last year or so), Leni is valued modestly. With 500bopd Leni stands at £15m. That compares to Magnolia Petroleum who are valued at £23.2m despite only having 370boepd (barrels of oil equivalent so not the same income). That figure is also likely to settle much lower as it includes production rates from recently drilled wells hence does not account for the inevitable decline to more sustainable rates. Beside Magnolia, you also have Northcote Energy who sit on a comparatively rich rating of £10.1m with 130boepd, and Nostra Terra (another company who have been unable to outrun the decline curve - I stated that concern in my initial review months ago) who have around 45-60boepd and are valued at £7.2m. There is a case to be made that the other companies are overvalued, but regardless, Leni offers better production rates and in my opinion, a sounder footing - $300,000 net profit per month is not to be disregarded.

Leni has been out of fashion over the last few months, and that problem has been compounded by erratic price movements. As with all oil and gas companies, they tend to be bought up in anticipation of drilling, and sold down during periods of low operational activity. I reckon that has been the case for Leni - it has made some good progress operationally, but it has all been fairly unexciting. The bottom line is being helped, but a large proportion of investors tend to flock to exploration plays as they like the speculative nature. That could mean that Leni will benefit in early 2014, as the company will start to seek better funding for the drills and gain final governmental consent. The wells are not make or break, but could add an appreciable amount to production, if successful. The terms of the funding will be the all important factor. The lower the interest coupon, the better, and flexible repayment terms would also be attractive. Whether those terms are possible in the current economic climate will be down to a variety of factors including Neil Ritson's negotiation skills and the performance of the assets. Perhaps a strategic investor would be more appropriate when compared to a bank or institution (potential for the investor to ask for a lower interest rate or be more flexible).

The number of shares in issue does remain a slight detraction, especially since over 90% are in public hands. Should production continue its upwards trajectory, the company will need to secure increased sales capacity from the current level. The legal claim will also be a focal point during Q1 as the court date approaches. It represents unexpected upside, although to factor that into an investment decision would probably be misplaced. Investors will also be keeping an eye on Spain, and whether any deal can be reached there. The plan for Ayoluengo is for up to 5 future well side-tracks to take place in order to access unswept oil reservoirs. Ultimately, the biggest and most important point is that the company needs to keep Leni on the current production path with production levels riding upwards as opposed to stalling. At the end of the day, it is delays that have dampened opinion on the company - in this case the delays don't have a significant impact upon the fundamentals. Operationally they are in more sound position, they have a strong focus moving forward, and technically they could potentially be forming a price base. As a note though, it does remain medium-risk until sustainable funding is sorted. At £15m there are more than enough positive developments to keep the Buy position on Leni.

UPDATE (03/06/14) - I have moved Leni from Buy to No Rating at 2.06p today after the shares have enjoyed a very strong run up in recent weeks. That is justified, but the shares are quite overbought on a technical viewpoint, and based on peers, the next 1-2 wells are potentially factored in at this price. I will look to see if a re-entry point presents itself, but take an 89% profit off the table after a particularly long wait

9 comments:

  1. Thanks el1te. I see there has been one of the low vol drops this morn because of the spread. Hate mm's :-]

    Solooiler

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  2. Thanks on behalf of LGO investors

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  3. Sorry for the late comment. Good write up and Leni has recovered some lost ground since

    CraigJ

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  4. Hi - any further thoughts after todays RNS?

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  5. Hi Elite,

    Just wondering about your target SP, in chart you mentioned 1.2p, any further thoughts?

    Thanks

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    1. Hi there,

      1.2p looks to be the first port of call. I reckon 1.5p is certainly possible now over the next 3 months or so, assuming continued positive news. The breakout which is almost definitely confirmed now, is major in terms of timescales, hence why Leni is now seeing a new lease of life.

      Hope that helps,
      El1te

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  6. Took my investment + profit out and put it in BMN, thanks for your research and tips El1te! What do you think of BLVN's RNS this morning? You were right about the delays appearing to come to an end!

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    1. Hi there,

      No problem at all - well done on Leni and good luck on BMN. BLVN's RNS this morning is encouraging and it essentially removes another hurdle. However, I do feel uncomfortable about the situation at Bomono and the lack of apparent progress. That could mean that the company is exposed to a near £10m liability if they fail to drill by December. I'll keep tracking closely, but won't be hesitant to take the cash out if they don't make progress on that front. After all, the liability would probably trigger a placing! On the other hand, if by some miracle they manage to get Bomono sorted and drilling, a pretty significant speculative rise would occur. The cost to drill is not excessive either at around £10m per hole, so it would make sense to drill, even if it does mean placing funds beforehand.

      El1te

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