Shares in LGO Energy (LSE: LGO) saw heavy trading and fell by as much as 10% when markets opened this morning, before recovering to trade largely unchanged.
The cause of this activity was the publication of the firms final results for 2014.
1. Sales up 55%
Rising production drove LGOs gross revenue up by 55% to 9.21m last year, despite falling oil prices.
Thats an encouraging performance. Gross profits rose by 163% to 2.95m, but this didnt translate into an operating profit. LGO reported an operating loss of 4.2m and a pre-tax loss of 5.11m.
Thats a big increase from 2013, when the operating loss was 2.5m and the pre-tax loss 2.8m.
Operating cash flow was just about positive, with net cash flow from operating activities of 503,000. This excludes the eight wells drilled last year, which were funded by new debt and included in the firms 10m capex bill for 2014.
2. Production up 496%
According to todays results, LGOs monthly average production rose by 496% last year. Monthly output rose from 261 barrels of oil per day (bopd) in April 2014 to 1,557 bopd in December 2014.
In todays results, Mr Ritson says that a similar ramp-up in production will occur in 2015. However, he also comments that this growth will be tempered by the underlying decline of existing wells.
It appears that Goudron wells are currently producing under natural pressure, without any artificial assistance. The firms plan is that when output from a well falls to zero, it will be recompleted using a pump in order to restart production.
LGO admits that due to a lack of production history using modern techniques in this field, it is not yet possible to forecast decline rates or plateau periods.
In my opinion, this makes it very hard to forecast the true production potential of LGOs Goudron field, or its likely profitability.
3. This number rose by 93%!
One reason LGO made a loss last year is that the firms administrative expenses, which includes pay and benefits, rose by 78% to 4.9m in 2014. This dwarfed the firms gross profit of 2.9m.
Depreciation and amortisation charges rose from 324m to 1,480m, due to increased production. However, director pay and benefits also rose dramatically, climbing by 93% to 1.3m.
In total, LGOs three non-executive directors received 61,000 cash and 276,000 worth of shares last year. This would probably have been higher, but two non-execs were only appointed in August.
The three executive directors (excluding David Lenigas) collectively received 253,000 in cash and 500,000 of shares, for a joint total of about 17 months service.
In my view, LGO shareholders might want to ask whether their boards approach to remuneration is appropriate for a company with only 31 full-time equivalent employees and turnover of less than 10m.
Is LGO a buy?
I believe LGO is doing a decent job of extracting oil from Goudron in the face of the collapse in oil prices, which has affected the whole industry.
However, I reckon the market cap of 100m is pretty generous for a loss-making firm with a turnover of just 9.1m. Im also concerned that director remuneration is too generous for such a small business.
At 3.4p per share, I dont see much upside at LGO.
I believe there are much better buys elsewhere in the small cap sector.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
