LgoEnergy(LSE: LGO) has slumped today after the company announced that it had raised 1m before expenses by way of a company arranged placing.
Lgoplaced111,111,110 new ordinary shares at 0.9p per share, taking the total number of shares in issue to3,165,164,156. The funds used from the placing will be used as working capitalinLgosTrinidad businessesincluding initiating work onLgosGoudron Sandstone programme.
Lgois looking to fast-track the development of its Goudron sandstoneprogram after an upbeat set of results from the first sandstone well, which was completed at the end of September. The well exceeded managements expectations for production, and now,Lgois looking to drill a further 10 sandstone wells in the near future.
A number of new wells are planned bythe end of 2015. Management estimates that due to the relative ease of drilling in the sandstone,Lgocan drill the shallow wells at a cost of $400,000 per well in less than ten days.
Its believed thatthe Goudron Sandstone reservoir totals 343 million barrels of reserves. The Goudron Sandstone reservoirrepresents over 40% of the overall current Goudron Fields estimated gross 805mmbblsoil in place.
Hard to value
Bringing ten new, low-cost wells with daily production in the region of 60 barrels per day online during the next few months will certainly boostLgosproduction. However, its difficult tovalue the companys shares at present.
Lgosshares closed at 1.1p at the end of last week, so todays placing has been conducted atan 18%discount to the market price. This is a big red flag. Companies that undertake deeply discounted share placings do so at the expense of existing shareholders. Whats more, a deeply discounted placing can indicate that the company is struggling to raise the cash from other sources.
Lgohas already made heavy use of placings to bolster its balance sheet this year. Back in January, the company raised 1.58m via a placing of 52.5m shares, and a further 6.7m was raised in February. This capital raising was part of the companysnew debt arrangementwith BNP Paribas.
Still,overall Lgolooks to be heading in the right direction. For the six months ending 30 June 2015, the company reported a gross profit of 2.1m, up 150% year on year. The groups pre-tax loss excluding non-cash items for the period was 187,000, a huge improvement on the figure of -2.2m as reported for the first half of 2015. This growth is even more impressive when you consider the fact that the price of oil was roughly 50% lower year-on-year.Lgosgross oil sales increased 200% year-on-year.
Despite these impressive figures, however, its difficult to valueLgo. Its clear that the company has limited cash reserves andis struggling to turn a profit. Also, the volatile price of oil means thatLgois at the mercy of the market.
The bottom line
If the price of oil recovers and Lgoturns profitable, the company could be a great long-term investment.
So, if you already own the companys shares, it might be sensible to sit back and ignoreLgofor a few years while keeping an eye onyourother investments.
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Rupert Hargreaves 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.
