By Tom Winnifrith, The Sheriff of AIM | Saturday 11 June 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Announcing your annual results at 1.38 PM ensures that some folks will miss the horrors you reveal. London's most useless Nomad, Mr Roland "fatty" Cornish will just be starting course two of four and so will not be back at his desk until the next trading day. So there is some point in sneaking out the bad news in the middle of the day. And that brings me to the trainwreck with Neil Ritson at the wheel, but David Lenigas driving from the back seat, LGO Energy (LGO).
At the beginning of October 2015 LGO had just over 3 billion shares in issue. 8 months later and with nearly 6 billion shares in issue what precisely has LGO achieved in this time? The results make it abundantly clear that it is not a lot other than the destruction of shareholder value. I start with what the auditors had to say. I quote:
In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosure made in the basis of preparation section of the accounting policies concerning the Company's and the Group's ability to continue as a going concern when taking into account the loan default status of the BNP facility and its impact on the net current liabilities of the Group.
Whilst we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate, these conditions together with the other matters set out or referred to in the basis of preparation section of the accounting policies indicate the existence of a material uncertainty which may give rise to significant doubt over the Company's and the Group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group or Parent Company were unable to continue as a going concern."
Ouch. Double ouch. Anyone who buys shares in the crock after reading that is certifiable. The shares, incidentally, are now just 0.19p - below the last placing price.
On the ground, in the past 8 months, LGO has only managed to re-complete two wells at a cost of $150,000, one of which, GY-671 was re-completed in a single week. It seems that actually growing production is the very last thing on Neil Ritson's mind - output just carries on heading South - and that all he has grown is the number of shares in issue which have virtually doubled whilst providing nothing in the way of verifiable productive growth. Still, dilution hardly matters if the company is never going to make a profit and pay a dividend.
Following the mandatory initial production hype for the re-completed wells - LGO is reluctant to tell us how much oil GY-671 and GY-50 are currently producing. Indeed the annual report had nothing positive to say about recent production at all, either at Goudron or in Spain. I have previously suggested that Spain is either running at reduced production levels or production may have been halted there entirely as it has run out of storage capacity. LGO has not come forward to clarify the position so I assume that I am right on one of these scenarios. LGO says it has 'rolling orders' in Spain but has not stated how much oil has actually been sold. The build up of oil in storage at the facility suggest that the rolling orders have been very small. Incidentally, I have rolling orders with Sainsburys, Tecos, Asda, M&S and Lidl - but I am not contractually obligated to buy from any of them.
I said that LGO was likely to declare losses of between £10-15 million and they came out in the lower middle of that forecast at £11.7 million. It has been very kind to itself - and the auditor has been complicit - and has probably deferred an additional £10 million to be written down in next year's accounts if it survives that long.
This was a record loss for the company - but not by much having declared a loss of £10.29 million in 2010 following the disaster of Lenigas' Gulf of Mexico mal-investment. One thing Lenigas and Ritson have proved is that they are entirely consistent in their loss making and never disappoint.
The company last week also issued another 161 million shares in itself in order to pay bills of £311,000. Is that effectively the June placing or is there more to come later this month? The AGM is on July 4th and the only issue on that agenda is to raise the bar for new shares the company can issue to even greater Olympian heights in preparation for the July placings and beyond.
The accounts for 2015 were bad but with production at half of 2015 levels now ( at a lower oil price), no-one knows what kind of financial position LGO is really in and how many times it needs to further tap dwindling market charity. I remind you that it is in debt and that it is still not generating any free cashflow after debt repayments, PLC costs and capex. It is in a hole but just keeps on digging.
The oil price has bounced sharply since the last placing but LGO's shares are now below the placing price. That is because there are only two certainties here. Survival is not one of them. But more losses and more share issues are racing certs. Keep selling.
Never miss a story.
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