An exclusive Q & A session with LGO Energy

The start of 2016 has proven to be a challenge to those invested in the oil and gas industry. Record low oil prices and the uncertainty of how many of the smaller companies plan to operate during these hard times will keep even the most narcoleptic of investors awake at night. With the set back of the last well they drilled (GY-678), long term holders had many questions they wanted to ask the company.

We decided to ask the company some of these tough questions to gain a bit more of an insight into their strategy for the near future. Now LGO have come out of their offer period, Neil Ritson, the CEO, provided us with a response to some of those key questions being asking.

The start of 2016 has proven to be a challenge to those invested in the oil and gas industry. Record low oil prices and the uncertainty of how many of the smaller companies plan to operate during these hard times will keep even the most narcoleptic of investors awake at night. With the set back of the last well they drilled (GY-678), long term holders had many questions they wanted to ask the company.

We have been asking the company some of these tough questions to gain a bit more of an insight into their strategy for the near future. Now LGO have come out of their offer period, Neil Ritson, the CEO, provided us with a response to some of those key questions being asked.

Share Talk – GY-678 was not previously scheduled to be drilled on Pad 3, why did LGO go back to Pad 3, if there was a possible fault line risk from the last drill channel. Was not the original plan to leave the last well on Pad 3 the right decision, even with the larger pay zone on the well?

Neil Ritson -The decision was to return to a proven thick zone in the reservoir.  GY-678 fully justified that decision finding the thickest ever C-sand recorded in the field.  The problem encountered in the well was not geological in nature and was purely a result of drilling practices and could have happened in any one of the 15 wells.

Share Talk – Would you consider a side track on GY-678, entering below the obstacle? Or is the cost similar to drilling a complete new well off a single new Pad?

Neil Ritson – We have other surface points to drill from on existing pads so the cost and complexity general favour the drilling of a new well, although a side-track is certainly technically feasible.

Share Talk – Once the declines percentages were known for Pad 1, 2 and 3, would it not have been feasible to change the drilling program for 2015 to GS wells only?

Neil Ritson – Decisions were taken in real-time with all the information available at each stage and in addition to production we were also seeking to collect additional data for the planned waterflood project and therefore it was decided to continue to the 15th well.  Whilst GY-678 was lost the data collected was extremely valuable.

Share Talk – You have confirmed that the GS wells could be drilled by a modified work over rig that you own, if that is the case, what is the cost of drilling a GS well with your own equipment?

Neil RitsonYes we have multiple options to drill with a heavy workover rig and the estimated cost to drill and complete an average depth Goudron Sandstone well would be less than US$500,000.

Share Talk – What is the cost per barrel to LGO with lifting costs, administration costs and loan costs all included, shareholders would be interested in the break even at Goudron, at the full BNNP cost, and not the temporary lower repayment that is currently in force?

Neil Ritson – Because some of our costs are variable and others fixed this is not as simple to answer as you may imagine.  Taxes and royalties also vary with oil price, and opex varies with production level.  The total corporate funding structure is also being reviewed in conjunction with the overall strategic view. I will, however, say that Goudron is inherently a low cost producer and can certainly be made to be economically sustainable at prices of $20/barrel and perhaps lower.

Share Talk – Would LGO consider dual perforation on all the new wells, or even simply a plug of C-sands and perforation of GS zones?

Neil Ritson – Our plans include production from both C-sand and GS intervals through the life of each well, however, at present the cost and complexity of dual completions is not considered justified at current oil prices. This will naturally be kept under review.

Share Talk – Where do you see the oil price going for 2016 and do you see smaller companies filling the shortfall of investment by major companies in their future projects?

Neil Ritson– Plan for the worst and hope for the best.  We are assuming prices will be low and volatile throughout 2016 and are planning accordingly.

Share Talk – For future well drillings, would LGO look at using different insurance options to prevent another unforeseen obstacle?

Neil Ritson– Insurance is not seen to be the best overall solution.  We will however be implementing revisions to our drilling supervision.

Share Talk – Starting the New Year, will LGO stick to the just-in-time strategy used previously or can we get an insight into a different approach given the lessons we’ve learnt from last year and a different oil price climate?

Neil Ritson -Just-in-time is even more important as we have to manage capital in an even more disciplined way during a period of low oil prices.  Currently there are no infrastructure projects that are adversely effecting operations or production.  Once we have access to drilling capital we will revisit the infrastructure needed to support that program.

The message seems clear from the answers that although 2016 is proving to be a challenging year for oil companies, LGO Energy understand this and continue to operate accordingly. The keen observer would have noted that the company re-iterated the fact that they are still a low cost producer, even with current oil prices. This is a luxury that many of its competitors don’t have and may ease some of the concerns of shareholders.

Can they also unlock the potential under GY-678? It was encouraging to see there are other options available to them as this could prove pivotal to providing a greater BOPD aspect for the company.

Many more questions will find answers soon enough. Most will know however, that during this period of rough seas, those that stay afloat would have put in place measures which they will benefit from in a future with higher oil prices.

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