LENI GAS & OIL: ADVANCING ITS OPERATIONS IN SPAIN, THE GULF OF MEXICO, TRINIDAD AND MALTA

Most small to medium sized oil and gas companies are generally called E&Ps – for exploration and production. But London-based, AIM-listed Leni Gas & Oil (AIM:LGO) is more of a P&E – production and exploration. For unlike many of its peers, it has already passed the milestone of profitable income, and has recently announced an ambitious work programme:

“In 2010 we intend to accelerate development plans in all countries, have multiple producing assets in both Spain and the Gulf of Mexico, progress appraisal of the deeper prospectivity and exploration prospects in Spain, step change production operations in Trinidad, and commence well planning in Malta” – David Lenigas, Executive Chairman, 11 June 2010 

We take a look at LGO’s assets in Trinidad, Malta and the Gulf of Mexico before turning to its Spanish operations, for which the company has particularly high hopes, and then discussing its current market value.

TRINIDAD

Many investors are probably unaware that Trinidad’s annual production is of the order of 100,000 barrels of oil per day. One of the first oil wells in the world was drilled at La Brea in 1857, discovering oil just 280 feet below surface. Trinidad is located in the prolific East Venezualan oil basin and oil exists at depth as well as close to surface.
The Icacos oilfield (of which LGO currently has 50% and is taking over operatorship) is just 15km from the coast of Venezuela in the middle of the oil basin, and has been on production since 1966. There is also a major play, Icacos Deep, below the long-established Icacos and Constance shallow production zones.

Currently, the Icacos oilfield is producing about 40 bopd; workovers and infrastructure improvements have recently lifted output by 30%, whilst almost halving lifting costs. Leni Gas & Oil is seeking what it calls “step change production potential” through a three-year work program which includes the drilling of infill targets and deeper prospects. The plans include opening up all of the existing wells, and logging and testing them, as part of an operational review of the asset. The company also plans to acquire its partner’s 50% stake in the asset. 

The company is planning for 100 bopd by end-2010, but also considers that the shallow zones may be capable of some 1000 bopd. The potential of Icacos Deep is unstated, though LGO believes it may be an analogue of Pedernales, which is a substantial oilfield that commenced production in 1933 and is still producing. LGO’s Trinidad assets might perhaps warrant rather closer attention by investors than hitherto.

MALTA

Malta is the only territory within the Leni Gas & Oil portfolio which is yet to enter production. The so-far-undrilled Southern Offshore Malta Blocks 4, 5, 6 and 7 in Area 4 are covered by a Production Sharing Contract in which LGO has 10%, the other 90% being held by Mediterranean Oil & Gas (AIM:MOG). 

This acreage, which covers 5,700 square kilometres, contains 5 leads and 4 prospects – and has a total unrisked most likely oil in place estimate of some 5.75 billion barrels gross. The prospective recoverable element of that is estimated at 1.475 billion barrels gross. MOG and LGO have invested $2.5m in 2009 on various works in addition to the 3D seismic which had already been collected. The partners are currently working on pre-drilling plans for the first exploration and appraisal well, the drilling of which is currently planned to commence between April and December 2011.

The cost of this first well is estimated at between $30m and $45m. MOG are looking for farm-in partners to reduce their very high 90% stake, but it is unclear whether Leni Gas & Oil would reduce its own 10% stake. A recent seabed survey has found evidence of oil seeps, indicative of a working hydrocarbon system in the acreage, which we consider an encouraging sign. If LGO were to retain their current 10% stake, the unrisked potential recoverable barrels to the company from this acreage would be 147.5 million barrels. This would be a company-maker if it came in. 

GULF OF MEXICO

Leni Gas & Oil currently has interests in 14 offshore oil and gas production blocks, which are in production or development stages. These assets are in shallow water e.g. Eugene Island and Ship Shoal are in some 80 feet and 100 feet of water respectively and are therefore unaffected by recent new US rules on deep water drilling.

The Proved and Probable reserves, net to the company from these assets, are 4.1 million barrels of oil equivalent. If the Possible category is included, this rises to 6.21 million boe and if the much more tenuous Prospective category is also taken into account, the Resources total becomes 9.25 million boe. These numbers include some options which LGO intends to exercise.

US hydrocarbon production is almost uniquely attractive financially by world industry standards, although Spain also yields a higher netback per barrel. These Gulf of Mexico reserves and resources therefore offer substantial financial value; LGO has recently given guidance that, once some planned operational work is completed at Eugene Island, Ship Shoal and South Marsh Island, net cash of some $0.6m per month might be possible from its US assets. The daily production at the end of 2010, net to LGO, is forecast at some 220 barrels of oil equivalent per day and rising.

The potential production upside can perhaps be broadly assessed by considering the number of years during which these assets could potentially produce. If for example production were held level over a 10-year period of full depletion, we calculate that the average daily production level (net to LGO) would be some 1100 boepd based upon the Proved and Probable reserves. Including the Possible reserves, this would rise to 1700 boepd; if the much more tenuous Prospective category is also included the total would be somewhat higher still, at 2500 boepd.

These are substantial net volumes, and provided that the oil and gas prices going forward are reasonable, production at such levels for a decade could potentially offer considerable financial rewards.

SPAIN

The company has recently declared Spain, as a result of detailed independent studies and operational progress, as its core asset. Spain made the first transatlantic shipment of oil in 1533, when a barrel of oil was brought from Venezuela aboard the Santa Cruz. State monopoly and control during subsequent centuries hampered both the development of Spain’s natural resources industry and its economy. Following 169 wildcat failures, the first oil discovery was made in 1964 in the La Lora concession, which is now owned by Leni Gas & Oil. Perhaps it comes as no surprise to learn that the La Lora (Ayoluengo oilfield) discovery initially caused great local excitement:“For a time many believed the area would become the Spanish Texas” – Iberia Nature, 10 March 2010   

Examination of the annual production data for the past 46 years for the Ayoluengo oilfield indicates a high level of initial activity, followed by a smooth depletion curve suggestive of an unmanaged field in natural decline. This is unsurprising since investment in the field ceased in 1991, and the past peak output of some 2500 bopd dwindled to about 100 bopd. Chevron sold the asset to Repsol who successfully trialled water injection in the 1990s – but despite a positive recommendation from Repsol’s technical staff, a full water injection programme to re-energise the reservoir and sweep the remaining recoverable oil was never implemented. A series of owners including Northern Petroleum, Ascent Resources, Gold Oil and Tethys Oil all subsequently took stakes in the asset, but no agreement on progress was made due to complex ownership arrangements which involved Spanish partners. Leni Gas & Oil then invested in the asset and increased its ownership to 100%, opening the door to development for the first time in two decades.

The company’s assets in Spain are centred upon the historic Ayoluengo oilfield and comprise 12 oil and gas production and exploration prospects at all lifecycle stages. It is unusual for an oilfield to exist in isolation; generally, various fields of differing sizes are found along a trend, which follows a deep source rock which was deposited in ancient times. LGO have been conducting ongoing local and regional studies to de-risk the assessed prospects and assess the deeper prospects, including the use of atomic resonance methods. The presence of substantial coal deposits is perhaps worth noting; some 25 years ago Spain still had 45,000 miners and the Spanish government has recently announced plans to encourage domestic production of energy resources; the country currently has to import about 80% of its energy needs (source: Reuters, 19 April 2010).

Leni Gas & Oil have recently used leading consultants to study their Spanish assets and are greatly encouraged by the findings. In 2009, helped by recently improved understanding of the structure, the company announced that rehabilitation of the Ayoluengo Purbeck oilfield has achieved stabilised production at 300 bopd, compared to almost 20 years of static production of around 100 bopd. The plan is to lift production further to some 1000 bopd by the end of 2010, and beyond that to seek to return production to the historic plateau of 2500 bopd.

LGO have recently been concentrating upon the upgrade of surface facilities in connection with a new offtake agreement with BP, to ensure the Ayoluengo operations centre can process 10,000 bopd. This work and agreement indicates that the company anticipates transforming its Spanish operations; part of this will involve re-opening the Hontomin-2 well and conducting an extended well test and seismic program. Hontomin-2 initially tested at 700 bopd and all production from Hontomin will be transported 38km to Ayoluengo for processing and sale.  

The Hontomin operations are linked to the potential use of the field, when depleted, to sequestrate carbon dioxide. Spain is very actively involved in seeking to reduce its carbon emissions which in 2008 were 22% above its Kyoto compliance target for 2012 and Hontomin appears to offer very substantial potential to store this greenhouse gas.

The potential daily production levels can be assessed in broad-brush terms from the resources numbers. The Ayoluengo oilfield has a mean oil initially in place volume of 106 million barrels, and 19% of that has been recovered since 1964, a low figure by modern standards and linked to the lack of investment in the past 20 years. LGO believe they can achieve 30% to 40% recovery using re-completions, new primary depletion, and gas and liquid assisted mobilisation and re-pressurisation programs. Taking the mean of 35% and subtracting the 19% already recovered, this implies that some 16% of the original oil in place remains to be recovered.

On that basis, some 17 million barrels of recoverable oil would remain. If such oil were fully recovered over a ten year period, the average annual production would be 1.7 million barrels i.e. 4650 bopd. In addition there are a further 11 shallow exploration and development prospects (including Hontomin) offering an estimated mean gross oil initially in place of 67.4 million barrels. This offers further possible upside to daily production volumes.

Recent studies which have included the reprocessing of 3D seismic shot by Chevron in the 1990s and core evaluation have also revealed two very significant opportunities below these shallow reservoirs and targets. The uppermost of these, at 2000-2300m below surface, is believed to potentially be an oil reservoir with a nominal gross reservoir sequence of 80m, a footprint of 10 square kilometres, and good porosity in the range 10-17%. 

Such a structure could potentially contain a very great deal of oil. Below this, down to some 2700m below surface, is now believed to be prospective ‘unconventional’ shale gas reservoir, with a potential for 3.8 trillion cubic feet of gas initially in place.

With 100% ownership of these Spanish assets and a high netback per barrel, success with boosting production at Ayoluengo would of major financial importance to LGO, and of considerable significance to the Spanish government.  The deeper targets could prove transformational for LGO.

FINANCIALS

Those investors who like companies whose directors have their own money invested will find it encouraging that the company’s founder and executive chairman David Lenigas currently has 21.7% of the company. The company has also stated that it plans to use cashflow from operations, when appropriate, to start buying-back some of the 608.25 million shares currently in issue. The company has no debt.

At the time of preparing this review of Leni Gas & Oil the share price was around 2p, giving a market capitalisation of £12 million. WH Ireland, little more than a year ago when the share price was “decimated, in line with the sector’s decline” at 2.625p, put a target price on the shares of 12p. They said: “As a debt free growth company funded by internally generated cashflow, LGO deserves a premium rating, not the heavy discount assigned to it by a gloomy market” – WH Ireland, 6 March 2009

It is worth noting that LGO came to AIM in March 2007 at 3p per share, raised funds through an August 2007 placing at 6p, and then raised further funds at 8p in June/July 2008. The major upward reappraisal of the Spanish assets occurred only recently. Whilst the relinquishment of some assets in Hungary, in order to focus company resources upon the core activities, resulted in a loss of £2.06m in the year ended 31 December 2009 the ongoing operations generated a gross profit of £1.05m.

The current depressed share price is believed by the company to be partly due to heavy institutional selling of some 120 million shares since February; such selling has also affected various other oil and gas stocks and has led to something of a “double dip” effect on share prices, in which they were initially pushed down during the worldwide financial crisis in 2008, picked up during 2009, only to be pushed down again in 2010.

Investors attracted toward the fundamentals may well compare the current £12m market capitalisation with the company’s assets in the Gulf of Mexico, since these are perhaps the easiest to value at present. The 4.1 million barrels of Proven and Probable reserves in the US are currently being assigned a value of just £3 per barrel by the market capitalisation.

On this evidence, LGO as a whole would seem to be significantly underpriced on these assets alone - with Spain, Trinidad, Malta and the upside in the Gulf of Mexico all “in for free”. With various potential company-maker opportunities underpinned by the producing assets, some investors might conclude that WH Ireland’s opinion of Leni Gas & Oil remains valid.   

The author holds shares in Leni Gas & Oil