Leni Gas & Oil CEO Ritson looks to revitalise company

AIM-listed Leni Gas & Oil (LON:LGO) certainly stands out with its strategy, biased as it is towards snapping up proven reserves and optimising recovery from already producing fields, with an eye on using resulting growth to support further exploration around these assets.

As well as being averse to relying on the need to strike ‘black gold’ to underpin growth, with all the uncertainty that entails, Leni, so far, has focused on operating in ‘low risk’ countries such as Spain, Trinidad and USA.

Born out of a cash shell, Leni listed in March 2007, raising £3.85 million at 3 pence per share. There have been further raisings, most notably £5.5 million via a placing last November at 3 pence, with the funds earmarked for accelerating development in Spain and Trinidad.

The shares briefly hit a 12-month high of 5.23 pence last October on some positive drilling news from Spain but recently have been languishing just below 3 pence.

For the six months to June 2010 Leni saw pretax losses widen to £637,000 from £110,000, mainly due to group administration expenses. Production for the period came in at 19,299 barrels of oil equivalent (boe) in Spain; 13,714 boe in the Gulf of Mexico (GoM) and 3,107 boe in Trinidad.  The interim cash position - ahead of the £5.5 million fundraising last November - stood at £176,000 versus £186,000.

Following the interim statement last September broker Edison noted production averaged 195 boe/day during the first half, below expectations, but struck a positive note on outlook, forecasting an average of 400 boe/d for 2010 overall. For 2011 and 2012 Edison, at the time, was looking for over 2,000 boe/d and 6,000 boe/d respectively. It now believes these targets cannot be met unless there is a major boost in production.

Certainly since the interims there have been encouraging signs of renewed vigour within Leni. Much of this can be attributed to new board appointments, notably Neil Ritson, the former boss of Regal Petroleum (LON:RPT), who joined Leni as chief executive last November. In February 2011, former BP (LON:BP) executive Steve Horton was appointed as a non-executive director. Horton’s many roles at the oil giant included worldwide director of drilling. 

Ritson and Horton have been quick to assure investors of their faith in Leni’s prospects. Last month both made share purchases, with Ritson snapping up 2.5 million shares at 2.797 pence/share, taking his holding to 7.5 million shares, equivalent to a 0.82 percent stake, and Horton buying one million shares at 2.95 pence, his total holding.

Ritson has also moved swiftly to review and re-prioritise company strategy. Much effort is now being directed towards getting operations in Spain to begin fulfilling their early promise. Expectations at Leni remain high for its 100 percent owned Ayoluengo oilfield in northern Spain. Discovered in 1964, it is the largest onshore field in Spain but only 17 million barrels have been brought to surface out of the estimated 100 million barrel oil-in-place field with production having peaked in 1969. Current production is averaging 122 barrels of oil per day (bopd) with 14 wells open and an additional 30 wells available.

An operational update last month, presented at the OilBarrel conference in London, underlined the company’s renewed emphasis on Spain, with a programme of well workovers now underway to boost production. The work, which will also take in the promising Hontomin-2 satellite field is expected to take around 90 days, cost €1.2 million and initially boost production to 300 barrels per day.

Leni reported yesterday it has now signed agreements with subcontractors and received all outstanding permits in connection with the Ayoluengo and Hontomin workover.

It has taken Leni longer than expected to prepare for this year's activities in Spain but Ritson assures the company is now set for “an active and productive period” there.  He adds: “We are confident the programme we have in place will achieve our target of increasing production to 500 bopd from our Spanish oilfields. Longer-term, expectations remain high given the presence of considerable untapped resources in the existing fields and surrounding areas. The company sees 2011 as a turning point in its efforts to exploit that potential.”

Elsewhere, Leni also has high hopes for its operations in Trinidad, albeit on a more modest scale than for Ayoluengo. Its 50 percent owned Icacos onshore field there holds 113,000 barrels as proven and probable reserves. Only four of its existing wells are open out of 17 with current production totalling 34 barrels per day.

In Trinidad too Ritson wants to up the pace of development so that production can be lifted to 150 barrels per day. Furthermore, with Icacos just 15 km away from a proven deep oil field in Venezuela and part of a light oil production fairway stretching across the southern part of the island, there is the tantalising prospect of other significant discoveries across the 1,960 acreage field. With progress in Trinidad picking up, the company “hopes to reveal additional news on this front in the next few months”.

Leni’s third key asset base is focused on the Gulf of Mexico (GoM). Most notably, it has various small royalty interests in the production from the Eugene Island-184 development ranging from about 2.5 to 6 percent and an overriding royalty interest for about 0.47 percent of the production from Ship Shoal-201.  
 
By Leni’s own admission, the ‘under performance’ of its GoM portfolio needs to be addressed. Its efforts were not helped by Leed Petroleum (LON:LDP), operator for the GoM blocks of interest to Leni, announcing last week suspension of production from Eugene and Ship Shoal. Leed’s decision was triggered by its failure to reach agreement in restructuring discussions with its lending bank UniCredit, potential investors and asset acquirers.

In response, Leni notes production from Eugene had been seriously constrained in any case during 2011 as it awaited the planned refurbishment of a key well. Leed’s decision therefore will only have a marginal impact on Leni’s financial projections for 2011. It adds: "The longer term impact is considered to be a deferral of production which is expected to be restored with reserves recovered at a later date."

Analysts at Edison stress the major priority for Leni over the short term is to get the operations in Spain up to speed. Encouraging updates on Trinidad and an end to drift across the GoM portfolio are also needed to help to boost confidence in the shares and provide a solid basis for fresh, confident valuation of the stock. Ritson appears determined to deliver good newsflow on these fronts, no doubt complimented with further tweaks and changes in strategy to support Leni’s growth prospects, in time for the full year results due by June.