Edison sees plenty of upside and cash flow potential in Leni Gas & Oil

Edison Investment Research said there was plenty of upside to the value of Leni Gas & Oil (LON:LGO) as the current market price implied a price of just US$0.5/boe (barrel of oil equivalent), while Edison said that US$2/boe would be more appropriate, noting its 10% exposure to highly prospective exploration acreage in Malta and high reliability of its projects.
The company is currently engaged in major development and rehabilitation projects in three petroleum provinces, the Basque-Cantabrian basin in Spain, the Cedros Peninsula in Trinidad and in the shallow water Gulf of Mexico. Edison noted that these projects related to shallow fields and involved measures such as applying enhanced recovery, which improved the reliability of operations and developing unexploited zones.
The recoverable resources attributable to the company and based on these three projects have been estimated at 40 mmboe (million barrels of oil equivalent) by Edison, which said that inclusion of the deep plays in these three locations along with offshore Malta could boost resources to over 575 mmboe on an unrisked basis.

The broker commented that Leni had a “substantial” resource base for a junior, most of which was in the prospective category. Production has been on a “strongly rising” trend between 2007 and 2009 with a gain from 49 boe/d (barrels of oil equivalent per day) to 434 boe/d. Edison projects the production to regain momentum in the second half and trend higher through 2011/12 after slowing in early 2010 due to rehabilitation and refurbishment activities, foreseeing a production rate of over 6,000 boe/d in 2012.

Edison also commented that the company had an “excellent” cash flow potential, forecasting EBITDA (earnings before interest, taxes, depreciation and amortisation) to improve to £3.3 million on revenues of £6 million and to £31 million on revenues of £44 million in 2011, while cash flow is expected to be “fairly neutral” despite heavy capital spending.
“The prospects for positive cash flow are excellent post 2010 with inflows forecast for 2011 and 2012 of £16m and £38m respectively,” Edison said in the report.