LGO Energy cash runs dry after drilling misshap

After a costly drilling accident, oil explorer LGO Energy has been prevented from accessing more cash from its bank facility as it has breached its covenants.

The AIM-listed company last month reported that well GY-678 in the Goudron Field offshore Trinidad, the last of seven development wells to be drilled, had suffered a mechanical problem, where an obstruction at approximately 1,800 feet prevented the well from being completed.

After failed attempts to recover the downhole equipment which was causing an obstruction, LGO, which earlier this month raised £1m towards planning for the related Goudron sandstone project, was forced to plug the hole with cement to release the oil rig.

Management will make a decision on possible re-entry and sidetracking, or re-drilling the well in order to reach what was found to be an exceptionally thick net oil pay zone previously drilled and logged in the well.

But in the meantime, the incident has already cost LGO $1.9m from the unsuccessful recovery attempts and it will potentially be liable for a further $1.5m from the cost of the lost downhole equipment, with an even greater loss from the missed oil production from the extensive oil pay.

"The loss of anticipated production from this well has had a negative impact on the group's cash flow forecasts to the extent that the liquidity ratios as specified in the group's banking arrangements with BNP Paribas have dropped below those originally envisaged in the covenants associated with the loan," the company said.

"The company is currently reviewing various options in constructive discussions with the bank, however, in the meantime the bank have indicated that no further amounts can be drawn against the facility."

Chief executive Neil Ritson assured that the issue was a short-term one and expected the company's cash flow to be improved in the coming months once production begins from the Goudron Sandstone activity.

"Stuck pipe incidents are not common and despite taking extensive precautions during the drilling of the 15 new wells, this incident, which occurred at the very end of the program, is a setback for LGO," he admitted.

"Whilst there is no long term impact to the company's assets and indeed the GY-678 well has shown that there is more and better C-sand reservoir than previously known, the short-term financial impact has to be managed."