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The last article noted how the management of Logan Energy (OTCPK:LOECF) was very experienced at building and selling companies. With the latest quarterly report that management is still reporting that everything is going as planned. Earnings (from operations) approached breakeven before a hedging gain pushed results into the black. This is important because an experienced management often uses the cash raised rather quickly to get the company going “all at once”. Now that the cash is gone, the fact that the second half should report production in excess of 10,000 BOED is a reassuring way of telling investors that relatively large amounts of cash flow are on the way.
Production Mix
More importantly, the acreage that management has assembled was known for its natural gas production in the past. But technology advancements have now improved the future production outlook.
Logan Energy Summary Of Improvements Over Past Development Practices (Logan Energy Second Quarter Corporate Presentation August 2024)
Shown above is one example of the improvements made. This was considered a natural gas producing area (and it still produces natural gas). But the advent of significant liquids production is having an outsized effect on revenues.
The technology advances have made the production mix profitability improvement a low-risk affair. Most of the industry knows where “things are”. The remaining challenge is getting the commodities to market at a competitive price. This area has now become competitive for products that were previously “out of the question”.
Production Mix Effect
What is happening is the area is converting from its natural gas production history to a more liquids-oriented production. At startup, the company “inherited” the older natural gas production. So, there will continue to be a fair amount of natural gas produced, no matter what happens with the future production mix of new wells.
(Note: Logan Energy Is A Canadian Company That Reports Using Canadian Dollars Unless Otherwise Stated)
Logan Energy Second Quarter Production And Revenue Summary Fiscal Year 2024 (Logan Energy Second Quarter 2024, Management Discussion And Analysis)
Note that the percentage increase in crude oil produced was a fantastic percentage. But that crude oil is still a relatively small part of production. Yet that increase in crude oil production (as part of the mix) drove a 94% increase in oil and gas sales despite the fact that natural gas prices declined during the same time period. This is going to be very important to company profitability going forward.
Average Net Prices
The effect on average net prices is a combination of a low volume starting point combined with a more profitable production mix. The wells in this area are the new first wells drilled in years.
Logan Energy Average Price Realized Per Barrel (Logan Energy Second Quarter 2024, Management Discussion And Analysis)
The net result of what is happening is that this company reported higher combined average net amounts per BOE despite very weak natural gas prices. The gain from a better product mix even exceeded the increase in oil prices.
Processing Expenses
Processing expenses per BOE rose considerably because there was a plant turnaround which incurred costs while some production went offline. There was also a burst pipeline that occurred in the first quarter. The infrastructure was inherited. But it has aged, and sometimes things get past even the best inspections. Management also used the second quarter (because it is Spring Breakup) to do some other projects that would save money going forward.
Logan Energy Operating Expenses Second Quarter Comparison (Logan Energy Second Quarter 2024, Management Discussion And Analysis)
Management expects a significant reduction in operating expenses now that many projects have completed, and production is expected to be significantly higher in the second half of the fiscal year. On a weighted average basis, the second half lower costs should account for more of the fiscal year average costs than the first half.
Even with the higher operating expenses, the operating netback still rose roughly 50% over the previous fiscal year because the more profitable production mix outweighed the extra costs that were part of the processing expenses.
Depletion and Depreciation
The last article mentioned that a pipeline had burst. Replacing that pipeline meant that the remaining value of the old pipeline was written off. This increased depreciation expense for the current fiscal year. The repairs that could be expensed were in operating expense (largely in the first quarter).
One of the things becoming apparent is that as a company that began with low production, a lot of things that are not material to larger companies cause some significant swings in expenses and income here. This is one of those things that a larger company handles, but the costs are easily absorbed without a big difference in overall costs.
With production heading above 10,000 BOED for the second half, that should begin to be the case here as well.
Cash Flow
This quarter, much of the cash flow went to fund additional working capital. Given the rapid growth of the production and the necessary startup expenses that happen in the first year after a spinoff, this should be no surprise.
Logan Energy Second Quarter 2024 Cash Flow Comparison (Logan Energy Second Quarter 2024, Management Discussion And Analysis)
The main story line that the cash flow generated from operations is following the rapid growth of revenue despite the plant turnaround and other (higher) operating expenses (that are typical of the second quarter in Canada). The startup story remains largely intact.
The growth in the cash flow actually shows the experience of management in determining the necessary expenses from the frivolous. Rapid growth often has its own risks of losing quality control and running into logistic nightmares that can cause hiccups. Management experience reduces the chances of that kind of “detour” to better profitability.
Once cash flow heads past 10,000 BOED, there may be some savings due to the amount of production that are not available now. That could help the future cash flow and the income statement.
Summary
The rising production with an improving production mix combined with some promised cost savings in the second half would appear to lead to a higher cash flow in the second half of the fiscal year than was the case in the first half of the fiscal year.
There are still some wells to come online from the 2024 campaign. But there will not be any more drilling of new wells until the fourth quarter of the current fiscal year.
Also note that the lender increased the company line of credit to C$75 million from C$50 million. Readers can likely expect more increases as management continues to meet its first-year goals.
Budget
The budget largely remains intact. Now the first-year income statement is largely useless due to all the startup projects and one unexpected burst pipe (at a time of low production at the beginning of the fiscal year).
Logan Energy Fiscal Year 2024 Budget (Logan Energy Corporate Presentation Second Quarter, August 2024)
It would appear that management planned well enough that the budget is still reasonable. This is yet another sign of management experience in building and selling companies.
Some costs like operating expenses should average lower in the next fiscal year because of higher volumes. At the same time, things like a burst pipe that happened in the current fiscal year should likewise be less significant (and not happen again).
It should be noted as well that the original money raised to get the company started is now gone. It is likewise clear that there is now a significant amount of cash flow from existing and expected production. Going forward, the income statement should begin to be significant in the next fiscal year.
This quarter broke into the black due to a hedging gain. However, even without that gain, operations were clearly approaching breakeven. Therefore, the next fiscal year should make money unless commodity prices drop (and maintain that drop) significantly.
For those who can withstand the new company and startup risk, this is a strong buy consideration (although many would consider it speculative). The experience of management building and selling companies sharply reduces that new company risk.
In the meantime, the first few wells are establishing a very profitable trend that could make this company worth far more in the future as more history becomes available. Right now, the original roughly C$120 million of startup money is producing an adjusted cash flow that will likely exceed C$40 million. That is not a bad return on the initial startup money. That return may improve considerably now that many initial infrastructure projects are out of the way.
Risks
Any upstream company is subject to the volatility and low visibility of future commodity prices. Here, there is an established hedging program to reduce at least the immediate volatility. But if in the long-run, prices sustain a downturn, there could be a change in the company outlook.
This company has a plan predicated upon the effectiveness of new technology compared to what was used in the past on the same acreage. At any time, there could be a surprise that would change the company outlook. Since this management has built and sold companies in this same area, that outlook is far more likely to be enhanced by continuing technology advances. However, there are never any guarantees about the future.
A loss of services from key personnel could prove critical to the company’s future prospects because this management is unusually experienced at building and selling companies.
There was a change of some personnel titles. That likely means that the company has made enough progress for management to begin adding personnel in the future. It is also a nod to the successful startup of the company so far. There is always a risk of new employees not meeting expectations or a newly promoted employee failing at their new job.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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