LEI - Lucas Energy, Inc

[wknecht]

After reading the thread the other week about Ryan Morris, I got interested and took a look at some of his positions. In particular I found the LEI idea interesting, and I recently initiated a small position. His thesis for this appears to be on VIC, and although there are aspects I don't quite follow, it appears to be largely intact to me. Given that he is now on the BOD and has replaced management, it provides some insight into how value might be extracted (e.g., Marathon JV rescission rights). I was curious if others on this board have followed this situation?

 

Since his VIC post, I have been encouraged by production numbers coming out of counties where LEI has property.  For example, compare the production estimates Marathon had in mind (pg 7) around the time they paid $25,000/acre to:

• 6,275 boepd initial production recently achieved by Marathon in Gonzales county; note, I imagine this is somewhat somewhat of a PR number and not a run rate, but very strong nevertheless
  
• production being achieved by EOG
  
• production being achieved by Sanchez Energy in the Palmetto Area
  

Also, LEI itself sold royalty interests on a small plot for $77,000/acre.

 

I'm fairly new to the E&P space, but these figures seem to point to higher acreage prices. Given the announced deal with Milestone (which will essentially involve the sale of acreage) seems to be in the negotiation phase, these are interesting data points.

[stahleyp]

This hit 55 cents per share today. Down over 60% over the past year.

 

Morris owns about nearly 5.5 million shares (about 20% o/s). I think it's a pretty big stake for him.

 

From what I've read (Meson's letter) the company has 3x market cap of proven reserves.  Trading under BV (.7).  Operating expenses are being slashed though it looks like their bleeding cash and issuing shares.  There were a couple 13Gs filled this year too with Ironman Energy, Hall Phoenix and Long Focus (I'm not familiar with any of these guys, to be honest) adding stakes.

[ItsAValueTrap]

Investing in independent oil and gas companies is very, very difficult in my opinion.  You should not trust their reserves.  It is extremely difficult to perform due diligence on their reserves without (A) technical expertise and (B) access to technical data.

 

If you want to scam investors, independent oil and gas is a good way to do it because it's legal and many investors don't know any better.  This makes the sector a magnet for fraud and so you have to deal with a ridiculous level of adverse selection.

 

*Disclosure:  Short a number of independent oil and gas companies.  I never looked at Lucas Energy.

[stahleyp]

Investing in independent oil and gas companies is very, very difficult in my opinion.  You should not trust their reserves.  It is extremely difficult to perform due diligence on their reserves without (A) technical expertise and (B) access to technical data.

 

If you want to scam investors, independent oil and gas is a good way to do it because it's legal and many investors don't know any better.  This makes the sector a magnet for fraud and so you have to deal with a ridiculous level of adverse selection.

 

*Disclosure:  Short a number of independent oil and gas companies.  I never looked at Lucas Energy.

 

Thanks, Admiral (I'm sure you get the reference. ;)  )

 

Morris is a director on the board, too. While it wouldn't stop fraud, I'd hazard to guess it would reduce the probability. If you get the chance to take a look, let us know your thoughts. :)

[ItsAValueTrap]

Hmm G&A spending looks totally out of line.

[stahleyp]

Here is the quote from the letter (2013 annual letter - if this isn't okay to post, someone let me know and I'll remove it).

 

"Decreased operating expenses by 40% at Lucas Energy year over year and completed the first

on-budget well in the company’s history. Though Lucas has proved Eagle Ford oil reserves over

3X the market capitalization, the challenging capital markets for micro-cap oil and gas

companies (the sub-index declined 25% in 2013) has made it prudent for us to seek increased

scale."

 

Curiously, nothing is mentioned about LEI in the 1Q 2014 letter.

[Myth465]

Interesting situation.

Seems like an outright sale at a percentage of PV is in their best interest.

 

Looks like they are trying to get back on positive cash flow, and then slowly develop / farm out the remaining acreage.

Based on the effort, I would guess they think that will yield a higher return then a sale today.

 

Will watch for a bit, and will look for those 5 year warrants.

[Myth465]

Pretty good call / presentation. Explains the situation quite well.

Seems like Management is doing well given the situation.

 

http://ir.lucasenergy.com/ir-calendar

[stahleyp]

Up over 23% today on no news (that I see). About 3.5x of average volume. Curious.

[yadayada]

hasnt morris been losing money in the past bull market. Wouldnt want to follow that guy anywhere.

[stahleyp]

hasnt morris been losing money in the past bull market. Wouldnt want to follow that guy anywhere.

 

Yeah, but Tilson and Gabelli seem to believe in him.

[Sportgamma]

What initially caught my interest in Ryan was that I felt he was trying to replicate the Buffett from the partnership days.

 

I think he tries very hard to find his edge and subsequently made a number of expensive mistakes. In my opinion, he tends to overthink things or tries to do something very complex as opposed to just pick cheap stocks.

 

I followed him into INFU which has worked out nicely, although turn of events very different from what I thought his plan was.

 

My general view of him is that he's not a bullshitter, that he's a talented guy and that he's genuinely sincere in what he's doing, despite the bad results.