Earlier in the day, we reported that shares of Lucas Energy, Inc. (NYSEMKT:LEI) were having a huge day, after the company released some very encouraging news. At the time of our article shares were trading up 138%, but since that time, we’ve seen the price soar much higher — all the way up to where it stands now at 384% of yesterday’s closing price. The question that some investors are left pondering though, is whether or not this huge price jump is justified.
Lucas Energy, Inc. (NYSEMKT:LEI) did announce that they’ve reached an agreement to acquire oil-equivalent-rich land that is currently producing 1,200 net barrels of oil equivalent per day (including natural gas and natural gas liquids) from 114 different wells. Additionally, Lucas Energy, Inc. (NYSEMKT:LEI) also will have additional drilling opportunities as 40 more well sites have already been identified.
While this is huge potential for revenue for a company that just recently appeared to be in severe trouble, we must question whether or not this huge move in share price is justified. According to a third-party reserve reports, total proved developed reserves on the land are estimated to be around 5.4 million barrels of oil equivalent, mostly comprised of natural gases and natural gas liquid, with 6% being actual oil. In exchange for these resource-rich lands, Lucas Energy, Inc. (NYSEMKT:LEI) will issue additional shares, meaning dilution will be taking place. A little over 13 million common stock shares, and 552,000 preferred stock shares will be issued.
This is where there could be some concern for investors who have blindly been throwing their money into the company based on the news alone. Currently, as of yesterday, Yahoo Finance reports that only 1.46 million shares were outstanding, with a float of just 944,820. This means that Lucas Energy, Inc. (NYSEMKT:LEI) plans to issue 8.9 times more common shares than there currently are available, meaning investors loose almost 90% of their equity in the company. This doesn’t include the 552,000 preferred shares which are convertible into another 3.9 million common stock shares, bringing the total up to close to 17 million additional shares issued of common stock.
Additionally, Lucus Energy will assume $31,350,000 in commercial bank debt, as well as fork over another $4,975,000 in cash in the deal. While the production of 5.4 million barrels of oil equivalent is huge, and at a $40/barrel price, comes to revenues of $216 million, one must also realize the huge costs to extract each barrel of oil/oil equivalent. According to CNBC, analysis found that at $40/barrel oil, 1.6% of the global oil production becomes unprofitable. With oil prices so low, who knows how much profit this will actually turn into.
In essence, the company is receiving a huge amount of land, rich in resources, pending approval by shareholders and creditors of the sellers, but in turn is issuing close over 10 times the amount of shares currently available, meaning investors are losing over 90% of their equity in the company per share they currently own. Is this really worth the huge jump we are seeing today? In my opinion it is not.
The stock is up 369.09% or $6.09 following the news, hitting $7.74 per share. About 11.78M shares traded hands or up 111011.11% from the average