San Leon Energy – Nigeria delays give rise to a funding concern

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

It has been an interesting year at San Leon Energy (SLE.L). After many years of struggling to create value from its existing asset base the company did a fairly impressive Nigerian deal in the summer of 2016. After a period of bedding down it emerged late in 2016 that San Leon was subject to a potential takeover from a mystery Chinese bidder and at a fairly sizable premium to the share price at the time. So the signals from San Leon towers were looking very promising indeed, I had hence rated this as a ‘BUY’ in both my previous posts. It has though gone very quiet from San Leon since the excitement of late 2o16 and we have so far had no formal update on the potential Chinese deal in the first two months of 2017. We did though get an operations update in the thick of ‘bury news’ season, on 3oth January 2016. In today’s piece I take a look at that Operations update and consider whether there was indeed bad news to bury and if so whether my BUY view on San Leon should change.

Quick Facts

San Leon Energy is an oil and gas exploration and production company. The company has a diverse portfolio of assets, but the core part of the business is a 9.72% economic interest (5.5% Shareholder interest) in the OML18 onshore block in Nigeria.

Vital Statistics as at 20th February 2017 close:

Current Share Price 53.5p
All Time High 57.125p – 13th Feb 2017
52 Week Low/High 57.125p – 13th Feb 2017
29.125 – 25th Aug 2016
Market Capitalisation £241m
Enterprise Value C£243m, minimal cash/no debt
Fully Diluted Market Capitalisation C£251m
PE/EPS Not applicable for where San Leon is in the cycle

The Operations Update

San Leon issued an RNS on its operations during the classic ‘no ones watching’ period on 30th December. This release was right in the middle of the traditional few days where companies attempt to bury bad news, so I was naturally sceptical. The operational progress on the ground was actually fairly good though, confirming that the OML18 production reached a peak of 61,000 barrels of oil per day (bopd) during the period. Production was around 50,000 bopd at the time of San Leon’s acquisition, so a 20% uplift in 6 months suggesting things are on track towards the stated target of 115,000 bopd by 2020.

Less positive however was the news on the payment situation and true to festive burying this update formed the final part of the RNS. By way of a refresher, two tranches of loan notes totalling $39m were due for repayment to San Leon by 1st January 2017. The counterparty to these notes is Midwestern Leon Petroleum but this company is ultimately dependant on EROTON for dividends to subsequently settle the loan notes with San Leon. See figure 1 below on how I understand the deal was structured:

Figure 1. Source –, San Leon Energy (Click for Large)

So let’s take a closer look at EROTON and the conditions needed to make these dividends upstream. Those conditions confirmed by San Leon in the Operational Update RNS are as follows:

The Company’s Admission Document, published in August 2016, provided details on the mechanism for dividends from Eroton to be made via Midwestern Leon. The conditions required to be met prior to dividends commencing were set out in paragraph 2.11 “Satisfaction of the conditions to approve distributions by Eroton” on page 59 and the Company is today providing an update on which of those conditions have been met.

The Company has been informed by Eroton that the following conditions have been met:

(i) the issue of a competent person’s report
(ii) compliance with all financial covenants and ratios stipulated in the Reserve Bank Lending (“RBL”) facility agreement
(iii) undertaking from Eroton to commence discussions on an optimal hedging strategy from 1 January 2018 to final maturity date of the RBL facility agreement and has to be in place by September 2017.

However, there are several conditions that have not been met:

The following conditions are yet to be satisfied:
(iv) reservation of nine months’ worth of upcoming debt repayments due in the debt service reserve account; and
(v) submission of audited financial statements by Eroton whereby 60 per cent. of audited net profits can be paid to dividends account.

The Company has been informed by Eroton that the timing for the satisfaction of these conditions is also influenced by the receipt by Eroton of the outstanding balance of historic cash calls from the Nigerian National Petroleum Corporation (“NNPC”), which was expected during 2016 but has yet to occur.

It transpires that EROTON does not have adequate reserves to make the dividend payments as yet. In my view this is likely to be a technical issue but also an actual liquidity issue. The main reason cited is the failure for the NNPC to settle historic cash calls. Fairly significant CAPEX has been expended on the OML18 licence to try and boost the production and it is suggested NNPC have not yet settled all of the bills in relation to this. EROTON does receive an income from the offtake of hydrocarbons, but it appears this is not enough to enable distributions upstream without NNPC settling its Capital account.

Perhaps no surprise, it has been well published that the NNPC has historic cashcalls due to various oil companies operating in Nigeria of around $6.8billion. According to its website, the NNPC has now installed a mechanism which will lead to the settlement of historic cash calls (pre 2016) which is encouraging, but NNPC set a timescale of 5 years to do so.   At present we don’t have visibility of the amounts owed to Eroton nor how much of the cash calls are required to be settled so that Eroton can start upstreaming cash. San Leon have confirmed that they are exploring other mechanisms to try and receive disbursements, but there has been no update on this so far in 2017.

What does this mean for San Leon? How is the balance sheet?

I have prepared an estimate of the cash position for San Leon as at End Feb 2017, i.e. now and where the company could be at April 2017 without resolving a payment mechanism with EROTON.  It was envisaged that the CAPEX for OML18 should be self funded by the EROTON receipts from offtake, so I have not assumed any further contribution needed for this. I am also not aware of any material funding needs on the other non Nigerian assets.

My conclusion – San Leon must be running on fumes now if I am correct in my calculations, which I have illustrated by figure 2.

Figure 2. Source –

The big payments to/from San Leon relate to the Poland asset disposal and a settlement with former partner Avobone N.V also relating to the Polish assets. The net effect is a creditor of around $14m. The entire amount is though not due immediately with the payment profile being deferred as indicated in the RNSs, but all are due for settlement by the close of 2017.

All in all, unless I have got my calculations horribly wrong or Eroton stumps up some cash then San Leon will need to raise some further finance imminently. I have no reason to believe that a fundraise is indeed imminent apart from my ‘back of fag packet’ calculation above. I did though contact San Leon on 14th February and not to wish the Investor Relation team a happy valentines! I made an inquiry about the cash position and the plan to continue to fund the liabilities as they fall due. I have received no comment so far.

San Leon does have a few options at its disposal though. The company in its most recent annual accounts advised it retains a debt facility with YorkVille Advisors. As far as I can tell the terms have not been updated since issue in 2010, If I am correct this agreement provides for a credit line of upto £15m, however this is dilutive facility which means new shares are issued at a 6% discount to the current market price.  I would therefore expect San Leon to try and avoid this if at all possible and secure some sort of bridging loan or other short term non-convertible debt funding. Given the projected cashflow from OML18 I believe the company is likely to have some success here in the now more buoyant Oil and Gas debt market.

The other option is for the company to try and defer payments to its creditors, the most material of course relate to the Polish settlement. However, clearly this is only viable as a short term measure and attracts interest of 5% per annum during the outstanding period, It is not clear the terms of default though, I suspect more punitive. Another consideration is that some of the corporate costs are provided by related parties, including CEO Oisin Fanning, so there could be some further flexibility here to delay.

All in all I don’t think these funding issues are a long term concern, this is a not another Kurdistan but short term San Leon needs to find I would estimate $10m imminently and assuming the deferred payment due to San Leon in respect of the Poland disposal is received on time in October 2017, then a further $10m or so is needed by the end of 2017. This I believe will settle the final Poland payments and any overheads. San Leon could require a further $4.5m if there is any delay to the consideration receivable.

In summary then, if Eroton can settle a reasonable portion of the $39m due then the above concerns go away. It is also worth noting that San Leon is not expected to have any material liabilities once the Poland settlement is off the balance sheet. We do though need clarity on the financial position of EROTON and a revised overview from San Leon on when distributions can be upstreamed. The promise of dividends to San Leon shareholders though still feels very far away until we receive this clarification.

What about the supposed Takeover of San Leon?

I covered the indicative 80p takeover offer in this piece here. Since then we have had no official announcement. The only output in 2017 is a another rumour of a second Chinese bidder. The cynic in me says this is likely placed by San Leon or an advisor, the motive being to try and force the first bidder to show their hand or up their price.

The market though clearly still does not believe an 80p deal will come to fruition given the shares are still trading in the low 50s. Tosca Fund, the largest shareholder are pretty much the only material buyer in the market and single handedly propping up the share price at the moment. To do so it has needed them to increase their holding from 54.41% as at time of the acquisition to 56.75% according to the last Rule 8.3 submission.

How will the deal end? We don’t know, it could be a way out for San Leon and its shareholders, but it does concern me that the due diligence is taking so long. For now though the priority is the financial position of EROTON and consequently how San Leon can settle its short term liabilities. Perhaps this is the same question our mystery bidder is pondering….



I have downgraded my view from Buy to Neutral. However, I certainly wouldn’t want to go short from here.

Long Term I believe this asset is still very attractive and even a part payment from Eroton would likely trigger a re-rate. The potential bonus of bid talks yielding a firm offer also makes this an attractive proposition. However, San Leon is back in my speculative bucket for now.

Watch this space though and those who have a higher risk appetite might consider a punt. As always, do your own research!

Disclaimer – I have no positions in any of the stocks mentioned. requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

San Leon – Share Price Fails to Respond to Indicative Bid

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

I previously wrote about San Leon (SLE) here and at that time in September my opinion was this was a BUY, with a preliminary target of 65p. At the start of this week things got interesting, a number of rumours were published by ‘reputable’ news sources and subsequently confirmed by San Leon. Why then have the shares failed to respond anywhere close to the price?

What’s was the background?

On Sunday, the Irish paper the business post published the following rumour which suggested San Leon were in discussions with an unnamed Chinese bidder to acquire the entire share capital, but no price was mentioned. San Leon very vaguely confirmed the rumour before market on Monday here, but stating as is normal in a bid situation that ‘there can be no certainty that an offer will be made or as to the terms on which any offer might be made’. The shares opened up 23% higher, but quickly ran out of steam shedding 10% from the highs of 53p, back down to 49p.

The share price had another boost on Wednesday lunchtime when Sky News suggested a price of £485m has been tabled and suggesting the counterparty to be Geron Energy. The article also stated this equated to an indicative offer of 80p. San Leon after hours on the same day confirmed this here, confirming the details of the deal but caveating that ‘Talks are at a preliminary stage and there are significant uncertainties as to whether or not the matter will proceed further. A formal offer would only be made following due diligence’.

The share price currently though sits at a 37.5% discount at 50p to the tabled indicative offer of 80p.

So what’s going on? Why has the share price failed to react?

The market does not believe this offer will materialise and hence is heavily risking the likelihood. The first issue is the bidder, Geron Energy Investment. Anyone heard of them? There is not much of a record of them on the internet, the only presence I could find is at, but I’m not convinced this is the party named. So no real clarity and given the recent case where Fitbit was subject to a fake bid from an unknown Chinese investment company I can understand the market being cautious.

The press articles also look heavily like they have been placed by an insider. Unsurprisingly Sky News does not put much work into investigative journalism around a unpopular small cap oil companies. My bet would be therefore that someone has fed Sky the story ‘word for word’. I think the market is questioning, who and why?

San Leon also has a long history of failing to deliver and letting down shareholders. Whilst it did appear to get a good deal in Nigeria and the fundamentals look solid we still have not yet had a substantial trading update on the asset despite the deal completing at the end of September. There is a deep mistrust of the management and good news just fails to stick at San Leon.

Is there room for optimism though? Should the share price be higher?

ToscaFund, the majority shareholder at 55.12% released this statement today, which has some interesting wording:

Toscafund has requested that the board of San Leon Energy respects and engages in discussions with the potential Offeror to assess its approach.

Toscafund notes that the only two comprehensive external research notes covering San Leon Energy were issued in September 2016 by Whitman Howard and SP Angel and set a target share price of 130p and 100p, respectively

Tosca is requesting the ‘board respects and engages in discussions with the potential offeror’. It also points to two notes from the house brokers which have targets significantly above the indicative offer price.

I’m not accusing Tosca of leaking this information, it could have come from a number of sources but I certainly don’t think they would have been upset to see this information in the public realm. The bid rumours forced the board to announce the potential deal, which they may have been sitting on for a while. It wouldn’t surprise me to learn that Tosca are putting serious pressure on the board to get a return on investment as the shares meanwhile languish again below the most recent placing price, at 44p. Let’s not also forget that Tosca has been a longer term holder in San Leon and has previously placed money in at 80p and higher. I believe Tosca are also suggesting by pointing to the broker notes that the minimum they are likely to accept is 100p+. Tosca to me is therefore sending a clear signal of a beauty parade to be had. Their share is potentially for sale and these are the terms.

But ToscaFund has majority control, so why don’t the offeror deal directly with Tosca? Irish Law makes hostile takeovers very challenging due to the requirement of the buyer to gain greater than 90% of shareholder support for takeover. Scheme of Arrangements can reduce this requirement, but this requires the blessing of the board. So it’s best bet for now is to appeal to the board to facilitate offers.

Final comment to my opening concern, San Leon did also ‘confirm that Geron Energy Investment is a party to the Offeror’. This to me suggest Geron are an agent to an ultimate buyer, this may explain why no one has the foggiest about who Geron are. Who therefore is the real interested party?

What’s my view?

Author’s View – Maintain BUY, Target 65p Minimum

As mentioned in my earlier piece, I like this company a lot on fundamentals, I won’t try and repeat my earlier article here, but assuming performance of the asset is currently as expected San Leon is expected to be on 19% dividend yield in the near future. The company is not distressed so I feel fairly comfortable holding the shares even with no bid situation. I appreciate the past but I feel there is a heavy discount already priced in here for the history. The OPEC deal can’t have done any damage to the business case since my last blog either.

There is now also the potential added upside of the major shareholder being open to a potential sale. The major shareholder is also a shrewd bugger, a $4bn hedge fund is not necessarily a bad fellow investor to coexisit with on the share register in this context.

If the bid comes to nothing though I would expect the shares to slump back in the near term. The failure to meet guidance may also hammer the share price given the continued lack of delivery. I am very much looking forward to the next trading update and for now I’ll try and ignore the speculation.

Disclaimer – I have long positions in this stock equal to 2% of my NAV

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

San Leon – 19% dividend yield. Too good to be true?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

I’ve been meaning to cover the return of San Leon for a while and today I’ve finally got around to it. Late in August San Leon return from suspension with the announcement of a deal in Nigeria and connected equity placing to the tune of £170m, at 45p a share. The shares today are trading just below the placing price at 44.62p, this gives an Enterprise value of around £195m, so is there plenty of value to be had here?

What is the background of San Leon?

Prior to the deal being done, San Leon had a range of fairly uninteresting exploration and appraisal stage assets, in Europe, Morocco and Western Sahara. The later of these assets had meant San Leon was no stranger to controversy, with a Major Norweigan Pension Fund blacklisting the company for ‘serious violations of fundamental ethical norms through its onshore hydrocarbon exploration in Western Sahara’. The Norwegians are not the only group either than San Leon have offended, Oisin Fanning the San Leon Energy CEO has been deeply unpopular with shareholders throughout his tenure. Oisin had been rewarded significantly through his £900,000 salary, despite San Leon not achieving much up until now. Protests from shareholders led Oisin to take his salary in shares, at least that way rewarding him for success. (For me his salary is still extortionate compared to the limited operations of the company.)

So what is this latest deal announced by San Leon?

On 22nd January the shares were suspended on AIM due to the takeover of Mart Resources Inc, together with Midwestern Oil resulting in an indirect acquisition for San Leon of a 9.72% stake in producing asset OML18 onshore Nigeria. Mart the acquired company was a Calagary based TSX listed company and San Leon’s co acquirer Midwestern Oil is a Indigenous Nigerian company, part owned by the Delta state government. The other two partners are NNPC, the Nigerian National Oil Company and Sahara, another Nigerian private energy company.

It is unclear to me the status of the operator EROTON post deal as Mart was a major shareholder in this entity, but I suspect San Leon, Mid Western and Bilton will continue to procure the services of EROTON as operator at least in the near term. I do note though that San Leon has a right to provide oil field services under the agreement so it a bit unclear how this will work post deal. It should also be noted that San Leon is also the only non indigenous partner. The complete Joint Venture structure is show in Fig 1 below:

Fig 1 – Source: Broker Report – Post Deal Completion

OML 18’s estimated gross 2P reserves are approximately 576 MMbbl of oil and approximately 4.2 Tcf of gas and its gross 2C contingent resources are approximately 203 MMbbls of oil and approximately 1.6 Tcf of gas. A pretty significant asset then for sure, production wise as of June 2016 OML 18 was producing at approximately 50,000 bopd of oil and approximately 50 MMscfpd of gas. Oil production is expected to peak at 120,000 boe per day by 2020, this requires though CAPEX of around US$1.8bn, this being fully funded by production. The final key metric; Opex per Boe is estimated to be between US$10-13 per Boe. It is clearly an exciting asset.

Fig 2 – Nigeria Licence Map

More good news came on 26th August whenSan Leon announced it had conditionally raised approximately GBP170.3 million (US$221.4 million) through an equity raise to fund the above acquisition, subject to shareholder approval which is likely to be granted on Tuesday 20th September.

San Leon post completion will also appoint Mutiu Sunmonu, highly experienced former Nigeria Country Manager of Shell as Non Exec chairman, this seems like a sensible appointment. Also appointed as Non-Executive Chairman is Ewen Ainsworth, former Finance Director of Gulf Keystone Petroleum and current Finance Director of Nostra Terra, two companies which have failed to deliver for shareholders so I’m less excited about this appointment. Overall though it is pleasing to get some non executives on board to place a check on the executive board. The executives will be the same as today, Oisin Fanning, Joel Price and Alan Campbell.

This is undoubtedly an ambitious deal and I can’t recall a fund raise as big on AIM this year…

But can the Nigeria deal turn around the companies fortunes?

Based on the house broker report here the unrisked NPV of the project is $514m (£395m), i.e. double the current market capitalisation. In fact if things go well the project will have paid back by 2018 (see fig 1) and if things work out the asset should throw off cashflow from there. This seems like excellent value, especially when you also consider San Leon have also promised to return 50% of the Free Cashflow (FCF) to shareholders, the 2017 dividend yield is a whopping 19% at todays share price! The 2017 Price/FCF ratio is also around 3x, so on every level this is a value play and that is before further upsides are considered such as developing the contingent resources and taking part in other exploration prospects in the region.

Fig 3 – Anticipated cashflow per Brandon Hill Broker Report


So what’s the catch? What are the risks?

A company with a Forward Price/FCF of 3x and a dividend yield of 19% usually means one thing – investors don’t believe a word management say. You see these crazy dividend yields a lot with some of the Chinese AIM stocks where fraud and other suspicious activity means most investors treat the whole sector as bargepole. However, San Leon despite some questionable practises is definitely not to be associated with that lot.

Nigeria definitely poses a risk, many investors know the Afren corruption story and many are also aptly aware of an increase in violence in the Delta region, this can often lead to sabotage giving a production downtime risk. That said the partnership structure may make it is easier for the JV to co-exist with the local communities, indeed there have been no recent interruptions to production at the field.

The field has produced well since Eroton took operatorship in 2015, but to maintain and increase production a significant programme is required, as noted above. That said no significant debottlenecking is required to raise production, the work looks limited to workovers, new drilling wells and associated infrastructure. In theory this looks straight forward, however I am unclear of Erotons role going forward given the change of JV structure and it should be noted that neither San Leon nor Midwestern have a significant track record as successful producers/developers.


BUY – Target 65p, capitalising at £280m with still plenty of room left in the NPV valuation.

San Leon knows it has pissed off shareholders previously and thus it is encouraging to see improved corporate governance with the appointment non executive appointments, Oisin taking his salary in shares and finally a mechanism to return cash to shareholders.

There are some risks for San Leon on this asset but there is nothing that causes me too much concern and having a heavyweight in Mutio Sunmono should be able to assist on many of the ‘on the ground’ issues. The dividend yield of 19% and Price/FCF of 3x means that management have plenty of room to screw up significantly and there still be significant value here.

A potential way of investing is to take a small exposure now and add more once the deal is concluded and the production in the first few months is reported.