News

Final results for the year ended 2017

07 September 2017

San Leon Energy Plc (“San Leon” or “the Company”), the AIM listed oil and gas exploration and production company focused on Africa and Europe, today announces its audited final results for the year ended 31 December 2016.

To view the full press release, please click here.

Highlights:

  • San Leon announced and completed its transformational entry into Nigerian onshore oil and gas production, in the world-class OML 18 block, securing an initial 9.72% indirect economic interest.
  • Since the acquisition constituted a reverse takeover under the AIM Rules, San Leon published an AIM readmission document and the Company’s ordinary shares were subsequently readmitted to trading on AIM in September 2016.

Operational

  • Eroton is the Operator of OML 18 while San Leon has a defined partner role under the Master Services Agreement. Plans from the 2016 Competent Persons Report (by Petrovision Energy Services Limited) are being executed to optimise production using coiled tubing, electric line, and slickline. Challenges are being addressed as they arise.
  • Such issues include:
    - higher than expected pipeline loss allocation (with fiscal metering being installed during Q4 2017 to help resolve)
    - higher than expected downtime (with valves to allow isolation of the upstream part of the NCTL pipelines being installed to reduce downtime)
    - slower than anticipated well work, due to a combination of downhole challenges, delays in permissions being granted, and capex availability. Downhole challenges are being addressed with the appropriate technical resources
  • The Orubiri Field came online in late 2016, and the Krakama Field was brought onto production in early 2017. They are expected to be followed by the Buguma Field in Q4 2017, which will now be brought on by direct tie-back to the Krakama Field.
  • Q4 2017 is expected to see the commencement of heavy workover and new well drilling.

Corporate

  • Completed an approximately $220 million equity raise as part of the OML 18 transaction, through a placing of new ordinary shares in September 2016.
  • A new Board was put in place at the time of the closing of the OML 18 transaction, to reflect the new focus on Nigeria. This included the appointment of Mutiu Sunmonu, formerly Managing Director of Shell Petroleum Development Company and Country Chairman of Shell Companies in Nigeria, as non-executive Chairman.
  • In November 2016, San Leon monetised its position in the Rawicz gas development for a net US$9.0 million in cash (part of which is due to be received in 2017).
  • The Company reached agreement with Avobone in November 2016, which was subsequently revised in June 2017, regarding payment for Avobone’s exit from the Siekierki project. The remaining amount to be paid according to the agreed repayment schedule is approximately €14.7 million as at 06 September 2017. Payments are currently up to date.
  • Just before year end, we announced the receipt of an approach from a possible, which may or may not lead to an offer being made for San Leon. After the reporting period we announced that we were in discussions with a further three entities, and in June 2017 we announced a conditional offer from China Great United Petroleum (Holding) Limited. There can be no certainty that any of these discussions will lead to a firm bid, or any transaction.
  • Oisin Fanning (now Chief Executive Officer) has drawn only 20% of his salary in cash with the balance paid or accruing in San Leon shares.

Financial

  • Total comprehensive profit for the year of €10.7m (2015: loss of €213.6m).
  • Total assets increased to €346m at 31 December 2016 (2015: €132m).
  • At year end the Group had cash and cash equivalents of €0.2m (2015: €0.9m).
  • Eroton continues to accrue cash from OML 18 operations into the Debt Service Reserve Account (“DSRA”) attached to its existing Reserves Based Lending (“RBL”) facility. Depositing three future quarterly RBL repayments into the DSRA is one of the conditions that need to be met before the RBL lenders will allow distribution of dividends from Eroton to its shareholders.
  • As Eroton has confirmed that other conditions have already been met, cash flow from Eroton can begin once sufficient funds have accrued in the DRSA, subsequent to which the Company can initiate its capital distribution policy.
  • The Company’s Irish counsel is progressing a capital reorganisation which is required to allow such distributions, which are later than originally expected, and the timing of such distributions will depend in part on the timing of distribution of dividends from Eroton.
  • The Company has various guarantees and a share pledge in place which provides security for all payments due to the Company under the MLPL Loan Notes. As of 06 September 2017 the Company had US$77.7 million in outstanding repayments.
  • An assessment of going concern highlights the importance of cash flow from Nigeria to San Leon’s continued operations, particularly as receipt of cash from dividends by Eroton and oan note repayments have been delayed (Ref: Note 2 Emphasis of matter: Going concern and Note 3: Going concern).
  • Continued asset optimisation and cost reduction strategy, resulting in relinquishing certain licences.

Outlook

  • The Company has concentrated on the right asset in Nigeria, with the right partner. The three expected revenue streams (loan repayments, dividends from San Leon’s indirect shareholding in OML 18 and from the provision of workover drilling and facilities services) represents a diversified approach to securing cash flow.

Market Abuse Regulation (MAR) Disclosure
Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement

CHAIRMAN’S STATEMENT

Corporate

2016 was all about the OML 18 transaction, and its €198.7 million (US$220.7 million) fund raising. The OML 18 transaction is summarised here.

A new Board was put in place by SLE on 21 September 2016 to reflect the new focus on Nigeria and cash flow.

San Leon undertook a number of steps to effect the purchase of its indirect interest in OML 18 in 2016. Midwestern Leon Petroleum Limited (MLPL), of which San Leon Nigeria BV has a 40% shareholding, purchased all of the shares in Martwestern Energy Limited (Martwestern). Martwestern holds a 50% shareholding in Eroton Exploration and Production Company Limited (Eroton), the operator of OML 18.

To partly fund the purchase of 100% of the shares of Martwestern, MLPL borrowed approximately €165.6 million (at year end rate) (US$174.5 million) in incremental amounts by issuing Loan Notes under a Loan Note Instrument which attracts a coupon of 17 per cent. Midwestern Oil and Gas Company Limited (Midwestern) is the 60% shareholder of MLPL and transferred its shares in Martwestern to MLPL as part of the full transaction. Following its Placing in September 2016, San Leon Energy PLC purchased all of the outstanding Loan Notes issued and is therefore the beneficiary and holder of all Loan Notes issued by MLPL. SLE has to be repaid the full €165.6 million (US$174.5 million) plus the 17% coupon once certain conditions have been met and using an agreed distribution mechanism. SLE is also a beneficiary of any dividends that will be paid by MLPL as a 40% shareholder in MLPL, but the Loan Note repayments must take, priority over any dividend payments made to MLPL shareholders and in accordance in the terms of the shareholders agreement.

Through its 50% shareholding in Eroton and other agreements, Martwestern holds an initial 24.3 per cent. economic interest in OML 18. Through the ownership of MLPL and other commercial agreements, SLE is an indirect shareholder of Eroton, and the Company holds an initial 9.72% economic interest in OML 18.

In November 2016, San Leon sold its position in the Rawicz gas development for a net €8.5 million (US$9.0 million) in cash, and in the Siekierki field for €1 plus a Net Profit Interest of 10%. Certain San Leon liabilities on these assets were also written off, to the value of approximately €2.8 million (US$3.0 million). Thebalance of the cash payment, US$4.5 million plus interest, is due to San Leon on or before 01 October 2017. In the case of Rawicz, this transaction monetised the successful drilling over the previous two years.

The Company also reached agreement with Avobone N.V. and Avobone Poland B.V. (together “Avobone”) in November 2016, which was subsequently revised in June 2017, regarding payment for Avobone’s exit from the Siekierki project. The remaining amount to be paid by SLE according to the agreed repayment schedule, is approximately €14.7 million. Payments are currently up to date.

Just before year end, we announced the receipt of an approach from a possible offeror, which may or may not lead to an offer being made for San Leon. After the reporting period we announced that we were in discussions with a further three entities, and in June 2017 we announced a conditional offer from China Great United Petroleum (Holding) Limited. Following the end of the 45-day due diligence period San Leon anticipates an update from China Great United Petroleum (Holding) Limited in the near-term. While there can be no certainty that any of these discussions will lead to a firm bid, or any transaction, the Company conducts such talks with shareholders’ best interests at heart, and considers the interest shown in San Leon by outside parties to be indicative of the quality of the OML 18 asset and of San Leon’s strong position in it. The Company will provide further updates on these discussions as appropriate.

Operational Update

Eroton is the Operator of OML 18 while San Leon has a defined partner role. A Competent Person’s Report preparedby Petrovision Energy Services Limited was published as part of the Admission Document, and provides considerable detail on plans for the asset. Those plans are being executed and, as with any major operation, are being adapted to fit opportunities and challenges as they arise. Fiscal metering is being installed on each OML 18 field to counter increased export pipeline loss allocation (expected installation is Q4 2017), and valves to allow isolation of the upstream part of the NCTL pipeline are being installed to reduce downtime.

The basis of optimising production is understanding the wells. Considerable data gathering has been carried out in the existing wells, and field activity is capitalising on that knowledge. Slickline, coiled tubing and electric line crews are involved across the OML 18 fields to optimise production and bring wells back online. Some of this work has been slower and more challenging than anticipated, so appropriate resources have been mobilised to address any issues. Some work programme delays have been caused by the slow granting of permissions, and by capex availability due to deferred receipt of cash call payments from NNPC.

The Orubiri Field came online in late 2016, and the Krakama Field was brought onto production in early 2017. They are expected to be followed by the Buguma Field in Q4 2017, which will now be brought on by direct tie-back to the Krakama Field. San Leon continues to believe in the asset, and supports the proactive measures being taken to realise that value.

Q4 2017 is expected to see the commencement of heavy workover and new well drilling, both of which target significant hikes in production rates.

Eroton continues to accrue cash from OML 18 operations into the Debt Service Reserve Account (“DSRA”) attached to its existing Reserves Based Lending (“RBL”) facility. While Eroton awaits Nigerian National Petroleum Corporation (“NNPC”) paying the balance of its cash calls for 2015 and 2016 (which is approximately US$93 million), in a welcome move NNPC began paying current cash calls from January 2017. Depositing three future quarterly RBL repayments into the DSRA is one of the conditions that need to be met before the RBL lenders will allow distribution of dividends from Eroton to its shareholders. The cumulative amount required to fill the DSRA account varies according to the RBL amortisation schedule, but is approximately US$120 million during 2017, falling to approximately US$90 million in 2018. As of 6 September 2017, the DSRA contained approximately US$32 million (9.9 bn Naira). As Eroton has confirmed that other conditions have already been met, dividends from Eroton to its shareholders can begin once sufficient funds have accrued in the DRSA. Subsequent to which San Leon can initiate its policy of returning 50% of Nigerian free cash flow to shareholders. The Company’s Irish counsel is progressing a capital reorganisation which is required to allow such distributions, which are later than originally expected for the above reasons; the timing of such distributions will depend in part on the timing of distribution of dividends from Eroton.

The Company has various guarantees and a share pledge in place which provides security for all payments due to the Company under the MLPL Loan Notes. Midwestern Oil and Gas Limited and its subsidiary, Mart Resources have guaranteed the payments. As of 6 September 2017 the Company had US$77.7 million in outstanding repayments under the MLPL Loan Notes relating to the quarterly repayments up to 1st July 2017.

Other Operations

The Company has continued in 2016, and after the reporting period in 2017, to exit a number of noncore assets (in Morocco – Sidi Moussa, in Poland – Braniewo, Gniew, Budzow, Bestwina, Wielun, Olesnica, South Prabuty, Cybinka and Torzym) to reduce costs and focus on its Nigerian assets.

To complement the Company’s cost reduction efforts, which include deferring some cash payments of Directors’ fees, the Company has well-established loan relationships with various terms and conditions.

During 2017 additional funds have been provided to the Company using these loan relationships with a current outstanding principal of approximately €4.3 million (£4.0 million).

Further facilities are available as follows:

  • An agreement with YA Global Master SPV Ltd ("YA Global") provides the Group with a debt facility of £15 million accessible over a 30-month period from 21 May 2015 ("the facility") until November 2017. YA Global has indicated that they may be prepared to extend the term for a further period but there can be no guarantee of this.
  • A facility of up to €20 million which may be available in two tranches from a UK based institution for an 18-month period until the end of 2018 in the event that the Company should require additional working capital. This is subject to terms and conditions, to be agreed in the event that the Company wishes to use this facility.

Financial Review

Revenue for the twelve months to 31 December 2016 was €0.3 million compared with €0.1 million for the twelve months to 31 December 2015. San Leon generated a profit before tax of €5.7 million for the twelve months to 31 December 2016, compared with loss before tax of €213.4 million in the twelve months to 31 December 2015. Administration costs increased for the 12 month period to €26.4 million (2015: €17 million). Profit per share for the period is 3.42 cent per share (2015: loss per share of 506.40 cent per share). Cash and cash equivalents including restricted cash at 31 December 2016 amounted to €1.5 million (31 December 2015: €2.3 million). The directors have undertaken an assessment of going concern as detailed in the Directors' Report on page 32, and Note 1 on pages 54 and 55 , which highlights the importance of cash flow from Nigeria to San Leon’s continued operations, particularly as receipt of cash from dividends by Eroton and loan note repayment has been delayed.

Outlook

The Company has concentrated on the right asset in Nigeria, with the right partner. The three expected revenue streams (loan repayments, dividends from San Leon’s indirect shareholding in OML 18 and from the provision of workover drilling and facilities services) represents a diversified approach to securing cash flow.

Mr Mutiu Sunmonu
Non-Executive Chairman


CHIEF EXECUTIVE OFFICER’S STATEMENT

“2016 was Year One of OML 18, Year One of the new San Leon. We are now more of a production, assetmanagement company, with a solid base – our indirect interest in Eroton provides us with exposure to a
world-class Nigerian oil and gas block, OML 18, over one thousand square kilometres of energy resources and infrastructure, rich with production, workover and service opportunities.”

I extend a very warm welcome on behalf of the Company, to Mr Mutiu Sunmonu – our new Chairman. Mr. Sunmonu brings with him a wealth of experience of the Nigerian E&P industry, and of OML 18 itself.

The OML 18 transaction is pivotal for the Company, and necessarily receives the vast majority of management’s effort. Both Mr. Sunmonu and I sit on the Eroton Board, and we are appointing highly experienced personnel into technical and financial positions within Eroton. We work as partners with Eroton to help ensure the success of the project. There have been challenges, including delays in well operating, increased downtime and increased pipeline losses allocation, which have impacted on the timing of repayment of loan notes to San Leon, and of dividend payments by Eroton. However, together with Eroton, we have found solutions which are in the process of being implemented. The delays in receipt of these cash flows are reflected in the assessment of going concern undertaken by the directors as detailed in the Directors' Report on page 32, and Note 1 on pages 54 and 55.

We are well underway with setting up our Nigerian service entity, through which San Leon will benefit from providing drilling, workover and facilities services on OML 18 – supporting one of the three expected cash flow streams from Nigeria. The Company is working with an established Nigerian drilling entity to finalise securing of one or more rigs to perform this work. Outside Nigeria we have seen an increase in business development interest in our other assets. The sale of Rawicz and Siekierki was completed, and various other assets are classified as held for sale. We have been clear for some time now, that non-core assets will be divested, and we have reduced such costs throughout the year.

I look forward very much to securing value for shareholders, whether through a corporate transaction or via our stated shareholder distribution policy on page 23.

Oisín Fanning
Chief Executive Officer

Chief Operating Officer’s statement

“It is most Petroleum Engineers’ wish to be in the middle of a world-class asset with an active work programme of well revitalisations and new drilling. While there have been challenges as well as successes, we have outlined to shareholders how Eroton is tackling issues as they arise, as it targets the gross field production of 100,000+ bopd shown in the CPR, albeit with some delays as announced. San Leon expects to become more actively involved in operations as its Nigerian service company begins performing drilling and workover functions, and appoints its senior technical appointee to Eroton.

OML 18 offers a strong cross-section of existing production, contingent resources, vast exploration on a block which is larger than Bahrain, existing oil and gas infrastructure, and nearby downstream offtake. Given Eroton’s active community relations, value from the block is fully attainable.”

Joel Price
Chief Operating Officer

POLAND
Interest in San Leon’s Polish assets has picked up significantly as the oil price has recovered. These assets cover both conventional and unconventional, and both oil and gas.

As an example, in the North of Poland the Company’s Gdansk W concession holds 220,000 acres of shale gas potential, with the most successful single vertical frac in Europe already well tested. The Szczawno concession includes a drilled but unfracced vertical well in a deeper formation with some natural fracturing.

With some concession having been relinquished or sold, we have reduced overhead costs. The Company looks forward to updating shareholders on monetisation of the remaining assets in due course.

IRELAND
San Leon’s 4.5% Net Profit Interest (NPI) on the Barryroe oil field provides access to future revenue streams with no additional capital required. A CPR was produced by the operator in 2013, and the operator continues efforts to farm out the asset to enable the next wells to be drilled.

MOROCCO
San Leon has interests in three areas in Morocco following its exit from Sidi Moussa (offshore). These cover onshore gas appraisal (Tarfaya conventional area, with a well drilled in 2015), onshore oil shale (Tarfaya oil shale), and onshore exploration (Zag).

After the reporting period, ONHYM contacted San Leon to take control of the bank guarantee on Zag and to request a further payment for work not performed.

The Company is in discussions with ONHYM regarding the area, which it believes should be subject to Force Majeure due to the security situation.

ALBANIA
The Durresi block is an extensive offshore area with local discovered oil and gas.

San Leon has previously acquired significant 3D seismic data, and continues to work on the technical side of the block while looking for a partner to drill.

To view the full press release, please click here.

Enquiries:

San Leon Energy plc
+ 353 1291 6292
Oisin Fanning, Chief Executive

SP Angel Corporate Finance LLP
(Nominated adviser to the Company)
+44 20 3470 0470
Richard Morrison
Ewan Leggat
Soltan Tagiev

Whitman Howard Limited
(Financial adviser to the Company)
+44 20 7659 1234
Nick Lovering

Brandon Hill Capital Limited
(Joint broker to the Company)
+44 203 463 5000
Oliver Stansfield
Jonathan Evans

Vigo Communications
(Financial Public Relations)
+44 207 830 9700
Chris McMahon
Alexandra Roper

Plunkett Public Relations
+353 1 280 7873
Sharon Plunkett

 

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