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San Leon links up with Aurelian

Are two disappointing unconventional gas explorers, San Leon Energy and Aurelian Oil & Gas, better than one?
November 14, 2012

Win-win, or lose-lose? For investors in San Leon Energy (SLE) and Aurelian Oil & Gas (AUL), a proposed merger could end up being both.

IC TIP: Hold

The win-win case

With operations or exploration licences in at least eight countries, San Leon needs a coffer full of cash to simultaneously advance its many promising projects. Indeed, the company's cash and cash-equivalent holdings fell from €26.2m at 31 December 2011 to €6.2m by 30 June - and with capital markets more difficult to tap than ever, Aurelian's $52m cash pile looks exceptionally tasty.

Aurelian, on the other hand, has been on the lookout for prospective buyers for the company since February, when it launched a strategic review. And, with serious technical challenges at its main unconventional gas asset in Poland and no willing parties other than San Leon - at least, none with better offers - the merger offers shareholders and management an exit strategy and a modest 13 per cent premium to the company's closing price before the announcement.

The deal also consolidates the companies' significant unconventional gas assets in Poland, such that the combined entity will be the largest foreign acreage holder in the country.

The lose-lose case

San Leon's share price has tumbled nearly 15 per cent since the all-share merger announcement because of the significant dilution it will cause. (San Leon shareholders will hold roughly 66 per cent of the enlarged company once completed.) Only time will tell whether the Aurelian deal will benefit shareholders in the long run. But San Leon's last major acquisition - of Poland-focused unconventional energy explorer Realm Energy in August 2011 - took place when San Leon's shares were worth 18.5p apiece. Reflecting the lack of technical success advancing the combined group's shale gas assets, San Leon's shares now trade for 8.15p.

Aurelian's share price has fallen, too (reflecting the all-share nature of the deal) and is down 12 per cent following the announcement to 9.7p. Considering the company began the strategic review when its shares were worth 16.25p apiece, shareholders could understandably be miffed that it is selling out at a low valuation.