- $187mn investment from Tri Ri Asset Management
- Controlling interest being acquired in subsea export pipeline
- Previous complex corporate transaction terminated
Aim-traded Nigeria-focused exploration and production company San Leon Energy (SLE:16.5p – suspended) has secured financing that enables it to take a controlling interest in the operator of a new subsea export pipeline for the Eroton-operated Niger Delta licence, OML 18.
Tri Ri Asset Management (TRAM), a New York-based fundamental value investor with $850mn assets under management, is advancing a $125mn (£103mn) convertible secured loan to San Leon that has a term of three years and incurs a fixed interest rate of 7.5 per cent. San Leon will receive $89.3mn (£73.5mn) net proceeds on drawdown as the interest costs of $28.1mn will be deducted from the principal as well as a $7.5mn one-off arrangement fee payable to the advisers who arranged the loan.
During the three-year loan term, TRAM has the right to convert $70mn of the loan principal into a one-third shareholding in San Leon’s wholly-owned subsidiary which owns its shareholding in Energy Link Infrastructure (ELI), a midstream infrastructure group. ELI is the operator of the new subsea 100,000 barrels of oil per day (bopd) alternative crude oil evacuation system (ACOES) export pipeline within the OML 18 acreage and a 2mn barrels of oil capacity offshore floating storage and offloading (FSO) vessel. TRAM also has the right to convert the balance of the loan, being $55mn, into 90mn new San Leon shares at a conversion price of 50p. That is three times San Leon’s share price when the Aim-traded shares were suspended, at 16.5p, on 3 July 2023, news of which led to a sell-off.
In addition, TRAM is subscribing for 44.99mn new shares in San Leon, or 10 per cent of the current shares in issue, at 30p a share, an 82 per cent premium to the suspended share price. This will raise $16.4mn (£13.5mn). As part of an investment that could total $187mn, TRAM has been granted 62.5mn warrants, exercisable at 60p per share, which could raise a further $45.6mn (£37.5mn). The US investment group is also entitled to a preferential economic interest equal to 50 per cent of the dividends received by San Leon from ELI for a period of 15 years.
Game-changing transaction
It’s a game-changing transaction for San Leon. That’s because it enables the UK company to advance a further $37mn loan to ELI and conclude a previously announced $42mn investment. Alongside that transaction, San Leon is acquiring a 13.5 per cent stake in ELI for $12mn (price renegotiated down from $15mn) from another shareholder to give the company a 55 per cent controlling interest in ELI, thus enabling it to exert control. ELI is heavily indebted and needs an immediate injection of capital to meet obligations to the main contractor for the pipeline construction. The new funds will enable ELI to settle these obligations and enable the ACOES export pipeline to be finally completed before the year-end.
Once commissioned, the new 47km secure undersea pipeline from OML18 to the FSO Eli Akaso terminal will materially reduce pipeline losses and downtime through the existing Nembe Creek Tunnel line to the Bonny Terminal. It will also mean that ELI starts generating substantial revenue, a win-win situation for all parties. Moreover, the terms of TRAM’s investment in San Leon highlight a more realistic valuation of the company’s shares as well as securing its funding. San Leon will now repay a $5mn loan from majority shareholder Toscafund and settle $15mn of liabilities outstanding to other creditors.
San Leon in the hot seat in loan note negotiations
The TRAM investment also puts San Leon in a strong financial position to deal with the repayment of $120mn of outstanding loan notes (17 per cent annual coupon) the company is due. San Leon currently holds its indirect 10.58 per cent interest in Eroton through a 40 per cent stake in Mauritius acquisition vehicle Midwestern Leon Petroleum, which effectively owns a 98 per cent stake in Eroton. San Leon issued the loan notes to Midwestern Leon Petroleum to enable Eroton to fund part of its share of a $1.1bn equity buyout of OML 18 from a Shell-operated consortium in 2015.
San Leon had previously intended to extinguish the loan notes as part of a protracted and complex transaction that would have seen San Leon increase its stake in OML 18 from 10.58 per cent to 44.1 per cent. However, the board has terminated this transaction and is now in early-stage discussions to swap the loan notes into new assets in Midwestern Leon Petroleum. The directors are also interested in acquiring Midwestern Leon Petroleum’s indirect interests in ELI, thus providing San Leon with an even greater share of the revenue generated from the ACOES export pipeline.
The guarantor of the $120mn loan notes is Midwestern Oil and Gas, the second-largest shareholder in San Leon with a 13.18 per cent shareholding. That company holds the other 60 per cent of Midwestern Leon Petroleum and has close links to Eroton and other members of the OML 18 consortium. Midwestern and Eroton have a common chairman. A deal will be done as it’s in Midwestern’s interests to do so.
Due to the amount outstanding on the Midwestern loan notes, any potential transaction would constitute a reverse takeover under Rule 14 of the Aim company rules, so would require the publication of a new Aim Admission Document by San Leon. The document will highlight the substantial hidden value in San Leon as highlighted by the terms of the TRAM transaction.
Shares suspension closer to being lifted
Although San Leon’s shares will remain suspended until the company has published both its 2022 accounts and its 2023 interim accounts, the new investment in ELI will accelerate the process.
That’s because the delay in publication was due to San Leon not receiving the audited financial statements of Midwestern Leon Petroleum, which includes the consolidated results of both Martwestern Energy and Eroton Exploration & Production (the operator of OML 18), as well as the audited financial statements of ELI. These are independently run companies so San Leon previously had no control over their respective audit and year-end processes.
However, by taking a controlling stake in ELI and terminating the previous transaction with Midwestern Leon Petroleum and Midwestern Oil and Gas, San Leon is in the driving seat. Importantly, the board is committed to publishing both sets of accounts as soon as possible to enable the share suspension to be lifted.
Admittedly, the shares have had a roller coaster ride since I included them, at 27.5p, in my 2021 Bargain Share Portfolio, hitting a high of 57p in the summer of 2022 before sliding below my advised buy-in price shortly before the share suspension when some investors headed for the exit. There is light at the end of the tunnel, and it points to a significant re-rating when the share suspension is lifted. The company not only owns valuable investments in both ELI and Eroton, but the $120mn Midwestern loan notes are alone worth a third more than San Leon's market capitalisation. Hold.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.
