- $50mn alternative financing discussions at an advanced stage but taking longer than expected
- $10.5mn of creditors outstanding
- Ongoing negotiations for disposal of non-core Oza field
- Delay in releasing 2022 accounts will see shares suspended from 3 July
Aim-traded shares in Nigeria-focused exploration and production company San Leon Energy (SLE:16p) fell 29 per cent to an all-time low after the company issued an update on its protracted refinancing and the delay to the release of its 2022 accounts.
The company is undergoing a major capital reorganisation that will see it end up with a 44.1 per cent stake in the Eroton-operated 1,035 sq km Niger Delta licence, OML 18. I covered the details of the complex transaction last summer (‘Slick operators’, IC, 19 July 2022), a key point being that San Leon is taking a majority interest in and making further loan investments to ELI, a midstream infrastructure group. The company is also the operator of a new subsea 100,000 barrels of oil per day (bopd) alternative crude oil evacuation system (ACOES) export pipeline within the OML 18 acreage.
The export pipeline runs to a 2mn barrels of oil capacity offshore floating storage and offloading vessel. Getting the ACOES up and running as quickly as possible is critical as it will enable OML 18 to start exporting oil – the company has suffered material pipeline losses and downtime through the existing Nembe Creek Tunnel line to the Bonny Terminal. Importantly, ELI is now in the process of finalising regulatory permits to commence full terminal operations.
Following a complex reorganisation with other associated parties, San Leon’s interest in ELI is increasing fivefold to 50.6 per cent and the company’s high-interest loans made to ELI will increase from $20mn currently to $48.3mn. San Leon previously entered a $50mn loan facility with MM Capital to fund its additional ELI investments and provide the company with working capital. However, having decided to seek alternative funding arrangements, financing discussions have not progressed as quickly as the board had planned, although they are at an advanced stage.
That’s an issue, as San Leon also needs to tap the $50mn new credit line to pay $10.5mn of unpaid creditors including directors, employees and tax authorities. The working capital situation is not being helped by delays to the proposed disposal of its non-core investment in the Oza oil field in Nigeria. The asset has a book value of $5.6mn and sale proceeds would provide San Leon with much-needed short-term cash flow.
Delays to 2022 accounts
To compound matters, San Leon is unable to release its 2022 annual accounts due to delays in receiving the accounts of Midwestern Leon Petroleum, which include the consolidated results of Eroton (the operator of OML 18).
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 also holds $115mn of loan notes (17 per cent annual coupon) issued by Midwestern Leon Petroleum that enabled Eroton to fund its share of the OML 18 acquisition.
Although the Midwestern Leon Petroleum loan notes will be extinguished as part of the protracted transaction that will see San Leon increase its stake in OML 18 from 10.58 to 44.1 per cent, for the time being the loan notes are still an asset of San Leon and are accruing interest. It’s a significant asset, worth 20p a share. The same is true of San Leon’s outstanding $20mn loan to ELI, which is worth 3.5p a share. The loan notes account for a quarter of analysts’ 86p-a-share tangible net asset value estimate.
News prompts share price sell-off
In the circumstances, it’s understandable why some shareholders have chosen to sell out today, San Leon’s share price has fallen from around the 23p level at which I last rated the shares a hold (‘Press speculation is making things difficult for this oil stock’, 27 February 2023).
However, chief executive Oisin Fanning is “optimistic that we are nearing a satisfactory conclusion [with our proposed funding partners]”. Once funding is secured, he expects San Leon to “progress quickly towards making the outstanding further investments in ELI and finalising our accounts”. Also, assuming the alternative funding is secured so that San Leon can complete its funding of ELI, then the ramp-up in export oil sales through the ACOES will deliver material cash flow to enable ELI to start repaying San Leon’s loan.
It’s worth noting, too, that San Leon’s share price is very volatile due to the low free float. Funds managed by Toscafund Asset Management hold 75 per cent of the 450mn shares in issue, and Midwestern Oil & Gas Company holds a further 13.18 per cent stake. Indeed, the 29 per cent share price fall has not been supported by selling volume as only 373,000 of the 450mn shares in issue were traded by 11am this morning.
So, although today’s news is far from ideal, I feel that it’s still worth holding onto the shares given the elevated risk premium embedded in the share price, which is depressing the valuation. The shares currently trade on an 80 per cent discount to risked NAV. In addition, San Leon’s board intends to return 50 per cent of free cash flow back to shareholders by way of dividends and proposes to issue shareholders with $40mn of preference shares to be redeemed 42 months after the major capital reorganisation finally completes. Hold.
