Dublin based and AIM-listed San Leon (LON:SLE) had a pretty torrid year in 2014.
The flagship SM-1 well, offshore Morocco, operated by Genel Energy (LON:GENL), received high quality oil during drilling and testing, but did not achieve sustained flow and was plugged and abandoned.
San Leon was carried for part of the cost of the well, but the drilling problems encountered and the addition of well testing to the programme involved, required material funding by the company.
The company enjoyed only nominal revenue during the year and saw the loss before tax expand to €37.42mln from a loss of €13.68mln in 2013. The share price fell sharply and remained.
But 2014 was also, executive chairman Oisin Fanning believes, a transformational year. His chairman’s report for 2014 he says: “For key energy players around the world, 2014 was the year when the price of oil fell significantly, putting enormous pressure on their financial performances and share prices, forcing some of them to cuts costs and jobs.
“For San Leon, 2014 was the year when one of our assets, the Rawicz-12 well on the Rawicz field in south-western Poland, tested at a highly successful 4.5mln standard cubic feet a day (mmscfd).”
The company has now moved closer to production and cash flow, helped by decisive action to reduce costs.
It is now poised to generate cash flow from 2016, starting with the Rawicz field, followed by the Siekierki project also in Poland, and down the line some royalty payments from the Barryroe field off the coast of Ireland.
In the meantime, covering the costs of moving the assets closer to production will be helped by a £29mln equity fund raising currently going through the mill. Significantly, the re-financing will be accompanied by a 100-for 1 share consolidation. This will raise the value of the shares from under a penny to 8p.
The placing has still to get through an EGM, expected tomorrow (July 17), but Oliver Stansfield, the managing director of Brandon Hill Capital, which managed the raise said: “I always thought the collapse of the shares in 2014 was overdone. Operationally San Leon did not do too badly in 2014. The offer has been taken up by existing and new shareholders but it is a great sign of confidence that ToscaFund’s stake in the company is going up to 42% from 22%.”
ToscaFund, founded by top stock picker Martin Hughes, is noted for its savvy investments.
The proceeds of the placing will primarily be used to bring the Rawicz and Siekierki projects on-stream in Poland. They will also be used to fund the drilling of commitment wells in Morocco and Albania. These wells are expected to be spudded in the third quarter and fourth quarter.
On the cost cutting front the company has exited Germany and Slovakia, and relinquished all or part of a number of other Polish licences. The Warsaw office has been moved to new premises with a halving of the rent. Fanning has agreed to take 80% of his salary in shares as from January 1, 2015.
As for cash flow, Dougie Youngson the oil and gas analyst at broker finnCap, said: “The fund raising and share consolidation are important because the placing is primarily focused on three cash flow projects: Rawicz, Sierkierki and Barryroe.”
At Rawicz (San Leon has a 35% stake) the field is estimated to have 40bn standard cubic feet of gas (bnscf) recoverable and the most recent well flowed at rate of 4.5mln standard cubic feet of gas (mmscfd). First gas is expected in Q1 2016. San Leon has forecast net free cash flow of US$13mln in 2016, increasing to US$20mln in 2017 before the field begins to decline. The company estimates the net present value (NPV10) – that is the gross income from the well minus costs over a ten year period – to be US$40mln.
Siekierki (35%) will be San Leon and its partner Palomar’s next project targeting 422bnscf of gross of gross contingent resources. San Leon is carried by Palomar for the first three wells, which will be tied into the local gas network with first gas expected in 2016. San Leon forecasts net free cash flow of US$7mln in 2016 increasing to US$15mln in 2018. The company estimates that its NPV10 will be US$148mln on the existing resource.
On Barryroe, in Ireland’s Celtic Sea, San Leon has a 4.5% net profit interest (NPI) in the Irish project where the operator Providence Resources (LON:PVR) is looking for a farm-in partner and is thought to be close to a deal. In the first phase starting in 2017 production is expected to rise to 17,000barrels of oil a day (bopd) and peak at 100,000 bopd by 2022. This could mean free net cash flow of US$10mln in 2018 rising to US$90mln in 2022. The NPV10 is forecast to be US$230mln.
San Leon has other assets, which offer potential upside in value. The company has not divested entirely from Morocco and the well there which is imminent is on the onshore Tarfaya licence. It is expected to cost San Leon £3mln.
There is also a well planned in Albania, which is on the onshore Duressi block that is estimated to have more than 10mln barrels of oil equivalent (mmboe) recoverable oil and gas and is expected to cost £5mln and is due to start drilling in the fourth quarter of this year.
Above all there is the Lewino prospect, in another part of Poland to Rawicz, which has shale oil and gas possibilities which could be game changing. Using San Leon’s own figures, but leaving out Morocco, Albania and Lewino as well as Barryroe; and including just the near production and cash flow, Yougson has come up with a valuation table which reads as follows:
The Value Proposition
£mln · p/share
Poland -- Rawicz · 24 · 39
Poland -- Siekierki · 95 · 154
Net Cash · 33 · 53
Core Value · 152 · 246
Given that San Leon’s share price is likely to be 8p by the end of this week, finnCap’s target price of 246p sounds rather mouth-watering.