San Leon Energy (“San Leon”, “SLE” or the “Company”) has announced that it has raised £170.3m in an equity placing (subject to shareholder approval) to complete the acquisition and restructuring of various interests in OML 18, located onshore Nigeria.
This is a milestone event for the company and we caught up briefly with the CEO Oisin Fanning to ask him a few questions:
Q: It’s great to see San Leon listed and trading again, after quite a lengthy period. What was the reason for the lengthy suspension?
A: Due to the size and nature of the proposed transaction, this was considered to be a reverse takeover. Stock market rules require an admission document to be published due to the large degree of change in the Company, in order to provide investors with all the information they need to make investment decisions. You can see from the size and detail of the admission document published today, that this is quite some task! In parallel, and reflected in the admission document, was the fundraising.
Q: You mention in the RNS that you see this as a transformational deal for SLE, explain why you think so?
A: This is San Leon’s first material production. Further than that, though, is the scale of the production and the plans for significantly increasing that in the near-term. We announced last year our plans for a move from exploration and appraisal to cash-generation, and this is a huge step forward in implementing that strategy.
Q: Raising such a large amount in August is a great achievement, why do you think that the deal was so interesting to institutions?
A: The quality of the asset, the production expectations (based upon CPR figures), the track record of the Operator in ramping up production, the existing hedge for around 35% of 2016-2017 production at $95/bbl gross, the checks and balances to maximise the promptness of loan repayments to San Leon from BidCo, and the right to provide drilling and workover services; this is an unusually attractive package which institutions generally agreed was a great platform for the future.
Q: As investors, what events can we look forward to in the near future?
A: San Leon intends to provide regular operational updates on Nigeria, detailing what has been happening but – just as importantly – what the near-term plans are for the asset. As you can see from the admission document, we are part-way through an extensive field rehabilitation programme to bring onto production existing wells, to improve the production of others, and to drill new wells. We look forward to describing progress to our investors.
Q: It is rare to see an AIM listed entity with significant production and therefore cash-flows. What are you proposing to do with the cash going forward?
A: The admission document details a shareholder returns policy, whereby the Company undertakes to return to shareholders (via either share buybacks or dividends) 50% of free cash flow from Nigeria, subject to shareholders approving the EGM resolutions. This policy will begin with first cash flow from the asset.
Q: Can we ask what has prompted the board changes at San Leon?
A: San Leon is becoming a very different company, with a production and cash flow focus. We are delighted that Mutiu Sunmonu is joining as Non-Executive Chairman, bringing extensive specific Nigerian experience and contacts. Other Board changes also reflect the scale and focus of San Leon from this point onwards. We are well-equipped to succeed.
Q: Can you give a little more information on the use of funds from the placing, how much is going into the ground and what the rest is being used for?
A: Approximately £133 million is being used directly to finance the transaction, and therefore “going into the ground”. The transaction needed to be completed in parts, due to the nature of the components of that transaction. There are necessarily financing costs associated with completing some of those earlier components, together with normal costs associated with a large placing and the documentation required for it. The remainder will be used to settle creditor balances, and for working capital. The message is clear – the capital raised will be working hard, and generating substantial cash.
Shard Capital’s view
Today’s RNS is potentially a transformational deal and seems to have been worth waiting for. Despite the country risk that Nigeria brings, the production numbers, the revenue potential and the terms of the deal look attractive at first glance.
The addition of Mr Sunmonu adds the required country experience and it is clear that San Leon will keep investors updated on the projects operations going forward.
The company has also undertaken to return 50% of free cash flow from Nigeria to shareholders (Subject to EGM approval, as is the fund raise). This sets them apart from a number of oil and gas plays on AIM and I expect Oisin is correct, that must have been what attracted institutions?