Half-year Report

RNS Number : 1744S

San Leon Energy PLC

29 September 2017

 

29 September 2017

San Leon Energy Plc

("San Leon", "SLE" or "the Company")

Interim Results

San Leon Energy, the AIM listed company focused on oil and gas development and appraisal in Africa and Europe, today announces its interim results for the six months ended 30 June 2017, and provides an update on its indirect interest in OML 18, a world-class oil and gas block onshore Nigeria, and other assets.

Highlights

Corporate

·     US$20.6 million has been received to date in relation to the US$174.5 million Loan Notes. The Company is scheduled to be repaid approximately US$19 million per quarter from Q4 2017 ·     The Company previously reached agreement with Avobone in November 2016, which was subsequently revised in June 2017, regarding payment for Avobone's exit from the Siekierki project in Poland. The remaining amount to be paid is approximately €14.7 million during October and November 2017 ·     In December 2016, the Company announced the receipt of an approach from a possible offeror. In April 2017, we announced that we had signed confidentiality agreements and were in discussions with a further three entities, and in June 2017 we announced an offer, conditional on completing final due diligence, from China Great United Petroleum (Holding) Limited ("China Great"). China Great has remained in a dialogue with the Company and has advised that the delay in its due diligence has been due to it now being in discussions to bring in a large EPC partner to add value in midstream projects on OML 18. China Great will update the Company regarding progress in due course. There can be no certainty that any of these discussions will lead to a firm intention to make an offer ·     Nick Butler resigned as a Non-Executive Director from the Board effective on 6 September 2017. An executive search has been launched to appoint two new Non-Executive Directors

Operational

·     Contract is in place for San Leon's senior operational appointee into Eroton, with his arrival in Nigeria imminent ·     Eroton is the Operator of OML 18 while San Leon has a defined partner role under the Master Services Agreement. Plans from the 2016 Competent Persons Report (by Petrovision Energy Services Limited) (the "CPR") are being executed to optimise production using coiled tubing, electric line, and slickline. Challenges regarding pipeline loss allocation, downtime and slower-than-anticipated well work mean that current production is below the production and sales forecasts set out in the CPR, and those challenges are being addressed as they arise.  ·     The Orubiri Field came online in late 2016, and the Krakama Field was brought onto production in early 2017. The Buguma Field is expected to follow in Q4 2017 and will now be brought on by direct tie-back to the Krakama Field ·     Commencement of heavy workover and new well drilling on various OML 18 fields to boost production expected in Q4 2017 ·     Eroton is near to completing an updated reserves report on OML 18

Financial

·     Loss for the period ended 30 June 2017 was €5.24m (2016: loss of €6.23m), of which €11.3m relates to a foreign exchange loss on the loan notes ·     Cash and cash equivalents as at 30 June 2017 of €0.3m (30 June 2016: €0.7m) ·     As at 27 September 2017: o  US$20.6m has been received in relation to payments due to San Leon under the US$174.5m Loan Notes o  €4.3m received from loans provided to San Leon o  €8.175m has been paid to Avobone during 2017 o  €1.7m cash and cash equivalents ·     Under an agreement with Yorkville, as announced on the 22 June 2017, San Leon issued 6,254,905 new ordinary shares at a price per share of 32 pence with a value of US$2.6m ·     As announced on 19 September 2017, agreements were entered into for the sale of a majority of the Company's Polish assets, subject to certain conditions ·     Decision made to relinquish Sidi Moussa, offshore Morocco

Chief Executive Officer, Oisin Fanning, commented:

"The Company has three targeted cash flow streams from Nigeria: Loan Note repayments, dividends from production via the indirect equity interest in OML 18, and from the provision of drilling and workover rig services to Eroton under the Master Services Agreement. While well activity and dividends from production have been delayed for the reasons set out in the final results for the year ended 31 December 2016, the security package held by San Leon over Loan Note repayments have resulted in $20.6 million being received by the Company to date, and approximately $19 million expected on a quarterly basis as a minimum from Q4 2017 onwards, until the Loan Notes are repaid in full.

San Leon continues to work with Eroton to target the commencement of dividend payments, and I look forward to updating shareholders on progress in that regard in due course."

Directors' Responsibility Statement

The directors of San Leon accept responsibility for the information contained in this announcement. To the best of their knowledge and belief (having taken all reasonable care to ensure such is the case), the information contained in this announcement is in accordance with the facts and does not omit anything likely to affect the import of such information.

Market Abuse Regulation (MAR) Disclosure 

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

References within this announcement to China Great and its ongoing discussions with the Company are being made with the approval of China Great, being the Offeror in relation to the conditional offer for San Leon referenced in this announcement.

Enquiries:

San Leon Energy plc	+ 353 1291 6292
Oisin Fanning, Chief Executive
SP Angel Corporate Finance LLP (Nominated adviser to the Company)	[phone]
Richard Morrison
Ewan Leggat
Soltan Tagiev
Whitman Howard Limited (Financial adviser to the Company)	[phone]
Nick Lovering
Brandon Hill Capital Limited (Joint broker to the Company)	[phone]
Oliver Stansfield
Jonathan Evans
Vigo Communications (Financial Public Relations)	[phone]
Chris McMahon
Alexandra Roper
Plunkett Public Relations	[phone]
Sharon Plunkett

Chairman's Statement

It has been one year since the completion of the OML 18 transaction and the Company's entry into Nigeria. Work has been performed on wells, additional fields have come on stream after being renovated, and significant field data has been gathered. However, certain challenges have been faced by Eroton, the operator, in terms of operations and permissions, and those are being tackled. Those issue include:

- higher than expected pipeline loss allocation (with fiscal metering being installed during Q4 2017 to help resolve)

- higher than expected downtime (with valves to allow isolation of the upstream part of the NCTL pipelines being installed to reduce downtime)

- slower than anticipated well work, due to a combination of downhole challenges, delays in permissions being granted, and capex availability. Downhole challenges are being addressed with the appropriate technical resources.

As a result current production is below the sales and production expectations set out in the CPR. In Q4 2017, the Company expects to see the commencement of heavy workover operations to boost production levels and new well drilling, the results of which we look forward to announcing in due course.

I am also pleased to highlight that San Leon has received $20.6 million in Loan Notes repayments to date. Further information on the loan notes is detailed below.

In addition to the 2017 events reported in the final results for the year ended 31 December 2016, the Company has continued to reduce its footprint in areas outside Nigeria. With agreements signed to dispose of interests in Poland, the deals, if completed will result in the Company only holding interests in two Baltic Basin shale gas assets in the country. To ensure management time and company funds are focused on Nigeria the Company will continue to dispose of non-core assets.

I am pleased to welcome Constantine Ogunbiyi as an advisor to the Board, bringing with him a wealth of Nigerian corporate and financial experience and contacts. Amongst other roles, he established and was CEO of First Hydrocarbon Nigeria ("FHN"), which with Seplat, acquired certain Nigerian assets from Shell in 2010. He raised more than $320 million in debt and equity for FHN, mostly from major Nigerian institutions.

Midwestern Leon Petroleum Limited Loan Notes Summary

In September 2016, SLE acquired approximately $174.5 million principal amount of 17% fixed rate secured loan notes 2020 (the "Loan Notes") constituted under an instrument dated 22 March 2016 (as amended and restated) (the "Instrument") executed by Midwestern Leon Petroleum Limited ("MLPL").

Under the Instrument, MLPL is required to make quarterly interest payments on the Loan Notes, subject to MLPL having received funds derived from OML 18 by way of dividends or distributions from Eroton, through Martwestern to MLPL ("Dedicated Proceeds"). Dividends or distributions from Eroton, through Martwestern to MLPL, can only be paid once the conditions of the Reserves Bank Lending facility have been met. The only condition still to be satisfied is the reservation of nine months' worth of upcoming debt repayments due in the debt service reserve account.

If over a fiscal quarter no Dedicated Proceeds are received by MLPL no interest is payable on the relevant interest payment date and MLPL is not in default under the Instrument. However, regardless of whether MLPL has actually received Dedicated Proceeds, the Instrument contains a 'long stop date' for each scheduled quarterly payment.

If over a fiscal quarter payments by MLPL to San Leon in respect of the Loan Notes are less than the scheduled quarterly payment, the shortfall is a "Noteholder Underpayment" and must be paid within a 'cure period' to avoid default under the Instrument. The cure period in the Instrument allows MLPL nine months from the occurrence of a Noteholder Underpayment to pay such amounts to SLE. If any Noteholder Underpayment is not paid in full on (or before) the expiration of this nine month cure period, an event of default arises.

In the case of an event of default, SLE may demand immediate payment of the full outstanding principal amount of the Loan Notes, all unpaid accrued interest and any other sum then payable from MLPL.  As disclosed in SLE's admission document, SLE has the benefit of a security package including guarantees and a share pledge. Midwestern Oil & Gas Company Limited, the 60% shareholder in MLPL, and Mart Resources Limited (together, the "Guarantors") have agreed to guarantee the obligations of MLPL under the Instrument.

The average quarterly scheduled amount of principal and interest to date is approximately $19 million. SLE has received payment of $20.6 million in satisfaction of Noteholder Underpayments to date. SLE must further receive approximately $19 million by 1 January 2018 from or on behalf of MLPL, and the same amount again by 1 April 2018 and every quarter thereafter until all Notes have been repaid for an event of default to be avoided and the guarantees to become enforceable. Once MLPL starts receiving sufficient Dedicated Proceeds, 100% of such proceeds can be applied by MLPL to repay the scheduled amounts payable under the Instrument and satisfying all Noteholder Underpayments.

If there are excess Dedicated Proceeds in a relevant fiscal quarter after satisfying the quarterly interest payment, the excess is used to repay any Noteholder Underpayments and then redeeming one fifteenth of the outstanding principal amount (approximately $11.6 million) of the Loan Notes.

Financial Review

Revenue for the six months to 30 June 2017 was €0.1m compared with €0.2m for the 6 months to 30 June 2016. Cost of sales for the 6 months to 30 June 2017 was €0.03m compared with €Nil for the 6 months to 30 June 2016.

Loss on equity investments for the 6 months to 30 June 2017 was €3.5m (30 June 2016: €0.002m). This loss relates to the equity investment by San Leon in MLPL and in turn MLPL's investment in Martwestern Energy and in turn the investment in Eroton and its OML 18 asset in Nigeria. During the 6 month period to 30 June 2017 profit generated from the investment in Eroton and Martwestern Energy is more than offset by the financing cost of arrangements entered into by MLPL.

Administrative costs decreased to €3.9m for the 6 months to 30 June 2017 (30 June 2016: €5.7m). The main reason for the decrease is the higher spend on legal and consultancy fees during the first half of 2016, and a swing in foreign exchange rates.

Avobone costs of €1.0m relate to fees and interest incurred during the 6 months to 30 June 2017 (30 June 2016:  €Nil).

Finance expense of €13.9m for the 6 months to 30 June 2017 (30 June 2016: €0.8m) relates to a foreign exchange loss on the Loan Notes of €11.3m and other loan and finance costs of €2.6m.

Finance income of €16.5m (30 June 2016: €Nil) is interest income on the US$174.5m Loan Notes.

Tax income for the 6 months to 30 June 2017 is €0.5m (30 June 2016: €Nil).

San Leon generated a loss after tax of €5.24m for the 6 months to 30 June 2017 compared with a loss after tax of €6.23m in the 6 months to 30 June 2016.

Adjusting for the foreign exchange loss of €11.3m on the US$174.5m Loan Notes, underlying profit for the 6 months to 30 June 2017 was €6.1m.

San Leon has requested payment of approximately US$77.7 million of loan principal and interest payments to date. To date, San Leon has received US$20.6 million which has been applied in satisfaction of principal and accrued interest on the Loan Notes. The outstanding balance is therefore US$57.1 million, increasing by approximately $19 million on the 1 October 2017. The Loan Notes are explained in more detail in the section above entitled "Midwestern Leon Petroleum Limited Loan Notes Summary".

The Company has well established loan relationships usually lasting less than a year with various terms and conditions and parties. During 2017 additional funds of approximately €6.3 million have been provided to the Company with a current outstanding principal of approximately €4.3 million (£4.0 million).

During 2017, €8,175,000 was paid to Avobone. Under the arbitration award, the Group has to pay Avobone a further €8,000,000 during October 2017 and €6,694,840 during November 2017.

Under an agreement with Yorkville, as announced on 22 June 2017, San Leon issued 6,254,905 ordinary shares at a price of 32 pence per share with a value of US$2.6m in part settlement of US$5.4mm owed under a promissory note backed by a Standby Equity Distribution Agreement announced on 1 November 2010. The remaining balance of $2.8m is to be repaid to Yorkville on or before 31 October 2017.

On 17 January 2017, San Leon issued and allotted 3,000,000 ordinary shares to two service providers, Robin Management Services and 4,000,000 ordinary shares to DSA Investments Inc. in respect of options granted and then exercised at a price of 30 pence per share.

The Company's Irish counsel is progressing a capital reorganisation which is required to allow dividends to be paid to San Leon shareholders. This is happening later than originally planned.

Outlook

The Company is very active in terms of assets - concentrating on its Nigerian interests, recently appointing its senior operations advisor to Eroton - as well as on a corporate front with the discussions regarding a potential takeover offer for the Company. While offer talks have been protracted, discussions continue with China Great and, while there can be no certainty that any of these discussions will lead to a firm intention to make an offer, we look forward to updating shareholders with progress on both operations and offer discussions in due course.

The following financial information on San Leon Energy Plc represents the Group's interim results for the 6 months ended 30 June 2017.

Consolidated income statement  

For the six months ended 30 June 2017

	Notes	Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Continuing operations
Revenue		71	187	345
Cost of sales		(32)	-	(128)
Gross profit		39	187	217
Share of (loss) / profit of equity accounted investments	8	(3,519)	(2)	12,217
Administrative expenses		(3,886)	(5,663)	(26,367)
Impairment of exploration and evaluation assets	7	-	-	(9,300)
Decommissioning of wells	17	-	-	(274)
Arbitration award	17	(968)	-	(3,628)
Other income	2	-	-	29,926
Dissenting shareholders award	17	-	-	(1,125)
Loss on disposal of equity accounted investments	3	-	-	(1,954)
Loss from operating activities		(8,334)	(5,478)	(288)
Finance expense	4	(13,914)	(754)	(13,025)
Finance income	5	-	1	2
Finance income - OML 18 Production Arrangement	6	16,520	-	16,801
(Loss) / profit before income tax		(5,728)	(6,231)	3,490
Income tax		486	1	2,227
(Loss) / profit from continuing operations		(5,242)	(6,230)	5,717

Profit / (loss) per share (cent) - continuing operations
Basic (loss) / profit per share		(1.2)	(14.8)	3.4
Diluted (loss) / profit per share		(1.2)	(14.8)	3.3

Consolidated statement of other comprehensive income 

For the six months ended 30 June 2017

	Notes	Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
(Loss) / profit for the period		(5,242)	(6,230)	5,717
Items that may be reclassified subsequently to the income statement
Foreign currency translation differences - subsidiaries		(997)	633	(763)
Foreign currency translation differences - joint venture	8	(5,679)	-	4,694
Fair value movements in financial assets	10	(3,717)	4,658	1,545
Deferred tax on fair value movements in financial assets		1,222	(1,615)	(494)
Total comprehensive (loss) / profit for the period		(14,413)	(2,554)	10,699

Consolidated statement of changes in equity

For the period ended 30 June 2017

Un-audited 30 June 2017	Share capital reserve €'000	Share premium reserve €'000	Currency translation reserve €'000	Share based payment reserve €'000	Fair value reserve €'000	Retained earnings €'000	Attributable to equity holders in Group €'000	Non-controlling interest €'000	Total €'000
Balance at 1 January 2017	130,957	401,503	40	20,693	4,017	(263,273)	293,937	-	293,937
Total comprehensive income for period
Loss for the period	-	-	-	-	-	(5,242)	(5,242)	-	(5,242)
Other comprehensive income
Foreign currency translation differences - subsidiaries	-	-	(997)	-	-	-	(997)	-	(997)
Foreign currency translation differences - joint venture (Note 8)	-	-	(5,679)	-	-	-	(5,679)	-	(5,679)
Fair value movements in financial assets	-	-	-	-	(3,717)	-	(3,717)	-	(3,717)
Deferred tax on fair value movements in financial assets	-	-	-	-	1,222	-	1,222	-	1,222
Total comprehensive income for period	-	-	(6,676)	-	(2,495)	(5,242)	(14,413)	-	(14,413)
Transactions with owners recognised directly in equity
Contributions by and distributions to owners
Issue of shares for cash	132	4,538	-	(1,905)	-	1,905	4,670	-	4,670
Shares to be issued in lieu of salary	-	-	-	409	-	-	409	-	409
Share based payment	-	-	-	-	-	-	-	-	-
Warrants issued on placing	-	-	-	-	-	-	-	-	-
Total transactions with owners	132	4,538	-	(1,496)	-	1,905	5,079	-	5,079
Balance at 30 June 2017	131,089	406,041	(6,636)	19,197	1,522	(266,610)	284,603	-	284,603

Consolidated statement of changes in equity

For the period ended 30 June 2017

Un-audited 30 June 2016	Share capital reserve €'000	Share premium reserve €'000	Currency translation reserve €'000	Share based payment reserve €'000	Fair value reserve €'000	Retained earnings €'000	Attributable to equity holders in Group €'000	Non-controlling interest €'000	Total €'000
Balance at 1 January 2016	127,145	205,126	(3,891)	12,049	2,966	(266,332)	77,063	-	77,063
Total comprehensive income for period
Loss for the period	-	-	-	-	-	(6,230)	(6,230)	-	(6,230)
Other comprehensive income
Foreign currency translation differences - subsidiaries	-	-	634	-	-	-	634	-	634
Fair value movements in financial assets	-	-	-	-	(1,050)	-	(1,050)	-	(1,050)
Deferred tax on fair value movements in financial assets	-	-	-	-	314	-	314	-	314
Total comprehensive income for period	-	-	634	-	(736)	(6,230)	(6,332)	-	(6,332)
Transactions with owners recognised directly in equity
Contributions by and distributions to owners
Share based payment	-	-	-	458	-	-	458	-	458
Total transactions with owners	-	-	-	458	-	-	458	-	458
Balance at 30 June 2016	127,145	205,126	(3,257)	12,507	2,230	(272,562)	71,189	-	71,189

Consolidated statement of changes in equity

For the period ended 30 June 2017

Audited 31 December 2016	Share capital reserve €'000	Share premium reserve €'000	Currency translation reserve €'000	Share based payment reserve €'000	Fair value reserve €'000	Retained earnings €'000	Attributable to equity holders in Group €'000	Non-controlling interest €'000	Total €'000
Balance at 1 January 2016	127,145	205,126	(3,891)	12,049	2,966	(266,332)	77,063	-	77,063
Total comprehensive income for year
Profit for the year	-	-	-	-	-	5,717	5,717	-	5,717
Other comprehensive income
Foreign currency translation differences - subsidiaries	-	-	(763)	-	-	-	(763)	-	(763)
Foreign currency translation differences - joint venture (Note 8)	-	-	4,694	-	-	-	4,694	-	4,694
Fair value movements in financial assets	-	-	-	-	1,545	-	1,545	-	1,545
Deferred tax on fair value movements in financial assets	-	-	-	-	(494)	-	(494)	-	(494)
Total comprehensive income for year	-	-	3,931	-	1,051	5,717	10,699	-	10,699
Transactions with owners recognised directly in equity
Contributions by and distributions to owners
Issue of shares for cash	3,784	194,926	-	-	-	(1,957)	196,753	-	196,753
Issue of shares in lieu of salary	28	1,451	-	(1,594)	-	-	(115)	-	(115)
Share based payment	-	-	-	9,537	-	-	9,537	-	9,537
Warrants issued on placing	-	-	-	701	-	(701)	-	-	-
Total transactions with owners	3,812	196,377	-	8,644	-	(2,658)	206,175	-	206,175
Balance at 31 December 2016	130,957	401,503	40	20,693	4,017	(263,273)	293,937	-	293,937

Consolidated statement of financial position

As at 30 June 2016

		Notes	Un-audited	Un-audited	Audited
			30/06/17	30/06/16	31/12/16
			€'000	€'000	€'000
Assets
Non-current assets
Intangible assets		7	44,704	47,761	44,621
Equity accounted investments		8	65,184	11,417	74,382
Property, plant and equipment		9	3,118	9,825	3,279
Financial assets		10	140,280	51,503	169,616
Other non-current assets			257	277	257
			253,543	120,783	292,155
Current assets
Inventory			264	315	253
Trade and other receivables		11	10,818	6,379	11,490
Other financial assets		12	1,227	1,261	1,328
Financial assets		10	57,174	-	37,727
Cash and cash equivalents		13	283	729	177
Assets classified as held for sale		14	2,641	-	2,553
			72,407	8,684	53,528
Total assets			325,950	129,467	345,683
Equity and liabilities
Equity
Called up share capital		18	131,089	127,145	130,957
Share premium account		18	406,041	205,126	401,503
Share based payments reserve			19,197	12,507	20,693
Currency translation reserve			(6,636)	(3,257)	40
Fair value reserve			1,522	2,230	4,017
Retained deficit			(266,610)	(272,562)	(263,273)
Total equity			284,603	71,189	293,937
Non-current liabilities
Provisions		17	1,280	24,437	1,280
Derivative			360	-	255
Deferred tax liabilities			5,624	8,772	7,332
			7,264	33,209	8,867
Current liabilities
Trade and other payables		15	8,702	16,481	11,298
Loans and borrowings		16	5,955	6,748	6,283
Provisions		17	18,426	1,840	24,298
Liabilities classified as held for sale		14	1,000	-	1,000
			34,083	25,069	42,879
Total liabilities			41,347	58,278	51,746
Total equity and liabilities			325,950	129,467	345,683

Consolidated statement of cash flows

For the six months ended 30 June 2016

	Notes	Un-audited			Un-audited	Audited
		30/06/17			30/06/16	31/12/16
		€'000			€'000	€'000
Cash flows from operating activities
(Loss) / profit for the period - continuing operations		(5,242)			(6,230)	5,717
Adjustments for:
Depletion and depreciation	9	194			418	647
Finance expense	4	13,914			754	13,025
Finance income	6	(16,520)			(2)	(16,803)
Share based payments charge		409			459	9,537
Foreign exchange		(1,609)			1,080	(391)
Income tax		(486)			(1)	(2,227)
Impairment of exploration and evaluation assets - continuing operations				-	-	9,300
Arbitration award	17	968			-	3,628
Dissenting shareholders		-			-	1,125
Decommissioning costs		-			-	274
Disposal of equity accounted investment		-			-	1,954
Bargain purchase of MLPL		-			-	(29,926)
(Increase) / decrease in inventory		(11)			13	76
Decrease/ (increase) in trade and other receivables		673			142	(784)
Decrease in trade and other payables		(2,308)			2,079	(3,270)
Movement in other non-current assets		-			556	576
Share of loss / (profit) of equity accounted investments	8	3,519			2	(12,217)
Tax paid		-			-	(4)
Net cash outflow in operating activities		(6,499)			(730)	(19,763)
Cash flows from investing activities
Net expenditure on exploration and evaluation assets		(4)			(716)	(1,117)
Dissenting shareholder payment	17	(1,864)			-	(705)
Proceeds of disposal of equity-accounted investments	3	-			-	4,222
Arbitration payment	17	(4,976)			-	(2,231)
Purchases of property, plant and equipment	9	(9)			(21)	(2,719)
Advances to equity accounted investments	8	-			(45)	53
Decrease in restricted cash	12	-			83	84
Acquisition of OML 18 equity interest	8	-			-	(27,545)
OML 18 Production Arrangement loan notes	10	11,341			-	(136,583)
Proceeds of financial investments and investment income	10	31			2	140
Net cash inflow / (outflow) from investing activities		4,519			(697)	(166,401)
Cash flows from financing activities
Proceeds from issue of shares		4,670			-	196,753
Proceeds from drawdown of other loans		3,788			1,851	6,104
Repayment of other loans		(3,743)			-	(12,437)
Movement in Director loan	15	(287)			151	145
Interest and arrangement fees paid		(2,378)			(754)	(5,040)
Net cash inflow from financing activities		2,050			1,248	185,525
Net increase / (decrease) in cash and cash equivalents		70			(179)	(639)
Effect of foreign exchange fluctuation on cash and cash equivalents		36			(5)	(97)
Cash and cash equivalents at start of period		177			913	913
Cash and cash equivalents at end of period	13	283			729	177

Notes to the Interim Financial Information

1. Basis of preparation and accounting policies

The Group interim financial information has been prepared in accordance with International Financial Reporting Standards and the accounting policies adopted are consistent with those followed in the preparation of the Group's financial statements for the year ended 31 December 2016. The interim financial information was approved by the Board of Directors on 27 September 2017.

The interim consolidated financial statements do not constitute statutory financial statements and therefore do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2016 which are available on the Group's website www.sanleonenergy.com.

The interim consolidated financial statements are presented in Euro ("€").

2. Other income

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Bargain purchase on acquisition of Midwestern Leon Petroleum Limited	-	-	29,926

The bargain purchase on acquiring a 40% interest in Midwestern Leon Petroleum Limited (MLPL) is calculated as follows:

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Fair value at the date of acquisition	-	-	57,471
Less equity investment in MLPL by San Leon Energy Nigeria B.V.	-	-	(27,545)
Bargain purchase of MLPL	-	-	29,926

3. Loss on disposal on equity accounted investments

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Consideration on sale of equity accounted investments	-	-	8,478
Loans eliminated on disposal	-	-	2,800
Book value at date of disposal	-	-	(15,041)
Decommissioning provision reversed	-	-	1,809
Loss on disposal of equity accounted investments	-	-	(1,954)

In November 2016, the Company sold its 35% interest in the Rawicz gas field held through TSH Energy Joint Venture B.V. for a cash consideration of €8.5 million (US$9.0 million), and the release of certain San Leon liabilities.

These liabilities included loans which were advanced by Palomar to the Company as a temporary carry of the drilling and testing costs of the Rawicz-12 and Rawicz-15 wells, and amount each to approximately €2.8 million (US$3.0 million).

The Company also sold its 35% interest in the Poznan assets held through Poznan Energy B.V (largely the Siekierki field) for a consideration of €1 plus a 10% Net Profit Interest ("NPI") in the Poznan assets. The NPI removes any further cost exposure to San Leon, while providing an interest in any future profits made by Palomar on the Poznan assets. A nil value has been placed on the NPI at this stage, since no agreed work programmes are in place for the asset. The first €2.1 million (US$2.2 million) was received on closing, the next €2.1 million (US$2.3 million) was received on 30 November 2016 and the remaining €4.3 million (US$4.5 million) is due to be paid to San Leon on or before 1 October 2017. An interest charge of LIBOR plus 5% is being applied to any sum not paid by 1 February 2017.

4. Finance expense

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
On loans and overdraft	1,355	754	4,844
Finance arrangement expenses other than OML 18 Production Arrangement	1,136	-	3,022
OML 18 Production Arrangement - fees	-	-	4,904
Foreign exchange loss on loan notes	11,320	-	-
Fair value charge on issue of warrants	103	-	255
	13,914	754	13,025

5. Finance income

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Deposit interest received	-	1	2

6. Finance income - OML 18 Production Arrangement

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Interest income on loan notes	16,520	-	8,843
Foreign exchange gain on loan notes	-	-	7,958
	16,520	-	16,801

7. Intangible assets

Exploration and evaluation assets

		Un-audited
		30/06/17
		€'000
Cost and net book value
At 1 January 2016		47,532
Additions		1,117
Disposals		(849)
Transfer from property, plant and equipment (assets under construction)		9,020
Transfer to held for sale assets		(2,553)
Currency translation adjustment		(346)
Impairment of exploration assets		(9,300)
At 31 December 2016		44,621
Additions		116
Disposals		(201)
Currency translation adjustment		168
At 30 June 2017		44,704

An analysis of exploration assets by geographical area is set out below:

	Un-audited 30/06/17 €'000	Un-audited 30/06/16 €'000	Audited 31/12/16 €'000
Poland	7,276	12,372	7,143
Morocco	29,018	27,184	29,162
Albania	8,410	8,205	8,316
Total	44,704	47,761	44,621

The Directors have considered the licence, exploration and appraisal costs capitalised in respect of exploration and evaluation assets, which are carried at historical cost. Those assets have been assessed for impairment and in particular with regard to remaining licence terms, likelihood of licence renewal, likelihood of further expenditures and on-going appraisals for each year. The directors are satisfied that there are no current indications of impairment, but recognise that the future realisation of these exploration and evaluation assets is dependent on future successful exploration and appraisal activities and the subsequent economic production of oil and gas reserves.

8. Equity accounted investments

Midwestern Leon Petroleum Limited

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Opening balance	74,382	-	-
Acquisition of OML 18 equity interest #	-	-	57,471
Share of (loss)/ profit of equity accounted investments	(3,519)	-	12,217
Exchange rate adjustment	(5,679)	-	4,694
Closing balance	65,184	-	74,382

Equity investment of €27.5 million plus bargain purchase of €30.0 million (Note 2).

Other equity accounted investments

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Opening balance	-	11,375	11,375
Advances to equity accounted investments	-	44	53
Disposal of interests	-	(2)	(11,428)
Closing balance	-	11,417	-

9. Property, plant and equipment

	Plant & equipment €'000	Assets under construction €'000	Office equipment €'000	Motor vehicles €'000	Total €'000
Cost At 1 January 2016	5,352	9,020	1,086	428	15,886
Transfer to intangible assets	-	(9,020)	-	-	(9,020)
Additions	2,719	-	-	-	2,719
Disposals	-	-	(24)	(27)	(51)
Currency translation adjustment	(178)	-	(7)	(9)	(194)
At 31 December 2016	7,893	-	1,055	392	9,340
Additions	-	-	7	2	9
Exchange rate adjustment	227	-	8	12	247
At 30 June 2017	8,120	-	1,070	406	9,596
At 30 June 2016	5,145	9,049	1,052	390	15,636
Depreciation
At 1 January 2016	4,292	-	955	373	5,620
Disposals	-	-	(24)	(27)	(51)
Charge for the period	528	-	83	36	647
Currency translation adjustment	(142)	-	(6)	(7)	(155)
At 31 December 2016	4,678	-	1,008	375	6,061
Exchange rate adjustment	204	-	8	11	223
Charge for period	165	-	21	8	194
At 30 June 2017	5,047	-	1,037	394	6,478
At 30 June 2016	4,482	-	971	358	5,811
Net book values
At 30 June 2017	3,073	-	33	12	3,118
At 30 June 2016	663	9,049	81	32	9,825
At 31 December 2016	3,215	-	47	17	3,279

Assets under construction related to the Group's Oil Shale Project in Morocco. The Directors have considered the classification of 'assets under construction' and made the decision to transfer the carrying value to 'Intangible assets' as the project is not yet at the stage of development and is still being evaluated.

10. Financial assets

	OML 18  Production Arrangement (i) €'000	Barryroe   4.5% net profit interest (ii) €'000	Quoted shares (iii) €'000	Unquoted shares (iv) €'000	Total €'000
Cost
At 1 January 2016	-	47,018	175	5,360	52,553
Additions	136,583	-	-	-	136,583
Finance income	8,843	-	-	-	8,843
Disposals	-	-	(139)	-	(139)
Exchange rate adjustment	7,958	-	-	-	7,958
Fair value movement	-	1,499	46	-	1,545
At 31 December 2016	153,384	48,517	82	5,360	207,343
Finance income	16,520	-	-	-	16,520
Loan note receipts	(11,341)	-	-	-	(11,341)
Exchange rate adjustment	(11,320)	-	-	-	(11,320)
Disposals	-	-	(31)	-	(31)
Fair value movement	-	(3,704)	(13)	-	(3,717)
At 30 June 2017	147,243	44,813	38	5,360	197,454
Current	57,174	-	-	-	57,174
Non-current	90,069	44,813	38	5,360	140,280
At 30 June 2016	-	46,065	78	5,360	51,503
Current	-	-	-	-	-
Non-current	-	46,065	78	5,360	51,503
At 31 December 2016	153,384	48,517	82	5,360	207,343
Current	37,727	-	-	-	37,727
Non-current	115,657	48,517	82	5,360	169,616

(i)     OML 18 Production Arrangement

The Company secured an initial 9.72% indirect economic interest in the OML 18 Production Arrangement, onshore Nigeria for a total consideration of €169 million (US$188.4 million).

The fair value assessment of the loan notes as referred to below is calculated as follows:

	Un-audited	Un-audited	Audited
	30/06/17	30/06/16	31/12/16
	€'000	€'000	€'000
Total consideration (US$188.4 million)	-	-	169,032
Fair value of loan notes attributable to equity investment (US$30.9 million)#	-	-	(27,545)
Net fair value of loan notes (US$157.5 million)	-	-	141,487
Arrangement fees (US$5.5 million) (Note 6)	-	-	(4,904)
Additions	-	-	136,583

The fair value of loan notes attributable to the equity investment is calculated using a discount factor of management's estimate of a market rate of interest of 8% above the coupon rate of 17% over the term of the loan notes.

The Company undertook a number of steps to effect the purchase of its interest in the OML 18 Production Arrangement in 2016. Midwestern Leon Petroleum Limited (MLPL), a company incorporated in Mauritius of which San Leon Nigeria B.V. has a 40% shareholding, was established as a special purpose vehicle to complete the transaction by purchasing all of the shares in Martwestern Energy Limited (Martwestern), a company incorporated in Nigeria. Martwestern holds a 50% shareholding in Eroton Exploration and Production Company Limited (Eroton), a company incorporated in Nigeria and the Operator of OML 18.

To partly fund the purchase of 100% of the shares of Martwestern, MLPL borrowed €156.6 million (US$174.5 million) in incremental amounts by issuing Loan Notes under a Loan Note Instrument which attracts a coupon of 17 per cent. Midwestern Oil and Gas Company Limited is the 60% shareholder of MLPL and transferred its shares in Martwestern to MLPL as part of the full transaction. Following its Placing in September 2016, San Leon Energy PLC purchased all of the outstanding Loan Notes issued of €103.7 million (US$115.5 million) and subscribed for further €52.9 million (US$58.9 million) of newly issued loan notes and is therefore the beneficiary and holder of all Loan Notes issued by MLPL. SLE will be repaid the full €156.6 million (US$174.5 million) plus the 17% coupon once certain conditions have been met and using an agreed distribution mechanism. SLE is also a beneficiary of any dividends that will be paid by MLPL as a 40% shareholder in MLPL, but the Loan Note repayments must take priority over any dividend payments made to the MLPL shareholders.

Through its 50% shareholding in Eroton and other agreements, Martwestern holds an initial indirect 24.3% economic interest in the OML 18 Production Arrangement. Through the ownership of MLPL and other commercial agreements, SLE is an indirect shareholder of Eroton, and the Company holds a 9.72% initial economic interest in OML 18.

The key information relevant to the fair value of the Loan Notes is as follows:

Valuation technique	Significant unobservable inputs	Inter-relationships between the unobservable inputs and fair value measurement
Discounted cash flows	- Discount rate 25% based on a market rate of interest of 8% above the coupon rate of 17% - MLPL profitability i.e. ability to generate cash flows for repayment - Loan Notes are repayable in full by 31 March 2020.	The estimated fair value would increase / (decrease) if: -   US Dollar exchange rate increased / (decreased)

The recoverability of the group and company's equity and loan note investments in the MLPL (OML 18 Production) arrangement is dependent on the ability of the OML 18 operator, Eroton, to make distributions. Eroton needs to meet certain conditions before its lenders will allow Eroton to make distributions to its shareholders. These distributions need to be made to enable MLPL repay interest and principal to San Leon. At the balance sheet date and at the date of approval of their financial statements these conditions have not been met by Eroton. The directors of San Leon have considered the carrying amounts of the loan notes and equity interest at 31 December 2016 and are satisfied that these are appropriate.

(ii) Barryroe - 4.5% Net Profit Interest (NPI)

The Directors have estimated the fair value of the NPI by reference to a third party evaluation report of contingent resources and cash flows prepared by Netherland Sewell & Associates Inc. (NSAI) in July 2013 for Providence Resources Plc ("Providence").

NSAI reported that the Basal Wealden oil reservoir has an estimated 2C in-place gross on-block volume of 761 MMBO with recoverable resources of 266 MMBO and 187 BCF of associated gas, based on a 35% oil recovery factor. In July 2013, NSAI also provided an estimate of the cash flows attributable to Providence's net interest from the Basal Wealden oil reservoir only. It estimated Providence's net present value at US$2.63 billion in the 2C case (estimated recoverable resources of 266 MMBO and 187 BCF of associated gas) at a 10% discount rate. Further details are available on the Providence website.

Further information has also been made available regarding the revised development plan or development costs which are key inputs into the valuation model.

As San Leon is not the operator of this licence, the Group does not have the ability to commission an independent technical evaluation of the licence area. Therefore, the Directors believe that the NSAI report, when coupled with other information released by Providence and adopted for certain changes in the market, gives the basis for the best estimate of fair value at year end.

With the increase in the oil price since the lows of early 2016 and an increase in farm-out activity, San Leon is confident of the asset value ascribed to Barryroe.

iii) Amedeo Resources plc

During 2017, the Company sold 100,000< ordinary shares in Amedeo Resources plc for cash consideration of €30,998. At 30 June 2017, the Company hold 213,512< ordinary shares with a market value of €28,548 (2016:€139,219).

During 2016, the Company sold 398,738< ordinary shares in Amedeo Resources plc for cash consideration of €139,219.

Adjusted for share consolidation of 1 for 100 in Amedeo Resources plc.

(iv) Ardilaun Energy Limited

As part of the consideration for the sale of Island Oil & Gas Limited to Ardilaun Energy Limited ("Ardilaun") in 2014.

Ardilaun agreed to issue shares equivalent to 15% of the issued share capital of Ardilaun. The original fair value of the 15% interest in Ardilaun was based on a market transaction in Ardilaun shares. The Directors have considered the carrying value of this interest at 31 December 2016 and are satisfied that the carrying value continues to be appropriate in the absence of further market data.

(v) Poznan 1% Net Profit Interest

Please see Note 3 for further details.

11. Trade and other receivables

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Amounts falling due within one year: Trade receivables from joint operating partners		41	75	19
VAT and other taxes refundable		1,071	711	894
Other debtors (i)		7,647	5,412	8,368
Prepayments and accrued income		2,059	181	2,209
		10,818	6,379	11,490

(i) Other debtors includes €4.3 million (US$4.5 million) due from Palomar for the disposal of equity accounted investments in 2016 (Note 3).

12. Other financial assets

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Restricted cash at bank		1,227	1,261	1,328

Restricted cash at bank at 30 June 2017 is a deposit account held in support of bank guarantees required under the Moroccan exploration licence, Zag, held by the Group.

After the reporting period, in April 2017, the Company announced that the Office National des Hydrocarbures et des Mines ("ONHYM") has written to the Company regarding the non-performance of the work programme on its Zag Licence, onshore Morocco. ONHYM has assumed control of the existing bank guarantee (listed above as restricted cash), and has requested a penalty of the same amount again to be paid. The Zag licence is in a geographical area which the Company believes justifies a declaration of force majeure due to the regional security situation. The Directors are confident, given their belief in the force majeure status of the licence, with the recoverability of the bank guarantee and that the penalty cannot be enforced. The company is in negotiations with ONHYM regarding the future of the licence including the week programme, and the force majeure status.

13. Cash and cash equivalents

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Cash and cash equivalents		283	729	177

14. Held for sale assets and liabilities

During 2016 efforts to sell, relinquish, or farm-out most of the Company's assets in Poland commenced as part of the strategic realignment and focus on Nigeria. This process is substantially underway and it is anticipated that sale and purchase agreements will be concluded in the second half of 2017 with regard to the held for sale assets, following which various formalities will have to be concluded, in particular with governmental authorities, before completion, expected in 2018.

The assets and liabilities that are up for sale in Poland are as follows:

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Assets
Exploration and evaluation assets		2,641	-	2,553
Liabilities
Decommissioning provision		1,000	-	1,000

During 2016 the held for sale exploration and evaluation assets were impaired by €2,861,100 in order to reduce their carrying value to fair value less costs to sell.

There are no other income or expenses related to the held for sale assets.

15. Trade and other payables

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Current
Trade payables		5,283	11,478	7,432
PAYE / PRSI		365	644	211
Other creditors		1,332	2,374	1,270
Accruals		1,662	1,985	2,038
Director's Loan		60	-	347
		8,702	16,481	11,298

16. Loans and borrowings

		Un-audited	Un-audited	Audited
		30/06/17	30/06/16	31/12/16
		€'000	€'000	€'000
Current
YA Global Masters SPV Limited		2,467	3,254	4,273
21st Luxury Luxtech Fund Ltd		3,104	-	-
Other		384	2,587	-
LPL Finance Limited		-	907	2,010
		5,955	6,748	6,283

17. Provisions

			Decommissioning €'000	Arbitration €'000	Other €'000	Total €'000
Cost
At 1 January 2016			4,291	20,561	1,355	26,207
Paid during the period			-	(2,231)	(705)	(2,936)
Provision during the period			274	3,628	1,125	5,027
Exchange rate adjustment			-	-	89	89
Transfer of decommissioning liability			(1,809)	-	-	(1,809)
Transfer to liabilities held for sale			(1,000)	-	-	(1,000)
At 31 December 2016			1,756	21,958	1,864	25,578
Paid during the period			-	(4,976)	(1,864)	(6,840)
Provision during the period			-	968	-	968
At 30 June 2017			1,756	17,950	-	19,706
Current			476	17,950	-	18,426
Non-current			1,280	-	-	1,280
At 30 June 2016			4,291	20,561	1,425	26,277
Current			415	-	1,425	1,840
Non-current			3,876	20,561	-	24,437
At 31 December 2016			1,756	21,958	1,864	25,578
Current			476	21,958	1,864	24,298
Non-current			1,280	-	-	1,280

Decommissioning

The provision for decommissioning costs is recorded at the value of the expenditures expected to be required to settle the Group's future obligations on decommissioning of previously drilled wells. As part of the sale of TSH and Poznan to Palomar, €1.8 million of the decommissioning provision was transferred with the sale.

Arbitration

On 7 November 2016, Avobone N.V. and Avobone Poland B.V. ("Avobone") (together, "Avobone") and the Company settled a number of ongoing disputes between them and between Avobone and certain of San Leon's subsidiaries, including Aurelian Oil & Gas Limited, Aurelian Oil & Gas Poland Sp. z.o.o, Energia Zachod Holdings Sp. z.o.o and AOG Finance Limited, in Poland, Netherlands, Ireland, England & Wales in respect of various matters including a final award in an ICC arbitration dated 21 May 2015. The total settlement amounts to €23.3 million plus interest to be paid to Avobone. Interest will accrue at a rate of 5% per annum on instalments until paid.

As announced by San Leon on 5 June 2017 an Extension Agreement was entered into with Avobone along with a revised payment schedule in respect of sums owed to Avobone.

A payment of €8,175,000 (inclusive of an extension fee) has been made during 2017 so far.

Further payments are due as follows:

·     During October 2017, San Leon shall pay to Avobone, a further sum of €8,000,000

·     During November 2017, San Leon shall pay to Avobone, a further sum of €6,694,840

Payments totalling €22,869,840 are expected during 2017 (inclusive of extension fees and interest since the 31 December 2016) approximately adding an additional €0.9 million to the provision.

Other

Certain Realm Energy International Corporation shareholders exercised rights of dissent under Canadian law not to accept the terms of acquisition in 2011. Under Canadian law, these dissenting shareholders are eligible to receive a cash payment equal to the fair value of their shareholding at acquisition. The provision represents the Directors' estimate of the cash consideration to be paid to those shareholders taking account of the market price of the Realm shares at acquisition.

In Q1 2017 the amount provided at 31 December 2016 was fully paid in cash to the shareholders.

18. Share capital

		Number of New Ordinary shares €0.01 each	Number of Deferred shares €0.0001 each 'm	Authorised equity '000
Authorised equity
At 1 January 2016		15,500,000,000	1,265,259	155,000
At 31December 2016		15,500,000,000	1,265,259	155,000
At 30 June 2017		15,500,000,000	1,265,259	155,000

		Number of new Ordinary Shares €0.01 each	Number of Deferred Ordinary Shares €0.0001 each 'm	Share capital €'000	Share premium €'000
Issued called up and fully paid:
At 1 January 2016		61,809,052	1,265,259	127,145	205,126
Issue of shares		378,400,000	-	3,784	194,926
Issue of shares in lieu of salary		2,816,668	-	28	1,451
At 31 December 2016		443,025,720	1,265,259	130,957	401,503
Issue of shares (i and ii)		13,254,905	-	132	4,538
At 30 June 2017		456,280,625	1,265,259	131,089	406,041
At 30 June 2016		61,809,052	1,265,259	127,145	205,126

(i) On the 17th January 2017 San Leon issued and allotted 3,000,000 new ordinary shares to Robin Management Services and 4,000,000 new ordinary shares to DSA Investments Inc. in respect of options exercised. The options were exercised at a price of 30 pence per share.

(ii) Under an agreement with Yorkville, as announced on the 22 June 2017, San Leon issued 6,254,905 new ordinary shares at a price per share of 32 pence with a value of US$2.6m.

On 21 September 2016, the Company issued 378,400,000 €0.01 New Ordinary Shares as a cash equity placing.

Costs directly attributable to the equity placing amounted to €1,974,311. These costs have been recognised as a deduction from equity.

2,816,668 ordinary shares were issued to Oisín Fanning in lieu of 80% of his salary due to him for the period 1 January 2015 to 31 August 2016. 1,167,485 ordinary shares for the year to 31 December 2015 and 1,649,485 ordinary shares for the period 1 January 2016 to 31 August 2016.

 

END

 

 

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