A strategy that originally grew out of caution sets San Leon Energy apart from the crowd amid the unprecedented challenges of 2020.
The Nigeria-focused company’s lend-to-invest strategy may not have been designed for 2020, but it has nevertheless created a uniquely strong position.
A $ 175 million loan transaction in 2016 gave San Leon a foothold in an oil project previously divested by Shell, which now has the capacity to produce approximately 50,000 barrels per day (bopd) without pipeline and export losses.
Nigeria-focused company lost $ 20.4 million (£ 15.4 million) in the first half of 2020
San Leon will see this principal paid back plus 17 percent interest – with another $ 88 million before full redemption comes in late 2021 – and at the same time it has a 10 percent economic interest in the underlying oil field.
The yield from the oil field will soon be boosted by a new pipeline and export route, which will take crude oil offshore to a floating storage and unloading facility. This will greatly improve the economy of the operation, which can lose about a third of its barrels before they hit the market.
San Leon, according to its lend-to-invest model, is supporting the financing of the pipeline project.
It will receive a four-year coupon of 14 percent and will gain a 10 percent stake in the infrastructure, providing a further stream of ongoing revenue.
The blueprint wasn’t followed again until September, with San Leon borrowing $ 7.5 million with a 10 percent coupon and a 15 percent equity stake in Decklar Petroleum – which receives most of the production from the Oza oil field.
Later, San Leon can increase its stake to 30 percent if / when it provides a new loan to finance expansion work at Oza.
These investments all follow a clear pattern, and the cash flow significantly supports a dividend policy that continues to yield shareholders – about $ 35 million was paid in the first half of this year, representing a return of about $ 30 per year at the time. cents.
“We borrow to invest because it is a more efficient use of capital,” said Oisin Fanning, CEO of San Leon.
Most small oil and gas companies buy to invest. The capital has sunk in a project and they will never get it back. They just have to hope that the investment goes well.
‘We approached it differently from 2016 and so far it has worked very well for us. We borrow money at a fairly high coupon. We protect our capital while getting some of the businesses ourselves.
‘From a strategic point of view, that has turned out to be very sensible. It basically means that even in tough times I can still say categorically that we will pay a nice dividend next year as we know we will come in around $ 100 million regardless of the market, regardless of the operational issues. We get it as repayment of principal plus interest. ‘
The model’s financial merits are arguably underestimated, at least from a stock price perspective – as a number of analysts recently wrote targets and valuation with a very substantial ‘blue sky’ attached to it.
Panmure Gordon threw a ‘buy’ recommendation in early October with a price target of 59p, representing an increase of about 100 percent over the market price of the stock on AIM.
Prior to that, Allenby Capital estimated San Leon’s enterprise value at £ 371 million, against £ 29 million as implied by the company’s market capitalization of approximately £ 115 million.
One reason investors may be overlooking San Leon’s success has to do with the way the business is presented in the way it is accounted for, and where the profit and loss contradict the group’s cash flow.
For those who don’t pay attention to coupons, cash, and dividends, the company’s $ 20.4 million loss in the first half of 2020 hides the nature of San Leon’s performance.
According to Fanning, the paper losses do not accurately reflect the company that had $ 41.5 million in loan repayments income or the $ 35 million paid out to shareholders in the first six months of 2020.
“You have to look at our checkout situation,” he pointed out. “Look at the money in it, look at the returns we’ve given shareholders, and you have to look at the deals we’re doing.”
In his note this month, Panmure described San Leon’s approach as a low-risk, value-creating model.
“With a relatively small amount of capital invested, attractive returns are achieved with more leverage and control than would be the case as a minority partner in a joint venture,” said City Broker analyst Ashley Kelty.
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