San Leon Regulatory News (SLE)

29 June 2018

San Leon Energy plc

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

Final Results

San Leon Energy plc ("San Leon" or "the Company"), the AIM listed oil and gas exploration and production company focused on Africa and Europe, today announces its audited final results for the year ended 31 December 2017. 

Highlights: 

· 2017 was the first full year of the Company's involvement in OML 18, onshore Nigeria, and the first year of cash flow from the Company's OML 18 investment. $39.6 million was received by the Company in 2017, with an additional $30 million received in H1 2018 up to 28 June.

· The Company's cash position (€17 million at 28 June 2018) has been substantially strengthened compared with this time last year, enabling management to focus further on yielding value from OML 18. While the financial results show 31 December 2017 figures, continued Loan Notes payments in 2018 have enabled significant additional improvement in creditor and cash positions.

· As of June 2018 the Company anticipates future cash flow from:

1) Principal and interest repayments to the Company from its $174.5 million Midwestern Leon Petroleum Limited ("MLPL") Loan Notes which were issued as part of the Company's OML 18 investment (balance as of 28 June 2018 is $165.4 million).

2) Dividend payments as a consequence of the Company holding an initial indirect 9.72% economic interest in OML 18. Delays in dividend payments to date are discussed below.

3) Income from the provision of rig-based drilling and workover services, and production services, to the operator of OML 18 under a Master Services Agreement ("MSA").

4) The Company's 4.5% Net Profit Interest in the Barryroe oil field, offshore Ireland, through potential income or a potential sale.

OML 18, Nigeria Operational Highlights

· While Krakama Field was brought onto production in early 2017 and a number of wells have had work performed on them, several operational issues constrained OML 18 performance during 2017.

· Underlying production from the assets has been steady at approximately 50,000 bopd. However, as previously disclosed, a number of operational issues, mostly external to the asset, have resulted in average OML 18 oil sales of approximately 26,000 bopd for 2017.

· 20% production downtime in 2017, primarily caused by third party terminal and gathering system issues, has impacted annual production. This issue is being addressed by the planned implementation of the new export pipeline and FSO project, and is also expected to improve overall well performance by removing the requirement to restart wells following any shut downs.

· 35% pipeline losses allocated to all operators by the Bonny Terminal operator are much higher than was anticipated in the 2016 Admission Document. Allocated losses are being disputed by Eroton Exploration and Production Company Limited ("Eroton"), the operator of OML 18. In the short term, this issue is being partially addressed by the installation of Lease Automatic Custody Transfer ("LACT") units to make sure that the OML 18 partners have fiscal metering of the oil prior to export into the gathering system. In the longer term, the export pipeline and FSO system mentioned above will provide additional control.

· The Nigerian National Petroleum Corporation ("NNPC") has made substantial repayments to Eroton for 2015 and 2016 joint venture cash call arrears. However, significant outstanding arrears still remain unpaid, which if received would provide capital for further investment in OML 18. NNPC has been paying its 2017 and 2018 cash calls and it is hoped that the improved business climate and outlook will enable settlement of remaining arrears to Eroton.

· Removing the challenges will enable greater capital allocation to production growth and support future dividends from Eroton to the Company via its initial indirect 9.72% economic interest in OML 18.

Corporate Highlights

· The Company spent much of 2017 in a formal offer period. San Leon confirmed in January 2018 that such offer talks ceased.

· In November 2017, San Leon confirmed that it had received a letter from Midwestern Oil and Gas Company Limited ("Midwestern") with an indicative proposal that included San Leon acquiring Midwestern's 60% shareholding in MLPL (the "Proposal"). San Leon holds the remaining 40% of MLPL. Since the Proposal could have resulted in a transaction being characterised as a "reverse takeover", the Company's shares were temporarily suspended. In late April 2018, the Company announced that its board had elected not to accept Midwestern's proposal, and the Company's shares recommenced trading.

· In December 2017, San Leon paid the final instalment of amounts owing to Avobone N.V. and Avobone Poland B.V. (together "Avobone") in relation to Avobone's exit from the Siekierki project in Poland. This was aided by the provision to the Company of a £11,000,000 convertible loan facility by funds managed by Toscafund Asset Management LLP ("Toscafund"), which was subsequently converted into shares of the Company.

· The receipt of the MLPL Loan Notes payments and the conversion of the loan facility from Toscafund into shares has put the Company in the financial position whereby many creditors at the year-end have now been settled. The Company is therefore able to progress with the planned capital reorganisation, which upon completion is anticipated to allow returns to shareholders.

· Following on from the resignation of Nick Butler as a non-executive director in September 2017, the Company subsequently appointed Linda Beal as a non-executive director and chair of the Audit Committee in January 2018. In May 2018, the Company appointed Bill Higgs as a non-executive director.

· The Company continued its policy of reducing costs outside Nigeria and focussing on its Nigerian assets. Agreements were entered into in September 2017 for the sale of the majority of the Company's Polish assets, subject to certain conditions. A decision was also made to relinquish Sidi Moussa, offshore Morocco, and to fully impair its other Moroccan assets due to a lack of expected activity on those other assets. As a result of these decisions, impairments and provisions of €55.5 million have been recognised.

· Oisin Fanning (Chief Executive Officer) has drawn only 20% of his salary in cash with the balance paid or accruing in San Leon shares.

Financial

· Total comprehensive loss for the year of €87.1 million (2016: profit of €10.7 million).

· Total assets of €255.8 million at 31 December 2017 (2016: €345.7 million).

· At year end the Group had cash and cash equivalents of €8.1 million (2016: €1.5 million).

· In 2017 the Company received a total of $39.6 million (€34.3 million) of Loan Note payments under the Loan Notes agreements entered into in September 2016 with MLPL, with a further $30.0 million being received in H1 2018 up to 28 June 2018. This leaves $165.4 million of principal and interest outstanding and payable as of 28 June 2018. Such receipts to date have been paid on behalf of MLPL due to the existence of guarantees to the Company under the Loan Note instruments, as dividends have yet to be received by MLPL. The Company anticipates continued payment receipts of an average of $18.1 million per quarter in H2 2018 and $16.6 million per quarter in 2019 until the Loan Notes are repaid in full following similar payments in 2020.

· San Leon has various guarantees and a share pledge is in place which provide security for payments due to the Company under the Loan Notes.

· San Leon income from its initial 9.72% indirect economic interest in OML 18 has been delayed because asset performance has not been as expected. As mentioned above, efforts are underway to address underlying issues.

· Other potential future income streams comprise the Master Services Agreement (entitling San Leon to provide rigs and related services to the OML 18 operator, Eroton), and the Barryroe Net Profit Interest, offshore Ireland.

· A facility is available as contingency to enable the Company to fulfil its cash flow requirements. This facility comprises up to £10 million available for a 2 year period from 08 June 2018 which can be drawn down in quarterly amounts of £1.25 million from Shard Capital Limited and Shard Capital Management Limited at the discretion of the lender.

Outlook

The Company is now in a far stronger financial position compared with the same time last year, with the benefit of an expected regular future income stream from its ongoing quarterly Loan Notes repayments. The Company continues to believe in its Nigerian asset and, as issues outlined above are addressed, anticipates future cash flows from both San Leon's indirect economic interest in OML 18, and from providing services under the MSA in due course.

The Annual Report and Accounts are available on the Company's website at www.sanleonenergy.com and will be posted to shareholders.

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.

Enquiries:

San Leon Energy plc

Oisin Fanning, Chief Executive (+ 353 1291 6292)

Cantor Fitzgerald Europe (Nominated adviser, financial adviser and joint broker to the Company)

Nick Tulloch (+44 131 257 4634)

David Porter (+44 207 894 8896)

Whitman Howard Limited (Financial adviser and joint broker to the Company)

Nick Lovering (+44 20 7659 1234)

Francis North (+44 20 7659 1234)

Brandon Hill Capital Limited (Joint broker to the Company)

Oliver Stansfield (+44 203 463 5000)

Jonathan Evans (+44 203 463 5016)

Vigo Communications (Financial Public Relations)

Chris McMahon (+44 207 830 9700)

Kate Rogucheva (+44 207 830 9705)

CHAIRMAN'S STATEMENT

OVERVIEW

2017 was the first full year of the Company's involvement in OML 18, onshore Nigeria, and the year under review was the first year of cash flow from the Company's entry into Nigeria.

The Company's cash position has significantly strengthened compared with this time last year, enabling management to focus further on yielding value from OML 18. We have exited or are exiting non-core assets and we anticipate future cash flow from:

1) Repayment of the Loan Notes.

2) Dividend payments as a consequence of holding an initial indirect 9.72% economic interest in OML 18.

3) Income from the provision of rig-based drilling and workover (and associated) services, and production services, under a Master Services Agreement ("MSA") with Eroton Exploration and Production Company Ltd ("Eroton"), the operator of OML 18.

4) 4.5% Barryroe Net Profit Interest (through potential income or a potential sale).

CORPORATE

San Leon's board took the view in 2015 that the Company needed to change its strategy, moving away from pure exploration and appraisal, and focussing on development, production and cash flow. The business climate in the industry had changed, partly as a result of lower commodity prices. It was against this background that San Leon sourced and completed its OML 18 transaction in September 2016.

1) Loan Notes repayment and interest

The Company entered into a Loan Notes agreement in September 2016 with Midwestern Leon Petroleum Limited ("MLPL"), whereby, once certain conditions have been met and using an agreed distribution mechanism, San Leon would be repaid the principal of $174.5 million (€165.6 million) plus an annual coupon of 17% through to 2020. By 31 December 2017, San Leon had received a total of $39.6 million (€34.3 million) of Loan Notes payments in order to avoid a default under the Loan Notes instruments, the start of such payments having been delayed due to the OML18 operational and external issues described in the Chief Operating Officer's report. During H1 2018, a further payment of $30.0 million was received, bringing total receipts to date to $69.6 million and leaving $165.4 million of principal and interest outstanding and payable as of 28 June 2018. Such receipts to date have been paid on behalf of MLPL due to the existence of guarantees to the Company under the Loan Notes instruments, as dividends have yet to be received by MLPL. The Company has a future receivable profile of an average of $18.1 million for H2 2018 and $16.6 million for 2019, with final quarterly payments during 2020, and the board anticipates that MLPL will continue to make these payments. San Leon has various guarantees and a share pledge in place which provide security for payments due to the Company under the Loan Notes.

2) Indirect equity interest

Eroton is the Operator of OML 18 while San Leon has a defined partner role through its shareholding in MLPL. San Leon has appointed a senior operational consultant into Eroton to assist in the development of the OML 18 asset.

The strategy for the asset is dividend growth from the indirect equity interest, as reserves are converted into production and cash flow. No dividend has been paid by Eroton in 2017 because asset performance has not been as hoped due to funding constraints caused mainly by external factors, although there have also been some delays caused by operational issues. These operational issues are summarised below, and explained in more detail in the Chief Operating Officer's Statement.

Firstly, while underlying production from the assets has been steady at approximately 50,000 bopd, substantial production downtime, caused by problems in the third party terminal and gathering system, resulted in the majority of the approximately 20% downtime in 2017 (reducing field production effectively to 40,000 bopd). This issue is being addressed by the planned implementation of the new export pipeline and Floating Storage and Offloading ("FSO") project, and is also expected to improve overall well performance by removing the requirement to restart wells following any shut downs.

Secondly, substantial pipeline losses have been allocated to all operators by the Bonny Terminal operator. The 35% pipeline losses (reducing field oil sales further to approximately 26,000 bopd) are much larger than the 9% assumed in the Admission Document and are being disputed by Eroton, who have asked the relevant authorities to investigate. In the short term, this issue is being partially addressed by the installation of Lease Automatic Custody Transfer ("LACT") units to make sure that the OML 18 partners have fiscal metering of the oil prior to export into the gathering system. In the longer term, the export pipeline and FSO system mentioned above will provide additional control.

Finally, the Nigerian National Petroleum Corporation ("NNPC") still has significant outstanding payments due to Eroton, settlement of which would provide capital for further investment in the asset. NNPC have been paying their cash calls through 2017 and it is hoped that the improved business climate and outlook will enable settlement of the outstanding payments.

Removing the above challenges will enable greater capital allocation to production growth and support future dividends from Eroton to the Company via its initial indirect 9.72% economic interest in OML 18.

The Reserves Based Lending ("RBL") conditions required for the payment of dividends by Eroton have now been met, with the exception of satisfying the amount payable to the Debt Service Reserve Account ("DSRA") and thereafter submitting audited accounts. As announced on 7 September 2017, depositing three future quarterly RBL repayments into the DSRA attached to Eroton's existing RBL facility, is one of the conditions that needs to be met before the RBL lenders will allow distribution of dividends from Eroton to its shareholders. The cumulative amount required to fill the DSRA varies according to the RBL amortisation schedule and is approximately $90m for much of 2018. The DSRA balance however fluctuates according to operational needs and due to some of the funding challenges experienced.

Any future payments of dividends by Eroton to Martwestern and from Martwestern to MLPL, after settlement of MLPL's Loan Notes obligations, will enable MLPL to pay dividends to its shareholders including San Leon. Given the delays in operational activity, downtime and pipeline losses, dividend payments by Eroton are not expected until the impact of the alternative export pipeline and/or the rig-based well activity have materially increased sales volumes of oil.

3) Services revenue

San Leon expects to provide the majority of the services for heavy well workovers and new well drilling on OML 18, through a new service entity under its control. The budget for doubling production from OML 18 via such operations is hundreds of millions of dollars, illustrating the potential for services income under the MSA.

4) Barryroe Net Profit Interest

The Company's 4.5% Net Profit Interest in Barryroe oil field, offshore Ireland, provides a zero cost potential future cash stream that has a carrying value of €42.6 million. Providence Resources Plc, the operator of Barryroe, has made recent progress with the announcement of a farm-out to drill three wells and is at the initial stages of development.

OTHER OPERATIONS

The Company continued its policy of reducing costs outside Nigeria and focussing on its Nigerian assets. As announced in September 2017, agreements were entered into for the sale of the majority of the Company's Polish assets, subject to certain conditions. Subject to closing of those transactions, the Company will retain material profit interests for no additional outlay to the Company. A decision was also made to relinquish Sidi Moussa, offshore Morocco, and to fully impair its other Moroccan assets due to a lack of expected activity.

The Company has applied for entry into the appraisal period of its offshore Duressi asset in Albania, for which a farm out is sought.

As a result of these decisions, impairments, write offs and provisions of €55.5 million have been recognised as set out in the financial review contained in the Chief Executive Officer's Statement. The total comprehensive loss for the year of €87.1 million is predominantly such impairment/write offs and provisions of non-Nigerian assets, and foreign exchange loss.

CORPORATE TRANSACTION ACTIVITY

The Company spent much of 2017 in a formal offer period, although in early January 2018 San Leon confirmed that such offer talks had ceased.

In November 2017 San Leon confirmed that it had received a letter from Midwestern Oil and Gas Company Limited ("Midwestern") with an indicative proposal that included San Leon acquiring Midwestern's 60% shareholding in MLPL (the "Proposal"). Through MLPL, Midwestern and San Leon are both indirect shareholders in Eroton, the operator of OML 18. Since the Proposal could have resulted in a transaction being characterised as a "reverse takeover", the Company's shares were temporarily suspended. In late April 2018, the Company announced that its Board had elected not to accept Midwestern's proposal, as it was not in the best interests of San Leon's shareholders since it did not provide a sufficient balance of added value for shareholders and certainty of near-term cash flow, and the Company's shares recommenced trading.

Settlement of outstanding obligations

In December 2017, San Leon paid the final instalment of amounts owing to Avobone N.V. and Avobone Poland B.V. (together "Avobone") in relation to Avobone's exit from the Siekierki project in Poland. This was aided by the provision to the company of a £11,000,000 convertible loan facility by funds managed by ToscaFund Asset Management LLP, which was subsequently converted into shares of the Company.

The receipt of the MLPL Loan Notes payments and the conversion of the loan facility from Toscafund into shares has put the Company in the financial position whereby many creditors at the year end have now been settled.

The Company is therefore able to progress with the planned capital reorganisation. This capital reorganisation, which has already been approved by the shareholders, requires legal work to be completed by the Company, and is subject to the confirmation of the High Court in Ireland, and will allow returns to shareholders.

Appointments of non-executive Directors

Following on from the resignation of Nick Butler as a non-executive Director in September 2017, the Company subsequently appointed Linda Beal as a non-executive Director and chair of the Audit Committee in January 2018. Linda brings extensive experience of working with African oil and gas groups, African-based advisers, and corporate and asset transactions.

In May 2018 the Company appointed Bill Higgs as a non-executive Director. Bill brings considerable operational experience, including in Africa, with companies ranging from a major to smaller independents.

OUTLOOK

The Company is now in a strong financial position, with the benefit of an expected regular future income stream from its ongoing quarterly Loan Notes repayments. The Company continues to believe in its Nigerian interests, as cash flows from San Leon's indirect equity interest in OML 18, and from its service offering under the MSA, are expected in due course as the issues outlined are addressed. I look forward to updating shareholders as OML 18 developments unfold.

Mr Mutiu Sunmonu

Non-Executive Chairman

CHIEF EXECUTIVE OFFICER'S STATEMENT

YEAR OVERVIEW

2017 was the year when the Company faced significant challenges - both financial and operational - and emerged positively in respect of the former, and with plans in place to address the latter.

FINANCIAL REVIEW

Income statement

Revenue for the twelve months to 31 December 2017 was €0.3 million compared with €0.3 million for the twelve months to 31 December 2016. San Leon generated a loss before tax of €71.3 million for the twelve months to 31 December 2017, compared with a profit before tax of €3.5 million in the twelve months to 31 December 2016. The tax charge to 31 December 2017 was €2.2 million (2016: credit of €2.2 million). The loss after tax to 31 December 2017 was €73.5 million (2016: profit of €5.7 million). Loss per share for the period is 16.18 cent per share (2016: profit of 3.42 cent per share).

Administration and Other Costs

Administration costs decreased for the 12 month period to €17.0 million (2016: €26.4 million). There were also some residual costs to finalise outstanding obligations to Avobone of €1.9 million (2016: €3.6 million) and some minor income to reduce operating costs along with a reduction in the decommissioning costs estimate amounting to €0.2 million.

Impairments/write offs and Provisions

During 2017 the Directors decided to make impairments/write offs totalling €49.1 million (2016: €9.3 million). These impairments/write offs partly relate to the intangible exploration and evaluation assets as detailed in Note 12 to the accounts being Albania €6.0 million (2016: €Nil), Morocco €28.9 million (2016:€6.4 million) and Poland €7.9 million (2016:€2.9 million). In addition, as explained in Note 22 to the accounts, due to the protracted nature of approval from the Polish authorities the Directors concluded that it is prudent to fully write off the Polish assets held for sale of €3.1 million.

Similarly, given the length of time to obtain approval for the Ardilaun transaction, as detailed in Note 17, and the 15% of Ardilaun shares still to be issued to San Leon, and the valuation of those shares when compared to other similar entities that are listed on a stock exchange, the Directors felt it prudent to carry a lower value of €2.2 million. Consequently, €3.2 million has been charged to the Income Statement in 2017.

During 2017, the directors, with regard to a fee due on the Ardilaun transaction, due to the protracted nature of government approval, and the potential length of time to receive such payment in the event of approval of up to 36 months, and a debtor which is in dispute, and VAT deemed to be potentially irrecoverable in an overseas jurisdiction, in order to be prudent, fully provided for €5.3 million.

As detailed in Note 20 to the accounts €1.2 million has been provided for in the event that a bank guarantee cannot be recovered.

The directors continue to vigorously pursue the value in many of the items detailed above which have either been impaired, written-off or provided for, and expect that in due course some amounts will be collected.

Finance Income and Expense and Equity Investments

Finance expense for the 12 months to 31 December 2017 was €25.5 million (2016: €13.0 million). This is made up of €4.2 million of interest expense (2016: €4.8 million), finance arrangement fees of €2.2 million (2016: €7.9 million), foreign exchange loss of €18.9 million (2016: gain of €8.0 million) on the Loan Notes, and a fair value charge on the issue of options and warrants €0.2 million (2016: €0.3 million).

Finance income for the 12 months to 31 December 2017 was €35.1 million (2016: €16.8 million). This is made up of €34.6 million of interest income (2016: €8.8 million) on the Loan Notes and other minor interest receivable and finance extension fees €0.5 million (2016: €nil).

The loss on equity investments during 2017 was €7.1 million (2016 profit of €12.2 million) and represents the Group's 40% share in the loss of MLPL.

Balance Sheet

As set out in the Chairman's Statement the receipt of Loan Notes proceeds by San Leon and the settlement of the obligation to Avobone significantly strengthened the cash position of the Group. The cash and cash equivalents including restricted cash at 31 December 2017 amounted to €8.1 million (31 December 2016: €1.5 million). In addition the San Leon balance sheet is now focused on the principal investments being the Loan Notes, the 40% equity investment in MLPL and the net profit interest in Barryroe.

COMPANY POSITION AND MARKET OVERVIEW

Our financial position has evolved since discussions with any of the various potential offerors or Midwestern commenced. With the first three quarterly payments in respect of Loan Notes received by 01 April 2018, we look forward to continued quarterly Loan Notes payments until the Loan Notes are fully repaid. Consequently, San Leon is now on a solid financial footing with a cash balance of €17 million at 28 June 2018 and all material issues with creditors and litigation behind us. I thank all shareholders, and in particular, our largest supporter, ToscaFund Asset Management LLP for their patience and support during the past year, which included a period of shares suspension arising as a consequence of our discussions with Midwestern.

I have been pleased to note the efforts made by the Nigerian administration with regard to supporting Nigerian National Petroleum Corporation ("NNPC") to become up-to-date with its historical and current financial commitments, as we approach the country's general election in February 2019. Of course, the improvement in the oil price during 2017 and into 2018 has been a boost to the country and to all those operating in it.

Finally, it was encouraging to note the passing of the first part of the Petroleum Industry Bill ("PIB"), being the Petroleum Industry Government Bill ("PIGB") through the National Assembly and Senate in 2018. We now look forward to the President signing the PIGB into law, which will help underpin investment into Nigeria. Of course we would also like to see progress of the remaining three parts of the PIB through Government.

STRATEGY

Our strategy is to deliver value to shareholders as we mature our interests in Nigeria. We shall continue to strive to monetise our existing assets outside Nigeria, allowing focus on our OML 18 core area via our indirect economic interest, Loan Notes, and MSA.

Oisín Fanning

Chief Executive Officer

CHIEF OPERATING OFFICER'S STATEMENT

OML 18

OML 18 is a world-class asset with substantial reserves and a CPR target gross production rate of over 100,000 bopd. From a subsurface technical perspective, the steps to achieve that are not particularly onerous - involving relatively simple workovers of existing wells, and the drilling of new wells in a prolific region with multiple stacked reservoir layers. That begs the question: why is OML 18 not yet generating more cash flow from operations?

To date, the operational cash flow on OML 18 has been affected by:

1) Slower-than-expected workover/drilling progress

2) Production downtime

3) Pipeline losses

Each factor is described below, together with the actions being taken to address them.

1) Workover/drilling progress

Non-rig workovers performed during 2017 continued to proceed less quickly than expected due primarily to downhole challenges. Undocumented debris ("fish") in the wells has been the main issue, albeit one which is expected to be overcome - and this is one of the focus areas for San Leon's senior operational manager now seconded into Eroton.

There were some challenges in execution due to the process of approvals with JV partners. Given the positive improvement in the prompt settlement of ongoing partner cash calls as described in the Chairman's Statement, Eroton expects the JV approvals process to continue to improve.

Following the 2018 budgetary planning process, the Company now expects that rig-based workovers, previously anticipated to commence in Q4 2017, will commence in Q3 2018, and new wells will be drilled commencing Q4 2018. This type of drilling activity has yielded material production gains in similar fields elsewhere in Nigeria and the Company remains confident the work will add materially to Eroton's production base. Such activity was the basis for the production gains reflected in the Company's admission document.

2) Production downtime

Tank tops and cargo shipping delays at the Bonny Terminal, as well as intermittent upstream outages on the Nembe Creek Trunk Line ("NCTL"), have resulted in material production downtime at OML 18. This accounted for the vast majority of the approximately 20% of downtime during 2017.

The proposed new export pipeline, described below, is expected to remove most of the production downtime.

3) Pipeline losses

First some definitions. The majority of operational income on OML 18 is derived from oil sales (although there is a ten-fold gas sales potential increase above the current 50 mmscf/d rate which Eroton plans to develop). Gross oil production is the volume of oil produced at the wellhead before it enters the export pipeline. Net oil production is the volume of oil deemed to be received at the Bonny terminal at the downstream end of the NCTL, the current export pipeline used to transport oil to the Bonny Terminal (and is therefore the volume actually sold). The difference between gross and net oil production is known as a "pipeline loss", and accounts for metering inaccuracies and deemed theft of oil - and is applied by the operator of the Bonny terminal as a blanket percentage adjustment to all users of the NCTL.

Following the installation of new Lease Automatic Custody Transfer ("LACT") units on the NCTL line in 2016, the Bonny Terminal operator allocated an average of approximately 35% pipeline losses to all operators using NCTL for 2017 (compared with 9% assumed and documented in the Admission Document). Eroton disputes the allocation and has requested that the relevant regulatory authorities investigate the allocation of such excessive losses with a view to reallocating losses in Eroton's favour (thereby boosting the sales numbers). Those discussions are ongoing.

LACT units for OML 18 are now in Nigeria and, following commissioning and regulatory sign off, are anticipated by Eroton to be operational by the end of Q3 2018. The use of these units is expected to provide accurate measurements at the transfer point and therefore reduce the pipeline losses allocated to Eroton.

The idea for a new export pipeline for OML 18 mentioned in last year's annual report, has now become a planned development. This pipeline would be dedicated to OML 18 and run to an offshore Floating Storage and Offloading ("FSO") system. Eroton would then not have to contend with metering issues or theft attributable to third parties, nor NCTL downtime (which is often caused by issues further upstream on that pipeline). It is therefore anticipated to realise significant advantages with respect to pipeline loss allocation and production up-time, coinciding with the expected timing of the production increases from rig-based activity.

It is clear to the Company, therefore, that the issues encountered are being dealt with. Additionally, there has been progress across the asset as detailed below.

· Production at OML18 has continued uninterrupted by any on-block security issues in 2017. During January 2018 illegal bunkering activity caused a fire on a non-operational well on the Buguma field. This did not affect production, and there were no casualties. The fire was swiftly brought under control by Eroton without a reportable spill.

· The Krakama field was brought into production in January 2017 on schedule. Further well activity on the field has yet to commence. Current oil production from Krakama is approximately 4,500 bopd.

· The Buguma Creek field is expected online during H2 2018.

· Field development plans ("FDPs") for Akaso, Cawthorne Channel and Alakiri have been submitted for approval to the NNPC.

· Eroton is working on an updated reserves report, with an expectation of adding material oil and condensate volumes. A summary of the finalised reserves report will be communicated to shareholders once it is available and after review by the Company.

· Gas lift installation in the near-term across a number of wells is expected to provide a production boost, as well as improving the ability of those wells to restart production after any field downtime.

I look forward to updating shareholders on the continued work to boost both gross and net oil production, and unlocking OML 18's value.

IRELAND

San Leon's 4.5% Net Profit Interest (NPI) on the Barryroe oil field provides access to potential future revenue streams with no additional capital required. A CPR was produced by the operator, Providence Resources Plc ("Providence") in 2013, and in March 2018 Providence announced a farm-out agreement with a privately-owned Chinese company to drill three wells and move the field towards development. Should this farm-out agreement complete, San Leon looks forward to this development work on an asset which has a 2013 CPR 2C resource of more than 260 mmbbl.

MOROCCO

San Leon announced during 2017 its exit from Sidi Moussa (offshore). Also during 2017, L'Office Nationale des Hydrocarbures et des Mines ("ONHYM") contacted San Leon to take control of the bank guarantee on Zag and to request a further payment for work not performed. The Company is in ongoing discussions with ONHYM regarding the area, which it believes should be subject to Force Majeure due to the security situation. No activity is currently planned on any other Moroccan assets, and consequently carrying values have been written to zero in the accounts.

The assets still held by San Leon comprise:

- onshore gas appraisal (Tarfaya conventional area, with a well drilled in 2015) - onshore oil shale (Tarfaya oil shale)

- onshore exploration (Zag).

POLAND

The Company has done what it set out to do last year, monetising Polish assets on the back of increased transaction interest. Subject to the closing of two separate transactions, San Leon will retain net profit interests in a number of assets in different geological settings, which will be operated by other companies. Other Polish assets have been relinquished, or are in such process.

ALBANIA

The Durresi block is an extensive offshore area (4,200 km2) gas Albania containing the A4-1X discovery well drilled by Agip and Chevron in 1993.

San Leon acquired 840 km2 of modern 3D seismic data in 2011, and continues to work on the technical side of the block while looking for a partner to take the asset through the appraisal phase by drilling a new well. Application has been made to enter the appraisal period on the asset.

Joel Price

Chief Operating Officer 

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2017

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

for the year ended 31 December 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

for the year ended 31 December 2017

COMPANY STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2017

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2017

COMPANY STATEMENT OF FINANCIAL POSITION

as at 31 December 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2017

COMPANY STATEMENT OF CASH FLOWS

for the year ended 31 December 2017

Notes to the Final Results

1. General

San Leon Energy plc ("the Company") is a company incorporated and domiciled in the Republic of Ireland.

The Group financial statements consolidate those of theCompany and its subsidiaries (together referred to as the"Group"). The registered office address is 1st Floor, Wilton Park House, Wilton Place, Dublin 2.

The financial information presented in this report has been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS") as adopted by the European Union and as set out in the Group's annual financial statements in respect of the year ended 31 December 2017. The financial information herein does not include all the information and disclosures required in the annual financial statements, however the full financial statements are included within the Annual Report and Accounts which are being distributed to shareholders and which are available on the Company's website www.sanleonenergy.com. It will also be filed with the Company's Annual Return in the Companies Registration Office. The financial information herein for the prior year ended 31 December 2016 represents an abbreviated version of the Group's statutory financial statements and the financial statements for the year ended 31 December 2016 filed with the Companies Registration Office.

2. Accounting policies

Basis of preparation

The Group and Company financial statements are prepared on the historical cost basis, except for financial assets (net profit interests and quoted shares), which are carried at fair value, and equity settled share option awards and warrants which are measured at grant date fair value.

Going concern

The Directors have prepared a detailed cash flow forecast for the Group and Company for the period from 1 June 2018 to 31 December 2019.

The principal assumptions underlying the cash flow forecast and the availability of finance to the Group are as follows:

· During 2016 the Company completed a transaction and holds €156.6 million (US$174.5 million) of Loan Notes in Midwestern Leon Petroleum Limited (MLPL), which will be repayable by MLPL to San Leon and a 40 per cent shareholding in MLPL, which gives San Leon an initial 9.72% economic interest in OML 18. The Group will receive cash flows from the Loan Notes in the form of interest and capital repayments. This continued to be the case during 2017 and the basis of the forecast for 2018. To date three quarterly Loan Note payments totalling US$58.6 million have been made on behalf of MLPL when due under the terms of the Loan Notes. The Group has assumed that it will continue to receive quarterly forecast cash flows during 2018 and 2019 from the Loan Notes and allocate to interest or capital repayments in accordance with the terms of the Loan Notes. A fourth quarterly Loan Notes payment, which is due by the end of June 2018, would be sufficient to provide cash funds to the Group and Company to remain a going concern for at least 12 months. As at the 28 June 2018 a further US$11.0 million has been received in relation to the fourth quarterly Loan Notes. It has been confirmed to the Company that up to a further US$8 million will be paid on behalf of MLPL by the 30 June 2018 which will fulfil the fourth quarterly Loan Notes payment due by the end of June 2018. 

· Ongoing exploration and administrative expenditure from the Group's existing activities are in line with current expectations and commitments.

· Provision and settlement of certain loans provided to the Group. The expectation is that no further loans will be required and all loans as detailed in Note 25 to the accounts will be fully settled within terms.

· Further cash inflow of US$3.6 million before interest and an extension fee from the sale of certain Polish assets on completion of the sale to NSP Investments Holdings Ltd (previously referred to as Palomar) will be received.

· Committed facility of £10 million from Shard Capital which can be drawn down on a quarterly basis in instalments of up to £1.25 million per quarter over a period of 2 years.

· The cash flow forecast reflects the on-going activity across the Group's exploration asset portfolio taking account of its licence commitments, technical team costs, administrative overhead, other financial commitments and its available financial resources from existing cash balances. The strategy of the Board is to continue to mitigate risk on the Group's exploration portfolio by monetising certain assets through outright/partial disposal of interests or securing farm-in partners on certain projects. The Directors are engaged in on-going discussions with third parties on the potential disposal of a number of the Group's assets which they expect will generate cash resources to assist in financing the Group's activities. Although there is potential for further cash inflows from monetising certain assets through outright/ partial disposal of interests or securing farm-in partners on certain projects, the cash flow projections do not include these supplemental cash inflows.

Given the Group's well understood cost base and the expected cash inflows in June 2018 associated with the interest and capital repayments on the Loan Notes with MLPL, the directors are confident that the Group has adequate resources to continue as a going concern with no material uncertainties.

It was originally envisaged that the quarterly Loan Notes payments due to the Group would be sourced by MLPL from the receipt of dividends through its indirect interest in Eroton via Martwestern. These dividends have not been received and consequently MLPL entered into a loan arrangement in order to be able to make Loan Notes payments to the Company. In the absence of the dividend payments to MLPL it will be reliant on further advances under the loan arrangement and in turn being able to make quarterly Loan Notes payments to the Company.

The Directors have concluded, that whilst any quarterly Loan Notes payment due in the second half of 2018, if delayed or not received, represents a material uncertainty in relation to the carrying value of the MLPL Loan Notes, the payment of the fourth quarterly Loan Notes payment of which US$11 million has been received to date, and a further up to US$8 million will be paid on behalf of MLPL by the end of June 2018, will enable the Group and Company to continue as a going concern. The uncertainty in relation to subsequent receipts in the second half of 2018 does not give rise to a significant doubt in relation to the Group and Company's ability to continue as a going concern.

Further, based on its consideration of Group cash flow projections and underlying assumptions outlined above, the Directors have a reasonable expectation that the Group and Company will have adequate resources to continue in operational existence and to discharge its debts as they fall due for the foreseeable future and for a period of at least 12 months from the date of approval of the financial statements.

Accordingly the Directors continue to adopt the going concern basis of preparation of the financial statements for the year ended 31 December 2017.

Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). These consolidated financial statements are presented in Euro (€), which is the Company's functional currency and the Group's presentational currency, rounded to the nearest thousand.

Use of estimates and judgements

The preparation of financial statements in conformity with EU IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, significant areas of estimation uncertainty and critical judgements used in applying accounting policies that have the most significant effect on the

amounts recognised in the financial statements include:

· Going concern (Note 1 to the accounts)

· Recoverability of intangible assets (Note 12 to the accounts)

· Measurement and recoverability of equity accounted investments (Note 13 to the accounts)

· Measurement and recoverability of financial assets (Note 17 to the accounts)

· Measurement of share-based payments (Note 29 to the accounts)

· Recognition of deferred tax asset for tax losses (Note 31 to the accounts)

· Provision (Avobone) (Note 26 to the accounts )

Basis of consolidation

The financial information incorporates the financial information of the Company and entities controlled by the Group (its subsidiaries). Control is defined as when the Group is exposed to or has the rights to variable returns from its investment with the entity and has the ability to affect these returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases. Where necessary, adjustments are made to the financial information of subsidiaries to bring their accounting policies into line with those used by other members of the Group. Intra-group balances and any unrealised gains and losses or income or expenses arising from intragroup transactions are eliminated in preparing the Group financial statements.

3. Revenue and segmental information

Operating segment information is presented on the basis of the geographical areas as detailed below, which represent the financial basis by which the Group manages its operations. The Board of Directors, which has been recognised as the Chief Operating Decision Maker (CODM), regularly receive verbal or written reports at board meetings for each of the segments based on the below criteria which management consider to be appropriate in evaluating segment performance relative to other entities that operate in the industry. As the Company is in a process of transition the segments are to be reviewed for relevance in the future.

^ This is the net expenditure incurred by the Group excluding amounts incurred by partners on shared exploration interests. It includes assets acquired through business combinations and equity accounted investments.

# Unallocated expenditure and liabilities include amounts of a corporate nature and not specifically attributable to a reportable segment.

^ This is the net expenditure incurred by the Group excluding amounts incurred by partners on shared exploration interests. It includes assets acquired through business combinations and equity accounted investments.

# Unallocated expenditure and liabilities include amounts of a corporate nature and not specifically attributable to a reportable segment.

Revenue relates to the provision of seismic acquisition services in Poland in 2017 and 2016.

4. Earnings per share

Basic earnings or loss per share is calculated by dividing the profit or loss attributed to ordinary shareholders of €73,527,000 loss (2016: €5,717,000 profit) by the weighted average number of shares of 454,472,053 (2016: 167,296,403) in issue during the year. The diluted earnings or loss per share is calculated by dividing the profit or loss attributed to ordinary shareholders of €73,527,000 loss (2016: €5,717,000 profit) by the diluted weighted average number of shares of 455,362,546 (2016: 171,242,476) in the event that share options and warrants are exercised.

5. Equity accounted investments

In 2016, the Company acquired a 40% non-controlling interest in Midwestern Leon Petroleum Limited as part of the OML 18 Production Arrangement transaction. Full details of the OML 18 Production Arrangement are set out in Note 6 below (of Note 17(i) of the financial statements).

6. Financial assets

OML18 Production Arrangement

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

# 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

In 2016, the Company undertook a number of steps to effect the purchase of its interest in the OML 18 Production Arrangement in 2016. 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 the 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 Notes 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. San Leon is due to 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. San Leon is also a beneficiary of any dividends that will be paid by MLPL as a 40% shareholder in MLPL, but the Loan Notes repayments must take priority over any dividend payments made to the MLPL shareholders.

Through its 50% shareholding in Eroton and other financial 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, San Leon is an indirect shareholder of Eroton, and the Company holds a 9.72% initial indirect economic interest in OML 18.

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

The recoverability of the Group and Company's equity and Loan Notes investments in the MLPL 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 to repay interest and principal to San Leon. At the reporting date and at the date of approval of their financial statements these conditions have not been met by Eroton. As a consequence MLPL had to enter into a loan during 2017 and subsequently in order to be able to meet its obligations under the Loan Notes and make payments to San Leon. During 2017 San Leon received total payments under the Loan Notes totalling €34.3 million (US$39.6 million). All payments during 2017 were received by the due date and in accordance with the terms of the Loan Notes. The payments received during 2017 represent interest and no principal on the Loan Notes repaid. The Directors of San Leon have considered the carrying amounts of the Loan Notes and equity interest at 31 December 2017 and are satisfied that these are appropriate.

7. Subsequent events

Appointments of Non-Executive Directors

San Leon announced on 16 January 2018 the appointment with immediate effect of Linda Beal as a Non-Executive Director. Linda Beal chairs the Audit Committee, and is also a member of the Remuneration Committee.

The appointment of Bill Higgs as a Non-Executive Director of the Company was announced on 24 May 2018.

Payment received in respect of Loan Notes

On 3 April 2018 San Leon announced it had received US$19 million in respect of the Loan Notes in full satisfaction of MLPL's obligations for Q1 2018. As announced on the 29 June 2018, US$ 11 million has been received in relation to the fourth quarterly Loan Notes payment and it has been confirmed to the Company that a further up to US$ 8 million will be paid by 30 June 2018. This will fulfil the fourth quarterly Loan Notes payment due to the Company by the end of June 2018.

Potential offers

San Leon confirmed on 5 January 2018 that discussions with both China Great United Petroleum (Holding) Limited ("CGUP"), originally announced on 28 June 2017, and Geron Energy Investment ("Geron"), originally announced on 21 December 2016, had been terminated. Both CGUP and Geron confirmed that they do not intend to make an offer for the issued and to be issued share capital of San Leon.

Resumption of trading in San Leon shares

San Leon announced on 3 November 2017 that it received a letter on 11 September 2017 from Midwestern Oil and Gas Limited ("Midwestern") with an indicative proposal that included San Leon acquiring Midwestern's shares in Midwestern Leon Petroleum Limited. Such an acquisition could constitute a reverse takeover under the AIM Rules for Companies (the "AIM Rules") and, in accordance with rule 14 of the AIM Rules, would require the publication of an AIM admission document ("Admission Document") and approval of shareholders of the Company at a general meeting to proceed. Accordingly, the Company's ordinary shares were suspended from trading pending the termination of these discussions or the publication of an Admission Document.

It was announced on 23 April 2018 that after careful consideration the board of San Leon determined that a combination with MLPL was not in the best interest of the San Leon shareholders at that time. San Leon requested the lifting of the suspension from trading of its shares on AIM and resumed trading at 7.30 am on 23 April 2018.

Appointment of NOMAD

Cantor Fitzgerald Europe ("Cantor Fitzgerald") was appointed San Leon's Nominated Adviser, financial adviser and broker on 24 April 2018.

SunTrust Oil

San Leon confirmed on 9 May 2018 that it had received an application from SunTrust Oil ("SunTrust") seeking leave (asking for permission) from the High Court Nigeria Holden to serve a petition outside the jurisdiction of Nigeria in respect of alleged amounts due. The claim by SunTrust is in respect of alleged payments due for the sale of their shares in Martwestern.

The Company, having taken legal advice, believes the claim has no foundation (there being no outstanding liabilities to SunTrust from San Leon following the issue of San Leon shares to SunTrust in September 2016), and additionally, the Nigerian courts lack jurisdiction for any such claim. The Company confirmed it had instructed its Nigerian solicitors to file objections restraining the applications of SunTrust. This would have the effect of striking out the applications.

Further on 22 May 2018, the Company confirmed that it or its subsidiaries or legal counsel had not received any summons or were aware of the existence of any such summons.

On 24 May 2018 San Leon confirmed that it had been provided with a copy of correspondence between SunTrust Oil ("SunTrust) and the Nigerian Department of Petroleum Resources ("DPR"). The correspondence relates to a requirement under Nigerian law for the Minister of Petroleum Resources to consent to any assignment of interests in oil and gas assets in Nigeria and the fact that such consent was not obtained prior to the purchase by the Company of its indirect interest in OML 18.

San Leon obtained legal advice prior to the purchase which confirmed that, owing to the way that the transaction was structured (and specifically the nature of its indirect interest in OML 18), it was not necessary for Eroton to obtain prior consent from the Minister. Furthermore, San Leon had re-confirmed with its legal advisers that this position is correct and the DPR will be notified accordingly. In addition, the Company remains of the view that the purported allegations by SunTrust are without any foundation or merit.