San Leon Regulatory News (SLE)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ('MAR). Upon the publication of this announcement via a Regulatory Information Service ('RIS'), this inside information is now considered to be in the public domain.

30 September 2019

San Leon Energy Plc

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

Interim Results

San Leon, the AIM listed company focused on oil and gas development and appraisal in Africa, today announces its unaudited interim results for the six months ended 30 June 2019, and provides an update on its indirect interest in OML 18, a world-class oil and gas block located in onshore Nigeria.

Highlights

Financial

·; Loss from continuing operations for the period ended 30 June 2019 was US$6.8 million (30 June 2018: profit of US$7.6 million (restated)~)

·; Cash and cash equivalents as at 30 June 2019 of US$12.2 million (30 June 2018: US$26.3 million (restated)~) following the successful tender for and purchase of US$30.5 million of its own ordinary shares

·; Cash as at 27 September 2019 was US$36.8 million

·; During 2019 to date US$37.8 million (30 June 2018: US$37.7 million) has been received in relation to payments due to San Leon under the US$174.5 million Loan Notes

·; The Company is scheduled to continue to be repaid against the Loan Notes, the balance of which is currently US$133.8 million, on a cash receipts basis

·; The Company anticipates announcing its first dividend in due course, as part of its shareholder distribution policy

·; Carrying value of Barryroe has been impaired by US$17.9 million to US$33.2 million to reflect delays in the operator completing the farm out

·; Functional currency change to US Dollars (US$)

Operational

An update on OML 18 activity during the first six months of 2019 is provided below.

·; The first of Eroton's (the operator of OML 18) newly-drilled wells came onto production at a combined rate of approximately 4,800 barrels of oil per day ("bopd") from its two separate production strings. Eroton has advised that its latest tested rate is approximately 5,200 bopd.

·; Oil sales were approximately 32,000 bopd in H1 2019 (26,003 bopd in H1 2018), and continues to be affected by losses and downtime of approximately 32%.

·; Gas sales averaged 34.3 million standard cubic feet per day ("mmscf/d") in H1 2019 after downtime.

·; 18% of the production downtime in H1 2019 was caused by third party terminal and gathering system issues. The poor third party performance in the export system is expected to be resolved by the implementation of the new alternative crude oil evacuation and storage system ("ACOES") for the purpose of transporting, storing and evacuating crude oil from OML 18 export pipeline ("Pipeline") running from within the OML 18 acreage and down to the open sea to a dedicated Floating Storage and Offloading ("FSO") vessel.

·; Eroton informs the Company that it has concluded and executed an agreement with Energy Link Infrastructure (Malta) Limited ("ELI"), for ELI to finance and construct the ACOES. The FSO ("ELI Akaso") has been procured and the required conversion works completed, and is currently being fitted with a LACT unit in Malaysia while awaiting final certification by the Nigerian Department of Petroleum Resources. The FSO is expected to set sail for Nigeria in November 2019. Work on the pipeline system is ongoing and the expectation is that the completed ACOES system will be commissioned in the second quarter of 2020. Once commissioned, the system is expected by Eroton to reduce the downtime and allocated pipeline losses currently associated with the Nembe Creek Trunk Line ("NCTL"), which were responsible for the majority of the 15,000 bopd difference between gross production when the pipeline is running, and average sales oil. In addition, it is anticipated that the FSO project will improve overall well uptime.

·; Year on year reduction in pipeline losses by the Bonny Terminal operator partially due to the installation of Lease Automatic Custody Transfer ("LACT") units to ensure that the OML 18 partners have fiscal metering of the oil prior to export into the gathering system (2019: 30 June 18%; 2018: 30 June 33%). Eroton has advised that it is the only supplier of oil into NCTL with functional LACT units, meaning that pipeline losses allocated to Eroton are materially lower than allocated to other NCTL users. In the longer term, the export pipeline and FSO system mentioned above will provide additional control.

·; Completion of Eroton's second newly-drilled well, Akaso-16, took significantly longer than expected. This in turn has delayed the move of the rig to the next well, MTMY-1. The rig is arriving at that location imminently. MTMY-1 is expected to be the last well drilled using the current rig contract, and Eroton expects to continue the drilling programme in early Q2 2020. Akaso-16 is being connected to the production system, and is expected to begin well testing in the coming weeks.

·; In January 2019, San Leon announced that Eroton had successfully restructured its RBL facility.

·; In July 2019 the Company announced that Eroton had received a 20-year licence renewal for OML 18, which now expires in 2039.

Corporate

·; The Company completed the planned capital reorganisation in early 2019. This enabled the Company to successfully tender for and purchase US$30.5 million of its own ordinary shares, at a price of 46 pence per share in March 2019.

·; The Company notes the press releases from Providence Resources Plc ("Providence") from September 2018 onwards, confirming a binding drilling farm-out agreement for Standard Exploration Licence 1/11 containing the Barryroe field, offshore Ireland. San Leon holds a 4.5% Net Profit Interest ("NPI") in Barryroe. As of 10 September 2019, Providence had provided additional time for the farminee to pay initial amounts as part of the transaction and extended the deadline to 30 September 2019. Due to the delay in payment as described above, the Directors have decided to impair the Barryroe carrying value by US$17.9 million to US$33.2 million to reflect their estimate of the impact of risks to the future cash flows on the value of the asset.

·; Ewen Ainsworth resigned as Finance Director on 30 June 2019 and Lisa Mitchell joined the Company as Chief Financial Officer and Executive Director on the same date.

·; During August 2019, the Company completed the sale of interests in four Polish concessions to Horizon Petroleum Ltd as part of the Company's strategy to monetise non-core assets.

·; In June 2019, San Leon announced that it and SunTrust had signed binding agreements terminating all litigation against San Leon, and precluding any future such litigation. The Company also announced that Midwestern had increased its shareholding in San Leon to 13.01%, following its purchase of all of SunTrust's remaining shares in San Leon.

Chief Executive Officer of San Leon, Oisin Fanning, commented:

"The Company's finances and outlook have been transformed with seven quarters of payments to satisfy the principle and accrued interest due from the US$174.5 million MLPL Loan Notes. Eroton continues to progress operationally to target delivering returns from OML 18. Following the March 2019 share repurchase, the Company anticipates distributing cash to shareholders in the form of dividends, and expects to announce its first dividend in due course."

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)

David Porter (+44 207 894 7000)

Rick Thompson (+44 207 894 7000)

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

Nick Lovering (+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 (+44 207 930 0230)

Simon Woods (+44 207 930 0230)

Chairman's Statement

I welcome the continued efforts by Eroton to increase OML 18's gross production by commencing drilling new wells, as well as addressing export downtime and allocated pipeline losses. The Company has previously documented the operational and financial challenges being tackled by Eroton as operator of OML 18.

The continued receipt of Loan Notes payments, now totaling US$143.6 million, puts San Leon in a healthy financial position and enabled it to repurchase US$30.5 million of its own shares in March 2019. During the period of 2019 to date, US$37.8 million has been received leaving US$133.8 million of principal and interest on a cash receipt basis outstanding and payable as of 27 September 2019.

I would like to thank Ewen Ainsworth for his work over the past 3 years as Finance Director. I would like to welcome Lisa Mitchell, who has joined San Leon as Chief Financial Officer and Executive Director.

Financial Review

To date, San Leon has received US$143.6 million representing Loan Note payments which have been applied in satisfaction of principal and accrued interest on the Loan Notes. As a result of these payments, cash and cash equivalents as at 30 June 2019 were US$12.2 million (30 June 2018: US$26.3 million (restated)~).

San Leon generated a loss after tax from continuing operations of US$6.8 million for the 6 months to 30 June 2019, compared with a profit after tax of US$7.6 million (restated)~ in the 6 months to 30 June 2018.

Revenue for the six months to 30 June 2019 was US$0.2 million, compared with US$0.1 million (restated)~ for the 6 months to 30 June 2018.

Profit on equity investments for the 6 months to 30 June 2019 was US$0.1 million (30 June 2018: loss of US$9.5 million (restated)~). This profit relates to San Leon's equity investment in Midwestern Leon Petroleum Limited ("MLPL"). MLPL has a 100% equity investment in Martwestern Energy, which in turn has a 50% equity investment in Eroton, the operator and holder of the Company's indirect interest in OML 18, Nigeria. The share of profit on equity accounted investments comprises administrative costs of US$0.3 million, net finance costs of US$1.1 million, profit on investment of US$3.0 million and a tax charge of US$1.5 million. This small profit reflects the operational challenges encountered by OML 18 (as described elsewhere) along with the financing arrangements which enabled the Company to acquire its indirect interest. This share of profit on equity accounted investments needs to be viewed in the context of the Loan Notes which enabled the acquisition of the indirect interest in OML 18 and generated finance income on the Loan Notes during the period of US$10.0 million.

Administrative costs decreased to US$5.9 million for the 6 months to 30 June 2019 (30 June 2018: US$8.6 million (restated)~). The decrease was due to reductions in wages and salaries of US$0.3 million, rent and rates of US$0.4 million, advisors and consultants of US$0.4 million, licence fees in Poland of US$0.2 million and foreign exchange of US$1.4 million.

Finance expense of US$0.1 million for the 6 months to 30 June 2019 (30 June 2018: US$0.7 million (restated)~) relates to interest expense and fees for loan facility arrangements and interest on obligations for leases.

Finance income of US$10.1 million (30 June 2018: US$23.0 million (restated)~) is substantially interest income on the US$174.5 million Loan Notes. The reduction year on year is due to a reforecast in timing of receipts of the Loan Notes, the reduction of the Loan Notes principal in the period and also the foreign exchange gain on the Loan notes recognised in 2018.

Tax credit for the 6 months to 30 June 2019 is US$5.2 million (30 June 2018: tax charge US$0.3 million (restated)~) predominantly relates to the deferred tax movement in Barryroe of $5.8 million.

Following completion of a capital reorganisation, the Company completed the return of US$30.5 million to shareholders through a share buy-back programme in March 2019. The Company had previously announced that the buy-back would be at least US$10.0 million.

The Interim Report and Accounts are available on the Company's website at www.sanleonenergy.com.

Outlook

The Company continues to be in a strong financial position, with the benefit of an expected future income stream from the principal and interest repayments due from the Loan Notes issued as part of the OML 18 investment and future dividends from the indirect interest. The Company believes that significant shareholder value will continue to be realised from its world class Nigerian interest, through cash flows from San Leon's indirect equity interest in OML 18, and from its technical services provision which are expected in due course when production and OML 18 financing issues are addressed. I look forward to updating shareholders as OML 18 progresses and as we continue to review other value accretive opportunities.

~ See Note 1.6 of Interim Report

San Leon Energy plc

Consolidated income statement

for the six months ended 30 June 2019

* See Note 1.5 for further details

~ See Note 1.6 for further details

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2019

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2019

* See Note 1.5 for further details

~ See Note 1.6 for further details

1 The balance as at 1 January 2018 has been restated to account for the following items:

a) On the adoption of IFRS 9 (Financial Instruments) on 1 January 2018 transitional adjustments were reflected in the opening equity position of the Group. This includes US$1.5 million in respect of the reclassification of "available for sale" assets to assets held at "fair value through profit and loss" reflecting cumulative historical changes in fair value that had been recorded in equity and is recorded as a credit to opening retained earnings. In addition, an opening adjustment to retained earnings of US$9.7 million has been made reflecting the impact of transition to IFRS 9 on the carrying values of financial assets and related credit loss provisions held.

There was also a US$1.4 million reclassification from the Fair value reserve to Retained earnings in respect of "available for sale" assets which the Group deems to have a US$nil value and is recorded as a debit to opening retained earnings.

See Note 1.6 for further details

b) An amount of US$1.2 million has been transferred from the Share based payment reserve to the Shares to be issued reserve in relation to the value of shares issued in lieu of salaries. There is no balance sheet impact on assets or liabilities and therefore a restatement of the balance sheet is not required.

c) An amount of US$0.2 million has been transferred from the Share based payment reserve to Retained earnings and an amount of US$0.1 million has been transferred from the Shares to be issued reserve to Retained earnings. There is no balance sheet impact on assets or liabilities and therefore a restatement of the balance sheet is not required.

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2019

* See Note 1.5 for further details

1 The balance as at 1 January 2018 has been restated to account for the following items:

a) On the adoption of IFRS 9 (Financial Instruments) on 1 January 2018 transitional adjustments were reflected in the opening equity position of the Group. This includes US$1.5 million in respect of the reclassification of "available for sale" assets to assets held at "fair value through profit and loss" reflecting cumulative historical changes in fair value that had been recorded in equity and is recorded as a credit to opening retained earnings. In addition, an opening adjustment to retained earnings of US$9.7 million has been made reflecting the impact of transition to IFRS 9 on the carrying values of financial assets and related credit loss provisions held.

There was also a US$1.4 million reclassification from the Fair value reserve to Retained earnings in respect of "available for sale" assets which the Group deems to have a US$nil value and is recorded as a debit to opening retained earnings.

b) An amount of US$1.2 million has been transferred from the Share based payment reserve to the Shares to be issued reserve in relation to the value of shares issued in lieu of salaries. There is no balance sheet impact on assets or liabilities and therefore a restatement of the balance sheet is not required.

c) An amount of US$0.2 million has been transferred from the Share based payment reserve to Retained earnings and an amount of US$0.1 million has been transferred from the Shares to be issued reserve to Retained earnings. There is no balance sheet impact on assets or liabilities and therefore a restatement of the balance sheet is not required.

San Leon Energy plc

Consolidated statement of financial position

as at 30 June 2019

* See Note 1.5 for further details

~ See Note 1.6 for further details

San Leon Energy plc

Consolidated statement of cash flows

for the six months ended 30 June 2019

* See Note 1.5 for further details 

~ See Note 1.6 for further details

San Leon Energy plc

Notes to the Interim Consolidated Financial Statements

for the six months ended 30 June 2019

1. Basis of preparation and accounting policies

1.1 Statement of compliance

These interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and should be read in conjunction with the Group's last annual consolidated financial statements as at and for the year ended 31 December 2018. They do not include all of the information required for a complete set of International Financial Reporting Standards ("IFRS") financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual financial statements. They should be read in conjunction with the Group's annual financial statements as at 31 December 2018 which are available on the Group's website www.sanleonenergy.com.

These unaudited Half year results were approved by the Board of Directors on 29 September 2019.

1.2 Significant accounting policies

The accounting policies applied by the Group in the Interim Financial Statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2018 with the exception of changes in accounting policy in respect of IFRS 16, Leases and International Financial Reporting Interpretations Committee ("IFRIC") 23: Uncertainty Over Income Tax Treatment which are described below.

The following standards are effective from 1 January 2019.

IFRS 16 Leases

IFRS 16 is effective for accounting periods beginning on or after 1 January 2019, and the Group adopted IFRS 16 with effect from 1 January 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. For lessees, IFRS 16 eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model whereby all leases are accounted for on-balance sheet, with some exemptions for short-term and low-value leases. It also includes an election which permits a lessee not to separate non-lease components (e.g. maintenance) from lease components and instead capitalise both the lease cost and associated non-lease cost.

The standard primarily affects the accounting for the Group's operating leases. The application of IFRS 16 results in the recognition of additional assets and liabilities in the consolidated statement of financial position and in the consolidated income statement. It replaces the straight-line operating lease expense with a depreciation charge for the right-of-use asset and an interest expense on the lease liabilities.

The incremental borrowing rate is the rate of interest that the lessee would expect to incur on funds borrowed over a similar term and security to obtain a comparable value to the right-of-use asset in the relevant economic environment. The Group's weighted average incremental borrowing rate pertaining to these leases is 5%.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a Lease. The Group now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed.

Transition

The Group adopted the new standard by applying the modified retrospective approach.

At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. All right-of-use assets were measured at the amount of the lease liability on adoption, adjusted by the amount of any prepaid or accrued interest payments.

Previously under IAS 17 operating lease rentals were charged to the Income Statement on a straight-line basis over the term of the lease.

The Group applied the recognition exemption for short-term and low-value leases and used hindsight when determining the lease term and if the contract contained options to extend or terminate the lease. The Group also elected not to separate non-lease components from lease components and instead capitalise both the lease cost and associated non-lease cost.

The Group has also elected to use the practical expedient which allows for a single discount rate to be applied to a portfolio of leases with reasonably similar characteristics.

The impact on the financial statements on transition to IFRS 16 is outlined in note 19.

Measurement

The Group recognises right-of-use assets representing its right to use the underlying assets and lease liabilities representing its obligation to make lease payments at the lease commencement date. The right-of use assets are initially measured at cost, and subsequently measured at cost less accumulated depreciation and impairment losses.

Lease liabilities are measured at the present value of the future lease payments, discounted at the Group's incremental borrowing rate. Subsequent to the initial measurement, the lease liabilities are increased by the interest cost and reduced by lease payments made.

The right-of-use assets and lease liabilities are remeasured when there are changes in the assessment of whether an extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised or where there is a change in future lease payments as a result of a change in an index or rate. The Group applies judgement when determining the lease term where renewal and termination options are contained in the lease contract.

IFRIC 23 Uncertainty over income tax treatment

IFRIC 23 is effective for accounting periods beginning on or after 1 January 2019, and the Group adopted IFRIC 23 with effect from 1 January 2019. IFRIC 23 sets out how to determine taxable profits and losses, tax bases, unused tax losses, unused tax credits and tax rates when there is uncertainty over income tax treatments under IAS 12 - Income Taxes. Where the group considers it is probable that an uncertain tax treatment will not be accepted by a tax authority the tax risk is measured using either the most likely amount method or the expected value method, as appropriate. The adoption and application of IFRIC 23 did not have a material impact on the Group.

1.3 Estimates and judgements

In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the last annual report for the year ended 31 December 2018.

1.4 Going concern

Based on the Group's forecast, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidation statements.

1.5 31 December 2018 Restatements

On 1 January 2019 the Group's presentation currency changed from Euro to US Dollars, given that a significant majority of Group earnings are now denominated in US Dollars (US$). The Group believes that the presentation currency change will give investors and other stakeholders a clearer understanding of the Group's performance over time.

Following this change in accounting policy, the comparatives in the consolidated financial statements are represented in US$ using the procedures outlined below:

- Assets and liabilities are translated into US$ at closing rates of exchange. Trading results are translated into US$ at the rates of exchange prevailing at the dates of transaction or average rates where these are a suitable proxy. Differences resulting from the retranslation on the opening net assets and the results for the period have been presented in the currency translation reserve, a component within shareholders' equity.

- Share capital, share premiums and other reserves are translated at historic rates prevailing at the dates of transactions.

- Cumulative currency translation adjustments are presented as if the Group had always used US$ as the presentation currency of its consolidated financial statements.

1.6 30 June 2018 Restatements

The 30 June 2018 results have been restated for the change in presentation currency as described in Note 1.5 above.

In addition, the Group's financial statements for the year ended 31 December 2018 included transitional adjustments made to the opening statement of financial position and statement of changes in equity in relation to the adoption of IFRS 9 (Financial Instruments) from 1 January 2018, and applied the standard to the results in the Group's financial statements for the year ended 31 December 2018.

The Group's interim financial statements for the 6 months ended 30 June 2018 did not show the impact of the adoption of IFRS 9 and did not include these adjustments. In accordance with the treatment of errors described IAS 8, a prior period restatement has been made to the statement of financial position as at 30 June 2018, the income statement and the statement of changes in equity for the period to 30 June 2018 to reflect the IFRS 9 transitional adjustments as at 1 January 2018 and the impact for the period to 30 June 2018 of adopting IFRS 9.

The impact of this prior period restatement on the Group's interim financial statements for the 6 months ended 30 June 2018 is as follows:

Consolidated statement of changes in equity for the period to 30 June 2018:

- The recognition of an expected credit loss provision as at 1 January 2018 of US$9.7 million and a decrease in opening retained earnings. The expected credit loss ("ECL") provision was recognised as an opening adjustment in the 31 December 2018 annual financial statements.

- The transfer of US$0.1 million from the fair value reserve and currency translation reserve to retained profits in respect of assets held at fair value through profit and loss. This reflected cumulative historical changes in fair value that had been recorded in equity and is recorded as a credit to opening retained earnings. There was no effect on the net assets of the company as a result of the transfer. The transfer was recognised as an opening adjustment in the 31 December 2018 annual financial statements.

Consolidated statement of financial position as at 30 June 2018:

- The recognition of an expected credit loss provision of US$7.6 million and a decrease in retained earnings.

Consolidated income statement for the 6 month period to 30 June 2018:

- A profit of US$2.1 million relating to the reduction of the expected credit loss provision.

- A profit of US$1.5 million relating to the fair value movements in financial assets and a corresponding tax charge of US$0.5 million.

No restatement for these matters is required in respect of the Group's financial statements for the year ended 31 December 2018.

2. Revenue and segmental information

3. Finance expense

* See Note 1.5 for further details

~ See Note 1.6 for further details

4. Finance income

All interest income in respect of assets is measured at amortised cost.

* See Note 1.5 for further details

~ See Note 1.6 for further details

5. Expected credit losses

* See Note 1.5 for further details

~ See Note 1.6 for further details

6. Income tax

The difference between the total tax shown above and the amount calculated by applying the applicable standard rate of Irish corporation tax to the loss before tax is as follows:

* See Note 1.5 for further details

~ See Note 1.6 for further details

7. Intangible assets

Exploration and evaluation assets

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

* See Note 1.5 for further details

~ See Note 1.6 for further details

The Directors considered the carrying value at 31 December 2018 of capitalised costs in respect of its exploration and evaluation assets. These assets were assessed for impairment indicators and in particular with regard to remaining licence terms, likelihood of licence renewal, likelihood of further expenditures and on-going appraisals for each area. Based on internal assessments from the latest information available at the time, the Directors impaired the exploration and evaluation assets by US$3.2 million for the year ended 31 December 2018.

8. Equity accounted investments

Midwestern Leon Petroleum Limited

* See Note 1.5 for further details

~ See Note 1.6 for further details

9. Property, plant and equipment

* See Note 1.5 for further details

~ See Note 1.6 for further details

10. Financial assets