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.

25 September 2020

San Leon Energy Plc

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

Interim Results

San Leon, the independent oil and gas production, development and exploration company focused on Nigeria, today announces its unaudited interim results for the six months ended 30 June 2020, and provides an update on its indirect interest in OML 18, a world-class oil and gas block located onshore in Nigeria.

Highlights

Corporate

· Completed the return of approximately US$35.3 million to shareholders during the first half of 2020 delivering on the Company's commitment to shareholder returns.

· Oisin Fanning, CEO, purchased 98 million shares in the Company, taking his interest to approximately 24%, on 7 May 2020.

· Adekolapo Ademola joined the Company as Non-Executive Director on 7 April 2020 as a designate of Midwestern Oil & Gas Company Ltd. Bill Higgs and Mark Phillips resigned as Non-Executive Directors in May and June 2020 respectively.

· The Company entered into an agreement dated 6 April 2020 amending the existing Loan Notes Instrument (the "Amendment") between San Leon and Midwestern Leon Petroleum Limited ("MLPL"). Under the terms of the Amendment, US$40.0 million was received immediately by San Leon, with the remaining balance payable being approximately US$82.2 million plus interest. A further US$10.0 million is expected to be settled on or before 6 October 2020, with the balance of the Loan Notes receivable to be paid in three quarterly instalments, commencing July 2021 and completing by December 2021.

Corporate - Post balance sheet

· On 3 August 2020 the Company provided a US$15.0 million loan and acquired a 10% interest in Energy Link Infrastructure (Malta) Ltd ("ELI"). ELI's sole asset is the proposed new Alternative Crude Oil Evacuation System ("ACOES") constructed to provide a dedicated oil export route from the OML 18 asset. Once commissioned, the system is expected by Eroton to reduce the downtime and allocated pipeline ("Pipeline") losses to below 10%.

· On 1 September 2020, the Company announced that it had conditionally agreed to invest US$7.5 million by way of a loan to Decklar Petroleum Limited ("Decklar"), who is the holder of a Risk Service Agreement ("RSA") with Millenium Oil and Gas Company Limited ("Millenium") on the Oza field, onshore Nigeria. Under the agreements, once completed, the Company will also receive a 15% interest in Decklar for a nominal amount paid.

· Allenby Capital Limited was appointed as Nominated Adviser and Joint Broker on 31 July 2020, after the reporting period.

Financial

· Cash and cash equivalents as at 30 June 2020 of US$35.6 million (30 June 2019: US$12.2 million).

· Cash and cash equivalents as at 18 September 2020 was US$22.6 million (US$6.8 million is restricted and held in escrow for the Oza transaction).

· During 2020 to date US$41.5 million (30 June 2019: US$10.7 million) has been received in relation to payments due to San Leon under the Loan Notes.

· The Company is scheduled to continue to be repaid against the Loan Notes, the balance of which is currently US$88.7 million, on a cash receipts basis.

· A share repurchase of US$2.0 million of Company shares was completed between October 2019 and January 2020.

· A special dividend of US$33.3 million was declared in May 2020, giving a dividend yield of approximately 30% as at the date of dividend announcement.

· Loss from continuing operations for the period ended 30 June 2020 was US$20.3 million (30 June 2019: loss of US$6.8 million). For clarity, this figure does not reflect Loan Notes cash received.

Operational

An update on OML 18 activity during the first six months of 2020 is provided below.

· Eroton completed its three well drilling programme in early 2020, with the final completion and flow of these wells impacted by Covid-19. The recent lower oil price has led Eroton to improve capital discipline and the prudent deferral of the next drilling campaign, now expected to commence towards the end of 2021.

· Eroton informs the Company that it has taken all appropriate precautions for its operations and people, with regards to Covid-19.

· Oil delivered to Bonny terminal for sales was approximately 25,200 barrels of oil per day ("bopd") in H1 2020 (32,000 bopd in H1 2019) and continues to be affected by combined losses and downtime of approximately 32%. The 2020 figure has also been affected by OPEC oil production quota restrictions. Together, the losses, downtime and OPEC restrictions cause the majority of the difference between gross production when there is no disruption to production, and oil is received at Bonny terminal for sales.

· Gas sales averaged 39.1 million standard cubic feet per day ("mmscf/d") in H1 2020 after downtime (34.3 mmscf/d in H1 2019).

· Production downtime of 15% in H1 2020 was caused by third party terminal and gathering system issues. Such issues in the third-party export system are expected to be substantially resolved by the implementation of the new ACOES for the purpose of transporting, storing and evacuating crude oil from OML 18 export Pipeline". The Pipeline will run from within the OML 18 acreage to a dedicated Floating Storage and Offloading ("FSO") vessel in the open sea, approximately 50 kilometres offshore. Expected timing for the commencement of operations is in the coming quarters.

· Pipeline losses by the Bonny Terminal operator have been relatively stable over the past year (30 June 2020: 20%; 30 June 2019: 18%). In the longer term, the export Pipeline and FSO system mentioned above are expected to reduce losses significantly.

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

"The Company's position and outlook remains strong.

"Whilst the world and the industry has been through turbulent times, we have taken advantage of the opportunities presented by this as well as utilising our cash position to further build our portfolio in Nigeria in line with our strategy. Our investment in ELI will support the reduction in pipeline losses and downtime at OML 18 whilst also providing loan note repayments as well as equity returns.

Our strong position is expected to continue in the year ahead as we receive further Loan Note payments and deliver upon our strategy."

Enquiries:

San Leon Energy plc

Oisín Fanning, Chief Executive (+ 353 1291 6292)

Allenby Capital Limited (Nominated adviser and joint broker to the Company)

Nick Naylor (+44 203 328 5656)

Alex Brearley (+44 203 328 5656)

Asha Chotai (+44 203 328 5656)

Panmure Gordon & Co (Joint broker to the Company)

Nick Lovering (+44 207 886 2500)

Brandon Hill Capital Limited (Joint broker to the Company)

Oliver Stansfield (+44 203 463 5000)

Jonathan Evans (+44 203 463 5000)

Tavistock (Financial Public Relations)

Nick Elwes (+44 207 920 3150)

Simon Hudson (+44 207 920 3150)

Barnaby Hayward (+44 207 920 3150)

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

Chairman's Statement

I welcome the progress on the ACOES system, as a means for taking a major step forward for oil sales on OML 18. The Company's continued implementation of its strategy has resulted in the ELI and Oza transactions, laying the groundwork for our future portfolio.

The continued receipt of Loan Notes payments, now totaling US$190.6 million, put San Leon in a healthy financial position and enabled the Company to pay a maiden special dividend of approximately US$33.3 million in May 2020. During the period of 2020 to date, US$41.5 million of Loan Note payments have been received. In April 2020 the Company amended the existing Loan Notes Instrument (the "Amendment") between San Leon and Midwestern Leon Petroleum Limited ("MLPL") leaving US$88.7 million of principal and interest on a cash receipt basis outstanding and payable as of 24 September 2020.

I would like to thank Mark Phillips and Bill Higgs for their service as Non-Executive Directors and wish them all the best for the future. I would like to welcome Adekolapo Ademola, who has joined San Leon as Non-Executive Director (appointed as a representative of Midwestern Oil & Gas Company Ltd).

Financial Review

To date this year, San Leon has received US$41.5 million of Loan Notes 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 2020 were US$35.6 million (30 June 2019: US$12.2 million).

San Leon generated a loss after tax from continuing operations of US$20.3 million for the six months to 30 June 2020, compared with a loss after tax of US$6.8 million in the six months to 30 June 2019. The majority of this loss is attributable to the loss on equity investments for the six months to 30 June 2020 of US$14.1 million (30 June 2019: profit of US$0.1 million). This loss relates to San Leon's equity investment in MLPL. MLPL has a 100% equity investment in Martwestern Energy, which in turn has a 50% equity investment in Eroton, the operator of the Company's indirect interest in OML 18, Nigeria.

The share of loss on equity accounted investments comprises 40% of MLPL's gross results being, administrative costs of US$1.0 million, net finance income of US$1.0 million, a loss on investment of US$31.6 million and a tax charge of US$3.7 million. This loss reflects the operational challenges encountered by OML 18 by way of third party terminal and gathering system issues and more generally the impact of Covid-19 on the global economy, oil prices and OPEC restrictions. Eroton has taken prudent and typical action to reduce discretionary spend over this period. This share of loss 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 also generated finance income on the Loan Notes during the period of US$7.7 million.

Revenue for the six months to 30 June 2020 was US$nil, compared with US$0.2 million for the six months to 30 June 2019.

Administrative costs increased to US$7.7 million for the six months to 30 June 2020 (30 June 2019: US$5.9 million). The change was due to an increase in wages and salaries of US$0.8 million, advisors and consultants of US$0.5 million, foreign exchange of US$0.8 million and a decrease in the share-based payments charge of US$0.3 million. The increase in advisors and consultants' fees was largely due to work performed on transactions in line with our strategy of investing in assets with expected near-term cash flow, two of such transactions are outlined below in the Post Balance sheet events.

Finance expense of US$0.1 million for the six months to 30 June 2020 (30 June 2019: US$0.1 million) relates to interest on obligations for leases.

Finance income of US$7.8 million (30 June 2019: US$10.1 million) is substantially interest income on the US$174.5 million Loan Notes. The reduction year on year is due to repayments made during the year combined with the Amendment which altered the timing of receipts of the Loan Notes and reduced the principal in the period.

The Expected Credit Loss ("ECL") provision has increased by US$5.9 million (30 June 2019: a credit of US$3.5 million) due to the Amendment and extension of loan note repayments and also to reflect the increased uncertainty in the global economy and the impact on oil price.

The tax charge for the six months to 30 June 2020 is US$0.8 million (30 June 2019: tax credit US$5.2 million) predominantly relating to the increase in the fair value of the Barryroe Net Profit Interest ("NPI") of US$1.6 million.

The Company completed a US$2.0 million share repurchase in January 2020 and in May 2020 declared a special dividend of US$33.3 million.

Post Balance sheet events

On 3 August 2020 the Company provided a US$15.0 million loan and acquired a 10% interest in Energy Link Infrastructure (Malta) Ltd ("ELI"). ELI's sole asset is the proposed new ACOES, which is being constructed to provide a dedicated oil export route from the OML 18 asset, comprising a new pipeline from OML 18 and a FSO. 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"), to below 10%. In addition, it is anticipated that the FSO project will improve overall well uptime. The investment comprises a 10% equity interest in ELI together with a US$15.0 million shareholder loan at a coupon of 14% per annum over 4 years, and repayable quarterly following a one-year moratorium from the date of investment.

On 1 September 2020 the Company also announced that it had conditionally agreed to invest US$7.5 million by way of a loan to Decklar Petroleum Limited ("Decklar"), the local subsidiary of Asian Mineral Resources Limited (TSX-V:ASN) (now renamed to Decklar Resources Inc (TSX-V:DKL)), listed on the Canadian TSX Venture Exchange. Decklar is the holder of a RSA with Millenium on the Oza field, onshore Nigeria. Until the loan and its interest are repaid, there will be a cash sweep in San Leon's favour. San Leon will also subscribe for a 15% equity interest in Decklar for a nominal amount. Oza is a marginal field which has previously produced oil, has existing infrastructure, and the Company believes has considerable development potential.

Outlook

San Leon remains in a strong position. Our strategy is delivering, and we expect to continue to deliver as we receive further Loan Note repayments in the coming year. OML 18 is undoubtedly a world class asset and we believe that the ACOES will significantly reduce OML 18's losses and downtime going forward. Our position allows us to make the most of the opportunities available to the Company as we look to continue to grow and develop our portfolio (as demonstrated by our investments in the ACOES and in the Oza field) whilst also distributing additional returns to our shareholders. I look forward to updating shareholders as OML 18 progresses and as we execute our new projects and review other opportunities.

San Leon Energy plc

Consolidated income statement

for the six months ended 30 June 2020

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2020

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2020

San Leon Energy plc

Consolidated statement of changes in equity

for the period ended 30 June 2020

San Leon Energy plc

Consolidated statement of financial position

as at 30 June 2020

San Leon Energy plc

Consolidated statement of cash flows

for the six months ended 30 June 2020

San Leon Energy plc

Notes to the Interim Consolidated Financial Statements

for the six months ended 30 June 2020

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 2019. 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 2019 which are available on the Group's website www.sanleonenergy.com.

These unaudited Half year results were approved by the Board of Directors on 24 September 2020.

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 2019.

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 2019.

The Company has used draft 30 June 2020 management accounts provided by MLPL to account for the equity accounted investment. These MLPL management accounts have not been reviewed or audited by MLPL's auditors.

1.4 Going concern

The Group closely monitors its liquidity risk and cash forecasts are produced regularly. Given the current environment of low oil prices and economic uncertainties as a result of Covid-19, cash forecast scenarios have been reviewed further. The principal assumptions underlying the cash flow forecast to the Group are as follows:

· On 6 April 2020, the Company entered into an agreement amending the MLPL Loan Notes Instrument. The Amendment extends the term of the Loan Notes to December 2021 and changes the expected loan note repayment schedule. Up to 30 June 2020, Loan Note payments totalling US$41.5 million of both principal and interest have been made on behalf of MLPL. Since reporting date, no further repayments have been received. US$10.0 million will be due to be settled on 6 October 2020, with quarterly repayments starting from July 2021. The Group has assumed that it will receive the respective forecast cash flows during 2020 and 2021 from the Loan Notes and for the purposes of managing the loan, cash flows are allocated to interest and then capital repayments in accordance with the terms of the Loan Notes.

· Income from the provision of subsurface technical and management services of gross US$3.0 million per year in 2020 and 2021.

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

· The cash flow forecast reflects the on-going activity across the Group's exploration asset portfolio which is now substantially reduced but does take into account licence commitments and technical team costs where relevant, administrative overhead, other financial commitments and its available financial resources from existing cash balances.

The Directors have considered the impact of Covid-19 upon the Company's indirect interest in OML 18, and upon the Loan Notes. The field operations of OML 18 will necessarily be slowed by the taking of customary health precautions, but as with most oil operations around the world, the Company are advised by Eroton that operations are continuing on a reasonable basis with a prudent reduction in discretionary spend. The impact of the current low oil price will likely result in the deferral of some operational and capital expenditure, as is prudent to preserve working capital by Eroton. That is expected to delay some production increases from drilling. Eroton's income will also be affected by the lower oil price itself, although that is buffered to some extent by the deferral of costs mentioned and a number of put options in place. The overall effect is likely only to be some delay in receiving distributions from Eroton via MLPL. However, due to the current uncertain economic outlook the Directors recognise the risk profile of the Loan Notes has increased. The credit risk has therefore been reviewed (see Note 11), and the provision for potential loss has increased accordingly. The Directors are still confident that the full outstanding loan balance will be repaid.

Given the Group's well understood cost base, the principal uncertainties relate to the quantum and timing of receipt of interest and capital repayments on the Loan Notes with MLPL. It was originally envisaged that the Loan Note 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 has entered into loan arrangements in order to be able to make Loan Note payments to the Company. In the absence of the dividend payments, MLPL will be reliant on further advances under the loan arrangements and in turn being able to make Loan Note payments to the Company. The Company has no obligation arising from the loan arrangements entered into by MLPL.

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.

2. Revenue and segmental information

3. Profit or loss on disposal of subsidiaries

(i) Other

In 2020 the Company liquidated certain foreign operations that held non-core assets. The Group's investment in the assets held by the subsidiaries has been fully impaired in prior periods. The liquidation or disposal of the foreign operations has resulted in the realisation of cumulative foreign currency losses of US$1.0 million (31/12/19: US$13.9 million), that had previously been recognised in equity. The realisation of the cumulative foreign currency losses does not impact the consolidated assets or liabilities.

(ii) Horizon Petroleum Ltd 

In August 2019, sale and purchase agreements were completed for the sale of a 100% interest in two oil & gas concessions in Poland, known as Bielsko-Biala and Cieszyn (together the "Primary Concessions"), and a 100% interest in two additional oil & gas concessions in Poland, known as Prusice and Kotlarka, (together the "Secondary Concessions") with Horizon Petroleum Ltd. ('Horizon') (TSXV: HPL).

San Leon will receive a 6% net profit interest on the Primary and Secondary Concessions when the concessions are transformed and granted to Horizon. Under revised completion terms, a cash payment of US$1,080,000 is also due to be paid to San Leon if the Bielsko-Biala concession is transformed and granted to Horizon. At the same time, San Leon is also to receive US$769,558 (CAD$1.0 million) in shares of Horizon. A cash payment of approximately US$75,000 is due to be paid to San Leon for each of the Secondary Concessions if granted to Horizon.

The aggregate consideration of US$2.0 million has been noted in Commitments and Contingencies (Note 18).

On completion of the sale, a US$100,000 advance received by the Company in 2017 as part of the Memorandum of Understanding became non-refundable.

4. Finance expense

5. Finance income

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

6. Expected credit losses

7. 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:

8. Intangible assets

Exploration and evaluation assets

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

The Directors considered the carrying value of capitalised costs in respect of its exploration and evaluation assets in 2018. 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, the exploration and evaluation assets remain fully impaired in 2020.

9. Equity accounted investments

Midwestern Leon Petroleum Limited

The Group identified potential impairment indicators, being that MLPL is yet to receive a dividend from Eroton, the equity interest is currently loss making, MLPL has entered into a loan to be able to make Loan Note repayments to the Group, and more generally, the effects of Covid-19 on the economic environment and its impact on oil prices and OPEC restrictions. To test for a potential impairment, the carrying value of the equity interest in MLPL was compared against the fair value less cost of sale. This was estimated using a discounted cashflow model of the expected future cashflows from MLPL's share of the underlying OML 18 asset. Future cashflows of OML 18 were estimated using the following price assumptions of US$35/bbl in 2020, US$45/bbl in 2021, and a subsequent long term price US$60/bbl escalated at 2% annually, with the cashflows discounted using a post-tax discount rate of 10%. Assumptions involved in the impairment assessment include estimates of commercial reserves, production rates, future oil prices, discount rates and operating and capital expenditure profiles, all of which are inherently uncertain. This analysis identified that the carrying value of the equity interest in MLPL is not impaired.

The Directors recognise that the future realisation of the equity accounted investment is dependent on future successful exploration and appraisal activities and subsequent production of oil and gas reserves.

10. Property, plant and equipment

11. Financial assets