San Leon Regulatory News (SLE)

16 May 2016

San Leon Energy plc

Strategy Update

Nigerian Onshore Production Deal, Portfolio Review and Related Party Transactions

San Leon Energy plc ("San Leon" or "the Company"), the AIM quoted oil and gas exploration and production company focused on Europe and Africa, is pleased to provide the following update:

Highlights

· San Leon is seeking to raise a minimum of $200 million via a placing of equity at a targeted price of 105 pence per ordinary share of San Leon (approximately a 261% premium to the price at suspension of 29.125 pence);

· The placing proceeds will be used to complete the acquisition of an indirect interest in OML 18, an onshore, producing oilfield in the Southern Nigerian Delta covering 1,035 km2 and formerly operated by Royal Dutch Shell plc;

· Significant cash flows are expected to be generated from OML 18, and a formal shareholder distribution policy is to be adopted going forward;

· As previously announced, the Acquisition constitutes a reverse takeover under the AIM Rules and will be subject to shareholder approval;

· The Company continues to optimise its broader portfolio by selected asset disposals.

Introduction

Certain defined terms used herein are set forth in the "Definitions" section of this press release.

All dollar amounts or references to "$" refer to US dollars.

On 22 January 2016, San Leon announced that it had reached agreement to participate in a transaction which would result in the Company securing a 9.72% indirect economic interest in OML 18, onshore Nigeria. The OML 18 Production Arrangement represents an entry by the Company into the Nigerian onshore oil and gas production market, one of the largest in the world. The OML 18 Production Arrangement is considered by the Board to be a transformational transaction for the Company.

Upon completion of the OML 18 Production Arrangement, the Company will have:

· A 9.72% indirect economic interest in OML 18, which benefits from having a significant portion of its oil production hedged at $95 per barrel until December 2017;

· The right to receive a minimum 65% cash sweep of the available funds distributed to BidCo from OML 18's production proceeds for four years to redeem the loan notes (further details below) and any accrued interest;

· The right to receive dividends declared by BidCo, as a 40% shareholder. Once shareholder approval has been granted, San Leon will receive a share of future distributions made by BidCo which will be based on cash flow generated by Eroton from OML 18 since March 2015 (the original date of the acquisition of OML 18 from Shell and its partners, since after that date Eroton cash flow has been accruing in the company to fund the reserves based lending repayment reserve);

· The right to provide oilfield services, such as workover and drilling rigs, to the operator of OML 18 which is expected to have a significant development programme funded entirely from operational cash flow.

OML 18 is located in the Southern Niger Delta, in Nigeria. In March 2015, Eroton acquired a 45% interest in OML 18 from Shell, Total and Agip for a total consideration of approximately $1.1 billion and became the operator of the asset. The remaining 55% interest in OML 18 is held by Nigeria National Petroleum Company ("NNPC"). The arrangements between NNPC and Eroton are governed by a joint venture agreement. 

OML 18 estimated gross 2P reserves are approximately 500 million barrels of oil and approximately 4.6 Tscf (Trillion standard cubic feet) of gas and its gross 2C contingent resources are around 200 million barrels of oil and 1.6 Tscf of gas (operator estimates). Under Eroton's operatorship, the production on the field has seen significant increases rising from approximately 10,000 bopd (barrels of oil per day) in March 2015 to approximately 50,000 bopd today as well as more than 50 mmscf/d (million standard cubic feet per day) of gas. In the development plans currently under discussion for OML 18, the intention is to increase production to in excess of 100,000 bopd. The Directors believe this to be a world-class onshore producing asset. 

The Directors believe that the OML 18 Production Arrangement will:

· be a transformational transaction for San Leon, by providing it with an indirect interest in a world-class onshore producing asset; and

· underpin the future cash flow of San Leon and allow for further transactional growth in combination with expected significant returns to its Shareholders.

The Board will be strengthened through the addition of directors with experience in the Nigerian oil and gas industry. Further information will be announced at the same time as the publication of the AIM re-admission document.

Deal Structure

The OML 18 Production Arrangement is structured in three parts, of which the initial stage was completed on 22 March 2016, with the finalisation of the Mart Acquisition. The Mart Acquisition comprised the provision of approximately $73 million of funding provided by funds managed by Toscafund and structured as secured notes ("Loan Notes") issued by BidCo, which together with other transaction costs, enabled the acquisition of Mart Resources.

The Loan Notes have a coupon of 17% per annum and mature on 22 March 2020. Principal and interest repayments will be paid through a cash sweep of at least 65% of the available funds distributed to BidCo from OML 18. The repayments have been guaranteed by Midwestern and Mart Resources Limited (a wholly-owned subsidiary of Midwestern), and the Loan Notes are secured via a securities pledge on 100% of BidCo's currents assets, subordinate to reserves based lending.

In order to complete the subsequent parts of the OML 18 Production Arrangement (collectively the "Remaining Transactions"), BidCo will need to raise an additional $100 million which is also intended to be structured as Loan Notes. Subject to completion of the OML 18 Production Arrangement and San Leon shareholder and regulatory approvals, San Leon will hold a 40% interest in BidCo.

The Company has concluded that shareholder value would best be obtained by San Leon becoming the ultimate beneficial owner of the entire $173 million of Loan Notes. This structure, if completed, would provide the Company with highly material cash flow from three sources:

· coupon and capital repayment of the Loan Notes, with associated cash sweep;

· cash flows from ordinary dividends associated with its indirect 9.72% economic interest in OML 18; and

· revenues associated with the Company's right to provide drilling and workover rig services to Eroton in its capacity as the OML 18 Operator.

Related Party Transaction

On 22 March 2016, San Leon entered into a conditional agreement to purchase up to all of the Loan Notes issued to Toscafund, plus accrued interest. The purchase was subject to approvals, consents and permissions including shareholder and regulatory approvals and is also dependent upon San Leon raising capital through a placing with institutional investors.

In consideration for providing the debt finance to BidCo, San Leon has pledged its shares in BidCo to Toscafund (the "Share Pledge") and agreed to issue 10 million warrants in San Leon to Toscafund at a price of 25 pence per share (the "Warrants"). The Warrants are exercisable for the period of 7 years from the date of issue and their issue is subject to shareholder approval and any other applicable regulatory approvals. The Company has also agreed to pay Toscafund an arrangement fee of $3 million ("Arrangement Fee") on completion of the purchase by the Company of any of the Loan Notes.

Toscafund is a substantial shareholder in San Leon, and as such the conditional agreement to acquire the Loan Notes, the Share Pledge, the Warrants and the Arrangement Fee is classified as a related party transaction under AIM Rule 13.

The Directors of San Leon consider, having consulted with the Company's current Nominated Adviser, SP Angel Corporate Finance LLP, that the terms of the conditional agreement to acquire the Loan Notes, the Share Pledge, the Arrangement Fee and the Warrants are fair and reasonable insofar as its shareholders are concerned.

Placing

The Company is therefore planning to undertake an equity fundraising of at least $200 million (the "Placing"), the net proceeds of which will be used (subject to any necessary shareholder and regulatory approvals) to:

• purchase the Loan Notes from Toscafund;

• repurchase the additional $100 million of loan notes required to complete the Remaining Transactions;

• fund transaction costs; and

• provide working capital to the Company.

San Leon's share of future net cash flows generated from OML 18 is expected to support a dividend policy (which will be subject to typical distribution conditions) to be implemented by the Company. The Company will be targeting to return to Shareholders, via either dividends or share buybacks, approximately 50% of available free cash flows for a period of five years from receipt of first cashflow from BidCo.

San Leon has retained Whitman Howard Limited and Brandon Hill Capital Limited to act as its brokers in relation to the Placing, at a targeted price per share of 105 pence, representing a premium of approximately 261% to the price at suspension, of 29.125 pence). Preliminary discussions with institutions have been very positive, and Toscafund has confirmed to the Company that it intends to participate in the Placing.

Suspension of Shares

As the OML 18 Production Arrangement would represent a reverse takeover under AIM Rules, trading in the Company's ordinary shares will remain suspended pending the publication of an admission document by the Company or an announcement that the proposed acquisition is not proceeding. Shareholders should also be mindful that any acquisition that constitutes a reverse takeover under the AIM Rules is conditional upon shareholder approval, and requires the Company to publish an AIM re-admission document and to reapply for the Company's ordinary shares to be re-admitted to trading on AIM. As a consequence, there is no certainty that the Acquisition will be completed.

Portfolio Optimisation

In line with the Company's previously-announced strategy to focus on cash flow from appraisal and development, certain non-core assets are being exited. This will reduce overhead costs and enable better concentration of technical and management effort as the geographical focus moves to Nigeria.

A number of Polish early-stage exploration licences are being relinquished, full details of which will be provided shortly. However, the majority of the Company's core Polish portfolio of appraisal and development, as well as shale appraisal will be retained. San Leon has also taken the decision to exit its interests in Romania.

Oisin Fanning, Executive Chairman, commented:

"This is a hugely exciting and transformational project for San Leon, so completing the equity raise and obtaining the necessary regulatory and shareholder approvals for the OML Production Arrangement is our immediate focus. I am conscious that the Company's shares have been suspended from trading on AIM since 22 January and I am very grateful for the patience of shareholders during that period. This is a complex transaction, and we are committed to getting it right, both in terms of structure and also in its implications for shareholder value. I am pleased to confirm that production in OML 18 has continued to be strong and this is a function of the operational controls and expertise that have been implemented by Eroton, the operator of the asset, as well as the implementation of the first stages of the field redevelopment plan. I look forward to providing a further update to our shareholders shortly."

Qualified person

Joel Price, who has reviewed this update, has more than 20 years' experience in the oil & gas industry and is a member of the Society of Petroleum Engineers. He holds a BA in Natural Sciences (Geology) from Cambridge University, an MEng in Petroleum Engineering from Heriot-Watt University, and an MBA from Durham University. Joel is Chief Operating Officer for San Leon Energy and is based in San Leon's London office.

Enquiries:

www.sanleonenergy.com

Definitions