Unfortunately, over the past 12 months, the value of the company’s shares has been cut in half. The big question is now, is the small-cap oil company still an attractive investment? 

Making progress

San Leon’s problems stem from issues at its main asset, the OML 18 project in Nigeria. This project, which is operated by regional producer Eroton, has run into several problems over the past 12 months, holding back potential returns to San Leon. Management expects that a large workover project during the fourth quarter should fix the bulk of these issues, paving the way for dividend payments from Eroton. 

The company is already receiving some income from this project via the way of loan notes issued to Midwestern Leon Petroleum Limited. Under the instrument, MLPL is required to make quarterly interest payments on the loan notes, subject to MLPL having received funds derived from OML 18 by way of dividends or distributions from Eroton. Even if no dividends are received, MLPL is still required to pay back the notes after a given period. The company received $20.6m in the third quarter under this agreement. San Leon is scheduled to be repaid approximately $19m per quarter from Q4 2017. 

Including these loan notes, all in all, management has “three targeted cash flow streams from Nigeria: Loan Note repayments, dividends from production via the indirect equity interest in OML 18, and from the provision of drilling and workover rig services to Eroton under the Master Services Agreement.“

Dividend income and the repayment of loan notes is just one of the ways San Leon can create value for investors. The firm is also currently in discussions with China Great United Petroleum regarding a possible takeover. 

According to the company’s half-year results published today, the parties have been in talks since December 2016, and due diligence is still ongoing. The last time a takeover was pitched, an offer price of £1 per share for San Leon was put forward.  

High risk, high reward

San Leon’s outlook has only improved since this time last year, so I believe a target price of £1 per share is still reasonable. Even a target price of 50p indicates an upside of more than 100% from current levels. 

That being said, San Leon isn’t entirely risk-free. According to the company’s first-half results, even after receiving the $20.6m loan note payment, on 27 September the firm’s cash balance was a meagre €1.7m. 

The sale of a majority stake in the group’s Polish assets should help boost its coffers but two further payments of €8m and €6.7m to Avobone regarding its exit from the Siekierki project in Poland later this year will put more pressure on the balance sheet. 

Overall, even though I believe San Leon looks undervalued based on its assets, the company could be heading for a cash crunch in the next few months. 

The company was forced to revealed that it’s in takeover discussions after media reports emerged over the weekend claiming that bidders were circling the company. According to press speculation, a bid in the region of £50m for the company is likely to materialise in the next week. Sources said that at least one potential buyer is circling the business, with management already engaged in preliminary talks. 

What’s your offer? 

It’s likely any bid for the company would have to be above the 80p a share paid by investors at the company’s last £29m capital raise earlier this summer. City chatter suggests a bidder would have to go above £1 a share to stand a chance of success. 

Unfortunately, today’s press release from San Leon didn’t shed much more light on any potential offer. The release only noted that “board of San Leon today confirms that it has received an approach from a possible offeror, which may or may not lead to an offer being made for San Leon.” The release also included the standard takeover disclosure statement, “there can be no certainty that an offer will be made or as to the terms on which any offer might be made.” 

Will a deal materialise? 

2016 has been a transformational year for San Leon. The company has gone from an early stage oil explorer to a fully fledged production company after taking on an active role as a partner in the Nigerian OML 18 asset. Further, San Leon struck gas at its Rawicz 12 well in south-western Poland earlier this year, and management estimates the revenues from this find alone could be more than $150m.

So the mysterious bidder could be looking to swoop on San Leon and take advantage of the firm’s depressed share price, gobbling up the Polish asset, the Nigerian interests and the rest of the company’s portfolio of exploration assets around the world at a rock-bottom price. 

If no deal emerges, there’s no reason why San Leon can’t survive as an independent entity and continue to develop the assets itself. This scenario may even result in better long-term results for investors. After raising £170m from investors to fund its Nigerian production agreement, San Leon’s management has stated the company will return 50% of free cash flow from Nigeria to shareholders via either share buybacks or dividends for five years. This shows management is actually committed to achieving the best returns for investors. 

Still, as of yet, the market hasn’t rewarded San Leon with the valuation it deserves for this commitment. It looks as if an opportunistic bidder is seeking to take advantage of this and swoop on San Leon before the firm’s shares re-rate higher.  

That’s why investing in highly speculative companies can be a risky business. The returns on offer often fail to compensate investors appropriately for the risk taken on.

If everything goes to plan, AIM darlings could become multi-baggers, generating impressive returns for those who are willing to take the risk. However, if things don’t go to plan investors could lose 100% of their capital.

High risk, high reward 

Churchill Mining (LSE: CHL) is currently fighting the Republic of Indonesia for damages associated with the unlawful revocation of the East Kutai Coal Project. Churchill and its partner, Planet Mining, held a 75% interest in East Kutai.

An independent assessment has calculated that Churchill’s damages from the unlawful seizure of the mine could be $1.3bn (around £910m). At the time of writing, Churchill’s market cap is only £29m. 

Now, Churchill still has a long way to go before it can claim to have won against Indonesia, and even if the company does win in the courts getting the cash is another matter altogether. That said if Churchill does win and Indonesia pays up, investors stand to make more than 20 times their money.

Huge market 

Tern (LSE: TERN) invests in established, private software companies and its largest investment is Cryptosoft, the only supplier with a market-proven software security product, for Machine-to-Machine (M2M) applications. 

According to Beecham Research, security is now the leading concern for users of M2M devices and the size of the market for security products is exploding. Based on the current rate of growth, the M2M security market will be worth $700m by 2018, according to M2M Magazine. Tern’s market cap is only £9m at the time of writing, so even if Cryptosoft can grab only a tiny share of the M2M market, Tern could be set for the big time. 

This year, Cryptosoft has already announced that it will provide authentication and encryption services for the Internet of Things with Symantec Corp, one of the world’s largest software and information technology companies. And today, Cryptosoft announced that it had signed a merger agreement with Device Authority, a device authentication software specialist. The two companies already work together so integration should be relatively simple. 

Production surge 

Shares in San Leon Energy (LSE: SLE) are currently suspended after the company dumped its NOMAD but where the business’s shares return to the market, is likely there will be a sudden rush by investors to buy into the firm’s growth story.

At the beginning of March, San Leon secured funds from its investors totaling C$89.3m plus an additional $4.5m in transaction costs to fund the acquisition of Canada’s Mart, an exploration and production company. As part of this deal, San Leon will secure a 9.72% indirect economic interest in the OML 18 block, onshore Nigeria.

The company has also negotiated a deal to acquire another of Martwestern Energy’s shareholders, SunTrust Oil Co Ltd. In a restructuring deal, San Leon is paying $117.4m to acquire SunTrust’s stake in Martwestern. Gross OML 18 block production was 31,600 barrels of oil per day in September 2015. Most of the production is hedged at $95 a barrel until December 2017. This deal could transform San Leon into a major oil producer. 

Bigger is better

Shell has underperformed the wider FTSE 100 by around 20% excluding dividends year-to-date, making the company one of the index’s worst-performing stocks. 

However, for the long-term investor, these declines present a once-in-a-lifetime opportunity. Indeed, Shell’s shares are now trading at their lowest level since the financial crisis, and the company is unlikely to go out of business any time soon. Net gearing was only 14.7% at the end of June and Shell’s management has begun an ambitious cost-cutting programme to boost the group’s profit margins. 

Cost-saving measures have already reduced Shell’s per-barrel operating costs by $10. What’s more, management is only approving the development of new production projects if they are affordable according to the prevailing environment — e.g. $50 per barrel oil. 

And according to my figures, these measures will ensure that Shell’s dividend yield of 7.9% remains safe for the time being. 

Bright outlook 

Like Shell, Premier Oil is also trading at a low not seen since the financial crisis. Also, just like Shell, for the long-term investor Premier presents a once-in-a-lifetime opportunity. 

Unfortunately, City analysts expect the company to report a pre-tax loss of £71m this year, as one-off charges hit the group’s bottom line. Analysts are expecting a pre-tax profit of £65m for 2016 and this forecast is likely to be revised higher if oil prices recover. 

Within Premier’s post-summer operational update, issued today, the company reported that 60% of its production for the rest of the year is hedged at $92/bbl, and 30% of 2016 production is hedged at $68/bbl. Further, the group is forecasting a significant reduction in year-on-year capex for 2016 and has $1.3bn of liquidity.

Existing banking covenants have been renegotiated out to mid-2017 and the group’s principle $2.5bn bank facility is not for refinancing until mid-2019. In other words, Premier’s not under any financial stress and the group has plenty of balance sheet flexibility. 

In play 

Picking stocks in the small-cap oil & gas sector is not for the faint-hearted. You’re more likely to lose your shirt than become the next John Rockefeller. However, San Leon Energy could just be one of the small-cap oilies that has a shot at making it to the big time. 

Unlike other oil & gas minnows, the group already has producing assets and it is aiming to generate a profit from its core assets within three to four years. Four months ago the company announced that it had discovered more than 50bn cubic feet of proved and probable (2P) gas reserves at its Polish Rawicz project. And San Leon is one of Europe’s largest unconventional oil & gas companies in terms of acreage. 

Moreover, San Leon’s management revealed last month that the group has received a takeover approach, although the status of this offer remains unknown.

Intelligent Energy: The Right Tech Name For You?

“British firm Intelligent Energy has claimed a breakthrough in building smartphones that run for a week on a single cartridge,” The Telegraph reported after the market closed on Friday, news of which pushed the stock higher today. “Intelligent Energy has the technological know-how to power your iPhone for a week without recharging.“

What you are buying: The shares of this fuel cell business were listed at 340p in July 2014. Following a 30% rise at one point today, they traded in the region of 114p for an implied market cap of £210m. They have changed hands in the 67p-291p range over the last 12 months. They were priced at 106p at 10.45 BST. 

Opportunity: A top-down approach suggests that Intelligent Energy could be the right tech name for your portfolio, particularly if you believe that hydrogen fuel cells will replace fossil fuels in the automotive industry over the long term. As a matter of fact, many companies have delivered big statements in recent years, yet their so-called value propositions have often miserably failed to live up with expectations. 

Financials: Its financial position doesn’t look too bad. Some 40% of its market value is represented by cash and cash-like items. For the six months to the end of March it had net cash of £58m, and reported negative operating cash flow in the region of £27m on revenue of about the same amount. It’s possible that Intelligent Energy will need more funds to finance its development, given that the run-rate for R&D and operating costs is about £45m annually, although revenue growth is expected to outpace the growth of its cost base. It has options, however, and dilution risk seem to be already priced into its equity valuation. 

My take: The group is unlikely to be in the black for a couple of years at least, but its operating earnings could surprise if its healthy pipeline delivers (that’s a big “if”, of course!) Elsewhere, trading multiples do not provide much help at present, so its shares remain a risky bet — but if you are invested, you’d do well to retain exposure to IEH for the long term at its current valuation. 

San Leon Energy Is a Takeover Target

“The board of San Leon notes the takeover speculation regarding San Leon in yesterday’s press. The board of San Leon confirms that it has received an approach from a possible offeror, that may or may not lead to an offer being made for San Leon,” the group said today.

Its price-to-book value points to a bargain trade, but other trading metrics send mixed signals. 

There have been a few positive news on the operational side earlier this year, yet the stock is down about 40% to 60p in 2015, a level that is not far off its one-year low of 48p.  Exploration costs are meaningful, and so are administrative expenses, its annual results show. 

I doubt the market is willing to take the risk of betting on its stock if the company doesn’t attract new partners or new funding, which suggests that management may accept a lowly offer below 100p a share. That is implicit in San Leon’s share price movement today, I’d say. 

Considering all this, I would give it a pass.

But there are opportunities out there. It’s all about balancing risk with reward.

You want to try and pick the companies with the best chance of success with plenty of upside if everything goes to plan. 

San Leon Energy (LSE: SLE) could be one such opportunity. 

Big news 

San Leon announced today that it has discovered its first bookable Polish reserves, following the success of the Rawicz-12 appraisal well drilled earlier this year.

The competent persons report has identified more than 50bn cubic feet of proved and probable (2P) gas reserves at the Rawicz project. The Rawicz prospect is located within Poland and reserve figures assumes a five-well development plan. San Leon has a 35% stake in the prospect. 

And gas production at the Rawicz project could start as early as 2016. There are several field development plans already being considered by San Leon and its project partner, Palomar Natural Resources. San Leon has no upfront drilling costs for its share of the first two wells.

Plenty to do

San Leon may be celebrating the discovery of its first bookable Polish reserves, but the company still has plenty of work to do before it can claim to be a success story. 

Still, the group believes that it can generate enough cash from asset sales going forward to fund operations for the foreseeable future, which — to some extent — de-risks the company. 

Assets held for sale totalled around €15m for the six months ended 30 June 2014 while cash and cash equivalents including restricted cash at 30 June 2014 amounted to €20.9m. What’s more, at the end of June San Leon reported total assets of €320m and liabilities of just under €40m.

Shareholder equity was reported at €280m, which implies that the company is severely undervalued at present levels. At time of writing, San Leon’s market cap stands at only €33m. 

An interesting case 

San Leon is an interesting company. Unlike other oil & gas minnows the group already has producing assets and it is aiming to generate a profit from its core assets within three to four years.

Alongside the Rawicz project, other core assets include 3m net acres of exploration potential on and offshore Morroco, and 4m acres of onshore potential across France and Spain. San Leon is one of Europe’s largest unconventional oil & gas companies in terms of acreage. 

Not a sure thing

All in all then, San Leon is an interesting company with plenty of potential. But like all early-stage oil minnows, until the company can bring its assets on stream and start generating cash, it is a risky bet. 

San Leon has acquired Petromaroc’s 1.5% working interest in the Sidi Moussa offshore licence, where Genel Energy is currently drilling.

Petromaroc has also transferred its 22.5% working interest in The Tarfaya Onshore licence. The deal means Petromaroc will pay San Leon its share of expenditure during the current exploration period.

Both transfers of interest are pending the approval of Morrocan authorities.

Oisin Fanning, San Leon’s executive chairman, commented:

“We are delighted to have acquired additional interests in our two highly prospective licences in Morocco at no additional costs to the Company. The excellent fiscal terms and high potential upside all contribute to make Morocco one of the last exploration frontiers.”

The company made a loss last year, and shareholders will hope for value creation through successful exploration projects.

Prospective investors should consider that the only competitive advantage among oil and gas businesses is to be the lowest cost producer. As such, close study of the balance sheet is essential prior to any trading decision.