In order to stop the alternate resort to truck crude production from oilfield OML 18 owing to incessant vandalism of the export route by pipeline vandal, the operators of the oilfield has resulted to construct an alternate subsea crude oil transportation pipeline. The plan to invest in such capital intensive project instead of the conventional pipe laying is the get the crude oil out of the reach of the vandals during evacuation.

So in furtherance to this infrastructural investment, San Leon, the independent oil and gas production, development and exploration company focused on Nigeria, has disclosed the company plan for further investment of US$5.0 million in Energy Link Infrastructure (Malta) Limited (ELI), which owns the new pipeline and the floating storage and offloading vessel for the OML 18 oil and gas field in Nigeria (OML 18).  This further investment in ELI is being funded by the issue of a secured US$5.0 million loan by the Company’s largest shareholders, certain funds managed by Toscafund Asset Management LLP.

Terms of the further investment in ELI

The Company has provided a US$5.0 million shareholder loan to ELI. The loan carries a coupon of 17 per cent. per annum over 4 years and is repayable quarterly following a one-year moratorium from the date of the loan being advanced.  In addition, the loan entitles San Leon to purchase a further 4.2 per cent. of ELI’s equity at nominal value in furtherance of the Company’s objectives of becoming ELI’s largest shareholder.  Together with San Leon’s existing shareholding in ELI and, taking account of certain anti-dilution provisions relating to the Company’s previous investments as well as other pending purchases, San Leon expects to increase its ownership of ELI to approximately 16.2 per cent. following the loan being made to ELI.

In addition to this investment, San Leon has agreed a period of exclusivity with ELI through to the end of August 2023 to make further investments, of up to US$37.0 million, in ELI.  These further investments, which may be made via a combination of cash and issuing new shares in San Leon, which would be on the same terms as described above, and, if made, would entitle San Leon to up to a further 30.8 per cent. of ELI, thereby becoming the largest shareholder of ELI with approximately 46 per cent. (Excluding the impact of further proposed investments in ELI as previously announced by the Company).  If completed in full, these further investments, which are conditional, inter alia, on San Leon completing its alternative US$50.0 million loan financing, would also give San Leon an aggregate shareholder loan to ELI of US$59.0 million, of which US$42.0 million would carry a 17 per cent. coupon and US$17 million would carry a 14 per cent. coupon.  As outlined by the Company on 15 February 2022, loan repayments from ELI to the Company have, to date, been waived but interest has continued to accrue on the outstanding balance.

Pursuant to the construction of the Alternative Crude Oil Evacuation System (ACOES), as described below, ELI has incurred a number of outstanding obligations to contractors, including a payment of US$5.0 million that is required to be made immediately to its main pipeline contractor as part of a series of stage payments.   The further investment now being made by San Leon is therefore critical to the ongoing operations of ELI and, therefore, the commissioning of the ACOES as well as preserving the value of San Leon’s investment in ELI. 

Financing the further investment in ELI

The further investment in ELI is being funded by the Company taking a US$5.0 million loan (Loan) from funds managed by Toscafund Asset Management LLP (Toscafund).  The Loan is available to the Company now, unlike the other financing options being pursued by the Company (details of which are set out below). The Loan is repayable by no later than 7 September 2023 and carries a coupon of 10 per cent. per annum.  Subject to drawing down the Loan, San Leon has entered into security arrangements with funds managed by Toscafund that comprise both a debenture issued by the Company as well as assignments and pledges over all of its group companies’ loan and equity interests in ELI.  The security will be released on full repayment of the Loan.  It is an express term of the Loan that funds advanced to the Company pursuant to it must be fully utilised to only makes the Company’s further investment in ELI.

Under the terms of ELI’s senior debt facility, ELI’s senior lender has a charge over all of ELI’s assets and, as further security, each ELI shareholder (including San Leon) has pledged their shares in ELI to the senior lender.  As the terms of the pledge are that the Company’s shares in ELI cannot be transferred or otherwise utilised without the lender’s consent, the Company has given security to the funds managed by Toscafund over the shares in San Leon ELI Limited, the group company which holds San Leon’s shares in ELI.

San Leon remains in advanced discussions with a third party in relation to securing an alternative loan facility of US$50.0 million.  This proposed alternative loan facility was reconfirmed verbally last week to the Company’s Chief Executive and the Company expects negotiations on finalising the legal documentation to take place in the near term. Once concluded, this facility will, amongst other things, be utilised by the Company to: (i) repay the Loan; (ii) fund San Leon’s further investments in ELI, as described above; (iii) pay the Company’s unpaid creditors (which currently stand at approximately US$13.0 million); and (iv) satisfy the Company’s ongoing working capital requirements.  The Board remains optimistic that a conclusion on the alternative loan facility will be reached and will provide an update to shareholders at that time.

The admission document published by the Company on 8 July 2022 included, amongst other things, details of an agreed $50.0 million loan facility that has been made available to the Company by MM Capital Holding Limited (MM Capital) for the purposes of funding the Company’s working capital requirements and financing further investments in ELI (MM Capital Facility).  The Board of San Leon has consciously delayed drawing down on the MM Capital Facility as it believes that alternative financing, including the proposed alternative loan facility described above, might be available on terms that may be better aligned with the Company’s overall strategic and financing objectives.  Specifically, discussions with prospective alternative lenders have included larger facilities, convertible loan note facilities and the possibility of direct equity investments in San Leon. Furthermore, it is the Board’s view that drawing down on the MM Capital Facility may preclude alternative financing options and, consequently, no draw down notice has yet been submitted to MM Capital. The MM Capital Facility is available until the end of this year.

Although the Board is cognisant of the Company’s numerous outstanding creditors and the increasing pressure a number of these creditors are applying to the Company (including sending letters before action), it continues to believe that the prospects of obtaining long term financing from a supportive partner, and therefore the opportunities that this creates for San Leon, outweighs the benefits of drawing down on the MM Capital Facility at this time.  In light of the recent discussions with its prospective new financing partner the Board anticipates settling all the Company’s outstanding creditors shortly upon completion of the proposed alternative $50.0 million loan facility, as well as repaying the Loan and, as a result, releasing the security it has granted funds managed by Toscafund over its interests in ELI and other assets.

Further information on ELI

ELI owns the ACOES project. As previously announced the ACOES will provide a dedicated oil export route from the OML 18 oil and gas field and is a new 47-kilometre secure undersea pipeline from OML 18 to the FSO ELI Akaso terminal. The ACOES pipeline component is expected to have a throughput capability of 100,000 barrels per day (b/d) of oil, while the FSO ELI Akaso has a storage capacity of 2 million barrels of oil. Once commissioned, the system is expected to reduce the downtime and allocated pipeline losses currently associated with the Nembe Creek Trunk Line (“NCTL“), to below 10 per cent.   The ACOES pipeline is expected to be completed in the second half of 2023.

ELI’s accounts for the year ended 31 December 2021 state that the company made a loss before tax of approximately US$10.5 million and reported total assets of approximately US$226.9 million.  Two of San Leon’s directors are currently appointed to ELI’s board.

The Board believes that the ACOES will have a significant effect on the operation of OML 18, primarily through the reduction of downtime and losses associated with the existing export route.  ELI, through its Nigerian subsidiary, will also earn fees for transporting and storing crude oil from OML 18 and potential third parties.

Related party transaction

The issue of the Loan by funds managed by Toscafund (which owns over 75 per cent. of San Leon’s issued shares) is classed as a transaction with a related party under the AIM Rules for Companies.  The Board (with the exception of Kolapo Ademola and Joel Price who are both directors of ELI), having consulted with the Company’s nominated adviser, Allenby Capital Limited, considers that the terms of the transaction are fair and reasonable insofar as the Company’s shareholders are concerned. 

Oisin Fanning, Chief Executive officer, commented:  “This new investment is an important step for both San Leon and ELI.  For us, it marks the next step in our further investment in that company, as originally outlined in our admission document last July but subsequently adjusted to address developments over the past year, and protects our position and past investment in ELI.  Our agreement with ELI to provide further financial support should soon see San Leon become ELI’s largest shareholder.  For ELI, our support enables it to address its financial obligations and continue the process of commissioning the ACOES – once operational, this is anticipated to be a profitable and cash-generative project from which San Leon expects substantial upside.”