WTI (Sep) $81.94 -88c, Brent (Oct) $85.34 -90c, Diff -$3.40 -2c.

USNG (Sep) $2.72xc+15c, UKNG (Sep) 76.49p +2.49p, TTF (Sep) €30.095 +€0.38.

Oil price

Oil fell yesterday and this morning as Chinese trade data disappointed but later today a bounce is already happening showing that the market is short and now let’s see the inventory data.

San Leon Energy

San Leon has announced a further investment of US$5.0 million in Energy Link Infrastructure (Malta) Limited, which owns the new pipeline and the floating storage and offloading vessel for the OML 18 oil and gas field in Nigeria.  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 from funds managed by Toscafund Asset Management LLP.  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 make 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 for the purposes of funding the Company’s working capital requirements and financing further investments in ELI.  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 terminalThe 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.”

This is a very smart deal indeed for SLE and CEO Oisin Fanning, above he states that SLE will become the largest shareholder in ELI which will lead into OML 18 after the stage payment to the ACOES. I have always thought that although sometimes the delays have felt interminable, and it’s not over yet, that shareholders would be richly rewarded. That time looks like it just got a little closer. 

PetroTal Corp

PetroTal has reported its operating and financial results for the three and six months ended June 30, 2023.

Selected financial and operational information is outlined below and should be read in conjunction with the Company’s unaudited consolidated financial statements and management’s discussion and analysis  for the three and six months ended June 30, 2023, which are available on SEDAR at www.sedar.com and on the Company’s website at www.PetroTal‐Corp.com.  All amounts herein are in United States dollars unless otherwise stated.

Key Selected Highlights

·    Achieved record average quarterly sales of 18,483 barrels of oil per day, up 46% from the first quarter 2023;

·    Produced a record 19,031 bopd in the quarter, up 56% from Q1 2023.  During the quarter the Company posted 60 days with production over 20,000 bopd;

·    Exited the quarter in a strong cash position with $92.6 million in total cash ($17.3 million restricted), up 29% from end of Q1 2023;

·    As a result of excellent Q2 2023 performance, the Company will declare and pay in Q3 2023, a cash dividend of US$0.025 per common share, which includes the recurring US$0.015 per common share amount, plus an amount for a minimum liquidity sweep of US$0.01 per common share;

·    Exported oil sales through Brazil averaged 513,000 bbls per month.  In April 2023 the Company had exported oil sales of approximately 590,000 barrels, that combined with Iquitos refinery deliveries represented total realized oil sales of 630,462 bbls for the month;

·    Commenced drilling well 15H on April 11, 2023, with first oil production in early June 2023, ahead of schedule.  The well produced at an average of 7,920 bopd for the last 19 days in June 2023 and has averaged 7,140 bopd for the 30 day period from June 12, 2023 to July 11, 2023, prior to the start of the dry season; 

·    Generated significant EBITDA and Free Funds Flow of $70.0 million ($41.63/bbl) and $37.7 million ($22.41/bbl) respectively, compared to $47.9 million ($42.22/bbl) and $7.9 million ($6.96/bbl) in Q1 2023;

·    Achieved Net Income in the quarter of $46.6 million (US$0.05/share) compared to $17.0 million (US$0.02) in Q1 2023; and,

·    During the quarter, the Company paid a dividend of US$0.015/share and repurchased 582,708 shares representing a total of $14.7 million of capital returned to shareholders (~3.4% of June 30, 2023 market capitalization).

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented: 

“PetroTal delivered its strongest quarter to date in Q2 2023.  Underpinned by unconstrained Brazilian export sales, the Company was able to produce over 20,000 bopd for 60 days which allowed the Company to achieve records in almost all major cash flow metrics including generating over $70 million of EBITDA.  In addition, our Q2 2023 operating and direct transportation cost was $5.80/bbl versus $7.70/bbl in Q1 2023, showing the benefit of larger volumes on fixed unit costs, and demonstrating how hard the team has worked to keep field costs in check, despite an inflationary environment.

The Board and Management are pleased with the additions of Mr. Jose Contreras (Senior VP Operations) and Mr. Felipe Arbelaez Hoyos (independent non-executive director).  These individuals are fitting in extremely well and adding significant value to the Company.

Looking ahead to Q3 2023, the Amazon River water level is currently low near Iquitos and is consequently forecast to be low on the Brazilian side near the end of Q3 2023, leading to a lighter barge fill requirement projected for most of the quarter.  As a result, the Company is reiterating its full year oil production guidance of 14,000 – 15,000 bopd.  This showcases the importance of securing other oil export routes and promoting the full and consistent operation of the ONP pipeline, both of which the Company are committed to advancing.”   

An outstanding quarter and half which exceeded my expectations, production of over 19/- b/d gave strong cash flow of $92.6m up 29%. This has led to another dividend, this time $0.025 which includes the recurring $0.015 and puts the yield to some 18% which doesn’t include the extra income from the buy-back. 

The river levels are low at this time of year but it evens itself out and guidance is unchanged at 14-15,000 b/d which shows what I have always said that it is wrong to panic about the distribution opportunities which in the conference presentation were outlined in some detail. 

My target price has been 150p for a very long time, right now I am tempted to put it up again but will wait until the market has cottoned on to a company that yields 20% including buy-backs and will give outstanding capital and income returns for a long time to come.  

United Oil & Gas

United Oil & Gas has provided an update on the conditional sale of the UK Central North Sea Licence P2519 containing the Maria discovery in Block 15/18 to Quattro Energy Limited a UK North Sea focused company which is being acquired by Jesmond Capital Limited to form an enlarged entity to be listed on the TSXV.

On 1 August 2023 the Company announced that all the conditions under the asset purchase agreement for the conditional sale of its UK Central North Sea Licence P2519 had not been met by the expiry of the long stop date on 31 July 2023. Further to this announcement United confirms that following the receipt by United of a US$100,000 non-refundable deposit from Quattro and a rescheduling of the total consideration payments, the parties have agreed an extension of the long stop date in the APA to 30 September 2023. It was also agreed that a further extension may be required for all conditions precedent to be met to allow completion of the sale, namely regulatory approvals to enable the transfer of funds to United, and the Licence assignment to Quattro, with such extension to be automatically granted on the satisfaction of the Quattro funding condition being met by 30 September 2023.

Whilst there has been no change to the maximum consideration under the APA of £5.7 million (cUS$7.2 million), following discussions with Quattro and their brokers the parties have agreed that revising the schedule of consideration payments will support the Quattro funding process and significantly increase the executability of the transaction. In considering this extension and revised payment terms, including the receipt of the non-refundable deposit, the Company has reviewed the other available options to deliver value to shareholders from this Licence and have concluded that the sale to Quattro remains the best option at this time.

Revised consideration payments:

–       Payment by Quattro to United of US$100,000 non-refundable deposit on 7 August 2023

–       £1million of initial cash payment to United now included in Contingent bonus payments, resulting in £1.45 million, less the non-refundable deposit due on completion (US$1.75 million)

–       No change to the additional £1.0 million to be paid to United upon approval of an FDP for Block 15/18e

–       Contingent bonus payments of up to £3.25 million (previously £2.25 million) upon reaching gross production thresholds from the field of three, four and five million barrels

UOG have been rather coerced into extending the longstop date until the 30th September as Quattro needs more time to raise the money for the deal. A non-returnable deposit of $100,000 is ok but UOG has had to alter the schedule and contingent payments to even get close to the line that it is not over yet. They will be hoping for a conclusive result with everything crossed.