San Leon on the brink after stormy times
Executive chairman Oisin Fanning is battling to keep his oil and gas explorer afloat after a cash row led to a winding-up petition, writes Gavin McLoughlin
Investing in oil and gas explorers isn't for the faint-hearted. Good results can deliver big rewards - bad results can mean you lose all your money.
British hedge fund manager Martin Hughes is certainly not in the faint-hearted category - his nickname in the City is 'The Rottweiler'.
Hughes's Toscafund is the majority shareholder in San Leon Energy, the oil and gas explorer run by Irish businessman Oisin Fanning.
San Leon is on the brink - with a creditor having just filed a petition in Dublin's High Court seeking to have it wound up. Toscafund's investment is small fry in the overall scheme of the funds it manages (over $4bn) - but the Rottweiler is probably snarling at the situation San Leon finds itself in.
The proximate cause of the difficulty is a long-running financial dispute with Avobone - a Dutch company which had partnered with San Leon on an asset in Poland. The main problem was a loan Avobone gave San Leon to meet Avobone's share of drilling. San Leon said the loan should only have been repayable "had Avobone exited after the field had generated sufficient cashflow to repay the loan".
"As of the timing of Avobone's exit in early 2013, the field had yet to generate cashflow."
The row made its way through various arbitration and court hearings before ultimately being settled this time last year. San Leon agreed to pay €23.3m plus interest to Avobone.
It wasn't as simple as all that, however, and a few months later, the companies agreed a revised payment schedule as San Leon had had trouble generating the cash. Another revised schedule was agreed at the beginning of this month.
Then came the bombshell news on Friday that Avobone was seeking a winding-up order. San Leon said its rival was looking to change the terms of the latest agreement, looking for further security for the sums owed.
"These additional requested terms are totally unacceptable ... [San Leon] has already provided security of payment and shall robustly defend the application," the company added. "San Leon can see no reason for Avobone's actions given the imminent payment expected to Avobone of all outstanding sums."
The matter is due back before the courts next month and it may spell the end for a business that just last year was boasting about a "transformational" deal that would see it take a stake in a producing field in Nigeria. The stake was acquired via a complex arrangement that saw San Leon become the beneficial owner of around $175m of loan notes.
But cash flow from that project has been slow - as of April 1 2017, it was due $58m but had only received $5m.
The project also contributed to problems in filing accounts. San Leon missed the stock-market-imposed deadline - and said this was due to the complexity of the Nigerian venture.
"The delay in publication of the accounts has been for procedural reasons," San Leon said, adding that it needed to incorporate "the consolidated financial statements" of a particular entity related to the Nigerian asset using the equity method of accounting - a process for dealing with the financial effects of an investee company in which the core company has a significant influence.
"The consolidation process involves several jurisdictions, and has taken longer than expected for what is the first such consolidation and equity accounted investment in Nigeria for San Leon. When this process is completed, it will be followed by a number of normal audit confirmatory and technical review matters, which when completed will then put the company in a position to finalise and publish its financial statements."
Eventually, the accounts were published three months late, and contained a note of warning from the company's auditors that there were "material uncertainties which may cast significant doubt" about the company's ability to continue. There was, the company recognised, a need for further funding.
Ultimately, the way out for Fanning might be to sell the business.
San Leon told the market in the summer that a Chinese company has been sniffing around and even made an indicative takeover offer valuing the company at 67-76p a share. That was a substantial premium to the share price at the time (around 30p). A formal offer was contingent on the completion of due diligence - with the Chinese expecting to be able to make a their move within 45 days according to San Leon. That period of time elapsed and no offer was forthcoming.
San Leon then said it was still in dialogue with the company, China Great United, which had said the reason for the delay in due diligence was that it was now talking to a potential partner who could add value to the Nigerian project.
Another option that has been mooted is a merger with Midwestern - a partner in the Nigerian project. "San Leon remains in discussions with Midwestern, which are at a very early stage and broad-ranging, regarding a potential corporate transaction, which could include an offer by Midwestern for San Leon or an offer by San Leon for certain assets of Midwestern," the company said on foot of media speculation. Shares are now suspended from trading on foot of this.
If a deal can be pulled off it would represent a great escape by Fanning who has been through some rough times in business before.
He was a founder of collapsed stockbroking firm MMI Stockbrokers, and chief executive from 1993 before stepping down in 1998, the year the company got into serious difficulty. He also founded Smart Telecom which went into examinership three years after Fanning's departure as chief executive in 2006.
Life at San Leon has been eventful too. Leaving aside the current imbroglio with Avobone and the various takeover possibilities, the company last year found itself making headlines when it was excluded from the Norwegian state pension fund's 'investment universe' over its activities in the Western Sahara, a sparsely populated disputed territory.
The dispute is between Morocco and a group of the region's indigenous population.
The fund's ethics council said San Leon "contributes to serious violations of fundamental ethical norms through its onshore hydrocarbon exploration in Western Sahara on behalf of Moroccan authorities".
An activist in the region told the Sunday Independent at the time: "Morocco has no right to explore for oil in Western Sahara without the consent of the people of Western Sahara and if the people of Western Sahara are not to benefit from it. Morocco has no right to look for the oil; San Leon is doing it, so therefore they're kicked out [of the investment fund]."
In response, San Leon said that it had satisfied local interests following dialogue with local elected representatives and that it was in the company's own interest - and that of Morocco - that any revenue from oil or gas would benefit the local community.
San Leon has had interests in the Irish offshore too but sold many of them to John McKeon's Ardilaun Energy which has recently been seeking to raise money from investors. Lamborghini enthusiast McKeon set up Circle Oil which went bust early this year. McKeon had left the board in 2008.
San Leon retains a 4.5pc net profit interest on the Barryroe prospect, majority owned by Providence Resources. Barryroe is Providence's flagship asset and is due to be drilled next year, Finding a heavyweight partner to help get oil out of the ground on a commercial basis has been a long-running saga. Though the upcoming drilling campaign might help, Barryroe isn't going to help San Leon anytime soon.
Fanning is well remunerated. In 2016, his package including share-based compensation came to more than €1.7m, according to San Leon's last annual report. In 2015, his package was almost €1.3m.
On the company's website, his strengths are listed. "Oisin is both visionary and deeply practical in pursuing business goals on behalf of stakeholders. He recognises the importance of finding and developing talented people to achieve a clear set of objectives". If San Leon makes it through the court case, and payments from Nigeria remain slow, he'll need to draw on all his strengths to get the business on track.
Sunday Indo Business