San Leon and Aurelian Merger

San Leon and Aurelian merger

The blog last looked at Aurelian (LSE:AUL) in early November after holders amassed a 67% gain after the initial post. I concluded that 'current shareholders may see it beneficial to reduce holdings in tandem with a likely share price spike'. In addition, during the very first blog post on Aurelian in September I mentioned the following having picked up on a phrase within their RNS. 'The company even went as far as saying that the options will include a potential merger, sale of assets or sale of the company'. On November 12, after two months, Aurelian and San Leon (LSE:SLE) announced a proposed merger that would seek to combine and create a mainly European oil and gas exploration and production company. This article seeks to cover San Leon's assets and the terms of the merger. For details on Aurelian's assets, read the article above and click through to 'Aurelian - Bargain Buy'.

Whilst Aurelian currently has a market cap hovering around £50m, San Leon's is double this standing at just over £100m. The company has ~1,143m shares in issue with a current price of 9 pence having peaked at just below 40p in 2011.

copyright Albertane
So who are San Leon? Through an array of acquisitions, SLE has built a portfolio encompassing assets located in a series of west and east European countries and an African asset. These include Poland, Albania, Morocco, Ireland, Spain and France. These assets target proven prospects that have not been fully exploited. In addition there is a focus on conventional oil and shale gas plays. The company describes its asset portfolio as having  prospects from low-risk, short term, low cost exploration through to huge upside company maker plays. Interestingly both San Leon and Aurelian have substantial institutional backings. Whilst it is far smaller for San Leon, is still stands at around 50%. Directors also hold large amounts of shares in San Leon.

Prior to any merger San Leon owns the second largest position in the Poland hydrocarbon industry which would move to the prime leader following the merger. Their assets span 19 concessions and are generally contained as shared interests with other national ad international companies. Targets are both oil and gas prone and the Polish economy is becoming increasingly reliant on alternatives to the domestic coal usage. Consequently there are high prices present. Poland also has favourable fiscal policies towards the hydrocarbon industry. A revised oil and gas exploration policy will be unveiled in 2013 to attract foreign direct investment to the area which could see assets become more sought after. In Poland SLE is participating in a 6 well free carry scheme with three wells already showing hydrocarbon signs. However, a find needs to be made concrete rather than just being suggested. One particularly important well is entitled Siciny-2 which discovered ~185m net pay estimated to contain 290bcf gas-in-place/sq mile. The potential at the Siciny concession is massive. Furthermore the Czaslaw SL-1 well was spudded in Poland on October 22nd. The company commented: "Following the success of the Lelchow SL-1 we have continued with our exciting exploration programme in the Southern Permian Basin with the spud of our second well, Czaslaw. We believe this is a highly prospective area and look forward to providing further updates on both wells in the near future."

In Albania San Leon owns a 100% stake in the Durresi block which spans 840km2. The company has noted that prospects range from 350bcf to 2TCF+ in gas as well as potential for 35-100+mmboe targets. A formal farm-out process has started here with a data room opened and with a partner announced going into the end of 2012 ahead of the first will which will be drilled in late 2013.

Offshore Morocco San Leon is involved in high-impact drilling programs that have attracted both Genel Energy and Cairn Energy to farm-into the license. This is undoubtedly good news as it proves a level of confidence in the assets and allows SLE to access a higher level os expertise that smaller firms can benefit from in frontier regions.  In the Foum Draa block SLE has a 14.2% working interest and as per terms of the farm-in (with Cairn) benefits from a $60million well free carry plus a $20million bank guarantee. The first exploration well is scheduled for 2013/2014, but with Cairn aboard it is likely that work will be expedited. In the Sidi Moussa block SLE has an 8% working interest and benefits from a $50million well free carry and a $17million bank guarantee. The fact that SLE has such potentially transformational prospects with risk removed for the initial wells is very exciting for holders. Along with Genel, the first well will also be drilled here in 2013/2014. At both blocks it is likely seismic will be re-shot as the existing seismic is ~10+ years old. Prospective resources at the mean level as set at 2.139 billion barrels and 1TCF of gas so the strategy of having small interests that are paid for is a tactically astute decision. As with most African countries the state owned oil and gas company can back-into the license so it can achieve a share of the profits. However, this is offset by the 10 year production holiday (i.e. when the 35% corporation tax is avoided).
courtesy of freedigitalphotos
Elsewhere in Morocco SLE has interests in the Zag basin where they have a 52.5% stake. P50 resource estimates stand at TCF with unrisked potential reaching for a further 9TCF upside. Large gas discoveries have been found very close to this area which open up the potential for shale gas exploration. Seismic has been completed here. Finally in Morocco the company has interests in the Tarfaya basin along with Enegi which are equally high-risk/high-potential assets.

A further asset the company has is offshore Ireland. This adds a degree of stability to the diverse portfolio due to a good fiscal regime and low corporation tax. San Leon has a 4.5% net profit interest in the large Barryroe discovery which has seen the likes of Providence Resources and Lansdowne Oil and Gas soar. Providence believes the discovery will eventually yield ~280m barrels of oil. More shale gas targets are present in France with significant upside potential and the company benefits from NovaSeis - a wholly owned subsidiary which aids the company in gaining and interpreting seismic data at reduced costs.

San Leon released their latest interim results in late September. Profit for the six months to July shrank from €1.48m in 2011 to €0.78m although this was due to increased working activity. Revenue had more than doubled to €1.16m with cahs proceeds at €6.21m as well as €9.9m in proceeds from the sale of a royalty stake. This cash pile would be boosted substantially should the merger take place. The results highlighted that production would begin at the Rawicz field in Q3 2013 and the Albania and Irish assets would eventually be farmed down. From a financial perspective the forward work program is well managed with Morocco free carried for the time being, other non-core high-risk assets being farmed down and a potential cash boost that Aurelian would bring.

Oisin Fanning, Chairman of San Leon said: "This has been San Leon's most active period to date both operationally and corporately. We have continued to prove up the potential of our assets through the drillbit whilst the calibre and potential of these assets has been further endorsed by the partners we have brought in. As we enter the next exciting phase of our development the level of activity seen in the last period is set to continue. We have an extensive work programme across our portfolio and will continue to manage our risk profile through the completion of further transactions similar to those done in Morocco. San Leon is well placed with a highly attractive portfolio of assets across a number of different play types and an excellent technical team in place.

Thus is is easy to see that San Leon and Aurelian are a broadly natural fit particularly due to the correlation in the Polish & East European assets. The terms of the £150m all-share merger are as follows:

- 1.3 San Leon shares exchanged for each Aurelian share
- Aurelian shareholders will consequently hold ~34% of the enlarged company with San Leon holders representing the remainder
- The merger values each Aurelian share at approximately 12.47p which represented a premium of 13.3%

Rowen Bainbridge, Chief Executive of Aurelian stated:
"The proposed merger between Aurelian and San Leon creates a leading upstream position in Poland with complementary play types, capabilities and relationships covering both conventional and un-conventional resources. The integration of Aurelian and San Leon’s Permian Basin assets and the combined conventional exploration portfolio elsewhere in Europe and North Africa offer a high impact forward program over the next 12 to 18 months. I believe the value proposition in the deal for shareholders is compelling."

Commenting on the Merger, Oisin Fanning, Executive Chairman of San Leon said:
"A merger with Aurelian makes perfect sense for the shareholders of both companies. The combination of cash resources and the Polish asset base alone creates an obvious and exciting opportunity to realise substantial growth. Both management teams have built up a tremendous amount of experience and we can now employ that to pursue a best-of-portfolio near term value creation strategy. The combined entity offers shareholders material conventional and unconventional plays in stable and highly import-dependent countries." 

Ultimately, with the substantial institutional backing, it is unlikely the merger will be turned down. However, what is interesting is that the share price of both companies dropped sharply on the day of the announcement with San Leon and Aurelian down ~14% and ~11% respectively. It is likely this was caused due to some institutional investors taking their funds elsewhere especially due to the small premium on the Aurelian shares that had been rising strongly beforehand. However, the share prices have now recovered with Aurelian standing at 10p/share and San Leon at 9p/share. For the presentation referring to the merger visit the link below:

With the plethora of assets San Leon holds and a declining cash balance it makes total sense for them to merge with Aurelian especially since their cash balance stands at over $50m. In addition the combination of assets fit together well even though the deal appears to value Aurelian at too low a level. Holders will be especially disappointed as the share price was higher prior to the strategic review announcement. With the merger very likely to go ahead with almost half of the votes already in favour, San Leon shares may be worth a look, particularly on the back of the Moroccan assets. SLE does also look potentially undervalued if it can uncover some of its prospective assets. However, with the initial reaction to the merger being negative and many questions about Aurelian's polish assets still unanswered, it remains to be seen whether the enlarged company will prosper. I have a neutral viewpoint for San Leon.


  1. Interesting one this is as sle looks good. but have already benefited from AUL.

    good write


  2. I am for the merger. thanks chap

  3. great detail for anyone new to SLE!

  4. positive times ahead

  5. Good times ahead imo