Value investors are usually swimming against the tide in their chosen profession, and we currently have a good example of this with San Leon Energy (SLE).
Despite the latest OPEC production cut agreement, crude oil prices remain low and economies are stalled within the Covid-19 pandemic environment.
Low Production Costs
However, San Leon can boast of a production cost of as low as $15 a barrel. and will have cash of 31.5p a share by the end of next year, versus the present 18p share price. Therefore, we are looking at a stock which may make even the most cynical E&P investor turn their head.
Looking at the cash position first, it stands at a very healthy $80M first in the wake of last week’s $40m Loan Note Repayment receipt announcement. This brings total receipts by San Leon so far in terms of the Loan Note Repayment up to $190m, with another $100m plus still to come in bygo by the end of 2021. All of this is before one factors in the likely revenues from San Leon’s OML 18 asset in Nigeria, of which it has a circa 10% stake.
A New Pipeline
Speaking of OML 18, its fortunes are likely to be further boosted by the completion of a dedicated pipeline by July this year, lowering the relative cost of production and removing losses. This effectively boosts net production from circa 3,000 boepd to 4,500 boepd. The operator is also drilling a number of new production wells between now and year end, which should further boost San Leon’s production numbers. San Leon retains a services agreement on the field, adding yet another potential revenue stream to the Company. to as high as 6,000 boepd.
A Strong Balance Sheet
There are very few E&P focused companies with a balance sheet as strong as San Leon’s $80M cash, no debt, and cash burn easily covered by the Loan Note Repayments ahead of the production boost in H2 2020 and subsequent oil production revenue stream..
Nevertheless, the real kicker for San Leon Energy currently may be as much as is relative strength in comparison to its peers. As well as maximising the value in OML 18, it could be able to utilise its balance sheet and pick up assets in distressed companies.
Amid all the uncertainties in the Covid-19 environment, one thing is clear, there are likely to be many bargains in the E&P space and San Leon Energy is positively positioned to take advantage of this situation.
The fact that the stock is back where it was three years ago only underlines the fundamentals and the market’s perception of the company. A return towards the implied end of 2020 cash value and initial 2020 share price resistance towards 30p appears to be a very conservative scenario on a three months timeframe.
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