Does San Leon Energy Plc Have What It Takes To Make It To The Big Leagues?

Picking stocks in the small-cap oil & gas sector is not for the faint-hearted. You’re more likely to lose your shirt than become the next John Rockefeller. 

But there are opportunities out there. It’s all about balancing risk with reward.

You want to try and pick the companies with the best chance of success with plenty of upside if everything goes to plan. 

San Leon Energy (LSE: SLE) could be one such opportunity. 

Big news 

San Leon announced today that it has discovered its first bookable Polish reserves, following the success of the Rawicz-12 appraisal well drilled earlier this year.

The competent persons report has identified more than 50bn cubic feet of proved and probable (2P) gas reserves at the Rawicz project. The Rawicz prospect is located within Poland and reserve figures assumes a five-well development plan. San Leon has a 35% stake in the prospect

And gas production at the Rawicz project could start as early as 2016. There are several field development plans already being considered by San Leon and its project partner, Palomar Natural Resources. San Leon has no upfront drilling costs for its share of the first two wells.

Plenty to do

San Leon may be celebrating the discovery of its first bookable Polish reserves, but the company still has plenty of work to do before it can claim to be a success story. 

Still, the group believes that it can generate enough cash from asset sales going forward to fund operations for the foreseeable future, which — to some extent — de-risks the company. 

Assets held for sale totalled around €15m for the six months ended 30 June 2014 while cash and cash equivalents including restricted cash at 30 June 2014 amounted to €20.9m. What’s more, at the end of June San Leon reported total assets of €320m and liabilities of just under €40m.

Shareholder equity was reported at €280m, which implies that the company is severely undervalued at present levels. At time of writing, San Leon’s market cap stands at only €33m. 

An interesting case 

San Leon is an interesting company. Unlike other oil & gas minnows the group already has producing assets and it is aiming to generate a profit from its core assets within three to four years.

Alongside the Rawicz project, other core assets include 3m net acres of exploration potential on and offshore Morroco, and 4m acres of onshore potential across France and Spain. San Leon is one of Europe’s largest unconventional oil & gas companies in terms of acreage

Not a sure thing

All in all then, San Leon is an interesting company with plenty of potential. But like all early-stage oil minnows, until the company can bring its assets on stream and start generating cash, it is a risky bet. 

If you're looking for a reduced risk opportunity, The Motley Fool's top analysts have recently identified a company that they consider to be one of the market's "top small caps".

The company in question has a strong cash balance, proven advantage and is supported by some of the biggest players in its industry.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.