Apr 13 - Sterling Resources Announces 2012 Operating and Financial Results

Source Press Release
Company Sterling Resources Ltd. (Pre-RTO) 
Tags Financial & Operating Data
Date April 29, 2013

Sterling Resources Ltd., an international oil and gas company with exploration and development assets in the United Kingdom, Romania,France and the Netherlands, is pleased to announce operating and financial results for the year ended December 31, 2012. Unless otherwise noted all figures contained in this release are denominated in Canadian dollars.

The net loss for the year ended December 31, 2012 was $49.5 million ($0.22 per common share - basic and diluted) compared to a net loss of $53.8 million ($0.27 per share basic and diluted) for the year endedDecember 31, 2011. The decrease in the net loss is largely attributable to the absence of dry hole and bad debt expenses in 2012; specifically, during 2011 the Company expensed $9.7 million in relation to the unsuccessful Grian well (Sterling 57 percent) on Block 48/28b in the UK Southern North Sea and wrote-off $6.8 million against recovery of overdue amounts receivable from the co-venturer on the Grian well.

  • Pre-licence and other exploration costs during 2012 totaled $31.4 million, an increase of $18.2 million over the 2011 level. During 2012, $20.0 million (2011- $5.7 million) related to the Company's interests in various licences in the UK,$7.8 million (2011- $4.7 million) was attributable to Romania, and $3.6 million (2011- $2.9 million) related to theNetherlands and other international ventures.

  • During December 2012 the Company relinquished its interest at Sheryl (UK Block 21/23a), where despite discovering oil in two wells drilled in prior years, no commercially acceptable development plan could be formulated. The suspended wells from the appraisal are planned to be abandoned by year-end 2014, and the carrying value of these assets has been reduced to zero, resulting in a $12.8 million expense.

  • Employee expense and general and administrative expenses charged to exploration licences and expenses as pre-licence costs were $3.1 million higher in 2012 than in 2011, due to increased costs and an increase in activity related to exploration assets.

  • Total net employee expenses during 2012 were $7.2 million, a decrease of $1.8 million compared to 2011. Of this total$3.3 million was non-cash share-based compensation, down from the 2011 figure of $5.9 million as certain options were fully amortized and no new options were issued.

  • During 2011 the Kirkleatham UK onshore property was recognized as impaired due to a reduction in reserves following increasing water production. As at year-end 2012 the decision was made to fully write down the remaining $2.7 millionvalue of Kirkleatham following the reserves report update in which the reserves were moved to the contingent resources category.

  • At year-end 2012 the Company has recognized an unrealized loss of $4.1 million on these derivative financial instruments compared to $2.5 million at year-end 2011.

  • Foreign exchange losses for 2012 totaled $0.3 million occurring mainly in the UK and the Netherlands arising as a result of the weakening of the US dollar during the period versus the GBP functional currencies used in those jurisdictions.  This compared favorably to the $6.6 million of foreign exchange losses incurred during 2011, due as well to the translation of a weakening US dollar.

Cash and cash equivalents were $9.4 million at December 31, 2012 compared to $50.0 million at year-end 2011. Restricted cash of $21.9 million at December 31, 2012 ($5.5 million as at December 31, 2011) was cash held in escrow, specifically $4.0 million related to the Netherlands F17-09 well, $2.7 million held in joint venture bank accounts in Romania for the Black Sea drilling campaign, and $15.2 million applicable to Breagh expenditures.  Under the terms of the Breagh credit facility, the £10 million ($16 million) that was previously reported as "non-current restricted cash" in the Company's financial statements is available to fund Breagh cost overruns and is included in current restricted cash as at December 31, 2012.

Net working capital was $0.1 million at December 31, 2012 decreasing substantially from the year-end 2011 level of $36.0 million due to continual operational activity at Breagh, the drilling campaigns in Romania andNetherlands, and amounts relating to the derivatives and decommissioning obligations transferred into current liabilities, partially offset by the funds received from the partial divestment of Cladhan.

The delayed start-up and cost increases at Breagh had severely disrupted Sterling's operational and financial plans for the past year as we had to raise additional funds, contain costs and reduce or defer capital investments in other portions of the portfolio. After fully utilizing its credit facility and subsequent to the year end, the Company completed a loan from an affiliate of Vitol S.A. raising US$12 million, made an equity offering and private placement in February 2013 raising $59.1 million after fees and expenses, and issued a bond in April 2013 raising US$218.6 million after fees and expenses. The  Vitol loan was fully repaid with proceeds of the equity issue and the existing £105 million senior secured credit facility with a group of lending banks will be repaid in full by proceeds of the bond issue.  The net proceeds of the bond are expected to be received into an escrow account on or around April 30, 2013 and disbursed to the Company shortly thereafter following perfection of security. Following the closing of the bond issue and the Cladhan farm-down, together with access to Breagh cash flow, the Company expects to be fully financed for all of its planned activities during the life of the bond. Adjusting for the bond issue and repayment of the bank debt, management estimates pro forma group cash (including restricted cash) at March 31, 2013 to be approximately US$127 million.

During full year 2013, operating cash flow after general and administration costs, Gemini loan agreement costs and other financing interest costs are estimated to be approximately $35 million. This is estimated to increase to approximately $120 million in 2014 due to a full year of production from the Breagh field, with further increases anticipated in 2015 and 2016.

Capital expenditures in 2013 could be approximately $110 million, of which approximately $60 million is related to the UK Breagh field development and the balance is largely exploration and appraisal expenditure (of which the principal components are Crosgan well $7 million, Muridava well $10 million, offshore Romania seismic$15 million). Looking further forward to 2014, possible capital investments could be approximately $80 million. However, the Company will be carefully assessing the ramp up and stability of Breagh production before proceeding with discretionary capital expenditures.

"The past year has been an extremely frustrating and challenging one for all of Sterling's stakeholders as we faced severe financial pressures as a result of the delay of production start-up at Breagh," noted Mike Azancot, Sterling`s President and CEO. "The performance of Breagh is key to our success and we will therefore take cautious steps towards future expenditures until the field starts to deliver revenues this year. With the bond issue in place, Sterling will be well positioned to move forward to develop its extensive asset base, with the potential to create significant value for its shareholders," added Mr. Azancot.

Operational Summary for 2012

United Kingdom

Breagh was due to come on stream in July 2012, but while the offshore elements of the project remained on schedule, the onshore facility build at the Teesside Gas Processing Plant (TGPP) was repeatedly delayed. Inadequate initial design and consequent redesign and modifications to construction along with lower than expected productivity and effects of poor weather all led to this disappointing project execution. With all major construction complete, the onshore and offshore pipelines dewatered, the focus is now towards the full commissioning of the onshore facilities with first gas estimated in August 2013.

In spite of the frustrating and disappointing news regarding Breagh, the underlying economic potential of the field remains very attractive. Proved and Probable Reserves for the field as reported by RPS Energy have been maintained at 31 million barrels of oil equivalent (Company interest) and initial production is anticipated to range from 45 to 54 million standard cubic feet per day (MMscf/d) (Company interest) with five or six production wells on-stream.  Four development wells have been drilled on the platform with the fifth well in progress the first three wells were tested at a combined rate of 88 MMscf/d (100 percent interest). Average production for the last five months of 2013, assuming production begins during the first week of August and with seven wells on-stream during the fourth quarter, is expected to be 54 MMscf/d (Company interest).

Phase 2 of the Breagh development targets reserves in the eastern area of the field and is currently being evaluated.  Our expectation is that this will comprise a second platform to the east of the field from which eight development wells will be drilled, reducing the number of wells required from the first platform to seven.  That being the case, the remaining cost for Phase 1 from April 1st, 2013 will drop to £34 million ($54 million) net to Sterling, of which £17 million ($27 million) net to Sterling remains prior to first gas in August 2013. Incremental capital costs of Phase 2 are expected to be around £88 million ($141 million) net to Sterling.  We expect to fund these remaining Breagh development costs from the proceeds of the senior secured bond raised during April 2013, and from production revenues generated from Phase 1 at Breagh.

Activities in the Cladhan area during 2012 included the drilling of an exploration well in Block 210/29c to the Upper Jurassic sands similar to those already appraised in the Cladhan field to the north.  The well, which was drilled at no cost to Sterling pursuant to a farm-out agreement with TAQA Bratani ("TAQA"), encountered porous sands, however these were not hydrocarbon bearing, and the well was plugged and abandoned.

To reduce the equity position to a more appropriate level going into the field development phase, Sterling signed an agreement with TAQA for the sale of a 13.5 percent interest for an initial consideration of US$47 million, payable in three installments. The first two installments totaling US$26.6 million were conveyed in cash, with the third installment composed of a combination of cash or carry at Sterling's election.  Sterling chose the carry alternative, which adjusted for tax will amount to a maximum of US$53.6 million (first carry).

Development of the Cladhan field in the UK Northern North Sea progressed and the partners received approval from UK regulator for the field development plan on April 23.  Initial oil production is expected in at the start of 2015.

In addition to the sale of a 13.5 percent interest to TAQA in April of 2012, Sterling signed further agreements inApril 2013 which ensured that the Company was in a position to submit evidence of funding ability for its share of development costs to DECC.  The agreements provide for:

  • Sterling to retain a 2.0 percent interest in Cladhan throughout, which is funded through the budgeted development cost out of a portion of the first carry negotiated in April 2012;

  • A repayable carry by TAQA of development expenditures on an 11.8 percent interest, transferred to  TAQA for the duration of the additional second carry; and

  • A permanent transfer in stages of a cumulative 12.6 percent interest in the Cladhan field to TAQA.

The remainder of the first carry (April 2012), which is not repayable, is to be utilized to fund pre-development and development costs on the 11.8 percent interest into approximately the second quarter of 2014, at which point the second carry (April 2013) begins to fund ongoing development costs. A 17 percent per annum uplift is applicable to the second carry. Repayment of the second carry to TAQA is expected to occur in mid 2015, with the 11.8 percent interest then returned to Sterling.  The total amount of net cash flow from the 11.8 percent interest used to repay the carry prior to its expected return to Sterling is estimated to be approximately $32 million. In the event of a downside case, such as higher capital costs, lower oil prices or lower than expected production, the time allotment for pay-out would be delayed, but Sterling has no further liability to  TAQA.

At the conclusion of this arrangement with TAQA, assuming payout, Sterling will hold a 13.8 percent interest in Cladhan.  As part of the arrangement, Sterling will transfer its 12.5 percent interest in South Cladhan to TAQA for nominal consideration; however, Sterling retains the contingent upside payments linked to future reserves pursuant to the April 2012 agreement on the main Cladhan field license.

In November, Sterling farmed out 40 of its 60 percent interest in UK Licence P1792 containing the Beverley prospect and the Belinda and Evelyn discoveries in Blocks 21/30f and 22/26c in the Central North Sea, to Shell U.K. Limited.  In exchange, Shell will cover Sterling's 20 percent remaining participating interest of 3D seismic costs across the two blocks and Sterling's share of the costs of an exploration well on the Beverley prospect.


In the Romanian Black Sea Sterling obtained approval from the regulator National Agency for Mineral Resources (NAMR) to procure a 40 percent interest in the Block 27 (Muridava) concession. This highly prospective shallow water block, immediately to the east of Sterling's Pelican Block, contains an existing hydrocarbon discovery which was drilled in 2001, multiple exploration plays and has existing 2D seismic coverage.

Sterling further expanded its offshore acreage in Romania with the procurement of a 50 percent interest in Block 25 (Luceafural), a shallow water block immediately to the west of Sterling's Midia Block.  Block 25 contains an existing gas discovery, multiple exploration plays and has 2D seismic coverage.

In October 2012, the Company announced that it had entered into the sale and purchase agreement with ExxonMobil and OMV  Petrom for the sale of its 65 percent interest in a portion of block 15 Midia in the Romanian Black Sea (the "Carve-out Transaction"). The consideration for the transaction payable to Sterling comprises US$29.25 million ($29.15 million) upon closing, a contingent payment of US$29.25 million ($29.15 million) upon satisfaction of certain conditions relating to any hydrocarbon discovery made on the portion sold, and a further contingent payment of US$19.5 million ($19.4 million) upon first commercial production from the portion sold. Completion is subject amongst other things to governmental approvals. This is due to be completed in June 2013.

During the fall of 2012, the Company commenced drilling of two exploration wells in the Romanian Black Sea.

The Ioana-1 well in the Midia Block targeted a Pontian sandstone formation in the upper section of the prospect and from a surface location at the water depth limit of the jack up drilling unit. Although the gas saturations encountered were very encouraging, the reservoir development was poor.  While this well was not deemed commercial, the extensive gas shows confirmed the presence of an active gas system within the Ioana prospect. Seismic indications suggest better quality gas-bearing sands may exist downdip of the Ioana-1 location.  A follow up program for Ioana is planned for 2013, including the acquisition of 3D seismic.

The Eugenia-1 in the Pelican Block (70 kilometres north of Ioana) was drilled immediately thereafter. Log analysis of the Eugenia well indicated a total 22 metres of gas-bearing Late Cretaceous sandstones, mainly within two intervals.  In addition to these Late Cretaceous sandstones, a 20 metre zone of interest was evident within an Eocene limestone section.  Another objective of the well was to test the stratigraphy of a large Oligocene slump or fan structure.  Although the well was drilled at a downdip location to target the deeper primary targets, 100 metres of good quality sandstone was encountered, and the Oligocene structure remains an interesting prospect updip of the current well.

These wells provide us with excellent information to now continue our exploration and appraisal operations in the Romanian Black Sea where new licence holders are contributing to a significantly increased overall activity level.

The Company intends to Farm down a portion of its equity position in its offshore licences and has had a formal sales process in place for a number of months which is ongoing.


Sterling completed the drilling of an appraisal well F17-09 in Block F17a of the Dutch North Sea. Although the well encountered porous sands, it did not prove up further resources at the well location. However, we gained useful information of the oil water contact hence providing a better understanding of the trapping mechanism, which will assist in optimizing development of the greater F-Quad area. In December 2012, Wintershall reported a discovery of 30 million barrels of oil in the Late Cretaceous chalk in the same block (a formation in which Sterling does not have an interest), which may open the potential for a combined development of the various oil discoveries in the F-Quad area including Sterling's Barkentijn and Korvet accumulations.

In addition to this activity on F17a, Sterling was jointly awarded licences E3 and F1 located in the northern sector of the Dutch North Sea where the Company hopes to apply its experience and knowledge from its UK Southern North Sea assets.

During May 2012, the Company concluded an agreement with Enquest PLC under the terms of which Sterling acquired a further 10 percent interest in the previously acquired F-Quad and L-Quad licences in the Dutch North Sea in exchange for Sterling`s 50 percent interest in Block 16/3d in the UK North Sea containing the Cairngorm prospect.

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