Aug 13 - Sterling Resources Announces Second Quarter Operating and Financial Results

Source Press Release
Company Sterling Resources Ltd. (Pre-RTO) 
Tags Financial & Operating Data
Date August 20, 2013

Sterling Resources Ltd. (TSX-V:SLG) ("Sterling" or the "Company") an international oil and gas company with exploration and development assets in the United Kingdom, Romania,France and the Netherlands, announces interim operating and financial results for the quarter ended June 30, 2013.  Unless otherwise noted all figures contained in this report are denominated in Canadian dollars.

For the three months ended June 30, 2013 the Company recorded a net loss of $20 million ($0.06 per share) compared with a net loss of $7.0 million ($0.03 per share) for the three months ended June 30, 2012.  This larger loss is mainly attributable to refinancing costs related to the replacement of the previous Reserves Based Loan (the "Credit Facility") with a Senior Secured Bond (the "Bond") and related banking and professional fees, including the expensing of $3.6 million of previously capitalized transaction costs relating to the Credit Facility. The Company incurred a total of $9.6 million of costs related to the refinancing during the three months endedJune 30, 2013 which includes the previously capitalized transaction costs.  During the first quarter of 2013, $1.6 million of one-time banking, legal and consultancy fees related to the strategic review process were incurred.

Pre-licence and other exploration costs during the second quarter of 2013 were $2.2 million, a decrease of $3.9 million compared to the same period in 2012. For the six month period ended June 30, 2013 pre-licence and other exploration costs totaled $3.5 million, a decrease of $4.6 million.  Geographically, $0.7 million ($4.7 millionin 2012) related to licenses in the United Kingdom, $2.0 million ($2.1 million in 2012) to Romania, and $0.8 million ($1.3 million) to the Netherlands and other international ventures. Seismic expenses of $3.2 millionduring the first half of 2012 related to the 42/13b, 42/17 and 42/18 (Lochran) licences in the UK account for most of the reduction year over year. Employee expense and general and administrative expenditures charged to exploration licences as pre-licence costs were $1.4 million higher in the first half of 2013 than the comparable period in 2012, due to a change in the composition of operated versus non-operated projects.

A realized foreign exchange loss of $4.1 million was incurred during the second quarter of 2013 on the repayment of the UK pound denominated Credit Facility from the US dollar denominated Bond facility as a result of the UK pound strengthening against the Canadian dollar. A foreign exchange loss of $0.6 million was incurred during the first quarter of 2013 which arose on the US dollar denominated short-term loan as a result of the Canadian dollar weakening in comparison to the US dollar. The comparable foreign exchange loss during the first half of 2012 was only $0.2 million.

Net employee expense for the six month period ending June 30, 2013 was $3.8 million a decrease of $0.4 million compared to same period in 2012.  Total employee expense was composed of non-cash share based compensation of $0.8 million and $3.0 million of salaries and wages. Non-cash share based compensation was down significantly from the $2.5 million level during the first half of 2012, as certain options were fully amortized and no new options were granted.

Recoveries from partners and those amounts capitalized to assets were down in the first half of 2013 relative to the first half of 2012, as operatorship of the Cladhan licence was transferred to TAQA Bratani, and there was no operated drilling activity during 2013, while two operated wells were drilled in the first quarter of 2012. For the six month period ended June 30, 2013, net general and administrative expense after recoveries was $1.5 million, an increase of $0.3 million over the same period in 2012, due principally to increased head office and legal fees.

Total financing costs during the second quarter of 2013 were $0.9 million including $0.8 million of expensed accrued interest and the amortization of Bond related transaction costs for that portion of the issue not related to the cost of Breagh development. The remainder of the financing costs are accretion of the discount on decommissioning obligations and have increased during the period as decommissioning obligations for Breagh have increased. During the first quarter $2.1 million of financing costs were incurred, of which $2.0 million related to transaction costs for the US $12 million bridging loan facility.

Cash and cash equivalents totaled $53.8 million at June 30, 2013 compared to $9.4 million at December 31, 2012. Restricted cash of $48.2 million at June 30, 2013 was comprised of $34.9 million to be utilized for Breagh development expenditures, $10.4 million in a retention account to cover the initial bond interest payment payable on October 30, 2013, minor amounts of cash held in escrow and $2.7 million held in joint venture bank accounts in Romania.

Net working capital of $90.3 million at June 30, 2013 represents a significant increase in working capital from year-end 2012 due to the Bond refinancing process, the reduction of drilling activity in Romania and the proceeds of the first quarter equity offering, all of which were offset by ongoing development costs at Breagh.

During April the Company refinanced its £105 million Credit Facility through a Bond issue of US $225 million.  The Bonds were issued by Sterling's wholly owned UK subsidiary Sterling Resources (UK) Ltd. and have a wide-ranging security package including a charge over the UK subsidiary's interests in the Breagh and Cladhan fields and over the shares of the UK subsidiary, as well as a parent company guarantee.  In addition to providing further financing and enabling Sterling accelerated access to the cash flow from the Breagh field, the other terms and conditions of the Bond issue will be less restrictive than those of the previous Credit Facility.  The Company expects to be fully financed for all of its planned activities during the life of the Bond even in the event that proceeds from the Midia Block carve-out transaction are delayed.

During early May the Company reached agreement with several of its largest shareholders, collectively representing approximately 40 percent of the issued and outstanding common shares, to support the ongoing growth of Sterling as a public company.  At the same time, Vitol confirmed that it had abandoned its previously announced intention to make a take-over bid for Sterling's common shares.  Subsequently, Messrs. Jacob S. Ulrich, James H. Coleman and Gavin Wilson were elected as directors at the annual general and special meeting of shareholders held on June 11th with Mr. Ulrich named as Chair.  In conjunction with the election of these new directors, incumbent directors Walt DeBoni, Graeme Phipps and Stewart Gibson agreed not to stand for re-election to the board. The Company would like to express profound thanks and gratitude to these retiring board members for their service and dedication to the Company during the course of their tenure.

"The delays and cost increases at Breagh have been intensely frustrating for shareholders, bondholders and all of those associated with Sterling.  However, with our balance sheet strengthened and Breagh production and cash flow imminent, the Company is now well positioned to pursue the exploration and development of its attractive portfolio of assets," stated Mike Azancot, Sterling's Chief Executive Officer. "We look forward to the commencement of production at Breagh and the opportunity to execute these plans in order to deliver value to our shareholders whose patience is greatly appreciated," added Mr. Azancot.

Operational Update

United Kingdom

In April, the Company signed agreements with TAQA Bratani Limited ("TAQA") which ensured that the Company was in a position to provide evidence of its ability to fund its share of Cladhan development costs to DECC by the end of that month in order to obtain FDP approval.  Under the terms of the agreement with  TAQA a full carry of development costs through to  first oil (expected at the beginning of 2015) is provided. The full carry of the Cladhan development costs removes any cost exposure through to initial oil production with an acceptable transfer of equity to  TAQA.  The development program is progressing with many major contracts awarded and plans for drilling the first development well to start late in 2013 or early 2014.

The exploration well on the Beverley prospect in the UK central North Sea cannot be drilled this year due to the very tight rig market. This well, in which Sterling will be fully carried by Shell, will therefore be drilled as soon as possible in 2014.

At the end of June, a revised timetable for the regulatory approval of Phase 2 of the Breagh development was agreed with the UK Department of Energy and Climate Control ("DECC"). This postpones the date for submitting an Addendum to the existing Field Development Plan ("FDP") to the end of December 2013 with approval not expected before June 2014.  The postponement is needed to ensure the development of the eastern side of the field is optimized to reflect the results of the recently drilled A03 and A05 wells.  Consequently, at this juncture Phase 2 first gas could be expected no sooner than late in 2016. The Company intends to fund the Phase 2 development from Phase 1 cash flow and potentially from a portion of the proceeds from the Bond issue.

Subsequent to the end of the quarter the Company was informed by the Breagh operator RWE Dea that first gas sales from the Breagh field would be delayed by a few weeks due to remedial work identified during the commissioning of the Teesside Gas Processing Plant ("TGPP").  Planned leak tests conducted prior to the introduction of hydrocarbon gas revealed the need to address high pressure vessel and line issues.  Remediation of these TGPP site issues is progressing well and all other work is progressing as expected, however it is likely that start-up will slip to mid-September.  Offshore facilities and the export pipeline to the terminal are fully commissioned and pressured with hydrocarbon gas, ready to commence production immediately upon completion of the TGPP related work.

In early August, the Breagh A05 well was completed and production tested.  Despite encountering a similar geological section to the A03 well, it flowed at a rate of 21 million standard cubic feet of gas per day ("MMscf/d"), considerably less than A03 test rate of 57 MMscf/d. RWE is evaluating the well data and may recommend prompt remedial actions to improve production from zones that may have experienced clay swelling from influx of water during the completion phase. The A04 well, which was originally completed in February 2013, was also production tested and flowed at a rate of 26 MMscf/d.  Based on the results of these production tests from wells A04 and A05, total average daily production during 2014 at Breagh is now estimated to be 112 MMscf/d (33 MMscf/d net to Sterling) which includes a contribution from well A07 expected from February 2014.  With these recent production tests now completed, the Ensco 70 rig has resumed drilling of well A06.


In Romania, work with the government continues in order to expedite the closing of the sale of the Midia Block carve-out acreage to ExxonMobil/OMV Petrom and the receipt of approximately US $29 million by around the end of 2013.

Plans have been finalized for the drilling of an exploration well in the fourth quarter of 2013 on the Muridava block in the Romanian Black Sea, in which Sterling holds a 40 percent interest. The well is due east of the Eugenia well, drilled last year in the Pelican block, and is targeting a 169 Bcf prospect according to the operator Petroceltic International plc. In addition, we intend to acquire 3D seismic over part of the Luceafarul block, in which we are operator with a 50 percent equity interest.  The acquisition of 3D seismic over the Midia and Pelican blocks and additional exploration and appraisal drilling is now expected to be conducted in 2014.

We continue to review the options and timing for a farm down of our large equity positions in our offshoreRomania blocks.

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