Sterling Resources announces 2013 operating and financial results

Source Press Release
Company Sterling Resources Ltd. (Pre-RTO) 
Tags Financial & Operating Data
Date April 16, 2014

Sterling Resources  has announced operating and financial results for the year ended December 31, 2013. Sterling changed the presentation currency of its financial reporting from Canadian dollars (which remains the functional currency of the Company) to US dollars effective December 31, 2013 and accordingly, unless otherwise noted, all figures contained in this release are denominated in US dollars. The change in presentation currency has been made to reflect better the Company’s business activities and improve comparability with the Company’s peers in the oil and gas industry.

The net loss for the year ended December 31, 2013 was $31.2 million ($0.11 per common share) compared to a net loss of $49.7 million ($0.22 per common share) for the year ended December 31, 2012. The decrease in the net loss is largely attributable to non-recurring refinancing and strategic review costs partially offset by increased revenues, foreign exchange gains and the 2012 relinquishment of the Sheryl licence in the UKNS. Highlights for the year ended December 31, 2013 include the following:

  • The Company’s first material production commenced at the Breagh gas field in the UKNS during October 2013 generating revenue of $3.5 million by year-end 2013. Natural gas is sold on a spot basis pursuant to a gas trading agreement with Vitol signed in 2011, whereby Sterling nominates volumes on a day ahead or month ahead basis and achieves a price very close to the UK reference spot price at the National Balancing Point. Sterling is paid the month following production. A small amount of condensate is also produced at Breagh (approximately 3 barrels of liquids per million standard cubic feet of production) and is sold to a third party at a price linked to NW European spot prices for naphthenic products.
  •  A third party Gemini Oil & Gas Fund II, L.P. (“Gemini”) was paid $465,000 pursuant to a loan agreement originally executed in 2007 related to the funding of appraisal wells on the Breagh field. Gemini is entitled to interest and principal repayments representing a portion of gas and condensate production revenue from Breagh and the portion varies as certain thresholds of cumulative payment are reached.
  •  Pre-licence and other exploration costs during 2013 were $8.4 million, a significant decrease from the 2012 level of $31.5 million, due to lower activity levels during 2013 and the relinquishment of Sheryl (UK block 21/23a) during 2012 which resulted in a charge of $12.8 million. Of the $8.4 million total, $3.6 million ($20.1 million in 2012) was attributable to licences in the UK, $2.0 million ($7.8 million in 2012) attributable to Romania, and $2.8 million ($3.6 million in 2012) was attributable to the Netherlands and other international ventures. In addition to the charge related to Sheryl, the 2012 pre-licence number was higher due to seismic costs on the UK 42/13b, 42/17 and 42/18 (Lochran) blocks, the Muridava block in Romania, and the E3/F1 block in the Netherlands which were acquired and expensed in the period.
  • For the year ended December 31, 2013 the Company recorded a foreign exchange gain of $9.8 million due to the weakening of the US dollar (in which $225 million senior secured bond of the Company’s UK subsidiary is denominated (the “Bond”)) against the UK pound (which is the functional currency for the UK), partially offset by bank balances held in US dollars. This gain offset losses incurred in the first half of 2013 which arose mainly (1) on the repayment of the UK pound denominated £105 million senior secured bank credit facility (the “Credit Facility”) from the US dollar denominated Bond as a result of the UK pound strengthening against the Canadian dollar and (2) a foreign exchange loss of $0.6 million during the first quarter of 2013 which arose on the US dollar denominated short-term loan as a result of the Canadian dollar weakening relative to the US dollar.
  • Net employee expense during 2013 totaled $7.3 million increasing marginally by $151,000 over the 2012 level. Of this total, $6.5 million was wages and salaries with the remaining $0.8 million related to non-cash compensation. The non-cash component was down from the $3.3 million level in 2012 as certain options were fully amortized and no new options were issued.
  • General and administrative expenses for the year ended December 31, 2013 after recoveries totaled $3.0 million, increasing by $159,000 over the 2012 level. During 2013 a number of cost saving initiatives were launched including the relocation of the offices in both London and Aberdeen to smaller facilities.
  • Costs related to refinancing and strategic review activities during 2013 totaled $12.9 million of which $7.6 million related to bank and professional consultants, $1.5 million to severance payments and $3.8 million of transaction costs related to the Credit Facility.
  • Financing costs during 2013 totaled $9.6 million primarily attributable to borrowing costs on the Bond issue occurred from the date production at Breagh commenced in October 2013. The remainder of financing costs include accretion of the discount on decommissioning obligations and have increased due to greater decommissioning obligations on the Breagh development. During the first quarter of 2013, $1.9 million of financing costs were incurred in relation to the $12 million bridging loan facility.
  • The Company has not yet recognized a deferred tax asset generated as a result of non-capital and other tax losses, due to the uncertainty of future taxable profits against which such losses can be offset. In the UK, tax losses are estimated to amount to $616 million for ring fence corporation tax losses and $580 million for supplementary charge corporation tax. The net value of UK tax losses (including future ring fence expenditure supplement available to claim on these losses) is estimated by management to be approximately $220 million. Tax losses and allowances in Canada include tax pools of approximately $61 million and non-capital losses of approximately $43 million, and $17 million of tax deductible expenses and losses are available to shield future taxable income in the Netherlands.

Cash and cash equivalents were $34.7 million at December 31, 2013 compared to $9.5 million at year-end 2012. Restricted cash of $7.8 million at December 31, 2013 ($22.0 million as at December 31, 2012) was cash held in blocked accounts, specifically $2.8 million related to expenditures at Breagh and $5.0 million towards the second Bond interest payable on April 30, 2014.

Net working capital was $2.2 million as at December 31, 2013, significantly higher than the level at year end 2012 mainly due to the refinancing, the wind-down of the drilling campaign in Romania and funds received from the share issue partly offset by the continuing development expenditure at Breagh. The current portion of long-term debt at year-end 2012 of $138.3 million was refinanced during the second quarter of 2013.

Capital expenditures during 2014 are anticipated to reach $86 million, of which approximately $31 million is related to UK Breagh Phase 1 field development; $16 million related to other UK exploration and appraisal; $24 million for exploration and appraisal in Romania, the Netherland and France; and $4 million for pre-development costs at Breagh Phase 2 and at Ana and Doina offshore Romania. The expected cost of exploration and appraisal work in Romania, the Netherland and France has decreased significantly compared to earlier guidance principally due to the deferral of the Luceafarul-1 well into 2015.

An updated corporate presentation is available for viewing on the Sterling Resources website.

'The past year has been a transitional one as the Company finally achieved production at Breagh and went through a significant change in leadership,” noted Jake Ulrich Sterling`s CEO. “Our focus is now upon optimizing production levels at Breagh and reducing our working interest levels in the Black Sea, in order to advance development towards achieving Romanian production,' added Mr. Ulrich.

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