Sterling Resources Announces First Quarter Operating and Financial Results
CALGARY, May 22, 2014 /CNW/ - 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 March 31, 2014. Unless otherwise noted all figures contained in this report are denominated in U.S. dollars.
For the three months ended March 31, 2014 the Company recorded net income of $167.6 million ($0.54 per share) compared with a net loss of $8.8 million ($0.04 per share) for the three months ended March 31, 2013. During the quarter the Company realized a pre-tax gain of $27.3 million on the sale of the Midia Shallow block in the Romanian Black Sea and realized revenues attributable to Breagh production of $20.5 million. Also in the first quarter of 2014 the Company recognized a deferred tax asset resulting in a credit of $144.5 million to the income statement following sustained production and management estimates that, based on its profit forecast and reserves available, there is now sufficient evidence to recognize the deferred tax asset. Operating expenses attributable to Breagh totaled $2.6 million during the quarter. The loss during the first quarter of 2013 was largely attributable to $2.0 million of costs related to a short-term loan used as bridge financing and to $1.6 million of one-time banking and professional fees associated with procurement of additional funding.
Pre-licence and other exploration costs during the first quarter of 2014 were $1.4 million, a level marginally higher than those incurred during the first quarter of 2013. Of this total cost, approximately $0.5 million was related to licences in the UK, compared to $0.8 million during the first quarter of 2013; $0.1 million was related to licences in Romania compared to $0.2 million expended during the first quarter of 2013; and $0.7 million was related to licences in the Netherlands and other international ventures compared to $0.3 million during the first quarter of 2013.
A foreign exchange gain of $1.8 million was recognized during the first quarter of 2014 as a result of the continued weakening of the U.S. dollar in relation to the UK pound, which is the functional currency for the UK. The loss of $0.6 million during the first quarter of 2013 related to a strengthening US dollar denominated bridge loan as a result of the weakening of the Canadian dollar in U.S. dollar terms.
Net employee expense for the quarter was $1.8 million, a level similar to that incurred during the first quarter of 2013. Total employee expense was composed of non-cash share based compensation of $0.1 million and $1.7 million of salaries and wages. Non-cash share based compensation was $0.5 million less than the amount in the first quarter of 2013, as certain options were fully amortized and no new options were granted.
Financing costs for the three months ended March 31, 2014 totaled $6.3 million representing the borrowing costs on the $225 million senior secured bond (the "Bond"). A small portion of the financing costs also include accretion of the discount on decommission obligations and have increased during the period due to greater decommissioning obligations attributable to Breagh. During the first quarter of 2013 financing costs totaled $2.1 million, including $2.0 million related to transaction costs on the bridging loan facility which were expensed following its repayment.
Cash and cash equivalents totaled $46.2 million at March 31, 2014 compared to $34.7 million at December 31, 2013. In addition, restricted cash of $10.1 million was held at March 31, 2014 in a retention account in accordance with the requirements of the Bond indenture. Restricted cash of $7.8 million as at December 31, 2013 was comprised of $2.8 million to be utilized for Breagh related expenditures and $5.0 million to partially cover the Bond interest payment paid on April 30, 2014.
Net working capital, totaled $21.9 million as at March 31, 2014 compared to $2.2 million as at December 31, 2013. This increase in working capital was mainly due to the receipt of the Midia Shallow carve-out proceeds during the quarter.
Sterling's operating cash flow during 2014 continues to be below expectations, due to lower than originally anticipated production levels at Breagh, some short term operational issues and lower UK natural gas spot prices. Sterling should have adequate liquidity to satisfy the minimum US$10 million of unrestricted cash (a requirement of the Bond indenture) in the UK subsidiary up to around the end of the third quarter of 2014. We continue to closely monitor this cash position in light of production levels, spot gas prices, Breagh capital expenditures and the timing of exploration activities and we are planning a further financing focusing on debt capital markets.
"Although the original production expectations for Breagh have not been met, we have seen the first substantial production revenue during the first quarter of 2014," stated Jake Ulrich, CEO of Sterling. "We will continue, in conjunction with the operator, to optimize the Breagh field in order increase both the efficiency and reliability of the field. The established production history has enabled us to recognize the deferred tax asset which is significantly larger than our current market capitalization and highlights the unrecognized value in our Company," added Mr. Ulrich.
At Breagh production resumed in early May following a three week shutdown to address fouling within the slug catchers and to replace level control instrumentation in order to improve processing reliability at the Teesside Gas Processing Plant ("TGPP"). During early May the Ensco 70 jack-up rig returned to the Breagh field to begin completion of well A07 using hydraulic fracture stimulation (fracking) which will be followed by the drilling and completion of well A08. The Ensco 70 rig will then be moved some 25 kilometres to the northeast to drill a well at Crosgan. Wells A09 and A10 are proposed to be drilled in 2015 from the Breagh Alpha platform, following a new 3D seismic acquisition over the field which is currently underway.
In accordance with the guidance provided on April 15th, average expected gross gas sales production for 2014 at Breagh remains at 90 to 95 million standard cubic feet ("MMscf/d"), which is net 27 to 28.5 MMscf/d to Sterling. As expected, production at Breagh was brought back on-stream on April 29th, following a three week maintenance related shut-in, however the TGPP was shut-in a few days later for several days to accommodate the logistics associated with the siting of the Ensco 70 well to compete the A07 well. Although not directly related to current operations at Breagh, during the first quarter it was announced that the operator of Breagh, RWE Dea, was sold to LetterOne Holdings S.A. We look forward to working with the management of LetterOne in the coming months.
Production at the Cladhan field in the Northern North Sea is expected to commence around the end of the first quarter of 2015. During April 2014 development drilling recommenced and sub-sea construction works to tie the wells back to the TAQA-operated Tern platform is expected to be completed by the fall of 2014. Topsides modification works at Tern are expected to complete around mid-2015, after first production. Initial gross production at Cladhan is forecast to be approximately 17,000 barrels per day ("bbls/d"), net 340 bbls/d to Sterling at the current 2.0 percent equity interest. Around the end of the third quarter of 2015, the repayable carry provided by TAQA is expected to pay-out and Sterling's interest would then rise to 13.8 per cent giving Sterling net production of approximately 2,200 bbls/d at end 2015.
Preparation work continues for the drilling of an exploration well on the Beverley oil prospect on UK block 22/26c (Sterling 20 percent). Nearly all of the cost of this well will be carried under a farm-out arrangement. Similarly, preparation work on the UK Crosgan well (block 42/15, Sterling 30 percent, non-operator) also continues. Both wells are planned for the second half of 2014; the Crosgan well will be drilled using the Ensco 70 following-on from the drilling activity on the Breagh field, and work is progressing to secure a rig for the Beverley well.
Late in 2013, Sterling was awarded a number of blocks close to the Breagh field containing the Ossian and Darach prospects. Currently farm-out partners are being sought to seek carries for the firm well commitments planned to test both of these prospects. Sterling was also an active participant in the 28th Offshore Licensing Round and expect the awards process to be completed by the end of 2014.
During the first quarter three major milestones were achieved as we move to de-risk the Romanian assets. The first of these was achieved during early February when proceeds from completion of the Midia Block carve-out transaction were received. Net of transaction costs and Romanian tax, Sterling received after-tax proceeds of approximately US$25 million. The Midia block has now been split into two parts with the shallow waters contract area ("Midia Shallow") being retained by Sterling at its current equity interest of 65 percent. The Midia Shallow block includes the Ana and Doina discoveries, the Ioana prospect and several other prospects. Sterling retains no interest in the smaller, carved-out portion of the Midia block ("Midia Deep").
The second milestone was the negotiation of extensions for the licence periods of Midia Shallow and Pelican blocks with the Romanian National Agency for Mineral Resources. An extension to May 2015 has already been granted and the commitments for this extension period have mostly been completed with the recent acquisition of 3D seismic (see below). Two further extension options are available, at the Concession-holders' election, to May 2018 and May 2020.
The third and final milestone was the earlier than anticipated completion of the 2014 3D seismic acquisition program over key parts of the Midia Shallow and Pelican blocks. The program comprised approximately 500km2 of acquisition over the Ana-Doina trend, and 100km2 over each of the Bianca prospect, Ioana prospect and Eugenia discovery. Processing and interpretation of this 3D seismic is expected to be completed during the third quarter of 2014. The earlier completion of the 3D seismic program means that the planned sell-down process to reduce the Company's equity interests in its Black Sea blocks can be accelerated to commence in mid-2014 with interpreted results available for all of Sterling's main fields and prospects, providing important information for potential new partners. Sterling intends to reduce its equity interests in the Midia Shallow and Pelican blocks (currently 65 percent), in the Luceafarul block (currently 50 percent) and in the Muridava block (currently 40 percent) to approximately half of the current levels by introducing a new partner. The intended time line is to sign binding documentation, if the process is successful, around the end of 2014.
The development of the Ana and Doina fields in the Midia block continues to be evaluated by Sterling but the timing of first production is now expected to occur during 2019, with this timeline to be finalized with a new prospective partner.
The 2014 Muridava-1 well, in which Sterling holds a 40 percent interest, spudded in early April and is expected to take two months to complete. The well is on the same geological trend as the existing Olimpiyskaya and Eugenia gas discoveries and has targets in three formations. The operator of Muridava Block has indicated that the other two commitment wells for the block have been postponed to 2015.
Acquisition of 500 km2 of 3D seismic over the F17 and F18 blocks (Sterling 35 percent, operator) is expected to commence by the end of May and should be completed in June 2014 with processing and interpretation expected to be completed by the middle of 2015. The seismic will be acquired over the oil discoveries and prospects in the Jurassic and Early Cretaceous horizons, to improve reservoir understanding and assist in evaluating new exploration potential and existing development options. Licence extensions have been granted to January 2016.
2014 Capital Expenditures
For the last three quarters of 2014, Sterling expects to spend the following approximate cash expenditures on development and firm exploration & appraisal ("E&A") activities, in $ millions:
|Breagh Phase 1 (including A07 frac and drilling of A08)||24|
|Breagh Phase 2 (pre sanction)||5|
|UK E&A (including Crosgan well and Bevcrley well, net of carry)||15|
|Romania and Netherlands E&A (including Muridava-1 well and F17/18 seismic)||15|
|Total - Q2-Q4 2014||59|
Annual General Meeting
The Sterling Resources AGM will be held on Friday, May 30th at 10:00 AM Mountain Daylight Time at The Metropolitan Conference Centre (Royal Room), 333 - Fourth Avenue S.W., Calgary, Alberta. The AGM proceedings will be webcast at http://www.newswire.ca/en/webcast/detail/1311647/1448039 and will be archived for 90 days following the meeting.
Sterling is a Canadian-listed international oil and gas company headquartered in Calgary, Alberta with assets in the United Kingdom, Romania, France and the Netherlands. The common shares are listed and posted for trading on the Toronto Stock Exchange Venture (TSX-V) exchange under the symbol "SLG".
Neither the TSX-V nor its Regulation Services Provider (as that term is defined in the policies of the TSX-V) accepts responsibility for the adequacy or accuracy of this release.
Filer Profile No. 00002072
All statements included in this news release that address activities, events or developments that Sterling expects, believes or anticipates will or may occur in the future are forward-looking statements. In addition, statements relating to expected production, reserves or resources are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions that the reserves and resources described can be profitably produced in the future.
These forward-looking statements involve numerous assumptions made by Sterling based on its experience, perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. In addition, these statements involve substantial known and unknown risks and uncertainties that contribute to the possibility that the predictions, forecasts, projections and other-forward looking statements will prove inaccurate, certain of which are beyond Sterling's control, including: the impact of general economic conditions in the areas in which Sterling operates, civil unrest, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility and obtaining required approvals of regulatory authorities. In addition there are risks and uncertainties associated with oil and gas operations. Readers should also carefully consider the matters discussed under the heading "Risk Factors" in the Company's Annual Information Form.
Undue reliance should not be placed on these forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. Sterling's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. These statements speak only as of the date of the news release. Sterling does not intend and does not assume any obligation to update these forward-looking statements except as required by law.
Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than for which it is disclosed herein.
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