Sterling Resources announces second quarter operating and financial results and positive initial results for Breagh well A08
CALGARY, Aug. 7, 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 June 30, 2014 and the initial results from Breagh well A08. Unless otherwise noted all figures contained in this report are denominated in US dollars.
For the three months ended June 30, 2014 the Company recorded net income of $6.3 million ($0.02 per share) compared with a net loss of $19.5 million ($0.06 per share) for the three months ended June 30, 2013. In addition to production revenue in 2014 improving net income, the Company incurred a total of $9.4 million of costs related to refinancing during the three months ended June 30, 2013 which included previously capitalized transaction costs. For the second quarter the Company incurred a dry hole expense of $7.7 million following the plugging and abandoning of the Muridava-1 well in offshore Romania in May 2014.
For the six months ended June 30, 2014 net income was $174.8 million ($0.56 per share) compared to a net loss of $28.4 million ($0.10 per share) for the six months ended June 30, 2013. This significant change is mainly attributed to recognition of a deferred tax asset during the first quarter of 2014, as well as a gain on disposal related to the Midia Shallow block carve-out in Romania and production revenue from Breagh.
Revenue for the three months ended June 30, 2014 was $12.1 million representing a decrease of $8.3 million from the previous quarter due to several production shutdowns and lower gas prices. For the six months ended June 30, 2014 revenue was $32.7 million as a result of sales of a cumulative 3 billion cubic feet of gas at an average realized price of 51.9 pence per therm (approximately $8.56 per thousand cubic feet) and 895 tonnes of condensate (16,500 barrels of oil equivalent) at an average price of £492 ($836) per tonne. As initial production commenced at Breagh in October 2013 there was no production revenue for the comparable period in 2013.
For the three month period ended June 30, 2014 pre-licence and other exploration costs totalled $1.8 million similar to the $2.1 million incurred during the second quarter of 2013. During the first half of 2014 pre-licence and other exploration costs totalled $3.2 million compared to $3.4 million for the same period in 2013. Geographically, $1.3 million ($0.7 million in 2013) related to licences in the United Kingdom, $0.6 million ($1.9 million in 2013) to Romania, and $1.3 million ($0.8 million) to the Netherlands and other international ventures.
Employee expense and general and administrative expenses for the six months ended June 30, 2014 totaled $3.6 million and $1.5 million respectively, a decrease of $163 thousand and $20 thousand respectively compared to the first half of 2013. Non-cash share based compensation for the first six months of the year totaled $528 thousand compared to $845 thousand during the comparable period in 2013, as certain options fully amortized and no new options were issued during 2013. New options were issued on May 30, 2014 which vest over the initial three years.
Financing costs for the six months ended June 30, 2014 were $12.6 million which was primarily borrowing costs of $12.2 million, related to the $225 million senior secured bond expensed from the date Breagh production commenced in October of 2013. During the comparable period in 2013 financing costs were $3.0 million which included $2.0 million related to the costs of the bridging loan facility that was fully repaid.
A foreign exchange gain of $1.7 million was realized during the first half of 2014 due to the continued weakening of the US dollar (in which the senior secured bond is denominated) against the UK pound, the functional currency for the UK. The Company recorded a foreign exchange loss of $4.7 million during the second quarter of 2013 as a result of the UK pound strengthening against the Canadian dollar upon full repayment of the UK pound denominated credit facility.
Cash and cash equivalents totaled $18.8 million at June 30, 2014 compared to $34.7 million at December 31, 2013. Restricted cash of $16.9 million at June 30, 2014 represent funds held in a retention account to be applied towards the senior secured bond interest and amortization payments due on October 30, 2014. Restricted cash of $7.9 million at December 31, 2013 was primarily comprised of $2.8 million for Breagh expenditures, and $5.1 million designated for the senior secured bond interest payment due on April 30, 2014.
The net working capital deficit of $21.6 million at June 30, 2014 is significantly below the level at year-end 2013 due to the recognition of two bond amortization payments payable within the next twelve months, which was partially offset by the receipt of the carve-out proceeds from the Midia Shallow block in the first quarter. In recognition of this working capital situation and the impact of weak UK gas prices upon expected cash flow in 2014, the Company announced on July 15 that it had entered into agreements with certain existing shareholders to issue 71,579,746 common shares at a price of C$0.482 per common share in order to raise approximately $32 million on a private placement basis. This share issue closed on July 25, 2014. With this funding, the Company expects to be fully financed until late in 2014. Several of the Company's shareholders have indicated a strong desire to support Sterling with additional funding if required, but we will continue to explore further funding options, including the debt capital markets, which would minimize further dilution of net asset value to shareholders.
"Sterling continues to face a number of current challenges most notably lower than expected production from Breagh and unusually low UK gas prices. This is against the back drop of unfavourable capital market conditions for the international E & P sector, particularly for companies of Sterling's size," stated Jake Ulrich, Sterling's Chief Executive Officer. "In spite of this challenging environment the Company continues to cautiously pursue exploration, appraisal and development opportunities that will add value and that can be financed and we appreciate the perseverance of all of Sterling's stakeholders as we continue to move forward with these initiatives," added Mr. Ulrich.
Sterling expects sales gas production for the second half of 2014 to average 119 million cubic feet of sales gas per day ("MMscf/d") for the whole field (36 MMscf/d net to Sterling), with a 2014 year-end exit rate of 135 MMscf/d (40.5 MMscf/d net to Sterling). During 2015 whole field sales gas production is expected to average 111 MMscf/d (33.3 MMscf/d net to Sterling) with a 2015 exit rate of 117 MMscf/d (35 MMscf/d net to Sterling). These projections assume the A07 well coming on-stream in mid-August 2014, the A08 well coming on-stream in late October 2014, and the assumed contribution from the sidetrack and hydraulic stimulation of two existing wells in the second half of 2015. In addition to gas production, condensate is being produced at an average condensate-gas ratio of 3.3 barrels per MMscf.
In mid June we were pleased to announce the successful hydraulic stimulation and production testing of Breagh well A07. After several days of flowing the well to clean it up, the well was production tested at a stabilized rate of 32 MMscf/d (100 percent) at the planned initial operating conditions of the well, significantly exceeding our expectations. The performance achieved under these conditions represents an estimated two to three-fold increase in production rates over what would have been expected if the well had been completed with the standard completion used in the Breagh field to date. The A07 well was brought on-line on August 7, 2014 and production will be ramped up over the next 1-2 days. The successful results make it very likely that hydraulic stimulation will be applied to most, if not all, of the Phase 2 development wells and we continue to work with the operator to finalize the scope of Phase 2.
Following the successful conclusion of the A07 stimulation in June, Breagh well A08 has been successfully drilled to a total measured depth ("MD") of 10,420ft (7,889ft true vertical sub-sea) to a location 1.8 km northeast of the Breagh Alpha platform, approximately 1.5km south east of well A03 and 1.5 km west of well A05. The well encountered four gas-bearing sand intervals within Zone 1, the main productive reservoir interval in the field. Preliminary analysis indicates total net pay identified from wireline logging of 265 feet MD or 112 vertical feet, which is the largest yet encountered in a Breagh well. Two of the four gas-bearing sand intervals show good communication with other producing wells from wireline pressure measurements. The other two intervals have been shown to be at or close to initial reservoir pressure conditions; one of the sands was tested at a low rate (4 million cubic feet per day) in well A05 and one sand is a new interval evident only in the A08 well. In conjunction with RWE Dea, the Operator, it has been agreed to hydraulically stimulate these latter two intervals as this could add significantly to the production potential of the well and potentially add to field reserves. Plans are now being prepared to conduct a program of stimulation work of up to four stages, which may include the stimulation of the two intervals which are in good communication with other producing wells. This work is expected to start in the next 1-2 weeks and first production from the well is expected by late October 2014 after final hook-up and commissioning of the well. The incremental stimulation program costs are estimated to be up to approximately $16 million gross ($5 million net to Sterling).
"The initial A08 well results are already very encouraging and the planned stimulation offers the possibility of making this the most productive well in the field," stated John Rapach, Chief Operating Officer for Sterling Resources. "The results are also very relevant in confirming our expectations of the effective drainage areas in the north and northeast of the field, and a successful stimulation will be very helpful in further optimizing the Phase 2 development of this field", he added.
The drilling of two additional wells (A09 and A10) and possibly two sidetracks and/or hydraulic stimulations on existing Phase 1 wells are being considered for a drilling program commencing in the third quarter of 2015, dependent on securing a drilling rig and stimulation vessel, and final approvals within the partnership. These wells would come on-stream in the first half of 2016. Upon the completion of the A08 production well, the Ensco 70 jack-up drilling rig will be moved to the Crosgan field in block 42/15a some 25 km northeast of the Breagh field (Sterling, 30 percent) to drill an appraisal well to the southwest of the discovery well 42/10b-2Z drilled in 1995.
Production at the Cladhan field in the Northern North Sea is expected to commence during May 2015. During April 2014 development drilling recommenced and sub-sea construction works to tie the wells back to the TAQA-operated Tern platform are expected to be completed by the fall of 2014. Topsides modification works at Tern is the longest duration activity with a key milestone being the installation of the first compressor train during the first quarter of 2015. 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. During the fourth 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 the end of 2015, when gross production is expected to be 16,000 bbls/d.
Operatorship of the offshore UK licence containing the Beverley oil prospect (block 22/26c) and the Evelyn and Belinda (block 21/30f) oil discoveries has been transferred to Shell UK as part of a farm-in arrangement. Preparations to drill a commitment well on the licence are now being coordinated by Shell with the intention to drill either the Beverley prospect or an appraisal well at Evelyn during 2015. The costs associated with this well will largely be carried under the terms of the farm-in arrangement with Shell.
Reprocessing of 3D seismic for UK Blocks 49/18b and 49/19b (Sterling 100 percent) was completed during 2013 identifying a significant Rotliegendes gas prospect at Niadar in close proximity to existing infrastructure. Sterling intends to farm-down its interest in the Niadar prospect during 2014, with plans to drill a firm commitment well during 2015.
The Muridava-1 well, in which Sterling holds a 40 percent interest, was drilled during the quarter reaching a total depth of 2,747 metres. Open-hole logs were not obtained through the primary zones of interest due to severe deterioration of the open hole, however drilling samples, cuttings and mud logs through the penetrated sections did not indicate the presence of hydrocarbon accumulations. Furthermore the well was unable to reach a secondary target in the Lower Cretaceous. As a result the well was plugged and abandoned in late May. Two further drilling locations have been identified on the Muridava block (block 27) which will be reviewed with the operator prior to a returning to this block in the second half of 2015 for two further wells.
A key milestone towards achieving a farm-down in Romania was accomplished with the completion of the 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 within the next couple of months. The sell-down process to reduce the Company's equity interests in its Black Sea blocks is then expected to commence in September with interpreted mapping available for the Ana and Doina fields and the majority of 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, and to close in the first quarter of 2015.
In the Netherlands, acquisition of 500km2 of 3D seismic over the F17a and F18 blocks (Sterling 35 percent, operator) was completed in June with processing and interpretation expected to be completed by the middle of 2015. The seismic acquired is over the oil discoveries and prospects in the Jurassic and Early Cretaceous horizons, in order to improve reservoir understanding and assist in evaluating new exploration potential and existing development options. Licence extensions for the F17a and F18 blocks have been granted to January 2016. The 3D seismic survey acquired during 2012 for the E03 and F01 blocks (Sterling operator with 30 percent) is currently being evaluated and the Dutch regulator has granted a one year licence extension. The partnership will be required to make a drilling decision or relinquish the licence by December 2014.
The partners in the St. Laurent licence in France (Sterling 33.42 percent, operator) have applied for a licence extension to August 2016 to facilitate the acquisition of seismic and potential drilling of a well within the licence period. In the Paris Basin, finalization of the awarding of three licences covering nine blocks remains pending.
Sterling Resources Ltd. 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 shares are listed and posted for trading on the TSX Venture Exchange under the symbol "SLG".
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
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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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