Sterling Resources' Special Committee Responds to Vitol Group

CALGARY, April 16, 2013 /CNW/ - The special committee of independent directors (the "Special Committee") of Sterling Resources Ltd. (TSX-V: SLG) ("Sterling" or the "Company") today responded to the press release of the Vitol Group (the "Vitol Group") dated April 15, 2013 wherein the Vitol Group made a number of inflammatory and unsubstantiated claims in relation to the conduct of the Special Committee and of Sterling's business and affairs.

In summary, the Special Committee notes the following:

• Management expects Breagh first gas by early August, at which point Sterling would become a material producer in the North Sea with significant free cash flow available to fund a disciplined capital program, realizing the value of existing assets.
• Financing has been a key challenge for the Company principally as a result of the Breagh project delays. The long-term financial structure of the Company is anticipated to be stabilized by the proposed US$225 million senior secured bond financing announced on April 8, 2013 that is currently being marketed (the "Bond") and the farm-down of its working interest in the Cladhan field to TAQA Bratani Limited (the "Farm-Down"), initiatives that were publicly disclosed prior to the Vitol Offer, as defined and discussed below. Management anticipates that the proposed Bond would completely refinance Sterling's existing Credit Facility (as defined below) and provide greater financial flexibility. Management also expects that the Cladhan Farm-Down will enable Sterling to retain a material working interest in the project, whilst providing funding for the development and will eliminate exposure to potential project cost overruns. The timing of the above initiatives is in keeping with Sterling's licence commitments on Breagh and Cladhan, which demand evidence of financing to progress their development and retain the interests.
• The Special Committee has evaluated, together with its financial and legal advisors, all the actions taken by management subsequent to the formation of the Special Committee and determined that they are in the best interest of Sterling, including the Bond and the Farm-Down.
• The Special Committee considers that Vitol's approach is opportunistic and attempts to take advantage of the Company's short term financing constraints. Despite the Special Committee's repeated efforts to engage with Vitol in good faith, their behavior has, in the Special Committee's view, been self-serving and disingenuous.

Background

On February 12, 2013, Vitol Anker International B.V. ("Vitol"), a member of the Vitol Group, announced by way of press release its intention to make an offer (the "Offer") to acquire all of the outstanding common shares (the "Shares") of Sterling not beneficially owned by Vitol and its affiliates, for cash consideration of $0.85 per Share.  On February 13, 2013, Sterling announced that it would consider the Offer and pursue a course of action which the board of directors of Sterling believed was in the best interests of Sterling and its stakeholders, including further negotiations with Vitol towards a mutually acceptable arrangement.  The Special Committee was constituted to discharge these objectives and retained RBC Capital Markets as its financial advisor to assist in that process.  In addition, at the request of Vitol and in order to facilitate Vitol's ability to ultimately make an offer to Sterling's shareholders in compliance with applicable law, the Special Committee retained an independent third party to prepare a formal valuation of the Shares pursuant to Multilateral Instrument 61-101. 

Both before and since that time, and on several occasions, the Special Committee has informed Vitol that the Offer does not reflect adequate value for Sterling and has invited Vitol to enter into negotiations regarding an improved offer that Sterling could support and recommend to its shareholders. Vitol has declined to enter into any such negotiations. Over the same timeframe, as previously disclosed, the Special Committee has, among other matters, considered the viability of Sterling as a going concern, the concurrent and anticipated business and affairs of Sterling and its assets and operations, all with the best interests of Sterling in mind.  As part of that analysis, the Special Committee, with the input of its advisors, has evaluated both the Bond and the Farm-Down, as compared to and in the context of other available alternatives, and determined that they are in the best interests of Sterling.

Responses to Vitol

Contrary to the assertions made by the Vitol Group in its press release of April 15, 2013, the conclusion of the Special Committee, after considering the advice of its financial and legal advisors, among other things, is that the Bond and Farm-Down are superior to other available options and are not destructive in any sense to shareholder value.  Both initiatives provide incremental capital and mitigate significant risks associated with the current Credit Facility and provide the financial certainty that is necessary in order to retain the Cladhan licence.

With respect to the specific allegations raised by Vitol, Sterling offers the following comments:

1. Independent valuation.  Sterling's Special Committee appointed an independent valuator in a timely manner following the announcement of the unsolicited Vitol Offer, and, since such appointment, has been diligently working with the valuator with a view to finalizing a formal valuation in accordance with applicable securities laws. Approximately a week ago Sterling informed Vitol that the independent valuator's analysis had been substantially completed and requested Vitol's instruction to ask the independent valuator to finalise the independent valuation so that Vitol would be in a position to mail its take-over bid for the Shares to shareholders.  The only reason the independent valuation has not been completed is that Vitol has not instructed Sterling to do so.
   
   
2. Equity financing.  Prior to completion of the equity financing for aggregate consideration of $63.25 million on March 11, 2013, Sterling was severely capital constrained and would have shortly been unable to finance its ongoing business and affairs. Far from being a "value dilutive initiative" (as alleged by Vitol), the equity financing, which was completed to fund ongoing costs at Breagh, has also provided the Special Committee with the additional time necessary to continue its strategic review process and, among other things, to attempt to engage in discussions with Vitol regarding a fair offer for the benefit of all shareholders. Without the equity financing Sterling shareholders would have had little choice but to agree to Vitol's inadequate Offer of $0.85 per Share.  It is also worth noting that Sterling proactively offered Vitol the opportunity to participate in the equity financing pro-rata. Rather than opposing the equity financing at the time, Vitol requested and obtained relief from the relevant securities regulatory authorities to allow it to participate in the equity financing, which represented the opportunity to maintain its relative percentage ownership of Shares at an acquisition price lower than it would have had to have paid on the open market.  Vitol's opposition to the financing is therefore a relatively newfound and convenient one given that they benefitted directly from it.
   
   
3. Senior Secured Bond.  Completion of the proposed Bond financing would enable full repayment of Sterling's Credit Facility and provide Sterling with sufficient funds to develop its assets for the benefit of the Company. The Special Committee's view is that Vitol's opposition to the Bond is designed to eliminate other sensible alternatives, thereby coercing Sterling shareholders into accepting Vitol's inadequate Offer.   Had Vitol been prepared to negotiate with Sterling towards a fair offer, Sterling would not have needed to pursue the Bond while the Special Committee continues to evaluate other strategic options. Vitol has elected not to enter into any negotiations with Sterling.
   
   The proposed Bond facilitates a number of positive outcomes for Sterling and its shareholders, including the prepayment of the entire existing Credit Facility, financing the continued development of the Breagh field, providing additional financing for general corporate purposes and allowing immediate access to cash flow from the Breagh field following first gas.
   
   Furthermore, the Special Committee wishes to respond strongly and directly to the allegation that the proposed Bond represents a defensive tactic intended to frustrate the Offer.  The terms and conditions of the proposed Bond are consistent with other similar senior secured bond offerings, including prepayment fees associated with the early retirement of the bonds.  The terms and conditions of the Bond are also less restrictive than those of the existing Credit Facility.  The Special Committee would also highlight that, as early as February 6, 2013, Sterling had contemplated and disclosed publically its intention to pursue a senior secured bond offering of up to US$250 million in the second quarter of 2013 in furtherance of its long term business objectives and in recognition of the onerous terms of its current Credit Facility.  Although numerous alternatives to address those objectives have been considered and evaluated by management, the Special Committee and the board of directors subsequent to that initial disclosure, the best available alternative to Sterling in the circumstances and at present is as reflected in Sterling's announcement of April 8, 2013 in relation thereto.  As a result, far from being a defensive tactic, the Bond had been clearly identified and publically disclosed as the preferred financing alternative even before Vitol made its proposed Offer.  The Vitol Group has had over two months to consider making a proposal to Sterling that might obviate the pressing need for the Bond, but has chosen to wait until the last moment possible to attempt to frustrate that Bond with a view to leaving Sterling and its shareholders with no option but to accept Vitol's inadequate Offer.  In the Special Committee's view, Vitol's allegations are therefore nothing but self-serving and disingenuous.     
   
   
4. Bank credit facility.  The principal default under the GBP 105 million senior secured credit facility (the "Credit Facility") arose at the end of 2012 when Sterling was unable to repay £15 million of loans under the Credit Facility, as previously disclosed.  The repayment requirement arose following a regular redetermination which resulted in a reduction of the borrowing base as a result of the delays and cost increases in Breagh.  Through a series of waiver and amendment agreements, the Company has deferred the requirement to repay this amount until June 30, 2013.  This outstanding loan repayment, coupled with the lack of production from Breagh, means it has not been possible to arrange any incremental debt funding from the bank group for the Breagh Phase 2 or Cladhan development projects.  Since the last redetermination at the end of 2012, the further delay to Breagh first production from May to August raises the possibility of a further redetermination which can be implemented by the banks at any time.  Should any further redetermination lead to a requirement to repay a further amount of loans there is no guarantee that such additional repayment could be deferred, raising the possibility of repayment acceleration of the Credit Facility and security enforcement of the UK subsidiary and/or Breagh field leading to very substantial value loss for shareholders.  To avoid this risk, the Company considers it imperative to refinance the Credit Facility as quickly as possible.
   
   A further consideration which has been utmost in the Company's financial planning is ensuring it will be in the position to demonstrate committed funding to the Department of Energy and Climate Change ("DECC") for the Cladhan and Breagh Phase 2 development projects.  Such funding evidence is required for Field Development Plan approval which will enable the respective production licences to move into the next period.  The current licence term for the Cladhan licence expires on April 30, 2013 and for the Breagh licence expires on June 30, 2013.  However, DECC has provisionally granted an extension of the Breagh licence expiry to December 31, 2013. To protect both shareholder value and the collateral value of the Breagh and Cladhan projects for our lenders, it is imperative that the Company refinances the current Credit Facility to enable the licences to be retained and to be able to demonstrate committed funding to DECC for the development projects to proceed.  Discussions were held with many other lending banks in the last quarter of 2012 and early 2013 but the Company determined that a suitable credit facility or facilities, meeting the Company's needs in relation to Cladhan and Breagh Phase 2, would not be available.  Vitol's allegations in relation to bank financing are therefore completely unjustified and self-serving.
   
   
5. Cladhan.  The Farm-Down is a normal-course business transaction that the Board indicated it was pursuing as early as February 6, 2013. DECC requires firm evidence of Sterling's ability to finance the Cladhan development by April 17, 2013 and the Farm-Down is the best available alternative. It is intended to remove entirely the requirement to fund material development costs, expected to be in the order of US$100 million, and very importantly to remove the Company's exposure to funding any cost overrun or to the financial implications of a delay in first oil.  For the Cladhan development, which involves a subsea system and substantial modifications to a mature host platform, the Company considers the risk of cost overruns to be significant.  At the P50 reserves level, the Company estimates that the value of the Company's interest in Cladhan has been reduced by around 25 percent (approximately $0.07 per Share) after factoring in the significant benefit of retaining historic tax allowances on the 12.6 percent interest that is to be permanently transferred. In a downside scenario where development costs are materially beyond expectations, the Company estimates that the value of the Company's interest in Cladhan will increase as a result of the Farm-Down.

In summary, it is regrettable that rather than proceed in good faith to negotiate a fair offer for shareholders that would be supported by the independent valuation, and supported by Sterling itself, Vitol has chosen instead to air publically its grievances and allegations. The Special Committee believes that Vitol is acting in this way in the hope that the Bond will be frustrated and that the final formal valuation will reflect the lack of available financing alternatives and thereby be driven to a range supportive of the Offer. It is the view of the Special Committee that Vitol seeks to coerce shareholders into believing that its opportunistic and inadequate Offer is the only viable alternative.

The Special Committee continues to be open to potential alternatives that would address the best interests of Sterling and its shareholders in keeping with its fiduciary duties. We must assume by their actions that Vitol has no intention of making a fair proposal for Sterling, despite repeated invitations to them to do so. Shareholders are urged to see the Vitol allegations for what the Special Committee views them as, unfounded and self-serving.

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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 TSX-V 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

Forward-Looking Statements

All statements included in this press release that address activities, events or developments that Sterling expects, believes or anticipates will or may occur in the future are forward-looking statements.

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, delays in production, third party performance failures, 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 press 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 press 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 press release should not be used for purpose other than for which it is disclosed herein.

SOURCE: Sterling Resources Ltd.

For further information: visit www.sterling-resources.com or contact:

Mike Azancot, President and Chief Executive Officer, Phone: [phone], Mobile: [phone], [email protected]

David Blewden, Chief Financial Officer, Phone: [phone], Mobile: [phone], [email protected]

George Kesteven, Manager, Corporate and Investor Relations, Phone: [phone], Mobile: [phone], [email protected]