CALGARY, Nov. 19, 2015 /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, France and the Netherlands, announces interim operating and financial results for the quarter ended September 30, 2015. Unless otherwise noted all figures contained in this report are denominated in US dollars.
- For the third quarter of 2015 Breagh's operating netback(1) was $13.5 million and for the nine months ending September 30, 2015 totaled $41.7 million (nine months ended September 30, 2014 – $39.2 million.
- For the third quarter of 2015 the Company's funds flow from operations(2) was $3.1 million and for the nine months ending September 30, 2015 totaled $20.2 million (nine months ended September 30, 2014 – $20.8 million).
- For the third quarter of 2015 the Company recorded a net loss of $10.8 million ($0.03 per share) compared with a net loss of $2.3 million ($0.01 per share) for the third quarter of 2014.
- For the nine months ended September 30, 2015 the net loss was $50.4 million ($0.13 per share) compared with net income of $173.0 million ($0.53 per share) for the nine months ended September 30, 2014. This significant drop in net income is principally attributable to recognition of a deferred tax asset and a gain on disposal related to the Midia Shallow block carve-out in Romania, both during the first quarter of 2014.
- Revenue for the third quarter of 2015 was $19.3 million, an increase of $2.6 million from the previous quarter largely due to a planned maintenance shutdown at Breagh for 20 days during June.
- For the nine months ended September 30, 2015 revenue was $61.8 million from sales of a cumulative 8.8 billion cubic feet of gas at an average realized price of 43.8 pence per therm (approximately $6.83 per thousand cubic feet) plus minor condensate sales. For the nine months ended September 30, 2014 revenue was $54.2 million from sales of 5.9 billion cubic feet of natural gas at an average realized price of $8.11 per thousand cubic feet, plus minor condensate sales.
- Employee expense and general and administrative expenses for the nine months ended September 30, 2015 totaled $3.3 million and $2.1 million respectively. Employee expenses declined substantially from $5.0 million incurred during the first nine months of 2014 largely as a result of staff reductions during the first quarter of 2015. Office relocations to lower cost premises in both London and Aberdeen have further reduced general and administrative expenses.
- Financing costs for the nine months ended September 30, 2015 were $20.4 million which primarily comprised borrowing costs of $19.5 million, up from $18.6 million in the first nine months of 2014, due to late interest payments, offset by lower interest costs, as a result of the first amortization payment made in October 2014. Interest costs of $5.8 million related to the Cladhan funding arrangement have been capitalized as borrowing costs.
- Non-recurring costs related to refinancing and strategic review activity during the first nine months of 2015 totalled $14.9 million, of which $9.6 million represents amortization of the first and second bond amendment fees and additional interest as a result of these amendments; $1.6 million related to severance payments; and $3.7 million related to the sale of the Romanian assets.
- Cash and cash equivalents, including restricted cash, totaled $18.5 million at September 30, 2015 compared to $17.7 million at December 31, 2014.
(1) Operating netback is a non-GAAP measure defined as revenue less third party entitlement and operating expenses, and is used to analyze operating performance.
(2) FFFO is a Non-GAAP measure defined as net income (loss) less adjustments for non-cash items (See consolidated statement of cash flows in the Company's unaudited condensed interim consolidated financial statements for the three month period ending September 30, 2015 and 2014) and is used to analyze operating performance.
Production at the Breagh field continued through the third quarter with high facilities uptimes and continued strong production. Third quarter average daily sales production rates were 107 million standard cubic feet per day (“MMscf/d”) gross, net 32.1 MMscf/d to Sterling. Condensate production during the quarter averaged 400 barrels per day gross, 120 barrels per day net to Sterling.
Preparatory work for the planned infill drilling campaign, anticipated to commence in the first quarter of 2016, continued throughout the third quarter. Main activities include tendering for a drilling rig and associated services, and procurement of long lead items for the planned activities. Engineering work and project planning for the onshore compression project also continued during the third quarter.
Processing of the newly acquired 3D seismic continued during the third quarter with time migration information delivered in June 2015 and final migration information expected prior to year-end. Phase 2 development planning continues to be on hold pending interpretation of this new 3D seismic information.
Average expected full field sales gas production for 2015 for Breagh is expected to be 101 MMscf/d (30.3 MMscf/d net to Sterling), close to previous guidance. In 2016 expected sales gas production is 100 MMscf/d for 100 percent of the field (30.0 MMscf/d net to Sterling), with the natural decline in production from existing wells being offset by the contribution from new wells during the year. Production uptime of 92 percent is assumed with no scheduled maintenance shutdowns planned for 2016 although a limited scope shutdown may occur in 2016 to permit compressor project tie-in works.
A further campaign of development drilling is expected from the Breagh Alpha platform starting in January 2016 with two to four new wells (A09-A12), of which the first two wells (A09 and A10) are currently budgeted with finalized well programs and cost estimates. In addition to the new wells, the operator DEA UK and Sterling are developing a program to re-enter and re-perforate the A04 well to improve well performance; to hydraulically frack production well A05; and to continue drilling on the Breagh Alpha platform with wells A11 and A12 following final interpretation of the 2014 3D survey. Phase 2 development planning continues to be on hold pending interpretation of this new 3D seismic information.
Front-end engineering and design work for onshore compression at the Teesside Gas Processing Plant commenced during July 2015 and is expected to lead to a final investment decision for the project late in 2015. The compression is expected to be operational in the second half of 2017 and could initially boost production rates by 40 to 50 percent.
The development cost for the remainder of Breagh Phase 1, reflecting the drilling and stimulation plans outlined above (with four new wells and two existing lower performance wells being re-entered, side-tracked and stimulated) together with onshore compression to be installed over 2015-2017, is $82 million net to the Company. This estimate is based on Sterling's view of remaining activity consistent with individual activity costings estimated by the operator from October 1, 2015 forward. On a cash basis the spending profile is expected by Sterling to be phased at $3 million during the fourth half of 2015, $47 million during 2016 and $32 million during 2017. Pre-sanction costs for Breagh Phase 2 are expected to amount to $2 million net to the Company in the fourth quarter of 2015.
During the third quarter, work at Cladhan advanced significantly with the completion of the subsea work program and the Tern platform shutdown works. Production is expected to commence late in November 2015, with completion of first oil critical work scopes and system commissioning, in parallel with pre-start up planning the only remaining outstanding items. The expected initial production rate from the field net to Sterling's 2 percent interest is approximately 300 barrels per day from the start of production in November for the remainder of 2015 and also as an annual average for 2016.
Riser pull-ins and umbilical installation were finished during the third quarter completing the interface between the Tern topsides facility and the newly installed Cladhan subsea infrastructure. In spite of this significant operational progress, as a consequence of low commodity prices and capital overruns, an impairment charge of $8.5 million has been recognized during the third quarter of 2015. Cumulative cash expenditure on the Cladhan development, resulting from costs arising on Sterling's 2 per cent interest above the level of a carry arrangement, was approximately $2 million up to September 30, 2015 with a further $1 million expected over the fourth quarter of 2015 and the first quarter of 2016.
During the third quarter, an economic evaluation of Block 21/30f containing the Belinda discovery for potential development and eventual tie-back to the nearby Triton FPSO was completed. As a consequence of the poor financial metrics indicated, Sterling has chosen to withdraw from the licence by the end of 2015. Shell UK has agreed to assume Sterling's 20 percent interest and any remaining liabilities with regard to the outstanding commitment well on the licence. As a result, an impairment of capitalized costs of $1.3 million has been recognized during the third quarter of 2015.
On blocks 42/2a, 42/3a, 42/4, 42/5 & 36/30 (Sterling 100 percent), which are located approximately 25 kilometres north of the Breagh gas field and contain the Darach and Ossian prospects, the Company is continuing a farm-down process for its interest during 2015 ahead of drilling a commitment well. The UK Oil & Gas Authority (“OGA”), as regulator, has agreed to extend the license expiry date to December 2018, by which time a commitment well needs to be drilled.
In August 2015 the OGA approved the relinquishment of block 49/18b containing the Nia prospect including a waiver for a contingent well. However, Sterling retains its 100 percent interest in block 49/19b containing the Niadar prospect, with the OGA extending the licence to December 2017 while Sterling pursues a farm-down process.
During late August Sterling completed the sale of its Romanian business to Carlyle International Energy Partners for headline consideration of $42.5 million. The sale includes licence blocks 13 Pelican, 15 Midia and 25 Luceafural, structured as a corporate sale of the company's wholly-owned subsidiary Midia Resources SRL and was initially announced on March 26, 2015. Concurrent with the Romanian sale, Sterling terminated the investment agreement with Gemini Oil & Gas Fund II, LP originally signed in 2007, with a payment of $10 million and the issuance to Gemini of 60,372,876 common shares with a market value of $7.5 million. The shares were issued pursuant to applicable prospectus exemptions and have a hold period which expires on December 27, 2015
Acquisition of 500 square kilometres of 3D seismic over the F17 and F18 blocks (Sterling 35 percent, operator) was completed in June of 2014. Processing was completed during September 2015 and inversion of the processed data commenced in early November with interpretation anticipated to be completed during the first quarter of 2016. The seismic was acquired to improve resolution of reservoir distribution and reduce structural uncertainty, to assist in evaluating new exploration potential in the area and to aid in the evaluation of development options such as a tieback to a potential Wintershall oil hub. Licence extensions have been granted to January 2017.
The 3D seismic survey for the E03 and F01 blocks in the Netherlands (Sterling 30 percent, non-operator), acquired during 2012 have been evaluated with little prospectivity recognized. A one-year extension was previously granted by the Ministry of Economic Affairs and by December 2015 the partnership will be required to make a drilling decision or relinquish the licence.
Preparations for the abandonment of the Grenade-3 well and recovery of the well site were completed during the fourth quarter of 2015, for minimal cost. Following these works, the extension application for the St. Laurent licence (Sterling 33.42 percent, non-operator) containing the Grenade discovery and the initial application for the Donzacq licence (Sterling 33.42 percent, non-operator) are expected to be withdrawn.
As the Company did not have sufficient liquidity to pay the amortization instalment due on October 30, 2015, holders of the UK subsidiary's senior secured bond (the “Bond”) were summoned to a meeting held on November 6th for the purpose of voting on certain amendments (the “Third Bond Amendments”) intended to provide Sterling with sufficient liquidity to the end of February 2016. These Third Bond Amendments include the deferral of the October 2015 instalment along with the deletion of the requirement to make a monthly transfer to the debt service retention account (“DSRA”) and a temporary reduction in the minimum UK liquidity, all of which the Company believes will be sufficient to ensure completion of a major transaction on or before February 29, 2016. As a result of the two instalments made to date, the outstanding bond amount is currently $180 million. As at September 30, 2015 the Company was in compliance with the terms of the bond.
Net proceeds from the Romanian Sale received in August 2015 of approximately $27.4 million (being gross proceeds less a cash payment to Gemini, transaction-related taxes and reimbursement to Sterling of allowable transaction fees already paid) were applied pursuant to the provisions set out in the second bond amendments. $24.8 million of this amount was used to pay Bondholders the outstanding April 2015 instalment (together with 7.5 percent amortization premium and accrued interest) and the remaining $2.6 million was transferred to the DSRA and was used towards funding the interest payment made on October 30, 2015.
The deferral of the October 2015 instalment payment, the deletion of the requirement to make a monthly transfer to the DSRA and the temporary reduction in minimum UK liquidity provided for by the third bond amendments are in aggregate anticipated to provide necessary incremental liquidity which the Company believes will be sufficient to ensure it can complete a major transaction and achieve the targeted bond redemption by no later than February 29, 2016.
“Sterling is working hard to achieve a full redemption of the Bond by the end of February 2016,” stated Jake Ulrich, Sterling's Chief Executive Officer. “We have been pursuing parallel processes of refinancing and a corporate sale, corporate merger or asset sale throughout 2015, with the assistance of financial advisers since the second quarter. We are making progress with all of these potential transactions and we are confident that we will be able to achieve the required Bond redemption,” added Mr. Ulrich.
Sterling Resources Ltd. is a Canadian-listed international oil and gas company headquartered in Calgary, Alberta with assets in the United Kingdom, 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. In particular, this news release contains forward-looking statements with respect to the implications of the implementation of the Third Bond Amendments on Sterling's financial position and Sterling's ability to sell or merge the company, or to refinance the Bond, and/or to complete an asset sale.
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.
SOURCE Sterling Resources Ltd.