April 19, 2016 - 10:52 AM EDT
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Sterling Resources Announces 2015 Operating and Financial Results and Reserves Disclosure

CALGARY, April 19, 2016 /CNW/ - Sterling Resources Ltd. (TSXV: SLG) ("Sterling" or the "Company"), an international oil and gas company with exploration, development and production assets in the United Kingdom and the Netherlands, is pleased to announce operating and financial results for the year ended December 31, 2015 and reserves as at December 31, 2015. Unless otherwise noted all figures contained in this release are denominated in US dollars.

Financial Summary

The net loss for the year ended December 31, 2015 was $206.9 million ($0.51 per common share) compared to net income of $111.0 million ($0.33 per common share) for the year ended December 31, 2014.  In 2015 the main factor driving the loss was the downward re-measurement of the deferred tax asset on the ground of lack of recoverability in the current low commodity price environment, whereas the net income in 2014 was mostly due to the recognition of a deferred tax asset and a gain on disposal relating to a licence carve-out transaction in Romania.  Highlights during the year were as follows:

  • Operating netback of $51.8 million came from $76.6 million of revenue less $7.1 million of third party entitlement and $17.7 million of operating expenses ($9.12 per barrel of oil equivalent).
  • Revenue from the Breagh gas field during 2015 totaled $76.6 million, on sales gas production of approximately 11.3 billion cubic feet ("Bcf") at an average realized price of 43.6 pence per therm ($6.53 per thousand cubic feet), and sales of 5,237 tonnes of condensate (43,727 barrels) at an average price of £260 ($396) per tonne. Comparatively, during the year ended December 31, 2014 the Company recorded gas sales of 8.9 Bcf at an average realized price of $8.19 per thousand cubic feet and 3,260 tonnes of condensate at an average price of $701 per tonne.
  • Revaluation of the deferred tax asset has resulted in a debit of $126.8 million to net income during 2015, a recognition that recovery of part of this asset is unlikely given the ongoing weakness in commodity prices.
  • Impairment costs in the year amounted to $39.4 million. The Cladhan field development represented $38.1 million of the total, with impairment due to continuing low commodity prices and capital overruns. Of this $38.1 million, $22.6 million was offset by an equal and opposite gain of $22.6 million on the non-financial liability associated with the Cladhan funding arrangements. No impairment was attributable to Breagh. The balance of impairment costs were a result of exiting or reducing exposure to exploration, appraisal and early development stage assets that cannot easily be financed.
  • Financing costs totaled $25.5 million primarily attributable to borrowing costs of $24.2 million on the senior secured bond (ticker on Nordic ABM exchange STRE01 PRO) (the "Bond"). Interest expense of $8.0 million related to the Cladhan funding arrangement has been capitalized as a borrowing cost until the asset entered into production in mid-December 2015 at which time capitalization ceased and the interest cost started being expensed.
  • The Company incurred $20.6 million of one-time costs related to refinancing and strategic review which included (1) $15.3 million representing the amortization of fees related to the first, second and third sets of Bond amendments; (2) additional interest as a consequence of these amendments and various advisor fee costs; (3) $1.6 million related to severance payments; and (4) $3.7 million related to the sale of the Romanian business described above.
  • The Company recorded a foreign exchange loss of $11.1 million due to the strengthening of the US dollar (in which both the Bond issued by its UK subsidiary ("Sterling UK") and the Cladhan funding arrangements are denominated) against the UK pound (which is the functional currency for Sterling UK) partially offset by lower US dollar bank balances.
  • Net general and administrative expense totaled $2.8 million during 2015, compared to $3.8 million in 2014, as a result of cost saving initiatives which were partially offset by increased legal and professional fees and lower recoveries. Net employee expenses in 2015, after allocations and recoveries, were $4.4 million, down significantly from the $7.1 million incurred in 2014 largely as a result of a 40 percent reduction in the Company's UK workforce during the first quarter of 2015.
  • Cash and cash equivalents were $10.9 million at December 31, 2015 compared to $17.7 million at year-end 2014.

Operational Summary

At Breagh strong production performance continued through the second half of 2015 with high facilities uptimes and with production levels exceeding the Company's short term forecast. Full year average gross sales gas production was 102.5 million standard cubic feet per day ("MMscf/d") net 30.8 MMscf/d to Sterling. Gross condensate sales for 2015 averaged 400 barrels per day ("bbls/d"), net 120 bbls/d to Sterling.

Preparations continue for a future infill drilling campaign at Breagh including the tendering for a drilling rig and associated services, as well as procurement of long lead items. Engineering work and planning for the onshore compression project also continued during 2015.  Processing of the 3D seismic was completed during the fourth quarter of 2015 and interpretation of this data set was completed during the first quarter of 2016. 

During December 2015LetterOne Holdings S.A. completed the sale of its 70 percent interest in Breagh to Ineos Group SA and subsequent to closing, Ineos sought to defer the planned infill drilling campaign and the onshore compression project. The planned infill development drilling campaign from the Breagh Alpha platform has now been delayed, with the likely start date now in 2017. The anticipated drilling campaign comprises two new wells A09 and A10, as well as the re-entry and hydraulic stimulation of one existing well in order to improve performance. Wells A11 and A12, and a further hydraulic stimulation of another existing well, could follow on as part of the same drilling campaign.  Early stage planning for a limited scope intervention on well A04 during 2016 is also ongoing to re-instate production from this well, which is currently shut-in.

Engineering and design work for onshore compression work was completed during February 2016, with further work on this project now delayed until 2017.  With the deferral of the infill drilling campaign and onshore compression project, full year gross sales gas production is expected to average 69 MMscf/d  (20.7 MMscf/d net to Sterling) due to the natural decline in production from the existing wells. 

Production commenced at Cladhan in the UK North Sea in mid-December 2015 with initial rates from each of the two production wells in line with expectations. Stable production has been achieved and water injection initiated with gross production in mid-February of approximately 10,600 bbls/d, 210 bbls/d net to Sterling.

Efforts to reduce non-essential costs are ongoing and during the third quarter of 2015 several UK licence blocks containing the small Nia discovery (block 49/18a), the Beverley prospect (block 21/30f) and Blakeney discovery (Block 21/27b) were relinquished as they were deemed uneconomic.  As a consequence of the poor projected returns for a potential development of block 22/26c containing the Belinda discovery, Sterling has chosen to withdraw from the licence with Shell UK agreeing to assume the Company's obligations associated with its 20 percent interest. 

An appraisal well 42/15a-3 (block 42/10a and 42/15a, Sterling 30 percent interest, non-operator) was completed at Crosgan in February 2015 reaching a total measured depth of 8,401 feet encountering gas bearing sands. Unfortunately the sands were thinner and deeper than anticipated and the well was plugged and abandoned, thus $4,846,000 was expensed as exploration costs during the first quarter of 2015.

On blocks 42/3a, 42/4, 42/5 and 36/30 containing the Ossian and Darach prospects (Sterling 100 percent), which are located approximately 25 kilometres north of the Breagh gas field, the Company is continuing a farmdown process.  The UK Oil & Gas Authority has agreed to extend the expiry date for this licence to December 2018, by which time a commitment well needs to be drilled.  As part of the agreement, block 42/2a was relinquished from the licence.

The Company completed the sale of its Romanian business to Carlyle International Energy Partners for consideration of $42.5 million in August 2015. The sale included licence blocks 13 Pelican, 15 Midia and 25 Luceafural, structured as a corporate sale of Sterling's wholly-owned subsidiary Midia Resources SRL. Concurrent with the Romanian sale, Sterling terminated the investment agreement with Gemini originally signed in 2007, with a payment of $10 million and the issuance to Gemini of 60.4 million common shares.  The Company continues to be entitled to further contingent payments from the previous sale of its 65 percent interest in a portion of block 15 Midia which was originally announced in January 2014.

In the Netherlands, processing of the 3D seismic acquired during 2014 was completed in September 2015 for blocks F17 and F18, (Sterling 35 percent interest, operator). The 3D seismic was acquired to improve resolution of reservoir distribution and reduce structural uncertainty to aid in the development planning process which includes a tieback to a potential Wintershall oil hub. A licence extension has been granted to January 2017.  The 3D seismic acquired for the E03 and F01 blocks (Sterling 30 percent interest, non-operator) in the Netherlands in 2012 has now been evaluated showing little exploration potential. Although a one-year extension had been previously granted, in December 2015 the partnership received confirmation that an application to withdraw from the licence had been accepted.

During the fourth quarter of 2015, the abandonment and site recovery of the Grenade-3 well in France was completed at a minimal cost. Following the completion of this work, letters requesting the withdrawal of the licence extension application for the St. Laurent licence (Sterling 33.42 percent interest, non-operator) which contains the Grenade discovery and the initial licence application for the Donzacq licence (Sterling 33.42 percent interest, non-operator) have been submitted, which if accepted will see Sterling exit France.   

Reserves Summary

Sterling announces the filing of its annual Reserves disclosure pursuant to National Instrument 51-101 ("NI 51-101") dated April 14, 2016. 

Company Reserves Summary (Based on Forecast Prices and Costs)(1)



Company Share Gross and Net Oil

and Gas Reserves

as at December 31, 2015


Summary of Net Present Value

of Future Net Revenue

Before Income Tax(6)

as at December 31, 2015


Proved +

Proved +

Proved +

Probable +

Proved +

Probable +







Breagh (4)








Cladhan (5)








Company Total (7,8)









Estimates of Reserves and Future Net Revenue have been made assuming the development of each property in respect of which the estimate is made will occur, without regard to the likely availability to the Company of funding required for that development..


Possible Reserves are those additional reserves that are less certain to be recovered than Probable Reserves.  There is a 10 percent probability that the quantities actually recovered will equal or exceed the sum of Proved plus Probable plus Possible Reserves. In this instance the gross values are the same as the net values because the royalty is zero.


Boe figures may be misleading, particularly if used in isolation.  A boe conversion ratio of six (6) Mcf to one (1) bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.  Given that the volume ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.


Breagh Reserves are predominantly gas. 


Cladhan Reserves are predominantly oil


Discounted at 10 percent per annum.


Company Reserves totals are arithmetic aggregations of multiple estimates, which statistical principles indicate may be misleading as to volumes that may actually be recovered. Readers should give particular attention to the estimates of individual classes of Reserves and appreciate the differing probabilities of recovery associated with each class under a specific set of economic conditions:

•       At least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated Proved reserves (1P);

•       At least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated Proved plus Probable reserves (2P); and

•       At least a 10 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated Proved plus Probable plus Possible reserves (3P).


The estimates of Reserves and Future Net Revenue for individual properties may not reflect the same confidence level as estimates of Reserves and Future Net Revenue for all properties, due to the effects of aggregation.


The Company's current equity interest is 2.0 percent, but may revert to 13.8 percent upon repayment of a carry arrangement with TAQA.  The RPS forecast of currently expected market conditions indicates that the repayment of the carry is never expected to occur.


The Company's hydrocarbon reserves were independently evaluated by RPS Energy Canada Ltd. ("RPS") effective December 31, 2015 in accordance with the Canadian Oil and Gas Evaluation Handbook ("COGEH") reserves definitions and evaluation practices and procedures, as specified by NI 51-101.  There is no certainty that it will be commercially viable to produce any portion of the Reserves.  The evaluation uses the RPS forecast prices and costs as at December 31, 2015. 

Complete details regarding Sterling's reserves for the year ended December 31, 2015 and in a format specified by NI 51-101 can be found on SEDAR at www.sedar.com or on the Company's website www.sterling-resources.com.

Executive summaries of the reserves and resources reports for the Breagh and Cladhan fields in the UK North Sea as at December 31, 2015 prepared by RPS are planned to be filed on SEDAR and made available on the Company's website www.sterling-resources.com within the next several days. 

Financial Update

During the year, the Company negotiated the second and third sets of bond amendments. The third set of bond amendments, agreed in November 2015, required the Company to complete an asset sale, corporate sale or merger which would fully redeem the bond by the end of February 2016.  However, despite a continuation of the intensive efforts which had commenced in 2014, such a transaction proved to be elusive and as a result the Company received a series of further waivers and bond amendments while it negotiated a recapitalization with bondholders. The Company and Sterling UK entered into a recapitalization agreement with the bond trustee on March 11, 2016 under the terms of which the Company will first launch a rights offering for gross proceeds of up to approximately $174 million, any proceeds of which will be used to repay bond liabilities (comprising bond principal, redemption premium, and accrued but unpaid interest and amendment fees; together "Bond Liabilities"). The final prospectus for the rights offering is expected to be filed around April 20, 2016.  Assuming the prospectus is filed on April 20, 2016, the Rights Offering will be open until May 19 and is expected to close on or about May 27, 2016. On that expected closing date, the Bond Liabilities would amount to approximately $214.1 million. The Company filed a preliminary short form prospectus in relation to the Rights Offering on March 21, 2016.

In the event that no existing shareholders exercise their subscription rights in the rights offering, bondholders would own 97 percent of the issued and outstanding common shares of the Company post completion of the recapitalization as the bondholders will exchange all but approximately $40 million of their remaining Bond liabilities for common shares (leaving approximately $40 million of remaining Bonds). In addition, standby funding of up to $40 million will be provided upon completion of the transactions contemplated by the recapitalization agreement in the form of a super senior credit facility (in two $20 million tranches) to be provided by two of the existing bondholders or their affiliates.  Shareholder approval will be sought as soon as practicable after completion of the rights offering and recapitalization to approve the creation of any control persons created by the recapitalization and for a material consolidation of the Company's common shares.

There was a numerical error in the March 11, 2016 news release in the section headed "Financial Update".  In the table, the projected closing group cash at the end of Q3 2018 should be $6 million and at the end of Q4 2018, $5 million (with both numbers being positive).  Minus signs had inadvertently been inserted during the drafting process.  While this shows the minimum group cash balance should not drop below $5 million, the Super Senior Facility can be utilized to meet any cash deficit arising from hedging premia, lower than expected operating cash flow or higher than expected costs while satisfying the requirement for a minimum cash balance of $5 million at all times.

CEO's Commentary

"Although Breagh has had strong production performance in 2015, the year has proved to be another difficult one for Sterling.  During 2015 we focused on managing the burden of the Company's Bond debt and seeking a financing or M&A transaction that would improve the Company's financial position.  Despite intensive efforts such a transaction proved to be elusive and post the year end we announced a fundamental recapitalization of the Sterling group which we believe is in the best interests of all stakeholders.  The reduction in the remaining Bond liability to $40 million and ability to access up to $40 million of additional funding are expected to transform the Company's financial health, which should allow us to maximize the economic potential of Breagh and weather the low gas price environment," stated Jake Ulrich, Sterling's Chief Executive Officer.  "We will continue to pursue M&A opportunities and will be better equipped to do so from a stronger financial position. Shareholders will benefit from the substantial debt reduction and removal of the significant financing overhang which has negatively impacted us for several years," added Mr. Ulrich.

Sterling Resources is a Canadian-listed international oil and gas company headquartered in Calgary, Alberta with assets in the United Kingdom 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

Forward-Looking Statements

All statements included in this news release that address activities, events or developments that Sterling expects, believes or anticipates will, should or may occur in the future are forward-looking statements.  In addition, statements relating to expected production, reserves, costs and valuation are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions that the reserves 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.

SOURCE Sterling Resources Ltd.

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Source: Equities.com News (April 19, 2016 - 10:52 AM EDT)

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