Sterling Resources Announces Third Quarter Operating and Financial Results
Sterling Resources Ltd. (SLG.V)(“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 September 30, 2013. Unless otherwise noted all figures contained in this report are denominated in Canadian dollars.
For the three months ended September 30, 2013 the Company recorded net income of $4.5 million ( $0.01 per share) compared with a net loss of $10.0 million ( $0.04 per share) for the three months ended September 30, 2012 due to a year-over-year decrease in pre-licence costs attributable to lower activity levels, lower losses attributable to derivative financial instruments, a foreign exchange gain on the bond, all partially offset by one-time refinancing and strategic review costs. For the nine months ended September 30, 2013 the Company recorded a net loss of $24.4 million ( $0.08 per share) compared with a net loss of $24.7 million ( $0.11 per share) for the nine months ended September 30, 2012 .
During the third quarter of 2013 the Company recorded a foreign exchange gain of $10.4 million due to the weakening US dollar (in which the bond is denominated) relative to the UK pound (which is the Company’s UK functional currency), partially offset by US dollar bank balances. This foreign exchange gain offset losses incurred during the first half of 2013 which occurred due to the repayment of the UK pound denominated Credit Facility from the US dollar denominated bond as a result of the UK pound strengthening against the Canadian dollar. During the comparable period in 2012, a foreign exchange loss of $1.0 million was incurred due to the weakening of the US dollar relative to the UK pound.
For the nine months ended September 30, 2013 pre-licence and other exploration costs were $5.0 million a decrease of $7.5 million . Geographically $1.3 million (2012 – $4.6 million ) related to licences in the United Kingdom , $2.1 million (2012 – $5.8 million ) related to licences in Romania and $1.6 million (2012 – $2.0 million ) related to licences in the Netherlands and other international ventures.
The 2012 pre-licence levels were higher due to seismic acquired and expensed for UK licences 42/13b, 42/17, and 42/18, Block 27 Muridava in the Romanian Black Sea and the E3/F1 licences in the Netherlands . Employee expense and general and administrative expenditures charged to exploration licences and expensed as pre-licence costs were higher YTD in 2013 than 2012 due to the different mix of projects being worked on during 2013.
Cash and cash equivalents at September 30, 2013 were $47.6 million compared to $9.4 million as at December 31, 2012 . Restricted cash of $29.6 million ( $21.9 million as at December 31, 2012 ) was comprised of $19.1 million devoted to Breagh related expenditures and $10.4 million to cover the initial bond interest payment which was paid on October 30, 2013 . Net working capital was $60.0 million at September 30, 2013 significantly above the level at year-end 2012 due to debt refinancing activities, the reduction in Romanian drilling activity, and funds received from the issuance of equity, all of which was partially offset by funding for ongoing operational activity at Breagh.
The Company was pleased to finally announce that natural gas production commenced at the Breagh field in the UK Southern North Sea subsequent to the quarter end. Initial production at start-up on October 12 th was 97 million standard cubic feet per day (MMscf/d) with production coming from three wells. The fourth and fifth wells had been made available by early November and the sixth well should be available in December. The seventh well is now being drilled from the Ensco 70 jack-up rig located over the Breagh Alpha platform and should be available for production early in the second quarter of 2014.
Production has been temporarily shut in since November 8 th as a result of certain mechanical problems encountered at the inlet area of the onshore Teesside Gas Processing Plant, where gas from the Breagh field is processed. Intrusive work is required to rectify the issues. Remaining investigative work and known repair work should be completed by the middle of January 2014 .
The operator RWE DEA (UK) and Sterling continue to review the productivity of the Breagh wells and potential remedial actions to address the disappointing production tests of some of the development wells. An eighth well has been agreed by the partnership to be drilled from the Breagh Alpha platform. Drilling is expected to start once the rig returns from the shipyard during the 2nd quarter of 2014. Additionally, the partnership is evaluating the benefits of hydraulically stimulating several of the current wells and possibly the eighth well.
Prior to the production shut down on November 8 th, the field had produced on a total of 12 days since first gas on October 12 th at various rates while the field and TGPP operations were stabilised as part of start-up procedures. Provisional sales (net to Sterling) over this period were GBP 1.5 million ( $2.5 million ). Average production in 2014, including the contribution from the eighth well, is now expected to be approximately 129 million standard cubic feet per day (“MMscf/d”) (39 MMscf/d net to Sterling) with an exit rate at the end of 2014 of 114 MMscf/d (34 MMscf/d net to Sterling).
After discussions with the UK Department of Energy and Climate Change, a further extension to June 30, 2014 has been agreed for the submission of the Phase 2 field development plan. This will allow the partnership to optimise the further development of the field with a view to maximizing value.
In mid-October the first development well was spudded at the Cladhan field in the northern North Sea, utilizing the Transocean John Shaw drilling unit. This well will be drilled first as an appraisal well to the north of the field and then sidetracked to the development location as a water injector. The planned development at Cladhan, which is operated by TAQA Bratani, is for two subsea producer wells and the subsea water injector currently being drilled, all tied back 17 kilometres to the Tern platform also operated by TAQA. Work on the Tern platform has commenced with site preparation including the removal of existing redundant equipment to provide space for the new Cladhan processing equipment and flowlines. First oil production is expected to begin in early 2015. Pursuant to agreements with TAQA, Sterling’s share of development costs will be carried through two separate carry arrangements which are planned to result in a final working interest of 13.8 percent for the Company by the third quarter of 2015.
Preparatory work, including the site survey, was conducted for the drilling of an exploration well on the UK North Sea Beverley oil prospect on block 22/26c, however due to a lack of rig availability drilling of this well has been delayed until 2014. The Beverley well is expected to be fully carried under the terms of a farm-out agreement.
In Romania , non-operated drilling of an exploration well on the Muridava block is expected to commence around the end of November and may take up to two months to complete. Interpretation of the 2D-seismic that was shot over the Midia and Pelican blocks continues, as does preparation for the Luceafarul block 3D-seismic shoot in late November 2013. The 2012 drilling results from the Ioana and Eugenia exploration wells on the Midia and Pelican blocks continue to be reviewed and further 3D-seismic is planned to be acquired during 2014 based upon this analysis. Sterling continues to move forward to close the sale and purchase agreement with ExxonMobil and OMV Petrom for the sale of the 65 percent interest in a portion of block 15 Midia in the Romanian Black Sea which was originally announced in October 2012 . Closing of this sale requires the approval of the Romanian government which is actively being sought. The consideration payable to Sterling related to this transaction is US$29.25 million payable upon closing, with further contingent payments linked to future success on the portion of the block sold. The Company also intends to proceed with a sell-down of its equity interests in all of its Romanian Black Sea licences during 2014.
In the Netherlands , extensions have been granted on the F17 and F18 licences until August 2014 , with a further three year extension available if the joint venture commits before then to 3D-seismic over the area. Preparation work in anticipation of acquisition of this seismic has commenced.
“The third quarter saw a number of changes at Sterling including a transition of leadership and as a result the Board continues the search process for a new CEO,” stated Jake Ulrich , Sterling’s Chair and Interim CEO. “Operationally the Breagh start-up is a transformational event for the Company and although the plant is currently temporarily shut-in, we look forward to using Breagh’s cash flow in due course to accelerate value realization for shareholders. The Board is committed to moving forward judiciously with a capital plan that will maximize returns for Sterling’s shareholders,” added Mr. Ulrich.
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”.
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