Sterling announces financial results for the quarter ended September 30, 2014
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 September 30, 2014. Unless otherwise noted, all figures contained in this report are denominated in US dollars.
For the three months ended September 30, 2014 the Company recorded a net loss of $2.3 million ($0.01 per share) compared with net income of $4.3 million ($0.01 per share) for the three months ended September 30, 2013. During the comparable quarter of 2013 the Company recorded a substantial one-time foreign exchange gain of approximately $10 million due to the weakening of the US dollar (in which the UK senior secured bond (the “Bond”) is denominated) against the UK pound (which is the functional currency for the UK).
For the nine months ended September 30, 2014 net income was $173.0 million ($0.53 per share) compared to a net loss of $24.0 million ($0.08 per share) for the nine months ended September 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 increasing production revenue from Breagh.
Revenue for the three months ended September 30, 2014 was $21.5 million representing an increase of $9.4 million from the previous quarter which had been impacted by several production shutdowns and lower summer gas prices. For the nine months ended September 30, 2014 revenue was $54.2 million as a result of sales of a cumulative 5.9 billion cubic feet of gas at an average realized price of 48.8 pence per therm (approximately $8.13 per thousand cubic feet) and 2,361 tonnes of condensate (43,500 barrels of oil equivalent) at an average price of £480 (approximately $798) 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 September 30, 2014 pre-licence and other exploration costs totaled $0.9 million down significantly from the $1.4 million incurred during the third quarter of 2013, reflecting lower exploration activity. During the first nine months of 2014 pre-licence and other exploration costs totaled $4.1 million compared to $4.8 million for the same period in 2013.
Geographically, $1.5 million ($1.3 million in 2013) related to licences in the United Kingdom, $0.9 million ($2.0 million in 2013) to Romania, and $1.7 million ($1.5 million) to the Netherlands and other international ventures.
Employee expense and general and administrative expenses for the nine months ended September 30, 2014 totaled $5.0 million and $2.3 million respectively, an increase of $136 thousand and $341 thousand respectively compared to the first nine months of 2013. Non-cash share based compensation for the first nine months of the year totaled $908 thousand compared to $831 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 nine months ended September 30, 2014 were $19.3 million which was primarily borrowing costs of $18.6 million, related to the Bond expensed from the date Breagh production commenced in October of 2013. During the comparable period in 2013 financing costs were $3.6 million which included $1.9 million related to the transaction costs on the bridging loan facility which were expensed following its repayment.
A foreign exchange loss of $2.2 million was incurred during the first nine months of 2014 due to the recent strengthening of the US dollar (in which the Bond is denominated) against the UK pound, the functional currency for the UK. The Company recorded a foreign exchange gain of $9.9 million during the comparable 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 $23.0 million at September 30, 2014 compared to $34.7 million at December 31, 2013. Restricted cash of $33.7 million at September 30, 2014 represent funds held in a retention account to be applied towards the Bond interest and amortization payments which were made as planned 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 Bond interest payment due on April 30, 2014.
The net working capital deficit was $7.1 million at September 30, 2014 compared to a net working capital surplus of $2.2 million as at December 31, 2013. At the end of October, the Bond was amortized down to $202.5 million using the funds in the retention account.
With the currently available cash and the anticipated cash flow generated from Breagh production (at recent forward curve gas prices averaging approximately 53 pence per therm (approximately $8.50 per thousand cubic feet) and the carry arrangements for Cladhan, the Company should have adequate liquidity to satisfy the requirements of the Bond agreement until late 2014. The Company continues with discussions to address the funding shortfall in late 2014 and to provide financing into the second quarter of 2015.
The Company faces a concentration of Breagh drilling capex and exploration and appraisal expenditures in the second half of 2015, by which time it is intended to have refinanced the Bond, possibly via a reserves based loan in the bank market which could be achieved in early 2015. It is anticipated that the recently commenced equity reduction process for the Romanian assets will result in upfront cash payments including payments for a share of certain past costs, however such receipts are unlikely to be received until around the end of Q1 2015. Sterling is also pursuing other asset sales in the UK including potentially a sale of part of Breagh.
“Sterling continues to move forward on its key asset and corporate initiatives including the optimization of the development at Breagh, monetizing a portion of the Romanian assets, and strengthening the group’s balance sheet. Although the Company continues to face ongoing financial challenges in this very capital constrained and volatile commodity price environment, we will continue to advance these initiatives that add value for investors,” stated Jake Ulrich, Sterling’s Chief Executive Officer. “Breagh production is now at the highest level yet achieved with eight wells on-line and the economics of drilling the remaining wells and the side tracks in Phase 1 are very attractive. In addition to the Romanian sell-down process we are pursuing other asset and corporate transactions, including potentially a sale of part of Breagh, in order to improve liquidity and accelerate the value creation process,” added Mr. Ulrich.
Full Release: Operational Update