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STERLING RESOURCES ANNOUNCES THIRD QUARTER OPERATING AND FINANCIAL RESULTS
Calgary, Alberta, Canada, November 6, 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.
Operational Update
United Kingdom
We are pleased to announce that the Breagh field came back into production on October 31, 2014 with eight wells on-line, including well A08 which has been fully hooked-up and commissioned. This follows a two-week shutdown for certain vessel inspections and minor modifications at the Teesside Gas Processing Plant ("TGPP"). Wells are still being opened up and TGPP operations are being stabilized following a cold start-up of both plant and platform; we have already achieved a production rate of 153 million cubic feet of gas per day ("MMscf/d") of sales gas and expect an average rate of around 150 MMscf/d for the month of November. During the shut-down period we were also able to accelerate hook-up of the recently drilled and hydraulically-stimulated A08 well, which has contributed to this higher level of production. Prior to the shutdown, we were also pleased to see much more consistent production at the Breagh field in the UK North Sea, achieving a production uptime of 96 percent during the period from early August (when well A07 came on-stream) up until mid-October.
As announced previously in the news release of October 27, 2014, Sterling expects sales gas production for the final quarter of 2014 to average 122 MMscf/d for the whole field (36 MMscf/d net to Sterling), with a 2014 year-end exit rate of 145 MMscf/d (43 MMscf/d net to Sterling). During 2015 whole field sales gas production is expected to average 112 MMscf/d (33 MMscf/d net to Sterling) with a 2015 exit rate of 117 MMscf/d (35 MMscf/d net to Sterling). Sterling expects full year 2014 sales gas production for the full field to average 87 MMscf/d (26 MMscf/d net to Sterling). In addition to gas production, condensate is being produced at an average condensate-gas ratio of 3.3 barrels per MMscf.
We are pleased to see much more consistent production at the Breagh field in the UK North Sea over the past few months, achieving a production uptime of 96 percent during the period from early August (when well A07 came on-stream) up until mid-October. With wells A01 through A07 on-stream, Breagh had been producing at approximately 113 MMscf/d prior to the field shutdown in mid-October for an unscheduled inspection of the condensate stabilization system at the TGPP, which was completed on October 31, 2014.
In early October we announced the successful fracture stimulation and production testing of Breagh well A08. After several days of flowing the well to clean it up, the well was production tested at a stabilized rate which should correspond to 42 MMscf/d of sales gas (100 percent) at the planned initial operating conditions of the well. The well came on-line on November 1, 2014, after bringing the field back into production on October 31, 2014 following successful inspections and modifications to certain vessels at TGPP.
Following completion of the final well A08 operations, the ENSCO 70 jack-up drilling rig is now moving to the Crosgan appraisal location in Block 42/15, some 25 kilometres northeast of Breagh. The appraisal well at Crosgan (Block 42/15a, Sterling 30 percent) is expected to spud during early November, with the cash cost of the well split between the fourth quarter of 2014 and the first quarter of 2015.
With the insights gained from the successful hydraulic stimulations at A07 and A08, Sterling and the Breagh operator are progressing plans to drill up to four additional wells (12 wells in total) from the Breagh Alpha platform. This program will be subject to well planning and analysis of the 3D seismic acquired earlier in 2014, the preliminary interpretation of which is expected to be available in the first quarter of 2015, and assumes hydraulic stimulation of all wells. Wells A09 and A10 are expected to be drilled in the latter half of 2015 with wells A11 and A12 planned for 2016. This program will also include the sidetrack and hydraulic stimulation of one or two of the existing lower performing wells.
At the Cladhan field in the Northern North Sea the first production well (P1) has been drilled and completed, encountering more and higher quality sands than expected. In addition the water injection well (W1) has been drilled and encountered the high quality down-dip reservoir sands evident from the 210/29-4Y appraisal well drilled by Sterling during 2010. With these two wells drilled the producer/injector pairing in the Cladhan main channel area is complete. The Transocean 'John Shaw' semi-submersible drilling rig will be relocated shortly to drill the second production well (P2), which has been suspended in order to use information from the W1 well to optimize the P2 down-hole location.
Initial production from Cladhan is now expected during the third quarter of 2015 with the slippage from the second quarter attributable to changes in the subsea work scope and the decision to defer work until the spring of 2015 to avoid the potential impact of winter weather. Current project cost forecasts indicate an increase of 12 percent from the original budget and pay-out of the second (2013) carry is now expected during the third quarter of 2016 based on the forward oil price curve. Sterling's equity interest is therefore anticipated to remain at 2.0 percent through 2015, rising to 13.8 percent after pay-out of the second carry. Development costs at the 2.0 percent interest level are expected to exceed the available funding from the first (2012) TAQA carry by approximately $2 million.
Operatorship of the licence containing the Beverley oil prospect (UK North Sea Block 22/26c) and the Evelyn and Belinda (UKNS Block 21/30f) oil prospects has been transferred to Shell UK Ltd as part of a farm-in arrangement. During 2015-2016 a well is planned for this area with the cost of this well largely covered by a carry arrangement.
The Company has launched farm-down processes for a UK North Sea licence near the existing UK Brigantine gas field containing the Rotliegendes Niadar prospect and another licence located approximately 25 kilometres north of the Breagh gas field containing the Carboniferous Darach and Permian reef Ossian prospects. Commitment wells could be drilled on these blocks in 2016 and 2015 respectively, but are not required to be drilled until early the following year in each case.
Romania
In Romania, the equity sell-down process on Sterling's Luceafarul, Muridava, Midia and Pelican Blocks is now underway. Sterling's only outstanding commitment exploration wells in Romania are one well on the Luceafarul block and two wells on the Muridava block (Sterling 50 percent and 40 percent respectively). All of these wells are now expected to be drilled in 2016 unless, as a result of our recently commenced equity reduction process, we achieve additional funding enabling us to accelerate one or more of these wells. Our estimated net exploration and appraisal costs for 2015 in Romania, the Netherlands and France, assuming a halving of current equity interests in all our Romanian licences and receipt of payment for half of our 3D seismic back costs over 2013-14, have consequently reduced from our previous guidance of $10 million (as provided in our news release of October 27, 2014) to $2 million.
Sterling Resources Ltd. 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 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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