22 March 2018
STERLING ENERGY PLC
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017
Sterling Energy plc is today issuing its preliminary results for the year ended 31 December 2017.
OVERVIEW
Sterling Energy plc ('Sterling' or the 'Company'), together with its subsidiary undertakings (the 'Group'), is an upstream oil and gas company listed on the AIM market of the London Stock Exchange. The Company is an experienced operator of international exploration and production licences, with a primary geographic focus on Africa and the Middle East. The Group has a high potential exploration asset in Somaliland and an active strategy to deliver shareholder value through disciplined, material exploration and production projects; leveraging the Company's experience, with an emphasis on securing near term cash flow generative opportunities.
2017 SUMMARY
Operations
· April 2017: Odewayne block, Somaliland; reduction in exposure to deferred consideration payments.
· September 2017: Odewayne block, Somaliland; 1,000km 2D seismic campaign completed.
· November 2017: C-10 block, Mauritania; exit (13.5% working interest).
· Production, net to the Company from the Chinguetti field (including royalty barrels), averaged 199 barrels of oil per day ('bopd') (2016: 279 bopd).
Corporate
· January 2017: Refreshed Board and non-executive Directors appointed.
· June 2017: Completion of capital restructuring.
· October 2017: Relocation to new office (forecasted ca. 60% cost savings).
· December 2017: CEO resignation. Eskil Jersing to remain in the post to effect an orderly handover. Departure date in Q2 2018.
Financial
· Adjusted Earnings before Interest, Tax, Depreciation, Amortisation and Exploration Expense ('EBITDAX') loss for the Group of $5.9 million (2016: $3.1 million loss).
· Cash resources net to the Group at 31 December 2017 of $81.4 million (2016: $88.1 million).
· The Group remains debt free and fully funded for all commitments.
· Ongoing focus on capital discipline, cash G&A expenses reduced by ca. 15% to $3.9 million and is forecast to be ca. 25% lower in 2018.
· Continued merger and acquisition ('M&A') mandate for transformational growth (asset and corporate options).
Post year end
· January 2018: Chinguetti, Mauritania; cessation of production ('CoP') and negotiated termination of the Funding Agreement.
For further information contact:
Sterling Energy plc +44 (0) 20 7405 4133
Eskil Jersing, Chief Executive Officer
Michael Kroupeev, Chairman
Peel Hunt LLP +44 20 7418 8900
Richard Crichton
Ross Allister
www.sterlingenergyplc.com Ticker Symbol: SEY
CHAIRMAN'S STATEMENT
Though 2017 was a year of partial oil price recovery, the question remains if this is a sign of reduced volatility and that the global oil market is finally finding its supply-demand balance.
Since 2014, a prolonged period of volatility has led to junior natural resource companies facing operational challenges and restricting their access to capital markets. We successfully navigated through this period without significant losses in our core values, and given the markets were still unsupportive, we managed to reduce our exposure to mid-term exploration. In 2017, we implemented our strategy of exiting from the Mauritanian C-10 block at low cost and also reduced our position in the Somaliland Odewayne block.
Oil production from the Chinguetti field ceased at the end of the year. Following a negotiated Deed of Termination settlement in January 2018, we are no longer exposed to this asset and the potential for escalating costs and project scope creep.
Following a period of instability in the oil market, many large portfolios of assets have been available for reorganisation and divestment. Numerous technically sound and material upstream opportunities have come to the market and were pursued by our team during 2017. No deals were concluded in the year, although due diligence is ongoing on a number of opportunities.
Financial
In 2017, business costs were further reduced by continued rationalisation of our structure and overheads. The Group had cash resources of $81.4 million at the end of 2017 (prior to the Chinguetti Funding Agreement termination settlement) and we remain free of debt with our work programme for 2018 fully funded.
Board and changes
In December 2017, Eskil Jersing elected to accept another appointment and resigned from the CEO role. The Board is currently reviewing options to further optimise the governance of the Company and will make appointments in due course. We would like to thank Eskil for his excellent contribution and achievements during his CEO tenure.
Outlook for 2018 and beyond
The outlook for 2018 to 2019 is positive. The Company is now in a good shape to pursue real time opportunities in our regions of focus and with strong expertise. Should market conditions worsen, we will preserve our capabilities and strengths, accordingly.
I would like to thank all our stakeholders for their continuing support and all of our management and staff for their diligent efforts during 2017.
Michael Kroupeev - Chairman
CEO'S STATEMENT
Market Landscape
The previous year has seen oil prices move within a relatively narrow band between $52 and $60. This period of price stability has allowed for better Upstream sector planning and more efficient project execution. This is in part due to OPEC and non OPEC members, led by Russia, agreeing to continue production cuts through into 2018.
The Oil and Gas industry continues on its slow recovery which though prolonged, will likely persist in constraining oil prices. This assumes ongoing compliance with OPEC led global production targets and recognises uncertainty around the likelihood of US shale oil production growth in the second half of 2018. As a result, market conditions remain somewhat strained as Companies seek greater returns on upstream investments amid capital markets being highly selective in their funding appetite for the E&P sector.
Shareholder alignment and Strategy
The Board, led by the major shareholder, Michael Kroupeev, has continued on the 2016 strategic mandate of repositioning the Company to execute on M&A led material cash flow generating asset(s) or Corporate solutions to the shareholders. In parallel, the overarching focus for management has been on continued cash preservation and reduction of outstanding asset liability exposure, in particular with respect to the Chinguetti oil field abandonment and decommissioning ('A&D') project.
Through early 2018 we have delivered on those initiatives, bar executing on a material M&A transaction. As a result, Sterling retains a unique position in the AIM listed E&P sector, with a strong cash platform of $48.8 million (post Chinguetti Deed of Termination as at 31 January 2018), lower G&A cost base and no liabilities, from which to leverage material growth.
Operations
The Group has had a Funding and Royalty Agreement based economic interest in the offshore Chinguetti oil field in Mauritania. The joint venture ('JV') participants, led by the Operator, Petronas, worked towards CoP at the end of 2017, through a safe, compliant and cost effective A&D project plan.
Given the corporate strategy and significant exposure to potentially major A&D operational risk and cost overruns, Sterling agreed to terminate the Funding Agreement on Chinguetti in January 2018 for $32.6 million. This was the culmination of almost two years of negotiations and persistence. The crystallisation of this liability exposure has cleaned up our balance sheet and allows for significantly improved optionality on the Company's strategic mandate.
On the C-10 block in Mauritania; in November 2017, we undertook a disciplined exit given the low likelihood of commercial hub-class risked potential. This was based on an extensive subsurface evaluation undertaken over the last two years. Subsequently, a penalty payment of $1.1 million for not fulfilling the minimum work obligations has been made to the Government as of March 2018.
With regards the Odewayne block in Somaliland; in April 2017, we reduced our overall cash exposure, by amending the farm-out agreement whilst still maintaining a material 34% working interest in the asset. Subsequently, we successfully and safely completed a ca. 1,000km regional 2D seismic acquisition program in Q3 2017 and will be trial line processing the data in house in Q1 2018.
Corporate
In June 2017 we completed a capital reduction reducing the nominal share value from 40 pence to 10 pence in order to eliminate our retained deficit, create distributable reserves, allow for the flexibility to make returns of capital to the shareholders and give the Company the option to issue new capital, should it be desirable to do so.
In October 2017, we moved to a smaller and more cost effective office space in Holborn and will see further G&A cost savings materialise into 2018.
Finally, I would like to truly thank the team at Sterling. They have my utmost respect and gratitude for their dedication and professionalism these last three years. It has been an honour to serve as your CEO leading the changed mandate. It is fitting that Sterling should embark on its next phase under new leadership, with a fresh and clean platform for growth. I wish my successor all the very best in steering the future progress of the Company to create shareholder value.
Eskil Jersing - Chief Executive Officer
OPERATIONS REVIEW
Since late 2015, the Company has continued with a strategic mandate of exiting non-core exploration portfolio assets and reducing outstanding liabilities, to provide a simpler and rejuvenated platform for M&A led growth. The Group's remaining African exploration focused Odewayne block provides fully carried exposure to a frontier basin that has the potential to deliver material hydrocarbon reserves.
SOMALILAND
Somaliland offers one of the last opportunities to target an undrilled onshore Mesozoic rift basin in Africa. The Odewayne block, with access to Berbera deepwater port less than a 100km to the north, is ideally located to explore this frontier basin. A 2D geophysical survey acquired in 2017, along with potential field data and legacy geological field studies help corroborate the presence of a sedimentary basin with further evidence for a working hydrocarbon system.
Odewayne (W.I. 34%) Exploration block
Overview
This large and unexplored frontier acreage position comprises an area of 22,840km2, the equivalent of ca. 100 UK North Sea blocks. Exploration activity prior to the 2017 regional 2D seismic acquisition program has been limited to the acquisition of airborne gravity and magnetic data and surface fieldwork studies, with no wells drilled on block.
The Odewayne production sharing agreement ('PSA') was awarded in 2005. It is in the Third Period, with a minimum work obligation of 500km of 2D seismic. The Third Period has been extended to 2 November 2019, through the 6th deed of amendment. The minimum work obligation during the optional Fourth Period of the PSA (also extended by 2 years to May 2020) is for 1,000km of 2D seismic and one exploration well.
The Company's wholly owned subsidiary, Sterling Energy (East Africa) Limited ('SE(EA)L'), holds a 34% working interest in the PSA. SE(EA)L originally acquired a 10% position from Petrosoma Limited ('Petrosoma') in November 2013 and an additional 30% from Jacka Resources Somaliland Limited ('Jacka') in two transactions during 2014.
In April 2017, the Company agreed to revised farm-out terms to reduce the staged contingent consideration payments due to Petrosoma and reduce SE(EA)L's interest in the Odewayne asset by 6%. The farm-out agreement was amended such that the parties cancelled the $8.0 million contingent consideration in return for: (i) a payment by SE(EA)L to Petrosoma of $3.5 million; and (ii) a transfer from SE(EA)L to Petrosoma of a 6% interest in the PSA. Post Government of Somaliland approval, SE(EA)L holds a 34% interest in the Odewayne Block, fully carried by Genel Energy Somaliland Limited ('Genel Energy') for its share of the costs of all exploration activities during the Third and Fourth Periods of the PSA.
In June 2017, the Somali Government (Ministry of Energy and Minerals) contracted BGP (Geophysical contractor) to undertake a 1,000km (full fold, 1,076km surface) 10km by 10km, 2D seismic campaign, to both satisfy and exceed the 500km minimum work program for the current Third Period. This acquisition program was undertaken over the basinal areas identified from the potential fields (gravity and magnetic) legacy data. The three month program was completed in late August 2017, safely and on time, with the second 500km recorded at an average of 14.5km per day.
Outlook
As of November 2017, Sterling undertook an integrated geological review of the basic post stack processed 2D dataset provided by the Operator Genel Energy. Following encouraging technical indications, the Company will undertake a highly focused and rigorous processing effort, independent of the Operator. The first phase deliverables will be a full pre stack time migrated dataset, consisting of 3 lines of ca. 235km. The primary technical objective will be improving the deeper subsurface image. Should this be successful, a second phase of processing will be undertaken on the remaining 765km (13 lines) of data. This workflow will allow for an informed technical and commercial perspective on the block by end Q2 2018.