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Sterling Resources Cladhan Project Seeing First Oil in Q3
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Sterling Resources Ltd. 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 March 31, 2015.
During the first quarter Sterling announced the sale of the assets in the Romanian Black Sea for cash consideration of $42.5 million with the transaction expected to close around the end of June.
Concurrently Sterling will terminate an investment agreement with Gemini Oil & Gas Fund II (Gemini) signed in 2007 under the terms of which the drilling costs of the successful Ana well on the Midia block were funded. Sterling will make a termination payment of $10 million cash and will issue $7.5 million of common shares to Gemini. (60,372,876 common shares at CAD $0.157, the ten-day volume-weighted average price for the period ended March 24, 2015). Net of the cash payment to Gemini, Sterling will receive $32.5 million from the sale of the Romanian assets prior to any Romanian tax liabilities.
Sterling had insufficient cash to meet a required amortization instalment due to bondholders on April 30, 2015. Accordingly, on April 23, Sterling summoned a meeting of the bondholders to request approval of further amendments to the bond agreement. At the bondholder meeting on May 8, 2015, holders of approximately 99 percent of bonds approved the amendments, which are expected to provide the necessary incremental liquidity to ensure the Company is properly funded through to October 28, 2015.
Jake Ulrich, Sterling's Chief Executive Officer stated: "The amendments to the bondholder agreement are designed to provide the Company with sufficient liquidity for the next six months to permit the completion of the initiatives currently underway to find a long term solution to our financial challenges. We are continuing our efforts to sell or merge the Company, to refinance the bond, possibly in conjunction with selling a portion of Breagh. We will continue to work diligently to pursue these initiatives over the next six months for the benefit of all stakeholders."
Financial Highlights
- For the three months ended March 31, 2015 the Company recorded a net loss of $44.5 million ($0.12 per share). Despite a material operating netback, the net loss arose principally as a result of the Breagh depletion charge, Crosgan appraisal costs, a deferred tax debit, and a foreign exchange loss as described below.
- Pre-licence and other exploration costs during the first quarter of 2015 were $6.4 million. Of this total cost, the largest element was $5.2 million related to licences in the UK (principally Crosgan well costs).
- Cash and cash equivalents totaled $17.6 million at March 31, 2015 compared to $17.7 million at December 31, 2014. The Company's net working capital deficit stood at $36.5 million at March 31, 2015 compared to $30.0 million at December 31, 2014.
Operational Update
United Kingdom
Steady production from Breagh has been achieved throughout the first quarter of 2015 at average rates of 125.7 million standard cubic feet per day (MMscf/d") gross (net 37.7 MMscf/d to Sterling) and at uptimes averaging 95.8 percent for the period. Operational performance has been good across the Breagh system with known issues being managed effectively and a stable operating regime fully established. Condensate production during the period averaged 0.48 thousand barrels per day ("Mbbls/d") (0.14 Mbbls/d net to Sterling).
Preparatory work for the planned infill drilling campaign, anticipated to commence in late 2015, continued throughout the first quarter. Main activities include preparation of rig tender documentation and procurement of long lead items for the planned activities. Early stage engineering work for the planned onshore compression project to be installed over 2015-2017 also continued during the first quarter with expected sanction now mid-year 2015. Processing of the newly acquired 3D seismic continued during the first quarter with delivery of the first package of information expected end May 2015. Breagh Phase 2 development planning continues to be on hold pending interpretation of this new 3D seismic information.
The remaining development cost for the remainder of Breagh Phase 1, reflecting the drilling and stimulation of four new wells and sidetrack and stimulation of two existing lower performance wells together with onshore compression, is $123 million net to the Company from April 1, 2015 based on estimates by the Company's reserves evaluator RPS. Based on an adjusted phasing made by Sterling management to reflect latest expected well timings, and prepared on a cash basis, this includes $7 million net in the last three quarters of 2015 and $65 million in 2016. Pre-sanction costs for Breagh Phase 2 are expected to amount to $3 million net to the Company in the last three quarters of 2015.
The Cladhan development drilling program was completed during the period and the John Shaw rig was demobilized. Topsides modifications work at the Tern platform in preparation to receive Cladhan production continued during the period. This included achievement of the significant milestone regarding preparatory works to enable commencement of the riser pull-ins at Tern, which are now on schedule to complete in June. First oil from Cladhan is forecast at the end of the third quarter of 2015 with most significant remaining works being completion of riser pull-ins, hook up of subsea equipment and commissioning. All remaining subsea workscopes now all fall within the summer construction window for work in the North Sea. The total development cost of Cladhan has increased and post carry arrangements with TAQA, Sterling's exposure to the cash funding of remaining development costs from April 1, 2015 is approximately $4 million, incurred in the last three quarters of 2015.
During February 2015 a well on the Crosgan prospect was drilled reaching a total depth of 8,401 feet measured depth encountering gas bearing sands in the Carboniferous Yoredale formation. However, the gas bearing sands were thinner and deeper than anticipated and the well was plugged and abandoned. Recognition of the impairment attributable to Crosgan was recognized at December 31, 2014.
Efforts continue to farm-out the licence blocks containing the Ossian/Darach and Niadar prospects where Sterling has a 100 percent interest. Terms for the licence block containing the Lochran prospect have been amended to reflect a new drill or drop work program, with a one year licence extension granted until January 2016; the expectation is that the well commitment will not be pursued and the remaining area of the licence will be surrendered prior to this date. Technical evaluation continues on the licence block containing the Belinda and Evelyn discoveries with plans for drilling or development required to be agreed with the regulator by November 2015, otherwise the licence would need to be relinquished.
Netherlands
Acquisition of 500 square kilometres of 3D seismic over the F17 and F18 blocks (Sterling 35 percent, operator) was completed in June of 2014. Processing is expected to be completed by the middle of 2015 and interpretation is expected to be completed by the end of 2015. The seismic was acquired over the oil discoveries and prospects in the Jurassic and Early Cretaceous horizons, to improve resolution of reservoir distribution and reduce structural uncertainty, to assist in evaluating new exploration potential in the area and to aid in the evaluation of development options such as a tieback to a potential Wintershall oil hub. Licence extensions have been granted to January 2017.
With regards to the E03 and F01 blocks in the Netherlands (Sterling 30 percent, non-operator), the 3D seismic survey acquired during 2012 has been processed and is currently being evaluated. A one-year extension has been granted by the Ministry of Economic Affairs and by December 2015 the partnership will be required to make a drilling decision or relinquish the licence.
France
In France, an application to relinquish the Donzacq licence (Sterling 33.42 percent, non-operator) has been submitted as a result of no extension being received from the regulatory authority to the adjacent St. Laurent licence (Sterling 33.42 percent, non-operator). The partners to the St. Laurent licence retain an obligation to decommission the Grenade-3 well on the licence, for which the cost is expected to be minimal. In the Paris Basin, Sterling is seeking to withdraw applications for all of its three licences, covering nine blocks. As a result, Sterling has minimal business activity in France and expects to withdraw completely as soon as practicable The Company had no carrying value for any of the French licences.