Exploration & Production | Finance & Investing | Debt | Capital Markets
Sterling Resources Selling Assets, Refinancing Bond
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Sterling Resources Ltd. has announced that its United Kingdom subsidiary Sterling Resources (UK) plc has summoned a meeting of holders of its US$225 million senior secured bond with current outstanding amount of US$202.5 million, to be held on December 12, 2014.
The purpose of the Bondholder Meeting is to allow Bondholders to vote on certain amendments to the Bond agreement dated May 2, 2013, with the intention of strengthening the Group's liquidity position for the next few months while it pursues a refinancing of the Bond, potentially in combination with one or more asset sales. In the preparation stage of summoning the Bondholder Meeting, Sterling discussed the proposed Bond Amendments with many of its largest Bondholders and has received support from holders of a majority of the Bonds for these Bond Amendments.
As previously announced over the past year, the Group's net cash flow from its main asset, the Breagh gas field, has been adversely impacted by a combination of delayed production start-up, the unexpected shutdowns of the Breagh field and onshore gas plant in late 2013 and early 2014, lower than expected aggregate production from the first six wells, lower than expected UK gas prices, and increased capital expenditures compared to the outlook when the Bond was issued in April 2013. Following the successful hydraulic stimulation of the Breagh A07 and A08 wells, Sterling is confident that the lower than expected production from Phase 1 of the Breagh development can be remedied by hydraulically stimulating new wells and by side-tracking and hydraulically stimulating some existing wells. This incremental work program for Phase 1 is expected to deliver attractive economic returns. Furthermore, gas prices have recovered significantly from the lows of the second and third quarters of 2014 and the forward curve for the next few years is at a broadly similar level to today's prices.
The principal benefit to the Group of the proposed Bond Amendments is a suspension of transfers of funds into a restricted account used for debt servicing obligations from November 30, 2014 until, but excluding, April 30, 2015. The aggregate amount due under the Bond on April 30, 2015 is to be paid into the DSRA on April 30, 2015.
Together, the Bond Amendments are anticipated to provide incremental liquidity, reaching an amount of $32.7 million immediately prior to the interest payment and amortization instalment payment (of the same amount) to be made on April 30, 2015. The Company believes this will be sufficient to address a currently anticipated cash deficit (below the level needed to satisfy the minimum liquidity covenant under the Bond Agreement of US$10 million) of approximately US$8 million as of December 31, 2014 and US$20 million at April 30, 2015, prior to the Bond Amendments. By April 30, 2015, Sterling is confident it will have either raised the funds to meet Sterling UK's payment to Bondholders as a result of asset sale(s) and/or by refinancing the Bond, most likely via a bank market reserves-based loan.
Operationally, Sterling is pleased to announce that Breagh sales gas production for the past two weeks has averaged 148 million cubic feet of sales gas per day (MMscf/d) for 100% of the field (44 MMscf/d net to Sterling).
Jake Ulrich, Chief Executive Officer of Sterling, said: "We believe the Bond Amendments will put the Group on a sound financial footing for the next few months. We are moving ahead with our previously announced plans to sell down assets in Romania. Additionally we are pursuing asset sales, including potentially a portion of Breagh, in the UK and a refinancing of our Bond in the bank market. When we have completed these intended transactions we believe the Group will be soundly financed for the foreseeable future, enabling us to consider other growth initiatives that will deliver value for shareholders while maintaining a significantly stronger balance sheet."