Sterling Resources Announces Second Quarter Operating and Financial Results

CALGARY, Aug. 24, 2016 /CNW/ - 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 and the Netherlands, announces interim operating and financial results for the quarter ended June 30, 2016. Unless otherwise noted all figures contained in this report are denominated in US dollars.

Financial Highlights

• For the second quarter of 2016, the Company recorded a net loss of $9.1 million ($0.00 per share) compared with net income of $4.7 million ($0.01 per share) for the second quarter of 2015. For the six months ended June 30, 2016, the net loss was $26.8 million ($0.01 per share) compared with a net loss of $40 million ($0.11 per share) for the six months ended June 30, 2015. Total revenue for the second quarter of 2016 was $12.3 million, slightly lower than revenue of $12.5 million generated during the first quarter of the year.
• For the second quarter of 2016, operating netback was $8.9 million compared to $10.5 million for the second quarter of 2015. For the six months ended June 30, 2016, operating netback was $17.8 million compared to $28.1 million for the six months ended June 30, 2015.
• For the six months ended June 30, 2016, revenue from the Breagh gas field was $18.4 million derived from sales of a cumulative 4.1 billion cubic feet of gas at an average realized price of 30.6 pence per therm (approximately $4.39 per thousand cubic feet) plus condensate sales of 1519 tonnes (11,171 barrels) at an average price of $298 per tonne ($40.52 per barrel).). Breagh continues to maintain a solid production history with an average uptime in 2016 to-date of 91 percent and average daily gas sales of 75 million cubic feet per day ("MMscf/d") gross, net 22.5 MMscf/d to Sterling.  Target production guidance for full year 2016 remains at 71 MMscf/d for 100 percent of the field (21.3 MMscf/d net).
• For the six months ended June 30, 2015, Breagh revenue was $42.6 million from sales of 5.7 billion cubic feet of natural gas at an average realized price of 45.5 pence ($7.09 per thousand cubic feet) and 2610 tonnes of condensate (21,792 barrels) at an average price of $456 per tonne ($54.61 per barrel).
• During the second quarter of 2015, a deferred tax credit of $3.4 million was recognized compared to zero during the second quarter of 2016. For the first half of 2016, a foreign exchange loss of $4.0 million was recorded, mostly due to the strengthening of the US dollar relative to the UK pound which was partially offset by bank balances held in US currency. During the six-month period ended June 30, 2015, a foreign exchange gain of $3.1 million was recorded due to the weakening of the US dollar in the second quarter of 2015.   
• Employee expense and general and administrative expenses for the six months ended June 30, 2016 totaled $1.8 million and $0.7 million, respectively. Employee expenses during the first half of 2015 were $2.4 million with the reduction of $0.6 million largely as a result of lower non-cash share based compensation charges.   General and administrative costs declined $0.9 million compared to the same period in 2015, as a result of cost saving initiatives offset by lower recoveries and legal and professional advisor costs set against the recapitalization process. 
• Financing costs for the six-months ended June 30, 2016, were $16.9 million consisting primarily of borrowing costs of $11.2 million on the bond.  During the first six months of 2015, financing costs totaled $12.5 million with $3.4 million related to the Cladhan funding arrangement which was capitalized as a borrowing cost up to the commencement of production in mid-December 2015 when capitalization ceased and the interest was expensed. During the first half of 2016, $5.4 million of Cladhan funding arrangement interest was expensed.
• Non-recurring costs related to the refinancing and strategic review for the three-month period ended June 30, 2016, totaled $0.38 million. For the six-month period ended June 30, 2016, $5.1 million of non-recurring costs related to the refinancing and strategic review have been expensed.
• Cash and cash equivalents totaled $8.2 million as at June 30, 2016, compared to $10.9 million as at December 31, 2015.    
• Net working capital, defined as current assets less current liabilities excluding the Cladhan funding arrangements, stood at a surplus of $9.9 million as at June 30, 2016, and has improved due to the completion of the recapitalization which previously had been treated as a current liability. Both trade and other receivables and payables are at lower levels compared to December 31, 2015, due to lower activity.

On July 5, an annual general and special meeting of shareholders was held to consider a number of matters, including a resolution to consolidate the shares on a 100:1 basis. This resolution was approved and the shares traded on a post consolidation basis from July 7^th. A modified board of directors was also elected at the meeting composed of Jake Ulrich, Eleanor Barker, Gavin Wilson and Mark McComiskey. Incumbent directors James Coleman, Teck Soon Kong, Robert Carter and John Collenette did not seek re-election and the Company thanks them for their past service.

Effective from the date of the meeting, John Rapach, formerly Chief Operating Officer (COO), was appointed both Chief Executive Officer (CEO) and COO, with Jake Ulrich the former CEO named as Chair of the board of directors.

The Company Secretary, Sherry Cremer will depart from Sterling at the end of August 2016 along with other staff members. The Company thanks Mr. Ulrich for the significant efforts made over several very difficult years for Sterling and for achieving the successful recapitalization, and thanks Ms. Cremer for over 30 years of highly committed service from the very beginning of Sterling as a corporation.

Following completion of the recapitalization and these board and senior management changes, the Company has been implementing a number of further significant cost reduction initiatives consistent with a focus on maximizing net cash flow from the UK Breagh gas field. The Company has closed both the Calgary and London offices, and all the operational, commercial and financial functions of the Company will now be conducted from the Aberdeen office. By the end of the third quarter, it is expected that a staff reduction of 55 percent will have been achieved compared to the level at the end of the second quarter. As a result of these cost reduction initiatives, general and administrative costs (excluding costs associated with the now-completed strategic review, the recapitalization and employee termination costs) are expected to reduce by 50 percent to approximately $4 million on a full year gross basis (before allocations and recoveries).

Commenting on the Company's activities to date during 2016, John Rapach, Sterling's Chief Executive Officer stated, "Sterling has undergone a major transformation with the completion of the recapitalization process and we are now moving forward, better positioned to weather the ongoing low commodity price environment.  With the recapitalization completed, we have now launched a major cost reduction initiative which will result in the consolidation of most corporate functions into the Aberdeen office and significant staff reductions. I wish to take this opportunity to thank the many long-serving employees of Sterling who have already left or will be leaving the Company this summer."

"With the rescaling of the Company completed, we now intend to focus on the UK Breagh gas field and to a lesser extent on other key North Sea assets and the F17a and F18 oil discoveries in the Dutch North Sea," added Mr. Rapach.

Operational Update

United Kingdom

Breagh

During the first half of 2016, production averaged 75 MMscf/d gross, (22.5 MMscf/d net to Sterling) inclusive of a planned one-week period of full shutdown for maintenance during June. The second quarter average sales gas rates were 70 MMscf/d gross, net 21 MMscf/d to Sterling. Gross condensate sales for the second quarter averaged 240 barrels per day ("bbl/d"), net 72 bbl/d to Sterling. With the continued strong performance of Breagh, 2016 full year sales gas production forecast is maintained at previous guidance average of 71 MMscf/d for 100 percent of the field (21.3 MMscf/d net) due to the natural decline in production from existing wells. This forecast figure incorporates a production uptime factor of 92 percent.

The infill drilling campaign is now expected to commence during the second quarter of 2017 with activity for the campaign expected to ramp up during fourth quarter of 2016, ahead of this start date.  Front-end engineering and design work on onshore compression at the Teesside Gas Processing Plant ("TGPP") was completed at the end of February 2016 with documentation completed during the second quarter.  Sanction of the compression project is now expected in the first quarter of 2017, with the project moving straight into the detailed engineering stage and expected to come online at the end of the third quarter of 2018. Interpretation of the seismic volume commenced during the fourth quarter 2015 and continued throughout the first half of 2016, with an expectation of completion late in the third quarter of 2016.  

The anticipated infill drilling campaign of two new wells (A09 and A10) and the re-entry and hydraulic stimulation of one existing well to improve performance commencing during Q2 2017 remains unchanged from previous reporting.  Wells A11 and A12, and a further hydraulic stimulation of another existing well could follow on as part of the same drilling campaign. In addition, planning has commenced for a limited scope intervention on well A04 during Q3 2016 to restart this non-producing well.

Phase 2 development planning remains on hold to allow for the assimilation of results from the 3D seismic interpretation work, including reservoir characterization of the south-eastern areas of the field. With the current low UK gas price environment however, developing an economically viable incremental plan for Phase 2 is expected to be more challenging.

The development cost for the remainder of Breagh Phase 1, reflecting the drilling and stimulation plans outlined above (with two new wells and one existing lower performance well to be re-entered, side-tracked and stimulated) together with the onshore compression project to be installed over 2017-2018, is anticipated to be approximately $45 million net to the Company from July 1, 2016. These costs are based on Sterling's view of remaining activity which is consistent with individual activity costs estimated by the operator. On a cash basis, this is expected to be phased $2 million in the second half of 2016, $24 million in 2017, $18 million in 2018 and $1 million in 2019. Pre-sanction costs for Breagh Phase 2 are expected to be negligible through to the first quarter of 2017.

Cladhan

First production from the Cladhan development was achieved in mid-December 2015. Cladhan production averaged 7,319 barrels per day ("bbl/d") gross during the second quarter (146 bbl/d net to Sterling). An average production rate of 8,756 bbl/d (net 175 bbl/d to Sterling) was achieved during the first half of 2016. Average uptime has been 82 percent.

Production well P2 flow rate declined significantly during the period and was shut in around mid-July. Full year average production is now forecast to be 6,620 bbl/d gross (132.4 bbl/d net to Sterling) for 2016. This compares to previous guidance of 11,665 bbl/d gross (233 bbl/d net to Sterling).

Netherlands

In the Netherlands, Sterling continues to hold a 35 percent interest in Blocks F17a and F18 (Jurassic and Early Cretaceous horizons) containing three small oil discoveries. Adjacent to these discoveries, Wintershall continues to evaluate development options for the Rembrandt oil discovery. Sterling acquired 3D seismic during the second quarter of 2014 on a cost-sharing basis with Wintershall, in order for Sterling better to understand various development options for these discoveries.

Seismic processing was completed during September 2015 but the inversion of the processed data was postponed until initial interpretation was completed to allow a more focused area to be defined. The inversion work commenced in July 2016 and seismic mapping of key reservoir horizons continues. Licence extensions had previously been granted to January 2017 and in July 2016, a further extension has been granted to January 2021.

France

Letters requesting the withdrawals of the extension application for the St. Laurent licence (Sterling 33.42 percent, non-operator) containing the Grenade discovery and the initial application for the Donzacq licence (Sterling 33.42 percent, non-operator) have been submitted. Formal approval of the works on the abandonment and site restoration of the Grenade-3 well, conducted in the fourth quarter of 2015, are expected in November 2016.

Financial Update

During the quarter, Sterling successfully completed a major recapitalization of the Sterling Group with the result that the amount of debt has been reduced to a much more appropriate level and the Group has access to a new loan facility, should this be needed over the next few years. Following on from the recapitalization, a 100:1 consolidation of the Company's common shares was conducted shortly after the end of the quarter and a number of further cost-reduction initiatives are underway.  The overall effect of these changes is to leave Sterling in much better shape to cope with an ongoing low commodity price environment.

The recapitalization included several steps, which on a simplified basis were as follows: 

• A rights offering was made to shareholders at a price of approximately C$0.0154 per share resulting in the issuance of 84.7 million common shares; the proceeds of the offering were used to fund the release and cancellation of part of the liabilities associated with the bond issued by the Company's UK subsidiary (which amounted to $214 million in aggregate). 
• The Company issued 14.2 billion common shares to bondholders in exchange for the release and cancellation of all remaining bond liabilities other than $40 million of bond principal, which remains in place.
• The Company's UK subsidiary entered into an amended and restated bond agreement which inter alia lowered the annual interest coupon from 14 per cent to 9 per cent, extended the bond maturity by a year to April 30, 2020 and removed the redemption premium.
• Finally, simultaneously with the entry into the amended and restated bond agreement, the Company's UK subsidiary entered into a super senior credit facility ("SSRCF") of up to $40 million (in two $20 million tranches) which would be available to fund Breagh development expenditure and certain other costs.

As of June 30, 2016, the SSRCF balance was zero, and from the recapitalization closing date through to the date of this release the SSRCF has not been utilized.

Sterling Resources Ltd. is a Canadian-listed international oil and gas company whose registered office is in Calgary, Alberta with assets in the United Kingdom 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.

Filer Profile No. 00002072

Forward-Looking Statements

All statements included in this news release that address activities, events or developments that Sterling expects, believes or anticipates will or may occur in the future are forward-looking statements.  In particular, this news release contains forward-looking statements with respect to expected future development activity, hydrocarbon production, seismic interpretation, capital expenditures, availability of finance, and reductions in staff numbers and in general and administrative costs.  

These forward-looking statements involve numerous assumptions made by Sterling based on its experience, perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances.  In addition, these statements involve substantial known and unknown risks and uncertainties that contribute to the possibility that the predictions, forecasts, projections and other-forward looking statements will prove inaccurate, certain of which are beyond Sterling's control, including: the impact of general economic conditions in the areas in which Sterling operates, civil unrest, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility and obtaining required approvals of regulatory authorities. In addition, there are risks and uncertainties associated with oil and gas operations.  Readers should also carefully consider the matters discussed under the heading "Risk Factors" in the Company's Annual Information Form.

Undue reliance should not be placed on these forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.  Sterling's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements.  These statements speak only as of the date of the news release. Sterling does not intend and does not assume any obligation to update these forward-looking statements except as required by law.

Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available.  Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than for which it is disclosed herein.

SOURCE Sterling Resources Ltd.

For further information: visit www.sterling-resources.com or contact: John Rapach, Chief Executive Officer, Phone: [phone], [email protected]; David Blewden, Chief Financial Officer, Phone: [phone], [email protected]; George Kesteven, Manager, Corporate and Investor Relations, Mobile: [phone], [email protected]