2005 Preliminary Results
Sterling Energy PLC
24 April 2006
24 APRIL 2006
STERLING ENERGY PLC
2005 PRELIMINARY RESULTS
ANOTHER SUCCESSFUL YEAR AND GREAT OPTIMISM FOR 2006
Sterling Energy, the AIM listed (symbol: SEY) independent oil & gas exploration
and production company operating in the Gulf of Mexico and Africa, today
announces its 2005 Preliminary Results together with an update on progress and
outlook.
2005 HIGHLIGHTS
Financial
• Turnover increased by 19% to £13.6 million (2004: £11.5 million)
• Pre-tax profit up 47% to a record £6.1 million (2004: £4.2 million)
before one-off Perth office closure cost of £1.2 million
• Cash inflow from operations, before the one-off closure cost and
working capital movements, increased by 13% to £8.8 million (2004: £7.8
million),
Production and reserves
• Average attributable production increased 4% to 9.7 mmcfged
(2004: 9.3 mmcfged) despite the impact of several highly destructive
hurricanes in the Gulf of Mexico
• Realised prices up 12% at $6.37/mcfge (2004: $5.68/mcfge)
• Net year-end proven & probable reserves over 21 million boe, of
which 65% are in the proven category
Operational
• Major investment in the offshore Mauritania Chinguetti field
development continued with a further $65 million of cash invested by
Sterling in the year and a further investment of $50 million projected
in 2006. Local office opened
• Three drilling successes offshore Mauritania with a 6th appraisal well
on the 300+ million bbl Tiof (Oualata) field, an appraisal well
on the 50 million bbl gross Tevet discovery and a new 30 million bbl
gross discovery, Labeidna. All wells were drilled at no cost to Sterling
• Key farmout to Exxon-Mobil on Madagascar acreage with Sterling
remaining as operator: carried 30% interest through seismic and up to
four well drilling programme
• New interest offshore Gabon adjacent to existing licences
• Extreme weather conditions offshore USA curtailed work programme
• Farmout of heavy oil discoveries in AGC
2006 HIGHLIGHTS
Operational
• Chinguetti field production commenced on-time in late February
and first Sterling lifting took place in early April. Production levels
to the end of March averaged 59,000 bpd gross. The operators peak rate
target is of up to 75,000 bpd gross sometime in the second half
• Firm exploration well programme in Africa of at least 5 wells to
mid-2007, largely carried. An expansion of this drilling programme to
enhance reserve and production upside is anticipated
• Operator development proposals on 300 million bbl+ gross Tiof
(Oualata) and 50 million bbl gross Tevet discoveries anticipated
• Consolidation of management of the African operations to the UK
head-office completed
• Carried piston-coring completed and 4,000 km 2-D seismic
programme offshore Madagascar brought forward and now underway
• Success with Galveston Bay and Gryphon C-3 wells in the USA, now
brought onstream and expected to produce 2.2 mmcfged net
• Memorandum of Understanding for an exploration block signed with
Kurdistan Regional Government of Iraq and field studies commenced
• New licence, exploration, drilling, development and production
interests actively being sought to expand reserves and production upside
potential
Harry Wilson, Chief Executive of Sterling Energy Plc, said:
'We are very well positioned with a good mix of producing assets and exploration
prospects and are optimistic for Sterling's continued development. While we
will have a significant increase in cash flow in 2006, we will not overpay for
assets as our focus is firmly on creating shareholder value. The increase in
cash flow, coming from Chinguetti and the USA, puts Sterling in a very strong
position to effect a step-change in its activities and to leverage itself into
new opportunities. It is especially pleasing to have started work in Kurdistan,
a vastly under-explored area. In this fast-changing energy environment, Sterling
looks forward to meeting the challenges and is confident of continued growth.'
For further information contact:
Sterling Energy plc (+44 1582 462 121)
Harry Wilson, Chief Executive
Graeme Thomson, Finance Director
Citigate Dewe Rogerson (+44 207 628 9571)
Media enquiries: Martin Jackson / George Cazenove
Analyst enquiries: Nina Soon
www.sterlingenergyplc.com
Ticker Symbol: SEY
STERLING ENERGY PLC
2005 PRELIMINARY RESULTS
CHAIRMAN'S STATEMENT
It is my pleasure, once again, to report further progress and considerable
achievements by your Company in 2005. This growth has continued into 2006. In
late February, a major milestone was achieved by Sterling when first oil was
produced on-time from the Chinguetti oil field offshore Mauritania. The first
Sterling cargo was lifted in early April. Gross production to the end of March
averaged 59,000 bpd and is expected to increase towards the operator's peak rate
of 75,000 bpd sometime in the second half of 2006. Sterling has an economic
interest in the field of approximately 8% plus a production-based royalty. Taken
together, these interests will yield substantial cash flow and mark a
step-change in Sterling's development as a significant international explorer
and producer of oil and gas.
In 2005, revenues from the sale of oil and gas increased by 19% from £11.5
million to £13.6 million. Pre-tax earnings rose 47% to £6.1 million (2004: £4.2
million) before the one-off cost of £1.2 million for the Perth office closure.
Like all other Gulf of Mexico producers, Sterling was affected by possibly the
worst hurricane season in living memory, which caused widespread damage to
communities in the southern US states and severe disruption to the oil and gas
industry. Although there was minimal physical damage to our facilities, numerous
third party pipelines were shut in for safety reasons and our production was
restricted. I am pleased to say that the majority of our production was resumed
quickly and is now fully restored.
The commencement of production from our major investment in Mauritania is
expected to lead to a very substantial increase in Sterling's financial and
operational performance in 2006.
With the closure of the Perth office in January 2006, Sterling has consolidated
its African management activity in the UK. Cost and time savings are being
realised. There are dedicated teams for Mauritania, new ventures and exploration
activities now in place, with relevant support. After the hectic pace of growth
in recent years, the asset portfolio has been streamlined.
On the exploration front, highlights included:
• A successful farm-out of our offshore Madagascar licences to
Exxon-Mobil, retaining a 30% interest and remaining operator. Sterling is
carried through a substantial programme of seismic and other work, plus
the drilling of up to four exploration wells. The work programme has
already been accelerated with sea bottom piston-coring completed and the
acquisition of approximately 4,000 km of 2-D seismic now underway.
• Success with three carried wells offshore Mauritania, being;
- an appraisal well on the 300+ million bbl Tiof (Oualata) field;
- an appraisal well on the 50 million bbl gross Tevet field;
- a discovery well on the new 30 million bbl gross Labeidna field.
• Useful local and regional information was garnered from the
offshore Gabon well, on which we were largely carried. We have been
awarded an interest adjacent to our existing licences. Work continues to
firm-up new prospects for drilling in late 2006/7.
• Farmout on Dome Flore heavy oil interests was completed, with
Sterling keeping a 30% carried interest through certain studies and
appraisal activities.
• The US activity was hampered by the severe weather and its
effects, as well as exceptionally difficult and volatile equipment and
energy pricing markets. Highlights were the Galveston Bay 251-5 and
Gryphon C-3 wells, successfully drilled in early 2006 and now onstream,
increasing to a combined projected net rate of approximately 2.2 mmcfged.
Your Company, with its growing cash flow from its major investment programme
over the last 18 months, is looking to increase its exposure to 'high impact'
exploration activity. It is focused on adding further material exploration
opportunities to its portfolio, together with development and production
activities. As a first and important step, Sterling has recently signed a
Memorandum of Understanding ('MOU') with the Oil, Gas and Petrochemical
Establishment ('OGE') of the Kurdistan Regional Government of Iraq giving
exclusive rights to commence geological studies and to negotiate a Production
Sharing Contract ('PSC') for an exploration block. Sterling sees this as a
vastly under-explored region with great potential.
Financials improve again
The year 2005 was a year marked by ongoing achievement. Pre-tax profit rose 20%
to a record £5.0 million and cash inflow from operations (before the closure
cost noted above and working capital movements), was up 13% at £8.8 million.
During a period of heavy investment and in light of the prevailing operating
conditions, this was an excellent result.
We have not elected for the early adoption of International Financial Reporting
Standards ('IFRS') and accordingly the financial statements have been prepared
on a basis consistent with the prior periods.
Building the springboard
Sterling directly invested a further $65 million of cash in the Chinguetti
development in 2005. The expenditures to complete the field development work and
to commence production, continued into 2006, with up to a further $50 million
paid or currently budgeted. The successful start-up will transform Sterling's
production base and financial performance. I am very pleased that production
started on-time in late February 2006 and the major increase in cash flow from
this development will help to provide the impetus for future growth.
We anticipate development decisions on both the Tevet and Tiof (Oualata) fields.
This would further boost our cash flow potential through the production royalty,
at no cost to Sterling, and also, in the case of Tevet, through the sharing of
Chinguetti facilities. In addition, we may be able to repeat the mutually
beneficial funding arrangements of Chinguetti on these or other fields, in
Mauritania or elsewhere.
We were less fortunate with developments in the Gulf of Mexico, with the
industry having to cope with the devastation of possibly the worst hurricane
season in living memory. As well as production disruptions, development plans
were also seriously impeded by the scarcity and high costs of equipment, as well
as oil and gas price volatility. Exploration results were mixed, although some
notable successes were recently recorded, the latest being the 2006 exploration
wells on Galveston Bay ST251-5 and the Gryphon C-3 noted above.
Group proven and probable reserves were over 21 million boe at the end of the
year. The existing exploration projects have the required prospectivity to add
to these reserves materially, leaving aside any new projects with which Sterling
will be involved.
Over the next twelve months we expect to participate in a number of drilling and
other exploration activities, intended to increase our reserves at a time of
growing worldwide supply concerns. With wells in Gabon, Mauritania and the USA,
as well as piston-coring and seismic in Madagascar, and an emphasis on new
ventures, it will be a busy time.
Streamlined management
During the last year the staff have not only had to deal with day-to-day
matters, but also the consolidation of African management activities in the UK,
establishing a staffed office in Mauritania and the impact of the hurricanes in
the USA. This, coupled with the expansion and strengthening of various functions
to cope with our growth, has made it a challenging time. I would like to thank
all of our staff, including those who worked with us in our Perth office, for
their support and professionalism in this demanding period. We believe the
benefits of these changes will become increasingly apparent.
I would also like to thank Dr. Elizabeth Butler who, after many years of
service, will not be seeking re-election to the Board at this year's AGM. Her
contribution has been greatly appreciated. I welcome Christopher Callaway, who
joined the Board in February 2006. His long and distinguished career in the City
will bring significant additional skills at this challenging time.
Strong Outlook
The outstanding progress of your Company over the last number of years is in no
small way due to the expertise and dedication of its staff whose industry
knowledge and professionalism have created the significant opportunities for
growth available to us today. In my decades in the industry, I have never felt
so optimistic about the outlook and I believe Sterling is very well positioned
to take advantage of the resulting opportunities.
With a significant increase in production and cash flow in 2006 and an
increasingly exciting exploration portfolio in a time of growing energy
shortages, Sterling can look forward with confidence to a rewarding period in
the years ahead.
Richard O'Toole
Chairman
21 April 2006
CHIEF EXECUTIVE'S STATEMENT
Our industry is undergoing a period of enormous change and we are adapting our
business model to continue the success we have so far delivered. Against this
backdrop, the start of production in Mauritania in February 2006 transforms our
cash flow, enabling Sterling to be bolder in the implementation of its growth
strategy.
Changing Industry Background
The key causes of this changing, volatile environment are the sustained 'high'
oil price, which many commentators are predicting will stay above $50/bbl over
the next 3 - 5 years. There is a recognition that the supply of oil and gas is
struggling to keep up with demand and that this supply may be subject to
unforeseen interruptions. The energy sector has moved quickly to adjust to
changes in these fundamental forces. The key issues we now have to contend with
include:
• A 'land grab' is underway: in addition to the major oil companies (who
need to meet reserve and production replacement targets), we now
have to contend with national oil companies strategically positioning
themselves to guarantee future supplies. Competition for prospective
acreage is intense.
• It is not just the oil price which has risen sharply. From the
commercial terms granted by governments for licences, through rig rates
& seismic costs to insurance premiums, the prices for everything in our
industry have gone up. Availability of equipment has plummeted with, for
example, the lead times on new rig contracts in West Africa currently
running at over a year.
• The economics of exploration projects have improved, which translate
into both higher risk targets and smaller prospects being drilled.
Buyers, often with 'cheap money', have also lowered the economic return
criteria they apply to acquisitions, such that many prices being paid
for reserves are, in our view, only supported by even greater optimism
about the future of energy prices.
• Investors have joined the 'black-gold rush'. Since we joined AIM
in October 2002, our peer group in London has risen from about 10 to
over 100 oil and gas companies and this rate of growth looks set to
continue during 2006. Readily available funds have chased a declining
number of good opportunities and inevitably pushed prices up.
Availability of experienced people has also become an issue as each of
the new companies have established their teams.
This all sets the scene for a highly competitive and expensive market place
where sellers are calling the tune. Although we are in the fortunate position of
having acquired many of our assets before these changes really started to bite
and have benefited from the inevitable rise in value, we are adapting our model
to continue this growth going forward.
Step-change
Our overall aim is to continue to build our cash flow, profitability and have
exciting exploration upside, focused on increasing value per share. In our
model to date:
Production has offered a steady rate of return which, with low risk
infill and step-out drilling, provided a platform from which to undertake
exploration. Our production assets would not normally be expected to
double the value of the Company in the short term - although the recent
rise in oil and gas prices has significantly increased their value - but
they do provide solid cash flow which we have sought to leverage into
other opportunities.
Exploration offers the big upside. A key objective has been to manage
the risks and costs of drilling, which we know statistically is more
likely to fail than succeed. Using our technical and commercial expertise,
we have been very successful in passing on exploration costs while
retaining significant upside to drilling outcomes. The key is to have a
string of material targets ready to drill in the near future. We have not
committed to any individual exploration project which could materially
damage the balance sheet: instead, we have put in place a sustainable
exploration programme which has been supported by our growing production
cash flow.
Our response to both the new industry environment and Sterling's own financial
resources, is to try and side-step the crowd and look for value in less obvious
opportunities. Buying conventional production at present levels is in our view
unlikely to meet our criteria, whereas, for example, our creative financing of
the Mauritanian Government's participation in the Chinguetti field unlocked
substantial value for both sides, which could otherwise have been lost. The
recent signing by Sterling of an MOU in the Kurdistan region is another example
of such opportunities.
Sterling's hallmark to date has been innovative transactions, playing to our
strengths of experience, creativity, flexibility and speed. Under-pinning this
model is the quality of the people within the Company; they are our most
essential resource.
The tremendous activity in the oil & gas sector makes it increasingly difficult
to stand out from our peers. We are already starting to see signs of investor
fatigue and the first soundings of sector consolidation. In the past, successful
oil companies were taken over by larger companies once their assets reached
critical mass and we expect history to repeat itself over the next few years.
The performance of the Company is the only true measure of the success of the
strategy. Our track record since listing on AIM in late 2002 is a vindication of
the model implemented by our team. Our vision is to remain in the top 10% of our
peer group in terms of value added and perceived upside potential.
Strongly positioned
We are very well positioned and optimistic for Sterling's continued development.
We will not overpay for assets as our focus is on creating shareholder value.
The cash flow from Chinguetti and from the USA puts Sterling in a very strong
position to effect a step-change in its activities and to leverage itself into
new opportunities in this fast-changing environment.
Harry Wilson
Chief Executive Officer
21 April 2006
OPERATIONS REPORT
AFRICAN AND MIDDLE EASTERN OPERATIONS
2005 saw the continued development of the Chinguetti field, exploration and
appraisal wells in Mauritania and Gabon, consolidation of the management of the
African interests in the UK and active management of the licence portfolio.
Sterling farmed-out exploration interests in the Ambilobe and Ampasindava
licences in Madagascar to Exxon-Mobil and has retained a 30% interest and
operatorship of this exciting exploration opportunity. It also added to its
portfolio the operated offshore Ibekelia Technical Evaluation Agreement ('TEA'),
which is adjacent to its two licences in Gabon.
In line with its policy to manage the portfolio pro-actively, Sterling also
farmed-out the Dome Flore heavy oil interests in AGC and relinquished its
non-economic licence interests in Cheval Marin and Croix du Sud in the AGC.
Activity on the Ntem licence in Cameroon has been suspended pending resolution
of a territorial issue with neighbouring Equatorial Guinea.
With the commencement of Chinguetti production in late February 2006 and the
consequent return on Sterling's investment, the pace of our production and
exploration activity is set to increase markedly.
Development decisions on discoveries in Mauritania totalling a gross 380+
million bbls, are expected in 2006, with Sterling having no cost exposure owing
to its royalty interest over 6% of PSC B and 3% in PSC A (adjusted for any
exercise by the government of its back-in rights, which for Chinguetti was 12%).
Sterling is currently expecting to participate in at least five exploration
wells in West Africa up to mid-2007. For these wells, most of its costs will be
paid by other companies through farmouts. New opportunities are being sought to
expand this programme and to enhance Sterling's already strong reserve and
production upside. An example of the implementation of this strategy is the
signing of the MOU in Kurdistan. An office is being opened and it is hoped a PSC
can be signed as Sterling is keen to undertake drilling there.
Mauritania: Chinguetti field onstream
The Chinguetti Field came onstream on 24 February 2006 and production to the end
of March averaged 59,000 bpd. It is expected that it will rise towards the
operator's forecast peak rate of up to 75,000 bpd in the second half of 2006.
There have inevitably been fluctuations since production commenced, as reservoir
management and other issues are optimised: the gas injection system is currently
being commissioned. The first cargo of crude in which Sterling had an interest
of approximately 170,000 bbls, was shipped in early April with payment due in
early May.
The development of the Chinguetti Field located 80 km offshore Mauritania in 800
metres of water, took place throughout 2005. The conversion of the Berge Helene
floating production unit took place in Singapore, with equipment sourced from
around the world. The drilling of injection and producer wells and the
installation of sub-sea equipment continued with the hook-up and commissioning
taking place at the start of 2006. Oil industry costs rose markedly during the
period and the development drilling and subsea architecture also presented many
challenges. Despite these obstacles, the start-up on this, the first producing
field in Mauritania, was on schedule.
Sterling has two interests in the Chinguetti production. The first is through
the ground-breaking Funding Agreement signed with the Mauritanian Government in
October 2004, whereby Sterling has a strategic partnership with Societe
Mauritanienne Des Hydrocarbures (SMH, formerly GPC) to fund SMH's 12% back-in to
the field, in exchange for an effective economic interest of approximately 8%.
As of the date of this report, Sterling had paid or accrued total expenditures
of $140 million in relation solely to its economic interest, including payment
of SMH's share of past, development and initial operating costs and a signature
bonus to the Government.
As part of the Funding Agreement, Sterling has also been working closely with
SMH. Through Sterling's new office in Nouakchott, it has been providing SMH with
training, assistance and workshops in the technical, commercial and financial
areas. Several SMH personnel have been seconded to the Sterling offices in the
UK.
The second interest in Chinguetti comes from the wider production-based royalty
arrangement Sterling has, which covers 3% and 6% respectively of all
developments in both PSC A and PSC B, each adjusted for any exercise by the
government of its back-in rights on fields developed. Sterling receives a cash
bonus of $1-2 million for each development approved over 50 million bbl and a
sliding scale royalty from any development based on net production. The payment
is subject to an annual escalation of the payment bands. At an oil price of $50/
bbl this is currently $5.87/bbl and at $60/bbl is $7.40/bbl. The royalty
interest was adjusted to 5.28% on Chinguetti as the Government exercised its
back-in right. Importantly, this royalty gives Sterling an interest in each
field and future discoveries without paying any of the exploration, appraisal or
development costs.
Sterling's share of net attributable proven and probable reserves for the
Chinguetti Field was 11.7 million bbls at the end of both 2004 and 2005. These
have been derived from the gross estimate of 139 million bbls set out in the
independent petroleum consultants' report in the circular to shareholders in
October 2004. The operator is expected to revise its 2004 gross estimate of 123
million bbls in light of actual production and other factors.
There are three discoveries in PSC B which are being evaluated by the operator
for development decisions:
- Tevet is a 2004 Miocene discovery close to Chinguetti, containing
estimated gross reserves of 50 million bbls. A development decision
is anticipated.
- Labeidna, similarly close to Chinguetti, was discovered in 2005 with
estimated gross reserves of 30 million bbls. It is also a Miocene
reservoir. Further appraisal drilling is expected.
It is likely that these two fields would be tie-backs to existing
Chinguetti facilities, thereby ensuring cost-effective development and
enhancing Chinguetti economics.
- The much larger Tiof (Oualata) field was discovered in late 2003 and
has estimated gross reserves of 300+ million barrels and significant
gas volumes. A 6th appraisal well was drilled on Tiof in 2005 and the
field is undergoing engineering studies with a view to a development
decision is anticipated. Sterling expects any development to be in
stages, partly because of the reservoir complexities. It has the
potential for a much greater gross production level than Chinguetti.
Aside from the great oil upside of the 50+ prospects in the PSC areas, for which
Sterling's exploration and other costs are carried through its royalty
agreement, there is also the major potential for gas developments in the
country. The Banda gas field in PSC A, was discovered in 2002 and has estimated
reserves of some 2.5 bcf. Whilst development options have been studied for this
and other discoveries in Mauritania, it is believed that significant further
volumes will be needed before this gas can be developed, probably involving
construction of LNG facilities. Further important reservoir information was
gathered during 2005, when the Chinguetti gas injection well was drilled on
Banda.
The Mauritanian exploration programme resumed in late 2005 after the Chinguetti
development drilling was completed, resulting in the discovery well at Labeidna,
the appraisal wells at Tiof (Oualata) and Tevet, as well as the first Cretaceous
discovery at Faucon in Block 1. Apart from the Chinguetti wells, five wells
were drilled during the year in PSC's A & B, with two successful appraisal wells
confirming expectations of development potential, the new discovery and two dry
holes.
In late March 2006, the Government announced that it had reached a proposed
resolution with Woodside, the operator of blocks including A and B, over their
disputes. Any proposals will be subject to partner agreement. As currently
understood, these proposals are not expected to have a material impact on
Sterling, partly due to the indirect nature of its interests.
The exploration programme for 2006 starting shortly will initially focus on
shallower water prospects. It is expected that the rig will spend much of its
time in Blocks A and B drilling wells at no cost to Sterling.
Madagascar licences farmed out
Sterling is the operator of the Ambilobe and Ampasindava blocks, awarded in
November 2004, which cover an area of some 34,000 sq km offshore northern
Madagascar. There has since been a surge of in interest in Madagascar, whose
offshore provinces represents one of the rare opportunities to explore undrilled
basins which offer significant potential.
In July 2005, an agreement was signed with Exxon-Mobil for them to farm-in to
both blocks. Under the terms of this agreement, Sterling will retain a 30%
interest in the licences and will be carried through an exploration work
programme that, subject to certain milestones being achieved, includes
piston-coring, 2D and 3D seismic acquisition and the drilling of up to two wells
per licence. Sterling also remains operator of the licences.
The results of the ongoing first phase geological and geophysical studies are
encouraging and an approximately 4,000 km regional 2D seismic acquisition
programme has been accelerated and is now underway. A piston-coring programme
has recently been completed to sample seafloor features which may be related to
an active hydrocarbon source. Integration of the results of these new programmes
with existing information, will provide a data-set to evaluate the potential of
the blocks and high-grade them for 3D acquisition and future drilling in
2007-08.
The Ambilobe and Ampasindava blocks are an exciting cornerstone of Sterling's
exploration portfolio, as evidenced by the farm in by Exxon-Mobil in 2005 and an
acceleration of the exploration programme planned for 2006.
Gabon - New TEA and a further well planned
Sterling operates three shallow water permits in southern Gabon; Iris Marin
(38.57% interest), Themis Marin (20.57% interest) and the Ibekelia TEA (40%
interest). In September 2005, Sterling signed a TEA with the Gabonese government
for the Ibekelia permit. The agreement covers a 673 sq km area which is
contiguous with the Gamba and Olowi oil fields and with Sterling's existing
licences. At the end of the evaluation term there is an option to convert to a
full Production Sharing Agreement.
In December 2004, Sterling participated in a joint 3D seismic survey with
adjacent operators covering three contiguous permit areas, including the
southern part of Themis Marin and the adjacent Etame area oil discoveries. The
Themis survey area covers some 240 sq km and the data is currently undergoing
intensive pre-stack depth migration processing to define sub-salt depth closures
at the prolific target Gamba reservoir level. An exploration well is scheduled
in the Themis Marin licence expected in early 2007, with the timing being
dependent principally on rig availability. Sterling will be carried for 18% of
its 20.57% working interest and hence will pay only 2.57% of the costs.
One well was drilled in the Iris Marin licence during August and September 2005,
the Iris Iboga Marin No 1 (IIBM-1) well. It reached a depth of 2,035 metres and
penetrated over 30 metres of excellent reservoir-quality sub-salt Gamba
sandstones, but unfortunately these formations were water bearing. Accordingly,
the well was plugged and abandoned. The excellent reservoir quality encountered
prompted Sterling and its partners to enter a 15 month licence extension and
undergo re-processing of the 3D seismic data to evaluate other potential
drilling targets in the licence. Following this well, Sterling increased its
effective interest in the licence to 38.57% from 20.57%.
Guinea-Bissau
Sterling holds a 5% working interest in the Sinapa licence, where the Sinapa-2
well drilled in April 2004 found oil. Reservoir quality and structural issues
mean commerciality of the find remains uncertain. Plans for appraisal of the
Sinapa licence await the outcome of drilling of two exploration wells in the
adjacent Esperanca permit in late 2006/early 2007. Sterling has an option to
acquire a 5% working interest in the Esperanca permit at no cost, to be
exercised after this first well.
AGC: Heavy oil Dome Flore interests farmed-out
- Dome Flore
AGC is the joint exploration zone between Senegal and Guinea-Bissau. In March
2005, Sterling farmed out 55% of its interest in the Dome Flore heavy oil
interests, retaining 30%. The Dome Flore licence lies in the shallow waters and
contains two significant heavy oil discoveries from the late 1960-70s. Sterling
estimates there are 800-1,000 million barrels in place. In 2005, a series of
engineering and feasibility studies indicated that additional reservoir rock and
oil samples were required to fully evaluate the potential of the heavy oil
accumulation.
In January 2006, the licence entered the first renewal period of the exploration
phase, being two years. As part of the evaluation of the heavy oil commercial
potential, a series of individual cores will be taken throughout the heavy oil
reservoir. These cores will deliver key data that is required to progress the
heavy oil feasibility study.
Additionally, in this period, a new 2D seismic survey will be acquired. The
purpose of this survey is to evaluate additional exploration potential in the
block associated with undrilled salt domes and potential tilted fault block
plays.
- Croix Du Sud
Sterling secured an extension of the Croix du Sud licence (85% interest) to
January 2006 in order to try find a partner to carry it in an exploration well
on the licence. However, no partner was found, mainly due to the major increases
in the already high drilling costs associated with this ultra deepwater licence
and its limited commercial potential. The licence has now lapsed.
Cameroon
During 2005, the financial obligations and work programme for the Ntem
concession area were suspended due to a dispute between Cameroon and Equatorial
Guinea over their maritime borders. Both countries are currently working
together to resolve the dispute. Sterling had planned to farm-out this licence
for drilling and had originally, and continues to, attract a good level of
industry interest. The award in late-2004 by Equatorial Guinea of a licence to
the South of Ntem overlapping up to 20% of Ntem, has delayed this drilling plan
until the situation is resolved.
Other areas
In 2005, Sterling disposed of its interest in its non-core GSEC 101 licence,
offshore Philippines, to AIM listed Forum Energy plc, in return for a 14.7 %
stake. Forum has a range of energy interests there, with small oil producing
fields, impending coal production and a gas-to-electricity development. Forum
carried out a 3-D seismic programme on its large Reed Bank area, which includes
the Sampaguita gas discovery; this is currently being interpreted to identify
drilling prospects. Further details on the company can be found at
www.forum-energy.com.
Other residual interests in Holland and onshore UK are progressively being
disposed of.
New Ventures
Sterling has an active new ventures programme searching for both production and
exploration opportunities to add to the upside potential of its portfolio. For
exploration, Africa, the USA and the Middle East are key focus areas, having the
potential to add high impact projects. The focus for production interests is in
both of its core areas, Africa and the USA. With the large production increase
expected in 2006 and with the higher cash flows, an increasing level of
resources is being committed to these new ventures.
UNITED STATES OPERATIONS
All of Sterling's production in 2005 was from the shallow waters of the Gulf of
Mexico. Despite the impact of several highly destructive hurricanes, average
attributable production increased 4% to 9.7 mmcfged (2004: 9.3 mmcfged). Oil and
gas prices were volatile, with the average for the year being 12% higher at
$6.37/mcfge (2004: $5.68/mcfge). After deducting 3.5 bcf of production for the
year and adding 1.4 bcfge net through completed projects, year-end proven and
probable reserves were 57.4 bcfge. Of these reserves, 86% is gas and, as in
2004, 60% of the total was categorised as proven by independent petroleum
consultants.
Production levels in early 2006 have been lower because of natural decline and
equipment shortages, leading to delays in restorative work, as well as some
residual restoration after the hurricane shut-ins. Production in the first
quarter 2006 averaged 7.8 mmcfged. This is expected to increase in the second
quarter, with two recent successful wells, brought onstream in mid-April, adding
an expected combined rate of 2.2 mmcfged net, as well as the completion of other
planned maintenance work. Plans for 2006 include expanding our position in the
Gulf of Mexico and into the onshore arena.
Sterling became an accredited operator in the Gulf of Mexico in 2004 and is now
responsible for 8 fields, 21 offshore structures in both Federal and State
waters, over 68 miles of pipelines, five compressor stations and two onshore
facilities with 7,500 bbls of oil storage capacity. It operated some 70% of its
2005 production. The management and administration is carried out by a staff of
twelve in Houston who interface with over 40 regulatory authorities.
The average life of Sterling's fields, based on average 2005 production and
year-end reserves, is approximately 15 years, which is considerably longer then
most of the younger Gulf of Mexico reservoirs. The continued contribution from
these reservoirs, some of which have lives in excess of 20 years, should provide
a cornerstone to production growth.
Sterling's major properties are its Mustang and Matagorda Island interests in
the western Gulf, which accounted for 57% of 2005 production (5.6mmcfged). The
MU 749 GU2 well, drilled to recover attic reserves, is producing, but has not
yielded the expected results. Sterling had promoted a 25% working interest to
cover part of its costs. A recompletion on the MU 748-1 well was successful, as
was the workover on the MI 520-16 that had not produced since 1995. Latterly,
Sterling has increased the throughput capacity of the pipeline system and
towards the end of the year the third party throughput increased, thereby adding
to transportation and processing fees. This income (before costs) was $2.2
million in 2005, up 54% on 2004.
Production from these Mustang and Matagorda fields in early 2006 has been lower
at some 3.8-4.2 mmcfged, adversely affected by the need to install further
compression facilities on MU748-1, which has been shut-in as a result. As was
increasingly the case during 2005, the lack of availability of equipment on a
timely basis, as well as increases in costs, has delayed or cancelled drilling
and work-over operations. In particular, after the extensive hurricane damage,
those drilling rigs, lift boats, supply and crew boats not damaged by the
storms, were directed to the central and eastern Gulf to give full support to
efforts to make assets safe and thence to bring production back on-line. The
2005 hurricanes have also increased property and business interruption insurance
rates by some 250-500% and the market capacity for named windstorm damage cover
has been greatly reduced. At the renewal in February 2006, Sterling's insurance
costs rose by approximately 250% and a cap of $25 million was placed on named
windstorm damage. This is one reason for the planned extension of activities
into the onshore arena.
With the purchase of a 3-D data-set over Mustang Island, Sterling has recently
developed its first internally generated prospects. It was successful at both
the 4th Quarter 2005 and 1st Quarter of 2006 Offshore Texas State Lease Sales,
acquiring 5 year term leases over two internally generated low to moderate
risked exploratory prospects. These two drilling opportunities will be matured
with the intention of farming them out on a promoted basis and drilling the
first of these in the 4th quarter of 2006, with the second in the first half of
2007. This is part of an emphasis on identifying infill locations in the area
for drilling.
The High Island area, in which Sterling has a royalty interest, accounted for
28% of production in 2005 (2.4 mmcfged). Natural decline rates reduced
production towards the end of the year and recent rates have been approximately
1.8 mmcfged. The Gryphon C-1 well has been particularly affected. In order to
restore production, the Gryphon C-3 well was drilled in March 2006 at no cost to
Sterling and has been brought on-line. Rates are being progressively increased
towards an additional 1.3-1.5 mmcfged net.
A recompletion on the Eugene Island 268-1 well in July 2005, was successful.
Analysis of potential production and reserve additions in Sterling's other
fields is underway and small or non-core interests are expected to be disposed
of.
Sterling's first move into the onshore USA, was successful. It participated for
a 28% working interest in a non-operated exploratory well, Galveston 251-5, in
the tidal area, just south of the City of Houston. The oil well was successfully
completed in March 2006 and has since been brought on production at a net rate
of approximately 0.8 mmcfged. This production, as well as the successful C-3
well and other works, will impact the second quarter production.
Of particular note for the remainder of the year are, firstly, a proposed well,
expected in the fourth quarter, on GA303 (17.5% working interest), secondly, an
agreed 16.25% working interest in an onshore Louisiana well (Andrew) in the
third quarter, and thirdly, a well and a workover planned in the Mustang and
Matagorda areas.
With the high volatility in product prices and the raised expectation of
sellers, Sterling was outbid on a number of production packages in 2005. The
task remains to find reserves and exploration opportunities whose net return is
commensurate with the related risk. With the weight of money in the sector and
the paucity of good opportunities, prices have inevitably been bid-up and
attractive drilling deals are sold quickly. The lead times for equipment have
extended from weeks, often to many months and costs have soared. As a result,
Sterling intends to grow its portfolio of drilling opportunities from internal
prospect generation, from industry partnerships and by selective production
acquisitions in this unprecedented industry environment.
PROVEN AND PROBABLE RESERVES
a. Volumes Oil Gas Attributable Reserves
(1)
(000 barrels) (million cubic feet) (000 barrels
equivalent)
At 1 January 2005 13,231 50,393 21,629
Upwards/(downwards) revisions from (42) 1,632 230
previous estimates (2)
Production in the year (106) (2,901) (589)
At 31 December 2005 13,083 49,124 21,270
b. Location of Reserves
The geographical location of the end 2005 reserves were:
North America 1,383 49,124 9,570
West Africa 11,700 0 11,700
Categorisation of proven and probable reserves:
i). At the start of the year:
Proven reserves 61% 60% 61%
Probable reserves 39% 40% 39%
ii). At the end of the year:
Proven reserves 70% 58% 65%
Probable reserves 30% 42% 35%
NOTES
1. The proven and probable reserves movements in 2005 are based on:
a. North America: evaluation reports by independent petroleum engineers as of
1 September 2005 for the offshore assets, with certain downward or upward
adjustments by the directors at the year-end where, in their opinion, subsequent
performance of assets or further evaluation through drilling or workovers or
through the impact of changes in prices or costs, requires adjustments.
b. West Africa: the reserves are based on an independent consultants
evaluation on the Chinguetti field contained in the circular to shareholders
dated 26 October 2004, of 139 million bbls gross (P50) from which the directors
have derived their estimate of Sterling's share of reserves. The net estimates
are based on Sterling's expected share of the economic entitlement from the
field arising from its overriding royalty interest and from its funding to SMH
(formerly GPC), rather than by direct ownership of the interest in the field.
With the completion of the field development, the commencement of production in
early 2006 and in light of economic conditions, it is expected that the field
operator will issue a revision to their field estimates during 2006 from their
current 123 million bbls gross.
2. The gas revisions principally relate to drilling, working-overs, installation
of additional compression and other facilities, reprocessing of seismic
data, well control and production history. The major revisions relate to the
Mustang Island and Gryphon properties.
3. Sterling has not yet booked reserves in West Africa relating to other
discoveries made before or during the year, such as Tiof (Oualata), Tevet,
Labeidna and Banda, on the basis that no firm development plan has as yet
been approved by the partners.
4. Definitions: Proven reserves have a 90% level of confidence that the stated
quantities will be equalled or exceeded. Probable reserves have a 50% level
of confidence that the stated quantity will be equalled or exceeded. Oil
includes condensates.
STERLING ENERGY SCHEDULE OF MAIN INTERESTS AT 31 DECEMBER 2005
Location Size Licence Sterling Working Sterling Net Operated/
(km(2)) Name Interest % Revenue Interest % Non-operated
Africa
Mauritania Offshore 6,969 PSC A n.a Sliding scale _
royalty over 3%
Offshore 8,095 PSC B n.a Sliding scale _
royalty over 6%
except 5.28% of
the Chinguetti
Field and an
economic interest
of approximately
8% in the Field
AGC Casamance-Bissau 1,699 Dome Flore 30%* n.a _
Cameroon Southern Douala 2,319 Ntem 100% n.a Operator
Basin
Gabon Southern Gabon 673 Ibekelia 40% n.a Operator
Southern Gabon 607 Iris Marin 38.57%** n.a Operator
Southern Gabon 911 Themis Marin 20.57% (pay 2.57% n.a Operator
of next well)
Guinea-Bissau Casamance-Bissau 2,349 Sinapa 5% n.a _
Casamance-Bissau 3,491 Esperanca 5% back-in right n.a _
Madagascar Offshore NW 20,800 Ambilobe 30% (carried n.a Operator
through up to 2
wells)
Offshore NW 13,147 Ampasindava 30% (carried n.a Operator
through up to 2
wells)
USA Mustang Island Mustang Island 90 - 100% 90 - 100% Operator
Texas Coast Gathering
System
Texas State Waters 48.9 Mustang Island 12.5 - 100% 9.4 - 82% Operator
Texas State Waters 21 Matagorda 42 - 75% 36.6 - 59.5% Operator
Island
Texas Federal 50 High Island 7.5% overriding 7.5% royalty in Operator
Gryphon,
Waters (incl 52 and royalty in otherwise 42.3 - 83.33%
Gryphon) Gryphon,
otherwise 50 -
100%
Texas Federal 23 Galveston 17.5% 11.9 - 12.6%
Waters (incl 303)
Louisiana 20 Eugene Island 60% 45% Operator
Federal Waters (incl 268)
Texas State Waters 5.82 Galveston Bay 28% 20%
(incl ST 2515)
* carried for
certain studies/
appraisal
**being increased
from 20.57%
FINANCIAL REPORT AND OUTLOOK
Sterling had a record year in 2005
Pre-tax profit increased by 20% to £5.0 million (2004: £4.2 million) and the
outlook is for a sustained improvement in cash flow and profitability following
the start-up of production in Mauritania in late February 2006. In 2005,
production increased by 4% to an average of 9.7 mmcfged, with 82% being gas.
Solid foundations to increase production and for future exploration and
development in Sterling's core areas, have now been established.
Record profits
Turnover increased by 19% to £13.6 million in 2005 (2004: £11.5 million).
Average realised prices for the year were approximately $6.37/mcfge (2004: $5.68
/mcfge) and the sterling exchange rate fell from $1.92:£ at the start of 2005 to
$1.72:£ by year-end.
Gross profit increased by 18% to £8.0 million from £6.8 million in 2004.
Of the totals, the average production for the first half was 11.2 mmcfge/d, up
32% on the corresponding period, at an average sales price of $6.26/mcfge (2004:
first half $5.76/mcfge). Second half 2005, production was severely curtailed,
principally by the effect of hurricanes and pipeline shut-ins, and averaged 8.3
mmcfge/d at an average price of $6.53/mcfge (2004: second half $5.62/mcfge).
Third party income from Sterling operated pipelines rose 54% to $2.2 million in
the year, before costs.
Costs of sales rose 20% to £5.6 million (2004: £4.7 million). In dollar terms,
this equates to an average unit cost of $2.87/mcfge (2004: $2.51/mcgfe). Of
these, direct production and pipeline costs were equivalent to $1.34/mcfge
(2004: $0.99/mcfge) and a depletion charge of $1.53/mcfge (2004: $1.52/mcfge).
Sterling's end 2005 US proven and probable reserve base was 57.4 bcfge. Proven
reserves were 60% of this total and the USA reserve life averages over 15 years.
The Mauritanian interests accounted for 55% of the estimated year-end proven and
probable reserves, being 11.7 mmbbls of oil reserves. First production from the
Chinguetti field commenced in late February 2006, with Sterling's first lifting
in early April. This start-up is expected to increase markedly the Group's
production level. After including the attributable share of acquisition costs,
expected past and development costs, the estimated purchase and development cost
of these reserves is approximately $16/bbl. The cost of forward oil market
transactions, carried out in early 2005, was approximately $7.6/bbl for 2.1
million barrels to the end of 2007. This risk management has safeguarded minimum
prices averaging $37.7/bbl. Sterling will receive actual prices up to an average
of $45.5/bbl and then all income over an average of $50/bbl. The cost of these
transactions is included in debtors at the year-end and will be amortised
against relevant production.
As expected, overheads rose by 28% to a net £2.6 million. This reflected the
impact of the planned expansion of the UK technical, commercial and support
staff to run the African operations and to cope with expected growth in
activity, as well as the opening of the Mauritanian local office. There was some
duplication of costs whilst the handover from the Perth office was completed.
The Houston office remained the operator of 70% of its production interests. In
January 2006, the closure of the Perth office, acquired with the Fusion purchase
in late 2004, was completed and a one-off exceptional cost of £1.2 million was
incurred; there is expected to be a quick payback on this cost due to savings in
travel, as well as in management time.
Before the one-off cost, there was an increase in the operating profit of 14% to
£5.4 million in 2005. With net financial income of £0.7 million (2004: net cost
£0.6 million), mainly from interest on net cash deposits, profit before tax and
exceptional costs was up 47% at £6.1 million (2004: £4.2 million).
The taxation charge of £1.9 million arose in the both the USA and UK. This is a
rate of 31% on the pre-tax profit, before the one-off charge noted above (2004:
29%). Most available tax losses have been utilised in earlier years, including
2004. However, because of the use of accelerated depletion for tax purposes for
certain US drilling and similar costs, the estimated current tax payable is £1.3
million and Sterling has provided a deferred tax charge of £0.6 million as it
expects that in the future certain of these timing differences will reverse.
Fully diluted earnings per share, which reflects the potentially dilutive impact
of options, was 0.22p per share (2004: 0.33p). This reduction reflects the full
year impact of the shares issued in the £97 million placing in November 2004,
which affect the computation only since their issue. These funds have been
progressively invested through 2005, mainly in the Chinguetti field development
in Mauritania, and the benefits to earnings should become apparent in 2006.
Cash flow strengthening
At the end of 2005, cash balances were £47.8 million (end 2004: £89.6 million),
of which £7.6 million was for unrestricted uses (2004: £20.3 million).
Cash inflows:
In 2005, cash inflow from operations (before the one-off Perth closure costs and
working capital movements) rose by 13% to £8.8 million (2004: £7.8 million). The
net financial cash inflow also rose to £1.2 million (2004: outflow £0.3 million)
and there was also £1.1 million arising from the exercise of options by Perth
staff (2004: £97.0 million share placing).
Cash outflows:
A total of £36.4 million was spent in 2005 in connection with the investment
associated with the development of the Chinguetti field in Mauritania. At the
end of the year total draw-downs of $65.1 million had been made under the
cash-backed $130 million letter of credit provided by Sterling to SMH (formerly
GPC). Funds are expected to be progressively drawn-down to meet the future and
past costs associated with the Government's direct 12% interest in this field,
in which Sterling has an approximate 8% economic interest. With first oil
production having commenced in late February 2006, Sterling expects to see a
marked increase in cash generated from production operations in the year.
Other cash capital expenditures were £8.9 million, of which £6.4 million related
to the drilling, appraisal and development of reserves in the Gulf of Mexico and
£2.5 million mainly to Africa. The increase in net debtors and current creditors
of £15.0 million includes the costs associated with the oil price 'futures'
noted above.
At the end of 2005, the $27.5 million loan from Hibernia, a subsidiary of
Capital One, included a number of financial covenants which, amongst other
matters, limits the level of funds that can be repatriated from the US to the
rest of the Group. It does not require any repayments before 30 June 2007, save
on a voluntary basis or as a result of a standard twice-yearly borrowing base
re-determination, one of which is currently in progress. The amount of the funds
that can be repatriated for Group use at the end of the year was about $5
million, virtually the same as the then USA cash balance. The current interest
rate payable is approximately 7.75%, with interest payments made quarterly.
Strengthened balance sheet
Net current assets fell to £37.6 million at the end of 2005, from £88.8 million
at the end of 2004, principally due to the use of funds for the Chinguetti field
development.
Sterling's equity shareholders' funds increased to £169.2 million at the end of
2005 (2004: £148.4 million). The issued share capital had risen by the end of
2005 to approximately 1,402 million shares, as set out in the Directors' Report.
The favourable movement in exchange rates produced an unrealised translation
gain of £16.6 million when dollar net assets were converted into sterling, being
the reporting currency, at the end of the year.
Financial outlook
The financial outlook is very strong, with a step-change expected following the
commencement of Mauritanian production. This should permit Sterling to enter
into an expansion of its exploration activity, with greater upside than
hitherto, to selectively acquire development and production activities and to
extend its ability to 'gear-up'.
The planned increased exposure to exploration will build on a programme that
currently is largely being funded by third parties. Continued exploration and
appraisal activity in Mauritania is currently mostly cost-free, due to royalty
interests. The cash requirement for new exploration, appraisal and development
will be highly dependent on the results, inter alia, of interpretation work, any
potential farm-outs, the result of current and proposed drilling and planned new
licences. Sterling intends to increase materially its exploration activity, with
an emphasis on higher potential impact opportunities in its core areas, which
may require greater cost exposure.
The directors expect proposals to be announced by the operator in 2006, on the
possible development of both the Tevet and Tiof (Oualata) fields, offshore
Mauritania. Sterling is entitled to a royalty income stream on these 350+
million bbl reserves and bonus payments of $1-2 million where any field's
reserves exceed 50 million barrels or its equivalent. Sterling makes no payment
in relation to its royalty interests for the exploration, appraisal or
development costs for these or for any other fields that may be discovered
there.
Liquidity in Sterling's shares on the stock market has again been higher in
2005. It is a constituent on the 'AIM 50' index for the largest companies, has
over 50 well-known institutions on its share register and more than 3,500
shareholders.
The directors' primary aim remains to continue to enhance shareholder value.
With the major growth in production and operational cash flow expected in 2006,
the directors are extremely confident of the outlook for Sterling in the coming
year.
Definitions
bbls - barrels of oil
bcf - billion cubic feet of gas
bcfge - billions of cubic feet gas equivalent
boe - barrels of oil equivalent
bopd - barrels of oil per day
mcf - thousand cubic feet of gas
mcfged - thousand cubic feet of gas equivalent per day
mmbbl - millions of barrels
mmcfgd - million cubic feet of gas per day
mmcfged - millions of cubic feet of gas equivalent per day
tcf - trillion cubic feet of gas
Consolidated profit and loss account
Year ended 31 December 2005
Note 2005 2004
£'000 £'000
Turnover 2 13,642 11,457
Cost of sales (5,615) (4,670)
Gross profit 8,027 6,787
Administrative expenses (2,625) (2,052)
Exceptional office closure costs 15 (1,153) -
Total administrative expenses (3,778) (2,052)
Operating profit 4,249 4,735
Interest receivable and similar income 1,882 312
Interest payable and similar charges (1,145) (883)
Profit on ordinary activities before 4,986 4,164
taxation
Taxation on profit on ordinary 3 (1,878) (1,197)
activities
Profit on ordinary activities after 3,108 2,967
taxation
Minority interest - 2
Profit for the financial year 3,108 2,969
Earnings per share : Basic 4 0.22p 0.34p
Earnings per share : Diluted 4 0.22p 0.33p
All profits and losses arise from continuing operations.
Consolidated balance sheet
Year ended 31 December 2005
Note 2005 2004
£'000 £'000
Fixed assets
Intangible assets 6 29,000 30,629
Tangible assets 7 131,863 51,754
Investments 8 689 -
161,552 82,383
Current assets
Debtors 15,501 2,968
Cash at bank and in hand 9 47,786 89,556
63,287 92,524
Creditors: amounts falling due (25,702) (3,762)
within one year
Net current assets 37,585 88,762
Total assets less current liabilities 199,137 171,145
Creditors: amounts falling due after more (15,918) (15,014)
than one year
Provisions for liabilities and charges (12,909) (6,671)
Net assets 170,310 149,460
Capital and reserves
Called up equity share capital 10 14,019 13,933
Share premium account 11 142,590 141,600
Currency translation reserve 11 8,364 (8,271)
Profit and loss account 11 4,274 1,166
Equity shareholders' funds 169,247 148,428
Minority interest 1,063 1,032
170,310 149,460
Consolidated statement of total recognised gains and losses
Year ended 31 December 2005
2005 2004
£'000 £'000
Profit for the financial year 3,108 2,969
Currency translation adjustments 16,635 (6,389)
Total recognised gains/(losses) relating to the 19,743 (3,420)
year
Reconciliation of movements in Group shareholders' funds
Year ended 31 December 2005
2005 2004
£'000 £'000
Profit for the financial year 3,108 2,969
Currency translation adjustments 16,635 (6,389)
Shares issued (net of expenses) 1,076 96,974
Movement in shares to be issued - (1,716)
Total movement in the year 20,819 91,838
Shareholders' funds at 1 January 148,428 56,590
Shareholders' funds at 31 December 169,247 148,428
Consolidated cash flow statement
Year ended 31 December 2005
Note 2005 2004
£'000 £'000
Net cash (outflow)/inflow from operations 13a (7,399) 8,145
Returns on investments and servicing of finance 13b 1,163 (290)
Capital expenditure 13b (45,314) (16,109)
Acquisitions and disposals 13b - (18,763)
Cash outflow before financing (51,550) (27,017)
Financing 13b 38,240 34,818
(Decrease)/increase in cash in the year 13c (13,310) 7,801
Notes to the financial information
Year ended 31 December 2005
1. Basis of accounting
The preliminary accounts have been prepared in accordance with applicable United
Kingdom Accounting Standards and under the historical cost convention. There are
no changes to the accounting policies as set out in the Annual Report for the
year ended 31 December 2004.
The preliminary accounts have also been prepared in accordance with the
Statement of Recommended Practice 'Accounting for Oil and Gas Exploration,
Development Production and Decommissioning Activities'.
The financial information set out above does not constitute statutory accounts
within the meaning of section 240 of the Companies Act 1985. Statutory accounts
for 2004 have been delivered to the Registrar of Companies, and those for 2005
will be delivered following the Company's Annual General Meeting. The statutory
accounts for 2005 were approved by the Board on 21 April 2006. The auditors have
reported on the accounts for both 2004 and 2005; their reports were unqualified
and did not contain statements under s237(2) and (3) of the Companies Act 1985.
2. Segment information
The Group operates in one business segment; the exploration for and production
of oil and gas. The Group currently has interests in four geographical
segments, Western Europe, North America, West Africa and East Africa as follows:
Western Europe3 North America West Africa East Africa Total
2005 2004 2005 2004 2005 2004 2005 2004 2005 2004
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Turnover1 79 - 13,563 11,457 - - - - 13,642 11,457
- existing
operations
Profit/(Loss) 142 (220) 4,972 4,747 (128) (363) - - 4,986 4,164
before taxation
Net assets2 5,270 17,881 26,276 26,419 138,599 105,160 165 - 170,310 149,460
1 All turnover is sold to third parties within the segment of origin.
2 Net assets exclude intra-group financing.
3 Net assets for Western Europe include £564,000 in 2004 that last year was
reflected in South East Asia. This asset has been exchanged in 2005 for an
Investment in a UK Quoted company (see Note 8).
3. Taxation
The Group tax charge comprises:
2005 2004
£'000 £'000
Current tax 1,306 226
Deferred tax - origination and reversal of timing differences 572 971
1,878 1,197
The difference between the current tax charge of £1,306,000 (2004 - £226,000)
and the amount calculated by applying the applicable standard rate of tax is as
follows:
2005 2004
£'000 £'000
Profit on ordinary activities before tax 4,986 4,164
Tax on profit on ordinary activities at standard US 1,695 1,416
corporation tax rate of 34% (2004: 34%)
Effects of:
Expenses not deductible for tax purposes 722 87
Capital allowances in excess of depreciation (594) (136)
Other temporary differences (552) (245)
Difference in non-US tax rates 4 33
Adjustment for tax losses (4) (929)
Adjustment in respect of prior years 35 -
Current tax charge for the year 1,306 226
During 2004 and 2005, the Group generated its results primarily in the US.
Therefore the tax rate in the above reconciliation for 2004 and 2005 is the
standard rate for US corporation tax.
4. Earnings per share
The calculation of basic earnings per share is based on the profit for the
financial year of £3,108,000 (2004 - £2,969,000) and on 1,393,778,640 (2004 -
884,788,687) ordinary shares, being the weighted average number of ordinary
shares in issue. The calculation of diluted earnings per share is based on the
profit for the financial year as for basic earnings per share. The number of
shares outstanding is adjusted as follows:
2005
Number of shares
For basic earnings per share 1,393,778,640
Exercise of options 31,622,597
For diluted earnings per share 1,425,401,237
5. Dividend
No dividend has been declared or is to be paid in respect of the year ended 31
December 2005.
6. Intangible fixed assets - unevaluated oil and gas interests
Group Company
£'000 £'000
At 1 January 2005 30,629 62
Written off (5) -
Transfers to tangible fixed assets (See (7,973) 10
Note 7)
Transfers to investments (See Note 8) (689) -
Additions 3,230 -
Currency translation adjustment 3,808 -
At 31 December 2005 29,000 72
Group net book value at 31 December 2005 comprises £1,863,000 for North America,
£70,000 for Western Europe, and £27,067,000 for Africa. Group net book value at
31 December 2004 comprised £1,678,000 for North America, £33,000 for Western
Europe, £564,000 for South East Asia, and £28,354,000 for Africa.
7. Tangible fixed assets
Oil and gas Computer &
interests office equipment Total
£'000 £'000 £'000
Group
Cost
At 1 January 2005 55,398 685 56,083
Transfers from intangible fixed assets 7,973 - 7,973
(See Note 6)
Additions 69,906 466 70,372
Currency translation adjustment 5,869 13 5,882
At 31 December 2005 139,146 1,164 140,310
Accumulated depreciation
At 1 January 2005 4,090 239 4,329
Charge for the year 3,007 388 3,395
Currency translation adjustment 723 - 723
At 31 December 2005 7,820 627 8,447
Net book value
At 31 December 2005 131,326 537 131,863
At 31December 2004 51,308 446 51,754
The net book value of oil and gas interests at 31 December 2005 comprises
£42,306,000 (2004: £31,601,000) relating to North America, £69,000 (2004:
£109,000) relating to Western Europe and £88,951,000 (2004: £19,598,000) to the
West Africa cost pools respectively.
8. Fixed asset investments
Investment in Quoted Company
The investment in a quoted company of £689,000 represents the net book value of
the GSEC 101 licence that the Group formerly held offshore of the Philippines.
This asset was transferred to Forum Energy plc in return for a current equity
interest of 14.7% effective from 18 May 2005. As at 31 December 2005 the market
value of this investment was £4,781,856 based on a Forum share price of 119.5p.
9. Cash at bank and in hand
Included in cash at bank and in hand for the Group is an amount of approximately
£2,379,000 (2004 - £1,566,000) held in a restricted account to be used for the
sole purpose of the payment of decommissioning costs on three US producing
licences.
There is additionally a deposit held in escrow for an amount of US$64,880,123
(£37,796,000) held by the parent company (2004 US$130,000,000 (£67,712,000)).
These funds are to be utilised to pay for past and ongoing costs with regard to
the Group's participation in the Chinguetti field development (see note 12c).
10. Called up equity share capital
2005 2004
£'000 £'000
Authorised:
2,400,000,000 (2004: 2,400,000,000) ordinary shares of 1p 24,000 24,000
Called up, allotted and fully paid:
1,401,950,558 ordinary shares of 1p each (2004 - 1,393,325,558 ordinary 14,019 13,933
shares of 1p each)
Movements during the year were as follows:
a. 125,000 new ordinary shares with a nominal value of £1,250 were issued
to a former employee who exercised share options in the year.
b. 8,500,000 new ordinary shares with a nominal value of £85,000 were
issued to ex-employees who exercised share options in the year in conjunction
with the closure of the Perth office (see note 15).
11. Reserves
Group Share Currency Profit and
premium translation loss account
account account Total
£'000 £'000 £'000 £'000
At 1 January 2005 141,600 (8,271) 1,166 134,495
Premium on shares issued 990 - - 990
Currency translation adjustments - 16,635 - 16,635
Profit for the year - - 3,108 3,108
At 31 December 2005 142,590 8,364 4,274 155,228
12. Financial commitments
(a) Annual commitments under non-cancellable operating leases are as follows:
Company and Group Land and Land and
Buildings Buildings
2005 2004
£'000 £'000
Operating leases with an option to terminate 6 -
within one year
Operating leases with an option to terminate 77 -
later than one but within two years
Operating leases with an option to terminate 70 395
between two and five years
153 395
(b) Expenditure commitments are as follows:
2005 2004
£'000 £'000
Due within one year 19,486 3,171
Due later than one year but within two years 15 5,497
19,501 8,668
In acquiring its oil and gas interests the Group has pledged that various work
programmes will be undertaken on each permit/interest. The commitments above
are an estimate of the cost of performing these work programmes.
(c) Mauritania transaction
On 26 October 2004 the Group entered into a Funding agreement with the Islamic
Republic of Mauritania (the 'Government') and Groupe Projet Chinguetti ('GPC'),
now Societe des Hydrocarbures Mauritenienne ('SMH') in relation to the funding
of the Government's share of the Chinguetti oil field development ('Chinguetti
Development'). SMH is a state owned special purpose vehicle formed by the
Government to hold its interest in the Chinguetti Development.
The Group has agreed to reimburse SMH the past costs payable by the Government
as a result of the exercise of its option to acquire 12 per cent of the
Chinguetti Development. The Group has further agreed to fund SMH's share of all
future petroleum costs (being exploration, appraisal and development costs)
relating to the Chinguetti Development up to the commencement of production.
Upon commencement of production SMH will pay a share of its operating
expenditure commitments, with the remainder being met by the Group.
The Group has put in place a letter of credit for US$130,000,000 backed by funds
on deposit under which the past and ongoing petroleum costs will be paid to GPC.
This figure represents the maximum amount that the Group will be required to pay
under the terms of the Funding agreement. As at 31 December 2005, US$65,119,877
had been drawn down on the facility to fund the development, and the remaining
funds of US$64,880,123 are held on escrow as disclosed in Note 9. Any remaining
funds on deposit will be released from escrow, on the 'Letter of Credit
Termination Date', which is defined as the earlier of either, two years after
completion of the Funding agreement (19 November 2006), or the completion of
payments by Sterling to SMH of both the past oil production costs and the
exploration costs and funding of the operating expenditure of SMH and Sterling
out of revenues from the sale of Chinguetti oil for a period of six consecutive
months after initial commercial production.
Under the Funding agreement the Company will become entitled to a portion of
SMH's share of profit oil produced from the Chinguetti Development. In addition,
the Group will be entitled to recover its costs from SMH's share of cost oil.
13. Notes to the cash flow statement
(a)Reconciliation of operating profit to net cash (outflow)/inflow from
operations
2005 2004
£'000 £'000
Operating profit 4,249 4,735
Depreciation and depletion 3,395 3,057
Intangible assets written off 5 50
Cash inflow from operations before 7,649 7,842
working capital movements
Increase in debtors (13,396) (1,455)
(Increase)/decrease in creditors (1,652) 1,758
Net cash (outflow)/inflow from (7,399) 8,145
operations
(b) Gross cash flows
2005 2004
£'000 £'000
Returns on investments and servicing of finance
Interest received 1,849 309
Interest paid (686) (599)
Net cash inflow/(outflow) 1,163 (290)
Capital expenditure
Purchase of intangible fixed assets (2,072) (3,618)
Purchase of tangible fixed assets (43,242) (12,491)
Net cash outflow (45,314) (16,109)
Acquisitions
Other acquisitions - (18,763)
Net cash outflow - (18,763)
Financing
Issue of ordinary shares, net of expenses 1,076 92,557
Drawdown under bank loan facility - 13,191
Net receipts/(payments) from restricted accounts 37,164 (70,930)
Net cash inflow 38,240 34,818
(c) Analysis and reconciliation of net funds
Group 1 January Cash Exchange 31 December
2005 flow movement 2005
£'000 £'000 £'000 £'000
Cash in hand and at bank* 20,233 (13,310) 688 7,611
Debt due after 1 year (14,233) - (1,685) (15,918)
Debt due within 1 year - - - -
Net funds 6,000 (13,310) (997) (8,307)
The cash balance at 31 December 2005 excludes £40,175,000 of restricted cash
(2004 - £69,323,000) as described further in Note 9.
2005 2004
£'000 £'000
(Decrease)/increase in cash in the year (13,310) 7,801
Cash inflow from increase in debt - (13,191)
Translation difference (997) (1,122)
Movement in net funds in year (14,307) (6,512)
Net funds at 1 January 6,000 12,512
Net funds at 31 December (8,307) 6,000
14. Post balance sheet events
Following the year end first oil production from the Chinguetti Field
commenced in late February in Mauritania in which Sterling has an approximate 8%
economic interest. Further cash calls have been made to date of $9,522,476. This
leaves a remaining deposit in the restricted bank account of $55,357,647.
15. Exceptional Costs
During the year the Board decided that it would be more advantageous to manage
all of the Group's African activities out of its UK head office. Accordingly,
the Perth office closed in 2005 and the relocation of activities and some key
personnel from Perth to the UK has now taken place. The costs of £1,153,000
incurred in respect of this closure have been fully recognised in 2005.
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