Interim Results
Sterling Energy PLC
25 September 2003
Interim results of Sterling Energy plc for the six months ended 30 June 2003
Sterling Energy plc ('Sterling' or the 'Company') today makes its interim
results announcement for the six months ended 30 June 2003.
Chairman, Richard O'Toole, said:
I am very pleased to report further excellent progress on many fronts since the
end of 2002. The highlights are:
• We are reporting a profit before tax of £1,112,000 for the six months
ended 30 June 2003.
• We have continued to add to our US gas reserves through acquisition,
drilling and workovers.
• We have had success with our 60% interest in a new well on Eugene
Island 268, with net reserves of over 4bcf. This tested at a gross
level of 5 mmcf/d and was brought onstream in early September.
• The Gryphon 2 discovery was brought onstream as an important gas
producer and we have recently signed a farmout agreement which may
result in further carried wells being drilled in an expanded area.
• Our side-track on El Gordo tapped four separate gas zones. We expect
the first zone to be on production within a few weeks.
• We were awarded a 100% interest in a new licence to the south of our
High Island A68/A83 area, adding to the potential reserves accessible
from our facilities.
• We have also concluded a throughput agreement with Forest Oil to use
our existing High Island 52 facilities to process their gas from their
neighbouring High Island 53 discovery. This is expected onstream next
month.
• By the end of June we had increased our production by almost a third
from the year-end level and recorded a positive cash flow from
operations for the six month period then ended.
• Last week we agreed to purchase a 20.37% stake in Fusion Oil & Gas plc
in a share-for-share exchange. The seller, Westmount Energy Limited,
has agreed to a lock-in of the Sterling Shares it receives for at
least a year.
• We have today announced a share offer for the issued share capital of
Fusion Oil & Gas plc that we do not already own, valuing the entire
issued share capital of Fusion at approximately £39.5 million. This is
being announced separately and a copy of that announcement is being
sent to all Sterling shareholders.
• We have also today announced a £10 million placing of shares with
major institutions to provide funds for a partial cash alternative to
Fusion shareholders. This is, in my view, a major vote of confidence
in the underlying value of the Company, its prospects and in its
management team who collectively are the largest shareholder in the
Company.
Operations
The highlight of the first half of the year was bringing onstream the Gryphon
C-2 well in High Island Block 52, in the Gulf of Mexico. Sterling owns a 7.58
per cent. overriding royalty interest in this well, and it has been producing
solidly at 25 million cubic feet per day ('mmcfd') since February. With gas
prices reaching as high as $19/mcf on day trading in February, revenues from
this asset have been exceptional. Current production from the two Gryphon wells
is in excess of 35 mmcfd, or 2.65 mmcfd net to Sterling.
Elsewhere in the Gulf of Mexico Sterling acquired a 60 per cent. working
interest in the Eugene Island 268 lease and participated in the setting of a new
production platform and the recompletion of the #1 well originally drilled by
UMC in 1997. The well was flow tested at 5 mmcfd, and we anticipate production
at or above this rate. Gas sales commenced on 10 September 2003.
Since the interim date, Sterling has participated in various workover and
recompletions on its existing assets, and has also participated in the Western
Gulf of Mexico Lease Sale, held in August, where it was successful in its only
bid, for High Island Block A-94, which lies adjacent to its existing production
at High Island A68/A83. This area is the subject of an ongoing technical
review, which it is hoped will result in a programme of development drilling on
the field, plus the delineation of large exploration prospects, that have been
identified on existing 2D seismic data.
As previously announced, the El Gordo #4 sidetrack resulted in the drilling of
four potentially commercial gas reservoirs. The deepest of these zones was
completed and placed on production, but has suffered from early sand production.
Currently plans are being made to recomplete this zone using a low cost
sand-control solution.
There remain a number of drilling and recompletion opportunities that the
Company is planning for the latter part of 2003 or early 2004, dependent upon
partner approval and rig availability. These include a sidetrack well in High
Island 52 in which Sterling owns a 45 per cent. working interest, and new
drilling in Galveston 303, in which Sterling has a 17.5 per cent. working
interest. We have also recently entered into a further agreement with Gryphon
granting them an option to fund the drilling of up to two additional deep wells
within the High Island 52 and 53 Production Unit, wherein we would receive a
royalty until payout, and then have the right to back-in for a working interest
in the well. We are hopeful that a well will be drilled early in 2004.
Internationally, aside from the Fusion offer, work is ongoing on the Reed Bank
project in the Philippines and new exploration acreage is under negotiation in
four separate countries.
Financial report for the six months to 30 June 2003 ('the period')
During 2002, the Group was transformed by the reverse takeover of Sterling
Energy Limited. The financial impact of this transaction on the six months to 30
June 2003 is illustrated in a number of the 'Financial Highlights' shown below.
Financial Highlights:
• The Group recorded a profit before taxation of £1,112,000 in
the period compared with a loss before taxation in the corresponding period in
2002 of £102,000.
• Turnover increased to £2,591,000 in the six months to 30 June
2003 from £22,000 in the first six months of 2002.
• Production averaged 4.2 million cubic feet equivalent per day
('mmcfe/d') in the first half, with an average of over 4.4 mmcfe/d in the second
quarter.
• Direct operating and related costs averaged $0.94 per
thousand cubic feet equivalent per day ('mcfe'), whilst depletion and
amortisation were $0.95/mcfe in the first half of 2003.
• Gross profit in the period was £1,712,000 compared with
£3,000 in the corresponding period in 2002.
• Basic earnings per share (after tax) were 0.27p per share in
the period compared with a loss of 0.2p in the corresponding period.
• Net current assets were transformed: end June 2003 total of
£6,364,000 (end June 2002: £192,000).
• Shareholders' funds rose to £16,921,000 at the period end
from £14,910,000 at the end of 2002.
• Net cash generated from operations of £499,000 in the period
(six months 2002: outflow £9,000).
• Capital expenditures of £2,544,000 in the period on new wells
and other works.
• Over £1,400,000 raised from the exercise of nearly 100% of
the outstanding warrants in the period.
Commentary:
The attached interim financial information shows improvement in a wide range of
performance areas. The improvement in the Group's financial position has been
gratifying with the benefits of our strategy showing through.
I am very pleased to report the further and continuing transformation of the
Group's financial performance in the six months to 30 June 2003. We saw an
excellent and continued improvement in gross profit to £1,712,000 in the period,
both compared with the corresponding period in 2002 and the second half of 2002.
This mainly reflects the purchase of SEL and Galveston 303 in October 2002 on
the re-admission to AIM, the commencement of production from the Gryphon-2 well
in March and the strong gas prices.
Turnover of £2,591,000 reflected our much increased average production in the
period to 4.2 mmcfe/d, compared with 3.3mmcfe/d at the end of 2002 and virtually
nil in the corresponding period of 2002. Approximately 95 per cent. of this
production was gas, sold at an average price in the period of $5.55/mcf, with an
exchange rate of US$1.65:£.
Direct operating and related costs averaged $0.94/mcfe, whilst depletion and
amortisation were $0.95/mcfe. After deducting overheads, the operating profit
was £1,110,000 compared with losses in both halves of 2002. An improvement in
interest income, due to positive cash balances, offset interest expenses on a
bank loan and on the unwinding of the discount on provisions for
decommissioning.
A taxation charge of £125,000 arose mainly on the US income and is computed
assuming the use of certain taxable US losses arising in prior periods. The
future tax payable will depend on a number of factors, not least the level and
composition of capital expenditures. It should be expected that, having taken
into account deferred tax, the rate of charge will be more normal in future.
Despite a fall in the US$ exchange rate of some 6 per cent. in the first half,
the net profit was £987,000 with basic earnings per share of 0.27p in the period
(first six months 2002: loss 0.2p).
Net current assets at the period end of £6,364,000 was mainly comprised of cash
balances. Period- end debtors and prepayments of £1,839,000 were largely offset
by a bank loan and creditors of £2,070,000. We are in the final stages of
renewing the bank loan of over £1,200,000 and expect to increase the facility
level and extend part of its repayment terms past one year, reflecting, amongst
other things, recent drilling results.
Most of the capital expenditures of over £2,500,000 incurred in the period,
which were mainly on the two wells announced as successful since the period-end
and expected onstream shortly, have been shown as additions to intangible fixed
assets. These and related costs are expected to be transferred into depletable
tangible pools in the second half of the year.
After the exercise of almost 100 per cent. of the outstanding warrants to raise
some £1,400,000, shareholders' funds at the period end rose to £16,921,000, with
the issued ordinary share capital being approximately 378.4 million ordinary
shares. The 40.0 million deferred consideration shares shown as 'shares to be
issued'' are expected to be allotted in full at the end of 2003.
Outlook
Our progress has been fast and the results from our portfolio of prospects have
shown some of the potential to be realised. Although gas prices have recently
shown their usual summer retreat, with the recent drilling success, especially
on our Eugene Island well, I remain optimistic of further operational progress
and improvement.
I am hopeful of a successful outcome to our offer for Fusion, which we see as a
sensible building block which will create a geographically focused portfolio of
production, appraisal and exploration assets with enhanced opportunities for all
shareholders. We also believe that by creating a larger independent oil company
with a stronger balance sheet, we will be able to extract greater value from the
existing exploration portfolio. We continue to look to acquire additional
production in the Gulf of Mexico, if and when suitable opportunities arise.
We will, however, not overpay for acquisitions. We will cautiously add to our
production and exploration portfolios organically and through deals, allowing
our skills and professional approach to again yield the excellent results that
our management team has so far secured for the Company.
Richard O'Toole
Chairman
25 September 2003
Sterling Energy plc - Consolidated profit and loss account
For the six months to 30 June 2003
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Turnover
Existing operations 2,591 8 22
Acquisitions - 14 566
2,591 22 588
Cost of sales
Existing operations (879) (8) (13)
Acquisitions - (11) (365)
(879) (19) (378)
Gross profit
Existing operations 1,712 - 9
Acquisitions - 3 201
1,712 3 210
Administrative expenses
Amounts written off intangible fixed assets - (10) -
Other:
Existing operations (602) (64) (131)
Acquisitions - - (157)
(602) (74) (288)
Operating profit/(loss)
Existing operations 1,110 (74) (122)
Acquisitions - 3 44
1,110 (71) (78)
Investment income 81 7 22
Interest payable and similar charges (79) (38) (42)
Profit/(loss) on ordinary activities before 1,112 (102) (98)
taxation
Taxation (Note 6) (125) - -
Profit/(loss) for the financial period 987 (102) (98)
Earnings/(loss) per share (Note 7): basic 0.27p (0.2p) (0.1p)
: diluted 0.24p (0.2p) (0.1p)
Sterling Energy plc - Consolidated balance sheet
As at 30 June 2003
As at As at As at
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Fixed assets
Intangible assets (Note 8) 6,444 33 4,096
Tangible assets 6,058 142 6,560
12,502 175 10,656
Current assets
Debtors 1,839 33 673
Cash at bank and in hand 6,595 651 7,334
8,434 684 8,007
Creditors: amounts falling due within one year (2,070) (492) (1,006)
Net current assets 6,364 192 7,001
Total assets less current liabilities 18,866 367 17,657
Creditors: amounts falling due after one year - - (808)
Provisions for liabilities and charges (1,945) - (1,939)
Net assets 16,921 367 14,910
Capital and reserves
Called-up share capital 3,784 1,347 3,538
Shares to be issued 1,600 - 1,600
Share premium account 14,516 2,377 13,334
Currency translation reserve (577) 36 (173)
Profit and loss account (2,402) (3,393) (3,389)
Shareholders' funds 16,921 367 14,910
Shareholders' funds may be analysed as:
Equity interests 16,921 (524) 14,910
Non-equity interests - 891 -
16,921 367 14,910
Sterling Energy plc - Consolidated statement of recognised gains and losses
For the six months to 30 June 2003
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Profit/(loss) for the financial period 987 (102) (98)
Currency translation adjustments (404) - (209)
Total recognised gains/(losses) relating to the period 583 (102) (307)
Reconciliation of movements in Group shareholders' funds
For the six months ended 30 June 2003
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Profit/(loss) for the financial period 987 (102) (98)
Other recognised losses for the period (404) - (209)
Shares issued (net of expenses) 1,428 - 13,147
Shares to be issued - - 1,600
Total movement in the period 2,011 (102) 14,440
Shareholders' funds at start of period 14,910 470 470
Shareholders' funds at end of period 16,921 368 14,910
Consolidated cash flow statement (see note 9)
For the six months ended 30 June 2003
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Net cash inflow/(outflow) from operations 499 (9) (1,104)
Returns on investments and servicing of finance 61 (27) (3)
Capital expenditure (2,544) (17) (79)
Acquisitions - - 405
Cash outflow before financing (1,984) (53) (781)
Financing 1,428 138 6,574
(Decrease)/increase in cash (556) 85 5,793
Notes to the interim financial information for the six months to 30 June 2003
1. There being no distributable reserves, no interim dividend can be
paid for the six months to 30 June 2003.
2. The interim financial information contained herein does not
constitute statutory accounts within the meaning of Section 240 of the Companies
Act 1985. The results for the year ended 31 December 2002 have been extracted
from the statutory accounts of the Group for the year then ended which have been
filed with the Registrar of Companies. The auditors' report on those accounts
was unqualified and did not contain any statement under section 237 of the
Companies Act 1985.
3. The interim financial information as at and for the six months ended
30 June 2003, including the comparatives for the 6 months ended 30 June 2002,
has not been audited by Sterling Energy plc's auditors.
4. The financial information included in this document has been prepared
on a consistent basis and using the same accounting policies as the audited
financial statements for the year ended 31 December 2002.
5. The Directors of the Company approved the financial information
included in this interim results document on 24 September 2003.
6. There is no provision for deferred tax at 30 June 2003 (30 June 2002
and 31 December 2002: £ nil). The difference between the current tax charge of
£125,000 and the amount calculated by applying the applicable standard rate of
tax is as follows:
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Group profit/(loss) on ordinary activities before tax 1,112 (102) (98)
Tax on Group profit/(loss) on ordinary activities at
standard US corporation tax rate of 34 per cent. (year
2002: 35 per cent.) 378 (36) (34)
Effects of:
Expenses not deductible for tax purposes 5 5 32
Capital allowances in excess of depreciation - - (6)
Depletion and impairment of oil & gas properties 138 11 58
Other temporary differences (4) - (18)
Adjustment for tax losses (see below) (392) 20 (32)
Group current tax charge for the period 125 - -
Subsequent to the acquisition of the whole of the issued share capital of
Sterling Energy Limited ('SEL') and its US subsidiary, Sterling Energy, Inc.
('SEI') in October 2002 for approximately £7,880,000, the Group has generated
its results primarily in the US. The tax rate in the above reconciliation for
all periods presented is the standard rate for US corporation tax.
In deriving the tax charge for the six months to 30 June 2003 the Group has
recognised the utilisation of all of SEI's US taxable losses arising in previous
periods, including those prior to its acquisition, which the directors believe
to be available for offset against taxable profits in this period.
7. Basic earnings/(loss) per share is based on the profit on ordinary
activities after taxation of £987,000 (first half 2002: loss for the period,
£102,000; year 2002: loss for the year £98,000) and the weighted average number
of 359,327,058 ordinary shares of 1p each in issue during the period (first half
2002: 44,537,208; year 2002: 90,983,836). Diluted loss per share is the same as
basic loss per share in both the six months to 30 June 2002 and for the year
2002.
For the six months to 30 June 2003, diluted earnings per share was 0.24p per
share. This is computed based on 414,190,544 ordinary shares, being the total
used for the computation of the basic earnings per share adjusted for 40,000,000
deferred consideration shares expected to be issued at the end of 2003 and
assuming the exercise of 11,701,121 of the options and 3,162,365 of the
warrants outstanding during the period respectively.
8. The additions to intangible fixed assets in the six months to 30 June
2003 of £2,448,000 is comprised principally of costs prepaid in relation to work
on two wells which was carried out after 30 June 2003. The Group declared these
wells to be productive in August 2003 and the costs were then accordingly
transferred into tangible fixed assets.
9. Consolidated cash flow statement
(a) Reconciliation of operating profit/(loss) to net cash flow from
operations
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
£000's £000's £000's
(unaudited) (unaudited) (audited)
Operating profit/(loss) 1,110 (71) (78)
Depletion and depreciation 441 11 170
Amounts written off intangible fixed asset - 10 -
(Increase)/decrease in debtors (1,166) (13) (334)
(Increase)/decrease in creditors 114 54 (862)
Net cash inflow/(outflow) from operations 499 (9) (1,104)
Returns on investments and servicing of finance
Interest received 81 7 18
Interest paid (20) (34) (21)
61 (27) (3)
Capital expenditure
Purchase of intangible fixed assets (2,448) (17) (33)
Purchase of tangible fixed assets (96) - (46)
(2,544) (17) (79)
Acquisitions
Purchase of subsidiary undertakings - - (202)
Cash acquired with subsidiary undertakings - - 607
- - 405
Financing
Issue of Ordinary shares 1,428 138 6,574
(b) Analysis and reconciliation of net funds
At Cash Exchange At
1 January Flow & Other 30 June
2003 £000's Movements 2003
£000's £000's £000's
Cash at bank and in hand* 6,476 (556) (223) 5,697
Debt due after 1 year (808) - 808 -
Debt due within 1 year (435) - (777) (1,212)
Net funds 5,233 (556) (192) 4,485
* The cash balance at 30 June 2003 excludes £898,000 of restricted cash (end of
2002: £858,000)
10. Further copies of this interim statement are available from
the Company Secretary, Sterling Energy plc, Mardall House, Vaughan Road,
Harpenden, Hertfordshire, AL5 4HU, United Kingdom. Telephone +44 (0) 1582
462121, Fax +44 (0) 1582 461221.
11. Subsequent event
On 19 September 2003, the Company announced that it had agreed to buy the whole
of the issued share capital of Westmount Resources Limited ('Westmount
Resources'). Westmount Resources' assets consist of 20,000,000 ordinary shares
in Fusion ('Fusion Shares'), whose shares are listed on AIM. These Fusion Shares
represent 20.37 per cent. of Fusion's issued share capital. Westmount Resources
also owns 500,000 partly paid shares in Fusion Oil & Gas NL, a wholly owned
subsidiary of Fusion, which are each convertible into one Fusion share on
payment of A$0.199. The consideration payable for Westmount Resources is
71,375,000 new ordinary shares of 1p each in the Company. By reference to the
closing mid-market price of a Fusion share of 39.25 pence on 18 September 2003,
the Fusion Shares had a market value of £7.85 million.
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