Interim Results

Sterling Energy PLC 19 September 2006 STERLING ENERGY PLC 2006 INTERIM RESULTS EXCELLENT PROGRESS ON POTENTIAL HIGH IMPACT PROJECTS 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 2006 Interim Results together with an update on progress and outlook. HIGHLIGHTS • First half 2006 turnover up 263% at £24.5 million (H1 2005, £6.7 million: year 2005, £13.6 million) • Net profit up 159% at record £4.9 million in first half 2006 (H1 2005, £1.9 million; year 2005, £2.1 million) • Record earnings per share of 0.34p (H1 2005, 0.13p, year 2005, 0.15p) • Record cash inflow from operations of £15.8 million H1 2006 compared with outflow of £11.8 million in first half 2005 (year 2005 outflow of £7.4 million) • Record H1 2006 production of 4,671 boepd, up 175% on H1 2005 • Average Group realised sales prices, after hedging costs, of $51.86/boe (first half 2005 $40.78/boe) • Unrestricted cash of £15.5 million at end of June 2006 (end 2005: £7.6 million) and undrawn bank facility of £4.9 million. Increased since by approximately £7 million • First oil produced from Chinguetti field on time in late February 2006: operational uncertainties about field productivity and future development plans reduce internal 2P ultimate field reserve estimate by 43% to 80 million bbls • Internally estimated Sterling Group 2P reserves of 16.6 million boe at end June 2006 (December 2005: 21.3 million boe) • Drilling underway: 5 wells expected over the second half, 4 in US with potential to double reserves there • Carried second half exploration well in Mauritania • Tiof and Tevet development proposals awaited: Sterling royalty interest has no development cost and cost benefits could accrue to Chinguetti • 2D survey in Madagascar being processed: Exxon to become operator of Ampasindava block, contiguous to its other offshore licences where an exploration well is expected in late 2007 • Planning for mid-2007 well offshore Gabon on track (20.57% interest, 18% carried) with internally estimated upside of net 10 million bbl • Two wells offshore Guinea-Bissau on track for mid 2007: internally estimated upside of up to 15 million bbls net (5% option to back-in after the first well) • Progress continues on Kurdistan PSC and local office being set-up Harry Wilson, Chief Executive of Sterling Energy Plc, said: 'Our position continues to strengthen with a now sizeable and growing cash position and an active and largely carried exploration portfolio. We have seen excellent progress on some potential high impact projects. Over the next year we have 8 wells planned, any one of which could be significant. Alongside this activity, we continue to seek new drilling opportunities and production acquisitions that can bring significant upside potential to the Group.' For further information contact: Sterling Energy plc (+44 1582 462 121) Harry Wilson, Chief Executive Graeme Thomson, Finance Director Evolution Securities (+44 207 071 4311) Rob Collins 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 2006 INTERIM RESULTS CHAIRMAN'S STATEMENT Record production, net profit and cash flow from operations On behalf of the Board of Directors, I am again pleased to report significant progress during the first half of 2006 with production up 175% to a record average of 4,671 boepd and a record 8 exploration wells planned in the next year, of which 5 are in the second half of 2006. Net profit for the first six months of 2006 was also a record at £4.9 million, up 158% on the corresponding period in 2005, whilst cash generated from operations of £15.8 million compared with an outflow of £11.8 million in the corresponding period. Chinguetti production start-up: good cash flow, lower production and reserves The Chinguetti field, offshore Mauritania, started producing on time in late February 2006. Initial production was as forecast, but unfortunately there have been mechanical and reservoir problems since then. We had 3 cargo liftings in the first half which, together with our royalty, yielded a turnover of $33.9 million. There have been 2 further Sterling liftings since then and one more expected by year-end. The mechanical issues are being dealt with by the operator (Woodside), who is also undertaking a detailed review of the reservoir with the objective of redefining the development plan, production profile and ultimately recoverable reserves. Without prejudging the final outcome of this review, it is our expectation that the reserves will be downgraded and ultimate development costs increased. Accordingly, in this report we have reduced our 2P Chinguetti field estimate to 80 million bbls. Under the provisions of the Funding Agreement, Sterling's net reserves have declined by a lower proportion than those of the field but its cash flow will continue to reflect its priority recovery of development costs paid on behalf of SMH, through cost oil production. Fortunately, the price we have so far received for the oil sold is substantially higher than originally envisaged. Also on the positive side, we understand that development plans for Tiof and Tevet are in preparation and are likely to be submitted to the government for consideration in the near-term. Both of these fields are likely to be developed using the Chinguetti facilities. This has positive revenue implications for Sterling through its royalty interest and shared costs with Chinguetti, as well as enhancing the prospects for a longer production life from Chinguetti than is currently expected. Largest ever exploration programme started and large upside being added We have our largest ever exploration programme, with 4 wells planned in the USA in the second half of 2006 and 4 firm and largely carried wells in Mauritania, Gabon and Guinea Bissau in the next year. These could add significantly to Group reserves. Progress in Madagascar has been accelerated, with 2-D seismic now shot and being processed and drilling expected next year on the licence adjacent to ours. We also continue to seek new licences and drilling opportunities, as well as production with upside potential. We are also particularly excited about our prospects in Kurdistan. This is a rather unusual project in that the balance between technical and political risk is the reverse of what we normally expect. The Kurdish Regional Government have made rapid progress in developing their widespread natural resources and have already published a Petroleum Law and Model Production Sharing Contract. We are working closely with them to convert the Memorandum of Understanding, which we signed in February 2006, into a PSC, and to establish a local office. Strategy Sterling's strategy is to create value by achieving a balance between production and exploration. Production provides us with the stable platform from which we can pursue higher risk exploration, but production by itself will not generate the end result we are looking for. We need to be involved in high potential exploration projects which can transform our asset value, whilst reducing risk through our technical, financial & commercial skills. We continue to seek to broaden the asset base and this has been and remains a key objective for us - unfortunately the recent environment in the oil sector has often made this difficult to achieve at an acceptable price. Exploration remains a key part of our strategy. The quality of third party opportunities has declined as our competitors are more encouraged to drill by the high oil price. This means that the majority of our exploration projects are likely to be internally generated - such as Madagascar & Kurdistan - and we believe our management team can generate attractive drilling opportunities to meet our objectives. Outlook Sterling continues to strengthen its position. We have a sizeable and increasing unrestricted cash balance, strong cash flow despite the Chinguetti issues, a growing exploration portfolio with a significant exploration programme in the coming year, a large part of which is carried. We are also well placed to capitalise on our royalty interests in Mauritania, with the two new field developments at Tiof and Tevet expected to be proposed later this year. Excellent progress has also been made on potential high impact activities. We continue to seek production acquisition and new drilling opportunities which achieve an acceptable risk/reward balance and have significant upside potential for the Group. Our staff and management have responded well to the challenges and on behalf of shareholders, I thank them for their dedication. The near-term outlook is for another exciting period in Sterling's development. Richard O'Toole Chairman For & on behalf of the Board of Directors AFRICAN OPERATIONS Mauritania First Sterling production in Africa at Chinguetti Sterling produced its first oil in Africa in the first half of 2006. Chinguetti, the first oil field developed in Mauritania, came onstream at the end of February, on time and within Sterling's cost estimates. Included in the first half results was a total turnover of $33.9 million, being the share of 3 cargoes and royalty income. After deducting related costs of hedges for the period of $4.4/bbl, these yielded an average sales price of approximately $59/bbl. After deducting depletion based on the lowered 2P field reserve estimate and production costs, Chinguetti sales accounted for approximately 60% of the Group's gross profit. To date, Sterling has sold 5 cargoes, which, together with the royalty income, has yielded a total turnover of $52.9 million before costs. Current expectations are for one more Sterling cargo by the end of 2006. Once onstream, the field production rapidly climbed towards the operator's ultimate target of 75,000 bopd. Water injection, gas lift and gas injection into the Banda gas field were brought online in the first two months. In April, the field began to produce significant gas, particularly in the two northern producing wells. This rose to the capacity limits of the FPSO facility, requiring the wells to be choked back and adding to the already sharply declining production. It also became apparent that the field water injection from the 5 wells was having little, if any, effect, indicating that the reservoir could be more complex and disconnected than partners had anticipated. Gas handling was further impacted by a series of failures in the gas injection compressors. Production fell to an average of just over 41,000 bopd for the second quarter. Since then, production has somewhat stabilised around 31-34,000 bopd. The Chinguetti operator and partners are conducting detailed studies to optimise future production and reserve recovery. A new well with a modified completion format is expected later this year, with an accelerated follow-on programme towards the end of 2007 and possibly two further stages of development drilling. This will inevitably add to overall field costs. It is expected that the operator will issue updated field reserve estimates and plans in the first quarter of 2007. It is expected that, whilst the field oil-in-place will not change materially, the well recovery rates will be significantly less than expected. Sterling anticipates that the field 2P reserves will be downgraded after the operator has concluded its review and that a further series of wells will be drilled, in addition to those originally planned, increasing the ultimate development costs. Based on these assumptions and the information currently available to it, Sterling has provisionally reduced its total 2P Chinguetti field estimate to 80 million bbls, a reduction of 43%. These interims have been prepared on this basis. Whilst production and reserves are less than expected, Sterling's cash flow will continue to reflect its priority recovery of development costs it has paid on behalf of SMH, through cost oil entitlement. As of the end of June, approximately 6 million bbls had been produced in the field. During the period, the PSC contracts in four offshore blocks, including the Chinguetti area, were re-negotiated by partners as part of the resolution of a dispute with the government over amendments signed in 2005. This included a 10% lower share of cost oil production for partners, including SMH/Sterling, if the realised oil sales price exceeds $55/bbl. Sterling has two economic interests in the Chinguetti development. The first is through the Funding Agreement with the Mauritanian Government, signed in November 2004, which enabled the Government to directly participate in the Chinguetti development through the recently renamed Societe Mauritanienne des Hydrocarbures (SMH). Sterling is proud to have worked closely with SMH to develop Mauritania's first oil field. With this indirect interest, Sterling did not pay any share of the $100 million Chinguetti project bonus paid by the partners as part of the above-noted dispute resolution. The second interest is a royalty agreement covering all of PSC A and PSC B (including Chinguetti). This is subject to a sliding scale royalty at a rate linked to the realised oil price; at an oil price of $61 - $64 per bbl, the royalty payment would be approximately $8 per bbl. Tiof and Tevet developments expected Sterling anticipates development announcements to be made in the next six months on the Tiof (Oualata) and Tevet discoveries in PSC B. These fall outside the Funding Agreement but Sterling may receive development bonuses and will receive production royalties whilst paying no development costs. Various plans have been mooted. For Tiof, a tension leg platform is expected, tied back to Chinguetti for an initial estimated 50-60 million bbl development with first oil in 2009 of up to 50,000 bopd. Subsequent satellite developments of further reserves could be made, depending on field performance. Tevet is a much smaller accumulation and could be tied directly to the Chinguetti FPSO. In addition to the royalty benefits, such developments would enhance the Chinguetti economics through the sharing of facilities and the ability to economically produce otherwise marginal reserves. LNG and exploration There has been exploration drilling activity over several blocks offshore Mauritania during the first half, with a dry well on the Colin prospect in PSC A. This exploration programme will continue through 2007, with another well on PSC A scheduled for H2 2006. The prospects for an LNG development using Banda and other gas discoveries, remains dependent on the outcome of drilling elsewhere in Mauritania, market needs, technology and resolution of the gas regime. Gabon: preparing for carried drilling in summer 2007 Sterling operates three shallow water permits in southern Gabon; Iris Marin (WI 38.57%), Themis Marin (WI 20.57%) and the Ibekelia TEA (WI 40%). In Themis Marin, intensive processing of the two 3D surveys is well underway with results expected in December 2006. The South Themis 3D Survey, which is adjacent to the Etame oil field, is undergoing pre-stack depth migration processing to identify sub-salt depth closures at the prolific Gamba reservoir level. The North Themis 3D survey, undergoing re-processing, is adjacent to the Olowi Field and is also prospective at the Gamba level. An exploration well is scheduled in the Themis Marin licence for late summer 2007. Although Sterling has a 20.57% WI it will pay only 2.57% of the well costs through a farmout carry; internal estimates are for net reserves of up to 10 million bbls. In Iris Marin, state-of-the-art 3D seismic Pre-stack Depth Migration re-processing is underway to evaluate potential drilling targets in the licence. The results of this work are expected by year-end. In September 2005, Sterling signed a Technical Evaluation Agreement (TEA) and following the compilation of the database, evaluation of the TEA is now fully underway with results expected by summer 2007. At the end of this evaluation, which will include an aeromagnetic survey, there is an option to convert to a full Production Sharing Agreement. Madagascar: 2D being interpreted: nearby drilling in 2007 The first half of 2006 has seen a further increase in the exploration activity in the Ambilobe and Ampasindava Production Sharing Contracts (PSC), offshore Northwest Madagascar. The focus has been on seismic acquisition with over 4,000km of new 2D seismic data acquired across both licenses and the quality of the new data appears excellent. In a separate acquisition programme, piston cores and heat-flow measurements have also been collected and the results are currently being interpreted. Sterling holds a 30% WI, carried through seismic and up to 4 wells and is currently operator of these two licences. It is expected that ExxonMobil will become operator of the Ampasindava licence in the near-term. In the Ambilobe PSC, a decision was taken to enter the second exploration period at the end of May. The second phase required relinquishment of 25% of the permit area and the new licence area is 15,600 sq km. The relinquished area did not encroach into any of the prospective areas identified. No relinquishments are currently required on the Ampasindava PSC and the total acreage held is 13,147 sq km. The second half of 2006 will see a focus on processing, interpretation and integration of the newly acquired data with the existing dataset. In 2007, exploration in Madagascar is likely to enter an exciting new phase. ExxonMobil and its partners in the Majunga PSC (adjacent to Sterling's Ampasindava PSC) are reportedly planning to drill a deepwater exploration well, subject to rig availability. Guinea-Bissau: two wells in early 2007 Sterling holds a 5% working interest in the Sinapa licence. Plans for appraisal of the Sinapa licence await the outcome of drilling of two exploration wells in the adjacent Esperanca permit in the first quarter 2007. Sterling has an option to acquire a 5% working interest in the Esperanca permit at no cost, to be exercised after the first of these two wells. Sterling estimates a net upside potential of up to 15 million bbls. Cameroon: border dispute unresolved The financial obligations and work programme for the Ntem concession area are currently suspended due to a dispute between Cameroon and Equatorial Guinea over their maritime borders. Both countries are working together to resolve the dispute. Sterling had planned to farm-out this licence for drilling which 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. AGC - Dome Flore: seismic and carried appraisal planned The Dome Flore concession lies within the AGC a joint exploration zone between Senegal/Guinea Bissau. Sterling holds a 30% working interest in the Dome Flore concession operated by Markmore, a Malaysian company with interests in bitumen refining. Heavy oil feasibility studies suggested the need for further appraisal to assess economic feasibility. The licence was extended in January 2006 with a commitment to drill either 2-4 heavy oil appraisal wells or a deeper carried exploration well, together with a 500km 2D seismic survey. These heavy oil deposits on Dome Flore and Dome Gea, contain an estimated 0.8 to 1 billion barrels in place. Kurdistan: progress towards PSC In February 2006, Sterling signed a Memorandum of Understanding ('MOU') with the Oil, Gas & Petrochemical Establishment of the Kurdistan Regional Government of Iraq ('KRG'). This provided exclusive rights for the company to carry out geological studies and negotiate a full Production Sharing Contract (PSC) for an exploration block in Kurdistan, a largely unexplored area of extremely high potential. Following the formation of a unified Kurdistan government in May 2006, in accordance with the Iraqi Constitution, and the appointment of a new Natural Resources Minister, a Petroleum Law and model PSC have been published. Sterling is working closely with the KRG to convert the MOU into a PSC and to open an office in Erbil, the capital of Kurdistan. The area has the potential to become a significant new core area for Sterling. UNITED STATES OPERATIONS Sterling's USA operations have now made a full recovery from the effects of the destructive 2005 hurricane season. Net daily production averaged 8.5 mmcfged in the first half of 2006, up from 7.8 mmcfged in the first quarter. It has recently reached 10.1 mmcfged. Average prices were up at $7.35/mcfge (up 17% on the corresponding period), whilst gross profit was $2.54/mcfge, up over 100% on the corresponding period. Despite average production down by 25% over the corresponding period in 2005, the net financial contribution from the US production operations has increased. Pipeline income also rose again, to $1.3 million (+18% over H1 2005). These operations generated approximately 40% of the Group's gross profit in the first half 2006. A well drilled on the Gryphon field (C-3) was completed in April at no cost to Sterling (7.5% ORRI), with the C-1 well declining as expected. This area remains one of Sterling's major producing interest averaging 2.25 mmcfged net in the first half of 2006 and had increased up to 3.23 mmcfged net at the period end. It was shut-in for a month in the second half of 2006, for extensive pipeline replacement work, which was completed late due to adverse weather conditions. All of this work was at no cost to Sterling. In April 2006, Sterling established onshore production for the first time, with a successful non-operated Davis 251 #5 discovery well (WI 28%), located in the tidal area of Galveston Bay, just south east of Houston. Sterling's first-half scheduled programme of offshore lift boat work was delayed due to shortage of equipment. It has therefore continued into the third quarter of 2006. This programme consisted of necessary maintenance and down-hole work to enhance daily production and properly maintain the offshore facilities. Workover efforts were successful in the Mustang Island area and work is now underway at the Matagorda Island properties. In line with its strategy, the Houston office has been expanding its portfolio of drilling opportunities and seeking additional production interests, including in the onshore areas of Texas and Louisiana. As an operator in both state and federal waters, Sterling is now positioned to become an onshore operator. Four US wells are planned to be drilled in the second half funded from cash flow, subject to equipment availability. Sterling is currently participating in drilling the small Andrew prospect (Trehan-1 well), onshore Vermilion Parish, south Louisiana (22.25% WI), with a target of 1-3 net bcfe. The North Theall Exploratory Prospect (34% WI), also in Vermilion Parish, south Louisiana, is expected to spud in early November, targeting a net 10-30 bcfe. Sterling is preparing to operate its first onshore exploratory well in Calcasieu Parish, south Louisiana (15% WI). This is a deep 18,000' Eocene test, targeting internally estimated net reserves of 20 bcfe and larger, but less likely, upside of 50 bcf+. The well is scheduled to spud in late December. The small fourth well is scheduled to be drilled in late December, offshore on GA Block 303 (15.75% WI). Located up-dip to the existing B-1 producing well, it targets an additional 1 bcfe net. Decommissioning work will begin in the second half at the High Island A68 and A83 areas, where production ceased in the 4th quarter of 2003. This work was delayed due to the effect of the 2005 hurricanes. Sterling is currently expanding its pipeline system and associated onshore processing facilities with work due to finish late in the fourth quarter of 2006. The majority of this project will be paid for by a third party user. This is aimed at more than doubling the oil and gas pipeline gathering and processing capacity of the northern MU facility and ultimately increasing pipeline income by around 50%. FINANCIAL REPORT FOR THE SIX MONTHS TO 30 JUNE 2006 (UNAUDITED) Summary: record results Profit on ordinary activities before taxation in the first half of 2006 was a record £7.2 million, up 159% from the £2.8 million of the corresponding period in 2005. With cash generated from operations of £15.8 million (H1 2005 outflow £11.8 million), Sterling's financial performance has continued to improve in the first half. Record turnover, gross and net profit Turnover in H1 2006, increased to £24.5 million, up 263% over H1 2005 and 79% higher than the whole of 2005. The Chinguetti Field in Mauritania yielded 72% of the total turnover in the first half. Gross profit was £10.0 million, up 150% on the £4.0 million in the first half of 2005. This comprised 58% from the Mauritanian operations and 42% from the USA. Cost of sales totalled £14.4 million (H1 2005: £2.7 million). Of this, £11.6 million related to Mauritanian production, including additional depletion of £3.3 million resulting from the reserve downgrade. The Gulf of Mexico accounted for £2.8 million. Average cost of sales in Mauritania in respect of our sales entitlement amounted to $35.2 per bbl, of which depletion was $32.4/bbl. In the Gulf of Mexico, costs averaged $3.3/mcfge ($2.8/mcfge in H1 2005), the increase particularly reflecting higher insurance and other costs. Of this, depletion there was $1.7/mcfge (H1 2005, $1.5/mcfge). Administrative costs rose to a total of £2.7 million (H1 2005:£1.8 million) principally following the increase in staffing, with a dedicated team for Mauritania and further growth of the commercial and legal, new ventures, and exploration teams. For the first time, compliance with FRS 20 requires these costs to include the estimated non-cash costs of issuing share options which is charged over the two-year vesting periods. A total of £0.5 million has been charged in each of the first halves of 2005 and 2006 and the prior year total has been restated. Profit on ordinary activities before taxation in the period was up 159% at £7.2 million (H1 2005: £2.8 million). This increase principally reflects the benefit of the commencement of sales in Mauritania. The taxation charge of £2.4 million includes £1.7 million that relates to the Mauritanian activities, with an underlying tax rate charged of approximately 30%. Due partly to the level of capital allowances on development costs in H1 2006, we do not estimate any significant current tax to be payable in respect of the period. We have provided for the resultant deferred tax in full. A taxation charge has also been provided for on the US Gulf of Mexico operations of £0.7 million, which is principally expected to consist of current tax payable. The record net profit for the period was £4.9 million, up 158% over H1 2005 and up 130% on the total for the whole of 2005. Fully diluted earnings per share rose 161% to 0.34p (H1 2005: 0.13p per share). Record cash flow The cash flow shows that a record £15.8 million was generated from the operations in the period, compared with an outflow of £11.8 million in H1 2005. Total investments in tangible fixed assets made in the period were £18.7 million, of which £16.8 million was for the Chinguetti development and £1.9 million on the USA operations. Other exploration costs, including new venture work, absorbed £0.9 million. Strong balance sheet: net current assets of £42 million Unrestricted cash balances rose to £15.5 million at 30 June 2006 from £7.6 million at the end of 2005 and there was also an undrawn bank facility in the USA of £4.9 million available (end 2005: nil). This increase in available cash largely reflects the receipt of funds associated with the start-up of Mauritanian oil production, whilst £4.6 million of bank debt was also repaid in H1. As of 18 September these unrestricted cash balances had increased by a further approximately £7 million to approximately £22.5 million. At the end of June 2006, net current assets were £42.4 million (end H1 2005: £54.5 million). This reduction reflects further drawings in H1 2006 of $21.2 million for development work under the $130 million Chinguetti letter of credit: cumulative drawings to the end of June 2006 were $95.4 million and as of 18 September 2006 totalled $98.3 million. Included in these assets were a total of £7.8 million for oil hedges to the end of 2007 covering 0.7 million bbls to the end of 2006 and 1.2 million bbls in 2007. During the first half of 2006, the secured USA bank facility was moved to Macquarie Bank. Of the $28 million facility at the end of the period, $18.8 million had been drawn. Subject to twice-yearly reviews, this loan is classified as long-term as it is not currently repayable until mid 2008. A review is currently underway. Tangible fixed assets at the end of June 2006 were £118.6 million, being 82% of the total fixed assets (end H1 2005: 74%). An accrual is expected to be made in the second half of 2006 in relation to the ORRI pool arrangements approved by shareholders at the 2003 AGM, as payout on some pools are expected to have then occurred. At the end of the first half 2006, equity shareholder funds had decreased to approximately £161.9 million (end 2005: £169.2 million). This movement principally reflects the increase in reported net profit in the period, offset by the impact of adverse exchange rate movements: average rates were £:$1.79 for the period (H1 2005 £:$1.87) and the closing rate was £:$1.85 (end 2005: £: $1.72). 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 NRI - net revenue interest ORRI - overriding royalty interest WI - working interest 2P - proven and probable reserves H1 - period from 1 January to 30 June $ - US dollar Sterling Energy plc - Consolidated profit and loss For the six months to 30 June 2006 Six months to 30 Six months to 30 Year ended June 2006 June 2005 31 December 2005 restated restated £000's £000's £000's (unaudited) (unaudited) (unaudited) Turnover 24,471 6,735 13,642 __________ __________ __________ Cost of sales (14,434) (2,734) (5,615) __________ __________ __________ Gross profit 10,037 4,001 8,027 __________ __________ __________ Administrative expenses (Note 9) (2,680) (1,800) (3,615) Exceptional office closure costs - - (1,153) __________ __________ __________ (2,680) (1,800) (4,768) __________ __________ __________ Operating profit 7,357 2,201 3,259 __________ __________ __________ Interest receivable & similar income 773 997 1,882 Interest payable & similar charges (903) (412) (1,145) __________ __________ __________ Profit on ordinary activities before 7,227 2,786 3,996 taxation Taxation (Note 6) (2,354) (896) (1,878) __________ __________ __________ Profit on ordinary activities after 4,873 1,890 2,118 taxation __________ __________ __________ Profit for the financial period 4,873 1,890 2,118 __________ __________ __________ Earnings per share: (Note 7) Basic 0.35p 0.14p 0.15p __________ __________ __________ Diluted 0.34p 0.13p 0.15p __________ __________ __________ Sterling Energy plc - Consolidated balance sheet As at As at As at 30 June 2006 30 June 2005 31 December 2005 restated restated £000's £000's £000's (unaudited) (unaudited)) (unaudited) Fixed assets Intangible assets 25,994 34,140 29,000 Tangible assets 118,597 98,483 131,863 Investments 694 - 689 __________ __________ __________ 145,285 132,623 161,552 __________ __________ __________ Current assets Inventory 1,246 - - Debtors 19,537 21,438 15,501 Cash at bank and in hand 36,669 65,135 47,786 __________ __________ __________ 57,452 86,573 63,287 Creditors: amounts falling due within (15,028) (32,049) (25,702) one year __________ __________ __________ Net current assets 42,424 54,524 37,585 __________ __________ __________ Total assets less current liabilities 187,709 187,147 199,137 __________ __________ __________ Creditors: amounts falling due after (10,187) (18,131) (15,918) one year Provisions for liabilities and (14,554) (7,839) (12,909) charges __________ __________ __________ Net assets 162,968 161,177 170,310 __________ __________ __________ Capital and reserves Called-up share capital 14,019 13,933 14,019 Share premium account 142,590 141,600 142,590 Currency translation reserve (4,306) 1,075 8,364 Share option reserve 2,879 1,913 2,424 Profit and loss account 6,723 1,624 1,850 __________ __________ __________ Equity shareholders' funds 161,905 160,145 169,247 __________ __________ __________ Minority interest 1,063 1,032 1,063 __________ __________ __________ Total capital employed 162,968 161,177 170,310 __________ __________ __________ Sterling Energy plc - Consolidated statement of recognised gains and losses For the six months ended 30 June 2006 Six months Six months Year ended to 30 June 2006 to 30 June 2005 31 December 2005 restated restated £000's £000's £000's (unaudited) (unaudited) (unaudited) Profit for the financial period 4,873 1,890 2,118 Currency translation adjustments (12,670) 9,346 16,635 __________ __________ __________ Total recognised (losses)/gains relating to the period (7,797) 11,236 18,753 __________ __________ Prior Year Adjustment (As (2,423) Explained in Note 9) Total (losses) and gains (10,220) recognised since last annual report and financial statements __________ Reconciliation of movements in Group shareholders' funds For the six months ended 30 June 2006 Six months Six months Year ended to 30 June 2006 to 30 June 2005 31 December restated 2005 restated £000's £000's £000's (unaudited) (unaudited) (unaudited) Profit for the financial period 4,873 1,890 2,118 Other recognised (losses)/gains (12,670) 9,346 16,635 for the period Shares issued (net of expenses) - - 1,076 Share Option Reserve 455 481 990 __________ __________ __________ Total movement in the period (7,342) 11,717 20,819 Shareholders' funds at start of 169,247 148,428 148,428 period __________ __________ __________ Shareholders' funds at end of 161,905 160,145 169,247 period __________ __________ __________ Consolidated cash flow statement (see note 8) For the six months ended 30 June 2006 Six months to Six months to Year ended 30 June 2006 30 June 2005 31 December 2005 £000's £000's £000's (unaudited) (unaudited) (unaudited) Net cash inflow/(outflow) from operations 15,809 (11,794) (7,399) Returns on investments and servicing of finance 233 750 1,163 Capital expenditure (19,608) (21,634) (45,314) __________ __________ __________ Cash outflow before financing (3,566) (32,678) (51,550) Financing 11,485 25,887 38,240 __________ __________ __________ Increase/(decrease) in cash 7,919 (6,791) (13,310) __________ __________ __________ Sterling Energy plc - Notes to the interim financial information For the six months to 30 June 2006 1. No interim dividend is proposed to be paid for the six months to 30 June 2006. 2. This statement does not comprise statutory accounts as defined in Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2005, on which the auditors gave an unqualified report, have been filed with the Registrar of Companies. 3. The interim financial information as at and for the six months ended 30 June 2006 have been neither audited nor reviewed 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 unaudited financial statements for the year ended 31 December 2005 with the exception of the adoption of FRS 20 'Accounting for Share Benefits'(see note 9). This accounting standard is required to be adopted for AIM Listed companies for accounting periods from 1 January 2006 and requires the fair value of share options granted to employees to be expensed in the profit and loss account. 5. The Directors of the Company approved the financial information included in this interim result document on 18 September 2006. 6. The Group tax charge comprises: Six months to Six months to Year ended 30 June 2006 30 June 2005 31 December restated 2005 restated £000's £000's £000's (unaudited) (unaudited (unaudited) Current tax 684 470 1,306 Deferred tax-origination and 1,670 426 572 reversal of timing differences __________ __________ __________ 2,354 896 1,878 __________ __________ __________ The difference between the current tax charge of £684,000 and the amount calculated by applying the applicable standard rate of tax is as follows: Group profit on ordinary activities before tax 7,227 2,786 3,996 Tax on Group profit on ordinary activities at standard UK corporation tax rate of 30% (year 2005 US corporation tax rate: 34%) 2,168 947 1,359 Effects of: Expenses not deductible for tax purposes 143 222 1,058 Capital allowances (in excess of)/ exceeded by depreciation (1,516) (548) (594) Other temporary differences (25) - (552) Difference in overseas tax rates (86) (35) 4 Adjustment for tax losses (see below) - (116) (4) Adjustment in respect of prior years - - 35 __________ __________ __________ Group current tax charge for the period 684 470 1,306 __________ __________ __________ In previous years the Group had generated its results primarily in the US and the tax rate in the above reconciliation for all periods presented was the standard rate for US corporation tax. During 2006 the Group generated a higher proportion of its results in Mauritania and the UK and as the expected underlying rate on the majority of the profits is expected to be at the UK rate of 30% this has been adopted as the rate used in the reconciliation above. 7. Basic earnings per share is based on the profit on ordinary activities after taxation of £4,873,000 (first half 2005: restated profit for the period, £1,890,000; year 2005: restated profit for the year £2,118,000) and the weighted average number of 1,401,950,558 ordinary shares of 1p each in issue during the period (first half 2005: 1,393,325,558; year 2005: 1,393,778,640). For the six months to 30 June 2006, the fully diluted earnings per share was 0.34p per share. This is computed based on 1,441,084,922 ordinary shares, being the total used for the computation of the basic earnings per share as adjusted in assuming the exercise of 39,134,364 of the 78,175,000 options granted or approved for grant as at the end of June 2006. 8. Notes to the cash flow statement a. Reconciliation of operating profit to net cash flow from operations Six months to Six months to Year ended 30 June 2006 30 June 2005 31 December restated 2005 restated £000's £000's £000's (unaudited) (unaudited) (unaudited) Operating profit 7,357 2,201 3,259 Depletion and depreciation 12,126 1,554 3,395 share option reserve 456 481 990 Amounts written off intangible fixed - - 5 assets (Increase) in debtors (3,174) (18,471) (13,396) (Increase) in inventory (1,246) - - (Decrease)/Increase in creditors 290 2,441 (1,652) __________ __________ __________ Net cash inflow/(outflow) from operations 15,809 (11,794) (7,399) __________ __________ __________ Returns on investments and servicing of finance Interest received 773 997 1,849 Interest paid and exchange differences (540) (247) (686) __________ __________ __________ 233 750 1,163 __________ __________ __________ Capital expenditure Purchase of intangible fixed assets (892) (2,688) (2,072) Purchase of tangible fixed assets (18,716) (18,946) (43,242) __________ __________ __________ (19,608) (21,634) (45,314) __________ __________ __________ Financing Issue of ordinary shares, net of expenses - - 1,076 (Repayment)/Drawdown under bank loan facility (4,588) 2,887 - Movements on restricted accounts 16,073 23,000 37,164 __________ __________ __________ Net cash inflow 11,485 25,887 38,240 __________ __________ __________ b. Analysis and reconciliation of net funds At 1 January Cash flow Exchange & At 30 June 2006 2006 Other Movement £000's £000's £000's £000's Cash at bank and in hand* 7,611 7,919 (80) 15,450 Debt due after 1 year (15,918) 4,953 778 (10,187) Debt due within 1 year - - - - __________ __________ __________ __________ Net funds/(debt) (8,307) 12,872 698 5,263 __________ __________ __________ __________ * The cash balance at 30 June 2006 excludes £21,219,000 of restricted cash (end of 2005: £40,175,000) 9. Prior year adjustment During the period the company adopted the Financial Reporting Standard 20 'Share Based Payment' which applies to AIM listed companies for accounting periods beginning on or after 1 January 2006. The fair value of employee share options is recognised as an employee expense and a corresponding reserve set up in the balance sheet. The associated expense is amortised over the vesting period of the share options. For the period to 30 June 2006 this resulted in an additional charge of £455,000. The effect of this standard on prior years is summarised below: Six months to Year ended 30 June 2005 31 December 2005 £000's £000's (unaudited) (unaudited) Profit and loss account Increase in administrative expense (481) (990) __________ __________ (Decrease) in profit for the period (481) (990) __________ __________ Balance Sheet Profit and loss reserves brought forward 1,433 1,433 Profit and loss reserves for the period 481 990 Share option reserve (1,914) (2,423) __________ __________ Change in reserves for the period - - __________ __________ 10. Further copies of this interim statement are available from the Company Secretary, Sterling Energy plc, Mardall House, 7-9 Vaughan Road, Harpenden, Hertfordshire, AL5 4HU, United Kingdom. Telephone +44 (0) 1582 462121, Fax +44 (0) 1582 461221, info@sterlingenergyuk.com This information is provided by RNS The company news service from the London Stock Exchange

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