Sterling Resources, a Canadian-listed international oil and gas company headquartered in Calgary, Alberta has said it will reduce its exploration activity.
In a statement issued today the company said that in order to address the impacts of the worsening industry environment and ongoing financing challenges, Sterling is shifting its strategy to focus on UK production and tax optimization, and to reduce significantly its exposure to exploration activity in the UK and internationally.
The company has said it is looking to sell a sale of part in its Breagh natural gas field in the UK North Sea, aiming to improve its financial liquidity and to facilitate a debt refinancing, as well as to assist in rebalancing the company’s asset portfolio which is currently over-dependent on the Breagh asset.
Subject to funding, Sterling has said it would then seek to acquire additional UK production with characteristics that would allow more efficient use of its large UK tax losses.
“In principle the Company believes it should be possible to acquire such assets at close to a fully-taxed valuation which, in Sterling’s ownership, will generate cash flows which are largely or completely sheltered from tax,” Sterling said.
Cuts in Romania and UK
The ongoing processes to significantly reduce licence equity offshore Romania and to farm-down the UK licences containing the Niadar and Ossian/Darach prospects are intended to reduce future net exploration expenditure as far as possible, the company has explained. Sterling has also said it is no longer intending to participate in UK Licensing Rounds (or elsewhere) for the foreseeable future.
In addition, the company has said it remains of the view that smaller exploration and production companies will continue to trade at greater discounts to net asset value than their larger peers, and will continue to consider mergers or other corporate transactions (as well as outright sale) that would be to the benefit of shareholders.
Jake Ulrich, Chief Executive Officer of Sterling, said: “Despite a very challenging macroeconomic environment we continue to have great faith in the long term potential of our assets. Our portfolio is predominantly gas, which represented 82 percent of our 2P reserves at the end of 2013 and 98 percent of our daily 2014 production. While the Brent crude spot price roughly halved in the second half of 2014, the UK National Balancing Point (NBP) spot gas price actually rose by about 20 percent. Our heavily gas-weighted portfolio therefore provides resilience to a sustained low oil price environment.
“Over time, we aim to close the value gap between our share price and our fair valuation through a focus on UK production and tax efficiency, backed by rigorous capital allocation.”
“Sterling has also said it is no longer intending to participate in UK Licensing Rounds (or elsewhere) for the foreseeable future.”
At the end of December 2014, Sterling had unrestricted cash and cash equivalents of approximately $18 million, following the completion of the amendments to the UK senior secured bond announced on December 12, 2014. Sterling needs to fund a combined interest payment and amortization instalment payment to bondholders of $32.7 million on April 30, 2015.
Without completion of any divestments, the expected cash deficit (below the $10 million minimum UK unrestricted cash required under the Bond and after making the $32.7 million payment and satisfying other Bond requirements) is expected to be approximately $20 million at the end of April 2015.
Sterling has said it is in talks with a number of potential purchasers of part of its interest in the UK Breagh gas field, and a significant proportion of the equity in its Romania assets.
Sterling has said that completion of either of these sales would be expected to provide all or part of the funds required to make the $32.7 million payment.
The company is also in discussions with a number of banks regarding a potential reserves based loan facility which, if completed prior to April 30, 2015, would therefore remove the need to make the $32.7 million payment to bondholders.
Sterlings’s estimated operating cash flow from Breagh and Cladhan in 2015 is expected to be approximately $80million using forward curve prices at December 31, 2014 (an average of 48.6 pence per therm or $7.55 per million British thermal units), net of Sterling’s estimate of operating costs and Flowstream entitlement. Sterling is planning to put in place gas price hedging through purchase of put options.