Sterling Resources has entered into an agreement to sell its entire Romanian business to Carlyle International Energy Partners (CIEP), an affiliate of The Carlyle Group.
The sale includes licence blocks 13 Pelican, 15 Midia, 25 Luceafarul and 27 Muridava, structured as a corporate sale of the company’s wholly-owned subsidiary Midia Resources SRL, and is expected to complete around the end of the second quarter of 2015 subject to satisfaction of certain conditions typical for a transaction of this nature, including statutory Romanian approvals and the consent of certain participants in the Romanian concessions, the company explained in the statement.
CIEP will pay a cash consideration of US$42.5 million to Sterling at completion (prior to any Romanian tax liabilities). Concurrent with the above sale Sterling has entered into an agreement with Gemini Oil & Gas Fund II, L.P. to terminate an investment agreement signed with Gemini in 2007. Under the investment agreement, Gemini provided funding to Sterling towards its drilling costs of the successful Ana discovery well on the Midia block in return for an entitlement for Gemini to receive payments equivalent to a share of Sterling’s gross revenue from any future production from a designated area within the block.
Upon completion of the Romanian sale, Sterling will make a termination payment to Gemini comprising a cash consideration of US$10 million out of the proceeds received from CIEP and issuance to Gemini of 60,372,876 common shares of Sterling (the Gemini Shares) having a market value of US$7.5 million (based on the ten day volume-weighted average price of the common shares on the TSX-V for the period ending March 24, 2015, being CAD $0.157 per share at an average exchange rate of US$1 = CAD$1.2664.) Following the issuance of the Gemini Shares, Sterling’s issued capital will total 441,572,956 shares, an increase of approximately 15.8 percent, of which Gemini’s shareholding will be 13.7 percent.
Net of the Gemini cash payment, Sterling will receive cash proceeds of US$32.5 million from the Romanian sale (prior to any Romanian tax liabilities). Pursuant to the Amended and Restated Bond Agreement dated December 14, 2014 relating to Sterling Resources (UK) plc’s senior secured bond and the Romanian Sale Agreement, the net cash proceeds will be applied according to a defined procedure which (in summary form) will in order (i) fund advisory costs and any transaction-related taxes, (ii) pre-fund the next amortization and interest payment due to Bondholders to the extent not already pre-funded, (iii) in relation to half of any excess from (i) and (ii), fund the redemption of Bonds, and finally (iv) in relation to the other half of any excess from (i) and (ii), provide unrestricted cash to the company. The next such amortization and interest payment is due on April 30, 2015, but as previously reported the company does not expect to have sufficient funds to make the payment in full on that date. As completion of the Romanian sale is likely to be after this date, the company is considering options to improve its short term liquidity position.
Sterling’s entitlement to further contingent payments from the completed sale of its 65 percent interest in a portion of the Midia Block in the Romanian Black Sea (the Carve-out Portion) to ExxonMobil Exploration and Production Romania and OMV Petrom S.A., which was announced on January 29, 2014, is unaffected by the Romanian Sale Agreement. These contingent payments relate to future exploration and development success occurring in the Carve-out Portion, and comprise US$29.25 million upon a commercial discovery being made and an additional US$19.5 million upon first production.
To address the company’s longer term financing needs, the company is continuing discussions with a number of potential purchasers for a sale of a 10-15 percent interest in the UK Breagh gas field and progressing a potential refinancing of the Bond and/or incremental financings.
Commenting on the Romanian sale, Jake Ulrich, Sterling’s Chief Executive Officer said: “Sterling has had a presence in the Romanian Black Sea since 1997. As operator, we discovered the Ana gas field in 2007 and built up further contingent and prospective resources through further drilling, seismic acquisition and interpretation, and gaining new licences. While we believe firmly in the significant future potential of these assets, we face material ongoing well commitments on our licences and potentially very material development costs which are inappropriate for a company of our size. We believe that the full value can only be realized by a company with much greater financial strength and with a longer term investment horizon.
“We have therefore decided to sell in order to focus our financial resources on the UK North Sea. Our team in Romania have served Sterling well and we wish them every success for the future under CIEP’s ownership. The sale will leave Sterling as a predominantly UK business focused on the high quality Breagh field, plus contingent resources with very minor ongoing costs in the Netherlands. We expect that this refocusing and simplification of our portfolio will make the company a more attractive candidate for a merger or corporate sale, benefiting all stakeholders.”
Sterling holds a 65 percent operated interest in blocks 13 Pelican and 15 Midia, a 50 percent operated interest in block 25 Luceafarul, and a 40 percent non-operated interest in block 27 Muridava, all in the Romanian Black Sea.