SEY.L Regulatory News (SEY)

25 March 2019

STERLING ENERGY PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

Sterling Energy plc is today issuing its preliminary results for the year ended 31 December 2018.

OVERVIEW

Sterling Energy plc ('Sterling' or the 'Company'), together with its subsidiary undertakings (the 'Group'), is an upstream oil and gas company listed on the AIM market of the London Stock Exchange. The Company is an experienced operator of international exploration and production licences, with a primary geographic focus on emerging markets including, Africa and the Middle East, although the Board would consider other regions for material opportunities. The Group has a high potential exploration asset in Somaliland and an active strategy to deliver shareholder value through disciplined, exploration and production projects; leveraging the Company's experience, with an emphasis on securing near term cash flow generative opportunities.

2018 SUMMARY

Operations

· Throughout 2018: Odewayne block, Somaliland - Sterling continued to support the Operator in progressing the technical understanding of the block.

· January 2018: Chinguetti, Mauritania - cessation of production ('CoP') and negotiated termination of the Funding Agreement ('Deed of Termination').

Corporate

· Continued merger and acquisition ('M&A') mandate for transformational growth (asset and corporate options).

· June 2018: Board and Management appointment of David Marshall as CEO. 

· October 2018: Appointment of GMP FirstEnergy as the Company's co-broker.

Financial

· Cash resources net to the Group at 31 December 2018 of $46.3 million (2017: $81.4 million).

· The Group remains debt free and fully funded for all commitments.

· Adjusted EBITDAX1: loss for the Group of $1.5 million (2017: $5.9 million loss).

· Ongoing focus on capital discipline, cash general and administrative overheads ('G&A') expenses reduced by 25% to $3.0 million and is forecast to be ca. 15% lower in 2019.

· Proactive focus on treasury management, with interest received totaling $1.0 million (2017: $1.1 million).

Post year end

· Odewayne block, Somaliland; Operating Committee Meeting ('OCM') held early March where the work program for 2019 was finalised by the Joint Venture ('JV') partners, including the reprocessing of 1,000km of 2D seismic to Pre-Stack Time Migration1 ('PSTM').

1defined within the definitions and glossary of terms

For further information contact:

Sterling Energy plc +44 (0) 20 7405 4133

David Marshall, Chief Executive Officer

Michael Kroupeev, Chairman

Peel Hunt LLP +44 (0) 20 7418 8900

Richard Crichton

James Bavister

www.sterlingenergyplc.com Ticker Symbol: SEY

This announcement contains inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations. 

CHAIRMAN'S STATEMENT

The market conditions remained unstable throughout 2018 with the oil price continuing to be volatile; Brent peaking at $86/bbl in October and sliding down to nearer $50/bbl three months later. Uncertainty is high and material deals require more time to evaluate and execute.

Our team is working hard screening a number of opportunities. Expectation is that from these efforts will materialise a value creating deal in the near term.

The Somaliland acreage remains very attractive, with costs carried by our partner during the current phase of the licence through to drilling in the subsequent period. The Operator continues the processing and interpretation of the data gathered throughout the Third Exploration Period and we are engaging closely with the process and the results. We see this as an exciting and potentially material exploration opportunity and look forward to the possibility of drilling over the next few years.

Financial

In 2018, business costs were further reduced by continued overhead initiatives and a focus on treasury management. The Group had cash resources of $46.3 million at the end of 2018 and we remain free of debt with our work programme for 2019 fully funded.

Board

In June 2018 the Company announced the appointment of David Marshall as the Chief Executive Officer and Director of the Company. David has 35 years' experience in oil and gas production and development specialising in technical solutions for accessing production from stranded assets.

Outlook for 2019 and beyond

The outlook for 2019 is exciting. Post Chinguetti the Company is pursuing opportunities in our focus areas, utilising our technical expertise. Should market conditions worsen, we will preserve our capabilities, strengths and cash position to weather any storm.

I would like to thank all our stakeholders for their continuing support and all of our management and staff for their diligent efforts during 2018.

Michael Kroupeev - Chairman

CEO'S STATEMENT

Market Landscape

Commodity prices in 2018 saw an oil price between the $50-86 per barrel range. Commodity prices were very volatile, particularly in Q4 2018 when prices averaged $68 per barrel. The beginning of 2019 has already seen a steady rise in crude prices, with crude prices up ca. 23% from January 1st to mid-March.

Majors are stepping back from large scale projects, investing more capital into projects with shorter payback timeframes. There is a clear appetite in the market for buying and selling existing production, however we have seen early signs that exploration projects are coming into focus once again.

Markets and the news cycle have been dominated by Britain's imminent withdrawal from the European Union in March 2019. Though the Company sees no direct impact from BREXIT, equity markets are likely to be volatile during the period preceding BREXIT and possibly thereafter. More recently Russia continues to cut production and Venezuelan and Iranian exports fall due to the impact of sanctions.

The Company is well financed and is positioned to take advantage of acquisition opportunities during these volatile market conditions.

Operations

During 2018 work on the Odewayne block in Somaliland was focused on undertaking a highly focused and rigorous processing effort, with the primary technical objective of improving the deeper subsurface image; as a part of this, Sterling finalised the processing to PSTM of three test 2D seismic lines and shared the results with the JV. In 2019 we will continue to support the Operator and look forward to the results from the reprocessing. The costs associated with current period (Third Period) and the Fourth Period are fully carried by Genel Energy, hence the minimal capital investment shown within the accounts.

In January 2018, Sterling completed the termination of its Funding Agreement for the Chinguetti oil field in Mauritania, crystallising the liability exposure. The completion of the termination process was the final step in the reorganisation of the Group and now allows us to concentrate on our corporate strategy of securing a material M&A transaction.

Activity has doubled on opportunity and asset screening and we are gaining deal traction due to the renewed focus and simplicity of the Group as mentioned above. Many smaller companies with viable developments but low cash reserves are looking for merger opportunities, giving them access to cash that is currently not available from capital markets.

Corporate

Sterling retains a strong position on the AIM listed oil and gas sector with a strong cash platform of $46.3 million and no debt or other liabilities.

The Company has continued to reduce G&A and focus on robust treasury management, in line with the Board mandate for cash preservation to maximise our ability to deploy capital into existing and new assets. In 2018 cash G&A expenses reduced by 25% in comparison to 2017. As we forecast into 2019 the Company hopes to achieve further G&A savings of ca. 15% whilst increasing interest received by ca. 15%.

In 2018 the Company appointed GMP FirstEnergy as joint corporate broker, and legal M&A specialists Pinsent Masons, as their expertise in the Oil and Gas sector will benefit the continued drive to a material transaction.

We have a clear strategy and can move quickly and decisively for the right opportunity, leveraging our cash balance and technical capabilities of the Sterling team to good effect.

David Marshall - Chief Executive Officer

OPERATIONS REVIEW

Since late 2015, the Company implemented a strategic mandate of exiting non-core exploration portfolio assets, and reducing outstanding liabilities, to provide a simpler and rejuvenated platform for M&A led growth. The Group's remaining African exploration focused Odewayne block provides fully carried exposure to a frontier basin that has the potential to deliver material hydrocarbon reserves.

SOMALILAND

Somaliland offers one of the last opportunities to target an undrilled onshore Mesozoic rift basin in Africa. The Odewayne block, with access to Berbera deepwater port less than a 100km to the north, is ideally located to explore this frontier basin. A 2D geophysical survey acquired in 2017, along with potential field data and legacy geological field studies, help corroborate the presence of a sedimentary basin with further evidence for a working hydrocarbon system.

Odewayne (W.I. 34%) Exploration block

Overview

This large and unexplored frontier acreage position comprises an area of 22,840km2, the equivalent of ca. 100 UK North Sea blocks. Exploration activity prior to the 2017 regional 2D seismic acquisition program has been limited to the acquisition of airborne gravity and magnetic data and surface fieldwork studies, with no wells drilled on block.

The Odewayne production sharing agreement ('PSA') was awarded in 2005. It is in the Third Period, with a minimum work obligation of 500km of 2D seismic. The Third Period has been extended, through the 6th deed of amendment and its minimum work obligation was met in 2017 when the Somali Government (Ministry of Energy and Minerals) contracted BGP (Geophysical contractor) to undertake a 1,000km (full fold, 1,076km surface) 10km by 10km, 2D seismic campaign. The minimum work obligation during the optional Fourth Period of the PSA (also extended by 2 years) is for 1,000km of 2D seismic and one exploration well.

The Company's wholly owned subsidiary, Sterling Energy (East Africa) Limited ('SE(EA)L'), holds a 34% working interest in the PSA. SE(EA)L originally acquired a 10% position from Petrosoma Limited ('Petrosoma') in November 2013 and an additional 30% from Jacka Resources Somaliland Limited ('Jacka') in two transactions during 2014.

In April 2017, the Company agreed to revised farm-out terms to reduce the staged contingent consideration payments due to Petrosoma and reduce SE(EA)L's interest in the Odewayne asset by 6%. The farm-out agreement was amended such that the parties cancelled the $8.0 million contingent consideration in return for: (i) a payment by SE(EA)L to Petrosoma of $3.5 million; and (ii) a transfer from SE(EA)L to Petrosoma of a 6% interest in the PSA. Post Government of Somaliland approval, SE(EA)L holds a 34% interest in the Odewayne Block, fully carried by Genel Energy Somaliland Limited ('Genel Energy') for its share of the costs of all exploration activities during the Third and Fourth Periods of the PSA.

In early 2018, following encouraging results from an integrated geoscience review in late 2017 of the basic post-stack processed 2D dataset provided by the Operator Genel Energy, Sterling undertook a highly focused and rigorous processing effort, independent of the Operator. The first phase deliverables were a full PSTM dataset, consisting of 3 lines of ca. 235km and were received in May 2018. These reprocessed lines showed significant improvements in subsurface imaging and were shared with the JV partners in order to assist the decisions on forward work programs.

In parallel to Sterling's efforts, the Operator undertook a number of studies to support the interpretation of the 2D seismic dataset. This included the integration of the 2D seismic data with the potentials field data in the form of a 2D gravity modeling study, alongside an updated review of the regional geology of the Odewayne basin. These studies have led to the development of a number of geological models that have been used to interpret the seismic data and help support the likely presence of a sedimentary basin. Following this work, the JV partners have agreed that reprocessing of the seismic data is needed to further improve the understanding of the prospectivity of the Odewayne Basin.

Outlook

2019 will see the reprocessing of the entire 2D seismic dataset that was acquired in 2017. Processing will be to PSTM (with the contingent option to include Pre-Stack Depth Migration) and is expected to begin in Q2 2019. Following receipt of the reprocessed data, these will be interpreted with the objective of identifying a number of leads for further investigation. Alongside the seismic reprocessing, contingent activity includes a surface seep study focused on areas highlighted by the seismic interpretation as most likely to be situated above migration pathways from hydrocarbon kitchens.

It is anticipated that the above work carried out in 2019 will allow the JV to develop a lead portfolio for the licence that will form the basis for future work. This future work could include infill 2D seismic data acquisition over the most prospective areas with a view to maturing a number of prospects to drill-ready status. Such infill seismic would be acquired in 2020 or 2021 ahead of a decision to enter the next exploration period (Fourth Period), which includes the commitment to drill an exploration well.

FINANCIAL REVIEW

Income Statement

During 2018 there was one lift from the Chinguetti field of 9,222 bbls (net to the Company) (2017: 92,056 bbls, from three liftings) resulting in Group turnover of $534k (2017: $4.4 million).

Cost of sales totalled $515k (2017: $7.9 million).

Group cash G&A decreased by 25% during the year to $3.0 million (2017: $3.9 million). The continued reduction in the Group's administrative overhead is in keeping with the Board driven KPI for cash preservation.

In 2018, a portion of the Group's staff costs and associated overheads have been expensed as pre-licence expenditure ($1.4 million), or capitalised/recharged ($39k) where they are directly assigned to capital projects or recharged. This totalled $1.4 million in the year (2017: $1.5 million). 

Other non-cash expenditure ($10k) relates to office asset depreciation.

Interest received during the year was $1.0 million (2017: $1.1 million). Net finance income (finance income less finance expenses) totalled $1.0 million in the year (2017: $459k).

The loss for the year was $2.0 million (2017: loss $9.0 million):

Group adjusted EBITDAX loss totalled $1.5 million (2017: $5.9 million loss):

The basic loss per share was $0.01 per share (2017: loss $0.04 per share). No dividend is proposed to be paid for the year ended 31 December 2018 (2017: $nil).

Statement of financial position

At the end of 2018, net assets/total equity stood at $67.3 million (2017: $69.3 million). Non-current assets relating to the Odewayne block totalled $21.1 million (2017: $21.0 million). Net current assets reduced to $46.2 million (2017: $48.2 million).

At the end of 2018, cash and cash equivalents totalled $46.3 million (2017: $81.4 million), this reduction primarily due to payments of; $32.5 million relating to the termination of the Chinguetti Funding Agreement and $1.3 million covering the minimum work obligation on the C-10 block (Mauritania).

IFRS 9 (Financial Instruments) was adopted on 1 January 2018 and required the consideration of the risk associated with the recoverability of intercompany loans between the Company and its subsidiary companies. This has resulted in an impairment allowance in the accounts of the company.

Cash flow

Net Group cash used in operating activities was $34.7 million (2017: $4.2 million outflow), primarily due to the termination of the Chinguetti Funding Agreement. A full reconciliation of which is provided in the Consolidated Statement of Cash Flows.

Cash investments in oil and gas assets are summarised below:

Minimal cash investments on the Odewayne Block in Somaliland during the year due to the Group's interest being fully carried by Genel Energy for its share of the costs during the Third and Fourth Periods of the PSA.

Total net decrease in cash and cash equivalents in the year was $35.0 million (2017: $6.8 million).

Accounting Standards

The Group has reported its 2018 and 2017 full year accounts under International Financial Reporting Standards ('IFRS'), as adopted by the European Union.

Cautionary statement

This financial report contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Directors believe the expectation reflected herein to be reasonable in light of the information available up to the time of their approval of this report, the actual outcome may be materially different owing to factors either beyond the Group's control or otherwise within the Group's control but, for example, owing to a change of plan or strategy. Accordingly, no reliance may be placed on the forward-looking statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve.

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. General information

The preliminary results announcement is for the year ended 31 December 2018.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2018 or 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The Annual Report and Accounts and the notice for the Company's Annual General meeting, which is to be held at 11.00 a.m. on 25 April 2019, will be posted to Shareholders on or about 29 March 2019.

2. Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operations Review. The financial position of the Group, its cash flows and liquidity position are described in the Financial Review.

The Group has sufficient cash resources for its working capital needs and its committed capital expenditure programme at least for the next 12 months. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

3. Operating segments

Africa operations in 2018 focused on exploration and appraisal activities in Somaliland and production activities in Mauritania. The UK corporate office is a technical and administrative cost centre focused on new ventures. The operating results of each segment are regularly reviewed by the Board of Directors in order to make decisions about the allocation of resources and to assess their performance.

The following table's present revenue, profit and certain asset and liability information regarding the Group's operating segments for the year ended 31 December 2018 and for the year ended 31 December 2017. 

4. Intangible Exploration and Evaluation assets

Included within 2017 additions were accruals of $1.3 million relating to C-10. This amount was settled in 2018.

Group intangible assets at the year end 2018:

Odewayne PSA, Somaliland: SE(EA)L 34%, Genel Energy 50%, Petrosoma 16%

Classified as a joint arrangement in accordance with IFRS 11.

5.Subsequent event

No significant subsequent events requiring disclosure or adjustment have occurred.

DEFINITIONS AND GLOSSARY OF TERMS

$ US dollars

Companies Act or Companies Act the Companies Act 2006, as amended

2006

1P proven reserves (both proved developed reserves + proved undeveloped reserves).

2D two dimensional

2P 1P (proven reserves) + probable reserves, hence "proved AND probable."

3D three dimensional

3P the sum of 2P (proven reserves + probable reserves) + possible reserves, all 3Ps "proven AND probable AND possible."

A&D abandonment and decommissioning

AIM AIM, a SME Growth market of the London Stock Exchange

AGM Annual General Meeting

Articles the Articles of Association of the Company

bbl barrel, equivalent to 42 US gallons of fluid

bopd barrel of oil per day

boe barrel of oil equivalent, a measure of the gas component converted into its equivalence in barrels of oil

Board the Board of Directors of the Company

City Code The City Code on Takeovers and Mergers

Company Sterling Energy plc

CoP cessation of production

CSOP Company Share Option Plan (HMRC approved share option scheme)

Directors the Directors of the Company

D&P development and production assets

E&E exploration and evaluation assets

E&P exploration and production

EBITDAX (Adjusted) earnings before interest, taxation, depreciation, depletion and amortisation, impairment, share-based payments, provisions, and pre-licence expenditure

EITI Extractive Industries Transparency Initiative

EUR the total amount of hydrocarbons expected to be produced from the hydrocarbon accumulation over the life of the project. Estimated ultimate recovery is synonymous with recoverable resource and the terms are used interchangeably.

Farm-in & farm-out a transaction under which one party (farm-out party) transfers part of its interest to a contract to another party (farm-in party) in exchange for a consideration which may comprise the obligation to pay for some of the farm-out party costs relating to the contract and a cash sum for past costs incurred by the farm-out party

FA Funding Agreement

FCA Financial Conduct Authority of the United Kingdom

FPSO Floating, Production, Storage and Offloading vessel

G&A general and administrative

G&G geological and geophysical

GBP pounds sterling

Genel Energy Genel Energy Somaliland Limited

Group the Company and its subsidiary undertakings

HMRC Her Majesty's Revenue and Customs

HSSE Health, Safety, Security and Environment

hydrocarbons organic compounds of carbon and hydrogen

IAS International Accounting Standards

IFRS International Financial Reporting Standards

Index FTSE 350 Index

Jacka Jacka Resources Somaliland Limited

JV joint venture

k thousands

km kilometre(s)

km2 square kilometre(s)

KPIs key performance indicators

lead indication of a potential exploration prospect

London Stock Exchange or LSE London Stock Exchange Plc

M&A merger and acquisition

m metre(s)

mcf thousand cubic feet

OECD Organisation for Economic Cooperation and Development

OPEC Organisation of the Petroleum Exporting Countries

Ordinary Shares ordinary shares of 10 pence each

P90 the value on a probabilistic distribution which is exceeded by 90% of the outcomes.

P50 the value on a probabilistic distribution which is exceeded by 50% of the outcomes. The P50 is also the median value of the distribution.

P10 the value on a probabilistic distribution which is exceeded by 10% of the outcomes.

Pmean the average of the values in the probabilistic distribution between defined 'boundary conditions'. Universally regarded as the best single value to quote or communicate for any uncertain distribution of outcomes involved in repeated trial investigations.

Panel or Takeover Panel the Panel on Takeovers and Mergers

Petroleum oil, gas, condensate and natural gas liquids

Petroleum system geologic components and processes necessary to generate and store hydrocarbons, including a mature source rock, migration pathway, reservoir rock, trap and seal.

Petrosoma Petrosoma Limited (JV partner in Somaliland)

Pre-Stack Depth Migration process by which seismic events are geometrically re-located in space and depth to the location the event occurred in the subsurface

Pre-Stack Time Migration process by which seismic events are geometrically re-located in seismic travel time to the location the event occurred in the subsurface

Prospect an area of exploration in which hydrocarbons have been predicted to exist in economic quantity. A group of prospects of a similar nature constitutes a play.

PSA production sharing agreement

PSC production sharing contract

QCA Code Corporate Governance Code for Small and Mid-Size Quoted Companies 2012

RA Royalty Agreement

Reserves reserves are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must satisfy four criteria; they must be discovered, recoverable, commercial and remaining based on the development projects applied. Reserves are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by development and production status

Reservoir a porous and permeable rock capable of containing fluids

Seismic data, obtained using a sound source and receiver, that is processed to provide a representation of a vertical cross-section through the subsurface layers

SESP Sterling Energy plc share price

Shares 10p ordinary shares

Shareholders ordinary shareholders of 10p each in the Company

SMHPM Société Mauritanienne Des Hydrocarbures et de Patrimoine Minier (Mauritania's national oil company)

Subsidiary a subsidiary undertaking as defined in the 2006 Act

Tcf Trillion cubic feet

United Kingdom or UK the United Kingdom of Great Britain and Northern Ireland

Waterford Finance and Investment Waterford Limited

Working Interest or WI a Company's equity interest in a project before reduction for royalties or production share owed to others under the applicable fiscal terms