SEY.L Regulatory News (SEY)

1 May 2008 07:01

Sterling Energy PLC01 May 2008 1 May 2008 STERLING ENERGY PLC 2007 PRELIMINARY RESULTS EXPLORING FOR SUCCESS Sterling Energy, the AIM listed (symbol: SEY) independent oil and gasexploration and production company operating in Africa, the Middle East, theGulf of Mexico and onshore USA, today announces its 2007 Preliminary Resultstogether with an update on progress and outlook. 2007 HIGHLIGHTS • Revenues for the year of $97.2 million (2006: $81.0 million) • Group sales averaged 5,760 boepd, up 31% (2006: 4,400 boepd) • Gross profit of $22.0 million (2006: $26.6 million) • EBITDA $56.6 million (2006: $59.6 million) • Group 2P reserves increased by 65% to 21.3 million boe at end 2007 • Secured the highly prospective Sangaw North licence 492 sq km, in the Kurdish region of Northern Iraq • Proposed drilling in Madagascar being "fast tracked" for 2009 and very large structures identified • Bank funding re-financed successfully, with a current facility of $158 million • $147 million cash acquisition of US onshore WEC completed end March 2007 • Year end bank debt of $153.3 million 2008 ACTIVITY AND OBJECTIVES • Sales process for the USA business commenced in April 2008 after a comprehensive strategic review of the Company's assets and prospects. The Board expects that the proceeds of any sale will enable it to repay all of the Company's borrowings and leave it with significant net cash • The US sale, together with cash revenues from its Mauritanian producing interests, will provide funding to increase the Company's investment in the considerable upside potential of its existing key assets in Africa and the Middle East, as well as to develop new opportunities • Sterling will focus on an increasing number of higher impact exploration prospects • Independent consultants, RISC, in a review in April 2008 of two prospects in Kurdistan and Madagascar, indicated unrisked best estimate net prospective resources of over 500 million bbls of oil with a high net estimate of over 1,900 million barrels of oil for Sterling's current interests • Conduct a 2D seismic programme in Kurdistan ahead of drilling in 2009 • Conduct well site survey in Madagascar and secure rig for high impact near-term drilling • The Chinguetti development programme in Mauritania has recently commenced, comprising three workover wells and two development wells with an initial target of doubling production. An appraisal well on the Banda gas discovery encountered gas and oil columns with contacts similar to those seen in the discovery well • Exploration well on the Charlie prospect, mean case 21 million bbls and upside case 40 million bbl, offshore Gabon is planned for May. A well in Themis Marin drilled in January 2008 was plugged and the licence has expired • Strategy includes farmouts to enhance risk-reward ratios and enable development of a wider portfolio of opportunities • First quarter 2008 production averaged 5,824 boepd (year 2007, average 5,760 boepd) • Cash and undrawn facilities of $16.4 million at end Q1 2008 • Sterling has signed letters of intent to sell peripheral USA properties for US$8.7 million and has completed six USA farmouts in 2008 NEW STRATEGY Sterling is a UK AIM listed exploration and production Company, which isredefining its strategy in order to focus its resources on higher impactopportunities in Africa and the Middle East. The Board of Sterling has recently undertaken a comprehensive strategic reviewof the Company's assets and prospects and has concluded that it would be inshareholders' best interests to sell the USA business. The Board believes thatthe USA business has grown to a size that makes it attractive to prospectivebuyers. On 7 April 2008 the Board announced that it had therefore mandated BMOCapital Markets to manage the sales process. The Board expects that the proceeds of any sale will enable it to repay theCompany's borrowings and leave it with significant net cash. This, together withcash revenues from its Mauritanian producing interests and farmouts, willprovide funding to increase the Company's investment in the considerable upsidepotential of its key assets in Africa and the Middle East. Sterling will focus on an increasing number of higher impact explorationprospects, which currently include Madagascar, Kurdistan, Gabon, AGC (a jointexploration zone between Senegal and Guinea Bissau) and Cameroon. It will alsopursue new opportunities, including potential acquisitions. Studies by an independent consultancy, RISC, covering two of the Company'sprospects in Kurdistan and offshore Madagascar, were recently completed. Theseindicated unrisked best estimate net prospective resources, which are dependenton exploration success and other factors, of over 500 million barrels of oilwith a high net estimate of over 1,900 million barrels of oil for Sterling'scurrent interests on those two prospects. Graeme Thomson, CEO of Sterling, commented: "Sterling Energy management has made significant progress in its strategy tore-position the Company with a sharp focus on high impact exploration prospectsand make available the resources necessary to deliver on the potential of theseassets. During the months ahead, we will complete a seismic programme inKurdistan and a well site survey in Madagascar, both precursors to drilling in2009. These two prospects alone have been valued by independent studies at over$2bn. We expect the sale of the US business to complete by the year end,transforming the balance sheet from net debt to significant net cash, enablingus to fully participate in the planned 2009 drilling campaign. It is going tobe an exciting year for our shareholders." CHAIRMAN'S STATEMENT Sterling made significant advances in 2007. However, it was a very challengingyear for the Company, particularly in respect of the share price, bank financingand our underlying asset performance. We have announced recently that we havetaken steps to address this situation through the sale of our USA assets. Weintend to focus in future on potentially "Company making" opportunities. In March 2007 the acquisition of Whittier Energy in the USA for $147 million wascompleted, and in November we announced the signature of the Sangaw North PSC inKurdistan. Our annual production averaged 5,760 barrels of oil equivalent perday, an improvement of 31% over 2006. Progress was also made with ourexploration assets in Africa and the Middle East. However, the development ofour licence portfolio has been slower than we had hoped owing to continuingintense competition for international oil and gas opportunities and our focus ononly very high potential opportunities which are sensibly priced. EBITDA was $56.6 million and there was a loss before tax of $2.9 million, afterpre-licence exploration expenditure of US$4.5 million. Production decline atthe Chinguetti oilfield in Mauritania now appears to have stabilised with recentgross production of about 10,000 gross barrels per day. New development wellsand other remedial action are underway to improve production levels markedly. There was a significant increase in the Company's oil and gas reserves as aresult of the Whittier acquisition. Our total reserves have increased from theequivalent of 12.9 million barrels of oil entitlement in 2006 to 21.3 millionbarrels of oil equivalent at the end of 2007. We drilled 29 wells in the USA in 2007 of which 24 were successful. There hasbeen a small reduction in our booked US reserves as a result of production notbeing fully replaced, with faster than expected declines in some wells, andthrough weather and equipment delays which delayed some production increases. Sterling's 2007 production in the USA averaged 25.8 million cubic feet of gasequivalent per day. While this marked a significant improvement over 2006, itwas slightly lower than we had hoped. It should also be borne in mind that some55% of our global production is gas, rather than oil. While it is good to beable to report a recent improvement in gas prices in the USA, the improvement isnowhere near as great as the increase in oil prices that we witnessed last year.Production in the USA in March 2008 reached a record of over 30 mmcfge/d. In December we announced the successful renegotiation of our bank facilities.This was an important milestone at a time of severe credit constraint in theglobal credit market. We now have a borrowing facility of $158 millionsyndicated with a number of major banks, of which $153 million is currentlydrawn down. Cash balances and undrawn facilities were $16.4 million at the endof Q1 2008. Recognising that market conditions are changing very fast, we have recentlyreviewed the Group's prospects and opportunities. We have decided to put theUSA assets up for sale to enable us to focus our resources on high rewardventures. After a sale, we expect to have no debt, significant cash andproduction income from Mauritania. It will be an enviable position from which tobuild. We have very recently added the high potential interest in Kurdistan andthere are moves to fast track drilling in Madagascar. On a personal note, I would like to thank our former Chairman Richard O'Toolewho left after the AGM in June 2007 and Paul Griggs who left on 30 April 2008,and all our staff, Directors and advisers for their work and support in what hasbeen an interesting and challenging year. I also wish Harry Wilson, GraemeThomson and Jon Cooper every success in their new roles of Deputy Chairman, CEOand CFO respectively. Looking forward, the much anticipated oil industry consolidation has been slowerthan predicted, but we expect to be able to play a part and benefit from it. Wehave an exciting programme of exploration activity ahead of us and astrengthened management structure and focus, which I believe will add materiallyto the value of the Company. CHIEF EXECUTIVE OFFICER'S REVIEW New strategy Sterling is changing. I became CEO in early February 2008 and the Board has nowcompleted a strategic review of the business and its prospects. Our near-termobjectives are clear; 1. We intend to focus more on potentially transforming drilling activity. Ourcurrent portfolio already has a programme of very high impact work planned inthe next year in Madagascar and Kurdistan, with important wells in Gabon andAGC. We will seek out more. Our focus areas will be Africa and the Middle East.We will take measured risks for major upside. An independent review by RISC ontwo of our prospects in Kurdistan and Madagascar has indicated unrisked upsidepotential net to Sterling of up to nearly 2 billion bbls, with obviousimplications for major value-creating possibilities. 2. To reduce our debt level and to improve our working capital position. We havereviewed our assets and for the reasons set out earlier we have announced plansto sell the USA assets in order to achieve this aim. We shall seek to farmoutselectively, which is a sensible way to enhance the risk-reward ratio for ourwork, will enable us to diversify and extend our portfolio and improve near-termcash flow. Much has been written about the banking "credit crunch" and stockmarkets have seen major falls, so we wish to make Sterling resilient to thesechanged conditions. Oil and gas prices are up, but so are costs Oil prices have more than doubled over the last year to record levels of over$110/bbl despite talk of "recession" in some of the major economies. Around 80%of the increase in energy usage is in the "developing countries" and there islittle spare producing capacity. US gas prices have risen over recent months,partly in response to oil prices, but also owing to the very cold winter, withrecord snow in many areas. Costs in the industry have been rising very rapidly too. Lead times on equipmentand drilling have continued to cause problems. Good opportunities are hard tofind and secure and there is a shortage of good and experienced people. Sterlingis fortunate to have an excellent team who have an interest in over 10% of theCompany. Our team is highly motivated to achieve success. High impact drilling and further projects sought We expect to drill prospects by the end of 2009 that will offer upside potentialto Sterling of hundreds of millions of barrels. Our projects are described in detail elsewhere in this annual report. I am alsoexcited about building new areas of activity too. As well as expanding our portfolio of licence interests, we intend to add to ourexisting near term drilling programme, both onshore and offshore. This will beachieved by redeploying our capital to new activities or through sectorconsolidation. We wish to offer our shareholders value growth through highupside projects combined with careful asset management. Material value in the exploration portfolio Great uncertainty has been created by the recent difficulties in the credit andstock markets. Their impacts have been widespread and harsh and we have to reactto these and other factors in formulating our strategy. As described in more detail earlier in this report, the Board has recentlycarried out a review of the relative upside potential and amount invested ineach of the business areas. Sterling wishes to make sure that its finances areappropriately organised and resilient. Whilst the results of our drillingprogramme in the USA in the last year were good and 2008 has started well, thesize of the investment required to enable that business to flourish fully isgrowing. Sterling has highly prospective assets to explore. With the fast tracking ofMadagascar to drilling and the new licence in Kurdistan in the last year, theBoard now believes it is in shareholders' best interests to focus its resourceson such high potential asset and opportunities and to reduce or eliminate itsdebt level. It therefore intends to dispose of its USA assets in 2008. This willenhance our working capital position materially by leaving us with significantnet cash after the sale. We will continue with farmouts, not only to yield cashor reduce the near-term costs of the wells but also to swap for other assets,thereby managing and diversifying the portfolio. This will also help to show thematerial value in our exploration portfolio which in current market conditionsappears to be largely ignored and will allow Sterling to add new opportunitiesfor growth in Africa and the Middle East. OPERATIONAL Africa and Middle East fast tracked Sterling has interests in exploration licences with multi-billion barrel targetswhich could be "Company makers". Some of these are considered medium risk andhigh cost, so it remains part of Sterling's strategy to farm-down theseinterests to give a more appropriate risk to reward ratio. Key activity isexpected on these in 2008/9. Madagascar Drilling on major structure fast tracked There has been a major change in our perception of the prospectivity ofSterling's Madagascar licences in the last year. Several very large prospectshave been evaluated and one has been matured towards drilling well ahead of ourformer scheduled timing. A rig is being sought and the Ambilobe and AmpasindavaPSC's have become an exciting cornerstone of Sterling's exploration portfolio. During 2007, the interpretation of over 4,000km of newly processed 2D seismic,plus a further 4,000km of newly reprocessed vintage 2D seismic data, began inearnest to generate prospects. Early results of this ongoing interpretation haveyielded some very large structural prospects and leads, the largest of which isthe Sifaka Prospect in the inboard portion of the Ampasindava PSC, in water ofapproximately 1,000-1,500m. The Sifaka Prospect has multi-billion barrelpotential and following a meeting between ExxonMobil, the operator, and thePresident of Madagascar in November 2007 it was reported that the partnershipwished to drill this prospect, subject to the availability of a suitable rig.Owing to the remote location of the block and the time it will take to secureand mobilise a rig in current market conditions, Sterling anticipates thatdrilling will take place in 2009. Preparations for the drilling of Sifaka continue with the acquisition of a sitesurvey over the drilling location scheduled for mid 2008, the first to beundertaken in offshore deepwater Madagascar. With the expected costs of thewell materially exceeding the remaining carry, Sterling plans to furtherfarm-down its interest in the Ampasindava PSC. The well would be the first testof the deepwater potential of Madagascar. Comparisons with the prolific basinsof Angola have been made. Sterling has a 30% WI in two blocks, totalling approximately 25,500 sq km in thenorth-western offshore area of Madagascar, with ExxonMobil as a 70% partner inboth blocks. In the smaller Ampasindava PSC, ExxonMobil is operator, whilstSterling is operator in the larger Ambilobe PSC. Kurdistan, Iraq Sangaw North fast tracked to drilling In November 2007 Sterling signed a PSC with the Kurdistan Regional Government(KRG) of Iraq for the Sangaw North exploration block. The block has an area of492 sq km and is situated 40 km to the southwest of Sulaimaniya. Surrounded by existing oil and gas fields, the block provides Sterling with anexploration position in an extremely prolific hydrocarbon province. Despite theclose proximity of a number of giant fields, for political and historicalreasons the area has not been explored, despite its world-class potential. Forexample, the Kirkuk field, 50km to the west of Sterling's block, has recoverableoil reserves in excess of 16 billion barrels. The block contains a very large, moderate-risk, undrilled surface anticline,with the potential to target multiple regionally-proven reservoir intervals.Analysis of a number of surface oil seeps on the block, indicates that the areais underpinned by the same hydrocarbon source rocks responsible for the majorityof the multi-billion barrels of Iraqi reserves. As a result, a working petroleumsystem is considered by Sterling to be proven on the block. Seismic data is required in order to improve confidence in mapping beforedrilling the first well. Sterling is evaluating tenders in order to acquire 2Dseismic data during the second half of 2008. It would then aim to drill anexploration well in 2009, subject to the availability of a rig. Sterling is inthe process of supplementing its existing local office in the capital, Erbil,with another in Sulaimaniya, Kurdistan's second city. Gabon Iris Marin: Charlie well expected to commence in May 2008 Plans to drill the Charlie prospect in May 2008 are well advanced, with a rigcontracted and site survey now completed. This prospect has mean case estimatedpotential recoverable reserves of 21 million bbls with an upside case of 40million bbls. Sterling estimates that a discovery of approximately 8 millionbbls should be commercial here. In May 2007 the Iris Marin Joint Venture entered into a third exploration termon Iris Marin. A 3D Pre-Stack Depth Migration processing project was completedin March 2007, from which several encouraging prospects were identified,including the Charlie Prospect. An aeromagnetic survey was also acquired at thesame time. Regional studies and nearby offset well data predict the presence ofexcellent reservoir quality sandstones in the area. A total of 347 km of high resolution 2D seismic data was acquired in January2008, covering the under-explored shallow water of Iris Marin, close to thelarge Gamba and Ivinga oil fields. This data is now being processed and will beinterpreted to delineate further prospects. Sterling has exercised its pre-emption rights to increase its interest in theIris Marin permit from 38.57% to 50%. Ibekelia Technical Evaluation Agreement Sterling and its partners are in negotiations to convert the neighbouringIbekelia TEA into a PSC following the successful completion of a technical studyover the Ibekelia area. The TEA covers a 673 sq km area which is contiguous withthe Gamba and Olowi oil fields and with Sterling's Iris Marin licence. Themis Marin lapsed The Themis Admiral Marine-1 well was drilled in early January 2008 in 14 daysand within budget. The well was abandoned as a dry hole with shows in thepredicted thick Gamba sandstone. An analysis of the well results and a review ofthe remaining prospectivity of the licence led the partners to allow the blockto expire. Sterling was carried for 18% of its approximately 28% interest. AGC Dome Flore extension sought The Dome Flore concession lies within the AGC, a joint exploration zone betweenSenegal and Guinea Bissau. Sterling holds a 30% WI and Markmore, a Malaysiancompany with interests in bitumen refining, is the operator. An exploration well to drill two stacked Maastrictrichtian light oil reservoirsis being planned. The shallower heavy oil accumulation will also be penetratedby this well and the interval cored to evaluate the production potential. Theheavy oil deposits on Dome Flore and Dome Gea contain an estimated gross 0.8 to1 billion barrels in place. Sterling's share of the drilling costs will becarried for this exploration well. A site survey for this well has been conducted, but a rig could not be securedto allow the well to be drilled ahead of the then licence expiry date of January2008. A licence extension has been requested, if this is granted then Markmorewill contract a rig. Guinea Bissau Following the plugging and abandoning of the Eirozes-1 well as a dry well inApril 2007, Sterling withdrew from both the Sinapa and Esperanca licenses (5% WIin each). Cameroon Border dispute: licence still suspended The financial obligations and work programme for the Ntem concession area (100%WI) are currently suspended owing to a dispute between Cameroon and EquatorialGuinea over their maritime borders. Both countries are working together toresolve the dispute. Sterling had planned to farm-out this licence for drilling and it continues toattract a good level of industry interest. However the award in late 2004 byEquatorial Guinea of a licence to the South of Ntem overlapping up to 15% of thelicence has delayed this drilling plan until the situation is resolved. Sterlingremains committed to assisting in the resolution of the dispute in the interestsof all parties. A number of discoveries have been made in the region recently and this has onlyserved to enhance its prospectivity. Mauritania Chinguetti Phase 2B development work scheduled to start in May 2008 In December 2007, Petronas took over operatorship of the Chinguetti developmentfollowing its acquisition of Woodside's Mauritanian assets. The operator iscurrently preparing for the Phase 2B development campaign, which it hopes willdouble production. The Atwood Hunter rig is expected to drill two newdevelopment wells and three workovers at a gross cost of around $150m, startingin May 2008. The new well locations were selected based on the high resolution 3D and 4Dseismic, which was shot over Chinguetti in 2007. This has enhanced the knowledgeof the complex field, which Sterling estimates held a remaining 32.5 millionbbls of gross 2P reserves and 18 million bbls of contingent resources at the endof 2007. Recent interpretations using this data suggest that the current wellsare only accessing about half of the ultimately recoverable reserves; theresults of the current development phase will help to determine any future work. During 2007, Sterling received a share of sales of 1,485 boepd from itsinterests in the Chinguetti field through the Funding Agreement and its Royaltyinterest which together generated over $35.2 million of revenues from four cargoliftings. The rate of decline has slowed significantly, with production beingmuch more stable and predictable since mid-2007. Other upside potential being reviewed An appraisal well on the 1-2 tcf Banda gas discovery straddling Blocks A and Bhas been drilled. The appraisal well encountered gas and oil columns withsimilar contacts to those seen in the discovery well. We await further resultsand a successful outcome of this well and subsequent confirmation of thecommercial viability would materially increase the value of Sterling's Royaltyinterest over Blocks A and B. Potential also remains for the development of the Tiof accumulation usingChinguetti's facilities. Reserves for the first stage of development areestimated in the range 40-60 million bbls gross. Sterling would benefit from itsRoyalty interest, a potential development bonus, plus operational synergiesthrough sharing the Chinguetti facilities. United States of America Assets disposal process initiated In April 2008, Sterling's board decided to put the USA assets up for salefollowing the review of all of its assets mentioned elsewhere in this report.Responding to current market conditions and the progress made on other licencesover the last year, Sterling wishes to redeploy its capital to existing andother higher potential assets and to repay its debt. It is anticipated that asale can be concluded well before the end of 2008. Reserves and production At the end of 2007, Sterling Inc. had 2P reserves of 111 bcfge (18.5 millionboe) and possible and contingent resources of 70+ bcfge (11.5 million boe).Approximately 65% of the 2P reserves were categorised as proven. Within thisportfolio Sterling has an inventory of identified drilling prospects, ofapproximately two/three years, most of which are already leased and many alreadyhave the necessary permits in place. During the year, Sterling participated in 29 new wells and re-completions. Ofthese 14 were in the South Texas region and 15 were in the Texas/Louisiana GulfCoast. There was also completion of a major upgrade of the production facilitieslocated in the Langlie Jal field located in the Permian Basin and a largeprogramme of abandonment work offshore in the High Island and Mustang Islandareas. These wells were successful but largely small. Higher than expecteddeclines in existing fields, unsuccessful drilling on two probable locations anddelays/cost issues relating to equipment availability, held back production andreserves. At year-end, production from these U.S. assets was 28.5 mmcfged (2006: 8.6mmcfge/d), with the majority of the rise being due to the purchase of WECcompleted at the end of March 2007. Over half of the production is operated bySterling from its offices in Houston and approximately 80% is natural gas. At the end of the first quarter of 2008 production had increased to over 30mmcfge/d from the shallow water and onshore coastal areas of the Gulf of Mexico,with nearly 70% coming from 11 fields. A somewhat lower pace of drilling in 2008than in 2007 is expected during the sales process. Diversified Asset Base South Texas In one of the most prolific hydrocarbon basins in the USA, Sterling currentlyhas production of nearly 9 mmcfge/d from a total of 87 wells. During mid-2007, Sterling completed an investment in a drilling programme withViking Petroleum, a private Houston Company, which generates drilling prospects,primarily in South Texas. This provides over 20 near-term drilling prospects andthree wells were drilled in 2007 and 15 are expected in 2008. Texas/Louisiana Onshore Gulf Coast Sterling currently has production from 82 wells and current production of over11 mmcfged. This area includes the Austin Chalk programme where the first 4wells have proved successful, the most recent being the Marlin well whichcommenced production at 4 mmcfged net in late March 2008. The Austin Chalkpresents some challenging drilling as it is highly over pressured and thesehorizontal wells are drilled to around 15,000 feet using under-balanced drillingtechniques. This programme is now restarting. Permian Basin and North Texas Sterling has production from 23 wells and a unit in this region producing around1 mmcfged. In July 2007 Sterling increased its working interest in the Windhamfield to 93% from 66% by purchasing the interest of the operator of the fieldwith a total transaction cost of c$3.6 million. Sterling became operator andintends to develop the field quickly. Offshore Gulf of Mexico Sterling currently has production from a total of 29 wells in the Gulf producingapproximately 9 mmcfge/d. In 2007 it farmed out of the non-producing High Island52 fields and facilities in return for earning a 2.85% ORRI in a successful welland the assumption by the farminee of an estimated $5+ million of plugging andabandonment costs. It has recently farmed out an interest in a high risksidetrack of an old well on Mustang Island that encountered mechanical problemsin return for a mainly carried interest and royalty. FINANCIAL REVIEW Selected financial data 2007 2006 Share of production boepd 5,760 4,400Year-end 2P reserves 000 boe 21,294 12,914 Revenue $million 97.2 81.0EBITDA $million 56.6 59.6Loss after tax $million (2.3) (38.6)Cash investment in oil & gas assets $million 233.3 51.2Year end cash $million 49.9 91.8Year end debt $million (153.3) (23.2)Year end net (debt)/cash $million (103.5) 68.6 Average realised oil price per bbl $/bbl 54.95 57.44Average realised gas price per mcf $/mcf 7.16 6.73Total operating costs per boe $/bbl 12.9 9.4 Sterling's key objective is to build a balanced portfolio of high valueinternational exploration and development opportunities and to manage thefinancial exposures they bring within the Group's financial resources. The acquisition of WEC, a NASDAQ-quoted Company with oil and gas operationsonshore USA, was completed at the end of March 2007 and accounted for in thesefinancial statements from 1 April 2007. WEC contributed an average of 3,737boepd in 2007, generating revenues to the Group of $39.8 million and $24.9million to operating cash flows. Sterling's bank debt to help fund the WEC purchase and other US assets wassuccessfully refinanced during the year. Revenues up 20% to $97.2 million in 2007 Revenues increased by 20% to $97.2 million in 2007 (2006: $81.0 million), withthe contribution from the acquired WEC assets and higher oil and gas pricesoffsetting the impact of disappointing Chinguetti field production. USA production increased by 109% to an average of 25.8 mmcfge/d (2006: 8.6mmcfge/d), with 74% being gas (2006: 83%). Revenues from USA operationsincreased 41% to $67.8 million (2006: $23.4 million) with an average realisedprice of $7.02/mcfge (2006: $6.73/mcfge). Third party income fromSterling-operated pipelines fell 38% to $1.6 million (2006: $2.5 million),before related costs. The Group's entitlement to Chinguetti field production in 2007 totalled 0.5million bbls (2006: 1.0 million bbls). Revenue from the Chinguetti fieldinterests totalled $29.3 million (2006: $57.6 million), net of the cost ofrelated settlements of hedge contracts crystallising of $5.9million (2006: $3.7million) and including the royalty income of $4.6 million (2006: $3.8 million).The average cargo sale price was $68.08/bbl (2006: $61.10/bbl), an averagediscount to Brent of $4.72/bbl (2006: $5.97/bbl). Operating profit $1.8 million 2007 operating profit amounted to $1.8 million (2006: $13.2 million beforeimpairment charges). Cost of sales increased to $75.2 million (2005: $54.4million), largely reflecting the additional cost of the acquired WEC business. USA costs of sales rose to $49.9 million (2006: $14.4 million) averaging $7.59/mcfge (2006: $4.48/mcgfe). Operating expenses increased to $2.75/mcfge (2006:$2.30/mcfge) and depletion charges increased to $4.83/mcfge (2006:$2.18/mcfge)reflecting, in the main, the higher asset valuations resulting from theinclusion of the WEC assets at their fair values. Chinguetti cost of sales were $25.3 million (2006: $40.0 million) averaging$47.0 /bbl (2006: $40.4 /bbl), of which $7.90 /bbl related to production costsand $32.50 /bbl to depletion charges. The unit production cost increase mainlyreflects lower production in 2007. Pre-licence costs of $4.5 million (2006: $1.4 million) were written off as isnow required by IFRS. With the increase in the scale of operations, administrative expenses rose by31% to $15.7 million (2006: $12.0 million). This is stated after capitalisationas fixed assets and recoveries from partners in operated joint ventures. EBITDA and net loss EBITDA totalled $56.6 million (2006: $59.6 million) which equates to $26.9/boe(2006: $37/boe). Interest revenue from cash deposits, less finance costs on the bank loans, werea net cost of $9.4 million (2006: income $0.1 million). This reflects theinterest and other costs related to the loan financing for and cash investmentin WEC. Other finance items include the release of provisions relating toproduct price hedge contracts settled in 2007 totalling $ 4.6 million gain(2006: $0.3 million gain). A taxation credit of $0.7 million arose in 2007 (2006: $6.1 million credit). Net loss after tax totalled $2.3 million (2006: $38.6 million). Fully dilutedloss per share was 0.14 USc per share (2006: 2.75 USc loss per share). Net cash flow from operating activities in 2007 of $47.7 million Cash inflow from operating activities fell to $47.7 million (2006: $62.3million) largely reflecting the decline in Chinguetti production. Cashinvestments in oil and gas assets totalled $233.3 million (2006: $51.1 million),including $145 million invested in the WEC acquisition and $32.6 million in WECinterests post acquisition, $32.1 million was invested in Sterling'spre-existing USA business, $13.4 million was invested in the Chinguetti field(2006: $39 million). A net amount of $49.2 million was raised in February 2007 from an equity placingto help fund the WEC acquisition. A further $22.3 million was raised in November2007 to fund the signature bonus and fees relating to the PSC entered into inKurdistan, which was paid out in February 2008. Bank facility successfully re-financed In November 2007, the Company re-financed its bank loan facilities. Thesereplaced the $100 million bridging facility entered into with Natixis Bank inMarch 2007 (of which $85 million had been drawn to fund the WEC acquisition),and the drawings of $51.3 million under a BNPP facilities held by WEC itself.The new $250 million reserve-backed revolving facility was initiallyunder-written by Natixis and has since been syndicated to a number of seniorbanks. The current authorised borrowing base under this US$250 million facilityis $143 million. Additionally, Natixis has provided a subordinated $15 millioncorporate facility. At the end of 2007, net debt stood at $103.5 million (2006: net cash $68.6million) with unrestricted cash balances of $44.1 million (2007: $86.7 million)and available undrawn bank facilities of $6.5 million. Growing Balance Sheet At the end of 2007, net assets stood at $278.3 million (2006: $223.6 million),with current assets less current liabilities of $10.4 million (2006: $73.4million). Non-current assets, primarily oil and gas assets totalled $522.1million (2006: $202.1 million). Total debt was US$158 million. Further hedging under-pinning loan and asset values In October 2007, the Group entered into a number of oil and gas pricederivatives, taking advantage of continuing high prices to under-pin assetvalues and the loan borrowing base. The Directors continually review forwardmarkets to identify opportunities to add value within the Group's hedgingpolicy, and consequent to such review further derivatives were entered into inFebruary 2008 in respect of future US production. The Group has accounted forthese derivatives as cash flow hedges. Details of the Group's hedging policy areset out in Note 1 and a summary of the hedges is set out in. No further hedgeshave been put in place since the end of 2007. Financial strategy and outlook The Group will look to press ahead with its strategy to add value for itsshareholders in a prudent and commercial manner. New ventures continue to be sought to expand the upside in the portfolio, aswell as additional production and/or development interests to add to theproduction profile. However, investment in both existing assets and new ventureswill be closely managed within constraints imposed by the Group's availableresources. It is intended to sell the USA assets as described elsewhere in thisreport. Cautionary statement This financial report contains certain forward-looking statements that aresubject to the usual risk factors and uncertainties associated with the oil andgas exploration and production business. Whilst the Directors believes theexpectation reflected herein to be reasonable in light of the informationavailable up to the time of their approval of this report, the actual outcomemay be materially different owing to factors either beyond the Group's controlor otherwise within the Group's control but, for example, owing to a change ofplan or strategy. Accordingly, no reliance may be placed on the forward-lookingstatements. For further information contact: Sterling Energy plc +44 (0)20 7405 4133Graeme Thomson, Chief Executive OfficerJon Cooper, Finance Director Evolution Securities +44 (0)20 7071 4311Rob Collins Citigate Dewe Rogerson +44 (0)20 7628 9571Media enquiries: Martin Jackson / Kate LehaneAnalyst enquiries: George Cazenove / Kate Delahunty www.sterlingenergyplc.com Ticker Symbol: SEY DEFINITIONS $ US Dollars2p proven and probablebbls barrels of oilbcf billion cubic feet of gasbcfge billions of cubic feet gas equivalentboe barrels of oil equivalentbopd barrels of oil per dayEBITDA earnings before interest, taxation, depreciation and abandonmentmcf thousand cubic feet of gasmcfge thousand cubic feet of gas equivalentmmbbl millions of barrelsmmcfg/d million cubic feet of gas per daymmcfge/d millions of cubic feet of gas equivalent per daynri net revenue interestorri overriding royalty interesttcf trillion cubic feet of gaswi working interestWEC Whittier Energy Corporation Sterling Energy plc Consolidated income statement Year ended 31 December 2007 Note 2007 2006 $'000 $'000 Revenue 97,171 81,003 Cost of sales (75,197) (54,419) Gross profit 21,974 26,584 Administrative expenses (15,720) (12,027)Impairment provision - (60,033)Pre-licence exploration costs (4,462) (1,368) Operating profit/(loss) 1,792 (46,844) Interest revenue and finance gains 3,286 3,082Gain on hedging instruments 4,618 303Finance costs (12,642) (3,201) Loss before tax (2,946) (46,660) Tax 3 693 6,101 Loss for the financial year (2,253) (40,559) Attributable to minority interest - 1,981 Loss attributable to equity holders of parent company (2,253) (38,578) Loss per share (cents): basic and diluted 4 (0.14)USc (2.75)USc All operations were continuing throughout both years. Consolidated statement of recognised income and expense Year ended 31 December 2007 Note 2007 2006 $'000 $'000 Exchange differences on translation of foreign operations 965 2,363Movement on value of investment in quoted company (4,082) (2,287)Movement on hedge reserve (14,421) - Net (loss)/income recognised directly in equity (17,538) 76 Loss for the financial year (2,253) (40,559) Total recognised loss for the year (19,791) (40,483) Attributable to:Equity holders of the parent (19,791) (38,502)Minority interests - (1,981) (19,791) (40,483) Sterling Energy plc Consolidated balance sheet 31 December 2007 Note 2007 2006 $'000 $'000Non-current assetsIntangible royalty assets 5 16,600 18,000Intangible exploration and evaluation assets 6 155,581 21,384Property, plant and equipment 7 342,917 156,800Investments 6,985 5,922 522,083 202,106 Current assetsInventories 5,036 3,713Trade and other receivables 41,965 13,863Derivative financial instruments 2,005 -Current tax repayable 833 1,248Cash and cash equivalents 9 49,866 91,759 99,705 110,583 Total assets 621,788 312,689 Current liabilitiesTrade and other payables (79,835) (32,182)Derivative financial instruments (9,434) (4,650)Current tax liabilities - (299) (89,269) (37,131) Non-current liabilitiesLong-term debt 10 (153,318) (23,214)Deferred tax liabilities (69,512) (6,128)Derivative financial instruments (7,174) -Long-term provisions (24,245) (22,593) (254,249) (51,935) Total liabilities (343,518) (89,066) Net assets 278,270 223,623 EquityShare capital 31,811 26,919Share premium account 341,414 273,785Share option reserve 8,368 6,451Investment revaluation reserve 657 4,739Currency translation reserve 658 (307)Hedging reserve (14,421) -Retained earnings (90,217) (87,964) Total equity and equity attributable to equity holders of 278,270 223,623the parent Sterling Energy plc Consolidated cash flow statement Year ended 31 December 2007 Note 2007 2006 $'000 $'000 Operating activities:Cash generated from operations 48,131 63,017Taxation refunded (paid) 416 (767) Net cash flow from operating activities 48,547 62,250 Investing activities:Capital expenditure (87,945) (51,191)Corporate acquisitions 8 (145,368) -Interest received 2,888 3,082 Net cash used in investing activities (230,425) (48,109) Financing activities:Net proceeds from issue of ordinary shares 72,521 245Long-term loan proceeds/(repayment) 78,779 (4,111)Interest paid (11,354) (1,648) Net cash flow from /(used in) financing activities 139,946 (5,514) Net (decrease)/increase in cash and cash equivalents (41,932) 8,627 Cash and cash equivalents at beginning of year 91,759 82,033 Effect of foreign exchange rate changes 39 1,099 Cash and cash equivalents at end of year 49,866 91,759 Notes to the consolidated financial information 1 General Information The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2006 or 2007, but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered following theCompany's annual general meeting. The auditors have reported on those accounts;their reports were unqualified, did not draw attention any matters by way ofemphasis without qualifying their reports and did not contain statements unders237(2) or (3) Companies Act 1985. While the financial information included in this preliminary announcement hasbeen prepared in accordance with the recognition and measurement criteria ofInternational Financial Reporting Standards (IFRS), this announcement does notitself contain sufficient information to comply with IFRS. The Company expectsto publish full financial statements that comply with IFRS in May 2008. Theaccounting policies applied are consistent with those adopted and disclosed inthe Group's annual financial statements for the year ended 31 December 2006,with the exception of adopting IFRS 7 - Financial Instruments: Disclosures whichdid not have any impact on the financial position of the Group. The Group uses derivative financial instruments to manage its exposure tomovements in oil and gas prices, fluctuations in foreign exchange rates andinterest rates. Derivatives financial instruments are stated at fair value.The purpose for which a derivative is used is established at inception. Toqualify for hedge accounting, the derivative must be 'highly effective' inachieving its objective and this effectiveness must be documented at inceptionand throughout the period of the hedge relationship. The hedge must be assessedon an ongoing basis and determined to have been 'highly effective' throughoutthe financial reporting periods for which the hedge was designated. For the purpose of hedge accounting, hedges are classified as either fair valuehedges, when they hedge the exposure to changes in the fair value of arecognised asset or liability, or cashflow hedges, when they hedge exposure tovariability in cashflows that is either attributable to a particular riskassociated with a recognised asset or liability or forecasted transaction.During the year the Sterling designated a number of its oil and gas derivativesas cashflow hedges of future production. This preliminary announcement was approved by a Board sub committee on 30 April2008. 2 Geographical segments The Group operates in one business segment; the exploration for and productionof oil and gas. The Group currently has interests in two geographical segments;North America, and Africa and the Middle East. Segment information about thebusiness is presented below. North America Africa Total INCOME STATEMENT 2007 2006 2007 2006 2007 2006 $'000 $'000 $'000 $'000 $'000 $'000 Revenue 67,843 23,441 29,328 57,562 97,171 81,003 Cost of sales (49,871) (14,380) (25,326) (40,039) (75,197) (54,419) Gross profit 17,972 9,061 4,002 17,523 21,974 26,584 Impairment provision - (2,653) - (57,380) - (60,033)Pre-licence exploration costs (1,181) - (3,281) (1,368) (4,462) (1,368) Segment result 16,791 6,408 721 (41,225) 17,512 (34,817) Unallocated corporate expenses (15,720) (12,027) Operating profit/(loss) 1,792 (46,844)Interest revenue and finance gains 3,286 3,082Gain on hedging instrument 4,618 303Finance costs (12,642) (3,201) Loss before tax (2,946) (46,660)Tax 693 6,101 Loss for the financial year (2,253) (40,559) Attributable to minority interest - 1,981 Loss attributable to equity holders (2,253) (38,578)of parent company Corporate assets North America Africa Total 2007 2006 2007 2006 2007 2006 2007 2006 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000OTHER SEGMENTINFORMATIONCapital additionsProperty, plant and 374 307 54,970 8,375 8,063 14,223 63,407 22,905equipmentE&E expenditure 600 - 10,668 2,972 24,437 2,555 35,705 5,527 Depreciation and (461) (233) (32,405) (7,338) (17,444) (35,407) (50,310) (42,978)amortisationImpairment - - - (2,653) - (57,380) - (60,033)provision BALANCE SHEET Segment assets* 45,451 88,515 424,005 97,461 152,132 126,713 621,788 312,689 Segment liabilities (175,666) (11,426) (128,261) (53,443) (39,591) (24,197) (343,518) (89,066) * Carrying amount of segment assets exclude intra-Group financing. 3 Taxation The Group tax charge comprises: 2007 2006 $'000 $'000 Current tax credit (509) (1,255)Deferred tax - origination and reversal of timing differences (184) (4,846) Total credit (693) (6,101) The difference between the tax credit of $693,000 (2006 - credit of $6,101,000)and the amount calculated by applying the applicable standard rate of tax is asfollows: 2007 2006 $'000 $'000 Loss on ordinary activities before tax (2,946) (46,660) Tax on loss on ordinary activities at standard (1,001) (15,864)US corporation tax rate of 34% (2006: 34%) Effects of:Expenses not deductible for tax purposes (1,856) (1,654)Capital allowances lower than/(in excess of) (82) 10,994depreciationOther temporary differences - 395Difference in non-UK/US tax rates 127 1,364Adjustment for tax losses 2,628 47Adjustment in respect of prior years (509) (1,383) Tax credit for the year (693) (6,101) During 2007 and 2006 the Group generated its results primarily in the US.Therefore the tax rate in the above reconciliation for 2007 is the standard ratefor US corporation tax. With effect from 1 April 2008, the main rate of UK corporation tax reduced to28%. However, given the Group's taxation charge principally relates to the US,the change of rate will not have a significant effect on the Group's overalltaxation charge. 4 Loss per share The calculation of basic and diluted loss per share is based on the loss for thefinancial year of $2,253,000 (2006 - loss $38,578,000) and on 1,565,678,397(2006 - 1,402,408,092) ordinary shares, being the weighted average number ofordinary shares in issue. As the effect of any dilutive shares would decreasethe loss per share, the basic and diluted loss per share are the same. 5 Intangible royalty assets Group $'000 Net Book Value at 1 January 2006 42,149Depletion charge for the year (1,675)Impairment charge for the year (22,474) Net Book Value at 31 December 2006 18,000Depletion charge for the year (1,400) Net Book Value at 31 December 2007 16,600 Group net book value at 31 December 2007 comprises the value of rights to futureroyalties in respect of the Group's agreements covering licences PSC A and PSC Bin Mauritania. The value of these royalty interests is dependent upon future oiland gas prices and the development and production of the underlying oil and gasreserves. An impairment assessment and any subsequent charge is calculated on anindividual royalty interest basis. Future recoverable amounts are estimated bymanagement based on the present value of future cash flows expected to bederived from the production of commercial reserves in these licences and arecompared against the carrying value of these assets. 6 Intangible exploration and evaluation (E&E) assets Group $'000 Net book value at 1 January 2006 26,660Additions during the year 5,527Amortisation charge for the year (949)Impairment charge for the year (9,854) Net book value at 31 December 2006 21,384Additions during the year 36,233Additions through acquisitions during the year 101,314Amortisation charge for the year (3,350) Net Book Value at 31 December 2007 155,581 The amount for intangible exploration and evaluation assets representsinvestments in respect of exploration licences. Impairment tests on E&E assets are conducted on an individual cost pool basiswhen facts and circumstances suggest that the carrying amount in the pool mayexceed its recoverable amount. The 2006 impairment recorded above relates toassets held in the Africa pool where the estimated recoverable amount of theproperty, plant and equipment and E&E in the pool was insufficient to cover thecarrying amount. 7 Property, plant and equipment Computer and Oil and gas assets office equipment Total $'000 $'000 $'000Group CostAt 1 January 2006 215,061 2,193 217,254Additions during the year 22,219 686 22,905 At 31 December 2006 237,280 2,879 240,159Additions during the year 62,612 795 63,407Additions through acquisitions during the year 167,978 292 168,270 At 31 December 2007 467,870 3,966 471,836 Accumulated depreciationAt 1 January 2006 14,019 1,281 15,300Charge for the year 39,993 361 40,354Impairment charge for the year 27,705 - 27,705 At 31 December 2006 81,717 1,642 83,359Charge for the year 44,452 1,108 45,560 At 31 December 2007 126,169 2,750 128,919 Net book value at 31 December 2007 341,701 1,216 342,917 Net book value at 31 December 2006 155,563 1,237 156,800 The impairment charge in 2006 for the Group related to the Group's Mauritanianand US interests. The impairment charge was calculated by reference toassessment of future discounted cash flows expected to be derived fromproduction of commercial reserves measured against the individual cashgenerating unit carrying values. 8 Acquisition of subsidiary On 29 March 2007, the Group acquired 100 per cent of the issued share capital ofWhittier Energy Corporation ("WEC") for cash consideration of $145.4 million,plus $1.4 million for directly attributable costs. WEC is the parent company ofa Group of companies involved in onshore US Gulf Coast exploration andproduction. This transaction has been accounted for using the purchase method ofaccounting. WEC was subsequently renamed Sterling Energy USA Inc. during theperiod. Book value Fair value $'000 $'000Net assets acquired : Property, plant and equipment 119,316 167,978Intangible exploration and evaluation assets 31,895 101,634Goodwill 1,485 - Trade and other receivables 15,506 15,342Cash and cash equivalents 1,392 1,392Trade and other payables (23,339) (23,339) Bank loans (51,325) (51,325)Deferred tax liabilities (24,139) (63,571)Decommissioning liabilities (711) (711) 70,080 146,760 Satisfied by:Cash 145,432Directly attributable costs 1,328 146,760 Net cash outflow arising on acquisition:Cash consideration (146,760)Cash and cash equivalents acquired 1,392 (145,368) WEC contributed $39.9 million of revenue, $4.8 million of gross profit, and aloss of $3.0 million to the Group's loss before tax for the period between theeffective date of acquisition and 31 December 2007. WEC contributed $25 millionto operating cash flow before working capital for the same period. 9 Cash and cash equivalents Group 2007 2006 $'000 $'000 Cash at bank and in hand, unrestricted 44,101 86,723Cash held on a restricted account 5,765 5,036 Cash and cash equivalents at 31 December 49,866 91,759 Cash and cash equivalents comprise cash in hand, deposits on call with banks andhighly liquid investments that are readily convertible into known amounts ofcash and which are subject to an insignificant risk of change in value. Included in cash and cash equivalents of the Group is an amount of $5,765,000(2006 - $5,036,000) held in restricted accounts to be used for the sole purposeof the payment of decommissioning costs on three US producing licences. 10 Long-term debt Group 2007 2006 $'000 $'000 Bank loan 153,318 23,214 At 31 December 2007 the group had a bank loan facility of $250,000,000 (the "borrowing-base facility") of which $144,818,000 had been drawn down under thisfacility at the end of the period. The amount that was available to be drawnunder this facility was determined by a twice-yearly borrowing base review. Inaddition, a further $482,136 (2006 - US$nil) is pledged under a letter ofcredit. The facility was secured by a floating charge over certain of theproperty, plant and equipment of the Group. An intra-group loan of approximately$74,393,600 (2006 - $28,453,800) was subordinated to the facility. Interest waspayable at a margin 2.25%- 4.5% over US LIBOR rate. The facility also includescertain financial and non-financial covenants. In addition to the borrowing-base facility, the company has an unsecuredcorporate facility available of $15,000,000 of which, at 31 December 2007,$8,018,000 had been drawn. During January 2007 the outstanding loan of $23,214,000 at 31 December 2006 withMacquarie Bank was repaid in full and the facility cancelled. 11 Post-balance sheet events On 4 April 2008 the Company announced the proposed sale of Sterling Energy Inc.and Sterling Energy USA Inc. (100% owned subsidiary companies) which representone of the companies two geographical segments (North America). (a) Sterling Energy Inc. and Sterling Energy USA Inc represent a significantpart of the business and in 2007 created a segment result of $16,791,000 profit(2006: $6,408,000 profit) and represented segment assets of $430,790,000 (2006:$97,461,000) and segment liabilities of $132,812,000 (2006: $53,443,000); (b) The aim of the sale is to repay the Group's existing borrowings and leaveit with significant net cash. This together with cash revenues from itsMauritanian providing interests will provide funding to increase the Group'sinvestment in its key high impact exploration assets. The Group will alsopursue new opportunities including acquisitions in Africa and the Middle East.The sale is expected to be completed by the end of 2008; (c) Further information on the North America segment is shown in note 2 of thefinancial statements. 12 Oil and gas price risk The group uses a range of derivative instruments to provide a cash flow hedgeagainst its exposure to volatility in oil and gas prices arising from floatingprice sales. At 31 December 2007 the group had cash flow hedges in place withthe following characteristics: Group 2008 settlements 2009 settlementsBrent Oil priceVolume (bbl) 360,000 360,000Hedge price (per bbl)- Swap $74.30 $74.30 WTI Oil priceVolume (bbl) 230,000 170,000Hedge price (per bbl)- Collar floors/ ceilings $60.00/ $72.30 - $83.00 -- Swaps $70.00 - $88.45 $69.90 Henry Hub Gas priceVolume (mmbtu) 3,458,000 950,000Hedge price (per mmbtu)- Collar floors/ ceilings $6.50 - $9.00/ $9.75 - $16.25 $7/ $8.65- Swaps $7.76 - $10.98 $8.00 - $9.22 The group policy is to hedge a minimum of 25% of the proven production profileof the Natixis Facility Borrowing Base Assets as required by the Facility withthe actual level determined by broader financial requirements and marketavailability and pricing. At 31 December 2006 there were no cash flow hedges inplace. The table below shows the combined impact on the fair values of oil and gasderivatives resulting from a $10 decrease/ increase in forward prices for oiland a $1 decrease/ increase for gas, analysed between earnings and equity. Group Company 2007 2006 2007 2006 $'000 $'000 $'000 $'000Decrease: Decrease in profit - 4,650 - 4650 Decrease in equity 3,193 - 4,243 - Decrease in net assets 3,193 4,650 4,243 4,650 Increase: Increase in profit - 4650 - 4,650 Increase in equity 26,396 - 18,063 - Increase in net assets 26,396 4,650 18,063 4,650 This information is provided by RNS The company news service from the London Stock Exchange