Annual Financial Report

RNS Number : 9179R

Sterling Energy PLC

14 March 2016

 

14 March 2016

 

STERLING ENERGY PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2015

Sterling Energy Plc is today issuing its preliminary results for the year ended 31 December 2015.

 

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 licences, with a primary focus on Africa. The Group currently has high potential exploration projects in Mauritania, Madagascar, Somaliland and Cameroon together with a production interest in Mauritania.

2015 SUMMARY

·      Production, net to the Company (including royalty barrels) from the Chinguetti field, averaged 310 barrels of oil per day ('bopd') (2014: 432 bopd).

·      Adjusted Earnings before Interest, Tax, Depreciation, Amortisation and Exploration Expense ('EBITDAX') loss for the Group of $6.3 million (2014: $5.1 million earnings).

·      Board and Management appointment of Eskil Jersing as CEO in March 2015.

·      Transfer of Murphy's 50% interest in the Ntem block to Sterling (now 100% and operator), offshore Cameroon, completed in April 2015.

·      Ampasindava block, Madagascar, exit (30% interest) in May 2015.

·      Completed 1,175km² 3D seismic acquisition safely, on time and budget over the Ambilobe block, offshore Madagascar, in June 2015, final processed data expected in-house Q1 2016.

·      Acquisition from Tullow Oil of a 40.5% interest in PSC C-3 exploration block, offshore Mauritania, completed in July 2015. Exited block in February 2016.

·      Acquisition from Tullow Oil of a 13.5% interest in PSC C-10 exploration block, offshore Mauritania, completed in November 2015.

·      Working with Chinguetti oil field stakeholders on a safe, cost effective and technically robust decommissioning and abandonment plan.

·      Cash resources at 31 December 2015 of $98.7 million (2014: $108.1 million), including joint venture partner funds of $1.1 million.

·      The Group remains debt free, with sufficient cash resources to fund all outstanding firm commitments.

For further information contact:

Sterling Energy plc                              [phone]

Eskil Jersing, Chief Executive Officer

Alastair Beardsall, Chairman

Peel Hunt LLP                                     [phone]

Richard Crichton

Ross Allister

www.sterlingenergyplc.com                Ticker Symbol: SEY

CHAIRMAN'S STATEMENT

At the beginning of 2015 few would have predicted a sustained decline in the global oil price and an E&P sector severely affected with developments being delayed, exploration deferred and licences being handed back to host governments. As 2015 progressed the speculation of a near term rebound in the oil price diminished to be replaced with the forecast of a 'lower for longer downturn'. Many outside of our sector have benefitted from the lower cost of energy; however, inside the upstream oil and gas sector we have seen a real slow down in activity and a re-alignment of ambitions.

In my statement last year I made reference to smaller E&P companies moving away from their previous business model of acquiring material acreage positions and then farm-out, on a promoted basis, to a larger player who would be expected to fund more expensive exploration activities. We had already adapted our Group strategy and become more cautious about our ability to farm-out what are sometimes, very large financial commitments. During 2015, we further refined our strategy when it became evident that the capital markets were not supporting even the appraisal and development activity associated with exploration success; we concluded we should prioritise smaller, value driven opportunities that we could progress with our own finances to the point where the early production could be used to financially justify project debt.

Despite the market downturn, we have made some progress within our existing portfolio of exploration assets, however the progress has been slow and cautious.

In February 2015, we acquired a 40.5% interest in production sharing contract ('PSC') C-3, a shallow water project offshore Mauritania. Tullow Mauritania Limited ('Tullow Oil'), the operator, had just completed the acquisition of a 1,600km 2D seismic programme. We have completed the integration of the new seismic data with the existing sub-surface data-set and failed to mature any leads to drill-ready prospects. In January 2016 we elected to withdraw from the PSC rather than fund our share of a 3D program and exploration well we considered as high risk.   

We acquired a further interest offshore Mauritania during 2015, a 13.5% interest in PSC C-10, again with Tullow Oil as the operator. The C-10 block has good legacy 3D seismic coverage and the joint venture ('JV') is actively working towards identifying a drill ready prospect as a step towards fulfilling the outstanding work commitment of one exploration well.

Also in Mauritania, we retain our financial interest in the Chinguetti oil field in Mauritania. At the prevailing oil price, production from Chinguetti is loss making and the relevant stakeholders are collectively working towards cessation of production through a compliant, safe and cost effective decommissioning and abandonment plan.

In Madagascar we completed the acquisition of 1,175km² of 3D seismic on the Ambilobe block and are now interpreting the new data in preparation for making a 'drill or drop' decision due in July 2016; the obligation in the next exploration phase includes the drilling of a well.

Also in Madagascar, Sterling, and ExxonMobil, our joint venture partner in the Ampasindava PSC, completed a review of the Sifaka prospect and concluded that the technical and commercial risks too great to justify the drilling of an exploration well; in May 2015 the joint venture partners elected to withdraw from the Ampasindava PSC.

In the Odewayne PSC, onshore Somaliland, where Genel Energy Somaliland Limited ('Genel Energy'), the operator, carries us for the costs of a seismic programme and one exploration well, the planning for the seismic continues to progress whilst the Government of Somaliland; establishes a trained and equipped Oil Protection Unit ('OPU').

In Cameroon, we continue to hold our 100% interest in the Ntem block. We maintain our claim of force majeure, declared in May 2014 as a result of the border dispute between Cameroon and Equatorial Guinea. We continue to seek the best way to progress the exploration activity in the Ntem block.

Financial

The Group had cash resources of $98.7 million at the end of 2015, including $1.1 million of partner funds, and we remain free of debt. Our work programme for 2016 is fully funded and we have resources available to progress both our existing portfolio and add new venture activity.

Board and Management Changes

On 23 March 2015 the Company announced the appointment of Eskil Jersing as Chief Executive Officer ('CEO') and a Director of the Company. Eskil's career to date spans 30 years of exploration, new ventures and business development roles in many of the world's key petroleum basins. Upon Eskil's appointment, I relinquished the role of Interim CEO.

On 13 March 2015 Dr Philip Frank stepped down from the Board and left the Company. Matthew Bowyer was appointed as Sterling's Exploration Manager.

Outlook for 2016 and beyond

There appear to be no tangible indications of how the continued volatility in the global oil price may positively impact the capital market that traditionally invested in the oil and gas sector. We shall continue to act cautiously with regard to our own investments in new ventures with a bias towards projects that can be appraised and developed via our existing resources. We will then have the option to accelerate and/or expand these cash flow generative ventures via third party project finance.

In addition to our strategy for growth, the Group has, via a combination of our own funds and carried interests, the resources to see our existing projects advance during 2016.

I would like to thank all our stakeholders for their continuing support for our strategy and all of our management and staff for their diligent efforts during 2015.

 

 

 

Alastair Beardsall

Chairman

CHIEF EXECUTIVE'S REVIEW

Market landscape

Over the last year, we have witnessed the continuation of a severe supply driven crude oil price downturn. This has led to a broad acceptance of a "lower for longer" price doctrine by the industry as a whole. Market volatility has continued into 2016, with oil and gas prices at multi-year lows, rising geopolitical tensions, mounting defaults, supply overhang, debt restructuring efforts and steep reductions in corporate work program and budgets. Importantly, however, the opportunity landscape has also opened up for buyers, with regards entry and significantly reduced seismic acquisition and drilling costs.

Renewed strategy                                                                        

Through the last year, Sterling has continued to mature, actively manage and grow our portfolio in a disciplined manner, to succeed in and adapt to, a sustained lower oil price landscape.

Smaller exploration focused players such as Sterling, can no longer rely on leveraged cover to execute and monetise assets in the early part of the value cycle. Equally, our Chinguetti oil field Funding and Royalty Agreement revenue no longer provides cover for general and administrative ('G&A') costs at current oil prices, and the joint venture works towards end of field life decisions.

In response, our capital resources will be allocated to limit or defer our liability exposure and focus on repositioning our portfolio to secure above average returns in the near to mid-term. Our aspiration over the next few years will be to gain exposure to a core asset, and execute on a portfolio with low cost, long-life and investment flexibility.

Asset activity

We have worked diligently at both maturing and refreshing our existing portfolio in a disciplined manner. Our forward business model remains focused on the exploration and appraisal phase of the E&P lifecycle, with a bias towards capital efficient opportunities in fiscally advantageous jurisdictions with lower lifecycle risk, breakeven commodity prices and offering nearer term options for commerciality.

In Mauritania, we increased our exposure to an emerging and underexplored petroleum province, with recent world class oil and gas discoveries by Kosmos (Mauritania) and Cairn (Senegal) through ground floor entries into the C-3 and C-10 offshore blocks, both operated by Tullow Oil. These decisions were predicated on the inboard C-3 block providing upside dependent running room for the immature, but technically attractive shelfal Cretaceous and Jurassic plays recognised in C-10. However, subsequent to detailed in-house evaluation of the 2014 2D seismic data over C-3, we concluded that the new data had not sufficiently de-risked the block to enter into Phase 2 of the PSC, due to begin June 2016. We therefore took the prudent and disciplined stance to exit the C-3 block, effective end of February 2016, subject to Government approval; with no additional cost exposure to the Group.

We continue to work diligently with the operator Tullow Oil and with Société Mauritanienne Des Hydrocarbures et de Patrimoine Minier ('SMHPM'), to technically quantify and rank the existing C-10 prospect portfolio, with a view to drilling an exploration well on the top ranked prospect, prior to end November 2017. We maintain the view that the world class gas discoveries made by Kosmos on the Mauritania - Senegal border further emphasise the infancy and potential upside of the analogous hydrocarbon plays in C-10, with both low cost entry exposure and flexible exit options. 

The Group has a Funding and Royalty Agreement based economic interest in the offshore Chinguetti oil field in Mauritania, amounting to ca. 9% of production. At prevailing oil prices, revenues from Chinguetti are insufficient to cover field operating costs and hence no longer cover the Company's administrative overhead costs. The JV participants (led by the operator, Petronas) and relevant stakeholders are collectively working towards cessation of production through a safe, compliant and cost effective decommissioning and abandonment plan.

In Somaliland, we are hopeful that a regional 2D seismic acquisition program in H2 2016 will help de-risk this frontier exploration block. The results of a 2015 surface seep study re-confirmed the outstanding potential offered by this basin scale acreage position, by validating all elements of a working petroleum system. Sterling is fully carried by the operator Genel Energy for all exploration costs during the current third and subsequent fourth exploration period, covering the 2D seismic survey and first well commitment. Planning and tendering for the 2D survey continues to progress whilst the Government of the Republic of Somaliland establishes a trained and equipped OPU that can provide the level of security required by in-country operators to ensure all future seismic and drilling operations can be conducted safely.

Subsequent to a detailed subsurface re-assessment of the prospectivity of the Ampasindava block, offshore Madagascar, by the JV and after discussions with the Office des Mines Nationales et des Industries Stratégiques ('OMNIS'), ExxonMobil and Sterling relinquished the block in May 2015. We are highly appreciative of the productive and collaborative nature of our relationship with ExxonMobil and OMNIS throughout the JV project life and relinquishment process. The Group does not expect to have any liabilities associated with the relinquishment. 

During May 2015, Sterling successfully operated a 1,175km² discretionary 3D seismic survey on time, on budget and without incident over the Ambilobe block, offshore Madagascar. The final processed dataset will be available in early March 2016. The costs of this 3D seismic survey have been carried by Sterling's JV partner Pura Vida Mauritius ('Pura Vida'). The JV is working to secure an extension to the current second exploration phase, (due to expire in July 2016) with a view to farming out the block post 3D evaluation from Q2 2016.

We are very pleased with the progress of a corporate social responsibility ('CSR') program that the Ambilobe JV is executing over three separate initiatives, namely: the Nosy Be and Ambanja fish market rehabilitation and Beramanja school projects. We must not forget our 'licence to operate' and be cognisant of the differences we can make to local communities through such projects.

In Cameroon, we continue to believe that, in accordance with the terms of the Ntem Concession, the declaration of force majeure on 6 May 2014 remains valid, pending formal resolution of the overlapping maritime border claims with Equatorial Guinea.

We will work with the Ministry of Industry, Mines and Technological Development of Cameroon to determine a forward plan for the Ntem block, given the declaration of force majeure. In the interim, we maintain our "reserve our rights" position on the Ntem block and continue to seek a collaborative, fair and equitable outcome.

Outlook

Overall, the Sterling portfolio still has the potential to deliver material exploration outcomes in Mauritania, Madagascar, Somaliland, and Cameroon. We continue to mature our top ranked assets to drill-ready status, or commercialise our positions as appropriate.

On the growth front, we have completed screening exercises on a significant number of opportunities through 2015. However, beyond the Mauritania C-3 and C-10 block entries, a number of technically attractive projects suffered through unacceptable commercial or above-ground risks and were not taken forward to acquisition stage.

We have strongly refocused our efforts to proactively evaluate shorter cycle executable opportunities that fit our revised strategy, to benefit from a sector recovery.

Sterling is fully funded for our current asset level commitments, through a strong balance sheet with cash resources of $98.7 million as at 31 December 2015. We are well placed to mature our portfolio, using our existing resources and continue to maintain a disciplined approach to growth, only acquiring and executing accretive projects the Company believes will ultimately deliver value for shareholders.

 

 

 

Eskil Jersing

Chief Executive Officer

 

 

 

 

 

OPERATIONS REVIEW

The Group's African focused asset portfolio provides exposure to exploration opportunities within a number of under-explored basins that have the potential to deliver material hydrocarbon reserves. These frontier and emerging areas have historically seen little activity but offer significant encouragement for the presence of commercially viable, working hydrocarbon systems.

MAURITANIA

Chinguetti (ca. 9% economic interest through Funding and Royalty Agreements). The Group has economic interests in the Chinguetti oil field through a Funding Agreement with SMHPM, Mauritania's national oil company, and a Royalty Agreement with Premier Oil ('Premier'), through the Group's wholly owned subsidiary Sterling North West Africa Holdings Limited.

Chinguetti Overview

Gross production for the Chinguetti field during 2015 averaged 5,083 bopd (2014: 5,512 bopd). Average production net to the Group, from the Group's economic interests during 2015, was 310 bopd (2014: 432 bopd). Production was in steady decline throughout the year, reflecting the maturity of the field, but benefited from a limited requirement for sub-sea or top side interventions. No infill drilling or workover activity took place during 2015.

The Group estimates that at the end of 2015, net entitlement 2P reserves stood at 173k barrels of oil equivalent (2014: 292k barrels of oil equivalent).

In February 2015, Premier exited from each of PSC A, PSC B (excluding Chinguetti) and PSC C-10 in Mauritania. The Group would have benefited, through the Royalty Agreement with Premier, from any future development on any of the three aforementioned PSC's. However given Premier's withdrawal, the Group does not expect any future benefits to materialise. Premier's exit from these PSC's does not affect the royalties currently received by the Group over Premier's interest in production from the Chinguetti field.

Outlook

The Chinguetti joint venture (Petronas, Tullow Oil, SMHPM, Premier, Kufpec) are evaluating how best to manage the Chinguetti field in a low oil price environment and with end of field life challenges. Formative discussions continue to be held with the Government of Mauritania and relevant stakeholders on how best to manage current operations and agree on a plan for a safe, cost effective and technically robust, decommissioning and abandonment phase.

In 2015, the Group bolstered its Mauritanian footprint via low cost ground floor entries into two exploration blocks, C-3 and C-10. The rationale underlying the C-3 and C-10 entries was that both blocks provided flexibility on work program commitment decisions, as well as offering exposure to material exploration upside in a re-emerging petroleum province on the West African margin. The entry into block C-3 was predicated on it being protection acreage in the event of a commercial discovery on block C-10, however subsequent work on C-3 post receipt of new 2D seismic data in 2015 ultimately did not support the entry premise. As a result a swift disciplined, data-driven exit decision was made to limit further capital exposure.

C-10 (WI 13.5%) Exploration block

Overview

Block C-10 covers an area of approximately 8,025km² and lies in water depths of 50 to 2,400m within the Nouakchott sub-basin, offshore Mauritania, surrounding the Chinguetti field. The C-10 block PSC is held by the Company's wholly owned subsidiary Sterling Energy Mauritania Limited ('SEML') (13.5% working interest), Tullow Oil (76.5% working interest and operator) and SMHPM (10% working interest). SMHPM is carried by SEML and Tullow Oil, pro-rata to their working interests, during the exploration phases. The PSC is in the second phase of the exploration period, which is due to expire on 30 November 2017 and has a minimum work obligation of one exploration well.

The block is fully covered by legacy 3D seismic coverage and lies within a proven petroleum basin offering exposure to multiple play-types from under-explored Jurassic and lower Cretaceous shelfal carbonates to Cretaceous and Tertiary clastic plays. Within the block confines a successful  exploration campaign in 2000-2003 targeting the Miocene play, yielded four oil and gas discoveries, including the Chinguetti oil field.

More recently in 2014 and 2015, Kosmos Energy, in deep water block C-8, immediately outboard of C-10 has made several world class LNG scale gas discoveries of Albian to Cenomanian age, with the Tortue West (Ahmeyim) structure alone reported to have Pmean gas resources of ca.11 Tcf. Further south in Senegal, the Albian clastic shelf margin play has also been successful with commercial oil and gas discovered at the SNE field, currently being appraised with best estimate 2C contingent resources of 468 million barrels of oil per FAR Limited's press release in February 2016.

In the C-10 block, Tullow Oil and the JV have matured a drill ready, Lower Cretaceous Neocomian age carbonate prospect, Lamina, located in water depths of approximately 100m. The joint venture anticipates that an exploration well to test this prospect in 2017 would cost in the order of $50 million ($7.5 million net to SEML) gross dry hole cost, substantively lower than the originally proposed $77 million cost in 2015.

Outlook

Following entry into the C-10 block in mid-2015, Sterling and its JV partners have been maturing and ranking the technical description of the play, prospect and lead portfolio on the merged, reprocessed and depth-migrated 3D seismic dataset. The joint venture will work towards selecting the prospect for drilling in 2017, with Lamina the currently highest ranked option, to meet the minimum work obligations. Sterling will continue to work on de-risking and ranking the remaining prospectivity within the three key remaining plays on block, through 2016.

Should the joint venture not fulfil the minimum work obligations, the gross liability owing to the Mauritanian government would be $7.5 million ($1.1 million net to SEML). Following the completion of Phase 2 the joint venture may elect to enter into Phase 3 (with a 3 year term) with a minimum work obligation of a further two exploration wells.

C-3 (WI 40.5%) Exploration block

Overview

Block C-3 is located in shallow water within the Nouakchott sub-basin, offshore Mauritania and covers an area of 9,825km². The PSC for block C-3 is held by SEML (40.5% working interest), Tullow Oil (49.5% working interest and operator) and SMHPM (10% working interest). SMHPM is carried by SEML and Tullow Oil, pro-rata to their working interest, during the exploration phases. The PSC is in the first phase of the exploration period, which runs to June 2016, with a minimum work commitment of acquiring 1,600km of 2D seismic data. The C-3 block was acquired as protection acreage for the adjacent C-10 block in the case of success on C-10, given that similar promising plays cover both blocks.

In late 2014, the operator acquired 1,600km of regional and infill 2D seismic data over block C-3 satisfying the minimum work obligations for the current phase. During 2015 SEML completed a detailed interpretation of the newly acquired 2D data. The resulting technical evaluation of the remaining play and lead potential was deemed by Sterling to be insufficiently de-risked by the 2D to justify entering into Phase 2 of the PSC; entailing a commitment to acquire 700km² of 3D seismic and drill one exploration well.

Outlook

In January 2016, SEML submitted a notice of withdrawal to Tullow Oil and SMHPM to reassign to Tullow Oil its 40.5% working interest share of block C-3 effective end February 2016. Completion of the withdrawal remains subject to approval by the Government of the Islamic Republic of Mauritania.

MADAGASCAR

The Group's Ambilobe block is located in the Ambilobe deep water basin, offshore north-west Madagascar. In May 2015, the Group relinquished the offshore Ampasindava block, located in the Majunga basin, north-west Madagascar. 

Ambilobe (WI 50% & operator) Exploration block

Overview

The Ambilobe block covers some 17,650km² and is located in the Ambilobe basin, offshore north-west Madagascar. Water depths across the block range from shoreline to 3,000m. The Ambilobe PSC is in the second phase of the exploration period and all work commitments have been fulfilled.

Sterling Energy (UK) Limited ('SE(UK)L') completed a farm-out agreement in December 2013 with Pura Vida under which Pura Vida assumed a 50% interest in the Ambilobe PSC and paid all costs associated with a discretionary 3D seismic survey subsequently acquired in 2015. Following the farm-out, SE(UK)L retained a 50% interest in the PSC and remains as operator.

The Ambilobe block is covered by an extensive database of vintage 2D data that led to the identification of a number of Cretaceous and Tertiary aged plays and leads, located in both shallow and deep waters. In June 2015 SE(UK)L as operator of the Ambilobe PSC completed a 1,175km² 3D seismic survey to improve the technical description of the high graded lead area prior to a "drill or drop" decision mid-2016. The 3D survey acquired by CGG Services SA was completed on time and budget, without incident and fully compliant with all environmental regulatory requirements. Processing of the seismic data by ION Geophysical Company commenced in the second half of 2015, with interim products having been made available and reviewed in-house prior to year-end.

Corporate social responsibility

Affiliated with the Ambilobe 3D survey, the Ambilobe JV has worked closely with the local communities and authorities of the region to undertake three CSR projects, one in each of the districts of Nosy Be, Ambanja and Ambilobe. In the Ambilobe district, the Ambilobe JV will support the renovation and rebuilding of two primary school classrooms. In each of Nosy Be and Ambanja districts, the Ambilobe JV will support the construction of a new fish market. The existing facilities for the local fisherman in these areas are currently inadequate and overcrowded. Building new, dedicated markets, will improve local traffic and sanitary conditions, contribute towards a safer environment for the local population and ultimately improve the livelihoods of the local fishermen. The Ambilobe JV will work in close collaboration with the local communities, with the aim of delivering the completed projects by mid-2016.

Outlook           

Continued processing of the 2015 3D seismic to Pre Stack Depth Migration stage with final deliverables expected in Q1 2016. Interpretation of interim data products is progressing and will focus on high-grading the lead inventory to help inform the decision on entry into Phase 3, which carries a one well commitment.

With Phase 2 of the Ambilobe PSC due to expire in July 2016, the joint venture will seek an extension to give sufficient time to complete the subsurface technical description and seek a farm-in partner prior to a decision whether to enter into Phase 3.

Ampasindava

Following a detailed subsurface re-assessment of the prospectivity of the Ampasindava block and after discussions with OMNIS, the joint venture, ExxonMobil (70% working interest) and Sterling (30% working interest), relinquished the Ampasindava block in May 2015.

SOMALILAND

The onshore basins of Somaliland offer one of the last opportunities to target an undrilled Mesozoic basin in Africa. The Odewayne block is ideally located to explore this play covering a large area of a completely unexplored onshore rift basin. Geophysical data and geological field studies indicate that the sedimentary basin underlying the block has encouraging evidence of a working hydrocarbon system.

Odewayne (WI 40%) Exploration block

Overview

This large, unexplored frontier acreage position comprises an area of 22,840km². Exploration to date has been limited to the acquisition of airborne gravity and magnetic data, with no seismic coverage and no wells drilled on block. Extensive geological field data provide strong encouragement for the presence of a deep sedimentary basin and has highlighted the presence of oil seeps at the surface indicating a working hydrocarbon system is present.

The Odewayne production sharing agreement ('PSA') was awarded in 2005, and is in the Third Period with an outstanding minimum work obligation of 500km of 2D seismic. The Third Period was recently extended by two years (to 2 November 2016) in order to allow time for an OPU to be established. The minimum work obligation during the Fourth Period of the PSA (also extended by 2 years to May 2018) 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'), currently holds a 40% working interest in the PSA. SE(EA)L acquired an original 10% from Petrosoma Limited ('Petrosoma') in November 2013 and an additional 30% from Jacka Resources Somaliland Limited ('Jacka') in two transactions during 2014. In aggregate, as consideration, SE(EA)L has paid $17.0 million to date and a further $8.0 million is to be paid to Petrosoma when certain operational milestones are reached.

SE(EA)L is fully carried by Genel Energy for its share of the costs of all exploration activities during the Third Period and Fourth Period of the PSA.

Outlook

Operational activities in Somaliland have been delayed while the Government of the Republic of Somaliland establishes a trained and equipped OPU that can provide the level of security required by in-country operators to ensure all future seismic and drilling operations are conducted safely. A 2D seismic acquisition program is currently scheduled to commence in H2 2016.

CAMEROON

Ntem is a large deep water concession in the southern Douala Basin. The Douala Basin of Cameroon is a proven oil and gas producing province with multiple discoveries made within the shallower water shelf area to the east of the Ntem Concession and multiple deep water discoveries to the north.

Ntem (WI 100% & operator) Exploration block

Overview

The Ntem Concession lies adjacent to the southern maritime border of Cameroon. Water depths range from 400 to 2,000m across this 2,319km² block. This block is well positioned with respect to both Tertiary and Upper Cretaceous play potential, both of which have proved commercially successful in Cameroon and Equatorial Guinea.

The Ntem Concession was subject to force majeure from June 2005 to January 2014, as a result of overlapping maritime border claims (referred to as the 'Affected Area') by the Republic of Cameroon and the Republic of Equatorial Guinea. Following the lifting of force majeure, the current exploration period ('First Renewal Period') of the Ntem Concession re-commenced on 22 January 2014. At that date, the remaining term of the First Renewal Period was approximately 15 months (expiring April 2015). The minimum work obligation (one exploration well) was satisfied by the drilling of the Bamboo-1 exploration well in February 2014.

On 6 May 2014, the Ntem joint venture partners notified Société Nationale des Hydrocarbures ('SNH') the national oil company of Cameroon, of the joint venture's declaration of force majeure pending formal resolution of the overlapping maritime border claims. SNH has advised that "Cameroon does not recognise that any situation of force majeure exists in the Ntem Permit".

In April 2015, Murphy Cameroon Ntem Oil Co. Ltd ('Murphy') and Sterling Cameroon Limited ('SCL') completed the transfer of Murphy's 50% interest in, and operatorship of the Ntem Concession, to SCL.

SCL received written notice, dated 22 April 2015, from SNH that it considered the First Renewal Period of the Ntem Concession to have expired on 22 April 2015 and the Ntem Concession to have lapsed.

The Group believes that, in accordance with the terms of the Ntem Concession, the declaration of force majeure on 6 May 2014 remains valid. As such, the First Renewal Period has been suspended since 6 May 2014 and therefore has not expired.

In December 2015, SCL became aware that SNH publicised the Ntem Concession as an "open block", SCL disputes this claim and reserves its rights to the Ntem Concession.

Outlook

SCL will work with the Ministry of Industry, Mines and Technological Development of Cameroon to determine a forward plan for the Ntem Concession, given the declaration of force majeure, the 22 April 2015 notice from the Ministry and the listing of the Ntem Concession as an open block.

Matthew Bowyer

Exploration Manager

FINANCIAL REVIEW

SELECTED FINANCIAL DATA

				2015	2014
Chinguetti production 1	bopd			310	432
Year end 2P reserves 1	kboe			173	292
Revenue	$million			5.0	16.0
Adjusted EBITDAX 1	$million			(6.3)	5.1
Loss after tax	$million			(16.0)	(12.3)
Net cash investment in oil & gas assets	$million			4.8	14.1
Year-end cash (including share of partner funds)	$million			98.7	108.1
Average realised oil price	$/bbl			50.3	94.2
Total cash operating costs (produced)	$/bbl			75.3	57.4
Year-end share price	Pence			15	20
Share price change 1	%			(26)	(55)
Debt	$million			0	0
1 Key performance indicators ('KPIs')

Revenue and cost of sales

Currently, all of the Group's production is from the Chinguetti field and totalled 266 bopd for the month of December 2015 (December 2014: 388 bopd).

2015 Chinguetti production, net to the Group, averaged 310 bopd, including royalty barrels, a decrease of 28% from the 432 bopd averaged in 2014; the reduced volumes reflect the lower oil price realised and increased production decline rates.

Gross volumes lifted and sold during the year from the Chinguetti field were down by 29% to 1.5 million barrels (2014: 2.1 million barrels).

The lifting cost per barrel has increased in 2015 by $24.2 to $94.2 (2014: $70.0). This was principally due to low levels of production consistent with a mature field production profile.

A summary of revenue, cost of sales and lifting volumes are provided below:

	2015	2014
Liftings (bbls)1	99,948	169,699
Revenue ($million)	5.0	16.0
Revenue / bbl ($)	50.3	94.2
Lifting cost ($million)	(9.4)	(11.9)
Lifting cost / bbl ($)	(94.2)	(70.0)
1 Net Sterling production during the year totalled 113,085 (2014: 157,751)

Loss for year

The 2015 loss totalled $16.0 million (2014: loss $12.3 million).

	2015
	$ million
Loss for year 2014	(12.3)
Decrease in revenue	(11.0)
Decrease in operating costs (excluding other obligations for 2014)	2.5
Increase in G&A	(0.3)
Impairment of Ntem (2015)	(8.2)
Impairment of Chinguetti FA and RA (2014)	6.0
Impairment of Ampasindava (2014)	1.9
Chinguetti cessation costs	2.2
Increase in other obligations (2015)	(0.3)
Other obligations (2014)	3.4
Decrease in finance net expense	0.1
Loss for year 2015	(16.0)

Cost of sales for the Group for 2015 (excluding the onerous commitment of $3.4 million) decreased by $2.5 million mainly due to a per unit decrease in depletion & amortisation, following the full impairment of the Chinguetti asset in 2014.

During 2015, the Group fully impaired the Ntem block, in Cameroon, resulting in a charge of $8.2 million.

The Group has made a provision of $3.7 million in the 2015 accounts to recognise anticipated future net onerous commitments for 2016 under the Chinguetti Funding Agreement (2014: $3.4 million). This reflects the expectation of an ongoing gap between unit revenues and costs on the field in 2016.

Group administrative overhead increased during the year to $2.3 million (2014: $2.1 million). Included within this charge is $297k (2014: $659k) with respect to share-based payment charges.

In 2015, a portion of the Group's staff costs and associated overheads have been recharged to joint venture partners ($452k), expensed as pre-licence expenditure ($2.0 million), or capitalised ($1.1 million) where they are directly assigned to capital projects. This totals $3.6 million in the year (2014: $4.1 million).

A summary of these movements are provided below.

	2015	2014
	$ million	$ million
Group administrative overhead (page 14)	(2.3)	(2.1)
Costs capitalised	(1.1)	(1.5)
Costs recharged to JV partners	(0.5)	(0.6)
Pre-licence expenditure	(2.0)	(2.0)
	(3.6)	(4.1)
Share based payment expense	0.3	0.7
Other non-cash expenditure	0.1	0.1
Group cash G&A expense	(5.5)	(5.4)

Adjusted EBITDAX and net loss

Group Adjusted EBITDAX (as defined within the Definitions and Glossary of Terms on pages 21 - 24) loss totalled $6.3 million (2014: $5.1 million earnings).

Net loss after tax totalled $16.0 million (2014: loss $12.3 million). The basic loss per share was $0.07 per share (2014: loss $0.06 per share).

Interest received and finance expenses result in a net expense of $712k (2014: $878k) which includes exchange losses of $89k (2014: $181k) on GBP cash deposits held at 31 December 2015 reported in US dollars, a non-cash finance expense of $1.0 million (2014: $1.1 million) relating to the unwinding of the Chinguetti decommissioning provision, interest received totalled $356k (2014: $398k) and other finance expenses totalling $13k (2014: $16k).

No dividend is proposed to be paid for the year ended 31 December 2015 (2014: $nil).

Cash flow

Net Group cash outflow generated from operating activities was $4.9 million (2014: $1.4 million inflow); a full reconciliation of which is provided in the Consolidated Statement of Cash Flows.

Net cash investments in oil and gas assets totalled $4.8 million (2014: $14.1 million) and are summarised below:

	2015	2014
	$ million	$ million
Mauritania	4.0	-
Somaliland	0.1	12.4
Madagascar	0.6	1.0
Cameroon	0.1	0.7
	4.8	14.1

Statement of financial position

At the year end, cash and cash equivalents totalled $98.7 million (2014: $108.1 million) of which $1.1 million (2014: $1.1 million) were held on behalf of partners, leaving a cash balance of $97.6 million (2014: $107.0 million). There are currently no restricted funds in the Group.

At the end of 2015, net assets/total equity stood at $86.8 million (2014: $102.4 million), and non-current assets totalled $25.1 million (2014: $28.5 million). Net current assets reduced to $94.1 million (2014: $96.6 million).

The Group's Chinguetti decommissioning provision increased during the year by $9.7 million to $32.4 million (2014: $22.7 million) reflecting an increase in the Group's estimate of gross decommissioning costs based on a provisional plan presented to the JV by the operator, further provided to the Group by SMHPM.

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

	Note	31st December 2015		31st December 2014
		$000		$000
Revenue		5,031		15,991
Cost of sales		(6,028)		(11,873)
Gross (loss)/profit		(997)		4,118
Other administrative expenses		(2,305)		(2,069)
Impairment of oil and gas assets	4	(8,183)		(7,903)
Pre-licence costs		(2,212)		(2,196)
Onerous contract		(3,700)		(3,390)
Chinguetti cessation costs		2,159		-
Total administrative expenses		(14,241)		(15,558)
Loss from operations		(15,238)		(11,440)
Finance income		356		398
Finance expense		(1,068)		(1,276)
Loss before tax		(15,950)		(12,318)
Tax		-		-
Loss for the year attributable to the owners of the parent		(15,950)		(12,318)
Other comprehensive income
Currency translation adjustments		6		24
Total other comprehensive income for the year		6		24
Total comprehensive expense for the year attributable to the owners of the parent		(15,944)		(12,294)
Basic loss per share (US cents)		(7.25)		(5.60)
Diluted loss per share (US cents)		(7.25)		(5.60)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Note	31st December 2015		31st December 2014
		$000		$000
Non-current assets
Intangible royalty assets		-		-
Intangible exploration and evaluation assets	4	25,074		28,426
Property, plant and equipment	5	34		72
		25,108		28,498
Current assets
Inventories		1,320		2,223
Trade and other receivables		550		3,294
Cash and cash equivalents		98,653		108,148
		100,523		113,665
Total assets		125,631		142,163
Equity
Share capital		149,014		149,014
Share premium		378,863		378,863
Currency translation reserve		(219)		(225)
Retained deficit		(440,862)		(425,209)
Total equity		86,796		102,443
Non-current liabilities
Long-term provisions		32,395		22,667
		32,395		22,667
Current liabilities
Trade and other payables		2,740		13,663
Short-term provisions		3,700		3,390
		6,440		17,053
Total liabilities		38,835		39,720
Total equity and liabilities		125,631		142,163

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

				Currency
		Share	Share	translation	Retained
		capital	premium	reserve	deficit 1	Total
		$000	$000	$000	$000	$000
At 1 January 2014		149,014	378,863	(249)	(413,550)	114,078
Loss for the year		-	-	-	(12,318)	(12,318)
Currency translation adjustments		-	-	24	-	24
Total comprehensive expense for the year attributable to the owners of the parent		-	-	24	(12,318)	(12,294)
Share option charge for the year		-	-	-	659	659
At 31 December 2014		149,014	378,863	(225)	(425,209)	102,443
Loss for the year		-	-	-	(15,950)	(15,950)
Currency translation adjustments		-	-	6	-	6
Total comprehensive expense for the year attributable to the owners of the parent		-	-	6	(15,950)	(15,944)
Share option charge for the year		-	-	-	297	297
At 31 December 2015		149,014	378,863	(219)	(440,862)	86,796

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

CONSOLIDATED STATEMENT OF CASH FLOWS

	Note	2015		2014
		$000		$000
Operating activities:
Loss before tax		(15,950)		(12,318)
Depreciation, depletion & amortisation		54		2,358
Impairment expense	4	8,183		7,903
Chinguetti cessation costs		(2,159)		-
Onerous provision		310		3,390
Finance income and gains		(356)		(398)
Finance expense and losses		1,056		1,265
Share-based payment charge		297		659
Operating cash flow prior to working capital movements		(8,565)		2,859
Decrease in inventories		903		523
Decrease/(Increase) in trade and other receivables		2,744		(359)
Decrease in trade and other payables		(2)		(1,669)
		(4,920)		1,354
Cash (outflow)/generated from continuing operations		(4,877)		1,814
Cash outflow from discontinued operations		(43)		(460)
Net cash flow (used in)/generated from operating activities		(4,920)		1,354
Investing activities
Interest received		356		398
Purchase of property, plant and equipment	5	(16)		(32)
Exploration and evaluation costs	4	(4,831)		(14,102)
Net cash used in investing activities		(4,491)		(13,736)
Net decrease in cash and cash equivalents		(9,411)		(12,382)
Cash and cash equivalents at beginning of year		108,148		120,755
Effect of foreign exchange rate changes		(84)		(225)
Cash and cash equivalents at end of year		98,653		108,148

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.       General information      

The preliminary results announcement is for the year ended 31 December 2015.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2015 or 2014, but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 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 2016, will be posted to Shareholders on or about 1 April 2016.

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

					Middle East
		Africa			(Discontinued)		Total
		2015	2014		2015	2014	2015	2014
		$000	$000		$000	$000	$000	$000
Statement of comprehensive income
Revenue		5,031	15,991		-	-	5,031	15,991
Cost of sales		(6,028)	(11,873)		-	-	(6,028)	(11,873)
Gross (loss)/profit		(997)	4,118		-	-	(997)	4,118
Impairment of E&E assets	Note 4	(8,183)	(1,863)		-	-	(8,183)	(1,863)
Impairment of royalty assets		-	(2,061)		-	-	-	(2,061)
Impairment of D&P assets	Note 5	-	(3,979)		-	-	-	(3,979)
Accruals release		-	-		5	5	5	5
Pre-licence costs		(2,212)	(2,196)		-	-	(2,212)	(2,196)
Chinguetti cessation costs		2,159	-		-	-	2,159	-
Onerous contract		(3,700)	(3,390)		-	-	(3,700)	(3,390)
Segment result		(12,933)	(9,371)		5	5	(12,928)	(9,366)
Unallocated corporate expenses							(2,310)	(2,074)
Loss from operations							(15,238)	(11,440)
Finance income							356	398
Finance expense							(1,068)	(1,276)
Loss before tax							(15,950)	(12,318)
Tax							-	-
Loss attributable to owners of the parent							(15,950)	(12,318)

4.         Intangible Exploration and Evaluation ("E&E") assets

			Group
			$000
Net book value at 1 January 2014			13,187
Additions during the year			17,102
Impairment for the year			(1,863)
Net book value at 31 December 2014			28,426
Additions during the year			4,831
Impairment for the year			(8,183)
Net book value at 31 December 2015			25,074

Impairment for the 2015 refers to the full impairment of the Ntem asset (2014: Ampasindava).

5.         Property, plant and equipment

		Computer
	Oil and Gas assets	and office equipment	Total
Group	$000	$000	$000
Cost
At 1 January 2014	185,802	143	185,945
Additions during the year	-	32	32
At 31 December 2014	185,802	175	185,977
Additions during the year	-	16	16
At 31 December 2015	185,802	191	185,993
Accumulated depreciation and impairment
At 1 January 2014	(180,256)	(45)	(180,301)
Charge for the year	(1,567)	(58)	(1,625)
Impairment reversal for the year	(3,979)	-	(3,979)
At 31 December 2014	(185,802)	(103)	(185,905)
Charge for the year	-	(54)	(54)
Impairment for the year	-	-	-
At 31 December 2015	(185,802)	(157)	(185,959)
Net book value at 31 December 2015	-	34	34
Net book value at 31 December 2014	-	72	72
Net book value at 31 December 2013	5,546	98	5,644

6.         Subsequent event

Mauritania - Withdrawal from block C-3

On 29 January 2016 it was announced that it's wholly owned subsidiary SEML had submitted a notice of withdrawal to its joint venture partners in relation to block C-3, offshore Mauritania. As part of the withdrawal, SEML will assign its entire 40.5% participating interest in the production sharing contract for block C-3, located offshore in the Islamic Republic of Mauritania to Tullow Oil at no cost to Tullow Oil. The minimum work obligations for block C-3 have been completed. As a result, SEML will have no additional costs associated with the withdrawal.

DEFINITIONS AND GLOSSARY OF TERMS

$                                                       US dollars

2006 Act                                            the Companies Act 2006, as amended

2007 LTIP                                          the 2007 Long Term Incentive Plan

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."

AIM                                                   AIM, a market of the London Stock Exchange

All Staff LTIP                                      the All Staff Long-Term Incentive Plan adopted in 2009

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

Combined Code or Code                     UK Corporate Governance Code 

Companies Act                                  the Companies Act (as amended 2006)

Company                                           Sterling Energy plc

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

Directors                                            the Directors of the Company

E&P                                                  exploration and production

Adjusted EBITDAX                             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

FPSO                                                Floating, Production, Storage and Offloading vessel

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

HMRC Approved Sub-Plan or               The HMRC approved sub-plan of the All Staff LTIP

HMRC Sub-Plan                                

HSSE                                                Health, Safety, Security and Environment

hydrocarbons                                     organic compounds of carbon and hydrogen

IFRS                                                 International Financial Reporting Standards

Index                                                 FTSE 350 Index

JV                                                     joint venture

K                                                      thousands

km                                                    kilometre(s)

km²                                                   square kilometre(s)

lead                                                   indication of a potential exploration prospect

London Stock Exchange or LSE          London Stock Exchange Plc

m                                                      metre(s)

mcf                                                    thousand cubic feet

Murphy                                              Murphy Cameroon Ntem Oil Co. Ltd

NED LTIP                                           non-executive Director Long Term Incentive Plan adopted in 2009

OECD                                                Organisation for Economic Cooperation and Development

OPU                                                  Oil Protection Unit

Ordinary Shares                                  ordinary shares of 40 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.

Petronas                                            PC Mauritania 1 PTY LTD

Petrosoma                                         Petrosoma Limited (joint venture partner in Somaliland)

Premier                                             Premier Oil

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

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

Pura Vida                                          Pura Vida Mauritius

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                                              40p ordinary shares

Shareholders                                      ordinary shareholders of 40p each in the Company

SMHPM                                            Société Mauritanienne Des Hydrocarbures et de Patrimoine Minier

Subsidiary                                         a subsidiary undertaking as defined in the 2006 Act

Tcf                                                     Trillion cubic feet

TSR                                                  total shareholder return (End Share Price - Opening Share Price/Opening Share Price) plus (Sum of Dividends per Share/Opening Share Price)

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

UK Corporate Governance Code           Formerly the Combined Code, sets out standards of good     practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders

United States or US                            the United States of America

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

 

END

 

 

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