Sterling Energy PLC, the AIM listed independent oil & gas exploration and production company, has announced its 2005 Interim Results together with an update on progress and outlook.
Highlights
· Unaudited first half net profit of £2.4 million up 83% from the same period in 2004.
· Average daily production increased by 20% to 10.2 mmcfged (H1 2004: 8.5 mmcfged).
· Average realised price achieved up 11% at $6.38/mcfge (H1 2004: $5.76/mcfge).
· US gas forward sales of only $5 million locked in at $6.67/mcfge to March 2006 leaving large upside to recent higher prices for the bulk of the production – market spot prices have recently exceeded $12/mcf.
· 2.1 million bbls related to the Chinguetti field with a floor price of c$38/bbl and the excess over c$50/bbl accruing to Sterling.
· Proven and probable reserves of approximately 21 million boe at mid-year, up 115% over the corresponding date.
· First production from the important Chinguetti development, offshore Mauritania, expected on time in February 2006.
· Major farmout of offshore Madagascar interests to ExxonMobil leaving Sterling with a 30% interest carried through seismic and up to four well programme.
· Possible development of heavy oil discoveries in Dome Flore enhanced by completed farmout, leaving Sterling with a 30% interest.
· Consolidation of Sterling’s interests in the Philippines into Forum Energy plc which was listed on AIM in August 2005.
· West Africa and Gulf of Mexico exploration drilling programmes of up to 10 wells over the next year underway.
Harry Wilson, Chief Executive of Sterling Energy Plc, said:
“The next six months will witness the beginning of a step change in the pace of Sterling’s development. We have an exploration drilling programme already underway, the start of production at Chinguetti in February next year will markedly increase cashflow and, given the strong commodity prices, new opportunities are arising. It’s going to be a busy and exciting period.”
Outlook
With the start-up of Chinguetti production in February 2006, a sustained and largely carried exploration programme in Africa of 6-10 wells over the next year, progress in the US and strong oil and gas prices, Sterling is well positioned for an exciting period in its development.
Operational summary
The period since the start of 2005 has seen accelerating activity for Sterling in both its production and exploration activities. First production in Africa remains on target for February 2006, from the offshore Chinguetti field development. Important farmouts have been secured on the heavy oil discoveries on Dome Flore and the exploration acreage offshore Madagascar, though the early results of the largely carried exploration programme elsewhere in Africa have been disappointing. US production has risen by 20% over the corresponding period. The planned capital expenditure programme has seen success and production has increased to offset natural declines. In common with the industry, the programme has been delayed by lack of availability of services, mainly through exceptional weather impacts and higher activity levels.
Mauritania
The 140 million bbl Chinguetti field development is now over 88% completed. Production is expected to rise to a plateau of 75,000 bopd gross. The hull of the floating production vessel arrived in Singapore in December 2004 and by March 2005 the principal topsides had been installed. The turret section integration started at the end of June and “sail-away” to production location is scheduled for the end of this month. Meanwhile, on the Chinguetti field the lower completions of all 6 production wells and 5 water injection wells have been completed.
In April, Sterling opened an office in Nouakchott, the capital of Mauritania. Sterling is working closely with Oil Ministry and Groupe Projet Chinguetti (GPC), the company set up by the Mauritanian Government to help manage its 12% working interest in Chinguetti. Training and assistance from Sterling is intended to help in the development of the country’s fledgling energy sector.
Sterling has two economic interests in the Chinguetti development. The first is through the Funding Agreement with the Mauritanian Government, signed in November 2004; Sterling receives an approximate 8% economic interest in production in return for funding its share of the past and development costs associated with the Government’s 12% working interest. This has been facilitated through the provision of a $130 million letter of credit which is being progressively drawn-down to meet the costs, c$42 million of which has been drawn to date.
The second interest is through a wider agreement whereby Sterling is paid a royalty on a sliding scale on every barrel produced under a 6% working interest in PSC B, including the Chinguetti field. At recent oil prices of $58-61/bbl, the royalty payment would be around $7.75/bbl before adjustments. Sterling will receive royalties on production from all other fields developed in PSC B and under a 3% working interest in PSC A, as well as a cash bonus of $2 million or 1 million respectively for each discovery declared commercial which is greater than 50 million bbls.
The Tiof discovery in PSC B, which is considerably larger than Chinguetti, is currently being evaluated following a further successful appraisal well in February 2005. Appraisal drilling on the Tevet discovery, adjacent to Chinguetti in PSC B, has also recently commenced. Exploration activity on PSC B & PSC A resumed in July. The high-risk exploration wells, Sotto in PSC A and Espadon in PSC B, were abandoned as dry. At least a further three exploration wells are planned by year-end.
AGC
In the AGC (joint zone between Senegal/Guinea Bissau), Sterling participates in two licences, the deep water exploration block Croix du Sud (88% interest and operator) and the Dome Flore block (30% interest). Dome Flore was farmed out in March 2005 to Markmore, a Malaysian company with interests in bitumen refining.
The Croix du Sud licence has been extended to January 2006 and discussions are ongoing with a number of companies interested in a drilling programme.
In the Dome Flore permit, Markmore, the operator, is undertaking a study of the feasibility of economic recovery of the heavy oil deposits of Dome Flore and Dome Gea, estimated at some 800-1,000 million barrels in place, with particular emphasis on steam assisted gravity drainage to facilitate the production of the heavy oil.
Cameroon
In consultation and cooperation with the Cameroonian authorities, Sterling has placed the Ntem Concession in Force Majeure. This period of suspension will allow Cameroon and Equatorial Guinea time to agree the maritime boundary between the two countries which runs along the southern edge of the licence. All of the work and financial obligations of the Ntem Concession have been suspended; however Sterling is continuing technical work in preparation for drilling an exploration well once this territorial issue has been resolved.
Gabon
Sterling currently operates three shallow water permits in southern Gabon; the Iris Marin and Themis Marin Production Sharing Contracts and recently acquired an exclusive Technical Evaluation Agreement over the Ibekelia permit.
During August and September 2005 an exploration well was drilled in the Iris Marin PSC. The Iris Iboga Marin-1 well was drilled to total depth of 2,035m and intersected an excellent quality reservoir but no significant hydrocarbons were encountered. Sterling had a 20.57% interest but due to a farmout paid for only 2.57% of the well costs.
Processing of the 3D seismic data acquired in southern Themis Marin during 2004 is ongoing. This survey was acquired and is being processed in conjunction with the adjacent Gryphon Marin PSC and Etame Marin PSC. Drilling of one well is anticipated in mid 2006. Under the terms of a farm-out, Sterling will pay 2.57% for its 20.57% equity in this well.
In September 2005, Sterling and its partners negotiated an exclusive Technical Evaluation Agreement (TEA) for the Ibekelia permit which is contiguous with the Iris Marin and Themis Marin permits and is adjacent to the Gamba and Olowi oilfields. Sterling is the operator with 40% equity.
Madagascar
In the 34,000 sq km Ambilobe and Ampasindava PSCs our exploration studies are yielding positive results and we are planning to acquire 2D seismic in 2006. This prospectivity has been recognised by other companies and in July 2005, ExxonMobil farmed in to both blocks. Under the terms of the farm-in agreement, Sterling will retain a 30% interest in the licences and will be carried through an exploration work programme that, subject to certain milestones being achieved, will include 2D and 3D seismic acquisition and the drilling of up to two wells per licence.
Perth Office Closure
The Board has decided it will be more advantageous to manage all of the Group’s African activities from its UK head office. Accordingly, the Perth office will close in January 2006. The relocation of activities and some key personnel from Perth to the UK will significantly reduce costs and provide for more streamlined and efficient operations. The Board would like to thank the staff of the Perth office for their contribution since the acquisition of Fusion in late 2003 and for their commitment during this handover period.
Forum Energy plc
During the first half, Sterling took a 15% interest in a new company, Forum Energy plc, which was floated on AIM in August, by exchanging its non-core GSEC 101 subsidiary for Forum shares. Based on the current market price, the implied value of this holding is approximately £5 million compared with a book cost of £0.7 million: no profit has been included on this transaction during the period.
USA
In the first half of 2005 the Houston office has focused on developing its Gulf of Mexico assets through drilling, recompletions and work-overs. These efforts will continue but drilling rigs, lift boats and other necessary equipment are in great demand and with lower availability due to the effects of the hurricanes and rising oil and gas prices, delays are inevitable. Two drilling rigs and a lift boat were contracted to handle the four development projects carried out in the period to date and with one project waiting on results. Activity has been focused on the Mustang Island and Matagorda Island properties of offshore Texas, and the Eugene Island property offshore Louisiana.
In the Mustang Island area, the 748 #1 well was successfully recompleted to a shallower zone and was brought on production in May at a sustained gross rate of 1.5 mmcfgd, which has exceeded expectations. Sterling has a 45% NRI in this property.
The Eugene Island 268 #1 well was successfully recompleted up-hole and brought onstream in July. It has established a gross rate of 3.5 mmcfgd. Sterling holds a 45% NRI.
The Mustang Island area, 749 GU #2 well was drilled for projected remaining attic reserves. To date the well has shown less than encouraging results with high water levels despite being “higher” than projected. The well will be put on production when services are available, to ascertain whether economic production can be established. Sterling promoted a 25% WI in this well to a local company to cover part of its costs and has retained a 56% NRI.
In Matagorda Island, the 520 #16 well was successfully worked over, re-establishing production from a wellbore in August that has not produced since late 1995. Initial production has been at a gross daily producing rate in excess of 1 mmcfgd. Sterling has a 46% NRI in this well.
There were also some operational restrictions in the period, with planned pipeline shut-ins, repairs, weather and closures for the above operations which restricted production to an average of 10.2 mmcfged, up 20% on the corresponding period. In the second half to-date, production has not yet increased above the level of the first half due to shut-ins for further pipeline maintenance, weather interruptions, unavailability of equipment to deal quickly with day-to-day production issues and declines on other wells. Recently, further third party production throughput in our pipeline system has been secured and is progressively increasing, providing a growing source of income.
Sterling has farmed-in for a 28% WI in a well to be drilled in October in the Galveston offshore area close to existing Sterling production. Continuing shortages of necessary equipment have, as for all operators, hampered the planned development programme in the second half, though Sterling anticipates three non-operated new wells over the next six months.
The US office is currently expanding its portfolio of drilling and production opportunities through internal generation and by participating in outside generated opportunities.
