24th Apr 2006 07:02
Sterling Energy PLC24 April 2006 24 APRIL 2006 STERLING ENERGY PLC 2005 PRELIMINARY RESULTS ANOTHER SUCCESSFUL YEAR AND GREAT OPTIMISM FOR 2006 Sterling Energy, the AIM listed (symbol: SEY) independent oil & gas explorationand production company operating in the Gulf of Mexico and Africa, todayannounces its 2005 Preliminary Results together with an update on progress andoutlook. 2005 HIGHLIGHTS Financial • Turnover increased by 19% to £13.6 million (2004: £11.5 million) • Pre-tax profit up 47% to a record £6.1 million (2004: £4.2 million) before one-off Perth office closure cost of £1.2 million • Cash inflow from operations, before the one-off closure cost and working capital movements, increased by 13% to £8.8 million (2004: £7.8 million), Production and reserves • Average attributable production increased 4% to 9.7 mmcfged (2004: 9.3 mmcfged) despite the impact of several highly destructive hurricanes in the Gulf of Mexico • Realised prices up 12% at $6.37/mcfge (2004: $5.68/mcfge) • Net year-end proven & probable reserves over 21 million boe, of which 65% are in the proven category Operational • Major investment in the offshore Mauritania Chinguetti field development continued with a further $65 million of cash invested by Sterling in the year and a further investment of $50 million projected in 2006. Local office opened • Three drilling successes offshore Mauritania with a 6th appraisal well on the 300+ million bbl Tiof (Oualata) field, an appraisal well on the 50 million bbl gross Tevet discovery and a new 30 million bbl gross discovery, Labeidna. All wells were drilled at no cost to Sterling • Key farmout to Exxon-Mobil on Madagascar acreage with Sterling remaining as operator: carried 30% interest through seismic and up to four well drilling programme • New interest offshore Gabon adjacent to existing licences • Extreme weather conditions offshore USA curtailed work programme • Farmout of heavy oil discoveries in AGC 2006 HIGHLIGHTS Operational • Chinguetti field production commenced on-time in late February and first Sterling lifting took place in early April. Production levels to the end of March averaged 59,000 bpd gross. The operators peak rate target is of up to 75,000 bpd gross sometime in the second half • Firm exploration well programme in Africa of at least 5 wells to mid-2007, largely carried. An expansion of this drilling programme to enhance reserve and production upside is anticipated • Operator development proposals on 300 million bbl+ gross Tiof (Oualata) and 50 million bbl gross Tevet discoveries anticipated • Consolidation of management of the African operations to the UK head-office completed • Carried piston-coring completed and 4,000 km 2-D seismic programme offshore Madagascar brought forward and now underway • Success with Galveston Bay and Gryphon C-3 wells in the USA, now brought onstream and expected to produce 2.2 mmcfged net • Memorandum of Understanding for an exploration block signed with Kurdistan Regional Government of Iraq and field studies commenced • New licence, exploration, drilling, development and production interests actively being sought to expand reserves and production upside potential Harry Wilson, Chief Executive of Sterling Energy Plc, said: "We are very well positioned with a good mix of producing assets and explorationprospects and are optimistic for Sterling's continued development. While wewill have a significant increase in cash flow in 2006, we will not overpay forassets as our focus is firmly on creating shareholder value. The increase incash flow, coming from Chinguetti and the USA, puts Sterling in a very strongposition to effect a step-change in its activities and to leverage itself intonew opportunities. It is especially pleasing to have started work in Kurdistan,a vastly under-explored area. In this fast-changing energy environment, Sterlinglooks forward to meeting the challenges and is confident of continued growth." For further information contact: Sterling Energy plc (+44 1582 462 121)Harry Wilson, Chief ExecutiveGraeme Thomson, Finance Director Citigate Dewe Rogerson (+44 207 628 9571)Media enquiries: Martin Jackson / George CazenoveAnalyst enquiries: Nina Soon www.sterlingenergyplc.com Ticker Symbol: SEY STERLING ENERGY PLC 2005 PRELIMINARY RESULTS CHAIRMAN'S STATEMENT It is my pleasure, once again, to report further progress and considerableachievements by your Company in 2005. This growth has continued into 2006. Inlate February, a major milestone was achieved by Sterling when first oil wasproduced on-time from the Chinguetti oil field offshore Mauritania. The firstSterling cargo was lifted in early April. Gross production to the end of Marchaveraged 59,000 bpd and is expected to increase towards the operator's peak rateof 75,000 bpd sometime in the second half of 2006. Sterling has an economicinterest in the field of approximately 8% plus a production-based royalty. Takentogether, these interests will yield substantial cash flow and mark astep-change in Sterling's development as a significant international explorerand producer of oil and gas. In 2005, revenues from the sale of oil and gas increased by 19% from £11.5million to £13.6 million. Pre-tax earnings rose 47% to £6.1 million (2004: £4.2million) before the one-off cost of £1.2 million for the Perth office closure.Like all other Gulf of Mexico producers, Sterling was affected by possibly theworst hurricane season in living memory, which caused widespread damage tocommunities in the southern US states and severe disruption to the oil and gasindustry. Although there was minimal physical damage to our facilities, numerousthird party pipelines were shut in for safety reasons and our production wasrestricted. I am pleased to say that the majority of our production was resumedquickly and is now fully restored. The commencement of production from our major investment in Mauritania isexpected to lead to a very substantial increase in Sterling's financial andoperational performance in 2006. With the closure of the Perth office in January 2006, Sterling has consolidatedits African management activity in the UK. Cost and time savings are beingrealised. There are dedicated teams for Mauritania, new ventures and explorationactivities now in place, with relevant support. After the hectic pace of growthin recent years, the asset portfolio has been streamlined. On the exploration front, highlights included: • A successful farm-out of our offshore Madagascar licences to Exxon-Mobil, retaining a 30% interest and remaining operator. Sterling is carried through a substantial programme of seismic and other work, plus the drilling of up to four exploration wells. The work programme has already been accelerated with sea bottom piston-coring completed and the acquisition of approximately 4,000 km of 2-D seismic now underway. • Success with three carried wells offshore Mauritania, being; - an appraisal well on the 300+ million bbl Tiof (Oualata) field; - an appraisal well on the 50 million bbl gross Tevet field; - a discovery well on the new 30 million bbl gross Labeidna field. • Useful local and regional information was garnered from the offshore Gabon well, on which we were largely carried. We have been awarded an interest adjacent to our existing licences. Work continues to firm-up new prospects for drilling in late 2006/7. • Farmout on Dome Flore heavy oil interests was completed, with Sterling keeping a 30% carried interest through certain studies and appraisal activities. • The US activity was hampered by the severe weather and its effects, as well as exceptionally difficult and volatile equipment and energy pricing markets. Highlights were the Galveston Bay 251-5 and Gryphon C-3 wells, successfully drilled in early 2006 and now onstream, increasing to a combined projected net rate of approximately 2.2 mmcfged. Your Company, with its growing cash flow from its major investment programmeover the last 18 months, is looking to increase its exposure to "high impact"exploration activity. It is focused on adding further material explorationopportunities to its portfolio, together with development and productionactivities. As a first and important step, Sterling has recently signed aMemorandum of Understanding ("MOU") with the Oil, Gas and PetrochemicalEstablishment ("OGE") of the Kurdistan Regional Government of Iraq givingexclusive rights to commence geological studies and to negotiate a ProductionSharing Contract ("PSC") for an exploration block. Sterling sees this as avastly under-explored region with great potential. Financials improve again The year 2005 was a year marked by ongoing achievement. Pre-tax profit rose 20%to a record £5.0 million and cash inflow from operations (before the closurecost noted above and working capital movements), was up 13% at £8.8 million.During a period of heavy investment and in light of the prevailing operatingconditions, this was an excellent result. We have not elected for the early adoption of International Financial ReportingStandards ("IFRS") and accordingly the financial statements have been preparedon a basis consistent with the prior periods. Building the springboard Sterling directly invested a further $65 million of cash in the Chinguettidevelopment in 2005. The expenditures to complete the field development work andto commence production, continued into 2006, with up to a further $50 millionpaid or currently budgeted. The successful start-up will transform Sterling'sproduction base and financial performance. I am very pleased that productionstarted on-time in late February 2006 and the major increase in cash flow fromthis development will help to provide the impetus for future growth. We anticipate development decisions on both the Tevet and Tiof (Oualata) fields.This would further boost our cash flow potential through the production royalty,at no cost to Sterling, and also, in the case of Tevet, through the sharing ofChinguetti facilities. In addition, we may be able to repeat the mutuallybeneficial funding arrangements of Chinguetti on these or other fields, inMauritania or elsewhere. We were less fortunate with developments in the Gulf of Mexico, with theindustry having to cope with the devastation of possibly the worst hurricaneseason in living memory. As well as production disruptions, development planswere also seriously impeded by the scarcity and high costs of equipment, as wellas oil and gas price volatility. Exploration results were mixed, although somenotable successes were recently recorded, the latest being the 2006 explorationwells on Galveston Bay ST251-5 and the Gryphon C-3 noted above. Group proven and probable reserves were over 21 million boe at the end of theyear. The existing exploration projects have the required prospectivity to addto these reserves materially, leaving aside any new projects with which Sterlingwill be involved. Over the next twelve months we expect to participate in a number of drilling andother exploration activities, intended to increase our reserves at a time ofgrowing worldwide supply concerns. With wells in Gabon, Mauritania and the USA,as well as piston-coring and seismic in Madagascar, and an emphasis on newventures, it will be a busy time. Streamlined management During the last year the staff have not only had to deal with day-to-daymatters, but also the consolidation of African management activities in the UK,establishing a staffed office in Mauritania and the impact of the hurricanes inthe USA. This, coupled with the expansion and strengthening of various functionsto cope with our growth, has made it a challenging time. I would like to thankall of our staff, including those who worked with us in our Perth office, fortheir support and professionalism in this demanding period. We believe thebenefits of these changes will become increasingly apparent. I would also like to thank Dr. Elizabeth Butler who, after many years ofservice, will not be seeking re-election to the Board at this year's AGM. Hercontribution has been greatly appreciated. I welcome Christopher Callaway, whojoined the Board in February 2006. His long and distinguished career in the Citywill bring significant additional skills at this challenging time. Strong Outlook The outstanding progress of your Company over the last number of years is in nosmall way due to the expertise and dedication of its staff whose industryknowledge and professionalism have created the significant opportunities forgrowth available to us today. In my decades in the industry, I have never feltso optimistic about the outlook and I believe Sterling is very well positionedto take advantage of the resulting opportunities. With a significant increase in production and cash flow in 2006 and anincreasingly exciting exploration portfolio in a time of growing energyshortages, Sterling can look forward with confidence to a rewarding period inthe years ahead. Richard O'TooleChairman21 April 2006 CHIEF EXECUTIVE'S STATEMENT Our industry is undergoing a period of enormous change and we are adapting ourbusiness model to continue the success we have so far delivered. Against thisbackdrop, the start of production in Mauritania in February 2006 transforms ourcash flow, enabling Sterling to be bolder in the implementation of its growthstrategy. Changing Industry Background The key causes of this changing, volatile environment are the sustained "high"oil price, which many commentators are predicting will stay above $50/bbl overthe next 3 - 5 years. There is a recognition that the supply of oil and gas isstruggling to keep up with demand and that this supply may be subject tounforeseen interruptions. The energy sector has moved quickly to adjust tochanges in these fundamental forces. The key issues we now have to contend withinclude: • A "land grab" is underway: in addition to the major oil companies (who need to meet reserve and production replacement targets), we now have to contend with national oil companies strategically positioning themselves to guarantee future supplies. Competition for prospective acreage is intense. • It is not just the oil price which has risen sharply. From the commercial terms granted by governments for licences, through rig rates & seismic costs to insurance premiums, the prices for everything in our industry have gone up. Availability of equipment has plummeted with, for example, the lead times on new rig contracts in West Africa currently running at over a year. • The economics of exploration projects have improved, which translate into both higher risk targets and smaller prospects being drilled. Buyers, often with "cheap money", have also lowered the economic return criteria they apply to acquisitions, such that many prices being paid for reserves are, in our view, only supported by even greater optimism about the future of energy prices. • Investors have joined the "black-gold rush". Since we joined AIM in October 2002, our peer group in London has risen from about 10 to over 100 oil and gas companies and this rate of growth looks set to continue during 2006. Readily available funds have chased a declining number of good opportunities and inevitably pushed prices up. Availability of experienced people has also become an issue as each of the new companies have established their teams. This all sets the scene for a highly competitive and expensive market placewhere sellers are calling the tune. Although we are in the fortunate position ofhaving acquired many of our assets before these changes really started to biteand have benefited from the inevitable rise in value, we are adapting our modelto continue this growth going forward. Step-change Our overall aim is to continue to build our cash flow, profitability and haveexciting exploration upside, focused on increasing value per share. In ourmodel to date: Production has offered a steady rate of return which, with low risk infill and step-out drilling, provided a platform from which to undertake exploration. Our production assets would not normally be expected to double the value of the Company in the short term - although the recent rise in oil and gas prices has significantly increased their value - but they do provide solid cash flow which we have sought to leverage into other opportunities. Exploration offers the big upside. A key objective has been to manage the risks and costs of drilling, which we know statistically is more likely to fail than succeed. Using our technical and commercial expertise, we have been very successful in passing on exploration costs while retaining significant upside to drilling outcomes. The key is to have a string of material targets ready to drill in the near future. We have not committed to any individual exploration project which could materially damage the balance sheet: instead, we have put in place a sustainable exploration programme which has been supported by our growing production cash flow. Our response to both the new industry environment and Sterling's own financialresources, is to try and side-step the crowd and look for value in less obviousopportunities. Buying conventional production at present levels is in our viewunlikely to meet our criteria, whereas, for example, our creative financing ofthe Mauritanian Government's participation in the Chinguetti field unlockedsubstantial value for both sides, which could otherwise have been lost. Therecent signing by Sterling of an MOU in the Kurdistan region is another exampleof such opportunities. Sterling's hallmark to date has been innovative transactions, playing to ourstrengths of experience, creativity, flexibility and speed. Under-pinning thismodel is the quality of the people within the Company; they are our mostessential resource. The tremendous activity in the oil & gas sector makes it increasingly difficultto stand out from our peers. We are already starting to see signs of investorfatigue and the first soundings of sector consolidation. In the past, successfuloil companies were taken over by larger companies once their assets reachedcritical mass and we expect history to repeat itself over the next few years. The performance of the Company is the only true measure of the success of thestrategy. Our track record since listing on AIM in late 2002 is a vindication ofthe model implemented by our team. Our vision is to remain in the top 10% of ourpeer group in terms of value added and perceived upside potential. Strongly positioned We are very well positioned and optimistic for Sterling's continued development.We will not overpay for assets as our focus is on creating shareholder value.The cash flow from Chinguetti and from the USA puts Sterling in a very strongposition to effect a step-change in its activities and to leverage itself intonew opportunities in this fast-changing environment. Harry WilsonChief Executive Officer21 April 2006 OPERATIONS REPORT AFRICAN AND MIDDLE EASTERN OPERATIONS 2005 saw the continued development of the Chinguetti field, exploration andappraisal wells in Mauritania and Gabon, consolidation of the management of theAfrican interests in the UK and active management of the licence portfolio. Sterling farmed-out exploration interests in the Ambilobe and Ampasindavalicences in Madagascar to Exxon-Mobil and has retained a 30% interest andoperatorship of this exciting exploration opportunity. It also added to itsportfolio the operated offshore Ibekelia Technical Evaluation Agreement ("TEA"),which is adjacent to its two licences in Gabon. In line with its policy to manage the portfolio pro-actively, Sterling alsofarmed-out the Dome Flore heavy oil interests in AGC and relinquished itsnon-economic licence interests in Cheval Marin and Croix du Sud in the AGC.Activity on the Ntem licence in Cameroon has been suspended pending resolutionof a territorial issue with neighbouring Equatorial Guinea. With the commencement of Chinguetti production in late February 2006 and theconsequent return on Sterling's investment, the pace of our production andexploration activity is set to increase markedly. Development decisions on discoveries in Mauritania totalling a gross 380+million bbls, are expected in 2006, with Sterling having no cost exposure owingto its royalty interest over 6% of PSC B and 3% in PSC A (adjusted for anyexercise by the government of its back-in rights, which for Chinguetti was 12%). Sterling is currently expecting to participate in at least five explorationwells in West Africa up to mid-2007. For these wells, most of its costs will bepaid by other companies through farmouts. New opportunities are being sought toexpand this programme and to enhance Sterling's already strong reserve andproduction upside. An example of the implementation of this strategy is thesigning of the MOU in Kurdistan. An office is being opened and it is hoped a PSCcan be signed as Sterling is keen to undertake drilling there. Mauritania: Chinguetti field onstream The Chinguetti Field came onstream on 24 February 2006 and production to the endof March averaged 59,000 bpd. It is expected that it will rise towards theoperator's forecast peak rate of up to 75,000 bpd in the second half of 2006.There have inevitably been fluctuations since production commenced, as reservoirmanagement and other issues are optimised: the gas injection system is currentlybeing commissioned. The first cargo of crude in which Sterling had an interestof approximately 170,000 bbls, was shipped in early April with payment due inearly May. The development of the Chinguetti Field located 80 km offshore Mauritania in 800metres of water, took place throughout 2005. The conversion of the Berge Helenefloating production unit took place in Singapore, with equipment sourced fromaround the world. The drilling of injection and producer wells and theinstallation of sub-sea equipment continued with the hook-up and commissioningtaking place at the start of 2006. Oil industry costs rose markedly during theperiod and the development drilling and subsea architecture also presented manychallenges. Despite these obstacles, the start-up on this, the first producingfield in Mauritania, was on schedule. Sterling has two interests in the Chinguetti production. The first is throughthe ground-breaking Funding Agreement signed with the Mauritanian Government inOctober 2004, whereby Sterling has a strategic partnership with SocieteMauritanienne Des Hydrocarbures (SMH, formerly GPC) to fund SMH's 12% back-in tothe field, in exchange for an effective economic interest of approximately 8%.As of the date of this report, Sterling had paid or accrued total expendituresof $140 million in relation solely to its economic interest, including paymentof SMH's share of past, development and initial operating costs and a signaturebonus to the Government. As part of the Funding Agreement, Sterling has also been working closely withSMH. Through Sterling's new office in Nouakchott, it has been providing SMH withtraining, assistance and workshops in the technical, commercial and financialareas. Several SMH personnel have been seconded to the Sterling offices in theUK. The second interest in Chinguetti comes from the wider production-based royaltyarrangement Sterling has, which covers 3% and 6% respectively of alldevelopments in both PSC A and PSC B, each adjusted for any exercise by thegovernment of its back-in rights on fields developed. Sterling receives a cashbonus of $1-2 million for each development approved over 50 million bbl and asliding scale royalty from any development based on net production. The paymentis subject to an annual escalation of the payment bands. At an oil price of $50/bbl this is currently $5.87/bbl and at $60/bbl is $7.40/bbl. The royaltyinterest was adjusted to 5.28% on Chinguetti as the Government exercised itsback-in right. Importantly, this royalty gives Sterling an interest in eachfield and future discoveries without paying any of the exploration, appraisal ordevelopment costs. Sterling's share of net attributable proven and probable reserves for theChinguetti Field was 11.7 million bbls at the end of both 2004 and 2005. Thesehave been derived from the gross estimate of 139 million bbls set out in theindependent petroleum consultants' report in the circular to shareholders inOctober 2004. The operator is expected to revise its 2004 gross estimate of 123million bbls in light of actual production and other factors. There are three discoveries in PSC B which are being evaluated by the operatorfor development decisions: - Tevet is a 2004 Miocene discovery close to Chinguetti, containing estimated gross reserves of 50 million bbls. A development decision is anticipated. - Labeidna, similarly close to Chinguetti, was discovered in 2005 with estimated gross reserves of 30 million bbls. It is also a Miocene reservoir. Further appraisal drilling is expected. It is likely that these two fields would be tie-backs to existing Chinguetti facilities, thereby ensuring cost-effective development and enhancing Chinguetti economics. - The much larger Tiof (Oualata) field was discovered in late 2003 and has estimated gross reserves of 300+ million barrels and significant gas volumes. A 6th appraisal well was drilled on Tiof in 2005 and the field is undergoing engineering studies with a view to a development decision is anticipated. Sterling expects any development to be in stages, partly because of the reservoir complexities. It has the potential for a much greater gross production level than Chinguetti. Aside from the great oil upside of the 50+ prospects in the PSC areas, for whichSterling's exploration and other costs are carried through its royaltyagreement, there is also the major potential for gas developments in thecountry. The Banda gas field in PSC A, was discovered in 2002 and has estimatedreserves of some 2.5 bcf. Whilst development options have been studied for thisand other discoveries in Mauritania, it is believed that significant furthervolumes will be needed before this gas can be developed, probably involvingconstruction of LNG facilities. Further important reservoir information wasgathered during 2005, when the Chinguetti gas injection well was drilled onBanda. The Mauritanian exploration programme resumed in late 2005 after the Chinguettidevelopment drilling was completed, resulting in the discovery well at Labeidna,the appraisal wells at Tiof (Oualata) and Tevet, as well as the first Cretaceousdiscovery at Faucon in Block 1. Apart from the Chinguetti wells, five wellswere drilled during the year in PSC's A & B, with two successful appraisal wellsconfirming expectations of development potential, the new discovery and two dryholes. In late March 2006, the Government announced that it had reached a proposedresolution with Woodside, the operator of blocks including A and B, over theirdisputes. Any proposals will be subject to partner agreement. As currentlyunderstood, these proposals are not expected to have a material impact onSterling, partly due to the indirect nature of its interests. The exploration programme for 2006 starting shortly will initially focus onshallower water prospects. It is expected that the rig will spend much of itstime in Blocks A and B drilling wells at no cost to Sterling. Madagascar licences farmed out Sterling is the operator of the Ambilobe and Ampasindava blocks, awarded inNovember 2004, which cover an area of some 34,000 sq km offshore northernMadagascar. There has since been a surge of in interest in Madagascar, whoseoffshore provinces represents one of the rare opportunities to explore undrilledbasins which offer significant potential. In July 2005, an agreement was signed with Exxon-Mobil for them to farm-in toboth blocks. Under the terms of this agreement, Sterling will retain a 30%interest in the licences and will be carried through an exploration workprogramme that, subject to certain milestones being achieved, includespiston-coring, 2D and 3D seismic acquisition and the drilling of up to two wellsper licence. Sterling also remains operator of the licences. The results of the ongoing first phase geological and geophysical studies areencouraging and an approximately 4,000 km regional 2D seismic acquisitionprogramme has been accelerated and is now underway. A piston-coring programmehas recently been completed to sample seafloor features which may be related toan active hydrocarbon source. Integration of the results of these new programmeswith existing information, will provide a data-set to evaluate the potential ofthe blocks and high-grade them for 3D acquisition and future drilling in2007-08. The Ambilobe and Ampasindava blocks are an exciting cornerstone of Sterling'sexploration portfolio, as evidenced by the farm in by Exxon-Mobil in 2005 and anacceleration of the exploration programme planned for 2006. Gabon - New TEA and a further well planned Sterling operates three shallow water permits in southern Gabon; Iris Marin(38.57% interest), Themis Marin (20.57% interest) and the Ibekelia TEA (40%interest). In September 2005, Sterling signed a TEA with the Gabonese governmentfor the Ibekelia permit. The agreement covers a 673 sq km area which iscontiguous with the Gamba and Olowi oil fields and with Sterling's existinglicences. At the end of the evaluation term there is an option to convert to afull Production Sharing Agreement. In December 2004, Sterling participated in a joint 3D seismic survey withadjacent operators covering three contiguous permit areas, including thesouthern part of Themis Marin and the adjacent Etame area oil discoveries. TheThemis survey area covers some 240 sq km and the data is currently undergoingintensive pre-stack depth migration processing to define sub-salt depth closuresat the prolific target Gamba reservoir level. An exploration well is scheduledin the Themis Marin licence expected in early 2007, with the timing beingdependent principally on rig availability. Sterling will be carried for 18% ofits 20.57% working interest and hence will pay only 2.57% of the costs. One well was drilled in the Iris Marin licence during August and September 2005,the Iris Iboga Marin No 1 (IIBM-1) well. It reached a depth of 2,035 metres andpenetrated over 30 metres of excellent reservoir-quality sub-salt Gambasandstones, but unfortunately these formations were water bearing. Accordingly,the well was plugged and abandoned. The excellent reservoir quality encounteredprompted Sterling and its partners to enter a 15 month licence extension andundergo re-processing of the 3D seismic data to evaluate other potentialdrilling targets in the licence. Following this well, Sterling increased itseffective interest in the licence to 38.57% from 20.57%. Guinea-Bissau Sterling holds a 5% working interest in the Sinapa licence, where the Sinapa-2well drilled in April 2004 found oil. Reservoir quality and structural issuesmean commerciality of the find remains uncertain. Plans for appraisal of theSinapa licence await the outcome of drilling of two exploration wells in theadjacent Esperanca permit in late 2006/early 2007. Sterling has an option toacquire a 5% working interest in the Esperanca permit at no cost, to beexercised after this first well. AGC: Heavy oil Dome Flore interests farmed-out - Dome Flore AGC is the joint exploration zone between Senegal and Guinea-Bissau. In March2005, Sterling farmed out 55% of its interest in the Dome Flore heavy oilinterests, retaining 30%. The Dome Flore licence lies in the shallow waters andcontains two significant heavy oil discoveries from the late 1960-70s. Sterlingestimates there are 800-1,000 million barrels in place. In 2005, a series ofengineering and feasibility studies indicated that additional reservoir rock andoil samples were required to fully evaluate the potential of the heavy oilaccumulation. In January 2006, the licence entered the first renewal period of the explorationphase, being two years. As part of the evaluation of the heavy oil commercialpotential, a series of individual cores will be taken throughout the heavy oilreservoir. These cores will deliver key data that is required to progress theheavy oil feasibility study. Additionally, in this period, a new 2D seismic survey will be acquired. Thepurpose of this survey is to evaluate additional exploration potential in theblock associated with undrilled salt domes and potential tilted fault blockplays. - Croix Du Sud Sterling secured an extension of the Croix du Sud licence (85% interest) toJanuary 2006 in order to try find a partner to carry it in an exploration wellon the licence. However, no partner was found, mainly due to the major increasesin the already high drilling costs associated with this ultra deepwater licenceand its limited commercial potential. The licence has now lapsed. Cameroon During 2005, the financial obligations and work programme for the Ntemconcession area were suspended due to a dispute between Cameroon and EquatorialGuinea over their maritime borders. Both countries are currently workingtogether to resolve the dispute. Sterling had planned to farm-out this licencefor drilling and had originally, and continues to, attract a good level ofindustry interest. The award in late-2004 by Equatorial Guinea of a licence tothe South of Ntem overlapping up to 20% of Ntem, has delayed this drilling planuntil the situation is resolved. Other areas In 2005, Sterling disposed of its interest in its non-core GSEC 101 licence,offshore Philippines, to AIM listed Forum Energy plc, in return for a 14.7 %stake. Forum has a range of energy interests there, with small oil producingfields, impending coal production and a gas-to-electricity development. Forumcarried out a 3-D seismic programme on its large Reed Bank area, which includesthe Sampaguita gas discovery; this is currently being interpreted to identifydrilling prospects. Further details on the company can be found atwww.forum-energy.com. Other residual interests in Holland and onshore UK are progressively beingdisposed of. New Ventures Sterling has an active new ventures programme searching for both production andexploration opportunities to add to the upside potential of its portfolio. Forexploration, Africa, the USA and the Middle East are key focus areas, having thepotential to add high impact projects. The focus for production interests is inboth of its core areas, Africa and the USA. With the large production increaseexpected in 2006 and with the higher cash flows, an increasing level ofresources is being committed to these new ventures. UNITED STATES OPERATIONS All of Sterling's production in 2005 was from the shallow waters of the Gulf ofMexico. Despite the impact of several highly destructive hurricanes, averageattributable production increased 4% to 9.7 mmcfged (2004: 9.3 mmcfged). Oil andgas prices were volatile, with the average for the year being 12% higher at$6.37/mcfge (2004: $5.68/mcfge). After deducting 3.5 bcf of production for theyear and adding 1.4 bcfge net through completed projects, year-end proven andprobable reserves were 57.4 bcfge. Of these reserves, 86% is gas and, as in2004, 60% of the total was categorised as proven by independent petroleumconsultants. Production levels in early 2006 have been lower because of natural decline andequipment shortages, leading to delays in restorative work, as well as someresidual restoration after the hurricane shut-ins. Production in the firstquarter 2006 averaged 7.8 mmcfged. This is expected to increase in the secondquarter, with two recent successful wells, brought onstream in mid-April, addingan expected combined rate of 2.2 mmcfged net, as well as the completion of otherplanned maintenance work. Plans for 2006 include expanding our position in theGulf of Mexico and into the onshore arena. Sterling became an accredited operator in the Gulf of Mexico in 2004 and is nowresponsible for 8 fields, 21 offshore structures in both Federal and Statewaters, over 68 miles of pipelines, five compressor stations and two onshorefacilities with 7,500 bbls of oil storage capacity. It operated some 70% of its2005 production. The management and administration is carried out by a staff oftwelve in Houston who interface with over 40 regulatory authorities. The average life of Sterling's fields, based on average 2005 production andyear-end reserves, is approximately 15 years, which is considerably longer thenmost of the younger Gulf of Mexico reservoirs. The continued contribution fromthese reservoirs, some of which have lives in excess of 20 years, should providea cornerstone to production growth. Sterling's major properties are its Mustang and Matagorda Island interests inthe western Gulf, which accounted for 57% of 2005 production (5.6mmcfged). TheMU 749 GU2 well, drilled to recover attic reserves, is producing, but has notyielded the expected results. Sterling had promoted a 25% working interest tocover part of its costs. A recompletion on the MU 748-1 well was successful, aswas the workover on the MI 520-16 that had not produced since 1995. Latterly,Sterling has increased the throughput capacity of the pipeline system andtowards the end of the year the third party throughput increased, thereby addingto transportation and processing fees. This income (before costs) was $2.2million in 2005, up 54% on 2004. Production from these Mustang and Matagorda fields in early 2006 has been lowerat some 3.8-4.2 mmcfged, adversely affected by the need to install furthercompression facilities on MU748-1, which has been shut-in as a result. As wasincreasingly the case during 2005, the lack of availability of equipment on atimely basis, as well as increases in costs, has delayed or cancelled drillingand work-over operations. In particular, after the extensive hurricane damage,those drilling rigs, lift boats, supply and crew boats not damaged by thestorms, were directed to the central and eastern Gulf to give full support toefforts to make assets safe and thence to bring production back on-line. The2005 hurricanes have also increased property and business interruption insurancerates by some 250-500% and the market capacity for named windstorm damage coverhas been greatly reduced. At the renewal in February 2006, Sterling's insurancecosts rose by approximately 250% and a cap of $25 million was placed on namedwindstorm damage. This is one reason for the planned extension of activitiesinto the onshore arena. With the purchase of a 3-D data-set over Mustang Island, Sterling has recentlydeveloped its first internally generated prospects. It was successful at boththe 4th Quarter 2005 and 1st Quarter of 2006 Offshore Texas State Lease Sales,acquiring 5 year term leases over two internally generated low to moderaterisked exploratory prospects. These two drilling opportunities will be maturedwith the intention of farming them out on a promoted basis and drilling thefirst of these in the 4th quarter of 2006, with the second in the first half of2007. This is part of an emphasis on identifying infill locations in the areafor drilling. The High Island area, in which Sterling has a royalty interest, accounted for28% of production in 2005 (2.4 mmcfged). Natural decline rates reducedproduction towards the end of the year and recent rates have been approximately1.8 mmcfged. The Gryphon C-1 well has been particularly affected. In order torestore production, the Gryphon C-3 well was drilled in March 2006 at no cost toSterling and has been brought on-line. Rates are being progressively increasedtowards an additional 1.3-1.5 mmcfged net. A recompletion on the Eugene Island 268-1 well in July 2005, was successful.Analysis of potential production and reserve additions in Sterling's otherfields is underway and small or non-core interests are expected to be disposedof. Sterling's first move into the onshore USA, was successful. It participated fora 28% working interest in a non-operated exploratory well, Galveston 251-5, inthe tidal area, just south of the City of Houston. The oil well was successfullycompleted in March 2006 and has since been brought on production at a net rateof approximately 0.8 mmcfged. This production, as well as the successful C-3well and other works, will impact the second quarter production. Of particular note for the remainder of the year are, firstly, a proposed well,expected in the fourth quarter, on GA303 (17.5% working interest), secondly, anagreed 16.25% working interest in an onshore Louisiana well (Andrew) in thethird quarter, and thirdly, a well and a workover planned in the Mustang andMatagorda areas. With the high volatility in product prices and the raised expectation ofsellers, Sterling was outbid on a number of production packages in 2005. Thetask remains to find reserves and exploration opportunities whose net return iscommensurate with the related risk. With the weight of money in the sector andthe paucity of good opportunities, prices have inevitably been bid-up andattractive drilling deals are sold quickly. The lead times for equipment haveextended from weeks, often to many months and costs have soared. As a result,Sterling intends to grow its portfolio of drilling opportunities from internalprospect generation, from industry partnerships and by selective productionacquisitions in this unprecedented industry environment. PROVEN AND PROBABLE RESERVES a. Volumes Oil Gas Attributable Reserves (1) (000 barrels) (million cubic feet) (000 barrels equivalent) At 1 January 2005 13,231 50,393 21,629 Upwards/(downwards) revisions from (42) 1,632 230 previous estimates (2) Production in the year (106) (2,901) (589) At 31 December 2005 13,083 49,124 21,270 b. Location of Reserves The geographical location of the end 2005 reserves were: North America 1,383 49,124 9,570 West Africa 11,700 0 11,700 Categorisation of proven and probable reserves: i). At the start of the year: Proven reserves 61% 60% 61% Probable reserves 39% 40% 39% ii). At the end of the year: Proven reserves 70% 58% 65% Probable reserves 30% 42% 35% NOTES 1. The proven and probable reserves movements in 2005 are based on: a. North America: evaluation reports by independent petroleum engineers as of1 September 2005 for the offshore assets, with certain downward or upwardadjustments by the directors at the year-end where, in their opinion, subsequentperformance of assets or further evaluation through drilling or workovers orthrough the impact of changes in prices or costs, requires adjustments. b. West Africa: the reserves are based on an independent consultantsevaluation on the Chinguetti field contained in the circular to shareholdersdated 26 October 2004, of 139 million bbls gross (P50) from which the directorshave derived their estimate of Sterling's share of reserves. The net estimatesare based on Sterling's expected share of the economic entitlement from thefield arising from its overriding royalty interest and from its funding to SMH(formerly GPC), rather than by direct ownership of the interest in the field.With the completion of the field development, the commencement of production inearly 2006 and in light of economic conditions, it is expected that the fieldoperator will issue a revision to their field estimates during 2006 from theircurrent 123 million bbls gross. 2. The gas revisions principally relate to drilling, working-overs, installation of additional compression and other facilities, reprocessing of seismic data, well control and production history. The major revisions relate to the Mustang Island and Gryphon properties. 3. Sterling has not yet booked reserves in West Africa relating to other discoveries made before or during the year, such as Tiof (Oualata), Tevet, Labeidna and Banda, on the basis that no firm development plan has as yet been approved by the partners. 4. Definitions: Proven reserves have a 90% level of confidence that the stated quantities will be equalled or exceeded. Probable reserves have a 50% level of confidence that the stated quantity will be equalled or exceeded. Oil includes condensates. STERLING ENERGY SCHEDULE OF MAIN INTERESTS AT 31 DECEMBER 2005 Location Size Licence Sterling Working Sterling Net Operated/ (km(2)) Name Interest % Revenue Interest % Non-operatedAfricaMauritania Offshore 6,969 PSC A n.a Sliding scale _ royalty over 3% Offshore 8,095 PSC B n.a Sliding scale _ royalty over 6% except 5.28% of the Chinguetti Field and an economic interest of approximately 8% in the FieldAGC Casamance-Bissau 1,699 Dome Flore 30%* n.a _Cameroon Southern Douala 2,319 Ntem 100% n.a Operator BasinGabon Southern Gabon 673 Ibekelia 40% n.a Operator Southern Gabon 607 Iris Marin 38.57%** n.a Operator Southern Gabon 911 Themis Marin 20.57% (pay 2.57% n.a Operator of next well)Guinea-Bissau Casamance-Bissau 2,349 Sinapa 5% n.a _ Casamance-Bissau 3,491 Esperanca 5% back-in right n.a _Madagascar Offshore NW 20,800 Ambilobe 30% (carried n.a Operator through up to 2 wells) Offshore NW 13,147 Ampasindava 30% (carried n.a Operator through up to 2 wells) USA Mustang Island Mustang Island 90 - 100% 90 - 100% Operator Texas Coast Gathering System Texas State Waters 48.9 Mustang Island 12.5 - 100% 9.4 - 82% Operator Texas State Waters 21 Matagorda 42 - 75% 36.6 - 59.5% Operator Island Texas Federal 50 High Island 7.5% overriding 7.5% royalty in Operator Gryphon, Waters (incl 52 and royalty in otherwise 42.3 - 83.33% Gryphon) Gryphon, otherwise 50 - 100% Texas Federal 23 Galveston 17.5% 11.9 - 12.6% Waters (incl 303) Louisiana 20 Eugene Island 60% 45% Operator Federal Waters (incl 268) Texas State Waters 5.82 Galveston Bay 28% 20% (incl ST 2515) * carried for certain studies/ appraisal **being increased from 20.57% FINANCIAL REPORT AND OUTLOOK Sterling had a record year in 2005 Pre-tax profit increased by 20% to £5.0 million (2004: £4.2 million) and theoutlook is for a sustained improvement in cash flow and profitability followingthe start-up of production in Mauritania in late February 2006. In 2005,production increased by 4% to an average of 9.7 mmcfged, with 82% being gas.Solid foundations to increase production and for future exploration anddevelopment in Sterling's core areas, have now been established. Record profits Turnover increased by 19% to £13.6 million in 2005 (2004: £11.5 million).Average realised prices for the year were approximately $6.37/mcfge (2004: $5.68/mcfge) and the sterling exchange rate fell from $1.92:£ at the start of 2005 to$1.72:£ by year-end. Gross profit increased by 18% to £8.0 million from £6.8 million in 2004. Of the totals, the average production for the first half was 11.2 mmcfge/d, up32% on the corresponding period, at an average sales price of $6.26/mcfge (2004:first half $5.76/mcfge). Second half 2005, production was severely curtailed,principally by the effect of hurricanes and pipeline shut-ins, and averaged 8.3mmcfge/d at an average price of $6.53/mcfge (2004: second half $5.62/mcfge).Third party income from Sterling operated pipelines rose 54% to $2.2 million inthe year, before costs. Costs of sales rose 20% to £5.6 million (2004: £4.7 million). In dollar terms,this equates to an average unit cost of $2.87/mcfge (2004: $2.51/mcgfe). Ofthese, direct production and pipeline costs were equivalent to $1.34/mcfge(2004: $0.99/mcfge) and a depletion charge of $1.53/mcfge (2004: $1.52/mcfge). Sterling's end 2005 US proven and probable reserve base was 57.4 bcfge. Provenreserves were 60% of this total and the USA reserve life averages over 15 years. The Mauritanian interests accounted for 55% of the estimated year-end proven andprobable reserves, being 11.7 mmbbls of oil reserves. First production from theChinguetti field commenced in late February 2006, with Sterling's first liftingin early April. This start-up is expected to increase markedly the Group'sproduction level. After including the attributable share of acquisition costs,expected past and development costs, the estimated purchase and development costof these reserves is approximately $16/bbl. The cost of forward oil markettransactions, carried out in early 2005, was approximately $7.6/bbl for 2.1million barrels to the end of 2007. This risk management has safeguarded minimumprices averaging $37.7/bbl. Sterling will receive actual prices up to an averageof $45.5/bbl and then all income over an average of $50/bbl. The cost of thesetransactions is included in debtors at the year-end and will be amortisedagainst relevant production. As expected, overheads rose by 28% to a net £2.6 million. This reflected theimpact of the planned expansion of the UK technical, commercial and supportstaff to run the African operations and to cope with expected growth inactivity, as well as the opening of the Mauritanian local office. There was someduplication of costs whilst the handover from the Perth office was completed.The Houston office remained the operator of 70% of its production interests. InJanuary 2006, the closure of the Perth office, acquired with the Fusion purchasein late 2004, was completed and a one-off exceptional cost of £1.2 million wasincurred; there is expected to be a quick payback on this cost due to savings intravel, as well as in management time. Before the one-off cost, there was an increase in the operating profit of 14% to£5.4 million in 2005. With net financial income of £0.7 million (2004: net cost£0.6 million), mainly from interest on net cash deposits, profit before tax andexceptional costs was up 47% at £6.1 million (2004: £4.2 million). The taxation charge of £1.9 million arose in the both the USA and UK. This is arate of 31% on the pre-tax profit, before the one-off charge noted above (2004:29%). Most available tax losses have been utilised in earlier years, including2004. However, because of the use of accelerated depletion for tax purposes forcertain US drilling and similar costs, the estimated current tax payable is £1.3million and Sterling has provided a deferred tax charge of £0.6 million as itexpects that in the future certain of these timing differences will reverse. Fully diluted earnings per share, which reflects the potentially dilutive impactof options, was 0.22p per share (2004: 0.33p). This reduction reflects the fullyear impact of the shares issued in the £97 million placing in November 2004,which affect the computation only since their issue. These funds have beenprogressively invested through 2005, mainly in the Chinguetti field developmentin Mauritania, and the benefits to earnings should become apparent in 2006. Cash flow strengthening At the end of 2005, cash balances were £47.8 million (end 2004: £89.6 million),of which £7.6 million was for unrestricted uses (2004: £20.3 million). Cash inflows: In 2005, cash inflow from operations (before the one-off Perth closure costs andworking capital movements) rose by 13% to £8.8 million (2004: £7.8 million). Thenet financial cash inflow also rose to £1.2 million (2004: outflow £0.3 million)and there was also £1.1 million arising from the exercise of options by Perthstaff (2004: £97.0 million share placing). Cash outflows: A total of £36.4 million was spent in 2005 in connection with the investmentassociated with the development of the Chinguetti field in Mauritania. At theend of the year total draw-downs of $65.1 million had been made under thecash-backed $130 million letter of credit provided by Sterling to SMH (formerlyGPC). Funds are expected to be progressively drawn-down to meet the future andpast costs associated with the Government's direct 12% interest in this field,in which Sterling has an approximate 8% economic interest. With first oilproduction having commenced in late February 2006, Sterling expects to see amarked increase in cash generated from production operations in the year. Other cash capital expenditures were £8.9 million, of which £6.4 million relatedto the drilling, appraisal and development of reserves in the Gulf of Mexico and£2.5 million mainly to Africa. The increase in net debtors and current creditorsof £15.0 million includes the costs associated with the oil price "futures"noted above. At the end of 2005, the $27.5 million loan from Hibernia, a subsidiary ofCapital One, included a number of financial covenants which, amongst othermatters, limits the level of funds that can be repatriated from the US to therest of the Group. It does not require any repayments before 30 June 2007, saveon a voluntary basis or as a result of a standard twice-yearly borrowing basere-determination, one of which is currently in progress. The amount of the fundsthat can be repatriated for Group use at the end of the year was about $5million, virtually the same as the then USA cash balance. The current interestrate payable is approximately 7.75%, with interest payments made quarterly. Strengthened balance sheet Net current assets fell to £37.6 million at the end of 2005, from £88.8 millionat the end of 2004, principally due to the use of funds for the Chinguetti fielddevelopment. Sterling's equity shareholders' funds increased to £169.2 million at the end of2005 (2004: £148.4 million). The issued share capital had risen by the end of2005 to approximately 1,402 million shares, as set out in the Directors' Report.The favourable movement in exchange rates produced an unrealised translationgain of £16.6 million when dollar net assets were converted into sterling, beingthe reporting currency, at the end of the year. Financial outlook The financial outlook is very strong, with a step-change expected following thecommencement of Mauritanian production. This should permit Sterling to enterinto an expansion of its exploration activity, with greater upside thanhitherto, to selectively acquire development and production activities and toextend its ability to "gear-up". The planned increased exposure to exploration will build on a programme thatcurrently is largely being funded by third parties. Continued exploration andappraisal activity in Mauritania is currently mostly cost-free, due to royaltyinterests. The cash requirement for new exploration, appraisal and developmentwill be highly dependent on the results, inter alia, of interpretation work, anypotential farm-outs, the result of current and proposed drilling and planned newlicences. Sterling intends to increase materially its exploration activity, withan emphasis on higher potential impact opportunities in its core areas, whichmay require greater cost exposure. The directors expect proposals to be announced by the operator in 2006, on thepossible development of both the Tevet and Tiof (Oualata) fields, offshoreMauritania. Sterling is entitled to a royalty income stream on these 350+million bbl reserves and bonus payments of $1-2 million where any field'sreserves exceed 50 million barrels or its equivalent. Sterling makes no paymentin relation to its royalty interests for the exploration, appraisal ordevelopment costs for these or for any other fields that may be discoveredthere. Liquidity in Sterling's shares on the stock market has again been higher in2005. It is a constituent on the "AIM 50" index for the largest companies, hasover 50 well-known institutions on its share register and more than 3,500shareholders. The directors' primary aim remains to continue to enhance shareholder value.With the major growth in production and operational cash flow expected in 2006,the directors are extremely confident of the outlook for Sterling in the comingyear. Definitions bbls - barrels of oil bcf - billion cubic feet of gas bcfge - billions of cubic feet gas equivalent boe - barrels of oil equivalent bopd - barrels of oil per day mcf - thousand cubic feet of gas mcfged - thousand cubic feet of gas equivalent per day mmbbl - millions of barrels mmcfgd - million cubic feet of gas per day mmcfged - millions of cubic feet of gas equivalent per day tcf - trillion cubic feet of gas Consolidated profit and loss account Year ended 31 December 2005 Note 2005 2004 £'000 £'000 Turnover 2 13,642 11,457 Cost of sales (5,615) (4,670) Gross profit 8,027 6,787 Administrative expenses (2,625) (2,052)Exceptional office closure costs 15 (1,153) - Total administrative expenses (3,778) (2,052) Operating profit 4,249 4,735Interest receivable and similar income 1,882 312Interest payable and similar charges (1,145) (883) Profit on ordinary activities before 4,986 4,164taxationTaxation on profit on ordinary 3 (1,878) (1,197)activities Profit on ordinary activities after 3,108 2,967taxation Minority interest - 2 Profit for the financial year 3,108 2,969 Earnings per share : Basic 4 0.22p 0.34p Earnings per share : Diluted 4 0.22p 0.33p All profits and losses arise from continuing operations. Consolidated balance sheet Year ended 31 December 2005 Note 2005 2004 £'000 £'000 Fixed assetsIntangible assets 6 29,000 30,629Tangible assets 7 131,863 51,754Investments 8 689 - 161,552 82,383 Current assetsDebtors 15,501 2,968Cash at bank and in hand 9 47,786 89,556 63,287 92,524 Creditors: amounts falling due (25,702) (3,762) within one year Net current assets 37,585 88,762 Total assets less current liabilities 199,137 171,145 Creditors: amounts falling due after more (15,918) (15,014)than one year Provisions for liabilities and charges (12,909) (6,671) Net assets 170,310 149,460 Capital and reservesCalled up equity share capital 10 14,019 13,933Share premium account 11 142,590 141,600Currency translation reserve 11 8,364 (8,271)Profit and loss account 11 4,274 1,166 Equity shareholders' funds 169,247 148,428 Minority interest 1,063 1,032 170,310 149,460 Consolidated statement of total recognised gains and losses Year ended 31 December 2005 2005 2004 £'000 £'000 Profit for the financial year 3,108 2,969Currency translation adjustments 16,635 (6,389) Total recognised gains/(losses) relating to the 19,743 (3,420)year Reconciliation of movements in Group shareholders' fundsYear ended 31 December 2005 2005 2004 £'000 £'000 Profit for the financial year 3,108 2,969Currency translation adjustments 16,635 (6,389)Shares issued (net of expenses) 1,076 96,974Movement in shares to be issued - (1,716) Total movement in the year 20,819 91,838Shareholders' funds at 1 January 148,428 56,590 Shareholders' funds at 31 December 169,247 148,428 Consolidated cash flow statementYear ended 31 December 2005 Note 2005 2004 £'000 £'000 Net cash (outflow)/inflow from operations 13a (7,399) 8,145 Returns on investments and servicing of finance 13b 1,163 (290)Capital expenditure 13b (45,314) (16,109)Acquisitions and disposals 13b - (18,763) Cash outflow before financing (51,550) (27,017)Financing 13b 38,240 34,818 (Decrease)/increase in cash in the year 13c (13,310) 7,801 Notes to the financial information Year ended 31 December 2005 1. Basis of accounting The preliminary accounts have been prepared in accordance with applicable UnitedKingdom Accounting Standards and under the historical cost convention. There areno changes to the accounting policies as set out in the Annual Report for theyear ended 31 December 2004. The preliminary accounts have also been prepared in accordance with theStatement of Recommended Practice "Accounting for Oil and Gas Exploration,Development Production and Decommissioning Activities". The financial information set out above does not constitute statutory accountswithin the meaning of section 240 of the Companies Act 1985. Statutory accountsfor 2004 have been delivered to the Registrar of Companies, and those for 2005will be delivered following the Company's Annual General Meeting. The statutoryaccounts for 2005 were approved by the Board on 21 April 2006. The auditors havereported on the accounts for both 2004 and 2005; their reports were unqualifiedand did not contain statements under s237(2) and (3) of the Companies Act 1985. 2. Segment information The Group operates in one business segment; the exploration for and productionof oil and gas. The Group currently has interests in four geographicalsegments, Western Europe, North America, West Africa and East Africa as follows: Western Europe3 North America West Africa East Africa Total 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Turnover1 79 - 13,563 11,457 - - - - 13,642 11,457 - existing operations Profit/(Loss) 142 (220) 4,972 4,747 (128) (363) - - 4,986 4,164before taxation Net assets2 5,270 17,881 26,276 26,419 138,599 105,160 165 - 170,310 149,460 1 All turnover is sold to third parties within the segment of origin. 2 Net assets exclude intra-group financing. 3 Net assets for Western Europe include £564,000 in 2004 that last year wasreflected in South East Asia. This asset has been exchanged in 2005 for anInvestment in a UK Quoted company (see Note 8). 3. Taxation The Group tax charge comprises: 2005 2004 £'000 £'000 Current tax 1,306 226Deferred tax - origination and reversal of timing differences 572 971 1,878 1,197 The difference between the current tax charge of £1,306,000 (2004 - £226,000)and the amount calculated by applying the applicable standard rate of tax is asfollows: 2005 2004 £'000 £'000 Profit on ordinary activities before tax 4,986 4,164 Tax on profit on ordinary activities at standard US 1,695 1,416corporation tax rate of 34% (2004: 34%) Effects of:Expenses not deductible for tax purposes 722 87Capital allowances in excess of depreciation (594) (136)Other temporary differences (552) (245)Difference in non-US tax rates 4 33Adjustment for tax losses (4) (929)Adjustment in respect of prior years 35 - Current tax charge for the year 1,306 226 During 2004 and 2005, the Group generated its results primarily in the US.Therefore the tax rate in the above reconciliation for 2004 and 2005 is thestandard rate for US corporation tax. 4. Earnings per share The calculation of basic earnings per share is based on the profit for thefinancial year of £3,108,000 (2004 - £2,969,000) and on 1,393,778,640 (2004 -884,788,687) ordinary shares, being the weighted average number of ordinaryshares in issue. The calculation of diluted earnings per share is based on theprofit for the financial year as for basic earnings per share. The number ofshares outstanding is adjusted as follows: 2005 Number of shares For basic earnings per share 1,393,778,640Exercise of options 31,622,597 For diluted earnings per share 1,425,401,237 5. Dividend No dividend has been declared or is to be paid in respect of the year ended 31December 2005. 6. Intangible fixed assets - unevaluated oil and gas interests Group Company £'000 £'000 At 1 January 2005 30,629 62Written off (5) -Transfers to tangible fixed assets (See (7,973) 10Note 7)Transfers to investments (See Note 8) (689) -Additions 3,230 -Currency translation adjustment 3,808 - At 31 December 2005 29,000 72 Group net book value at 31 December 2005 comprises £1,863,000 for North America,£70,000 for Western Europe, and £27,067,000 for Africa. Group net book value at31 December 2004 comprised £1,678,000 for North America, £33,000 for WesternEurope, £564,000 for South East Asia, and £28,354,000 for Africa. 7. Tangible fixed assets Oil and gas Computer & interests office equipment Total £'000 £'000 £'000Group CostAt 1 January 2005 55,398 685 56,083Transfers from intangible fixed assets 7,973 - 7,973(See Note 6)Additions 69,906 466 70,372Currency translation adjustment 5,869 13 5,882 At 31 December 2005 139,146 1,164 140,310 Accumulated depreciationAt 1 January 2005 4,090 239 4,329Charge for the year 3,007 388 3,395Currency translation adjustment 723 - 723 At 31 December 2005 7,820 627 8,447 Net book valueAt 31 December 2005 131,326 537 131,863 At 31December 2004 51,308 446 51,754 The net book value of oil and gas interests at 31 December 2005 comprises£42,306,000 (2004: £31,601,000) relating to North America, £69,000 (2004:£109,000) relating to Western Europe and £88,951,000 (2004: £19,598,000) to theWest Africa cost pools respectively. 8. Fixed asset investments Investment in Quoted Company The investment in a quoted company of £689,000 represents the net book value ofthe GSEC 101 licence that the Group formerly held offshore of the Philippines.This asset was transferred to Forum Energy plc in return for a current equityinterest of 14.7% effective from 18 May 2005. As at 31 December 2005 the marketvalue of this investment was £4,781,856 based on a Forum share price of 119.5p. 9. Cash at bank and in hand Included in cash at bank and in hand for the Group is an amount of approximately£2,379,000 (2004 - £1,566,000) held in a restricted account to be used for thesole purpose of the payment of decommissioning costs on three US producinglicences. There is additionally a deposit held in escrow for an amount of US$64,880,123(£37,796,000) held by the parent company (2004 US$130,000,000 (£67,712,000)).These funds are to be utilised to pay for past and ongoing costs with regard tothe Group's participation in the Chinguetti field development (see note 12c). 10. Called up equity share capital 2005 2004 £'000 £'000Authorised: 2,400,000,000 (2004: 2,400,000,000) ordinary shares of 1p 24,000 24,000 Called up, allotted and fully paid: 1,401,950,558 ordinary shares of 1p each (2004 - 1,393,325,558 ordinary 14,019 13,933shares of 1p each) Movements during the year were as follows: a. 125,000 new ordinary shares with a nominal value of £1,250 were issuedto a former employee who exercised share options in the year. b. 8,500,000 new ordinary shares with a nominal value of £85,000 wereissued to ex-employees who exercised share options in the year in conjunctionwith the closure of the Perth office (see note 15). 11. Reserves Group Share Currency Profit and premium translation loss account account account Total £'000 £'000 £'000 £'000 At 1 January 2005 141,600 (8,271) 1,166 134,495Premium on shares issued 990 - - 990Currency translation adjustments - 16,635 - 16,635Profit for the year - - 3,108 3,108 At 31 December 2005 142,590 8,364 4,274 155,228 12. Financial commitments (a) Annual commitments under non-cancellable operating leases are as follows:Company and Group Land and Land and Buildings Buildings 2005 2004 £'000 £'000 Operating leases with an option to terminate 6 -within one yearOperating leases with an option to terminate 77 -later than one but within two yearsOperating leases with an option to terminate 70 395between two and five years 153 395 (b) Expenditure commitments are as follows: 2005 2004 £'000 £'000 Due within one year 19,486 3,171Due later than one year but within two years 15 5,497 19,501 8,668 In acquiring its oil and gas interests the Group has pledged that various workprogrammes will be undertaken on each permit/interest. The commitments aboveare an estimate of the cost of performing these work programmes. (c) Mauritania transaction On 26 October 2004 the Group entered into a Funding agreement with the IslamicRepublic of Mauritania (the "Government") and Groupe Projet Chinguetti ("GPC"),now Societe des Hydrocarbures Mauritenienne ("SMH") in relation to the fundingof the Government's share of the Chinguetti oil field development ("ChinguettiDevelopment"). SMH is a state owned special purpose vehicle formed by theGovernment to hold its interest in the Chinguetti Development. The Group has agreed to reimburse SMH the past costs payable by the Governmentas a result of the exercise of its option to acquire 12 per cent of theChinguetti Development. The Group has further agreed to fund SMH's share of allfuture petroleum costs (being exploration, appraisal and development costs)relating to the Chinguetti Development up to the commencement of production.Upon commencement of production SMH will pay a share of its operatingexpenditure commitments, with the remainder being met by the Group. The Group has put in place a letter of credit for US$130,000,000 backed by fundson deposit under which the past and ongoing petroleum costs will be paid to GPC.This figure represents the maximum amount that the Group will be required to payunder the terms of the Funding agreement. As at 31 December 2005, US$65,119,877had been drawn down on the facility to fund the development, and the remainingfunds of US$64,880,123 are held on escrow as disclosed in Note 9. Any remainingfunds on deposit will be released from escrow, on the "Letter of CreditTermination Date", which is defined as the earlier of either, two years aftercompletion of the Funding agreement (19 November 2006), or the completion ofpayments by Sterling to SMH of both the past oil production costs and theexploration costs and funding of the operating expenditure of SMH and Sterlingout of revenues from the sale of Chinguetti oil for a period of six consecutivemonths after initial commercial production. Under the Funding agreement the Company will become entitled to a portion ofSMH's share of profit oil produced from the Chinguetti Development. In addition,the Group will be entitled to recover its costs from SMH's share of cost oil. 13. Notes to the cash flow statement (a)Reconciliation of operating profit to net cash (outflow)/inflow fromoperations 2005 2004 £'000 £'000Operating profit 4,249 4,735Depreciation and depletion 3,395 3,057Intangible assets written off 5 50 Cash inflow from operations before 7,649 7,842working capital movementsIncrease in debtors (13,396) (1,455)(Increase)/decrease in creditors (1,652) 1,758 Net cash (outflow)/inflow from (7,399) 8,145operations (b) Gross cash flows 2005 2004 £'000 £'000Returns on investments and servicing of financeInterest received 1,849 309Interest paid (686) (599) Net cash inflow/(outflow) 1,163 (290) Capital expenditurePurchase of intangible fixed assets (2,072) (3,618)Purchase of tangible fixed assets (43,242) (12,491) Net cash outflow (45,314) (16,109) AcquisitionsOther acquisitions - (18,763) Net cash outflow - (18,763) FinancingIssue of ordinary shares, net of expenses 1,076 92,557Drawdown under bank loan facility - 13,191Net receipts/(payments) from restricted accounts 37,164 (70,930) Net cash inflow 38,240 34,818 (c) Analysis and reconciliation of net fundsGroup 1 January Cash Exchange 31 December 2005 flow movement 2005 £'000 £'000 £'000 £'000 Cash in hand and at bank* 20,233 (13,310) 688 7,611 Debt due after 1 year (14,233) - (1,685) (15,918)Debt due within 1 year - - - - Net funds 6,000 (13,310) (997) (8,307) The cash balance at 31 December 2005 excludes £40,175,000 of restricted cash(2004 - £69,323,000) as described further in Note 9. 2005 2004 £'000 £'000 (Decrease)/increase in cash in the year (13,310) 7,801Cash inflow from increase in debt - (13,191)Translation difference (997) (1,122) Movement in net funds in year (14,307) (6,512)Net funds at 1 January 6,000 12,512 Net funds at 31 December (8,307) 6,000 14. Post balance sheet events Following the year end first oil production from the Chinguetti Fieldcommenced in late February in Mauritania in which Sterling has an approximate 8%economic interest. Further cash calls have been made to date of $9,522,476. Thisleaves a remaining deposit in the restricted bank account of $55,357,647. 15. Exceptional Costs During the year the Board decided that it would be more advantageous to manageall of the Group's African activities out of its UK head office. Accordingly,the Perth office closed in 2005 and the relocation of activities and some keypersonnel from Perth to the UK has now taken place. The costs of £1,153,000incurred in respect of this closure have been fully recognised in 2005. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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