11th May 2005 07:00
Sterling Energy PLC11 May 2005 11 MAY 2005 STERLING ENERGY PLC 2004 PRELIMINARY RESULTS ANOTHER YEAR OF SIGNIFICANT ACHIEVEMENT Sterling Energy, the AIM listed (symbol: SEY) independent oil & gas explorationand production company, today announces its Preliminary Results for the yearended 31 December 2004 together with an update on progress since the year endand the outlook. 2004 Highlights: • Revenue more than doubled to £11.5 million • Pre-tax profit up 130% to a record £4.2 million • Operating cash flow increased 144% to £8.1 million • Production doubled with year-end rate of 10.2 mmcfge/d • Successful placing of shares at 17p per share raising £97 million • Funds principally used to acquire c.8% economic interest in the 75,000 bpd (gross) Chinguetti development, offshore Mauritania • Net proven and probable reserves up 450% to over 21.6 million barrels equivalent • Life of US interests extended to 15 years • New exploration acreage acquired in Madagascar 2005 Progress and Outlook: • Chinguetti development on track for first production in Q1 2006 • Agreement reached to sell non-core Philippines interest to new company intending to float on AIM in 2005 • Virtually carried through an 8-10 well programme in Africa • Farmout completed in AGC, retaining 30% interest in 800-1,000 million bbl of in place heavy oil discoveries • Further farmout activity expected • New licence, exploration and production interests being sought ahead of anticipated significant increase in cash flow when Chinguetti enters production • US drilling and workovers programme aims to double production there by year-end Harry Wilson, Chief Executive of Sterling Energy Plc, said: "This has been another year of significant achievement for Sterling. We havemoved strongly forward on both an operational and a strategic front. The nextfew years offer many further exciting opportunities including the anticipatedsignificant increase in cash flow from our Mauritanian interests and theprospects from a substantially increased exploration programme. These willensure that Sterling is well placed to continue to exploit the growingopportunities in our industry." Enquiries Sterling Energy (01582 462 121) Web site: www.sterlingenergyplc.comHarry WilsonGraeme Thomson Citigate Dewe Rogerson (020 7638 9571)Media: Martin Jackson / Rachel LankesterAnalyst: Nina Soon Evolution Securities (020 7071 4300)Rob Collins / Henry Turcan STERLING ENERGY PLC 2004 PRELIMINARY RESULTS Joint Chairman and Chief Executive Statement We are delighted to report another year of significant achievement for yourcompany which has again exceeded all of our expectations in terms of growth,consolidation, and future prospectivity. Revenues doubled to £11.5 million and pre-tax profit increased 130% to £4.2million, whilst proven and probable reserves rose by 450% to 21.6 million boe. One of the highlights was the successful acquisition of an approximate 8%economic interest in the Chinguetti field offshore Mauritania which lays thefoundation for a quantum leap in production and cash flow in the first quarterof 2006. This firmly places your company in an enviable position to exploit thegrowing opportunities within our industry. With an active exploration programme of up to ten wells in Africa, largelyfunded by third parties and up to six exploration, appraisal and developmentwells in the US, we are very well placed to make further significant progress inthe year ahead. Financial The year 2004 has been marked by the achievement of the following significantmilestones: • A doubling of production and gross profit from US operations following the $39.5 million Mustang Island acquisition, bringing operatorship of five fields and related pipeline systems. • Cash flow from operations increased by 144% to £8.1 million. • Extension of average US reserves life from approximately 11 years to 15 years. • Successful £97 million share issue to fund the Chinguetti participation in Mauritania. • Inclusion of the Company in the new "AIM 50" index with a market capitalisation of approximately £240 million. • A balancing of reserves, now split almost equally between Africa and the US, as well as between oil and gas. Development Through its well programme in the US the company intends to increase itsproduction to 20 mmcfge/d by the end of 2005. The Chinguetti development is presently on course to commence production duringthe first quarter of 2006, when it is forecast to markedly increase Sterling'sproduction. Exploration Your company's exploration activity continues to grow with an exciting programmeplanned for 2005 and beyond, including: Africa • Further evaluation work on the Tiof and Tevet discoveries inMauritania which we anticipate will lead to both being declared commercialduring 2005/6. • The recently announced farm-down to 30% of our interest in theDome Flore licence in AGC. Subject to the outcome of detailed technicalstudies, this may lead to the company being carried for an exploration well. Wewill also participate at no cost in the review of the possible development ofthe 800-1,000 million barrels of heavy oil in place within the licence and ofits further exploration potential. • The Ambilobe and Ampasindava licences in Madagascar, acquiredduring the year, are already attracting significant industry attention. • The completion of the farm out of our two blocks in Gabon whichprovides the company with an 18% carry out of a 20.57% working interest in aminimum of two and possibly four wells. • The farm-out of our Ntem licence in Cameroon has receivedsignificant industry interest. We have, however, delayed the process until aborder demarcation issue with neighbouring Equatorial Guinea is resolved. Gulf of Mexico, USA • We expect to drill up to six exploration and appraisal wellsduring 2005 and intend to double production by the year-end. • Sterling qualified to become an operator in 2004 and took overas operator on a majority of its US licences. • A bank loan of $27.5 million has been extended until mid-2007. Other Areas • The conditional disposal of the Philippines licence GSEC101 for23% of a new company intending to list on AIM later this year will allowSterling to focus its resources on its core activities, while retaining upsidepotential. Human Resources The year has seen significant changes in the structure of your company. It nowhas offices on four continents, Europe, America, Africa and Australasia. Onbehalf of shareholders we thank all of the staff and directors for theirunstinting efforts in a year of huge change. The year saw the departure of afounder director Nigel Quinton who we would like to thank for his contributionover the years and the appointment of two new directors Andrew Grosse and PaulGriggs. We wish them well as they face new challenges. Outlook Your company looks forward to exciting challenges and opportunities over thenext couple of years. The anticipated significant increase in future cash flowfrom our Mauritanian interests, coupled with our skilled and motivated staffand a substantially increased exploration programme, will ensure that Sterlingis well placed to continue to exploit the growing opportunities in our industry. Richard O'Toole Harry WilsonChairman Chief Executive 10 May 2005 OPERATIONS REPORT GULF OF MEXICO: MORE THAN DOUBLED RESERVES AND PRODUCTION With production and reserves more than doubled in the year, Sterling has laidthe foundation for continued growth in the US. The key target for 2005 is toagain double daily production by year-end. 2004 represented a period of considerable growth for the Houston office and itsportfolio. From the two people at the end of 2003, a highly capable staff of tenexperienced industry professionals was assembled to handle commercial, legal,engineering, geoscience, and accounting functions for the Gulf of Mexico. Thestaff operates at the highest skill level and effectiveness, drawing managementand other support from the Group and when needed, from top industry consultants.It is this skill base that has permitted Sterling to become operator on most ofits production. The major boost to production and reserves came in February 2004, when Sterlingclosed the purchase of the Mustang Island (Osprey) properties, pipelines andfacilities in the state waters of Texas. Sterling became an operator in thisarea for the first time, with its many advantages. This $39.5 millionacquisition more than doubled the US proven and probable ("2P") reserve base.Based on an independent consultants' report these 2P reserves increased from23.3 bcfge at the end of 2003 to more than 59.6 bcfge at the close of 2004.Whilst about 35 bcfge of this increase was due to the Mustang Island deal, aprogramme of works to enhance and optimise production also added 4.0 bcfge tothe 2P reserves. Production virtually doubled in 2004, rising to 8.5 mmcfge/d in the first halfand increased again to 10.2 mmcfge/d in the second half of the year. In thesecond half of 2003 Sterling's average daily production was 5.3 mmcfge/d, with4.2 mmcfge/d in the first half. Total production was 3.4 bcfge in 2004. Based onend 2004 production levels and 2P reserves, Sterling's US producing interestshave an average life of 15 years, up nearly 4 years from 2003. Portfolio development in 2005 With this production base and with the cost of most production deals havingincreased markedly, Sterling is currently focused on realising value from itsportfolio of in-house generated appraisal and development prospects. It isscheduled to participate in 3-6 new wells and workovers during 2005 on itsfields, whilst also continuing to seek new drilling opportunities and,selectively, production purchases. As a result of the Mustang Island purchase, the necessary assembly of its staffand also due to becoming operator on most of its other fields, Sterling'sdrilling programme was largely deferred into 2005. This enabled a great deal ofreview and confirmation to be carried out during the second half of 2004, with afocused re-mapping effort being implemented, assisted by 3-D purchases. Thishelped to rank the workover and drilling opportunities to be pursued in 2005.With the growth of the Sterling group and its US success in 2004, the Houstonoffice is now able to consider larger drilling opportunities than before. The two active areas for Sterling Energy in 2005 are Mustang Island andMatagorda Island Areas of Texas state waters. These are areas in which Sterlinghas excellent records, strong operations, engineering and geosciences expertise.The targeted reservoirs in these areas are lower Miocene and Oligocene in age.These are in the most prolific trends along the Texas gulf coast with typicalfields ranging from 5 to 200+ bcfge. These fields have long 10 to 20 year well lives which are much longer then themajority of the younger Gulf of Mexico producers. Contribution from thesereservoirs should assist in balancing Sterling's production base with steadylong life reserves. Sterling has identified extensive undeveloped reserve potential within itsexisting producing assets, especially in both Mustang and Matagorda Islands. This drilling programme is underway. The Mustang Island 749 GU No. 2 (Sterling:100% working interest) is expected to reach target in mid-May. This well targets5+ bcfge gross, proven undeveloped reserves in the Oligocene, Cib Haz sands atan approximate depth of 11,500', with upside potential of 15 bcfe grossreserves. Sterling will shortly begin a work-over operation on the Eugene Island 268 No. 1well. This re-completion is targeting 3+ bcfge (gross) of proven behind pipereserves in two sands at an approximate depth of 4,800'. Sterling has a 60% WIin this well. 2004 & first quarter 2005 operational highlights Sterling ended 2004 with exciting results in both the Mustang Island andMatagorda Areas. Following Sterling becoming operator of Sherman field in August2004, Sterling made facility repairs which increased the net daily production bya third to 0.5 mmcfge/d. At the same time Sterling upgraded certain fieldfacilities as part of its ongoing review of its operated fields aimed atensuring compliance with best practice and with safety as a top priority. In December 2004, work-over operations were completed on the Mustang Island 904#5 well which initially doubled the net daily gas production to1.940 mmcfge/d.This has helped to increase average net production in the first quarter of 2005to 10.5 mmcfge/d. Sterling expects there will be some normal maintenance work onsome of the pipelines taking its product to market over the coming months, withconsequent production interruptions; accordingly, this time will also be used toperform routine work on the platforms and facilities. Field operations In the offshore US Sterling has an interest in 12 fields, 8 of which areoperated. Nine of these properties are in Texas State Waters and three are inFederal Waters. The operated fields account for approximately 64% of current netproduction. Early in 2004 Sterling became an operator in the Texas, State Waters and in thesecond half became operator in the Federal Waters of the Gulf of Mexico. Currently, Sterling operates: • 21 Offshore Structures• Over 68 miles of pipeline• 5 Compressor Stations• 2 Onshore Bases With 7,500 Bbls of Oil Storage Capacity As an operator in the Gulf of Mexico it prides itself in operating at thehighest standards, with an emphasis on: • Optimising Production Performance• Minimising Cost• Safety and Compliance• Protection of the Environment Having the ability to operate in both State and Federal Waters exposes Sterlingto a wider array of business opportunities and has assisted in defining SterlingEnergy, Inc. as a highly regarded partner and operator. Pipelines and facilities Sterling now has ownership in over 68 miles of pipeline. The most recentaddition was 43 miles of the Mustang Island gathering systems and in two onshorefacilities located on Mustang Island near the city of Corpus Christi. Thisgathering system and facilities had considerable unused capacity to transportand process at the time of acquisition. Recent third party drilling success in Mustang and Matagorda Islands hasincreased the demand for usage of Sterling's gathering system and facilities.This transportation and processing of additional third party hydrocarbons isexpected to add further to the monthly cash flow, especially since the additionof additional compression in the North system in November 2004. This has droppedthe line pressure and will allow Sterling and other third party users to produceat lower pressures and increase per well recoveries. Sterling expects tomarkedly increase throughput in these lines in the second half. AFRICAN OPERATIONS TRANSFORMED Following the acquisition in late 2003 of Fusion, 2004 was a transforming periodfor Sterling in Africa and this has continued into 2005. In particular,Sterling was able to apply knowledge from Fusion's Mauritanian assets to acquirean economic interest in the Chinguetti development. This field, due onstream inearly 2006, is expected to bring Sterling its first African production,transform the company's cashflow and enable it to continue to build its assetbase in this core area. Meanwhile, considerable time has been spent tidying up and further developingthe African portfolio. Sterling expects to participate in some 8-10 explorationwells up to mid-2006, with most of its costs met by other companies throughfarmouts. The company has also taken on new exploration interests in Madagascarand continues to search for new opportunities in the region. In line with itspolicy to drop areas which do not offer sufficient near/medium term returns,Sterling also relinquished its licence interest in Cheval Marin, AGC and in thetechnical cooperation agreement in SADR during 2004. Activity on the Ntemlicence in Cameroon has been suspended pending resolution of a territorial issuewith neighbouring Equatorial Guinea. Mauritania: production due in early 2006 and new discoveries made Chinguetti field development on track for production in early 2006 In October 2004, Sterling announced a ground-breaking deal to fund theMauritanian government's exercising of its back-in rights over 12% of theChinguetti field. This is the first field to be developed in this fast-emergingand highly prospective country. Sterling's innovative approach has given it anapproximately 8% economic interest in the field. The company will furtherbenefit from Chinguetti, as well as other developments in the area, through thepreviously held sliding scale royalty arrangement with Premier. Sterling paid a signature bonus of $15.5 million to the government and made a$130 million letter of credit available to Groupe Projet Chinguetti (GPC), thenewly formed state oil company, to refund its share of past costs and pay futuredevelopment costs up to commencement of production. The financing agreement wasa key factor in enabling the government to exercise its back-in rights. Sterlingwill also help to train personnel and give advice as part of the development ofGPC and are pleased to be recognised as a strategic partner of the government. Under the agreement, Sterling will be entitled to recover its costs from GPC'sshare of "cost oil" from the field and will receive a significant proportion ofGPC's share of "profit oil", according to cumulative production thresholds. Ifadditional discoveries are tied-back into the field facilities, Sterling willalso receive income to take account of the benefits received. The Chinguetti field is on target for first oil in the first quarter of 2006 andis planned to rapidly reach peak field production levels of 75,000 bpd.Development drilling commenced in October 2004 and is now nearly complete. Workon the subsea facilities and FPSO is now estimated to be some 66% complete andwithin Sterling's cost estimate at the time of the November 2004 placing. Exploration yields new discoveries and more activity planned in 2005 Drilling in Mauritania PSC's A and B commenced in September 2004 with twodedicated deepwater vessels, Stena Tay and Western Navigator. Activity hasincluded exploration, appraisal and Chinguetti development wells and is set tocontinue from at least one rig through late 2005 with 5-6 exploration wells andthe final development wells on Chinguetti. Of the three new exploration wells drilled to test the established Miocenereservoir, Merou and Capitaine were dry but Tevet, located between Chinguettiand Banda, was a new discovery. Sterling estimates Tevet could contain 60-75million bbls and expects it to be tied-back ultimately into Chinguetti. Tiof Appraisal Drilling indicates largest field in Mauritania to date Six wells have now been drilled on Tiof 25km north of Chinguetti in PSC B. Keyamongst these was the Tiof-6 well production test for which the results werevery encouraging. Options for developing this complex field are beingconsidered. Provisional recoverable reserve estimates of 300-400 million barrelsare being suggested which would make it the largest Mauritanian discovery sofar. Sterling pays no costs towards the exploration, appraisal or development ofTiof but will benefit through the royalty arrangement and, on declaration ofcommerciality, will also receive a bonus of $2 million. AGC: Dome Flore farmed-out in 2005 Sterling is currently operator of two licences in AGC, the joint zone betweenSenegal and Guinea-Bissau. In early 2005, the company farmed out 55% of itsinterest in Dome Flore (retaining 30%) and also secured an extension of theCroix de Sud licence (85% interest) where discussions continue with severalcompanies regarding potential farm-out. Sterling's 10% interest in Cheval Marinwas relinquished in January 2005 as it was not considered to have adequatecommercial potential. Dome Flore activity The Dome Flore permit lies in the shallow waters of the AGC. The block containstwo significant heavy oil discoveries from the late sixties and early seventieswhich Sterling estimates at around 800-1,000 million barrels in place. Highresolution 3D seismic over the Dome Flore and Dome Gea salt diapirs, deliveredin June 2004, is enabling this substantial heavy oil resource to be welldefined. In March 2005, Sterling announced the farm-out of 55% of its interest in DomeFlore to Markmore, a Malaysian industrial company with interests in, amongstothers, a bitumen refinery being built in Malaysia and a major housing projectin Senegal. Markmore will become operator and will fund a heavy oil feasibilitystudy, a study of exploration potential, the cost of a possible exploration wellwith a bonus on success, and a small signature bonus. Sterling retains a 30%interest in the licence. A one year study is planned for the heavy oil, with particular emphasis on steamassisted gravity drainage to facilitate the production of the heavy oil. InCanadian tar sands such technology has achieved recovery rates above 40% andwith current oil prices this may have significant commercial potential. Initial interpretation of the 3D seismic is also confirming the explorationpotential for light oil reservoirs within the Cretaceous section. With thisbackground, a new exploration well could be drilled in 2006/7, fulfilling therequirements for licence renewal due in January 2006. Croix Du Sud extended The AGC approved a one year extension to the Croix du Sud licence to January2006 to allow Sterling to properly complete the evaluation of an extensivereprocessing programme and seismic interpretation project and to continue itsefforts to bring in new parties with a view to drilling. Cameroon work delayed During 2004 the entire 3D seismic survey, covering some two thirds of thedeepwater Ntem concession area, was reprocessed. A dramatic improvement in dataquality has resulted, facilitating the generation of a high-graded prospectinventory. Initial results are encouraging. Many of the stratigraphic featureswhich form the basis of success in other regional successes are observed inNtem. Sterling had planned to farm-out this licence, and had attracted a good level ofindustry interest, but the award in late 2004 by Equatorial Guinea of apartially overlapping licence to the South of Ntem has delayed this plan.Discussions are presently being held with the government of Cameroon with a viewto resolving this territorial issue. Until that time the proposed drillingactivity is suspended. Gabon farmouts and exploration well due in mid-2005 Sterling currently operates two shallow water permits, Iris Marin and ThemisMarin, in southern Gabon. Following completion of successful farmouts of itsinterests in both permits, Sterling holds a 20.57% working interest on eachlicence but will pay only 2.57% of two wells with the remaining costs beingcarried by Premier. 2004 marked the completion of two 3D seismic processing projects, most notablyon Iris. Pre-stack depth migration has helped to define sub-salt depth closuresat the prolific target Gamba reservoir level, yielding an inventory with severalhigh-graded prospects. Strong new partners have joined the licence, the locationfor the first well, Iboga-1, has been chosen and a rig commissioned for drillingaround July 2005. In December 2004, Sterling participated in a joint 3D seismic survey withadjacent operators Forest Oil & Vaalco Energy covering three contiguous permitareas including the southern part of Themis Marin and the adjacent Etame areaoil discoveries. The Themis survey covers some 240 km2 and will undergo similarintensive processing. Future drilling activity in Themis Marin will be based onthe results of this survey. Guinea-Bissau option exercised In April 2004 the Sinapa-2 well established a potential oil column in excess of500m on the flank of a salt diapir in a play type similar to those beingexplored in Dome Flore. Reservoir quality and structural issues meancommerciality of the find remains uncertain, but it has established the presenceof a petroleum system in the shallow waters. Sterling exercised its option toacquire 5%, which requires only future costs be paid. Sterling also retains a similar 5% option to participate in the adjacentEsperanca permit, to be exercised after the first well in that permit, expectedin the next year. Madagascar licence awarded Sterling signed PSC's for the Ambilobe and Ampasindava Blocks covering an areaof 34,000 sq km offshore northern Madagascar on the 15th July 2004 and bothcontracts were officially awarded on the 29th November 2004 followingratification by the President of Madagascar. These blocks are an excitingaddition to Sterling's exploration portfolio in a country which following ouracquisition of the licenses has also seen the recent entry of ExxonMobil andNorsk Hydro. Madagascar has been known to possess excellent oil source rocks since the early20th Century when two giant exhumed oilfields were found onshore. Subsequentdrilling onshore has also found numerous oil shows, making Madagascar a uniquelyoil-prone province in East Africa. Until recently the majority of explorationhas been focused onshore, but due to unfavourable geology it has failed to yieldcommercial discoveries. Today, exploration has refocused offshore whereExxonMobil, Norsk Hydro and Vanco are all actively exploring. The first exploration phase for the Ambilobe and Ampasindava Blocks isgeological and geophysical studies which will be used to high-grade areas forseismic acquisition which is planned for 2006. In a world with very few unexplored exploration provinces remaining, theAmbilobe and Ampasindava licenses offer an increasing rare opportunity toexplore undrilled offshore basins with significant petroleum potential. Other areas In May 2005, Sterling conditionally disposed of its interest in GSEC 101offshore Philippines to a newly-formed company, Forum Energy plc in return for a23% stake. Forum has a range of energy interests in that country, with small oilproducing fields and funding of £3.3 million. Forum intends to carry out a 3-Dseismic programme on GSEC101 in June and to list on AIM in 2005. At the priceof the fund raised to date, Sterling's interest has an implied value of £4million. Other residual interests in Holland, onshore UK and North America areprogressively being disposed of. New Ventures Sterling has an active new ventures programme searching for both production andexploration opportunities to add to our portfolio. For exploration, its primaryfocus area is Africa where it sees the potential to add high impact projects,whereas for production the focus in on both of its core areas, Africa and in theGulf of Mexico. An increasing level of resources is being committed to these newventures. Proven and Probable Reserves a. Volumes: (1) Oil Gas Attributable reserves ('000 barrels) (million cubic ft) ('000 equivalent) At 1st January 2004 99 22,752 3,891 Asset Acquisitions (2) 12,428 27,110 16,946 Upwards/(Downwards) revision from previous (3) 800 3,380 1,363 Production (96) (2,849) (571) At 31st December 2004 13,231 50,393 21,629 b. Location of reserves: The geographical location of the end 2004 reserves were: North America 1,531 50, 393 9,929 West Africa 11,700 - 11,700 c. Categorisation of proven and probable reserves: 1) At the end of the year: Proven reserves 61% 60% 56% Probable reserves 39% 40% 44% 2) At the start of the year Proven reserves 70% 55% 55% Probable reserves 30% 45% 45% NOTES 1. The proven and probable reserves movements in 2004 are based on: a. US: evaluation reports by independent petroleum engineers as of 1st July 2004for the offshore assets, with certain downward or upward adjustments by thedirectors at the year-end where, in their opinion, subsequent performance ofassets or further evaluation through drilling or workovers or through the impactof changes in prices, requires adjustments. The net reserves for the onshoreNorth American assets have been estimated by directors and account for less than0.01% of year-end 2004 reserves. b. West Africa: the reserves are based on an independent consultant's evaluationon the Chinguetti field contained in the circular to shareholders dated 26October 2004, updated by the directors to reflect their estimate of Sterling'sshare of reserves based on its expected share of the economic entitlement fromthe field arising from its overriding royalty interest and from its funding toGPC, rather than by direct ownership of the interest in the field. 2. The acquisitions during the year were principally of: a. a variety of working interests (up to 100%) in the Mustang Island propertiesoffshore US in February 2004 and; b. an economic interest in the Chinguetti field through the entering into of afunding agreement with GPC, a company owned by the government of Mauritania, asset out in a circular to shareholders dated 26 October 2004. 3. The oil revisions principally relate to the recognition of reservesarising from the approval of a development plan for the Chinguetti oil fieldoffshore Mauritania attributable to Sterling through its royalty interest. Thegas revisions principally relate to working-overs, installation of additionalcompression and other facilities, reprocessing of seismic data, well control andproduction history. The major revisions relate to the Mustang Island properties. 4. Sterling has not booked reserves in West Africa relating to otherdiscoveries made before or during the year such as Tiof, Tevet and Banda, on thebasis that no firm development plan has as yet been approved by the partners. 5. Definitions: Proven reserves have a 90% level of confidence that thestated quantities will be equalled or exceeded. Probable reserves have a 50%level of confidence that the stated quantity will be equalled or exceeded. Oilincludes condensates. FINANCIAL REPORT AND OUTLOOK Sterling had a record year in 2004. Net profit increased by 87% to £2.97 million and its proven and probable reservebase increased by more than 450% to over 21 million boe. Production increasedby 97% to 9.3 mmcfge/d and the foundations for future exploration anddevelopment in the USA and Africa have now been established. A successful £97million placing in November 2004 enabled the Group to fund an approximately 8%economic interest in the offshore Chinguetti field development in Mauritania,expected onstream in early 2006 with production of up to 75,000 bpd. This willgreatly add to attributable production and give a major increase in cash flow. Turnover more than doubled to £11.5 million in 2004. Average realised priceswere approximately $5.68/mmcfge (2003:$5.22/mmcfge), although the fall in thesterling exchange rate from $1.79:£ at the start of 2004 to $1.92:£ by year-end,has partly masked the actual improvement in underlying performance when measuredin US dollars. Gross profit increased by 112% to £6.8 million from £3.19 million in 2003. Of the totals, the average production for the first half was 8.5 mmcfge/d, withaverage sales price of $5.76/mmcfge (2003: $5.55/mmcfge). Second half 2004production averaged 10.2 mmcfge/d with an average price of $5.62/mcfge. About83% of production in the year was gas. Unit costs of sales rose 85% to $2.51/mmcfged. Of these, direct production costswere equivalent to $0.99/mcfge (2003:$0.95/mcfge) and a depletion charge of$1.52/mmcfge (2003:$1.15/mcfge). The change over the prior year levels wasmainly due to the impact of the $39.5 million Osprey asset purchase in February,which accounted for 57% of 2004 year-end US proven and probable reserves and 59%of gross profit. Sterling's end 2004 US proven and probable reserve base of 59.6bcfge was up 255%in the year. Our share of US reserves in the proven category jumped from 55% to61% in the year, whilst the US reserve life based on year-end production rateshas risen to 15.0 years at the end of the year from 11.4 years at the start of2004. Sterling's implied US finding and acquisition costs for the year was $1.3/mcfe. Our Mauritanian interests accounted for 54% of the year-end proven and probablereserves, being 11.7 mmbbls of oil reserves: first production is expected inearly 2006. Including the attributable share of expected development costs theestimated purchase and development cost of these reserves is approximately $8/bbl. As forecast, with the impact of the planned Houston office expansion to becomeoperator of the majority of its production interests, the costs of the Perthoffice acquired with Fusion in December 2003 and the UK's expanded new venturesteam and Group support staff, our charged overheads increased to approximately£2.05 million. Approximately 15% of these were reorganisation and terminationcosts. There was again an increase in the operating profit of 177% to £4.73 million in2004. With net financial income, mainly from interest on cash deposits, profitbefore tax was up 130% at £4.16 million (2003:£1.81 million). The taxation charge of £1.2 million arose in the USA and is, as explainedpreviously, much higher than in 2003 as the majority of the available tax losseswere utilised in that year. Because of the use of remaining US tax losses and ofaccelerated depletion for tax purposes for certain US drilling costs, Sterlinghas provided a deferred tax charge of £0.97 million reflecting the expectationthat in the future certain of these timing differences are expected to reverse. Fully diluted earnings per share, which reflects the potentially dilutive impactof options, was 0.33p per share (2003: 0.33p). This is despite the impact of theshares issued for the Fusion takeover in late 2003 which was exploration focusedand the £97million placing in November 2004, the shares for which affected thecomputation since their issue. Operating Cash Flow up 144% Operating cash flow up by 144% Cash inflows: The 2004 cash inflow from operations rose 144% to £8.1 million compared with£3.3 million in 2003. A total of £97 million was raised from the issues ofshares for cash with the November 2004 placing at 17p per share (£92.6 millionnet of direct expenses). Cash outflows: A total of £11.6 million was spent in 2004 in connection with the investmentassociated with the Chinguetti field in Mauritania described earlier. Thisincluded a signature bonus to the Mauritanian Government of $15.5 million. Atthe end of the year no draw-downs had been made under the cash-backed $130million letter of credit provided by Sterling to the GPC, nor had any drawingsbeen made as of the date hereof. Funds are expected to be progressivelydrawn-down to meet the future and past costs associated with the Government'sdirect 12% interest in this field, in which Sterling has an approximate economicinterest currently estimated at 8%. With first oil production expected in early2006 building to 75,000 bpd (gross), 2005 will see a major outflow of funds tomeet the GPC's share of costs. During the first half of 2006 this is expected tosee a sharp turnaround into a strong cash inflow. The $39.5 million Osprey purchase was completed in late February 2004. The fundsfor this deal came from a $25.5 million bank funding from Hibernia NationalBank, with the whole of the $27.5 million then outstanding under the facilitybeing repayable in June 2006. The remainder of the consideration was met fromcash resources, after deducting a $2.5 million closing adjustment due to cashgenerated from these assets between effective date and completion. The loan from Hibernia includes a number of financial covenants which, amongstother matters, limits the level of funds that can be repatriated from the US tothe rest of the Group. Following a recent review the loan has been extended by ayear and does not require any repayments before 30 June 2007, save on avoluntary basis or as a result of a standard twice-yearly borrowing basere-determination, the next of which is currently in progress. The amount of thefunds that can be repatriated has also increased.. The current interest ratepayable is approximately 5.75%, with payments made quarterly. After other cash capital expenditures of £4.5 million, of which £1.0 millionrelated to the drilling, appraisal and development of reserves in the Gulf ofMexico and £3.5 million to other activities, mainly in Africa, cash resourcesincreased to an unrestricted £20.3 million at the end of 2004, with a further$130 million held as collateral for the letter of credit set out above. Strengthened Balance Sheet Net current assets rose to £88.8 million at the end of 2004 from £10.4 millionat the end of 2003. At the date of this report the Group's unrestricted cashbalances were equivalent to over £10 million and there was the full $130 millionremaining undrawn under the Chinguetti letter of credit . Sterling's equity shareholders' funds increased to £148.4 million at the end of2004 (2003: £56.6 million). This principally reflected the approximately £97million placing. The issued share capital had risen by the end of 2004 toapproximately 1,393 million shares, as set out in the Directors' Report. Theadverse movement in exchange rates produced an unrealised translation loss of£6.4 million when dollar assets were converted into sterling, being thereporting currency, at the end of the year. The balance sheet at the end of 2003 included an £11.6 million minorityinterest, being the fair value of the approximately 30% interest held by Premierin the two subsidiaries of Fusion which hold the working interests in theMauritania contract areas. During 2004, £10.6 million of this was released fromminority interest and from intangible fixed assets on completion of the dealrelating to the sale of the Group's remaining interest in one of thesesubsidiaries to Premier. This disposal, in substance, exchanged Fusion's workinginterests in PSC B for a royalty interest which bears no further drilling ordevelopment costs, together with further "success" payments to Sterling relatedto the size and number of further discoveries. The directors currently expectthe remaining conditional deal will be substantially completed in 2005. Financial Outlook The financial outlook remains strong. With an increased level of drilling and exploration activity expected in the USAin 2005, and a target to double reserves and production by the year-end,Sterling expects sustained further improvement in its US financial performance.If the programme of development drilling is successful this could furtherincrease our commercial reserves and could assist in further financialflexibility in these operations. As we did in 2004, for 2005 we have used thefutures markets to "sell" approximately $10 million of gas at prices averaging$6.20/mcfge. We intend to continue to use such contracts to cover part of ourforecast production as part of our risk management. The development of the Chinguetti field offshore in Mauritania is expected tocontinue the growth of the Group once first production arises, expected in early2006. This has, as envisaged, required cash utilisation, not least to "lock-in"prices for approximately 2.1 mmbbls covering 2006/07. In essence, Sterling has afloor price of approximately $38/bbl and will receive actual prices up toapproximately $46/bbl. From then until approximately $50/bbl that part of theselling price is forfeit but the excess over $50/bbl is all retained bySterling. Development and any repayment of "past" costs until production willbe principally be met through draws on the $130 million letter of credit. Thedirectors expect the development of the Tiof field and possibly Tevet, offshoreMauritania, will be announced in the year from which it is entitled to a royaltyincome stream and bonus payments of $2 million where each fields reserves exceed50 million barrels. Sterling makes no payment to the exploration or developmentcosts for these or any other fields that may be discovered here. The planned increased exposure to exploration in West and East Africa, not leastcontinued exploration and appraisal activity in Mauritania, is largely cost-freedue to farmouts or royalty interests. However, any cash requirement forexploration will also be highly dependent on the results, inter alia, ofinterpretation work, any potential farm-outs, the result of current and proposeddrilling and licences acquired. New licence additions are also planned. Sterlingplans to carefully increase its exploration activity to include an increasingupside, and possibly cost, exposure, whilst also diversifying its portfolio. The Group is included in the new "AIM 50" index for the largest companies, hasseen sustained and increased liquidity in its share trading, has over 60well-known institutions on its share register and is approaching 3,000shareholders. The directors primary aim remains to enhance shareholder value. With its vastly improved financial condition and balanced reserve base, a majorgrowth in cash flow when Chinguetti comes onstream, exciting exploration andappraisal projects and with the belief that the outlook for energy remainsexcellent, the directors are extremely confident for the outlook for 2005/6. Definitions bbls barrels of oilbcf billion cubic feet of gasbcfge billions of cubic feet gas equivalentboe barrels of oil equivalentbopd barrels of oil per daymcf thousand cubic feet of gasmcfge/d thousand cubic feet of gas equivalent per daymmbbl millions of barrelsmmcfg/d million cubic feet of gas per daymmcfge/d millions of cubic feet of gas equivalent per daytcf trillion cubic feet of gas Sterling Energy plc and subsidiary undertakings Consolidated profit and loss accountYear ended 31 December 2004 Note 2004 2003 £'000 £'000 Turnover 2Existing operations 5,138 5,533Acquisitions 6,319 - 11,457 5,533 Cost of salesExisting operations (2,354) (2,348)Acquisitions (2,316) - (4,670) (2,348) Gross profitExisting operations 2,784 3,185Acquisitions 4,003 - 6,787 3,185Administrative expenses Existing operations (1,396) (1,481)Acquisitions (656) - (2,052) (1,481) Operating profitExisting operations 1,388 1,704Acquisitions 3,347 - 4,735 1,704 Interest receivable and similar income 312 219Interest payable and similar charges (883) (114) Profit on ordinary activities before taxation 4,164 1,809Taxation on profit on ordinary activities 3 (1,197) (228) Profit on ordinary activities after taxation 2,967 1,581 Minority interest 2 5 Profit for the financial year 2,969 1,586 Earnings per share : Basic 4 0.34p 0.38p : Diluted 4 0.33p 0.33p Sterling Energy plc and subsidiary undertakings Consolidated balance sheet31 December 2004 Note 2004 2003 £'000 £'000 Fixed assetsIntangible assets 6 30,629 49,957Tangible assets 7 51,754 10,433 82,383 60,390 Current assetsDebtors 2,968 1,512Cash at bank and in hand 8 89,556 14,485 92,524 15,997 Creditors: amounts falling due (3,762) (5,600) within one year Net current assets 88,762 10,397 Total assets less current liabilities 171,145 70,787 Creditors: amounts falling due after more than one (15,014) -year Provisions for liabilities and charges (6,671) (2,626) Net assets 149,460 68,161 Capital and reservesCalled up equity share capital 9 13,933 7,806Share premium account 10 141,600 50,753Equity shares to be issued - 1,716Currency translation reserve 10 (8,271) (1,882)Profit and loss account 10 1,166 (1,803) Equity shareholders' funds 148,428 56,590 Equity minority interest 1,032 11,571 Total capital employed 149,460 68,161 Sterling Energy plc and subsidiary undertakings Consolidated statement of total recognised gains and lossesYear ended 31 December 2004 2004 2003 £'000 £'000 Profit for the financial year 2,969 1,586Currency translation adjustments (6,389) (1,709) Total recognised losses relating to the year (3,420) (123) Reconciliation of movements in Group shareholders' fundsYear ended 31 December 2004 2004 2003 £'000 £'000 Profit for the financial year 2,969 1,586Other recognised losses for the year (6,389) (1,709)Shares issued (net of expenses) 96,974 41,687Movement in shares to be issued (1,716) 116 Total movement in the year 91,838 41,680Shareholders' funds at 1 January 56,590 14,910 Shareholders' funds at 31 December 148,428 56,590 Consolidated cash flow statementYear ended 31 December 2004 Note 2004 2003 £'000 £'000 Net cash inflow from operations 13a 8,145 3,340 Returns on investments and servicing of finance 13b (290) 168Capital expenditure 13b (16,109) (5,660)Acquisitions and disposals 13b (18,763) (690) Cash outflow before financing (27,017) (2,842)Financing 13b 34,818 10,925 Increase in cash in the year 13c 7,801 8,083 Sterling Energy plc and subsidiary undertakings Notes to the financial informationYear ended 31 December 2004 1. Basis of accounting The preliminary accounts have been prepared in accordance with applicable UnitedKingdom Accounting Standards and under the historical cost convention. Thereare no changes to the accounting policies as set out in the Annual Report forthe year ended 31 December 2003. 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 2003 have been delivered to the Registrar of Companies, and those for 2004will be delivered following the Company's Annual General Meeting. The statutoryaccounts for 2004 were approved by the Board on 9 May 2005. The auditors havereported on the accounts for both 2003 and 2004; 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 has interests in four geographical segments, WesternEurope, North America, South East Asia and Africa as follows: Western Europe North America South East Asia Africa Total 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Turnover* - - 5,138 5,533 - - - - 5,138 5,533- existing operations- acquisitions** - - 6,319 - - - - - 6,319 - Profit/(Loss) before (220) (237) 4,747 2,063 - - (363) (17) 4,164 1,809taxation Net assets*** 17,317 1,956 26,419 14,955 564 211 105,160 51,039 149,460 68,161 * All turnover is sold to third parties within the segment of origin** Acquisitions in 2004 relate to the Group's purchase of the Osprey interests (see note 12)*** Net assets exclude intra-group financing. 3. Taxation The Group tax charge comprises: 2004 2003 £'000 £'000 Current tax 226 -Deferred tax - origination and reversal of timing differences 971 228 1,197 228 The difference between the current tax charge of £226,000 and the amountcalculated by applying the applicable standard rate of tax is as follows: 2004 2003 £'000 £'000 Profit on ordinary activities before tax 4,164 1,809 Tax on profit on ordinary activities at standard US corporation tax rate of 34% 1,416 615(2003: 34%)Effects of:Expenses not deductible for tax purposes 87 64Capital allowances in excess of depreciation (136) (791)Other temporary differences (245) 12Difference in non-US tax rates 33 1Adjustment for tax losses (929) 99 Current tax charge for the year 226 - During 2003 and 2004, the Group generated its results primarily in the US.Therefore the tax rate in the above reconciliation for 2003 and 2004 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 £2,969,000 (2003 - £1,586,000) and on 884,788,687 (2003 -417,759,246) 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: 2004 Number of shares For basic earnings per share 884,788,687Exercise of options 26,078,893 For diluted earnings per share 910,867,580 5. Dividend No dividend has been declared or is to be paid in respect of the year ended 31December 2004. 6. Intangible fixed assets - unevaluated oil and gas interests £'000 At 31 December 2003 49,957Disposal (10,539)Transfers to tangible fixed assets (9,841)Additions 3,619Currency translation adjustment (2,567) At 31 December 2004 30,629 The disposal relates to the fair value of a minority interest held in asubsidiary company that was acquired in the prior year. The company in whichthe minority interest was held has been fully disposed of during the year. Group net book value at 31 December 2004 comprises £1,678,000 for North America,£33,000 for Western Europe, £564,000 for South East Asia, and £28,354,000 forAfrica. Group net book value at 31 December 2003 comprised £3,765,000 for NorthAmerica, £62,000 for Western Europe, £211,000 for South East Asia, and£45,919,000 for Africa. 7. Tangible fixed assets Oil and gas Computer & Interests office Total equipment £'000 £'000 £'000 CostAt 1 January 2004 11,655 307 11,962Transfers from intangible fixed assets 9,841 - 9,841Acquisition (see note 12) 21,790 - 21,790Related Shares:
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