Sterling Energy (SEY).
Mkt Cap £35m. Cash £62.5m. Debt £Zero
Attendee; Eskil
Jersing (CEO)
Last week we caught up with newly appointed CEO of Sterling
energy, Eskil Jersing. Our initial interest in the company was sparked by a
perceived valuation gap, as Sterling’s ~$100m (£62.5m) in cash appears markedly
under-represented in its current market cap of £38.5m. Of this cash the group has
~$30m (~£19m) of commitments, a $22.7m (£14.19m) abandonment liability for the
Chinguetti field in Mauritania, and a further $8m (£5m) of potential stage
payments in Somaliland. Post these commitments the stock remains at a discount
to cash, with no value ascribed to the current asset portfolio, or indeed, any 'option
value' as management holds the cash to do deals in what most view as being a buyers’ market.
Beyond the obvious balance sheet strength, Key highlights (as
we see them) from an asset perspective are the group’s growing position
offshore Mauritania, where Sterling added two material licences in 2015; C3
(coastal / shallow water) & C10 (deeper offshore). Both blocks were
acquired at minimal cost, notably C10 has an exploration well planned to spud within
18 months. In Madagascar, worth highlighting is Sterling’s fully carried status on
the current 3D seismic survey, with potential for an exploration well to be
drilled in 1H 2017. In terms of ‘sleepers’ the group maintains positions in
both Somaliland (security issues) and Cameroon (border dispute). Despite
activity in both regions being on hold, the group’s interests could represent a
windfall for investors if their respective issues can be resolved.
Mauritania
PSC B, Chinguetti
The Chinguetti field was discovered in 2001 and lies in 800m
of water, 80km off the coast of Mauritania. Sterling currently holds an 8% economic
interest via funding agreement with SMHPM (Mauritania national oil company) and
a sliding scale royalty over 5.28% of Premier’s share of production. In 2014
these combined interests resulted in 432bopd production net to Sterling ($6.9m
cash flow) from gross output from the field of 5512 bopd.
Block C-3, Sterling
Energy 40.5%, position acquired (February 2015)
In February 2015, Sterling acquired (pending Government
approval and completion of the transaction) a 40.5% working interest in block
C-3 from Tullow in exchange for ~$2.5m towards back costs. C-3 is a shallow
water exploration block, shown in the above map as running along the coast of
Mauritania. The block covers an area of 9,781km2 at average water
depth of under 100m. Interest holders in C3 are as follows; Tullow 49.5% (Operator),
Sterling Energy 40.5% and SMHPM 10% (Mauritania’s state oil company). Block C-3
is currently in exploration phase 1, which involved a 1600km2 2D seismic
survey, which was acquired in late 2014. The survey is currently in-house and under
interpretation.
The second exploration phase runs from June 2016 and involves
the acquisition of a further 700km2 of 3D seismic and the drilling of
a single exploration well. The group are expected to make a ‘drill or drop’
decision on the block by the first half of 2016, once the results of the 2D
seismic interpretation have been evaluated.
Block C-10, Sterling
Energy 13.5%, position acquired June 2015.
Sterling Energy acquired (pending Government approval and
completion of the transaction) a 13.5% interest in block C-10 in exchange for
$50,000 of back costs. Block C-10 surrounds the Chinguetti field and was awarded
to Tullow in 2011. C-10 interest holders are as follows; Tullow 76.5% (Operator),
Sterling Energy Mauritania Limited (SEML) 13.5% and SMH 10%. C-10 is an
offshore block covering an area of 10,725km2 with water-depth varying
from 50 to 2,400m.
The C-10 licence is in the second phase of exploration (Nov
2014 – Nov 2017) which involves the drilling of a single exploration well.
Tullow has identified a drill ready prospect within a multitude of additional
prospects and leads. Current technical work focuses on maturation of the
prospect inventory following the receipt of the recently reprocessed 3D survey
covering the area. Tullow expects to drill an exploration well in 2016 at an
anticipated cost of $77m ($11.55m net to SEML). Phase 3 exploration period runs
from Nov 2017 – Nov 2020 and requires the drilling of a further 2 exploration
wells.
Madagascar
Ambilobe Block,
Sterling 50%, acquired 2004.
Ambilobe PSC was awarded to Sterling Energy in 2004.
Ambilobe is an offshore block covering an area of 17,650km2.in
0-3000m water depth. Interest holders in Ambilobe are Sterling 50% (Operator)
and Pura Vida 50%. Pura Vida farmed in to Ambilobe in late 2013, taking a 50%
WI in exchange for carrying costs associated with a 3D seismic survey, acquisition
of which completed in June 2015. The carry is expected to cover all costs of
the 3D seismic survey.
A 5500km 2D seismic program had already been acquired and
interpreted. CGG, who carried out the 3D survey expect interpretation,
resulting in a worked up series of prospects, to be completed by early 2016,
completing work commitments under the second phase of exploration. Phase 3
exploration period involves the drilling of a commitment well, which
potentially could be drilled in 1H 2017.
Somaliland,
Odewayne
PSC, 40% working interest, awarded in 2005.
Sterling holds a 40% WI in the Odewayne PSC in Somaliland,
for which the group has paid $17m with a further $8m of potential, staged
payments. The onshore block covers block SL6 and parts of blocks SL7 & SL7 and
covers an area of 22,840km2 equivalent to 100 UKCS blocks. Interest
holders are Sterling 40%, Genel 50% (Operator) and Petrosoma 10%. Operations in
Somalia have been interrupted by security issues; as a result of these delays a
2-year extension to the current work period (phase 3) was granted in May 2014,
with the dates of subsequent periods adjusted accordingly.

Odewayne represents frontier acreage with no seismic control
and no drilling to date. Sterling are carried by Genel for all costs associated
with the third & fourth exploration phase, with Sterling’s expenditure in
these periods limited to $8m due to Petrosoma at certain operational milestones.
The PSC is currently in the third exploration period (May 2012 – Nov 2016) which
involves a gravity mag survey (completed) and 500km of 2D seismic
data, which remains outstanding.
The 2013 aero mag survey confirmed a broad basin over the
Odewayne block thought to be of Jurassic to Cretacaous age, analogous to
producing basins in Yemen. Field work on the block has shown evidence of
numerous seeps, encouraging signs that the basin includes a working hydrocarbon
system. The pending 2D seismic survey will be the next step to defining
drillable prospects at Odewayne, exploration activity in the block is currently
on hold due to security threat. Both Sterling and Genel are supporting the government
in setting up an oilfield protection unit (OPU), with the hope of commencing
seismic operations once safe operation of personnel can be established.
The fourth exploration period (Nov 16 – May 2018), for which
Sterling costs are to be fully carried by Genel, involves a further 1000km of
2D seismic data and the drilling of a single exploration well.
Cameroon
Ntem concession,
Sterling 100% WI (force majeure)
The Ntem concession is a large undrilled block covering an
area of 2,319m2 in 400m to 2000m water depth. The concession has
been in force majeure since June 2005 as a result of overlapping maritime
border claims by the Republic of Cameroon and the republic of Equatorial
Guinea.
The force majeure preventing activity in the
block was lifted in January 2014, allowing drilling of the Bamboo-1 exploration
well outside of the disputed border area. The Bamboo-1 well was drilled to a total
depth of 4,747m in 1600m of water. The well encountered well developed high
porosity sandstones but sadly no significant hydrocarbons. The block does
contain additional potential, specifically the Tonga & Baobab prospects. The
current exploration period re-commenced in January 2014. In May 2014 the JV
partners declared force majeure once more, suspending their work obligations
under the terms of the Ntem concession.