15 April 2020

STERLING ENERGY PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

Sterling Energy plc is today issuing its results for the year ended 31 December 2019.

OVERVIEW

Sterling Energy plc ('Sterling' or the 'Company'), together with its subsidiary undertakings (the 'Group'), is an upstream oil and gas company listed on the AIM market of the London Stock Exchange. The Company is an experienced operator of international exploration and production licences, with a primary geographic focus on emerging markets including, Africa and the Middle East, although the Board would consider other regions for material opportunities. The Group has a high potential exploration asset in Somaliland and an active strategy to deliver shareholder value through disciplined, exploration and production projects; leveraging the Company's experience, with an emphasis on securing near term cash flow generative opportunities.

2019 SUMMARY

Operations

·      Government of the Republic of Somaliland granted a continued extension to the current period of the Odewayne production sharing agreement ('PSA').

·      Throughout 2019: Odewayne block, Somaliland - Sterling continued to support the Operator in progressing the technical understanding of the block.

Corporate                                                                                                   

·      Continued merger and acquisition ('M&A') mandate for transformational growth (asset and corporate options).

·      Screened over fifty separate opportunities globally over 2019 and engaged with five of these to the point of indicative offer.

Financial

·      Cash resources net to the Group at 31 December 2019 of $44.9 million (2018: $46.3 million).

·      The Group remains debt free and fully funded for all commitments.

·      Adjusted EBITDAX¹: loss for the Group of $917k (2018: $1.5 million loss).

·      Ongoing focus on capital discipline, cash general and administrative overheads ('G&A') expenses reduced by 15% to $2.6 million (2018: $3.0 million).

·      Proactive focus on treasury management, with interest received totaling $1.1 million (2018: $1.0 million).

¹defined within the definitions and glossary of terms.

For further information contact:

Sterling Energy plc                              +44 (0) 20 7405 4133

David Marshall, Chief Executive Officer

Michael Kroupeev, Chairman

Peel Hunt LLP                                       +44 (0) 20 7418 8900

Richard Crichton

David McKeown

www.sterlingenergyplc.com               Ticker Symbol: SEY

This announcement contains inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

CHAIRMAN'S STATEMENT

A number of key factors affected oil price expectations in 2019 including global demand, performance of the Chinese economy, the wider macro-economic environment, maritime regulations, revision of trade deals, production cuts as well as Iranian sanctions. Following the year end, and into 2020, Coronavirus concerns became a new and extremely significant factor of uncertainty and further affected underlying net asset value and risk appetite, with Brent crude plunging by over 30% in one day. Some of the E&P deals that looked promising throughout the year at $60/bbl have proven not to have sustainable value as midterm investments and are currently languishing along with international indexes.

During 2019 our team intensified screening and pre-selection of E&P opportunities that meet corporate standards and the class of assets targeted by the Group. Some of the key criteria were reviewed and updated by the Board to improve focus and concentrate on added value and secure cases in what has been and continues to be a volatile market.

The Somaliland acreage remains an attractive opportunity in the long term, subject to good progress by the Operator Genel Energy which carries our costs inclusive of the drilling of the first well and has a strong cash balance to weather the downturn and fund its operations. Results of the reprocessed 2D seismic data are now ready for interpretation and we are hopeful this will show potential for material accumulations of hydrocarbons. During the year, the operator successfully applied for the extension of the Third Exploration Period, which was subsequently granted by the state authority. Once interpretation work is complete the Operator may elect to proceed to the Fourth Exploration Period which will focus on additional seismic and the drilling of an exploration well.

Financial

2019 costs were further reduced by the means of the improved overhead management and the net cash resources at the end of the year remain solid. 2020 financial obligations are minimal and fully funded. 

Board and management

In 2019 the Board and the management team led by David Marshall as the Chief Executive Officer and Director of the Company remained stable and focused on the corporate strategy and its objectives. The overall expertise and the background of the team allowed the group to effectively screen opportunities in all major basins around the world and to short list the most promising ones for the Board to review.

Outlook for 2020

The Covid-19 virus has had a significant impact, affecting economies and populations globally. The spread of Covid-19 has been unlike any previous virus, taking governments and populations by surprise. It is widely expected that the world economy will be severely impacted by the Covid-19 despite measures by governments to protect it. Sterling is currently in a very strong position, preserving its capabilities, strengths and cash position to absorb any shock to the UK and wider economy and anticipates distressed M&A opportunities to arise as a result of this situation. Sterling has not experienced any significant disruption to its operations and continues to be fully functional, however Government lockdowns across the globe will undoubtably have an effect on our counterparties and progress on potential investments. The Company continues to monitor the situation in Somaliland.

The Company continues to be fully set to evaluate M&A opportunities that continue to arise in 2020 and remains committed to executing an accretive acquisition once the right opportunity is identified. We expect that despite the current global uncertainties and the risk factors which are currently impacting the fossil fuel industry as a whole, our past background and professional excellence will allow us to target a deal for the benefit of all our shareholders.

The backing of our stakeholders, and their continued support is much appreciated and we now have in place all the tools we require to be able to conduct a successful transaction over the course of the year.

Michael Kroupeev - Chairman

CEO'S STATEMENT

2019 & 2020 Market Landscape

Oil price in 2019 started strongly with Brent reaching $67 per barrel in the first Quarter, dropping back to $60 per barrel at end 2019, the price cushioned by increased USA oil productions despite OPEC interventions and geopolitical disruption. 

A relatively stable oil price during 2019 should have encouraged M&A activity, but the large proportion of assets available were higher risk exploration prospects with operators reluctant to sell oil production and development opportunities. Production assets that were available tended to have marginal economics at flat ~$60 per barrel.

The dramatic change in oil price following the Covid-19 impact on demand, along with the collapse of the Opec+ Alliance, has further weakened highly leveraged oil companies, who will see the benefit of partnering with a cash rich entity. This steep decline, as a result of world events, has particularly impacted financial markets and will allow us to benefit from the database of companies we have evaluated in 2019 whilst presenting new opportunities to acquire assets at advantageous terms.

The Company is well financed and is positioned to take advantage of acquisition opportunities during these volatile market conditions.

Operations

During 2019 work on the Odewayne block in Somaliland focused on the reprocessing of the entire 2D seismic dataset acquired in 2017 to pre-stack time migration ('PSTM'). This product was delivered to the Company in Q1 2020. Sterling will review this newly reprocessed 2D seismic data set in 1H 2020 and will update its technical assessment and outlook on block prospectivity accordingly.

We will continue to support the Operator and look forward to the results from the reprocessing. The costs associated with current period (Third Period) and the Fourth Period are fully carried by Genel Energy Somaliland Limited ('Genel Energy'), hence the minimal capital investment shown within the accounts.

Corporate

During 2019 Sterling reviewed over fifty opportunities, of which 5 bids were placed and a number are still under consideration. The oil price environment in 2019 saw high expectations of value from sellers which in turn made concluding a deal with reasonable terms challenging.

Our strong cash position of $44.9 million, with no debt or other liabilities, can be used to leverage a production foothold and include low risk exploration commitment. In 2020 Sterling's ability to fund exploration and development is key to our forward strategy. Our focus for 2020 is onshore low-cost operators, who will benefit from our cash position to develop and explore their existing portfolio.

The Company has continued to reduce G&A and focus on robust treasury management, in line with the Board mandate for cash preservation to maximise our ability to deploy capital into existing and new assets. In 2019 G&A expenditure reduced by 15% in comparison to 2018 whilst increasing interest received.

Sterling has a detailed understanding of the current M&A market and intends to take advantage of the current volatile marketplace. As such, we look to the remainder of 2020 with confidence in the belief that the current turmoil will present a number of exciting opportunities for Sterling.

David Marshall - Chief Executive Officer

OPERATIONS REVIEW

Since late 2015, the Company implemented a strategic mandate of exiting non-core exploration portfolio assets, and reducing outstanding liabilities, to provide a simpler and rejuvenated platform for M&A led growth. The Group's remaining African exploration focused Odewayne block provides fully carried exposure to a frontier basin that has the potential to deliver material hydrocarbon reserves.

SOMALILAND

Somaliland offers one of the last opportunities to target an undrilled onshore rift basin in Africa. The Odewayne block, with access to Berbera deepwater port less than a 100km to the north, is ideally located to commercialise any discovered hydrocarbons. A 2D geophysical survey acquired in 2017 and reprocessed in 2019, along with potential field data and legacy geological field studies, are the focus of the company's 2020 work programme to determine if a Mesozoic sedimentary basin is present in the block.

Odewayne (W.I. 34%) Exploration block

Overview

This large and unexplored frontier acreage position comprises an area of 22,840km², the equivalent of ca. 100 UK North Sea blocks. Exploration activity prior to the 2017 regional 2D seismic acquisition program has been limited to the acquisition of airborne gravity and magnetic data and surface fieldwork studies, with no wells drilled on block.

The Odewayne production sharing agreement was awarded in 2005. It is in the Third Period, with a minimum work obligation of 500km of 2D seismic. The Third Period has been further extended, through the 8th deed of amendment, and its minimum work obligation was met in 2017 when the Somaliland Government (Ministry of Energy and Minerals) contracted BGP (Geophysical contractor) to undertake a 1,000km (full fold, 1,076km surface) 10km by 10km 2D seismic campaign. The minimum work obligation during the optional Fourth Period of the PSA, which has also been extended by 2 years, is for 1,000km of 2D seismic and one exploration well.

The Company's wholly owned subsidiary, Sterling Energy (East Africa) Limited ('SE(EA)L'), holds a 34% working interest in the PSA. SE(EA)L originally acquired a 10% position from Petrosoma Limited ('Petrosoma') in November 2013 and an additional 30% from Jacka Resources Somaliland Limited ('Jacka') in two transactions during 2014.

In April 2017, the Company agreed to revised farm-out terms to reduce the staged contingent consideration payments due to Petrosoma and reduce SE(EA)L's interest in the Odewayne asset by 6%. The farm-out agreement was amended such that the parties cancelled the $8.0 million contingent consideration in return for: (i) a payment by SE(EA)L to Petrosoma of $3.5 million; and (ii) a transfer from SE(EA)L to Petrosoma of a 6% interest in the PSA. Post Government of Somaliland approval, SE(EA)L holds a 34% interest in the Odewayne Block, fully carried by Genel Energy for its share of the costs of all exploration activities during the Third and Fourth Periods of the PSA.

In early 2018, following encouraging results from an integrated geoscience review in late 2017 of the basic post-stack processed 2D dataset provided by the Operator Genel Energy, Sterling undertook a highly focused and rigorous processing effort, independent of the Operator. The first phase deliverables were a full PSTM dataset, consisting of 3 lines of ca. 235km and were received in May 2018. These reprocessed lines showed significant improvements in subsurface imaging and were shared with the joint venture ('JV') partners in order to assist the decisions on forward work programs.

In parallel to Sterling's efforts, the Operator undertook a number of studies to support the interpretation of the 2D seismic dataset. This included the integration of the 2D seismic data with the potential fields data in the form of a 2D gravity modeling study, alongside an updated review of the regional geology of the Odewayne basin. These studies led to the development of a number of geological models that were used to interpret the seismic data which in the Company's view help support the likely presence of a sedimentary basin. Following this work, the JV partners agreed that reprocessing of the seismic data was needed to further improve the understanding of the prospectivity of the Odewayne Basin.

Outlook

Following the various tests performed by both Sterling and the Operator, in 2019 the Operator undertook the reprocessing of the whole 2D seismic data set to pre-stack time migrated data. An interpretation dataset was made available by the Operator in November 2019 and final products were delivered in January 2020.

Sterling will review this newly reprocessed 2D seismic data set in Q2 2020 and will update its technical assessment and outlook on block prospectivity accordingly. Alongside the seismic reprocessing, a surface seep study focused on areas highlighted by the seismic as most likely to be situated above migration pathways from potential hydrocarbon kitchens. It is anticipated that the above work will aid the JV partnership in developing an appropriate forward work program to further evaluate the prospectivity of the licence. 

FINANCIAL REVIEW

Non-IFRS measures

The Group uses certain measures of performance that are not specifically defined under IFRS or other generally accepted accounting principles. These non-IFRS measures include capital investment, debt and adjusted EBITDAX.

Income Statement

Group G&A decreased by 15% during the year to $2.6 million (2018: $3.0 million). The continued reduction in the Group's administrative overhead is in keeping with the Board driven KPI for cash preservation.

In 2019, a portion of the Group's staff costs and associated overheads have been expensed as pre-licence expenditure ($1.3 million), or capitalised/recharged ($23k) where they are directly assigned to capital projects or recharged. This totalled $1.4 million in the year (2018: $1.4 million). 

Interest received during the year was $1.1 million (2018: $1.0 million). Net finance income (finance income less finance expenses) totalled $1.0 million in the year (2018: $1.0 million).

The loss for the year was $1.6 million (2018: loss $2.0 million):

Group adjusted EBITDAX loss totalled $917k (2018: $1.5 million loss):

The basic loss per share was 0.7 cents per share (2018: loss 0.9 cents per share). No dividend is proposed to be paid for the year ended 31 December 2019 (2018: $nil).

Statement of financial position

At the end of 2019, non-current assets totalled $22.1 million (2018: $21.1 million) relating in principal to the Odewayne block ($21.1 million).

At the end of 2019, net assets/total equity stood at $65.8 million (2018: $67.3 million).    

IFRS 16 (Leases) was adopted on 1 January 2019 and required the Company to account for all leases under a single balance sheet model, recognising both the rights to the asset and the liability arising under the lease.

Net current assets reduced to $44.5 million (2018: $46.2 million). At the end of 2019 cash and cash equivalents totalled $44.9 million (2018: $46.3 million), this reduction is for the most part due to G&A overheads.

Cash flow

Total net decrease in cash and cash equivalents in the year was $1.5 million (2018: $35.1 million, primarily due to the termination of the Chinguetti Funding Agreement), a full reconciliation of which is provided in the Consolidated Statement of Cash Flows.

During the year there were minimal cash investments on the Odewayne Block in Somaliland due to the Group's interest being fully carried by Genel Energy for its share of the costs during the Third and Fourth Periods of the PSA.

Accounting Standards

The Group has reported its 2019 and 2018 full year accounts under International Financial Reporting Standards ('IFRS'), as adopted by the European Union.

Cautionary statement

This financial report contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Directors believe the expectation reflected herein to be reasonable in light of the information available up to the time of their approval of this report, the actual outcome may be materially different owing to factors either beyond the Group's control or otherwise within the Group's control but, for example, owing to a change of plan or strategy. Accordingly, no reliance may be placed on the forward-looking statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME