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Interview

Jacob S. Ulrich, Chairman & CEO, Sterling Resources, UK

“We need to bulk up and find the right partners, the right synergies, and the right value drivers in common. These are the ingredients to build up a company to something that can deliver attractive, sustainable returns to shareholders,” explains Jacob S. Ulrich, Chairman and CEO of Sterling Resources.


What have been some of the main challenges and achievements for Sterling Resources of the past year?

The year started badly for Sterling because with the repeated delays and cost increases in Breagh, we were perceived to have significant funding challenges. The combination of an equity issue and a bond issue, in very difficult circumstances, gave us the funding we needed to move forward and repayment of the bank debt removed a number of very restrictive financial covenants. We restructured the Board in June after the AGM, at which point I became Chairman, and I became interim CEO in August upon the departure of the previous CEO.

Our main asset is the Breagh gas field in the UK Southern North Sea, in which we have a 30 percent non-operated stake. Breagh was originally planned to start production in mid-2012 but was some 15 months late (and significantly over budget) when this finally occurred in October 2013.  Due to an operating issue with the inlet pipeline, the field had to be shut down in early November and we lost seven weeks’ production. Our focus is now on stabilizing production to demonstrate the long-term potential of Breagh.

What were the priorities you set when you took over as Interim CEO half way into the year?

First and foremost was getting the Breagh development onstream.

Our second priority is to rationalize our position in Romania. We believe we have significant value in our undeveloped gas fields, discoveries and exploration acreage in the Black Sea. Going forward, monetizing the Romanian asset portfolio will require a large amount of capital expenditure, on exploration, appraisal and development activities. For that reason we are looking at farm-downs of our exploration licences and a partial divestiture of our development assets. Over the next three to six months as we get recently acquired 3D seismic processed and interpreted, we will be able to see the true potential of our exploration acreage and this should ensure we have the most successful equity-reduction process.

Another priority is to build-up our North Sea portfolio, especially around our existing acreage and infrastructure. We have been successful in the UK 27th Offshore Licensing Round awards and are looking for other opportunities, either where we farm in or where we pick up other properties.

Lastly, we are focusing on the cost base of the company. We have already achieved a material cost reduction by moving to cheaper offices in Aberdeen and in London.

All of Sterling Resources’ assets and its senior management are in Europe but the company is listed on the Toronto Stock Exchange. What is the challenge in raising capital in Canada while showcasing value in Europe?

We have been quoted in Canada since 1996 when we had assets in Alberta, and capital raising on the Toronto stock exchange has long been recognised as particularly well-suited to small E&P companies.

For the past few years, raising equity capital has been very challenging across the small to mid-cap quoted E&P sector, whether companies are listed in Toronto, London or elsewhere. The sector has rather fallen out of favor with investors, and companies typically trade at a significant discount to Net Asset Value. As a result, equity issuance can be highly dillutive for existing shareholders. In our case, we are very mindful of the fact that our share price reached a peak of nearly $5 less than three years ago but has fallen to around $0.70 recently.

It is extremely challenging for companies our size to attract investors in the current environment.  I believe there is a threshold of very roughly USD 1 billion of market capitalization; you need to have that type of size and you need to have a portfolio of cash-producing assets. At Sterling Resources, we are very much reliant on one asset, Breagh, thus it is critical to expand into other cash-producing assets.

People have talked about the rationalization of smaller companies for more than ten years. The fact of the matter is that investors are currently not thrilled with companies of just a few hundred million dollars market cap. In the North Sea over the next 18-24 months, I expect to see some aggregation of smaller players into the mid-cap range, although many people will point out that this has been forecasted for some time.

What are two reasons to buy shares of Sterling Resources?

Firstly, we are operating at a significant discount to our net asset value—less than half the current average of brokers’ estimates. Secondly, we do have exciting prospects, especially from the UKCS 27th Licensing round and in the Romanian Black Sea. We will move forward in Romania to de-risk the assets and limit our long-term financial exposure. We feel strongly that our share price does not begin to reflect the value of our Romanian assets. Currently, investors are understandably focusing on our risk exposure and the level of future capital expenditures. If we manage to de-risk the assets and still keep a substantial upside, I believe that the stock will start to look much more attractive, to both investors and other industry players.

In conclusion, we should finally get some value for Romania. Everyone I have spoken to and everyone on the team is very excited about the geological prospects.

How does Sterling Resources manage its partnerships? What is it bringing to the table?

We have a mixture of operated and non-operated licences; our UK Breagh field and the Cladhan development are non-operated but we operate the majority of our other licences at the exploration, appraisal and pre-development stage, which plays to our technical strengths. We have a tremendous amount of geological and operating expertise at Sterling. Together with our two main operator partners in the UK, RWE Dea and TAQA, we try to be involved in the decisions around the drilling and completion processes. For instance, we have been fully engaged with RWE Dea on plans to increase the productivity of the wells at Breagh where we are strong proponents of hydraulic stimulation.

And the license Sterling Resources obtained in the UKCS 27th licensing round is currently at a 100 percent working interest?

At the end of 2013, Sterling was awarded by the Department of Energy and Climate Change, a licence covering Blocks 42/2a, 42/3a, 42/4, 42/5 and 36/30, which are located approximately 25 kilometres north of the Breagh gas field. This provides an opportunity to explore both more traditional and new plays close to our existing Breagh infrastructure.

Sterling Resources will indeed be the operator of the licence with a 100 percent working interest. Exploitation of this licence will be far too costly for us on our own and thus we will be looking to reduce our equity interest. I am very pleased to say that we have already had a lot of interest expressed in this licence by prospective farm-in partners.

Going forward, what role do you see for juniors and medium E&P players in the UKCS?

When the bigger players get out, they do not want to sell asset-by-asset. They want to sell packages. When you are a small 200-400 million dollar market cap company, you cannot really afford these packages. Also, you don’t want to rely on one or two assets. We need to bulk up and find the right partners, the right synergies, and the right value drivers in common. These are the ingredients to build up a company to something that can deliver attractive, sustainable returns to shareholders.

What role do you see for Sterling in the coming years, and what are the resources needed in the future?

We are fairly small with around 30 full-time employees and a market capitalization of roughly 210 million dollars. For us to reach the billion-dollar threshold to which I previously referred, clearly we are going to have to do more than acquire more exploration licenses. As I have mentioned, we have some very interesting prospective acreage in the North Sea, about 25 kilometres north of Breagh.

Moreover we see many opportunities in Romania. The problem with Romania for a small company is that cash flow is projected to start in the 2019 timeframe, which does not excite investors in the near-term. For that reason we need to find something mid-term that we can develop and get some cash flow from during the 2016-2017 horizon.

In conclusion, we have a number of opportunities that will require more funding, whether that comes from additional debt once Breagh is up and running, or new equity.

Furthermore, at Sterling Resources, we have some great sub-surface expertise. It is a small enough environment right now, so that everyone knows what is going on and it is easy enough to share information. It is quite a change from the organizations I have been with in the past, which tended to be much larger. Although the technical and financial aspects are both interesting, the real challenge is to get everyone working as a team and identifying how to build value.

We will need to evaluate a broad range of organic and strategic opportunities to continue growing. Standing still is not an option. I certainly think that we could significantly increase our size in the next 18-30 months if we deliver on our current plans.

 

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