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.
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.
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.
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.
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.