Sterling Energy - No longer a busted flush?

By the end of last year Sterling was looking like a busted flush. The share price had fallen to a tenth of what it used to be, as the Chinguetti field - expected to be a shot in the arm - proved flawed, and the company's cash cow natural gas operations in the Gulf of Mexico were hit by falling gas prices.

Worse, Sterling had borrowed heavily to fund its exploration programmes. Because of the fall in gas prices, it was in breach of its agreements with the banks, and was living from one emergency refinancing to the next. Without funds, it couldn't progress its exploration projects, and was getting painted into a corner - having to farm out from a position of weakness. Since it was pretty obvious that the company was in a mess, no one was going to offer a decent price for a farm-in, either - which would mean shareholders got a stingy share of the real value of the prospects.

Sterling has both production and exploration interests, but the two portfolios are quite separate. It's increasing likely, though, that it will end up as a pure explorer, since Chinguetti could be winding down, and management has now put the US gas interests - which account for 77% of production revenue - up for sale. (Production fell 13% at the interim stage.)

Chinguetti, in Mauritania, was expected to be a major producer for Sterling, and a 2008 drilling programme was originally intended to double production. However, the field has seem a steep decline in production, with increasing water production in most wells;  production rates have fallen from 16,500 bo/d to 9,500. Chinguetti was meant to move on to Phase 3 next year, which should have increased production again, but with lower oil prices Phase 3 may not be economically viable - in which case the field could be abandoned as early as 2011. ^[1] Assuming the US interests have been sold by then, that would leave Sterling with no production at all - so it desperately needs to get its exploration programmes working, and that means financing some drilling. Which gets us back to that little problem of where the money is coming from.

Fortunately, if the company hasn't actually got a 'get out of jail free' card, at least the slightly easier credit conditions this year have enabled it to refinance properly. A £62.5m placing enabled it to secure a bank waiver till February 2011 ^[2] , taking the pressure off considerably. A further £20.6m open offer is expected in a month or so. Meanwhile the placing brought in a new strategic investor - Michael Kroupeev, former director of Dana Petroleum and Sibir Energy, has taken 29.99%  of the enlarged share capital through his vehicle Waterford.

Management has also got an injection of fresh blood with new chairman Alastair Beardsall. His past experience includes stints at First Calgary and Emerald Energy, both of which were sold to bidders, ensuring good returns for shareholders. He turned round Emerald, smartened it up and sold it off - no doubt investors are hoping he can do the same for Sterling Energy. (Incidentally, he worked for Waterford as a consultant some years ago.)