CALGARY, Nov. 28, 2014 /CNW/ - Sterling Resources Ltd. (TSX-V: SLG) ("Sterling" or the "Company" and together with its subsidiaries the "Group") announces that its United Kingdom ("UK") subsidiary Sterling Resources (UK) plc ("Sterling UK") has today summoned a meeting of holders ("Bondholders") of itsUS$225 million senior secured bond with current outstanding amount of US$202.5 million (ticker on Nordic ABM exchange: STRE01 PRO) (the "Bond"), to be held on December 12, 2014 (the "Bondholder Meeting"). The purpose of the Bondholder Meeting is to allow Bondholders to vote on certain amendments (the "Bond Amendments") to the Bond agreement dated May 2, 2013 (the "Bond Agreement"), with the intention of strengthening the Group's liquidity position for the next few months while it pursues a refinancing of the Bond, potentially in combination with one or more asset sales. In the preparation stage of summoning the Bondholder Meeting, Sterling discussed the proposed Bond Amendments with many of its largest Bondholders and has received support from holders of a majority of the Bonds for these Bond Amendments.
As previously announced over the past year, the Group's net cash flow from its main asset, the Breagh gas field, has been adversely impacted by a combination of delayed production start-up, the unexpected shutdowns of the Breagh field and onshore gas plant in late 2013 and early 2014, lower than expected aggregate production from the first six wells, lower than expected UK gas prices, and increased capital expenditures compared to the outlook when the Bond was issued in April 2013. Following the successful hydraulic stimulation of the Breagh A07 and A08 wells, Sterling is confident that the lower than expected production from Phase 1 of the Breagh development can be remedied by hydraulically stimulating new wells and by side-tracking and hydraulically stimulating some existing wells. This incremental work program for Phase 1 is expected to deliver attractive economic returns. Furthermore, gas prices have recovered significantly from the lows of the second and third quarters of 2014 and the forward curve for the next few years is at a broadly similar level to today's prices.
The principal benefit to the Group of the proposed Bond Amendments is a suspension of transfers of funds into a restricted account used for debt servicing obligations (the "Debt Service Retention Account" or "DSRA") fromNovember 30, 2014 until, but excluding, April 30, 2015. The aggregate amount due under the Bond on April 30, 2015 is to be paid into the DSRA on April 30, 2015.
The current funds in the DSRA (approximately US$5.5 million) resulting from a transfer on October 30, 2014, will be used to pay an amendment fee to Bondholders in the amount of US$2.5 million (the "Amendment Fee"), with the balance transferred back to an unrestricted bank account of Sterling UK, assuming the approval of the Bond Amendments at the Bondholder Meeting and the implementation thereof. In addition, the minimum liquidity covenant under the Bond Agreement will be reduced from US$10 million to US$7.5 million on a temporary basis until and including January 30, 2015. No deferral of the scheduled semi-annual interest payment and amortization instalment on April 30, 2015, or of any other interest payments or amortization instalments to Bondholders is being made, nor are any new Bonds being issued, as a result of the Bond Amendments.
Together, the Bond Amendments are anticipated to provide incremental liquidity, reaching an amount of $32.7 million immediately prior to the interest payment and amortization instalment payment (of the same amount) to be made on April 30, 2015. The Company believes this will be sufficient to address a currently anticipated cash deficit (below the level needed to satisfy the minimum liquidity covenant under the Bond Agreement of US$10 million) of approximately US$8 million as of December 31, 2014 and US$20 million at April 30, 2015, prior to the Bond Amendments. By April 30, 2015, Sterling is confident it will have either raised the funds to meet Sterling UK's payment to Bondholders as a result of asset sale(s) and/or by refinancing the Bond, most likely via a bank market reserves-based loan.
As compensation for the Bond Amendments, Sterling UK will be required to pay the Amendment Fee to the Bondholders and provide for additional prepayments of Bonds and other payments in the event of asset sales in the following manner.
- In the event of sale of an interest in Breagh or Cladhan:
- mandatory prepayment of a portion of Bonds will be made in accordance with the original Bond Agreement;
- any excess proceeds, after deduction of fees, will be used to fund the DSRA up to the required amount of the interest payment and amortization instalment to be made on April 30, 2015; and
- in the case of a Breagh interest sale only, a small additional mandatory Bond prepayment will be made.
- In the event of sales of assets other than Breagh and Cladhan, including assets in Romania and the Netherlands:
- cash proceeds (after deduction of fees, taxes and expenses) will be used to fund the DSRA; and
- half of the net cash proceeds will be used to prepay Bonds.
All such prepayments will occur at the ruling mandatory prepayment premium as defined in the Bond Agreement (currently 6 percent, dropping to 5 percent from April 30, 2015 and dropping further during the life of the Bond). In addition, Bondholders will receive, indirectly through the Bond trustee, consent rights with respect to any sale of Breagh or Cladhan assets for non-cash consideration. Finally, the compensation offered to Bondholders includes a wider negative pledge provision over the Group's assets, certain new covenants and event of default provisions e.g. relating to the Breagh asset and additional security covering the Group's Romanian business. Such additional security will include a pledge over the Group's Romanian licences, a pledge over shares in Sterling's 100 percent owned subsidiary Midia Resources SRL, a guarantee from Midia Resources SRL and a pledge over certain receivables.
The unrestricted funds freed up by the Bond Amendments are intended to be used towards ongoing costs including Breagh-related costs, the purchase of gas price put options, other corporate costs, and as a cash buffer for the Group in the event of cost increases or reduced revenues.
Assuming approval by a two-thirds majority of Bondholders (by value) at the Bondholder Meeting, the Bond Amendments will become effective upon execution of an amended and restated Bond Agreement reflecting the Bond Amendments, promptly following the Bondholder Meeting and no later than December 22, 2014. A copy of the Bondholder Meeting summons letter is being filed on SEDAR and on the Company's website and a copy of a corporate presentation to Bondholders is being uploaded to the Company's website. These documents provide further information about the background to and full details of the Bond Amendments.
Operationally, Sterling is pleased to announce that Breagh sales gas production for the past two weeks has averaged 148 million cubic feet of sales gas per day ("MMscf/d") for 100% of the field (44 MMscf/d net to Sterling).
Jake Ulrich, Chief Executive Officer of Sterling, commented, "We believe the Bond Amendments will put the Group on a sound financial footing for the next few months. We are moving ahead with our previously announced plans to sell down assets in Romania. Additionally we are pursuing asset sales, including potentially a portion of Breagh, in the UK and a refinancing of our Bond in the bank market. When we have completed these intended transactions we believe the Group will be soundly financed for the foreseeable future, enabling us to consider other growth initiatives that will deliver value for shareholders while maintaining a significantly stronger balance sheet."
Sterling is a Canadian-listed international oil and gas company headquartered in Calgary, Alberta with assets in the United Kingdom, Romania, France and the Netherlands. The common shares are listed and posted for trading on the Toronto Stock Exchange Venture (TSX-V) exchange under the symbol "SLG".
Neither the TSX-V nor its Regulation Services Provider (as that term is defined in the policies of the TSX-V) accepts responsibility for the adequacy or accuracy of this release.
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