SEY.L Regulatory News (SEY)

16 May 2007 07:01

Sterling Energy PLC16 May 2007 STERLING ENERGY PLC 2006 PRELIMINARY RESULTS CONFIDENT OF GROWTH Sterling Energy, the AIM listed (symbol: SEY) independent oil & gas explorationand production company operating in Africa, the Gulf of Mexico and onshore USA,today announces its 2006 Preliminary Results together with an update on progressand outlook. 2006 HIGHLIGHTS: • Revenues up 226% to $81.0 million in 2006 from $24.9 million in 2005 • Entitlement sales increased in the year by 172% to an average of 4,400 boe/d • Gross profit up 73% to $26.6 million • Net cash flow from operating activities of $62.3 million (2005: outflow $13.6 million) • Operating profit before amortisation, depletion and impairment provision was $56.2 million in 2006 (2005: $11.6 million) • Operating loss of $46.8 million in 2006 (2005: profit $3.0 million) after non-cash charge of $57.3 million for previously announced Mauritanian assets impairment provision • 2006 profit before tax and impairment provision was $13.4 million compared with restated 2005 equivalent loss of $13.3 million 2007 ACTIVITY AND OBJECTIVES • Placing to raise £26.1 million before expenses (c.$50 million) and short-term bank facility of up to $100 million completed • $145 million cash acquisition of US based Whittier Energy Corp. ("WEC") completed in late March 2007. WEC has drilled 7 successful wells so far in 2007 out of 8 drilled • WEC deal increased Group 2P reserves by over 90% to c.24.5 million boe from their end 2006 level of 12.9 million boe • Operator estimate of remaining Chinguetti 2P field reserves increased by 34% to 51 million bbls from Sterling's end 2006 total. C-18 well drilled and brought onstream • Current Group production of over 6,000 boe/d, an increase of 88% from the first quarter 2007 level of 3,200 boe/d • Record number of wells planned for in the next 12 months, with over 35 wells in the USA and at least 4 in Africa. 2007 Guinea-Bissau drilling was unsuccessful. Licence extension recently granted on Iris Marin, Gabon with commitment to exploration well • Dr Richard Stabbins to become Chairman at the AGM following the decision of Mr Richard O'Toole to retire • Current unrestricted cash of c.$35 million, undrawn bank facilities of $14 million and bank debt of $140 million • Objective is to add to producing assets and near-term developments, participate in international licences and drilling programmes that, if successful, would add materially to the Group's value Harry Wilson, Chief Executive of Sterling Energy Plc, said: "The production from Chinguetti in 2006 was disappointing, but with the $145million Whittier acquisition completed at the end of March 2007, this year hasstarted very well. We now have a stronger financial, operational and strategicbase from which to grow and I expect a sizeable increase in production cash flowover the next year. 2007 will be our most active drilling period ever and I lookforward to seeing the upside unlocked in our assets. We plan to continue ourgrowth both organically and through acquisition while recognising that thecompetitive environment requires an innovative approach." For further information contact: Sterling Energy plc (+44 1582 462 121)Harry Wilson, Chief ExecutiveGraeme Thomson, Finance Director Evolution Securities (+44 207 071 4311)Rob Collins Citigate Dewe Rogerson (+44 207 628 9571)Media enquiries: Martin Jackson / George CazenoveAnalyst enquiries: Nina Soon www.sterlingenergyplc.com Ticker Symbol: SEY STERLING ENERGY PLC 2006 PRELIMINARY RESULTS CHAIRMAN'S STATEMENT The Company has a strengthened production-driven cash flow following the $145million cash purchase of Whittier ("WEC") at the end of March 2007. It has arecord number of wells planned for the coming year and has added to an alreadystrong management team. I am proud to have seen Sterling grow from an idea intoa leading and robust AiM listed energy company with a healthy future. In 2006, sales revenues rose by 226% to $81.0 million. Gross profit was $26.6million compared with restated 2005 equivalent of $15.4 million. With theadoption of International Financial Reporting Standards ("IFRS"), Sterling hasalso commenced reporting in US dollars, which will more clearly reflect itsbusiness and its underlying performance. Entitlement sales increased in the yearby 172% to a Group average of 4,400 boe/d, following the start-up of productionin Mauritania. With the WEC deal completed, Group production is currently over6,000 boe/d. As previously described in the 2006 interims and in the release sent toshareholders in January 2007, the performance at Chinguetti was belowexpectations and a 2006 non-cash impairment provision of $57.3 million has beenmade. Since the year-end the field operator has estimated the remaining end 2006proven and probable ("2P") reserves to be 51 million bbls, 34% higher thanSterling had used in these statements. Total 2006 gross revenues from productionsales and royalties since field production commenced were $57 million in cash,with one lifting and $8.7 million to date in 2007. Operating profit before impairment provision, amortisation and depletion was$56.2 million in 2006, compared with $11.6 million in 2005. After charging thenon-cash impairment provision, depletion and amortisation, the 2006 operatingloss was $46.8 million (2005: profit $3.0 million). Sterling's net cash flow from operating activities for 2006 was $62.3 million(2005: $13.6 million outflow). The $145 million cash acquisition of WEC was completed in late March 2007. Thiswas partly funded from the proceeds of a gross £26 million (c.$50 million)equity placing to institutions and a new $100 million short term bank facilitywith Natixis. The expanded Sterling Group's current bank debt is $140 million(including $53 million in WEC), whilst available cash balances are c.$35 millionand undrawn facilities are $14 million. Sterling has undertaken to refinance itsbank debts by the end of 2007 and is currently working toward this with the keyaims of increasing flexibility and lengthening repayment. The increased Group cash flow following the WEC acquisition will enable aramp-up in the Group's drilling programme. WEC more than doubles our Group production to its current level of over 6,000boe/d and increases our 2P reserves by over 90% to approximately 24.5 millionboe at the end of the first quarter of 2007. It diversifies our productionportfolio and also brings a large number of individually small but importantexploration opportunities. WEC has historically been able to increase its reserves through the drillbit.Sterling plans 35 wells in the USA in the next 12 months, as well as seekingprospects on its increased undeveloped acreage. We welcome its management andemployees as an important part of the Sterling operations. In West Africa, at least a further four wells are expected. Work will continueon maturing the Madagascar licences, new applications and on potential purchasesof exploration, appraisal, development or production assets. We have also justbeen notified that the application to extend the Iris Marin licence in Gabonwith a commitment to an exploration well has been successful. I expect that 2007 will be Sterling's most active drilling year to date. The Group headcount is now over 80 in our offices in the UK, USA, Mauritania andKurdistan. To help facilitate growth, recruitment and retention, the offices inthe UK and the USA will shortly relocate and consolidate in the centres ofLondon and Houston. With all the changes and opportunities ahead of the Company and after over fouryears as Chairman since its listing on AiM, I have decided to stand down asChairman and not to seek re-election as a Director at the forthcoming AGM. I amvery pleased to report that Dr Richard ("Dick") Stabbins, who has been anon-executive Director since mid-January 2007, has accepted the unanimousinvitation of the Board of Directors to become non-executive Chairman at theconclusion of the AGM. Aged 63, Dick has more than 35 years technical and managerial experience of theenergy sector and public companies and owns or has options over nearly 5.5million ordinary shares. He has worked for the Saskatchewan (Canada) Departmentof Mineral Resources (1969-72), for Murphy Oil (1972 -75) and for Ranger Oil(1975-81). He was Exploration Manager and subsequently Exploration Director ofGoal Petroleum plc from 1981 until 1996. From July 2000 until its acquisition inearly 2004 by Sterling he was a Non-Executive Director of Fusion Oil & Gas plc. Dick currently manages a private energy company, Montrose Industries Ltd, whichhas interests in a wide range of energy projects in North-West Europe. He alsohas considerable private venture capital experience. He is a former Chairman(1990) of the Petroleum Exploration Society of Great Britain and a CouncilMember (2000-2003) of The Geological Society of London, whose Audit Committee hechairs. He also serves on their Investment and Remuneration Committees. I am sure he will bring fresh ideas and vigour to the Company. I know hebelieves that Sterling is well placed to continue to grow and foresees acontinuation of our strategy of adding to producing assets, near-termdevelopments and participating in international exploration which, with success,could all add materially to the Group's asset value. The emphasis will continue to be a balance between our production, which gives ahealthy cash flow and underpins net assets, and drilling discretionary higherrisk and higher reward exploration wells that could make for a substantiveuplift in value. To succeed, companies like ours need cash flow, the support ofshareholders, excellent staff and to be able to drill sufficient wells toprovide longer-term growth. I believe that we have these prerequisites. There continue to be sector consolidation opportunities but, as with assets,this is a very competitive environment, especially with oil and gas pricesremaining high. I believe our strong management is well placed to deliver on itsstrategy. I wish to thank the directors, staff, advisers and shareholders for theirsupport and efforts for Sterling and I look forward to further great success forthe Group. Richard O'TooleChairmanFor and on behalf of the Board of Directors15 May 2007 OPERATIONS REPORT United States of America Growing cash flow, increasing drilling, diversified portfolio, stronger team For the US operations, 2006 and the early part of 2007 has been a period ofchange and opportunity. The strategy of expanding from the Gulf of Mexicoshallow waters to the onshore gulf coast states has been implemented andfollowing the WEC deal, 2P reserves are currently over 120 bcfge (c.20 millionboe), with around 65% in the proven category and 80% being gas. Production is currently around 26 mmcfge/d (c.4,300 boe/d), with over halfoperated by Sterling. This compares with an average of 8.6 mmcfge/d (1,400 boe/d) in 2006, down 12% on 2005 partly due to natural decline, as well as extended pipeline shut-ins for replacement and expansion. The average life of the US assets is around 12 years, based on current production and 2P reserves after the Whittier Energy Corp. ("WEC") deal. The USA is a core area for cash flow and reserves. It is expected to add toreserves and production through the record 35 wells planned for the next 12months, to widen the scope for add-on deals and to help fund internationaloperations, including drilling. $145 million purchase of WEC completed in late March 2007 At the end of March 2007, the purchase of the issued share capital of WEC, anonshore USA, NASDAQ listed company, was completed for a cash consideration of$145 million and the assumption of its other net liabilities, including bankdebt of approximately $53 million. The cash consideration was $60 million paidfrom existing cash resources and the remainder from the Natixis bank facility,which is repayable no later than the end of 2007. This purchase materiallystrengthens the management team, more than trebles USA production, significantlyincreases and diversifies the discretionary cash flow and brings with it aportfolio of over 90 identified drilling locations and c.8,000 undevelopedacres. The average WEC production in the first quarter of 2007 was 16 mmcfge/dand that of Sterling in the USA was 8 mmcfge/d. This will lead to a considerableincrease in net production in the second quarter of 2007. WEC was an independent oil and gas exploration company headquarted in Houston.It acquired, developed and exploited properties located in three core areas;South Texas, Permian Basin and the Texas/Louisiana onshore Gulf Coast.Acquisitions made by it in 2006 added acreage in Mississippi and East Texas. Itoperates nine fields in Texas, three in Louisiana and one in Mississippi and hassignificant non-operated interests in these core areas. With a staff of 27, ithas an active technical team that generates exploitation and explorationprojects, which are typically drilled with industry partners, as well asparticipating in the projects generated by others. WEC currently has anexperienced team of engineers, geoscientists and landmen, a significant databaseof 3-D seismic, over 27,000 gross undeveloped acres (8,000 net acres) underlease and a portfolio of over 90 probable or possible 3D supported exploitationand exploration targets. For 2006 it recorded a net profit of approximately $10million on sales of approximately $43 million. It has hedged approximately 65%of its expected production from its proven reserves for over 30 months. In 2006, WEC's average production was 16 mmcfe/d and at the end of the year ithad approximately 48 bcfge (8 million boe) of proved reserves and some 24 bcfge(4 million boe) of probable reserves. Its results will be included in those ofSterling from the date of its acquisition in March 2007. WEC was formed in 1991 with various non-operated oil and gas interests. In 2002/3 it completed four purchases of operated interests for c.$7 million and becamepublicly traded. WEC completed four acquisitions during 2004 and in April 2005acquired RIMCO Production Co. for $55 million. In this acquisition, it acquiredworking interests in 116 active wells and one unit, in 18 producing fieldsprincipally located in Texas and Louisiana, adding 24 bcfge in proved reservesand 8 mmcfge/d of production. This also provided an enhanced technical team withthe ability to generate new prospects and a team of landmen. It also brought asignificant number of prospects targeting over 80 bcfge of non-proved resourcepotential, added the ability to drill prospects and generate additionalopportunities. During 2006, WEC completed two further purchases for $30 million.In January 2007, Sterling announced its recommended offer for WEC whichcompleted in late March. The integration of the two offices into one downtown Houston office is underwayand expected to be completed in the third quarter, with a combined staff of some40 professionals. In addition to adding 2P reserves at the date of acquisition of over 70 bcfge(over 11 million boe), WEC also brings contingent resources (possible andexploration) of nearly 48 bcfge (c.8 million boe), nearly doubling those in theUSA portfolio. In 2006, WEC drilled 36 onshore wells with a success rate of 83%. Drilling and exploration activity in 2006 and to date in 2007 Due to the huge increases in offshore drilling and related costs, a concertedeffort was made to grow the portfolio with onshore targets. Some of the moreexpensive offshore wells have been postponed due to cost considerations. Aprogramme of liftboat work was completed and a total of five wells were drilledin the USA by Sterling in 2006, two offshore and three onshore, with three beingbrought onstream as producers. Reserve additions were not sufficient to offsettotal production and other adjustments and so year-end 2006 2P reserves were 54bcfge, down 5% from the end of 2005. In April 2006, a well on the Gryphon field (C-3: 7.5% ORRI) was drilled at nocost to Sterling and brought onstream. This field averaged 2.4 mmcfge/d in 2006,second only to the Mustang/Matagorda Island areas which averaged 4.0 mmcfge/d. Late in 2006, Sterling committed to the Three Counties drilling programme in aprolific part of the fractured Austin Chalk producing trend in Texas, adding upto 25 potential well locations. This is a low risk horizontal drilling playwith the potential to target up to 25 bcf of net reserves additions. Drillingof the first deviated well commenced in early April 2007 and the first well (55%WI) is nearing its target depth of around 12,000 ft. The Galveston 303 #7 well (17.36% WI) encountered 50 feet of gas pay. This wellhas been completed and will be online in the second quarter of 2007. Additionalmapping will be required to assess the positive impact of this completion. The small Galveston Bay 251-5 well (28% WI) in the inland tidal waters, wassuccessfully completed in 2006. The small onshore prospect, Andrew (29.6%WI) andhigh risk North Theall (40% WI) exploratory wells were unsuccessful, bothencountering gas but not in economic quantities. A conditional farmout on HighIsland 52 may lead to a well being drilled in 2007 at no cost to Sterling forits 2.85% ORRI. In 2007 Sterling has also participated in the c18,000 ft Brown 1 well ("ThunderStud") and which has reached target depth, has recently been logged and is beingevaluated. To date in 2007, WEC has participated in the drilling of nine wells with sevensuccessful, one dry hole and one currently being evaluated. Five wells were drilled on the royalty acreage in Zapata County, Texas (12.5% -25% NRI). With the active drilling programme experienced since 2006, thisroyalty acreage now accounts for over 3 mmcfge/d of net production. WEC also participated in the successful drilling of its first well in McMullenCounty, Texas (33% WI). The well is being prepared to be on production by theend of the June. Sterling has over 4,000 gross acres leased here and there isthe potential for multiple offsets to this first well. An exploratory well in the East Lake Arthur area near Lafayette, Louisiana (67%WI) was drilled. A secondary interval at c.10,000 ft was tested at rates inexcess of 1 mmcfd. Facilities are being constructed and preparations for apipeline hook-up. A development well has been drilled on the operated Rayne field: a secondaryobjective is to be tested. A well in Jackson County, Texas was abandoned. Expansion of Mustang Island Facilities The North Mustang Island gathering system and facilities were significantlyexpanded to handle larger volumes of oil and gas for both Sterling and thirdparties towards the end of 2006. This project was mainly paid for by a customerbut Sterling retains full ownership of the facilities and gathering system. In2006 the third party pipeline income rose 19% to $2.5 million. In the firstquarter of 2007 it has risen further to approximately $0.25 million per month. An exciting 2007 With a greatly expanded and diversified reserve base, increased cash flow and anextensive drilling programme, the USA operations will be very active. Internalprospect generation will be a key focus, adding drilling opportunities which maybe sold on a promoted basis where beneficial. Activity will also focus on themanagement of the asset portfolio, with efforts focused on materialopportunities. Africa and Middle East Mauritania Recent positive news after 2006 reserve downgrade As previously announced in both the interim report in September 2006 and in thecircular and announcement setting out the WEC offer dated 18 January 2007, theperformance of the Chinguetti field has disappointed. As stated in the Januarycircular, a report by an independent petroleum engineering consultant, RISC, setout an ultimate field 2P reserve estimate of 50 million bbls assuming a further3-4 development wells and contingent resources of a further 18 million bbls.They valued Sterling's Mauritanian assets at $87-121 million and using their 2Preserves indicated a fall of 64% from the end 2005 ultimately recoverable fieldreserve estimate. The key reason for the decline is that the recoverability perwell is much lower than had been forecast as the complex field is more faultedand compartmentalised than the operator had originally estimated. Based on the RISC report on the Mauritanian assets, as well as taking intoaccount factors such as risks, performance, oil prices and significantuncertainties on this and other possible future developments, the Board has madea non-cash impairment provision against the Mauritanian assets in 2006 of $57.3million, writing them down in the Sterling financial statements to the low endof the RISC valuation, being $87.0 million. Sterling has two economic interests in the Chinguetti development. The first isthrough the Funding Agreement with the Mauritanian Government, signed inNovember 2004, which enabled the Government to participate directly in theChinguetti development through Societe Mauritanienne des Hydrocarbures ("SMH").In 2006, Sterling had 6 liftings, selling its entitlement of 0.9 millionbarrels and realising $57.4 million of revenue, at an average price of $61/bbl.Cumulative net cost under the Funding Agreement to the end of 2006 was $114million, with a further $24 million principally for the 2004 signature bonus andother related costs. A total of $46 million was also paid for the purchase of Sterling's secondinterest, being royalties from the 2003 purchase of Fusion Oil & Gas plc. Anagreement with Premier Oil, covers any production from a 3% interest in PSC A,a 6% interest in PSC B (with a 5.28% interest in Chinguetti). These are asliding scale royalty at a rate linked to realised oil (or gas) prices. In 2006,Sterling received royalties of $3.8 million at an average royalty rate of $7.7/bbl. The Chinguetti field, Mauritania's first oil field development and Sterling'sfirst African production, came onstream in February 2006. Production rapidlyclimbed towards the field operator's (Woodside) target of up to 75,000 bopd.Water injection and gas lift, together with gas injection into the Banda gasfield, were all brought online in the first two months of production.Unfortunately, oil production quickly began to decline due to high gasproduction and lack of pressure support from the water injection. Closemonitoring of the field indicated that the reservoir structure was far morecomplex than expected. In particular it was more faulted and economicallyproducible reserves were therefore significantly lower. In June 2006, the PSC contracts in four offshore blocks, including theChinguetti area, were re-negotiated as part of the resolution of a disputebetween the partners and the government over amendments signed in 2005. Thisincluded a reduction of the cost oil ceiling rate of the Chinguetti field from60% to 50% during each quarter when the field crude oil market price equals orexceeds $55/bbl. The partners also paid a $100 million Chinguetti project bonusto the Government - this did not involve either SMH or Sterling making apayment. Field production fell to an average of just over 41,000 bopd for the secondquarter of 2006 and the decline continued throughout the rest of the year. Withproblems on the FPSO and in re-starting various wells after shut-downs, thefield production ended 2006 at just under 30,000 bopd, bringing the average forthe period since production started to 35,100 bopd. The total field productionin 2006 was 10.9 million bbls. At the end of 2006 and based on the RISC report,remaining 2P field reserves were estimated at 39.4 million bbls and net toSterling they were 4.0 million bbls. Production in the first quarter of 2007 was 18,300 bpd and the cumulative fieldproduction by the end of March was 12.5 million barrels. The Chinguetti 18development well spudded in late December 2006 and, despite some problems withthe completion, successfully reached its target and came onstream in March 2007.In April, production was estimated at 17,500 bpd with restrictions arising froma subsea equipment maintenance programme and operational problems, including aplug failure in well C-14. Sterling has had one 2007 lifting, in February,which, together with the royalty payment received, totalled $8.7 million. The Operator continues to study ways to optimise future production and reserverecovery. A 2007 seismic campaign to acquire high resolution 3D and 4D data hasbeen completed. This will be processed and interpreted through the year in orderto optimise field recovery and economics. It is then expected that an additional3-4 development wells will be drilled in 2008, with the timing to be decided andwith a modified completion format. Since the year-end there has been some encouraging news, with the field operatorestimating remaining end 2006 field 2P reserves at 51 million bbls, 34% higherthan RISC had estimated in its report. The operator indicated that there couldalso be further development phases with associated field reserves, currentlyclassified as contingent resources, of a further 28 million bbls. A recentdisposal of an interest in the field and adjacent licences has also indicated apotentially higher value than used in the financial statements for 2006. Tiof discovery Development plans for Tiof (also known as Oualata) have been delayed butSterling is hopeful that a field development plan will be proposed this year.Although this field falls outside the Funding Agreement, Sterling will benefitif it utilises the Chinguetti FPSO and related facilities, whilst paying nodevelopment costs. Furthermore, under the Royalty Agreement, Sterling willreceive production royalties and may receive a $2 million development bonus. A tension leg platform is the expected development approach, tied back toChinguetti for an initial estimated 40-60 million bbl development. First oilcould be up to 50,000 bopd in 2010/11. Subsequent satellite developments of further reserves, most notably at Tevet,could be made, depending on field performances Any such further development using Chinguetti's facilities would benefitSterling through the sharing of facilities and the ability to economicallyproduce otherwise marginal reserves. Other Discoveries and Exploration The prospects for an LNG development using Banda and other gas discoveries,remains dependent on the outcome of drilling elsewhere in Mauritania, marketneeds, technology and licence terms including clarification of the gas fiscalregime. There are no plans for exploration in either PSC A or B areas in 2007. Madagascar Sterling has a 30% WI in two blocks totalling approximately 25,500 sq km in thenorthern offshore area. ExxonMobil is a 70% partner in both blocks: in thesmaller Ampasindava PSC, it became operater in October 2006, whilst Sterlingremains operator on the Ambilobe PSC. During 2006, the acquisition and processing of over 4,000km of new 2D seismic,plus the reprocessing of over a further 4,000km of vintage 2D seismic, tookplace. This provides a modern processed regional seismic dataset covering bothblocks, which will be used for prospect generation. Initial interpretation of seismic data shows that both blocks contain some largestructures and the current focus is to further evaluate these. In the comingyear or so, exploration of this unexplored frontier region is expected to entera new phase; ExxonMobil and its partners in the Majunga PSC (adjacent to theAmpasindava PSC) are reportedly planning the first deepwater exploration well,subject to rig availability and other considerations, in 2008. During 2006, ExxonMobil and Sterling jointly entered the second explorationperiod in both blocks, with the pre-requisite relinquishment of 25% of thelicence areas. The Ambilobe PSC is now 15,600 sq km and the Ampasindava PSC is9,860 sq km. Under the conditions of the farm-in by ExxonMobil in July 2005,Sterling's 30% interest in the licences will be carried through an explorationwork programme that, subject to certain milestones being achieved and afinancial cap on the carry in each block, includes 2D and 3D seismic acquisitionand the drilling of up to two wells per licence. With the significant increasein drilling and other costs since then, Sterling currently estimates that thiswould cover it for all costs up to and including part of any well costs. The Ambilobe and Ampasindava PSC's are an exciting cornerstone of Sterling'sexploration portfolio. The integration of the results of the new seismic datawith existing information will provide invaluable insights into the potential ofthis region. This will facilitate high-grading of areas for 3D seismicacquisition in late 2007/early 2008. Gabon Sterling operates two shallow water permits in southern Gabon, Iris Marin(38.57% WI) and Themis Marin (20.57% WI), as well as the Ibekelia TechnicalEvaluation Area (40% WI). Themis Marin exploration well in third quarter2007 In Themis Marin a detailed 3D PSDM imaging and processing project was completedduring 2006. Data has been interpreted and integrated with regional studies togenerate a prospect portfolio, from which a clearly defined prospect at thesub-salt Gamba formation level has been approved by partners for drilling. Planning for an exploration well to drill this prospect in the third quarter of2007 is well advanced. The Gamba formation reservoir produces at the nearbyEtame field and its surrounding satellite fields. Sterling will be carried for18% of its 20.57% working interest and hence will pay only 2.57% of the wellcosts. Iris Marin: permit extension granted In Iris Marin, an intensive 3D PSDM project is in the final stages ofcompletion. A number of good prospects have been identified and are underevaluation. An application was made in early 2007 to take the licence into athird term and commit to drilling an exploration well, which has very recentlybeen granted. The Iris Iboga Marin No 1 (IIBM-1) well, drilled by Sterling in2005 to 2,035 metres, penetrated over 30 metres of excellent reservoir-qualitysub-salt Gamba sandstones in the area. In the year Sterling increased its interest in this permit by 18% to 38.57%. In Iris Marin and in the neighbouring Ibekelia area, also operated by Sterling,a 7,100 line km aeromagnetic survey has been completed in 2007. The data wasacquired as part of an ongoing regional evaluation. The Ibekelia TEA agreementcovers a 673 sq km area which is contiguous with the Gamba and Olowi oil fieldsand with Sterling's existing licences. At the end of the evaluation term thereis an option to convert to a full Production Sharing Agreement. Guinea-Bissau Two high risk exploration wells abandoned: interest in permit acquired Sterling holds a 5% working interest in the Sinapa and Esperanca licences. Plansfor the further appraisal of these licences awaits the detailed evaluation ofthe results of the two high-risk 2007 exploration wells drilled on the Esperancapermit, which were abandoned. After the first of these wells, Sterling exercisedits option to acquire a 5% WI in Esperanca at no cost and is liable for itsshare of the costs of the second well from the date it exercised its option. Cameroon Border dispute: licence still suspended The financial obligations and work programme for the Ntem concession area (100%WI) are currently suspended due to a dispute between Cameroon and EquatorialGuinea over their maritime borders. Both countries are working together toresolve the dispute. Sterling had planned to farm-out this licence for drillingand it continues to attract a good level of industry interest. The award inlate-2004 by Equatorial Guinea of a licence to the South of Ntem overlapping upto 20% of the licence has delayed this drilling plan until the situation isresolved. Sterling remains committed to assisting in the resolution of thedispute in the interests of all parties. AGC Dome Flore Exploration well planned for late 2007 The Dome Flore concession lies within the AGC, a joint exploration zone betweenSenegal and Guinea Bissau. Sterling holds a 30% WI: Markmore, a Malaysiancompany with interests in bitumen refining, is the operator. An exploration well to drill two stacked Miocene light oil targets in late 2007,is being planned, dependent on rig availability. The shallower heavy oilaccumulation will also be penetrated by this well and the interval cored toevaluate the heavy oil potential. The heavy oil deposits on Dome Flore and DomeGea contain an estimated 0.8 to 1 billion barrels in place. Sterling share ofdrilling costs will be carried through this exploration well. Kurdistan, Iraq Steady progress being made In February 2006, Sterling signed a Memorandum of Understanding ("MOU") with theOil, Gas & Petrochemical Establishment of the Kurdistan Regional Government ofIraq ("KRG"). This provided exclusive rights for the company to carry outgeological studies and negotiate a full Production Sharing Contract (PSC) for anexploration block in Kurdistan, a largely unexplored area of high potential. Sterling is working closely with the KRG to convert the MOU into a PSC and hasfollowed the progress made as the central and regional authorities seek toclarify the energy legislation. With an office in Erbil, the capital ofKurdistan, and a local General Manager overseeing its business activities,Sterling is committed to widening its activities in the region. This has thepotential to become a significant new core area for Sterling. FINANCIAL REPORT AND OUTLOOK Adoption of IFRS and reporting in US$ The results of the Sterling Group for 2006 have been prepared, for the firsttime, in accordance with International Financial Reporting Standards ("IFRS")which AiM companies are required to adopt no later than the financial reportingperiod commencing on or after 1 January 2007. As a result, the 2005 comparativefigures have also been restated. The accounting polices adopted by the Group andthe impact of the move from UK GAAP to IFRS for the previously audited 2005financial statements, including quantification of the main accountingdifferences, are set out in the attached statements. At the same time, Sterling has adopted the US dollar as the reporting currencyof the Group with effect from 1 January 2005. The Board believes that byreporting in US dollars the accounts will provide a clearer representation ofthe underlying transactions which are predominantly carried out in US dollars.These changes have required a very considerable amount of additional work andcost. Revenue up 226% to $81.0 million in 2006 Revenue increased by 226% to $81.0 million in 2006 (2005: $24.9 million),largely reflecting the start-up of production from the Chinguetti field. Revenuefrom Chinguetti was $57.6 million, net of the cost of related settlements ofhedge contracts crystalising of $3.7 million and including the royalty income of$3.8 million. The average cargo sale price was $61.10/bbl (an average discountto Brent of $5.97/bbl) before deductions of $3.89/bbl for the hedges. In the US, the average realised price achieved was approximately $6.73/mcfge(2005: $6.39/mcfge), an increase of 5%. Third party income fromSterling-operated pipelines rose 19% to $2.5 million (2005: $2.1 million),before related costs. The Group's share of barrels lifted from the Chinguetti field in 2006 totalled0.9 million barrels, which when added to the entitlement from the royaltystream, added an average of 3,030 bpd to average sales for the year. USAproduction decreased by 12% to an average of 8.6 mmcfge/d, (2005: 9.7 mmcfge/d),with 83% being gas (2005: 82%). Cost of sales rose significantly to $54.4 million (2005: $9.5 million), thisincrease principally reflecting production from the Chinguetti field. Averagecost of sales for the Chinguetti field liftings was $40.40 /bbl, of which $7.90/bbl related to production costs and $32.50 /bbl to depletion charges. For theUS operations, the average unit cost of sales was $4.48/mcfge (2005: $2.87/mcgfe). Of these costs, direct production costs rose markedly as a result ofincreases in insurance, ad valorum taxes and platform maintenance costs to $2.30/mcfge (2005:$1.34/mcfge). The higher depletion charge of $2.18/mcfge (2005:$1.53/mcfge) resulted mainly from higher projected development and abandonmentcosts and reserve adjustments. Gross profit increased by 73% to $26.6 million in 2006 from $15.4 million in2005. Operating profit in 2006 was $13.2 million (2005: profit $6.0 million), before anon-cash impairment provision of $60.0 million (2005:$3.1 million). Of thisprovision, $57.3 million arose in 2006 from the Mauritanian assets for thereasons noted above. There was also a USA impairment provision of $2.7 millionagainst producing interests under the new IFRS requirements. Pre-licence costsof $1.4 million were incurred in 2006 and are now required to be immediatelyexpensed (2005: $0.7 million). With the increase in the scale of operations, administrative expenses rose by83% to $12.0 million ($2005: $6.6 million). This increase reflects the full-yearimpact of the expansion of the UK technical, commercial and support staff to runthe African operations, which includes the Mauritanian production start-up.Sterling operates over half of its production in the USA and is operator inGabon, Madagascar and Cameroon. The 2006 costs included a $1.9 million (2005:$1.8 million) charge in respect of the fair value of outstanding share options. Interest revenue from cash deposits, less finance costs on the US bank loan anddecommissioning provisions, were a net cost of $0.1 million (2005: income $1.3million). Under IFRS, the product price hedge contracts maturing in 2006 and in2007 are "marked to market" resulting in a gain of $0.3million in 2006 (2005:$20.7 million loss). A taxation credit of $6.1 million arose in 2006 (2005: $4.4 million credit). Fully diluted loss per share, which reflects the potentially dilutive impact ofoptions and the impairment provisions, was 2.75 USc per share (2005: 0.86 UScloss). Net cash flow from operating activities in 2006 of $62.3 million The 2006 cash inflow from operating activities of $62.3 million compared with anoutflow in 2005 of $13.6 million, the increase reflecting the impact of theChinguetti production. Net cash of $48.1 million was used in investingactivities (2005: $80.2 million), of which $34 million was for the Chinguettifield compared with $65 million in 2005. Other cash capital expenditures wereprincipally $13 million related to the Gulf of Mexico. At the end of 2006, unrestricted cash balances were $86.7 million (2005: $13.1million) and a further $5.0 million was for restricted uses in the USA forabandonment of fields (end 2005 a total of $69.0 million was for restricted usesrelated to Chinguetti and in the USA). At 31 December 2006 USA bank loan drawn was $23.2 million (2005: $27.3 million).At the end of 2006 current assets less current liabilities were $73.4 millioncompared with $43.4 million at the end of 2005. Principally as a consequence of the impairment provisions made, Sterling'sequity shareholders' funds fell to $223.6 million at the end of 2006 (2005:$260.0 million). Outlook Since the end of 2006, Sterling has completed the $145 million WEC purchase.This was funded with approximately $60 million of cash and $85 million from asecured Group short term loan with Natixis. A share placing in January 2007raised a gross total of £26.1 million at 16p per share and in January theyear-end USA bank loan of $23.5 million was repaid in full. Currently, unrestricted cash balances total approximately $35 million withundrawn bank facilities of US$14 million. Total bank debt of the enlarged Groupis approximately $140 million, of which $53 million is drawn under the facilityassumed with the WEC purchase and $87 million is under the short-term loanrepayable by the end of 2007. Sterling intends to refinance this debt,increasing its term and flexibility. With a greatly increased discretionary cash flow and 2P reserve base in the USAassets following the WEC deal, Sterling intends to drill a record number ofexploratory and development wells in the USA in 2007. In Africa, Chinguetti cashflow is largely expected to be used to fund further development drilling in2008, whilst the majority of other committed costs are carried by third parties. New ventures continue to be sought to increase the pace of exploration drillingand to expand the upside in the portfolio, as well as additional production and/or development interests to extend the production profile. Sterling is well placed to increase its production cash flow though 2007 and toadd to its reserves and upside potential through an increased pace of drilling. PROVEN AND PROBABLE RESERVES (4) Volumes (1) Oil Gas Entitlement Reserves ('000 (million ('000 barrels barrels) cubic feet) equivalent) At 1 January 2006 13,083 49,124 21,270 Acquisitions (2) 3,436 573 Upwards revisions (2) 956 160 Downwards revisions(2) (6,620) (4,617) (7,390) Production (1,266) (2,595) (1,699) At 31 December 2006 5,197 46,304 12,914 a. Location of Reserves The geographical location of the end 2006 reserves were: North America 1,245 46,304 8,962 West Africa 3,952 0 3,952 b. Categorisation of proven and probable reserves: 1. At the start of the year: Proven reserves 70% 58% 65% Probable reserves 30% 42% 35% 2. At the end of the year: Proven reserves 60% 55% 57% Probable reserves 40% 45% 43% NOTES 1. The proven and probable reserves movements in 2006 are t abased on: a. North America: evaluation reports by independent petroleum engineer's as of 1 September 2006 for the offshore assets and as of 31 December 2006 for the onshore acquisition, with certain downward or upward adjustments by the directors for the offshore assets at the year-end where, in their opinion, subsequent performance of assets, or further evaluation through drilling or workovers or through the impact of changes in prices or costs, justifies adjustments. b. West Africa: the reserves are based on an independent petroleum engineer's evaluation of the Chinguetti field as of 31 December 2006, arising from its overriding royalty interest and from its funding to SMH (formerly GPC), rather than by direct ownership in the interest in the field. 2. The downward oil revision relates to the Chinguetti field reserves and is based on the report in 1 above. Gas revisions principally relate to drilling, workovers, installation of additional compression and other facilities, reprocessing of seismic data, well control and production history in the USA. The major downward gas revisions relate to a well on the Mustang Island properties. The oil additions relate to the Three Counties project onshore Texas. 3. Sterling has not booked reserves in West Africa relating to other Mauritanian or AGC discoveries, on the basis that there are no firm development plans. 4. Definitions: Proven reserves have a 90% level of confidence that the stated quantities will be equalled or exceeded. Probable reserves have a 50% level of confidence that the stated quantity will be equalled or exceeded. Oil includes condensates. STERLING ENERGY SCHEDULE OF MAIN INTERESTS AT31 DECEMBER 2006 Location Size Licence Sterling Working Sterling Net Operated/ (km(2)) Name Interest % Revenue Interest % Non-operatedAfrica Mauritania Offshore 6,969 PSC A n.a Sliding scale royalty over 3% Offshore 8,095 PSC B n.a Sliding scale royalty over 6% (except 5.28% of the Chinguetti Field, plus an economic interest of approximately 9% in the FieldAGC Casamance-Bissau 1,699 Dome Flore 30%* n.aCameroon Southern Douala 2,319 Ntem 100% n.a Operator BasinGabon Southern Gabon 673 Ibekelia (TEA) 40% n.a Operator Southern Gabon 607*** Iris Marin 38.57% n.a Operator Southern Gabon 911 Themis Marin 20.57% (pay 2.57% n.a Operator of next well)Guinea-Bissau Casamance-Bissau 2,349 Sinapa 5% n.a Casamance-Bissau 3,491 Esperanca 5% ** n.aMadagascar Offshore NW 15,600 Ambilobe 30%* n.a Operator Offshore NW 9,860 Ampasindava 30%* n.a USA: offshore Mustang Island Mustang Island 90-100% 90-100% Operator Texas Coast Gathering System Texas State 48.9 Mustang Island 12.5-100% 9.4-82% Operator Waters Texas State 21 Matagorda 42-75% 36.6-59.5% Operator Waters Island Texas Federal 50 High Island 7.5% overriding 7.5% royalty in Operator Gryphon, Waters (incl 52 and royalty in Gryphon, otherwise 42.3-83.33% Gryphon) otherwise 50- 100% Texas Federal 23 Galveston 15.75-17.4% 10.7-11.3% Waters (incl 303) Louisiana 20 Eugene Island 60% 45% Operator Federal Waters (incl 268) Texas State 5.82 Galveston Bay 28% 20% Waters (incl ST 2515)USA: onshore Texas 101 Three Counties 22.5-55% 17-42% Austin Chalk Louisiana 16.5 Brown / 15% 10.8% Operator Thunder Stud Whittier Texas 64.3 SE Texas 3-D 17.9% 12.8%onshore Project Areafrom endMarch 2007 6.8 Windham 71.3% 53.5% Operator 6.9 Carthage 70.8% 53.1% Operator 9.1 Westhoff 75% 57.2% Operator 8.2 Sunrise 12.5-25% NRI 12.5-25% NRI Louisiana 13.25 Rayne/Crowley 30% 22% Operator 1.6 Cut-Off 75% 56% Operator * carried interest ** option *** size reduces in for defined work or exercised Apr 3rd term from 2007 $ amount 2007 onwards Definitions 2P - proven and probablebbls - barrels of oilbcf - billion cubic feet of gasbcfge - billions of cubic feet gas equivalentboe - barrels of oil equivalentbopd - barrels of oil per daymcf - thousand cubic feet of gasmcfge/d - thousand cubic feet of gas equivalent per daymmbbl - millions of barrelsmmcfg/d - million cubic feet of gas per daymmcfge/d - millions of cubic feet of gas equivalent per dayNRI - net revenue interestORRI - overriding royalty interestWI - working interest Consolidated income statementYear ended 31 December 2006 2005 2006 restated Note $'000 $'000 Revenue 81,003 24,879 Cost of sales (54,419) (9,509) Gross profit 26,584 15,370 Administrative expenses (12,027) (6,564)Impairment provision 4,5,6 (60,033) (3,072)Pre-licence exploration costs (1,368) (659)Office closure costs - (2,098) Operating (loss)/profit (46,844) 2,977 Interest revenue and finance gains 3,082 3,366Gain/(loss) on hedging instruments 303 (20,729)Finance costs (3,201) (2,026) Loss before tax (46,660) (16,412) Tax 2 6,101 4,370 Loss for the financial year (40,559) (12,042) Attributable to minority interest 1,981 - Loss attributable to equity holders of parent company (38,578) (12,042) Loss per share (cent): basic and diluted 3 (2.75)USc (0.86)USc Consolidated statement of recognised income and expense 2005 2006 restated Note $'000 $'000 Exchange differences on translation of foreign operations 9 2,363 (2,670)Movement on share option reserve 9 1,898 1,802Movement on value of investment in quoted company 9 (2,287) 7,026 Net income recognised directly in equity 1,974 6,158 Loss for the financial year (40,559) (12,042) Total recognised income and expense for the year (38,585) (5,884) Attributable to:Equity holders of the parent (36,604) (5,884)Minority interests (1,981) - (38,585) (5,884) Consolidated balance sheetYear ended 31 December 2006 2005 2006 restated Note $'000 $'000Non-current assetsIntangible royalty assets 4 18,000 42,149Intangible exploration and evaluation assets 5 21,384 26,660Property, plant and equipment 6 156,800 201,954Investments 5,922 8,209 202,106 278,972 Current assetsInventories 3,713 -Trade and other receivables 13,863 10,409Current tax repayable 1,248 -Cash and cash equivalents 91,759 82,033 110,583 92,442 Total assets 312,689 371,414 Current liabilitiesTrade and other payables (32,182) (41,877)Derivative financial instruments (4,650) (4,953)Current tax liabilities (299) (2,242) (37,131) (49,072) Non-current liabilitiesLong-term debt (23,214) (27,325)Deferred tax liabilities (6,128) (10,974)Long-term provisions 7 (22,593) (22,080) (51,935) (60,379) Total liabilities (89,066) (109,451) Net assets 223,623 261,963 EquityShare capital 8 26,919 26,899Share premium account 9 273,785 273,560Share option reserve 9 6,451 4,553Investment revaluation reserve 9 4,739 7,026Currency translation reserve 9 (307) (2,670)Retained earnings 9 (87,964) (49,386) Equity attributable to equity holders of the parent 223,623 259,982 Minority interest - 1,981 Total equity 223,623 261,963 Consolidated cash flow statementYear ended 31 December 2006 2005 2006 restated Note $'000 $'000 Operating activities:Cash generated/(absorbed) by operating activities 10 63,017 (13,318)Taxation paid (767) (331) Net cash flow from/(used in) operating activities 62,250 (13,649) Investing activities:Capital expenditure (51,191) (83,518)Interest received 3,082 3,306 Net cash used in investing activities (48,109) (80,212) Financing activities: Net proceeds from issue of ordinary shares 245 1,851Long-term loan repayment (4,111) -Interest paid (1,648) (1,264) Net cash flow (used in)/from financing activities (5,514) 587 Net increase/(decrease) in cash and cash equivalents 8,627 (93,274) Cash and cash equivalents at beginning of year 82,033 171,939 Effect of foreign exchange rate changes 1,099 3,368 Cash and cash equivalents at end of year 91,759 82,033 1. a) Basis of accounting The preliminary results announcement has been prepared in accordance withInternational Financial Reporting Standards ("IFRSs") and under the historicalcost convention. The information for the comparative period has been restatedfrom a UK GAAP basis contained in the statutory financial statements for theperiod, with a summary of the effects being represented in note 13 below. The financial information set out above does not constitute statutory accountswithin the meaning of section 240 of the Companies Act 1985. Statutory accountsfor 2005 have been delivered to the Registrar of Companies, and those for 2006will be delivered following the Company's Annual General Meeting. The statutoryaccounts for 2006 were approved by the Board on 15 May 2007. The auditors havereported on the accounts for both 2005 and 2006; their reports were unqualifiedand did not contain statements under s237(2) and (3) of the Companies Act 1985.Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with IFRSs, this announcement does not itselfcontain sufficient information to comply with IFRSs. The Company expects topublish full financial statements that comply with IFRSs in its annual reportand accounts 2006. This preliminary announcement was approved by the Board on 15 May 2007. 1. b) Geographical segments The group operates in one business segment; the exploration for and productionof oil and gas. The group currently has interests in two geographical segments;North America, and Africa. Segment information about the business is presentedbelow. North America Africa Total INCOME STATEMENT 2006 2005 2006 2005 2006 2005 $'000 $'000 $'000 $'000 $'000 $'000 Revenue 23,441 24,879 57,562 - 81,003 24,879 Cost of sales (14,380) (9,509) (40,039) - (54,419) (9,509) Gross profit 9,061 15,370 17,523 - 26,584 15,370 Impairment provision (2,653) (322) (57,380) (2,750) (60,033) (3,072)Pre-licence exploration costs - - (1,368) (659) (1,368) (659) Segment result 6,408 15,048 (41,225) (3,409) (34,817) 11,639 Unallocated corporate expenses (12,027) (8,662) Operating (loss)/profit (46,844) 2,977Interest revenue and finance gains 3,082 3,366Gain/(loss) on hedging instrument 303 (20,729)Finance costs (3,201) (2,026) Loss before tax (46,660) (16,412)Tax 6,101 4,370 Loss for the financial year (40,559) (12,042) Attributable to minority interest 1,981 - Loss attributable to equity holders (38,578) (12,042)of parent company Corporate assets North America Africa Total 2006 2005 2006 2005 2006 2005 2006 2005 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000OTHER SEGMENTINFORMATIONCapital additionsProperty, plant and 307 742 8,375 15,319 14,223 105,012 22,905 121,073equipmentE&E expenditure - - 2,972 608 2,555 943 5,527 1,551 Depreciation and (233) (175) (7,338) (5,338) (35,407) - (42,978) (5,513)amortisationImpairment provision - - (2,653) (322) (57,380) (2,750) (60,033) (3,072) BALANCE SHEET Segment assets* 88,515 82,253 97,461 93,620 126,713 195,541 312,689 371,414 Segment liabilities (11,426) (9,691) (53,443) (53,102) (24,197) (46,658) (89,066) (109,451) * Carrying amount of segment assets exclude intra-group financing. 2. Taxation The group tax charge comprises: 2006 2005 $'000 $'000 Current tax (credit)/charge (1,255) 2,141Deferred tax - origination and reversal of timing differences (4,846) (6,511) Total credit (6,101) (4,370) The difference between the tax credit of $6,101,000 (2005 - credit of$4,370,000) and the amount calculated by applying the applicable standard rateof tax is as follows: 2006 2005 $'000 $'000 Loss on ordinary activities before tax (46,660) (16,412) Tax on loss on ordinary activities at standard (15,864) (5,580)US corporation tax rate of 34% (2005: 34%) Effects of:Expenses not deductible for tax purposes (1,654) 9,684Capital allowances lower than/(in excess of) 15,840 (985)depreciationOther temporary differences 395 (1,042)Difference in non-UK/US tax rates 1,364 7Adjustment for tax losses 47 (7)Adjustment in respect of prior years (1,383) 64Deferred tax credit (4,846) (6,511) Tax credit for the year (6,101) (4,370) During 2006 and 2005 the Group generated its results primarily in the US.Therefore the tax rate in the above reconciliation for 2006 is the standard ratefor US corporation tax. 3. Loss per share The calculation of basic and diluted loss per share is based on the loss for thefinancial year of $38,578,000 (2005 - restated loss $12,042,000) and on1,402,408,092 (2005 - 1,393,778,640) ordinary shares, being the weighted averagenumber of ordinary shares in issue. As the effect of any dilutive shares woulddecrease the loss per share, the basic and diluted loss per share are the same. 4. Intangible royalty assets $'000 Net Book Value at 1 January 2005 44,878Additions during the year 21Impairment charge for the year (2,750) Net Book Value at 31 December 2005 42,149Depletion Charge for the year (1,675)Impairment charge for the year (22,474) Net Book Value at 31 December 2006 18,000 Group net book value at 31 December 2006 comprises the value of rights to futureroyalties in respect of the group's agreements covering licences PSCA and PSCBin Mauritania. The value of these royalty interests is dependent upon future oiland gas prices and the development and production of the underlying oil and gasreserves. 5. Intangible exploration and evaluation (E&E) assets $'000 Net book value at 1 January 2005 25,109Additions during the year 1,551 Net book value at 31 December 2005 26,660Additions during the year 5,527Depletion charge for the year (949)Impairment charge for the year (9,854) Net Book Value at 31 December 2006 21,384 The amount for intangible exploration and evaluation assets representsinvestments in respect of exploration licences. 6. Property, plant and equipment Oil and gas Computer and assets office equipment Total $'000 $'000 $'000CostAt 1 January 2005 94,866 1,315 96,181Additions during the year 120,195 878 121,073 At 31 December 2005 215,061 2,193 217,254Additions during the year 22,219 686 22,905 At 31 December 2006 237,280 2,879 240,159 Accumulated depreciationAt 1 January 2005 9,006 459 9,465Charge for the year 4,691 822 5,513Impairment charge for the year 322 - 322 At 31 December 2005 14,019 1,281 15,300Charge for the year 39,993 361 40,354Impairment charge for the year 27,705 - 27,705 At 31 December 2006 81,717 1,642 83,359 Net book value at 31 December 2006 155,563 1,237 156,800 Net book value at 31 December 2005 201,042 912 201,954 7. Long-term provisions a) Decommissioning provision North Africa Total America $'000 $'000 $'000 At 1 January 2005 10,671 - 10,671Additions in year 3,389 3,885 7,274Unwinding of discount 835 - 835 At 31 December 2005 14,895 3,885 18,780Additions in year 333 130 463Utilisation in year (471) - (471)Unwinding of discount 883 238 1,121 At 31 December 2006 15,640 4,253 19,893 The amounts shown above represent the estimated costs for decommissioning thegroup's producing interests in North America, which are expected to occurbetween 2008 and 2017 and in respect of its economic interest in the Chinguettifield in Mauritania where decommissioning is expected to occur around 2014. b) 2003 Production royalty bonus scheme 2006 2005 $'000 $'000 At 1 January 3,300 3,300Transferred to current liabilities (600) - At 31 December 2,700 3,300 8. Share capital 2006 2005 $'000 $'000Authorised:2,400,000,000 (2005: 2,400,000,000) ordinary shares of 1p 46,078 46,078 Called up, allotted and fully paid:1,402,950,558 ordinary shares of 1p each (2005 - 1,401,950,558 26,919 26,899ordinary shares of 1p each) 9. Reserves Share Share Investment Currency premium option revaluation translation Retained account reserve reserve reserve earnings Total $'000 $'000 $'000 $'000 $'000 $'000 At 1 January 2005 271,858 2,751 - - (37,344) 237,265Premium on shares issued 1,702 - - - - 1,702Currency translation - - - (2,670) - (2,670)adjustmentsRevaluation on Investment held - - 7,026 - - 7,026for saleShare option reserve charge for - 1,802 - - - 1,802the yearLoss for the year - - - - (12,042) (12,042) At 1 January 2006 273,560 4,553 7,026 (2,670) (49,386) 233,083 Premium on shares issued 225 - - - - 225Currency translation - - - 2,363 - 2,363adjustmentsRevaluation on Investment held - - (2,287) - - (2,287)for saleShare option reserve charge for - 1,898 - - - 1,898the yearLoss for the year - - - - (38,578) (38,578) At 31 December 2006 273,785 6,451 4,739 (307) (87,964) 196,704 10. Cash flows from operating activities 2006 2005 $'000 $'000Operating activities:Operating (loss)/profit (46,844) 2,977Depletion and amortisation 42,978 5,513Impairment expense 60,033 3,072Exploration expense 1,368 659Premium/settlement of hedging transactions - (16,020)Share-based payment provision 1,898 1,802 Operating cash flow prior to working capital 59,433 (1,997) (Increase) in inventories (3,713) -(Increase) in trade and other receivables (3,454) (8,670)Increase/(decrease) in trade and other payables 10,751 (2,651) Cash generated/(absorbed) by operating activities 63,017 (13,318) 11. Post balance sheet events On 19 January 2007 the company announced a recommended $145 millioncash offer for the issued share capital of Whittier Energy Corporation ("WEC"),a NASDAQ-listed US company with producing and exploration assets onshore GulfCoast. A placing of 163,250,000 new ordinary shares at 16p was completed at thattime, raising £26.1 million before expenses and a short-term bank facility of upto $100 million, repayable no later than 31 December 2007 was also completed.The acquisition of WEC was completed on 29 March 2007. The long term bank loan of $23.2 million was repaid in full in January2007 12. Share-based payments The group recognised a total expense, within administration costs, in respect ofshare-based payments under the equity-settled share option plan of $1,898,000(2005:$1,802,000). 13. Transition to IFRS The company has elected to adopt International Financial Reporting Standards ("IFRS"). In preparing these financial statements the group has converted to IFRSas at a transition date of 1 January 2005 and prepared an opening balance sheetunder IFRS at that date. The effect of the transition on the profit and netassets of the group are set out below. At that date the company made thosechanges in accounting policies and other restatements required by IFRS 1 for thefirst-time adoption of IFRS. This note explains the principal adjustments madeby the group in restating its UK GAAP balance sheet as at 1 January 2005 and itspreviously published UK GAAP financial statements for the year ended 31 December2005. Exemptions applied IFRS 1 allows exemptions from the application of certain IFRS requirements toassist companies with the transition process. Accordingly, the group has appliedthe following choices in respect of the optional exemptions from fullretrospective application, as set out in IFRS 1. a) Business combinations exemption The group has applied the business combinations exemption in IFRS 1. It has notrestated business combinations that took place prior to the 1 January 2005transition date. b) Cumulative translation differences exemption The group has elected to set the cumulative translation differences to zero at 1January 2005. This exemption has been applied to all subsidiaries in accordancewith IFRS 1. c) Share-based payment transaction exemption The company has elected not to apply the exemption to IFRS 2 Share-basedPayments to equity instruments granted on or before 7 November 2002, andaccordingly IFRS 2 has been applied to all such awards. Main adjustments In adopting IFRS, the main adjustments to the group's UK GAAP financialstatements as translated into US dollars, and re-classified to conform to IFRSbalance sheet formats, can be explained as follows: 1. IFRS 2 - Share-based Payments The company operates a share option scheme for directors and staff of the group.Under UK GAAP no adjustment was made to the financial statements when optionswere granted as such options are granted at market value; adjustments were madeto the financial statements only when the options were exercised. IFRS 2 requires such share-based payments to be fair valued at grant date usingan option pricing model and charged through the income statement over thevesting period of the relevant awards. 2. IFRS 6 Exploration for and evaluation of mineral resources IFRS 6 requires that all pre-licence costs, incurred before the group hasobtained the legal rights to explore a specific area, are written off in theyear that they are incurred. On transition to IFRS all such capitalised costsexisting at 1 January 2005 were written off (net of related deferred tax) toretained earnings. 3. IAS 16 Property, plant and equipment and IAS 36 Impairment of Assets The group applied the 'full cost' accounting policy under UK GAAP under whichcosts were carried in cost pools which may have included a number of individualfields and depreciated on a unit of production basis by reference to that costpool. Under IFRS, the group still applies the full cost methodology toexploration and evaluation ('E&E') assets and the unit of production method fordepreciating costs, but IAS 16 requires that proved properties are depleted onan individual property basis and not by reference to the cost pools. IAS 36 further requires that impairment tests of proved properties are performedon an individual asset basis and not on a cost pool basis. 4. IAS 38 Intangible Assets Under UK GAAP the group's over-riding royalty interests were accounted for aspart of the group's tangible and intangible oil and gas interests. IFRS 6 andIAS 36 do not permit this treatment. The group has therefore determined toaccount for these interests in accordance with IAS 38, recognising amortisationof the individual carrying values of such interests on a unit of productionbasis when the related field comes into production and applying an impairmenttest to the individual carrying values of such individual assets when necessary. On transition to IFRS, adjustments have been recorded to write off intangibleroyalty assets associated with unsuccessful prospects which were previouslycovered within the UK GAAP full cost pool, and to recognise related deferred taxeffects. 5. IAS 39 Financial Instruments: Recognition and Measurement Under IAS 39 the group is required to "mark to market" its derivatives andcertain other financial assets and liabilities to recognise them at fair value. a) On transition to IFRS, an adjustment has been made to recognise the fairvalues of the hedges and the liability in respect of the 2003 production royaltybonus scheme in the balance sheet and recognise the movement in fair value inthe income statement. b) On transition to IFRS, adjustments have been made to recognise the fairvalue of the "available for sale" investment in Forum Energy plc by means of anadjustment to equity in each year. 6. IAS 12 Income taxes Under IAS 12, the group is required to calculate deferred tax on fair valueadjustments that arise as a result of a business combination. On transition toIFRS, an adjustment has been made to recognise the deferred tax liabilityassociated with such adjustments, with any subsequent movement in the ongoingdeferred tax liability being recorded as an adjustment to the income statement. Analysis of effect of transition to IFRS on profit and net assets of the group for the year to 31 December2005 Notes Effect on Effect on profit net assets US$'000 US$'000 IFRS 2 Share based payments 1 (1,802) -IFRS 6 Pre-licence costs 2 (659) (2,157)IAS 16 Depletion and impairment of oil and gas assets 3 270 238IAS 38 Accounting for royalty interests 4 (2,750) (3,750)IAS 39 Oil and gas price hedges 5 (20,729) (20,973)IAS 39 Accounting for 'Available-for-sale financial 5 - 7,026assets'IAS 39 2003 Production royalty bonus scheme 5 - (3,300)IAS 12 Income taxes 6 7,893 (7,471) Reduction in profit/net assets (17,777) (30,387) This information is provided by RNS The company news service from the London Stock Exchange