Sterling Energy is changing. I became CEO in early February 2008 and the Board has now completed a strategic review of the business and its prospects. Our near-term objectives are clear.
1. We intend to focus more on potentially transforming drilling activity. Our current portfolio already has a program of very high impact work planned in the next year in Madagascar and Kurdistan, with important wells in Gabon and AGC. We will seek out more. Our focus areas will be Africa and the Middle East. We will take measured risks for major upside. An independent review by RISC on two of our prospects in Kurdistan and Madagascar has indicated unrisked upside potential net to Sterling of up to nearly 2 billion bbls, with obvious implications for major value-creating possibilities.
2. To reduce our debt level and to improve our working capital position. We have reviewed our assets and for the reasons set out earlier we have announced plans to sell the USA assets in order to achieve this aim. We shall seek to farmout selectively, which is a sensible way to enhance the risk-reward ratio for our work, will enable us to diversify and extend our portfolio and improve near-term cash flow. Much has been written about the banking "credit crunch" and stock markets have seen major falls, so we wish to make Sterling resilient to these changed conditions.
Oil and gas prices are up, but so are costs.
Oil prices have more than doubled over the last year to record levels of over $110/bbl despite talk of "recession" in some of the major economies. Around 80% of the increase in energy usage is in the "developing countries" and there is little spare producing capacity. US gas prices have risen over recent months, partly in response to oil prices, but also owing to the very cold winter, with record snow in many areas.
Costs in the industry have been rising very rapidly too. Lead times on equipment and drilling have continued to cause problems. Good opportunities are hard to find and secure and there is a shortage of good and experienced people. Sterling is fortunate to have an excellent team who have an interest in over 10% of the Company. Our team is highly motivated to achieve success.
High impact drilling and further projects sought.
We expect to drill prospects by the end of 2009 that will offer upside potential to Sterling of hundreds of millions of barrels.
Our projects are described in detail elsewhere in this annual report. I am also excited about building new areas of activity too.
As well as expanding our portfolio of license interests, we intend to add to our existing near term drilling program, both onshore and offshore. This will be achieved by redeploying our capital to new activities or through sector consolidation. We wish to offer our shareholders value growth through high upside projects combined with careful asset management.
Material value in the exploration portfolio.
Great uncertainty has been created by the recent difficulties in the credit and stock markets. Their impacts have been widespread and harsh and we have to react to these and other factors in formulating our strategy.
As described in more detail earlier in this report, the Board has recently carried out a review of the relative upside potential and amount invested in each of the business areas. Sterling wishes to make sure that its finances are appropriately organized and resilient. Whilst the results of our drilling program in the USA in the last year were good and 2008 has started well, the size of the investment required to enable that business to flourish fully is growing.
Sterling has highly prospective assets to explore. With the fast tracking of Madagascar to drilling and the new license in Kurdistan in the last year, the Board now believes it is in shareholders' best interests to focus its resources on such high potential asset and opportunities and to reduce or eliminate its debt level. It therefore intends to dispose of its USA assets in 2008. This will enhance our working capital position materially by leaving us with significant net cash after the sale. We will continue with farmouts, not only to yield cash or reduce the near-term costs of the wells but also to swap for other assets, thereby managing and diversifying the portfolio. This will also help to show the material value in our exploration portfolio which in current market conditions appears to be largely ignored and will allow Sterling to add new opportunities for growth in Africa and the Middle East.
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