RepoRt and FInanCIaL StateMentS 2011
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Sterling Energy Plc
5 Chancery Lane
London
WC2A 1LG
Tel: +44 (0)20 7405 4133
Fax: +44 (0)20 7440 9059
Info@sterlingenergyuk.com
www.sterlingenergyplc.com
STERLING ENERGY PLC
Sterling Energy Plc (“Sterling” or the “Company”) is an
upstream oil and gas Company listed on AIM in London.
Sterling is an experienced operator of international
licences with a current focus on projects in Africa and
the Middle East. Sterling has high potential projects in
Cameroon, Madagascar and Kurdistan.
CONTENTS
Chairman’s Statement 2
Chief Executive’s Review 4
Operations Review 6
Reserves Summary 13
2011 SUMMARY
n Completed farm-out of Ntem block, offshore
subsidiary of Murphy Oil
Cameroon,
to
Corporation; Sterling retains 50% interest and is
carried for its share of all exploration expenditure
during the current exploration period under the
Ntem contract.
n Sangaw North-1 exploration well failed to find
commercial hydrocarbons; secondary objectives
within Sangaw North block are being evaluated.
n Received $11.2 million of net cash flow from
Chinguetti field operations during 2011 (2010:
Schedule of Interests 14
$15.6 million).
Financial Review 15
n Cash
resources as at 31 December 2011
Corporate Responsibility
Board of Directors
18
19
$115.8 million (2010: $111.7 million).
n Company remains debt free.
n Strengthened technical team in support of New
Ventures focus.
Corporate Governance 21
Remuneration Report 25
Directors’ Report 30
Statement of Directors’ Responsibilities 36
Independent Auditors’ Report 37
Consolidated Statement of Comprehensive Income 39
Consolidated Statement of Financial Position 40
Consolidated Statement of Changes In Equity 41
Consolidated Statement of Cash Flows 42
Company Statement of Financial Position 43
Company Statement of Changes In Equity 44
Company Statement of Cash Flows 44
Notes to the Financial Statements 45
Definitions and Glossary of Terms 74
Professional Advisers 78
Annual General Meeting 79
STERLING ENERGY PLC
1
CHAIRMAN’S STATEMENT
We believe Sterling’s exploration portfolio contains a number of very prospective assets, a view supported by Murphy Oil
Corporation when they chose, through a wholly-owned subsidiary, to farm-in to our Ntem licence in Cameroon. In
exchange for a 50% interest they will fund all of the costs for Sterling’s retained 50% interest during the remainder of
the current exploration period of the licence. Murphy has a broad experience of drilling wells in deep water and they
have become operator for the Ntem block. We look forward to when the boundary dispute between Cameroon and
Equatorial Guinea is resolved and we can re-commence our exploration of the Ntem block.
The biggest disappointment for 2011 was the failure to discover commercial hydrocarbons in the Sangaw North-1
exploration well. However, our sub-surface specialists believe, based on all the available data, that there is potential for
secondary objectives on the flanks of the main Sangaw structure. We plan to acquire 2D seismic this year to evaluate
this potential.
In Madagascar progress on the Ampasindava and Ambilobe blocks remain stalled following the change of Government
in March 2009. A ‘roadmap’ has been agreed between the current Government and their African neighbours for the
holding of democratic elections during 2012, after which Sterling and ExxonMobil, our partner in Ampasindava block,
will resume exploration activities.
Notwithstanding the merits of our existing projects, we recognise the need to broaden the portfolio, and we have the
human and financial resources to achieve this. Our focus remains exploration. Our preferred method of entry is to secure
a material working interest which, following a work programme to de-risk and/or value-add, we can farm down prior
to major capital exposure. We have refreshed our new venture team with a new Exploration Director and several new
sub-surface specialists who will complement the skills of our existing team. I look forward to reporting on our progress
towards securing opportunities during 2012.
FINANCIAL
The Company remains in a very strong financial position with cash resources of $115.8 million at the end of 2011. Our
approved work programme for 2012 is fully funded and we now have substantial funds available for new venture
activity. During 2011, we held these very material funds to cover two possible eventualities: if the outcome of the
Sangaw North-1 well had been more positive we would have funded our 53.33% working interest of an accelerated
programme of seismic and an appraisal well, and prior to farming out 50% of the Ntem block to Murphy Cameroon
Ntem Oil Co. Ltd we wished to be ready, if circumstances permitted force majeure to be lifted, to progress the drilling
of an exploration well as required under the Ntem Contract. Sterling is now able to commit a much larger proportion of
the cash reserves towards acquiring and progressing new ventures.
We remain pleased that the revenue from Chinguetti field operations in Mauritania provided positive cash flow during
2011 in excess of Sterling’s administrative costs.
BOARD AND MANAGEMENT CHANGES
During 2011, Dr. Jonathan Cooper, Sterling’s Finance Director, and Mr. Andrew Grosse, Sterling’s Exploration Director,
resigned. I thank them both for their valuable contributions over the years and wish them well in their new endeavours.
Dr. Philip Frank was appointed Sterling’s new Exploration Director on 3 October 2011. Philip has spent some 34 years in
the E&P industry and already, in the few months he has been with Sterling, his experience as a successful explorer has
greatly enhanced Sterling’s new venture activity.
NOMINATED ADVISER AND BROKER
On 16 December 2011, Sterling appointed Liberum Capital Limited as the Company’s nominated adviser and broker.
Liberum provides a wide range of services for its clients, including corporate finance advice, stock broker and research.
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STERLING ENERGY PLC
OUTLOOK FOR 2012 AND BEYOND
Whilst we have no influence over the resolution of the border dispute between Cameroon and Equatorial Guinea, we are
ready to commence the drilling programme to evaluate the large prospects, identified from 3D seismic, when force majeure
can be lifted. We believe the Ntem block contains significant potential value waiting to be tested with the drill bit.
During 2012 one of our key objectives is to add to our portfolio of assets. Additions will be sought to broaden our
exposure to opportunities in Africa and the Middle East. However, outstanding opportunities outside of these core areas
will also be considered.
I would like to thank all Sterling’s Directors and staff for their resilience during a disappointing 2011 and look forward
to reporting progress with our existing projects and delivering new opportunities during 2012.
Alastair Beardsall
Chairman
19 March 2012
STERLING ENERGY PLC
3
CHIEF EXECUTIVE’S REVIEW
Sterling is an oil and gas company focused on exploration in Africa and the Middle East. The Company’s strategy
continues to be to add shareholder value through participation in the exploration drilling of large exploration prospects
whilst retaining a material working interest. The Company’s existing portfolio consists principally of large working
interests in high materiality exploration licences acquired early in the exploration of an area. The Company has then
advanced understanding of the exploration play through the acquisition of data and the application of technical studies,
and reduced the exploration risk to a level that is commercially viable for the drilling of exploration wells. When
appropriate the Company has introduced partners, generally through a farm-down process, to pay some, or all, of
Sterling’s share of the costs of exploration drilling operations.
The Company’s exploration portfolio consists of highly prospective interests in three areas, Cameroon, Madagascar and
Kurdistan. With this concentrated portfolio, the drilling of exploration wells is infrequent and the outcome of success or
failure in any one well will greatly affect the longer term value of the Company (the average historical industry success
rates for exploration wells worldwide is approximately one success for every five wells drilled). Success in any one
exploration well has the potential for very large returns for shareholders and, by farming-down a proportion of our
working interest in exchange for a third party to cover our share of the costs, the down side of our financial exposure is
limited and success in any one exploration well has the potential for very large returns for shareholders.
During 2011, the Company made mixed progress in advancing exploration in two of its current areas, Kurdistan and
Cameroon.
In Kurdistan, Sterling completed the drilling and testing of the Sangaw North-1 well. Following the farm-down of a
26.67% working interest to Addax, Sterling retained a large potential upside on success, for a cost to the Company of
approximately $11 million, being its working interest share of testing operations as all drilling costs were carried by
Addax under the farm-out agreement. Unfortunately, testing operations demonstrated only small quantities of gas
accompanied by water, making the main structure on the block non-commercial. Sterling has combined the well result
with existing seismic data and exploration results in the area surrounding the block to develop a secondary play along
the flanks of the main structure. The joint venture partnership plans to acquire additional 2D seismic in 2012 to confirm
this play and, if this data is encouraging, may elect to drill an exploration well in 2013.
In Cameroon, Sterling has introduced Murphy Cameroon Ntem Oil Co. Ltd a wholly owned subsidiary of Murphy Oil
Corporation, a successful deep-water operator, as a 50 per cent working interest partner and operator in the Company’s
deep water Ntem licence. Murphy paid to Sterling a contribution towards past costs and is committed to fully fund joint
operations in relation to the current phase of exploration which includes the drilling of one exploration well. The block
remains in force majeure due to a disagreement between the neighbouring Governments of Cameroon and Equatorial
Guinea on their maritime border. When force majeure is lifted, fifteen months remain of the current phase of exploration
in which to drill the planned exploration well.
Reprocessing of the existing 3D seismic that covers more than 66% of the Ntem licence, and subsequent interpretation,
was also completed in 2011 and increased the Company’s confidence in the four prospects within the licence. In the
Company’s best estimate each prospect has gross un-risked prospective resources of several hundred million barrels of
recoverable oil.
In Madagascar, the Company has a material interest in the giant Sifaka prospect in the deep water Ampasindava licence
in Madagascar. This prospect has been assessed by RISC, an independent sub-surface engineering consultancy, as having
1.2 billion barrels of gross un-risked prospective resource of recoverable oil.
However, progress towards drilling the Sifaka prospect was halted in 2009 when there was a change of Government in
Madagascar by non-democratic means. In 2011, the incumbent Government and their African neighbours signed a
‘roadmap’ for the holding of democratic elections during 2012, after which Sterling and ExxonMobil, our partner in
Ampasindava block, expect to resume exploration activities.
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STERLING ENERGY PLC
The Company also has an economic interest, approximately equivalent to 8 per cent, in production from the Chinguetti
field in Mauritania and a minor royalty interest in the surrounding exploration acreage. Chinguetti is mature with no
further development planned in the field. Gross oil production during 2011 averaged approximately 7,250 barrels per
day. The rate of production decline has been reduced over the last 2 years, due to reservoir management and production
optimisation activities. As a result of this improved production performance and outlook compared to previous
predictions, the Company has in 2011 partially reversed a prior impairment of the asset by $8.3 million and increased
the net proved and probable reserves by 0.472 million barrels. Cash flow from our interests in Chinguetti currently covers
the Company’s administrative overhead costs and makes a contribution to the cost of operations. Whilst the cash flow
from this project is significant, this asset is not material in comparison to the future potential of our other projects.
Sterling’s exploration portfolio consists of highly prospective and material exploration projects in three emerging
exploration areas. However, the largest scale projects, in Cameroon and Madagascar, are currently stalled operationally
due to external factors not controlled by Sterling. Consequently, the planned exploration programme in existing assets
during 2012 is relatively modest, consisting of the acquisition of 2D seismic data in the Sangaw North licence in
Kurdistan and aeromagnetic data in the Ambilobe licence in Madagascar. Notwithstanding this situation, Sterling is ready
to accelerate activities in both of these areas should the opportunity arise.
While the Company is confident these external factors will be resolved in due course, Sterling is, in the meantime, in a
position to use its additional asset, a strong balance sheet with cash resources of $115.8 million at 31 December 2011,
to build on the existing portfolio in a manner consistent with the Company’s strategy.
A material portion of the balance sheet cash has been held over the last two years for the eventualities of appraisal
operations in Kurdistan and exploration drilling in Cameroon. Following the successful farm-out in Cameroon and
unsuccessful exploration well in Kurdistan, this portion is now available for new ventures.
Sterling’s technical and commercial team was re-structured during 2011 and continues to be strengthened. The
Company is ready to progress our existing exploration projects as fast as allowed by external factors, and to identify and
secure complementary exploration opportunities in 2012. The building of the exploration portfolio is a major focus of
the Company during 2012 and we look forward to reporting to our shareholders on the progress we shall make in this
regard.
Angus MacAskill
Chief Executive Officer
19 March 2012
STERLING ENERGY PLC
5
OPERATIONS REVIEW
CAMEROON
Ntem (WI 50%)
The Ntem concession area is a deep water block situated in the southern Douala/Rio Muni Basin and lies adjacent to the
northern maritime border of the Rio Muni province of Equatorial Guinea. Water depths range from 400m to 2,000m
across the block. During the first term of the concession over 2,100km of 2D and 1,500km2 of 3D seismic data were
acquired. Additional seismic and gravity data were purchased.
This large block is undrilled and is well placed with respect to both Tertiary and Upper Cretaceous plays, which have both
proved successful in West Africa. To the north of the block, Tertiary oil, gas and condensate discoveries made by Noble
Energy commenced production in 2011, and further nearby discoveries are being appraised by Euroil (Bowleven).
During 2011, Sterling re-processed the 3D seismic data and interpretation of the improved data increased Sterling’s
confidence in the material exploration prospects previously identified in the block. The Company considers that four of
these prospects are ready to drill and estimates that each has gross un-risked prospective recoverable resources of several
hundred million barrels.
In November 2011 Sterling completed a farm-out agreement with Murphy Cameroon Ntem Oil Co. Ltd (Murphy), a
wholly owned subsidiary of Murphy Oil Corporation under which Murphy was assigned a 50% working interest in, and
operatorship of, the Ntem concession. Sterling retains a 50% non-operated working interest. As consideration, Murphy
paid to Sterling a contribution towards past costs and is committed to fully fund joint operations in relation to the current
phase of exploration.
Operations within the Ntem concession area are currently suspended under the force majeure provisions of the licence
owing to an overlapping maritime border claim between Cameroon and Equatorial Guinea. The Company believes that
both countries are actively working to resolve this issue and that the impact of the outcome will be either neutral or
positive to the Company’s position however, the possibility exists that the resolution could take longer than expected
and that the outcome could have a negative effect on the Company’s position.
When force majeure is lifted, there will be 15 months remaining in the current exploration period which includes the
drilling of one exploration well. Having introduced an experienced deep water operator, the Company is now well placed
for this operation when it occurs.
MADAGASCAR
Sterling’s Ambilobe and Ampasindava blocks are located in the Majunga and Ambilobe deep water basins, respectively,
offshore north-west Madagascar. Exploration activity in these blocks continues to be delayed due to the political situation
in the country following a change of Government by non-democratic methods in March 2009. The Government of
Madagascar has not been recognised by the African Union or by the United Nations. In September 2011, the political
parties in Madagascar agreed a process, prepared by the Southern African Development Community, leading to elections
expected by the end of 2012.
During 2011, discussions have been undertaken with OMNIS, the state regulator, to prolong the current exploration
period of both the Ambilobe and Ampasindava production sharing contracts. These discussions have been positive and
an outcome is expected in 2012, however, the possibility exists that these licences will not be prolonged.
Ampasindava (WI 30%)
The production sharing contract (PSC) for Ampasindava is in the third phase of the exploration period with a minimum
work commitment of one exploration well. The large Sifaka prospect is ready to drill and has been independently
estimated to contain gross un-risked best estimate prospective recoverable resources of 1.2 billion barrels
(RISC Competent Persons Report, March 2008). ExxonMobil (WI 70%, Operator) and Sterling plan to drill this well once
political stability is re-established.
6
STERLING ENERGY PLC
Following the farm-in by ExxonMobil in 2005, Sterling’s costs are carried up to a fixed amount. The cost to drill the Sifaka
prospect is estimated to exceed the remaining carry and the Company may farm down the current working interest to
cover these costs. It is currently unlikely that an exploration well will commence drilling before 2014.
Ambilobe (WI 100% & Operator)
The PSC for Ambilobe is in the second phase of the exploration period. All work commitments have been fulfilled by
completing geological and geophysical studies and acquiring approximately 1,000km of 2D seismic. A number of large
Cretaceous and Tertiary leads have been identified, located in both shallow and deep waters, which will require
additional seismic data to develop into potential drillable prospects.
During 2011, an environmental impact assessment was undertaken in preparation for future exploration activities in the
area. The Company plans to complete this study in 2012. The Company may undertake the acquisition of aeromagnetic
data in 2012 to optimise the planning of subsequent seismic data acquisition.
KURDISTAN
Sangaw North PSC (WI 53.33% & Operator)
The Sangaw North block lies in the foothills region of the Zagros fold belt, approximately 140km south east of Erbil, the
capital of the Kurdistan region of Iraq.
The Sangaw North-1 exploration well, commenced in 2010 was drilled to a total depth of 4,190m into the Triassic aged
Kurra Chine formation and in the current reporting period three flow tests were conducted across intervals between the
Triassic aged Kurra Chine and the Cretaceous aged Kometan formations. Gas was produced, along with formation
water, at rates that are not commercial and the well has been plugged and abandoned. Details of the three flow tests
conducted in the current reporting period are as follows:
DST-3 tested an open-hole interval from 3,338m to 4,190m across the Jurassic Mus and Butmah formations and the
Triassic Kurra Chine formation. The well flowed at a stabilised rate of approximately 4.6 million standard cubic feet of
gas and 7,280 barrels of formation water per day during a 12 hour flow period through a 96/64ths inch choke with a
wellhead pressure of 470 pounds per square inch. Analysis of gas samples, following the flow test, indicated that
53 per cent of the produced gas was hydrocarbon gas with the remainder comprising 46 per cent hydrogen sulphide
and 1 per cent carbon dioxide.
DST-4 tested a 100m cased hole interval within the Jurassic aged Sargelu formation. Formation gas and water were
observed in small quantities at surface but sustainable flow rates were not achieved.
DST-5 tested a 100m cased hole interval within the Cretaceous aged Kometan formation. The well flowed at a stabilised
rate of approximately 0.4 million standard cubic feet of gas and 4,500 barrels of formation water per day during an
8 hour flow period through a 60/64ths inch choke with a wellhead pressure of 280 pounds per square inch. Analysis of
gas samples, during the flow test, indicated approximately 83 per cent of the produced gas was hydrocarbon gas with
the remainder comprising 10 per cent hydrogen sulphide and 7 per cent carbon dioxide.
The Sangaw North-1 exploration well tested the main structure within the block and was, unfortunately, unsuccessful.
The Company has integrated the results of this well, along with exploration results in surrounding areas, into its
geological interpretation of the block and believes that smaller, but nonetheless interesting, potential remains in an
exploration play along the flanks of the main structure.
Following the identification of the remaining exploration potential, the joint venture partners entered the second
sub-period of the exploration phase of the PSC in November 2011, with a duration of 2 years to November 2013. The
work commitment for this period has been fulfilled by the drilling of the Sangaw North-1 well.
STERLING ENERGY PLC
7
OPERATIONS REVIEW – continued
The partnership plans to acquire 130km of 2D seismic data in 2012 to evaluate the identified exploration leads with the
aim of preparing a prospect for drilling in 2013.
MAURITANIA
Chinguetti (Economic Interest via Funding and Royalty Agreements)
Gross production continued to decline at the lower rate observed in 2010, reducing from 7,800 bopd in January to 6,800
bopd in December. The average production net to Sterling during 2011 was 629 bopd.
Sterling estimates that at the end of 2011, as a result of the lower observed decline rate, Chinguetti held a remaining
9.2 million barrels of gross proved and probable reserves (2P) that could be accessed with the existing wells. This is
reflected in the upwards revision of Sterling’s net 2P reserves to 0.664 million barrels.
No in-fill drilling or work-over activity took place on the Chinguetti field during 2011. A planned shutdown for
maintenance of the floating production and storage facility was conducted over a 5 day period in November 2011.
In October 2011, the joint venture partners in PSC A and PSC B concluded agreements with the Mauritanian
Government for the replacement of the offshore exploration areas within these PSC’s with a new, single exploration PSC
called C-10, operated by Tullow Oil Plc. The exploration programme in PSC C-10 is expected to include a minimum of
2 wells over the first 3 years. The existing Banda, Tevet and Tiof discoveries have been ring-fenced under their original
PSC terms and extensions of up to 18 months were granted to allow appraisal and development activities to be
completed. Petronas will continue to operate Chinguetti field.
In the event of any commercial development of existing or future discoveries within these contract areas, Sterling will be
entitled to revenue, but will not have any cost obligations, under its royalty interest agreements with Premier Oil.
Philip Frank
Exploration Director
19 March 2012
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STERLING ENERGY PLC
CAMEROON – NTEM
Contract Summary
Contract type
Contract signed
Concession
14 March 2001
Contract effective date
3 September 2002
Contract area
Participants
Murphy (Operator)
Sterling
2,319 km2
50%
50%
Licence term remaining
In force majeure,
minimum work and
financial obligations are
suspended
Current work period
15 months to run after
the lifting of force
majeure
Minimum work commitment Drill 1 exploration well
a) Production Bonuses Average Production
Bonus
Rate
50,000 bopd
100,000 bopd
$1 Million
$5 Million
b) Proportional Royalty Annual Production
State
Rate
Entitlement
0-50,000 bopd
50-100,000 bopd
>100,000 bopd
4.0%
6.0%
10.0%
c) Corporation Tax
40% (on net profits)
d) Additional Petroleum Duty (APD), is calculated as a
percentage of the profit subject to corporation tax and
is paid in addition to the corporation tax. R factor is
defined as the ratio of ‘Accrued Net Income’ and
‘Accrued Investments’:
R< 1.5, APD= 0%
1.52.5, APD= 20.0%
e) State may back in for a 10% participating interest in
any development and production area
f) Production concession duration is 25 years,
renewable for 10 years
Overview
The Ntem concession is a deep water block situated in
the southern Douala/Rio Muni Basin and lies adjacent to
the northern maritime border of the Rio Muni province
of Equatorial Guinea. Water depths range from 400m to
2,000m across the block.
During the first term of the concession over 2,100km of
2D and 1,500km2 of 3D seismic data were acquired.
Additional seismic and gravity data were also purchased.
This large block is undrilled and is well placed with
respect to both Tertiary and Upper Cretaceous plays.
The Ntem concession is currently in force majeure as a
result of overlapping maritime border claims between
Cameroon and Equatorial Guinea. Both countries are
actively working to resolve this issue. When force
majeure is lifted, there will be 15 months remaining in
the current exploration period. The work commitment in
this period is 1 exploration well.
In November 2011, Murphy Cameroon Ntem Oil Co.,
Ltd (Murphy), a wholly owned subsidiary of Murphy Oil
Corporation, farmed into the block becoming a 50%
working interest partner in, and operator of the Ntem
concession. Sterling retains a 50% non-operated
working interest and Sterling’s share of costs for the
remainder of the current exploration period will be paid
by Murphy.
STERLING ENERGY PLC
9
OPERATIONS REVIEW – continued
MADAGASCAR
AMBILOBE
Contract Summary
Contract type
Contract signed
PSC
15 July 2004
Effective start date
28 November 2004
Contract area
Participants
Sterling (Operator)
Exploration term
Phase 2
17,650 km2
100%
possible 2 year
extension
End of Phase 2 under
discussion
Phase 2 work commitment
Completed
Production term
25 year period with
possible 5-10 year
extension
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STERLING ENERGY PLC
8 year period with
2D seismic data.
Overview
The Ambilobe block is located in the Ambilobe basin,
offshore Madagascar. Water depths across the block
range from shoreline to 3,000m.
The Phase 1 and Phase 2 work programme
commitments were fulfilled by conducting G&G studies,
acquiring approximately 1,000km of new 2D seismic
and processing more than 5,000km of new and vintage
In July 2005 Sterling farmed out 70% interest to
ExxonMobil. 550km of new 2D seismic data were
purchased and more than 5,500km of 2D data were
reprocessed. A number of large leads in Cretaceous and
Tertiary plays have been identified which will require
additional seismic data to evaluate as potential drillable
prospects.
In May 2008, Phase 2 of the exploration period was
extended by 1 year. In early 2009 ExxonMobil withdrew
from the PSC and their interest reverted to Sterling.
Discussions are ongoing to prolong Phase 2 of the
licence which was scheduled to end in November 2010.
AMPASINDAVA
Contract Summary
Contract type
Contract signed
PSC
15 July 2004
In late 2007 the Sifaka prospect was selected as the first
prospect for drilling and a site-survey was undertaken in
2008. In November 2008 the joint venture partners
Effective start date
28 November 2004
elected to enter Phase 3 of the exploration period which
7,379 km2
has a firm well commitment.
Contract area
Participants
Exxon Mobil (Operator)
Sterling
70%
30%
Exploration term
8 year period with
Phase 3
possible 2 year
extension
End of Phase 3 under
discussion
Phase 3 work commitment
1 exploration well
Production term
Overview
25 year period with
possible 5-10 year
extension
The Sifaka Prospect is located in the inboard portion of the
Ampasindava block, in water depths of 500m to 1,800m.
Sifaka is mapped as a very large, simple structure with the
main reservoir target, Jurassic deep-water turbidite
sandstones, expected
to be encountered at
approximately 3,000m below the seabed.
RISC (Competent Persons Report, March 2008) has
estimated the gross (100%) un-risked prospective
resources for the Sifaka prospect as follows:
Low Estimate
Best Estimate
High Estimate
150 million bbl
1.2 billion bbl
4.8 billion bbl
The Ampasindava block is located in the Majunga basin,
The drilling of the Sifaka prospect could be the first
offshore Madagascar. Water depths across the block
exploration well to test the deepwater potential of
range from 20m to 2,500m.
Madagascar.
Sterling, as operator, fulfilled the Phase 1 and Phase 2 work
Discussions are ongoing to prolong Phase 3 of the licence
programme commitments for the block by completing
which was scheduled to end in November 2011.
G&G studies and acquiring more than 3,000km of 2D
seismic. In July 2005, Sterling farmed out the block to
ExxonMobil. Following acquisition, processing and
interpretation of the new 2D seismic data, Sterling
transferred operatorship to ExxonMobil at the end of 2006.
Sterling estimates that ExxonMobil’s remaining carry at
the beginning of 2012 is approximately $37 million
towards the gross cost of drilling.
STERLING ENERGY PLC
11
OPERATIONS REVIEW – continued
KURDISTAN – SANGAW NORTH
Overview
PSC
The Sangaw North block lies in the foothills region of the
10 November 2007
Zagros fold belt, approximately 140km south east of
492 km2
Erbil, the capital of the Kurdistan region of Iraq. The
block is located 50km southeast of the giant Kirkuk oil
field and is on trend with both the Taq Taq oil discovery
(90km) and the Chemchemal gas and condensate
discovery (30km).
The Sangaw North PSC was awarded for an initial five-
year term. The minimum work commitment for the 1st
sub-period (November 2007 to November 2011
including a one year extension) of 200km of 2D seismic
was fulfilled with the acquisition of 325 km of 2D
seismic acquired in 2008/09.
In July 2011, Sterling completed the drilling and testing
of the Sangaw North-1 exploration well, which fulfilled
the minimum work commitment for the 2nd sub-period.
In November 2011, the joint venture partners entered
the 2nd sub-period of exploration which runs to
November 2013.
Contract Summary
Contract type
Contract signed
Contract area
Participants
Sterling (Operator)
KNOC
53.33% *
20%
Addax
*If the KRG’s back-in rights are fully exercised, then Sterling’s
working interest will reduce to 40%
26.67%
Exploration period expires
November 2013
1st Sub-period
1st Sub-period extension
2nd Sub-period
Summary of PSC terms
Royalty
Cost recovery (oil)
Profit share (oil)
Cost recovery (gas)
Profit share (gas)
Tax
3 years
1 year
2 years
10%
40% after royalty
30%-15% sliding scale
53% after royalty
40%-20% sliding scale
Paid from state share
of production
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STERLING ENERGY PLC
RESERVES SUMMARY
2011
Oil
(000 bbl)
2011 2011 2010 2010 2010
Gas Reserves Oil Gas Reserves
(mcf) (000 boe) (000 bbl) (mcf) (000 boe)
Volumes of Proven plus Probable Reserves
At 1st January 421
– 421 340 – 340
Revision – Chinguetti(1-3) 472
– 472 320 – 320
Production (229)
– (229) (239) – (239)
At 31st December 664
– 664 421 – 421
Notes:
(1) The reserves stated are for Sterling’s net interests in the Chinguetti field only and are based on Sterling’s own assessment of
reserves, as at 31 December 2011. Sterling’s interest in the Chinguetti field is through its Funding Agreement and Royalty
Agreements; Sterling does not have a direct equity participation in the Chinguetti field. The assessment was made in accordance
with the definitions as set out on page 74.
(2) Sterling has not booked reserves relating to other Mauritanian discoveries, on the basis that there are no approved development
plans for these discoveries.
(3) In accordance with the guidelines of the AIM Market of the London Stock Exchange, Dr. Philip Frank, Ph.D. Geology (1977),
Exploration Director of Sterling Energy Plc, who has been involved in the oil industry for over 30 years, is the qualified person that
has reviewed the assessment of reserves set out above.
STERLING ENERGY PLC
13
SCHEDULE OF INTERESTS
Size Licence Sterling Sterling Operated/
Location (km²) Name Working Net Revenue Non-operated
Interest % Interest %
Africa
Mauritania Offshore 110 PSC A n.a Sliding scale royalty over 3% Non-operated
Offshore 403 PSC B n.a Sliding scale royalty over 6% Non-operated
(except 5.28% of the
Chinguetti Field)
Offshore 10,725 PSC C-10 n.a Sliding scale royalty Non-operated
over 4% (average)
Chinguetti 29 Funding Agreement n.a Economic interest for Non-operated
with SMH approximately 8% of
Chinguetti project
Cameroon Southern Douala Basin 2,319 Ntem 50%(1) Non-operated
Madagascar Offshore NW 17,650 Ambilobe (2) 100% Operator
Offshore NW 7,379 Ampasindava (2) 30%(3) Non-operated
Middle East
Iraq Kurdistan 492 Sangaw North 53.33% Operator
(1) Carried for the remainder of the current exploration period which includes the drilling of one exploration well.
(2) The current exploration period was due to end in November 2010. Sterling and Exxon are in discussions with OMNIS, the State oil
Company of Madagascar, with regard to extending the current exploration periods of both licences.
(3) Carried for defined $ amount.
14
STERLING ENERGY PLC
FINANCIAL REVIEW
SELECTED FINANCIAL DATA
2011 2010
Chinguetti production*
Year-end 2P reserves*
Revenue
EBITDA*
Profit after tax
Net cash investment in oil & gas assets
Year-end cash (including partner funds)
Year-end debt*
bopd 629 654
000 boe 664 421
$million 19.1 25.3
$million 11.6 11.3
$million 18.4 5.8
$million 1.7 12.2
$million 115.8 111.7
$million – –
Year-end net cash (including partner funds)
$million 115.8 111.7
Average realised oil price (net of hedges)
$/bbl 108.57 80.44
Total cash operating costs per boe (produced)
$/boe 34.03 38.15
Year-end share price
Share price change*
* Key performance indicators
HIGHLIGHTS
Pence 40 84
% (53) (46)
n Group net profit of $18.4 million in 2011 (2010 $5.8 million);
n Cash balance at year-end of $115.8 million (2010: $111.7 million);
n Average 2011 Chinguetti production 629 bopd (2010: 654 bopd);
n Debt free throughout 2011.
REVENUE AND COST OF SALES
2011 production averaged 629 bopd, including Royalty barrels, a decrease of 4% from the 654 bopd averaged in 2010.
Currently, all of the Group’s production is from the Chinguetti field and the Group’s production was 597 bopd for the
month of December 2011.
Group turnover was $19.1 million (2010: $25.3 million) on 176,345 barrels sold (2010: 315,000) with an average
realised oil price of $108.57 per bbl (2010: $80.44 per bbl). Volumes lifted and sold during the year were down by 46%
to 2.0 million barrels (2010: 3.7 million barrels), due mainly to timing differences on liftings of oil stored in facilities at
the Chinguetti field.
PROFIT FROM OPERATIONS
The 2011 profit from operations totalled $16.3 million (2010: $7.3 million).
During the year, an impairment reversal totalling $8.3 million (2010: $nil) on the Chinguetti asset has been recognised.
This reversal of prior year impairments has been made following a review of decline rates by the operator, Petronas, who
have extended their estimates of the economic field life. Sterling’s own assessment of the asset’s economic field life,
although more conservative than that of the operator, is broadly in line with their assessment.
Chinguetti cost of sales totalled $6.1 million (2010: $13.6 million) averaging $34.66/bbl (2010: $43.11/bbl). The
difference in the average cost per barrel is principally due to reductions in direct operating expenditures and reduced
Royalty amortisation charges following the economic field life revision on the Chinguetti block.
Pre-licence exploration costs of $1.3 million (2010: $0.7 million) have been written off during the year.
STERLING ENERGY PLC
15
FINANCIAL REVIEW – continued
Administrative costs increased marginally during the year to $3.7 million (2010: $3.6 million). Included within this charge
is $1.9 million (2010: $1.9 million) relating to share-based payment charges.
A portion of the Group’s staff costs and associated overheads are recharged to the joint venture partners, expensed as
pre-licence expenditure or capitalised where they are directly attributable to on-going capital projects. In 2011 this
portion amounted to $5.1 million (2010: $6.8 million).
EBITDA AND NET PROFIT
Group EBITDA (as defined within the Definitions and Glossary of Terms on page 75) totalled $11.6 million (2010:
$11.3 million).
Net profit after tax totalled $18.4 million (2010: profit $5.8 million). The basic profit per share was $0.08 per share
(2010: $0.03 per share).
Interest revenue and finance expenses were a net income of $2.2 million (2010: net expense $1.4 million) reflecting
foreign exchange losses of $0.1 million (2010: $0.6 million) on GBP cash balances held at 31 December 2011 which are
reported in US Dollars.
Non-cash finance income of $1.9 million (2010: $1.0 million) relates to the reduction of the decommissioning discount
on the Chinguetti abandonment provision due to the improvements in the expected field life. Of this $1.9 million, an
expense of $0.9 million (2010: $1.0 million) relates to the unwinding of the decommissioning provision and an income
of $2.8 million (2010: $nil) relates to adjustments made to the provision during the year following a review of the field’s
economic life by the operator (see note 1 on page 48 and note 5 on page 54).
Interest revenue was $0.4 million (2010: $0.2 million).
No dividend is proposed to be paid for the year ended 31 December 2011 (2010: $nil).
CASH FLOW
Net Group cash inflow generated from operating activities was $5.6 million (2010: $10.4 million).
Net cash investments in oil and gas assets totalled $1.7 million (2010: $12.2 million) primarily comprising of $4.5 million
invested in Kurdistan relating to testing costs on the Sangaw North-1 well, a net reduction of $3.5 million in costs in
Cameroon following the successful farm-out of the Ntem field ($4.8 million cost reimbursement) and $0.7 million
invested in Madagascar. The Group’s exploration drilling expenditure for Sangaw North-1 was carried by Addax, with
Sterling paying its share of testing costs.
STATEMENT OF FINANCIAL POSITION
Cash and cash equivalents were $115.8 million at the year-end (2010: $111.7 million) of which unrestricted funds of
$1.0 million (2010: $10.1 million) was held on behalf of partners, leaving a cash balance of $114.8 million (2010:
$101.6 million) available for Sterling’s own use at 31 December 2011. At the end of 2011, net assets/total equity stood
at $116.1 million (2010: $95.8 million), and non-current assets were $31.3 million (2010: $21.8 million). This increase
was primarily as a result of investment in Kurdistan, the increase to the Chinguetti Funding Agreement and the increase
to the Chinguetti Royalty Asset. Net current assets increased to $105.1 million (2010: $96.3 million).
The Group’s Chinguetti decommissioning provision decreased during the year by $1.9 million to $20.1 million (2010:
$22.0 million) following a review of the field’s economic life by the operator (see note 1 on page 48 and note 5 on
page 54).
HEDGING
During 2011 the Group did not have any oil and gas price derivatives in place (2010: no oil and gas price derivatives in
place).
16
STERLING ENERGY PLC
CAUTIONARY STATEMENT
This financial report contains certain forward-looking statements that are subject to the usual risk factors and
uncertainties associated with the oil and gas exploration and production business. Whilst the Directors believe the
expectation reflected herein to be reasonable in light of the information available up to the time of their approval of this
report, the actual outcome may be materially different owing to factors either beyond the Group’s control or otherwise
within the Group’s control but, for example, owing to a change of plan or strategy. Accordingly, no reliance may be
placed on the forward-looking statements.
Andrew Smith
Financial Controller
19 March 2012
Angus MacAskill
Chief Executive Officer
19 March 2012
STERLING ENERGY PLC
17
CORPORATE RESPONSIBILITY
Sterling is committed to conducting its business in a responsible and sustainable way. Sterling recognises that it has
corporate and social responsibilities to the local communities in the areas in which it operates, to its partners, to its
employees and to its shareholders. In pursuing its business objectives it undertakes not to compromise its corporate or
social responsibilities with any of these stakeholders.
BUSINESS INTEGRITY
The highest ethical standards are the cornerstone of Sterling’s business. Sterling is committed to conducting its business
with integrity, honesty and fairness. All business activities are reviewed to ensure they meet these standards. Sterling also
seeks to ensure that similar standards are applied by its business partners, contractors and suppliers. All members of staff
are individually accountable for their actions to ensure they apply and maintain these standards.
Sterling is a member of TRACE International Inc., the anti-bribery association. The Directors have completed the TRACE
training and assessment. Following the enactment of the UK Bribery Act on 1 July 2011, Sterling has adopted amended
policies and guidelines to further reinforce the Company’s anti-bribery procedures.
COMMUNITY RESPONSIBILITY
Sterling is committed to being a good partner in the communities in which the Company operates. Engagement and
dialogue with our local communities is essential in ensuring, where possible, projects benefit both the Company and the
communities in which the project is located.
Throughout the year Sterling has continued to employ local staff and contractors at both its Suleimaniah office and
operations on the Sangaw North block. Sterling has also continued to assist with basic infrastructure projects helping to
provide water, electricity and schooling to local villages that would otherwise have been without these most basic
amenities.
EMPLOYEES
Sterling is committed to providing a workplace free of discrimination where all employees are afforded equal
opportunities and are rewarded upon merit and ability. In the implementation of this policy Sterling is committed to
ensuring that all employees are given contracts with clear and fair terms. Staff are offered access to relevant training and
encouraged to join professional bodies to enhance knowledge, competence and career development.
Sterling is committed to achieving the highest possible standards of conduct, accountability and propriety and to a
culture of openness in which employees can report legitimate concerns without fear of penalty or punishment. Sterling
has a whistle blowing policy which empowers employees to be proactive, to stop or report any failure to comply with
legal obligations or Sterling’s regulations, dangers to health and safety, financial malpractice, damage to the
environment, criminal offences and actions which are likely to harm the reputation of the Company. The whistle blowing
policy allows employees to make anonymous reports directly to a non-executive Director.
HEALTH, SAFETY, ENVIRONMENT AND SECURITY (‘HSES’)
It is an objective of Sterling that every individual is aware of his/her responsibility towards providing for a safe and secure
working environment. HSES and social responsibility leadership are core competencies throughout Sterling’s line
management organisation. Sterling’s HSES risks are managed in a systematic way by utilising procedures and appropriate
training of staff, with the aim to reduce these risks to as low as is reasonably practical. Sterling ensures that appropriate
emergency response systems are in place to reduce and mitigate the impact and losses of any incident and any residual
risks and that it is in compliance with all relevant laws, regulations and industry standards.
Sterling maximises its influence with joint venture partners to share its HSES and social responsibility values. Contractors
are required to demonstrate and deliver a credible HSES and social responsibility programme. In order to achieve
continual improvement, Sterling is committed to reviewing its HSES and social responsibility performance each quarter.
Sterling is committed to minimising its impact on the environment in both field operations and within its offices. All staff
share responsibility for monitoring and improving the performance of its environmental policies with the objective of
reducing our impact on the environment on a year on year basis.
18
STERLING ENERGY PLC
BOARD OF DIRECTORS
Alastair Beardsall, executive Chairman, aged 58
Alastair joined Sterling in September 2009. He has been involved in the oil industry for over 30 years. For the first
12 years Alastair worked on international assignments with Schlumberger, the oil-field services Company. From 1992 he
began working for independent exploration and production operators, with increasing responsibility for specific
exploration, development and production ventures.
Between September 2003 and October 2009, Alastair was Executive Chairman of Emerald Energy Plc during which time
Emerald grew from a market capitalisation of less than £8 million to a size that allowed the Company to enter the FTSE
250 index in January 2009. In October 2009 Emerald was acquired by Sinochem Resources UK Limited, for £7.50 per
share in a transaction that valued Emerald at £532 million.
Angus MacAskill, Chief Executive Officer, aged 52
Angus joined Sterling as Chief Executive Officer in November 2010. His career in the oil and gas industry started in 1981
with 5 years at Schlumberger on assignments in Africa. Angus joined Mobil Oil and, during 10 years with the company,
held a number of production, reservoir engineering and managerial posts in UK and Norway.
Since 1997, Angus has worked for a number of independent exploration and production companies, including
Enterprise Oil and Elixir Petroleum, in commercial, managerial and executive positions of increasing responsibility.
Angus joined Emerald Energy in 2006 as Chief Operating Officer and in December of that year was appointed Chief
Executive Officer. During the following three years, the company experienced material growth following exploration
successes in its assets in South America and the Middle East, prior to being acquired by Sinochem in 2009.
Philip Frank, Exploration Director, aged 59
Philip joined Sterling in October 2011 as Exploration Director. Following a PhD gained at Liverpool University, he started
his oil industry career in 1977 with an 11 year spell in BP, initially as a North Sea rig geologist and finally as the
group-wide Assistant Chief Geologist.
Since then he has held senior management positions in a range of UK-based independent exploration and production
companies including Clyde, Monument and LASMO, and has gained extensive world-wide exploration experience with
an emphasis on new venture generation.
Philip was closely involved with Emerald Energy from 2003 through to its acquisition in 2009. Initially in a consulting role
and finally as Exploration Manager, he provided the exploration direction for the company’s successes both in Colombia
and in Syria.
Nicholas Clayton, non-executive Director, aged 48
Nicholas was appointed a non-executive Director of Sterling in October 2009. Nicholas is chairman of the Audit
Committee and a member of the Remuneration and Nomination Committees.
Nicholas has provided strategic and corporate finance advice to a number of public and private oil and gas companies
since January 2007. Between August 2005 and December 2006 he was Global Co-Head of Oil and Gas Corporate
Finance for Canaccord Adams. For the previous 5 years he held the position of Global Head of Oil and Gas Corporate
Finance for Dresdner Kleinwort Benson, the investment bank, having previously been Global Head of Oil and Gas
Research between 1997 and 2000. Nicholas began his career at BP having obtained a first class honours degree in
Business Studies, sponsored by BP, from Portsmouth Polytechnic in 1985.
He is currently Chairman of Bridge Resources Corp., a Canadian listed Company with operations in the North Sea and
North America. Nicholas also serves as a non-executive Director of Circle Oil Plc and provides strategic advice to Geopark,
an AIM-listed Company operating in Chile and Argentina.
STERLING ENERGY PLC
19
BOARD OF DIRECTORS – continued
Keith Henry, non-executive Director, aged 67
Keith was appointed a non-executive Director of Sterling in September 2009. He chairs the Remuneration Committee
and is a member of the Audit and Nominations Committees.
He has over 35 years of international business experience in the development, ownership, design and construction of
major facilities worldwide. He was with Brown & Root Limited for 23 years, the last five of which were as Chief Executive
responsible for the Europe, Africa and FSU regions. From 1995 to 1999 he was Chief Executive of National Power Plc,
and then Chief Executive of Kvaerner Engineering and Construction Ltd until June 2003.
Keith serves as Chairman of Regal Petroleum Plc and Mediterranean Oil and Gas Plc, as well as serving as a non-executive
Director and advisor to a number of companies in the engineering, services and energy sectors. He is a Fellow of the
Royal Academy of Engineering.
Malcolm Pattinson, non-executive Director, aged 68
Malcolm is a geoscientist with 40 years of experience and joined Sterling in November 2010. Until 2001 he was the
vice-president of exploration for Ranger Oil (which became CNR); and prior to this he was exploration vice-president for
Hamilton Oil (which became BHP). From 2001 to 2006 Malcolm was a consultant for Tullow Oil.
Malcolm is an honorary life member and former chairman of the Petroleum Exploration Society of Great Britain, and was
awarded the medal for outstanding achievement in 1996 by the Petroleum Group of the Geological Society. He is the
chairman of GTO Limited and was formerly a Director of Aurelian Oil and Gas Plc.
20
STERLING ENERGY PLC
CORPORATE GOVERNANCE
APPLICATION OF UK CORPORATE GOVERNANCE CODE PRINCIPLES
The Directors are mindful of their duties and responsibilities to all Shareholders and of their statutory duties under the
Companies Act, the core duty of which is to act in good faith and in a way most likely to promote the success of the
Company for the benefit of its members as a whole. As an AIM listed company, the Company is not required to comply
with the UK Corporate Governance Code, however, the Directors are committed to maintaining the highest standards
of corporate governance. This statement describes how the Company has applied the main and supporting principles of
corporate governance set out in the UK Corporate Governance Code published by the Financial Reporting Council in
June 2010 (“Code”).
The Company has adhered to the provisions set out in the Code with the exception of the matters referred to below.
Provision D.1.3 Non-executive Directors (“NED”) have been awarded share options under the NED Long Term Incentive
Plan (“LTIP”). The NED LTIP rules and option awards were approved by shareholders, as required under
the Code, at the December 2009 extraordinary general meeting. Future NED LTIP awards will be
awarded subject to approval by shareholders. Under the NED LTIP rules, shares acquired by the exercise
of options are not required to be held for at least one year after the non-executive Director leaves the
Board as required under the Code. Notwithstanding the foregoing, the Board considers each of the
non-executive Directors to be independent.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Composition, Operation and Independence
The Board currently comprises the executive Chairman, two executive Directors and three non-executive Directors. Each
of the executive Directors has extensive knowledge of the oil and gas industry combined with general business and
financial skills. All of the Directors bring independent judgement to bear on issues of strategy, performance, resources,
key appointments and standards. The Board meets regularly throughout the year and all the necessary information is
supplied to the Directors on a timely basis to enable them to discharge their duties effectively.
The Board is responsible to the Shareholders for the proper management of the Company. A Statement of Directors’
Responsibilities in respect of the Financial Statements is set out on page 36.
The Board has a formal schedule of matters specifically reserved for its decision. These include strategic planning,
business acquisitions or disposals, authorisation of major capital expenditure and material contractual arrangements,
changes to the Group’s capital structure, setting policies for the conduct of business, approval of budgets, remuneration
policy of Directors and senior management, and taking on debt and approval of Financial Statements. Other matters are
delegated to the Committees of the Board and executive Directors, supported by policies for reporting to the Board.
No new share options have been issued to non-executive Directors under the NED LTIP. In the opinion of the Board the
NED LTIP aligns the objectives of the non-executive Directors with those of Shareholders. The NED LTIP is not subject to
performance conditions for independence reasons.
Keith Henry is the Senior Independent Director. The Senior Independent Director is available to Shareholders if they have
concerns which, through the normal channels of contact with the Chairman or CEO have not been resolved or for which
such contact is inappropriate.
The Company maintains Directors’ and Officers’ liability insurance cover and provides the Directors with indemnity, the
level of which is reviewed annually.
STERLING ENERGY PLC
21
CORPORATE GOVERNANCE – continued
Meetings and Attendance
The following table summarises the number of Board and committee meetings held during the year and the attendance
record of the individual Directors:
Board Audit Remuneration Nominations
Meetings Committee Committee Committee
Number Meetings in year 8 2 3 1
Alastair Beardsall 8 – 2* –
Nicholas Clayton 8 2 3 1
Jonathan Cooper (resigned 18 October 2011) 7 – – –
Philip Frank (appointed 3 October 2011) 2 – – –
Andrew Grosse (resigned 3 October 2011) 6 – – –
Keith Henry 8 2 3 1
Angus MacAskill 8 – – 1
Malcolm Pattinson 8 2 3 1
*denotes attendance by invitation
Induction and Training
New Directors, on their appointment to the Board, are briefed by the Board and management on the activities of the
Group and its key business and financial risks, the Terms of Reference of the Board and its Committees, the list of Board
reserved matters, and the latest financial information about the Group. The Chairman ensures that Directors update their
skills, knowledge and familiarity with the Company to fulfil their roles on the Board and on Board Committees. On-going
training is available as necessary and includes updates from the Company Secretary on changes to the AIM rules, the
Code, requirements under the Companies Act and other regulatory matters. Directors may consult with the Company
Secretary at any time on matters related to their role on the Board. All Directors have access to independent professional
advice at the Company’s expense.
Evaluation of the Board’s Performance
Performance evaluation takes place for individual Directors, the Board and its Committees and includes assessing the
effectiveness of the Board as a whole. The evaluation of the performance of Directors is carried out using peer appraisal
questionnaires which combine business and personal performance and includes discussions with the Senior Independent
Director and the Senior Independent Director with the Chairman. Aspects of performance include attendance and
participation at Board meetings, quality of involvement in Committees, commitment and effectiveness of their
contribution to Board activities (including the AGM and shareholder communications), the adequacy of training and non-
executive Directors’ independence. The process is conducted and reviewed by the Senior Independent Director, on behalf
of the Nomination Committee; the Company Secretary is advised of its completion. The performance of the Chairman
is reviewed annually in a meeting of the non-executive Directors, led by the Senior Independent Director. This review
takes into account the views of executive Directors.
Retirement and Re-election
The Company’s Articles of association require that any Director who has been a Director at the preceding two Annual
General Meetings and who was not appointed or re-appointed by the Company, retire and stand for re-election. All new
Directors appointed since the previous Annual General Meeting need to stand for election at the following Annual
General Meeting.
22
STERLING ENERGY PLC
SUB-COMMITTEES
The Board has appointed the following sub-committees:
Audit Committee
This Committee currently comprises Nicholas Clayton, Keith Henry and Malcolm Pattinson, under the Chairmanship of
Nicholas Clayton. It reviews the interim and annual financial statements, internal control matters and the scope and
effectiveness of the external audit. The external auditors have unrestricted access to the Chairman of the Audit
Committee. Audit Committee meetings are also attended by the external auditor where appropriate and, by invitation,
the Chairman, Chief Executive Officer, other Directors and senior management.
Audit Committee Report for 2011
The Audit Committee met two times during the year. During these meetings the Audit Committee considered the
following:
• the integrity of the financial statements and other formal announcements relating to the Group’s financial
performance and, in particular, reviewed the judgments that are contained within the financial statements;
• the Group’s internal control and risk management policies and systems, and their effectiveness;
• Sterling’s whistle blowing procedures to ensure that its employees are able to raise concerns, in confidence, about
possible wrongdoing in financial reporting and other matters;
• the requirements for an internal audit function in the context of the Group’s overall risk management system. The
Committee is satisfied that the Group does not currently require an internal audit function, however, it will continue
to monitor the situation;
• the Committee recommends that the Board presents the resolution to the shareholders at the 2012 AGM to
reappoint BDO LLP as external auditors; and
• monitoring a policy on the engagement of the external auditors to supply non-audit services, taking into account
relevant guidance regarding the provision of non-audit services by the external audit firm.
Nominations Committee
The members of this Committee are currently Nicholas Clayton, Keith Henry and Malcolm Pattinson under the
Chairmanship of Malcolm Pattinson. The Nominations Committee considers the composition of the Board and makes
recommendations on the appointment of new Directors. The Nomination Committee also co-ordinates the performance
evaluation of Directors and senior management and considers those candidates presenting themselves for election at the
AGM.
Nominations Committee Report for 2011
The Nomination Committee met one time during the year during 2011.
Philip Frank, Exploration Director, will offer himself for election at the AGM following his appointment on 3 October
2011. Alastair Beardsall, Chairman, will retire by rotation and offer himself for re-election at the AGM. Their biographical
details, provided on page 19, demonstrate the range of experience and skill which each bring to Sterling. The
Nominations Committee and the Board considers that their performance continues to be effective and that each Director
has the necessary commitment to fulfil their respective roles.
Remuneration Committee
The members of the Committee are Keith Henry, Nicholas Clayton and Malcolm Pattinson under the Chairmanship of
Keith Henry. Further details on the roles and responsibilities of the Remuneration Committee are described in greater
detail in the Report on Directors’ Remuneration, set out in pages 25 to 29.
STERLING ENERGY PLC
23
CORPORATE GOVERNANCE – continued
COMMUNICATIONS WITH SHAREHOLDERS
The Board is accountable to the Company’s shareholders and as such it is important for the Board to appreciate the
aspirations of the shareholders and equally that the shareholders understand how the actions of the Board and short-
term financial performance relate to the achievement of the Company’s longer term goals.
The Board reports to the shareholders on its stewardship of the Company through the publication of interim and final
results each year. Press releases are issued throughout the year and the Company maintains a website
(www.sterlingenergyplc.com) on which press releases, corporate presentations and the annual report and accounts are
available to view. Additionally this annual report contains extensive information about the Company’s activities. Enquiries
from individual shareholders on matters relating to the business of the Company are welcomed. Shareholders and other
interested parties can subscribe to receive notification of news updates and other documents from the Company via
email. In addition the executive Directors meet with major shareholders to discuss the progress of the Company.
The executive Chairman provides periodic feedback to the Board following meetings with shareholders. The Senior
Independent Director also attends some shareholder meetings to ensure the Board is appraised of all feedback provided
by such meetings.
The Annual General Meeting provides an opportunity for communication with all Shareholders and the Board
encourages the Shareholders to attend and welcomes their participation. The Directors attend the Annual General
Meeting and are available to answer questions. Details of resolutions to be proposed at the Annual General Meeting to
be held on 19 April 2012 can be found in the notice of the meeting, on pages 79 to 83.
INTERNAL CONTROLS
In September 1999 the Turnbull Guidance (Internal Control: Guidance for Directors on the Combined Code) was
published, and revised in October 2005.
The Directors acknowledge their responsibility for establishing and maintaining the Group and the Company systems of
internal control. These are designed to safeguard the assets of the Group and to ensure the reliability of financial
information for both internal use and external publication.
The Group’s internal control procedures include Board approval for all significant projects. All major expenditures require
either senior management or Board approval at the appropriate stages of each transaction. A system of regular reporting
covering both technical progress of projects and the state of the Group’s financial affairs provides appropriate
information to management to facilitate control. The Board reviews, identifies, evaluates and manages the significant
risks that face the Group.
Any systems of internal control can only provide reasonable, and not absolute, assurance that material financial
irregularities will be detected or that the risk of failure to achieve business objectives is eliminated. The Directors, having
reviewed the effectiveness of the system of internal financial, operational and compliance controls and risk management,
consider that the system of internal control operated effectively throughout the financial year and up to the date the
financial statements were signed.
CONFLICTS OF INTEREST
The Company has in place procedures for the disclosure and review of any conflicts, or potential conflicts of interest
which the Directors may have and for the authorization of such conflicts by the Board. In deciding whether to authorize
a conflict matter or a potential conflict the Directors must have regard to their general duties under the Companies
Act 2006.
24
STERLING ENERGY PLC
REMUNERATION REPORT
REMUNERATION COMMITTEE
The Remuneration Committee is comprised of Keith Henry, Nicholas Clayton and Malcolm Pattinson. Keith Henry is the
Chairman of the Remuneration Committee. The Committee makes recommendations to the Board, within its agreed
terms of reference, on the structure and overall remuneration package for executive Directors and reviews the
remuneration for other senior employees. Non-executive Directors’ fees are considered and agreed by the Board.
The Remuneration Committee is permitted to appoint independent advisors to assist in the determination of
remuneration.
REMUNERATION POLICY
The Company’s policy on Directors’ remuneration is that the overall remuneration package should be sufficiently
competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives and
thereby enhancing shareholder value. The package consists of salary, performance related bonus and share options
awarded under the All Staff Long Term Incentive Plan, with the balance between these components being salaries at
levels around the middle of the range of salaries for peer companies and material additional remuneration linked to
performance and results adding materially to shareholder value. Sterling acknowledges the benefit of the executive
Directors accepting appointments as non-executive Directors of other companies; if they accept more than two such
appointments they are required to pass their fees for those appointments to the Company. The details of individual
components of the executive remuneration package and service contracts are discussed below:
Basic Salary and Benefits: The salary and benefits are reviewed annually. Currently the Remuneration Committee uses
remuneration data collected from published accounts and surveys of peer companies and does not use executive
remuneration consultants. The Committee reviews this method on a regular basis.
Performance Related Bonuses: Performance bonuses are awarded to executive Directors by the Board, upon
recommendations by the Remuneration Committee. Prior to each year the Remuneration Committee considers the levels
of potential bonus payments and the corresponding set of objectives for which bonuses may be payable. Objectives are
set to align the individuals’ motivation with the longer term sustainable future of the Company. These objectives may
not provide short term or easily measurable results. At the end of each year the Remuneration Committee considers if
the objectives have been achieved as well as individual contribution to the performance of the Group. The maximum
level of performance bonus is capped as a percentage of annual salary.
Results Based Long Term Incentive Plans: In 2009 the Company reviewed the existing share-based incentive schemes
currently in place to motivate and incentivise its employees, and also took independent advice. Based on this review the
Company proposed a new All Staff Long Term Incentive Plan as being the most effective way to deliver the incentives
that the Board believes will continue to align the interests of the employees and shareholders. Shareholders approved
this plan at the December EGM held on 22 December 2009.
With effect from 2009, awards are made in the form of options to acquire shares in the Company at the shares’ nominal
value. The All Staff LTIP is designed as a three year plan and the Company intends to grant annual awards in October
each year based on the recommendations of the Remuneration Committee.
Awards are made on similar terms to non-executive Directors of the Company, under a separate plan the NED LTIP.
Awards under the NED LTIP are made by the Board and are not subject to performance conditions for independence
reasons.
Pensions: The Group operates a number of defined contribution pension schemes pursuant to which it contributes
10% per cent of pensionable salary per eligible member.
Fees: The fees for non-executive Directors are determined by the Board within the limits stipulated in the Articles of
Association. The non-executive Directors are not involved in any discussions or decision about their own remuneration.
STERLING ENERGY PLC
25
REMUNERATION REPORT – continued
SERVICE CONTRACTS
Each of the executive Directors has a service contract with the Company, details of which are as follows:
Director Commencement Date of current Base annual Notice
of appointment contract salary period
Alastair Beardsall 8 September 2009 1 January 2011 *£80,000 6 months
Philip Frank 3 October 2011 3 October 2011 £225,000 6 months
Angus MacAskill 9 November 2010 9 November 2010 £263,800 6 months
* As of 1 January 2011 contracted to devote 20% of his working time to the business of Sterling Energy Plc.
The salaries paid to the Directors are reviewed annually with the most recent salary review being implemented on
1 January 2012.
Non-executive Directors do not have service contracts, but instead each has a letter of appointment setting out the terms
and conditions of their appointment, details of which are as follows:
Director Commencement Date of Base fees
of appointment current contract per annum
Nicholas Clayton 1 October 2009 1 October 2009 £30,000
Keith Henry 8 September 2009 8 September 2009 £30,000
Malcolm Pattinson 15 November 2010 15 November 2010 £30,000
Save for the fees outlined above and the share options awarded under the NED LTIP, the non- executive Directors are not
entitled to any other benefits or arrangements.
Except as disclosed above, there are no service contracts or letters of appointment in force between any Director with
the Company or the Group as at the date of this document.
The Company has granted an indemnity to its Directors (including subsidiary undertakings) under which the Company
will, to the maximum extent possible, indemnify them against all costs, charges, losses and liabilities incurred by them
in the performance of their duties.
The Company provides limited Directors’ and Officers’ liability insurance, at a cost of approximately $26,000 in 2011
(2010 – $68,000).
26
STERLING ENERGY PLC
DIRECTORS AND THEIR INTERESTS
Directors’ Remuneration and Share Options
Aggregate remuneration (audited)
Compensation Defined
Fees and for loss contribution Benefits Total Total
basic salary of office Bonus pension in kind 2011 2010
£ £ £ £ £ £ £
Executive Directors
Alastair Beardsall 80,000 – – 8,000 3,723 91,723 346,581
Jonathan Cooper 153,173 – – 15,581 3,809 172,563 254,633
(resigned 18 October 2011)
Philip Frank 56,250 – – 5,625 35 61,910 –
(appointed 3 October 2011)
Andrew Grosse 188,833 – – 18,883 6,411 214,127 324,151
(resigned 3 October 2011)
Angus MacAskill 250,000 – 85,000 25,000 5,004 365,004 39,840
(appointed 9 November 2010)*
Graeme Thomson – – – – – – 326,537
(resigned 22 December 2009)
Non-executive Directors
Nicholas Clayton 30,000 – – – – 30,000 30,000
Keith Henry 30,000 – – – – 30,000 30,000
Malcolm Pattinson 30,000 – – – – 30,000 3,885
(appointed 15 November 2010)
Richard Stabbins – – – – – – 30,000
(resigned 31 December 2010)
Aggregate
remuneration 2011 818,256 – 85,000 73,089 18,982 995,327 –
Aggregate
remuneration 2011 US$ 1,311,665 – 136,255 117,162 30,429 1,595,511 –
Aggregate
remuneration 2010 881,052 185,753 202,250 103,328 13,244 – 1,385,627
Aggregate
remuneration 2010 US$ 1,362,072 287,167 312,671 159,741 20,475 – 2,142,126
* During the year a bonus equivalent to £85,000 was awarded to Angus MacAskill. Following the deduction of income tax obligations,
the residual amount is to be satisfied by the issuance of 102,000 ordinary shares in Sterling Energy Plc with the restriction that they
may not be traded for a period of at least 12 months from award.
Directors’ interests in LTIP’s are accounted for under IFRS 2 (Share-based payments), accounting charges in the period are
detailed in note 25.
STERLING ENERGY PLC
27
REMUNERATION REPORT – continued
Share Options (audited)
Details of options to acquire ordinary shares in the Company under the scheme approved in 2001 are as follows. The
exercise price is shown in pence as this is the price at which the options are denominated under the scheme:
1st January 31st December Exercise Exercise
2011 Granted Lapsed 2011 price period
Andrew Grosse
37,500 – – 37,500 160p Up to 18/10/2012
37,500 – (37,500) – 500p Up to 09/03/2014
12,500 – (12,500) – 680p Up to 28/01/2015
37,500 – (37,500) – 960p Up to 29/06/2016
Total
125,000 – (87,500) 37,500
Directors’ interests in Sterling Save As You Earn Option Scheme (‘SAYE’) (audited)
The Directors’ interests in the SAYE scheme set up in 2008 are as follows:
1st January Cancelled 31st December Option Earliest Latest
2011 in year 2011 price exercise date exercise date
Jonathan Cooper
Andrew Grosse
10,101 (10,101) – 95.04p n/a n/a
10,101 – 10,101 95.04p 01/12/2011 01/06/2012
20,202 (10,101) 10,101
Directors’ interests in the Sterling 2007 Long Term Incentive Plan (‘LTIP’) (audited)
The Directors’ interests in the 2007 LTIP are as follows:
1st January 31st December Exercise Earliest Latest
2011 Lapsed Granted Exercised 2011 price exercise date* exercise date*
Jonathan Cooper 105,000 (52,500) – – 52,500 40p 03/11/2011 02/02/2012
Andrew Grosse 62,975 (10,000) – – 52,975 40p 03/11/2011 02/02/2012
167,975 (62,500) – – 105,475
*If the Company is in a closed period the earliest and latest date of exercise may vary.
Jonathan Cooper and Andrew Grosse did not exercise any interests by the latest expiry date of 2 February 2012.
All Staff Long-Term Incentive Plan (audited)
The Directors’ interests in the All Staff LTIP are as follows:
1st January 31st December Exercise Earliest Latest
2011 Lapsed Granted Exercised 2011 price exercise date exercise date
Alastair Beardsall** 1,125,000 – – – 1,125,000 40p 01/10/2012 30/09/2014
Jonathan Cooper 592,893 (592,893) – – – 40p n/a n/a
Philip Frank – – 1,097,600 – 1,097,600 40p 01/10/2014 30/09/2016
Andrew Grosse 698,350 (698,350) – – – 40p n/a n/a
Angus MacAskill 1,000,000 – 609,800 – 1,609,800 40p 01/10/2013 30/09/2015
3,416,243 (1,291,243) 1,707,400 – 3,832,400
** In recognition of Alastair Beardsall’s efforts in the fund raising and the September 2009 Placing, and as a means of retention,
50 per cent of the options awarded to him in 2009 will vest without performance criteria in October 2012, always provided he remains
employed by the Company at that time.
28
STERLING ENERGY PLC
Non-executive Directors Long-Term Incentive Plan (audited)
The non-executive Directors’ interests in the NED LTIP are as follows:
1st January 31st December Exercise Earliest Latest
2011 Lapsed Granted Exercised 2011 price exercise date* exercise date*
Nicholas Clayton** 125,000 – – – 125,000 40p 01/10/2012 30/09/2014
Keith Henry** 125,000 – – – 125,000 40p 01/10/2012 30/09/2014
Malcolm Pattinson*** – – 125,000 – 125,000 40p 01/01/2014 31/03/2015
Richard Stabbins (resigned
31 December 2010) 52,084 – – – 52,084 40p 03/11/2011 02/02/2012
302,084 – 125,000 – 427,084
*If the Company is in a closed period the earliest and latest date of exercise may vary.
** Approved by shareholders at the AGM held on 22 December 2009.
*** Approved by shareholders at the AGM held on 28 April 2011.
Richard Stabbins did not exercise any interests by the latest expiry date of 2 February 2012.
The rules of the LTIP schemes are summarised in note 25.
For and on behalf of the Board
Keith Henry
Chairman, Remuneration Committee
19 March 2012
STERLING ENERGY PLC
29
DIRECTORS’ REPORT
The Directors present their annual report on the affairs of Sterling and its subsidiaries, together with the financial
statements and auditors’ report for the year ended 31 December 2011.
PRINCIPAL ACTIVITY AND BUSINESS REVIEW
The principal activity of the Group and Company throughout the year remained the exploration for and production of
oil and gas in Africa and the Middle East. The significant developments during 2011 and the other activities of the Group,
as well as the future strategy and prospects for the Group, are reviewed in detail in the Chairman’s Statement, the Chief
Executive’s Review, the Operational Review and the Financial Review.
The Group operates through overseas branches and subsidiary undertakings as appropriate to the fiscal environment.
Significant subsidiary undertakings of the Group are set out in note 15 to the financial statements.
The Group uses a number of key performance indicators (KPI’s) to assess the business performance against strategy.
These are net debt ($), reserves (million boe), EBITDA ($), production (bopd) and share price growth and analysis of the
KPI’s can be found in the Financial Review.
RESULTS AND DIVIDENDS
The Group profit for the financial year was $18.4 million (2010: profit of $5.8 million). This leaves an accumulated Group
retained deficit of $411.1 million (2010: deficit $431.4 million) to be carried forward. The Directors do not recommend
the payment of a dividend (2010: nil).
GOING CONCERN
The Group business activities, together with the factors likely to affect its future development, performance and position
are set out in the Operations Review on pages 6 to 12. The financial position of the Group and Company, its cash flows
and liquidity position are described in the Financial Review on page 16. In addition, note 24 to the financial statements
include the Group’s objectives, policies and processes for managing its capital financial risk: details of its financial
instruments and its exposures to credit risk and liquidity risk.
The Group has sufficient cash resources for its working capital needs and its committed capital expenditure programme
at least for the next 12 months. As a consequence, the Directors believe that both the Group and Company are well
placed to manage their business risks successfully despite the current uncertain economic outlook.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence
for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual
financial statements.
CAPITAL STRUCTURE
Details of the issued share capital, together with details of the movements in the Company’s issued share capital during
the year, are shown in note 17 to the financial statements. The Company has one class of ordinary share which carries
no right to fixed income. Each share carries the right to one vote at general meetings of the Company.
There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the
general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements
between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights.
Details of the employee share schemes are set out in note 25.
No person has any special rights of control over the Company’s share capital and all issued shares are fully paid.
30
STERLING ENERGY PLC
DIRECTORS
The Directors who served during the year were as follows:
Mr. Alastair Beardsall
Mr. Nicholas Clayton
Dr. Jonathan Cooper (resigned 18 October 2011)
Mr. Andrew Grosse (resigned 3 October 2011)
Dr. Philip Frank (appointed 3 October 2011)
Mr. Keith Henry
Mr. Angus MacAskill
Mr. Malcolm Pattinson
Biographical details of serving Directors can be found in the Board of Directors section of this report.
DIRECTORS’ ELECTION AND ROTATION
With regard to the appointment and replacement of the Directors, the Company is governed by its Articles of
Association, the Code, the Companies Acts and related legislation. The powers of Directors are described in the
Corporate Governance section.
In accordance with article 110 of the Company’s Articles of Association Philip Frank offers himself for election at the
forthcoming AGM on 19 April 2012.
In accordance with article 106 of the Company’s Articles of Association Alastair Beardsall retires by rotation and offers
himself for re-election at the forthcoming AGM.
DIRECTORS’ AND THEIR INTERESTS
The Directors, who served during the year and subsequently, together with their beneficial interests in the issued share
capital of the Company, were as follows:
Ordinary shares 19-March 31-December 31-December
of 40p each 2012 2011 2010
Alastair Beardsall** 500,000 500,000 500,000
Nicholas Clayton* 132,500 132,500 132,500
Jonathan Cooper** (resigned 18 October 2011) n/a n/a 58,012
Philip Frank** (appointed 3 October 2011) 32,204 32,204 –
Andrew Grosse** (resigned 3 October 2011) n/a n/a 696,211
Keith Henry* 500,000 500,000 500,000
Angus MacAskill** 100,000 100,000 –
Malcolm Pattinson* 62,810 62,810 12,810
* Non-executive Director, member of the Audit, Remuneration and Nominations Committees.
** Executive Director.
Beneficial shareholdings include the shareholdings of a Director’s spouse and infant children.
STERLING ENERGY PLC
31
DIRECTORS’ REPORT – continued
SUBSTANTIAL SHAREHOLDING
Except for the holdings of ordinary shares listed below, the Company has not been notified by or become aware of any
persons holding 3% or more of the 219,389,020 issued ordinary shares of 40 pence each of the Company at 19 March
2012:
Number %
Waterford Finance and Investment Limited 65,384,217 29.80
Invesco Asset Management Limited 39,737,820 18.11
Mr. Denis O’Brien 16,190,443 7.38
Artemis Investment Management Limited 10,910,174 4.97
SUPPLIER PAYMENT POLICY AND PRACTICE
The Company’s and Group’s policy is to settle terms of payment with suppliers when agreeing each transaction, ensuring
that suppliers are made aware of the terms of payment and abide by them. At the 2011 year end, the number of supplier
days outstanding for the Group was 37 days (2010: 69 days).
CHARITABLE AND POLITICAL CONTRIBUTIONS
During the year the Group and Company made charitable donations of $800 (2010: $2,500), principally to local charities
serving the communities in which the Group operates. No political contributions were made during the year (2010: $nil).
BUSINESS RISK
The Directors have identified the following current principal risks in relation to the Company’s future performance. The
relative importance of risks faced by the Company can, and is likely to change with progress in the Company’s strategy
and developments in the external business environment.
Strategic:
Strategy risk
The Company’s strategy may not deliver the results expected by shareholders. The Directors regularly monitor the
appropriateness of the strategy, taking into account both internal and external factors, and the progress in implementing
the strategy, and modify the strategy as may be required based on results. Key elements of this process are annual
business plans and strategy reviews, monthly reporting, and regular Board meetings.
The Board has identified the broadening of the exploration portfolio, using the existing financial resources of the
Company, as an important element of the Company’s strategy.
Operational:
Exploration risk
Exploration activities within the Company’s licences may not result in a commercial discovery. Sterling is pursuing a
growth strategy with a concentrated portfolio of exploration assets. The historic industry average exploration drilling
success rate is approximately one success for every five wells. There is no certainty of success from the existing portfolio.
Sterling mitigates the exploration risk through the experience and expertise of the Company’s specialists, the application
of appropriate technology, and the selection of prospective exploration assets. The Company has an objective to acquire
additional exploration assets, which will diversify exploration risk.
32
STERLING ENERGY PLC
Health, Safety, Environment, and Security (‘HSES’) risk
The Company conducts operations in countries in Africa and the Middle East. There is a risk of an HSES incident in these
operations, with the potential to impact staff, contractors, communities, and the environment, and to have a negative
impact on the Company’s reputation. This risk is mitigated through the implementation of the Company’s HSES
management system, training of staff, and selection of contractors.
Financial:
Counterparty risk
Sterling’s cash resources may be negatively affected by failure of a counterparty. To mitigate this risk, the Company holds
a large proportion of its cash reserves in US dollars on deposit with banks and institutions with a minimum credit rating
of AA-. Additionally, the maximum amount that can be placed within any single financial institution is capped. The
currency for most contracts, procurement, services and oil sales, is US dollars and therefore the Company believes it is
not particularly exposed to large currency fluctuations. Furthermore, with substantial cash reserves the Company has no
immediate requirement to raise new equity or debt and therefore is not exposed to the current uncertainty in the equity
capital or debt markets.
External:
Country risk
The Company’s assets are located in non-OECD countries. Governments, regulations, and the security environment may
change with a consequential effect on the Company’s assets. The Company’s assets in Cameroon and Madagascar are
currently affected by country-specific situations.
In Cameroon, the Company holds a 50% working interest is the highly prospective Ntem block. The Governments of
Cameroon and Equatorial Guinea are negotiating their joint maritime border, part of which runs concurrent with two of
the Ntem block boundaries. The Company believes the final location of the maritime border will not impinge upon the
Ntem area, however there is no certainty that, when agreement over the maritime border is reached, the Ntem acreage
will remain as it is defined under the current licence agreement with the Cameroon Government.
The Company is in negotiations with OMNIS and the Government of Madagascar to prolong the Ampasindava and
Ambilobe licences; the existing exploration phase of each licence ended in November 2010. The Company believes the
discussions are progressing well and expects a positive outcome; however there is no certainty of a positive outcome.
Country risk is mitigated by monitoring the political, regulatory, and security environment within the countries in which
Sterling holds assets, engaging in constructive discussions where and when appropriate, and introducing third-party
expertise if this may assist in resolution of issues affecting the Company’s assets.
The Company has an objective to acquire additional assets for the exploration portfolio, which may assist in diversifying
country risk.
STERLING ENERGY PLC
33
DIRECTORS’ REPORT – continued
In addition to the current principal risks identified above and general business risks, the Group’s business is subject to
risks inherent in oil and gas exploration, development and production activities. There are a number of potential risks
and uncertainties which could have a material impact on the Group’s long-term performance and could cause actual
results to differ materially from expected and historical results. The Company has identified certain risks pertinent to its
business including:
Category Risk
Strategic and Economic Inappropriate or poorly conceived strategy and plans
Failure to deliver on strategy and plans
Business environment changes
Significant competition
Regulatory barriers to entry
Operations in territories which are susceptible to political, fiscal and social instability
Limited diversification
Shareholder concentration
Operational HSE incident or non-compliance under local rules and/or laws
Poor field performance
Failure to add value through exploration
Licences, permits and/or approvals maybe difficult to sustain
Reliance on other operators
Delays in conducting work programmes
Commercial Failure to access new opportunities
Failure to maximise value from existing interests
Loss of control of key assets
Dissatisfied stakeholders
Failure to negotiate optimal contract terms
Reserve and production estimations are not exact determinations
Regulatory compliance and legal
Human Resources and Failure to recruit and retain key personnel
Management Processes Human error or deliberate negative action
Inadequate management processes
Insufficient timely information available to the management and the Board
Financial Restrictions in capital markets impacting available financial resource
Oil or gas price volatility impacting both revenues and reserves
Counterparty default
Cost escalation and budget overruns
Fiscal changes
Operations under-insured
Foreign currency risk
The Directors regularly monitor such risks, using information obtained or developed from external and internal sources,
and will take actions as appropriate to mitigate these. Effective risk mitigation may be critical to Sterling in achieving its
strategic objectives and protecting its assets, personnel and reputation. The Company has developed a business
management system, including a risk management process which identifies key business risks and measures to mitigate
these risks and then implements such measures considered appropriate. Other significant elements of the business
34
STERLING ENERGY PLC
management system include regular Board review of the business, defined process for preparation and approval of the
annual work programme and budget, monthly management reporting, financial operating procedures, and HSES and
anti-bribery management systems.
Sterling reviews its business risks and management systems on a regular basis and, through this process, the Directors
have identified the principal risks. The Company manages some risks by maintaining a portfolio of projects and ensuring
the Company is in compliance with the terms of all its agreements, through the application of appropriate policies and
procedures implemented in the business management system, and via the recruitment and retention of a team of skilled
and experience professionals.
FINANCIAL INSTRUMENTS
Information about the use of financial instruments, the Group’s policy and objectives for financial risk management is
given in note 24 to the financial statements.
AUDITORS
Each of the persons who are a Director at the date of approval of this Annual Report confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware;
and
• the Directors have taken all the steps that they ought to have taken as a Director in order to make themselves aware
of any relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies
Act 2006.
BDO LLP has expressed its willingness to continue in office as auditors and a resolution to appoint BDO will be proposed
at the forthcoming Annual General Meeting.
Angus MacAskill
Director
19 March 2012
STERLING ENERGY PLC
35
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors
have elected to prepare the Group and Company financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the
financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and
Company and of the profit or loss of the Group and Company for that period. The Directors are also required to prepare
financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the
Alternative Investment Market.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any
material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company
will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
WEBSITE PUBLICATION
The Directors are responsible for ensuring the annual report and the financial statements are made available on a
website. Financial statements are published on the Company’s website in accordance with legislation in the United
Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other
jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’
responsibility also extends to the ongoing integrity of the financial statements contained therein.
DIRECTORS’ RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and
fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included
in the consolidation taken as a whole; and
• the annual report includes a fair review of the development and performance of the business and the position of
the Company and the undertakings included in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.
For and on behalf of the Board
Angus MacAskill
Director
19 March 2012
36
STERLING ENERGY PLC
INDEPENDENT AUDITORS’ REPORT
We have audited the financial statements of Sterling Energy Plc for the year ended 31 December 2011 which comprise
of the group statement of comprehensive income, the group and company statement of financial position, the group
and company statement of changes in equity, the group and company statement of cash flows and the related notes.
The financial reporting framework that has been applied in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the financial statements in accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.
The Directors have chosen to comply with the requirements of the Listing Rules and Schedule 8 of the Large and
Medium-Sized Companies and Groups (Accounts and Reports Regulations) 2008 made under Section 421 of the
Companies Act 2006 (“Schedule 8”) with regard to the Directors’ Remuneration Report as if the company is a quoted
company included on the official list.
Our responsibility is to audit and express an opinion on that part of the Directors’ Remuneration Report to be audited.
Other than previously noted we are not responsible for auditing and expressing an opinion on the company’s compliance
with the requirements of the Listing Rules.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
A description of the scope of an audit of financial statements is provided on the APB’s website at
www.frc.org.uk/apb/scope/private.cfm.
OPINION ON FINANCIAL STATEMENTS
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at
31 December 2011 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European
Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the provisions of the Companies Act 2006;
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
STERLING ENERGY PLC
37
INDEPENDENT AUDITORS’ REPORT – continued
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to
you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Scott Knight (senior statutory auditor)
For and on behalf of BDO LLP,
statutory auditor
London
United Kingdom
19 March 2012
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
38
STERLING ENERGY PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2011
31st December 2011 31st December 2010
Note $000 $000
Revenue 4 19,146 25,314
Cost of sales 6 (6,113) (13,565)
Gross profit 13,033 11,749
Other administrative expenses (3,728) (3,649)
Reversal of impairment of oil and gas assets 8,269 –
Impairment of oil and gas assets (33) (152)
Pre-licence costs (1,282) (698)
Total administrative expenses 3,226 (4,499)
Profit from operations 5 16,259 7,250
Finance income 8 3,212 224
Finance expense 8 (1,051) (1,629)
Profit before tax 18,420 5,845
Tax 9 – –
Profit for the year attributable to the
owners of the parent 18,420 5,845
Other comprehensive income/(expense)
Currency translation adjustments 31 (127)
Revaluation of investments – (12)
Total other comprehensive income/(expense) for the year 31 (139)
Total comprehensive income for the year
attributable to the owners of the parent 18,451 5,706
Basic profit per share (USc) 11 8.40 2.66
Diluted profit per share (USc) 11 8.29 2.65
STERLING ENERGY PLC
39
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December 2011
31st December 2011 31st December 2010
Note $000 $000
Non-current assets
Intangible royalty assets 12 3,221 824
Intangible exploration and evaluation assets 13 22,455 20,793
Property, plant and equipment 14 5,643 175
31,319 21,792
Current assets
Inventories 2,872 901
Trade and other receivables 16 922 17,695
Cash and cash equivalents 115,826 111,679
119,620 130,275
Total assets 150,939 152,067
Equity
Share capital 17 148,589 148,573
Share premium 378,859 378,859
Currency translation reserve (204) (235)
Retained deficit (411,103) (431,380)
Total equity 116,141 95,817
Non-current liabilities
Long-term provisions 20 20,297 22,231
20,297 22,231
Current liabilities
Trade and other payables 21 14,501 34,019
14,501 34,019
Total liabilities 34,798 56,250
Total equity and liabilities 150,939 152,067
The financial statements of Sterling Energy Plc, registered number 1757721 were approved by the Board of Directors
and authorised for issue on 19 March 2012.
Signed on behalf of the Board of Directors
Angus MacAskill
Director
Alastair Beardsall
Director
40
STERLING ENERGY PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2011
Investment Currency
Share Share revaluation translation Retained
capital premium reserve reserve deficit* Total
$000 $000 $000 $000 $000 $000
At 1 January 2010 148,537 378,859 12 (108) (439,161) 88,139
Profit for the year – – – – 5,845 5,845
Investment revaluation – – (12) – – (12)
Currency translation adjustments – – – (127) – (127)
Total comprehensive income for the year
attributable to the owners of the parent – – (12) (127) 5,845 5,706
Issued share capital 36 – – – – 36
Share option charge for the year – – – – 1,936 1,936
At 31 December 2010 148,573 378,859 – (235) (431,380) 95,817
Profit for the year – – – – 18,420 18,420
Currency translation adjustments – – – 31 – 31
Total comprehensive income for the year
attributable to the owners of the parent – – – 31 18,420 18,451
Issued share capital 16 – – – – 16
Share option charge for the year – – – – 1,857 1,857
At 31 December 2011 148,589 378,859 – (204) (411,103) 116,141
* The share option reserve has been included within the retained deficit reserve.
STERLING ENERGY PLC
41
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2011
31st December 2011 31st December 2010
Note $000 $000
Operating activities
Cash generated from operations 23 5,573 10,446
Net cash flow from operating activities 5,573 10,446
Investing activities
Interest received 365 224
Purchase of property, plant and equipment (41) (178)
Exploration and evaluation costs (1,695) (12,030)
Proceeds on disposal of available for sale assets – 20
Proceeds on disposal of PPE 22 –
Net cash used in investing activities (1,349) (11,964)
Financing activities
Net proceeds from issue of ordinary shares 16 36
Net cash flow generated from financing activities 16 36
Net increase/(decrease) in cash and cash equivalents 4,240 (1,482)
Cash and cash equivalents at beginning of year 111,679 113,859
Effect of foreign exchange rate changes (93) (698)
Cash and cash equivalents at end of year 115,826 111,679
42
STERLING ENERGY PLC
COMPANY STATEMENT OF FINANCIAL POSITION
31 December 2011
31st December 2011 31st December 2010
Note $000 $000
Non-current assets
Property, plant and equipment 14 5,602 15
Investments 15 105,740 223,137
111,342 223,152
Current assets
Inventories 2,872 901
Trade and other receivables 16 21,395 47,185
Cash and cash equivalents 114,831 100,936
139,098 149,022
Total assets 250,440 372,174
Equity
Share capital 17 148,589 148,573
Share premium 378,859 378,859
Retained deficit (368,070) (371,480)
Total equity 159,378 155,952
Non-current liabilities
Long-term provisions 20a 20,144 22,032
20,144 22,032
Current liabilities
Trade and other payables 21 70,918 194,189
70,918 194,189
Total liabilities 91,062 216,221
Total equity and liabilities 250,440 372,174
The financial statements of Sterling Energy Plc, registered number 1757721 were approved by the Board of Directors
and authorised for issue on 19 March 2012.
Signed on behalf of the Board of Directors
Angus MacAskill
Director
Alastair Beardsall
Director
STERLING ENERGY PLC
43
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2011
Share Share Retained
capital premium deficit* Total
$000 $000 $000 $000
At 1 January 2010 148,537 378,859 (381,565) 145,831
Total comprehensive income for the year – – 8,149 8,149
Issued share capital – – – 36
Share option charge for the year 36 – 1,936 1,936
At 31 December 2010 148,573 378,859 (371,480) 155,952
Total comprehensive income for the year – – 1,553 1,553
Issued share capital 16 – – 16
Share option charge for the year – – 1,857 1,857
At 31 December 2011 148,589 378,859 (368,070) 159,378
* The share option reserve has been included within the retained deficit reserve.
COMPANY STATEMENT OF CASH FLOWS
Year ended 31 December 2011
31st December 2011 31st December 2010
Note $000 $000
Operating activities
Cash generated from/(used in) operations 23 13,527 (4,484)
Net cash flow used in operating activities 13,527 (4,484)
Investing activities
Interest received 365 224
Proceeds on disposal of PPE 22 –
Net cash generated from investing activities 387 224
Financing activities
Net proceeds from issue of ordinary shares 16 36
Net cash flow generated from financing activities 16 36
Net increase/(decrease) in cash and cash equivalents 13,930 (4,224)
Cash and cash equivalents at beginning of year 100,936 106,265
Effect of foreign exchange rate changes (35) (1,105)
Cash and cash equivalents at end of year 114,831 100,936
44
STERLING ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2011
1. ACCOUNTING POLICIES
a) General information
Sterling Energy Plc is a public Company incorporated in the United Kingdom under the UK Companies Act. The
address of the registered office is 5 Chancery Lane, London, WC2A 1LG. The Company and the Group are
engaged in the exploration for, and development and production of, oil and gas.
These financial statements are presented in US dollars as this is the currency in which the majority of the Group’s
revenues and expenditure are transacted and the functional currency of the Company.
b) Basis of accounting and adoption of new and revised standards
(i) New and amended standards adopted by the Group:
The following new standards and amendments to standards are mandatory for the first time for the Group for
financial year beginning 1 January 2011. Except as noted, the implementation of these standards is not expected
to have a material effect on the Group.
Standard
Effective date
Impact on initial application
IAS 24 – Revised – Related
1 January 2011
The structure of definition of a related party has been
Party Disclosures
simplified and
inconsistencies eliminated.
Illustrative
examples have also been added. The entities that are most
likely to be affected are those that are part of a group that
includes both subsidiaries and associates, and entities with
shareholders that are involved with other entities.
Improvements to IFRSs
Generally
The
improvements
in this Amendment clarify the
(2010)
1 January 2011
requirements of IFRSs and eliminate inconsistencies within
and between Standards. The improvements did not have
any impact on the current or prior years’ financial
statements.
No other IFRS issued and adopted but not yet effective are expected to have an impact on the Group’s financial
statements.
STERLING ENERGY PLC
45
NOTES TO THE FINANCIAL STATEMENTS – continued
1. ACCOUNTING POLICIES – continued
(ii) Standards, amendments and interpretations, which are effective for reporting periods beginning after the date
of these financial statements which have not been adopted early:
Standard
Description
IFRS 7
Amendment disclosure of information in respect of transferred
financial assets not derecognised
Amendment of fixed date of transition to IFRSs’
Deferred Tax: Recovery of Underlying Assets
Presentation of Items of Other Comprehensive Income
Financial Instruments
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
Separate Financial Statements
Investments in Associates and Joint Ventures
Employee Benefits
IFRS 1
IAS 12
IAS 1
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IAS 27
IAS 28
IAS 19
IFRS 7
IAS 32
Effective date
1 July 2012
1 July 2011
1 January 2012
1 July 2012
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
1 January 2013
Amendment disclosure, offsetting financial assets and financial liabilities.
1 January 2013
Amendment offsetting financial assets and financial liabilities.
1 January 2014
The Group has not yet assessed the impact of IFRS 9. Amendments and interpretations are not expected to
materially affect the Group’s reporting or reported numbers.
c) Going concern
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group
has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to
adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in
the Directors’ Report.
d) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and the entities
controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the
Company has the power to govern the financial and operating policies of an invested entity so as to obtain
benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of
comprehensive income from the effective date of acquisition or up to the effective date of disposal, as
appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting
policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
As a consolidated Group statement of comprehensive income and expense is published, a separate statement of
comprehensive income and expense for the parent Company has not been published in accordance with section
408 of the Companies Act 2006.
46
STERLING ENERGY PLC
1. ACCOUNTING POLICIES – continued
Jointly controlled operations are arrangements in which the Group holds an interest on a long term basis which
are jointly controlled by the Group and one or more ventures under a contractual arrangement. The Group’s
exploration, development and production activities are sometimes conducted jointly with other companies in this
way. Since these arrangements do not constitute entities in their own right, the consolidated financial statements
reflect the relevant proportion of costs, revenues, assets and liabilities applicable to the Group’s interests.
e) Revenue
Sales of oil and gas are recognised, net of any sales taxes when goods are delivered or the title has passed to the
customer. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective
interest rate applicable. Royalties and tariff income are recognised as earned on an entitlement basis. Dividend
revenue from investments is recognised when the shareholders’ rights to receive payment have been established.
f) Oil and gas interests
Exploration and evaluation assets
The Group accounts for oil and gas exploration under the full cost method having regard to the requirements of
IFRS 6 Exploration for and Evaluation of Mineral Resources. E&E costs are initially capitalised within intangible
assets. Such E&E costs include licence acquisition costs, geological and geophysical costs, costs of drilling
exploration and appraisal wells, and an appropriate share of overheads. E&E costs are capitalised and
accumulated in cost pools which are not larger than a segment. Expenditures incurred before the Group has
obtained the legal rights to explore a specific area are expensed in the year that they are incurred.
Costs relating to the exploration and evaluation of oil and gas interests are carried forward until the existence or
otherwise of commercial reserves has been determined.
If commercial reserves have been discovered, the related E&E assets are assessed for impairment and the resultant
carrying value is then reclassified as oil and gas assets within property, plant and equipment, on a cost pool by
cost pool basis.
E&E assets that are determined not to have resulted in the discovery of commercial reserves remain capitalised
as intangible E&E assets at cost, subject to the relevant cost pool meeting an impairment test as set out below.
Under the full cost method, impairment tests on E&E assets are conducted on an individual cost pool basis,
including any development or producing assets, when facts and circumstances suggest that the carrying amount
in the pool may exceed its recoverable amount. Such indicators include the point at which a determination is
made as to whether or not commercial reserves exist. The E&E assets are tested for impairment together with all
development and production assets associated with that cost pool, as a single cash-generating unit. The
aggregate carrying value is compared against the expected recoverable amount of the cost pool, generally by
reference to the present value of the future cash flows expected to be delivered from production of commercial
reserves. Where the E&E assets to be tested fall outside the scope of any established cost pool, there will generally
be no commercial reserves and if the E&E is determined as unsuccessful the E&E assets concerned will be written
off in full. Any impairment loss is separately recognised within the statement of comprehensive income.
Impaired assets are reviewed annually to determine whether any substantial change to their fair value amounts
previously impaired would require reversal.
A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change
in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying
amount that would have been determined (net of depletion or amortisation) had no impairment loss been
STERLING ENERGY PLC
47
NOTES TO THE FINANCIAL STATEMENTS – continued
1. ACCOUNTING POLICIES – continued
recognised in prior periods. Reversal of impairments and impairment charges are credited/(charged) to a separate
line item under total costs in the Consolidated Income Statement.
Refer to note 5 for detailed disclosure of the results of impairments and impairment reviews performed.
Development and production assets
Development and production assets are generally accumulated on a field-by-field basis and include the cost of
developing the commercial reserves discovered and bringing them into production, together with the E&E
expenditures, incurred in finding commercial reserves, transferred from intangible E&E assets as outlined above,
which constitutes a single cash generating unit. Depletion is provided for on a cash-generating unit basis on a
unit of production basis over the life of the proven and probable commercial reserves taking into account the
expected future costs to extract all such reserves.
An impairment test is performed on an individual cash-generating unit whenever events and circumstances
indicate that the carrying value of an asset may exceed its recoverable amount.
The recoverable amount is assessed as the present value of the future cash flows expected to be derived from
production of commercial reserves.
The cash-generating unit basis is generally the field, however, oil and gas assets, including infrastructure assets,
may be accounted for on an aggregated basis where such assets are economically inter-dependent.
Property, plant and equipment assets other than oil and gas assets
Property, plant and equipment other than oil and gas assets are stated at cost, less accumulated depreciation,
and any provision for impairment. Depreciation is provided at rates estimated to write off the cost, less estimated
residual value, of each asset over its expected useful life as follows:
Computer and office equipment – 33% straight line
g) Decommissioning
Provisions for decommissioning costs are recognised in accordance with IAS 37 Provisions, Contingent Liabilities
and Contingent Assets. Provisions are recorded at the present value of the expenditures expected to be required
to settle the Group’s future obligations.
Provisions are reviewed at each reporting date to reflect the current best estimate of the cost at present value.
The unwinding of the discount is reflected as a finance expense. A decommissioning asset is also established,
since the future cost of decommissioning is regarded as part of the total investment to gain access to future
economic benefits, and included as part of the cost of the relevant development and production asset. Depletion
on this asset is calculated under the unit of production method based on commercial reserves.
h) Intangible royalty interests
The carrying value of each individual royalty interest is initially stated at cost, and amortised on the unit of
production basis relative to the underlying asset and assessed individually for impairment when there is an
indication that an impairment event may have occurred.
i) Foreign currencies
The US dollar is the functional and reporting currency of the Company and the reporting currency of the Group.
Transactions denominated in other currencies are translated into US dollar at the rate of exchange ruling at the
date of the transaction. Assets and liabilities in other currencies are translated into US dollars at the rate of
48
STERLING ENERGY PLC
1.
ACCOUNTING POLICIES – continued
exchange ruling at the reporting date. All exchange differences arising from such translations are dealt with in
current year comprehensive income.
The results of entities with a functional currency other than the US dollar are translated at the average rates of
exchange during the period and their statement of financial position at the rates ruling at the reporting date.
Exchange differences arising on translation of the opening net assets and on translation of the results of such
entities are dealt with through the currency translation reserve.
j) Taxation
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported
in the statement of comprehensive income because it excludes items of income or expense that are taxable or
deductible on other years and it further excludes items that are never taxable or deductible. The Group’s liability
for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of
assets and liabilities in the financial statements and the corresponding tax bases used in the computation of
taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and
associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary
differences and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it
is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or
the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when
it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets
against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the
Group intends to settle its current tax assets and liabilities on a net basis.
k) Investments (Company)
Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under
a contract whose terms require delivery of the investment within the timeframe established by the market
concerned, and are initially measured at cost, including transaction costs.
Non-current investments in subsidiary undertakings are shown in the Company’s Statement of Financial Position
at cost less any provision for permanent diminution of value.
l) Operating leases
Rentals under operating leases are charged on a straight-line basis over the lease term.
STERLING ENERGY PLC
49
NOTES TO THE FINANCIAL STATEMENTS – continued
1. ACCOUNTING POLICIES – continued
m) Financial instruments
The Group has the following Financial Instruments, all financial assets are loans and receivables. There are no
other categories of financial asset.
Trade receivables
Trade receivables are measured at amortised cost, unless the effect of the time value of money is immaterial.
Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is
objective evidence that the asset is impaired.
Cash and cash equivalents
Cash and cash equivalents comprise demand deposits, and other short term highly liquid investments, with an
original maturity of less than 3 months, and are readily convertible to a known amount of cash and are subject
to an insignificant risk of change in value.
The Group has the following financial liabilities, all are classified as held at amortised cost. The Group holds no
other categories of financial liability.
Trade payables
Trade payables are stated at their amortised cost.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual
arrangements entered into. An equity instrument is any contract that evidences a residual interest in the asset of
the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the
proceeds received net of direct issue costs.
n) Pension costs
The Group operates a number of defined contribution pension schemes. The amount charged to the Statement
of Comprehensive Income for these schemes is the contributions payable in the year. Differences between
contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in
the Statement of Financial Position.
o) Share-based payments
The Company and Group have applied the requirements of IFRS 2 Share-based payments. The Company issues
equity share-based payments to certain employees. The fair value of these awards has been determined at the
date of the grant of the award allowing for the effect of any market-based performance conditions. This fair
value, adjusted by the estimate of the number of awards that will eventually vest as a result of non-market
conditions, is expensed uniformly over the vesting period.
The fair values are calculated using an option pricing model with suitable modifications to allow for employee
turnover before vesting and early exercise. The inputs to the model include: the share price at the date of grant;
exercise price; expected volatility; expected dividends; risk-free rate of interest; and patterns of exercise of the
plan participants.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of the
options, measured immediately before and after the modification, is also charged to the Consolidated Statement
of Comprehensive Income over the remaining vesting period.
50
STERLING ENERGY PLC
1. ACCOUNTING POLICIES – continued
p) Over/(under) lift
Lifting or off take arrangements for oil and gas produced in certain of the Group’s operations are such that each
participant may not receive and sell its precise share of the overall production in each period. The resulting
imbalance between cumulative entitlement and cumulative liftings is ‘underlift’ or ‘overlift’. Underlifts are valued
at the lower of cost and net realisable value and overlifts are valued at market value. Adjustments are made to
cost of sales and balances included within receivables and payables as appropriate.
q) Inventories
The Group’s share of any material and equipment inventories is accounted for at the lower of cost and net
realisable value. Net realisable value is the estimated selling price less the estimated costs of completion and the
estimated costs necessary to make the sale. The cost of inventories comprises all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.
r) Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable
that the Group would be required to settle that obligation. Provisions are measured at the management’s best
estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present
value where the effect is material.
s) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision makers. The chief operating decision makers have been identified as the executive Board
members.
The operating results of each of the geographical segments are regularly reviewed by the Group’s chief operating
decision makers in order to make decisions about the allocation of resources and to assess their performance.
Africa has exploration and development activities, the Middle East has exploration activities and the United
Kingdom office is an administrative cost centre.
2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
In the application of the Group’s accounting policies, which are described in note 1, the Directors are required to
make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not
readily apparent from other sources. The estimates and associated assumptions are based on historical experience
and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised if the revision affects only that period, or in the
period of the revision and future periods if the revision affects both current and future periods.
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are discussed below.
STERLING ENERGY PLC
51
NOTES TO THE FINANCIAL STATEMENTS – continued
2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY – continued
Commercial reserves
Commercial reserves are proven and probable oil and gas reserves, calculated on an entitlement basis. Estimates
of commercial reserves underpin the calculation of depletion and amortisation on a unit of production basis.
Estimates of commercial reserves include estimates of the amount of oil and gas in place, assumptions about
reservoir performance over the life of the field and assumptions about commercial factors which, in turn, will be
affected by the future oil and gas price.
Impairment of assets
Management is required to assess the oil and gas assets for indicators of impairment. The carrying value of oil
and gas assets is disclosed in notes 12, 13 and 14. The carrying value of related investments in the Company
statement of financial position is disclosed in note 15. As part of this assessment, management has carried out
an impairment test on the Chinguetti oil and gas assets within property, plant and equipment. This test compares
the carrying value at the reporting date with the expected discounted cash flows from the relevant projects.
For the discounted cash flows to be calculated, management has used a production profile based on its best
estimate of proven and probable reserves and a range of assumptions including a 10% pre-tax discount rate and
an internally estimated oil price profile. Exploration and evaluation assets are subject to a separate review for
indicators of impairment, by reference to the impairment indicators set out in IFRS 6, which is inherently
judgemental.
Decommissioning
The Group has obligations in respect of decommissioning in Mauritania. The extent to which a provision is
recognised depends on the legal requirements at the date of decommissioning, the estimated costs and timing
of the work and the discount rate applied. Decommissioning estimates for the Chinguetti field are based on a
range of operator estimates which are currently under further review by the operator and the Chinguetti
partners. Sterling believes the field could be abandoned earlier than originally planned and allowance has been
made for this in the calculation of the obligation.
Fair values
The determination of the fair values of oil and gas properties, particularly exploration and evaluation assets and
royalty assets, requires the use of estimates similar to those described above.
Share-based payments
Management is required to make assumptions in respect of the inputs used to calculate the fair value of share-
based payment arrangements. Details of these can be found in note 25.
3. OPERATING SEGMENTS
The Group’s two operating segments are its Africa and Middle East segments. The UK corporate office is a
technical and administrative cost centre. The operating results of each of these segments are regularly reviewed
by the Group’s executive Directors and senior management in order to make decisions about the allocation of
resources and to assess their performance.
The accounting policies of these segments are in line with those set out in note 1.
52
STERLING ENERGY PLC
3. OPERATING SEGMENTS – continued
The following tables present revenue, profit and certain asset and liability information regarding the Group’s
operating segments for the year ended 31 December 2011, and for the year ended 31 December 2010.
Corporate
Africa
Middle East
Total
2011 2010 2011 2010 2011 2010 2011 2010
$000 $000 $000 $000 $000 $000 $000 $000
Other segment information
Capital additions
Property, plant and
equipment 41 178 – – – – 41 178
Exploration and
evaluation – – (2,786) 3,045 4,481 8,985 1,695 12,030
Depreciation &
amortisation (160) (299) (267) (1,003) – – (427) (1,302)
Impairment reversal – – 8,269 – – – 8,269 –
Impairment provision – – (33) (152) – – (33) (152)
Segment Assets and
Liabilities
Non-current assets* 41 159 17,432 12,268 13,846 9,365 31,319 21,792
Segment assets** 115,300 102,004 3,297 7,841 1,023 20,430 119,620 130,275
Segment liabilities*** (994) (1,873) (33,088) (34,692) (716) (19,685) (34,798) (56,250)
Revenue from continuing operations includes amounts of $17.5 million from one single customer (2010: $24.0 million). (100%
external).
* Segment non-current assets include $6.0 million in Cameroon (2010: $9.4 million), $13.8 million in Kurdistan (2010:
$9.4 million) and $8.8 million in Mauritania (2010: nil).
** Carrying amounts of segment assets exclude investments in subsidiaries.
*** Carrying amounts of segment liabilities exclude intra-group financing.
2011 2010 2011 2010 2011 2010
$000 $000 $000 $000 $000 $000
Africa
Middle East
Total
Statement of comprehensive income
Revenue 19,146 25,314 – – 19,146 25,314
Cost of sales (6,113) (13,565) – – (6,113) (13,565)
Gross profit 13,033 11,749 – – 13,033 11,749
Impairment reversal 8,269 – – – 8,269 –
Impairment provision (33) (152) – – (33) (152)
Pre-licence costs (1,282) (698) – – (1,282) (698)
Segment result 19,987 10,899 – – 19,987 10,899
Unallocated corporate expenses (3,728) (3,649)
Profit from operations 16,259 7,250
Finance income 3,212 224
Finance expense (1,051) (1,629)
Profit before tax 18,420 5,845
Tax – –
Profit attributable to owners of the parent 18,420 5,845
STERLING ENERGY PLC
53
NOTES TO THE FINANCIAL STATEMENTS – continued
4. REVENUE
2011 2010
$000 $000
Revenue from the sale of oil and gas 17,509 23,978
Royalty income 1,637 1,336
Total operating revenue 19,146 25,314
Total
5. PROFIT FROM OPERATIONS
Profit from operations is stated after charging/(crediting):
2011 2010
Note $000 $000
Staff costs 7 4,554 5,772
Share-based payments 7 1,857 1,936
Impairment reversal (8,269) –
Impairment expense 33 152
Depreciation of other non-current assets 14 161 308
Total
An analysis of auditor’s remuneration is as follows:
Fees payable to the Group’s auditors for the audit of the
Group’s annual accounts 70 62
Audit of the Company’s subsidiaries pursuant to legislation 32 31
Total audit fees 102 93
Tax advisory services to previous auditors 37 36
Total non audit fees 37 36
During the year the Company reversed impairments totalling $8.269 million in accordance with IAS 36
“Impairment of Assets” following a review by the operator of forecast field life estimations on the Chinguetti
field in Mauritania. This review resulted in an extension of the economic field life to better reflect decline rates
that have been regressing less aggressively than originally prognosed. Of the $8.269 million, $5.606 million
relates to reversals of prior period impairment losses on the Chinguetti Funding Agreement and $2.663 million
to reversals of prior period impairment losses on the Chinguetti Intangible Royalty Asset.
Impairment reversals have been determined by estimating the value in use and resulted in an increase in field
reserves of 0.472 million barrels of oil (Reserves Summary page 13). In calculating this impairment, management
used a range of assumptions, including a long-term oil price of $85 per barrel and a 10% pre-tax discount rate.
6. COST OF SALES
2011 2010
$000 $000
Amortisation of intangible royalty asset 266 994
Operating costs 7,814 9,105
(Under)/over lift of product entitlement (1,967) 3,466
6,113 13,565
54
STERLING ENERGY PLC
7. EMPLOYEE INFORMATION
The average monthly number of employees of the Group (including executive Directors) was:
2011 2010
Africa & Middle East 17 20
Corporate support staff 14 14
31 34
Group employee costs during the year (including executive Directors) amounted to:
2011 2010
$000 $000
Wages and salaries 3,831 4,912
Social security costs 426 497
Other pension costs 297 363
Share-based payments 1,857 1,936
6,411 7,708
Key management personnel include Directors who have been paid $1.600 million (2010: $2.142 million), see
Remuneration Report for additional detail.
A portion of the Group’s staff costs and associated overheads are recharged to the joint venture partners,
expensed as pre-licence expenditure or capitalised where they are directly attributable to on-going capital
projects. In 2011 this portion amounted to $5.140 million (2010: $6.807 million).
8. FINANCE INCOME AND FINANCE EXPENSE
2011 2010
$000 $000
Finance income:
Interest revenue on short-term deposits 365 224
Revisions to discount on decommissioning provision in year 2,847 –
3,212 224
Finance expense:
Interest on bank loans and bank charges 10 14
Unwinding of discount on decommissioning provision 959 1,045
Unwinding of discount on production royalty bonus provision 21 19
Exchange differences 61 551
1,051 1,629
STERLING ENERGY PLC
55
NOTES TO THE FINANCIAL STATEMENTS – continued
9. TAXATION
The difference between the tax credit of $nil (2010: $nil) and the amount calculated by applying the applicable
standard rate of tax is as follows:
2011 2010
$000 $000
Profit before tax 18,420 5,845
Total
Tax on profit on ordinary activities at standard UK corporation
tax rate of 26.5% (2010: 28%) 4,881 1,637
Effects of:
Expenses not deductible for tax purposes (2,117) 866
Capital allowances in excess of depreciation (2,981) (3,644)
Other temporary differences – (25)
Adjustment for tax losses 217 1,166
Tax charge for the year – –
10. PROFIT ATTRIBUTABLE TO THE COMPANY
The profit for the financial year dealt within the Company accounts of Sterling Energy Plc was $1.553 million
(2010: profit of $8.149 million). As provided by s408 of the Companies Act 2006, no individual statement of
comprehensive income and expense is provided in respect of the Company.
11. EARNINGS PER SHARE
The calculation of basic profit per share is based on the Group consolidated profit for the financial year of
$18.420 million (2010: profit $5.845 million) and on 219,382,869 (2010: 219,332,806) ordinary shares, being
the weighted average number of ordinary shares in issue. For the year ended 31 December 2011, the basic
earnings per share were 8.40 US¢ per share (2010: profit 2.66 US¢ per share).
For the year ended 31 December 2011, the fully diluted earnings per share were 8.29 US¢ per share (2010: 2.65
US¢ per share). This is computed based on 222,292,291 (2010: 220,865,039) ordinary shares, being the total
used for the computation of the basic earnings per share as adjusted in assuming the exercise of 2,909,000 of
the 8,844,000 options granted or approved for grant as at 31 December 2011 (see note 25 on page 68).
12. INTANGIBLE ROYALTY ASSETS
Group
$000
Net book value at 31 December 2009 and 1 January 2010 1,818
Amortisation charge for the year (994)
Net book value at 31 December 2010 824
Impairment reversal 2,663
Amortisation charge for the year (266)
Net book value at 31 December 2011 3,221
Group net book value at 31 December 2011 comprises the value of rights to future royalties in respect of the
Group’s agreements covering licences PSC A and PSC B in Mauritania. The value of these royalty interests is
56
STERLING ENERGY PLC
12. INTANGIBLE ROYALTY ASSETS – continued
dependent upon future oil and gas prices and the development and production of the underlying oil and gas
reserves.
An impairment assessment and any subsequent charge are calculated on an individual royalty interest basis.
Future recoverable amounts are estimated by management based on the present value of future cash flows
expected to be derived from the production of commercial reserves in these licences and are compared against
the carrying value of these assets.
During the year impairment losses recognised in prior periods totalling $2.664 million have been reversed on the
Chinguetti asset. Details of impairment losses can be found in note 1 on page 48 and note 5 on page 54.
13. INTANGIBLE EXPLORATION AND EVALUATION (E&E) ASSETS
Group
$000
Net book value at 31 December 2009 and 1 January 2010 8,957
Additions during the year 12,030
Impairment charge for the year (194)
Net book value at 31 December 2010 20,793
Additions during the year 6,474
Reimbursement of back costs on farm-out (4,779)
Impairment charge for the year (33)
Net book value at 31 December 2011 22,455
The amount for intangible exploration and evaluation assets represents investments in respect of exploration
licences (see note 1f). Impairment tests on E&E assets are conducted on an individual cost pool basis when facts
and circumstances suggest that the carrying amount in the pool may exceed its recoverable amount. The
impairment recorded above relates to assets held in the Africa pool of $0.04 million (2010: $0.2 million) where
the estimated recoverable amount of the property, plant and equipment and E&E in the pool was insufficient to
cover the carrying amount.
During the year the Group successfully completed a farm-out of the Ntem block. As part of the farm-out
agreement Sterling received $4.8 million of costs previously incurred on this block (see financial review page 16).
STERLING ENERGY PLC
57
NOTES TO THE FINANCIAL STATEMENTS – continued
14. PROPERTY, PLANT AND EQUIPMENT
Computer
Oil and Gas and office
assets equipment Total
Group $000 $000 $000
Cost
At 31 December 2009 and 1 January 2010 185,871 2,771 188,642
Additions during the year – 178 178
Adjustments during the year (42) – (42)
At 31 December 2010 185,829 2,949 188,778
Additions during the year – 41 41
Disposals in the year – (26) (26)
Adjustments during the year (4) – (4)
At 31 December 2011 185,825 2,964 188,789
Accumulated depreciation and impairment
At 31 December 2009 and 1 January 2010 (185,871) (2,466) (188,337)
Charge for the year – (308) (308)
Impairment reversal for the year 42 – 42
At 31 December 2010 (185,829) (2,774) (188,603)
Charge for the year – (161) (161)
Disposals in the year – 12 12
Impairment reversal for the year 5,606 – 5,606
At 31 December 2011 (180,223) (2,923) (183,146)
Net book value at 31 December 2011 5,602 41 5,643
Net book value at 31 December 2010 – 175 175
Net book value at 31 December 2009 – 305 305
58
STERLING ENERGY PLC
14. PROPERTY, PLANT AND EQUIPMENT – continued
Computer
Oil and Gas and office
assets equipment Total
Company $000 $000 $000
Cost
At 31 December 2009 and 1 January 2010 185,871 176 186,047
Adjustments during the year (42) – (42)
At 31 December 2010 185,829 176 186,005
Adjustments during the year (4) – (4)
Disposals in the year – (26) (26)
At 31 December 2011 185,825 150 185,975
Accumulated depreciation and impairment
At 31 December 2009 and 1 January 2010 (185,871) (151) (186,022)
Charge for the year – (10) (10)
Impairment reversal for the year 42 – 42
At 31 December 2010 (185,829) (161) (185,990)
Charge for the year – (1) (1)
Disposals in the year – 12 12
Impairment reversal for the year 5,606 – 5,606
At 31 December 2011 (180,223) (150) (180,373)
Net book value at 31 December 2011 5,602 – 5,602
Net book value at 31 December 2010 – 15 15
Net book value at 31 December 2009 – 25 25
During the year impairment losses recognised in prior periods totalling $5.606 million have been reversed on the
Chinguetti asset. Details of impairment losses can be found in note 1 on page 48 and note 5 on page 54.
15. INVESTMENT IN SUBSIDIARIES
Company
$000
Cost
At 1 January 2010 221,386
Additions during the year 1,751
At 31 December 2010 223,137
Additions during the year 1,539
Disposals during the year on liquidation of subsidiary undertakings (118,936)
At 31 December 2011 105,740
STERLING ENERGY PLC
59
NOTES TO THE FINANCIAL STATEMENTS – continued
15. INVESTMENT IN SUBSIDIARIES – continued
The principal subsidiary undertakings at the year-end are as follows (these undertakings are included on
consolidation):
Proportion
of voting
Country of Class of rights
incorporation shares held held # Nature of business
Sterling Energy (UK) Limited * United Kingdom Ordinary 100% Exploration for oil and gas
Sterling Energy (International) Limited ** United Kingdom Ordinary 100% Exploration for oil and gas
Sterling Northwest Africa Holdings Limited * Jersey, CI Ordinary 100% Exploration for oil and gas
Sterling Cameroon Holdings Limited *** Jersey, CI Ordinary 100% Investment holding company
Sterling Cameroon Limited *** Jersey, CI Ordinary 100% Exploration for oil and gas
* Held directly by the Company, Sterling Energy Plc
** Held directly by Sterling Energy (UK) Limited
*** Held directly or indirectly through Sterling Northwest Africa Limited
# 2011 and 2010
During the year the Company voluntarily liquidated Sterling Energy (Mauritania) Limited and Sterling Oil Ltd. The
carrying value of these subsidiaries at the date of disposal was $118.936 million. The net loss on the disposal of
these subsidiaries totalled $16.561 million.
16. TRADE AND OTHER RECEIVABLES
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Trade receivables 428 6,945 21 6,557
Amounts owed by subsidiary undertakings – – 21,308 40,541
Other receivables 51 212 13 41
Amounts due from joint venture partners 46 10,122 – –
Prepayments and accrued income 397 416 53 46
922 17,695 21,395 47,185
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
17. SHARE CAPITAL
2011 2010
$000 $000
Authorised, called up, allotted and fully paid
219,389,020 (2010: 219,363,506) ordinary shares of 40p 148,589 148,573
Movements during the year included:
•
Issue of 25,514 Ordinary Shares of 40 pence to a former employee on 29 March 2011.
60
STERLING ENERGY PLC
18. RESERVES
Reserves within equity are as follows:
Share capital
Amounts subscribed for share capital at nominal value.
Share premium account
The share premium account represents the amounts received by the Company on the issue of its shares which
were in excess of the nominal value of the shares.
Investment revaluation reserve
Gains/losses arising on the revaluation of the Group’s investments that are classified as available-for-sale.
Currency translation reserve
The foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries
whose functional currencies are not the US$.
Retained deficit
Cumulative net gains and losses recognised in the Statement of Comprehensive Income less any amounts
reflected directly in other reserves.
19. DEFERRED TAX
At the reporting date the Group had an unrecognised deferred tax asset of $21.490 million (2010: $22.190
million) relating primarily to unused tax losses and unutilised capital allowances. No deferred tax asset has been
recognised due to the uncertainty of future profit streams against which these losses could be utilised. At the
reporting date the Company had an unrecognised deferred tax asset of $21.273 million (2010: $21.919 million)
relating primarily to unused losses and unutilised capital allowances.
20. LONG-TERM PROVISIONS
2011 2010
$000 $000
Group
Decommissioning provision (a) 20,144 22,032
2003 Production royalty bonus scheme (b) 153 199
20,297 22,231
a) Decommissioning provisions
2011 2010
$000 $000
Group
At 1 January 22,032 20,987
Revisions in year (2,847) –
Unwinding of discount 959 1,045
20,144 22,032
The amounts shown above for Africa represent the estimated costs for decommissioning the Group’s producing
interests in respect of its economic interest in the Chinguetti field in Mauritania.
STERLING ENERGY PLC
61
NOTES TO THE FINANCIAL STATEMENTS – continued
20. LONG-TERM PROVISIONS – continued
The Company amount of $20.144 million (2010: $22.032 million) in Africa represents the amount provided
within the Company for future decommissioning expenditure.
During the year the economic field life was extended following a review by the operator of decline rate
performance. The extension of field life has resulted in a revision to the provision during the year of
$2.847 million. Full details of impairment losses and reversals can be found in note 1 on page 48 and note 5 on
page 54.
b) 2003 Production royalty bonus scheme
2011 2010
$000 $000
Group
At 1 January 199 251
Unwinding of discount 21 19
Transferred to current liabilities (69) (63)
Foreign exchange movements 2 (8)
153 199
This scheme was intended to reward key persons for the successful performance of certain assets after financial
thresholds had been reached for the period since listing in 2002. The scheme was terminated in 2007 and
replaced by the LTIP scheme (‘2007 LTIP’, and the ‘All Staff LTIP’, see note 25) and no further sums will accrue.
The Company has the option to require the one remaining beneficiary to subscribe for new ordinary shares for
the net amount arising after tax and national insurance from 2008 onwards.
21. TRADE AND OTHER PAYABLES
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Trade payables 962 14,696 6 81
Amounts owed to subsidiary undertakings – – 58,570 181,656
Amounts advanced from joint venture
partners 205 92 – –
Accruals 13,334 19,231 12,342 12,452
14,501 34,019 70,918 194,189
The Directors consider that the carrying amount of trade and other payables approximates their fair value.
22. OPERATING LEASES AND CAPITAL COMMITMENTS
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Minimum lease payments under operating
leases recognised as an expense in the year 4,447 4,598 3,383 3,594
62
STERLING ENERGY PLC
22. OPERATING LEASES AND CAPITAL COMMITMENTS – continued
At the reporting date outstanding commitments for minimum operating leases payments fall due as follows:
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Within one year 4,395 4,401 3,378 3,373
In the second to fifth year inclusive 696 7,970 490 6,738
After five years – – – –
5,091 12,371 3,868 10,111
Operating lease payments represent the Group’s share of rentals for an FPSO (Floating Production Storage and
Offtake) vessel in Mauritania and rentals payable for certain of its office properties. The current FPSO lease is due
to expire in 2013 at which point the Joint Venture Partners have an option to extend the contract for a further
period of time.
Included within the $5.091 million is $3.378 million and $0.490 million payable on the FPSO within one year and
two to five respectively.
23. CASH FLOWS FROM OPERATING ACTIVITIES
2011 2010
$000 $000
Group
Operating activities:
Profit before tax 18,420 5,845
Finance income and gains (3,212) (224)
Finance expense and losses 1,041 1,615
Depletion and amortisation 427 1,302
Impairment reversal (8,269) –
Impairment expense 33 152
Gain on disposal of property, plant and equipment (8) (8)
Gain on disposal of available for sale assets – (14)
Share-based payment charge 1,857 1,936
Operating cash flow prior to working capital movements 10,289 10,604
(Increase)/decrease in inventories (1,971) 3,466
Decrease/(increase) in trade and other receivables 16,773 (15,117)
(Decrease)/increase in trade and other payables (19,518) 11,493
5,573 10,446
STERLING ENERGY PLC
63
NOTES TO THE FINANCIAL STATEMENTS – continued
23. CASH FLOWS FROM OPERATING ACTIVITIES – continued
2011 2010
$000 $000
Company
Operating activities:
Profit before tax 1,553 8,149
Finance income and gains (3,212) (224)
Finance expense and losses 996 1,962
Depletion and amortisation 1 9
Impairment reversal (5,605) (42)
Net movement in investments (1,539) –
Disposal of investments 16,569 –
Gain on disposal of property, plant and equipment (8) (8)
Share-based payment charge 1,857 1,936
Operating cash flow prior to working capital movements 10,612 11,782
(Increase)/decrease in inventories (1,971) 3,466
Decrease/(increase) in trade and other receivables 25,790 (17,967)
Decrease in trade and other payables (20,904) (1,765)
13,527 (4,484)
24. FINANCIAL INSTRUMENTS
Capital risk management and liquidity risk
The Group and Company is not subject to externally imposed capital requirements. The capital structure of the
Group and Company consists of cash and cash equivalents held for working capital purposes and equity
attributable to the equity holders of the parent, comprising issued capital, reserves and retained deficit as
disclosed in the statement of changes in equity. The Group and Company uses cash flow models and budgets,
which are regularly updated, to monitor liquidity risk.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the
basis of measurement and the basis on which income and expenses are recognised, in respect of each material
class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial
statements.
Due to the short term nature of these assets and liabilities such values approximate their fair values at
31 December 2011 and 31 December 2010.
2011 2010
Group $000 $000
Carrying amount/Fair value
Financial assets (classified as
loans and receivables)
Cash and cash equivalents 115,826 111,679
Trade and other receivables 525 17,279
Total 116,351 128,958
64
STERLING ENERGY PLC
24. FINANCIAL INSTRUMENTS – continued
2011 2010
Group $000 $000
Financial liabilities at amortised cost
Trade and other payables 14,501 34,019
Total 14,501 34,019
Carrying amount/Fair value
2011 2010
Company $000 $000
Carrying amount/Fair value
Financial assets (classified as loans
and receivables)
Cash and cash equivalents 114,831 100,936
Trade and other receivables 21,342 47,139
Total 136,173 148,075
Financial liabilities at amortised cost
Trade and other payables 70,918 194,189
Total 70,918 194,189
Financial risk management objectives
The Group’s and Company’s objective and policy is to use financial instruments to manage the risk profile of its
underlying operations. The Group continually monitors financial risk including oil and gas price risk, interest rate
risk, equity price risk, currency translation risk and liquidity risk and takes appropriate measures to ensure such
risks are managed in a controlled manner including, where appropriate, through the use of financial derivatives.
The Group and Company does not enter into or trade financial instruments, including derivative financial
instruments, for speculative purposes.
Interest rate risk management
The Group and Company does not have any outstanding borrowings and hence, the Group and Company is
only exposed to interest rate risk on its short term cash deposits.
Interest rate sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to interest rates for derivative and
non-derivative instruments at the reporting date and assuming the amount of the balances at the reporting date
were outstanding for the whole year.
A 100 basis point change represents management’s estimate of a possible change in interest rates at the
reporting date. If interest rates had been 100 basis points higher and all other variables were held constant the
Group’s profits and equity would be impacted as follows:
STERLING ENERGY PLC
65
NOTES TO THE FINANCIAL STATEMENTS – continued
24. FINANCIAL INSTRUMENTS – continued
Group
Increase
Company
Increase
2011 2010 2011 2010
$000 $000 $000 $000
Cash and cash equivalents 1,158 1,117 1,148 1,009
1,158 1,117 1,148 1,009
Foreign currency translation risk
The Group’s and Company’s reporting currency is the US dollar; being the currency in which the majority of the
Group’s revenue and expenditure is transacted. The US dollar is the functional currency of the Company and
the majority of its subsidiaries. Less material elements of its management, services and treasury functions are
transacted in pounds sterling. The majority of balances are held in US dollars with transfers to pounds sterling
and other local currencies as required to meet local needs. The Group does not enter into derivative transactions
to manage its foreign currency translation or transaction risk.
The Group and Company’s foreign currency translation risk is as follows:
Financial assets
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Cash and cash equivalents
Cash and cash equivalents held in US$ 101,671 111,679 100,862 100,936
Cash and cash equivalents held in GBP 14,155 – 13,969 –
115,826 111,679 114,831 100,936
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Trade and other receivables
Trade and other receivables held in US$ 469 17,210 13,693 43,624
Trade and other receivables held in GBP 56 69 7,649 3,515
525 17,279 21,342 47,139
Financial Liabilities
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Trade and other payables
Trade and other payables held in US$ 13,763 32,276 65,676 189,190
Trade and other payables held in GBP 738 1,743 5,242 4,999
14,501 34,019 70,918 194,189
66
STERLING ENERGY PLC
24. FINANCIAL INSTRUMENTS – continued
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial
loss to the Group or Company. The Group and Company reviews the credit risk of the entities that it sells its
products to or that it enters into contractual arrangements with and will obtain guarantees and commercial
letters of credit as may be considered necessary where risks are significant to the Group or Company. The
Group’s and Company’s business is diversified in terms of both region and the number of counter-parties and
the Group and Company does not have significant exposure to any single counter-party or Group and Company
of counter-parties with similar characteristics.
In relation to its cash and cash equivalents, the Group has to manage its currency exposures and the credit risk
associated with the credit quality of the financial institutions in which the Group maintains its cash resources.
At the year-end the Group held approximately 88% (2010: 83%) of its cash in US dollars. At the year-end the
Group held the majority of its balances with AA- and A+ Standard & Poors rated institutions. The Group
continues to monitor its treasury management to ensure an appropriate balance of the safety of funds and
maximisation of yield.
None of the other trade and other receivables had been impaired. Trade and other receivables are non-interest
bearing. The Group does not hold any collateral as security and the Group does not hold any significant
provision in the impairment account for trade and other receivables as they relate to customers with no default
history.
Liquidity and interest rate tables
The following tables detail the remaining contractual maturity for the non-derivative financial assets and
liabilities of the Group and Company. The tables have been drawn up based on the undiscounted cash flows of
financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both
interest and principal cash flows including rates for loan liabilities and cash deposits on actual contractual
arrangements. The weighted average interest rate used in 2011 is nil (2010: nil).
Less than Six months One to six
six months to one year years Total Interest Principal
Group $000 $000 $000 $000 $000 $000
2011
Trade payables 1,167 – – 1,167 – –
2010
Trade payables 14,788 – – 14,788 – –
Less than Six months One to six
six months to one year years Total Interest Principal
Company $000 $000 $000 $000 $000 $000
2011
Trade payables 6 – – 6 – –
2010
Trade payables 81 – – 81 – –
STERLING ENERGY PLC
67
NOTES TO THE FINANCIAL STATEMENTS – continued
24. FINANCIAL INSTRUMENTS – continued
Upside sharing agreement
Fair value measurement at 31 December 2011
Following the sale of Sterling’s U.S. operations to Atinum E&P Inc. (“Atinum”) in 2009 the Company holds a
three year ‘upside sharing agreement’, under which the Company is entitled to a 40% share of the annual
excess net production proceeds, net of certain costs, if Atinum’s average realised oil price exceeds $90 bbl
and/or the realised gas price exceeds $9 mcf in 2010–2012.
The Company has modelled the value of each of the embedded derivatives (for oil and gas production) using a
DCF model at a wide range of oil and gas prices. Each commodity price (at a given point in the future) is
calculated using this statistical distribution. The DCF model takes account of production profiles, appropriate
discount factors and costs, hedges and other contractual terms.
The probabilities are calculated using a normal distribution whose mean represents the most likely price at the
future point and whose standard deviation is related to the volatility of the commodity price. An examination
of historical prices for a given time period is analysed to determine the standard deviation and therefore the
volatility.
A futures curve is used to establish the market’s latest expectation of the commodity price in the future and
therefore a mean for the distribution curve. Commodity prices are affected by a large number of variables and
for this reason it has been considered appropriate to calculate the probability using a normal distribution.
The upside sharing agreement fair value valuation is based on inputs where there is no observable market data
to accurately assess the outcome of the agreement.
At 31 December 2011 the value of the upside sharing agreement was $nil (31 December 2010: $nil). The Group
has no financial obligation in respect of this agreement.
25. SHARE-BASED PAYMENTS
The Group recognised a total expense, within administration costs, in respect of share-based payments under
equity-settled share option plans of $1,857,000 (2010: $1,936,000). The Company recognised a total expense,
within administration costs, in respect of share-based payments under equity-settled share option plans of
$215,000 (2010: $184,000).
In 2009 the Company reviewed the existing share-based incentive schemes currently in place to motivate and
incentivise its employees. The Company also took independent advice to support its review. Based on this, the
Company proposed a new All Staff Long Term Incentive Plan as being the most effective way to deliver the
incentives that the Board believes will continue to align the interests of the employees and shareholders.
Shareholders approved this plan at the December EGM held on 22 December 2009.
With effect from 2009, all further awards are made under the All Staff Long Term Incentive Plan. Awards are
made on similar terms to non-executive Directors of the Company, under a separate plan the NED Long Term
Incentive Plan.
68
STERLING ENERGY PLC
25. SHARE-BASED PAYMENTS – continued
Share options (2002–2007)
Movements during the year on share options were as follows:
2011 2010
Weighted Weighted
2011 average 2010 average
Number of exercise Number of exercise
share price share price
options (pence) options (pence)
Outstanding at the beginning of period 1,125,625 337 1,248,125 397
Forfeited during the period (326,250) 553 (122,500) 816
Exercised during the period – – – –
Outstanding at the end of the year 799,375 266 1,125,625 337
Exercisable at the end of the year 799,375 266 1,125,625 337
For all options the Group plan provides for a grant price equal to the average quoted market price of the
Company’s shares on the date of grant. All options are equity settled.
The vesting period for all options is generally two years. If the options remain unexercised after a period of ten
years from the date of grant, the options expire. Furthermore, some options are forfeited if the employee leaves
the Group before the options vest.
The range of exercise prices for options outstanding at the end of the year was:
2011 Weighted
average exercise 2011 2010
Year of grant: price (pence) Number Number
2001 n/a – 58,750
2002 160 503,750 546,250
2003 280 193,750 193,750
2004 500 14,375 83,125
2005 681 27,500 100,000
2006 922 47,500 131,250
2007 620 12,500 12,500
No share options were exercised during 2011 (2010: nil). The options outstanding at the end of the year have
a weighted average contractual life of 1.18 years (2010: 2.51 years). The cost of share options is spread over
the vesting period of two years. The weighted average fair value of options granted during the period was nil
pence (2010: nil). Some of the options lapse if the employee leaves the Company.
No further awards were made under this share option scheme post the introduction of the 2007 LTIPs.
2007 Long Term Incentive Plan (“2007 LTIP”)
Following the introduction, and approval by shareholders of the All Staff Long Term Incentive Plan (‘All Staff
LTIP’) in 2009, no further awards or grants have been made under the 2007 LTIP, subsisting awards and grants
will remain in place and the scheme will be allowed to time lapse.
STERLING ENERGY PLC
69
NOTES TO THE FINANCIAL STATEMENTS – continued
25. SHARE-BASED PAYMENTS – continued
Movement during the year on share options were as follows:
2011 2010
Number Number
of share of share
options options
Outstanding at the beginning of period 910,240 1,263,282
Exercised during the period (25,513) (53,881)
Lapsed during the period (467,399) (299,161)
Outstanding at the end of the year 417,328 910,240
Exercisable at the end of the year 417,328 174,558
The nominal cost options outstanding at the end of the year have a weighted average remaining contractual
life of nil years (2010: 0.89 years). The cost of these shares is spread over the vesting period of 3 years (2010:
3 years).
The actual number of shares that will be finally awarded out of the maximum number stated above under the
2007 LTIP, or alternative cash settlement at the parent Company’s option, will depend upon the achievement of
performance criteria measured over a vesting period of three years for each award.
Up to 50% of the nominal cost options will vest based on a comparison of the total shareholder return (“TSR”)
of the parent Company as measured against a comparator group of companies (“the First Performance
Condition”). The TSR of each Company with the comparator group will be statistically ranked.
The number of options that ultimately vest is based on the Company’s relative ranking as follows:
TSR compared to comparator group
Below Median 25.0%
Median to Upper Quartile 32.5%
Upper Quartile to Upper Decile 42.5%
Above Upper Decile 50.0%
Up to the other 50% of the nominal cost options will vest based on the share price growth of the Company’s
shares at the date of grant or at the amendment date for options granted before the amendment date (“the
Second Performance Condition”) as follows:
Share price growth %
Below 50% 25.0%
50% – 75% 30.0%
75% – 100% 35.0%
100% – 125% 40.0%
125% – 150% 45.0%
above 150% 50.0%
The 2007 LTIP options exercised during the year were for good leavers whose awards were pro-rated under the
scheme rules and were subject to certain performance criteria.
The Company used the inputs noted below to measure the fair values of the old and new nominal cost options.
These fair values were calculated using modified binomial option pricing models. Expected volatility was
70
STERLING ENERGY PLC
25. SHARE-BASED PAYMENTS – continued
estimated by calculating the historical volatility of the Company’s share price over the three years preceding the
grant of the 2007 LTIP options.
For the options that are subject to the First Performance Condition, a weighted expected percentage of options
vesting were applied. This was estimated based on the Company’s historical TSR performance against the
comparator Group on a quarterly basis from 2000 to 2009.
All Staff Long Term Incentive Plan (“All Staff LTIP”)
In accordance with the approved All Staff LTIP, the Group has granted options to its staff and executive Directors
to acquire shares in the Company.
The movement during the year on the share options were as follows:
Number of Exercise price Number of Exercise price
Share options (pence) Share options (pence)
2011
2010
Outstanding at the beginning of the year 5,282,777 40 3,143,088 40
Granted during the period 3,952,150 40 2,367,989 40
Forfeited during the period (1,880,059) 40 (228,300) 40
Outstanding at the end of the year 7,354,868 40 5,282,777 40
Exercisable at the end of the year – – – –
All options are equity settled. The vesting period is three years. If the options remain unexercised after a period
of five years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group
before the options vest or are exercised.
The options outstanding at the year-end have a contractual life of 4.10 years (2010: 4.19 years). The cost of the
options is spread over the vesting period of three years. The fair value of the options granted during the year
was 8.96 pence (2010: 31.24 pence).
If the Sterling Energy share price (“SESP”) under-performs the Index performance by 10% or more, then no
share options will be earned and the share options will lapse.
If the SESP performance is between matching the Index and under-performing by 10%, the amount of the share
options that will be earned will be determined by extrapolating on a 2.5:1 straight line basis.
If the SESP performance matches the Index performance, then 25% of the share options will be earned.
If the SESP performance is between matching the Index and out-performing by 50%, the amount of the share
options that will be earned will be determined by extrapolating on a 1.5:1 straight line basis.
If the SESP out performs the Index performance by 50% or more, then 100% of the share options will be
earned.
All performance measures are defined as being the absolute share price performance or absolute index
performance, and not the performance relative to each other.
STERLING ENERGY PLC
71
NOTES TO THE FINANCIAL STATEMENTS – continued
25. SHARE-BASED PAYMENTS – continued
Fair values were measured by use of a modified binomial model. The inputs to the basic binomial model were
as follows:
2011 2010
Share price (pence) 40 68
Exercise price (pence) 40 40
Expected volatility at time of grant 79.77% 85.21%
Expected life (years) 3 3
Risk free rate (%) 0.81% 0.75%
Expected dividends Nil Nil
Expected volatility for grants in the year was estimated by calculating the historical volatility of the Company’s
share price over the period 23 December 2009 to 30 September 2011 (2010: over the period 23 December
2009 to 30 September 2010). The Company has overlaid a normal distribution for the FTSE350 condition to
assess a range of possible outcomes.
The Company has then compared the SESP performance against the range of Index performance to estimate
the vested proportions of share options in accordance with the scheme rules. Weighting factors based on
probabilities under the normal distribution are then applied to the range of share option values to calculate a
weighted-average share option value.
Non-executive Directors Long Term Incentive Plan (‘NED LTIP’)
In accordance with the approved NED LTIP, the Group has granted options to its non-executive Directors to
acquire shares in the company.
The movement during the year on the share options was as follows:
Number of Exercise price Number of Exercise price
Share options (pence) Share options (pence)
2011
2010
Outstanding at the beginning of the year 302,084 40 375,000 40
Granted during the period 125,000 40 – –
Lapsed during the period – – (72,916) –
Outstanding at the end of the year 427,084 40 302,084 40
Exercisable at the end of the year – – – –
All options are equity settled. The vesting period is three years. If the options remain unexercised after a period
of five years from the date of grant, the options expire.
Furthermore, options are forfeited if the employee leaves the Group before the options vest or are exercised.
The options outstanding at the year-end have a contractual life of 3.20 years (2010: 4.00 years). The cost of the
options is spread over the vesting period of three years. The fair value of the options granted during the year
was n/a (2010: n/a pence).
No performance criteria are attached to the outstanding options, other than the requirement that the holders
must remained employed by the Group when the options are exercised, unless employment is terminated on
death, or as a good leaver.
Fair values were measured by use of a binomial model, using the same inputs as the basic (pre-modified) model
for the All Staff Long Term Incentive Plan above.
72
STERLING ENERGY PLC
26. RELATED PARTY TRANSACTIONS
Details of Directors’ remuneration, which comprise key management personnel, are provided below:
2011 2010 2011 2010
$000 $000 $000 $000
Group
Company
Short-term employee benefits 1,482 1,695 144 145
Compensation for loss of office – 287 – –
Defined contribution pension 117 160 – –
Share-based payments 1,089 1,238 255 144
2,688 3,380 399 289
Further information on Directors’ remuneration is detailed in the Remuneration Report, on pages 25 to 29.
27. SUBSEQUENT EVENTS
There have been no events subsequent to the reporting date that require disclosure.
STERLING ENERGY PLC
73
DEFINITIONS AND GLOSSARY OF TERMS
Year ended 31 December 2011
$
2006 Act
2007 LTIP
1P
2D
2P
3D
3P
AIM
All Staff LTIP
AGM
API gravity
Articles
bbl
bbl/d
bopd
boe
boepd
bcf
Board
C
Capex
CGR
US dollars
The Companies Act 2006, as amended
the 2007 Long Term Incentive Plan
Proven reserves or in-place quantities depending on the context
two dimensional
the sum of Proven and Probable reserves or in-place quantities
depending on the context
three dimensional
the sum of Proven, Probable and Possible reserves or in-place
quantities depending on the context
Alternative Investment Market of the London Stock Exchange
the All Staff Long-Term Incentive Plan adopted in 2009
Annual General Meeting
an American Petroleum Institute scale for crude oil density
the Articles of Association of the Company
barrel, equivalent to 42 US gallons of fluid
barrel per day
barrel of oil per day
barrel of oil equivalent, a measure of the gas component converted
into its equivalence in barrels of oil
barrel of oil equivalent per day
billion cubic feet of gas
the Board of Directors of the Company
Celsius
capital expenditure
condensate gas ratio
Code or City Code
Combined Code
The City Code on Takeovers and Mergers
the Combined Code on Corporate Governance. Now superseded by
the UK Corporate Governance Code (see below)
Companies Act
the Companies Act (as amended 2006)
Company or Sterling
Sterling Energy Plc
Contingent Resources
those quantities of petroleum estimated, as at a given date, to be
potentially recoverable from known accumulations by application of
development projects but which are not currently considered to be
commercially recoverable due to one or more contingencies,
Contingent Resources are a class of discovered recoverable resources
COS
CPF
Darcy
chance of success
central production facility
unit of permeability
74
STERLING ENERGY PLC
Deg
Directors
DST
E&E
EBITDA
EMV
EPF
ESP
EUR
farm-in & farm-out
FDP
FPSO
FSA
G&G
GBP
GIIP
GOC
GOR
GWC
Group
H2S
HMRC
HSES
degrees
the Directors of the Company
drill stem test, a method of flow testing a well
exploration and evaluation assets
earnings before interest, taxation, depreciation, depletion and
amortisation, impairment, share-based payments and pre-licence
expenditure
expected monetary value
early production facility
electric submersible pump
economic ultimate recovery
a transaction under which one party (farm-out party) transfers part
of its interest to a contract to another party (farm-in party) in
exchange for a consideration which may comprise the obligation to
pay for some of the farm-out party costs relating to the contract and
a cash sum for past costs incurred by the farm-out party
field development plan
Floating, Production, Storage and Offloading vessel
the Financial Services Authority of the United Kingdom
geological and geophysical
pounds sterling
gas initially in place
gas oil contact
gas oil ratio
gas water contact
the Company and its subsidiary undertakings
hydrogen sulphide
Her Majesty’s Revenue and Customs
Health, Safety, Environment and Security
hydrocarbons
organic compounds of carbon and hydrogen
km
km2
KRG
lead
kilometre(s)
square kilometre(s)
Kurdistan Regional Government of Iraq
indication of a possible exploration prospect
London Stock Exchange or LSE
London Stock Exchange Plc
m
mmbbl
mmstb
metre(s)
million barrels
million barrels of oil at stock tank conditions
STERLING ENERGY PLC
75
DEFINITIONS AND GLOSSARY OF TERMS – continued
Year ended 31 December 2011
mmboe
mmcf
mmcfg/d
mmcfge/d
mmscf/d
mss
mTVDss
NED LTIP
NPV
OECD
Opex
Ordinary Shares
OWC
P90, P50, P10
million barrels of oil equivalent
million cubic feet of gas
million cubic feet of gas per day
million cubic feet of gas equivalent per day
million cubic feet at standard pressure and temperature per day
metres sub-sea
metres true vertical depth sub-sea
non-executive Director Long Term Incentive Plan adopted in 2009
net present value of a series of cash-flows
Organisation for Economic Cooperation and Development
operating expenditure
Sterling ordinary shares of 40 pence each
oil water contact
90%, 50% and 10% probabilities respectively that the stated
quantities will be equalled or exceeded. The P90, P50 and P10
quantities correspond to the Proved (1P), Proved + Probable (2P) and
Proved + Probable + Possible (3P) confidence levels respectively
Panel or Takeover Panel
The Panel on Takeovers and Mergers
Petroleum
Petronas
PP&E
PRMS
Prospect
Prospective Resources
psi(a)
PSC
Reserves
Reservoir
RF
76
STERLING ENERGY PLC
oil, gas, condensate and natural gas liquids
PC Mauritania I PTY LTD
Property, Plant & Equipment
Petroleum resource Management System as issued in March 2007 by
the Society of Petroleum Engineers et al
a potential sub-surface accumulation of hydrocarbons which has
been identified but not drilled
those quantities of petroleum which are estimated, as at a given
date,
from undiscovered
accumulations
to be potentially
recoverable
pounds per square inch (absolute)
production sharing contract
reserves are those quantities of petroleum anticipated to be
commercially recoverable by application of development projects to
known accumulations from a given date forward under defined
conditions. Reserves must satisfy four criteria; they must be
discovered, recoverable, commercial and remaining based on the
development projects applied. Reserves are further categorised in
accordance with the level of certainty associated with the estimates
and may be sub-classified based on project maturity and/or
characterised by development and production status
a porous and permeable rock capable of containing fluids
recovery factor
RI
RISC
Scf
Seismic
SESP
Shares
royalty interest
RISC (UK) Limited of Golden Cross House, 8 Duncannon Street,
London WC2N 4JF
standard cubic feet of gas (measured at 60 degree Fahrenheit and
14.7 psia)
data, obtained using a sound source and receiver, that is processed
to provide a representation of a vertical cross-section through the
subsurface layers
Sterling Energy share price
40p Ordinary Shares
Shareholders
Ordinary shareholders of 40p each in the Company
SMH
spud
sq km
sq mi
stb
STOIIP
Subsidiary
Water-cut
Societe Mauritanienne Des Hydrocarbures
to commence drilling a well
square kilometre
square mile
stock tank barrel (measured at 60 degrees Fahrenheit and 14.7 psia)
Stock tank oil initially in place
a subsidiary undertaking as defined in the 2006 Act
that per centage of total fluid production that is water
Working Interest or WI
a Company’s equity interest in a project before reduction for
royalties or production share owed to others under the applicable
fiscal terms
Tcf
TEA
TD
TVD
trillion cubic feet of gas
technical evaluation agreement
total depth
true vertical depth
United Kingdom or UK
the United Kingdom of Great Britain and Northern Ireland
UK Corporate Governance Code
Or Code
Formerly the Combined Code, sets out standards of good practice in
relation to board leadership and effectiveness, remuneration,
accountability and relations with shareholders
United States or US
the United States of America
STERLING ENERGY PLC
77
PROFESSIONAL ADVISERS
Nominated Advisors
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London
EL2Y 9LY
Corporate Brokers
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London
EL2Y 9LY
Corporate Bankers
Barclays Commercial Bank
1 Churchill Place
London
E14 5HP
HSBC
165 Fleet Street
London
EC4A 2DY
Legal
Ashurst
Broadwalk Street
5 Appold Street
London
EC2A 2HA
Auditors
BDO LLP
55 Baker Street
London
W1U 7EU
Registered Office
5 Chancery Lane
London
WC2A 1LG
78
STERLING ENERGY PLC
ANNUAL GENERAL MEETING
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to
what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate
independent professional adviser authorised under the Financial Services and Markets Act 2000. If you have
sold or otherwise transferred all your shares in Sterling Energy Plc, please forward this document and the
accompanying Form of Proxy to the person through whom the sale or transfer was effected, for transmission
to the purchaser or transferee.
Information relating to the appointment of a proxy may be found in the notes appended to this notice of
Annual General Meeting.
STERLING ENERGY PLC (the “Company”)
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the Annual General Meeting of Sterling Energy Plc will be held at Ashurst LLP,
Broadwalk House, 5 Appold Street, London, EC2A 2HA on 19 April 2012, at 11.00 a.m. to consider and, if
thought fit to pass, the following resolutions. Resolution 8 shall be proposed as a special resolution and all
other resolutions shall be proposed as ordinary resolutions.
ORDINARY RESOLUTIONS
1. To receive and adopt the Accounts for the financial year ended 31 December 2011, together with the
reports of the Directors and auditors thereon.
(Resolution 1)
2. To approve the Remuneration Report contained in the Accounts for the financial year ended 31 December
2011.
3. To re-appoint BDO LLP as auditors of the Company.
4. To authorise the Directors to set the remuneration of the auditors.
(Resolution 2)
(Resolution 3)
(Resolution 4)
5. In accordance with article 106 of the Company’s Articles of Association, to re-elect Alastair Beardsall, who
retires by rotation, as a Director of the Company.
(Resolution 5)
6. In accordance with article 110 of the Company’s Articles of Association, to elect Philip Frank as a Director
of the Company (appointed since the last Annual General Meeting).
(Resolution 6)
7. That the Directors be generally and unconditionally authorised for the purposes of section 551 of the
Companies Act 2006 (the “Act”), to exercise all the powers of the Company to allot shares and grant rights
to subscribe for, or convert any security into, shares:
(a) up to an aggregate nominal amount (within the meaning of section 551(3) and (6) of the Act) of
£29,251,869 (such amount to be reduced by the nominal amount allotted or granted under (b) below
in excess of such sum); and
(b) comprising equity securities (as defined in section 560 of the Act) up to an aggregate nominal amount
(within the meaning of Section 551(3) and (6) of the Act) of £58,503,739 (such amount to be reduced
by any allotments or grants made under (a) above) in connection with or pursuant to an offer or
invitation by way of a rights issue in favour of holders of ordinary shares in proportion (as nearly as
practicable) to the respective number of ordinary shares held by them on the record date for such
allotment (and holders of any other class of equity securities entitled to participate therein or if the
Directors consider it necessary, as permitted by the rights of those securities), but subject to such
exclusions or other arrangements as the Directors may consider necessary or appropriate to deal with
fractional entitlements, treasury shares, record dates or legal, regulatory or practical difficulties which
STERLING ENERGY PLC
79
ANNUAL GENERAL MEETING – continued
may arise under the laws of, or the requirements of any regulatory body or stock exchange in any
territory or any other matter whatsoever,
these authorities to expire at the conclusion of the next Annual General Meeting of the Company (or if
earlier on 30 June 2013), (save that the Company may before such expiry make any offer or agreement
which would or might require shares to be allotted or rights to be granted, after such expiry and the
Directors may allot shares, or grant rights to subscribe for or to convert any security into shares, in pursuance
of any such offer or agreement as if the authorities conferred hereby had not expired).
(Resolution 7)
SPECIAL RESOLUTION
8. That subject to the passing of Resolution 7, the Directors be given power pursuant to section 570(1) and
573 of the Companies Act 2006 (the “Act”) to:
(a) allot equity securities (as defined in section 560 of the Act) of the Company for cash pursuant to the
authority conferred by that resolution; and
(b) sell ordinary shares (as defined in section 560(1) of the Act) held by the Company as treasury shares
for cash,
as if section 561 of the Act did not apply to any such allotment or sale, provided that this power shall be
limited to the allotment of equity securities for cash and the sale of treasury shares:
(i) in connection with or pursuant to an offer or invitation to acquire equity securities (but in the
case of the authority granted under Resolution 7(b), by way of a rights issue only) in favour of
holders of ordinary shares in proportion (as nearly as practicable) to the respective number of
ordinary shares held by them on the record date for such allotment or sale but subject to such
exclusions or other arrangements as the Directors may consider necessary or appropriate to deal
with fractional entitlements, treasury shares, record dates or legal regulatory or practical
difficulties which may arise under the laws or the requirements of any regulatory body or stock
exchange in any territory or any other matter whatsoever; and
(ii) in the case of the authority granted under Resolution 7(a) above (or in the case of any transfer
of treasury shares), and otherwise than pursuant to paragraph (i) of this resolution, up to an
aggregate nominal amount of £4,387,780,
and shall expire at the conclusion of the next Annual General Meeting of the Company (or, if earlier, on
30 June 2013), save that the Company may before such expiry make any offer or agreement which would
or might require equity securities to be allotted, or treasury shares to be sold, after such expiry and the
Directors may allot equity securities, or sell treasury shares in pursuance of any such offer or agreement
as if the power conferred hereby had not expired.
(Resolution 8)
By Order of The Board
Michelle Churchward
COMPANY SECRETARY
19 March 2012
80
STERLING ENERGY PLC
Registered Office:
Sterling Energy Plc
5 Chancery Lane
London
WC2A 1LG
EXPLANATORY NOTES TO THE RESOLUTIONS
The following explanatory information is provided by way of background to the business of the meeting:
Resolution 2
This resolution is to approve the Directors’ Remuneration Report for the financial year ended 31 December
2011. You can find the report on pages 25 to 29 of the Annual Report 2011.
Resolution 6
Biographical details of the Director standing for election (Philip Frank) appear on page 19 of the Annual
Report 2011.
Resolution 7
Your Directors may allot shares and grant rights to subscribe for, or convert any security into, shares only if
authorised to do so by shareholders. The authority granted at the last Annual General Meeting is due to
expire at this year’s Annual General Meeting. Accordingly, Resolution 7 will be proposed as an ordinary
resolution to grant new authorities to allot shares and grant rights to subscribe for, or convert any security
into, shares (a) up to an aggregate nominal amount of £29,251,869 and (b) in connection with a rights issue
up to an aggregate nominal amount (when added to allotments under part (a) of the resolution)
of £58,503,739.
These amounts represent approximately one third and approximately two thirds respectively of the total
issued ordinary share capital of the Company at 23 March 2012, in accordance with current guidelines of the
Association of British Insurers (the “ABI”) insofar as they affect the Company. If given, these authorities will
expire at the next Annual General Meeting of the Company or on 30 June 2013, whichever is the earlier. Your
Directors have no present intention of issuing shares pursuant to this authority.
Resolution 8
Your Directors also require additional authority from shareholders to allot equity securities or sell treasury
shares where they propose to do so for cash and otherwise than to existing shareholders pro rata to their
holdings. The authority granted at the last Annual General Meeting is due to expire at this year’s Annual
General Meeting. Accordingly, Resolution 8 will be proposed as a special resolution to grant such authority.
Apart from offers or invitations in proportion to the respective number of shares held, the authority will be
limited to the allotment of equity securities and sales of treasury shares for cash up to an aggregate nominal
value of £4,387,780 (being five per cent of the Company’s issued ordinary share capital at 23 March 2012). If
given, this authority will expire at the next Annual General Meeting of the Company or on 30 June 2013,
whichever is the earlier. Your Directors do not have any present intention of exercising this authority, but
consider it desirable to have the flexibility to use it should opportunities arise. Your Directors will have due
regard to institutional guidelines in relation to any exercise of this authority, in particular, the requirement
for advance consultation and explanation before making any non pre-emptive cash issue pursuant to this
resolution which exceeds 7.5% of the Company’s issued share capital in any rolling 3 year period.
Recommendation
Your Directors believe that all the proposed resolutions to be considered at the Annual General Meeting as
set out in this document are in the best interests of the Company and its shareholders as a whole. Accordingly,
your Directors unanimously recommend that you vote in favour of them as they intend to do in respect of
their own beneficial holdings.
STERLING ENERGY PLC
81
EXPLANATORY NOTES TO THE RESOLUTIONS – continued
NOTES:
1. Appointment of a proxy
Only holders of ordinary shares are entitled to attend and vote at this meeting.
A member is entitled to appoint another person as their proxy to exercise all or any of their rights to attend
to speak and to vote at the Annual General Meeting. A member may appoint more than one proxy in relation
to the meeting, provided that each proxy is appointed to exercise the rights attached to a different share or
shares held by them. A proxy need not be a member of the Company. A Form of Proxy for the Annual General
Meeting is enclosed and should be completed and returned so as to reach the Company’s registrar, Capita
Registrars, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU by hand, post or courier (during normal
business hours only), not later than 48 hours before the time of the Annual General Meeting. Completion of
a Form of Proxy or any CREST Proxy Instruction will not preclude a member attending and voting in person at
the meeting.
Alternatively, you can register your proxy vote electronically by means of a website provided by the Company’s
registrar (www.capitashareportal.com), where full instructions are provided. In order to register your vote on-
line you will need to enter the Investor Code which is given in the enclosed Form of Proxy. This website can
only be used for the purpose stated above, not for sending any other document or information.
2. CREST electronic proxies
Alternatively, if you are a member of CREST, you may register the appointment of a proxy by using the CREST
electronic proxy appointment service.
CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment
service may do so for this Annual General Meeting and any adjournment(s) thereof by using the procedures
described in the CREST Manual subject to the provisions of the Company’s Articles of Association. CREST
personal members or other CREST sponsored members, and those CREST members who have appointed a
voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able
to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate
CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK
& Ireland Limited’s specifications and must contain the information required for such instructions, as described
in the CREST Manual (available via www.euroclear.com/CREST). The message, regardless of whether it
constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed
proxy, must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) by no later
than 48 hours before the start of the Annual General Meeting. For this purpose, the time of receipt will be
taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host)
from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed
by CREST. After this time any change of instructions to proxies appointed through CREST should be
communicated to the appointee through other means.
CREST members and, where applicable, their CREST sponsors or voting service providers should note that
Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular
messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST
personal member or sponsored member or has appointed a voting service provider(s), to procure that his
CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message
is transmitted by means of the CREST system by any particular time. In this connection, CREST members and,
82
STERLING ENERGY PLC
where applicable, their CREST sponsors or voting service provider(s) are referred, in particular, to those
sections of the CREST Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a)
of the Uncertificated Securities Regulations 2001.
3. Documents on display
There will be available for inspection at the registered office of the Company during normal business hours
from the date of this notice until the time of the Annual General Meeting and at the place of the Annual
General Meeting for at least 15 minutes prior to and during the meeting:
(a) copies of service agreements under which Directors of the Company are employed, and copies of the
terms and conditions of appointment of non-executive Directors; and
(b) the Company’s Articles of Association.
4. Right to attend and vote
Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that in
order to have the right to attend and vote at the Annual General Meeting (and also for the purpose of
determining how many votes a person entitled to attend and vote may cast), only those persons who have
their name entered in the register of members’ of the Company at 6:00 p.m. on 17 April 2012 or, in the event
of any adjournment, by 6:00 p.m. on the date which is two days before the day of the adjourned meeting.
Changes to entries on the register after this time shall be disregarded in determining the rights of any person
to attend or vote at the meeting.
5. Corporate members
Any corporate which is a member can appoint one or more corporate representatives who may exercise on its
behalf all of its powers as a member provided that they do not do so in relation to the same shares.
6. Electronic Communication
You may not use any electronic address (within the meaning of section 333(4) of the Companies Act 2006)
provided in this notice (or in any related documents including the proxy form) to communicate with the
Company for any purposes other than those expressly stated.
STERLING ENERGY PLC
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RepoRt and FInanCIaL StateMentS 2011
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Sterling Energy Plc
5 Chancery Lane
London
WC2A 1LG
Tel: +44 (0)20 7405 4133
Fax: +44 (0)20 7440 9059
Info@sterlingenergyuk.com
www.sterlingenergyplc.com
STERLING ENERGY PLC