Report and Financial Statements
2016
Sterling Energy plc (‘Sterling’ or the ‘Company’), together
with its subsidiary undertakings (the ‘Group’), is an upstream
oil and gas company listed on the AIM market of the London
Stock Exchange. The Company is an experienced operator of
international exploration and production licences, with a primary
geographic focus on Africa. The Group has high potential
exploration projects in Mauritania and Somaliland together with a
production and royalty interest in Mauritania. The Company has
an active strategy to deliver shareholder value through disciplined,
material exploration and production projects; leveraging the
Company’s experience, with an emphasis on securing near term
cash flow generative opportunities.
2
Sterling Energy plc Report and Financial Statements 2016 Sterling Energy plc
Report and
Financial Statements
Year ended 31 December 2016
CONTENTS
OVERVIEW
Chairman’s Statement
Chief Executive’s Review
2016 Summary
STRATEGIC REPORT
Operations Review
Schedule of Interests
Reserves Summary
Financial Review
Business Risk
CORPORATE GOVERNANCE
Board of Directors
Audit Committee Report
Nominations Committee
Remuneration Committee Report
Communications with Shareholders
Internal Controls
Conflicts of Interest
Extractive Industries Transparency Initiative (‘EITI’)
Directors’ Report
Statement of Directors’ Responsibilities
GROUP ACCOUNTS
Independent Auditors’ Report
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes In Equity
Consolidated Statement of Cash Flows
Company Statement of Financial Position
Company Statement of Changes In Equity
Company Statement of Cash Flows
Notes to the Financial Statements
Definitions and Glossary of Terms
Professional Advisers
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Sterling Energy plc Report and Financial Statements 2016 OVERVIEW
Chairman’s Statement
We expect to see activity on both the Somaliland Odewayne
block in 2017 and Mauritania C-10 exploration block in 2018.
The severe decline in the global oil price reached its lowest
We have also continued with our portfolio realignment
point during January 2016 when Brent crude reached
efforts, relinquishing exploration assets with limited near
$26 a barrel. During 2016 the price improved ending at
to mid-term value triggers or monetisation options (at
$54 a barrel reversing the downward trend experienced
little or no cost). Sterling has successfully executed this
in 2015. It appears therefore that the very low, longer
re-alignment at minimal cost to the Company. We expect
downturn predicted has been partially reversed. Despite
to see activity on both the Somaliland Odewayne block in
improvements to the oil price, the E&P sector continues
2017 and Mauritania C-10 exploration block in 2018. In
to be adversely affected by projects being delayed
addition, the Company continues to actively investigate
and exploration being deferred or cancelled. As my
possible acquisition or merger opportunities which may
predecessor observed last year many outside of our
bring transformational growth and help deliver a more
sector have benefitted from the lower cost of energy;
balanced cash flow generating portfolio.
however, inside the upstream oil and gas sector we have
seen a significant slowdown in activity coupled with a
Our financial interest in the Chinguetti oil field in Mauritania
shift away from exploration.
is loss making and we expect production to cease in
2017. We are therefore concentrating our efforts in
As reported this decline in the oil price has forced us
determining the extent of our contingent financial liability
to review our business model. Both the lack of farm-in
for decommissioning and abandonment of the field.
appetite on the part of the larger oil companies to fund
expensive exploration activities and the lack of appetite
In terms of cost saving initiatives, the Company has been
in the capital markets for funding appraisal projects, let
working to reduce the Group’s administrative expenses
alone funding exploration, has set us on a much narrower
in reaction to external adverse market conditions. These
strategy where as a first step in our review cost saving
efforts have, over the last year, materially reduced the
and preservation of cash resources is our paramount
Group’s wages and salary expenses. A reduction in office
objective. In addition to that ongoing process, we have
floor space is also scheduled and we are committed to
reviewed our business model in light of the changes in
further material reduction in costs.
market conditions and we are looking to invest in a more
balanced cash flow generating portfolio.
4
Sterling Energy plc Report and Financial Statements 2016
FINANCIAL
OUTLOOK FOR 2017 AND BEYOND
The Group had cash resources of $88.1 million at the end
While the global oil price has seen a marked and what
of 2016 and we remain free of debt. Our work programme
appears to be a sustainable recovery, it is very unlikely
for 2017 is fully funded and we have resources available
that in the near term this will impact positively on the
to progress both our existing portfolio and add new
industry or investor appetite for exploration assets.
venture activity in the event that such a venture presents
We shall pursue our new business model cautiously,
itself and meets with our stricter investment criteria.
preserving resources in anticipation of a recovery in
BOARD AND CHANGES
market conditions and investor sentiment towards active
exploration driven strategies. Whilst we wait for this
In the last quarter of 2016 three members of the Board
recovery, we will continue to actively investigate possible
resigned due to strategic differences on the future direction
acquisition or merger opportunities, to deliver a more
of the Company. Post the year end two new directors
balanced, revenue focused portfolio of assets.
were appointed, namely Ilya Belyaev and Leo Koot. Mr
Belyaev is a representative of one of our shareholders
I would like to thank all our stakeholders for their
who brings valuable financial and entrepreneurial
continuing support and all of our management and staff
experience, while Mr Koot is an experienced oil and gas
for their diligent efforts during 2016.
professional and we will benefit from his considerable
industry experience. Also in 2017, I had the honour of
being appointed as your Chairman, a role which I will
faithfully serve in the interest of all shareholders. Eskil
Michael Kroupeev
Chairman
Jersing, our CEO, continues to serve on the Board.
17 March 2017
Sterling Energy plc Report and Financial Statements 2016
5
OVERVIEW
Chief Executive’s Review
MARKET LANDSCAPE
REFRESHED BOARD, SHAREHOLDER ALIGNMENT
The previous 12 months have clearly demonstrated
AND STRATEGY
that the prolonged commodity downturn will be the
Sterling has continued to proactively manage our legacy
new normal, despite the slight respite from November’s
exploration portfolio by exiting from our C-3, Ntem and
OPEC agreement boosting prices to above $50/bbl. The
Ambilobe assets; all viewed as having no realistic chance
fundamentals of supply and demand continue to set the
of monetisation, or limited risked success potential in the
cost basis under which our industry operates.
near to mid-term.
Pure exploration driven activity continues to decline, with
Revenue from our Chinguetti oil field Funding and Royalty
a renewed focus on lower risk infrastructure led drilling
Agreements will come to end, with cessation of production
and hydrocarbon reserves conversion from contingent
in 2017. In response, our efforts continue to be focused on
to firm. Whilst global upstream spending outlook is
limiting our Chinguetti liability exposure and repositioning
improving, capital spending in 2017 is still forecast to be
the Company to source and execute the acquisition of a
approximately 40% lower than 2014, at ca. $450 billion per
material M&A led cash flow generating asset.
Wood Mackenzie. Governments and resource holders will
need to continue the momentum in improving fiscal terms
Through the last year, we have also seen a governance
across the value lifecycle in order to attract investment.
transition, with our majority shareholders Waterford
The forward view on oil prices suggests we will stay within
Finance and
Investment Limited
(‘Waterford’) and
a $50-$70 per barrel band through to 2020.
Mistyvale, requesting seats on the Board to ensure a fully
aligned forward strategy. In May 2016 Alastair Beardsall
This backdrop imparts the need for acute focus on fiscal
retired and was replaced by Nick Clayton in the position of
discipline, on those top quartile projects that deliver
non-executive Chairman. Additionally, Michael Kroupeev
robust returns at the lower end of that price band, and
was appointed as a non-executive Director.
as a consequence most mergers and acquisition (‘M&A’)
activity is directed to lower cost, fast response projects.
In October 2016, Nick Clayton, together with Keith
The service cost deflation (approximately 20-30%) over
citing strategic differences on the future direction of
Henry and Malcolm Pattinson, resigned from the Board
the last few years appears to be reducing with some
the Company.
jurisdictions now seeing small cost increases. Despite
this, the opportunity landscape continues to favour those
Sterling remains unique in the smaller E&P sector, with a
with access to capital, operating cost advantages and
strong cash position from which to leverage. However,
flexibility to scale back, with deferred capital outlay as
given our loss of Chinguetti revenue and external market
prices continue to stay low.
conditions, we have continued on a path of prudent cash
6
Sterling Energy plc Report and Financial Statements 2016
Sterling remains unique in the smaller E&P sector, with a strong
cash position from which to leverage.
preservation. Since 2015, we have undertaken a number
Senegal border further emphasise the infancy and
of initiatives to reduce our costs, with wages and salaries
potential upside of the analogous hydrocarbon plays
reducing by 23%, leaving our group administrative
in C-10, with flexible exit options for Sterling. This has
overhead at approximately $2.0 million. This has primarily
further been validated by BP’s recent ca. $1 billion
been delivered through a shift in our capability set and
strategic entry to the basin and their intention to drill
resources related to exiting of non-core assets to better
up to 4 high impact exploration wells in 2017, some of
fit our strategic mandate. These efforts continue and will
which will target material oil prone prospects close to the
be regularly monitored into 2017, with amongst others,
C-10 block.
plans to move to smaller serviced office space.
ASSET ACTIVITY
On the Odewayne licence in Somaliland, a regional
2D seismic acquisition program due to commence Q2
The Group has an economic interest in the offshore
2017 will help de-risk this vast frontier exploration block.
Chinguetti oil field in Mauritania via the Funding
Sterling is fully carried by the operator Genel Energy
and Royalty Agreements, amounting to ca. 9.5% of
for all exploration costs during the current third and
cumulative production. Revenues
from Chinguetti
subsequent fourth exploration period, covering the 2D
since late 2014 have been insufficient to cover ongoing
seismic and the first exploration well commitment. In
operational costs and thus Sterling’s administrative
August 2016, we received a further 2 year extension on
overhead costs. The Joint Venture (‘JV’) participants, led
the current third exploration period of the block.
by the operator PC Mauritania 1 PTY LTD (‘Petronas’)
and relevant stakeholders are collectively working
Over the year we undertook disciplined exits from three
towards cessation of production in 2017, with the
assets at limited cost. All assets were seen as having
implementation of a safe, compliant and cost-effective
low chances of being monetised in the near to mid-term
A&D plan. The A&D plan and associated Environmental
and as such did not fit our revised strategic mandate.
Impact Statement (‘EIS’) both lie with the Government of
We completed our withdrawal from the C-3 block in
Mauritania for final approval.
Mauritania in March 2016, assigning our entire 40.5%
participating interest to Tullow Oil; as a result we had no
On the C-10 block in Mauritania, we continue to work
additional costs associated with the withdrawal.
diligently with the operator Tullow Mauritania Limited
(‘Tullow Oil’) and with Société Mauritanienne Des
Following a full interpretation and evaluation of our
Hydrocarbures et de Patrimoine Minier (‘SMHPM’), to
2015 operated 3D survey on the Ambilobe block in
mature a top ranking drill ready prospect suitable for
Madagascar we completed our withdrawal in May 2016,
drilling in 2018. We maintain the view that the world class
without material cost. Prior to that, I am pleased that we
gas discoveries made by Kosmos on the Mauritania –
maintained our corporate social responsibility (‘CSR’)
Sterling Energy plc Report and Financial Statements 2016
7
OVERVIEW
Chief Executive’s Review (cont.)
activities by successfully completing the Nosy Be and
I am very pleased that as of January 2017, with Michael
Ambanja fish market rehabilitation and Beramanja
Kroupeev as our new Chairman along with Ilya Belyaev
school projects.
and Leo Koot joining the Board, we now have a highly
aligned team looking to directly deliver on a refreshed
Finally on the Ntem block in Cameroon we exited
shareholder driven mandate.
in December 2016, as we were unable to reach an
acceptable solution with the resource holder to advance
Finally, on behalf of the Company I would like to thank
operational activities on the block.
OUTLOOK
Alastair Beardsall, Nick Clayton, Keith Henry and
Malcolm Pattinson for all their contributions to the
Company since 2009; we wish them every success in
Sterling is fully funded for all of our asset level commitments
their various endeavours.
and liabilities through a strong balance sheet with cash
resources of $88.1 million as at 31 December 2016.
With regards to the Sterling portfolio, we have the
Eskil Jersing
Chief Executive Officer
potential to deliver material value to our shareholders
17 March 2017
in the Somaliland and Mauritania assets over the next
few years. We look forward towards the completion
and interpretation of the Somaliland regional 2D seismic
survey in the second half of 2017 and the C-10 JV drilling
a material exploration well in 2018.
On the growth front, we restructured our capability set
in 2016 to focus on M&A led due diligence efforts. As
a result we undertook lengthy evaluations on a number
of projects. We will continue on this M&A led mandate
in 2017, with the intent of originating, delivering and
executing on a transformative asset or corporate solution.
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Sterling Energy plc Report and Financial Statements 2016
2016 SUMMARY
Production, net to the Company from the Chinguetti field (including royalty barrels), averaged 279
barrels of oil per day (‘bopd’) (2015: 310 bopd).
Adjusted Earnings before Interest, Tax, Depreciation, Amortisation and Exploration Expense
(‘EBITDAX’) loss for the Group of $3.1 million (2015: $6.3 million loss).
C-3 block, Mauritania, exit (40.5% working interest) in March 2016.
Ambilobe block, Madagascar, exit (50% working interest and Operator) in May 2016.
Ntem Concession, Cameroon, exit (100% working interest and Operator) in December 2016.
Working with all Chinguetti oil field stakeholders on a safe, cost-effective and technically robust
decommissioning and abandonment plan (‘A&D plan’), to commence in 2017.
Odewayne block, Somaliland, 2D seismic campaign to commence in Q2 2017.
Cash resources net to the Group at 31 December 2016 of $88.1 million (2015: $97.6 million).
The Group remains debt free, with cash resources significantly in excess of all outstanding firm
commitments.
Ongoing focus on capital discipline, cash G&A expenses reduced by approximately 20% with
continued reductions in 2017.
Continued merger and acquisition mandate for transformational growth (asset and corporate
options).
Sterling Energy plc Report and Financial Statements 2016
9
Sterling Energy plc
Strategic Report
Year ended 31 December 2016
STRATEGIC REPORT
Operations Review
The Group’s African focused asset portfolio provides exposure to exploration
opportunities within under-explored or frontier basins that have the potential to
deliver material hydrocarbon reserves. These areas have historically seen little
activity but offer significant encouragement for the presence of commercially
viable, working hydrocarbon systems.
MAURITANIA
Chinguetti (ca. 9.5% of cumulative production
through the Funding Agreement and a 6% Royalty
Agreement derived from Premier’s WI). The Group
has economic interests in the Chinguetti oil field
through a Funding Agreement with SMHPM,
Mauritania’s national oil company, and a Royalty
Agreement with Premier Oil (‘Premier’). The C-10
block offers potential exposure to a world class
LNG and possibly liquids prone play, proved up by
Kosmos in the adjacent outboard acreage.
Chinguetti
Overview
Gross production for the Chinguetti oil field during
2016 averaged 4,549 bopd (2015: 5,083 bopd).
Average production net to the Group, from the Group’s
economic interests during 2016, was 279 bopd
(2015: 310 bopd). Production was in steady decline
throughout the year, reflecting the maturity of the field,
but revenues benefited from a reduction in the Floating
Production, Storage and Offtake (‘FPSO’) base day
rate, and a field wide cost saving exercise implemented
by the Operator.
The Group estimates that at the end of 2016, net
entitlement 2P reserves stood at 73k barrels of oil
equivalent (‘boe’) (2015: 173k boe).
Outlook
The Chinguetti JV (Petronas, Tullow Oil, SMHPM,
Premier, Kufpec) are evaluating how best to manage
the Chinguetti field with the current end of field life
challenges. Discussions continue to be held with the
Government of Mauritania and relevant stakeholders
on how best to both manage current operations and
agree on a plan for a safe, cost-effective and technically
robust decommissioning and abandonment phase.
A summary of Chinguetti interests and Group resource
summary are provided on pages 15 and 18 of the
Strategic Report.
In 2015, the Group enlarged its Mauritanian footprint
through entering into two offshore exploration blocks,
C-3 and C-10. The rationale underlying entry was that
the acreage offered low cost ground floor exposure to
material exploration upside in a re-emerging petroleum
province. This was subsequently validated with
recent world class LNG scale discoveries by Kosmos.
Following the exit from C-3 in early 2016, efforts have
been focused on maturing the prospect inventory for
drilling on the C-10 block.
C-10 (WI 13.5%) Exploration block
Overview
Block C-10 covers an area of approximately 8,025km²
and lies in water depths of 50 to 2,400m within the
Nouakchott sub-basin, offshore Mauritania, and wholly
surrounds the Chinguetti field. The C-10 production
sharing contract (‘PSC’) is held by the Company’s
wholly owned subsidiary Sterling Energy Mauritania
Limited (‘SEML’) (13.5% working interest), Tullow Oil
(76.5% working interest and operator) and SMHPM
(10% working interest). SMHPM is carried by SEML and
Tullow Oil, pro-rata to their working interests, during the
exploration phases. The PSC is in the second phase of
the exploration period, which is due to expire on 30
November 2017 and has a minimum work obligation of
one exploration well.
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Sterling Energy plc Report and Financial Statements 2016
Mauritania
Somaliland
The block is almost fully covered by numerous legacy
3D seismic surveys and lies within a proven petroleum
basin, offering exposure to multiple play-types from
under-explored Jurassic and lower Cretaceous shelfal
carbonates to Cretaceous and Tertiary clastic plays.
Within the block confines, a successful exploration
campaign in 2000-03 targeting the Miocene play
and yielded four oil and gas discoveries, including the
Chinguetti oil field.
Since 2014, Kosmos Energy has discovered and
appraised in deep water block C-8 immediately outboard
of C-10, several world class LNG scale gas discoveries
of Albian to Cenomanian age, with the Tortue West
(Ahmeyim) structure alone reported to have Pmean gas
resources of ca.15 Tcf. In 2017, Kosmos and new partner
BP will continue exploration within the Cenomanian/
Albian play with a focus on proving an oil fairway adjacent
to the northwestern boundary of the C-10 block. Further
south in Senegal, the Albian clastic shelf margin play
has also been successful with commercial oil and gas
discovered at the SNE field, currently being appraised
with 2C in place resources of more than 2.7 billion barrels
and the ongoing programme will further define the
recovery potential of the field, per Cairn Energy’s press
release in March 2017.
Outlook
Following entry into the C-10 block in mid-2015, Sterling
and its JV partners have been actively maturing and
ranking the technical description of the play, prospect
and lead portfolio on the 3D seismic dataset. The JV
continues to work towards selecting a prospect for
drilling to meet the minimum work obligations.
Tullow Oil and the JV are in discussions with SMHPM and
the Ministry with regards to the appropriate future path
on the C-10 block, with a view to securing an extension
and recognising that a well will not be drilled prior to the
current Phase 2 expiry in November 2017.
Should the JV not fulfil the minimum work obligations,
the gross liability owing to the Mauritanian government
would be $7.5 million ($1.1 million net to SEML).
Following the completion of Phase 2 the JV may elect to
enter into Phase 3 (with a 3 year term) with a minimum
work obligation of a further two exploration wells.
C-3 Exploration block (Relinquished 2016)
Overview
Following the submission of a withdrawal notice in
January 2016 to Tullow Oil and SMHPM, the completion
of Sterling’s withdrawal from the C-3 block became
effective in March 2016.
Sterling entered into the C-3 block in February 2015
following extensive re-evaluation of exploration data
along the margin post the 2014 Cairn SNE-1 discovery
in Senegal to the south. This highlighted the possible
extension of an Albian clastic play into PSC C-3.
The subsequent C-3 block exit decision was data driven
and based on disciplined technical and commercial
rationale. A full technical evaluation of the acreage was
completed in early Q1 2016 on the newly acquired 2D
seismic data. This enabled Sterling to take a technical
view that the new data had insufficiently de-risked the
remaining play and lead potential to justify committing to
a 3D seismic survey and the drilling of 1 well.
Sterling Energy plc Report and Financial Statements 2016
13
STRATEGIC REPORT
Operations Review (cont.)
SOMALILAND
The onshore basins of Somaliland offer one of the
last opportunities to target an undrilled Mesozoic
basin in Africa. The Odewayne block is ideally
located to explore this play covering a large area
of a completely unexplored onshore rift basin.
Geophysical data and geological field studies
indicate that the sedimentary basin underlying
the block has encouraging evidence of a working
hydrocarbon system. In 2016 the JV, in collaboration
with the Ministry of Energy and Mines has been
progressing towards the acquisition of the first
seismic data in the region.
Odewayne (WI 40%) Exploration block
Overview
This large, unexplored frontier acreage position comprises
an area of 22,840km2. Exploration activity to date has
been limited to the acquisition of airborne gravity and
magnetic data, with no seismic coverage and no wells
drilled on block. Extensive geological field data provides
strong encouragement for a deep sedimentary basin
and has highlighted the presence of oil seeps at surface,
suggesting that a working hydrocarbon system exists.
The Odewayne production sharing agreement (‘PSA’)
was awarded in 2005 and is in the Third Period with an
outstanding minimum work obligation of 500km of 2D
seismic. The Third Period was recently extended in 2016
by two years to 2 November 2018. The minimum work
obligation during the optional Fourth Period of the PSA
(also extended by 2 years to May 2020) is for 1,000km of
2D seismic and one exploration well.
The Company’s wholly owned subsidiary, Sterling Energy
(East Africa) Limited (‘SE(EA)L’), currently holds a 40%
working interest in the PSA. SE(EA)L acquired an original
10% from Petrosoma Limited (‘Petrosoma’) in November
2013 and an additional 30% from Jacka Resources
Somaliland Limited (‘Jacka’) in two transactions during
2014. In aggregate, as consideration, SE(EA)L has paid
$17.0 million to date and a further $4.0 million is to be paid
in stages to Petrosoma as and when certain operational
milestones are reached, with a further $ 4.0 million due on
drilling of an exploration well.
SE(EA)L is fully carried by Genel Energy for its share of
the costs of all exploration activities during the Third and
Fourth Periods of the PSA.
Outlook
In 2016 the Ministry of Energy and Mines progressed
a directed speculative survey in Somaliland to allow
the acquisition of 2D seismic data. The project is led
by the Ministry who in Q4 2016 signed a contract with
BGP (a Chinese geophysical and drilling contractor) to
acquire seismic data over a number of blocks, including
Odewayne. The data on Odewayne is scheduled to be
acquired from Q2 2017, is intended to fulfil (at least) the
minimum work obligation and will be the first seismic
data acquired on the block.
MADAGASCAR
Ambilobe Exploration block (Relinquished 2016)
Overview
Following the acquisition and interpretation of 3D seismic
data on the Ambilobe block in 2015 and 2016, Sterling
issued a notice of withdrawal from the Ambilobe block
in April 2016 to its JV partner Pura Vida Mauritius (‘Pura
Vida’). In May 2016 the withdrawal was completed prior
to the end of the second phase of the PSC with all
commitments met and no material surrender costs.
CAMEROON
Ntem Exploration block (Relinquished 2016)
Overview
The Company issued a notice of surrender in relation to
the Ntem Concession, offshore Cameroon in 2016 which
became effective in December 2016. The Company did
not incur any material costs associated with the surrender.
14
Sterling Energy plc Report and Financial Statements 2016
STRATEGIC REPORT
Schedule of Interests
Year ended 31 December 2016
Location
Size
(km²)
Licence
Name
Sterling
Working
Interest %
Sterling
Net Revenue
Interest %
Operated/
Non-operated
Mauritania: Offshore
29
PSC B -
Chinguetti Field
n/a
Sliding scale royalty
from 6% WI 1
Non-operated
Economic interest for
approximately 7% of
Chinguetti project 2
Mauritania: Offshore
Somaliland: Onshore
8,025
PSC C-10
13.5%
22,840 Odewayne Block 3
40%
Non-operated
Non-operated
1 The Company’s royalty interest derives from Premier’s working interest of 6% in PSC B. The Company’s royalty is up to 6% of Premier’s
working interest.
2 The Company’s interest derives from the Funding Agreement with SMHPM (Based on December 2016 net lifting revenue).
3 Carried for the minimum work obligation of current phase and next phase of PSA.
Sterling Energy plc Report and Financial Statements 2015
15
STRATEGIC REPORT
Mauritania
Block C-10
(WI 13.5%)
CONTRACT SUMMARY
Contract type
Contract signed
Contract effective date
Contract area
PSC
27 October 2011
30 November 2011
8,025km2
Participants
Tullow Mauritania Limited (Operator)
Sterling Energy Mauritania Limited
Société Mauritanienne Des Hydrocarbures
et de Patrimoine Minier
76.5%
13.5%
10%*
Exploration term
Current Phase 2: To 30 November 2017
Phase 2 work commitment: One well
Phase 3 (optional): To 30 November 2020
Phase 3 work commitment: Two wells
Production term
Twenty five years
State participation
The State may back in for up to a maximum of 14% participating interest (to include their 10% carried interest in the exploration
phase) in any development and production area.
Licence status
In November 2015, SEML completed the acquisition of a 13.5% working interest in PSC C-10.
* Carried through exploration
16
Sterling Energy plc Report and Financial Statements 2016
Sterling Energy plc Report and Financial Statements 2015
Somaliland
Odewayne
(WI 40%)
CONTRACT SUMMARY
Contract type
Contract signed
Contract effective date
Contract area
PSA
6 October 2005
6 October 2005
22,840km2
Participants
Genel Energy Somaliland Limited (Operator)
Sterling Energy (East Africa) Limited
Petrosoma Limited
50%
40%
10%
Exploration term
Current Period 3: To 2 November 2018
Period 3 work commitment: 500km 2D seismic acquisition
Period 4 (optional): To 2 May 2020
Period 4 work commitment: 1,000km 2D seismic acquisition and one exploration well
Period 5 (optional): To 2 May 2021
Period 5 work commitment: 500km 2D seismic acquisition and one exploration well
Period 6 (optional): To 2 May 2022
Period 6 work commitment: 500km 2D seismic acquisition and one exploration well
Production term
Twenty five years, renewable for additional ten years
State participation
State may back in for up to a 20% participating interest in any development and production area.
Licence status
The block is in Period 3 of the exploration period with an outstanding work commitment of 500km of 2D seismic. The Group’s
costs associated with Period 3 and 4 work programmes are fully carried by Genel Energy.
Sterling Energy plc Report and Financial Statements 2016
17
STRATEGIC REPORT
Reserves Summary
Year ended 31 December 2016
2016
Oil
(000 boe)
2016
Gas
(mcf)
2016
Reserves
(000 boe)
2015
Oil
(000 boe)
2015
Gas
(mcf)
2015
Reserves
(000 boe)
Volumes of Proven plus Probable
Reserves
At 1 January
Revision – Chinguetti (1-3)
Production
At 31 December
173
2
(102)
73
-
-
-
-
173
2
(102)
73
292
(6)
(113)
173
-
-
-
-
292
(6)
(113)
173
1 The reserves stated are for the Company’s net interests in the Chinguetti field only and are based on the Company’s own assessment of reserves, as
at 31 December 2016. The Group’s interest in the Chinguetti field is through its Funding Agreement and Royalty Agreement; The Company does not
have a direct equity participation in the Chinguetti field. The assessment was made in accordance with the definitions as set out on pages 91 - 93.
2 The Group 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, Mr Matthew Bowyer, Subsurface Manager of Sterling Energy
plc, who has been involved in the oil industry for over 21 years, is the qualified person that has reviewed the technical information set out above.
Matthew Bowyer
Subsurface Manager
17 March 2017
18
Sterling Energy plc Report and Financial Statements 2016
Financial Review
Year ended 31 December 2016
Selected Financial Data
Chinguetti production
Year end 2P reserves
Revenue
Adjusted EBITDAX 1
Loss after tax
Net cash investment in oil & gas assets
Year-end cash net to the Group
Average realised oil price
Total cash operating costs (produced)
Year-end share price
Share price change
Debt
bopd
kboe
$million
$million
$million
$million
$million
$/bbl
$/bbl
Pence
%
$million
1 As defined within the definitions and glossary of terms on pages 91 - 93.
2016
279
73
4.8
(3.1)
(8.5)
1.1
88.1
39.8
64.6
15.0
3
–
2015
310
173
5.0
(6.3)
(16.0)
4.8
97.6
50.3
75.3
14.5
(26)
–
Revenue and Cost of Sales
2016 Chinguetti production, net to the Group, averaged 279 bopd (including royalty barrels), a decrease of 10% from the
310 bopd averaged in 2015; the reduced volumes reflect the lower oil price realised at the start of 2016 along with the
expected decline in production for the field.
Gross volumes lifted and sold during the year from the Chinguetti oil field were up by 49% to 2.2 million barrels over four
cargo liftings (2015: 1.5 million barrels over three cargo liftings); whilst the main increase in gross volumes is as a result
of the extra lift, on average cargo volumes were up by 12% in 2016.
The achieved lifting cost per barrel (excluding the onerous contract provision) has decreased in 2016 by $44.9 to $49.3
(2015: $94.2).
Cost of sales for the Group for 2016 (excluding the onerous contract provision) decreased by $3.5 million, due in part to
a reduction in the FPSO base day rates and a field wide cost saving exercise implemented by the Operator.
Sterling Energy plc Report and Financial Statements 2016
19
STRATEGIC REPORT
Financial Review (cont.)
Year ended 31 December 2016
A summary of revenue, cost of sales and lifting volumes are provided below:
Liftings (bbls) 1
Revenue ($million)
Revenue/bbl ($)
Lifting cost ($million) 2
Lifting cost/bbl ($) 2
1 Net Sterling production during the year totalled 101,939 (2015: 113,085)
2 Excluding onerous contract provision
Loss for Year
The 2016 loss totalled $8.5 million (2015: loss $16.0 million).
Loss for Year 2015
Other obligations (2015)
Impairment of Ntem (2015)
Chinguetti cessation costs (2015)
Impairment of Ambilobe (2016)
Impairment of C-3 (2016)
Decrease in revenue
Decrease in cost of sales
Decrease in G&A and pre licence
Increase in net finance income
Loss for year 2016
2016
2015
121,031
99,948
4.8
39.8
(6.0)
(49.3)
5.0
50.3
(9.4)
(94.2)
$ (million)
(16.0)
3.7
8.2
(2.2)
(3.8)
(3.6)
(0.2)
3.9
0.5
1.0
(8.5)
20
Sterling Energy plc Report and Financial Statements 2016
During 2016, the Group fully impaired the Ambilobe block in Madagascar ($3.8 million) and the C-3 block in Mauritania
($3.6 million), resulting in a total charge of $7.4 million.
Group administrative overhead decreased during the year to $2.0 million (2015: $2.3 million). Included within this
charge is $73k (2015: $297k) with respect to share-based payment charges. The continued reduction in the Group’s
administrative overhead is in reaction to both external market conditions and the change in strategic mandate. In 2016
the Group’s wages and salaries have reduced by 23%.
In 2016, a portion of the Group’s staff costs and associated overheads have been recharged to JV partners ($87k),
expensed as pre-licence expenditure ($1.8 million), or capitalised ($785k) where they are directly assigned to capital
projects. This totals $2.7 million in the year (2015: $3.6 million).
A summary of these movements is provided below.
Group administrative overhead (page 57)
Costs capitalised
Costs recharged to JV partners
Pre-licence expenditure
Share based payment expense
Other non-cash expenditure
Group cash G&A expense
2016
$ (million)
2015
$ (million)
(2.0)
(0.8)
(0.1)
(1.8)
(2.7)
0.1
-
(4.6)
(2.3)
(1.1)
(0.5)
(2.0)
(3.6)
0.3
0.1
(5.5)
Adjusted EBITDAX and Net Loss
Group adjusted EBITDAX (as defined within the definitions and glossary of terms on pages 91 - 93) loss totalled $3.1
million (2015: $6.3 million loss).
Net loss after tax totalled $8.5 million (2015: loss $16.0 million). The basic loss per share was $0.04 per share (2015:
loss $0.07 per share).
Interest received and finance expenses result in a net income of $290k (2015: $712k expense) which includes exchange
losses of $231k (2015: $89k) on GBP cash deposits held at 31 December 2016 reported in US dollars, a non-cash
finance expense of $149k (2015: $1.0 million) relating to the unwinding of the Chinguetti decommissioning provision (see
Note 9 on page 77 and Note 20 on page 83), interest received totalling $683k (2015: $356k) and other finance expenses
totalling $14k (2015: $13k).
No dividend is proposed to be paid for the year ended 31 December 2016 (2015: $nil).
Sterling Energy plc Report and Financial Statements 2016
21
STRATEGIC REPORT
Financial Review (cont.)
Year ended 31 December 2016
Cash Flow
Net Group cash outflow generated from operating activities was $8.8 million (2015: $4.9 million outflow) a full reconciliation
of which is provided in the Consolidated Statement of Cash Flows.
Net cash investments in oil and gas assets totalled $1.1 million (2015: $4.8 million) and are summarised below:
Mauritania
Somaliland
Madagascar
Cameroon
2016
$ (million)
2015
$ (million)
1.0
-
0.1
-
1.1
4.0
0.1
0.6
0.1
4.8
Statement of Financial Position
At the year end, cash and cash equivalents totalled $88.1 million (2015: $98.7 million of which $1.1 million were held on
behalf of partners, leaving a cash balance of $97.6 million).
At the end of 2016, net assets/total equity stood at $78.4 million (2015: $86.8 million), and non-current assets totalled
$18.9 million (2015: $25.1 million). Net current assets reduced to $74.0 million (2015: $94.1 million) due mainly to the
$18.1 million decommissioning provision movement from non-current to current liabilities.
The Group’s Chinguetti decommissioning provision (current and non-current) decreased during the year by $939k to
$31.5 million (2015: $32.4 million) reflecting the Group’s estimate of gross abandonment and decommissioning costs
based on a draft A&D plan presented to the JV by the operator and further provided to the Group by SMHPM (see Note
20 on page 83).
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.
22
Sterling Energy plc Report and Financial Statements 2016
Business Risk
PRINCIPAL BUSINESS RISKS
The long-term commercial success of the Group depends on its ability to manage its existing asset portfolio and to find,
acquire, develop and/or commercially produce new oil and natural gas reserves.
The Directors regularly monitor all risks to the Company using information obtained or developed from external and
internal sources, and will take actions as appropriate to mitigate these. The Group has developed a risk management
system that identifies key business risks and measures to mitigate these risks. The Company proactively implements
such measures considered appropriate on a case-by-case basis. Other significant elements of the risk management
approach include regular Board review of the business, a defined process for preparation and approval of the annual
work programme and budget, monthly management reporting, financial operating procedures, HSSE, securities and
anti-bribery management systems.
The relative importance and impact of risks faced by the Group can, and are likely to change with progress in the Group’s
strategy and developments in the external business environment. As such the Group reviews its business risks and
management systems on a regular basis.
The Directors have identified the following principal risks and mitigants in relation to the Group’s future performance.
Category
Financial
Risk
Mitigation
Change
• Low oil & gas commodity prices and
• Group maintains a strong balance
• Low commodity
• Difficulty in capital raising for
market volatility.
prices
• Market volatility
• Counterparty
distress
new acquisitions and/or to fund
development activities.
• Counterparty default.
• Cost escalation and budget
overruns (including Chinguetti
decommissioning).
• Licence extension uncertainty.
• Fiscal stability.
• Foreign currency risk.
• Financial control of operated and non-
operated assets.
• Fraud and corruption / increased third
party exposure.
sheet and remains fully funded for its
existing commitments.
• Continually assess all existing asset
and proposed new acquisitions in
light of future capital requirements
from a disciplined lifecycle investment
perspective.
• Regularly monitor and amend cost
structure, investment strategy and
tactics to include countercyclical
investments and leverage low service
costs for seismic and drilling.
• Regularly review business plans, G&A
expenses, ongoing strategy reviews,
monthly reporting and regular Board
meetings.
• The Group holds the majority of
its cash in US dollars which is the
predominant currency used in oil and
gas operations.
• Regularly engage with partners
to influence cost-effective capital
expenditure and decommissioning
expenditure.
• Engagement with shareholders to
inform investment decisions (including
shareholder representatives on the
Board).
►
Sterling Energy plc Report and Financial Statements 2016
23
STRATEGIC REPORT
Business Risk (cont.)
External
• The Group’s assets are located in
• Country risk
• Climate change
• Legal
compliance
• Brexit
non-OECD countries. Governments,
regulations, and the security
environment may adversely change,
including the use of tax claims, real or
not. The Group’s assets in Somaliland
and Mauritania have been or are
affected by country-specific situations.
• The regulation of the energy industry
to address climate change is
increasingly international in scope
and application. The Group’s activity
focuses on finding and producing
carbon based fuels often with long
investment and production lifecycles.
• Legal compliance, regulatory or
litigation risk.
• The Group’s headquarters are located
in the UK, which is negotiating its exit
from the European Union.
Strategic
• Concentration
of portfolio
• Competition
• Group’s assets remain concentrated
on early stage frontier and emerging
basin exploration within the African
continent.
• Reduction in interest to promote/
carry early stage exploration assets –
making it more difficult to farm-out the
Group’s early stage exploration assets.
• Competitors have significantly greater
financial and technical resources.
• Regular monitoring of political,
regulatory and HSSE changes.
Engaging in constructive discussions
where and when appropriate and
introducing third-party expertise as
required. The Group has objectives
to acquire additional core assets, to
assist in diversifying country risk.
• New investments are considered in
the light of changing environmental
regulations.
• The Company accords the highest
importance to corporate governance
matters and upholding the highest
ethical standards.
• Activities are subject to various
different jurisdictional laws, customs,
fiscal and administrative regulations.
• The Company employs suitably
experienced and qualified staff and,
when required, external advisors to
ensure full compliance. Legal risk
assessment and due diligence (where
appropriate) is undertaken for all
counterparties the Company deals with.
• The Group’s exploration activities are
located outside of the UK and the EU
and should be relatively unaffected by
Brexit.
• The Board has and will consider
diversifying the current exploration
portfolio risk by acquiring appraisal,
development and/or producing assets,
using existing financial resources of
the Group and additional capital (as
required).
• Highly selective in choosing where
and when to deploy its business
development resources and New
Ventures focus.
Operational
• Exploration activities may not result
• Diversify and manage risk across a
• Exploration,
production and
decommission-
ing risk
• Operator and
partner risk
in a commercial discovery. Producing
wells may lead to a financial loss.
• For some assets, the Group is
dependent on other operators for the
performance of E&P activities.
• Counterparty misalignment.
• Operations under-insured.
portfolio of assets. Apply the Group’s
experience and expertise and
appropriate technology to minimise
risk.
• The Group carefully considers
the technical, HSSE and financial
capabilities of operators and potential
partners during any JV farm-out or
new acquisition.
▲ Increased ▼ Decreased ► Unchanged
24
Sterling Energy plc Report and Financial Statements 2016
►
▲
▼
OTHER BUSINESS RISKS
In addition to the principal risks above and general business risks, the Group’s business is subject to risks inherent in oil and
gas exploration, development and production activities. A number of potential risks and uncertainties could have a material
impact on the Group’s long-term performance, causing actual results to differ materially from expected and historical results.
The Group has identified certain risks pertinent to its business including:
Category
Risk
Strategic and Economic
Operational
Commercial
• Inappropriate or poorly conceived strategy and plans
• Failure to deliver on strategy and plans
• Business environment changes
• Failure to access new opportunities
• Shareholder concentration
• HSSE incident or non-compliance under local rules and/or laws
• Poor field production (revenue) performance and end of field life decisions
• Licences, permits and/or approvals may be difficult to sustain
• Delays in conducting exploration work programmes
• Failure to maximise value from existing interests
• Loss of control of key assets
• Dissatisfied stakeholders
• Failure to negotiate optimal contract terms
• Inexact reserve and production determinations
• Complex regulatory compliance
Human Resources and
Management Processes
• Failure to recruit and retain key personnel / human capital deficit and/or
engage in adequate succession planning
• Human error or deliberate negative action(s)
• Bribery and corruption
• Inadequate management processes
• Insufficient timely information available to the management and the Board
Sterling Energy plc Report and Financial Statements 2016
25
STRATEGIC REPORT
Business Risk (cont.)
COMPANY POLICIES
The Directors are mindful of the impact of the Company’s business on its employees and contractors, the environment
and on the wider community. In particular, it notes the following with respect to corporate responsibility, business integrity,
community responsibility, employees and HSSE.
HEALTH, SAFETY, SECURITY AND ENVIRONMENT (‘HSSE’)
It is an objective of the Group that every individual is aware of his/her responsibility towards providing for a safe and
secure working environment. HSSE and social responsibility leadership are core competencies throughout the Group’s
organisation. The Group’s HSSE 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. The Group 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.
The Group maximises its influence with JV partners to share its HSSE and social responsibility values. Contractors are
required to demonstrate and deliver a credible HSSE and social responsibility programme. In order to achieve continual
improvement, the Group is committed to reviewing its HSSE and social responsibility performance at least each quarter.
The Group 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.
CORPORATE RESPONSIBILITY
The Group is committed to conducting its business in a responsible and sustainable way. The Group has corporate,
environmental and social responsibilities to the indigenous 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 CSR
with any of these stakeholders. In 2016, the Group successful completed three CSR projects in Madagascar.
BUSINESS INTEGRITY
The highest ethical standards are a cornerstone of the Group’s business. The Group is committed to conducting its
business with integrity, honesty and fairness. All business activities are reviewed to ensure they meet these standards.
The Group 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 that they apply and maintain these standards.
COMMUNITY RESPONSIBILITY
The Company and its subsidiary undertakings are committed to being a good partner in all communities in which it
operates. Engagement and dialogue with local stakeholders is essential in ensuring, that where possible, projects benefit
both the Group and the communities in which the project is located.
26
Sterling Energy plc Report and Financial Statements 2016
EMPLOYEES
The Group is committed to providing a workplace free of discrimination where all employees are afforded equal opportunities
and are rewarded on merit and ability. In the implementation of this policy the Group 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 their knowledge, competencies, career development and opportunities for progression.
The Group 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. The
Group has a whistleblowing policy which empowers employees to be proactive, to report any failure to comply with legal
obligations or the Group’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 Group. The whistleblowing policy allows
employees to make anonymous reports directly to an independent non-executive Director.
The Strategic Report was approved by the Board of Directors on 17 March 2017 and signed on its behalf by:
Tony Hawkins
Company Secretary
Eskil Jersing
Chief Executive Officer
Sterling Energy plc Report and Financial Statements 2016
27
Sterling Energy plc
Corporate Governance
Year ended 31 December 2016
CORPORATE GOVERNANCE
Board of Directors
Eskil Jersing, Chief Executive Officer, aged 53
Eskil joined the Company on 23 March 2015. He holds a BSc in Geophysics from University College Cardiff and an MSc
in Petroleum Geology from Imperial College London.
He started his career in the oil and gas industry in 1985 as a Field Seismologist with SSL in Papua New Guinea. From
1993 to 2009 he worked for Enterprise Oil on numerous Exploration projects (London, Aberdeen, Houston, and Brazil),
and following the takeover, Shell International (Houston); initially as a Senior Geophysicist, moving on to be the Gulf of
Mexico Exploration Strategy and Planning Manager and finally as the Gulf of Mexico Paleogene Exploration Manager.
In 2009, Eskil joined Marathon Oil (Houston) as their Exploration Manager (Conventional New Ventures) Worldwide and
subsequently Apache Corporation (Perth) as Director Worldwide Exploration and New Ventures Asia Pacific.
Prior to joining Sterling he was Head of New Ventures and Co-Head of Mergers & Acquisitions at Petrobras Oil & Gas
BV (Rotterdam).
Michael Kroupeev, non-executive Chairman, aged 50
Michael joined Sterling Energy’s Board as a non-executive Director in May 2016 and was appointed as non-executive
Chairman of Sterling Energy in January 2017. He is a member of the Nominations Committee.
Michael has 21 years’ experience working within the exploration and production sector. After attending University in Russia
and the United Kingdom in Plasma physics and an MBA respectively, he began his UK career working for Dana Petroleum
plc as a Director in 1994. In 1995, Michael founded Waterford. Waterford is an oil and gas focused vehicle, specialising in
the financing of oil, gas and other energy related projects in emerging markets. He has been directly involved in the capital
raising for natural resource projects and in acquiring, restructuring, developing and divesting such assets. Waterford has a
number of substantial shareholdings in oil and gas companies with operations in Europe, Africa and Australasia.
Leo Koot, Senior Independent non-executive Director, aged 54
Leo was appointed the Senior Independent non-executive Director of Sterling Energy in January 2017. He chairs the
Audit and Remuneration Committees and is a member of the Nominations Committee.
Leo has over 28 years’ experience in the energy sector and an MSc in Petroleum Engineering from Delft University,
the Netherlands. Following a successful start to his career with Shell International, he has been involved in multiple
successful business start-ups of scale including EDP Ltd, TAQA Bratani (UK) Ltd and TAQA Iraq BV.
He was Managing Director of Taqa in the UK from 2008 to 2013, delivering 60,000 bopd and $1.7 billion revenue in 2013.
Subsequently, Leo was President of Taqa Iraq from 2013 to 2015 primarily responsible for the Atrush field development
and Sulaymaniyah power plant in Kurdistan.
Leo is currently the Managing Partner of MENA Gulf Investments, with an energy related sector focus and a target fund
size of US$500 million.
Ilya Belyaev, non-executive Director, aged 35
Ilya was appointed a non-executive Director of Sterling Energy in January 2017. He is a member of the Audit, Nominations
and Remuneration Committees.
Ilya has acted as investor in private equity and venture capital projects via Supremum Capital where he is currently Chief
Executive Officer, Managing Partner and fund co-founder, and Concentric VC where he is a Venture Partner, having
closed over a dozen transactions in Russia and UK with a focus on finance and real estate sectors.
Prior to moving into private equity and venture capital, Ilya spent over 8 years in investment banking at JPMorgan,
Barclays Capital and VEB Capital in London and Moscow. Ilya graduated from Moscow State University in 2004, with
an MSc in Mathematics.
30
Sterling Energy plc Report and Financial Statements 2016 APPLICATION OF UK CORPORATE GOVERNANCE CODE PRINCIPLES
Throughout the year ended 31 December 2016 the Board has sought to comply with a number of the provisions of the
UK Corporate Governance Code (‘the Code’) in so far as it considers them to be appropriate to an entity of the size
and nature of the Group. The Directors make no statement of compliance with the Code overall and do not explain in
detail any aspect of the Code with which they do not comply. The Group continues to keep its overall system of internal
controls under review.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Composition, Operation and Independence
As at March 2017 the Board currently comprises the non-executive Chairman, one executive Director, one Senior
Independent non-executive Director and a non-executive Director. The executive Director 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 53.
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 Director, supported by policies for reporting to the Board.
Leo Koot is the Senior Independent non-executive Director. The Senior Independent non-executive Director is available
to all shareholders if they have concerns which, through the normal channels of contact with the non-executive Chairman
and CEO, have not been resolved or for which such contact is inappropriate.
The Group maintains Directors’ and Officers’ liability insurance cover and provides the Directors with indemnity, the level
of which is reviewed annually.
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:
Number of meetings in year
Eskil Jersing
Alastair Beardsall (resigned 11 May 2016)
Michael Kroupeev (appointed 11 May 2016)
Keith Henry (resigned 13 October 2016)
Nicholas Clayton (resigned 13 October 2016)
Malcolm Pattinson (resigned 13 October 2016)
Board
Meetings
Audit
Committee1
Remuneration
Committee
Nominations
Committee
10
10
4
6
9
9
9
3
-
-
-
3
3
3
2
-
-
-
2
2
2
1
-
-
-
1
1
1
1 In addition to the Audit Committee meeting to discuss the annual audit and full year results, the Committee also met in advance of announcements
of a financial disclosure, including the Interim Results at 30 June and the quarterly IMS.
31
Sterling Energy plc Report and Financial Statements 2016
CORPORATE GOVERNANCE
Board of Directors (cont.)
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 non-executive Chairman ensures
that Directors update their skills, knowledge and familiarity with the Group to fulfil their roles on the Board and on Board
Committees. Ongoing 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 non-executive Director. 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 non-executive Director, on behalf of the Nominations
Committee; the Company Secretary is advised of its completion. The performance of the non-executive Chairman is
reviewed annually in a meeting of the non-executive Directors, led by the Senior Independent non-executive Director.
This review takes into account the views of the executive Director.
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 been 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.
32
Sterling Energy plc Report and Financial Statements 2016 Audit Committee Report
An important part of the role of the Audit Committee is its responsibility for reviewing the effectiveness of the Group’s
financial reporting, internal control policies, and procedures for the identification, assessment and reporting of risk. The
latter two areas are integral to the Group’s core management processes and the Committee devotes significant time to
their review. Further information on risk management and internal control systems is provided within the Strategic Report
on pages 23 - 27 and also on page 47.
One of the key governance requirements of a group’s financial statements is for the report and accounts to be on the
whole fair, balanced and understandable. The co-ordination and review of the Group-wide input into the Annual Report
and Accounts is a sizeable exercise performed within an exacting time-frame which runs alongside the formal audit
process undertaken by the external Auditors. Arriving at a position where, initially, the Audit Committee and then the
Board, is satisfied with the overall fairness, balance and clarity of the document is underpinned by the following:
• comprehensive guidance issued to contributors at operational levels;
• a verification process dealing with the factual content of the reports;
• comprehensive reviews undertaken at different levels that aim to ensure consistency and overall balance; and
• comprehensive review by the senior management team.
The Audit Committee has also championed efforts to remove unnecessary items from the Report and Financial Statements
by stripping out duplication and sequencing information in a consistent and reasonable manner without compromising
compliance with UK regulatory and accounting requirements.
An essential part of the integrity of the financial statements is the key assumptions and estimates or judgments that
have to be made. The Committee reviews key judgments prior to publication of the financial statements at both the end
of the financial year and at the end of the six month interim period, as well as considering significant issues throughout
the year. In particular, this includes reviewing any subjective material assumptions within the Group’s activities to enable
an appropriate determination of asset valuation and provisioning and the accounting treatment thereof. The Committee
reviewed and was satisfied that the judgments exercised by management on material items contained within the Report
and Financial Statements are reasonable.
Additionally, the Committee also considered the management’s assessment of going concern with respect to the Group’s
cash position and its commitments for the next 12 months and was satisfied that the Group continues to be able to fund
its liabilities from existing cash reserves which totalled $88.1 million at 31 December 2016.
The Audit Committee has considered the Group’s internal control and risk management policies and systems, their
effectiveness and 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 periodically review the situation.
The Committee also considered the Group’s whistleblowing procedures to ensure that its employees are able to raise
concerns, in confidence, about possible wrongdoing in financial reporting and other matters. Whistleblowing was a
standing agenda item at all Board meetings and the Audit Committee met several times during the year to consider
these matters.
The external audit function plays an important part in assessing the effectiveness of financial reporting and internal
controls, and the effectiveness and quality of audit is of key importance. Our Auditors, BDO LLP, have been in place since
2010. In line with the audit profession’s own ethical guidance, the current audit engagement partner is due to rotate off
the Company’s account in the year ending 31 December 2020, having served for a period of five years.
33
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Audit Committee Report (cont.)
The Committee reviews the Auditors’ independence and monitors the nature and level of non-audit fees payable to them
on an annual basis. The Committee believes that certain work of a non-audit nature is best undertaken by the external
Auditors, and believes that it is not appropriate to limit the level of such work by reference to a set percentage of the
audit fee, as this does not take into account important judgments that need to be made concerning the nature of work
undertaken to help safeguard the Auditors’ independence. Details of fees payable to the Auditors are set out in Note 5
on page 75.
The Committee has reviewed the UK Corporate Governance Code including the best practice for companies to put
the external audit contract out to tender at least every ten years. Having considered the Financial reporting Council’s
(‘FRC’s’) guidance on aligning the timing of such re-tenders with the audit engagement partner rotation cycle, the
Committee’s current intentions are that it will initiate a re-tendering process prior to 2020. This policy will be kept under
review and the Committee will use its regular reviews of Auditor effectiveness to assess whether an earlier date for such
a re-tender would be desirable. Such regular reviews are used to assess the effectiveness of the external audit process
and the Auditors’ performance, with the Committee undertaking an internal assessment of the audit effectiveness and
performance which is mapped against audit appointment criteria. The Committee has recommended to the Board that
it recommend that shareholders support the re-appointment of BDO LLP at the 2017 AGM.
The previous committee comprising Nicholas Clayton, Keith Henry and Malcolm Pattinson resigned in Q4 2016, I would
like to thank them for their contributions to the Audit committee.
Leo Koot
Chairman of the Audit Committee
17 March 2017
MEMBERS
This Committee currently comprises:
• Leo Koot (Chairman)
• Ilya Belyaev
SUMMARY OF RESPONSIBILITIES
• Reviewing the effectiveness of the Group’s financial reporting, internal control policies and procedures for the
identification, assessment and reporting of risk;
• monitoring the integrity of the Group’s financial statements, including a review of the management report issued by the
executive management to the Board each month;
• monitoring the effectiveness of the internal control environment;
• making recommendations to the Board on the appointment of the Auditors;
• making recommendation to the Board on Auditors’ fees;
• agreeing the scope of the Auditors’ annual audit programme and reviewing the output;
• ensuring the independence of the Auditors is maintained;
• assessing the effectiveness of the audit process; and
• developing and implementing policy on the engagement of the Auditors to supply non-audit services.
The Auditors have unrestricted access to the Chairman of the Audit Committee. Audit Committee meetings are attended
by the Auditor where and when appropriate and, by invitation, the other Directors and senior management.
34
Sterling Energy plc Report and Financial Statements 2016 Nominations Committee
During 2016, the Nominations Committee held one meeting; additionally other Nominations Committee matters were
handled by either the non-executive Directors prior to or by the Directors during Board Meetings. These discussions
addressed the following topics:
• appointment of Chairman;
• appointment of non-executive Directors; and
• review of skills/experience on the board.
As at March 2017 the members of this Committee are Michael Kroupeev, Leo Koot, Ilya Belyaev and Eskil Jersing under
the Chairmanship of Michael Kroupeev. The Nominations Committee considers the composition of the Board and makes
recommendations on the appointment of new Directors and those candidates presenting themselves for re-election.
The Chairman of the Nominations Committee coordinates the annual performance evaluation of Directors.
The previous committee comprising Malcolm Pattinson (Chairman), Nicholas Clayton and Keith Henry resigned in Q4
2016. I would like to thank them for their contributions to the Nominations Committee.
Michael Kroupeev
Chairman of the Nominations Committee
17 March 2017
35
Sterling Energy plc Report and Financial Statements 2016
CORPORATE GOVERNANCE
Remuneration Committee Report
The Remuneration Committee convened twice during the year and has been actively engaged on all matters of corporate
remuneration. The Remuneration Committee of Keith Henry (Chairman), Malcolm Pattinson and Nick Clayton resigned
from their posts in October 2016. The new Committee of Leo Koot (Chairman) and Ilya Belyaev have taken seat from 19
January 2017.
The Committee has considered the following matters:
• the 2016 review of achievement of certain corporate objectives/key performance indicators (‘KPIs’); and subsequently
• the setting of 2017 corporate objectives/KPIs;
• the terms of the 2009 All Staff LTIP, NED LTIP and HMRC Approved schemes; and
• the proposed basic salary uplift for 2017 to reflect general inflation and merit awards for staff and executive management.
The safe operation of our activities, the management maturation and exposure limitation of the Group’s assets and
liabilities, and the selective disciplined pursuit of new business opportunities, are the main performance criteria on which
the Company’s executive team and employees are judged when considering remuneration matters.
2016 has been a year of transition at Sterling in what continues to be a challenging landscape for E&P companies. We
have continued to reshape our portfolio away from long-cycle pure Exploration-biased assets, exiting three Exploration
blocks cleanly, reducing our contingent commitment and liability exposures where possible, and ensuring our focus is
primarily on an evolved M&A led growth mandate, chasing material revenue generating opportunities. In addition much
emphasis has been placed on ensuring our capabilities are better aligned to our corporate strategic mandate, with
regards staffing and G&A overheads to ensure continued disciplined capital allocation. This cost reduction initiative is
under ongoing review by the new committee.
Sterling withdrew from the C-3 block, Mauritania in March 2016, assigning its entire 40.5% working interest to Tullow Oil,
with no outstanding commitments or material costs to the Group.
The exit from the Ambilobe block (50% working interest and Operator) in Madagascar was completed in May 2016, with
no outstanding commitments or material costs associated to the withdrawal, with Pura Vida taking over operatorship.
On the Ntem Concession (100% working interest and Operator) in Cameroon, Sterling issued a notice of surrender in
August 2016 (effective end of December 2016), again with no outstanding commitments or material costs to the Company.
A major and ongoing focus has been working with our Chinguetti oil field key partners, SMHPM and the Government of
Mauritania on a safe, cost-effective and technically prudent decommissioning and abandonment plan, due to commence
execution in 2017.
Refer to the Operations Review for details on current assets.
With regards the continued M&A mandate for transformational growth (asset and corporate options), origination, due
diligence and subsequent delivery to the Group continues to be challenging in the current market. Ultimately, despite
being unsuccessful in executing on any specific project, the Committee was satisfied that the management team was
able to originate and propose a number of high-graded opportunities to the Board for sanction.
The new Remuneration Committee has, since January 2017, focused on revising and updating the existing corporate
remuneration philosophy and structure, to ensure a fair and equable structure with direct shareholder alignment on the
36
Sterling Energy plc Report and Financial Statements 2016 core objective of value creation for the Group. In essence the intent is to align the entire Company and provide material
rewards only if we are successful in delivering the core Group objectives. This will initially involve looking at the following
Remuneration policy matters:
• the terms of the 2009 All Staff LTIP and HMRC Approved schemes and their ability to motivate, incentivise and retain
the calibre of staff and management required to promote future success for the Group; we will look to factor out the
impact of commodity prices so that these events are neutral to ensure that the reward pool is not artificially inflated or
deflated by the commodity cycle;
• the setting of 2017 corporate objectives/KPIs and associated bonus structures;
• proposed basic salary uplift for 2017 to reflect general inflation and merit awards for staff and executive management;
and
• staff capability optimization to the renewed strategic mandate.
The Committee, when reviewing base salaries for staff and executive Directors, consider matters of retention, motivation,
the economic climate (CPI/RPI), the challenges facing the business and appropriate industry benchmarks of remuneration
in peer companies. The annual base salary levels are intended to provide the core reward for the role at a sufficient level
to help recruit and retain employees as well as reflecting the role and experience of the individual. The annual base salary
levels for executive Directors were as follows:
Director
Alastair Beardsall
Eskil Jersing
2016 salary
2015 salary
% change
£100,000
£277,800
£100,000
£275,000
n/a
1%
The non-executive fees are determined by the Board with no Director voting on his own remuneration. For 2016 the fees
for each non-executive individual are provided on page 43.
The rules of the Company’s Staff Bonus Scheme permit the award of an annual bonus to executive Directors where:
• The total annual bonus is capped at a maximum of 100% of the base salary; it is intended to incentivise the execution
of the business strategy. It rewards the achievement of annual financial and strategic business targets, KPIs and
delivery of personal objectives. These targets are renewed annually and relate to the Business as a whole;
• up to 50% may be awarded for achieving certain corporate objectives, for 2016 these objectives included HSSE
performance, M&A execution and certain asset/liability exposure targets;
• up to 50% may be awarded for exceptional personal performance; exceptional is performance above and beyond
that expected under the individual’s job description. This element includes a subjective assessment of performance as
opposed to operating on a sliding scale; and
• the Committee retains discretion to reduce the bonus payment in the event of a serious HSSE incident or series of
incidents.
The Committee awarded the following bonus to the executive Director during the year:
Director
Alastair Beardsall
Eskil Jersing
2016 bonus
2015 bonus
% change
£0
£13,890
£0
£0
n/a
n/a
37
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Remuneration Committee Report (cont.)
Annual bonuses are also granted to eligible UK staff under the same rules; the maximum percentage that can be
awarded reflects the individual’s skills and experience. Bonuses are not awarded to non-executive Directors.
The Committee awarded no options under the All Staff LTIP or HMRC Approved schemes during the year.
Under the vesting criteria of the All Staff LTIP, options granted will only vest if the Company Share Price meets the criteria
set out in Note 24 on pages 88 - 89. Under these criteria, if the Company Share Price underperforms the FTSE 350 Index
(‘Index’), by more than 10% then no options will vest. For 100% of the options to vest the Company Share Price must
outperform the Index by more than 50%. No LTIPs vested in the year.
The Company also utilises an HMRC approved Company Share Option Plan (‘CSOP’) that allows both the Company and
the employee to benefit from some tax savings offered on the exercise of qualifying options. The specific details of the
scheme can again be found in Note 24. Where appropriate, Directors, senior management and other employees have
been issued options under the HMRC Sub-Plan in preference to the non-approved All Staff LTIP; the sum of the awards
to all individuals under the HMRC Sub-Plan and All Staff LTIP is equal to the number that would have been issued under
the All Staff LTIP if the HMRC Sub-Plan had not been approved and implemented.
The intent of the LTIP scheme is to incentivise the achievement of business strategy over the longer term. The Committee
is considering whether or not the All Staff LTIP and HMRC Approved CSOP schemes retain the ability to motivate,
incentivise and retain the calibre of staff and management required to promote future success for the Group.
I am excited to be a part of Sterling Energy’s future and am committed to help the Company navigate the challenging
industry environment. The Board and Committee believe the changes in the E&P industry and Sterling Energy’s position
within this industry warrants a review of the present remuneration structure aiming to closer align staff and shareholders.
I am committed to maintaining an open and constructive dialogue with all stakeholders in remuneration matters.
Finally, I would like to thank Keith Henry (Chairman), Nicholas Clayton and Malcolm Pattinson for all their contributions to
the Remuneration Committee since 2009.
Leo Koot
Chairman of the Remuneration Committee
17 March 2017
MEMBERS
This Committee currently comprises:
• Leo Koot (Chairman)
• Ilya Belyaev
SUMMARY OF RESPONSIBILITIES
• Agreeing a policy for the remuneration of the Chairman, executive Directors and other senior executives;
• within the agreed policy, determining individual remuneration packages for the Chairman, executive Directors and
senior employees;
• agreeing the policy on terms and conditions to be included in service agreements for the Chairman, executive Directors,
and other senior executives, including termination payments and compensation commitments, where applicable; and
• the approval of any employee incentive schemes and the performance conditions to be used for such schemes
including share performance targets.
38
Sterling Energy plc Report and Financial Statements 2016 OPERATION OF THE COMMITTEE
The Remuneration 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. The Committee consists entirely of non-executive Directors and, where appropriate, will invite executive
Directors or senior managers to attend meetings to provide suitable context for its discussions. Only members of the
Committee participate in discussions and reach conclusions on matters with which the Committee is responsible. No
member or attendee is authorised to participate in matters relating to their own remuneration. Non-executive Directors’
fees are considered and agreed separately by the Board as a whole. The Chairman and non-executive Directors are not
entitled to participate in the Companies executive remuneration programmes or pension arrangements. The Committee
has not engaged the services of any remuneration consultants during the year.
REMUNERATION STRATEGY
The Company remuneration strategy is under review and the intent is to provide a remuneration package that:
• helps to attract, retain and motivate;
• is aligned to shareholders’ interests;
• is competitive within the appropriate market;
• encourages and supports a performance culture aligned to the achievement of the Company’s strategic objectives; and
• is fair and transparent.
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, pension provision,
other benefits such as private medical cover, life assurance and share options awarded under the All Staff LTIP. The
balance between these components is targeted at base salary levels around the middle of the range for peer companies
with material additional remuneration linked to performance and results that add materially to shareholder value.
The Company acknowledges the benefit of the executive Directors accepting appointments as non-executive Directors
of other companies; however, if they accept more than two such appointments, they are required to deduct such fees
for those appointments from their Company executive remuneration.
Details of individual components of executive remuneration are:
Elements of package Purpose and link to strategy
How element is reviewed
Base salary and fees
To recognise market value of the
role, reflecting the individual’s
skills, experience, authorities and
responsibilities, to ensure the business
can attract and retain the appropriate
Directors, both executive and non-
executive.
Reviewed annually. The Committee uses comparator data
where possible, collected from published accounts and
industry surveys of peer companies to determine the base
salary for each of the executive Directors. No executive
remuneration consultants were used during the year. The
executive Directors use peer group data to determine the
level of fees for the non-executive Directors.
Performance related
bonuses
To incentivise and reward, on an
annual basis, the performance of
individuals and the Group on both
financial and non-financial metrics.
Objectives/KPIs are set, prior to the year under review,
to align near-term goals with the longer term sustainable
future of the Group. At the end of each year the Committee
considers if the KPIs have been achieved in addition to
individual performance and contribution to the Group. The
maximum level of performance related bonus for executive
Directors is capped at 100% of annual salary; non-executive
Directors do not participate in the bonus scheme.
39
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Remuneration Committee Report (cont.)
All Staff LTIP, HMRC
Approved schemes
To reward delivery of sustained long-
term total shareholder returns (TSR)
performance aligned to the interests of
shareholders.
Pension provision
To provide competitive retirement
benefits commensurate with schemes
offered by peer companies.
Other benefits
To provide competitive cost-effective
benefits through leveraging the
Group’s size and scale.
The All Staff LTIP scheme options are equity settled and
have a vesting period of three years. If options remain
unexercised after a period of five years from the date
of grant, the options expire. Options are forfeited if the
employee or Director leaves the Group before the options
vest or are exercised, however, the Committee may exercise
discretionary powers in certain circumstances. All Staff
LTIPs are subject to the performance conditions set out
in Note 24. The maximum value to which options may be
granted in any one year is capped, the cap is based upon
the individual’s role and responsibilities, for the executive
Directors the cap is 100% of annual base salary.
The Group operates a number of defined contribution
pension schemes pursuant to which it contributes 10%
of pensionable salary per eligible member. Scheme
membership and contribution is linked to the member’s base
salary (see above).
The Group subscribes to a number of benefits for
employees and Directors which include life assurance,
income protection; subsidised fitness centre membership
and private medical insurance, some of these benefits are
linked to base salary.
The Company operates no defined benefit schemes and no material changes to the benefits have been made during the year.
The principles and criteria used in the remuneration of executive personnel do not differ materially from those listed
above. The Committee may incentivise the engagement of new employees by way of uplift to the LTIPs awarded in the
first year of employment. No upper limit to the size of the uplift to the LTIP award has been set as the Committee will
consider sign-on awards on a case-by-case basis. No cash settled sign-on payments are made.
Notice periods for Directors are in line with Code guidance, none are currently greater than six months with Code
guidance being none greater than twelve months.
Termination payments made to Directors on loss of office that are not provided for within their service contracts are only
made if the Committee considers them appropriate, has recommended them to the Board and the Board has granted
their approval.
Following the remuneration policy set out above the Remuneration Committee has determined the following packages
for 2017:
• Eskil Jersing, Chief Executive Officer, will receive a base salary, effective 1/1/2017, of £277,800, a 10% non-contributory
pension contribution paid directly to Eskil Jersing and other benefits as set out above.
• For Eskil Jersing any award under the performance related bonus scheme will be determined at the end of 2017
and will be based on achievement of certain corporate KPIs and individual performance, the principles of the bonus
scheme are set out on page 39. The Company considers the specifics of the KPIs to be commercially sensitive as they
reflect the Company’s commercial strategy; in general the KPIs are focused on HSSE, M&A led growth initiatives and
managing the Group’s financial exposure to its existing assets.
• The award of options under the Company’s All Staff LTIP plan to Eskil Jersing will be determined by the Remuneration
Committee during the year in accordance with the principles as set out above and disclosed at the time of any award.
40
Sterling Energy plc Report and Financial Statements 2016
Following the remuneration policy set out above the Directors have determined the 2017 fees for the non-executive
Directors to be set at £100,000 for Michael Kroupeev (non-executive Chairman from 19 January 2017), £50,000 for Leo
Koot and £36,000 for Ilya Belyaev.
All Staff and NED LTIPs
Directors’ interests in LTIPs are accounted for under International Financial Reporting Standard (‘IFRS’) 2 - Share-Based
Payments; accounting charges in the period are detailed in Note 24 on pages 88 - 89.
The Directors’ interests in the All Staff LTIP scheme, which was approved by shareholders at the EGM held on 22
December 2009, are as follows (audited):
1 January
2016
Lapsed/
forfeited
Granted Exercised
31 December
2016
Exercise
price
Earliest
exercise
date
Latest
exercise
date
Alastair Beardsall
2,384,600 (2,384,600)
Eskil Jersing
-
-
2,384,600 (2,384,600)
-
-
-
-
-
-
-
-
-
n/a
n/a
n/a
n/a
n/a
n/a
All of Alastair Beardsall’s LTIPs where forfeited in the year due to resignation.
The non-executive Directors’ interests in the NED LTIP, which was approved by shareholders at the EGM held on 22
December 2009, are as follows (audited):
1 January
2016 1
Lapsed/
forfeited
Granted Exercised
31 December
2016
Exercise
price
Earliest
exercise
date
Latest
exercise
date
Nicholas Clayton
103,150
(103,150)
Keith Henry
103,150
(103,150)
Malcolm Pattinson
103,150
(103,150)
309,450
(309,450)
-
-
-
-
-
-
-
-
-
-
-
-
1 Awards approved by shareholders on 22 December 2009, 28 April 2011 and 19 April 2013.
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
All LTIPs where forfeited in the year due to resignations. The Company intends to cease the operation of the NED LTIP.
Service Contracts
Directors’ service contracts are reviewed annually at the end of each calendar year with any changes taking effect from
1 January of the following year. The 2016 salary review was implemented on 1 January 2017 and is incorporated within
the numbers below:
Director
Eskil Jersing
Commencement of
appointment
Date of current
contract
Base annual
salary
Notice
period
23 March 2015
23 March 2015
£277,800
6 months
41
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Remuneration Committee Report (cont.)
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, current details of which are as follows:
Director
Commencement of
appointment
Date of current
contract
Michael Kroupeev
09 May 2016
09 May 2016
Leo Koot
Ilya Belyaev
19 January 2017
19 January 2017
19 January 2017
19 January 2017
Base fees
per annum
£100,000
£50,000
£36,000
Save for the fees outlined above, 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. In addition, Waterford, founded by Michael Kroupeev, entered into
to a relationship agreement with the Company, given that Waterford and its associates beneficially own Ordinary shares in
the Company, equivalent to approximately 29.5% of the entire issued share capital of the Company. This was undertaken
on terms and conditions that are customary for a substantial shareholding of this nature (the ‘Relationship Agreement’).
Directors and their interests (audited)
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
of 40p each
Alastair Beardsall 1 (resigned 11 May 2016)
Eskil Jersing 1
14 March
2017
31 December
2016
n/a
-
n/a
-
Michael Kroupeev 2 (appointed 11 May 2016)
64,815,517
64,815,517
Keith Henry 3 (resigned 13 October 2016)
Nicholas Clayton 3 (resigned 13 October 2016)
Malcolm Pattinson 3 (resigned 13 October 2016)
Leo Koot 3 (appointed 19 January 2017)
Ilya Belyaev 4 (appointed 19 January 2017)
1 Executive Director.
n/a
n/a
n/a
-
-
n/a
n/a
n/a
n/a
n/a
31 December
2015
1,062,500
-
n/a
500,000
132,500
62,810
n/a
n/a
2 Non-executive Chairman, member of the Nominations Committees. Founder of Waterford Finance and Investment Limited (‘Waterford’). Water-
ford and its Associates beneficially own 64,815,517 Ordinary Shares in the Company, equivalent to approximately 29.5% of the entire issued
share capital.
3 Non-executive Director, member of the Audit, Remuneration and Nominations Committees.
4 Non-executive Director, member of the Audit, Remuneration and Nominations Committees. Nominee of Mistyvale Limited (‘Mistyvale’). Mistyvale
beneficially own 34,467,790 Ordinary Shares in the Company, equivalent to approximately 15.7% of the entire issued share capital.
Beneficial shareholdings include the shareholdings of a Director’s spouse and infant children.
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 $24k in 2016 (2015: $27k).
42
Sterling Energy plc Report and Financial Statements 2016
Aggregate Remuneration
The single figure of total remuneration paid to Directors in 2016 and 2015 is summarised below (audited):
2016 Remuneration
Fees and
basic salary
Bonus
Executive Directors:
Alastair Beardsall
(resigned 11 May 2016)
£
41,667
£
-
Pension
contributions
paid as cash
£
Defined
contribution
pension
£
Benefits
in kind
£
Single figure
remuneration
Total 2016
£
4,167
-
3,956
49,790
Eskil Jersing
277,800
13,890
9,145
18,635
9,411
328,881
Non-executive Directors:
Michael Kroupeev
(appointed 11 May 2016)
Nicholas Clayton
(resigned 13 October 2016)
Keith Henry
(resigned 13 October 2016)
Malcolm Pattinson
(resigned 13 October 2016)
23,113
55,754
28,291
28,291
Aggregate remuneration 2016 (£)
454,916
Aggregate remuneration 2016 (US$)
616,027
2015 Remuneration
Executive Directors:
Alastair Beardsall
Eskil Jersing
(appointed 23 March 2015)
Philip Frank
(resigned 13 March 2015)
Non-executive Directors:
Nicholas Clayton
Keith Henry
Malcolm Pattinson
Fees and
basic salary
£
148,650
213,654
70,176
35,700
35,700
35,700
Aggregate remuneration 2015 (£)
539,580
Aggregate remuneration 2015 (US$)
824,796
-
-
-
-
13,890
18,809
Bonus
£
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
23,113
55,754
28,291
28,291
13,312
18,027
18,635
25,234
13,367
514,120
18,101
696,198
Pension
contributions
paid as cash
£
Defined
contribution
pension
£
Benefits
in kind
£
Single figure
remuneration
Total 2015
£
14,865
-
-
-
-
-
-
21,365
9,413
5,521
172,928
240,540
7,018
3,693
80,887
-
-
-
-
-
-
35,700
35,700
35,700
14,865
22,722
28,383
43,386
18,627
601,455
28,473
919,377
43
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Remuneration Committee Report (cont.)
Fees and Basic Salary
Base fees and salary remain the foundation of the Directors’ remuneration packages which determine the levels of other
elements such as pension contributions and bonus payments. When setting base salaries for executive Directors, the
Remuneration Committee will take into account:
• the Director’s performance, individual responsibilities, authorities and experience; and
• comparisons with salary levels in peer group companies gathered from disclosure in various public documents such as
peer group annual reports and accounts.
The basic salary is used to determine the level of pension contributions. The level of fees for the non-executive Directors is
set by the Remuneration Committee with reference to the fees paid to non-executive Directors in peer group companies.
Bonus
The Remuneration Committee administers the bonus scheme for the Company and considers whether executive Directors
are eligible for an annual and/or interim bonus payment; the Committee also has an oversight for bonus awards to staff.
The bonus scheme comprises two parts, (i) corporate performance as measured against pre-determined objectives/KPIs,
and (ii) individual performance; refer to page 39 for further details. If so, performance conditions will be relevant to the
award, stretched and designed to enhance shareholder value and to promote the long-term success of the Company.
Upper limits are set and disclosed by the Remuneration Committee. The Remuneration Committee reviewed the outcome
of the Company’s performance with regard to its 2016 KPIs and noted that some of the key objectives had been achieved
and accordingly a limited executive bonus was awarded to the executive Directors in 2016. As a comparison, in 2015 the
Remuneration Committee noted that although it had met some of its key objectives, no executive bonuses were awarded
to the executive Directors as both the CEO and Chairman declined to take them. The Company considers the KPIs to be
commercially sensitive as they reflect the Company’s commercial strategy; in general the KPIs are focused on HSSE, new
ventures and managing the Companies financial exposure to its existing assets. The KPIs for 2016 are similar to those
adopted in 2015. Non-executive Directors are not eligible to receive bonus payments.
Defined Contribution Pension
The defined contribution pension scheme is an employer contribution scheme calculated at 10% of base salary. Such
payments are made into individual Director personal pension plans as chosen by each individual Director. On retirement,
such contribution payments cease from the effective date of cessation of employment. Non-executive Directors are not
eligible to receive pension contributions.
Benefits in Kind
Taxable benefits in kind for executive Directors include Company paid private medical health schemes and associated
cash plans; the latter is subject to an annual limit. In addition the Company pays for life insurance, travel insurance,
Directors and Officers insurance and disability cover; such benefits are not taxable benefits for individual Directors.
The table below sets out the total remuneration for the Company’s CEO for the past six years:
44
Sterling Energy plc Report and Financial Statements 2016
Year
CEO
% change
CEO single
figure of total
remuneration
(£)
Annual bonus
pay-out against
maximum
opportunity
(%)
Long-term
incentive vesting
rates against
maximum
opportunity
(%)
2016
2015
2014
2013
2012
2011
Eskil Jersing
Alastair Beardsall 1 / Eskil Jersing
Alastair Beardsall 1
328,881
290,184
13.3%
32.0%
219,801
(51.3%)
Angus MacAskill 2 / Alastair Beardsall 1
451,417
52.4%
Angus MacAskill
Angus MacAskill
296,169
(18.9%)
365,004
(0.4%)
23%
4%
-
-
-
-
-
-
-
-
-
-
1 Part-time.
2 Includes £74,745 paid as compensation for loss of office.
From August 2013 until Eskil Jersing’s appointment (March 2015), Alastair Beardsall had acted as interim CEO in addition
to being executive Chairman (his remuneration as relating to his appointment in 2013 had been prorated accordingly).
The annual percentage change in CEO single figure remuneration for years 2011 to 2016 compares with that of all
employees: (23.9%), (20.5%), 8.5%, (19.8%), 11.1% and (6.0%) respectively.
The graphs below show the value of the executive Director packages for 2016 together with minimum and maximum
remuneration attainable:
Alastair Beardsall (executive Chairman)
Maximum
Actual
Minimum
£0
£100,000
£200,000
£300,000
£400,000
£500,000
£600,000
Eskil Jersing (Chief Executive)
Maximum
Actual
Minimum
Basic salary
Bonus
Pension provision
Other benefits
Basic salary
Bonus
Pension provision
Other benefits
£0
£100,000
£200,000
£300,000
£400,000
£500,000
£600,000
The table below shows the total Group remuneration compared to the total distribution to shareholders:
Total Group
remuneration (£)
Total distribution
to shareholders
2016
2015
1,890,314
2,011,139
-
-
45
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Communications with Shareholders
The Board is directly 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 Group’s longer term goals. With non-executive Chairman
Michael Kroupeev and Ilya Belyaev on the Board as shareholder representatives, this has allowed for more direct
alignment between the Board and the shareholders.
The Board formally 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 Report and Financial Statements are
available to view. Additionally this Report and Financial Statement contains extensive information about the Group’s
activities. Enquiries from individual shareholders not directly represented at the Board 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.
The non-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 25 April
2017, can be found in the notice of the meeting on the Company’s website.
46
Sterling Energy plc Report and Financial Statements 2016 Internal Controls
In September 1999 the Turnbull Guidance (Internal Control: Guidance for Directors on the Combined Code) was
published, and revised in October 2005. In September 2012 the UK Corporate Governance Code was published for
reporting periods beginning on or after 1 October 2012 and subsequently revised in September 2014 for reporting
periods beginning on or after 1 October 2014.
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.
47
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Conflicts of Interest
The Group and 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 clearance or otherwise of such conflicts by the Board. In deciding on
a conflict, or a potential conflict, the Directors must have regard to their general duties under the Companies Act 2006.
48
Sterling Energy plc Report and Financial Statements 2016 Extractive Industries Transparency Initiative (‘EITI’)
In accordance with the Transparency Criteria as set out by the EITI, the following payments to Government bodies have
been made during the year ended 31 December 2016:
Madagascar: Ambilobe 1
Mauritania: Chinguetti 2
Mauritania: C-3 3
Mauritania: C-10 3
Somaliland 4
2016
$000
156
104
370
248
75
953
2015
$000
166
104
370
224
75
939
1 Payments made by Pura Vida (SE(UK)L pays its pro rata share of cost).
2 Included within payments made to SMHPM under the terms of the Chinguetti Funding Agreement, relating to Chinguetti field operating costs,
PSC obligations and decommissioning, totalling $7.5 million in 2016 (2015: $8.8 million).
3 Gross payments made by Tullow (SEML pays its share of cost).
4 Payments made by Genel Energy (SE(EA)L fully carried for its share of cost).
49
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Directors’ Report
The Directors present their Annual Report and Financial Statements on the affairs of the Company and its subsidiaries,
together with the independent Auditors’ Report for the year ended 31 December 2016.
PRINCIPLE 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 with a primary focus on Africa. The significant developments during 2016 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, Chief
Executive’s statement and the Strategic Report section of this report.
The Group operates through overseas branches and subsidiary undertakings as appropriate to the fiscal environment.
Subsidiary undertakings of the Group are set out in Note 16 to the financial statements.
The Group uses a number of KPIs to assess the business performance against strategy, these include; HSSE, M&A led
growth initiatives and managing the Group’s financial exposure to its existing assets.
RESULTS AND DIVIDENDS
The Group loss for the financial year was $8.5 million (2015: loss $16.0 million). This leaves an accumulated Group
retained deficit of $449.3 million (2015: deficit $440.9 million) to be carried forward. The Directors do not recommend the
payment of a dividend (2015: $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 12 - 14. The financial position of the Group and Company, its cash
flows and liquidity position are described in the Financial Review on pages 19 - 22. In addition, Note 23 to the financial
statements includes 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 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 18 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 24. No person has any special rights of control over the
Company’s share capital and all issued shares are fully paid.
50
Sterling Energy plc Report and Financial Statements 2016
DIRECTORS
The Directors who served during the year were as follows:
Mr. Alastair Beardsall
Mr. Eskil Jersing
Mr. Michael Kroupeev
Mr. Keith Henry
Mr. Nicholas Clayton
Mr. Malcolm Pattinson
Mr Leo Koot
Mr Ilya Belyaev
(resigned 11 May 2016)
(appointed 11 May 2016)
(resigned 13 October 2016)
(resigned 13 October 2016)
(resigned 13 October 2016)
(appointed 19 January 2017)
(appointed 19 January 2017)
Biographical details of serving Directors can be found in the Board of Directors section of this report on page 30.
DIRECTORS AND ELECTION ROTATION
With regard to the appointment and re-election 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 within this report.
In accordance with article 106 of the Company’s Article of Association Eskil Jersing offers himself for re-election and in
accordance with article 110 of the Company’s Article of Association Michael Kroupeev, Leo Koot and Ilya Belyaev offer
themselves for election at the forthcoming AGM on 25 April 2017.
SUBSTANTIAL SHAREHOLDINGS
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 220,053,520 issued ordinary shares of 40 pence each of the Company at
14 March 2017:
Waterford Finance & Investment Ltd
YF Finance Limited
Mistyvale Limited
Denis O'Brien
Banque Heritage
Number
64,815,517
36,611,361
34,467,790
15,750,000
14,930,358
%
29.45
16.64
15.66
7.16
6.78
BUSINESS RISK
A summary of the principle and general business risks can be found within the Strategic Report on pages 23 - 27.
FINANCIAL INSTRUMENTS
Information about the use of financial instruments, the Group’s policy and objectives for financial risk management is
given in Note 23 to the financial statements.
51
Sterling Energy plc Report and Financial Statements 2016 CORPORATE GOVERNANCE
Directors’ Report (cont.)
AUDITORS
Each of the persons who are a Director at the date of approval of this Report and Financial Statements 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 to be held on 25 April 2017.
Eskil Jersing
Chief Executive Officer
17 March 2017
52
Sterling Energy plc Report and Financial Statements 2016 Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Directors Report, Strategic Report and 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 (‘IFRS’) 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 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
Group’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 Group and thus for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
WEBSITE PUBLICATION
The Directors are responsible for ensuring the Report and 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 that the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position
and profit or loss of the Group and Company and the undertakings included in the consolidation taken as a whole; and
the Report and Financial Statements include 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.
Eskil Jersing
Chief Executive Officer
17 March 2017
53
Sterling Energy plc Report and Financial Statements 2016
Sterling Energy plc
Group Accounts
Year ended 31 December 2016
Independent Auditors’ Report
to the members of Sterling Energy plc
We have audited the financial statements of Sterling
Energy plc for the year ended 31 December 2016 which
comprises the consolidated and Company statement
of financial position, the consolidated statement of
comprehensive income, the consolidated and Company
statement of cash flows, the consolidated and Company
statement of changes in equity 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 and, as regards the parent company
financial statements, as applied in accordance with the
provisions of the Companies Act 2006.
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 Financial Reporting Council’s
(‘FRC’s’) Ethical Standards for Auditors. The Company
voluntarily prepares a Directors’ Remuneration Report
in accordance with the provisions of the Companies Act
2006 that would have applied had the Company been a
quoted company. We have agreed to audit the part of the
Directors’ Remuneration Report that we would have been
required to audit under the Companies Act 2006 if the
Company was a quoted company.
SCOPE OF THE AUDIT OF THE FINANCIAL
STATEMENTS
A description of the scope of an audit of financial statements
is provided on the FRC’s website at:
www.frc.org.uk/auditscopeukprivate
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 2016 and of the Group’s loss 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; and
• the financial statements have been prepared
in
accordance with the requirements of the Companies Act
2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation.
OPINION ON OTHER MATTERS PRESCRIBED BY
THE COMPANIES ACT 2006
In our opinion the information given in the Strategic Report
and Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
OPINION ON DIRECTORS’ REMUNERATION REPORT
WHICH WE HAVE AGREED TO REPORT
In our opinion the part of the Directors’ Remuneration
Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
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 McNaughton (senior statutory auditor)
For and on behalf of BDO LLP, statutory auditor
London, United Kingdom
17 March 2017
BDO LLP is a limited liability partnership registered in England and Wales.
56
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Consolidated Statement of Comprehensive Income
Year ended 31 December 2016
Note
31 December 2016
$000
31 December 2015
$000
Revenue
Cost of sales
Gross profit/(loss)
Other administrative expenses
Impairment of oil and gas exploration assets
Pre-licence costs
Onerous contract
Chinguetti cessation costs
Total administrative expenses
Loss from operations
Finance income
Finance expense
Loss before tax
Tax
Loss for the year attributable to the owners of the parent
Other comprehensive income - items to be reclassified to
the income statement in subsequent periods
Currency translation adjustments
Total other comprehensive income for the year
Total comprehensive expense for the year attributable to
the owners of the parent
Basic loss per share (US cents)
Diluted loss per share (US cents)
4
6
3
20
7
5
9
9
10
13
13
4,815
(2,262)
2,553
(2,045)
(7,375)
(1,951)
-
-
(11,371)
(8,818)
683
(394)
(8,529)
-
(8,529)
50
50
(8,479)
(3.88)
(3.88)
5,031
(6,028)
(997)
(2,305)
(8,183)
(2,212)
(3,700)
2,159
(14,241)
(15,238)
356
(1,068)
(15,950)
-
(15,950)
6
6
(15,944)
(7.25)
(7.25)
57
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Consolidated Statement of Financial Position
Year ended 31 December 2016
Note
31 December 2016
$000
31 December 2015
$000
Non-current assets
Intangible exploration and evaluation assets
Property, plant and equipment
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Equity
Share capital
Share premium
Currency translation reserve
Retained deficit
Total equity
Non-current liabilities
Long-term provisions
Current liabilities
Trade and other payables
Short-term provisions
Total liabilities
Total equity and liabilities
14
15
17
18
20
21
20
18,846
17
18,863
1,948
6,540
88,058
96,546
115,409
149,014
378,863
(169)
(449,318)
78,390
14,472
14,472
1,363
21,184
22,547
37,019
115,409
25,074
34
25,108
1,320
550
98,653
100,523
125,631
149,014
378,863
(219)
(440,862)
86,796
32,395
32,395
2,740
3,700
6,440
38,835
125,631
The financial statements of Sterling Energy plc, registered number 1757721, were approved by the Board of Directors
and authorised for issue on 17 March 2017.
Signed on behalf of the Board of Directors.
Eskil Jersing
Chief Executive Officer
17 March 2017
58
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Consolidated Statement of Changes in Equity
Year ended 31 December 2016
At 1 January 2015
Loss for the year
Currency translation adjustments
Total comprehensive expense for the year
attributable to the owners of the parent
Share option charge for the year
At 31 December 2015
Loss for the year
Currency translation adjustments
Total comprehensive expense for the year
attributable to the owners of the parent
Share option charge for the year
Share capital
Share
premium
$000
$000
Currency
translation
reserve
$000
Retained
deficit 1
Total
$000
$000
149,014
378,863
(225)
(425,209)
102,443
149,014
378,863
(219)
(440,862)
-
-
-
-
-
-
-
-
-
6
6
-
-
-
-
-
-
-
-
-
-
50
50
-
(15,950)
(15,950)
-
6
(15,950)
(15,944)
297
(8,529)
-
297
86,796
(8,529)
50
(8,529)
(8,479)
73
73
At 31 December 2016
149,014
378,863
(169)
(449,318)
78,390
1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve.
59
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Consolidated Statement of Cash Flows
Year ended 31 December 2016
Note
15
3
15
14
20
Operating activities
Loss before tax
Depreciation, depletion & amortisation
Impairment expense
Chinguetti cessation costs
Onerous provision
Finance income and gains
Finance expense and losses
Share-based payment charge
Operating cash flow prior to working capital movements
(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables
Decrease in trade and other payables
Increase in short-term provisions
Cash outflow from continuing operations
Cash outflow from discontinued operations
Net cash flow used in operating activities
Investing activities
Interest received
Purchase of property, plant and equipment
Exploration and evaluation costs
Decommissioning costs
Net cash used in investing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
2016
$000
(8,529)
32
7,375
-
(3,700)
(683)
380
75
(5,050)
(628)
(5,990)
(1,377)
4,200
(8,845)
(8,835)
(10)
(8,845)
683
(15)
(1,147)
(1,088)
(1,567)
(10,412)
98,653
(183)
88,058
2015
$000
(15,950)
54
8,183
(2,159)
310
(356)
1,056
297
(8,565)
903
2,744
(2)
-
(4,920)
(4,877)
(43)
(4,920)
356
(16)
(4,831)
-
(4,491)
(9,411)
108,148
(84)
98,653
60
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Company Statement of Financial Position
Year ended 31 December 2016
Note
31 December 2016
$000
31 December 2015
$000
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Equity
Share capital
Share premium
Retained deficit
Total equity
Non-current liabilities
Long-term provisions
Current liabilities
Trade and other payables
Short-term provisions
Total liabilities
Total equity and liabilities
15
16
17
18
20
21
20
-
29,148
29,148
1,948
24,686
88,054
114,688
143,836
149,014
378,863
(449,921)
77,956
14,472
14,472
34,424
16,984
51,408
65,880
143,836
-
29,113
29,113
1,320
20,478
97,483
119,281
148,394
149,014
378,863
(451,885)
75,992
32,395
32,395
36,307
3,700
40,007
72,402
148,394
During the year the Company made a profit of $1.9 million (2015: $4.3 million loss).
The financial statements of Sterling Energy plc, registered number 1757721, were approved by the Board of Directors
and authorised for issue on 17 March 2017.
Signed on behalf of the Board of Directors
Eskil Jersing
Chief Executive Officer
17 March 2017
61
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS
Company Statement of Changes in Equity
Year ended 31 December 2016
At 1 January 2015
Total comprehensive expense for the year
Share option charge for the year
At 31 December 2015
Total comprehensive income for the year
Share option charge for the year
At 31 December 2016
Share
capital
$000
Share
premium
$000
Retained
deficit 1
$000
Total
$000
149,014
378,863
(447,839)
80,038
-
-
-
-
(4,343)
(4,343)
297
297
149,014
378,863
(451,885)
75,992
-
-
-
-
1,891
1,891
73
73
149,014
378,863
(449,921)
77,956
1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve.
62
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS Company Statement of Cash Flows
Year ended 31 December 2016
Note
20
Operating activities
Profit/(loss) before tax
Chinguetti cessation costs
Onerous provision
Finance income and gains
Finance expense and losses
Share-based payment charge
Operating cash flow prior to working capital movements
(Increase)/decrease in inventories
Increase in trade and other receivables
Decrease in trade and other payables
Decrease in provisions
Net cash flow used in operating activities
Investing activities
Interest received
Decommissioning costs
Net cash (used in)/generated from investing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
2016
$000
1,891
-
(3,700)
(683)
406
-
(2,086)
(628)
(4,208)
(1,883)
-
(8,805)
683
(1,088)
(405)
(9,210)
97,483
(219)
88,054
2015
$000
(4,344)
(2,159)
310
(356)
1,036
22
(5,491)
903
(705)
(4,018)
(18)
(9,329)
356
-
356
(8,973)
106,473
(17)
97,483
63
Sterling Energy plc Report and Financial Statements 2016GROUP ACCOUNTS 1.
ACCOUNTING POLICIES
a) General Information
Sterling Energy plc is a public company incorporated in the United Kingdom under the UK Companies Act 2006.
The address of the registered office is 85 Fleet Street, London, EC4Y 1AE. The Company and the Group are
engaged in the exploration, development and production of commercial 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
The Group and Company financial statements have been prepared in accordance with IFRSs as adopted
by the EU.
(i) New and amended standards adopted by the Group:
No standards adopted this year had a material effect.
(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
Effective date
EU Endorsement status
IFRS 15
IFRS 9
IFRS 16
IAS 12
IAS 7
IFRS 15
IFRS 2
Revenue from Contracts with Customers
1 January 2018
Financial Instruments
1 January 2018
Endorsed
Endorsed
Leases
1 January 2019
Expected H2 2017
Recognition of deferred tax assets for
unrealised losses (Amendments)
1 January 2017
Expected Q2 2017
Disclosure Initiative: amendments
1 January 2017
Expected Q2 2017
Clarifications to IFRS 15 revenue from
Contracts with Customers
Classification and Measurement of Share-
based Payment Transactions (Amendments)
Annual Improvements
to IFRSs
(2012–2014 Cycle)
IFRIC 22
Foreign Currency Transactions and Advance
Consideration
1 January 2018
Expected Q2 2017
1 January 2018
Expected H2 2017
1 January 2017 and 1
January 2018
Expected H2 2017
1 January 2018
Expected H2 2017
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 preparation of the financial statements. Further detail is contained in the
Directors’ Report.
d) Basis of Consolidation
(i) Subsidiaries
The consolidated financial statements incorporate the financial statements of the Company and entities controlled
by the Company (its subsidiaries) made up to 31 December each year. Control is recognised where an investor is
64
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS exposed, or has rights, to variable returns from its investment with the investee and has the ability to affect these
returns through its power over the investee.
The results of subsidiaries acquired, or disposed of, during the year are included in the 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.
(ii) Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group
transactions, are eliminated in preparing the consolidated financial statements.
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.
e) Jointly Controlled Operations
The Group is a party to a joint arrangement when there is a contractual arrangement that confers joint control over
the relevant activities of the arrangement to the Group and at least one other party. Joint control is assessed under
the same principles as control over subsidiaries. The Group classifies its interest in joint arrangements as joint
operations as the Group has both the rights to assets and obligations for the liabilities of the joint arrangement.
In assessing the classification of interests in joint arrangements, the Group considers:
• the structure of the joint arrangement;
• the contractual terms of the joint arrangement; and
• any other facts and circumstances.
The Group accounts for its interests in joint operations by recognising its share of assets, liabilities, revenues and
expenses in accordance with its contractually conferred rights and obligations.
f) Revenue
Sales of oil and gas are recognised, net of any sales taxes, when risks and rewards of ownership have passed to
the customer; typically this is at the point of physical lifting. See also section r) below. Royalties and tariff income
are recognised as earned on an entitlement basis.
g) Oil and Gas Interests
Exploration and evaluation (‘E&E’) assets
Capitalisation
Pre-acquisition costs on oil and gas assets are recognised in the Income Statement when incurred. Costs
incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and
commercial appraisal costs, and other directly attributable costs of exploration and appraisal including technical
and administrative costs, are capitalised as intangible exploration and evaluation (‘E&E’) assets. The assessment
of what constitutes an individual E&E asset is based on technical criteria but essentially either a single licence
area or contiguous licence areas with consistent geological features are designated as individual E&E assets.
Costs relating to the exploration and evaluation of oil and gas interests are carried forward until the existence, or
otherwise, of commercial reserves have been determined.
65
Sterling Energy plc Report and Financial Statements 2016 E&E costs are not amortised prior to the conclusion of appraisal activities. Once active exploration is completed
the asset is assessed for impairment. If commercial reserves are discovered then the carrying value of the
E&E asset is reclassified as a development and production (‘D&P’) asset, following development sanction, but
only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If it
subsequently assessed that commercial reserves have not been discovered, the E&E asset is written off to the
Income Statement.
Impairment
The Group’s oil and gas assets are analysed into cash generating units (‘CGU’) for impairment reporting purposes,
with E&E asset impairment testing being performed at an individual asset level. The current CGU consists of the
Group’s whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate
that the carrying value of an E&E asset exceeds the recoverable amount. The recoverable amount of the individual
asset is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting
from an impairment review are written off to the Income Statement. 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.
As 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 recognised in
prior periods. Reversal of impairments and impairment charges are credited/(charged) to separate line items under
total administration expenses within the statement of comprehensive income.
Refer to Notes 2 and 3 for detailed disclosure of the results of impairments and impairment reviews performed.
Development and Production Assets
Capitalisation
Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment together with
E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset within property, plant
and equipment. Normally each individual field development will form an individual D&P asset but there may be
cases, such as phased developments, or multiple fields around a single production facility when fields are grouped
together to form a single D&P asset.
Depreciation
All costs relating to a development are accumulated and not depreciated until the commencement of production.
Depreciation is calculated on a unit of production basis based on the proven and probable reserves of the asset.
Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment
will normally be fully depreciated over the life of the field. However these items are assessed to consider if their
useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would
be charged. The key areas of estimation regarding depreciation and the associated unit of production calculation
for oil and gas assets are recoverable reserves and future capital expenditures.
Impairment
A review is carried out for any indication that the carrying value of the Group’s D&P assets may be impaired.
The impairment review of D&P assets is carried out on an annual, asset by asset basis and involves comparing
the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined
as the higher of its fair value less costs to sell and value in use. The value in use is determined from estimated
future net cash flows, being the present value of the future cash flows expected to be derived from production of
66
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS
commercial reserves. Impairment resulting from the impairment testing is charged to a separate line item under
total administration expenses within the Statement of Comprehensive Income.
The pre-tax future cash flows are adjusted for risks specific to the cash-generating unit and are discounted using
a pre-tax discount rate. The discount rate is derived from the Group’s post-tax weighted average cost of capital
and is adjusted where applicable to take into account any specific risks relating to the country where the cash-
generating unit is located, although other rates may be used if appropriate to the specific circumstances. The
discount rates applied in assessments of impairment are reassessed each year.
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.
h) 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 depreciation – 33% straight line.
i) 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. Any
change in the date on which provisions fall due will change the present value of the provision. These changes are
treated as an administrative expense.
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.
j) 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. Each royalty asset is assessed individually for impairment when there is an
indication that an impairment event may have occurred. See also Impairment of assets – Details of these can be
found in Note 2.
k) 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 dollars 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
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.
67
Sterling Energy plc Report and Financial Statements 2016 l) Taxation
Current Tax
Tax is payable based upon 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. Any Group 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 JV’s, 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.
m) Investments (Company)
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.
n) Operating Leases
Rentals under operating leases are charged on a straight-line basis over the lease term.
o) Financial Instruments
The Group’s Financial Instruments comprise of cash and cash equivalents, loans and receivables. There are no
other categories of financial instrument.
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 three 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.
68
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS
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.
p) 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.
q) 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.
r) Over/(Under) Lift of Inventories
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 and overlifts
are valued at the lower of cost and net realisable value. Adjustments are made to cost of sales and balances
included within receivables and payables as appropriate.
s) 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.
t) 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 Board of Directors.
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 (discontinued) and the
United Kingdom office is an administrative cost centre.
69
Sterling Energy plc Report and Financial Statements 2016 u) Contingent Consideration
Contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to
the former owners of an acquiree. The terms, under which this consideration will be calculated and paid, is part of
the acquisition agreement. The consideration will only be paid if specified future events occur or conditions are met.
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 ongoing 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.
Company – Investment
If circumstances indicate that impairment may exist, investments in subsidiary undertakings of the Company are
evaluated using market values, where available, or the discounted expected future cash flows of the investment. If
these cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded
in the Company. Evaluation of impairments on such investments involves significant management judgement and
may differ from actual results - see Note 16.
Onerous Commitment Provision
A provision for an onerous commitment is made where the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under the said contract – for 2015 details of
this can be found in Note 20.
Onerous commitments on future oil and gas activities are only recognised where such commitments are certain.
No recognition is given for onerous work programme commitments for specific assets where there remains
uncertainty on the outcome of discussions between respective oil and gas operators, government bodies and/or
other stakeholders. No onerous commitment provision has been recognised in 2016 due to the uncertain nature
of the Chinguetti field performance in 2017. Management has forecasted various sensitivities to the performance
of the Chinguetti field in 2017 and deemed the commitment to be immaterial.
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. See page 18.
Impairment of Assets
Management is required to assess oil and gas assets for indicators of impairment and has considered the economic
value of both individual E&E assets and the Chinguetti Funding Agreements. The carrying value of oil and gas
70
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS
assets is disclosed in Notes 14 and 15. The carrying value of related investments in the Company Statement of
Financial Position is disclosed in Note 16.
With reference to the Chinguetti Funding Agreement, as part of the assessment, management has carried out an
impairment test whereby the test compares the carrying value at the reporting date with the expected discounted
future cash flows. 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.
With reference to the Chinguetti Royalty Agreement, impairment assessments and any subsequent charges are
calculated on an individual royalty interest basis. Future recoverable amounts are estimated by management
based upon 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.
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 judgmental.
Key assumptions used in the value-in-use calculations
The calculation of value-in-use for oil and gas assets under development or in production is most sensitive to the
following assumptions:
• production volumes;
• commodity prices;
• fixed and variable operating costs;
• capital expenditure; and
• discount rates.
Production volumes/recoverable reserves
Annual estimates of oil and gas reserves are generated internally by the Group with external input from operator
profiles. These are reported annually to the Board. The self-certified estimated future production profiles are used
in the life of the fields which in turn are used as a basis in the value-in-use calculation.
Commodity prices
An average of published forward prices and the long-term assumption for natural gas and Brent oil are used for
future cash flows in accordance with the Group’s corporate assumptions. Field specific discounts and prices are
used where applicable.
Fixed and variable operating costs
Typical examples of variable operating costs are pipeline tariffs, treatment charges and freight costs. Commercial
agreements are in place for most of these costs and the assumptions used in the value-in-use calculation are
sourced from these where available. Examples of fixed operating costs are platform costs and operator overheads.
Fixed operating costs are based on operator budgets.
Capital expenditure
Field development is capital intensive and future capital expenditure has a significant bearing on the value of an
oil and gas development asset. In addition, capital expenditure may be required for producing fields to increase
production and/or extend the life of the field. Cost assumptions are based on operator budgets or specific contracts
where available. The Company and Group are currently not exposed to development capital expenditures.
71
Sterling Energy plc Report and Financial Statements 2016
Discount rates
Discount rates reflect the current market assessment of the risks specific to the oil and gas sector and are based on
the weighted average cost of capital for the Group. Where appropriate, the rates are adjusted to reflect the market
assessment of any risk specific to the field for which future estimated cash flows have not been adjusted. The Group
has applied a discount rate of 10% for the current year (2015: 10%).
Sensitivity to changes in assumptions
A potential change in any of the above assumptions may cause the estimated recoverable value to be lower than
the carrying value, resulting in a further impairment loss. The assumptions which would have the greatest impact
on the recoverable amounts of the fields are production volumes and commodity prices. Having reviewed these
assumptions, impairment has been recognised in the current year for both the Ambilobe and C-3 blocks.
During the year the Group recognised impairments totalling $7.4 million in accordance with IAS 36 “Impairment of
Assets”. This related to the full impairment of the Ambilobe and C-3 blocks, the decisions were based on a combination
of above ground risks and a risked assessment of the prospectivity on the blocks.
During 2015 the Group recognised impairments totalling $8.2 million in accordance with IAS 36 “Impairment of
Assets”. This related to the full impairment of the Ntem block, a decision based on a combination of above ground
risks (the current impasse with the Government over the Company’s claim of force majeure) and a risked assessment
of the remaining prospectivity on block.
Impairments and associated reversals have been determined by comparing the current value in use to carrying values.
Oil & gas expenditure – acquisitions and disposals
Commercial transactions involving the acquisition of a D&P asset in exchange for an E&E or D&P asset are accounted
for at fair value with the difference between the fair value and cost being recognised in the statement of comprehensive
income as a gain or loss. When a commercial transaction involves a D&P asset and takes the form of a farm-in or
farm-out agreement, the premium expected to be paid/received is treated as part of the consideration.
Fair value calculations are not carried out for commercial transactions involving the exchange of E&E assets. The
capitalised costs of the disposed asset are transferred to the acquired asset. Farm-in and farm-out transactions of
E&E assets are accounted for at cost. Costs are capitalised according to the Group’s cost interest (net of premium
received or paid) as costs are incurred.
Proceeds from the disposal of an E&E asset, or part of an E&E asset, are deducted from the capitalised costs and the
difference recognised in the statement of comprehensive income as a gain or loss. Proceeds from the disposal of a
D&P asset, or part of a D&P asset, are recognised in the Income Statement, after deducting the related net book value
of the asset. The Company and Group were not exposed to disposal proceeds in the year.
Decommissioning
The Company 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 periodically reviewed by the operator and the partnership. Details of these can be found
in Note 20.
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 24.
72
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS
3.
OPERATING SEGMENTS
The Group’s two operating segments are its Africa and Middle East (discontinued) 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.
The following tables present revenue, profit and certain asset and liability information regarding the Group’s
operating segments for the year ended 31 December 2016 and for the year ended 31 December 2015.
Africa
Note
2016
$000
2015
$000
Middle East
(Discontinued)
2015
$000
2016
$000
Total
2016
$000
2015
$000
Statement of comprehensive income
Revenue 1
Cost of sales
Gross profit/(loss)
4,815
5,031
(2,262)
(6,028)
2,553
(997)
Impairment of E&E assets
14
(7,375)
(8,183)
-
-
(1,951)
(2,212)
-
-
(3,700)
2,159
(6,773)
(12,933)
Accruals release
Pre-licence costs
Onerous contract
Chinguetti cessation costs
Segment result
Unallocated corporate expenses
Loss from operations
Finance income
Finance expense
Loss before tax
Tax
Loss attributable to owners of the
parent
-
-
-
-
-
-
-
-
-
-
-
-
-
5
-
-
-
4,815
5,031
(2,262)
(6,028)
2,553
(997)
(7,375)
(8,183)
-
5
(1,951)
(2,212)
-
-
(3,700)
2,159
5
(6,773)
(12,928)
(2,045)
(2,310)
(8,818)
(15,238)
683
356
(394)
(1,068)
(8,529)
(15,950)
-
-
(8,529)
(15,950)
1 Revenue from continuing operations (Mauritania, Africa) includes amounts of $4.6 million (100% external) from one single customer (2015:
$4.7 million).
73
Sterling Energy plc Report and Financial Statements 2016
Corporate
Africa
2016
$000
2015
$000
2016
$000
2015
$000
Middle East
(Discontinued)
2015
$000
2016
$000
Total
2016
$000
2015
$000
Other segment
information
Capital additions:
Property, plant and
equipment
Exploration and evaluation
Depreciation, depletion &
amortisation
Impairment expense
Segment assets and
liabilities
15
-
(32)
-
16
-
(54)
-
-
1,147
4,831
-
-
-
(7,375)
(8,183)
Non-current assets 1
17
34
18,846
25,074
Segment assets 2
88,570
98,010
7,976
2,503
-
-
-
-
-
-
-
-
-
-
-
15
16
1,147
4,831
(32)
(54)
(7,375)
(8,183)
18,863
25,108
10
96,546
100,523
Segment liabilities 3
(555)
(654)
(36,459)
(38,173)
(5)
(8)
(37,019)
(38,835)
1 Segment non-current assets include $1.4 million in Mauritania (2015: $4.0 million) and $17.5 million in Somaliland (2015: $17.5 million).
2 Corporate segment assets include $88.1 million cash and cash equivalents (2015: $97.6 million) and $511k other receivables (2015:
$426k). Carrying amounts of segment assets exclude investments in subsidiaries.
3 Carrying amounts of segment liabilities exclude intra-group financing.
4.
REVENUE
Revenue from the sale of oil and gas
Royalty income
Total operating revenue
Total
2016
$000
4,555
260
4,815
2015
$000
4,670
361
5,031
74
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 5.
LOSS FROM OPERATIONS
Loss from operations is stated after charging:
Total
Staff costs
Share-based payments
Impairment
Depreciation of other non-current assets
Onerous contract
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
Audit of the Company's subsidiaries pursuant to legislation
Audit related assurance services
Total audit fees
See Note 2 for details on the above impairment.
6.
COST OF SALES
Operating costs
(Under)/over lift of product entitlement
Onerous contract provision
7.
CHINGUETTI CESSATION COSTS
Increase in decommissioning provision
Reassessment of accrued costs
Note
8
8
14
15
20
Note
20
2016
$000
2,980
73
7,375
32
-
43
50
-
93
2016
$000
6,590
(628)
(3,700)
2,262
2016
$000
-
-
-
2015
$000
3,623
297
8,183
54
3,700
50
56
-
106
2015
$000
8,514
904
(3,390)
6,028
2015
$000
(8,762)
10,921
2,159
75
Sterling Energy plc Report and Financial Statements 2016
8.
EMPLOYEE INFORMATION
The average monthly number of employees of the Group and Company was as follows:
Group
Company
2016
2015
2016
2015
Africa
Corporate support staff
Non-executive
5
9
3
17
7
10
3
20
-
-
3
3
Group and Company employee costs during the year amounted to:
Wages and salaries
Social security costs
Other pension costs
Compensation payments
Share-based payments
Group
Company
2016
$000
2,314
298
182
186
73
2015
$000
3,023
372
228
-
297
2016
$000
183
21
-
-
-
3,053
3,920
204
-
-
3
3
2015
$000
163
17
-
-
22
202
Key management personnel include directors who have been paid $696k (2015: $919k), see Remuneration
Committee Report (pages 36 - 45) for additional detail.
A portion of the Group’s staff costs and associated overheads are recharged to the JV partners, expensed as
pre-licence expenditure or capitalised where they are directly attributable to ongoing capital projects. In 2016 this
portion amounted to $2.7 million (2015: $3.6 million).
76
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 9.
FINANCE INCOME AND FINANCE EXPENSE
Finance income:
Interest revenue on short-term deposits
Finance expense:
Bank charges
Unwinding of discount on decommissioning provision
Exchange differences
2016
$000
683
683
14
149
231
394
10. TAXATION
The tax charge for the year is calculated by applying the applicable standard rate of tax as follows:
Loss before tax
Tax on loss on ordinary activities at standard
UK corporation tax rate of 20.00% (2015: 20.25%)
Effects of:
Expenses not deductible for tax purposes
Capital allowances in excess of depreciation
Adjustment for tax losses
Tax charge for the year
Total
2016
$000
(8,529)
(1,706)
618
(600)
1,688
-
2015
$000
356
356
13
966
89
1,068
2015
$000
(15,950)
(3,230)
1,572
(785)
2,443
-
Deferred Tax
At the reporting date the Group had an unrecognised deferred tax asset of $17.8 million (2015: $19.0 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 $14.1 million (2015: $15.4 million) relating primarily to
unused losses and unutilised capital allowances.
77
Sterling Energy plc Report and Financial Statements 2016 11. DISCONTINUED OPERATIONS
On 29 January 2013, the Company formally announced the Group’s withdrawal from the Sangaw North licence
in Kurdistan. The decision to relinquish was made in December 2012 and all amounts were fully impaired at
this date. At the date of the final dissolution, the Group had fully satisfied the work commitment required by the
Sangaw North PSC and all other commitments in country.
The financial impact of the Group’s discontinued operations is provided below:
Net decrease in cash and cash equivalents
12. PROFIT/(LOSS) ATTRIBUTABLE TO THE COMPANY
2016
$000
(10)
2015
$000
(43)
The profit for the financial year within the Company accounts of Sterling Energy plc was $1.9 million (2015: $4.3
million loss). As provided by s408 of the Companies Act 2006, no individual statement of comprehensive income
and expense is provided in respect of the Company.
13. EARNINGS PER SHARE
Basic
Diluted
2016
$000
2015
$000
2016
$000
2015
$000
Loss for the year
(8,529)
(15,950)
(8,529)
(15,950)
Weighted average number of ordinary shares in
issue during the year
220,053,520
220,053,520
220,053,520
220,053,520
Dilutive effect of share options outstanding
-
-
-
-
Fully diluted average number of ordinary shares
during the year
220,053,520
220,053,520
220,053,520
220,053,520
EPS (US cents)
(3.88)
(7.25)
(3.88)
(7.25)
In the current year, the number of potentially dilutive ordinary shares in respect of All staff and NED LTIPs outstanding
as at the year-end is 2,287,800 (2015: 7,495,450) (see Note 24 on pages 88 and 89).
78
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 14.
INTANGIBLE EXPLORATION AND EVALUATION (‘E&E’) ASSETS
Net book value at 1 January 2015
Additions during the year
Impairment for the year
Net book value at 31 December 2015
Additions during the year
Impairment for the year
Net book value at 31 December 2016
Group
$000
28,426
4,831
(8,183)
25,074
1,147
(7,375)
18,846
Impairment for the 2016 refers to the full impairment of the Ambilobe and C-3 assets (2015: Ntem).
79
Sterling Energy plc Report and Financial Statements 2016 15. PROPERTY, PLANT AND EQUIPMENT
Group
Cost
At 1 January 2015
Additions during the year
At 31 December 2015
Additions during the year
At 31 December 2016
Accumulated depreciation and impairment
At 1 January 2015
Charge for the year
At 31 December 2015
Charge for the year
At 31 December 2016
Net book value at 31 December 2016
Net book value at 31 December 2015
Net book value at 31 December 2014
Company
Cost
At 1 January 2015
At 31 December 2015
At 31 December 2016
Accumulated depreciation and impairment
At 1 January 2015
At 31 December 2015
At 31 December 2016
Net book value at 31 December 2016
Net book value at 31 December 2015
Net book value at 31 December 2014
80
Oil and Gas
assets
$000
Computer
and office
equipment
$000
185,802
-
185,802
-
185,802
(185,802)
-
(185,802)
-
(185,802)
-
-
-
175
16
191
15
206
(103)
(54)
(157)
(32)
(189)
17
34
72
Oil and Gas
assets
$000
Computer
and office
equipment
$000
185,802
185,802
185,802
(185,802)
(185,802)
(185,802)
-
-
-
-
-
-
-
-
-
-
-
-
Total
$000
185,977
16
185,993
15
186,008
(185,905)
(54)
(185,959)
(32)
(185,991)
17
34
72
Total
$000
185,802
185,802
185,802
(185,802)
(185,802)
(185,802)
-
-
-
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 16.
INVESTMENT IN SUBSIDIARIES
Cost
At 1 January 2015
Additions during the year
At 31 December 2015
Additions during the year
At 31 December 2016
Company
$000
28,890
223
29,113
35
29,148
The subsidiary undertakings at 31 December 2016 are as follows (these undertakings are included on consolidation):
Country of
incorporation
Class of
shares
held
Type of
ownership
Proportion of
voting rights
held 2016
Proportion of
voting rights
held 2015
Nature of
business
Sterling Energy (UK)
Limited
Sterling Energy
(International) Limited 1
Sterling Energy
Overseas Limited
Sterling Energy
Mauritania Limited 2
Sterling Northwest
Africa Holdings Limited
Sterling Energy
Holdings Limited 3
Sterling Cameroon
Limited 4
Sterling Energy (East
Africa) Limited 4
United
Kingdom 5
United
Kingdom 5
United
Kingdom 5
United
Kingdom 5
Ordinary
Direct
100%
100%
Ordinary
Indirect
100%
100%
Ordinary
Direct
100%
100%
Ordinary
Indirect
100%
100%
Jersey, CI 6
Ordinary
Direct
100%
100%
Jersey, CI 6
Ordinary
Indirect
100%
100%
Jersey, CI 6
Ordinary
Indirect
100%
100%
Jersey, CI 6
Ordinary
Indirect
100%
100%
Exploration for
oil and gas
Exploration for
oil and gas
Investment
holding company
Exploration for
oil and gas
Exploration for
oil and gas
Investment
holding company
Exploration for
oil and gas
Exploration for
oil and gas
1 Held directly by Sterling Energy (UK) Limited
2 Held directly by Sterling Energy Overseas Limited
3 Held directly by Sterling Northwest Africa Holdings Limited
4 Held directly by Sterling Energy Holdings Limited
5 Registered address - 85 Fleet Street, London, EC4Y 1AE
6 Registered address - 12 Castle Street, St Helier, Jersey, JE2 3RT
81
Sterling Energy plc Report and Financial Statements 2016 17. TRADE AND OTHER RECEIVABLES
Trade receivables
Amounts owed by subsidiary undertakings
Other receivables
Amounts due from joint venture partners
Prepayments and accrued income
No trade receivables are overdue or impaired.
Group
Company
2016
$000
2,249
-
4,089
-
202
6,540
2015
$000
80
-
130
-
340
550
2016
$000
2,146
22,475
17
-
48
2015
$000
42
20,366
8
-
62
24,686
20,478
The Directors consider that the carrying amount of trade and other receivables is a reliable estimate of their fair value.
18. SHARE CAPITAL
Authorised, called up, allotted and fully paid
220,053,520 (2015: 220,053,520) ordinary shares of 40p
149,014
149,014
2016
$000
2015
$000
19. 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.
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 dollar.
Retained Deficit
Cumulative net gains and losses recognised in the Statement of Comprehensive Income less any amounts
reflected directly in other reserves. The share option reserve has been included within the retained deficit and is a
non-distributable reserve.
82
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 20. SHORT AND LONG-TERM PROVISIONS
Short-term provisions are detailed in the table below:
Onerous commitment
Decommissioning provision (a)
Odewayne consideration
Other provisions
Group
Company
2016
$000
-
16,984
4,000
200
21,184
2015
$000
3,700
-
-
-
2016
$000
-
16,984
-
-
2015
$000
3,700
-
-
-
3,700
16,984
3,700
a) Decommissioning provisions Group/Company
At 1 January
Transferred from long-term provision
Used
Long-term provisions are detailed in the table below:
Decommissioning provisions Group/Company
At 1 January
Increase in decommissioning provision
Unwinding of discount
Transferred to short-term provision
2016
$000
-
18,072
(1,088)
16,984
2015
$000
22,667
8,762
966
-
32,395
2016
$000
32,395
-
149
(18,072)
14,472
The amounts shown above represent the estimated costs for decommissioning the Group’s producing interests
in respect of its economic interest in the Chinguetti field in Mauritania.
The Company amount of $14.5 million (2015: $32.4 million) represents the amount provided within the Company
for future decommissioning expenditure.
83
Sterling Energy plc Report and Financial Statements 2016
21. TRADE AND OTHER PAYABLES
Trade payables
Amounts owed to subsidiary undertakings
Amounts advanced from joint venture partners
Accruals
Group
Company
2016
$000
118
-
-
1,245
1,363
2015
$000
264
-
1,043
1,433
2,740
2016
$000
3
2015
$000
13
33,470
35,523
-
951
-
771
34,424
36,307
The Directors consider that the carrying amount of trade and other payables is a reliable estimate of their fair value.
22. OPERATING LEASES AND CAPITAL COMMITMENTS
Group
Company
2016
$000
2015
$000
2016
$000
2015
$000
Minimum lease payments under operating
leases recognised as an expense in the year
4,737
6,124
4,308
5,702
At the reporting date outstanding commitments for minimum operating leases payments fall due as follows:
Within one year
In the second to fifth year inclusive
Group
Company
2016
$000
1,745
-
1,745
2015
$000
4,774
422
5,196
2016
$000
1,387
-
1,387
2015
$000
4,315
-
4,315
Operating lease payments represent the Group’s share of rentals for the Berge Helene vessel in Mauritania, a BWO
operated FPSO and rentals payable for its office properties.
23. 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.
84
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 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
2016 and 31 December 2015.
Group
Financial assets (classified as loans and receivables)
Carrying amount/Fair value
2016
$000
2015
$000
Cash and cash equivalents
88,058
97,553
Cash and cash equivalents held on behalf of partners
Trade and other receivables
Total
Financial liabilities at amortised cost
Trade and other payables
Total
Company
Financial assets (classified as loans and receivables)
Cash and cash equivalents
Trade and other receivables
Total
Financial liabilities at amortised cost
Trade and other payables
Total
-
6,338
94,396
1,363
1,363
1,100
209
98,862
2,740
2,740
Carrying amount/Fair value
2016
$000
2015
$000
88,054
24,638
97,483
20,416
112,692
117,899
34,424
34,424
36,307
36,307
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.
85
Sterling Energy plc Report and Financial Statements 2016 Interest Rate Risk Management
The Group and Company does not have any outstanding borrowings and thus, 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 at the reporting date
and assumes 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:
Cash and cash equivalents
Group Increase
Company Increase
2016
$000
881
2015
$000
987
2016
$000
881
2015
$000
975
Foreign Currency Risk
The Group’s and Company’s functional currency is the US dollar, being the currency in which the majority
of the Group’s revenue and expenditure is transacted. Small elements of its management, services and
treasury functions are held and transacted in pounds sterling. Such elements transacted in pounds sterling
have been exchanged at; the average rate of $1.3542/£1.00 (2015:$1.5286/£1.00) or the year-end spot rate
of $1.2303/£1.00 (2015:$1.4819/£1.00), depending on its nature. The Group does not enter into derivative
transactions to manage its foreign currency. Foreign currency risk is immaterial to the Group and Company –
see the following table:
Financial Assets
Cash and cash equivalents
Cash and cash equivalents held in US$
Cash and cash equivalents held in GBP
Trade and other receivables
Trade and other receivables held in US$
Trade and other receivables held in GBP
Group
Company
2016
$000
87,646
412
88,058
2015
$000
97,380
1,273
98,653
2016
$000
87,641
413
88,054
2015
$000
96,203
1,280
97,483
Group
Company
2016
$000
6,241
97
6,338
2015
$000
157
53
210
2016
$000
23,005
1,633
24,638
2015
$000
20,408
8
20,416
86
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS Financial Liabilities
Trade and other payables
Trade and other payables held in US$
Trade and other payables held in GBP
Group
Company
2016
$000
1,011
352
1,363
2015
$000
2,202
538
2,740
2016
$000
28,058
6,366
34,424
2015
$000
30,042
6,265
36,307
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, group or 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 99.5% (2015: 98.7%) of its cash in US dollars. At the year end the Group
held the majority of its balances with AA- and A+ Standard & Poor’s rated institutions. The Group continues to
monitor its treasury management to ensure an appropriate balance of the safety of funds and maximisation of yield.
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. There are no financial instruments held at fair value under the level 1,
2 and 3 hierarchy.
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 2016 is nil % (2015: nil %).
Less than
six months
$000
Six months
to one year
$000
One to
six years
$000
Total
$000
Interest
$000
Principal
$000
Group
Trade payables (2016)
65
Trade payables (2015)
1,197
Company
Trade and other
payables (2016)
Trade and other
payables (2015)
2
8
-
-
-
-
-
-
65
1,197
33,470
33,472
35,523
35,531
-
-
-
-
-
-
-
-
87
Sterling Energy plc Report and Financial Statements 2016
24. 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 $73k (2015: $297k). The Company recognised a total expense, within
administration costs, in respect of share-based payments under equity-settled share option plans of $nil (2015:
$22k).
In 2009 the Company reviewed the existing share-based incentive schemes currently in place to motivate and
incentivise Group 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 (‘All Staff LTIP’) 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 LTIP. Awards are made on similar terms to
non-executive Directors of the Company, under the non-executive Director Long-Term Incentive Plan (‘NED LTIP’).
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, was as follows:
2016
Number of
share options
2016
Exercise
price (pence)
2015
Number of
share options
2015
Exercise price
(pence)
Outstanding at the beginning of the year
Lapsed/forfeited during the period
Outstanding at the end of the year
Exercisable at the end of the year
6,116,500
(3,962,700)
2,153,800
-
40
40
40
-
11,556,950
(5,440,450)
6,116,500
-
40
40
40
-
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 31 December 2016 have a contractual life of 2.75 years (2015: 3.35 years). The cost
of the options is spread over the vesting period of three years. There have been no options granted under the plan
since 2014. The fair value of the options granted in 2014 was 5.7 pence.
If the Company 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.
88
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS 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.
Fair values were measured by use of a modified binomial model.
All Staff LTIP Sub-Plan
In 2013 the Company introduced a HMRC approved sub-plan to the All Staff LTIP (‘HMRC Sub-Plan’).
The movement during the year, on the share options, was as follows:
2016
Number of
share options
2016
Exercise
price (pence)
2015
Number of
share options
2015
Exercise price
(pence)
Outstanding at the beginning of the year
1,069,500
Lapsed/forfeited during the period
Outstanding at the end of the year
Exercisable at the end of the year
(935,500)
134,000
-
42
42
40
-
1,235,700
(166,200)
1,069,500
-
42
42
42
-
The options outstanding at 31 December 2016 have a contractual life of 2.75 years (2015: 3.33 years). The cost
of the options is spread over the vesting period of three years. There have been no options granted under the plan
since 2014. The fair value of the options granted during 2014 was 5.7 pence.
Fair values were measured by use of a modified binomial model.
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:
Outstanding at the beginning of the year
Lapsed/forfeited during the period
Outstanding at the end of the year
Exercisable at the end of the year
2016
Number of
share options
2016
Exercise
price (pence)
2015
Number of
share options
2015
Exercise price
(pence)
309,450
(309,450)
-
-
40
40
40
40
392,783
(83,333)
309,450
309,450
40
40
40
40
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 non-executive Director leaves the Group before the options vest or are
exercised.
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.
89
Sterling Energy plc Report and Financial Statements 2016 25. RELATED PARTY TRANSACTIONS
Details of Directors’ remuneration, which comprise key management personnel, are provided below:
Short-term employee benefits
Defined contribution pension
Share-based payments
Group
Company
2016
$000
671
25
(47)
649
2015
$000
876
43
(84)
835
2016
$000
183
-
-
183
2015
$000
163
-
22
185
Further information on Directors’ remuneration is detailed in the Remuneration Committee Report, on pages 36 - 45.
The Group and Company has no other disclosed related party transactions.
26. CONTINGENT LIABILITIES
Following the farm-in to the Odewayne licence in Somaliland, there is a remaining contingent consideration of
$4.0 million (2015:$8.0 million) payable to Petrosoma based upon various operational milestones being met. At
31 December 2016, these milestones had not been met.
27. SUBSEQUENT EVENTS
No significant subsequent events requiring disclosure or adjustment have occurred.
90
Sterling Energy plc Report and Financial Statements 2016Year ended 31 December 2016Notes to the Financial StatementsGROUP ACCOUNTS Definitions and Glossary of Terms
$
2006 Act
1P
2D
2P
3D
3P
AIM
All Staff LTIP
AGM
Articles
bbl
bopd
boe
Board
US dollars
the Companies Act 2006, as amended
proven reserves (both proved developed reserves + proved undeveloped
reserves)
two dimensional
1P (proven reserves) + probable reserves, hence “proved AND probable”
three dimensional
the sum of 2P (proven reserves + probable reserves) + possible reserves, all
3Ps “proven AND probable AND possible”
AIM, a market of the London Stock Exchange
the All Staff Long-Term Incentive Plan adopted in 2009
Annual General Meeting
the Articles of Association of the Company
barrel, equivalent to 42 US gallons of fluid
barrel of oil per day
barrel of oil equivalent, a measure of the gas component converted into its
equivalence in barrels of oil
the Board of Directors of the Company
Combined Code or Code
UK Corporate Governance Code
Companies Act
the Companies Act (as amended 2006)
Company
CSOP
Directors
E&P
Adjusted EBITDAX
EITI
EUR
Farm-in & Farm-out
Sterling Energy plc
Company Share Option Plan (HMRC approved share option scheme)
the Directors of the Company
exploration and production
earnings before interest, taxation, depreciation, depletion and amortisation,
impairment, share-based payments, provisions, and pre-licence expenditure
Extractive Industries Transparency Initiative
the total amount of hydrocarbons expected to be produced from the
hydrocarbon accumulation over the life of the project. Estimated ultimate
recovery is synonymous with recoverable resource and the terms are used
interchangeably.
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.
FA
FCA
FPSO
Funding Agreement
Financial Conduct Authority
Floating, Production, Storage and Offloading vessel
91
Sterling Energy plc Report and Financial Statements 2016 Definitions and Glossary of Terms (cont.)
G&G
GBP
geological and geophysical
pounds sterling
Genel Energy
Genel Energy Somaliland Limited
Group
HMRC
HMRC Approved Sub-Plan or
HMRC Sub-Plan
HSSE
hydrocarbons
IFRS
Index
JV
K
km
km2
lead
the Company and its subsidiary undertakings
Her Majesty’s Revenue and Customs
The HMRC approved sub-plan of the All Staff LTIP
Health, Safety, Security and Environment
organic compounds of carbon and hydrogen
International Financial Reporting Standards
FTSE 350 Index
joint venture
thousands
kilometre(s)
square kilometre(s)
indication of a potential exploration prospect
London Stock Exchange or LSE
London Stock Exchange Plc
m
mcf
NED LTIP
OECD
OPU
metre(s)
thousand cubic feet
non-executive Director Long-Term Incentive Plan adopted in 2009
Organisation for Economic Cooperation and Development
Oil Protection Unit
Ordinary Shares
ordinary shares of 40 pence each
P90
P50
P10
Pmean
the value on a probabilistic distribution which is exceeded by 90% of the
outcomes.
the value on a probabilistic distribution which is exceeded by 50% of the
outcomes. The P50 is also the median value of the distribution.
the value on a probabilistic distribution which is exceeded by 10% of the
outcomes.
the average of the values in the probabilistic distribution between defined
‘boundary conditions’. Universally regarded as the best single value to
quote or communicate for any uncertain distribution of outcomes involved in
repeated trial investigations.
Panel or Takeover Panel
the Panel on Takeovers and Mergers
Petroleum
Petroleum system
Petronas
Petrosoma
Premier
oil, gas, condensate and natural gas liquids
geologic components and processes necessary to generate and store
hydrocarbons, including a mature source rock, migration pathway, reservoir
rock, trap and seal.
PC Mauritania 1 PTY LTD
Petrosoma Limited (JV partner in Somaliland)
Premier Oil PLC
92
Sterling Energy plc Report and Financial Statements 2016
Pre Stack Depth Migration
Prospect
PSA
PSC
Pura Vida
RA
Reserves
Reservoir
Seismic
SESP
Shares
Shareholders
SMHPM
Subsidiary
Tcf
TSR
process by which seismic events are geometrically re-located in space and
depth to the location the event occurred in the subsurface
an area of exploration in which hydrocarbons have been predicted to exist
in economic quantity. A group of prospects of a similar nature constitutes a
play.
production sharing agreement
production sharing contract
Pura Vida Mauritius
Royalty Agreement
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
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 plc share price
40p ordinary shares
ordinary shareholders of 40p each in the Company
Société Mauritanienne Des Hydrocarbures et de Patrimoine Minier
(Mauritania’s national oil company)
a subsidiary undertaking as defined in the 2006 Act
Trillion cubic feet
total shareholder return (End Share Price – Opening Share Price/Opening
Share Price) plus (Sum of Dividends per Share/Opening Share Price)
Tullow Mauritania Limited
Tullow Oil
United Kingdom or UK
the United Kingdom of Great Britain and Northern Ireland
UK Corporate Governance Code
Waterford
Working Interest or WI
Formerly the Combined Code, sets out standards of good
relation to Board leadership and effectiveness, remuneration, accountability
and relations with shareholders
practice in
Waterford Finance and Investment Limited
a Company’s equity interest in a project before reduction for royalties or
production share owed to others under the applicable fiscal terms
Sterling Energy plc Report and Financial Statements 2016
93
Professional Advisers
Nominated Adviser and Corporate Broker
Peel Hunt
Moor House
120 London Wall
London
EC2Y 5ET
Corporate Bankers
The Royal Bank of Scotland Plc
1 Albyn Place
Aberdeen
AB10 1BR
HSBC
165 Fleet Street
London
EC4A 2DY
Julius Baer & Co. Ltd
Freie Strasse 107
4001 Basle
Switzerland
Legal
Memery Crystal LLP
44 Southampton Buildings
London
WC2A 1AP
Auditors
BDO LLP
55 Baker Street
London
W1U 7EU
Registered Office
85 Fleet Street
London
EC4Y 1AE
94
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Sterling Energy plc Report and Financial Statements 2016 Sterling Energy plc
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