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Success in Kurdistan Could Give This Oil and Gas Company a Second Coming

Companies / Oil Companies May 22, 2009 - 05:22 AM GMT

By: FleetStreetInvest


Best Financial Markets Analysis ArticleLast week, the Oil Ministry of Baghdad quit arguing with the Kurdish government and agreed to permit the export of 100,000 barrels of crude oil per day from Kurdistan. While Baghdad has been stalling, the Kurds have got on with the job of granting licenses to bold, foreign oil prospectors. And now, the latter seem to have the upper hand. While Baghdad may still be refusing to acknowledge the legality of these arrangements, the awkward truth is that Iraq is seeing its oil revenues fall through a combination of lower world prices and its failure to develop its own industry. In short, it needs the money.

In this column on 2 April, I mentioned that Heritage Oil had made a major oil discovery and had seen its share price soar. This is one of a handful of overseas companies to have braved the political climate and gotten involved in Kurdistan. I also spoke of another small oil company, currently drilling in Kurdistan, which could also hit the big time.

There is a third way of getting involved in this exciting story . . .

Four years ago, Sterling Energy (ticker: SEY) was a successful contributor to the Red Hot portfolio. Indeed, looking back I find that we checked out in September 2005 with a 257% gain, having enjoyed a share price move from 5.25p to 18.75p. If that felt good at the time, it feels a whole lot better now because the share price has slipped all the way down to 2p. Should we be getting back into the shares? To find out, I have been reading a research note by broker Oriel Securities.

I confess that I have not been following every tick of Sterling’s progress in recent years. What I do remember is that it had grown from nothing into a significant oil producer in the Gulf of Mexico, and had promising acreage off the coast of West Africa. The directors, who had founded Sterling and were still major shareholders, had a reputation for smart deal making and were much admired in the City.

How are the mighty fallen! Looking at the situation now I am amazed to discover just how much of a mess Sterling is now in. Since those heady days, all sorts of things have gone wrong, and Sterling is now fighting for its corporate life. Let me try to summarize the position today.

Sterling is producing oil in the Gulf of Mexico and from its Chinguetti field off the west coast of Africa. The rate of production from the latter has not lived up to expectations, while production from the former has suffered because Sterling’s financial position has not allowed it to make necessary investments. Now with production falling short of forecasts, the last thing Sterling has needed has been a fall in the global price of oil, but that of course is precisely what has happened.

The price of oil is a major factor in Sterling Energy’s fortunes

Even when oil prices were high, Sterling managed to get on the wrong side of things. In the first half of last year, its production at Chinguetti was 156,000 barrels – 13% below the 180,000 that it had committed to deliver. To make up the shortfall, it had to buy the difference on the open market – at just the time when the oil price was close to its all-time high. The result was a loss of $15m. All this has taken its toll, and Sterling’s balance sheet has been stretched to breaking point. It managed to raise £13m last year through an issue of new shares at 2p each, but has still had to go cap in hand to its bankers, to put its US assets up for sale. It

These latter two issues are still unresolved, but a month ago Sterling did persuade its bankers to put off the day of reckoning until August. If it can stay afloat for a little longer beyond that, a lifeboat may just appear on the horizon in the shape of Sterling’s interests in Kurdistan. Sterling has a 53% interest in the Sangaw North block in Kurdistan, where partner Addax has farmed in and will pay the costs of the seismic program and the first well on the block. Seismic data is said to be ‘highly encouraging’ and drilling should start before the end of the year.

Success here could be enough to give Sterling Energy a second coming. But its situation is still perilous.

Best wishes,

Tom Bulford
For The Penny Sleuth

PS. I've discovered 3 fantastic ways to play the oil story.

I'm putting together the report right now and will send it to you as soon as it's complete. I'm really excited by it - it's taken a lot of research, but I really think it'll be one of the most important investment documents for high risk penny share investors this year or next...

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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Fleet Street Daily is an unregulated product published by Fleet Street Publications Ltd. Information in Fleet Street Daily is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision

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