Mr. Jacob Ulrich reports

STERLING RESOURCES ANNOUNCES FIRST QUARTER OPERATING AND FINANCIAL RESULTS

Sterling Resources Ltd. has released interim operating and financial results for the quarter ended March 31, 2014. (Unless otherwise noted, all figures contained in this report are denominated in U.S. dollars.)

For the three months ended March 31, 2014, the company recorded net income of $167.6-million (54 cents per share) compared with a net loss of $8.8-million (four cents per share) for the three months ended March 31, 2013. During the quarter, the company realized a pretax gain of $27.3-million on the sale of the Midia shallow block in the Romanian Black Sea and realized revenues attributable to Breagh production of $20.5-million. Also in the first quarter of 2014, the company recognized a deferred tax asset resulting in a credit of $144.5-million to the income statement following sustained production, and management estimates that, based on its profit forecast and reserves available, there is now sufficient evidence to recognize the deferred tax asset. Operating expenses attributable to Breagh totalled $2.6-million during the quarter. The loss during the first quarter of 2013 was largely attributable to $2.0-million of costs related to a short-term loan used as bridge financing and to $1.6-million of one-time banking and professional fees associated with procurement of additional financing.

Prelicence and other exploration costs during the first quarter of 2014 were $1.4-million, a level marginally higher than those incurred during the first quarter of 2013. Of this total cost, approximately $500,000 was related to licences in the United Kingdom compared with $800,000 during the first quarter of 2013; $100,000 was related to licences in Romania compared with $200,000 expended during the first quarter of 2013; and $700,000 was related to licences in the Netherlands and other international ventures compared with $300,000 during the first quarter of 2013.

A foreign exchange gain of $1.8-million was recognized during the first quarter of 2014 as a result of the continued weakening of the U.S. dollar in relation to the U.K. pound, which is the functional currency for the U.K. The loss of $600,000 during the first quarter of 2013 related to a strengthening U.S.-dollar-denominated bridge loan as a result of the weakening of the Canadian dollar in U.S.-dollar terms.

Net employee expense for the quarter was $1.8-million, a level similar to that incurred during the first quarter of 2013. Total employee expense was composed of non-cash share-based compensation of $100,000 and $1.7-million of salaries and wages. Non-cash share-based compensation was $500,000 less than the amount in the first quarter of 2013, as certain options were fully amortized and no new options were granted.

Financing costs for the three months ended March 31, 2014, totalled $6.3-million representing the borrowing costs on the $225-million senior secured bond. A small portion of the financing costs also includes accretion of the discount on decommission obligations and has increased during the period due to greater decommissioning obligations attributable to Breagh. During the first quarter of 2013, financing costs totalled $2.1-million, including $2.0-million related to transaction costs on the bridging loan facility, which were expensed following its repayment.

Cash and cash equivalents totalled $46.2-million at March 31, 2014, compared with $34.7-million at Dec. 31, 2013. In addition, restricted cash of $10.1-million was held at March 31, 2014, in a retention account in accordance with the requirements of the bond indenture. Restricted cash of $7.8-million as at Dec. 31, 2013, was composed of $2.8-million to be utilized for Breagh-related expenditures and $5.0-million to partially cover the bond interest payment paid on April 30, 2014.

Net working capital, totalled $21.9-million as at March 31, 2014, compared with $2.2-million as at Dec. 31, 2013. This increase in working capital was mainly due to the receipt of the Midia shallow carve-out proceeds during the quarter.

Sterling's operating cash flow during 2014 continues to be below expectations, due to lower than originally anticipated production levels at Breagh, some short-term operational issues and lower U.K. natural gas spot prices. Sterling should have adequate liquidity to satisfy the minimum $10-million (U.S.) of unrestricted cash (a requirement of the bond indenture) in the U.K. subsidiary up to around the end of the third quarter of 2014. The company continues to closely monitor this cash position in light of production levels, spot gas prices, Breagh capital expenditures and the timing of exploration activities, and it is planning a further financing, focusing on debt capital markets.

"Although the original production expectations for Breagh have not been met, we have seen the first substantial production revenue during the first quarter of 2014," stated Jake Ulrich, chief executive officer of Sterling. "We will continue, in conjunction with the operator, to optimize the Breagh field in order to increase both the efficiency and reliability of the field. The established production history has enabled us to recognize the deferred tax asset, which is significantly larger than our current market capitalization and highlights the unrecognized value in our company," added Mr. Ulrich.

Operational update

United Kingdom

At Breagh, production resumed in early May, following a three-week shutdown to address fouling within the slug catchers and to replace level control instrumentation to improve processing reliability at the Teesside gas-processing plant. During early May, the Ensco 70 jack-up rig returned to the Breagh field to begin completion of well A07, using hydraulic fracture stimulation (fracking), which will be followed by the drilling and completion of well A08. The Ensco 70 rig will then be moved about 25 kilometres to the northeast to drill a well at Crosgan. Wells A09 and A10 are proposed to be drilled in 2015 from the Breagh Alpha platform, following a new 3-D seismic acquisition over the field, which is currently under way.

In accordance with the guidance provided on April 15, average expected gross gas sales production for 2014 at Breagh remains at 90 million to 95 million standard cubic feet, which is net 27 million to 28.5 million standard cubic feet to Sterling. As expected, production at Breagh was brought back on stream on April 29, following a three-week maintenance-related shut-in; however, the TGPP was shut in a few days later, for several days, to accommodate the logistics associated with the siting of the Ensco 70 well to compete the A07 well. Although not directly related to current operations at Breagh, during the first quarter, it was announced that the operator of Breagh, RWE Dea, was sold to LetterOne Holdings S.A. The company looks forward to working with the management of LetterOne in the coming months.

Production at the Cladhan field in the northern North Sea is expected to commence around the end of the first quarter of 2015. During April, 2014, development drilling recommenced, and subsea construction works to tie the wells back to the TAQA-operated Tern platform are expected to be completed by the fall of 2014. Topside modification works at Tern are expected to be completed around mid-2015, after first production. Initial gross production at Cladhan is forecast to be approximately 17,000 barrels per day, net 340 bbl per day to Sterling at the current 2.0-per-cent equity interest. Around the end of the third quarter of 2015, the repayable carry provided by TAQA is expected to pay out, and Sterling's interest would then rise to 13.8 per cent giving Sterling net production of approximately 2,200 bbl per day at the end of 2015.

Preparation work continues for the drilling of an exploration well on the Beverley oil prospect on U.K. block 22/26c (Sterling 20 per cent). Nearly all of the cost of this well will be carried under a farm-out arrangement. Similarly, preparation work on the U.K. Crosgan well (block 42/15, Sterling 30 per cent, non-operator) also continues. Both wells are planned for the second half of 2014. The Crosgan well will be drilled using the Ensco 70, following on from the drilling activity on the Breagh field, and work is progressing to secure a rig for the Beverley well.

Late in 2013, Sterling was awarded a number of blocks close to the Breagh field containing the Ossian and Darach prospects. Currently farm-out partners are being sought to seek carries for the firm well commitments planned to test both of these prospects. Sterling was also an active participant in the 28th offshore licensing round and expects the awards process to be completed by the end of 2014.

Romania

During the first quarter, three major milestones were achieved as the company moves to derisk the Romanian assets. The first of these was achieved during early February when proceeds from completion of the Midia block carve-out transaction were received. Net of transaction costs and Romanian tax, Sterling received after-tax proceeds of approximately $25-million (U.S.). The Midia block has now been split into two parts with the shallow waters contract area being retained by Sterling at its current equity interest of 65 per cent. The Midia shallow block includes the Ana and Doina discoveries, the Ioana prospect, and several other prospects. Sterling retains no interest in the smaller, carved-out portion of the Midia block (Midia deep).

The second milestone was the negotiation of extensions for the licence periods of Midia shallow and Pelican blocks with the Romanian National Agency for Mineral Resources. An extension to May, 2015, has already been granted, and the commitments for this extension period have mostly been completed with the recent acquisition of 3-D seismic (see herein). Two further extension options are available, at the concession holders' election, to May, 2018, and May, 2020.

The third and final milestone was the earlier than anticipated completion of the 2014 3-D seismic acquisition program over key parts of the Midia shallow and Pelican blocks. The program comprised approximately 500 square kilometres of acquisition over the Ana-Doina trend and 100 square kilometres over each of the Bianca prospect, Ioana prospect and Eugenia discovery. Processing and interpretation of this 3-D seismic are expected to be completed during the third quarter of 2014. The earlier completion of the 3-D seismic program means that the planned selldown process to reduce the company's equity interests in its Black Sea blocks can be accelerated to commence in mid-2014, with interpreted results available for all of Sterling's main fields and prospects, providing important information for potential new partners. Sterling intends to reduce its equity interests in the Midia shallow and Pelican blocks (currently 65 per cent), in the Luceafarul block (currently 50 per cent) and in the Muridava block (currently 40 per cent) to approximately half of the current levels by introducing a new partner. The intended timeline is to sign binding documentation, if the process is successful, around the end of 2014.

The development of the Ana and Doina fields in the Midia block continues to be evaluated by Sterling, but the timing of first production is now expected to occur during 2019, with this timeline to be finalized with a new prospective partner.

The 2014 Muridava-1 well, in which Sterling holds a 40-per-cent interest, spudded in early April and is expected to take two months to complete. The well is on the same geological trend as the existing Olimpiyskaya and Eugenia gas discoveries and has targets in three formations. The operator of the Muridava block has indicated that the other two commitment wells for the block have been postponed to 2015.

Netherlands

Acquisition of 500 square kilometres of 3-D seismic over the F17 and F18 blocks (Sterling 35 per cent, operator) is expected to commence by the end of May and should be completed in June, 2014, with processing and interpretation expected to be completed by the middle of 2015. The seismic will be acquired over the oil discoveries and prospects in the Jurassic and Early Cretaceous horizons, to improve reservoir understanding and assist in evaluating new exploration potential and existing development options. Licence extensions have been granted to January, 2016.

Capital expenditures for 2014

For the last three quarters of 2014, Sterling expects to spend the approximate cash expenditures as summarized in the attached table on development and firm exploration and appraisal activities.

                              CASH EXPENDITURES
                            (in $ millions (U.S.))
                                                                          
Breagh phase 1 (including A07 frack and drilling of A08)                        $24     
Breagh phase 2 (presanction)                                                      5      
U.K. E&A (including Crosgan well and Beverley well, net of carry)                15     
Romania and Netherlands E&A (including Muridava-1 well and F17/18 seismic)       15     
Total: Q2 to Q4 2014                                                             59     

Annual general meeting

The Sterling Resources AGM will be held on May 30 at 10 a.m. Mountain Daylight Time at the Metropolitan Conference Centre (royal room), 333 Fourth Ave. Southwest, Calgary, Alta. The AGM proceedings will be webcast and will be archived for 90 days following the meeting.

We seek Safe Harbor.