Sterling Energy Resources (SGER)

[LouisDesyjr]

There are financial statements for fiscal years 2009 and 2010 available from the company. The 2010 annual report was signed by the CPA firm July 20, 2011; so hopefully the report for year ending December 31, 2011 will be available in late July. If anyone wants a copy of the 2009 and 2010 annual report, I can email you a PDF of it. Just send me an email at [e-mail] and I will reply with the financials as an attachment.

The company completed the chapter 11 reorganization on November 1, 2011. Existing properties were sold in May of 2010 and the proceeds used to pay off the debt plus other outstanding liabilities. There were no changes in the common stock. Anyone who had shares prebankruptcy under the symbol SGER, or bought during the bankruptcy under the stock symbol SGERQ, should see their shares are now listed as SGER. The shares have the same ownership percentage as before the bankruptcy. As of Dec 31, 2010 there were 12,050,599 common shares. According to www.otcmarkets.com, there were 476 shareholders of record as of December 31, 2010. It is reported that Officers/Directors hold 24% of the common. http://www.otcmarkets.com/stock/SGER/company-info

At the end of 2010, the company had $2,273,612 in current assets and $44,009 in liabilities. Current assets net of liabilities, was $2,229,513. With 12,050,599 common shares that meant that net current assets was $2,229,513/12,050,599 or $0.185 per share of common stock. This value does not take into account any of their properties or equipment.

Net income for 2010 was negative $450,054. There are some adjustments that I would make to that number in order to get an idea of what to expect for 2011 and future years for net income and cash flow. I would add back the loss on sale of assets of $246,203 and interest expense of $480,222, since one can expect these expenses will not occur anymore. I would subtract $246,456 from net income which was collected in 2010 from the SemGroup LP bankruptcy as detailed in note 13 on the financial statements. These changes give a net income of $51,915, and that is what I would expect for 2011 and the futures for net income.
For changes to the cash flow for 2011 and future years, I would take the $51,915 net income just calculated, add back depreciation of $351,263 from 2010 and subtract capital expenditures of $18,590 giving $334,673 positive. This is the amount that I would expect to be able to increase cash for 2011 and future years, assuming there are no unusual changes to the company.

Stockholders equity did take a hit with all of the chaos surrounding the closing of Columbia Bank and Trust and the amount in the bank account over the insured amount, but offset by the loan amount. Stockholders Equity dropped from $6,675,565 September 2008 to $5,144,423 as of December 31, 2010 for a decline of $1,531,142. I do not blame the officers or directors for this decline, since there was no reason not to buy the new property with the $6,000,000 loan and would have put the company in a better position. It is unfortunate that loan holder would not just wait for a sale of assets to pay off the company and forced the company to file Chapter 11 in order to be able to do an orderly sale of assets to pay off liabilities and get more working capital. In the end, all of the debtors to the company got paid in full but additional fees had to be spent on lawyers. Working capital at that time of the failure of Columbia Bank and Trust was about $2 million. I expect that the reason the money was kept in an account at Columbia Bank and Trust is that is was probably one of the conditions of the loan, i.e. the company agreed to keep its working capital on deposit at the bank while the loan was outstanding.

While looking in the online internet archive at past versions of the company web site, I do see that in past years there was a report put out by Sterling Energy Resources on its drilling prospects plus I saw that for one of the years there was a wav file of a conference call. Unfortunately, it looks as though the web site had not been updated in a while and for most of last year, the web site had gone inactive. The company domain name is still registered with Network Solutions until July 21, 2012. I wrote to the company and asked if they could reactivate the web site. It should only cost about $150 per year to run the web site, excluding the cost for changes to it. I also asked if they could post financial statements from the past and current drilling reports on the current, operating properties and prospects, like they use to.

I also found an old press release for an offer by the company to repurchase 1,000,000 common shares in 2006 for $0.50 per share. I was not able to find out the result of that tender offer. Hopefully it was fully subscribed.

In addition to the above, I found one of the college investment funds had a few thousand shares at some point, plus a company called Affinity Wealth Management reported that it held 64,370 common shares as of December 31, 2011. In addition, there was a person named G. Mchutchin who filed a report about 3,000 shares in 2005, but I have no idea if they still hold the shares or not.

The company mentioned that they should have in place a warrant program like they did in 2008, which I think would be a good thing since the exercise prices ranged from $0.35 to $2.50 and give the company an incentive to get the price up over $2.50 within two years.

I hope that the company starts another drilling program for 2012 on the rework and new drilling prospects that the company has on its existing properties. With WTI prices near $100 per barrel, I would expect that it would be profitable for the company to rework existing drilling sites and institute a drilling program for potential drilling sites.

Louis J. Desy Jr.
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