Interim results for six months ended 30 Sept 2015

RNS Number : 5863F

Enteq Upstream PLC

13 November 2015

 



Enteq Upstream plc

Interim results for the six months ended 30 September 2015

AIM traded Enteq Upstream plc ("Enteq", the "Company" or the "Group"), the oil & gas drilling technology company, today releases its interim results for the six months ended 30 September 2015.

Operational Highlights

·          Oil price and North American rig count reduced by over 50% since September 2014

·          Overhead run-rate reduced by approximately 50% in same time period

·          Half-on-half revenues continued to decline reflecting rig count reduction

·          Cash balance, at 30 September 2015, increased to $14.5m

Financial Metrics

	Six months to:
	30 Sept 2015 US$m		30 Sept 2014 US$m
·          Revenue	3.0		13.6
·          Consolidated adjusted EBITDA1	0.4 loss		1.0
·          Loss before tax	1.3		2.2
·          Adjusted earnings per share (cents)2	2.5 loss		1.3
·          Cash	14.5		13.8

Outlook

·    Oil price and North American rig count expected to remain depressed until at least 2017

·    Spare equipment capacity in market continues to depress demand for Enteq products

Neil Warner, Chairman of Enteq Upstream plc, commented:

"Enteq's reported results mirror recent announcements from other major oil-field service companies.   As expected, Enteq's revenues and profits have suffered due to the scale of the industry down-turn. In addition to the decisive internal cost reduction programme reported in our March 2015 full year results, further reductions have been made during H1 2015/16.  As a result, we have improved our cash balance since March 2015 and now operate at close to a break-even adjusted EBITDA level.   The Group continues to explore opportunities to expand market share outside North America and to maintain a strong technology offering."

¹ Adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements, performance share plan charges and exceptional items.

² Adjusted earnings per share is reported profit per share adjusted for foreign exchange movements, amortisation, performance share plan charges and exceptional items.

For further information, please contact:

Enteq Upstream plc                                                   [phone]

Martin Perry, Chief Executive Officer

David Steel, Finance Director

Investec Bank plc (Nomad and Broker)                   [phone]

Chris Treneman, Patrick Robb, David Anderson

Interim Report

CHAIRMAN & CHIEF EXECUTIVE OFFICER REPORT

Introduction

Enteq Upstream is a supplier of Measurement While Drilling equipment to oil and gas directional drilling service companies. In the six months ended 30 September 2015 in excess of 80% of Enteq's revenues were generated in North America, driven by the activity of drilling directional and horizontal wells for the extraction of oil and gas from shale.

Enteq produces specialist equipment which measures directional and other operational parameters whilst a well is being drilled. The service company customer typically buys or rents this equipment in order to support a drilling contract they have with the oil or gas company.

Since September 2014, as a result of a fall in WTI crude oil prices from US$110 to approximately US$50, much of the drilling has become uneconomic, resulting in contracts for rigs and drilling being cancelled or not renewed. The number of active rigs in North America has fallen from approximately 2,000 to around 800.  The service companies, therefore, currently have substantial levels of unutilised equipment.   Service companies with remaining contracts 'cannibalise' their excess capacity in order to maintain the equipment which is still in operation. Purchases of new equipment are, therefore, substantially reduced whilst this over- capacity exists. 

As and when the North American drilling market stabilises, albeit at a potential new, lower, level of activity, the remaining equipment will need to be refreshed and updated, and the excess capacity of equipment which has been 'cannibalised' will disappear from the market.   

Enteq has taken pro-active and timely steps to adjust both overheads and production capacity to reflect the reduced market size. The business is now operating at close to break-even at an adjusted EBITDA level given the current market conditions. The business is also cash positive, as existing debtors are collected and new sales are made from existing inventories. By maintaining a strong cash balance, Enteq is well positioned for any market recovery.

Operational Highlights

·          Oil price and North American rig count reduced by over 50% since September 2014

·          Overhead run-rate reduced by approximately 50% in same time period

·          Half-on-half revenues continued to decline reflecting rig count reduction

·          Cash balance, at 30 September 2015, increased to $14.5m

Operational Overview

In the six months to 30 September 2015, Enteq merged two operational sites, in the Houston area, into one without significantly impacting the level of service provided to the customer base.  Mechanical manufacturing has been broadly suspended and sales are being made from existing inventories. The Californian technology and electronic sensor manufacturing facilities have been consolidated into a single unit, with the core engineering function being maintained.   All support functions to the operating business, including Finance, HR, Group and general administration, have been reduced to a minimum.  During the period, the US moved to a single finance team using one common system, resulting in reduced staff and other support costs.   On 1 July 2015, the Board of Directors and other senior managers accepted a further salary reduction.

New opportunities continue to be explored, primarily in the Eastern Hemisphere.

Market conditions

Rig count, or the number of operational drilling rigs, is driven primarily by the price of oil.  Below a certain price the drilling of a new well is not cost-effective.

Improved efficiencies in drilling and production techniques in North America and the volume of wells drilled in the last two to three years has given rise to all-time high production levels of oil in North America.   OPEC and Saudi Arabia in particular are reluctant to lose global market share to North American oil and have maintained production, resulting in a substantial and sustained fall in the price of oil.

Many other global factors need to be taken into consideration, but for domestic economic reasons in OPEC countries, and for the oil industry to sustain the required supply levels, oil prices are expected to increase, in the medium term.   However, there is little consensus as to what will be the new "normal" price and when this will be reached and hence when the drilling market will stabilise.

Outlook

·    Oil price and North American rig count expected to remain depressed until at least Q4 2016

·    Spare equipment capacity in market depressing demand for Enteq products

Results

For the six month period to 30 September 2015, Enteq reported revenues of US$ 3.0m (September 2014 US$ 13.6m) and an adjusted EBITDA loss of US$ 0.4m (September 2014: profit of US$ 1.0m).

The group's cash balance remains strong at US$ 14.5m as at 30 September 2015.

Like-for-like overheads have reduced from US$ 4.4m, in the 6 months to September 2014, to US$ 2.3m in the period being reported; a reduction of 48%.  The majority of the reduction has been staff related, with 17 posts being removed across all overhead related departments; 5 of which have been removed since 1 April 2015.

Cash balance and cashflow

As at 30 September 2015, the Group had a cash balance of US$ 14.5m (September 2014 US$ 13.8m), an improvement of US$ 0.4m over the position as at 31 March 2015.  This movement can be analysed as follows:

	US$m
Adjusted EBITDA	(0.4)
Change in operational working capital	0.7
Operational cash generated	0.3
R&D expenditure	(0.1)
Warranty settlement received	0.3
Severance payments	(0.1)
Net cash movement	0.4
Cash balances as at 1 April 2015	14.1
Cash balances as at 30 September 2015	14.5

During the period, US$ 0.3m was received in relation to a claim against the warranties given by the vendors of M&R Industries, Ltd. and Pro-Flow Fabrications Technologies, Ltd, the assets and liabilities of which formed the subsidiary, Enteq KMS LLC.  This cash receipt represented the full and final settlement of the claim.

The US$ 0.1m severance payments related to the 26 posts eliminated during the period in order to further align the cost base of the Group to the challenging market conditions.   Of the 26 posts, 21 were from production areas and 5 related to overhead functions.

Prospects

In the medium term, the North American market for land drilling is expected to stabilise and Enteq is determined to maintain or increase its market share in that market.   Outside North America, Enteq continues to identify and convert new customers in order to broaden the customer base. New technologies continue to be reviewed and developed.

Martin Perry                                                    Neil Warner

Chief Executive                                               Chairman

Enteq Upstream plc

12 November 2015

Enteq Upstream plc
Condensed Consolidated Income Statement
			Six months to 30 September 2015	Six months to 30 September 2014	Year to 31 March 2015
			Unaudited	Unaudited	Audited
	Notes		US$ 000's	US$ 000's	US$ 000's
Revenue			2,983	13,635	18,525
Cost of Sales			(628)	(8,201)	(11,614)
Gross Profit			2,355	5,434	6,911
Administrative expenses before amortisation			(3,743)	(4,735)	(8,809)
Amortisation of acquired intangibles	9b		-	(2,863)	(5,701)
Impairment of acquired intangibles including goodwill			-	-	(39,538)
Other exceptional items			41	(108)	(122)
Foreign exchange (loss)/gain on operating activities			10	(2)	(12)
Total Administrative expenses			(3,692)	(7,708)	(54,182)
Operating loss			(1,337)	(2,274)	(47,271)
Finance income			39	83	127
Loss before tax			(1,298)	(2,191)	(47,144)
Tax expense	8		-	-	(83)
Loss for the period	5		(1,298)	(2,191)	(47,227)
Loss attributable to:
Owners of the parent			(1,298)	(2,191)	(47,227)
Earnings/loss per share (in US cents):	7
Basic			(2.2)	(3.7)	(80.1)
Diluted			(2.2)	(3.7)	(80.1)
Adjusted earnings per share (in US cents):	7
Basic			(2.5)	1.3	(3.1)
Diluted			(2.5)	1.3	(3.1)

Condensed Consolidated Statement of Comprehensive Income
		Six months to 30 September 2015	Six months to 30 September 2014	Year to 31 March 2015
		Unaudited	Unaudited	Audited
		US$ 000's	US$ 000's	US$ 000's
Loss for the period		(1,298)	(2,191)	(47,227)
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss		-	-	-
Items that will be reclassified subsequently to profit or loss		-	-	-
Total comprehensive income for the period		(1,298)	(2,191)	(47,227)
Total comprehensive income attributable to:
Owners of the parent		(1,298)	(2,191)	(47,227)

Enteq Upstream plc
Condensed Statement of Financial Position
		30 September 2015	30 September 2014	31 March 2015
		Unaudited	Unaudited	Audited
	Notes	US$ 000's	US$ 000's	US$ 000's
Assets
Non-current
Goodwill	9a	-	15,127	-
Intangible assets	9b	148	26,821	-
Property, plant and equipment		3,069	3,516	4,837
Non-current assets		3,217	45,464	4,837
Current
Trade and other receivables		4,323	13,324	5,019
Inventories		7,690	7,463	7,363
Cash and cash equivalents		14,524	13,791	14,091
Current assets		26,537	34,578	26,473
Total assets		29,754	80,042	31,310
Equity and liabilities
Equity
Share capital	10	943	939	939
Share premium		90,467	90,395	90,395
Share based payment reserve		456	271	364
Retained earnings		(64,119)	(17,785)	(62,821)
Total equity		27,747	73,820	28,877
Liabilities
Current
Trade and other payables		2,007	6,222	2,433
Total equity and liabilities		29,754	80,042	31,310

Enteq Upstream plc
Condensed Consolidated Statement of Changes in Equity Six months to 30 September 2015
				Share
	Called up	Profit		based
	share	and loss	Share	payment	Total
	capital	account	premium	reserve	equity
	US$ 000's	US$ 000's	US$ 000's	US$ 000's	US$ 000's
Issue of share capital	4	-	72	-	76
Share based payment charge	-	-	-	92	92
Transactions with owners	4	-	72	92	168
Loss for the period	-	(1,298)	-	-	(1,298)
Other comprehensive expense for the period                              -		-	-	-	-
Total comprehensive income	-	(1,298)	-	-	(1,298)
Movement in period:	4	(1,298)	72	92	(1,130)
As at 1 April 2015 (audited)	939	(62,821)	90,395	364	28,877
As at 30 September 2015 (unaudited)	943	(64,119)	90,467	455	27,747
Six months to 30 September 2014
				Share
	Called up	Profit		based
	share	and loss	Share	payment	Total
	capital	account	premium	reserve	equity
	US$ 000's	US$ 000's	US$ 000's	US$ 000's	US$ 000's
Share based payment charge	-	-	-	49	49
Transactions with owners	-	-	-	49	49
Loss for the period	-	(2,191)	-	-	(2,191)
Other comprehensive expense for the period                              -		-	-	-	-
Total comprehensive income	-	(2,191)	-	-	(2,191)
Movement in period:	-	(2,191)	-	49	(2,142)
As at 1 April 2014 (audited)	939	(15,594)	90,395	222	75,962
As at 30 September 2014 (unaudited)	939	(17,785)	90,395	271	73,820

Enteq Upstream plc
Condensed Consolidated Statement of Cash flows
	Six months to 30 September 2015	Six months to 30 September 2014	Year to 31 March 2015
	Unaudited	Unaudited	Audited
	US$ 000's	US$ 000's	US$ 000's
Cash flows from operating activities
Loss for the period	(1,298)	(2,191)	(47,227)
Net finance income	(39)	(83)	(127)
Loss on disposal of fixed assets	-	-	195
Share-based payment non-cash charges	91	49	142
Impact of foreign exchange movement	(10)	2	12
Impairment of acquired intangibles and goodwill	-	-	39,538
Depreciation and Amortisation charges	939	3,198	6,665
	(317)	975	(802)
Decrease/(increase) in inventory	506	(1,873)	(1,773)
Decrease/(increase) in trade and other receivables	697	(4,658)	3,645
(Decrease)/increase in trade and other payables	(427)	1,358	(2,429)
Net cash from operating activities	459	(4,198)	(1,359)
Investing activities
Purchase of property, plant and equipment	(3)	(154)	(2,297)
Purchase of intangible fixed assets	(148)	(767)	(1,197)
Interest received	39	83	127
Net cash from investing activities	(112)	(838)	(3,367)
Financing activities
Share issue	76	-	-
Increase/(decrease) in cash and cash equivalents	423	(5,036)	(4,726)
Non-cash movements - foreign exchange	10	(2)	(12)
Cash and cash equivalents at beginning of period	14,091	18,829	18,829
Cash and cash equivalents at end of period	14,524	13,791	14,091

ENTEQ UPSTREAM PLC

NOTES TO THE FINANCIAL STATEMENTS

For the six months to 30 September 2015

1.     Reporting entity

Enteq Upstream plc ("the Company") is a public limited company incorporated and domiciled in England and Wales (registration number 07590845).  The Company's registered address is The Courtyard, High Street, Ascot, Berkshire, SL5 7HP.

The Company's ordinary shares are traded on the AIM market of The London Stock Exchange. 

Both the Company and its subsidiaries (together referred to as the "Group") are focused on the provision of specialist products and technologies to the upstream oil and gas services market.

2.     General information and basis of preparation

The information for the period ended 30 September 2015 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the period ended 31 March 2015 has been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The annual financial statements of the Group are prepared in accordance with IFRS as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

The Group's consolidated interim financial statements are presented in US Dollars (US$), which is also the functional currency of the parent company. These condensed consolidated interim financial statements (the interim financial statements) have been approved for issue by the Board of directors on 12 November 2015.

This half-yearly financial report has not been audited, and has not been formally reviewed by auditors under the Auditing Practices Board guidance in ISRE 2410.

3.     Accounting policies

The interim financial statements have been prepared on the basis of the accounting policies and methods of computation applicable for the period ended 31 March 2015. These accounting policies are consistent with those applied in the preparation of the accounts for the period ended 31 March 2015, except for the adoption of the following standards as of 1 April 2015:

•              Annual Improvements to IFRSs 2010 -2012 Cycle

The adoption of these new accounting standards has not had a material impact on the interim statement for the current period. Further details of the impact of their adoption will be given in the year-end financial statements for the year ended 31 March 2016.

4.      Estimates

When preparing the interim financial statements, management undertakes a number of judgements, estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses. The actual results may differ from the judgements, estimates and assumptions made by management, and will seldom equal the estimated results. The judgements, estimates and assumptions applied in the interim financial statements, including the key sources of estimation uncertainty were the same as those applied in the Group's last annual financial statements for the year ended 31 March 2015.

5.     Adjusted Earnings

The following analysis illustrates the performance of the Group's activities, and reconciles the Group's loss, as shown in the condensed consolidated interim income statement, to adjusted earnings.  Adjusted earnings is presented to provide a better indication of overall financial performance and to reflect how the business is managed and measured on a day-today basis.  Adjusted earnings before interest, taxation, depreciation and amortisation ("adjusted EBITDA") is also presented as it is a key performance indicator used by management.

	Six months to 30 September 2015	Six months to 30 September 2014	Year to 31 March 2015
	US$ 000's	US$ 000's	US$ 000's
	Unaudited	Unaudited	Audited
Loss for the period	(1,298)	(2,191)	(47,227)
Other exceptional items	(145)	112	122
Impairment of intangible assets	-	-	39,538
Amortisation of acquired intangible assets	-	2,863	5,701
Foreign exchange movements	(10)	2	12
Adjusted earnings	(1,453)	786	(1,854)
Depreciation charge	939	335	964
Finance income	(39)	(83)	(127)
PSP charge	104	-	93
Other non-recurring charges	-	-	57
Tax charge	-	-	83
Adjusted EBITDA	(449)	1,038	(784)
Exceptional bad debt charge	-	-	835
Underlying adjusted EBITDA	(449)	1,038	51

6.     Segmental Reporting

For management purposes, the Group is currently organised into a single business unit, the Drilling Division, which is based, operationally, solely in the USA.

The principal activities of the Drilling Division are the design, manufacture and selling of specialised products and technologies for Directional Drilling and Measurement While Drilling operations used in the energy exploration and services sector of the oil and gas industry.

At present, there is only one operating segment and the information presented to the Board is consistent with the consolidated income statement and the consolidated statement of financial position.

The net assets of the Group by geographic location (post-consolidation adjustments) are as follows:

Net Assets	30 September 2015	30 September 2014	31 March 2015
	US$ 000's	US$ 000's	US$ 000's
	Unaudited	Unaudited	Audited
Europe (UK)	15,039	17,328	13,834
United States	12,708	56,492	15,028
Total Net Assets	27,747	73,820	28,862

The net assets in Europe (UK) are represented, primarily, by cash balances.

The revenue, by geographical area, is as follows:

Revenue	30 September  2015	30 September 2014	31 March 2015
	US$ 000's	US$ 000's	US$ 000's
	Unaudited	Unaudited	Audited
North America	2,456	10,731	15,312
China	106	1,948	1,950
Middle East	421	956	1,263
Total Revenue	2,983	13,635	18,525

7.     Earnings Per Share

Basic earnings per share

Basic earnings per share is calculated by dividing the loss attributable to ordinary shareholders for the six months of US$ 1,298,000 (September 2014: loss of US$ 2,191,000) by the weighted average number of ordinary shares in issue during the period of 59,031,278 (September 2014: 58,953,653).

Adjusted earnings per share

Adjusted earnings per share is calculated by dividing the adjusted earnings for the six months of US$ 1,453,000 (September 2014: loss of US$ 786,000), by the weighted average number of ordinary shares in issue during the period of 59,031,278 (September 2014: 58,953,653).

The adjusted diluted earnings per share information are considered to provide a fairer representation of the Group's trading performance.

A reconciliation between basic earnings and adjusted earnings is shown in Note 5.

As the Group is loss making, any potential ordinary shares have the effect of being anti-dilutive. Therefore, the diluted EPS is the same as the basic EPS. As the share price, as at 30 September 2015, was below the option price of all the options issued, the adjusted diluted EPS the same as adjusted EPS.

8.     Income Tax

No liability to corporate taxes, in either the UK or the US, arose on ordinary activities for the six months under review.

9.     Intangible Fixed Assets

a)     Goodwill

	US$ 000's
Cost:
As at 30 September 2015 and 1 April 2015	19,619
Impairment:
As at 30 September 2015 and 1 April 2015	(19,619)
Net Book Value:
As at 30 September 2015 and 1 April 2015	-

b)    Other Intangible Fixed Assets

	Developed technology	IPR&D technology	Brand names	Customer relationships	Non- compete agreements	Total
	US$ 000's	US$ 000's	US$ 000's	US$ 000's	US$ 000's	US$ 000's
Cost:
As at 1 April 2015	12,320	7,108	1,240	20,586	5,931	47,185
Capitalised in period	-	148	-	-	-	148
As at 30 September 2015	12,320	7,256	1,240	20,586	5,931	47,333
Amortisation:
As at 1 April 2015	(12,320)	(7,108)	(1,240)	(20,586)	(5,931)	(47,185)
Charge for the period	-	-	-	-	-	-
As at 30 September 2015	(12,320)	(7,108)	(1,240)	(20,586)	(5,931)	(47,185)
Net Book Value:
As at 30 September 2015	-	148	-	-	-	148
As at 1 April 2015	-	-	-	-	-	-

The main categories of Intangible Fixed Assets are as follows:

Developed technology:

This is technology which is currently commercialised and embedded within the current product offering.

IPR&D technology:

This is technology which is in the final stages of field testing, has demonstrable commercial value and is expected to be launched within the next 12 months.

Brand names:

The value associated with the XXT trading name used within the Group.

Customer relationships:

The value associated with the on-going trading relationships with the key customers acquired.

Non-compete agreements:

The value associated with the agreements signed by the Vendors of the acquired businesses not to compete in the markets of the businesses acquired.

10.  Share capital

Share capital as at 30 September 2015 amounted to US$ 943,000 (31 March 2015 and 30 September 2014: US$ 939,000).

11.  Going concern

The Directors have carried out a review of the Group's financial position and cash flow forecasts for the next 12 months by way of a review of whether the Group satisfies the going concern tests. These have been based on a comprehensive review of revenue, expenditure and cash flows, taking into account specific business risks and the current economic environment. With regards to the Group's financial position, it had cash and cash equivalents at 30 September 2015 of US$ 14.5 million.

Having taken the above into consideration the Directors have reached a conclusion that the Group is well placed to manage its business risks in the current economic environment. Accordingly, they continue to adopt the going concern basis in preparing the Interim Condensed Financial Statements.

12.  Principal risks and uncertainties

Further detail concerning the principal risks affecting the business activities of the Group is detailed on pages 12 and 13 of the Annual Report and Accounts for the period ended 31 March 2015.  Consideration has been given to whether there have been any changes to the risks and uncertainties previously reported.  None have been identified.

13.  Events after the balance sheet date

There have been no material events subsequent to the end of the interim reporting period ended 30 September 2015.

14.  Copies of the interim results

Copies of the interim results can be obtained from the Group's registered office at The Courtyard, High Street, Ascot, Berkshire, SL5 7HP and are available from the Group's website at www.enteq.com.

 

END

 

 

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