Half-year Report

RNS Number : 5181P

Enteq Upstream PLC

18 November 2016

 

Enteq Upstream plc

Interim results for the six months ended 30 September 2016

AIM traded Enteq Upstream plc ("Enteq", the "Company" or the "Group"), the oil & gas drilling technology company, today announces its interim results for the six months ended 30 September 2016.

Despite some recent stabilisation of oil prices, followed by a small increase in North American rig count, the oil & gas drilling industry has yet to regain confidence in a near term recovery.  Consequently, purchases of new or replacement Measurement While Drilling equipment, such as that supplied by Enteq, remain infrequent.

Enteq's revenues during the first half of the current financial year have been disappointing although, as a result of direct action by management to further reduce costs and preserve cash, an increase of available cash on the balance sheet is again reported.

A new contract win in Saudi Arabia and other opportunities should lead to an improved second half, albeit revenues for the full year are likely to be lower than previously expected by management.

The Board continues to review the Company's cost base whilst balancing this with the required core skills and capabilities which should allow a recovery in a stabilised market.

Operational Highlights

·          Overhead run-rate further reduced by approximately 50% since the start of the financial year

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

·          Recent contract win in Saudi Arabia

·          Cash balance, at 30 September 2016, increased to $15.2m ($14.5m in September 2015)

Financial Metrics

	Six months to:
	30 Sept 2016 US$m		30 Sept 2015 US$m
·          Revenue	0.7		3.0
·          Consolidated adjusted EBITDA1	0.7 loss		0.4 loss
·          Loss before tax	1.0		1.3
·          Adjusted earnings per share (cents)2	1.5 loss		2.5 loss
·          Cash	15.2		14.5

Outlook

·    A prolonged period of stable oil prices at current levels should encourage a recovery in North American rig count in 2017

·    Spare equipment capacity in the market will continue to limit demand for Enteq products

·    Projects outside North America continue to show promise

Iain Paterson, Chairman of Enteq Upstream plc, commented:

"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 are being reviewed and developed whilst maintaining control of capital expenditure in order to protect the Group's strong cash position."

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, primarily those operating in North America.  As a result of a global balancing of oil production from North American shale resources, the last 18 months has seen a prolonged reduction in oil prices resulting in significantly less drilling activity.  The number of rigs operating in North America has fallen from approximately 2,000 to 600 during that period.

Enteq produces specialist equipment which measures directional and other operational parameters whilst a well is being drilled. The service company customer owns a fleet of this equipment which they use to service their oil company clients.  In the current market, all customers have significant over-capacity in their fleets and therefore have not been purchasing any new equipment for replacement or expansion. 

Enteq took pro-active and timely steps to adjust both overheads and production capacity to reflect the reduced market size. The business is now operating at a base level which maintains core capability for a recovery whilst conserving cash balances wherever possible.

By maintaining the remaining business and engineering capability with a strong cash balance, Enteq is well positioned for any market recovery.

Operational Highlights

·          Overhead run-rate reduced by approximately 50% since the year end

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

·          Recent contract win in Saudi Arabia

·          Cash balance, at 30 September 2016, increased to US$15.2m (US$14.5m in September 2015)

Operational Overview

Enteq maintains an engineering, electronic assembly and repair facility in Santa Clara, California with seven key individuals.  A five acre, 30,000 sq. ft. facility, (owned by Enteq) is largely idle, with a core team of six maintaining both customer support and relations. International sales and HQ facilities are maintained in the UK with three staff, including two Directors.  During the last six months the Board of Directors was reduced from six to four members.  All staff have accepted pay reductions and, wherever practical, salary payments are made in shares rather than cash.

Opportunities outside North America continue to show promise with a recent contract announced in Saudi Arabia and on-going activity in the Middle East, Far East, Africa, China and Russia. Cash flow however remains tight from all national and international Oil companies as they acclimatise to the new lower oil price environment.

Market conditions

Recent oil price corrections to around US$50 per barrel should create a viable environment for stabilised drilling activity should this price remain and confidence return to the industry.

North American rig count reduced by a further 33% since September 2015 and 71% since September 2014.  Oil prices continue to be in line with those in September 2015 but are down 51% since September 2014.

In North America, there remain some 5,000 wells which have been drilled but not completed (brought into production). The first activity in a stabilised oil price environment will be to increase production levels by completing these wells. Thereafter, an increase in drilling activity should be expected and a new level of rig activity (at a lower base than in 2014/15) established.

International projects will take some time to be re-budgeted and re-started however there is no doubt about the long-term demand and requirement for medium to long term drilling activity in order to maintain energy supplies.

Enteq should expect to at least maintain its previous market share in a recovering market and, as a result of some customer and competitor consolidation, should be able to take advantage of any recovery.

Outlook

·    A prolonged period of stable oil prices at the current level should encourage a recovery in North American rig count in 2017

·    Spare equipment capacity in the market will continue to limit demand for Enteq products

·    Projects outside North America continue to show promise

Results

For the six month period to 30 September 2016, Enteq reported revenues of US$ 0.7m (September 2015: US$ 3.0m) and a loss for the period of US$1.0m (September 2015: loss of US$1.3m).   The adjusted EBITDA loss was US$ 0.7m (September 2015: loss of US$ 0.4m).  A reconciliation between the reported loss and the adjusted EBITDA is shown in note 5 to the financial statements below.

The Group's cash balance remains strong at US$ 15.2m as at 30 September 2016.  This is up US$ 0.7m on the September 2015 balance of US$ 14.5m and up US$ 0.1m on the 31 March 2016 balance of US$ 15.1m.

Like-for-like overheads have reduced from US$ 2.3m, in the six months to September 2015, to US$ 1.1m in the period being reported; a reduction of 54%.  The majority of the reduction has been non-staff related including closing two locations (Austin and North Houston) plus a general emphasis on cost reductions.  A further two overhead posts were removed in April and May 2016 respectively.

Cash balance and cashflow

As stated above, at 30 September 2016, the Group had a cash balance of US$ 15.2m an improvement of US$ 0.1m over the position as at 31 March 2016.  This movement can be analysed as follows:

	US$m
Adjusted EBITDA	(0.7)
Change in operational working capital	0.9
Operational cash generated	0.2
R&D expenditure	(0.1)
Net cash movement	0.1
Cash balances as at 1 April 2016	15.1
Cash balances as at 30 September 2016	15.2

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 are being reviewed and developed whilst maintaining control of capital expenditure in order to protect the group's strong cash position.

 

Martin Perry                                                    Iain Paterson

Chief Executive                                               Chairman

Enteq Upstream plc

17 November 2016

Enteq Upstream plc
Condensed Consolidated Income Statement
			Six months to 30 September 2016	Six months to 30 September 2015	Year to 31 March 2016
			Unaudited	Unaudited	Audited
	Notes		US$ 000's	US$ 000's	US$ 000's
Revenue			745	2,983	6,289
Cost of Sales			(342)	(628)	(2,201)
Gross Profit			403	2,355	4,088
Administrative expenses before amortisation			(1,368)	(3,743)	(6,225)
Amortisation of acquired intangibles	9b		(32)	-	(30)
Other exceptional items			(31)	41	(2,585)
Foreign exchange (loss)/gain on operating activities			(33)	10	(1)
Total Administrative expenses			(1,464)	(3,692)	(8,841)
Operating loss			(1,061)	(1,337)	(4,753)
Finance income			64	39	93
Loss before tax			(997)	(1,298)	(4,660)
Tax expense	8		(30)	-	(81)
Loss for the period	5		(1,027)	(1,298)	(4,741)
Loss attributable to:
Owners of the parent			(1,027)	(1,298)	(4,741)
Earnings/loss per share (in US cents):	7
Basic			(1.7)	(2.2)	(8.0)
Diluted			(1.7)	(2.2)	(8.0)
Adjusted earnings per share (in US cents):	7
Basic			(1.5)	(2.5)	(3.6)
Diluted			(1.5)	(2.5)	(3.6)

Condensed Consolidated Statement of Comprehensive Income
		Six months to 30 September 2016	Six months to 30 September 2015	Year to 31 March 2016
		Unaudited	Unaudited	Audited
		US$ 000's	US$ 000's	US$ 000's
Loss for the period		(1,027)	(1,298)	(4,741)
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		(1,027)	(1,298)	(4,741)
Total comprehensive income attributable to:
Owners of the parent		(1,027)	(1,298)	(4,741)

Enteq Upstream plc
Condensed Statement of Financial Position
		30 September 2016	30 September 2015	31 March 2016
		Unaudited	Unaudited	Audited
	Notes	US$ 000's	US$ 000's	US$ 000's
Assets
Non-current
Goodwill	9a	-	-	-
Intangible assets	9b	364	148	267
Property, plant and equipment		2,960	3,069	2,903
Non-current assets		3,324	3,217	3,170
Current
Trade and other receivables		1,609	4,323	3,423
Inventories		4,489	7,690	4,214
Cash and cash equivalents		15,206	14,524	15,121
Current assets		21,304	26,537	22,758
Total assets		24,628	29,754	25,928
Equity and liabilities
Equity
Share capital	10	961	943	950
Share premium		90,681	90,467	90,558
Share based payment reserve		659	456	549
Retained earnings		(68,589)	(64,119)	(67,562)
Total equity		23,712	27,747	24,495
Liabilities
Current
Trade and other payables		916	2,007	1,433
Total equity and liabilities		24,628	29,754	25,928

Enteq Upstream plc
Condensed Consolidated Statement of Changes in Equity Six months to 30 September 2016
				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	11	-	123	-	134
Share based payment charge	-	-	-	110	110
Transactions with owners	11	-	123	110	244
Loss for the period	-	(1,027)	-	-	(1,027)
Total comprehensive income	-	(1,027)	-	-	(1,027)
Movement in period:	11	(1,027)	123	110	(783)
As at 1 April 2016 (audited)	950	(67,562)	90,558	549	24,495
As at 30 September 2016 (unaudited)	961	(68,589)	90,681	659	23,713
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	456	27,747

Enteq Upstream plc
Condensed Consolidated Statement of Cash flows
	Six months to 30 September 2016	Six months to 30 September 2015	Year to 31 March 2016
	Unaudited	Unaudited	Audited
	US$ 000's	US$ 000's	US$ 000's
Cash flows from operating activities
Loss for the period	(1,027)	(1,298)	(4,741)
Net finance income	(64)	(39)	(93)
Loss on disposal of fixed assets	-	-	43
Share-based payment non-cash charges	111	91	185
Impact of foreign exchange movement	33	(10)	1
Depreciation and Amortisation charges	230	939	1,349
	(717)	(317)	(3,256)
(Increase)/decrease in inventory	(532)	506	3,714
Decrease in trade and other receivables	1,824	697	1,596
Decrease in trade and other payables	(437)	(427)	(1,000)
Net cash from operating activities	138	459	1,054
Investing activities
Purchase of tangible fixed assets	-	(3)	(66)
Disposal proceeds of tangible fixed assets	-	-	72
Purchase of intangible fixed assets	(129)	(148)	(297)
Interest received	64	39	93
Net cash from investing activities	(65)	(112)	(198)
Financing activities
Share issue	55	76	175
Increase/(decrease) in cash and cash equivalents	128	423	1,031
Non-cash movements - foreign exchange	(33)	10	(1)
Cash and cash equivalents at beginning of period	15,121	14,091	14,091
Cash and cash equivalents at end of period	15,216	14,524	15,121

ENTEQ UPSTREAM PLC

NOTES TO THE FINANCIAL STATEMENTS

For the six months to 30 September 2016

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 2016 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 2016 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 18 November 2016.

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 2016. These accounting policies are consistent with those applied in the preparation of the accounts for the period 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 2016.

5.     Adjusted earnings and adjusted EBITDA

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 2016	Six months to 30 September 2015	Year to 31 March 2016
	US$ 000's	US$ 000's	US$ 000's
	Unaudited	Unaudited	Audited
Loss for the period	(1,027)	(1,298)	(4,741)
Other exceptional items	32	(145)	2,585
Amortisation of acquired intangible assets	31	-	30
Foreign exchange movements	33	(10)	11
Adjusted earnings	(931)	(1,453)	(2,125)
Depreciation charge	199	939	1,319
Finance income	(64)	(39)	(93)
PSP charge	106	104	199
Tax charge	30	-	81
Adjusted EBITDA	(660)	(449)	(619)

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 2016	30 September 2015	31 March 2016
	US$ 000's	US$ 000's	US$ 000's
	Unaudited	Unaudited	Audited
Europe (UK)	14,531	15,039	14,569
United States	9,181	12,708	9,866
Total Net Assets	23,712	27,747	24,435

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

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$ 1,027,000 (September 2015: loss of US$ 1,298,000) by the weighted average number of ordinary shares in issue during the period of 60,080,608 (September 2015: 59,031,278).

Adjusted earnings per share

Adjusted earnings per share is calculated by dividing the adjusted earnings loss for the six months of US$ 931,000 (September 2014: loss of US$ 1,453,000), by the weighted average number of ordinary shares in issue during the period of 60,080,608 (September 2014: 59,031,278).

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 2016, was below the option price of all the options issued, the adjusted diluted EPS the same as adjusted EPS.

8.     Income Tax

A liability to corporate taxes of US$30,000 arose in the US on ordinary activities for the six months under review.

9.     Intangible Fixed Assets

a)     Goodwill

	US$ 000's
Cost:
As at 30 September 2016 and 1 April 2016	19,619
Impairment:
As at 30 September 2016 and 1 April 2016	(19,619)
Net Book Value:
As at 30 September 2016 and 1 April 2016	-

9.             Intangible Fixed Assets (cont.)

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 2016	12,500	7,225	1,240	20,586	5,931	47,482
Capitalised in period	-	129	-	-	-	129
As at 30 September 2016	12,500	7,354	1,240	20,586	5,931	47,611
Amortisation:
As at 1 April 2016	(12,350)	(7,108)	(1,240)	(20,586)	(5,931)	(47,215)
Charge for the period	(32)	-	-	-	-	(32)
As at 30 September 2016	(12,382)	(7,108)	(1,240)	(20,586)	(5,931)	(47,247)
Net Book Value:
As at 30 September 2016	118	246	-	-	-	364
As at 1 April 2016	150	117	-	-	-	267

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 2016 amounted to US$ 961,000 (31 March 2016: US$ 950,263 and 30 September 2015: US$ 943,000).

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 2016 of US$ 15.2 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 10 and 11 of the Annual Report and Accounts for the period ended 31 March 2016.  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 2016.

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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