LAM.L Regulatory News (LAM)

19 September 2019

LAMPRELL PLC("Lamprell" and with its subsidiaries the "Group")

INTERIM FINANCIAL RESULTS

FOR SIX MONTHS TO 30 JUNE 2019

1H results in line with expectations

Strong bid pipeline, progressing towards awards

Financial highlights

·; Revenue of USD 106.4 million

·; Net cash of USD 50.2 million expected to improve moderately in 2H 2019

·; Gross margin of (12.2%)

·; Net loss of USD 51.9 million

·; Backlog of USD 441 million (31 December 2018: USD 540 million)

·; Negotiating a new debt facility, current facility extended until mid-December 2019 to allow for time to agree terms of new agreement

·; Borrowings USD 40.3 million

Operational highlights

·; World class 12-month rolling total recordable incident rate (TRIR) of 0.16

·; East Anglia One project - all 60 jackets installed by the client, discussions around commercial close out of the project ongoing

·; Moray East project progressing to schedule and within budget

·; Reliable flow of rig refurbishment work, with 12 rigs stacked at present

Strategic update

·; Actively bidding for multiple projects on Saudi Aramco's LTA, awards anticipated from early 2020

·; Progressing discussions regarding monetising equipment in inventories on the balance sheet

·; IMI discussing the commercial and technical terms, and timing of the first two new build jackup rigs, with their client

·; Continuing enthusiasm for the growth prospects in the offshore renewables sector

·; Continuing focus on the UAE as a strategic geography given the significant opportunity set which is developing

Current trading and outlook

·; 2019 Revenue guidance range maintained at USD 275-350 million, with 100% coverage for the bottom end secured

·; Extent of 2020 revenue growth contingent on pace of awards over the next six months

·; The timing of contract awards remains challenging and represents a material uncertainty

·; Bid pipeline steady at USD 6.3 billion, focus on oil and gas opportunities in the Middle East and offshore wind farm projects in Europe

For the definitions of EBITDA and net cash, please refer to the 'Alternative performance measures' in the notes to interim financial information.

Christopher McDonald, Chief Executive Officer said:

"I am pleased to see work returning to our yards with both Moray East project ramping up and the rig refurbishment segment providing a steady flow of projects. Our focus and effort in delivering strategic opportunities in Saudi Arabia has intensified since being added to Saudi Aramco's LTA list and I am confident that, despite delays, we will see results from this effort. The renewables industry continues to demonstrate encouraging growth and we are also beginning to see early but solid interest in the newbuild jackup rig market. These developments will underpin our gradual recovery over the coming years."

The management team will hold a presentation on 19 September 2019 at 9.30am at the London Stock Exchange (10 Paternoster Square, London EC4M 7LS). The live webcast will be accessible on our company website, at www.lamprell.com or on the following link:

https://webcasting.brrmedia.co.uk/broadcast/5d5bf62685f23e7c1eda6800 

Phone: +44 (0)330 336 9105; confirmation code 2306292

- Ends -

Enquiries:

Notes to editors

Lamprell PLC, based in the United Arab Emirates ("UAE") and with over 40 years' experience, is a leading provider of fabrication, engineering and contracting services to the offshore and onshore oil & gas and renewable energy industries. The Group has established leading market positions in the fabrication of shallow-water drilling jackup rigs, liftboats, land rigs, and rig refurbishment projects, and it also has an international reputation for building complex offshore and onshore process modules and fixed platforms.

Lamprell employs over 4,000 people across multiple facilities, with its primary facilities located in Hamriyah, Sharjah and Jebel Ali, all of which are in the UAE. In addition, the Group has facilities in Saudi Arabia (through a joint venture agreement). Combined, the Group's facilities cover approximately 828,000 m2 with 1.6 km of quayside.

Lamprell is listed on the London Stock Exchange (symbol "LAM").

Chief Executive Officer's Review

In the first half of 2019 we completed fabrication and assembly of the foundations for the East Anglia One project. We have embedded the lessons learned from that first offshore windfarm project and successfully commenced fabrication on our second renewables project as planned. Despite delays in a number of core strategic opportunities and the ongoing market uncertainties, we continue to see a good flow of bidding activity from Saudi Arabia, the UAE and in the renewables sector.

Operational performance in 1H

We continue to deliver exemplary results in safety performance, with a 12-month rolling TRIR of 0.16 at the period end. Robust safety systems and culture are core to our operational success and our ability to work with top tier clients and our focus on maintaining high standards in this area remains intact as the activity level ramps up in our yards for the Moray East project.

All fabrication and assembly works on the East Anglia One project completed in July, and all 60 jackets have been installed by the client in the field offshore United Kingdom. The parties are in discussions around commercial close out of the project.

Our second renewables project, Moray East, is progressing safely, in line with budget and schedule. Earlier this year we made incremental investment in yard set up to improve efficiencies for the jackets throughput. Steel cutting commenced in June and welding works are now well underway.

The rig refurbishment segment continues to demonstrate reliably good activity levels. To date, we have completed nine refurbishment projects and received eight rigs in our yards for various new works, as well as adding three new contracts which are due to arrive in our yards during the second half of the year. We are currently stacking 12 rigs in Sharjah and Hamriyah, the majority are warm stacked and we see a gradual, albeit small, increase in the scope of work performed.

The IMI yard in Saudi Arabia, of which Lamprell is a 20% joint venture partner, has now progressed to the construction phase. All four of the fabrication zones at the yard are expected to be commissioned for operation in late 2022. Lamprell continues to support the IMI management team as it develops its technical capabilities in anticipation of full start-up.

Strategic initiatives

With the number of significant offshore windfarm projects expected to be sanctioned over the coming 5-10 years growing each year, Lamprell continues to make incremental investments into equipment and operational set-up of the Hamriyah facility, to be more efficient and productive. These improvements will help to make Lamprell more competitive when bidding on new projects in the renewables sector and ensure better control throughout the complex execution process.

In December 2018, Lamprell received a Letter of Intent for the subcontract of two newbuild jackup rigs from IMI as part of the offtake agreement between the IMI yard and its client, ARO Drilling. Due to the prolonged downturn in the oil and gas industry and specifically the slow pace of recovery for day rates in the drilling industry, IMI continues to review exact technical and commercial requirements and the timing for an award of the first two rigs with its client, and we will update the market as and when awarded.

Since being added to Saudi Aramco's Long-Term Agreement programme (LTA) in November 2018, we have submitted multiple bids and continue to progress with further bids due for submission shortly. As a new entrant to the programme, we expect any initial awards to be of smaller scope as client gains confidence in our capabilities. Whilst we have no visibility or influence on timing of awards, we anticipate to see some news flow from early 2020 onwards.

Market overview and bid pipeline

The bid pipeline at 30 June 2019 was USD 6.3 billion (31 December 2018: USD 6.4 billion). Approximately two thirds of the pipeline originates from the Middle East as supported by recent growth forecasts from the region. Accordingly, interest in both land rigs and newbuild jackup rigs is beginning to improve although progress to awards remains slow.

The renewables project pipeline is progressing to plan and as at 30 June 2019 represented USD 2.0 billion of total bid pipeline. This year we have submitted two bids, which are expected to be awarded in early 2020. The Contract for Difference auction in the UK is expected to result in a number of new projects reaching final investment decision over the coming months so we expect bidding to remain at similar levels in the near term. We continue to target projects of similar scope and profile to Moray East to ensure we retain sufficient yard capacity for LTA projects, new build jackup rig work and other EPCI projects.

Outlook

Our current backlog is USD 441 million (31 December 2018: USD 540 million). As previously announced, due to ongoing delays with a number of core project awards, our 2019 revenue guidance was narrowed to USD275-350 million, with 100% of the bottom end of the range covered. The high end of the range is contingent on new awards. Further details relating to the uncertainties are set out in Note 2.1. We anticipate further year-on-year revenue growth in 2020 and will be in a position to provide a revenue forecast range as we gain more clarity on awards in the next six months.

Christopher McDonald

Chief Executive Officer

Lamprell plc

Financial Review

The Group's financial performance in 1H 2019 was in line with our expectations, with revenue levels weighted to the second half of the year. Our profitability has been affected by 53% of our revenue in 1H not contributing any project margin. Net cash has trended downwards in line with forecast, with the balance sheet continuing with low levels of debt.

Results from operations

Total revenue for the the six-month period ended 30 June 2019 was USD 106.4 million (1H 2018: USD 155.1 million), of which 47% is attributed to the oil & gas business stream and 53% to renewables. The acceleration of progress on the Moray East renewables project will result in a stronger revenue generation in the second half of the year.

The EPCI segment, which currently includes the East Anglia One and Moray East projects, generated USD 61.9 million.

Revenue from rig refurbishment projects amounted to USD 13.2 million. The contracting services businesses contributed USD 31.3 million to total Group revenue.

Margin performance 

The Company made a gross loss of USD 13.0 million (1H 2018: gross profit of USD 7.2 million) driven primarily by a combination of lower revenues and zero margin contribution from a significant proportion of the revenues generated in the period. The early phases on the Moray East project and completion of the East Anglia One project together constituted 53% of the revenues (USD 56.9 million) but contributed no margin. The Moray East project will have significantly progressed by 2H 2019 and will contribute margin from that point in accordance with our revenue and accounting policies.

General and Administrative expenses have increased slightly to USD 29.3 million and operational overheads to USD 19.0 million as per our previous guidance. The increases reflect investments to retain and upskill our staff and to improve our focus on delivering strategic objectives, as well as moderate investment in yard efficiencies.

The gross loss coupled with cost pressures at current revenue levels resulted in a negative EBITDA from continuing operations of USD (29.6) million (1H 2018: USD (6.2) million), with an EBITDA margin of (27.8)%, down from (4.0)% in the comparative period in 2018.

Finance costs and financing activities

As previously announced, net finance costs in the first half of 2019 increased to USD 4.1 million largely as a result of IFRS 16 lease adoption (1H 2018: USD 1.8 million).

Net loss and loss per share

The Group generated a net loss of USD 51.9 million (1H 2018: net loss of USD 21.9 million) which equates to a loss per share of (15.20)c (1H 2018: loss per share of (6.42)c).

Capital expenditure

Capital expenditure in the 1H 2019 amounted to USD 9.6 million and is largely associated with yard improvements in our Hamriyah facility to increase productivity.

IMI equity contributions

There was no equity contribution to the IMI joint venture during the reporting period. To date, total contribution to the IMI joint venture amounts to approximately USD 59.0 million, out of a USD 140.0 million total maximum commitment. The Company's share of the losses for the IMI joint venture in 1H 2019 was USD 4.9 million. Ongoing construction activities are sufficiently funded and we currently do not expect to make further contributions in 2019.

Cash flow and liquidity

We report a net cash outflow from operating activities of USD 16.3 million, which was driven predominantly by our negative EBITDA and working capital requirements of the Moray East project in the period, offset by focussed collections of receivables.

The Group's net cash is expected to improve moderately in 2H 2019 due to receipts from current projects but will be lower than our net cash reported as at 31 December 2018.

Balance sheet

The Group's net cash decreased to USD 50.2 million from USD 80.0 million as at 31 December 2018. This reflects our cash outflow from operating activities and USD 9.6 million of capital expenditure primarily on yard improvements in our Hamriyah facility. The working capital position on the Moray East project is expected to reverse in 2H 2019 and we also expect to receive final payment on the East Anglia One project, which is expected to result in a moderately improved net cash position by the end of the year.

The Group's total assets at the period-end were USD 572.5 million (31 December 2018: USD 556.4 million). Inventories on the balance sheet amount to USD 88.6 million. This includes approximately USD 81.7 million for equipment inventory which includes our proprietary LAM2K land rig and two Super 116E rig kits purchased ahead of the market downturn, which we continue to market actively.

Shareholders' equity reduced to USD 343.4 million (31 December 2018: USD 393.0 million).

Borrowings

Borrowings at the end of the reporting period were USD 40.3 million (31 December 2018: USD 19.8 million), following the repayment of the term loan and drawdown of the revolving facility under the existing debt facility.

At 30 June 2019 the Group's existing debt facilities comprised (a) a USD 100 million term loan amortised over five years, which had been fully repaid by the end of the reporting period; and (b) a USD 50 million revolving facility usable for general working capital purposes, of which USD 40 million was drawn during the reporting period. The debt facility was due to expire in August 2019 and we have agreed an extension until mid-December 2019 while we progress with debt refinancing negotiations for a new facility.

The Group's debt to equity ratio at 30 June 2019 was 11.73% (31 December 2018: 5.03%).

Going concern

The Group's interim financial statements have been prepared on a going concern basis, notwithstanding the material uncertainty as further discussed in Note 2.1.

Dividends

In the context of the low revenue levels in 2019, the delays in major project awards and the investment for future growth in IMI, the Directors do not recommend the payment of an interim dividend for the period in relation to current financial year ending 31 December 2019. The Directors will continue to review this position in light of market conditions at the relevant time.

Principal risks and uncertainties

Principal risks are a risk or combination of risks that could materially threaten the Company's business model, performance, solvency or liquidity, or prevent it from meeting its strategic objectives. The Group has an established risk management framework which requires all risk owners to identify, evaluate and monitor risks and take steps to reduce, manage or eliminate the risk. This framework is overseen by the Audit & Risk Committee and the Board as a whole, but is implemented and actioned by the executive team.

For details of the Group's principal risks and uncertainties, please refer to the Notes to Financial Statements and the Risk Report in the Company's 2018 Annual Report (which is available on our website at www.lamprell.com). During 1H 2019, the Audit & Risk Committee undertook a number of deep dives into key risks to the Company with the risk owners and subsequently reported back to the Board on these risks and the Group's risk mitigation activities, confirming that no significant changes or new risks had been identified.

Antony Wright

Chief Financial Officer

Lamprell plc

Condensed consolidated interim income statement

Condensed consolidated interim statement of other comprehensive income

Condensed consolidated interim balance sheet

Condensed consolidated interim statement of changes in equity

Condensed consolidated interim statement of cash flows

Non-cash transaction

The following adjustments have been considered as non cash transactions on adoption of IFRS 16. Refer to Note 2.3(b) for details.

1 Legal status and activities

There has been no change in the legal status or to the Company and its subsidiaries (together referred to as "the Group") or principal activities of the Company since the publication of our most recent annual financial statements.

This condensed consolidated interim financial information has been reviewed, not audited. The information for the year ended 31 December 2018 included in these condensed consolidated interim financial statement does not constitute statutory accounts as defined in the Isle of Man Companies Acts 1931-2004. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

2 Summary of significant accounting policies

2.1 Basis of preparation

The condensed consolidated interim financial information for the six months ended 30 June 2019 have been prepared in accordance with the Disclosure Guidance and Transparency Rules ("DTR") of the United Kingdom's Financial Conduct Authority ("FCA") and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting" as adopted by the European Union ("EU"). The consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2018, which have been prepared in accordance with IFRSs as adopted by the EU.

The Group incurred a loss of USD 51.9 million during the six months ended 30 June 2019 (30 June 2018: USD 21.9 million) and was in a net cash position of USD 50.2 million at 30 June 2019 (31 December 2018: USD 80.0 million). This constitutes a decrease in its cash resources and is mainly attributable to cash outflows from operating activities of USD 16.2 million (30 June 2018: 82.8 million).

On 30 July 2019 the Group secured an extension to the current borrowing facilities until 11 December 2019 as negotiations continue to finalise a new facility with a local and an international bank to provide increased headroom for the business. Refer to note 25.

In performing their assessment of going concern, the Directors have considered forecast cash flows for the 15 months to December 2020. The key assumptions included in the forecast cash flows over this period are:

·; the completion and signing of a debt refinancing agreement in the last quarter of the year which is expected to comprise a term loan and revolving credit facility to support the business: this is at an advanced stage of negotiation with lenders and the term sheet is in the process of being approved. This will be followed by conversion of this term sheet to detailed final documentation and this gives us confidence that the refinancing will be completed before year end;

·; the commercial closeout of the East Anglia ONE ("EA1") project and resulting final payment in the last quarter of the year: the Directors are in advanced negotiations with the client as set out in the key judgements note 3.1;

·; new project awards and expected receipts therefrom consistent with historical payment terms: conversion of a portion of the bid pipeline to contract awards in line with our strategy is further discussed in the Chief Executive Officer's review. This includes opportunities to monetise the rig kits which we continue to market actively;

·; the sale of the LAM2K land rig and timing of receipt of the sale proceeds in the last quarter of the year;

·; execution of the existing major project in accordance with the milestones in the contract and payment receipts in accordance with the contract;

·; the timing of further cash investment in the next 15months in the International Maritime Industries ("IMI") associate; and

·; capex and cash overhead reduction if and when required notwithstanding the need to retain strategic capacity.

The Directors remain confident that the timing and realisation of these assumptions are reasonable and reflect their assessment of the most likely outcome. However, the timing and realisation of these matters is not wholly within management's control and so the Directors have also considered downside sensitivities to the key assumptions. The Directors have concluded that, in aggregate, such matters beyond management's control represent a material uncertainty that may cast significant doubt on the entity's ability to continue as a going concern. Significant disruption to the timing or realisation of the anticipated cash flows could result in the business being unable to realise its assets and discharge its liabilities in the normal course of business.

In view of this, the Directors have considered the realistic availability and likely effectiveness of actions that they could take to avoid, or reduce the impact or likelihood of a significant deterioration in the cash flows which are discussed in the key assumptions above. On the basis of these actions, the directors are confident that, notwithstanding the material uncertainty discussed above, the Group will have adequate resources to continue in operational existence for the foreseeable future and therefore the going concern basis of accounting remains appropriate.

2.1 Accounting policies

The accounting policies applied in the preparation of the condensed consolidated interim financial information are consistent with those of the annual financial statements for the year ended 31 December 2018 except for the adoption of new standards and interpretations effective as of 1 January 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The annual financial statements for the year ended 31 December 2018 are available on the Company's website (www.lamprell.com).

(a) New and amended standards adopted by the Group

·; IFRS 16 Leases, see Note 2.3 for impact on the Group.

·; IFRIC 23 Uncertainty over Income Tax Treatments - no impact on the Group.

·; IFRS 9 (Amendments) Prepayment features with negative compensation - no impact on the Group.

·; IAS 19 (Amendments) Plan Amendment, Curtailment or Settlement - no impact on the Group.

·; IAS 28 (Amendments) Long-term interests in associates and joint ventures - no impact on the Group.

·; Annual Improvements to IFRSs 2015-2017 Cycle - no impact on the Group.

2.2 IFRS 16 - Leases

The Group has adopted IFRS 16 with effect from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

IFRS 16 introduces new or amended requirements with respect to lease accounting. It removes the distinction between operating and finance lease, requiring the recognition of a right-of-use asset and a lease liability at commencement of all leases, except for short-term leases and leases of low value assets. The Group is not party to any material leases where it acts as lessor, but the Group does have a number of material yard leases.

(a) Changes in accounting policy

At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

For a contract that is, or contains, a lease, the Group accounts for each lease component within the contract as a lease separately from non-lease components of the contract. The Group determines the lease term as the non-cancellable period of a lease, together with both:

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a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and

b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

The Group as a lessee

For a contract that contains a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

The relative stand-alone price of lease and non-lease components is determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately. If an observable stand-alone price is not readily available, the Group estimates the stand-alone price, maximising the use of observable information. The non-lease components are accounted for in accordance with the Group's policies.

For determination of the lease term, the Group reassesses whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that:

a) is within the control of the Group; and

b) affects whether the Group is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term.

At the commencement date, the Group recognises a right-of-use asset and a lease liability under the lease contract.

Lease liability

Lease liability is initially recognised at the present value of the lease payments that are not paid at the commencement date. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the Group uses its incremental borrowing rate.

After initial recognition, the lease liability is measured by (a) increasing the carrying amount to reflect interest on the lease liability; (b) reducing the carrying amount to reflect the lease payments made; and (c) remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments. Where (a) there is a change in the lease term as a result of reassessment of certainty to exercise an exercise option, or not to exercise a termination option as discussed above; or (b) there is a change in the assessment of an option to purchase the underlying asset, assessed considering the events and circumstances in the context of a purchase option, the Group re-measures the lease liabilities to reflect changes to lease payments by discounting the revised lease payments using a revised discount rate. The Group determines the revised discount rate as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or its incremental borrowing rate at the date of reassessment, if the interest rate implicit in the lease cannot be readily determined.

Where (a) there is a change in the amounts expected to be payable under a residual value guarantee; or (b) there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments, including a change to reflect changes in market rental rates following a market rent review, the Group re-measures the lease liabilities by discounting the revised lease payments using an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates. In such case, the Group use a revised discount rate that reflects changes in the interest rate.

The Group recognises the amount of the re-measurement of lease liability as an adjustment to the right-of-use asset. Where the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, the Group recognises any remaining amount of the re-measurement in profit or loss.

The Group accounts for a lease modification as a separate lease if both:

a) the modification increases the scope of the lease by adding the right-of-use one or more underlying assets; and

b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

Lease modifications that are not accounted for as a separate lease, the Group, at the effective date of the lease modification: (a) allocates the consideration in the modified contract; (b) determines the lease term of the modified lease; and (c) re-measures the lease liability by discounting the revised lease payments using a revised discount rate.

The revised discount rate is determined as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee's incremental borrowing rate at the effective date of the modification, if the interest rate implicit in the lease cannot be readily determined.

Right-of-use assets

The right-of-use asset is initially recognised at cost comprising:

a) amount of the initial measurement of the lease liability;

b) any lease payments made at or before the commencement date, less any lease incentives received;

c) any initial direct costs incurred by the Group; and

d) an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. These costs are recognised as part of the cost of right-of-use asset when the Group incurs an obligation for these costs. The obligation for these costs are incurred either at the commencement date or as a consequence of having used the underlying asset during a particular period.

For assets that meet the definition of property, plant and equipment, right-of-use asset is amortised over the term of the lease.

Previous accounting policy

The Group's previous accounting policy under IAS 17 can be found in note 2.13 of the annual financial statements for the year ended 31 December 2018.

(b) Impact of adoption of IFRS 16

The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information. In respect of those leases the Group previously treated as operating leases, the Group has elected to measure its right-of-use assets arising from property leases using the approach set out in IFRS 16. Right-of-use assets are recognised based on the remaining lease period with no cumulative adjustment in retained earnings.

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 will continue to be applied to those leases entered into or modified before 1 January 2019.

The Group also elected to use the following practical expedients permitted by standard:

·; a single discount rate has been applied to portfolios of leases with reasonably similar characteristics;

·; the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and

·; the use of hindsight in determining the lease term.

Set out below are the amounts by which each financial statement line item is affected as a result of the adoption of IFRS 16:

The total right-of-use assets of USD 57.5 million recognised at 1 January 2019 relate to leases of properties. Additions to right-of-use asset during the period ended 30 June 2019 were USD 0.4 million.

Management has made key judgements in determining the right-of-use asset and liabilities as follows:

(a) Discount rate has been determined as 7.34% based on the Group's incremental borrowing rate as at 1 January 2019; and

(b) Certain long-term leases have escalation clauses which allow for rent reviews every five years. However, in line with IFRS 16, no increments have been included as the rates are not defined.

A change in these assumptions could result in an increase or decrease in the right-of-use assets, liabilities and finance costs recognised in the consolidated financial statements.

During the six months ended 30 June 2019, in relation to leases under IFRS 16 the Group recognised the following expenses in the consolidated income statement:

The cash payments for the principal portion of the lease liabilities during the six months ended 30 June 2019 was USD 0.8 million (30 June 2018: nil).

The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019.

3 Critical accounting judgements and key sources of estimation uncertainty

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

3.1 Critical judgements in applying accounting policies

Liquidated damages claims (LDs)

As further detailed in Note 4.1.1 of the consolidated financial statements for the year ended 31 December 2018, the Group encountered major operational and commercial challenges on the East Anglia ONE ("EA1") project which resulted in a total forecast loss for the Group at 30 June 2019 of USD 95.6 million (31 December 2018: USD 89.4 million).

Due to delays on the project and concerns over technical specifications stipulated in the contract, the client is contractually entitled to claim liquidated damages to a maximum of USD 33.8 million.

Management has not recorded a provision for liquidated damages, which remains a significant judgment at the half year. The significant judgment explained in note 4.1.1 of the consolidated financial statements for the year ended 31 December 2018 related to a comfort letter obtained from the Employer. Set out below is an update on the key components of the significant judgment at the reporting date, which is also supported by an updated comfort letter from the Employer:

• The Belfast based assembly of the final jackets for the EA1 project has been completed and delivered within the installation campaign window as agreed in the comfort letter obtained from the Employer on 17 March 2019.

• All 60 jackets have been installed by the client within the agreed installation campaign window and therefore did not affect commitments with other EA1 Contractors, which would have been impacted if not achieved. Management is now in discussions with the client around commercial closeout of the project including a mutually agreed technical evaluation process and a warranty structure for each jacket.

Based on the above, management believe the risk of Liquidated Damages being levied has been mitigated and continues to work with the client and its experts to ensure a process for the technical evaluation and then the final acceptance and warranty structure that would be acceptable to both parties. The maximum potential exposure to the Group would amount to a reduction in contract revenue by USD 33.8 million and a corresponding reduction to net assets.

3.2 Key sources of estimation uncertainty

Revenue recognition

The Group uses the input method to account for its contract revenue. Use of the input method requires the Group to estimate the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the Group's accounting policy. As a result, the Group is required to estimate the total cost to completion of all outstanding projects at each period end. The application of a 10% sensitivity to management estimates of the total costs to completion of all outstanding projects at the period end would result in an increase in assets by USD 7.8 million (H1 2018: USD 1.8 million) if the total costs to completion are decreased by 10% and a decrease liabilities by USD 1.4 million (H1 2018: USD 1.5 million) if the total costs to completion are increased by 10%.

Impairment of property, plant and equipment and intangible assets

Impairments tests of property, plant and equipment and intangible assets were performed as at 31 December 2018 and disclosed in Note 4.2.3 of the consolidated financial statements for the year ended 31 December 2018. IAS 36 - Impairment of Assets requires an impairment review if indicators exist at a reporting period. An indicator of impairment exists at 30 June 2019 in that the market downturn and instability in the oil and gas market continues to affect capital expenditure in the sector notwithstanding signs of recovery. This has had an impact on our backlog and utilisation of our assets attributable to the United Arab Emirates CGU notwithstanding an improved pipeline. Therefore, in view of this indicator, management has performed a full impairment review as at 30 June 2019 and the headroom amounts to USD 83 million. Based on this, no impairment has been recorded as at 30 June 2019.

In arriving at the headroom, we have updated the model with the latest inputs from the long term finance model including the key assumptions used in estimating the value in use of the cash generating unit as at 31 December 2018 - refer to Note 4.2.3 of the consolidated financial statements for the year ended 31 December 2018. The key assumptions and methodology remain the same as those used at year end other than changes to profiling of new awards and the effect this has on timing of revenue and cash flows.

Provision for warranty

Warranty provisions are recognised in respect of assurance warranties provided in the normal course of business relating to contract performance. They are based on previous claims history and it is expected that most of the costs in respect of these provisions will be incurred over the next one to two years. For first-of-a-kind projects, management makes use of a number of assumptions in determining the provision for potential warranty claims based on the scope and nature of work, confidence gathered from inspections and quality control during project execution and previous claim history for projects that closely mirror the type of works involved. Furthermore, in view of the final acceptance process for the EA1 jackets stated in Note 3.1, management has made a significant judgement after considering in depth technical evaluations and its' experts opinion with respect to the likelihood of occurrence of a future warranty claim and the expected remedial costs. Management believe the current warranty provision is reasonable and no additional warranty provision has been made as at 30 June 2019.

The application of a 10% sensitivity to management estimates of the provision for warranty claims would result in an increase in provision for warranty claims by USD 0.6 million or a decrease of USD 0.6 million.

4 Segment information 

The Group is organised into business units, which are the Group's operating segments and are reported to the Executive Directors, the chief operating decision maker. These operating segments are aggregated into three reportable segments - 'Rigs' and 'Engineering, Procurement, Construction & Installation [EPC(I)]' and 'Contracting Services' based on strategic objectives, similar nature of the products and services, type of customer and economic characteristics.

The Rigs segment contains business from New Build Jack Up rigs, land rigs and refurbishment. The EPCI segment contains business from foundations, process modules, offshore platforms, pressure vessels and engineering and construction (excluding site works). The Contracting Services segment comprises Site works, Operations and Maintenance, manpower supply and safety services.

Sales between segments are carried out on agreed terms. The revenue from external parties reported to the Executive Directors is measured in a manner consistent with that in the consolidated income statement.

The Executive Directors assesses the performance of the operating segments based on a measure of gross profit. The labour, project management and equipment costs are measured based on standard cost. The measurement basis excludes the effect of the common expenses for yard rent, repairs and maintenance and other miscellaneous expenses.

The Group uses standard costing method for recording labor, project management and equipment cost on project. Standard cost is based on an estimated or predetermined cost rates for performing an operation under normal circumstances. Standard costs are developed from historical data analysis adjusted with expected changes in the future circumstances. The difference between total cost charged to the projects at standard rate and the actual cost incurred are reported as under or over absorption.

The reconciliation of the gross operating profit is provided as follows:

The breakdown of revenue from all services is as disclosed in note 5.

Certain customers individually accounted for greater than 10% of the Group's revenue and are shown in the table below:

The revenue from these customers is attributable to the EPC(I) and contracting services segment.

The above customers in 2019 are not necessarily the same customers as in 2018.

5 Disaggregation of revenue

There was no revenue recognised at a point in time during the six months period ended 30 June 2019 and 30 June 2018.

The transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied), to be recognised over time, as at 30 June 2019 are, as follows:

6 General and administrative expenses

7 Earnings per share 

The calculation of the basic and diluted loss per share is based on the following data:

8 Property, plant and equipment

Depreciation expense of USD 10.6 million has been charged to cost of sales and USD 1.2 million to general and administrative expenses. This includes a depreciation charge on right-of-use assets of USD 2.4 million. Additions include USD 0.4 million pertaining to right-of-use asset recognised during the year. See note 2.3 for details regarding initial application of IFRS 16.

9 Investments accounted for using the equity method

 * Investment has been accounted to nil as share of losses exceed investment value.

10 Trade and other receivables

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12 Cash and bank balances

13 Inventories

The cost of inventories recognised as an expense amounts to USD 4.1 million (30 June 2018: USD 8.2 million) and this includes USD 2.5 million (30 June 2018: USD 3.1 million) in respect of write-down of inventory to net realisable value.

14 Related party transactions

The Group entered into the following transactions during the period with related parties at prices and on terms agreed between the related parties.

15 Share capital

There is no movement in issued and fully paid ordinary shares and share premium for the period ending 30 June 2019 and year ended 31 December 2018.

During 2019, Employee Benefit Trust ('EBT') acquired 54,972 shares (31 December 2018: 353,828 shares) of the Company. The total amount paid to acquire the shares was USD 43,658 (31 December 2018: USD 222,420) and has been deducted from the consolidated retained earnings. During 2019, 54,972 shares (31 December 2018: 353,828 shares) were issued to employees on vesting of the performance shares and 16,268 shares (31 December 2018: 16,268 shares) were held as treasury shares at 30 June 2019.

16 Other reserves

17 Trade and other payables

18 Contract liabilities

19 Derivative financial instruments

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

a. Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

b. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

c. Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The following table presents the Group's assets that are measured at fair value at:

There were no liabilities as at 30 June 2019 and 31 December 2018 measured at fair value.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.

There were no transfers between Level 1, 2 and 3 during the period.

There were no changes in valuation techniques during the period.

20 Borrowings

Repayments of borrowings amounting to USD 20.0 million were made during the period. Draw-down during the period amounted to USD 40.0 million. As at 30 June 2019, the Group borrowings amount to USD 40.3 million.

At 30 June 2019, the Group has banking facilities of USD 435.9 million (31 December 2018: USD 540.1 million) with commercial banks. The facilities include bank overdrafts, letters of guarantees, letters of credit and short-term loans. These are summarised below:

The Group facilities were scheduled to expire in August 2019. However, on 30 July 2019, the Group secured an extension to these facilities to 11 December 2019 and negotiations are ongoing with a syndicate of one local and one international banks to secure a new facility.

21 Dividends

There were no dividends declared or paid during the six months period ended 30 June 2019.

22 Commitments

(a) Operating lease commitments

At the reporting date, the Group had outstanding commitments under short-term operating leases, which fall due as follows:

Effective 1 January 2019, Operating lease commitments other than short-term leases have been accounted and disclosed as per IFRS 16. See note 2.3 for details.

(b) International Maritime Industries' commitments

In 2017, the Group has entered into commitments associated with the investment in International Maritime Industries. Under the Shareholders' Agreement, the Group will invest up to a maximum of USD 140.0 million in relation to its commitment over the course of construction of the Maritime Yard between 2017 and 2022 with USD 59.0 million already paid to date. The forecast contributions are as follows:

(c) Other commitments

23 Bank guarantees