Enteq Tech Regulatory News (NTQ)

Enteq Upstream plc

("Enteq", the "Company" or the "group")

Final results for the year ended 31 March 2014

Technology acquisition

Appointment of distributor in China.

AIM traded Enteq Upstream plc ("Enteq"), the oil & gas drilling technology company, today announces its financial results for the year ended 31 March 2014.

Financial metrics

Operational Highlights

· Like for like revenue growth of 24%

· New customers represent greater than 25% of total revenue

· Integration of product lines into full Measurement While Drilling System

o Sales of newly introduced systems represent 17% of total revenue

o Initial systems sales completed in Eastern Hemisphere

· Investment in technology, product & market expansion

Acquisition of drilling motor technology

Enteq has completed the acquisitions of assets and IP in relation to a drilling motor technology. The maximum total consideration payable will be $2.15m for the acquisition, of which $1.95m will be contingent on performance and payable over a maximum period of five years.

Appointment of Chinese distributor and significant initial order

Enteq has appointed Shanghai SK Petroleum & Chemical Equipment corporation, a publicly listed company in Shenzhen as an exclusive distributor for China with agreement for further co-operation. An initial order, for delivery within H1 FY 2014/15 of approximately $2m has been placed for demonstration systems and initial inventory.

Outlook

· Positive market sentiment regarding drilling rig utilisation and capital expenditure forecasts in North America

· New product lines and technology development will broaden addressable market

· Further market penetration expected in China, Middle East & Russia

· Outlook in line with expectations

Martin Perry, CEO of Enteq Upstream plc, commented:

 "Our results for the financial year ended March 2014 show pleasing like for like annual growth from a stabilised North American drilling market which is believed to have good prospects in 2014. Through investment in technology, product line extension and geographic diversification, Enteq continues to expand its customer offering and addressable market. We have been successful with early expansion of the business beyond North America, and the new agreement in China represents a significant opportunity. With the security of a strong balance sheet we continue to focus on growing the drilling technology business organically and through the addition of complementary product lines. "

For further information, please contact:

Enteq Upstream plc +44 (0) 1494 618741

Martin Perry, Chief Executive Officer

David Steel, Finance Director

Investec Bank plc (Nomad and Broker) +44 (0) 20 7597 4000

Chris Treneman, Patrick Robb, David Anderson

Vigo Communications Limited +44 (0) 20 7016 9570

Peter Reilly, Patrick D'Ancona

Notes:

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

2 Loss before tax includes a non-cash impairment charge in relation to acquired goodwill and intangible assets as described in note 6 to the financial statements.

3 Adjusted profit per share is reported profit per share adjusted for foreign exchange movements, amortisation and exceptional items.

The 2013 comparator figures are for the post-acquisition periods for XXT (10.5 months) and KMS (8.5 months).

Chairman's statement

Review of the Year

Enteq has delivered a year with 'like for like' revenue growth of 24% and a significant increase in adjusted EBITDA, from break-even to $1.9m, in line with expectations.

Market conditions during the financial year of 2013/14 have been stable in North America. Enteq products remain popular amongst the larger independent directional drillers and new customers have made up in excess of 25% of total revenues during the year under review,.

Enteq has continued the integration of its product lines into a fuller Measurement While Drilling system which incrementally addresses new customers in North America and in the Eastern Hemisphere. The sales of these newly introduced systems have represented 17% of sales during this period.

Cash balances, at the year-end, remained strong at approximately $19m and the business operations have been broadly cash neutral before investment in R&D, acquisition of fixed assets for new business initiatives and an increase in working capital as a result of high Q4 sales and strategic investment in inventory.

Reflecting the requirement to further improve performance from the current business segment, before potentially resuming a broader 'buy and build' strategy, some cost reductions in the central overheads and underperforming segments of the business have been made which will reduce the annualised run rate of overheads by approximately $1.5m.

David Steel has stepped up to the role of Finance Director during the year and has now been appointed to the board.

As noted in the Company's trading statement of 16 April 2014 the changed nature of the market for Enteq's parts and components business has required a non-cash impairment charge of goodwill and intangible assets related to the acquisition of KMS of $9.8m, leading to the statutory loss after tax of $11.6m for the full year.

Prospects

Enteq has entered the new financial year with some independent market reports forecasting increases in rig utilisation and capital expenditure in North America. Good incremental sales in the Eastern Hemisphere are being realised. The recent acquisition of the new drilling motor product line adds to the potential of the business.

Neil Warner

Chairman

Chief Executive's operating review

Market Overview

The market for directional drilling is driven by the commodity prices of Oil & Gas which dictate whether a well can be drilled and produced economically.

The oil price for WTI was $95 per barrel in April 2013 and $101 per barrel in March 2014. This mainly stable market for oil has enabled consistent and stable conditions for economic drilling in the oil fields. The gas price (Henry Hub index) was $4.2 per mbtu in April 2013 and $4.9 per mbtu in March 2014, with some seasonal, weather related variation, during the winter. These gas prices have not, however, supported a renewal of drilling for gas in the shale producing gas fields where existing production is meeting demand.

For Enteq, in excess of 90% of sales to date have been in North America where a good indicator of market conditions is the number of rigs drilling at any time. The average number of active drilling rigs in North America was 2,283 in 2012 and subsequently 2,136 in 2013 (a drop of 7%). Rig utilisation is independently forecast to increase in 2014.

The drilling of horizontal wells in North America, predominantly in shale fields, has become more efficient with wells being drilled in substantially shorter times (reductions from around 30 days in 2011 to 20 days for the equivalent well in 2013). The conditions for drilling have additionally become harsher and hotter.

Enteq has focused its product development and engineering on producing a high-specification product range with enhanced reliability in the harsh and high temperature drilling environments. A number of the larger independent directional drilling companies have adopted the Enteq range of products because of the reliability and longevity of the technology, They continue to migrate from older technology and upgrade and expand their fleet of equipment as the market demands.

New customers (representing in excess of 25% of 2013/14 revenues) have recognised the reputation of Enteq equipment. Additionally, through the integration of sensors, electronic and mechanical components into a complete system, Enteq has been able to provide a more complete solution; these system sales have represented 17% of total revenues during the year.

In China, where campaigns to drill in shale are at an early stage, higher temperatures are also being experienced hence creating an opportunity for growth in demand for Enteq's products.

In other international markets, Enteq's full system allows smaller, regional, companies to enter the directional drilling market and, as local indigenous companies, they should be able to gain market share within their own regional oil & gas companies.

In this stable market environment the Enteq management initiatives have resulted in a like for like increase in revenues of 24% to $24.6m during the year ended March 2014, resulting in an adjusted earnings per share of 2.2 cents ( 2012/13 : loss of 0.8 cents).

Product development and introductions

Enteq maintains a highly skilled team of development engineers centered in Santa Clara, California with skills in mechanical design, electronics, firmware engineering and software. In September 2013 a new Technology Manager was appointed and a number of new initiatives are now underway.

New commercial product releases during the year under review include a new data transmission device, interface protocols and updated software.

In addition to in-house engineering Enteq has also concluded 3rd party technology agreements for exclusive regional distribution of a logging while drilling resistivity technology, for enhanced supply agreement of a bespoke directional sensor and for technical advances to a specialized data acquisition hardware.

Organisation

Enteq has added to the highly skilled and professional management and staff in the business during the last financial year whilst also ensuring the Company's overheads are suitable for the scale of the business. Some central overhead, and overhead in the manufacturing business (KMS), have been reduced. Further integration of the acquired businesses has allowed the management structure to be developed. The annualised run rate of overhead has been reduced by a total of $1.5m.

Appointment of exclusive Chinese distributor

Since the financial year end, Enteq has agreed a strategic partnership with Shanghai Shenkai petroleum & chemical equipment corporation ltd., a publicly traded company in Shenzen. Shenkai is a manufacturer and supplier of geo-physical equipment in China and other territories with considerable proven successful relationships within the potential market for Enteq products. Shenkai will act as exclusive distributor for Enteq's products and will co-operate in developing technologies specifically adapted to the Chinese market. Shenkai will also support Enteq in developing supply channels in China. An initial order, for delivery within H1 FY 2014/15 of approximately $2m has been agreed by Shenkai for demonstration systems and initial inventory.

Further investment

No further acquisitions were made during the year ended 31 March 2014, however, investment has continued into the in-house development of new technology and in 3rd party agreements.

A total investment of approximately $4.4m was made during the year in technology development, a fleet of demonstration/rental equipment, finished goods stocks and some fixed assets.

Investment in inventories of systems and finished products has allowed faster delivery and assisted with new customer gains.

Enteq continues to evaluate potential acquisitions, however, the Board considers that the current cash reserves are likely to be better used for enhancing the organic growth of the Company and investing in complementary technologies and products where strong returns from the immediately addressable market can be achieved.

Acquisition of drilling motor technology

Subsequent to the year end the acquisition of assets and technology for a product range of drilling motors has been made for a possible maximum consideration of approximately $2.15m, of which $1.95m is contingent on performance.

Drilling motors are a complementary product line to the current Enteq Measurement While Drilling systems which can be sold to the same customer base on a global basis. The product line has been developed with and operated by major oil companies in North America and has successfully drilled in excess of 120 wells. The product line will need further development and investment over the next 12 to 18 months.

Summary

Enteq has delivered a like for like increase in revenues of 24% to $24.6m during the year ended March 2014, resulting in an adjusted earnings per share of 2.2 cents (2012/13: loss of 0.8 cents). The growth has resulted from the introduction of a new integrated measurement while drilling system representing 17% of sales, new customers representing greater than 25% of sales and initial international sales representing approximately 7% of Sales.

The year has allowed for further integration of the acquired businesses and technology, delivery of new products and improvements in market share in North America. The Group is better placed to deliver reliability and support to our customers in a harsher drilling environment. Enteq has also made its first direct sales into the Middle East and Russian markets, and with the recent appointment of Shenkai as strategic partner in China is poised to develop the potential of the Chinese market. The acquisition of the drilling motor product line demonstrates further steps to broaden the addressable market and products offered within the directional drilling market.

Martin Perry

Chief Executive Officer

Financial review

Introduction

The comparative figures for the period to 31 March 2013 incorporates 10.5 months trading for XXT and 8.5 months for KMS together with a full year of central operating costs.

Results

The total revenue for the year was predominantly sensor, electronic and mechanical component sales, however, 17% of revenue related to sales of complete systems. The overall gross margin was 40%, down from 43% for the previous trading period, reflecting the move of the product mix towards system sales. Whilst each system reflects a higher unit value, when compared to component sales, the margins are lower due to the inclusion of third party components.

The contingent consideration balance of $3.4m on the balance sheet as at 31 March 2013, related to payments due to the vendors on the acquired businesses if various performance targets were met during the second year from the date of acquisition. None of these targets were met and, hence the full amount has been released, this year.

Amortisation is charged in respect of the acquired intangible assets and is charged over their estimated useful lives which are set out more fully in note 6 to the financial statements.

Management carefully reviews the carrying value of goodwill and other intangible assets arising on acquisitions. This process involves 'impairment testing' in which the carrying value of all intangible assets is compared to the net present value of the expected future cashflows which derive from the acquired businesses. The Board has concluded that these tests demonstrate that, primarily, due to the increased level of competition in the North American market, the intangible assets and goodwill associated with the KMS acquisition requires an impairment charge of $9.8m. The intangible assets and goodwill associated with the XXT acquisition remain unchanged.

The foreign exchange gain results from the movement in the GBP/USD exchange rate on the GBP cash balances held by Group. These GBP denominated holdings are now less than 5% of total cash holdings.

Statement of Financial Position

The Group's assets and liabilities at the year-end were as follows:

The reduction in both Goodwill and Intangibles relate to the previously referred to impairment charge of $9.8m plus the underlying amortization charge.

The increase in net working capital reflects both an increase in trade receivables, due to the high level of systems sales towards the year end and an increase in inventory, reflecting the management decision to hold more finished goods ready for immediate delivery.

Cash flows

Central overheads were reduced during the year. The group produced operating cash significantly ahead of the previous year's figure.

The increase in working capital was primarily due to the increase in trade receivables, referred to above. The $4.4m investment figure includes $2.2m of demonstration systems equipment and increased finished goods holdings to ensure faster responsiveness to customer demand. This $2.2m is shown within the "increase in inventory" caption of the consolidated Statement of Cash Flows.

The $15m Revolving Credit Facility in place with HSBC as at 31 March 2013 was incurring non-utilisation charges and was subsequently relinquished on 18 December 2013, in order to reduce central overheads.

The Group's financial position is robust. The Group had no bank borrowings or other debt and had a closing cash position of $18.8m as at 31 March 2014.

Annual Report and Accounts

The 2014 Annual Report and Accounts and a Notice of its Annual General Meeting will be posted out to shareholders shortly. The Annual Report and Accounts and the Notice of its Annual General Meeting will be available on the Company's website, www.enteq.com.

Annual General Meeting

The Company's Annual General Meeting will be held on 11 September at 10.00am at 2 Gresham Street, London EC2V 7QP. The documents being sent to shareholders shortly, in connection with the Company's Annual General Meeting, are:

· Report and Accounts for the year ended 31 March 2014;

· Notice of Annual General Meeting; and

· Proxy card.

Copies of these documents can also be obtained during normal business hours at the registered office of the company:

The Courtyard

High Street

Ascot

Berks SL5 7HP

David Steel

Finance Director

Enteq Upstream plc

Consolidated Statement of Changes in Equity

Enteq Upstream plc

Consolidated Statement of Cash Flows

Notes to the consolidated financial statements

1. BASIS OF PREPARATION

The results for the year ended 31 March 2014 have been prepared using the accounting policies and methods of computation consistent with those used in the Group's annual report for the year ended 31 March 2013. The results have also been presented and prepared in a form consistent with that which will be adopted in the Group's annual report for the year ended 31 March 2014 and in accordance with the recognition and measurement requirements of the International Reporting Standards as adopted by the European Union.

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 March 2014 and the year ended 31 March 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to Companies House. Those for the year ended 31 March 2014 will be delivered following the Company's Annual General Meeting on 11 September 2014.

The financial information has been extracted from the Group's Annual Report for the year ended 31 March 2014. The auditors have reported on these accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006. The Group intends to publish its 2014 Annual Report and Accounts in June 2014.

2. SEGMENTAL REPORTING

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

The principal activities of the Drilling Tools division is the design, manufacture and selling of specialised parts and products for Directional Drilling and Measurement While Drilling operations for use in the energy exploration and services sector of the Oil and Gas industry.

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

3. PROFIT AND LOSS ANALYSIS

The following analysis illustrates the performance of the Group's activities, and reconciles the Group's profit, 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. The adjusted earnings before interest, taxation, depreciation and amortisation ("adjusted EBITDA") is also presented as it is a key management metric.

The other exceptional items result from either from non-recurring transactions or acquisition related costs. The total can be analysed as follows:

The release of contingent consideration results from a review of the likelihood of the "trigger points" for payment to the vendors of the two acquired businesses being achieved. The trigger points for XXT related to revenue growth and the commercialisation of various new products, whereas for KMS they related to revenue growth only. In the view of the senior management, at the date of these accounts, in neither instance are all the trigger points likely to be reached. Thus, in accordance with IFRS3 (revised), the corresponding elements of the initial contingent consideration have been released to the Profit and Loss account. This is on the basis that the factors influencing the achievability of these trigger points have changed since the date of acquisition.

4. INCOME TAX

Analysis of tax expense

No liability to UK corporation tax arose on ordinary activities for the period.

Factors affecting the tax charge

The tax assessed for the period is different from to the standard rate of corporation tax in the UK. The difference is explained below:

There has been no deferred taxation recognised in these financial statements due to the uncertainty surrounding the timing of the recovery of these amounts. The total losses available to the Group in the relevant tax jurisdictions are as follows: UK $3.3m; United States $6.6m (2013: UK $3.0m; United States $3.5m). There were no significant deferred tax liabilities.

5. EARNINGS PER SHARE AND DIVIDENDS

Basic earnings per share

Basic earnings per share is calculated by dividing the loss attributable to ordinary shareholders for the year of $11,573k (Year to 31 March 2013: loss of $709k) by the weighted average number of ordinary shares in issue during the year of 58,954k (31 March 2013: 53,178k).

Adjusted earnings per share

Adjusted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders, excluding exceptional items, amortisation of intangible assets and foreign exchange profits or losses for the year of a profit of $1,297k (Year to 31 March 2013: loss of $416k), by the weighted average number of ordinary shares in issue during the year of 58,954k (31 March 2013: 53,178k).

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 and the adjusted diluted EPS the same as adjusted EPS.

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 below.

March 2014:

March 2013:

During the year Enteq Upstream Plc did not pay any dividends (2013: nil).

6. INTANGIBLE ASSETS

a) Goodwill

b) Other Intangible Fixed Assets

Other intangible assets by cash generating unit ("CGU") (see below):

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 various trading names 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.

Goodwill and Impairment

The Group tests goodwill annually for impairment. The impairment test carried out on the balances as at 31 March 2014 indicated that there was an impairment relating to the goodwill and intangibles assets associated with the KMS CGU. This resulted from slower growth rates for both revenue and gross margin when compared to the impairment test assumptions used at 31 March 2013. These reductions are due to a more competitive market for KMS products, which is predominantly within North America. The total impairment has been calculated at $9.8m and has been allocated as follows:

The impairment charge has been allocated on the basis that the carrying value of both developed technology and non-compete agreements, relating to the KMS CGU, is zero. This is due to certain events that have occurred post acquisition that indicate that both these categories no longer have any intrinsic value.

No impairment is required for the XXT CGU.

The recoverable amounts of the CGUs are determined from value in use calculations. For both CGUs, the key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessment of the time value of money and the risks specific to the CGUs. The growth rates are based on management forecasts for the four years to March 2018. Cash flow forecasts are prepared from the most recent financial plans approved by the Board.

The forecasts for XXT assume annual growth rates between 15% and 33% until 2018 and nil thereafter in the long term. The forecasts for KMS assume annual growth rates between 12% and 34% until 2018 and 2% thereafter in the long term.

.

These long-term growth rates do not exceed the long-term average growth rates for the industry as a whole.

The forecasts used for the period up to March 2018 show significant growth rates for both XXT and KMS. These growth rates are supported by the following, which impact on both companies (unless otherwise stated):

The pre-tax rate used to discount cash flow forecasts is 15.7% for both KMS and XXT. Management regard these discount rates as being appropriate for each CGU. They are a result of the risks and markets each CGU operates within as well as the stage of maturity of each business. They are based on analysis of similar companies within the sector in which they operate.

The goodwill, as at 31 March 2014, of $15.1m relates to certain assets within the XXT business that cannot be separately identified due to their nature. These items include sector knowledge and the anticipated future profitability that the Group can bring to the businesses acquired.

The Group has conducted a sensitivity analysis which analyses the impact on key impairment test assumptions arising from a range of factors that could affect trading and economic scenarios. The following sensitivity tests were run:

· An increase in the discount rate of 1% for both CGU's; and

· A decrease of 5% on forecast revenues, with no offsetting cost savings, over the four years ending March 2018.

The first test indicates no impairment for XXT, but a further impairment of $0.6m relating to KMS. The second test indicates no impairment for XXT, but a further impairment of $0.3m relating to KMS

The factors relating to the release of the contingent consideration do not result in impairment due to the relatively short term nature of the factors influencing the triggering of the payments.

Intangible assets

The intangible assets acquired during the year represent their fair value at the date of acquisition.

Amortisation

All categories of intangible assets, apart from Goodwill, are being amortised over their respective useful lives, on a straight line basis. These are:

Brand names 5 - 20 years

Customer relationships 11 - 13 years

Developed Technology 4 - 7 years

IPR&D Technology 7 years

Non-compete agreement 5 years

7. GOING CONCERN

After considering the current financial projections of the Group and taking into account the cash needs of the business and availability of funds, the Directors have a reasonable expectation that the group has adequate resources to continue its operations for the foreseeable future. For this reason, they continue to adopt a "going concern" basis in preparing the Statement of Annual Results.

8. RESPONSIBILITY STATEMENT OF THE DIRECTORS

To the best of the knowledge of the Directors (whose names and function are set out below), the preliminary announcement which has been prepared using accounting policies and methods of computation consistent with those used in the Group's annual report for the year ended 31 March 2013 and adopted for the financial year ended 31 March 2014, gives a true and fair view of the assets, liabilities, financial position and profit for the Company and the undertakings included in the consolidation taken as a whole; and

Pursuant to Disclosure and Transparency Rules, Chaplet 4, the Directors' Report of the Company's annual report will include a fair review of the development and performance of the business taken as a whole, together with a description of the principal risks and uncertainties faced by the business.

Executive Directors

Raymond Garcia Chief Operating Officer

Martin Perry Chief Executive Officer

David Steel Finance Director

Non-Executive Directors

Neil Warner Chairman

Iain Paterson

Robin Pinchbeck