Enteq Tech Regulatory News (NTQ)

Enteq Upstream plc

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

Final results for the year ended 31 March 2015

AIM traded Enteq Upstream plc ("Enteq"), the oil & gas drilling technology company, today announces its financial results for the year ended 31 March 2015.

Key features

· First half financial results showed progressive growth

· Second half was materially impacted by substantial reduction in drilling rigs operating in North America

· Full year revenue reduction of 25%

· Sales outside North America increased from $1.2m to $3.2m (5% to 17% of total)

· Continued investment in technology & product line expansion

· Normalised overhead1 reduced by 13% on an annualised basis

· Post year-end run rate indicates a total overhead reduction of 43%,

· Cash balances maintained during the second half and post year end.

Financial metrics

Years ended 31 March:

Outlook

· Uncertain oil price future continues to drive reduced drilling rig utilisation and capital expenditure forecasts in North America

· New product lines and technology development will broaden addressable market

· Further market penetration anticipated in Far East, Middle East & Russia

· Focus on cash conservation during period of unprecedented market uncertainty

Martin Perry, CEO of Enteq Upstream plc, commented:

"The 2014/15 Financial Year showed a good progression in market share increase and growth during the first half. During the second half the oil price collapse and subsequent severe rig count reduction in North America drove material cost savings and re-focusing in order to preserve cash and underlying operating profitability. Overall the trading was in line with expectations. Penetration of the international markets has been pleasing, as has the completion of some further technology agreements and developments. Enteq's strong cash balance, that currently stands at $14.8m, and continuing tight cost management, combined with its competitive technology, means that we are well positioned to benefit from any market recovery."

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

1 Normalised overheads is reported administration expenses before amortisation adjusted for depreciation, bonus charges, R&D costs, PSP charges and provisions.

2 Underlying adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements, provisions and exceptional items.

3Adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements and exceptional items.

4Loss 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.

5Adjusted profit per share is reported profit per share adjusted for foreign exchange movements, amortisation and exceptional items.

Chairman's statement

Review of the Year

As a result of a severe oil price reduction and subsequent rig count reduction of 59% in North America (2,400 rigs in March 2014 as against 984 Rigs in May 2015, (source: Baker Hughes) Enteq's revenues reduced by 25% to $18.5m, from $24.m. The impact of the dramatic change to the industry is disappointing given the revenue progress we had made in the first half of the financial year.

A positive underlying adjusted EBITDA has been preserved, at $0.1m, down from $1.9m in the previous year. We have focused on preserving our cash balance which as at 31 March 2015 was $14.1m, slightly up from the $13.8m as at 30 September 2014. The balance was down from the 31 March 2014 position of $18.8m due to investment in research & development, an increase in rental assets and working capital. In order to achieve this, overheads have been carefully managed, with a full year normalised overhead run-rate reduction of 13%; the reduction from the first half of 2013/14 in comparison with the second half of 2014/15 is 23%. Further overhead reductions during the second half indicate a current half yearly run-rate of $2.5m, an overall reduction of 43%.

The results were in line with the Board's expectations, which were re-set after the indications of oil price and rig count reductions in January 2015.

Enteq products have maintained market share and customer loyalty through the year, whilst excess capacity has significantly reduced repeat orders in the second half 2014/15.

Sales outside North America of $3.2m represents 17% of total sales in the year ending 2014/15, against 5% in 2013/14.

Enteq has continued to evolve and add to its product lines, now marketing a broader Measurement While Drilling and directional drilling product line. The acquisition of a mud-motor product line, announced in June 2014 was completed during the financial year and a technology and distribution partnership agreement for an Electro-magnetic transmission system has been completed since the end of the financial year.

Cash balances, at the year-end, remained strong at $14.1m 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 rental inventories.

Reductions in overheads have been made across all segments of the business and were initiated rapidly after the reducing oil price, in October/November 2014, signaled a likely significant down-turn in drilling activity. Consolidation of all Enteq's operations, facilities and central management has taken place. As a result the work force has reduced from 94 as of 30 March 2014 to 56 at the end of March 2015.

Enteq's employees all deserve recognition for their ongoing commitment and achievements over the last year during difficult market conditions.

As noted in the Company's year end update of 29 April 2015, the changed nature of the market for Enteq's products has required a non-cash impairment charge in respect of goodwill and intangible assets of $39.5m leading to a statutory loss after tax of $47.2m for the full year.

Prospects

The world macro-economic conditions of supply and demand in the oil & gas sector continue to create an uncertain environment for North American drilling. An excess of capacity in the market, combined with an ongoing reduced rig count, will delay any short term recovery from a strengthening oil price. Enteq continues to invest in both its operations and customer base in the Eastern Hemisphere and enhance its product line. Enteq's strong cash balance and continuing tight cost management, combined with its competitive technology, means that the Company is well positioned to benefit from any market recovery.

Neil Warner

Chairman

Chief Executive's operating review

Market Overview

Enteq supplies equipment and technology to the oilfield services markets for directional drilling. The equipment supplied is known as Measurement While Drilling equipment.

Directional drilling is carried out in order to extract Oil & Gas as efficiently as possible, in particular from shale rock formations when subsequent completion and fracking operations are carried out to release the hydrocarbons.

Directional drilling is carried out by major service companies such as Schlumberger, Halliburton and Baker Hughes, as well as smaller dedicated directional drilling specialists. The major service companies are generally vertically integrated, developing and operating equipment that they design for their own use. The smaller directional drilling specialists generally purchase equipment from 3rd party suppliers such as Enteq.

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 $101 per barrel in March 2014, $90 in September 2014 and $52 in March 2015. The dramatically reduced oil price has caused the North American rig count to reduce from 2,400 rigs in March 2014, maintained at around 2,300 in September 2014, to 984 by May 2015, a reduction of 59%.

Measurement While Drilling equipment such as that provided by Enteq, is directly related to the rig count, as each set of equipment will be utilised on one rig. Although there is a natural replacement cycle of equipment, estimated at approximately 20% per year, in a time of spare capacity due to overall lack of utilisation, that spare capacity will be used to fill the on-going replacement demands.

The North American (Henry Hub) gas price has also reduced, from $4.9 per mbtu in March 2014 to around $2.9 per mbtu during the 3 months to March 2015.

The market outside North America has also been affected by the reduced commodity prices, but with a less dramatic immediate reaction. The International rig count (not including China) has reduced from 1,325 rigs in March 2014 to 1,258 in March 2015. Data is not published in China, but there has also been a slowdown in activity in China due to commodity pricing and internal political issues (all rig count numbers sourced from Baker Hughes).

Enteq's addressable markets

Enteq's short term addressable market in North America will be limited by the overcapacity in the market. Enteq's customer base does however include the larger of the independent operators (outside the "Majors": Schlumberger, Halliburton, Baker and Weatherford) who continue to maintain market share and upgrade their fleet of equipment in order to protect their capabilities.

Through technology development and partnership, Enteq continues to broaden their capability and expand the market that can be addressed.

Outside North America, in some markets, the broader range of technology is a pre-requisite to compete with the 'Majors', and Enteq is advancing their capabilities in this area.

Market penetration in China, Middle East and Russia continues to show further opportunity.

Competition

Other third party suppliers of MWD equipment will have been equally affected by the market conditions and Enteq has seen new market entrants developing niche products.

Enteq continues to differentiate its products through the fundamental reliability and strength of its system. Any failure during a drilling operation can cause significant financial losses to the operator. The Enteq system has been designed, and is continually improved, with an awareness of redundancy, all possible failure modes and robustness of design and build. Reliability records remain very strong.

Enteq also continues to supply spare parts and components both for the Enteq internal systems and for third parties. The competition in this area remains high from other mechanical manufacturing facilities in USA, Canada, and from suppliers in China.

Product development and introductions

Enteq maintains a highly skilled team of development engineers centred in Santa Clara, California, with support from field engineers based in Houston but operating internationally.

Enteq is also actively making agreements with third party suppliers of technology and integrating these developments on to the Enteq platform.

During the financial year, Enteq acquired some IP and assets related to drilling motor technology, confirmed agreements for integration of a resistivity tool, and after the year end, has confirmed a co-operation agreement for a unique Electro Magnetic transmission technology.

Sales & Marketing

Enteq maintains a marketing profile promoting the high end capability of Enteq products. Enteq exhibited at the International Association of Drilling Contractors / Society of Petroleum Engineers conference in London as well as the Offshore Technology Conference in Houston.

The North American sales team, based in Houston, represents the full Enteq product range with support from an experienced technical team. International sales are generated from the UK, with a dedicated resource in China and representatives in key markets with opportunity.

Acquired assets and IP

An acquisition of assets and IP/ designs for a product range of drilling motors was made for in June 2014 for a possible maximum consideration of approximately $2.15m, of which $1.95m is by way of a royalty payment stream related to sales made. Some of these assets have subsequently been sold, covering the initial cash investment in this project, however considering current market conditions, the follow-on investment needed to fully exploit this opportunity has not been made.

Investment in inventories of systems, finished products and inventory for rental was increased during the first half of the financial year, however in the second half a focus on sales of current inventories was introduced.

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 where strong returns from the immediately addressable market can be seen.

Future strategic direction

The Board believes that when the North American market stabilises again, Enteq is well placed for recovery and subsequent organic growth. Outside North America, Enteq should continue to gain market penetration based on product introduction, technological capability and relationships.

Enteq continues to believe in the longer term strategy of further acquisitions in the global technology supply chain for oilfield services in order to develop a well-integrated and differentiated, balanced Company.

Conclusion

The 2014/15 Financial Year showed good progression in market share increase and growth during the first half, followed by the need for immediate and dramatic reductions, cost savings and re-focusing during the second half of the year in order to preserve cash and profitability. Penetration of the international markets has been pleasing given the requirement for further technology agreements and development. Enteq remains well placed for any market recovery.

Martin Perry

Chief Executive Officer

Financial review

Results

The year to 31 March 2015 was very much a year of two halves. Due to the dramatic reduction in the price of WTI from September 2014 onwards and its impact on, primarily, our North American customer base, an encouraging H1 revenue of $13.6m has been followed by a very disappointing H2 figure of $4.9m, giving a full year total of $18.5m. International sales (those outside North America) rose from $1.2m in the year to 31 March 2014, to $3.2m this year. This increase was primarily due to the system sales to new customers in both China and the Middle East. The H1 gross margin was 40%, but due to a change of the product mix towards the lower margin mechanical components, the H2 gross margin was only 30%. The full year gross margin was 37%, down from 40% for the previous year. Total overheads, at $6.8m, were down $1.1m on the previous year's figure. This was, primarily, down to prompt senior management actions to reduce costs, once the full impact of the reduction in the price of oil on our customer base became apparent.

The oil price reduction during H2 has put a serious strain on the cashflows of a number of our customers. In recognition of this fact, a bad debt provision of $0.9m has been taken at the year end. We are in regular contact with these customers to ensure that this exposure is minimised.

Amortisation is charged in respect of the acquired intangible assets and is charged over their estimated useful lives.

The "Other charges" included in the ongoing operating loss for the year includes the non-cash charge relating to the new Performance Share Plan.

At the end of each financial year, management reviews the carrying value of goodwill and other intangible assets. 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 these assets. The Board has concluded that these tests demonstrate that due to the impact the oil price reduction has had on our customer base, combined with the uncertainty over how long this level of oil price is likely to last, the carrying value of both the intangible assets and goodwill need to be fully impaired. As a consequence, the profit and loss account includes a non-cash impairment charge of $39.5m.

The foreign exchange gain results from the movement in the GBP/USD exchange rate on the GBP cash balances held by the Group.

Statement of Financial Position

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

The reduction in both Goodwill and Other Intangible assets relate to the impairment charge of $39.5m plus the annual amortisation charge as set out above.

The small increase in net working capital reflects a decrease in trade receivables, due to the "unwind" of the high level of cash due relating to sales made in H1, countered by an increase in inventory and reduction in creditors.

Cash flows

Whilst the total cash outflow in the year was $4.7m, the closing cash balance of $14.1m is $0.3m higher than the position as at 30 September 2014. This reflects the senior management's concentration on preserving cash since the major reduction in oil prices.

The positive change in operational working capital was primarily due to the decrease in trade receivables, referred to above. The $5.9m investment figure includes $1.9m of rental fleet assets, $1.1m of R&D spend and $2.3m of increased finished goods holdings to ensure faster responsiveness to customer demand in an increasing competitive environment. This $2.3m change in finished goods is shown within the "Increase in inventory" caption of the consolidated Statement of Cash Flows.

Financial Capital Management

The Group's financial position is robust. The Group had no bank borrowings or other debt and had a closing cash position of $14.1m as at 31 March 2015.

The Group monitors cash balances and movements daily and operates under treasury policies and procedures which are set by the Board.

The financial statements are presented in US dollars as the Company's primary economic environment, in which it operates and generates cash flows, is one of US dollars. Apart from its UK based overhead costs, substantially all other transactions are transacted in US dollars.

The Group is subject to the foreign exchange rate fluctuations to the extent that it holds non-US Dollar cash deposits. These GBP denominated holdings are now approximately 3% of total cash holdings.

Annual Report and Accounts

The 2015 Annual Report and Accounts and a Notice of its Annual General Meeting has been sent to shareholders and is available on the Company's website, www.enteq.com.

Annual General Meeting

The Company's Annual General Meeting will be held on 15 September 2015 at 12.00 noon at the offices of Investec Bank plc, 2 Gresham Street, London EC2V 7QP. The documents sent to shareholders in connection with the Company's Annual General Meeting, are:

· Report and Accounts for the year ended 31 March 2015;

· 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

Enteq Upstream plc

Consolidated Statement of Changes in Equity

Enteq Upstream plc

Consolidated Statement of Cash Flows

Enteq Upstream plc

Notes to the consolidated financial statements

1. BASIS OF PREPARATION

The results for the year ended 31 March 2015 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 2014. 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 2015 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 2015 and the year ended 31 March 2014, but is derived from those accounts. Statutory accounts for 2014 have been delivered to Companies House. Those for the year ended 31 March 2015 will be delivered following the Company's Annual General Meeting on 15 September 2015.

The financial information has been extracted from the Group's Annual Report for the year ended 31 March 2015. 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 2015 Annual Report and Accounts in June 2015.

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.

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. A key measurement used by the board is Adjusted EBITDA. This reconciliation is included in note 3, below.

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

All of the group's revenue arise from the sale of specialised parts and products for Directional Drilling and Measurement While Drilling operations.

The group had no customers that contributed in excess of 10% of the group's total sales for the year (2014: none). No revenue relates to customers based in the UK (2014: none).

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 consolidated income statement, to adjusted earnings. Adjusted earnings and underlying adjusted earnings are presented to provide a better indication of overall financial performance and to reflect how the business is managed and measured on a day-to-day 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:

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 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 $6.7m (2014: UK $3.3m; United States $6.6m). 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 $47,227k (31 March 2014: loss of $11,572k) by the weighted average number of ordinary shares in issue during the year of 58,954k (31 March 2014: 58,954k).

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 loss of $1,854k (31 March 2014: profit of $1,298k), by the weighted average number of ordinary shares in issue during the year of 58,954k (31 March 2014: 58,954k).

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 year end share price is below the option price of all the options issued, 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 2015:

March 2014:

During the year Enteq Upstream Plc did not pay any dividends (2014: nil).

6. INTANGIBLE ASSETS

a) Goodwill

b) Other Intangible Assets

There is deemed to be two cash generating unit ("CGU's") within the company.

The main categories of Intangible 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 and other intangible assets annually for impairment. The impairment test carried out on the balances as at 31 March 2015 indicated that there was an impairment of the full carrying value of both goodwill and intangibles assets. This is due, primarily, to the dramatic weakening in the price of WTI ("West Texas Intermediate") oil during the period October 2014 to February 2015. This in turn has led to a reduced demand on the North American independent drillers who, thus, have significantly cut back on both their capital expenditure on new drilling rigs and operating expenditure on their current rig fleet, which are the main routes to market for Enteq products. The total impairment has been calculated at $39.5 million and is summarised as follows:

The recoverable amounts of the CGUs are determined from value in use calculations. 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 CGU. The growth rates are based on management forecasts for the five years to March 2020. Cash flow forecasts are prepared from the most recent financial plans approved by the Board.

The forecasts assume annual growth rates between 1% and 5% until 2020 and nil 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 pre-tax rate used to discount cash flow forecasts is 13.1% (2014: 15.7%). Management have based this rate on the following factors: a Risk Free Rate of 2.5%; a levered equity beta of 1.5; a market risk premium of 5.5%; a small cap premium of 3.81% and an implied cost of debt of 4.53%.

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 2014 and adopted for the financial year ended 31 March 2015, 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

Martin Perry Chief Executive Officer

Raymond Garcia Chief Operations Officer

David Steel Finance Director

Non-Executive Directors

Neil Warner Chairman

Iain Paterson

Robin Pinchbeck