Enteq Tech Regulatory News (NTQ)

Enteq Upstream plc

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

Final results for the year ended 31 March 2020

AIM traded Enteq Upstream plc, the oil and gas drilling technology company, today announces its results for the year ended 31 March 2020.

Financial metrics

Years ended 31 March ($m):

Key features

· Growth in both revenue and adjusted EBITDA*

· International revenue up from 9% to 30% of total

· Adjusted EBITDA* margin up from 24% to 28%

· Continued investment in new technologies and rental fleet

· Recent downturn in global markets reflected in major write-down of intangible assets ($4.2m) and inventory ($2.7m)

Outlook

· US markets uncertain of short-term recovery; oil price stabilisation will support international opportunities 

· Focussed investment in new technology

· Emphasis on maintaining a strong balance sheet

Martin Perry, CEO of Enteq Upstream plc, commented:

"Enteq is well positioned to support current activities for the foreseeable future. In addition, Enteq will maintain investment in potential game-changing technology which has the potential to address the demands for reduced costs in the future drilling environment. Even in a medium term, reduced oil price, post Covid-19, world there will continue to be a demand for hydrocarbons and increased efficiency in drilling will be needed for the industry.

With a strong balance sheet and a continued appetite to invest in focused new product development Enteq is well positioned to benefit from a return to market stability."

1 Adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements, Performance Share Plan charges and exceptional items. See note 3.

2 Ongoing operating loss is reported profit before tax adjusted for interest and exceptional items.

3 Adjusted post tax loss per share (cents) is reported profit before tax adjusted for amortisation foreign exchange movements and exceptional items divided by the weighted average numbers of ordinary shares in issue.

For further information, please contact:

Enteq Upstream plc +44 (0) 1494 618739

Martin Perry, Chief Executive Officer

David Steel, Finance Director

Investec Bank plc (Nomad and Broker) +44 (0) 20 7597 5970

Chris Treneman, Patrick Robb, David Anderson

Combined Chief Executive and Chairman's report

Review of the Year

This year's financial results show growth in both revenue and adjusted EBITDA. Revenue increased by 7% to $10.9m, primarily due to international revenue rising from $1.0m in the year to March 2019 to $3.2m this year. The North American market experienced a challenging year with revenue falling from $9.2m to $7.7m, primarily due to the oilfield services companies concentrating on reducing their debt burden, with a rapid decline in revenues since the outbreak of the virus pandemic and dramatic oil price reductions. Adjusted EBITDA has risen to $3.1m (March 2019: $2.5m) and represents a margin of 28%, up from 24% last year. Operating activities produced a positive cashflow of $0.9m. Overall, however, the cash balance reduced by $1.7m during the year to $10.2m, due to continued investment in technology, engineering and rental assets.

In mid-March 2020, a combination of reduced oil demand, due to the outbreak of COVID-19 virus, and increased oil production by both Saudi Arabia and Russia saw a dramatic shift downwards in the oil price. The price of a barrel of West Texas Intermediate ("WTI") dropped from $41 on 6 March to $14 on 30 March. This raised questions regarding the sustainability of the United States based shale oil drilling and production business model. US oilfield services companies embarked on major cost and cash saving measures including laying off staff and freezing both capex and any discretionary opex spend.

Enteq responded quickly to this major reduction in demand for all its product lines by reducing the US workforce by approximately 60%, releasing all US based contract staff and curtailing all discretionary spend. In addition, in order to further conserve cash, all Board members have agreed to take a significant proportion of their remuneration in new Enteq shares.

In recognition of the uncertain market conditions in both the short and medium term, these reported results contain an exceptional write off of previously capitalised costs of developing new products that are no longer deemed commercially viable of $4.2m (held within intangible assets) and a $2.7m write down of specific products held in inventory.

During this financial year the Group's USA focussed rental model continued to be a major proportion of the total group revenue at 44%, up from 35% last year. Pleasingly, all kits were revenue earning during the year, with no kits being returned before the end of their contractual rental period. During the year the number of kits held in the fleet reduced from 32 to 17; the remaining kits being held in the balance sheet at a value of $1.0m (March 2019: $3.4m).

Prior to the global slow-down, positive gains were made in the International markets with revenue rising from $1.0m to $3.2m. The dominant geographical market was China, which represented 84% of the total international revenues. Although the effect of the virus in China slowed all activity during the last quarter, new negotiations and supply contracts are again under discussion. During the year a supply agreement and partnership was re-negotiated in Saudi Arabia, where a separation, re-registering and reclaim of equipment was concluded with a previous agent. A new partner has been found and appropriate agreements signed. This will enable renewed focus on the Saudi market, concentrating on suppling equipment to Saudi Aramco.

 A significant new technology license agreement was announced in September 2019 with Shell Global Solutions. This license grants Enteq exclusive rights to the IP and know-how generated by Shell relating to a novel rotary steerable drilling technology. A rotary steerable system offers significant advantages over traditional directional drilling techniques by allowing for faster drilling, longer lateral distances, creation of a more manageable well and cost efficiencies. 

The rotary steerable market is currently dominated by the major suppliers, such as Schlumberger, BakerGE and Halliburton, whom, it is estimated, currently account for more than 75% of the global market. After recent price adjustments the global market for Rotary Steerable related work in 2021 is still estimated to be greater than $2bn.

The Shell Rotary Steerable System, which had been developed through to initial prototype testing, delivers significant advantages of efficiency and lower operating costs. The arrangement with Shell is royalty based, as outlined in the agreement announcement of September 2019 and Enteq is on-track with the re-engineering efforts, based in the UK, for new prototype tools to be in test during 2021. Enteq has submitted their first, satisfactory, progress report to Shell regarding the work competed to date which includes validation of key principles, design review of requirements for a reliable down-hole tool and significant modelling of force mechanisms. Enteq Board have concluded that this is a viable project and continue to invest both internally and with a dedicated contract engineering team based in the UK for the following phases of development.

Due to the dramatic change in market conditions at the end of the financial year, some difficult decisions had to be made regarding the appropriate level of ongoing business overheads. Unfortunately, this resulted in significant reductions, mostly related to operations support in the USA and in engineering projects which may not have a market in the new global environment. Core competencies and capabilities have been maintained in the business and Enteq is well positioned with inventory to fulfil future orders. Enteq remains able to provide competitive delivery times for potential new customers, which together with creative partnerships, should continue to support on-going activity.

Prospects

Enteq is well positioned to support current activities for the foreseeable future. In addition, Enteq will maintain investment in potential game-changing technology which has the potential to address the demands for reduced costs in the future drilling environment. Even in a medium term, reduced oil price, post Covid-19, world there will continue to be a demand for hydrocarbons and increased efficiency in drilling will be needed for the industry.

With a strong balance sheet and a continued appetite to invest in focused new product development Enteq is well positioned to benefit from a return to market stability.

Financial Review

Income Statement

The total revenue of $10.9m represents a 7% increase over the previous year. The North American market was challenging during the year, even before the events of mid-March, with a steady decrease in rig count from 1,025 as at 1 April 2019 to 790 at the end of February; with a dramatic drop to 664 as at 31 March 2020. This was despite a relatively stable price of a barrel of WRT during the majority of the year, only varying between $65 and $52 until mid-March, then falling to $19 by 31 March. The market commentators were of the view that the oilfield service companies, Enteq's customers, were using any available cash to pay off debt acquired to service their expansion post the last down turn, rather than replacing existing kit. This resulted in North American turnover falling from $9.3m last year to $7.7m this year. The international revenue grew strongly from $0.9m to $3.2m, with the Chinese market being particularly buoyant. Despite facing fierce competition from local Chinese suppliers, the fact that Enteq's products have a proven track record of operating up to 175Oc, whereas the local products can only manage up to 150Oc, gave us a significant competitive advantage.

The full year gross margin was 61%, down from last year's 65%, due to a combination of a lower proportion of the higher margin rental revenue and a higher proportion of the lower margin mechanical component sales this year.

Total operational overheads, at $3.5m, was down 17% on last year's figure. This reflected the reduction in the headcount numbers during the year, plus a continued focus on cost control.

The combined depreciation and amortisation charge was up on the previous year due to an additional $0.7m being spent on new rental kits combined with the underlying age profile of the historic rental fleet. The number of kits at 31 March 2020 was 17, a net reduction of 15 since the previous year end due to a number of kits coming to the end of their rental period, with ownership passing to the renter on receipt of the final rental payment, Pleasingly, no kits were returned during the year ahead of the full rental period.

The "Other charges" shown above relate, primarily, to the non-cash cost associated with the Performance Share Plan.

As previously mentioned, the year-end figures included an exceptional charge of $7.3m. This included a $4.2m write off of all the new product development projects previous capitalised in Intangible assets, except for work on the rotary steerable system acquired under license from Shell Global Solutions in September 2019. A charge of $2.7m was taken as a write down of the carrying values of the majority of finished products held in inventory. Both these charges relate to the continuing uncertainty surrounding the future trading conditions that Enteq faces, until the global oil and gas market stabilises, the timing of which is unknown. A further $0.1m relates to severance payments made to the US employees that were made redundant as a direct result of the mid-March oil price collapse.

Statement of Financial Position

Enteq's net assets at the financial year-end comprised of the following items:

As mentioned above the "Intangible assets" now solely represents the value of the on-going R&D work on the rotary steerable system, carried out by the UK based engineering team. The decrease during the year to $0.1m relates to the net of the ongoing development of various new products up until the mid-March downturn, less the $4.2m write down.

The net book value of property, plant & equipment at $2.4m is the net of the $0.2m invested in replacing production equipment at South Houston, being offset by the depreciation charge.

The decrease in the net book value of the rental fleet reflects the net reduction of 15 during the year, as previously mentioned.

The $0.8m decrease in net working capital is due, primarily, to the $2.7m inventory write down countered by an increase in trade debtors due to strong sales in January and February.

Cash flows

Whilst the Group delivered an improved adjusted EBITDA for the year, the investment in operational working capital during the year meant that $0.9m of operational cash was created, broadly similar to last year.

The continuing robustness of the balance sheet enabled further expansion of Enteq's market share through further investment to increase the number of kits in the rental fleet.

The increase in R&D spend reflected the increased focus on engineering projects up until the unforeseen downturn in March.

The CAPEX relates to the replacing of various production related equipment.

Overall, the Group saw a net cash outflow of $1.7m (2019: $3.6m) reducing the Group's closing cash balance as at 31 March 2020 to $10.2m.

Financial Capital Management

Enteq's financial position continues to be robust. Enteq had no bank borrowings, or other debt, and had a closing cash position of $10.2m as at 31 March 2020.

Enteq monitors its cash balances 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.

Enteq is subject to the foreign exchange rate fluctuations to the extent that it holds non-US Dollar cash deposits. The year-end GBP denominated holdings are approximately 11% of total cash holdings, up from the 1% of last year's balance. The increase was due to taking advantage of the favourable exchange rate during the mid-March turmoil to sell $1.0m for GBP.

Annual Report and Accounts

The 2020 Annual Report and Accounts has today been sent to shareholders and is available on the Company's website, www.enteq.com.

Annual General Meeting

In light of ongoing Government advice to restrict all non-essential travel and social contact, the AGM will take place on 29 September 2020 at 12.00 noon at the Company's office in Amersham with the minimum quorum of attendees facilitated by the Company.

David Steel

Finance Director

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

1. BASIS OF PREPARATION

The results for the year ended 31 March 2020 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 2019. 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 2020 and in accordance with the recognition and measurement requirements of the International Financial 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 2020 and the year ended 31 March 2019, but is derived from those accounts. Statutory accounts for 2019 have been delivered to Companies House. Those for the year ended 31 March 2020 will be delivered following the Company's Annual General Meeting on 29 September 2020.

The financial information has been extracted from the Group's Annual Report for the year ended 31 March 2020. The auditors have reported on these accounts; their reports were unqualified, but did draw attention to the uncertainty regarding the carrying value of the inventory 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 2020 Annual Report and Accounts in July 2020.

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 are 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 profit and loss statement and the consolidated statement of financial position. A key measurement used by the board is Adjusted EBITDA. This reconciliation is included in note 6, below.

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

Revenues

All the above revenues are recognised at a point in time.

Net Assets

Non-current Assets

All of the Group's revenue arises from the sale and rental of specialised parts and products for Directional Drilling and Measurement While Drilling operations. The Group had 2 customers that contributed in excess of 10% of the Group's total sales for the year (2019: 3). These customers contributed $3,948k and $1,279k respectively. (2019: $2,617k, $1,286k and $1,122k). No revenue relates to customers based in the UK (2019: none).

3. PROFIT AND LOSS ANALYSIS

The following analysis illustrates the performance of the Group's activities, and reconciles the Group's loss for the period, as shown in the consolidated profit and loss statement, to adjusted earnings and adjusted EBITDA.

Adjusted earnings and adjusted EBITDA 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 exceptional items can be analysed as follows:

The write down of inventory has been classified as an exceptional item due to the nature of change in the oil and gas market resulting from both the impact of the COVID-19 and the reductions in the price of oil during March 2020.

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 $1.1m; United States $13.3m (2019: UK $0.7m; United States $15.7m). 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 $7,838k (31 March 2019: loss of $98k) by the weighted average number of ordinary shares in issue during the year of 64,900k (31 March 2019: 63,297k).

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 $372k (31 March 2019: profit of $19k), by the weighted average number of ordinary shares in issue during the year of 64,900k (31 March 2019: 63,297k).

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 weighted average option price of all the options issued, the adjusted diluted EPS is 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.

During the year Enteq Upstream Plc did not pay any dividends (2019: nil).

6. INTANGIBLE ASSETS

a) Goodwill

b)

c) Other Intangible Assets

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 foreseeable future.

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

Due to the severe downturn in the price of oil seen since the start of March 2020, all intangible assets were assessed as to their future commercial viability. The conclusion was that only the development of the rotary steerable project, whose licence was obtained from Shell Global Solutions in September 2019, could be justified as having future economic value. As a consequence of this evaluation an impairment charge of $4,192k was recognised in the consolidated profit and loss statement for the year ended 31 March 2020.

As the goodwill had previously been written down to zero there is no requirement for an impairment review to be performed. The remaining intangible assets were subjected to the standard annual test for impairment. The impairment test carried out on these balances as at 31 March 2020 indicated that there was no impairment of the full carrying value of the intangible assets. 

There is deemed to be just one cash generating unit ("CGU") within the Company. In previous years there were deemed to be two, but from a financial & operational perspective both US locations are now being run as one unit.

The recoverable amount of the CGU is determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the future revenues, 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 2025. Cash flow forecasts are prepared from the most recent financial plans approved by the Board.

The forecasts assume annual growth rates between 15% and 30% until 2025 and 3% 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 12.1% (2019: 13.5%). Management have based this rate on the following factors: a Risk Free Rate of 1.4%; a levered equity beta of 1.5; a market risk premium of 5.5%; a small cap premium of 3.8% and an implied cost of debt of 4.5%.

Intangible assets

Any intangible assets acquired during the year represents their fair value at the date of acquisition.

Amortisation

All categories of intangible assets, apart from the Goodwill and the IPR&D technology, are being amortised over their respective useful lives, on a straight-line basis. The remaining amortisation period of the intangible assets is between 26 and 34 months.

7. GOING CONCERN

The impact of both COVID-19 and the significant deterioration in the oil and gas drilling market, particular in North America have been fully factored into various financial scenarios relating to future trading. The output of this modelling demonstrates that even in the case of a significant reduction in revenue the corresponding cost reduction measures and reduction in CAPEX and development spend will enable the Group to retain significant cash balances in both the near and medium term. Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

The uncertainty as to the future impact on the Group of the recent Covid-19 outbreak in particular has been considered as part of the Group's adoption of the going concern basis. To date, we have not observed any material impact on our activities due to Covid-19 over and above that of the significant reduction in the North America rig count since the start of March 2020 and, indeed, the recently announced $1.0m contract ward in China demonstrates the robustness of the post Covid-19 oil and gas drilling market in that country.

8. RESPONSIBILITY STATEMENT OF THE DIRECTORS

To the best of the knowledge of the Directors (whose names and functions are set out below), the preliminary announcement 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 2019 and adopted for the financial year ended 31 March 2020, 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, Chapter 4, the Directors' Report of the Company's annual report will include a fair review of the development and performance of the business taken, together with a description of the principal risks and uncertainties faced by the business.

Executive Directors

Martin Perry Chief Executive Officer

David Steel Finance Director

Non-Executive Directors

Iain Paterson Chairman

Neil Hartley