Enteq Tech Regulatory News (NTQ)

Enteq Upstream plc

("Enteq")

Final results for the year ended 31 March 2021

 and Investor Presentation

Enteq, the energy drilling technology company, today announces its results for the year ended 31 March 2021.

Key features

· Total revenue down from $10.9m to $5.1m due to COVID 19 impact:

o North America revenue down from $7.5m to $1.9m

o International revenue down from $3.4 to $3.2m but now up from 32% to 62% of total

· Gross profit margin down from 61% to 53% due to product mix variances

· Administrative expenses before amortisation reduced from $7.3m to $3.6m:

o Underlying overheads1 reduced from $3.6m to $2.6m

o Depreciation on rental fleet down from $3.2m to $0.9m

o Depreciation on other fixed assets steady at $0.2m

· Loss attributable to shareholders down from $7.8m to $1.1m

· Breakeven adjusted EBITDA2 on significantly reduced revenue

· Continued investment in new technologies

Financial metrics

Years ended 31 March ($m):

Outlook

· Recent oil price stabilisation and increased US rig count underpins optimism regarding US markets

· Targeted focus on international opportunities

· Ongoing investment in the development of new technologies

· Continued emphasis on maintaining a strong balance sheet

Andrew Law, CEO of Enteq Upstream plc, commented:

"Despite the very challenging trading conditions seen in the period under review, Enteq continues to be well positioned to support current and future activities. Enteq will continue to invest in the potentially game-changing SABER rotary steerable technology, as well as the other technology driven engineering projects. The post Covid-19 market for Enteq is currently evolving, but the recent oil price stability, together with the steadily increasing US rig count, gives the Board grounds for cautious optimism regarding the short and medium-term outlook."

Investor Presentation

Please note that Andrew Law and David Steel, Chief Financial Officer, will be providing a live presentation relating to these results via the Investor Meet Company platform on 9th July 2021 at 10:30am BST.

The presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via the Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation.

Investors can sign up to Investor Meet Company for free and attend this presentation via the following link:

https://www.investormeetcompany.com/enteq-upstream-plc/register-investor

Investors who already follow Enteq on the Investor Meet Company platform will automatically be invited.

1 The reconciliation between Underlying overheads and Administrative expenses before amortisation is follows:

Year to 31 March 2021 Year to 31 March 2020

$m $m

Underlying overheads 2.6 3.6

Depreciation - fixed assets 0.2 0.2

Depreciation - rental fleet 0.9 3,2

PSP Share charge 0.2 0.3

Administrative expenses before amortisation (including bad debt charge) 3.9 7.3

2 The reconciliation between Loss attributable to shareholders and Adjusted EBITDA is follows:

Year to 31 March 2021 Year to 31 March 2020

$m $m

Loss attributable to shareholders (1.1) (7.8)

Exceptional items - 7.3

Amortisation - 0.2

Depreciation - fixed assets 0.2 0.2

Depreciation - rental fleet 0.9 3.2

PSP Share charge 0.2 0.3

Interest (0.1) (0.3)

Other (FX & tax) - -

Adjusted EBITDA 0.1 3.1

Both the above alternative performance measures are shown as the Board consider these to be key to the management of the business as a whole

For further information, please contact:

Enteq Upstream plc +44 (0)1494 618739

www.enteq.com 

Andrew Law, Chief Executive Officer

David Steel, Chief Financial Officer

finnCap Ltd (NOMAD and Broker) +44 (0)20 7220 0500

Ed Frisby, Emily Watts, Tim Harper (Corporate Finance)

Andrew Burdis, Barney Hayward (ECM)

Combined Chief Executive and Chairman's report

Review of the Year

As this year's financial results are fully explained in the following Financial Review, this review will focus on Enteq's response to the challenging market conditions faced during the year to 31 March 2021.

In the previous financial year, Enteq responded quickly to the major reduction in demand for all its product lines seen during the spring of 2020. The US workforce was reduced by approximately 60%, all US based contract staff were released and all discretionary spend curtailed. This drive to reduce overheads continued throughout this reporting period, with two senior US sales and management focused posts being removed with their responsibilities being reallocated to both the remaining US and UK senior management team. Care was taken not to weaken the level of customer support provided with some of the overhead savings re-allocated to bolstering this function, which was further strengthened towards the year end by the use of contract staff. A new Product Director was recruited in November 2020 with a remit to successfully bring the SABER rotary drilling system through both laboratory testing and field trials, then onto full commercialisation in the shortest time possible.

Following a strategic review, the Board decided to permanently reduce the in-house capacity for manufacture of a range of low margin mechanical components. Following this decision, all of the related Houston based production equipment was sold during February/March 2021. As this equipment was virtually fully written down, this resulted in both net proceeds and the associated gain, of approximately $0.5m. The cash proceeds will be applied to the development of future products, such as the SABER system.

During this financial year the Group's US focussed rental fleet continued to provide a significant proportion of the total group revenue. However, the reduced demand in the US, coupled with the planned expiry of existing rental contracts has resulted in a reduction in the number of kits in the rental fleet from the 17 at the start of the year, down to two minor items on hire as at 31 March 2021.

The positive gains in the international market share made over the previous two years were maintained despite the price of a barrel of oil being below $40 until the end of June 2020 only rising to the current level of approximately $60 by the end of February 2021. This was due to both repeat orders from existing, primarily China based, customers as well as acquiring new customers in this region. The latest update from Enteq's strategic partner in the Kingdom of Saudi Arabia, Sawafi Aljazeera Oilfield Products and Services Co. Ltd ("Sawafi") is that their client, Saudi Aramco, have informed them that due to low drilling activity there is currently no foreseeable need for the equipment that was placed in Saudi Arabia on stand-by. The equipment will be redeployed to other opportunities. Sawafi wish to continue with the partnership arrangement with particular emphasis on the new technologies that Enteq is developing, chiefly SABER.

The SABER product development, based on the exclusive IP and Technology license agreement from Shell, has seen significant progress during the year, with all the design work now completed and field trial ready prototypes currently going through the laboratory-based testing phase. The appointment of the experienced Product Director has significantly focused the project on ensuring that a fleet of commercially viable prototypes will be ready for deployment with potential customers before the end of the current financial year. Despite the oil price fluctuations seen this year, the global market for rotary steerable related services in 2021 is still estimated to be in the region of $2bn. This is significantly greater than the addressable market for Enteq's current product offerings. Other engineering projects currently on-going are focussed on developing improved signal analysis and higher speed up-hole telemetry systems, both of which could be sold as separate product lines as well as integrating seamlessly into the SABER system.

Board changes

On 29 September 2020, Andrew Law joined the Board as a Commercial Director, having been employed by Enteq in January 2019 as Director of International Sales, a non-Board appointment. Andrew has a background in the oilfield industry through Field Engineering at Schlumberger and General Management within Weatherford. Andrew has also worked in corporate finance at KPMG and is a Sloan Fellow from London Business School. The Board changes announced on 12 November 2020, came into effect on 1 April 2021, with Andrew, becoming the Chief Executive Officer and Martin Perry, the founder of Enteq and previous CEO moving to the role of Non-Executive Chairman. The other changes include Neil Hartley taking the role of Senior Independent Non-Executive Director, with Iain Paterson, the previous Chairman, continuing as a Non-Executive Director. David Steel continues to serve on the Board as Chief Financial Officer. In the early part of the Financial Year (April 2020), Raymond Garcia, a founder and Board member left the company.

Staff

There were a total of 15 employees at the end of the year, down from the 19 at the previous year end, primarily due to the overhead positions being removed at the South Houston facility, as discussed above. The Board would like to recognise the on-going loyalty, dedication and support of the remaining personnel as Enteq continues with its excellent reputation for the reliability of equipment and commitment to customer support during these difficult market conditions.

Potential change of name

The Board is considering a change of name to Enteq Technologies plc as this name better reflects the core strategy of the group which is to develop technologies that enable more efficient, and hence cost effective, methods of drilling for all target resources. These methods are as applicable to geothermal applications, as shown by an increasing proportion of revenue coming from this activity, up from just over 3% last year to just over 6% this year, as well as improving the efficiency of drilling for hydrocarbons, especially gas. A special resolution will be put to the forthcoming AGM proposing this change of name.

Prospects

Despite the very challenging trading conditions seen in the period under review, Enteq continues to be well positioned to support current and future activities. Enteq will continue to investment in the potentially game-changing SABER rotary steerable technology, as well as the other technology driven engineering projects. The post Covid-19 market for Enteq is currently evolving, but the recent oil price stability, together with the steadily increasing US rig count, gives the Board grounds for cautious optimism regarding the short and medium-term outlook.

Financial Review

This review contains pro-forma statements which are different in presentation to the statutory format shown on the following pages.

Income Statement

The North American market was extremely challenging during the year, with the rig count falling from 790 at the end of February 2020 to 664 as at 31 March 2020, then down further to a low of 266 at the end of July 2020, an overall reduction of 68% from the February level. Thereafter there was a steady month on month increase to 430 active rigs by the end of March 2021. The price of a barrel of WRT fell from $53 in February to a low of $16 at the end of April; it then stabilized at approximately $40 for the majority of the year, rising to approximately $60 for the last two months of the year under review. The impact of the above was that North American revenue fell from $7.5m last year to $1.9m this year. Due to strong continued demand, primarily from China, the international revenue at $3.2m was virtually unchanged from the $3.4m of last year.

The full year gross margin was 53%, down from last year's 61%, 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 $2.6m, was down $0.9m on last year's figure. This reflected the reduction in the headcount numbers, primarily two senior posts in the US during the year, plus a continued focus on cost control.

The combined depreciation and amortisation charge was significantly down on the previous year due to the number of rental kits falling from 17 at 31 March 2020 to just two minor components on rental as at the end of this year.

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

The net exceptional item charge of $0.1m comprises severance costs of $0.4m relating to the headcount reductions mentioned above plus aborted transactions costs of $0.1m, offset by a $0.4m gain following the sale of the mechanical component related production machinery at the Houston facility.

Statement of Financial Position

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

Both the closing balance and the increase in the year in the intangible assets relate to the on-going spend on all the engineering projects, predominately the SABER rotary steerable system.

The net book value of property, plant & equipment at $2.3m is only $0.1m lower than the previous year-end despite the disposal of the mechanical component related production machinery due to these items having been previously written down to a very low carrying value due to the increasing use of sub-contractors to provide these parts.

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

The net working capital of $3.9m has increased $0.9m during the year. This is due to an increase in debtors of $0.5m; a reduction in creditors of $0.6m; and a decrease of inventory of $0.2m. The debtor and inventory movements relate to the impact of the higher level of trading seen in the last quarter of the financial year. The creditor movement is due to timing differences between incurring the cost and making the associated payments.

Cash flows

Overall, the Group saw a net cash outflow of $2.1m (2020: $1.7m) reducing the Group's closing cash balance as at 31 March 2021 to $8.1m. The majority of this reduction ($1.6m) related to the on-going investment in the engineering projects, primarily the SABER tool.

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 $8.1m as at 31 March 2021. The impact of COVD 19 did not require any changes to the way capital is managed within the group.

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 foreign exchange rate fluctuations to the extent that it holds non-US Dollar cash deposits. The year-end GBP denominated holdings are approximately 3% of total cash holdings, down from the 11% of last year's balance. The decrease was due to taking advantage of the favourable exchange rate during the mid-March 2020 turmoil to sell $1.0m for GBP, a pattern not repeated this year.

Annual Report and Accounts

The 2021 Annual Report and Accounts, together with the notice of Annual General Meeting, have today been sent to shareholders and are available on the Company's website, www.enteq.com.

Annual General Meeting

Unless the ongoing Government advice is not to hold this meeting in person, the Company's Annual General Meeting will be held on 23 September 2021 at 12.00 noon at the offices of finnCap, 1 Bartholomew Close, London, EC1A 7BL.

David Steel

Chief Financial Officer

There are no other items requiring disclosure as comprehensive income.

Enteq Upstream Plc

Consolidated Statement of Changes in Equity

Enteq Upstream Plc

Consolidated Statement of Cash Flows

1. BASIS OF PREPARATION

The results for the year ended 31 March 2021 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 2020. 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 2021 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 2021 and the year ended 31 March 2020, but is derived from those accounts. Statutory accounts for 2020 have been delivered to Companies House. Those for the year ended 31 March 2021 will be delivered following the Company's Annual General Meeting on 23 September 2021.

The financial information has been extracted from the Group's Annual Report for the year ended 31 March 2021. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under s498(2) or (3) Companies Act 2006. The Group published its 2021 Annual Report and Accounts on 7 July 2021.

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 group 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. Revenue is only generated by the selling activity.

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.

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

Revenues

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 3 customers that contributed in excess of 10% of the Group's total sales for the year (2020: 2). These customers contributed $ 2,088k, $1,020k and $572k respectively. (2020: $3,948k and $1,279k). No revenue relates to customers based in the UK (2020: none).

3. EXCEPTIONAL ITEMS

The exceptional items can be analysed as follows:

The write down of inventory in 2020 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 $1.4m; United States $20.3m (2020: UK $0.5m; United States $21.0 NB: both these figures have been re-stated). There were no significant deferred tax liabilities. These tax loses have no expiry date.

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 $1,109k (31 March 2020: loss of $7,838k) by the weighted average number of ordinary shares in issue during the year of 67,065k (31 March 2020: 64,900k).

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 number of outstanding share options that are not included in the above figures are as follows:

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 (2020: nil).

6. INTANGIBLE ASSETS

a) 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.

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.

There are now considered to be two cash generating units ("CGU"). The recoverable amount of each CGU is determined from value in use calculations both where the asset is currently in use or will be in the future. 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 2026. Cash flow forecasts are prepared from the most recent financial plans approved by the Board.

Currently the SABER project is in the development phase and has not generated any revenue. On the assumption that the SABER project is launched successfully, the longer-term forecast assumes annual growth rates between 5% and 3%. The remaining assets impairment test within the separate CGU assumes annual growth rates of 69% in the year to March 2023, 58% in the year to March 2024, 25% in the year to March 2025, 20% in the year to March 2026, followed by 3% thereafter.

The pre-tax rate used to discount both cash flow forecasts is 12.8% (2020: 12.1%). Management have based this rate on the following factors: a Risk Free Rate of 2.3%; 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

The intangible assets acquired during the year comprise both externally procured services from specialist suppliers, which is shown at the purchase cost, and internally generated costs which is shown at the cash cost of the items acquired, primarily payroll related costs.

Amortisation

All categories of intangible assets, apart from the IPR&D technology, are being amortised over their respective useful lives, on a straight-line basis. The rotary steerable project will have its useful life assessed once the field trial have been completed which will give a better estimate of the useful of this asset.

7. RESPONSIBILITY STATEMENT OF THE DIRECTORS

To the best of the knowledge of the Directors (whose names and functions are set out below), the final results 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 2020 and adopted for the financial year ended 31 March 2021, 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 Guidance 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

Andrew Law Chief Executive Officer

David Steel Chief Financial Officer

Non-Executive Directors

Martin Perry Chairman

Iain Paterson

Neil Hartley