Enteq Tech Regulatory News (NTQ)

Enteq Upstream plc

Interim results for the six months ended 30 September 2013

AIM traded Enteq Upstream plc ("Enteq", the "Company" or the "Group"), the oil & gas drilling technology company, today releases its interim results for the six months ended 30 September 2013.

Highlights

Performance reflects significant improvement in many areas with gains in market share from a recovering North American directional drilling market

· Revenues of $10.6m (Sept 2012: $5.3m)

· EBITDA in Drilling Tools Division1of $2.3m (Sept 2012: $1.6m)

· Consolidated adjusted EBITDA2 of $0.5m (Sept 2012: $0.3m)

· Loss before tax $2.5m (Sept 2012: $3.5m)

· Adjusted earnings per share3 of 0.4 cents (Sept 2012: 0.5 cents)

· Cash balances of $21.3m as at 30 September 2013 (Sept 2012: $25.8m)

Continued investment in business delivering platform for further growth

· Successful integration of acquisitions has enabled delivery of full Measurement While Drilling systems for sales and rental

· Additional sales resources and infrastructure in Houston, Calgary and E.Hemisphere are gaining new customers and opportunities

· Customers migrating / upgrading legacy equipment to the newer generation Enteq solutions is continuing to demonstrate the technical differentiation of Enteq's product lines

· New product release will deliver incremental revenue from all system sales

· Investment in engineering will provide pipeline of new products

Prospects

Trading during the first half of the financial year has been in line with the full-year management expectations. Revenue growth period by period indicates good market share growth in a stabilised North American market. Operational leverage in the business will deliver further performance improvements.

Growth is expected from further market shares gains as a result of sales and rentals of complete systems, development of new technologies and entry into new markets.

Management's focus and discipline has been to develop the drilling division of the business. Existing cash resources will continue to be used to invest in and develop this opportunity through internally engineered development and potential 'bolt-on' acquisition activity.

Enteq's medium term strategy remains to develop multiple, integrated, vertical supply chains of products and technologies to be sold to the oil & gas services sector on an international basis.

Martin Perry, CEO of Enteq Upstream plc, commented:

"The results shown in the first half of this year are indicative of a strong product line performing well in a recovering market. The acquired businesses have been strengthened in terms of physical infrastructure, management processes, product offering and sales capacity. These investments are beginning to show real returns and position the business well for further growth. The global market for hydrocarbon extraction and the need for advanced technology and products to enhance the capability of oilfield service companies continues to support the Enteq business model and medium term growth strategy "

Neil Warner, Chairman of Enteq Upstream plc, commented:

"Management has demonstrated its proven ability to focus, integrate and build acquired businesses in a challenging environment. The Board is confident that Enteq is increasingly well positioned to take advantage of market opportunities."

1 The businesses which comprise the Drilling Tools Division were acquired during the six months ended 30 September 2012 and their results are incorporated from the date of acquisition.2Consolidated EBITDA adjusted for exceptional items and foreign exchange movements.3Basic earnings per share adjusted for exceptional items, amortisation of acquired intangible assets and foreign exchange movements.

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Interim Report

CHAIRMAN'S REPORT

Introduction

During the first half of this financial year, management has focused on the integration and development of the businesses acquired last year (XXT and KMS & Pro-Flow). These supply products and technologies in the 'Measurement While Drilling' (MWD) market, primarily to directional drilling service companies in North America.

When Enteq was formed, the overriding strategy was to acquire businesses to which value could be added through Enteq's technical, management and sales strengths, building on the management team's significant experience. The first three acquisitions fit that goal very well. In the first half of this financial year, the acquired businesses have been strengthened in terms of physical infrastructure, management processes, product offering and sales capacity. These necessary efforts are starting to bear fruit.

Current trading is in line with management expectations for the full year.

Overview

MWD equipment comprises sensors and assemblies which transmit data during the drilling of an oil or gas well back to the surface where the information is used to control and direct the drilling process.

The directional drilling services market is c.$14bn pa and is dominated by the major international service companies (Schlumberger, Halliburton, and Baker) which generally use (but do not sell) their internally developed and manufactured products. The independent sector of directional drilling service companies relies on purchasing tools and products from third parties. The downhole drilling tool product sales market is c. $3.3bn pa and it is in this market that Enteq's drilling division operates.

The acquired companies currently address the North American land drilling market, which has been dominated in recent years by drilling in shale for gas and oil. Based on core acquired technology and through investment in product development, equipment and sales, Enteq expects both to gain market share in North America and also to expand into other substantial markets outside North America.

During the first year of ownership, and in particular during the reporting period April to September 2013, management has made good progress in establishing Enteq as a recognised supplier of integrated MWD systems, has maintained and improved key client relationships with the larger independent operators in North America and established new relationships both in North America and beyond, including Russia and the CIS. The investments made in facilities and product offering will enable the Company to take advantage of improving market conditions.

The Board thanks our employees for their contribution to the progress made in this period.

Results

The acquired businesses are reported as Enteq's 'Drilling Division'. The comparable period in 2012 incorporated results of the businesses since completion of acquisition (4.5 months for XXT and 2.5 months for Enteq KMS).

For the six months ended 30 September 2013 the Drilling Division delivered revenues of $10.6m (September 2012 $5.3m) and EBITDA of $2.3m (September 2012 $1.6m). The Group as a whole reported adjusted EBITDA of $0.5m (September 2012 $0.3m).

The Group's balance sheet is robust, with available cash of $21m as at 30 September 2013.

Prospects

Enteq Upstream has now established a strong footprint as an MWD system supplier in North America. Significant opportunities exist to develop from this platform, both in terms of product line and geographies.

Management has demonstrated its proven ability to focus, integrate and build acquired businesses in a challenging environment.

Existing cash is being utilised to deliver medium term shareholder value from investment in the Company and market development activities.

The Board is confident that Enteq is increasingly well positioned to take advantage of market opportunities. The quality of Enteq's people and technologies underpin the ability of the business to grow.

Neil Warner

Non-executive Chairman

Enteq Upstream plc

20 November 2013

CHIEF EXECUTIVE OFFICER'S REPORT

Highlights

· Successful integration of acquisitions has enabled delivery of full Measurement While Drilling systems for sales and rental

· Additional sales resources and infrastructure in Houston, Calgary and E.Hemisphere are gaining new customers and opportunities

· Migration / upgrade of customers' legacy equipment to the newer generation Enteq solutions is continuing to demonstrate the technical differentiation of the product lines

· New product release will deliver incremental revenue from all system sales

· Investment in engineering will provide pipeline of new products

Operational review

During the six months ended 30 September 2013, Enteq continued the integration and consolidation of its Drilling Division. Enteq is now becoming a recognised name as the provider of the best in technology, from XXT, with all the other components required to operate 'Measurement While Drilling' (MWD) services. Sales and marketing initiatives have established the Enteq brand and achieved success with new customers. Enteq products have been adopted by a number of the largest independent directional drilling companies in North America.

A new operational office was established in the Woodlands area, to the north of Houston. This is an area where a number of the major directional drilling companies have their operational bases, allowing easier and more frequent customer interaction. The facility comprises sales and support staff for the full Enteq range of products and systems and is the centre for the assembly of full MWD kits. To accelerate the establishment of this facility an investment of c.$1m was made in equipment and inventory. A customer support team has been established with the objective to differentiate and gain revenues, by supplying the best support available in the market for training, on-site support, repairs and parts.

Alongside broadening our marketing capability, we continue to develop our product offering. A full MWD kit, which Enteq can now provide, comprises two units of each component, including all the sensor equipment and software from XXT, mechanical housings, connectors and assemblies from our South Houston manufacturing operation, plus third party equipment such as a Gamma Ray sensor and hazardous area rig floor display. The initial kits made available include third party mechanical 'pulser' sections, but these are being phased out and replaced with Enteq's own pulsers as they become available. The MWD 'kit', of which the first unit was sold in September 2013, will allow Enteq to compete with sales from other 'kit providers' giving the added advantage of an integrated solution based on the proven reliability of XXT's core technologies and products.

A feature of the drilling services market is the increasing use of rental equipment, as opposed to purchased kits, by smaller, capital constrained directional drilling companies. To date, Enteq has not been a participant in the rental market, but with the completion of the full kit capability, investment will be made in equipment for rental to exploit this market opportunity.

Improved partnerships and re-seller agreements have been established with sales organisations that have customers in the Eastern Hemisphere (primarily Russia and the CIS) where either the full Enteq kit or high proportions of XXT/Enteq components have been included in sales proposals. A number of these organisations operate from Canada, where Enteq has established a new sales presence. A preliminary representative agreement has been established in China with some bid proposals in progress, while a bid process is also underway in Uzbekistan. Further technology developments are still required in the Enteq solution to address fully the Eastern hemisphere markets.

Investment has continued in product development and engineering. As part of completing the management succession plan for the acquired businesses, a new head of engineering has been appointed. The new mechanical pulser project has been completed and is in the process of commercialisation, while the Electro Magnetic data transmission system remains in field trial. A significant software upgrade has been released which improves the functionality and user interface of the XXT surface system. A number of other projects are in process, and a strategic review has identified the areas for focus over the coming years that will maintain Enteq's product leadership position. Development and engineering will continue to be an area of investment for the Company with high actual and incremental returns expected from these efforts.

The KMS and Pro-Flow businesses have been fully absorbed into the Enteq Drilling 'brand' and the manufacturing facilities owned in Houston are now referred to as 'Enteq South Houston'. We have continued the process in this business of moving away from contract machining towards a focused, higher margin product line dedicated to drilling motor and MWD parts and components. An ongoing margin and process improvement programme continues. Relationships with key customers are being developed, where an increased level of joint commitment should result in improved volumes and margins. To develop this business an investment in inventory levels is planned in the current financial year to ensure that customer demand can be satisfied in a timely and cost-effective manner.

Market conditions

Rig count is a key indicator of the strength of the North American Land Drilling market for the utilisation of and demand for sensors and equipment. In early May 2013, the North American rig count was 1,944 (260 lower than May 2012). In early October 2013, this number had increased to 2,117 (92 lower than October 2012).

The rig count numbers highlight the decline during the summer of 2012, but demonstrate the relative stability during the same period in 2013. It should also be noted that to avoid infrastructure damage during these months, the Canadian market always undergoes the 'spring break-up' during which transportation of heavy equipment is prohibited whilst the ground de-frosts. Particularly wet weather (and major floods in Calgary) during the summer of 2013 resulted in a prolonged period of inactivity in Canada, although normal operational activity has now resumed.

Commodity prices remained fairly steady through the period, with WTI Oil at around $100 bbl. This price allows economic drilling in the major shale oil fields. However the continuing lack of infrastructure for accessing remote fields in Canada and the Bakken in North Dakota, means that extraction must be economic at, perhaps, $30 per barrel below this due to transportation costs.

Gas prices have remained around $3.60 MMBtu which is not sufficient for any resumption in drilling of the shale gas fields.

In the medium to longer term, it is assumed by most market observers that when infrastructure projects are completed, and decline rates from existing production accelerate, drilling to extract known gas reserves is inevitable and that this will continue for the foreseeable future.

As the physical drilling conditions continue to become more arduous for the directional drilling service companies, Enteq's customers, the opportunity for our technology continues to grow. Operators expect wells to be drilled faster and longer. Pad drilling, where multiple wells are drilled in rotation by a single rig in a confined area leads to extra efficiencies but create more demands on drilling equipment. Failure of equipment is not tolerated, with equipment expected to survive at elevated temperatures (up to 175oc) and endure high shock and vibration for periods of up to 20 days without interruption. Pricing by directional drillers is typically based on a daily or hourly rate, so whilst efficiencies are gained by the operators, drillers are required to work their equipment harder for a constant time based charge. Enteq's equipment is designed to fulfil exactly these requirements.

The major international service companies (Schlumberger, Halliburton, Baker et al) continue to maintain strong market presence in North America, especially with the major oil companies and in geologically challenging environments, however the next tier of larger independent service companies (Enteq's customers) are holding their market share.

The net result of the market dynamics is a period of relative stability within the Enteq customer base, albeit with no significant fleet expansion. Some spare capacity remains in the market from the decline in overall utilisation from last year, but importantly the increasing technical demands on equipment continue to drive a transition from older, less reliable equipment to newer, more robust and reliable solutions such as those provided by Enteq.

International directional drilling activity remains significant, with as many rigs drilling outside North America as within. Currently the market outside North America for directional drilling services remains dominated by the major international service companies, which use their internal supply chain and engineering to satisfy their equipment demands. This market dynamic may be changed over a period of years if equivalent technology can be supplied to regional and independent local companies who could then compete with the benefits of local contacts and competitive pricing. Enteq, through developing and accumulating the appropriate technologies, and using existing sales networks, intends to address this market.

The global market for hydrocarbon extraction and the need for technology and products to enhance the capability of oilfield service companies continues to support the Enteq business model and medium term growth strategy.

Financial metrics

Revenue and absolute gross margins have progressed in each of the last three halves. The results shown in the first half of this year are indicative of a strong product line performing well in a recovering market. The acquired businesses have been strengthened in terms of physical infrastructure, management processes, product offering and sales capacity. These investments are beginning to show real returns and position the business well for further growth. The underlying Divisional trading profitability continues to convert into positive cash flow.

The business is positioned well to benefit from an upturn in trading. High operational gearing enables incremental sales and gross margin to translate into increased EBITDA without any significant change in overheads.

· Revenues of $10.6m (Sept 2012: $5.3m)

· EBITDA in Drilling Tools Division1 of $2.3m (Sept 2012: $1.6m)

· Consolidated adjusted EBITDA2 of $0.5m (Sept 2012: $0.3m)

· Loss before tax $2.5m (Sept 2012: $3.5m)

· Adjusted earnings per share3 of 0.4 cents (Sept 2012: 0.5 cents)

· Cash balances of $21.3m as at 30 September 2012 (Sept 2012: $25.8m)

1 The businesses which comprise the Drilling Tools Division were acquired during the six months ended 30 September 2012 and their results are incorporated from the date of acquisition.2 Consolidated EBITDA adjusted for exceptional items and foreign exchange movements.3Basic earnings per share adjusted for exceptional items, amortisation of acquired intangible assets and foreign exchange movements.

Investment activities and cash flows

Investments of $2.4m have been made during the period, principally in equipment which is used by potential customers on a trial basis, prior to purchasing and to deploy sufficient inventory of sensors and kit components to allow rapid response to customer demand. Continuing investment of $0.6m has also been made in new product development.

The Group had available cash of $21.3m as at 30 September 2013 after having made the investments described above and funding working capital growth (which arose through growing revenue) and central costs.

Prospects

Revenue growth period by period indicates good market share growth in a stabilised North American market. Operational leverage in the business will deliver further performance improvements.

The North American market will continue to dominate the demand for Enteq equipment in the near term. The actions being taken by Enteq position the Company well to continue to gain share in this market. These actions include:

· New customer wins

· On-going supply to and upgrades for the larger independent directional drillers' equipment fleets

· Introduction of new technologies

· Introduction of full-kit supply capability

· Entry into the rental market

· Provision of first-class customer support

Customer indications suggest reasonable confidence that current activity levels will continue through the end of 2013 and into 2014 in North America. Management is encouraged that customers recognise the need for reliable and robust equipment to compete effectively in this market.

N. American market conditions remain uncertain; however upside opportunities will arise when the infrastructure in North America is developed to facilitate gas use. This should result in renewed growth in drilling fleets and activity levels.

Opportunities in other global markets such as Russia, Middle East, China and South America remain considerable. Enteq is increasing the sales and marketing presence in these territories, developing partnerships and potential new customer relationships.

Management's focus and discipline has been to develop the drilling division of the business as the initial vertical market. Existing cash resources will continue to be used to invest in and develop this division through organic growth and potential 'bolt-on' acquisition activity. Enteq's medium term strategy remains to develop multiple, integrated, vertical supply chains of advanced technologies and products, to be sold to the oil and gas services sector on an international basis.

Martin Perry

Chief Executive

Enteq Upstream plc

20 November 2013

ENTEQ UPSTREAM PLC

NOTES TO THE FINANCIAL STATEMENTS

For six months to 30 September 2013

1. Reporting entity

Enteq Upstream plc ("the Company") is a public limited company incorporated and domiciled in England and Wales (registration number 07590845). The Company's registered address is The Courtyard, High Street, Ascot, Berks SL5 7HP.

The Company's ordinary shares are traded on the AIM market of The London Stock Exchange plc.

Both the Company and its subsidiaries (together referred to as the "Group") are focused on the provision of specialist products and technologies to the upstream oil and gas services market.

2. General information and basis of preparation

The information for the period ended 30 September 2013 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the period ended 31 March 2013 has been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The annual financial statements of the Group are prepared in accordance with IFRS as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

The Group's consolidated interim financial statements are presented in US Dollars ($), which is also the functional currency of the parent company. These condensed consolidated interim financial statements (the interim financial statements) have been approved for issue by the Board of directors on 20 November 2013.

3. Accounting policies

The interim financial statements have been prepared on the basis of the accounting policies and methods of computation applicable for the period ended 31 March 2013. These accounting policies are consistent with those applied in the preparation of the accounts for the period ended 31 March 2013, except for the adoption of the following standards as of 1 April 2013:

• IFRS 13 "Fair Value Measurements"

• Annual Improvements 2009-2011

The adoption of these new accounting standards has not had a material impact on the interim statement for the current period. Further details of the impact of their adoption will be given the year-end financial statements for the year ended 31 March 2014.

4. Estimates

When preparing the interim financial statements, management undertakes a number of judgements, estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses. The actual results may differ from the judgements, estimates and assumptions made by management, and will seldom equal the estimated results. The judgements, estimates and assumptions applied in the interim financial statements, including the key sources of estimation uncertainty were the same as those applied in the Group's last annual financial statements for the year ended 31 March 2013.

5. Adjusted Earnings

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 performance indicator used by management.

6. Segmental Reporting

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

The principal activities of the Drilling Division are the design, manufacture and selling of specialised products and technologies for Directional Drilling and Measurement While Drilling operations used 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.

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

The net assets in Europe (UK) are represented, primarily, by cash balances.

7. Earnings Per Share

Basic earnings per share

Basic earnings per share is calculated by dividing the loss attributable to ordinary shareholders for the six months of $2,481,000 (September 2012: loss of $3,496,000) by the weighted average number of ordinary shares in issue during the period of 58,953,653 (September 2012: 47,612,377).

Diluted earnings per share

Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders for the six months of $2,481,000 (September 2012: loss of $3,496,000) by the weighted average number of ordinary shares in issue during the period of 58,953,653 (September 2012: 47,612,377).

Adjusted earnings per share

Adjusted earnings per share is calculated by dividing the adjusted earnings for the six months of $241,000 (September 2012: loss of $239,000), by the weighted average number of ordinary shares in issue during the period of 58,953,653 (September 2012: 47,612,377).

Adjusted diluted earnings per share

Adjusted diluted earnings per share is calculated by dividing the adjusted earnings for the six months of $241,000 (September 2012: loss of $239,000), by the weighted average number of ordinary shares in issue during the period of 58,953,653 (September 2012: 47,612,377).

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 in Note 5.

8. Income Tax

No liability to corporate taxes, in either the UK or the US, arose on ordinary activities for the six months under review.

9. Contingent liabilities

Apart from the balances shown in the Condensed Statement of Financial position, which relate to potential further payments in connection with the acquisition of XXT, the Directors are not aware of any further contingent liabilities faced by the Group as at 30 September 2013 (31 March 2012: $nil, 30 September 2012: $nil).

10. Intangible Fixed Assets

a) Goodwill

Consideration has been given as to whether there have been any indicators of impairment in relation to the carrying value of Goodwill, but none have been identified. Whilst the Group as a whole continues to be loss-making, the underlying trading of the acquired businesses is profitable and remains in line with expectations and forecasts prepared at the 2013 year end. A full impairment test will be conducted at the year end in accordance with the Group's accounting policies.

b) Other Intangible Fixed Assets

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.

11. Contingent consideration

The contingent consideration relates to payments due to the vendors on the acquired businesses if they meet various performance targets over the two years from the date of acquisition. Elements of these targets are no longer likely to be met, and have been released through the profit and loss account in accordance with the Group's accounting policy.

12. Share capital

Share capital as at 30 September 2013 amounted to $939,000 (31 March 2013 and 30 September 2012: 939,000).

13. Going concern

The Directors have carried out a review of the Group's financial position and cash flow forecasts for the next 12 months by way of a review of whether the Group satisfies the going concern tests. These have been based on a comprehensive review of revenue, expenditure and cash flows, taking into account specific business risks and the current economic environment. With regards to the Group's financial position, it had cash and cash equivalents at 30 September 2013 of $21.3 million. The Group also has in place a revolving credit facility of $15.0 million, which has not been drawn down.

The Group remains comfortably within its borrowing covenants.

Having taken the above into consideration the Directors have reached a conclusion that the Group is well placed to manage its business risks in the current economic environment. Accordingly, they continue to adopt the going concern basis in preparing the Interim Condensed Financial Statements.

14. Principal risks and uncertainties

Further detail concerning the principal risks affecting the business activities of the Group is detailed on pages 16 and 17 of the Annual Report and Accounts for the period ended 31 March 2013. Consideration has been given to whether there has been any changes to the risks and uncertainties previously reported. None have been identified.

15. Events after the balance sheet date

There have been no material events subsequent to the end of the interim reporting period ended 30 September 2013.

16. Copies of the interim results

Copies of the interim results can be obtained from the Group's registered office at The Courtyard, High Street, Ascot Berkshire SL5 7HP and are available from the Group's website at www.enteq.com.