Final results for the year ended 31 March 2013

RNS Number : 3327H
Enteq Upstream PLC
19 June 2013
 



Enteq Upstream plc

("Enteq" or the "Company")

19 June 2013

Final results for the year ended 31 March 2013

Enteq Upstream plc, the oil & gas field services company, today releases its consolidated financial statements for the year ended 31 March 2013.

Operational Highlights

·      Completed acquisitions of XXT and KMS to form Enteq's Drilling Products Division

·      Successful transition to become an integrated and focused Measurement While Drilling 'system' provider

·      First Eastern Hemisphere sales completed with significant further opportunities

·      Enhanced product range and technology agreements

·      New manufacturing facilities and increased capacity in California, Texas and U.K.

·      Sales & marketing investment driving growth in market share and customer base

Financial metrics

Trading results are for post-acquisition periods for XXT (10.5 months) and KMS (8.5 months).

·      Revenue                                                  $15.4m                    (2012: $nil)

·      Adjusted EBITDA1                                    $0.1m                      (2012: loss of $1.9m)

·      Loss before tax                                       $0.6m                      (2012:  $3.3m)

·      Adjusted loss per share2                             0.8 cents                 (2012: 13.4 cents)

·      Loss per share                                        1.3 cents                 (2012: 28.8 cents)

 

·      Cash                                                        $23.9m                    (2012: $20.8m)

·      Available bank facility                              $15.0m                    (2012: $nil)

 

Outlook

·      North American rig count currently stable and expected to grow modestly in 2013

·      Enteq gaining market share and increased sales from transition to systems provider

·      International sales expected to grow in key markets

·      Continuing expansion of product range through acquisition/agreements and engineering development

·      Buy & build strategy continues to address significant global market potential

·      Improved trading anticipated in current financial year

 

Martin Perry, CEO of Enteq Upstream plc, commented:

"The year ended 31 March 2013 was our first year of operations.  Despite difficult market conditions in North America during the first half of the financial year the businesses which we acquired in May and July 2012 are being transformed and integrated into a focused and progressive supplier of systems for directional drilling. We have added to our foot-print, in California, Texas and the U.K.  We have broadened our product range and continue to enhance our offering to customers. We have gained market share in North America and sales in other international markets have commenced. Our intention is to continue investment in both organic and inorganic growth opportunities."

For further information, please contact:

 

Enteq Upstream plc

+44 (0) 20 7861 3232

Martin Perry, Chief Executive Officer


Ian Leaman, Chief Financial Officer




Investec Bank plc

+44 (0) 20 7597 5970

James Grace, Patrick Robb, David Anderson




Pelham Bell Pottinger

+44 (0) 20 7861 3232

Mark Antelme, Charlie Stewart


 

 

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

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

 

 

Chairman's Statement

 

Review of the Year

Enteq Upstream plc is building a technology and products business in the global upstream oil & gas market. This has been an active year with Enteq completing its first acquisitions, raising additional equity and debt capital and integrating the acquired businesses.

The initial acquisitions have been focused on specialist products for directional drilling, demand for which has been driven by the development of the 'unconventional' shale drilling market for oil and gas in North America. This drilling market has grown rapidly since 2009 but experienced some reduction from mid 2012, after some commodity price concerns. Activity levels remain high but are approximately 20% below peak levels. Our first Enteq acquisition, XXT, provides products which are by nature capital purchases for its drilling customers. As previously reported, XXT suffered a poor first six months of trading as a result of lower levels of drilling activity. KMS continued to trade in line with its pre-acquisition levels. Trading has recovered in the most recent 6 months and the medium and long term prospects for these initial acquisitions, as the addressable market and market share is broadened, continues to hold promise.

During the year, Enteq has transformed the acquired businesses from supplying individual components towards more integrated systems supply and support. By moving up the value chain, Enteq is adding value and increasing average order sizes. New product and technology launches have also been achieved.

Over the next year, we intend to continue to broaden Enteq's existing product range through internal investment, technology licensing or acquisition and continuing to seek to pursue the buy and build model and grow value for shareholders.

Enteq's employees all deserve recognition for their commitment and achievements over the last year. It is they who have cemented Enteq's foundations by deploying their skills and enthusiasm so quickly and effectively. On behalf of the Board I would like to thank all members of staff.

 

Prospects

Enteq enters the new financial year with a strong balance sheet, with available cash of $24m and an unutilised bank funding line of $15m. North American market conditions appear to have settled as represented by trading since the year end.   Initiatives to continue a broadening of addressable market and market share continue. Improved trading is anticipated in the current financial year.

 

 

Neil Warner

Chairman

 

 

Chief Executive's Operating and Strategic Review

 

Introduction

Enteq Upstream plc was founded and listed on AIM in July 2011 with a strategy to acquire and build a technology and products businesses in the upstream oil and gas sector.  The first Enteq acquisition, XXT, was supported by a further equity fund-raise, and completed in May 2012.  Subsequent acquisitions of KM Services and Pro-Flow in Houston were completed in July 2012.

The acquisitions were focused on the directional drilling market in North America. The customer base, of Directional Drillers, operate Measurement While Drilling equipment on rigs drilling horizontal and deviated wells on land in USA and Canada. The demand for these wells has been dominated by the opportunity to exploit 'unconventional' shale oil and gas.

Subsequent to completing the acquisitions, Enteq has focused on integrating and transforming the acquired businesses into an international 'Reach and Recovery' business that can address the multi-billion-dollar global market for directional drilling.

Other acquisition opportunities have been appraised during the period but were not considered appropriate to complete at the time. Enteq's strategy is to continue to expand its product range for Directional Drilling technologies and equipment and to enter alternative, adjacent markets when the appropriate opportunities arise.

 

Reporting & performance indicators

A set of Key Performance Indicators have been set for the acquired companies. These are implemented immediately on completion of acquisitions and reported weekly to senior management who review, initiate action where required and follow-up. The following Key Performance Indicators are used:

Financial: Sales, gross profit%, EBITDA%, order intake, backlog, accounts receivable & payables ageing, working capital days and capital expenditure. Other performance measures: Number of reportable incidents.

Key market indicators regularly monitored by management and Board of Directors include: Global Rig Count, North American Rig Count, WTI Oil Price and Henry Hub Natural Gas Price.

Governance

Enteq is committed to maintaining high standards of Corporate Governance. As an AIM listed Company, Enteq is not obliged to follow the UK Corporate Governance Code (June 2010) but the Board has determined that the Company will seek to follow the code as far as practicable. During the period under review the Board has continued to develop internal controls and processes to ensure as far as possible compliance with the Code.

 

Strategy & Business Model

Market Overview

Enteq's products are sold to businesses providing oilfield services. This market is very significant, valued at some $100 bn1. The provision of services and operating technical equipment, is dominated by the major oilfield service companies such as Schlumberger, Halliburton, Baker Hughes and Weatherford. These vertically integrated companies have developed their own technologies and products and have an in-house supply chain. Generally, they do not sell or make these technologies available to competitors.

The smaller service companies and National Oil Companies which operate their own services generally do not have the ability to develop their own technologies and solutions and therefore to compete effectively, require a third-party equipment developer and supplier. National Oilwell Varco ($32bn Market Cap) and GE's Oil & Gas business are dominant suppliers of equipment. Enteq's strategy is to compete in this market with differentiated technologies and products supported by excellent customer service.

The market for sales of downhole drilling tools is around $3.3bn1.

1Spears Oilfield Market Report 2013

Enteq's addressable markets

The initial market addressed by Enteq through its acquisitions in 2012 is Directional Drilling and in particular Measurement While Drilling (MWD). The market size for Enteq's customers providing services in these markets is around $14bn1. Enteq provides:

(i)             equipment which is considered a capital purchase and which is used on a repeat basis (estimated life of product is 5 years in a drilling environment) and

(ii)            consumables and parts which wear through use and are replaced on a regular basis.

In North America there are approximately 2,100 drilling rigs, virtually all of which use MWD equipment. Outside North America (not including China) there are approximately 1,300 rigs. In North America approximately 65%1 of the market is dominated by the vertically integrated service companies; some 150 smaller independent directional drillers and MWD providers make up the remainder. The largest of these 'independents' will have the capability of operating on up to 200 rigs; these comprise Enteq's initial addressable market, which in a stable environment we estimate is valued at $300m-$400m.

Outside North America, the major providers again dominate, especially in the offshore and remote markets. Many local, regional and indigenous service providers exist which require equipment and support. China, Russia and Venezuela are currently Enteq's largest potential markets outside USA.

In North America during in the first half of 2012 the gas price fell due to over-production and the difficulties of transporting gas. However most of the rigs drilling for gas were transported to the oil producing regions where the demand for drilling was still high. Directional drillers remained at capacity during this period and continued to expand their fleets of MWD equipment. In mid-2012 the oil price fell, fuelled by political and other global economic uncertainties. The North American rig count dropped by approximately 20%1, where it has broadly remained through the end of 2012 and to date.

This drop in rig utilisation led to directional drilling companies having surplus equipment capacity. Whilst they continued to operate their equipment on hand, they ceased any expansion and utilised spare capacity to replace any equipment that may have become damaged or lost in hole. Hence capital expenditure from these customers was minimal during the period of declining rig count.

A further factor influencing the market is the huge pressure from oil producers for drilling contractors to become more efficient in (i) the time taken to drill wells and (ii) to reduce costs.  As equipment, such as that provided by Enteq, becomes more reliable and can operate for longer at elevated temperatures, it becomes possible to drill longer wells in a shorter time, enabling more rapid production from the well. Through the technical superiority and reliability of Enteq's equipment in these environments, Enteq's customers have gained market share from their less capable and reliable competitors.

The combined effect of Enteq's customers gaining market share and demand for replacement equipment (even in a flat market) brought new orders from existing customers during the last quarter of the financial year to March 2013, as resumption of capital expenditure and fleet expansion programs begins.

Overall demand for consumables and parts, driven by the number of feet drilled, has remained stable as activity continues.

 

Competition

The dominant third party supplier of MWD equipment to directional drilling companies is GE, whose product lines comprised the Tensor system and the Geolink and Bluestar products which it acquired with Sondex plc (the previous company operated by the founders of Enteq).  GE has discontinued the Geolink product line, which was the standard in the Eastern Hemisphere.

The Enteq MWD system is based around the technology developed by XXT, whose founders were also the key developers behind the Tensor system. Enteq's MWD system is therefore compatible with existing Tensor systems but allows a migration path to a number of the enhanced sensors and controls which are now integral to the Enteq solution.

A further competitor is APS, based in Connecticut, USA. APS has developed an MWD solution which has filled a gap in the market outside North America, especially as the Geolink product is no longer available. It is believed that APS has recently won a $100m supply contract to Venezuela, via a Chinese led integrated services package. This demonstrates the scale of the opportunities in Enteq's addressable markets. Enteq believes that its evolving solution will have technically differentiated features which set it ahead of APS.

Two other smaller USA based providers, both 'spin-offs' from GE, BenchTree and Tolteq, are present in the market as are various 'system integrators'.

Acquisitions

XXT

The business and assets of XXT were acquired in May 2012. XXT was a small focused group with 20 people developing firmware, down-hole electronics and sensors. They shipped the manufactured equipment as discreet components to their customers. The customer base was small (80% of business from its top 6 customers) with the technical capability to then integrate the XXT 'intelligence' into operational systems.

Since acquisition, Enteq has doubled XXT's floor space to 7,200 sq.ft, dedicating a new adjacent building to manufacture and test the sensors, electronics, and software. A new manufacturing manager (known to the business previously) has been appointed and will take over as the original manager retires this year. The small team of specialist technicians was maintained through the quieter periods of production in the first half of the year, but have recently again been working close to capacity. With the addition of locally available technicians, output could be more than doubled in the new facility.

The original facility has become dedicated to engineering and product development. Firmware, electronic, mechanical engineering and documentation resources have been added both to cascade the knowledge from the founders of the business and to accelerate new product introductions and enhancements.

Enteq-KMS

In July 2012, Enteq acquired the business and assets of the sister companies Pro-Flow and KM Services, located in facilities of 38,000 sq.ft. in South Houston.  Pro-Flow is a fabrication plant building specialist surface equipment needed by directional drilling companies. KM Services is a machining business, manufacturing spare parts and components used within drilling motors and MWD systems operated by the same directional drilling companies.  KM Services also undertook contract machining work for the integrated service companies such as Halliburton and Weatherford.

On acquisition, Pro-Flow and KMServices were rapidly integrated to become Enteq-KMS which has a common customer base, including a significant overlap with XXT.  Cross-product training was undertaken and shared relationships with key customers established. 

As part of the acquisition terms related to earn-out provisions, Enteq was required to maintain the existing General Manager in his role unless certain targets were not achieved. The level of engagement Enteq could bring to KMS was initially limited by this lack of day-to-day management influence.  After 6 months of ownership, the targets set had not been achieved and a change of management was made.  The business has required some re-focusing on core business, a review and improvement of systems and processes, improved inventory control and margin improvement. These changes are now underway.

Product development and introductions

A new Pulser product has been released to the market. This is a key component of a Measurement While Drilling string which transmits the data through a series of pressure pulses through the drilling fluid where it is received by surface system and displayed via software at the surface. The sales value of the pulser is $40,000. They are typically sold in pairs as part of the Enteq 'system' as well as being stand-alone and compatible products to GE/Tensor and other Tensor style systems. This is one of the key products identified on acquisition, commercialisation of which also secures part of the vendors' earn-out.

The surface acquisition system, which is a key differentiator for XXT, with unique functionality, has been enhanced and adapted enabling pull-through sales with key customers.

An Electromagnetic Data Transmission system ("EM") is currently in field trials and is showing positive initial results. If successful, some further engineering work is required and this will address a new market sector currently unavailable to Enteq or our customers and will 'pull-through' further system sales.  A system sale including EM is likely to be valued at $650k.

A 3-wire down-hole communication system, also an 'earn-out' related product, has progressed. This system will be incorporated in all new Enteq systems and become the core of a new, more reliable solution. Interfaces for other sensors, allowing third party digital sensors, to be added to the Enteq system are being released shortly.

Other technology agreements have been completed with external engineering groups to provide solutions related to power generation and formation evaluation which will further enhance and add considerable value to the Enteq solution.

People

Enteq is building a highly skilled and professionally staffed business and has recruited and promoted into key roles. Our management structure has been developed and we continue to invest in building our teams.

Facilities

Enteq now has operational facilities in Santa Clara, California; North & South Houston, Texas; Austin, Texas; and Amersham, U.K. Approximately 100 people are employed by the business.

In January 2013, Enteq opened a new 4,000 sq.ft sales and technical support centre in the Woodlands, North Houston.  This is an area of customer concentration and will allow improved communication and support to be given to existing and potential customers. This centre now houses sales and technical support for integrated XXT and KMS sales teams, as well as technical support. This is also where the Enteq MWD systems are being assembled.  Accelerated by an opportunity to acquire a full MWD system, and supported by the manufacture of significant lab and workshop facilities at KMS, a fully functional system can now be demonstrated to customers, provided for trials and sold from this location.  The XXT and KMS manufacturing units both ship components to this facility where they are assembled and tested as a system.

For new customers, Enteq will also sell a full set of lab and workshop equipment enabling a user-friendly 'turn-key' operation for the customer.  The sale price of two systems and lab equipment, which would be a minimum start-up requirement, would be priced at approximately $500k, as compared to a typical one-off sensor combination sale from XXT historically being approximately $50k.

New management, sales and support staff have been added, based in North Houston, many of whom were already known to Enteq.

In Austin, Texas and in Amersham, UK, Enteq has established small serviced offices for the corporate and finance functions. In the UK a corporate development resource has been added; this function includes early business development in the Eastern Hemisphere.

Sales & Marketing

Prior to acquisition, XXT had no proactive sales process.  KMS, on acquisition, had an immature, non oil-field focused team of account managers.  The XXT sale is a very technically led sale; the core group of customers was very sophisticated technically, knew what they needed and liked to have in-depth technical discussions with the founders of XXT regarding their requirement. New business was not actively sought out.

Enteq is a very sales oriented organisation, with the CEO, COO and all senior management actively engaged in customer meetings and business development.  A sales team for XXT components and the Enteq MWD system has been established in Houston with appropriate technical sales support and experience.   Key members of the team have migrated from GE and, therefore, know the market and customers very well.  The team at KMS is still in transition to becoming fully developed and integrated, with team members having the appropriate industry knowledge.

Sales programmes have been established which are successfully allowing Enteq to gain market share and enable migration to the Enteq system.  Trial periods are offered with purchase options. Rental options are also offered in order to facilitate new customer entry.

Some notable successes have been achieved. For example one of the largest independent North American directional drillers decided to transition all of their existing GE/Tensor systems, initially to the XXT Downhole Interface Module, which is the processing core of the system, and potentially later to incorporate a broader range of Enteq's sensors.

Internationally, an early success has been achieved with one of the largest independent Russian services companies agreeing a supply contract with Enteq and initial products supplied. A broader technical partnership is under discussion. Other near-term potential opportunities exist in China and Venezuela. For these markets, however, additional formation evaluation sensors are required as part of the system, and Enteq is currently in negotiations to partner or license this technology.

A common marketing communications approach has been taken across the Group, with corporate branding guidelines ensuring consistency across all presentational materials.  A common structure, design and lay-out of web-sites has been achieved and a unified marketing communication package introduced. The global industry show, Offshore Technology Conference in Houston was attended in early May with a strong, unified presence established. Enteq is a name the industry now recognises.  

Further Acquisitions

Enteq's vision and strategy to develop a global business with multiple technology solutions and differentiated product divisions remains clear.  Opportunities both to expand the range of products within the current drilling division and to find a suitable platform from which to build in parallel markets are continually explored.

Current market conditions have led to a mismatch between opportunity and vendor price expectation, such that some of the opportunities explored are not appropriately priced, or are not available now.

Broadening the existing product range for directional drilling is being aggressively pursued through internal investment in engineering resource, technology licensing or acquisition and investment in products more suited to a rental fleet for this market.

 

Conclusion

Enteq has been transformed in the last year from an investment shell into a leading supplier of MWD systems to a huge global market.  Acquisitions have been completed and integrated and step-change progress achieved within the product range offered to existing and potential customers.

The image of the company is that of an international supplier of high quality and professional solutions.

Challenging market conditions led to disappointing financial results for the first period of ownership of the acquired businesses.   However, the potential for medium term growth and financial performance has been enhanced during the year, with a great deal more still to do. Improved trading is anticipated in the current financial year.

Enteq's consistent strategy remains to buy, integrate and build high quality technology and products businesses for the upstream oil & gas industry, which has substantial market potential.

 

 

Martin Perry

Chief Executive Officer

18 June 2013

 

 

Financial Review

                Introduction

The Group results incorporate 10.5 months trading for XXT and 8.5 months for KMS together with a full year of central operating costs. No comparisons for the period to 31 March 2012 are made because no acquisitions had been completed during that period.

Results

Year ended 31 March 2013

 Division

$million

Group

$million

Total

$million

Revenue

15.4

-

15.4

Gross profit

6.6

-

6.6

Overheads

(3.3)

(3.2)

(6.5)

Adjusted EBITDA

3.3

(3.2)

0.1

Release of contingent consideration

-

7.5

7.5

Transaction costs - exceptional item

-

(1.2)

(1.2)

Other exceptional items

-

(0.2)

(0.2)

Foreign exchange

-

(1.0)

(1.0)

Depreciation & amortisation

(0.5)

(5.4)

(5.9)

Interest

-

0.1

0.1

Profit/(loss) before tax

2.8

(3.4)

(0.6)

Tax

(0.1)

-

(0.1)

Profit/(loss) after tax

2.7

(3.4)

(0.7)

 

Revenues from XXT, as described in the Operating Review, were below pre-acquisition run rate.  KMS continued at its pre-acquisition level.   Gross profit margin at XXT, post acquisition, was in line with its pre-acquisition margin.  KMS's gross profit margin fell slightly during the reported period, in which the acquired businesses were being integrated.

Overheads at XXT increased as the investments in enhanced production facilities and engineering resource were made.  At KMS there was no significant change from pre-acquisition levels. Central overheads of $3.2m were incurred to support both the Group's operations and in continuing its buy-and-build strategy.

The Group's operating businesses contributed an adjusted EBITDA of $3.3m for the period from acquisition to the year-end.

Both of the acquisitions included elements of contingent consideration, which are payable if the businesses achieve agreed performance targets. At completion, provisions for payment of the present value of the maximum potential sums are made in accordance with IFRS. At the date of signing these financial statements the performance of the businesses against these targets are assessed. Where management believes that these targets have or will not be reached, the provision is adjusted accordingly. IFRS requires that where there is a change in market conditions post completion, any release of such provisions is shown in the Income Statement. Accordingly the sum of $7.5m has been released as an exceptional credit.

Transaction costs of $1.2m were incurred both in relation to the completed acquisitions ($1.0m) and to undertaking appraisals of potential transactions.

The foreign exchange charge results from the movement in the GBP/USD exchange rate on the GBP cash balances held by Group following the completion of the acquisition of XXT.

Amortisation is charged in respect of the acquired intangible assets and is charged over their estimated useful lives which are described in note 7b below.

A tax charge of $0.1m arises in respect of Texas Franchise tax, which cannot be offset against tax losses which arise across the Group's operations.

 

Balance sheet

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

As at 31 March

 2013

$million

2012

$million

Goodwill

19.6

-

Plant & equipment

3.7

-

Intangibles

39.0

-

Net working capital

4.6

(1.1)

Cash

23.9

20.8

Contingent consideration

(3.4)

-

Net assets

87.4

19.7

 

Capital & reserves

87.4

19.7

 

The principal movements on the balance sheet result from the acquisitions which the Group has undertaken in the year (see below), together with the associated fundraising.

Management carefully reviews the carrying value of goodwill arising on acquisitions. This process involves 'impairment testing' in which the carrying value of goodwill is compared to the net present value of the expected future cashflows which derive from the acquired businesses. The Board has concluded that these tests demonstrate sufficient headroom above the carrying values for these to be maintained without need for any impairment provision.

 

Cash flows


 2013

$ million

2012

$ million

Opening cash balances

20.8

-

Cash generated from operations

2.9

-

Capital raised (net of costs)

65.4

23.1

Acquisitions (including costs)

(60.6)

(0.9)

Central overheads

(3.6)

(1.3)

Foreign exchange movements

(1.0)

(0.1)

Closing cash balances

23.9 

20.8

 

In addition to the cash balance shown above, the Group has a $15m Revolving Credit Facility in place with HSBC, which is available for working capital, capital expenditure and acquisitions.

 

The principal movements in cash during the year comprised the inflow from equity issued and the initial consideration for the acquisitions of both XXT and KMS.  Cash conversion from operations was 87%.  Central overhead cash outflow included the payment of transaction fees incurred in the period ended 31 March 2012.

 

Acquisitions

On 18 May 2012 Enteq completed the acquisition of substantially all of the assets of XXT Inc. The initial consideration for the assets and business was $43.1m in cash and $3.0m in newly issued Enteq shares, as well as up to $8.0m in contingent consideration. Details of the transaction are set out in Note 6 below.

On 23 July 2012 Enteq announced further acquisitions of substantially all of the assets of M&R Industries and Pro-Flow Fabrication Technologies (together now referred to as Enteq-KMS). The initial consideration was $11.5m (payable in cash and was satisfied from Enteq's existing resources) as well as up to $6.0m in contingent consideration. Enteq also acquired a 5-acre site from which the businesses operate for a cash consideration of $2.3m. Details of the transaction are set out in Note 6 below.

 

Financial Capital Management

The Group's financial position is robust. The Group had no bank borrowings or other debt at the balance sheet date.

In addition to holding cash balances of $23.9m (2012 - $20.8m), the Group secured a Revolving Credit Facility of $15m with HSBC during the year. This flexible facility may be utilized to fund working capital, internal investments or acquisitions.

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 share placings, 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.

 

                Annual Report and Accounts

The 2013 Annual Report and Accounts and a Notice of its Annual General Meeting are being posted today to shareholders today. The Report and Accounts for the year ended 31 March 2013 and the Notice of Annual General Meeting are also available on the Company's website, www.enteq.com

 

Annual General Meeting

The Company's Annual General Meeting will be held on 11 September 2013 at 12.30 at 2 Gresham Street, London EC2V 7QP. The documents being sent to shareholders today in connection with the Company's Annual General Meeting are:

·           Report and Accounts for the year ended 31 March 2013

·           Notice of Annual General Meeting

·           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

 

Ian Leaman

Chief Financial Officer

18 June 2013

 

 

Enteq Upstream plc




Condensed Consolidated Income Statement






Year to 31 March 2013

Period to 31 March 2012


Notes

$ 000's

$ 000's





Revenue


15,368

-

Cost of Sales


(8,792)

-

Gross Profit


6,576

Administrative expenses before amortisation


(7,029)

(1,875)

Amortisation of acquired intangibles


(5,423)

-

Release of contingent consideration

3

7,493

-

Other exceptional items

3

(1,414)

(1,542)

Foreign exchange loss on operating activities


(948)

(116)

Total Administrative expenses


(7,321)

(3,533)

Operating loss


(745)

(3,533)





Finance income


158

220

Finance expense


(62)

-





Loss before tax


(649)

(3,313)





Tax expense

4

(60)

-

Loss for the period


(709)

(3,313)





Loss attributable to:




Owners of the parent


(709)

(3,313)





 

 




Earnings per share (in US cents):

       5



Basic


(1.33)

(28.78)

Diluted


(1.33)

(28.78)





Adjusted earnings per share (in US cents):

5



Basic


(0.78)

(13.42)

Diluted


(0.78)

(13.42)

 

 

 

Condensed Consolidated Statement of Comprehensive Income


Year to 31 March 2013

Period to 31 March 2012







$ 000's

$ 000's





Loss for the period


(709)

(3,313)

Total comprehensive income for the period


(709)

(3,313)





Total comprehensive income attributable to:




Owners of the parent


(709)

(3,313)

 

 

Enteq Upstream plc




Condensed Statement of Financial Position

 




 



As at  31 March 2013

As at 31 March 2012

 


Notes

$ 000's

$ 000's

 

Assets




 

Non-current




 

Goodwill

7a

      19,619

-

 

Intangible assets

7b

        38,962

-

 

Property, plant and equipment


      3,699

            6

 





 

Non-current assets


        62,280

            6

 





 

Current




 

Trade and other receivables


          4,929

            64

 

Inventories


         3,751

-

 

Cash and cash equivalents


        23,949

        20,844

 





 

Current assets


        32,629

        20,908

 





 

Total assets


       94,909

        20,914

 





 





 

Equity and liabilities




 





 

Equity




 

Share capital


939

         242

 

Share premium


90,395

        22,766

 

Share based payment reserve


143

            19

 

Retained earnings


(4,022)

(3,313)

 





 

Total equity


       87,455

        19,714

 





 

Liabilities




 

Current




 

Trade and other payables


         4,093

         1,200

 





 

Non-current




 

Contingent Consideration


          3,361

 





 

Total liabilities


          7,454

          1,200

 





 

Total equity and liabilities


        94,909

        20,914

 

 

 

Enteq Upstream plc

Condensed Consolidated Statement of Changes in Equity

 





Share



Called up



based



share

Retained

Share

payment

Total


capital

earnings

premium

reserve

equity


$ 000's

$ 000's

$ 000's

$ 000's

$ 000's







Issue of share capital

697

-

69,059

-

69,756

Cost of share issue

-

-

(1,430)

-

(1,430)

Share based payment charge

-

-

-

124

124







Transactions with owners

697

                -  

67,629

124

68,451







Loss for the period

-

(709)

-

-

(709)







Total comprehensive income

                -  

(709)

                -  

                -  

(709)







Total movement

697

(709)

67,629

124

67,741

As at 1 April 2012

242

(3,313)

22,766

19

19,714







As at 31 March 2013

938

(4,022)

90,395

143

87,455



















Issue of share capital

242

-

23,924

-

24,166

Cost of share issue

-

-

(1,158)

-

(1,158)

Share based payment charge

-

-

-

19

19







Transactions with owners

242

                -  

22,766

19

23,027







Loss for the period

-

(3,313)

-

-

(3,313)







Total comprehensive income

                -  

(3,313)

                -  

                -  

(3,313)







As at 31 March 2012

242

(3,313)

22,766

19

19,714

 

 

 

Enteq Upstream plc

Condensed Consolidated Statement of Cashflows


Year to 31 March 2013

Period to 31 March 2012


$ 000's

$ 000's

Cash flows from operating activities



Operating Loss after income tax

(709)

(3,313)

Net finance income

(96)

(220)

Share-based payment non-cash charges

124

19

Foreign exchange difference

949

116

Release of Contingent Consideration

(7,493)

-

Depreciation and Amortisation charges

5,951

2





(1,274)

(3,396)




Increase in inventory

(1,042)

-

Increase in trade and other receivables

(941)

(64)

Increase in trade and other payables

566

1,121




Net cash from operating activities

(2,691)

(2,339)




Investing activities



Purchase of businesses

(57,532)

(8)

Purchase of intangible fixed assets

(824)

-

Purchase of fixed assets

(320)

-

Interest received

96

220




Net cash from investing activities

(58,580)

                     212







Financing activities



Share issue

66,755

                24,165

Fund raising costs

(1,430)

(1,158)

Incentive share issue

 -

80




Net cash from financing activities

65,325

                23,087







Increase in cash and cash equivalents

4,054

                20,960




Non-cash movements - foreign exchange

(949)

(116)

Cash and cash equivalents at beginning of period

                20,844

                       -  




Cash and cash equivalents at end of period

23,949

20,844

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.     BASIS OF PREPARATION

The results for the year ended 31 March 2013 have been prepared using the accounting policies and methods of computation consistent with those used in the Group's annual report for the period ended 31 March 2012.  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 2013 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 2013 and the period ended 31 March 2012 but is derived from those accounts.  Statutory accounts for 2012 have been delivered to Companies House.   Those for the year ended 31 March 2013 will be delivered following the Company's Annual General Meeting on 11 September 2013.

 

The financial information has been extracted from the Group's Annual Report for the year ended 31 March 2013. 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 2013 Annual Report and Accounts in July 2013.

 

 

 

2.     SEGMENTAL REPORTING

For management purposes, the Group is currently organised into a single business unit, the Drilling Tools

division, which is currently based solely in the USA.

 

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

 

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

 


31 March 2013

31 March 2012


USD 000's

USD 000's




Europe (UK)

22,467

19,791

United States

64,989

(77)




Total Group assets

87,456

19,714




3.     PROFIT AND LOSS ANALYSIS

 

The following analysis illustrates the performance of the Group's activities, and reconciles the Group's profit, as shown in the condensed consolidated income statement, to adjusted earnings. Adjusted earnings is presented to provide a better indication of overall financial performance and to reflect how the business is managed and measured on a day-today basis. The adjusted earnings before interest, taxation, depreciation and amortisation ("adjusted EBITDA") is also presented as it is a key management metric.

 


31 March 2013

31 March 2012


USD 000's

USD 000's




Loss attributable to ordinary shareholders

(709)

(3,313)

Tax Charge

60

-

Release of contingent consideration1

(7,493)

-

Other exceptional items2

1,414

1,542

Amortisation of acquired intangible assets

5,423

-

Foreign exchange movements

949

116

Adjusted earnings

(356)

(1,655)




Depreciation charge

528

2

Net finance income

(96)

(220)




Adjusted EBITDA

76

(1,873)

 

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

 

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


31 March 2013

31 March 2012


USD 000's

USD 000's




Acquisition related costs

1,162

1,542

Charge relating to issue of shares

190

-

Severance to employee of acquired business

62

-

Total exceptional items

1,414

1,542

 

 

 

 

 

4.     INCOME TAX

 

      Analysis of tax expense

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

 

Factors affecting the tax charge

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

 


31 March 2013

31 March 2012


USD 000's

USD 000's




Loss on ordinary activities before tax

(709)

(3,313)







Loss on ordinary activities multiplied by the

standard rate of corporation tax in the UK of 24% (2012: 26%):

 

 

(170)

 

 

(861)

Effects of:



Tax losses to carry forward

170

861

Texas State Franchise Tax

60

-




Total income tax

60

-

 

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 $3.0m; United States $3.5m. (2012: UK $0.5m). There were no significant deferred tax liabilities.

 

 

 

 

5.     EARNINGS PER SHARE AND DIVIDENDS

 

Basic earnings per share

Basic earnings per share is calculated by dividing the loss attributable to ordinary shareholders for the year of $709k (Period to 31 March 2012: loss of $3,313k) by the weighted average number of ordinary shares in issue during the year of 53,178k (31 March 2012: 11,511k).

 

 

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 $416k (Period to 31 March 2012: loss of $1,544k), by the weighted average number of ordinary shares in issue during the year of 53,178k (31 March 2012: 11,511k).

 

As the Group is loss making, any potential issue of ordinary shares have the effect of being anti-dilutive.   Therefore, the diluted EPS is the same as the basic EPS and the adjusted diluted EPS the same as adjusted EPS.

 

The adjusted diluted earnings per share information are considered to provide a fairer representation of the Group's trading performance.

 

March 2013:

EPS

 

Earnings

Weighted average  number of shares

Per-share amount


 USD 000's

USD 000's

  US cents





Loss attributable to ordinary

shareholders

(709)

53,178

(1.33)

Foreign exchange movements

949

-

-

Amortisation of intangible assets

5,423

-

-

Exceptional items

(6,079)

-

-





Adjusted

(416)

53,178

(0.78)

 

 

March 2012:

EPS

 

Earnings

Weighted average  number of shares

Per-share amount


 USD 000's

USD 000's

  US cents





Loss attributable to ordinary

shareholders

(3,313)

11,511

(28.78)

Foreign exchange movements

148

-

-

Amortisation of intangible assets

-

-

-

Exceptional items

1,620

-

-





Adjusted

(1,545)

11,511

(13.42)

      

 

During the year Enteq Upstream Plc did not pay any dividends (2012: nil).

 

 

6.     ACQUISITION OF SUBSIDIARIES

 

XXT Incorporated

 

On 18 May 2012, the Group acquired substantially all of the operating assets and certain liabilities of XXT Incorporated, a California based business specialising in the design and manufacture of high-quality, ruggedized

electronic equipment for use in the energy exploration and services sector of the Oil and Gas industry.

 

The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Group, in respect of this acquisition:


XXT

carrying

value

 

 

Adjustments

 

 

Fair value

 


USD 000's

USD 000's

USD 000's

Property, plant and equipment

149

(31)

117

Other intangibles

-

35,879

35,879

Inventory

804

-

804

Other working capital

2,046

(700)

1,346

Cash and cash equivalents

370

-

370

Net assets acquired

3,369

35,148

38,517

Goodwill arising on acquisition

-

15,127

15,127


3,369

50,275

53,644

Consideration paid and costs incurred:




Consideration satisfied in cash to Vendors



39,091

Payment to escrow account



4,004

Working capital adjustment



1,362

Total cash payments



44,457

Satisfied in shares



3,000

Contingent consideration (less than one year)



3,093

Contingent consideration (greater than one year)



3,094

Total consideration incurred



53,644





Consideration paid in cash



43,095

Cash acquired



(370)

Total net cash outflow



42,725

 

Other Intangibles:

 

The total of $35.9m of other intangible assets can be analysed as follows:

 

 

 

Developed technology



9,857

Intellectual Property and R&D technology



4,439

Brand name



1,240

Customer relationships



15,285

Non-compete agreements



5,058




35,879

Consideration transferred

The acquisition was settled in cash amounting to $44.5m, and new ordinary shares with a market value at the date of acquisition of $3.0m.

 

The purchase agreement also included additional contingent consideration of up to $8.0m payable in two annual instalments following the closing date, should certain performance targets be met. The total amount payable is based on revenue growth and volumes of product sales in the future and range from $nil to $8.0m. Management have estimated the total amounts expected to be paid based on forecasts for the business and their judgement.

 

Acquisition-related costs amounting to $0.4m are not included as part of consideration transferred and have been recognised as an expense in the consolidated income statement, as part of other exceptional items, so far as they were incurred in the period.

 

Deferred tax

The identified intangible assets are expected to be fully deductible for tax purposes. Hence no deferred tax arises on the recognition of these assets.

 

 

XXT's notional contribution to the Group results

From the date of acquisition to 31 March 2013, the business has contributed $6.8m to Group revenue and $1.2m to loss before tax, after exceptional items. If the acquisition had occurred on 1 April 2012, the business would have contributed $7.8m to Group revenue and $1.5m to loss before tax.

 

Goodwill of $15.1m, recognised on this acquisition, relates to certain assets that cannot be separately identified. These items include sector knowledge and the anticipated future profitability that the Group can bring to the business acquired.

 

 

M&R Industries, Ltd. and Pro-Flow Fabrications Technologies, Ltd. (together known as KMS)

 

On 23 July 2012, the Group acquired, through its indirect wholly-owned subsidiary, Enteq KMS LLC, substantially all of the business and assets and some of the liabilities of M&R Industries, Ltd. and Pro-Flow Fabrication Technologies, Ltd. for an initial consideration of $11.5m. M&R (using the trading name KM Services) and Pro-Flow, manufacture and sell specialised parts and products for Directional Drilling and Measurement While Drilling operations.

 

The following table sets out the book values of the identifiable assets and liabilities acquired and their fair

value to the Group, in respect of this acquisition:

 


KMS

carrying

value

Adjustments

Fair value

 


USD 000's

USD 000's

USD 000's

Property, plant and equipment

3,784

-

3,784

Other intangibles

-

7,682

7,682

Inventory

1,980

(293)

1,687

Other working capital

550

(84)

466

Cash and cash equivalents

250

-

250

Net assets acquired

6,565

7,305

13,869

Goodwill arising on acquisition

-

4,492

4,492


6,565

11,797

18,361

Consideration paid and costs incurred:




Consideration satisfied in cash



10,200

Payment to escrow account (present value)



1,239

Total cash payments



11,439

Purchase of additional land



2,254

Contingent consideration (less than one year)



2,334

Contingent consideration (greater than one year)



2,334

Total consideration incurred



18,361





Consideration paid in cash



11,439

Cash acquired



(250)

Total net cash outflow



11,189

 

Other Intangibles:

 

The total of $7.7m of other intangible asset can be analysed as follows:

 

Developed technology



1,507

Customer relationships



5,301

Non-compete agreements



874




7,682

 

Consideration transferred

The acquisition was settled in cash amounting to $11.4m.

 

The purchase agreement also included additional contingent consideration of up to $6.0m payable in two annual instalments following the closing date should certain performance targets be met. The total amount payable is based on volumes of product sales in the future and range from $nil to $6.0m. Management have estimated the total amounts expected to be paid based on forecasts for the business and their judgement.

 

Acquisition-related costs amounting to $0.6m are not included as part of consideration transferred and have been recognised as an expense in the consolidated income statement, as part of other exceptional expenses, so far as they were incurred in the period.

 

Deferred tax

The identified intangible assets are expected to be fully deductible for tax purposes. Hence no deferred tax arises on the recognition of these assets.

 

KMS's notional contribution to the Group results

From the date of acquisition to 31 March 2013, the business has contributed $8.6m to Group revenue and $3.6m to profit before tax, after exceptional items. If the acquisition had occurred on 1 April 2012, the business would have contributed $12.1m to Group revenue and $4.8m to profit before tax.

 

Goodwill of $4.5m, recognised on this acquisition, relates to certain assets that cannot be separately identified. These items include sector knowledge and the anticipated future profitability that the Group can bring to the business acquired.

 

7.     INTANGIBLE ASSETS

 

a)     Goodwill


USD 000's

Cost:


On acquisition of XXT

15,127

On acquisition of KMS

4,492

As at 31 March 2013

19,619



Impairment:


Charge for the year

-

As at 31 March 2013

-



Net Book Value:


As at 31 March 2013

19,619

 

 

b)    Other Intangible Fixed Assets

 


Developed technology

IPR&D technology

Brand names

Customer relationships

Non- compete agreements

Total


USD 000's

USD 000's

USD 000's

USD 000's

USD 000's

USD 000's

Cost:







On acquisition of XXT

9,857

4,439

1,240

15,285

5,058

35,879

On acquisition of KMS

1,507

-

-

5,301

873

7,681

Capitalised in period

-

824

-

-

-

824

As at 31 March 2013

11,364

5,263

1,240

20,586

5,932

44,384








Amortisation:







Charge for the year

2,306

555

54

1,500

1,007

5,422

As at 31 March 2013

2,306

555

54

1,500

1,007

5,422








Net Book Value:







As at 31 March 2013

9,058

4,708

1,186

19,086

4,924

38,962

 

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.

 

 

The acquisitions XXT and KMS were part of the Group's strategic plan and were completed in anticipation of one another, with common synergies identified. Management are of the opinion that the value of these synergies is proportional to the value of each business. As such the goodwill attributable to each CGU is considered to be consistent with the goodwill arising on each acquisition.

 

 

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

 

 

8.     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.

 

 

9.     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 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 2012 and adopted for the financial year ended 31 March 2013, 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 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 Operating Officer

Ian Leaman                    Chief Financial Officer

 

 

Non-Executive Directors

Neil Warner                    Chairman

Iain Paterson                 

Robin Pinchbeck           

      

 

A copy of this report will also be available on the Group's website at www.enteq.com.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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