Enteq Technologies plc

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

Interim results for the six months ended 30 September 2022

and

IMC Investor Presentation

Enteq Technologies plc (AIM: NTQ.L) the energy services technology and equipment supplier, today announces its interim results for the six months ended 30 September 2022.

Key Highlights

·  Measurement While Drilling revenues in H1 were significantly up on this time last year due to North American activity, albeit at lower margins due to share of third-party equipment sales.

·   International sales were limited due to lagging international market recovery and ongoing China shut-downs.

·   The SABER engineering project has progressed with the initial fleet of the latest design of SABER tools being built. The complementary MegaHop technology development has been launched.

·  All initial testing of SABER has achieved the objectives with encouraging results. Active drilling in hard-rock environment has been scheduled at an independent test-site in Norway and customer trials arranged.

·   Investment in SABER has continued using existing balance sheet resources to progress into the final engineering phase and SABER tool-build, resulting in a cash position of US$1.8m at the end of the period rising to US$2.5m as at the date of this announcement.

Financial metrics       

Andrew Law, CEO of Enteq Technologies plc, commented:

"Enteq continues to adapt to the changing global and industry dynamics by focusing on the higher margin potential in the significantly larger (>US$2bn) growth market of Rotary Steerable Drilling where SABER can offer a differentiated and cost-effective alternative. Progress continues with the build and test of the SABER system. Resources from the existing balance sheet are being used to support bringing SABER to commercialisation."

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 22 November 2022 at 10:30am GMT.

The presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via the Investor Meet Company dashboard up until 9.00am 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 www.investormeetcompany.com/enteq-upstream-plc/register-investor. Investors who already follow Enteq on the Investor Meet Company platform will automatically be invited.

For further information, please contact:

Enteq Technologies 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, Fergus Sullivan (Corporate Finance)

Andrew Burdis, Barney Hayward (ECM)

^*Adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements, performance share plan charges and exceptional items - see note 5

Interim Report

CHAIRMAN & CHIEF EXECUTIVE OFFICER'S REPORT

Overview

Enteq supplies and develops drilling and measurement technology for the worldwide oil and gas, geothermal and methane capture directional drilling markets. Enteq provides equipment through rental or purchase, enabling independent and regional directional drilling companies to operate as an alternative to major integrated service companies. Directional drilling encompasses Rotary Steerable Systems ("RSS") and Measurement While Drilling ("MWD").

As a step change to the original MWD business, Enteq is commercialising the SABER (Steer At-Bit Enteq Rotary) RSS Tool, a truly disruptive and unique alternative to both conventional RSS and traditional directional drilling. SABER can allow Enteq to access a considerably larger addressable market with notably fewer active competitors compared to those in the MWD market. The SABER Tool is an evolution of the intellectual property developed, proven in concept and successfully tested downhole by Shell. Enteq has the exclusive worldwide licence to the intellectual property and is now progressing through the field-trial programme ahead of commercialisation.

Enteq's MWD business has an established reputation for reliability both in North America, where operations using Enteq equipment are regularly being carried out on a significant number of rigs, and in key international areas and in geothermal operations.

Financial performance

The key driver of the half year revenue of US$4.9m has been the steady increase in North American drilling activity, a continuation of the recovery seen through the whole of the previous financial year. This recovery has been a function of the relative stability in the price of a barrel of West Texas Intermediate ("WTI"), despite a weakening during the month of September itself. The average price of WTI in the period under review was US$101, moving from US$104 on 1 April to US$80 at the period end. This stability, at a relatively high price, resulted in the North American onshore active drilling rig count rising by 14%; from 673 on 1 April to 765 at the end of September.

As expected, the international markets have been slower to respond to this price stability. The proportion of international revenue, at 3% in this reporting period, continues the recent trend with the international revenue of the second half of the previous financial year at 9%, down from the 28% seen in the first half year.

The reported gross margin of 28% in the first half of this year compares to 35% in the six months to 31 March 2022 and 37% in the equivalent period to 30 September 2021. This reduction is due to a lower proportion of sales coming from the high margin rental revenue stream (down from 23% in the first half year to 30 September 2021 to only 7% in this reporting period) combined with a higher proportion coming from the electronic component product line (up from 46% to 53% in same periods) within which an increasing number of third party, lower margin, items were sold.

In the six months ended 30 September 2022, administrative expenses before amortisation, depreciation and long-term incentive scheme charges were US$1.3m. This is down from both the US$1.4m in the equivalent period to 30 September 2021 and the US$1.8m in the six months to 31 March 2022, reflecting the continuing focus on cost control measures.

The adjusted EBITDA profit in the period was US$0.1m, a pleasing improvement over the US$0.6m loss in the equivalent period last year. The primary reason for the improvement was the uplift in revenue and associated gross margin. A reconciliation between the reported loss and the adjusted EBITDA profit is shown in note 5 to the Financial Statements below.

Cash balance and cashflow

On 30 September 2022, the Group had a cash balance of US$1.8m down US$3.0m on the US$4.8m reported as at 31 March 2022. As at the date of this announcement the cash balance was US$2.5m.

The half year cash movement can be analysed as follows:

The increase in trade receivables relates to strong revenues towards the end of the period with the outstanding balances being collectable in future months. The R&D expenditure was primarily relating to the SABER Rotary Steerable System development program. Management expects that the future cash balances are sufficient to complete SABER's field-testing phase and to bring it to a successful commercial launch.

Operations

Enteq's dedicated SABER technology and manufacturing centre is now fully operational, having opened in February 2022. This facility is located close to Cheltenham, UK, one of the global centres of expertise for Rotary Steerable Systems with access to specialised engineering and machining firms. 

The engineering, manufacturing and distribution functions related to the MWD division continues to operate from the Enteq owned facility in Houston, Texas. 

SABER field-testing is the priority for progression to the commercialisation phase. The SABER project has continued to progress according to the development plan, with the improved latest design of SABER entering the downhole-readiness phase for active drilling testing. This latest improved, simplified and ruggedised design is an outcome of the successful initial downhole passive testing, followed by an accelerated production and assembly programme to deliver downhole-ready tools. Extensive testing at surface has both re-validated this unique concept and refined the design. Active downhole drilling field-testing has been booked at a test site Norway, with follow-up active downhole drilling planned with selected customer test partners keen to continue the move into the commercialisation phase. 

In line with the direction of the industry, chiefly the growth market opportunity for Rotary Steerable Systems, the Company strategy has been aligned with ensuring the technical and commercial success of SABER. A concerted effort is in place to utilise the assets on the balance sheet to provide financial resources for SABER commercialisation and build-up of the rental fleet. Following initial active drilling testing, the focus will be on pre-production design improvements and building-up the SABER rental-fleet as rapidly as possible, subject to any supply chain constraints, to support deployment into the selected initial regions.

To support SABER, there is a disciplined strategy to concentrate the MWD business on cash-generative commercial deals. As the MWD market is becoming increasingly commoditised, the decision has been taken to focus on providing customers with differentiated technologies with the potential to enhance SABER deployment to customers. For example, our recent introduction of our MegaHop¹ technology can allow communication from SABER to customers' existing equipment. 

Organisation

The MWD division has personnel operating from Houston and the SABER division has personnel operating from Houston and Cheltenham.  

Outlook

The underlying macro-fundamentals for RSS show that the market and RSS usage is increasing and that this market is in need of additional competition. Extensive and continued industry engagement by Enteq, including recent attendance at the ADIPEC global trade show, has confirmed there is a high level of potential demand for SABER in each of the key geographies where Enteq operates. In particular, this potentially disruptive technology has a strong product-market fit having the potential for lower cost of operation as well as reduced risk.

Andrew Law                                                    Martin Perry

Chief Executive                                              Chairman

Enteq Technologies plc

15 November 2022

¹ www.enteq.com/news-media/2022/09/enteq-technologies-launches-real-time-communications-solution-for-rss-and-mwd-operations

ENTEQ TECHNOLOGIES PLC

NOTES TO THE FINANCIAL STATEMENTS

For the six months to 30 September 2022

1.    Reporting entity

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, Berkshire, SL5 7HP.

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

Both the Company and its subsidiaries (together referred to as the "Group") provide equipment to energy service companies for use in the hydrocarbon and geothermal extraction sectors.

2.    General information and basis of preparation

The information for the period ended 30 September 2022 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 2022 has been delivered to the Registrar of Companies. The auditors have reported on these accounts; their reports were unqualified, but did draw attention to the uncertainty regarding the carrying value of the inventory by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

The 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 (US$), 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 15 November 2022.

This half-yearly financial report has not been audited and has not been formally reviewed by auditors under the Auditing Practices Board guidance in ISRE 2410.

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 2022. These accounting policies are consistent with those applied in the preparation of the accounts for the period ended 31 March 2022.

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 2022.

5.    Adjusted earnings and adjusted EBITDA

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

6.  Exceptional items

The exceptional items can be analysed as follows:

7.    Segmental Reporting

For management purposes, the Group is currently organised into a single business unit, the Drilling Division, which is based, operationally, primarily in the USA but with a technology centre based in the UK.

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 denominated in US$.

8.    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 US$766,000 (September 2021: loss of US$1,205,000) by the weighted average number of ordinary shares in issue during the period of 69,247,129 (September 2021: 68,415,563).

9.    Income Tax

No tax liability arose on ordinary activities for the six months under review. 

10.  Intangible Fixed Assets

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 in the foreseeable future.

Brand names:

The value associated with various trading names used within the Group.

Customer relationships:

The value associated with the on-going trading relationships with the key customers acquired.

11.  Share capital

Share capital as at 30 September 2022 amounted to US$1,081,000 (31 March 2022: US$1,072,000 and 30 September 2021: US$1,070,000).

12.  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 2022 of US$1.8 million.

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.

13.  Principal risks and uncertainties

Further detail concerning the principal risks affecting the business activities of the Group is detailed on pages 11 to 13 of the Annual Report and Accounts for the period ended 31 March 2022. Consideration has been given to whether there have been any changes to the risks and uncertainties previously reported. None have been identified.

14.  Events after the balance sheet date

There have been no material events subsequent to the end of the interim reporting period ended 30 September 2022.

15.  Copies of the interim results

Copies of the interim results are available from the Group's website at www.enteq.com.