Press

EnQuest Results for the Six Months Ended 30 June 2018


Material growth in production and cash generation; all 2018 guidance reaffirmed.
Repayment of debt remains a priority

Results for the six months ended 30 June 2018
7 September 2018

Unless otherwise stated, all figures are on a Business performance basis and are in US Dollars.

Highlights and outlook

  • EnQuest is proposing to undertake a Rights Issue for $138 million to facilitate the exercise of its option to acquire the remaining 75% interest in the Magnus field (see separate announcement).
    • The acquisition would bring approximately 60 MMboe of 2P reserves, a material increase to production and provide an additional net present value to the Group of approximately $500 million
    • Funds from the Rights Issue will primarily be used for the $100 million cash consideration and to deliver a two-well 2019 infill drilling programme
  • Group net production up 45.9%, averaging 53,990 Boepd in the six months to end June 2018; full year 2018 guidance of 50,000 Boepd to 58,000 Boepd reaffirmed
    • Kraken average gross production was c.31,000 Bopd in the first half of 2018 and has subsequently improved following increased water injection; DC4 subsea infrastructure installed ahead of drilling programme
    • New wells at Heather, Magnus and PM8/Seligi are onstream and producing in line with the Group's expectations; second Magnus well due online in the coming days
    • Three Alma/Galia workovers completed in August; aggregate production increased as planned
  • Increased revenue of $548.3 million (2017: $294.8 million) and EBITDA of $311.9 million (2017: $151.0 million); higher production volumes and market prices partially offset by the impact of hedging
  • Unit operating costs at $22.6/boe (2017: $24.9/boe)
  • Gross costs at SVT on track to reduce from c.£200 million in 2017 to c.£150m in 2018, reflecting EnQuest's operating model and focus on efficiencies
  • Material increase in cash generated from operations at $318.3 million (2017: $136.9 million); lower cash capital expenditure of $125.8 million (2017: $205.1 million)
  • At 30 June 2018, net debt had reduced to $1,973.4 million (excluding Payment in Kind interest, net debt was
    $1,845.8 million), with cash and available bank facilities of $256.8 million
  • Financing agreement for $175 million with funds managed by Oz Management. The financing is ring-fenced on a 15% share of Kraken with repayment made out of the cash flows from this 15% share
  • The Group's improved cash generating capacity enabled the early cancellation of $50 million of the Group's credit facility in May, with an additional $25 million voluntary prepayment in August. The term facility has consequently reduced to $1,050 million
  • The Group continues to prioritise maximising cash flow to facilitate the reduction of net debt
  • Put options in place for c.5.3 MMbbls of oil for the second half of 2018 at an average price of c.$66/bbl

EnQuest Chief Executive, Amjad Bseisu, said:

“As we have announced today, the Board is proposing to exercise its option to acquire the remaining 75% interest in the Magnus field, with the cash consideration for Magnus to be funded through a Rights Issue, which will also provide funds to drill two infill wells in 2019. Our view of Magnus as a high quality asset has been enhanced since acquiring our initial 25% interest. The option is on attractive economic terms and upon completion, our increased ownership will provide the Group with an immediate and material increase to the Group's existing 2P reserves and annual production.

“In our existing business, recent performance at Kraken has been improving with production in July and August averaging around 33,000 Bopd. The successful drilling and workover campaigns we have undertaken this year at Magnus, PM8/Seligi Heather and Alma/Galia, combined with robust underlying production performance across the portfolio underpins our confidence in delivering within our full year guidance range of 50,000 to 58,000 Boepd.

“We continue to focus on debt reduction and liquidity and have seen the early cancellation of $75 million of the Group's credit facility and the execution of a ring-fenced financing agreement in relation to a 15% interest in Kraken. The Group's improved cash generating capacity will further support a reduction in debt.

“The Group's significant potential within the portfolio, underpinned by Magnus, PM8/Seligi and Kraken, ensure EnQuest is well positioned for long-term sustainable growth.”

Production and financial information

 

H1 2018

H1 2017

Change
%

Production (Boepd)

53,990

37,015

45.9

Revenue and other operating income ($m)*

548.3

294.8

86.0

Realised oil price ($/bbl)*

59.5

51.9

14.6

Average unit operating expenditure ($/Boe)

22.6

24.9

(9.2)

EBITDA ($m)**

311.9

151.0

106.6

Gross profit ($m)

100.8

46.1

118.7

Profit before tax & net finance costs ($m)

105.2

33.6

213.1

 

 

 

 

Reported profit after tax ($m)

43.3

29.3

47.8

Reported basic earnings per share (cents)

3.8

2.6

46.2

 

 

 

 

Cash generated from operations ($m)

318.3

136.9

132.5

Cash capex ($m)

125.8

205.1

(38.7)

 

End June 2018

End 2017

 

Net (debt)/cash ($m)***

(1,973.4)

(1,991.4)

(0.9)

* Including losses of $77.3 million (2017: gain of $0.3 million) associated with EnQuest's oil price hedges. **EBITDA is calculated on a business performance basis, and is calculated by taking profit/loss from operations before tax and finance income/(costs) and adding back depletion, depreciation, foreign exchange movements and the realised gains/loss on foreign currency derivatives related to capital expenditure. *** Net (debt)/cash represents cash and cash equivalents less borrowings, stated excluding accrued interest and the net-off of unamortised fees and IFRS 9 adjustments.

Summary financial review of H1 2018

(all figures quoted are in US Dollars and relate to Business performance unless otherwise stated. Comparative figures for the income statement relate to the period ending 30 June 2017 and the balance sheet as at 31 December 2017.)

Revenue was $548.3 million for the six months ended 30 June 2018 compared to $294.8 million for the same period in 2017. This increase was driven by material growth in the Group's production, primarily reflecting the contributions from Kraken and Magnus, and higher market prices, partially offset by the impact of the Group's hedging programme. The commodity hedge programme resulted in realised losses of $77.3 million in the first half of 2018 (2017: realised gain of $0.3 million). Consequently, the Group's blended average realised oil price was $59.5/bbl for the six months ended 30 June 2018, compared to $51.9/bbl received during the first half of 2017. Excluding the impact of hedging, the average realised oil price was $68.1/bbl in the first half of 2018, compared to $51.8/bbl received during the first half of 2017.

Revenue is predominantly derived from crude oil sales and for the six months ended 30 June 2018 crude oil sales totalled $608.9 million compared with $286.8 million for the comparative period in 2017. The increase in revenue reflects both higher production and oil price. Revenue from the sale of gas and condensate in the period was $10.7 million (2017: $0.4 million), reflecting the gas sales derived from Magnus.

Business performance cost of sales were $447.5 million for the six months ended 30 June 2018 compared with $248.6 million for the same period in 2017. Operating costs increased by $54.0 million to $220.6 million, reflecting the inclusion of the Kraken and Magnus assets in the Group's production portfolio. The Group's average unit operating cost has decreased by 9.2% to $22.6/Boe from the comparative period.

Depletion expense was $216.5 million compared with $94.4 million for the six months ended 30 June 2017, mainly reflecting the additional production from Kraken and Magnus in 2018.

EBITDA for the six months ended 30 June 2018 was $311.9 million compared with $151.0 million for the same period in 2017. The increase in EBITDA is driven by the increase in revenue, partially offset by operating costs.

Net other income of $11.4 million (2017: net expenses of $11.3 million) is primarily comprised of net foreign exchange gains, which relate to the revaluation of Sterling-denominated amounts in the balance sheet.

The tax credit for the six months ended 30 June 2018 of $23.0 million (2017: $25.0 million tax credit) is mainly due to Ring Fence Expenditure Supplement (‘RFES') on UK activities.

The Group's reported cash generated from operations for the six months ended 30 June 2018 was $318.3 million, compared to $136.9 million for the six months ending 30 June 2017. The main driver for this increase is the impact of higher production and oil prices on revenue.

Exceptional items were a net gain of $34.5 million before tax for the six months ended 30 June 2018 (2017: loss of $20.0 million). Revenue included unrealised gains of $2.5 million in respect of the mark to market movement on the Group's commodity contracts (2017: unrealised gains of $62.3 million). Other exceptional items in the first half of 2018 include an increase in the fair value adjustment of the discounted purchase option valuation for Magnus and associated infrastructure assets of $41.8 million.

EnQuest's net debt decreased from $1,991.4 million at the end of 2017 to $1,973.4 million at 30 June 2018. This includes $127.6 million of inception to date interest that has been capitalised to the principal of the facilities pursuant to the terms of the Group's November 2016 refinancing (‘PIK'), compared to $90.5 million at 31 December 2017. Excluding the PIK capitalised in 2018, net debt reduced by $55.1 million.

UK corporate tax losses at 30 June 2018 increased to $3,139.3 million (2017: $3,121.3 million).

Operating review

Production details

Net daily average Production on a working interest basis

 

H1 2018

H1 2017

 

 

(Boepd)

(Boepd)

Northern North Sea

 

18,002

17,099

Central North Sea

 

6,108

10,849

Kraken

 

21,655

971

Total UKCS

 

45,765

28,045

Total Malaysia

 

8,225

8,969

Total EnQuest

 

53,990

37,015

1 Net production since first oil on 23 June, averaged over the six months to the end of June 2017.

Northern North Sea operations

Average production in the six months to end June 2018 of 18,002 Boepd was 5.3% higher than the same period in 2017. Increased production was driven by the contribution from Magnus and better than expected production at Heather from the H-67 well, which was completed and brought online in March. This was partially offset by planned maintenance shutdowns at Thistle and the Dons being accelerated to align with the revised shutdown schedule for their export route, combined with natural declines across the area.

Performance at Magnus in the period has been strong following successful plant de-bottlenecking, completion of the planned maintenance shutdown ahead of schedule and first production from the M-62 well delivered in May. The Group has also successfully completed the M-63 well below budget and ahead of schedule, having applied key lessons learned from the drilling of M-62. Production is expected to commence in the coming days. Water injection performance has been strong, with high levels of uptime in the first half of 2018 reflecting the Group's analysis of historical power generation reliability and focus on alleviating downtime issues. There are clear plans in place to increase injection capacity within the water system by returning to service the second of two Deaeration towers on the asset and improve pump operations in 2019.

Outside of the planned maintenance shutdowns at Thistle and the Dons, high levels of plant uptime and water injection efficiency continued to be maintained. In June, the Dunlin bypass export project was sanctioned which, once completed, will see volumes from Thistle and the Dons exported via the Magnus facility and Ninian pipeline system on to the Sullom Voe Terminal. The pipeline order has been placed, with installation work expected to be undertaken in the spring and summer of 2019.

As part of the Group's asset life extension strategy, improving asset integrity and reducing longer-term decommissioning costs, EnQuest continues to pursue a series of partner-funded idle well reservoir abandonments. At the end of August, the first five of six well abandonments at Thistle have been successfully concluded ahead of schedule and at a lower cost than budgeted.

The Group continues to deliver safe and stable operations at the Sullom Voe Terminal while progressing the optimisation of its planned work programme and identifying and implementing cost-efficiency initiatives. The Group is firmly on track to reduce operating costs at the terminal by around 25%, from approximately £200 million in 2017 to around £150 million in 2018. These savings are being achieved while also delivering a strong safety performance, which remains the top priority, and high levels of site availability. They have been driven by the application of an asset business model at the terminal, focused supply chain management including utilising the Group's increased scale, efficient project delivery through the reduction in the number of projects and concurrent activities and simplifying and improving utilisation of the resources on site. Further savings are planned for 2019.

Central North Sea operations

Production at both Scolty/Crathes and Alma/Galia was in line with expectations and therefore, with expected declines, average Central North Sea production in the six months to end June 2018 of 6,108 Boepd was lower than the same period in 2017.

In June, the installation of a new pipeline at Scolty/Crathes was sanctioned. The pipeline is expected to significantly improve production levels from the development following its installation, planned for the summer of 2019. Wax restrictions on production will continue to be managed until the pipeline is operational.

Following the successful completion of the three-well Electric Submersible Pump related workovers in the third quarter at Alma/Galia, aggregate production has improved as planned. The scheduled maintenance shutdown was also completed during the workover campaign to minimise production losses.

Production efficiency in the period for the Greater Kittiwake Area has improved, reflecting the production optimisation workscopes undertaken in 2017. The extensive planned maintenance shutdown scope was executed successfully earlier in the third quarter. Output from Alba in the first half of 2018 was in line with expectations.

Kraken

Average gross production in the six months to end June 2018, which includes the impact of the March maintenance shutdown, was slightly below expectations. Lower water injection rates in the second quarter, due to additional maintenance of the sea water coarse filters, impacted reservoir pressure which in turn drove lower average production. Following completion of the required filter maintenance, water injection rates were significantly increased and gross production has improved, averaging c.33,000 Bopd in July and August.

In August, the Kraken partners agreed a compensation settlement from Armada Kraken Pte Ltd, a wholly-owned subisidiary of Bumi Armada Berhad (‘Bumi'), in relation to historic issues with the FPSO. Bumi has agreed to pay $15 million to the Kraken partners, which is to be fully settled by 17 December 2018. Within this agreement, the parties agreed requirements for issuance of the Acceptance Certificate, which have now been met. As a result, the Acceptance Certificate has now been issued to Bumi.

Since first production, more than 10 million barrels of oil have been produced, over 7.5 million of which has been produced in 2018, and 20 cargoes offloaded from the FPSO, with 16 of these offloaded in 2018. Cargo pricing continues to be healthy reflecting the quality of Kraken crude.

The DC4 subsea manifold was installed in the second quarter, with installation of the remaining subsea infrastructure for DC4 also now completed. As a result of improved reservoir understanding, the Group has gained approval for developing DC4 with three wells instead of the four originally planned. This reduction in well count has an immaterial impact on oil production rates or recovery and results in approximately a $23 million reduction in capital costs of the drilling programme. Drilling is expected to commence in the coming weeks with first production in early 2019.

There was significant interest in the equity farm-out process conducted earlier this year. Having reviewed the various options available to the Group, the Board approved the financing arrangement as the preferred economic option at this time. The Board will continue to keep a future potential equity farm-down of Kraken under review.

Malaysian operations

Average production in Malaysia in the six months to end June 2018 of 8,225 Boepd was 8.3% lower than 2017, primarily reflecting natural decline at Tanjong Baram. Production efficiency remained high at both Tanjong Baram and PM8/Seligi.

The Group's planned idle well intervention programme on PM8/Seligi commenced in March. At the end of August, six idle wells had been returned to service ahead of schedule and below budget, reflecting the successful execution of simultaneous operations. As seen in prior years, this work programme continues to arrest the field's natural decline.

The Group's 2018 two-well drilling programme was successfully completed and brought into production in July, with aggregate flow rates in line with pre-drill expectations.

Financing

In May, the Group's improved cash generating capacity enabled the early cancellation of $50 million of the Group's credit facility. In August, an additional $25 million was voluntarily cancelled early, with a further reduction of $195 million due in October.

The Group has agreed $175 million of financing with funds managed by Oz Management. The financing, which is at a lower cost than the current interest on EnQuest's existing senior credit facility, is ring-fenced on a 15% interest in the Kraken oil field, the affiliate transfer for which is subject to normal regulatory approval, and will be repaid out of the cash flows associated with the 15% ring-fenced interest over a maximum of five years.

EnQuest is proposing to undertake a Rights Issue for $138 million to facilitate the exercise of its option to acquire the remaining 75% interest in the Magnus field. The Group anticipates the acquisition will bring approximately 60 MMboe of 2P reserves, a material increase to production and approximately $500 million of additional net present value to the Group, after deducting the total consideration of the acquisition (see separate announcement).

2018 outlook reaffirmed

The Group's expectation for material net production growth in 2018 within the guidance range of c.50,000 to 58,000 Boepd remains unchanged. The drilling programmes at Magnus and PM8/Seligi, along with the workover programme at Alma/Galia, have now completed with those wells brought online delivering production improvements in line with the Group's expectations. All other guidance is reaffirmed.

The Group's significant potential within the portfolio, which includes high quality assets such as Magnus, Kraken and PM8/Seligi in Malaysia, ensure EnQuest is well positioned for long-term sustainable growth.



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