Results for the six months ended 30 June 2020

Strong production performance and targeted free cash flow breakeven on track

3 September 2020

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

Comparative figures for the income statement relate to the period ended 30 June 2019 and the Balance Sheet as at 31 December 2019.

Alternative performance measures are reconciled within the 'Glossary - Non-GAAP measures' at the end of the Financial Statements.

Good performance in a challenging environment

§  Group net production averaged 66,055 Boepd in the six months to end June 2020; full year production guidance range of 57,000 Boepd to 63,000 Boepd maintained, although currently expect to be towards the upper part of this range

§  Operations materially unaffected by COVID-19

§  Strong performance on Kraken with gross production of 38,967 Bopd (net 27,472 Bopd), c.19% higher than the same period in the prior year. Full year production is expected to be towards the upper part of the 30,000 Bopd to 35,000 Bopd (gross) guidance range

§  Revenue of $450.7 million (2019: $858.2 million) and EBITDA of $274.9 million (2019: $525.9 million), reflecting  strong production volumes and the benefit of the Group's hedging programme, partially offset by lower market prices

§  Operating expenditure decreased to $174.3 million (2019: $248.4 million) with unit operating costs reduced to $14.4/Boe (2019: $20.1/Boe), reflecting strong production and cost control

§  Robust cash generated from operations at $283.2 million (2019: $426.2 million); cash capital expenditure of $101.4 million (2019: $124.6 million), with full year guidance of c.$120 million unchanged

§  Free cash flow generation of $87.5 million (2019: $138.3 million) has enabled further debt reduction

§  Lower oil price assumptions resulted in non-cash post-tax impairments of $251.6 million, and non-cash de-recognition of undiscounted deferred tax assets of $432.6 million. EnQuest retains access to its tax losses and allowances

End June net debt reduced by $61.9 million from year end

§  At 30 June 2020, net debt was reduced to $1,351.1 million (end 2019: $1,413.0 million) with cash and available bank facilities amounting to $269.5 million (end 2019: $288.6 million)

§  Tanjong Baram Project Finance Facility of $31.7 million fully repaid in June; Sculptor Capital Facility reduced by $31.8 million in the period to end June

§  For full year 2020, the Group's hedge programme covers c.11.4 MMbbls. Approximately 10.3 MMbbls are hedged at an average floor price of $43/bbl, with a further 1.1 MMbbls hedged with an average floor price of c.$52/bbl in accordance with the Sculptor Capital facility agreement

Significant, low-cost 2C resource addition in the UK North Sea

§  Signed sale and purchase agreement for 40.81% equity interest in and operatorship of Bressay licences in July

§  Low-cost addition of up to 115 MMbbls (net) 2C resources; opportunity for long-term, low-risk, phased sub-sea tie-back project

EnQuest Chief Executive, Amjad Bseisu, said:

"The Group continues to perform well in challenging conditions, including COVID-19 and the early shutdown of a number of our assets. The safety of our people and our assets remains our priority. With our ongoing focus on operational excellence, we have continued to exceed our operational targets, including production of around 66,000 Boepd in the first half of 2020.

"Our difficult and early decisions to shut down our higher cost assets have resulted in a substantial cost reduction programme, which is on track. We remain confident that we will achieve our 2020 targets, with free cash flow breakeven for the full year at c.$33/Boe. We continue to target free cash flow breakeven of c.$27/Boe in 2021.

"Even with the most challenging macro and oil price environment since our genesis as a company, we have been able to generate around $87 million of free cash flow in the period and reduced our net debt. We remain focused on continuing to reduce our debt and strengthening our balance sheet.

"Looking further ahead, I am delighted we have agreed the acquisition of a material operating interest in the Bressay field. The addition of up to 115 MMbbls of net 2C resources materially increases our 2C resource base and provides EnQuest an opportunity to demonstrate further its proven capabilities in low-cost drilling and heavy oil."

 

Production and financial information

	H1 2020	H1 2019		Change %
Production (Boepd)	66,055	68,548		(3.6)
Revenue and other operating income ($m)1	450.7	858.2		(47.5)
Statutory reported revenue and other operating income ($m)2	439.4	815.4		(46.1)
Realised oil price ($/bbl)1	43.6	66.1		(34.0)
Average unit operating expenditure ($/Boe)	14.4	20.1		(28.3)
Gross profit ($m)	39.8	269.9		(85.3)
Statutory reported gross profit ($m)	19.3	223.0		(91.3)
Profit before tax & net finance costs ($m)	24.6	264.5		(90.6)
EBITDA ($m)	274.9	525.9		(47.7)
Statutory reported profit/(loss) after tax ($m)	(619.0)	44.3		-
Statutory reported basic earnings/(loss) per share (cents)	(37.4)	2.7		-
Cash generated from operations ($m)	283.2	426.2		(33.6)
Cash capex ($m)	101.4	124.6		(18.6)
	End June 2020	End 2019
Net (debt)/cash ($m)	(1,351.1)	(1,413.0)		(4.4)

¹ Including net realised gains of $35.2 million (2019: net realised gains of $7.6 million) associated with EnQuest's oil price hedges

² Including net realised and unrealised gains of $23.9 million (2019: net realised and unrealised losses of $35.3 million) associated with EnQuest's oil price hedges

 

Summary financial review of H1 2020

Revenue was $450.7 million for the six months ended 30 June 2020 compared with $858.2 million for the same period in 2019. This decrease was primarily driven by the material reduction in the oil price and moving from a net overlift to a net underlift position at the end of 30 June 2020. Group revenue is predominantly derived from crude oil sales and for the six months ended 30 June 2020, crude oil sales totalled $375.5 million compared with $761.9 million for the comparative period in 2019. Revenue from the sale of gas and condensate in the period was $27.6 million (2019: $79.9 million), reflecting significantly lower market prices for gas.

The commodity hedge programme resulted in realised gains of $35.2 million in the first half of 2020 (2019: realised gains of $7.6 million). Consequently, the Group's average realised oil price was $43.6/bbl for the six months ended 30 June 2020, compared to $66.1/bbl received during the first half of 2019. Excluding the impact of hedging, the average realised oil price was $39.9/bbl in the first half of 2020, compared to $65.4/bbl received during the first half of 2019.

Cost of sales were $410.9 million for the six months ended 30 June 2020 compared with $588.3 million for the same period in 2019. Operating costs decreased by $74.1 million to $174.3 million, primarily reflecting the Group's focus on cost control, including the decision to cease production at Heather and Thistle. The Group's average unit operating cost has decreased by 28.3% to $14.4/Boe (2019: $20.1/Boe). Other cost of sales decreased by $103.3 million to $236.6 million (2019: $339.9 million), reflecting the change from a net overlift to a net underlift position, and the lower cost of Magnus-related third-party gas purchases following the reduction in the market price for gas, partially offset by a $19.0 million inventory write down recognised in the first half of the year, which primarily relates to inventory held at assets scheduled for decommissioning.

EBITDA for the six months ended 30 June 2020 reduced to $274.9 million compared with $525.9 million for the same period in 2019. This was driven by lower revenue partially offset by lower cost of sales.

The tax credit for the six months ended 30 June 2020 was $71.5 million (2019: $36.2 million tax charge).

Remeasurement and exceptional items were a net loss of $308.1 million before tax for the six months ended 30 June 2020 (2019: loss of $120.0 million). Revenue included unrealised losses of $11.3 million in respect of the mark-to-market movement on the Group's commodity contracts (2019: unrealised losses of $42.9 million). Pre-tax non-cash impairment charges of $409.8 million on the Group's tangible oil and gas assets were recognised, reflecting a reduction in oil price assumptions. Other remeasurement and exceptional items in the first half of 2020 also includes a $161.9 million gain in relation to the fair value recalculation of the Magnus contingent consideration reflecting the reduction in oil price assumptions and a $6.2 million provision in relation to the Group's transformation programme referred to below.

The Group's reported cash generated from operations for the six months ended 30 June 2020 was $283.2 million (2019:  $426.2 million) primarily as a result of lower revenue. Free cash flow for the six months ended 30 June 2020 was $87.5 million (2019: $138.3 million).

EnQuest's net debt decreased by $61.9 million from $1,413.0 million at the end of 2019 to $1,351.1 million at 30 June 2020. Net debt at 30 June 2020 includes $166.2 million of inception to date interest that has been capitalised to the principal of the senior credit facility and bonds ('PIK'), compared to $133.3 million at 31 December 2019.

In January 2020, EnQuest voluntarily repaid $35.0 million of the senior credit facility early, resulting in no further amortisations due in 2020. The next amortisation payment of $65.0 million is due by 1 April 2021.

In June 2020, EnQuest made an early voluntary repayment of the entire $31.7 million of the Tanjong Baram project finance facility having received the first of three instalments from PETRONAS for reimbursement of outstanding net capital expenditure of around $50 million relating to the Tanjong Baram project. The remaining two reimbursement instalments are due from PETRONAS in the second half of the year.

The strong production performance at Kraken has driven a $31.8 million reduction in the Sculptor Capital facility in the first six months of the year.

The Group continues to have access to its full UK corporate tax losses of $3,086.8 million at 30 June 2020 (2019: $2,903.4 million).

 

Operating review

Production details

 

Net daily average production on a working interest basis		1 Jan' 2020 to 30 Jun' 2020	1 Jan' 2019 to 30 Jun' 2019
		(Boepd)	(Boepd)
Magnus		18,806	17,774
Kraken		27,472	23,107
Other North Sea		11,471	19,068
Total UKCS		57,749	59,949
Total Malaysia		8,306	8,599
Total EnQuest		66,055	68,548

 

Magnus

Average production in the six months to end June was 18,806 Boepd, 5.8% higher than the same period in 2019. This increase was driven by high production efficiency of 86% and also high water injection efficiency of 91%. Combined with two new wells coming onstream in March, which are performing in line with expectations, this has partially offset gas compressor performance issues experienced in the first quarter. Production optimisation activities are continuing and the Group expects to complete a one-week maintenance shutdown in the fourth quarter to carry out essential works,

Kraken

Gross production during the first six months of 2020 averaged 38,967 Bopd (net 27,472 Bopd), an increase of 18.9% and ahead of the top end of guidance. This was driven by a good performance from the floating, production, storage and offloading ('FPSO') vessel, with high production efficiency of 86%. Overall subsurface and well performance remains good and the Group continues to optimise production through improved injector-producer well management following the completion of well testing in May and June. Drilling at Worcester was completed during the first half of the year, with the new producer-injector pair coming onstream late in the second quarter.

In June 2020, Kraken reached three years since the delivery of first oil, with output significantly increasing from 7.7 MMbbls in the first 12 months of operation to over 14.2 MMbbls in its third year. Cargo pricing has improved over the same period and remains robust, with the Group continuing to optimise sales into the shipping market with Kraken oil being a key component of IMO 2020 compliant low-sulphur fuel oil.

In the third quarter, repairs were required to the DC1 riser, resulting in two producer wells shut in for approximately two weeks. In addition, a one-week planned shutdown of operations is planned in the third quarter to allow for essential maintenance work to be undertaken.

With the better than expected performance so far this year, production is currently expected to be towards the upper part of the 30,000 Bopd and 35,000 Bopd (gross) full year guidance range.

Other North Sea operations

Production in the six months to end June averaged 11,471 Boepd, 39.8% lower than the same period in 2019. This decrease was primarily driven by the decision not to restart production at the Heather/Broom and Thistle/Deveron fields, which contributed c.9,000 Boepd in the same period in 2019. Elsewhere, lower water injection and a lack of gas lift, along with gas compressor downtime and underlying natural declines, impacted production at the Dons. These reductions were partially offset by strong production efficiency at Alma/Galia, with production in line with expectations, while performance was significantly improved at Scolty/Crathes following the completion of the pipeline replacement project during the third quarter of 2019. Alba continues to perform in line with the Group's expectations, with the Group continuing to deliver stable operations and plant availability at the Sullom Voe Terminal.

In June, a cessation of production ('CoP') application for the Heather asset was accepted by the regulator, which allows preparations to begin for decommissioning and lowers EnQuest's share of costs to 37.5% (from 100.0%). The platform remains shutdown and is depressurised. The Group expects to recommence the well abandonment programme in 2021.

The Thistle/Deveron CoP application was lodged with the regulator in July and once accepted, the decommissioning phase will begin, resulting in EnQuest's share of post-tax costs reducing to 6.1% (from 99.0%). Project activities related to the removal of the redundant crude oil storage tanks at Thistle continued, with the successful removal of the tanks completed in July. The facility is expected to remain permanently unmanned for the remainder of 2020, with a well abandonment programme targeted for 2021.

At the Dons, given the impacts on gas supply for gas lift as a result of the shutdown at Thistle and the resulting lower production, the Group is working with its partners and the regulator to seek the necessary regulatory approvals in respect of CoP. Operations are expected to cease in the second quarter of 2021.

At Alma/Galia, CoP occurred on 30 June 2020 as planned. The EnQuest Producer FPSO will shortly move off station and sail to the oil terminal jetty at Nigg. The Group continues to explore a number of options regarding its future.

Following the decisions to pursue CoP at the Heather, Thistle/Deveron and the Dons assets, the Group has re-organised its UK North Sea business into three directorates that report to Bob Davenport, Managing Director - North Sea. These directorates are Upstream, Midstream and Decommissioning¹. With the changing operational footprint of the Group, support functions have also been reviewed. Given the scale of change, with the number of employee and contractor roles in the UK reduced by approximately 40%, the UK workforce has undergone an open and transparent collective consultation process to ensure all employees were treated fairly and with respect. This consultation process, which included the appointment of employee representatives to work with management to ensure the proposed changes did not compromise safety and to minimise the impact on the Group's people and operations, gave all employees at EnQuest the opportunity to nominate themselves for relevant roles within the new organisation structure. Feedback received from the employee representatives was positive. This transformation enables the Group's directorates to focus on the most appropriate activities that deliver operational excellence and safe results at each of its assets.

¹ Upstream includes: Magnus, Kraken, the Greater Kittiwake Area and Scolty/Crathes, and Alba. Midstream includes: the Sullom Voe Terminal and the Group's pipeline operations. Decommissioning includes Heather/Broom, Thistle/Deveron, the Dons and Alma/Galia

Malaysian operations

Average production in Malaysia in the six months to end June 2020 of 8,306 Boepd was broadly in line with the same period in 2019. Continued high production efficiency, which averaged c.96%, and the impact of idle well restoration activities, combined with higher gas sales, largely offset the loss of volumes from Tanjong Baram, which was shut-down ahead of the termination of the small field risk service contract.

In June, a short planned maintenance shutdown was successfully completed on PM8/Seligi, with a total production outage of around two days being achieved, well within the original planned five day outage.

 

 

Business development and growth opportunities

In July, the Group announced that it had signed a binding sale and purchase agreement with Equinor for an equity interest in the Bressay licenses. Under the agreement, EnQuest will assume operatorship of the licenses with a participating interest of 40.81% for an initial consideration of £2.2 million, payable as a carry against 50% of Equinor's net share of costs. It is expected that up to115 MMbbls, net to EnQuest, will be added to the Group's 2C resources. With no near-term capital commitments, Bressay offers the Group the opportunity for a long-term, low-risk, phased sub-sea tie-back project, potentially to the Kraken field, which could reduce emissions, costs and extend Kraken's field life.

Further to the addition of 2C resources potential at Bressay, EnQuest has a large volume of reserves and resources within its portfolio, providing opportunities for long term and low-cost drilling when conditions are supportive. Magnus offers 2C resources of c.38 MMbbls and around 250 million barrels of movable oil still to evaluate. Kraken continues to offer further near-field opportunities through the evaluation and development of the western area, which holds an estimated 70-130 MMbbls of STOIIP. In Malaysia, EnQuest has c.22 MMboe of 2P reserves and c.76 MMboe of 2C resources. Subsurface studies are ongoing on Block PM409, which is a proven hydrocarbon area containing several undeveloped discoveries contiguous to the Group's existing PM8/Seligi PSC.

Environmental, Social and Governance

The safety of its people will always be a top priority for EnQuest. The Group continues to monitor actively the impact on operations from COVID-19 and has implemented a number of mitigations to minimise the impact, adopting an approach based upon the principles of safety and welfare of people and security of supply. The Group has remained aligned and supportive of the government position and remained compliant with Dubai, Malaysia and UK government and industry policy. The Group has also been working with a variety of stakeholders, including industry and medical organisations, to ensure its operational response and advice to its workforce is appropriate and commensurate with the prevailing expert advice and level of risk. Appropriate restrictions on offshore travel have been implemented, such as self-declaration by, and isolation of, individuals who are symptomatic. Pre-mobilisation testing and temperature checks are also in operation for all operational staff prior to travelling to the Group's UK North Sea onshore and offshore operating facilities. EnQuest's normal communicable disease process has been updated specifically in respect of COVID-19, with additional offshore isolation capability and agreements in place to transport impacted individuals back onshore in dedicated helicopters. At the Sullom Voe Terminal, the same processes have also been implemented, with isolation capability at local accommodation. These measures have been robust, resulting in EnQuest having a strong record of minimising the impact of COVID-19 on our people, with only three cases of COVID-19 confirmed offshore, across all producing assets. Across the Group's onshore office locations, appropriate risk assessments have been undertaken with any necessary procedural and office layout alterations implemented to minimise the risk as the Group's workforce gradually returns to the office in line with relevant government guidelines. At the time of publication of EnQuest's half year results, the Group's day-to-day operations continue without being materially affected by COVID-19.

The Group expects its Scope 1 and 2 emissions to be around 15% lower in 2020 compared to 2019, reflecting the pursuit of several emission reduction projects and the Group's decisions to cease production at its Heather, Thistle/Deveron and Alma/Galia assets. Based on current estimates for the existing portfolio, the Group expects to deliver a reduction in emissions of c.10% over the next three years. EnQuest is also a participant in the Energy Hub, an initiative being developed by the Shetland Islands Council and the Oil and Gas Technology Centre aiming to deliver a clean, sustainable energy future for Shetland and the UK. In the meantime, the Group continues voluntarily to limit emissions in Malaysia below the regulatory limit and optimise sales of Kraken cargoes directly to the shipping market, avoiding emissions related to refining and helping reduce sulphur emissions in accordance with the IMO 2020 regulations. The Group Safety & Risk Committee has also concluded its assessment of whether 'climate change' should be categorised as a standalone risk area within the Group's risk management framework (in addition to the recognition already accorded to climate change related issues across the existing principal risk areas) and concluded that it should be categorised as such.

The Group remains committed to improving workforce diversity across the business. At present, around 20% of EnQuest's country leadership teams are female and the Group is committed to improving this further.

EnQuest has continued to provide support to the communities in which it works. In Malaysia, EnQuest is sponsoring one university student to study STEM-related subjects at University Malaya and has also signed a Memorandum of Agreement to sponsor the IChemE accreditation of the Chemical Engineering programme at The National University of Malaysia. This accreditation is expected to improve the employability of graduating students, anticipated to be some 80-100 individuals for each intake year.

In March, Howard Paver was appointed as the Senior Independent Director, replacing Helmut Langanger who retired from the Board, while in May, Howard replaced Laurie Fitch as Chair of the Remuneration Committee. Laurie remains a member of the Committee.

Liquidity and net debt

At the end of June 2020, net debt was $1,351.1 million, down $61.9 million from $1,413.0 million at 31 December 2019, reflecting strong operational performance and the impact of the Group's commodity hedge programme in the first quarter, partially offset by the settlement of the Group's high yield and retail bond interest as payment in kind through the issuance of additional notes. Total cash and available facilities were $269.5 million, including ring-fenced accounts associated with Magnus, the Sculptor Capital facility and other joint venture accounts totalling $89.3 million.

In June, the Group made an early voluntary repayment of the remaining $31.7 million of the Tanjong Baram project finance facility, having received the first of three instalments from PETRONAS for settlement of the outstanding net capital expenditure of around $50 million relating to the Tanjong Baram project. The remaining two reimbursement instalments are due from PETRONAS in the second half of the year.

As a result of the material decline in the oil price in the first quarter, the Group pre-emptively sought a waiver of the liquidity test for the remainder of 2020 from the lenders in the Senior Credit Facility which was granted in the second quarter.

By the end of June, c.5.9 MMbbls of oil hedges had been settled. Approximately 5.2 MMbbls had an average floor price of c.$49/bbl, while c. 0.7 MMbbls associated with the Sculptor Capital facility had an average floor price of c.$52/bbl. For the remaining six months of 2020, EnQuest has c. 5.5 MMbbls of oil hedges in place. Approximately 5.1 MMbbls are hedged at an average price of c.$36/bbl, with a further c.0.4 MMbbls hedged with an average floor price of c.$52/bbl in accordance with the Sculptor Capital facility agreement.

2020 outlook reaffirmed

Group production performance in the period was above the top end of guidance at 66,055 Boepd. Full year production guidance of 57,000 and 63,000 Boepd is maintained, although the Group currently expects to be towards the upper part of this range. During the second half of 2020, the strong production performance from the first half of the year is expected to be partially offset by planned maintenance shutdowns, the cessation of production at Alma/Galia in June, lower expected production from the Don's and natural field declines.

Implementation of the Group's 2020 cost savings and reduction in free cash flow breakeven remain on track, with operating expenditure expected to be around $335 million and cash capital expenditure around $120 million, in line with previous guidance.

While debt repayment remains the priority, the Group continues to assess its large and low-cost 2C resource base for future development when conditions are supportive.

- Ends -

 

For further information please contact:

 

EnQuest PLC	Tel: +44 (0)20 7925 4900
Amjad Bseisu (Chief Executive)
Jonathan Swinney (Chief Financial Officer)
Ian Wood (Head of Communications & Investor Relations)
Jonathan Edwards (Senior Investor Relations & Communications Manager)
Tulchan Communications	Tel: +44 (0)20 7353 4200
Martin Robinson
Martin Pengelley
Harry Cameron

Presentation to Analysts and Investors
A presentation to analysts and investors will be held at 09:00 today - London time. The presentation and Q&A will also be accessible via an audio webcast, available on the investor relations section of the EnQuest website at www.enquest.com. A conference call facility will also be available at 09:00 on the following numbers:

Conference call details:

UK: +44 (0) 800 376 7922

International: +44 (0) 207 192 8000

Confirmation Code: EnQuest

 

Notes to editors

This announcement has been determined to contain inside information.

Identity of the person making this notification: Stefan Ricketts, Company Secretary

 

ENQUEST

EnQuest is an independent production and development company with operations in the UK North Sea and Malaysia. The Group's strategic vision is to be the operator of choice for maturing and underdeveloped hydrocarbon assets by focusing on operational excellence, differential capability, value enhancement and financial discipline.

EnQuest PLC trades on both the London Stock Exchange and the NASDAQ OMX Stockholm. Its UK operated assets include Thistle/Deveron, Heather/Broom, the Dons area, Magnus, the Greater Kittiwake Area, Scolty/Crathes, Alma/Galia and Kraken; EnQuest also has an interest in the non-operated Alba producing oil field. At the end of June 2020, EnQuest had interests in 17 UK production licences and was the operator of 15 of these licences. EnQuest's interests in Malaysia include the PM8/Seligi and PM409 production sharing contracts, both of which the Group operates.

Forward-looking statements: This announcement may contain certain forward-looking statements with respect to EnQuest's expectations and plans, strategy, management's objectives, future performance, production, reserves, costs, revenues and other trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Nothing in this announcement should be construed as a profit forecast. Past share performance cannot be relied upon as a guide to future performance.

 

 

 

FINANCIAL REVIEW

Financial Overview

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

Comparative figures for the Statement of Comprehensive Income relate to the period ended 30 June 2019 and the Balance Sheet as at 31 December 2019.

Alternative performance measures are reconciled within the 'Glossary - Non-GAAP measures' at the end of the Financial Statements.

Production on a working interest basis decreased by 3.6% to 66,055 Boepd, compared to 68,548 Boepd in the first half of 2019.

Revenue for the six months ended 30 June 2020 was $450.7 million, 47.5% lower than the comparative 2019 six month period (2019: $858.2 million).

The Group's operating expenditures of $174.3 million were 29.8% lower than the comparative period (2019: $248.4 million). Unit operating costs decreased by 28.3% to $14.4/Boe (2019: $20.1/Boe).

EBITDA for the six months ended 30 June 2020 was $274.9 million, 47.7% lower than the comparative period (2019: $525.9 million).

	Business performance
	H1 2020	H1 2019
	$ million	$ million
Profit from operations before tax and finance income/(costs)	24.6	264.5
Depletion and depreciation	252.3	255.4
Inventory write-down	19.0	5.7
Net foreign exchange (gains)/losses	(21.0)	0.3
EBITDA	274.9	525.9

 

EnQuest's net debt decreased by $61.9 million from $1,413.0 million at the end of 2019 to $1,351.1 million at 30 June 2020. Net debt at 30 June 2020 includes $166.2 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 $133.3 million at 31 December 2019.

	Net debt/(cash)
	30 June 2020	31 December 2019
	$ million	$ million
Bonds	991.4	971.9
Multi-currency revolving credit facility ('RCF')	440.8	475.1
Sculptor Capital facility1	91.1	122.9
Tanjong Baram Project Finance Facility	-	31.7
SVT Working Capital Facility	11.2	31.9
Cash and cash equivalents2	(183.4)	(220.5)
Net debt	1,351.1	1,413.0

 

Notes:

1      Sculptor Capital facility was previously known as the Oz Management facility

2      Includes restricted cash of $1.6 million (see note 10)

In January 2020, EnQuest voluntarily repaid $35.0 million of the RCF early, resulting in the Group having repaid all the amortisations due in 2020. The next amortisation payment of $65.0 million is due 1 April 2021.

In June, EnQuest made an early voluntary repayment of the entire $31.7 million of the Tanjong Baram Project Finance facility having received the first of three instalments from PETRONAS for reimbursement of outstanding net capital expenditure of around $50 million relating to the Tanjong Baram project. The remaining two reimbursement instalments are due from PETRONAS in the second half of the year.

$32.2 million of bond interest was settled through the issue of additional notes ('PIK') and capitalised to the principal of the facilities in the period, reflecting an average oil price of less than $65/bbl over the relevant cash payment condition period in accordance with the terms of the bonds.

The strong production performance at Kraken has driven a $31.8 million reduction in the Sculptor Capital facility in the first six months of the year.

The Group continues to have full access to its UK corporate tax losses of $3,086.8 million at 30 June 2020 (31 December 2019: $2,903.4 million). In the current environment, no material corporation tax or supplementary corporation tax is expected to be paid on UK operational activities for the foreseeable future. The Group paid cash corporate income tax on the Malaysian assets, which will continue throughout the life of the production sharing contract.

 

Income Statement

Revenue

On average, market prices for crude oil in the first half of 2020 were lower than in the same period in 2019. The Group's average realised oil price excluding the impacts of hedging was $39.9/bbl for the six months ended 30 June 2020, 39.0% lower than the comparative period (2019: $65.4/bbl). Revenue is predominantly derived from crude oil sales, which for the six months ended 30 June 2020 totalled $375.5 million, 50.7% lower than the comparative period (2019: $761.9 million), primarily reflecting the significantly lower oil prices and moving from a net overlift to a net underlift position at the end of 30 June 2020. Crude oil sales for the period ended 30 June 2020 were 9.4 MMbbls (2019: 11.6 MMbbls). Revenue from the sale of condensate and gas in the period was $27.6 million (2019: $79.9 million), reflecting significantly lower market prices for gas. Tariff and other income generated $12.4 million (2019: $8.9 million). The Group's commodity hedges and other oil derivatives contributed $35.2 million of realised gains (2019: gains of $7.6 million), including a gain of $5.6 million of non-cash amortisation of option premiums (2019: gain of $4.7 million).

Cost of sales

	Business performance
	H1 2020	H1 2019
	$ million	$ million
Production costs	137.7	210.2
Tariff and transportation expenses	36.1	39.2
Realised loss/(gain) on FX derivatives related to operating costs	0.5	(1.0)
Operating costs	174.3	248.4
Change in lifting position and inventory	(48.5)	29.4
Depletion of oil and gas assets	248.4	250.4
Other cost of sales	36.7	60.1
Cost of sales	410.9	588.3
	$/Boe	$/Boe
Operating cost per barrel
- Production costs	11.4	16.9
- Tariff and transportation expenses	3.0	3.2
Average unit operating cost	14.4	20.1

 

Cost of sales were $410.9 million for the six months ended 30 June 2020, 30.2% lower than the comparative period (2019: $588.3 million). Operating costs decreased by $74.1 million, primarily reflecting the Group's focus on cost control, including the decision to cease production at Heather and Thistle. The Group's average unit operating cost has decreased by 28.3% to $14.4/Boe.

The credit relating to the Group's lifting position and inventory was $48.5 million (2019: $29.4 million debit). This reflects a switch to a $23.5 million net underlift position at 30 June 2020 from a $28.6 million net overlift position at 31 December 2019.

Depletion expense of $248.4 million was 0.8% lower than the comparative period (2019: $250.4 million).

Other cost of sales of $36.7 million was lower than the comparative period (2019: $60.1 million). This primarily reflects the lower cost of Magnus-related third-party gas purchases following the reduction in the market price for gas partially offset by the $19.0 million inventory write down recognised in the first half of the year, which primarily relates to inventory held at assets scheduled for decommissioning.

Other income and expenses

Net other expense of $11.7 million (2019: net other expenses of $0.3 million) is primarily $45.9 million recognition of the increase in the decommissioning provision of the fully impaired assets offset by foreign exchange gains of $21.0 million and the $10.4 million gain on the termination of the Tanjong Baram risk service contract.

Finance costs and income

Finance costs of $90.9 million were 14.9% lower than the comparative period (2019: $106.8 million). The charges include $52.8 million of interest payable on loans and borrowings and bonds (2019: $69.7 million), $26.1 million of finance charges related to lease liabilities (2019: $26.8 million), $7.1 million unwinding of discount on provisions and liabilities (2019: $7.0 million), together with other facility fees such as commitment fees, and the amortisation of bond fees.

Finance income was a total of $1.1 million for the six months ended 30 June 2020 (2019: $1.1 million).

Taxation

The tax credit for the six months ended 30 June 2020 is $71.5 million (2019: $36.2 million tax charge).

 

 

Remeasurements and exceptional items

Remeasurements and exceptional items resulting in a net loss of $308.1 million before tax have been disclosed separately for the six months ended 30 June 2020 (2019: loss of $120.0 million).

Revenue included unrealised losses of $11.3 million in respect of the mark-to-market movement on the Group's commodity contracts (2019: unrealised losses of $42.9 million). Pre-tax non-cash impairment charges of $409.8 million on the Group's tangible oil and gas assets were recognised, reflecting a reduction in oil price assumptions. Other remeasurement and exceptional items in the first half of 2020 also includes a $161.9 million gain in relation to the fair value recalculation of the Magnus contingent consideration reflecting the reduction in oil price assumptions and a $6.2 million redundancy provision in relation to the Group's transformation programme (2019: increase in contingent consideration on the 75% acquisition of Magnus and associated infrastructure of $26.9 million, $28.1 million unwinding of discount on the end 2018 contingent consideration balance and the provision for settlement of the historical KUFPEC claim of $15.6 million).

A net tax charge of $317.1 million (2019: credit of $41.7 million) has been presented as exceptional, representing the non-cash de-recognition of undiscounted deferred tax assets of $432.6 million given the Group's lower oil price assumptions, partially offset by the tax impact of the above items. The exceptional de-recognition of the undiscounted deferred tax asset balance is made up of de-recognition of previously recognised tax losses and allowances of $363.5 million and the immediate de-recognition of the notional tax-credit of $24.4 million arising on business performance in the six months to June 2020 and ring-fenced expenditure supplement uplift of $44.7 million recognised in the period to 30 June 2020. EnQuest continues to have access to its full UK corporate tax losses of $3,086.8 million at 30 June 2020.

Profit/(loss) for the period

Total pre-tax losses for the period to 30 June 2020 were $373.4 million (2019: profit of $38.7 million), primarily reflecting non-cash impairments. Total post-tax losses for the period to 30 June 2020 were $619.0 million (2019: profit of $44.3 million), and include the partial de-recognition of deferred tax assets.

Cash flow and liquidity

Net debt at 30 June 2020 amounted to $1,351.1 million, including PIK of $166.2 million, compared with net debt of $1,413.0 million, including PIK of $133.3 million, at 31 December 2019. The Group has remained in compliance with financial covenants under its debt facilities throughout the six month period. The movement in net debt was as follows:

	$ million
Net debt 1 January 2020	(1,413.0)
Net cash flows from operating activities	275.1
Cash capital expenditure	(101.4)
Net cash received on termination of Tanjong Baram risk service contract	17.1
Lease payments	(56.1)
Magnus contingent consideration	(25.8)
Net interest and finance costs paid	(21.4)
Non-cash capitalisation of interest to principal of bond and debt facilities	(33.3)
Other movements, primarily net foreign exchange loss on cash and debt	7.7
Net debt 30 June 2020	(1,351.1)

 

The Group's reported net cash flows from operating activities for the six months ended 30 June 2020 were $275.1 million, 32.7% down compared to the comparative period (2019: $409.0 million). The main drivers for this decrease are the impact of a significantly lower oil price and lower sales volumes.

Cash outflow on capital expenditure is set out in the table below:

	H1 2020	H1 2019
	$ million	$ million
North Sea	99.4	122.8
Malaysia	1.9	1.7
Other	0.1	0.1
	101.4	124.6

 

Cash capital expenditure primarily relates to Kraken and Magnus drilling activities.

Balance Sheet

The Group's total asset value has decreased by $974.8 million to $3,801.8 million at 30 June 2020 (31 December 2019: $4,776.6 million), mainly due to impairment charge on the Group's tangible oil and gas assets, the non-cash partial de-recognition of the Group's undiscounted deferred tax assets and depletion of oil and gas assets. Net current liabilities have decreased by $69.1 million to $213.6 million as at 30 June 2020 (31 December 2019: $282.7 million). Included in the Group's net current liabilities are $88.6 million of estimated future obligations where settlement is ring-fenced to the financial performance at Kraken and Magnus (31 December 2019: $178.7 million).

Property, plant and equipment ('PP&E')

Property, plant and equipment has decreased to $2,809.1 million at 30 June 2020 from $3,450.9 million at 31 December 2019. This decrease is explained by impairment charges of $409.8 million, depletion and depreciation charges of $252.3 million, change in decommissioning provision of $10.6 million and the termination of the Tanjong Baram risk service contract ($41.6 million), offset by capital additions of $72.5 million. Capital additions are set out in the table below:

	H1 2020
	$ million
North Sea	71.8
Malaysia	0.7
	72.5

Intangible oil and gas assets

Intangible oil and gas assets have remained consistent at $27.6 million at 30 June 2020 (31 December 2019: $27.6 million).

Trade and other receivables

Trade and other receivables have decreased by $17.7 million to $261.8 million at 30 June 2020 compared to $279.5 million at 31 December 2019. The decrease is driven by a reduction in joint venture debtors, due to timing, partially offset by an increase in the Groups underlift position.

Cash and net debt

The Group had $183.4 million of cash and cash equivalents and $1,351.1 million of net debt, including PIK and capitalised interest of $174.1 million, at 30 June 2020 (31 December 2019: $220.5 million cash and cash equivalents and $1,413.0 million of net debt, including PIK and capitalised interest of $140.7 million). Net debt comprises the following liabilities:

·      $219.2 million principal outstanding on the £155 million retail bond, including interest capitalised as PIK of $28.2 million;

·      $772.2 million principal outstanding on the high yield bond, including interest capitalised as PIK of $122.2 million;

·      $440.8 million of the credit facility, comprising amounts drawn down of $425.0 million and interest capitalised as PIK of $15.8 million;

·      $91.1 million on the Sculptor Capital facility, comprising amounts drawn down of $83.2 million and capitalised interest of $7.9 million; and

·      $11.2 million relating to the SVT Working Capital Facility.

 

Provisions

The Group's decommissioning provision increased by $27.9 million to $739.8 million at 30 June 2020 (31 December 2019: $711.9 million). The movement is driven primarily by change in estimate $20.4 million, interest unwinding of $7.1 million and additions of $7.5 million offset by utilisation of $7.1 million.

 

Contingent consideration

The contingent consideration relating to the Magnus acquisition decreased by $152.3 million to $505.0 million at 30 June 2020 (30 December 2019: $657.3 million). In the six months ended 30 June 2020, EnQuest repaid $28.9 million to BP and recognised a change in fair value estimate charge of $161.9 million, offset by an unwinding of discount of $39.7 million. 

Income tax

The Group has a corporation tax liability at 30 June 2020 of $2.8 million, compared to $4.1 million at 31 December 2019. This primarily represents tax payable in relation to the activity in Malaysia.

Deferred tax

The Group's net deferred tax asset has decreased from $555.1 million at 31 December 2019 to $311.8 million at 30 June 2020, primarily reflecting the non-cash partial de-recognition of undiscounted deferred tax assets given the Group's lower oil price assumptions. The exceptional de-recognition of the undiscounted deferred tax asset balance is made up of de-recognition of previously recognised tax losses and allowances of $363.5 million and the immediate de-recognition of the notional tax-credit of $24.4 million arising on business performance in the six months to June 2020 and ring-fenced expenditure supplement uplift of $44.7 million recognised in the period to 30 June 2020. EnQuest continues to have access to its full UK corporate tax losses carried forward at the half year amounting to $3,086.8 million (31 December 2019: $2,903.4 million).

Trade and other payables

Trade and other payables of $305.7 million at 30 June 2020 decreased from $419.9 million at 31 December 2019, reflecting settlement of previously deferred capital expenditures and a reduced cost base following the Group's transformation programme.

Lease obligations

As at 30 June 2020, the Group held a lease liability of $680.6 million (31 December 2019: $716.2 million).

Financial Risk Management

Oil price

The Group is exposed to the impact of changes in Brent crude oil prices on its revenue and profits. EnQuest's policy is to manage the impact of commodity prices to protect against volatility and allow availability of cash flow for reinvestment in capital programmes that are driving business growth.

During the six months ended 30 June 2020, commodity derivatives generated a total gain of $24.0 million, with revenue and other operating income including a realised gain of $35.2 million. The unrealised losses of $11.2 million relate mostly to open swaps.

Foreign exchange

EnQuest's functional and presentational currency is US Dollars. Foreign currency risk arises on purchases and the translation of assets and liabilities denominated in currencies other than US Dollars. To mitigate the risks of large fluctuations in the currency markets, the hedging policy agreed by the Board allows for up to 70% of the non-US Dollar portion of the Group's annual capital budget and operating expenditure to be hedged. For specific contracted capital expenditure projects, up to 100% can be hedged.

EnQuest continually reviews its currency exposures and, when appropriate, looks at opportunities to enter into foreign exchange hedging contracts. During the six months ended 30 June 2020, these contracts resulted in an unrealised loss of $3.0 million recognised in the income statement.

Surplus cash balances are deposited as cash collateral against in-place letters of credit as a way of reducing interest costs. Otherwise, cash balances can be invested in short-term bank deposits and AAA-rated liquidity funds, subject to Board-approved limits and with a view to minimising counterparty credit risks.

Going concern

The Group closely monitors and manages its funding position and liquidity risk throughout the year, including monitoring forecast covenant results, to ensure that it has access to sufficient funds to meet forecast cash requirements. Cash forecasts are regularly produced, and sensitivities considered for, but not limited to, changes in crude oil prices (adjusted for hedging undertaken by the Group), production rates and costs. These forecasts and sensitivity analyses are designed to allow management to mitigate liquidity or covenant compliance risks in a timely manner. Management has also repaid the term loan on or ahead of schedule, with no further scheduled payments due in 2020.

The Group continues to monitor actively the impact on operations from COVID-19 and has implemented a number of mitigations to minimise the impact, adopting an approach based upon the principles of safety and welfare of people and security of supply. The Group has remained aligned and supportive of the government position and remained compliant with Dubai, Malaysia and UK government and industry policy. The Group has also been working with a variety of stakeholders, including industry and medical organisations, to ensure its operational response and advice to its workforce is appropriate and commensurate with the prevailing expert advice and level of risk.  Appropriate restrictions on offshore travel have been implemented, such as self-declaration by, and isolation of, individuals who are symptomatic. Pre-mobilisation testing and temperature checks are also in place for all operational staff prior to travelling to the Group's UK North Sea onshore and offshore operating facilities. EnQuest's normal communicable disease process has been updated specifically in respect of COVID-19, with additional offshore isolation capability and agreements in place to transport impacted individuals back onshore in dedicated helicopters. At the Sullom Voe Terminal, the same processes have also been implemented, with isolation capability at local accommodation.    

At the time of publication of EnQuest's Half year Report and Accounts, the Group's day-to-day operations continue without being materially affected by COVID-19.

The Group reviewed each of its assets and related spending plans in response to the material decline in oil price in March 2020. The plan remains not to restart production at the Heather/Broom and Thistle/Deveron fields and CoP at the Dons field is planned in Q2 2021. At the same time, the Group continues to implement its operating cost and capital expenditure reduction programme and this is assumed in the Base case.

The Base case is in line with the Group's production guidance and uses an oil price assumption of $40/bbl for the remainder of 2020, $47/bbl for 2021, with a longer-term price assumption of $60/bbl and are broadly in line with current consensus.

The Base case has been subjected to stress testing by considering the impact of the following plausible downside risks (the 'Downside case'):

•           10.0% discount to Base Case prices;

•           Corporate production risking of circa 2.0% for 2020 and circa 3.5% for 2021; and

•           Potential restriction of cash associated with additional decommissioning security agreements.

The Base case and Downside case indicate that the Company is able to operate within its existing borrowing facilities for 12 months from the date of approval of the Half year Report and Accounts. The Directors have also performed reverse stress testing with the breakeven price for liquidity in the Going Concern period being c.$17/bbl.

The quarterly liquidity covenant in the facility (the 'Liquidity Test') requires that the Group shows it has sufficient funds available to meet all liabilities when due and payable for the period commencing on each quarter and ending on the date falling 12 months after the final maturity date which is 1 October 2021. The Liquidity Test assumptions include a price deck of the average forward curve oil price, minus a 10% discount, of 15 consecutive business days starting from approximately the middle of the previous quarter.

Under these prices the Group forecasts no breaches in the Base case for the Liquidity Test. The Group also obtained pre-emptive waivers for the remaining quarters in 2020 meaning the next applicable test date is 31 March 2021. By applying the 10% discount stipulated in the Liquidity Test and an additional reduction in excess of 9% on Base case prices, across all periods, the Group would breach this covenant, prior to any mitigations such as asset sales or other funding options. Under a lower oil price scenario, there is a risk of a potential covenant breach, which would therefore require a further covenant waiver to be obtained. The Directors are confident that obtaining further waivers from the facility providers would be forthcoming. Should circumstances arise that differ from the Group's projections, the Directors believe that a number of mitigating actions, including refinancing, asset sales or other funding options, can be executed successfully in the necessary timeframe to meet debt repayment obligations as they become due and in order to maintain liquidity. 

Outside of the going concern period, the RCF expires in October 2021 (see note 12). The Directors are confident the Group will be able to repay or refinance the RCF based on the Group's Base case cash flow projections.

After making appropriate enquiries and assessing the progress against the forecast, projections and the status of the mitigating actions referred to above, the Directors have a reasonable expectation that the Group will continue in operation and meet its commitments as they fall due over the going concern period. Accordingly, the Directors continue to adopt the going concern basis in preparing these financial statements.