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EnQuest Announces 2020 Half Year Results

Source: www.gulfoilandgas.com 9/3/2020, Location: Europe

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.”

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

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.

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