08 September 2016

2016 HALF YEAR RESULTS

ENQUEST PLC, 8 September 2016. 
Results for the 6 months ended 30 June 2016*.

Strong production growth, 42,520 Boepd in H1 2016, up 43% on H1 2015
Unit opex down further to $23/bbl, ahead of target and now 50% down on H1 2014
Kraken on track for first oil in H1 2017, gross capex lowered by further c.$150m
Continuing focus on strengthening the balance sheet

* Unless otherwise stated, all figures are on a business performance basis and are in US dollars.

Highlights

  • EnQuest is delivering against its strategic priorities in the continuing low oil price environment.  Further action to reduce opex and capex has been accompanied by sustained strength in operations.  High production efficiency has driven EnQuest’s highest H1 levels of production, with a well implemented drilling programme and with first oil from the Kraken development on schedule for H1 2017.
  • Production averaged 42,520 Boepd in H1 2016, strong growth of 43% on H1 2015, with production increases in every operated asset:
    • UK production grew by 22%, before inclusion of production from the new Alma/Galia development. Malaysian production was also up by over 20%. 
    • Alma/Galia delivered an average net production of 6,433 Boepd in H1 2016.  Post first oil optimisation of production levels has continued in H2 2016, including two well interventions and acid treatments.  Following which, between 5 and 31 August gross Alma/Galia production averaged 18,785 Boepd.
    • With the extended period of production build up for Alma/Galia, full year 2016 production guidance is now anticipated to be in the range of between 42,000 and 44,000 Boepd, around the lower end of previous guidance, at the mid-point representing strong growth of c.18% over 2015.
  • Revenue of $391.3 million and EBITDA*** of $242.9 million, reflecting the strong operational performance.  The $182.6 million of cash generated from operations was $99.3 million or 119% up on H1 2015, reflecting the production growth.
  • Continued further reductions in operating costs, H1 2016 unit opex was ahead of target at $23/bbl,  benefiting from additional cost saving initiatives, including savings from EnQuest’s offshored procurement hub.  Full year unit opex is now expected to be around the lower end of the $25-$27/bbl guidance; this reflects the impact of the Alma/Galia well interventions in H2. 
  • 2016 EnQuest cash capex outflow is being reduced by a net c.$30 million, predominantly as a result of the further phasing of milestone payments.
  • The Kraken development is continuing on schedule.  EnQuest today announces a further c.$150 million decrease in full cycle gross project capex, in addition to the c.$425 million of cost reductions announced since project sanction, giving a new gross full cycle project capex cost of c.$2.6 billion.  Sail away of the Kraken FPSO is expected in H2 2016, as planned, ahead of first oil in H1 2017.  In July 2016, EnQuest announced that it was conducting negotiations for the farm out of a 20% working interest in the exploration and production licences in the Kraken Field, to the Delek Group. EnQuest will provide further details in the event either of transaction documents being signed or of it becoming apparent that a binding agreement cannot be reached.
  • Scolty/Crathes is both ahead of schedule and under budget, with first oil now expected around the 2016 year end.
  • Net debt at the period end, was $1,681 million.

Summary

EnQuest CEO Amjad Bseisu:
“Strong production of 42,520 Boepd has been delivered, representing broad based growth of 43% over H1 2015.  Unit opex of $23/bbl is down 41% on the $39/bbl in H1 2015, and down 50% on the $46/bbl in H1 2014.  2016 cash capex, is reduced by a further c.$30 million, now set to be in the range between $670 million and $720 million.

EnQuest is progressing both of its development projects ahead of budget; the Kraken FPSO is on track for sail away in H2 2016, with its full cycle gross capex costs now reduced by a further c.$150 million to c.$2.6 billion. The Scolty/Crathes development is ahead of schedule.  This year’s drilling programme has been executed very efficiently, delivering more wells within the original budget.
In H1 2016, EnQuest delivered EBITDA of $242.9 million and more than doubled cash generated from operations to $182.6 million, driven by the scale of the production growth, cost cutting and oil price hedging, more than countering the impact of lower oil prices.

With very substantial structural reductions in our cost base already delivered, the long term potential of EnQuest’s business model remains compelling.  EnQuest’s overriding priority continues to be delivering a business which is robust in this challenging environment.”

Summary production statistics and key financials H1 2016 H1 2015 Change %
Production (Boepd) 42,520 29,665 43
Realised oil price $/bbl** 62 87 (29)
Revenue and other operating income ($m) 391.3 444.0 (12)
Gross profit ($m) 117.7 108.4 9
Profit/(loss) before tax & net finance costs ($m) 149.7 99.1 51
EBITDA*** ($m) 242.9 226.7 7
Cash generated from operations ($m) 182.6 83.3 119
Net cash flows from operating activities ($m) 170.2 70.7 141
Reported basic earnings per share (cents) 19.5 12.8 52
Cash capex ($m) 261.6 404.3 (35)
  End H1 2016 End H1 2015  
Net (debt)/cash****($m) (1,681.0) (1,548.0) 9

** Includes $127.1 million associated with EnQuest’s effective oil price hedges and $0.3 million associated with other commodity derivatives (H1 2015: includes $99.1 million associated with effective oil prices hedges and $47.5 million associated with other commodity derivatives). *** 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 and foreign exchange movements. **** Net (debt)/cash represents cash and cash equivalents less borrowings as per the balance sheet stated excluding accrued interest and the net-off of unamortised fees.

Outlook

Production guidance: Average production guidance for the full year 2016 is in the range of 42,000 Boepd to 44,000 Boepd.

Capital expenditure: Full year 2016 cash capex is expected to be reduced, as a result of the further phasing of milestone payments.  This is despite additional capex on drilling the Eagle discovery.  The net effect should result in full year 2016 cash capital expenditure being reduced by c.$30 million, down to between $670 million and $720 million.  On July 18, 2016, EnQuest announced that it was conducting negotiations for the farm out of a 20% working interest in the exploration and production licences in the Kraken Field, to the Delek Group. EnQuest will provide further details in the event either of transaction documents being signed or of it becoming apparent that a binding agreement cannot be reached.

Operating expenditure: Unit opex of $23/bbl is ahead of target. EnQuest now anticipates full year unit opex around the lower end of the $25-$27/bbl guidance for the full year 2016.   This full year opex expectation reflects pre-first oil ‘operating’ costs at Scolty/Crathes and costs associated with the K1 and K3z interventions at Alma/Galia, which are incurred in H2 2016.   EnQuest expects to reduce unit opex into the low $20s per barrel when Kraken is fully onstream.

EnQuest continues to seek cost reductions across the supply chain; including production operations and services, import gas, logistics, maintenance, subsea, manpower.  Projects are being reduced in scope and deferrals of cash payment have been agreed.  EnQuest continues to work with the SVT operator to reduce gross cost levels and reductions are expected to continue.

Oil price hedging: Of the 10 million barrels originally hedged across 2016 at an average of $68 per barrel, at the start of July 2016, c.5.5 million remained in place, at an average of $68 per barrel.

Tax: In the current oil price environment, EnQuest does not anticipate paying material UK cash tax in the foreseeable future.

Foreign exchange rates: If prevailing $/£ exchange rates continue, these should have a substantial positive impact on income in 2017 and 2018, reducing opex by between $30 million to $40 million in each year.

Funding: EnQuest remains focused on monitoring and managing its funding position and liquidity, continuing strategic priorities in this low oil price environment. In this context, EnQuest has continued to take action to implement cost saving programmes, both to reduce and rephase planned operational expenditure, general and administrative spend and capital expenditure. EnQuest is also pursuing a number of additional funding options, to ensure adequate liquidity continues to be available.  EnQuest is holding constructive discussions with its main debt and credit providers, or their representatives, concerning proposals for accommodations including to amend the structure, covenants, interest payment obligations, maturities and other aspects of its debt. The RCF lenders continue to be supportive and have provided waivers when required.

Financial review of H1 2016

  • The Group’s blended average realised price per barrel of oil sold excluding hedging was $41 for the six months ended 30 June 2016, below the $58 per barrel received during the first half of 2015, reflecting the decline in oil prices.  Revenue is predominantly derived from crude oil sales and for the six months ended 30 June 2016 crude oil sales totalled $256.5 million compared with $294.1 million for the comparative period in 2015.  The decrease in revenue was due to the lower oil price, offset partially by the higher production. 
  • Reflecting EnQuest’s cost optimisation, and the 43% increase in production volumes, unit operating costs reduced by 41% to $23 per barrel.  Although production has significantly increased, operating costs decreased by $16.7 million, reflecting EnQuest’s cost reductions.
  • EBITDA for the six months ended 30 June 2016 was $242.9 million compared with $226.7 million during the six months ended 30 June 2015.  The higher EBITDA is mainly due to the increase in production and reduced operating costs, offset by the impact of lower oil prices in H1 2016. The impact of lower oil prices has been partially mitigated through the contribution of $128.1 million from the Group’s commodity hedge portfolio (2015: $146.7 million).
  • The tax credit for the six months ended 30 June 2016 of $56.9 million (2015: $22.4 million tax credit), excluding exceptional items, is due primarily to an increase in the Ring Fence Expenditure Supplement on UK activities.
  • Finance costs of $66.8 million include $52.0 million of bond and loan interest payable.
  • EnQuest’s net debt has increased from $1.55 billion at the end of 2015 to $1.68 billion at 30 June 2016, reflecting investment in its assets.
  • Exceptional losses totalled $8.5 million before tax for the six months ended 30 June 2016. 
  • As a result of the continued capital investment, UK corporate tax losses at the end of the period increased to approximately $2,733.6 million. 

H1 2016 production and development performance and outlook by asset:

Production on a working interest basis

Net daily average
H1 2016

Net daily average
H1 2015

(Boepd)

(Boepd)

Thistle/Deveron

8,966

7,690

Dons/Ythan

6,600

6,419

Heather/Broom

6,114

3,615

Kittiwake

3,738

2,915

Alma/Galia
6,433
-

Alba

1,236

1,249

Total UKCS

33,087

21,888

PM8/Seligi (Malaysia)

8,152

7,777

Tanjong Baram
1,281
-
Total Malaysia
9,433
7,777

Total EnQuest

42,520

29,665

UK North Sea
Production
Thistle/Deveron

Production of 8,966 Boepd from Thistle/Deveron was up 17% on H1 2015 with the benefit of the 2015 work programme and a further phase of the field life extension programme. This latest programme of Thistle drilling activities was brought to a close in January 2016.

Maintenance, integrity and life extension projects are continuing throughout 2016, including a routine planned shutdown of approximately two weeks in H2, which will include further field life extension work, which will increase the plant’s capacity to handle produced water.

Don fields/Ythan

Production of 6,600 Boepd from the Don fields was up 3% on H1 2015, with strong reservoir performance generally and the benefit of the Ythan well, drilled last year.  Production also benefitted from the positive impact of the start of gas import, which has increased plant efficiency, and also reduced platform fuel costs.

The 2016 Dons work programme includes chemical treatment programmes and routine maintenance, including a planned two week shutdown in H2.  This shutdown is planned to coincide with a Brent Pipeline System maintenance outage.

Following the default of First Oil PLC in February 2016, a process was initiated which resulted in the transfer to EnQuest of 15.15% of First Oil’s previous 19.275% working interest in the West Don Field for nominal consideration;  the transfer completed on 2 August 2016. Production from EnQuest’s additional 15.15% interest will be effective from August 2016 onwards.  Following completion of the transfer, EnQuest has a 78.6% working interest in the West Don Field.

Heather/Broom

Production of 6,114 Boepd from Heather/Broom was up 69% on H1 2015, with the continuing benefit of the Heather production well brought onstream in March 2015, the reinstatement of water injection to the Broom field in Q2 2015 and also to very high levels of production efficiency.  The Heather platform completed one year without an unplanned production outage.  The Heather/Broom hub has proved to be particularly responsive to water injection.

Greater Kittiwake Area (‘GKA’), including the Scolty/Crathes development

Production of 3,738 Boepd was up 28% on H1 2015, with continuing improvements in production efficiency.  Gadwall was brought back onstream in August 2015 and has performed well.  GKA production is continuing to benefit from chemical treatments on Goosander in 2015.

The Scolty/Crathes development is ahead of schedule and under budget.  The subsea and topside programmes are both progressing well.  EnQuest confirms that first oil should be around the 2016 year end.  In particular, the execution of EnQuest’s 2016 GKA drilling programme has been excellent.  The Scolty reservoir was on prognosis and the Crathes reservoir exceeded expectations, with a small reserves upgrade anticipated. Construction work on the GKA platform has progressed well, with all major units having now been installed offshore; the subsea scope is also progressing well.  A planned shutdown is currently taking place, allowing essential tie-in work to be carried out in preparation for first oil.

In Q2 2016, EnQuest undertook the drilling of the Eagle exploration well. Eagle was acquired along with EnQuest’s other interests in the Greater Kittiwake Area (‘GKA’) in 2014. The Eagle exploration well was completed in Q2 2016 and confirmed as a discovery.  Preliminary analysis of the results indicated Fulmar oil bearing reservoir was encountered with a vertical thickness of 67ft and excellent reservoir properties.  Additionally no oil water contact was encountered, representing potential upside volumes on the flank of the structure. The encouraging results of the initial analysis lead EnQuest to anticipate gross total recoverable reserves to be of a similar order of magnitude to those in the nearby Gadwall producing oil field; it is estimated that total gross ultimate recovery from Gadwall will be approximately 6 MMstb. Further evaluation of the Eagle results is ongoing, but given the expected low cost of the tie back, it is expected to be commercial.

Alma/Galia

By March 2016, six Alma/Galia production wells had been commissioned.  All these wells were onstream by early Q2 2016 and after analysis of the initial results, a production performance enhancing work programme was established.  This programme is now complete.  The K2 (AP5) well cleaned up naturally after a number of weeks of production, resulting in a substantial increase in production, K1 (AP4) required a chemical treatment which has been successful and the workover of the K3z (AP1) well, was carried out by early August, further increasing production, taking gross Alma/Galia production levels to an average of 18,785 Boepd between 5 and 31 August.

The drilling of well K7, the replacement for the uncompleted K6, is in progress and K7 should be online around the 2016 year end.  2016 drilling on Alma/Galia has allowed for additional reserve analysis, which has confirmed the existing assessment of Alma/Galia’s overall net reserves, with there still being potential for remaining reserves to exceed the base sanction case.

Alba

Overall, H1 2016 production of 1,236 Boepd from Alba was closely in line with the level in H1 2015.  This reflected the net effect of the A70 production well being brought online in April, with its performance exceeding expectations, also of a two week shutdown early in the year as a consequence of bad weather, followed subsequently by high operational uptime.

The A71 production well was drilled in August 2016 and is anticipated to be online later in H2 2016.

Development

Kraken

Overall the project remains on schedule and below budget, with first oil anticipated in H1 2017.

Floating production, storage and offloading vessel (‘FPSO’): The FPSO is nearing mechanical completion with focus now on pre-commissioning and commissioning activities. The three boilers have all been fired for the first time and are undergoing performance tests. Three of four engines are mechanically complete. The turret area is mechanically complete. The accommodation module is fully operational and the operations crew are living onboard. Commissioning activities are ramping up at the quayside before sailing the vessel to deepwater anchorage in order to commission systems such as water injection pumps, HSP power fluid pumps, sulphate reduction package, fire water and deluge and lifeboats.

Subsea: The subsea installation programme is now complete with all three Drill centres (‘DC1’, ‘DC2’ and DC3’) fully connected to the STP buoy for hook up to the FPSO. There is one short programme planned to install the last mooring pile and wire/chain.

Drilling: The drilling programme continues to make excellent progress. A total of four producer and four injector wells have now been safely drilled and completed, with results meeting or exceeding pre-drill predictions.

EnQuest has today announced a further c.$150 million reduction in the gross full cycle Kraken project costs to c.$2.6 billion.  This reduction was primarily possible because of the progress on drilling and the execution of the subsea programme; these capex reductions will reduce cash outflow in 2017 and beyond.

Malaysia

Production

PM8/Seligi

Production of 8,152 Boepd from PM8/Seligi was up 5% on H1 2015. 2016 production started strongly as a result of unusually calm January weather and a successful well intervention. In Q2 2016, a pro-active 11-day shutdown was executed to complete safety checks and inspections that were deemed prudent, after which production returned to good levels. PM8/Seligi’s performance is supported by strong production efficiency and the ongoing idle well restoration programme.

In the near term, EnQuest will continue to enhance production by investing in well interventions and facility integrity to maximise both reliability and production efficiency at low cost. Longer term, development drilling, secondary recovery and field life extension activities will contribute to improved recovery and additional reserves.

Tanjong Baram

Tanjong Baram produced 1,281 Boepd in H1 2016, having not yet commenced production during the comparative prior period of H1 2015.

Ends

For further information please contact:

EnQuest PLC Tel: +44 (0)20 7925 4900
Amjad Bseisu (Chief Executive)
Jonathan Swinney (Chief Financial Officer) 
Michael Waring (Head of Communications & Investor Relations)                                                                       

Tulchan Communications Tel: +44 (0)20 7353 4200
Martin Robinson           
Martin Pengelley

This announcement has been determined to contain inside information.

Presentation to Analysts and Investors

A presentation to analysts and investors will be held at 09:30 today – London time. The presentation and Q&A will also be accessible via an audio webcast – available from the investor relations section of the EnQuest website at www.enquest.com.   A conference call facility will also be available at 09:30 on the following numbers:

Conference call details:
            
UK: +44(0)20 3427 1907

USA: +1646 254 3361

Confirmation Code: EnQuest

Notes to editors
EnQuest is the largest UK independent producer in the UK North Sea.  EnQuest PLC trades on both the London Stock Exchange and the NASDAQ OMX Stockholm. Its operated assets include the Thistle/Deveron, Heather/ Broom, Dons area, the Greater Kittiwake Area and Alma/Galia, also the Kraken and the Scolty/Crathes developments; EnQuest also has an interest in the non-operated Alba producing oil field.  At the end of June 2016, EnQuest had interests in 29 UK production licences, covering 41 blocks or part blocks and was the operator of 26 of these licences.

EnQuest believes that the UKCS represents a significant hydrocarbon basin, which continues to benefit from an extensive installed infrastructure base and skilled labour.  EnQuest believes that its assets offer material organic growth opportunities, driven by exploitation of current infrastructure on the UKCS and the development of low risk near field opportunities.

EnQuest is replicating its model in the UKCS by targeting previously underdeveloped assets in a small number of other maturing regions; complementing its operations and utilising its deep skills in the UK North Sea.  In which context, EnQuest has interests in Malaysia where its operated assets include the PM8/Seligi Production Sharing Contract and the Tanjong Baram Risk Services Contract.

Forward looking statements: This announcement may contain certain forward-looking statements with respect to EnQuest’s expectation 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 presentation should be construed as a profit forecast.  Past share performance cannot be relied on as a guide to future performance.

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