Enteq Technologies plc (LON:NTQ) the energy services technology and equipment supplier, has announced its interim results for the six months ended 30 September 2022.
Key Highlights
· Measurement While Drilling revenues in H1 were significantly up on this time last year due to North American activity, albeit at lower margins due to share of third-party equipment sales.
· International sales were limited due to lagging international market recovery and ongoing China shut-downs.
· The SABER engineering project has progressed with the initial fleet of the latest design of SABER tools being built. The complementary MegaHop technology development has been launched.
· All initial testing of SABER has achieved the objectives with encouraging results. Active drilling in hard-rock environment has been scheduled at an independent test-site in Norway and customer trials arranged.
· Investment in SABER has continued using existing balance sheet resources to progress into the final engineering phase and SABER tool-build, resulting in a cash position of US$1.8m at the end of the period rising to US$2.5m as at the date o f this announcement.
Financial metrics
| Six months ended 30 September: | ||
| 2022 | 2021 | |
| US$m | US$m | |
| · Revenue | 4.9 | 2.3 |
| · Adjusted EBITDA* | 0.1 | (0.6) |
| · Post tax loss for the period | 0.8 | 1.2 |
| · Loss per share (cents) | 1.1 | 1.8 |
| · Cash balance | 1.8 | 5.3 |
Andrew Law, CEO of Enteq Technologies plc, commented:
“Enteq continues to adapt to the changing global and industry dynamics by focusing on the higher margin potential in the significantly larger (>US$2bn) growth market of Rotary Steerable Drilling where SABER can offer a differentiated and cost-effective alternative. Progress continues with the build and test of the SABER system. Resources from the existing balance sheet are being used to support bringing SABER to commercialisation.”
* Adjusted EBITDA is reported profit before tax adjusted for interest, depreciation, amortisation, foreign exchange movements, performance share plan charges and exceptional items – see note 5
Interim Report
CHAIRMAN & CHIEF EXECUTIVE OFFICER’S REPORT
Overview
Enteq supplies and develops drilling and measurement technology for the worldwide oil and gas, geothermal and methane capture directional drilling markets. Enteq provides equipment through rental or purchase, enabling independent and regional directional drilling companies to operate as an alternative to major integrated service companies. Directional drilling encompasses Rotary Steerable Systems (“RSS”) and Measurement While Drilling (“MWD”).
As a step change to the original MWD business, Enteq is commercialising the SABER (Steer At-Bit Enteq Rotary) RSS Tool, a truly disruptive and unique alternative to both conventional RSS and traditional directional drilling. SABER can allow Enteq to access a considerably larger addressable market with notably fewer active competitors compared to those in the MWD market. The SABER Tool is an evolution of the intellectual property developed, proven in concept and successfully tested downhole by Shell. Enteq has the exclusive worldwide licence to the intellectual property and is now progressing through the field-trial programme ahead of commercialisation.
Enteq’s MWD business has an established reputation for reliability both in North America, where operations using Enteq equipment are regularly being carried out on a significant number of rigs, and in key international areas and in geothermal operations.
Financial performance
The key driver of the half year revenue of US$4.9m has been the steady increase in North American drilling activity, a continuation of the recovery seen through the whole of the previous financial year. This recovery has been a function of the relative stability in the price of a barrel of West Texas Intermediate (“WTI”), despite a weakening during the month of September itself. The average price of WTI in the period under review was US$101, moving from US$104 on 1 April to US$80 at the period end. This stability, at a relatively high price, resulted in the North American onshore active drilling rig count rising by 14%; from 673 on 1 April to 765 at the end of September.
As expected, the international markets have been slower to respond to this price stability. The proportion of international revenue, at 3% in this reporting period, continues the recent trend with the international revenue of the second half of the previous financial year at 9%, down from the 28% seen in the first half year.
The reported gross margin of 28% in the first half of this year compares to 35% in the six months to 31 March 2022 and 37% in the equivalent period to 30 September 2021. This reduction is due to a lower proportion of sales coming from the high margin rental revenue stream (down from 23% in the first half year to 30 September 2021 to only 7% in this reporting period) combined with a higher proportion coming from the electronic component product line (up from 46% to 53% in same periods) within which an increasing number of third party, lower margin, items were sold.
In the six months ended 30 September 2022, administrative expenses before amortisation, depreciation and long-term incentive scheme charges were US$1.3m. This is down from both the US$1.4m in the equivalent period to 30 September 2021 and the US$1.8m in the six months to 31 March 2022, reflecting the continuing focus on cost control measures.
The adjusted EBITDA profit in the period was US$0.1m, a pleasing improvement over the US$0.6m loss in the equivalent period last year. The primary reason for the improvement was the uplift in revenue and associated gross margin. A reconciliation between the reported loss and the adjusted EBITDA profit is shown in note 5 to the Financial Statements below.
Cash balance and cashflow
On 30 September 2022, the Group had a cash balance of US$1.8m down US$3.0m on the US$4.8m reported as at 31 March 2022. As at the date of this announcement the cash balance was US$2.5m.
The half year cash movement can be analysed as follows:
| US$m | |
| Adjusted EBITDA profit | 0.1 |
| Change in trade and other receivables | (1.9) |
| Change in trade and other payables | (0.2) |
| Change in inventory | 0.4 |
| Operational cashflow | (1.6) |
| Increase in the rental fleet | (0.3) |
| R&D expenditure | (1.1) |
| Net cash movement | (3.0) |
| Cash balances as at 1 April 2022 | 4.8 |
| Cash balances as at 30 September 2022 | 1.8 |
The increase in trade receivables relates to strong revenues towards the end of the period with the outstanding balances being collectable in future months. The R&D expenditure was primarily relating to the SABER Rotary Steerable System development program. Management expects that the future cash balances are sufficient to complete SABER’s field-testing phase and to bring it to a successful commercial launch.
Operations
Enteq’s dedicated SABER technology and manufacturing centre is now fully operational, having opened in February 2022. This facility is located close to Cheltenham, UK, one of the global centres of expertise for Rotary Steerable Systems with access to specialised engineering and machining firms.
The engineering, manufacturing and distribution functions related to the MWD division continues to operate from the Enteq owned facility in Houston, Texas.
SABER field-testing is the priority for progression to the commercialisation phase. The SABER project has continued to progress according to the development plan, with the improved latest design of SABER entering the downhole-readiness phase for active drilling testing. This latest improved, simplified and ruggedised design is an outcome of the successful initial downhole passive testing, followed by an accelerated production and assembly programme to deliver downhole-ready tools. Extensive testing at surface has both re-validated this unique concept and refined the design. Active downhole drilling field-testing has been booked at a test site Norway, with follow-up active downhole drilling planned with selected customer test partners keen to continue the move into the commercialisation phase.
In line with the direction of the industry, chiefly the growth market opportunity for Rotary Steerable Systems, the Company strategy has been aligned with ensuring the technical and commercial success of SABER. A concerted effort is in place to utilise the assets on the balance sheet to provide financial resources for SABER commercialisation and build-up of the rental fleet. Following initial active drilling testing, the focus will be on pre-production design improvements and building-up the SABER rental-fleet as rapidly as possible, subject to any supply chain constraints, to support deployment into the selected initial regions.
To support SABER, there is a disciplined strategy to concentrate the MWD business on cash-generative commercial deals. As the MWD market is becoming increasingly commoditised, the decision has been taken to focus on providing customers with differentiated technologies with the potential to enhance SABER deployment to customers. For example, our recent introduction of our MegaHop1 technology can allow communication from SABER to customers’ existing equipment.
Organisation
The MWD division has personnel operating from Houston and the SABER division has personnel operating from Houston and Cheltenham.
Outlook
The underlying macro-fundamentals for RSS show that the market and RSS usage is increasing and that this market is in need of additional competition. Extensive and continued industry engagement by Enteq, including recent attendance at the ADIPEC global trade show, has confirmed there is a high level of potential demand for SABER in each of the key geographies where Enteq operates. In particular, this potentially disruptive technology has a strong product-market fit having the potential for lower cost of operation as well as reduced risk.
Andrew Law Martin Perry
Chief Executive Chairman
Enteq Technologies plc
15 November 2022
1 www.enteq.com/news-media/2022/09/enteq-technologies-launches-real-time-communications-solution-for-rss-and-mwd-operations
