ENQUEST PLC, Results for the year ended 31 Dec 14

ENQUEST PLC, 19 March 2015.  Results for the year ended 31 December 2014*.
2014 production up 15%, substantial 25 MMboe reserves increase
Production of between 33,000 Boepd and 36,000 Boepd for 2015, up c.24%

Highlights

§ Production averaged 27,895 Boepd, up 15.2%, over 2013.  This was due to very good operational performance, with an excellent HSE performance, excellent production efficiency and with a 3,459 Boepd contribution from EnQuest's first international production. 

§ Net 2P reserves of 220.0 MMboe as at end 2014, up 25.2 MMboe on prior year, reserves replacement ratio of c.350%. Net contingent resources of 170.6 MMboe at end of 2014, up 49.2 MMboe.

§ Revenue of $1,010 million, EBITDA^** of $581 million, reflecting the strong operational performance.

§ The Floating Production, Storage and Offloading ('FPSO') vessel for the Alma/Galia development has now left the yard on schedule and the project is on track for first oil in mid-2015.

§ Kraken continues to be on budget and is on schedule for first oil in 2017. The drilling of an appraisal well in Kraken West has confirmed the presence of oil, with potential for upside. Further evaluation is ongoing. 

§ Cost reduction action across the board; confirming 2015 cash capex target of c.$600 million, also a unit opex reduction target of c.10% over 2014, to an average of c.$38/bbl in 2015.  

§ Hedging already in place for 2015 and now also for 2016, currently with 10 million barrels hedged in 2016, through puts averaging c.$68 per barrel in 2016.

§ Non-cash post-tax impairments of $335.3 million, due to lower near term oil price assumptions. 

§ Net debt at the year end, was $932.8 million.

§ Production guidance for the full year 2015 is for an average of between 33,000 Boepd and 36,000 Boepd, representing a 24% annual increase at the mid-point of the range.

* Unless otherwise stated, all figures are before exceptional items and depletion of fair value uplift and are in US dollars.

**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 at the reported cash flow statement date of 31 December.

EnQuest CEO Amjad Bseisu said:

"EnQuest delivered a strong operational performance in 2014, with production up 15%, EBITDA of $581 million and a 25 MMboe increase in reserves.  Our two major development projects are both progressing well; the EnQuest Producer has now left the yard and the Alma/Galia development is on track for first oil in mid-2015, Kraken is on budget and on schedule for first oil in 2017.

During the latter part of 2014, EnQuest acted quickly to counter lower oil prices, implementing a new hedging programme, significantly cutting 2015 cash capital expenditure and taking action across the board to reduce operating costs materially.  Consequently this year, EnQuest expects to deliver unit opex of c.$38/bbl, a reduction of  c.10% on 2014. Reducing cost and increasing efficiency are core to the EnQuest business model.

EnQuest is also set to benefit from the material increases in production from both Alma/Galia and Kraken in the next two years, delivering significant additional cash flow.  Despite the uncertain markets, we are well placed for the future."

Summary of 2015 year to date and outlook

EnQuest has performed well at the start of 2015; production efficiency for the North Sea has again been very strong and the focus on operational efficiencies in PM8/Seligi has been delivering excellent daily gross production.

In 2015, the focus is on bringing Alma/Galia to production and delivering the Kraken project on track.  The drilling programme has also been rationalised significantly.

EnQuest remains on course for six producing operated hubs in the UK and achieving annual net production from the UK North Sea of approximately 50,000 Boepd.  The PM8/Seligi fields in Malaysia, have the capacity to increase international production.

Production guidance: Average production guidance for the full year 2015 is between 33,000 Boepd and 36,000 Boepd, with Alma coming on stream in mid-2015.

Drilling programme: The rationalised 2015 drilling programme includes a production well on Galia, three new production wells on Thistle and the H66 well completion on Heather.  The first Ythan development well will also be completed.

Exploration and appraisal: The drilling of an appraisal well and sidetrack to the west of the Kraken field has confirmed the presence of oil.  Preliminary analysis indicates that the primary well (Tyrone) found oil bearing reservoir with a net vertical thickness of approximately 25 feet.  The sidetrack (Tiree) also confirmed oil bearing reservoir, with net vertical thickness of approximately 83 feet.  Further evaluation is ongoing.

Development opportunities:  Following Front End Engineering Design ('FEED') studies, submission of a Field Development Plan ('FDP') is anticipated in 2015 for the development of Scolty/Crathes.  The Tanjong Baram field development is proceeding according to plan, with first oil targeted by the end of H1 2015.

Capital expenditure: In 2015, cash capital expenditure on current projects is expected to be approximately $600 million, including around $350 million being invested in the Kraken development and about $100 million in Alma/Galia. Capex reductions have been achieved both from development projects and from existing fields.  

Operating expenditure: EnQuest achieved unit opex of $42.1/bbl in 2014 and is targeting a reduction target of c.10% in 2015, to c.$38/bbl.  This is being achieved through lower cost barrels coming onstream and through substantial direct cost savings. 

Further cost savings are being targeted across the business, through the supply chain and by improving efficiencies in operations, through maximising production and minimising waste.  Limited company contractor rates have been cut and headcount reduced in the UK and logistics costs are down significantly.

Depletion and depreciation: In 2015, the depletion and depreciation charge is anticipated to be slightly higher than in 2014.
 

Tax: In the current oil price environment, EnQuest does not anticipate paying material UK cash tax before 2025.

Hedging:  EnQuest has put hedging in place for 2016, currently with 10 million barrels hedged through puts averaging c.$68 per barrel.  For 2015, EnQuest has restructured the hedging programme, realising a gain of $100 million. EnQuest now has 10 million barrels hedged in 2015 at c.$65 per barrel. 

Financing:  EnQuest successfully negotiated a relaxation of covenants to its revolving credit facility and ongoing continued compliance with its covenants is a priority for 2015 and beyond.

By Production and Development Asset

UK North Sea

Thistle/Deveron

§ Drilling will recommence at Thistle in 2015, with three new production wells being brought onstream, one in the middle of the year and two more in H2 2015.

Don fields

§ A phased development of the Ythan field is planned, with drilling operations on the first well continuing through Q1 2015 and first production from the field by mid-2015.  The drilling of the Ythan AA injector well is planned for around the end of 2015.  Other areas to increase production in the Dons area will be reviewed, however, as expected, natural rates of decline will continue in 2015. 

Heather/Broom

§ There will be no further drilling on Heather in 2015 beyond the completion of the Heather H66 production well.

Greater Kittiwake Area ('GKA')

§ Following the success of the Mallard workover, a Gadwall sidetrack is expected in mid-2015.

Alma/Galia

§ The EnQuest Producer vessel left the yard in Newcastle and has now successfully completed marine performance trials in deeper water nearby.  Alma/Galia is on course for first oil in mid-2015, with five wells now available to come onstream.  A phased start up is planned, with one well coming onstream per week for the first month.  Drilling on the Galia production well is to be completed and tied in during H2 2015.

§ EnQuest's net 2P reserves for Alma/Galia increased slightly to c.26MMboe at the start of 2015, following the positive results from the wells which have been drilled.

Kraken

§ The Kraken programme for 2015 includes the installation of subsea hardware, including the manifolds for the first drill centre which connect to the templates already installed, two templates for the second drill centre, installation of the mooring system for the FPSO and commencement of the development drilling programme. The new drilling rig is expected on location at Kraken in H2 2015 to commence the Kraken batch top-hole drilling programme.

§ The FPSO programme also continues, with a dry docking scheduled to be undertaken to install the FPSO turret infrastructure by the end of Q1 2015.

International

Malaysia

§ Development of the Tanjong Baram field continues, with first oil scheduled by the end of H1 2015.

§ The 2015 PM8/Seligi work programme is focused on well interventions activities and improvements to the field infrastructure, including work on gas compressors, pipelines and generators.

Tunisia

In February 2015, EnQuest announced that it had exited from its small investment in Tunisia, retention of which had been subject to conditions which were not satisfied within the relevant timeframe.   Consideration of $22 million had been kept in escrow and was duly returned to EnQuest.

Summary review of 2014

Financial

§ In 2014, EnQuest generated EBITDA of $581.0 million, benefiting from action taken on costs in H2 2014. EBITDA was lower than in 2013 mainly due to lower oil prices and to higher tariff and transportation costs.  Cash generated from operations was $637.1 million compared to $562.7 million, mainly due to increases in trade payables, accrued payables and an overlift position compared to an underlift in 2013.

§ 2014 revenue of $1,009.9 million was 5.1% higher than in 2013, mainly due to the 15.2% increase in production offset by the 8.3% decrease in the realised price per barrel of oil sold. The increase in revenue was also due to an overlift of $8.2 million in 2014 compared with an overlift of $2.6 million in 2013.  Within revenue in 2014 there is $31.7 million of realised income relating to oil commodity hedges and call options.

§ Profit from operations before tax and net finance costs was $362.5 million, down 3.3% on the prior year.  This reflects cost of sales of $654.1 million for 2014 compared with $526.3 million in 2013.  An increase of $85.3 million was due to increased costs relating to the GKA and PM8/Seligi acquisitions and an increase of $34.0 million was due to increased transportation costs.  That increase was partly due to increased volumes, but mainly due to an increase in the costs per barrel at the Sullom Voe Terminal (SVT).  Total full year 2014 unit operating costs of $42.1/bbl reflected the initial benefit of cost reduction initiatives taken in H2 2014 and the lower exchange rate and generally a year of good operational performance and strong control of direct costs. 

§ Profit after tax and net finance costs was $137.4 million, down on last year, reflecting increased interest costs following the 2014 bond issuance.  

§ EnQuest's funding facilities include c.$900 million of bonds and a committed credit facility of $1.2 billion plus an accordion of up to a further $500 million.  2014 year end net debt was $932.8 million, with $217.6 million drawn on the credit facility utilisation before taking into account cash balances.  The net debt position was after cash outflow of $1,060.3 million on capital expenditure.

§ Non-cash post-tax impairments of $335.3 million, due to lower near term oil price assumptions.

§ As a result of the continued capital investment, UK corporate tax losses at the end of the year increased to approximately $1,818 million. 

Production, Development & Reserves

¹ Net production since the completion of the acquisition at the start of Mar' 2014, averaged over the twelve months to end of Dec' 2014.
² Net production since the completion of the acquisition at the end of Mar' 2013, averaged over the twelve months to end of Dec' 2013.
³ Net production since the completion of the acquisitions at the end of June 2014, averaged over the twelve months to end of Dec' 2014.

Note: Production from PM8/Seligi was 2,078 Boepd on an entitlement basis.

UK North Sea

Thistle/Deveron

§ In 2014, Thistle delivered 14% production growth year on year, reflecting continuing benefit from new production wells brought onstream during the course of H2 2013 and the programme of investment in the Thistle life extension project. In 2014, the A57 and A60 wells continued to outperform expectations, with watercut rising slower than anticipated. The investment programme in Thistle delivered a stepped improvement in production efficiency.

Don fields

§ In 2014, production optimising projects were implemented to address the natural decline in the Don fields. Production efficiency remained very strong, at 89%, with high levels of water injection efficiency supporting production.  Production from Area 22 of Don Southwest was boosted by a successful acid stimulation treatment on Well S2z and by the completion in August of a new production well. The new production well TJ delivered initial rates in line with expectations.  On West Don, the W4 well suffered from scale build up and was shut-in in November awaiting remedial measures, scheduled for 2015.

Heather/Broom

§ Production at Heather/Broom delivered 4,081 Boepd in 2014.  This was down slightly after a strong performance in 2013.  Following the completion of the 2013 rig reactivation project, rig operations in Q1 2014 commenced with a workover of the H56 well, which was brought onstream in May and has continued to deliver planned levels of production.  This was followed by the sidetrack of shut-in well H44 as a new injection well in the B2 block.  H64 was brought on in July, which resulted in an increase from the nearby production well, H62Y.  Crestal production well, H47, was sidetracked in place of the planned workover, and was brought onstream in November, delivering an initial rate significantly above expectation.  High levels of operational uptimes and a production efficiency of over 90% have been achieved. 

Greater Kittiwake Area

§ EnQuest took over as the operator at the end of Q1 2014; the initial focus was on integration and delivering an early workover programme on Mallard. 

§ The Mallard workover was successfully completed and was brought online at the end of Q3 2014, GKA production peaked at 7,300 Boepd, shortly after.  Since acquiring GKA, EnQuest has improved operational efficiency and with the benefit of the workover, production has increased from just over 2,500 Boepd gross in the first few months, to over 5,500 Boepd gross in October.  The Grouse well now benefits from stable gas-lift supply.

Alma/Galia

§ At the end of 2014, the Alma/Galia development project was on track for first oil in mid-2015.

§ Systems required for first oil were mechanically complete, with commissioning well underway.  Control systems (marine, subsea, electrical submersible pumps) had been installed and commissioned.  Five production wells were fully completed and ready for the FPSO tie-in.  The drilling programme for the production wells was successfully completed; five wells were drilled with results meeting or exceeding expectations.  All subsea well tie-ins were complete. The subsea infrastructure was in place, with risers and mooring systems wet-stored awaiting the arrival of the FPSO.

Kraken

§ During 2014, the Kraken project progressed well, on budget and on schedule. 

§ In Q2 2014, the Kraken FPSO donor vessel arrived at the shipyard in Singapore for conversion scope to commence.

§ In H2 2014, EnQuest commenced installation of the subsea structures at the first drill centre, where the initial wells for the development will be drilled.  Delivery of the hydraulic submersible pumps used to provide the artificial lift commenced in Q3 2014. Detailed engineering, procurement and manufacture for all equipment relating to wells, subsea infrastructure and the FPSO continued throughout 2014.

International

PM8/Seligi. Malaysia.

§ Following the acquisition at the end of June 2014, EnQuest assumed offshore field operations in October, and the overall transition completed in December 2014, with strong production from the fields.  EnQuest intends to enhance production through well interventions, facilities rectification and upgrades, and subsurface programmes that will lead to new wells in 2016.

Tanjong Baram. Malaysia.

§ In March 2014, EnQuest signed a contract for the development of the Tanjong Baram field, offshore Sarawak.  Tanjong Baram is being developed as an unmanned platform with production tied back to the Petronas Carigali operated West Lutong A complex.  The development plan is based on a two well programme, with capacity for one additional well in the facilities design.

Reserves

§ Audited net 2P reserves at the start of 2015 were 220.0 MMboe, a 13.0% increase on the start of 2014; reflecting a reserves replacement ratio of c.350% and a reserve life of over 20 years.  The increase resulted partly from positive revisions to reserve estimates from infill drilling and an improved knowledge of the reservoirs.  Approval of the Ythan discovery for development, and the promotion of the Scolty and Crathes discoveries following development planning, also contributed to the increase in EnQuest's reserve base.  Further additions arose from 2014 acquisitions, including interests in the Greater Kittiwake Area ('GKA') and PM8/Seligi in Malaysia.    

Ends

For further information please contact:

Presentation to Analysts and Investors

A presentation to analysts and investors will be held at 09:00 today. 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 09:00 on the following numbers:

Conference call details:

UK:      +44(0)20 3427 1918

USA:    +1646 254 3364

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, West Don, Don Southwest, Conrie, Kittiwake, Mallard, Gadwall, Goosander and Grouse producing fields and the Alma/Galia, Kraken and Ythan developments; EnQuest also has an interest in the non-operated Alba producing oil field.  EnQuest had 34 UK production licences at the start of 2015, covering 45 blocks or part blocks, and was the operator of 29 of these licences. This increases to 38 production licences including the 28th round awards awarded in Q1 2015, covering 54 blocks or part blocks in the UKCS, 33 of the licences are operated by EnQuest. 

EnQuest believes that the UKCS represents a significant hydrocarbon basin in a low risk region, 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 has begun replicating its existing model in the UKCS by targeting previously underdeveloped assets in a small number of other maturing regions; complementing our operations and utilising our 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 ('PSC') and the Tanjong Baram development, EnQuest also has an interest in the non-operated SB307/SB308 blocks.

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.

STRATEGIC REPORT

CHAIRMAN'S STATEMENT

EnQuest's performance
During 2014, EnQuest delivered a strong operational performance and reacted swiftly to the oil price declines witnessed in the second half of the year.  The Company has a significant capital programme associated with its Kraken investment in 2015 and 2016 and looks forward to 2017, when Kraken is planned to be onstream.

Despite the recent downturn in the oil price, since EnQuest's inception five years ago, we have grown our original net 2P reserve base by over 173%, representing a replacement ratio of 514%.  Consequently, EnQuest started 2015, with a reserve life of over 20 years.  During these first five years, EnQuest generated c.$2.7 billion in cash flow from operations. 

Industry background
From the outset, EnQuest has worked closely with the industry and the UK Government to bring about structural changes to the business environment in the North Sea, which we believe are essential to the future of the industry.  The North Sea needs a stable and incentivising fiscal regime with regulation that encourages new development activity and promotes greater collaboration between operators, leading to a lower cost base.  The steep decline in oil prices during the latter part of 2014 has acted as a catalyst for action. 

EnQuest's response to lower oil prices
In response to declining oil prices, EnQuest took action to protect against further oil price falls and to maximise cost reduction.  EnQuest accelerated its oil price hedging programme and worked closely with the supply chain to reduce operating and capital expenditure.  While we remain confident about the long term prospects for the oil price, we are managing our business so as to allow us to withstand a more prolonged period of lower oil prices. 

EnQuest's funding facilities include a $1.2 billion committed credit facility, with a $500 million accordion.  EnQuest renegotiated covenants with its lending banks and these have been relaxed until mid-2017.  Ongoing continued compliance with its covenants is a priority for 2015 and beyond.  With its credit facility and a long dated debt maturity profile, the financial position of the Company remains resilient. 

At the same time, EnQuest delivered very good operational performance in 2014, with strong production growth and industry leading levels of production efficiency.  The Alma/Galia development project recovered from delays in the first half of 2014, and since then it has remained on schedule.  Since its sanction at the end of 2013, the Kraken development project has consistently been on schedule and on budget.

The EnQuest Board
The composition of the Board remained constant during 2014. The Directors assess and evolve EnQuest's strategy, taking key decisions on its implementation. In 2014 these included the acquisition of EnQuest's first producing assets outside the North Sea, and in 2015 the Board also took measured actions in light of the lower oil price environment, in terms of setting the new business plans for 2015 and beyond.

EnQuest's results are a reflection of the quality of our people and on behalf of the Board, I would like to thank my EnQuest colleagues for their continued hard work, commitment to our values, and successful pursuit of the Company's development plans.

Governance
In 2014, EnQuest complied in full with the 2012 UK Corporate Governance Code.  In September 2014, the Financial Reporting Council published the revised 2014 UK Corporate Governance Code, compliance with which will continue to be reported annually by EnQuest.  We are well advanced in implementing our responses to the changes brought in by the 2014 UK Corporate Governance Code.

Corporate Governance for EnQuest is not merely following a set of rules, but embedding a framework which supports our core values and, provides structure for how we are organised, how we manage risk, how we behave and how we provide assurance in respect of performance. In 2014, the Board strengthened a number of areas of corporate governance including the risk management framework and corporate responsibility. We work to ensure that all elements of corporate governance are part of our corporate culture and we have developed an environment which nurtures, develops and maintains our approach. 

The Board reviewed the Company's corporate responsibility model. We ensured that we have strong relevant policies in place, covering the areas of Health and Safety, People, Business Environment, Business Conduct and Community.  We will be working towards monitoring the impact and progress of these areas in the coming period.  Our UK Health and Safety policy has now also been implemented in our international projects in Malaysia, with supplemental policies as required by local legislation.

Dividend
The Company has not declared or paid any dividends since incorporation in January 2010 and does not intend to pay dividends in the near future. Any future payment of dividends is expected to depend on the earnings and financial condition of the Company and on such other factors as the Board of Directors of the Company considers appropriate.

Delivering sustainable growth
We are managing our business to withstand a prolonged period of low oil prices and I am confident that EnQuest will emerge from this down cycle in even better shape to implement our strategy successfully.  The life of the Alma/Galia field is over ten years and the Kraken field has a twenty five year life, this is a long term business.

STRATEGIC REPORT

CHIEF EXECUTIVE'S REPORT

EnQuest's performance, business model and strategy
EnQuest's core competency in controlling costs and managing operations efficiently is particularly important in the current climate of low oil prices.  Despite challenging macro conditions, EnQuest delivered a strong operational performance in 2014, with production of 27,895 Boepd, whilst EBITDA was $581 million.  2014 was a record year for production and was up 15% on the prior year.  The acquisition of the Seligi and PM8 oil fields in Malaysia provided EnQuest with its first contribution from outside the North Sea, countering the impact of delay to the Alma/Galia project.  

EnQuest delivered an increase in its net 2P reserve base, up by 25.2 to 220.0 MMboe, reflecting a reserve replacement ratio of approximately 350% for 2014.  The increase resulted partly from positive revisions to reserve estimates from infill drilling and an improved knowledge of the reservoirs.  Approval of the Ythan discovery for development, and the promotion of the Scolty and Crathes discoveries following development planning, also contributed to the increase in EnQuest's reserve base.  Further additions arose from 2014 acquisitions, including interests in the Greater Kittiwake Area ('GKA') and PM8/Seligi in Malaysia. 

During the latter part of 2014, EnQuest acted quickly to counter the impact of a rapid decline in oil prices, increasing the hedging programme and significantly cutting 2015 cash capital expenditure to c.$600 million, with reductions from both developments and existing fields. We are targeting a reduction in EnQuest's operating cost per barrel of c.10%, from $42.1/boe in 2014 to an average of c.$38/boe in 2015.  This is being achieved through lower cost barrels coming onstream, reducing opex per barrel in newly acquired fields, and through substantial direct cost savings.  We are targeting cost savings across the business, through the supply chain and by improving efficiencies in our operations, through maximising production and minimising waste.  We have cut limited company contractor rates and reduced our headcount in the UK and logistics costs are down significantly.  This agile focused approach enabled EnQuest to hold unit operating costs flat during its first five years, while average costs in the North Sea doubled. EnQuest continues to work with the supply chain and contractors to achieve further cost savings and optimisation.  

Given the low oil price environment, EnQuest negotiated a relaxation of covenants to its revolving credit facility until mid-2017.  This continued commitment from our lenders recognises the cash flow generation of EnQuest's business and in particular the expected increases in cash flow from the Alma/Galia and Kraken developments.

EnQuest has achieved a 173% increase in net oil reserves over the last five years, having converted more than half of the original reserves into flowing barrels.  Despite the reductions to the investment programme, EnQuest remains on course to achieve annual net production from the UK North Sea of 50,000 Boepd, with six operated producing hubs in the UK.   In Malaysia, PM8/Seligi has the potential to increase international production significantly over the coming years.

Health, safety, environment and assurance ('HSE&A')
In 2014, EnQuest met its commitment to deliver safe results, with the best HSE performance since formation in April 2010.  EnQuest achieved a Lost-Time Incident Frequency Rate ('LTIFR') of zero and a Recordable Incident Frequency Rate ('RIFR') below the industry average. There were no High Potential Incidents ('HIPO's): the last recorded HIPO was in April 2013.

In addition, the producing northern North Sea assets achieved a total of 11 years without a Lost-Time Incident ('LTI') and 11 million man hours LTI-free. Health and Safety Executive inspections were performed on all the assets, and no major issues were identified. These results are a testament to the focus given to HSE&A. 

North Sea operations
In 2014, EnQuest delivered good production of 24,436 Boepd in the UK, marginally ahead of the 24,222 Boepd in 2013.  This reflects the continuing strength of field reservoir performance and high production efficiency from EnQuest's existing UK assets.  With production efficiency from existing assets averaging 88% in 2014, EnQuest is likely to have further improved its position in the Oil & Gas UK's rankings.

EnQuest delivered 12 wells in 2014, including successful wells at Heather and Don South West.  At the Dons, the Ythan development in Don North East, moved from licence award, through Field Development Plan submission and approval, to spudding of the first well in less than 12 months.  The Thistle life extension project continued to improve production levels in 2014.  Thistle produced over three million barrels of oil for the first time since 1997.  The Greater Kittiwake Area ('GKA') assets were acquired early in 2014.  Subsequent to the acquisition of GKA, the discovery of Avalon further enhanced the potential of GKA.

North Sea developments

Alma/Galia 
During 2014, both the subsea and the drilling programmes for the Alma/Galia project were delivered on time.  By the end of the year, five production wells were fully completed and ready for tie-in and the subsea infrastructure was in place.  However, delays to the programme for the Floating Production, Storage and Offloading vessel ('FPSO', the 'EnQuest Producer') had moved the earliest possible 'sailaway' date into the winter months.  This would have significantly increased the operational risks and costs of waiting for appropriate weather conditions.  Sailaway and first oil were therefore rescheduled to spring 2015 and to mid-2015 respectively.  Since August 2014, the FPSO construction has remained on track and following first oil, initial net peak production of c.13,000 Boepd is expected, significantly increasing EnQuest's production profile.  Plateau unit operating cost is expected to be approximately $15/bbl to $20/bbl.

Delays and cost increases for the EnQuest Producer initially stemmed from changes to the implementation of safety codes, such as for moorings and also other regulatory imposed scope changes.  The extent of work required on the vessel was also greater than anticipated.

The FPSO is essentially now a new vessel with all the topsides having been replaced.   Ownership of the vessel at first oil provides EnQuest with a range of additional funding options, such as a potential sale and leaseback.

EnQuest's net 2P reserves for Alma/Galia increased slightly to c.26 MMboe at the start of 2015, following the positive results from the wells which have been drilled.

Kraken 
During 2014, the Kraken project progressed well, on budget and on schedule. 

In Q2 2014, the FPSO donor vessel arrived at the shipyard in Singapore and its conversion scope commenced.  In H2 2014, EnQuest commenced installation of the subsea structures at the first drill centre, where the initial wells for the development will be drilled.  Detailed engineering, procurement and manufacture for all equipment relating to wells, subsea infrastructure and the FPSO continued throughout 2014.

With the Kraken project on budget, its anticipated net capital expenditure estimate is unchanged at $1.4 billion to first oil.  The full cycle breakeven cost for the project continues to be in the region of $55/bbl.  In addition, with $512 million invested to the end of 2014, the forward economics of the 25 year life project are strong with an internal rate of return in the mid thirties per cent, net to EnQuest using the forward curve in early March 2015.

North Sea acquisitions
In Q1 2014, EnQuest applied for and was offered an 'out of round' licence in the Don North East area ('Don NE') for blocks 211/18e and 211/19c.  This included the Area 23 and Area 24 discovered oil accumulations and an undrilled extension to the Don NE field.  Following the award of this licence a Field Development Plan for 'Ythan' was submitted and approved.

In Q1 2014, EnQuest announced the acquisition of the Greater Kittiwake Area assets.  The acquisition fits within the goals of managing mature fields and of exploiting nearby discoveries and near field exploration opportunities.  The Scolty and Crathes discoveries are within the GKA area, with potential to benefit from a tie-back to Kittiwake. The combination of these opportunities also facilitates the extension of the GKA field life itself.

The base consideration for the acquisition was $39.9 million, which following working capital and other adjustments resulted in the payment of a cash consideration of $30.3 million.  When the acquisition was announced, the additional net 2P reserves were recorded as 4.7 MMboe as at the economic date of 1 January 2013.  Following GKA post acquisition production of a net 0.5 million barrels of oil in 2014, EnQuest recorded net 2P reserves of c.8 MMbbls in GKA as at the end of 2014.  Reasons for the net increase included not only the addition of Scolty/Crathes, but also improved performance and the lengthening of the field life.

In Q4 2014, EnQuest was offered and accepted eight licences as part of the UK 28^th North Sea licensing round.

International
2014 was a transformational year for EnQuest's international business, particularly with the acquisition of the PM8/Seligi fields, delivering our first production from outside the North Sea. 

In Q2 2014, EnQuest announced the signing of a small field risk service contract with Petroliam Nasional Berhad ('Petronas'), the national oil company for Malaysia, for the development and production of petroleum from the Tanjong Baram field offshore Sarawak, Malaysia. Start-up is expected in mid-2015.  Separately, the Kitabu prospect, was drilled in Q1 2014, however the well failed to encounter hydrocarbons; this was in the SB307/SB308 contract area where EnQuest has a non-operated interest.

Later in Q2 2014, EnQuest announced a significant expansion of its footprint in Malaysia, through the acquisition the PM8 Production Sharing Contract ('PSC') fields and the Seligi oil field, from ExxonMobil Exploration and Production Malaysia Inc; both EnQuest and Petronas Carigali Sdn Bhd to hold participating interests. EnQuest also signed an agreement with Petronas to extend the term of the PSC, comprising PM8 PSC assets and the Seligi oil field to 2033 (formally 'PM8 PSC (Extension)' or simply 'PM8/Seligi').  This acquisition has a good strategic fit and offers considerable potential for EnQuest to use its core skills in enhancing value from maturing fields.

The base consideration for the acquisition was $67.0 million, which following interim period adjustments resulted in the payment of a cash consideration of $24.7 million.  Following strong production of a net 0.8 million barrels of oil in 2014, EnQuest recorded net 2P reserves of c.15 MMbbls in PM8/Seligi as at the end of 2014.  In December 2014, following a short transition period, EnQuest took over operatorship and is working on an ongoing programme to target further efficiency improvements and to maximise recovery.   Production in the last six months of 2014 was approximately 7,000 Boepd net, on a working interest basis and this continued to improve into 2015. 

In February 2015, EnQuest announced that it had exited from its small investment in Tunisia, retention of which had been subject to conditions which were not satisfied within the relevant timeframe.   Consideration of $22 million had been kept in escrow and was duly returned to EnQuest.

In 2014, EnQuest was offered and accepted 2 licences as part of the 2014 Awards in Pre-Defined Areas ('APA') Norwegian Licensing Round.

Financial performance

In 2014, EnQuest generated EBITDA of $581 million, benefiting from further action taken on costs in H2 2014 and also from its full year currency hedging programme.

Following the delays to the Alma/Galia project in early 2014, EnQuest's net capex cost for the first phase of the project is expected to be c.$55/bbl.

EnQuest's funding facilities include c.$900 million of bonds and a committed credit facility of $1.2 billion plus an accordion of up to a further $500 million.  2014 year end net debt was $933 million, with $218 million drawn on the credit facility utilisation before taking into account cash balances.

Total full year 2014 unit operating costs of $42.1 per barrel reflected the initial benefit of cost reduction initiatives taken in H2 2014 and the lower exchange rate and generally a year of good operational performance and strong control of direct costs. 

There were non-cash post-tax impairments of $335.3 million, due to lower near term oil price assumptions.

2015 year to date

EnQuest has performed well at the start of 2015; production efficiency has again been very strong on our North Sea assets and our focus on operational efficiencies in PM8/Seligi has been delivering excellent daily production.

The EnQuest Producer programme is proceeding according to schedule in Q1 2015; the boilers were ignited and fired, notice was given to moor and hook up the vessel in the field.  The FPSO recently left the yard in Newcastle, and has successfully completed marine performance trials in deeper water nearby, on schedule for first oil from Alma/Galia in the middle of this year.

The drilling of an appraisal well in Kraken West has confirmed the presence of oil, with potential for upside. Further evaluation is ongoing.
 
Hedging for 2015 was already in place and hedging is now also in place for 2016, currently with 10 million barrels hedged through puts averaging c.$68 per barrel in 2016.

Outlook for the rest of 2015 and beyond

EnQuest is focused on performance and execution.  Safety will always be a priority and we are focused on operational efficiency and further reducing costs.  Alma/Galia is on track for first production in the middle of the year.  Production for 2015 is expected to be an average of between 33,000 Boepd and 36,000 Boepd, a 24% increase over 2014 at the mid-point of the range.   With unit operating expenditure of approximately $15/bbl to $20/bbl during the period of initial net peak volumes, Alma/Galia will also contribute towards a reduction in EnQuest's 2015 unit operating costs of c.10% over 2014.

2015 priorities also include delivering the $600 million cash capital expenditure programme, focused on the Kraken development project.   The drilling programme has been rationalised to existing commitments and to projects with high margin barrels, including the drilling of three low cost near field production wells on Thistle, a Gadwall sidetrack and bringing Alma/Galia onstream.

In Malaysia, the 2015 work programme on PM8/Seligi will be focused on well intervention activities and improving the field infrastructure.  For Tanjong Baram, the implementation of our development plan is well underway, with first oil targeted by the end of H1 2015. 

In Q1 2015, covenants of the credit facility were relaxed giving significant flexibility in a lower oil price environment.  EnQuest's focus in 2015 will be on near term profitable cash flow and optimising the long term value of the business.  If the low oil price environment continues, then beyond existing development commitments, capital expenditure will continue to be rationalised.

The speed and size of changes made to the business in response to deteriorating energy market conditions was achieved through the agility and focus inherent in EnQuest's business model.    EnQuest delivers material improvements to mature fields and we will continue doing so in 2015 and beyond.

STRATEGIC REPORT

OPERATING REVIEW

NORTH SEA OPERATIONS
TOP QUARTILE PRODUCTION EFFICIENCY
Overview
In 2014, EnQuest had its best Health, Safety & Environment ('HSE') performance since it was formed in April 2010, with its focus on HSE culture and performance. Good HSE performance drives good business performance, and the Production Efficiency ('PE') has been excellent. In 2014, EnQuest achieved an overall UK production efficiency of 88% excluding the new GKA assets, or of 86% including GKA. This, together with the delivery of successful wells at Heather and Don South West, enabled production of 24,436 Boepd in the North Sea in 2014. 

Looking forward to 2015, with Alma/Galia on track for first oil in the middle of the year, the North Sea operations team is ready to take control of the development as it is handed over by the projects team.  With net peak production of c13,000 Boepd, Alma/Galia is set to increase daily UK production levels by over 50%. The Gadwall sidetrack and other barrel adding activities will continue on the existing hubs.  Work to finalise the best development solution for Scolty/Crathes will also continue.

On Heather, the return to drilling programme was completed in Q1 and drilling operations have been continuous throughout the year with production from the platform peaking at more than 7,000 Boepd (gross) in November, the first time such levels have been reached since January 2013. Heather achieved high levels of operational uptime, with an exceptional run of 136 continuous days without a production trip, due to the focus of the operations teams onshore and offshore.

Substantial progress has also been made on Kittiwake. The return of the Mallard field to production following its workover in the summer added 3,000 Boepd, increasing overall Greater Kittiwake Area field rates to around 5,500 Boepd, less than six months after acquisition.

On the Don fields, high levels of water injection were achieved and the drilling of the TJ production well and the scale dissolver programme at Don Southwest were delivered.  The Don North East located Ythan field has progressed from open acreage to development in six months, with the well spudded ahead of schedule.

Thistle/Deveron achieved year on year production growth of 14%. The Thistle life extension project itself made further progress in 2014 and a major industry award highlighted recognition of this project as a proven template for successfully extending the life of ageing assets. 

On exploration, the Avalon well was drilled faster than scheduled and was under budget, and the Cairngorm appraisal well yielded positive initial results.  In the 28^th licensing round EnQuest was awarded acreage it had applied for around its hubs.

At the end of 2014, EnQuest started the process for the return of 32% of its interests in Crawford to the previous owner, following which EnQuest will hold a 19% working interest.

Thistle/Deveron

Working interest at end 2014: 99%
Decommissioning liabilities: Remain with former owner
Fixed steel platform
Daily average net production:
2014: 9,024 Boepd
2013: 7,925 Boepd

2014

In 2014, Thistle delivered 14% production growth year on year, reflecting continuing benefit from new production wells brought onstream during the course of H2 2013 and the programme of investment in the Thistle life extension project. The A57 and A60 wells continued to outperform expectations with water cut rising slower than anticipated. The commissioning of the 'D' turbine on gas and the reinstatement of the refurbished 'B' turbine gave improved power stability and improved water injection efficiency in the second half of the year.  The second of two new cranes was fully installed and made operational in Q3 2014, reducing risk and operating expenditure.  These elements of the life extension investment programme, alongside EnQuest's focused operating strategy, have continued to improve production efficiency at Thistle.

2015 and beyond

Drilling will restart at Thistle in 2015, with three new production wells being brought onstream, one in the middle of the year and two more in H2 2015. The Thistle life extension project will be mechanically complete during 2015, with full completion scheduled for 2016.  A planned maintenance shutdown of the Sullom Voe Terminal ('SVT') will stop export from Thistle for three weeks at the end of H1 2015; EnQuest has scheduled its own maintenance programme for the same dates and will additionally use it for some extra life extension works.

The Don fields

Working interest at end 2014:
- Don Southwest, 60%
- Conrie, 60%
- West Don, 63.45%
- Don North East, 60%
Decommissioning liabilities: As per working interests
Floating production unit with subsea wells
Daily average net production:
2014: 8,835 Boepd
2013: 11,014 Boepd

2014

Production efficiency remained very strong, at almost 90%, with high levels of water injection efficiency supporting production.  Production from Area 22 of Don Southwest was boosted by a successful acid stimulation treatment on Well S2z and by the completion in August of a new production well. The new production well, TJ, delivered initial rates in line with expectations but production chemistry issues prevented successful gas lift, and medium term rates were below expectation.   The acid stimulation and scale inhibition programme also benefitted Don SW wells S11 and S10Y.   An upgrade of the water injection system is underway which will allow better operability and increased injection rates.  On West Don, the W4 well suffered from scale build up and was shut-in in November awaiting a remedial acid treatment. Bad weather delayed this work into Q1 2015. In Q1 2014, EnQuest applied for and was offered an 'out of round' licence (P.2137) in the Don North East area for blocks 211/18e and 211/19c, including the Area 23 and Area 24 discovered oil accumulations and an undrilled extension to the Don North East field.  The Area 24 discovery which lies adjacent to the Don Southwestfield, progressed rapidly to development with the Field Development Plan, for the renamed 'Ythan' field approved by DECC and the first well spudded in November.

2015 and beyond

A phased development of the Ythan field is planned, with drilling operations on the first well continuing through Q1 2015 and first production from the field by mid-2015.  The drilling of the Ythan AA injector well is planned for around the end of 2015.  Following W4 scale build up in winter it was brought back online in Q1 2015 and is performing well.  The SVT shutdown will similarly be used for planned EnQuest maintenance on the Northern Producer.

During 2015, the natural rates of decline will reduce production. 

Heather/Broom

Working interest at end 2014:
 - Heather, 100%
 - Broom, 63%
Decommissioning liabilities:
- Heather, 37.5%
- Broom, 63%
Fixed steel platform
Daily average net production:
2014: 4,081 Boepd
2013: 4,339 Boepd

2014

Production at Heather/Broom delivered 4,081 Boepd in 2014.  This was down slightly after a strong performance in 2013.  Following the completion of the 2013 rig reactivation project, rig operations in Q1 2014 commenced with a workover of the H56 well, which was brought onstream in May and has continued to deliver planned levels of oil production.  This was followed by the sidetrack of shut-in well H44 as a new injection well in the B2 block.  The H64 injector was brought on in July, which resulted in an increase from the nearby producer, H62Y, over the following months.  Crestal producer, H47, was sidetracked in place of the planned workover, and was brought onstream in November, delivering an initial rate significantly above expectation.  New producer H66, a sidetrack of suspended well H48, was being drilled at year end. 

High levels of operational uptimes and a production efficiency of over 90% have been achieved and 136 consecutive days without any production interruptions were achieved in H2 2014.   The Broom water injection flowline failed at the end of August; replacement options were assessed and a contract awarded for the design, procurement and installation of a replacement line.

2015 and beyond

Beyond the completion of the Heather H48 sidetrack as the H66 production well,  there will be no further drilling on Heather in 2015. Broom injection will be reinstated by the middle of 2015.  The SVT shutdown will similarly be used for planned EnQuest maintenance on Heather/Broom.

Greater Kittiwake Area ('GKA')

Acquisition completed in Q1 2014
Working interest 50% in each of:
- Kittiwake
- Grouse
- Mallard
- Gadwall
- Goosander
Decommissioning liabilities:
Kittiwake 25%
Mallard 30.5%
Grouse, Gadwall and Goosander 50%
Fixed steel platform
100% interest in export pipeline from GKA to Forties Unity platform
Daily average net production:
2014: 1,281 Boepd
This is based on the net production since the acquisition at the start of March 2014, as averaged over the full year.

Post acquisition programme in 2014
EnQuest took over as the operator at the end of Q1 2014 with the duty holder remaining in place.  The focus was on integrating GKA and delivering an early work over programme on Mallard, which has led to a near doubling of production.  Next steps will include progressing the proposed Field Development Plan ('FDP') submission for the nearby Scolty/Crathes discoveries, with a tie-back to GKA with potential exploration of nearby prospects.

The Mallard workover was successfully completed and was brought online at the end of Q3 2014, GKA production peaked at 7,300 Boepd, shortly after.  Following inspection and routine testing the existing tree was reinstalled, which reduced expenditure and allowed early production from Mallard.   Since acquiring GKA, EnQuest has been applying its proven skills for managing mature fields.  Improved operational efficiency and the benefit of the workover, has production from just over 2,500 Boepd gross in the first few months, to over 5,500 Boepd gross in October.  The Mallard workover also facilitated the opportunity for an accelerated Gadwall workover.  Production from Gadwall will be reinstated mid-2015, following the sidetracking of the existing well in H2 2014.  The Grouse well now benefits from stable gas-lift supply. 

EnQuest made substantial improvements in operating efficiency, with opex per barrel significantly reduced from pre-acquisition levels.  Front End Engineering Design ('FEED') studies were being completed on the proposed development of Scolty/Crathes.  

2015 and beyond

Goosander, Grouse and Mallard will all be online in 2015 and production from Gadwall is expected to be reinstated in mid-2015.

We are conducting studies on future development scenarios for Avalon, and have considered options for Avalon in FEED engineering on Scolty/Crathes. 

Further reductions in GKA unit opex are anticipated during 2015. 

Alma/Galia
Working interest at end 2014:
- 65% in both fields
Decommissioning liabilities: As per working interest
Floating, production storage and offloading unit with subsea wells
First oil expected in mid-2015
- Net peak production to be in excess of 13,000 Boepd

2014

At the end of 2014, the Alma/Galia development project was on track for first oil in mid-2015. Systems required for first oil were mechanically complete, with commissioning well underway. 

Control systems (marine, subsea, electronic submersible pumps) had been installed and commissioned.  Five production wells were fully completed and ready for FPSO tie-in.  The pre-first oil drilling programme for the production wells was successfully completed, with five wells meeting or exceeding expectations.  The subsea infrastructure was in place, with risers and mooring systems wet-stored awaiting the arrival of the FPSO.

2015

In January the EnQuest Producer boilers were lit, one of the final steps ahead of completing onshore commissioning. The FPSO recently left the yard in Newcastle and has successfully completed marine performance trials in deeper water nearby, on schedule for first oil in the middle of the year. Oil tank commissioning is undertaken in the field, just ahead of commercial production coming onstream.  Alma/Galia is on course for first oil in mid-2015.  Five wells are now available to come onstream in mid-2015; a phased start up is planned, with one well coming onstream per week, for the first month.  Drilling on the Galia production well is to be completed and tied in during H2 2015.

Alba (non-operated)

Working interest at end of 2014: 8%
Decommissioning liabilities: As per working interest
Fixed steel platform
2014: 1,214   Boepd
2013: 922^*  Boepd

(*) Net production since the completion of the acquisition at the end of March 2013, averaged over the full year.

Field production was stable in 2014. The Alba oil field is operated by Chevron. 

In 2014, operations included the drilling of two production wells, with the second well coming onstream in September 2014.  A new 4D seismic survey was also acquired, which is key for maturing future drilling targets. 

2015 and beyond

Infill drilling will continue in 2015, with a new production well (S11) and a water injection pipeline scheduled to be online in Q3 2015.  There will be a planned maintenance shutdown for approximately three weeks in 2015.

STRATEGIC REPORT

OPERATING REVIEW

MAJOR PROJECTS
KRAKEN CONTINUES ON SCHEDULE AND ON BUDGET FOR FIRST OIL IN 2017

Overview
2014 was a year of significant progress for EnQuest's Kraken development in the northern North Sea, with material advances across the key areas of the project; all key supplier contracts are in place on a fixed price, milestone basis.

During 2014, the work that was required to prepare the donor tanker for conversion to FPSO was largely completed; hull and deck modifications began, alongside other workscopes, including accommodation upgrades and helideck fabrication. All the principal contracts have now been placed for individual modules, including the power, water injection and electrical units.

Kraken

Working interest at end 2014: 60%
Decommissioning liabilities: As per working interest
Floating Production Storage and Offloading unit with subsea wells
First Oil expected 2017
- Net peak production to be c.30,000 Boepd

2014

During 2014, the Kraken project progressed well, on budget and on schedule. 

In Q2 2014, the FPSO donor vessel arrived at the shipyard in Singapore for the conversion scope to commence. The programme of conversion work continued throughout the rest of the year.  The initial focus was on the hull conversion and the marine system refurbishment.  Fabrication progressed for key elements of the FPSO, including the topside modules, accommodation and the helideck.

In H2 2014, EnQuest conducted the installation of two integrated templates (subsea structures) at the first drill centre, where the initial wells for the development will be drilled.  A survey vessel successfully completed coring work at the FPSO mooring anchor locations.  Delivery of the hydraulic submersible pumps ('HSP') used to provide the artificial lift commenced in Q3 2014. Detailed engineering, procurement and manufacture for all equipment relating to wells, subsea infrastructure and the FPSO continued throughout 2014.

Further appraisal drilling was undertaken to the west of the Kraken field in H2 2014, to assess potential there.

2015 and beyond 

The Kraken programme for 2015 includes the installation of subsea hardware, including the manifolds for the first drill centre which connect to the templates already installed and two templates for the second drill centre and six subsea trees.   The mooring system for the FPSO and the batch drilling programme will also commence.

The drilling of an appraisal well and sidetrack in to the west of the Kraken Field has confirmed the presence of oil. Preliminary analysis indicates that the primary well (Tyrone) found oil bearing reservoir with a net vertical thickness of approximately 25 feet.  The sidetrack (Tiree) also confirmed oil bearing reservoir, with net vertical thickness of approximately 83 feet.  Further evaluation is ongoing. 

The new drilling rig is expected on location at Kraken by Q3 2015, to commence the Kraken batch drilling programme.

The FPSO programme also continues, with a dry docking scheduled to install the FPSO turret by the end of Q1 2015.

STRATEGIC REPORT

OPERATING REVIEW

INTERNATIONAL
OPERATIONS

Our Production Sharing Contract ('PSC') for PM8/Seligi in Malaysia includes the Seligi oil field, once the largest oil field off Peninsular Malaysia.  PM8/Seligi combined has over 200 wells.  This is a substantial opportunity for EnQuest to replicate the success of its strategy on Thistle, potentially on a considerably larger scale, significantly increasing production, extending PM8/Seligi's field life and increasing reserves.

Malaysia

PM8/Seligi has already materially increased EnQuest's overall production levels and by Q4 2014, the new fields were producing approximately 15,000 Boepd gross.  Having taken over operatorship, EnQuest is focused on an ongoing programme to target efficiency improvements and to maximise recovery.

PM8/Seligi

Working interest at end 2014: 50%
Decommissioning liabilities:

·      PM8, 50%

·      Seligi, 50% of partial liability allocated based on ratio remaining oil reserves and to estimated ultimate recovery

In addition to the main production platform and separate gas compression platform, there are eleven minimum facility satellite platforms tied back to the main platform
Daily average net production:
2014: 3,459 Boepd (working interest)
2014: 2,078 Boepd (entitlement)
Reflects net production from June 2014 to December 2014, averaged over the full year.

2014

EnQuest assumed offshore field operations in October, while the overall transition completed in December 2014.  Production from the fields has been strong and continues to increase.  Going forward, EnQuest intends to enhance production through well interventions, facilities rectification and upgrades, and subsurface programmes that will lead to new wells.

2015 and beyond

The work programme is focused on well interventions and improving the field infrastructure, including gas compressors, power generators and ongoing integrity management of topside facilities and pipelines. 

Tanjong Baram

Working interest at end 2014: 70%
Decommissioning liabilities: None

2014

In March 2014, EnQuest signed a Small Field Risk Service Contract with PETRONAS for the development of the Tanjong Baram field, offshore Sarawak.  Tanjong Baram is being developed as an unmanned platform with production tied back to the Petronas Carigali operated West Lutong A complex.  The development plan is based on a two well programme, with capacity for one additional well in the facilities design. Work on the development of the project is proceeding according to plan.

2015 and beyond

Development of field is underway, with first oil targeted by end of H1 2015, to be followed by steady state operations.

risks and uncertainties

Management of risks and uncertainties

The Board has articulated EnQuest's strategy to deliver shareholder value by:

exploiting its hydrocarbon reserves;

commercialising and developing discoveries;

converting its contingent resources into reserves; and

pursuing selective acquisitions.

In pursuit of this strategy, EnQuest has to face and manage a variety of risks. Accordingly, the Board has established a risk management framework to enhance effective risk management within the following overarching statement of risk appetite approved by the Board:

•We aim to deliver consistently above median investment performance

•We will manage the investment portfolio against agreed key performance indicators

•We seek to avoid reputational risk by ensuring that our operational processes and practices reduce the potential for error as far as practical

•We seek to embed a risk culture within our organisation which does not encourage excessive risk taking activities and is in line with overall risk appetite

•We seek to manage operational risk by means of a variety of controls to prevent or mitigate occurrence

•We set clear tolerances for all material operational risks to minimise overall operational losses, with zero tolerance for criminal conduct

A Risk Committee periodically reviews and updates the Group Risk Register based on the individual risk registers of its members. The Group Risk Register, along with an assurance mapping exercise and a risk report (focused on the most critical risks and emerging and changing risk profiles), is periodically reviewed by the Board (with senior management), to ensure that key issues are being adequately identified and actively managed. In addition, a system of risk reviews has been established to provide oversight in respect of prospective significant commitments.

Key business risks

The Group's principal risks are those which could prevent the business from executing its strategy and creating value for shareholders or lead to a significant loss of reputation.

Set out below are the principal risks and the mitigations together with an estimate of the potential impact and likelihood of occurrence after the mitigation actions and how these have changed in the past year.

          STRATEGIC REPORT

FINANCIAL REVIEW

Financial Overview

The Group has delivered a strong operational performance in 2014 against a backdrop of falling oil prices and general industry cost pressures.  Significant capital investment in growth projects continued throughout the year.

In the year ended 31 December 2014, the Brent crude oil price averaged $98.9 per barrel compared to $108.7 per barrel for 2013.  Total production volumes were 15% higher for the year ended 31 December 2014 which resulted in revenue of $1,009.9 million compared with $961.2 million in 2013.

EBITDA for the year ended 31 December 2014 was $581.0 million compared with $621.3 million in 2013.  The lower EBITDA is mainly due to lower oil prices in H2 2014 and higher tariff and transportation costs. 

In H1 2014 the Group successfully raised a $650 million high yield bond.  The 8 year bond further diversified the Company's capital base and gives long term maturities for its debt profile.  At the year end $217.6 million was drawn on the $1.2 billion Revolving Credit Facility (RCF) before taking into account cash balances of $176.8 million.  In addition, during the year, the Group also entered a £31.8 million 2 year development loan facility to finance the construction of the Group's Aberdeen office building.

Following receipt of the bond proceeds EnQuest entered into a number of foreign exchange transactions to swap $550 million of the US Dollar proceeds into Sterling to enable it to repay Sterling drawings under the RCF.  The transactions required EnQuest to swap Sterling back into US Dollars between October and December 2014 at a fixed rate.  In early October 2014 the transactions were closed out realising a gain of $46.7 million. 

^{1 Stated excluding accrued interest and net of unamortised fees.}

Through these facilities, EnQuest has a diversified and long term funding base providing financing for current projects.

As a result of the continued capital investment, UK corporate tax losses at the end of the year increased to approximately $1,818 million.  The effective tax rate for the year excluding exceptional items is 43.5% which reflects the blend of UK and international assets.  In the current environment, no material corporation tax or supplementary corporation tax is expected to be paid on UK operational activities before 2025.  The Group paid cash corporate income tax on assets acquired in Malaysia and this is expected to continue throughout the life of the production sharing contract (PSC).

Income Statement

Production and revenue

Production levels, on a working interest basis, for the year ended 31 December 2014 averaged 27,895 Boepd compared with 24,222 Boepd in 2013.  The increase reflects a substantial initial contribution from PM8/Seligi in Malaysia, higher production in the Thistle field which has been experiencing high production efficiency and ten months of production from the newly acquired Greater Kittiwake Area (GKA) assets.  This was partially offset by the expected natural decline in the Don fields.

The Group's blended average realised price per barrel of oil sold was $100.6 for the year ended 31 December 2014, below the $109.7 per barrel received for 2013, reflecting the decline in the oil price in Q4 2014.  Revenue is predominantly derived from crude oil sales and for the year ended 31 December 2014 crude oil sales totalled $970.5 million compared with $953.8 million in 2013.  The increase in revenue was due to the higher production and an overlift of $8.2 million in 2014 compared with an overlift of $2.6 million in 2013 and partly offset by a reduction in the oil price.  Within revenue in 2014 there is $31.7 million of realised income relating to oil commodity hedges and call options.

Operating costs

Cost of sales comprises cost of operations, tariff and transportation expenses, change in lifting position, inventory movement, derivative and foreign exchange hedging movements and depletion of oil and gas assets.  Cost of sales for the Group (pre-exceptionals and depletion of fair value adjustments) were as follows:

Cost of sales pre-exceptionals and depletion of fair value adjustments was $654.1 million for the year ended 31 December 2014 compared with $526.3 million in 2013.  An increase of $85.3 million was due to costs relating to the GKA and PM8/Seligi acquisitions and an increase of $34.0 million was due to increased transportation costs.  The significant increase in the latter was partly due to increased volumes, but mainly due to an increase in the costs per barrel at the Sullom Voe Terminal (SVT).  This has been partially offset by an overall gain relating to the bond proceeds currency transactions and realised mark to market valuations on foreign exchange trades.

The Group's operating costs comprise production costs and tariff and transportation costs which were $436.5 million for the year ended 31 December 2014 compared with $308.0 million in 2013.  Transportation costs increased from $73.5 million to $140.0 million for the year ended 31 December 2014 mainly due to significantly higher unit costs per barrel at SVT.  Production costs increased by $61.7 million to $296.2 million for the year ended 31 December 2014, partly attributable to the acquisition of the GKA asset on 1 March 2014 and the PM8/Seligi Malaysian asset acquired at the end of June.  In the other producing assets, higher costs in Thistle and Heather related to diesel usage and increased logistics and maintenance costs.

There has been a significant increase in SVT tariff costs.  Costs are $28.9 million higher than prior year due to a higher base level of costs incurred by the operator and also EnQuest being allocated a higher proportion of SVT costs in 2014.  This reflects EnQuest's increased production and therefore higher share of throughput at SVT.  In addition, the exceptional items include a charge of $32.8 million in respect of 2012 and 2013 costs which were only notified to EnQuest by the operator in 2014.  Working collaboratively with the SVT operator and co-owners, gross costs are expected to be reduced going forward and also a lower proportion of these will accrue to EnQuest. The project to define the medium to long term future is maturing in its definition and we expect the SVT operator to define the project fully in 2015.  Finally, the unit operating cost per barrel has been adjusted for a 40% allocation of the gain from the bond proceeds currency transactions, which reflects the approximate ratio of operational expenditure to capital expenditure for the year.

Due to the above factors, the Group's average unit production and transportation cost has increased by $6.6 per barrel.

The Group's depletion expense per barrel for the year is consistent with the previous year with a higher rate in Heather and Thistle as a consequence of a higher capex profile offset by lower production in the Don fields.

The Group's change in lifting position was an $8.2 million expense for the year ended 31 December 2014, compared with an expense of $2.6 million in 2013.  The net overlift during 2014 has increased mainly due to the UK operated assets being in an overlift position offset with an underlift in Alba and Malaysia.

Exploration and evaluation expenses

Exploration and evaluation expenses were $4.0 million in the year compared with $8.6 million reported in the previous year.  The expenses in 2014 primarily relate to South West Heather, Norway's pre-licence costs and costs relating to the 28^th Licence Round in the UK.

General and administrative expenses

General and administrative expenses were $16.5 million in the year ended 31 December 2014 compared with $25.0 million reported in the previous year.  A reduction in business development specific costs and higher Parent Company Overhead (PCO) recovery accounts for the majority of the movement.

Other income and expenses

Other income is comprised of net foreign exchange gains of $27.2 million in the year ended 31 December 2014 relating to exchange rate fluctuations relating to the retail bond and bank loans.

Taxation 

The tax charge for the year of $105.8 million, excluding exceptional items, represents an effective tax rate of 43.5% compared with 43% in the previous year.  The small increase in the Group's effective tax rate for the year is due primarily to foreign exchange losses relieved at the mainstream tax rate, partly offset by an increase in the Ring Fence Expenditure Supplement on UK activities.  

Exceptional items and depletion of fair value uplift

Exceptional losses totalling $821.9 million before tax have been disclosed separately in the year ended 31 December 2014.  Tangible oil and gas assets have been impaired by $678.8 million relating to the Don fields and Alma/Galia.  The impairment is primarily due to the significant fall in the oil price in the latter part of 2014.

Exceptional items also includes an impairment of $152.0 million to intangible costs for the year ended 31 December 2014.  The majority of the costs relate to the Crawford, Porter, Kildrummy and Cairngorm licences and some GKA acreage in the UK. In current market conditions some of these interests do not merit sufficient funds to progress them to economic development.  The impairment also includes costs on the unsuccessful exploration well in the SB307/308 block in Malaysia.

The remaining balance is made up of SVT costs of $32.8 million invoiced by the operator in 2014, but relating to 2012 and 2013 production, $6.9 million of depletion on the fair value uplift on acquisitions and $19.2 million unrealised mark to market losses on derivative contracts offset by negative goodwill of $28.6 million relating to the acquisition of PM8/Seligi in Malaysia.

The tax impact of the exceptional items is a tax credit of $508.1 million, resulting in an overall tax credit for the year of $402.3 million and an overall effective tax rate of 69.5%.

Finance costs

Finance costs of $121.1 million include $52.1 million of bond and loan interest payable, $12.1 million unwinding of discount on decommissioning provisions, $41.4 million relating to the time value of the closed out puts. Other financial expenses of $18.5 million are primarily commitment and letter of credit fees of $11.6 million as well as arrangement fee amortisation relating to the bank facilities and bonds of $6.8 million.  The Group capitalised interest of $3.2 million for the year ended 31 December 2014 in relation to the interest payable on borrowing costs on its capital development projects.

Finance income

Finance income of $1.8 million includes $0.3 million of bank interest receivable, $0.4 million VAT interest received and $0.9 million unwinding on the financial asset created in 2012 as part of the consideration for the farm out of the Alma/Galia development to KUFPEC.

Earnings per share

The Group's reported basic earnings per share was (22.8) cents for the year ended 31 December 2014 compared with 24.4 cents in 2013.  The decrease of 47.2 cents was attributable to higher operating, finance and exceptional impairment costs offset slightly by a lower tax charge for 2014.  The Group's reported diluted earnings per share excluding exceptional items was 17.8 cents for the year ended 31 December 2014 compared with 24.0 cents in 2013.  The decrease of 6.2 cents was mainly attributable to lower gross profit and higher finance costs offset by a lower effective income tax rate. 

Cash flow and liquidity

The Group's reported cash generated from operations in 2014 was $637.1 million compared with $562.7 million in 2013.  The reported cash flow from operations per share was 82.3 cents per share compared with 72.3 cents per share in 2013.   The increase is mainly due to a decrease in trade receivables and joint venture debtors, an increase in trade payables, accrued payables and a decrease in the opening underlift position . 

During the year ended 31 December 2014, $2.1 million was received in relation to an exploration refund for EnQuest Norge AS's activities in Norway. In addition, $7.9 million was paid during the year ended 31 December 2014 in relation to EnQuest Group's UK tax liabilities for non-operational activities and petroleum revenue tax (PRT). $6.6 million was paid in relation to the Group's operations in Malaysia. 

It is anticipated that the underlying effective tax rate for 2015 will be materially below the UK statutory tax rate of 60%, excluding one-off exceptional tax items, mainly due to the impact of Ring Fence Expenditure Supplement. In the current environment and with the investment in the North Sea, the Group does not expect a material cash outflow for UK corporation tax on operational activities before 2025.  This is due to the projected level of capital expenditure, which benefits from tax deductible first year capital allowances in the UK, available field allowances and accumulated tax losses which are largely attributable to the Group's capital investment programme to date.  

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

Significant projects were undertaken during the year, including:

·      the Alma/Galia development including spending on the FPSO and further drilling of the production wells;

·      the Kraken development;

·      the Thistle life extension programme;

·      the Dons drilling programme on the TJ production well and the scale dissolver programme at Don Southwest;

·      Ythan JT well; 

·      the acquisition of GKA and successful workover of Mallard;

·      the Heather/Broom drilling programme was completed and drilling programmes on H44, H47 and H56; and

·      PM8/Seligi acquisition.

Net debt at 31 December 2014 amounted to $932.8 million compared with net debt of $381.1 million in 2013.

In H1 2014, the Group successfully issued a $650 million high yield bond, with a 7% coupon and a 2022 maturity.

In 2015, the Group renegotiated financial covenants under its RCF to provide greater flexibility for its capital investment programme.  The net debt/EBITDA covenant has been increased to 5 times and the ratio of financial charges to EBITDA is reduced to 3 times, both until mid-2017.  Compliance with ongoing covenants continues to be a priority for the Group.

Balance Sheet

The Group's total asset value has increased by $545.4 million to $4,095.9 million at 31 December 2014 (2013: $3,550.5 million).

Property, plant and equipment

Property, plant and equipment (PP&E) has increased to $3,116.4 million at 31 December 2014 from $2,871.2 million at 31 December 2013.  The increase of $245.2 million is mainly due to oil and gas asset capital additions of $839.5 million.  The main spend relates to Kraken ($112.7 million) and Alma/Galia ($415.8 million).  There was also $82.1 million in relation to changes in estimates on the decommissioning provisions and $206.1 million of acquisition costs mainly relating to GKA ($55.0 million) and Malaysia ($150.9 million).  Depletion and depreciation charges of $252.0 million were incurred as well as an impairment charge of $678.8 million.

On 1 March 2014, EnQuest completed the acquisition of the GKA assets including an interest in the Kittiwake to Forties oil export pipeline.  In June 2014, EnQuest completed the acquisition of the Seligi oil field and the PM8 PSC, located offshore Malaysia. 

Intangible oil and gas assets

Intangible oil and gas assets decreased by $65.2 million to $65.7 million at 31 December 2014.  The decrease mainly relates to impairments on the Crawford, Porter, Kildrummy and Cairngorm licenses and some GKA acreage in the UK.

Investments

The Group holds an investment of 160,903,958 new ordinary shares in Ascent Resources plc which is valued at $0.7 million based on the quoted bid price as at 31 December 2014.

Inventory

Inventory increased by $42.6 million, the increase relates to the purchase of christmas trees of $22 million and drilling and operational inventory.

Trade and other receivables

Trade and other receivables have increased by $19.0 million to $286.2 million at 31 December 2014 compared with $267.2 million in 2013.  Prepayments and accrued income include the initial payment of $100 million to Armada Kraken PTE Limited for the lease of an FPSO vessel for the Kraken field.    Trade receivables and joint venture receivables have both decreased in line with normal business activity.

Cash and bank

The Group had $176.8 million of cash and cash equivalents at 31 December 2014 and $217.6 million was drawn down on the $1.2 billion RCF.

Provisions

The Group's decommissioning provision increased by $221.3 million to $449.7 million at 31 December 2014 (2013: $228.4 million).  The acquisition of GKA and PM8/Seligi have an associated provision of $124.3 million.   EnQuest has a 50% interest in the GKA area, but is only responsible for approximately 25% of the decommissioning liability for the platform.  The decommissioning provision for GKA is $77.6 million.  For the PM8 PSC, EnQuest's estimated share of decommissioning provision is approximately $46.7 million, for which the PSC contractors are required to make annual cost recoverable contributions into a sinking fund based on a pro-rata production basis.

The Group has re-evaluated the discount rate to be used when discounting the Group's decommissioning liabilities.  The liability is discounted at 3% (2013: 5%) and this is included as a change in estimate, resulting in an increase of $77.4 million. The underlying costs for the UK assets remain consistent with the third party report that was commissioned in 2013 to complete the detailed triennial study to review decommissioning cost estimates for the operated producing hubs. 

The Group acquired 40% of the Kraken field from Nautical Petroleum plc and First Oil plc in 2012 through payment of the development costs (other than operator costs) incurred from 1 January 2012 in respect of the development programme for the Kraken discovery which would otherwise have been payable by those partners.

A provision was initially recognised in 2013 for the contingent carry (additional consideration) which is dependent on a reserves determination.  The reserves determination would be triggered by the carried parties, based on drilling work or, if later, the date on which the 'firm' carry expires.  The contingent carry is pro-rated between 100-166 million barrels of 2P reserves.  The field development plan which was approved in November 2013, stated 137 million barrels. This would give rise to a contingent carry of approximately $80 million which is included as a provision.  The carry is estimated to be paid 12 months after the 'firm' consideration has expired in early 2015.

Income tax

The Group had no UK corporation tax or supplementary corporation tax liability at 31 December 2014, which remains unchanged from the prior year. The Group had PRT recoverable of $4.4m at 31 December 2014 compared with a $4.0 million liability at 31 December 2013. The decrease is due to over paid PRT instalments on Alba in the second half of 2014.  The income tax asset at 31 December 2014 represents the expected refund on exploration activities undertaken in Norway, a pre-acquisition corporate income tax overpayment in Malaysia, and the expected PRT refund.

Deferred tax liability

The Group's deferred tax liability (net of deferred tax assets) has decreased by $283.7 million to $462.6 million at 31 December 2014 from $746.3 million in 2013.  The decrease is mainly due to the impairment charge, partly offset by the capital expenditure programme undertaken by the Group during the year which provides the Group with 100% first year capital allowance claims as well as an increase in ring fence taxation losses carried forward and deferred tax liabilities arising on the acquisition of assets in Malaysia. Total UK tax losses carried forward at the year end amount to approximately $1,818 million. 

Trade and other payables

Trade and other payables have increased to $429.1 million at 31 December 2014 from $363.3 million at 31 December 2013.  The increase of $65.8 million is due to an increase in trade payables of $57.8 million in line with increased activity in the year and an increase in the overlift position of $13.1 million.

Other financial liabilities

Other current liabilities have decreased by $68.4 million to $101.5 million.  The decrease relates to the Kraken 'firm' carry which has reduced throughout the year, amounting to $99.0 million.  This is offset by an increase relating to commodity forward contracts and forward foreign currency contracts of $29.6 million.

Other non-current financial liabilities have increased by $22.9 million. The balance is made up of commodity forward contracts of $18.0 million that expire in 2016 and $5.7 million relating to a carry liability with respect to PM8. 

Financial Risk Management

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 and during 2013 the Company entered into commodity hedging contracts to hedge partially the exposure to fluctuations in the Brent oil price during 2014.  A total of 3.6 million barrels of puts (300,000 barrels per month) were bought at a price of $106 per barrel and 7.2 million barrels of calls were sold at a price of $106 per barrel, which would only be triggered if the monthly average price of Brent exceeded a fixed price for the given month (ranging from $119 to $124 per barrel).

During Q1 2014, the Company swapped an additional 1 million barrels in Q2 at prices of approximately $109 per barrel. An additional 1 million barrels were swapped in Q2 at a price of $105/bbl.

In Q4 2014, the Company bought puts covering 8 million barrels to hedge 2015 production at an average price of $87.3/bbl. In addition, the Company sold calls covering 8 million barrels maturing in 2015 and 7.5 million barrels maturing in 2016. The put position was closed in Q4 2014, with the Company purchasing new puts covering 10 million barrels of 2015 production priced at $65/bbl and selling a further 2.25 million barrels of 2015 calls. In return, for closing out the $87.3/bbl puts and purchasing the lower priced puts and selling the additional calls, the Company received cash of $100 million.  Gains of $119.1 million in respect of the 8 million barrels of puts closed in December, which were designated as hedges of 2015 production, have been deferred in equity, and will be recognised during 2015.

After the year end the Group hedged 10 million barrels of production for 2016, through the purchase of puts with an average strike price of $68.2/bbl on a pro rata basis throughout 2016.  In addition, the Group sold further calls  maturing in mid-2015 and through 2016.  In total, as at the date of this report, the Group has sold 11.8 million barrels of 2015 calls with an average strike price of $80.55/bbl, and 13.5 million barrels of 2016 calls with an average strike price of $88.53/bbl.

The total premiums received or receivable through the sale of calls to date totals $115.0 million.  This premium will be realised in the income statement over the life of the options.  In total $6.8 million was realised in 2014, with a further $82.4 million and $25.8 million to be realised in 2015 and 2016 respectively.  Unrealised mark to market movements in these options will be recognised as an exceptional item in line with the Company's accounting policy.

EnQuest's functional 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.  During the first half of 2013, the Group entered into a structured product to hedge a portion of its Sterling, and Norwegian Krone exposure throughout 2013 and 2014.   During 2014, a total of £182 million of Sterling exposure was hedged using this structured product with an average strike price of $1.46:£1.  If the spot rate at expiry of the contracts was above $1.64:£1 then there was no trade and the Group funded its Sterling requirement through the spot market or drew Sterling on the bank facility.  Between $1.64:£1 and $1.33:£1, EnQuest traded at the lower of $1.46:£1 and the spot rate, and below $1.33:£1, EnQuest traded a higher volume of currency at $1.46:£1. 

The same structure was also used to hedge the Group's Norwegian Krone (NOK) exposure arising as part of the Kraken development project.  In 2014, a total of NOK367 million was hedged.

During 2014 the Company entered into several foreign exchange swap contracts when Sterling was trading above $1.66:£1.  The realised impact of $46.7 million has been recognised in the income statement within cost of sales.

EnQuest continually reviews its currency exposures and when appropriate looks at opportunities to enter into foreign exchange hedging contracts.

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 liquidity risk throughout the year, including monitoring forecast covenant results. 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 development project timing and costs. These forecasts and sensitivity analyses allow management to mitigate any liquidity or covenant compliance risks in a timely manner.

Following the significant decline in oil prices, management has taken action to implement certain cost saving programmes, to reduce planned operational expenditure, general and administrative spend and capital expenditure in 2015 and 2016.  Management also successfully renegotiated certain covenants contained within the Revolving Credit Facility.

At year end, the Group had significant headroom on its borrowing facilities and related financial covenants under both the Revolving Credit Facility and the Retail Bond. The Group's forecasts and projections take into account the actions described in the preceding paragraph, and reflect the assumption that the Group's major projects remain on track.  These forecasts indicate that the Company will be able to operate within the requirements of its existing borrowing facilities for 12 months from the date of approval of the Annual Report and Accounts.  Forecasts therefore indicate that the Group's liquidity will remain strong.  Furthermore, if there were further sustained falls in the oil price or the benefits of planned initiatives are not realised, management has a number of options available to it to maintain strong liquidity, including asset sales, new financings or amendment of covenants under the existing financing arrangements (including the Retail Bond) and may do so as a precautionary measure should it determine that it is appropriate or prudent to do so.  The directors therefore continue to adopt the going concern basis in preparing the financial statements.