Results for Half Year Ended 30 June 2020

Source Press Release
Company Energean plcEdison SpA 
Tags Hedging, Upstream Activities, Strategy - Upstream, Capital Spending, Guidance, Strategy - Corporate, Financial & Operating Data
Date September 11, 2020

Energean plc (LSE: ENOG TASE:אנאג), the independent gas-focused producer focused on the Mediterranean, announces its half-year results for the six months ended 30 June 2020 ("1H 2020").

Mathios Rigas, Chief Executive, Energean commented:"

Despite some COVID-19-related disruptions, in the year-to-date we have made solid progress on our flagship gas project in Israel, which is scheduled to deliver first gas in 2H 2021. We have successfully performance-tested all three Karish development wells, delivered a resource upgrade at Karish North, completed the installation of the 8 bcm/yr capacity, 90km pipeline that will deliver Energean's gas sales (currently at 5.6 bcm/yr) into the Israeli domestic market, completed the hull of our FPSO in China and moved it to Singapore, and have commenced heavy lifting operations.

"In the second half of the year, we look forward to completing our acquisition of Edison E&P, which, alongside the Karish project, will further secure our long-term, resilient cash flow profile and option-rich portfolio. Following completion of the deal, around 70% of our future production will be sold under long-term gas sales agreements that will largely insulate us against oil price volatility. We will continue to own and operate the majority of our asset base and are well-funded for all of our projects."

On the ESG front we received an award for "Best ESG Energy Growth Strategy in Europe 2020", recognising our efforts and focus on achieving our stated net zero target and our overall focus to comply with the United Nations' 17 Sustainable Development Goals ("SDGs")."

As we move into an exciting and transformational period for the business, I would like to personally thank my colleagues around the world for their hard work and commitment to driving the business forward and keeping one another safe and well during these challenging times."

Highlights

Energean

·   Completed installation of the 90km gas pipeline that will connect the Energean Power FPSO to the national natural gas transmission system in Israel

·   The electrical house ("Ehouse") module was lifted onto the FPSO hull at the Admiralty Yard, Singapore on 24 August 2020 marking the start of the FPSO hull and topsides integration campaign

·   Subsea and onshore works for the Karish project progressing in line with expectations; installation of the production manifold and subsea isolation valves was completed during June 2020, and installation of the FPSO anchoring system in August 2020

·   Analysis of the results of performance testing during clean-up operations of the three Karish Main development wells indicates a significantly higher liquids content than had previously been envisaged

·   The Israel Ministry of Energy approved the Karish North Field Development Plan ("FDP") during August 2020

·   During 1H 2020, Energean increased debt capacity by $395 million through its $175 million upsizing of the Israel project finance facility and the signing of a new $220 million reserve-based lending facility ("RBL") to fund the Edison E&P acquisition, significantly enhancing financial flexibility

·   Cash and undrawn debt facilities of $872.5 million[1] as at 30 June 2020

·   In August 2020, Energean was rated at gold level by MAALA, the Israel CSR standards-setting organisation and will be rated under the Maala Index on the Tel Aviv Stock Exchange going forward

Edison E&P transaction (subject to transaction close)

·   Entered into further amendments to the Sale and Purchase Agreement ("SPA") for the acquisition of Edison E&P, following which, inter alia, the gross consideration for the transaction is $284 million[2], down from an original sum of $750 million; the Algerian asset and Norwegian subsidiary will be excluded from the transaction perimeter

·   Under the amended SPA, the net consideration that would have been payable had completion occurred on 30 June 2020, would have been $190 million; Energean does not expect this number to change materially before actual completion

·   $220 million RBL facility signed with ING, Natixis and Deutsche Bank to fund the acquisition and ongoing working capital

·   Shareholders voted unanimously in favour of the transaction at a general meeting held on 20 July 2020

Combined business results

·   1H 2020 pro forma production[3] was 52.1 kboed, compared with full year guidance of 44.5 - 51.5 kboed

·   1H 2020 pro forma revenue3 was $177 million and operating cash flow3 was $68 million

Outlook

·   Completion of the acquisition of Edison E&P will occur following the remaining Conditions Precedent to the transaction ("CPs") being fulfilled, expected in 4Q 2020

·   The Company's independent reserves auditors, DeGolyer and MacNaughton ("D&M"), are preparing a revised Competent Persons Report ("CPR") following completion of the Karish Main drilling programme to refine reserve and resource estimates in the fields; Energean expects to publish the results of this report in the coming weeks

·   Continued progress on the integration of the topsides in the Admiralty Yard, Singapore, with sailaway to Israel expected in summer 2021 and first gas in 2H 2021

·   Installation of the risers that will connect the production wells to the FPSO is expected to commence in 4Q 2020 and to be completed in 1Q 2021, marking completion of the subsea works required ahead of arrival of the Energean Power FPSO

·   Final Investment Decision ("FID") on the 1.2 Tcf (34 bcm, gross) Karish North project is expected before year end 2020

·   Outcome of discussions with the Greek Government, initiated as part of the strategic review of the Prinos area assets, regarding a financing package to support continued investment in the Prinos area is expected in 4Q 2020

·   2020 pro forma full year production guidance is maintained at 44.5 -51.5 kboed[4]

·   2020 pro forma capital expenditure guidance reduced to $635 - 705 million4 , a $75 - 125 million reduction on guidance issued in June 2020 ($760 - 780 million), primarily due to i) rescheduling of expected milestone payments under the Karish EPCIC contract; and ii) expected timing of capital expenditure on Edison E&P's NEA project, Egypt

Key financial data

Energean's interim standalone income statement and operating cash flow is driven almost entirely by the Prinos area assets, investment in which has been significantly reduced as a result of the ongoing strategic review. 1H 2020 revenue is derived from one cargo lifting; a second cargo was lifted on 14 July 2020 and, therefore, the associated production is not reflected in 1H 2020 revenues.

Edison E&P's financial results for the period are presented below both on a standalone basis and also combined with Energean's 1H 2020 results to arrive at pro forma results for the period. The locked box of the acquisition is 1 January 2019; all economic results after this date belong to Energean, subject to closing of the transaction, expected 4Q 2020.

  Energean standalone 1H 2020 $m  Edison E&P standalone[5] 1H 2020 $m  Energean + Edison pro forma 1H 2020[6] $m  Energean standalone 1H 2019 $m 
Production (kboed)  2.1  50.0  52.1  3.9 
Sales and other revenue  2.1  174.7  176.8  40.0 
Cash cost of production plus G&A  15.7  108.6  124.3  18.0 
Adjusted EBITDAX[7]  (8.9)  65.0  56.1  24.0 
Operating cash flow[8]  (14.5)  82.1  67.6  23.7 
Development capital expenditure  237.9  11.9  249.8  309.6 
Exploration capital expenditure  5.3  66.4  71.7  37.3 
Cash capital expenditure  243.3  79.0  322.3  541.4 
Net debt  861.4  NA[9]  861.4  390.4 
Net debt including Energean's pro-rata share of Israel debt only (excluding Kerogen minority) ($ million)  597.4  NA10  597.4  597.4 

Energean's stand-alone loss after tax for the period ended 30 June 2020 was $77.3 million (30 June 2019: $4.5 million), which is stated after a non-cash impairment charge of $63.0 million that reflects the lower commodity price outlook.

Enquiries

Investors and Analysts  Tel: +44 7917 608645   
Kate Sloan, Head of Investor Relations and Equity Capital Markets    
Media  Tel: +30 210 8174 242   
Sotiris Chiotakis     
       

Conference call

A conference call for analysts and investors will be held at 08:00am BST today. Please register your participation in this morning' conference call at the following link. You will be given the option to either participate via webcast or dial in.

https://secure.emincote.com/client/energean/energean001

The presentation slides will be made available on the website shortly .

Energean Operational Review

ESG

In July 2020, Maala, the Israel CSR standards-setting organisation, rated Energean at gold level and the shares will be included in the Maala Index on the Tel Aviv Stock Exchange.

In August 2020, Energean was awarded Best ESG Energy Growth Strategy for Europe 2020, with highlights by the judging panel including: commitment to the UN's Global Compact and net-zero emissions goal; commitment to sustainability; the linking of executive incentive pay to performance against ESG targets; and commitment to transparent disclosure of emissions tracking.

Israel

Despite COVID-related challenges experienced during the period, Energean has made solid progress on its flagship Karish project, offshore Israel. The project remains on track to deliver first gas in 2H 2021.

Reserves, resources and production

Well performance testing

During 1H 2020, Energean Israel successfully assessed the performance of all three development wells during clean-up operations. Results from production measurement confirmed that each of the three wells will be capable of delivering up to the individual well design limit of 300 mmscfd (approximately 3 bcm/yr per well) and that, combined, the three wells will be able to produce to the 8 bcm/yr capacity of the Energean Power FPSO.

Liquids production

All three development wells encountered high quality liquids with samples measured at 48 API. Analysis of the results of performance testing during clean-up operations of the three Karish Main development wells indicates a significantly higher liquids content than had previously been envisaged. Liquids production potential will be quantified as part of the upcoming CPR of the Karish, Karish North and Tanin fields.

CPR

As announced on 9 April 2020, D&M certified gross (Energean, 70%) contingent resources of 1.2 Tcf (33.7 bcm) of gas and 39 mmbbl of liquids in the Karish North field, a 32% uplift to Energean's previous estimates. Following issuance of this CPR, combined total gross (Energean, 70%) 2P reserves plus 2C resources in the Karish, Karish North and Tanin fields were estimated to be 99 bcm (almost 3.5 Tcf) of gas and 82 mmbbls of liquids, a total of 698 mmboe (88% gas).

Following completion of the drilling and performance testing of the three development wells in Karish Main, Energean has engaged D&M to produce a CPR to refine and confirm reserve and resource volumes across the Karish Main, Karish North and Tanin fields. Energean expects to announce the results of this CPR in the coming weeks.

Gas Sales and Purchase Agreements ("GSPAs")

Energean Israel (Energean, 70%) has signed GSPAs for the supply of 5.6 bcm/yr of gas on plateau. Over the life of the contracts, the GSPAs account for approximately 75% of the current 2P reserve plus 2C resource base of 99 bcm. Having secured sufficient resources to fill the FPSO for a number of years, Energean's near-term strategy is to secure the necessary offtake to fill the remaining 2.4 bcm/yr of spare capacity in the Energean Power FPSO. Energean is assessing a number of opportunities in both the Israeli domestic market, as well as key export markets in order to meet this target.

Project progress

Subsea and onshore

The pipelay vessel Solitaire and construction support vessel Normand Cutter arrived offshore Israel in May 2020. Installation of the 90km gas pipeline that will deliver gas from the Energean Power FPSO to Israel has now been completed, well within the project schedule, and pre-commissioning is expected to be complete around year-end.

Installation of the subsea equipment at the Karish field is progressing in line with expectations. All long-lead items (the christmas trees and wellheads, manifold and subsea isolation valves) have been delivered by the suppliers. Installation of the manifold and subsea isolation valves was completed during June 2020 and installation of the FPSO anchoring system was completed in August 2020. Looking forward, installation of the three sets of risers that will connect the three producing wells to the FPSO is expected to commence in 4Q 2020 and to be completed in 1Q 2021, marking the end of the subsea works that are required to be completed ahead of arrival of the Energean Power FPSO.

Onshore, the works are progressing well and the whole system is expected to be ready to receive first gas in 2Q 2021, well ahead of expected hook-up of the FPSO.

Energean Power FPSO progress and key milestones

The Energean Power FPSO hull arrived at the Sembcorp Marine Admiralty Yard in Singapore on 15 April 2020. On arrival, Energean was informed of a temporary halt to operations at the yard, which was intended to reduce the risk of COVID-19 transmission.

The yard re-opened on 2 June 2020, although government restrictions and associated health checks being performed in the workers' dormitories resulted in a slow ramp-up in the workforce over the course of June and July. A major ramp up of the workforce occurred during August 2020 and in the first week of September the workforce on the project averaged more than 480 workers per day.

Installation of the topside modules onto the FPSO hull has now commenced; the Ehouse module, which contains all the FPSO control equipment and electrical switchgear, was successfully lifted onto the Energean Power hull on the 24 August 2020; and heavy lifting operations for the remaining modules are expected to commence in the coming weeks.

Following commencement of the lifting campaign, topsides integration and pre-commissioning is expected to take approximately 10-11 months, following which the FPSO is expected to sailaway from Singapore to Israel. Energean is working with its contractors to mitigate the schedule impacts experienced to date and has identified options such as shift optimisation and productivity improvement measures, which could reduce this 10-11 month period to sailaway.

First gas from the project is expected during 2H 2021.

The health and safety of its workers remains of paramount importance to the Company and it supports all necessary measures to prevent further transmission of COVID-19.

Greece

Working interest production from the Prinos area averaged 2.1 kboed during 1H 2020 with full year production expected to be between 1.5 - 2.0 kboed. There was one cargo shipment of 212 kbbls during 1H 2020 that occurred on 29 March 2020, which generated $1.9 million of revenue. A second cargo of 211 kbbls was sold on 14 July 2020, generating $7.6 million of revenues that are not included within 1H 2020 revenues.

At the end of 2019, Energean decided to place its Prinos area assets under strategic review, during which investment has been limited, resulting in current production levels. Energean is in discussions with the Greek government, which, if successful, could result in a capital injection through a combined debt and equity package. Any equity would relate solely to the subsidiary in which the Prinos area assets are held. Should this financing package materialise, Energean could recommence work on the Epsilon project, which could add approximately 2 kbopd upon first oil from the three vertical wells that have been pre-drilled. These three wells plus the drilling of further wellstock could result in commercialisation of the 44 mmboe of working interest 2P reserves and 2C resources held within the field. 

Exploration

In Ioannina, interpretation of the newly acquired seismic lines has been completed and a drill-or-drop decision will be taken in 2H 2020. In Aitoloakarnania, the joint venture is awaiting approval of its environmental action plan before commencing the 2D seismic acquisition campaign.

In Montenegro, Energean has been granted a one-year extension to the first exploration period, which now ends on 15 March 2022.

Edison E&P acquisition (subject to transaction close)

Third amendment to the SPA

As announced on 29 June 2020, Energean has entered into further amended terms for its acquisition of Edison E&P following which, inter alia, the Norwegian subsidiary will be formally excluded from the transaction perimeter. Combined with the previously announced exclusion of the Algerian asset, $466 million of total reductions to the original gross consideration have been agreed. The gross consideration for the transaction[10] is now $284 million, which compares to the original sum of $750 million.

Under the amended SPA, the net consideration had completion occurred on 30 June 2020 (which would have taken into account 18 months of business results since the locked-box date of 1 January 2019), would have been $190 million, before taking the positive hedging position of €14 million into account. Energean does not expect the net consideration to change materially before actual completion.

Under the amended SPA the $100 million Cassiopea contingent payment will now vary between $0 and $100 million, depending on future Italian gas prices at the point in time at which first gas production is delivered from the field, currently anticipated in 2023.

Acquisition financing

As previously announced, on 20 June 2020, Energean signed a $220 million RBL with ING, Natixis and Deutsche Bank. The RBL replaced the outstanding $255 million acquisition bridge facility and is available for both debt and issuance of letters of credit ("LCs"). The RBL has an accordion option of up to $200 million, for a total facility limit of up to $420 million.

The RBL has a tenor of six years from the closing date and is subject to semi-annual redeterminations. The interest rate is LIBOR plus a margin of 4.75% per annum during the first, second and third years after closing, and 5.75% thereafter. The RBL carries covenants that are customary for this type of facility.

In addition to the RBL, Energean has entered into a standalone bilateral LC facility with ING. The facility will be for an amount up to GBP 80 million provided for the purpose of issuing LCs for United Kingdom decommissioning obligations and obligations under the United Kingdom licences and does not impact upon the availability of the new RBL. 

This RBL, along with the cash held in Energean plc, will be used to fund the net consideration, as outlined above, plus transaction costs and ongoing working capital requirements of the combined portfolio.

Shareholder vote

On 29 June 2020, Energean issued its prospectus and shareholder circular. A general meeting was held on 20 July 2020, at which shareholders voted unanimously in favour of the transaction.

Government approvals

Good progress has been made in obtaining the necessary government approvals for the updated transaction. Golden Power approval has now been granted in Italy and the approval from the Ministry of Economic Development is expected shortly. Updated approvals in France & Greece and comfort letter in the UK are anticipated in the coming weeks. Egypt is still planned to be the final approval for logistical reasons.

Completion timeline

Energean expects the transaction to close in 4Q 2020. Completion will occur as soon as all outstanding government approvals for the revised transaction have been granted and the carve outs of the Algerian asset and Norwegian subsidiary, which are progressing well, have been completed.

Edison E&P operational review

The information provided in the following Edison E&P operational review has been obtained from Edison E&P internal reports.

Southern Europe 

Producing assets

Edison E&P's Southern European assets delivered average working interest production of 9.7 kboed (55% gas) during 1H 2020, towards the top end of the full year guidance range of 8 - 10.5 kboed.

In order to preserve capital in the current commodity price environment much of the activity previously planned for 2020 has been deferred, including the Calipso and Leoni sidetracks (both Italy), which will now be included in the 2021 programme.

Argo Cassiopea

In light of the macro environment, Edison E&P is working closely with ENI to streamline this development project. First gas continues to be expected during 2023.

Exploration and appraisal

In Croatia, Edison E&P expects to spud the Irena-2 appraisal well in 4Q 2020. It will target the same gas-bearing horizon that was successful in Irena-1 and, in the event of a success, the well will be suspended for future production.

Egypt

Abu Qir

Egypt delivered 38 kboed of production during 1H 2020, approximately 90% of which was gas (200 mmcfd / 1 bcm), ahead of full year 2020 market guidance of 34 - 37 kboed (of which 90% is gas: 197 - 215 mmcfd or 2.0 - 2.2 bcm). The four-well infill drilling programme has been deferred until after start-up of the NEA / NI greenfield development.

NEA / NI

Contractor commercial bids for the Engineering, Procurement, Installation and Commissioning ("EPIC") contracts were received during August 2020 and are currently being assessed by Edison E&P. Edison E&P and Energean expect to take FID on the NEA project later in 2020.

Exploration

In June 2020, Edison E&P submitted a formal request to enter the second exploration period in the North East Hap'y Offshore block (Edison E&P, 30%). Although the exploration well drilled during the first exploration phase did not find commercial hydrocarbons, Edison E&P and ENI are evaluating a large, Zohr-like structure for a potential well in the second exploration phase.

Following completion of the commitment well in the North Thekah Offshore licence, Edison E&P has decided to relinquish the licence.

Receivables

At 30 June 2020, net receivables (after provision for bad and doubtful debts) in Egypt were $212 million (31 December 2019: $222 million), of which $131 million (31 December 2019: $126 million) were classified as overdue. $82 million of the overdue receivables balance is currently held by EGPC as collateral for exploration financial commitments on the North Thekah, North East Hap'y and South Idku exploration licences. All three wells have now been drilled and completed and the amounts held as collateral are expected to be released into the pool of receivables available for recovery.

Cash collection from EGPC during the period was $101 million.

United Kingdom

Production

1H 2020 production in the UK North Sea was 2.3 kboed (35% gas, 0.02 bcm). This is ahead of full year guidance of 1 - 2 kboed primarily due to better-than-forecast uptime.

Perenco has shut in the Trent field, awaiting higher gas prices before resuming production. As Trent is the host facility for production from the Tors fields, the Tors fields are currently offline. Production from the Tors fields represents approximately 10% of the full year budget. As such, this shut in is not expected to materially impact performance against the full year guidance range.

Appraisal

The two-well Glengorm appraisal campaign is expected to commence in late 2020.

2020 pro forma guidance - combined business[11]

  FY 2020 Guidance   1H 2020 
Production     
     Egypt (kboe/d)  34 - 37  38.1 
     Southern Europe (kboe/d)  9.5 - 12.5  11.7 
 UK North Sea (kboe/d)  1 - 2  2.3 
Total pro forma production (kboe/d)  44.5 - 51.5  52.1 
     
Financials  2020  1H 2020 
Consolidated net debt ($ million)  1,400 - 1,450[12]  861.4 
Net debt including Energean's pro-rata share of Israel debt only (excluding Kerogen minority) ($ million)  1,100 - 1,12512  597.4 
     
Operating Costs & G&A     
-       Israel ($ million) 
-       Egypt ($ million)  55 - 60  26.5 
-       Southern Europe ($ million)  105 - 125  74.5 
-       UK North Sea ($ million)  25 - 30  17.9 
-       Energean G&A ($ million)  15  5.3 
-       Edison G&A ($ million)  25 - 30  Included in Southern Europe opex 
Operating costs & G&A ($ million)  225 - 260  124.2 
     
Development and production capital expenditure     
-       Israel ($ million)  475 - 525  235.3 
-       Egypt ($ million)  20-30  5.6 
-       Southern Europe ($ million)  35 - 40  7.3 
-       UK North Sea ($ million)  10 - 15  1.5 
-       Other ($ million)  0.5 
Total Pro Forma Development & Production Capital Expenditure ($ million)  540 - 610  250.2 
     
Exploration Expenditure     
-       Israel ($ million)  4.8 
-       Egypt ($ million)  70  58.3 
-       Southern Europe ($ million)  0.7 
-       UK North Sea ($ million)  15  7.1 
Total Exploration Expenditure ($ million)  95  70.9 
     
Decommissioning expenditure ($ million) 

Energean Financial Review

Financial results summary

  1H 2020   1H 2019   Change 
Av. daily working interest production (kboed)  2.1  3.9   (46.2%) 
Sales revenue ($m)  2.1  40.0   (94.8%) 
Realised oil price ($/boe)  9.1  58.3   (84.4%) 
Cost of production[13] ($m)  10.4  13.5   (23.0%) 
Cost of production per barrel ($/boe)  27.5  19.0  44.7% 
SG&A  6.9  5.5  25.5% 
Adjusted EBITDAX[14] ($m)  (8.9)  24.0   (137.1%) 
(Loss) after tax ($m)  (77.3)  (4.5)  (1618%) 
Cash flow from operating activities ($m)  (14.5)  23.7   (161.2%) 
Capital expenditure ($m)  244.3  346.9   (29.6%) 
  1H 2020   FY 2019   Change 
Net debt (cash) ($m)  861.4  561.6  53.4% 
Net debt including Energean's pro-rata share of Israel debt only (excluding Kerogen minority) ($ million)[15]  597.4  367.8  62.4% 
Net debt / equity (%)  72.7%  44.5%  63.2% 

Revenue, production and commodity prices

Working interest production from Greece averaged 2.1 kbopd, a decrease of 46.2% for the period (1H 2019: 3.9 kbopd). 1H 2020 revenue was $2.1 million, a 94.8% decrease for the period (1H 2019: $40.0 million).

The reduction in revenue for the period reflects i) the reduced production levels at Prinos which has resulted from the reduced level of investment during the period of strategic review and fewer cargo liftings; and ii) the lower commodity price environment. During 1H 2020, there was one shipment of 212 kbbls (1H 2019: 669 kbbls through two shipments), which occurred on 29 March 2020. This generated $1.9 million of revenue (1H 2019: $39.4 million) and reflected a net realised price of $9.1/bbl (1H 2019: $58.3/bbl).

During 1H 2020, the average Brent price was $40/bbl versus $64.2/bbl in 1H 2019. Pricing of the first cargo of the year was based on April 2020 commodity prices, during which Brent averaged $18.5/bbl, underpinning the level of revenues for the period.

A second cargo was sold on 14 July 2020, generating $7.6 million of revenues. 211 kbbls of crude were lifted, reflecting a net realised price of $35.9/bbl.

1H 2020 Revenue of $2.1 million includes $0.2 million in relation to sulphur sales (1H 2019: $0.6 million).

Cost of production

Cost of production is a non-IFRS measure that is used by the Group as a useful indicator of the Group's underlying cash costs to produce hydrocarbons. The Group uses the measure to compare operational performance period-to-period, to monitor cost and assess operational efficiency. Cost of production is calculated as cost of sales, adjusted for depreciation and hydrocarbon inventory movements.

The spare processing capacity in the Prinos infrastructure provides a high level of operational leverage. Consequent to the reduced investment during the strategic review, production has declined between 1H 2019 and 1H 2020 and this has resulted in a 44.5% increase in per barrel cost of production, from $19/bbl in 1H 2019 to $27.5/bbl in 1H 2020. Cost saving initiatives have been launched to reduce the overall cost of production required to produce Prinos field oil. These initiatives are largely responsible for the reduction in costs from $13.5 million during 1H 2019 to $10.4 million during 1H 2020.

Depreciation, impairments and write-offs

Depreciation charges on production and development assets before impairments decreased by 33% to $11.6 million (1H 2019: $17.3 million) due to decreased production and reduced capital expenditure in the Prinos area. On a per barrel of production basis, this represented a 20% increase to $30/bbl (1H 2019: $25/bbl).

During the period, indicators for impairment were identified for the Prinos cash generating unit. This was due to a reduction in both short-term and long-term commodity price assumptions, combined with a change in the Group's forecasts for production from the Prinos area assets. As a result, Energean recognised an impairment charge of $63.0 million in 1H 2020 (1H 2019: $nil).

Selling, General and Administrative expenses ("SG&A")

Energean incurred SG&A costs of $6.9 million in 1H 2020. This represents a 25% increase versus the comparable period last year (1H 2019: $5.5 million) and is due to increased share-based payment charges and the additional staffing and administrative costs caused by the rapid growth of the Group's portfolio and the efforts associated with developing the projects.

Other income and expenses

Other expenses of $15.8 million (1H 2019: $3.5 million) include several one-off items that are not expected to be incurred in future years. These include $8.4 million of transaction costs in relation to the Edison E&P acquisition, a write-down of $4.9 million relating to the disposal of the Energean Force rig unit, and $1.5 million of restructuring costs that relate to cost saving initiatives in the Prinos area assets.

Other income of $8.9 million (1H 2019: $2.0 million) includes the $5.0 million termination fee that was payable by Neptune Energy in relation to the termination of its sale and purchase agreement to buy the UK North Sea and Norwegian subsidiaries, pursuant to Energean's acquisition of Edison E&P, and $3.9 million of other income related to waivers obtained for specific accounts payables balances in the Greek subsidiary. Other income in 1H 2019 was limited to $2.0 million, which related mainly to a bank liability that was written off during the period.

Finance income / costs

Net finance income in 1H 2020 was $0.8 million (1H 2019: net finance costs of $5.9 million), composed of $3.6 million (1H 2019: $8.2 million) of finance costs after capitalisation and $4.4 million (1H 2019: $2.2 million) of finance income.

During 1H 2020 in Israel, Energean incurred $34.1 million (1H 2019: $7.4 million) of interest expenses relating to the senior credit facility for the Karish development and additional finance arrangement fees, $3.3 million (1H 2019: $3.5 million) of interest expenses in relation to the deferred acquisition payments that are payable to the sellers of the Karish and Tanin leases and $0.4 million of other commitment charges, representing gross finance expenses of $37.8 million (1H 2019: $11.0 million). This amount has been fully capitalised onto the balance sheet.

Energean incurred $5.7 million (1H 2019: $7.2 million) of interest expenses in relation to its Greek RBL facilities, of which $2.7 million (1H 2019: $1.4 million) was capitalised on the balance sheet.

The primary component of interest income was a $3.9 million contribution resulted from the revised estimated loan cash flow in the entity that holds Energean's Greek assets.

Crude oil hedging

Energean has no crude oil hedges outstanding as of 30 June 2020 (1H 2019: $nil).

Taxation

Energean recorded taxation income of $21.8 million in 1H 2020 (1H 2019: $1.4 million tax expense), composed primarily of deferred taxation income, the majority of which is related to impairment losses for the Greek assets.

Adjusted EBITDAX

Adjusted EBITDAX is a non-IFRS measure used by the Group to measure business performance. It is calculated as profit or loss for the period, adjusted for discontinued operations, taxation, depreciation and amortisation, share-based payment charge, impairment of property, plant and equipment, other income and expenses, net finance costs and exploration and evaluation expenses. The Group presents adjusted EBITDAX as it is used in assessing the Group's growth and operational efficiencies as it illustrates the underlying performance of the Group's business by excluding items not considered by management to reflect the underlying operations of the Group.

Adjusted EBITDAX[16]  (8.9)  24.0 
Reconciliation to profit / (loss):     
Depreciation and amortisation  (12.8)  (17.7) 
Share-based payment charge  (1.2)  (0.5) 
Impairment losses  (63.0) 
Exploration and evaluation expense  (0.5)  (0.5) 
Other expenses  (15.8)  (3.5) 
Other income  8.9  2.0 
Finance income  4.4  0.8 
Finance cost  (3.6)  (6.7) 
Net foreign exchange gain/(loss)  (6.6)  (1.0) 
Taxation income / (expense)  21.8  (1.4) 
Profit / (loss) from continuing operations  (77.3)  (4.5) 

Operating cash flow

In 1H 2020, Energean recorded a cash outflow from operations before working capital of $15.2 million, versus a cash inflow of $20.9 million in 1H 2019. After working capital movements, the cash outflow in 1H 2020 was $14.5 million versus a cash inflow of $23.7 million in 1H 2019. The year-on-year decrease in operating cash flow has been driven by the reduction in revenues delivered between the two periods and $7.5 million of expenditure relating to acquisition costs for the proposed acquisition of Edison E&P paid in the period. As discussed above, this reduction in revenues during the period is due to i) a lower level of production and consequent lower number of barrels sold; ii) timing of liftings; and iii) the lower commodity price environment.

Capital expenditure

Capital Expenditure is defined as additions to property, plant and equipment and intangible exploration and evaluation assets less lease asset additions, asset additions due to decommissioning provisions, capitalised share-based payment charge, capitalised borrowing costs and certain other non-cash adjustments. The Directors believe that capital expenditure is a useful indicator of the Group's organic expenditure on oil and gas development assets, exploration and evaluation assets incurred during a period because it eliminates certain accounting adjustments such as capitalised borrowing costs and decommissioning asset additions.

   
  1H 2020    1H 2019 
  $m    $m 
Additions to property, plant and equipment  279.8    336.7 
Additions to intangible exploration and evaluation assets  6.8    37.5 
Less:       
Capitalised borrowing cost  (40.6)    (12.4) 
Leased assets additions and modifications  (0.9)    (9.8) 
Capitalised share-based payment charge  (0.0)    (1.2) 
Capitalised depreciation  (0.3)    (1.6) 
Change in environmental rehabilitation provision  (0.5)    (2.4) 
Total capital expenditures  244.3    346.8 
Movement in working capital  (1.1)    194.4 
Cash capital expenditures per the cash flow statement  243.2[17]    541.2 

The breakdown of capital expenditures during 1H 2020 and 1H 2019 was as follows:

  1H 2020  1H 2019 
  Capital expenditure $m  Capital expenditure $m 
Development and Production     
Israel  234.9  263.4 
Greece  2.5  46.2 
Other  0.1 
Total  237.5  309.6 
     
Exploration and Appraisal     
Israel  4.8  30.2 
Greece  0.3  2.5 
Montenegro  0.4  4.6 
Total  5.5  37.3 

Net cash / debt and gearing ratio

Net debt is defined as the Group's total borrowings less cash and cash equivalents. Management believes that net debt is a useful indicator of the Group's indebtedness, financial flexibility and capital structure because it indicates the level of borrowings after taking account of any cash and cash equivalents that could be used to reduce borrowings. The Group defines capital as total equity and calculates the gearing ratio as net debt divided by capital.

EBRD facilities  138.0  157.2  159.8 
Israel Project Finance facility ($1,450m)  956.0  276.6  756.2 
Edison reserve-based lending facility ($220m)   
Total borrowings  1,094.0  433.8  916.0 
Cash and cash equivalents  (232.5)  (43.5)  (354.4) 
Total net debt / (cash)  861.5  390.3  561.6 
Capital  1,184.7  1,084.7  1,260.7 
Gearing ratio  72.7%  36.0%  44.5% 
Net debt excluding Kerogen minority reconciliation  1H 2020 $m  1H 2019 $m  31 December 2019 $m 
Total net debt / (cash)  861.5  390.3  561.6 
Kerogen minority pro-rata (30%) share of Israel debt  (264.1)  (73.5)  (193.7) 
Net debt including Energean's pro-rata share of Israel debt only (excluding Kerogen minority)  597.4  316.8  367.9 

Israel senior credit facility

In March 2020, Energean Israel increased the size of its senior credit facility amount from $1.275 billion to $1.45 billion.

New reserve-based lending facility

In June 2020, Energean signed a new RBL with a group of lending banks in order to fund a portion of the cash consideration to be paid by the Company for the acquisition of Edison E&P, to fund transaction costs and for general corporate purposes. The new facility is composed of a single senior secured revolving reserve-based credit facility of up to $220 million, which may be drawn by way of loans or LCs. The facility limit may be increased by up to $200 million (for a total facility limit of up to $420 million) subject to certain conditions contained in the accordion provisions of the new facility.

In connection with the new RBL, Energean has entered into a standalone bilateral LC facility with ING Bank N.V. for up to GBP 80 million, provided for the purpose of issuing LCs for the United Kingdom decommissioning obligations and obligations under the United Kingdom licences. This LC facility does not impact upon the availability of the new reserve-based lending facility

The new RBL is drafted on the basis of a customary reducing borrowing base facility arrangement whereby the maximum amount that can be drawn on any date is calculated as the lesser of the total commitments (currently $220 million) and the borrowing base amount, which is subject to customary semi-annual redeterminations.

The new reserve-based lending facility has a tenor of six years from the closing date. The interest rate is LIBOR plus a margin of 4.75% during the first, second and third years after closing, and 5.75% thereafter. The facility contains customary covenants, which include, but are not limited to i) net debt to EBITDAX ratio of 3.5x; and ii) EBITDAX to finance charges of greater than 2x.

Greek reserve-based lending facility

In January 2020, Energean made a prepayment under its EBRD RBL of $19 million, to coincide with the commencement of the loan amortisation. Its lenders, for both the EBRD facility and the Romanian tranche of the loan, simultaneously cancelled undrawn commitments under the loan. As such, the loan should be considered fully drawn. Amortisation on the RBL is currently $19 million for each six-month period until maturity in October 2023.

In June 2020, Energean Oil and Gas S.A. Limited, a wholly owned subsidiary of Energean, agreed a waiver with its lenders under the EBRD RBL under which all financial covenant ratios have been waived until October 2021. The next redetermination of the loan borrowing base has also been agreed as October 2021, rather than the customary six-month period.

Principal risks and uncertainties

Effective risk management is fundamental to achieving our strategic objectives and protecting our personnel, assets, shareholder value and our reputation. The Board has overall responsibility for determining the nature and extent of the risks it is willing to take in achieving the strategic objectives of the Group and ensuring that such risks are managed effectively. A key aspect of this is ensuring the maintenance of a sound system of internal control and risk management. For all the known risks facing the business, Energean attempts to minimise the likelihood and mitigate the impact. Energean has a zero tolerance to financial fraud or ethics non-compliance and ensures that HSE risks are managed to levels that are as low as reasonably practicable.

COVID-19 related risks

Operating during the COVID-19 outbreak

The main event of the first half of 2020 was undoubtedly the COVID-19 pandemic, which has negatively impacted international economic activity, the oil industry and the capital markets. The economic environment, largely shaped by the COVID-19 pandemic, has been exceptionally tough for the profitability of Energean.  The social and economic impact of the pandemic significantly hurt demand for hydrocarbons and caused a sharp drop in oil and gas prices.

The future impacts of COVID-19 are impossible to predict and could include i) uncertainty around commodity prices ii) uncertainty around the recovery of demand and iii) potentially, new waves of infection and associated impacts on operations.

Even in these extraordinary times, Energean continued to deliver progress on the Karish project and achieve a number of key milestones, while safeguarding the health and safety of its employees, contractors and suppliers.

Operations: FPSO: Prior to COVID-19, the hull sailaway from China had been delayed to 31 March 2020, a delay of 3.5 months from the scheduled date of 15 December 2019. This delay could have been extended even further due to the COVID-19 outbreak. However, due to measures taken by the Company and its contractors, work progressed well at the yard in China and the hull was able to sailaway to Singapore during April 2020. Upon arrival in Singapore, Energean was informed of a temporary halt to operations in the yard, designed to limit the spread of COVID-19. The yard reopened on 2 June 2020 but, due to ongoing restrictions imposed by the Singaporean government and designed to further limit the spread of COVID-19, the build-up in the workforce in the yard was slow. During early August, a significant number of new workers were allowed back onto the project and an isolated lift of the E-house occurred on 24 August 2020 with full lifting operations expected to commence in the coming weeks. Subsea operations on the project have proceeded in line with the plan and have not been materially affected by COVID-19. First gas from the project is on track for in 2H 2021. The company has issued force majeure notices to its Israeli gas sales customers to mitigate any penalties arising from the delays to first gas that were caused by COVID-19.

Moreover, Energean has taken steps to quickly understand and mitigate the potential impact on its wider supply chain from the COVID-19 threat.

People: In this environment, effective communication plans are in place to respond to the changing demands of the crisis. As part of its HSE policies, the Company already has an adequate communicable-illness policy in place. The Company has also issued safety precautions, including remote-working guidelines in order to enable Energean's people to stay safe and to protect each other and their communities. Energean personnel have demonstrated the ability to respond to difficult conditions, providing optimism for the future.

Business continuity is continuously tested in light of all potential COVID-19 threat events with an emphasis on employees, supply chain contacts, stakeholders and the completion of the Edison E&P acquisition.

Overview of other key risks

The Group's principal risks for the remaining six months of the year are set out below:

Strategic risks

·    Failure to deliver the Karish gas field project, offshore Israel, on schedule and/or within budget.

·    Risks related to the acquisition of Edison E&P, including:

o  Completion, since the acquisition is subject to the satisfaction (or waiver) of certain conditions.

o  Integration, since the success of the transaction will depend on Energean's ability to integrate Edison E&P, including bringing together the cultures and capabilities of both organisations in an effective manner.

Financial risks

·    Financial ability and flexibility risk

·    Treasury and trading risk

·    Liquidity risk and restricted funding risk

The above financial risks encompass the risk of erosion of financial strength and value through revenue deterioration and inadequate liquidity / funding due to adverse commodity price movements, poor capital and cost discipline and poor balance sheet management.

Political and regulatory risks

·    Risk of disruption due to local community and political influence in Israel: the risk of loss or damage to relationships with the Israeli government and other stakeholders, jeopardising the Company's ability to conduct business.

·    Risk of disruption to business due to political, economic and military conditions in Israel and the region. The Company, with an expanding presence in the Middle East and the Eastern Mediterranean, operates in a historically sensitive geopolitical environment where exposure to a range of political developments at the local or regional level could result in business disruption. The Company has furthermore pursued new opportunities in countries where political, economic and social transition may take place. Political instability changes to the regulatory environment or taxation, international sanctions, expropriation or nationalisation of property, civil strife, strokes, insurrection, acts of terrorism or war may disrupt or curtail existing operations and/or future business development activities. Such eventualities may also affect the recovery of company assets or result in additional costs, particularly given the long-term nature of major projects involving significant capital expenditure.

·    Climate change abatement legislation may have a material adverse effect on the oil and gas industry. Risk of loss due to climate change legislation and regulatory initiatives restricting emissions of greenhouse gases.

Operational, counterparty and conduct risks

·    HSE Inherently hazardous industry subject to comprehensive legislation. The risk of loss resulting from inadequate procedures and processes, technical failure, human errors or external events. Climate change legislation and regulatory initiatives restricting emissions of greenhouse gases.

·    Cyber security risk. The risk of loss resulting from inadequate procedures and processes, technical failure, human error or external events.

·    Corporate Reputation and Culture/Ethics/Compliance Risk. Risk of a major breach of Energean's values, Energean's Corporate Culture and Business Ethics Policy, lease agreements or major laws and regulations with a potential to seriously damage the Company's reputation or result in criminal prosecution, severe fines or material unexpected costs.

·    Counterparty risk. The risk of loss or damage due to counterparties' default or otherwise failure to fulfil their obligations. Once the Edison E&P transaction complete, this includes the recoverability of receivables from EGPC

These risks are consistent with those identified at 31 December 2019. The Board continues to actively monitor the effect of Covid-19 on global oil and gas markets and the Company's operations. However, in respect to the identification of principal risks, the primary risks associated with Covid-19 are considered to be embedded within the existing principal risks, including the potential impact of the pandemic on commodity price volatility and access to capital. Further information detailing the way in which these risks are mitigated can be found in Energean's 2019 Annual Report and Accounts, which is available at .

Events since 30 June 2020

Shareholders voted unanimously in favour of the acquisition of Edison E&P at a general meeting that was held on 20 July 2020.

Activity in the Admiralty Yard in Singapore has accelerated since 30 June 2020. In the first week of September, the workforce on the project averaged more than 480 workers per day.

The E-house was lifted on 24 August 2020 with the full lifting programme expected to commence in the coming weeks.

Going Concern Statement

The Group carefully manages its risk to a shortage of funds by monitoring its funding position and its liquidity risk.

Cash forecasts are regularly produced based on, inter alia, the Group's latest life of field production and expenditure forecasts, management's best estimate of future commodity prices (based on recent forward curves) and the Group's borrowing facilities.

In addition, on a regular basis, the Group performs sensitivity tests of its liquidity position for changes in crude oil price, production rates and expected completion of various ongoing projects.

In March 2020 the price of oil collapsed following a disagreement between OPEC+ countries on production levels. This fall in price was compounded by the perceived lack of future demand for oil caused by disruptions to businesses and economic activity as a result of COVID-19. Whilst the OPEC+ countries, together with a wider group of producers, subsequently agreed to lower daily production levels, the continuing uncertainty over the future demand for oil as a result of the continuing impact of COVID-19 is restricting the recovery of the oil price.

The impact of COVID-19 and the current economic environment has been considered as part of the going concern assessment.  The Group's going concern assessment has taken account of potential impacts of COVID-19 and the current economic environment to create an adjusted base case. This reflects the current business disruption including (i) delay to key projects, (ii) deterioration in economic conditions and the resulting impact on oil and gas prices and (iii) the ability to operate effectively during a period of remote working.

The Group's adjusted base case includes the below actions, with a base case forecast assumed oil price of US$45/bbl in 2H 2020 and US$50/bbl 2021 and PSV gas prices of €12.5/ MWh in 2H 2020 and €15.0/ MWh in 2021, respectively and production in line with prevailing rates.

1.         Edison E&P Acquisition:

·    In May 2020, Energean announced that it entered into further amended terms for its proposed acquisition of Edison E&P following which, inter alia, the Norwegian subsidiary will be formally excluded from the transaction perimeter. As a result of the above adjustments, the gross consideration for the transaction has been reduced to $284 million from an original enterprise value of $750 million.

·    On 20 June 2020, Energean signed a $220 million Reserve Based Lending facility ("RBL") with ING, Natixis and Deutsche Bank in order to fund a portion of the cash consideration to be paid by the Company for the acquisition of Edison E&P, to fund transaction costs and for general corporate purposes. The facility limit may be increased by up to $200 million (for a total facility limit of up to $420 million) subject to certain conditions contained in the accordion provisions of the new facility.

2.         Karish Field Development, Israel:

·    In March 2020 the Karish Project Finance Facility was increased by $175 million to ensure the Group is well funded for any impact of delay on the project (particularly prudent in light of COVID-19 and recent market turbulence).

·    A portion of the facility can also be used for further developments in Israel and for appraisal expenditure.

·    The Project Finance Facility is available during construction and currently has $420 million still available.

3.         Greek RBL

In June 2020, the Group agreed a waiver with its lenders under the EBRD reserve-based lending facility whereby all financial covenant ratios have been waived until October 2021. The next redetermination of the borrowing base has also been agreed as October 2021, rather than the customary six-month period.

Forecast liquidity has been assessed under a number of stressed scenarios and a reverse stress test performed to support this assertion.

The sensitivities are designed to model potential downside scenarios relating to COVID19, whereby the Group experiences:

·    A period of depressed economic activity across the entire going concern period, with resulting reduction in revenues as a result of sustained reduced oil & gas prices;

·    Further delays in its key projects Karish in Israel, NEA in Egypt and Cassiopea in Italy, including the impact of delay in supply of goods and materials.

This is done to identify risks to liquidity and covenant compliance and enable management to formulate appropriate and timely mitigation strategies in order to manage the risk of funds shortfalls or covenant breaches and to ensure the Group's ability to continue as a going concern.

Should a more extreme downside scenario occur, prudent mitigating actions that can be executed in the necessary timeframe could be taken such as a tightening of operating cost and reductions in other discretionary exploration and development expenditures.

In forming an assessment on the Group's ability to continue as a going concern and its review of the forecasted cashflow of the Group over the next 16months (from the date of approval of the interim condensed consolidated financial statements) the Board has made significant judgements about:

·    the duration of the low oil price environment; and

·    the Group's ability to implement the mitigating actions within the Group's control

After careful consideration, the Directors are satisfied that the Group has sufficient financial resources to continue in operation for the foreseeable future, for a period of not less than 12 months from the date of this report. For these reasons, they continue to adopt the going concern basis in preparing the interim condensed consolidated financial statements.

Statement of Directors' responsibilities

The Directors confirm that to the best of their knowledge:

1)    The condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

2)    The interim management report contains a fair review of the information required by FTR 4.2R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year);

3)    The interim management report includes a true and fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

Source: EvaluateEnergy® ©2021 EvaluateEnergy Ltd