Half Yearly Report

ENQUEST PLC, 13 August 2014.  Results for the 6 months to 30 June 2014    

STRONG 18% PRODUCTION GROWTH Vs H1 2013

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

Highlights

• Production in H1 2014 was 25,292 Boepd, up 17.9% on H1 2013, as a result of strong reservoir performance and high production efficiency, which are expected to continue in H2 2014.
  
  
• 2014 full year average production guidance is maintained at between 25,000 Boepd and 30,000 Boepd. This reflects the ongoing strong performance from EnQuest's existing hubs in 2014, a reduction from Alma/Galia and the first contribution from PM8/Seligi.

• Revenue was $503.8 million, with EBITDA of $284.0 million and cash flow of $318.2 million generated from operations.

• The acquisition of 'PM8/Seligi' in Malaysia completed as planned at the end of June 2014, building on EnQuest's core skill of extracting value from maturing fields; this acquisition immediately adds to production and reserves and the transition of the operatorship from ExxonMobil to EnQuest is underway.
  
  
• Significant progress has been made on the FPSO* for the Alma/Galia development, however sailaway is now weather dependent.  Taking into account the winter weather, sailaway is planned for spring 2015, with first oil in the middle of the year.  The FPSO is substantially complete and commissioning has started. Three wells have been completed and a fourth is in the process of being completed for production.
  
  
• Kraken is proceeding on time and on budget and progress is continuing on the host vessel. The Kraken West appraisal well 'Tyrone' will be drilled in H2 2014.
  
  
• Business development: In addition to the PM8/Seligi acquisition, in H1 2014, EnQuest completed the acquisition of the Greater Kittiwake area hub ('GKA') and was awarded the Tanjong Baram field development in Malaysia. EnQuest was also awarded, out of round, the Don North East licence, following which a Field Development Plan for 'Ythan' has recently been submitted.  Successful exploration and appraisal wells were drilled at Cairngorm and Avalon.

* Floating Production, Storage and Offloading vessel

EnQuest CEO Amjad Bseisu said:
"In 2014 so far, EnQuest has again delivered good growth in reserves and production.  Production was up 18% in the first half of 2014 and acquisitions, combined with the new development contract award in Malaysia are expected to result in an incremental increase of approximately 20 MMboe in net 2P reserves.

With our UK North Sea activities set for substantial growth from our new hubs, we have been complementing our UK business by establishing EnQuest in South East Asia, through the Tanjong Baram field development and the acquisition of PM8/Seligi. Seligi was once the largest oil field in Peninsular Malaysia and we are evaluating the potential from infill drilling and workovers at PM8/Seligi. 

I am delighted that in Oil & Gas UK's latest production efficiency rankings, EnQuest again performed very strongly and was in the top quartile.  Production efficiency has been an important driver of the strong performance from our existing assets in H1 2014 and we see this continuing in the second half of the year.  EnQuest will soon have six producing hubs, and over 15 producing fields, giving diversity to our portfolio."

(1) EBITDA is calculated by taking profit/loss from operations before tax and finance income/(costs) and adding back depletion (adjusted for depletion of fair value uplift), depreciation, impairment, write-off of intangible oil and gas assets and foreign exchange movements.  The foreign exchange adjustment was not made in 2013 and the prior year EBITDA figure has been restated accordingly.   (2) Net (debt)/cash represents cash and cash equivalents less borrowings as at the reported cash flow statement date of 30 June.

Performance summary and latest outlook

2014 to date has been another period of good delivery and progress for EnQuest.  Production efficiency and reservoir performance from existing producing assets have been strong, with good initial progress on the integration of new acquisitions.  For the remainder of2014, in the UK, EnQuest will continue to invest in its current producing assets, including the completion of the first GKA workover and will also continue with the substantial investment programme in the Kraken development.  In Malaysia, in H2 2014, EnQuest will continue transitioning to take over full operatorship of PM8/Seligiand development of the Tanjong Baram field has commenced.  In H1 2014, EnQuest submitted applications as part of the UK 28th North Sea Licensing Round; the results are anticipated in H2 2014.

• Production guidance: EnQuest has maintained its 2014 full year average production guidance at between 25,000 Boepd and 30,000 Boepd, on a working interest basis.   
• Exploration and appraisal: In the UK, drilling of the 'Eagle' exploration well in the GKA area is planned for H2 2014, as is drilling of the Kraken 'Tyrone' appraisal well.  In offshore Malaysia, exploration drilling in the Sabah area is anticipated around the end of 2014.
• Capital expenditure:  Capital expenditure for 2014 will now include the investment in Tanjong Baram and the PM8/Seligi acquisition and its initial capital programme.  In the North Sea, capital expenditure will include the initial investment in the development of Ythan and additional Alma FPSO costs. In total, therefore the EnQuest 2014 capital expenditure programme should be approximately $1.2 billion.
• Operating expenditure: 
  The integration of the acquisition of PM8/Seligi at the mid-year point adds approximately $50m to production and transportation costs for the full year 2014.  
  Transportation costs have also been impacted by the Sullom Voe oil terminal ('SVT'); H1 2014 results include an exceptional charge of $32 million arising from the third party operator's finalisation of the costs for 2013.  Estimated 2014 costs also increase to reflect the higher base level and EnQuest being allocated a higher proportion of the SVT costs in 2014, reflecting other users' lower throughput.   In keeping with the recommendations of Sir Ian Wood's review seeking to maximise economic recovery from the UKCS, the operator of SVT and its users have formed a task force and are working closely together assessing lower cost options for the medium and longer term.  As a result of the PM8/Seligi acquisition and these SVT updates, total production and transportation costs for 2014 are now expected to be in the range $535 million to $555million.  
• Tax: The H1 2014 post-exceptionals effective tax rate was 22%, reflecting the impact of the Ring Fenced Expenditure Supplement.  The effective tax rate for the full year 2014 is anticipated to be in the range of 25% to 33%, but this will depend on oil price and production in the second half of the year in both the UK and internationally.  The Group is expecting to pay cash corporate income tax on assets acquired in Malaysia from the second half of 2014 and throughout the life of this Production Sharing Contract ('PSC').
  

Summary financial review of H1 2014 

• EBITDA was $284.0 million.  Net debt was $716.7 million at the end of H1 2014, after an increased cash capital investment of $482.0 million.  This outflow included $114.0 million invested in EnQuest's existing producing fields, $101.9 million in Kraken and $207.6 million in Alma/Galia.
• H1 2014 revenue of $503.8 million was 10.5% higher than the previous period mainly reflecting the higher production and also the slightly higher realised oil price. 
• Gross profit was $164.3 million, down 6.1% on the prior period.  This reflects the increased SVT tariff costs, up $28.2 million on last year, as well as approximately $30 million of GKA costs post the acquisition in Q1 2014.
• Unit production costs were $35.4 per barrel in H1 2014 Vs $31.5 per barrel in H1 2013; the increase related mainly to the impact of the GKA acquisition, with like for like unit operating costs held broadly flat. 
• Profit after tax and net finance costs was $75.1 million, down 23.1% reflecting increased interest costs following bond issuance.
• Tax losses were approximately $1,453 million at the end of H1 2014.
• In H1 2014 the Group successfully raised a $650 million high yield bond.

  DETAILED REVIEW

(3)  Net production since the completion of the acquisition at the start of March 2014, averaged over the six months to the end of June 2014.
(4) Net production since the completion of the acquisition at the end of March 2013, averaged over the six months to the end of June 2013.

Production and developments
Average EnQuest production for H1 2014 was 25,292 Boepd, up 17.9% on H1 2013; reflecting strong reservoir and production efficiency performances

Thistle/Deveron

• Production at Thistle/Deveron achieved a net 9,281 Boepd, an 84% increase on the same period last year, reflecting continued benefit from the new production wells which came onstream in H2 2013 and from investment in a significantly improved power supply.  In 2014, further capital investment is being made in the ongoing Thistle field life extension project; ongoing activities include: a control systems upgrade and significant simplification of processes, jacket integrity improvements and topsides structural integrity improvements.

Dons

• Production at the Dons achieved a net 9,789 Boepd, down in line with expectations, reflecting anticipated natural decline rates. Two key wells, West Don W4 and Don SW S11 had both outperformed expectations and are now declining. Production efficiency has remained very strong, with high levels of water injection efficiency supporting production.
• Production optimising projects are continuing with a new production well drilled in Don Southwest, in Area 22 ('TJ').  The well is planned to be tied-in to the subsea system and placed on production in September. A programme of chemical treatments to remove scale is ongoing.  Offshore construction has commenced on a project to upgrade the water injection
  system capacity. 
• In Q1 2014, EnQuest applied for and was offered an 'out of round' licence in the Don North East ('Don NE') 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 NE field.  Following the award of the Don NE licence, a field development plan ('FDP') for 'Ythan' has been submitted
  and is targeted to come onstream in late 2015 / early 2016.

Heather/Broom

• Production at Heather/Broom achieved 4,041 Boepd, down following a strong performance last year and ahead of benefits from the redevelopment and life extension programme now underway.  A small underlying decline in the Broom field is in line with expectations.  Production efficiency in H1 2014 was the highest level achieved for over five years.
• Following commencement of rig operations in Q1 2014, the workover of the H56 well was successfully completed in Q2 2014, the first workover on Heather for nearly a decade.  The rig has since drilled and completed the first new well, H64, a water injection well (previously named H44).  H64 came online in July, and will provide pressure support and increased oil production in a nearby producer. The 2014 programme also includes a sidetrack of H48 as a new producer and a workover of the crestal E-Block producer H47. 

Greater Kittiwake Area (GKA)

• Following the completion of the acquisition at the start of March, GKA has been integrated into EnQuest's operations. Following a maintenance shutdown and the current workover of Mallard, benefits from the improvement programme should start to be seen late in H2 2014.
• The recent Avalon discovery has helped to enhance the potential of GKA; further exploration opportunities are also being assessed. Drilling of the 'Eagle' exploration well in GKA is planned for H2 2014. Planning for the Gadwell work programme is progressing well, as is preparation of a Scolty/Crathes field development plan.   

Alba (non-operated)

• Alba is on track for the drilling of two production wells in 2014, one well is already online and one is currently being completed.

PM8/Seligi

• EnQuest acquired the PM8/Seligi Production Sharing Contract ('PSC') and entered into an interim transition services agreement with ExxonMobil to facilitate the transfer of the assets.   Net production is currently approximately 5,000 Boepd; the transition programme includes a two week operational shutdown during H2 2014.
• The commercial terms for PM8/Seligi are similar to traditional revenue over cost ('R/C') PSCs in Malaysia.
• In addition to our initial reserve estimates, EnQuest is also evaluating the potential from infill drilling and workovers at PM8/Seligi; over 200 wells have previously been drilled at Seligi alone.

Alma/Galia

• Subsea work has been completed with the exception of mooring and riser pull-ins to the FPSO. Completion operations continue on the wells, three wells have been completed and a fourth is underway. On the FPSO, the finishing work is now nearing completion and commissioning has started. Due partly to some marine and topside legacy issues associated with earlier work, construction work in the UK yard has  advanced more slowly than expected; to avoid the worst of the winter weather, sailaway of the FPSO is now planned for spring 2015, with first oil in the middle of 2015.

Kraken

• An oil tanker is undergoing a conversion programme to become the FPSO for the Kraken development.  This 'host' vessel arrived in the Keppel shipyard in Singapore on schedule in H1 2014 and the hull conversion and marine system refurbishment is progressing.  Pipeline route surveys have been undertaken on the Kraken site, boulders removed and preparatory pipeline initiation facilities installed. In H2 2014, two integrated template structures will be installed, these are key elements of the subsea infrastructure.  The Engineering Procurement Construction Installation ('EPCI') contract for the Subsea Umbilical Riser and Flowlines ('SURF') has been executed.  A scheduled pre-payment of $50 million was made to Bumi as planned. Good progress is being made on the evaluation of drilling rig options.
• The Kraken West appraisal well 'Tyrone' will be drilled in H2 2014.

Further exploration and appraisal

• The Cairngorm appraisal well reached its target in Q1 2014, with indications of hydrocarbons in a relatively good quality basement reservoir.  Further evaluation of the results is ongoing.
• The drilling of the Avalon well in Q2 2014, confirmed a discovery; preliminary analysis indicated an 85 ft vertical column of reasonable quality mobile oil in good quality high permeability sands.  Avalon is located near to GKA, with potential for a tie-back.  Further evaluation is ongoing.

Business development

Tanjong Baram

• On 16 May 2014, EnQuest announced that it had secured a small field development 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. It is intended to develop Tanjong Baram as a near field tieback to the West Lutong A complex; the work programme is already well underway and is going according to plan.

PM8/Seligi

• On 13 June 2014, EnQuest announced that it was further expanding its footprint in Malaysia through the acquisition of an operated interest in the producing Seligi oil field and the PM8 production sharing contract; collectively now known as the 'PM8 PSC (Extension)' or 'PM8/Seligi'. The transaction completed at the end of June 2014, following delivery of the conditions precedent, including an extension to the agreement with PETRONAS for the continuing development and production of petroleum resources from PM8/Seligi, until 2033. 

Didon

• EnQuest's acquisition of interests in the producing Didon oil field in Tunisia completed in mid-July 2014.  The consideration will be kept in escrow, pending the response of the Tunisian authorities, anticipated by the end of this year. EnQuest will assume responsibility for Didon operations in accordance with transitional arrangements to assure an efficient handover. The original announcement on 29 May 2013 included details of the consideration of $23 million, subject to adjustment for the interim period from 1 January 2013. The Zarat transaction is still pending.

                                                                             Ends

For further information please contact:

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

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

Presentation to Analysts and Investors
A presentation to analysts and investors will be held at 09:30 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 09:30 on the following numbers:

United Kingdom: +44(0)20 3427 1913
United States of America:  +1646 254 3367

Notes to editors

About EnQuest  www.enquest.com 
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.  It is a constituent of the FTSE 250 index.  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 and Kraken developments; EnQuest also has an interest in the non-operated Alba producing oil field.  At the end of H1 2014, EnQuest had interests in 35 production licences covering 48 blocks or part blocks in the UKCS, of which 29 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 is expanding geographically to a small number of other maturing regions; complementing our operations and utilising our skills in the UK North Sea. In addition to its interests in the PM8/Seligi producing oil fields in Malaysia, EnQuest also has interests in Malaysia in two blocks offshore Sabah, and a small field risk service contract, offshore Sarawak.

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, reserves, production, 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.

FINANCIAL REVIEW

EnQuest made good progress in the first half of 2014, with EBITDA of $284.0 million pre-exceptional items and fair value adjustments (2013: $274.0 million adjusted to exclude foreign exchange) and cash generated from operations $318.2 million (2013: $234.7 million) which results in a net borrowing position of $716.7 million at 30 June 2014 (31 December 2013: $381.1 million). The net cash decrease of $335.6 million is due to the significant expansion and capital expenditure programme being undertaken by the Group.

In H1 2014 the Group successfully raised a $650 million high yield bond.  The 8 year bond further diversifies the Company's capital base and puts EnQuest in a strong financial and flexible position.  The $1.2 billion revolving credit facility was undrawn at the half year and allows EnQuest to take advantage of potential acquisition opportunities as well as investing in its current projects.

As a result of the continued capital investment, UK corporate tax losses at the end of the half year increased to approximately $1,453 million.  The effective tax rate for the year is expected to be in the range of 25%-33% which reflects the blend of UK and international assets.  With the investment programme in the UK, no material corporation tax or supplementary corporation tax is expected to be paid on UK operational activities before 2020.  The Group is expecting to pay cash corporate income tax on assets acquired in Malaysia from the second half of 2014 and throughout the life of the PSC.

Production and revenue
Production averaged 25,292 boepd in the first half of 2014 compared with 21,455 boepd in the first half of 2013.

The increase primarily arises from higher production in the Thistle field which has been experiencing high production efficiency.  This is off-set partially with a decrease in Don South West production relating to natural decline and a planned shut-down.  The Group's blended average realised price per barrel of oil sold was $109.98 in H1 2014, compared with $108.7 per barrel in H1 2013.  Revenue increased by $47.9 million to $503.8 million in the six months ended 30 June 2014 compared with the same period in the prior year which also reflects a reduction in the over-lift position from $40.1 million to $9.9 million

Operating costs
Cost of sales pre-exceptional items and fair value adjustments for the Group are summarised below:

There has been an increase in SVT (Sullom Voe oil terminal) tariff costs in the year compared with prior years.  Costs are $28.2 million higher than H1 2013 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 level of throughput at SVT.  In addition, the exceptional items include a charge of $32.4 million in respect of actualisation of 2013 costs which have now been notified to EnQuest by the operator.  The operator of SVT and its users, including EnQuest, have formed a task force and are working closely together assessing lower cost options for the medium and longer terms.

Gross profit pre-exceptional items and fair value adjustments was $164.3 million (2013: $175.0 million).  The decrease in gross profit of $10.7 million is due to the increase in SVT tariffs as well as GKA lifting costs being incurred from completion on 1 March 2014 with no liftings occurring for GKA in H1 2014.  An under-lift position on GKA partially offsets this effect.  In addition, depletion increased mainly due to a higher mix of production from the Thistle hub, the addition of GKA and an increase in the Heather/Broom hub due to a higher capital investment compared to the prior year.  Cost of sales reflects an over-lift of $9.9 million (2013: $40.1million), the reduction from last year relates mainly to a significant under-lift position in GKA and Alba.  EBITDA of $284.0 million was $10 million higher than H1 2013.

Exploration and evaluation expenses
Exploration and evaluation expenses of $2.2 million for the six months to 30 June 2014 (2013: $2.3 million) mainly relate to expenses incurred in business development and small impairment and write-off costs relating to relinquished licenses.  Exploration costs also include the Group's 28th UK licensing round applications.

General and administrative expenses
General and administrative expenditure (G&A) for the six months to 30 June 2014 was $3.7 million compared with $4.5 million in the same period last year.  The expenses primarily relate to the Group's general management and business development expenses after recharges to joint venture partners. 

Other expenses
Other expenses for the six months to 30 June 2014 was $9.1m compared with $1.0 million in the same period last year.  The increase is principally foreign exchange losses primarily from the strengthening of sterling with respect to the retail bond.

Finance costs
Finance costs of $39.4 million (2013: $24.7 million) include $8.4 million of a non-cash unrealised accounting mark to market valuation loss on the Group's outstanding foreign exchange contracts deemed ineffective for hedge accounting purposes.  Non-cash expense for the unwinding of the discount on the decommissioning provision was $7.0 million.  The remaining finance costs include bond interest on the retail and the new high yield bond of $14.6 million, $5.0 million for bank fees and commitment charges associated with the Group's revolving credit facility and letter of credit utilisation, amortisation of facility fees and loan interest paid totalling $4.4 million.

Finance income
Finance income of $4.2 million (2013: $4.8 million) includes a mark to market hedging gain of $2.9 million.

Taxation
The income tax charge pre-exceptional items and fair value adjustments of $39.1 million for the first half of the year (2013: $49.7 million) reflects the expected full year effective tax rate on UK and Norwegian activities.  The effective tax rate is lower than 2013 due to a material increase in Ring Fence Expenditure Supplement ('RFES'), partly offset by Petroleum Revenue Tax, a reduction in the tax benefit available from leasing arrangements and other minor tax rate increases.

Exceptional items and depletion of fair value uplift
These items relate to the actualisation of the SVT tariff for 2013 as well as the fair value uplift for depletion.

Cash flow, capital investment and liquidity
Cash generated from operations has increased to $318.2 million (2013: $234.7 million).  Investment in property, plant and equipment in the period was $444.3 million (2013: $392.9 million). This relates mainly to the continued re-fit of the FPSO and related expenditure on the Alma/Galia development.  In addition, there has been spend on the Kraken Subsea Production system, on the Thistle hub there has been the ongoing life extension project and the Don South West hub progressed the TJ well. 

At 30 June 2014 the Group had $716.7 million of net borrowings (31 December 2013: $381.1 million) and total available bank facilities of $1,200 million, of which $153 million was utilised for letters of credit. 

Balance sheet
The Group's total asset value has increased by $832.9 million since 31 December 2013 to $4,383.4 million as at 30 June 2014.

Property, plant and equipment increased to $3,334.4 million as at 30 June 2014 from $2,871.2 million at 31 December 2013. The increase of $463.2 million is mainly due to oil and gas asset additions of $365.7 million.  As outlined above this relates to the Alma/Galia development, the Kraken Subsea Production system, the Don South West TJ well and the Thistle hub life extension project.

On 1 March 2014 the acquisition of Centrica's share of the UKCS GKA (Greater Kittiwake Area) assets, as well as its 100% interest in the Kittiwake to Forties oil export pipeline, completed.  Also, in June 2014, EnQuest completed the acquisition of ExxonMobil Exploration and Production Malaysia Inc's interest in the Seligi oil field and the PM8 PSC, located offshore Malaysia.  Total asset additions relating to acquisitions amounted to $205.8 million.

Intangible oil and gas assets have increased to $197.5 million as at 30 June 2014 from $130.9 million at 31 December 2013. The increase is made up of costs relating to exploration on Cairngorm, Avalon and the GKA acquisition. 

The Group's net borrowing position of $716.7 million as at 30 June 2014 compares to a net borrowing position of $381.1 million at 31 December 2013.  The increase in borrowings since December 2013 is due to the significant capital expenditure programme being undertaken by the Group as well as acquisitions made in the period.
The Group's deferred tax liability (net of deferred tax asset) has increased by $26.9 million since 31 December 2013 to $773.2 million as at 30 June 2014. The increase is due to accelerated capital allowances arising on the Group's capital investment programme offset by an increase in tax losses. UK tax losses carried forward at the half year amounted to approximately $1,453 million.

Trade and other payables have increased by $65.2 million compared with 31 December 2013, to $428.5 million at 30 June 2014, this is mainly due to a higher level of creditors.  There was also an acquired over-lift of $9.4 million in Malaysia.  Trade and other receivables have increased by $69.5 million to $336.7 million at 30 June 2014 due to a prepayment on Kraken FPSO lease for $50 million and the unamortised facility fees in relation to the undrawn facility at 30 June 2014.  The UK assets were in an under-lift position at 30 June 2014 of $7.5 million (31 December 2013: $17.2 million under-lift).

Provisions have increased by $210.1 million to $518.5 million relating mainly to decommissioning.  The GKA and PM8/Seligi acquisitions have associated decommissioning liabilities.  EnQuest has a 50% interest in the GKA area but is only responsible for approximately 25% of the decommissioning liability.  The decommissioning provision for GKA is $74.4 million.  For the PM8 PSC (Extension), EnQuest's estimated share of decommissioning liability is approximately $101.3 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.

Financial risk management

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 the US dollar. EnQuest will continue to review foreign exchange hedging contracts, in line with the policy agreed by the Board which allows for operating expenditure and capital expenditure to be hedged to mitigate the risk of currency fluctuations.

The Group is exposed to the impact of changes in Brent crude oil prices on its revenue and profits.  In August and September 2013, some commodity hedging contracts were entered into partially to hedge the exposure to fluctuations in the Brent oil price during 2014.   Additionally, the Company entered into a swap for 1 MMbbls during the second quarter at a price of approximately $109/bbl.  In Q3 2014, the company hedged 1 MMbbls of production by entering a costless collar, with a floor of $105/bbl and a ceiling of $116/bbl.