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ENQ Enquest Plc

14.10
0.10 (0.71%)
28 Mar 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Enquest Plc LSE:ENQ London Ordinary Share GB00B635TG28 ORD 5P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  0.10 0.71% 14.10 14.00 14.15 14.88 13.60 14.66 7,953,321 16:35:00
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Offices-holdng Companies,nec 1.92B -41.23M -0.0224 -6.25 258.27M

EnQuest PLC Final Results (5123T)

21/03/2019 7:01am

UK Regulatory


Enquest (LSE:ENQ)
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RNS Number : 5123T

EnQuest PLC

21 March 2019

Results for the year ended 31 December 2018 and 2019 outlook

48% production growth and debt reduction delivered in 2018

2019 production growth and debt reduction driven by Magnus

21 March 2019

Unless otherwise stated, all figures are on a Business performance basis and are in US Dollars.

2018 performance

-- Acquisition of additional interests in Magnus and the Sullom Voe Oil Terminal completed in December

-- Group production averaged 55,447 Boepd in 2018, up 48.2% on 2017

-- Revenue of $1,201.0 million (2017: $635.2 million) and EBITDA of $716.3 million (2017: $303.6 million); higher volumes and realised prices, partially offset by the impact of commodity hedges

-- Cash generated from operations of $788.6 million (2017: $327.0 million) reflecting higher EBITDA

-- Cash capital expenditure of $220.2 million (2017: $367.6 million)

-- Cash and available bank facilities amounted to $309.0 million at 31 December 2018, with net debt of

$1,774.5 million (2017: $1,991.4 million)

-- Net 2P reserves of 245 MMboe and net 2C resources of 198 MMboe at the end of 2018 (2017: 2P reserves of 210 MMboe; 2C resources of 164 MMboe); growth driven by acquisition of Magnus

2019 performance and outlook

-- Average Group production expected to grow by around 20% to between 63,000 to 70,000 Boepd; production has averaged 67,700 Boepd in the first two months of the year

-- Operating expenditure expected to be approximately $600 million, including additional interest in Magnus

-- Cash capital expenditures expected to be approximately $275 million; includes a combined total of approximately $100 million related to deferred payments from prior periods and phasing of spend from 2018, mainly DC4

-- EnQuest has hedges in place for c.8.0 MMbbls of oil. Approximately 6.5 MMbbls are hedged at an average floor price of c.$66/bbl. In accordance with the Oz Management facility agreement, the Group has a further c.1.5 MMbbls hedged across 2019 with an average floor price of c.$56/bbl

-- Group's credit facility reduced to $730.0 million following early repayment of $55.0 million

-- End 2019 Net debt to EBITDA ratio expected to be approaching 2x; EnQuest's target is between 1x and 2x

EnQuest Chief Executive, Amjad Bseisu, said:

"In 2018, the Group met its financial and operational targets. Production increased by 48%, just above the midpoint of our guidance, which, along with strong cost control, drove a significant improvement in cash generation allowing the Group to reduce net debt.

"FPSO performance has been the main limiting factor in achieving Kraken's full production potential. As such, our clear operational priority is to improve Kraken's FPSO uptime and efficiency. We are working with the FPSO operator on a number of improvement initiatives.

"We are committed to further reducing our debt, and expect our net debt to EBITDA ratio to trend towards 2x this year and intend to operate within our 1-2x target in the future.

"The acquisition of Magnus has added material value to the business through significant production and reserve growth, and the application of our production enhancing capabilities are already improving performance above original expectations.

"In the near term, we remain focused on investing in short-cycle projects which maximise cash flow and allow us to deliver on our plans to reduce our debt. We have opportunities for low-cost material growth in near-field, short-cycle infill and tie-back investments, particularly at Magnus, PM8/Seligi and Kraken.

"Longer term, our capital allocation will balance investment to develop our asset base, returns to shareholders and the acquisition of suitable growth opportunities."

Production and financial information

 
                                             2018        2017   Change 
                                                                     % 
 Production (Boepd)                        55,447      37,405     48.2 
-------------------------------------  ----------  ----------  ------- 
 Revenue and other operating income 
 ($m)(1)                                  1,201.0       635.2     89.1 
-------------------------------------  ----------  ----------  ------- 
 Realised oil price ($/bbl)(1)               61.2        52.2     17.2 
-------------------------------------  ----------  ----------  ------- 
 Gross profit ($m)                          275.0        65.7    318.6 
-------------------------------------  ----------  ----------  ------- 
 Profit before tax & net finance 
  costs ($m)                                290.0        47.3    513.1 
-------------------------------------  ----------  ----------  ------- 
 EBITDA ($m)(2)                             716.3       303.6    135.9 
-------------------------------------  ----------  ----------  ------- 
 Cash generated from operations 
  ($m)                                      788.6       327.0    141.2 
-------------------------------------  ----------  ----------  ------- 
 Reported profit after tax ($m)             127.3      (60.8)        - 
-------------------------------------  ----------  ----------  ------- 
 Reported basic earnings per share 
  (cents)(3)                                 10.4       (4.6)        - 
-------------------------------------  ----------  ----------  ------- 
 Cash capex ($m)                            220.2       367.6   (40.1) 
-------------------------------------  ----------  ----------  ------- 
                                         End 2018    End 2017 
-------------------------------------  ----------  ----------  ------- 
 Net (debt)/cash ($m)(4)                (1,774.5)   (1,991.4)   (10.9) 
-------------------------------------  ----------  ----------  ------- 
 
 

Notes:

1 Including losses of $93.0 million (2017: losses of $20.6 million) associated with EnQuest's oil price hedges

2 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, foreign exchange movements, inventory revaluation and the realised gains/loss on foreign currency derivatives related to capital expenditure

3 2017 reported earnings per share has been restated for the bonus element of the rights issue

4 Net (debt)/cash represents cash and cash equivalents less borrowings, stated excluding accrued interest and the net-off of unamortised fees

Production details

 
 Production on a               Net daily      Net daily 
  working interest               average        average 
  basis                      1 Jan' 2018    1 Jan' 2017 
                                      to             to 
                                 31 Dec'        31 Dec' 
                                    2018           2017 
-------------------  ----  -------------  ------------- 
                                 (Boepd)        (Boepd) 
 Northern North 
  Sea                          19,293(1)      15,627(2) 
 Central North Sea                 6,353          8,131 
 Kraken                           21,369       4,709(3) 
                           -------------  ------------- 
 Total UKCS                       47,015         28,467 
                           -------------  ------------- 
 Total Malaysia                    8,432          8,938 
                           ------------- 
 Total EnQuest                    55,447         37,405 
                                       7 
                           -------------  ------------- 
 

Notes:

1 Includes net production related to 25% interest in Magnus until 30 November 2018 and 100% interest of Magnus from 1 December 2018, averaged over the 12 months to the end of December 2018

2 Includes net production from the initial 25% interest in Magnus from 1 December 2017, averaged over the 12 months to the end of December 2017

3 Net production since first oil on 23 June, averaged over the 12 months to the end of December 2017

2018 performance summary

During 2018, the Group was focused on meeting its financial and operational targets and facilitating debt reduction. The successful acquisition of Magnus, the Sullom Voe Terminal and related infrastructure assets from BP was a great testament to our people's focus on delivery and excellent team collaboration. The Group's collective efforts delivered a set of assets with a strong strategic fit into the portfolio. EnQuest's cash generation capability has improved through the acquisition of Magnus in particular and the Group is well positioned to meet its debt repayment schedule and capital programme in 2019 and beyond.

In line with the Group's guidance, EnQuest's average production increased by 48.2% to 55,447 Boepd, primarily reflecting the contributions from Kraken and Magnus, a better than expected performance at Heather, Alma/Galia and Scolty/Crathes, partially offset by natural declines.

The combination of significantly higher production, higher realised prices and the Group's focus on cost control resulted in EBITDA and cash generated by operations more than doubling in 2018 compared to 2017, reaching $716.3 million and $788.6 million, respectively.

As expected, cash capital expenditure of $220.2 million was materially lower than 2017. The majority of the expenditure was at Kraken, although the delayed arrival of the Transocean drilling rig resulted in the DC4 drilling programme and associated costs being phased into 2019, with the remaining spend largely reflecting drilling activities at Heather/Broom and PM8/Seligi.

Liquidity and net debt

During the year, EnQuest continued to manage its liquidity position actively and ensuring the Group is able to deploy capital and resources to those key projects which maximise cash flow to facilitate debt reduction.

In January, the Group agreed to receive $30.0 million in cash from BP in exchange for undertaking the management of the physical decommissioning of the Thistle and Deveron fields and making payments by reference to 4.5% of BP's decommissioning costs of these fields when spend commences. Following shareholder approval at the General Meeting held in October, EnQuest received a further $20.0 million in cash in exchange for increasing its total payment obligation of BP's decommissioning costs of the Thistle and Deveron fields by 3.0% to 7.5%.

In February, the Group completed the $37.25 million refinancing agreement in relation to its Tanjong Baram project, providing approximately $25.0 million in additional liquidity.

In September, the Group agreed $175 million of financing with funds managed by Oz Management. The financing is ring-fenced on a 15% interest in the Kraken oil field and will be repaid out of the cash flows associated with the 15% ring-fenced interest over a maximum of five years.

In October, following shareholder approval at the General Meeting, net proceeds of around $128.9 million were raised through a rights issue in which the Group received valid acceptances in respect of 95.5% of the total number of new ordinary shares offered pursuant to the rights issue. $100.0 million of the proceeds were used to fund EnQuest's share of the consideration in relation to acquiring the remaining 75% interest in Magnus and additional interests in the Sullom Voe Terminal and associated infrastructure. The balance will be used to fund a two-well infill drilling programme in 2019.

During the year, the Group's improved cash generation and the Kraken financing agreement facilitated the cancellation and repayment of $340.0 million of the Group's credit facility.

At the end of the year, net debt was reduced by 10.9% to $1,774.5 million, with total cash and available facilities of $309.0 million, including ring-fenced accounts associated with Magnus, the Oz Management facility and other joint venture accounts totalling $107.3 million.

Reserves and resources

Net 2P reserves at the end of 2018 were 245 MMboe (2017: 210 MMboe) and have been audited on a consistent basis with prior years. This represents a reserve life of 13 years. The reserve replacement ratio was 184%, driven by the acquisition of an additional 75% equity interest in Magnus. Net 2C resources at the end of 2018 were 198 MMboe (2017: 164 MMboe) and included an additional 40 MMboe of 2C resources associated with the Magnus acquisition.

2019 performance and additional outlook details

At Magnus, performance has remained strong through the first two months of the year. FPSO performance has continued to limit production performance at Kraken. All DC4 wells are now onstream and, as FPSO maintenance activities are completed, production is expected to significantly improve. We continue to expect to deliver gross production of between 30,000 and 35,000 Bopd from Kraken. Elsewhere across the portfolio, aggregate production has been broadly in line with the Group's expectations.

2019 production is expected to grow by around 20% to between 63,000 and 70,000 Boepd, primarily driven by Magnus. Production from DC4 at Kraken, where all three wells are now onstream, and the anticipated improvement in performance at Scolty/Crathes following the installation of the replacement pipeline scheduled for the third quarter of 2019 are expected to offset natural declines elsewhere across the portfolio.

The successful delivery of the capital programme, which includes drilling at Kraken, Magnus and PM8/Seligi combined with project-related expenditures at Scolty/Crathes and Thistle/Deveron and the Dons, will underpin production during 2019 and beyond.

Debt repayment remains the priority for the Group, and will be enabled through its improved cash-generation capability combined with its focus on cost control and capital discipline. In March, the Group reduced its credit facility by $55.0 million to $730.0 million, ahead of the scheduled amortisation due in April, which now has a balance due of $50.0 million. At the end of 2019, the Group expects overall net debt to EBITDA to be approaching 2x, with the Group intending to operate between 1x and 2x in the future.

Summary financial review of 2018

(all figures quoted are in US Dollars and relate to Business performance unless otherwise stated)

Revenue and other operating income for 2018 was $1,201.0 million, 89.1% higher than 2017 ($635.2 million). This increase reflects the material increase in volumes and higher realised prices, partially offset by realised losses of $93.0 million associated with the Group's commodity hedge programme (2017: losses of $20.6 million), which reflected the timing at which the hedges were entered into and the increase in market prices during the first half of 2018 in particular. The Group's blended average realised oil price was $61.2/bbl in 2018, compared to $52.2/bbl during 2017. Excluding this hedging impact, the average realised oil price was $66.2/bbl in 2018, 22.8% higher than 2017 ($53.9/bbl), reflecting higher market prices. Revenue is predominantly derived from crude oil sales which totalled $1,237.6 million, 94.3% higher than 2017 ($637.0 million), reflecting the material increase in volumes and higher realised prices. Revenue from the sale of condensate and gas was $43.1 million (2017: $2.8 million) as a result of increased gas sales from Magnus, which includes the combination of produced gas sales and the onward sale of third-party gas purchases not required for injection activities, for which the costs are included in other cost of sales.

Total cost of sales for 2018 was $926.0 million, 62.6% higher than 2017 ($569.5 million). This included non-cash depletion expense of $437.1 million, 95.9% higher than 2017 ($223.1 million) as a result of increased production, primarily at Kraken and Magnus.

Operating expenditures of $465.9 million were 33.4% higher than 2017 ($349.3 million), reflecting the full year contribution of Kraken and Magnus, partly offset by the benefit of a weaker Sterling exchange rate. The Group's average unit operating cost for 2018 was $23.0/Boe, 10.2% lower than 2017 ($25.6/Boe) primarily as a result of the material increase in production.

Other cost of sales increased by $35.4 million to $48.1 million compared to 2017 ($12.7 million), principally reflecting the cost of additional Magnus related third-party gas purchases not required for injection activities.

Other net income of $19.1 million (2017: net expense of $17.6 million) primarily comprise net foreign exchange gains as a result of revaluing Sterling-denominated amounts on the balance sheet following the weakening of Sterling against the US Dollar.

EBITDA for 2018 was $716.3 million, 135.9% higher than 2017 ($303.6 million) largely as a result of higher production and higher realised prices increasing Group revenues.

The tax credit for 2018 of $20.9 million (2017: $66.0 million tax credit), excluding exceptional items, is due predominantly to the Ring Fence Expenditure Supplement on UK activities.

Post-tax exceptional items for 2018 were a gain of $49.1 million (2017: losses of $27.3 million). The gain in 2018 primarily reflects the non-cash increase in fair value of $74.3 million recognised under step acquisition accounting on the initial interests in the assets acquired from BP in December 2017 following completion of the acquisition of additional interests in these assets in December 2018. Post-tax non-cash impairments of oil and gas assets of $78.7 million were largely offset by post-tax unrealised gains on commodity contracts of $59.9 million.

Net debt at 31 December 2018 was $1,774.5 million, a decrease of 10.9% compared to 2017 ($1,991.4 million) primarily as a result of the improved cash generating capability of the Group and lower cash capital expenditure programme in 2018 of $220.2 million (2017: $367.6 million), principally at Kraken. Excluding Payment in Kind interest ('PIK'), net debt was $1,642.5 million (2017: $1,900.9 million).

UK corporate tax losses at the end of the year were $3,225.3 million (2017: $3,121.3 million).

Ends

For further information please contact:

EnQuest PLC Tel: +44 (0)20 7925 4900

Amjad Bseisu (Chief Executive)

Jonathan Swinney (Chief Financial Officer)

Ian Wood (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 - London time. The presentation and Q&A will also be accessible via an audio webcast, available on the investor relations section of the EnQuest website at www.enquest.com. A conference call facility will also be available at 09:30 on the following numbers:

Conference call details:

UK: +44 (0)800 376 7922 or +44 (0) 844 571 8892

International: +44 (0) 207 192 8000

Confirmation Code: EnQuest

Notes to editors

This announcement has been determined to contain inside information.

ENQUEST

EnQuest is an independent production and development company with operations in the UK North Sea and Malaysia. The Group's strategic vision is to be the operator of choice for maturing and underdeveloped hydrocarbon assets by focusing on operational excellence, differential capability, value enhancement and financial discipline.

EnQuest PLC trades on both the London Stock Exchange and the NASDAQ OMX Stockholm. Its UK operated assets include Thistle/Deveron, Heather/Broom, the Dons area, Magnus, the Greater Kittiwake Area, Scolty/Crathes Alma/Galia and Kraken; EnQuest also has an interest in the non-operated Alba producing oil field. At the end of December 2018, EnQuest had interests in 18 UK production licences and was the operator of 16 of these licences. EnQuest's interests in Malaysia include the PM8/Seligi Production Sharing Contract and the Tanjong Baram Risk Services Contract, both of which the Group operates.

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 announcement should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.

Chairman's statement

EnQuest performance overview

In 2018, EnQuest took a further significant step forward in strengthening the business and adding to its potential. The exercise of the Magnus Option, which received very strong support from our shareholders to acquire the remaining 75% equity interest in Magnus, provided the Group with an immediate and material increase to its 2P reserves, production and cash flow. Magnus performance has been strong since EnQuest assumed operatorship in December 2017 and the application of the Group's differential capabilities saw production increase significantly in late 2018.

While production from Kraken was below our expectations, primarily reflecting FPSO performance and weather-related outages, the strong production performance across the Group elsewhere saw EnQuest meet its production growth target. The Group's improved cash-generating capability and the execution of the Kraken financing agreement enabled the Group to make material repayments on its bank debt. Debt reduction remains a priority for EnQuest.

The Group's net 2P reserves were up approximately 17% after accounting for the increased production in 2018, driven by the additional 75% interest in Magnus. By the end of 2018, EnQuest had a net 2P reserves base of 245 MMboe, which represents average growth of approximately 13% per annum since EnQuest's formation nine years ago and a reserves life of around 13 years.

Industry context

For much of 2018, we saw a steady improvement in the oil price, reflecting a combination of strong growth in global demand coupled with increasing constraints on supply. However, during the fourth quarter, concerns over a weakening demand outlook and expectations of over-supply saw a rapid deterioration in the oil price, which dipped to around $50/bbl in late December. Since then, the price has recovered to within the range of c.$65/bbl and c.$68/bbl. Throughout this period of volatility, we have remained focused on achieving our targets, maintaining and enhancing production while controlling costs and capital expenditure. It is vital we continue to keep this focus through 2019 with ongoing oil price uncertainty.

The Directors believe that the UK Continental Shelf remains an attractive investment proposition. While there may be some disruption to the supply chain from the impacts of the UK's proposed exit from the European Union, the Directors are confident that such issues can be overcome. The industry has worked hard in recent years to reduce its operating and capital costs, facilitating delivery on the UK Government's strategy of Maximising Economic Recovery of the significant hydrocarbons that remain in place. This competitive regulatory structure is further supported by a competitive fiscal regime, an extensive installed infrastructure base, access to a world-leading supply chain and a highly skilled workforce. EnQuest has been successful in replicating its UK operating model in Malaysia, another maturing region with significant hydrocarbons in place, and where the Group has a strong partnership with PETRONAS.

EnQuest's Board

As previously noted in EnQuest's 2017 Annual Report and Accounts, we were extremely pleased to welcome Laurie Fitch to the Board. Laurie joined the Company on 8 January 2018 and became a member of both the Risk and Remuneration Committees. In January 2019, as planned, Laurie succeeded Helmut Langanger as the Chair of the Remuneration Committee. Helmut has chaired the Committee for nine years, developing open and transparent communications with our investors as we have shaped an effective remuneration policy. I would like to take this opportunity to thank Helmut for his valuable leadership over this period. We are pleased he will continue to be a member of the Remuneration Committee to aid Laurie's transition into the role.

As a Board, we remain conscious of the need to have an effective succession plan that ensures the Board has the correct composition of skills and experience to continue its support of the executive management team in executing the Group's strategy. We are therefore very pleased that, subject to shareholder approval at the annual general meeting, Howard Paver will join the Board. Howard is a petroleum engineer by background and has 40 years of oil and gas experience working for Hess, BHP Petroleum, Mobil and Schlumberger in various senior leadership positions. His significant knowledge in production and development, as well as experience of managing complex assets in various parts of the globe, will bring technical and commercial skills to the Board. This is of particular relevance as Helmut Langanger, who has over 40 years of industry experience, will be rotating off the Board in due course.

In 2019, both Helmut and I will have served as Directors of the Company for nine years. With the completion of the Magnus option and following on from the Company's financial restructuring in late 2016, the Company is positioned to pursue its strategic goals and, as is now appropriate, Helmut, as Senior Independent Director, is leading a process to identify a candidate to replace me as Chairman and take the Company forward to the next phase of its development. It is envisaged that after my succession process has completed, Helmut will retire from the Board.

EnQuest's people

In 2018, the Group was focused on meeting its operational and financial targets and maintaining cost and capital discipline in a volatile macro environment. The capital raise, via a rights issue, to facilitate the strategically important acquisition of additional interests in Magnus, the Sullom Voe Terminal and associated infrastructure from BP, and the financing associated with Kraken, all required significant amounts of the Board's and management's time and attention. Additionally, achieving all of these objectives has only ultimately been possible due to EnQuest's people. The Board and I would like to express our gratitude to everyone, both new and old, at EnQuest for their drive, commitment and professionalism in delivering Safe Results, meeting our targets and completing the acquisition of assets from BP to give the Company an even stronger base upon which to build for the future.

Following the results of our culture survey in 2017, the Group's Values were refreshed through a series of group-wide focus groups and workshops. This process has ensured that our Values embody everything the Company stands for and align with the aspirations of our people, acting as a guide in the pursuit of EnQuest's strategy. Through 2019, the refreshed Values will be incorporated into a number of the Group's processes, including those in Human Resources and Health, Safety, Environment and Assurance.

In early 2019, the Board approved the establishment of an Employee Forum to improve engagement and interaction between the workforce and the Board. This supplements the Group's existing employee engagement activities and is in line with the revised Corporate Governance Code published in July 2018.

Strategy and governance

The Directors provide strategic guidance and challenge to executive management and take key decisions on the implementation of the Group's strategy. EnQuest's governance framework also contains several non-Board Committees, which provide advice and support to the Chief Executive, including an Executive Committee, Investment Committee and HSE&A Committee.

The Group welcomes the drive for increased governance and transparency in general, and specifically in relation to climate change. The Board recognises the increasing societal, media and investor focus on climate change and the desire to understand its potential impacts on the oil and gas industry through improved disclosure, utilising mechanisms such as those proposed by the Task Force on Climate-related Financial Disclosures. Through the Risk and Audit Committees, the Board has continued to review the potential risk of climate change on the effective execution of the Group's strategy and has concluded that, on a standalone basis, climate change is not a principal risk but one factor amongst others influencing our assessment of the Group's principal risks, the details of which can be found on pages 20 to 28. The Risk Committee will continue to undertake detailed analyses of specific risk areas to ensure that the potential effects of climate change continue to be identified, considered and assessed appropriately within the Group's Risk Management Framework. Further, the Board, in particular through the work of the Risk Committee, has been active in supporting the continued evolution of the Group's Risk Management Framework to

enhance effective risk management within the Board-approved risk appetite of the Company. Through this process, the Risk Committee reviewed all risk areas faced by the Group and identified the causes of risk and their associated impacts and mapped these to the preventative and containment controls used to manage such risks to acceptable levels.

Ensuring that the Board works effectively remains a key focus of the Company. During the year, an external evaluation of the Board was held which recognised the improvements made in the Group's governance since the last external evaluation in 2016. It also identified additional areas for consideration to drive continuous improvement in this area. The most important area discussed related to Board succession planning, which I have already outlined. The Board is committed to delivering the highest standards of corporate governance. Activities are already under way in relation to the changes to the Corporate Governance Code announced in July 2018 and the Board is actively engaged in the implementation of the necessary processes and procedures that will enable continued compliance.

The Board believes that the manner in which the Group conducts its business is important. In the execution of our strategy, we are committed to working responsibly for the benefit of all our stakeholders. The Board has approved the Company's overall approach to corporate responsibility, which is focused on five main areas. These are: Health and Safety; People; Environment; Business Conduct; and Community. The Board receives regular information on the performance of the Company in these areas, and specifically monitors health, safety and environmental reporting at each Board meeting. The Company's Health, Safety, Environment & Assurance ('HSE&A') Policy is reviewed by the Board annually and all incidents, forward-looking indicators and significant HSE&A programmes are discussed by the Board. Specific developments and updates in all areas are brought to the Board's attention when appropriate. Having undertaken a detailed review of the Group's HSE&A processes, the Risk Committee recommended the addition of HSE&A oversight and review within its scope of work to supplement and assist the Board in reviewing such matters.

The Group has a Code of Conduct that it requires all personnel to be familiar with as it sets out the behaviour which the organisation expects of its Directors, managers and employees, as well as suppliers, contractors, agents and partners.

Dividend

The Company has not declared or paid any dividends since incorporation and does not plan to pay dividends in the immediate future. However, the Board anticipates reviewing the policy when appropriate, the timing of which will be subject to the oil price environment, the capital structure of the Company and its expected future cash flows.

2019: continued focus on delivery and debt reduction

We have made significant progress in 2018, meeting our targets and making substantial repayments of our bank debt. The acquisition of Magnus diversifies our production portfolio and, along with Kraken and PM8/Seligi, provides the Group with material future production opportunities. In 2019, we must continue to focus on delivering on our targets to facilitate the effective management of our liquidity position and capital structure. With the oil price environment remaining volatile, we recognise that we must maintain our focus on financial discipline, cost efficiencies and managing Group liquidity. We will continue to prioritise our resources to those projects which maximise cash flow to facilitate debt reduction, continuing the Company's progress towards a more sustainable balance sheet which will enable the long-term growth of the business.

Chief Executive's report

Overview

During 2018, the Group was focused on meeting its financial and operational targets and facilitating debt reduction. The successful acquisition of Magnus, the Sullom Voe Terminal and related infrastructure assets from BP was a great testament to our people's focus on delivery and excellent team collaboration. The Group's collective efforts delivered a set of assets with a strong strategic fit into the portfolio. EnQuest's cash-generation capability has improved through the acquisition of Magnus in particular and we are well positioned to meet our debt repayment schedule and capital programme in 2019 and beyond.

Operational performance

EnQuest's average production increased by 48.2% to 55,447 Boepd, above the mid-point of the Group's guidance. The increase reflected the contributions from Kraken and Magnus, along with a better than expected performance at Heather, Alma/Galia and Scolty/Crathes, partially offset by natural declines.

Following strong shareholder support for the rights issue undertaken in October, EnQuest completed the acquisition of additional interests in Magnus, the Sullom Voe Terminal and related infrastructure in December. The additional interest in Magnus and the success of plant debottlenecking and well intervention work drove a substantial and better than expected increase in production.

The acquisition of Magnus also drove a material increase in net 2P reserves to 245 MMboe at the end of 2018, up 17% on the 210 MMboe at the end of 2017, and was a key component in the Group achieving a reserves replacement ratio of 184%. While production at Kraken has been below expectations, with FPSO performance the main limiting factor, the Group's reserves position for Kraken remains materially unchanged. Since the Company was formed with around 81 MMboe of 2P reserves, the Group has achieved a compound average reserves growth of 13%, with remaining 2P reserves representing a current production life of around 13 years.

Financial performance

The combination of increased production and higher realised prices drove an improved financial performance in 2018. Both EBITDA and cash generated by operations more than doubled, to $716.3 million and $788.6 million respectively. The Group's ongoing focus on cost control kept operating expenditure to $465.9 million, with unit operating costs reduced to around $23.0/Boe. Capital expenditure was also significantly lower year on year, down $147.4 million to $220.2 million, primarily driven by the reduced programme at Kraken.

EnQuest reviewed a number of potential opportunities to realise value from the Kraken asset. Having reviewed the various options available to the Group, the Board approved the financing arrangement for $175 million, ring-fenced on a 15% interest in the Kraken oil field, with funds managed by Oz Management, as the preferred economic option at the time. We continue to keep a future potential equity farm-down at Kraken under review.

The combination of this financing agreement and strong underlying business performance facilitated accelerated repayments of the Group's credit facility, which reduced by $340.0 million, from $1,125.0 million to $785.0 million, excluding the revolving credit facility. The Group ended the year with net debt of $1,774.5 million, down from $1,991.4 million at the end of 2017 and further debt reduction remains a near-term priority for the Group.

Health, Safety, Environment and Assurance ('HSE&A')

As always, Safe Results is our number one priority and we have had excellent results in many areas, meeting the majority of our performance targets. In Malaysia, we again had zero lost-time incidents ('LTI'), with PM8/Seligi achieving eight years LTI free, and we reduced the number of hydrocarbon release events. This strong performance came against a backdrop of high activity levels offshore. In the UK North Sea, our colleagues on the Kittiwake platform recorded their 13th year without an LTI with many of our other assets also delivering an LTI-free year. However, we saw an increase in the number of hydrocarbon release events and had a high-potential dropped-object incident on Magnus associated with lifting operations. These serve to highlight that we must remain focused on safety at all times and aim for continuous improvement in all that we do.

The main sources of atmospheric emissions from EnQuest assets are derived from combustion plant associated with power generation and flaring. As such, while overall extraction emissions increased in 2018, largely as a result of the addition of Magnus to our portfolio, our improved production performance drove our extraction-related greenhouse gas emissions intensity ratio lower by 17.6%. In Malaysia, the team's focus on minimising emissions resulted in flaring at PM8/Seligi being maintained at around 35% below the annual flare consent from the regulator.

While hydrocarbons are expected to remain a key element of the UK and global energy mix, the Group recognises that it must endeavour to minimise carbon emissions from its operations as far as practicable as it seeks to enhance hydrocarbon recovery and extend the useful lives of mature and underdeveloped assets and associated infrastructure in a profitable and responsible manner. Our strategy of acquiring assets and extending their economic life facilitates the industry's move from long-term, 'full-cycle' expenditure to lower-carbon energy supply sources while helping to fulfil energy demand requirements during this transition period.

UK North Sea operations

Production from the UK North Sea was materially higher in 2018 than in 2017. This increase was driven by a combination of additional production from Kraken and Magnus and the successful execution of our planned work programmes.

At Magnus, the team successfully undertook plant de-bottlenecking and water injection system improvements. Two new wells were drilled and brought online, with further production improvements driven by successful well intervention activities. Following our two-well drilling campaign in 2018, a further two-well programme will commence in 2019, along with additional intervention and plant improvement activities. Future material infill drilling opportunities continue to be refined and assessed to maximise recovery from the significant remaining resources in place.

Further drilling successes were achieved at Heather, Thistle and Alma/Galia. The H-67 well at Heather delivered above the Group's pre-drill expectations and the Group began its well abandonment campaign at Heather in December following the successful execution of six well abandonments at Thistle. The replacement of three Electric Submersible Pumps at Alma/Galia resulted in production restoration in line with the Group's plans.

At both Alma/Galia and Scolty/Crathes, production was better than expected as a result of improved production efficiency and the successful management of wax deposition, respectively. The successful production optimisation strategy at Scolty/Crathes has resulted in the project achieving payback just over two years after start-up, despite the wax deposition challenges meaning only the Crathes reservoir has delivered production and revenues.

During the year, we sanctioned the Scolty/Crathes pipeline replacement project, to remedy the wax deposition-related production restrictions, and the Dunlin bypass, which will see volumes from Thistle and the Dons exported via the Magnus facility and Ninian Pipeline System to the Sullom Voe Terminal. Both projects help underpin longer-term production from these assets. Elsewhere, the Group continues to assess development options for the Eagle Discovery and at Dons North East.

Production at Kraken was below expectations, reflecting a number of FPSO and weather-related outages throughout the year. Our clear operational priority in 2019 is to improve FPSO uptime and efficiency. We are working with the FPSO operator on a number of improvement initiatives to maximise facility uptime to enable stable production. Reservoir performance has been strong and remains broadly in line with the Group's expectations. We have seen excellent communication between producer and injector wells and our improving management of reservoir voidage following repairs to the water injection system also supported reservoir deliverability.

The delayed arrival of the drilling rig at Drill Centre 4 ('DC4') resulted in drilling commencing later than planned with first production from the wells being rephased accordingly. Drilling at DC4 is nearing completion, with the first two of three wells now onstream. We continue to assess future opportunities at Kraken that have material volumes of oil in place for future development, such as the Western Flank.

At the Sullom Voe Terminal, the Group reduced terminal operating costs by around 25%, to approximately GBP150.0 million, through the implementation of a number of efficiency initiatives. We also assisted in three ship-to-ship transfers of oil in the Port of Sullom Voe, and the Group continues to explore opportunities to maximise the long-term value of the terminal.

Malaysia operations

Production in 2018 was slightly lower than in 2017, primarily reflecting natural decline at Tanjong Baram. Our focus on asset integrity, which included underwater structural integrity assessments and gas compressor rejuvenation, helped drive continued high levels of production efficiency at PM8/Seligi. The regulator recognised the Group's efforts with an award for the 'Highest Improvement' in relation to offshore self-regulation. Our programme of well interventions continues to be successful in arresting the field's decline, and we successfully concluded EnQuest's first ever drilling campaign at PM8/Seligi, with aggregate production from the two new wells in line with expectations.

EnQuest will continue its asset life extension activities in 2019 through further investment in two new wells, idle well restoration and facility improvements and upgrades. Technical studies to support future development drilling and secondary recovery projects to increase ultimate recovery from the material volumes in place in PM8/Seligi are also under way.

2019 performance and outlook

Following effective reservoir management and well intervention work at Magnus, performance has remained strong through the first two months of the year. FPSO performance has continued to limit production performance at Kraken. All DC4 wells are now onstream and, as FPSO maintenance activities are completed, production is expected to significantly improve. We continue to expect to deliver gross production of between 30,000 and 35,000 Bopd from Kraken. Elsewhere across the portfolio, aggregate production has been broadly in line with the Group's expectations.

2019 production is expected to grow by around 20% to between 63,000 and 70,000 Boepd, primarily driven by Magnus. Production from DC4 at Kraken, where all three wells are now onstream, and the anticipated improvement in performance at Scolty/Crathes following the installation of the replacement pipeline scheduled for the third quarter of 2019 are expected to offset natural declines elsewhere across the portfolio.

The successful delivery of the capital programme, which includes drilling at Kraken, Magnus and PM8/Seligi combined with project-related expenditures at Scolty/Crathes and Thistle/Deveron and the Dons, will underpin production during 2019 and beyond.

Debt repayment remains the priority for the Group, and will be enabled through its improved cash-generation capability combined with our focus on cost control and capital discipline. In March, the Group reduced its credit facility by $55.0 million to $730.0 million, ahead of the scheduled amortisation due in April, which now has a balance due of $50.0 million. At the end of 2019, the Group expects overall net debt to EBITDA to be approaching 2x, with the Group intending to operate between 1x and 2x in the future.

Longer-term development

In the near term, we remain focused on delivering on our plans to reduce our debt. We also have the opportunity for material growth where our portfolio has significant potential for near-field, short-cycle development, particularly at Magnus, PM8/Seligi and Kraken.

After we have reduced our debt to sustainable levels, and dependent on price conditions and company performance, our capital allocation will balance investment to develop our asset base, returns to shareholders and the acquisition of suitable growth opportunities. The application of our proven capabilities in enhancing hydrocarbon recovery from mature and underdeveloped assets means we are well placed to pursue long-term sustainable growth.

Operating review

Northern North Sea operations

Daily average net production:

   --      2018: 19,293 Boepd1 
   --      2017: 15,627 Boepd2 

Notes:

1 Includes net production related to 25% interest in Magnus until 30 November 2018 and 100% interest of Magnus from 1 December 2018, averaged over the 12 months to the end of December 2018

2 Includes net production from the initial 25% interest in Magnus since the acquisition on 1 December 2017, averaged over the 12 months to the end of December 2017

2018 performance summary

Production in 2018 of 19,293 Boepd was 23.5% higher than in 2017, primarily reflecting a full year's contribution from Magnus and better than expected performance from the H-67 well at Heather, which came online in March, partially offset by natural declines across the area. Good production and water injection efficiency performance was achieved at Heather/Broom, Thistle and the Dons, with production efficiency at each of these fields above 80%.

Magnus performance has been strong throughout 2018, also achieving production efficiency above 80%. Successful plant de-bottlenecking, completion of the planned maintenance shutdown and additional production following the two well drilling campaign were complemented by successful well intervention activities. Water injection performance has been strong, with high levels of uptime throughout the year, reflecting the Group's analysis of historical power generation reliability and a focus on alleviating downtime issues.

EnQuest continued to pursue a series of partner-funded idle well reservoir abandonments as part of the Group's asset life extension strategy, improving asset integrity and reducing longer-term decommissioning costs. At Thistle, six well abandonments were successfully concluded ahead of schedule and at a lower cost than budgeted, with the team subsequently mobilised to Heather to undertake abandonment work on two wells. In June, the Dunlin bypass export project was sanctioned which, once completed, will see volumes from Thistle and the Dons exported via the Magnus facility and Ninian Pipeline System to the Sullom Voe Terminal.

At the Sullom Voe Terminal, the Group made excellent progress in the optimisation of its planned work programme and identified and implemented a number of cost-saving initiatives. The Group was successful in reducing terminal operating costs by around 25% to approximately GBP150.0 million through focused supply chain management, efficient project delivery and simplifying and improving utilisation of the resources on site. These savings were achieved while delivering a strong safety performance and high levels of site availability. In line with the Group's aim to maximise the long-term value of the terminal, the Group has worked with the Shetland Islands Council and other stakeholders to deliver three ship-to-ship transfers of crude oil at the terminal.

2019 performance and outlook

Strong production performance at Magnus has continued, with aggregate production elsewhere broadly in line with the Group's plans.

At Magnus, the Group is focused on maintaining and improving production through a combination of drilling two new wells, further well intervention activity and increases in the facility's water injection capacity by returning to service the second of two deaeration towers on the asset and improving pump operations. EnQuest will continue to optimise the volumes and placement of both injected water and gas to maintain production. A three-week shutdown is planned for the second quarter.

The planned two-week maintenance shutdowns at Thistle and the Dons are expected to take place in the summer and have been coordinated with the operator of the existing third-party export route and the timing of the installation of the Dunlin bypass pipeline to minimise downtime during the pipeline's commissioning phase. Drilling of the Dons North East prospect continues to be evaluated.

At Heather/Broom, further well abandonments are expected to be executed during the year along with a scheduled three-week shutdown in the third quarter. Further well intervention and drilling opportunities are being developed.

Central North Sea operations

Daily average net production:

   --      2018: 6,353 Boepd 
   --      2017: 8,131 Boepd 

2018 performance summary

Production in 2018 of 6,353 Boepd was 21.9% lower than in 2017. The reduction was primarily driven by the expected performance at both Scolty/Crathes and Alma/Galia, although production at both assets was slightly better than anticipated with production efficiency at both fields above 80%.

At Alma/Galia, three failed Electric Submersible Pumps ('ESP') were successfully replaced during the third quarter, restoring aggregate production in line with plans. Production and water injection efficiency were strong, although partially offset by the end of production from the Galia reservoir following the cessation of the originally installed ESP.

Good management of wax deposition at Scolty/Crathes drove a better than expected performance and the installation of the new pipeline was sanctioned in June. Wax restrictions on production will continue to be managed until the pipeline is operational.

Aggregate production from Kittiwake and Alba was slightly ahead of expectations. Anticipated natural declines were partially mitigated by better than expected production and water injection efficiency. The team at Kittiwake delivered production efficiency of around 80% while also achieving another strong HSE&A performance, reaching 13 years without a lost-time incident.

2019 performance and outlook

Performance to the end of February has been broadly in line with the Group's expectations.

The Scolty/Crathes pipeline is expected to be installed during the third quarter. To facilitate annual maintenance and the required pipeline installation and commissioning activities, a shutdown of approximately six weeks has been planned. Once complete, production levels at Scolty/Crathes are expected to improve significantly. At Kittiwake, production optimisation activities and development options for the Eagle discovery continue to be evaluated. Following an extensive asset integrity campaign across the Greater Kittiwake Area in 2018, a short shutdown is planned during the third quarter.

With Alma/Galia expected to cease production early in the next decade, the focus is on production optimisation and cost control, with preparatory decommissioning plans now under way. A two-week scheduled shutdown is planned for the second quarter.

The Kraken development

Daily average net production:

   --      2018: 21,369 Bopd 
   --      2017: 4,709 Bopd(1) 

Note:

1 Net production since first oil on 23 June, averaged over the 12 months to the end of December 2017

2018 performance summary

Average gross production for 2018 was below expectations. Throughout 2018, production was limited by a number of FPSO system and weather-related outages which required additional maintenance activities to resolve. Following repairs to the water injection system, injection rates were significantly increased to manage reservoir voidage, which in turn supported improved reservoir deliverability. Reservoir performance remains on track with well testing and reservoir modelling showing excellent communication between producer and injector wells. Net lease charter payment credits arising from the non-availability of the Kraken FPSO in 2018 were approximately $45 million, which partially mitigated the loss of revenue associated with lower production performance.

At DC4, the subsea infrastructure was installed in line with plans. Drilling commenced in November after the delayed arrival of the Transocean Leader drilling rig, with first production from the wells being rephased to the end of the first quarter 2019. As a result of improved reservoir understanding, the Group gained approval for developing DC4 with three wells instead of the four originally planned, saving approximately $23 million with no material impact on oil production rates or recovery anticipated.

2019 performance and outlook

FPSO performance has continued to limit production performance at Kraken. All DC4 wells are now onstream and performing in line with expectations. As FPSO maintenance activities are completed, production is expected to significantly improve. We continue to expect to deliver gross production of between 30,000 and 35,000 Bopd from Kraken.

A three-week maintenance shutdown is scheduled for the third quarter.

The Group continues to pursue opportunities for production optimisation through improving facility uptime and reservoir management activities, including well tests, water injection and reservoir voidage. Assessment of additional near-field, low-cost drilling opportunities within the existing producing reservoir and the Western Flank, which combined contain around 115 MMbbls of stock tank oil initially in place, is ongoing.

Malaysia operations

Daily average net production:

   --      2018: 8,432 Boepd(1) 
   --      2017: 8,938 Boepd(1) 

Note

(1) Working interest. 2018 entitlement: 5,631 Boepd; 2017 entitlement: 5,884 Boepd

2018 performance summary

Production in 2018 of 8,432 Boepd was 5.7% lower than in 2017, primarily reflecting natural decline at Tanjong Baram. Production efficiency has remained high at PM8/Seligi, with the planned shutdown activities in September and October successfully concluded ahead of budget and schedule. During the year, the Group undertook a significant low-cost idle well intervention programme at PM8/Seligi. In total, 12 idle wells were returned to service ahead of schedule and below budget, delivering production improvements above the Group's plans. Such programmes have been fundamental to arresting natural declines at the field since EnQuest took on operatorship. The Group also drilled its first new wells in the field, with aggregate production broadly in line with the Group's expectations. Asset integrity activities included underwater structural inspections for a number of assets, gas compressor rejuvenation and improving satellite facility monsoon reliability performance through the upgrade of control and shutdown systems. The installation of multi-phase flow meters at PM8/Seligi platforms B, E and Raya-A and remote well monitoring and testing at the satellite facilities will facilitate improved well optimisation. The team received an award for the 'Highest Improvement' in relation to offshore self-regulation, reflecting the Group's focus on safety and continuous improvement.

At Tanjong Baram, the focus remained on steady, safe and low-cost operations. Third-party export facility outages limited production efficiency and uptime throughout the year.

2019 performance and outlook

Aggregate production from PM8/Seligi and Tanjong Baram has been in line with the Group's expectations for the first two months of 2019, with the Group receiving an award for meeting domestic demand fluctuations for natural gas.

At PM8/Seligi, a two-well drilling campaign is expected to be executed in the third quarter of 2019, with first production from both wells around the end of the quarter. Further subsurface studies will be completed to enable the Group to continue to develop and optimise its future drilling opportunities to further increase recovery from the significant hydrocarbons in place, targeting an increase in production over time.

Further idle well intervention activities are planned throughout the year, with the Group planning to return to service around ten wells in order to mitigate natural decline in the reservoir.

2019 will also benefit from asset rejuvenation activity, including idle piping isolation, pipework maintenance, glycol dehydration unit rejuvenation and a compressor turbine control panel upgrade. A minimal shutdown is planned this year and is aligned with the third-party operated oil export pipeline and terminal maintenance activities to minimise downtime.

Longer term, EnQuest will extend field life through further investment in idle well restoration, facility improvements and upgrades and technical studies supporting development drilling and secondary recovery projects to increase ultimate recovery.

At Tanjong Baram, the focus is on maintaining safe operations, with production expected to continue to decline.

Financial review

Financial overview

All figures quoted are in US Dollars and relate to Business performance unless otherwise stated.

The Group made significant progress in 2018, meeting our targets, maintaining financial discipline and making substantial repayments of our bank debt. Significant time and attention were devoted to completing the acquisition of assets from BP and executing the financing agreement for a 15% share of Kraken, which have strengthened the balance sheet and enhanced liquidity.

Production on a working interest basis increased by 48.2% to 55,447 Boepd, compared to 37,405 Boepd in 2017. The full year's contribution from Magnus, including the post-acquisition impact of an additional 75% equity interest in December, increased volumes at Kraken and the strong performance at Heather were partially offset by anticipated lower production at Alma/Galia and Scolty/Crathes, along with natural declines across the portfolio.

Revenue for 2018 was $1,201.0 million, 89.1% higher than in 2017 ($635.2 million) reflecting the material increase in volumes and higher realised prices. The Group's commodity hedge programme resulted in realised losses of $93.0 million in 2018 (2017: losses of $20.6 million) as a result of the timing at which the hedges were entered into and the increase in market prices during the first half of 2018 in particular.

The Group's operating expenditures of $465.9 million were 33.4% higher than in 2017 ($349.3 million) reflecting the full year contribution of the Kraken and Magnus assets. Unit operating costs decreased by 10.2% to $23.0/Boe (2017: $25.6/Boe) as a result of increased production.

EBITDA for 2018 was $716.3 million, up 135.9% compared to 2017 ($303.6 million), primarily as a result of increased revenue.

 
 
                                    2018         2017 
                               $ million    $ million 
---------------------------  -----------  ----------- 
Profit from operations 
 before tax and finance 
 income/(costs)                    290.0         47.3 
---------------------------  -----------  ----------- 
Depletion and depreciation         442.4        227.6 
---------------------------  -----------  ----------- 
Inventory revaluation                5.8            - 
---------------------------  -----------  ----------- 
Net foreign exchange 
 (gain)/loss                      (21.9)         23.9 
---------------------------  -----------  ----------- 
Realised (gain)/loss 
 on FX derivatives related 
 to capital expenditure1               -          4.8 
---------------------------  -----------  ----------- 
EBITDA                             716.3        303.6 
---------------------------  -----------  ----------- 
 

Note:

1 Realised (gain)/loss on FX derivatives is recorded within cost of sales. Where the derivative hedges capital expenditure, the (gain)/loss is added back when calculating EBITDA in order to reflect the underlying result of operating activities.

EnQuest's net debt decreased by $216.9 million to $1,774.5 million at 31 December 2018 (31 December 2017: $1,991.4 million). This includes $132.0 million of interest that has been capitalised to the principal of the facilities pursuant to the terms of the Group's November 2016 refinancing ('Payable in Kind' or 'PIK') (31 December 2017: $90.5 million) (see note 19 for further details). Excluding PIK capitalised in 2018, net debt reduced by $258.4 million.

 
                                  Net debt/(cash) 
                              ------------------------ 
                              31 December  31 December 
                                     2018         2017 
                                $ million    $ million 
----------------------------  -----------  ----------- 
Bonds(1)                            965.1        944.9 
----------------------------  -----------  ----------- 
Multi-currency revolving 
 credit facility(2) ('RCF')         799.4      1,100.0 
----------------------------  -----------  ----------- 
Oz Management facility              178.5            - 
----------------------------  -----------  ----------- 
Tanjong Baram Project 
 Finance Facility                    31.7          8.5 
----------------------------  -----------  ----------- 
Mercuria Prepayment 
 Facility                            22.2         75.5 
----------------------------  -----------  ----------- 
SVT Working Capital 
 Facility                            15.7         25.6 
----------------------------  -----------  ----------- 
Other loans                           2.5         10.0 
----------------------------  -----------  ----------- 
Cash and cash equivalents         (240.6)      (173.1) 
----------------------------  -----------  ----------- 
Net debt                          1,774.5      1,991.4 
----------------------------  -----------  ----------- 
 

Notes:

1 Stated excluding accrued interest and accounting adjustment on adoption of IFRS 9 Financial Instruments of $33.4 million, and excluding the net-off of unamortised fees. Includes $117.5 million of PIK (2017: $85.7 million)

2 Stated excluding accrued interest and excluding the net-off of unamortised fees. Includes $14.4 million of PIK (2017: $4.8 million)

During the year, the Group's improved cash generation and the Kraken financing agreement facilitated cancellation and repayment of $340.0 million of the RCF, more than the scheduled amortisation requirement. In March 2019, EnQuest repaid an additional $55.0 million early with further scheduled amortisation reductions under the facility due in April 2019 ($50.0 million) and October 2019 ($100.0 million).

As at 31 December 2018, total cash and available facilities totalled $309.0 million, including ring-fenced accounts associated with Magnus, the Oz Management facility and other joint venture accounts totalling $107.3 million (2017: $270.9 million including ring-fenced accounts associated with Magnus and other joint venture accounts totalling $71.9 million). Undrawn available facilities amounted to $68.4 million at the end of 2018 (2017: $97.8 million).

UK corporate tax losses at the end of the year remained broadly in line with 2017 at $3,225.3 million (2017: $3,121.3 million). The Group generated taxable profits as production from Kraken increased and completed the acquisition of 75% of the Magnus field and associated infrastructure. Both utilised existing tax losses, which were largely offset by additional Ring Fence Expenditure Supplement ('RFES') generated in the period.

In the current environment, no significant corporation tax or supplementary corporation tax is expected to be paid on UK operational activities for the foreseeable future. During 2018, cash tax has been paid on the profits generated from Magnus and associated infrastructure assets prior to the completion of the acquisition of the additional interests. As part of this transaction, the assets were transferred to EnQuest Heather Ltd from EnQuest NNS Ltd, which allows profits generated by these assets to be offset against tax losses. Post-transfer, no taxes are expected to be payable in respect of these assets for the foreseeable future. The Group also paid cash corporate income tax on the Malaysian assets which will continue throughout the life of the Production Sharing Contract.

Income statement

Production and revenue

Production on a working interest basis increased by 48.2% to 55,447 Boepd, compared to 37,405 Boepd in 2017. The full year's contribution from Magnus, including the post-acquisition impact of an additional 75% equity interest in December, increased volumes at Kraken and the strong performance at Heather were partially offset by anticipated lower production at Alma/Galia and Scolty/Crathes, along with natural declines across the portfolio.

On average, market prices for crude oil in 2018 were higher than in 2017. The Group's blended average realised oil price excluding the impact of hedging was $66.2/bbl, 22.8% higher than in 2017 ($53.9/bbl). Revenue is predominantly derived from crude oil sales which totalled $1,237.6 million, 94.3% higher than in 2017 ($637.0 million), reflecting the material increase in volumes and higher realised prices. Revenue from the sale of condensate and gas was $43.1 million (2017: $2.8 million) as a result of sales of gas from Magnus, which includes the combination of produced gas sales and the onward sale of third-party gas purchases not required for injection activities, for which the costs are included in other cost of sales. Tariffs and other income generated $13.4 million (2017: $16.0 million). The Group's commodity hedges and other oil derivatives generated $93.0 million of realised losses (2017: $20.6 million), including losses of $17.2 million of non-cash amortisation of option premiums (2017: losses of $10.4 million) as a result of the timing at which the hedges were entered into and the increase in market prices during the first half of 2018 in particular. The Group's blended average realised oil price including the impact of hedging was $61.2/bbl in 2018, 17.2% higher than 2017 ($52.2/bbl).

Cost of sales

 
 
                                      2018         2017 
                                 $ million    $ million 
-----------------------------  -----------  ----------- 
Production costs                     396.9        287.1 
-----------------------------  -----------  ----------- 
Tariff and transportation 
 expenses                             68.4         62.2 
-----------------------------  -----------  ----------- 
Realised (gain)/loss 
 on FX derivatives related 
 to operating costs                    0.6            - 
-----------------------------  -----------  ----------- 
Operating costs                      465.9        349.3 
-----------------------------  -----------  ----------- 
Realised (gain)/loss 
 on FX derivatives related 
 to capital expenditure                  -          4.8 
-----------------------------  -----------  ----------- 
(Credit)/charge relating 
 to the Group's lifting 
 position and inventory             (25.1)       (20.4) 
-----------------------------  -----------  ----------- 
Depletion of oil and 
 gas assets                          437.1        223.1 
-----------------------------  -----------  ----------- 
Other cost of sales                   48.1         12.7 
-----------------------------  -----------  ----------- 
Cost of sales                        926.0        569.5 
-----------------------------  -----------  ----------- 
Operating cost per barrel(1)         $/Boe        $/Boe 
-----------------------------  -----------  ----------- 
- Production costs                    19.6         21.0 
-----------------------------  -----------  ----------- 
- Tariff and transportation 
 expenses                              3.4          4.6 
-----------------------------  -----------  ----------- 
                                      23.0         25.6 
-----------------------------  -----------  ----------- 
 

Note:

   1   Calculated on a working interest basis. 

Cost of sales were $926.0 million for the year ended 31 December 2018, 62.6% higher than in 2017 ($569.5 million). Operating costs increased by $116.6 million, reflecting the full year contribution of Kraken and Magnus partly offset by the benefit of a weaker Sterling exchange rate. The Group's average unit operating cost decreased by 10.2% to $23.0/Boe as a result of increased production.

Depletion expense of $437.1 million was 95.9% higher than in 2017 ($223.1 million), mainly reflecting the contribution from Kraken and Magnus in 2018. Other cost of sales of $48.1 million were higher than in 2017 ($12.7 million), principally reflecting the cost of additional Magnus related third-party gas purchases not required for injection activities.

General and administrative expenses

General and administrative expenses were $4.0 million (2017: $0.8 million), reflecting the Group's personnel and property costs.

Other income and expenses

Net other income of $19.1 million (2017: net other expenses of $17.6 million) primarily comprises net foreign exchange gains, which relate to the revaluation of Sterling-denominated amounts in the balance sheet following the weakening of Sterling against the Dollar. The prior year expense comprised net foreign exchange losses, offset by one-off general and administration recovery impacts.

Finance costs

Finance costs of $236.1 million were 58.5% higher than in 2017 ($149.0 million). The increase was primarily driven by a $40.8 million reduction in capitalised interest as a result of the Kraken project coming onstream in 2017 (2018: $1.5 million; 2017: $42.3 million), an additional $24.5 million in finance lease interest (2018: $55.8 million; 2017: $31.3 million), $19.7 million additional bond and loan interest charges (2018: $157.7 million; 2017: $137.9 million) and an additional $0.5 million relating to the unwinding of discount on provisions and liabilities, largely in respect of decommissioning (2018: $14.0 million; 2017: $13.5 million). Other finance costs included $8.5 million amortisation of arrangement fees for financing facilities and bonds (2017: $2.8 million) and other financial expenses of $1.7 million (2017: $5.9 million), primarily the cost for surety bonds principally to provide security for decommissioning liabilities.

Finance income

Finance income of $3.4 million (2017: $2.2 million) includes $1.8 million of bank interest receivable (2017: $0.4 million) and $1.5 million from the unwind of the discount on financial assets (2017: $1.8 million).

Taxation

The tax credit for 2018 of $20.9 million (2017: $66.0 million tax credit), excluding exceptional items, is mainly due to the RFES on UK activities.

Earnings per share

The Group's Business performance basic profit per share was 6.4 cents (2017: loss per share of 2.5 cents, restated for bonus element of rights issue) and Business performance diluted profit per share was 6.2 cents (2017: loss per share of 2.5 cents, restated for bonus element of rights issue).

Remeasurement and exceptional items

Revenue included unrealised gains of $97.4 million in respect of the mark to market movement on the Group's commodity contracts (2017: unrealised loss of $7.7 million).

Non-cash impairment charge on the Group's oil and gas assets arising from changes in assumptions combined with change in production profiles in the North Sea totalled $126.0 million (2017: $172.0 million).

Other income and expense included a $1.3 million loss on fair value in relation to the revaluation of the option to purchase the remaining 75% of Magnus and other interests and the fair value uplift of the initial acquisition assets on the accounting step acquisition of $74.3 million. It also includes the reversal of a contingent provision of $5.3 million.

A tax credit of $12.4 million (2017: credit of $117.0 million) has been presented as exceptional, representing the tax impact of the above items.

Earnings per share

The Group's reported basic profit per share was 10.4 cents (2017: loss per share of 4.6 cents, restated for bonus element of rights issue) and reported diluted profit per share was 10.1 cents (2017: loss per share of 4.6 cents, restated for bonus element of rights issue).

Cash flow and liquidity

Net debt at 31 December 2018 amounted to $1,774.5 million, including PIK of $132.0 million, compared with net debt of $1,991.4 million at 31 December 2017, including PIK of $90.5 million. The Group has remained in compliance with financial covenants under its debt facilities throughout the year. The movement in net debt was as follows:

 
                                   $ million 
---------------------------------  --------- 
Net debt 1 January 2018            (1,991.4) 
---------------------------------  --------- 
Operating cash flows                   794.4 
---------------------------------  --------- 
Cash capital expenditure             (220.2) 
---------------------------------  --------- 
Finance lease payments               (144.8) 
---------------------------------  --------- 
Net cash proceeds from rights 
 issue                                 128.9 
---------------------------------  --------- 
Magnus acquisition consideration     (100.0) 
---------------------------------  --------- 
Vendor loan repayments on 
 Magnus financing                     (48.6) 
---------------------------------  --------- 
Net interest and finance costs 
 paid                                (155.3) 
---------------------------------  --------- 
Non-cash capitalisation of 
 interest                             (45.0) 
---------------------------------  --------- 
Other movements, primarily 
 net foreign exchange 
 on cash and debt                        7.5 
---------------------------------  --------- 
Net debt 31 December 2018(1)       (1,774.5) 
---------------------------------  --------- 
 

Note:

1 Stated including $117.5 million of bond PIK (2017: $85.7 million) and $14.4 million of facility PIK (2017: $4.8 million). Capitalised interest on Oz Management facility of $3.5 million (2017: $nil)

The Group's reported operating cash flows for the year ended 31 December 2018 were $794.4 million, up 163.2% compared to 2017 ($301.8 million). The main drivers for this increase were the material increase in volumes and higher realised prices, partly offset by commodity price hedges.

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

 
                               Year ended    Year ended 
                              31 December   31 December 
                                     2018          2017 
                                $ million     $ million 
---------------------------  ------------  ------------ 
North Sea                           200.2         355.3 
---------------------------  ------------  ------------ 
Malaysia                             19.5           3.1 
---------------------------  ------------  ------------ 
Exploration and evaluation            0.5           9.2 
---------------------------  ------------  ------------ 
                                    220.2         367.6 
---------------------------  ------------  ------------ 
 

Cash capital expenditure primarily relates to Kraken activities and well drilling on Heather/Broom and PM8/Seligi.

Balance sheet

The Group's total asset value has increased by $623.4 million to $5,661.9 million at 31 December 2018 (2017: $5,038.5 million), mainly attributable to the acquisition of the remaining 75% of Magnus and associated assets. Net current liabilities have decreased to $301.2 million as at 31 December 2018 (2017: $377.9 million).

Property, plant and equipment ('PP&E')

PP&E has increased by $501.3 million to $4,349.9 million at 31 December 2018 from $3,848.6 million at 31 December 2017 (see note 10). This increase is explained by the capital additions to PP&E of $181.5 million, additions of $745.4 million for the acquisition of the remaining 75% interest in Magnus and additional interests in associated assets, additions of $123.9 million on the uplift of the original 25% acquisition, a net increase of $19.0 million for changes in estimates for decommissioning and other provisions, including the KUFPEC cost recovery provision, offset by depletion and depreciation charges of $442.4 million and non-cash impairments of $126.0 million.

The PP&E capital additions during the period, including capitalised interest, are set out in the table below:

 
                            2018 
                       $ million 
-------------------  ----------- 
Kraken                      70.3 
-------------------  ----------- 
Northern North Sea          53.8 
-------------------  ----------- 
Central North Sea           41.6 
-------------------  ----------- 
Malaysia                    15.8 
-------------------  ----------- 
                           181.5 
-------------------  ----------- 
 

Intangible oil and gas assets

Intangible oil and gas assets marginally decreased to $51.8 million at 31 December 2018 (31 December 2017: $52.1 million).

Trade and other receivables

Trade and other receivables have increased by $48.0 million to $275.8 million at 31 December 2018 compared with $227.8 million at 31 December 2017 (see note 15).

Cash and net debt(1)

The Group had $240.6 million of cash and cash equivalents at 31 December 2018 and $1,774.5 million of net debt, including PIK and capitalised interest of $135.5 million (2017: $173.1 million of cash and cash equivalents and $1,991.4 million of net debt, including PIK of $90.5 million). Net debt1 comprises the following liabilities:

-- $218.9 million principal outstanding on the GBP155 million retail bond, including interest capitalised as an amount PIK of $21.5 million in the year (2017: $224.1 million and $14.9 million, respectively);

-- $746.1 million principal outstanding on the high yield bond, including PIK of $96.1 million in the year (2017: $720.8 million and $70.8 million, respectively);

-- $799.4 million carrying value of credit facility, comprising amounts drawn down of $785.0 million and PIK interest of $14.4 million (2017: $1,100.0 million comprising amounts drawn down of $1,095.2 million and PIK interest of $4.8 million);

-- $178.5 million carrying value of Oz Management facility, comprising amounts drawn down of $175.0 million and capitalised interest of $3.5 million (2017: $nil);

   --      $15.7 million relating to the SVT Working Capital Facility (2017: $25.6 million); 
   --      $22.2 million relating to the Mercuria Prepayment Facility (2017: $75.5 million); 
   --      $2.5 million outstanding from a trade creditor loan (2017: $10.0 million); and 

-- $31.7 million principal outstanding on the Tanjong Baram Project Finance Facility (2017: $8.5 million).

Note:

1 Net debt excludes accrued interest, accounting adjustment on adoption of IFRS 9 Financial Instruments and the net-off of unamortised fees (see note 19).

Provisions

The Group's decommissioning provision increased by $32.4 million to $671.7 million at 31 December 2018 (2017: $639.3 million). The movement is explained by an increase of $29.9 million due to changes in estimates (including the impact of oil prices and foreign exchange rates) and $12.6 million unwinding of discount, partially offset by reductions of $10.0 million for decommissioning carried out in the period.

Other provisions increased by $605.4 million in 2018 to $715.4 million (2017: $110.0 million). Key movements during the period primarily related to the remaining acquisition of 75% of Magnus and additional interests in SVT and associated infrastructure assets from BP. An addition of $625.3 million reflects the discounted amounts expected to be due under the terms of the Magnus vendor loan and long-term profit sharing agreement associated with the 75% interest. In 2018, EnQuest repaid $48.6 million of the outstanding vendor loan associated with the initial 25% interest, and recognised a change in estimate of $12.8 million on the outstanding contingent consideration (see note 29). Other provisions also includes EnQuest's obligation to make payments to BP by reference to 7.5% of BP's decommissioning costs of the Thistle and Deveron fields. $5.3 million of the movement relates to the utilisation of PM8/Seligi cost recovery.

Income tax

The Group had a UK corporation tax or supplementary corporation tax liability at 31 December 2018 of $12.2 million (2017: $nil), primarily reflecting tax payable on Magnus and associated infrastructure assets prior to the completion of the acquisition of additional interests and the transfer of these assets to EnQuest Heather Limited. Following transfer of the assets, no further tax is expected to be payable for the foreseeable future. The remainder of the income tax liability of $3.7 million related to corporate income tax on Malaysian assets (see note 7).

Deferred tax

The Group's net deferred tax asset has decreased from $335.6 million at 31 December 2017 to a net deferred tax asset of $258.9 million at 31 December 2018. The decrease is mainly due to the deferred tax liability generated as part of the business combination accounting for the Magnus acquisition during the period.

Total UK tax losses carried forward at the year end amount to $3,225.3 million (2017: $3,121.3 million) (see note 7).

Trade and other payables

Trade and other payables of $502.0 million at 31 December 2018 are $55.9 million higher than at 31 December 2017 ($446.1 million). $483.8 million are payable within one year (2017: $367.3 million) and $18.2 million are payable after more than one year (2017: $78.8 million). The increase in current payables mainly reflects VAT payments due at year end combined with other working capital movements (see note 23).

Obligations under finance leases

As at 31 December 2018, the Group held a finance lease liability of $709.0 million associated with the Kraken FPSO of which $93.2 million is classified as a current liability.

Other financial liabilities

As at the end of 2018, the Group had no other financial liabilities (2017: $68.3 million). The decrease primarily relates to the cash payment associated with waiver fees due to credit facility lenders and mark to market movements on the Group's commodity derivatives following the weakening of the oil price in late 2018.

Financial risk management

Oil price

The Group is exposed to the impact of changes in both Brent crude oil prices and gas prices on its revenue and profits. EnQuest's policy is to manage the impact of commodity prices to protect against volatility and allow availability of cash flow for repayment of debt and investment in capital programmes.

During the year ended 31 December 2018, commodity derivatives generated a total gain of $4.4 million, with revenue and other operating income including a realised loss of $93.0 million. The losses were mostly in respect of the settlement of swaps and calls, and the amortisation of premiums on calls.

Foreign exchange

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.

EnQuest continually reviews its currency exposures and, when appropriate, looks at opportunities to enter into foreign exchange hedging contracts. During the year ended 31 December 2018, losses totalling $0.4 million (2017: gain of $0.4 million) were recognised in the income statement. This included losses totalling $0.6 million realised on contracts maturing during the year (2017: $nil).

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 funding position and liquidity risk throughout the year, including monitoring forecast covenant results, to ensure that it has access to sufficient funds to meet forecast cash requirements. 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 project timing and costs. These forecasts and sensitivity analyses allow management to mitigate liquidity or covenant compliance risks in a timely manner. Management has also continued to take action to implement cost-saving programmes to reduce planned operational expenditure, general and administrative spend and capital expenditure in 2018 and 2019. At 31 December 2018, the Group had total cash and available facilities of $309.0 million, including ring-fenced accounts associated with Magnus, the Oz Management facility and other joint venture accounts totalling $107.3 million.

The Group's business plan ('Base case'), which underpins this going concern assessment, assumes Kraken production rates are in line with the Group's production guidance. The Base case has been updated for the forward curve and uses an oil price assumption of c.$61.9/bbl throughout 2019 and c.$60.7/bbl for first quarter 2020. This has been further stress tested under a plausible downside case ('Downside case') as described in the viability statement. Both cases reflect the bank debt amortisation profile due in the going concern period. The Directors consider the Base case and Downside case to be an appropriate basis on which to make their assessment.

The Base case and Downside case indicate that the Company is covenant compliant and able to operate within the headroom of its existing borrowing facilities for 12 months from the date of approval of the Annual Report and Accounts.

Should circumstances arise that differ from the Group's projections, the Directors believe that a number of mitigating actions, including asset sales or other funding options, can be executed successfully in the necessary timeframe to meet debt repayment obligations as they become due and in order to maintain liquidity.

After making enquiries and assessing the progress against the forecast, projections and the status of the mitigating actions referred to above, the Directors have a reasonable expectation that the Group can continue in operation and meet its commitments as they fall due over the going concern period. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

Viability statement

The Directors have assessed the viability of the Group over a three-year period to March 2022. This assessment has taken into account the Group's financial position as at March 2019, the future projections and the Group's principal risks and uncertainties. The Directors' approach to risk management, their assessment of the Group's principal risks and uncertainties, and the actions management are taking to mitigate these risks are outlined on pages 20 to 28. The period of three years is deemed appropriate as it is the time horizon across which management constructs a detailed plan against which business performance is measured and also covers the period within which the Group's term loan and revolving credit facility is expected to be repaid. Based on the Group's projections, the Directors have a reasonable expectation that the Group can continue in operation and meet its liabilities as they fall due over the period to March 2022.

The Group's business plan process has underpinned this assessment and has been used as the Base case. The business plan process takes account of the Group's principal risks and uncertainties, and has further been stress tested to understand the impact on the Group's liquidity and financial position of reasonably possible changes in these risks and/or assumptions.

The forecasts which underpin this assessment use the same oil price assumption as for the going concern assessment, with a longer-term price assumption for the viability period being aligned to the current forward curve.

For the current assessment, the Directors also draw attention to the specific principal risks and uncertainties (and mitigants) identified below, which, individually or collectively, could have a material impact on the Group's viability during the period of review. In forming this view, it is recognised that such future assessments are subject to a level of uncertainty that increases with time and, therefore, future outcomes cannot be guaranteed or predicted with certainty. The impact of these risks and uncertainties, including their combined impact, has been reviewed by the Directors and the effectiveness and achievability of the potential mitigating actions have been considered.

   --      Oil price volatility 

A decline in oil and gas prices would adversely affect the Group's operations and financial condition. To mitigate oil price volatility, the Directors have hedged approximately 6.5 MMbbls of collar options at an average floor price of around $66/bbl in the first half of 2019. In accordance with the Oz Management facility agreement, the Group has a further approximately 1.5 MMbbls hedged across 2019 with an average floor price of around $56/bbl. The Directors, in line with Group policy, will continue to pursue hedging at the appropriate time and price.

   --      Kraken production 

All production and injector wells on Drilling Centres ('DC') DC1, DC2, DC3 and DC4 are onstream. Both production processing trains are also online and production and injection wells are operating in line with expectations in aggregate. On the basis of this performance, and subject to delivering on the Group's plans to further optimise production and improve plant uptime, EnQuest expects to deliver planned production rates.

   --      Access to funding 

The Group's credit facility contains certain covenants (based on the ratio of indebtedness incurred under the term loan and revolving credit facility to EBITDA, finance charges to EBITDA, and a requirement for liquidity testing). Prolonged low oil prices, cost increases and production delays or outages could further threaten the Group's liquidity and/or ability to comply with relevant covenants.

The Directors recognise the importance of ensuring medium-term liquidity and in particular to protect against potential future declines in the oil price. EnQuest has a committed $785 million Tranche A Term Loan and a further Tranche B $75 million revolving credit facility (collectively the 'Facility'). Across the Facility, $68 million remains available at 31 December 2018.

In addition, the maturity dates of the existing $746 million High Yield Bond and the GBP172 million Retail Notes (both figures inclusive of the PIK notes) is April 2022, with an option exercisable by the Group (at its absolute discretion) to extend the maturity date to October 2023 if the existing Facility is not fully repaid or refinanced by October 2020.

A further condition to the payment of interest on both the High Yield Bond and Retail Notes in cash is based on, amongst other things, the average prevailing oil price (dated Brent Futures benchmark as published by Platts) for the six-month period immediately preceding the day which is one month prior to the relevant interest payment date being at least $65 per barrel; otherwise interest payable is to be capitalised.

In conducting the viability review, these risks have been taken into account in the stress testing performed on the Base case described above.

Specifically the Base case has been subjected to stress testing by considering the impact of the following plausible downside risks:

   --      a 10.0% discount to the oil price forward curve; 
   --      a 3.5% decrease in 2019 production and a 5.0% decrease from 2020 onwards; 
   --      a 2.5% increase in operating costs except for fixed costs related to the Kraken FPSO; and 
   --      a 2.5% increase in capital expenditure from 2020 onwards. 

A scenario has been run illustrating the impact of the above risks on the Base case. This plausible Downside case indicates that mitigating actions, including asset sales or other funding options, would need to be undertaken for the Group to be viable for in some parts of the three-year period.

Notwithstanding the principal risks and uncertainties described above, after making enquiries and assessing the progress against the forecast, projections and the status of the mitigating actions referred to above, the Directors have a reasonable expectation that the Group can continue in operation and meet its commitments as they fall due over the viability period ending March 2022. Accordingly, the Directors therefore support this viability statement.

Risks and uncertainties

Management of risks and uncertainties

Consistent with the Company's purpose (as set out on the inside of the front cover of this report), the Board has articulated EnQuest's strategic vision to be the operator of choice for maturing and underdeveloped hydrocarbon assets. EnQuest is focused on delivering on its targets, driving future growth and managing its capital structure and liquidity.

EnQuest seeks to balance its risk position between investing in activities that can achieve its near-term targets and drive future growth with the appropriate returns, including any appropriate market opportunities that may present themselves, and the continuing need to remain financially disciplined. This combination drives cost efficiency and cash flow generation, facilitating a reduction in the Group's debt. In this regard, the Board has developed certain strategic tenets to guide the Company which link with its strategy and appetite for risk. Broadly, these reflect a focus by the Company on:

-- Maintaining discipline across metrics such as financial headroom, leverage ratio and gearing;

-- Enhancing diversity within our portfolio of assets, with a focus on underdeveloped producing assets and maturing assets with investment potential; and

   --      Ensuring the quality of the investment decision-making process. 

In pursuit of its strategy, EnQuest has to manage a variety of risks. Accordingly, the Board has established a Risk Management Framework to enhance effective risk management within the following Board-approved overarching statement of risk appetite:

-- We make investments and manage the asset portfolio against agreed key performance indicators consistent with the strategic objectives of enhancing net cash flow, reducing leverage, managing costs and diversifying our asset base;

-- We seek to embed a risk culture within our organisation corresponding to the risk appetite which is articulated for each of our principal risks;

-- We seek to avoid reputational risk by ensuring that our operational and HSE&A processes, policies and practices reduce the potential for error and harm to the greatest extent practicable by means of a variety of controls to prevent or mitigate occurrence; and

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

The Board reviews the Company's risk appetite annually in light of changing market conditions and the Company's performance and strategic focus. The Executive Committee periodically reviews and updates the Group Risk Register based on the individual risk registers of the business. The Group Risk Register, along with an assurance mapping and controls review exercise and a risk report (focused on identifying and mitigating the most critical and emerging risks through a systematic analysis of the Company's business, its industry and the global risk environment), is periodically reviewed by the Board (with senior management), to ensure that key issues are being adequately identified and actively managed. In addition, the Group's Risk Committee (a sub-Committee of the Board) provides a forum for the Board to review selected individual risk areas in greater depth.

As part of its strategic, business planning and risk processes, the Group considers how a number of macro-economic themes may influence its principal risks. These are factors which influence long-term supply and demand trends and/or about which the Company should be cognisant in developing its strategy. They include, for example, developments in technology, demographics, climate change and how markets and the regulatory environment may respond, and the decommissioning of infrastructure in the UK North Sea and other mature basins. These themes are relevant to the Group's assessments across a number of its principal risks. The Group will continue to monitor these themes and the relevant developing policy environment at an international and national level and will adapt its strategy accordingly. For example, EnQuest remains conscious of the potential for a number of aspects of climate change to amplify certain principal risks over time (e.g. in relation to access to capital markets - see 'Financial' risk on page 24 - and oil price - see 'Oil and gas prices' risk on page 26). The Group is also conscious that as an operator of mature producing assets with limited appetite for exploration, it has limited exposure to investments which do not deliver near-term returns and is therefore in a position to adapt and calibrate its exposure to new investments according to developments in relevant markets.

As part of its evolution of the Group's Risk Management Framework, the Risk Committee has refreshed its views on all risk areas faced by the Group (categorising these into a 'Risk Library' of 18 overarching risks). For each risk area, the Committee reviewed 'Risk Bowties' that identified risk causes and impacts and mapped these to preventative and containment controls used to manage the risks to acceptable levels.

The Board, supported by the Audit and Risk Committees, has reviewed the Group's system of risk management and internal control for the period from 1 January 2018 to the date of this report and carried out a robust assessment of the Company's emerging and principal risks, the procedures in place to identify and mitigate principal and emerging risks and confirms that the Group complies in this respect with the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting'.

Key business risks

The Group's principal risks (identified from the 'Risk Library') are those which could prevent the business from executing its strategy and creating value for shareholders or lead to a significant loss of reputation. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.

Cognisant of the Group's purpose and strategy, the Board is satisfied that the Group's risk management system works effectively in assessing and managing the Group's risk appetite and has supported a robust assessment by the Directors of the principal risks facing the Group.

Set out on the following pages are:

   --      The principal risks and mitigations; 

-- An estimate of the potential impact and likelihood of occurrence after the mitigation actions, along with how these have changed in the past year; and

   --      An articulation of the Group's risk appetite for each of these principal risks. 

Amongst these, the key risks the Group currently faces are a sustained decline in oil prices (see 'Oil and gas prices' risk on page 26), a lack of growth opportunities (see 'Production' risk on page 22 and 'Subsurface risk and reserves replacement' on page 23) and materially lower than expected production performance for a prolonged period, particularly at the Kraken field (see 'Production' risk on page 22).

 
risk                            appetite 
----------------------------    -------------------------------    ---------------------------- 
Health, safety & environment    The Group's principal              The Group's desire is 
 ('HSE')                         aim is Safe Results                to maintain upper quartile 
 Oil and gas development,        with no harm to people             HSE performance measured 
 production and exploration      and respect for the                against suitable industry 
 activities are complex          environment. Should                metrics. 
 and HSE risks cover             operational results 
 many areas including            and safety ever come 
 Major Accident Hazards,         into conflict, employees 
 personal health and             have a responsibility 
 safety, compliance with         to choose safety over 
 regulatory requirements,        operational results. 
 asset integrity issues          Employees are empowered 
 and potential environmental     to stop operations for 
 harm, including those           safety-related reasons. 
 associated with the 
 impacts of climate change. 
 
 Potential impact - Medium 
 (2017 Medium) 
 Likelihood - Low (2017 
 Low) 
 
 There has been no material 
 change in the potential 
 impact or likelihood 
 and the Group's overall 
 record on HSE remains 
 robust. 
----------------------------    -------------------------------    ---------------------------- 
                                mitigation 
----------------------------    -------------------------------    ---------------------------- 
                                The Group maintains,               EnQuest's HSE Policy 
                                 in conjunction with                is now fully integrated 
                                 its core contractors,              across our operated 
                                 a comprehensive programme          sites and this has enabled 
                                 of HSE, asset integrity            an increased focus on 
                                 and assurance activities           Health, Safety and the 
                                 and has implemented                Environment. 
                                 a continual improvement            There is a strong assurance 
                                 programme, promoting               programme 
                                 a culture of transparency          in place to ensure 
                                 in relation to HSE matters.        EnQuest complies with 
                                 HSE performance is discussed       its Policy and Principles 
                                 at each Board meeting              and regulatory commitments. 
                                 and the mitigation of 
                                 HSE risk has been enhanced 
                                 through further emphasising 
                                 the role of HSE oversight 
                                 within the Risk Committee's 
                                 terms of reference. 
                                 During 2018, the Group 
                                 continued to focus on 
                                 control of Major Accident 
                                 Hazards and 'Safe Behaviours'. 
 
                                 In addition, the Group 
                                 has a positive and transparent 
                                 relationship with the 
                                 UK Health and Safety 
                                 Executive and Department 
                                 for Business, Energy 
                                 & Industrial Strategy, 
                                 and the Malaysian regulator, 
                                 Malaysia Petroleum Management. 
----------------------------    -------------------------------    ---------------------------- 
 
 
risk                             appetite 
-----------------------------    --------------------------------    ------------------------------- 
Production                       Since production efficiency         production assets in 
 The Group's production           and meeting production              its portfolio, EnQuest 
 is critical to its success       targets are core to                 has a very low tolerance 
 and is subject to a              our business and the                for operational risks 
 variety of risks, including:     Group seeks to maintain             to its production (or 
 subsurface uncertainties;        a high degree of operational        the support systems 
 operating in a mature            control over                        that underpin production). 
 field environment; potential 
 for significant unexpected 
 shutdowns; and unplanned 
 expenditure (particularly 
 where remediation may 
 be dependent on suitable 
 weather 
 conditions offshore). 
 
 Lower than expected 
 reservoir performance 
 or insufficient addition 
 of new resources may 
 have a material impact 
 on the Group's future 
 growth. 
 
 Climate change could 
 result in more severe 
 weather conditions over 
 time, which could impact 
 asset uptime. 
 
 The Group's delivery 
 infrastructure in the 
 UK North Sea is, to 
 a significant extent, 
 dependent on the Sullom 
 Voe Terminal. 
 
 Longer-term production 
 is threatened if low 
 oil prices bring forward 
 decommissioning timelines. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Low (2017 
 Low) 
 
 There has been no material 
 change in the potential 
 impact or likelihood. 
 
 The Group has delivered 
 on its 2018 production 
 target despite a lower 
 performance at Kraken 
 than originally expected. 
 With the additional 
 interest in the Magnus 
 asset, EnQuest's production 
 portfolio has been further 
 diversified, with material 
 growth expected as a 
 result in 2019. However, 
 the increased interest 
 in Magnus also increased 
 the Group's reliance 
 on the Sullom Voe Terminal. 
 Further, the Dunlin 
 bypass export project, 
 once completed, will 
 see volumes from Thistle 
 and the Dons exported 
 via the Magnus facility 
 and Ninian Pipeline 
 System and will therefore 
 further increase reliance 
 on the Sullom Voe Terminal. 
-----------------------------    --------------------------------    ------------------------------- 
                                 mitigation 
-----------------------------    --------------------------------    ------------------------------- 
                                 The Group's programme               Life of asset production 
                                  of asset integrity and              profiles are audited 
                                  assurance activities                by independent reserves 
                                  provide leading indicators          auditors. The Group 
                                  of significant potential            also undertakes regular 
                                  issues which may result             internal reviews. The 
                                  in unplanned shutdowns              Group's forecasts of 
                                  or which may in other               production are risked 
                                  respects have the potential         to reflect appropriate 
                                  to undermine asset availability     production uncertainties. 
                                  and uptime. The Group 
                                  continually assesses                The Sullom Voe Terminal 
                                  the condition of its                has a good safety record 
                                  assets and operates                 and its safety and operational 
                                  extensive maintenance               performance levels are 
                                  and inspection programmes           regularly monitored 
                                  designed to minimise                and challenged by the 
                                  the risk of unplanned               Group and other terminal 
                                  shutdowns and expenditure.          owners and users to 
                                  The Group monitors both             ensure that operational 
                                  leading and lagging                 integrity is maintained. 
                                  KPIs in relation to                 Further, EnQuest expects 
                                  its maintenance activities          to be well positioned 
                                  and liaises closely                 to manage potential 
                                  with its downstream                 operational risks related 
                                  operators to minimise               to the Sullom Voe Terminal 
                                  pipeline and terminal               having assumed operatorship 
                                  production impacts.                 of the terminal and 
                                                                      with the workforce having 
                                  Production efficiency               transferred with the 
                                  is continually monitored            asset in 2017. Nevertheless, 
                                  with losses being identified        the Group actively continues 
                                  and remedial and improvement        to explore the potential 
                                  opportunities undertaken            of alternative transport 
                                  as required. A continual,           options and developing 
                                  rigorous cost focus                 hubs that may provide 
                                  is also maintained.                 both risk mitigation 
                                                                      and cost savings. 
 
                                                                      The Group also continues 
                                                                      to consider new opportunities 
                                                                      for expanding production. 
-----------------------------    --------------------------------    ------------------------------- 
 
 
risk                             appetite 
-----------------------------    --------------------------------    ---------------------------- 
Project execution and            The efficient delivery              While the Group necessarily 
 delivery                         of new project developments         assumes significant 
 The Group's success              has been a key feature              risk when it sanctions 
 will be partially dependent      of the Group's long-term            a new development (for 
 upon the successful              strategy. The Group's               example, by incurring 
 execution and delivery           current appetite is                 costs against oil price 
 of development projects.         for short-cycle development         assumptions), it requires 
                                  projects such as infill             that risks to the efficient 
 Potential impact - Medium        drilling and near-field             implementation of the 
 (2017 High)                      tie-backs.                          project are minimised. 
 Likelihood - Low (2017 
 Low) 
 
 The potential impact 
 has reduced, with the 
 likelihood remaining 
 unchanged. As the Group 
 focuses on reducing 
 its debt, its current 
 appetite is to pursue 
 short-cycle development 
 projects. The main project 
 developments in 2019 
 are oil export pipeline 
 projects for Thistle/Deveron 
 (the Dunlin bypass project) 
 and Scolty/Crathes (the 
 pipeline replacement 
 project). 
-----------------------------    --------------------------------    ---------------------------- 
                                 mitigation 
-----------------------------    --------------------------------    ---------------------------- 
                                 The Group has project 
                                  teams which are responsible 
                                  for the planning and 
                                  execution of new projects 
                                  with a dedicated team 
                                  for each development. 
                                  The Group has detailed 
                                  controls, systems and 
                                  monitoring processes 
                                  in place to ensure that 
                                  deadlines are met, costs 
                                  are controlled and that 
                                  design concepts and 
                                  the Field Development 
                                  Plan are adhered to 
                                  and implemented. These 
                                  are modified when circumstances 
                                  require and only through 
                                  a controlled management 
                                  of change process and 
                                  with the necessary internal 
                                  and external authorisation 
                                  and communication. The 
                                  Group also engages third-party 
                                  assurance experts to 
                                  review, challenge and, 
                                  where appropriate, make 
                                  recommendations to improve 
                                  the processes for project 
                                  management, cost control 
                                  and governance of major 
                                  projects. EnQuest ensures 
                                  that responsibility 
                                  for delivering time-critical 
                                  supplier obligations 
                                  and lead times are fully 
                                  understood, acknowledged 
                                  and proactively managed 
                                  by the most senior levels 
                                  within supplier organisations. 
                                  EnQuest also supports 
                                  its partners and suppliers 
                                  through the provision 
                                  of appropriate secondees 
                                  if required. 
-----------------------------    --------------------------------    ---------------------------- 
 
 
risk                               appetite 
-------------------------------    ---------------------------------    ------------------------- 
Subsurface risk and                Reserves replacement                 the assumption of risk 
 reserves replacement               is an element of the                 in relation to the key 
 Failure to develop its             sustainability of the                activities required 
 contingent and prospective         Group and its ability                to deliver reserves 
 resources or secure                to grow. The Group has               growth, such as drilling 
 new licences and/or                some tolerance for                   and acquisitions. 
 asset acquisitions and 
 realise their expected 
 value. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in the potential 
 impact or likelihood 
 as oil price volatility, 
 a focus on strengthening 
 the balance sheet and 
 increased competition 
 to acquire assets continues 
 to limit business development 
 activity to the pursuit 
 of reserves enhancing, 
 selective, cash--accretive 
 opportunities. 
 
 Low oil prices can potentially 
 affect development of 
 contingent and prospective 
 resources and/or reserves 
 certifications. 
-------------------------------    ---------------------------------    ------------------------- 
                                   mitigation 
-------------------------------    ---------------------------------    ------------------------- 
                                   The Group puts a strong              The Group continues 
                                    emphasis on subsurface               to consider potential 
                                    analysis and employs                 opportunities to acquire 
                                    industry--leading professionals.     new production resources 
                                    The Group continues                  that meet its investment 
                                    to recruit in a variety              criteria. 
                                    of technical positions 
                                    which enables it to 
                                    manage existing assets 
                                    and evaluate the acquisition 
                                    of new assets and licences. 
 
                                    All analysis is subject 
                                    to internal and, where 
                                    appropriate, external 
                                    review and relevant 
                                    stage gate processes. 
                                    All reserves are currently 
                                    externally reviewed 
                                    by a Competent Person. 
                                    In addition, EnQuest 
                                    has active business 
                                    development teams, both 
                                    in the UK and internationally, 
                                    developing a range of 
                                    opportunities and liaising 
                                    with vendors/government. 
-------------------------------    ---------------------------------    ------------------------- 
 
 
risk                             appetite 
-----------------------------    --------------------------    ----------------------------- 
Financial                        The Group recognises          costs and complying 
 Inability to fund financial      that significant leverage     with its obligations 
 commitments or maintain          has been required to          to finance providers 
 adequate cash flow and           fund its growth as low        while delivering shareholder 
 liquidity and/or reduce          oil prices have impacted      value, recognising that 
 costs.                           revenues. However, it         reasonable assumptions 
                                  is intent on reducing         relating to external 
 The Group's term loan            its leverage levels,          risks need to be made 
 and revolving credit             maintaining liquidity,        in transacting with 
 facility contains certain        enhancing profit margins,     finance providers. 
 financial covenants              reducing 
 (based on the ratio 
 of indebtedness incurred 
 under the term loan 
 and revolving facility 
 to EBITDA, finance charges 
 to EBITDA and a requirement 
 for liquidity testing). 
 Prolonged low oil prices, 
 cost increases, including 
 those related to an 
 environmental incident, 
 and production delays 
 or outages could threaten 
 the Group's liquidity 
 and/or ability to comply 
 with relevant covenants. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in the potential 
 impact or likelihood; 
 however, there is potential 
 for the cost of capital 
 to increase as factors 
 such as climate change 
 concerns and oil price 
 volatility may reduce 
 investors' acceptable 
 levels of oil and gas 
 sector exposure and 
 the cost of emissions 
 trading certificates, 
 or their replacement 
 in the event the UK 
 exits the European Union, 
 may trend higher. In 
 addition, adhering to 
 the term loan amortisation 
 schedule remains partially 
 dependent on the successful 
 increase in the Group's 
 aggregate production 
 being materially in 
 line with expectations 
 and no significant reduction 
 in oil prices. Further 
 information is contained 
 in the going concern 
 and viability paragraphs 
 on pages 18 to 20 of 
 the Financial Review. 
-----------------------------    --------------------------    ----------------------------- 
                                 mitigation 
-----------------------------    --------------------------    ----------------------------- 
                                 Debt reduction is a           Funding from the bonds 
                                  strategic priority.           and revolving credit 
                                  During the year, the          facility is supplemented 
                                  Group completed a $175        by operating cash inflow 
                                  million credit facility       from the Group's producing 
                                  from Oz Management and        assets. The Group reviews 
                                  raised c.$129 million         its cash flow requirements 
                                  (net) through a rights        on an ongoing basis 
                                  issue, of which $100          to ensure it has adequate 
                                  million was used to           resources for its needs. 
                                  fund the Group's cash 
                                  consideration for the         The Group is continuing 
                                  acquisition of additional     to enhance its financial 
                                  interests in assets           position through maintaining 
                                  from BP. The Group also       a focus on controlling 
                                  paid and/or cancelled         and reducing costs through 
                                  a total of $340 million       supplier renegotiations, 
                                  of the term facility.         assessing counterparty 
                                                                credit risk, hedging 
                                  These steps, together         and trading, cost-cutting 
                                  with other mitigating         and rationalisation. 
                                  actions available to          Where costs are incurred 
                                  management, are expected      by external service 
                                  to provide the Group          providers, the Group 
                                  with sufficient liquidity     actively challenges 
                                  to strengthen its balance     operating costs. The 
                                  sheet for longer--term        Group also maintains 
                                  growth.                       a framework of internal 
                                                                controls. 
                                  Ongoing compliance with 
                                  the financial covenants 
                                  under the Group's term 
                                  loan and revolving credit 
                                  facility is actively 
                                  monitored and reviewed. 
-----------------------------    --------------------------    ----------------------------- 
 
 
risk                            appetite 
----------------------------    -------------------------------    -------------------------------- 
Human resources                 As a low-cost, lean                The Group recognises 
 The Group's success             organisation, the Group            that the benefits of 
 continues to be dependent       relies on motivated                a lean and flexible 
 upon its ability to             and high-quality employees         organisation require 
 attract and retain key          to achieve its targets             agility to assure against 
 personnel and develop           and manage its risks.              the risk of skills shortages. 
 organisational capability 
 to deliver strategic 
 growth. Industrial action 
 across the sector could 
 also impact the operations 
 of the Group. 
 
 Potential impact - Medium 
 (2017 Low) 
 Likelihood - High (2017 
 Medium) 
 
 The impact and likelihood 
 have increased given 
 the increased competition 
 in the sector, particularly 
 in the UK. 
----------------------------    -------------------------------    -------------------------------- 
                                mitigation 
----------------------------    -------------------------------    -------------------------------- 
                                The Group has established          The Group also maintains 
                                 an able and competent              market--competitive 
                                 employee base to execute           contracts with key suppliers 
                                 its principal activities.          to support the execution 
                                 In addition to this,               of work where the necessary 
                                 the Group seeks to maintain        skills do not exist 
                                 good relationships with            within the Group's employee 
                                 its employees and contractor       base. 
                                 companies and regularly 
                                 monitors the employment            The Group recognises 
                                 market to provide remuneration     that there is a gender 
                                 packages, bonus plans              pay gap within the organisation 
                                 and long-term share-based          but that there is no 
                                 incentive plans that               issue with equal pay 
                                 incentivise performance            for the same tasks. 
                                 and long-term commitment           EnQuest aims to attract 
                                 from employees to the              the best talent, recognising 
                                 Group.                             the value of diversity. 
 
                                 We recognise that our              Executive and senior 
                                 people are critical                management retention, 
                                 to our success and so              succession planning 
                                 are continually evolving           and development remain 
                                 our end-to-end people              important priorities 
                                 management processes,              for the Board. It is 
                                 including recruitment              a Board-level priority 
                                 and selection, career              that executive and senior 
                                 development and performance        management possess the 
                                 management. This ensures           appropriate mix of skills 
                                 that we have the right             and experience 
                                 person for the job and             to realise the Group's 
                                 that we provide appropriate        strategy; succession 
                                 training, support and              planning therefore remains 
                                 development opportunities          a key priority. 
                                 with feedback to drive 
                                 continuous improvement             EnQuest is introducing 
                                 whilst delivering Safe             a Group Employee Forum 
                                 Results. The culture               during 2019 to add to 
                                 of the Group is an area            our employee communication 
                                 of ongoing focus and               and engagement strategy. 
                                 a 'Values refresh' took            This forum will improve 
                                 place during 2018.                 engagement and interaction 
                                                                    between the workforce 
                                                                    and the Board. 
----------------------------    -------------------------------    -------------------------------- 
 
 
risk                              appetite 
------------------------------    ------------------------------    --------------------------------- 
Reputation                        The Group has no tolerance 
 The reputational and              for conduct which may 
 commercial exposures              compromise its reputation 
 to a major offshore               for integrity and competence. 
 incident, including 
 those related to an 
 environmental incident, 
 or non-compliance with 
 applicable law and regulation 
 are significant. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Low (2017 
 Low) 
 
 There has been no material 
 change in the potential 
 impact or likelihood. 
------------------------------    ------------------------------    --------------------------------- 
                                  mitigation 
------------------------------    ------------------------------    --------------------------------- 
                                  All activities are conducted      The Group undertakes 
                                   in accordance with approved       regular audit activities 
                                   policies, standards               to provide assurance 
                                   and procedures. Interface         on compliance with established 
                                   agreements are agreed             policies, standards 
                                   with all core contractors.        and procedures. 
 
                                   The Group requires adherence      All EnQuest personnel 
                                   to its Code of Conduct            and contractors are 
                                   and runs compliance               required to pass an 
                                   programmes to provide             annual anti-bribery, 
                                   assurance on conformity           corruption and anti-facilitation 
                                   with relevant legal               of tax evasion course. 
                                   and ethical requirements. 
                                                                     All personnel are authorised 
                                                                     to shut down production 
                                                                     for safety-related reasons. 
------------------------------    ------------------------------    --------------------------------- 
 
 
risk                               appetite 
-------------------------------    -------------------------------    ------------------------------ 
Oil and gas prices                 The Group recognises 
 A material decline in              that considerable exposure 
 oil and gas prices adversely       to this risk is inherent 
 affects the Group's                to its business. 
 operations and financial 
 condition. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in 
 the potential impact 
 or likelihood. 
 The Group recognises 
 that climate change 
 concerns and related 
 regulatory developments 
 are likely to reduce 
 demand for hydrocarbons 
 over time. This may 
 be mitigated by correlated 
 constraints on the development 
 of new supply. 
-------------------------------    -------------------------------    ------------------------------ 
                                   mitigation 
-------------------------------    -------------------------------    ------------------------------ 
                                   This risk is being mitigated       In order to develop 
                                    by a number of measures            its resources, the Group 
                                    including hedging oil              needs to be able to 
                                    price, renegotiating               fund the required investment. 
                                    supplier contracts,                The Group will therefore 
                                    reducing costs and commitments     regularly review and 
                                    and institutionalising             implement suitable policies 
                                    a lower cost base.                 to hedge against the 
                                                                       possible negative impact 
                                    The Group monitors oil             of changes in oil prices 
                                    price sensitivity relative         while remaining within 
                                    to its capital commitments         the limits set by its 
                                    and has a policy (see              term loan and revolving 
                                    page 74) which allows              credit facility. 
                                    hedging of its production. 
                                    As at 19 March 2019,               The Group has established 
                                    the Group had hedged               an in-house trading 
                                    approximately 8 MMbbls.            and marketing function 
                                    This ensures that the              to enable it to enhance 
                                    Group will receive a               its ability to mitigate 
                                    minimum oil price for              the exposure to volatility 
                                    its production.                    in oil prices. 
 
                                                                       Further, as described 
                                                                       previously, the Group's 
                                                                       focus on production 
                                                                       efficiency supports 
                                                                       mitigation of a low 
                                                                       oil price environment. 
-------------------------------    -------------------------------    ------------------------------ 
 
 
risk                                 appetite 
---------------------------------    ---------------------------------    --------------------------- 
Fiscal risk and government           The Group faces an uncertain         Due to the nature of 
 take                                 macro--economic and                  such risks and their 
 Unanticipated changes                regulatory environment.              relative unpredictability, 
 in the regulatory or                                                      it must be tolerant 
 fiscal environment can                                                    of certain inherent 
 affect the Group's ability                                                exposure. 
 to deliver its strategy/business 
 plan and potentially 
 impact revenue and future 
 developments. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in the potential 
 impact or likelihood, 
 although the anticipated 
 exit of the United Kingdom 
 from the European Union 
 may impact the regulatory 
 environment going forward, 
 for example by affecting 
 the cost of emissions 
 trading certificates. 
---------------------------------    ---------------------------------    --------------------------- 
                                     mitigation 
---------------------------------    ---------------------------------    --------------------------- 
                                     It is difficult for                  All business development 
                                      the Group to predict                 or investment activities 
                                      the timing or severity               recognise potential 
                                      of such changes. However,            tax implications and 
                                      through Oil & Gas UK                 the Group maintains 
                                      and other industry associations,     relevant internal tax 
                                      the Group engages with               expertise. 
                                      government and other 
                                      appropriate organisations            At an operational level, 
                                      in order to keep abreast             the Group has procedures 
                                      of expected and potential            to identify impending 
                                      changes; the Group also              changes in relevant 
                                      takes an active role                 regulations to ensure 
                                      in making appropriate                legislative compliance. 
                                      representations. 
---------------------------------    ---------------------------------    --------------------------- 
 
 
risk                           appetite 
---------------------------    ----------------------------    ---------------------------- 
Joint venture partners         The Group requires partners     creditworthiness of 
 Failure by joint venture       of high integrity. It           partners and evaluates 
 parties to fund their          recognises that it must         this aspect carefully 
 obligations.                   accept a degree of exposure     as part of every investment 
                                to the                          decision. 
 Dependence on other 
 parties where the Group 
 is not the operator. 
 
 Potential impact - Medium 
 (2017 Medium) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in the potential 
 impact or likelihood. 
---------------------------    ----------------------------    ---------------------------- 
                               mitigation 
---------------------------    ----------------------------    ---------------------------- 
                               The Group operates regular      The Group generally 
                                cash call and billing           prefers to be the operator. 
                                arrangements with its           The Group maintains 
                                co-venturers to mitigate        regular dialogue with 
                                the Group's credit exposure     its partners to ensure 
                                at any one point in             alignment of interests 
                                time and keeps in regular       and to maximise the 
                                dialogue with each of           value of joint venture 
                                these parties to ensure         assets. 
                                payment. Risk of default 
                                is mitigated by joint 
                                operating agreements 
                                allowing the Group to 
                                take over any defaulting 
                                party's share in an 
                                operated asset and rigorous 
                                and continual assessment 
                                of the financial situation 
                                of partners. 
---------------------------    ----------------------------    ---------------------------- 
 
 
risk                             appetite 
-----------------------------    -----------------------------    ------------------------- 
Competition                      The Group operates in            sector. 
 The Group operates in            a mature industry with 
 a competitive environment        well-established competitors 
 across many areas, including     and aims to be the leading 
 the acquisition of oil           operator in the 
 and gas assets, the 
 marketing of oil and 
 gas, the procurement 
 of oil and gas services 
 and access to human 
 resources. 
 
 Potential impact - High 
 (2017 Medium) 
 Likelihood - High (2017 
 Medium) 
 
 The potential impact 
 and likelihood has increased 
 due to an increase in 
 the number of available 
 oil and gas assets and 
 competitors looking 
 to acquire them. 
-----------------------------    -----------------------------    ------------------------- 
                                 mitigation 
-----------------------------    -----------------------------    ------------------------- 
                                 The Group has strong             The Group maintains 
                                  technical and business           good relations with 
                                  development capabilities         oil and gas service 
                                  to ensure that it is             providers and constantly 
                                  well positioned to identify      keeps the market under 
                                  and execute potential            review. 
                                  acquisition opportunities. 
-----------------------------    -----------------------------    ------------------------- 
 
 
risk                                 appetite 
---------------------------------    ------------------------------    ------------------------------ 
Portfolio concentration              Although the extent               concentrated in the 
 The Group's assets are               of portfolio concentration        UK North Sea and therefore 
 primarily concentrated               is moderated by production        this risk remains intrinsic 
 in the UK North Sea                  generated internationally,        to the Group. 
 around a limited number              the majority of the 
 of infrastructure hubs               Group's assets remain 
 and existing production              relatively 
 (principally oil) is 
 from mature fields. 
 This amplifies exposure 
 to key infrastructure 
 (including ageing pipelines 
 and terminals), political/fiscal 
 changes and oil price 
 movements. 
 
 Potential impact - High 
 (2017 High) 
 Likelihood - High (2017 
 Medium) 
 
 The acquisition of an 
 additional interest 
 in the Magnus oil field 
 has elevated this risk 
 in the long term (by 
 further concentrating 
 the Group's portfolio 
 in the UK North Sea). 
 Further, the Dunlin 
 bypass export project, 
 once completed, will 
 see volumes from Thistle 
 and the Dons exported 
 via the Magnus facility 
 and Ninian Pipeline 
 System to the Sullom 
 Voe Terminal. 
 
 The Group is currently 
 focused on oil production 
 and does not have significant 
 exposure to gas or other 
 sources of income. 
---------------------------------    ------------------------------    ------------------------------ 
                                     mitigation 
---------------------------------    ------------------------------    ------------------------------ 
                                     This risk is mitigated            Production at the Greater 
                                      in part through acquisitions.     Kittiwake Area, Alma/Galia 
                                      For all acquisitions,             and Kraken reduced the 
                                      the Group uses a number           Group's prior concentration 
                                      of business development           to the Brent Pipeline 
                                      resources to evaluate             System ('BPS') and the 
                                      and transact acquisitions         Sullom Voe Terminal. 
                                      in a commercially sensitive       However, the acquisition 
                                      manner. This includes             of an additional interest 
                                      performing extensive              in the Magnus field 
                                      due diligence (using              in December 2018 resulted 
                                      in-house and external             in further concentration 
                                      personnel) and actively           in Sullom Voe Terminal, 
                                      involving executive               with concentration increasing 
                                      management in reviewing           again following completion 
                                      commercial, technical             of the Dunlin bypass 
                                      and other business risks          export project in 2019. 
                                      together with mitigation          Although the Group has 
                                      measures.                         concentration risk at 
                                                                        Sullom Voe Terminal, 
                                      The Group also constantly         taking operatorship 
                                      keeps its portfolio               of the terminal has 
                                      under rigorous review             put the Group in a position 
                                      and, accordingly, actively        of more direct control 
                                      considers the potential           of such risk. 
                                      for making disposals 
                                      and divesting, executing 
                                      development projects, 
                                      making international 
                                      acquisitions, expanding 
                                      hubs and potentially 
                                      investing in gas assets 
                                      or export capability 
                                      where such opportunities 
                                      are consistent with 
                                      the Group's focus on 
                                      enhancing net revenues, 
                                      generating cash flow 
                                      and strengthening the 
                                      balance sheet. 
---------------------------------    ------------------------------    ------------------------------ 
 
 
risk                              appetite 
------------------------------    --------------------------------    ----------------------------- 
International Business            In light of its long-term           However, such tolerance 
 While the majority of             growth strategy, the                does not impair the 
 the Group's activities            Group seeks to expand               Group's commitment to 
 and assets are in the             and diversify its production        comply with legislative 
 UK, the international             (geographically and                 and regulatory requirements 
 business is still material.       in terms of quantum);               in the jurisdictions 
 The Group's international         as such, it is tolerant             in which it operates. 
 business is subject               of assuming certain                 Opportunities should 
 to the same risks as              commercial risks which              enhance net revenues 
 the UK business (e.g.             may accompany the opportunities     and facilitate strengthening 
 HSE&A, production and             it pursues.                         of the balance sheet. 
 project execution); 
 however, there are additional 
 risks that the Group 
 faces, including security 
 of staff and assets, 
 political, foreign exchange 
 and currency control, 
 taxation, legal and 
 regulatory, cultural 
 and language barriers 
 and corruption. 
 
 Potential impact - Medium 
 (2017 Medium) 
 Likelihood - Medium 
 (2017 Medium) 
 
 There has been no material 
 change in the impact 
 or likelihood. 
------------------------------    --------------------------------    ----------------------------- 
                                  mitigation 
------------------------------    --------------------------------    ----------------------------- 
                                  Prior to entering a                 Where appropriate, the 
                                   new country, EnQuest                risks may be mitigated 
                                   evaluates the host country          by entering into a joint 
                                   to assess whether there             venture with partners 
                                   is an adequate and established      with local knowledge 
                                   legal and political                 and experience. 
                                   framework in place to 
                                   protect and safeguard               After country entry, 
                                   first its expatriate                EnQuest maintains a 
                                   and local staff and,                dialogue with local 
                                   second, any investment              and regional government, 
                                   within the country in               particularly with those 
                                   question.                           responsible for oil, 
                                                                       energy and fiscal matters, 
                                   When evaluating international       and may obtain support 
                                   business risks, executive           from appropriate risk 
                                   management reviews commercial,      consultancies. When 
                                   technical and other                 there is a significant 
                                   business risks together             change in the risk to 
                                   with mitigation and                 people or assets within 
                                   how risks can be managed            a country, the Group 
                                   by the business on an               takes appropriate action 
                                   ongoing basis.                      to safeguard people 
                                                                       and assets. 
                                   EnQuest looks to employ 
                                   suitably qualified host 
                                   country staff and work 
                                   with good-quality local 
                                   advisers to ensure it 
                                   complies with national 
                                   legislation, business 
                                   practices and cultural 
                                   norms while at all times 
                                   ensuring that staff, 
                                   contractors and advisers 
                                   comply with EnQuest's 
                                   business principles, 
                                   including those on financial 
                                   control, cost management, 
                                   fraud and corruption. 
------------------------------    --------------------------------    ----------------------------- 
 
 
risk                                 appetite 
---------------------------------    ----------------------------    ------------------------------ 
IT security and resilience           The Group endeavours            data, impact operations 
 The Group is exposed                 to provide a secure             or destabilise its financial 
 to risks arising from                IT environment that             systems; it has a very 
 interruption to, or                  is able to resist and           low appetite for this 
 failure of, IT infrastructure.       withstand any attacks           risk. 
 The risks of disruption              or unintentional disruption 
 to normal operations                 that may compromise 
 range from loss in functionality     sensitive 
 of generic systems (such 
 as email and internet 
 access) to the compromising 
 of more sophisticated 
 systems that support 
 the Group's operational 
 activities. These risks 
 could result from malicious 
 interventions such as 
 cyber-attacks. 
 
 Potential impact - Medium 
 (2017 Medium) 
 Likelihood - Low (2017 
 Low) 
---------------------------------    ----------------------------    ------------------------------ 
                                     mitigation 
---------------------------------    ----------------------------    ------------------------------ 
                                     The Group has established       The Risk Committee undertook 
                                      IT capabilities and             additional analyses 
                                      endeavours to be in             of cyber-security risks 
                                      a position to defend            in 2018. Recognising 
                                      its systems against             that it is one of the 
                                      disruption or attack.           Group's key focus areas, 
                                                                      the Group now employs 
                                                                      a cyber-security manager. 
                                                                      Work on assessing the 
                                                                      cyber-security environment 
                                                                      and implementing improvements 
                                                                      as necessary will continue 
                                                                      during 2019. 
---------------------------------    ----------------------------    ------------------------------ 
 

Stefan Ricketts

Company Secretary

The Strategic Report was approved by the Board and signed on its behalf by the Company Secretary on 20 March 2019.

KEY PERFORMANCE INDICATORS

 
   2018   2017   2016 
 
 
 UK North Sea Lost Time Incident Frequency 
  ('LTIF')(1)                                         0.61      0.70      0.82 
 Malaysia LTIF(1)                                     0.00      0.00      0.00 
------------------------------------------------  --------  --------  -------- 
 Group LTIF(1)                                        0.43      0.46      0.51 
------------------------------------------------  --------  --------  -------- 
 Production (Boepd)                                 55,447    37,405    39,751 
------------------------------------------------  --------  --------  -------- 
 Net 2P reserves (MMboe)                               245       210       215 
------------------------------------------------  --------  --------  -------- 
 Business performance data: 
 Revenue and other operating income(2) ($ 
  million)                                         1,201.0     627.5     849.6 
 Realised blended average oil price per 
  barrel(2) ($)                                       61.2      52.2      63.8 
 Opex per barrel (production and transportation 
  costs) ($)                                          23.0      25.6      24.6 
 EBITDA(3) ($ million)                               716.3     303.6     477.1 
 Cash capex(4) on property, plant and equipment 
  oil and gas assets ($ million)                     220.2     367.6     609.2 
------------------------------------------------  --------  --------  -------- 
 Reported data: 
 Cash generated from operations ($ million)          788.6     327.0     408.3 
 Net debt including PIK ($ million)                1,774.5   1,991.4   1,796.5 
------------------------------------------------  --------  --------  -------- 
 

(1) Lost time incident frequency represents the number of incidents per million exposure hours worked (based on 12 hours for offshore and 8 hours for onshore)

(2) Including realised loss of $93.0 million in 2018 associated with EnQuest's oil price hedges (2017: realised loss of $20.6 million; 2016: realised gain of $255.8 million)

(3) 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, foreign exchange movements, inventory revaluation and the realised gains/loss on foreign currency derivatives related to capital expenditure

(4) Net of proceeds from disposal of $nil million (2017: $nil million; 2016: $1.5 million)

OIL AND GAS RESERVES AND RESOURCES

At 31 December 2018

 
                                                   UKCS         Other Regions    Total 
                                             ---------------  ----------------  ------ 
                                              MMboe    MMboe   MMboe    MMboe    MMboe 
 Proven and probable reserves 
  (notes 1,2,3,6 and 8) 
  At 31 December 2017                                    190                21     210 
    Revisions of previous estimates                      (3)                 1     (2) 
        Discoveries, extensions and 
         additions                                         -                 -       - 
    Acquisitions and disposals 
     (note 7)                                             55                 -      55 
      Production 
    Export Meter                                (17)              (3) 
    Volume Adjustments (note 
     5)                                            0                1 
    Production during period:                           (17)               (2)    (19) 
  Total at 31 December 2018                              225                20     245 
 Contingent resources (notes 
  1,2 and 4) 
  At 31 December 2017                                     98                67     164 
    Revisions of previous estimates                        4                 1       5 
        Discoveries, extensions and 
         additions                                         -                 -       - 
    Acquisitions and disposals 
     (note 7)                                             36                 -      36 
    Promoted to reserves                                 (6)                 -     (6) 
  Total at 31 December 2018                              131                68     198 
 
 Notes: 
 1    Reserves are quoted on a net entitlement basis, resources 
       are quoted on a working interest basis 
 2    Proven and probable reserves and contingent resources have 
       been assessed by the Group's internal reservoir engineers, 
       utilising geological, geophysical, engineering and financial 
       data 
 3    The Group's proven and probable reserve profiles has been 
       audited by a recognised Competent Person in accordance with 
       the definitions set out under the 2018 Petroleum Resources 
       Management System and supporting guidelines issued by the 
       Society of Petroleum Engineers 
 4    Contingent resources relate to technically recoverable hydrocarbons 
       for which commerciality has not yet been determined and are 
       stated on a best technical case or '2C' basis 
 5    Correction of export to sales volumes 
 6    All UKCS volumes are presented pre-SVT value adjustment 
 7    Proven and probable reserves: Acquisition of additional 75% 
       equity in Magnus. Contingent resources: Acquisition of additional 
       75% equity in Magnus largely offset by relinquishment of the 
       Group's equity interests in the Kildrummy and Torphins licences 
 8    The above proven and probable reserves include 6 MMboe that 
       will be consumed as lease fuel on the Kraken FPSO and fuel 
       gas on Heather, Broom, West Don, Don SW, Conrie and Ythan 
 9    The above table excludes Tanjong Baram in Malaysia 
 

Group Statement of Comprehensive Income

For the year ended 31 December 2018

 
                                                    2018                                       2017 
-------------------------  -----  -----------------------------------------  ----------------------------------------- 
                                                  Remeasurements                             Remeasurements 
                                                 and exceptional                            and exceptional 
                                      Business       items (note   Reported      Business       items (note   Reported 
                                   performance                4)    in year   performance                4)    in year 
                           Notes         $'000             $'000      $'000         $'000             $'000      $'000 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Revenue and other 
 operating 
 income                     5(a)     1,201,005            97,432  1,298,437       635,167           (7,716)    627,451 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Cost of sales               5(b)     (926,020)             1,718  (924,302)     (569,506)             5,481  (564,025) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Gross profit/(loss)                    274,985            99,150    374,135        65,661           (2,235)     63,426 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Net impairment 
 (charge)/reversal 
 to oil and gas assets         4             -         (126,046)  (126,046)             -         (171,971)  (171,971) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
General and 
 administration 
 expenses                   5(c)       (4,018)                 -    (4,018)         (848)                 -      (848) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Other income                5(d)        22,428            78,316    100,744         6,807            50,613     57,420 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Other expenses              5(e)       (3,362)          (14,715)   (18,077)      (24,363)          (20,358)   (44,721) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Profit/(loss) from 
 operations 
 before tax and finance 
 income/(costs)                        290,033            36,705    326,738        47,257         (143,951)   (96,694) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Finance costs                  6     (236,114)              (28)  (236,142)     (149,020)             (272)  (149,292) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Finance income                 6         3,389                 -      3,389         2,213                 -      2,213 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Profit/(loss) before 
 tax                                    57,308            36,677     93,985      (99,550)         (144,223)  (243,773) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Income tax                     7        20,887            12,406     33,293        65,996           116,947    182,943 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
Profit/(loss) for the 
 year attributable to 
 owners of the parent                   78,195            49,083    127,278      (33,554)          (27,276)   (60,830) 
-------------------------  -----  ------------  ----------------  ---------  ------------  ----------------  --------- 
 
 
Other comprehensive income 
-------------------------------   -----  -------  --------  -------- 
Items that may be reclassified 
 to profit or loss: 
-------------------------------   -----  -------  --------  -------- 
Transfers to income statement 
 of cash flow hedges                        (36)                 (5) 
-------------------------------   -----  -------  --------  -------- 
Other comprehensive income 
 for the year, net of tax                   (36)                 (5) 
-------------------------------   -----  -------  --------  -------- 
Total comprehensive income 
 for the year, attributable 
 to owners of the parent                 127,242            (60,835) 
-------------------------------   -----  -------  --------  -------- 
 
Earnings per share               8    $        $         $         $ 
-------------------------------   -----  -------  --------  -------- 
Basic                             0.064    0.104  (0.025)*  (0.046)* 
-------------------------------   -----  -------  --------  -------- 
Diluted                           0.062    0.101  (0.025)*  (0.046)* 
-------------------------------   -----  -------  --------  -------- 
 

* Restated following rights issue

The attached notes 1 to 29 form part of these Group financial statements.

Group Balance Sheet

At 31 December 2018

 
                                                             2018        2017 
                                   Notes                    $'000       $'000 
---------------------------------  -----  -----------------------  ---------- 
ASSETS 
---------------------------------  -----  -----------------------  ---------- 
Non-current assets 
---------------------------------  -----  -----------------------  ---------- 
Property, plant and equipment         10                4,349,913   3,848,622 
---------------------------------  -----  -----------------------  ---------- 
Goodwill                              11                  283,950     189,317 
---------------------------------  -----  -----------------------  ---------- 
Intangible oil and gas assets         12                   51,803      52,103 
---------------------------------  -----  -----------------------  ---------- 
Investments                           13                       31         152 
---------------------------------  -----  -----------------------  ---------- 
Deferred tax assets                    7                  286,721     398,263 
---------------------------------  -----  -----------------------  ---------- 
Other financial assets                20                    5,958       8,191 
---------------------------------  -----  -----------------------  ---------- 
                                                        4,978,376   4,496,648 
---------------------------------  -----  -----------------------  ---------- 
 
Current assets 
---------------------------------  -----  -----------------------  ---------- 
Inventories                           14                  100,532      78,045 
---------------------------------  -----  -----------------------  ---------- 
Trade and other receivables           15                  275,809     227,754 
---------------------------------  -----  -----------------------  ---------- 
Current tax receivable                                         20       1,159 
---------------------------------  -----  -----------------------  ---------- 
Cash and cash equivalents             16                  240,604     173,128 
---------------------------------  -----  -----------------------  ---------- 
Other financial assets                20                   66,575      61,737 
---------------------------------  -----  -----------------------  ---------- 
                                                          683,540     541,823 
---------------------------------  -----  -----------------------  ---------- 
TOTAL ASSETS                                            5,661,916   5,038,471 
---------------------------------  -----  -----------------------  ---------- 
 
EQUITY AND LIABILITIES 
---------------------------------  -----  -----------------------  ---------- 
Equity 
---------------------------------  -----  -----------------------  ---------- 
Share capital and premium             17                  345,331     210,402 
---------------------------------  -----  -----------------------  ---------- 
Merger reserve                                            662,855     662,855 
---------------------------------  -----  -----------------------  ---------- 
Cash flow hedge reserve                                         -          36 
---------------------------------  -----  -----------------------  ---------- 
Share-based payment reserve                               (6,884)     (5,516) 
---------------------------------  -----  -----------------------  ---------- 
Retained earnings                                        (17,750)   (106,911) 
---------------------------------  -----  -----------------------  ---------- 
TOTAL EQUITY                                              983,552     760,866 
---------------------------------  -----  -----------------------  ---------- 
 
Non-current liabilities 
---------------------------------  -----  -----------------------  ---------- 
Borrowings                            19                  735,470     888,993 
---------------------------------  -----  -----------------------  ---------- 
Bonds                                 19                  990,282     934,351 
---------------------------------  -----  -----------------------  ---------- 
Obligations under finance leases      24                  615,781     679,924 
---------------------------------  -----  -----------------------  ---------- 
Provisions                            22                1,306,092     705,999 
---------------------------------  -----  -----------------------  ---------- 
Trade and other payables              23                   18,209      78,777 
---------------------------------  -----  -----------------------  ---------- 
Other financial liabilities           20                        -       7,121 
---------------------------------  -----  -----------------------  ---------- 
Deferred tax liabilities               7                   27,815      62,685 
---------------------------------  -----  -----------------------  ---------- 
                                                        3,693,649   3,357,850 
---------------------------------  -----  -----------------------  ---------- 
 
Current liabilities 
---------------------------------  -----  -----------------------  ---------- 
Borrowings                            19                  311,261     330,012 
---------------------------------  -----  -----------------------  ---------- 
Obligations under finance leases      24                   93,169     118,009 
---------------------------------  -----  -----------------------  ---------- 
Provisions                            22                   81,050      43,215 
---------------------------------  -----  -----------------------  ---------- 
Trade and other payables              23                  483,781     367,312 
---------------------------------  -----  -----------------------  ---------- 
Other financial liabilities           20                      142      61,207 
---------------------------------  -----  -----------------------  ---------- 
Current tax payable                                        15,312           - 
---------------------------------  -----  -----------------------  ---------- 
                                                          984,715     919,755 
---------------------------------  -----  -----------------------  ---------- 
TOTAL LIABILITIES                                       4,678,364   4,277,605 
---------------------------------  -----  -----------------------  ---------- 
TOTAL EQUITY AND LIABILITIES                            5,661,916   5,038,471 
---------------------------------  -----  -----------------------  ---------- 
 

The attached notes 1 to 29 form part of these Group financial statements.

The financial statements were approved by the Board of Directors on 20 March 2019 and signed on its behalf by:

Jonathan Swinney

Chief Financial Officer

Group Statement of Changes in Equity

For the year ended 31 December 2018

 
                                   Share 
                                 capital            Cash flow  Share-based 
                               and share    Merger      hedge     payments   Retained 
                                 premium   reserve    reserve      reserve   earnings     Total 
                                   $'000     $'000      $'000        $'000      $'000     $'000 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Balance at 1 January 2017        208,639   662,855         41      (6,602)   (46,081)   818,852 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
 
Profit/(loss) for the year             -         -          -            -   (60,830)  (60,830) 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Other comprehensive income             -         -        (5)            -          -       (5) 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Total comprehensive income 
 for the year                          -         -        (5)            -   (60,830)  (60,835) 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Share-based payment                    -         -          -        2,849          -     2,849 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Shares issued on behalf of 
 Employee Benefit Trust            1,763         -          -      (1,763)          -         - 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Balance at 31 December 2017 
 (as previously reported)        210,402   662,855         36      (5,516)  (106,911)   760,866 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
 
Adjustment on adoption of 
 IFRS 9 (see note 2)                                                         (38,117)  (38,117) 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Balance at 1 January 2018        210,402   662,855         36      (5,516)  (145,028)   722,749 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Profit/(loss) for the year             -         -          -            -    127,278   127,278 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Other comprehensive income             -         -       (36)            -          -      (36) 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Total comprehensive income 
 for the year                          -         -       (36)            -    127,278   127,242 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Issue of share capital           128,916         -          -            -          -   128,916 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Share-based payment                    -         -          -        4,645          -     4,645 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Shares purchased on behalf 
 of Employee Benefit Trust         6,013         -          -      (6,013)          -         - 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
Balance at 31 December 2018      345,331   662,855          -      (6,884)   (17,750)   983,552 
----------------------------  ----------  --------  ---------  -----------  ---------  -------- 
 

The attached notes 1 to 29 form part of these Group financial statements.

Group Statement of Cash Flows

For the year ended 31 December 2018

 
                                                                   2018        2017 
                                                       Notes      $'000       $'000 
-----------------------------------------------------  -----  ---------  ---------- 
CASH FLOW FROM OPERATING ACTIVITIES 
-----------------------------------------------------  -----  ---------  ---------- 
Cash generated from operations                            28    788,629     327,034 
-----------------------------------------------------  -----  ---------  ---------- 
Cash (paid)/received on sale/(purchase) of 
 financial instruments                                         (16,363)     (1,185) 
-----------------------------------------------------  -----  ---------  ---------- 
Proceeds from exercise of Thistle decommissioning                50,000           - 
 option 
-----------------------------------------------------  -----  ---------  ---------- 
Decommissioning spend                                     22   (10,036)    (10,605) 
-----------------------------------------------------  -----  ---------  ---------- 
Income taxes paid                                              (17,798)    (13,463) 
-----------------------------------------------------  -----  ---------  ---------- 
Net cash flows from/(used) operating activities                 794,432     301,781 
-----------------------------------------------------  -----  ---------  ---------- 
 
INVESTING ACTIVITIES 
-----------------------------------------------------  -----  ---------  ---------- 
Purchase of property, plant and equipment                     (220,213)   (358,420) 
-----------------------------------------------------  -----  ---------  ---------- 
Purchase of intangible oil and gas assets                             -     (9,171) 
-----------------------------------------------------  -----  ---------  ---------- 
Proceeds from disposal of Ascent loan notes                           -       3,561 
-----------------------------------------------------  -----  ---------  ---------- 
Consideration on exercise of Magnus acquisition 
 option                                                       (100,000)           - 
-----------------------------------------------------  -----  ---------  ---------- 
Deferred consideration on initial Magnus acquisition           (48,642)           - 
-----------------------------------------------------  -----  ---------  ---------- 
Interest received                                                 1,600         340 
-----------------------------------------------------  -----  ---------  ---------- 
Net cash flows (used)/from in investing activities            (367,255)   (363,690) 
-----------------------------------------------------  -----  ---------  ---------- 
 
FINANCING ACTIVITIES 
-----------------------------------------------------  -----  ---------  ---------- 
Proceeds from bank facilities                                   219,900     162,970 
-----------------------------------------------------  -----  ---------  ---------- 
Repayment of bank facilities                                  (402,008)    (50,969) 
-----------------------------------------------------  -----  ---------  ---------- 
Gross proceeds from issue of shares                             138,926           - 
-----------------------------------------------------  -----  ---------  ---------- 
Shares purchased by Employee Benefit Trust                      (6,013)           - 
-----------------------------------------------------  -----  ---------  ---------- 
Share issue and debt restructuring costs paid                   (3,997)     (1,356) 
-----------------------------------------------------  -----  ---------  ---------- 
Repayment of obligations under finance leases                 (144,820)           - 
-----------------------------------------------------  -----  ---------  ---------- 
Interest paid                                                 (136,482)    (46,052) 
-----------------------------------------------------  -----  ---------  ---------- 
Other finance costs paid                                       (20,425)     (6,286) 
-----------------------------------------------------  -----  ---------  ---------- 
Net cash flows from/(used) financing activities               (354,919)      58,307 
-----------------------------------------------------  -----  ---------  ---------- 
 
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS             72,258     (3,602) 
-----------------------------------------------------  -----  ---------  ---------- 
Net foreign exchange on cash and cash equivalents               (4,726)       5,210 
-----------------------------------------------------  -----  ---------  ---------- 
Cash and cash equivalents at 1 January                          169,668     168,060 
-----------------------------------------------------  -----  ---------  ---------- 
CASH AND CASH EQUIVALENTS AT 31 DECEMBER                        237,200     169,668 
-----------------------------------------------------  -----  ---------  ---------- 
 
Reconciliation of cash and cash equivalents 
-----------------------------------------------------  -----  ---------  ---------- 
Cash and cash equivalents per statement of 
 cash flows                                                     237,200     169,668 
-----------------------------------------------------  -----  ---------  ---------- 
Restricted cash                                           16      3,404       3,460 
-----------------------------------------------------  -----  ---------  ---------- 
Cash and cash equivalents per balance sheet                     240,604     173,128 
-----------------------------------------------------  -----  ---------  ---------- 
 

The attached notes 1 to 29 form part of these Group financial statements.

Notes to the Group Financial Statements

For the year ended 31 December 2018

1. Corporate information

EnQuest PLC ('EnQuest' or the 'Company') is a limited liability company incorporated and registered in England and is listed on the London Stock Exchange and on the Stockholm NASDAQ OMX.

The principal activities of the Company and its subsidiaries (together the 'Group') is to enhance hydrocarbon recovery and extend the useful lives of mature and underdeveloped assets and associated infrastructure in a profitable and responsible manner.

The Group's financial statements for the year ended 31 December 2018 were authorised for issue in accordance with a resolution of the Board of Directors on 20 March 2019.

A listing of the Group companies is contained in note 27 to these Group financial statements.

2. Summary of significant accounting policies

Basis of preparation

The Group financial information has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 December 2018 and applied in accordance with the Companies Act 2006. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December 2018.

The Group financial information has been prepared on an historical cost basis, except for the fair value remeasurement of certain financial instruments, including derivatives, as set out in the accounting policies below. The presentation currency of the Group financial information is United States Dollars and all values in the Group financial information are rounded to the nearest thousand ($'000) except where otherwise stated.

The financial statements have been prepared on the going concern basis. Further information relating to the use of the going concern assumption is provided in the 'Going concern' section of the Financial Review.

New standards and interpretations

The Group applied IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments from 1 January 2018. The nature and effect of the changes as a result of adoption of these new accounting standards are described below. Other new standards are also effective from 1 January 2018 but they do not have a material effect on the Group's financial statements. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The five-step model applies to revenue arising from contracts with customers and requires revenue to be recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. Determining the timing of the transfer of control, at a point in time or over time, requires judgement.

The Group adopted IFRS 15 using the full retrospective method of adoption as per the new IFRS 15 accounting policies and the Group has assessed that there is no impact on the financial statements.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement, bringing together the accounting aspects for financial instruments: classification and measurement, impairment under the expected credit loss ('ECL') model and hedge accounting.

When adopting IFRS 9, the Group has applied transition relief and opted not to restate prior periods. Differences arising from the adoption of IFRS 9 are recognised in retained earnings. The total impact on the Group's retained earnings as at 1 January 2018 is $38.1 million. The effect of adopting IFRS 9 is as follows:

Impact on the statement of financial position (increase/(decrease)):

 
                            31 December        IFRS 9   1 January 
                                   2017    Adjustment        2018 
 Balance sheet (extract)          $'000         $'000       $'000 
 Non-current liabilities 
 Bonds                          934,351        38,117     972,468 
 Total                          934,351        38,117     972,468 
                           ============  ============  ========== 
 
 Equity 
 Retained earnings            (106,911)      (38,117)   (145,028) 
 Total                        (106,911)      (38,117)   (145,028) 
                           ============  ============  ========== 
 

The table shows the adjustment recognised for each relevant line item. Line items that were not affected by the changes have not been included. The adjustments are recognised in the opening balance sheet on 1 January 2018.

In October 2017, the IASB confirmed the accounting for modifications of financial liabilities under IFRS 9. When a financial liability measured at amortised cost is modified without this resulting in derecognition, a gain or loss should be recognised in profit or loss. The gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate ('EIR'). Any fees and costs incurred are amortised over the remaining term of the asset.

At the end of 2016 the Group's bonds were refinanced, for which the modification was not considered to be significant under IAS 39. As a result, the change in contractual cash flows on the bonds was amortised over the new life of the bonds, rather than taken straight to profit or loss. Under IFRS 9, the refinancing is a modification of the debt in which the difference in contractual cash flows should be taken straight to profit or loss. The cash flows were reassessed and, on 1 January 2018 on the adoption of IFRS 9, an adjustment for $38.1 million was taken through opening reserves and through the amortised value of the bonds ($15.4 million increase to high yield bonds and a $22.7 million increase to retail bonds).

Standards issued but not yet effective

Standards issued and relevant to the Group, but not yet effective up to the date of issuance of the Group's financial statements, are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt these standards when they become effective. The Directors do not anticipate that the adoption of these standards will have a material impact on the Group's financial statements in the period of initial application.

IFRS 16 Leases

IFRS 16 Leases, issued in January 2016, sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. It replaces the previous leases standard IAS 17 Leases and is effective from 1 January 2019. IFRS 16 requires lessees and lessors to make more extensive disclosures than under IAS 17.

IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments. Lessees will be required to recognise separately the interest expense on the lease liability and the depreciation expense on the right-of-use asset. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current accounting under IAS 17 i.e. lessors continue to classify leases as finance or operating leases.

During 2018, the Group has performed an impact assessment for the application of IFRS 16. This assessment is based on currently available information and will be subject to changes arising from further reasonable and supportable information being made available to the Group in 2019, including the Group's borrowing rate at 1 January 2019 when the Group will adopt IFRS 16. The Group continues to assess its accounting processes, controls and policies on an ongoing basis.

The Group will adopt the new standard on the required effective date using the modified retrospective method. The Group will apply the practical expedient to grandfather the definition of a lease on transition. It will therefore apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17. Contracts which have not been considered or identified as a lease will continue to be accounted for in line with their historical treatment. The Group will also elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application and lease contracts for which the underlying asset is of low value.

The Group has identified leases which will be recognised as finance leases under IFRS 16. On the implementation of IFRS 16 on 1 January 2019, the Group expects to recognise right-of-use assets and corresponding lease liabilities of approximately $82 million. The preliminary estimated impact on the Group's 2019 consolidated statement of comprehensive income results in a decrease in to net profit of approximately $2 million; a result of the replacement of operating lease payments previously accounted under IAS 17 by increased depreciation and finance charges under IFRS 16. EBITDA is estimated to increase by approximately $7 million. The estimated 2019 consolidated financial statements impact is computed based on the information available to date and the actual impact of IFRS 16 on the Group's 2019 consolidated financial statements may differ from the estimates provided above.

Basis of consolidation

Subsidiaries

Subsidiaries are all entities over which the Group has the sole right to exercise control over the operations and govern the financial policies generally accompanying a shareholding of more than half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing the Group's control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.

Intercompany profits, transactions and balances are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Joint arrangements

Oil and gas operations are usually conducted by the Group as co-licensees in unincorporated joint operations with other companies. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the consent of the relevant parties sharing control.

Most of the Group's activities are conducted through joint operations, whereby the parties that have joint control of the arrangement have the rights to the assets, and obligations for the liabilities, relating to the arrangement. The Group reports its interests in joint operations using proportionate consolidation - the Group's share of the production, assets, liabilities, income and expenses of the joint operation are combined with the equivalent items in the consolidated financial statements on a line-by-line basis.

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree's identifiable net assets. Those petroleum reserves and resources that are able to be reliably valued are recognised in the assessment of fair values on acquisition. Other potential reserves, resources and rights, for which fair values cannot be reliably determined, are not recognised.

Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as a financial liability are remeasured through profit or loss. If the contingent consideration is not within the scope of IFRS 9, it is measured at fair value in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date, and is subject to a maximum of one year.

Goodwill

Goodwill arising on a business combination is initially measured at cost, being the excess of the cost of the business combination over the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity at the date of acquisition.

If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, the gain is recognised in profit or loss.

Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that such carrying value may be impaired.

For the purposes of impairment testing, goodwill acquired is allocated to the cash generating units ('CGU') that are expected to benefit from the synergies of the combination. Each unit or units to which goodwill is allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.

Impairment is determined by assessing the recoverable amount of the CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than the carrying amount of the CGU and related goodwill, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.

Critical accounting estimates and judgements

The management of the Group has to make estimates and judgements when preparing the financial statements of the Group. Uncertainties in the estimates and judgements could have an impact on the carrying amount of assets and liabilities and the Group's result. The most important estimates and judgements in relation thereto are:

Estimates in oil and gas reserves

The business of the Group is to enhance hydrocarbon recovery and extend the useful lives of mature and underdeveloped assets and associated infrastructure in a profitable and responsible manner. Estimates of oil and gas reserves are used in the calculations for impairment tests and accounting for depletion and decommissioning. Changes in estimates of oil and gas reserves resulting in different future production profiles will affect the discounted cash flows used in impairment testing, the anticipated date of decommissioning and the depletion charges in accordance with the unit of production method.

Estimates in impairment of oil and gas assets, goodwill and the estimate of the cost recovery provision

Determination of whether oil and gas assets or goodwill have suffered any impairment requires an estimation of the fair value less costs to dispose of the CGU to which oil and gas assets and goodwill have been allocated. The calculation requires the entity to estimate the future cash flows expected to arise from the CGU using discounted cash flow models comprising asset-by-asset life of field projections using Level 3 inputs (based on the IFRS 13 fair value hierarchy). Key assumptions and estimates in the impairment models relate to: commodity prices that are based on internal view of forward curve prices for the first three years and thereafter at $75/bbl inflated at 2.0% per annum from 2023; discount rates derived from the Group's post-tax weighted average cost of capital of 10.0% (2017: 10.0%); commercial reserves and the related cost profiles. As the production and related cash flows can be estimated from EnQuest's experience, management believes that the estimated cash flows expected to be generated over the life of each field is the appropriate basis upon which to assess goodwill and individual assets for impairment.

These same models and assumptions are used in the calculation of the cost recovery provision (see note 22).

Determining the fair value of property, plant and equipment on business combinations

The Group determines the fair value of property, plant and equipment acquired in a business combination based on the discounted cash flows at the time of acquisition from the proven and probable reserves. In assessing the discounted cash flows, the estimated future cash flows attributable to the asset are discounted to their present value using a discount rate that reflects the market assessments of the time value of money and the risks specific to the asset at the time of the acquisition. In calculating the asset fair value, the Group will apply a forward curve followed by an oil price assumption representing management's view of the long-term oil price.

Decommissioning provision

Amounts used in recording a provision for decommissioning are estimates based on current legal and constructive requirements and current technology and price levels for the removal of facilities and plugging and abandoning of wells. Due to changes in relation to these items, the future actual cash outflows in relation to decommissioning are likely to differ in practice. To reflect the effects due to changes in legislation, requirements, technology and price levels, the carrying amounts of decommissioning provisions are reviewed on a regular basis.

The effects of changes in estimates do not give rise to prior year adjustments and are dealt with prospectively. While the Group uses its best estimates and judgement, actual results could differ from these estimates.

In estimating decommissioning provisions, the Group applies an annual inflation rate of 2.0% (2017: 2.0%) and an annual discount rate of 2.0% (2017: 2.0%).

Going concern

The Directors' assessment of going concern concludes that the use of the going concern basis is appropriate and that the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its commitments as they fall due over the going concern period.

The going concern assumption is highly sensitive to economic conditions. The Group closely monitors and manages its funding position and liquidity risk throughout the year, including monitoring forecast covenant results, to ensure it has access to sufficient funds to meet forecast cash requirements. 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 liquidity or covenant compliance risks in a timely manner. See the Financial Review for further details.

Taxation

The Group's operations are subject to a number of specific tax rules which apply to exploration, development and production. In addition, the tax provision is prepared before the relevant companies have filed their tax returns with the relevant tax authorities and, significantly, before these have been agreed. As a result of these factors, the tax provision process necessarily involves the use of a number of estimates and judgements including those required in calculating the effective tax rate. In considering the tax on exceptional items, the Group applies the appropriate statutory tax rate to each item to calculate the relevant tax charge on exceptional items.

The Group recognises deferred tax assets on unused tax losses where it is probable that future taxable profits will be available for utilisation. This requires management to make judgements and assumptions regarding the likelihood of future taxable profits and the amount of deferred tax that can be recognised.

Foreign currencies

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The Group's financial statements are presented in United States Dollars ($), the currency which the Group has elected to use as its presentation currency.

In the accounts of the Company and its individual subsidiaries, transactions in currencies other than a company's functional currency are recorded at the prevailing rate of exchange on the date of the transaction. At the year end, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at the balance sheet date. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the rate of exchange as at the dates of the initial transactions. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated using the rate of exchange at the date the fair value was determined. All foreign exchange gains and losses are taken to profit and loss in the statement of comprehensive income.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Cost comprises the purchase price or construction cost and any costs directly attributable to making that asset capable of operating as intended by management. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Oil and gas assets are depleted, on a field-by-field basis, using the unit of production method based on entitlement to proven and probable reserves, taking account of estimated future development expenditure relating to those reserves.

Depreciation on other elements of property, plant and equipment is provided on a straight-line basis at the following rates:

   Office furniture and equipment     Five years 
   Fixtures and fittings                       Ten years 
   Long leasehold land                     period of lease 

Each asset's estimated useful life, residual value and method of depreciation are reviewed and adjusted if appropriate at each financial year end. No depreciation is charged on assets under construction.

Oil and gas assets

Exploration and appraisal assets

The Group adopts the successful efforts method of accounting for exploration and evaluation costs. Pre-licence costs are expensed in the period in which they are incurred. Expenditure directly associated with exploration, evaluation or appraisal activities is initially capitalised as an intangible asset. Such costs include the costs of acquiring an interest, appraisal well drilling costs, payments to contractors and an appropriate share of directly attributable overheads incurred during the evaluation phase. For such appraisal activity, which may require drilling of further wells, costs continue to be carried as an asset whilst related hydrocarbons are considered capable of commercial development. Such costs are subject to technical, commercial and management review to confirm the continued intent to develop, or otherwise extract value. When this is no longer the case, the costs are written off as exploration and evaluation expenses in the statement of comprehensive income. When exploration licences are relinquished without further development, any previous impairment loss is reversed and the carrying costs are written off through the statement of comprehensive income. When assets are declared part of a commercial development, related costs are transferred to property, plant and equipment. All intangible oil and gas assets are assessed for any impairment prior to transfer and any impairment loss is recognised in the statement of comprehensive income.

Development assets

Expenditure relating to development of assets including the construction, installation and completion of infrastructure facilities such as platforms, pipelines and development wells, is capitalised within property, plant and equipment.

Farm-outs - in the exploration and evaluation phase

The Group does not record any expenditure made by the farmee on its account. In the event of a partial farm-out, the Group also does not recognise any gain or loss on its exploration and evaluation farm-out arrangements but redesignates any costs previously capitalised in relation to the whole interest as relating to the partial interest retained. Any cash consideration received directly from the farmee is credited against costs previously capitalised in relation to the whole interest with any excess accounted for by the farmor as a gain on disposal.

Farm-outs - outside the exploration and evaluation phase

In accounting for a farm-out arrangement outside the exploration and evaluation phase, the Group:

   --      Derecognises the proportion of the asset that it has sold to the farmee; 

-- Recognises the consideration received or receivable from the farmee, which represents the cash received and/or the farmee's obligation to fund the capital expenditure in relation to the interest retained by the farmor and/or any deferred consideration;

-- Recognises a gain or loss on the transaction for the difference between the net disposal proceeds and the carrying amount of the asset disposed of. A gain is only recognised when the value of the consideration can be determined reliably. If not, then the Group accounts for the consideration received as a reduction in the carrying amount of the underlying assets; and

-- Tests the retained interests for impairment if the terms of the arrangement indicate that the retained interest may be impaired.

The consideration receivable on disposal of an item of property, plant and equipment or an intangible asset is recognised initially at its fair value by the Group. However, if payment for the item is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognised as interest revenue. Any part of the consideration that is receivable in the form of cash is treated as a financial asset and is accounted for at amortised cost.

Carry arrangements

Where amounts are paid on behalf of a carried party these are capitalised. Where there is an obligation to make payments on behalf of a carried party and the timing and amount are uncertain, a provision is recognised. Where the payment is a fixed monetary amount, a financial liability is recognised.

Changes in unit of production factors

Changes in factors which affect unit of production calculations are dealt with prospectively, not by immediate adjustment of prior years' amounts.

Borrowing costs

Borrowing costs directly attributable to the construction of qualifying assets, which are assets that necessarily take a substantial period of time to prepare for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised as interest payable in the statement of comprehensive income in accordance with the effective interest method.

Impairment of tangible and intangible assets (excluding goodwill)

At each balance sheet date, the Group reviews the carrying amounts of its oil and gas assets to assess whether there is an indication that those assets may be impaired. If any such indication exists, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of its fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows attributable to the asset are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in the statement of comprehensive income.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the statement of comprehensive income.

Non-current assets held for sale

Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs of disposal.

Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Financial instruments (policy applicable from 1 January 2018)

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis.

Financial assets

Initial recognition and initial measurement

Financial assets are classified, at initial recognition, as amortised cost, fair value through other comprehensive income ('FVOCI'), or fair value through profit or loss ('FVPL').

The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow characteristics and the Group's business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus transaction costs (in the case of a financial asset not at fair value through profit or loss). Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.

Subsequent measurement

Financial assets at amortised cost

This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:

-- The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and

-- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest rate method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.

Financial assets at fair value through other comprehensive income (debt instruments)

The Group measures debt instruments at fair value through OCI if both of the following conditions are met:

-- The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and

-- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

For debt instruments at FVOCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in the statement of profit or loss and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVPL.

Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at FVOCI, as described above, debt instruments may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

Financial assets at FVPL are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss.

This category includes derivative instruments and listed equity investments which the Group had not irrevocably elected to classify at FVOCI.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Impairment of financial assets

IFRS 9's impairment requirements use more forward-looking information to recognise expected credit losses - the ECL model. This replaces IAS 39's 'incurred loss model'.

The Group recognises an allowance for ECLs for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a '12-month ECL'). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a 'lifetime ECL').

For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

For debt instruments at FVOCI, the Group applies the low credit risk simplification. At every reporting date, the Group evaluates whether the debt instrument is considered to have low credit risk using all reasonable and supportable information that is available without undue cost or effort. In making that evaluation, the Group reassesses the internal credit rating of the debt instrument. In addition, the Group considers that there has been a significant increase in credit risk when contractual payments are more than 30 days past due.

It is the Group's policy to measure ECLs on such instruments on a 12-month basis.

Financial liabilities

Initial recognition and initial measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Group's financial liabilities include loans and borrowings, trade and other payables, quoted and unquoted financial liabilities, and derivative financial instruments.

Subsequent measurement

Financial liabilities at fair value through profit or loss

Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss.

The Group uses derivative financial instruments, such as forward currency contracts, interest rate swaps and commodity contracts, to address its foreign currency risks, interest rate risks and commodity price risks, respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any changes in fair value are recognised immediately in the profit or loss within 'Remeasurements and exceptional items' profit or loss on the face of the income statement. When a derivative reaches maturity, the realised gain or loss is included within the Group's 'Business performance' results with a corresponding reclassification from 'Remeasurements and exceptional items'.

Option premium received or paid for commodity derivatives are amortised into 'Business performance' revenue over the period between the inception of the option, and that option's expiry date. This results in a corresponding reclassification from 'Remeasurements and exceptional items' revenue.

The Group has not designated any derivative financial instruments as hedging instruments for the periods contained within these financial statements.

Loans and borrowings

This is the category most relevant to the Group and includes the measurement of the bonds. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. This category generally applies to interest-bearing loans and borrowings.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss.

Inventories

Inventories of consumable well supplies are stated at the lower of cost and net realisable value, cost being determined on an average cost basis. Inventories of hydrocarbons are stated at the lower of cost and net realisable value.

Cash and cash equivalents

Cash and cash equivalents includes cash at bank, cash in hand, outstanding bank overdrafts and highly liquid interest-bearing securities with original maturities of three months or less.

Equity

Share capital

The balance classified as equity share capital includes the total net proceeds (both nominal value and share premium) on issue of registered share capital of the parent company. Share issue costs associated with the issuance of new equity are treated as a direct reduction of proceeds.

Merger reserve

Merger reserve represents the difference between the market value of shares issued to effect business combinations less the nominal value of shares issued. The merger reserve in the Group financial statements also includes the consolidation adjustments that arise under the application of the pooling of interest method.

Cash flow hedge reserve

For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve. Upon settlement of the hedged item, the change in fair value is transferred to profit or loss.

Share-based payments reserve

Equity-settled share-based payment transactions are measured at the fair value of the services received, and the corresponding increase in equity is recorded directly at the fair value of the services received. The share-based payments reserve includes shares held within the Employee Benefit Trust.

Retained earnings

Retained earnings contain the accumulated results attributable to the shareholders of the parent company.

Employee Benefit Trust

EnQuest PLC shares held by the Group are deducted from the share-based payments reserve and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from the sale and the original cost being taken to reserves. No gain or loss is recognised in the statement of comprehensive income on the purchase, sale, issue or cancellation of equity shares.

Provisions

Decommissioning

Provision for future decommissioning costs is made in full when the Group has an obligation: to dismantle and remove a facility or an item of plant; to restore the site on which it is located; and when a reasonable estimate of that liability can be made. The amount recognised is the present value of the estimated future expenditure. An amount equivalent to the discounted initial provision for decommissioning costs is capitalised and amortised over the life of the underlying asset on a unit of production basis over proven and probable reserves. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the oil and gas asset.

The unwinding of the discount applied to future decommissioning provisions is included under finance costs in the statement of comprehensive income.

Other

Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Group as a lessee

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.

Finance leases are capitalised at the commencement of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the income statement.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Lease charter payment credits, arising from the non-performance of the leased asset, are recognised as an operating expense in the income statement for the period to which they relate.

An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the income statement on a straight-line basis over the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Revenue from contracts with customers

Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled to in exchange for those goods or services. The Group has concluded that it is the principal in its revenue arrangements because it typically controls the goods or services before transferring them to the customer.

Sale of crude oil, gas and condensate

The sale of crude oil, gas or condensate represents a single performance obligation, being the sale of barrels equivalent on collection of a cargo or on delivery of commodity into an infrastructure. Revenue is accordingly recognised for this performance obligation when control over the corresponding commodity is transferred to the customer. Variable revenue conditions can arise on either party based on the failure to provide commitments detailed within the contract. These variations arise as an event occurs and therefore the transaction price is known at the timing of the performance obligations with no judgement required. The normal credit term is 30 to 90 days upon collection or delivery.

Tariff revenue for the use of Group infrastructure

Tariffs are charged to customers for the use of infrastructure owned by the Group. There is one contract per customer which is for a period of 12 months or less and is based on one performance obligation for the use of Group assets. The use of the assets is not separable as they are interdependent in order to fulfil the contract and no one item of infrastructure can be individually isolated. Revenue is recognised over the performance of the contract as services are provided for the use of the infrastructure at the agreed contracted rates on a throughput basis.

Other income

Other income is recognised to the extent that it is probable economic benefits will flow to the Group and the revenue can be reliably measured.

Production imbalances and under/over-lift

Production imbalances arise on fields as oil is lifted per each joint venture party, resulting in a variance in the volume of oil lifted versus the entitlement per owner per their working interest. All Group fields are operated through a Joint Venture Agreement ('JVA') through which production imbalances are settled. Settlement occurs through agreed lifting schedules and are not settled in cash, with the exception of a misbalance at the cessation of contract. As collaborative agreements and non-monetary exchanges, the transactions do not meet the definition of a customer under IFRS 15 and are recognised through cost of sales.

The under or over-lifted positions of hydrocarbons arising from production imbalances are valued at market prices prevailing at the balance sheet date. An under-lift of production from a field is included in current receivables and valued at the reporting date spot price or prevailing contract price. An over-lift of production from a field is included in current liabilities and valued at the reporting date spot price or prevailing contract price. Movements in under or over-lifted positions are accounted for through cost of sales.

Remeasurements and exceptional items

As permitted by IAS 1 (Revised): Presentation of Financial Statements, certain items are presented separately. The items that the Group separately presents as exceptional on the face of the statement of comprehensive income are those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance.

The following items are classified as Remeasurements and exceptional items ('exceptional'):

-- Unrealised mark-to-market changes in the remeasurement of derivative contracts are included in exceptional profit or loss. This includes the recycling of realised amounts from exceptional items into 'Business performance' income when a derivative instrument matures, together with the recycling of option premium amortisation from exceptional to 'Business performance' as set out in the derivatives policy previously;

-- Impairments and write offs/write downs are deemed to be exceptional in nature. This includes impairments of tangible and intangible assets, and write offs/write downs of unsuccessful exploration. Other non-routine write offs/write downs, where deemed material, are also included in this category;

-- The depletion of a fair value uplift to property, plant and equipment that arose from the merger accounting applied at the time of EnQuest's formation; and

-- Other exceptional items that arise from time to time as reviewed by management and disclosed as exceptionals in the notes to the financial statements, such as the acquisition accounting of Magnus and other interests in 2017 and 2018.

Employee benefits

Short-term employee benefits

Short-term employee benefits such as salaries, social premiums and holiday pay, are expensed when incurred.

Pension obligations

The Group's pension obligations consist of defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions. The Group has no further payment obligations once the contributions have been paid. The amount charged to the statement of comprehensive income in respect of pension costs reflects the contributions payable in the year. Differences between contributions payable during the year and contributions actually paid are shown as either accrued liabilities or prepaid assets in the balance sheet.

Share-based payment transactions

Eligible employees (including Directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions) of EnQuest PLC.

Equity-settled transactions

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. Fair value is measured in reference to the scheme rules, as detailed in note 18. In valuing equity-settled transactions, no account is taken of any service or performance conditions, other than conditions linked to the price of the shares of EnQuest PLC (market conditions) or 'non-vesting' conditions, if applicable.

The cost of equity-settled transactions is recognised over the period in which the relevant employees become fully entitled to the award (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The statement of comprehensive income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance conditions are satisfied. Equity awards cancelled are treated as vesting immediately on the date of cancellation, and any expense not previously recognised for the award at that date is recognised in the statement of comprehensive income.

Taxes

Income taxes

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date.

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Group financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is measured on an undiscounted basis using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset only if a legal right exists to offset current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single net payment.

Production taxes

In addition to corporate income taxes, the Group's financial statements also include and disclose production taxes on net income determined from oil and gas production.

Production tax relates to Petroleum Revenue Tax ('PRT') within the UK and is accounted for under IAS 12 Income Taxes since it has the characteristics of an income tax as it is imposed under Government authority and the amount payable is based on taxable profits of the relevant fields. Current and deferred PRT is provided on the same basis as described above for income taxes.

Investment allowance

The UK taxation regime provides for a reduction in ring fence supplementary corporation tax where investment in new or existing UK assets qualify for a relief known as investment allowance. Investment allowance must be activated by commercial production from the same field before it can be claimed. The Group has both unactivated and activated investment allowance which could reduce future supplementary corporation taxation. The Group's policy is that investment allowance is recognised as a reduction in the charge to taxation in the years claimed.

3. Segment information

Management have considered the requirements of IFRS 8: Operating Segments in regard to the determination of operating segments and concluded that the Group has two significant operating segments: the North Sea and Malaysia. Operations are managed by location and all information is presented per geographical segment. The information reported to the Chief Operating Decision Maker does not include an analysis of assets and liabilities and accordingly this information is not presented.

 
Year ended 31 December 2018                                              Total 
                                         North            All other                   Adjustments 
 $'000                                     Sea  Malaysia   segments   segments   and eliminations  Consolidated 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Revenue: 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Revenue from contracts with 
 customers                           1,140,116   144,483          -  1,284,599                  -     1,284,599 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Other income                             9,046         -        395      9,441              4,397        13,838 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Total revenue                        1,149,162   144,483        395  1,294,040              4,397     1,298,437 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Income/(expenses): 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Depreciation and depletion           (411,624)  (30,767)          -  (442,391)                  -     (442,391) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Net impairment reversal/(charge) 
 to oil and gas assets               (125,009)   (1,037)          -  (126,046)                  -     (126,046) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Impairment reversal of investments       (121)         -          -      (121)                  -         (121) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Exploration write offs and 
 impairments                           (1,407)         -          -    (1,407)                  -       (1,407) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Segment profit/(loss)                  276,365    38,442      5,839    320,646              6,092       326,738 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Other disclosures: 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Capital expenditure                    167,070    15,806          -    182,876                  -       182,876 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
 
 
Year ended 31 December 2017                                              Total 
                                         North            All other                   Adjustments 
 $'000                                     Sea  Malaysia   segments   segments   and eliminations  Consolidated 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Revenue: 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Revenue from contracts with 
 customers                             527,272   119,545          -    646,817                  -       646,817 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Other income                             8,578       347          -      8,925           (28,291)      (19,366) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Total revenue                          535,850   119,892          -    655,742           (28,291)       627,451 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Income/(expenses): 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Depreciation and depletion           (201,684)  (27,514)          -  (229,198)                  -     (229,198) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Net impairment reversal/(charge) 
 to oil and gas assets               (187,716)    15,745          -  (171,971)                  -     (171,971) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Impairment reversal of investments        (19)         -          -       (19)                  -          (19) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Exploration write offs and 
 impairments                               193         -          -        193                  -           193 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Segment profit/(loss)                (135,187)    39,062     22,844   (73,281)           (23,413)      (96,694) 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Other disclosures: 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
Capital expenditure                    322,398     2,299          -    324,697                  -       324,697 
-----------------------------------  ---------  --------  ---------  ---------  -----------------  ------------ 
 

Adjustments and eliminations

Finance income and costs and gains and losses on derivatives are not allocated to individual segments as the underlying instruments are managed on a Group basis.

Capital expenditure consists of property, plant and equipment and intangible assets, including assets from the acquisition of subsidiaries. Inter-segment revenues are eliminated on consolidation. All other adjustments are part of the reconciliations presented further below.

Reconciliation of profit/(loss):

 
                                                        Year ended    Year ended 
                                                       31 December   31 December 
                                                                            2017 
                                                              2018         $'000 
                                                             $'000 
----------------------------------------------------  ------------  ------------ 
Segment profit/(loss)                                      320,646      (73,281) 
----------------------------------------------------  ------------  ------------ 
Finance income                                               3,389         2,213 
----------------------------------------------------  ------------  ------------ 
Finance expense                                          (236,142)     (149,292) 
----------------------------------------------------  ------------  ------------ 
Gain/(loss) on oil and foreign exchange derivatives          6,092      (23,413) 
----------------------------------------------------  ------------  ------------ 
Profit/(loss) before tax                                    93,985     (243,773) 
----------------------------------------------------  ------------  ------------ 
 

Revenue from two customers relating to the North Sea operating segment each exceed 10% of the Group's consolidated revenue arising from sales of crude oil, with the total amount of $580.5 million (2017: two customers; $206.1 million arising in the North Sea operating segment and $105.2 million in the Malaysia operating segment).

All of the Group's segment assets (non-current assets excluding financial instruments, deferred tax assets and other financial assets) are located in the United Kingdom except for $111.7 million located in Malaysia (2017: $119.1 million).

4. Remeasurements and exceptional items

 
                                                          Impairments 
                                              Fair value          and 
                                                                write 
Year ended 31 December 2018                remeasurement         offs    Other 
 $'000                                               (i)         (ii)    (iii)      Total 
----------------------------------------  --------------  -----------  -------  --------- 
Revenue and other operating income                97,432            -        -     97,432 
----------------------------------------  --------------  -----------  -------  --------- 
Cost of sales                                      2,310        (592)        -    (4,119) 
----------------------------------------  --------------  -----------  -------  --------- 
Net impairment (charge)/reversal on oil 
 and gas assets                                        -    (126,046)        -  (126,046) 
----------------------------------------  --------------  -----------  -------  --------- 
Other income                                           -            -   78,316     78,316 
----------------------------------------  --------------  -----------  -------  --------- 
Other expenses                                   (9,590)      (1,528)  (3,597)   (14,715) 
----------------------------------------  --------------  -----------  -------  --------- 
Finance costs                                          -            -     (28)       (28) 
----------------------------------------  --------------  -----------  -------  --------- 
                                                  90,152    (128,166)   74,691     36,677 
----------------------------------------  --------------  -----------  -------  --------- 
Tax on items above                              (36,962)       48,161    1,207     12,406 
----------------------------------------  --------------  -----------  -------  --------- 
                                                  53,190     (80,005)   75,898     49,083 
----------------------------------------  --------------  -----------  -------  --------- 
 
 
                                                          Impairments 
                                              Fair value          and 
                                                                write 
Year ended 31 December 2017                Remeasurement         offs     Other 
 $'000                                               (i)         (ii)     (iii)      Total 
----------------------------------------  --------------  -----------  --------  --------- 
Revenue and other operating income               (7,716)            -         -    (7,716) 
----------------------------------------  --------------  -----------  --------  --------- 
Cost of sales                                      9,726      (2,682)   (1,563)      5,481 
----------------------------------------  --------------  -----------  --------  --------- 
Net impairment (charge)/reversal on oil 
 and gas assets                                        -    (171,971)         -  (171,971) 
----------------------------------------  --------------  -----------  --------  --------- 
Other income                                       1,685          193    48,735     50,613 
----------------------------------------  --------------  -----------  --------  --------- 
Other expenses                                         -         (19)  (20,339)   (20,358) 
----------------------------------------  --------------  -----------  --------  --------- 
Finance costs                                          -            -     (272)      (272) 
----------------------------------------  --------------  -----------  --------  --------- 
                                                   3,695    (174,479)    26,561  (144,223) 
----------------------------------------  --------------  -----------  --------  --------- 
Tax on items above                               (1,473)       65,730     5,482     69,739 
----------------------------------------  --------------  -----------  --------  --------- 
Other tax exceptional items(iv)                        -            -    47,208     47,208 
----------------------------------------  --------------  -----------  --------  --------- 
                                                   2,222    (108,749)    79,251   (27,276) 
----------------------------------------  --------------  -----------  --------  --------- 
 

(i) Fair value remeasurements include unrealised mark-to-market movements on derivative contracts and other financial instruments where the Group does not classify them as effective hedges. It also includes the impact of recycled realised gains and losses (including option premia) out of 'Remeasurements and exceptional items' and into 'Business performance' profit or loss. Refer to note 2 for further details on the Group's accounting policies for derivatives and 'Remeasurements and exceptional items'. In addition, this includes the fair value remeasurement of contingent consideration on the Magnus vendor loan of $9.7 million (2017: includes $1.3 million gain in respect of the disposal of the Ascent Resources loan notes)

(ii) Impairments and write offs includes an impairment of tangible oil and gas assets totalling $126.0 million (2017: impairment of $172.0 million). 2017 includes a charge of $2.7 million in relation to exceptional inventory write downs. Further details on the tangible impairment are provided in note 10

(iii) Other includes a $1.3 million loss in relation to the revaluation of the option to purchase the Magnus oil field and other interests and $74.3 million in relation to the step acquisition uplift of the original 25% equity acquired in 2017 (see note 29) (2017: $22.3 million purchase option, $16.1 million Thistle decommissioning option and $10.3 million 25% acquisition value, totalling a gain of $48.7 million). Other movements mainly relate to the derecognition of contingent consideration on future exploration of $5.3 million (see note 22) (2017: Charge of $10.3 million in relation to the 2014 PM8 cost recovery settlement agreement, a charge of $6.4 million for the cancellation of contracts and a charge of $2.8 million in relation to the provision on restricted cash). Other income also includes other items of income and expense which, because of the nature or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year so as to facilitate comparison with prior periods and to better assess trends in financial performance

(iv) In 2017, other tax exceptional items included $13.2 million for the recognition of previously de-recognised tax losses, together with $34.0 million for the impact on deferred tax of a revision to the balance of non-qualifying expenditure

5. Revenue and expenses

(a) Revenue

The Group generates revenue through the sale of crude oil, gas and condensate, and the provision of infrastructure to its customers for tariff income. Other sources of revenue include amounts related to derivative contracts and rental income from operating leases.

The nature and effect of initially applying IFRS 15 on the Group's financial statements are disclosed in note 2.

 
                                                             Year ended    Year ended 
                                                            31 December   31 December 
                                                                   2018          2017 
                                                                  $'000         $'000 
---------------------------------------------------------  ------------  ------------ 
Revenue from contracts with customers: 
---------------------------------------------------------  ------------  ------------ 
Revenue from crude oil sales                                  1,237,600       636,966 
---------------------------------------------------------  ------------  ------------ 
Revenue from gas and condensate sales                            43,063         2,822 
---------------------------------------------------------  ------------  ------------ 
Tariff revenue                                                    3,936         7,029 
---------------------------------------------------------  ------------  ------------ 
Total revenue from contracts with customers                   1,284,599       646,817 
---------------------------------------------------------  ------------  ------------ 
Rental income                                                     7,205         7,074 
---------------------------------------------------------  ------------  ------------ 
Realised (losses)/gains on oil derivative contracts 
 (see note 20(f))                                              (93,035)      (20,575) 
---------------------------------------------------------  ------------  ------------ 
Other operating revenue                                           2,236         1,851 
---------------------------------------------------------  ------------  ------------ 
Business performance revenue                                  1,201,005       635,167 
---------------------------------------------------------  ------------  ------------ 
Unrealised (losses)/gains on oil derivative contracts(i) 
 (see note 20(f))                                                97,432       (7,716) 
---------------------------------------------------------  ------------  ------------ 
Total revenue and other operating income                      1,298,437       627,451 
---------------------------------------------------------  ------------  ------------ 
 

(i) Unrealised gains and losses on oil derivative contracts which are either ineffective for hedge accounting purposes or held for trading are disclosed as exceptional items in the income statement (see note 4)

Disaggregation of revenue from contracts with customers

 
                                                           Year ended               Year ended 
                                                          31 December              31 December 
                                                                 2018                     2017 
                                                                $'000                    $'000 
--------------------------------------------  ---------  ------------  ---------  ------------ 
                                              North Sea      Malaysia  North Sea      Malaysia 
--------------------------------------------  ---------  ------------  ---------  ------------ 
Revenue from contracts with customers: 
--------------------------------------------  ---------  ------------  ---------  ------------ 
Revenue from crude oil sales                  1,096,581       141,019    519,694       117,272 
--------------------------------------------  ---------  ------------  ---------  ------------ 
Revenue from gas and condensate sales            39,599         3,464        549         2,273 
--------------------------------------------  ---------  ------------  ---------  ------------ 
Tariff revenue                                    3,936             -      7,029             - 
--------------------------------------------  ---------  ------------  ---------  ------------ 
Total revenue from contracts with customers   1,140,116       144,483    527,272       119,545 
--------------------------------------------  ---------  ------------  ---------  ------------ 
 

Revenue derived from the sale of crude oil, gas and condensate is recognised as goods transferred at a point in time when control is gained by the customer on collection or delivery. The sale of oil is subject to market prices. The Group manages this risk through the use of commodity derivative contracts. Revenue derived from tariff revenue is recognised as the service is provided over time.

Contract balances

The following table provides information about receivables from contracts with customers. There are no contract assets or contract liabilities.

 
                      2018    2017 
                     $'000   $'000 
------------------  ------  ------ 
Trade receivables   69,857  80,743 
------------------  ------  ------ 
 

Trade receivables are non-interest-bearing and are generally on terms of 30 to 90 days post control gained by the customer. In 2018 and 2017, no provision was recognised for expected credit losses on trade receivables.

(b) Cost of sales

 
                                                                 Year ended    Year ended 
                                                                31 December   31 December 
                                                                       2018          2017 
                                                                      $'000         $'000 
-------------------------------------------------------------  ------------  ------------ 
Production costs                                                    396,880       287,064 
-------------------------------------------------------------  ------------  ------------ 
Tariff and transportation expenses                                   68,446        62,208 
-------------------------------------------------------------  ------------  ------------ 
Realised loss/(gain) on foreign exchange derivative 
 contracts(i) (see note 20(f))                                          615         4,848 
-------------------------------------------------------------  ------------  ------------ 
Change in lifting position                                         (14,332)      (20,643) 
-------------------------------------------------------------  ------------  ------------ 
Crude oil inventory movement                                       (10,761)           237 
-------------------------------------------------------------  ------------  ------------ 
Depletion of oil and gas assets (see note 10)                       437,104       223,135 
-------------------------------------------------------------  ------------  ------------ 
Other cost of operations                                             48,068        12,657 
-------------------------------------------------------------  ------------  ------------ 
Business performance cost of sales                                  926,020       569,506 
-------------------------------------------------------------  ------------  ------------ 
Depletion of oil and gas assets (see note 10)                             -         1,563 
-------------------------------------------------------------  ------------  ------------ 
Write down of inventory                                                   -         2,682 
-------------------------------------------------------------  ------------  ------------ 
Unrealised (gains)/losses on foreign exchange derivative 
 contracts(ii) (see note 20(f))                                       (248)       (9,726) 
-------------------------------------------------------------  ------------  ------------ 
Unrealised (gains)/losses on carbon derivative contracts(ii) 
 (see note 20(f))                                                   (2,062)             - 
-------------------------------------------------------------  ------------  ------------ 
Other expenses                                                          592             - 
-------------------------------------------------------------  ------------  ------------ 
Total cost of sales                                                 924,302       564,025 
-------------------------------------------------------------  ------------  ------------ 
 

(i) The realised loss on foreign exchange derivative contracts was $0.6 million for contracts related to operating expenditure (2017: loss of $4.8 million related to capital expenditure)

(ii) Unrealised gains and losses on foreign exchange derivative contracts which are held for trading are disclosed as exceptional in the income statement (see note 4)

(c) General and administration expenses

 
                                                               Year ended    Year ended 
                                                              31 December   31 December 
                                                                     2018          2017 
                                                                    $'000         $'000 
-----------------------------------------------------------  ------------  ------------ 
Staff costs (see note 5(f))                                        91,113        79,138 
-----------------------------------------------------------  ------------  ------------ 
Depreciation (see note 10)                                          5,287         4,500 
-----------------------------------------------------------  ------------  ------------ 
Other general and administration costs                             32,764        20,077 
-----------------------------------------------------------  ------------  ------------ 
Recharge of costs to operations and joint venture partners      (125,146)     (102,867) 
-----------------------------------------------------------  ------------  ------------ 
                                                                    4,018           848 
-----------------------------------------------------------  ------------  ------------ 
 

(d) Other income

 
                                                                     Year ended    Year ended 
                                                                    31 December   31 December 
                                                                           2018          2017 
                                                                          $'000         $'000 
-----------------------------------------------------------------  ------------  ------------ 
Net foreign exchange gains                                               21,911             - 
-----------------------------------------------------------------  ------------  ------------ 
Prior year general and administrative expenses recovery                       -         5,101 
-----------------------------------------------------------------  ------------  ------------ 
Other income                                                                517         1,706 
-----------------------------------------------------------------  ------------  ------------ 
Business performance other income                                        22,428         6,807 
-----------------------------------------------------------------  ------------  ------------ 
Excess of fair value over consideration: 25% acquisition 
 value (see note 29)                                                          -        10,314 
-----------------------------------------------------------------  ------------  ------------ 
Excess of fair value over consideration: Purchase option 
 (see note 29)                                                          (1,329)        22,300 
-----------------------------------------------------------------  ------------  ------------ 
Excess of fair value over consideration: Thistle decommissioning 
 option (see note 29)                                                         -        16,120 
-----------------------------------------------------------------  ------------  ------------ 
Fair value gain on step acquisition (see note 29)                        74,345             - 
-----------------------------------------------------------------  ------------  ------------ 
Contingent consideration release                                          5,300             - 
-----------------------------------------------------------------  ------------  ------------ 
Gain on disposal of financial assets                                          -         1,263 
-----------------------------------------------------------------  ------------  ------------ 
Change in provision for contingent consideration                              -           423 
-----------------------------------------------------------------  ------------  ------------ 
Other exceptional income                                                      -           193 
-----------------------------------------------------------------  ------------  ------------ 
Total other income                                                      100,744        57,420 
-----------------------------------------------------------------  ------------  ------------ 
 

(e) Other expenses

 
                                                           Year ended    Year ended 
                                                          31 December   31 December 
                                                                 2018          2017 
                                                                $'000         $'000 
-------------------------------------------------------  ------------  ------------ 
Net foreign exchange losses                                         -        23,910 
-------------------------------------------------------  ------------  ------------ 
Exploration and evaluation expenses: Pre-licence costs 
 expensed                                                          40            43 
-------------------------------------------------------  ------------  ------------ 
Other                                                           3,322           410 
-------------------------------------------------------  ------------  ------------ 
Business performance other expenses                             3,362        24,363 
-------------------------------------------------------  ------------  ------------ 
Change in provision for contingent consideration                9,590             - 
-------------------------------------------------------  ------------  ------------ 
2014 PM8 cost recovery settlement agreement                         -        10,329 
-------------------------------------------------------  ------------  ------------ 
Early termination of contracts                                      -         6,435 
-------------------------------------------------------  ------------  ------------ 
Write down of receivable                                        3,010         2,808 
-------------------------------------------------------  ------------  ------------ 
Exploration and evaluation expenses: Written off and 
 impaired                                                       1,407             - 
-------------------------------------------------------  ------------  ------------ 
Other expenses                                                    708           786 
-------------------------------------------------------  ------------  ------------ 
Total other expenses                                           18,077        44,721 
-------------------------------------------------------  ------------  ------------ 
 

(f) Staff costs

 
                                                  Year ended    Year ended 
                                                 31 December   31 December 
                                                        2018          2017 
                                                       $'000         $'000 
----------------------------------------------  ------------  ------------ 
Wages and salaries                                    56,316        48,773 
----------------------------------------------  ------------  ------------ 
Social security costs                                  4,487         4,686 
----------------------------------------------  ------------  ------------ 
Defined contribution pension costs                     4,210         3,057 
----------------------------------------------  ------------  ------------ 
Expense of share-based payments (see note 18)          4,645         2,849 
----------------------------------------------  ------------  ------------ 
Other staff costs                                      4,731         2,486 
----------------------------------------------  ------------  ------------ 
Total employee costs                                  74,389        61,851 
----------------------------------------------  ------------  ------------ 
Contractor costs                                      16,724        17,287 
----------------------------------------------  ------------  ------------ 
Total staff costs                                     91,113        79,138 
----------------------------------------------  ------------  ------------ 
 

The average number of persons employed by the Group during the year was 839, with 415 in operating activities and 424 in administrative functions (2017: 506, with 343 in operating activities and 163 in administrative functions).

(g) Auditor's remuneration

The following amounts were payable by the Group to its auditor, Ernst & Young LLP, during the year:

 
                                                             Year ended    Year ended 
                                                            31 December   31 December 
                                                                   2018          2017 
                                                                  $'000         $'000 
---------------------------------------------------------  ------------  ------------ 
Fees payable to the Company's auditor for the audit 
 of the parent company and Group financial statements               721           584 
---------------------------------------------------------  ------------  ------------ 
 
Fees payable to the Company's auditor and its associates 
 for other services: 
---------------------------------------------------------  ------------  ------------ 
The audit of the Company's subsidiaries                             108           114 
---------------------------------------------------------  ------------  ------------ 
Audit related assurance services (interim review)                   134           181 
---------------------------------------------------------  ------------  ------------ 
Tax advisory services                                                 5             5 
---------------------------------------------------------  ------------  ------------ 
Corporate finance services(i)                                       368             - 
---------------------------------------------------------  ------------  ------------ 
                                                                    615           300 
---------------------------------------------------------  ------------  ------------ 
Total auditor's remuneration                                      1,336           884 
---------------------------------------------------------  ------------  ------------ 
 

(i) Relates to the reporting accountant's report on the unaudited pro forma financial information in the Company's combined prospectus and circular for the rights issue (see note 17)

6. Finance costs/income

 
                                                              Year ended    Year ended 
                                                             31 December   31 December 
                                                                    2018          2017 
                                                                   $'000         $'000 
----------------------------------------------------------  ------------  ------------ 
Finance costs: 
----------------------------------------------------------  ------------  ------------ 
Loan interest payable                                             93,413        74,434 
----------------------------------------------------------  ------------  ------------ 
Bond interest payable                                             64,243        63,463 
----------------------------------------------------------  ------------  ------------ 
Unwinding of discount on decommissioning provisions 
 (see note 22)                                                    12,617        11,471 
----------------------------------------------------------  ------------  ------------ 
Unwinding of discount on other provisions (see note 
 22)                                                                 918         1,838 
----------------------------------------------------------  ------------  ------------ 
Unwinding of discount on financial liabilities (see 
 note 20(g))                                                          72           163 
----------------------------------------------------------  ------------  ------------ 
Fair value (gain)/loss on financial instruments at FVPL 
 (see note 20(f))                                                    353          (15) 
----------------------------------------------------------  ------------  ------------ 
Finance charges payable under finance leases                      55,837        31,273 
----------------------------------------------------------  ------------  ------------ 
Amortisation of finance fees on loans and bonds                    8,525         2,760 
----------------------------------------------------------  ------------  ------------ 
Other financial expenses                                           1,664         5,902 
----------------------------------------------------------  ------------  ------------ 
                                                                 237,643       191,289 
----------------------------------------------------------  ------------  ------------ 
Less: amounts capitalised to the cost of qualifying 
 assets                                                          (1,529)      (42,269) 
----------------------------------------------------------  ------------  ------------ 
Business performance finance expenses                            236,114       149,020 
----------------------------------------------------------  ------------  ------------ 
Unwinding of discounts on other provisions                            28           272 
----------------------------------------------------------  ------------  ------------ 
                                                                 236,142       149,292 
----------------------------------------------------------  ------------  ------------ 
Finance income: 
----------------------------------------------------------  ------------  ------------ 
Bank interest receivable                                           1,821           381 
----------------------------------------------------------  ------------  ------------ 
Unwinding of discount on financial asset (see note 20(g))          1,517         1,832 
----------------------------------------------------------  ------------  ------------ 
Other financial income                                                51             - 
----------------------------------------------------------  ------------  ------------ 
                                                                   3,389         2,213 
----------------------------------------------------------  ------------  ------------ 
 

7. Income tax

(a) Income tax

The major components of income tax (credit)/expense are as follows:

 
                                                                  Year ended    Year ended 
                                                                 31 December   31 December 
                                                                        2018          2017 
                                                                       $'000         $'000 
--------------------------------------------------------------  ------------  ------------ 
Current income tax 
--------------------------------------------------------------  ------------  ------------ 
Current income tax charge                                             17,763           214 
--------------------------------------------------------------  ------------  ------------ 
Adjustments in respect of current income tax of previous 
 years                                                                     -         (932) 
--------------------------------------------------------------  ------------  ------------ 
 
Current overseas income tax 
--------------------------------------------------------------  ------------  ------------ 
Current income tax charge                                             16,048        11,191 
--------------------------------------------------------------  ------------  ------------ 
Adjustments in respect of current income tax of previous 
 years                                                                   420           263 
--------------------------------------------------------------  ------------  ------------ 
Total current income tax                                              34,232        10,736 
--------------------------------------------------------------  ------------  ------------ 
 
Deferred income tax 
--------------------------------------------------------------  ------------  ------------ 
Relating to origination and reversal of temporary differences       (61,879)     (202,173) 
--------------------------------------------------------------  ------------  ------------ 
Adjustments in respect of changes in tax rates                       (4,404)             - 
--------------------------------------------------------------  ------------  ------------ 
Adjustments in respect of deferred income tax of previous 
 years                                                               (2,304)        14,469 
--------------------------------------------------------------  ------------  ------------ 
 
Deferred overseas income tax 
--------------------------------------------------------------  ------------  ------------ 
Relating to origination and reversal of temporary differences            612       (5,840) 
--------------------------------------------------------------  ------------  ------------ 
Adjustments in respect of deferred income tax of previous 
 years                                                                   450         (135) 
--------------------------------------------------------------  ------------  ------------ 
Total deferred income tax                                           (67,525)     (193,679) 
--------------------------------------------------------------  ------------  ------------ 
Income tax (credit)/expense reported in profit or loss              (33,293)     (182,943) 
--------------------------------------------------------------  ------------  ------------ 
 

(b) Reconciliation of total income tax charge

A reconciliation between the income tax charge and the product of accounting profit multiplied by the UK statutory tax rate is as follows:

 
                                                              Year ended    Year ended 
                                                             31 December   31 December 
                                                                    2018          2017 
                                                                   $'000         $'000 
----------------------------------------------------------  ------------  ------------ 
Profit/(loss) before tax                                          93,985     (243,773) 
----------------------------------------------------------  ------------  ------------ 
 
Statutory rate of corporation tax in the UK of 40% (2017: 
 40%)                                                             37,594      (97,509) 
----------------------------------------------------------  ------------  ------------ 
Supplementary corporation tax non-deductible expenditure          20,284        21,170 
----------------------------------------------------------  ------------  ------------ 
Non-deductible expenditure/income(i)                            (21,689)       (7,673) 
----------------------------------------------------------  ------------  ------------ 
Petroleum revenue tax (net of income tax benefit)                      -         3,703 
----------------------------------------------------------  ------------  ------------ 
North Sea tax reliefs                                           (64,228)      (93,234) 
----------------------------------------------------------  ------------  ------------ 
Tax in respect of non-ring fence trade                               691       (9,085) 
----------------------------------------------------------  ------------  ------------ 
Tax losses not recognised                                          1,509      (11,230) 
----------------------------------------------------------  ------------  ------------ 
Deferred tax rate changes                                        (4,404)             - 
----------------------------------------------------------  ------------  ------------ 
Adjustments in respect of prior years                            (1,434)        13,665 
----------------------------------------------------------  ------------  ------------ 
Overseas tax rate differences                                      (673)       (4,163) 
----------------------------------------------------------  ------------  ------------ 
Share-based payments                                                 899         1,475 
----------------------------------------------------------  ------------  ------------ 
Other differences                                                (1,842)          (62) 
----------------------------------------------------------  ------------  ------------ 
At the effective income tax rate of 17% (2017: 75%)             (33,293)     (182,943) 
----------------------------------------------------------  ------------  ------------ 
 

(i) The 2018 credit is mainly due to the non-taxable income in relation to the goodwill and non-taxable fair value movements on the acquisition of the 75% interest in the Magnus oil field, this is netted against the non-tax deductible depreciation on fixed assets

(c) Deferred income tax

Deferred income tax relates to the following:

 
                                                                         (Credit)/charge 
                                                                           for the year 
                                                  Group balance            recognised in 
                                                       sheet              profit or loss 
                                             ------------------------  -------------------- 
                                                    2018         2017       2018       2017 
                                                   $'000        $'000      $'000      $'000 
-------------------------------------------  -----------  -----------  ---------  --------- 
Deferred tax liability 
-------------------------------------------  -----------  -----------  ---------  --------- 
Accelerated capital allowances                 1,400,956    1,163,562     93,196     28,290 
-------------------------------------------  -----------  -----------  ---------  --------- 
Other temporary differences                            -            -          -          - 
-------------------------------------------  -----------  -----------  ---------  --------- 
                                               1,400,956    1,163,562 
-------------------------------------------  -----------  -----------  ---------  --------- 
Deferred tax asset 
-------------------------------------------  -----------  -----------  ---------  --------- 
Losses                                       (1,212,998)  (1,228,034)     15,046  (167,998) 
-------------------------------------------  -----------  -----------  ---------  --------- 
Decommissioning liability                      (267,954)    (254,008)   (13,946)   (68,590) 
-------------------------------------------  -----------  -----------  ---------  --------- 
Other temporary differences                    (178,920)     (17,098)  (161,821)     14,619 
-------------------------------------------  -----------  -----------  ---------  --------- 
                                             (1,659,862)  (1,499,140) 
-------------------------------------------  -----------  -----------  ---------  --------- 
Deferred tax expense                                                    (67,525)  (193,679) 
-------------------------------------------  -----------  -----------  ---------  --------- 
Net deferred tax (assets)/liabilities          (258,906)    (335,578) 
-------------------------------------------  -----------  -----------  ---------  --------- 
 
Reflected in the balance sheet as follows: 
-------------------------------------------  -----------  -----------  ---------  --------- 
Deferred tax assets                            (286,721)    (398,263) 
-------------------------------------------  -----------  -----------  ---------  --------- 
Deferred tax liabilities                          27,815       62,685 
-------------------------------------------  -----------  -----------  ---------  --------- 
Net deferred tax (assets)/liabilities          (258,906)    (335,578) 
-------------------------------------------  -----------  -----------  ---------  --------- 
 

Reconciliation of net deferred tax assets/(liabilities)

 
                                                            2018      2017 
                                                           $'000     $'000 
-----------------------------------------------------  ---------  -------- 
At 1 January                                             335,578   191,715 
-----------------------------------------------------  ---------  -------- 
Tax income/(expense) during the period recognised in 
 profit or loss                                           67,525   193,679 
-----------------------------------------------------  ---------  -------- 
Tax income/(expense) during the period recognised in           -         - 
 other comprehensive income 
-----------------------------------------------------  ---------  -------- 
Deferred taxes acquired (see note 29)                  (144,197)  (49,816) 
-----------------------------------------------------  ---------  -------- 
At 31 December                                           258,906   335,578 
-----------------------------------------------------  ---------  -------- 
 

(d) Tax losses

The Group's deferred tax assets at 31 December 2018 are recognised to the extent that taxable profits are expected to arise in the future against which tax losses and allowances in the UK can be utilised. In accordance with IAS 12 Income Taxes, the Group assessed the recoverability of its deferred tax assets at 31 December 2018 with respect to ring fence tax losses and allowances.

The Group has unused UK mainstream corporation tax losses of $287.5 million (2017: $290.2 million) for which no deferred tax asset has been recognised at the balance sheet date due to uncertainty of recovery of these losses. In addition the group has not recognised a deferred tax asset for the adjustment to bond valuations on the adoption of IFRS 9 (see note 2). The benefit of this deduction is taken over 10 years with a deduction of $3.8 million being taken in the current period with the remaining benefit of $34.4 million remaining unrecognised.

The Group has unused Malaysian income tax losses of $9.4 million (2017: $5.2 million) arising in respect of the Tanjong Baram RSC for which no deferred tax asset has been recognised at the balance sheet date due to uncertainty of recovery of these losses.

No deferred tax has been provided on unremitted earnings of overseas subsidiaries, Finance Act 2009 exempted foreign dividends from the scope of UK corporation tax where certain conditions are satisfied.

(e) Change in legislation

Finance Act 2017 enacted legislation in relation to the restriction of corporate interest deductions from 1 April 2017 and the restriction of relief for mainstream corporate tax losses with effect from 1 April 2017. While these changes do not impact North Sea ring fence of relief for mainstream corporate tax losses with effect from 1 April 2017, they have an impact on the current year Group tax charge where North Sea ring fence losses are offset against mainstream corporate tax profits which would otherwise be exposed due to the operation of these new rules. The restriction had no impact on the current year tax charge (2017: $15.1 million).

8. Earnings per share

The calculation of earnings per share is based on the profit after tax and on the weighted average number of Ordinary shares in issue during the period.

Following the completion of the rights issue in October 2018 the earnings per share calculations, for all period up to the date the rights issue shares were issued, have been adjusted for the bonus element of the rights issue. The bonus factor used was 1.17. Further information on the rights issue is included in note 17.

Basic and diluted earnings per share are calculated as follows:

 
                                                         Weighted average 
                                      Profit/(loss)      number of Ordinary     Earnings per 
                                        after tax              shares               share 
                                    -----------------  ---------------------  ---------------- 
                                      Year ended 31        Year ended 31       Year ended 31 
                                         December             December            December 
                                    -----------------  ---------------------  ---------------- 
                                       2018      2017        2018      2017*     2018    2017* 
                                      $'000     $'000     million    million        $        $ 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
Basic                               127,278  (60,830)     1,226.2    1,319.8    0.104  (0.046) 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
Dilutive potential of Ordinary 
 shares granted under share-based 
 incentive schemes                        -         -        37.8       53.0  (0.003)        - 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
Diluted                             127,278  (60,830)     1,264.0    1,372.9    0.101  (0.046) 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
Basic (excluding exceptional 
 items)                              78,195  (33,554)     1,226.2    1,319.8    0.064  (0.025) 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
Diluted (excluding exceptional 
 items)                              78,195  (33,554)     1,264.0    1,372.9    0.062  (0.025) 
----------------------------------  -------  --------  ----------  ---------  -------  ------- 
 

*Restated following rights issue

9. Dividends paid and proposed

The Company paid no dividends during the year ended 31 December 2018 (2017: none). At 31 December 2018, there are no proposed dividends (2017: none).

10. Property, plant and equipment

 
                                                                         Office 
                                                                     furniture, 
                                                         Oil and       fixtures 
                                                      gas assets   and fittings       Total 
                                                           $'000          $'000       $'000 
---------------------------------------------------  -----------  -------------  ---------- 
Cost: 
---------------------------------------------------  -----------  -------------  ---------- 
At 1 January 2017                                      6,787,343         54,722   6,842,065 
---------------------------------------------------  -----------  -------------  ---------- 
Additions                                                320,627          2,994     323,621 
---------------------------------------------------  -----------  -------------  ---------- 
Initial recognition of finance lease asset (see 
 note 24)                                                771,975              -     771,975 
---------------------------------------------------  -----------  -------------  ---------- 
Acquired (see note 29)                                   124,542              -     124,542 
---------------------------------------------------  -----------  -------------  ---------- 
Change in decommissioning provision                      143,992              -     143,992 
---------------------------------------------------  -----------  -------------  ---------- 
Change in cost recovery provision (see note 22)         (77,785)              -    (77,785) 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2017                                    8,070,694         57,716   8,128,410 
---------------------------------------------------  -----------  -------------  ---------- 
Additions                                                178,627          2,856     181,483 
---------------------------------------------------  -----------  -------------  ---------- 
Acquired (see note 29)                                   745,350              -     745,350 
---------------------------------------------------  -----------  -------------  ---------- 
Acquired: Change in fair value on step acquisition 
 (see note 29)                                           123,909              -     123,909 
---------------------------------------------------  -----------  -------------  ---------- 
Change in decommissioning provision (see note 
 12 and 22)                                               30,194              -      30,194 
---------------------------------------------------  -----------  -------------  ---------- 
Change in cost recovery provision (see note 22)          (7,947)              -     (7,947) 
---------------------------------------------------  -----------  -------------  ---------- 
Change in financial carry liability (see note 
 20)                                                     (1,066)              -     (1,066) 
---------------------------------------------------  -----------  -------------  ---------- 
Change in estimate                                       (2,195)              -     (2,195) 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2018                                    9,137,556         60,572   9,198,138 
---------------------------------------------------  -----------  -------------  ---------- 
 
Accumulated depletion and impairment: 
---------------------------------------------------  -----------  -------------  ---------- 
At 1 January 2017                                      3,846,028         32,591   3,878,619 
---------------------------------------------------  -----------  -------------  ---------- 
Charge for the year                                      224,698          4,500     229,198 
---------------------------------------------------  -----------  -------------  ---------- 
Impairment charge for the year                           171,971              -     171,971 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2017                                    4,242,697         37,091   4,279,788 
---------------------------------------------------  -----------  -------------  ---------- 
Charge for the year                                      437,104          5,287     442,391 
---------------------------------------------------  -----------  -------------  ---------- 
Impairment charge for the year                           126,046              -     126,046 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2018                                    4,805,847         42,378   4,848,225 
---------------------------------------------------  -----------  -------------  ---------- 
 
Net carrying amount: 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2018                                    4,331,719         18,194   4,349,913 
---------------------------------------------------  -----------  -------------  ---------- 
At 31 December 2017                                    3,827,997         20,625   3,848,622 
---------------------------------------------------  -----------  -------------  ---------- 
At 1 January 2017                                      2,941,315         22,131   2,963,446 
---------------------------------------------------  -----------  -------------  ---------- 
 

On 1 December 2018, the Group acquired the remaining 75% interest in the Magnus oil field and associated interests (see note 29), resulting in an acquisition of assets at a value of $745.4 million allocated to property, plant and equipment.

The Group acquired the initial 25% interest in Magnus oil field and associated interests in 2017 (see note 29), resulting in an acquisition of assets at a value of $124.5 million allocated to property, plant and equipment. As part of the step acquisition to 100% the initial interest of 25% was revalued, resulting in an increase of $123.9 million.

During the year ended 31 December 2017, the Group's lease from Armada Kraken PTE Limited ('BUMI') of the Floating Production,

Storage and Offloading vessel ('FPSO') for the Kraken field commenced. The lease has been assessed as a finance lease, and a $772.0 million lease liability and lease asset were recognised in June 2017. The liability was calculated based on the present value of the minimum lease payments at inception of the lease (see note 24).

Impairments to the Group's producing oil and gas assets and reversals of impairments are set out in the table below:

 
                                    Impairment (charge)/reversal    Recoverable amount(iii) 
                                   ------------------------------  ------------------------- 
                                       Year ended      Year ended   31 December  31 December 
                                      31 December     31 December          2018         2017 
                                             2018            2017         $'000        $'000 
                                            $'000           $'000 
---------------------------------  --------------  --------------  ------------  ----------- 
North Sea(i)                            (125,009)       (187,716)       158,890      301,731 
---------------------------------  --------------  --------------  ------------  ----------- 
Malaysia(ii)                              (1,037)          15,745        41,488       48,301 
---------------------------------  --------------  --------------  ------------  ----------- 
Net impairment reversal/(charge)        (126,046)       (171,971) 
---------------------------------  --------------  --------------  ------------  ----------- 
 

(i) North Sea includes Thistle/Deveron and the Dons fields. The impairments are attributable primarily to changes in field life assumptions

   (ii)   The amounts disclosed for Malaysia relate to the Tanjong Baram field 

(iii) Recoverable amount has been determined on a fair value less costs of disposal basis (see note 11 for further details of methodology and assumptions used, and note 2 Critical Accounting Estimates and Judgements for information on significant estimates and judgements made in relation to impairments). The amounts disclosed above are in respect of assets where an impairment (or reversal) has been recorded. Assets which did not have any impairment or reversal are excluded from the amounts disclosed

The net book value at 31 December 2018 includes $95.4 million (2017: $71.1 million) of pre-development assets and development assets under construction which are not being depreciated.

The amount of borrowing costs capitalised during the year ended 31 December 2018 was $1.5 million and relates to the Dunlin Bypass project (2017: $42.3 million relating to the Kraken development project). The weighted average rate used to determine the amount of borrowing costs eligible for capitalisation is 7.7% (2017: 7.0%).

The net book value of property, plant and equipment held under finance leases and hire purchase contracts at 31 December 2018 was $690.7 million (2017: $756.3 million).

11. Goodwill

A summary of goodwill is presented below:

 
                                  2018      2017 
                                 $'000     $'000 
-----------------------------  -------  -------- 
Cost and net carrying amount 
-----------------------------  -------  -------- 
At 1 January                   189,317   189,317 
-----------------------------  -------  -------- 
Acquisition (see note 29)       94,633         - 
-----------------------------  -------  -------- 
At 31 December                 283,950   189,317 
-----------------------------  -------  -------- 
 

On 1 December 2018, the Group acquired the remaining 75% interest in the Magnus oil field and associated interests. Goodwill of $94.6 million was recognised, representing the future economic benefits that EnQuest's expertise is expected to realise from the assets (see note 29).

The historic goodwill balance arose from the acquisition of Stratic and PEDL in 2010 and the Greater Kittiwake Area asset in 2014.

Goodwill acquired through business combinations has been allocated to a single CGU, the UK Continental Shelf ('UKCS'), and this is therefore the lowest level at which goodwill is reviewed.

Impairment testing of oil and gas assets and goodwill

In accordance with IAS 36 Impairment of Assets, goodwill and oil and gas assets have been reviewed for impairment at the year end. In assessing whether goodwill and oil and gas assets have been impaired, the carrying amount of the CGU for goodwill and at field level for oil and gas assets is compared with their recoverable amounts.

The recoverable amounts of the CGU and fields have been determined on a fair value less costs to sell basis. Discounted cash flow models comprising asset-by-asset life of field projections using Level 3 inputs (based on IFRS 13 fair value hierarchy) have been used to determine the recoverable amounts. The cash flows have been modelled on a post-tax and post-decommissioning basis at the Group's post-tax discount rate of 10.0% (2017: 10.0%). Risks specific to assets within the CGU are reflected within the cash flow forecasts.

The goodwill on the acquisition of Magnus is assessed to be fully recoverable as at 31 December 2018.

Key assumptions used in calculations

The key assumptions required for the calculation of the recoverable amounts are:

   --      Oil prices; 
   --      Currency exchange rates; 
   --      Production volumes; 
   --      Discount rates; and 
   --      Opex, capex and decommissioning costs. 

Oil prices are based on an internal view of forward curve prices for the first three years and thereafter at $75/bbl inflated at 2% per annum from 2023.

Production volumes are based on life of field production profiles for each asset within the CGU. The production volumes used in the calculations were taken from the report prepared by the Group's independent reserves auditor.

Operating expenditure, capital expenditure and decommissioning costs are derived from the Group's Business Plan adjusted for changes in timing based on the production model used for the assessment of proven and probable ('2P') reserves.

The discount rate reflects management's estimate of the Group's weighted average cost of capital ('WACC'). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group's investors. The cost of debt is based on its interest-bearing borrowings. Segment risk is incorporated by applying a beta factor based on publicly available market data. The post-tax discount rate applied to the Group's post-tax cash flow projections was 10.0% (2017: 10.0%). Management considers this to be the best estimate of a market participant's discount rate.

Sensitivity to changes in assumptions

The Group's recoverable value of assets is highly sensitive, inter alia, to oil price achieved and production volumes. The recoverable amount of the CGU would be equal to the carrying amount of goodwill if either the oil price or production volumes (on a CGU-weighted average basis) were to fall by 5% (2017: 7%) from the prices outlined above and volumes disclosed in the Annual Report. Goodwill would need to be fully impaired if the oil price or production volumes (on a CGU-weighted average basis) were to fall by 31% from the prices outlined above (2017: 16%). The above sensitivities have flexed revenues and tax cash flows, but operating costs and capital expenditures have been kept constant.

12. Intangible oil and gas assets

 
                                                          Accumulated  Net carrying 
                                                    Cost   impairment        amount 
                                                   $'000        $'000         $'000 
----------------------------------------------  --------  -----------  ------------ 
At 1 January 2017                                229,524    (179,192)        50,332 
----------------------------------------------  --------  -----------  ------------ 
Additions                                          1,076            -         1,076 
----------------------------------------------  --------  -----------  ------------ 
Write off of relinquished licences previously 
 impaired                                        (3,076)        3,076             - 
----------------------------------------------  --------  -----------  ------------ 
Unsuccessful exploration expenditure written 
 off                                                   -          159           159 
----------------------------------------------  --------  -----------  ------------ 
Change in decommissioning provision (see note 
 22)                                                 502            -           502 
----------------------------------------------  --------  -----------  ------------ 
Impairment charge for the year                         -           34            34 
----------------------------------------------  --------  -----------  ------------ 
At 31 December 2017                              228,026    (175,923)        52,103 
----------------------------------------------  --------  -----------  ------------ 
Additions                                          1,393            -         1,393 
----------------------------------------------  --------  -----------  ------------ 
Write off of relinquished licences previously 
 impaired                                       (63,547)       63,547             - 
----------------------------------------------  --------  -----------  ------------ 
Unsuccessful exploration expenditure written 
 off                                                   -      (1,009)       (1,009) 
----------------------------------------------  --------  -----------  ------------ 
Change in decommissioning provision (see note 
 22)                                               (286)            -         (286) 
----------------------------------------------  --------  -----------  ------------ 
Impairment charge for the year                         -        (398)         (398) 
----------------------------------------------  --------  -----------  ------------ 
At 31 December 2018                              165,586    (113,783)        51,803 
----------------------------------------------  --------  -----------  ------------ 
 

During the year ended 31 December 2018, the Group relinquished licences previously impaired resulting in write off of $63.5 million. During 2018, the Group developed the Eagle prospect (2017: Kraken field) resulting in the additions to intangibles.

13. Investments

 
                                                              $'000 
---------------------------------------------------------  -------- 
Cost: 
---------------------------------------------------------  -------- 
At 1 January 2017, 31 December 2017 and 31 December 2018     19,231 
---------------------------------------------------------  -------- 
Provision for impairment: 
---------------------------------------------------------  -------- 
At 1 January 2017                                          (19,060) 
---------------------------------------------------------  -------- 
Impairment reversal/(charge) for the year                      (19) 
---------------------------------------------------------  -------- 
At 31 December 2017                                        (19,079) 
---------------------------------------------------------  -------- 
Impairment (charge)/reversal for the year                     (121) 
---------------------------------------------------------  -------- 
At 31 December 2018                                        (19,200) 
---------------------------------------------------------  -------- 
 
Net carrying amount: 
---------------------------------------------------------  -------- 
At 31 December 2018                                              31 
---------------------------------------------------------  -------- 
At 31 December 2017                                             152 
---------------------------------------------------------  -------- 
At 1 January 2017                                               171 
---------------------------------------------------------  -------- 
 

The accounting valuation of the Group's shareholding (based on the quoted share price of Ascent) resulted in a non-cash impairment charge of $0.1 million in the year to 31 December 2018 (2017: $0.02 million).

14. Inventories

 
                   2018     2017 
                  $'000    $'000 
--------------  -------  ------- 
Crude oil        23,183   12,422 
--------------  -------  ------- 
Well supplies    77,349   65,623 
--------------  -------  ------- 
                100,532   78,045 
--------------  -------  ------- 
 

During 2018, inventories of $5.8 million (2017: $2.9 million) were recognised within cost of sales in the statement of comprehensive income. Included within this balance is $5.8 million as a result of the write down of inventories to net realisable value (2017: $2.7 million). The write downs are included in cost of sales.

15. Trade and other receivables

 
                                    2018      2017 
                                   $'000     $'000 
-------------------------------  -------  -------- 
Current 
-------------------------------  -------  -------- 
Trade receivables                 69,857    80,743 
-------------------------------  -------  -------- 
Joint venture receivables         84,745    87,037 
-------------------------------  -------  -------- 
Under-lift position               81,173    32,299 
-------------------------------  -------  -------- 
VAT receivable                         -    11,739 
-------------------------------  -------  -------- 
Other receivables                 14,741     1,844 
-------------------------------  -------  -------- 
                                 250,516   213,662 
-------------------------------  -------  -------- 
Prepayments and accrued income    25,293    14,092 
-------------------------------  -------  -------- 
                                 275,809   227,754 
-------------------------------  -------  -------- 
 

Trade receivables are non-interest-bearing and are generally on 15 to 30 day terms. Trade receivables are reported net of any provisions for impairment. As at 31 December 2018, no impairment provision for trade receivables was necessary (2017: $nil).

Joint venture receivables relate to amounts billable to, or recoverable from, joint venture partners and were not impaired. Under-lift is valued at market prices prevailing at the balance sheet date. As at 31 December 2018, no other receivables were determined to be impaired (2017: none).

The carrying value of the Group's trade, joint venture and other receivables as stated above is considered to be a reasonable approximation to their fair value largely due to their short-term maturities.

As per the application of IFRS 9, an impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of customer segments with similar loss patterns (i.e. by geographical region, product type, customer type and rating). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written off if past due for more than one year and are not subject to enforcement activity. The Group evaluates the concentration of risk with respect to trade receivables and contract assets as low, as its customers as joint venture partners and there are no indications of change in risk.

16. Cash and cash equivalents

The carrying value of the Group's cash and cash equivalents is considered to be a reasonable approximation to their fair value due to their short-term maturities. Included within the cash balance at 31 December 2018 is restricted cash of $3.4 million (2017: $3.5 million). Of this, $2.8 million relates to cash held in escrow in respect of the unwound acquisition of the Tunisian assets of PA Resources (2017: $2.8 million) and the remainder relates to cash collateral held to issue bank guarantees in Malaysia.

Cash and cash equivalents also include an amount of $3.4 million (2017: $3.9 million) held in a Malaysian bank account which can only be used to pay cash calls for the Tanjong Baram asset and amounts related to the Tanjong Baram project finance loan.

At 31 December 2018, $6.6 million (2017: $7.0 million) was placed on short-term deposit in order to cash collateralise the Group's letter of credit.

17. Share capital and premium

The movement in the share capital and share premium of the Company was as follows:

 
                                          Ordinary 
                                         shares of 
                                           GBP0.05     Share     Share 
                                              each   capital   premium    Total 
Authorised, issued and fully paid           Number     $'000     $'000    $'000 
-----------------------------------  -------------  --------  --------  ------- 
At 1 January 2018                    1,186,084,304    85,105   125,297  210,402 
-----------------------------------  -------------  --------  --------  ------- 
Issuance of equity shares              508,321,844    33,077   105,849  138,926 
-----------------------------------  -------------  --------  --------  ------- 
Expenses on issue of equity shares               -         -   (3,997)  (3,997) 
-----------------------------------  -------------  --------  --------  ------- 
At 31 December 2018                  1,694,406,148   118,182   227,149  345,331 
-----------------------------------  -------------  --------  --------  ------- 
 

The share capital comprises only one class of Ordinary share. Each Ordinary share carries an equal voting right and right to a dividend.

At 31 December 2018, there were 73,180,394 shares held by the Employee Benefit Trust (2017: 56,023,671). On 22 October 2018, 22,126,481 shares were acquired by the Employee Benefit Trust pursuant to the rights issue. The remainder of the movement in the year is due to shares used to satisfy awards made under the Company's share-based incentive schemes.

On 22 October 2018, the Company completed a rights issue, pursuant to which 508,321,844 new Ordinary shares were issued at a price of GBP0.21 per share, generating gross aggregate proceeds of $138.9 million. 485,477,620 of the new shares issued resulted from existing shareholders taking up their entitlement under the rights issue to acquire three new Ordinary shares for every seven Ordinary shares previously held. Following the admission to the market of an additional 508,321,844 Ordinary shares on 22 October 2018, there were 1,694,406,148 Ordinary shares in issue at the end of the year.

18. Share-based payment plans

On 18 March 2010, the Directors of the Company approved three share schemes for the benefit of Directors and employees, being a Deferred Bonus Share Plan, a Restricted Share Plan and a Performance Share Plan. A Sharesave Plan was approved in 2012.

The share-based payment expense recognised for each scheme was as follows:

 
                                    2018    2017 
                                   $'000   $'000 
--------------------------------  ------  ------ 
Deferred Bonus Share Plan            649   1,069 
--------------------------------  ------  ------ 
Restricted Share Plan                668   1,024 
--------------------------------  ------  ------ 
Performance Share Plan             2,126    (68) 
--------------------------------  ------  ------ 
Sharesave Plan                       801     230 
--------------------------------  ------  ------ 
Executive Director bonus awards      401     594 
--------------------------------  ------  ------ 
                                   4,645   2,849 
--------------------------------  ------  ------ 
 

The fair value of awards is calculated at the 'market value', being the average middle market quotation of a share for the three immediately preceding dealing days as derived from the Daily Official List of the London Stock Exchange, provided such dealing days do not fall within any period when dealings in shares are prohibited because of any dealing restriction. The fair values of awards granted to employees during the year are based on the 'market value' on the date of grant, or date of invitation in respect to the Sharesave Plan.

The following disclosure and tables shows the number of shares potentially issuable under equity-settled employee share awards, including the number of options outstanding and those options which have vested and are exercisable at the end of each year. The awards have been adjusted for the effect of the rights issue.

Deferred Bonus Share Plan ('DBSP')

Eligible employees are invited to participate in the DBSP scheme. Participants may be invited to elect or, in some cases, be required, to receive a proportion of any bonus in Ordinary shares of EnQuest (invested awards). Following such award, EnQuest will generally grant the participant an additional award over a number of shares bearing a specified ratio to the number of his or her invested shares (matching shares). The awards granted will vest 33% on the first anniversary of the date of grant, a further 33% after year two and the final 34% on the third anniversary of the date of grant. Awards, both invested and matching, are forfeited if the employee leaves the Group before the awards vest.

The fair values of DBSP awards granted to employees during the year, based on the defined market value on the date of grant, are set out below:

 
                                        2018  2017 
--------------------------------------  ----  ---- 
Weighted average fair value per share    36p   37p 
--------------------------------------  ----  ---- 
 

The following shows the movement in the number of share awards held under the DBSP scheme:

 
                                    2018         2017 
                                  Number       Number 
---------------------------  -----------  ----------- 
Outstanding at 1 January       2,631,797    2,508,026 
---------------------------  -----------  ----------- 
Granted during the year(i)     1,007,312    1,357,040 
---------------------------  -----------  ----------- 
Vested during the year       (1,407,040)  (1,214,427) 
---------------------------  -----------  ----------- 
Forfeited during the year       (71,342)     (18,842) 
---------------------------  -----------  ----------- 
Outstanding at 31 December     2,160,727    2,631,797 
---------------------------  -----------  ----------- 
Exercisable at 31 December             -            - 
---------------------------  -----------  ----------- 
 

(i) On 22 October 2018, at its discretion, the Company increased the number of shares receivable by participants in the DBSP by a factor of 1.17 so that the value of their rights under outstanding awards was not adversely affected by the rights issue. This resulted in the grant of 316,128 additional shares. The fair value of these awards is being expensed over the remaining vesting period of the original awards to which they relate

The weighted average contractual life for the share awards outstanding as at 31 December 2018 was 0.9 years (2017: 0.9 years).

Restricted Share Plan ('RSP')

Under the RSP scheme, employees are granted shares in EnQuest over a discretionary vesting period at the discretion of the Remuneration Committee of the Board of Directors of EnQuest, which may or may not be subject to the satisfaction of performance conditions. Awards made under the RSP will vest over periods between one and four years. At present, there are no performance conditions applying to this scheme nor is there currently any intention to introduce them in the future.

The fair values of RSP awards granted to employees during the year, based on the defined market value on the date of grant, are set out below:

 
                                        2018  2017 
--------------------------------------  ----  ---- 
Weighted average fair value per share    32p   33p 
--------------------------------------  ----  ---- 
 

The following table shows the movement in the number of share awards held under the RSP scheme:

 
                                    2018        2017 
                                  Number      Number 
---------------------------  -----------  ---------- 
Outstanding at 1 January      12,180,771  12,564,319 
---------------------------  -----------  ---------- 
Granted during the year(i)     1,789,377     587,216 
---------------------------  -----------  ---------- 
Vested during the year         (240,515)   (893,465) 
---------------------------  -----------  ---------- 
Forfeited during the year    (1,056,880)    (77,299) 
---------------------------  -----------  ---------- 
Outstanding at 31 December    12,672,753  12,180,771 
---------------------------  -----------  ---------- 
Exercisable at 31 December     4,037,914   3,451,209 
---------------------------  -----------  ---------- 
 

(i) On 22 October 2018, at its discretion, the Company increased the number of shares receivable by participants in the RSP by a factor of 1.17 so that the value of their rights under outstanding awards was not adversely affected by the rights issue. This resulted in the grant of 1,812,650 additional shares. The fair value of these awards is being expensed over the remaining vesting period of the original awards to which they relate

The weighted average contractual life for the share awards outstanding as at 31 December 2018 was 5.0 years (2017: 4.8 years).

Performance Share Plan ('PSP')

Under the PSP, the shares vest subject to performance conditions. The PSP share awards granted during the year had four sets of performance conditions associated with them: 30% of the award relates to Total Shareholder Return ('TSR') against a number of comparator group oil and gas companies listed on the FTSE 350, AIM Top 100 and Stockholm NASDAQ OMX; 30% relates to reduction in net debt; 30% relates to production growth; and 10% relates to 2P reserve additions over the three-year performance period. Awards will vest on the third anniversary.

The fair values of PSP awards granted to employees during the year, based on the defined market value on the date of grant and which allow for the effect of the TSR condition which is a market-based performance condition, are set out below:

 
                                        2018  2017 
--------------------------------------  ----  ---- 
Weighted average fair value per share    32p   33p 
--------------------------------------  ----  ---- 
 

The following table shows the movement in the number of share awards held under the PSP scheme:

 
                                     2018         2017 
                                   Number       Number 
---------------------------  ------------  ----------- 
Outstanding at 1 January       70,181,724   61,023,323 
---------------------------  ------------  ----------- 
Granted during the year(i)     27,186,417   16,302,086 
---------------------------  ------------  ----------- 
Vested during the year        (1,160,744)  (2,412,846) 
---------------------------  ------------  ----------- 
Forfeited during the year    (14,070,898)  (4,730,839) 
---------------------------  ------------  ----------- 
Outstanding at 31 December     82,136,499   70,181,724 
---------------------------  ------------  ----------- 
Exercisable at 31 December      3,540,460    2,816,844 
---------------------------  ------------  ----------- 
 

(i) On 22 October 2018, at its discretion, the Company increased the number of shares receivable by participants in the PSP by a factor of 1.17 so that the value of their rights under outstanding awards was not adversely affected by the rights issue. This resulted in the grant of 11,318,326 additional shares. The fair value of these awards is being expensed over the remaining vesting period of the original awards to which they relate

The weighted average contractual life for the share awards outstanding as at 31 December 2018 was 4.0 years (2017: 4.0 years).

Sharesave Plan

The Group operates an approved savings related share option scheme. The plan is based on eligible employees being granted options and their agreement to opening a Sharesave account with a nominated savings carrier and to save over a specified period, either three or five years. The right to exercise the option is at the employee's discretion at the end of the period previously chosen, for a period of six months.

The fair values of Sharesave awards granted to employees during the year, based on the defined market value on the date the invitation for the scheme opens, are shown below:

 
                                        2018  2017 
--------------------------------------  ----  ---- 
Weighted average fair value per share    26p    8p 
--------------------------------------  ----  ---- 
 

The following shows the movement in the number of share options held under the Sharesave Plan:

 
                                    2018         2017 
                                  Number       Number 
---------------------------  -----------  ----------- 
Outstanding at 1 January      12,834,269   12,657,432 
---------------------------  -----------  ----------- 
Granted during the year(i)    26,069,708    1,299,185 
---------------------------  -----------  ----------- 
Vested during the year       (1,614,746)     (17,213) 
---------------------------  -----------  ----------- 
Forfeited during the year    (1,541,554)  (1,105,135) 
---------------------------  -----------  ----------- 
Outstanding at 31 December    35,747,677   12,834,269 
---------------------------  -----------  ----------- 
Exercisable at 31 December             -            - 
---------------------------  -----------  ----------- 
 

(i) On 22 October 2018, at its discretion, the Company increased the number of options receivable by participants in the Sharesave Plan by a factor of 1.17 so that the value of their rights under outstanding awards was not adversely affected by the rights issue. This resulted in the grant of 5,235,954 additional shares. The exercise price of outstanding options was also reduced by multiplying by a factor 0.8546. The incremental fair value of these adjustments is being expensed over the remaining vesting period of the options to which they relate

The weighted average contractual life for the share options outstanding as at 31 December 2018 was 2.6 years (2017: 1.7 years).

Executive Director bonus awards

As detailed in the Directors' Remuneration Report, the remuneration of the Executive Directors includes the participation in an annual bonus plan. Any bonus amount in excess of 100% of salary will be deferred into EnQuest shares for two years, subject to continued employment.

The fair value of the Executive Director bonus awards granted during the year, based on the defined market value on the date of grant, are set out below:

 
                                        2018  2017 
--------------------------------------  ----  ---- 
Weighted average fair value per share    39p   39p 
--------------------------------------  ----  ---- 
 

The following table shows the movement in the number of share awards held under the Executive Director bonus plan:

 
                                    2018       2017 
                                  Number     Number 
---------------------------  -----------  --------- 
Outstanding at 1 January       2,445,722  2,869,393 
---------------------------  -----------  --------- 
Granted during the year(i)       714,064    779,846 
---------------------------  -----------  --------- 
Cash settled in the year               -  (726,505) 
---------------------------  -----------  --------- 
Vested during the year       (1,949,074)  (477,012) 
---------------------------  -----------  --------- 
Outstanding at 31 December     1,210,712  2,445,722 
---------------------------  -----------  --------- 
Exercisable at 31 December     1,949,074          - 
---------------------------  -----------  --------- 
 

(i) On 22 October 2018, at its discretion, the Company increased the number of shares receivable by participants in the PSP by a factor of 1.17 so that the value of their rights under outstanding awards was not adversely affected by the rights issue. This resulted in the grant of 459,112 additional shares. The fair value of these awards is being expensed over the remaining vesting period of the original awards to which they relate

The weighted average contractual life for the share awards outstanding as at 31 December 2018 was 0.6 years (2017: 0.6 years).

19. Loans and borrowings

The Group's loans are carried at amortised cost as follows:

 
                                              2018                           2017 
                                  -----------------------------  ----------------------------- 
                                  Principal     Fees      Total   Principal    Fees      Total 
                                      $'000    $'000      $'000       $'000   $'000      $'000 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Credit facility                     799,444        -    799,444   1,099,966       -  1,099,966 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Oz Management facility              178,524  (3,325)    175,199           -       -          - 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Crude oil prepayment                 22,222    (111)     22,111      75,556   (378)     75,178 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
SVT working capital facility         15,747        -     15,747      25,622       -     25,622 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Tanjong Baram project financing 
 facility                            31,730        -     31,730       8,531   (292)      8,239 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Trade creditor loan                   2,500        -      2,500      10,000       -     10,000 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Total loans                       1,050,167  (3,436)  1,046,731   1,219,675   (670)  1,219,005 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
 
Due within one year                                     311,261                        330,012 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Due after more than one year                            735,470                        888,993 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
Total loans                                           1,046,731                      1,219,005 
--------------------------------  ---------  -------  ---------  ----------  ------  --------- 
 

Credit facility

In October 2013, the Group entered into a six-year $1.7 billion multi-currency revolving credit facility (the 'RCF'), comprising of a committed amount of $1.2 billion (subject to the level of reserves) with a further $500 million available through an accordion structure. Interest on the RCF was payable at LIBOR plus a margin of 2.50% to 4.25%, dependent on specified covenant ratios.

On 21 November 2016, pursuant to restructuring, the Group entered into an amended and restated credit agreement, which included the following terms:

-- Commitments split into a term facility of $1.125 billion and a revolving facility of $75 million (together the 'credit facility');

   --      Maturity date extended to October 2021; 
   --      Amortisation profile amended, with 1 April 2018 the first scheduled amortisation date; 

-- Borrowings subject to mandatory repayment out of excess cash flow (excluding amounts required for approved capital expenditure), assessed on a six-monthly basis;

-- Borrowings up to $890.7 million subject to interest at LIBOR plus a margin of 4.75%, paid in cash;

-- Borrowings in excess of $890.7 million subject to interest at LIBOR plus a margin of 5.25%, paid in cash, with a further 3.75% interest accrued and added to the Payment In Kind ('PIK') amount at maturity of each loan's maturity period;

-- PIK amount repayable at maturity and subject to 9.0% interest, which is capitalised and added to the PIK amount on each 30 June and 31 December;

   --      Accordion feature cancelled; and 
   --      $12 million waiver fee payable to lenders on 31 March 2018. 

The Group concluded that the above amendments to the RCF are a substantial modification, resulting in the previous loan carrying amount of $1,002.3 million ($1,017.3 million principal less unamortised issuance costs of $15.0 million) being derecognised and a new loan of $1,017.3 million being recognised at fair value. The difference of $15.0 million, which equated to the unamortised fees of the previous loan, was recognised as loss on extinguishment. The $12.0 million waiver fee along with $11.1 million of advisors' fees were directly attributable to the modification of the RCF and were also expensed as part of the loss on extinguishment.

During November 2017, the Group agreed additional amendments to its term loan and revolving credit facility. These changes include the deferral of the scheduled $140 million reduction in the term loan facility from 1 April 2018 to 1 October 2018.

At 31 December 2018, the carrying amount of the credit facility on the balance sheet was $799.4 million, comprising the loan principal drawn down of $785.0 million, plus $14.4 million of interest capitalised to the PIK amount (2017: $1,100.0 million, being loan principal drawn down of $1,095.2 million plus $4.8 million of interest capitalised to the PIK amount).

At 31 December 2018, after allowing for letter of credit utilisation of $6.6 million, $68.4 million remained available for drawdown under the credit facility (2017: $7.0 million and $97.8 million respectively).

Oz Management facility

On 24 September 2018, the Group entered into a $175.0 million financing facility with Oz Management LP. The facility was drawn down in full and is repayable in five years from initial availability of the facility. Interest accrues at 6.3% annual effective rate plus one-month USD LIBOR. The financing is ring-fenced on a 15% interest in the Kraken oil field and will be repaid out of the cash flows associated with the interest over a maximum of five years. If second ranking security interest in respect of the assets secured under the credit facility is obtained within 6 months of the financial close of the Oz Management facility, the interest rate shall decrease to 5.75% annual effective rate plus one-month USD LIBOR.

Crude oil prepayment transaction

On 25 October 2017, the Group entered into an $80 million crude oil prepayment with Mercuria Energy Trading SA.

Repayment is made in equal monthly instalments over 18 months, through the delivery of an aggregate of approximately 1.8 mmbbls of oil. EnQuest will receive the average Brent price over each month subject to a floor of $45/bbl and a cap of approximately $64/bbl. Interest on the prepayment is payable at one-month USD LIBOR plus a margin of 7.0%. The prepayment transaction is being undertaken on an unsecured basis.

At 31 December 2018, the carrying amount of the prepayment on the balance sheet was $22.2 million (2017: $75.6 million).

SVT working capital facility

On 1 December 2017, EnQuest NNS Limited entered into a GBP42 million revolving loan facility with a joint operator partner to fund the short-term working capital cash requirements on the acquisition of SVT and other interests (see note 29). The facility is able to be drawn down against in instalments and accrues interest at 1.0% per annum plus GBP LIBOR. The facility is repayable three years from the initial availability of the facility.

Tanjong Baram project financing facility

On 25 October 2017, the Group entered into a $34.6 million financing facility in Malaysia with Castleton Commodities Merchant Asia Co. Pte Ltd. The facility is repayable within five years from the drawdown date on 28 February 2018 or on termination of the Risk Services Contract, and is secured against the Tanjong Baram asset. Interest is payable at USD LIBOR plus a margin of 8% per annum.

Trade creditor loan

In October 2016, the Group borrowed $40 million under a loan facility with a trade creditor to fund the settlement of deferred amounts for the Kraken project. The loan will be paid in full in 2019.

Bonds

The Group's bonds are carried at amortised cost as follows:

 
                                        2018                          2017 
                             ---------------------------  ---------------------------- 
                             Principal     Fees    Total  Principal      Fees    Total 
                                 $'000    $'000    $'000      $'000     $'000    $'000 
---------------------------  ---------  -------  -------  ---------  --------  ------- 
High yield bond                760,553  (6,475)  754,078    720,827   (8,467)  712,360 
---------------------------  ---------  -------  -------  ---------  --------  ------- 
Retail bond                    237,778  (1,574)  236,204    224,048   (2,057)  221,991 
---------------------------  ---------  -------  -------  ---------  --------  ------- 
Total bonds due after more 
 than one year                 998,331  (8,049)  990,282    944,875  (10,524)  934,351 
---------------------------  ---------  -------  -------  ---------  --------  ------- 
 

High yield bond

In April 2014, the Group issued a $650 million high yield bond with an originally scheduled maturity of 15 April 2022 and paying a 7.0% coupon semi-annually in April and October.

On 21 November 2016, the high yield bond was amended pursuant to a scheme of arrangement whereby all existing notes were exchanged for new notes. The new high yield notes continue to accrue a fixed coupon of 7.0% payable semi-annually in arrears. The interest will only be payable in cash if the 'Cash Payment Condition' is satisfied, being the average of the Daily Brent Oil Prices during the period of six calendar months immediately preceding the 'Cash Payment Condition Determination Date' is equal to or above $65/bbl. The 'Cash Payment Condition Determination Date' is the date falling one calendar month prior to the relevant interest payment date. If the 'Cash Payment Condition' is not satisfied, interest will not be paid in cash but instead will be capitalised and satisfied through the issue of additional high yield notes ('Additional HY Notes'). $27.5 million of accrued, unpaid interest as at the restructuring date was capitalised and added to the principal amount of the new high yield notes issued pursuant to the scheme. The maturity of the new high yield notes was extended to 15 April 2022 and the Company has the option to extend the maturity date of the new high yield notes to 15 April 2023. Further, the maturity date of the new high yield notes will be automatically extended to 15 October 2023 if the credit facility is not repaid or refinanced in full prior to 15 October 2020.

At the end of 2016, the modification was not considered to be significant under IAS 39. As a result, the change in contractual cash flows on the bonds were amortised over the new life of the bonds, rather than taken straight to profit or loss. Under IFRS 9, the refinancing is a modification of the debt in which the difference in contractual cash flows should be taken straight to profit or loss. The cash flows were reassessed and, on 1 January 2018 on the adoption of IFRS 9, an adjustment for $15.4 million was taken through opening reserves and through the amortised value of the bond. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

The fair value of the high yield bond was estimated to be $534.4 million (2017: $519.9 million). The price quoted for the retail bond was used to estimate the fair value of the high yield bond on the basis that, since the restructuring, both bonds carry similar rights.

Retail bond

In 2013, the Group issued a GBP155 million retail bond with an originally scheduled maturity of 15 February 2022 and paying a 5.5% coupon semi-annually in February and August. For the interest period commencing 15 August 2016, in accordance with the terms of the bond, the rate of interest increased to 7.0% following the determination of the Company's leverage ratio at 31 December 2015.

On 21 November 2016, the retail bond was amended pursuant to a scheme of arrangement whereby all existing notes were exchanged for new notes. The new retail notes continue to accrue a fixed coupon of 7.0% payable semi-annually in arrears. The interest will only be payable in cash if the 'Cash Payment Condition' is satisfied, being the average of the Daily Brent Oil Prices during the period of six calendar months immediately preceding the 'Cash Payment Condition Determination Date' is equal to or above $65/bbl. The 'Cash Payment Condition Determination Date' is the date falling one calendar month prior to the relevant interest payment date. If the 'Cash Payment Condition' is not satisfied, interest will not be paid in cash but instead will be capitalised and satisfied through the issue of additional retail notes ('Additional Retail Notes'). The maturity of the new retail notes was extended to 15 April 2022 and the Company has the option to extend the maturity date to 15 April 2023. Further, the maturity date of the new retail notes will be automatically extended to 15 October 2023 if the credit facility is not repaid or refinanced in full prior to 15 October 2020.

At the end of 2016, the modification was not considered to be significant under IAS 39. As a result, the change in contractual cash flows on the bonds were amortised over the new life of the bonds, rather than taken straight to profit or loss. Under IFRS 9, the refinancing is a modification of the debt in which the difference in contractual cash flows should be taken straight to profit or loss. The cash flows were reassessed and, on 1 January 2018 on the adoption of IFRS 9, an adjustment for $22.7 million was taken through opening reserves and through the amortised value of the bond. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

The bond had a fair value of $156.8 million (2017: $161.6 million). The fair value of the retail bond has been determined by reference to the price available from the market on which the bond is traded.

20. Other financial assets and financial liabilities

(a) Summary

 
                                                     2018                 2017 
                                              -------------------  ------------------- 
                                              Assets  Liabilities  Assets  Liabilities 
                                               $'000        $'000   $'000        $'000 
--------------------------------------------  ------  -----------  ------  ----------- 
Financial liabilities at fair value through 
 profit or loss: 
--------------------------------------------  ------  -----------  ------  ----------- 
Commodity contracts                           54,733          142       -       41,996 
--------------------------------------------  ------  -----------  ------  ----------- 
Foreign exchange contracts                       248            -       -            - 
--------------------------------------------  ------  -----------  ------  ----------- 
Carbon contracts                               2,077            -       -            - 
--------------------------------------------  ------  -----------  ------  ----------- 
Financial liabilities at amortised cost: 
--------------------------------------------  ------  -----------  ------  ----------- 
Other liabilities                                  -            -       -       19,211 
--------------------------------------------  ------  -----------  ------  ----------- 
Financial assets at fair value through 
 OCI: 
--------------------------------------------  ------  -----------  ------  ----------- 
Interest rate swap designated as cash 
 flow hedge                                        -            -      36            - 
--------------------------------------------  ------  -----------  ------  ----------- 
Financial assets at amortised cost: 
--------------------------------------------  ------  -----------  ------  ----------- 
Other receivables                              9,517            -  61,701            - 
--------------------------------------------  ------  -----------  ------  ----------- 
Total current                                 66,575          142  61,737       61,207 
--------------------------------------------  ------  -----------  ------  ----------- 
 
Financial liabilities at amortised cost: 
--------------------------------------------  ------  -----------  ------  ----------- 
Other liabilities                                  -            -       -        7,121 
--------------------------------------------  ------  -----------  ------  ----------- 
Financial assets at amortised cost: 
--------------------------------------------  ------  -----------  ------  ----------- 
Other receivables                              5,958            -   8,191            - 
--------------------------------------------  ------  -----------  ------  ----------- 
Total non-current                              5,958            -   8,191        7,121 
--------------------------------------------  ------  -----------  ------  ----------- 
 

(b) Oil commodity contracts

The Group uses put and call options and swap contracts to manage its exposure to the oil price.

Commodity derivative contracts are designated as at FVPL, and gains and losses on these contracts are recognised as a component of revenue. These contracts typically include bought and sold call options, bought put options and commodity swap contracts.

For the year ended 31 December 2018, gains totalling $4.4 million (2017: losses of $28.3 million) were recognised in respect of commodity contracts designated as FVPL. This included losses totalling $93.0 million (2017: losses of $20.6 million) realised on contracts that matured during the year, and mark-to-market unrealised gains totalling $97.4 million (2017: losses of $7.7 million). Of the realised amounts recognised during the year, a loss of $17.2 million (2017: loss of $10.4 million) was realised in 'Business performance' revenue in respect of the amortisation of premium income received on sale of these options. The premiums received are amortised into 'Business performance' revenue over the life of the option.

In October 2017, the Group entered into an 18-month collar structure for $80 million (see note 19). The collar includes 18 separate call options and 18 separate put options, subject to a floor of $45/bbl and a cap of approximately $64/bbl. Included in the total gains for the year ended 31 December 2018, a loss of $8.0 million was recognised in 'Business performance' revenue (2017: loss of $5.2 million).

The mark-to-market of the Group's open contracts as at 31 December 2018 was an asset of $54.7 million (2017: liability of $42.0 million). The position includes a loss of $0.1 million in respect of fixed price swap contracts for 200,000 barrels of 2019 production at a weighted average price of $54.6/bbl (2017: loss of $29.2 million in respect of fixed price swap contracts for 4,150,000 barrels of 2018 production at a weighted average price of $59.1/bbl).

(c) Foreign currency contracts

The Group enters into a variety of foreign currency contracts, including Sterling, Euros, Swedish Krona, Norwegian Krone and United Arab Emirates Dirhams. During the year ended 31 December 2018, losses totalling $0.4 million (2017: gain of $0.4 million) were recognised in the income statement. This included losses totalling $0.6 million (2017: $nil) realised on contracts maturing in the year.

The mark-to-market of the Group's open contracts as at 31 December 2018 was $0.2 million (2017: $nil).

(d) Interest rate swap

During the year ended 31 December 2015, the Group entered an interest rate swap which effectively swaps 50% of floating USD LIBOR rate interest on the Group's Malaysian loan into a fixed rate of 1.035% until 2018. The swap, which is effective from a hedge accounting perspective, completed in the year with a loss of $0.4 million recognised within finance expenses on the income statement (2017: gain of $0.02 million). The net asset fair value at 31 December 2017 was $0.04 million.

(e) Carbon commodity contracts

During the year the Group entered forward carbon commodity contracts to manage its exposure to compliance with European emissions regulations. The contracts are designated as at FVPL and gains and losses on these contracts are recognised as a component of cost of sales.

For the year ended 31 December 2018, unrealised gains of $2.1 million (2017: $nil) were recognised in respect of carbon commodity contracts designated as FVPL. No contracts matured during the year.

The mark-to-market of the Group's open contracts as at 31 December 2018 was $2.1 million (2017: $nil).

(f) Income statement impact

The income/(expense) recognised for commodity, currency and interest rate derivatives are as follows:

 
                                     Revenue and 
                                    other operating 
                                        income            Cost of sales         Finance costs 
                                 --------------------  --------------------  -------------------- 
Year ended 31 December 2018      Realised  Unrealised  Realised  Unrealised  Realised  Unrealised 
                                    $'000       $'000     $'000       $'000     $'000       $'000 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity options                (29,309)      63,022         -           -         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity swaps                  (47,740)      29,016         -           -         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity futures                 (7,951)          84         -           -         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity collar on prepayment 
 transaction                      (8,035)       5,310         -           -         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Foreign exchange contracts              -           -     (615)         248         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Carbon forwards                         -           -         -       2,062         -           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Interest rate swap                      -           -         -           -     (353)           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
                                 (93,035)      97,432     (615)       2,310     (353)           - 
-------------------------------  --------  ----------  --------  ----------  --------  ---------- 
 
 
                                       Revenue and 
                                      other operating 
                                          income            Cost of sales         Finance costs 
                                   --------------------  --------------------  -------------------- 
Year ended 31 December 2017        Realised  Unrealised  Realised  Unrealised  Realised  Unrealised 
                                      $'000       $'000     $'000       $'000     $'000       $'000 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Call options                            880    (18,670)         -           -         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity swaps                    (23,754)      14,144         -           -         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Commodity futures                     (437)       (363)         -           -         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Purchase and sale of crude 
 oil                                  2,736     (2,827)         -           -         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Foreign exchange swap contracts           -           -         -         433         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Other forward currency contracts          -           -   (4,848)       9,293         -           - 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
Interest rate swap                        -           -         -           -        15        (38) 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
                                   (20,575)     (7,716)   (4,848)       9,726        15        (38) 
---------------------------------  --------  ----------  --------  ----------  --------  ---------- 
 

(g) Other receivables and liabilities

 
                                         Other receivables         Other 
                                                     $'000   liabilities 
                                                                   $'000 
---------------------------------------  -----------------  ------------ 
At 1 January 2017                                   59,757        19,767 
---------------------------------------  -----------------  ------------ 
Additions on acquisition                            38,420         6,742 
---------------------------------------  -----------------  ------------ 
Disposed during the year                           (3,561)             - 
---------------------------------------  -----------------  ------------ 
Change in fair value                                   627         (340) 
---------------------------------------  -----------------  ------------ 
Utilised during the year                          (27,209)             - 
---------------------------------------  -----------------  ------------ 
Unwinding of discount                                1,832           163 
---------------------------------------  -----------------  ------------ 
Foreign exchange                                        26             - 
---------------------------------------  -----------------  ------------ 
At 31 December 2017                                 69,892        26,332 
---------------------------------------  -----------------  ------------ 
Exercised on acquisition (see note 29)           (509,447)             - 
---------------------------------------  -----------------  ------------ 
Change in fair value                               488,426       (7,283) 
---------------------------------------  -----------------  ------------ 
Utilised during the year                          (66,194)      (14,907) 
---------------------------------------  -----------------  ------------ 
Unwinding of discount                              (1,081)            72 
---------------------------------------  -----------------  ------------ 
Foreign exchange                                       980             - 
---------------------------------------  -----------------  ------------ 
Classification update                               32,899       (4,214) 
---------------------------------------  -----------------  ------------ 
At 31 December 2018                                 15,475             - 
---------------------------------------  -----------------  ------------ 
 
Current                                              9,517             - 
---------------------------------------  -----------------  ------------ 
Non-current                                          5,958             - 
---------------------------------------  -----------------  ------------ 
                                                    15,475             - 
---------------------------------------  -----------------  ------------ 
 

Other receivables

 
                                   2018    2017 
Comprised of:                     $'000   $'000 
-------------------------------  ------  ------ 
BUMI receivable                  15,475  24,407 
-------------------------------  ------  ------ 
Purchase option                       -  22,300 
-------------------------------  ------  ------ 
Thistle decommissioning option        -  16,120 
-------------------------------  ------  ------ 
Kufpec receivable                     -   7,065 
-------------------------------  ------  ------ 
Total                            15,475  69,892 
-------------------------------  ------  ------ 
 

In August 2016, EnQuest agreed with Armada Kraken PTE Ltd ('BUMI') that BUMI would refund $65 million (EnQuest's share being $45.8 million) of a $100.0 million lease prepayment made in 2014 for the FPSO for the Kraken field. This refund is receivable from 2018 and onwards. Included within other receivables at 31 December 2018 is an amount of $15.5 million representing the discounted value of EnQuest's share of these repayments (2017: $24.4 million). A total of $9.1 million was collected during the period. Unwinding of discount of $0.2 million (2017: $1.6 million) is included within finance costs in the 12 months ended 31 December 2018.

As part of the Magnus and other interests' acquisition (see note 29), the Group had an option to acquire the remaining 75% of the Magnus oil field and BP's interest in the associated infrastructure. The option was exercised on 1 December 2018 and in line with the accounting for step acquisitions the option was remeasured at fair value resulting in a loss of $1.3 million which was recognised through other income in 'Remeasurements and exceptional items' in the statement of comprehensive income.

As part of the Magnus and other interests' acquisition, the Group also entered into an option to undertake the decommissioning of Thistle. At 31 December 2017, the receivable had a carrying value of $16.1 million. The option was exercised in the year and a total of $50 million was received with the corresponding liability of $33.6 million recognised within provisions (see note 22).

As part of the 2012 farm-out to the Kuwait Foreign Petroleum Exploration Company ('KUFPEC') of 35% of the Alma/Galia development, KUFPEC agreed to pay EnQuest a total of $23.3 million over a 36-month period after Alma/Galia is deemed to be fully operational. During the year ended 31 December 2018, the arrangement was completed and $7.1 million was received. At 31 December 2017, the receivable had a carrying value of $7.1 million.

Other liabilities

 
                                                         2018    2017 
Comprised of:                                           $'000   $'000 
-----------------------------------------------------  ------  ------ 
Accrued waiver fee                                          -  12,000 
-----------------------------------------------------  ------  ------ 
Financial carry                                             -   7,211 
-----------------------------------------------------  ------  ------ 
Decommissioning of Magnus and other interests option        -   4,214 
-----------------------------------------------------  ------  ------ 
Other                                                       -   2,907 
-----------------------------------------------------  ------  ------ 
Total                                                       -  26,332 
-----------------------------------------------------  ------  ------ 
 

As part of the agreement to acquire an interest in the PM8/Seligi assets in Malaysia, the Group agreed to carry Petronas Carigali for its share of exploration or appraisal well commitments. Well commitments were performed during the year and the liability was released during the year. At 31 December 2017, the liability had a carrying value of $7.2 million.

21. Fair value measurement

The following table provides the fair value measurement hierarchy of the Group's assets and liabilities:

 
                                                           Quoted 
                                                           prices  Significant    Significant 
                                                        in active   observable   unobservable 
                                                          markets       inputs         inputs 
                                                           (Level       (Level         (Level 
                                                Total          1)           2)             3) 
31 December 2018                                $'000       $'000        $'000          $'000 
------------------------------------------  ---------  ----------  -----------  ------------- 
Financial assets measured at fair value: 
------------------------------------------  ---------  ----------  -----------  ------------- 
Derivative financial assets at FVPL 
------------------------------------------  ---------  ----------  -----------  ------------- 
Oil commodity derivative contracts(i)          54,733           -       54,733              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
Foreign currency derivative contracts(ii)         248           -          248              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
Carbon commodity derivative contracts(ii)       2,077           -        2,077              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
Other financial assets at FVPL 
------------------------------------------  ---------  ----------  -----------  ------------- 
Quoted equity shares                               31          31            -              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
Liabilities measured at fair value: 
------------------------------------------  ---------  ----------  -----------  ------------- 
Derivative financial liabilities at FVPL 
------------------------------------------  ---------  ----------  -----------  ------------- 
Oil commodity derivative contracts(i)             142           -          142              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
Other financial liabilities measured at 
 FVPL 
------------------------------------------  ---------  ----------  -----------  ------------- 
Contingent consideration                      660,436           -            -        660,436 
------------------------------------------  ---------  ----------  -----------  ------------- 
Liabilities for which fair values are 
 disclosed 
------------------------------------------  ---------  ----------  -----------  ------------- 
Interest-bearing loans and borrowings       1,050,167           -            -      1,050,167 
------------------------------------------  ---------  ----------  -----------  ------------- 
Obligations under finance leases              708,950           -            -        708,950 
------------------------------------------  ---------  ----------  -----------  ------------- 
Retail bond                                   156,764     156,764            -              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
High yield bond                               534,363           -      534,363              - 
------------------------------------------  ---------  ----------  -----------  ------------- 
 
 
                                                               Quoted 
                                                               prices  Significant    Significant 
                                                            in active   observable   unobservable 
                                                              markets       inputs         inputs 
                                                               (Level       (Level         (Level 
                                                    Total          1)           2)             3) 
31 December 2017                                    $'000       $'000        $'000          $'000 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Financial assets measured at fair value: 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Derivative financial asset at FVPL 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Interest rate swap(ii)                                 36           -           36              - 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Other financial assets at FVPL 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Quoted equity shares                                  152         152            -              - 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Assets for which fair values are disclosed 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Thistle decommissioning option                     16,120           -            -         16,120 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Purchase option                                    22,300           -            -         22,300 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Liabilities measured at fair value: 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Derivative financial liabilities at FVPL 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Commodity derivative contracts(i)                  41,996           -       41,996              - 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Other financial liability at FVPL 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Decommissioning of Magnus and other interests 
 option                                             4,214           -            -          4,214 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Contingent consideration                           83,166           -            -         83,166 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Liabilities for which fair values are 
 disclosed 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Interest-bearing loans and borrowings           1,219,675           -            -      1,219,675 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Obligations under finance leases                  797,933           -            -        797,933 
----------------------------------------------  ---------  ----------  -----------  ------------- 
Retail bond                                       161,595     161,595            -              - 
----------------------------------------------  ---------  ----------  -----------  ------------- 
High yield bond                                   519,896           -      519,896              - 
----------------------------------------------  ---------  ----------  -----------  ------------- 
 

(i) Valued using readily available information in the public markets and quotations provided by brokers and price index developers

(ii) Valued by the counterparties, with the valuations reviewed internally and corroborated with market data

Fair value hierarchy

All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy, based on the lowest level input that is significant to the fair value measurement as a whole, as follows:

Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities;

Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;

Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. There have been no transfers between Level 1 and Level 2 during the period (2017: no transfers).

For recurring and non-recurring fair value measurements categorised within Level 3 of the fair value hierarchy, the Group uses the valuation processes to decide its valuation policies and procedures and analyse changes in fair value measurements from period to period. Level 3 financial instruments consist of interest-bearing loans and borrowings (see note 19) and provisions (see note 22), which are valued in accordance with the Group's accounting policies.

22. Provisions

 
                                                                                  Surplus  Other provisions 
                 Decommissioning      Carry       Cost recovery     Contingent      lease             $'000 
                       provision  provision           provision  consideration  provision                        Total 
                           $'000      $'000               $'000          $'000      $'000                        $'000 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
At 1 January 
 2017                    493,891      5,491              89,529         22,580      2,816                 -    614,307 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Additions 
 during the 
 year                     63,613          -              10,329          3,131          -                 -     77,073 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Acquisitions 
 (see note 29)                 -          -                   -         66,623          -                 -     66,623 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Changes in 
 estimates                80,881          -            (77,785)          (423)        194                 -      2,867 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Unwinding of 
 discount                 11,471          -               1,838            255         17                 -     13,581 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Utilisation             (10,605)    (5,491)                   -        (9,000)      (394)                 -   (25,490) 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Foreign 
 exchange                      -          -                   -              -        253                 -        253 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
At 31 December 
 2017                    639,251          -              23,911         83,166      2,886                 -    749,214 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Additions 
 during the 
 year                          -          -                   -              -          -            41,856     41,856 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Acquisitions 
 (see note 29)                 -          -                   -        625,296          -                 -    625,296 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Changes in 
 estimates                29,908          -             (7,947)         21,816          -               657     44,433 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Unwinding of 
 discount                 12,617          -                 260             20          8                 -     12,905 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Utilisation             (10,036)          -             (5,261)       (69,862)      (409)                 -   (85,568) 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Classification 
 update                        -          -             (5,068)              -          -             4,214      (854) 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Foreign 
 exchange                      -          -                   -              -      (141)                 -      (141) 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
At 31 December 
 2018                    671,740          -               5,895        660,436      2,344            46,727  1,387,142 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
 
Classified as: 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Current                   10,395          -                   -         69,680        388               587     81,050 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
Non-current              661,345          -               5,895        590,756      1,956            46,140  1,306,092 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
                         671,740          -               5,895        660,436      2,344            46,727  1,387,142 
---------------  ---------------  ---------  ------------------  -------------  ---------  ----------------  --------- 
 

Decommissioning provision

The Group makes full provision for the future contractual costs of decommissioning its production facilities and pipelines on a discounted basis.

The Group's total provision represents the present value of decommissioning costs which are expected to be incurred up to 2042 assuming no further development of the Group's assets. The liability is discounted at a rate of 2.0% (2017: 2.0%). The unwinding of the discount is classified as a finance cost (see note 6).

These provisions have been created based on internal and third-party estimates. Assumptions based on the current economic environment have been made which management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required, which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning liabilities is likely to depend on the dates when the fields cease to be economically viable. This in turn depends on future oil prices, which are inherently uncertain.

The Group enters into surety bonds principally to provide security for its decommissioning obligations. The surety bond facilities which expired in December 2018 were renewed for 12 months, subject to ongoing compliance with the terms of the Group's borrowings. At 31 December 2018, the Group held surety bonds totalling $123.2 million (2017: $129.6 million).

Carry provision

Consideration for the acquisition of 40% of the Kraken field from Cairn (previously Nautical) and First Oil PLC in 2012 was through development carries. The 'contingent' carry is dependent upon a reserves determination which took place in Q2 2016. During 2017, $5.5 million of the carry had been paid, with no remaining liability recognised on the balance sheet as at 31 December 2018 (2017: $nil).

Cost recovery provision

As part of the KUFPEC farm-in agreement, a cost recovery protection mechanism was agreed with KUFPEC to enable KUFPEC to recoup its investment to the date of first production. If, on 1 January 2017, KUFPEC's costs to first production had not been recovered or deemed to have been recovered, EnQuest would pay KUFPEC an additional 20% share of net revenue. This additional revenue is to be paid until the capital costs to first production have been recovered.

A provision has been made for the expected payments that the Group will make to KUFPEC. The assumptions made in arriving at the projected cash payments are consistent with the assumptions used in the Group's 2018 year end impairment test, and the resulting cash flows were included in the determination of the recoverable value of the project. In establishing when KUFPEC has recovered its capital cost to first oil, the farm-in agreement requires the use of the higher of the actual oil price, or $90/bbl real, inflated at 2.0% per annum from 2012. These cash flows have been discounted at a rate of 2.0% (2017: 2.0%).

During 2017, the Group entered into discussions with Petronas in relation to the prior period PM8 cost recovery. During 2017, a provision was made for the expected payments that the Group will make as part of the settlement agreement. During the year ended 31 December 2018, $5.3 million was paid. At 31 December 2018, the remaining balance to be paid was recognised within accruals for a value of $5.1 million (2017: $10.3 million).

Contingent consideration

As part of the purchase agreement with the previous owner of the GKA assets, a contingent consideration was agreed based on Scolty/Crathes field development plan ('FDP') approval and 'first oil'. EnQuest paid $3.0 million in November 2015, following FDP approval in October 2015, and $9.0 million during 2017. During 2018, $8.0 million was paid with no remaining liability recognised on the balance sheet as at 31 December 2018 (2017: $8.1 million). Change in estimate of $0.1 million is included within finance costs for the year ended 31 December 2018 (2017: $0.4 million).

In addition, there was potential consideration due subject to future exploration success which, having been reassessed, are deemed not to be probable. No remaining liability has been recognised on the balance sheet as at 31 December 2018 (2017: $5.3 million). The reversal of provision is included within other income for the year ended 31 December 2018.

On 1 December 2017, the acquisition of the initial 25% interest in the Magnus oil field ('Magnus') and associated interests (collectively the 'Transaction assets') was funded through a vendor loan from BP (see note 29). The loan is repayable solely out of the cash flows, which are achieved above operating cash flows from the acquired assets and is secured over the interests in the Transaction assets. The loan accrues interest at a rate of 5.0% per annum on the base consideration. The fair value has been estimated by calculating the present value of the future expected cash flows, based on a discount rate of 10.0% (2017: 10.0%) and assumed repayment of around three years. A total of $61.9 million was repaid during 2018. Change in fair value of $9.7 million is recognised within finance costs in the 12 months ended 31 December 2018. The provision of $33.9 million is expected to be paid during 2019, as disclosed within current provisions (2017: $69.8 million).

On 1 December 2018, the acquisition of the additional 75% interest in the Magnus oil field and associated interests (see note 29) was part funded through a vendor loan and profit share arrangement with BP, originally recognised at a discounted value of $626.6 million The loan is repayable solely out of the cash flows which are achieved above operating cash flows from Magnus and is secured over the acquired assets. The loan accrues interest at a rate of 7.5% per annum on the base consideration. The fair value has been estimated by calculating the present value of the future expected cash flows, based on a discount rate of 10.0% and assumed repayment over the life of the field.

Surplus lease provision

In June 2015, the Group entered a 20-year lease in respect of the Group's office building in Aberdeen, with part of the building subsequently being sub-let with a rent-free incentive. A provision has been recognised for the unavoidable costs in relation to the sub-let space. The provision has been discounted using a 2.0% discount rate (2017: 2.0%). At 31 December 2018, the provision was $2.3 million (2017: $2.9 million).

Other provisions

As part of the Magnus and associated interests acquisition (see note 29), EnQuest agreed to pay additional consideration in relation to the management of the physical decommissioning costs of Magnus. At 31 December 2018, the amount due to BP by reference to 7.5% of BP's decommissioning costs on Magnus on an after-tax basis was $12.6 million (2017: $4.2 million).

The Thistle decommissioning option was exercised during the year resulting in receipt of cash of $50 million. At 31 December 2018, the amount due to BP by reference to 7.5% of BP's decommissioning costs on Thistle and Deveron on an after-tax basis was $33.6 million (2017: $nil). Unwinding of discount of $0.7 million is included within finance income for the year ended 31 December 2018 (2017: $nil).

23. Trade and other payables

 
                             2018     2017 
                            $'000    $'000 
------------------------  -------  ------- 
Current 
------------------------  -------  ------- 
Trade payables            162,686  144,584 
------------------------  -------  ------- 
Accrued expenses          296,758  271,686 
------------------------  -------  ------- 
Over-lift position         12,837   23,173 
------------------------  -------  ------- 
Joint venture creditors     1,701    1,632 
------------------------  -------  ------- 
VAT payable                23,543        - 
------------------------  -------  ------- 
Other payables              4,465    5,014 
------------------------  -------  ------- 
                          501,990  446,089 
------------------------  -------  ------- 
Classified as: 
------------------------  -------  ------- 
Current                   483,781  367,312 
------------------------  -------  ------- 
Non-current                18,209   78,777 
------------------------  -------  ------- 
                          501,990  446,089 
------------------------  -------  ------- 
 

Trade payables are normally non-interest-bearing and settled on terms of between 10 and 30 days. The Group has arrangements with various suppliers to defer payment of a proportion of its capital spend. The majority of these deferred payments fall due in 2019 and the balance is expected to be fully settled in 2020.

Certain trade and other payables will be settled in currencies other than the reporting currency of the Group, mainly in Sterling.

Accrued expenses include accruals for capital and operating expenditure in relation to the oil and gas assets.

The carrying value of the Group's trade and other payables as stated above is considered to be a reasonable approximation to their fair value largely due to the short-term maturities.

24. Commitments and contingencies

Commitments

(i) Operating lease commitments - lessee

The Group has financial commitments in respect of non-cancellable operating leases for office premises. These leases have remaining non-cancellable lease terms of between one and 20 years. The future minimum rental commitments under these non-cancellable leases are as follows:

 
                                                           2018     2017 
                                                          $'000    $'000 
-------------------------------------------------------  ------  ------- 
Due in less than one year                                 5,058    7,177 
-------------------------------------------------------  ------  ------- 
Due in more than one year but not more than five years   20,096   27,286 
-------------------------------------------------------  ------  ------- 
Due in more than five years                              62,238   75,536 
-------------------------------------------------------  ------  ------- 
                                                         87,392  109,999 
-------------------------------------------------------  ------  ------- 
 

Lease payments recognised as an operating lease expense during the year amounted to $5.1 million (2017: $5.3 million).

Under the Dons Northern Producer Agreement, a minimum notice period of 12 months exists whereby the Group expects the minimum commitment under this agreement to be approximately $7.8 million (2017: $7.1 million).

(ii) Operating lease commitments - lessor

The Group sub-leases part of its Aberdeen office. The future minimum rental commitments under these non-cancellable leases are as follows:

 
                                                           2018    2017 
                                                          $'000   $'000 
-------------------------------------------------------  ------  ------ 
Due in less than one year                                 1,568   1,638 
-------------------------------------------------------  ------  ------ 
Due in more than one year but not more than five years    6,952   7,141 
-------------------------------------------------------  ------  ------ 
Due in more than five years                               2,927   4,686 
-------------------------------------------------------  ------  ------ 
                                                         11,447  13,465 
-------------------------------------------------------  ------  ------ 
 

Sub-lease rent recognised during the year amounted to $1.1 million (2017: $1.3 million).

(iii) Finance lease commitments

The Group had the following obligations under finance leases as at the balance sheet date:

 
                                              2018          2018       2017          2017 
                                           Minimum       Present    Minimum       Present 
                                          payments         value   payments         value 
                                             $'000   of payments      $'000   of payments 
                                                           $'000                    $'000 
---------------------------------------  ---------  ------------  ---------  ------------ 
Due in less than one year                  144,188        93,169    173,846       118,009 
---------------------------------------  ---------  ------------  ---------  ------------ 
Due in more than one year but not more 
 than five years                           460,960       313,500    460,960       289,949 
---------------------------------------  ---------  ------------  ---------  ------------ 
Due in more than five years                341,212       302,281    456,374       389,975 
---------------------------------------  ---------  ------------  ---------  ------------ 
                                           946,361       708,950  1,091,180       797,933 
---------------------------------------  ---------  ------------  ---------  ------------ 
Less future financing charges              237,410             -    293,247             - 
---------------------------------------  ---------  ------------  ---------  ------------ 
                                           708,950       708,950    797,933       797,933 
---------------------------------------  ---------  ------------  ---------  ------------ 
 

The FPSO finance lease liability is carried at $709.0 million as at 31 December 2018 (2017: $797.9 million), of which $144.2 million is classified as a current liability. Finance lease interest of $55.8 million (2017: $31.3 million) has been recognised within finance costs. The finance leases has with an effective borrowing rate of 8.12%.

(iv) Capital commitments

At 31 December 2018, the Group had capital commitments excluding the above lease commitments amounting to $15.7 million (2017: $33.8 million).

Contingencies

The Group becomes involved from time to time in various claims and lawsuits arising in the ordinary course of its business. Other than as discussed below, the Company is not, nor has been during the past 12 months, involved in any governmental, legal or arbitration proceedings which, either individually or in the aggregate, have had, or are expected to have, a material adverse effect on the Company's and/or the Group's financial position or profitability, nor, so far as the Company is aware, are any such proceedings pending or threatened.

The Group is currently engaged in a dispute with KUFPEC, the Group's field partner in respect of Alma/Galia. KUFPEC has commenced a court action in the High Court of Justice claiming an alleged breach of one of the Group's warranties provided under the Alma/Galia Farm-in Agreement and seeking damages of $91.0 million (the maximum breach of warranty claim permitted under the Alma/Galia Farm-in Agreement), together with interest. The court proceedings are ongoing and the Directors believe that a considerable period will elapse before a final decision is reached by the courts.

The Directors consider the merits of the claim to be poor and the Group is defending itself vigorously. The Group has not made any provisions in respect of this claim as the Directors believe the claim is unlikely to be successful; and in any event the Directors believe the chances of an outcome exposing the Group to material damages are remote. There can, however, be no assurances that this claim will not ultimately be successful, or that the Group would not otherwise seek to enter into a settlement or compromise in respect of this claim, or that in the event of any such circumstances the Group would not incur costs and expenses in excess of its estimates.

The Group is also currently engaged in discussions with EMAS, one of the Group's contractors on Kraken who performed the installation of a buoy and mooring system, in relation to the payment of approximately $15.0 million of variation claims which EMAS claims is due as a result of soil conditions at the work site being materially different from those reasonably expected to be encountered based on soil data previously provided. The Group is confident that such variation claims are not valid and that accordingly such amount is not due and payable by the Group under the terms of the contract with EMAS. The parties are currently in discussions pursuant to the dispute resolution process under the contract.

25. Related party transactions

The Group financial statements include the financial statements of EnQuest PLC and its subsidiaries. A list of the Group's principal subsidiaries is contained in note 27 to these Group financial statements.

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

All sales to and purchases from related parties are made at normal market prices and the pricing policies and terms of these transactions are approved by the Group's management. With the exception of the transactions disclosed below, there have been no transactions with related parties who are not members of the Group during the year ended 31 December 2018 (2017: none).

Share subscription

In 2018, subscription for new Ordinary shares pursuant to the rights issue (see note 17) at the issue price of GBP0.21 per share:

-- Double A Limited ('Double A'), a company beneficially owned by the extended family of Amjad Bseisu, took up its entitlement in the rights issue, subscribing for 43,849,727 shares;

   --      Double A participated in the rump placing for 5,000,000 shares; and 

-- Directors and key management personnel took up their entitlement in the rights issue, subscribing for 382,273 shares.

Office sublease

During the year ended 31 December 2018, the Group recognised $0.1 million (2017: $0.1 million) of rental income in respect of an office sublease arrangement with Levendi Investment Management, a company where 72% of the issued share capital is held by Amjad Bseisu.

Contracted services

During the year ended 31 December 2018, the Group obtained contracting services from Influit UK Production Solutions for a value of $0.06 million (2017: $0.04 million). Amjad Bseisu has an indirect interest in Influit UK Production Solutions.

Compensation of key management personnel

The following table details remuneration of key management personnel of the Group. Key management personnel comprise of Executive and Non-Executive Directors of the Company and other senior personnel. This includes the Executive Committee for the year ended 31 December 2018.

 
                                     2018    2017 
                                    $'000   $'000 
---------------------------------  ------  ------ 
Short-term employee benefits        7,052   5,057 
---------------------------------  ------  ------ 
Share-based payments                1,300   1,305 
---------------------------------  ------  ------ 
Post-employment pension benefits      218      55 
---------------------------------  ------  ------ 
                                    8,570   6,417 
---------------------------------  ------  ------ 
 

26. Risk management and financial instruments

Risk management objectives and policies

The Group's principal financial assets and liabilities comprise trade and other receivables, cash and short-term deposits, interest-bearing loans, borrowings and finance leases, derivative financial instruments and trade and other payables. The main purpose of these financial instruments is to manage short-term cash flow and raise finance for the Group's capital expenditure programme.

The Group's activities expose it to various financial risks particularly associated with fluctuations in oil price, foreign currency risk, liquidity risk and credit risk. Management reviews and agrees policies for managing each of these risks, which are summarised below. Also presented below is a sensitivity analysis to indicate sensitivity to changes in market variables on the Group's financial instruments and to show the impact on profit and shareholders' equity, where applicable. The sensitivity has been prepared for periods ended 31 December 2018 and 2017, using the amounts of debt and other financial assets and liabilities held at those reporting dates.

Commodity price risk - oil prices

The Group is exposed to the impact of changes in Brent oil prices on its revenues and profits generated from sales of crude oil.

The Group's policy is to have the ability to hedge oil prices up to a maximum of 75% of the next 12 months' production on a rolling annual basis, up to 60% in the following 12-month period and 50% in the subsequent 12-month period.

Details of the commodity derivative contracts entered into during and on hand at the end of 2018 are disclosed in note 20.

The following table summarises the impact on the Group's pre-tax profit and total equity of a reasonably possible change in the Brent oil price, on the fair value of derivative financial instruments, with all other variables held constant. As the derivatives on hand at 31 December 2018 have not been designated as hedges, there is no impact on equity.

 
                      Pre-tax profit         Total equity 
-----------------  --------------------  -------------------- 
                    +$10/bbl   -$10/bbl   +$10/bbl   -$10/bbl 
                    increase   decrease   increase   decrease 
                       $'000      $'000      $'000      $'000 
-----------------  ---------  ---------  ---------  --------- 
31 December 2018    (40,310)     45,146          -          - 
-----------------  ---------  ---------  ---------  --------- 
31 December 2017    (68,350)     48,320          -          - 
-----------------  ---------  ---------  ---------  --------- 
 

Foreign exchange risk

The Group is exposed to foreign exchange risk arising from movements in currency exchange rates. Such exposure arises from sales or purchases in currencies other than the Group's functional currency (US Dollars) and the bond which is denominated in Sterling. 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. Approximately 3% (2017: 1%) of the Group's sales and 42% (2017: 81%) of costs (including capital expenditure) are denominated in currencies other than the functional currency.

The Group also enters into foreign currency swap contracts from time to time to manage short-term exposures.

The following table summarises the sensitivity to a reasonably possible change in the US Dollar to Sterling foreign exchange rate, with all other variables held constant, of the Group's profit before tax due to changes in the carrying value of monetary assets and liabilities at the reporting date. The impact in equity is the same as the impact on profit before tax. The Group's exposure to foreign currency changes for all other currencies is not material:

 
                      Pre-tax profit 
-----------------  -------------------- 
                       +$10%      -$10% 
                        rate       rate 
                    increase   decrease 
                       $'000      $'000 
-----------------  ---------  --------- 
31 December 2018    (41,852)     41,852 
-----------------  ---------  --------- 
31 December 2017    (43,100)     43,100 
-----------------  ---------  --------- 
 

Credit risk

Credit risk is managed on a Group basis. Credit risk in financial instruments arises from cash and cash equivalents and derivative financial instruments where the Group's exposure arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments (see maturity table within liquidity risks in note 26). For banks and financial institutions, only those rated with an A-/A3 credit rating or better are accepted. 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.

In addition, there are credit risks of commercial counterparties including exposures in respect of outstanding receivables. The Group trades only with recognised international oil and gas companies and at 31 December 2018 there were $5.0 million of trade receivables past due (2017: $23.6 million), $1.6 million of joint venture receivables past due (2017: $1.7 million) and $nil (2017: $nil) of other receivables past due but not impaired. Subsequent to year end, $4.6 million of these outstanding balances have been collected (2017: $1.5 million). Receivable balances are monitored on an ongoing basis with appropriate follow-up action taken where necessary.

 
                                                    2018    2017 
Ageing of past due but not impaired receivables    $'000   $'000 
------------------------------------------------  ------  ------ 
Less than 30 days                                  4,649   1,726 
------------------------------------------------  ------  ------ 
30-60 days                                            16       - 
------------------------------------------------  ------  ------ 
60-90 days                                             8     253 
------------------------------------------------  ------  ------ 
90-120 days                                            -       - 
------------------------------------------------  ------  ------ 
120+ days                                          1,933  23,301 
------------------------------------------------  ------  ------ 
                                                   6,606  25,280 
------------------------------------------------  ------  ------ 
 

At 31 December 2018, the Group had three customers accounting for 81% of outstanding trade receivables (2017: four customers, 84%) and two joint venture partners accounting for 41% of outstanding joint venture receivables (2017: three joint venture partners, 97%).

Liquidity risk

The Group monitors its risk to a shortage of funds by reviewing its cash flow requirements on a regular basis relative to its existing bank facilities and the maturity profile of its borrowings. Specifically, the Group's policy is to ensure that sufficient liquidity or committed facilities exist within the Group to meet its operational funding requirements and to ensure the Group can service its debt and adhere to its financial covenants. At 31 December 2018, $68.4 million (2017: $97.8 million) was available for drawdown under the Group's credit facility (see note 19).

The following tables detail the maturity profiles of the Group's non-derivative financial liabilities including projected interest thereon. The amounts in these tables are different from the balance sheet as the table is prepared on a contractual undiscounted cash flow basis and include future interest payments.

 
                              On demand    Up to   1 to 2     2 to 5   Over 5      Total 
                                  $'000   1 year    years      years    years      $'000 
Year ended 31 December 2018                $'000    $'000      $'000    $'000 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Loans and borrowings                  -  364,135  272,189    546,611        -  1,182,935 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Bonds(i)                              -   34,234   36,521  1,229,314        -  1,300,069 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Obligations under finance 
 leases                               -   93,169   69,689    243,811  302,282    708,951 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Trade and other payables              -  419,855   18,209          -   50,412    488,476 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
                                      -  911,393  396,608  2,019,736  352,694  3,680,431 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
 
 
                              On demand    Up to   1 to 2     2 to 5   Over 5      Total 
                                  $'000   1 year    years      years    years      $'000 
Year ended 31 December 2017                $'000    $'000      $'000    $'000 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Loans and borrowings                  -  424,886  347,603    667,975        -  1,440,464 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Bonds(i)                              -   66,141   66,141  1,112,842        -  1,245,124 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Obligations under finance 
 leases                               -  118,009   64,142    225,807  389,975    797,933 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Trade and other payables              -  364,472  157,554          -        -    522,026 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
Other financial liabilities           -    7,211        -          -        -      7,211 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
                                      -  980,719  635,440  2,006,624  389,975  4,012,758 
----------------------------  ---------  -------  -------  ---------  -------  --------- 
 

(i) Maturity analysis profile for the Group's bonds includes semi-annual coupon interest. This interest is only payable in cash if the average dated Brent oil price is equal to or greater than $65/bbl for the six months preceding one month before the coupon payment date (see note 19)

The following tables detail the Group's expected maturity of payables and receivables for its derivative financial instruments. The amounts in these tables are different from the balance sheet as the table is prepared on a contractual undiscounted cash flow basis. When the amount receivable or payable is not fixed, the amount disclosed has been determined by reference to a projected forward curve at the reporting date.

 
                                            Less than  3 to 12  1 to 2      Over 
                                 On demand   3 months   months   years   2 years   Total 
Year ended 31 December 2018          $'000      $'000    $'000   $'000     $'000   $'000 
-------------------------------  ---------  ---------  -------  ------  --------  ------ 
Commodity derivative contracts      10,069     52,382    1,852       -         -  64,303 
-------------------------------  ---------  ---------  -------  ------  --------  ------ 
Foreign exchange derivative 
 contracts                               -        249        -       -         -     249 
-------------------------------  ---------  ---------  -------  ------  --------  ------ 
Carbon derivative contracts          (837)      9,542        -       -         -   8,705 
-------------------------------  ---------  ---------  -------  ------  --------  ------ 
                                     9,232     62,173    1,852       -         -  73,257 
-------------------------------  ---------  ---------  -------  ------  --------  ------ 
 
 
                                            Less than   3 to 12   1 to 2      Over 
                                 On demand   3 months    months    years   2 years     Total 
Year ended 31 December 2017          $'000      $'000     $'000    $'000     $'000     $'000 
-------------------------------  ---------  ---------  --------  -------  --------  -------- 
Commodity derivative contracts     (4,991)   (29,616)  (10,850)  (1,531)         -  (46,988) 
-------------------------------  ---------  ---------  --------  -------  --------  -------- 
Chooser contract                   (1,035)          -         -        -         -   (1,035) 
-------------------------------  ---------  ---------  --------  -------  --------  -------- 
Interest rate swaps                      -       (13)      (19)        -         -      (32) 
-------------------------------  ---------  ---------  --------  -------  --------  -------- 
                                   (6,026)   (29,629)  (10,869)  (1,531)         -  (48,055) 
-------------------------------  ---------  ---------  --------  -------  --------  -------- 
 

Capital management

The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 19, cash and cash equivalents and equity attributable to the equity holders of the parent company, comprising issued capital, reserves and retained earnings as in the Group statement of changes in equity.

The primary objective of the Group's capital management is to optimise the return on investment, by managing its capital structure to achieve capital efficiency whilst also maintaining flexibility. The Group regularly monitors the capital requirements of the business over the short, medium and long term, in order to enable it to foresee when additional capital will be required. On 21 November 2016, the Group completed a comprehensive package of financial restructuring measures (see notes 17 and 19 for further details).

The Group has approval from the Board to hedge foreign exchange risk on up to 70% of the non-US Dollar portion of the Group's annual capital budget and operating expenditure. For specific contracted capex projects, up to 100% can be hedged. In addition, the Group's policy is to have the ability to hedge oil prices up to a maximum of 75% of the next 12 months production on a rolling annual basis, up to 60% in the following 12-month period and 50% in the subsequent 12 month period. This is designed to reduce the risk of adverse movements in exchange rates and market prices eroding the return on the Group's projects and operations.

The Board regularly reassesses the existing dividend policy to ensure that shareholder value is maximised. Any future payment of dividends is expected to depend on the earnings and financial condition of the Company and such other factors as the Board considers appropriate.

The Group monitors capital using the gearing ratio and return on shareholders' equity as follows:

 
                                                                 2018       2017 
                                                                $'000      $'000 
----------------------------------------------------------  ---------  --------- 
Loans, borrowings and bond(i) (A)                           2,048,498  2,164,550 
----------------------------------------------------------  ---------  --------- 
Cash and short-term deposits                                (240,605)  (173,128) 
----------------------------------------------------------  ---------  --------- 
Net debt/(cash) (B)                                         1,807,894  1,991,422 
----------------------------------------------------------  ---------  --------- 
Equity attributable to EnQuest PLC shareholders (C)           983,552    760,866 
----------------------------------------------------------  ---------  --------- 
Profit/(loss) for the year attributable to EnQuest PLC 
 shareholders (D)                                             127,278   (60,830) 
----------------------------------------------------------  ---------  --------- 
Profit/(loss) for the year attributable to EnQuest PLC 
 shareholders excluding exceptionals (E)                       78,195   (33,554) 
----------------------------------------------------------  ---------  --------- 
Gross gearing ratio (A/C)                                         2.1        2.8 
----------------------------------------------------------  ---------  --------- 
Net gearing ratio (B/C)                                           1.8        2.6 
----------------------------------------------------------  ---------  --------- 
Shareholders' return on investment (D/C)                          13%       (8%) 
----------------------------------------------------------  ---------  --------- 
Shareholders' return on investment excluding exceptionals 
 (E/C)                                                             8%       (4%) 
----------------------------------------------------------  ---------  --------- 
 
   (i)    Principal amounts drawn, excludes netting off of fees (see note 19) 

27. Subsidiaries

At 31 December 2018, EnQuest PLC had investments in the following subsidiaries:

 
                                                                                               Proportion 
                                                                                                       of 
                                                                                                  nominal 
                                                                                                    value 
                                                                                                of issued 
                                                                                                   shares 
                                                                             Country           controlled 
                                                                              of                       by 
Name of company                    Principal activity                         incorporation     the Group 
--------------------------------   ---------------------------------------   ---------------  ----------- 
                                    Intermediate holding company 
                                     and provision of Group manpower 
EnQuest Britain Limited              and contracting/procurement services      England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Heather Limited(i)           of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Thistle Limited(i)           of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
Stratic UK (Holdings) 
 Limited(i)                         Intermediate holding company               England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
Grove Energy Limited1               Intermediate holding company               Canada                100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest ENS Limited(i)               of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest UKCS Limited(i)              of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Norge AS(i)2                 of hydrocarbons                           Norway                100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Heather Leasing 
 Limited(i)                         Leasing                                    England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EQ Petroleum Sabah Limited(i)        of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Dons Leasing Limited(i)     Dormant                                    England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Energy Limited(i)            of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Production Limited(i)        of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Global Limited              Intermediate holding company               England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest NWO Limited(i)               of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EQ Petroleum Production             Exploration, extraction and production 
 Malaysia Limited(i)                 of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Construction, ownership and operation 
NSIP (GKA) Limited3                  of an oil pipeline                        Scotland              100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Provision of Group manpower and 
EnQuest Global Services              contracting/procurement services 
 Limited(i)4                         for the International business            Jersey                100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Marketing and               Marketing and trading of crude 
 Trading Limited                     oil                                       England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
NorthWestOctober Limited(i)         Dormant                                    England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest UK Limited(i)               Dormant                                    England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Petroleum Developments      Exploration, extraction and production 
 Malaysia SDN. BHD(i)5               of hydrocarbons                           Malaysia              100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest NNS Holdings Limited(i)     Intermediate holding company               England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest NNS Limited(i)               of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
EnQuest Advance Holdings 
 Limited(i)                         Intermediate holding company               England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
                                    Exploration, extraction and production 
EnQuest Advance Limited(i)           of hydrocarbons                           England               100% 
---------------------------------   ----------------------------------------   -------------  ----------- 
 
   (i)    Held by subsidiary undertaking 

The Group has three branches outside the UK (all held by subsidiary undertakings): EnQuest Global Services Limited (Dubai); EnQuest Petroleum Production Malaysia Limited (Malaysia); and EQ Petroleum Sabah Limited (Malaysia).

Registered office addresses:

   1      Suite 2200, 1055 West Hastings Street, Vancouver, British Columbia, V6E 2E9 
   2      Fabrikkveien 9, Stavanger, 4033, Norway 
   3      Annan House, Palmerston Road, Aberdeen, Scotland, AB11 5QP, United Kingdom 
   4      Ground Floor, Colomberie House, St Helier, JE4 0RX, Jersey 
   5      c/o TMF, 10th Floor, Menara Hap Seng, No 1 & 3, Jalan P. Ramlee 50250 Kuala Lumpur, Malaysia 

28. Cash flow information

Cash generated from operations

 
                                                                   Year ended    Year ended 
                                                                  31 December   31 December 
                                                                         2018          2017 
                                                          Notes         $'000         $'000 
------------------------------------------------------  -------  ------------  ------------ 
Profit/(loss) before tax                                               93,985     (243,773) 
------------------------------------------------------  -------  ------------  ------------ 
Depreciation                                               5(c)         5,287         4,500 
------------------------------------------------------  -------  ------------  ------------ 
Depletion                                                  5(b)       437,104       224,698 
------------------------------------------------------  -------  ------------  ------------ 
Exploration costs impaired/(reversed) and written 
 off                                                       5(d)         1,407         (193) 
------------------------------------------------------  -------  ------------  ------------ 
Net impairment (reversal)/charge to oil and gas 
 assets                                                       4       126,046       171,971 
------------------------------------------------------  -------  ------------  ------------ 
Write down of inventory                                       4         5,837       (2,682) 
------------------------------------------------------  -------  ------------  ------------ 
Write down of asset                                           4         3,602         2,808 
------------------------------------------------------  -------  ------------  ------------ 
Excess of fair value over consideration                       4             -      (48,734) 
------------------------------------------------------  -------  ------------  ------------ 
Loss on fair value of purchase option                         4         1,329             - 
------------------------------------------------------  -------  ------------  ------------ 
Gain on step acquisition accounting for 25% of 
 Magnus and other interests                                   4      (74,345)             - 
------------------------------------------------------  -------  ------------  ------------ 
Gain on disposal of loan notes                             5(d)             -       (1,263) 
------------------------------------------------------  -------  ------------  ------------ 
Impairment (reversal)/charge to investments                   4           121            19 
------------------------------------------------------  -------  ------------  ------------ 
Share-based payment charge                                 5(f)         4,645         2,849 
------------------------------------------------------  -------  ------------  ------------ 
Shares purchased on behalf of Employee Benefit 
 Trust                                                       17             -       (1,763) 
------------------------------------------------------  -------  ------------  ------------ 
Change in deferred consideration                           5(d)        14,028             - 
------------------------------------------------------  -------  ------------  ------------ 
Change in surplus lease provision                            22             8         (200) 
------------------------------------------------------  -------  ------------  ------------ 
Change in decommissioning provision                        5(d)        12,617             - 
------------------------------------------------------  -------  ------------  ------------ 
Change in other provisions                                   22       (3,907)        10,161 
------------------------------------------------------  -------  ------------  ------------ 
Amortisation of option premiums                              20        17,208      (10,445) 
------------------------------------------------------  -------  ------------  ------------ 
Unrealised (gain)/loss on commodity financial 
 instruments                                            5(a)(b)      (97,432)       (2,010) 
------------------------------------------------------  -------  ------------  ------------ 
Unrealised (gain)/loss on other financial instruments   5(a)(b)       (2,310)             - 
------------------------------------------------------  -------  ------------  ------------ 
Unrealised exchange loss/(gain)                            5(e)      (21,911)        23,910 
------------------------------------------------------  -------  ------------  ------------ 
Net finance (income)/expense                                  6       219,191       147,079 
------------------------------------------------------  -------  ------------  ------------ 
Operating profit before working capital changes                       742,510       276,932 
------------------------------------------------------  -------  ------------  ------------ 
Decrease/(increase) in trade and other receivables                      6,844      (13,611) 
------------------------------------------------------  -------  ------------  ------------ 
(Increase)/decrease in inventories                                     22,255         2,039 
------------------------------------------------------  -------  ------------  ------------ 
(Decrease)/increase in trade and other payables                        17,020        61,674 
------------------------------------------------------  -------  ------------  ------------ 
Cash generated from operations                                        788,629       327,034 
------------------------------------------------------  -------  ------------  ------------ 
 

Changes in liabilities arising from financing activities

 
                                              Loans                         Finance 
                                     and borrowings               Bonds      leases 
                                          (see note           (see note   (see note 
                                                19)                 19)         24)        Total 
Year ended 31 December 2018                   $'000               $'000       $'000        $'000 
----------------------------------  ---------------  ------------------  ----------  ----------- 
At 1 January 2017                       (1,102,366)           (868,740)           -  (1,971,106) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Cash flows                                (112,001)                   -           -    (112,001) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Additions                                         -                   -   (771,975)    (771,975) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Foreign exchange adjustments                  (552)            (18,828)           -     (19,380) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Capitalised PIK                                   -            (58,242)           -     (58,242) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Unwind of finance discount                        -                   -    (31,273)     (31,273) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Other non-cash movements                    (4,756)                 935       5,315        1,494 
----------------------------------  ---------------  ------------------  ----------  ----------- 
At 31 December 2017                     (1,219,675)           (944,875)   (797,933)  (2,962,483) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Adjustment on adoption of IFRS 9                  -            (38,117)           -     (38,117) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
At 1 January 2018                       (1,219,675)           (982,992)   (797,933)  (3,000,600) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Cash flows                                  357,072                   -     144,820      501,892 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Additions                                 (175,000)                   -           -    (175,000) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Foreign exchange adjustments                    814              11,745           -       12,559 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Capitalised interest and PIK               (13,179)            (16,220)           -     (29,399) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Unwind of finance discount                        -                   -    (55,837)     (55,837) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
Other non-cash movements                      (199)            (10,864)           -     (11,063) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
At 31 December 2018 (see note 19)       (1,050,167)           (998,331)   (708,950)  (2,757,448) 
----------------------------------  ---------------  ------------------  ----------  ----------- 
 

29. Business combinations

Acquisitions in 2018

Acquisition of 75% interest in Magnus oil field and associated interests

On 1 December 2018, EnQuest completed the acquisition from BP of the remaining 75% interest in the Magnus oil field ('Magnus'), an additional 9.0% interest in Sullom Voe Oil terminal and supply facility ('SVT') and other additional interests in associated infrastructure (collectively the 'Transaction assets'). This acquisition followed from the acquisition of initial interests completed in December 2017 (see below). The transaction is in keeping with EnQuest's strategy of maximising value from late life assets with significant remaining resource potential.

The Transaction assets constitute a business and the acquisition has been accounted for using the acquisition method, in accordance with IFRS 3 Business Combinations. The consolidated financial statements include the fair values of the identifiable assets and liabilities as at the date of acquisition and the results of the assets for the one month period from the acquisition date. Each identifiable asset and liability is measured at its acquisition date fair value based on guidance in IFRS 13 Fair Value Measurement. The standard defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly fashion between willing market participants at the measurement date.

Accounts receivable are recognised at gross contractual amounts due, as they relate to large and creditworthy customers. Historically, there has been no significant uncollectible accounts receivable in the Transaction assets. At 31 December 2018, none of the trade receivables have been impaired.

The fair value of the identifiable assets and liabilities of the Transaction assets as at the date of acquisition were:

 
                                                                    Fair value 
                                                                    recognised 
                                                                on acquisition 
                                                                         $'000 
-------------------------------------------------------------  --------------- 
Assets 
-------------------------------------------------------------  --------------- 
Property, plant and equipment (see note 10)                            745,350 
-------------------------------------------------------------  --------------- 
Inventory                                                               50,977 
-------------------------------------------------------------  --------------- 
Trade and other receivables (see note 15)                                2,927 
-------------------------------------------------------------  --------------- 
 
Liabilities 
-------------------------------------------------------------  --------------- 
Trade and other payables (see note 23)                                (44,616) 
-------------------------------------------------------------  --------------- 
Financial liabilities (see note 20)                                    (8,370) 
-------------------------------------------------------------  --------------- 
Deferred tax liability (see note 7)                                   (94,634) 
-------------------------------------------------------------  --------------- 
 
Total identifiable net assets                                          651,633 
-------------------------------------------------------------  --------------- 
Technical goodwill arising on acquisition                               94,633 
-------------------------------------------------------------  --------------- 
Purchase option derecognition                                         (20,970) 
-------------------------------------------------------------  --------------- 
Purchase consideration                                                 725,296 
-------------------------------------------------------------  --------------- 
 
Purchase consideration transferred: 
-------------------------------------------------------------  --------------- 
Cash transferred                                                       100,000 
-------------------------------------------------------------  --------------- 
Deferred consideration: Vendor loan                                    116,530 
-------------------------------------------------------------  --------------- 
Contingent consideration: Future cash flow share arrangement           508,766 
-------------------------------------------------------------  --------------- 
Total purchase consideration                                           725,296 
-------------------------------------------------------------  --------------- 
 

(i) The initial accounting for the acquisition of the Transaction assets has only been provisionally determined at the end of the reporting period. At the date of finalisation of these financial statements, the necessary market valuations and other calculations had not been finalised and they have therefore only been provisionally determined based on the Directors' best estimates. Thus, the fair value of the net assets may be subsequently adjusted, with a corresponding adjustment to goodwill prior to 1 December 2019 (one year after the transaction)

Goodwill arising on acquisition

The option to purchase the remaining 75% in Magnus and other interests was included with the acquisition of the initial 25% interest. As at 31 December 2017, the option was recognised as a financial asset of $22.3 million. The option was revalued on exercise on 1 December 2018 to the fair value of the acquisition assets, resulting in a financial asset of $21.0 million. The revaluation of the option in the year resulted in an expense of $1.3 million and has been recognised in the statement of comprehensive income through other income in 'Remeasurements and exceptional items'. The option value captures the ability of EnQuest to extend the life of existing mature assets and from the Group's ability to maximise the value from the late life assets with significant remaining resource potential and the increase in underlying oil prices during the year.

On acquisition, the option was derecognised as part of the acquisition assets and liabilities. The goodwill of $94.6 million arises principally due to the requirement to recognise deferred tax assets and liabilities for the difference between the assigned fair values and the tax bases of assets acquired and liabilities assumed in a business combination. The assessment of the fair value of property, plant and equipment is based on cash flows after tax. Nevertheless, in accordance with IAS 12 sections 15 and 19, a provision is made for deferred tax corresponding to the tax rate multiplied with the difference between the acquisition cost and the tax base. The offsetting entry to this deferred tax is goodwill. Hence, goodwill arises as a technical effect of deferred tax ('technical goodwill'). None of the goodwill recognised will be deductible for income tax purposes.

Fair value of consideration

The consideration for the acquisition of the Transaction assets was $300 million, consisting of $100 million cash contribution, paid from the funds received through the rights issue undertaken in October 2018, and $200 million deferred consideration financed by BP, which are to be repaid out of future cash flows from the assets. With an effective date of 1 January 2017, the deferred consideration was adjusted for the interim period and working capital adjustments, resulting in contingent consideration of $116.5 million as at 1 December 2018. The deferred consideration is secured over the interests in the Transaction assets and accrues interest at a rate of 7.5% per annum on the base consideration.

The consideration also included a cash flow sharing arrangement whereby EnQuest and BP share the net cash flow generated by the 75% interest on a 50:50 basis, subject to a cap of $1 billion received by BP. The present value of the contingent future cash flow share arrangement over the estimated life of the field has resulted in the recognition of contingent consideration of $508.8 million.

The present value of the deferred and contingent profit share consideration is calculated from the future expected cash flows, at a discount rate of 10.0%. These are recognised within contingent consideration within provisions (see note 22).

From the date of acquisition, the Transaction assets have contributed $41.7 million of revenue and a $1.2 million gain to the profit before tax from continuing operations of the Group. If the combination had taken place at the beginning of 2018, revenue from continuing operations would have been an additional $264.7 million and the profit before tax from continuing operations would have been an additional $103.7 million. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2018.

Fair value uplift

The acquisition of the remaining 75% interest is considered a step acquisition as per IFRS 3 Business Combinations. The property, plant and equipment acquired with the initial 25% has been fair valued as at 1 December 2018, recognising an uplift of $123.9 million to property, plant and equipment and a corresponding deferred tax liability of $49.6 million. The gain on uplift of $74.3 million has been recognised through other income in 'Remeasurements and exceptional items' in the statement of comprehensive income.

Acquisitions in 2017

Acquisition of 25% interest in Magnus oil field and associated interests

On 1 December 2017, EnQuest completed the acquisition from BP of an initial 25% interest in the Magnus oil field ('Magnus') as well as a 3.0% interest in SVT, 9.0% of Northern Leg Gas Pipeline ('NLGP'), and 3.8% of Ninian Pipeline System ('NPS') (collectively the 'Transaction assets').

The fair value of the identifiable assets and liabilities of the Transaction assets as at the date of acquisition were:

 
                                                                   Fair value 
                                                                   recognised 
                                                               on acquisition 
                                                                        $'000 
------------------------------------------------------------  --------------- 
Assets 
------------------------------------------------------------  --------------- 
Property, plant and equipment (see note 10)                           124,542 
------------------------------------------------------------  --------------- 
Purchase option(i)                                                     22,300 
------------------------------------------------------------  --------------- 
Financial asset(ii)                                                    16,120 
------------------------------------------------------------  --------------- 
Inventory                                                              14,884 
------------------------------------------------------------  --------------- 
                                                                      177,846 
------------------------------------------------------------  --------------- 
Liabilities 
------------------------------------------------------------  --------------- 
Trade and other payables (see note 23)                                (8,459) 
------------------------------------------------------------  --------------- 
Financial liabilities(iii)                                            (4,214) 
------------------------------------------------------------  --------------- 
Deferred tax liability (see note 7)                                  (49,816) 
------------------------------------------------------------  --------------- 
                                                                     (62,489) 
------------------------------------------------------------  --------------- 
Total identifiable net assets at fair value                           115,357 
------------------------------------------------------------  --------------- 
Excess of fair value over cost arising on acquisition: 
------------------------------------------------------------  --------------- 
Purchase option(i)                                                   (22,300) 
------------------------------------------------------------  --------------- 
Thistle decommissioning option(ii)                                   (16,120) 
------------------------------------------------------------  --------------- 
25% acquisition value                                                (10,314) 
------------------------------------------------------------  --------------- 
Total excess of fair value over cost arising on acquisition          (48,734) 
------------------------------------------------------------  --------------- 
Purchase consideration through vendor loan                             66,623 
------------------------------------------------------------  --------------- 
 

(i) The financial asset related to the purchase option to acquire the remaining 75% of Magnus oil field and BP's interest in the associated infrastructure for a value of $300 million. At 31 December 2017, the option was recognised as a financial asset of $22.3 million (see note 20)

(ii) The financial asset related to the Thistle decommissioning option, and represents the difference between the $50 million cash that BP would transfer to EnQuest upon exercise of the option, and the net present value of the estimated cash outflow to settle the liability assumed

(ii) The financial liability related to the amount due to BP by reference to 7.5% of BP's actual decommissioning costs on an after-tax basis. The additional consideration EnQuest may pay is capped at the amount of cumulative positive cash flows received by EnQuest from the Transaction assets

The new assets recognised in the 31 December 2017 financial statements were based on a provisional assessment of their fair value while the Group determined the necessary market valuations and other calculations. During 2018, the calculations were completed resulting in a $1.5 million decrease to accruals and underlift, with the corresponding balance taken through acquisition property, plant and equipment.

In addition to the above identifiable assets and liabilities, under the terms of the agreement, the Group had the option to acquire the remaining 75% of the Magnus oil field and BP's interest in the associated infrastructure as exercised and described above. EnQuest also had the option to receive $50 million from BP in exchange for undertaking the management of the physical decommissioning activities for Thistle and Deveron and making payments by reference to 6.0% of the gross decommissioning costs of Thistle and Deveron fields. The option was exercised in full during 2018 (see note 20).

The excess of fair value of the net assets acquired over the purchase consideration has arisen primarily due to BP's strategic decision to partner with EnQuest to extend the life of existing mature assets and from the Group's ability to maximise the value from the late life assets with significant remaining resource potential. The gain has been immediately recognised through exceptionals in the statement of comprehensive income.

Fair value of consideration

The consideration payable has been satisfied via a vendor loan from BP. The loan is repayable solely out of the cash flows which are achieved above operating cash flows from the Transaction assets and is secured over the interests in the Transaction assets. The loan accrues interest at a rate of 5.0% per annum on the base consideration. The base consideration was $85 million, which was adjusted for the interim period and working capital adjustments since the economic date of 1 January 2017, resulting in contingent consideration of $66.6 million. The present value of the deferred consideration was calculated from the future expected cash flows, at a discount rate of 10.0% and assumed repayment of around three years. This is recognised within contingent consideration within provisions (see note 22).

During 2017 from the date of acquisition, the Transaction assets contributed $14.0 million of revenue and $2.1 million to the profit before tax from continuing operations of the Group. If the combination had taken place at the beginning of 2017, revenue from continuing operations would have been $73.9 million and the profit before tax from continuing operations would have been $25.9 million. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2017. At 31 December 2017, none of the trade receivables have been impaired.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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