I’ve been a fan of Serica Energy (SQZ) for many years and during that time have watched it grow into a mid-tier oil and gas producer, and I believe that now is the time to consider investing in the company once again. Serica has been one of the few real success stories in the AIM oil and gas sector, and having initially been a bit of a failure with its operations in Indonesia, it acquired a share in the producing Erskine (18%) field in the North Sea, from BP, at just the right time and has never looked back. It then went on to further expand its operations and gave its production a massive increase with the acquisition of the Bruce (98%), Keith (100%) and Rhum (50%) fields, also from BP and in the North Sea.
The acquisition of those assets came at just the right time and has helped Serica grow into a company worth circa £275 million at the current share price of around 103p, as although production from Erskine remains at a decent level it has gradually declined as reserves continue to be depleted, and the latest update shows daily output of 2,200boe/d and at the start of the year 2P reserves stood at 4.1 million barrels of oil equivalent, so at that rate it probably only has four years or so left although in reality that will be longer as the production rate continues to fall. Whilst Erskine will continue to provide a useful income, the main focus is Bruce, Keith and Rhum, and in particular Bruce and Rhum, given that Keith only produces around 450boepd net to Serica. The majority of Serica production - around 80% - is gas and is split fairly evenly between the Bruce and Rhum fields, and although production has dropped slightly recently and averaged 24,100boepd over the last three months, we should see that rise again in the very near future once the Rhum R3 well intervention project is completed. The R3 well is already connected to the gas pipeline, but is blocked by equipment that was left by the previous operator, so a recompletion of the well offers potentially large production upside given that the other two wells at Rhum can potentially produce at rates of up to 15,000boepd each. Bringing R3 online could also give 2P reserves at Rhum a significant boost from the 28.7 million boe which they were reported as being at the start of the year.
Obviously, this work on R3 comes at a cost, and the £11 million net to Serica has now increased by £3 million as a result of the delays. The Bruce assets are never going to cause any fireworks as they are late life, but have been steadily producing significant amounts on a daily basis via the 21 wells at the field, and overall net 2P reserves for the BKR assets as a whole stood at 51.4mmboe at the start of 2020. In terms of cash flow from these assets, under the terms of the acquisition and the way that the vendors are paid, Serica will continue to receive 60% of the net cash flow during 2021, but that then increases to 100% from 2022 onwards. As if the expansion of Rhum wasn’t enough to get the interest of investors, its other asset, Columbus, which it acquired at the same time as Erskine, is about to be developed and brought online, and at the end of June 2020 a further £22 million was required to cover the 50% share of the asset which Serica holds. Columbus is due to have a development well drilled on it in H1 2021, with production expected later in the year. According the field development plans for Columbus, peak gas production is expected to be around year four (which would be 2025) and would see 11.9bcf produced that year (8.9bcf for the first year), plus condensate peaking at circa 82,000scm in 2022, and with a field life of 14 years. Overall the field is estimated to have 6.7 million boe of 2P reserves net to Serica.
The company has had its fair share of ups and downs during 2020, as most oil and gas producers have, but with gas prices starting to at least show some signs of recovering, and with production set to increase next year, I can see plenty of longer term potential here as the company has enough reserves to keep it going for a good few years yet. As at the last accounts the company had a little over £100 million in the bank, so is well covered for any costs, plus has a £22.8 million provision in place for the decommissioning of Bruce and Keith when that time arrives – it will also have to pay 30% of the Rhum decommissioning costs at some point in the future, but that is still a long way off. Despite the weak gas prices at the start of this year - although to some extent that was offset via hedging - the company still managed to announce a maiden dividend of 3p per share when it published its interims, and I would expect to see a regular income stream from this stock in the future, as well as the potential for share price appreciation. The latest operational update from Serica also announced that it had relinquished its exploration licence in Namibia, but I see that as a positive as I would much rather it focussed on the North Sea than expensive drills in Africa, and even if it did find oil, it could be years before any development actually occurred to bring it online, and at great initial expense. Overall I can see plenty to like about this company at the current share price level, and as oil and gas prices recover over the coming years I can see plenty of upside potential - with R3 and Columbus both increasing production - as well as the chance for a steady income stream and reasonable yield from future dividends. So, I would view this as a longer term investment with plenty of potential and a great track record as well. Now is the time to buy the shares.
Filed under: Serica Energy, Telit, Octagonal, CyanConnode, Bidstack, Lying James Draper, Tim Martin
RISK WARNING & DISCLAIMER - FiveFreeShareTips.com tips are provided by independent authors via a common carrier platform and do not represent the opinions of FiveFreeShareTips.com. FiveFreeShareTips.com does not accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at FiveFreeShareTips.com and via emails you receive from [email protected] are for your general information and use and are not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by the tipsters or FiveFreeShareTips.com and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Trading shares involves the risk of loss. The tipsters and FiveFreeShareTips.com shall not be liable for any losses or other damages incurred. The value of investments can go up or down and the past is not necessarily a guide of future performance.
Well actually it will be six. One every week day and one on Sunday, each landing with you at 11 AM sharp.
Unlike other services (which may always have a vested interest) we pride ourselves on our impartiality and cover all small caps including AIM. the Standard List, The Wider Main Market and NEX.
We cover small caps, penny shares, FTSE 350 stocks and blue chips. We look for red hot penny shares, Warren Buffett style value investments with yield and growth stocks. There is no technical analysis in our work just solid fundamental analysis from a team of experts with decades of stockmarket experience.
You will not agree with all we publish but if you are interested in small caps you cannot afford to ignore it either. Yo'll never be charged for the free share tips from Five Free Share Tips and given the star writers involved you know that they will move share prices.
There's no telephone number or postal address required and there is no charge, ever, for your Five Free Share Tips membership. Just free shares tips every day apart from Saturday And each day's share tip will not just be a few thoughts cobbled together but will be detailed analysis from experts.
Our experts do not just earn their living from writing. All own shares. If they own shares in a stock they cover they will declare it and will not sell until after advising a sell to our readers. And why not our tips are so good that why shouldn't our readers put their money where their mouth is?
Don't just take our word for it! Judge us on the calibre of our free share tips and join today to start receiving them from September 1 2017. If you don't like what you get delivered to your inbox unsubscribe and you will never hear from us again. So why not give it a go? Sign Up Now
We've put together a panel of top tipsters, including:
Tom Winnifrith, in his 27th year writing about shares, noted fraudbuster & dubbed "The maverick Tipster"
Chris Bailey, City whizz kid turned financial guru, rated as one of the top 50 commentators on shares on twitter, founder of Financial Orbit
Steve Moore, has worked with Tom Winnifrith for all bar 3 weeks of his working life - a noted commentator on value stocks
Malcolm Stacey, The Grandfather of Share Blogging, the founder of ShareCrazy & a best selling autthor of stockmarket books
Lucian Miers, the Bard of the Boleyn, one of the UK's best known short sellers
Gary Newman, writes about value investing on AIM, speciality is in share tips on oil and mining companies
Nigel Somerville, The Deputy Sheriff of AIM, an expert in forensic analysis a skill used to bust frauds but also to tip true value investments
The team from HotStockRockets, specialising in AIM and small cap shares which will fly on a three month view
Remember to book your place at the UK Investor Show 2018. The UK’s top investment show taking place on Saturday 21 April 2018 at the Queen Elizabeth II Conference Centre in Westminster, London. The show will feature a unique line-up of top speakers including Nigel Wray, tech queen Vin Murria, Dave Lenigas, Mark Slater, Tom Winnifrith, Adam Reynolds, Ed, Croft, Nick Leslau Luke Johnson and Dr Johnny Hon as well as 135 exhibiting small cap companies.
The hot share tips given here are of necessity, general. They cannot relate to the individual circumstances of investors. Anyone considering following the share tips contained here should seek independent advice from a Financial Conduct Authority authorised Stockbroker or Financial Adviser. We cannot be held liable if individuals suffer losses through following share tips contained on this site or emailed out as free share tips. The value of investments can go down as well as up. The past is not necessarily a guide to future performance. Investing in shares can lose you part or all of your capital although the potential returns are theoretically unlimited. The difference between the buy share price and the sell share price for smaller company shares (penny shares) can be significant. Profits from dealing in shares may be liable to tax - the level of tax and bases of relief from tax are subject to change. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Some of the shares recommended on this site will be smaller company shares. By their nature such investments can be relatively illiquid and thus hard to trade. And that makes such investments more of a high risk than larger company shares (or 'small caps'/'penny shares'). FiveFreeShareTips.com & its sister site ShareProphets.com defines a smaller company share as any stock traded on AIM or NEX or which has a market capitalisation of less than £300 million.