Serica Energy - a buy as production is due to expand says Gary Newman

Breaking: stale Telit bull committing market abuse? Read HERE

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.

BREAKING: Octagonal – another departure from the AIM casino and more egg on face for Britain’s most useless FD Nilesh Jagatia. Read from Tom Winnifrith, The Sheriff of AIM, HERE

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.

Read HERE: CyanConnode – again “Director Share Purchases” which aren’t... and why not announced yesterday with the others?

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.

Lying James Draper and Bidstack – it is what is NOT said in today’s pre-placing ramptastic trading statement says Tom Winnifrith HERE

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.

Heroic Tim Martin of JD Wetherspoon again lashes lockdown madness and the liars of Fleet Street. Read HERE

Filed under: Serica Energy, Telit, Octagonal, CyanConnode, Bidstack, Lying James Draper, Tim Martin

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