The oil and gas market is quite hard to read at the moment, particularly when it comes to individual companies which are producing, as some have seen large share price rises whilst others barely seem to have moved despite the fundamentals appearing to be strong. In general, there seems to have been a bit of a disconnect between energy prices and the way in which the companies which produce oil and gas have seen their share price moving particularly when it comes to oil and if you look back at where they were trading the last time that Brent was at $70/barrel...
Oil prices have slipped back a bit in recent weeks on concerns over further lockdowns in Europe and the US, but for the time being at least it appears that OPEC is keen to maintain high prices, even if it means continuing to restrict output of its members, and alongside that, in the US it looks as though the oil industry won’t have it as easy under a Biden administration as what it has done in the past, in terms of being able to develop new fields – plus access to debt finance is likely to prove tougher as well. Gas prices haven’t quite shown the same sort of strength, but are still a lot higher than they were throughout the first half of last year, and although storage levels have remained high, I’m not sure that will continue to be the case in the future as I see several potential disruptions to supply, particularly in Europe, as well as a good chance of demand strengthening. Relations between Europe and Russia aren’t great at the moment, and a lot of the total gas supply comes from Russia and there has been pressure on Germany to halt the Nord Stream 2 pipeline. In recent years there has been a significant increase in imports of LNG from the US into Europe, but changes to policy in the US by the new administration could well impact upon that, certainly in the longer term. So, I see a decent chance of gas prices in Europe strengthening. If we look even closer to home, there has also been talk of restricting or even banning new exploration projects within the North Sea, and given how dependent the UK appears to be on gas for power - in spite of the talk about switching to renewable energy sources and the like - I would say that this would also seem to be positive for any companies that produce gas in the UK. So if I was looking for a company that produces good amounts of gas, as well as oil, operates in the North Sea, and appears to still be undervalued given the bounce back in commodity prices, then Serica Energy (SQZ) would be high on the list.
Currently the company is trading at a market cap of around £313 million at a share price of 116p, and for that I believe that you are getting very good value with plenty of upside potential in the near term. During 2020 the company produced 23,800boepd from its BKR and Erskine fields and operates at a cost of around $14/boe, with around 80% of its production being gas. Last year the average realised price for gas was 25p/th, plus $42/barrel for oil to give around $20/boe overall (before the benefits of any hedging kicked in). Production would have been around 27,000boepd had there not been a 45 day shutdown for repairs to Bruce. By the start of the year those prices had improved significantly, and in January equated to $43/boe. Since then oil has strengthened even more, although gas has been very volatile and has weakened slightly. The company also has a strong balance sheet and is debt-free with just over £100 million in the bank plus it still had around £45 million in previous tax losses that can be offset (as at the last set of interims up to the end of June), as well as having paid out a maiden dividend of 3p/share. So, there is the potential for the company to make further acquisitions, as it has successfully done in the past. In the absence of any acquisitions there is still plenty of growth potential for its current assets anyway, with the development of the 50% owned Columbus field now underway via the spudding of a development well which is expected to bring 7,000boepd gross online by the end of this year, of which around 70% is gas, at a CAPEX cost of £17 million for the year. Undeveloped 2P reserves for Columbus have previously been estimated at around 14mmbbls of oil equivalent and would suggest a field life of around six years. Erskine still provides a useful income for the company, although production is starting to drop off gradually and averaged 2,300boepd, but it is the Bruce and Rhum fields which produce most of its gas and oil, with an average of 21,500boepd in 2020.
There is plenty of further upside from Rhum via an intervention in the R3 well which has the potential to add significant amounts of production. This well has remained blocked for years but is already connected to the gas pipeline and a successful operation to bring it online could see rates of up to 15,000boepd, based on the what could potentially be produced from the two existing Rhum wells. This would also have the potential to add significant amounts to the 28.7mmbbls of oil equivalent 2P reserves that the field had at the start of 2020. This work is anticipated to cost around £7.8 million this year and operations are ongoing and with news expected at any time. It is also worth bearing in mind the structure of the deal when Serica acquired BKR, and although this year the company only receives 60% of the net cash flow from the assets (the same as it did last year), from 2022 onwards that rises to 100%.
Based on all of this, not only does the company look strong but there is plenty of newsflow to come – with the R3 intervention; the completion of the Columbus development well; and the full year results for 2020 due soon, which I would expect to be viewed as positive, given the situation last year. You probably aren’t going to see fireworks here or massive share price rises overnight, but barring any really unexpected bad news, the share doesn’t carry the risk of taking a big hit to the price either. On that basis, and given oil and gas price predictions going forwards, I can see plenty of value in the shares from around this level and view it as a strong buy as it continues to build substantial amounts of cash whilst also paying out further dividends.
Filed under: Serica Energy, SPAC, Zoetic, Mobile Streams, Tern, James Halstead, Zoo Digital
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.