Oil has been on a bit of a charge recently and there aren’t any real signs of that strength coming to an end anytime soon, but quite a few of the producers haven’t responded as well as you would expect, in terms of share price movement. That can definitely create opportunities though, and amongst those which I view as being too cheap, especially in light of recent news and further developments to come, is an old favourite of mine, Serica Energy (SQZ).
For months the share price was stuck trading in the 110-120p range, despite oil prices strengthening and I had assumed that was largely due to the ongoing re-entry of its Rhum asset, in the North Sea, via the R3 well, and the fact that it was taking far longer to try and get it flowing again than many anticipated. This well had been abandoned by the previous operator with debris stuck in it and an obstruction across the completion, but was always viewed as having the potential to have a major impact on current production. Last week the company announced that it had successfully installed the new completion equipment and that the well had been flowed at a rate of 58.4mmscf/d along with 135bbls/d of condensate, and that this had been constrained by the limits of the testing equipment onboard, which was as expected. These volumes equate to over 10,000boepd and R3 should actually be capable of producing at higher rates when it is brought online, with flows being towards the higher end of previous expectations. To put that into context, the company averaged 23,800boepd during 2020, although that was impacted by work that was carried out during H1 of that year, and should have been closer to 30,000boepd without that.
That shows just how much of an impact R3 could have once it is producing, as even last year with typically low oil and gas prices, the company still managed to generate a post-tax profit of £7.8 million, as well as over £44 million of operating cash flow. That also resulted in it paying a maiden dividend of 3p/share. Another factor to bear in mind when it comes to the potential to generate free cash flow, and net profit, particularly with strengthening oil and gas prices, and predictions that those are here to stay for at least the next few years, is that currently Serica is entitled to 60% of net cash flow from the BKR (Bruce, Keith and Rhum) assets, but next year that increases to 100% and will make a significant difference, especially as it will coincide with the increased production from Rhum. In addition to the impressive flow data, bringing R3 online also has the potential to significantly increase the current 2P reserves for that field, which stood at around 28.7mmbbls. The R3 well will be hooked up to the facilities on the Bruce platform, and will utilise the spare capacity that had – with the current focus on carbon emissions, it is also worth noting that doing this won’t significantly increase that.
It hasn’t all been plane sailing though for Serica of late, as whilst the R3 intervention was seen as carrying risk, the development well at its Columbus field, to bring that into production, was seen as much more straightforward, but turned out to be the drill that caused issues, as the screens needed to filter out fine particles, weren’t able to be installed. The good news though is that the horizontal section through the Upper Forties sands and shales was in line with pre-drill expectations, and the reservoir section of the well will now be side-tracked and re-drilled, which, all being well, will avoid a repeat of the problems encountered. The additional cost of this work was around £3 million, but luckily it isn’t expected to delay first oil from Columbus, which is still on track for Q4 of this year – that should see around 3,500boepd net to Serica from this 50% owned project, and with around 70% of that being gas.
When news on R3 dropped the shares briefly spiked up to around 135p, but have pulled back since then to 125p, giving a market cap of circa £335 million. I suspect we saw some traders taking profit on the R3 news along with a degree of caution over Columbus not quite going as planned, and that may be preventing the share price taking off to the extent I would have expected after that news. I believe that this offers a very good buying opportunity though, as whilst there is still some Columbus risk if anything was to go wrong again with that, in my view the real risk was that R3 would fail, and that has now gone. Currently I don’t own any shares here myself but am planning to buy back in – especially if there are any further dips, possibly driven by any temporary dip in oil and gas prices (although that may not happen) – and can see plenty of upside potential from the current share price, especially towards the end of this year and into 2022. There is still fantastic longer term potential here, and although it has already done better than I could ever have imagined when I first tipped it as a buy at around 5p, I still think there is plenty more to unfold here in the coming years – including the potential for further acquisitions as more large companies look to exit, and picking up these producing assets at a favourable price is something that Serica has proven that it is very good at. Like any company in this sector, there are some risks and largely relate to something happening that significantly impacted production for a prolonged period of time, as has happened to some of the Serica fields before, but with its output spread between a number of wells, R3 should actually have helped reduce that – although of course the Bruce facility is essential to production rates. There is also the risk that oil, and particularly gas, prices could drop, but then that is the same for any company in this sector, and if you are looking to invest in these commodities, then I would assume that your outlook on them is bullish anyway. Overall though there is nothing here to put me off, and plenty to make me think that the company will continue to do very well. Buy.
Filed under: Serica Energy, ESG, Best of the Best, Dillistone, Braveheart, Pharos Energy, IKEA
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.