Join our community of smart investors

Serica Energy has a gas in the first half

North Sea company promises “very significant returns” to shareholders
Serica Energy has a gas in the first half
  • Interim cash flow from operations tripled to £64m 
  • Production down on the first half of 2020, but higher prices boosted sales

Winter is closing in for the UK but the sun is shining for Serica Energy (SQZ), the North Sea oil and gas producer. Even before the run-up in gas prices in recent weeks, the company had seen a major uptick in prices compared to 2020, and has reported cash flow from operations of £64m, triple last year’s figure. 

Serica operates the Bruce, Keith and Rhum (BKR) fields, and is bringing a new gas field on stream by the end of the year. Given the massive incoming cash inflow in the second half thanks to the record gas prices, chief executive Mitch Flegg said the company expected “very significant returns for shareholders”. Serica has paid end-of-year but not interim dividends this year and in 2020. 

The company produces around 5 per cent of the UK’s gas output, and this will increase in the coming year through the Columbus development, which is now expected in Q4 2021 at anticipated gross rates of around 7,000 barrels of oil equivalent per day (boe/d). 

Gas prices don’t look to be coming down anytime soon, thanks to the arrival of winter boosting demand in Europe, while the high prices in Asia are pushing some countries to burn oil for power instead. This has helped push the crude oil price to $80 (£59) a barrel for the first time since 2018. Serica’s production is around four-fifths gas, with the rest oil.

Consultancy Rystad Energy said there was further “upside potential” for oil and gas prices “as winter approaches and the global energy crunch intensifies”. 

Serica reported that gas prices had averaged close to 150p per therm in September, compared to 56p/therm in the first half of the year. If these highs continue in 2022, even with some drop-off, the company will see cash flow surge thanks to the structure of its agreement to buy its North Sea fields, in which it handed the vendor 60 per cent of net cash flow from the BKR fields in 2020 and 2021. This drops to nothing as of 1 January, as production ramps up as well. 

Broker Peel Hunt significantly upgraded its cash profit forecasts after Serica released its interim numbers, shifting its 2021 estimate up by 30 per cent to £287m, and its 2022 estimate up by 46 per cent to £362m. 

We moved Serica on to a buy recommendation in the dark days of 2020 because of its balance sheet and prospects. We’ll stick with that call. Buy. 

Last IC View: Buy, 105p, 6 May 2020

SERICA ENERGY    
ORD PRICE:214pMARKET VALUE:£ 573m
TOUCH:213.5-214.5p12-MONTH HIGH:222pLOW: 90p
DIVIDEND YIELD:1.6%PE RATIO:NA
NET ASSET VALUE: 72pNET CASH:£4.5m
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202045.920.45.00nil
20211012.251.00nil
% change+120-89-80-
Ex-div:-   
Payment:-