Bigger Serica Energy holds on to profits

Serica Energy (SQZ) painted a negative picture of operating in the UK in its half-year results, but it has held on to profits from its North Sea oil and gas assets despite higher taxes and weaker prices. The driver of higher sales was the Tailwind acquisition, which almost doubled production. This almost made up for the lower energy prices, although costs were also much higher.  

Chief executive Mitch Flegg said the investment and growth plans came in spite of the higher tax bill resulting from the Energy Profits Levy. “We share the widespread concerns within the sector about the health of the UK's offshore upstream industry given the current fiscal regime and future uncertainties,” he said. The two central arguments are there are no more ‘super’ profits to tax now that gas prices have come down – oil being back up beyond $90 (£70.87) a barrel – and the uncertainty over future tax rates is hurting development. 

Operating profit for the first half was £159mn, a fall of a fifth on the year before. On top of the higher costs and lower prices, this was also hit by transaction costs of £8mn, foreign exchange losses and asset write-offs. This is all linked to growing in scale – Tailwind doubles the number of fields in the portfolio, and took production in the first half to an average of 39,350 barrels of oil equivalent per day (boepd) from 26,600 boepd in the first half of 2022. 

Work on the original Bruce and Keith wells should also boost production from those fields, too, with the full-year production guidance 40,000 boepd to 45,000 boepd. The top-end has been pulled back from 47,000 due to slower-than-expected ramp ups at the two production hubs after planned shutdowns over the summer. 

Handily, the Tailwind acquisition brought significant tax losses and cut the tax bill for the first half. Booking a £140mn ‘gain on acquisition’ also helped the bottom line. 

The flipside of buying Tailwind is taking on its debt and committing to the higher operating costs. Serica remains in a net cash position, however, although broker Peel Hunt sees this coming down from £234mn to £154mn at the end of the year. This is still a solid position and the higher oil price should drive up sales in the second half. Buy. 

Last IC View: Buy, 245p, 13 Apr 2023