Serica Energy's dealmaking prowess on show

Serica Energy (SQZ) has booked a massive rise in its after-tax profits for 2022, even with the hit from the Energy Profits Levy. The North Sea oil and gas company hiked its dividend as a result, taking the total payout from 9p the year before to 22p, on the back of operating profit almost doubling to £476mn. Higher production and higher prices drove the profit surge. 

The 2022 results are little indication of what it will do this year, however.  

Serica completed the purchase of Tailwind Energy in March, which will take production from an average of 26,000 barrels of oil equivalent per day (boepd) last year to a forecast 40,000-47,000 boepd in 2023. The £360mn acqusition was largely paid for in shares, plus a £59mn cash payment. Serica also took on a reserves-based lending facility (loan) of $366mn (£293mn) in the deal. 

Serica saw a £64mn charge from the UK windfall tax, as well as a deferred tax expense of £59mn, although this is only a paper figure. “We will maintain our ongoing investment in near term opportunities from our existing portfolio and look for further opportunities where they can be justified under the current tax regime,” said chief executive Mitch Flegg. Other operators in the North Sea have cut spending in the UK because of the higher tax rate. 

Peel Hunt expects earnings to climb again this year, thanks to the production increase, with Ebitdax (cash profits minus exploration spending) at £864mn, compared to £682mn in 2022. Despite the impact of the windfall tax, Serica remains highly cash generative, and at a low valuation. There is risk in taking on debt now but even if oil and gas prices go south, near-term cash flow should take borrowings down quickly. Buy. 

Last IC View: Buy, 352p, 27 Sep 2022