Serica Energy announces buyback and hits out at the windfall tax

David Latin, chairman of Serica Energy (SQZ), was scathing over the government’s North Sea tax policies in his statement accompanying the driller’s full-year report. He maintains that any financial justification for the windfall profits tax has long since disappeared, so the extension of the tax through to 2029 “risks killing off investment across the UK sector of the North Sea”.

Serica Energy is one of the largest UK North Sea oil and gas producers, averaging 40,121 barrels of oil equivalent per day (boepd), so Latin’s comments should carry some weight, although one suspects that Whitehall views the industry as some sort of archaic cash cow. But his observation is supported by the fact that benchmark gas prices fell to an average of 99p per therm in 2023 compared with 198p per therm in 2022. Crude oil prices proved more resilient, but gas still accounts for 56 per cent of Serica’s production profile, albeit down from 91 per cent in 2022.

The average realised sales price, after hedging, came in at $63 (£50.81) per boe, against $104 per boe in the prior year. The deterioration in underlying pricing was also brought home by a 53 per cent reduction in operating cash flow to £195mn, tax deductions notwithstanding. Capital expenditure was also pared back to £79.2mn from £98.3mn during the year prior. Adjusted cash profits (factoring in exploration expenses) fell to £381mn from £617mn last time around.

Looking ahead, the production guidance range has been lowered to 41,000–46,000 boepd from an upper limit of 48,000 boepd previously announced. The group also revealed its first-ever share buyback programme, totalling £15mn. Management confirmed that Serica still enjoys institutional support for its expansion plans. So, given the modest 17 per cent premium to net assets, we keep our buy call. Buy.

Last IC view: Buy, 180p, 22 Feb 2024