Serica Energy hits super-profit territory in first half

Serica Energy (SQZ) really does have impeccable timing: the numbers are in for the first half-year period in which it has had 100 per cent exposure to net cash flow from its North Sea assets, and profits have soared. Hedging did knock off earnings slightly, but an operating profit boost of £191mn, to £196mn, is hard to sniff at. This was effectively all carried through to the pre-tax profit as well. 

Serica bought the Bruce, Keith and Rhum fields (collectively known as BKR) from BP in 2018, and partly paid for them using a profit-sharing deal that meant it held onto 60 per cent of net cash flow in 2020 and 2021. This year it received the full amount. 

Domestic gas producers – as lauded as they have been recently – have come under heavy scrutiny from the government, although the new energy profits levy did not come through in time to impact the first-half numbers. It could take a dent out of full-year figures, however. 

Serica also noted volatility in the gas market meant it had to put up £300mn in security for existing hedges, double the level seen earlier in the year. The company has not added any new hedging contracts since last year, and said hedging would impact less than a fifth of production by the December quarter. 

Just to show it’s not all butterflies and rainbows, the company did report delays and cost increases at its North Eigg exploration well earlier in the month, while a first-quarter production outage at the Rhum asset knocked guidance slightly. This is now 26,000-28,000 barrels of oil equivalent per day (boepd) – around 85 per cent of this output is gas, though. 

Broker Peel Hunt has forecast production of 27,000boepd, down from 27,500boepd for the full year. 

The Kistos (KIST) tit-for-tat takeover attempts (where each company thought it should be the acquirer) look to be finished, but chief executive Mitch Flegg said Serica would still “actively seek opportunities both at the asset and corporate level” to add production and add some diversity to the asset base. This has meant the company has held back on buybacks, which were greenlit at the last annual general meeting. 

Peel Hunt forecasts a full-year adjusted pretax profit of £770mn, double last year, and said the hedges rolling off would mean the company stays in a very strong position even if gas prices dip or production is below expectations. Buy. 

Last IC View: Buy, 348p, 12 July 2022