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Serica Energy eyes deals after earnings surge

The North Sea gas producer triples its dividend and hints at M&A thanks to high prices and the end of profit sharing on its key assets
April 25, 2022
  • Dividend raised from 3.5p to 9p 
  • Cash holdings soar in first months of 2022

In January, we posited that Serica Energy (SQZ) would be a helpful hedge for rising energy costs. Then came the war in Ukraine, which further limited global oil and gas supply, and Serica’s accounts for 2021 and outlook for the rest of the year indicate it will remain a strong investment even after this current crisis. 

Sales have skyrocketed by over £340mn between 2020 and 2021, and an additional £200mn is set to hit the top line this year, as per Stifel forecasts, thanks to the higher gas prices and the end of a cash-sharing arrangement for the Bruce, Keith and Rhum fields in the North Sea, collectively known as BKR. A net cash flow sharing deal with former BKR owners BP (BP), TotalEnergies (FR:TTE) and BHP (BHP)

In light of the higher earnings, management boosted the dividend from 3.5p for 2020 to 9p for 2021. Serica has a single dividend for each year. 

The company did see a fall in production last year, due to maintenance, but this was more than covered by the price improvement. The outlook for 2022 is between 26,000 barrels of oil equivalent per day (boepd) and 30,000boepd, the midpoint of which would represent a one-quarter increase on last year. This guidance was dropped from 27,100boepd-33,600boepd because of production rates at the Columbus project. 

Chief executive Mitch Flegg said two new projects reaching production last year meant the company was “further increasing our contribution to the provision of vital lower-carbon gas to the UK’s energy market”.

Flegg said Serica would keep an eye on further asset purchases. There is plenty in the war chest to put towards an acquisition: the company’s cash level at the time of the results announcement was £363mn, although £151mn is serving as a hedging security. Around 20 per cent of its production is still hedged, although it has not added gas price hedges since July last year because of the "extreme market volatility". 

Even if deals prove tough to find in this environment, there are organic growth options. Werner Riding at Peel Hunt said the spudding of the North Eigg exploration well later in the year could have “very significant positive implications” if it proves commercial. 

This environment won't last forever, but Serica is certainly making hay while the sun shines. Buy. 

Last IC View: Buy, 232p, 13 Jan 2022

SERICA ENERGY (SQZ)   
ORD PRICE:366pMARKET VALUE:£1bn
TOUCH:365-366p12-MONTH HIGH:423pLOW: 112p
DIVIDEND YIELD:2.4%PE RATIO:13
NET ASSET VALUE:100pNET CASH:£103mn
Year to 31 DecTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201732.010.86.00nil
201835.739.520.0nil
201925110924.03.0
202012612.53.003.5
202151413530.09.0
% change+309+980+900+157
Ex-div:30 Jun   
Payment:22 Jul