Not too late for Serica windfall

But what exactly is Serica buying? Once the deal becomes effective on 1 January, the group will own 36, 35 and 50 per cent interests in the Bruce, Keith and Rhum fields respectively, and will sit as the producer-operator of all three, collectively known as the “BKR assets”. Together with its stake in Erskine, another North Sea field acquired from BP in 2015, broker Peel Hunt judges Serica’s production assets to be worth 87.5p. Including cash on the balance sheet and tax credits, the brokerage values the group’s core net asset base at £355m, or 134p a share.

So this deal clearly represents a giant leap for the hitherto junior producer, but the question for investors is whether it offers value at the current price? The answer, we believe, is yes. Assuming operating costs stay below $15 (£11) a barrel and Brent crude averages $57 in 2018 and $60 in 2019, Peel Hunt reckons Serica’s interests should generate a net profit of $83m and $118m in those years, at the end of which there is expected to be $193m net cash on its balance sheet. Thereafter, field production is set to steadily decline, and assuming no discoveries are made, the group’s reserves will last less than seven years. This helps to explain why BP is happy to wave goodbye to the BKR assets (albeit for around £300m in total payments); put simply, the fields are worth a lot less to an oil major than they are to a mid-tier producer.

Importantly, BP will retain financial liability for all decommissioning costs, although Serica in on the hook for 30 per cent of post-tax costs, and the job of planning and executing the fields’ closure at some point in the next decade.