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Serica: profits in the pipeline

Despite issues with two separate pipelines, Serica's deal with BP remains on track
April 10, 2018

Shares in Serica Energy (SQZ) are down since the start of the year. If that demonstrates profit-taking by long-term holders, that’s eminently understandable. After announcing a massive deal with BP to acquire stakes in the Bruce, Keith and Rhum (BKR) fields in the North Sea, the Alternative Investment Market-traded explorer and producer’s stock tripled in value at the end of 2017.

IC TIP: Buy at 68p

Operationally, the news has been mixed. In January, during routine cleaning operations, a blockage formed in the Lomond to Everest condensate export pipeline from the Erskine field, leading to production being suspended.

Then again, shareholders could hardly have wished for a better market backdrop to the BKR deal. Although the transaction is set to complete in the third quarter of 2018, since the start of January 40 per cent of the net cash flow from BP’s BKR fields has been destined for Serica’s bank account. During that time Brent crude has largely stayed at or above $65 (£46) a barrel, far in excess of an average sale price of $52 in 2017 – which led to Serica’s strongest ever annual profit.

Newsflow should remain steady in the coming months. Beyond the BKR deal, wells are being drilled at the Rhum R3 well and the Rowallan prospect, and Serica hopes to have submitted a development plan for the Columbus field by mid-year.

Prior to these results, Peel Hunt was forecasting adjusted full-year pre-tax profits of $84m and EPS of 31.5¢, climbing to $127m and 44.6¢ in 2019.

SERICA ENERGY (SQZ)  
ORD PRICE:68pMARKET VALUE:£179m
TOUCH:67-68p12-MONTH HIGH:93pLOW: 20p
DIVIDEND YIELD:NILPE RATIO:16
NET ASSET VALUE:38.8¢NET CASH:$30.2m
Year to 31 DecTurnover ($m) Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
2013nil-5.1-3.0nil
2014nil-35.6-14.0nil
201524.04.33.0nil
201621.43.34.0nil
201732.010.86.0nil
% change+49+226+50-
Ex-div:na   
Payment:na   
£1=$1.42