Serica Energy Moram
Results of companies

Serica 1H22 results – LSE:SQZ

Serica Energy reported record results in the 1H22. It achieved revenue of £353.5MM, operating cash flow of £312MM and £116.7MM of net income (43 pence EPS). Its production was 26600 boe/d (85% natural gas) and its cash on 23rd September was £480MM.

From our point of view, the record results were already priced in as natural gas prices (specifically NBP) have been elevated this year. However, the CC give some interesting highlights that we resume briefly.

Serica operating assets

The average net production in the Serica results from 1H22 was lower than their initial guidance as expected due to the outage in Rhum back in March. Full-year guidance was narrowed to the lower part of the range (26000-28000). Operating costs were similar to 1H21, but we should expect these costs to grow due to inflation (labour, materials,..)

The initial well (Bruce M1) re-entered for the first time since 1998 and production increased from around 400 boe/d before intervention to over 1,800 boe/d in July 2022. Also, a second well (Bruce M4) increased from around 450 boe/d to over 2,400 boe/d

Because of the new taxes (26th May), they are accelerating the plan to perform similar interventions on other Bruce and Keith wells, both subsea and from the platform. They estimate to work on 5/6 wells (4 of them already identify) in the 2023 campaign.

Serica’s North Eigg exploration

The North Eigg well was spudded in July. Currently, they are working on the exploration well and the results should be in December. When we talked with Mitch in August, he told us that their estimation for the success of this operation (commercially viable amount of gas) was between 20-33%. If it is viable, they would expect something very similar to Rhum. It would be a game-changing discovery for Serica.

The results of this well will be determinant for the Serica strategy. If it is commercially viable, they will put all their effort to make it operative as soon as possible. Otherwise, we believe that it would force them to do M&A and it would be difficult to say no again to buybacks.

Apart from NE, they say that they have 20% of the Skerryvore licence (they are not operators). And will be a drilling campaign on this field before October 2025.

Serica’s hedging strategy

Hedges have been a major pain for Serica management for two reasons. First, they are losing a lot of money as hedges are 40-55 pence/therm when the spot price is several times that figure. Second, the amount of money that they have to put aside because of hedges is massive. They cannot use that money as it is a guarantee (hedging means that you are short in natural gas, so margin calls are around the corner in this volatile environment).

This hedging strategy has limited them to make buybacks or even a sizeable M&A. If they have £400MM in cash but £300MM can be tied to the hedges… And that situation is now that hedges have declined considerably, 6 months ago it was a continuous headache.

The good news is that after 3-4 months the hedges volume will not be significant. It will allow them along with the results of North Eigg to have more flexibility to execute an M&A/buybacks strategy.

We also talked with Mitch that they are not going to put more hedges at least before they enter into an M&A operation that requires them to get some debt or a sizeable Capex program.

Serica remaining volume of hedges
Sericas outstanding Margin calls

Our thoughts about Serica’s future after the 1H22 results

As we head into the winter, we believe that natural gas prices are going to remain unusually high at least for the next 3-6 months. And then for 2-3 more years, but not at this year’s prices.

After reading the Serica 1H22 results, we understand that Serica is not going to do anything but build cash until December. Then, when we have the results of the North Eigg, we will gain some clarity about the next steps. Due to the new taxes, Serica has a big incentive to invest in the UK. Consequently, the North Eigg fit that purpose and would allow them to pay fewer taxes on the benefits generated by its existing assets. However, they are also looking for assets outside the UK, and not only natural gas assets. Consequently, if North Eigg is not commercially viable, we should expect M&A activity and maybe, some buybacks. In the meanwhile, they have introduced its first interim dividend, elevating the total annual payment to 17 pence.

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