Serica Energy Plc (AIM: SQZ): Bolt-on acquisition provides tax synergies and operational flexibility

• Serica is acquiring the UK assets of the Parkmead Group for an initial consideration US$6.5 mm in cash.
• The transaction includes 50% WI in the Skerryvore prospect (Serica already owns 20%) and 50% in Fynn Beauly (heavy oil discovery). An additional deferred consideration of US$11.7 mm will be paid in stages over the next 3 years. On approval of a FDPs, Serica would make contingent payments of £0.8/bbl with a cap of £30 mm for Skerryvore and £90 mm for Fynn Beauly.
• The transaction is expected to complete in 1H25.
• The transaction offers Serica significant tax synergies. Upon completion of the acquisition, Serica's tax loss balance will increase by £197 mn for RCT, £193 mn for SCT (including £12 mn in activated investment allowances), and £1 mm for EPL, as of 30 June 2024. Previously, we forecasted that Serica's tax losses for SCT and RCT would be exhausted by mid-2027 and mid-2028, respectively. With this acquisition, these tax losses will now extend until mid-2028 and 2030
• The value of these tax losses could increase further if the company makes a more material acquisition of tax paying producing assets in the UK. This remains one of Serica’s strategic goal.
• The acquisition provides operational flexibility. With a 70% interest in Skerryvore, Serica now controls the timing of exploration and drilling activities. However, given the current context of poor visibility on environmental approvals and the UK government's attitude towards exploration, drilling at Skerryvore is likely to be delayed.
• We have increased our target price from £2.90 per share to £3.00 per share, which captures the accretive nature of the acquisition.

Valuation
We have incorporated the acquired tax losses into our valuation for Serica. We have also moved forward our DCF for the company by one year to YE25. A s a result, our Core (2P) NAV has increased from £2.41 per share to £2.58 per share, and our ReNAV has risen from £2.82 per share to £3.04 per share. Approximately 50% of this increase reflects the value created by the acquisition.