Serica Energy Plc (AIM: SQZ): Very high flow rate at new Bittern well
• The B6 well on the Bittern field is now in production at a stable gross rate of ~8 mboe/d. Net to Serica, this represents ~5.2 mboe/d. This is well above our expectations of ~3 mboe/d (net).• This result showcases the quality of the subsurface team at Serica, something emphasised by the CEO at the HY results, as the well was drilled horizontally in a thin 245 m long reservoir section just above the oil-water contact.
• Overall production is now above 50 mboe/d. Given a slow ramp-up following the summer shutdown, production needs to remain at this level for FY24 production to average ~41 mboe/d (which is the company’s guidance).
• We forecast that the Gannet GE-05 well will add a further ~2 mbbl/d once on stream in November.
• The key newsflow for Serica is the upcoming UK budget to be published on 31 October that will provide visibility on the UK fiscal regime. We believe that the share price trades at a discount to the worst case scenario. If UK fiscal terms are too punitive, Serica’s future investment in the UK will be very limited. Under such a scenario, Serica estimates that the UK business could generate >U$500-600 mm of cumulative free cash flow by YE27. This represents almost the current market cap of the company.
• We re-iterate our target price of £2.90 per share
All eyes on the October budget
Assuming 38% for the EPL (total of 78% tax on profit), no sunset date for the EPL and no allowed depreciation for EPL purposes (ie £1 of spending triggers only 40% of tax shield vs 78% tax) would lead to a core NAV (based on the company’s 2P reserves only) of ~£1.80 per share. This represents ~30% upside to the current share price. Assuming “normal” depreciation (78% tax shield vs 78% tax) takes our Core NAV to £2.50 per share and unlocks further investment opportunities, including Buchan, with an overall ReNAV of ~£2.90 per shares.
Valuation
Our Core NAV and ReNAV for Serica are respectively £2.55 per share and £2.92 per share. The Core NAV reflects our valuation for the company based on its 2P reserves. We carry only £0.14 per share for Buchan in our ReNAV.
Serica Energy is an independent oil and gas company with production, development and exploration licence interests in the U.K. Continental Shelf and exploration interests in Ireland, Morocco and Namibia. As of Dec 31 2016, Co. had proved plus probable reserves of 3.8 million barrels of oil equivalent, which consisted of 2.1 million barrels of oil and 10.40 billion cubic feet of gas.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
Auctus has been set up at the beginning of a new decade in which we see significant opportunities in the Energy space. Globally, demand for energy is at record levels and continues to grow. Conversely, investment in traditional energy sources has been severely constrained. We believe this imbalance creates opportunities for both companies and investors.
Auctus provides Corporate Broking, Equity Research and Investment Banking services.
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