Serica Energy Plc (AIM: SQZ): Catalysts ahead

• The envisaged merger between EnQuest and Serica is not proceeding at this time. Given the drop in Brent since the potential transaction leaked on 7 March, this outcome is unsurprising. Given Serica’s prospects as a standalone company, there was no imperative for the company to force a deal. There are multiple catalysts to the share price in the coming months.
• Production at Triton is expected to restart in June. With the W7Z well on the Guillemot North West field (Serica: 10%) and the EV02 well on the Evelyn field (Serica: 100%) coming on stream, production at Triton alone has the potential to reach up to 30,000 boe/d net to Serica.
• Solidified drilling plans at Kyle and the first new wells on Bruce since 2012 could support production >40,000 boe/d until the end of the decade. Some contingent resources at BKR (33.4 mmboe) and Kyle (11.1 mmboe) may be converted into 2P reserves in 2025, as Serica evaluates infill drilling opportunities. Kyle could be sanctioned in 1H26, pending regulatory approvals, with production of 6-10 mbbl/d in 2028.
• An improved political environment may also be the catalyst for FID on the Buchan Horst prospect.
• Serica continues to actively pursue other M&A opportunities in the UK and internationally
• With a final dividend for 2024 of £0.10/sh and with Auctus assumed 2025 interim dividend of £0.06/sh, Serica could distribute a total of £0.16/sh in dividends in 2025, representing a ~12.5% yield. As we incorporate the FY25 production guidance, the YE24 2P reserves, higher £/US$ exchange rate (US$1.30/£ vs. US$1.23/£ previously) and lower Brent price assumptions for 2025, we have changed our target price to £2.70/sh.

Reflections on the merger discussions with EnQuest
With higher net debt, decom liabilities and opex/boe than Serica, EnQuest is likely to face a greater relative negative impact on its cash flow generation and value in a lower Brent environment. Despite this, EnQuest's share price outperformed Serica’s during the offer period, causing a divergence that likely impacted ability to agree deal terms.

Valuation and forecasts
We now forecast 35.7 mboe/d production for 2025, near the midpoint of Serica’s guidance (33-37 mboe/d). We have lowered our valuation of the 2P reserves at BKR but we have incorporated the additional 2C resources at BKR and Kyle. Given the associated low regulatory risk, we are attributing a 75% chance of success. We have reduced our cash tax forecasts for FY25 by US$71 mm (overpaid in 2024). We now assume US$65/bbl for Brent in 2Q25 and 3Q25. Overall our new Core NAV and ReNAV are £2.38/sh and £2.67/sh. Despite lower FY25 production and commodity prices, we forecast that the aggregate FCF from 2025 to 2027 will be equal to the current market cap.