Serica Energy Plc (AIM: SQZ): Cumulative free cash flow near market cap by YE27 if UK tax regime constrains investments
• 1H24 production was 43.7 mboe/d, which is in line with our expectations. Net cash of ~US$143 mm at the end of June was also near our forecasts.• The FY24 production is expected to be towards the bottom end of the guidance of 41-46 mboe/d, mostly due to more downtime than expected at the Triton hub. The summer maintenance lasted >61 days instead of scheduled 40 days.
• With further visibility on the UK fiscal regime expected at the end of October, the key takeaway from the announcement is Serica’s financial framework. Given the strength of the company’s balance sheet, Serica has declared an interim dividend of £0.09/sh (in line with last year). Assuming the worst case fiscal regime, Serica’s future investments 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. On our commodity price scenario and production forecast, this could be achieved as early as YE26.
• This leaves ample room to continue to fund a generous dividend. By YE24, the company will have already returned ~US$130 mm to shareholders (dividends plus share buybacks) which represents >20% of the current market cap.
• We continue to value the company at ~£1.80 per share based on the worst case fiscal regime changes. This represents 50% upside to the current share price. Our target price is unchanged at £2.90 per share.
Drilling newsflow and addressing downtime
The Triton drilling campaign is on track. The Bittern B6 horizontal well is promising and expected on stream imminently. The Gannet GE-05 well has been drilled below budget. The well is expected to start production in November. We carry an additional ~3 mbbl/d net production for B6 and ~2 mbbl/d for GE-05 once on stream. This would boost the company’s production at YE24. The second compressor at Triton (which provides redundancy) is expected to be repaired by YE24, reducing shutdown risk. Serica will focus on processes and maintenance to increase overall production efficiency and reduce the duration of shutdown.
Valuation
Our lower oil price and production assumptions (we assume ~41 mboe/d for FY24 with US$80/bbl for Brent in 2H24) have minimal impact on our Core NAV of ~£2.50/sh and ReNAV of ~£2.90/sh. We have also assumed that first oil at Buchan is delayed by a year.
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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