Serica Energy Plc (AIM: SQZ): Operational glitch creates an opportunity
• Production at the Triton FPSO has been interrupted due to potential dry gas seal failure at the A gas compressor. The vulnerability of Triton to an issue with the single compressor was flagged previously, and improving the robustness of production was highlighted by Serica’s new CEO as a priority. The second compressor would have reduced the operational vulnerability of the FPSO but it has not yet been repaired. This second compressor is now expected to be brought back in service in 1Q25 instead of 4Q24, given that the priority will be to repair the A compressor.• Production at the Triton FPSO is expected to be restored mid November.
• As a result of this 2-3 week shut down, average annual production is now expected to be slightly below 41 mboe/d.
• Pending publication of the UK budget on Wednesday and the subsequent operating update to be published by Serica in mid-November, we have not changed our estimates for 2024. Reducing our production forecast for 2024 by 1-2 mboe/d is expected to have a minimal impact on our valuation
• Any share price weakness could offer an opportunity for investors. At the current share price the dividend yield is ~18%. Current UK gas prices are high (97.9 p per therm so far in 4Q24 vs our assumptions of 95 p per therm) and even assuming very punitive fiscal terms in the UK, the high free cash flow generation of the company suggests this level of dividend is sustainable.
• We re-iterate our target price of £2.90 per share
UK budget to be published on 30 October
The key newsflow for Serica is the upcoming UK budget to be published on 30 October that will provide visibility on the UK fiscal regime. 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 ~50% 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 £2.55/sh and £2.92/sh respectively. The Core NAV reflects our valuation for the company based on its 2P reserves. We carry only £0.14/sh 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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