Serica Energy Plc (AIM: SQZ): UK budget better than feared
• While the new fiscal regime for UK upstream oil and gas in yesterday’s UK budget incorporates a 3% increase in EPL (to 38%) and the elimination of the 29% investment uplift allowance for EPL purposes, this is a better outcome than feared.• While these changes were expected, the industry and investors had been concerned by the possibility that capex investment might not be fully deductible for EPL purposes. That risk has now been removed.
• In addition, the 62.5% investment uplift allowance for SCT purposes (10% rate) remains in place.
• Overall, this means that £1 of spending triggers 84.15% of tax shield vs a 78% tax rate. This is better than our assumption of 78%/78%.
• Importantly, the new fiscal regime provides stability and visibility to the industry for the duration of the current government until 2030. The new fiscal regime allows Serica to continue to invest in the UK North Sea.
• Of particular interest is the Bruce area where multiple growth opportunities have been identified. No new wells have been drilled at Bruce since 2012. The same subsurface team (from Tailwind Energy) that successfully encountered new development opportunities at Triton will now focus on Bruce.
• A stable fiscal regime will also probably make UK M&A transactions more likely.
• While economics are now strong enough to sanction the Buchan Horst development, the key risk there remains the environment permitting process. The result of the ongoing consultation that will define the new rules is expected in the spring. We therefore do not anticipate much capex spending at Buchan in 2025.
• With the fiscal uncertainty now removed and a sustainable dividend (yield is ~16% assuming current commodity prices), Serica Energy is a “must own” stock.
• We re-iterate our target price of £2.90 per share.
Valuation
We have not changed our production and capex forecasts ahead of the operating update expected to be published by Serica in mid-November. As we incorporate the new UK fiscal terms and the impact of the unexpected shut in of Triton until mid-November, our Core NAV and ReNAV are respectively ~£2.50 per share and £2.90 per share. The Core NAV reflects our valuation for the company based on its 2P reserves. We have not changed our risk factor for Buchan (60%). Sanctioning Buchan would add £0.22 per share to our Core NAV.
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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