Serica Interims 09 & Tristone Valuation

Friday, Aug 28 2009 by

Serica Interims out today:


Gas sales commenced in August 2009 from the Kambuna Field, Indonesia

Bandon exploration well discovers oil off the Atlantic coast of Ireland [but warns may not be commercial]

Awarded 100% interest in UK block 22/19c containing the Oates prospect

Awarded 100% interest in Irish offshore licence FEL 1/09 in the Rockall Basin [currently shooting seismic]

Awarded 25% interests in two exploration permits offshore Morocco

Retains 33.33% interest in Block 06/94 PSC in Vietnam [AWE has withdrawn after the failure of the well in June]

Financial Highlights

First significant operational revenue achieved from August 2009

Cash position at 30 June 2009 - US$29.0 million


Forward Programme

Serica's main priority for 2009 was to achieve first production from the Kambuna field. Having commenced gas sales from Kambuna, the Company's attention is now on reaching the contracted rate of 40 MMscfd as soon as all systems are fully commissioned and then to work with Pertamina and the Indonesian authorities to achieve a higher contract rate...

Over the next twelve months Serica is planning an exploration programme of wells that could be of great significance to the Company, including the Conan prospect in the East Irish Sea, the Oates prospect in UK Block 22/19c in the Central North Sea west of the Columbus field and two offshore wells in the Kutai PSC in Indonesia.

Tristone (Serica broker) has today put out a research note, with a 12 month target price of 115p. 

It values Serica's main assets as follows, assuming $50 oil in 2009 and $70 oil in 2010:

  Asset risked p/share


p /share

drill next

12 months?

producing assets Kambuna 71.9 71.9   ie more than Serica's current share price
undeveloped assets Columbus 19.5 27.9    
exploration assets Bandon 11.2 74.4   downraded to 15% CoS because of commerciality warning
  Columbus upside 7.7 38.7    
  Kambuna upside 14.6 29.2    
  Conan 29.8 153.3 yes Serica commented on their 'increased confidence'. They are looking for a farm out partner and this valuation assumes a farm down to 40%
  Boyne 35.4 180.3   ie the gas prospects, excluding Bandon
  Oates 3.7 36.2 yes  
  Kutai 4.8 48 yes this…

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Serica Energy plc is a United Kingdom-based oil and gas company. The Company has exploration and development activities based in the United Kingdom, Ireland, Namibia and Morocco, and an economic interest in an oilfield offshore Norway. The Company's segments include UK, Ireland and Africa. It holds licenses in the Central North Sea and the East Irish Sea, which includes the Columbus Field. It holds Frontier Exploration Licenses for Muckish, Aghla and Derryveagh, and Liffey and Boyne Prospects. The Company also holds interest in Blocks 113/26b and 113/27c, including the Doyle prospect. It holds interest in Block 113/22a, which is operated by Zennor North Sea Limited. The Company has interest in a Petroleum Agreement covering Blocks 2512A, 2513A, 2513B and 2612A in the Luderitz Basin, offshore Namibia in partnership with other companies. The Company has working interest in the Sidi Moussa license. The Company has an economic interest in the potential development of the Vette field. more »

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20 Posts on this Thread show/hide all

uncommon13 29th Aug '09 1 of 20

In February 2009 the Company agreed an extension of its US$100 million debt facility until November 2009. As of 25 August 2009, the Company's debt facility was US$60 million drawn out of a total facility of US$100 million, resulting in a net debt position of approximately US$40 million. Ongoing expenditure will be incurred prior to refinancing in November 2009 however the receipt of revenues from the Kambuna field will put the Company in a stronger financial position. Although the refinancing cannot be considered certain in the current environment, the Company is currently engaged in discussions with its existing lenders to refinance its debt facility. The option of further asset sales is also open to the Company.

I've highlighted an important point missing in the results dissemination regarding their financial position.

Anyway, I believe they shouldn't have problems re-negotiating with lenders since the start of Kambuna revenues. However, it is only a very slight worry with 4% of my portfolio in SQZ.


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djpreston 29th Aug '09 2 of 20
Indeed, it is, as you say, the only real uncertainty at the moment though in practice shouldn't be a problem at all. A cracking line up of explo upside underpinned by Kambuna. Its a good note (the last by Tristone of any co they cover) I do wish, however, that sqz wasn't so illiquid. We do our trades in Canada generally but not averse to arbing some news in London (even though the spread is criminal here).
Fund Management: European Wealth
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tiswas 29th Aug '09 3 of 20

In reply to djpreston (post #2)

Funnilly enough the spread was very tight yesterday when I was buying, 0.25p 0r 0.5p for most of the day.  I tend to put a small order on SETS and wait for it to be filled.

Last year SMDR offered a 1:3 share swap valuing SQZ at 70p when the formers shares were 210p. Today's prices aren't a million miles away from that ratio - 60p and 207p.  I wonder if they will have another go? 1:2 might interest me this time.  8:)

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doverbeach 29th Aug '09 4 of 20

1:2 would have interested me last time :)  I would be happy to take Salamander shares as well.

But the problem with a Salamander offer, is the bits they aren't interested in (ie ex SE Asia) are the ones that have got more interesting this year, so they may be unwilling to pay for these / unable to appreciate their potential. Asset sales to Salamander may be more possible, but I can't see Serica wanting to lose their shiny new production income.


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oilretire 29th Aug '09 5 of 20


Conan is probably the largest undrilled amplitude anomaly in the East Irish Sea. The prospective resource potential of Conan could be as much as one trillion cubic feet of gas

Centrica has to be a good bet for the farm in? Cash to spend, attention & resources turning away from Venture, stated strategy to secure more of it's own gas and 10km from North Morecambe.

The North Morecambe development incorporates one of the most sophisticated gas processing terminals in Europe. Offshore is a drilling and production platform, not normally manned, which can be operated remotely from either South Morecambe or the North Morecambe control room at Barrow-in-Furness.

All gas processing for the North Morecambe field takes place onshore, avoiding the need for complex equipment and providing substantial cost reductions.


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fleecednflogged 17th Sep '09 6 of 20

The couple of weeks since the last post have seen SQZ drift (now 57p to buy) and SMDR breaking to the upside (now 217 p to buy).  If I were Paul Ellis I would be getting a bit nervous.  The opening post from doverbeach (thanks) shows Tristone's valuation of SQZ at 131p per share and that assumes $50 oil for 2009.  The banks will, no doubt, be trying to get their pint of blood out of Serica and an agreement/RNS might be weeks off.  It is that rns which I believe could be the short term key to getting SQZ's share price moving again.

Would now be a good time for SMDR to return with a bid?

At the moment a 3 for 1 bid would give SQZ holders about a 25% premium.  2.5 for 1 would give about a 50% premium.  James Menzies will himself be looking over his shoulder.  Consolidation in SE Asia looks to be coming.  A value-creating successful bid for SQZ would be good for SMDR holders and make SMDR a more difficult meal for others.

If SMDR are to return with another bid I would suggest that they may not get a better time.

I'm holding both and wouldn't be surprised to see both swallowed up, with Serica first to go. 

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djpreston 17th Sep '09 7 of 20


Couldnt disagree re the optimal timing for a bid by SMDR (or ayone to be honest) but cant really see anyone else being that interested at the moment.

The key concern would have to be whether SMDR would be interested. I was slightly surprised they tried last time since they are much more SE Asia orientated than SQZ and why would they suddly want to change and take on the Ireland licences etc???

They interesting thing would be if SQZ were to flog off their interest in Kambuna now that it is producing and thus free up cash for development of the other assets? If I were they it is something that would be worth investigating....


Fund Management: European Wealth
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fleecednflogged 17th Sep '09 8 of 20


The board of SMDR said this at the time of their bid.

"The board of Salamander would explore options for maximising shareholder value from non-core assets including the potential for demerger or sale. "

They were referring to the non-SE Asian assets.  Probably the same would apply now.  Tristone make the Serica's SE Asian assets worth about 50% more than Serica's current market cap.  That would permit a 2.5 for 1 offer to be made and the British Isles assets of Serica would be sold for pure profit.

Agree, SQZ might offer Kambuna to Salamander.

The winner might the one who next makes a big announcement?  ........  bid or bank agreement or Kambuna sale?

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djpreston 17th Sep '09 9 of 20

SQZ does look undervalued and overlooked at present prices given the core value of Kambuna. Any deal re finances should restore some faith in the company. Trouble is, there are more "sexy" stories around at the moment so SQz is just languishing (like one or two of my other stocks).


Fund Management: European Wealth
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tiswas 18th Sep '09 10 of 20

In reply to fleecednflogged (post #8)

The Board also said at the time:


Commenting today, James Menzies, Chief Executive of Salamander, said:
"The Board continues to believe in the strong strategic logic for consolidating Serica's Asian portfolio within a larger
entity. We consider that the Proposed Offer represented a fair relative valuation of the two companies and that the
share exchange terms proposed provided both sets of shareholders with exposure to current cash flow, production
growth and significant upside through a broad exploration portfolio. However, following the rejection of our Proposed
 offer by Serica's Board and against the backdrop of deteriorating equity, debt and commodity markets, we have
 elected not to proceed and have decided to withdraw our Proposed Offer."

Cannot see what has changed other than equity and commodity markets have improved considerably so the rationale is
 still there and the share ratio has moved higher in SMDR favour. I will keep buying with fingers crossed that SQZ are not
 shafted by the Banks, although they are in a far stronger position to do something about it this time if that happens.
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tiswas 16th Oct '09 11 of 20

In reply to tiswas (post #10)

I see the share price ratio has now gone to more than 5:1 so SMDR could come back with a lower ratio offer than last time and still offer a tempting premium to SQZ shareholders.  3:1 would currently give a 75% premium assuming punters like the deal and the share price holds up. SMDR must be tempted again, no?

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fleecednflogged 16th Oct '09 12 of 20

Tempted? Yes, I'd say so.

SMDR has raced up today. Intraday auction triggered and uncrossed at 274p, up 9.5%.

SQZ looks every inch the metaphorical 'sitting duck'.

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tiswas 16th Oct '09 13 of 20

In reply to fleecednflogged (post #12)

Unless of course SMDR are in play themselves, which would put a big hole in my theory.  And I remember reading somewhere that they may have a preference for a deal with Coastal where they share some common interests?

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djpreston 16th Oct '09 14 of 20


As Ive been saying to a Fool today, from a stand off point of view (ignoring things like Director's egos), Id say taht the ideal deal woudl surely be a merger with CEO and an associated buy of the remaining 50% of Kambuna.

That woudl produce a very focussed SE Asia play of decent size with good solid production, reserves and explo. That would go down quite well with the investmetn community Id guess.


Fund Management: European Wealth
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tiswas 16th Oct '09 15 of 20

In reply to djpreston (post #14)

Makes sense Darron.  But that would involve paying cash for the 50% of Kambuna whereas with an all share offer for SQZ they can preserve cash and, as I think you mentioned elsewhere, flog off some of the other assets, which appear to have some worth looking at the Tristone note above.   I would bite their hand off for the old 3:1 ratio but accept they might not be that generous this time.

Maybe it would them give them the critical mass to be the dominant partner in any merger discussions with CEO if there are indeed director ego issues?

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tiswas 23rd Oct '09 16 of 20

In reply to tiswas (post #15)

A wee tick up in the sp and some decent volume by SQZ standards. Whether that is an overhang gone or new interest I dont know but If I were SMDR I would still be tempted to use my strong paper to snap up SQZ whilst weak. The SMDR logic for a bid, outlined  in my post 10 above still stands, perhaps more so than it did a year ago.


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monkeynuts 30th Nov '09 17 of 20

Serica Q3 results have hit the wire. You can see them here:

Operational highlights:
* Kambuna field now in production, achieving first gas and oil sales
* Awarded new offshore exploration acreage in Rockall Basin, west of Ireland
* Significant prospects for drilling identified in Kutai PSC, Indonesia
* 600 sq km of 3D seismic acquired in Block 06/94, offshore Vietnam
* Farm in offers under review for Block 22/19c (Oates prospect)

* First significant production revenue gained from Kambuna gas and oil sales
* US$21.0 million cash position at 30 September (includes restricted cash of
US$1.5 million)
* Third quarter operating profit of US$0.2 million
* Entered into new three year US$100 million Senior Secured Debt facility

Forward programme:
* Focus at Kambuna to build production to 40 mmscfd and 4,000 bopd
* Exploration programme which could deliver significant potential for the
Company: - Conan in the UK East Irish Sea - Oates in the UK Central North
Sea - Two offshore wells (Dambus & Marindan) in Kutai PSC, Indonesia

- Two offshore wells in Block 06/94, Vietnam

Paul Ellis, Chief Executive of Serica commented:

"Our focus during the quarter was to bring Kambuna on stream. We successfully
achieved this with production levels reaching 38 mmscfd and 4,000 bopd before
production was temporarily suspended by the gas buyer. We are now back on
production and expect soon to be producing around 40 mmscfd.

With Kambuna up and running the excitement in the next twelve months will come
from our exploration portfolio which includes plans to drill the Conan and Oates
prospects in the UK and up to five wells in South East Asia."

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tiswas 7th Dec '09 18 of 20

In reply to monkeynuts (post #17)

Sale of a package of assets for $98.6m cash including 25% interest in Kambuna.^SQZ

Not had time to look at Tristone report to see if this represents good value or a fire sale but having recently renewed the bank facility I hope it is the former! Would SMDR now make a move if they want Kambuna?  Interested in any broker comments if anyone has them?


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tiswas 7th Dec '09 19 of 20

In reply to tiswas (post #18)

Doesnt look a great price to me.  Tristone had Kambuna at 71.9p per share  with POO a lot lower (okay this is gas). I reckon the cash received is equivalent to 33p per share so less that the Kambuna value and they also throw in 24.6% interest in Kutai and 33.33% interest in Block 06/94 PSC in Vietnam.

I wonder if SMDR had to approve the Kambuna sale of whether they will have a go at SQZ as the market has only taken SQZ up to 54p on the news. 75p and they could probably have the lot!

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doverbeach 7th Dec '09 20 of 20

hi tiswas -

I don't disagree about the price not being brilliant (although the POO is totally irrelevant to Kambuna). Nevertheless, use the valuation from this asset sale and Serica is still massively undervalued! See my new thread here:  Comments on that thread please as this one is getting a bit old.


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