#SQZ Serica Energy acquisition

25th Nov '17 by Noodle Hat

38 comments 14157 reads

Is anyone looking at Serica recent acquisition announced last week and have any thoughts on it value and future for the company?

It appears to be a step change for the company taking it from around 3k boe to over 21k with no fund raising, no debt and already making circa $20mill profit from existing erskine platform alone with a number

See transaction pres here:
http://www.serica-energy.com/presentations

I already had a large position in this company but finding it hard to assess it value, some on twitter...seem to have put some good cashflow analysis together suggesting the company 'could' have an implied market cap value of circa £500mill off this deal (@sharesearch) .. thats obviously a huge increase form current £70m market cap but seems not unreasonable assumptions made..

any thoughts greatly appreciate.

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gus 1065

25th Nov '17

Hi Noodle.

Not that close to Serica Energy (LON:SQZ) situation but if you’ve not already seen it here’s the thread from III.

http://www.iii.co.uk/investment/detail?code=cotn:SQZ.L&display=discussion

The usual optimistic hype. The Johnny Lite value at 50p per share on re-listing is one of the more conservative efforts.

Gus.

BlueFrew

But there should be material upside from this deal. Look at the P/E at the suspension price. It's sub 5. Yes, there is a reason for that. A single producing asset where the pipeline needs fairly regular treatment to stop wax build up. To me that didn't matter, since the oil isn't going anywhere while the field is shut in and the company didn't cost much to run. But it clearly put some off.

With another 3 producing fields added, the risk of a problem at Erskine is diluted. That's got to be worth putting the company on a better rating. I mean it's a lot less risky than something like Gulf Keystone Petroleum (LON:GKP) and that's on a P/E of over 12, according to the Stocko figures. That's before you factor in the Serica cash pile that is about a third of the market cap.

Its also a pretty good deal for both BP and Serica. BP get rid of a potentially problematic Iranian partnership at Rhum. They still take a nice share of any upside, however they've also left some of the upside on the table for Serica.

The only real issue I have with the deal is the new (old) CEO. I made a little cash from a small Circle Oil short. So I'm not overly thrilled to see the guy who guided that company onto the rocks popping back to Serica.

(Long Serica Energy (LON:SQZ) )

26th Nov '17

Hi BlueFrew.

As with most things O&G, the “potential” upside is huge. Experience teaches us, however, that there can be plenty of slippage between “potential” and “actual”. Of the three fields being acquired they’re all late life assets (Keith in particular is expected to tail off by 2019) and we shouldn’t under estimate the potential hair of being tied in with Iran via the Rhum/IOC link in a world of Mr Trump threatening to escalate sanctions etc.. Likewise, taking on the responsibility for the current BP personnel is a big undertaking for a small company.

A read of the acquisition presentation (http://www.serica-energy.com/downloads/Transaction-presentation.pdf) shows Serica Energy (LON:SQZ) have thought through and addressed many of the risks but that doesn’t necessarily mean they’ve covered every possible issue. BP (LON:BP.) are no fools and passing on the apparent upside to a minnow like Serica Energy (LON:SQZ) shouldn’t be taken as an act of undiluted philanthropy. Caveat emptor and all that.

Short term I suspect the price will spike up when the re-listing happens as enthusiastic speculators pile in but longer term it may be a bumpier ride. Good luck to holders. I’ll watch from the sidelines for now but may come onboard in due course.

Gus.

Hi Gus,

Those are all fair comments I think. If things go well there should be material upside from here. A market cap of 4x times current would see a share price over £1. I don't think that's an unreasonable target in the medium term.

However if I wasn't holding then I can see why somebody might wait and see. Some of the infrastructure is old. It is only a couple of months ago that you could have got in at a discount while Erskine was shut in for maintenance. It's certainly possible that there could be issues where a much better entry point becomes available. It's also possible that there could be issues which were such that somebody might not want to get involved at all.

Personally, I like the risk/reward here so will continue to hold. Though I may change my mind in the unlikely event that we see some of the more outlandish share price predictions occur immediately post suspension. :-)

30th Nov '17

Serica Energy (LON:SQZ) due to publish its Admission Document and for shares to resume trading this morning. Watching with interest. Good luck to holders.

Gus.

Ended up 142% on the day. I must confess to having a small nibble first thing this morning on a long spread bet via IG index at just under 50p. Small beer stake wise. Will wait for it all to settle down before considering a longer term position.

Strange day all round. Some huge intra day swings up and down in a variety of stocks across a range of sectors with a big sell off into the close. I ended up with 9 stocks down more than 5% and 6 stocks up more than 5% - net net the overall portfolio barely moved (down about 0.1% overall) but crazy volatility. If I had any hair left it would be grey by now ....

Gus.

Noodle Hat

Yep great day for sqz.still got all my chips in at the moment. The more detail of the deal the better it seems. Some very good analysis on Twitter, don't laugh..,of cash flows etc. By all accounts including the pay back to bp they will be making circa £70mill plus profit so pe of 2 ish...

I can't see how this doesn't continue to rerate over the next few days. Puts them in a whole other league to before.

Massive opportunities in next few yrs to put that cash flow to good use growing the company further,

So I suppose the question is what is an average p/e value for a profit producing oiler? Hard to find out between the over ramped piles of **** with no earnings and massive losses and large producers that have been savaged in the past few yrs..?
Interesting that one Twitter poster posted,l:

ITHACA energy had 9400boepd in 2016,reserves of 76mmboe,production guidance in '17 of approx 20kboepd (with addition of greater Stella) OPEX of $23 per barrel. Net debt at $600m and were bought out by Delek for £520m. NOW compare that to Serica and the deal they brokered #SQZ

I ask because I'm primarily a technical trader not investor and haven't got my head round all the variables...just broke all my rules when I saw sqz 6 months ago churning out profit at obscene low valuation.

8th Dec '17

Updated revenue and estimated eps for 2018 now on stock report for this interested..... fwd pe of 2 currently....

Albertos

10th Dec '17

Don't you think its strange that the new estimates have a forward PER of 2ish yet the target price is 67p? Brokers consider this is a deal which will not go through?

Phil

petroleum1

I am invested in SQZ for more than 5 yrs. I am not sure 100% of this but I think SQZ has £100-200m losses in the past that could be used to reduce decommissioning cost and hence the BP/SQZ deal. I do not know how I can find out the above number.

11th Dec '17

The tax details are on page 9 of the Admission Document:

http://www.serica-energy.com/downloads/reports/c113648CCL.PDF

$165M of tax allowances as at 1st January 2017. Some of that will be used against profits from Erskine this year, so likely somewhere between $150M and $160M once the deal completes.

(Long Serica Energy (LON:SQZ) )

BlueFrew
Market cap now is £200m. You have $165m tax allowance and £.... cash plus the new assets. The share price now is 74p. When will you consider selling?

I copied this from Twitter:

"SQZ Stockopedia has EPS growth at +500% for 18’ worth noting at YE 17’ expect cash to be worth c15p of SP. EPS numbers like this would mean SP 150p would still look cheap..."

yep, the numbers from the peel hunt broker note and revised on stocko ( assume thats where there upgraded numbers are from?) are even better than previously assumed. i mean an eps of 32p sounds crazy but if accurate who knows what SP this could achieve with the rate of profit cash building about to happen in 2018.

so even a P/e of 5 = a sp of 160p. and more standard of 10 = a sp of 320p!? added to this NO DEBT and cash estimate end of 2018 of circa $100million...and $190m in 2019. Anyone know average industry P/E?

I just don't know if theres another prospect like SQZ in the oil and gas space? , no debt, massive profit cash gen, very low opex, very very low current p/e. with huge scope in future to put that cash to good use on further acquisitions and a number of drills/ expansion coming up in 2018 with Columbus, Rowallan and Rhum R3 all of which could have substantial upside.

Worth thinking that they got this deal for no dilution Or cash upfront, all through earn out structure, what could they do with 1 or $200 million in the bank? I don't think its a wild step to think they could easily become a multi billion $ market cap in the upcoming years..

12th Dec '17

Hi petroleum1,

Despite this now being my largest position by a country mile, I've added in the last week.

Yes there are risks, as the problems with the Forties Pipeline show. As well as the execution risks we are dependent on some old infrastructure. However I think that short of the type of disaster that would sink most small or mid cap oil companies, there is still think there are significant rewards here.

By this time next year, assuming no major hiccups, then I'd say fair value would be somewhere around 150p - 180p. The P/E will still be pretty low, but balanced with the fact that a couple of the fields are near end of life and the age of some of the infrastructure. However, Noodle Hat has mentioned other activities which could potentially drive the price (or fair value at least) a lot higher.

At the moment, in the absence of any news that significantly changes the investment case I plan to sit tight for a year or so and assess where things are at that point.

slartybartfast

I don't suppose that anyone has access to the Peel Hunt research have they? I'd like to get my head round the projected cashflows showing the gradual reduction of oil from the fields (I think Keith only has 1 more year) along with our net increase in take with the reducing % payments back to BP

#SQZ Serica Energy acquisition

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Noodle Hat

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