Stock Brief - Serica Energy (LON:SQZ)

2nd Mar '22 by Keelan Cooper

22 comments 6555 reads

Serica Energy shares are currently trading at all-time highs, with the share price set alight by soaring natural gas prices over the past year. The company is currently responsible for over 5% of the UK’s natural gas supply, and continues to expand its productive capacity, recently reaching nearly 30,000 barrels of oil equivalent per day (boe/d) in December 2021.

Serica’s success story has been reflected in both the share price and the company’s financial performance. Its most recent corporate update highlighted a cash build to over £218 million as at 31st December 2021. This figure is only set to grow as the company now retains 100% of the net cash flows from its Bruce, Keith and Rhum (BKR) fields in the North Sea, though 50% of Rhum is still owned by the Iranian Oil Company (IOC).

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The unfortunate recent developments in Ukraine, and the looming threat of another world war, continue to push gas prices higher as energy supplies become increasingly uncertain. Despite prices falling back since the pre-Christmas 2021 peak of 450p per therm, they remain 6 times higher than this time last year.

With the fundamental backdrop for energy prices being so favourable, is there still value left to extract in Serica’s shares?

Profile

What are the company's principal business activities, how does it generate its revenues?

Serica is a UK based upstream oil and gas producer, with a range of production and exploration assets located in the North Sea. Over 85% of the company’s current production now comes from natural gas, which accounts for over 5% of the UK’s entire natural gas supply.

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Serica’s production assets include the Bruce, Keith and Rhum fields in the UK Northern North Sea. The company also operates the Columbus field and maintains an interest in the Erskine field, in the central North Sea. Combined, these fields currently produce nearly 30,000 boe/d net to Serica, guidance for this year is in the range of 27,100 and 33,600 boe/d. Proven and probable oil reserves (2P) from these fields stand in excess of 61 mmboe (million barrels of oil equivalent) as of the 1st Jan 2021.

The company’s management team have notable experience in the North Sea and are experts in optimising the use of new technologies to maximise production and…

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Mikex1

2nd Mar '22

Blimey - never seen a £300M cash pile being called a risk!

Ned Kelly

Correction I think is needed on Rhum. It is my understanding that 50% of Rhum is owned by the Iranian national oil company and hence Serica needs an annual licence from the US to operate the field because of the US sanctions on Iran. This has always been granted in the past few years. Whilst it is correct to say that Serica will now benefit from 100% of the production of their 50% share of the field, income from the other 50% accrues to Iran.

Guybrush

Epsilon

As far as Warren Buffett is concerned, capital allocation is the KEY RISK to consider when assessing a management team.

"Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value

After ten years in the job, a CEO whose company retains earnings equal to 10% of net worth, will have been responsible for the deployment of more than 60% of all capital at work in the business."

Doug2b

3rd Mar '22

Cerica, interesting and informative write up. Hard to draw any firm conclusions. Tangible equity falls at an average of avout 4% relative to MCap pa over the past 4 years. Some modest share issuing over the past 4 years, but then this last year Serica seems to have bought back nearly all the extra shares issued over recent years.

Big build up in intangibles though, clearly a lot of expansion going on here, how and when reserves are shown on the balance sheet requires specialsed knowlege to fully understand I think, cash position looks decent as well.

I have invested in oil/gas and oil services in the past. Ithaca to 2017 gave me 6 fig gains, Kentz was a key holding before its buy out c2014 and Perofac was great for me in 2009 to 2010, although I lost money on PFC in 2017, which highlights the unpredictability of the sector.

Assuming that the inevitable small oiler operational risks run favourably, it will all come down to the oil price, the long term outlook is unfavourable in my view, but for the next few years, perhaps the next 3 to 5 years, the oil and gas price outlook looks pretty good.

Personally, I don't feel inclined to invest in this sector now, partly becuse investing in oil/gas can affect my capacity to sleep soundly and partly because the post 2016 UK specific and other global headwinds have now thrown up compelling bargains in lower risk UK facing sectors. And no, risk and reward do not need to go together, if you analyse stocks correctly, you can have your cake and eat it, low risk, high reward.

One thing that I will say about Serica. When analysing, I started by looking at the balance sheet and saw the huge build up in intangibles, linked to the very strong cash position. Those two observations don't normally go together without massive share issuing having happened. So I looked at the share issue record to see for myself. The small number of additonal shares issued over the past 4 years have almost all been bought back, this does suggest that Serica takes the wealfare of its shareholders seriously and clearly the business is highly cash generative at the moment.

Is Cerica good value at this price? I think that is very hard for me to judge, certainly an interesting business though.

DIYinvestor

I used Serica Energy, as an example recently, to show the benefits of doing your own research (with a calculator). Details Here! Mick (DIYinvestor).

Keelan Cooper

4th Mar '22

Hi Mikex1,

As Epsilon has very well put, capital allocation is indeed a key risk factor to consider. In fairness to Serica's management team, they have an excellent track record here.

However, a £300 million cash pile might embolden the management team to take on riskier, more ambitious acquisitions, which may not be in the best long-term interests of the company and its shareholders. We've seen many examples of management teams destroying shareholder value through acquisitions in the past. That hopefully won't be the case here, but it is always worth considering!

Kind regards,

Keelan

Hi Ned,

Thank you for pointing this out! This will be updated to make sure the 50% holding of Rhum by the IOC (Iranian Oil Company) is clearer.

Hi DIYinvestor,

Thank you for your comment. I really enjoyed your thorough analysis in the video! It perfectly demonstrates how investors can stay ahead of the market using their own up-to-date forecasts. Estimates often lag by a few months at the best of times and valuation mismatches are where the opportunities lie!

6th Mar '22

Hi Keelan,

Many thanks for you kind comments. For those of us interested in small to medium sized companies, where they're not covered by analysts, it can be the only way to get a feel for what's going on.

I also 100% agree with you that valuation mismatches can provide great opportunities!

Kind Regards, Mick (a.k.a. DIYinvestor)

wmcmarleymount

thanks , very interesting

Roodini

21st Mar '22

fantastic work. Been holding £Sqz for a year now and had done some digging but your video was amazing work. Thanks

14th Apr '22

you have to question if Serica is a UK company operating in UK waters, why on earth do they need the permission of the Americans to operate. The Americans have been spreading democracy around the world to oil producing countries at the end of a missile for years, so for them to have a say in the operation of a UK company really get on my nerves!

21st Apr '22

Hi Keelan, I was 1.6% out (below) the actual figures and despite the run up in price, since I created the Youtube video (14th Feb 2022), the prospects for 2022 IMO remain excellent. For those of us that have held Serica Energy (LON:SQZ) for a while, the proposed dividend of 9p (an increase of 157% on 2021) represents a very nice return on our purchase cost!

With Serica benefitting from 100% of the BKR assets in 2022 and onwards, that's a 66% increase on output (at a much higher price per boepd)!

Any thoughts?

Mick (aka DIY-Investor)

22nd Apr '22

hi Mick,

Yes you were very close. Pretty excellent results yet still they got a hammering yesterday!

The results was written like a funeral speech. Maybe to down play its results a bit to pacify the windfall tax loons?

The upside will be this year as you pointed out. Though i MAY trim back my position as its become a huge % of my portfolio.

Saying that its hard to find a company with a better cash flow?

29th Apr '22

Hi Roodini,

Yes, the recent news is also very interesting… I’m preparing another video presentation, based on my updated research and pointing out a few things that indicate where the results have been downplayed IMO.

Mick.

Rusty2

9th May '22

I notice there has been quite a pullback on some smaller energy stocks whilst Shell (LON:SHEL) and £BP are still going up, any ideas for the reason?

lots of theories, nothing concrete!

The broker did The sale of BP stakes in a way to dump the shares, probably causing some second thoughts and profit taking.

They have had a good run, but even after the beating they took today, they still trade on a PE of 1 to 2.. I’m still holding the rest of the year, picked a few more up today!

I did top up Serica Energy (LON:SQZ) today, don't really understand the fall when oil and gas prices are still high. I did sell some £BP on friday.

dodge1664

I was very surprised to see how much these shares have fallen back. They are now only 11% above pre-war levels having been as high as 45% up! Although the fighting is now more limited to eastern Ukraine, a peaceful solution isn't in sight and it could all flare up again if Putin starts losing and lashes out with WMD.

I suppose this is because of the steep drop in UK wholesale gas prices. tradingeconomics.com attribute this to "warm weather prospects, ample LNG supplies, and fading concerns over Europe’s access to Russian gas"

Stock Brief - Serica Energy (LON:SQZ)

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Keelan Cooper

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