Stock Pitch - Serica Energy (LON:SQZ)

10th Mar '21 by Jack Brumby

24 comments 8840 reads

Serica Energy (LON:SQZ) was pitched to the Stockopedia Investment Club on February 16th 2021 as contrarian value bet on a rerating of quality operators in the oil & gas industry.

This is a sensibly run, cash generative oil & gas producer with production, development, and exploration assets in the UK Continental Shelf (UKCS). It is responsible for around 5% of the UK's gas production.

Serica has a strong balance sheet and a material net cash position. It is initiating dividend payments and there are several explicit near-term catalysts that should further enhance free cash flows over the next couple of years.

Yet oil and gas is unfashionable, with ESG concerns driving capital out of the industry. Meanwhile, Serica needs to develop existing assets and acquire new ones in order to extend its life of operations.

But the shares are cheap compared to cash flows and there are opportunities in the UKCS - in 2020 RockRose Energy rapidly grew into a c£200m enterprise by acquiring assets in this area. There is also scope for further recovery in gas prices.

Despite the improving price outlook, Serica's share price remains rangebound. Is this justified or is a rerating on the cards?

Summary

Bull Points - exposure to improving oil & gas prices; experienced management and high-quality assets in a stable jurisdiction; commodity price recovery is now a tailwind; Rhum 3 and Columbus can increase cash flows over the next year or two; £60m of net cash for M&A; initiating dividend payments; limited decommissioning liabilities

Bear Points - Capital is flowing out of O&G; ESG trends are against it; gas and oil prices might fall; R3 and/or Columbus could slip; exploration assets might get relinquished; Serica needs to make acquisitions to expand reserves

Profile

About the Stock:

Serica Energy is a Speculative Small Cap Super Stock trading on the AIM market. It is in the Energy sector, in the Oil & Gas industry.

The share price is 116.8p and so, with 267,904,093 shares in issue, the market cap is £312.9m. A net cash position means the group's enterprise value is smaller, at £251.3m.

The group has a StockRank of 94 and a strong spread of factors, with a Quality Rank of 73, a Value Rank of 83, and a Momentum Rank of 80.

The value…

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Norfolk'n'Good

10th Mar '21

Wentworth Resources (LON:WEN) ....?

Antehelion

ita renewed just recently, almost the first thing Biden did in his new administration.

mblackstock8

Really surprised by this outcome; and as you say you have no energy stocks in the club now. Energy and financials are probably the best bets for gains going forwards. Serica is probably the most well run and undervalued in the sector. BKR going to 100% next year and the stock is currently on a 12 month trailing PE of 6.1...wow! OFAC license renewal has already been granted, whoever mentioned that. Usually I always agree with the decisions but I think this one could be a bad decision.

Lord Gnome

11th Mar '21

Renewal was never in doubt. Serica provides 5% of the Uk's gas supply.

castlekeep

Perhaps a lot of people don’t realise that there is more to oil and gas than meets the eye. Oil chemicals go in lots of things, fabrics and pharmaceuticals to name but 2. In addition gas goes into synthetic liquid fuel and is the feedstock for quorn!

So you don’t just get energy from them.....

Will S

Can you enlighten me how gas is a feedstock for Quorn?

DWit199

12th Mar '21

The fermentation medium for Quorn contains various salts, glucose and ammonia. Most ammonia production is from natural gas. I think Quorn has a lower CO2 footprint than chicken but the difference is not huge.

Rusty2

"Soybean oil is currently a major feedstock for production of biodiesel"

I think you are confused. It does give off lots of gas. Quorn is just an american brand name.

willhampson

Thanks for this Jack. I've held Serica Energy (LON:SQZ) on and off over the last two years, with currently no holding. I think buying right now is a little bit of a punt on whether the R3 intervention issues can be addressed or will become a wider and more expensive issue. That's obviously a shorter term factor, but leaves me sitting on the sidelines till it is resolved either way. On a longer term view, I think Serica has some compelling characteristics that you have highlighted above. It would not surprise me at all if it was taken out this year as well.

I must be confused as I thought Quorn was a food produced by the fermentation of fungus. Are you saying Quorn is an American brand name for biodiesel?

Camtab

I think there is a lot of uncertainty around Hydrocarbon stocks Jack. As you know markets hate uncertainty. Renewables/Hydrogen have done well suggesting the market believes we are generally moving away from this sector.

No it is a food brand, meat substitute.

Roodini

25th Apr '21

Agreed, everything is made with Oil and Gas. Even wind turbines and solar panels need absolutely shed loads of hydrocarbons to produce them. Hydrogen From water needs massive amounts of electricity to turn H20 into H2 and 02, personally the ESG issue might have the head wind and will be a recipient of Government handouts but without oil and gas non of it will happen.

Even the EEV (emission elsewhere vehicles) run on Electricity and not pixie dust.

As of Jan 21, 30 Terra watts out of approx 70 is produced by Gas in the UK

gus 1065

13th Jul '21

Very positive flow test results announced on the Columbus development well this morning.

https://www.investegate.co.uk/....

Expected to come fully on stream in Q4 this year. Excellent result and further demonstrates Serica Energy (LON:SQZ) credentials as a well run quality O&G operator.

Gus.

Patrickmylnetrade

2nd Aug '21

Hi Gus...

As a LTH I'm very pleased with this news and the RHUM drill results too!

"Operations on R3 have proved more challenging than expected but the skill and dedication of our operational team has enabled us to achieve this welcome result. The volumes flowed during the test are equivalent to over 10K boe/d which demonstrates the quality of the Rhum asset". That is (5Kboe/d to Serica Energy (LON:SQZ)), but this was limited by the equipment so potentially more upside?

this alongside the Columbus result which is 7Kboe/d gross. another 3.5K? to Serica, meaning if I've understood it properly, we are adding 8500 boe/d equivalent, mostly in Gas and condensate, to our sales over the next 6 mnths.

Currently SQZ have reported in Mar this year..

· Average net production of 23,800 boe per day (2019: 30,000 boe per day) - reduction reflects 1H caisson repairs and other field maintenance work.

So these two results add considerable upside to their production. As you point out Gus, "Great results and credit to this well run O&G..."
As for the share price, it's finally moved off of £1.20 area which it seems to have been stuck at for the last few years... and is now paying a dividend...

I'm not sure the stocko ratings have digested this info into their ratings and figures on the company stock report FYI.... so potentially a buying opportunity..

Having tried and failed at a lot of oil investments... Serica has been one of my success stories and I will continue to hold for the foreseeable future.... (hope I haven't jinxed it now !!) and Serica is GAS rather than oil, so more in vogue for those of us who are carbon concerned.... and more politically palatable.

thanks Jack and Gus for your input on this

Patrick

2nd Sep '21

Confirmation of first gas and oil being taken from the Rhum 3 well this morning.

https://www.investegate.co.uk/...

Company is justifiably upbeat in their comments.

ls2g08

14th Sep '21

With the current natural gas prices this looks very cheap. I have seen some conclude that they could generate around USD1.7m per day. Looking at the futures market, the prices look to be staying elevated for circa 6 months, which means this could generate something like half it's market cap (£200m) in cash in the next 6 months.

9th Oct '21

Yes one that got away but I assume some members are not keen on this sector.

With hindsight they should have increased their exposure to this sector, it is one of few that has performed well in the last few months.

I would be interested in an updated performance table and also a table for the rejects, it looks like some of those have done rather well, such as £WOSG.

Morning Ray.

If you’re interested in speculative Oil & Gas developers (and I’m not suggesting Serica Energy (LON:SQZ) is one) ……. you’re probably in a very small minority on this site! It’s a sector I’ve probably bet too many chips in over the years and as many commentators warned me ahead of time most of them haven’t come off for one reason or another. And when they don’t come off they frequently result in 70%+ drawdowns in a very short space of time.

So with that warning in mind my current (and has been for a pretty roller coaster six years) peccadillo is a company called Pantheon Resources (LON:PANR) . At one point in 2016/7 it was on the cusp of a huge development project in Texas which for various reasons didn’t come off and resulted in a near death experience for the company (and its shareholders). I merrily watched the share price rise from an initial entry level of about 30p up to a peak in the 180p’s (wasn’t I smart) before not so merrily holding all the way back down again to single digit pennies (wasn’t I stupid) as massive dilution was needed to keep the lights on.

Wind the clock forward to 2020/21 and they’ve reinvented themselves as a prospector in the Alaskan North Slope area. Possibly more by luck than judgement (actually to be fair it’s probably judgement, my principal reason for being in this stock is that I’ve met and highly rate the CEO Jay Cheatham) they appear to have struck major pay dirt with a group of fields that prospectively contain well over one billion BOE very close to existing transport infrastructure. A lot of detail both in the company profile:-

http://pantheonresources.co.uk...

and a very detailed presentation from August this year reviewing the results of the early stage drilling and testing.

The strategy is to drill, test, prove up the reserves and then sell the company to an oil major in a relatively short time frame (rather than become a long term producer themselves) - not least because most of the senior execs are close to if not we’ll beyond sensible retirement age. Share price has taken off recently which is either rampant speculation or a considered risk/reward view that if proven up the indicated reserves would justify an exit price of at least 400p a share. High risk and highly speculative IMO it’s either an 8-10x upside or a total wipe out.

marmalade

16th Oct '21

Good call mblackstock8.

I have not been following this stock as I am focussed on ZPHR. Will follow now though as imo both show promise into a strong energy mkt. I thought you might like the following article as it goes a long way to explain the outlook for the energy sector and the bull case for nimble smaller cap gas/oil shares. Not sure it has posted entire link but if you type in Energy Matters Another Fine Mess article by Chris Sladen you should find it.

https://anzmex.org/energy-matt...

SQZ still a good fwd p/e!

Stock Pitch - Serica Energy (LON:SQZ)

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Jack Brumby

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