REG - Serica Energy PLC - Operations and Financial Update

Serica EnergyAnnouncement

27/06/2024 07:00

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RNS Number : 0448U  Serica Energy PLC  27 June 2024

Serica Energy plc

("Serica" or the "Company")

Operations and Financial Update

London, 27 June 2024 - Serica Energy plc (AIM: SQZ), a British independent
upstream oil and gas company with operations in the UK North Sea, provides the
following operations and financial update.

 

Guidance

 

Production guidance is unchanged at 41,000 boe/d to 46,000 boe/d.

 

Operating costs for the year to date are consistent with the target of US$20
per boe.

 

Production

 

Average net production for the year to date 1  is 43,781 boe/d. The average
monthly breakdown by area is as follows (all numbers in boe/d):

 

               Jan       Feb       Mar       Apr       May       June 2   Total
 Bruce Hub      22,670    23,958    21,458    23,382    23,555   25,771   23,355
 Triton Hub     12,726    18,364    17,470    17,076    3,691    17,520   14,276
 Other Assets   7,259     6,174     5,454     5,656     6,743    5,408     6,150
 Total          42,655    48,496    44,382    46,114    33,989   48,699   43,781

 

Bruce Hub production has been steady year to date. The uptick in June reflects
the impact of the recent Light Well Intervention Vessel ("LWIV") campaign on
Bruce. More production history is required to estimate the 'steady' state
levels of production from the worked over wells.

 

The well intervention to reinstate production from the Keith field has also
been successfully completed. Production from the K1 well restarted on 8 June
but has been intermittent to date while topsides operations are optimised.

 

This summer's programme of Bruce field platform well interventions is on track
to commence in mid-July. The programme has a planned duration of ninety days
and includes a range of activities designed to enhance production and routine
monitoring.

 

A brief routine outage of the Forties Pipeline System is scheduled in July. We
plan to take advantage of this to carry out some maintenance work on Bruce.
The Bruce Hub is scheduled to be shut-in for seven days to carry out these
activities.

 

At our Triton Hub, the Triton FPSO is currently operating with a single gas
export compressor with repairs to restore two-compressor operations due in
October. A trip on the available compressor during May led to no production
via the Triton FPSO for three weeks. Full production has been re-established
but this operating vulnerability will remain until the second compressor is
repaired. The planned 2024 summer shutdown of the Triton FPSO remains at forty
days commencing on 1 July.

 

In our Other Assets, we are seeing generally good performance in line with or
above our targets. The exception is Erskine which was shut-in on 26 January
2024 due to a problem with a compressor on the host Lomond platform. Although
production was re-established in early May, it has since been taken offline
for the planned Lomond turnaround. Erskine production is scheduled to restart
in late July.

 

Triton Area drilling

 

The reservoir section of the B1z sidetrack (re-named as the "B6" well) on the
Bittern field has been drilled successfully. Initial well logging has given
good indications of high quality, oil filled reservoir, consistent with
pre-drill expectations. The forward plan is to complete the well and to
commence testing in August 2024 after the planned Triton summer shutdown.

 

Following completion of the B6 well, the COSL Innovator rig will move to the
Gannet E field in order to drill the GE-05 well. Production from this well is
expected to start in November 2024.

 

Financial

 

At 26 June 2024 the Company held cash and cash equivalents of £301.6 million
and debt drawings of US$231.0 million (£182.0 million) respectively. This is
after 2023 final tax payments of £58.3 million, capital spending of £80.0
million, asset acquisition costs of £17.3 million (including completion of
the Greater Buchan Area transaction and 'BKR' transaction related payments)
and the share buyback of £15.0 million.

 

Following the sanction of the Belinda development, estimated cash spend on
capital items during 2024 as a whole is currently estimated at about £200
million pre-tax. It should also be noted that the schedules for tax payment in
respect of 2024 and dividends mean these cash items fall disproportionately
into the second half of the year.

 

AGM presentation

 

At the Annual General Meeting ("AGM") today, presentations will be made by the
Chairman and Interim CEO, David Latin, and the CFO, Martin Copeland. Copies of
the presentations will be available on the Company website
www.serica-energy.com under Investors/Presentations.

 

 

The full text of the Chairman's Statement to be delivered at the AGM by David
Latin, Chairman and Interim CEO, is below. It includes the following:

 

"Over just a few years Serica has been transformed from a small international
exploration focussed company into one of the top 10 producers in the UK North
Sea, safely and responsibly operating complex facilities offshore and growing
its 2P reserves some 35 times since the beginning of 2015. To deliver these
achievements we have navigated operational challenges, oil and gas prices
hitting historic lows - remember gas prices of 10 pence a therm in May 2020 -
and pulled off multiple good acquisitions.  With the assets, financial
strength, staff and leadership now in place, we have a very solid platform for
entering the next phase of growth."

 

"We are rightly proud of our track record of growth and value creation, and we
aim to repeat the same in the future. Unfortunately, recent and potential
future increases in UK oil and gas taxes make that increasingly difficult.
Consequently, while we remain watchful for opportunities in the UK that might
be attractive despite this increasingly challenging context, we are also
looking very actively overseas."

 

 

 

Chairman's 2024 AGM Statement

 

I am very honoured to be addressing you as the Chairman of Serica Energy for
the first time at an Annual General Meeting. Following in the footsteps of the
inspirational Tony Craven Walker, I look forward to maintaining and building
on the standards that he set.

 

Serica is a UK success story. It has been built largely through the
acquisition of unloved assets from the 'Majors'. Through diligent attention,
investment and the application of a good dose of skill, we have supplied much
needed energy, created substantial value, paid significant amounts of tax,
created jobs and reduced emissions. We are proud of that track record and
confident of our ability to repeat those successes where government policies
and regulations make that possible - more about which I will cover later.

 

It has been an eventful twelve months for Serica. Clearly, there has been
significant change in the leadership of the Company since our last AGM. One
year ago, the baton of chairman was passed from Tony to me, and then we
announced, firstly, that Andy Bell and, then later, Mitch Flegg would be
standing down as CFO and CEO respectively. Their contributions to the
remarkable successes of Serica over the last several years are immense. I
thank both.  Andy was succeeded as CFO by Martin Copeland, who will speak
later about the 2023 financial results, and we look forward to Chris Cox
starting as CEO on the 1(st) of July.

 

In the last year the Company has prepared for and initiated an ambitious
investment programme of well interventions and drilling. I am pleased to
report that so far execution has gone well; a testament to the capabilities of
our Operations and Technical teams. Less welcome were the unexpected
challenges encountered during the maintenance shutdowns on both our main
producing hubs last summer. By necessity, these were longer than planned which
materially impacted production.

 

I am particularly pleased that we completed the acquisition of Tailwind in
March last year. The benefit of a substantially increased level of production,
now balanced between oil and gas, is clear given the changes in oil and gas
prices since we concluded the transaction. Average realised gas prices fell
42% from 2022 to 2023 and, while realised oil prices also fell, the reduction
was less at 27%; a relative trend which has continued in 2024. On a pro-forma
basis, in 2023 we achieved a reserves replacement ratio of over 170% with 2P
year-end reserves increased from 130 to 140 million barrels of oil equivalent
despite producing 14 million barrels of oil equivalent. Our enlarged reserves
base supports a new debt facility which increases our financial resilience and
our ability to take advantage of attractive M&A options. Finally, despite
markedly reduced sales prices last year compared with 2022, we had sufficient
post tax cash flow and reserves to mean that today we are seeking shareholder
consent to propose a final dividend of 14p per share, giving a total dividend
in respect of 2023 of 23p per share.

 

Since 2018 to the end of 2023, on a proforma basis, Serica has produced over
50 million barrels oil equivalent and has kept investing through the commodity
price cycle. According to independent reserves reports, Bruce/Keith/Rhum 2P
reserves were higher at the end of last year than they were when Serica bought
the assets. According to those same reports, both the Bruce and Triton hubs
are now projected to be producing into the mid-2030s, representing nearly an
added decade of production compared to expectations when the assets were
acquired.

 

Moreover, at the same time as adding oil and gas reserves, we have reduced the
carbon emissions associated with the facilities we operate and are developing
plans to reduce them further.

 

We are a publicly owned company unashamedly seeking to create value for our
shareholders. While doing so we also deliver for a wide range of other
stakeholders.  Serica has created high-quality well-paid jobs in the UK, paid
taxes of approximately £500 million to the UK Government since 2020 and
contributed - as the producer of about 5% of the UK's gas production - to the
energy security of the UK at a time of heightened tensions in Europe.

 

We are rightly proud of our track record of growth and value creation, and we
aim to repeat the same in the future. Unfortunately, recent and potential
future increases in UK oil and gas taxes make that increasingly difficult.
Consequently, while we remain watchful for opportunities in the UK that might
be attractive despite this increasingly challenging context, we are also
looking very actively overseas. You will of course appreciate that I will not
be able to comment on specific opportunities.

 

Inevitably, I have to say more about the macro issues facing UK North Sea
producers today.

 

I have been involved in this industry for more than 30 years and have worked
all over the world. Other than when I was responsible for a company which had
significant assets in a war zone, I have never encountered a situation which
was so challenging when it comes to making investment decisions, and planning
for the future more generally, as it is in the UK at present.

 

Reliable, sustainable, and affordable energy is the lifeblood of our modern
society. Notwithstanding the critical importance of the energy transition,
which Serica wholeheartedly supports, the fact is that oil and gas accounts
for 74% of UK primary energy consumption today and will remain a vital and
significant contributor to the power, transportation and goods on which each
person in the UK relies every day and will do for decades to come, even in the
most ambitious Net Zero Scenarios.

 

The UK consumes almost twice as much oil and gas as it produces. This deficit
will persist even as the country seeks to reduce its consumption of
hydrocarbons. Consequently, every barrel of oil and molecule of gas used but
not produced in the UK is imported. Without continued investment in our
homegrown oil and gas sector, the gap between UK production and consumption
will only widen, to be filled inevitably by imports. These imports worsen our
national balance of payments, only deliver jobs and taxes to foreign countries
and, typically, have higher production and transportation carbon emissions by
the time they get to our shores.

 

We hear much reference in the UK political debate to terms such as "proper
windfall tax", "oil and gas giants" and "closing loopholes". These phrases
reflect fundamental misconceptions.

 

UK oil and gas producers already pay tax at an overall rate of 75%, three
times the tax rate for UK companies operating in other sectors. This is
despite the period of so-called "windfall" conditions for UK producers having
long passed, with oil and gas prices having returned to historically normal
levels. Yet in the current General Election, no reduction to match the
circumstances is proposed by the Conservative Party and yet another increase
in the tax rate to 78% is proposed by the Labour Party.

 

As to the claim that the tax is being paid by the "oil and gas giants", it is
in fact independent companies like Serica who are most affected. The 'Majors'
account for only around a third of UK production and the vast majority of
their profits are made overseas and are not touched by increasing tax rates on
UK production. Indeed, for those companies such as Serica that continued to
invest in their assets during periods of lower commodity prices prior to the
invasion of Ukraine, the current fiscal regime represents a further punishment
for risk capital committed to its portfolio during the very low commodity
prices seen in the Covid period.

 

Closing "loopholes" in UK oil and gas tax seems to mean different things to
different people. Whatever is meant, I wish to be crystal clear that reducing
tax relief for capital expenditure below the rate at which tax is payable
would make investment in the vast majority of UK North Sea projects
unprofitable, meaning that these projects, and the jobs and tax revenues they
would generate, simply will not happen.

 

Oil and gas continue to flow only when the mains supply of investment stays
open. Without it, the flow dries up. Even existing oil and gas fields decline
and need continuous investment to maintain production. Without investment
fields will start to shut-in and there will be a domino effect in the
interconnected and interdependent UK North Sea infrastructure. Significantly
reducing tax relief for capital expenditure will rapidly and terminally
accelerate the decline in UK oil and gas production. The trajectory of UK
production will not be a smooth glide path. Oil and gas consumption in the UK
will be reduced not one iota, but UK jobs will be lost, imports increased,
overall emissions raised, tax receipts for the Exchequer actually reduced, and
the country's security weakened.

 

What I describe are not just the arguments of oil and gas companies. They have
support across the political spectrum including the trade union movement.

 

On top of the fiscal uncertainties, we also have the implications of the
Supreme Court decision last week requiring planning authorities to take
account of downstream emissions in the approvals process for oil and gas
fields. We do not take issue with consideration of the environmental impact of
planning decisions. Again, however, the choice is not between UK oil and gas
or no oil and gas; the choice is UK oil and gas or foreign oil and gas. As was
stated in the Supreme Court decision, emissions respect no borders. The oil
and gas we do not produce, we still import and consume. Global emissions will
be no less because the oil or gas is not produced in the UK.

 

I hold that hydrocarbons are not intrinsically evil. They have allowed our
civilisation to escape the bounds of subsistence. Welcome alternatives are
being developed but we - not least in the UK - will continue to depend on
hydrocarbons for decades to come and surely it is better to produce these
responsibly under world leading regulatory oversight in this country, with all
the attendant benefits in jobs and tax revenues, than to import hydrocarbons
which often arrive with a higher environmental and social cost than domestic
production.

 

So, I ask the next UK Government to pursue policies which recognise the
long-term importance and value of homegrown oil and gas production as a source
of essential energy, jobs and government revenues. Specifically, this
requires, firstly, a tax system which is predictable, stable and equitable in
terms of sharing profits between private capital and the public Exchequer.
Secondly, we need a coherent regulatory system that properly reflects that
climate change is a global issue and not a parochial one.

 

And yet, notwithstanding all the headwinds we face in the UK, I am optimistic
for Serica's future.

 

Over just a few years Serica has been transformed from a small international
exploration focussed company into one of the top 10 producers in the UK North
Sea, safely and responsibly operating complex facilities offshore and growing
its 2P reserves some 35 times since the beginning of 2015. To deliver these
achievements we have navigated operational challenges, oil and gas prices
hitting historic lows - remember gas prices of 10 pence a therm in May 2020 -
and pulled off multiple good acquisitions.  With the assets, financial
strength, staff and leadership now in place, we have a very solid platform for
entering the next phase of growth.

 

I hope that the circumstances will allow us to keep investing in our existing
portfolio for many years to come. If necessary, however, we will adjust our
strategy to protect shareholder value. In any event, be assured that we will
continue to be diligent in delivering the most we can from our existing assets
and to search out new value accretive opportunities, whether they be in the UK
or overseas.

 

 

 

 

 

Enquiries:

 

 Serica Energy plc                                                         +44 (0)20 7390 0230
 David Latin (Chairman and Interim CEO) / Martin Copeland (CFO) / Stephen
 Lambert (VP Legal and External Relations)

 Peel Hunt (Nomad & Joint Broker)                                          +44 (0)20 7418 8900
 Richard Crichton / David McKeown / Georgia Langoulant

 Jefferies (Joint Broker)                                                  +44 (0)20 7029 8000
 Sam Barnett / Will Soutar

 Vigo Consulting (PR Advisor)                                              +44 (0)20 7390 0230
 Patrick d'Ancona / Finlay Thomson                                         serica@vigoconsulting.com

 

 

NOTES TO EDITORS

Serica Energy is a British independent oil and gas exploration and production
company with a portfolio of UKCS assets.

Serica has a balance of gas and oil production. The Company is responsible for
about 5% of the natural gas produced in the UK, a key element in the UK's
energy transition.

Serica's producing assets are focused around two main hubs: the Bruce, Keith
and Rhum fields in the UK Northern North Sea, which it operates, and a mix of
operated and non-operated fields tied back to the Triton FPSO. Serica also has
operated interests in the producing Columbus (UK Central North Sea) and
Orlando (UK Northern North Sea) fields and a non-operated interest in the
producing Erskine field in the UK Central North Sea.

Serica has a two-pronged strategy for growth comprising investment in its
existing portfolio and M&A.

Further information on the Company can be found at www.serica-energy.com
(http://www.serica-energy.com) . The Company's shares are traded on the AIM
market of the London Stock Exchange under the ticker SQZ and the Company is a
designated foreign issuer on the TSX. To receive Company news releases via
email, please subscribe via the Company website.

 1  Year to 23 June 2024

 2  Month to date (23 June 2024)

(3) June figures provisional pending regular monthly validation process

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