WTI (Oct) $68.71 +$1.04, Brent (Nov) $71.84 +$78c, Diff -$3.13 -41c
USNG (Oct) $2.17 -9c, UKNG (Oct) 89.99p +2.28p, TTF (Oct) €37.65 +€0.65

Oil price

Oil is falling again today, Brent has fallen below $70 a barrel as the, too little too late, Opec+ policy of pushing back the quota changes got little traction and weak data from China hit demand numbers which were mirrored in yet lower retail gasoline prices in the US. 

Serica Energy

Serica has announced its unaudited financial results for the six months ended 30 June 2024.  

Chris Cox, Serica’s CEO, stated:
“I am delighted to introduce my first set of results as Serica CEO. Prior to joining, I felt that the Company stood out due to the quality of the team, its strong financial position, and the opportunities for growth both organically and through acquisition – my opinion of the Company’s potential to create value for shareholders has only increased since my arrival.

Despite an unjustifiably punitive fiscal regime that may make future investment on the UKCS challenging – and with the level of capital allowances remaining uncertain until the Autumn Budget on 30 October – what is clear is that, thanks to our investment in our assets and our lean operating model, our producing assets remain cash generative, even after paying taxes at a rate of 75% today and due to rise to 78% from 1 November.

Our confidence in our cash generation outlook, together with our strong balance sheet, gives us capital allocation options. Paramount amongst these will always be supporting material shareholder returns which is why we are announcing today that we are holding the interim dividend flat at 9p per share. In addition, to sustain the longevity of our model, we want to continue reinvesting our cash flows into our UK North Sea assets. As a reservoir engineer, I am encouraged that there are multiple attractive opportunities to invest in our portfolio to allow us to sustain production and deliver home-grown low-carbon energy in the medium term. However, we will only be able to make these investments if the fiscal environment allows us to generate a fair return on your capital. We also have the option to add to our portfolio through acquisitions and that is why we will continue, intensively but prudently, to seek value-accretive M&A, both at home and abroad.

Whatever the outcome of the Autumn Budget, my focus will not waver from safety, operational delivery, and growth. The potential in the fields we operate is demonstrated by the positive early signs we are seeing from the Triton drilling programme, and I have been deeply impressed by the talented team we have within Serica that will enable us to unlock further value. Serica will continue to pursue a returns-led investment strategy, and I am confident that we are set to deliver materially cash-generative production for many years to come.”

The team at Serica is up and running and this is a pretty good set of results with a few things that can be tinkered with, all of which were addressed on a good investor call this morning. EBITDAX of $279 gives a net profit of $82.5m but what I like the most is the cash figure of $131m and that enabled a dividend of 9p, and a ‘very material yield of some 19%’. 

FCF is $98m and the company point out that the way that it is heading that this will be higher than the market cap by 2027 which makes you wonder. The point is more in my view that SQZ has a very strong and highly resilient balance sheet that enables further investment in the UKCS if tax allows, a sensible M&A programme if it does not and either way a proper level of shareholder distributions via dividend or share buy-backs.

One really important thing to look for in the statement is where the company takes an unusually frank view with regard to ongoing cash generation, not seen often in forward looking statements as they say in the trade.  ‘This reflects the Company’s confidence in its medium-term robust cash generation outlook, with the expectation of generating over half a billion dollars of cash flow after currently committed investments over the coming three years at current commodity prices, after factoring in the expected tax regime’. Hence the comment about the market cap and this is based on the worst possible tax regime.

Technically Serica has a world class subsurface team which gives the company scope in all these objectives and has recently drilled two wells, the B6 at the Bittern field (SQZ:64.6%) which has been tied into the Triton FPSO and is expected to come onstream any time soon. The second is the GE-05 well on the Gannet field (SQZ:100%), is at TD and all looking good for production in November. Given the high equity stakes in these wells, both could be material and the 2024 exit rate potentially impressive.

The guidance has been lowered, not by much but to the lower end of the existing 41-46,000 boepd and this is due to the unplanned downtime at the Triton hub but there is more here. Talking of full disclosure, new CEO Chris Cox when speaking this morning did say that he was not happy with the guidance offered and I’m sure that is code for a tightening up of this area. Chris also made it clear that he isn’t particularly happy with the asset performance and spoke well about how that can be changed.  

The company mentioned its investment at the Buchan field where the development is on hold due to the environmental impact statement, as well as the Government’s tax position. It is a very exciting development and ticks so many boxes, it is a flagship state of the art piece of engineering, will be a model for  low carbon hydrocarbon production and helps the UK economy by supplying over 1,000 direct jobs, pays more than fair tax and of course contributes to the UK’s energy security.

As I write completing this article I notice that the CFO has bought some shares for cash, something I always like, it shows that he, like me considers Serica to be hugely undervalued. The comments about free cash flow aside, the fact that the company has a fantastic asset base, a really impressive management team with ESG credentials and that robust balance sheet. Serica is plainly way too cheap, it may be suffering from the political behaviour at the moment but the company is built to last unlike the odd Secretary of State…

Results summary ($ million1 unless stated)

1. Please note that from these Interims and going forward, the Directors have elected to change the Group’s presentational currency from Pounds Sterling to US Dollars, as the Group believes that the change will give investors and other stakeholders a clearer understanding of Serica’s performance over time and align with the presentation currency of its peers
2. Pro-forma, following the acquisition of Tailwind on 23 March 2023
3. See Reconciliation of non-IFRS measures for further detail

Highlights

Production in first half of 2024 in line with guidance, with positive initial drilling results

• Production of 43,700 boepd the first half of 2024 (H1 2023 pro forma: 49,350 boepd)
  • Production split of 60% gas, and 40% liquids
• Operating costs were around $19/boe in H1 2024 (H1 2023: $17.5/boe)
• Five well-drilling campaign on Triton ongoing:
  • The B6 well (formerly B1z sidetrack) on the Bittern field (SQZ: 64.6%) has been tied into the Triton FPSO. Promising data were collected during drilling and we eagerly anticipate initial flow rates in coming days
  • The GE-05 well on the Gannet field (SQZ: 100%) has now been drilled to TD and completed safely and ahead of schedule, with initial signs looking positive and production from the well expected to start in November 2024

Material cash generation supporting shareholder returns

• Cash inflow from operations of $301 million and EBITDAX of $279 million
  • Cash tax paid of $72 million in H1 2024. Serica's tax liabilities, apart from the EPL, are partially shielded due to the tax losses acquired with Tailwind, the balance of which remained at over $1 billion at 30 June
  • Capital expenditure of $124 million, comprising largely the light well intervention vessel ('LWIV') campaigns on BKR and initial stages of Triton well investments
• Free cash flow of $98 million in H1 2024 (H1 2023: $134 million)
• Following the share buyback of £15 million ($19 million), interim dividend of 9p declared today, unchanged on 2023. This reflects the Company's confidence in its medium-term robust cash generation outlook, with the expectation of generating over half a billion dollars of cash flow after currently committed investments over the coming three years at current commodity prices, after factoring in the expected tax regime
  • The interim dividend is payable on 21 November 2024 to shareholders registered on 25 October 2024, with an ex-dividend date of 24 October 2024
• Given the importance of capital allowances to the economics of future investments in our UK portfolio, we will provide further guidance on our future ability to reinvest in our portfolio as part of our medium-term capital allocation policy following the Autumn Budget

 Strong balance sheet provides platform for future growth

• Serica's robust liquidity position underpins the Company's ability to make targeted growth investments, both through continuing to unlock the potential in our assets and by investing in value accretive M&A opportunities
• During the period we completed our acquisition of a 30% working interest in the Buchan Horst field from Jersey Oil & Gas
• The Company has been and will continue to be very active in screening cash-generative M&A opportunities at home and in the wider North Sea, as well as increasingly in other geographies, but we will remain disciplined and will only conclude such transactions where we are confident of the potential to deliver value to shareholders

 Outlook and guidance

• Due to unplanned downtime at the Triton hub, full year average production is expected to be at the bottom end of the previously stated 41-46,000 boepd guidance range
• Full-year capital expenditure is expected to be around $260 million pre-tax, in line with expectations
• The cash payment of both the 2023 Final and the 2024 Interim dividends, a combined total of $112 million, occurs in H2 2024. Combining this with the schedule for cash tax payments, which is also weighted to the second half, means that these cash outflows are expected to be higher in H2 than in H1, as is typically the case

Corcel

Corcel has announced that the its contractor, Metatek Group, has completed the acquisition of data phase of the Enhanced Full Tensor Gradiometry Survey (“eFTG”) on Block KON-16 as originally announced on 7 June 2024. KON-16 is 35% owned and operated by Corcel, through its subsidiary Atlas Petroleum Exploration Worldwide Ltd.

With data collection efforts now completed, the Company’s focus moves to processing and interpretation, which is expected to extend through Q4 2024.  The Company looks for this work to deliver highly accurate geological representations of critical interest for further developing the prospectivity of KON-16, which when fully integrated with the existing 2D seismic and well data, will enable the Company to high grade prospective areas in this large 1,000 sq km block and design a focused 2D seismic acquisition program in 2025 which the Company intends will ultimately lead to the drilling of the first new well on the block since the 1960s. 

Corcel CEO Scott Gilbert commented:
“We are very pleased with the completion of the acquisition of data phase of the eFTG survey on Block KON-16. This is a significant milestone in our exploration efforts, providing us with an important dataset that will help refine our understanding of the subsurface structure and prospectivity of this large, under explored block.”

People ask if I follow Corcel and I did start but things are changing a great deal at the moment so maybe things might change but at the moment not much is going on. 

KeyFacts Energy Industry Directory: Malcy's Blog