Serica Energy, [LON:SQZ] the AIM-listed producer of Liquified Natural Gas (LNG) announced its financial results for the six months ended 30th June 2022 on 27th September. As one could imagine, with energy prices, in particular natural gas, soaring through the roof, times are good for the North Sea gas extractor.
During the half year period, revenue leaped 250% to GBP353.3m compared with GBP100.8m for the prior year. Operating income totalled GBP196.4m, up significantly from GBP5.5m the prior year, in which production suffered from Covid setbacks. Bumper profits for Serica led to the payment of a 9p dividend in July, and the announcement of a first ever interim dividend of 8p to be paid to shareholders in November 2022.
Stellar performance for the company was the result of a double whammy of both increased production in 2022, with average production of 26,600 barrels of oil equivalent per day (boepd) net to Serica compared to 18,855 boepd for 1H21 and a significant uplift in average gas prices with the company able to realise prices of 136p per therm compared to 50p per therm in 2021. Operational results for Serica were also aided by increased ownership of assets, with the closure of Serica’s profit-sharing deal with BP in 2021.
Additional capacity yet to be realised
Serica owns five operational gas production facilities in the North Sea – Rhum, Keith and Bruce, which were acquired in a deal with BP and Columbus and Erskine in which Serica has part ownership alongside other Oil and Gas operators.
Serica’s largest production platform Rhum experienced a serious outage that impacted production volumes 1H22. In February a failure of a power supply within a Subsea Control Module (SCM) shut down the Rhum field. Serica had to mobilise a diving vessel, carry out and replace the failed SCM. The field restarted production on March 17th. Taking account of the shut down in March, Rhum production was up 50% from the previous year.
Another significant well for Serica, Bruce, underwent significant operational development during the period. Re-perforations were made to the field that added approximately 3,400 boepd to production volume. An independent evaluation of Bruce was undertaken in January to show significant longevity of the well, and Serica expects production to continue to 2030, up from expectations of cease of production in 2026 on purchase of the asset.
The smallest asset within the BKR purchase from BP, Keith has been shut in since 2021, and requires more work which Serica will undertake in 2023.
Production from both the Columbus and Erskine wells has been underwhelming during the period, with various operation issues constraining production. Serica is confident that production rates for these joint ventures will return in the coming year.
Implications of gas price volatility
During 1H22 volatile gas prices played into Serica’s favour, however such extreme volatility does cause inefficiencies for the operator. In order to de-risk against such price volatility, Serica issues hedging contracts for a portion of its production. This led Serica to achieve a lower realised price for its gas during 1H22 at 136p per therm, compared to the market average during the period of 175p per therm.
Source: Serica Investor presentation
In light of Serica’s increasing financial stability the company has opted not to seek any new hedging contracts, which will see 50% of its hedges expire as of August 2022 and a complete removal of hedges as of September 2023. This will in turn increase Serica’s exposure to gas price volatility, with greater reward possible, should gas prices continue to rise.
Serica Energy development pipeline
Serica Energy currently has two locations undergoing development. The well with largest potential, North Eigg, is owned 100% by Serica and the operator has plans to connect the North Eigg rig to its owned and operated Bruce gas field via a subsea pipeline. Gas from North Eigg can then be mixed with gas from the Bruce development and sold in an efficient manner.
North Eigg has suffered some setbacks in 2022, with drilling complications causing production delays. Serica expects the first results from North Eigg to be delivered in December 2022. If successful North Eigg production could deliver a significant boost to Serica’s top and bottom line.
Serica’s smaller development prospect, Skerryvore, where Serica has 20% ownership is in the earlier stages of development. Serica has announced it is moving to the next stages of development with its commercial partners and an exploration well will be drilled by October 2025.
Serica Energy outlook and valuation
Aside from the unpredictable nature of gas price volatility, Serica’s operational development is progressing well, and the company should continue to grow production volumes from its existing wells through the medium term.
Earnings expectations for Serica put the company on a prospective p/e of 5x, a rating that suggests bumper profits this year might fail to be surpassed in the future. Despite this bargain rating, Serica ended September 2022 with GBP480m in cash and hedging advances, giving significant stability to weather a bumpy ride for gas prices in 2023.
Serica Energy opened trading today (30th September) at 373,73p. The company has offered a year-to-date return of 52.53% and a one-year return of 58.5% with a market capitalization of GBP976.6m