Serica bullish on North Sea gas as pre-tax profits surge 88-fold

Serica has quadrupled production from its 24-year-old Bruce M1 well, which it re-entered for the first time since 1998 when it was operated by BP
Serica has quadrupled production from its 24-year-old Bruce M1 well, which it re-entered for the first time since 1998 when it was operated by BP

Profits at North Sea independent Serica Energy surged by 88-fold in the first half of the year as the company capitalised on high gas prices with a 41 per cent increase in production.

Serica, which accounts for about 5% of all gas consumed in the UK, will pay its first-ever interim dividend of 8p per share following the huge uplift in profits. It paid a final dividend of 9p at the end of the last financial year.

Revenues during the six months to the end of June more than trebled to £353.5 million as Serica benefitted from the first full contribution from its 14-million-barrel Columbus project in the North Sea and the Rhum R3 well originally drilled 17 years ago by BP. The company also quadrupled production from its 24-year-old Bruce M1 well.

This increase in production to 26,600 barrels of oil equivalent (boe) per day from 18,855 a year earlier was combined with an average gas price of 175p per therm, up from 50p per therm in the first half of 2021. More than 85% of Serica’s production is gas, with the remainder being oil.

Serica Energy chief executive Mitch Flegg

This increase in production at higher commodity prices led to a spike in pre-tax profits which hit £194.5m, up from just £2.2m in the same period last year.

The company narrowed its production guidance for the full year to between 26,000 and 28,000 boe per day, down from the 26,000 to 30,000 forecast in July. However, chief executive Mitch Flegg remained bullish on the future investment programme, with results expected from Serica’s North Eigg exploration well in December.

“Furthermore, the BKR (Bruce, Keith and Rhum) cash flow sharing arrangements have now come to an end after four years during which the company shared the net cash flow with the vendors of the relevant assets,” Mr Flegg said. “We now retain 100% of the net cash flow from BKR.”

The UK Government’s windfall tax – the Energy Profits Levy – did not impact the company’s first half results because the policy was not enacted until July. Serica said the 25% levy on profits arising from May 26 “could result in significant impact in the future”, though the emergency legislation has significant benefits as well.

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Producers paying the EPL can secure 91% tax relief on investments in new projects, which essentially translates to a cost of just 9p for every £1 spent on new exploration and production.

“Incentives to reinvest in additional oil and gas reserves offer Serica the opportunity to mitigate its impact,” the company said. “Therefore, we will not only maintain our ongoing investment plan but will also look to expand and accelerate elements of that programme.”

Serica further hinted that a successful outcome at North Eigg, which is estimated to contain 60 million boe, could trigger cash call.

“The company is evaluating a number of acquisition and new investment opportunities and a successful outcome of the North Eigg exploration well would have a significant impact upon the company’s cash requirements, with strong pressure to follow up any success rapidly so as to support the UK’s security of gas supply,” Serica said.

READ MORE: Serica Energy reveals North Eigg exploration well delays

Earlier this year Serica was embroiled in a buyout standoff with smaller rival Kistos that included tit-for-tat takeover offers by both sides. That came to a close in August when Kistos walked away after the two failed to agree on a revised proposal.

“Although it proved not possible to reach agreement with Kistos on the terms of the respective potential offers between the two companies, Serica continues to actively seek opportunities at both the asset and corporate level that would strengthen the company, diversify its asset base and deliver incremental value to shareholders,” Serica said.

The company’s shares closed yesterday’s trading 3.8% higher, up 13p at 355p.