Serica Energy is open to a merger and expansion opportunities in the North Sea, the oil and gas producer’s boss said.
Chief executive Mitch Flegg told City A.M. the company is well-placed to take advantage of challenging investment conditions driven by the windfall tax and the ageing nature of the domestic basin.
He expects more international giants will consider divesting from UK waters in the coming years, with Serica one of the “minority” of companies with the necessary capital to snap up freshly available assets.
“I think there will be more consolidation, which personally is good for us. It’ll make opportunities for a company of our size,” he said.
Even though the UK oil and gas sector was no longer “top of the list” for overseas companies, he believed very few incumbent producers were “cashed up” and ready to exploit potential sales,
“I would like to think that we are in that minority — so I think there will be opportunities for us. It’s going to be a rocky road for the for the industry,” Flegg added.
In June, Eni and Var Energi reached a £3.9bn deal to acquire Neptune Energy offshore assets, while Serica itself was subject to a failed £1bn-plus takeover bid from Kistos Energy last year.
Flegg considered the Energy Profits Levy — dubbed the ‘windfall tax’ — to be a “huge hit on the industry,” alongside increasingly tough terms for lending with a number of banks withdrawing from the sector to meet environmental criteria around emissions and financing.
Yet he remained optimistic about Serica’s future trading and operations — with the company also considering more overseas investments.
“Nimble focus companies will always find a way to benefit from from adversity, and I’d like to think we’re in that we’re in that category,” he said.
The energy boss spoke to City A.M. following the company’s half-year results this morning, which revealed a downturn in revenue and operating profits.
Revenues declined from £353.4m to £340.6m year-on-year, reflecting lower commodity prices, while operating profit has slid from £196m to £159m over the same period.
This has contributed a 10.3 per cent drop in its share price on the London Stock Exchange this morning — with the company now priced at 240.4p per share.
While it has described the windfall tax as “wholly unwelcome,” the company has also downgraded output expectations due to production difficulties.
However, net cash is robust at £234.9m, leaving the company well positioned for M&A opportunities after its takeover of Tailwind in March earlier this year.
Meanwhile, there is a discrepancy between the reaction from analysts to the results, and investors on the FTSE AIM UK 50 Index.
Alex Smith, equity research analyst at Investec, believed the results revealed “medium-term resilience of the production base post the Tailwind deal.”
“Serica remains our preferred equity vehicle to play expected prolonged high UK gas prices as well as sustained higher oil prices, post the Tailwind deal,” he said.
Smith also noted that the UK gas forward curve still points well above 100p per therm over the next two winters – more than double pre-crisis norms of 40-45p in trading — leaving the company well-placed for profits over the medium term.
Investec has sustained a buy stance at a target price of 390p per share, while Jefferies also maintains a buy outlook at a lower price of 290p per share.