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North Sea firm eyes bumper deals amid downturn

North Sea firm eyes bumper deals amid downturn


North Sea-focused Serica Energy has said it is still on the hunt for acquisitions and could pay around £150 million for the right target in spite of the challenges posed by the Covid 19 coronavirus crisis.

This has resulted in a plunge in oil and gas prices and prompted a range of firms to slash investment in the North Sea.

However, Serica is still making money in the area. Directors reckon the firm is in a good position to capitalise on opportunities that will be created amid the downturn.

 Chief executive Mitch Flegg said the slump will likely encourage majors to accelerate their retreat from the North Sea. Serica could generate good returns from investing in assets that big fish may decide are not material.

“There is growth to be obtained, there are opportunities but perhaps they are not big enough for some of the larger companies,” said Mr Flegg.

Smaller firms that have been left struggling to service debts by the fall in commodity prices may need to launch fire sales of assets.

“I think there will be more Covid-related shocks, particularly to the oil price, and I think there might be companies that need to divest in order to survive,” said Mr Flegg.

He welcomed the fact that oil and gas prices have recovered some ground after hitting multi-year lows in April. The easing of some lockdown measures around the world has boosted demand.

However, Serica is not banking on conditions improving significantly.

While the company suffered a sharp fall in profits in the first half, it made enough money to maintain its cash reserves at around £100m.

That leaves it with significant firepower to expand its portfolio.

The company will focus on deals that would result in a notable increase in its scale. Mr Flegg said this might mean paying half of its current market capitalisation of around £300m for a suitable opportunity.

Serica was very pleased with the first half performance of the North Sea portfolio that it has amassed through a series of acquisitions.

This includes interests in the Bruce, Keith and Rhum fields, which it bought from BP, Total and BHP, in a series of deals that completed in 2018.

 Serica has invested in extending the lives of the fields and managed to reduce the associated production costs.

Mr Flegg paid tribute to Serica’s employees for maintaining production at profitable levels through the coronavirus lockdown. Social distancing requirements have created complications for oil and gas firms.

The update from Serica will be welcomed by industry watchers in the North Sea, as fears mount another long downturn is in prospect in the area.

Serica has shown firms can remain profitable in the North Sea even if oil and gas prices remain relatively low.

The company’s operating costs averaged $15.12 per barrel oil equivalent in the first half. Brent crude sold for around $40 per barrel yesterday. That compared with $15.98/bbl in April and around $70/bbl in January.

Mr Flegg said Serica had used hedging effectively to offset the impact of price falls.

He noted: “We have not had to furlough or lay off any staff nor have we had to take advantage of any of the various government schemes that were made available to support industry.”

 Serica is using cash generated in the North Sea to fund investment in the development of existing assets in the area.

The company expects to bring the Columbus gas field into production next year.

It is planning to do work on a well in order to boost production from the Rhum field, in which it has a 50% stake. The Iranian oil company owns the other 50%. Serica had to win an exemption from the US authorities to ensure production from the field could continue after Donald Trump imposed fresh sanctions on Iran.

 Production from the BKR fields was shut down for 45 days so that Serica could complete repair work on a disused caisson that was found to have deteriorated.

This was a factor in average production falling to 21,600 barrels of oil equivalent per day in the first half, from 30,000 boepd last time.

Serica’s revenues fell to £46m from £146m. Pre-tax profits dropped to £20.4m from £51.9m.

Source: The Herald

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Published: 11-09-2020

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