Joel’s Resource Report – grab em whilst you can #SQZ

Joel’s Resource Report – grab em whilst you can #SQZ

At the time of writing the author has a long position in Serica Energy.

Hi all, I’ve struggled a little with inspiration the past few weeks and my manager left, which has somewhat distracted me from the portfolio. That being said, I finally had some time to do some additional research and rebalancing in my portfolio last week.

One share which I would argue is attractive across the short, medium, and long term is London-listed Serica Energy (LON:SQZ).

Serica Energy is an oil and gas business which primarily produces gas from its assets in the North Sea.

Historically, Serica was one of the shares which helped drive out performance for me in late 2017 when the company announced it was to purchase assets from BP.

Today at an ask of £1.33, Serica’s market cap is £360 million:

(source: Google)

Investment Rationale

No debt and closing cash of £89 million at year end.

Cash flow from operations of £44 million during 2020, with abnormally low gas prices.

2019 cashflow of £137 million at more normal gas prices.

Gas prices have been on a tear recently and Serica’s share price has not responded (see above SP chart):

(source: IG)

If gas prices are sustained at current levels, then if the Serica share price doesn’t move up, I think the entire market cap could be covered by cash in the bank by the end of 2022.

Multiple value catalysts over the coming quarters

Q3 Catalyst – additional production online after successful re completion of the R3 well.

Q4 Catalyst – additional production online from the Columbus development, approx 7000 boe/d. (Serica owns 50%)

2022 Catalyst – Serica bought BP’s assets under a profit sharing agreement. Serica currently receives 60% of the cashflows from the acquired assets, but this will rise to 100% from 1 January 2022.

2022 Catalyst – North Eigg exploration well to be drilled

Summary

The Serica energy share price hasn’t broken above £1.40 for the past two years. However, with increasing gas prices and multiple value catalysts I believe that a breakout could be on the cards. As with any natural resources investment there’s an element of risk, but I believe risk/reward is heavily skewed in investors’ favour.

A word on ESG – Serica supports the Oil & Gas Authority’s “Vision 2035”. This seeks to maximize value, minimise emissions and reduce reliance on hydrocarbon imports. An oil and gas businesses isn’t likely to win ESG company of the month, but gas is crucial for our economy and for power. I even cook with it!

For those interested in further research on Serica, I’d recommend the recent AGM presentation.

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    Nice one ……on my watch list for a good entry

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