RE: Proactive investors article2 Dec 2020 23:11
A good read for all, this is also stood out to me Maverick, they clearly want to do deals but they need to be right.
At corporate level, Serica is counting down to a step-change in profitability.
As a by-product of the deal structure, Serica will soon see a substantial jump in revenues and cash generation. At the time of the deal, the AIM-quoted firm did not have to pay BP any upfront cash.
Instead, it agreed to pay BP an earn-out from the fields’ sales – in the first year of the deal it was 60% of sales, before reducing to 50% in year two and 40% in years three and four.
“We didn’t have to go into debt to acquire those assets and that has served us really well this year,” Flegg explained.
“The structure of that deal and the fact that we didn’t have to go into debt was absolutely crucial to our current position, and our current success.”
In a year’s time, Serica will retain 100% of the cash generated by the assets. “This means that we will have a boost in cashflow from 60% to 100%. Looking at it another way that’s a 66% increase from current levels.”
Also in the ledger will be the start of production at the Columbus field in 2021, with the 50% owned project slated to yield production rates net to Serica of around 3,500 - 4,000 boe/d at its peak.
Meanwhile, there are project opportunities within the BKR footprint which could provide further production growth. One example is already underway – an intervention project at the Rhum field’s third well (R3; previously drilled and connected for production) kicked off in October with the potential to add significant production volumes.
As a debt-free, profitable producer the company evidently ticks some key boxes for investors and a progressive dividend policy further bolsters the appeal.
In July, the company paid its maiden dividend, which at 3p per share amounted to around £8mln.
Increasing the portfolio through further M&A deals remains part of Serica’s strategy. Further deals could be forthcoming in the coming months as corporate activity across the sector picks up following 2020’s turbulence.
“We want to grow the portfolio and we want to do more deals,” Flegg said.
“We’re all hearing lots of stories of companies refocussing away from the North Sea, and wanting to sell assets, but it isn’t happening as quickly as I expected.
“I think part of that is oil prices in particular have been so poor this year and I think a lot of sellers are a bit nervous about selling, or being seen to sell, too quickly.
“There are ways around that. We’re always open to the sort of innovative deal structures that we’ve utilised in the past.
“We’ll buy at a low price and are willing to compensate as things get better. If there’s an upside, I’m happy to share the upside.”
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