Member Info for Megla

Ithaca announced a merger with ENI in April and the deal was concluded in October, so 6 months from start to finish. I would imagine the very same advisors will be working on the Serica/Enquest deal if the deal goes ahead.

I really like the idea, but as always the devil will be in the detail. The debt, G&A and tax synergies would certainly make the group much more investable from an institutional perspective.

Even if we assume only 50% of Serica’s gas assets can be shielded from CT and SCT, Serica would be capable of producing $250m of FCF, whilst maintaining the current level of CAPEX (assuming Triton issues are resolved, which I’m sure they will be).

As a group, it would be capable of investing $450m a year in CAPEX, whilst producing FCF of around $350m. Half of which, I would hope, would be returned to investors. This would give the new group a yield comparable to what we’ve got now, and would also provide ENQ holders with an insane yield based on them getting a higher percentage of the combined equity relative to current market caps.

On reflection, I think a deal would need to have a payout to SQZ holders of £200m. So a 40% special dividend. And the split would be around 60/40 (+/- 5%) in favour of Serica. I guess we’ll find out in a couple of weeks if they’ve managed to make a deal and what it looks like.

Impossible to know until we get more details.

SQZ will probably benefit more in the short-term, with a potential 30%+ special dividend, but ENQ will likely get a larger share of the combined group relative to their current market cap, which should benefit them longer term, especially if there’s an aggressive dividend policy.

I’m a Serica holder only, so currently thinking that if the combined valuation flags on inception, I can buy more of the stock with the special dividend, but will revisit if/when the deal is announced.

Thanks for taking a stab at it, Dumbly.

I’m sure O&G tax experts are getting paid handsomely to work this out.

If you’re correct, the combined group should be able to pay a significant repeatable dividend for a long time to come, especially if the UK government come to their senses and provide a more balanced tax regime from 2030.

Thanks Dumbly, just be totally clear, is that for combined group? Or ENQ as it stands now?

No can guarantee anything, but I'd take the total opposite position to dcarn.

The dividend will need to be super attractive to get shareholder approval. I think the yield will be equal to what we're getting now, at least in the short-term. No one is going to accept a jam tomorrow deal, where the board go empire building with the increased FCF. I'll be looking for a commitment to a percentage of post tax CFFO.

Tamovv / Stevo,

You’re both obviously very well versed on ENQ, so you might be able to answer this one. Assuming $80m a year in CT & SCT for Serica’s gas assets, how long will ENQ’s tax losses against this and their core business?

Just after a rough estimate based on a continuation of current commodity prices.

For info, the Triton hub should be protected from SCT and CT until roughly end of 2028, this includes the recent poor performance of the FPSO and the use of the tax losses from Parkmead (its worth have a chat with Serica IR about the Parkmead losses).

Stevo,

A follow your logic on a potential valuation for the new company, but I hope it’s too pessimistic.

Serica was trading £100m higher than the current market cap in January, so netting the recent bounce off the lows against the expected synergies doesn’t feel right.

The current valuations of both companies aren’t stretched by any means. Combine them and we’ve got less risk, better access to credit and the abilty to invest for the future. The group will be comfortably FTSE250, which will help from an institutional perspective.

I hope the group will have an aggressive dividend policy. It’s one of the reasons I’m invested in Serica, this will also help with the valuation.

Obviously the market will make its own mind up, but I’d be more than happy to reinvest my capital return into the enlarged group if the market cap is closer to £750m than £1bln.

Hi Tamovv,

My own view is that the payout to Serica holders should be around £150m. A healthy 30% special dividend, but without weakening the balance sheet of combined group too much.

I think we’d all be disappointed if the combined market cap didn’t eventually reach £1bln+, any major cash outflows and the perception of a weak balance sheet would challenge that valuation.

It’ll certainly be interesting to see how this one progresses.

Tony,

Ithaca have a dividend policy of 15%-30% of post tax CFFO, I’d like to see that repeated for the SQZ/ENQ combination, with a commitment for the top end of that range for 2yrs post deal (again similar to the Ithaca/ENI transaction).

For the below, I’m assuming a 60/40 split in favour of Serica, but it just pure speculation.

With the reduced level of taxation and operational synergies, I do think the group would be capable (for a time) of doubling Serica’s current dividend to $220m (lots of caveats here, commodity prices, triton production, level of investment etc). This would mean Serica holders would see their dividend yield increase to around 20%. Enquest holders would go from not having a dividend at all, to having a yield of 30% on the current value of their investment. These might sound like crazy numbers, but Serica’s assets can produce $300m of FCF alone with BKR using ENQ’s tax losses. Enquest I assume at least $100m of FCF, but don’t follow them as close.

Whether the deal even completes, or whether the group would choose to have such an aggressive dividend policy remains to be seen.

Everyone wants their side to negotiate hard, but in reality the base deal will be around the current valuations (+/- 5%). This will then be adjusted based on the payout to Serica, which will compensate for the dividend payment that Serica holders were expecting this year. Maybe Amjad would prefer a more significant payout so he gets a bigger slice of the combined pie?!

The combined group will be much more attractive as an institutional proposition, which matters more than appeasing PI’s. It’ll be a FTSE250 company with the scale to compete in the UK and internationally. It will be a dividend paying company (commodity price caveat) and should command a significantly higher valuation than the current sum of parts.

The big win is the use of ENQ losses against the BKR hub, which is $80m net, add in G&A and other bits and we’re looking at $100m of increased FCF in 2026 (assuming the deal completes at the back end of this year). That with increased scale, reduced risk and better credit rating, should allow for a much more attractive valuation.

Not everyone will be happy, but I’m certainly hoping a deal can be reached.

It does make it feel like Enquest are the ones pushing it.

The deal makes total sense to me, assuming Enquest’s tax losses can be used against Serica’s Gas production.

Mercuria happy to go with it but want something up front as a sweetener?! If only to make up for the missed dividend this year?!

Decent payout to Serica holders but a smaller piece of the pie???

Current valuations would be 70% Serica 30% Enquest.

$100m payout to Serica shareholders and change the percentage split to Serica 65% Enquest 35%.

Who knows what the thinking is.

But it would become a ftse250 company, so would need to be bought by plenty of funds.

The combined group makes sense to me:

- Relatively low decomp (thanks to Serica having next to zero)

- Low level of debt

- 80kbpd

- Debt synergies, increase RBL and get rid of Enquest’s expensive debt

- G&A synergies

- An absolute mountain of tax losses

- Scale to compete

Current valuations would be 70% Serica, 30% Enquest, which would seem fair (Serica holder only).

There isn’t really a price to pay, it’s just an agreement on the relative valuations of the two companies so they can work out the percentage split of the combined equity. I would imagine it’s only a reverse takeover due to the ability to make best use of tax loss positions of both companies.

The return of capital (I’m guessing) will be to compensate for the dividend payment that now may not happen.

Need to see the percentage split, but this makes total sense in the current market.

Someone needs to explain this very slowly to the Labour Party.

The dividend in its current form should be toast. It would be totally irresponsible to put the balance sheet under further strain with an uncertain outlook for commodity prices. Basically, it should be cut in half.

What the weak commodity prices will do is highlight just how garbage the tailwind assets have been. The company has got away with it up until now (in terms of providing a healthy dividend), but without energy prices to bail them out they should be feeling the heat.

Harbour’s results highlight just how much of a clown show Labour are. Imagine having a tax rate of over 100%, that Labour wanted to make even more punitive. They really don’t have a single clue what they’re doing.

Then the icing on the cake, the FPSO for the Buchan development has now been released, again due to ridiculous government policy.