Member Info for Megla

To paraphrase, paid promoter thinks Serica can still hit production targets well in excess of the current yearly average.

To be clear, I’m not saying they can’t, but operationally the company has been garbage this year.

Dreadful update.

- Production 10% less than lowest part of guidance

- Net cash position completely wiped out

- Strategy is to grow organically or by acquisition, yet the company doesn’t appear to be able to do either

This is now very poor by the BOD, mid November can be open to interpretation, but this is ridiculous.

If true, that’s an insane cut for a company that only said profits would be at the lower end of guidance.

UK definitely a head wind with crazy Labour Party at the helm, but next years PBT should be £1bln+ with a full year of Hibbett’s & Courir.

Sadly, this is all coming from a party that thinks it’s a good idea to put up employers NI, which tells us all we need to know about their business acumen.

Sekforde, I agree with you on maximising the current assets, and we should see the benefits of that next year as production increases. While 50k might be a bit a stretch, hitting 45k (average over the year) would be excellent result, particularly as those additional barrels will be tax efficient.

In my view, there are three main ways to deliver value to shareholders:

1. Sell the company (Mercuria 180+?)

2. Enter wind-down mode

3. Mergers and acquisitions

I’d be satisfied if the company focused solely on the current assets, effectively putting us in wind-down mode, provided that all FCF is returned to shareholders through dividends or buybacks below a certain price. Realistically, I doubt this would happen - CEOs generally aim to grow companies rather than give them an expiration date. This makes a merger or acquisition the more likely path.

All just my views of course, it’ll be interesting to see what the company says later this month.

My two pence worth, imho the current share price weakness is a contribution of 4 things:

1. The production misses throughout the year. Not hitting the lower end of guidance is poor form. The revenue loss if taking the midpoint of guidance is a big number. They need to do better next year, especially given this is considered a high investment year.

2. The net cash position will be all but wiped out at year-end. This is a combination of the production slipups, high capex and generous dividend. Basically the balance sheet isn’t as strong as it was, albeit still better than most of the sector.

3. General malaise in the sector due to Labour’s ridiculous tax grab.

4. There is no longer a growth story to sell the investors, which limits the upside to the stock. No one is going to buy a stock at 250p, if the estimated value of future cash flows is 250p. Don’t get me wrong, I think the current share price is well under where it should be, but the combination of the this and the other points is reflected in the share price weakness.

As for the dividend being sustainable, I guess that all depends on the future plans and cash flow allocation post tax loss utilisation. In my view, the sector needs to consolidate, small independents just can’t compete in a sector that has been put under so much stress from the government of the day.

Time to earn their crust as the saying goes.

That or sell us to Mercuria for 200p.

Agree, Serica has clear sight of its tax loss utilisation so would effectively be buying assets in the UK with 78% tax rate, and where any decomp costs couldn’t be offset against the EPL. Obviously if a deal included additional tax losses then it would probably work.

Personally, I think consolidation in the sector is now needed and my first conversation would be with Kistos.

“Overall, on average, we assume that over the

forecast period capital expenditure is 26 per cent lower, oil production 6.3 per cent lower,

and gas production 9.2 per cent lower compared to our March forecast.”

Pg67 of the budget - astonishing shortsightedness from Labour.

100% agree with Sekforde.

Capex relief has only been cut from 91p to 84.25p, which should ensure Buchan gets the green light - assuming they can get the new environmental permissions of course.

I believe Auctus were expecting a small reduction to capital allowances, so their price target might have a small revision upwards.

Obviously a 78% tax rate isn’t great, but this is the best we could have hoped for out of today.

MrBombastic,

I’m not going to defend the Conservatives, they were dreadful, but their stance on O&G was very different to Labour.

The Conservatives introduced a windfall tax when there was a windfall, increasing/extending it now with Oil trading in the low 70’s is just ludicrous.

The current EPL allows for 91p of relief for every pound in capex spend. That is a huge incentive to invest, it is more generous than Norway, but exclude certain costs as deductibles so probably evens itself out.

Labour’s changes are hugely damaging for the sector, regardless of what happens today. A 78% tax rate, reduced investment relief, all whilst certain costs are still excluded as deductibles. It has been dreamed up by people that don’t have a clue how the industry works. It’ll cost jobs, investment, tax revenue and will ultimately increase CO2 emissions as we import LNG from half way around the world. So yes, Labour will be to blame for the untimely demise of the industry.

Yes I know, I miss typed or got autocorrected.

But thanks for your valuable input.

290p current plus buchan

250p current with capital allowances

180p current with removal of capital allowance

feels about right, removal of capital allowances is in the region of $35m per year tax hit (bag of *** packet calcs). 10yrs x $35m = $350m or £270m total hit.

£270m / 390m shares = 70p per share.

Sekforde, agree with this, although I do think the upside will be limited in the worst case scenario. Mainly because the lack of a growth story, which would need to be addressed by an acquisition or merger.

I’m not overly focussed on short-term price movements, but it’ll certainly be interesting to see the markets response to whatever we get in the budget.

Sekforde, you would assume so, but Serica’s H1 FCF presentation slide doesn’t align with the FCF estimates produced by Auctus for 2024-2027. That said, Serica were using full removal of capital allowances (worst case scenario) and Auctus just 20%, so again there’s a key difference that would explain some of the disparity.

I agree to some extent on the tax rate, but it won’t stop me and the rest of the spreadsheet nerds having a go. If I can’t get near the revised numbers produced by Auctus after the budget, then I’ll speak to IR (who will probably say Auctus are independent so they can’t comment on the numbers).

Anyways, fingers crossed for a non disastrous outcome from the budget. I’m certainly given up hoping for a good outcome so won’t be surprised if we get a cut to capital allowances.

Sekforde,

It isn’t worth going into too much detail right now, particularly as Auctus will update their numbers post budget anyway. But in terms of numbers, they’re assuming about $200m in tax, where my number is closer to $300. We already have different assumptions in terms of capital allowances, which explains some of difference, but the only way I can get to their number is by reducing the effective tax rate, which would be a challenge given the tax rate is going to increase.

Auctus also appear to be over zealous when compared against Serica’s own presentation so I’m happy to be on the more conservative side, at least for now.

As for the divi, it’s totally unaffordable post tax loss utilisation, but the business will undoubtedly look completely different by then anyway. Hopefully for the better.

Sekforde,

I can't get anywhere near your FCF number with the commodity prices that you've used, but better to save those sort of discussions for after the budget when the tax regime is clear, well, up until 2030 at least.

We know the company will produce a lot of cash in 2025/2026, the problem comes when the tax losses are fully utilised and FCF drops off a cliff. I really don't see value in buying back the stock (the dividend is more than generous) when the company needs to be investing for the future. Particularly considering that when cash flows drop off a cliff, so will the dividend.

The point I'm really making here, is that absent a growth story, the stock will always trade at a discount to its true valuation. After all, who wants to pay 200p to get 200p returned over a decade?! What the company's current valuation is will depend on what happens on Wednesday.

This could become a common theme if Labour’s budget does effectively end new investment.

Without a growth story to sell to investors, the share price will likely trade at a significant discount to NAV, rise into dividend, then fall further to take into account the new valuation post payout.

Obviously they’ll still be opportunities, tax deals, consolidation and international expansion, but at it stands, UK focused O&G companies wouldn’t be in high demand.

Tamovv,

As we know, the worst possible outcome would be the removal of the capital allowances against the EPL, in that scenario, I just can't see how any investments would get the green light. You may as well just stick the money in the bank for a decade and you'd probably get a better return. For this reason, I just don't think it'll happen, unless Labour have totally lost the plot.

My hunch (and that's all it is) would be a 50% removal of capital allowances against the EPL, this would leave 65.25% of CAPEX relief for every £1 invested. In the context of 78% tax rate, where certain costs are excluded as deductibles, this will be very damaging for the industry.

The other problem is that we won't have sight of the 2030 tax rate post budget, given that we're expecting to see a successor to the EPL, companies will have to assume its continuation until told otherwise. Getting sight of a more favorable tax rate from 2030 would likely allow the likes of Buchan to progress, even with the short-term increase in taxation (assuming we can regulatory approval now emissions from using the product have to be taken into account).

Let's see what we get next week, I guess a win at this stage would be if the capital allowances are left untouched.