Member Info for Sekforde

There are really three events that could be enormously beneficial over the next three months.

First we should have the half year results by about 19th September 2024. Given the update on 26th June 2024 we more or less know already what these will be. But what we will learn is whether the interim dividend will be maintained or even increased and whether there will be more share buybacks. My personal hope is that the dividend is cut but replaced with buybacks. Second we will have the budget on 30th October 2024. The market clearly fears the worst but I am extremely hopeful that most of the capital allowances will remain in place. In any case the torture will be over and we should have a stable tax regime finally in place for the term of the Government. Third we have the US election on 6th November 2024. I think the now likely result will be positive for oil prices as Harris will not be keen to see an expansion of US production. Reducing production in the UK makes no difference to overall oil prices because we produce so little. But the US now accounts for 13.4 million barrels a day. Trump does not understand or believe in climate change or the environment and he would make drilling super easy. An extra 2 million barrels a day on the market would certainly lower prices a lot. It will not happen under Harris.

Alavib what do you suppose would happen if each year rather than spend £90m on dividends the company spent £90m on buying shares and then cancelling them? If the share price did not move then after 5 and a half years there would be no shares left to buy. Or the smart guy who kept a single share would own the entire company. So that will not happen. The demand drives up the sp over time. It is the role of the board to decide how best to allocate shareholders' capital. It buys shares when it judges them to be undervalued. The £15m spent earlier this year at much higher prices was based on the board's view that at £1.80 plus the shares were far too low. That argument is even more compelling now they are at £1.28.

Megla I do like the ambition of Harbour. But it is taking on a lot of debt albeit at low rates of interest to buy Wintershall. My fascination with Serica is that there is very little risk for potentially huge reward. We have no have no debt and no decommissioning costs. We have been given production guidance for both 2024 and 2025 and we know the forward prices of both gas and oil. Taking out say 20% of the shares would mean that the dividend becomes (even) more affordable. Forecasting the future is so darn hard. But at some stage the market will just see all the cash being generated.

Megla what I think the tax regime has done has made everything in the UK sector of the North Sea cheaper. That is why it may in the end be better to stick with the dog we know rather than head to Norway or further afield. A company which could in theory buy all its shares (at current prices) with its present net cash and roughly 20 months of FCF has got to be absurdly undervalued. A proper share buy back scheme I think will be announced with the interims and then ..... well I am repeating myself.

In the presentation given in April of this year (27mins in) there is reference to the unused tax losses on Tailwind. These were £470m at the time of acquisition (March 2023) and were at year end £395m. So with the revised EPL the effective tax rate should rise from 46% to around 50% for 2025. The tailwind tax losses should see us through to the end of 2026. I see FCF at around £250m for each of 2024 and 2025 if current prices for oil and gas hold.

My own retriever is demanding buybacks and wants the dividend cut to zero.

Alavib where a share price has fallen, share buybacks are a much more tax efficient way of returning money to share holders. Assuming the market cap of Serica remained at £500m, a £90m share buyback would enhance the share price by 18%. An individual shareholder would be able to sell 18% of his holding and pay no or very little tax whilst maintaining the same percentage stake in the company. In contrast a dividend would be taxed at the tax payer's marginal rate. If you think that "every man and his dog" know that buybacks do not benefit shareholders then perhaps you need to discuss this "silly suggestion" with the few dogs who have some understanding of mathematics.

With all these unending comments about the inequity of the EPL it is easy to lose sight of the quite extraordinary prospects for the company. Against a market cap of almost exactly £500m we had as of 26th June 2024 £120m in cash and a business that generated £195m free cash flow in 2023. In 2024 FCF should be higher because any tax change introduced in the budget will only affect the last two months, we have substantially higher production overall and with the bad hedges falling away we have much higher realised prices. I am therefore think we could do around £230m in 2024 and the same again in 2025 as I see capital expenditure falling in 2025. The company should reduce its dividend and use the save money to buy back more cheap shares. I think it will.

Nick the globe. You raise an interesting point about the possible impact of the European Convention on Human Rights. The United Kingdom has been a signatory to this treaty since 1950. Article 1 of the 1st protocol limits the power of the state to confiscate private property. The entire convention has been incorporated into the UK law by the Human Rights Act 1998. This means that it is no longer necessary to obtain a ruling from the European Court in Strasbourg as our own High Court can adjudicate as to whether an act of Parliament is consistent with the convention. Could it be argued that the EPL is so discriminatory and excessive that it infringes the convention? I do not think so. The second paragraph to Article 1 of the 1st protocol does make clear that the state is free to raise necessary taxation.. I have no doubt that if parliament passed a law to the effect that one individual should pay a wealth tax of 100% on all his property that would certainly infringe the convention. But there have been no successful challenges to UK tax laws. A ruling that a statute is inconsistent with the convention does not of itself alter the law or change the statute. But the reputation of any country who is a signatory to the convention and found to be in breach would suffer immeasurable damage if it did not alter its law to comply with the convention. The United Kingdom has been successfully challenged in other areas and has always altered its law to comply. There was a recent successful challenge to the tax law of the Netherlands and that country will not doubt change its law to comply.

I do not agree. People who think that there can be any challenge in the courts to an Act of Parliament do not have the slightest understanding of the constitution of the UK. Parliament is sovereign and if an act is passed then that is the law of the land. Of course Parliament can increase the rate of tax or reduce allowances through the annual Finance Act. We are stuck with the EPL. Work out if Enquest is still good value or not. But please ignore fantasy stuff about legal challenges. Won't happen. Can't happen.

They have projected FCF of $190m for 2024, $247m for 2025, $202m for 2026, $341m for 2027 and $151m for 2028. I would settle for that.

Megla, all they have said that they hope to raise £1.2bn a year extra from tax on oil and gas. On the basis that Serica represents about 5% of total production my working assumption is that we face an additional £60m a year for the next five years. What we have to do is to assume that there will be around 6000 boe extra per day in 2024 and 2025 over 2023 and that we get an extra $3 a boe for the entire production. The additional income covers the additional tax quite easily.

I think everything that could be said about the unfairness of the EPL has been said. However I still think that even with the proposed changes the FCF generated this year and next should be around the same as 2023 - -ie £195m. Higher tax is offset by increased production and higher post hedging prices. There is no obvious reason therefore to cut the dividend which costs £90m a year. The yield is a truly magnificent 18%. The £100m a year retained earnings could purchase a great many good assets with a fast payback. Of course the tax environment has made everything much cheaper in the UK compared to Norway. After 1st November 2024 we should have certainty which will help a lot.

An 18% dividend or even a 9% dividend usually implies that the market does not think it can be maintained. It is just a completely outlandish rate of return on capital. But in Serica's case it looks easily sustainable. And when the market realises the fact then there should be some revaluation of the share price. The only risk factor is a huge fall in commodity prices. But that under the current legislation should trigger an end to the EPL. OPEX is just $20 a barrel. The very large capex is largely discretionary. I am losing £8,500 on my positions taken out at £1.35 with enormous confidence. So am I darn well hope I am not missing something.

All a company which considers itself undervalued has to do is buy its own shares and then cancel them. Eliminate 50% of the shares and the company could afford to double the dividend per share. I was content with the present 18% yield but would not mind 36% instead.

Megla the tax losses on Tailwind should last about four years. We are then perilously close to the end of the EPL any way. Assuming the dividend is maintained, the £100m a year or so of retained profit will be used to buy some cash generating asset. In other words, my assuming that FCF does not rise at all in 2026 and 2027 is actually quite pessimistic. But even if FCF were £100m a year for 10 years, £380m would be far too low. It is hardly as if the company will have no value in 10 years time given its proven track record of more than replacing its reserves.

There is a strong case for the company doing precisely what it has been doing. It has invested heavily this year (£200m capex) whilst the super generous allowances persist. It has gone for quick payback drilling. The additional oil stream for next year and beyond will come primarily from tailwind's assets and therefore the profits will be taxed (at least for the next four years) at 38% rather than 78%. The share price performance has been horrible if you go back two or three years. It has been brilliant if you go back nine years. But recent bad performance can hardly be blamed on the company. The market has massively misunderstood the effect of the Government's yet to be enacted tax changes. They will not be so bad and the market will then start to realise that a company able to generate £200m a year FCF for the next 10 years (at least) is not correctly value at £380m. The reason for not investing outside the UK is that for Serica it is safer not to do so. At least not yet.

No not at all. All highly competent. Hence the growth in reserves, the elimination of debt, the canny purchase of tailwind with its tax losses and now an 18% dividend or if you include the share buybacks 21%.

With net cash of £120m the Enterprise Value is now just £380m. That is against free cash flow of £195m last year and likely at least same again in the next three years or so. Just extraordinary.

Megla I think we can do both. The company already has a massive war chest of cash and plenty of (not that expensive)borrowing facilities. The FCF for 2023 was £195m but I have yet to see an estimate for 2024 let alone 2025. But we know that production is much higher and realised prices are much higher. Even with the additional EPL and the reduced allowances Serica could generate FCF of well over £400m in the next 24 months. Nothing is cheaper than its own shares at the moment.