Member Info for Sekforde

True but whether shares are held in treasury or cancelled makes no difference. Those shares have no voting rights and do not attract a dividend - the company cannot pay itself. If it were up to me, I would be spending around £50m a year on shares and cancelling them. I think that is achievable even whilst maintaining the current dividend of 23p a share. Roll on the budget and then we can really start proper forecasts of FCF through to 2026 and beyond.

True they have not formally committed to it. But if they do not pay it, it will only because they choose to buy more shares for cancellation instead which would be even better. The dividend costs £90 m a year. FCF last year was £195m. But that was at lower realised prices and lower production than this year and next. I think they will continue to pay the dividend AND buy more shares for cancellation. Of course the effect of share buybacks reduces the cost overall of maintaining a 17.5% dividend. Buy say £60m of shares and the cost of the annual dividend comes down from £90m to £80m.

Both Enquest and Serica are at absurd valuations. I used to think Enquest stood out. But I now think the case for both is equally strong. Enquest has greater upside because it has half the market cap of Serica and some really interesting long term transition assets. But Serica is safer as it will have plenty of net cash (around £120m at the end of 2024) and its 17.5% dividend is entirely safe.

Dumbly because whatever the outcome there would be a net saving of costs and an accelerated use of Enquest's tax losses. Enquest's debt is rapidly disappearing like the autumn mist and its decomm costs are spread over 15 years so it could just keep it simple do nothing and keep adding to its balance sheet at a rate of about 10% of market cap every month (until the EPL is payable in October).

Stevo why would not an all share offer by Enquest for Serica work on a ratio of one third Enquest and two thirds Serica. The combined group should be worth a lot more than the two separate companies.

Megla to be clear, I do not think it is justified. It is already far too much. And I think the decision to ban new licences when the UK will be burning fossil fuel for the next 40 years is completely absurd. We do not yet know what "closing loopholes" will mean and I think that is where we may be pleasantly surprised. I do not think the present generous allowances will be reduced by a huge amount. The UK cannot afford to force out all investment from an important sector as it will bring forward the day when the Exchequer has to meet a whole heap of shared decommissioning liabilities. I expect Serica to have FCF of in excess of $200m each year over the life time of this Parliament. It has some tax losses of its own to use. But you should not get too exercised by my use of the word "paranoid". There is a great case for investing now at the depths of all the gloom and misery.

And Megla on borrowing both companies have recently negotiated substantial facilities although at fairly expensive rates especially in the case of Enquest.

Megla the paranoia is in the overstatement of the effect of the changes proposed not in rational discussion. You should pay some attention to Stevo's careful analysis on, for example, the taxational regime in Malaysia which turns out to be even more punitive than the UK. And as far as I can see, with the proposed changes, the UK is going to be quite similar to Norway. I agree one should look at the accounts and not rely too heavily on a single unchallenged remark at a shareholders' meeting. But the annual cost of both interest and decommissioning is less than Enquest saves in tax as a result of its present tax assets. On an accelerated receipt basis this tax asset is worth around $800m. This partly explains why Enquest's FCF in 2023 was higher last year than Serica's despite having half the market cap. Enquest could be bought by Serica for $600m. It would have to borrow around $450m at a cost of around $40m a year but would generate FCF of perhaps $250m in 2025 and 2026 if Brent prices hold and it finds a way of retaining the tax advantage.

Fiscal change proposals

Megla I have read both the Labour manifesto and the chairman of Serica's statement. The paranoia is in the contention that the fiscal changes proposes will "destroy" the industry. I do not myself think the EPL was ever justified. Oil and gas prices are well below there 10 year average if you allow for inflation. But it is going from 35% to 38% under Labour which I do not think will cause many companies to become unprofitable. Enquest has net debt of around $300m. It decommissioning liabilities are according to its accounts $700m but according to its chairman at the shareholders meeting around $400m. So not billions. Any merger will be about using Enquest's tax losses which reduce its overall tax to 38% or around 45% if you allow for the non deductible elements.

Tamovv. I too am way over exposed to the sector. But the investment case for each and every company operating principally in the North Sea is hugely compelling. Serica is extraordinary. It will have around $130m net cash at the end of this year. It has virtually no decommissioning costs. It is comfortably able to maintain its current dividend which if you include the share buybacks is well over 19% at today's market cap. If it chooses to reduce the dividend then that will only be because it wants to make other investments which should ultimately benefit shareholders to a greater extent. I think it will soon bid for Enquest. There is huge paranoid being expressed on all these boards every day about the new Labour Government. But I think we will all be pleasantly surprised when (a) investment allowances are only marginally reduced and (b) there is a commitment to fiscal stability throughout the lifetime of the present Parliament. Labour does not to lose its recently acquired swathe of Scottish seats and that means it cannot afford to destroy the entire oil and gas industry.

Shareholders need to stop catastrophising about the new Government. Increasing the windfall tax to 38% and trimming the investment allowances and banning new licences will not prevent Serica from continuing to pay a dividend of 17.4% at today's market cap. Total returns to shareholders should also include the share buybacks which are likely to be at least repeated next year. That adds an effective return of 2.2%. So the total sustainable return is 19.6% per annum. And even at that rate there will be capital generated to buy additional assets either in the Uk or elsewhere.

Thomas F

I accept that we should rely upon the accounts rather than an off the cuff remark at a shareholders' meeting. I was astonished when $400m was mentioned and wished I had asked him to explain the figure in the accounts which is as you say over $700m. The merger would/should be a purchase by Enquest issuing new shares to Serica shareholders so that the latter ended up with roughly two thirds of the company (more or less in line with current market cap). The much larger company (if it happened almost immediately) should have a net debt of around $150m (although both face some heavy EPL payments later in the year). There would be a reduction in the overall rate of tax, a huge slashing of opex costs and a greatly increased combined FCF.

It is all perfect. A liquidator is a forced seller. And no one else is looking to buy because of the 78% tax. BUT our tax is 38%. So use the cash and buy something with an 18 month payback period.

Absolutely. Buy that. Perfect instantaneous fit.

Stevo,

I agree one has to be a bit cautious about 2026. However if nearly all of the FCF generated in 2025 is used to pay down actual debt rather than add to a cash pile the finance costs could fall by $30m in 2026 over 2025. We then have been told that there should be a saving of $30m in diesel costs over 2025. We also know that leasing costs come down over 2025. On production we have no guidance. But there has been a lot of capex this year which was designed to increase production in 2025 so I am hoping 2026 will be much the same as 2025. Incidentally you used the figure of plus 1000 barrels a day for 2025. It could be quite a bit more. Why do you think opex will be higher? If you are adjusting for inflation then you need to the same for the price of Brent. I agree it will all be academic if as seems likely there is some meaningful m and a.

I do not think there is anything being missed by anyone. What there is however is the most overwhelmingly miserable sentiment. But precisely because the company has started to buy its own shares and will up the purchases in 2025 I think that will change quickly. The paradox is that the low sp enables far more shares to be purchased and then cancelled.

What is the significance of 12.26p? None at all. The only way to value any share is to try to work out the stream of likely FCF over time and then discount future years to give a Net Present Value. With this little company there are two points of great uncertainty (a) the future price of Brent and (b) the budget in October. So to come up with a proper valuation you have to make moderate assumptions. I say (a) assume Brent price remain the same and (b) assume 38% EPL and a reduction in allowances to 80% (from 91%). You then have to use the company's own figures for 2025 and make certain further assumptions as to opex and capex for 2026 and beyond. Well doing that exercise for three years only I have FCF 2024 of $160m (including farmdown) 2025 $240m (see Stevo's analysis in late March) and yes 2026 $300m. And guess what? Applying a 7% deferment rate on the basis of those three years only the market cap should be $160m plus $223m plus $258m which comes to $641m. That is roughly twice our present market cap. And because I have done it for three years only you have to assume zero value at the end of 2026. Likely? Of course not.. The present rating of Enquest Serica et al represents the greatest opportunity of all times. The market has got it so very wrong.

No one really knows what will be done on investment allowance. What does closing loopholes really mean? But I think there will be a reduction from 91% to around 80% and of course the EPL will rise to 38%. That will have zero effect on Enquest until October 2026. The worst the changes the better Enquest's relative tax position becomes. Could snap up some cash producing assets for a song.

Mansardman during the period 1997 to 2010 the UK economy grew at 2.3% a year. Since 2010 under the coalition and Conservatives it has averaged 1.2% a year. So whatever you think of Labour, their track record is not of "crashing" the economy. And in fact the tax take as a percentage of gnp was lower overall that it has been under the Tories.