On 21st November 2017 Serica Energy (LSE:SQZ) announced it had agreed to acquire the North Sea offshore oil interests of BP, which includes the Bruce, Keith and Rhum (BKR) fields. Described by Serica’s directors as ‘transformational for the company’, the stock trebled in value within weeks of the news. In May, the company alerted the market to the fact that one of the fields, Rhum, might find itself entwined in the wrangle over Trump’s sanctions on Iran since the Iranian Government effectively owns the other 50% of the field. With the stock sitting just above its 200 Day Moving Average (DMA), is today’s 61p asking price offer a good buying opportunity?
North Sea acquisition
As part of the acquisition, an initial £12.8m payment is due to be paid by Serica upon completion, and this is expected in mid-2018. Other significant contingent payments in excess of £40m are also due to be made by Serica in the years ahead.
Much of the financing for the deal is due to come from free cash flows anticipated to be generated by BKR. Consequently, the company opted not to raise equity finance to fund the acquisition.
On the news, Serica’s share price jumped from 27.6p on the 21st of November 2017 to a closing high of 91p on the 15th of January 2018. The high in January had been preceded by an announcement that production at BKR had resumed following a successful repair of the Forties Pipeline system originally revealed as faulty on the 12th of December 2017.
Today, a share price of 62p gives Serica a Market Cap of circa £162m with a known Net Asset Value (NAV) of US $102,296,000.
The acquisition was deemed a reverse-takeover and the Admission Document stated, on an unaudited basis, that the BKR assets generated a profit of $72,504,000 for the six-month period to the 30th of June 2017. Doubling this figure and adding it to Serica’s last full year profit of US $20,489,000 in 2017 (after deducting $3,386,000 of BKR acquisition costs) implies it is possible for Serica to generate an annualised profit of circa US $165,000,000 from 2019 onwards. But there is a potential problem…
Sanction implications
On the 8th May, the company announced that it had noted comments made by Donald Trump in relation to Iran and possible sanctions. The reason for the concern is that the other half of the Rhum field is effectively owned by the Iranian Government. Consequently, Serica could become entangled in US sanctions. Further clarity is currently being sought but the company potentially faces being constrained from the full economic benefits to be derived from the soon to be 50% owned Rhum field. The market reacted strongly to this news and the share price, which was around 85p pre-announcement, fell to a low of 53p just three days later. The stock made a partial recovery to 75p but the rally was thwarted on the confirmation that sanctions were to be imposed on Iran.
On 22nd May, the company updated the market on the situation stating:
“Serica and BP are both committed to resolving the issue of US sanctions as they apply to Rhum with a view to enabling a timely completion of the BKR Transaction in the third quarter of 2018 and safeguarding ongoing operations. The deferral of work on the R3 well, pending resolution of the sanctions position, is not expected to impact the long-term recovery of Rhum reserves, nor the completion of the BKR Transaction.”
On further investigation, it appears that previous sanctions on Iran had a very big impact on operations across the BKR fields, with BP shutting in Rhum for a number of years from 2010. This, in turn, led to BP questioning the long-term future of the Bruce field which shares infrastructure with the Rhum field. In 2013, a spokeswoman for Total, one of BP’s partners on the field said: “It (Bruce) will have to be stopped and decommissioned in the years to come if the situation with Rhum does not evolve”.
Fundamentally, the potential profits achievable make Serica a very attractive proposition, particularly with the current valuation. But further clarity on the implications of sanctions on Iran is critical information to consider, with potentially disastrous consequences should a shutdown of Rhum be necessary again.
