This morning saw Serica Energy (LSE:SQZ) announce plans to significantly increase its stake in the Bruce and Keith North Sea oil and gas fields, helping to push its shares up 16.6pc to 82p. The business will pay an initial $5m and a further $15m to acquire Total E&P UK’s 42.25pc stake in Bruce and 25pc position in Keith. With Serica agreeing to buy stakes and take over operatorship of Bruce and Keith- alongside a further site called Rhum- from BP in November, today’s transaction brings its total interest in the fields to 78.25pc and 59.83pc respectively.
With Bruce and Keith’s net production reaching around 4,700boe/din H1 2018, of which 83pc was gas, Serica said today’s deal will be immediately cash flow and value accretive once it has completed. It added that it will significantly increase its existing estimated net 2P reserves of c.49mmboe, as announced at the time of the BP deal. Finally, the firm said the deal will be funded from existing revenues and expects it to further strengthen its position as one of the leading mid-tier independent oil and gas producers on the UK Continental Shelf.
Today’s acquisition is slated to complete by the end of Q3 2018, but it is conditional on the deal between Serica and BP reaching completion. The BP deal was complicated earlier this year by the introduction of US sanctions on Iran, with the Iranian government effectively 50pc owning the Rhum field. At the time, Serica said: ‘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’
In today’s update, Serica said it will only have to pay Total the further $15m cash consideration – payable in three $5m instalments – if production continues at Rhum, because the field’s resources are transferred via Bruce and Keith. If production at Rhum is interrupted, the company said any relevant instalments will be deferred, providing it with ‘protection in the event that US sanctions are imposed more widely than currently anticipated’.
However, the firm is by no means out of the woods as a result of this condition. As we pointed out in June, BP had to shut Rhum for four years in 2010 when sanctions were imposed on Iran. This, in turn, led BP toquestion the long-term future of Bruce, which shares infrastructure with Rhum. Likewise, in 2013, a spokeswoman for Total, said: ‘It (Bruce) will have to be stopped and decommissioned in the years to come if the situation with Rhum does not evolve’.
Luckily, a solution was found in 2014 when a temporary management scheme was set up that froze revenue due to Tehran, the Iranian state-backed entity, until sanctions were lifted in January 2016 and production could resume. It is obviously possible that this kind of solution will be adopted again, but there remain risks of delays, or worse, a failure to secure any resolution at all.
Fundamentally, the potential profits achievable in the North Sea make Serica a very attractive proposition, particularly with shares being battered somewhat since the sanctions were first announced. However, 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.
On today’s deal, Mitch Flegg, chief executive of Serica Energy, said: ‘We are delighted to have reached agreement with Total E&P to increase our stakes in the Bruce and Keith fields to 78.25% and 59.83% respectively. This further acquisition, following on from the BKR Transaction and coupled with the transfer of operatorship of the Bruce, Keith and Rhum fields to Serica UK, places us in a strong position to unlock increased value from the assets and benefit from economy of scale. This is exactly in line with the Government’s intention to maximise the economic recovery of assets in the North Sea, and we believe that both of these acquisitions will benefit our shareholders, partners and employees.
‘This acquisition is a logical next step for us. It provides us with further scale, builds on our asset base and moves us closer towards our objective of being a highly efficient, profitable mid-tier operator focused on the UK North Sea, where we believe there is plenty of potential for further growth. For our shareholders we are building considerable additional value whilst protecting our balance sheet through another innovatively structured deal that benefits both parties.’