US/Iran sanctions continue to hit Serica Energy, but is this a buying opportunity? (SQZ)

By Patricia Miller

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The reintroduction of US sanctions on Iran dealt another blow to Serica Energy (LSE:SQZ) today, but recent share price weakness could potentially be creating an exciting buying opportunity for the firm. Shares fell 3.6pc, or 2.6p, to 67.8p after the business announced the delay of work at the Rhum field in the North Sea due to the involvement of the state-backed Iranian Oil Company, which owns a 50pc stake. Serica announced an agreement to purchase an interest in the Rhum field – alongside two other North Sea fields called Bruce and Keith – from BP last November.

Specific services at Rhum are obtained from the US Office of Foreign Assets Control, bringing into question the potential impact on the site of Donald Trump’s recent decision to reimpose sanctions on Iran. Operator BP had been planning to re-complete the Rhum R3 well at the site this week but has deferred the work until the position relating to US sanctions is clarified, to ensure safe and efficient operations.

Despite the complications, Serica said progress on the transaction – which will also see it take over as operator – remains on schedule and is expected to complete in the third quarter of 2018. Furthermore, the deferral of work on the R3 well is not likely to impact the long-term recovery of Rhum reserves. Serica added that it is working closely with BP and the Iranian Oil Company to evaluate the potential impact of the sanctions and has the support of UK authorities in all discussions.

Mitch Flegg, Serica’s chief executive, said: ‘As a British company working to maximise the full recovery of Britain’s gas reserves in line with OGA and UK Government policy, we will be working with our partners and the UK Government to identify measures, acceptable to the US authorities, to protect safe and efficient Rhum operations and ensure maximum economic recovery of reserves from this valuable UK resource. We are receiving full support from all the relevant UK authorities in these efforts. All aspects of completing the BKR transaction remain on track: an Aberdeen office has been identified; key staff are being recruited by Serica, and the transition process of moving operational staff and contracts from BP to Serica is well advanced. All parties are working to see a successful completion’.

Today marks the second time Serica has been dealt a blow by concerns over the implications of US sanctions on Iran on its operations. Earlier this month, its shares tanked 21.6pc after it issued a statement simply saying it was ‘evaluating the implications’ of Trump’s comments. With shares now down by nearly a fifth since the release of that statement, it could be worth taking a looking at buying shares in Serica.

With the three fields that it is planning to purchase from BP producing up to 5pc of the UK’s domestic gas, it seems likely that the sites are likely to have the full backing of Britain’s government going forward. If this proves to be the case, and they are in fact ‘too important to fail’, then the recent fall in Serica’s shares could prove to be an over-reaction.

On the other hand, there is an argument to be made that it is impossible to predict where Donald Trump and the US will go next with their hard line against Iran. Indeed, new US secretary of state Mike Pompeo promised the ‘strongest sanctions in history’ on the country earlier this week. If this sort of sabre-rattling and aggressive rhetoric continues, then Serica’s position could be complicated.

Author: Daniel Flynn

Disclosure: The author of this piece does not own shares in the company mentioned

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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