Serica shares dented by £3m hit to H1 earnings from drilling delay

Despite dealing with drilling issues at its North Eigg oil well and the threat of a windfall tax, the Serica Energy share price could be set to rebound. Investor sentiment looks positive as the company prepares to release its H1 results, following the UK government’s decision to scrap the windfall tax proposal.

With gas prices hovering at record highs, North Sea gas producer Serica Energy [SQZ.L] could be on track to post another set of robust results when it reports its H1 update on 27 September.

The UK upstream oil and gas producer has seen its share price gain considerably in 2022 amid concerns about stable energy supplies in the wake of the Ukraine-Russia war. Serica’s share price has risen 58.8% year-to-date, however, has pulled back since hitting a 52-week high of 454p during intraday trading on 30 August to sit at 371p on 22 September.

However, it hasn’t all been plain sailing for the FTSE AIM 100 stock. On 14 September, the firm said that drilling delays at its North Eigg well, in the Northern North Sea, would impact the company to the tune of £3m, after equipment failed. Shares fell by 2.2% in response to the news.

CEO Mitch Flegg remained upbeat, saying that while technical delays were “extremely frustrating”, they wouldn’t impact the well’s chances of success. The company hopes North Eigg can provide low-emission gas for the UK for 10 years from 2025. 

Core assets ‘undervalued’

In July, Serica rejected a £1bn merger proposal from Kistos, saying the offer substantially undervalued the company’s core assets and could make it liable to more debt. The Serica share price gained 32.8% throughout the month and rallied to a 52-week high in August, though it has since slipped 18.3% from this peak.

However, it all forms part of a picture that suggests Serica is in good shape going forward. In April, the firm delivered positive full-year earnings for the year ended December 2021. It reported profits before tax of £135.1m, and gross profits of £387m, a substantial improvement on its 2021 loss of -£3m. It also noted cash resources of £218m, again significantly up on 2021’s £91m.

The company said it was benefiting from new production at its Rhum R3 and Columbus wells amid the rally in commodity prices. It also underlined that the company had “no debt”, saying it was well placed for M&A activity, with a “strong and stable” position for fiscal year 2022. Serica announced its shareholder dividend would rise to 9p, from 3.5p in 2021.

Analysts rate Serica stock a ‘buy’

If Serica’s North Sea projects can move past recent technical difficulties and fulfil its production targets, the company looks well-placed to capitalise on growing domestic gas demand. The company is set to release updates on its North Eigg well in December.

One hiccup for Serica this year was the looming shadow of a potential windfall tax on energy companies to help protect hard-hit consumers’ pockets, which led to Serica’s stock slumping to a low at the end of May. However, Liz Truss’ recent decision to U-turn on implementing the tax is likely to benefit Serica and other energy companies. 

At its FY 2021 earnings call, chairman Tony Craven Walker said Serica had seen a “remarkable transformation” from the small company it was a few years ago.

In April, Jefferies analyst Mark Wilson wrote in a note that the the firm’s position in the UK gas market was “unrivalled”. He upgraded Serica’s stock to a ‘buy’ off the back of rising commodity prices and offered a 12-month target price of 600p, representing a 61.7% increase on the Serica share price’s last close on 22 September. At The Wall Street Journal, four analysts currently rate the stock a ‘buy’.