By Kristy Dorsey
North Sea independent Serica Energy is set to review its dividend policy in expectation of “very significant” shareholder returns on the back of record high gas prices.
The company, which accounts for roughly 5 per cent of the UK’s gas production, said new output from its Rhum R3 and Columbus wells will benefit from the unprecedented rise in prices triggered by shortages arising from supply chain disruptions. Considering the strong gas price trends currently unfolding, Serica will review the level of dividend for 2021, having paid 3.5p per share last year.
Reporting its results for the first half of this year, Serica noted that wholesale market prices averaged more than 56p per therm, about three times higher than in the same period a year earlier. Since the start of September, prices have further surged to average closer 150p per therm.
“In the current environment Serica’s focus on gas production and investment in new projects is expected to generate very significant returns for shareholders and help support further investment,” chief executive Mitch Flegg said.
“In the first half of the year, we continued to pursue our strategy of capital investment in our assets. This has allowed us to recomplete the Rhum R3 well and bring it into production in August and to drill the Columbus development well which is now ready to produce.
READ MORE: North Sea oil firm shrugs off well setback as it prepares to increase output
“Serica’s production is over 80% gas and we are delighted that we are already seeing the benefits of our investment strategy in the second half through increasing production levels at a time of record high wholesale prices.”
Discovered by Serica in 2006, Columbus is a new development located to the east of Aberdeen. Serica has a 50% interest in the project, which is expected to produce about 7,000 barrels of oil equivalent per day (boe/d) – approximately three-quarters of which is likely to be gas – when it comes on stream in the fourth quarter.
The R3 well that forms part of the giant Rhum gas field off Shetland has since August added more than 4,000 boe/d to production capacity. The well was originally drilled in 2005 but was never brought into production.
Serica – which built its position as a leading North Sea independent by acquiring assets that bigger operators appeared to have lost interest in – purchased a 50% stake in the Rhum field from BP in 2017.
READ MORE: Oil and gas firm which is big employer in Aberdeen advances
The company remains in the market for further acquisitions, but it said that extreme price volatility has made it difficult to executive transactions.
“During the period we have made proposals to acquire significant asset packages but to date we have not secured a deal at a price that is attractive to us,” Mr Flegg said. “We will not overpay in order to secure a quick deal, but we continue to work on a number of opportunities to grow the company.”
The results for the first six months of the year do not reflect the impact of recent record price rises, but the improvement from the lows of 2020 saw revenues more than double despite a reduction in production.
First half production averaged 18,900 boe/d, down from 21,600 boe/d in the same period a year earlier. This was impacted by a planned maintenance outage for the Forties Pipeline System, and by shutdowns to carry out other maintenance delayed from 2020 by the pandemic.
READ MORE: Oil firm highlights potential of undeveloped finds off Shetland
Revenues rose to £100.8m against £46m previously, but pre-tax profits fell to £2.2m from £20.4m because of provisions for hedging losses. Serica is choosing to keep more than 80% of its projected oil and gas volumes unhedged to retain “material upside” amid “extraordinary volatility” in global markets.
Looking ahead, Serica said drilling remains set to get underway next year on an exploration well at North Eigg, which lies just northwest of Rhum. The prospect is thought to hold gas equivalent of up to 70 million barrels of oil.
Serica, which has an operations centre in Aberdeen and headquarters in London, also announced the appointment of former Premier Oil director Richard Rose as a non-executive director. Shares in the AIM-listed company closed yesterday’s trading 5.5p higher at 220.5p.
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