TIDMSQZ
RNS Number : 0427W
Serica Energy PLC
13 April 2023
Serica Energy plc
("Serica" or the "Company")
Results for the year ended 31 December 2022
London, 13 April 2023 - Serica Energy plc (AIM: SQZ), a British
independent upstream oil and gas company with operations in the UK
North Sea today announces its audited financial results for the
year ended 31 December 2022. The results are included below and
copies are available at www.serica-energy.com and www.sedar.com
.
Commenting on the results, Mitch Flegg, Serica's CEO stated:
" 2022 was another year of outstanding progress for Serica.
There was strong growth in production volumes, a significant
upgrade to reserves and increased profitability at all levels.
Serica's two-pronged strategy is to invest in our high-quality
portfolio of UK North Sea assets to unlock value and prolong their
life whilst continuing to target future acquisition opportunities.
It is to be hoped that the Government will ensure that the fiscal
terms applying in the UK North Sea make the UK competitive for
future energy investment.
We have now completed the acquisition of Tailwind which has
boosted production and reserves and provides a number of
short-cycle growth opportunities for the Company.
I'm delighted that we can recommend an increased final dividend
of 14p per share. The continued strength of the Company underpins
the intention to maintain or increase the dividend in future years.
"
2022 Summary
-- Profits increased at all levels with a 93% increase in
operating profit and a 124% increase in profit after tax, boosted
by the end of BKR net cash flow sharing, increased production
volumes and higher commodity prices.
-- Average net production of 26,200 boe per day compared to
22,200 boe per day for 2021, an 18% increase.
-- Serica 2P reserves increased to 74.9 million boe effective 1
January 2023 (1 January 2022: 62.2 million boe) with Group 2022
production replaced more than two-fold .
-- Acquisition of Tailwind Energy Investments Limited announced
on 20 December 2022 and completed post year-end on 23 March
2023.
-- Final 2022 dividend of 14p per share recommended, bringing
2022 full year total to 22p per share(1) compared to 9p per share
for 2021.
Financial
-- Average 2022 realised sales price, after hedging, of approx.
US$104 per boe (2021: US$77 per boe) and average operating cost of
US$15.7 per boe (2021: US$16.5 per boe).
-- Operating profit of GBP476.2 million (2021: GBP246.1 million) after:
o realised losses of GBP45.4 million on 2022 gas price hedging
(2021: GBP56.6 million)
o unrealised gains of GBP20.9 million on hedge valuations (2021:
losses GBP74.6 million)
o E&E asset write-off of GBP82.7 million related to North
Eigg exploration well.
-- Profit after tax of GBP177.8 million (2021: GBP79.3 million)
after current tax charges of GBP277.7 million (2021: GBP15.8
million) and non-cash deferred tax provisions of GBP32.7 million
(2021: GBP40.0 million).
-- Net cash inflow from operating activities of GBP560.1 million
(2021: GBP157.6 million) including:
o GBP91.0 million net release of cash security held by gas price
hedge counterparties (2021: net payments lodged GBP113.6
million)
o GBP143.5 million cash taxes paid in 2022 (2021: nil). Further
GBP140 million of 2022 tax charges paid in early 2023.
-- Closing cash at 31 December 2022 of GBP432.5 million (2021:
GBP103.0 million) plus a further GBP24.3 million of cash security
lodged with gas price hedge counterparties (2021: GBP115.4
million). Remaining cash hedge security fully released post year
end. Closing cash at 31 December 2022 is after:
o GBP97.1 million exploration and development spend (2021:
GBP52.2 million)
o GBP93.9 million final BKR cash flow related payments (2021:
GBP81.3 million)
o GBP46.3 million dividends paid (2021: GBP9.4 million).
-- Following the 2022 year end the Directors became aware that a
filing in respect of certain dividends paid in 2022 had not been
made as required under the Companies Act. Accordingly a resolution
will be proposed at this year's AGM to resolve this.
Operational
-- Updated independent audit of field reserves reported Serica's
share of estimated remaining 2P reserves as 74.9 million boe
effective 1 January 2023:
o represents net upward revision of about 250% of 2022
production compared to 62.2 million boe reported as at 1 January
2022
o result of projected deferral of Bruce hub cessation of
production until 2035, ongoing interventions on Bruce wells and
plans for further drilling.
-- Initial Light Well Vessel Intervention campaign conducted in
mid-2022 to boost production from two Bruce wells with further
campaigns planned:
o M1 re-entered and rates increased from 400 boe/d to 1,800
boe/d in July after successful scale removal, water shut-off and
perforation/reperforation
o similar programme then carried out on M4 increasing rates from 450 boe/d to 2,400 boe/d.
-- North Eigg HPHT exploration well successfully drilled to
16,728 feet - encountered hydrocarbons in sub-commercial quantities
and well has been suspended pending analysis of data and assessment
of any further potential in the area.
ESG
-- Reduced carbon intensity on Bruce platform by 8% compared to
2021 through closer emissions monitoring, improved performance and
greater production efficiency.
-- Developed and submitted Bruce Emissions Reduction Action Plan
(ERAP), demonstrating a pathway to meeting the North Sea Transition
Deal emissions reduction targets.
-- Supported new technology projects such as energy from waves,
eco-friendly concrete, alternative fuels, arial methane monitoring
and flare gas combustion efficiency.
Outlook
-- Tailwind acquisition completed in late March 2023 and is
already contributing strongly to Serica's combined reserves growth
and production rates as well as better diversifying the Group's
offtake routes and commodity balance and offering a range of near
term investment options:
o updated Tailwind reserves report shows increase in 2P reserves
from 41.8 million boe at 1 January 2022 to 55.5 million boe at 1
January 2023, replacing 2022 production four-fold
o Gannet GE04 well onstream in February 2023 at initial
production rates above 10,000 boe/d and exceeding pre-drill
estimates
o net production for the combined Serica and Tailwind portfolios
averaged 46,800 boe/d during Q1 2023
o preparations during 2023 for a four-well Triton area drilling
campaign in 2024 starting with the Gannet GE05 well
o integration plans on track, including sharing best practices,
prioritising work programmes and high grading investment
opportunities.
-- Combined Group production guidance range for 2023 maintained
at 40,000 - 47,000 boe/d on a full year proforma basis:
o combined operating costs to remain below $20 per boe
o Price hedging under borrowing facility for oil production
acquired from Tailwind
-- 2023 from 23 March, approx. 11,000 bbl/d @ average
$58/bbl
-- 2024 approx. 4,000 bbl/d @ average $74/bbl
-- A second light Well Intervention Vessel campaign to enhance
production on BKR wells planned for the summer with a further
campaign expected in 2024.
-- Subject to shareholder approval at the AGM, a final 2022
dividend of 14p per share will be payable on 27 July 2023 to
shareholders registered on 30 June 2023 with an ex-dividend date of
29 June 2023.
-- Completion of the acquisition of Tailwind puts the Company in
a strong position to maintain and grow its dividend. Following the
introduction of an interim dividend in 2022, future dividends will
continue to be paid in two annual instalments determined by the
financial performance and cash flow generation of the business.
A conference call for sell-side analysts will be held later
today at 9:30 am (UK time). If you would like to participate,
please email serica@vigocomms.com . A copy of the accompanying
presentation can be found on our website: www.serica-energy.com
.
Investor Presentation
Mitch Flegg will provide a live presentation relating to the
full year results via the Investor Meet Company platform on 24
April 2023 at 4.00pm BST.
The presentation is open to all existing and potential
shareholders. Questions can be submitted pre-event via the Investor
Meet Company dashboard up until 9.00am the day before the meeting
or at any time during the live presentation.
Investors can sign up to Investor Meet Company for free and add
to meet Serica Energy plc via:
https://www.investormeetcompany.com/serica-energy-plc/register-investor
Investors who already follow Serica on the Investor Meet Company
platform will automatically be invited
Note:
(1) The interim dividend was paid to shareholders on the
register at that time (approx. 273 million shares) and the final
dividend will be paid to the shareholders on the register on 30
June 2023 (expected to be approx. 381 million shares) .
Regulatory
This announcement is inside information for the purposes of
Article 7 of Regulation 596/2014 as retained in the UK pursuant to
S3 of the European Union (Withdrawal) Act 2018.
The technical information contained in the announcement has been
reviewed and approved by Fergus Jenkins, VP Technical at Serica
Energy plc. Mr. Jenkins (MEng in Petroleum Engineering from
Heriot-Watt University, Edinburgh) is a Chartered Engineer with
over 25 years of experience in oil & gas exploration,
development and production and is a member of the Institute of
Materials, Minerals and Mining (IOM3) and the Society of Petroleum
Engineers (SPE).
Enquiries:
+44 (0)20 7390
Serica Energy plc 0230
Mitch Flegg (CEO) / Andy Bell (CFO)
+44 (0)20 7418
Peel Hunt (Nomad & Joint Broker) 8900
Richard Crichton / David McKeown
Jefferies (Financial Advisor & Joint +44 (0)20 7029
Broker) 8000
Tony White / Will Soutar
+44 (0)20 7390
Vigo Consulting 0230
Patrick d'Ancona / Finlay Thomson serica@vigocomms.com
CHAIRMAN'S STATEMENT
Dear Shareholder
Last year I wrote to you against the backdrop of international
turmoil following Russia's invasion of Ukraine and the
consequential major disruptions to energy supply. This resulted in
significant volatility in energy prices throughout the year which
saw UK day-forward gas prices peak for a short period in August
2022 at over GBP6/therm. Since then they have fallen and are now
back to the level of two years ago, approximately 80% lower than
the level reached last August.
In the meantime, however, the Government has raised taxes on the
offshore industry to a level which does not reflect current prices
or provide for a price floor level. This has impacted the smaller
companies disproportionately far more than the international
companies and is likely to become unsustainable given that prices
are now very materially below the levels envisaged when the tax
rises were introduced. Combined, this has had a material effect on
the share prices of companies such as Serica and puts a question
mark over the financing of many North Sea projects.
The important role of the smaller UK upstream companies
operating in the North Sea, many of them British, is to optimise
the production of remaining North Sea reserves for the ultimate
benefit of the UK at a time when the provision of energy security
has never been more important. But to do this needs a stable fiscal
environment in which we can plan and operate with taxes at a level
commensurate with the risks that we take. Setting taxes on profits
at the current 75% level without any provision for falling prices
drives away the financing which is required.
It is to be hoped that the Government will review its current
policy and derive a new basis upon which companies like Serica can
thrive and show the innovation which is needed to bring the full
benefit of offshore resources to the UK in parallel with the energy
transition efforts being made by the major companies.
Notwithstanding the background against which we have to operate,
Serica has been able to add value in the four years since acquiring
the Bruce, Keith and Rhum (BKR) assets in late 2018 and taking over
as operator. Our efforts to-date had already extended the
decommissioning date to the end of this decade, illustrating the
innovation and technical skill of the smaller companies. Our teams
in Aberdeen and offshore are now working on projects to extend the
life of these assets still further and optimise producible reserves
in the right fiscal environment and this is reflected in our latest
reserves report.
As a result of the careful management of our financial resources
Serica remains strongly financed. 2022 reflects the first year
following the end of the BKR earn-in period which now enables us to
derive the full benefit of our interest in BKR. The benefits of the
resultant cash flow uplift can be seen in our results. Although we
found gas in the North Eigg well which will require further
evaluation we have taken full provision for the well to reflect the
uncertain outlook. The resulting group profit before taxation for
the year after this provision amounts to GBP488 million against the
prior year GBP135 million. After providing for the impact of
materially increased taxes, GBP278 million of which are current
cash payments, after tax profit was GBP178 million against prior
year GBP79 million.
We are committed to a dividend policy which reflects the
underlying performance of the Company and which provides a good
return to shareholders in an uncertain environment whilst also
leaving room for investment in continuing asset growth. In November
we paid an interim dividend of 8 pence per share. Subject to
approval of shareholders at the Annual General Meeting in June
2023, we are proposing a final dividend of 14 pence per share, an
increase on last year and bringing the total dividend for the year
to 22 pence per share.
We continue to look for ways to increase our opportunity for
value accretion. At the turn of the year we announced our intention
to acquire Tailwind Energy Investments Ltd. We have made it clear
for some time that over-reliance on a single asset, BKR, whilst
showing considerable ongoing potential, is not a sensible policy
and the Tailwind transaction provides us with the opportunity to
achieve better balance, both from a portfolio perspective and from
a commodity perspective. This should provide us with the strength
to manage uncertain times whilst also adding value for shareholders
and is structured in a way to maintain the full strength of our
balance sheet.
Shareholders approved the Tailwind acquisition at an
Extraordinary General Meeting held in January and, following
receipt of all conditions precedent, we announced completion of the
transaction in March. Serica is now a broader spread company with
interests in two North Sea hubs, one of which it operates, and
better exposure to an oil/gas mix. The acquisition also brings a
portfolio of near term investment opportunities as well as strong
reserves and production growth. We believe that the transaction is
fully compatible with our ESG objectives and Serica is optimistic
that the full benefit of the combination will start to come through
this year.
As part of building the company to the scale and size that we
now are, we have also been looking to strengthen and broaden the
Board. I am delighted that Jérôme Schmitt, who joined the Board in
mid-2022, and Michiel Soeting, who joined in February 2023, are
providing us with the benefit of their knowledge and experience.
Both bring significant financial and strategic insight to the
Board. Following the Tailwind acquisition we also welcome Rob
Lawson and Guillaume Vermersch who will further strengthen and
broaden the Board and bring additional and complementary
experience.
Finally, my own role. I have been on the Board since the Company
started as a small exploration company operating in the North Sea
and South East Asia. I have seen it through the transition to the
company that it is today, a very significant British-based upstream
operator with material operations in the North Sea and generating
good returns to shareholders. I am proud of that achievement and am
proud of the team that has made it possible. I am sure that all
shareholders would like me to thank them. The Company has a very
strong team, a strong balance sheet, a very material production
base and very strong credentials, all of which put it in a good
position for future success.
In line with good corporate governance practice, due to my
length of service I shall be standing down from the Chair and the
Board at the end of our forthcoming Annual General Meeting and am
delighted that David Latin has agreed to take over as Chair from
that date. David has been on the Board since the end of 2021 and
brings enormous experience to the Company both as an Independent
Director and shortly as Non-Executive Chairman. David has over 30
years' working in the upstream sector including senior roles at BP
plc and the OMV Group where he led growth of a significant business
in the North Sea, Africa and Australasia. More recently he has
developed his knowledge of private equity investing as a founder of
First Alpha Energy Capital and of the energy transition via venture
capital backed Talaria Technology. With David in the Chair and a
strong Board and Executive Team I am sure that the Company is in
good hands.
Tony Craven Walker
Chairman
12 April 2023
STRATEGIC REPORT
The following Strategic Report of the operations and financial
results of Serica Energy plc ("Serica") and its subsidiaries (the
"Group") should be read in conjunction with Serica's consolidated
financial statements for the year ended 31 December 2022.
References to the "Company" include Serica and its subsidiaries
where relevant. All figures are reported in GB Sterling ("GBP")
unless otherwise stated.
The Company is subject to the regulatory requirements of AIM, a
market of the London Stock Exchange in the United Kingdom. Although
the Company delisted from the Toronto Stock Exchange ("TSX") in
March 2015, the Company is a "designated foreign issuer" as that
term is defined under Canadian National Instrument 71-102 -
Continuous Disclosure and Other Exemptions Relating to Foreign
Issuers.
Serica is an independent oil and gas company with production,
development and exploration interests in the UK Continental
Shelf.
CEO's REVIEW
2022 has been another year of outstanding achievement for
Serica. Net production for the year was 26,200 boe/d an increase of
some 18% on the previous year. This increase is further
illustration of the successful strategy of investing in our assets
in order to both add value and prolong their lives. The Company
still has a strong balance sheet with significant cash and limited
decommissioning liabilities. This has allowed us to make these
investments despite the backdrop of volatile commodity prices and
an unstable fiscal regime.
Two major capital growth projects were executed during the year.
Our first Light Well Intervention Vessel ("LWIV") campaign was
carried out in the second quarter of the year with a scope of
production re-instatement, well surveillance, production
enhancement and well integrity activities on a number of subsea
wells tied back to the Bruce platform. Some of these wells had not
been re-entered for over 20 years. The initial well (Bruce M1) was
re-entered for the first time since 1998. After a successful scale
removal and water shutoff, a significant reperforation and new
perforation campaign was executed and the well returned to
production. Production rates from the well increased from around
400 boe/d before intervention to over 1,800 boe/d in July 2022.
A similar programme was followed on the second well (Bruce M4)
and production rates for the well were increased from around 450
boe/d to over 2,400 boe/d.
The second project was the North Eigg exploration well which was
drilled in the second half of the year. Although the well was
drilled safely and successfully encountered hydrocarbons, the
reservoir sands were thinner than prognosed and so the hydrocarbons
found are not of commercial quantities. The data acquired from the
well is being analysed to determine if a future sidetrack location
can be designed to evaluate the volumes of hydrocarbon in this new
discovery. The well has been suspended prior to future potential
re-entry and sidetrack.
In 2022 Serica had gas price hedging in place covering
approximately one quarter of gas sales (or around one fifth of
combined oil and gas production). These hedges were in the form of
swaps and equivalent fixed price instruments. The majority (approx.
80%) of Serica's oil and gas production was unhedged allowing the
Company to benefit from the historically high gas prices and strong
oil prices. During the year, the highly erratic gas futures market
had a huge impact on hedge security requirements which at one point
stood at over GBP300 million. These security requirements fell
throughout the second half of the year as Serica's remaining gas
price hedges continue to expire and stood at GBP24 million at year
end.
On 26 May 2022 the UK government announced the introduction of
an Energy Profits Levy (EPL), a new 25% levy on profits arising on
or after that day. On 17 November, the rate was increased to 35%,
bringing the combined tax rate to 75%. However, incentives to
reinvest in additional oil and gas reserves offer Serica the
opportunity to mitigate its impact. Therefore, we will maintain our
ongoing investment in near term opportunities from our existing
portfolio and look for further opportunities where they can be
justified under the current tax regime.
Against this background the Company is steadily increasing its
returns to shareholders, a key element of the strategy. In November
we paid an interim dividend of 8 pence per share. Subject to
approval of shareholders at the Annual General Meeting in June
2023, we are proposing a final dividend of 14 pence per share, an
increase on last year and bringing the total dividend for the year
to 22 pence per share.
In December we announced that Serica had entered into an
agreement to acquire the entire issued share capital of Tailwind
Energy Investments Ltd ("Tailwind") from Tailwind Energy Holdings
LLP. The transaction achieves our strategic objective of materially
increasing the scale and diversity of our UKCS portfolio of assets.
The Tailwind portfolio also brings multiple organic investment
opportunities for further material near-term growth in reserves and
production. Following this transaction, Serica will retain its
competitive strengths of a strong balance sheet, positive cash flow
and low decommissioning cost obligations. Moreover, through the
introduction of Mercuria as a new strategic investor, we will be
differentially positioned to take advantage of the opportunities we
expect to arise through industry consolidation, the North Sea
Transition Deal and potentially overseas.
As announced on 5 April 2023, Serica has commissioned a new
Competent Person's Report ("CPR") effective 1 January 2023 which
included a significant upgrade to net 2P reserves estimates. Our
net 2P reserves stood at 62.2 million boe at 1 January 2022 and our
2022 net production was 8.3 million boe after adjustment for fuel
gas but our net 2P reserves at 1 January 2023 stand at 74.9 million
boe with revisions having replaced more than twice the level of
2022 production. This achievement is further evidence that Serica's
long-term strategy is delivering value.
Similarly, a CPR was commissioned for the Tailwind Reserves
effective 1 January 2023. For the Tailwind portfolio net 2P
reserves stood at 41.8 million boe at 1 January 2022 and 2022 net
production was 4.2 million boe but net 2P reserves at 1 January
2023 stand at 55.5 million boe. Taking the two portfolios together,
upward net revisions of 2P reserves were more than three times the
amount of production in 2022.
Our industry is essential for the economic and environmental
prosperity of our country. Our brilliant, skilled people work
tirelessly to produce the energy from offshore locations around
Britain that powers not just our homes, transport and industry, but
the everyday products we need to live well.
We are proud to make a huge contribution to the UK economy.
Serica alone has paid GBP284 million in tax to the UK Exchequer
since the start of 2022 and in 2022/23 alone our upstream industry
as a whole will add at least GBP28bn to the UK economy. In addition
to its pivotal role in securing the energy security of the country,
the upstream sector has a sizeable impact on the UK balance of
payments and provides 215,000 skilled jobs across the length and
breadth of the country.
The industry is committed to delivering Net Zero by 2050, but
alongside expanding into energy sources like wind and hydrogen, the
UK will continue to need oil and gas. The Climate Change Committee
concludes that oil and gas will meet 50% of the UK's energy needs
in the mid-2030s and will still provide 22% in 2050. Around 40% of
the UK's electricity comes today from gas fired power stations and
in 2022, domestic gas production met 44% of the UK's total needs
reducing the requirement for imports.
Finally, I would like to recognise the outstanding performance
of our 180 strong workforce who have again exceeded expectations
and I welcome the new staff who have joined us from Tailwind. I
would also like to acknowledge the incredible contribution of Tony
Craven Walker who has today announced that he will be standing down
as Chair. Tony has been instrumental in the development of the
Company from its early stages through to its establishment at one
of the UK's top ten producers, and I would like to personally thank
him for the experience and guidance that he has provided to me and
the entire management team. I look forward to working with the
incoming Chair, Dave Latin who I have known for many years.
I believe we have an outstanding workforce, management team and
Board and a combination of skills that will drive the company even
further to create more value for shareholders.
Mitch Flegg
Chief Executive Officer
12 April 2023
ACQUISITION OF TAILWIND ENERGY INVESTMENTS LTD
After the end of the year, on 23 March 2023 Serica Energy
completed the acquisition of Tailwind Energy Investments Ltd, a
privately owned independent oil and gas company with assets in the
UK North Sea. As part of the transaction, Mercuria - an investor in
Tailwind - became a strategic investor in Serica.
Tailwind was formed in 2016. Through a combination of
acquisitions, production enhancements and development of new
fields, executed by a small and expert team of oil and gas
professionals, it built a portfolio of upstream assets situated in
the UK North Sea. At the end of 2022 this portfolio had 2P reserves
of 55.5 million boe, with a rising production profile that reached
an average 23,300 boe/d in December 2022.
The assets acquired by Serica with the Tailwind transaction
comprise primarily a mix of operated and non-operated producing
fields tied-back to the Triton FPSO in the UK Central North Sea.
Tailwind's interests in producing fields also include 100% in the
Orlando field located in the UK Northern North Sea and a
non-operated 25% in the Columbus field in the UK Central North Sea
(operated by Serica).
The acquisition of Tailwind was aimed at achieving Serica's
longstanding objective to have a more diverse and broadly based
UKCS portfolio of producing fields, with material reserves and
value upside potential, coupled with a more balanced exposure to
commodity price risk. The transaction represents substantial
progress towards this objective with the number of producing fields
increased from five to eleven, mainly centred around two hubs
(Bruce and Triton), a substantial increase in 2P reserves (combined
130.4 million boe as at 31 December 2022) and a balance of gas and
oil production.
The acquisition has also added considerably to the organic
investment opportunities in Serica's portfolio. Rig slots have been
reserved in order to drill infill wells on the Bittern, Gannet E,
Guillemot North West and Evelyn fields in 2024; all of which are
existing tie-backs to the Triton FPSO. The potential developments
of the Belinda field as a tie-back to the Triton FPSO and the
Mansell field, situated in the UK Northern North Sea, are being
evaluated. All these activities will continue under the ownership
of Serica, whose team has been supplemented by the addition of
Tailwind staff.
These substantial enhancements to Serica's portfolio of upstream
assets have been achieved while maintaining the Company's financial
strength. Moreover, Serica retains a relatively low level of
decommissioning liabilities largely as a result of foundational
transactions by both Serica and Tailwind in the past involving the
sellers retaining such obligations. Serica's strong balance sheet,
allied with expected net cash inflows from the enlarged portfolio,
provides a basis for continued dividends to shareholders,
investment in the existing portfolio and further acquisitions. Very
few UKCS-focused independent oil and gas companies share this same
combination of attributes.
As described elsewhere in the Annual Report and Serica's
forthcoming updated ESG Report, making a positive contribution to
the North Sea Transition Deal is a key objective. Serica will use
its operating experience and support the infrastructure operators
of the Tailwind assets to reduce emissions. The longer-term outlook
depends in part on investments to reduce emissions from the Bruce
and Triton hubs. As operator of the Bruce hub and co-owner of the
Triton FPSO, Serica is engaged in the development and
implementation of GHG Emissions Reduction Action Plans for both
facilities.
REVIEW OF OPERATIONS
Production
Northern North Sea: Bruce Field - Blocks 9/8a, 9/9b and 9/9c,
Serica 98% and operator
Serica operates the Bruce field and facilities consisting of
three bridge-linked platforms, wells, pipelines and subsea
infrastructure. The platforms contain living quarters, reception,
compression, power generation, processing and export facilities and
a drilling derrick that is currently mothballed. There is also the
subsea Western Area Development (WAD) that produces from the edges
of the Bruce area.
Bruce production is predominantly gas which is rich in liquids.
Gas is exported through the Frigg pipeline to the St Fergus
terminal, where it is separated into sales gas and NGL's. Oil is
exported through the Forties Pipeline System to Grangemouth.
In 2022, activity returned to pre-Covid levels on the platform
as national controls were relaxed. A 14-day maintenance campaign
focussing on integrity works was executed in the summer. During
this campaign we completed the removal of the redundant caisson
that had interrupted production in 2020. In addition, a Bruce
platform well work campaign was successfully executed in Q3.
Operations included well integrity maintenance, production logging,
adding perforations to the upper producing zones and water
injectivity trials.
In addition, the first vessel-based interventions (LWIVs) of
Serica's ownership took place on two of the WAD wells, performing
logging, maintenance interventions, water shut-off, scale removal
and addition of new perforations. Both interventions were
successful and have helped define future targets for campaigns in
2023 and 2024.
Prior to carrying out the intervention on the WAD wells,
maintenance on the field electrical supply was carried out
including replacement of master control system (MCS) modules and
power leads to protect production from the WAD area. Further work
is planned ahead of the 2023 intervention campaign.
Bruce field production in 2022 averaged approx. 6,900 boe/d
(2021: 6,700 boe/d) net to Serica. Full year production reliability
was 94%.
The latest independent estimate of reserves by RISC Advisory
estimated 2P reserves of 31.8 million boe net to Serica as of 1
January 2023 (2022: 15.8 million boe). This increase reflects the
benefits from future planned well interventions and from field life
extension beyond 2030.
Northern North Sea: Keith Field - Block 9/8a, Serica 100%
Keith is an oil field produced by one subsea well tied back to
the Bruce facilities and requires very little maintenance. In
normal operation Keith produces at a relatively low rate but
provides a low-cost contribution to the oil export from Bruce.
During 2022 work was undertaken on the electrical supply to Keith
which discovered a fault in the system. The system was isolated and
production shut in ahead of a replacement being fitted in Q3 2023.
This, in combination with a well intervention planned for Q2 2024,
is expected to restore the field to sustained production.
The latest independent estimate of reserves by RISC Advisory
estimated 2P reserves of 2.4 million boe net to Serica as of 1
January 2023 (2021: nil). These reserves are recognised based upon
the planned 2023 and 2024 programmes.
Northern North Sea: Rhum Field - Blocks 3/29a, Serica 50% and
operator
The Rhum field is a gas condensate field producing from three
subsea wells tied into the Bruce facilities through a 44km
pipeline. Rhum production is separated into gas and oil and
exported to St Fergus and Grangemouth along with Bruce and Keith
production. Rhum gas has a higher CO(2) content than Bruce gas and
so is blended with Bruce gas before leaving the offshore
facilities.
In February 2022, the master control system (MCS) module
supplying power to the Rhum wells failed in service shutting down
the field. A vessel was sourced and the spare MCS was fitted
restoring production after an 18-day outage. The recovered MCS has
been overhauled to ensure that a spare remains available. Also
during 2022 the Rhum separator on the Bruce topsides was
debottlenecked to allow more flexibility optimising production from
all three Rhum wells.
Rhum field production in 2022 averaged in excess of 15,700 boe/d
net to Serica. Full year production reliability was 80%.
The latest independent estimate of reserves by RISC Advisory
estimated 2P reserves of 36.4 million boe net to Serica as of 1
January 2023 (2022: 37.2 million boe). This represents an increase
in reserves after 2022 production is taken into account which
arises from the extension of field life into the 2030s.
Central North Sea: Erskine Field - Blocks 23/26a (Area B) and
23/26b (Area B), Serica 18%
Serica holds a non-operated interest in Erskine, a gas and
condensate field located in the UK Central North Sea. Serica's
co-venturers are Ithaca Energy 50% (operator) and Harbour Energy
32%. Erskine fluids are processed and exported via the Lomond
platform, which is 100% owned and operated by Harbour. Serica
provide a secondee to Lomond as part of the offshore management
team.
The Erskine field has five production wells and produces oil and
gas over the Erskine normally unattended installation, which is
transported to Lomond via a multiphase pipeline and processed on
the Lomond platform. Then condensate is exported down the Forties
Pipeline System via the CATS riser platform at Everest and gas is
exported via the CATS pipeline to the CATS terminal at
Teesside.
In March 2022 an intervention to replace the downhole safety
valve on well W5 was successfully carried out and a 22-day
maintenance outage was carried out in July and August. An
intervention to reinstate production from another well is being
considered for late 2023 or early 2024.
Erskine production levels in 2022 averaged over 1,680 boe/d
(2021: 1,650 boe/d). Operating efficiency in 2022 was 76%.
An updated independent audit of the Erskine field by RISC
Advisory confirmed Serica's share of estimated 2P reserves at 3.3
million boe as of 1 January 2023 (2022: 3.4 million boe). The level
of estimated remaining reserves at the beginning of 2023 matched
those at the point of acquisition in June 2015 with all production
in the intervening period effectively having been replaced through
reserves upgrades to-date.
Central North Sea: Columbus Field - Blocks 23/16f and 23/21a
(part), Serica 50% and operator
The Columbus Development is located in the UK Central North Sea
and produces from a gas-condensate reservoir in the Forties
Sandstone Formation. The development consists of a single
horizontal well which runs along the central axis of the reservoir,
drilled in the spring of 2021, and production commenced in November
2021.
The Columbus well is connected to the Arran export pipeline
through which Columbus production is exported along with Arran
Field production. When production reaches the Shearwater platform,
it is separated into gas and condensate. The gas is exported to St
Fergus via the SEGAL line and the condensate to Cruden Bay via the
Forties Pipeline System.
Columbus had good initial test rates and started production in
November 2021. Flow rates declined during the first few months of
production and average Columbus production in 2022 was around 1,900
boe/d net to Serica. There were two planned outages during 2022, a
10-day field outage in January and an 18-day Shearwater maintenance
outage in August.
Columbus reserves had a downward revision in 2022 due to
analysis of data gathered from the first full year of production,
and the subsequent interpretation of this data. The latest
independent report of reserves, compiled by RISC Advisory,
estimated 2P reserves of 1.1 million boe net to Serica as at 1
January 2023 (2022: 4.9 million boe) after allowing for production
of 0.6 million boe during 2022.
UK Exploration
North Eigg and South Eigg - Blocks 3/24c and 3/29c, Serica
Energy (UK) Limited 100% and operator
In December 2019, Serica was awarded the P2501 Licence as part
of an out of round application; this comprises Blocks 3/24c and
3/29c and contains the North Eigg and South Eigg prospects. The
official start date for the licence was 1 January 2020. The work
commitment included drilling an exploration well within two years.
The North Eigg prospect was high-graded for drilling, as it was
believed to share many similarities with the nearby Rhum field,
operated by Serica.
T he 3/24c-6B North Eigg exploration well was drilled to a total
depth of 16,728 feet in the Jurassic Heather formation and initial
analysis indicated that, whilst the well encountered hydrocarbons,
commercial quantities were not encountered by the wellbore. At the
well location, the objective sands were thinner than had been
prognosed, with a total of 16 feet of hydrocarbon-bearing sands
discovered. These did however confirm the presence of hydrocarbons
at a deeper depth than in the adjacent producing Rhum field.
A full suite of wireline logging data was acquired and analysis
of this, along with results from core and fluid samples recovered
is ongoing and will be used to update geological interpretations
and models. The results of the interpretation will determine
whether a future sidetrack of the well can be designed to better
evaluate the volumes of hydrocarbon in this new discovery.
The well was left suspended in a way that would allow potential
re-entry and sidetrack, or abandonment, as appropriate.
Skerryvore and Ruvaal- Blocks 30/12c (part), 30/13c (split),
30/17h, 30/18c and 30/19c (part), Serica Energy (UK) Limited: 20%
working interest, Operator Parkmead
The Skerryvore and Ruvaal prospects lie in the Central North
Sea, 60km south of the Erskine field. Potential for both sandstone
and chalk reservoirs has been identified.
In September 2022, the P2402 Joint Venture elected not to
proceed to the next phase of the Licence and that has therefore now
been relinquished (effective date 30 September 2022).
Parkmead, CalEnergy and Serica decided to move ahead with P2400
(Skerryvore), though NEO chose to withdraw. Serica maintained its
equity in the licence, staying at 20%. Both Parkmead and CalEnergy
increased their shares to 50% and 30% respectively, absorbing the
equity previously held by NEO (effective date 30 September
2022).
The next phase of the Licence includes a commitment well before
October 2025 and the Joint Venture are targeting a well by the end
of 2024.
Licence Awards in the UK 32(nd) licensing round
In December 2020 Serica was formally awarded four new blocks in
the UK 32(nd) licensing round. Blocks 3/25b, 3/30, 4/26 and 9/5a
are in the vicinity of the Bruce hub and include several leads
which, if successful, could be tied back to Serica's existing
infrastructure, or to other facilities in the region. The work
programme does not include any commitment wells but is designed to
mature these leads to drill-ready status. A decision whether to
continue with the licences is due before the end of 2023. A
decision about next steps therefore needs to be nominated to NSTA
by the end of September 2023.
Group Proved plus Probable Reserves ("2P")
Total oil
Oil Gas and gas*
mmbbl bcf mmboe
2P Reserves at 31 December
2021 13.2 294.1 62.2
------------ ------------- -------------
2022 production (1.0) (43.7) (8.3)
Revisions 6.5 87.0 21.0
2P Reserves at 31 December
2022 18.7 337.4 74.9
============ ============= =============
*Total Group gas reserves at 31 December 2021 and 2022 have been
converted to barrels of oil equivalent using a factor of 6.0 bcf
per mmboe for reporting and comparison purposes. As the actual
calorific values of gas produced from individual fields varies,
reported production rates for each field and the total production
and revisions numbers reported above may not convert precisely.
Group Proved and Probable reserves at 31 December 2022 shown
here are extracted from an independent report prepared by RISC
Advisory ("RISC") in accordance with the reserve definitions
guidelines defined in SPE Petroleum Resources Management System
2018 ("PRMS 2018"). RISC were familiar with the assets, having also
completed an audit in the previous year.
Figures quoted relate to export fluids, so Fuel in Operation has
already been subtracted.
Aggregate reserves revisions result from several factors,
including field production performance in the time between audits
and prevailing commodity prices, which are used for the economic
evaluation.
Some volumes classified as contingent resources during the
previous audit have now been re-classified as reserves, primarily
because work has been included in the approved forward work
programme to further enhance production. In addition, the Rhum R3
well has performed at the upper end of expectations since its
successful workover.
Columbus reserves had a downward revision due to analysis of
data gathered from the first full year of production, and the
subsequent interpretation of this data.
For the previous report, Serica had assumed the permanent
cessation of production (COP) for the Bruce hub would occur at the
end of 2030 which was reflected in the CPR prepared by RISC. As
part of the 'North Sea Transition Deal' the UK plans 'Zero Routine
Flaring' at the end of 2030, and hence continuing production past
that date requires investment related to flare gas recovery and
other emission reduction measures. During 2022, Serica matured
plans to undertake the projects necessary to meet these
requirements and the cost of the projects has been included in the
economic modelling required to determine economic cut-offs used to
determine reserves. On the basis of these plans and the economic
analysis, the new CPR assumes that Bruce hub production will
continue to 2035 which is a significant part of the upward revision
in 2P reserves.
The CPR takes account of the Energy Profits Levy ("EPL")
introduced by the UK Government in 2022 (and subsequently revised)
which did not previously apply.
LICENCE HOLDINGS
The following table summarises the Group's licences as at 31
December 2022.
Licence Block(s) Description Role % Location
UK
--------- ------------------- --------------------------- ------------- ----- ---------------
P.090 9/9a Bruce Bruce Field Production Operator 99% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.090 9/9a Rest of Block Development Operator 98% Northern North
Excluding Bruce Sea
(REST)
------------------- --------------------------- ------------- ----- ---------------
P.198 3/29a (ALL) Rhum Field Production Operator 50% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.209 9/8a Bruce Bruce Field Production Operator 98% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.209 9/8a Keith Keith Field Production Operator 100% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.209 9/8a Rest of Block Development Operator 98% Northern North
Excluding Bruce Sea
and Keith (REST)
------------------- --------------------------- ------------- ----- ---------------
P.276 9/9b BRUCE Bruce Field Production Operator 98% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.276 9/9c (ALL) Bruce Field Production Operator 98% Northern North
Sea
------------------- --------------------------- ------------- ----- ---------------
P.276 9/9b Rest of Block Development Operator 98% Northern North
Excluding Bruce Sea
Unit (REST)
------------------- --------------------------- ------------- ----- ---------------
P.566 3/29b (ALL) Rhum Field non-unitised Operator 100% Northern North
production Sea
------------------- --------------------------- ------------- ----- ---------------
P.975 3/24b (ALL) Rhum non-unitised Operator 100% Northern North
production Sea
------------------- --------------------------- ------------- ----- ---------------
P.975 3/29d (ALL) Rhum non-unitised Operator 100% Northern North
production Sea
------------------- --------------------------- ------------- ----- ---------------
P101 23/21a Columbus Columbus Development Operator 50% Central North
Area Sea
------------------- --------------------------- ------------- ----- ---------------
Columbus Development Central North
P1314 23/16f Area Operator 50% Sea
------------------- --------------------------- ------------- ----- ---------------
Central North
P57 23/26a Erskine Field - Production Non-operator 18% Sea
------------------- --------------------------- ------------- ----- ---------------
Central North
P264 23/26b Erskine Field - Production Non-operator 18% Sea
------------------- --------------------------- ------------- ----- ---------------
30/12c, 30/13c, Central North
P2400 30/17h, 30/18c Exploration Non-operator 20% Sea
------------------- --------------------------- ------------- ----- ---------------
Northern North
P2501 3/24c, 3/29c Exploration Operator 100% Sea
------------------- --------------------------- ------------- ----- ---------------
3/25b, 3/30, 4/26, Northern North
P2506 9/5a Exploration Operator 100% Sea
------------------- --------------------------- ------------- ----- ---------------
F INANCIAL REVIEW
2022 RESULTS
Serica generated a profit before taxation of GBP488.2 million
for 2022 compared to GBP135.1 million for 2021. After current and
deferred tax provisions of GBP310.4 million (2021: GBP55.8
million), profit for the year was GBP177.8 million compared to
GBP79.3 million for 2021.
Profits were boosted during the year by a combination of
increased production arising from successful 2021 investment on the
Rhum R3 and Columbus wells, work on Bruce wells during 2022 and
from high gas prices. Serica's continuing success in replacing oil
and gas production since completion of the BKR acquisitions through
investment assists the Company in counteracting the normal decline
profiles of mature fields in the UKCS and thus sustaining financial
performance.
Sales revenues
The total 2022 sales revenue of GBP812.4 million (2021: GBP514.1
million) included GBP37.5 million of gas supply contract revenue
(2021: GBPnil). Gas supply contract revenue reflects the
extinguishing of liabilities which were booked upon the conversion
of some gas price swaps into fixed pricing under gas sales
agreement during 2021. These liabilities are extinguished when the
relevant gas volumes are delivered with an equivalent credit to the
income statement.
Total product sales volumes for the year comprised approximately
431.5 million therms of gas (2021: 373.7 million therms), 1.1
million lifted barrels of oil (2021: 0.8 million barrels) and
71,290 metric tonnes of NGLs (2021: 52,400 metric tonnes). The
combined sales revenue of GBP812.4 million (2021: GBP514.1 million)
consisted of BKR revenues of GBP678.2 million (2021: GBP463.4
million), Erskine revenues of GBP63.6 million ( 2021: GBP36.3
million) and Columbus revenues of GBP70.6 million (2021: GBP14.4
million).
Average 2022 sales prices net of system fees were: 160 pence per
therm including contract revenue (2021: 122 pence per therm) for
gas, US$97.2 per barrel (2021: US$71.4 per barrel) for oil and
GBP480 per metric tonne (2021: GBP340 per metric tonne) for NGLs.
This gave a combined realised sales price net of hedging of US$104
per barrel of oil equivalent (2021: US$77 per boe). The average gas
sales price of 160 pence per therm reflects a mix of volumes sold
at current spot prices and volumes sold at contracted fixed prices.
This is before gas price hedging costs on the retained gas price
swaps detailed below. The fixed price element represented a
reduction from daily spot pricing averaging approximately 30 pence
per therm (2021: nil).
Gross profit
The gross profit for 2022 was GBP594.3 million compared to
GBP386.8 million for 2021. Overall cost of sales of GBP218.2
million compared to GBP127.3 million for 2021. This comprised
GBP121.0 million of operating costs (2021: GBP97.1 million) and
GBP76.9 million of non-cash depletion charges (2021: GBP37.0
million), reflecting higher production volumes and the impact of
reduced Columbus reserves. A further charge of GBP20.3 million
represents a movement during the year of the opening liquids
underlift to a significant overlift position (2021: credit of
GBP6.9 million).
Operating costs comprise production, processing, transportation
and insurance and also included some non-recurring charges.
Operating costs per boe were US$15.7, compared to US$16.5 for 2021.
Costs per boe have benefitted from the fixed elements of production
costs being spread over increased production volumes but this has
been partly offset by underlying cost inflation and exceptional
costs related to the Rhum production interruption in Q1.
The 2022 depletion charge reflects the impact of a full year of
Columbus production. Following the significant downgrade to
Columbus reserves in the year, Columbus depletion is charged at a
relatively higher unit cost per boe than the other producing assets
and this has increased the overall depletion charge.
Operating profit before BKR fair value adjustment, net finance
revenue and tax
The operating profit for 2022 was GBP476.2 million compared to
GBP246.1 million for 2021. This included hedging expense, related
to gas price swaps, of GBP45.4 million realised during 2022 (2021:
GBP56.6 million) partly offset by unrealised hedging income of
GBP20.9 million (2021: expense GBP74.6 million). Unrealised income
represented the movement in respective valuations of future period
swaps outstanding at year end 2021 and year end 2022.
An E&E asset write-off for 2022 of GBP82.7 million (2021:
GBPnil) comprised drilling costs from the North Eigg exploration
well incurred to 31 December 2022. The well encountered
hydrocarbons, but not of commercial quantities as the reservoir
sands were thinner than prognosed. The expenditure is applicable
for total tax offset of approx. 85%. Further analysis of data is
ongoing to assess if a future sidetrack location can be designed to
evaluate further and the well has been suspended.
Administrative expenses for 2022 of GBP9.2 million compared to
GBP6.1 million for 2021 mainly due to an increase in corporate
activity, including advisor costs on projects separate to the
Tailwind acquisition.
Transaction costs of GBP1.8 million (2021: GBPnil) comprise work
on the due diligence, negotiation and structuring of the Tailwind
transaction during 2022.
Share-based payments were GBP3.5 million (2021: GBP2.4 million)
and currency gains were GBP3.9 million (2021: losses of GBP0.9
million) largely arising on GBP-reported US$ holdings as sterling
weakened compared to the US$ during 2022.
Profit before taxation and profit for the period after
taxation
Profit before taxation for 2022 was GBP488.2 million (2021:
GBP135.1 million) after an GBP8.4 million credit arising from a
decrease in the fair value of the BKR financial liability (2021:
charge of GBP110.5 million) and GBP3.6 million of net finance
revenue (2021: net costs of GBP0.4 million).
The 2022 fair value credit of GBP8.4 million relating to the BKR
financial liability largely arose from an increased discounting
effect from field life extension on the estimated amounts of those
remaining liabilities. The fair value of the liabilities, which are
described under BKR asset acquisitions below, is re-assessed at
each financial period end. The prior year charge of GBP110.5
million included significant increases in the settlement of final
net cash flow sharing and Rhum contingent consideration that
occurred following higher production and gas prices impacting these
items in 2H 2021.
Net finance revenue represents interest income earned on cash
deposits offset by the discount unwind on decommissioning
provisions and other minor finance costs.
As the Group had fully utilised its remaining losses carried
forward from previous years during 2021, cash taxes are payable on
2022 income. In addition to corporation tax and supplementary
charge, 2022 full year results also include charges for the newly
introduced Energy Profits Levy ("EPL"). The EPL applies an
additional 25% tax on profits earned from the production of UK oil
and gas from 26 May 2022, increasing to 35% from January 2023 to
March 2028.
The 2022 taxation charge of GBP310.4 million (2021: GBP55.8
million) comprised current tax charges of GBP277.7 million (2021:
GBP15.8 million) and non-cash deferred tax charge of GBP32.7
million (2021: GBP40.0 million). The current tax expense includes
an EPL current tax charge of GBP64.3 million. The deferred tax
expense includes a one-off non-cash deferred tax charge of GBP59.0
million due to the introduction of the EPL. This arises because the
deferred UK tax position on our balance sheet has been revalued
from 40% to 75%, where relevant, to reflect the increase in our
future tax rate in the period to 10 March 2028.
Overall, this generated a profit after taxation of GBP177.8
million for 2022 compared to a profit after taxation of GBP79.3
million for 2021.
GROUP BALANCE SHEET
Exploration and evaluation assets reduced by GBP1.9 million in
the year from GBP2.9 million at 31 December 2021 to GBP1.0 million
at 31 December 2022. New expenditure of GBP80.8 million on UK
licences during the year largely comprised GBP80.0 million on
drilling the North Eigg prospect. However, this was more than
offset by E&E asset write-offs of GBP82.7 million comprising
2022 and prior period North Eigg well costs.
Total property, plant and equipment decreased from GBP328.9
million at year end 2021 to GBP265.9 million at 31 December 2022.
Additions comprised capital expenditure during 2022 of GBP16.3
million mainly on the Bruce LWIV campaign. These were offset by
depletion charges for 2022 of GBP76.9 million (2021: GBP37.0
million), decommissioning asset revisions of GBP2.2 million and
other depreciation charges of GBP0.2 million (2021: GBP0.2
million). Depletion charges represent the allocation of field
capital costs over the estimated producing life of each field and
comprise costs of asset acquisitions and subsequent investment
programmes. Depletion charges on the Columbus asset increased
significantly from 2021 given the full year of production on the
asset and reduction in the asset reserve base.
An inventories balance of GBP4.0 million and trade and other
receivables of GBP134.6 million at 31 December 2022 showed little
change from year end 2021.
Hedging advances of GBP24.3 million at 31 December 2022 (31
December 2021: GBP115.4 million) represented cash security lodged
with commodity hedging counterparties, covering both remaining
swaps and fixed forward prices, and is based upon gas futures
prices at the end of December 2022. This is returned to Serica
should forward gas prices fall or when monthly contracts are
settled. Hedging advances showed extreme fluctuations in 2022
reflecting the extraordinary volatility in the gas market this
year.
The increase in cash balances from GBP103.0 million at 31
December 2021 to GBP432.5 million at 31 December 2022 reflected
cash flow from operations of GBP704.9 million mainly offset by
significant taxation payments of GBP143.5 million, dividends paid
of GBP46.3 million, capital expenditures of GBP97.1 million and
GBP93.9 million of final net cash flow and other consideration paid
to BKR counterparties.
Current trade and other payables increased to GBP69.9 million at
31 December 2022 from GBP33.7 million at the end of 2021, mainly
due to the timing of significant ongoing operational work on North
Eigg in Q4 2022 and the generation of a significant oil overlift
balance during 2022.
The balance of UK corporation tax payable of GBP150.0 million
(31 December 2021: GBP15.8 million) represents final instalments
due in respect of 2022, covering corporation tax, supplementary
charge and EPL. The increase from 2022 reflects Serica being a
tax-payer for the full 2022 period following the utilisation of tax
losses in 2021, and increased tax rates applicable from 26 May
2022. Significant corporation tax payments of GBP143.5 million were
made in 2H 2022.
Derivative financial liabilities of GBP24.9 million at 31
December 2022 (31 December 2021: GBP45.8 million) represent the
valuation of gas price swaps remaining in place at the year end and
the consequent amounts projected to be due based upon futures
pricing prevailing at that date.
Gas contract liabilities arising from the replacement of some
gas price swaps by contracted fixed price elements as described
above, comprise current liabilities of GBP1.0 million (31 December
2021: GBP37.5 million) and non-current liabilities of GBPnil (31
December 2021: GBP1.0 million).
Current financial liabilities of GBPnil (31 December 2021:
GBP93.9 million) and non-current financial liabilities of GBP29.4
million (31 December 2021: GBP37.8 million) comprise remaining
deferred consideration projected to be paid under the BKR
acquisition agreements.
The current financial liability of GBP93.9 million at 31
December 2021 comprised the final two net cash flow sharing
payments due, those for November and December 2021 totalling
GBP63.3 million, a fixed payment of GBP16.0 million arising from
the successful outcome of the Rhum R3 well operations and a further
GBP14.6 million of contingent consideration in respect of Rhum
field performance during 2021 and over the previous two years.
These amounts were all settled in 1H 2022.
Non-current financial liabilities comprised deferred
consideration in respect of BKR decommissioning and oil linefill.
Under arrangements for those BKR field interests acquired from BP,
Total E&P and BHP, decommissioning liabilities were retained by
the vendors with Serica liable to pay deferred consideration
equivalent to 30% of the actual costs of decommissioning net of tax
recovered by them.
Non-current provisions relate to future decommissioning
obligations. These showed a decrease of GBP2.9 million from GBP28.1
million at 31 December 2021 to GBP25.2 million at 31 December 2022.
The decrease arose from GBP1.2 million of expenditure on suspended
wells and GBP2.3 million of downward revisions to discounted cost
estimates offset by a GBP0.6 million expense due to the unwinding
of the discount applied to the estimates.
The deferred tax liability of GBP153.3 million at 31 December
2022 increased from GBP120.6 million at year end 2021 and reflects
accounting provisions expected to be released in future periods now
the Group's tax losses have been fully utilised. The deferred tax
position in the balance sheet has been revalued from 40% to 75%
where applicable to reflect the increase in the future tax rate in
the period to 10 March 2028 resulting from the EPL.
Overall, net assets have increased from GBP272.5 million at year
end 2021 to GBP408.7 million at 31 December 2022 after payment of
dividends of GBP24.5 million in July 2022 and GBP21.8 million in
November 2022.
The increase in share capital from GBP182.0 million to GBP183.2
million arose from shares issued following the exercise of share
options and shares issued under employee share schemes, whilst the
increase in other reserves from GBP22.1 million to GBP25.6 million
arose from share-based payments related to share option awards.
CASH BALANCES AND FUTURE COMMITMENTS
Current cash position and price hedging
At 31 December 2022 the Group held cash and cash equivalents of
GBP432.5 million (31 December 2021: GBP103.0 million) excluding
cash lodged as security with gas price hedge counterparties. Of
total cash and cash equivalents, GBP18.1 million was held in a
restricted account against letters of credit issued in respect of
certain decommissioning liabilities as at 31 December 2022 (31
December 2021: GBP12.9 million). Having utilised all of its tax
losses carried forward by end 2021, Serica's first cash tax
instalments of GBP143.5 million, were paid in 2H 2022, including
the first instalment of the Energy Profits Levy paid in December
2022. Final instalments for 2022 were paid in January 2023.
No gas price hedges have been added since July 2021. In August
2021, some gas price swaps for 2022/3 were replaced by equivalent
pricing for the same volumes fixed directly under gas sales
contracts. These were valued at that date and are held as gas
contract liabilities in the balance sheet without further
revaluation. These liabilities are then extinguished when the
relevant gas volumes are delivered. Consequently, Serica's gas
price hedging comprises a mix of gas price swaps, fair valued at
the balance sheet date, and fixed pricing under gas sales contracts
which is held at initial value until extinguished.
At 31 December 2022 Serica held gas price swaps and equivalent
fixed pricing under gas sales agreements for periods up to Q3 2023.
For 2023, it held an average 150,000 therms per day for H1 and
50,000 therms per day for Q3 at average prices of 49 pence per
therm and 41 pence per therm respectively. At 31 December 2022,
cash hedging security advances of GBP24.3 million had been lodged
with hedge counterparties as security against settlement of future
hedge instruments (31 December 2021: GBP115.4 million).
Outstanding gas hedging is around 10% of volumes for 1H 2023
with negligible amounts remaining thereafter. The low level of
remaining hedges continues to reduce exposure to hedge security
requirements. The Company's oil and liquids production remains
unhedged.
As of 31 March 2023, the Company held cash and cash equivalents
of GBP389.3 million, after payment of cash consideration for the
Tailwind acquisition of GBP61.6 million on 23 March 2023.
Cash projections are run periodically to examine the potential
impact of extended low oil and gas prices as well as possible
production interruptions. Serica currently has substantial net cash
resources and relatively low operating costs per boe which means
that the Company is well placed to withstand such risks and its
capital commitments can be funded from existing cash resources.
Field and other capital commitments
There are no existing capital commitments on the Erskine
producing field and net production revenues are expected to cover
all ongoing field expenditures. Serica's 18% share of
decommissioning costs will be met by BP up to a level of GBP31.3
million, adjusted for inflation, and Serica's current estimate of
such costs is below this level.
There are no significant existing capital commitments on the BKR
producing fields. Potential further programmes to enhance current
production profiles and extend field life are under consideration.
Net revenues from Serica's share of income from the BKR fields is
expected to cover Serica's retained share of ongoing field
expenditures as well as deferred consideration due under the
respective BKR acquisition agreements set out below. Serica's share
of decommissioning costs relating to its interests in the existing
BKR field facilities will be met by the vendors apart from those
field shares acquired from Marubeni (Bruce 3.75%, Keith 8.33%) for
which Serica is directly responsible.
On the Columbus field, Serica's share of production revenue is
expected to cover Serica's share of ongoing field expenditures.
Decommissioning obligations are limited as the development
comprises a single well linked via a subsea completion to an
existing pipeline.
The Group's only significant exploration commitment is the
drilling of a commitment well on Licence P2400 (Skerryvore) to be
drilled before October 2025.
BKR asset acquisitions
On 30 November 2018 Serica completed the four BKR acquisitions.
During 1H 2022, the final elements of contingent cash consideration
arising from the net cash flow sharing arrangements, and other
contingent payments arising from Rhum R3 well production and Rhum
performance criteria, were made. The following elements of
consideration were outstanding at 31 December 2022:
-- BP, Total E&P and BHP retain liability, in respect of the
field interests Serica acquired from each of them, for all the
costs of decommissioning those facilities that existed at the date
of completion. Serica will pay deferred consideration equal to 30%
of actual future decommissioning costs, reduced by the tax relief
that each of BP, Total E&P and BHP receives on such costs.
These are held as non-current financial liabilities at 31 December
2021 and 2022. Staged prepayments against such projected amounts
commenced in 1H 2022 (GBP9.1 million is included within trade and
other receivables in the Balance Sheet at 31 December 2022) and
will be spread over the remaining years before cessation of field
production.
-- Serica will pay to each of BP, Total E&P and BHP,
deferred consideration equal to 90% of their respective shares of
the realised value of oil in the Bruce pipeline at the end of field
life. These are held as non-current financial liabilities at 31
December 2021 and 31 December 2022.
OTHER
Asset values and impairment
A review was performed for any indication that the value of the
Group's oil and gas assets may be impaired at the balance sheet
date of 31 December 2022 and no impairment triggers were noted
other than for the Columbus production asset following the
significant downgrade in reserves for the asset. The future
recoverable amounts of the Columbus were then assessed and no
impairment was recorded.
At 31 December 2022, Serica's market capitalisation stood at
GBP777.9 million based upon a share price of 285.0 pence which
exceeded the net asset value of GBP408.7 million. By 11 April the
Company's market capitalisation has risen to GBP911.0 million.
BUSINESS RISK AND UNCERTAINTIES
Serica, like all companies in the oil and gas industry, operates
in an environment subject to inherent risks and uncertainties. The
Board regularly considers the principal risks to which the Group is
exposed and monitors any agreed mitigating actions. The overall
strategy for the protection of shareholder value against these
risks is to carry a broad portfolio of assets with varied
risk/reward profiles, to apply prudent industry practice, to carry
insurance where both available and cost effective, and to retain
adequate working capital.
Serica has built a strong working capital reserve which is
available to respond to a range of risks including production
interruptions, severe commodity price falls and unexpected costs.
To supplement this the Company carries business interruption
insurance to mitigate the impact of ongoing operating costs over
sustained periods of production shut-in beyond an initial 60 days,
where caused by events covered under such policies. The Company
also uses price hedging instruments to help manage field revenues
where considered cost effective
The principal risks currently recognised and the mitigating
actions taken by management are as follows:
Investment Returns: Management seeks to invest in a portfolio
of exploration, development and producing acreage capable
of delivering returns to shareholders through acquisitions
of producing assets to which it can add further value and
through the discovery and exploitation of commercial reserves.
Delivery of this business model carries a number of key risks.
Risk Mitigation
-----------------------------------------------------------------
Business conditions may deteriorate
and * Management regularly communicates its strategy to
stock market support may be shareholders
eroded lowering investor appetite
and obstructing fundraising
* Focus is placed on building a diverse and resilient
asset portfolio capable of offering investment
options throughout the business cycle
-----------------------------------------------------------------
Each investment carries its
own risk profile and no outcome * Management aims to avoid over-exposure to individual
can be certain assets, to identify the associated risks objectively
and mitigate these where practical
-----------------------------------------------------------------
Operations: Operations may not go according to plan leading
to damage, pollution, cost overruns or poor outcomes.
Risk Mitigation
------------------------------------------------------------------
Production may be interrupted
generating significant revenue * The Company seeks to diversify its revenue streams
loss whilst costs continue to
be incurred
* Management determines and retains an appropriate
level of working capital
* The Group carries business interruption cover
------------------------------------------------------------------
Safety may be compromised or
control of production may be * Safe operating procedures are applied and updated
lost
* Emergency response planning is carried out and
rehearsed regularly
------------------------------------------------------------------
Asset integrity of the production
facilities may cause production * Strict adherence to Company 'Integrity Management
or HSE disruptions Framework' and company Performance Standards
* Comprehensive maintenance programme and assurance
process
------------------------------------------------------------------
Third party offtake routes may
experience restrictions or interruptions * The Group aims to diversify its exposure to offtake
and full availability may depend routes where possible
upon sustained production from
other fields in the system
* The Group carries business interruption cover
------------------------------------------------------------------
Capital programmes may be delayed
and costs may overrun * Planned programmes incorporate the potential impact
of normal delays and overruns
* The Group retains working capital reserves to cover
these
------------------------------------------------------------------
The Company is reliant upon
its IT systems to maintain operations * The Group employs specialist support
and communications
* Protection against external intrusion is incorporated
within the system and tested regularly
------------------------------------------------------------------
Excessive flaring causes increased
emissions and exceeds guidelines * Close monitoring of flaring is conducted and targets
set
* Work is ongoing to eliminate routine flaring from
assets
------------------------------------------------------------------
Personnel: The Group relies upon a pool of experienced and
motivated personnel to conduct its operations and execute
successful investment strategies
Risks Mitigation
----------------------------------------------------------------
Key personnel may be lost to
other companies * The Remuneration Committee regularly evaluates
incentivisation schemes to ensure they remain
competitive
* The Group seeks to build depth of experience in all
key functions to ensure continuity
----------------------------------------------------------------
Personal safety may be at risk
in demanding operating environments, * A culture of safety is encouraged throughout the
typically offshore organisation
* Responsible personnel are designated at all
appropriate levels
* The Group maintains up-to-date emergency response
resources and procedures
----------------------------------------------------------------
Political and commercial environment: World share and commodity
markets and political environments continue to be volatile
Risk Mitigation
-----------------------------------------------------------------
Tax rates and allowances may
be varied at short notice, significantly * Management will utilise investment incentives where
reducing retained income available and consider geographical diversification
-----------------------------------------------------------------
Volatile commodity prices mean
that the Group cannot be certain * Planning and forecasting considers downside price
of the future sales value of scenarios
its products
* Oil and gas floor price hedging is utilised where
deemed cost effective
* Price mitigation strategies are considered at the
point of major capital commitment
-----------------------------------------------------------------
Sanctions imposed by the U.S.
government may threaten continuing * Serica operates comprehensive controls to ensure
production from the Rhum field compliance with license terms
and licences are required to
be renewed periodically, with
the current licence to be renewed * The renewal process is initiated well in advance of
in January 2025 renewal dates
-----------------------------------------------------------------
The UKCS licensing regime under
which Serica's operational rights * Management maintains regular communication with
and obligations are defined regulatory authorities
may be subject to future change
* The Company aligns its standards and objectives with
government policies as closely as possible
-----------------------------------------------------------------
Task Force for Climate-related Financial Disclosures
("TCFD")
Details of ESG strategies directed towards reducing carbon
emissions and contributing to government Net Zero targets are
described on pages 55 to 57 and also in a separate ESG Report.
The TCFD has developed a framework to formalise and implement
the reporting of financial disclosures related to climate change.
Serica has reviewed guidance issued by the TCFD with regard to the
identification, management and reporting of climate-related
financial risks and the Company is developing its capabilities to
analyse and report climate-related risks giving consideration to
the TCFD guidance.
Governance
-- The Board is ultimately responsible for the governance of
climate-related risks and opportunities. It sets policies and then
reviews these as appropriate.
-- The Board recognises climate change as a material risk to
Serica with potential financial implications and understands that
responding to the risks associated with climate change and building
resilience is integral to the long-term success of the
organisation.
-- It reviews major risks regularly, receives updates from its
subcommittees and also takes direct reports from key personnel. It
sets general policy related to climate risks and opportunities,
identifies where further actions are required and delegates
authorities accordingly. This includes progress on emissions
reduction, general environmental performance, developments in
climate-related regulation and cost impacts.
-- The Health, Safety and Environment Committee reports to the
Board on the effectiveness of the Company's HSE and ESG programs
and ensures that risks, including environmental or carbon-related
hazards are fully assessed and appropriately mitigated. In
addition, this sub-committee ensures that all personnel, including
contractors employed by the Company, are fully aware of their HSE
and ESG responsibilities and have been properly trained.
-- The Audit Committee supervises the financial analysis of
climate-related risks and opportunities and its incorporation into
economic and investment models.
-- The Remuneration Committee determines employee compensation
packages and bonus structures which incorporate incentives to
deliver climate-related objectives.
-- The above subcommittees all meet regularly as required.
-- At the end of 2022, the decision was made to create a
dedicated Sustainability Board Committee, outside of the HSE
Committee, to focus on specific ESG topics and issues, including
climate related risk and opportunities. This new Board Committee
has since been formed and its terms of reference published.
Strategy
The Company's focus is on acquiring or developing oil and gas
assets, extending the producing lives of mid-to-late life assets
and developing additional reserves where this can be done with a
low carbon footprint, typically by utilising existing processing
and export facilities.
Serica aligns with the UK government's commitment to achieving
Net Zero emissions by 2050. Although our current assets are
estimated to cease production well before 2050, Serica takes into
account the earlier emissions reduction targets of the North Sea
Transition Deal when making strategic decisions. Serica uses the
risk categories recommended by the TCFD to further its reflection
of climate-related risk and opportunities: Transition risks,
including policy, legal, technology, market changes, and Physical
risks resulting from event driven (acute) or longer-term (chronic)
shifts in climate patterns.
Serica also recognises the opportunities presented to its
organisation that are associated with climate change and the
transition to a low carbon economy. These include divestments by
larger companies of assets where Serica can seek to improve
environmental performance, investment in energy efficient
technology and collaboration between asset and infrastructure
owners. Domestically-produced gas has a strategic role to play in
the UK's energy transition. This offers a lower carbon alternative
to more carbon-intensive fuels and to LNG imports and also assists
in protecting the UK's security of energy supply as global energy
sourcing is restructured. Serica is well-placed to apply its proven
capabilities to extending the production lives of such assets
whilst driving carbon-reduction programmes.
Serica has developed operational objectives which are aligned
with climate-related risk reduction and climate change resilience
planning. These include:
-- Creation and continued use of emissions related key
performance indicators (KPIs) and targets that directly affect
employee bonus payments including those of the Senior Management
Team;
-- Continued development and enhancement of a robust ESG policy and strategy with a corresponding communication structure to internal and external stakeholders;
-- Submission to the Regulator of a Bruce Emissions Reduction
Action Plan (ERAP) that clearly lays out the programme of
activities to achieve the emissions reduction targets set out in
the North Sea Transition Deal. This includes major equipment change
out and a degree of electrification of facilities;
-- A dedicated VP ESG and Business Innovation to lead strategy
development, drive change and support continuous improvement in
emissions performance and wider ESG commitments;
-- Creation of an Emissions Reduction Group, who look at
opportunities to reduce the Company's carbon emissions in line with
Industry targets. This group is led by Serica's Energy Transition
Engineering Advisor, a new role that was created in 2022;
-- Serica are active members of the Net Zero Technology Centre,
who aim to help accelerate the development and implementation of
technology to lower emissions;
-- Alignment to recognised international ESG benchmarks and
transparency initiatives such as the Global Reporting Initiative
("GRI") and Sustainability Accounting standards Board ("SASB") in
addition to developing alignment to the TCFD recommendations.
Scenario Analysis
The TCFD has proposed that business resilience to climate risks
should be assessed through scenario analysis. Scenarios start with
the end goal, i.e. limiting global temperature rise to 1.5degC, and
then model the steps that society, industry, governments etc must
take in order to achieve it. The scenarios describe the impact on
factors such as supply, demand, regulations, taxes and commodity
pricing. Serica has taken a pragmatic approach to modelling and
looks at the comparative changes to commodity prices under
different scenarios, i.e., modelling a high and a low-price case,
rather than taking the absolute values suggested in the scenarios.
Serica has decided to base its analysis on two scenarios developed
by the International Energy Agency's (IEA) World Outlook:
1. Net Zero - accelerated emissions reduction to achieve Net
Zero emissions in the energy industry by 2050
2. Stated Policies - slower progress based upon existing
governmental policies
In 2022, Serica ran quantitative scenario analysis against its
business economic models, looking at the legacy Serica and Tailwind
assets and the combined assets post-acquisition in March 2023.
Parameters for the economic models were based on those of the
International Energy Agency's (IEA) 2022 Net Zero and Stated
Policies scenarios and concentrated on carbon taxes and commodity
prices. The results of the exercise confirmed that Serica's
business models are resilient under these scenarios. Serica will
continue to use scenario analysis to test its resilience under
different climate scenarios.
Climate Risk Management
-- The Senior Management Team is structured and empowered to
ensure that the Board has the necessary climate related information
to assess the associated risks and opportunities. The team is
responsible for compliance with and reporting against the
organisational climate related metrics and targets in their
individual business areas. The team evaluates climate-related risks
and opportunities as an integral part of its business activities
developing risk management systems, standards and procedures as
required to achieve this.
-- Serica's Risk Management Policy underlines the identification, assessment and mitigation of climate-related risks. Climate-related risks and opportunities are identified under the Company's Risk Management Policy. As its existing assets are all currently projected to cease production within the next ten to fifteen years, this is the key period of focus for the Company.
-- Serica uses an operating risk management framework and risk
assessment matrix to capture, rank and manage significant
risks.
-- Having assessed climate-related risks the Company either
identifies specific mitigating actions and programmes or, where
such specific responses are not considered feasible, builds likely
financial impacts into valuations and planning.
-- Where investigating new investment opportunities and
acquisitions, reviews are conducted of all climate-related risks
and potential mitigations.
-- As Serica's climate-related risk identification and
management programme progresses, regular updates are provided to
the Board and where appropriate added into the Group's risk
register which is then reviewed monthly.
As Serica's existing fields are all currently projected to cease
production within the next fifteen years, as such, this is the key
period of focus for the Company. Hence, Serica has primarily
targeted its considerations of climate-related risks and
opportunities over the short and medium terms. Serica have defined
the time period for short, medium and long terms risks as:
-- Short term risks: 1 - 3 years
-- Medium term risks: 6 - 9 years
-- Long term risks: 10 + years
Serica uses the risk categories recommended by the TCFD to
further its reflection of climate-related risk and opportunities:
Transition risks and Physical risks.
Serica have identified the following climate related risks:
Climate Related Risks
Risk Mitigation
------------------------------------------------------------------
The transition away from carbon-based
energy sources may restrict * The estimated value of future reserves is
the future demand for, or progressively discounted for later periods of
production of, the Group's production
oil and gas reserves (Medium
to Long term)
* Since the acquisition of Tailwind Energy, our
reserves are more evenly split between oil and gas.
This mitigates the risk of the demand for one
commodity reducing more than another in the medium
term
* The Company closely follows industry related
forecasts and trends from numerous sources, including
the IEA and OEUK
* The Company's ESG team reviews opportunities for
investment in clean technology and is currently
involved in projects with the Net Zero Technology
Centre
------------------------------------------------------------------
Energy transition objectives
may bring additional levies * Estimates of climate-related charges are included in
or taxes (Short term) cost estimates where reasonably identifiable
* Management prioritises the delivery of ESG objectives
which may reduce such impacts
------------------------------------------------------------------
Costs related to the transition
including ETS carbon credits * A range of potential outcomes are modelled, and
and investment in more efficient financial plans are flexed to ensure economic
equipment/processes may increase resilience under a wide range of scenarios
significantly whilst commodity
prices may be volatile
(Short to Medium term) * The Company Emission Reduction Action Plan was
developed in 2022 to address this
------------------------------------------------------------------
More extreme weather patterns
may threaten or disrupt operations * The Company seeks to maintain robust transport and
(Short to Long term) supply chains
* The impact of extreme climatic conditions such as
exceptional waves are incorporated in risk management
scenarios
* The Company conducts an annual Severe Weather Action
Plan Emergency Response exercise
------------------------------------------------------------------
Sources of finance including
equity markets and debt providers * Management engages with potential sources to
may be harder to access or anticipate their ESG compliance requirements
become more expensive
(Short term)
* The Company also seeks to retain a range of
alternative financing options
* Potential funding cost increases are considered when
planning investments
------------------------------------------------------------------
The range of potential acquisitions
may be restricted by ESG considerations * Management considers the emissions profiles of
(Short to Medium term) potential acquisition targets and the mitigating
actions that it can implement
* It prioritises opportunities to deliver low carbon
intensity production into the UK market
------------------------------------------------------------------
The industry's reputation
is damaged through negative * The Company follows internationally recognised ESG
perception by external stakeholders reporting guidelines
(Short to Medium term)
* It also seeks regular engagement with stakeholders on
its ESG activities and performance
------------------------------------------------------------------
Metrics and Targets
Carbon emissions data is collected from Serica's assets,
including operated and partnered facilities. Serica assures this
data for consistency and comparability throughout its portfolio
over time. This data is used to ensure compliance with UKCS
emissions regulation and to comply with all operating permits and
consents associated with Serica's assets. It also provides
benchmarks for delivering emissions reductions through the adoption
of meaningful and achievable carbon reduction targets. Details on
progress will be provided in the ESG Report to be published in
conjunction with the Annual Report.
Serica sets annual emissions targets as part of its annual bonus
scheme. Performance against these targets is directly linked to the
remuneration of our staff and executives. Serica has implemented
ESG bonus linked targets since 2021.
These are based on absolute rather than proportionate or
intensity based targets. Performance against these targets is
monitored on a regular basis and performance is reported across the
organisation from our Board to staff and contractors via Serica's
Environmental Performance Dashboard.
Key Performance Indicators ("KPIs")
The Company's main business is the acquisition, development and
production of commercially attractive oil and gas reserves in a
safe and environmentally sensitive manner. This is achieved both
through pursuing the full cycle of exploration, discovery,
development and production and also through acquiring existing
reserves where management believe that further value can be
added.
Operational and financial performance is tracked through the
following KPI's whose progress is covered within the Review of
Operations and Finance Review within this strategic report:
-- Daily production volumes
-- Production costs per barrel of oil equivalent
-- Realised sales income per barrel of oil equivalent
HSE performance is tracked through the following KPI's whose
progress is covered within an updated ESG Report:
-- Recordable incidents and injuries
-- Workforce engagement in HSE
-- Quality of discharges to water and air
-- Ongoing maintenance programmes
ESG performance is tracked through the following KPI's whose
progress is covered within the ESG Report:
-- Annual carbon emissions
-- Flare volumes
-- Establishing a methane action plan
Elements falling within each of the above categories are
included within annual incentive schemes for all Group
employees.
The Company tracks its new business development objectives
through the building of a risk-balanced portfolio of full cycle
assets. Specific KPI's are not applied due to the range of
different potential acquisition targets. However, successful
delivery will add to future production volumes and net realised
income.
Further information upon the Company's HSE and ESG policies and
delivery can be found within the ESG Report which will be issued
along with the 2022 Annual Report.
Section 172 statement
The Directors' statement under Section 172 of the Companies Act
2006 is included on pages 52 to 54.
Additional Information
Additional information relating to Serica, can be found on the
Company's website at www.serica-energy.com and on SEDAR at
www.sedar.com
The Strategic Report has been approved by the Board of
Directors.
On behalf of the Board
Mitch Flegg
Chief Executive Officer
12 April 2023
Forward Looking Statements
This disclosure contains certain forward looking statements that
involve substantial known and unknown risks and uncertainties, some
of which are beyond Serica Energy plc's control, including: the
impact of general economic conditions where Serica Energy plc
operates, industry conditions, changes in laws and regulations
including the adoption of new environmental laws and regulations
and changes in how they are interpreted and enforced, increased
competition, the lack of availability of qualified personnel or
management, fluctuations in foreign exchange or interest rates,
stock market volatility and market valuations of companies with
respect to announced transactions and the final valuations thereof,
and obtaining required approvals of regulatory authorities. Serica
Energy plc's actual results, performance or achievement could
differ materially from those expressed in, or implied by, these
forward looking statements and, accordingly, no assurances can be
given that any of the events anticipated by the forward looking
statements will transpire or occur, or if any of them do so, what
benefits, including the amount of proceeds, that Serica Energy plc
will derive therefrom.
Serica Energy plc
Group Income Statement
For the year ended 31 December
2022 2021
Note GBP000 GBP000
Continuing operations
Sales revenue 4 812,423 514,136
Cost of sales 5 (218,155) (127,313)
Gross profit 594,268 386,823
Unrealised hedging income/(expense) 6 20,877 (74,592)
Realised hedging expense 6 (45,384) (56,615)
Pre-licence costs (185) (199)
E&E asset write-offs 14 (82,749) -
Administrative expenses (9,225) (6,097)
Transaction costs 31 (1,785) -
Foreign exchange gain/(loss) 3,903 (854)
Share-based payments 27 (3,510) (2,386)
Operating profit before net finance revenue 476,210 246,080
and tax
Change in fair value of BKR financial liabilities 22 8,407 (110,529)
Finance revenue 9 4,499 82
Finance costs 10 (938) (527)
Profit before taxation 488,178 135,106
Taxation charge for the year 11a) (310,382) (55,812)
Profit for the year 177,796 79,294
========== ===========
Earnings per ordinary share - EPS
Basic EPS on profit for the year (GBP) 12 0.65 0.30
Diluted EPS on profit for the year (GBP) 12 0.62 0.28
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those
passing through the income statement. Therefore, the total
comprehensive income attributable to equity holders of the parent
is GBP177,796,000.
Serica Energy plc
Registered Number: 5450950
Balance Sheet
As at 31 December
Group Company
2022 2021 2022 2021
Note GBP000 GBP000 GBP000 GBP000
Non-current assets
Exploration & evaluation assets 14 1,001 2,949 - -
Property, plant and equipment 15 265,907 328,944 216 43
Investments in subsidiaries 16 - - 105,256 105,256
266,908 331,893 105,472 105,299
---------- ---------- -------- --------
Current assets
Inventories 17 3,998 4,053 - -
Trade and other receivables 18 134,627 132,351 25,445 162,010
Hedging security advances 19 24,320 115,390 - -
Cash and cash equivalents 20 432,529 102,984 141,218 578
---------- ---------- -------- --------
595,474 354,778 166,663 162,588
---------- ---------- -------- --------
TOTAL ASSETS 862,382 686,671 272,135 267,887
---------- ---------- -------- --------
Current liabilities
Trade and other payables 21 (69,887) (33,697) (3,367) (1,023)
Corporate tax payable (149,998) (15,804) - -
Derivative financial liabilities 19 (24,914) (45,791) - -
Gas contract liabilities 19 (987) (37,505) - -
Financial liabilities 22 - (93,861) - -
Non-current liabilities
Gas contract liabilities 19 - (987) - -
Financial liabilities 22 (29,378) (37,795) - -
Provisions 23 (25,199) (28,095) - -
Deferred tax liability 11d) (153,295) (120,608) - -
---------- ---------- -------- --------
TOTAL LIABILITIES (453,658) (414,143) (3,367) (1,023)
---------- ---------- -------- --------
NET ASSETS 408,724 272,528 268,768 266,864
========== ========== ======== ========
Share capital 25 183,177 181,993 155,478 154,294
Merger reserve 16 - - 88,088 88,088
Other reserve 27 25,576 22,066 25,576 22,066
Accumulated funds/(deficit) 199,971 68,469 (374) 2,416
TOTAL EQUITY 408,724 272,528 268,768 266,864
========== ========== ======== ========
The profit for the Company was GBP43.5 million for the year
ended 31 December 2022 (2021: loss of GBP0.4 million). In
accordance with the exemption granted under section 408 of the
Companies Act 2006 a separate income statement for the Company has
not been presented.
Approved by the Board on 12 April 2023
Mitch Flegg Andrew Bell
Chief Executive Officer Chief Financial Officer
Serica Energy plc
Statement of Changes in Equity
For the year ended 31 December
Group Share Other Accum'd
Note capital reserve funds/ Total
(deficit)
GBP000 GBP000 GBP000 GBP000
At 1 January 2021 181,606 19,680 (1,440) 199,846
Profit for the year - - 79,294 79,294
--------- --------- ---------- ---------
Total comprehensive income - - 79,294 79,294
Share-based payments 27 - 2,386 - 2,386
Issue of share capital 25 387 - - 387
Dividend paid 13 - - (9,385) (9,385)
At 31 December 2021 181,993 22,066 68,469 272,528
Profit for the year - - 177,796 177,796
---------
Total comprehensive income - - 177,796 177,796
Share-based payments 27 - 3,510 - 3,510
Issue of share capital 25 1,184 - - 1,184
Dividends paid 13 - - (46,294) (46,294)
At 31 December 2022 183,177 25,576 199,971 408,724
========= ========= ========== =========
Share Merger Other Accum'd
Company capital reserve reserve funds Total
(deficit)
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 January 2021 153,907 88,088 19,680 12,170 273,845
Loss for the year - - - (369) (369)
--------- --------- --------- ---------- ---------
Total comprehensive income - - - (369) (369)
Share-based payments (note
27) - - 2,386 - 2,386
Issue of share capital
(note 25) 387 - - - 387
Dividend paid - - - (9,385) (9,385)
At 31 December 2021 154,294 88,088 22,066 2,416 266,864
Profit for the year - - - 43,504 43,504
--------- --------- --------- ---------- ---------
Total comprehensive income - - - 43,504 43,504
Share-based payments (note
27) - - 3,510 - 3,510
Issue of share capital
(note 25) 1,184 - - - 1,184
Dividend paid (note 13) - - - (46,294) (46,294)
At 31 December 2022 155,478 88,088 25,576 (374) 268,768
========= ========= ========= ========== =========
Serica Energy plc
Cash Flow Statement
For the year ended 31 December
Group Company
2022 2021 2022 2021
Note GBP000 GBP000 GBP000 GBP000
Operating activities:
Profit/(loss) for the year 177,796 79,294 43,504 (369)
Adjustments to reconcile profit
for the year
to net cash flow from operating
activities:
Taxation charge 310,382 55,812 - -
Change in BKR fair value liability (8,407) 110,529 - -
Net finance (income)/costs (3,870) 445 (982) 49
Depreciation and depletion 76,887 37,048 - -
Oil and NGL over/underlift 20,270 (6,859) - -
E&E asset write-offs 82,749 - - -
Unrealised hedging (gains)/losses (20,877) 74,592 - -
Movement in contract revenue (37,505) - - -
Share-based payments 3,510 2,386 3,510 2,386
Other non-cash movements (1,503) 349 140 80
Decrease/(increase) in security
advances 91,070 (113,590) - -
(Increase)/decrease in trade and
other (8,571) (86,527) (24) 453
receivables
Decrease in inventories 55 580 - -
Increase in trade and other payables 22,872 3,544 2,131 207
Cash inflow from operations 704,858 157,603 48,279 2,806
Taxation paid (143,500) - - -
Decommissioning spend (1,218) - - -
---------- ---------- -------- --------
Net cash inflow from operating
activities 560,140 157,603 48,279 2,806
---------- ---------- -------- --------
Investing activities:
Interest received 4,499 82 1,033 7
Purchase of E&E assets (80,801) (1,906) - -
Purchase of property, plant and
equipment (16,298) (50,252) - -
Receipts from Group subsidiaries - - 136,761 -
Cash outflow from business combination 22 (93,871) (81,277) - -
Cash outflow arising on asset
acquisitions 23 - (1,002) - -
---------- ---------- -------- --------
Net cash flow from investing
activities (186,471) (134,355) 137,794 7
---------- ---------- -------- --------
Financing activities:
Payments of lease liabilities 28 (132) (179) (132) (179)
Proceeds from issue of shares 25 1,184 387 1,184 387
Dividends paid 13 (46,294) (9,385) (46,294) (9,385)
Finance costs paid (385) (71) (51) (56)
Net cash flow from financing
activities (45,627) (9,248) (45,293) (9,233)
--------- -------- --------- --------
Net increase/(decrease) in cash
and cash equivalents 26 328,042 14,000 140,780 (6,420)
Effect of exchange rates on cash
and cash
equivalents 26 1,503 (349) (140) (80)
Cash and cash equivalents at 1
January 26 102,984 89,333 578 7,078
Cash and cash equivalents at 31
December 26 432,529 102,984 141,218 578
========= ======== ========= ========
Serica Energy plc
Notes to the Financial Statements
1. Authorisation of the Financial Statements and Statement of
Compliance with International Accounting Standards in conformity
with the requirements of the Companies Act 2006
These are not the statutory accounts of the Company prepared in
accordance with the Companies Act. The Group's and Company's
financial statements for the year ended 31 December 2022 were
authorised for issue by the Board of Directors on 12 April 2023 and
the balance sheets were signed on the Board's behalf by Mitch Flegg
and Andrew Bell. Serica Energy plc is a public limited company
incorporated and domiciled in England & Wales with its
registered office at 48 George Street, London, W1U 7DY. The
principal activity of the Company and the Group is to identify,
acquire and subsequently exploit oil and gas reserves. Its current
activities are located in the United Kingdom. The Company's
ordinary shares are traded on AIM.
The Group's financial statements have been prepared in
accordance with UK-adopted International Accounting Standards in
conformity with the requirements of the Companies Act 2006 as they
apply to the financial statements of the Group for the year ended
31 December 2022. The Company's financial statements have been
prepared in accordance with UK-adopted International Accounting
Standards in conformity with the requirements of the Companies Act
2006 as they apply to the financial statements of the Company for
the year ended 31 December 2022 and as applied in accordance with
the provisions of the Companies Act 2006. The principal accounting
policies adopted by the Group and by the Company are set out in
note 2.
The Company has taken advantage of the exemption provided under
section 408 of the Companies Act 2006 not to publish its individual
income statement and related notes. The profit dealt with in the
financial statements of the parent Company was GBP43,504,000 (2021:
loss GBP369,000).
2. Accounting Policies
Basis of Preparation
The accounting policies which follow set out those policies
which apply in preparing the financial statements for the year
ended 31 December 2022.
The Group and Company financial statements have been prepared on
a historical cost basis and following the change in functional and
presentational currency from US$ to GBP sterling with effect from 1
January 2019 are presented in GBP sterling. All values are rounded
to the nearest thousand pounds (GBP000) except when otherwise
indicated. In preparing the Group financial Statements management
has considered the impact of climate change. These considerations
did not have a material impact on the financial reporting
judgements and estimates and consequently climate change is not
expected to have a significant impact on the Group's going concern
assessment to June 2024 nor the viability of the Group over the
next five years. However, governmental and societal responses to
climate change risks are still developing, and are interdependent
upon each other, and consequently financial statements cannot
capture all possible future outcomes as these are not yet known. It
is recognised that Net Zero targets and third party expectations
may drive government action that imposes further requirements and
costs on companies in the future. The Group has additional planned
expenditure related to flare gas recovery and other emission
reduction measures, however, as all of the Group's currently
producing assets are projected to cease production by 2036 it is
believed that any such future changes would have a relatively
limited impact compared to assets with longer durations.
Going Concern
The Directors are required to consider the availability of
resources to meet the Group's liabilities for the period ending 30
June 2024, the 'going concern period'. The financial position of
the Group, its cash flows and capital commitments are described in
the Financial Review above.
At 31 December 2022 the Group held cash and term deposits of
GBP432.5 million which included GBP18.1 million of restricted
funds. Following completion of Serica's acquisition of Tailwind
Energy Investments Ltd on 23 March 2023 the Serica Group's going
concern considerations now include a US$366 million assumed RBL
facility, and a separate undrawn US$50 million junior facility
which is available until the RBL is repaid. See note 31 for further
details of the RBL and junior facility. The acquisition of Tailwind
gives the Group increased production and operating cash flows, a
balance in product mix between gas and oil, and two main operating
hubs which reduces the potential impact of production
interruptions. Serica currently has competitive operating costs per
boe and its capital commitments can be funded from existing cash
resources.
The Group regularly monitors its cash, funding and liquidity
position, including available facilities and compliance with
facility covenants. Near term cash projections are revised and
underlying assumptions reviewed, generally monthly, and longer-term
projections are also updated regularly. Downside price and other
risking scenarios are considered. In addition to commodity sales
prices the Group is exposed to potential production interruptions
and these are also considered under such scenarios. In recent
years, management has given priority to building a strong cash
reserve which can respond to different types of risk.
As at 31 March 2023 the Group held cash and term deposits of
GBP389.3 million including GBP18.1 million of restricted funds,
with separate RBL liquidity headroom of US$36 million (US$330
million drawn versus US$366 million available).
For the purposes of the Group's going concern assessment we have
reviewed two cash projections for the going concern period. These
projections cover a base case forecast and an extreme stress test
scenario for the combined operations of the Group, including both
legacy Tailwind and Serica assets. RBL repayments have been assumed
based on the current redetermination and no covenant compliance
matters noted.
The base case assumptions include commodity pricing of
GBP1/therm for gas and US$70/bbl for oil throughout the going
concern period. Production, opex, capex and tax assumptions are
those currently included in standard management forecasting. The
forward looking price assumptions are considered as reasonable in
light of recent commodity forward pricing and a consensus of
published forecasts from the industry, brokers and other
analysts.
The stress test assumptions assume commodity pricing of
GBP1/therm for gas and US$70/bbl for oil for Q2 2023, a full
six-month shut-in of all production for 2H 2023, followed by a
return to base case production in 1H 2024 to the end of the going
concern period at 30 June 2024. Lower commodity pricing of 75
pence/therm and US$50/bbl oil are assumed for the 1H 2024 period in
this scenario which are significantly below the range of current
market expectations for the going concern period. Under this
scenario, which would result in lower cash inflows and repayments
of the RBL facility as redetermined, the Group was able to maintain
sufficient cash to meet its obligations and maintain covenant
compliance. A number of mitigating factors and mitigating actions
that are under management control are available to management in
the stress test event. These would mitigate the reduced operating
cash outflows experienced and are not included in the
projection.
After making enquiries and having taken into consideration the
above factors, the Directors considered it appropriate that the
Group has adequate resources to continue in operational existence
for the going concern period. Accordingly, they continue to adopt
the going concern basis in preparing the financial statements.
Use of judgement and estimates and key sources of estimation
uncertainty
The preparation of financial statements in conformity with
UK-adopted International Accounting Standards in conformity with
the requirements of the Companies Act 2006 requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as well as the disclosure of contingent
assets and liabilities at the balance sheet date and the reported
amounts of revenues and expenses during the reporting period.
Estimates and judgements are continuously evaluated and are based
on management's experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. Actual outcomes could differ from these
estimates.
Uses of judgement
A key source of judgement that has a significant risk of causing
material adjustment to the amounts recognised in the financial
statements is whether impairment triggers exist that might lead to
the impairment of the Group and Company's assets (including oil and
gas development assets and Exploration and Evaluation "E&E"
assets).
Assessment of the recoverable amount of intangible and tangible
assets
The Group monitors internal and external indicators of
impairment relating to its intangible and tangible assets, which
may indicate that the carrying value of the assets may not be
recoverable. The assessment of the existence of indicators of
impairment in E&E assets involves judgement, which includes
whether licence performance obligations can be met within the
required regulatory timeframe, whether management expects to fund
significant further expenditure in respect of a licence, and
whether the recoverable amount may not cover the carrying value of
the assets. For development and production assets judgement is
involved when determining whether there have been any significant
changes in the Group's oil and gas reserves.
The Group determines whether E&E assets are impaired at an
asset level and in regional cash generating units ('CGUs') when
facts and circumstances suggest that the carrying amount of a
regional CGU may exceed its recoverable amount. As recoverable
amounts are determined based upon risked potential, or where
relevant, discovered oil and gas reserves, this involves
estimations and the selection of a suitable pre-tax discount rate
relevant to the asset in question. The calculation of the
recoverable amount of oil and gas development and production
properties involves estimating the net present value of cash flows
expected to be generated from the asset in question. Future cash
flows are based on assumptions on matters such as estimated proven
and probable oil and gas reserve quantities and commodity prices.
The discount rate applied is a pre-tax rate which reflects the
specific risks of the country in which the asset is located.
Sources of estimation uncertainty
The key sources of estimation uncertainty that have a
significant risk of causing material adjustment to the amounts
recognised in the financial statements are: the assessment of
impairment indicators, the assessment of commercial reserves,
determining the fair value of contingent consideration and
decommissioning provisions.
Assessment of impairment indicators
Management is required to assess the carrying value of
investments in subsidiaries in the parent company balance sheet for
impairment by reference to the recoverable amount. This requires an
estimate of amounts recoverable from oil and gas assets within the
underlying subsidiaries (see note 16).
A review was performed for any indication that the value of the
Group's oil and gas assets may be impaired at the balance sheet
date of 31 December 2022 in accordance with the stated policy and
no impairment triggers were noted other than for the Columbus
production asset. Columbus reserves booked in the 2022 reserves
report had a significant downward revision due to analysis of data
gathered from the first full year of production, and the subsequent
interpretation of this data. This analysis, together with lower
production than initially forecast and the introduction of the EPL,
are factors that combine as a trigger for potential impairment. The
future recoverable amounts of the Columbus were assessed and no
impairment was recorded, largely due to the impact of strong future
commodity prices (see note 15) and the significantly reduced
carrying amount given the increased depletion charge recognised as
a result of the reserves reduction. Based on sensitivities
performed, there is no risk of a material adjustment to the
carrying value of the Columbus CGU, because a reasonable change in
key assumptions used to determine the recoverable amount would not
result in an impairment.
Assessment of commercial oil and gas reserves
Management is required to assess the level of the Group's
commercial reserves together with the future expenditures to access
those reserves, which are utilised in determining the depletion
charge for the period and assessing whether any impairment charge
is required. The Group employs independent reserves specialists who
periodically assess the Group's level of commercial reserves by
reference to data sets including geological, geophysical and
engineering data together with reports, presentation and financial
information pertaining to the contractual and fiscal terms
applicable to the Group's assets. In addition, the Group undertakes
its own assessment of commercial reserves and related future
capital expenditure by reference to the same data sets using its
own internal expertise. A 10% reduction in the assessed quantity of
commercial reserves would lead to an increase in the depletion
charge for 2022 of GBP8.5 million (2021: GBP4.1 million).
Determining the fair value of contingent consideration on BKR
acquisitions
The Group determined the fair value of initial contingent
consideration payable based on discounted cash flows at the time of
the acquisition in 2018, calculated for each separate component of
the contingent consideration. The same models and assumptions were
used in the calculation of the fair value of property, plant and
equipment arising on the business combination. Any cash flows
specific to the contingent consideration also reflect applicable
commercial terms and risks. In calculating the fair value of the
remaining contingent consideration on the BKR acquisitions payable
as at 31 December 2022, assumptions underlying the calculation were
updated from 2021. These included updated commodity prices,
production profiles, future opex, capex and decommissioning cost
estimates, discount rates, proved and probable reserves estimates
and risk assessments. For further details including sensitivities
of the calculation to changes in input variables (see note 22).
Decommissioning provision
Amounts used in recording a provision for decommissioning are
estimates based on current legal and constructive requirements and
current technology and price levels for the removal of facilities
and plugging and abandoning of wells. Due to changes in relation to
these items, the future actual cash outflows in relation to
decommissioning are likely to differ in practice. To reflect the
effects due to changes in legislation, requirements and technology
and price levels, the carrying amounts of decommissioning
provisions are reviewed on a regular basis. The effects of changes
in estimates do not give rise to prior year adjustments and are
dealt with prospectively. While the Group uses its best estimates
and judgement, actual results could differ from these estimates
(see note 23).
Basis of Consolidation
The consolidated financial statements include the accounts of
Serica Energy plc (the "Company") and entities controlled by the
Company (its subsidiaries) made up to 31 December each year.
Together these comprise the "Group".
Control is achieved when the Company:
-- has power over the investee;
-- is exposed, or has rights, to variable returns from its
involvement with the investee; and
-- has the ability to use its power to affect its returns.
The Company reassesses whether or not it controls an investee if
facts and circumstances indicate that there are changes to one or
more of the three elements of control listed above. Consolidation
of a subsidiary begins when the Company obtains control over the
subsidiary and ceases when the Company loses control of the
subsidiary. Specifically, the results of the subsidiaries acquired
or disposed of during the year are included in profit or loss from
the date the Company gains control until the date when the Company
ceases to control the subsidiary.
Where necessary, adjustments are made to the financial
statements of subsidiaries to bring the accounting policies used
into line with the Group's accounting policies. All inter-company
balances and transactions have been eliminated upon
consolidation.
Foreign Currency Translation
The functional and presentational currency of Serica Energy plc
and its subsidiaries is GBP sterling following the change in
functional and presentational currency from US$ to GBP sterling
with effect from 1 January 2019.
Transactions in foreign currencies are initially recorded at the
functional currency rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are retranslated at the foreign currency rate of exchange ruling at
the balance sheet date and differences are taken to the income
statement. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the
exchange rate as at the date of initial transaction. Non-monetary
items measured at fair value in a foreign currency are translated
using the exchange rate at the date when the fair value was
determined. Exchange gains and losses arising from translation are
charged to the income statement as an operating item.
Business Combinations and Goodwill
Business combinations from 1 January 2010
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured as the aggregate of
consideration transferred, measured at acquisition date fair value
and the amount of any non-controlling interest in the acquiree.
Acquisition costs incurred are expensed.
When the Group acquires a business, it assesses the financial
assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as at the acquisition date.
Any contingent consideration to be transferred to the acquirer will
be recognised at fair value at the acquisition date. Contingent
consideration classified as an asset or liability that is a
financial instrument and within the scope of IFRS 9 Financial
Instruments, is measured at fair value with the changes in fair
value recognised in the statement of profit or loss in accordance
with IFRS 9. Other contingent consideration that is not within the
scope of IFRS 9 is measured at fair value at each reporting date
with changes in fair value recognised in profit or loss.
Goodwill on acquisition is initially measured at cost being the
excess of purchase price over the fair market value of identifiable
assets, liabilities and contingent liabilities acquired. Following
initial acquisition, it is measured at cost less any accumulated
impairment losses. Goodwill is not amortised but is subject to an
impairment test at least annually and more frequently if events or
changes in circumstances indicate that the carrying value may be
impaired. If the fair value of the net assets acquired is in excess
of the aggregate consideration transferred, the Group re-assesses
whether it has correctly identified all of the assets acquired and
all of the liabilities assumed and reviews the procedures used to
measure the amounts to be recognised at the acquisition date. If
the reassessment still results in an excess of fair value of net
assets acquired over the aggregate consideration transferred, then
the gain is recognised in profit or loss.
At the acquisition date, any goodwill acquired is allocated to
each of the cash-generating units, or groups of cash generating
units expected to benefit from the combination's synergies.
Impairment is determined by assessing the recoverable amount of the
cash-generating unit, or groups of cash generating units to which
the goodwill relates. Where the recoverable amount of the
cash-generating unit is less than the carrying amount, an
impairment loss is recognised.
Joint Arrangements
A joint operation is a type of joint arrangement whereby the
parties that have joint control of the arrangement have the rights
to the assets and obligations for the liabilities, relating to the
arrangement.
The Group conducts petroleum and natural gas exploration and
production activities jointly with other venturers who each have
direct ownership in and jointly control the operations of the
ventures. These are classified as jointly controlled operations and
the financial statements reflect the Group's share of assets and
liabilities in such activities. Income from the sale or use of the
Group's share of the output of jointly controlled operations, and
its share of joint venture expenses, are recognised when it is
probable that the economic benefits associated with the transaction
will flow to/from the Group and their amount can be measured
reliably.
Full details of Serica's working interests in those petroleum
and natural gas exploration and production activities classified as
joint operations are included in the Review of Operations.
Exploration and Evaluation Assets
As allowed under IFRS 6 and in accordance with clarification
issued by the International Financial Reporting Interpretations
Committee, the Group has continued to apply its existing accounting
policy to exploration and evaluation activity, subject to the
specific requirements of IFRS 6. The Group will continue to monitor
the application of these policies in light of expected future
guidance on accounting for oil and gas activities.
Pre-licence Award Costs
Costs incurred prior to the award of oil and gas licences,
concessions and other exploration rights are expensed in the income
statement.
Exploration and Evaluation (E&E)
The costs of exploring for and evaluating oil and gas
properties, including the costs of acquiring rights to explore,
geological and geophysical studies, exploratory drilling and
directly related overheads, are capitalised and classified as
intangible E&E assets. These costs are directly attributed to
regional CGUs for the purposes of impairment testing; UK.
E&E assets are not amortised prior to the conclusion of
appraisal activities but are assessed for impairment at an asset
level and in regional CGUs when facts and circumstances suggest
that the carrying amount of a regional cost centre may exceed its
recoverable amount. Recoverable amounts are determined based upon
risked potential, and where relevant, discovered oil and gas
reserves. When an impairment test indicates an excess of carrying
value compared to the recoverable amount, the carrying value of the
regional CGU is written down to the recoverable amount in
accordance with IAS 36. Such excess is expensed in the income
statement. Where conditions giving rise to impairment subsequently
reverse, the effect of the impairment charge is reversed as a
credit to the income statement.
Costs of licences and associated E&E expenditure are
expensed in the income statement if licences are relinquished, or
if management do not expect to fund significant future expenditure
in relation to the licence.
The E&E phase is completed when either the technical
feasibility and commercial viability of extracting a mineral
resource are demonstrable or no further prospectivity is recognised
. At that point, if commercial reserves have been discovered, the
carrying value of the relevant assets, net of any impairment
write-down, is classified as an oil and gas property within
property, plant and equipment, and tested for impairment. If
commercial reserves have not been discovered then the costs of such
assets will be written off.
Asset Purchases and Disposals
When a commercial transaction involves the exchange of E&E
assets of similar size and characteristics, no fair value
calculation is performed. The capitalised costs of the asset being
sold are transferred to the asset being acquired. Proceeds from a
part disposal of an E&E asset, including back-cost
contributions are credited against the capitalised cost of the
asset, with any excess being taken to the income statement as a
gain on disposal.
Farm-ins
In accordance with industry practice, the Group does not record
its share of costs that are 'carried' by third parties in relation
to its farm-in agreements in the E&E phase. Similarly, while
the Group has agreed to carry the costs of another party to a Joint
Operating Agreement ("JOA") in order to earn additional equity, it
records its paying interest that incorporates the additional
contribution over its equity share.
Property, Plant and Equipment - Oil and gas properties
Capitalisation
Oil and gas properties are stated at cost, less any accumulated
depreciation and accumulated impairment losses. Oil and gas
properties are accumulated into single field cost centres and
represent the cost of developing the commercial reserves and
bringing them into production together with the E&E
expenditures incurred in finding commercial reserves previously
transferred from E&E assets as outlined in the policy above.
The cost will include, for qualifying assets, any applicable
borrowing costs.
Depletion
Oil and gas properties are not depleted until production
commences. Costs relating to each single field cost centre are
depleted on a unit of production method based on the commercial
proved and probable reserves for that cost centre. The depletion
calculation takes account of the estimated future costs of
development of management's assessment of proved and probable
reserves, reflecting risks applicable to the specific assets.
Changes in reserve quantities and cost estimates are recognised
prospectively from the last annual reporting date. Proved and
probable reserves estimates obtained from an independent reserves
specialist have been used as the basis for 2021 and 2022
calculations.
Impairment
A review is performed for any indication that the value of the
Group's development and production assets may be impaired.
For oil and gas properties when there are such indications, an
impairment test is carried out on the cash generating unit. Each
cash generating unit is identified in accordance with IAS 36.
Serica's cash generating units are those assets which generate
largely independent cash flows and are normally, but not always,
single development or production areas. If necessary, impairment is
charged through the income statement if the capitalised costs of
the cash generating unit exceed the recoverable amount of the
related commercial oil and gas reserves.
Acquisitions, Asset Purchases and Disposals
Acquisitions of oil and gas properties are accounted for under
the acquisition method when the assets acquired and liabilities
assumed constitute a business.
Transactions involving the purchase of an individual field
interest, or a group of field interests, that do not constitute a
business, are treated as asset purchases. Accordingly, no goodwill
and no deferred tax gross up arises, and the consideration is
allocated to the assets and liabilities purchased on an appropriate
basis. Proceeds from the entire disposal of a development and
production asset, or any part thereof, are taken to the income
statement together with the requisite proportional net book value
of the asset, or part thereof, being sold.
Decommissioning
Liabilities for decommissioning costs are recognised when the
Group has an obligation to dismantle and remove a production,
transportation or processing facility and to restore the site on
which it is located. Liabilities may arise upon construction of
such facilities, upon acquisition or through a subsequent change in
legislation or regulations. The amount recognised is the estimated
present value of future expenditure determined in accordance with
local conditions and requirements. A corresponding tangible item of
property, plant and equipment equivalent to the provision is also
created.
Any changes in the present value of the estimated expenditure
are added to or deducted from the cost of the assets to which it
relates. The adjusted depreciable amount of the asset is then
depreciated prospectively over its remaining useful life. The
unwinding of the discount on the decommissioning provision is
included as a finance cost.
Underlift/Overlift
Lifting arrangements for oil and gas produced in certain fields
are such that each participant may not receive its share of the
overall production in each period. The difference between
cumulative entitlement and cumulative production less stock is
'underlift' or 'overlift'. Underlift and overlift are valued at
market value and included within debtors ('underlift') or creditors
('overlift').
Property, Plant and Equipment - Other
Computer equipment and fixtures, fittings and equipment are
recorded at cost as tangible assets. The straight-line method of
depreciation is used to depreciate the cost of these assets over
their estimated useful lives. Computer equipment is depreciated
over three years and fixtures, fittings and equipment over four
years, and right-of-use assets over the period of lease.
Inventories
Inventories are valued at the lower of cost and net realisable
value. Cost is determined by the first-in first-out method and
comprises direct purchase costs and transportation expenses.
Investments
In its separate financial statements the Company recognises its
investments in subsidiaries at cost less any provision for
impairment.
Financial Instruments
Financial instruments comprise financial assets, cash and cash
equivalents, financial liabilities and equity instruments.
Financial assets and financial liabilities are recognised when the
Group becomes a party to the contractual provisions of the
financial instrument.
Financial assets
Financial assets are classified, at initial recognition, as
subsequently measured at amortised cost, fair value through profit
or loss, and fair value through other comprehensive income
(OCI).
The classification of financial assets at initial recognition
depends on the financial asset's contractual cash flow
characteristics and the Group's business model for managing
them.
With the exception of trade receivables that do not contain a
significant financing component or for which the Group has applied
the practical expedient, the Group initially measures a financial
asset at its fair value plus transaction costs (in the case of a
financial asset not at fair value through profit or loss). Trade
receivables that do not contain a significant financing component
or for which the Group has applied the practical expedient are
measured at the transaction price determined under IFRS 15.
The Group determines the classification of its financial assets
at initial recognition and, where allowed and appropriate,
re-evaluates this designation at each financial year end.
Financial assets at fair value through profit or loss include
financial assets held for trading and derivatives. Financial assets
are classified as held for trading if they are acquired for the
purpose of selling in the near term.
In order for a financial asset to be classified and measured at
amortised cost it needs to give rise to cash flows that are 'solely
payments of principal and interest (SPPI)' on the principal amount
outstanding. This assessment is referred to as the SPPI test and is
performed at an instrument level. Financial assets with cash flows
that are not SPPI are classified and measured at fair value through
profit or loss, irrespective of the business model.
Cash and cash equivalents
Cash and cash equivalents include balances with banks and
short-term investments with original maturities of three months or
less at the date acquired.
Financial liabilities
Financial liabilities are classified, at initial recognition, as
financial liabilities at fair value through profit or loss, loans
and borrowings, payables, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate. The Group's
financial liabilities currently include trade and other payables.
All financial liabilities are recognised initially at fair value.
Obligations for loans and borrowings are recognised when the Group
becomes party to the related contracts and are measured initially
at the fair value of consideration received less directly
attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the effective
interest method.
Gains and losses are recognised in the income statement when the
liabilities are derecognised as well as through the amortisation
process.
Emissions liabilities
The Group operates in an energy intensive industry and is
therefore required to partake in emission trading schemes ('ETS').
The Group recognises an emission liability in line with the
production of emissions that give rise to the obligation. To the
extent the liability is covered by allowances held, the liability
is recognised at the cost of these allowances held and if
insufficient allowances are held, the remaining uncovered portion
is measured at the spot market price of allowances at the balance
sheet date. The expense is presented within 'production costs'
under 'cost of sales' and the accrual is presented in 'trade and
other payables'.
Derivative financial instruments
The Group uses derivative financial instruments, such as forward
commodity contracts, to hedge its commodity price risks. The Group
has elected not to apply hedge accounting to these derivatives.
Such derivative financial instruments are initially recognised at
fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are
carried as financial assets when the fair value is positive and as
financial liabilities when the fair value is negative. Any gains or
losses arising from changes in the fair value of derivatives are
taken directly to the statement of profit or loss and other
comprehensive income and presented within operating profit.
Further details of the fair values of derivative financial
instruments and how they are measured are provided in Note 19.
Equity
Equity instruments issued by the Company are recorded in equity
at the proceeds received, net of direct issue costs.
Trade and other receivables and contract assets
Trade receivables and contract assets
A receivable represents the Group ' s right to an amount of
consideration that is unconditional (i.e., only the passage of time
is required before payment of the consideration is due). A contract
asset is the right to consideration in exchange for goods or
services transferred to the customer.
Provision for expected credit losses of trade receivables and
contract assets
For trade receivables and contract assets, the Group applies a
simplified approach in calculating expected credit losses 'ECLs'.
Therefore, the Group does not track changes in credit risk, but
instead, recognises a loss allowance based on lifetime ECLs at each
reporting date. The Group has established a provision matrix that
is based on its historical credit loss experience, adjusted for
forward-looking factors specific to the debtors and the economic
environment. A financial asset is written off when there is no
reasonable expectation of recovering the contractual cash flows.
The Group's receivables have a good credit rating and there has
been no noted change in the credit risk of receivables in the year.
The Company holds inter-company loans with subsidiary undertakings
with repayment dates being repayable on demand. These inter-company
loans are disclosed on the face of the balance sheet. None are past
due nor impaired. The carrying value of these loans approximates
their fair value. The expected credit loss on these loans with
subsidiary undertakings is expected to be immaterial, both on
initial recognition and subsequently.
Provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable
that an outflow of resources will be required to settle the
obligation, and a reliable estimate can be made of the amount of
the obligation.
The Group's estimate in respect of contingent consideration that
may be payable following the acquisition of its interest in the
Erskine field, is capitalised as an asset acquisition cost. The
value of the provision is determined by the amounts and nature of
operating costs incurred over a contractual period.
Revenue from contracts with customers
Revenue from contracts with customers is recognised when control
of the goods or services are transferred to the customer at an
amount that reflects the consideration to which the Group expects
to be entitled to in exchange for those goods or services. Revenue
is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods provided in
the normal course of business, net of discounts, customs duties and
sales taxes. The Group has concluded that it is the principal in
its revenue arrangements because it typically controls the goods or
services before transferring them to the customer.
The sale of crude oil, gas or condensate represents a single
performance obligation, being the sale of barrels equivalent on
collection of a cargo or on delivery of commodity into an
infrastructure. Revenue is accordingly recognised for this
performance obligation when control over the corresponding
commodity is transferred to the customer. The Group principally
satisfies its performance obligations at a point in time and the
amounts of revenue recognised relating to performance obligations
satisfied over time are not significant. The normal credit term is
15 to 45 days upon collection or delivery.
Finance Revenue
Finance revenue chiefly comprises interest income from cash
deposits on the basis of the effective interest rate method and is
disclosed separately on the face of the income statement.
Finance Costs
Finance costs of debt are allocated to periods over the term of
the related debt using the effective interest method. Arrangement
fees and issue costs are amortised and charged to the income
statement as finance costs over the term of the debt.
Share-Based Payment Transactions
Employees (including Executive Directors) of the Group receive
remuneration in the form of share-based payment transactions,
whereby employees render services in exchange for shares or rights
over shares ('equity-settled transactions').
Equity-settled transactions
The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date on which they
are granted. In valuing equity-settled transactions, no account is
taken of any service or performance conditions, other than
conditions linked to the price of the shares of Serica Energy plc
('market conditions'), if applicable.
The cost of equity-settled transactions is recognised, together
with a corresponding increase in equity, over the period in which
the relevant employees become fully entitled to the award (the
'vesting period'). The cumulative expense recognised for
equity-settled transactions at each reporting date until the
vesting date reflects the extent to which the vesting period has
expired and the Group's best estimate of the number of equity
instruments that will ultimately vest. The income statement charge
or credit for a period represents the movement in cumulative
expense recognised as at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest,
except for awards where vesting is conditional upon a market or
non-vesting condition, which are treated as vesting irrespective of
whether or not the market or non-vesting condition is satisfied,
provided that all other performance conditions are satisfied. For
equity awards cancelled by forfeiture when vesting conditions are
not met, any expense previously recognised is reversed and
recognised as a credit in the income statement. Equity awards
cancelled are treated as vesting immediately on the date of
cancellation, and any expense not recognised for the award at that
date is recognised in the income statement. Estimated associated
national insurance charges are expensed in the income statement on
an accruals basis.
Where the terms of an equity-settled award are modified or a new
award is designated as replacing a cancelled or settled award, the
cost based on the original award terms continues to be recognised
over the original vesting period. In addition, an expense is
recognised over the remainder of the new vesting period for the
incremental fair value of any modification, based on the difference
between the fair value of the original award and the fair value of
the modified award, both as measured on the date of the
modification. No reduction is recognised if this difference is
negative.
Income Taxes
Current tax, including UK corporation tax and overseas
corporation tax, is provided at amounts expected to be paid using
the tax rates and laws that have been enacted or substantively
enacted by the balance sheet date.
Deferred tax is provided using the liability method and tax
rates and laws that have been enacted or substantively enacted at
the balance sheet date. Provision is made for temporary differences
at the balance sheet date between the tax bases of the assets and
liabilities and their carrying amounts for financial reporting
purposes. Deferred tax is provided on all temporary differences
except for:
-- temporary differences associated with investments in
subsidiaries, where the timing of the reversal of the temporary
differences can be controlled by the Group and it is probable that
the temporary differences will not reverse in the foreseeable
future; and
-- temporary differences arising from the initial recognition of
an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither
the income statement nor taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary
differences, to the extent that it is probable that taxable profits
will be available against which the deductible temporary
differences can be utilised. Deferred tax assets and liabilities
are presented net only if there is a legally enforceable right to
set off current tax assets against current tax liabilities and if
the deferred tax assets and liabilities relate to income taxes
levied by the same taxation authority.
Earnings Per Share
Earnings per share is calculated using the weighted average
number of ordinary shares outstanding during the period. Diluted
earnings per share is calculated based on the weighted average
number of ordinary shares outstanding during the period plus the
weighted average number of shares that would be issued on the
conversion of all relevant potentially dilutive shares to ordinary
shares. It is assumed that any proceeds obtained on the exercise of
any options and warrants would be used to purchase ordinary shares
at the average price during the period. Where the impact of
converted shares would be anti-dilutive, these are excluded from
the calculation of diluted earnings.
Leases
As a lessee, the Group recognises a right-of-use asset and a
lease liability at the lease commencement date. The lease liability
is initially measured at the present value of the lease payments
that are not paid at the commencement date, discounted by using the
rate implicit in the lease, or, if that rate cannot be readily
determined, the Group uses its incremental borrowing rate.
The lease liability is subsequently recorded at amortised cost,
using the effective interest rate method. The liability is
remeasured when there is a change in future lease payments arising
from a change in an index or rate or if the Group changes its
assessment of whether it will exercise a purchase, extension or
termination option. When the lease liability is remeasured in this
way, a corresponding adjustment is made to the carrying amount of
the right-of-use asset or is recorded in profit or loss if the
carrying amount of the right-of-use asset has been reduced to
zero.
The right-of-use asset is measured at cost, which comprises the
initial amount of the lease liability adjusted for any lease
payments made at or before the commencement date, plus any initial
direct costs incurred and an estimate of costs to dismantle and
remove the underlying asset or to restore the underlying asset or
the site on which it is located, less any lease incentives
received. Right-of-use assets are depreciated over the shorter
period of lease term and useful life of the underlying asset.
The Group does not currently act as a lessor.
New and amended standards and interpretations
The Group has adopted and applied for the first time, certain
standards and amendments, which are effective for annual periods
beginning on or after 1 January 2022. The Group has not early
adopted any other standard, interpretation or amendment that has
been issued but is not yet effective. Other than the changes
described below, the accounting policies adopted are consistent
with those of the previous financial year.
Several amendments and interpretations apply for the first time
in 2022, but do not have an impact on the consolidated financial
statements of the Group.
Standards issued but not yet effective
Certain standards or interpretations issued but not yet
effective up to the date of issuance of the Group's financial
statements are listed below. This listing of standards and
interpretations issued are those that the Group reasonably expects
to have an impact on disclosures, financial position or performance
when applied at a future date. The Group is currently assessing the
impact of these standards and intends to adopt them when they
become effective. In reviewing the below standards, the Group does
not believe that there will be a material impact on the financial
statements.
Amendments to IAS 1: Classification of Liabilities as Current or
Non-current
The amendments are effective for annual reporting periods
beginning on or after 1 January 2024 and must be applied
retrospectively. The Group is currently assessing the impact the
amendments will have on current practice.
GLOSSARY
bbl barrel of 42 US gallons
bcf billion standard cubic feet
boe barrels of oil equivalent (barrels of oil, condensate and LPG plus the heating equivalent
of gas converted into barrels at the appropriate rate)
BKR Bruce, Keith and Rhum fields
BPEOC BP Exploration Operating Company
CGU Cash generating unit
CPR Competent Persons Report
ESG Environmental, Social and Governance
FDP Field Development Plan
FPS Forties Pipeline System
GRI Global Reporting Index (framework for sustainability reporting)
HPHT High pressure high temperature
mscf thousand standard cubic feet
mmbbl million barrels
mmboe million barrels of oil equivalent
mmscf million standard cubic feet
mmscfd million standard cubic feet per day
NGLs Natural gas liquids extracted from gas streams
NTS National Transmission System
OGA Oil and Gas Authority
Overlift Volumes of oil or NGLs sold in excess of volumes produced
Underlift Volumes of oil or NGLs produced but not yet sold
P10 A high estimate that there should be at least a 10% probability that the quantities recovered
will actually equal or exceed the estimate
P50 A best estimate that there should be at least a 50% probability that the quantities recovered
will actually equal or exceed the estimate
P90 A low estimate that there should be at least a 90% probability that the quantities recovered
will actually equal or exceed the estimate
Pigging A process of pipeline cleaning and maintenance which involves the use of devices called pigs
Proved Reserves Proved reserves are those Reserves that can be estimated with a high degree of certainty to
be recoverable. It is likely that the actual remaining quantities recovered will exceed the
estimated proved reserves
Probable Reserves Probable reserves are those additional Reserves that are less certain to be recovered than
proved reserves. It is equally likely that the actual remaining quantities recovered will
be greater or less than the sum of the estimated proved + probable reserves
Possible Reserves Possible reserves are those additional Reserves that are less certain to be recovered than
probable reserves. It is unlikely that the actual remaining quantities recovered will exceed
the sum of the estimated proved + probable + possible reserves
Reserves Estimates of discovered recoverable commercial hydrocarbon reserves calculated in accordance
with the revised June 2018 Petroleum Resources Management System (PRMS) version 1.01
SASB Sustainability accounting standards board
Tcf trillion standard cubic feet
TCFD Taskforce on Climate-related Financial Disclosures
UKCS United Kingdom Continental Shelf
UNSDG United Nations Sustainable Development Goals
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END
FR ITMBTMTIBTTJ
(END) Dow Jones Newswires
April 13, 2023 02:00 ET (06:00 GMT)
Grafico Azioni Serica Energy (AQSE:SQZ.GB)
Storico
Da Dic 2024 a Gen 2025
Grafico Azioni Serica Energy (AQSE:SQZ.GB)
Storico
Da Gen 2024 a Gen 2025
