INTERVIEW: Serica Energy sees N Sea acquisition opportunities in market turmoil

London — Upheaval in the North Sea oil and gas industry should create opportunities for well financed companies to seek out acquisitions, but a cautious approach will be needed to secure worthwhile assets, CEO of London-listed Serica Energy, Mitch Flegg, told S&P Global Platts in an interview.

Flegg underlined his company's debt-free position and said the collapse in oil and gas prices was an "encouraging sign" as it looks to build on its 2018 purchase of a cluster of mature North Sea fields known as Bruce, Keith and Rhum.

The company was on the look-out for production assets it can "add value to" in the conventional North Sea or West of Shetland area, Flegg said.

Serica increased its oil and gas output by 18% last year to 30,000 b/d of oil equivalent on the back of the new purchases. Rhum accounts for about 3% of UK gas production and operates under a partnership with Iran's state oil company that dates from before the Iranian Revolution, for which it has received a succession of US sanctions waivers.

The Bruce, Keith and Rhum purchases were structured partly to relieve BP and other legacy owners of decommissioning liability, with Serica making minimal up-front payments, but sharing revenues with the former owners until 2021. BP holds a 5% stake in Serica.

By increasing the efficiency of operations, Serica says it has managed to extend the estimated timeline for shutting down the Bruce facility, on which Rhum relies for infrastructure, from 2026 to 2028, and has reduced the operating costs of its whole portfolio to $12.60/boe of production. It ended 2019 with around $100 million in cash.

This week Serica announced plans to start work in the fourth quarter on refurbishing a third well at Rhum that was never used due to technical difficulties. It also aims to attract other license holders to use the Bruce facilities.

Meanwhile, it is also keen to make further acquisitions. In the current environment working out what was worth buying would be key, Flegg said. Mergers and acquisitions in the sector totaled $6 billion last year, according to Oil & Gas UK, however, the coronavirus pandemic is holding up deals, including Premier Oil's purchase of another package of BP assets.

Speaking of the market overall, Flegg said: "There will be a number of distressed companies, a number of distressed assets. I don't think there are many buyers out there because there aren't many companies that have the fire-power, that have the cash to do it. It's an encouraging sign for us that the market is where it is."

However, "the assets that people need to sell quickly are the assets that have got real problems -- they're selling them for a reason. We want to find assets that we can add value to, and that's the key to us. But we think they're out there as well."

Price protection

Serica, like some of its peers, has been insulated from the collapse in oil and gas markets by its hedging, which covers 30%-40% of its production in the current quarter, ensuring it gas prices two-three times higher than recent spot prices, at 35-41pence a therm.

Flegg said Serica's lack of debt had helped it secure favorable hedging deals, unlike, as he sees it, some rivals. However, he added that the company was only hedged for the next year, arguing there was too little certainty for hedging beyond that to be worthwhile.

"What people often forget is hedging costs money," he said. "Most companies that have hedging strategies are almost forced into an automatic hedging by their debt providers. Our hedging strategy is to look for value in the market rather than just routinely hedge."

"We wouldn't want to be taking the risk of paying a lot of money to have hedges for a year-and-a-half from now."

As for the wider industry, Flegg said he did not expect companies to shut down fields due to low oil prices unless the fields were close to being decommissioned anyway, as with some operated by rival EnQuest.

He acknowledged widespread concern about the supply chain -- drilling companies for example -- and the industry's worries that such companies may not be as resilient as in 2014-15, causing knock-on problems for operators of North Sea fields.

Serica, however, had conducted a "very thorough review" of the supply-chain companies it relied on and had not found any major risks, Flegg said, adding, "it would be foolish" to say there were no risks. The company plans a brief maintenance shutdown of around five days over the summer.

Flegg stressed that any deferral of activity by Serica would be done in consultation with its service providers. "We are not ever going to be the sort of company that just says...we're cancelling that, we'll rip up that contract, and we'll walk away from it," he said.

"A lot of other operators -- it's a little bit more of a struggle for those guys. I am hearing stories of rig contracts just being cancelled, and lots of problems."