Serica Energy (AIM: SQZ) boss Chris Cox aims to buy up aging UK assets as “the fiscal regime in the North Sea can’t really get any worse than it is right now.”
The Serica chief executive explained how his firm has changed its attitude towards the UK as it laid out plans to explore merger and acquisition (M&A) deals in the North Sea.
“The UK, we think, holds some opportunity,” Cox told Energy Voice.
“Part of the reason there’s an opportunity is that it’s not very attractive for very many people.”
The firm, which was once looking to pick up assets in Norway, now sees an opportunity to pick up bargains as investors abandon the basin.
“There are people that want to exit, there are people that want to reduce their exposure to the North Sea, there are folks that are looking to partner,” he added.
Unrealistic Norwegian prices and optimism for UK assets
In recent months, UK oil and gas players have attempted to shield themselves from the country’s steep 78% tax rate.
US operator Apache revealed plans to exit the basin by 2030, the UK’s largest producer, Harbour Energy (LON:HBR), diversified its portfolio through the $11.2billion acquisition of German rival Wintershall Dea and London-based supermajor Shell (LON:SHEL) combined its assets with Norwegian state-owned firm Equinor.
It is for this reason, that Serica is looking to its tried-and-true method of picking up ageing assets and extracting additional value from them.
As other firms attempt to hide from the Energy Profits Levy (EPL), or windfall tax, Cox sees a glimmer of hope for the UK, although he admitted: “I don’t have a crystal ball and I might be wrong”.
© Serica EnergyHe commented: “My view is, the fiscal regime in the North Sea can’t really get any worse than it is right now and so if you think whatever comes after the EPL is going to be better than the EPL, then the value of people’s assets is going to go up over time rather than down.”
Cox added “I quite like the idea of buying at the bottom of a cycle” and, he believes, that the UK “might be at the bottom of the cycle right now,” prompting a renewed interest in the country.
This is a change of pace from Serica’s previous sentiment around UK investment.
Ahead of the UK’s autumn budget, CFO Martin Copeland told Energy Voice that the firm was looking to acquire assets in Norway.
However, since Cox was named CEO in May, attitudes towards the UK have shifted, not in small part due to the attention others have shown the country’s Nordic cousin.
“Lots of people are interested in assets in Norway and as a consequence, every M&A process is competitive in Norway,” Cox added.
“We looked at a few things in Norway after I joined, and my view is the people who have stuff to sell in Norway have unrealistic expectations of what they might get for their assets.”
Cox explained that his firm “were involved in some processes” when he took over, however, these did not pan out.
Serica’s Norwegian U-turn
Although the firm hasn’t ruled out ever entering the Norwegian market, it’s current outlook is that it “looks quite difficult to do something that’s value accretive” within the country.
Norway was seen as a natural next step for UK operators on the build-up to the Labour government’s first budget as the UK planned to up its headline rate of tax to that of its neighbour while removing investment allowances that were once afforded under the EPL.
Norway has historically had a higher rate of tax than the UK, however, its fiscal regime allows for investment allowances that incentivise operators to spend on further activity.
However, the retention of the windfall tax’s first-year capital allowances created an opportunity for Serica.
As a well-known independent UK player, Serica is becoming a port of call for those looking to sell assets in the North Sea, Cox explained.
“Any anybody that’s got anything to sell is probably going to approach us, and so we know we know pretty much about everything that’s out there.”
More drilling to come from Serica in the UK North Sea
© Supplied by Dana PetroleumSomething that is making the UK appealing for Serica at the moment is that it has ways to “shelter” itself from the high rate of tax.
“The situation we’re in right now is our oily assets have historical tax losses, so they’re paying hardly anything in the way of tax,” he said.
“Our gas assets are fully tax paying at the moment and even though we’re a 50/50 split, more or less, for oil and gas, the oil is far more valuable to us at the moment and so that brings it into stark focus that the tax makes a big difference.”
In November, Cox told shareholders that his firm welcomed news from the budget which offered “much needed clarity over future investment allowances” that benefited some of its assets.
Because of the capital allowance retention, Serica is “one of the few active drillers in the in the UK, North Sea at the moment,” commented Cox.
The firm is currently halfway through a five well drilling campaign at its joint venture Triton project and Cox forecasts further drilling over the next two years.
“The next thing that you’re going to see from us is probably going to be a drilling campaign around Bruce, Keith and Rhum,” he added.
“Those are gas assets that don’t have a tax shelter, but they can still work because we’ve got the capital allowances.”
He added the caveat that “we don’t know exactly which wells we’re going to drill yet or exactly when it’s going to happen,” but he said those projects will happen.
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