Serica Energy plc (OTCPK:SQZZF) Q4 2023 Earnings Conference Call April 24, 2024 9:00 AM ET
Company Participants
David Latin – Chairman and Interim Chief Executive Officer
Martin Copeland – Chief Financial Officer
Operator
Good afternoon, ladies and gentlemen and welcome to the Serica Energy Plc Investor Presentation. [Operator Instructions] Before we begin, I would just like to submit the following poll, and if you’d give that your kind attention, I am sure the company would be most grateful. And I would now like to hand you over to the executive management team from Serica Energy, David, Martin, good afternoon.
David Latin
Good afternoon, everybody and thank you very much, Jake. Good afternoon, everybody. I’m delighted to be here with Martin Copeland, and we’re pleased to be able to present 2023’s results with Serica, and we’ll endeavor to leave some time at the end to answer Q&A after we’ve been through these slides. It will probably take us about 40 minutes to get through the slides.
And before I start, I just want to say a sincere thank you to Mitch Flegg. I know many of you will be familiar with Mitch and maybe watched him do this for a few years now. He has had a very significant impact on Serica. He laid strong foundations for us over the 6 years as CEO, and I’m honored to take over for him in an interim period as the CEO whilst remaining the Chair. Mitch has been instrumental in building a strong company, and 2023 was another very strong year of financial performance for Serica despite low commodity prices in a really challenging fiscal environment. I’m going to just go through to our first slide.
The performance is such that as you probably know by now, we are making a decision to pay a final dividend of 14p a share, which means an increase in the total dividend for 2023 to 23p per share compared with the 22p in respect of 2022. In addition, we are also launching a £15 million buyback of share scheme. This is an indication of the Board’s confidence in 2024 cash flows and the longer-term value of the assets that the company has.
And the first slide that’s up there, our investment case at a glance, really, a lot of that information will be familiar to many of you that have followed Serica for a while, but perhaps not everybody. So I’ll just step through it quickly. We’re a UK-focused independent oil and gas company. We produce from two hubs. It’s very balanced between oil and gas, and we’re an operator of most of what we do.
Our production has increased over the years to over 40,000 barrels a day of oil equivalent. We say oil equivalent because that’s a way of reporting gas and oil in the same units. Reserves, importantly, and these are the oil and gas pools that underpin the production, have more than doubled to 140 million barrels of oil equivalent since we started out in 2018, operating the Bruce, Keith, Rhum hub. We have a very strong balance sheet, which provides a platform for future growth. We’ve been paying dividends since 2020. And when you take what we’re now proposing, it will be more than £200 million of dividends going back to shareholders. And as I’ve said, we’ve got – our inaugural share buyback has initiated.
In terms of the highlights for 2023, first of all, investment highlights. We did a deal and bought Tailwind in March. That reduced risk in the portfolio by adding separate production hubs, where we had one before, and infrastructure, and it brought oil where we mainly had gas. Thank goodness for that, because we’ve seen a real change in the commodity prices since then. I’ll come back to that. We also bought a portfolio of incremental investment opportunities. And this is the way that we can replace our production because oil and gas fields, as you produce them, they shrink. So you need to be adding more all the time. The way we do that is a number of ways. We had a very successful well intervention campaign on Bruce again last year. We’re doing some more of that this year, and we drill new wells.
So the intervention is working over existing wells, but we also drill new wells. We drilled one last year, but we’re drilling more this year, and I’ll be focusing on that later. We also acquired a low-cost entry point into a fairly significant redevelopment project on Buchan. It’s a 70 million barrel prospect for redevelopment that could take final investment decision later in the year.
In terms of growth, I’ve mentioned that we’ve increased our production significantly since 2022. I also would like to draw your attention to the reserves additions, and I’ll be speaking about them a bit more. But we’ve more than replaced our reserves in 2023. This increased resource base that we have has allowed us to essentially take out a refinance facility.
We had a facility that came with Tailwind. We’ve refinanced it with some leading banks who have given us a new debt facility, which really demonstrates their confidence in the company and how it’s being run and our asset base. And then finally, in the growth area, we’ve grown our capability in terms of staff. We’ve got some great staff now, both from Serica and Tailwind. And together, they are creating new opportunities for us to invest in the assets that we have.
In terms of returns, we’re going to start using this EBITDAX cash number because it’s important to our lending banks, and Martin will talk a bit more about that later. It was a significant amount of cash, despite halving of the gas price versus that in 2022. The oil prices were more stable. Also, we paid significant dividends last year, almost £90 million, and we’ve declared this new dividend for last year that will be hopefully agreed at the AGM, and our buyback program.
A few operational metrics for you. And I’m sorry, some of the things here a bit arcane, they’re oil and gas industry. But I’ve talked about the production already increasing from ‘22 to ‘23. I would say we could have done even better than 40,000 barrels a day. We had a longer-than-planned shutdown on Bruce and Triton last year. These shutdowns were to perform maintenance that’s critical to the health of these old assets, but also they were performing some important life extension work, and we had some unplanned work that had to be done. We took a decision to do it. It does, of course, mean that while we remained in the guidance for last year, we produced a bit less than we have the potential to produce.
In terms of costs, we remain competitive in the basin under $20 a barrel, which is our target. We saw significant inflationary pressures last year and in general, across the business. And these extended shutdowns, which I’ve already mentioned, resulted in more work, and so that came with more cost. But nevertheless, we’re managing our unit OpEx. Reserves replacement I’m going to talk about in a moment, so I won’t say anything more here.
In terms of safety, we obviously want everybody to go home as they arrived at work, safe and sound, and we want to avoid all safety-related incidents. I’m glad to say that we haven’t had any significant incidents, and we work hard to identify and learn from any near misses, both our own and those of others. To-date, we’ve had a good track record. When it comes to carbon emissions – these numbers are for Bruce, which is our operated facility. When it comes to carbon emissions, we’ve had a significant reduction from 2022 to 2023. While it in part reflects the shutdown, I think there’s something important to mention here, which is when we shut down the facilities, we still need to power them. And that power this time was provided with temporary generators, which produced much less by way of emissions. So we’re much more efficient and save a huge amount of carbon dioxide emissions.
In terms of carbon intensity, we are at the lowest level ever, so this is the amount of carbon per barrel of oil equivalent we produce. It’s the lowest level that we’ve been at since we took over the Bruce assets from BP in 2018, and it’s well below the average in the basin. We’re committed to continuously improving both of these metrics in line with the UK emission reduction targets. I’ve mentioned reserves a few times. Let me just talk you through this. This is independently audited. So on the left-hand side, we’ve got where we finished up at the end of 2022 going into 2023 when you take account of the Tailwind assets that we bought. And the sum there is 130 million barrels of oil equivalent reserves.
On the right hand side of the chart, you have the same number for the end of 2023, and it adds to 140 million barrels. So we’ve added 10 million. And the way you get there is we produced 14 million, which is the first flying brick, if you like, but we also added 24 million, so the net result is we grew by 10 million. If you take that 140 million barrels and you just assume we carried on producing at the same rate, that tells you, you’ve got 10 years. If you’ve done the same calculation back in 2018, the answer would have been 6 years. So this is something that many companies can do in an old basin like the North Sea, and it reflects all the hard work of our employees, finding these opportunities to add more when we’re producing. What kinds of things are they adding? Well, the upward revisions in 2023 included identifying a new target for a well to drill on Bruce in the future. They identified a well intervention campaign that’s underway at the moment, and there’ll be another one probably next year.
And then importantly, a really big part of the revisions was recognizing that if we can drop the pressure on the facilities in Bruce, we can suck more gas out of Rhum. And that’s quite a neat engineering solution to getting more reserves through our facilities. And then finally, the Belinda field development – Belinda’s a tieback to Triton. I’ll come and talk about that a bit more in a moment.
Moving on to maintaining production. Some of you will be familiar with this chart. We’ve shown it a few times in the past. The blues are the production from Bruce, Keith and Rhum, mainly, and the browns are what came with the acquisition of Tailwind, so the Triton hub production, mainly. And what you can see here is the big shutdown that I’ve been mentioning in 2023. It’s the hole in the middle of the chart.
I think what you could also see is that since then, production’s been pretty strong. There’s the occasional up and down, this is to be expected, but it’s remained pretty strong. And year-to-date, we’re at over 45,000 barrels a day of oil equivalent. So last year’s average, I’ll remind you, was just over 40,000. Year-to-date, we’re at 45,000. Our guidance for the year is 41,000 barrels to 46,000 barrels a day.
It’s been narrowed slightly because as I’ll show you in a moment, this year depends quite heavily on a drilling campaign that has started, but started a bit later than we expected. And it’s also been impacted by the fact that Erskine, which is one of the smaller producing units for us, has not been producing through much of the year up until now, although it is back on stream.
The outturn of this year so – is going to reflect the drilling campaign, which I’ll talk to more in a moment, and then any planned shutdowns we have on Triton or Bruce. So we do have a planned shutdown on Triton this year. It’s built into the plans. We have a very small one on Bruce that’s not related to Bruce. Actually, it’s related to the export pipeline, Forties Pipeline System, which has to do an annual shutdown. So that’s a week there, and I think it’s about 40 days on Triton. One of the things we’d also like to say here is that in 2025, we would expect a broadly similar range of production to what we expect for this year. So again, 41,000 barrels to 46,000 barrels a day.
Moving on to the well program, which I’ve mentioned several times. This is a really busy slide, and that’s because it’s a very busy year. Let me help you get your eyes in. The blue bars are the beginning and ending of activity sets. The blue triangles are where you expect production to come associated with those activity sets.
And before talking about them specifically, I want to make the point that the triangles are very close to the ends of the bars, typically. Now this is not normal for oil and gas projects, but because these are all very near to infrastructure tiebacks and the tiebacks are short, we can get that production onstream very quickly after completing the drilling.
Normally, you might expect quite a long-time between finishing the drilling program and starting production, but for the kinds of things we’re investing in, it’s very short, and they’re short payback times. At the top, we’ve got Bruce and Keith well interventions. This is work to go into the existing wells, clean them up, add perforations, remove blockages and get instantly a bit more production. They’ve been successful in [indiscernible]. There’s a big new program of new wells starting at Bittern, and then moving down through the others to Belinda are wells that all tie back to the Triton facility. We’re spending almost £195 million of cash this year on that entire program. That includes £25 million for the Belinda project, which is the one at the bottom, where we’ve taken final investment decision, but it’s not yet finally approved by the regulators. It’s got all of the pre-FID approvals, but we’re waiting the final field development plan approval by the regulators.
Let me move – one last thing on that, actually, because it’s important, and Martin will talk about it tax. So we spend all of that money, but that’s not actually what we’ll end up spending after tax, because the current tax regime gives us a good allowance on investment capital, and we’ll get a lot of that back. So the net after tax will be very, very much smaller.
Moving to the Triton well campaign, which was on the last slide and this pretty picture, which is a drilling rig over Bittern. I think what I’d really like to focus on here is the fact that the well campaign delivers tremendous rates of return. So it plays back quickly. The average over those 5 wells is within 2 years. The IRR over that 5-well package is more than 100%.
And because we’re plugging them into existing facilities, which are running already, we’re not adding to the carbon emissions associated with those facilities. We’re just providing more production through them. So actually, our carbon intensity comes down.
So they’re great things to do. Belinda, as I’ve already said, was sanctioned. We’d expect first oil for that in 2026. Those numbers, by the way, which I’ve given you are based on the forward oil and gas price curves at the moment, and they’re based on the current tax assumptions. We will talk about tax later, as I’ve already indicated.
Martin, over to you for the financials.
Martin Copeland
Thanks, Dave, and it’s very good to be speaking with you all today. Since this is my first time doing this, I wanted to start off by formally acknowledging the very strong legacy of careful financial management that has been led by Andy Bell as our CFO, who I am succeeding. And I also wanted to pay thanks to Andy for the very strong support he’s given me in the 2 months I’ve been in the job, and we have a very smooth transition from a CFO perspective.
This slide gives a snapshot of key figures, and I’ll go into some of those in a bit more detail, particularly the takeaways on some of the next pages. As Dave said, we are putting in – we are today highlighting a couple of cash metrics that we will focus on going forward, one of which is EBITDAX and the other is cash flow from operations after tax. Those are relevant, and I’ll get into a little bit more detail on the cash flow from operations on subsequent slides.
Moving to the income statement. We put out our full set of results today. So what this is designed to do is help to orientate people and help them to understand those numbers. When we look at our production, the 40,000 barrels a day of proforma production delivered around 14.6 million barrels of oil equivalent, as Dave was saying. That’s at the wellhead. On a sales basis, it was around 14.2 million barrels.
And on an as-reported basis, recognizing that our results for ‘23 only included 9 months of Tailwind, the sales volumes was around 12.3 million barrels. That means that the £633 million of revenues was equivalent to around $64 a barrel of oil equivalent in terms of realized prices after hedging, and that compares to around $104 a barrel of oil equivalent in 2022. So it shows you the impact of lower commodity prices in ‘23 as compared to 2022.
That was the key driver of that, in particular, that the benchmark gas price that we focus on, the so-called NBP price, moved from an average of 198p a therm to 99p a therm from 2022 to ‘23. And our realized gas price, after taking into account our hedges, was around 93p a therm. The impact of the reduced gas prices was partially mitigated by the contribution of the Tailwind oil-weighted assets, because oil prices held up considerably, averaging $83 a barrel in 2023 as compared to $101 in 2022. Our realized oil price was around $70.5 a barrel, again, because of hedging that we’d taken out to protect the downside.
On operating costs, on OpEx per barrel, on a statutory basis, as in if you take the £219 million that we show on this page as our direct operating costs, it equated to around $21 a barrel of oil equivalent. But on a proforma basis, I assuming the basis as if we’d owned Tailwind for the full 12 months, it would have worked out as around $19 a barrel, which is the number that is below our $20 a barrel target.
Administration costs, G&A increased basically in line with the activities in the business, but there’s also circa £2 million to £3 million of non-recurring costs that we identified within that number. So we’d expect to be able to extract some savings from that on a go-forward basis. We – there’s a couple of accounting metrics that are in the numbers that are potentially worth highlighting.
One is the impact of acquisition accounting on the Tailwind acquisition. We show here a £58 million number in respect to that. That’s actually reduced from the numbers shown at the interims, but not because anything has changed. The fair value was exactly the same, but in the closeout of the audit, a different treatment of deferred tax was applied to it, which has reduced that number as compared to the numbers shown at the time of the interims.
The tax charge we show here of £203 million in total, that includes deferred tax. So £183 million was the current tax, and that’s the metric that we think is the appropriate one to focus on. On the current tax to EBITDAX basis, that means we had an effective tax rate of 48% last year. And I’ll turn to that in a little bit more detail on subsequent slides.
Moving to the balance sheet. The most important event from a balance sheet perspective, Dave has already touched on it, was the conclusion of our reserve base – is our reserve-based loan facility, which we closed out in January of this year. Completing that financing, which is one of the largest all new money reserve-based loans in the past few years, is no mean feat in the current environment and a testament to the quality of Serica’s business as well as a huge amount of hard work by Serica team and our banks. And we clearly see our banks as important strategic partners as we grow our business in the future. We’ve also included on this page the drawn balances and the net position as of the 22nd of April as we’d also disclosed as regards to the year-end in our results.
Turning to one other component of our balance sheet, which is actually one of the smaller numbers on the balance sheet, which is our decommissioning provisions. This chart, which we’ve used a different version of in earlier presentations, shows that we are advantaged as it comes to looking at decommissioning provisions. We have, on a relative basis, expressed as dollars per 2P barrel, we have one of the lowest amounts of decommissioning provisions on our balance [indiscernible] the North Sea peers at less than $2 a barrel as compared to an average for the peer group that we focus on of nearly $8.
That, in addition to the fact that we actually spend quite a little amount of cash on decommissioning, means that we’re in an advantaged position. And the fact that we spend less money on decommissioning is especially advantageous today because the windfall tax, the EPL, does not allow you to deduct decommissioning costs when you’re – against your tax bill.
Turning to the cash generation. This chart shows a cash waterfall, a cash bridge, from our gross cash position at the end of 2022 of £433 million through to the £291 million at the end of 2023. What we’ve done here is we’ve positioned this around a central point of the cash flow from operations less tax. The reason for that is that the items to the left of that are essentially the – what the business itself generates and, of course, the tax that we have to pay. But what we’ve done with taxes, we’ve split it between the current year, which is effectively the amount attributable to 2023. And although on a cash basis, we paid £279 million, we put the remaining £96 million just to the right of the £628 million bar. So on a cash flow from operations after current tax basis, we generated £200 million worth of cash flow from operations after tax.
We then focus from our capital allocation decisions on the bars to the right of that, in particular, the turquoise-colored bars on this. So we spent that money on CapEx associated with the investment program during 2023 on the cash component of the Tailwind acquisition, on some paydown of our debt and on dividends. And those are the choices that we, as a management team and a Board, have to make and on which we’ll communicate, obviously, on a go-forward basis.
We’ve also included a slide here around our hedging. This sets out a couple of things. First of all, it shows you that the legacy hedges that we had associated with the previous Tailwind RBL are rolling off. Those are the bars that you see in Q1 and Q2 ‘24 on the oil side. Those were hedges in the kind of $60 to $68 a barrel range. Those are rolling off, and we have replaced the hedging with a program that you see set out on this page in both oil and gas at rates that are considerably more attractive. And we’ve designed our hedging to be a combination of swaps and collars, which allows us to protect the downside but keep exposure to the upside. And you can see on this page, on the oil, it’s been in the order of $70 a barrel floor price, but with upside all the way to $100, $110 a barrel. And on gas, protecting the downside at around high 70s to 80p a therm with exposure up to the 120p a therm-type range.
Moving to dividends, obviously, very important in terms of the returns that we’re going to – that we pay to our investors. As Dave’s already indicated, we’re proposing today a 14p a share final dividend for 2023. And this chart just shows that over the course of the period since we’ve been paying dividends in 2020, we have paid over £200 million worth of dividends. And if you put that into context, that is equivalent to roughly 25% of our market capitalization today. So it’s a very considerable amount of shareholder return over that time period. We haven’t shown on this chart the buyback. The buyback has – that we initiated today is actually a component of 2024 returns, so hence why it’s not shown on this chart.
Moving to tax. I’ve mentioned it already in terms of the effective tax rate, but I think this is a helpful way of looking at that. So what we’ve shown is what our tax rate, our effective tax rate was for 2021, ‘22 and ‘23 all using the same methodology, which is current tax as a proportion of EBITDAX. But we’ve shown it on – in the dark blue bars, but in the light blue line, we’ve shown what the effective marginal tax rate was for the oil and gas industry in that year.
So in 2021, when we were in the old regime, pre-windfall tax, 40% was the rate. Then during 2022, that is actually a blended number because the EPL windfall tax came in partway through the year on the May 26. And then this year, we’re in the 75% regime. But what’s important is to see the gap between the effective tax rate and that marginal rate. And the explanation for that gap is a combination of the Tailwind tax losses combined with the capital relief that we get on our investment program. And that’s what explains the difference between our effective tax and the marginal tax rate.
I know there’s been good disclosure in the past about the tax losses that we acquired with Tailwind, and we’ve put disclosures to what balances of those losses were at the end of 2023. But to put those into value terms, they – we’ve retained value for £395 million as of the year-end 2023 in relation to the carry-forward tax loss position, and that’s equivalent to the £470 million that was disclosed at the time of the Tailwind acquisition. So we’ve used some, but we’ve got plenty more to go as regards to those tax losses. And for 2024, we’ll have the full contribution of Tailwind for a full 12 months as well as higher oil prices, so expect to see more benefit from those losses coming through.
Finally, I just wanted to say a few words about our overall framework for capital allocation. This is something that we’re obviously very focused on in terms of how do we allocate your money, our shareholders’ money. This starts from the foundation of the safe and reliable operations of the production of hydrocarbons, because without that, we don’t have the cash flow against which to make capital allocation decisions. So that’s the foundational component, and it’s obviously the fundamental aspect of what the company does.
Then we have choices to make, and what we wanted to give – to communicate here is the kind of philosophy and priorities that we as a Board will be thinking about. First of all, that is to meet what we’re required to meet in terms of finance costs for any of our – any debt that we might have at the moment. Obviously, that’s very modest because we are in a net cash position. Then to investment in our own assets, and Dave’s gone through what we’re doing this year, which obviously is a very busy period of investment. Then we will move to thinking about disciplined M&A, and I stress the word disciplined. We’ll be very focused on making sure whatever we do delivers value to shareholders and to the continuing payment of dividends.
And then to the extent we have excess capital, we’ll also look at buybacks. And today, we initiated a buyback, an inaugural buyback to start some of that component of shareholder distributions. And if we had taken on debt, for instance, for an acquisition, which so far, we have not, we would also look to de-lever to get back to and make sure that we at all times maintain prudent net metrics.
So with that, I’m going to hand back to Dave for some final remarks, and then obviously, we’re happy to take questions later.
David Latin
Thank you very much, Martin. Just some final comments regarding the external environment and our response to it going forwards. And I think these pictures are striking. If you can get your eyes in, on the left, we have Brent oil prices going back to 2010. And on the right, we have gas prices going back to 2010. What you can see is that the big dips in Brent, the last big dip in Brent was the pandemic, 2020, 2021. In gas, there was a dip in the same time period during the pandemic. During those low oil prices and low gas prices, Serica actually had the courage to continue to invest. Thank goodness, because actually, that was what allowed us to produce in better times. Unfortunately, times got too good for a while, particularly in gas, and that’s what this windfall noise is all about. But I think you’ll agree the windfall has absolutely been and gone. You can see the blue zone show the sort of historic norms, if you’d like, and we’re well inside the blue in both oil and in gas. So this windfall has been and gone.
And in fact, those prices aren’t inflated. So if you’d actually taken inflation into account, you’d argue we’re even further out of any windfall regime. So we should conclude that oil and gas are really at historic norms, and yet the tax burden in the UK has increased 3x in the last 2 years, and there’s yet another increase proposed by Labor should they come into power, along with a threat to take away a substantial portion of capital allowances.
This tax burden, together with the fiscal uncertainty and the instability in the UK, means it’s increasingly difficult for us to make investment decisions in the longer-term. We’ve still got some attractive short-cycle investments in our portfolio. We’re doing a lot right now, and they will benefit from the current tax allowances. I know there are some questions on that. And there are probably still some valuable acquisitions to be made in the UK when the time is right, but that time isn’t now. I think what we need to do right now is wait and see what happens a bit and look to grow our business outside of the UK. And so that’s what we’ve been doing, and it takes time. We’ve been looking at the broader North Sea for quite some time. We’ve been actively screening opportunities across the whole region. The work continues.
We’ve probably got the deepest, strongest, most capable team, management team and at the Board level, too, when it comes to M&A. However, that doesn’t mean that we’re going to rush about doing things. We’re always going to be disciplined. We’re mindful of creating value for you, our shareholders, and we make no apologies that these things take time. It takes time to find the right transaction. It may well be that the right transaction comes out of the UK, and we have to wait for the right moment and weather some storms in the meantime. However, we’re looking hard at Norway and other parts of the wider region. But I want to focus a bit on Norway because it stands out.
If you look at the light blue bars on the left, you can see Norway final investment decisions doing a bit of a hockey stick up. There have been more and more of them recently. The UK, in dark blue, does the opposite. This reflects the difference in the support that the government and society give towards oil and gas in those countries. Norway is a high-tax area, but it’s often confused in minds because it’s not just about high tax. What we have there is a government that’s very supportive of the industry. So the reason that the final investment decisions go up in Norway towards the end of that period is during the pandemic, the Norwegian government recognized that the supply chain in the industry was fragile and needed support.
And what they did was they accelerated investment allowances. And they made them happen faster, and that encouraged final investment decisions. It also encourages exploration drilling, and the area is sort of 10 years younger really than the UK North Sea and has been managed in a much more staged and piecemeal kind of way. So whilst Labor talk about Norwegian tax raising for the UK, it’s certainly nothing like what they have been talking about. The Norwegian tax regime is a framework that recognizes that to have a vibrant industry that is investing, if you have high taxes, you need to offer attractive investment allowances and capital relief to allow for the growth that’s necessary.
I’m talking a lot about Norway. Don’t take it as a conclusion that we will do a deal there. These things take time. We are learning about Norway, and we are looking at lots of things in Norway. And it’s an exciting place to look, but we will continue to look at the UK because, as I say, now’s not the time to panic. Now is the time to recognize we’re a really strong company, and we can take our time, and we can look for the right opportunities as they arise.
My final slide really talks to about our company and our purpose, and we’re unashamedly a producer of hydrocarbons. And I say unashamedly because we believe that the world still needs them, and they can be produced safely and efficiently and as cleanly as possible, but they’re hydrocarbons. We’re good at it. We’re a safe and experienced operator. We’ve grown our production and our reserves in a very unusual way for an old basin like the North Sea. We keep replacing them. Most people only replace about 4%. We’re over 100% every year, year-on-year. We’ve got a strong balance sheet with plenty of firepower for M&A. We’ve got a good track record of M&A. Erskine was a great deal. Bruce, Keith, Rhum was a great deal. I think many of you, I hope, are starting to realize that the Tailwind deal was a good deal in many, many ways. And with all of that, we can continue to provide significant returns to our shareholders, and that’s what we intend to do.
Question-and-Answer Session
A – David Latin
I think with that, we’re going to look at your questions, and there have been plenty coming in. We will endeavor to answer as many of these as we can, and perhaps just to take – there were one or two that came in before the call today. One was about – at the Capital Markets Day, we were told the company was looking to expand its horizons, but the Chief Investment Officer has left. So what progress have you made?
And perhaps just to say that Steve Edwards did a great job for us. He helped us focus. He helped us get things moving. He’s helped us shape the team. We’ve brought some more people in since then, but these things take time. We’ve screened a lot of deals. We continue to look at everything, pretty much. So we’re making progress. We’re understanding it all, but we’re not going to move too fast. Another question that came in is one that comes up quite a lot actually, and it’s – some people own Kistos and Serica and would like to see us together.
I would say that we look at all possibilities in the UK and outside. Clearly, Kistos approached us about a possible deal back in 2022 when the gas prices were very high. It was a deal that involved a lot of debt and taking the cash out of Serica and would have made us a gas company. We’re quite glad that we’re not a gas company in terms of only gas today. We’ve seen gas prices fall from 6p a therm to 60-something pence a therm, and we’ve seen the market capitalization of both companies come down a bit since then. And actually, that combination doesn’t look as good as perhaps it would have looked at, at that moment in time, even if we had liked the debt, which we didn’t. I think today, a combination of those companies – Kistos is a much smaller company than us now, and perhaps we want to look for something that will move dial a bit more. But nevertheless, I would never rule anything out. We’re looking at everything. I’m going to get Martin in to answer a question. Perhaps, Martin, why don’t we pick up a question about share buybacks and dividends costing us quite a lot. Considering you have debts of over £200 million, do you think that paying such a generous dividend is wise?
Martin Copeland
Thank you. I mean, yes, that’s – look, it’s a very good question, and it’s obviously one of the things that we as a Board will always focus on. But I think one of the strengths of Serica is that actually relative to any of our peers, although we have gross debt of around £200 million, we are net cash of around £80 million. So we don’t – effectively, we don’t have any debt, and that is a significant strength relative to our peers. And what it means is that we’re able to withstand different environments more robustly than some of our peers. And we believe that continuing to pay a healthy return to our shareholders is sensible and wise.
We have, though, given you a bit of a framework as to how we’re going to think about capital allocation on a go-forward basis. We haven’t in any way said that we’re changing our dividend policy, but we have started a buyback today, as you will have seen. And we will communicate further on how we think about capital allocation in the near-term. As you’ll know, there’s quite a lot of changes going on in terms of personnel and also a lot of activity in terms of considering M&A, etcetera. So we will come back to you and give further communication as to how we think about that in more detail later in the year.
David Latin
Thanks Martin. And a couple of more questions, and maybe I will have a go at these. How are you factoring in the labor stance on energy profits levy? We think about it a lot. We thought very, very hard about taking a final investment decision on Belinda. It was a difficult decision. We have committed to that rig into the third quarter last year, and we felt it was a right decision as part of the package. The reason we worry about it a bit is in that five-well program, it’s the activity that hangs out more in the space, if I call it like that. So, we think hard. And looking further ahead, we will think very hard about investments in the UK if labor do, what they are threatening to do. And I think on the back of answering that, two other ones is, is spending on back end contemplated in the guidance for the year? No, not really, nothing significant, there is a little bit I think, but nothing of significance. When would you expect to write the first check? Isn’t the FPSO expected to be purchased soon? It’s not being purchased by us, and the first check won’t come really until after final investment decision, first check of any significance. And that isn’t expected until the back end of the year or certainly later this year. And we and the JV will have to take stock of the environment at that point in time to decide what to do. Can we make it clear which part of 2024 projected CapEx is deductible on the 91% capital allowance of the EPL? I think pretty much everything we showed you is. Martin, would you like to…
Martin Copeland
Yes. I mean – well, I mean that’s the sort of simple answer. The complex answer as regards to taxes, it’s always complicated because there are some things that are and some things that aren’t eligible. But essentially, we are confident that the spend that we will implement during 2024 will be eligible for capital allowances. And clearly, that’s one of the reasons why a company like ours that was capable of coming up with projects in a relatively – short-cycle projects and relatively quickly has been able to take advantage of the capital reliefs that are available to us. And I think there was a separate question about how do we think about that in the context of what Labor party might do. I think that’s one of the beauties of this company, which is we are able to and have proven our ability to be able to make decisions in a smart way and to pivot as appropriate. So, our Board is absolutely acutely conscious of that. But what we can say is that – and as Dave said, the investments that we are making in the four-well program, but also the Belinda field are very strong returns, and we showed numbers on that in the investor slide.
David Latin
And Martin, while you are on the speaker, previous communications stated a progressive dividend. Is this still the plan? I mean I think maybe to talk to your capital allocation framework…
Martin Copeland
Yes, I think again, I will sort of refer back to what I said before. We will communicate more on that. But essentially, what we think is and we will always focus on is the affordability of shareholder distributions relative to our cash flow from operations after tax and hence, that’s the reason why we focused on that measure. But in terms of more specificity on that, we will communicate more on that later in the year.
David Latin
There has been a couple of questions that came through on the Tailwind deal itself. Why did the company double down on the UKCS with the Tailwind acquisition in full knowledge of the EPL and tax regime? Why not consider more favorable fiscal regimes? And I think the answer to that is we actually – we did the Tailwind acquisition in full knowledge of the EPL and the tax regime, and we factored it into the valuation and the economics. And Tailwind actually mitigated commodity price risk, single asset pipeline risk. It brought new things to do and some relatively tax-advantaged barrels with it. So, that’s our answer. And someone asked me to score it on 1 to 10. I won’t do that. But I would say that I think it’s a good deal. I am glad we did it. It’s made us a stronger company. There is no doubt about that. And I think we would be far weaker if we hadn’t done it. I think then to another question, where do you see Serica in 3 years to 5 years’ time? I imagine that we will be a bigger and stronger company continuing to provide good returns to shareholders. We will probably have diversified to one or two more hubs and/or countries. And we will be doing, I hope, more of the same. What we are good at is squeezing value out of assets that are in their sort of mid to late life. And we have shown that. It’s highly unusual to replace reserves year-on-year from older assets. That’s what we do. That’s what the team does really well in Serica. That’s what we want to continue to do. And if you think about places like Norway and beyond, we would be looking for, in the longer term, those sorts of opportunities in those places, too, to apply what we are good at in those places. There is a question about whether we would go further afield than the wider North Sea region? We are staying focused on looking close to home right now because we like to be focused, but we always keep a beady eye open to see what’s out there. So, we will keep an eye open. And one of the benefits of Mercuria, and I will mention them because they often come up in questions, too, is that they have a global footprint. And they bring us ideas, and that’s okay. It’s okay for shareholders to bring us ideas, and they will continue to do so because they have got a good finger on the pulse in lots of places where we don’t. And we will think about those things when they come. Martin, do you want to add anything on those or pick up another question?
Martin Copeland
I was actually just scouting through some of the other things that are out here. So, I mean there is obviously a very good range of questions here. One of them says, are you concerned that the Iran-Israel conflict may lead to sanctions on Rhum? I think the short answer is that is no. As you know, the arrangements that we have in place were done because sanctions were imposed on Iran. And so we don’t think that, that’s an issue because in fact, the arrangements that we have in place were put in place precisely to deal with that. Yes, that was – I am just looking through now, is – can the EPL be legally challenged as the oil and gas prices have normalized? Unfortunately, we would like to think that, that was the case, but I think not, because governments are sovereign and can pass taxation legislation, and they have done. So, no, I think is the short answer to that.
David Latin
Here is one. Mitch. Mitch is an excellent CEO, and he will be sorely missed. What was the reason for his departure? Told you I wouldn’t duck anything. Mitch has been a fantastic and well-trusted CEO and colleague. He is leaving simply because he and the Board unanimously agreed that it’s time to freshen up the team. But we are moving to the next stage. We think we may be moving to something that’s bigger, moving to something that’s got its foot in more than one country, and it’s time to start that stage of the journey, Serica 3.0, if you like. Serica 1.0 was an exploration company in places like Indonesia and Namibia. Maybe we wish we had stayed in Namibia. Someone asked me that earlier today. Serica 2.0 has been a company that moved back to the North Sea and focused on production and has done really well doing that. And Serica 3.0 is going to be bigger, more diversified and probably beyond the UK ultimately. And that’s what we need to start building now.
Martin Copeland
Yes, there is a question here about the buyback in terms of when will it start. Well, the answer to that is as per the announcement today, it in fact started today. So, we have done that. And as is normal practice, we will be disclosing as and when we have bought back shares, we will make disclosures. So, those of you that follow the RNS, you will see quite a lot of them. In terms of the pace at which we will exercise that, we are not going to put the specifics of that out there. As you can appreciate, obviously, we don’t want to be – being absolutely specific about exactly how we will do that, but we are going to do it in a way that’s consistent with the regulations, in particular, the MAR [ph] regulations, which obviously impose what we can and can’t do in that respect. But we will communicate after shares have been purchased as is the requirement.
David Latin
Martin, there is a question. Can you give more information about what oil and gas prices you require in order to maintain the current dividend?
Martin Copeland
Yes. I mean it’s a good question. And of course, it’s fundamental to the whole issue of capital allocation. I think the reality is that this company started paying dividends after coming off the back of really quite low oil prices back in 2020, right. But I think it slightly goes to the point about our perspective on shareholder distributions as a whole is going to be linked to the cash flow from operations after tax measure, and that itself will be impacted by commodity prices. So, I am going to slightly duck the question. It’s going to be part of the mix. And clearly – so I can’t give you an absolute hard answer in terms of at what price. There clearly – theoretically, there is a price at which we would – that would be a challenge, but we are very far away from that today.
David Latin
I have got another one of those tough questions. How many credible candidates are there on the potential CEO list? And are you one of them? So, I would say I was always a backstop, and we have had quite a few credible candidates. We are quite advanced in the search, and we hope that we will be able to get to a place where we can announce what – where we are going with all of that by the time we get to the AGM at the end of June, 27th of June. So, we should know before then where we are in the CEO succession process.
Martin Copeland
I have got one here on M&A. Could you give more detail regarding – sorry, wrong one. When is it likely the North Sea acquisition will be announced? Would it be surprising if nothing had happened in 2024? And I think on that one, Dave sort of already mentioned it, but I will reiterate the point that actually we are going to be unashamedly – we understand and we have signaled for a long while that we are focusing on M&A, and we are. There is a lot of work going on. We are looking at a lot of different things. But actually part of our job is to recognize when to say no and to make sure that when we do announce something, it’s the right deal. So, I can’t put a deadline on that because we don’t want to have a deadline. We don’t want to have a gun to our head in that respect, right. We are going to make sure that we do the right deal for shareholders, for the company, for all stakeholders involved in this company. So, I am afraid we are going to stay disciplined in that respect. And hopefully, when we do have something that we think is the right thing, we will obviously put it out to and announce it and put out to shareholders.
David Latin
Another question about succession, having recognized the contribution that Mitch made to the growth of the company and the successes that he brought, why did the Board let him go when there was no identified successor? And this is a difficult one. I have been asked this quite a lot, but the reality is that when you go out to find a CEO, you have to do so very publicly, and it can take a while, right. Some people are on nine months or more of garden leave before they can come and work for you, right. So, you may be looking at a period of 6 months to 12 months from even beginning that whole search. And you can’t do it secretly, right, because it’s a small pond, and everybody knows what’s going on. So, you have to be public. We didn’t think it was right or fair on anybody to have a long period of uncertainty and not be moving forward. And I think we had an experience. We have had experience where things can fall through in the search, and then you have to start again. So, the mitigation against that long period of time and uncertainty was that I was going to be part of the team regardless and so would step in and help Martin through this period, and then we will get a new CEO, somebody else or myself, by the end of it. I hope that answers the question. Do you want to pick up another one, Martin?
Martin Copeland
Well, there is another one here which maybe is for you, Dave. It says, is the Board concerned that Mercuria now control 25% to 28% of the enlarged equity?
David Latin
Well, Mercuria still control around 25%. Mercuria, a very supportive shareholder. We have two terrific directors on the Board, right. And they know when to where the Mercuria happens say, actually, we need to tell you what we think the shareholder would think about X, Y or Z, right. And shareholders are allowed to tell us what they think. So, occasionally, they will do that when we ask them. But they are actually very good contributors to the Board in their own right. Rob Lawson was the Head of M&A in BP. He has got tremendous contacts around the world of M&A and brings a lot of astute business thinking when it comes to deals. Guillaume has been, from the very beginning, the CFO at Mercuria. He sits as an observer on the Audit Committee. He asks really good questions. He brings very good insights. And he is quite entrepreneurial, as you would imagine for somebody that’s helped build a company from nothing to many, many billions, which is what it is today. So, those two directors know that they are directors of Serica and are really good. But they are, of course, connected to Mercuria. Mercuria, strategically, is a good partner, right. As I have said earlier, they are all over the world, so they can see what’s going on. They have got a tremendously strong balance sheet, which could provide us with support in certain situations. Obviously, it would be a related party transaction if we did a transaction with them, whether it was a hedging transaction, whether it was a sort of junior debt transaction, but they are very, very supportive. And even having them known to be supportive of a deal, for example, if we were going to go and do one as a shareholder, I think would give a lot of confidence to a seller. So, all of those reasons why I think it’s good to have them involved. And yes, they have got significant influence as they should have as a 25% shareholder, but certainly no more than the other 75% who have their 75% of influence. What else, confidence in maintaining dividends, if we answered that. I think we probably have. Can you see anything that we need to pick up, Martin? I am scanning here now.
Martin Copeland
Yes. I mean there is – are there any other companies in Europe or the U.S. that are directly comparable to Serica? If there is direct comp, what kind of multiple does it trade at? It’s a challenging one. I mean obviously, the comps [ph], I mean obviously the ones we tend to focus on are the UK – our UKCS peers, which is really Ithaca or EnQuest, Harbour, et cetera. But of course, some of those are changing now quite significantly, right, with the transaction Ithaca’s just announced today, the one that Harbour announced around Christmas time. So, I mean that’s kind of what we tend to focus on. And of course, in terms of multiples, the main metric that people tend to focus on is NAV. And so I am not sure there is a straightforward and easy multiple that one can refer to. But I think we are probably getting towards the end of the…
David Latin
I think we are running out of time. And what we will endeavor to do, as Mitch always did do was do his best to answer all the questions, we will provide answers to them. We have got through most, but probably not absolutely all. It’s a big list, and some of them are duplicative. So, it’s quite hard to weed out the ones that are different sometimes. But I hope you don’t feel too shortchanged. And with that, I am going to hand back to Jake. Thank you for your time everyone.
Operator
David, Martin, that’s great. Thank you very much for your presentation and for answering all of those questions that you can from investors. And of course, given the significant attendance on today’s call, we will give you back all of the questions that were submitted today just for you to review, to then add any additional responses, of course, where it’s appropriate to do so. And we will publish all of those responses out on the platform. But David, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.
David Latin
I think the closing comments are that we are clear about the kind of company we are, right. We want to build on the successes of the past. We don’t want to panic, and we want to continue to provide a return for our shareholders. That’s what we are going to do. And I hope if you are not a shareholder, you will join us. And if you are one, you will stay with us. It’s going to be a good journey.
Operator
David, that’s great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I am sure will be greatly valued by the company. On behalf of management team of Serica Energy plc, we would like to thank you for attending today’s presentation. That now concludes today’s session, so good afternoon to you all.
