Serica Energy plc (OTCPK:SQZZF) Q2 2022 Earnings Conference Call September 27, 2022 8:00 AM ET
Company Participants
Mitch Flegg – Chief Executive Officer
Conference Call Participants
Operator
[Technical Difficulty] Serica Energy plc Interim Results Investor presentation. Throughout this recorded presentation, investors will be in a listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab that’s just situated on the right hand corner of your screen. Please just simply type in your questions at any time and press send. The Company may not be in a position to answer every question it receives during the meeting itself. However, all questions submitted today will be reviewed with responses published on the Investor Meet Company platform where it is appropriate to do so. Before we begin, I would like to submit the following poll, and if you could give that your kind attention, I’m sure the Company would be most grateful.
And I now like to hand you over to CEO, Mitch Flegg. Good afternoon, sir.
Mitch Flegg
Yes. Good afternoon. Thanks for the introduction. Good afternoon, everyone. Thanks for joining us. I think most people are pretty aware, I am Mitch Flegg, the Chief Executive in Serica. And I guess normally at these things, I start off with a little bit of background to the company, which I’m not – it isn’t in this presentation, but clearly, we are a North Sea focused oil and gas exploration and production company, heavily focused on gas rather than oil and heavily focused on production rather than exploration, but we do cover the full range.
This presentation, which I’ll go through fairly briefly to leave time to answer questions is fairly short, but is focused very much on what happened in the first half of this year because this is our Interim Results Day and what happens in the near future. There were some pre-submitted questions and I’ll try and answer those as I go along. Fortunately, I think almost what everything that was in the pre-submitted questions is covered in the presentation. So I’ve not had to do too much extra work to be ready for those questions. But as I say, I’ll be happy to answer other questions at the end as they come in.
So first half of this year, what’s it all been about? It’s been a good half. We are very, very pleased with the outturn of the first half of this year. What we’ve seen is that our ongoing strategy of investment is paying off. So we’ve always – and anyone who’s heard me speak before have heard me banging on about the fact that we are always investing for the future. We are investing in the growth of the company. And the most recent campaigns, the Columbus well, which we drilled last year and brought on production towards the end of last year, the Rhum R3 well intervention, which we carried out last year and brought Rhum pad well on to on stream towards the end of last year as well. And then this year’s well intervention campaign, which I’ll talk a little bit more about, have really added significant production capability to the company. And we are not finished there. We are – and again, we will talk about this more. We are drilling the North Eigg exploration well at the moment, and we are accelerating other opportunities to do more well intervention work.
So the result of that is seen quite clearly in the increased production. So we’ve had a 41% increase in our production in the first half of this year compared to the first half of last year. So that is entirely due to that investment program that we’ve been running for the last few years. I expect the second half of the year to be broadly similar to where we are in the first. So our guidance for the full-year is between 26,000 and 28,000 boe per day net.
Now we are always talking BOE, barrels of oil equivalent, even though our production is predominantly gas. That’s just convention within the industry. If I talked in gas volumes, I think people wouldn’t find it as easy to follow. So when I’m talking about barrels of oil equivalent, it’s gas rather than oil that I’m talking about. So that increased production has led to increased cash flow. We are all aware that the commodity prices generally have been very high, and I’ll talk about this in more detail, but it’s led to increased sales revenue. Our sales revenue was something like £350 million and operating cash flow it was £312 million for the first half of this year. The result of that is that this is all added to our financial strength.
Our cash plus hedging advances stood at £418 million at the end of first half of the year. We got no borrowings. We got very limited decommissioning liabilities, so we have a very, very strong and very clean balance sheet. This has led, I mean, earlier in the year, we announced and paid our annual dividend of 9 pence a share that was paid in July. And today, we’ve announced our first-ever interim dividend of a further 8 pence a share, which will be paid in November this year. So it’s been a really strong six months of technical and financial performance. But it is so important nowadays that we can’t just concentrate on those things.
We have to allied to that be able to demonstrate that we have a due regard and an improvement in our ESG, our Environmental, Social and Governance skills. And again, we’ve been able to reduce our carbon intensity from the Bruce platform and we are doing a lot of work. We were one of the first signatory and a big supporter of the Energy Services Agreement, which is very, very important to our industry to protect the supply chain, which really is the future of everything we are doing.
So six months of good performance. I’m not going to go through every, every box on this plot. I think I’ve already talked about the fact that our sales revenue and our operating cash flow were both significantly increased. I’ve talked about our production. Our costs have been broadly level over the first six months of this year compared to the first six months of last year. Now in a period of – we are seeing increasing inflation in the oil field, I think to have kept our cost level is a pretty good performance. I think this is going to become an increasingly difficult metric to follow.
Traditionally, the industry talks about operating costs in dollars per barrel. We are all aware that right now the exchange rate between dollars and pounds is all over the place. So it’s going to be increasingly difficult to follow this. But in the first six months of this year dollar, pound exchange rates were similar to where they were the previous year. So I think that is a decent comparison. And the result of that is that our profit after tax has gone up significantly and so our earnings per share are unrecognizable from where they were a year previously.
So that’s kind of set the scene. I’ll go through some of those things in a little bit more detail. And as I said, take questions at the end. The first one is just to talk about our production. And I think that the – hopefully the graph says everything. We started to see the increase in production in the second half of last year. So if you look at the period from July to December, 2021, we saw a steadily increasing production trend compared to the first half of last year.
By the time, if we go to the end of last year, we had the green bars in here, which was Columbus, which we’ve just brought on stream. And you’ll see, I think I’ve talked previously about the Rhum increase when we brought the R3 well on, which is when the gray bars here go from wherever they were about sort 12,000 to 13,000 boe per day up to 17,000 to 18,000 boe per day.
So we saw that increase in the second half of last year, and we’ve maintained that generally in the first half of this year. We did have a shutdown to Rhum during March this year, which was a bit disappointing. We had an equipment failure there, which led to, you can see again from the gray bars. The performance of Rhum in March was pretty disappointing, but we fixed it very quickly. And during the period that Rhum was underperforming, we managed to crank up Bruce to optimize the Bruce production. These are the blue bars in here, so the overall impact of that shutdown wasn’t is big as it might otherwise have been.
So the bottom line, 41% increase in 2022 over 2021 for a production level of 26,600 boe per day. So we think a very, very strong performance. Allied to that were the commodity prices, gas prices have been crazy largely, but not totally, but largely driven by the conflict in but the terrible conflict in Ukraine. And we don’t want to be seen to be benefiting from that, but there is certainly an impact on international gas prices. We see huge volatility. So the blue bars here are the average monthly day ahead prices. And you’ll see that even as recently as May, we had a month where UK gas prices were below a £1 per therm. Three months later, in August, [indiscernible] absolutely crazy volatility.
Oil prices, the orange curve here have risen not as fast, and at the moment are actually on the way down. But you’ll see here that we’ve seen a big increase year-on-year from 25 pence a therm average in 2020 through to 113 pence last year through to 205 pence year-to-date in 2022. In the first half of the year, it was a 175 p a therm because you can see that July and August were slightly higher. And I can see that that’s one of the questions that’s coming through. I will try and pick up questions as they come through. I won’t name and shame people. But someone has said that the realized pre-hedging gas price looks low relative to average NBP day-ahead pricing.
So as I said, the average NBP for the first six months of this year was 175 pence. I think our realized price was 136. So it is lower, but that’s because some of what is called hedging is actually through our gas sales contracts. And I’m not going go into too much detail in this presentation. I think it’s probably – we don’t really have time to do that, but the 136 that we realized, basically takes account of our hedging. So that’s the answer to that question. If not, please feel free to add another question in the box for that.
So commodity prices have been strong. So that has led to an increase in our cash position. You see in this plot, I’m kind of just showing where our cash has been every six months for the last, whatever it is, four years. And you’ll see that after we did the deal to buy these assets from BP, we built our cash in the first year. And then for a couple of years, we tried to keep our cash levels at around a £100 million. We felt that having a £100 million gave us the ability to deal with the day-to-day business and have the contingency that we needed.
In the last two periods, the last two six-month periods, we’ve seen this incredible rise in our cash balances due to the increased production and the increased gas prices, such that at the end of the first half of this year, we sat at a total cash, cash equivalence and hedging advances of £418 million. Now I’ve put some numbers in here, so you can see that actually since June it’s continued to rise. Last Friday, which was the last time we tallied up that had actually risen to £482 million. You have to take into account that since the end of June when it was £418 million, we have actually made a tax payment of £66 million and we made a dividend payment of £24 million. So there’s been two big set piece payments of £90 million, and we still raised our cash from £418 million to £482 million.
So clearly, it’s a very, very cash generative business at the moment. The issue for us really has been that we do have a significant amount of hedges in the company still. And we have to post security, cash security against those hedges. And we can see that, so that’s the orange part of these curves here. We can see that that has generally risen such that at the end of June this year, our hedges – our hedge security that was in place was something like £160 million. I’ll come onto that on the next slide in a little bit more detail, if I can find the right button. Sorry. There we go.
So this hopefully gives you a bit of an indication on our hedges. Now, we haven’t put any new hedges in place since July, 2021, so it’s over years since we put any hedges in place. But we always prior to that had a rolling program of putting hedges in place to protect our downside. And that was very successful for us. It’s particularly in 2020 when gas prices went incredibly low, our hedging policy paid off dramatically, and it enabled us to continue to invest in the projects that are doing so well for us at the moment. We haven’t put any new hedges in place. This plot, the upper right hand side plot shows you the number of remaining hedges that we have.
At the start of this year, we had hedges covering a total of 146 million therm, part of those were swaps, part of those were fixed price agreements, we talked about earlier. Those hedges are being extinguished rapidly such that by the middle of the year, we were down to 60 something million or 80 something million. I think right now we’re down to 64 million compared to the 146 million we were at the start of the year. By this time next year, our hedges will be totally extinguished. So everything else being equal, you would expect that the margin calls or the hedge security that we have to have in place, you would expect that to be dropping at the same rate as our number of hedges is dropping.
Unfortunately, there has been such volatility in the forward prices of gas that are outstanding margin calls or the hedge security that we have to put in place as shown in the bottom of these two plots has been varying dramatically throughout the year. So there have been – I mean, and I’ve just showed – it’s impossible to show this on a daily basis because there is just so much volatility. I’ve just shown where it stands at the end of each month this year-to-date. And so rather than seeing the decreasing trend that we would expect, if everything else stayed equal, we’ve seen this kind of sorted effect where at times the margin calls or the hedge security have been less than a £100 million, and at times they’ve been well in excess of £300 million.
So this is one of the reasons that we are no longer putting further hedges in place. The volatility in the market means that the hedge security is too much of a risk for us to take. So we are not putting new hedges in place. We will continue to review that as we go forward. But at the moment, we are letting our hedge book run down, so it expires. So we do not in the future expect to have this margin call liability.
So it brings us on to capital returns. I think I’ve already mentioned that we – last year or earlier this year, paid a 9 pence per share dividend in respect of 2021. You only go back a couple of years to the fact that certain never paid a dividend in the past. Our first ever dividend was 3 pence a share. In 2019, we increased that to 3.5 pence in 2020 and then for 2021, we paid 9 pence a share earlier this year.
Given the strong results for the first half of this year, we are today announcing our first ever interim dividend, which we’ve set at the level of 8 pence per share, which will be paid in November, and it will bring our combined dividend payments during 2022 to a total of 17 pence per share.
Also, I think you’ll be aware, at our AGM in July this year, we passed a resolution to enable us to have the facility to make share buybacks or to repurchase shares in the future. This is something we didn’t have that facility previously, and it’s something we’ve never done as a company. And it’s something we’ve always said that we will utilize when we see the benefit to shareholders. So when will we see the benefit to shareholders? Well, we need to make sure that we retain sufficient funds in order to run the business. So we need sufficient funds to be able to cater for eventualities on our production assets, but also to execute our ongoing forward capital expenditure programs. So the North Eigg well that we are drilling at the moment and the future well interventions, and we’ll talk a bit more about well interventions as we go forward.
We also, right now we’re drilling Eigg. If Eigg is successful, North Eigg is successful. We want to be able to make a very quick investment decision in order to capitalize on the current tax advantages that are out there. But also if Eigg is successful, we want to get back to market. We want to be selling gas as quickly as possible. So we need to retain sufficient cash to enable the Eigg development.
At the moment to be able to cover those hedging security requirements up to £300 million, as I said, at the end of last month. So we need sufficient funds to be able to do all of those things and to follow our plans to be in the M&A market to grow the portfolio. So when we take into account all of those factors, we do not believe that the timing is right immediately to initiate a buyback program. We do think that all of the issues I’ve talked about are relatively short-term, and the hedging requirement we believe should go away relatively quickly. We will know where we are going with Eigg relatively quickly. So we believe that we will resolve those issues quite soon. But at the moment, it is not appropriate to launch share buyback.
So that really was the kind of financial bits and pieces. I’ll go in and talk now a little bit about what we are doing technically and what kind of keeps us busy and keeps the operation team going. We’ve just completed our first ever Light Well Intervention Vessel campaign a bit of a mouthful. Light Well Intervention Vessel campaign. Now all this is going out with a subsea intervention vessel as shown in the bottom left photo there and reentering subsea wells. So the Bruce Field, a number of the wells were drilled through the platform and are quite easy to access, but a number of the wells are drilled remotely, so they’re connected to the platform by a subsea pipeline.
And there’s been no work on any of those wells for a number of years, well since they were drilled. So these wells were drilled by BP back in the 15, 20 years ago. And there has been no maintenance or intervention done on those wells in the interim. So we went back for our first ever campaign. The first well we did was the Bruce M1 well. It had been underperforming for a number of years. And we went initially just to try and see if we could understand why it was underperforming. We found a couple of things.
First of all, we found a restriction in the well. So if you look at this diagram, I don’t know if you can make it out on bottom left hand side, that kind of shows. We saw a real restriction, which was a build up of scale sort of calcium carbonate, I think it was scale that had been precipitated from water production in the well, the court that had kind of collected and caused this restriction, which was restricting flow. So we went in and we cleaned out that restriction with some mechanical scrapers and then also with some chemical solvents to get that out of there.
We also then did some analysis of what was flowing into the well from where we saw that some of the zones just weren’t contributing. We saw that there was some water coming in at the bottom of the well, which is never good in a predominantly gas well. So we set a plug-to-plug off the water. We re-perforated the producing zones, and we added some perforations in some new zones that hadn’t been perforated previously. And what they did was that added something like 1,500 barrels a day, again, mainly gas, but 1,500 barrels of oil equivalent a day as a direct result of these operations.
So we turned a really underperforming well into a good performer. We then went on and did the same on the second well, Bruce M4 was actually slightly more straightforward there. We didn’t have to put a shutoff plug into that well, but we re-perforated, we increased performance on that well by some like 1,900 barrels a day. So those two wells between them have added 3,000 barrels of oil equivalent per day, which is significant.
We have learned a lot from those two projects. And we are now going to good list of other candidate wells that we can do similar actions on. We’ve been out and we’ve contracted a vessel for 60 days to go back in early 2023, so probably late spring probably to go and start looking at the other candidate wells because we think we can repeat this performance on more wells next year. So it’s worked very, very well. The financial payback of that project was incredibly quick. It’s paid for itself a very, very quickly and we think we can repeat that next year. So we’re doing everything we can to accelerate that project to do it again next year.
I also talked about North Eigg, and this was – I’m keep on forgetting the questions that people have been asking me. But one of the questions was, how is North Eigg drilling going and when might the outcome been known? So how is the drilling going on in Eigg? We had a really, really difficult start. We had problems in the top hole locations that necessitated us having to re-spud the well twice which was a big blow.
We were encountering quite unconsolidated drilling conditions in the top hole section such that, what’s called boulders, I don’t really think of them as boulders, but probably chunks of rock around 20 centimeters in diameter were becoming dislodged as we drilled the top hole section, falling in on top of the drill bits, such that we would drill and then these rocks would fall in on top of the drill and then we get stuck and wouldn’t be able to pull out of the hole.
It is a known problem. It was worse here than we had anticipated. We lost significant amount of time having to re-spud the well as a result of that. When we got back in drilling, we had an unrelated failure, a one-off failure, a piece of rig equipment, which also delayed us for a little while.
So progress hasn’t been good, we are now back to drilling operations. I think the good thing about all of this is that the problems we’ve had have absolutely no impact on the outcome of the well. The problems we’ve had were in the top hole section in the top few 100 feet below the seabed and that has absolutely no bearing on what we’re going to find when we get down to the reservoir.
We’ve still got a long way to drill to get to the reservoir. And so we’re not going to have results from this well until into December this year. I mean, originally we had hoped to have them by the end of October, but we have had these significant delays. But yes, what we’ve seen so far has absolutely no impact on the ultimate performance of the well. So it’s a significant prospect, its 60 million barrels and on a P50 most likely basis of recoverable resources. If it comes in, it’s close to our existing infrastructure, it’s close to Bruce. So we would be able to tie it back relatively straightforward.
I mean it’s a high pressure, high temperature prospect. So it’s a proper piece of engineering. But it is – yes, I mean, it won’t require building new platforms or particularly long pipelines we will tie it back to our existing infrastructure. Someone has just asked what piece of drilling equipment failed. I feel it’s – I mean, it’s not a Serica piece of equipment. It was a piece of equipment owned by the rig contractor. And I think it would be unfair of me to comment on the rig contractors’ equipment. So sorry, I am going to duck that question.
Well we are on that, someone said, would the drilling problems have been less disruptive if you’d used a much newer drilling rig rather than the Paul B. Loyd. It’s an interesting question. There aren’t that many newer drilling rigs that are active in the North Sea. And I would argue that the Paul B. Loyd has the best record in recent years in drilling these high pressure, high temperature wells. So this is not a well that could be drilled by every rig that’s out there. There are very few HPHT wells that rigs that could do this work. And the Paul B. Loyd has a fantastic reputation through the years. So I think using a newer rig would not necessarily have avoided these problems.
What else are we doing? I mean, on the exploration front, some of you will have noticed that our partners in the Skerryvore prospect, it’s a Parkmead or the operator of this. We’re not quite unusually in our portfolio, we’re not operator of this exploration prospect. Our partners announced last week, I think it was that they’re moving forward into the next phase of this license. And a well will be drilled within that next three-year phase. So the partners are aligned on this project and looking to accelerate that investment and get that well drilled. So you may have seen that announced by Parkmead already.
And finally, before I go of operations, just to kind of look at some of the things that perhaps don’t get as much publicity because there’s a lot of work we do that is around improving and extending the life of our assets on the Bruce hub, as we call it. So the fields that use Bruce, Bruce Keith and Rhum. When we bought those assets, the independent view was that they would last until 2026, and then we would have to abandon them. We renew that independent work. So we have a competent person, an independent person who looks at that every year.
And they now say that we will be producing those assets until at least 2030. So we’ve added four years to the life of those assets by reducing costs, by improving uptime and by investing in the assets. But we want to continue to do that. And we’ve got an internal project now that I think a lot of people in the company are getting very excited about that actually enables us to concentrate and we set ourselves a target of extending the life of these assets to at least 2035. So it’s imaginatively called Project 2035+. But we think we can do this. We think we can add five years to the life of these assets, which will add significant value. We’ll add significant reserves. And to do that, we are going to have to reduce our carbon intensity. We’re going to have to be better because you just cannot keep on producing unless you can reduce the emissions that are associated with that. We are obliged to do that.
We think that the projects like R3 and the LWIV campaign have shown that we can do this, we can add reserves, we can continue to reduce cost, we can continue to reduce carbon, and we can extend the life of these assets. So it doesn’t always get the publicity, but I can assure you there’s a huge amount of work in the company to focus on extending the life of these assets.
So where does that leave us? Where do we stand? I’ve mentioned it a couple of times, over 85% of our production is gas. We are making a significant contribution to the country’s security of supply. A year ago that was a phrase that most people weren’t particularly – it wasn’t used in the press. It wasn’t particularly popular. And if I said that in a meeting or a conference, I wouldn’t get much recognition for it. But now everybody understands that as a country, security of gas in particular, security of gas supply is really important to us.
And with our production being 85%, 90% gas and us producing over 5% of the UK’s gas, we are in a really favorable position. We are bang smack in the middle of what the government wants. The energy security strategy for the UK recognizes how important domestic production is and it recognizes that our gas will have a significantly lower carbon footprint than LNG imports in particular. So I think we’re in a great position going forward, and we’ll continue to invest to maintain those production levels, hopefully to increase those production levels whilst reducing our carbon emissions.
So I think we’re in a very, very strong market sector at the moment. But we want to grow our company, we want to be bigger because I think we’ve done a lot of good things with the assets that we’ve got, but you can’t go on forever extending the life of one set of assets. So we need more assets and so we spend a lot of our time looking at M&A, mergers and acquisitions or opportunities.
It’s a complex market. The tax changes in the last year have made it more difficult. The changes in gas price in the last year and the volatility have made it very difficult to value deals. And so it has been difficult to move forward on M&A things in the last year. But we do see significant opportunities going forward. And there are some new opportunities that are coming up because of the allowances that are available under the EPL, the windfall tax. So we see those opportunities in the UK North Sea.
We’ve always said and you probably will have heard me say before, we’re not just – we don’t just want to do deals for the sake of deals. I’m never going to stand here and say my ambition is to produce a 100,000 barrels a day because it’s not, I mean, we could do that. We could go and buy things that are not very profitable and produce a lot of oil and it might sound good, but we’re looking to actually do deals where we can add value. And so we are quite picky.
And we do realize that we may – in order to get what we want, we may need to look outside of the UK and so we are increasingly looking at non-UK opportunities. But we will always stay true to our screening, if you like our process that looks at where we can add value, where we can reduce costs, where we can exploit synergies, where we can improve the environmental performance and where we can add value to assets. So we do see lots of opportunities.
So you’ll be glad to hear that I’m coming towards the end. And I think this really is that the final slide before I go into your questions and I can see some good ones coming through. Where are we? As I said, I think we’re well positioned. We have – more than 85% of our production is gas. That is crucial to the UK market, and it’s crucial to the UK market going forward as we go towards net zero. We are benefiting from higher international gas prices, but we are reducing the UK reliance on higher emission imports. So we’re in a really good position. We’re in a really good sector, if you like.
Within that sector, we think we are really competitively positioned. So we do have significant cash. We don’t have any borrowings. I’ve not talked about it. We don’t have very much in the way of decommissioning liabilities. A lot of companies have a lot of money tied up in future decommissioning. We don’t have a lot of decommissioning liabilities. I hadn’t even really talked about the fact that the deal we did to buy the assets from BP and others has come to an end now.
So we were sharing our cash flow until the start of this year with the sellers. We’re no longer doing that. We now keep a 100% of cash flow. So we are in a really competitive position. We’re fully funded to move forward and grow the company. And we’ve got lots of opportunities. We’ve got the Eigg well that’s drilling at the moment. The LWIV campaign was really good. And it shows that the benefit of doing those, and we can do more of those.
We’ve got lots of opportunities, as I said, with this Project 2035+ to invest in Bruce going forwards. And there will be investment allowances under the windfall tax that will benefit from. And we’re also looking at acquisitions of new assets that may require investments because again, the opportunities under the windfall tax may help us finance some of those opportunities. So that’s been a fairly quick whistle stop through.
And I can see that there are lots of questions that are coming in and I’ll try and go through the questions as they came in. Approximately what percentage of your costs would you estimate are fixed in dollars versus pounds? 90% plus of our costs are in pounds. Probably 95% of our costs are in pounds. 95% of our revenue is in pounds. So we’re not really massively impacted by the exchange rates.
Second question, we can buy oil from Kenya, it’s really cheap now, then we can sell it at higher prices. We’re not a trader. That’s not what we do. I don’t know if that’s true. I have no reason to disbelieve it, but we’re an exploration and production company, we’re not a trading company.
Next one, you mentioned currency fluctuations. What currencies do you hold? As I said, 90%, 95% of our business is done in pounds. We hold some dollars, but we get some revenue in dollars. So, yes, we’re a pound company.
Next one, separate from BKR a 100% share, what is the like-for-like performance of production? So all of the production numbers I’ve talked about are a 100% share. So I mean, yes, the fact that our production, the production numbers that I’ve quoted this year are higher than last year. That’s not because of the end of the BKR deal, the BKR deal was a cash flow sharing deal. It was nothing to do with production. So our real production has gone up from 18,800 last year to 26,600 this year. It’s a real increase. It’s not a paper increase.
Next one is a quite a long question. The current forward curve implies that Serica trades on a free cash flow yield to enterprise value of more than a 100%. What kind of M&A target would you consider sensible compared with the returns that your own stock office? And do you have a lower yield requirement for M&A than for share buybacks? Does the strong near-term pricing and gas imply that predominantly oil focus targets are sensible?
There’s a lot of questions in there. In reverse order, we are focused on gas, but we’re focused on gas because it has a very good environmental footprint. There are oil projects out there that have good environmental footprints as well. There are some oil projects out there that are terrible. So we are more likely to find what we want with a gas project than an oil project, but we do not discriminate and we would consider oil opportunities going forwards.
Do we have lower yield requirements for M&A for share buybacks? We look at all investment opportunities on an equal basis and as a Board, we look at these things and we look at, I don’t want to get too technical, but we’ll look at investment opportunities on a discounted cash flow basis. So we will look at the long-term value of an asset and what we can add to that value. So we do try to compare things on a like-for-like basis. If I mean – I probably can’t go into too much more detail on that, but if the sender of that question wants to drop me an email, please do. And I can give a fuller answer, but I’m conscious of time here, so I can’t really go into too much detail on that.
Next question, what is the outlook for Columbus? Columbus, I think, as we said previously hasn’t performed at the levels, the production rates that we had hoped. But it is producing steadily and obviously as a predominantly gas asset has. We brought that on just as we saw the peak of gas prices. And so Columbus commercially has done very, very well, continues to produce, but it has produced at lower than we would initially have expected.
I think there is still a lot of technical work being carried out to see whether Columbus is going to continue producing at a lower rate for longer and make up some of the shortfall that we’re seeing at the moment, or whether it will be a lower rate the shorter. I don’t know the answer to that just yet. We’re still acquiring data as we go forward, but it’s producing steadily as you saw from the plots earlier and is a good contribution to our production mix.
Next one, what return are you getting on your cash? I think, we all know that banking returns are not particularly good at the moment. I don’t have a simple answer for that, but we’re getting typical bank rates. I’m afraid I don’t have a number. I can’t really give you that.
Next one. Can you estimate how much of the £418 million will be reduced by tax due on it? Okay. So what’s our outset? Well, we just made a tax payment and as I said in the presentation, and the tax system runs on in installments. And this is one of the other questions that actually came up in the pre-questions, I was talking about windfall taxes and how they will apply.
The windfall tax starts from May this year, May 26, I think it was. And so there is no claw back on hold, on revenue that was before the 26th of May. So the impact on – certainly on our first half from the windfall tax is very, very small. There’s a small amount of tax on one-month of production, so the outstanding tax on that £418 million number is not significant. I don’t have an exact number for it, but you will see, as we’ve already said in Q3 we paid, I think £66 million tax bill.
Next question. AIM-listed Longboat Energy is a firm that takes equity in exploration drills. Would similar investments be eligible for UK windfall tax investment incentive? Yes. So, that’s what we’re doing on Skerryvore. So we are invested in that, it’s another operator. But our investment in that, if that well is drilled during the period of the windfall tax, then that will be eligible for the investment incentive.
And there was another question that came up in the pre-read questions. And I was asked how long will the windfall tax extend for? At the moment, there is a, what’s called a sunset clause in the energy profits levy, which means that it exists and it lasts until the end of 2025, and then that legislation is removed, if you like. So it is a time bound tax. The particular question was, does it only apply to one-year? And it’s not just a one-year. So the windfall tax applies from May this year up until December 2025. And so going back to the other question, if we drill the Skerryvore well during that period, then that investment will be eligible for relief under the windfall tax.
So next question, would a £50 million share buyback be easily accommodated given cash and hedge profile? Well as we said, we’ve assessed our cash position and our cash requirements and we’ve come to the conclusion that immediately we’re not in a position to launch a share buyback. We talked about the fact, yes, at the end of the half we have £418 million. We’ve seen margin call requirements of over £300 million. So our assessment is that right now, a 50 million share buyback would not be an advisable move. But we do keep that on the review and we will continue to review that.
Next question. Does the volatility in hedging requirement explains why they don’t return cash via dividends or buybacks? Yes. I think that’s the case. So whilst the hedging requirements are so volatile, we think it be unwise to return cash.
Next question. How fast can you schedule further well interventions at Bruce? Do you consider the results of the first two wells a reasonable guide for the expected results of further action? How many well interventions are feasible?
Well, I think, as I’ve already said, we do think that the first two wells give us good confidence that we can go back and do more and so we are accelerating. I assure you we’re doing it as fast as we can. So how fast can we schedule further interventions? Yes, I mean, spring next year is the quickest we’re going to be able to do it. How many well interventions are feasible? We’ve got a list of candidate wells of, I don’t know perhaps half a dozen or so. It depends what we see and we’re going to get more ambitious with some of the things we try, and that may mean that there are more opportunities. But at the moment, we’ve got, yes, up to half a dozen, probably two, three, four good candidates, and then a couple that we’re going to try it and see what happens.
Next one. The new investment allowance means that for every £100 invested, there’s a £91 reduction on that basis. Isn’t the net cash flow to develop North Eigg or other existing assets relatively small? Why is there a need to hold a large amount of cash for CapEx? It’s a very good question. And it’s a question of phasing. So you have to be able to do the work. So it is easy to say that, yes, if you’ve got a £100 million development, you’re going to get a reduction. Actually, it’s 85% initially in time it’s 91.25%. So yes, you will get allowance against tax.
So if you’ve got a £100 million to spend or £200 million to spend, you will only eventually end up paying 15% of that or possibly less. However, you’ve got it spend it first and then claim it back against tax. So that’s why you need to keep the cash in your account because you need to have the money to put the contracts in place to pay the bills and then claim it back against tax. So it’s a phasing issue. And apologies if I’m going through these quickly, but I can see that there are more questions coming in more quickly than I’m answering.
Next one is, if North Eigg is a dry hole, would that mean you then have surplus funds available to do a buyback? As I said, yes, the results of North Eigg are one of the factors that will drive our ability to do buybacks in the future.
Next one, excellent results and presentation well done to the whole of the team. And I’d like to echo that. I mean, it is this fantastic team performance, so thank you for whoever set back in. What’s the best place to track the day ahead NBP price that Serica received?
It’s really difficult. There is a website called ICE, the International Commodities Exchange, but that doesn’t give you the day-ahead price. I don’t know of anywhere apart from like Bloomberg and things you have to pay for that will give you the day-ahead price. Apologies, but that’s outside of my area of expertise. But if you want the month-ahead price, then ICE is not a bad spot to look for it.
Next one. What long-term gas price would you assume for the purposes of measuring attractiveness of M&A? Yes, I don’t like dodging questions, but if I tell you that now, then the – our counterparties will know how I’m valuing things and that might give away our competitive position. So I’m afraid, I’m not going to answer what our long-term gas price assumptions are.
Next one. Can we get an agreement to only carry out share buybacks where free cash flow permits, company is debt free and company is trading below NAV? Well, I think that’s kind of what I’ve been trying to say that, we are only going to do a share buyback when free cash flow permits it. We are net debt free, so that’s a given and yes, we would only want to buy back shares if we felt we were trading below our net asset values. So I think that is what I’ve been trying to say. So there’s nothing to add there. I’m skipping through a few here because they are coming in much quicker than I’m answering, but a lot of them are kind of repeated questions.
There’s a question around capital costs to get North Eigg to production. The North Eigg development depends on how big the field actually is. What we see the analog of Rhum, which is a huge field probably bigger than Eigg would be, and Rhum is being produced from three wells. So Eigg, I think in all of our cases is between one and three development wells. So the relative costs for those wells are quite low. It’s not like one of these fields that’s going to need 15 development wells. And therefore, you have huge costs in terms of Christmas trees and long lead items. So for one or two wells, the costs are relatively, relatively low.
There’s a question about if North Eigg is successful, what would the production rates be? Until we drill, I can’t really tell you, but I mean, if you look at Rhum, which is a decent analog. Rhum is producing on a gross basis something like 30 million, that’s 30,000 boe per day slightly less from three wells. So yes, in a absolute upside, North Eigg could be producing that amount, but that is absolute total speculation. If your intervention campaign early next year is successful, can you grow production in 2023? I would hope so. That’s why we would be doing it.
Good one. Next one. Will you be sending Andrew Austin a Christmas card this year? Lol. Yes, I mean, I’ve got nothing against Andrew. I’ve known him for many years and I don’t have a problem with him. And a follow-up to that, can you let us know what deal you proposed to Kistos, to give us an idea of how you approach deals? They have obviously published the details of their approach to Serica. I think we did publish the details of our approach. Our approach was – in contrast to what they had approach – to their approach to us, which was financed by debt, which we believe would’ve left the company in quite a risky situation. We proposed a relatively small cash amount plus some Serica shares. And so I don’t remember the exact numbers, but the proportions were probably 75% in shares and 25% in cash, it was turned down by Kistos. That wasn’t what they were looking for. So we move on.
But the approach was that we saw some assets there and we felt that if we could put them together with our asset base, we could possibly create a stronger company. But it is quite important that you still have the cash in that – on the balance sheet to be able to develop assets and to move things forward. So we weren’t just prepared to throw lots of money at it. We didn’t think the opportunity was there for that.
Right. Next to what extent do you regard LNG imports as competing with gas produced by Serica? Yes, I mean, LNG is competition. I mean, all gas goes into the national grid, so yes, it doesn’t matter where it comes from. What we believe is that our gas is better for the environment. It has lower emissions and it’s better for the company. So, yes, LNG is competition to us. Do you think we will be better off on the main market or the FTSE 250? That’s a complex issue. There are lots of issues in favor and against it. There are different tax treatments in some cases for some investors. So for some investors, they like to see us on AIM.
The flip side to that is that some of the Tracker funds tend to follow the larger markets. I think our position is that ultimately we do have the ambition to be on FTSE 250. I think we qualify in size. I think we would be number 190 something if we were on it. I’ve not check that recently [indiscernible] look at my numbers. And there is actually – there’s quite a cost in order to do it. I mean, you have to issue a new prospectus and so we believe that there are better things for us to be focused on a day-to-day basis than going into that sort of project. So there may come a time when associated with a deal of some description, it’s worthwhile trying to go onto the 250, but right now it’s in itself, it’s not an ambition, but in the long-term it is an ambition.
How active are you intending to be on the up and coming new UK Licence round? Well, when it’s announced, I believe we will be active. We’re doing some preparation work and we’ve got some ideas, but it hasn’t kicked off yet, so I do expect us to be working on that. Are you seeing rig rates and LWIV costs increasing and are they priced in dollars? We are seeing rig rates and LWIV costs increasing. Most rig rates are in dollars. The LWIV lightweight intervention are a mixture, so we are seeing some increases there.
Some asking about Kistos, which I think we’ve touched on already. There’s a couple of people asking questions about other potential targets and I can’t comment on whether we’re interested in buying a certain other company that would be [indiscernible] do that. Where do I see Serica say, 12 months time? I think still very much here based in the UK, hopefully with a larger portfolio, hopefully with more production, hopefully with having made a number of significant investments during the 12 months and looking forward to the next phase of our transition because we want to be a consolidator, we want to be a bigger oil and gas company. I think we can do that, but ultimately we will want to look at things outside of the UK and possibly an alternative energy. So I think there’s a lot of future at the moment. We’re focused very much on the next step as an oil and gas company. I think we’ll be I really hope that we’ll be in the same sphere of operation, but slightly larger in year’s time.
Someone asking me to speculate on gas prices, I’m not, I can’t, I mean, well, I mean, I’ve been asked the question, so I’ve give an honest answer. I think gas prices, I think will not stay as high as they have been in the last six months because I think it’s unsustainable, but I don’t think they’re going to go back as low as they were for the last five years or whatever. So I think because as an industry and as a – we’re not, yes, as a world we haven’t invested in oil and gas enough in the last five years, I think that there is going to be a fundamental re-rate. We won’t go back to the long-term averages, but it won’t stay as high it is at the moment.
Given your concerns around hedging requirements, is it also the case you’re not comfortable executing on M&A currently? No, we do have concerns around hedging security, but that doesn’t mean we’re not comfortable executing on M&A. We see those things as not being linked.
So interesting question, does the extension of field life rely heavily on high gas price? If prices came back to 100 pence a therm, would that mean Bruce is likely to end earlier? I think if gas prices crashed then that would impact the end of field life. But I don’t see the gas prices are going to crash. I think they’ll come down, but not as low as long-term averages. So I don’t think that’s an issue.
I’m aware that I’m up to 2 O’clock and I don’t know if our host is here, but can I carry on? Is that allowed?
Operator
Absolutely, sir.
Mitch Flegg
Okay, brilliant. Thank you for that. So sorry, if I’m testing everyone’s patience, but I would like to get through as many of these questions as I can. Why have you not paid a special dividend? We’ve paid an interim dividend and I think for the same reasons that we’ve talked about not moving into a share buyback, we’re not prepared to pay a special dividend.
We talk to a lot of our investors and particularly our institution investors and special dividends are not particularly favored by institution investors because of the tax treatment actually giving someone a big special dividend and then them losing a considerable amount through tax is not very popular. So we hear generally from our investors that they would – if we were to return capital, they would prefer it in terms of a share buyback as opposed to a special dividend. But I know that everybody has different tax situations and I’m not qualified to give tax advice, so I wouldn’t try to do that.
Same person, you mentioned you’d be looking to invest outside the UK. Where do you find attractive assets? I think, we’re not going to go a long way away from the UK. We will look in the North Sea in other nearby countries. But again, I don’t want to – yes, I can’t really say any more than that.
And same person, have you considered Namibia again? Or is pure exploration outside of the UK not attractive? It’s a good question. I mean, we are, as I say, a production company and so we are looking for opportunities, but we are not looking for pure exploration outside of the UK, so we would be looking – we’re not against exploration, but we would like it to come with some production. So at the moment, Namibia is not on our list.
Were you able to forward sell gas at recent high prices? We sell our gas – all of our gas at day-ahead prices, so yes, we’ve been selling our gas at the recent high prices, but we’re not been forward selling. We don’t sell two or three months in advance.
Question, the company has not made an acquisition for a long time, how seriously are you looking for acquisitions? How can shareholders be sure the company is taking M&A seriously? Can you offer any assurance here? I can only offer words. I can only tell you that my team – certainly the team in London spend more time on M&A than absolutely anything else. I’m guessing, I would say we’ve looked at 20 or 30 opportunities in the last couple of years, I would say we’ve made serious proposals on, I’m guessing six or seven and we haven’t been successful, but they’re just words. You have to believe me, we are taking it very, very seriously. I’m afraid that’s the only assurance I can give you.
Thank you. Someone congratulating us and then saying, are we concerned that Serica are a takeover target? Not overly concerned. I think, yes, I mean, there’s a limited number of companies that might be interested in us. And so I don’t at the moment assess that we would be particularly exposed to a takeover bid. I mean, obviously we had one earlier this year. I think the really pleasing thing about that was that our shareholders weren’t interested in selling. Our major shareholders expressed confidence in the way the company is being run. So I don’t think we’re an immediate takeover target.
The next one is pretty much the same question. Another one pretty much the same question. Another one, haven’t been any developments on the availability of options to hedge gas prices and there haven’t really the gas hedge market. And there is another question in here that talks about Harbour and the way that Harbour have hedged. And the hedging for a company of our size is very, very difficult because of the level of security that we need to provide. A company like Harbour with a large company with a bigger and better credit rating may have options that aren’t available to us, but for us the hedging market is a particularly dangerous place, and I’m not prepared to take those risks to just to get a few more hedges in.
And I think I’ve got to the bottom of the list finally. When looking outside the UK for acquisitions, how do you factor in the risk of windfall taxes in those countries? Great question. And we do have access to tax advice and tax advisors, international tax advice and tax advisors and we do take that advice on board, and we do look at those things when we look at new countries. But ultimately it’s a political risk and we also assess the political risk of going into a new country. So it is a factor, we do take advice, we don’t pretend we are the experts on these things, we do take independent advice, but right now that is very difficult and that is one of the things that makes it difficult looking to move into a new country.
Then someone’s asked me what I think the fair value market capitalization of the company is. I’m afraid, I’m not allowed to answer those sorts of questions that will be guiding the market.
The next, I think this is the last question now. Next time there is an approach for the company. Would this be [RNS] with immediate effect? I note Kistos approached Serica and initial discussions were held, only formally announced to the market when Kistos went public. Yes, I mean, that’s a good question. And please don’t think that there was anything that was withheld from the market. You will see that when Kistos went public, they were clear to point out that they hadn’t actually made a proposal for the company. I can’t remember the exact words they used, but they talked about the fact that they had made a non-binding approach or something. It wasn’t an offer that was capable of acceptance, it was an inquiry.
And so we wouldn’t necessarily need to, and don’t broadcast if there’s an inquiry. We would always, and we have an advisor and the regulator that makes sure that we do everything, undertake other panel rules. And if there is an approach for the company, which was your question, if there’s an approach for the company, yes, we would be announcing that, but there wasn’t a formal approach for the company with Kistos.
Right, so one last question that’s coming. Where do I see Serica main strengths? I think it’s the team. I mean, I think we’ve got just a fantastic set of people that are really, really dedicated to making this a better place to work, making it a better company and adding value. And that’s where I see our strengths. I think the good things that we’re doing, the LWIV campaign came from within the company. This was what the guys wanted to do. The improvements we’ve made in our environmental performance come from Clara and a great team of ESG professionals. So I think the strength is the people and the willingness and drive to make this a better company.
So at that stage, I’m sorry, I’ve gone over time, and I realize I’ve gone through those questions really, really quickly and apologies. But thank you for the number of questions. It was really – it’s good to see. And apologies if I’ve skipped through anything. You can always get in touch with me info@serica-energy.com and we will answer any questions that come through there.
So having said that, I’ll pass you back to our host.
Question-and-Answer Session
Q –
Operator
Perfect. Mitch, that’s great. Thank you very much indeed for your presentation this afternoon and for also being so generous of your time there and addressing all of those questions that came in from investors this afternoon. And of course, we will make all these questions available to you immediately after the presentation has ended for you to review and then add any additional responses where it’s appropriate to do so. Mitch, I know investor feedback is particularly important to you, and I will shortly redirect those on the call to provide you with their feedback. But perhaps before doing so, if I may just ask you for a few closing comments, just to wrap up with, and then as I said, I’ll redirect those on the call for feedback.
Mitch Flegg
Okay. Well, thank you. I mean, thanks. Firstly, just thanks everyone for your time. I do like these sessions. I do like the feedback. I think it is important for us to understand what our shareholders want. I know that it’s difficult for companies to interact with individual shareholders and I get a lot of individual questions and quite often just – the rules don’t allow me to say things. So I do like to do these things where I can talk to a wide audience. Hopefully, you’ll see that we’re not ducking any issues. You’ll get answers from us and we are – I hope giving you the whole story. We’re not hiding anything. I know that not everything I say is popular, but I hope that you understand how we’re running the business, and I hope that you can see that we are getting a return on our collective investment. We are increasing our performance, we are increasing our production, we are increasing our profitability, which I believe is to everyone’s benefit. So thanks for your support. Thanks for your time. And that’s all I’ve got to say really.
Operator
Mitch, that’s great, and thank you once again for taking the time to update investors this afternoon. Could I please ask investors not to close this session as you’ll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This only takes a few moments to complete, but I am sure that would be greatly valued by the company. On behalf of the 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.
Mitch Flegg
Thank you.
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