Serica Energy, a prominent player in the North Sea oil and gas industry, has revealed plans for a new drilling initiative even as other firms scale down their activities due to the introduction of the windfall tax.
Serica’s CEO, Mitch Flegg, expressed enthusiasm about the upcoming “continuous drilling and well operations across the Bruce and Triton hubs over the forthcoming eighteen months.” This announcement coincided with a modest increase in the company’s profits.
In the first half of 2023, the company reported post-tax profits amounting to £175,472, which marked an increase from last year’s £116,729 during the same period.
Interestingly, these profits were achieved despite the windfall tax’s initiation last year, which hiked the overall UK oil and gas production levies from 40% to 75%. This tax is slated to stay in effect until 2028.
To stimulate investment, the tax provided an allowance permitting offshore operators to get back £91.40 for every £100 used on fresh projects. Serica capitalized on these allowances to elevate production across multiple wells.
Moreover, Serica successfully concluded a £367m acquisition of Tailwind Energy, another North Sea firm. Tailwind’s tax deficits enabled further reductions in the windfall tax liability.
This strategic move brought down Serica’s collective tax rate from 75% to 55%.
Commenting on this, Flegg noted, “The acquisition of Tailwind came with significant tax offsets, potentially translating to over £400m in UK tax deductions.”
The performance of Serica contrasts sharply with other North Sea entities. For instance, last month, Harbour Energy, the largest UK oil and gas producer, reported a dramatic shift from almost $1bn in profits to a $6.3m (£8m) loss for the year’s first half, attributing this to a whopping 102% effective tax rate due to the windfall tax.
In a similar vein, companies like Ithaca Energy are pulling the plug on certain projects and reducing production in light of the tax, while Enquest reported a $21.2m post-tax loss in the year’s first half.
However, despite Serica’s resilient performance, Flegg emphasized that the windfall tax looms large over the industry. He stated, “While Serica’s current state and forward-looking investment strategies are optimistic, we, like many others in the industry, are concerned about the health and future of the UK’s offshore sector, especially given the existing tax structure.”
In terms of production, Serica manages two hubs in UK territories that yield about 49,000 barrels of oil daily, 55% of which is gas.
Investec analyst Alex Smith remarked, “Serica had a commendable first half, primarily because of the production stemming from Tailwind’s assets. However, there are looming questions about the political future and Serica’s capacity for further external growth, which might be affecting stock prices.”
Recently, Serica announced its North Eigg exploration well, located off Scotland’s coast, failed to yield significant gas amounts. Consequently, the £13m well will be discarded.
Serica’s stock, which saw a jump from 235p to 267p in the past month, recently dipped to 251p.
