TIDMSQZ
RNS Number : 7085W
Serica Energy plc
03 August 2018
Serica Energy plc ("Serica" or the "Company")
Acquisition of Total E&P's Interests in Bruce and Keith
London, 3 August 2018 - Serica Energy plc (AIM: SQZ) is pleased
to announce that Serica Energy (UK) Limited ("Serica UK") has
signed a Sale and Purchase Agreement ("SPA") to acquire further
interests in the Bruce and Keith fields and associated
infrastructure in the UK North Sea from Total E&P UK Limited
("Total E&P") ("BK Acquisition"). Under the SPA, Serica UK will
acquire a 42.25% interest in the Bruce field and a 25% interest in
the Keith field and associated infrastructure ("BK Assets"). The BK
Acquisition has an effective date of 1 January 2018 and completion
will be subject to completion of the previously announced
acquisition of interests in the Bruce, Keith and Rhum fields from
BP ("BKR Transaction"). The BK Acquisition is also subject to inter
alia certain regulatory, government and partner consents with
completion targeted for the end of Q3 2018.
Transaction highlights
Following completion of the BKR Transaction and transfer of
operatorship of the Bruce, Keith and Rhum fields to Serica UK, the
board believes the BK Acquisition will further strengthen Serica's
position as one of the leading mid-tier independent oil and gas
producers on the UK Continental Shelf and will provide incremental
benefits to the Company.
-- Further increase in reserves and production
o Serica's pro-forma net 2P reserves as at 1 July 2018 are
expected to increase by approximately 11mmboe from approximately
49mmboe(i) post completion of the BKR Transaction to approximately
60mmboe post completion of the BK Acquisition
o Net production in 1H 2018 from the BK Assets was approximately
4,700boe/d, of which 83% is gas
o The BK Acquisition is expected to be immediately cash flow and
value accretive following completion
-- Structured to mitigate financial risk and maintain balance sheet resilience
o Existing net cash resources are not expected to be impacted by
the BK Acquisition
o Bulk of consideration deferred and contingent
o Initial cash consideration of US$5 million expected to be
funded by Serica UK's share of net cash flows from the BK Assets
between 1 January 2018 and completion of the BK Acquisition
o Future payments linked to the performance of the BK Assets,
allowing both parties to share the benefits of improving field
recoveries and production efficiencies
-- Further increased scale in line with strategic growth plans
o The BK Acquisition, coupled with transfer of operatorship of
the Bruce, Keith and Rhum fields to Serica UK, should enable Serica
to unlock increased value from the BK Assets
o No additional resources will be required. Existing
infrastructure and expanded team already being put into place as
part of the BKR Transaction
o The BK Acquisition will further increase Serica's scale and
profile, improve its ability to attract further growth funding and
investment opportunities for both organic growth and further
acquisitions
Principal terms of the BK Acquisition
The initial cash consideration for the BK Acquisition is US$5
million, to be adjusted for working capital, with further cash
consideration of US$15 million to be paid in three instalments of
US$5 million. These instalments are payable subject to continued
production from the Rhum field (production of which is transported
via the BK Assets) with the instalments payable in three tranches
approximately 8, 16 and 24 months following completion of the BK
Acquisition. Should Rhum production be interrupted due to the
application of US Sanctions limiting Rhum operations, the relevant
instalments will be deferred, providing Serica with protection in
the event that US Sanctions are imposed more widely than currently
anticipated.
Total E&P will also receive a share of pre-tax net cash flow
from the BK Assets under a net cash flow sharing deed ("NCFSD") on
the same terms as the net cash flow sharing deed entered into as
part of the BKR Transaction. Total E&P will receive a share of
pre-tax net cash flow from the BK Assets of 60% in 2018 (subject to
adjustments made for the period prior to completion of the BK
Acquisition), 50% in 2019 and 40% in each of 2020 and 2021. The net
cash flow shares are calculated on a monthly basis. No amounts are
payable by Serica UK unless this cash flow is positive and amounts
are repayable to Serica UK in the event of negative cash flow, up
to the amount of prior payments made to Total E&P in the same
year. Excess losses in a year are carried forward to be offset
against future income. As a constituent part of the calculation of
the Monthly Net Cash Flow Payment, Serica shall, subject to the
terms of the NCFSD, be entitled to propose the carrying out of
Necessary Investment Works and / or Discretionary Investment
Works.
Total E&P is retaining liability for the costs of
decommissioning facilities and wells already in place. Serica will
pay further deferred consideration to Total E&P in respect of
30% of Total E&P's share of future decommissioning costs when
due, reduced by the tax relief attributable to Total E&P on
such costs. This element of consideration is capped by the amount
of cumulative net cash flow received by Serica UK as a result of
the BK Acquisition. Deferred consideration will also be payable in
respect of the realised value of oil in the Bruce pipeline at the
end of field life.
Total E&P is retaining a 1% interest in the Bruce field on
completion of the BK Acquisition. Under the terms of the SPA, Total
E&P has the option for a specified period of time to assign
this residual interest to Serica UK on the same terms as the BK
Acquisition save for the initial cash consideration being US$1 and
there being no further cash consideration payable in respect of
Rhum production or deferred consideration in respect to oil in the
Bruce pipeline.
Completion of the BK Acquisition is conditional inter alia
on:
-- Completion of the BKR Transaction;
-- Relevant third-party consents;
-- OGA approvals;
-- HMRC approval; and
-- The execution of certain decommissioning documents.
The BK Acquisition also contains customary warranties in
relation to the BK Assets from Total E&P for a transaction of
this nature.
Mitch Flegg, Chief Executive of Serica Energy, commented:
"We are delighted to have reached agreement with Total E&P
to increase our stakes in the Bruce and Keith fields to 78.25% and
59.83% respectively. This further acquisition, following on from
the BKR Transaction and coupled with the transfer of operatorship
of the Bruce, Keith and Rhum fields to Serica UK, places us in a
strong position to unlock increased value from the assets and
benefit from economy of scale. This is exactly in line with the
Government's intention to maximise the economic recovery of assets
in the North Sea, and we believe that both of these acquisitions
will benefit our shareholders, partners and employees."
"This acquisition is a logical next step for us. It provides us
with further scale, builds on our asset base and moves us closer
towards our objective of being a highly efficient, profitable
mid-tier operator focused on the UK North Sea, where we believe
there is plenty of potential for further growth. For our
shareholders we are building considerable additional value whilst
protecting our balance sheet through another innovatively
structured deal that benefits both parties."
"Completion of the transaction with Total E&P is anticipated
to take place immediately after completion of the BKR Transaction
with BP which requires certain regulatory consents, including a
Licence from the US Office of Foreign Assets Control ("OFAC")
relating to ongoing operations on the Rhum field. We and BP are
actively engaged in advance stage discussions with both UK and US
governments to provide the basis on which the necessary Licence
consents can be obtained and thereby enable continuing operations
on the Rhum field after expiry of the existing OFAC Licence. As the
BKR Assets make a significant and important contribution to UK
offshore gas production we are seeking to ensure that an
appropriate Licence will be granted and are working closely with
all parties to this end."
Background to and reason for the BK Acquisition
In November 2017 Serica announced the BKR Transaction under
which Serica UK will acquire interests in the Bruce, Keith and Rhum
fields in the North Sea and associated infrastructure from BP.
Under the terms of the BKR Transaction Serica UK will acquire a 36%
interest in Bruce, a 34.83% interest in Keith and a 50% interest in
Rhum. The deal has an effective date of 1 January 2018. Completion
of the BKR Transaction is targeted to take place at the end of Q3
2018.
The BKR Transaction was deemed a reverse takeover and an
admission document was published and shareholders approved the BKR
Transaction at a General Meeting of the Company on 18 December
2017. There are still a number of conditions precedent which need
to be satisfied ahead of completion of the BKR Transaction. As part
of the BKR Transaction, operatorship of the Bruce, Keith and Rhum
fields will be transferred from BP to Serica, along with
approximately 110 BP staff.
The BK Acquisition presents Serica with an opportunity to
further increase its reserve and production base by assuming a
greater interest in assets already well known to the Company and
its shareholders. As seen previously, the BK Acquisition is also
structured in a way that minimises downside risk and dilution for
shareholders, whilst also maintaining the Company's balance sheet
resilience.
About the BK Assets
The net 2P Reserves attributable to the BK Assets as at 1 July
2018 are estimated to amount to approximately 11mmboe. These
reserves will provide a significant addition to the estimated 2P
Reserves of approximately 49mmboe attributable to Serica (assuming
completion of the BKR Transaction) reported at the time of the BKR
announcement.
The Bruce field was discovered in June 1974 and is located in
the UK Northern North Sea, 350 km northeast of Aberdeen at a water
depth of 122 metres and with an area of approximately 75 km(2).
Field development was approved in 1990 and production started in
1993. Production is primarily gas with associated condensate and
NGLs. The field produces from 11 reservoir units, separated by
faulting and has had a cumulative production since 1993 of over
3tcf. To date there are over 60 well penetrations in the field with
21 producing wells.
The Keith field lies 6.8 km to the southwest of the Bruce field
in a water depth of 120 meters and has been developed as a subsea
tie-back to the Bruce complex. The Keith field was confirmed as a
separate field to Bruce after drilling in 1987 and first came on
production in 2000, with a second phase of development in 2002. No
further capital programmes are planned on Keith as the field is in
the final stages of its producing life. Subject to completion of
the BK Acquisition, Serica UK intends to continue production from
its single well as long as economically viable, but the well is
currently scheduled to cease production in 2019.
Wet gas from the Bruce and Keith fields is processed at the
Bruce complex and then transported via a 6 km spur line through the
Frigg pipeline to St. Fergus for Natural Gas Liquids extraction.
Dry gas is delivered as part of a commingled gas stream at St.
Fergus into the National Transmission System. NGLs are extracted at
St. Fergus and transported via a 12-inch diameter, 22 km pipeline
to Cruden Bay. The condensate is separated at the Bruce complex
then exported via a 24-inch diameter line, 254 km to the Forties
Unity platform. The liquids are then transported via the 36-inch
diameter Forties pipeline 240 km to Cruden Bay, then overland to
Grangemouth.
The BK Assets include the Bruce field facilities which comprise
three bridge-linked platforms. There is a production platform
housing a crew of up to 168 with production and utilities
equipment. The second platform is a drilling platform, with the
third platform hosting reception and compression facilities.
The BK Assets being acquired generated an operating profit
before interest, taxation, depletion and amortisation of US$33.8
million for the year ended 31 December 2017 based on unaudited
financial information extracted from the Total E&P accounting
records.
Summary of Assets (as of 1 July 2018)
Net 2P Reserves Serica Energy BKR BK Enlarged Group
Oil & Liquids (mmbbls) 1.58 4.57 2.57 8.73
Gas (mmscf) 8,781 235,782 42,960 287,523
Combined (mmboe) 3.05 46.24 11.1 60.38
Impact on Serica
The BK Acquisition is structured to control risk and minimise
Shareholder dilution
The BK Acquisition has been structured primarily on a deferred
cash/contingent consideration basis, leaving Serica UK with a
relatively small initial consideration of US$5 million which is
expected to be funded from Serica UK's share of net cash flow from
the BK Assets during the period from 1 January 2018 to completion
of the BK Acquisition. The Directors expect to be able to meet the
future deferred cash and contingent consideration payable from
Serica UK's share of the net cash flows from the BK Assets
following completion of the BK Acquisition with the level of future
payments linked to the performance of the BK Assets thereby
allowing both parties to share the benefits of improving field
recoveries and production efficiencies.
Maintains the Company's Balance Sheet resilience
The consideration structure with its emphasis on future payments
related to asset performance will assist Serica in maintaining its
balance sheet resilience with net cash resources and limited
borrowings. The Company's only borrowings at completion of the BK
Acquisition are expected to be drawings under the prepayment
facility provided by BP in respect of the BKR Transaction. In
addition, the arrangements on decommissioning, under which Total
E&P is retaining all of the decommissioning liabilities of
existing facilities, will assist Serica in maintaining financial
capability to support its future operations.
The BK Acquisition is expected to be cash flow and value
accretive
The BK Acquisition is expected to be immediately cash flow and
value accretive post-completion of the BK Acquisition. Based on
2018 production rates, Serica's net production would increase by
approximately 4,700boe/d as a result of the BK Acquisition. Based
on the BKR CPR and the Serica CPR, pro-forma net 2P Reserves per
Serica share are anticipated to increase by around 21%.
Efficient use of tax pool
Serica UK is expected to be able to optimise the value of its
pool of carried forward UK tax allowances by accelerating their use
against taxable profits from the Bruce and Keith fields. The value
of the pool stood at approximately US$146.5 million at 1 January
2018.
Increased scale
The Directors believe that scale is important in the
international oil and gas industry. The BK Acquisition will further
increase Serica's prominence and profile, improving its ability to
attract new investment funding when required. This increased scale
places the Company in a strong position to grow both organically
through application of technology and operational efficiencies and
inorganically through further acquisitions.
Analyst Conference Call
A conference call for analysts will be held at 10:00, Friday 3
August 2018. To participate in this call, please contact
serica@instinctif.com for dial-in details.
Technical Information
The technical information contained in the announcement has been
reviewed and approved by Clara Altobell, VP Technical at Serica
Energy plc. Clara Altobell (MSc in Petroleum Engineering from
Imperial College, London) has over 20 years of experience in oil
& gas exploration, production and development and is a member
of the Society of Petroleum Engineers (SPE) and the Petroleum
Exploration Society of Great Britain (PESGB).
The Reserves information extracted from the BKR CPR and the
Serica CPR referenced in this announcement has been prepared in
accordance with generally accepted petroleum engineering and
evaluation principles set forth in standards pertaining to the
estimating and auditing of Oil and Gas reserves information
promulgated by the SPE (the SPE Standards).
Regulatory
This announcement is inside information for the purposes of
Article 7 of Regulation 596/2014.
Enquiries
Serica Energy plc
Tony Craven Walker
Executive Chairman tony.cravenwalker@serica-energy.com +44 (0)20 7457 2020
Mitch Flegg
CEO mitch.flegg@serica-energy.com +44 (0)20 7457 2020
Peel Hunt
Richard Crichton richard.crichton@peelhunt.com +44 (0)20 7418 8900
Ross Allister ross.allister@peelhunt.com +44 (0)20 7418 8900
James Bavister james.bavister@peelhunt.com +44 (0)20 7418 8900
Instinctif
David Simonson david.simonson@instinctif.com +44 (0)20 7457 2020
Catherine Wickman catherine.wickman@instinctif.com +44 (0)20 7457 2020
George Yeomans george.yeomans@instinctif.com +44 (0)20 7457 2020
Notes to Editors
Serica Energy is an oil and gas exploration and production
company with exploration, development and production assets in the
UK and exploration interests in the Atlantic margins offshore
Ireland and Namibia. Serica holds an 18% non-operated interest in
the Erskine field in the UK Central North Sea and a 50% operated
interest in the Columbus field scheduled to commence development in
2019.
In November 2017 Serica announced the BKR Transaction under
which Serica UK will acquire interests in the Bruce, Keith and Rhum
fields in the North Sea and associated infrastructure from BP.
Under the terms of the BKR Transaction Serica UK will acquire a 36%
interest in Bruce, a 34.83% interest in Keith and a 50% interest in
Rhum. The deal has an effective date of 1 January 2018. Completion
of the BKR Transaction is targeted to take place at the end of Q3
2018.
The Rhum field is owned under a 50:50 unincorporated joint
arrangement between BP and Iranian Oil Company (U.K.) Limited
(IOC). In 2015, the US and the EU implemented temporary, limited
and reversible relief of certain sanctions related to Iran pursuant
to a Joint Comprehensive Plan of Action ("JCPOA"). On 29 September
2017, BP obtained a specific OFAC Licence relating to the ongoing
operation of the Rhum field, such licence expiring on 30 September
2018. In May 2018, the U.S. government announced its planned
withdrawal from the JCPOA, and tasked the US Office of Foreign
Assets Control ("OFAC") with implementing the full re-imposition of
both primary and secondary sanctions in respect of Iran by the end
of a wind-down period, which, for Rhum, expires on 4 November 2018.
BP and Serica are actively engaged in discussions with both UK and
US governments with the aim that the Rhum field can continue to
operate during this wind-down period and thereafter.
Further information on the Company and the BKR Transaction can
be found at www.serica-energy.com.
The Company is listed on the AIM market of the London Stock
Exchange under the ticker SQZ and is a designated foreign issuer on
the TSX. To receive Company news releases via email, please
subscribe via the Company website.
Glossary
Term Meaning
"2P" proved plus probable reserves;
"bbls" barrel of 42 US gallons;
"boe" barrel of oil equivalent;
"boe/d" barrels of oil equivalent per day;
"BKR CPR" The competent person's report on the
BKR Assets as of 1 June 2017, prepared
by Ryder Scott Company, L.P. and published
in the Serica admission document;
"Discretionary Investment Any works or investment on the BK
Works" Assets which is not classified as
Necessary Investment Works;
"Dry Gas" Dry Gas is a natural gas containing
insufficient quantities of hydrocarbons
heavier than methane to allow their
commercial extraction or to require
their removal in order to render the
gas suitable for fuel use;
"Monthly Net Cash Flow Monthly payments made subject to the
Payment" terms of the NCFSD
"mmbbls" million barrels of oil;
"mmboe" million barrels of oil equivalents;
"mmscf" million standard cubic feet;
"Necessary Investment Any works or investment relating to
Works" the above water facilities of the
BK Assets which; (i) is necessary
in Serica's reasonable opinion to
maintain production levels for the
Bruce field up to the close of 2021;
or (ii) is required to comply with
directions from the UK Oil and Gas
Authority or Health and Safety Executive;
"NGLs" natural gas liquids extracted from
gas streams;
"possible reserves" possible reserves are those additional
Reserves that are less certain to
be recovered than probable reserves.
It is unlikely that the actual remaining
quantities recovered will exceed the
sum of the estimated proved + probable
+ possible reserves;
"probable reserves" probable reserves are those additional
Reserves that are less certain to
be recovered than proved reserves.
It is equally likely that the actual
remaining quantities recovered will
be greater or less than the sum of
the estimated proved + probable reserves;
"proved reserves" proved reserves are those Reserves
that can be estimated with a high
degree of certainty to be recoverable.
It is likely that the actual remaining
quantities recovered will exceed the
estimated proved reserves;
"Reserves" estimates of discovered recoverable
commercial hydrocarbon reserves;
"Serica CPR" The competent person's report on the
certain of Serica's assets as of 30
June 2017, prepared by Netherland,
Sewell & Associates INC. and published
in the Serica admission document;
and
"Wet Gas" Wet Gas is a natural gas containing
sufficient quantities of hydrocarbons
heavier than methane to allow their
commercial extraction or to require
their removal in order to render the
gas suitable for fuel use.
(i) Throughout this document reserve figures are taken from the
BKR CPR and Serica CPR contained in the Serica Admission Document
published on 30 November 2017 updated for production to 1 July
2018.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
AGRZMGGRMZKGRZZ
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