Serica Energy PLC

LSE:SQZ

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[Mitch Flegg, Chief Executive Officer]

[Starts Abruptly] miserably to finish everything within the allotted time on the first two. So, I'll try and keep the -- try and keep this moving along. I'm going to make a short presentation, and I'll try and keep it as short as possible, so that we can get on to the questions. Please put your questions into the Q&A function, and I've got a number of questions that were sent in advance. So, thanks for those of you that have sent those questions through.

It's a bit of a strange thing actually, we're now here almost four months through 2023, and I'm talking about the 2022 full year end results. And if you -- if anyone casts their mind back to the start of 2022, we were in a completely different world. Gas prices were still less volatile than they are at the moment. It was pre the Russia invasion of Ukraine, it was pre the tax changes that we've seen in the U.K. for oil and gas companies in the last year. And finally, it was well before we'd even thought about anything to do with Tailwind. So, we were a very different company, and the industry was very different.

So -- but as I say, this is about our 2022 results. So, the first half of the presentation will be about that. And then, I will go on to talk a little bit more about the Tailwind transaction, because I'm sure that's really more what you guys want to hear about.

It is worth going back and looking at what we did in 2022, because it was a year that I think we're proud of the performance of the company, and I think everybody in the company works -- worked very, very hard and achieved an incredible amount. Production for the year, and so this is -- as through all of this section, I'm just talking about Serica, there's nothing here about the Tailwind assets.

But production on the Serica assets increased by 18% compared to 2021. So, we produced 26,200 barrels of oil equivalent per day throughout 2022. I use barrels of oil equivalent because it's a kind of industry convention. Most of our production was actually gas, but we convert that into the equivalent of oil barrels just in order to be able to compare. So, a really strong performance year-on-year compared to 2021.

But at the same time, we've managed to increase our reserves. We've managed to increase the amounts of reserves left in the ground. And I'll talk more than that -- more about that as we go through. But actually, our -- we've more than twice covered the production that we had during the year. So, we produced a lot of oil and gas through the year. We started off with 62 million barrels, and we ended up with 75 million almost. So that is a pretty neat trick.

The operating profit for the year, as you would have expected, with strong production throughout the year and high gas prices, the operating profit was virtually double what it had been the previous year. And despite the changes to the tax regime during the year, which were unwelcomed, despite those changes to the tax regime, our profit after tax was by far a record for the company and more than doubled what it was in 2021.

So, I think a really, really strong set of results, and that allows us to recommend a final dividend for 2022 of £0.14 a share, and that will bring the full year payment up to £0.22 a share following the interim that we paid in November of last year of £0.08. So, £0.22 a share of dividend compared to £0.09 the previous year. I think it was £0.035 the year before that. We're very pleased that we're able to make that return to shareholders.

And finally, the other highlight, I think, of 2022 was our diversification of the portfolio. We were able to announce the acquisition of Tailwind. I will talk about this more. It wasn't completed until March this year, but it was announced during 2023.

So, they're the kind of high level highlights of the year. To put a little bit more detail on that, and I'm not go through each of these plots in detail, I would hope that you've each seen these plots previously. As I mentioned, revenue, very, very strong, a combination of high commodity prices and very good production. So, you can see a very, very good upward trend from 2018 through to 2022 in revenue. The year that stands out was 2020 when the first year of COVID when there was a huge downturn in gas prices. We still did okay that year, but that was the only year where we haven't shown year-on-year improvement in our revenue.

We've kept costs under control. When we took over the Bruce, Keith and Rhum assets from BP, costs were running, in fact, higher than this in the previous year. We're running at about $18 per BOE. In 2022, we're down to just well -- yeah, we're down to just under $16 per BOE. So, I think that's a pretty good performance, but we are seeing an uptrend. As everybody is seeing an uptrend in costs, we're seeing inflation in the oil patch. So, to keep those costs steady, let's say, over the last few years, I think it has been a very, very good performance.

As I said, that led -- if you're making more revenue and you're keeping your costs under control, that leads to an increased operating profit and an increased profit after taxation, which then leads to the increased dividend that I've already talked about. So, I think it's a nice flow through the story.

And then, finally, as I've already mentioned, our reserves now stand higher than the -- when we bought the Bruce, Keith and Rhum assets from BP back in 2017-2018. So, again, I think, outstanding performance by the team to continue to upgrade reserves through the really good technical work that's been going on.

I talked about commodity prices. In some ways, this is a horrific plot. It kind of shows what gas prices have done in the last -- well, this goes back to the start of 2020. I talked about -- and the blue bars here are gas prices. I've put in the orange curve here is oil prices to show that, I think in relative terms, there's probably less volatility in oil, but the gas prices have been incredibly volatile. In 2020, we saw gas prices below £0.10 a therm at some stages. In fact, even during -- there was one point last year where we saw gas prices below £0.10 a therm. I think that was around this time last year, it was towards the end of April, I think, last year. We've also seen on a daily basis, prices in excess of £0.05 a therm. So, the volatility is incredible.

Throughout the last three, four years, we've seen this range from 2020 where the year's average was £0.25 a therm, 2021, £1.13 a therm, and last year, £1.98 a therm. This year, prices have fallen back somewhat, but still, I think, are well in excess of the long-term averages. So, everything we're doing is against the backdrop of that volatility.

And I think we're -- again, we look back at some of the decisions we made and some of the decisions we made back in this tough period in 2020 when we carried on investing in our assets, where we committed to the Rhum R3 project where we committed to Columbus. They were some of the best decisions we made, because those were -- when times were hard, we invested in our assets, and that's why we're seeing the increase in production now. So, I think that's -- it's really important that we have a consistent plan to continue to invest in assets whatever the day-to-day prices of oil and gas are doing.

I will talk a little bit about our hedges. So -- and bearing in mind, this is -- we're talking primarily here about circa as was in last year. And one of the big problems we faced during 2022, were the levels of security we had to provide against our hedges. You will recall that we have always hedged to provide us with protection against downside volatility. And we've not been hedging for the last couple of years. We have not put any new hedges in place since July 2021. But at the start of last year, we had something like 146 million therms hedged. Some of those were swaps, some of those were fixed prices under a gas sales agreement.

And at one stage during last year, that led to us having to lay out security in excess of £300 million. So, although the hedges were giving us that protection and were mitigating risk, they became a risk in themselves because we had to put out so much security to the counterparties. Because of that, we've not been entering into any new hedges. We've been letting the old hedges run off. So, by the end of last year, we only had, I think, 22% of the hedges left that we've started the year with. And so, right now, our hedging security has reduced to zero. So, it was one of the key risks and one of the key issues that we faced last year. But it is something that is now under control, and we have -- we no longer have that exposure to margin calls.

We do -- as part of the transaction with Tailwind, we have picked up a relatively modest amount of oil hedging, which is associated with the RBL, which is the debt facility that we acquired with the Tailwind transaction. So, we have some level of hedging on oil this year and a small amount of oil next year. I'll go into this in a little bit more detail as we go through this session.

So, what has that done to our cash position? We report our cash every six months. And at the end of last year, our cash position was £433 million compared to £103 million a year previously. Plus, at that stage, we had a relatively small amount of £24 million of security or hedging-related margin calls. So, our total tax position at the end of last year was £457 million compared to the start of the year when we had £103 million in cash and something like £115 million in margin calls. So, we were £218 million the year previously. So, our cash levels have doubled within the 12-month period.

And that is after the fact that we -- during 2022, we continue to invest in our assets in our portfolio. So, we had something like £97 million of exploration and development spend. There was something like £93 million, which were the final payments under the Bruce, Keith and Rhum cash flow sharing mechanism, which finished at the start of the year, and we paid something like £46 million in dividends in the calendar year. So, the amount in respect to 2022 would be higher than that because we're about to pay the big one now. But during the year -- during the calendar year, we paid £46 million in dividends.

As I've already said, we are recommending a final dividend of £0.14 per share. This require shareholder approval, and this will go to the AGM. And if approved, will be payable in July with the next dividend date at the end of June. I think the ongoing strength of the company does underpin our intention to maintain or increase the dividend in future years. In any extractive industry, particularly with the commodity price volatility that we've seen, there are no guarantees, but it is our strong intention to have a progressive dividend, and I do expect that we will at least maintain and hopefully increase the dividend in future years.

I've not spoken thus far about our ESG credentials. I think we have a very, very strong ESG ethos within the company. We are driving down our carbon intensity, and we have really a first-rate team working on our environmental, social and governance issues. We are pleased to say that in some recent benchmarking from the NSTA, the North Sea Transition Authority, our carbon intensity is something like 32% lower than the equivalent North Sea facilities, the average of the equivalent. So, we're pleased with where we sit, but we are still following a stringent process to try and reduce our emissions going forward. The targets we set ourselves are in line with the North Sea Transition Deal. And compared to a baseline of 2018, we intend to reduce our emissions by 50% by 2030, with the aim of getting to net zero by 2050, and we're well aligned to do that. So, the record that we have is outstanding, and we were able to reduce our emissions last year.

We, on every year, produce a pretty extensive ESG report. This year's report is due -- I should know exactly when, but it's within the next couple of weeks, it will be published. You'll be able to find it on our website. It's not anything that ever is published in hard copy, but you will be able to download it from our website, and there's a huge amount of information about all of the initiatives that go on within the company on a day-to-day basis and some of the longer-term projects that we're involved in. So that will be published very shortly.

So that was really what I was going to talk about 2022. Excuse me. But I think it is important that we talk about the Tailwind acquisition that was announced at the tail end of last year. Why are we doing this deal? There are a number of reasons. I think the first and most important factor is that this puts some diversification into our portfolio. Prior to doing the Tailwind transaction, we, in Serica, were very, very reliant on a single piece of kit. We were very, very reliant on the Bruce platform and the pipelines that take the oil and gas from Bruce to town. If we had a failure in that system, we would have been in a pretty bad position. And no industry, no company wants to be a single asset company or rely on a single piece of kit.

By doing the Tailwind transaction, we then have two production hubs. So, we're not reliant just on Bruce. We're not reliant just on Triton, which is the main asset we're buying, there's a bunch of other assets in there as we'll see, but it gives us that diversity. And it also gives us a better balance between oil and gas. We were previously 90% gas, and absolutely totally exposed to those gyrations in gas prices. By buying Tailwind -- the Tailwind portfolio of assets, we now have a far better mix between oil and gas. It's almost 50-50. And that in itself gives us a hedge. So, we're no longer just totally reliant on gas prices. And it also gives us a huge number of growth opportunities. So, there are a huge number projects that we can get after, and we'll talk about some of those as we go forward.

It makes us a bigger company. We don't do that just for the sake of it. It's not scale-for-scale sake, but we do become and are now one of the top 10 U.K. producers. It will increase our 2023 production by somewhere between 50% and 80%, and it increases our reserves dramatically, and we'll talk a little bit more about that as we go through this presentation. It's accretive to shareholders. So, on every basis, it will, over the next year and over the next three years, be accretive in terms of reserves per share and in terms of cash flow per share.

It's -- it enables us to remain a financially strong company. We will have a very, very strong balance sheet. We do have a very strong balance sheet right now. We've got an enhanced cash flow, and it will create significant firepower for future expansion of the company, because this is not the end game. Doing this deal doesn't create the company that we want to be forever, but it gives us a fantastic platform to go on and grow the company.

It doesn't take on any significant new liabilities. Both portfolios, both Serica and Tailwind, had relatively low or very low decommissioning obligations. So, we're not taking on any hidden nasties or any hidden obligations here. And it brings a committed strong shareholder into the group. So, we now have Mercuria as a strategic shareholder with a 25% interest in the company. And they have some skills that we don't. They have some international reach and some risk management capabilities that are very welcome. So, they're the reasons for doing the deal.

Is it working? What has it done? Well, it now means, we've got production this year, our production guidance of between 40,000 and 47,000 BOE per day, which is split between oil and gas, as I said. It gives us now a total of 11 producing fields, importantly, two producing hubs. We still are operator of 80%, and we like to be the operator. We believe that's where we can have most value. And it enhances our technical skills. We now have over 200 staff in -- between London, Aberdeen and offshore. And as you can see from the plot, it gives us a good geographical spread of assets.

I talked a little bit about the reserves additions, and it's quite interesting that both Serica and Tailwind, in the last 12 months, have significantly increased their 2P reserves. So, I'm not sure if everyone will be familiar with the system that we run, but like most companies, we have an independent assessment made on an annual basis of the reserves, the oil -- the recoverable oil and gas that we have left in the ground. And both ourselves and Tailwind have done this on an annual basis. If we go back to the end of 2021, Serica reserves were just over 60 million barrels and the Tailwind reserves were just over 40 million barrels. So, I think it was 104 million barrels if we took a pro forma combination between the two companies.

In the last year, both companies have produced a lot of oil and gas. So, we produced over 8 million barrels and Tailwind produced 4 million barrels. So, with all other things being equal, we produced over 12 million barrels. We started the year with 104 million. So, it would have gone down to just over 90 million barrels. But because of the good technical work to add reserves and to add value to the company, and so this is -- and this hasn't involved going out and exploring and finding new fields, but this is through additions to the fields that were already in the portfolio. We've managed to add almost 40 million barrels of 2P reserves. So, rather than being at 90 million, as we would have been, we stand at the end of the year being somewhere around 130 million barrels. So, the revision -- the revisions are more than 3 times the amount produced during 2022. And if you look at the new Serica, where we stand today with 130 million barrels, that's something like double where the old Serica was at 62 million only a year ago.

So, I think this really demonstrates the ability of both companies to add value from a basket of portfolio of assets. And we believe we got the skills within the enlarged company to continue doing that. So, there are lots of opportunities to continue adding to our reserves and continue adding value for all of our shareholders.

I'll talk a little bit about this year and the production year-to-date. So, if we combine the two portfolios, and so -- obviously, most of the first quarter, we weren't combined. But if we, for the sake of argument, combined the two portfolios, the average production for the first quarter of the year was just a shade under 47,000 barrels of oil equivalent per day. So, a really, really strong performance.

I think the plot actually quite neatly demonstrates many things about our business, and many of the things that actually were reasons behind us wanting to do this transaction. You'll see the volatility just in our production levels. A lot of people think that we've got a bunch of oil and gas fields out there, we turn on the tap and it's a very, very steady flow. It's not. The engineering challenges associated with operating in the North Sea, such that we see huge variability on a day-to-day basis. Despite that variability, and just to get your eye in here, the brown and orange curves are ex Tailwind assets. The blue curves are ex Serica assets. And you'll see that, various times, we've had shutdowns, we've had issues on -- in both portfolios.

So, around the start of March, there were some issues on the Tailwind portfolio. Around the start of February, there were some issues on the Serica portfolio. This demonstrates why the diversity in the portfolio is so important because, through that three-month period, there has never been a day when those problems have coincided. The worst, there was only one single day during that 90-day period when production fell below 25,000 BOE per day. And we managed to make obtain a very, very strong performance throughout.

One of the big reasons for that, you'll see here in the -- whatever it is, the second lightest brown color that we saw a big increase in the Gannet's production from mid-February onwards. And this is when we brought the Gannet's GE-04 well, the fourth well on Gannet into production, and that has really outperformed and helped us achieve really these stunning performance towards the end of the quarter when, on a number of days between the two portfolios, production was in excess of 60,000 BOE per day. So, I think this is demonstrating the value and many of the reasons that we wanted to do this transaction.

Our full year production guidance, and the moment is unchanged. We -- when we announced the deal, we said we expected our full year guidance to be between 40,000 and 47000 BOE per day. In the first quarter, we've done almost exactly 47,000. I mean, I think there's still a lot of variability as the year goes through. We will, on both portfolios, have, or on both hubs, we will have planned shutdowns during the summer months. So, we always shut down for planned maintenance purposes. So, we would expect that will happen during July-August. So, I would expect the third quarter of the year to be slightly lower. I do expect that we will revisit this production guidance as the year goes on. I do expect that we will narrow the guidance. I hope we'll be able to narrow it towards top end of that range, but right now, we're still planning on 40,000 to 47,000 BOE per day for the full year.

As we've said, we've got a number of short-term growth opportunities. We've got -- on the Bruce platform, we did a light well intervention campaign. I'll probably not go through the details of that, but we did one in 2022, which was successful in adding production. So, it boosted our updated production, and it added a little bit of reserves. So, we've committed to another one of those campaigns for 2023, which will take place during this summer, early summer, and we've now committed to one in 2024 as well.

And we've also committed to a rig for a four-well campaign in the Triton area, which will be the sidetrack of a bitten well. The fifth Gannet well, I talked earlier about Gannet GE-04 being such a success, there's a fifth world to be drilled there. The Evelyn field, which came on last year, was always planned as a phase development. So, we have now committed to drilling the second well, the second phase of that. And there's a Guillemot infill well, which is probably less material to us. We have a less -- a lower interest in that, but there'll be four wells, realistically starting early in 2024. So, we've got a huge portfolio of opportunities to continue to add value, and we're really excited about getting after those campaigns.

So, it's kind of bringing me to the end. I was trying to aim to talk for half an hour. For once, I think I might have got it about right. We think this is the start of a new era for the company. We think this is the start of something rather than the end of something. It is challenging in the U.K. The tax changes have been difficult, but we do think that the transaction with Tailwind gives us this diversity, it gives us a balance, and it gives us an opportunity with these short-term growth projects.

We've got a great team, and both teams had a really impressive record of doing deals and delivering projects. And we think we can build on those. We think we've got the financial firepower. We certainly have a strong balance sheet. We certainly have good borrowing capacity, and we have a huge cash generation facility that is, as you can see from the production rates that we're getting, is working very, very well.

So, we think all of that gives us the platform for increased earning and continuing shareholder returns, and we think we want to continue growing that return to shareholders.

So, with that, I think that's the end of the first phase. I apologize if that's been fairly quick, but I do want to get onto the Q&As, which we'll probably add some color to some of those points.

[Operator]

Mitch, that's great. If I may just jump back in there, and thank you very much indeed for your presentation this afternoon.

Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab that situate on the top right-hand corner of your screen. But just while Mitch takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboard.

Mitch, we did receive a number of pre-submitted questions, as you did kindly mention, ahead of today's event. And as you can see there in the Q&A tab, we have also received a number of questions throughout your presentation this afternoon as well. So, firstly, thank you to all of those on call for taking the time to submit their questions. And, Mitch, if I may hand back to you just to respond to those questions where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.

[Mitch Flegg, Chief Executive Officer]

Okay. Thanks. All right, I'll go through these. And I will answer every question that has been sent in.

So, question one, a lot of companies in the oil and gas space are buying back shares and paying dividends. Up till now, Serica has focused on growth and has done so very successfully. However, given the expansion with Tailwind and the recent reserves update, the company seems to be sufficiently large and diversified to focus more on the low valuation and creating shareholder wealth through dividend and/or buybacks. Can you please elaborate on any plans you have with respect to this matter?

Well, I mean, as I think I've already said, we do have a progressive dividend policy that is driven by the financial performance and cash flow generation. And the £0.14 final dividend, I think that's equivalent to £53 million in shareholder returns, which will bring the full return to -- I think, it's over £75 million for 2022. So, yeah, in answer to the question, we do have a focus on dividends, and that is, I think, a pretty big commitment on our part. We consider to look at this, and when we think we have cash holdings that are surplus to requirements, we will continue to look at the optimum method of returning that cash to shareholders. And we do have the authority for share buybacks, and it may come to an appropriate time to use that. But at the moment, the primary method of delivering cash back to shareholders is through the dividend policy, and it's that progressive dividend policy that I think is playing quite handsomely at the moment.

The next question, and apologies, I'm reading these off a separate piece of paper, can you please pay dividends quarterly? It would help stabilize the share price and make Serica more appealing to shareholders.

Good question. In November, we paid our first-ever interim. So that was the first time we'd ever paid six monthly. It's only three years ago, we paid our first-ever dividend. So, we gone from not playing a dividend to playing one annually to playing one six monthly. I don't think we're quite ready to go to quarterly just yet. There is a huge administrative burden, but that wouldn't hold us back if it was the right thing to do. But we're not signaling that we are an income stock, we still see ourselves as a growth company. Our primary or my primary aim is to grow the share price. And I believe we can do that with the appropriate investment of the cash that we have. So, we're not ruling out going to quarterly dividends in the future. At the moment, we report on a semi-annual basis, we report on a six-monthly basis, and I think it works best to keep our dividend payments in line with our reporting schedule.

The next -- I said I'll answer all questions, but the next two are almost exactly the same. And so, I will just take one of them. And this says, the results stated that from March 2023, we've hedged 11,000 barrels a day at an average of $58 per barrel, and in 2024, approximately 4,000 at an average of $74 per barrel. When exactly does the $58 per barrel hedge end? When exactly does the $74 hedge begin? And finally, was $58 per barrel for 2023 the best price we could have achieved on the open market?

So, there's a number of questions in there. And I should probably explain how this works. I mean, basically, we've -- we didn't put these hedges in place when we did the deal with Tailwind. We acquired these hedges with -- from -- with the deal. So, these hedges were put in place by Tailwind because it is customary that with any debt facility, and Tailwind had this small reserve-based lending facility, is customary that requires a level of commodity price hedging, and that can be provided by any of the lenders in that facility. So, the hedges that are there are not new hedges that have been put in place. They were put in place in -- many years ago. And so, the question about was $58 the best we could have achieved in the market, I think is not really relevant, because $58 was the best that could have been achieved back two or three years ago whenever those hedges were put in place.

The other part of the question about when does the $58 expire and when does the $74 start, it -- the numbers we quoted, the $58 per barrel in 2023 are the average throughout the year. So, it isn't $58 a barrel for every month, it's on an increasing trend, and next month -- next year, it isn't $74 throughout the year, it's also on a slightly differing trend. So, yeah, I mean, basically, in the second half of this year, the average hedge price is considerably higher than $58 per barrel. And then -- but it doesn't -- it's not a step change from $58 to $74 at the end of the year, it's a gradually rising trend. These were all known about and all valued and all part of the transaction. And, yeah, we -- there is -- there are no surprises here, and these were in the public domain prior to the transaction they announced.

The next question is, and this is an interesting one, and I've had several emails on this from people, and I'm aware that it's caused some interest on some of the bulletin boards that I'm sure a number of you will be aware of. And the question reads, there is a paragraph in the results that reads, "Following the 2022 year end, the Directors became aware that a filing in respect of certain dividends paid in 2022 had not been made as required under the Companies Act. Accordingly, a resolution will be proposed at this year's AGM to resolve this." Can you explain in simple terms what has happened?

I'll try. And I think the important point to note here -- and I'm answering not just this question, but some of the other questions that have been sent in by email and other methods. The important thing here is that this is in respect of dividends paid in 2022. A lot of people have been speculating that this is somehow related to the future, and it's somehow related to the dividend that we're about to pay, that we're about to recommend to the AGM. And so, that's the first thing to point out is that this is in respect of dividends paid in 2022, and that's -- it says that in the question.

What happened was that following the end of last year, we did become aware that we had missed the filing of a -- of some interim accounts that need to be filed with Companies House prior to the payments of a dividend. Now, these interim accounts show that the company has significant distributable profits in order to be able to make the -- in order to be able to make the dividend payments. The accounts were prepared, and they do, of course, show that we had significant profits, and we had sufficient profits to be able to make the payment. The -- yeah, so the accounts were prepared. Due to a totally innocent admin error, they were not properly filed, so they never arrived at Companies House. It's -- yeah, just a simple admin error.

We've investigated this a lot, and we find that we're not the only company that's made this mistake. It is quite an outmoded old-fashioned process. And there are a number of companies, and I'm not going to name names, but there are a number of household named companies that have made the same mistake and missed this. The system can be resolved by a resolution, which we will propose at the Annual General Meeting, which will basically mean that shareholders have the ability to vote on this, and to put the situation back to it would have been if we had the resolution made in full compliance.

So, frustrating, an oversight. Absolutely nothing to do with 2023, absolutely nothing to do with the Tailwind deal, and absolutely nothing to do with some of the frankly absurd comments that we've seen and received about this being part of some big conspiracy theory. It was purely an oversight in 2022.

Next question, does the CEO intend to purchase SQZ shares given the low valuation? The depressed share valuation is even more stark given the valuation of the recently acquired Tailwind assets. Investors appear to be mindful of the lack of CEO share purchases in the open market and the relatively minor shareholding given the CEO's tenure and generous compensation.

Yeah, I mean, I've said I'll answer all the questions, I'm not willing to discuss my own personal finances here. But I will point out that I am very, very aligned with shareholders due to the existing shares I have and the fact that I have a number of options. My focus is on trying to deliver value for all shareholders, and I think we're demonstrating that through our capital returns approach, and I think the dividends that we've announced this year demonstrate that. I'm committed to delivering. I believe in the strategy, and I believe we've positioned ourselves with a -- in a fantastic position to capitalize on what we've done and drive the company forwards. So, I'm not going to discuss my personal finances, and I don't think I could. I think if I made a statement here that I was going to buy some shares or I'm not going to buy some shares, that would be seen as misleading to the market. So, I'm afraid I'm not going to do that. And if people want to email me directly, feel free. If you want to chat, I'm happy to chat about these things, but I'm not going to make any statements here.

The next question, presuming 2023 is the year of consolidation, does the enlarged Board plan to actively seek significant new opportunities thereafter, especially outside the North Sea, with a view to building Serica into a much larger company, or will its main strategic focus be to optimize existing assets and extend these with occasional bolt-ons?

Yeah, I mean, I hope we've made this clear. And we have repeatedly stated that, and I think I said it earlier today, the Tailwind deal is not the endpoint, it's not the endgame. We've created I think a really good platform to go ahead and do more deals. We've got the firepower, we've got the expertise, we've got the dealmakers, and we are -- we've reorganized the way we look at M&A because we've got some good new people in the organization now that are tasked with doing this. And so, we are very much looking at growing the portfolio and creating a larger company that's got more opportunities in it. Because in the way that we're adding reserves year-on-year to the assets we've got, we want to get more assets so that we can continue to do that.

So, yeah, the answer to the question -- I can't remember exactly what the question was, but the answer to the question is that we're not sitting back now and saying that this is a done deal. We are looking to grow the company through acquisitions, through mergers, as much as we can. We will -- we're in a very, very fortunate position that we have the cash. We have the borrowing capability. We can do small bolt-on deals that were mentioned. We can do larger transactions. We will definitely be looking at those things. But we're not going to forget the day job. And we have the vast majority of our people are working on getting more and more value out of the assets that we already own, and doing a fantastic job, I must say, and that's both the Serica staff and the ex-Tailwind staff have demonstrated the ability to get more value out of what we've got. So, yeah, it's very much a two-pronged strategy; it's, grow the company through M&A and add value through the undoubted engineering and subsurface skills that we have.

So, they were the pre-submitted questions. I can see that I'm guessing probably 50 or so questions have come in real time. If you give me a moment, I'll just have a flick through those.

There's a number here about the tax regime, and we have to be prepared to talk on tax. If the windfall tax remains permanent, how will Serica manage the new environment?

I think in the way that we are at the moment, I mean, I think we -- the windfall tax came in last year. We remained very, very profitable. We -- I think, the windfall tax will be damaging to the industry on a long-term scale, and I think people investing in longer-term projects will just be unwilling or unable to make those investments. But I think investing in short cycle, quick payback, quick return projects is viable still. I think the investment allowances that are available under the windfall tax at the moment help companies like us. And we do -- as I've said, we do want to invest through the cycles, and I think we can. We're not a company that is going out doing wildcat exploration looking to put new platforms in West of Shetland. We are a very short cycle company, and I think we can be nimble and focused and continue to thrive through these ups and downs.

Next question, there's another one on windfall tax, which I won't do. Next question. Is the £0.22 dividend a benchmark?

And given the increased share count -- well, that £0.22 is on the increased share count. And I've already said that we expect to have a progressive dividend. So, yeah, that is the benchmark going forward.

What is the cost of producing a therm of gas?

That's a good question, and I don't know the answer to that. I mean, we've published our cost of production in terms of dollars per BOE. I would have to back calculate on the production cost of a therm of gas. But I promise we'll put that in whatever our next presentation is, I'll put that out there and we'll get that fact in there, because it is quite useful to people.

Next question, is Serica looking at opportunities outside of the U.K.?

Yes, we are. I won't say any more than that.

Next one, why fix 11,000 barrels at $58? It seems very low.

As I said, that was fixed years ago. So, I'm afraid that isn't something that we've done.

Has there been any clarity on whether you can use Tailwind's tax losses on all of Serica's taxable income, or just legacy Tailwind profits?

I think we've discussed this several times previously, and in the short term, the tax legislation says that the tax losses remain within the company where the assets are and where the profit is. So, right now, the Tailwind tax losses are applicable to the Tailwind assets. It is not inconceivable that we will look during coming years to rationalize and to move assets around. But at the moment, the tax losses are within the Tailwind asset companies.

There's a couple of people asking me to make cash flow predictions for the year, and I'm afraid I can't do that. We have talked about our production guidance for the year, and I think anyone can then make their own assumptions on commodity prices. But I'm afraid I'm not really allowed to do that.

There's a question on the unaudited net cash position at the end of 2023. I don't have that to hand, but it was in the report, and so we have published that.

Next one, how many new wells do your 2P reserves assume at both the legacy Serica and legacy Tailwind fields?

So, they assume the wells that we have committed to. So, reserves are not classed as 2P reserves unless they're committed to. So that includes the four wells campaign that are -- we've announced and a well on Bruce that we're planning in subsequent years. So, yeah, I can't say more than that. So, it includes the wells that we have committed to.

A question then, how much skin in the game do Directors have?

I think something like 2% of the company is owned by the current Directors. That is published on our website. Again, I've not got the number to hand in front of me. And I am seeing these questions in real time, so I'm afraid I've not got everything at my fingertips. But I believe it's something like 2% of the shares in the company are held by Directors.

Another question I get quite often, why no details on the locked box nature of the Tailwind deal?

I think there's a -- yeah, some misunderstanding about what that lockbox means. The lockbox mechanism was designed to provide us with protection against Tailwind taking money out of the company after we'd agreed to buy it. So, there is no -- I'm not quite sure what people seem to see. People were -- I think some people were expecting there to be a treasure trove that we opened up that had some goodies in it. The lockbox is not like that. The lockbox is to protect us, and it's a common mechanism that is used to protect the buying company against the selling company stripping assets out of it. So that was what the lockbox was about.

Yeah, I mean, there's a couple of questions here that are difficult to answer, but I will -- yeah, I'm not going to duck them. And one is -- they're both the same effectively. Can you add some flavor as to why the market has reacted negatively to the Tailwind deal and the subsequent collapse in share price?

I mean, it's a very difficult question. And I think I'm -- again, I'm not going to duck it, but I would suggest that if you compare our share price to a number of our peers, you've seen the same sort of movement. So, if you look at companies that -- I'm not going to name names here because it would be wrong of me to do so. I'm not going to comment on what other companies are doing. But if you look at a number of U.K.-focused oil and gas companies, they have seen significant impact on their share price from a number of issues. One is the imposition of the windfall tax, which has hit a number of companies. And the other is that really the collapsing in gas prices.

The gas prices -- I [don't know] (ph) the up-to-date numbers again in front of me, but gas prices have fallen by more than 50% from when we announced the Tailwind transaction to where we are right now. So, there has been -- yeah, I mean, the market position has changed significantly. Market sentiment has changed. And so, we're not the only company that has had a significant downgrade in our share price. I personally don't believe it is due to the transaction that we announced. Clearly, the market didn't fully appreciate what we were talking about when we put the deal out there. But clearly, I think that -- well, I think that the performance of the portfolio is demonstrating why we did the deal. I think the production figures are sparkling. I think the split between oil and gas is helping us dramatically.

And so, yeah, I mean, I think we are starting to get the message across. We've got a big job to do to actually turn some people around. There has been a lot of negative comment, and there will continue to be negative comment. And we welcome the debate. I -- but I mean, we have a job to actually demonstrate to people the value of this deal. But I think producing 47,000 BOE per day in the first three months of this year is demonstrating why this is a good deal.

Right. Would we consider acquiring production assets overseas?

Yes, I think I've said that already.

And next question is the same. The one after that is -- it's a question that comes up regularly, and we've been asked previously and I've answered it previously about becoming a FTSE 250 company and looking for a main market listing. We qualify. I think we would be comfortably within the FTSE 250 at the moment. And we are looking at the pros and cons. We've been talking to a lot of shareholders just recently, and it's something that -- it's a bit -- it's a marmite question. Some shareholders want us to remain on AIM. Some shareholders like the -- and I'm not giving financial advice here and I wouldn't, I'm qualified to give tax advice. Some people like the inheritance tax benefits. Other people believe that if we go to the main market, we will get more coverage and tracker funds following us. It's quite a balanced argument. It's something we're looking at really seriously right now. A final decision hasn't been made, but I can assure you that we are looking at transitioning to the main market, and that will continue.

Right. There's a very, very long question here about our hedging policy. And I've talked about our hedging policy. We hedged previously as downside protection, and that was hugely, hugely important to us during 2020 when gas prices were very low. It enabled us to continue investing in our assets, which is why we're performing so well right now. In 2021 and 2022, as this questioner points out, our hedging cost us a lot of money. It was not -- it didn't look so smart in those years, and we've paid out during those years. But the value that we got in 2020 was significant and that enables us to be the company that we are today. So, yeah, I mean, I think, the hedging, it was a risk mitigation, and it went to becoming a risk when we got into the situation of the margin calls, and that's why we put no new hedges in place for the last few years.

Yeah, I mean, interesting question, a good question, something I think I probably should have raised. Our chairman is stepping down. So, Tony Craven Walker has been with the company more or less since the start. He's been in the industry for 50 years. He's a legend. He's been an inspiration to everyone in the company. And the question is, will he still be holding any role, or will he be stepping away fully from the business? He's a significant shareholder. And he won't mind me saying that I know that he'll never step fully away. He'll always be involved. But he won't have any formal role in the company. I'm sure, we will use his advice and we'll use him as a sounding board. I'm sure he will keep in touch, but he won't have a formal role in the company.

Next question, are there any cost savings to be had from the acquisition of Tailwind?

Again, this one I get a lot. The Tailwind deal wasn't done with a view to synergies. It wasn't done so that we said, oh, we can put these two companies together and fire a bunch of people and stop using a bunch of consultants and stop using a bunch of contractors. It was done because we wanted the diversity. We wanted two separate hubs and two production hubs. And so, there are some cost savings. There are some things that we will only need to do once rather than twice. At the moment, we had two CPRs. Next year, there'll be one CPR with one provider. There are a lot -- there are some small savings, but it wasn't done primarily for cost savings.

And I know that I'm in risk of running over my time, but I don't really want to miss out on any of these questions. So, hopefully, you will bear with me.

Someone here saying, does acquiring oil production provide the best value for shareholders and strategy for growth when the current gas price is more than double the current oil price?

I'm afraid that's just not true. The current gas price is pretty well equivalent to the current oil price, so -- if not, slightly lower. So, I don't -- I can't answer that. We think that acquiring oil assets is the right thing to do. I think the important thing, and this is another question on here, is they have to be oil assets with the proper ESG credentials. So, I know there are lots of all assets out there that we could buy, but they have -- they're incredibly polluting, they have a very, very high carbon emissions, and we're not prepared to do that. So, we're quite comfortable with oil. If the assets have a good carbon efficiency, or we know that we can improve the carbon efficiency. So, there's nothing wrong with oil, and I think it gives us that good protection. I think the oil and gas act as a hedge against each other.

Another question about the lockbox, which I think I've answered. More questions. Did the company consider acquiring the Norwegian company Mime that Kistos have just acquired?

Frankly, no. It wasn't something that was on our radar. I think probably a good deal for Kistos and good luck to them. I think for a company of our size, and we are significantly larger than Kistos, I think the materiality in that deal was probably not there. I can see why it's a good deal for Kistos. But in the short term, it adds something like 2,000 BOE per day. And as I've said, repeatedly, we're producing 47,000 at the moment. So, I think the short-term materiality doesn't -- wouldn't have worked for us. I think long-term, it has potential, but it wasn't something that we looked at.

Another question about the lockbox. And it was -- the question was about reassuring investors that Mercuria would not pay themselves a large dividend prior to completion. That didn't happen. I'm not quite sure why that would be suggested.

So, I think I've got to most of the questions. Oh, there's one here. When will the Tailwind results for 2022 be announced?

I'm afraid I just don't know the answer to that. I know that they're being worked on. I believe it's relatively soon. Apologies, I don't know the answer to that.

And finally, yeah, and I will make this the final one. Oh, no, actually there's one here. Not a question, but thanks to you and the Serica team. So, thank you for whoever put that in.

And the final one is, has there been any further works or advancements on the North Eigg well?

And I should have talked about that. So, as you know, North Eigg was an exploration well that we drilled last year, high pressure, high temperature, very deep well. That was a disappointment, and we didn't find what we were looking for. It was very close to the Rhum field, and -- at its closest, a couple of kilometers from Rhum. And the sands in Rhum that we expected to find in Eigg just weren't there. The reservoir wasn't developed to the extent that we would have liked. However, we drilled right through in and right very close to where we expected the final total depth of the well to be. We encountered some hydrocarbons. From memory, it was 15 or 20 feet of hydrocarbons, so not enough to be significant, well, not enough to be commercial, but actually quite significant. I mean, anytime you find 25 feet of hydrocarbons, you've got to try and understand where it's coming from and where it's going to, and have we drilled into a small edge of a giant field that goes [indiscernible] from us.

We are analyzing all of the data that we've acquired from that well, and there's some really good quality well -- data. We suspended the well rather than abandoning it, so that we can go back and re-enter that well and drill a sidetrack if we can find a location where we think there is going to be an enhanced reservoir thickness. There's a lot of work going on in the team to do that. So far, we haven't found the evidence that we really need to say, yes, we're going to go back and drill a sidetrack. But that work is still ongoing. I can't rule it out just yet. I would expect we'll have that work wrapped up this quarter. And I would expect we'll make an announcement at that -- so we will make an announcement at that stage. So there's been lots of further work, but no further advancements to answer the question.

So, at that stage, I think we've done my hour, and I apologize for running over again. But thanks for your patience. And I think one thing I will say at the danger of getting overwhelmed is that, we have an email address info at serica-energy.com, where we welcome questions. So, we regularly get questions from shareholders, and we always answer them. Although I see some people accuse me of not answering, but I think we always answer questions, and, yeah, I mean, we're happy to take those on board. So, feel free to contact us. I like the feedback. I like to know what people are thinking.

But with that, I'll hand you back to our hosts.

[Operator]

Mitch, thank you very much indeed for being so generous of your time there and addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended just for you to review and to then add any additional responses, of course, where it's appropriate to do so, and then we'll publish all those responses out on the Investor Meet Company platform.

But Mitch, just before really looking to redirect those on the call to provide 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'd be great.

[Mitch Flegg, Chief Executive Officer]

Yeah, thanks. Yeah. So, obviously, it's a bit of a strange one. I mean, the presentation was about 2022, it's ancient history, it's all about 2023. I think the -- and 2024 and beyond. I think the Tailwind transaction really does establish the company, and it gives us the strength that we need to kick on from here. So, as I've said, there are two themes or two strands to the strategy: we want to expand the portfolio through M&A, I think we're brilliantly positioned to be able to do that; and we want to continue to get as much value out of the assets as we possibly can. And I think we've demonstrated the ability to do that.

So, we want to continue replacing reserves. We want to continue to try and increase our 2P reserves. And we want to continue to play our role in providing energy for the country, providing jobs and doing our bit. We think the industry is really, really important. We think it's got a fantastic future despite the political and tax changes that we're seeing. We are here to stay and we are here to share those gains with our shareholders.

So that really is my -- the end of it, and I'm seven minutes over. So, thanks for your attention.

[Operator]

Mitch, 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'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 will only take a few moments to complete, but I'm sure it'd 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.