North Sea-focused oil and gas production & exploration company Serica Energy (LSE: SQZ) delivered full-year results today following a “transformational” year in 2017. Strengthening oil and gas prices drove operating profit up around 300% to $14.1m, and the firm’s cash balance shot up to $34m from just under $17m a year ago.
The big news in November was that the company announced the acquisition of BP’s interests in the Bruce, Keith and Rhum fields in a move set to diversify Serica’s revenue and reduce its dependence on the Erskine field. Benefits of the deal will be higher production volumes and reserves, and the ability of the firm to use its prior tax losses to offset profits. The directors say the deal is “structured to control risk and minimise shareholder dilution,” and they expect it to complete during the third quarter of 2018.
The firm’s improved prospects drove the shares up during the year. In November, you could have picked up some of the stock at 27p, but today the shares change hands for around 67p. Yet they’ve been higher, touching 91p or so in January. Chief executive Mitch Flegg said that the firm is working hard towards the transition of the assets from BP as well as looking for new assets to add in the UK North Sea to grow the business, “where there are strategic benefits for Serica.”
City analysts following the firm expect earnings to increase around 512% during 2018 and 27% the year after that, which throws up a tempting forward price-to-earnings ratio of just over two, although the future financing outcomes resulting from the deal with BP makes the valuation a little muddy for the time being. Nevertheless, I think Serica is an interesting investment proposition that could sit well in a portfolio alongside oil major Royal Dutch Shell (LSE: RDSB).
One of the striking things about Shell is its forward dividend yield running close to 5.7% for 2019. City analysts expect earnings to rise 53% this year and 9% in 2019. Those earnings should cover the dividend payment around 1.4 times, which is quite a low level of cover from earnings, suggesting the directors may see little opportunity to invest in further growth projects.
Back in February with the full-year results report, chief executive Ben van Beurden said 2017 was a year of “transformation,” just like it was for Serica. Driven this time, though, by a “relentless focus on value, performance and competitiveness,” which saw the firm generate $39bn of cash flow from operations, excluding working capital movements, from an “upgraded” portfolio.
As an income stock, Shell looks tempting, but a glance at the share-price chart reveals how volatile the stock can be because of its cyclicality. Commodity prices have been firmer lately, but that situation can reverse, and if the share price declines, the capital you lose could wipe out years of income gains from the dividend. That’s one reason I think it could be worth diversifying your holdings in the sector to include potential growers such as Serica Energy.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.