Serica Energy set to rebound as North Sea winds shift

After more than a year of operational hitches, Serica Energy PLC (AIM:SQZ) looks poised for a meaningful turnaround, with free cash flow generation and a healthy dividend back on the cards, according to Shore Capital analysts.

They kick off coverage with a “buy” call and a fair-value target of 221p - a 22% premium to the current price.

ShoreCap notes that Serica is “on the cusp of putting a prolonged period of production disruption behind it” with the imminent restart of its Triton Hub, which should double net output to above 40,000 barrels of oil equivalent per day in the second half of fiscal 2025.

That would bring the company back to its pre-disruption run-rate, after unexpected shutdowns and project delays dented volumes over the past twelve months.

A key advantage for Serica is its tax position: a carry of historic losses means the onerous UK tax regime, particularly the Energy Profits Levy, doesn’t bite as hard as it does for peers.

ShoreCap highlights that, while the UK Government’s spring consultation on replacing the levy could pave the way for a genuine windfall tax to replace it entirely, Serica “could see its effective tax rate fall materially” in the process.

On top of that, management is keen to reward investors directly. The company plans to migrate from AIM to the London Stock Exchange’s Main Market, a move designed both to broaden its shareholder base and to underline its commitment to a sustainable dividend.

ShoreCap estimates a 9%, a level they “believe can be comfortably funded from free cash flow through fiscal 2027 even if Brent crude falls by around 30 per cent from our base-case assumption of US$70 a barrel.”

Serica’s production base is well balanced between oil and gas, with 2P reserves of approximately 118 million barrels of oil equivalent underpinning that 40 kbbl/d output.

Management has signalled a willingness to grow volumes beyond this level, too, though details remain light on potential acquisitions or new-well drilling.

Politically, the tide is turning in favour of domestic hydrocarbons. Growing calls for the UK to bolster energy security have lent support to companies like Serica, whose assets lie squarely in the mature but low-decline central North Sea.

ShoreCap argues that “things can only get better for UK operators” if the Government follows through on its review of oil-and-gas taxation.

All told, Serica ticks a lot of boxes for investors looking for leveraged exposure to oil and gas prices, without the big-cap complexities of larger explorers. Assuming operational performance holds to plan, and the tax backdrop lightens, ShoreCap's initiation leaves little doubt that Serica could be one of the smarter mid-cap energy picks in London this year.