Why Serica Energy shares are tipped to rally again

The North Sea plans of FTSE 250-bound Serica Energy (LSE:SQZ) today led to sweetened price targets amid City enthusiasm over an “embarrassment of riches for future growth”.

The AIM-listed shares are up by 47% so far this year to 263.8p but Panmure Liberum and Berenberg see further to go after lifting their estimates to 353p and 365p respectively.

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The upgrades follow Tuesday’s capital markets day, where Serica outlined an organic growth pipeline that it believes can sustain higher production levels into the next decade.

The strategy, which is focused around low-risk and short-cycle developments, follows a flurry of merger and acquisition activity that is set to make Serica the UK’s sixth-biggest producer and responsible for more than 10% of the country’s gas output.

Chief executive Chris Cox highlighted a “multitude of opportunities” as Serica looks to deliver material cash generation for further value-accretive growth and shareholder returns.

The production plans were accompanied by the disclosure of a new dividend policy based on a range of 15-30% of post-tax cash flow from operations.

This is consistent with the level of historic shareholder distributions and in line with the current 16p a share annual dividend. The new policy will not apply in respect of the 10p final dividend, which is payable on 24 July with an ex-dividend date on 25 June.

The company, which owes its scale to the Bruce, Keith and Rhum assets acquired from BP in 2018, has delivered a 360% total shareholder return since introducing the dividend in 2019.

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Noting the strength of the balance sheet, Berenberg said a dividend payout at the top end of the guidance range would deliver an 11% yield in 2027. However, it said it is possible the company will be more cautious ahead of the large investment programme.

Further out, Berenberg’s modelling shows that the dividend yield then averages 7% out to 2030, with the balance sheet remaining in a net cash position throughout the period.

The bank, which regards Serica as a core Buy in its oil and gas coverage, said a 30% payout delivers an average 10% yield from 2027 to 2030. It added that the balance sheet retained significant flexibility for M&A, even when assuming weaker gas prices in 2028 and 2029.

Serica told investors this week that it is currently tendering for a rig to undertake a multi-well drilling programme that will target infill wells and tie-backs across the broader portfolio.

Its diversified asset base currently stretches across 11 producing fields from West of Shetland to Southern North Sea, with production and reserves broadly evenly split between oil and gas. The number of fields is set to grow to 25 by the end of this year.

The planned short-cycle projects have the potential to add 30,000 barrels of oil equivalent per day (boepd) of incremental production, which will support annual average production of over 50,000 boepd into the next decade.

The current year-to-date figure is 43,300 boepd after production during 2025 was severely impacted by unusually high unscheduled downtime at the Triton hub.

The production outlook and higher-than-expected commodity price backdrop means Serica is on track to report a net cash position at the end of June. Tax losses due to investments and acquisitions provide a tax shelter for the majority of production.

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Panmure Liberum said the capital markets day showed an “embarrassment of riches” for future growth.

The broker said: “We are impressed with the emphasis on short-cycle organic opportunities which will allow Serica to take advantage of its large pool of tax losses, while also benefiting from the higher capital allowances for assets without tax shelter.

“The short development time of the projects will boost production in short order and lower the risks that can occur around costs for larger multi-year developments.

“However, the company is also well protected from the downside risks of lower commodity prices through a wide-scale hedging programme.”

Serica has a £1 billion market value, which will be large enough for inclusion in the FTSE 250 index when a planned move to the main market takes place in the third quarter.