Acquisition to lift North Sea player into top 10 UK producers and strengthen its oil & gas portfolio

UK-based oil and gas company Serica Energy has outlined the strategic rationale behind its proposed acquisition of Tailwind Energy Investments from a compatriot company, Tailwind Energy Holdings, explaining that this will diversify its portfolio, boosting it with a new production hub.

In late December 2022, Serica Energy disclosed that it had entered into an agreement with Tailwind Energy Holdings to acquire the entire issued share capital of Tailwind Energy Investments in a deal worth approximately £367 million.

As explained at the time, the consideration for this acquisition encompasses the issue of up to 111,048,124 new ordinary shares in Serica, which will represent up to 28.9 per cent of the firm’s enlarged issued share capital, as well as a cash payment on completion of £58.7 million. The company will also be taking on Tailwind’s net debt, which as of 30 November 2022 was around £277 million.

In addition, Mercuria, the largest shareholder of Tailwind, will become a strategic investor in Serica with an approximate 25.2 per cent stake as part of this transaction. The two parties will also enter into a relationship agreement while two Mercuria-nominated non-executive directors, Guillaume Vermersch and Robert Lawson, will join the Serica board upon completion of the acquisition.

In an update on Monday, Serica opted to provide more information on the growth benefits of the proposed Tailwind acquisition along with an update on the recent operational and financial performance of the two companies.

Mitch Flegg, CEO of Serica, commented: “We are delighted by the transaction which we believe will improve cashflow and capital return predictability for shareholders and be immediately accretive on key metrics while also maintaining a strong balance sheet, providing increased resilience through the diversification of the Serica portfolio and create a platform for further growth in the future.”

Serica’s board believes that this transaction will enable the firm to diversify and strengthen its portfolio by adding a new production hub in the Triton area, which will result in a balanced mix of gas and oil and “an enlarged hopper of short-cycle organic growth opportunities.”

Moreover, the acquisition of Tailwind is expected to significantly increase reserves and production along with cash flow and earnings per share, lifting Serica into the top ten UK producers with net production expected to increase by 50-80 per cent in 2023, which would remain sustained until 2025 at above 40,000 boe/d.

Additionally, reserves are expected to be increased by 67 per cent – as at 1 January 2022 – “before allowing for the full impact of Tailwind’s successful 2022 work programme,” highlighted Serica. According to the company, its 2022 average net production was 26,050 boe/d while Tailwind’s net production “increased significantly,” to 19,500 boe/d average in Q4 and touching 24,500 boe/d during December 2022, thanks to the completion of the Orlando well workover and Evelyn tie-back.

Furthermore, Serica revealed a combined proforma net production forecast of 40,000 to 47,000 boe/d in 2023, 41,000 to 48,000 boe/d in 2024 and 42,000 to 49,000 boe/d in 2025. The company also underlined that the results from the GE-04 well – operated by Tailwind with 100 per cent interest – were “considerably better” than pre-drill estimates with expected initial production rates in excess of 8,000 boe/d compared with 5,000 boe/d predrill estimate. The production from this tie-in to the Triton FPSO is planned for Q1 2023.

Serica claims that the combined operating costs are projected to remain below $20 per boe with the objective of future reductions while this combination retains low decommissioning liabilities compared to North Sea peers in line with the firm’s existing portfolio.

Moreover, Serica believes that this acquisition creates a diverse and resilient production portfolio with multiple organic investment opportunities – such as the Bruce hub and Triton area infill wells – with a combination of teams with “impressive track records” of deals – BKR and Triton – and projects like R3 and Evelyn.

The company further points out that this transaction materially increases reserves and production whilst maintaining balance sheet strength and significant net cash position while the relationship with Mercuria provides a partner able to support a range of growth options. 

Serica further mentioned the rising production from the Triton area thanks to the Evelyn development, Bittern A2 well intervention and GE-04 well, which were carried out in 2022. The Triton FPSO uptime was more than 95 per cent in Q4 2022 while Tailwind’s Evelyn and the Gannet-E expansion projects are expected to add over 10,000 boe/day to its net production.

Tailwind executed an ongoing investment programme with facilities upgrade and maintenance programmes in 2022 and a further campaign is planned in 2023. A rig was also hired for the Bittern B1z sidetrack and the Gannet E-05 well slated for 2024, while a possible FID of a 100 per cent owned and operated Belinda field and Evelyn phase 2 is on the cards during 2023.

As there are three elements to the UK’s oil and gas taxation – corporation tax (30 per cent), supplementary charge (10 per cent) and energy profits levy (35 per cent) – Tailwind retains “significant tax losses” at the end 2022, underlined Serica. These are currently estimated at:

• Ring Fence Corporation Tax: $1.4 billion
• Supplementary Charge: $1.2 billion
• Energy Profits Levy: $0.1 billion

Serica Energy underscores that the losses are available for utilisation against future taxable profits with a potential tax offset in the region of £470 million based on current taxation rates.