Serica Energy Eyes 2026 Rebound After Tough Year

Serica Energy ((GB:SQZ)) has held its Q4 earnings call. Read on for the main highlights of the call.

Serica Energy’s latest earnings call painted a picture of strategic progress overshadowed by operational setbacks and tax headwinds. Management stressed that while Triton outages and a heavy deferred tax charge pushed the group to a loss after tax, accretive M&A, reserve growth and improving cash generation underpin a markedly more optimistic outlook for 2026.

Reserves and Resources See Double-Digit Growth

Serica reported a 19% pro forma increase in 2P reserves in 2025, effectively replacing all production as 10.2m barrels moved into 2P against 10.1m barrels produced. Contingent 2C resources rose 16%, helped by an additional 18.2m barrels at Bruce and 8m barrels at Wagtail, taking total 2C volumes above the 100m‑barrel mark.

Accretive M&A at Low Entry Cost

The company completed multiple acquisitions, including Prax Upstream and a portfolio from TotalEnergies, which closed today, materially expanding and diversifying its asset base. These transactions added more than 20,000 barrels per day of production capacity and reserves at around $3.30 per barrel, with Serica also receiving a net $75m of cash and expecting the deals to be cash‑flow accretive.

Production Growth Targets and Early 2026 Momentum

Management reaffirmed ambitions to lift output to about 65,000 barrels per day by the end of 2026, while keeping guidance of “significantly over” 40,000 barrels per day for the year. The core portfolio is already showing momentum, with the Bruce hub regularly delivering around 20,000 barrels per day net and a recent two‑week period averaging above 50,000 barrels per day following Triton’s restart, alongside first oil from Belinda.

Hedging Underpins Cash Flows

Serica’s hedge book generated $75m of unrealized gains and about $8m of realized gains last year, cushioning the impact of volatile commodity prices. For 2026 the group has hedged roughly 60% of expected production and about half of 2027 output, keeping around 40–55% of volumes exposed to upside while estimating attractive realized prices if oil and gas benchmarks remain strong.

Balance Sheet on a Stronger Path

Year‑end 2025 net debt stood at $200m, roughly one times EBITDAX, but has already been more than halved following deal completions. Management expects the company to move into a net cash position by the end of the first half, providing added financial flexibility for investment, shareholder returns and potential future transactions.

Dividend Maintained Despite Headwinds

Despite lower revenues and reported losses, Serica maintained its full‑year dividend at 16p per share, including a proposed final payment of 10p. The board signalled its intention to continue distributions into 2026, while balancing shareholder payouts with capital requirements for growth projects and integration of new acquisitions.

Low Decommissioning Liabilities Support Value

Decommissioning provisions remain below $2 per 2P barrel of oil equivalent, a notably low level for a mature basin operator. This limited clean‑up burden enhances long‑term asset economics and supports the company’s case that its expanded portfolio can generate sustained value even as fields age.

Organisational Strengthening and Integration Execution

Serica highlighted a series of senior appointments and a strengthened executive team as key to managing its enlarged portfolio. The successful operational takeover of the GLA fields and Shetland Gas Plant, alongside the integration of TotalEnergies staff and px operations, was showcased as evidence of growing organisational and integration capability.

Triton Disruptions Hit 2025 Performance

Unscheduled maintenance at Triton in February and March forced a shutdown of just over three weeks, and the field is currently constrained by a single gas‑export compressor, limiting net production to about 25,000 barrels per day. Management estimates that Triton underperformance cost the company roughly $250m of missed revenues in 2025, marking it as the single biggest drag on the year’s results.

Revenue and Production Declines Reflect Operational Issues

Group revenues fell 20% year on year to $601m, with production down around 4.5m barrels, or roughly 30%, compared with 2023 on a pro forma basis. The declines were largely attributed to the Triton issues and other operational interruptions rather than structural demand weakness, reinforcing management’s view that performance should recover as reliability improves.

Deferred Tax Charge Drives Reported Loss

Although Serica delivered $80m of profit before tax, about half the prior year, accounting results were dominated by a $130m non‑cash deferred tax charge. This included around $65m linked to the extension of the Energy Profits Levy, pushing the book tax rate to 165% and leading to a reported loss after tax of $52m, despite underlying operating profitability.

Costs Rise on Maintenance and Deal Activity

Operating costs rose roughly 10% compared with the previous year, driven by heavy maintenance work, particularly at Bruce, and adverse currency movements. General and administrative expenses edged higher by just under $2m, while transaction costs of about $5.5m reflected the company’s busy M&A calendar.

Reliability and Concentration Risk at Triton

Management cautioned that Triton remains a concentration risk until both gas compressors and power turbines are consistently available, leaving the asset vulnerable to further outages. With Triton expected to account for as much as a quarter to a third of group production in 2027, achieving stable reliability is strategically critical for Serica’s medium‑term output profile.

Policy and Tax Uncertainty Weigh on the Basin

The extension of the Energy Profits Levy from 2028 to 2030 materially increased Serica’s deferred tax liabilities and underscores the company’s exposure to political decisions. Executives repeated calls for a more stable and supportive regulatory regime, arguing that policy uncertainty is deterring investment and constraining the potential of the UK North Sea.

Market Volatility Complicates Deals and Forecasts

Sharp swings in commodity prices following geopolitical events in the Middle East and a steep backwardation in forward curves are making valuation and forecasting more challenging. Serica noted that expected payments tied to contingent acquisition milestones, such as the ONE‑Dyas and Spirit deals, are particularly sensitive to future price paths and differing tax treatments.

Additional Operational Interruptions Beyond Triton

Production from the Orlando field was largely lost over the period after wave damage hit the Ninian host platform, adding to the year’s operational shortfall. Output has now restarted, but the episode highlights broader reliability issues across the portfolio that the company is working to address as it scales up.

Guidance and Outlook Emphasise Recovery and Growth

Serica reiterated its January guidance, targeting 2026 production “significantly over” 40,000 barrels per day and aiming for about 65,000 barrels per day by year‑end, even as the Lancaster field ceases in May. With net debt set to shift into net cash by mid‑year, a maintained 16p dividend, substantial tax‑loss shields, robust hedging and double‑digit reserve growth, management framed 2026 as a year of recovery from 2025’s disruptions and a platform for further growth.

Serica’s earnings call underscored a year where operational mishaps and tax policy dealt heavy blows to headline numbers, but did not derail the company’s strategic trajectory. For investors, the key takeaway is that while execution risk around Triton and regulatory uncertainty remain, Serica enters 2026 with stronger assets, improving balance sheet metrics and clear volume growth targets that could drive a rebound in financial performance.