Serinus Energy Q&A: Cashflow strength, low cost ability to produce and financial flexibility (LON:SENX)

Serinus Energy

Serinus Energy plc (LON:SENX) Chief Executive Officer Jeffrey Auld and Chief Financial Officer Andrew Fairclough caught up with DirectorsTalk for an exclusive interview to discuss the highlights from their preliminary results, maintaining production at Moftinu, their updated reserves report and what the key attributes of the business are.

Q1: Now, you’ve announced your prelim results for 2020. Jeffrey, what would you identify as a highlights of 2020 for Serinus Energy?

A1: Well, first and foremost, the safety of our staff, we had a global pandemic, we had to keep our staff safe, both in the field and in the offices, and we didn’t have any production interruptions. So, it’s very, very important to us that we managed through those difficulties.

Secondly, we restructured the capital structure of the business last year, in 2020, with a debt restructuring and I think that the fundamental importance of that cannot be exaggerated. For far longer than I’ve been involved with the business, there’s been a material uncertainty that the going concern statement and accounts and for 2020 that’s been relieved. The company is now in a much stabler position and the capital structure is more appropriate for the work we’re trying to do.

Cashflow, we were capital positive throughout the commodity price downturn. This time last year, we were looking at prices that we hadn’t seen for quite some time, and even through the considerable shock to the commodity price system, we were able to continue to generate cashflow. That’s a function of the cost structure of the business and how we operate the business.

So, I think those are the real highlights. It took a lot from the team to be able to deliver those, it was a challenging year for everyone and I just think that the staff and the team did such a good job achieving those highlights.

Q2: Andrew, the results seem very resilient given the difficult year that we’ve gone through?

A2: Absolutely right. It’s been a difficult year for the industry, the oil and gas industry as a whole, and clearly both with the collapse in the commodity prices through the front half of the year, and to much of the second off and, COVID creating the challenges it did.

It was just highlighted in many ways, it’s actually been a good year for us as a company, we increased production by 68% to an average production rate to 2,340 barrels of oil equivalent per day for the year. Even though we experienced a 42% decline in our average realised commodity prices, we generated revenue in the year of $24 million, which was about flat on last year.

The impact of the price declines can’t be overestimated because in 2020, the average realised price per BOE was just over $28 compared to an average in 2019 of over $48 per BOE.

So, that was a challenge and it was a tough environment and in that, at the half year, we elected to take an impairment of about $10 million, very much as a result of the impact of commodity pricing that we saw.

Saying all that, we maintained positive cash flow throughout the year, it was very much a product of a disciplined approach to cost management and we kept our operating expenditure at below $10, which was actually $9.67 per BOE and that was down from a figure of $13.78 cents in 2019. So, a real focus on costs and the flexibility within the business to allow us to do that.

Cash generation, normalised EBITDA was $6.6 million, again, we were pleased with that and we closed the year with cash on the balance sheet of $6 million.

So, all in all, we feel it was a pretty resilient performance, we’ve now got a debt free balance sheet, and it’s a good platform for this year’s activities.

Q3: As you say, production in 2020 increased over 2019 to 2,340 barrels of oil equivalent a day. Are there any key trends?

A3: Yes, it was up 68% from a base of 1,389 barrels of oil equivalent per day.

The key trends, in Romania, we added a third well onto production in February of last year, that was the M-1004 well, that allowed us to increase production through the year. After the end of the year, executed another well, the M-1008 well, during a fairly extensive continuing COVID locked down in Romania and that is also now in production. We have to remember these are shallow gas wells so there is a natural depletion and therefore they do need to be managed and you need to manage the field and production quite actively.

In Tunisia, production has been fairly steady throughout the year, we did see a slight reduction in the fourth quarter, as a result of workovers that we’d planned, that were delayed due to inability to get technicians into the country because of restrictions as a result of COVID and quarantining periods on either side. So, that did have a slight impact at the end of the year but that’s now completed and we should expect that to flow through in the coming year.

Q4: Jeffrey, just back to you, what will you do in Moftinu to maintain production?

A4: It’s a good question, Andrew alluded to the fact that wells decline so we now think that on the Moftinu field, we have the wells that we need, we have one other location that we have identified but it looks, right now, like we can manage the field, manage the production of the field with the existing wells.

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So, what we do now is we manage the production, we make sure that we’re producing as efficiently as possible from the field and later on this year, we’ll be putting compression in and that will help keep the production stable and increased production.

Really the next step is to find another Moftinu, I’ve always said this business is a business where we repeat the success on Moftinu on other fields. The block in Romania is 3000 square kilometres so it’s a very, very large chunk of land and we think there’s lots of these Moftinu’s scattered around.

So, the next event is to drill the Sancrai-1  exploration well, it’s an exploration well, it’s a near prospect exploration well, and we hope that that would deliver the next Moftinu and we could continue to grow like that.

The path is twofold now, maintaining production efficiently in Moftinu and then increasing by finding another Moftinu-like field.

Q5: Now, Andrew also mentioned the production in Tunisia seem stable? What can you do to increase production there?

A5: Production in Tunisia is stable and that’s the great thing about our Tunisian assets is that sort of production has been stable for a long time.

What we need to do now is we need to apply capital to make that production more efficient and to grow it and so we have plans to install pumps into the Sabria field and this is a very large field with lots of oil in place. We have our recent reserve report showed 455 million barrels originally in place with very, very low recovery factors  and so putting pumps into the field will allow us to produce more oil out of that field, existing oil. So, that’s really the thing we’re going to do this year. In our southern fields, we’re going to do the same thing, work over wells, put pumps in, pretty much just keep the tune up high and that will increase in production for us.

So, without spending a lot of capital, we will work on these fields to increase production, primarily by putting pumps in and making sure the wells are working efficiently.

Q6: You mentioned your reserves, you’ve recently updated your reserves report, haven’t you?

A6: We update our reserves annually, we have an independent reserve engineer do those reserves for us so they take a look at the reserves and they give us an independent opinion. This year Gaffney Cline and Associates was our reserve engineer and, in our results, we provide the information that Gaffney Cline provides for us.

So, this year, yes, we’ve managed to increase our proved reserves, our 1P reserves, by 101%, our 2P reserves have gone down slightly by 9% and that that’s a function of converting 2P reserves into 1P so upgrading the quality of the reserves, and that’s also a function of 2020 production.

So, those reserve numbers are all in our results, we’re quite proud to do that every year and I would note that Gaffney Cline also gives a net present value of those reserves and this year, the net present value of our 2P reserves was $73 million after tax at a discount rate of 10%. Now that’s roughly the equivalent of about £53 million and that’s 5p per share and so we’re currently trading at just above 3p per share where we have proved and probable reserves, reserves not resources, that are valued at 5p.

So, the reserve report does a couple of things, it shows independently what we have but it also puts a value to it and this is one of the reasons why we think this equity is so attractive and so valuable.

Q7: Just thinking about that, what do you see as the key attributes of Serinus Energy?

A7: We’re a producing oil company, we produce over 2000 barrels a day, we do that with a very low cost base and that means that the returns to cash returns to the business are high even in a fluctuating commodity market.

So, I think the strongest attribute of the business is that production and the cashflow, as Andrew said, normalised EBITDA of $6.6 million in 2020, even though our realised prices were down 42% so that cash generation is the strength of the business.

We also talked about the reserves. There’s lots more to be able to generate cash so the asset base is robust so whilst we’re generating cash now from a portion of that reserve base, we have more reserves to be able to generate cashflow from. So, I think that’s another attribute that is quite strong is a good solid asset base.

Then we have the financial flexibility to go pursue it now, we no longer have any material uncertainty on our going concerns so the business is financially very strong and we can allocate that operating cashflow to things like the Sancrai well in Romania or to the pumps in Tunisia where we can grow the business with our organically generated cashflow.

So, I think the attributes are the strength of the cashflow, the low cost ability to produce and the ability to take that financial flexibility and apply it to a large asset base.

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