Serica Energy Plc

Serica Energy Plc (LON: SQZ) is a United Kingdom-based Oil and Gas Company, with exploration and development activities based in the United Kingdom, Ireland, Namibia and Morocco, and economic interest in an oilfield offshore Norway.

Investment Highlights - Serica Energy Plc – Hold at GBX 99.43

• The Company is looking for the commencement of production at Rhum R3 well, which will significantly increase the production volume.
• In the last one month, the Company delivered a decent return of ~ 7.88% and delivered higher returns compared to the benchmark Index (FTSE-AIM Index).
• As per valuation metrics, EV/Sales and EV/EBITDA multiples of the Serica Energy Plc are currently lower as compared to the corresponding multiples of the Oil & Gas industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is supporting an upside move (around 42 level), which means the stock price could increase in the short term.

Key Risks

• The ongoing impacts of the Covid-19 mayhem would continue to create a challenging and volatile trading environment.
• The performance is also exposed to exchange rate fluctuations, technological changes, and geopolitical tensions.

Operational Update (released on 12 October 2020)

• The Company commenced the offshore operations, with the preparation to begin production from Rhum R3 well.
• The Company installed first Columbus subsea equipment successfully, and the first drill is expected in the second half of 2021.
• Serica Energy witnessed an improvement in gas prices, and production or operations remained unaffected from covid-19 interruptions.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company, with the commencement of production at R3 Intervention project and Columbus development, is entering into an exciting period of adding value to operations. These developments will add production volumes and bring diversity to the portfolio. The Company has a strong net production level and is further benefited by improved gas prices. The Company though faced some complexities related to remote installations due to covid-19 pandemic. Overall, the Company has a robust balance sheet with decent cash reserves and no debt to tackle the uncertain period and expand the portfolio further. The stock made a 52-week low and high of GBX 61.30 and GBX 142.82, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for Serica Energy Plc at the current price of GBX 99.43 (as on 2 November 2020, before the market close at 8:23 AM GMT) and will recommend fresh buying at the right time.

Westmount Energy Ltd

Westmount Energy Ltd (LON: WTE) is an AIM-listed Company, managing as an energy investment firm. The Company’s strategy is to invest in and provide capital to small and medium-sized enterprises from the oil and gas industry.

Investment Highlights - Westmount Energy Ltd – Expensive at GBX 20.34

• The Company has shown a significant decline in the financial performance, with the loss after tax, reflecting the impact of the covid-19 crisis on fair value gains on financial assets.
• As per valuation metrics, Price/Earnings and Price/Book Value multiples of the Westmount Energy Ltd are currently higher as compared to the corresponding multiples of the Oil & Gas industry, reflecting overstretched valuations.
• The Company’s Return on Equity remained negative 11.5% for H1 FY2020, stood significantly lower than the industry median of 6.3% and continue to decline since FY2018.
• From the technical standpoint, 14-day RSI is in the overbought zone and supporting downward movement (around 71 level), which means the stock price could decline in the short term.

Key Risks

• The Company’s investment activities are exposed to financial risks, market risks, liquidity risk and credit risk.
• The Company’s financials are impacted by the covid-19 pandemic, as it impacted the operational performance of investee companies.

Financial & Operational Highlights – FY2020 (30 June 2020) (released on 30 October 2020)

(Source: Annual Report, Company Website)

• For the financial year 2020, the Company did not generate revenue, while profitability margins remained in the negative zone, due to higher administrative expenses and lower net fair value gains.
• The Company made supplementary investments in Guyana-Suriname Basin, and commencement of ExxonMobil operated multi-well project.
• The Company raised £5.57 million for additional investment in Cataleya Energy Corporation.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a decline in financial performance in the financial year 2020. The Company is in the development stage and hence rely on grants and cash balances to carry on all the business activities, and the bottom-line performance has declined, as operating expenses are not managed efficiently, and the profitability margins remained in the negative zone for the period. WTE has a strong cash balance and is opportunistic on the deployment of capital in the Guyana-Suriname Basin. Presently, the Company is trading near the 52-week high, raising doubts at its upside potential at the current price level. The stock made a 52-week low and high of GBX 6.70 and GBX 23.01, respectively.

Based on the factors as highlighted above, we believe the stock of Westmount Energy Ltd is “Expensive” at the current price of GBX 20.34 (as on 2 November 2020, before the market close at 8:52 AM GMT), with support from few catalysts needs to be evaluated at a later stage such as the outcome of drilling operations coming shortly.

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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