SERICA ENERGY PLC
2019
ANNUAL REPORT AND ACCOUNTS
Company Number: 5450950
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EXECUTIVE CHAIRMAN’S STATEMENT
Dear Shareholder
I am writing to you at an extraordinary time and a difficult time for many people,
affecting not only personal lives and business in general but also the oil and gas industry
in particular. Under these circumstances the combination of factors facing our industry
are unprecedented.
I am, however, glad to be able to report that Serica is in robust financial health with
strong finances, strong production levels and no borrowings or unfunded liabilities. We
have taken all the steps that we can to keep our employees and contractors, essential to
playing our part in maintaining UK energy supplies, safe and protected during the
current COVID-19 outbreak. Due to their efforts and with our strong finances we are well
placed to weather the current storms and also to take on the challenges and
opportunities ahead.
Last year saw a transformation of Serica’s business. Group operating profit for 2019 of
£88 million after depreciation but before provision for taxes represents an 11-fold
increase on prior year. This was achieved notwithstanding UK gas prices weakening over
the period with the average price significantly lower than that of the previous year. We
ended 2019 with £102 million net cash and no debt which puts us in a strong position as
we enter an uncertain period for the industry.
Although we are facing unprecedented challenges, Serica is very much open for
business, particularly as the industry repositions itself in a changing world. Our financial
strength has resulted from the cautious approach which we took during the past year to
developing new business opportunities and from efficiencies which our offshore teams
introduced to operations. Our approach is fully focused on value and on managing the
risks associated with the business, not only technical risk and price risk but also political
risk as the fundamentals of the business change and we enter a world of both surpluses
and energy transition.
With these risks very much in mind the Erskine and the Bruce, Keith and Rhum
transactions were constructed as partnership deals with the vendors. This structuring
has brought very material financial and risk-sharing benefit, not only to Serica but also
to the counterparties. It has simultaneously strengthened and protected Serica’s
finances. The arrangements have enabled us to successfully reduce unit operating costs
materially, whilst, at the same time extending the economic life of remaining reserves
and related infrastructure and to do so in a way which preserves Serica’s financial
capability and our ability to perform in downturns such as the one we are currently
witnessing. It has been a win-win experience for not only Serica’s shareholders but also
to the benefit of the original owners of the assets with whom we share our performance
and I hope provides a template for future transactions.
Over the past year we have indicated that it would be the Board’s intention to commence
dividend payments once the Company had built up sufficient cushion to absorb knocks
and build on opportunities that both inevitably come in our industry. We were not
anticipating the perfect storm of a virus-induced collapse in demand occurring
simultaneously with a new supply war amongst major producers but, due to the strength
of the Company’s underlying financial position, I am pleased nevertheless to be able to
announce our maiden dividend even in the midst of such major uncertainties.
In determining the level of the dividend we are mindful of the uncertain world we face.
UK gas prices are currently at a level not seen for well over a decade and oil prices
reflect the current major oversupply and collapse in demand. The virus-impacted world
is a new phenomenon which renders most expert evaluations for forward prices subject
to even greater unpredictability. We are therefore recommending commencing dividends
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at what we feel is a prudent level of 3 pence per share. This will cost the Company £8
million but it is the Board’s view that, with significant cash balances at year end, no
borrowings or major commitments, strong ongoing production and flexibility in
controlling forward budgets, we are in a very strong position to commence a dividend
payment and to both weather the current storms and seek new opportunities.
In the Chief Executive’s report Mitch will be reporting on decisions we are taking to
control costs and retain financial flexibility and decisions we are taking in respect of our
current projects and forward expenditure profile. These include potentially rescheduling
investment when we feel there would be greater economic return from deferral. We
shall, of course, be keeping a flexible approach and a close eye on events over the
coming months as we emerge from the current crisis and reposition our forward
programme in the light of the then better-known facts.
Last year we also talked about our intention to seek new acquisition opportunities to add
further value by building on operating efficiencies, reducing cost, exploiting synergies
and managing risk. During the course of the year we made proposals in a number of
initiatives but did so with a cautious approach and an eye on the risk/reward balance.
We were not able to identify an opportunity which met the counterparties’ expectations
in respect of both value and risk when set against what we felt was a very uncertain
outlook for commodity prices. In the current crisis facing the industry we feel our
caution in this respect has been beneficial and has had the effect of strengthening the
Company’s position.
However, our objectives remain the same and we will continue to seek acquisition
opportunities to build upon the solid base we have established but we will do so with risk
and shareholder value firmly in mind. Our business model looks more to combining
corporate capabilities and strengths with others to add value, blending Serica’s low cost
base, flexibility and operating capabilities with assets which no longer fit the objectives
of others. If the current turmoil in the markets continues and major energy and utility
companies have to refocus their businesses to meet the longer-term transition to new
sources of energy we feel that there will be increasing emphasis on asset consolidation in
which Serica would hope to play its part.
Finally, a word on the way we go about our activities. Serica is one of a leading group of
companies producing oil and gas from the North Sea. Our operations currently supply
about 5% of UK offshore gas production to the UK economy. We endeavour to produce
these reserves with full focus on reducing our environmental footprint where we can and
with the utmost attention to the health and safety of our personnel. These are topmost
amongst our priorities and are of paramount and particular importance.
They are especially important during the current period of restrictions placed on staff
movements and work practices caused by the pandemic outbreak. Our onshore and
offshore teams have weathered storms, both physical, as in the big offshore storms this
February, and operational, as in tackling the measures required to counter the
pandemic. That they have been able to take on both in quick succession demonstrates
the skills and commitment that they bring to the work that they do. Both I and the
Board and, I am sure, shareholders would like to thank them for this and for the success
that they have brought to the Company last year.
As the Company progresses so we look to expand diversity and complementary skills on
the Board. We are delighted that Kate Coppinger, who until recently was Managing
Director, Oil & Gas and Chemicals at Standard Chartered Bank, has accepted an
invitation to join Serica’s Board as a Non-Executive Director with immediate effect. Kate
brings considerable knowledge to the Board on upstream M&A strategies and we
welcome her as a new member.
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The immediate future for industry looks uncertain as I write but with uncertainty comes
opportunity as the industry moves forward and Serica is well placed to take advantage of
those opportunities.
Tony Craven Walker
Chairman
22 April 2020
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STRATEGIC REPORT
The following Strategic Report of the operations and financial results of Serica Energy plc
(“Serica”) and its subsidiaries (the “Group”) should be read in conjunction with Serica’s
consolidated financial statements for the year ended 31 December 2019.
References to the “Company” include Serica and its subsidiaries where relevant. All
figures are reported in GB Sterling (“£”) unless otherwise stated. With effect from 1
January 2019, the Group’s results have been reported in £ with prior period comparative
information converted from US$ and restated in £.
The Company is subject to the regulatory requirements of AIM, a market of the London
Stock Exchange in the United Kingdom. Although the Company delisted from the Toronto
Stock Exchange (“TSX”) in March 2015, the Company is a “designated foreign issuer” as
that term is defined under Canadian National Instrument 71-102 - Continuous Disclosure
and Other Exemptions Relating to Foreign Issuers.
Serica is an independent oil and gas company with production, development and
exploration interests in the UK Continental Shelf and exploration interests in Namibia.
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CEO’s REVIEW
2019 was a year of outstanding performance for Serica with net production totalling an
average of 30,000 boe/d and operating profit of £87.7 million. In our first full year of
operatorship of the Bruce, Keith and Rhum (“BKR”) fields we have increased the net
production from these assets to 27,300 boe/d (compared to 24,800 boe/d in 2018).
Erskine production has been strong and net Serica production averaged 2,700 boe/d
(compared to 650 boe/d in 2018).
With gross operated production from the BKR fields of 41,000 boe/d, Serica has
established itself as one of the leading independent UKCS operating companies and has
assembled a talented and motivated operating team. This focused team has succeeded
in reducing our operating costs to US$12.6 per boe. This compares to approximately
US$18 per boe for full year 2018. This reduction from the prior year level reflected both
reduced costs and higher production rates.
The continued reduction in operating costs is one of our key objectives in seeking to
extend the life of our operated assets. Serica has commissioned a new Competent
Person’s Report (“CPR”) effective 1 January 2020 and this has identified several
upgrades to net 2P Reserves estimates particularly due to the successful efforts to
extend the prognosed Cessation of Production (“COP”) on Bruce. The latest CPR
estimates Bruce COP (2P case) to occur in 2028 (compared to 2026 in the previous
CPR). Our net 2P reserves stood at 68.8mmboe at 1 January 2019 and our 2019 net
production was 11.0mmboe but due to these upgrades, after reclassification and
revisions our net 2P reserves at 1 January 2020 stand at 62.3mmboe.
The extensive infrastructure associated with the Bruce field is particularly valuable and
the utilisation of existing infrastructure is a key part of the UK Government’s North Sea
policy. This infrastructure offers significant capacity for third party tiebacks and Serica is
already engaged in preliminary discussions with potential third-party shippers. The
reduction in operating cost will help attract further business. We are also working on
projects to increase the throughput of hydrocarbons across the Bruce platform. There
are two major projects that are currently ongoing:
1. The Rhum field currently produces from two wells (R1 and R2) which are subsea tie-
backs to the Bruce platform. A third well (R3) was drilled when the field was
originally developed but was not put into production due to mechanical problems with
equipment in the well. Serica is working on a project to bring R3 into production for
the first time, with the aim of increasing production and overall recovery from the
Rhum reservoir. Work continues on preparations for the Rhum R3 intervention
project and the timing is under review.
2. In December 2019, Serica Energy (UK) Limited, received an out of round award of a
100% interest in the UK petroleum licence P2501, blocks 3/24c and 3/29c. These are
located in the area adjacent to the Serica operated Rhum field. The award contains
the HPHT North Eigg and South Eigg prospects and Serica has committed to drilling
an exploration well on the North Eigg prospect within 3 years. In the event of a
discovery on these blocks, Serica will investigate options for HPHT subsea tie-backs
to the Bruce facilities and topsides modifications to ensure a low cost, efficient design
to enable early development, maximise recovery and optimise production. Serica
anticipates that there will be ample capacity within the Bruce facilities to handle
North and South Eigg production.
In short, Bruce is open for business in order to maximise economic recovery from the
area as a whole and therefore further extend the life of the existing assets.
After exploring in Ireland for over twelve years, Serica formally relinquished its three
offshore licences in September 2019. Although Serica intends to continue covering the
full life cycle of exploration, development and production, Irish opportunities have been
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and are likely to continue to be much longer-term and the expense of maintaining the
licences will be redirected to lower risk, nearer term opportunities in the Company’s core
areas elsewhere.
2020 has already presented a number of new challenges to the Company. During a
Bruce platform inspection in late January 2020, the condition of an unused seawater
return caisson on the platform was observed to have deteriorated. This caisson had been
taken out of service in 2009. Production through the Bruce facility was halted while the
problem was fully investigated and a subsequent underwater inspection determined that
the unused caisson had parted below the water line. Our expert teams onshore and
offshore successfully designed and executed a programme of repairs using a Remotely
Operated Vehicle (“ROV”) launched from a Diving Support Vessel (“DSV”). This work was
performed during some of the most difficult weather conditions experienced in the North
Sea for several years. Together with selected contractors we completed the programme
of work to secure the caisson safely and with no environmental impact.
The successful conclusion of this work demonstrates the tremendous operating capability
of our team. The work will have no negative impact on future production rates or on the
ultimate hydrocarbon recovery from the Bruce, Keith and Rhum fields.
More recently the twin impacts of COVID-19 and the fall in commodity prices have
presented new challenges. The Bruce platform is responsible for around 5% of the UK’s
gas production and it is important to maintain this production. The country needs this
gas to create the power needed to allow the NHS and critical infrastructure to function.
Therefore, most of our offshore team are designated as ‘key workers’ and we continue to
work with the government and industry bodies to protect our staff and ensure that all
precautions are in place to make their working environment safe
Serica has experienced no interruption in production due to the COVID-19 outbreak. We
have strict travel policies in place and have also reduced manning levels on the Bruce
platform in order to reduce the risk of an outbreak, allow social distancing offshore and
provide isolation areas for suspected cases.
Serica has no borrowings, limited decommissioning liabilities and healthy cash reserves.
Our operating costs remain low and so we are well-positioned to cope with commodity
price variations. However, in light of recent commodity price weakness, a thorough
evaluation of operating costs has been undertaken. Despite the additional costs
associated with the Bruce caisson repairs it has been possible to identify significant cost
savings associated with ongoing operations. Reductions in 2020 absolute operating costs
of 10% have been identified to further those achieved in 2019 and are being
implemented.
Along with other operators we have also reviewed our capital expenditure for 2020. The
Columbus development requires the availability of the Arran to Shearwater pipeline but
the Arran partners have chosen to delay that project due to the current business
environment. The Columbus partners remain committed to the project but are reviewing
the drilling timing for the development well due to this unexpected delay to the Arran to
Shearwater pipeline. This would defer approximately £11.5 million of net CAPEX from
2020 to 2021. The timing of the R3 project is also under review and project execution
may be deferred until 2021. The North Eigg exploration well is still scheduled for 2021
(no significant CAPEX is expected on North Eigg in 2020).
As a modern, dynamic energy company operating in a rapidly evolving energy landscape
Serica recognises the need to lead a responsible business where our team feels
empowered to address environmental and social challenges. We recognise these
challenges and are working to develop a truly sustainable business which contributes to
fulfilling the UK’s energy demands whilst adding value for our shareholders and
stakeholders. I am delighted therefore, to announce the publication today of our first
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ever Environment Social and Governance (“ESG”) Report which can be found at
www.serica-energy.com
Mitch Flegg
Chief Executive Officer
22 April 2020
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REVIEW OF OPERATIONS
Production
Northern North Sea: Bruce Field – Blocks 9/8a, 9/9b and 9/9c, Serica 98% and operator
Serica completed the acquisition of its 98% interest in the Bruce field on 30 November
2018 and took over as operator from BP. The Bruce facilities consist of three bridge-
linked platforms, wells, pipelines and subsea infrastructure. The platforms contain living
quarters for up to 168 people, reception, compression, power generation, processing and
export facilities and a drilling platform that is currently mothballed. There is also the
subsea Western Area Development (“WAD”) that produces from the edges of the Bruce
area. Serica is responsible for actively maintaining, monitoring, repairing and optimising
all equipment, wells and associated pipelines.
The Bruce field is produced through a combination of platform wells and subsea wells
tied back to the platform, with a total of over 20 wells producing from multiple reservoirs
and compartments. Bruce production is predominantly gas, which is rich in NGL’s, plus
condensate. Gas is exported through the Frigg pipeline to the St Fergus terminal, where
it is separated into sales gas and NGL’s. Condensate is exported through the Forties
Pipeline System to Grangemouth where it is sold as Forties blend oil.
The offshore team is supported onshore from the Serica technical headquarters in
Aberdeen which has a live video link to the platform, streaming data and offering
seamless communication with the offshore crew.
Bruce field production in 2019 averaged in excess of 13,100 boe/d of exported oil and
gas net to Serica (2018 proforma – 12,000 boe/d). Production reliability was 93% with a
short, planned maintenance period that overlapped the annual Forties Pipeline System
integrity testing. This compares to 89% achieved during 2018 and demonstrates the
impact that Serica’s operatorship has had on facility uptime.
Following a successful campaign in 2018 to repair three conductors (pipes connecting the
wells from the seabed to the platform), four more sets of conductor clamps were
installed in the August planned outage to protect against future well shut-ins. An
additional diving campaign successfully reinstated a second umbilical to the WAD
manifold, increasing reliability from the subsea wells.
During 2019 three key activities in understanding the future production potential of
Bruce were undertaken. A successful trial of lower pressures at the well heads to
facilitate increased gas production, the recommissioning of the test separator on the
compression platform which increases the ability to undertake well performance tests
and a well by well evaluation building on the first two activities. The well by well review
was designed to identify the production upsides achievable from the planned future well
intervention campaigns with the aim of enhancing and extending existing field
production profiles.
Serica’s 98% field interest and focus on the Bruce asset means that it can identify and
implement changes that improve performance swiftly and efficiently. Further to our
previous success in integrating nine individual IT systems, we have continued to
streamline our IT and integrated additional elements of our management systems,
helping to reduce our IT costs by more than 30% overall.
We are also challenging the way things are done and reducing procedural complexity to
expedite work execution. Assets in the North Sea face a constant challenge to keep
metalwork painted so as to prevent corrosion. A comparison would be painting the Forth
bridge but 100 miles offshore. By tailoring our process to find the right coating, applied
in the right way, by the right people in 2019 we executed twice as much fabric
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maintenance (painting work) as was done in 2018, but for the same price. Having better
paint coating should reduce replacement and repair cost in future years.
The reduction of production outages on the Bruce platform has delivered more consistent
production volumes which, allied to effective cost control, has proved key in reducing
Group average operating costs to US$12.6 per boe, down from a proforma average of
US$18 per boe for 2018. This is also expected to contribute to the extension of field life.
The latest independent report by Lloyd’s Register estimated 2P reserves of 22.2 million
boe net to Serica as of 1 January 2020.
fully
In January 2020, during a Bruce platform inspection, the condition of an unused
seawater return caisson on the platform was observed to have deteriorated. This caisson
had been taken out of service in 2009. Production through the Bruce facility was halted
while the problem was
inspection
determined that the unused caisson had parted below the water line. Both the upper and
lower sections of the caisson were intact and engineering work to ensure that the
caisson was properly secured commenced. Work was successfully undertaken during the
following weeks and the caisson sections secured allowing production to restart on the 5
March 2020 considerably ahead of schedule despite some of the worst weather
conditions seen in the North Sea for years. It is expected that the remaining work will be
completed within 2020.
investigated. A subsequent underwater
Northern North Sea: Keith Field – Block 9/8a, Serica 100% and operator
Keith is a small oil field produced via one subsea well tied back to the Bruce facilities and
requires very little maintenance. Keith produces at a relatively low rate but contributes
to oil export from Bruce at minimal additional cost. Average Keith production in 2019
was approximately 450 boe/d (2018 proforma – 800 boe/d). It is intended to keep the
well in production as long as economically viable.
The latest independent estimate of reserves by Lloyd’s Register estimated 2P reserves of
453,000 boe net to Serica as of 1 January 2020.
Northern North Sea: Rhum Field – Blocks 3/29a, Serica 50% and operator
The Rhum field is a gas condensate field producing from two subsea wells, R1 and R2,
tied into the Bruce facilities through a 44km pipeline. Rhum production is separated into
gas and condensate and exported to St Fergus and Grangemouth respectively along with
Bruce and Keith production. Combined the wells are capable of producing at combined
rates approaching 30,000 boe/d (gross) each of which some 95% is gas. The field has
produced at relatively constant rates with limited reservoir decline evident through the
year. Average Rhum production from the two wells in 2019 was 13,775 boe/d net to
Serica.
A third well, R3, requires intervention work before it can be brought on production. In 1H
2019, investigative work to assess the condition of the well and associated control
systems was successfully carried out and the data incorporated into planning for the R3
intervention. Meanwhile, as production from the R1 and R2 wells has continued at higher
than anticipated levels this has left less spare processing capacity available in the near
term for additional production volumes from R3. The intention remains to carry out the
work this year but project execution may be deferred until 2021.
The latest independent estimate of reserves by Lloyd’s Register estimated 2P reserves of
28.7 million boe net to Serica as of 1 January 2020.
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Central North Sea: Erskine Field – Blocks 23/26a (Area B) and 23/26b (Area B), Serica
18%
Serica holds a non-operated interest in Erskine, a gas condensate field located in the UK
Central North Sea. Serica’s co-venturers are Ithaca Energy 50% (operator) and Chrysaor
32%. Erskine fluids are processed and exported via the Lomond platform, which is 100%
owned and operated by Chrysaor. Serica provides a secondee to Lomond as part of the
offshore management team.
The Erskine field is produced through five wells from the Erskine normally unattended
installation, transported to Lomond via a multiphase pipeline and processed on the
Lomond platform. Then condensate is exported down the Forties Pipeline System via the
CATS riser platform at Everest and gas is exported via the CATS pipeline to the terminal
at Teesside.
The field was returned to production in October 2018 after a 10-month shutdown to
install a section of new pipe to bypass recurring wax blockage on the condensate export
pipeline. A high frequency cleaning regime of the pipeline continues to be followed in
order to maintain the availability of the export route and improve overall export
reliability.
This has resulted in significant improvement in uptime: production efficiency in 2019 was
slightly above 80% compared with much lower efficiencies in recent years. The Erskine
production levels in 2019 averaged over 2,700 boe/d. This is the highest level since the
acquisition by Serica in 2015 without any new wells having been drilled in that time.
Works have also been carried out on the Erskine production module located on the
Lomond platform to rectify a long-standing compressor seal issue which had been the
second largest factor impacting on production after pipeline issues. The regular pigging
program on the new line has continued and no indications of wax build-up have been
seen. To minimise work offshore whilst coronavirus restrictions are required, the planned
full summer 2020 maintenance shut in will not take place but instead there will be some
shorter production interruptions for specific tasks as required.
An updated independent audit of the Erskine field by Lloyd’s Register confirmed
estimated 2P reserves of 4.1 million boe net to Serica as of 1 January 2020.
Development
Central North Sea: Columbus Development – Blocks 23/16f and 23/21a, Serica 50% and
operator
Serica is Columbus field operator with partners Tailwind Mistral Limited (25%) and
Waldorf Production Limited (25%). This gas condensate discovery is located in the
Eastern Central Graben, UK Central North Sea and the reservoir is located within the
Forties Sandstone.
In October 2018, OGA approved a Field Development Plan (“FDP”) for Columbus, which
included an expected peak production of 7,800 gross boe/day. The Columbus
development plan involves tying a single horizontal subsea well into a pipeline being laid
between the Arran field (which received development approval at a similar time to
Columbus) and the Shearwater platform, both operated by Shell. Arran and Columbus
fluids will combine in the new pipeline and be produced together through to the
Shearwater processing facilities, making use of an existing riser. The Columbus partners
will pay for the tie-in and compensate the Arran owners for some re-routing of the
pipeline but will not bear the capital cost of laying a new pipeline to Shearwater. Costs
will be recovered by Arran by way of a tariff on production through the pipeline.
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As soon as development approval was received, detailed well design began and long-lead
items started to be procured. Several of the key pieces of infrastructure will be
manufactured and installed by Shell, with Serica drilling and completing the long-reach
well targeting reservoir sands of Forties age.
Columbus timing is dependent on the Arran-Shearwater pipeline being tied into the
Shearwater platform. The Arran partners have chosen to delay this project due to the
current business environment, and so the start-up of the Columbus field is now expected
to be in late 2021.
The latest independent reserves audit, carried out by Lloyd’s Register, reported
Columbus 2P Reserves of 6.7 million boe net to Serica as of 1 January 2020.
Exploration
UK
North Eigg and South Eigg – Blocks 3/24c and 3/29c, Serica 100% and operator
In December 2019, Serica was awarded the licence containing the North Eigg and South
Eigg prospects as part of an out of round application. The work programme is to
reprocess seismic and drill an exploration well within the initial three years. The North
Eigg prospect has been high-graded for drilling, being clearly visible on 3D seismic data
and sharing many similarities with the nearby Rhum field, operated by Serica.
Work has started on planning the exploration well, which will be high temperature and
high pressure. Pursuing this project is part of Serica’s strategy for the Bruce catchment
area. In the event of a commercial discovery, Serica would seek a fast track route to
develop the field potentially via a subsea tie-back to the Serica operated and 98% owned
Bruce facilities. As well as providing Serica with potentially significant additional
reserves, a tie-back to the Bruce platform would reduce unit operating costs and extend
the economic life of this strategic North Sea infrastructure.
Columbus West – Block 23/21b, Serica 50%, operator Summit Exploration and
Production
The Columbus West licence was awarded in the UK 30th Round and lies directly west of
Serica’s operated Columbus field. Serica has used its regional understanding to work
with its partner to aim to identify potential commercially attractive prospects. During
2019 seismic reprocessing was completed over the licence and technical interpretation of
the data carried out to help identify a potential drilling target. The prospects are
currently being screened and ranked and there will be a drill or drop decision by the end
of the initial term, October 2020.
Skerryvore and Ruvaal– Blocks 30/12c (part), 30/13c (split), 30/17h, 30/18c and 30/19c
(part), Serica 20%, operator Parkmead
The Skerryvore and Ruvaal prospects lie in the Central North Sea, 60km south of the
Erskine field. Over 500km2 of 3D seismic data has been purchased over the licence
areas. The seismic is being reprocessed and will then be interpreted and a drill or drop
decision made on the prospects by the end of the initial three-year term in September
2021.
Central North Sea: Rowallan Prospect - Block 22/19c, Serica 15%, operator ENI UK
In April 2019, the ENI UK-operated Rowallan exploration well 22/19c-7 reached a total
depth of 4,641 metres and was plugged and abandoned. Serica was fully carried and
paid no costs towards the drilling of the well which encountered a 182 metre section of
sandstone and shale but was not found to be hydrocarbon bearing. This is thought to be
due to a lack of sealing rock to form a hydrocarbon trap. The well was drilled on time
and on budget.
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The partnership reviewed the results of 22/19c-7 and determined that the remaining
prospects identified on the block had similar seal risks and made the decision to
relinquish the licence. The blocks to the south of Rowallan, 22/24g and 22/25f have also
been relinquished.
Namibia
Luderitz Basin: Blocks 2512A, 2513A, 2513B and 2612A (part), Serica 85% and operator
Serica is in discussion with the Namibia Ministry of Mines and Energy on new licence
terms to extend its interest in the Luderitz Basin blocks. It is anticipated that these
discussions will be completed in the near term allowing Serica and its partners to
progress work on the licence. During 2019, Serica incorporated recent drilling results
offshore Namibia to build on its geological understanding of the region. These results
have provided evidence towards a regional seal rock that would trap migrating
hydrocarbons, thus benefitting deeper prospects, some of which have been identified in
Serica’s licence area. Serica understands that further drilling in Namibia is currently
planned by other operators, which will provide more data points and hopefully
strengthen the chance of success of Serica’s prospects.
Ireland
Frontier Exploration Licences 1/09, 4/13, 1/06 Serica 100%
After exploring in Ireland for over twelve years, Serica formally relinquished its three
offshore licences in September 2019. All work done to date and related samples and
data have been provided to the Petroleum Affairs Division in the Department of
Communications, Climate Action and Environment.
Although Serica intends to continue covering the full life cycle of exploration,
development and production, Irish opportunities have been and are likely to continue to
be much longer-term and the expense of maintaining the licences will be redirected to
lower risk, nearer term opportunities in the Company’s core areas elsewhere.
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Group Proved plus Probable Reserves (“2P”)
2P Reserves at 31 December 2018
2019 production
Fuel in operation
Revisions
2P Reserves at 31 December 2019
Oil
mmbbl
14.4
(1.3)
1.7
14.8
Gas
bcf
Total oil and gas
mmboe
326.8
(49.1)
(28.0)
35.0
284.7
68.8
62.3
Proved and Probable reserves as at 31 December 2018 were based on independent
reports prepared by consultants Netherland, Sewell & Associates (Erskine and Columbus)
and Ryder Scott (Bruce, Keith and Rhum) in accordance with the reserve definitions of
the Canadian Oil and Gas Evaluation Handbook.
Rather than continue with two overseas reserves auditors, Serica changed the reserves
auditor to UK-based Lloyd’s Register. Accordingly, Group Proved and Probable reserves
as at 31 December 2019 are based on the independent report prepared by Lloyd’s
Register in accordance with the reserve definitions guidelines defined in SPE Petroleum
Resources Management System 2018 (“PRMS 2018”).
Gas reserves at 31 December 2018 and 2019 have been converted to barrels of oil
equivalent using a factor of 6.0 bcf per mmboe for reporting and comparison purposes.
Actual calorific value of produced gas from individual fields may result in a different
conversion factor.
Fuel in Operation refers to gas used to generate power required to run the production
and processing facilities; this gas is produced from the reservoir but removed before the
production stream is sold and hence does not form part of the revenue stream.
Guidelines in the two reporting standards used to prepare the figures in the table above
differ, with FIO volumes being included in the totals at the end of 2018 but not at the
end of 2019.
As summarised above, aggregate reserves revisions result from several factors, including
field production performance in the time between audits and prevailing commodity
prices, which are used for the economic evaluation. Both of these may result in changes
to production profile curtailment and decommissioning.
- 14 -
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Northern North
Sea
Central North Sea
LICENCE HOLDINGS
The following table summarises the Group's licences as at 31 December 2019.
Licence
UK
Block(s)
Description
Role
%
Location
P.090
9/9a BRUCE
Bruce Field Production
Operator 99%
P.090
P.198
9/9a Rest of Block excluding
Bruce (REST)
3/29a (ALL)
Development
Operator 98%
Rhum Field Production
Operator 50%
P.209
9/8a BRUCE
Bruce Field Production
Operator 98%
P.209
9/8a KEITH
Keith Field Production
Operator 100%
P.209
9/8a Rest of Block excluding
Bruce and Keith (REST)
Development
Operator 98%
P.276
9/9b BRUCE
Bruce Field Production
Operator 98%
P.276
9/9c (ALL)
Bruce Field Production
Operator 98%
P.276
P.566
9/9b Rest of Block excluding
Bruce Unit (REST)
3/29b (ALL)
P.975
3/24b (ALL)
P.975
3/29d (ALL)
P101
23/21a Columbus
P1314
23/16f
P57
23/26a
Development
Operator 98%
Operator 100%
Rhum Field non-unitised
production
Rhum non-unitised
production
Rhum non-unitised
production
Columbus Development Area Operator 50%
Operator 100%
Operator 100%
Columbus Development Area Operator 50%
Central North Sea
Erskine Field - Production
P264
23/26b
Erskine Field - Production
P2385
22/24g, 22/25f
P2388
23/21b
Exploration
Exploration
P2400
30/12c, 30/13c, 30/17h, 30/18c
Exploration
P2402
30/19c
P2501
3/24c,3/29c
Exploration
Exploration
Namibia
20%
18%
18%
Non-
operator
Non-
operator
Non-
operator
Non-
operator
Non-
operator
Non-
operator
Operator 100%
50%
20%
20%
Central North Sea
Central North Sea
Central North Sea
Central North Sea
Central North Sea
Central North Sea
Northern North
Sea
0047
2512A, 2513A, 2513B, 2612A
(part)
Exploration
Operator
85%
Luderitz Basin
- 15 -
FINANCIAL REVIEW
With effect from 1 January 2019, following the change in functional and presentational
currency (see note 3), the Group and Company’s results are reported in £ with prior
period comparative information converted from US$ and restated in £. This change
follows completion of the major BKR acquisitions in late 2018 which brought significant
additional volumes of UK gas for which sales are denominated in £ and costs which are
settled almost entirely in £.
Revenues and costs arising from the BKR acquisitions have been included from 30
November 2018 onwards. Serica’s share of net income from the BKR fields from the
effective date of the acquisitions, 1 January 2018, until 30 November was deducted from
the consideration paid at completion rather than included within the 2018 income
statement. Further, a significant bargain gain on the acquisitions of £33.7 million has
been booked in 2018.
In addition, the Erskine field only contributed two and one-half months of net income
during 2018 whilst an export line blockage was resolved. Production restarted in late
October 2018 with steady production since then.
2019 RESULTS
Serica is reporting results incorporating the first full year of contribution from its BKR
assets following completion of the four acquisitions late in 2018. These show healthy
levels of production, profit and cash generation, despite a fall-off in gas prices during the
year, supported by reduced levels of operating cost per boe.
In addition to a strong operational performance, the benefits of the BKR deal structures
can be seen through the closing 2019 balance sheet. BKR-related deal liabilities which
stood at £254.8 million at year end 2018 were reduced to £155.5 million at year end
2019. The gas prepayment facility arranged with BP, totalling £16 million including
interest, was fully paid off during the year leaving the Company with no debt at 31
December 2019. This is also after payment of 50% of net cashflow due under BKR
agreements for 2019 leaving only two remaining years each at 40%.
Under the BKR deals, net cash flow sharing and certain other deferred payments vary in
line with actual net cash generated thus flexing with changes in commodity sales prices
and production volumes. This mitigated the impact of falls in gas prices last year. It
continues to mitigate the impact of the erratic oil and gas market conditions prevailing
so far this year as well as the recent six-week shut in of BKR for caisson repairs. Just as
Serica as buyer and BP, Total E&P and BHP as vendors shared the benefits through the
strong production and pricing periods during 2018 and 2019, the impact of recent cash
flow reductions is also shared by each party. Remaining payments due are expected to
be further reduced if the recent commodity price slump is sustained for a significant
period.
Overall, Serica generated a profit before taxation for 2019 of £108.8 million compared to
£39.5 million for 2018. After non-cash deferred tax provisions of £44.8 million (2018 -
£12.0 million release), profit for the year was £64.0 million compared to £51.5 million
for 2018.
Sales revenues
Total product sales volumes for the year comprised approximately 491.3 million therms
of gas, 1,567,100 lifted barrels of oil and 85,500 MT of NGLs. These generated total
2019 product sales revenue of £250.5 million (2018: £35.7 million) consisting of BKR
revenues of £216.6 million (2018: £26.6 million) and Erskine revenues of £33.9 million
(2018: £9.1 million). This represented average sales prices net of system fees of 31
pence per therm, US$61.4 per barrel and US$337 per tonne respectively giving an
- 16 -
approximate realised sales price for lifted volumes of US$30 per barrel of oil equivalent.
This is before gas price hedging gains detailed below.
Oil sales are booked as revenue when barrels are lifted and title is transferred whilst
movements in over/underlifts are charged/credited to cost of sales.
Gross profit
Gross profit for 2019 was £85.8 million compared to £20.0 million for 2018. Overall cost
of sales of £164.7 million compared to £15.7 million for 2018. This comprised £105.1
million of operating costs (2018 - £13.1 million) and £52.6 million of non-cash depletion
charges (2018 – £6.2 million). There was also a charge for the movement during the
year in oil stocks. Serica’s significant underlift position at the end of 2018, including an
oil allocation of 95,000 barrels from December BKR production, was reversed during
2019 leaving a small overlift position at year end 2019 and giving rise to a £7.0 million
charge within cost of sales (2018 - £3.6 million credit).
Operating costs include costs of production, processing, transportation and insurance.
Depletion charges are based upon the booked acquisition values for the BKR and Erskine
transactions allocated on a unit of production basis for the relevant period. Operating
costs of US$12.6 per boe compare to approximately US$18 per boe for full year 2018
calculated for comparative purposes on a proforma basis to include the BKR assets from
the effective acquisition date of 1 January 2018. This reduction from the prior year level
reflected both reduced costs and higher production rates.
Depletion charges per boe of £4.9 in 2019 are calculated on a unit of production basis
and reflected an increase in total booked proven and probable reserves. Operating costs
of £12.2 million and depletion charges of £1.7 million related to the Erskine field whilst
operating costs of £92.9 million and depletion charges of £50.9 million related to the
BKR fields.
Operating profit before net finance revenue, tax and transaction costs
Operating profit for 2019 was £87.7 million compared to £8.0 million for 2018. The
increase included gas price hedging gains (other income) on price puts and swaps of
£10.6 million (2018 - £1.6 million loss) comprising realised gains of £3.9 million
maturing in 2019 and unrealised gains of £6.7 million reflecting the estimated fair value
of further instruments held in respect of future periods. Following net impairments and
write-backs of E&E assets of £2.5 million in 2018 there were minor charges of £0.1
million in 2019. Administrative expenses of £6.0 million for 2019, up from £3.6 million
for 2018, reflected the additional resources required to support the much expanded
Serica organisation. Other expenses in 2019 comprised a foreign exchange loss of £1.0
million (2018 - £0.1 million gain) arising on £/US$ currency movements during the year
and share-based payments of £1.1 million for 2019 (2018 - £0.4 million). The operating
profit for 2018 included BKR transition costs of £8.8 million with no further such charges
in 2019.
Profit before taxation and profit for the year
Profit before taxation was £108.8 million (2018 – £39.5 million).
The 2019 profit before taxation includes a gain of £21.8 million arising following a
downwards revision of the fair value of the Balance Sheet financial liability relating to
consideration projected to be paid under the BKR agreements. The fair value of this
liability is re-assessed each financial period end and the most significant factors behind
the downward revision released to the Income Statement are lower realised gas pricing
on amounts paid in respect of 2019 and lower short-term gas prices used in the forecast
of 2020 Net Cash Flow payments.
The 2018 bargain purchase gain of £33.7 million represented the difference between fair
valuations of the BKR assets acquired and consideration paid or potentially payable
- 17 -
calculated in accordance with applicable accounting standards. In accordance with
accounting standards, the fair value was provisionally determined at year end 2018.
Adjustments to the provisional fair value assessments have been identified during the
current period. The net impact of the adjustments to the acquisition date balance sheet
is a reduction in the bargain purchase gain of £7.8 million. This comprises a combined
£3.0 million of revisions to the estimations of the consideration payable and of the
acquisition date fair value of inventory and trade and other payables, less a £10.8 million
adjustment to the estimation of the deferred tax liabilities arising at the acquisition date.
These final adjustments are reflected in the 2018 restated results.
Finance revenue of £0.6 million (2018 - £0.2 million) represented interest earned on
cash deposits. Finance costs of £1.3 million (2018 – £0.3 million) represented the
discount unwind on decommissioning provisions and interest payable on the gas
prepayment facility drawings.
A non-cash deferred tax charge of £44.8 million compared to a credit of £12.0 million for
2018. The prior year credit largely reflected the accelerated recognition of the Group’s
historic UK ring fenced tax losses based upon the significant increase in projected
income arising from completion of the BKR acquisitions. As the Company continues to
benefit from accumulated losses carried forward from previous years it is not currently
paying cash taxes. It is nonetheless required to make provision for deferred taxes in
recognition of future periods when all losses have been utilised and cash payments will
be made and this is reflected in the provision for 2019. Tax losses remaining at 31
December 2019 are expected to continue to shelter income from cash tax payments for
at least 2020 and potentially longer at current commodity prices.
Overall, this generated a profit for the year of £64.0 million compared to £51.5 million
for 2018.
BALANCE SHEET
The balance sheet at 31 December 2019 demonstrates Serica’s significant progress
through the year.
Exploration and evaluation assets showed a small increase from £3.2 million in 2018 to
£3.7 million in 2019 reflecting minor ongoing licence work in the UK and Namibia.
Property, plant and equipment decreased from £373.7 million to £325.4 million during
2019 principally reflecting depletion charges on oil and gas assets of £52.6 million (2018
- £6.2 million) offset by £4.5 million of Columbus asset additions and other minor asset
movements of £0.2 million.
The inventories balance of £4.7 million at 31 December 2019 (2018 – £4.3 million)
comprised materials and spare parts. Trade and other receivables decreased from £53.0
million in 2018 to £35.9 million in 2019 as the level of recoverables outstanding
following completion of the BKR transactions was reduced during 2019 and a significant
liquids underlift prior year balance of £6.7 million unwound during 2019. The current
2019 overlift position of £0.2 million is classified in liabilities. The 2019 balance includes
trade receivables of £20.9 million (2018 – £30.9 million), £10.9 million of recoverables
from JV partners (2018 – £5.9 million) and other receivables and prepayments of £4.1
million (2018 – £9.5 million).
The derivative financial asset of £6.9 million in 2019 (2018 - £0.1 million) represented
the fair value of gas price put options and swaps in place as at 31 December 2019
covering the period from 1 January 2020 to 31 December 2020. The year-end cash and
cash equivalent balances plus term deposits totalled £101.8 million (2018 – £43.1
million).
- 18 -
The reduction in current trade and other payables to £24.6 million at 31 December 2019
from £35.2 million in 2018 represents settlement during 2019 of amounts outstanding
following completion of the BKR acquisitions. Current provisions of £1.8 million (2018 –
£1.8 million) represent certain contingent liabilities related to savings in field operating
costs that may fall due under the Erskine acquisition agreement.
Financial liabilities of £45.4 million (2018 - £90.3 million) within current liabilities and
£110.1 million (2018 – £164.5 million) within non-current liabilities comprise remaining
amounts projected to be paid under the BKR agreements. The current element includes
amounts estimated to be payable under the BKR net cash flow sharing arrangements
during 2020 plus fixed amounts of US$10.0 million (2018 - US$5.0 million in current and
US$10.0 million in non-current financial liabilities) due to Total E&P also under the BKR
agreements. Current and non-current amounts due under the net cash flow sharing
arrangements are based on forward projections of production volumes and sales prices
with final liabilities ultimately calculated on production volumes and sales prices actually
achieved in the respective periods. Non-current financial liabilities also include estimated
deferred consideration in respect of Rhum field performance and BKR decommissioning.
Non-current provisions of £22.6 million have been made in respect of decommissioning
liabilities for the Bruce and Keith interests acquired from Marubeni (2018 - £22.6
million). These were not subject to the same contingent and deferred consideration
arrangements as those field interests acquired from BP, Total E&P and BHP respectively
under which decommissioning liabilities were retained by the vendors with Serica liable
to pay deferred consideration equivalent to 30% of the actual costs of decommissioning
net of tax recovered by them. No provision is included for decommissioning liabilities
related to the Erskine facilities as these are retained by BP up to a cap which is not
projected to be exceeded.
Overall net assets have increased from £131.8 million in 2018 to £198.0 million in 2019.
The increase in share capital from £180.3 million to £181.4 million arose from shares
issued following the exercise of share options and shares issued under an employee
share scheme, whilst the increase in other reserve from £16.7 million to £17.8 million
arose from share-based payments related to share option awards.
CASH BALANCES AND FUTURE COMMITMENTS
Current cash position and price hedging
At 31 December 2019 the Group held cash and cash equivalents of £101.8 million (2018
– £42.1 million) with no term deposits (2018 – £1.0 million). Of this total, £12.1 million
was held in a restricted account as security against letters of credit issued in respect of
certain decommissioning liabilities. The main element of the increase was Serica’s
retained share of the strong net operating cash flows from the Company’s producing
interests. These amounts were offset by cash payments totalling £57.3 million (2018 –
net receipts of £22.2 million) under the BKR acquisition agreements, primarily monthly
payments to BP, Total E&P and BHP respectively, of 50% of net operating cash flows
derived from the Bruce, Keith and, in the case of BP, Rhum interests acquired from those
companies. Amounts due under the net cash flow sharing arrangements fall to 40% for
2020/2021 and zero thereafter. The increase was also generated after full repayment of
£15.7 million before interest of the BKR prepayment facility (2018 - £12.8 drawing) and
£4.6 million of capital costs on Columbus and Erskine.
At 31 December 2019 Serica held gas price puts covering volumes of 160,000 therms
per day for 1H 2020 at a floor price of 35 pence per therm with no upside price
restrictions. Serica also held gas price swaps at fixed prices of; 46.55 pence per therm
covering 160,000 therms per day for Q1 2020, 40.75 pence per therm covering 160,000
therms per day for Q2 2020, 37.6 pence per therm covering 80,000 therms per day for
Q3 2020 and 45.41 pence per therm covering 80,000 therms per day for Q4 2020.
- 19 -
In January 2020, Serica obtained additional gas price swaps covering 120,000 therms
per day for Q1 2021 at an average of 45.95 pence per therm. In March 2020, further
swaps of 80,000 therms per day for November 2020 at 32.55 pence per therm, 100,000
therms per day for December 2020 at 35.55 pence per therm and 65,000 therms per
day for Q1 2021 at 36.20 pence per therm were obtained.
Following onset of the COVID-19 crisis, cash projections have been run to examine the
potential impact of extended low oil and gas prices as well as possible production
interruptions. Some 80% of Serica’s production is gas with low prices partially mitigated
by price hedging up to 31 March 2021. The BKR net cash flow sharing arrangements and
structuring of the Rhum deferred consideration further mitigate the impact of low sales
prices and any production interruptions to end 2021 upon net income. This allied to the
fact that Serica currently has substantial cash resources, no borrowings and relatively
low operating costs per boe means that the Company is well placed to withstand such
risks and its limited capital commitments can be funded from existing cash resources.
Field and other capital commitments
Following completion of the condensate export line bypass there are no further capital
commitments on the Erskine producing field and net production revenues are expected
to cover ongoing field expenditures.
Serica’s share of income from the BKR fields, after net cash flow sharing payments, is
expected to cover Serica’s retained share of ongoing field expenditures as well as other
contingent or deferred consideration due under the respective BKR acquisition
agreements set out below. Plans to workover the Rhum R3 well are in hand with work
expected to be carried out in Q4 2020 with expenditures met from existing cash
resources.
The Columbus development is underway with first gas expected in late 2021. Total
expenditure net to Serica’s share of development costs outstanding at 1 January 2020 is
estimated at approximately £23 million.
The Group has no significant exploration commitments apart from the well on North Eigg
prospect to be drilled within three years of the November 2019 licence award.
BKR asset acquisitions
On 30 November 2018 Serica completed the four BKR acquisitions. The following
elements of consideration were still outstanding at 31 December 2019:
• A contingent payment of £16 million is due to BP Exploration Operating Company
(“BPEOC”) upon a successful outcome of work to bring the Rhum R3 well onto
production and demonstration of a minimum cumulative 90 days of gas
production at a defined level.
• Contingent payments of up to £7.7 million are due to BPEOC for each of 2020 and
2021 based upon Rhum field performance and sales prices in the respective
years. There will then be a final calculation of the combined performances
covering these years plus 2019 applied to total consideration of £23.1 million.
The payment in respect of 2019 was £2.6 million and further payments are
expected to be significantly reduced based upon current projected production
volumes and market prices.
• Two further instalments of deferred consideration of US$5 million each are due to
Total E&P due in April 2020 and December 2020.
•
In addition, Serica will pay contingent cash consideration to BPEOC, Total E&P
and BHP calculated as 40% of net cash flows resulting from the respective field
interests acquired from those companies in each of 2020 and 2021. Such
- 20 -
amounts will be paid by Serica pre-tax on a monthly basis and then offset by
Serica against its own tax liabilities.
• BP, Total E&P and BHP will retain liability, in respect of the field interests Serica
acquired from each of them, for all the costs of decommissioning those facilities
that existed at the date of completion. Serica will pay deferred contingent
consideration equal to 30% of actual future decommissioning costs, reduced by
the tax relief that each of BP, Total E&P and BHP receives on such costs. Staged
prepayments against such projected amounts will commence in 2022 and be
spread over the remaining years before cessation of field production
• Serica will pay to each of BP, Total E&P and BHP, deferred consideration equal to
90% of their respective shares of the realised value of oil in the Bruce pipeline at
the end of field life.
OTHER
Asset values and impairment
At 31 December 2019, Serica’s market capitalisation stood at £345.3 million based upon
a share price of 129.2 pence which exceeded the net asset value of £198.0 million. By
21 April the Company’s market capitalisation has fallen to £216.9 million. Management
has carried out a thorough review of the carrying value of the Group’s assets and
determined that no write-downs are required.
- 21 -
BUSINESS RISK AND UNCERTAINTIES
Serica, like all companies in the oil and gas industry, operates in an environment subject
to inherent risks and uncertainties. The Board regularly considers the principal risks to
which the Group is exposed and monitors any agreed mitigating actions. The overall
strategy for the protection of shareholder value against these risks is to retain a broad
portfolio of assets with varied risk/reward profiles, to apply prudent industry practice, to
carry insurance, where both available and cost effective, and to retain adequate working
capital.
The four BKR acquisitions have greatly increased production levels which, along with
associated cash receipts upon completion, have enabled Serica to build a strong working
capital reserve. This is available to respond to a range of risks including production
interruptions, severe commodity price falls and unexpected costs. To supplement this
the Company carries business interruption insurance to meet estimated field operating
costs over sustained periods of production shut-in, where caused by events covered
under such policies. The Company also uses price hedging instruments to help manage
field revenues and will continue to seek cost effective opportunities to add to its existing
gas price puts and swaps. These currently cover an estimated 30% of the Company’s
retained share of projected 2020 gas production.
The principal risks currently recognised and the mitigating actions taken by the
management are as follows:
Investment Returns: Management seeks to invest in a portfolio of exploration,
development and producing acreage delivering returns to shareholders through
acquisitions of producing assets to which it can add further value and through the
discovery and exploitation of commercial reserves. Delivery of this business model
carries a number of key risks.
Risk
Mitigation
Stock market support may be eroded
lowering investor appetite and
obstructing fundraising
• Management regularly
communicates its strategy to
shareholders
Each investment carries its own risk
profile and no outcome can be certain
• Focus is placed on building a
diverse and resilient asset portfolio
capable of offering prospectivity
throughout the business cycle
• Management aims to avoid over-
exposure to individual assets, to
identify the associated risks
objectively and mitigate where
practical
Operations: Operations may not go according to plan leading to damage, pollution,
cost overruns or poor outcomes.
Risk
Mitigation
Production may be interrupted generating
significant revenue loss whilst costs
continue to be incurred
• The Company seeks to diversify its
revenue streams
• Management also determines and
retains an appropriate level of
working capital
• Business interruption cover is
- 22 -
Third party offtake routes may experience
restrictions or interruptions and full
availability may depend upon sustained
production from other fields in the system
The Company is reliant upon its IT
systems to maintain operations and
communications
carried when cost effective
• The Group aims to diversify its
exposure to offtake routes where
possible though all of its oil
production currently uses the FPS
system
• The Group carries business
interruption cover
• The Group employs specialist
support and
• Protection against external
intrusion is incorporated within the
system and tested regularly
Personnel: The Group relies upon a pool of experienced and motivated personnel to
conduct its operations and execute successful investment strategies
Risks
Key personnel may be lost to other
companies
• The Remuneration Committee
Mitigation
regularly evaluates incentivisation
schemes to ensure they remain
competitive
Personal safety may be at risk in
demanding operating environments,
typically offshore
• The Group seeks to build depth of
experience in all key functions to
ensure continuity
• A culture of safety is encouraged
throughout the organisation
• Responsible personnel are
designated at all appropriate levels
• The Group maintains up-to-date
emergency response resources and
procedures
Political and commercial environment: World share and commodity markets and
political environments continue to be volatile
Risk
Sanctions imposed by the U.S.
government may threaten continuing
production from the Rhum field and
licences are required to be renewed
periodically
obtained which has enabled
continuing production from Rhum
• An OFAC Licence has been
Mitigation
• Serica initiates the renewal process
well in advance of the specified
date
Volatile commodity prices mean that the
Group cannot be certain of the future
sales value of its products
• Planning and forecasting considers
downside price scenarios
• Oil and gas floor price hedging
may be utilised where deemed cost
effective
- 23 -
• Price mitigation strategies may be
employed at the point of major
capital commitment
COVID-19: The impact of the virus has significantly affected the majority of global
activities and markets. The full extent and duration of the crisis remains uncertain.
Risk
The Company’s personnel may be at risk
from catching the virus
• The Company has instituted
Mitigation
recommended safe practices and
will maintain these as necessary
• Serica has instituted a programme
of working from home where
feasible and temporarily closed its
London and Aberdeen offices
• The Company has reduced the
number of staff working offshore to
a safe minimum and encourages
safe working and travelling
practices
The spread of infection and associated
counter measures may interrupt offshore
operations
• The Company has reduced the
number of staff working offshore to
a safe minimum
The continued operation of Serica’s fields
may be adversely affected by
interruptions to operations of fields and
infrastructure downstream
The crisis and associated reduction in
global activity and travel have severely
impacted commodity markets and prices
and may continue to do so for an
undetermined period of time
• Management encourages safe
practices both offshore and
travelling to and from the platform
• Serica carries a working capital
reserve to cover such eventualities
• Serica works with the regulatory
bodies and infrastructure owners
to identify and mitigate any such
risks
• Serica uses commodity price
hedging instruments where
deemed cost effective
•
Investment strategies and
expenditure programmes are
evaluated under a range of price
scenarios
• Serica is reducing non-essential
work and costs where practical
In addition to the principal risks and uncertainties described herein, the Group is subject
to a number of other risk factors generally, a description of which is set out in our latest
annual information form available on www.sedar.com.
- 24 -
Key Performance Indicators (“KPIs”)
The Company’s main business is the acquisition, development and production of
commercially attractive oil and gas reserves in a safe and environmentally sensitive
manner. This is achieved both through pursuing the full cycle of exploration, discovery,
development and production and also through acquiring existing reserves where
management believe that further value can be added. The Company tracks its non-
financial performance through the building of a risk-balanced portfolio of full cycle
assets, the accumulation of commercial oil and gas reserves and the efficient production
of those reserves. In parallel, the Company tracks and reports its HSE and ESG
performance. Financial performance is tracked through the management of expenditures
within resources available, the optimal exploitation of production infrastructure and the
cost-effective production of reserves. A review of the Company’s progress against these
KPIs is covered in the operations and financial review within this Strategic Report.
S172 statement
The Directors’ statement under Section 172 of the Companies Act 2006 is included on
pages 45 and 46.
Additional Information
Additional information relating to Serica, can be found on the Company’s website at
www.serica-energy.com and on SEDAR at www.sedar.com
The Strategic Report has been approved by the Board of Directors.
On behalf of the Board
Mitch Flegg
Chief Executive Officer
22 April 2020
Forward Looking Statements
This disclosure contains certain forward looking statements that involve substantial
known and unknown risks and uncertainties, some of which are beyond Serica Energy
plc’s control, including: the impact of general economic conditions where Serica Energy
plc operates, industry conditions, changes in laws and regulations including the adoption
of new environmental laws and regulations and changes in how they are interpreted and
enforced, increased competition, the lack of availability of qualified personnel or
management, fluctuations in foreign exchange or interest rates, stock market volatility
and market valuations of companies with respect to announced transactions and the final
valuations thereof, and obtaining required approvals of regulatory authorities. Serica
Energy plc’s actual results, performance or achievement could differ materially from
those expressed in, or implied by, these forward looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the forward looking
statements will transpire or occur, or if any of them do so, what benefits, including the
amount of proceeds, that Serica Energy plc will derive therefrom.
- 25 -
DIRECTORS’ REPORT
The Directors of the Company present their report and the Group financial statements of
Serica Energy plc (“Serica” or the “Company”) for the year ended 31 December 2019.
Principal Activities
The principal activity of the Company and its subsidiary undertakings (the “Group”) is to
identify, acquire, explore and subsequently exploit oil and gas reserves. Its current
activities are located in the United Kingdom and Namibia.
Business Review and Future Developments
A review of the business and the future developments of the Group is presented in the
Strategic Report (including a Chief Executive Officer’s Report, a Review of Operations
and Financial Review) and Chairman’s Statement (all of which, together with the
Corporate Governance Statement, are incorporated by reference into this Directors’
Report).
Results and Dividends
The profit for the year was £64,020,000 (2018: £51,485,000).
In view of the strong performance of the Company, the Directors are recommending the
payment of a final dividend of 3 pence per share for the year to 31 December 2019, see
note 14 (2018: £nil).
Financial Instruments
The Group’s financial risk management objectives and policies are discussed in note 25.
Events Since Balance Sheet Date
Events since the balance sheet date are included in Note 33.
Directors and their Interests
The following Directors have held office in the Company since 1 January 2019 to the date
of this report:
Antony Craven Walker
Neil Pike
Ian Vann
Mitch Flegg
Trevor Garlick
Malcolm Webb
The Directors who held office at the end of the financial year had the following interests
in the ordinary shares of the Company according to the register of Directors’ interests:
Antony Craven Walker (1)
Neil Pike (2)
Ian Vann
Mitch Flegg
Malcolm Webb
Trevor Garlick
Class
of
share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
- 26 -
Interest at
end of year
7,357,694
505,000
267,935
184,445
44,681
-
Interest at
start of year
(or date of
appointment if
later)
7,357,694
505,000
267,935
184,445
44,681
-
1. 6,448,810 ordinary shares were held by Antony Craven Walker and 908,884 by Rathbones
(pension funds).
2. 190,000 ordinary shares were held by Romayne Pike in her ISA and 185,000 ordinary shares by
Luska Limited.
None of the Directors who held office at the end of the financial year had any disclosable
interest in the shares of other Group companies.
No rights to subscribe for shares in or debentures of Group companies were granted to
any of the Directors or their immediate families, or exercised by them, during the
financial year except as indicated below:
Details of share awards that have been granted to certain Directors under the Serica
Energy plc Share Option Plan 2005 (“Serica 2005 Option Plan”) are included in note 29
to the Financial Statements. Details of share awards made during 2019 and up to 21
April 2020 under the Serica Energy plc Long Term Incentive Plan (the “LTIP”) are also
included in note 29.
Auditor
A resolution to reappoint Ernst & Young LLP, as auditor will be put to the members at the
annual general meeting.
Disclosure of information to auditors
The directors who were members of the Board at the time of approving the Directors’
Report are listed above. So far as each person who was a director at the date of
approving this report is aware, there is no relevant audit information, being information
needed by the auditor in connection with preparing its report, of which the auditor is
unaware. Having made enquiries of fellow directors and the Group’s auditor, each
director has taken all the steps that he is obliged to take as a director in order to made
himself aware of any relevant audit information and to establish that the auditor is aware
of that information.
On behalf of the Board
Mitch Flegg
Director
22 April 2020
- 27 -
CORPORATE GOVERNANCE STATEMENT
Chairman’s Corporate Governance Statement:
I am pleased to introduce the corporate governance section of our report which explains how
the Company’s governance framework supports the principles of integrity, strong ethical values
and professionalism integral to our business. As Chairman of the Company it is my
responsibility to work with my fellow Board members to ensure that the Company embraces
corporate governance and delivers the highest standards we can. It is within my role to manage
the Board in the best interests of our many stakeholders. Good governance depends on strong
and effective leadership and a healthy corporate culture, supported by robust systems and
processes and a good understanding of risk. As we said last year as a Board we recognise that
we are accountable to our many stakeholders and this report, together with the reports of the
Audit, Nomination & Corporate Governance, Remuneration and Health, Reserves, Safety &
Environmental Committees, seeks to demonstrate our commitment to high standards of
governance. Our bid to maintain good levels of corporate governance has allowed us to build a
healthy corporate culture throughout the organisation. The Board is fully supportive of
embracing high levels of corporate governance.
The Company adopts the Quoted Companies Alliance Corporate Governance Code 2018 (the
‘QCA Code’) which it believes to be the most appropriate recognised corporate governance code
for the Company. We report our compliance with the QCA Code through the AIM Rule 26 section
of our website and in areas of our Annual Report.
2019 has been a year of strong performance which has established Serica as one of the leading
independent UKCS operators. We continue to look at ways in which we can improve on this
performance but do so without prejudicing our high standards towards Corporate Governance,
the Health and Safety of our employees, ethics and the Environment.
Finally, the importance of engaging with our shareholders continues and underpins the success
of the business. The Board strives to ensure that there are numerous opportunities for investors
to engage with both the Board and executive team.
Antony Craven Walker
Executive Chairman
28
The QCA Code has ten principles of corporate governance that the Company has committed to
apply within the foundations of the business. These principles are:
Principles
Establish a strategy and business
model which promote long-term
value for shareholders
Seek to understand and meet
shareholder
and
expectations
needs
into
Take
stakeholder
responsibilities
implications for long-term success
account
and
wider
social
their
and
throughout
Embed effective risk management,
considering both opportunities and
threats,
the
organisation
Maintain the Board as a well-
functioning balanced team led by
the Chair
Ensure that between them the
directors have the necessary up-
to-date experience, skills and
capabilities
Evaluate Board performance based
on clear and relevant objectives,
seeking continuous improvement
Promote a corporate culture that is
based on ethical values and
behaviors
Serica Response
The Company operates in a sector that is exposed
to political, operational, commercial, product
pricing and hazard risk. Its strategy is to manage
risks, financial capacity and growth opportunities in
the business through an active programme of
acquisition and divestment to balance risk and
potential whilst optimising operating costs and
procedures to improve performance and identifying
new technologies that can enhance value. The
Company seeks a forward looking, professional and
safety conscious culture in all that it does to
provide an environment for the benefit of all
stakeholders.
The Company engages with shareholders at the
Annual General Meeting, after the announcement
of interim and final results and regularly presents
at investor events.
The Company seeks to be a responsible corporate
citizen in all its areas of operation and is committed
to maintaining a high standard of corporate
governance.
The Company has published a Environmental,
Social and Governance Report. See further details
on pages 47 to 49.
The Company has an effective risk management
framework, which is subject to oversight by the
Audit Committee. See further details on page 38.
Refer to further discussion of the Board structure
and composition on pages 32 and 33.
The complementary skills and experience of our
Board and Executive Management
team are
included on pages 30 to 31.
Refer to discussion of Board evaluation on page 35.
The Company has a zero-tolerance approach to
bribery and corruption and has an Anti-Bribery
Policy in place to protect the Company, its
employees and those third parties with which the
business engages. Employees have each partaken
in Anti-Bribery training and assessment.
29
Maintain governance structures
and processes that are fit for
purpose
good
decision-making by the Board
support
and
Refer to further discussion of the Company’s
governance structures, including matters reserved
for the Board, on page 36.
Communicate how the Company is
governed and is performing by
dialogue with
maintaining
shareholders and other relevant
stakeholders
a
and
Company’s
The
operational
financial
performance is summarised in the Annual Report
and the Interim Report, with regular updates
provided to stakeholders in other forums through
the year, including press releases and regular
updates to the Company’s website.
EXECUTIVE MANAGEMENT TEAM AND BOARD OF DIRECTORS/PROFILES
Antony Craven Walker, Executive Chairman, started his career with BP in 1966 and has been a
leading figure in the British independent oil industry since the early 1970s. Mr Craven Walker
founded two British independent oil companies, Charterhouse Petroleum, where he held the
post of Chief Executive, and Monument Oil and Gas, where he held the post of Chief Executive
and later became Chairman. Mr Craven Walker was also a founder member of BRINDEX
(Association of British Independent Oil Exploration Companies). Mr Craven Walker was
appointed Non-Executive Chairman of the Company in 2004 and, following the retirement of the
then Chief Executive in April 2011, initially acted as interim Chief Executive. With effect from 1
June 2015, he took the role of Executive Chairman following the departure of two Executive
Directors. Under his direction the Company embarked upon its strategy to refocus on the North
Sea and build a strong production base. Mr Craven Walker’s experience in the oil and gas and
public market sectors gives him the skills necessary to provide the services of Executive
Chairman as the Company continues to develop its business strategy.
Committees: Nomination & Corporate Governance Committee.
Mitch Flegg, Chief Executive officer has over 35 years of experience in the upstream oil and gas
industry, including positions at Shell and Enterprise Oil. Mr Flegg first joined the Company in
2006 and was responsible for all drilling and development operations. He was promoted to the
position of Chief Operating Officer in March 2011 and appointed to the Board in September
2012. Mr Flegg left the Company in May 2015 to become CEO of Circle Oil Plc. Mr Flegg re-
joined the Board on 21 November 2017 as Chief Executive Officer on the announcement of the
BKR transaction. Mr Flegg’s background and experience ensures that the Company is effectively
led to achieve the Company’s long-term strategic goals and becomes a leading producer and
operator. Mr Flegg was appointed to the board of OGUK, The UK Oil and Gas Industry
Association Limited in April 2020.
Committees: Reserves Committee, Health Safety & Environmental Committee.
Neil Pike, the Senior Independent Non-Executive Director joined the Company as a director in
2004. Mr Pike has been involved in the global petroleum business as a financier since joining
the energy department at Citibank in 1975. Mr Pike remained an industry specialist with
Citibank throughout his career until he joined the Company and was closely involved in the
development of specialised oil field finance. Latterly he was responsible for Citibank’s
relationships with the oil and gas industry worldwide. Mr Pike with his financial background
provides the experience required as chairman of the Audit Committee to challenge the financial
decisions of the business and also to work with and question the Group’s auditors as required.
30
Committees: Audit Committee (Chair), Remuneration Committee, Nomination & Corporate
Governance Committee.
Ian Vann, Non-Executive Director joined the Board in 2007. Mr Vann was employed by BP from
1976 and directed and led BP’s global exploration efforts from 1996 until his retirement in
January 2007. Mr Vann was appointed to the executive leadership team of the Exploration &
Production Division of BP in 2001, initially as Group Vice President, Technology and later as
Group Vice President, Exploration and Business Development. Mr Vann’s industry background
provides the Board with the necessary expertise to review and challenge decisions and
opportunities presented both within the formal arena of the boardroom and as called upon when
needed by the executives. Mr Vann chairs the Company’s Remuneration Committee.
Committees: Remuneration Committee (Chair), Health Safety & Environmental Committee,
Audit Committee and Reserves Committee.
Trevor William Garlick, Non-Executive Director joined the Board on 30 November 2018, on
completion of the BKR transaction. Mr Garlick started his career in 1982 with Marathon Oil
International, before joining BP in 1986, where he worked for 30 years, latterly as Regional
President for BP in UK and Norway from 2010 until his retirement in 2016. Mr Garlick was the
Operator’s Chair of the industry association, Oil & Gas UK, from 2014 to 2016 and is currently a
director of Opportunity North East Limited and Vice Chairman of the Oil & Gas Technology
Centre. As a newly appointed Non-Executive to the Board, Mr Garlick brings a wealth of
experience and a fresh pair of eyes to the business. Mr Garlick chairs the Company’s Health,
Safety and Environment Committee and the Reserves Committee.
Committees: Health Safety & Environmental Committee (Chair), Reserves Committee (Chair)
and Audit Committee.
Malcolm Webb, Non-Executive Director joined the Board on 30 November 2018, on completion
of the BKR transaction. Mr Webb started his career with Burmah Oil Company in 1974, before
joining the British National Oil Corporation in 1976 and Charterhouse Petroleum in 1981, as a
solicitor working in various legal roles. Between 1986 and 1999, Mr Webb worked in the
Petrofina SA Group in various senior management roles, leaving as Managing Director of Fina
plc. In 2001, Mr Webb joined the UK Petroleum Industry Association as Director General and
between 2004 and 2015 served as Chief Executive to the industry association, Oil & Gas UK. Mr
Webb’s industry background, together with his corporate and legal experience provides the
Board with the expertise to review and challenge decisions and opportunities presented. Mr
Webb chairs the Company’s Nomination and Corporate Governance Committee.
Committees: Nomination & Corporate Governance Committee (Chair) and Remuneration
Committee.
Kate Coppinger, Non-Executive Director joined the Board on 22 April 2020. Ms. Coppinger has
over 20 years’ investment banking experience, primarily focused on providing M&A advice to oil
and gas companies. Her career includes roles at Canadian Imperial Bank of Commerce, Harrison
Lovegrove and most recently as Managing Director at Standard Chartered in the Oil and Gas
team responsible for origination and execution of transactions for European clients. Her global
transaction experience spans Asia through to South America with particular emphasis on the
North Sea.
31
CORPORATE GOVERNANCE FRAMEWORK
GOVERNANCE STRUCTURE
The Board of Directors acknowledge the importance of corporate governance, believing that the
QCA Code provides the Company with the right framework to maintain a strong level of
governance.
The Board retains ultimate accountability for good governance and maintains full and effective
control over the Company. The Company holds regular Board meetings at which financial,
operational and other reports are considered and, where appropriate, voted on. The Board is
responsible for the Group’s strategy, performance, key financial and compliance issues,
approval of any major capital expenditure and the framework of internal controls.
There is a clearly defined organisational structure with lines of responsibility and delegation of
authority to executive management. The Board is responsible for monitoring the activities of the
executive management. The Board has five independent, Non-Executive Directors to bring an
independent view to the Board. The Chairman has the responsibility of ensuring that the Board
discharges its responsibilities and is also responsible for facilitating full and constructive
contributions from each member of the Board in determination of the Group’s strategy and
overall commercial objectives. In the event of an equality of votes at a meeting of the Board,
the Chairman has a second or casting vote.
The Company is committed to a corporate culture that is based on sound ethical values and
behaviours and it seeks to instil these values across the organisation as a whole. The Company
promotes its commitment through its public statements on its website, in its report and
accounts and internally through its communications to its employees and other stakeholders.
The Company has adopted a code of dealings in securities which the Board regards as
appropriate for an AIM listed company and is compliant with the Market Abuse Regulations. The
Company takes all reasonable steps to ensure compliance by the directors, employees and
agents with the provisions of the AIM rules relating to dealings in securities.
The directors take the issue of bribery and corruption seriously. The directors acknowledge the
importance of ensuring that the Company, its employees and those third parties with which the
business engages are operating within the requirements of the Bribery Act. The Company has a
zero-tolerance approach to bribery and corruption and has adopted an anti-bribery policy to
protect the Group, its employees and those third parties with which the Company engages. An
online training session is adopted by the Company to ensure that all employees and the Board
are compliant with the anti-bribery policy.
Since the onset of the COVID-19 crisis the Board has adopted working-from-home procedures
and has also sponsored the application of working practices in line with government advice
throughout the Company’s operations. It has increased monitoring of the potential impacts of
the crisis on the Company including reviewing a range of cash flow projections incorporating
downside price and other scenarios and is keeping Company strategies and potential
opportunities under review.
BOARD COMPOSITION
As at 31 December 2019, the Board of the Company consisted of the Executive Chairman, the
Chief Executive Officer and five non-executive Directors. Neil Pike, as the senior independent
Non-Executive director along with the other Non-Executive Directors ensure the Board
independence required given the Company has an Executive Chairman. All the Non-Executive
directors are independent in character and judgement and have the range of experience and
calibre to bring independent judgement on issues of strategy, performance, resources and
standards of conduct which is vital to the success of the Group.
32
The Board believes that there is an adequate balance between the Non-Executive and Executive
directors, both in number and in experience and expertise, to ensure that the Board operates
independently of executive management.
BOARD COMMITTEES AND STRUCTURE
The Board has established a Nomination and Corporate Governance Committee, an Audit
Committee, a Reserves Committee, a Remuneration and Compensation Committee and a
Health, Safety and Environmental Committee. All Committees are committed to report back to
the Board following a Committee meeting.
Nomination & Corporate Governance Committee
The Nomination & Corporate Governance Committee assists the Board’s oversight of the
Company’s observance of the QCA Code and the Corporate Governance Guidelines, compliance
with the rules of AIM and other relevant corporate governance rules, including compliance with
the Company’s Share Dealing Code and with AIM rules relating to dealings by directors or
employees in the Company’s shares. The Committee is also responsible for monitoring the
overall effectiveness of the Board and its Committees, proposing to the Board new nominees for
election as directors to the Board, determining succession plans and for assessing directors on
an ongoing basis.
The Nomination & Corporate Governance Committee is comprised of the Executive Chairman
and two independent Non-Executive Directors. The Committee is chaired by Malcolm Webb and
its other members are Antony Craven Walker and Neil Pike.
The Committee met three times during 2019 and will meet at least three times, and additionally
as required, during the current financial year.
Audit Committee
The Audit Committee meets regularly and consists of three members, all of whom are Non-
Executive Directors. The Committee's purpose is to assist the Board's oversight of the integrity
of the financial statements and other financial reporting, the independence and performance of
the auditors, the regulation and risk profile of the Group and the review and approval of any
related party transactions. The Audit Committee may hold private sessions with management
and with the external auditor without management present. The VP Finance is invited to join the
meetings and present his report.
The Audit Committee met four times in 2019 and proposes to meet at least two times during
the next financial year. The Committee is chaired by Neil Pike and the other members are Ian
Vann and Trevor Garlick.
Reserves Committee
The Reserves Committee is a sub-committee of the Audit Committee. The Committee’s purpose
is to review the reports of the independent reserves auditors which require that the Board
discuss the reserves reports with the independent reserves auditors or delegate authority to a
reserves committee comprised of at least two Non-Executive Directors. The Committee is
chaired by Trevor Garlick and its other members are Ian Vann and Mitch Flegg. The Committee
met once in 2019 and typically meets once a year prior to publication of the annual results.
Remuneration and Compensation Committee
The Remuneration and Compensation Committee meets regularly to consider all material
elements of remuneration policy, share schemes, the remuneration and incentivisation of
33
Executive Directors and senior management and to make recommendations to the Board on the
framework for executive remuneration and its cost. The role of the Committee is to keep under
review the remuneration policies to ensure that Serica attracts, retains and motivates the most
qualified talent who will contribute to the long-term success of the Company.
The Committee met five times in 2019 and proposes to meet at least twice during the next
financial year. In addition, written resolutions of the Committee are passed from time to time
particularly in relation to routine matters such as the allotment of shares pursuant to share
option exercises as well as to record formally decisions of the Committee reached outside the
scheduled meetings.
The Committee is composed of three Non-Executive Directors all of whom are independent. The
Committee is chaired by Ian Vann and its other members are Neil Pike and Malcolm Webb.
Health, Safety and Environmental Committee
The Health, Safety and Environmental Committee is responsible for matters affecting
occupational health, safety and the environment.
The Committee met four times during 2019 and proposes to meet quarterly during the next
financial year. The Committee is chaired by Trevor Garlick and its other members are Ian Vann
and Mitch Flegg. The head of VP Operations is invited to attend the meeting and present his
report.
Directors’ attendance at meetings
The Board generally has one scheduled Board meeting every month over the course of the
financial year with informal discussions scheduled as required. Additional meetings are held
depending upon opportunities or issues to be dealt with by the Company from time to time.
The Non-Executive Directors hold informal meetings during the course of the year at which
members of management are not in attendance. The Non-Executive Directors held one formal
meeting during 2019.
The Directors’ attendance at scheduled Board meetings and Board committees during 2019 is
detailed in the table below:
Director
Board Audit Remuneration Nomination
HSE
Reserves
14*
3^
1^
&
Corporate
Governance
3
14
14
14
13
14
14
4*
4
-
-
4
4
5
5*
5^
4
-
5
3
2^
2^
3*
1^
3
-
-
4
4
4*
4
-
-
1
1
-
1*
1
A Craven Walker
(Chairman of the
Board)
N Pike
I Vann
M Flegg
M Webb
T Garlick
Total meetings
Notes: The Chairman, CEO and Non-Executive directors attended a number of meetings of Committees of
which they were not members during the course of the year at the invitation of the Committee chairman.
*Chairman
^Invitee
34
BOARD OBJECTIVES/ACTIVITIES
The Board is responsible for formulating, reviewing and approving the Company’s strategy,
budgets and corporate actions. The effectiveness of the Board, director and senior management
appointments and the Company’s succession planning is evaluated on a regular basis.
BOARD EVALUATION/REVIEW OF BOARD’S EFFECTIVENESS
The Board considers that its effectiveness and the individual performance of its directors is vital
to the success of the Company.
The Company currently conducts an informal Board self-evaluation process on an ad hoc basis.
The Non-Executive Directors met formally once during 2019. At this meeting, the size,
structure, performance, leadership and effectiveness of both the Board and Committees were
evaluated. The Board considers that it functions effectively and the need for formal Board
evaluation has not been considered necessary to date.
It is recognised that with the expansion of the Board in parallel with the expansion of the
Company’s activities and the need to meet the requirements of the QCA Code a more formal
process will be necessary. The Company will introduce a structure to set clear targets and
objectives for improving and monitoring performance of an enlarged Board and will introduce a
formal evaluation for all Board members to monitor their individual contribution and
commitment.
The evaluation process will set out criteria against which Board, Committee and individual
effectiveness is measured.
There is a strong flow of communication between the directors, and in particular between the
CEO and Chairman, with consideration being given to both standing agenda items and the
strategic and operational needs of the business. Comprehensive board papers are circulated
well in advance of meetings, giving directors due time to review the documentation and
enabling an effective meeting. Minutes are drawn up to reflect the true record of the discussions
and decisions made. Resulting actions are tracked for appropriate delivery and follow up.
The directors have a wide knowledge of the Company's business and understand their duties as
directors of a company quoted on AIM. The directors have access to the Company’s Nominated
Adviser (Nomad), auditors and solicitors as and when required. The Company’s Nomad provides
an annual board room training. These advisors are available to provide formal support and
advice to the Board from time to time and do so in accordance with good practice.
The Company Secretary helps keep the Board up to date with developments in corporate
governance and liaises with the Nomad on areas of AIM requirements. The Company Secretary
has frequent communication with both the Chairman and CEO and is available to other
members of the Board as required. The directors are also able, at the Company’s expense, to
obtain advice from external advisers if required
The Board is mindful of the need for succession planning. The Nomination & Corporate
Governance Committee regularly monitors the requirements for succession planning and Board
appointments to ensure that the Board is fit for purpose. If external training or assistance with
recruitment is required by the Committee, this will be made available.
The Nomination & Corporate Governance Committee is mindful of the Board’s performance and
composition together with the performance of individual directors and senior management.
35
MATTERS RESERVED FOR THE BOARD
The Board retains full and effective control over the Company and is responsible for the
Company’s strategy and key financial and compliance issues. There are certain matters that are
reserved for the Board and they include but are not limited to:
Strategy and Management
Approval of: long-term objectives; commercial strategic aims; annual operating and capital
expenditure budgets; extending the Company’s activities into new business; any decision to
cease to operate all or any material part of the Company’s business.
Structure and Capital
Capital structure; major changes to the Company’s corporate structure; changes to the
management and control structure; change to the Company’s listing; alteration of the
Company’s articles of association; change in the Company’s accounting reference date,
registered name or business name.
Financial Reporting and Controls
Approval of: finance reports interim management statements and any other preliminary
announcement of the final results; annual reports and accounts; dividend policy and declaration
of any dividend and significant changes in accounting policies/practice.
Internal Controls
Ensuring maintenance of a sound system of internal control and risk management.
Finance
Raising new capital and confirmation of major financing facilities; recommendation of dividends;
operating and capital expenditure budgets; granting of security over any material Company
asset.
Contracts
All contracts above £3m; major capital contracts over £3m; contracts which are material or
strategic; contracts outside of the approved budget and not in the ordinary course of business;
major investments or any acquisitions/disposals and transactions with Directors or other related
parties which are not in the ordinary course of business.
Communications
Approval of resolutions and documentation put forward to shareholders; approval of circulars,
prospectuses and listing particulars and approval of press releases concerning matters decided
by the Board
Board membership and other appointments
Director and senior management appointments and the Company’s succession planning is
evaluated on a regular basis.
Remuneration
Determining the remuneration policy for the directors, senior executives and all staff and the
remuneration of the Non-Executive directors. Introduction of new share incentive plans or
major changes to existing plans, to be put to shareholders for approval.
Delegation of Authority
Division of responsibilities between the Chairman, the Chief Executive and Executive Directors;
delegated levels of authority, including the Chief Executive's authority limits; establishment of
Board Committees and approval of terms of reference of Board Committees.
Corporate Governance Matters
Review of the Company’s overall corporate governance arrangements.
36
Other
Policies including the share dealing code; appointment or change of the Company's principal
professional advisers and auditors; overall levels of insurance for the Company; material
litigation; any decision likely to have a material impact on the Group or Company from any
perspective including, but not limited to, financial, operational, strategic or reputational;
matters reserved for Board decisions and which the Board considers suitable for delegation are
contained in the terms of reference of its Committees; and the grant of options, warrants or any
other form of security convertible into shares.
NOMINATION AND CORPORATE GOVERNANCE COMMITTEE REPORT
The Nomination and Corporate Governance Committee is a standing committee of the Board of
the Company comprised of two Non-Executive Directors and one Executive Director.
The Committee’s membership comprises Malcolm Webb (Non-Executive director and Committee
Chairman), Neil Pike (Non-Executive director) and Antony Craven Walker (Executive Chairman
of the Company).
The Role of the Committee
The Committee is responsible for:
• Assisting the Board’s oversight of the Company’s observance of the QCA Code and the
Corporate Governance Guidelines;
• Ensuring the Company is compliant with the rules of AIM and other relevant corporate
governance rules, including compliance with the Company’s Share Dealing Code and
with the AIM Rules relating to dealings by directors or employees in the Company’s
shares.
• Reviewing the structure, effectiveness and performance of all members of the Board and
of all Board Committees.
• The recruitment and training of directors, including independent Non-Executive directors.
• Maintaining an effective succession plan for the Board, its Committees and the senior
executives of the Company and assessing directors on an ongoing basis
Independence of Non-Executive Directors
The Committee and the Board are satisfied that each Non-Executive director serving at the end
of the year remains independent and continues to have sufficient time to discharge their
responsibilities to the Company. Neil Pike and Ian Vann have served on the Board for over ten
years. Their ongoing contribution is integral to the Company’s governance and input for the
Company’s plans for succession. Whilst they continue to serve on the Board they stand for re-
election annually at the Company’s Annual General Meetings and are considered to be
providing independent advice and oversight in both character and judgement.
2019
In 2019 the Committee reviewed and refreshed the Committee’s terms of reference to be
brought in line with the Committees current responsibilities.
The Committee also evaluated the composition of the Board and agreed that whilst members of
the Committee should continue to review candidates for future vacancies or succession
planning, no substantial changes should be made to the Board during 2019.
37
2020 looking forward
The Committee, which has so far met once in 2020 and aims to meet three times during the
year, will pay particular attention to Board structure and succession planning this year with one
new Board appointment made.
“At Serica we value the practical approach to corporate governance embodied in the QCA Code as we
recognise that good governance supports and enables sustainable corporate growth and development. In
essence it is about having the right team doing the right things to deliver value for our shareholders.”
Malcolm Webb
Chairman of the Nominations and Corporate Governance Committee
22 April 2020
AUDIT COMMITTEE REPORT
The Audit Committee (the ‘Committee’) is a standing committee of the Board of the Company
and is comprised of three Non-Executive directors.
An important part of the role of the Committee is its responsibility for reviewing and monitoring
the effectiveness of the Group’s financial reporting, internal control policies, and procedures for
the identification, assessment and reporting of risk. The latter two areas are integral to the
Group’s core management processes and the Committee devotes significant time to their
review.
The Audit Committee is also responsible for overseeing the relationship with the external
auditor. As Chair of the Committee, during the financial year, I have reviewed and considered
the recent recommendations of the Quoted Companies Alliance Corporate Governance Code,
Audit Guide published in September 2019.
An essential part of the integrity of the financial statements lies around the key assumptions
and estimates or judgments to be made. The Committee reviews key judgments prior to
publication of the financial statements at both the end of the financial year and at the end of
the six-month interim period, as well as considering significant issues throughout the year. In
particular, this includes reviewing any subjective material assumptions within the Group’s
activities to enable an appropriate determination of asset valuation, provisioning and the
accounting treatment thereof.
The Committee reviewed and was satisfied that the judgments exercised by management on
material items contained within the Report and Financial Statements are reasonable.
2019
The Committee has engaged Ernst & Young (EY) to act as external auditors and they are also
invited to attend Committee meetings, unless they have a conflict of interest. During the year,
the Committee met four times and the members attendance record at Committee meetings
during the financial year is set out on page 34.
- The Audit Committee has considered the Group’s internal control and risk management
policies and systems, their effectiveness and the requirements for an internal audit
function in the context of the Group’s overall risk management system. The Committee
is satisfied that the Group does not currently require an internal audit function; however,
it will continue to periodically review the situation.
38
- The external auditors, EY, were re-appointed at the Company’s annual general meeting.
The Serica Group fee to EY for the financial year to 31 December 2019 is £367,000. The
Audit Committee shall undertake a comprehensive review of the quality, effectiveness,
value and independence of the audit provided by EY each year, seeking the views of the
wider Board, together with relevant members of the Committee.
Whilst EY have been the Company’s auditors for fifteen years, the Committee are comfortable
that EY’s audit remains independent.
2020
In considering the implications of the COVID-19 crisis for the Company, the Audit Committee
has placed particular emphasis upon testing going concern assumptions. This has included the
stress testing of key assumptions including forecast pricing and production levels. Focus has
also been placed upon additional disclosures particularly with respect to the basis of preparation
of the financial statements (note 2) and post-balance sheet events (note 33).
Responsibilities
The Committee reviews and makes recommendations to the Board on:
compliance with accounting standards and legal and regulatory requirements
• any change in accounting policies
• decisions requiring a major element of judgement and risk
•
• disclosures in the interim and annual report and financial statements
•
• any significant concerns of the external auditor about the conduct, results or overall
reviewing the effectiveness of the Group’s financial and internal controls
outcome of the annual audit of the Group
• any matters that may significantly affect the independence of the external auditor
Neil Pike
Chairman of the Audit Committee
22 April 2020
RESERVES COMMITTEE REPORT
The Reserves Committee (the ‘Committee’) is a sub-committee of the Audit Committee, a
standing committee of the Board of the Company and is comprised of two Non-Executive
directors and an Executive director.
The Committee comprises of Trevor Garlick (Non-Executive director), Ian Vann (Non-Executive
director and previous chairman of the Committee) and Mitch Flegg (CEO of the Company).
The Committee’s purpose is to review the reports of the independent reserves auditors. This
requires that the Board discuss the reserves reports with the independent reserves auditors or
delegate authority to a reserves committee comprised of at least two Non-Executive
Directors. The Committee meets at least once a year, prior to approval of the annual results.
2019
• Reviewed the Company’s procedures for providing information to the qualified reserves
auditors who reported on reserves data.
• Met with management and the two qualified reserves auditors to review the reserves
data and the auditor's annual reserves report.
39
• Reviewed proposals to engage one UK-based reserves auditor instead of retaining two
US-based reserves auditors and recommended approval.
• Reviewed and recommended to the Board approval of the content and filing of the
Company’s annual statement of reserves data and other oil and gas information.
2020 Looking Forward
• Meet new independent reserves auditor and review reserves data, process undertaken
and report.
• Review the process for establishing the audit terms of reference and supplying
information to the reserves auditor.
• Make recommendation to the Board regarding the Company’s annual statement of
reserves data and other oil and gas information.
Trevor Garlick
Chairman of the Reserves Committee
22 April 2020
DIRECTORS’ REMUNERATION REPORT
The Remuneration Committee
The Remuneration (the “Committee”) is a standing committee of the Board of the Company and
is comprised of three Non-Executive directors.
The Committee is composed of three Non-Executive Directors all of whom are independent. The
Committee is chaired by Ian Vann and its other members are Neil Pike and Malcolm Webb.
The purpose of the Committee is to assist the Board in discharging its oversight responsibilities
relating to the attraction, compensation, evaluation and retention of executive directors and key
senior management employees, in particular the Chief Executive Officer and Executive
Chairman. The Committee aims to ensure that the Company has the right skills and expertise
needed to enable the Company to achieve its goals and strategies and that fair and competitive
compensation is awarded with appropriate performance incentives across the Company
The Committee held five meetings during 2019. Members’ attendance records are disclosed in
the Corporate Governance Report contained in this Annual Report.
Consideration by the Directors of matters relating to Directors’ remuneration
The Committee is responsible for making recommendations to the Board regarding the
framework for the remuneration of the executive directors and other members of executive
management. The Committee works within its terms of reference, and its role includes:
•
•
•
•
•
•
•
Reviewing and approving the Company's overall compensation
philosophy and programs.
Determining and agreeing with the Board, the Remuneration Policy for all executive
directors and under guidance of the executive directors, other members of Executive
Management Team.
Ensuring executive remuneration packages are competitive.
Determining whether annual bonus payments should be made and approving levels for
individual executive directors.
Determining each year whether any awards/grants should be made under the incentive
schemes and the value of such awards.
Considering any new long-term incentive scheme awards and performance criteria.
Agreeing directors’ service contracts and notice periods.
40
The Company is committed to maintaining an open and transparent dialogue with shareholders
on all aspects of Remuneration within the Group.
Summary of work undertaken during 2019
The Committee:
•
•
reviewed and agreed the 2019 employee salary increases along with an increase in
offshore allowances and 2019 bonus scheme.
contributed to the review of the Company’s various pension schemes and consolidation
of those schemes.
• provided input to the employee consultation process following the 12-month period post
•
the Company’s acquisition of BP’s interest in Bruce, Keith and Rhum.
considered and agreed employee contract variations to allow standardised employee
terms of conditions of employment.
Looking ahead 2020
• Reviewing and agreeing the cash bonus to be awarded to employees in respect of the
financial year 2019.
• Considering and agreeing any discretionary bonuses to be awarded to senior
management.
• Considering and agreeing a programme for the grant of any LTIP awards for 2020.
• Proposing and agreeing the remuneration packages for executive directors for 2020.
• Reviewing and agreeing salary proposals for all employees.
• Considering a share save scheme for 2020.
• Agreeing a framework for the cash bonus plan 2020.
Executive Directors’ service contracts.
The Company’s policy on Directors’ service contracts are indicated below:
Director
Antony Craven Walker
Effective term
1 July 2015
Mitch Flegg
21 November 2017
Notice period
6 months from Executive
12 months from Company
6 months from Executive
12 months from Company
Executive Remuneration
The table below sets out the single total figure of remuneration and breakdown for each
Executive director paid for the 2019 financial year.
Salary
Annual Bonus
Benefits
Pension
Total
Anthony Craven Walker
£400,000
Mitch Flegg
£400,000
Nil
£19,194
Nil
£419,194
£124,000
Nil
£40,000
£564,000
41
Mr Craven Walker has waived his entitlement to Illness and Medical Insurance, Pension
contribution and participation in the SIP.
ADDITIONAL DETAILS
Share Option Plans
The Company operates three discretionary incentive share option plans: (i) the Serica Energy
Plc Long Term Incentive Plan (the "LTIP"), which was adopted by the Board on 20 November
2017 which permits the grant of share-based awards, (ii) the 2017 Serica Energy plc Company
Share Option Plan (“2017 CSOP”), which was adopted by the Board on 20 November 2017, and
(iii) the Serica 2005 Option Plan, which was adopted by the Board on 14 November 2005.
Awards can no longer be made under the Serica 2005 Option Plan. However, options remain
outstanding under the Serica 2005 Option Plan. The LTIP and the 2017 CSOP together are
known as the "Discretionary Plans".
The Discretionary Plans will govern all future grants of options by the Company to directors,
officers and employees of the Group. The directors intend that the maximum number of
ordinary shares which may be utilised across all of the Company’s share option plan will not
exceed 10% of the issued ordinary shares of the Company from time to time in line with the
recommendations of the Association of British Insurers.
The objective of the Discretionary Plans is to develop the interest of directors, officers and
employees of the Group in the growth and development of the Group by providing them with
the opportunity to acquire an interest in the Company and to assist the Company in retaining
and attracting executives with experience and ability.
Long Term Incentive Plan
The following awards have been granted to certain directors and employees under the LTIP,
these were deemed to be granted in November 2017 under IFRS 2 in accordance with the 30
November 2017 Admission Document:
Deferred Bonus Share Awards involve the deferral of bonuses into awards over shares in the
Company. They are structured as nil-cost options and may be exercised up until the fifth
anniversary of the date of grant. The awards below, outstanding as at 31 December 2019,
vested on 31 January 2019 and were not subject to performance conditions; however, they
were conditional on completion of the BKR Acquisition, subject to the Board determining
otherwise.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of shares
granted subject to
Deferred Bonus Share
Awards
225,000
225,000
414,000
864,000
Performance Share Awards are subject to performance conditions based on average share
price growth targets to be measured by reference to dealing days in the period of 90 days
ending immediately prior to expiry of a three-year performance starting on the date of grant of
a Performance Share Award. Performance Share Awards are structured as nil-cost options and
may be exercised up until the tenth anniversary of the date of grant.
42
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees
aggregate)
Total number of shares granted
subject to Performance Share
Awards
2019
411,067
2018
1,500,000
411,067
1,500,000
below Board
level
(in
2,913,506
2,250,000
3,735,640
5,250,000
Retention Share Awards are structured as nil-cost options with a vesting date of between 1
and 31 January 2021 and may be exercised up until the tenth anniversary of the date of grant.
Retention Share Awards are split as follows: 49,125 Share Value Plan replacement awards and
193,414 other retention awards
Director/Employees
Total number of shares
granted subject to
Retention Share Awards
Employees below Board level (in aggregate)
242,539
NON-EXECUTIVE DIRECTORS
2019 Non-Executive Director fees
Non-Executive
Directors
Chair/Director
Fees (£)
Committee
Chairman
(£)
Fees
Neil Pike
Ian Vann
Malcolm Webb
Trevor Garlick
40,000
40,000
40,000
40,000
10,000
10,000
10,000
10,000
Ian Vann
Remuneration Committee Chairman
22 April 2020
43
HEALTH, SAFETY AND ENVIRONMENT COMMITTEE REPORT
The Health, Safety and Environment Committee (‘Committee’) is responsible for matters
affecting occupational health, safety and environment, and is primarily focused on
ensuring that HSE policies are adopted and applied across the Group.
The Committee comprises of Trevor Garlick (Non-Executive director), Ian Vann (Non-
Executive director and previous chairman of the Committee) and Mitch Flegg (Chief
Executive Officer of the Company).
During 2019, the Committee has met quarterly to discuss matters pertaining to Health,
Safety and Environmental issues with focus primarily on the operations of the Bruce,
Keith & Rhum fields and ensuring that adequate HSE policies are adopted and applied
across the Group.
2019 Review
• Evaluated HSE performance against industry standards and acted on Regulator
feedback
• Developed and finalised an HSE and Risk Management Plan and closely evaluated
HSE performance against the agreed Plan at each meeting
• Received training on HSE legal responsibilities from the Company’s HSE legal
advisors and made relevant changes based on advice received
• Reviewed major and reportable HSE incidents occurred, investigations led and
lessons learned at each meeting
• Agreed HSE performance metrics linked to the Company bonus scheme
• Agreed to draft a plan to benchmark and reduce carbon intensity/emissions
During 2020, the Committee plans to develop a 2020 HSE plan, continue to review the
on-going HSE procedures and culture, evaluate HSE performance against industry
standards, evaluate performance against the 2020 plan, agree a HSE bonus scorecard
for 2020 to be linked to the Company bonus scheme for 2020 and ensure that the HSE
policy and procedures remain effective. The Committee also plans to place a focus on
how the Company can reduce carbon intensity/emissions.
‘The Committee’s main role is to assure the Board that the Company has plans in place
to maintain and improve a strong health, safety and environmental culture. The
Committee shall continue to help to ensure that the Company continues to operate its
assets safely and reduce our emissions’.
Trevor Garlick
Chairman of the Health and Safety and Environment Committee
22 April 2020
- 44 -
Directors’ Statement under Section 172 (1) of the Companies Act 2006
The Section 172 (1) of the Companies Act obliges the Directors to promote the success
of the Company for the benefit of the Company’s members as a whole.
The section specifies that the Directors must act in good faith when promoting the
success of the Company and in doing so have regard (amongst other things) to:
a. the likely consequences of any decision in the long term,
b. the interests of the Company’s employees,
c. the need to foster the Company’s business relationship with suppliers, customers
and others,
d. the impact of the Company’s operations on the community and environment,
e. the desirability of the Company maintaining a reputation for high standards of
business conduct, and
the need to act fairly as between members of the Company.
f.
The Board of Directors is collectively responsible for the decisions made towards the
long-term success of the Company and how the strategic, operational and risk
management decisions have been implemented throughout the business is detailed in
the Strategic Report.
Employees
Our employees are one of the primary assets of our business and the Board recognises
that our employees are the key resource which enables delivering Company’s vision and
goals. Annual pay and benefit reviews are carried out to determine whether all levels of
employees are benefitting fairly and to retain and encourage skills vital for the business.
The Remuneration Committee oversees and makes recommendations of executive
remuneration and any long-term share awards as detailed in the Remuneration
Committee Report on page 40. The Board encourages management to improve
employee engagement and to provide necessary training in order to use their skills in
the relevant areas in the business. The Health, Safety and Environmental Committee
reviews the health and safety measures implemented in the business premises on a
quarterly basis and improvements are continuously recommended for better practice,
further details are provided in the Health, Safety and Environmental Committee report
on page 44.
The employees are informed of the results and important business decisions and are
encouraged to feel engaged and to improve their career potential.
Suppliers, Customers and Regulatory Authorities
The Board acknowledges that a strong business relationship with suppliers and
customers is a vital part of the growth. Whilst day to day business operations are
delegated to the executive management, the Board sets directions with regard to new
business ventures. The Board upholds ethical business behaviour across all of the
Company’s activities and encourages management to seek comparable business
practices from all suppliers and customers doing business with the Company. We value
the feedback we receive from our stakeholders and we take every opportunity to ensure
that where possible their wishes are duly considered.
Community and Environment
The Board periodically reviews the Health and Safety measures implemented by the
Health, Safety and Environmental Committee
in the business premises and
improvements are recommended for better practices. The Company recognises and is
aware of the potential impact that it may have on the environment. Serica recognises
- 45 -
the importance of Environmental and Social and Corporate Governance (ESG), further
details are contained in the ESG Report on page 47.
Maintaining High Standards of Business Conduct
The Company is incorporated in the UK and governed by the Companies Act 2006. The
Company has adopted the Quoted Companies Alliance Corporate Governance Code 2018
(the ‘QCA Code’) and the Board recognises the importance of maintaining a good level of
corporate governance, which together with the requirements to comply with the AIM
Rules ensures that the interests of the Company’s stakeholders are safeguarded. The
Board has prompted that ethical behavior and business practices should be implemented
across the business. Anti-corruption and anti-bribery training are compulsory for all staff
and contractors and the anti-bribery statement and policy is contained on the Company’s
website. The Company’s expectation of honest, fair and professional behaviour is
reflected by this and there is zero tolerance for bribery and unethical behaviour by
anyone representing the Company.
The importance of making all employees feel safe in their environment is maintained and
a Whistleblowing Policy is in place to enable staff to confidentially raise any concerns
freely and to discuss any issues that arise. Strong financial controls are in place and are
well documented.
Shareholders
The Board places equal importance on all shareholders and recognises the significance of
transparent and effective communications with shareholders. As an AIM listed company
there is a need to provide fair and balanced information in a way that is understandable
to all stakeholders and particularly our shareholders.
The primary communication tool with our shareholders is through the Regulatory News
Service, (“RNS”) on regulatory matters and matters of material substance. The
Company’s website provides details of the business, investor presentations and details of
the Board and Board Committees, changes to major shareholder information, QCA Code
disclosure updates under AIM Rule 26. Changes are promptly published on the website
to enable the shareholders to be kept abreast of Company’s affairs. The Company’s
Annual Report and Notice of Annual General Meetings (AGM) are available to all
shareholders. The Interim Report and other investor presentations are also available on
our website.
Investor events are also arranged with shareholders throughout the year which presents
an opportunity for shareholders to speak with the executive directors in a formal
environment and in more informal one to one meetings. By providing a variety of ways
to communicate with investors the Company feels that it reaches out to engage with a
wide range of its stakeholders.
On behalf of Board
Antony Craven Walker
Executive Chairman
22 April 2020
- 46 -
Environmental and Social and Corporate Governance (ESG)
ESG is a term that is becoming synonymous with business sustainability and the societal
impact of business. In recent years ESG reporting has become an ever increasingly
important consideration for investors as they continue to place increasing value on
aspects of the business performance that would not traditionally be reported on in the
Annual Financial Report but, nevertheless have potential implications for investors such
as emissions data, environmental non-compliances, anti-slavery and corruption policies
and performance and stakeholder grievances.
During our first year of operations, Serica has successfully integrated ESG into our
operational and planning mindset. This is driving us to conduct and plan operations in a
manner that not only reduces the impact we are having on the environment but also
reduces inefficiencies, serves the communities in which we operate and ensures our staff
are well looked after and managed.
Our approach
As an oil and gas exploration and production company, we are increasingly cognizant of
stakeholder interest in the ethos and sustainability for our business, and we strive for
continuous improvements in all aspects of ESG performance. By nurturing our own
internal ESG culture and continually engaging with industry bodies and peers we are
maintaining currency in the most applicable and impactful ESG principles which are
continually embedding in our strategy, management processes and business operations.
Serica’s Board of Directors assesses the Company’s ESG practices and performance and
ensures that the necessary resources are in place to support that vision as recently
demonstrated by the appointment of a new vice president role of VP ESG and Business
Innovation.
around
In order to demonstrate our transparency and set a benchmark for our future ESG
performance, in 2019 we produced our first Serica ESG Report. The report was
structured
Sustainable Development Goals
(https://unsdg.un.org/) and utilised the Global Reporting Initiatives (GRI) Reporting
Performance Standards which, as outlined on the GRI website, are the most widely
adopted global standards for sustainability reporting. The GRI Standards represent
global best practice for reporting on a range of economic, environmental and social
impacts.
the United Nations
Serica chose to report against the GRI Core Option. The Core Option presents a refined
list of essential reporting elements deemed material to the Company and its
stakeholders. The ESG report explains in more detail our rationale on materiality and
gives the information disclosed to the GRI.
Our operations are controlled via a Business Management System comprising a set of
policies and guidelines, which help us monitor, evaluate and improve our daily activities,
internal control systems and procedures.
The key policies and guidance in place are:
- Code of Business Conduct
- Health, Safety and Environment (HSE) Policy
- Personnel Handbook
- Anti-Corruption and Bribery Policy
- Whistle Blowing Policy
- Share-dealing Policy
- 47 -
Our People
For Serica employee management is about providing a safe, healthy and productive
atmosphere to each member of its team. In 2018, the Company’s staff structure was
transformed with 114 employees transferring from BP to the new Serica team, following
the landmark acquisition of BKR interests. To facilitate this transition and encourage
integration, we put in place all requirements needed for a safe and efficient transfer of
operations, including the opening of new offices in Aberdeen and the creation of 23 new
jobs. The newly formed multi-disciplinary team is already delivering exceptional results
and is at the heart of our potential for growth.
We believe that success will be delivered by creating a working environment of mutual
respect and trust where shared goals, roles and responsibilities are clear and personal
accountability is a matter of professional pride. We invest time to train, support and
motivate our personnel to build the atmosphere of confidence, shared values and
responsibility that will bring prosperity to employees and shareholders alike.
HSE
The safety of our employees and operations always comes first in our business and we
continue to improve our standards and procedures to maintain a safe working
environment. One of our priorities on assuming operatorship of the newly acquired
assets was to initiate engagement sessions with key industry bodies such as the Offshore
Petroleum Regulator for Environment & Decommissioning (OPRED) and the Health and
Safety Executive (HSE) to facilitate consultation on health and safety related matters
and further improve our standards to meet industry requirements. We will continue to
work hard to invest in these important relationships.
We believe that engagement and collaboration are essential to reducing the impacts of
our activities and mitigating risks. Serica is committed to providing guidance and training
to its offshore personnel to ensure safe working practice, supported by required skills,
sustainability awareness and efficient communications. In doing so, we have engaged
with an expert in oil and gas workforce engagement, Step Change in Safety (SCiS), to
improve our employees’ Major Accident Hazard awareness. We are also proud to be an
early adopter of the new International Association of Oil and Gas Producers (IOGP) Life
Saving Rules and signatories to the Industry Search and Rescue (ISAR) helicopter
service. These engagements have helped us establish appropriate operating procedures
to ensure effective delivery on our policies, and we strive to further improve our
practices in this area.
Environment
At Serica we work hard to reduce our environmental impacts through the careful
planning and management of operations. Reducing our atmospheric emissions,
preventing leaks, seeps and spills offshore and decreasing the volume of harmful
chemicals we utilise offshore are all key to reducing our environmental impact. Serica
also participates in industry initiatives to reduce the environmental impact of the supply
chain and consistently contributes to industry environmental working groups.
Business ethics
By establishing strong corporate governance policies, we are ensuring that Serica’s core
values and standards of business conduct align with the interests of all stakeholders. By
adopting and implementing clear procedures and allocating responsibilities across the
managing team, we ensure international industry best practice is implemented in the
area of risk assessment and management.
The Board of Directors plays a fundamental stewardship role in ensuring that the
Company conducts its activities in a manner that enables all stakeholders to thrive. The
- 48 -
set of policies and procedures, set out by the Board, governs the standards and
behaviours of our personnel wherever they are at work. The Company’s leadership is
wholly committed to work with transparency and integrity, taking personal responsibility
for individual actions and corporate behaviours.
This approach covers our work with our own employees, as well as third parties, giving
guidance to the way we manage our supply chain. As one of the UK oil & gas industry’s
significant businesses, Serica is highly conscious of the part we play in the local
economy. Currently, over 95% of our contracts are serviced by UK suppliers, and almost
70% of these are in the North East of Scotland. We strive to encourage transparency and
accountability in our engagement processes with all our suppliers.
On behalf of the Board
AMBA Secretaries Limited
22 April 2020
- 49 -
Directors’ responsibilities statement in relation to the Group and Company
financial statements
The Directors are responsible for preparing the Strategic Report, the Director’s Report
and financial statements in accordance with applicable United Kingdom law and
regulations and those International Financial Reporting Standards as adopted by the
European Union.
Company law requires the directors to prepare financial statements for each financial
year. As required by the AIM Rules of the London Stock Exchange they are required to
prepare the Group financial statements in accordance with International Financial
Reporting Standards as adopted by the European Union. Under United Kingdom company
law the directors have elected to prepare the Parent Company financial statements in
accordance with International Financial Reporting Standards as adopted by the European
Union. Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of affairs of the
Group and the Company and the profit or loss of the Group for that period.
In preparing those Group and Company financial statements the Directors are required
to:
• present fairly the financial position, financial performance and cash flows of the
Group;
•
select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
•
state that the Group and Company has complied with IFRSs, subject to any
material departures disclosed and explained in the financial statements;
• present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information
• provide additional disclosures when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the Group’s and Company’s financial
position and financial performance; and
•
state whether the Group financial statements have been prepared in accordance
with IFRSs as adopted by the European Union, subject to any material departures
disclosed and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient
to show and explain the Group’s transactions and disclose with reasonable accuracy at
any time the financial position of the Group and Company and enable them to ensure
that the Group and Company financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Group and Company and
hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
The Directors confirm that they have complied with these requirements and, having a
reasonable expectation that the Company and the Group have adequate resources to
continue in operational existence for the foreseeable future, will continue to adopt the
going concern basis in preparing the accounts.
- 50 -
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SERICA ENERGY PLC
Opinion
In our opinion:
Serica Energy plc’s group financial statements and parent company financial statements (the
“financial statements”) give a true and fair view of the state of the group’s and of the parent
company’s affairs as at 31 December 2019 and of the group’s profit for the year then ended;
the group financial statements and parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union; and
the group financial statements and parent company financial statements have been prepared in
accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Serica Energy plc which comprise:
Group
Parent company
Group balance sheet as at 31 December 2019
Balance sheet as at 31 December 2019
Group income statement for the year then ended
Statement of changes in equity for the
year then ended
Group statement of comprehensive income for the year
then ended
Statement of cash flows for the year
then ended
Group statement of changes in equity for the year then
ended
Related notes 1 to 33 to the financial
statements including a summary of
significant accounting policies
Group statement of cash flows for the year then ended
Related notes 1 to 33 to the financial statements,
including a summary of significant accounting policies
The financial reporting framework that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as
regards to the parent company financial statements, as applied in accordance with the provisions of
the Companies Act 2006.
Separate opinion in relation to IFRSs as issued by the IASB
Separate opinion in relation to IFRSs as issued by the IASB as explained in Note 1 to the Financial
Statements, the group in addition to complying with its legal obligation to apply IFRSs as adopted by
the European Union, has also applied IFRSs as issued by the International Accounting Standards
Board (IASB). In our opinion the Financial Statements comply with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our report below. We are
independent of the group and parent company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as
applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with
these requirements.
- 51 -
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require
us to report to you where:
•
•
the directors’ use of the going concern basis of accounting in the preparation of the financial
statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material
uncertainties that may cast significant doubt about the group’s or the parent company’s ability
to continue to adopt the going concern basis of accounting for a period of at least twelve
months from the date when the financial statements are authorised for issue.
Overview of our audit approach
Key audit
matters
• Measurement of BKR contingent consideration
• Assessment of commercial reserves and its impact on the Financial
Statements
•
Impact of Covid-19 and low oil and gas prices on the assessment of going
concern
Audit scope
• We performed an audit of the complete financial information of two
components
• The components where we performed full audit procedures accounted for
100% of Profit before tax, 100% of Revenue and 99% of Total assets.
Materiality
• Overall group materiality of £3.2 million which represents 3% of the
Group’s profit before tax.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the financial statements of the current period and include the most significant assessed
risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters were addressed in the context
of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide
a separate opinion on these matters.
Risk
Our response to the risk
Measurement of BKR
contingent consideration
Refer to the Accounting policies
(page 73); and Note 23 of the
Consolidated Financial
Our procedures focused primarily on
the risks relating to the contingent
consideration model, assumptions and
judgements associated with the
estimation of the consideration. These
included:
- 52 -
Key observations
communicated to
the Audit Committee
At the April 2020
meeting of the Audit
Committee, we
confirmed that we had
completed our audit
procedures in respect
of the accounting for
the contingent
consideration and
were satisfied that
management had
followed a robust
process in estimating
the fair value as at the
balance sheet date.
We concluded that the
value of the contingent
consideration recorded
as a liability at year
end and the movement
in the liability from
2018, recorded in the
income statement, as
well as payments
made in the year were
accounted for
appropriately. In
addition, we concluded
that the disclosures
made in relation to the
estimates and
estimation uncertainty
involved with the
valuation were
appropriate.
Statements (page 98)
During 2018, the Group
completed a transaction
whereby Serica acquired a 98%
interest in the Bruce and Keith
(BKR) fields and a 50% interest
in the Rhum field for a
combination of cash, deferred
and contingent consideration.
The contingent consideration is
remeasured at fair value at
each reporting date with
changes in the fair value during
the year being reflected in the
income statement.
At 31 December 2019, the fair
value of the BKR contingent
consideration is £148.1 million
and the change in fair value
since the prior year that is
recorded in the income
statement represents a charge
of £21.8 million. There is a
significant judgement and
estimation involved in
determining the contingent
element of the consideration,
and its fair value, which is
based on a share of future
cashflows from the fields.
The fair value calculations are
complex as most of the
contingent consideration is
dependent upon future
commodity prices and
economic environment as well
as future asset performance.
They involve a range of
projections and assumptions
related to future operating and
development costs, production
volumes, oil and gas sales
prices, discount rates,
estimates of future
decommissioning expenditure
and taxation.
Given this, we believe that the
measurement of contingent
consideration carries significant
risk of material misstatement.
• making enquiries of management
and those who participated in the
preparation of the valuation to
understand the terms of the
contracts, whether there had been
any changes to the agreements
after the 2018 acquisition and
obtained an understanding of the
process and identified key controls;
• ensuring the mechanics of the
model are consistent with the terms
of the relevant agreements;
• checking the integrity of the model
and testing its mathematical
accuracy;
• using our internal valuation
specialists to assist us in assessing
the key external assumptions and
inputs used in measuring the fair
value of the contingent
consideration payable. This included
commodity price curves, discount
rates and inflation;
• assessing the reasonableness of
forecast production and cost
profiles, decommissioning and
taxation;
• assessing management’s estimation
of commercial oil and gas reserves
used in the contingent consideration
calculation (see KAM on
assessment of commercial
reserves);
• performing sensitivity analysis in
relation to significant assumptions
applied by management in the
valuation;
• confirming the cash consideration
paid during the year to relevant
transaction agreements and bank
documentation;
• assessing the competence of both
management’s internal and external
specialists and the objectivity and
independence of external
specialists, to consider whether they
were appropriately qualified to carry
out the valuation;
• confirming consistency of
assumptions with other areas of the
financial statements; and
- 53 -
We did not identify any
exceptions as a result
of our audit
procedures.
We consider the
commercial reserves
updates have been
correctly included in
the financial statement
calculations and
consider the
disclosures in the
Financial Statements
to be appropriate.
• assessing the adequacy of the
related disclosures in Note 23 to the
financial statements.
We carried out the following
procedures:
• confirming our understanding of the
group’s controls over their
certification process for technical
and commercial experts who are
responsible for reserves and
resources estimation;
• assessing the competence and
objectivity of these experts, to
satisfy ourselves they were
appropriately qualified to carry out
the volumes estimation;
• obtaining confirmation directly from
Lloyds Register that they are
independent from Serica and have
performed their procedures in line
with the guidelines set out by the
Society of Petroleum Engineers;
• confirming that any material
changes in reserves and resources
were made in the appropriate
accounting period;
• validating that the reserves and
resources estimates were included
appropriately as key inputs within
the group’s financial statements,
including; the reserves used in the
contingent consideration model,
preparation of the cash flow
forecasts for the assessment of the
going concern assumption, the
determination of the deferred tax
asset and accounting for DD&A.
Assessment of commercial
reserves and its impact on
the Financial Statements
Refer to note 2 accounting
policies section “Use of
judgement and estimates and
key sources of estimation
uncertainty” (page 66)
The estimate of oil and gas
reserves and resources has a
significant impact on the
Financial Statements,
particularly impairment testing;
depreciation, depletion and
amortization (‘DD&A’) charges;
and valuation of the contingent
consideration associated with
the 2018 BKR acquisition.
As described in note 16 to the
consolidated financial
statements, oil and gas
properties amounted to
£324.9m and have an
associated DD&A charge of
£52.6m. At 31 December 2019,
the fair value of contingent
consideration is £148.1m and
the impact on the income
statement of the change in fair
value is £21.8m.
The estimation of oil and
natural gas reserves and
resources is a significant area
due to the technical uncertainty
in assessing quantities.
Reserves and resources are
also a fundamental indicator of
the future potential of the
group’s performance.
Impact of Covid-19 and low
oil and gas prices on the
assessment of going concern
Refer to note 2 of the financial
statements “accounting
policies” (page 65) and note 33
of the financial statements “post
balance sheet events” (page
117).
The global Covid-19 pandemic
In assessing the appropriateness of the
going concern assumption used in
preparing the financial statements, we
have performed the following
procedures:
• confirmed our understanding of
Serica’s going concern assessment
process as well as the control
environment implemented by
management;
In April 2020, we
reported that, based
on our testing
performed, in our view
the going concern
assumption adopted in
the 2019 financial
statements remains
appropriate after
considering the
potential impact of
Covid-19 and the low
- 54 -
at the start of 2020 has affected
business and economic activity
in the United Kingdom where
the group operates. The range
of potential outcomes are
uncertain; however, the virus
outbreak is causing significant
business disruption and a
significant decrease in demand
for oil and gas products
globally.
In addition, an international
dispute between OPEC+
countries in early March 2020
triggered a price war. The
resultant over-supply of oil and
gas to global markets, coupled
with the fall in demand due to
the outbreak of Covid-19, has
resulted in low oil and gas
prices.
The outbreak and current
market over-supply have;
significantly increased the
uncertainties inherent in the
going concern assessment
including key assumptions such
as future commodity prices and
production volumes.
Management has performed
additional stress testing to
support the going concern
assessment to evaluate the
impact of plausible downside
scenarios. These include
scenarios that reflect extended
low oil and gas prices
throughout 2020 and 2021,
which are at the low end/lower
than current forecasts and
forward prices, and a three-
month production shut-in to
reflect potential operational or
Covid-19 related issues that
could potentially impact the
Group.
Management has also
performed reverse stress
testing, which is designed to
model the conditions that would
have to exist such that the
Group required additional cash
resources or had to rely on
mitigating factors in 12 months-
time. These included an
adverse production shut-in
scenario and a low-price
environment, reflecting oil and
• checked the mathematical accuracy
of management’s cash flow forecast
and stress tests;
oil and gas price
environment.
We confirmed that
management’s
disclosure
appropriately
describes the risks and
mitigation associated
with Serica’s ability to
continue to operate as
a going concern. .
• verified the opening cash balance,
that no cash inflows from debt
funding are assumed and that the
final net cash position excludes £12
million of cash held in a restricted
account as security against letters of
credit issued in respect of certain
decommissioning liabilities;
• challenged the reasonableness of
the key assumptions as well as their
consistency with other areas of the
audit, which included benchmarking
management’s oil and gas price
assumptions to historic trends,
recent bank and broker forecasts
and forward price curves. We also
considered the circumstances that
could lead to a significant or
prolonged production shut in and
also the potential impact of actions
of external stakeholders and trading
counterparties on management’s
assessment;
• considered the appropriateness of
the oil and gas reserves
assumptions on which
management’s assessment is based
and that the profiles were consistent
with those used in other areas of the
financial statements (see KAM on
assessment of commercial
reserves);
• performed sensitivity analysis to
consider the impact of key
underlying inputs such as a
reduction in commodity prices and
lower production volumes;
• challenged the likelihood of
management's ability to execute
mitigating actions, as required, to
continue its business activities in the
severe downside scenarios
simulated in their sensitivity analysis
and reverse stress testing; and
• reviewed the appropriateness of
management's going concern
disclosures in the annual report and
financial statements.
- 55 -
gas price assumptions for the
next 12 months that are
considerably lower than the
latest forward prices for 2020
and 2021 or market prices that
have been experienced for the
last 10 years.
In severe downside scenarios,
management have also
identified key mitigating actions
including the ability to defer
planned capital expenditure
and reduce variable operating
costs, as required.
Under both management’s
base case cash flow forecasts
and stress testing scenarios,
the Group is expected to
remain cash flow positive for
the period of the going concern
assessment.
In the prior year, our auditor’s report included a key audit matter in relation to ‘Accounting for Business
Combination’. We removed this in the current year as with the exception of adjustments to the PPA,
the business combination accounting was completed in the prior year. With the exception of the
measurement of contingent consideration significant audit effort and judgement was not applied in
determining the current year adjustments.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance
materiality determine our audit scope for each entity within the Group. Taken together, this enables us
to form an opinion on the consolidated financial statements. We take into account size, risk profile, the
organisation of the group and effectiveness of group wide controls, changes in the business
environment and other factors such as recent Internal audit results when assessing the level of work
to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we
had adequate quantitative coverage of significant accounts in the financial statements, we selected
two components, which represent the principal business units within the Group.
We performed an audit of the complete financial information of these two business units as these
were “full scope components” selected based on their size or risk characteristics.
The components where we performed audit procedures accounted for 100% (2018: 100%) of the
Group’s Profit before tax, 100% (2018: 100%) of the Group’s Revenue and 99% (2018: 100%) of the
Group’s Total assets.
For the remaining components, we performed other procedures, including analytical review, testing of
consolidation journals, intercompany eliminations and foreign currency translation recalculations to
respond to any potential risks of material misstatement to the Group financial statements.
Changes from the prior year
- 56 -
In the prior year, we included three additional entities as specific scope components. Following the
completion of the BKR transaction, the assets held in these three entities are no longer material to the
group making up less than 1% of total assets.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed
to be undertaken at each of the components by us, as the primary audit engagement team, or by
component auditors from other EY global network firms operating under our instruction. The audit of
one of the full scope components in 2019 was performed by our component team based in Aberdeen.
The other full scope component was audited by the primary team.
The Group audit team designed a programme of planned interactions with the Aberdeen component
team including that the Senior Statutory Auditor visited the component team. The primary team
interacted regularly with the component team throughout the year and met regularly with the audit
partner responsible for the component audit work. The primary team had access to the underlying
audit working papers of the component, reviewed key working papers and were responsible for the
scope and direction of the audit process. The Senior Statutory Auditor, and other senior members of
the primary team, also met with local management during the year and attended the year end audit
closing meeting between the component auditors and management.
A site visit to Aberdeen was planned to take place during the year end audit period. However, due to
travel restrictions resulting from the outbreak of the Covid-19 virus, this visit could not be performed.
However, because of the procedures performed, and interactions made throughout the year with both
the component auditors and local management, and the additional procedures performed at group
level, this allowed the primary team to exercise sufficient oversight of and involvement in the work of
the component audit team. These procedures included direct review of component workpapers
remotely, regular component calls over the course of the audit and involvement of the primary audit
team in component team meetings with management.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of
identified misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably
be expected to influence the economic decisions of the users of the financial statements. Materiality
provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £3.2 million (2018: £1.1 million), which is 3% (2018:
1%) of profit before tax (2018: equity). We used 5% of forecast profit before tax at the planning phase
of the audit. We believe that, in the current year, profit before tax is the most appropriate
measurement basis compared to equity as profits are a principal consideration of the users of the
financial statements. In the prior year, profits were influenced to a large extent by the bargain
purchase gain arising from the business combination and costs incurred by the Group in completing
the deal over a 12-month period to 30 November 2019.
We determined materiality for the Parent Company to be £2.1 million (2018: £5.0 million), which is 1%
(2018: 5%) of equity. We use equity as the basis for materiality as the purpose of the Parent Company
is to hold investments in its subsidiaries. Any balances in the Parent Company financial statements
that were relevant to our audit of the consolidated group were audited using an allocation of group
performance materiality.
During the course of our audit, we reassessed initial materiality and updated its calculation for the
actual financial results of the year.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to
reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality.
- 57 -
On the basis of our risk assessments, together with our assessment of the Group’s overall control
environment, our judgement was that performance materiality was 50% (2018: 75%) of our planning
materiality, namely £1.6 million (2018: £0.8 million). We have set performance materiality at this
percentage after taking into account the Group’s history of misstatements identified during the audit,
our ability to assess the likelihood of misstatements and the effectiveness of the internal control
environment.
Audit work at component locations for the purpose of obtaining audit coverage over significant
financial statement accounts is undertaken based on a percentage of total performance materiality.
The performance materiality set for each component is based on the relative scale and risk of the
component to the Group as a whole and our assessment of the risk of misstatement at that
component. In the current year, the performance materiality allocated to the components was £1.7
million (2018: £0.6 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in
excess of £0.16 million (2018: £0.05 million), which is set at 5% of planning materiality, as well as
differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality
discussed above and in light of other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the annual report set out on pages 2 to
25, other than the financial statements and our auditor’s report thereon. The directors are responsible
for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the strategic report and the directors’ report for the financial year for
which the financial statements are prepared is consistent with the financial statements; and
the strategic report and directors’ report have been prepared in accordance with applicable legal
requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its
environment obtained in the course of the audit, we have not identified material misstatements in the
strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act
2006 requires us to report to you if, in our opinion:
- 58 -
• adequate accounting records have not been kept by the parent company, or returns adequate for
•
our audit have not been received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and
returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
•
• we have not received all the information and explanations we require for our audit
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 50, the directors
are responsible for the preparation of the financial statements and for being satisfied that they give a
true and fair view, and for such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, the directors are responsible for assessing the group and parent
company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the directors either intend to liquidate
the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor’s report.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of
Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to
the company’s members those matters we are required to state to them in an auditor’s report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Mark Woodward (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
22 April 2020
- 59 -
Serica Energy plc
Group Income Statement
For the year ended 31 December
Registered Number: 5450950
Balance Sheet
As at 31 December
Continuing operations
Sales revenue
Cost of sales
Gross profit
Other income/(expense)
Pre-licence costs
Impairment and write-offs of E&E assets
Administrative expenses
Foreign exchange (loss)/gain
Share-based payments
BKR transition costs
Operating profit before net finance revenue, tax
and transaction costs
Change in fair value of BKR financial liability
Bargain purchase gain on BKR acquisitions
BKR transaction costs
Finance revenue
Finance costs
Note
2019
£000
2018
£000
*restated
5
250,533
35,708
6 (164,748)
(15,690)
85,785
20,018
10,618
(566)
(80)
(5,963)
(1,020)
(1,094)
-
(1,554)
(217)
2,450
(3,644)
118
(367)
(8,814)
87,680
7,990
21,771
-
-
571
(1,252)
-
33,673
(2,102)
201
(282)
7
15
29
27
23
27
27
10
11
Profit before taxation
108,770
39,480
Taxation (charge)/credit for the year
12a)
(44,750)
12,005
Profit for the year
64,020
51,485
Earnings per ordinary share - EPS
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
13
13
0.24
0.23
0.20
0.19
*restated from US$ to £ following change of functional and presentational currency – see note 3
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the
income statement.
- 60 -
Serica Energy plc
Registered Number: 5450950
Balance Sheet
As at 31 December
Note
Group
2019
£000
Company
2019
£000
2018
£000
*restated
Non-current assets
Exploration & evaluation assets 15
16
Property, plant and equipment
17
Investments in subsidiaries
Current assets
Inventories
Trade and other receivables
Derivative financial asset
Term deposits
Cash and cash equivalents
18
19
20
21
21
3,652
325,404
-
329,056
4,671
35,906
6,880
-
101,825
149,282
3,183
373,721
-
376,904
-
387
105,256
105,643
4,284
52,976
138
1,000
42,103
100,501
-
93,330
-
-
11,348
104,678
2018
£000
*restated
-
-
105,256
105,256
-
86,234
-
1,000
19,710
106,944
TOTAL ASSETS
478,338
477,405
210,321
212,200
Current liabilities
Trade and other payables
Financial liabilities
Provisions
Non-current liabilities
Financial liabilities
Provisions
Deferred tax liability
TOTAL LIABILITIES
22
23
24
(24,600)
(45,351)
(1,848)
(35,229)
(90,307)
(1,848)
23
24
12d)
(110,108) (164,488)
(22,647)
(31,081)
(280,328) (345,600)
(22,590)
(75,831)
(1,738)
-
-
-
-
-
(1,738)
(3,219)
-
-
-
-
-
(3,219)
NET ASSETS
198,010
131,805
208,583
208,981
Share capital
Merger reserve
Other reserve
Accumulated deficit
26
17
181,385
-
17,818
(1,193)
180,294
-
16,724
(65,213)
152,595
153,686
88,088
88,088
17,818 16,724
(48,426)
(51,009)
TOTAL EQUITY
198,010
131,805
208,583
208,981
*restated from US$ to £ following change of functional and presentational currency – see note 3
The loss for the Company was £2.6 million for the year ended 31 December 2019 (2018:
profit of £128.0 million). In accordance with the exemption granted under section 408 of
the Companies Act 2006 a separate income statement for the Company has not been
presented.
Approved by the Board on 22 April 2020
Antony Craven Walker
Executive Chairman
Mitch Flegg
Chief Executive Officer
- 61 -
Serica Energy plc
Statement of Changes in Equity
For the year ended 31 December
Group
At 1 January 2018
*Translation effect
Profit for the year
Total comprehensive income
Share-based payments
Issue of share capital
At 31 December 2018
Profit for the year
Total comprehensive income
Share-based payments
Issue of share capital
Note
Share
capital
£000
*restated
Other
reserve
£000
*restated
Accum’d
deficit
£000
*restated
Total
£000
*restated
169,984
15,428
(109,581)
75,831
10,102
929
(7,117)
3,914
-
-
-
208
-
-
367
-
51,485
51,485
-
-
51,485
51,485
367
208
180,294
16,724
(65,213)
131,805
-
-
-
1,091
-
-
1,094
-
64,020
64,020
-
-
64,020
64,020
1,094
1,091
29
26
29
26
At 31 December 2019
181,385
17,818
(1,193)
198,010
Company
At 1 January 2018
*Translation effect
Share
capital
£000
*restated
143,837
8,550
Merger
reserve
£000
*restated
Other
reserve
£000
*restated
Accum’d
deficit
£000
*restated
Total
£000
*restated
-
-
15,428
(83,434)
75,831
929
(4,952)
4,527
Profit for the year
Total comprehensive income
Share-based payments (note 29)
Issue of share capital (note 26)
Transfers
-
-
-
208
-
-
-
-
-
88,088
-
-
367
-
-
128,048 128,048
128,048 128,048
367
208
-
-
-
(88,088)
At 31 December 2018
152,595
88,088
16,724
(48,426) 208,981
Profit for the year
Total comprehensive income
Share-based payments (note 29)
Issue of share capital (note 26)
Transfers
-
-
-
1,091
-
-
-
-
-
-
-
-
1,094
-
-
(2,583)
(2,583)
-
-
-
(2,583)
(2,583)
1,094
1,091
-
At 31 December 2019
153,686
88,088
17,818
(51,009) 208,583
- 62 -
* As described in Note 3, the presentation currency for the Group has been changed to £
from 1 January 2019, with retrospective effect on comparative figures. Equity per 1
January 2018 has been translated to £ using the £/US$ closing rate applicable for the
same date. As a result, a translation effect occurs for each component of equity. The
translation effect related to share capital, other reserve and accumulated deficit is shown
as a separate item in the statement of change in equity for 2018.
- 63 -
Serica Energy plc
Cash Flow Statement
For the year ended 31 December
Operating activities:
Profit/(loss) for the year
Adjustments to reconcile profit for the year
to net cash flow from operating activities:
Taxation charge/(credit)
BKR transition and transaction costs
Change in BKR fair value liability
Bargain purchase gain on BKR acquisitions
Net finance costs/(income)
Depreciation and depletion
Oil and NGL over/underlift
Impairment and write-offs of E&E assets
Unrealised and realised hedging (gains)/losses
Write-back of loans and investments
Share-based payments
Other non-cash movements
Cash outflow on BKR transition/transaction
Decrease/(increase) in trade and other
receivables
(Increase)/decrease in inventories
(Decrease)/increase in trade and other
payables
Net cash in/(out)flow from operations
Investing activities:
Interest received
Purchase of E&E assets
Purchase of property, plant and equipment
Cash (out)/inflow from business combination
Cash outflow arising on asset acquisitions
Changes in term deposits
(Payments)/receipts from Group subsidiaries
Net cash flow from investing activities
Financing activities:
(Repayments)/proceeds of borrowings
Proceeds from issue of shares
Finance costs paid
Net cash flow from financing activities
Net increase/(decrease) in cash and cash
equivalents
Effect of exchange rates on cash and cash
equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
Group
2019
£000
Company
2019
£000
2018
£000
*restated
2018
£000
*restated
64,020
51,485
(2,583)
128,048
44,750
-
(21,771)
-
681
52,631
6,969
80
(6,742)
-
1,094
638
-
6,147
(12,005)
10,916
-
(33,673)
81
6,153
(3,609)
(2,450)
1,827
-
367
(118)
(12,796)
(36,564)
-
-
-
-
-
-
-
-
(201)
(176)
-
-
-
-
-
-
-
-
- (129,543)
367
(85)
-
(408)
1,094
(149)
-
1,100
(386)
(11,234)
25
20,448
-
(1,690)
-
1,585
136,877
(9,913)
(2,404)
(237)
571
(549)
(4,736)
(57,259)
-
1,000
-
201
(1,351)
(4,220)
22,238
(2,102)
3,224
-
225
-
(178)
-
-
1,000
(8,196)
(60,973)
17,990
(7,149)
(15,673)
1,091
(962)
(15,544)
12,800
208
(193)
12,815
-
1,091
(49)
1,042
201
-
-
-
-
-
5,566
5,767
-
208
-
208
60,360
20,892
(8,511)
5,738
(638)
42,103
101,825
250
20,961
42,103
149
19,710
11,348
101
13,871
19,710
27
23
26
28
28
28
28
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 64 -
Serica Energy plc
Notes to the Financial Statements
1. Authorisation of the Financial Statements and Statement of Compliance with
IFRS
The Group’s and Company’s financial statements for the year ended 31 December 2019
were authorised for issue by the Board of Directors on 22 April 2020 and the balance
sheets were signed on the Board’s behalf by Antony Craven Walker and Mitch Flegg.
Serica Energy plc is a public limited company incorporated and domiciled in England &
Wales with its registered office at 48 George Street, London, W1U 7DY. The principal
activity of the Company and the Group is to identify, acquire and subsequently exploit oil
and gas reserves. Its current activities are located in the United Kingdom and Namibia.
The Company’s ordinary shares are traded on AIM.
The Group’s financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as adopted by the EU as they apply to the
financial statements of the Group for the year ended 31 December 2019. The Company’s
financial statements have been prepared in accordance with IFRS as adopted by the EU
as they apply to the financial statements of the Company for the year ended 31
December 2019 and as applied in accordance with the provisions of the Companies Act
2006. The Group’s financial statements are also prepared in accordance with IFRS as
issued by the IASB. The principal accounting policies adopted by the Group and by the
Company are set out in note 2.
The Company has taken advantage of the exemption provided under section 408 of the
Companies Act 2006 not to publish its individual income statement and related notes.
The loss dealt with in the financial statements of the parent Company was £2,583,000
(2018: profit £128,048,000).
2. Accounting Policies
Basis of Preparation
The accounting policies which follow set out those policies which apply in preparing the
financial statements for the year ended 31 December 2019.
The Group and Company financial statements have been prepared on a historical cost
basis and following the change in functional and presentational currency from US$ to £
sterling with effect from 1 January 2019 (see note 3) are presented in £ sterling. All
values are rounded to the nearest thousand pounds (£000) except when otherwise
indicated.
Going Concern
The Directors are required to consider the availability of resources to meet the Group’s
liabilities for the foreseeable future. The financial position of the Group, its cash flows
and capital commitments are described in the Financial Review above.
At 31 December 2019 the Group held cash and term deposits of £101.8 million which
had increased to approximately £108.9 million by 20 April 2020 with the balance at each
date including £12.1 million of restricted funds. The bulk of contingent and deferred
consideration due under the BKR acquisition agreements is related to future successful
field performance and consequently will be either reduced or deferred in the event of
production interruptions or lower net cash generation in a low oil and gas price
environment.
- 65 -
The Group regularly monitors its cash, funding and liquidity position. Near term cash
projections are revised and underlying assumptions reviewed, generally monthly, and
longer-term projections are also updated regularly. Downside price and other risking
scenarios are considered. In addition to commodity sales prices the Group is exposed to
potential production interruptions and these are also considered under such scenarios.
Serica’s acquisitions to-date have been structured to reduce post-completion risk and,
following completion of the BKR transactions, management has given priority to building
a strong cash reserve which can respond to different types of risk.
Following onset of the COVID-19 crisis, and the impact of the dispute between OPEC+
countries on oil and gas prices, we have stress tested future cash flow forecasts for the
Group to evaluate the impact of plausible downside scenarios. These include scenarios
that reflect extended low oil and gas prices throughout 2020 and 2021, which are at the
low end/lower than current forecasts and forward prices, and a three-month production
shut-in to reflect potential operational or Covid-19 related issues that could potentially
impact the Group. We have also performed reverse stress testing to assist our
judgement, which is designed to model the conditions that would have to exist such that
the Group required additional cash resources or had to rely on mitigating factors in 12
months-time. These included an adverse production shut-in scenario and low-price
environment, reflecting oil and gas price assumptions for the next 12 months that are
considerably lower than the latest forward prices for 2020 and 2021 or market prices
that have been experienced for the last 10 years. Under all of these scenarios we retain
sufficient liquidity in our business.
The impact of low gas prices is partially mitigated by price hedging up to 31 March 2021
for a proportion of projected gas sales volumes, which deliver monthly cash inflows to
Serica where market prices are lower than 35 up to 46 pence per therm with the price
variations reflecting the periods covered. The BKR net cash flow sharing arrangements
vary in line with actual net cash generated and therefore the impact of lower sales prices
and production volumes will be shared by Serica and the previous BKR owners. This
mitigated the impact of falls in gas prices last year. It continues to mitigate the impact of
the erratic oil and gas market conditions prevailing so far this year and remaining
payments are expected to be further reduced if low commodity prices are sustained for a
significant period.
Serica currently has no borrowings, relatively low operating costs per boe and its limited
capital commitments can be funded from existing cash resources. Additionally, we have
considered planned cost reductions which provide further resilience against softer
commodity prices. In particular, Serica has reduced the level of offshore personnel
through deferring non-essential work and has facilitated remote working wherever
possible.
After making enquiries and having taken into consideration the above factors, the
Directors have reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future. Accordingly, they continue
to adopt the going concern basis in preparing the financial statements.
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet
date and the reported amounts of revenues and expenses during the reporting period.
Estimates and judgements are continuously evaluated and are based on management’s
experience and other factors, including expectations of future events that are believed to
be reasonable under the circumstances. Actual outcomes could differ from these
estimates.
The key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the amounts recognised in the financial statements are: determining the
- 66 -
fair value of contingent consideration, determining the fair value of property, plant and
equipment on a business combination, decommissioning provisions, the assessment of
commercial reserves, the impairment of the Group and Company’s assets (including oil &
gas development assets and Exploration and Evaluation “E&E” assets), and the
recoverability of deferred tax assets.
Determining the fair value of contingent consideration on BKR acquisitions
The Group determined the fair value of initial contingent consideration payable based on
discounted cash flows at the time of the acquisition in 2018 calculated for each separate
component of the contingent consideration. The same models and assumptions were
used in the calculation of the fair value of property, plant and equipment arising on the
business combination. Any cash flows specific to the contingent consideration also reflect
applicable commercial terms and risks. In calculating the fair value of contingent
consideration on the BKR acquisitions payable as at 31 December 2019, assumptions
underlying the calculation were updated from 2018. These included updated commodity
prices, production profiles, future opex, capex and decommissioning cost estimates,
discount rates, proved and probable reserves estimates and risk assessments. For
further details including sensitivities of the calculation to changes in input variables, see
note 23.
Determining the fair value of property, plant and equipment on business combination
The Group determines the fair value of oil and gas assets acquired in a business
combination based on the discounted cash flows at the time of acquisition based on
management’s assessment of proven and probable reserves reflecting risks applicable to
the assets acquired. The estimated future cash flows attributable to the asset are
discounted to their present value using a discount rate that reflects the market
assessments of the time value of money and the risks specific to the asset at the time of
acquisition. In calculating the asset fair value, the Group will apply oil and gas price
assumptions representing management’s view of the medium and long-term pricing
Adjustments to fair value assessments reflecting corrections and adjustments based
upon further information that became available can then made up to twelve months after
completion of the acquisitions (see note 27).
Decommissioning provision
Amounts used in recording a provision for decommissioning are estimates based on
current legal and constructive requirements and current technology and price levels for
the removal of facilities and plugging and abandoning of wells. Due to changes in
relation to these items, the future actual cash outflows in relation to decommissioning
are likely to differ in practice. To reflect the effects due to changes in legislation,
requirements and technology and price levels, the carrying amounts of decommissioning
provisions are reviewed on a regular basis. The effects of changes in estimates do not
give rise to prior year adjustments and are dealt with prospectively. While the Group
uses its best estimates and judgement, actual results could differ from these estimates
(see note 24).
Assessment of commercial oil and gas reserves
Management is required to assess the level of the Group’s commercial reserves together
with the future expenditures to access those reserves, which are utilised in determining
the amortisation and depletion charge for the period and assessing whether any
impairment charge is required. The Group employs independent reserves specialists who
periodically assess the Group’s level of commercial reserves by reference to data sets
including geological, geophysical and engineering data together with reports,
presentation and financial information pertaining to the contractual and fiscal terms
applicable to the Group’s assets. In addition, the Group undertakes its own assessment
of commercial reserves and related future capital expenditure by reference to the same
data sets using its own internal expertise.
Assessment of the recoverable amount of intangible and tangible assets
The Group monitors internal and external indicators of impairment relating to its
- 67 -
intangible and tangible assets, which may indicate that the carrying value of the assets
may not be recoverable. The assessment of the existence of indicators of impairment in
E&E assets involves judgement, which includes whether licence performance obligations
can be met within the required regulatory timeframe, whether management expects to
fund significant further expenditure in respect of a licence, and whether the recoverable
amount may not cover the carrying value of the assets. For development and production
assets judgement is involved when determining whether there have been any significant
changes in the Group’s oil and gas reserves.
The Group determines whether E&E assets are impaired at an asset level and in regional
cash generating units (‘CGUs’) when facts and circumstances suggest that the carrying
amount of a regional CGU may exceed its recoverable amount. As recoverable amounts
are determined based upon risked potential, or where relevant, discovered oil and gas
reserves, this involves estimations and the selection of a suitable pre-tax discount rate
relevant to the asset in question. The calculation of the recoverable amount of oil and
gas development and production properties involves estimating the net present value of
cash flows expected to be generated from the asset in question. Future cash flows are
based on assumptions on matters such as estimated proven and probable oil and gas
reserve quantities and commodity prices. The discount rate applied is a pre-tax rate
which reflects the specific risks of the country in which the asset is located.
Management is required to assess the carrying value of investments in subsidiaries in
the parent company balance sheet for impairment by reference to the recoverable
amount. This requires an estimate of amounts recoverable from oil and gas assets within
the underlying subsidiaries (see note 17).
A review was performed for any indication that the value of the Group’s oil and gas
assets may be impaired at the balance sheet date of 31 December 2019 in accordance
with the stated policy and no impairment triggers were noted. COVID-19 has been
determined as a non-adjusting post-balance sheet event (see note 33).
Deferred taxation
Deferred tax assets, including those arising from unutilised tax losses, require
management to assess the likelihood that the Group will generate sufficient taxable
profits in future periods, in order to utilise recognised deferred tax assets. Assumptions
about the generation of future taxable profits depend on management’s estimates of
future cash flows. These estimates are based on forecast cash flows from operations
(which are impacted by production and sales volumes, oil and natural gas prices,
reserves, operating costs, decommissioning costs, capital expenditure, dividends and
other capital management transactions) and judgement about the application of existing
tax laws. The most significant variable behind the increased deferred tax asset
recognised in 2018 is the acquisition of the further producing oil and gas assets in
November 2018 which have generated a significant increase in management’s estimate
of future cash flows and taxable income expected to be sheltered by available tax losses.
To the extent that actual events differ significantly from estimates, the ability of the
Group to realise deferred tax assets could be impacted.
Basis of Consolidation
The consolidated financial statements include the accounts of Serica Energy plc (the
“Company”) and its wholly owned subsidiaries Serica Holdings UK Limited, Serica Energy
Holdings B.V., Serica Energy (UK) Limited, Serica Glagah Kambuna B.V., Serica Sidi
Moussa B.V., Serica Energy Slyne B.V., Serica Energy Rockall B.V., Serica Energy
Namibia B.V., Serica Energy Corporation, Asia Petroleum Development Limited,
Petroleum Development Associates (Asia) Limited and Petroleum Development
Associates (Lematang) Limited. Together these comprise the "Group".
All inter-company balances and transactions have been eliminated upon consolidation.
- 68 -
Foreign Currency Translation
The functional and presentational currency of Serica Energy plc and its subsidiaries is £
sterling. See further detail in note 3 regarding the change in functional and
presentational currency from US$ to £ sterling with effect from 1 January 2019.
Transactions in foreign currencies are initially recorded at the functional currency rate
ruling at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the foreign currency rate of exchange ruling at the
balance sheet date and differences are taken to the income statement. Non-monetary
items that are measured in terms of historical cost in a foreign currency are translated
using the exchange rate as at the date of initial transaction. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rate at
the date when the fair value was determined. Exchange gains and losses arising from
translation are charged to the income statement as an operating item.
Business Combinations and Goodwill
Business combinations from 1 January 2010
Business combinations are accounted for using the acquisition method. The cost of an
acquisition is measured as the aggregate of consideration transferred, measured at
acquisition date fair value and the amount of any non-controlling interest in the
acquiree. Acquisition costs incurred are expensed.
When the Group acquires a business, it assesses the financial assets and liabilities
assumed for appropriate classification and designation in accordance with the contractual
terms, economic circumstances and pertinent conditions as at the acquisition date. Any
contingent consideration to be transferred to the acquirer will be recognized at fair value
at the acquisition date. Contingent consideration classified as an asset or liability that is
a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured
at fair value with the changes in fair value recognized in the statement of profit or loss in
accordance with IFRS 9. Other contingent consideration that is not within the scope of
IFRS 9 is measured at fair value at each reporting date with changes in fair value
recognized in profit or loss.
Goodwill on acquisition is initially measured at cost being the excess of purchase price
over the fair market value of identifiable assets, liabilities and contingent liabilities
acquired. Following initial acquisition, it is measured at cost less any accumulated
impairment losses. Goodwill is not amortised but is subject to an impairment test at
least annually and more frequently if events or changes in circumstances indicate that
the carrying value may be impaired. If the fair value of the net assets acquired is in
excess of the aggregate consideration transferred, the Group re-assesses whether it has
correctly identified all of the assets acquired and all of the liabilities assumed and
reviews the procedures used to measure the amounts to be recognized at the acquisition
date. If the reassessment still results in an excess of fair value of net assets acquired
over the aggregate consideration transferred, then the gain is recognized in profit or
loss.
At the acquisition date, any goodwill acquired is allocated to each of the cash-generating
units, or groups of cash generating units expected to benefit from the combination's
synergies. Impairment is determined by assessing the recoverable amount of the cash-
generating unit, or groups of cash generating units to which the goodwill relates. Where
the recoverable amount of the cash-generating unit is less than the carrying amount, an
impairment loss is recognised.
Joint Arrangements
A joint operation is a type of joint arrangement whereby the parties that have joint
- 69 -
control of the arrangement have the rights to the assets and obligations for the
liabilities, relating to the arrangement.
The Group conducts petroleum and natural gas exploration and production activities
jointly with other venturers who each have direct ownership in and jointly control the
operations of the ventures. These are classified as jointly controlled operations and the
financial statements reflect the Group's share of assets and liabilities in such activities.
Income from the sale or use of the Group’s share of the output of jointly controlled
operations, and its share of joint venture expenses, are recognised when it is probable
that the economic benefits associated with the transaction will flow to/from the Group
and their amount can be measured reliably.
Full details of Serica’s working interests in those petroleum and natural gas exploration
and production activities classified as joint operations are included in the Review of
Operations.
Exploration and Evaluation Assets
As allowed under IFRS 6 and in accordance with clarification issued by the International
Financial Reporting Interpretations Committee, the Group has continued to apply its
existing accounting policy to exploration and evaluation activity, subject to the specific
requirements of IFRS 6. The Group will continue to monitor the application of these
policies in light of expected future guidance on accounting for oil and gas activities.
Pre-licence Award Costs
Costs incurred prior to the award of oil and gas licences, concessions and other
exploration rights are expensed in the income statement.
Exploration and Evaluation (E&E)
The costs of exploring for and evaluating oil and gas properties, including the costs of
acquiring rights to explore, geological and geophysical studies, exploratory drilling and
directly related overheads, are capitalised and classified as intangible E&E assets. These
costs are directly attributed to regional CGUs for the purposes of impairment testing; UK
& Ireland and Africa.
E&E assets are not amortised prior to the conclusion of appraisal activities but are
assessed for impairment at an asset level and in regional CGUs when facts and
circumstances suggest that the carrying amount of a regional cost centre may exceed its
recoverable amount. Recoverable amounts are determined based upon risked potential,
and where relevant, discovered oil and gas reserves. When an impairment test indicates
an excess of carrying value compared to the recoverable amount, the carrying value of
the regional CGU is written down to the recoverable amount in accordance with IAS 36.
Such excess is expensed in the income statement. Where conditions giving rise to
impairment subsequently reverse, the effect of the impairment charge is reversed as a
credit to the income statement.
Costs of licences and associated E&E expenditure are expensed in the income statement
if licences are relinquished, or if management do not expect to fund significant future
expenditure in relation to the licence.
The E&E phase is completed when either the technical feasibility and commercial viability
of extracting a mineral resource are demonstrable or no further prospectivity is
recognised. At that point, if commercial reserves have been discovered, the carrying
value of the relevant assets, net of any impairment write-down, is classified as an oil and
gas property within property, plant and equipment, and tested for impairment. If
commercial reserves have not been discovered then the costs of such assets will be
written off.
- 70 -
Asset Purchases and Disposals
When a commercial transaction involves the exchange of E&E assets of similar size and
characteristics, no fair value calculation is performed. The capitalised costs of the asset
being sold are transferred to the asset being acquired. Proceeds from a part disposal of
an E&E asset, including back-cost contributions are credited against the capitalised cost
of the asset, with any excess being taken to the income statement as a gain on disposal.
Farm-ins
In accordance with industry practice, the Group does not record its share of costs that
are ‘carried’ by third parties in relation to its farm-in agreements in the E&E phase.
Similarly, while the Group has agreed to carry the costs of another party to a Joint
Operating Agreement ("JOA") in order to earn additional equity, it records its paying
interest that incorporates the additional contribution over its equity share.
Property, Plant and Equipment – Oil and gas properties
Capitalisation
Oil and gas properties are stated at cost, less any accumulated depreciation and
accumulated impairment losses. Oil and gas properties are accumulated into single field
cost centres and represent the cost of developing the commercial reserves and bringing
them into production together with the E&E expenditures incurred in finding commercial
reserves previously transferred from E&E assets as outlined in the policy above. The cost
will include, for qualifying assets, borrowing costs.
Depletion
Oil and gas properties are not depleted until production commences. Costs relating to
each single field cost centre are depleted on a unit of production method based on the
commercial proved and probable reserves for that cost centre. The depletion calculation
takes account of the estimated future costs of development of management’s
assessment of proved and probable reserves, reflecting risks applicable to the specific
assets. Changes in reserve quantities and cost estimates are recognised prospectively
from the last reporting date. Proved and probable reserves estimates obtained from an
independent reserves specialist have been used as the basis for 2019 calculations.
Impairment
A review is performed for any indication that the value of the Group’s development and
production assets may be impaired.
For oil and gas properties when there are such indications, an impairment test is carried
out on the cash generating unit. Each cash generating unit is identified in accordance
with IAS 36. Serica’s cash generating units are those assets which generate largely
independent cash flows and are normally, but not always, single development or
production areas. If necessary, impairment is charged through the income statement if
the capitalised costs of the cash generating unit exceed the recoverable amount of the
related commercial oil and gas reserves.
Acquisitions, Asset Purchases and Disposals
Acquisitions of oil and gas properties are accounted for under the acquisition method
when the assets acquired and liabilities assumed constitute a business.
Transactions involving the purchase of an individual field interest, or a group of field
interests, that do not constitute a business, are treated as asset purchases. Accordingly,
- 71 -
no goodwill and no deferred tax gross up arises, and the consideration is allocated to the
assets and liabilities purchased on an appropriate basis. Proceeds from the entire
disposal of a development and production asset, or any part thereof, are taken to the
income statement together with the requisite proportional net book value of the asset, or
part thereof, being sold.
Decommissioning
Liabilities for decommissioning costs are recognised when the Group has an obligation to
dismantle and remove a production, transportation or processing facility and to restore
the site on which it is located. Liabilities may arise upon construction of such facilities,
upon acquisition or through a subsequent change in legislation or regulations. The
amount recognised is the estimated present value of future expenditure determined in
accordance with local conditions and requirements. A corresponding tangible item of
property, plant and equipment equivalent to the provision is also created.
Any changes in the present value of the estimated expenditure is added to or deducted
from the cost of the assets to which it relates. The adjusted depreciable amount of the
asset is then depreciated prospectively over its remaining useful life. The unwinding of
the discount on the decommissioning provision is included as a finance cost.
Underlift/Overlift
Lifting arrangements for oil and gas produced in certain fields are such that each
participant may not receive its share of the overall production in each period. The
difference between cumulative entitlement and cumulative production less stock is
‘underlift’ or ‘overlift’. Underlift and overlift are valued at market value and included
within debtors (‘underlift’) or creditors (‘overlift’). Following the adoption of IFRS 15
‘Revenue from Contracts with Customers’, movement in liquids over/underlift is classified
in cost of sales with effect from 1 January 2018. Movements during an accounting period
had previously been adjusted through revenue, such that gross profit was recognised on
an entitlement basis.
Property, Plant and Equipment - Other
Computer equipment and fixtures, fittings and equipment are recorded at cost as
tangible assets. The straight-line method of depreciation is used to depreciate the cost of
these assets over their estimated useful lives. Computer equipment is depreciated over
three years and fixtures, fittings and equipment over four years, and right-of-use assets
over the period of lease.
Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is determined
by the first-in first-out method and comprises direct purchase costs and transportation
expenses.
Investments
In its separate financial statements the Company recognises its investments in subsidiaries
at cost less any provision for impairment.
Financial Instruments
Financial instruments comprise financial assets, cash and cash equivalents, financial
liabilities and equity instruments. Financial assets and financial liabilities are recognised
when the Group becomes a party to the contractual provisions of the financial
instrument.
- 72 -
Financial assets
Financial assets are classified, at initial recognition, as subsequently measured at
amortised cost, fair value through profit or loss, and fair value through other
comprehensive income (OCI).
The classification of financial assets at initial recognition depends on the financial asset’s
contractual cash flow characteristics and the Group’s business model for managing them.
With the exception of trade receivables that do not contain a significant financing
component or for which the Group has applied the practical expedient, the Group initially
measures a financial asset at its fair value plus transaction costs (in the case of a
financial asset not at fair value through profit or loss). Trade receivables that do not
contain a significant financing component or for which the Group has applied the
practical expedient are measured at the transaction price determined under IFRS 15.
The Group determines the classification of its financial assets at initial recognition and,
where allowed and appropriate, re-evaluates this designation at each financial year end.
Financial assets at fair value through profit or loss include financial assets held for
trading and derivatives. Financial assets are classified as held for trading if they are
acquired for the purpose of selling in the near term.
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. After initial measurement loans and
receivables are subsequently carried at amortised cost, using the effective interest rate
method, less any allowance for impairment. Amortised cost is calculated by taking into
account any discount or premium on acquisition over the period to maturity. Gains and
losses are recognised in the income statement when the loans and receivables are de-
recognised or impaired, as well as through the amortisation process.
Cash and cash equivalents
Cash and cash equivalents include balances with banks and short-term investments with
original maturities of three months or less at the date acquired.
Financial liabilities
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value
through profit or loss, loans and borrowings, payables, or as derivatives designated as
hedging instruments in an effective hedge, as appropriate. The Group’s financial
liabilities currently include interest bearing loans and borrowings, and trade and other
payables. All financial liabilities are recognised initially at fair value. Obligations for loans
and borrowings are recognised when the Group becomes party to the related contracts
and are measured initially at the fair value of consideration received less directly
attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are subsequently
measured at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the liabilities are
derecognised as well as through the amortisation process.
Derivative financial instruments
The Group uses derivative financial instruments, such as forward commodity contracts,
to hedge its commodity price risks. The Group has elected not to apply hedge accounting
to these derivatives. Such derivative financial instruments are initially recognised at fair
value on the date on which a derivative contract is entered into and are subsequently
- 73 -
remeasured at fair value. Derivatives are carried as financial assets when the fair value
is positive and as financial liabilities when the fair value is negative. Any gains or losses
arising from changes in the fair value of derivatives are taken directly to the statement
of profit or loss and other comprehensive income and presented within operating profit.
Further details of the fair values of derivative financial instruments and how they are
measured are provided in Note 20.
Equity
Equity instruments issued by the Company are recorded in equity at the proceeds
received, net of direct issue costs.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources will be required to
settle the obligation, and a reliable estimate can be made of the amount of the
obligation.
The Group’s estimate in respect of contingent consideration that may be payable
following the acquisition of its interest in the Erskine field, is capitalised as an asset
acquisition cost. The value of the provision is determined by the amounts and nature of
operating costs incurred over a contractual period.
Revenue from contracts with customers
Revenue from contracts with customers is recognised when control of the goods or
services are transferred to the customer at an amount that reflects the consideration to
which the Group expects to be entitled to in exchange for those goods or services.
Revenue is measured at the fair value of the consideration received or receivable and
represents amounts receivable for goods provided in the normal course of business, net
of discounts, customs duties and sales taxes. The Group has concluded that is is the
principal in its revenue arrangements because it typically controls the goods or services
before transferring them to the customer.
The sale of crude oil, gas or condensate represents a single performance obligation,
being the sale of barrels equivalent on collection of a cargo or on delivery of commodity
into an infrastructure. Revenue is accordingly recognised for this performance obligation
when control over the corresponding commodity is transferred to the customer. The
normal credit term is 15 to 45 days upon collection or delivery.
Finance Revenue
Finance revenue chiefly comprises interest income from cash deposits on the basis of the
effective interest rate method and is disclosed separately on the face of the income
statement.
Finance Costs
Finance costs of debt are allocated to periods over the term of the related debt using the
effective interest method. Arrangement fees and issue costs are amortised and charged
to the income statement as finance costs over the term of the debt.
Share-Based Payment Transactions
Employees (including executive directors) of the Group receive remuneration in the form
of share-based payment transactions, whereby employees render services in exchange
for shares or rights over shares (‘equity-settled transactions’).
- 74 -
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the
fair value at the date on which they are granted. In valuing equity-settled transactions,
no account is taken of any service or performance conditions, other than conditions
linked to the price of the shares of Serica Energy plc (‘market conditions’), if applicable.
The cost of equity-settled transactions is recognised, together with a corresponding
increase in equity, over the period in which the relevant employees become fully entitled
to the award (the ‘vesting period’). The cumulative expense recognised for equity-settled
transactions at each reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Group’s best estimate of the number of equity
instruments that will ultimately vest. The income statement charge or credit for a period
represents the movement in cumulative expense recognised as at the beginning and end
of that period.
No expense is recognised for awards that do not ultimately vest, except for awards
where vesting is conditional upon a market or non-vesting condition, which are treated
as vesting irrespective of whether or not the market or non-vesting condition is satisfied,
provided that all other performance conditions are satisfied. For equity awards cancelled
by forfeiture when vesting conditions are not met, any expense previously recognised is
reversed and recognised as a credit in the income statement. Equity awards cancelled
are treated as vesting immediately on the date of cancellation, and any expense not
recognised for the award at that date is recognised in the income statement. Estimated
associated national insurance charges are expensed in the income statement on an
accruals basis.
Where the terms of an equity-settled award are modified or a new award is designated
as replacing a cancelled or settled award, the cost based on the original award terms
continues to be recognised over the original vesting period. In addition, an expense is
recognised over the remainder of the new vesting period for the incremental fair value of
any modification, based on the difference between the fair value of the original award
and the fair value of the modified award, both as measured on the date of the
modification. No reduction is recognised if this difference is negative.
Income Taxes
Current tax, including UK corporation tax and overseas corporation tax, is provided at
amounts expected to be paid using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is provided using the liability method and tax rates and laws that have been
enacted or substantively enacted at the balance sheet date. Provision is made for
temporary differences at the balance sheet date between the tax bases of the assets and
liabilities and their carrying amounts for financial reporting purposes. Deferred tax is
provided on all temporary differences except for:
•
•
temporary differences associated with investments in subsidiaries, where the timing
of the reversal of the temporary differences can be controlled by the Group and it is
probable that the temporary differences will not reverse in the foreseeable future;
and
temporary differences arising from the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the transaction,
affects neither the income statement nor taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary differences, to the extent
that it is probable that taxable profits will be available against which the deductible
- 75 -
temporary differences can be utilised. Deferred tax assets and liabilities are presented
net only if there is a legally enforceable right to set off current tax assets against current
tax liabilities and if the deferred tax assets and liabilities relate to income taxes levied by
the same taxation authority.
Earnings Per Share
Earnings per share is calculated using the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share is calculated based on the
weighted average number of ordinary shares outstanding during the period plus the
weighted average number of shares that would be issued on the conversion of all
relevant potentially dilutive shares to ordinary shares. It is assumed that any proceeds
obtained on the exercise of any options and warrants would be used to purchase
ordinary shares at the average price during the period. Where the impact of converted
shares would be anti-dilutive, these are excluded from the calculation of diluted
earnings.
New and amended standards and interpretations
The Group has adopted and applied the following standards that are relevant to its
operations for the first time for the annual reporting period commencing 1 January 2019:
-
IFRS 16 - Leases
IFRS 16 Leases, issued in January 2016, set out the principles for the recognition,
measurement, presentation and disclosure of leases for both lessors and lessees. It
replaced the previous leases standard IAS 17 Leases and is effective from 1 January
2019. Under the new standard all lease contracts, with limited exceptions, are
recognised in financial statements by way of right of use assets and corresponding lease
liabilities. Compared with the previous accounting for operating leases, it impacts the
classification and timing of expenses and consequently the classification between cash
flow from operating activities and cash flow from financing activities.
IFRS 16 introduced a single, on-balance sheet lease accounting model for lessees. A
lessee recognises a right-of-use asset, representing its right to use the underlying asset,
and a lease liability, representing its obligation to make lease payments. Lessees
recognise separately the interest expense on the lease liability and the depreciation
expense on the right-of-use asset. There were recognition exemptions for short-term
leases and leases of low-value items. Lessor accounting remains similar to the previous
accounting under IAS 17 i.e. lessors continue to classify leases as finance or operating
leases.
There are no other new or amended standards or interpretations effective for the first
time for periods beginning on or after 1 January 2019 that had a significant impact on
the financial statements.
Leases
Impact of IFRS 16 on Serica and accounting policy applicable from 1 January 2019
Serica does not currently have material lease contracts and therefore the impact of the
adoption of the new standard at 1 January 2019 is not considered to be material. In
applying IFRS 16 for the first time the Group has applied the short-term lease practical
expedient by not recognising lease liabilities in respect to lease arrangements with a
remaining lease term of less than 12 months as at 1 January 2019. The Group adopted
the modified retrospective approach to adoption on 1 January 2019, measuring right-of
use assets at an amount based on their respective lease liability on adoption, with the
cumulative effect of adopting the standard recognised at the date of initial application
without restatement of comparative information.
- 76 -
As a lessee, the Group recognises a right-of-use asset and a lease liability at the lease
commencement date. The lease liability is initially measured at the present value of the
lease payments that are not paid at the commencement date, discounted by using the
rate implicit in the lease, or, if that rate cannot be readily determined, the Group uses its
incremental borrowing rate.
The lease liability is subsequently recorded at amortised cost, using the effective interest
rate method. The liability is remeasured when there is a change in future lease payments
arising from a change in an index or rate or if the Group changes its assessment of
whether it will exercise a purchase, extension or termination option. When the lease
liability is remeasured in this way, a corresponding adjustment is made to the carrying
amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of
the right-of-use asset has been reduced to zero.
The right-of-use asset is measured at cost, which comprises the initial amount of the
lease liability adjusted for any lease payments made at or before the commencement
date, plus any initial direct costs incurred and an estimate of costs to dismantle and
remove the underlying asset or to restore the underlying asset or the site on which it is
located, less any lease incentives received. Right-of-use assets are depreciated over the
shorter period of lease term and useful life of the underlying asset.
The Group does not currently act as a lessor.
Accounting policy before 1 January 2019
Under IAS 17, the determination of whether an arrangement is or contains a lease is
based on the substance of the arrangement at the inception date. The arrangement is
assessed for whether fulfilment of the arrangement is dependent on the use of a specific
asset or assets or the arrangement conveys a right to use the asset or assets, even if
that right is not explicitly specified in an arrangement.
As a lessee
A lease is classified at the inception date as a finance lease or an operating lease. A
lease that transfers substantially all the risks and rewards incidental to ownership to the
Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the fair value of the
leased asset or, if lower, at the present value of the minimum lease payments. Lease
payments are apportioned between finance charges and reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Finance
charges are recognised in finance costs in the income statement. A leased asset is
depreciated over the shorter of the useful life of the asset or, if applicable, the lease
term.
An operating lease is a lease other than a finance lease. Operating lease payments are
recognised as an operating expense in the income statement on a straight-line basis
over the lease term.
Standards issued but not yet effective
Certain standards or interpretations issued but not yet effective up to the date of
issuance of the Group’s financial statements are listed below. This listing of standards
and interpretations issued are those that the Group reasonably expects to have an
impact on disclosures, financial position or performance when applied at a future date.
The Group is currently assessing the impact of these standards and intends to adopt
them when they become effective. In reviewing the below standards, the Group does not
believe that there will be a material impact on the financial statements.
- 77 -
Standard
Effective year
commencing on or after
IFRS 3 – Definition of a Business (amendments to IFRS 3)
IAS1, IAS8 -Definition of Material (amendments to IAS1
and IAS 8)
Framework in IFRS Standards
IFRS 17 – Insurance Contracts
1 January 2020
1 January 2020
1 January 2020
1 January 2020
- 78 -
3.
Change in functional and presentational currency
An entity’s functional currency is the currency of the primary economic environment in
which the entity operates and in which all transactions should be recorded. In light of the
recent developments within the Company and Group’s operations following completion of
the BKR acquisitions on 30 November 2018, the directors have reassessed the functional
currency of both the Company and the Group’s main operating subsidiary, Serica Energy
(UK) Limited, and concluded that the functional currency of these entities is now pounds
sterling (“£”). The directors further concluded that the currency in which the Company
and Group’s financial results are reported, the presentational currency, should also be
changed to £.
The BKR acquisitions have brought a significant increase in scale to the business with a
majority of revenues now earned from gas sales which realise revenue in £, and most of
the operator expenditure running the BKR assets is also denominated in £. The date of
change in functional currency from US$ to £ is 30 November 2018. However, given that
the impact between a change on 30 November 2018 compared to 1 January 2019 is
considered to be immaterial the change has been made effective on 1 January 2019.
Consequently, the Group 2019 Interim Financial Statements were presented in £ and
future Group and Company financial statements, starting with these for 2019, will also
be presented in £. The change in presentational currency from US$ to £ represents a
voluntary change in accounting policy and is applied retrospectively with 2018
comparatives restated.
The presentation currency for the Company and Group has been changed to £ from 1
January 2019, with retrospective effect on comparative figures. Assets and liabilities
have been translated into £ at closing rates of exchange on the relevant balance sheet
date, whilst income and expenditure items were translated at rates of exchange
prevailing at the relevant time of the transaction. Share capital and other reserves have
been translated at the closing rates of exchange on the relevant balance sheet date.
Equity per 1 January 2018 has been translated to £ using the £/US$ closing rate
applicable for the same date. As a result, a translation effect occurs for each component
of equity. The translation effect related to share capital, other reserve and accumulated
deficit is shown as a separate item in the statement of change in equity for 2018.
The exchange rates of the US dollar to pounds sterling over the periods restated in this
report are as follows: 31 December 2017- closing rate 1.349, year ended 31 December
2018 - closing rate 1.2734, average rate 1.335.
- 79 -
4.
Segment Information
The Group’s business is that of oil and gas exploration, development and production. The
Group’s reportable segments are based on the location of the Group’s assets.
The following tables present revenue, profit and certain asset and liability information
regarding the Group’s geographical reportable segments for the years ended 31
December 2019 and 2018. Costs associated with the UK corporate centre are included in
the UK reportable segment.
Year ended 31 December 2019
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
E&E asset write-offs
Operating and segment profit/(loss)
Change in BKR financial liability
Finance revenue
Finance costs
Profit/(loss) before taxation
Taxation charge for the year
Profit/(loss) after taxation
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
UK
£000
Ireland
£000
Africa
£000
Total
Ireland
£000
Ireland
Ireland
Africa
Africa
Africa
250,533
-
(52,631)
(109,576)
(566)
(62)
87,698
21,771
571
(1,252)
108,788
(44,750)
64,038
-
-
-
(18)
(18)
-
-
-
(18)
-
(18)
-
-
-
-
-
-
-
-
-
-
-
-
250,533
(52,631)
(109,576)
(566)
(80)
87,680
21,771
571
(1,252)
108,770
(44,750)
64,020
UK
£000
Ireland
£000
Africa
£000
Total
£000
325,404
304
149,282
474,990
-
-
-
-
-
3,348
-
3,348
325,404
3,652
149,282
-
478,338
Segment liabilities
Total liabilities
(280,272)
(280,272)
(52)
(52)
(4) (280,328)
(4) (280,328)
Capital expenditure 2019:
Property, plant & equipment
Exploration and evaluation assets
5,074
291
-
18
-
240
5,074
549
- 80 -
Year ended 31 December 2018
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
E&E asset impairment/write-offs
BKR transition costs
Operating and segment profit/loss
Bargain purchase gain on BKR acquisition
BKR transaction costs
Finance revenue
Finance costs
Profit before taxation
Taxation credit for the year
Profit after taxation
UK
£000
Ireland
£000
*restated *restated
35,708
-
-
(6,153)
-
(14,984)
(217)
-
9,866 (7,416)
-
(8,814)
15,406 (7,416)
-
33,673
-
(2,102)
-
201
-
(282)
46,896 (7,416)
12,005
-
58,901 (7,416)
Africa
£000
*restated
Total
Ireland
£000
*restated
Ireland
Ireland
Africa
Africa
Africa
-
-
-
-
-
-
-
-
-
-
-
-
-
-
35,708
(6,153)
(14,984)
(217)
2,450
(8,814)
7,990
33,673
(2,102)
201
(282)
39,480
12,005
51,485
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
UK
£000
Ireland
£000
Africa
£000
Total
£000
373,721
74
85,765
459,560
-
-
5
5
-
3,109
-
3,109
373,721
3,183
85,770
14,731
477,405
Segment liabilities
Total liabilities
(345,362)
(345,362)
(128)
(128)
(110)
(110)
(345,600)
(345,600)
Capital expenditure 2018:
Property, plant & equipment
Exploration and evaluation assets
3,964
753
-
409
-
189
3,964
1,351
Unallocated assets comprise cash on deposit. In 2019 all cash on deposit is allocated to
the UK operating segment.
Information on major customers is provided in note 5.
- 81 -
5. Sales Revenue
Gas sales
Oil sales
NGL sales
2019
£000
2018
£000
*restated
28,137
152,586
75,237
4,877
22,710 2,694
250,533
35,708
*restated from US$ to £ following change of functional and presentational currency – see note 3
Gas sales revenue in 2018 and 2019 arose from one key customer, all oil sales revenue
in 2018 and 2019 was from one key customer, and NGL sales in 2019 were made to four
(2018: four) customers.
6. Cost of Sales
Operating costs
Depletion (see note 16)
Movement in liquids overlift/underlift
2019
£000
105,148
52,631
6,969
2018
£000
*restated
13,146
6,153
(3,609)
164,748
15,690
*restated from US$ to £ following change of functional and presentational currency – see note 3
7. Group Operating Profit
This is stated after crediting/(charging):
Realised hedging gains
Unrealised hedging gains/(losses)
Other income/(expense)
2019
£000
2018
£000
*restated
3,876
6,742
273
(1,827)
10,618
(1,554)
Operating leases
Operating lease rentals on land and buildings expensed in 2018 were £208,000*.
Depreciation, depletion and amortisation expense
Depreciation of other property, plant and equipment totalled £190,000 in 2019 (2018:
£nil) and was allocated within general and administrative expenses.
Depletion of oil and gas properties is classified within cost of sales.
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 82 -
8. Auditor’s Remuneration
Audit of the Group accounts
Audit of the Company’s accounts
Audit of accounts of Company’s subsidiaries
Total audit fees
Other fees to auditor:
Corporate transaction services
Other assurance fees
2019
£000
2018
£000
*restated
325 170
30
11
211
30
12
367
£000
£000
-
-
-
267
32
299
*restated from US$ to £ following change of functional and presentational currency – see note 3
Fees paid to Ernst & Young LLP and its associates for non-audit services are not
disclosed in the individual accounts of the Company as Group financial statements are
prepared which are required to disclose such fees on a consolidated basis.
- 83 -
9. Staff Costs and Directors’ Emoluments
a) Staff Costs
Staff costs
Wages and salaries
Social security costs
Other pension costs
Share-based long-term incentives
2019
£000
2018
£000
*restated
16,749
2,075
1,960
1,094
4,765
525
140
367
21,878
5,797
The average number of persons employed by the Group during the year was 145 (2018: 22),
with operating ac
9 in management functions (2018: 7), 126 in technical functions (2018: 13) and 10 (2018:2)
in finance and administrative functions.
The average number of persons employed by the Company during the year was 10 (2018: 7),
operating ac
with 7 in management functions (2018: 6), nil in technical functions (2018: nil) and 3 (2018:1)
in finance and administrative functions.
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
1,255
40
242
1,095
27
175
1,537
1,297
b) Directors’ Emoluments
The emoluments of the individual Directors were as follows. All amounts are paid in £ sterling.
A Craven Walker
M Flegg (1)
N Pike
I Vann
T Garlick (2)
M Webb (3)
fees
£000
400
400
50
50
50
50
2019
Salary and
2019
Bonus
2019
Pension
£000
£000
-
124
-
-
-
-
-
40
-
-
-
-
40
1,000
124
Note (1) Cash in lieu of pension.
Note (2) Trevor Garlick was appointed on 30 November 2018.
Note (3) Malcolm Webb was appointed on 30 November 2018.
Number of Directors securing benefits under defined
contribution schemes during the year
Number of Directors who exercised share options
- 84 -
2019
Benefits
in kind
£000
19
-
-
-
-
-
2019
Total
£000
419
564
50
50
50
50
2018
Total
£000
*restated
489
432
50
50
3
3
19
1,183
1,027
2019
2018
1
-
1
-
Aggregate gains made by Directors on the exercise of options
£000
-
£000
-
*restated from US$ to £ following change of functional and presentational currency – see note 3
The Group defines key management personnel as the Directors of the Company. There
are no transactions with Directors other than their remuneration as disclosed above and
those described in Note 32.
10. Finance Revenue
Bank interest receivable
Total finance revenue
2019
£000
571
571
2018
£000
*restated
201
201
*restated from US$ to £ following change of functional and presentational currency – see note 3
11. Finance Costs
Interest payable on BKR Facility
Interest payable on Erskine acquisition consideration
Other interest payable
Unwinding of discount on decommissioning provisions (note 24)
Total finance costs
2019
£000
643
-
96
513
1,252
2018
£000
*restated
204
41
5
32
282
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 85 -
12. Taxation
a) Tax charged/(credited) in the income statement
Charge for the year
Total current income tax charge
Deferred tax
2019
£000
2018
£000
*restated
-
-
-
-
Origination and reversal of temporary differences in the
current year
Adjustment in respect of prior years
Total deferred tax charge/(credit)
44,750
-
-
(12,005)
44,750
(12,005)
Tax charge/(credit) in the income statement
44,750
(12,005)
b) Reconciliation of the total tax charge/(credit)
The tax in the income statement for the year differs from the amount that would be
expected by applying the standard UK corporation tax rate for the following reasons:
corporation tax in the UK of
2019
£000
2018
£000
*restated
Accounting profit before taxation
108,770
39,480
Statutory rate of corporation tax in the UK of 40% (2018:
40%)
Expenses not deductible for tax purposes
Unrecognised tax losses
Exploration write-offs
Bargain gain on BKR acquisitions
Utilisation of tax losses not previously recognised
Different foreign tax rates
Other
Recognition of losses not previously recognised
Tax charge/(credit) reported in the income statement
43,508
218
1,033
29
-
-
11
(49)
-
44,750
15,792
1,010
377
1,854
(13,470)
(6,350)
1,123
(336)
(12,005)
(12,005)
- 86 -
c) Recognised and unrecognised tax losses
The Group’s deferred tax assets at 31 December 2019 are recognised to the extent that
taxable profits are expected to arise in the future against which tax losses and
allowances in the UK can be utilised. In accordance with IAS 12 Income Taxes, the
Group assessed the recoverability of its deferred tax assets at 31 December 2019 with
respect to ring fence losses and allowances.
The Group has UK ring fence tax losses of £40.2 million available as at 31 December
2019 (2018: £109.4 million) which form part of total UK tax losses of approximately
£65.4 million (2018: £133.7 million) that are available indefinitely for offset against
future trading profits of the companies in which the losses arose. Of this amount £40.2
million (2018: £51.8 million) has been set off against taxable temporary differences.
The benefit of approximately £25.2 million (2018: £24.3 million) of tax losses has not
been recognised in these consolidated statements which reflects the extent of the total
available UK tax losses that have not either been recognised in the net deferred tax
asset or set against a deferred tax liability arising.
d) Deferred tax
The deferred tax included in the balance sheet is as follows:
2019
£000
2018
£000
*restated
Deferred tax liability:
Temporary differences on capital expenditure
(130,162)
(149,828)
Deferred tax liability
(130,162)
(149,828)
Deferred tax asset:
Tax losses carried forward
Deductibles under the Net Cash Flow Sharing Deed
Decommissioning liability
Deferred tax asset
Net deferred tax liability
Reconciliation of net deferred tax (liabilities)/assets
At 1 January
*Translation effect
Tax (charge)/ income during the year recognised in profit
Deferred taxes acquired (see note 27)
At 31 December
16,395
28,900
9,036
43,878
65,810
9,059
54,331 118,747
(75,831) (31,081)
2019
£000
(31,081)
-
(44,750)
-
2018
£000
*restated
12,016
777
12,005
(55,879)
(75,831)
(31,081)
- 87 -
The deferred tax in the Group income statement is as follows:
Deferred tax in the income statement:
Temporary differences on capital expenditure
Temporary difference on future recoverable costs
Tax losses carried forward
Net Cash Flow Sharing Deed
Other temporary differences
2019
£000
(19,666)
-
27,483
36,910
23
2018
£000
*restated
3,903
-
(15,908)
-
-
Deferred income tax charge/(credit)
44,750
(12,005)
e) Changes to UK corporation tax legislation
Finance Act 2016 enacted a change in the mainstream corporation tax rate to 17% with
effect from 1 April 2020. In the Budget statement on 11 March 2020 it was announced
that the corporation tax rate will remain at 19% from 1 April 2020.
The headline rate of tax for UK ring-fenced trading profits remains at 40%.
f) Unrecognised deferred tax liability
In 2019 and 2018 there are no material temporary differences associated with
investments withbsidiaries forhich
subsidiaries for which deferred tax liabilities have not been recognised.
g) Company
The Company has £25.2 million (2018: £23.9 million *) of UK corporation tax
losses which are not recognised as deferred tax assets.
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 88 -
13. Earnings Per Share
Basic earnings or loss per ordinary share amounts are calculated by dividing net profit or
loss for the year attributable to ordinary equity holders of the parent by the weighted
average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit attributable
to ordinary equity holders of the Company by the weighted average number of ordinary
shares outstanding during the year plus the weighted average number of ordinary shares
that would be issued on the conversion of dilutive potential ordinary shares granted
under share-based payment plans (see note 29) into ordinary shares.
The following reflects the income and share data used in the basic and diluted earnings
per share computations:
2019
£000
2018
£000
*restated
Net profit from continuing operations
64,020
51,485
Net profit attributable to equity holders of the parent
64,020
51,485
2019
’000
2018
’000
Basic weighted average number of shares
265,768
264,164
Dilutive potential of ordinary shares granted under
share-based payment plans
10,362
11,087
Diluted weighted average number of shares
276,130
275,251
Basic EPS on profit for the year (£)
Diluted EPS on profit for the year (£)
2019
£
2018
£
*restated
0.24
0.23
0.20
0.19
*restated from US$ to £ following change of functional and presentational currency – see note 3
14. Dividends proposed
Proposed dividends on ordinary shares
A final cash dividend for 2019 of 3 pence per share is proposed (2018: nil) which would
generate a payment of £8.0 million.
Proposed dividends on ordinary shares are subject to approval at the annual general
meeting and are not recognised as a liability as at 31 December 2019.
- 89 -
15. Exploration and Evaluation Assets
Group
Cost:
1 January 2018
*Translation effect
Additions
Write-offs
Transfers to property, plant and equipment (note 16)
31 December 2018
Additions
Write-offs
31 December 2019
Provision for impairment:
1 January 2018
*Translation effect
Impairment reversal for the year
31 December 2018
Impairment reversal for the year
31 December 2019
Net book amount:
31 December 2019
31 December 2018
1 January 2018
Total
£000
*restated
48,905
2,971
1,351
(7,416)
(42,628)
3,183
549
(80)
3,652
(9,313)
(553)
9,866
-
-
-
3,652
3,183
39,592
*restated from US$ to £ following change of functional and presentational currency – see note 3
The 2019 asset write-off figure comprised a £0.1 million charge following the
relinquishment of UK Licence P1620 (containing the Rowallan prospect) and final minor
charges against costs incurred on the Group’s Irish licences.
The impairment reversal net of write-off charges against E&E assets in 2018 was a credit
of £2.5 million. This comprised an impairment reversal of £9.9 million in respect of the
Group’s Columbus asset in the UK North Sea partially offset by asset write-off charges
against the Group’s Irish assets consisting of the Slyne 1/06 Licence (£2.7 million) and
Rockall 1/09 and 4/13 Licences (£4.7 million).
- 90 -
The full impairment reversal recorded against the Columbus asset book amount in 2018
arose from revised economic evaluations and operational developments in the project.
The recoverable post-tax amount of US$68 million for the Columbus asset was
determined on a fair value less costs to sell basis (’FVLCS’) using a discounted cash flow
model which exceeded the Columbus book cost of £42.6 million. The projected cash
flows were extrapolated until 2029 using a 2% growth rate and were adjusted to risks
specific to the asset and discounted using a discount rate of 10% (10.5% for previous
impairment reversal in 2015). This discount rate was derived from the Group’s estimate
of discount rates that might be applied by active market participants and was adjusted
where applicable to take into account any specific risks relating to the region where the
asset is located.
In determining FVLCS it was necessary to make a series of assumptions to estimate
future cash flows including volumes, price assumption and cost estimates. The
calculation was most sensitive to the following assumptions; discount rates, oil and gas
prices, reserve estimates and project risk. There were no reasonably possible changes in
any of the above key assumptions that would have caused the carrying value of the
Columbus asset to materially exceed its recoverable amount. Serica submitted a Field
Development Plan to the OGA in June 2018 and was granted development and
production consent in October 2018. Effective 31 December 2018, Columbus resources
were re-classified as reserves and the book costs previously recorded as Exploration and
Evaluation assets were reclassified as Oil and Gas assets within Property, Plant and
Equipment.
Company
The Company has no E&E assets.
- 91 -
16. Property, Plant and Equipment
Group
Cost:
1 January 2018
*Translation effect
Additions
Acquisitions (note 27)
Transfers (note 15)
31 December 2018
Additions
Revisions (note 24)
Oil and gas
properties
£000
*restated
8,869
1,442
3,752
326,342
42,628
383,033
4,558
(570)
Equipment,
fixtures
and fittings
£000
*restated
Right-of-
use assets
Total
£000
£000
*restated
-
-
212
-
-
212
-
-
-
-
-
-
-
-
8,869
1,442
3,964
326,342
42,628
383,245
516
5,074
-
(570)
31 December 2019
387,021
212
516
387,749
Depreciation and depletion:
1 January 2018
*Translation effect
3,206
165
Charge for the year (note 6)
6,153
31 December 2018
9,524
Charge for the year (note 6,7)
52,631
31 December 2019
62,155
Net book amount:
31 December 2019
31 December 2018
1 January 2018
324,866
373,509
5,663
-
-
-
-
61
61
151
212
-
-
-
-
-
3,206
165
6,153
9,524
129
52,821
129
62,345
387
325,404
-
373,721
-
5,663
BKR asset acquisitions
On 30 November 2018 the Group acquired interests in the Bruce, Keith and Rhum fields
resulting in an acquisition of assets (see note 27) at a value of £326.3 million allocated
to property, plant and equipment.
Columbus
Following the approval of the FDP for Columbus and decision for the project to proceed
the associated net book amount of £42.6 million was transferred from E&E assets to
property, plant and equipment in 2018.
- 92 -
Other
Depletion charges on oil and gas properties are classified within ‘cost of sales’.
Depreciation on other elements of property, plant and equipment is provided on a
straight-line basis, and taken through general and administration expenses.
Company
The Company has right-of-use assets with a net book amount of £0.4 million as at 31
December 2019.
17. Investments
Company – Investment in subsidiaries
Cost:
As at 1 January 2018
*Translation effect
Movement in investment
As at 1 January 2019
Movement in investment
As at 31 December 2019
Provision for impairment:
As at 1 January 2018
*Translation effect
Impairment reversal for the year
As at 1 January 2019
Impairment reversal for the year
As at 31 December 2019
Net book amount:
31 December 2019
31 December 2018
1 January 2018
Total
£000
*restated
99,358
5,898
-
105,256
-
105,256
(98,358)
(5,838)
104,196
-
-
-
105,256
105,256
1,000
*restated from US$ to £ following change of functional and presentational currency – see note 3
In the Company financial statements, the cost of the investment acquired on an historic
reorganisation in 2005 was calculated with reference to the market value of Serica
Energy Corporation as at the date of the reorganisation. As a UK company, under
Section 612 of the Companies Act 2006, the Company is entitled to merger relief on its
share reorganisation with Serica Energy Corporation, and the excess of £88,088,000
over the nominal value of shares issued (US$7,475,000) was credited to a merger
reserve. The merger reserve is adjusted for any write-down in the value of the
investment in subsidiary. Following the impairment charges recorded in 2010 and 2013
- 93 -
against the Company’s investment in subsidiary undertakings, all amounts initially
credited to the merger reserve were eliminated. The write-back of investment in
subsidiary in 2018 noted below generated a transfer of £88,088,000 to the merger
reserve of those amounts initially eliminated in prior periods.
Management assessed the carrying value of investments in subsidiaries in the parent
company balance sheet for impairment by reference to the recoverable amount. The
impairment reversal in 2018 of £104,196,000 against the carrying value of investments
in subsidiaries, and the reduction of £25,347,000 in provision for impairment against
amounts owed by Group undertakings (see note 19) was made following an increase in
value attributed to certain of the oil and gas assets held by the Company’s subsidiary
undertakings. This was largely generated following the acquisition of the BKR assets in
November 2018, an upgrade to Erskine proved and probable reserves, and operational
developments on the Columbus asset during 2018.
Details of the investments in which the Group and the Company (unless indicated) hold
20% or more of the nominal value of any class of share capital are as follows:
Name of company:
Holding
Nature of
business
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Holding
Serica Holdings UK Ltd
Holding
Serica Energy Holdings BV (i & iii)
E&P
Serica Energy (UK) Ltd (i)
Exploration
Serica Energy Slyne BV (i & iii)
Exploration
Serica Energy Rockall BV (i & iii)
Exploration
Serica Energy Namibia BV (i & iii)
Exploration
Serica Sidi Moussa BV (i & iii)
Serica Foum Draa BV (i, iii & iv)
Dormant
Serica Glagah Kambuna BV (i & iii) Ordinary Dormant
Ordinary
Dormant
Serica Energy Corporation (i & ii)
Ordinary
Dormant
APD Ltd (i & ii)
Ordinary
Dormant
PDA Asia Ltd (i & ii)
Dormant
Ordinary
PDA (Lematang) Ltd (i)
Dormant
Serica UK Exploration Ltd (i)
Ordinary
Dormant
Serica Walvis Namibia BV (i,iii & iv) Ordinary
(i) Held by a subsidiary undertaking
(ii) Incorporated in the British Virgin Islands
(iii) Incorporated in the Netherlands
(iv) Liquidated in 2018
% voting
rights
and
shares
held
2019
100
100
100
100
100
100
100
-
100
100
100
100
100
100
-
% voting
rights and
shares
held
2018
100
100
100
100
100
100
100
-
100
100
100
100
100
100
-
The registered office of the Company’s subsidiaries incorporated in the UK is 48 George
Street, London, W1U 7DY.
The registered office of the Company’s subsidiaries incorporated in the Netherlands is
Hoogoorddreef 15, 1101 BA Amsterdam, The Netherlands.
The registered office of APD Ltd and PDA Asia Ltd is P.O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin Islands. The registered office of
Serica Energy Corporation is P.O. Box 71, Road Town, Tortola, British Virgin Islands.
- 94 -
18. Inventories
Group
2019
£000
Company
2019
£000
2018
£000
*restated
Materials and spare parts
4,671
4,284
4,671
4,284
-
-
2018
£000
*restated
-
-
*restated from US$ to £ following change of functional and presentational currency – see note 3
Inventories are valued at the lower of cost and net realisable value. Cost is determined
by the first-in first-out method and comprises direct purchase costs and transportation
expenses. Inventories are recorded net of an obsolescence provision of £1.3 million
(2018: 1.3 million) which was recognised as part of the BKR acquisition accounting (note
27).
19. Trade and Other receivables
Due within one year:
Amounts owed by Group undertakings
Trade receivables
Amounts recoverable from JV partners
Other BKR receivables
Other receivables
Prepayments and accrued income
VAT recoverable
Liquids underlift
Group
2019
£000
-
20,859
10,870
907
284
983
2,003
-
Company
2019
£000
2018
£000
*restated
-
30,952
5,894
7,004
35
320
2,024
6,747
93,064
-
-
-
-
-
266
-
2018
£000
*restated
84,868
-
-
-
15
264
1,087
-
35,906
52,976
93,330
86,234
*restated from US$ to £ following change of functional and presentational currency – see note 3
Trade receivables at 31 December 2019 arose from five (2018: five) customers. They
are non-interest bearing and are generally on 15 to 30 day terms.
Other BKR receivables include final consideration amounts due from the BKR acquisitions
and deferred BKR transition costs.
None of the Group’s receivables are considered impaired and there are no financial
assets past due but not impaired at the year end. The Directors consider the carrying
amount of trade and other receivables approximates to their fair value.
Management considers that there are no unreasonable concentrations of credit risk
within the Group or Company.
At the reporting date the amounts owed by Group undertakings to the Company are
disclosed net of an impairment of £13,231,000 (2018: £13,231,000) – see note 17.
- 95 -
20. Financial assets
Financial assets - current
Derivative financial instruments
Group
2019
£000
6,880
6,880
2018
£000
*restated
138
138
Company
2019
£000
-
-
2018
£000
*restated
-
-
*restated from US$ to £ following change of functional and presentational currency – see note 3
Derivative financial instruments
The Group enters into derivative financial instruments with various counterparties. The
gas put option commodity contract with BP (fair value hierarchy level 2) is measured
based on a consensus of mid-market values from third party providers based on the
Black Scholes model with inputs of observable spot commodities price, interest rates and
the volatility of the commodity. Other derivative financial instruments are valued by
counterparties, with the valuations reviewed internally and corroborated with readily
available market data (level 2).
Details of the Group’s derivative financial instruments held as at 31 December 2019 and
entered into during 2020 to date are provided in note 25.
21. Cash and Term Deposits
Group
2019
£000
2018
£000
*restated
Company
2019
£000
2018
£000
*restated
Cash at bank and in hand
Short-term deposits
42,584
59,241
28,372
13,731
5,281
6,067
6,372
13,338
Cash and cash equivalents
101,825
42,103
11,348
19,710
Term deposits
-
1,000
-
1,000
101,825
43,103
11,348
20,710
*restated from US$ to £ following change of functional and presentational currency – see note 3
As at 31 December 2019, the cash balance of £101.8 million contains an amount of
£12.1 million held in a restricted account as security against letters of credit issued in
respect of certain decommissioning liabilities.
- 96 -
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-
term deposits and term deposits are made for varying periods of between one and
ninety-five days depending on the immediate cash requirements of the Group and earn
interest at the respective short to medium term deposit rates. The Group’s exposure to
credit risk arises from potential default of a counterparty, with a maximum exposure
equal to the carrying amount. The Group seeks to minimise counterparty credit risks by
only depositing cash surpluses with major banks of high quality credit standing and
spreading the placement of funds over a range of institutions.
Financial institutions, and their credit ratings, which held greater than 10% of the
Group’s cash and short-term deposits at the balance sheet date were as follows:
S&P/Moody’s
credit rating
Group
2019
£000
Company
2019
£000
2018
£000
*restated
2018
£000
*restated
Barclays Bank plc
Lloyds Bank plc
Investec Bank plc
A-1
A-1
P-1
36,358
53,120
12,314
19,567
23,508
-
5,229
6,119
-
5,166
15,544
-
*restated from US$ to £ following change of functional and presentational currency – see note 3
For the purposes of the consolidated and Company cash flow statement, cash and cash
equivalents exclude term deposits of £nil from the above amounts at 31 December 2019
(2018: £1,000,000).
22. Trade and Other Payables
Current:
Trade payables
Other payables
Accrued expenses
Liquids overlift
Group
2019
£000
Company
2019
£000
2018
£000
*restated
2018
£000
*restated
5,807
1,914
16,657
222
4,443
12,206
18,580
-
94
629
1,015
-
2,595
624
-
-
24,600
35,229
1,738
3,219
*restated from US$ to £ following change of functional and presentational currency – see note 3
Trade payables are non-interest bearing and are generally on 15 to 30 day terms.
Accrued expenses include accruals for operating and capital expenditure in relation the
oil and gas assets. The Directors consider the carrying amount of trade and other
payables approximates to their fair value.
Lease liabilities in respect of right of use assets are included within other payables.
- 97 -
23. Financial liabilities
Group
2019
£000
Company
2019
£000
2018
£000
*restated
2018
£000
*restated
BKR contingent consideration (note 27)
BKR deferred consideration (note 27)
BKR prepayment facility
148,054
7,405
-
227,386
11,513
15,896
Split:
Current
Non-current
155,459
254,795
45,351
110,108
90,307
164,488
155,459
254,795
-
-
-
-
-
-
-
-
-
-
-
-
-
-
*restated from US$ to £ following change of functional and presentational currency – see note 3
BKR consideration
On 30 November 2018 Serica completed the four BKR acquisitions. These comprised:
• 36% in Bruce, 34.83333% in Keith and 50% in Rhum plus operatorship of each
field from BP Exploration Operating Company Limited (“BP”). Initial consideration,
paid at completion, was £12.8 million with contingent payments of £16 million
due in relation to the outcome of future work on the Rhum R3 well and up to a
total £23.1 million due in relation to Rhum field performance and sales prices in
respect of 2019, 2020 and 2021.
• 42.25% in Bruce and 25% in Keith from Total E&P UK Limited (“Total E&P”).
Initial consideration was US$5 million with three further instalments of deferred
consideration of US$5 million each due on 31 July 2019, 31 March 2020 and 30
November 2020.
• 16% in Bruce and 31.83333% in Keith from BHP Billiton Petroleum Great Britain
Limited (“BHP”). Initial consideration was £1 million.
• 3.75% in Bruce and 8.33334% in Keith from Marubeni Oil and Gas (UK) Limited
(“Marubeni”). Initial consideration was US$1 million payable to Serica with no
contingent or deferred consideration.
In addition to combined initial, deferred and contingent considerations, Serica pays
contingent cash consideration to BP, Total E&P and BHP calculated as a percentage (60%
in 2018, 50% in 2019 and 40% in each of 2020 and 2021) of net cash flows resulting
from the respective field interests acquired. Serica will also pay deferred contingent
consideration equal to 30% of their respective shares of future decommissioning costs,
reduced by the tax relief that each of BP, Total E&P and BHP Billiton receives on such
costs.
The bulk of contingent consideration due under the BKR acquisition agreements is
related to future successful field performance and consequently will be either reduced or
deferred in the event of production interruptions or lower net cash generation.
- 98 -
Fair value measurement of BKR contingent consideration
The fair value of the contingent consideration is estimated as at applicable reporting
dates from a valuation technique using future expected discounted cash flows. This
methodology uses several significant unobservable inputs which are categorised within
Level 3 of the fair value hierarchy.
The calculations are complex as they are structured with most of the contingent
consideration contingent upon future commodity price and economic environment as well
as future asset performance. They involve a range of projections and assumptions
related to future operating and development costs, production volumes, oil and gas sales
prices, discount rates, estimates of future decommissioning expenditure and taxation.
Estimated contingent consideration payments have been calculated at a discount rate of
11% (2018: 12%) and assumed repayment across the remaining 2020-2021 period
(2018: 2019-2021 period) of the Net Cash Flow Sharing Deed and other operational
timelines that trigger payment of consideration.
Given the multiple input variables and judgements used in the calculations, and the inter
relationships between changes in these variables, an estimate of a reasonable range of
possible outcomes of undiscounted value of the contingent consideration is not
considered possible. In isolation, the calculations are most sensitive to assumed oil and
gas reserves and production profiles and future natural gas prices. Changes in most of
the key assumptions noted above would also impact the fair value of assets/liabilities in
addition to the contingent consideration.
In calculating the fair value of contingent consideration on the BKR acquisitions payable
as at 31 December 2019, assumptions underlying the calculation were updated from
2018. These included updated commodity prices, production profiles, future opex, capex
and decommissioning cost estimates, discount rates, proved and probable reserves
estimates and risk assessments.
A sensitivity analysis to the gas prices used shows a decrease of 10% in the price used
would result in a decrease in the fair value of the contingent consideration by £11.5
million, and an increase of 10% would result in an increase in the fair value of the
contingent consideration by £11.6 million.
A sensitivity analysis to the discount rate used shows a decrease in the discount rate
used from 11% to 9% would result in an increase in the fair value of the contingent
consideration by £9.9 million, and an increase from 11% to 13% would result in a
decrease in the fair value of the contingent consideration by £8.4 million.
2019 payments and income statement gain of £21.8 million arising on
revaluation of BKR consideration
Short and long-term financial liabilities representing estimated BKR consideration as at
31 December 2018 totalled £238.9 million. During 2019, £61.7 million of BKR contingent
and deferred consideration was paid comprising £4.1 million of deferred consideration
(paid to Total E&P) and £57.6 million of Net Cash Flow Sharing Deed payments (paid to
BP, Total E&P and BHP).
As noted above, the fair value of this financial liability was re-assessed for the 2019
financial period end, with the final estimate of short and long-term liabilities as at 31
December 2019 amounting to £155.5 million. The overall liability reduction of £83.5
million in 2019 comprised cash payments of £61.7 million and a non-cash revision of
£21.8 million recorded as a gain in the Income Statement.
The most significant factors behind the downward revision released to the Income
Statement are lower realised gas pricing on amounts paid in respect of 2019 and lower
- 99 -
short-term gas prices now used in the forecast of 2020 Net Cash Flow payments and
other elements of contingent consideration.
Reconciliation of movement in BKR consideration
At 31 December 2018 *restated
Payments made in year
Revisions during the year
Unwinding of discount
Change in fair value liability
At 31 December 2019
Classified as:
Current
Non-current
Total
£000
238,899
(61,669)
(43,824)
22,053
(21,771)
155,459
45,351
110,108
155,459
*restated from US$ to £ following change of functional and presentational currency – see note 3
BKR prepayment facility
Current liabilities of £15.9 million as at 31 December 2018 represented amounts drawn
under the prepayment facility made between Serica and BP Gas Marketing Limited and
dated 21 November 2017. All amounts due under the facility were repaid during 2019.
Under this facility, BP Gas agreed to provide for drawings to cover the initial
consideration and cost of premiums payable for gas price puts (hedging instruments
which set a floor price for certain volumes of gas production) which were purchased by
Serica in conjunction with signing the acquisition agreement. The prepayment facility
carried interest at one-month LIBOR plus 4.5% per annum compounded monthly and
added to the outstanding amount and had a maximum duration of three years from
initial drawings on 21 November 2017. Repayments commenced six months after
completion and were based on 35% of Serica’s retained share of gas sales revenues
from the BKR Assets including any price related hedging gains and after deduction of
those proportions due to BP under the Net Cash Flow Sharing Deed.
- 100 -
24. Provisions
At 1 January 2018
*Translation effect
Acquisitions (note 27)
Revisions during the year
Unwinding of discount (note 11)
At 31 December 2018
Revisions during the year
Unwinding of discount (note 11)
Erskine Decommissioning
provision
£000
*restated
consideration
£000
*restated
Total
£000
*restated
1,994
118
-
(264)
-
1,848
-
-
-
-
1,994
118
22,615
-
32
22,615
(264)
32
22,647
24,495
(570)
513
(570)
513
At 31 December 2019
1,848
22,590
24,438
Classified as:
Current
Non-current
1,848
-
1,848
-
22,590
1,848
22,590
22,590
24,438
*restated from US$ to £ following change of functional and presentational currency – see note 3
Decommissioning provision
Bruce, Keith and Rhum fields
The Group makes full provision for the future costs of decommissioning its production
facilities and pipelines on a discounted basis. With respect to the Bruce, Keith and Rhum
fields, the decommissioning provision is based on the Group’s contractual obligations of
3.75%, 8.33334% and 0% respectively of the decommissioning liabilities rather than the
Group’s equity interests acquired. The Group’s provision represents the present value of
decommissioning costs which are expected to be incurred up to 2032 and assumes no
further development of the Group’s assets. The liability is discounted at a rate of 2%
(2018: 2%) and the unwinding of the discount is classified as a finance cost (see note
11).
Erskine field
No provision for decommissioning liabilities for the Erskine field is recorded as at 31
December 2018 or 2019 as the Group’s current estimate for such costs is under the
agreed capped level to be funded by BP. This has been fixed at a gross £174.0 million
(£31.32 million net to Serica) with this figure adjusted for inflation.
Erskine consideration payments
Under the terms of the Erskine acquisition, certain contingent payments may be made
by Serica related to savings in field operating costs. The current estimated provision for
these amounts is £1.8 million which has been capitalised as an oil and gas asset cost
(see note 16). Uncertainties currently exist as to the quantification of any final payment
but it is expected to be settled in 2020.
Company
The Company has no provisions.
- 101 -
25. Financial Instruments
The Group’s financial instruments comprise cash and cash equivalents, bank loans and
borrowings, accounts payable and accounts receivable, derivative financial instruments,
deferred consideration and contingent consideration It is management’s opinion that the
Group is not exposed to significant interest, credit or currency risks arising from its
financial instruments other than as discussed below:
Serica has exposure to interest rate fluctuations on its cash deposits and, during
2018 and 2019, the BKR facility; given the level of expenditure plans over 2020/21
this is managed in the short-term through selecting treasury deposit periods of one
to three months. Cash and treasury credit risks are mitigated through spreading the
placement of funds over a range of institutions each carrying acceptable published
credit ratings to minimise concentration and counterparty risk.
Serica sells oil, gas and related products only to recognised international oil and gas
companies and has no previous history of default or non-payment of trade
receivables. Where Serica operates joint ventures on behalf of partners it seeks to
recover the appropriate share of costs from these third parties. The majority of
partners in these ventures are well established oil and gas companies. In the event of
non-payment, operating agreements typically provide recourse through increased
venture shares.
Serica retains certain non-£ cash holdings and other financial instruments relating to
its operations. The £ reporting currency value of these may fluctuate from time to
time causing reported foreign exchange gains and losses. Serica maintains a broad
strategy of matching the currency of funds held on deposit with the expected
expenditures in those currencies. Management believes that this mitigates most of
any actual potential currency risk from financial instruments.
It is management’s opinion that the fair value of its financial instruments approximate to
their carrying values, unless otherwise noted.
Interest Rate Risk Profile of Financial Assets and Liabilities
The interest rate profile of the financial assets and liabilities of the Group as at 31 December is
as follows:
Group
Year ended 31 December 2019
Fixed rate
Short-term deposits
Within 1 year 1-2 years 2-5 years
£000
-
£000
59,241
£000
-
Floating rate
Cash
Within 1 year 1-2 years
£000
-
£000
42,584
2-5 years
£000
-
Year ended 31 December 2018
Fixed rate
Short-term deposits
Term deposits
Within 1 year 1-2 years 2-5 years
£000
*restated
13,731
1,000
£000
*restated
£000
*restated
-
-
-
-
- 102 -
Total
£000
59,241
59,241
Total
£000
42,584
42,584
Total
£000
*restated
13,731
1,000
14,731
Floating rate
Cash
BKR facility
Within 1 year 1-2 years
£000
-
-
£000
28,442
(15,896)
2-5 years
£000
-
-
Total
£000
28,442
(15,896)
12,546
The following table demonstrates the sensitivity of finance revenue and finance costs to
a reasonably possible change in interest rates, with all other variables held constant, of
the Group’s profit before tax (through the impact on fixed rate short-term deposits and
applicable bank loans).
Increase/decrease in interest rate
+0.75%
-0.75%
Effect on profit Effect on profit
before tax
2018
£000
*restated
before tax
2019
£000
524
(524)
127
(127)
The other financial instruments of the Group that are not included in the above tables
are non-interest bearing and are therefore not subject to interest rate risk.
The interest rate profile of the financial assets and liabilities of the Company as at 31
December is as follows:
Company
Year ended 31 December 2019
Fixed rate
Short-term deposits
Within 1 year
£000
6,067
1-2 years 2-5 years
£000
-
£000
-
Floating rate
Cash
Year ended 31 December 2018
Fixed rate
Short-term deposits
Term deposits
Floating rate
Cash
Within 1 year
£000
5,281
1-2 years
£000
-
2-5 years
£000
-
Within 1 year
£000
*restated
1-2 years 2-5 years
£000
*restated
£000
*restated
13,338
1,000
-
-
-
-
Within 1 year
£000
6,372
1-2 years
£000
-
2-5 years
£000
-
Total
£000
6,067
6,067
Total
£000
5,281
Total
£000
*restated
13,338
1,000
14,338
Total
£000
6,372
- 103 -
Credit risk
The Group’s and Company’s exposure to credit risk relating to financial assets arises
from the default of a counterparty with a maximum exposure equal to the carrying value
as at the balance sheet date. Cash and treasury credit risks are mitigated through
spreading the placement of funds over a range of institutions each carrying acceptable
published credit ratings to minimise counterparty risk.
In addition, there are credit risks of commercial counterparties including exposures in
respect of outstanding receivables. The Group’s oil and gas sales are all contracted with
well-established oil and gas or energy companies. Also, where Serica operates joint
ventures on behalf of partners it seeks to recover the appropriate share of costs from the
third-party counterparties. The majority of partners in these ventures are well
established oil and gas companies. In the event of non-payment, operating agreements
typically provide recourse through increased venture shares. Receivable balances are
monitored on an ongoing basis with appropriate follow-up action taken where necessary.
Foreign currency risk
The Group enters into transactions denominated in currencies other than its GBP£
reporting currency. Non-GBP denominated balances, subject to exchange rate
fluctuations, at year-end were as follows:
Cash and cash equivalents:
US Dollar
Norwegian kroner
Euros
Accounts receivable:
US Dollar
Trade and other payables:
US Dollar
Group
2019
£000
30,395
6
172
Company
2019
£000
2018
£000
*restated
8,383
6
27
7,783
-
-
2018
£000
*restated
5,996
-
-
7,397
13,368
10
273
2,584
3,297
-
35
The following table demonstrates the Group’s sensitivity to a 10% increase or decrease
in the US Dollar against the Pound sterling. The sensitivity analysis includes only foreign
currency denominated monetary items and adjusts their translation at the year-end for a
10% change in the foreign currency rate.
Increase/decrease in foreign exchange rate
10% strengthening of £ against US$
10% weakening of £ against US$
Effect on profit
before tax
2019
£000
Effect on profit
before tax
2018
£000
*restated
(3,521)
3,521
(1,845)
1,845
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 104 -
Liquidity risk
The table below summarises the maturity profile of the Group and Company’s financial
liabilities at 31 December 2019 based on contractual undiscounted payments. The Group
monitors its risk to a potential shortage of funds by monitoring the maturity dates of
existing debt.
Group
Year ended 31 December 2019 Within
1 year
£000
1 to 2
years
£000
2 to 5
years
£000
>5
years
£000
Total
£000
Trade and other payables
BKR deferred consideration
24,600
7,405
-
-
-
-
-
-
24,600
7,405
Year ended 31 December 2018 Within
1 year
£000
*restated
38,615
3,850
15,896
Trade and other payables
BKR deferred consideration
BKR facility
2 to 5
years
£000
1 to 2
years
£000
>5
years
£000
*restated *restated *restated
-
-
-
-
7,663
-
-
-
-
Total
£000
*restated
38,615
11,513
15,896
Amounts payable as BKR contingent consideration are explained in detail in note 23. The
bulk of contingent consideration due under the BKR acquisition agreements is related to
future successful field performance and either paid out as a proportion of cash inflows or
dependent on successful performance, with
impacted downwards
accordingly.
liquidity risk
Company
Year ended 31 December 2019 Within
1 year
£000
1 to 2 years
£000
2 to 5 years
£000
Total
£000
Trade and other payables
1,738
-
-
1,738
Year ended 31 December 2018
Trade and other payables
Within
1 Year
£000
*restated
3,219
1 to 2 years
£000
2 to 5 years
£000
-
-
Total
£000
*restated
3,219
*restated from US$ to £ following change of functional and presentational currency – see note 3
Commodity price risk
The Group is exposed to commodity price risk. Where and when appropriate the Group
will put in place suitable hedging arrangements to mitigate the risk of a fall in commodity
prices. All gas production is sold at prices linked to the spot market. The significant
majority of oil and NGL production was sold at prices linked to the spot market.
At 31 December 2019 Serica held gas price puts covering volumes of 160,000 therms
per day for 1H 2020 at a floor price of 35 pence per therm with no upside price
restrictions. Serica also held gas price swaps at fixed prices of; 46.55 pence per therm
covering 160,000 therms per day for Q1 2020, 40.75 pence per therm covering 160,000
- 105 -
therms per day for Q2 2020, 37.6 pence per therm covering 80,000 therms per day for
Q3 2020 and 45.41 pence per therm covering 80,000 therms per day for Q4 2020.
In January 2020, Serica obtained additional gas price swaps covering 120,000 therms
per day for Q1 2021 at an average of 45.95 pence per therm. In March 2020, further
swaps of 80,000 therms per day for November 2020 at 32.55 pence per therm, 100,000
therms per day for December 2020 at 35.55 pence per therm and 65,000 therms per
day for Q1 2021 at 36.20 pence per therm were obtained.
Fair values of financial assets and liabilities
Management assessed that the fair values of cash and short-term deposits, trade
receivables, trade payables and other current liabilities approximate their carrying
amounts largely due to the short-term maturities of these instruments. As such the fair
value hierarchy is not provided.
Capital management
The primary objective of the Group’s capital management is to maintain appropriate
levels of funding to meet the commitments of its forward programme of exploration,
production and development expenditure, and to safeguard the entity’s ability to
continue as a going concern and create shareholder value. At 31 December 2019, capital
employed of the Group amounted to £198.0 million (comprised of £198.0 million of
equity shareholders’ funds and £nil of borrowings), compared to £147.7 million at 31
December 2018 (comprised of £131.8 million of equity shareholders’ funds and £15.9
million of borrowings).
At 31 December 2019, capital employed of the Company amounted to £208.6
(comprised of £208.6 million of equity shareholders’ funds and £nil of borrowings),
compared to £209.0 million at 31 December 2018 (comprised of £209.0 million of equity
shareholders’ funds and £nil of borrowings).
- 106 -
26. Equity Share Capital
The concept of authorised share capital was abolished under the Companies Act 2006
and shareholders approved the adoption of new Articles of Association at the 2010
Annual General Meeting which do not contain any reference to authorised share capital.
As at 31 December 2019, the share capital of the Company comprised one “A” share of
GB£50,000 and 267,230,216 ordinary shares of US$0.10 each. The “A” share has no
special rights.
The balance classified as total share capital includes the total net proceeds (both nominal
value and share premium) on issue of the Group and Company’s equity share capital,
comprising US$0.10 ordinary shares and one ‘A’ share.
Allotted, issued and fully paid:
Group
Number
Share
Share
Total
capital premium Share capital
£000
*restated
£000
*restated
£000
*restated
As at 1 January 2018
263,679,040
19,613 150,371
169,984
*Translation effect
Shares issued
1,078,780
1,168
81
8,934
127
10,102
208
As at 1 January 2019
264,757,820
20,862 159,432
180,294
Shares issued
2,472,397
200
891
1,091
As at 31 December 2019
267,230,217
21,062 160,323
181,385
Allotted, issued and fully paid:
Company
Number
Share
Share
Total
capital premium Share capital
£000
*restated
£000
*restated
£000
*restated
As at 1 January 2018
263,679,040
19,613 124,224
143,837
*Translation effect
Shares issued
1,078,780
1,168
81
7,382
127
8,550
208
As at 1 January 2019
264,757,820
20,862 131,733
152,595
Shares issued
2,472,397
200
891
1,091
As at 31 December 2019
267,230,217
21,062 132,624
153,686
*restated from US$ to £ following change of functional and presentational currency – see note 3
2,048,500 ordinary shares were issued across 2019 used to satisfy awards under the
Company’s share-based incentive schemes and 423,897 ordinary shares issued under
the Share Incentive Plan. 201,506 ordinary shares have been issued in 2020 to date and
as at 21 April 2020 the issued voting share capital of the Company was 267,431,722
ordinary shares and one “A” share.
- 107 -
27. Business Combination
Acquisition of Bruce, Keith and Rhum interests
On 30 November 2018 Serica completed a transaction to acquire various interests in the
Bruce, Keith and Rhum fields in the UK North Sea from BP and three further transactions
with Total E&P, BHP and Marubeni to acquire their respective interests in the Bruce and
Keith fields.
Completion of these four transactions means Serica now has a 50% interest in the Rhum
field, a 98% interest in the Bruce field and a 100% interest in the Keith field.
The combination of transactions was an acquisition of interests in a joint operation under
IFRS 11 and, as the activity constituted a business as defined in IFRS 3 Business
Combinations, the acquisitions were accounted for as a business combination. The
consolidated financial statements for 2018 included the fair values of the identifiable
assets and liabilities as at the date of acquisition, and the results of the combined
transaction assets for the one-month period from the acquisition date.
Assets
Property, plant and equipment (note 16)
VAT recoverable and other assets
Underlift
Inventory
Liabilities
Trade and other payables
Deferred tax liability (note 12d)
Provisions (note 24)
Fair value
Final
provisionally assessment
Fair value
recognised
and other on acquisition
recognised on
acquisition
£000
*restated
326,342
397
3,995
5,212
335,946
revision
£000
-
-
-
(1,268)
(1,268)
(14,672)
(45,109)
(22,615)
(82,396)
3,379
(10,770)
-
(7,391)
£000
326,342
397
3,995
3,944
334,678
(11,293)
(55,879)
(22,615)
(89,787)
Total identifiable net assets at fair value
253,550
(8,659)
244,891
Bargain purchase gain arising on
acquisitions
41,474
(7,801)
33,673
Initial consideration received/receivable
Deferred consideration payable (note 23)
Contingent consideration payable (note 23)
Purchase consideration
26,823
(11,513)
(227,386)
(212,076)
858
-
-
858
27,681
(11,513)
(227,386)
(211,218)
*restated from US$ to £ following change of functional and presentational currency – see note 3
The excess of fair value of the net assets acquired over the purchase consideration has
been recognised as a bargain purchase gain in the income statement.
- 108 -
Fair value of consideration
The 2018 bargain purchase gain of £33.7 million represented the difference between fair
valuations of the BKR assets acquired and consideration paid or potentially payable
calculated in accordance with applicable accounting standards. In accordance with
accounting standards, the fair value was provisionally determined at year end 2018.
Adjustments to the provisional fair value assessments have been identified during the
current period. The net impact of the adjustments to the acquisition date balance sheet
is a reduction in the bargain purchase gain of £7.8 million. This comprises revisions to
the estimations of the consideration payable and of the acquisition date fair value of
inventory and trade and other payables that were identified within twelve months of the
completion of the acquisitions and are therefore recognised in accordance with IFRS 3.
This also comprises a £10.8 million adjustment to the estimation of the deferred tax
liabilities arising at the acquisition date. This adjustment was identified more than twelve
months after the completion of the acquisition and therefore, it is not accounted for as
revision of the provisional fair values under IFRS 3. As the item is though quantitively
material to the 2019 financial statements, it has been accounted for in accordance with
the requirements of IAS 8. As a result, the revision is still reflected as a restatement of
the acquisition date balance sheet with a resulting impact on the bargain purchase gain
in the 2018 income statement.
The bargain purchase gain, representing the excess of fair value of the net assets
acquired over the purchase consideration, arose primarily due to the strategic decisions
of the sellers to exit these assets due to a variety of factors including operational risks
and relatively low materiality for the sellers. These later life assets have significant
remaining resources and Serica has the ability to both maximise the value from these
assets and share the value with BP, Total E&P and BHP Billiton. Furthermore, the
majority of the consideration payable is contingent upon future events and is also
subject to the impact of discounting. The BKR asset acquisitions consisted of four
separate transactions with the four different counterparties who reported historical
financial information under differing financial reporting requirements. Management
considered that it was impractical to assess the income statement disclosure impacts in
respect of the combined single entity for the 2018 reporting period as though the
acquisitions had completed on 1 January 2018.
Cash (outflow)/inflow from business combination in cash flow statement
The cash outflow of £57.3 million arising in 2019 (2018: cash inflow of £22.2 million of
initial consideration) for the BKR acquisition comprises payments of £57.6 million of
contingent consideration paid, £4.1 million of deferred consideration paid partially offset
by £4.4 million of initial consideration received.
BKR acquisitions and other transition related costs
Significant transition costs of £8.8 million and transaction costs of £2.1 million were
expensed in 2018 on various elements of the four BKR acquisitions which completed on
30 November 2018. These were largely incurred on the significant transition work
streams associated with the preparations for the transfer of operatorship of the BKR
Assets (US$5.0 million), related IT costs (US$4.0 million), the transfer of documentation
and contracts, and general preparation covering all associated processes. Other costs
included corporate items incurred on the negotiation and documentation of the
transactions and on the AIM Re-admission Document published in November 2018.
- 109 -
28. Additional Cash Flow Information
Analysis of Group net cash
Year ended 31 December 2019
1 January
2019 Cash flow
£000
£000
Non-cash
movements
£000
31
December
2019
£000
Cash
Short-term deposits
28,371
13,732
14,424
45,936
(211)
(427)
42,584
59,241
42,103
60,360
(638)
101,825
Year ended 31 December 2018
1 January
2018 Cash flow
£000
£000
*restated
*restated
Non-cash
movements
£000
*restated
31
December
2018
£000
*restated
Cash
Short-term deposits
6,226
14,735
22,043
(1,151)
103
147
28,372
13,731
20,961
20,892
250
42,103
Analysis of Company net cash
Year ended 31 December 2019
1 January
2019 Cash flow
£000
£000
Non-cash
movements
£000
31
December
2019
£000
Cash
Short-term deposits
6,372
13,338
(1,142)
(7,369)
51
98
5,281
6,067
19,710
(8,511)
149
11,348
Year ended 31 December 2018
1 January
2018 Cash flow
£000
£000
*restated
*restated
Non-cash
movements
£000
*restated
31
December
2018
£000
*restated
Cash
Short-term deposits
3,472
10,399
2,868
2,870
32
69
6,372
13,338
13,871
5,738
101
19,710
- 110 -
Changes in Group liabilities arising from financing activities
Year ended 31 December 2019
1 January
2019 Cash flow
£000
£000
Non-cash
movements
£000
31
December
2019
£000
BKR facility
15,896
(16,539)
643
-
Cash outflows in 2019 comprised £15,673,000 of borrowing repayments and £866,000
of finance costs paid.
Year ended 31 December 2018
1 January
2018 Cash flow
£000
£000
Non-cash
movements
£000
31
December
2018
£000
BKR facility
2,892
12,800
204
15,896
*restated from US$ to £ following change of functional and presentational currency – see note 3
- 111 -
29. Share-Based Payments
Share Option Plans
The Company operates three discretionary incentive share option plans: the Serica
Energy Plc Long Term Incentive Plan (the "LTIP"), which was adopted by the Board on
20 November 2017 which permits the grant of share-based awards, the 2017 Serica
Energy plc Company Share Option Plan (“2017 CSOP”), which was adopted by the Board
on 20 November 2017, and the Serica 2005 Option Plan, which was adopted by the
Board on 14 November 2005. Awards can no longer be made under the Serica 2005
Option Plan. However, options remain outstanding under the Serica 2005 Option Plan.
The LTIP and the 2017 CSOP together are known as the "Discretionary Plans".
The Discretionary Plans will govern all future grants of options by the Company to
Directors, officers, key employees and certain consultants of the Group. The Directors
intend that the maximum number of ordinary shares which may be utilised pursuant to
the Discretionary Plans will not exceed 10% of the issued ordinary shares of the
Company from time to time in line with the recommendations of the Association of
British Insurers.
The objective of these plans is to develop the interest of Directors, officers, key
employees and certain consultants of the Group in the growth and development of the
Group by providing them with the opportunity to acquire an interest in the Company and
to assist the Company in retaining and attracting executives with experience and ability.
Serica 2005 Option Plan
As at 31 December 2019, 4,578,050 options granted by the Company under the Serica
2005 Option Plan were outstanding. All options awarded under the Serica 2005 Option
Plan since November 2009 have a three-year vesting period. When awarding options to
directors, the Remuneration Committee are required to set Performance Conditions in
addition to the vesting provisions before vesting can take place. Of the above options,
2,500,000 of these options were granted to Mr Craven Walker in July 2015 at exercise
prices higher than the market price at the time of the grant to establish firm
performance targets.
No options were granted in 2018 or 2019 under the Serica 2005 Option Plan.
The following table illustrates the number and weighted average exercise prices (WAEP)
of, and movements in, share options during the year:
Serica 2005 option plan
Outstanding as at 1 January
Exercised during the year
Expired during the year
2019
Number
6,465,550
(1,887,500)
-
2019
WAEP
£
0.25
0.48
-
2018
Number
8,196,330
(1,078,780)
(652,000)
2018
WAEP
£
0.25
0.24
0.40
Outstanding as at 31 December
4,578,050
0.11
6,465,550
0.25
Exercisable as at 31 December
4,578,050
0.11
6,465,550
0.25
The weighted average remaining contractual life of options outstanding as at 31
December 2019 is 5.0 years (2018: 4.9 years).
For the Serica 2005 option plan, the exercise price for outstanding options at the 2019
year-end ranges from £0.07 to GB£0.31 (2018: £0.07 to £0.68).
- 112 -
As at 31 December 2019, the following director and employee share options were
outstanding:
Expiry Date
Amount
April 2021
January 2022
January 2023
January 2024
June 2025
July 2025
July 2025
July 2025
Total
50,000
428,050
200,000
300,000
1,100,000
1,000,000
1,000,000
500,000
4,578,050
Exercise cost
GB£
15,685
91,496
54,500
39,000
72,600
120,000
180,000
120,000
Long Term Incentive Plan
The following awards granted to certain Directors and employees under the LTIP
(deemed to be granted in November 2017 under IFRS 2) are outstanding as at 31
December 2019.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of shares
granted subject to
Deferred Bonus Share
Awards
225,000
225,000
414,000
864,000
Deferred Bonus Share Awards involve the deferral of bonuses into awards over shares in
the Company. They are structured as nil-cost options and may be exercised up until the
fifth anniversary of the date of grant. Vesting of the Deferred Bonus Share Awards was
the later of the date of completion of the BKR Acquisition and 31 January 2019 and all
awards have therefore now vested. They were not subject to performance conditions;
however, they were conditional on completion of the BKR Acquisition, subject to the
Board determining otherwise.
Director/Employees
Antony Craven Walker
Mitch Flegg
Employees below Board level (in aggregate)
Total number of shares
granted subject to
Performance Share
Awards
1,500,000
1,500,000
2,250,000
5,250,000
Performance Share Awards have a three-year vesting period and are subject to
performance conditions based on average share price growth targets to be measured by
reference to dealing days in the period of 90 days ending immediately prior to expiry of
a three-year performance starting on the date of grant of a Performance Share Award.
Performance Share Awards are structured as nil-cost options and may be exercised up
until the tenth anniversary of the date of grant. They were not subject to completion of
the BKR Acquisition and are not exercisable as at 31 December 2019.
- 113 -
LTIP awards in 2019
In Q1 2019, the Company granted nil-cost Performance Share Awards over 3,735,640
ordinary shares and nil-cost Retention Share Awards over 242,539 ordinary shares, a
combined total of 3,978,179 ordinary shares under the LTIP. The award was made to
members of the Group’s executive team, senior management and employees. The
awards included a total of 822,154 ordinary shares for the executive directors and
persons discharging managerial responsibilities as follows:
Director/PDMR
Antony Craven Walker
Mitch Flegg
Total number of shares
granted subject to
Performance Share
Awards
411,067
411,067
822,134
These awards are subject to vesting criteria based on absolute share price performance
over a three-year period and are not exercisable as at 31 December 2019.
Share-based compensation
The Company calculates the value of share-based compensation using a Black-Scholes
option pricing model (or other appropriate model for those options subject to certain
market conditions) to estimate the fair value of share options at the date of grant. There
are no cash settlement alternatives. The estimated fair value of options is amortised to
expense over the options' vesting period.
£1,094,000 has been charged to the income statement for the year ended 31 December
2019 (2018: £367,000) and a similar amount credited to the share-based payments
reserve, classified as ‘Other reserve’ in the Balance Sheet. A charge of £242,000 (2018:
£175,000) of the total charge was in respect of key management personnel (defined in
note 10).
30. Leases
In March 2019 the Group entered into a three-year lease at its new registered office, 48
George Street, following the expiry of its previous London office lease at 52 George
Street, which had been recognised as an operating lease.
Following the adoption of IFRS 16 – Leases on 1 January 2019, the Group recognised a
right-of use asset and a lease liability at the lease commencement date.
The lease liability is initially measured at the present value of the lease payments that
are not paid at the commencement date, discounted by using the rate implicit in the
lease, or, if that rate cannot be readily determined, the Group uses its incremental
borrowing rate.
The right-of-use asset is measured at cost, which comprises the initial amount of the
lease liability adjusted for any lease payments made at or before the commencement
date. Right-of-use assets are depreciated over the shorter period of lease term and
useful life of the underlying asset. The depreciation starts at the commencement date of
the lease.
The Group had no right-of use assets as at 31 December 2018. Initial right-of-use assets
and lease liabilities of £516,000 were recognised by the Group during 2019 within
property, plant and equipment and other liabilities respectively. A depreciation charge of
£129,000 was expensed within administrative expenses. £178,000 of cash payments
- 114 -
made against the lease liability during 2019 are reflected in the 2019 Group cash flow
statement as a cash outflow on property, plant and equipment.
An operating lease is a lease other than a finance lease. Operating lease payments are
recognised as an operating expense in the income statement on a straight-line basis
over the lease term.
31. Capital Commitments and Contingencies
At 31 December 2019, other amounts contracted for but not provided in the financial
statements for the acquisition of exploration and evaluation assets and oil and gas
properties amounted to £nil for the Group and £nil for the Company (2018: £nil and £nil
respectively).
The Company also has obligations to carry out defined work programmes on its oil and
gas properties, under the terms of the award of rights to these properties. The Company
is not obliged to meet other joint venture partner shares of these programmes.
BKR commitments
There are no significant current capital commitments on the BKR producing fields though
plans to carry out work on the Rhum R3 well are in hand with work expected to be
carried out in 2020. Net revenues from Serica’s share of income from the fields, after net
cash flow sharing payments, are expected to cover Serica’s retained share of ongoing
field expenditures and deferred or contingent consideration due under the respective
acquisition agreements. These include £16 million due to BP upon a successful outcome
from the Rhum R3 workover, US$5 million due to Total E&P on 31 March 2020 and 30
November 2020 and amounts of up to £7.7 million due to BP in respect of each or 2020
and 2021 dependent upon achievement of certain Rhum field production and gas price
levels. Further deferred contingent consideration amounts will fall due to each of BP,
Total E&P and BHP representing 30% of their retained share of the actual costs of
decommissioning the BKR field facilities in existence at completion net of tax relief. In
April 2019, Serica posted cash collateral of approximately £12.1 million under BKR
decommissioning security arrangements in support to the issue of letters of credit
required. This secured amount is within the Group’s cash balances of £101.8 million as
at 31 December 2019. The funds are freely transferable but alternative collateral would
need to be put in place to replace the cash security.
Erskine commitments
As at 31 December 2018, the cash balance of £43.1 million contained an amount of £3.0
million that was secured against a bank guarantee given in respect of operational and
capital expenditure to be carried out during 2019 on the Erskine field in the UK. This
security was no longer required during the course of 2019 and no Erskine guarantee now
exists.
Other commitments
The Group has no significant exploration commitments apart from the well on North Eigg
prospect to be drilled within three years of the November 2019 licence award. Other less
material minimum obligations include G&G, seismic work and ongoing licence fees in the
UK.
Other
The Group occasionally has to provide security for a proportion of its future obligations to
defined work programmes or other commitments.
Where the Company enters into financial guarantee contracts and guarantees the
indebtedness of other companies within the Group, the Company considers these to be
insurance arrangements, and accounts for them as such. In this respect, the Company
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treats the guarantee contract as a contingent liability until such time that it becomes
probable that the Company will be required to make a payment under the guarantee.
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32. Related Party Transactions and Transactions with Directors
There are no related party transactions, or transactions with Directors that require
disclosure except for the remuneration items disclosed in the Directors Report and note
9 above. The disclosures in note 9 include the compensation of key management
personnel.
The Company’s related parties consist of its subsidiaries and the transactions and
amounts due to/due from them are disclosed in the accompanying notes to the Company
financial statements.
33. Post Balance Sheet Events
Bruce Platform Caisson
On 30 January 2020 Serica announced that during a Bruce platform inspection, the
condition of an unused seawater return caisson on the platform was observed to have
deteriorated. This caisson had been taken out of service in 2009. Production through the
Bruce facility, comprising the Bruce Keith and Rhum fields, was halted while the problem
was fully investigated.
A subsequent underwater inspection determined that the unused caisson had parted
below the water line leaving both the upper and lower sections of the caisson intact.
Engineering work to ensure that the caisson was properly secured was carried out and
after a shut-in of approximately six weeks, production from the three fields was
restarted.
The financial impact has been mitigated by the net cash flow sharing arrangements put
in place with BP, Total E&P and BHP respectively in conjunction with the BKR
acquisitions.
COVID-19
Since 31 December 2019 the building COVID-19 crisis has caused increasing restrictions
of all forms of travel and many normal business and commercial activities both in the
UK, Serica’s main arena of operations, and globally. This has impacted markets generally
with oil and gas commodity markets particularly disrupted. In addition, an international
dispute between OPEC+ countries in early March 2020 triggered a price war. The
resultant over-supply of oil and gas to global markets, coupled with the fall in demand
due to the outbreak of Covid-19, has significantly reduced the price at which Serica has
been selling its oil and gas production since early March though partially mitigated by the
Company’s gas price puts and swaps. The spread of the virus could also disrupt the
Company’s operations either directly or through its supply chain, product offtake routes
or other dependencies. The impact to Serica is mitigated by the workings of the net cash
flow sharing agreements put in place with BP, Total E&P and BHP respectively in
conjunction with the BKR acquisitions.
In addition to its price hedging cover and net cash flow sharing arrangements, Serica
entered this period with strong cash balances, no debt, limited fixed liabilities and
relatively low operating costs per boe. In management’s opinion this leaves the
Company well placed to withstand the actual and potential impacts of the current crisis
and continue to seek opportunities to further build its business.
Serica has put in place measures to protect its personnel including working from home
for onshore staff and safe travel and social distancing procedures for offshore staff
working on the Bruce platform.
COVID-19 and the impact of the OPEC+ dispute on commodity prices, have been
determined as a non-adjusting balance sheet events. However the significant estimates
and judgements that will be made in preparing future financial statements may also be
impacted if the current macro-economic uncertainty continues and estimates of long-
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term commodity prices decrease. In particular, we expect the following would be
impacted: the estimated amounts of BKR contingent consideration payable, which
include significant short-term elements, would reduce and the estimated recoverable
amounts of property, plant and equipment would be lower and the headroom of
recoverable amounts over respective carrying values would reduce. We do not believe,
based on current forecasts, that impairments on oil and gas assets would arise.
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GLOSSARY
bbl
bcf
boe
BKR Assets
BPEOC
CPR
ESG
FDP
FPS
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
NGLs
NTS
OGA
Overlift
Underlift
P10
P50
P90
Pigging
Proved
Reserves
Probable
Reserves
Possible
Reserves
Reserves
Tcf
UKCS
barrel of 42 US gallons
billion standard cubic feet
barrels of oil equivalent (barrels of oil, condensate and LPG plus the heating
equivalent of gas converted into barrels at the appropriate rate)
Bruce, Keith and Rhum fields
BP Exploration Operating Company
Competent Persons Report
Environmental, Social and Governance
Field Development Plan
Forties Pipeline System
High pressure high temperature
thousand standard cubic feet
million barrels
million barrels of oil equivalent
million standard cubic feet
million standard cubic feet per day
Natural gas liquids extracted from gas streams
National Transmission System
Oil and Gas Authority
Volumes of oil or NGLs sold in excess of volumes produced
Volumes of oil or NGLs produced but not yet sold
A high estimate that there should be at least a 10% probability that the
quantities recovered will actually equal or exceed the estimate
A best estimate that there should be at least a 50% probability that the
quantities recovered will actually equal or exceed the estimate
A low estimate that there should be at least a 90% probability that the
quantities recovered will actually equal or exceed the estimate
A process of pipeline cleaning and maintenance which involves the use of
devices called pigs
Proved reserves are those Reserves that can be estimated with a high
degree of certainty to be recoverable. It is likely that the actual remaining
quantities recovered will exceed the estimated proved reserves
Probable reserves are those additional Reserves that are less certain to be
recovered than proved reserves. It is equally likely that the actual
remaining quantities recovered will be greater or less than the sum of the
estimated proved + probable reserves
Possible reserves are those additional Reserves that are less certain to be
recovered than probable reserves. It is unlikely that the actual remaining
quantities recovered will exceed the sum of the estimated proved +
probable + possible reserves
Estimates of discovered recoverable commercial hydrocarbon reserves
calculated in accordance with the revised June 2018 Petroleum Resources
Management System (PRMS) version 1.01
trillion standard cubic feet
United Kingdom Continental Shelf
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