Serica Energy plc (SQZ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Serica Energy plc Half Year Results Investor Presentation. [Operator Instructions]. I would now like to hand you over to the executive management team from Serica Energy. Chris Martin. Good morning.

Good morning, and welcome, everybody, for our half year results and my first as CEO. I'm joined here by Martin Copeland, our CFO, I'd like to thank everybody who submitted questions in advance, and we will take questions as we go through and answer as many as we can at the end. So we'll go through a fairly short presentation, and then we will go to Q&A. I'll just give you plenty of time to read our usual disclaimer. Thank you. Next slide. And let's start with my initial impressions. I've been here a little over 2 months now. And I'd just like to share a few thoughts on what I've seen. And obviously, ahead of view, before joining the company. There were certain things that you could see from the outside that you could all see as well. And what I saw was a company with a strong asset base, a good management team, a strong focus on ESG and a strong balance sheet. And so there's a lot to like in all of that. But normally, I found that when you join a company, you find a few surprises after you get inside. And I've experienced that myself and discovered reserves downgrades and unsafe assets and things you don't like to think about. And there were surprises here at Serica as well when I joined. But they've almost all been good surprises here. I've seen upside in our asset base, and we'll talk a bit more about that, and that's across the board. I discovered that we've got what I think is the best subsurface team I've ever seen, looking after those assets. And we have a really supportive Board that wants to grow the business. So as I say, it looked good before I arrived. I've seen some good surprises since I got here. I think we have very good rocks. So the subsurface in all our assets is better than I expected. We've got a good team to exploit those rocks. And we can see how to improve the business, and we've got a strong balance sheet to pursue growth. So if I felt positive before joining the company, I'm feeling even more positive now. So I'll just move on now to our producing asset base. So this is our existing assets and the platform from which we plan to grow. We have robust production. We've got an even split between oil and gas reserves and a long reserves life compared with a number of our competitors. And I'm very encouraged by what I've seen, particularly of the subsurface so far. We've got good reservoirs, and we have potential to further exploit those reservoirs in our existing asset base. And some of this is playing out right now with a couple of really exciting wells, which we've already drilled, which are not on production yet, and I'll report in some detail on those in a short time. So the subsurface tells a great story. But one thing I've already discovered is that we can do better with how we run our facilities day-to-day. We currently do not take full advantage of the well capacity we have. And that will be a key focus for me in the coming months. Ultimately, this will lead to us becoming better at forecasting production and delivering against our targets. As I said, we have good rocks and now we'll be increasing the rigor as we focus on operational efficiency. Work on our facilities will improve delivery and we will be better on guidance. This provides the bedrock of a very strong business. So looking at our performance in the first half. This is what we've delivered. As we indicated when we announced the interim date, for the first time, we are now presenting in U.S. dollars, which aligns with many of our peers. And since we are now balanced between U.S. dollar oil and pound sterling gas, there's a logic to presenting in dollars. Production was robust and in line with guidance at 43,700 BOE per day. The annual summer shutdowns occurred after the reporting period and we will discuss that shortly. Our operating costs remained low at $19 per barrel, and we generated material cash flow from operations, which after tax came to $259 million. Although not shown here, EBITDAX for the first half of the year was $279 million. With free cash flow in the period of nearly $100 million, despite this being a year of strong investment, the financial position of the business is robust. We retained a net cash position at the half year of $131 million. And with undrawn capacity in our RBL as well, we have funds from which to grow. And all of this gives us the confidence to retain our interim dividend at 9p per share. And this is why we have that confidence. And I'm going to spend a few minutes on this slide as it's important to understand the value of our business. Investments made in the past as well as those that we're making now in the Triton area are delivering and will continue to deliver results and drive material medium-term cash flow. This chart shows our projected available cash flow over a 4-year period, which is taking into account our committed capital investment and maintenance CapEx, including this year, where we are making material investments in new wells. For this analysis, we're assuming commodity prices of $75 a barrel of oil and 80p a therm for gas. And importantly, the worst-case tax scenario, that's one in which we pay 78% tax. We get no investment allowances against EPL, and we end up also with no EPL capital allowances. For comparison, the best possible tax outcome would add a further $150 million of cash over this period, most of which would occur in 2025. For those who prefer to look at the different price outlook, each $5 change in oil price and 5p change in gas price in combination results in $90 million of incremental cash flow over this period. As you can see, we expect to generate well over $0.5 billion of free cash flow by the end of 2027, even in this worst-case scenario, most of that in the coming 3 years. As a comparison, we have shown our current market cap in U.S. dollars on the graph. The extent of our cash generation to come provides us with significant optionality over our capital allocation strategy. The available cash flow bar represents cash, which could be used for a combination of further investments in our existing assets, M&A opportunities or shareholder returns through dividends or buybacks. Of course, what we're keen to do is to invest at least part of this in the portfolio, allowing us to sustain production from the North Sea deliver new projects and support jobs across the U.K. in the supply chain and, of course, ultimately, deliver more tax revenues to the government. It is worth noting that, as we said in today's R&S, since we took over the BKR hub in 2018, we spent over GBP 1 billion on the U.K. supply chain. This supports jobs and communities across the U.K. and skill sets, which are needed to drive the energy transition. If we have the right tax regime, we would be keen to do that all over again. Our current drilling campaign promises really rapid returns. Typically, less than 1 year. And we would certainly like to continue with our returns-led investment strategy in our existing portfolio. We are also actively seeking value-accretive diversification elsewhere. And are focused on paying an attractive and material dividend. Above all, the key message from this slide is that this resilient cash generation gives us optionality. And now let's look at the sources of that cash generation. We largely produce from 2 key hubs: Bruce, Keith and Rhum, or BKR, which is mostly gas, and Triton, which is mostly oil. The first half of the year showed relatively stable production in line with our guidance. However, we have had issues with both hubs. For BKR it is a case of untapped potential in that we have been unable to produce at the maximum potential of our wells due to constraints within our production facilities. While at Triton, as we already announced with our AGM statement, we experienced some unplanned outages in January and May. Although it is, of course, after the reporting period, the scheduled annual maintenance shutdown on Triton in July extended from 40 days planned to 61 days in total. As a result, we now expect annual production to be at the bottom end of guidance range. Issues like this are frustrating for all of us, but we don't have to let it continue. It is possible to fix this. Fortunately, I've seen it before, and I know what it takes to fix it. But before we talk about that, I would remind you that the barrels we don't produce this year have not gone anywhere. We'll get them next year or the year after. And as I've already said, we have good reservoirs with more potential to come. I keep emphasizing that because if the rocks are not good, you can't do anything about it. Production efficiency, however, we can fix. Benchmarking data shows that there's a strong correlation between some key metrics and stable production performance. None of these are a surprise and a few of them are listed here in the second bullet. Things like staying on top of your maintenance backlog and planning shutdowns, way in advance. The most common failing I see is companies putting effort into improving things that they're already good at. The truth is that you need to identify the things you're not so good at and fix those. The benchmark data shows you only need to be average at all of these things, and you'll be top quartile on production efficiency. The subsurface is good and we need to match that with good operational performance, which is something I faced before in my career. The good news is that this does not require huge amounts of CapEx or lengthy shutdowns to fix it. We just need more rigor around our day-to-day activities. It's not rocket science. So let's look in a bit more detail at the BKR hub. So these are assets that can produce a robust rates for a long time to come. Our well intervention programs carried out during the period have delivered great value, but it could be better. As one example, we did a workover on the Bruce M5 well with excellent initial results when it was brought back online. However, since the short maintenance shutdown, we had because of the FPS pipeline outage, we've been unable to get that well flowing again. We also have more significant opportunities in and around all 3 fields. In Bruce, we have the potential to produce oil wells, which hasn't been done before. It's basically a gas field, but it has a small oil rim. We also have some fault blocks, which haven't been drained fully in Bruce. And we have a large zone with huge gas in place above the main reservoir, which hasn't really been tapped yet in Bruce, and we're looking at the potential to exploit that. Rhum also has potential for infill wells, and there's low-risk exploration targets around Keith. BKR has delivered significant value, and Serica can also be proud of its record on the ESG front. Emissions have been reduced significantly since Serica took over the fields and carbon intensity continues to move lower and is well below the North Sea average. This slide shows our well intervention and drilling activities this year and next. The workover campaign on Bruce is coming to an end, meaning that the focus for the remainder of the year is very much on Triton, with a well campaign that is set to deliver rapid payback again, that's likely to be less than a year. This well campaign, including bringing Belinda to production in 2026, represents the vast majority of our committed capital spend at this time. Of course, we'd love to add Buchan to this chart, but work on that is on hold until there's clarity over both the fiscal regime and the evolving requirements around how environmental impact assessments will be handled for new developments. Turning to Triton now. Our subsurface team has done an outstanding job of identifying high-quality subsurface targets in a group of fields, which previous owners felt were already fully developed. Drilling at Triton can boost production and we are currently in the middle of a 5-well drilling campaign of high-quality targets. I will cover B6 and GE-05 in some detail in a second. The next well will be on Guillemot, in which we only have a 10% interest. But then the campaign finishes with wells on Evelyn and Belinda, both of which are 100% Serica and both of which look very promising to me. I look forward to sharing good news on those wells with you in the future. This slide gives you a flavor of the results from our first 2 wells in the Triton drilling program, B6 and Gannet GE-05. Unfortunately, we don't have either well on production yet, although B6 is due online any day now. In fact, we're hoping later today. GE-05 should be online in early November. What you're looking at here is a cross-section through the reservoir in each field with Bittern at the top and Gannet at the bottom, and the well trajectory superimposed on top of that. That's the orange line through the middle. And on this plot, red represents oil, while blue and green colors represent either water or rock, which is not part of the reservoir. The color representation here comes from a tool called Earth Star, which sits just behind the drill bit and allows us to see what we're drilling through before we even get there. So we're able to adjust the angle of the wellbore to stay in the best zone. This sort of technology is invaluable when drilling through reservoirs like this, where you're not 100% certain where the top of the reservoir is or where the oil water contact is. And what you can see is that both wells drilled horizontally through long sections of good quality sand, which is full of oil. And we're also a good distance above the water in both wells. This means we can be confident of wells producing clean oil at high rates from both wells. It's really difficult to envisage a better outcome. Although the horizontal section in GE-05 is longer than B6, it's likely to produce at lower rates due to the slightly lower permeability, but mainly because of the much higher viscosity of the oil in Gannet. However, it will still be a great well by North Sea standards. And I've got an interesting personal history with B6 well. Because 20 years ago, I plan to drill a well, almost exactly like that in this field when I was at Amerada Hess. And we were operator of Triton. And we thought a horizontal well like this at the top of the field would be an outstanding production well and better than any other wells in the field. However, after I left Hess and unbeknown to me, the new management never drilled that well. So imagine my delight when I showed up in my first week at Serica, and I discovered that, a, Hess had never drilled this well; and b, Serica was in the process of drilling it now. So I'm really -- I'm looking forward probably more than anybody else to see in the results of this well in the coming days. So now let's move on to one of the other great opportunities in our portfolio, which is the Buchan Horst. You'll have heard a bit about this in the press recently, so I won't belabor that. But it's a really exciting project and exactly the sort of thing that the U.K. needs to go ahead. It's one of the largest undeveloped fields in the U.K. and it would support over 1,000 highly skilled jobs and generate tax revenues. And enhance the country's energy security. Now whether it can go ahead, depends almost entirely on the government. We will only proceed if we can win the battle for capital allowances. And for more on that and on the finances in general, I'll hand over to Martin.

Thanks, Chris. So turning now to our results for the half year. We generated $462 million of revenue, which was on sales volumes of 56% gas and 44% oil NGLs. That was up on the $422 million from last year as reported. But recognizing that in the first year of -- first half of 2023, only included the tailwind assets from the 23rd of March. The like-for-like comparator would have been $545 million. The key reason for the reduced like-for-like revenues were realized gas prices some 30% lower at 67p per therm as opposed to 97p a therm for the comparable period. To put that in context, 67p a therm is equivalent to less than $50 a barrel, which only serves to highlight how much we are not in windfall conditions anymore. In addition, although like-for-like oil sales were almost exactly flat year-on-year at $252 million, this masks the fact that comparable oil sales volumes were down nearly 20% at 3.2 million barrels as compared to 3.9 million in the first half of '23. These lower oil volumes were, though offset by higher realized prices, averaging $78 a barrel compared to $66 a barrel for the prior period. Direct operating costs of $151 million meant that we kept our operating costs at $19 a barrel of oil equivalent, which is very competitive for the basin in the first half of the year and is inside our target. However, although we see full year absolute operating costs remaining in line with our expectations. The lower full year production guidance means that the full year on a dollar per barrel basis were already come in slightly above our $20 a barrel guidance. Our first half results, however, highlight the critical importance of tax in a world of currently 75%, soon to be 78% and with the impact of losses as well as capital investment allowances in a phase of high investment by Serica. Despite identical tax rates applying during the period, our book tax was down from $169 million in the first half of 2023 to $106 million in this period. And our effective tax rate, which we define as the current tax divided by the EBITDAX was down from 56% to 26% in the first half of 2024. This materially lower effective tax rate demonstrates the combined impact of the use of our carryforward losses and the currently very attractive capital and investment allowances against the EPL, the windfall tax. We've shown on this page the balances of our tax losses at the half year of over $1 billion of tax loss, which equates to value of over $500 million in those losses alone. Turning now to the use of cash during the period. The $370 million opening adjusted cash position is the dollar equivalent of the GBP 292 million we showed at the end of 2023 in our full year results. Then we obviously generated revenue and the operating costs, which I've just spoken. The hedging and working capital movement is at $3.5 million realized hedging loss, but there was also a $22 million net working capital outflow. The cash tax paid of $72 million represents the January installment of tax and is really in respect to 2023 activity. But to illustrate the material swings that current tax regime can create, equivalent number in the first half of 2023 was more than $100 million higher at $174 million. We have, again, as we did with the final year, showing a notional cash balance after our CFFO less tax. And the difference between those 2 bars that is equal to the amount of cash flow from operations after tax that we generated in the period of $193 million. The reason we showed it this way is that we see the outflows to the right of that bar, that central bar, as representing our capital allocation choices. So during the period, we paid $7.5 million on the completion of our farm-in to the Buchan Horst license that Chris has just spoken about. And as we've made it clear, we are in a high-investment phase this year. We spent $112 million in the period on BKR light well intervention vessel activities and the beginning of the Triton well program as well as long lead items on the Belinda project. And there was also $4.5 million spent on decommissioning, a very small number, obviously, overall in comparison to many of our peers. Finally, we paid down our debt facility by $52.5 million in the period and we undertook GBP 15 million buyback, which is shown here in dollars at $19 million. Recognizing the importance of a cash outlook, the purpose of this chart is to highlight the fact that as last year and as is common with all our peers, cash outflows are weighted towards the second half of the year. Where we've shown actual numbers on the chart, that's because the unknown numbers, i.e., the existing half one cash outflows, but also the second half payments for dividends, which comprised with the 14p a share final dividend that we paid in July, and also the 9p interim dividend that we're declaring today and will be paid on the 21st of November. Tax payments are also weighted to the second half with scheduled payments in both July and October. The exact balance payable will, of course, not be known until we file our return, which is why we've shown a directional view on this at this stage. Likewise, for CapEx, as indicated today, we're retaining our full year guidance of $260 million pretax with spending during the second half concentrated on the Triton drilling program, which Chris has just gone through. This chart is a chart that we have used before, and we repeat it here as it demonstrates the very significant sums we have distributed to shareholders, especially relative to our current market value over the last few years. The 2024 bar shows the cash value of the 9p interim we've declared today as well as the GBP 15 million of share buyback that we undertook during the period. Moving now to our capital allocation priorities. This chart illustrates our overall allocation, articulation of our capital allocation priorities. When we announced the full year results in April, we had hoped that we'd be able to give greater clarity on framing the medium-term expectations for shareholders at this point at the time of the interims. However, as Chris has already indicated, we are now faced with not knowing exactly where we stand on the critical issue of EPL capital allowances until the 30th of October when the autumn budget will be published. Even then we may still lack some clarity about the proposed tax regime after 2030, but we will then have a very definite clear view of where we sit at least for the next 5 years. The key relevance of this is to determine how much of our capital we are able to invest in our U.K. assets and then the exciting opportunities we see within them. In addition, as Chris will comment further, we continue to be very active in screening M&A opportunities, internationally and at home, and we hope will be clear that we see maintaining strong shareholder distributions as fundamental to our investment case. So the mix of priorities remains as we previously articulated. But putting a clear set of guardrails around this for investors is something we intend to do, but can only do in late Q4 after we've been able to factor in the autumn budget into our forward plans. And with that, I'll pass back to Chris.

Thanks, Martin. And as I mentioned earlier, in addition to shareholder returns, we have opportunities to create value, both organically and inorganically. Given the age of our assets, we've got a surprisingly full basket of opportunities in our existing portfolio. And I don't know if I mentioned this earlier, but we also have the best subsurface team I've ever worked with evaluating these opportunities. But we need the right sort of fiscal regime to allow us to pursue these projects. something, as Martin said, we will know more about by the end of October. In parallel, we're seeking M&A opportunities, which add value for shareholders. Now we've been open about looking at targets in Norway. But entry into Norway is notoriously difficult as the M&A market has always been very competitive there and everyone sees the same attractions in having a Norwegian business. We continue to evaluate opportunities there. But I also want to be clear that we've not given up on the U.K. Depending on the fiscal regime, there may be very attractive growth opportunities. And it is clearly a less competitive market than Norway. We have also started identifying other geographies which might allow us to replicate the strategy that we've pursued in the U.K. This is currently under review with our Board. Now this slide shows my main focus areas at the moment with the overarching goal of creating shareholder value. We need to run our assets safely and reliably and keep our ESG focus. We will also have a concerted effort to deliver more consistent production performance, as I've said. And we are in the middle of evaluating and prioritizing all the investment opportunities in our current portfolio. We will set a capital allocation policy, which balances long-term value growth with shareholder distributions. And we will continue to look for opportunities to diversify our portfolio. But we will only do this, where we can demonstrate that we can grow shareholder value. That concludes our presentation, and we would be happy now to take your questions. Andrew?

Thank you very much Martin. Thank you very much Chris. We had some very good questions come in. As you expect, we will answer many of them as we possibly can in next half an hour. [Operator Instructions]. So without further ado, the first question we had is how do you plan to tackle the high and rising windfall tax placed upon the company by the government?

Yes. Thanks, Andrew. I'll have a stab at that, but Martin, feel free to jump in. So look, it's hurt all E&P companies, there's no doubt. But I think we have a really strong base business that generates good cash flow as we've just shown. So in terms of surviving this, I think we're in a much better position than most of our peers. We also have tax losses, largely those that we picked up through the tailwind transaction, which mitigate the tax impact in the short term. And we will optimize our capital allocation policy. So what do I mean by that? We're only going to invest in the things that give us the best returns. So if we have a tax regime in the U.K., where we think we can still invest on drilling new wells and doing developments and have good returns, then we'll do that. But otherwise, we'll do other things with our capital, and that will either be M&A or it will be shareholder returns. And the last thing I'd say on this is -- we've not given up, by the way, on influencing the government on the outcome of the budget by the end of October. We're still working very hard at that. We're lobbying. We're working with industry peers and industry bodies. We're working with unions. We're doing everything in our power to try to influence so that we have a sensible outcome on tax. Martin, I don't know if you've got anything you want to add?

No, I suppose the other point, though, of course, is that we're also looking abroad, right? So I mean, one of the ways we can mitigate it if we don't get something which allows us to invest, as I say, is either to distribute more to our shareholders and buyback our shares and/or in dividends or invest in another geography. And I think as Chris indicated, that isn't people shouldn't read that as being solely Norway. We probably talked a lot about Norway in the past. It's not that we're not looking at Norway, but partly Norway is just a good contrast to the U.K. in terms of how sensible its policies are, but we are looking further afield than that as well.

That probably answers the key point of the next question I was going to ask. Can you confirm whether or not international expansion is a major focus for the business. I think clearly it is. So I'll take the rest of that question as well. What would you say that M&A looks like? What are you looking for? Are you looking to operate it or nonoperated, gas versus oil? And do you see any regions off-limits?

Okay. I think, again, I'll take a stab, and I'm sure, Martin will add to that. Our preference would be operated, I have to say. The company operates a large portion of its U.K. portfolio. And obviously, the benefit of that is things are in our own hands. And so when I talk about, I know what it takes to improve production efficiency. Of course, we can do what we want on our assets. And therefore, we had fixed that. If it's somebody else operating, that one step removed and therefore, you are influencing rather than executing and that just takes a little bit more effort and a little bit more time in my view. So I would prefer to operate it. But look, we're more interested in value add than anything else. I think you asked about oil or gas. I don't care. I like making money. And if we find a set of assets where we think we can add a lot of value. I'm agnostic about whether that's oil or gas to be honest. Where would we not go? What's off limits? I think war zones are a terrible idea. I wouldn't really want to go there. I don't like doing business in corrupt regimes. And forgive me, I'm not going to tell you where I think is corrupt, but you can maybe figure that out for yourself. And I think above anything else, so we're focused on value. And we really like the strategy that we've been pursuing in the U.K. which is acquire some assets. And quite often, to date, it's been off the majors, but it doesn't have to be, acquire some assets that are mid- to late life that haven't been given the love. And then go and add value to them. And I think it's a great model that the company has had, and we can do more of that. And I think there are going to be assets coming available in lots of different parts of the world that fit that description. And the model that we have here that I really like is it's not just about take the assets and get cost out and run the facilities efficiently. It's also about looking at the subsurface and finding subsurface opportunities, which other people haven't chased. And we found that with BKR and Triton in spades, where the majors have capital allocation issues where they can't drill everything. And money tends to go to the bigger projects and you pick these things up from the majors and you just find opportunity all over the place. And I probably haven't mentioned this today, but we've got a bloody fantastic subsurface team that knows how to go and find this stuff. And so I've got a lot of confidence that we can do more of the same. Martin, what have I missed?

No, no, I think it's very good. I mean I suppose just to reiterate, it's the focus for M&A. We've got a very, very strong M&A team, right? I've been here now for 6 months. And it feels like we keep talking about our intent to do M&A. And of course, I'm sure for shareholders, it must be frustrating to say whether you keep talking about it. So where is the deals? The reality is we've been looking at a whole lot of things. And M&A is like an iceberg. As when we announce something, that will mean that there's 9 things that we've looked at, considered and for whatever reason, we haven't been able to do or we haven't wanted to do because we didn't feel it created the right shareholder value. So the fundamental focus is doing something that creates shareholder value. And in doing that, we're always going to look at that against our own value, right? So that will include against buying back our own shares. And clearly, where they are today, that makes that a relatively high bar. So we've got to balance that need to get some international exposure, need to get further diversification into our business deliver value. And that's just slightly hard nut to crack, but we have an nice team on it, just like we have a nice team on the subsurface. So we're working it very hard, and we hope to be able to do something in the not-too-distant future, but we just can't promise when, and we actually won't make excuses for that because it's more important that we do the right deal and we just do A deal.

I think before we move on from M&A, one final thing then. Do you have any financial limits or any deal sizes in mind?

Well, inevitably, we do. I mean we're not going to jeopardize the balance sheet. One thing we know for sure is that that's the recipe for bad things in an E&P company. The good thing is we have an RBL facility and RBLs are inherently reserve-based lending, inherently conservative in terms of how they're structured and in a way, the fact that we have a facility with a borrowing base of $525 million, which means the banks have set that as a conservative value against which to lend to us should be a pretty good signal actually to how wrongly value we are in the market. But essentially, we're not going to overlever the balance sheet. We're only going to be looking at acquisitions that include production anyway. We're not going to be making the mistakes that others have made in the past. We completely understand that. So yes, there are constraints clearly on what we can do as a result of that. But oftentimes now, we can do deals where actually you're probably not necessarily having to pay a very significant amount of cash upfront. It depends on where, yes, and that's what Serica has done very well in the past and we would expect to be able to do things like that again.

You mentioned it yourself and then you talked about the valuation of the company. So why share buybacks not ongoing?

So we renewed our mandate at the AGM, as people will be aware and we absolutely consider that as part of the mix. And hopefully, as we signaled today. The main reason why we're not immediately sort of triggering that right now. We've obviously announced the interim dividend, and we continue to believe that paying a dividend is a very important part of the mix. So it's not going to be an alternate, buybacks would always be in addition to, not instead of dividends. And then what we've actually indicated is, obviously, as we think about the wider range of capital allocation choices, knowing where we end up on the 30th of October, which is obviously only just around the corner is important in that. So that's kind of where we -- why we haven't kind of signaled any more on that right now. We have the authorities, we could do that at any time. So I guess it's my answer on that one, Andrew.

While you have the mic, Martin and we're going for another one. These dividends be retained at 23p for next year?

I mean, certainly, that's the direction which we're heading in. Obviously, we have not set the final year dividend. And as a prudent board, you can't until you know the outcome of the year. But obviously, a signal we gave today is that we're retaining the interim at the level it was last year.

So then we'll come back to Chris on this one. You covered it off well in the presentation, I think, but it is an important point that worth asking this specific question. How do you want to avoid unplanned downtime and extended planned downtime going forward?

That's a great question. And it's about -- it's really about getting the basics right. It's some of the things that I showed on that slide. And that really is a very strong correlation between getting some of those basics right and having the best operational performance. Now at the moment, we've not done the work to figure out which of those elements were underperforming in. So we've got a bit of work where we measure ourselves on a whole list of. There's about 10 of these elements, and it's things like continuous improvement and performance management and how quickly you repair something when it goes down. What sort of bottlenecks you have in your facilities? How much of a maintenance backlog do you have. Those kind of pretty basic measures. And if you measure yourself on those things, you can then see where the best-in-class is. We have benchmark data. We can go to that and see what the best people do. And we can see where we've got a gap. And you closed the gap on the things that you're not particularly good at, as I said in the presentation, you don't waste time on the things that you're already good at, and it's a trap that people fall into. They go, "Oh, yes, well, we're best-in-class at maintenance backlog. So we'll get even better at that." And meanwhile, ignoring something that's going to trip you up and have an extended outage. So look, the company has not been great at this in the last few years. Not making any excuses for that, but we've disappointed a number of times on production. I think that there's a couple of elements to that. One is forecasting, how good are we forecasting? And do we foresee the kind of outages that we should be foreseeing? And the second one is just getting better at it. So it takes time. It takes a bit of time to gather the data and figure out where you need to put the effort and then you've got to put your shoulder to the wheel and fix those things. And so my experience it might take 2 years to get to be top quartile in that area. But you'd start to see improvements from the moment you begin to take action.

Moving topics somewhat, you mentioned in the statement about moving from aim to the main market. Is that something that is front of mind? Or is it something that's just an option?

Maybe I'll take that one. Yes, so it's definitely an area that we're doing real work on, and we're exploring the pros and the cons of it. And it's been -- it's obviously been a topic I think we've talked about it in the past, and we've talked about in the past the fact that we would do that in conjunction with a transaction. One of the thing that's changed is the fact that the regulations have changed and made it such that, frankly, the main Board is there were very few advantages now, to remaining on aim, relative to being on the main board. So I think that's kind of accelerated our focus on the issue. Just so people are aware, there's some -- there is a key role, which is you can't move on when you're -- you have to be within 9 months of your last audited numbers. And so we would not be able to do it in 2024, because we don't audit our half year. So clearly, we're getting towards being 9 months beyond our last audited numbers, which means 2025 would be the earliest we could do it. So what we're planning to do is use the autumn to go through the work to make sure that we covered off everything. We know exactly what all the pros and cons are. And then as we come back later in the year, we'll be able to update shareholders on what the conclusions of that are and what our intents are going into 2025.

Thank you very much, Martin. Moving into a bit of a quick fire round now in terms of the questions. How long do you project tax losses to last?

So we, I mean, look, the pace at which we use them is obviously somewhat varied depending on the level of production and the price. But 2 to 3 years is what we've said. And I think we've reiterated again today that the balance is over $1 billion of tax losses with -- probably of the value particularly of the EPL losses, which is $230 million is going up because when the EPL rate goes to 38%, the value goes up of those losses. So the value is still around $500 million when I do my simple math on that, associated with them. And again, if you just add that to all the factors that just show where -- how the market valuation seems, let's say, not quite in the right place.

Share purchase from the buyback were not canceled. Why not?

Yes. I mean we've had this question a few times, and as I think shareholders will know, the buyback we did was the first buyback that Serica has ever done, and it was a relatively small sum. And the timing of doing it was, we got hit somewhat against kind of a male strong created by the fact that the general election was called during that time period and the political noise was very high. But the specific and sort of technical reason why we didn't cancel those shares is because we also knew that we had some legacy share awards that we would need to issue in the same time period to -- from a historic LTIP awards. And if we hadn't put the shares into treasury, we would have ended up issuing shares at the same time as buying them back, which is a very -- would be a very peculiar thing to do. So it was a very specific and technical reason as to why. Treasury shares are not counted for the purposes of voting. They don't say for the perspective of any metrics there. They're effectively as good as canceled. But what I can say is if we do another buyback and if we do anything of any more significant scale, we'll definitely cancel the shares. We're not in any -- that's exactly the point. The point is to reduce the share count. So hopefully, that answers the question.

I believe it does. Moving on to -- well, we've got a question specifically about Slide 6, which I think is worth answering. Could you please clarify the specific projects included in the currently committed CapEx box on this slide?

I can probably take that one as well. So yes, it's all of the -- it's what we referred to you now sometimes there's our Triton 5-well program. And it was previously a Triton 4-well program and then we added Belinda, which is a fifth well on the program. So it's basically all of those wells. So it includes the ones that Chris talked about, obviously, B6, G5, the small stake we have in the Guillemot North West well and Evelyn and then Belinda. And then there's also a kind of relatively small but a modest level of maintenance CapEx that we have throughout the period. So it may not be technically committed, but it's things that we know we're going to have to spend money on to keep the facilities up and running. What it doesn't include, obviously, is Buchan. It doesn't include future infill wells on the Bruce area, some of which Chris talked about and indeed some of which we've talked about in the past, they're not in there because we haven't taken a final investment decision on them. And as hopefully we've indicated during this presentation and previously, that the viability of those will be tested based on whether we get the right fiscal regime and the right capital lapses.

Well, and also, we have choices about whether we drill those wells or return cash to shareholders or do M&A. So that's why those future CapEx programs are not in there.

We have a question, one for you, Chris. I think I mean you mentioned not maximizing well capacity. What is the maximum well capacity?

I honestly don't know that today, and that's one of the issues is as a company, one of the things we're not doing that we will be doing going forward is on a daily basis, measuring the maximum capacity and then you measure what your losses are against that capacity. So every day, you're sort of saying, well, my wells could have done this. This is how many barrels I produced. What's the gap? What caused it? What have we got to do to make sure I get that tomorrow. And it's this kind of daily obsession really with every barrel that you use. So one of the first things we've got to do is go around and add up what the well capacity is. And the reason I'm not being evasive about what the number is, it depends. And the reason I say that is if you produce each well on its own across our platforms with nothing else flowing, you'd get one number for that well. If you produce it when a lot of other wells are producing as well and they're all flowing it at different pressures and they're taking up room in the pipeline, et cetera, you get a different number for that well. So right now, I don't think we've got a really good handle on what's the maximum that we can produce on any given day. And that's one of the issues. We kind of get what we get. And therein lies a great opportunity because getting really rigorous about that process of measuring your losses and then figuring out what caused them and eliminating them going forward just represents an upside for us.

We've got a number of questions about the share price and many of them are linked back to maybe linked that to share buybacks. So one of the things I think is worth asking is, what do you think the market misunderstands about the company at the moment?

Yes. I mean, clearly, there's something. And that's one of the reasons we've got that graph. The slide that shows the cash flow over the next few years because we produce our market cap in 3 years under some really conservative assumptions. So maybe the market doesn't understand that. I think we're probably also being punished because we've had a few misses on production. And so maybe the market doesn't believe what we say a little bit. I don't know. It's baffling to me. And you look at what our yield is at the moment with our dividends against where the share price is. And it looks crazy. It's up by 18% or 19% at the moment. And what we hear is some people look at that and say, well, something doesn't add up here. And it doesn't add up because the company is worth more than that, but people assume there must be something wrong because we got such a high yield, sorry, Martin.

Yes. I was just going to say, I mean, that's -- eventually, we're conscious at this point, which is why we put in, and it's not something that companies always do. But we put in that forward look on the cash flows, and we set out what all the assumptions were to show that there's absolutely notwithstanding all the noise we have on the kind of tax front. A very resilient medium-term outlook, which should continue to allow us to pay healthy returns to our shareholder base and invest. And frankly, we have a very strong balance sheet. We have no decommissioning liability. So it's not like when you come to the end of that time period, you suddenly got some rule of liabilities that's coming our way. That's not the case. So yes, we just think -- I mean, we recognize. And frankly, if the market doesn't understand it, that's because we maybe need to do a better job of getting that message out, and this is very much part of that effort, and we'll be continuing to do that. We are going to put an enormous amount of shoe leather and to continue to try to make sure that, that is heard and understood. So yes, I mean, that's really the job that we need to do. And we know, Chris has said some things we need to do better operationally. One of things we need to do better is get the cons out there and make sure people understand. So there aren't kind of like room is full speed is going around. We're just being very, very clear and transparent about how we see things.

Message understood on that one. Moving again back to the political landscape in the U.K. Where is the uncertainty on the inclusion of scope of the emissions in the EIA process rank in your current concerns?

Well, I think it's -- well, it's definitely a concern because that's going to have a direct impact on Buchan going forward. So that's the main thing. This is going to impact Buchan. Of course, we don't know where that's going to come out at the moment. I think it's the Finch ruling, I just find it mind-boggling that it could be concluded that if we don't produce a barrel, then somehow that demand goes away. I mean that seems to be what the ruling was based on and assumption that the demand is there because the supply was there, which is complete nonsense as we all know. But look, I know there's a legal challenge going on with Shell on [indiscernible] and Equinor as well have got a legal challenge. And then we expect to hear from the government how we're supposed to take that into account. Now it doesn't say we can't get an EIA license. It just says we need to take that into account. And of course, one way you can take it into account as you say, here's what our Scope 3 emissions would be and those Scope 3 emission exactly the same if we didn't this project. I'm hopeful that we'll find a solution to it. So yes, for us, it's a direct impact on Buchan in particular. I think the rest of the capital projects that we have in the pipeline are probably not impacted by it. Martin?

No, exactly right. And I think the main point is that we don't know exactly what it will be they've said the spring. So what it does mean is we're going to have to wait until the spring to have a new set of rules that we set out by the regulator that we have to follow. Once we have the rules, we'll follow them, right? I mean, of course, in the meantime, we obviously knew we can calculate what the Scope 3 emissions of Buchan will be, right? So we could easily resubmit with Scope 3. And what will matter then is, as Chris said, is that then compared against the equivalent Scope 3 from imports, which because it's Scope 3, i.e., the use of the product will be identical. So if it's logically, it should make notice. But of course, we wait to see how exactly that will play out.

So I think we're rapidly running out of time. So just before we -- before I hand back over to the operator, I'd just like to thank everyone again for the questions that have come in. I'm aware there have been many more asked than answered, although I hope we covered off the key topics. If there are anything that you feel that we didn't answer then please e-mail them over to me directly, you'll find my e-mail on the website. I'm also very happy to jump on the call with any shareholders at any time. And with that, I will hand back over to the operator.

Perfect. That's great. Andrew, Chris, Martin. Thank you very much indeed for being so generous of your time and addressing all of those questions that came in from investors this morning. And of course, we will give you back all of the questions that were submitted today just for you to review and to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. But Chris, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Sure. Thanks. And I'm aware we're right on 10:00, so I'll keep it really brief. Hopefully, we've demonstrated what we see as the intrinsic value of the company and how that's somehow disconnected from the share price. We know we need to get better at our production performance. We know we need to get better at communicating our story and hopefully that will start to make difference. So look, thank you all for your attendance, a lot of great questions. I've seen there's a bunch more that we haven't got to and we will be answering those in the course of time. Thank you all, and stay safe.

Perfect. Chris, that's great. Thank you once again for updating investors this morning. Could I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of management team of Serica Energy plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you.