Serica Energy has signed a Sale and Purchase Agreement ('SPA') to acquire further interests in the Bruce and Keith fields and associated infrastructure in the UK North Sea from Total E&P UK. Under the SPA, Serica UK will acquire a 42.25% interest in the Bruce field and a 25% interest in the Keith field and associated infrastructure ('BK Assets'). The BK Acquisition has an effective date of 1 January 2018 and completion will be subject to completion of the previously announced acquisition of interests in the Bruce, Keith and Rhum fields from BP ('BKR Transaction'). The BK Acquisition is also subject to inter alia certain regulatory, government and partner consents with completion targeted for the end of Q3 2018.

Transaction highlights

Following completion of the BKR Transaction and transfer of operatorship of the Bruce, Keith and Rhum fields to Serica UK, the board believes the BK Acquisition will further strengthen Serica's position as one of the leading mid-tier independent oil and gas producers on the UK Continental Shelf and will provide incremental benefits to the Company.

  • Further increase in reserves and production
    • Serica's pro-forma net 2P reserves as at 1 July 2018 are expected to increase by approximately 11mmboe from approximately 49mmboei post completion of the BKR Transaction to approximately 60mmboe post completion of the BK Acquisition
    • Net production in 1H 2018 from the BK Assets was approximately 4,700boe/d, of which 83% is gas
    • The BK Acquisition is expected to be immediately cash flow and value accretive following completion
  • Structured to mitigate financial risk and maintain balance sheet resilience
    • Existing net cash resources are not expected to be impacted by the BK Acquisition
    • Bulk of consideration deferred and contingent
    • Initial cash consideration of US$5 million expected to be funded by Serica UK's share of net cash flows from the BK Assets between 1 January 2018 and completion of the BK Acquisition
    • Future payments linked to the performance of the BK Assets, allowing both parties to share the benefits of improving field recoveries and production efficiencies
  • Further increased scale in line with strategic growth plans
    • The BK Acquisition, coupled with transfer of operatorship of the Bruce, Keith and Rhum fields to Serica UK, should enable Serica to unlock increased value from the BK Assets
    • No additional resources will be required. Existing infrastructure and expanded team already being put into place as part of the BKR Transaction
    • The BK Acquisition will further increase Serica's scale and profile, improve its ability to attract further growth funding and investment opportunities for both organic growth and further acquisitions

Principal terms of the BK Acquisition

The initial cash consideration for the BK Acquisition is US$5 million, to be adjusted for working capital, with further cash consideration of US$15 million to be paid in three instalments of US$5 million. These instalments are payable subject to continued production from the Rhum field (production of which is transported via the BK Assets) with the instalments payable in three tranches approximately 8, 16 and 24 months following completion of the BK Acquisition. Should Rhum production be interrupted due to the application of US Sanctions limiting Rhum operations, the relevant instalments will be deferred, providing Serica with protection in the event that US Sanctions are imposed more widely than currently anticipated.

Total E&P will also receive a share of pre-tax net cash flow from the BK Assets under a net cash flow sharing deed ('NCFSD') on the same terms as the net cash flow sharing deed entered into as part of the BKR Transaction. Total E&P will receive a share of pre-tax net cash flow from the BK Assets of 60% in 2018 (subject to adjustments made for the period prior to completion of the BK Acquisition), 50% in 2019 and 40% in each of 2020 and 2021. The net cash flow shares are calculated on a monthly basis. No amounts are payable by Serica UK unless this cash flow is positive and amounts are repayable to Serica UK in the event of negative cash flow, up to the amount of prior payments made to Total E&P in the same year. Excess losses in a year are carried forward to be offset against future income. As a constituent part of the calculation of the Monthly Net Cash Flow Payment, Serica shall, subject to the terms of the NCFSD, be entitled to propose the carrying out of Necessary Investment Works and / or Discretionary Investment Works.

Total E&P is retaining liability for the costs of decommissioning facilities and wells already in place. Serica will pay further deferred consideration to Total E&P in respect of 30% of Total E&P's share of future decommissioning costs when due, reduced by the tax relief attributable to Total E&P on such costs. This element of consideration is capped by the amount of cumulative net cash flow received by Serica UK as a result of the BK Acquisition. Deferred consideration will also be payable in respect of the realised value of oil in the Bruce pipeline at the end of field life.

Total E&P is retaining a 1% interest in the Bruce field on completion of the BK Acquisition. Under the terms of the SPA, Total E&P has the option for a specified period of time to assign this residual interest to Serica UK on the same terms as the BK Acquisition save for the initial cash consideration being US$1 and there being no further cash consideration payable in respect of Rhum production or deferred consideration in respect to oil in the Bruce pipeline.

Completion of the BK Acquisition is conditional inter alia on:

  • Completion of the BKR Transaction;
  • Relevant third-party consents;
  • OGA approvals;
  • HMRC approval; and
  • The execution of certain decommissioning documents.

The BK Acquisition also contains customary warranties in relation to the BK Assets from Total E&P for a transaction of this nature.

Mitch Flegg, Chief Executive of Serica Energy, commented:

'We are delighted to have reached agreement with Total E&P to increase our stakes in the Bruce and Keith fields to 78.25% and 59.83% respectively. This further acquisition, following on from the BKR Transaction and coupled with the transfer of operatorship of the Bruce, Keith and Rhum fields to Serica UK, places us in a strong position to unlock increased value from the assets and benefit from economy of scale. This is exactly in line with the Government's intention to maximise the economic recovery of assets in the North Sea, and we believe that both of these acquisitions will benefit our shareholders, partners and employees.'

'This acquisition is a logical next step for us. It provides us with further scale, builds on our asset base and moves us closer towards our objective of being a highly efficient, profitable mid-tier operator focused on the UK North Sea, where we believe there is plenty of potential for further growth. For our shareholders we are building considerable additional value whilst protecting our balance sheet through another innovatively structured deal that benefits both parties.'

'Completion of the transaction with Total E&P is anticipated to take place immediately after completion of the BKR Transaction with BP which requires certain regulatory consents, including a Licence from the US Office of Foreign Assets Control ("OFAC") relating to ongoing operations on the Rhum field.  We and BP are actively engaged in advance stage discussions with both UK and US governments to provide the basis on which the necessary Licence consents can be obtained and thereby enable continuing operations on the Rhum field after expiry of the existing OFAC Licence.  As the BKR Assets make a significant and important contribution to UK offshore gas production we are seeking to ensure that an appropriate Licence will be granted and are working closely with all parties to this end.'