Serica takes on three BP interests in North Sea

Serica Energy’s wholly-owned subsidiary Serica UK has signed a sale and purchase agreement to acquire BP's interests in the Bruce, Keith and Rhum fields in the North Sea, it announced on Tuesday.

The AIM-traded firm said that under the agreement, Serica will acquire a 36% interest in Bruce, a 34.83% interest in Keith and a 50% interest in Rhum - collectively the ‘BKR Assets’.

Subject to completion of the acquisition, Serica would also become production operator of the BKR Assets, with the board anticipating that approximately 110 BP staff would be transferred to Serica.

The acquisition remained subject to certain regulatory, government and partner consents.

Serica said the deal has an effective date of 1 January 2018, and completion of the acquisition was expected to take place in mid-2018.

The Initial consideration would be £12.8m, to be adjusted for working capital, with additional contingent consideration amounts of up to £39.1m payable dependent on certain production and gas price thresholds being achieved.

Serica said the initial consideration was expected to be exceeded by Serica's share of net cash flow from the BKR Assets between 1 January 2018 and completion of the acquisition.

It said the contingent cash consideration would be financed by expected cash flows from the BKR Assets.

BP would also receive a share of pre-tax net cash flow from the BKR Assets of 60% in 2018, 50% in 2019 and 40% in each of 2020 and 2021.

The net cash flow shares would calculated on a monthly basis, with no amounts payable by Serica UK unless the cash flow is positive and amounts repayable to Serica UK in the event of negative cash flow, up to the amount of prior payments made to BP in the same year.

Excess losses in a year would carried forward to be offset against future income.

BP would retain liability for all decommissioning costs relating to facilities existing at completion - including wells - associated with the BKR Assets acquired by Serica UK.

Serica UK would pay BP additional consideration equal to 30% of such costs at the time of decommissioning, reduced by the tax relief that BP receives on those costs.

That element of consideration was capped by the amount of net cash flow received by Serica UK as a result of the acquisition.

As part of the acquisition, Serica UK also entered into product sales agreements with BP to off-take Serica's share of gas and oil production from the BKR Assets on market terms.

It also agreed to enter sales contracts for natural gas liquids production on a similar basis.

BP Gas Marketing also agreed to provide Serica UK with a prepayment facility of up to £16m, which could be used to provide further financing flexibility to cover the cost of hedging instruments which have been purchased by Serica UK in conjunction with signing the acquisition agreement and, if required, the initial consideration.

“This transaction will establish Serica as a leading British independent oil and gas company with the scale, balance sheet and operating capability to prosper in the North Sea's rapidly changing upstream oil and gas industry,” said Serica’s executive chairman Tony Craven Walker.

“It will diversify Serica from being a single asset to a multi-asset production company.

“It will also broaden our role as an operator, which will enable us to maximise performance from Bruce, Keith and Rhum, complement the continuing good performance from Erskine and deliver further value growth.”

Walker said Serica achieved that through an earn-out structure which would enable both Serica and BP to share the risk and benefit from the future performance of the BKR Assets.

“For Serica, the transaction is expected to be both cash flow and value accretive.

“It has been delivered without diluting existing shareholder equity and significantly increases reserves and production per share.”