With UK shares struggling due to concerns of a global recession in the midst of a tightening monetary cycle, Serica Energy (LSE:SQZ) has been a rare shining light. The energy stock has seen gains of 10,000% from its all-time low and was up a further 15% on Tuesday having rejected a billion-dollar deal from a smaller rival energy stock. After this kind of a run, is it too late for me to buy for the long term?
What does Serica Energy do?
Serica Energy is one of Britain’s leading independent upstream oil and gas companies, with operations centred on the UK North Sea. It currently plays a leading role in the UK’s energy transition, with over 85% of its production being natural gas that has significant environmental advantages over other fossil fuels.
The UK shares continued their positive momentum after Serica Energy confirmed on Tuesday that it’s rejected an offer, by rival Kistos, that represented a 25% premium on their closing price. At the time of writing, the stock was trading at 348p, which is still 10% under the offer price. This indicates management has conviction that it can continue to deliver growth for investors. This is certainly a promising sign.
Oil and gas sector tailwinds to headwinds
The UK North Sea has been extremely lucrative for Serica. However, even with that being the case, there is no guarantee that future explorations will yield similar results. The company naturally also has a history of success, but if it does not strike proverbial gold in its ongoing exploration projects, such as the North Eigg project, it could be a considerable drain on its funds. This would naturally damage the share price and, importantly, could affect the company’s long-term plans and attractiveness.
The sector as a whole has received tailwinds this year thanks to runaway oil and gas prices. However, I do not see these prices as a long-term trend, and certainly not a sustainable one. In fact, I see this as more of a short-term symptom of the restructuring of global supply chains. I am not bullish on the long-term prospects and prices of oil, although the company is focused more intently on natural gas and this is certainly where the opportunity for Serica remains.
Conflicted: what I’m doing!
You would think that after such a meteoric rise — to the tune of 10,000% over the last decade — that the shares would look overpriced, but in a relative sense it still appears to hold pretty good value to me, trading at a price-to-earnings ratio of a little over 10. Since 2018 it has also multiplied revenue by a whopping 15x. Quite the feat for a company operating in such an uncertain sector.
All in all, despite the rosy picture painted and the demand for its assets at a premium by a rival company, I believe Serica could soon face turbulence in the shape of falling oil and gas prices. This means I expect the share price is at risk of becoming cheaper over the coming months to years.
Whilst I do still see value in Serica shares, I feel there are better long-term opportunities out there to park my cash today.
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