Serica Energy 18/02/2010

Initiation - refocusing on higher returns

In response to a changing E&P market Serica is shifting its focus of Share performance (p)
attention towards higher return opportunities, having successfully
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extracted value by the partial disposal of its assets in South East Asia.
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With plans to drill up to five wells this year targeting over 160mmboe of
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unrisked prospective resources, a strong cash position following
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disposals and the ramp up of production in Kambuna, we are expecting
Serica to deliver on its early-stage value creation strategy with significant 40

growth in 2010. 30

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Feb Apr Jun Aug Oct Dec Feb
Opportunities closer to home
Following changes in licencing terms and in the market for E&P assets Share information
Serica sees Western Europe and adjacent areas now offering more attractive Price 65p
fiscal terms, economics and acquisition opportunities than it sees in South
Shares 176.5m
East Asia. Its recent sale of assets in South East Asia marks a shift in Serica’s
Market capitalisation £114m
geographical emphasis towards opportunities closer to home. This is
Ticker AIM: SQZ
expected to drive Serica’s strategy for the medium-term.
Sector Oil and Gas Producers
Targeting over 160mmboe in 2010
Serica is planning to drill up to five exploration wells in 2010: two UK Company description
offshore prospects (Oates and Conan) targeting over 90mmboe net to Serica Energy is a junior oil & gas
company focused on early-stage value
Serica in H1 2010, two offshore wells in Indonesia (Dambus and Marindan)
creation through exploration, appraisal
and one onshore well in the Kutai PSC in H2 2010. With a net 60mmboe and development of hydrocarbons in
attributable to Dambus and further upside from two other prospects this economically attractive basins. It has a
exploration activity provides exciting near-term upside potential. diversified portfolio of assets in the UK
& Ireland, Indonesia, Spain and
Strong technical and commercial track record Morocco.
Serica’s strong track record of farming out - ten times in the last five years -
while retaining substantial operated stakes underlines a proven ability to
enact its early stage strategy, enabling it to bring forward cash flows as well
as cut its exploration costs and risks. It also demonstrates the technical
strength of its exploration team in securing a portfolio of attractive low-risk
prospects.
Strong cash position
Following the sale of assets and repayment of its outstanding credit facility
liability, Serica now has a net cash position of around $45m which will be
used to fund activity in 2010 as well as other opportunities. The company
will also benefit this year from the ramp up of production at Kambuna and
the impact of last year’s farm-outs reducing cash requirements.
Analysts
Valuation Simon Hawkins 020 7194 8361
We value Serica using a risked net asset valuation (NAV), calculating core simon.hawkins@omniir.co.uk

NAV at $186m or 65p/share plus exploration upside of $303m giving a total Sam Woodward 020 7194 8361
risked NAV of $489m or 170p/share. With Serica’s shares currently trading at sam.woodward@omniir.co.uk
65p, any buyers today are effectively getting all exploration upside for free.
Exhibit 1 - Serica’s global footprint

Source: Serica Energy, Omni Investment Research

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Company analysis

Company overview
Serica Energy is a junior oil and gas company focussed on early-stage value creation through the successful
exploration, appraisal and development of its assets in the UK & Ireland, Indonesia, Spain and Morocco.
Balancing this are its Columbus development project in the UK North Sea and production from the Kambuna
gas field in Indonesia where production is expected to reach 3,000 boepd (net) in 2010. Serica currently has
2P reserves of 19mmboe but is targeting over 160mmboe prospective resources in its 2010 exploration
programme.

Strategy
Serica’s strategy is to create value through the low cost/high reward stages of exploration and appraisal before
selling down stakes to a larger industry partner who has the financial muscle to fund the higher capital
intensive stages of development and production. Serica’s ideal targets are exploration assets in prospective
regions where 3D seismic data already exists and where it can obtain a large working interest and be operator.
Serica then likes to farm down its interests, typically to around 50%, prior to drilling. This enables the company
to reduce risk (especially if it is carried for one or two wells) while still retaining a significant stake in the upside
potential.

Operations
Having recently refocussed its asset base in favour of regions offering more attractive fiscal terms, Serica has
assembled a geographically and operationally balanced portfolio of assets with near-term production
alongside significant exploration potential in four main regions:

UK & Ireland
Indonesia
Spain, and
Morocco

UK & Ireland
Serica has built a portfolio of interests in seventeen blocks offshore the UK & Ireland. It entered the UK in 2001
and has acreage in the Central North Sea, the Southern North Sea and the East Irish Sea. It has been active in
Ireland since 2006 and operates off both the West and North-West coast of Ireland. To date, the company has
drilled six wells in the UK (three gas discoveries with three further wells to appraise these discoveries) and one
well, the Bandon oil discovery, in Ireland. All of these wells encountered producible hydrocarbons. Most
notable of the UK offshore discoveries is the Columbus gas condensate field (50% interest, operator) in the UK
Central North Sea Block 23/16f which encountered a gross gas pay of 125 ft and was tested at 17.5mmscf/d.
This is currently awaiting development sanction by the UK Government, due toward the end of 2010.

Serica also has important near-term exploration upside in its interests in Oates and Conan. Oates is located in
the UK Central North Sea Block 22/19c and drilling is targeting 78mmboe of gross unrisked mean prospective
resources. Serica is being carried by Premier Oil who will fund 100% of the drilling costs (c$22m) in return for a
50% interest and operatorship. Work is likely to start in June/July. Serica has also farmed out an interest in its
500 bcf (gross) Conan prospect in the East Irish Sea, with Agora receiving 35% interest in the block in return
for funding 70% of the costs of a well ($8m). A jack-up drilling rig has been secured for Conan and will be
mobilised in April, with spudding expected in April/May. Serica retains a 65% interest and operatorship of the
Irish Sea Blocks 113/2b and 113/27c which contain Conan and the follow-on Doyle prospect.
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Exhibit 2 - Serica’s interests in the UK

Source: Serica Energy

Indonesia
Following Serica’s disposal of a number of assets in the region, its Indonesian interests now comprise a non-
operated 25% stake in the Glagah Kambuna TAC and a 30% operated stake in the Kutai PSC. It also holds a
100% interest in the East Seruway PSC.

At the Kambuna field, commercial gas production started in 11 August 2009. This is sold to two industrial
users, PLN, the state electricity company, and Pertiwi Nusantara, with initial contracts calling for (gross) 40
mmscf/d and 4,000 barrels of condensate per day (boepd). After initial difficulties at PLN in taking supply,
production resumed in November at around 10 mmscf/d. Field contracts now call for 45 mmscf/d and 4,500
boepd and capacity is likely to ramp up by Q210.

Exhibit 3 - Serica’s interests in the South East Asia

Source: Serica Energy

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At Kutai, processing and interpretation of extensive 2D and 3D seismic data obtained during 2008 has
identified numerous prospects. Two offshore prospects, Dambus and Marindan, and one onshore prospect
are to be drilled in H2 2010. The Dambus prospect is particularly interesting, targeting potential 200mmboe
gross mean unrisked prospective resources. The East Seruway PSC was awarded in late 2008. Following the
acquisition of seismic data in 2010 an exploration well is expected to be drilled before licence expiry in
October 2011.

Spain
Serica acquired its interests in four onshore exploration licences (Abiego, Barbastro, Binéfar and Peraltilla) in
north-eastern Spain in 2003 and currently holds 75% interests. Having identified a working petroleum system
underlying the licences, the company acquired new 2D seismic in 2008 which was mapped and showed the
presence of several prospects. Serica is seeking a farm-in partner before drilling a possible well in 2011. The
licences have been suspended by the Government at Serica’s request until November 2010 when a drill or
drop decision is required.

Morocco
Awarded in June 2009, Serica holds 25% interests in the Foum Draa and Sidi Moussa exploration licences
offshore Morocco. A high quality 3D seismic survey over both licences was undertaken by the previous
operator, and the data is being reprocessed by Serica. The results of this will determine the potential of the
licences and whether the company will continue to the drilling stage.

News flow
Over the next 12 months Serica is planning participation in five wells within its existing asset base and
commencing development of the Columbus gas field. In the following table we set out the company’s near
term exploration programme, indicating where news flow may be forthcoming.

Exhibit 4 - Expected news flow

Asset News flow Timing

Oates Exploration well Q2/3 2010

Conan Exploration well Q2 2010

Columbus Development sanction Q4 2010

Dambus Exploration well Q3 2010

Marindan Exploration well Q3 2010

Kutai onshore prospect Exploration well Q4 2010

East Seruway 2D seismic survey Q1 2010

Source: Serica Energy

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Key attractions
We see a number of key attractions of Serica including:
Active near-term exploration programme
In 2010, Serica will drill five exploration wells targeting net risked mean prospective resources of over 90
mmboe offshore UK and 60mmboe in Indonesia along with further upside potential from two more
prospects in Kutai. It is also looking to obtain sanction for the development of the Columbus gas field in
the UK North Sea, undertake a 2D seismic survey over East Seruway in Indonesia and reprocess 3D seismic
in Block 15/21g in the Central North Sea, in the Rockall Basin offshore Ireland and offshore Morocco.
Exploration upside
Going forward, further upside is available from the Boyne, Achill and Liffey gas prospects in the Slyne Basin
(FEL 1/06) and testing the new oil play opened up by the Bandon drilling last year; the Muckish prospect in
the Rockall Trough (FEL 1/09) which could hold over 650 bcf of gas equivalent; the Doyle prospect in Block
113/26b adjacent to Conan; the Watson prospects at Block 110/2d; and the “Spaniards” Lead in Block
15/21g that has already tested at 2,660 bopd.
Strong technical and commercial track record
Serica’s strong track record of farming out - ten times in the last five years - and selling down assets while
retaining substantial operated stakes underlines a proven ability to enact its early stage strategy, enabling
it to bring forward cash flows as well as cut its exploration costs and risks. It also demonstrates the strength
of its technical team to deliver exploration successes.
Strong balance sheet
The $100m raised from the sale of its South East Asian assets has allowed Serica to repay a large part of its
draw-down from the credit facility and leaves it with a net cash position of around $45m. It is now
enjoying the ramp up of production revenue from Kambuna and has significantly reduced its 2010
exploration commitments following the farm-down of its interests in Conan and Oates.

Potential concerns
Potential risks or concerns identified include:
Exploration risk
Serica attracts the usual risks associated with exploration such as the risks of a dry hole or finding
uncommercial quantities of hydrocarbons. Serica has a track record for managing these risks well. For
instance, in Ireland Conan is a strong amplitude anomaly and every other analogous anomaly to this
drilled in the East Irish Sea has found gas. In the UK, Oates is a stratigraphic trap and is like Columbus - the
first strat trap targeted in the UK North Sea and which discovered a commercial gas field.
Commercial risk
Serica currently sells its gas from the Kambuna field in North Sumatra on life of field contracts at an
average price of $5.80/mcf (plus 3% pa escalation) to two local industrial users, PLN and Pertiwi, and so is
very dependent for revenue generation on their reliability as gas buyers. This concentration therefore
poses a risk. Last year, production was suspended at Kambuna for over 40 days as PLN undertook
maintenance at its power station owing to problems with its gas turbines. However, gas demand is strong
in North Sumatra and there are no other new sources of gas evident in the region at present.
Commodity price risk
Gas production at Kambuna is protected from commodity price fluctuations since it is sold at a fixed price.
However Serica’s Kambuna oil production and its assets offshore the UK & Ireland are not so protected.
Therefore, if oil and gas prices were to fall, Serica could be potentially exposed with reduced valuations and
lower margins.
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Financials
Serica’s losses of $13.37m posted for the nine months to 30 September 2009 are consistent with many junior
explorers that have limited or no production revenues. Although this included sales revenue of $4.17m from
Kambuna, production only started on the 11 August so only six weeks of production was therefore included.
Going forward, Serica is expected to benefit from its 25% share of full field gross production of 45,000 mmscf/
d of gas and 4,500 barrels of condensate per day sold close to Brent oil prices.

Importantly, the company is thought to have around $70m cash and only $20-30m outstanding debt
following the $100m sale of assets in South East Asia. We expect this to be more than enough to fund near-
term activities, especially with the ramp up of Kambuna production cash flows, cost reductions following
recent farm-outs and the $100m debt facility already in place. Serica also hopes to receive in a few years time
a significant production bonus from the Norwegian Bream field it sold in 2008.

We forecast capex in 2010 at around $25m. Key elements include Serica’s share of the costs of drilling Conan,
three exploration wells at Kutai and initial development costs of Columbus.

Valuation
We value Serica using a risked net asset valuation (NAV), calculating core NAV at $186m or 65p/share (NPV10,
$70 Brent, flat, real), largely attributable to its 2P reserves in Kambuna, Columbus and its large net cash
position. In addition to this we calculate risked exploration upside of $303m or 105p/share, giving a total
risked NAV of $489m or 170p/share. With Serica’s shares currently trading at 65p, any buyers today are
effectively getting all exploration upside for free.

Exhibit 5 - Summary valuation

Asset Interest Serica net $/bbl Unrisked POS Risked p/share

mmboe NPV10 $m $m

Kambuna 2P 25% 10 10 100 100% 100 35

Columbus 2P 50% 9 5 45 100% 45 16

Net Cash 45 16

Bream bonus 6 2

Overheads -10 -3

CORE NAV 186 65

Oates 50% 39 10 390 40% 156 54

Conan 65% 54 5 270 40% 108 38

Dambus 30% 60 2 120 30% 36 13

Marindan 30% 6 2 12 20% 2 1

Kutai onshore 30% 2 2 4 20% 1 0

RISKED UPSIDE 303 105

RISKED NAV 489 170

Source: Omni Investment Research, Serica Energy

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