North Sea oil and gas companies Enquest and Serica Energy are in talks about an all-shares merger as the windfall tax takes its toll.

Management at Serica believe a tie-up would create greater scale and diversification, and a stronger platform for future expansion.

It is envisaged that the possible combination would be implemented by way of a reverse takeover whereby EnQuest would make an offer for Serica. This would see a return of capital to current Serica shareholders, who would own most shares in the enlarged business.

Under City takeover rules, EnQuest must declare a concrete intention to put forward an offer for Serica by 5pm on 4 April or walk away.

Serica is the larger producer, with a market capitalisation of around £500m, well down from its 2022 peak of £1.2 billion following Russia’s invasion of Ukraine. 

EnQuest’s market capitalisation has also fallen from a peak of almost £600m in 2022 to its current value of £207m.

The Energy Profits Levy (EPL) has seen the valuations of North Sea productions tumble alongside lower oil prices.

Serica CFO Martin Copeland said in January the 78% tax rate had made it “incredibly difficult” to bring in new investors. Harbour Energy this week announced that its entire profit had been wiped out by the tax.

Serica also missed its initial production guidance for 2024 after outages at the Titan and Bruce fields, further knocking the shares. 

A combined Serica-Enquest entity would produce around 80,000 barrels of oil equivalent per day (boepd). Both own assets directly east off the coast of Aberdeen, although do not have any major holdings together currently.

Analysts expect Serica’s sales to rebound to nearly £800m in 2025.