Many UK shares are struggling due to economic headwinds as well as the geopolitical tensions in Ukraine. FTSE AIM-incumbent Serica Energy (LSE:SQZ) has seen its share price climb nicely over the past few years. Is it too late to buy the shares?
Oil and gas business
Serica is a leading mid-tier oil and gas business. In 2018, it completed an exciting acquisition of three fields in the North Sea from BP. This made it a substantial player in producing oil and gas in the lucrative North Sea.
So what’s happening with Serica shares? As I write, they’re trading for 312p. At this time last year, the stock was trading for 149p, which is a 109% increase over a 12-month period. Five years ago, the shares were trading for 26p, which means the shares have returned 1,100% based on current levels.
UK shares have risks
One of the biggest risks with commodity producers in my experience is the significant financial and operational issues they face when exploring assets. This is a costly exercise firstly, which could hurt Serica’s balance sheet as well as investor returns. Furthermore, if it is unable to yield any commodities from its exploration, the longer-term outlook for the business could also be affected.
Next, much has been made of the surging oil and gas prices in recent months. Although in the shorter term this could boost the coffers, the question that bugs me is whether this is sustainable longer term. The answer is usually no. I’ve often thought investing in commodities when commodities are volatile is a bad idea. I will keep an eye on developments here.
The bull case and what I’m doing now
Despite Serica’s remarkable share price rise in the past few years, the shares still look good value for money. They’re currently on a price-to-earnings ratio of 10.
So what has underpinned Serica’s rise in recent years? I believe its performance has definitely played a part. Although I am aware past performance is not a guarantee of the future, I review it to gauge the bigger picture. Looking back, I can see it has grown revenue year-on-year for three of the past four years. 2020 levels were affected by the pandemic. It is worth remembering many UK shares’ performance dipped during this unprecedented time. 2021 performance was excellent. I also note it has no debt and lots of cash. This is exciting as it could boost further investment, as well as payouts to investors.
Serica shares could boost my passive income stream through dividends. Its current dividend yield stands at 3%. This is in line with the FTSE 100 average of 3%-4%, despite being on the FTSE AIM index. I am aware dividends can be cancelled at any time, however.
Upon reviewing whether I would buy or avoid Serica shares for my holdings, I found myself torn. This is often a bad sign for me personally. The current negativity surrounding oil and gas prices is definitely a factor. Furthermore, the pitfalls of exploration for new assets in oil and gas businesses are well-documented.
I decided to stick to my general rule of not buying commodity stocks when prices and the market in general are volatile. I will keep a keen eye on Serica shares, however.