Harbour Energy: A Transformational Opportunity?

16th Jan by Roland Head

13 comments 3492 reads

FTSE 250 oil and gas producer Harbour Energy (LON:HBR) is now the largest independent oil producer in the North Sea. I reckon it could also become a FTSE 100 member by the end of 2024, if the recently-announced $11.2bn deal to acquire the majority of Wintershall Dea’s production assets goes ahead as planned.

Harbour is also currently one of the most highly-ranked UK shares in the Stockopedia universe, with Super Stock status and a StockRank of 98 at the time of writing:

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Recent financial performance has been excellent. Soaring gas prices in 2022 boosted profits:

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These windfall profits also enabled Harbour to accelerate its planned debt repayments. Net debt fell from $2.8bn at the end of 2021 to less than $800m at the end of June 2023:

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The word transformative is sometimes overused in investment commentary, but I don’t think it’s an exaggeration in terms of the potential impact of the Harbour/Wintershall Dea combination.

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I looked at Harbour’s smaller North Sea rival Serica Energy (LON:SQZ) in a recent piece, following that company’s own transformative acquisition with Tailwind Energy.

Given the recent news and share price action from Harbour Energy, now seems a good time to take a closer look at Harbour and at the Wintershall Dea deal.

With a rolling forecast P/E of 6 and a dividend yield of nearly 7%, Harbour’s value metrics appear quite attractive:

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Does Harbour offer an opportunity here for private investors, or do the apparently favourable terms of this deal hint at pitfalls to come?

Harbour Energy: a big roll-up

Private investors who have been in the UK markets for a while are likely to remember Premier Oil. This business was a well-established North Sea operator and also had assets in certain Asian markets.

My impression was always that Premier was a good operator, but its financial position was weak.

Like a number of others, including Enquest (LON:ENQ), Premier overcommitted to expensive development projects ahead of the 2015/16 oil sector crash. The group was then left with unmanageable levels of debt, but some attractive assets that gradually came…

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Silver Moon

16th Jan

Back in 2015 I lost a heck of a lot of money in Harbour Energy (LON:HBR) , have not killed the dog by selling out and in the meantime living in hope. I never figured out why the share price crashed and remain nervous. I also hold Serica Energy (LON:SQZ) and while I like Harbour Energy's Momentum I much prefer Serica's dividend.

14 Double Up

Thanks for the write up Roland, great to see some coverage of O&G stocks on Stocko. I’m trying to assess the likelihood of the merger not going through? 50/50?

portugull

Interesting Roland but I have 8.5% of my Portfolio in Serica Energy (LON:SQZ) which is down 17% at present so I am biding my time on Oil. Like Silver Moon I enjoy the Div from Serica.

doug2500

Will there not be a persistent large seller in the market in BASF though? Even if there's a lock in period presumably if they want out of O&G they will then start to sell.

KevinS1

17th Jan

I took the decision to sell my holding in Harbour Energy (LON:HBR) this week based on a few factors;

1. Whilst the decision to diversify means they are less reliant on the North Sea this remains a major part of their stocks. I cannot see a Labour Govt making things any easier.

2. Long-term I see things getting harder for the O&G majors - that's not to say they won't make money and at times be a good investment, but the headwinds are going to continue as more and more focus is pushed onto alternatives

3. I don't like the risks that sit around decommissioning costs and can only see these risks and associated costs increasing

4. There is still a long way to go before this deal is completed and any bumps in the road could see the recent rise reversed

I appreciate I might be bailing at just the time it starts a major uptrend, but I am looking to move my PF to a more diversified slant with more collectives - I cannot afford to get things wrong on one-dimensional stocks as I near retirement. But I could be wrong.

Because of this, I am keeping my holding in Serica Energy (LON:SQZ) which whilst less diversified (once Harbour complete their deal) does come with a stronger dividend and I feel a bigger upside in the medium-term when all risks are considered. But again I could be wrong and reserve the right to change my mind.

Lincs

Excellent article - thanks Roland. I am in the exact same camp as KevinS1 though and sold out a day after the announcement made. Having bought in early November I was more than happy to take the near 30% gain - think the froth may come off a little more yet, but current sp trend appears to disagree! I'll use any drop to get back on board if the story is as good as has been heralded. Time will give more opinions and 'expert' comments to appear and better clarity on which to base a decision - too many questions at the moment. Continuing to hold onto my Serica.

OldSchool05

18th Jan

Harbour Energy (LON:HBR) produced a trading update this morning. This now shows that net debt is only $200m at the end of 2023 (from $800m at end 2022). This means that HBR now stands at an enterprise value of $3.3bn (or £2.6bn). It expects to be net debt free during H1 2024.

In 2023, from a shareholder perspective we received $200m in dividends and they undertook $200m in share buybacks. That's a very good return in its own right on an enterprise value of $3.3bn.

From here in 2024, we should be receiving another $200m in dividends, no mention of buybacks at present as far as i can see.

There is potential disruption to oil and gas in the Middle East if current events continue.

I don't know how to assess whether the Wintershall Dea acquisition will go through, although HBR today mentions it has received irrevocable approval of >25% of its shareholder base. I would be staggered if the deal fell through due to HBR shareholders.

Roland Head

Just a quick update following the Harbour Energy (LON:HBR) FY trading update this morning and the resulting share price fall.

2023 numbers seem broadly in line -- although production was at the bottom end of the guidance range, free cash flow of c.$1bn appears to be in line with forecasts. A decent result with good debt reduction as OldSchool05 highlights below.

2024: I felt this was a little disappointing. Production from the current Harbour assets could fall by up to 20% due to maintenance etc and this is not expected to recover in 2025 - a useful reminder IMO that many of these fields are essentially run-off assets.

Perhaps the main takeaway from the 2024 guidance for me was that free cash flow is expected to fall to just $200m this year -- coincidentally, the exact amount of the current dividend... This highlights the operating leverage here, in my view -- even with quite bullish commodity price forecasts for a realised oil price of $84 and gas at 100p/therm (helped by hedging, I think), the drop in production and higher operating costs/boe mean that cash generation will drop sharply.

2025: projections for 2025 will obviously change completely if the Wintershall Dea deal goes ahead. But HBR does expect a recovery in FCF from its existing assets next year, which seems encouraging.

Roland's view: on balance, this doesn't significantly change my view on the risk/reward situation. I would personally wait until the prospectus is released in Q2 with detailed information on the Wintershall Dea assets before making a decision. But there doesn't seem any immediate risk to the 7% yield, so it could be interesting at sub-300p.

Please DYOR, as always -- this is only my opinion. As I tried to highlight in my original article above, there are a lot of moving parts here that could change the eventual outcome for equity holders.

Thanks 14DoubleUp,

Today's trading update said 25% of shareholders have agreed, up from c.18% at the time the deal was announced in December.

I'm not sure if that's good progress or not. I would say it's not a done deal yet, but I suspect the merger will go through.

Roland

Thanks Roland, and the German government has announced it will closely review the transaction from BASF perspective. Could be just politics (given UK is now outside of EU), but is probably weighing down on the shares today.

This is telling us what we already know - HBR needs acquisitions and mergers in order to maintain / increase profitabilty. Without the Wintershall deal going through it would need to look elsewhere (it's carbon capture/ store plans aren't going to bring in money anytime soon). The Wintershall deal is a biggy with many unknown variables - I think it's too much of a leap of faith to invest prior to more info being available. Personally I am hoping that the SP drops to nearer that immediately prior to the announcement being made.

turbo

19th Mar

I cannot claim to have done too much research, but have been tempted by the chart signals into purchasing a stake in Harbour Energy (LON:HBR) today

Pad Harrison

24th Mar

Thank you. Helpful review. Share price are falling, I guess due to production issues in 2024. Fingers crossed. Not sure when to sell though?

Harbour Energy: a transformational opportunity?

Harbour Energy: a big roll-up

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Roland Head

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