Harbour Energy (LSE:HBR) is the FTSE 250’s biggest oil and gas producer. And following an announcement on 21 December 2023, that it plans to acquire the worldwide assets of Wintershall Dea, I think the stock is something of a bargain.
The deal is expected to add production of 300 barrels of oil equivalent per day to Harbour’s existing output of 200.
On the day that news of the deal broke, its shares closed 21% higher. Over the next four weeks, they climbed steadily, and peaked at 329p.
But the shares are now changing hands for around 250p. That’s only marginally higher than before the announcement. And less than half what they were in April 2022.
Improving profitability
The declining stock price doesn’t reflect Harbour’s pre-tax earnings.
As the chart below shows, EBITDA (earnings before interest, tax, depreciation, and amortisation) was $3.9bn, in 2022.
Chart by TradingView
For the six months ended 30 June 2023, EBITDA was approximately $1.4bn. This is more than the company earned for the whole of 2019, when it was valued more highly.
So what’s going on?
A massive tax bill
In May 2022, the government introduced the Energy Profits Levy (EPL) on earnings generated from the North Sea. From 1 January 2023, this was increased to 35%.
With corporation tax at 40%, this means the company is subject to a tax rate of 75% on its profits.
The following chart shows this has hugely increased its tax bill and, in my view, is the primary reason behind the company’s falling share price.
Chart by TradingView
The EPL will apply until 31 March 2028, although if oil and gas prices fall to their 20-year average — for two consecutive quarters — it will be scrapped.
However, Brent crude is currently around 13% higher than this floor price.
Falling valuation
A common method of valuing an energy company is to compare its enterprise value (EV) — an estimate of how much someone would have to pay to buy it — with EBITDA.
EV is calculated by adding together market cap and debt, and then deducting cash.
The chart below shows that Harbour’s EBITDA/EV has been falling recently — it’s now less than one.
Chart by TradingView
What does this all mean?
Wintershall has an EV of $11.2bn and during the first half of 2023, recorded an EBITDA of approximately $2.2bn. Doubling this to reflect 12 months of trading, gives a figure of $4.4bn. This implies an EV/EBITDA of around 2.5.
Based on its balance sheet at 30 June 2023, Harbour currently has an EV of $2.4bn. Multiplying its EBITDA for the first six months of 2023 by two, gives an expected result of $2.8bn for the full year.
Therefore, post-merger the group’s EV will be approximately $13.6bn. And it will have an EV/EBITDA of 1.9.
Even if investors remain sceptical and drop the group’s valuation to one, its stock market valuation should be $7.2bn. Based on the number of shares that will be in issue, this implies a share price of 335p. That’s a premium of around 34% to today’s value.
That’s why — despite the penal tax rate, its carbon-intensive footprint and its exposure to volatile commodity prices — the company’s shares appear to be a ‘no-brainer’ buy to me.
