Harbour Energy (LSE:HBR), the oil and gas producer, recently recorded the highest stock market valuation of any member of the FTSE 250. Its market cap is now (6 September) £715m ahead of British Land. Promotion to the FTSE 100 looks to be a certainty when the next reshuffle takes place.
The boost in value came after the completion on 4 September of its acquisition of the upstream assets of Wintershall Dea. As part of the deal, new shares were issued to the former owners of the German-based group.
| Pre-deal | Post-deal | |
|---|---|---|
| Shares held by legacy shareholders | 770,387,788 | 770,387,788 |
| Shares issued to new shareholders | – | 921,202,238 |
| Shares in circulation | 770,387,788 | 1,691,590,026 |
| Share price (£) | 2.86 | 2.80 |
| Market cap (£bn) | 2.203 | 4.736 |
Both parties placed a value of $11.2bn (£8.5bn) on Wintershall’s assets. This comprises $4.15bn (£3.15bn) in new shares, the taking on of $4.9bn (£3.72bn) of debt and $2.15bn (£1.63bn) in cash.
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But what’s remarkable is that investors currently value the group at only £2.5bn more than they did before the acquisition!
Surely this makes Harbour Energy the bargain of the decade… no, millennium?
Transformational?
As a result of the deal, production in 2024 is expected to increase to 470-485 kboepd (thousand barrels of oil equivalent per day). In 2023, Harbour’s North Sea assets yielded 186 kboped.
And operating costs are forecast to fall to $13-$14 boe from last year’s $16.
Using the mid-point of these figures, year-on-year production could increase by 156% and unit costs might fall by 16%. Surely this justifies more than a £2.5bn increase in market cap?
Perhaps investors are wary of the additional debt that has been taken on. At 30 June 2024, the company was in a net cash position.
Income investors will be pleased that the anticipated improvement in earnings enables the group’s directors to make a commitment to increase the annual dividend to 26.25 cents (19.9p) per share. Based on the current share price of 280p, this implies a yield of 7.1%.
As a shareholder, I also welcome the deal for other reasons.
Previously, Harbour was almost entirely dependent on North Sea oil and gas, which is being taxed heavily. The last government introduced an energy profits levy (EPL) — or ‘windfall tax’ — which took the company’s effective rate of tax to 75%. This could be increased to 78% in the October budget.
The group now has exposure to oil and gas fields in Norway, Argentina, North Africa and Germany. These fall outside the scope of the EPL.
A difficult industry
But investing in the energy sector can be risky. Commodity prices are notoriously volatile, which can affect earnings. It’s also costly finding new fields.
And there are operational dangers. BP, for instance, is still paying fines and compensation for the Deepwater Horizon explosion that took place in the Gulf of Mexico in 2010.
However, taking these challenges on board, I think Harbour Energy’s shares are significantly undervalued.
I suspect the muted reaction to the Wintershall deal could be a sign that the energy sector has fallen out of fashion and that ethical investing is starting to have an impact on the valuations of ‘dirty’ companies. It’s certainly the case that UK oil and gas companies are valued less highly than some of their American and European peers.
However, for the time being, I’m planning to hold on to my shares.
