With an 8% yield, is the second-largest FTSE 250 stock worth considering?

Our writer considers the value of the second-largest stock on the FTSE 250 with a £4bn market cap and a dividend yield of 8%.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Harbour Energy (LSE: HBR) is a FTSE 250 oil and gas company based in London. With a £4bn market cap, it’s not only the second-largest on the index but also currently larger than the 10 smallest on the FTSE 100. Consequently, it main rejoin the main index in the next reshuffle.

It got demoted from the FTSE 100 in late 2022 after its market cap collapsed below £3bn. However, it catapulted back above £4bn again in early September last year after finalising the acquisition of the upstream assets of German oil and gas producer Wintershall Dea.

The acquisition represents a significant expansion for the company, pushing production up to 475,000 barrels of oil equivalent per day (boepd). According to a press release, it’s now “one of the world’s largest and most geographically diverse independent oil and gas companies.”

Should you invest £1,000 in easyJet right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if easyJet made the list?

See the 6 stocks

Created with Highcharts 11.4.3Harbour Energy Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Assessing viability

Harbour certainly seems to be enthusiastically expanding its business but oil and gas is a tough industry. Prospecting for new wells can be expensive and at times, can yield no returns. Many independent companies experience long periods of losses and mounting debt with no guarantee of a recovery.

When assessing oil and gas companies, it’s important to consider how many years of reserves they hold. The potential value of an as-yet untapped reserve depends on its commercial viability.

Successful explorations amount to assets on the balance sheet and then slowly decrease as they are depleted. As incoming cash is used to fund new explorations, the company can quickly fall back into a low valuation.

Thus, accurately assessing the investment viability of an oil and gas company can prove difficult. This is often made most evident by a wildly fluctuating price-to-earnings (P/E) ratio.

Value and dividends

Harbour Energy P/E ratio
TradingView.com

In the graph above, we can see how Harbour’s trailing P/E ratio has moved in a range between -18 and +105 over the past few years.

Currently, it’s positive and sits around 28, which looks expensive for investors considering it now. But the recent boost in production means earnings are forecast to improve significantly, so it has a forward P/E ratio of only 10.

That means the current share price of 277p could be very cheap, prompting analysts to forecast an average 12-month price target of 370p — a 33% increase!

An extra 8% in dividends on top of that would be the cherry on top. But with almost no track record of payments, it’s impossible to say whether its dividends are reliable.

With no steady or consistent cash flow, energy companies can be unreliable when it comes to dividends. Last year, for instance, Diversified Energy Company slashed its dividend and the yield fell from 15% to 7.2%.

Subsequently, I wouldn’t factor in the dividend when assessing the long-term value of Harbour.

Further advancements

But in December 2024, Harbour enjoyed further good news. In cooperation with partner Ithaca Energy, it discovered hydrocarbons in the Jocelyn South prospect in the North Sea. Of course, while the discovery is promising, the commercial viability of it still needs to be evaluated. As ever, there’s a risk it could cost a lot and amount to little.

While Harbour’s developments seem promising, I don’t plan to buy it today. However, it may be worth considering for risk-tolerant investors keen on emerging energy stocks.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »

Investing Articles

When will Lloyds shares hit £1?

Lloyds shares have surged over the past 12 months, but where will they go next? Dr James Fox thinks there’s…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »