Based on amounts declared for its 2024 financial year, Harbour Energy (LSE:HBR) is a dividend stock that’s currently (31 March) yielding 9.8%.
Admittedly, some of this above-average yield has been caused by a disappointing share price performance. Since March 2024, it’s fallen by a quarter. But even if the stock was changing hands close to its 52-week high, it would still be yielding over 6%. The average for the FTSE 250 is 3.4%.
I’m convinced that softening energy prices have contributed to the share price fall. For example, over the past 12 months, Brent crude has fallen 16%. But I think this is only part of the story.
Until recently, Harbour Energy was entirely dependent on the North Sea. As a result, all of its profit fell within the scope of the energy profits levy (‘windfall tax’). The effective tax rate for those extracting oil and gas from UK waters is 78%.
Better prospects
But following a “transformational” deal which, towards the end of 2024, saw the group acquire the upstream assets of Wintershall Dea, more of its profit will escape the British tax authorities. The group now has operations in Norway, Germany, Denmark, Argentina, Mexico, Egypt, Libya, and Algeria.
Comparing 2025 — the first full year post-deal – with 2023, the group’s expected to be producing 2.5 times more, at a cost of $4 a barrel (oil equivalent) less.
Just before the deal completed, Harbour Energy’s market cap was £2.2bn. Now, it’s just under £3bn. In my opinion, this doesn’t reflect the scale of the enlarged group. It also ignores the advantages of having a wider geographical footprint.
And although it’s impossible to guarantee future dividends, the group’s planning to return $455m to shareholders for its 2025 financial year. This is based on an anticipated free cash flow (FCF) of $1bn (before dividends and buybacks).
A challenging environment
But we live in difficult times. Regional conflicts and an uncertain global economic outlook are damaging confidence, which could impact commodity prices.
Indeed, the group’s FCF outlook assumes a Brent crude price of $80 a barrel – it’s currently around $72. To compensate a little, the European gas price is slightly above the group’s assumption of $13 per mscf (thousand standard cubic feet). However, at the moment, it looks as though the group’s $1bn forecast is on the high side.
Also, the move towards ethical investing means the oil and gas sector is out of bounds for an increasing number of funds and private investors.
But the demand for hydrocarbons is expected to increase for several years to come. Most experts seem to agree that even when peak demand is reached, it’s unlikely to fall rapidly thereafter.
And even if Harbour Energy’s FCF falls below the level expected, I still think there’s still plenty of headroom before the dividend has to be cut.
Encouragingly for shareholders like me, the average 12-month price target of the 10 analysts covering the stock is 296p (206p-379p). This implies a 42% upside to today’s share price of 208p.
On reflection, I plan to hold on to my shares in the group. I feel the present dividend on offer is sufficient to compensate me for the risks associated with investing in this particularly volatile sector.
