With a yield of 10%, Harbour Energy (LSE:HBR) has earned itself a reputation as one of the most generous dividend shares around. And just before Christmas, the oil and gas producer announced it had agreed to buy LLOG Exploration Company for $3.2bn. The acquisition marks the group’s “strategic entry into the US Gulf of America”.
But what could the deal mean for its above-average dividend?
Déjà vu
When I first heard the news, I was reminded of Harbour Energy’s September 2024 acquisition of the upstream assets of Wintershall Dea for $11.2bn. At the time, it was described as “transformational”. But since then, the group’s share price has fallen 25%.
In a similar vein, the purchase of LLOG is said to be “setting the stage to achieve extraordinary results”. However, investors appear lukewarm. On the day the news was released (22 December), the value of the group’s shares fell just over 1%.
Undoubtedly, the post-IPO fall in Harbour’s market-cap has helped push its yield higher. But since listing in April 2021, it’s also been steadily increasing its dividend.
| Date | Share price (pence) | Dividend (pence) | Yield (%) |
|---|---|---|---|
| 31.12.21 | 354 | 8.14 | 2.3 |
| 31.12.22 | 304 | 17.02 | 5.6 |
| 31.12.23 | 309 | 18.50 | 6.0 |
| 31.12.24 | 255 | 19.38 | 7.6 |
| 29.12.25 | 196 | 19.52 (forecast) | 10.0 |
Future payouts
On the face of it, the LLOG deal should be good for income investors. That’s because it’s likely to be “free cash flow per share accretive from 2027”. But Harbour Energy says it will adopt a “payout ratio approach in 2026”. This means there will be a “base dividend” — and share buybacks – to align with international peers.
At the moment, it’s unclear what the ratio might be. Indeed, the group warns that post-completion its “indebtedness and financial leverage” will increase, which could reduce the cash available for dividends.
This is a reminder that it’s impossible to predict dividend payments with any accuracy, particularly in an industry where earnings can be volatile.
A different perspective
However, I think now’s the time to consider Harbour Energy more for its growth potential than its generous dividend.
Following on from the Wintershall Dea acquisition, the LLOG deal means the group’s less reliant on the North Sea, where profits are taxed at 78%. The rate in the Gulf of America is 23%.
But I wonder if this might soon change. At the end of December, the Daily Mail reported than when the Energy Profits Levy was introduced in 2022, it was expected to raise £26bn over the next three years. In fact, it’s generated £9.7bn.
Some of this can be explained by a fall in oil and gas prices but they are now roughly where they have been for much of the past decade, so this shouldn’t come as much of a surprise.
Instead, it could be a real-life example of the Laffer Curve in operation. The American economist, Arthur Laffer, put forward a theory that increasing a tax rate doesn’t necessarily increase the revenue it raises. Instead, it could act as a disincentive and may have the opposite effect to that intended.
Perhaps the UK government will reduce the EPL soon? If it did, I’m sure this would have a positive impact on Harbour Energy’s share price.
But even if the government doesn’t change policy, the Winterhsall Dea and LLOG purchases mean the group now has a lower effective tax rate, higher earnings, and significantly more reserves than before. This could help kickstart the group’s rather lacklustre share price. The downside is that this could suppress the dividend yield.
