Two of the North Sea’s largest independent oil producers, Harbour Energy PLC (LSE:HBR) and Ithaca Energy, could more than double their valuations in the most optimistic scenarios detailed in a note by American investment bank Jefferies.
Harbour produces some 200,000 barrels of oil per day (bopd) (90% of which is in British waters) whilst Ithaca is working to grow its production base to 100,000 bopd.
Jefferies' analyst team, in a 45-page sector note, initiated its coverage on Harbour and Ithaca whilst moving down its broader forecasts by 7% across the sector as it softened its crude price outlook (by 4% to US$93.80 per barrel for 2023) and gas price forecast (reduced by 19% to 248p per therm).
Its longer-term forecasting sees Brent crude at US$70 per barrel from 2025 onwards whilst gas is seen returning to a much more affordable 95p per therm.
Despite the anticipated normalisation of commodity pricing, the bank is pretty bullish for the London Stock Exchange-listed North Sea producers.
Focussing on Harbour and Ithaca, Jefferies laid out an ‘upside scenario’ which sees target prices pitched at 650p (+114%) and 370p (+102%) respectively. The bank’s base case, meanwhile, still sees 43% and 34% upside for the two oilers.
The two North Sea shares now yield c.20% direct shareholder return following 2022's tax increases and both have recovery potential, according to analysts Mark Wilson and Ruben Dewa.
Harbour a ‘buy’ with 435p target
At Harbour, Jefferies see multiple catalysts.
Near-term ones may come in January’s trading update and/or March’s release of 2022 financial results.
The bank highlighted its expectations for full-year production to be at the upper end of guidance, which was set at 200,000 to 210,000 bopd, whilst opex and capex spending are both anticipated to land at the lower end of the scale.
Significantly, Jefferies highlights that Harbour benefits from some £4.1bn of tax losses acquired via the Premier Oil business interests. Meanwhile, operationally, there is potential for upside through ongoing development of the Catcher and Tolmount fields in the North Sea, plus the development of the Zama discovery in Kenya or its gas assets in Indonesia.
Jefferies' downside scenario (in which oil prices drop to US$60 or US$70) would point to a possible 34% decline to around 200p per share.
Ithaca a ‘buy’ with a 245p target
Ithaca, which rejoined the stock exchange late in 2022, has a history of growth via M&A complemented by organic development which, according to Jefferies, gives the company “a coherent full cycle growth strategy”.
The Jefferies analysts note that “increased UK oil & gas taxation has been a material headwind to UK producers in 2022, but we estimate Ithaca is free cash flow (FCF) generative every year through the energy profits levy (EPL) window to 2028".
Ithaca could generate some US$2.8bn of FCF at an oil price of around US$76, whilst it is growing production volumes by around 6% per year, the bank’s analysts added.
Jefferies expects Ithaca to report 77,000 to 80,000 boepd for the fourth quarter of 2022 and, similarly, 72,000 to 80,000 boepd for 2023 – whilst the medium term target is 70,000 to 90,000 boepd.
The analysts noted that Ithaca is to pay US$400mln of dividends in 2023 and its capex budget is expected to be US$900mln to US$1.3bn for the medium term and US$100-120mln for the fourth quarter.
For Ithaca the operational growth story will be all about execution, as the company works through its current programmes – particularly from the Cambo and Rosebank projects, which are due to reach final investment decisions in 2023.
Based on Jefferies' ‘downside’ oil price scenarios, the bank's target would be 130p which would be a 29% decline from current levels.