North Sea oil and gas companies Harbour Energy (LSE:HBR) and Serica Energy Plc (AIM:SQZ) were named as ‘top picks’ by American investment bank Jefferies, which has detailed its view on a ‘whole new E&P world’.
Driven by significantly higher oil and gas prices, and heightened demand for new sources of fuel, Jefferies has redrawn its preferred stocks in the sector.
Analyst Mark Wilson, in a note, detailed Jefferies upgraded commodity price forecasts for 2022 amidst the changing European landscape - most notably, it lifted its Brent crude forecast by 34% at US$91 and the UK NBP gas price rises 74% to 197p per therm.
Harbour is noted among the London-listed shares that has cashflows most levered to higher prices, alongside the likes of EnQuest, Tullow Oil and Diversified Oil & Gas.
“HBR’s leverage to high oil price is seen with a 42% increase in Total NAV to 631p when run at Jefferies updated oil & gas price deck,” the Jefferies analyst said. He also points out that applying the bank’s upgraded forecasts sees Harbour generate some US$1.65bn of fee cash flow, for a 28% free cash flow yield.
Wilson, meanwhile, points to the imminent start-up of Harbour’s Tolmount gas field and its recently reported strong production performance, of 219,000 barrels oil equivalent per day, up until the end of February.
“[It] shows HBR starting to deliver the type of operational performance which was missing during 2021 but which was arguably only a matter of time given production is principally from ex-IOC (integrated oil company) assets.”
Jefferies has a ‘buy’ rating for Harbour, with a new 680p price target lifted from 520p (current price: 470p).
The US bank similarly rates Serica Energy as a ‘buy’ and hikes its target to 600p, from 360p, and called the company’s exposure to UK gas prices “unrivalled” – specifically, Wilson highlights that more than 80% of its production is gas and more than 25% is hedged.
Serica has yet to report 2021 result but guided £281mln of net cash, and, Wilson reckons the company can generate some US$555mln of free cash flow in 2022 which is more than a 90% improvement from the bank’s prior estimate.
Enquest Plc (AIM:ENQ), another North Sea focussed stock, has its price target upgraded to 50p from 30p as Jefferies anticipates material deleveraging from US$1.2bn to US$700mln. Wilson, meanwhile, called EnQuest’s 49% free-cash-flow yield “compelling”.
Elsewhere in the sector Tullow Oil PLC (LSE:TLW) sees Jefferies up its price target to 90p, from 65p, and the target for Kosmos Energy Ltd (LSE:KOS, NYSE:KOS) jumps to 750p, from 385p. Both are rated as a ‘buy’.