You could be forgiven if the emergence of Harbour Energy (LSE:HBR) has passed you by, there were a few distractions in 2020.
Harbour Energy (LSE:HBR) is the biggest UK oil company that you’re not quite heard of, but, scratch beneath the surface and you’ll likely find it to be familiar.
It was created in the wake of the Covid-19 oil price collapse with the merger of cash-strapped Premier Oil and Chrysaor.
The merger solved problems for both companies as the former found the means to refinance and open up a path to repay debt, whilst the former’s private equity owners it has created an avenue for divestment.
Producing well in excess of 200,000 barrels of oil per day and valued in London at some £3.5bn it is the North Sea’s largest independent producer.
Since the combination strong crude oil prices have allowed Harbour to accelerate its deleveraging and ‘right-size’ its debt pile.
In May, the company told investors that it repaid US$600mln of debt in the first quarter of 2022. Net debt reduced to US$1.7bn from US$2.3bn at the end of December and Harbour said it expects to be debt free in 2023.
Harbour in May highlighted investment plans comprising US$1.3bn of capital spending, the majority of which is earmarked for investments into operations in the UK.
It will include the development and expansion of existing fields – more than 20 development and infill wells are due to be completed before the end of 2022.
The asset base has been accumulated through the acquisition of established mature fields.
Whilst under private equity ownership in late 2017 fields were acquired from Shell PLC (LSE:SHEL, NYSE:SHEL), establishing the company at 17,000 boepd of production, before picking up over 100,000 boepd worth of assets from ConocoPhilips in 2019.
The Premier merger brought the company into the public market and bolstered volumes further.
In 2022, Harbour is expanding with the addition of production from the Tolmount gas field which will yield another 20,000 boepd before the Tolmount East section comes online next year.
Tolmount will increase the UK’s gas production by more than 5%.
Internationally, meanwhile, projects in Indonesia and Mexico also bulk out the pipeline for the coming years.
“Our increased production reflects the addition of the Premier portfolio, improved operating reliability and increased UK drilling activity,” said chief executive Linda Cook said in May.
“We continue to invest in high return, infrastructure-led opportunities within our asset base to sustain production while at the same time generating material free cash flow.”
Chief executive Linda Cook is an American oil executive who previously ran the Shell Gas & Power subsidiary for Royal Dutch Shell and was chair of Chrysaor prior to the Premier deal.
Analysts at Jefferies rate Harbour as a ‘buy’ with a 680p price target, suggesting substantial upside to the current price of around 378p.
Jefferies analyst Mark Wilson in April identified Harbour among the London-listed oil firms most levered to higher crude prices.
The analyst upgraded Jefferies forecasts expecting to see Harbour generate some US$1.65bn of free cash flow, for a 28% free cash flow yield.
Tolmount’s start-up shows Harbour is starting to deliver the type of operational performance which was missing during 2021 but was “arguably only a matter of time given production is principally from ex-IOC (integrated oil company) assets.”
As a low-cost, high volume producer Harbour is seeing substantial cash flow in 2022 but is always set to be among the companies hit most by the UK government’s new wind-fall tax.
“We calculate the new Energy Profit Levy increases Harbour's cash tax charge by US$2bn over the 3.5 year lifespan of the windfall tax,” analysts at Barclays said in a note.
“While that is a significant dent in 2023-24E free cash flow, the business continues to trade on a 2023E FCF yield >30% and the balance sheet can turn net cash during 2023.”
Harbour shares have fallen close to 25% in the past month as calls for the windfall tax grew louder and eventually became government policy.
Under the new regime oil and gas profits are taxed at 65%, up from 40%, though company’s were handed newly enhanced tax relief on new investments, with 91p of every £1 invested being available to claim.
Unlike before, when tax relief was claimed once returns on investments were realised with revenue the new scheme allows the relief to be claimed after the point of investment.
The thinking in government was that it would promote new inward investment from international oil and gas company’s but it remains to be seen how well executive teams will have taken the abrupt change in taxation.