By Jaime Llinares Taboada
Harbour Energy joined the ranks of the London Stock Exchange last week. With a market capitalization of nearly £4 billion ($5.50 billion), the company formed from the merger of Premier Oil and Chrysaor Holdings is now the largest independent oil-and-gas group in the British exchange.
Here is what you need to know about it.
A sector heavyweight emerges
Harbour Energy /zigman2/quotes/200314882/delayed UK:HBR +1.39% was born during a time of turmoil for the oil industry. Last year, governments across the world implemented lockdowns and travel restrictions to fight against the coronavirus pandemic. Demand for fuel suddenly plummeted and oil prices nosedived. Brent crude slipped below $20 a barrel in April 2020. This dealt a huge blow to players such as Premier Oil /zigman2/quotes/204472294/delayed PMOIF +6.89% .
The company, a mid-tier producer of hydrocarbons focused in the U.K. and South East Asia, reported a $671.5 million loss just for the first half of 2020. Its shares closed at 26 pence on August 20, the day the results were released, having fallen from 98 pence at the start of the year.
Two months later, while Premier was struggling to refinance $2.9 billion of debt that was coming due soon, privately-owned Chrysaor swooped in and struck a deal to take over the ailing company. Under a reverse takeover deal, Premier shareholders received a 5.45% stake in the enlarged group, and Chrysaor — which now owns the newly created Harbour Energy — committed to repay and cancel $2.7 billion worth of debt held by Premier.
On April 1, when it started trading in London, Harbour forecast that its oil and gas production for 2021 would average between 200,000 and 215,000 oil-equivalent barrels a day. Most of it will come from the U.K. North Sea fields Chrysaor already owned when it took over Premier.
For London-listed independent oil-and-gas companies, which — unlike integrated majors such as BP /zigman2/quotes/202286639/delayed UK:BP -0.59% and Royal Dutch Shell /zigman2/quotes/206428183/delayed UK:RDSA -0.21% /zigman2/quotes/204253697/delayed UK:RDSB -0.28% — focus only on exploration and production, this is as high as it gets. Output from FTSE 250 /zigman2/quotes/210598417/delayed UK:MCX -0.07% constituents such as Energean /zigman2/quotes/202961330/delayed UK:ENOG +0.11% , Tullow Oil /zigman2/quotes/205079109/delayed UK:TLW -0.81% , Diversified Gas & Oil and Cairn Energy /zigman2/quotes/206606447/delayed UK:CNE +1.31% is considerably lower.
Energean has forecast 2021 daily production at 35,000-40,000 oil-equivalent barrels, whereas Tullow Oil expects to achieve between 60,000 and 66,000 oil barrels. DGO hasn’t provided 2021 guidance, but produced 99,831 oil-equivalent barrels a day in 2020. And Cairn expects to achieve 16,000-19,000 barrels a day in 2021, excluding some 33,000-38,000 barrels from the oil and gas fields it is acquiring in Egypt.
“Harbour will likely become one of the ‘go to’ names for many investors looking to increase their sector weight,” U.K. brokerage Peel Hunt said in a recent note.
Oil-price recovery to increase Harbour’s appeal
With oil prices now bouncing back from last year’s lows, shares in companies such as Harbour Energy look increasingly appealing to investors.
Peel Hunt on Tuesday raised its recommendation for Harbour to hold from reduce, following an upward revision of its own oil price assumptions to $60 a barrel. The brokerage’s analysts now expect Harbour will deliver earnings before interest, taxes, depreciation, amortization and exploration of $2.25 billion in 2021 and $2.26 billion in 2022.
Analysts highlight Harbour’s cash flow generation capacity as one of its key strengths. The oil-price recovery only reinforces this view.
Barclays analyst James Hosie estimates Harbour can generate $1.1 billion of free cash flow in 2022. “Harbour Energy will provide U.K. investors with a new E&P stock with the scale, breadth and balance sheet needed to be an attractive investment proposition in what remains a structurally challenged energy sub-sector,” he said in a recent note.
In addition, Harbour’s production comes at a low cost. The company’s cash flow breakeven is between $30 and $35 per oil-equivalent barrel. The breakeven point for Norwegian peers Lundin Energy AB and Aker BP ASA, in comparison, stands above $40, due to their higher capital expenditure and tax costs, Jefferies analysts said in a recent report.
A dividend could be on the horizon
Having increased low-cost production and enhanced cash generation, the takeover of Premier has created a stronger business, according to Berenberg analyst James Carmichael. This should ensure the company can achieve its goal of reducing net debt, expand internationally and, crucially, initiate a sustainable dividend.
In December, Premier Oil said the combined group was expected to generate enough cash to pay a dividend in respect of 2021. With oil prices now $10 higher than around Christmas, this looks increasingly likely. Jefferies analysts forecast a 0.5-pence distribution for this year. Berenberg also sees near-term dividend potential, but expects Harbour’s management to provide more clarity in the coming weeks.
Further room to grow
Harbour has said capital expenditure will be $1 billion a year. According to Jefferies, this is essentially sustaining expenditure to maintain production at around 200,000 barrels.
But Harbour’s parent company has some experience in making counter-cyclical, advantageous acquisitions of oil and gas fields, the U.S. bank says. “Harbour has a broad set of international growth opportunities, including […] a management team with a track record of value creation through disciplined M&A transactions,” the company said earlier this month, signaling it hasn’t ruled out the option of expanding its portfolio through acquisitions.
Write to Jaime Llinares Taboada at email@example.com