Harbour Energy PLC (LON: HBR)

Harbour Energy PLC is an FTSE 250 listed independent oil and gas company. It operates in UK, Indonesia, Norway, Vietnam, Falkland Islands, Mexico, and Brazil. The Company works in a mixture of producing assets, development, pre-development assets and exploration.

Growth Prospects

• Decent Production Volumes: The Company is a global independent oil and Gas producer with more than 200 Kboepd (“kilo barrels of oil equivalents per day”). Despite the challenges faced by the Company amid Covid-19 and maintenance in H1FY21, the Company has increased its production from 151 kboepd at the end of H1FY21 to more than 200 Kboepd in September 2021, reflecting solid operational management and high demand.
• Strong Operational Management: Harbour has a unique cash-generative diversified UK business with competitive operational costs. The Company's production is well-diversified in the product and across the territories, which act as a natural hedge against any single product or geography-related volatility. The Company plans to maintain operational control over 50% of its portfolio while growing to at least two regions of scale.
• Financial Flexibility: On the investment front, the Company follows a disciplined M&A strategy and plans to acquire production with underdeveloped 2P reserves. The Company maintains a solid balance sheet the financial flexibility to fund both further growth and shareholder returns.

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Key Risks 

• Delay in Projects: Amid rising cases of Covid-19, the projects could delay due to lockdowns and restrictions, which might affect the Company's growth outlook.
• Restrictions Over Prices: As commodity prices are nearing their all-time highs, the fear of inflation rises even higher. The government could step in to control the prices up to a certain level.
• Integration Risk: Failure to successfully integrate the Company could result in losses or additional expenses.

Outlook for Oil and Gas

Multiyear high in Natural Gas, record shortage of fuel across the UK, low supply across China and Europe are all results of the global energy shortage. Post the devastation caused by the Covid-19, the global energy producers are yet to recover back to the pre-pandemic levels. At the same time, the low interest rate, bond buying and government spending on growth and infrastructure have boosted the demand for fossil fuels quicker than anticipated. Nature is also playing its role in denting the supply with hurricanes across the Gulf of Mexico affecting the productions.

In conclusion, we can say that the demand for Oil and Natural Gas is likely to continue even further, taking the commodity prices to even higher levels.

Now we will analyse some key fundamental and shareholders statistics of Harbour Energy PLC.

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 23 September 2021)

(Source: Company Presentation)

• The Company is well poised to reap the synergy benefits from the merger of Premier Oil PLC and Chrysaor Holdings Ltd.
• The maintenance and Covid-19 volatility impacted the production level, as it declined from 187 Kboepd in H1FY20 to 151 Kboped at the end of H1FY21. However, the Company regained momentum, and at present, the production level is more than 200 Kboepd.
• The Company increased its capex to USD 380 million from USD 364 million in H1FY20.
• The Company improved its balance sheet with significant liquidity available more than USD 1 billion and net debt reduced to USD 2.6 billion while keeping leverage below 1.2x.

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 29 September 2021, at 8:10 AM GMT+1, HBR’s shares were trading at GBX 356.32, down by around 4.22% against the previous day closing price. Stock 52-week High and Low were GBX 670.00 and GBX 215.40, respectively.

On a daily chart, the stock price is trading between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. 

Valuation Methodology: Price to Earnings (NTM) (Illustrative)

Business Outlook

HBR delivered a decent performance in H1 FY21, with a growth of 20% in the revenue. The bottom line also returned to the positive zone from the losses in H1FY20. The production levels increased to more than 200 Kboepd in September 2021, and the management reiterated the production guidance of 170-180 kboepd for FY21. The Company forecasts operating cost and total capital expenditure to remain unchanged at USD 15-16/boe and $1.1 billion, respectively. The higher Oil and Gas prices are likely to boost the margins and profitability of the Company in H2FY21. HBR will receive the synergy benefit from the merger, and drilling activity returning to normal will drive growth in the near term.

Considering the high demand and prices of Oil and Gas, its increased production volume, its continued investments, the improved profitability, leverage, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Harbour Energy Plc at the current price of GBX 356.32 (as on 29 September 2021 at 8:10 AM GMT+1), with lower-double digit upside potential based on 14.17x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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