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Harbour Energy shares continue post-pandemic price recovery


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Harbour Energy shares are up 43% year-to-date to 524p, as the largest UK listed independent oil and gas company delivered exceptional 2021 full-year results.

harbour energySource: Bloomberg
 
 Charles Archer | Financial Writer, London | Publication date: Tuesday 19 April 2022 

Harbour Energy (LON: HBR) shares were worth as much as 2,337p in January 2020, before the covid-19 pandemic-induced crash saw them collapse to just 320p within a couple of months.

But the FTSE 250 company, like frequent collaborators BP and Shell, is expecting further profits in 2022. A return closer to its historical share price could be imminent.

Harbour Energy share price: full-year results

2021 full-year results made for excellent reading for long-term investors. Harbour Energy highlighted its completed reverse merger with Premier Oil, with ‘synergies progressing as planned.’

It also increased oil production to 175 thousand barrels of oil equivalent per day (kboepd), up from 173 in 2020. And encouragingly, production ramped up in Q4 to 214 kbpoed.

In addition, Harbour finalised the restructuring of its portfolio, exiting from operations in both the Falkland Islands and Brazil. Meanwhile, it experienced success at multiple UK drilling sites as well as at Tuna in Indonesia.

Financially, Harbour delivered operating cash flow of $1.6 billion and free cash flow of $678 million, while EBITDAX rose by 36% to $2.4 billion. And it made a healthy profit after tax of $101 million, a far cry from its disastrous $778 million loss in 2020.

The company also shaved down its debt pile by $800 million to $2.3 billion and proposed a final dividend of $100 million. By all accounts, Harbour Energy had a successful 2021. And 2022 could be even better.

gasSource: Bloomberg

Where next for Harbour Energy shares?

CEO Linda Cook believes ‘2021 was a transformational year…we are well placed to deliver value creation, growth and shareholder returns.’

In 2022, Harbour Energy expects to increase output by around 15% to between 195 and 210 kbpoed. And assuming oil and gas prices remain at $100/barrel and 200p/therm, it’s forecasting free cash flow of between $1.5 and $1.7 billion in 2022, with the potential to pay off its remaining $2.3 billion debt in 2023.

In last month’s earnings call, CFO Alexander Krane enthused that if ‘this higher commodity environment remains with us, then yes we will not have much debt by the end of the year and potentially debt-free next year.’

Of course, this is a big assumption. Sanctions on Russian oil combined with the reluctance of OPEC+ to increase production could see oil prices remain stubbornly high. But Brent Crude went negative for the first time in history only two years ago, and the pandemic is not over yet.

However, if oil prices remain elevated, Krane told investors that in 2023 he would ‘reassess and see if it makes sense to either increase dividend levels or institute buybacks.’

But roughly 50% of oil Harbour’s oil production is hedged at $61 a barrel through 2022, as a requirement by the company’s lenders against its debt pile. Gas production is similarly hedged.

While Harbour won’t feel the full benefit of $100 prices, it also means investors can sleep easy knowing it can meet its obligations and continue to expand — the company has over $5 billion of decommissioning provisions on its balance sheet and expects capital expenditure to rise by 40% to $1.3 billion in 2022. Competitor Tullow Oil has similar hedging arrangements for identical reasons.

Multiple analysts concur with the optimistic outlook of Harbour Energy’s management. Morgan Stanley has an outperform rating on the stock, Barclays an overweight, and Canaccord Genuity Group has it as a buy.

One vocal advocate is Jefferies analyst Mark Wilson, who rates the stock a ‘top pick’ with a 680p price target. He argues the imminent start-up of Tolmount gas field and strong production performance in February of 219 kbpoed ‘shows HBR starting to deliver the type of operational performance…which was arguably only a matter of time given production is principally from ex-IOC assets.’

And encouragingly, top shareholder EIG Global Energy Partners, which found Harbour Energy in 2014 and retained 36% of the company’s shares in last year’s reverse merger, appears to have not sold any shares after the lock-up period expired on 1 April. With its share price surging, this suggests the energy investing giant expects it to rise still further.

And in the current monetary environment, safe harbours are hard to come by.

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