This FTSE 250 stock could soar 30% in 2024!

Our writer explains why he’s expecting big things — over the next 12 months — from the stock of the FTSE 250’s largest oil and gas producer.

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Harbour Energy (LSE:HBR) was the second-best performer on the FTSE 250 in December 2023.

Its shares ended the month 38% higher, largely due to the announcement of an acquisition that will transform the scale of the energy producer.

But I think the stock has the potential to climb higher.

Should you invest £1,000 in Harbour Energy Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Harbour Energy Plc made the list?

See the 6 stocks

If my reasoning is correct, it could soar by 30% in 2024.

Here’s why.

The sum of the parts

On 21 December 2023, Harbour announced that it was to acquire the upstream assets of Wintershall Dea in a deal worth $11.2bn (£8.86bn at current exchange rates).

The transaction will be funded through a combination of cash (£1.71bn), the issue of new shares (£3.28bn), and the taking on of some of Wintershall’s debt (£3.87bn).

Prior to the news being released, Harbour was valued by the stock market at £1.89bn.

Therefore, in theory, the new group should be worth £6.88bn — the combined pre-acquisition value of both companies (£10.75bn) less the value of the loan notes.

The current owners of Wintershall will receive 921.2m new shares, bringing the total post-transaction number in issue to approximately 1.69bn.

The share price should therefore be 407p — a premium of approximately 30% to its current value.

Am I missing something?

But this begs the question, why are Harbour’s shares still changing hands for around 315p?

I think there are six possible explanations for this.

Firstly, the deal has yet to be finalised. Completion is not expected until the final quarter of 2024.

Second, the acquisition is to be part-funded through the issue of new shares, which have been valued at 360p. Although higher than today’s share price, it’s still well below my theoretical price.

The third reason could be that profits from the North Sea are subject to a huge tax rate of 75%. And there’s no commitment from the UK’s two largest political parties to reduce this.

Next, earnings from the oil and gas industry are notoriously volatile.

Fifthly, ethical investors don’t want anything to do with the sector.

And finally, the target company is privately owned. There’s less information in the public domain about its financial performance. It might take investors some time to assess whether the deal is a good one.

To try and help overcome this problem, figures have been produced by the two companies illustrating what the group would have looked like in 2022. Combined EBITDAX (earnings before interest, tax, depreciation, amortisation, and exploration costs) would have been $10.3bn (£8.15bn) for the 12 months ended 31 December 2022.

That’s a 157% uplift on Harbour’s earnings.

If its pre-acquisition share price was increased by the same amount, its stock would be changing hands for over 600p!

Some final thoughts

Setting aside the issue of what the fair value of the new group should be, the directors have promised to increase the dividend per share by 5%.

And there will be other benefits too.

The deal will help expand Harbour’s geographical footprint.

Also, its reserves will more than double.

And it will lower the operating cost per barrel of oil equivalent by over 25%.

Even if the share price doesn’t get close to 407p, as an existing shareholder, I’ll be happy with the additional passive income. The improved earnings potential should also help ensure that the dividend is sustainable over the long term.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Harbour Energy Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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