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.
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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.
