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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young black colleagues high-fiving each other at work

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »