The Harbour Energy (LSE: HBR) share price dipped today after the oil and gas producer warned of falling production this year due to “an unusually high level of planned shutdowns”.
This fall has left the shares with a tempting forecast dividend yield of 7%. Harbour also a big acquisition in the pipeline that could transform the outlook for 2025 and beyond.
I’m wondering if this FTSE 250 stock now offers a buying opportunity. Let’s take a look.
Why are the shares falling?
Harbour Energy’s says that average production fell by 10% to 186,000 barrels of oil equivalent per day (boepd) in 2023. This was at the bottom end of previous guidance for production of 185,000–195,000 boepd.
However, financial results for the year appear to be pretty much as expected, with revenue of $3.9bn and all-important free cash flow of around $1.0bn.
This strong cash performance has allowed Harbour to reduce net debt to just $0.2bn at the end of the year, despite returning $441m to shareholders through buybacks and dividends. I reckon that’s a good result.
In 2024, management expect production to fall to between 150,000 and 165,000 boepd – a drop of up to 20%. This is mostly due to “an unusually high level of planned shutdowns” for maintenance work.
Lower production and increased maintenance spend means that costs will rise. As a result, free cash flow is expected to drop to just $0.2bn in 2024, before recovering in 2025.
On track for a big acquisition
The reality for many North Sea producers now is that they are managing ageing fields with declining production. Harbour Energy’s reserves have a remaining production life of just six years.
This is why many companies in the sector are buying up additional assets and merging with rivals. Harbour announced its own bold plan just before Christmas.
The company has agreed a $11.2bn deal to buy almost all of the production assets owned by rival Wintershall Dea. This includes a big chunk of oil and gas production in the Norwegian North Sea.
This deal is quite complex and isn’t expected to complete until late this year. But if it does go ahead, it should triple Harbour Energy’s total production to around 500,000 boepd.
If that happens, Harbour’s current guidance for 2024 and 2025 will become much less important. What will matter more will be the performance of the Wintershall Dea assets.
Would I buy now?
Harbour’s management thinks that the combined group will generate more free cash per share than its current business. CEO Linda Cook said that she expects to be able to increase the dividend by 5% if the acquisition completes.
At the current share price, I reckon that could give Harbour shares a 7.5% dividend yield.
I think the shares might be attractive at this level. However, there are a lot of moving parts here. A slump in oil and gas prices could hit future profits. Decommissioning costs are another concern, for me.
I’d like to know more about the Wintershall assets before I consider buying. That information is due to be released during the second quarter of this year. Until then, I’m going to stay on the sidelines. I reckon there are plenty of simpler opportunities elsewhere.
