Since March 2020, the Harbour Energy (LSE:HBR) share price has fallen 86%. Of all the FTSE 250 stocks, this makes it the third-worst performer. It also fell heavily yesterday (6 March) when the oil and gas producer announced its 2024 results.
The group’s performance includes around four months’ contribution from the Wintershall Dea portfolio of assets. These were acquired on 3 September, for consideration of $11.2bn (£8.7bn at current exchange rates). The deal has been described as “transformational” because it means the enlarged group will be producing more than twice as much as Harbour Energy’s previous output.
Investors appear unimpressed
But just prior to the purchase, the group’s stock market valuation was £2.2bn. It’s now – despite the significant uplift in production — only £3.1bn. It looks as though investors are sceptical about the deal.
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However in 2024, Harbour Energy achieved production of 258,000 barrels of oil equivalent a day (boepd). This was 40% more than in 2023. And revenue was 65% higher at $6.2bn. For 2025, when the full benefit of the acquisition is realised, output is expected to be 450,000-475,000 boepd.
However, despite this revenue growth, the company’s bottom line has been severely impacted by the government’s energy profits levy, or windfall tax as it’s more commonly known.
The group made a post-tax loss of $93m versus a profit of $45m in 2023. However, the 2024 results do include $1.1bn of exceptional costs, including impairments and write-offs.
Amazingly, the company was subject to an effective tax rate of 108%. Fortunately, much of the Wintershall Dea portfolio falls outside the scope of the windfall tax. But the group’s still likely to face an eye-watering tax bill for the foreseeable future.
Cash is king
However, it’s cash that really matters. And in 2025, the company’s forecasting free cash flow (after tax and before shareholder distributions) of $1bn. This is based on a Brent crude price of $80 a barrel and a European gas price of $13/mscf (thousand standard cubic feet).
By comparison, oil’s currently trading at $70 and gas is just over $15. A $5 movement (up or down) in Brent crude is equivalent to $115m of cash a year. A $1 change in the gas price will have the same impact.
Based on current market prices, it therefore appears as though the group remains on target to deliver the $1bn of cash that’s been forecast. And with the dividend currently costing $455m a year, assuming all goes to plan, it will be covered more than twice by free cash.
But commodity prices can be volatile, so there are no guarantees that the $1bn will be achieved. And any sign of a shortfall could impact the dividend and investor confidence.
However, ignoring the disappointing market reaction to the results, I intend to remain a shareholder. Despite the enormous tax rate, the group’s cash generative. And there’s a bit of headroom, which should ensure the dividend’s maintained even if energy prices soften a little.
Also, the group’s price-to-book ratio is only 0.63 which, in my opinion, suggests the recent sell-off has gone too far. On this basis, investors looking to add an undervalued stock to their portfolios — and one offering a generous dividend — could consider buying Harbour Energy shares.
