Harbour Energy free cash soars alongside tax bill

Harbour Energy (HBR) has revealed a $2.45bn (£2.1bn) tax bill for 2022, taking its post-tax profit to $8mn on sales of $5.4bn for the year. The company has lobbied heavily for changes to the government’s energy profits levy, which was increased to 75 per cent on profits in November. Harbour boss Linda Cook said the levy was having a significant impact on the business. “For Harbour, the UK's largest oil and gas producer, it has all but wiped out our profit for the year,” she said. “This has driven us to reduce our UK investment and staffing levels.” 

The tax bill does bear some scrutiny, however – for the 2022 calendar year, the current tax expense is $706mn, including $326mn from the windfall tax. The lion’s share of the $2.45bn is from $1.5bn in a “one-off non-cash deferred tax charge”, which comes from the revaluation of tax losses that came from the Premier Oil takeover, using the new 75 per cent tax rate out to 2028. Actual tax payments for the year came to $551mn, double the year before on a pre-tax profit that was eight times the previous year’s figure. 

Outside the tax battle, Harbour’s year is as expected – earnings surged on higher oil and gas prices. Ebitdax, which is cash profits excluding $106mn in exploration spending, rose almost two-thirds, while free cash flow tripled to $2.1bn.  

Its hefty borrowings have also come down significantly, with $1.8bn paid off its largest debt facility, leaving net debt at $704mn, excluding leases. On top of that reduction, the company also spent $361mn on buybacks in 2022, with another $41mn of shares repurchased so far this year. 

The company has said it would make a strategic shift away from growth in the North Sea because of the higher UK taxes. Analysts say new reserves must be found. Over the course of 2022, Harbour’s reserves declined by 9 per cent, with production and UK licence relinquishments offset by exploration in Indonesia. “The biggest challenge [for Harbour] lies in the future, and centres on how to fix its growth problem as capex gets cut and production decline sets in,” said Peel Hunt analysts in the lead-up to the results announcement. 

Cook and her management team said they were open to Norway, which has higher taxes than the UK, while exploration in Indonesia has been stymied by having a Russian partner on one of its projects there. 

Harbour is keen to outline just how tough things are currently, but its free cash figures and shareholder returns say otherwise. Its medium-term prospects keep us circumspect, however, even with the windfall tax discount on its shares currently. Hold. 

Last IC View: Hold, 471p, 31 Aug 2022