Harbour Energy keeps shrinking

North Sea oil and gas producer Harbour Energy (HBR) has reported an interim set of numbers that would be the envy of most companies in the London Stock Exchange: free cash flow of $1bn (£800mn), at a margin of 50 per cent, and while that is down 23 per cent on last year, it will keep returning significant cash to shareholders.

But the company is still fuming about the Energy Profits Levy (EPL) that has upped the UK tax it pays on profits. “In response to the EPL in the UK, we scaled back our activities in certain areas and acted decisively to manage our cost structure,” said management. Despite the weaker environment, Harbour will raise its half-year dividend by 9 per cent on last year, to 12¢, and is in the midst of a $200mn share buyback programme. 

Tax for the period was $437mn, compared with $506mn pre-EPL last year on a far-higher profit. The levy has certainly had an impact on Harbour’s ability to raise new debt – its reserves-based lending facility has been knocked back to $1.1bn from $2.7bn, “a very significant part” of which was due to the higher tax level, according to CFO Alexander Krane. Total liquidity is $1.6bn adding in $500mn available from bonds. 

The profit decline came because of lower sales driven by the price decline of oil and gas, as well as higher administrative costs and impairments. But the company’s debt pile is far smaller than last year. Just a year ago, Harbour had net debt (excluding leases) of $700mn, and is now down to a neutral cash/debt position. 

Coming up, Investec sees free cash flow declining, with the yield dropping to 29 per cent next year from 77 per cent in 2022. Investing in significant new production, perhaps at its Indonesia licences, could arrest this, but that will also come at a cost. Hold. 

Last IC View: Hold, 289p, 9 Mar 2023