Harbour Energy faces temporary cash drain in 2024

The day before Harbour Energy (HBR) revealed a steep fall in annual profits, chancellor Jeremy Hunt announced that the windfall tax on sector earnings would remain at current levels and be extended for an additional year. Hardly auspicious.

The market had already priced in events on the back of the driller’s January trading update, but the chancellor’s confirmation of the surcharge extension will have done little to improve investor sentiment, to say nothing of capital allocations towards the UK North Sea. It certainly would not have been welcomed by Harbour’s chief executive, Linda Cook, based on her earlier comments.

At any rate, offshore UK isn’t the only game in town and the group could further broaden its production profile through the $11.2bn (£8.8bn) deal to acquire Wintershall Dea's upstream oil and gas assets, the completion of which is pencilled in for the fourth quarter – subject to approvals.

There were no surprises on the production front, with an 11 per cent fall-away to 186,000 barrels of oil equivalent per day (boepd), along with a $2 increase in operating expenses to $16 a barrel. A similar cost increase is anticipated in 2024, while production should range between 150k and 165k boepd. The overarching point, however, is that softening oil and gas prices fed through to a two-thirds drop in operating profits to $913mn.

Harbour presents a mixed outlook. Reserves are up and there are positive prospects on replacement barrelage. Unsurprisingly, the forward consensus rating is in tune with the long-term average, but free cash flows will come under pressure this year from capex allocations and an increased cash tax charge, although management anticipates that the group will “generate significantly higher free cash flow in 2025”. Hold.

Last IC view: Hold, 289p, 9 Mar 2023