Stockwatch: is this share an emerging global oil & gas major?

Harbour Energy (LSE:HBR) has delivered stonking 2025 numbers – that is if you “normalise” for a $3.0 billion (£2.2 billion) annual tax bill, having paid an effective rate of 106% on its North Sea operations.

From 1 November 2024, the new Labour government raised the energy profits levy on oil & gas companies to 38%, extending this to a total headline tax of 78% that will continue to 2030.

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But despite the income statement showing $2.8 billion pre-tax profit whittled down to a $182 million loss (after a loss also in 2024 when tax was 1.1x profit), Harbour shares were one of the biggest energy risers yesterday, up 9.5% to 285p, even ahead of Tullow Oil (LSE:TLW).

It likely shows respect for the most vigorous acquisitions policy I have seen from a mid-size producer in four decades of following the oil & gas sector. It has taken Harbour to a £4.5 billion valuation. Its 40% share price rise this year tracks a similar rally in oil prices, where normally oil shares lag the commodity given that it is more volatile, and due to company hedging policies. Yet investors are justifiably sensing Harbour is gearing to the higher price environment.

Impressive numbers from a major 2024 deal, with more to come

For analysts, it is a nightmare to accurately assess if true value is being created when a company is pursuing rapid and significant debt-funded acquisitions, and whether risk is rising due both to debt service costs and integration risks. It is one thing to flag exciting numbers in the aftermath of big takeovers; it is quite another to make it happen over a five-year time frame. Mind you, a favourable commodities pricing environment does help tilt the odds in Harbour’s favour.

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Showcasing record production up 84% to 474,000 barrels of oil equivalent per day (boepd), Harbour does not discern like-for-like performance nor regarding a 64% increase in 2025 revenue to $10.1 billion. This substantially derives from the $11.2 billion acquisition of Wintershall Dea in September 2024, a major strategic pivot way from historic reliance on the North Sea. It is also supported by new wells coming on stream in the UK, Norway, Argentina and Egypt.

Last December’s $3.2 billion acquisition of LLOG, marking a strategic entry into the US Gulf of Mexico, is not included in these results but helps explain how 2026 is “off to a strong start”, plus an annual free cash flow target of $1.0 billion in 2028.

Harbour Energy - financial summary
year end 31 Dec
reporting in US$

Source: company accounts.

Perhaps it reflects the market’s fascination with oil & gas right now: none of yesterday’s coverage of the results questioned the effect of this tax measure – which is set to last until March 2030 unless Labour is despatched sooner than an August 2029 general election – on Harbour’s intrinsic value.

The focus has been on Harbour’s burgeoning numbers and progress in creating one of the most internationally diversified oil & gas producers on the planet. Given it pursues a “scavenger” strategy of buying production assets, it appears not to have much exploration exposure. Some may see this as reducing risk rather than the volatility linked to inevitably mixed exploration news.

Debt raises sensitivity to oil & gas prices

Buying LLOG did, however, add $2.0 billion of debt to $5.2 billion existing (before $634 million leases), which last year generated a $689 million net interest charge when adjusting for $846 million cash. This was covered 5.1x by operating profit but it is good fortune how energy prices have now soared.

As with Tullow, debt significantly explains why the shares are sensitive to oil & gas price volatility. Harbour is set to benefit from gas prices up even more than oil currently, given its operations are well-balanced between the two.

Management’s confidence in this financial balancing act is implicit in guiding for free cash flow of $0.6 billion albeit based on $65 a barrel Brent oil and $11 European gas prices, where a $5 change in Brent or $1 change in gas boosts free cash flow by $170 million or $150 million respectively.

So, if Brent holds anywhere near $84.3 currently (and climbing), gas around $17 (with President Vladimir Putin capitalising on the crisis, threatening to cut off Russia-Europe gas supplies), then Harbour’s finances could be transformed.

What fortunate timing for its board now to link shareholder returns directly to free cash flow “with a base dividend and deleveraging alongside attractive organic growth opportunities in the near term”. Total distributions for 2025 have been $478 million, a 45% payout of free cash flow.

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In terms of yield, however, a total 27.8 cents dividend in respect of 2025 – equivalent to 20.8p and a yield of 7.3% with the shares at 285p – is expected to ease this year to around 19.7 cents or 14.8p, hence a prospective yield of 5.2%. That could well be higher if Middle East war proves protracted, keeping energy prices above Harbour’s budgeting. The results’ financial review explains an aspect of hedging – it’s why most often oil & gas shares do not mirror commodity price swings – although Harbour’s $7.2 billion net debt is significantly why its shares are leveraged to commodity price movements.

Distinguished CEO is catalyst for strategy and execution

Overall, I respect how chief executive Linda Cook is positioning Harbour Energy as a vibrant mid-cap. She has over 40 years’ of industry experience, including 29 at Shell where she became CEO of its gas & power side. She then chaired Chrysaor Holdings from mid-2014, which merged with Premier Oil in March 2021, gaining a London listing by way of reverse takeover. At the time, the group became the largest oil & gas producer in the North Sea, hence it was a target for the “windfall tax” and is why a radical strategic shift has been under way since 2024.

Yet the chart looks to be no roaring affirmation of her stewardship, the shares down from over 630p to 153p as of last April, although they may possibly be at the early stage of forming a “bowl” given Harbour’s underlying momentum and higher energy prices.

Source: TradingView. Past performance is not a guide to future performance.

In fairness, oil prices trended lower after the initial shock from Russia’s February 2022 invasion of Ukraine, and Harbour’s vigour caught my attention last August when I asked if mid-2025 was broadly an inflection point.

I liked its scavenger business model and I saw this work well in the 1990s when smaller companies such as Clyde Petroleum and Dana Petroleum bought and honed assets from oil majors. Early 2024 had seen a pivot to gas, and geographic spread was evolving. I concluded with a “buy” stance at 228p, regarding Harbour as having greater strategic clarity than BP (LSE:BP.) yet presenting lower financial risk than Tullow.

I concede I overlooked the windfall tax element; I was more concerned by $7.4 billion of decommissioning liabilities, classed as a provision under long-term liabilities. These have barely reduced over the year and constitute 119% of net assets. I thought they helped explain why the market was pricing for a relatively stronger yield (compensating for this risk) than you would expect from a mid-cap oil & gas share.

As with onerous North Sea taxes, management does not see fit to explain this in more detail in the results, but it is relevant to intrinsic value and risk versus reward. Hedge fund GLG Partners has flirted with a short position: 0.54% of issued share capital as of last 2 January, up to 0.90% on 17 February, but (as if cutting losses) reduced to 0.58% on 3 March.

A tantalising equity proposition

Respect to Harbour’s strategy and execution, yet there’s a sharp intake of breath at the extent of tax plus sleeping decommissioning liabilities. I cannot therefore regard it as investment quality – it being too hard to quantify intrinsic value in this mercurial machine – but I sense the market is right to pick up on Harbour as energy prices re-rate.

If this Middle East war drags on, and with Iranian proxies stubbornly disrupting oil tanker passage, then 2026 is going to turn out a lot different from the firm consensus only a week or so ago when oil was expected to trade in a $50-60 range.

On the other hand – and the big medium-term risk with chasing oil & gas shares right now – if Iran’s clerical regime is swept aside and the country doesn’t descend into civil war, and if the Revolutionary Guard is decimated and US President Donald Trump appoints his favoured leader who kowtows to US policy, you could see oil slump even lower than $50 when sanctions on Iranian exports are lifted.

Just typing that reinforces an overall feeling of incredulity. At 285p, I’ll stay with a speculative long-term “buy” stance on Harbour.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.