Member Info for Megla

Thanks for your thoughts Tamovv.

On the divi, I’m going to pencil in $200m until we get better guidance on the production number for next year. I do think they’ll have to b conservative, and ensure they still pay off a good chunk of the debt, especially whilst the two main development projects remain on ice.

That would give us $133m at the year-end results and another $100m around this time next year.

What I do find odd is why the drilling at GSA has been postponed. The tax regime is horrendous BUT the investment allowance is small bright spot. Labour, only last week, were still talking about a proper windfall tax and removing the improved allowance, I would have thought next year would be a good opportunity to proceed with any short cycle activities.

As you say, the hedging has and continues to be excellent. Harbour could learn a lot, especially given their Gas hedging for next year is still awful.

I do remain optimistic that once the current government see the damage they’re doing to the industry they’ll tweak the tax regime, this could be done in the on-going fiscal review. Whatever folk think about Oil & Gas we still need to produce it whilst there’s demand for it.

So we know the IPO divi for 2023 will be respected, but does anyone have a view what the divi will be for next year?

I have a rough range of $150m - $300m, the lower being 15% of post tax CFFO and the higher 30% of post tax CFFO.

We know production will drop next year, so not an exact science, but interested to hear views.

Sekforde,

It isn’t as simple as you’re making out, tax losses are complicated, they can’t just be ported and used on Habour’s production instantly.

This is why Habour are paying CT and SCT even when the company still has several hundred million in losses to utilise.

Enquest isn’t a good fit in my view, but each to their own and all that.

NAV_Mike

Surely Sunak and Hunt will eventually come their senses?! I think most on this forum would welcome a permanent windfall tax, provided it was designed correctly. Ideally, something that is progressive and adjusts based on commodity prices. There is an opportunity to make changes in the fiscal review, whether they take it or not is a different matter.

As for Labour, Starmer, even yesterday, was harping on about a proper windfall tax. It is depressing to see the leader of the opposition suggest that a tax rate of 75%+ is too low. Labour’s policy would take the tax to a minimum 78%, but in reality it would be more like 85% if the improved investment allowance is removed. Investment and production would of course drop like a stone, and their policies would ultimately be reversed, but not before decimating the equity values of the likes of Harbour, Ithaca, Enquest etc. If this ‘proper windfall tax’ is in their manifesto I will reluctantly sell (at a considerable loss).

A few takeaways from the results.

Operationally, the company continues to perform exceptionally well.

Cash flows were exceptionally strong, although this was flattered by the lack of any tax payments in H1.

Profit was dire, which illustrates how ludicrous the EPL is, especially for a company that is still working through some very poor hedging. As stated by Harbour, the clean effective tax rate would have been an eye watering 79%!!!!! Obviously related to certain costs not being excludable from the SCT and EPL.

The hedging for next year is still poor compared to the forward curve.

Nice to see Zama will be converted to 2P in the not too distant future. Drilling in Indonesia could be just what the company needs.

The huge reduction in the RBL was expected but it is still disappointing. I would assume those shorting the company knew about this.

As has been the case for some time, the real problem for Harbour is the clowns in Downing Street. Soon to be followed by an even bigger bunch of clowns. How anyone can justify a 79% tax rate over the last 6 months when energy prices are (arguably) at inflated adjusted norms is beyond me.

Reading the results of both Harbour & Ithaca, it really is hard to imagine there won’t be a change to the EPL in the fiscal review. But with the Labour still talking about a proper windfall tax and removing the investment allowance, it’s still hard to see how common sense prevails.

Tamovv,

Happy to share my workings if you’ve got a throw away email address? I think you’re invested in Ithaca so would be good to compare on that as well. Not sure if this site allows private messaging, but if it does, drop me the details and I’ll send through.

Comrieman,

The $300m of FCF was based on a low energy price assumption highlighting the absurdity of the EPL. That was literally the title of the post.

The first part of my post used commodity prices that were just under the floor price, giving FCF of $460m. It then took the low summer prices on that day, which were marginally above the floor price, and projected them forward to come up with $300m. This was to show that Harbour, in certain scenarios, could make more money with lower energy prices.

Now I’m not sure why you’re spending your time trawling through my posts, but I hope that clears things up.

As for my latest $500m FCF projection for 2024 using the current forward curve, I know you think it’s ludicrous, but let’s revisit in a few months time and see whether it was accurate or not.

Lastly, on the acquisition, of course they’re going to do one, it’s literally the company’s strategy to do so. And when they do, those numbers can be included in a FCF projection.

Comrieman, so let me get this straight, you’re basing your production number on acquisition that hasn’t happened yet, you’re guessing at commodity prices rather than using the best thing we have available, and you have no idea how to work out the tax?! Great effort.

It has only just been updated, Tamovv. I’ve been checking regularly is well.

The remaining divi is about $270m of the $400m that they committed to. Not sure what the payout proportion will be at the interims.

Tamovv, what production levels and O&G price assumptions are you using? I’ll stick them into my (ludicrous) spreadsheet and see what comes out.

Comrieman, why are you scared of posting your numbers? If you want to use $90 oil for 2024 that’s absolutely fine, they’re just FCF estimates based on assumptions. Personally, I’d use the forward curve given the opportunity it brings for hedging, but each to their own.

Comrieman, if oil & gas prices equal the numbers from my previous post, then the yes FCF would be about $300m. The current curve is significantly higher.

Why don’t you break your word salad down into something a bit more structured.

Tell me what your production and oil & gas price assumptions are, then just give numbers for the following, that way I can see why I’m so wrong.

Revenue

OPEX

CAPEX (including decomp)

Finance

Lease

Tax (broken down by the 3 elements)

Comrieman, I assume you’re staying my FCF forecast for 2024 is ludicrous?!

If so, please show your FCF numbers. I’d like to see just why my forecast is so wrong.

Xp045

The most logical explanation is that Fitch used the forward curve for O&G prices at the time the report was created. It probably included Gas at 200p+ a therm and Oil at £100+. Regardless, it is very clearly wrong and needs throwing in the bin.

FCF will reduce quite dramatically in 2024 due to the full utilisation of the tax losses (likely Q1 2024). I estimate FCF at around $500m for 2024 based on the current forward curve.

Thanks xpo45.

Unfortunately the report is obviously wrong, unless there definition of FCF is different to the industry standard.

In the report, FCF shows as $1.5bln for 2023 when Harbour themselves have guided to $1bln. Harbour's FCF estimate was made with Oil at $85 & Gas at 150p a therm, obviously the yearly average for both commodities has been much lower. Moreover, FCF this year includes the benefit of the tax loss position and a proportion of the EPL being paid next year.

Xpo45

From next year, with the tax losses utilised, there's no way Habour can produce $1bln (assuming you meant dollars) of FCF per year at the current forward curve. Happy to have a look at the report though, if you can share a link? I can only assume it was for this year, or there assumptions for energy prices are way higher than current.

As for the FPL discussions, who knows. As an investor I don't have a problem with the windfall tax, I just think it should be a progressive. So at current prices we might be paying a little extra, but not the ridiculous 75% we're currently stuck with.

The buyback is pointless in the current market. It needs to be canned and a $75m a quarter dividend put in its place.

Investors get regular cash in their pocket, and shorts face a 3% quarterly bill for the privilege of shorting the stock.

Xpo45, most businesses don't need to give 75% of their profits to HMRC.

The company isn't massively undervalued. It probably deserves a higher valuation (I would say that as a holder) but the market cap is running at EV/FCF multiple of 4/5. That isn't a bad valuation for a company with limited reserves. If the EPL was removed tomorrow, the share price would rise more than 100%.

Arguably, the Linda and Co have done a good job, the problem is the FPL and the prospect of a Labour government that want to put a final nail in the coffin for North Sea O&G. There's not much Harbour can do about this other than diversify away from the UK, which will obviously take time.

Net-debt will likely increase into year-end.

Costs will likely rise due to the dollar/GBP exchange rate.

Production will continue to fall due to natural decline.

Labour are still talking about a ‘proper windfall tax’, removing the investment allowance and scrapping any new licenses.

Debt capacity will reduce during the RBL redetermination.

The EPL has massively reduced post tax profits.

Large decomp liability.

Harbour fairly valued at EV/FCF x 5 (FCF being $500m for 2024 onwards due to the utilisation of the tax losses).

Decent company with a decent divi, but I’m not expecting fireworks unless the EPL is changed or energy prices spike again.

For balance, the share price without the EPL would now be around £6 on the same EV/FCF multiple.

This will spike when the annoying background seller is cleared. Price far to cheap for a 10k producer (even without Montara).