Member Info for Megla

Rachel is just acting dumb, she knows full well the vast majority of BP & Shell’s profits are made outside of the UK. It’s just populist nonsense that Labour know is a vote winner because the electorate has got used to state handouts.

The front page of the Sunday times this morning says Starmer will ban all new drilling in the North Sea. This will ultimately back fire hugely but it’ll certainly cause some ripples in the industry if it does make it into their manifesto, especially considering how far they are ahead in the polls.

If it was blanket ban on all new drilling (including in-fill), decline rates would be huge. I suspect Starmer would row back somewhat once in power, but there’s going to be limited upward movement in the share price for UK O&G companies with Labour threatening to decimate the industry.

Sekforde, I would imagine so, although the interest earned on deposit will likely be less than the interest on the debt. Still, it’s a good place to be in, even if net-debt does creep up over the rest of the year.

I’m not convinced Amjad would ever sell Enquest, but if there was a way of using the tax losses against Harbour’s production then I would definitely support a deal. Not sure that’s possible in reality, but then I’m no tax expert.

Sekforde, I think you’re missing the point, I’m not being pessimistic or optimistic. They’re just FCF projections based on different O&G price assumptions.

The point is, in a more normal energy price environment, FCF will reduce dramatically once the tax losses are fully utilised. I’ve said before, I don’t want to be cheering on high energy prices just so I can get a decent return.

I would like affordable energy prices, but I also want Harbour to make a decent return in that scenario, and that can only come by tweaking the EPL.

As for net debt, that will increase to around $500m by the end of year based on current O&G prices. Debt will not be repaid, cash will be sitting in the bank awaiting deployment for an acquisition.

DoctorD,

Agree that relaxing the EPL is politically toxic, it can however still be done.

Increase the EPL to 40%, to give a total tax rate of 80%, higher than Norway’s and good for a few headlines. Remove the improved investment allowance, this should stay, but Labour are playing populist politics with it.

Now add a floor price, so the EPL doesn’t kick in until a certain realised price. Once the floor price is breached, the tax increases in stages, until the very highest prices hit the top rates of tax ($150 a barrel / 250p a therm).

Obviously there would be a lot of discussion about the floor price and the tax brackets, but something like this would be far more beneficial to an industry that supports over 200k jobs.

I’m not saying anything will happen, but there are ways of improving the EPL without it being a vote killer.

Typo

*an additional 35% tax*

Absolutely Sekforde, there’s more than one way to value a company. At an EV/FCF of 5, this looks a reasonable valuation to me given the current reserves life, but investors are free to take their own approach. There’s nothing wrong with being bullish/optimistic, but the market might not share that view, which is evidenced by the current share price.

I know I’m like a broken record, but the problem is simply the EPL. We can’t expect there not be a material impact to the company’s valuation when we’re paying an additional 75% tax with energy prices back at more normal levels

I was relatively generous in my FCF forecast for next year by using the forward curve, Gas is higher due to the risk of winter being colder than normal. If we take current day ahead O&G prices ($74 Oil & 75p a therm) and use them for 2024, FCF would be about $300m, and given net debt will rise from now until year end, that would undoubtedly mean the buyback won’t be renewed in 2024.

I would imagine most on this board would argue $74 Oil & 75p a therm are inflated adjusted normal prices, so the EPL shouldn’t apply. Removing the EPL would mean FCF of $800m, which really shows the impact of the tax at lower energy prices.

Obviously there’s no way of knowing what the energy prices will be, which is a why the EPL simply doesn’t work. Having a tax that increased in stages based on realised prices would be much more beneficial for the industry, but there has to be an appetite to change it.

Happy,

It’s an inability to accept just how painful the EPL is with energy prices now back to normal levels. The day ahead gas price in now just 75p, the OBR’s forecast that was used to justify the tax was around 250p a therm.

With normal energy prices (adjusted for inflation) and without the EPL, Harbour would have been capable of producing $700m of FCF a year, even with the tax losses utilised. This would have resulted in a significantly higher share price than we do now. Basically, the business is now significantly worse than it would have been, some windfall tax.

Sekforde, the market has certainly grasped the impact of the EPL, it's you and others that believe the share price is massively undervalued. Whereas using a simple 5 x EV/FCF shows that it really isn't. So either the current valuation isn't all that cheap (with the EPL in place) or some investors on here have yet to grasp the impact on the company's valuation.

I believe the EPL will be tweaked, its utterly insane at current energy prices, but I'm also realistic that if it doesn't then the share price doesn't have much of catalyst to spring forward, especially with a Labour government laying in wait.

Sekforde, I believe Harbour has a reasonable future, despite the current political headwinds, but I really don’t think people are grasping the impact of the EPL on the company’s valuation.

Next year, with the tax losses utilised, we’ll be paying 75% tax to HMRC. I’ve tried to illustrate the impact of that with my rough numbers. Without the EPL I think we’d now be near 700p a share. With the EPL in place, the current valuation doesn’t look overly cheap given the reduction in energy prices.

The market isn’t going to value the company at 15x years of production, when we have 2P reserves that will last 6/7 at current run rates. If Harbour want a higher valuation, then they need to get cracking converting 2C to 2P, something they didn’t do very well at last year.

Optimism is fine, but in reality, we either need significantly higher Oil & Gas prices (something I don’t think anyone wants). Or for the EPL to be tweaked to make if fair for both producers and consumers.

Damofarl, I guess you believe in Starmer’s headline policy of further increasing taxes on the North Sea from an already eye watering 75%.

Are you not concerned about the impact on FCF and the potential reduction in energy investment, including renewables and CCS? Or maybe you believe he’s spouting populist nonsense (spoiler - he is) and will row back once elected?

Kign, I wouldn't like to guess. I certainly hope it isn't that much given the company's ambitions, but given the reduction in post tax cash flows, that number wouldn't be all that surprising.

Obviously this is another unintended consequence of an absolutely ridiculously designed knee jerk tax. It really is hard to believe that with oil in the $70's and Gas at 80p a therm we're paying a windfall tax at all. Gas prices are firmer next year due to the risk of a cold winter, but surely there's got to be some middle ground that will allow O&G companies to continue to invest & reward their shareholders, whilst ensuring we do pay a few quid extra quid in taxes if energy prices do spike again. Maybe when household bills drop in July there can be an adult conversation about it.

Kign, as a shareholder, I'd be very upset if we continued to invest in a region with those fiscal terms, so yes I believe investment would drop off a cliff.

Bizarrely, there are some Labour voters invested here, so would be interesting to see their view.

One final set of depressing numbers using 2024 and its forward curve.

Assuming Labour won a snap election and they removed the investment allowance and increased the EPL to 38% (78% total tax rate) then we'd be looking at FCF of £325m and valuation of £1.6bln at 5 x EV/FCF, or £1.98 a share.

Sekforde, my numbers are for 2024, not 2023.

Harbour isn't undervalued on an EV/FCF basis, which is a good way of valuing an energy company given the limited reserves life. So again, I would disagree with you.

If there was no EPL, then yes, the company would most definitely be undervalued, as my numbers clearly show. Sadly, the numbers also show we'd be better off in a normal commodity price environment without the EPL.

If the $1bln investment per year results in improved FCF, then the company will have a higher valuation. Last year the company burned through a $1bln and yet 2P reserves still dropped heavily.

Basically, the company has been screwed. If the EPL is watered down or removed, then the share price will rocket North, until then we'll all likely be disappointed.

"Everyone knows the shares are fundamentally undervalued"

I'm going to disagree with this statement.

Next year, with the tax losses utilised, the business will produce roughly £400m of FCF ($73 oil & £1.30 per therm as per the current forward curve). The current market cap is roughly £2bln, so assuming limited debt at year end, the business trades at 5 x EV/FCF, which isn't unreasonable.

Using the same commodity prices and valuation metric BUT without the EPL, the business would have produced about £1.1bln of FCF and produced a valuation of £5.5bln or 670p per share.

In a normal commodity price environment ($73 oil & 70p per therm), and again without the EPL, the business would have produced £700m of FCF, resulting in a valuation of £3.5bln and 426p per share.

Basically, we've been stuffed by the EPL.

Day to day swings are irrelevant.

- Q3 Completion of JAPEX deal
- Q3 Drill bit turning
- Q3 Small acquisition
- Q4 Larger acquisition?

Year-end share price several multiples of the current price imho. DYOR etc

Geordie, why did you miss out the £40m tax refund? You wouldn’t be trying to talk the share price down would you?

Norway is probably the best place in the world for exploration given the tax incentives. Any future exploration would done using the EFF, and paid back with tax rebates, but then you probably know that already.

Any joint venture developments will utilise the facility $100m offered by JAPEX, but again you already know that, but non of this with the narrative you’re trying to paint.

Agreed Mozza, a multi-billion pound company isn't here for scraps and yet the market cap is an astounding £12m.

Production deal likely before the Q3 drill imho. Add in some successful exploration (always a risk) and we'll likely be looking at several multiples of the current share price.

It might take a while for the market to get it (ironic after a 100% rise) but finally Longboat are on the right track.

It takes some conviction to buy a company that is 100% up in the day, but that’s what I’ve just done.

The stock currently trades under net-cash (post deal), with a hugely significant drill to come in Q3.

Norwegian based acquisition sounds imminent with the backing of our new partner. Turning Longboat into an exploration AND production company.

Norway a great place to do business, the investment allowances more or less risk free exploration.

Market cap looks a multiple too low imho. DYOR etc as always.

Sorry, typo, £5m