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Sekforde, your FCF projections for 2024 look far too optimistic. Could you layout the various components that you’re using to get to that number?
In addition, why not use the forward curve to drive your oil & gas price assumptions? Obviously the reality will be different, but that’s what the market is telling us at this moment. Gas prices are currently a lot higher than 90p for next year, which Harbour should be utilising to increase hedging.
The problem is the ridiculous EPL, EBITDA will increase next year but then we’ll be giving 75% to HMRC as the tax losses run out.
It’s been said before, but unless the EPL is tweaked then we can forget about £4+. Still, there’s probably a few quid to be made at these prices. IMHO DYOR etc etc
Fair point, not sure why anyone would ever see positives in a falling share price, I’d rather see the company buying back stock at £4 per share. In fact, I don’t want to see the company buying back stock at all. Either put the money to work or put it in my pocket.
Market seems to be getting a impatient with Harbour, EV now less than half the value at inception. Mostly EPL related of course, but Ms Cook likely starting to feel uncomfortable.
Landicaamans,
You’re an institutional investor, given the current fiscal/political environment, would you increase your weighting in an already hated sector (Mr smith sums this up well)? I think the problem for Harbour, is that in most cases the answer to the question is going to be no.
The EPL is an utterly dreadfully designed tax, that leaves the company with absolute peanuts if Oil / Gas prices fallback to more normal levels.
I remain invested on the basis that the EPL will be tweaked in the near future, I also pick-up a decent dividend yield in doing so, but I don’t see the share price gaining any traction whilst the current version on the tax remains in place.
A big risk is that Labour get into power and follow through with what they’re saying. Increasing the tax rate and removing the investment allowance will completely destroy investment in the sector. Populism at its finest.
There is an answer to this, redesign the tax to target the windfall only (people with a differing view of what that is) but then that would actually take some effort rather than current knee-jerk reactions that have put us in this mess in the first place.
The answer is within the article, a simple floor price doesn't work, the industry needs something fair to both producers and consumers when prices are ridiculously high.
“A better approach that might bridge the political divide would be to offer a regime where rates moved predictably with prices, preferably at lower levels but with fewer allowances. The position would be transparent and likely to survive both a change of government and market shocks.”
Why this wasn't implemented in the first place is beyond me. The Tories or Labour would likely win a few Scottish votes if they adopted this approach, which would be far more practical than trying to out-do each other with ever more taxes.
Economic mismanagement is nonsense, the vast majority of people cheered on furlough and the printing of mountains of cash that allowed people to sit at home and wait out the pandemic. Couple that with an energy price shock from the Russian invasion and here we are, the same position as nearly every other western country. But sure, let’s blame Liz Truss and her short spell at number 10.
The IMF forecast shows that we’ll outperform Germany and others over the forecast horizon, but I guess that doesn’t fit the picture you’re trying to paint.
I agree the current crop of Conservatives aren’t great, as you say they dreamed up the ridiculously designed EPL in first place, but the answer to the country’s problems isn’t Labour.
IMHO of course.
Damofarl,
You do realise Interest rates has risen around the world, right?! Truss caused some temporary noise and a spike in UK gilts (which the BOE actually profited from) but to say the Conservatives are responsible for the interest rate rises is devoid from reality. The US has higher rates, is Truss to blame for that as well?
Fuel/energy, we're basically in the same boat as most of Europe. In hindsight, every country would have done things differently. Hopefully whoever is in power next will do better.
"I believe in HBR" but support a party that will cripple investment in the North Sea.
You and Labour are well suited.
hobione, hysterical nonsense.
The NHS England budget is £155bln, which is in part, funded by successful British industries like Oil & Gas. Now you can argue that budget should be higher, but to say you won't get an ambulance if you vote Conservative is utterly ridiculous.
I dread to think what the waiting lists would have been if Starmer had managed to lock us up for another 6 months.
Lol Hobione, you've been spending too much time on twitter.
I guess the conservatives are also responsible for interest rates going up around the world as well then?! And there was me thinking it was something to with COVID and the ridiculous amounts of cash injected into the system via QE.
Lets not forget Starmer wanted to keep us all locked up towards the end of the pandemic, which would have compounded the problems for the NHS and the economy, but sure things would be so much better under Labour.
The current crop of Conservatives are dreadful, but Labour are a most definitely a clown show.
Whereas it'd be a disaster for the share price, I'd like to see the entire industry put two fingers up to the government and suspend all new UK CAPEX.
The EPL at 25% with the improved investment allowance was bad but still workable, the current tax is utterly insane given the reduction in energy prices. Quick to implement knee jerk rubbish, drag heels whilst the UK loses hundreds of millions of investment due to the fiscal instability of a so called Conservative party.
The problem with a floor price is it just doesn’t really work to encourage investment. One minute you’re paying 40% tax, then $1 more and you’re paying 75% with potentially hundreds of millions difference in FCF. It just doesn’t make any sense.
I’d like to think, and assuming the Conservative government are serious about being fair with the industry, then they’ll have used the time to come up with something far better than the previous rushed nonsense.
What I’d like to see is a 40% tax at a combined ‘realised’ price of say $65-$70, then the tax stepping up by 1% for every dollar over that up to a maximum of 78% (same as Norway). Any windfall tax returns go to support those in most need with their energy bills. That way, it takes into account the mix of oil & gas, whilst being fair on producers and consumers. I’m sure there are plenty of flaws in even this suggestion, but for me it seems like the right way to go. Anyway, let’s see what we get.
Absolutely Nitro, this is a massive opportunity to show their support for a hugely successful British industry that employs 200,000 plus people, whilst also showing their green credentials by supporting CCS.
Let’s face it, anyone that wants to get rid of Oil & Gas believes in ideology over reality, which would already put them in the delusional Labour camp.
Only thing that worries me is that the floor price for the windfall is rumoured to be a ridiculous $65, but hopefully the mechanism for any windfall is far more sophisticated than that.
Happy stop scaremongering.
2024 EPL will be paid in 2025.
FCF is disappointing but for those that haven’t had their heads in the sand it is close to expectations.
EPL is an utter disaster at current energy prices, this is Habours problem.
This is a bit of a worry. Although the balance of 2022 would have been paid in January so does offset somewhat. I’m sure this will become clearer in the Q&A.
Using a gas price significantly higher than current to get to that $1bln is disappointing. “Hey guys, this is what you could have if prices rise by about 25%”.
Buyback will have to be put in place very quickly to support the share price. Not much good news in this update.
The OBR’s forecast for Gas prices (it isn’t really a forecast, they just take the futures curve at that time) was £3.40 per therm for 2023 & £2.70 per therm for 2024.
With that price deck, and with the EPL in place, Harbour would still have produced $3bln+ in FCF over the two years. The company would have had a massive windfall, so the implementation of the tax was difficult to argue against.
The problem is, the forward curve changes everyday, which shows just how ridiculous it was to impose should a punitive tax rate on a incredibly cyclical industry without a mechanism to reduce/remove it.
The current forward curve is roughly £1.30 for 2023 & £1.40 for 2024. At these prices, household bills will be under the price guarantee, therefore no government support will be provided. Obviously prices could rise again, especially next winter, but as it stands, they’re not too horrendous, especially when adjusted for inflation over the last couple of years.
Of course prices are still somewhat higher than they used to be, but it does feel incredibly wrong that Harbour are now worse off than we would have been if the Ukraine war had never happen. That may be a contentious statement, the high prices last year did allow us to plow through the debt much quicker than expected with only a limited windfall tax.
Anyway, the likelihood of anything changing to the EPL in the spring statement is zero (IMHO) but I’m sure the industry is being vocal to the government behind the scenes. If gas prices stay the same, or go lower, then they’ll be a lot pressure to tweak things come the autumn statement. I guess we’ll find out then just how hated the industry is.