Member Info for Sekforde

Hi Stevo,

You cannot start with $65 a barrel when Brent is $80 and gas is 300p+++++++ per them.

My approach is modest. I do not know whether gas or oil price will rise or fall so I assume they will stay the same. That is a conservative assumption because inflation tends to increase the price of everything over time. 2022 is in the bag. I assume we were fed truthful information on 3rd November 2022 and it follows the Free Cash flow for 2022 is about $2.3bn (well above the range of 2 - 2,2 bn). It is well above the range indicated because of gas being sky high and top of range production figures. So what about 2023? Well actually all you need to do is add about $500M for the additional windfall tax and FCF is basically the same as 2022. Oil is a bit lower Gas is quite a bit higher. Interest is lower. Hedging a bit better. My £1.7bn FCF is not ambitious at all. And actually assuming CAPEX of $1.2bn a year the production should rise and not fall. Some of the assumptions on valuation seem to be based on the notion the company has about 6 years left. The vast Capex is all about ensuring that there will always be 7 years of supply. So one should value say $1.5 bn a year to a perpetuity. That comes to about $30 bn not $3bn. But I will settle for $6bn.

If the company kept buying every trading day the number of shares it bought yesterday and the price did not change then it would take approximately 5 years before every share was purchased. Could the company afford to spend approximately $3m every trading day on share purchases? Yes of course. That is only around $600M a year. At present prices of gas and oil I still maintain the FCF will be $2.3bn this year . I make FCF around $1.7bn in 2023 and around $1.5bn in 2024. I will not bore you all with my maths. I have assumed around 210k boe a day and constant prices of oil and gas. I have factored in the savings in interest, the additional windfall tax, the ending of the accumulated tax credits from past losses in 2024, and the ending of the bad hedging in that same year. On the assumed debt of $600m at the end of 2022, we should clear that (by April) and therefore have $1.1 bn for share buybacks and dividends. Of course it just cannot happen that all the shares are purchased at about £3 leaving one lucky punter with the only share left in 2028. There will at some stage be a change as the chipping away continues.

The total number of shares in issue as of last night was 854,398,889 at £3.01 that gives a market cap of £2.572 bn or $3.11bn. Debt as 31st December 2022 should be around $600M. (I am assuming $2.3bn free cash flow for reasons that I have stated in several posts). Accordingly we have an enterprise value of just $3.71bn as year end. I hope the meeting with the Treasury yields some results but assuming it does not, I still think the outlook is really good. Future investment in the North Sea is all but paid for by the 91% up front capital allowance. It can be funded by moderate and sensible borrowing at low rates. The large cash surpluses should continue to be used to maintain the dividend and to carry on knocking out shares. Almost 8 % of share capital has been eliminated since the summer when the first buy back programme began.

The market cap of harbour is $3.3 bn. We produce 207k boe a day. Our debt is now about $800m. By contrast Exxon has a market cap of $427bn and has about $38 bn in debt. It produces around 2.3 M boe a day. So Exxon is roughly 110 times the enterprise value for 11 times the production. Of course I acknowledge all the down stream stuff that Exxon has. But even so this is so absurd and ramping up the share buy backs (800k) yesterday is absolutely the right approach.

Almost 700,000 shares purchased today. Let the suckers keep selling at these ultra low low prices.

On the free cash flow guidance this was also based on a range of 200 to 210k boe a day. Having averaged 207k boe equivalent for the first 9 months and moving into the last quarter with little maintenance being carried out we should push that to the very top of the range. It is a combination of much higher than assumed gas prices, marginally higher than assumed oil prices and top of the range production with the extra not hedged at all that should lift us to $2,3bn OR MORE. And the Neptune story is out. $6bn potential offer. Harbour is a more valuable company overall and yet has a market cap of around $3.3bn.

We are going to be hitting $2.3bn free cash flow for 2022 with oil and gas at these prices and production being ramped up before the year end. Meanwhile the share buy backs continue a pace. The noose will tighten soon.

Another bad day. But a reminder that Saudi Arabia is able to prevent an oil price collapse (other than in pandemic driven world wide shutdown) by reducing supply or in this case not increasing it. However the big news for me was the relentless continued purchases. 710,459 at a cost of around $2.6M.

Stevo at the risk of splitting hairs, the guidance of $2-2.2bn was based on Brent averaging $90 per barrel and gas averaging 220 p a therm from 30th September 2022 to year end. Brent averaged $93.33 in October and from 1st November to 17th November it averaged $95.20. It has recently fallen to just below $90. I cannot find reliable figures for gas but we have certainly averaged above 220p a therm so far since 30th September. The guidance suggested that we would be in "the upper half" of the range 200 - 210 kboepd. Well given we averaged 207 kboepd to 30th September and the summer maintenance programme was more or less over by 30th September we ought to be able return to the 219 kboepd achieved in the first two months of the year. This could take the average for the year to right to the top of the range or say 210 kbopd. I should imagine given the additional tax does not take effect until 1st January 2023 every mechanical sinew is being stretched to bring production into the current year!

Stevo fair enough point. But even on the assumption that the unused losses are only $800m at the end of 2022, the whole of 2023 should be the same in terms of ordinary taxation as 2022 and a large part of 2024 should also be the same. It follows the only difference between 2022 and 2023 is an extra $500m in windfall tax. If it is the case, that the free cash flow for 2022 is $2.3bn (in accordance with the forecast but allowing for higher than assumed prices) then we are looking at a free cash flow for 2023 of $1.8bn (assuming same again prices overall). And I have not adjusted for a big reduction in interest payments. However you do the maths, it is very difficult to see free cash flow for 2023 and 2024 being less than $3bn in total. That sum alone is quite close to the present market cap.

At the time of the merger the company said " as a result of historic investment in the Uk Central Sectors Harbour expects to be able to generate sufficient profit to fully utilise the losses by 2026". In the last full set of accounts to December 2021 the value of the tax asset was said to be $1.938 bn.

Kign we know the effect of the windfall tax for 2022. It is $400M. So why is $900m or so wrong for 2023? And why does it not lead to FCF for 2023 of around $1.5bn at constant price and more in 2024 with the bad hedges gone?

I agree the figures produced by Stevo are completely inaccurate. The figure to focus on is FCF. We now know the windfall tax for 2022 is $400M (see last trading update). We know that it applied from 26th May 2022 and was at 25%. Applying it for a full year at 35% produces a figure just above $900M at constant prices. The forecast FCF for 2022 was $2-2.2bn. But because of the higher than assumed oil and gas prices this may well come in at $2.3bn. The UK government will not be taking 80% of EBITDA as Harbour has substantial unused tax losses. All in all we can look forward to 3 years of at least $1.5bn FCF under the new regime. After paying down likely debt of around $600m (at end of 2022) most of the remainder of this FCF will be given to shareholders. (To the extent that it is not then this should add to future returns). FCF is of course after Capex with the result that during this three years the North Sea will continue to be developed and overseas assets will start contributing a huge amount. So the 3 year outlooks is for direct rewards to shareholders (dividends and buybacks) of a sum far exceeding the present miserable market cap and at year end 2026 a much more valuable company with far greater proven reserves and higher production than the 210k boe today.

Thanks Banbury. And you make a very good point about hedging. I was dead set against hedging. But that was of course because it meant we did not reap the rewards of high prices. I am now reconsidering in the light of the windfall tax. We may as well hedge because we will not reap so much of the reward of even higher prices. Do we not want to lock in the certainty of very acceptable returns into say 2025? I always measure investments against the bench mark of 10 year gilts. At the moment you can get a certain yield of just over 3% a year for 10 years and then get you money back with its buying power substantially eroded by inflation. I and others have calculated next year's free cash flow should be around $1.5 bn with the present hedges and assuming current prices. The market cannot believe that that is sustainable hence we have a valuation of around $3.4bn. If we were to lock in free cash flow of say $1.5bn a year for the next three years by selling forward nearly all production of gas and oil into 2024 and 2025 would not the market at least value the company at $4.5 bn? After all the company is hardly going to be worth nothing at the end of 2025 when it is investing $1bn plus a year and will still have some exceptional assets and be debt free? The only thing that explains the way this share has dropped is either extreme pessimism as to the outlook for commodity prices (which could be eliminated by hedging) or else a real inability to understand what free cash flow actually means.

What a turbulent week! But however the market reacted, the autumn statement was not at all bad. The headline rate of tax of 75% (40% ordinary 35% windfall) simply does not apply to Harbour for the time being. It still has enormous tax losses to use against ordinary corporation tax. These were estimated at the time of the merger in 2021 to cover 4 years. And the windfall tax itself can to a large extent be off set by making capital investments. (Incidentally a qualifying investment would not be the taking over another company by buying its shares.) The net result is that Harbour can comfortably afford to develop its North Seas assets whilst investing in lower tax environments elsewhere. However, like a one note record, I am transfixed by the recommencement of the share buybacks. Yesterday these were increased to over 660,000 with roughly $2.5M being spent. With 28 trading days before the end of the year and with about $92M left, this may suggest that the company intends to execute that programme (or most of it) before the end of the year augmenting total return to shareholders for the year to $600M. So we will end the year with a company that has reduced its debt from $2.3bn to around $600M and paid a further $600M to it shareholders AND which will in 2023 pay off its debt completely and deliver at least (I think) $800M returns to shareholders in the form of dividends and share buybacks from a free cash flow of around $1.5bn. It will end 2023 (if it does this) with around $300M net cash. Linda Cook is a clever and ambitious woman and she has not made any mistakes so far.

The sp now is back to the low point in the summer if you take into account the 7 % of shares that have been purchased. I think it is just sentiment which can change very quickly as we all know.

At a valuation of $3.31 bn, $95m buys 2.87% of the company. A big chunk.

The super deduction is improved as the briefing note makes clear. For every £1 invested the tax allowance is 91.40p rather than 91.25p. And then 109p for expenditure on reducing carbon emissions.

With this level of windfall tax and current prices Harbour will have a free cash flow of at least $1.5 bn in 2023 and $2 bn in 2024. It does have seven years of reserves but the CAPEX expenditure enables it to constantly add to these. The likely debt at the end of this year will be about $600m. It could eliminate the debt pay $200m each year in dividends and then spend the remaining $2.5 bn buying shares. If the market capital value were to remain at only $3.5bn at the end of 2024 - itself a very pessimistic assumption - then the effect of eliminating $2.5 bn of share capital must be to force up the price per share to more than double the current level. And of course maintaining the dividend at $200m is actually increasing it per share as shares are cancelled. It has been a horrible journey with two major shocks. But I am hanging in.

The BBC is forecasting 35%. They say it has been heavily trailed to avoid spooking the markets!