Member Info for Sekforde

Plebeens the hedging should stop when the company is not obliged to hedge - namely when it has paid off its debt. There are very few hedges into 2024. A company producing oil at $16 a barrel can afford to accept spot market prices and not pay money someone else money to take risk that the company can afford to take itself.

The net debt fell by over $600M between 31st December 21 and 31st March 22. The CAPEX figure was only $160M during that period so it is not clear that we can continue at $200M a month. BUT I think we can because we have higher prices and blessed Tolmount. So I think the half yearly results will show debt to 30th June 22 at just $1.1B.

The current cost of decommissioning is included in the CAPEX spend. At $60 the tax would be nil if the government kept its promise to remove the windfall when normal prices return. The future cost of decommissioning is in the accounts as a liability. But most will in fact be incurred in 10 to 20 years and will be funded by future income which is being maintained by the CAPEX spend.

Markets are supposed to be forward looking. Here is one possible scenario for 2024. Production in terms of oil equivalent 250K per day. Average price S125 per barrel or equivalent. No hedging to speak of. No debt. Total income $125 x 250 x 365 = $11,406,250,000 but say $11bn. CAPEX remains at $1.4 bn. (Management conservative) Cost $20 (up from $15) per barrel= 250,000 x $20 x 365 = $1.825 bn (that is a high assumption). Tax $2bn (ludicrously high assumption but bear with me) Free cash flow = $11bn - $1.825 - $2bn - $1.4bn = $5.775 bn. Of course free cash flow is not the same as profits or earnings. But that money would belong to the shareholders. It is better and more meaningful than profits. The market cap is $4.5bn. So the forward PE is less than 1. It is like buying a house for $4.5 million and renting it for a year for $5.775 million AFTER tax. Crazy. Nuts. Who is selling this gem? And on Linda Cook. Her stake was not given to her she had it in the old company. True she is not buying. But she was not selling either at £5.37. Smart lady. Will someone look at my maths and tell me where in Heaven's name I am going wrong. 2024 is just 18 months away. No time at all in investment terms. I am a one note record. Saying the same thing time and time again. Boring every one. But this is a never to be repeated BUY.

S122 now ancient history. S123.

And (C) the tax is hardly going to be $300M in 2022 and then $400M in 2023 when only seven months are taxed in 2022 and the entire 12 months are taxed in 2023. So Miles you may well have rather imagined the conversation you had.

One thing also to bear in mind, it that the chancellor announces the proposed tax and then Parliament passes legislation to implement it. This windfall tax will not become law until a bespoke Finance Bill passes through Parliament. The detail will be interesting and there are chances of amendments. I think the industry will lobby hard for the sunset clause to be brought forward as that is damaging and unfair. Any way there is nothing wrong with this company. It has great prospects. It is making a fortune every day. The nonsense we have seen will pass. Always does.

I think all that is happening is that large trades are being reported late. That sometimes happens. God only knows why as it is confusing.

The tax is not going to be $300M in 2022 as it only kicks in from 26th May 2022. I agree the company would not casually discuss anything like that over the phone. May be we are now over the worst.

The current dividend yield is 4.6% ($200M / $4.45 bn).

Oil I am not saying the oil will rise. We just do not know. A reasonable assumption is that it will stay the same. The windfall tax is based on future profits. $1 bn is a reasonable assumption over the next three years and seven months. The $107M is just for 2022. So it will not dent much the company's own estimate for free cash flow of between $1.5 and $1.7 bn. And those figures were based on average Brent of $100 and it is well ahead of that now and not all production is hedged in 2022. I do not think any one here is overly optimistic. We are all just doing the maths and suggesting the present sp is too low. All shares are valued ultimately on the likely return to shareholder over time. And I ask anyone to say how or why my own calculations this morning are unrealistic. I think the company itself will buy shares at these levels and up to around 550p. It does not have to pay off all its not very expensive debt. And knocking out 15% of shares would be a clear signal and keep the company in the FTSE 100.

Actually I have been a little conservative. Take the year 2025. Total production of oil (or gas equivalent) = 250,000 barrels a day. Average price $115. Value per day = $28.750 M. Yearly $28.750 x 365 = $10.493 bn. Cost of production at $20 per barrel = $20 x 250 x 365 = $1.825 M. CAPEX say $3bn. Tax say $500M. Dividend $200M. Free cash flow for 2024 = $10.493 - $1.825 - $3.0bn - $500M - $200M = $4.96bn. I have allowed for a large increase in the cost of production. I have assumed the price of oil/gas remains constant. I have allowed for a big increase in CAPEX spending. I have assumed higher taxes. The market has not actually appreciated that these bad hedges will unwind and that will have a dramatic effect on earnings. The first more or less hedge free year is 2025.

Correction $4.3 bn not $4.4bn. (50% of $8.6bn)

To be fair one should calculate the impact of tax on each of the years it is due to last. It is due to last until December 2025. The only research I have seen is the note by Jefferies. That suggested $107 M for 2022 and S268M for 2023. Assuming Brent remains around $115 per barrel we should allow may be $350M for 2024 and 2025 when all the bad hedging unwinds thereby augmenting profit. So the total additional tax could be around $1bn. BUT Harbour will not be paying any other tax (or not much) because of its (premier's) accumulated losses. And so assuming CAPEX runs at $1.4 bn a year, the total free cash flow should be around $1.6 bn 2022, $2bn in 2023 $2.5bn in 2024 and $2.5bn in 2025. The huge increase is because of the unwinding of the bad hedges, the elimination of most of the finance charges and some increase in production. 2022 is the company's existing forecast, the others years "back of the envelope" mathematical projections. So in just 3 and half years the company should be able to accumulate net $8.6Bn in free cash whilst paying a dividend of $200M a year and of course the additional tax. Of course I do not see Harbour just sitting on its cash. Much of it will be distributed. It would be completely reasonable to distribute 50% of it during the next three and a half years. This means that the total distribution would be $700M (present dividend) plus $4.4bn. The remaining $4.4bn could comfortably pay off the debt (around $1.3bn today) and almost completely knock out the additional tax by additional investments. Just remember the total market cap is just $4.4bn at Friday's close. And yet in just 42 months the company is capable of shelling out to its shareholders a sum greatly in excess of its present market cap, whilst eliminating its debt and ramping up investments. So that makes this a buy that will never be repeated.

What an awful day we have endured and not quite over. But really with this company there are no unknowns. We know the current and future oil and gas prices. We know the debt. We know about the hedges and how they are unwinding. We know about the reserves and how they have increased. We know about the tax losses still to be used. We know about the free cash flow forecast just days ago. We know about the capital reduction plan. We know about the skill and reputation of the board. We know the cost of production. We known about the windfall tax and how it might be mitigated. We know about the share buy back authority and the strong hint that the dividend was going up if prices remained elevated. We know they have since increased. And so we just have to buy more and hold and hold for a happy life.

I could not have been more wrong so far. I am now £129,000 down on my HBR position and just shifted a whole load of cash into my IG account to meet margin calls. But it is days like this when nerves of steel are required. I was a big fan of paying down the company's debt. I would stop that for now and buy out 15% of the shares in accordance with the permission granted at the AGM. Just the saving of the dividend payments on those shares at the current market cap would be about the same as the interest paid on the outstanding debt. And it would restore confidence. The debt should now only be around $1.3 bn if the rate of progress has been maintained and so can be held at that level for a few months. It would only take about four or five months of free cash flow to take out 15%. And if the market cap remains constant during that exercise the sp would be 15% higher. Would be a start back to sanity.

Well the details are not at all clear.

1. An additional 25% "levy". On what? The additional profits made because of high prices or on all profits? If the latter that is 40% and plus 25% = 65%. Huge.
2. 90% deduction on "investments". So what counts? Buying another company? Just North Sea investments? But plenty of scope to bring forward "investments" that will be made any way and eliminate the tax. When the sundown clause kicks in there will only be normal tax to pay on the profits made on those investments.
3. How much do prices have to fall to reduce or eliminate the tax? What are normal prices?
4. Why cannot existing tax losses be used to offset a tax on profits?

But despite all the doubt about how it will work, it just is no big deal. The statutory profits will not be enormous and certainly the accumulated losses can be set against the normal 40% tax. What always matters is free cash flow and I see that as still being above $1.7 bn for each of the next three years. So again it is a jam tomorrow message. But I am overall quite happy. This is now yesterday's threat and we can live with paying a bit more tax to end the incessant talk.

The one thing markets do not like is uncertainty. The announcement is at 11.30. The package is £10bn. but how much of that is to be raised by the windfall tax and how much by additional borrowing is not certain. The UK's finances are actually ok. The PSBR is forecast be around £100 bn this year. But high inflation erodes the real value of national debt. At 10% the real value of a £2.4 trillion debt is eroded by £240 bn. And so with some economic growth the ratio of debt to gnp should fall this year. The upshot is the Government can afford to borrow more to deal with this so called cost of living crisis. I think Harbour will get off lightly because it is investing like crazy for a small company. So once this is announced the market will be able to do the maths again and will conclude the windfall tax was a complete feather duster. Remember we are just seven months away from being debt free and in less than 36 months the company is capable of generating its entire market cap in free cash flow. Free cash flow remember is after tax interest and dividends.

Thanks Miles. It may be technical but why do it? And I still do not begin to understand the reference to $6.8bn. That is more than the market cap. of the company.

There is one thing I really want to understand and do not is this capital restructuring which was overwhelming approved by the shareholders at the AGM. This has to be approved by the Court of Sessions in Scotland in July and the company claims it will release $6.8bn of reserves to use to support the dividend etc. There is a complicated mechanism described of issuing B shares and cancelling them. There is not anywhere standing to the credit of the company $6.8bn is there? Any where? Is there a link anywhere that explains properly what is happening? It it were half true it would hugely add the raging bull case.