Member Info for Stevo12

It is interesting that we have frequent references to oil price movements on this board and yet the majority of our production is gas and will increase to approaching 2/3 following WD deal.

The oil price seems to gravitate + or - 10% around the mid $70 per barrel, while gas gyrates from 150p to 60p per therm over relatively short time periods. I would suggest the volatility of gas is much more impactful on HArbour than oil prices. It will be interesting to look back in a couple of years time to see if gas prices in 2022 and 2023 were an anomaly away from a 20 year trend line of 50-60p per therm gas. What I find interesting is that even at 60p per therm European gas is still 4 times more expensive than US gas - a massive advantage for US industry and cheap energy is the US is one of the key drivers for the outperformance of US economy in 2023.

When will our politicians realise that energy cost and availability is a key driver of economic performance.

Tamovv and Londoner

Thanks for all your input and challenge, really helpful in advancing our understanding. You can bet your bottom dollar the IIs and hedge funds will be doing the same.

I have not listened to the WD analyst call, but reflecting on Tamovv’s comment that the CFO highlighted that tax in H2 would be below cash tax in H1 due to lower taxable profits in 24 than 23, driven by commodity prices. The €1b tax in H124 makes sense as it relates to 2023 profits and highlights that 2023 tax cash cost of €2.3b includes higher H1 tax due to higher profits in 2022.

My analysis of hedges and assumed O&G prices indicated an increased realised price (due to gas hedges),revenue and EBITDA for 2024, but if the CFO is giving guidance that the tax and taxable profit will be lower in 2024, we should use this guidance. Given EBITDA of $4.7b for 2023 and assuming it decreases to $4.5b in 2024 (€4b) would result in a $150m tax reduction to €1.85b for 2024, compared to cash tax of €2.25b in 2023.

I can equally see Harbour EBITDA being impacted if gas averages 60p per therm as compared with the 100p per therm assumption used by management. Impact would be $445m reduction in EBITDA but only $110m impact on FCF.

Accordingly taking WD CFO guidance of lower EBITDA for 2024 (estimated $4.5b) and Harbour gas price assumption of 100p per therm reducing to 60p (reduces EBITDA from $2.7 to $2.3b which includes the impact 28.5k BOPD lower production), results in combined EBITDA of $6.8b and EV at 1.7xs of $11.6b or MV of $6.3b after $5.3b debt or approx £3 per share.

While the analysis is interesting (at least to me), it should be recognised that there are a number of assumptions and ifs and maybes and should be taken with a serious health warning. it does highlight that the post acquisition share price of the combined business, if valued on similar metrics to Norways listed O&G companies which have strong credit ratings, could be in the £3-3.50 range. I think the initial thought of £7 is now unrealistic now we have seen the WD 23 detail and the HArbour 2024 guidance.

Baysil

Not disputing that Equnior is a great company with over $100b of revenue and a global super major. About a 1/3 of that revenue is from its oil and gas E&P business in Norway. It has a large trading and midstream business like Shell and BP and it generated $10b of profit in 2023 after paying $26b in taxes (almost all in Norway). Equinor generated $6.5b of post tax profit from its E&P operations in Norway.

Equinor production is 2.1m barrels a day of oil and gas of which 1.4m per day is from Norway. The Norway E&P is generating approx $11 per barrel after tax profit which is similar to BP Aker and pretty close to WD (adjusting for one offs).

What I am saying is that Norway has a very clear position. The state funds 78% of exploration and development costs and keeps 78% of the operating cash flows during production. An efficient Norwegian operator’s 22% share can generate a good return as BP Aker and Equinor demonstrate. At 2023 oil and gas prices, this is in the $10-11 per barrel FCF range (gas at current prices is closer to $8 per BOE and oil $13 per barrel.)

Harbour generated $15 per barrel FCF in 2023 but this was before full EPL payments. What I am struggling to understand why you would value a business at $10 per barrel of 2P reserves (including undeveloped 2P) which will earn you about $10 per barrel over next 10 years.

I think we all have differing views over renewables and CCS. My observation is that we are many years away from CCS revenues and the profitability and the business model is not yet clear.

Londoner

On 2023 WD oil, I calculated realised price of European oil sales at 19m barrels @66.3 and 14.9m barrels at average Brent of $82.3. This gives an average realised price for European oil of $73.3. LA and ME oil averaged $72 per barrel.

On gas I have average Europe realised price of $47.2 per BOE (67p per therm) and LA and ME at $21.3 and $23 per BOE.

I like your before and after analysis and effectively we are paying $2.8b (increased debt) to benefit from an additional $600m of EBITDA, which will be closer to $200m after tax. We could have acquired $600m of producing EBITDA for approx $1b (100m+ of reserves). So in very broad summary, we are paying $1.8b for scale, diversification and potential synergies.

I also recognise that WD’s 2024 gas hedges cover over 50% of European gas sales at 105p per therm providing a strong underpin for WD 24 EBITDA compared to Harbours 24 gas hedges at average of 62p per therm.

I will wait to see prospectus before deciding to fold or hold. There may be something we are missing.

I agree that the the uncertain UK tax regime is a drag on UK O&G valuations, but I really cannot see an outcome where UK tax regime is worse than Norway. Current NS O&G is significantly better than Norway but recognise Labour is worse.

Tambov

Was the amounts disclosed in the analyst call $ or €? I estimated 2023 tax paid of €2.3b included €0.4b related to 2022, so 2023 tax cash cost $1.9b. I think €1.7b is a good estimate for 2024 if EBITDA falls to €4b. This would however leave FCF of 4-1.7 (tax) - 1.4 (capex + exploration)- 0.2 (int) = €0.5b FCF for WD.

Your debt assumptions re harbour bond and net debt are consistent with mine.

I have had a more detailed look at WD 2024 EBITDA and I calculate it being higher than 23 due to gas hedges and oil price improvements. At 60p per therm and $80 oil, I calculate revenue €0.7b higher partly offset by €0.2b higher OPEX. This should result in 2024 EBITDA of €4.7b ($5.1b). This improvement is almost all Norway related and will be taxed at 78% but should result in 2024 FCF of $0.7-1b.

Asartara

It is not clear what debt was assumed to have been left with the business on the IPO so very difficult to compare apples and apples.

The actual net debt at 31-12-23 of WD was €2.4b as compared to the approx $6b being transferred to Harbour

Zebbo

There are so many unknowns with CCS. What we do know is that 2030 is the earliest potential date for CCS to commence. What we don’t know is how CCS will be priced and how much will be paid to the capturing process and how much will be paid for transport and storage.

While government have announced some big intent (£20b of funding), there is no detail of how CCS will be subsidised.

Accordingly I don’t think any value is currently assigned to CCS given uncertainty on commercial model and the time lines.

Londoner.

The 1.8% bonds will be generating approx $150m interest saving pa until refinancing. The $0.5b is a rough estimate of the difference between fair value of the debt and nominal value. This should be adjusted for in the debt add back to arrive at potential equity values but given the debt can range between $5b and $7.2b, depending on pre completion cash flows, this is a false level of precision.

My core concern is relative values to drive the equity split. We know WD EBITDA for 2023 was $4.6m and using EBITDA multiple of 1.5 (per Aker BP) would value the business at $6.9b. Harbour is currently valued at approx 0.8x 2023 EBITDA. The deal is valuing WD at over 1.8x 2023 EBITDA at current HBR share price.

I just do not see the rationale for the differing values. Prospects in Mexico are similar, Harbour has good prospect in far East. UK and Norway Tax regimes are similar pre Labour. Harbour has far higher decom liability - could this be part of reason. I also struggle with the WD 2P reserves and that approx 500m are undeveloped. I have never seen this disclosure before and wonder how much of Harbour’s 2P reserves are undeveloped.

Buzz

Not sure why Bondholder would not agree. They currently have security over WD assets and post deal they will also have security over Harbour assets as well.

I also recall somewhere that the bonds were with the BASF group. Could be wrong.

I think Harbour’s long term survival would only be a question if Labour implemented their full tax policy which I believe is unlikely due to job losses and union resistance. We could still have a good few years of $1b FCF with no UK CAPEX until production dropped to unsustainable levels, probably enough time to build overseas business and then walk away from UK decommissioning.

I should add that I still believe this merger is the right deal for both sides, it is just that WD appear to have too big a slice of the pie.

Dumbly

Unfortunately the article sits behind a pay wall.

Londoner

While not perfect, I think Aker bP is the best proxy for valuing WD/HArbour post merger. BP Aker also has significant debt and your assumption that the market will only ascribe a liability of $1b to the $6b of debt is I believe unrealistic. The below market interest rates last for 2-3 years post completion and the MV of debt is probably $0.5b below face value.

I do agree that if the combined group can generate a maintainable FCF of $2.5b per year, then share valuation could be in the £4-5 range per share. However this would require EBITDA of at least $10b which would need gas to at or over 100p per therm. Not impossible.

Another way of looking at comparable valuations of Harbour and WD is that the WD Norway is similar size to HArbour NS at 170k BPD and generates over 80% of WD’s profits. I would say the two business are similarly valued given EBITDA and tax rates etc. So why is the rest of WD business valued at 2 times HArbour when it is relatively low margin gas with some decent oil.

My real gripe on this deal is the relative values. While WD is generating approximately 65% more EBITA than Harbour, I can not see how WD is valued at more than 3 times Harbour. The deal values WD at $33k per BOPD and Harbour at $17.5k BOPD.

If WD was valued at twice Harbour it would be a fair deal.

Egremont

It is not that Latin American and Middle Eastern gas is cheap, it is that Europe is relatively expensive.

Gas in the US is currently selling at 15p per therm which is less than a 1/4 of the European price. This is why the US can afford to liquify the Natural Gas, build LNG ships and then ship it to Europe and still make a profit.

The cost of LNG facilities is huge and only affordable for likes of US, Qatar, Australia etc.

Astana

I am not saying the price target is £1.70. This would be the valuation if there were no synergies, rerating etc - which there will be. I must say I was quite shocked by the less than impressive financial performance of WD in 2023. The original announcement by Harbour was that the deal would result in increased FCF per share for Harbour shareholders. I took this as the $1.40 FCF per share for 2023 would be higher post acquisition. This would require FCF of $2.4b with increased shares in issue. This feels a big stretch, unless the reference is to the forecast Harbour FCF for 2024 of $0.2b.

On Var, the company generated $850m of FCF after $2.6m of CAPEX for 2023. This is a huge amount of CAPEX and with the Neptune acquisition, it will be a 500k BPD in 2025. Revenue for Q4 was $2.5b which is approx $1b higher than WD’s Q4 revenue as they are 2/3 oil and realising $83 per barrel. Also debt at $3b will be lower than combined business. Obviously they are paying high taxes but this is mitigate by significant capex. Looks a really interesting business.

Alex

I compared the WD and BP Aker results released last week and the big difference is that BPAker generated EBITA of $12.3b compared to WD of $4.8b. BP Akers production was approx 50% higher.

The combined WD and Harbour business generated approx $7.6b EBITA in 2023 (at higher combined volumes than BP AKer) and will have debt of approx $6b compared to BP Aker $3b. BP Aker has a market cap of $15b and EV of $18b or approx 1.5xs EBITDA. Applying the BP Aker metric to the combined WD/HArbour business would give an EV of $11.4b and equity value of $5.4b or $3.27 per share (£2.60). Accordingly unless I am missing something the market is pricing in a full rerating of the post deal value at current share price.

This is quite a move in my position and is primarily driven by the 2023 WD results. I thought the business was more profitable and did not realise size of the low margin gas business in Latin America and Middle East. Ultimately there is also an impact from gas prices which seem to be softening quite significantly. Gas at 100p per therm ($12 per MCF) and the business and EBITDA looks quite different.

The question I am trying to grapple with is whether the elevated gas prices in 2022 and 2023 are a thing of the past as US LNG replaces Russian gas. Is gas at $50-60p per therm the new norm? If so buying a 2/3 gas business at top dollar may not be the best idea.

I hope I am missing something and this is the great value of these boards to challenge thinking. Please someone shot me down.

I agree that investment grade rating indicates a relatively low level of debt relative to FCF and low default risk. This talks to a FCF of $2-3b per year on $6b of debt. I just can’t see with the Norwegian and UK tax rates, how the combined business can generated that level of FCF.

Egremont

The 3.60p per share used is purely a mechanism to arrive at the $11.2b valuation. They could have equally used £2.60 and agreed a WD valuation of $10b. This would still give WD the same 55% of new group in addition to transferring $6b plus of their debt to harbour. The question to ask is whether WD business is worth 10xs FCF. If we see that for the first 1/2 of 2024 ahead of shareholder approval process the WD business is generating less than $1b pa FCF, will the deal be approved?

It really comes down to what the Harbour business is worth on a standalone basis if Labour wins election and follows through on its tax proposals.

Apologies - error in my penultimate para - the combined EBITA for 2023 was $7.4b and not $8.6b which would generate an EV of $8.14m and market value of $2.14b pre rerating.

Londoner

Apologies for delay in responding. Just back from a week away with the good lady and was trying to read the WD results on my iPhone. I can’t believe I did not see the WD results were in Euros and not dollar - rookie error.

Had a good read through WD results last night on a “big screen)” and I note that WD discloses revenue from production of €5,272m and EBITDA of €4,190. This reflects OPEX of €0.7m and Admin of €0.3m. Translating to $ at 1.09 results in revenue of $5746 and EBITDA of $4,567 or $38.7 per barrel.

I used EBITDA of $2.8b for harbour for 2023 and production of 186k per day generating EBITDA of $41.2, however recognise this could be slightly lower. Harbour post hedge realised prices were $78 oil and 54p power therm gas.

I have European realised oil price for WD at $73.3 post hedges and Latin America and Middle East at $64.7, resulting in overall realised oil price at $72 per barrel. This results in total oil revenue of $3b and gas revenue of $2,746m or $35.8 per barrel (approx 51p per therm or $6 per MCF). Breaking down the realised gas prices, I calculate 67p per therm for European sales ($7.9 per MCF) post hedges and 31p per therm for Latin America and the Middle East. Europe generates 55% of gas sales.

So what does this mean. Harbour has generated slightly higher EBITDA per barrel in 2023 than WD due to higher realised oil and gas prices offsetting higher OPEX per barrel. The European business of WD generates a higher EBITDA per barrel than HArbour with WD Europe generating 64% of WD production and 82% of EBITDA.

Looking forward into 2024 WD has just under 30% of its gas production hedged at approx 105p per therm and 17% of oil hedged at $72 per barrel. Harbour has approx 15% of gas hedged at 62p per therm a 8% of oil production at $84. Accordingly WD holding a much better hedging position into 2024.

So in summary, I think it is a reasonable conclusion that harbour and WD will have similar EBITDA per barrel in 2024 and given 80% plus of WD profits are from Norway, the tax burden and FCF per barrel will be similar. Based on 2024& 25 production, I can see that WD should be valued at 2x Harbour but the current deal is 3Xs. It seems to be driven by 2P reserves but only 780m of WDs 1.3b of 2P reserves are developed compared to 400m for HArbour,

If the UK stock exchange values NS O&G based on EDITDA multiple less debt, HArbour is valued at 1.1x EBITDA. The combined EBITDA for 2023 is $8.6b which translated to enterprise value of $9.5b with debt of $6b ish gives a market cap of $3.5b or about £1.70 per share. I don’t see this as the likely post deal share price but the floor price before rerating. The low interest on debt (1.8%) has a value as well as scale, but it will ultimately come down to FCF for 2025 and beyond.

My conclusion is that the WD business is overvalued by $3-4b relative to HArbour and this is ultimately going to be dilutive to Harbour shareholders.

Londoner

I should add if gas price was an average of $43.6 per BOE this would generate gas revenues of 76.7m x 43.6=$3.34b. I have assumed total O&G revenues of $4.9m ($4.2b EBITA plus $700m of OPEX) which would result in oil revenues of $1,56b/41.2m = $37.8 per barrel of oil. This is roughly half of the realised oil price.