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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.
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.
Londoner
Pleased you are also taking a good luck at this.
The problem with the disclosed info on page 54 is that it is the average for the produced oil and gas and also the WD trading activities that are not coming with the deal. The amount of traded oil and gas exceeded $3b in 2023 and as such distorts the average realised oil and gas prices.
The realised price on produced oil and gas (the business coming over to Harbour) is not disclosed and I have estimated based on average oil price across the year and the 19m barrels of oil hedges, an average realised oil price of $72.6 per barrel. I have used averaged realised price per BOE of $41.5 (EBITDA 4.2b/118m barrels production = $35.4+6.1 OPEX= $41.5). Gas price is then $25.3 BOE equivalent.
I recognise there is one significance assumption above, namely the averaged realised price of oil.
However the one indisputable factor is that EBITBA per barrel for WD is $35.4 which compares to $42 for Harbour and WD has a higher tax burden per barrel than Harbour (pre Labour).
Accordingly I am still struggling to understand why the deal values WD production at $95 per barrel of annual production while Harbour is valued at $48.5 per barrel of annual production. Just does not make sense even though WD has more Reserves the averaged life of the developed reserves is similar to Harbour at 7 years.
I think part of the reason the price has been falling is that the profitability and performance of the WD business has become clearer with recent announcements.
The recently announced financial statements of WD has highlighted that WD is generating similar EBITDA to Harbour as a result of gas/oil mix with WD earning very low gas prices in Argentina and middle east. I have looked in detail at WD’s FCF for 23 and while reporting a small negative FCF, adjusting for 2022 tax payments in 23 and interest expense, The adjusted FCF is broadly similar to Harbour’s $1b for 23.
While WD,s 2P reserves looks huge at 1.3b, approx $780m are developed and in production. The balance still needs capex to develop.
Ultimately due to very low pricing of gas overseas, particularly in Argentina, the vast majority of FCF is generated in Norway and looking at 2024 and beyond, I think the WD business has very similar FCF potential to Harbour.
Accordingly I am struggling to understand why Linda has agreed to value the WD business at 3 times the value of Harbour. I think the initial euphoria has faded as the details of the deal emerge. Taking developed 2p reserves of 780m, these reserves are valued at $14 per barrel and after tax, I think they best the business will free cash flow is $8-10 per barrel.
It will be interesting as the q1 and q2 24 results for WD are released and the FCF and profitability per barrel becomes apparent whether there will be the same support for this deal. I have gone form the deal fully pricing WD to significantly overpricing the WD business.
Nitro
Agreed that this is a deal needed by both sides and merger is the right route. Just feels that WD have come out of this with a better deal than Harbour.
The question will be in due course how the market values the WD 2P reserves and FCF. If WD production generates lower FCF per barrel than Harbour's, there is no reason for the 2P reserves to be valued higher than Harbour’s reserves. If this is the case then not sure what this means for share price.
On the positive side the debt coming across has a very low interest rate and interest expense will be lower than $100m pa for a number of years.
I do however trust in Harbour’s management to strike a good deal and I hope that I am missing something.
I have had a good read through the WD results and a. Little confusing as they inclorporate some activeities that are not coming over to HArbour. However my key take always are as follows:
1. WD’s EBITDA per barrel of production is $35. Thus surprised me a little as it compares to Harbour’s EBITDA per barrel of $42 and WD have much lower OPEX per barrel of $6.1 compared to HArbour’s $16 per barrel. Digging a little deeper WD has a similar realised oil price per barrel but WD is only realising an average of $25 per barrel equivalent for gas. This is equivalent to 34p per therm compared to Harbour who in 2023 realised 58p per therm, even with very poor hedges expiring this year. It appear this is primarily due to very low prices on its non European gas sales.
2. Zero FCF in 2023 after CAPEX $1.2b, Exploration $0.2b, Admin $0.3b, Interest $0.35b, tax £2.2b.
3. Accordingly while BPD production of WD is double Harbour, EBITDA is only 50% higher due to much lower gas prices in international markets. For deal purposes, Harbour is valued at 3.60 per share or $3.3b as compared to WD at approx $10b. I am struggling to understand how WD is valued at 3x Harbour when it is only generating 50% higher operating cash flows. I recognise the 2P reserves are much higher but they are not being extracted as quickly as Harbour and a significant amount of WD’s 2P is undeveloped and in regions where gas prices are poor.
I can see why ABNOC walked away at this price and I have said before this is a very full price. It feels like harbour is between a rock and a hard place and needs this deal for scale and diversification.
While I admire the ambition and intent of Enquest/Veri to turn Sullom Voe and the Shetlands into a green energy super hub with CCS and Hydrogen production powered by windfarms, this scale of project would be a challenge for the likes of Shell or BP to fund and deliver. We are seeing BP partnering up with Harbour on the Viking CCS project and both BP and Shell involved in other Tier 1 and 2 CCS initiatives but not SV.
SV has not been selected as a Tier 1 or 2 projects (I don’t think it even applied) and accordingly it will not be prioritised for public sector funding and without public funding, it will be difficult to get private sector funding. This initiative is beyond the financial means of Enquest as we fight a UK tax regime intent on destroying NS O&G.
I just hope they have a partner lined up with billions to spend on a green dream.
I think it is worse than nationalisation. Ed expects the private sector to fund 55% of upfront capital, receive 22% of the operating profit during production (which might just cover the borrowing cost of the upfront capital) and then pay for 60% of the decommissioning. The tax take will be greater than economic value created and is akin to being asked to go to work and paying £110 tax on every £100 of earnings.
This is cleverly a strategic play to close down the NS as quickly as possible and push the UK towards renewables. Unfortunately it will just drive us to rely on imports.
Neversell
In a share based merger the value applied to each others equity is to some extent irrelevant, the key issue is the relative split of the equity in the enlarged group.
Perhaps I can use a simplified example, if there were two apple traders who are in discussions to combine their businesses. One trader has 100 apples and the other has 40 apples. Both parties could agree there apples are worth £1 or £10 each but it is irrelevant, it is the equity interest in the new business that is important which would be 40/140 and 100/140 (assuming same type of apples)
Applying this logic to the WD/ Harbour deal. WD brings 1,000 million of 2P and Harbour 400m 2P. WD is valuing its 2P at approx $9b (adjusted for the pre deal cash generation) or $9 per barrel. Mr market is currently valuing Harbour at $6.30 per barrel and the 3.60 valuation uplift agreed in the deal effectively increases the value of Harbour’s 2P to $8.70 which then determines the equity split in the enlarged company (after adjusting for debt).
Accordingly the £3.60 price allocated to the Harbour shares is purely to arrive at the agreed equity split of 45:55 after adjusting for the WD debt. The same could have been achieved by reducing the value ascribed to the WD 2P reserves to be closer to HArbour’s.
It is not a prediction of the share price now or in the future.
The same equity split could have been achieved by valuing WD 2P reserves at a comparable value to Harbour which would reduce the disclosed purchase price, but would have still result in WD receiving 921m shares or 55% of the enlarged group.
Tamov
There is rarely only one reason for share price moves. I do not believe the market believes there is any risk of the deal being blocked by regulators in Germany or elsewhere. My personal gut feel is that it is a combination of medium term gas prices softening and the Labour O&G policy which renders any new NS development uneconomic from 2025.
I still believe while we are not picking up the WD assets on the cheap, There are real synergistic benefits created from the deal which will be shared 55:45 between WD and Harbour shareholders. These synergies will not be material cost reductions but slightly more subtle such as cheaper debt, reduced risk due to diversification, access to different scale of institutional investor, ability to take on future acquisitions and sweep up distressed businesses etc, financial muscle to participate in new field developments etc
It is very difficult to put a value on these synergies today, but they are real and will translate to a share price rerating both pre and post deal. The scale of the post acquisition 2P and 2C reserves is clear and the shape of the balance sheet (including debt) is visible. I think the big question the market will be looking for clarity on will be the post acquisition FCF in 2025 to 2028.
Fog
My statement that the deal is fully priced refers to the total purchase price relative to 2P reserves and FCF.
This deal is principally an equity swap and in essence can be broken down as follows from a Harbour shareholder perspective:
1. We are exchanging 100% equity interest in Harbour for 45% of enlarged group.
2. We are taking on $2.2b of WD’s debt ($4.9b at 45%)
3. We are likely paying approx $1b in cash dependent on WD FCF until completion of which 45% will be borne by Harbour shareholders
Placing a £3.6 value on the 921m shares to be issued is purely notional to arrive at a disclosed valuation of WD. The key question we should be asking is whether 45% of WD is worth what we are paying, which is 55% of Harbour equity plus $2.65b of cash equivalent. 55% of harbour today is worth $1.4b, plus the $2.65b cash equivalent results in total consideration for 45% of WD of $4.05b. This values WD at $9b or approx $9 per 2P reserve.
This looks reasonable compared to other listed O&G companies in Norway. However this compares to Harbour which is currently valued at $6.30 per 2P reserves. While WD’s OPEX is lower than Harbour by approx $10 per barrel, after tax this is worth $2.2 per barrel and Uk and Norway tax regime are broadly similar (pre labour amendments). Accordingly WD 2P reserves are valued approx $0.5 per barrel higher than Harbour’s in the deal.
On a FCF basis it is more difficult to compare with limited information available on WD.
Accordingly my conclusion is at we are offering a full value to WD shareholders which is presumably reflective of a competitive bid process and the value to Harbour shareholders is more in the diversification, scale and credit rating as opposed to picking up cheap assets.
The deal looks even better when you factor in the Labour plans for NS O&G
Londoner
You are correct on a number of points. The 360p is a notional price and has no real meaning. The market value of the shares at the date they are issued on completion will determine the value of the consideration. It may be above or below 360p.
We should also note the bonds are well below market rate at 1.8% and will be fair valued on acquisition. The interest cost on these almost $5b of bonds will be less than Enquest pays on its $800m of gross debt and falls into Harbours playbook of take on large debt on Acquisition and materially play down over 2-3 years.
Your note on comparison to Aker BP is relevant given the oil/gas mix and while gas seems to be the flavour of the day, I personallly prefer the lower volatility of oil. However BP Akers market cap also reflects significant debt and EV comparisons might be more relevant.
As i have noted previously this is a fully priced deal given WD’s less than exciting FCF, but it feels like an essential transaction for both parties.