The Harbour Energy (LSE: HBR) share price has lagged the price of oil this year. While a barrel of Brent Crude has risen by nearly 40% to $108, Harbour shares are up just 20%, at around 430p.
In last week’s results, Harbour’s management said the business could generate up to $1.7bn of free cash flow in 2022 if oil prices stay at $100. That could see Harbour become debt-free in 2023 — potentially providing a big catalyst for the share price.
Should I add this North Sea oil producer to my portfolio? Here are some of the factors I think could affect the Harbour share price going forward.
3 reasons to buy
1) Harbour Energy seems to have plenty of oil and gas. The company says its reserves rose from 451m barrels of oil equivalent (boe) to 488m boe last year, despite the impact of a year’s production. There’s a busy work plan for 2022 and I’m confident the company will be able to replace its production again this year.
2) Harbour shares do not look expensive to me, even allowing for Harbour’s steep $2.3bn net debt pile. My sums indicate that even including this debt, Harbour’s business is valued at less than 10 times free cash flow. That’s fairly cheap, in my view. A forecast dividend yield of 4% is another attraction for me.
3) If oil prices stay high this year, Harbour could potentially become debt free in 2023. That’s sooner than expected. My analysis suggests this could open the door to larger shareholder returns, which could provide a significant boost to the share price.
3 reasons why I’m cautious
1) Harbour Energy’s gains from high energy prices are being capped by its hedging contracts. These are required by the company’s lenders to make Harbour has enough cash available for debt repayments, regardless of energy prices. In 2022, around 50% of the group’s oil production has been hedged at $61. That means the firm won’t get the full benefit of $100 oil. It’s a similar story with Harbour’s gas production.
2) Harbour Energy will have to keep spending to maintain its production, even if (when) oil prices fall. Spending seems to be rising too. Capital expenditure and decommissioning costs rose by 33% to $935m last year. In 2022, the company expects total spending to rise by 40% to $1,300m. Decommissioning costs are a particular concern for me. Harbour’s balance sheet shows $5,354m of decommissioning provisions. These are costs that are expected as the group’s fields gradually reach the end of their lives.
3) Finally, I think there’s a technical reason why Harbour’s share price might stay under pressure for a little longer. Around 30% of the company’s shares are still held under a lock-up agreement that expires on 1 April. If the group’s private backers want to cash in their stock while oil prices are high, we could see heavy selling into the market from next month.
Harbour Energy share price: what next?
The latest broker forecasts price Harbour shares on just five times 2022 forecast earnings, with a 4% dividend yield. That seems cheap enough, but I need to consider the possibility that oil prices may soon peak, if they haven’t already.
On balance, my feeling is that Harbour shares are fairly valued and could go a little higher. However, given the risks I’ve identified, I’m not yet ready to buy the shares for my portfolio.