Harbour Energy [LON:HBR] shares commenced trading this week. The FTSE All-Share business is a merger between Premier Oil and Chrysaor Holdings. It is the largest UK-listed independent oil and gas company, with daily production expected to exceed 200,000 barrels of oil equivalent (boe).
Oil and gas recovery
Of course, investing in the oil and gas sector has been a precarious undertaking over recent years. The continued shift towards cleaner forms of energy, as well as the impact of an economic slowdown, have stifled profitability across the industry.
However, the prospects for Harbour Energy could improve significantly. According to the International Energy Agency (IEA), global demand for oil will return to pre-coronavirus levels in 2023. Consumption could increase materially over the coming months as the world economy is forecast to grow by 6% in 2021 and 4.4% in 2022, according to the IMF.
Furthermore, the IEA forecasts that world oil consumption in 2026 will be 4.4% higher than it was in 2019. Its growth is expected to be driven by emerging economies, where population growth and rising incomes are forecast to produce a rise in oil demand in spite of environmental concerns. This could more than offset reduced demand from developed economies that are rapidly shifting their consumption towards cleaner forms of energy.
Future growth opportunities
Against this backdrop, Harbour Energy’s investment case begins to look increasingly appealing. So, too, does its cost base. It has operating costs of around $15 per boe. Meanwhile, its free cash flow breakeven point is expected to be no more than $35 per boe. This suggests that it has a wide margin of safety at the present time, given that the price of Brent is currently in excess of $60 per barrel.
Even though around 80% of the firm’s production is generated from UK-based assets, it also has development opportunities in Asia. This could help to diversify its operations over time, and may aid the firm’s long-term growth potential within a total resource base that currently stands at 1.7bn boe on a proven and probable (2P) basis.
Risks factored into valuation
With net debt in excess of £2bn, Harbour Energy’s balance sheet is highly leveraged. For example, its debt is relatively high compared to a current market capitalisation of £3.7bn. This suggests that its shares could prove to be volatile compared to sector peers.
They may also be negatively impacted by threats such as a slower than expected world economic recovery from Covid-19, as well as a faster pace of transition towards cleaner forms of energy across the globe. This could limit upside for oil and gas prices, and may be detrimental to profitability across the sector.
However, in our view, Harbour Energy’s valuation appears to take into account the risks it faces. It currently trades on a prospective price-earnings ratio of 10.8 using 2022 forecast earnings per share. Given its low cost base and the prospect of a sustained recovery in demand for oil over the next five years, the firm appears to offer a relatively attractive risk/reward opportunity.