Besides, Harbour had $1,097mn tax losses and allowances at the end of H1 ’23. This should help the company reduce its near-term tax liability and generate better FCF.
The company also has about 260mn 2C resources outside the UK, primarily in Indonesia and Mexico. They can potentially be brought into production in the medium term, reducing the company’s effective tax rate.
Importantly, actual tax payments can be reduced due to investment allowances. Initially set at 80% (in May 2022), they were later reduced to just 29%. However, decarbonisation expenditure enjoys an 80% investment allowance. So companies, for example, can claim 80% of the costs to modify an oil platform to use wind power.
There was some easing of the tax burden after the government introduced the changes in June 2023. Specifically, the tax rate will return to 40% if both oil and gas prices average $71.4/bl and £0.54/therm for two consecutive quarters.
Short reserves life
With 410mn boe of 2P reserves, Harbour’s reserves life is just 5.9. This is much shorter than the usual 10+ years for a typical E&P – a minimum level that allows to keep production broadly flat. At 5.9, Harbour’s production is just not sustainable and could face a 15-20% annual decline without more development or acquisitions.
I think the company could partially mitigate this issue through the development of its contingent resources (2C), which are almost the same in size as its proved and probable reserves (2P). M&A is another option.
At 190kboe/d daily output (70mn boe annually), Harbour's annual FCF should be $1.1bn. In the worst case, assuming that the company's organic decline is 20%, Harbour would need to replace 14mn boe of reserves every year to keep production flat.
Historically, finding and development costs (F&D) averaged about $10-15/boe, which would require $140-210mn. Even if Harbour spends twice the amount, its capex will rise by a total of $280-420mn, and its FCF should still be at a comfortable $0.7-0.8bn.
Moreover, with many smaller companies trading at about $5/boe reserves multiples, Harbour may find buying existing companies cheaper than drilling for new reserves.
The optimists may also point out international opportunities in Harbour’s portfolio, including 260mn boe of 2C resources in Mexico and Indonesia and almost 10% of existing production outside the UK.
Lower oil & gas prices represent a usual risk for an E&P company like Harbour. However, the company has been hedging some of its production so it is less sensitive to the declining energy prices. Its relatively low opex provides further cushion for its cash flows.
A $5/bl change in the oil price would lead to a 9% change in FCF, while a 10p/therm change in the gas prices would change its FCF by 5% (based on management’s guidance).