Picture supply: Getty Photos
Harbour Power (LSE:HBR) is the FTSE 250’s largest oil and fuel producer. And following an announcement on 21 December 2023, that it plans to amass the worldwide property of Wintershall Dea, I feel the inventory is one thing of a cut price.
The deal is predicted so as to add manufacturing of 300 barrels of oil equal per day to Harbour’s present output of 200.
On the day that information of the deal broke, its shares closed 21% larger. Over the subsequent 4 weeks, they climbed steadily, and peaked at 329p.
However the shares are actually altering arms for round 250p. That’s solely marginally larger than earlier than the announcement. And fewer than half what they have been in April 2022.
Enhancing profitability
The declining inventory value doesn’t mirror Harbour’s pre-tax earnings.
Because the chart beneath reveals, EBITDA (earnings earlier than curiosity, tax, depreciation, and amortisation) was $3.9bn, in 2022.
Chart by TradingView
For the six months ended 30 June 2023, EBITDA was roughly $1.4bn. That is greater than the corporate earned for the entire of 2019, when it was valued extra extremely.
So what’s occurring?
A large tax invoice
In Could 2022, the federal government launched the Power Earnings Levy (EPL) on earnings generated from the North Sea. From 1 January 2023, this was elevated to 35%.
With company tax at 40%, this implies the corporate is topic to a tax price of 75% on its income.
The next chart reveals this has vastly elevated its tax invoice and, for my part, is the first purpose behind the corporate’s falling share value.
Chart by TradingView
The EPL will apply till 31 March 2028, though if oil and fuel costs fall to their 20-year common — for 2 consecutive quarters — will probably be scrapped.
Nonetheless, Brent crude is at present round 13% larger than this ground value.
Falling valuation
A standard methodology of valuing an power firm is to check its enterprise worth (EV) — an estimate of how a lot somebody must pay to purchase it — with EBITDA.
EV is calculated by including collectively market cap and debt, after which deducting money.
The chart beneath reveals that Harbour’s EBITDA/EV has been falling lately — it’s now lower than one.
Chart by TradingView
What does this all imply?
Wintershall has an EV of $11.2bn and through the first half of 2023, recorded an EBITDA of roughly $2.2bn. Doubling this to mirror 12 months of buying and selling, provides a determine of $4.4bn. This means an EV/EBITDA of round 2.5.
Based mostly on its steadiness sheet at 30 June 2023, Harbour at present has an EV of $2.4bn. Multiplying its EBITDA for the primary six months of 2023 by two, provides an anticipated results of $2.8bn for the total 12 months.
Subsequently, post-merger the group’s EV shall be roughly $13.6bn. And it’ll have an EV/EBITDA of 1.9.
Even when buyers stay sceptical and drop the group’s valuation to 1, its inventory market valuation must be $7.2bn. Based mostly on the variety of shares that shall be in challenge, this suggests a share value of 335p. That’s a premium of round 34% to at this time’s worth.
That’s why — regardless of the penal tax price, its carbon-intensive footprint and its publicity to risky commodity costs — the corporate’s shares seem like a ‘no-brainer’ purchase to me.
