Will Thomson of Massif Capital presented his in-depth investment thesis on Harbour Energy (UK: HBR) at Best Ideas 2025, held from January 9-24.
Editor’s note: This idea may be especially timely because the company has reported results that fell short of expectations. However, HBR remains “a great company from a fundamental asset and management perspective”, according to a note Will sent us earlier today.
Thesis Summary
Harbour Energy presents a compelling opportunity in the European Independent E&P sector. Through strategic M&A, HBR management has transformed the firm into one of the largest independent oil and gas producers globally, with a diversified asset base and robust financial profile.
The acquisition of Wintershall Dea’s non-Russian assets reduces HBR’s reliance on UK assets and expands its presence in markets like Norway and Argentina. This geographic diversification, coupled with greater focus on natural gas production, positions the company well for the energy transition.
HBR’s financial outlook is attractive, with projected free cash flow yields of 15-20% annually between 2025 and 2030. The company’s investment-grade credit rating and manageable debt levels underscore its financial stability.
Based on various commodity price scenarios, Massif Capital values the company at 548 GBp per share.
Slides
Let’s listen to the full session and look over the transcript.
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Transcript
Will Thomson: As always, I am thrilled to present at an MOI conference and look forward to any feedback on today’s idea, Harbour Energy. It wasn’t originally an activist idea. It is not an activist idea right now, but there is a potential activist opportunity here, in case anyone is interested.
Harbour Energy is now the largest independent European exploration and production oil company. This is not taking into account the large integrated firms, like Total or BP. These guys are pure-play exploration and production, primarily in the North Sea but now also globally. It trades in London under the ticker HBR.
The company has undergone a significant transformation since it was founded in roughly 2017. It has gone from zero production to an expected 500,000 barrels per day next year. Harbour Energy has grown quite rapidly under the leadership of a CEO who I have great deal of respect for – Linda Cook. Her career was previously tied to Shell, where she was on the board and the executive management team. From 2000 to about 2009, she led and built Shell’s LNG business, which grew quite dramatically under her.
Harbour Energy is her second act, so to speak. It started as a private equity-backed business investing in UK North Sea assets that were being disposed of by a lot of majors. Over time, it has gone through four mergers. M&A is the company’s bread and butter in terms of growth. The fourth merger is quite transformative, but what’s most interesting is that over the course of all these mergers, the market has largely ignored the company.
Harbour Energy is one of the world’s largest, most geographically diverse independents. By independent, I mean a company that only does upstream. It has no refining assets. It doesn’t engage in midstream. It just produces oil and natural gas. It’s got a high-quality balance sheet and is cash flow-generative. The asset base is extremely productive, and the company has a broad set of growth options. When we look at oil and natural gas companies, that growth optionality and diversity of possible growth paths is extremely critical, at least from my perspective.
One thing that’s quite difficult to do in oil and natural gas is continuously find and replace reserves and maintain growth. The easiest way to accomplish that is to have a multiplicity of fields you can look at and attempt to exploit. If you’re too focused on any one field, your growth options are much more limited.
Harbour Energy has a track record of delivering value-accretive, large-scale M&A. There are multiple examples of transformative mergers and acquisitions since 2017. The company has a lot of financial strength and capital discipline, as well as a new investment-grade credit profile after the most recent merger.
Why do I like looking at European independents right now? I strongly believe that oil companies, mining firms, and natural resources companies have to be returning capital to shareholders. Because of the cyclical nature of what they do and commodity prices, it is my opinion that – outside the majors – that really has got to come in the form of a dividend. Share buybacks can be a bit of a mixed bag for a cyclical business that will almost always roundtrip from a low to a high and back again over the course of any five- to 10-year period. On the other hand, the dividend is cash in your pocket as an investor to redeploy appropriately given the cycle.
According to forward-looking sell-side best estimates of the dividend yields for the next 12 months, those of the European independent E&Ps have gone well above 10% at this point. On the other hand, the XOP, which is a global US-tilted oil and natural gas ETF, has got dividend yields below 3%, and the Stoxx 600, which captures the entirety of the large-cap oil and natural gas universe in Europe, shows dividends yields sitting below 6%. Dividend yields and capital return are well below those of the independents.
Things are flipped around on a next 12-month EV/EBITDA basis. The European majors are trading cheaply, to be perfectly frank, but not quite as cheaply as the European independents, all relative to the US. European independent oil and natural gas producers are interesting opportunities. They’re cheap on a relative basis and have a high capital return.
What’s even more interesting is that if you look at the equity results factored to 100 from roughly the date of Harbour Energy’s inception, you see it has just gotten wiped out while the rest of the industry players have done decently. That is of great interest because Harbour Energy has been cash flow-positive during basically the entire period. It has also paid down debt multiple times although the debt has been volatile because of M&A. Overall, the company has continuously improved itself during this period, engaging in a merger that has completely transformed the business.
Harbour Energy believes that M&A is part of its skill set. M&A in oil and natural gas is quite important because scaling quickly tends to be critical. Everything in oil and natural gas occurs at a huge scale because the volumes of what needs to be accomplished are massive, so the ability to ramp up to high volumes of production and also put a lot of volume of production through any assets you own is critical because the assets are big and expensive, and you have to reach economies of scale. Good M&A in oil and natural gas is a general framework I use.
You want geographic diversification. Ideally, you end up with an OECD weighting. Those are good countries to be operating in. You want low asset concentration and a material position in multiple established oil and natural gas basins, which supports ever more scaling. You always want to be scaling up in oil and natural gas. You want high-operating margins with strong cash flow. Some assets in oil and natural gas are designed to be free cash flow-producing assets.
Harbour Energy has focused on what I would call infrastructure-led exploration, which is to say expanding the assets that individual offshore fields or rigs are producing from. It takes a rig in the North Sea and looks for another 20 million barrels in some little field that – on its own – wouldn’t necessarily justify an oil rig, but when there’s already a rig there, it justifies an extension. You want reserve replacement opportunities via high levels of contingent reserves. Those are reserves that might require some infrastructure.
You also want financial strength – you want and need the ability to rapidly de-lever. That’s why acquiring high free cash flowing assets or assets with very quick to cash flow opportunities – like the infrastructure-led exploration – is so important.
From my perspective, you need to be environmentally conscious at this point. This is not an ESG story by any means, but all the oil companies now measure their GHG emissions per barrel of oil. You want to see that variable declining. It does correlate with equity performance. Then you want a history of responsible operations. Harbour Energy is mostly offshore except in Argentina. If you’re not a responsible actor offshore, when things go wrong, they tend to go seriously wrong. It’s critical that management be conscious of both the safety and the environmental component.
There are several M&A examples throughout the life of Harbour Energy. In its first couple of years, the company had a different name. In 2017, it was just a private equity vehicle backing another publicly listed firm. In 2017, it made its first move, acquiring all of Shell’s UK North Sea assets. It went from zero to producing quite a bit of oil.
Each of these acquisitions has a different value creation story. The Shell transition was the first one. It focused on reinvesting in these midlife assets, delegating the first half of what it could produce. Now Harbour is looking to exit those fields. They required some level of reinvestment. The first acquisition was reinvesting in these midlife assets and taking advantage of the existing infrastructure to go out and find those infrastructure-led fields – those 20 million barrels of oil that were just over the horizon of a core field.
The Conoco deal is the second one. It focused on getting more scale and driving synergies. Those are actual operational synergies. One quite nice thing about real assets is that while there are financial synergies, oftentimes, real asset businesses like this have quite legitimate operational synergies. This is shutting down one offshore rig because you’ve already got a rig in the area that can handle pumping from another field – consolidating actual money being spent on the ground producing the product.
The Premier Oil deal in 2021 was a COVID-driven opportunity. Premier Oil was trying to do the same thing Harbour Energy has done, except it got a little over its skis on the debt profile side of things. Because Harbour Energy had de-levered after both the Shell and ConocoPhillips deals, it was in a great position to take advantage of this opportunity created by COVID and the fall in oil and natural gas prices. There were operational synergies but also quite a bit of material financial synergies as Premier Oil had significant levels of debt that now was spread out over a larger production base. It also brought with it several international opportunities. Harbour Energy did not have international opportunities up until that point.
The deal I see as truly catapulting the business was announced in December 2023 and completed in the fourth quarter of 2024. Harbour Energy took over the assets of Wintershall Dea, which was an oil and natural gas producer owned by German chemical conglomerate BASF and private equity firm LetterOne. LetterOne was backed by three Russian oligarchs, two of whom were sanctioned after the invasion of Ukraine.
As part of this deal, Harbour Energy purchased all of Wintershall Dea’s non-Russian assets and all the assets that were not in a joint venture with Gazprom. They add about 300,000 barrels per day of production to Harbour Energy’s roughly 200,000 barrels per day of production in 2024. They also add 1.5 billion in 2C, or contingent reserves, and another 800,000 in proven reserves. What ended up happening was a $3.5 billion to $4 billion enterprise value company taking over an $11.2 enterprise value company. In doing so, Harbour Energy transformed its operations. It has also transformed its balance sheet in quite a positive way and significantly boosted its cash flow.
To review, the Wintershall transaction added material producing positions in Norway, Germany, Argentina, Mexico, and North Africa. It also expanded Harbour Energy’s budding footprint in Northern European carbon capture. It added 1.1 billion in 2P reserves at about $10 a barrel of oil equivalent and 300,000 in daily production.
Part of the acquisition cost was covered with $4.15 billion in equity issuance to BASF. What’s interesting to note is that this equity was priced at 360 pence, which is a premium of about 60% to the stock price on the day the deal was announced. It’s a premium of about 10% to the post-transaction announcement high and a premium of about 48% to the current share price. BASF took all of that equity. LetterOne got a different type of equity due to the sanction concerns regarding the Russians, with no voting or control whatsoever. They were willing to pocket quite a bit of a premium to the open market. While they are tied up for six months and create a potential overhang on the stock, given the discount to the share price they took it at, it seems reasonable to assert they will be shareholders until they see some kind of return. Otherwise, did why they take it at 360 pence per share?
There was also a $2.15 billion cash consideration. In addition, the investment-grade debt Wintershall had was ported over to Harbour Energy. As a result, Harbour Energy got reviewed by the ratings agencies as well as the debtholders, and all agreed they could take the Wintershall debt at the same terms. As part of this merger, the company itself got upgraded from a speculative to an investment-grade credit profile.
The merger also transforms the company in terms of its daily production, but that changes its peer group quite dramatically, if you will. There aren’t that many international independent E&Ps, a group to which I would say Harbour Energy has now become a member. Aker and Var are Norwegian E&Ps that would be appropriate comparables for Harbour Energy. They are North Sea-focused and Norwegian continental shelf-focused. They have now grown quite dramatically all of a sudden.
I also looked at a selection of US E&P of different kinds. Diamondback is a pure fracker. Hess is a little bit of everything. Kosmos would probably be the closest to Harbour Energy as it is an offshore-focused E&P that has frontier market exposure and is a sub-scale relative to the projects it undertakes. Granite Ridge is very much a subscale, pure-play fracker. They have also grown quite dramatically. Given that the stock has not moved at all with this change in production, it definitely raises some interesting questions.
From an operational perspective, this has also changed the company quite dramatically by reducing its operating cost. The assets acquired in Germany, Mexico, Norway, Argentina, and the Middle East are all quite a bit cheaper on a barrel of oil equivalent basis than the company’s existing assets. As a result, we expect the per-barrel operating cost to drop by about 25% next year.
Now, a $4 billion EV company taking over a roughly $12 billion EV company may raise concerns about what that might look like on the balance sheet, but I would argue that Harbour Energy has managed to take over a larger company and improve the strength of the balance sheet. Obviously, that starts with the credit rating going from speculative to investment grade. It also includes a shift from a reserve-based lending facility that was adjusted on an annual basis – based on the lenders’ evaluation of the asset base – to a $3 billion five-year unsecured revolver. It went from having secured lending that was evaluated on an annual basis to unsecured lending on a five-year basis.
Harbour Energy took $1.7 billion in hybrid bonds from Wintershall, and those bonds will be recategorized as equity and carry about a 2% interest rate. They’re also callable, perpetual callable. The first call date is 2028, I believe, or 2026. The company accepted these long-dated bonds. It’s borrowing money now at dramatically cheaper rates. It was in the 5% to 7% range. I don’t think it could borrow at 2% right now, but it’s in discussions for significantly cheaper debt than that 5% to 7% it was paying.
In terms of valuation, we think the stock is worth about five pounds. Prices on the London Stock Exchange are in pence, so Harbour Energy is currently trading at about 260 pence. Our target would be 548 pence. That’s based on a scenario analysis with a 35% bear case weighting, 50% base case weighting, and 15% bull case weighting with a 50/50 weighting between a perpetuity growth DCF and an EV/EBITDA DCF.
In all three cases, we’ve played with the oil and natural gas prices. In the bear case, we use $60 oil in perpetuity and $10 European natural gas TTF. In the bull case, it’s $80 and $14. Our base case is what we call our massive capital outlook. The massive capital outlook for oil and natural gas seemed aggressively conservative in November when we first started putting some of this together. I had penciled in $60 oil on average in 2025, which I didn’t think would happen, but I thought oil would be falling. Today, we are up over $80 again. I don’t know if that $80 has legs – I don’t really think so – but I would say the middle scenario – at least from an immediate-term oil price – deserves to be bumped up quite a bit in terms of the oil price.
Compared to many of its peers, Harbour Energy is dirt cheap – both the old Harbour Energy (pre-Wintershall Dea merger) and the new Harbour Energy. On a trailing 12-month basis, it has a very healthy free cash flow. It sits right in the middle of the peer group. On a next 12-month EV/EBIT or EV/EBITDA basis, it’s cheap as chips, and it’s also very cheap on an EV to daily production basis.
The balance sheet and the dividend yield are quite strong. The company is simply not getting recognized for the value it’s creating via M&A. There are a couple of reasons for that. It has got plenty of organic growth potential now. The market may not have recognized that yet. Prior to the Wintershall Dea merger, the organic growth potential was more limited, but there was still quite a bit of potential. Now, it has grown quite dramatically.
Harbour Energy had about 1.8 billion in 2C reserves as of the end of 2023. The company assesses this annually. A handful of finds that occurred in 2024 have bumped that number up beyond 2 billion. It’s 55% gas; it’s heavily weighted towards gas.
The company has high-value short-cycle opportunities. That’s the infrastructure-led exploration it has. That would be in North Africa, Norway, the UK, and Germany. It’ll mostly be in Norway and the UK. Harbour Energy also has significant scalable unconventional opportunities in Argentina where it has quite a large position in the Vaca Muerta field, the only other meaningful shale play globally.
Harbour Energy has made some interesting deals with Golar LNG, partnering with it on the deployment of one of Golar’s FLNG vessels to the area. Harbour Energy owns about a 15% interest in that joint venture and will be providing gas to it. It also has significant offshore conventional growth in Mexico, where the Zama field is being fast-tracked and a new field near the Zama field which is infrastructure-led. It may or may not be able to connect them, but it’s looking in the same places.
Then there are multi-trillion cubic feet discoveries in Indonesia. All told, this year it made discoveries on which it has partnered with the Abu Dhabi Sovereign Wealth Fund’s oil and natural gas arm with about 11 trillion cubic feet of gas in place. For context, the EIA estimates that the US has 308 trillion cubic feet of gas reserves, so 11 trillion is by no means earth-shattering, but it’s a fairly significant endowment. Harbour Energy is not entitled to all of it. It has a 40% interest in one field and 20% in the other fields, but any way you slice it, the 2C resource will grow quite dramatically.
Given its experience in infrastructure-led development, there’s quite a bit of infrastructure in those Indonesian fields Harbour Energy can take advantage of in addition to a mothballed LNG facility that could be turned back on – for a cost, but not nearly the cost of building a new LNG facility – if it wanted to monetize some of those assets for export overseas. We would expect that partnering with the Abu Dhabi Sovereign Wealth Fund’s energy arm is something it’s planning on.
I would also add that none of this is included in our valuation or production profile, which are based on existing fields and running them basically to zero. There’s quite a bit of growth potential, and Harbour Energy targets $40 break-evens. To contextualize that, according to the Federal Reserve, which does an annual study of it, last year’s break-even numbers in the Permian were $64 and $62 (Delaware and Midland, respectively), $55 in the US Gulf and Mexico, $40 in Brazil offshore, and $50 in Russia.
I would argue that the $40 mark has become the base of where oil can fall to. It can obviously fall below $40 a barrel, but below $40 a barrel, everyone’s got to start shutting in or conserving because very few producers outside the Middle East are capable of producing at sub-$40. Harbour Energy is sticking to this, and it has managed to achieve it for the last couple of years.
As mentioned, Harbour Energy also has some growth potential in terms of carbon capture and storage. The economic potential of this is uncertain at this point, but I would say that Harbour Energy has advanced the furthest in terms of locking up storage licenses. The Acorn and Viking fields have been selected by the UK government to receive funding as part of a program to build up the carbon capture and storage business in the North Sea.
The round one companies were selected. There were two other companies selected. They will be splitting about a billion dollars in government financing to help advance those projects. Harbour Energy – along with partners Shell, BP, Equinor, and a couple of others – is currently negotiating the terms of that support, but we would expect comparable support levels. The economics of these projects are still uncertain, but those are projects that fast-track. They will not be as remunerative as oil and natural gas, they do have some significant potential and burnish the company’s reputation a bit as well.
Finally, with a company that has this much M&A in its history, management is still considering M&A. They believe they’ll be able to rapidly pay down debt and – with a roughly $3 billion undrawn revolver – have plenty of liquidity to engage in more M&A. We have not talked with them about where they’re looking for deals, but investors, the sell-side, and the potential activist opportunity are pushing them to take over a US-listed firm and relist from the UK to the US. While the EV/EBITDA multiple at which the US industry trades is quite a bit higher, Harbour Energy is healthier in terms of operating margins, free cash flow yield, and net debt to EBITDA. There’s some opportunity for it to rerate if it lists in the US.
We see a couple of interesting takeover targets. One of them is Kosmos, which is a subscale Gulf of Mexico and frontier market offshore producer. It has a manageable debt load, and – perhaps most appealing – is entering what I would call a harvesting stage where it has spent a lot of money and time building out assets in the last couple of years and will now really start to free cash flow.
Another interesting opportunity would be a company like Granite Ridge, which would take Harbour Energy in a slightly different direction. I picked Granite Ridge for no particular reason other than it’s a pure-play subscale US-focused fracker. There are quite a few of these guys, but they’re too small to compete in the Permian or any of the shale basins. Granite Ridge happens to have a very clean balance sheet. It’s not an operator of any of its assets, which makes merging with it a little easier because you don’t have to take over all of a sudden the operation of a bunch of US assets. This company also has robust free cash flow potential.
The idea of a US listing also looks appealing when you consider the country factor impact. Harbour Energy’s UK exposure has been a serious drag over the last 12 months and especially in the last quarter, with the strength of the dollar and the issues in the UK, both political and economic. The UK exposure has weighed on the company for quite some time, and we believe that getting rid of it would provide a significant bump to the bottom line or the equity price.
That’s the story behind Harbour Energy. We think the company’s a double, but it can be quite a bit more. That double is based on a discounted cash flow of the existing assets run to zero and a spread of commodity prices. Commodity prices could surprise in either direction, but given Harbour Energy’s position and free cash flow, it’s quite prepared for them to fall. If they go up, the company is in a strong position to harvest returns and reinvest, redeploy, or share them with investors via dividends.
I would end by saying that with the latest merger, Harbour Energy is now about a 60% natural gas producer, and natural gas is really focused on Europe. Europe is in desperate need of natural gas at all times, especially following the invasion of Ukraine by Russia. Every winter that Europe falls behind – relative to the average, it felt quite far behind in 2024 – sets it up for a more difficult year to fill its natural gas tanks. Every year that it is more difficult is a higher call on US LNG, which drives up the overall price of natural gas globally, in our estimation. We do see evidence of potential economic reasons to think oil should fall in the near term, but the natural gas market looks quite tight until more LNG supply comes online in 2026, 2027, and beyond.
That’s Harbour Energy in a nutshell. Once again, we think it’s about a double. The company has got one of the greatest management teams in the business right now as well as a long track record of successful M&A that has gone underappreciated by the market. We think there’s quite a bit more opportunity and development to come out of this management team.
The following are excerpts of the Q&A session with Will Thomson:
John Mihaljevic: How do you see the capital allocation mix going forward?
