The North Sea has become choppier since Harbour Energy shares started trading in London two years ago. Oil and gas producers are in the eye of a political storm over whether new fossil fuel developments should be permitted. A windfall levy raised their headline tax rate to 75 per cent from 40 per cent.
Harbour, the UK’s biggest producer, reportedly held talks with Talos Energy of the US to reduce its dependence on its domestic market. It needs an international deal.
Talos has multiple attractions. These include exposure to the Gulf of Mexico and a listing in New York, where shareholders rate fossil fuel producers more highly. Harbour boss Linda Cook has always backed international expansion.
When Harbour — previously the unpronounceable Chrysaor — reversed into London-listed Premier Oil in 2021, it traded on a multiple of nine times forward earnings. It currently trades at just over five times, a discount to US peers such as Talos, which is on 6.6 times.
Harbour shares have dropped 40 per cent in the last two years. That is despite ebitda, a measure of cash profits, increasing 67 per cent between 2021 and 2022 to $4bn.
Harbour issued no response to a Reuters report of merger talks, suggesting no deal is imminent.
Fantasy M&A points to an all-share takeover by Harbour as the most likely transaction. The starting point would be undisturbed share prices of £2.44 ($3.04) for Harbour and $13.47 for Talos. That equates to 4.5 Harbour shares for each unit of Talos equity. If Talos shareholders sought a control premium of between 20 and 25 per cent, equity in the new entity would be allocated on a 5.5:1 basis.
The UK’s opposition Labour party, which is leading in the polls, has pledged to ban any new oil and gas developments if it gains power at next year’s general election. It has also suggested extending windfall taxes on energy companies.
It is difficult to see how conditions will improve for UK-focused oil groups. Harbour should accelerate its search for moorings overseas.
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