Is the Harbour Energy share price undervalued in the oil and gas sector?

With an energy crunch and blows to oil supply hiking demand, Harbour Energy share price jumped as the firm emerged as a profit-making company last year. A potential windfall tax on oil and gas extractors would hit Harbour’s margins, but for now the undervalued stock could be primed to surge.

Investors on the lookout for gains in the current market might do well to consider the outlook for the Harbour Energy [HBR.L] share price. Morgan Stanley put an ‘overweight’ rating on the stock earlier in May and analyst price targets suggest plenty of upside.

Shares of Harbour Energy are up 27.5% so far this year, closing 20 Friday at 451.5p, but have taken a recent hit. The past month has seen a 13.2% decline and the stock is some way off its 52-week high of 526p on 10 April.

Harbour Energy might produce only a fraction compared with BP [BP.L] and Shell [SHEL.L], but the stock could be undervalued — especially considering the firm became profitable for the first time this year. With the energy crisis taking its toll on markets and fossil fuel prices still high, the company’s revenues are forecast to jump significantly.

Why should investors care about the Harbour Energy share price?

2021 was a big year for Harbour Energy. Not only did it complete a merger with Premier, but profit after tax came in at $101m, a turnaround from a $778m loss in 2020. Oil production hit 175,000 barrels of oil equivalent per day, up from 173,000 in 2020.

Harbour Energy is guiding for oil production to be between 195,000–210,000 barrels per day this year, up 15% from 2021. That forecast assumes oil and gas prices remain at $100/barrel and 200p/therm.

The forecast for free cash flow is between $1.5bn and $1.7bn after tax and dividend payments.  Harbour Energy has hedged a significant volume of oil at an average price of $61.15 per barrel, which should provide some resilience if oil prices were to drop.

“2021 was a transformational year with completion of the merger, our third significant transaction since 2017. As a result, we became a public company with a global footprint and the largest London-listed independent oil and gas company,” said the company’s CEO Linda Z Cook.

Cook added that with Harbour Energy’s “robust balance sheet and track record of successful M&A” it was “well placed to deliver value creation, growth and shareholder returns”.

How would a windfall tax hit Harbour Energy?

The UK government has reportedly rejected a windfall tax on oil and gas profits. However, Chancellor Rishi Sunak hinted to online forum Mumsnet that the idea was “never off the table”. The tax would add an additional 10% in corporation tax to oil and gas companies active in the North Sea, on top of the 40% already paid on profits. Labour has argued that a one-off levy could raise £1.2bn to be used for discounts on energy bills.

Sunak suggested that the levy would be charged against companies that were underinvesting in the UK energy sector. While the idea of what would count as underinvestment is hazy, it is worth noting that Harbour Energy increased its funding for new and existing projects this year to $640m, up from $556m, and plans to further increase spending.

What are analysts forecasting?

Morgan Stanley isn’t the only broker rating Harbour Energy stock. So far this year, Barclays restated its ‘overweight’ rating in March, while Canaccord upgraded the stock to ‘buy’ back in January.

According to the Financial Times, the 10 analysts offering price targets have a 629.11p median price target, suggesting a 40.1% upside on Friday’s close. The most bullish target is 771.95p, while the most bearish is 393.2p. Six analysts rate the stock a ‘buy’, three ‘outperform’ and one ‘hold’.