Harbour Energy plc ($HBR)

Good morning, ladies and gentlemen, and welcome to the Harbour Energy plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself, however, the company can review all questions submitted today. And will publish those responses where it's appropriate to do so on the Investor Meet Company platform. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CEO, Linda Z. Cook. Linda, good morning.

Thanks, Jake. Good morning, everyone, and thanks for joining the call. Before we get started, maybe just a few words on the events going on in the Middle East. I mean the conflict, I think, as most people are now aware, has seen more than 20% of global crude oil and LNG exports disrupted. That's really unprecedented. It's led to extreme market volatility and, of course, increased concerns over physical oil and gas supplies, including phosphates and other things as well. So quite an event that we're experiencing now. We're now a couple of weeks into a ceasefire, but of course, still waiting for the safe restart of traffic through the Strait. We do hope that the ceasefire holds and that hopefully, imminent negotiations or further discussions can lead to a return to peace and stability in the region. But against this uncertain backdrop, Harbour has to continue operating, of course, and we remain focused on continuing to execute our strategy and controlling what we can. And we have a strong track record when it comes to strategic, operational and financial delivery, supported by active portfolio management. And of course, I'm proud to say, a world-class team. Our consistent strategy together with that delivery means that today, we're benefiting from a large-scale diverse production base with a competitive cost structure, a material exposure to both Brent oil prices and European gas prices. We also have investment-grade credit ratings, and that's supported by our prudent financial policy. And in particular, we do take a rather systematic approach to hedging. So we look to protect our downside exposure while preserving meaningful upside participation and have continued to hedge through the recent volatility, securing in particular some attractively priced European gas collars. So we'll turn now to the presentation and to the second slide, and for those not so familiar with us, a quick introduction to how we got to where we are today. Over the last 10 years, we've grown rapidly from 0 to 0.5 million barrels per day of production, driven by fairly disciplined M&A and also reinvesting in the assets that we acquired to add value as we've sought to build a global diverse independent oil and gas company. Since our first acquisition in 2017, we repeatedly demonstrated our ability to identify and secure strategic value-enhancing transactions. Early acquisitions were focused on building scale in our first region, which was the U.K. Then it was about diversifying and adding positions of scale in other countries, in particular, through the Wintershall Dea acquisition in 2024. Our more recent transactions, which were announced late last year have been targeted towards refining and strengthening the portfolio, making it more resilient and enhancing our longevity. And a good example of this is, of course, the LLOG transaction in the U.S. Gulf of America, which completed ahead of schedule already in February. The LLOG assets that we acquired through that transaction are oil weighted. They're fully operated, which we like, and they have a compelling growth profile and a long reserve life. So this acquisition helps secure our overall production at a level between 475,000 and 500,000 barrels per day through to the end of the decade. And while overall production stays broadly stable, what we'll see is a significant increase in our cash flow through to 2030 as we have declining U.K. production, and we're replacing that with growth in the U.S. and over time, in Mexico, both lower tax rate jurisdictions. If we go to the next slide, in addition to the LLOG transaction, we announced 2 other transactions at the end of 2025. We agreed the divestment of most of our Indonesia assets, including our mature and subscale producing assets for $215 million. That divestment will improve the overall quality of our portfolio and accelerate the value from those assets. The transaction is expected to close in the coming weeks, and that will nearly complete our exit from Southeast Asia after our divestment from Vietnam mid-last year. We also announced the $170 million acquisition of Waldorf, which is a small U.K. producer that is in administration. Once complete, that acquisition will bring significant financial synergies and materially enhance our U.K. cash flow. The proceeds from the sale of Indonesia, along with the near-term cash uplift we're expecting from Waldorf will help fund the entry into the U.S. Gulf through the $3 billion acquisition of LLOG. As just mentioned, through LLOG, we established a strategic position in the U.S. deepwater, acquiring a high-quality portfolio in one of the world's most prolific oil and gas producing basins. So taken together, these 3 transactions materially increase Harbour's free cash flow outlook to the end of the decade. Turning to the next slide. At our full year results last month, we updated our 2026 guidance to reflect these transactions, LLOG completion in February and the expected closing of Waldorf and Indonesia transactions by the middle of the year. For 2026, we now expect production to be between 475,000 and 500,000 barrels per day. We set our unit operating cost guidance at around $14.50 per barrel, while total capital expenditures this year are expected to be between $2.2 billion and $2.4 billion, that's about $13 per barrel on a unit of production basis. With about 80% of our production exposed to Brent and European gas prices, then that means our margins will continue to be strong. In fact, post completion of the LLOG acquisition, we're now more sensitive to oil prices. So we have -- with a $5 move in the average oil price for the full year, that will impact this year's free cash flow by $170 million, and a $1 change in European gas price impacts free cash flow by $150 million. So hopefully, those rules of thumb are helpful as we navigate this quite volatile period of prices. At our outlook pricing that we used in March of $65 dated Brent and $11 European gas, we had expected to generate $600 million in free cash flow this year. If we now update that and assume higher commodity prices of, say, $80 Brent and $13 European gas, in particular, that Brent number could be conservative. I think where we are now is higher than $95. But at $80 Brent, $13 European gas, we expect free cash flow this year to be at close to $1.4 billion, so more than 2x kind of the estimate in March -- in early March, which was, of course, at a lower oil and gas price outlook. Next slide provides a snapshot of Harbour today as a result of the portfolio actions taken over the last few years, including the Wintershall Dea acquisition, which gave us material positions in Norway, Mexico and Argentina, and then also the divestment that I mentioned to Vietnam and Indonesia. The center of gravity of the portfolio is now shifting to the West to lower tax jurisdictions with significant running room. Like in the past, if we don't see a route to scale or assets can't compete for capital in our portfolio, they do become divestment targets. So we have a quite active portfolio management, it will be an ongoing feature of what we do in Harbour. And with the LLOG acquisition, the bar to compete internally for capital has got that much higher. If we look at the next slide, while we have a global portfolio, it's really 5 key countries that we focus on: Norway, the U.K., Argentina, Mexico and the U.S. And as you can see, these account for around 90% of our company no matter how you slice it, so whether it's production or you're looking at cash flow, reserves or resources, and each of the countries has an important role to play. So let me walk through each one of them, and we'll start on the next slide with Norway. It's our largest producer today at 170,000 barrels per day. That accounts for 35% of our overall production in Harbour. In the country, we have a strong pipeline of infrastructure-led developments that we expect will sustain production in the country well into the next decade. This includes 4 subsea tieback projects that we're bringing onstream over the next 24 months, including Dvalin North, this is due onstream in the middle of this year. And we're also maturing our next set of projects to final investment decisions, and that will help sustain production even longer. And those projects include the Gjøa subsea tiebacks and our operated Cuvette discovery. And we continue to explore, and just last month, announced the Omega Sør discovery where we have a 35% stake. So we were happy to see that. Next slide, we talk about the U.K. Here, the team continues to do a great job despite the difficult fiscal environment. This includes maintaining high reliability, structurally lowering our cost base, including unfortunately through continued head count reductions. They've been delivering best-in-class drilling performance and executing selective -- very selectively some high-return, short-cycle investment opportunities that will somewhat offset the production decline. As a result of these actions, and if we take them together with the Waldorf acquisition and its financial synergies that come mainly in the form of tax loss that we'll be -- tax losses that we'll be able to use against our earnings. We'll be transforming the cash flow outlook from our U.K. business. And of course, we have to say a few words probably about the energy profits levy or what's called the EPL in the country. This was -- there was genuine optimism, I think, at the end of February that the chancellor might be announcing the early removal of the EPL, which today doesn't expire until 2030, and hoping that it would be replaced with a more sensible windfall profits tax structure. At the government's request, we had, alongside wider industry, provided some detailed evidence on the scale of investment that early removal of the EPL could potentially unlock. In aggregate, this equated to GBP 17 billion -- sorry, GBP 17 billion of investment across the sector in the U.K. North Sea that would directly support jobs, growth, of course, domestic energy security. However, with the oil prices spiking at the outbreak of the war, I think the decision just became too politically difficult for the chancellor to take, at least for the time being. We continue to believe, however, that this is precisely the moment to signal early removal of the EPL given the heightened concerns around energy security. And the smart thing to do would be to replace it with the government's windfall profits tax, the new design, and that's set out to reduce oil and gas companies' profits from unusually high oil and gas prices, but still incentivizes the important investment needed to utilize the country's domestic resources and enhance domestic energy security. So we remain in dialogue with the government and hope that someday, we will see early removal of that -- of the EPL tax. Next slide now, we move on to Argentina. Today, here, we're producing 70,000 barrels per day, and most of that is coming from our conventional gas fields in the CMA-1 license offshore Tierra del Fuego province. At CMA-1, we have a series of potential developments that will keep the infrastructure at capacity at more than 40,000 barrels per day through to 2040. Perhaps more exciting, though, is our significant position in the huge world-class unconventional Vaca Muerta play. Here, we have a 24% interest in 2 of the largest licenses in the Vaca Muerta. We have San Roque in the oil window and APE in the gas window. At San Roque, we're progressing our application for the unconventional license with the 16 well drilling program, which is expected to start around the end of this year or early next. At APE, we're currently producing about 20,000 barrels per day with production constrained by the domestic gas market. So what we need here is access to additional gas markets, international ones, and that's why we're participating in Southern Energy, which is a 6 million tonne per annum phased LNG project. Export permits and incentives under the new RIGI infrastructure regulation in the country have been secured, and major pipeline and EPC contracts are in the process of being awarded. We also recently contracted about 80% of the first vessels offtake to SEFE, the German utility gas buyer. And we're starting to -- and we're now seeing significant interest in the offtake of the second vessel as buyers on the world's LNG market are looking to diversify sources of supply away from the Middle East and in some cases, the U.S. So start up from the first LNG vessel remains on track around the end of next year and from the second vessel at the end of 2028. So with our Vaca Muerta acreage and interest in Southern Energy, I think you can maybe see why we're really excited about the potential of Argentina. Turning now to the next slide and our newest core business unit, the Gulf of America, which came through the LLOG transaction. First, with hindsight, we feel good about having agreed this transaction when oil prices were around $65 per barrel. Looks like with a bit of luck on that regard, we might have got the timing just right there. The acquired assets are oil weighted. They give us scale and growth through to the end of the decade in this important oil and gas producing region. It's 100% operated, centered around 3 deepwater hubs called Who Dat, Buckskin and Leon-Castile. Production is expected to increase to around 65,000 to 70,000 barrels per day by 2028, supported by investment in high IRR drilling targets that are all near existing hubs and the continued ramp-up at Leon-Castile, which started up last year. With the existing cost structure and attractive fiscal terms, we're adding high-margin barrels to the portfolio that will help fuel our free cash flow growth through to the end of the decade. And with more than 350 million barrels of 2P reserves and 2C resources, plus 0.5 billion barrels of prospective resources and success in recent licensing rounds in the Gulf, we believe we have substantial running room. And we have a great team. The LLOG team are responsible for about 1/3 of all discoveries made in the Gulf since 2014, and they have a proven track record of converting resources to production, ranking best-in-class among peers when it comes to development cycle time. So our new Gulf of America business unit really is transformative for Harbour, and it raises the bar for capital competition within the company. Finally, Mexico, on the next slide, our fifth core business unit. This represents our most material long-term growth opportunity. Through the Zama and Kan shallow water hubs where we have existing discoveries, we're building a scaled, advantaged business with additional exploration potential. At Zama, where operatorship was transferred from Pemex to Harbour in December of last year, which was a significant milestone, our focus is on optimizing the development concept to lower the breakeven cost, improve returns and lower the execution risk ahead of entering FEED later this year. At our operated Kan discovery to the Southwest of Zama, last year, we upgraded our resource estimates by 50% to 150 million barrels gross. And like with Zama, our focus is on optimizing the development concept ahead of entering FEED. So together, Zama and Kan have the potential to deliver reserves equivalent to more than 2 years of the company's production. And as operator of both of these hubs, we have the opportunity to capture synergies across design, drilling and operations. As I mentioned, both projects are expected to enter FEED this year, and we're targeting both to be FID ready within the next 18 months or so. We'll also see additional upside through alignment with our Gulf of America business unit just across the border using key capabilities and talent we acquired through LLOG and also leveraging relationships with key suppliers across the broader Gulf to successfully help us deliver both of those Mexico projects. This next slide then puts everything together, showing our expected CapEx and production outlook to the year 2030. As you can see from the chart on the left, we expect to spend between $2 billion and $2.3 billion per year from 2027, which we think is the right level of expenditure given the size of our portfolio and our opportunity set. And it allows us to sustain production between 475,000 and 500,000 barrels per day through to the end of the decade. With the U.S. assets and our projects in Mexico, we'll have increased operational control over our spending levels, and that gives us more flexibility to adjust spending if we need it up or down. And with over 3 billion barrels of reserves and resources, we'll be able to prioritize the most competitive projects continuing to high-grade the portfolio. The next slide now. So while overall production is remaining stable, we're replacing the declining higher cost U.K. production with higher margin barrels in the U.S. and over time, Mexico. As a result, as we look through to 2030, we expect to deliver materially growing free cash flow. So this strategic shift in production towards lower tax jurisdictions mean we expect our effective tax rate to fall significantly as we move through the decade. And in parallel, we expect CapEx to reduce to around $2 billion to $2.3 billion from 2027, as I just mentioned, that reflects the continued portfolio high-grading and disciplined capital allocation. So as a result of all of that, free cash flow is expected to materially improve in 2028 at flat oil and gas pricing, and that's supported by increasing production in the U.S. Gulf and the significant financial synergies from the U.K. Waldorf acquisition starting from 2027. Beyond that, we see further cash flow margin upside towards the end of the decade, driven by continued growth in the U.S. and as our Mexico projects start to come onstream. This next slide sets out our 3 capital allocation priorities, which we look to balance through the commodity price cycles. First, we're committed to maintaining an investment-grade balance sheet. Following every major transaction, we've consistently prioritized debt reduction. And with the additional leverage from our recent transactions, we intend to do the same again. Second, we aim to maintain a robust and diverse portfolio. By investing $2 billion to $2.3 billion per annum, we expect to be able to deliver stable production with improved margins as we move through the coming years. Third, we'll continue to deliver attractive shareholder returns through the cycle. We recently updated our distribution policy by moving to a payout ratio. This aims to return to shareholders between 45% and 75% of our free cash flow with a base dividend of $300 million. When leverage is greater than 1x, we expect the payout to be towards the lower end of the payout range. That enables us to prioritize debt reduction when leverage is high. And then when leverage is less than 1x, we'd expect the payout ratio to move towards the higher end. This policy allows us to invest in our high-return growth projects and to delever through the cycle. And it also ensures our shareholders are able to benefit from our growth in free cash flow and also to share in the upside from higher commodity prices like we're experiencing at the moment. As mentioned, for 2026, we said we expected to generate $600 million of free cash flow. That was based on $65 oil and $11 European gas. Given where leverage is following the LLOG transaction, we would pay out at the lower end of our payout range. So this would mean shareholder distributions of $300 million or our base dividend for 2026. At $80 oil and $13 gas, however, we expect to generate $1.4 billion of free cash flow. At a 45% payout that would result in shareholder distributions to doubling to at least $600 million and with the $800 million balance then going towards the balance sheet, and that will help us materially accelerate our ability to reduce debt this year. Final slide then in summary, 2025, excellent year for Harbour Energy operationally, financially and strategically. We've carried that momentum into 2026 with the completion of the LLOG acquisition. And production is off to a good start this year, averaging more than 500,000 barrels per day for the first 2 months of the year. Our portfolio actions continue to transform the outlook for Harbour, and we're seeing the benefits already of our increased scale and resilience. Further, our organic opportunity set within the portfolio today mean that we can sustain production and deliver free cash flow growth through the end of the decade and possibly beyond. So we feel well positioned in the current -- in today's current environment. And with that, we will open it up to questions. Over to you, Jake.

Perfect, Linda. That's great. And thank you very much indeed for your presentation this morning. [Operator Instructions] But Linda, we have received a number of questions. So perhaps, if we dive straight into it. The first question that we have here asks, can you provide some more color around the impact of the events in the Middle East on Harbour and how you're responding to this?

Yes. Thanks. Of course, it's a good and topical question. I think the first thing to say is that we, thankfully, at this point don't have operations in the Middle East. So from a physical operations standpoint, we're not impacted -- directly impacted. Our closest operations are in Egypt, and there, everything continues normally. Of course, the big and immediate impact it has are the higher commodity prices, which I've talked about through this presentation just -- and gave you a flavor, I think, of the sensitivity of the Harbour free cash flow outlook to those higher prices. So you already have a feel for that. I think longer term, we're starting to look at the supply chain and trying to understand where we might have vulnerabilities if the conflict continues and the closure of the Strait continues for some time. So for example, watching for signs of things like fuel shortages for our supply boats and offshore drilling rigs and things in the U.K. is one thing we're keeping a close eye on. So far, we haven't seen any of those manifest, but of course, we're doing planning in case things take a turn for the worse or continue for a very long period of time. From a capital investment standpoint, this is a long-term business for us. We've seen multiple cycles over the years of prices going up and down. So certainly, we're not counting on prices staying high forever. So I think it's a pretty steady hand on the steering wheel when it comes to capital allocation and the projects that we're investing in, many of which, if we're investing in them today, won't start up until next year at the earliest or beyond that. So we have to take a longer-term view. And then from a hedging standpoint, we have taken the opportunity where we've seen it to execute some, I think, pretty attractive collars. So we're putting in place floors, for example, for oil that might be in the $70s, but capturing upside up to $100 per barrel. So pretty wide ranges where we see those opportunities, we're feeling good about capturing those and locking in some -- or reducing any downside that we might have in the portfolio, but still capturing a lot of the upside. So those are a few things that we're doing.

Thanks, Linda. And just turning to the next question. We have someone asking, good to see the LLOG transaction completed in February. Can you talk us through the strategic rationale for the acquisition? Why this particular U.S. transaction and really how Harbour came to be the successful bidder?

Yes. Thank you. Yes, we're really excited, as I've already said, about the transaction and our entry into the U.S. Since we started Harbour, now almost 10 years ago, we had always had the aim and it always made sense for us as a conventional, mostly offshore producer to be in the U.S. Gulf. And so we have tracked opportunities for entry there for many, many years. And as we kind of held our wishlist internally of what might be attractive, LLOG was always in the top 1 or 2 on that priority list. But it just unfortunately wasn't available until just last fall. It was privately held and the owners just weren't motivated to sell. Unfortunately, sadly, the founder of the company passed away now about a couple of years ago. And following that, the family, it was now in the hands of the family and a trust. They decided to proceed with the divestment following the receipt of an unsolicited offer they received from another party. So they kicked off a fairly limited process. It was invitation only. I think you could count the number of companies invited to that process on one hand. So while we don't necessarily like competitive processes, this was a fairly limited one. In addition to price, what was really important for the family was that they found a good home for the company, one that would continue to honor the company's reputation and in particular, would need all -- most, if not all of the team, which they had a close relationship with. And with Harbour, given that we have no -- had, at the time, no existing U.S. operations or Gulf operations or even any employees based in the U.S. I think we could give them some real reassurance that we were, in fact, going to need all of their team and that our commitment would be to continue to invest in that business and try to grow the company. So they got very, very comfortable with us from that standpoint and then generally, culturally as well. So we felt good about the outcome of the transaction. It was a competitive process. But if we look at -- we paid $3.2 billion, if you look at independent third-party valuations, they're mostly closer to $4 billion. So we felt good about that. And of course, at the time when we were buying, oil prices were in their $60s. And since we completed in February, oil prices have been much higher, and so we're now benefiting, of course, from the higher prices as well. So I feel good about the transaction. And so far, so good.

Perfect. We've had a number of questions come in on M&A, but perhaps if we take this one as I think it speaks to the others as well. You've got here today by M&A. What's next is the plan for more transformational acquisitions? And how do you think about portfolio management more generally?

Yes. I think our thinking about M&A has evolved with the evolution of the company. So of course, we started and built the company through M&A. We have a really good M&A toolkit and skill set, and really proud of everything that the team has delivered on that front. But today, we're at 500,000 barrels a day, so 0.5 million barrels per day. The size of the company feels good to me. So 0.5 million barrels a day, over 3 billion barrels of reserves and resources. From that standpoint, we no longer feel the need to necessarily grow the overall size of the company. So we have a scale that we think is sustainable and viable and large enough to be competitive and of interest to investors today. So going forward, I think the objective of any M&A that we may do will be like the transactions we announced at the end of last year, continuing to just strengthen and refine the overall quality of the portfolio. So divesting positions in countries that are subscale, replacing those by strengthening acquisitions in countries where we're currently present, and have a core strategic position to continue to strengthen those going forward. So probably a bit more tactical rather than transformational going forward.

At these prices, you're generating significant free cash flow. In this context, how are you thinking about debt reduction and where do you want to get leverage to versus additional shareholder distributions? And then the second part of the question asks, how are you thinking about additional distributions in terms of dividends versus buybacks?

Yes. Good question. And I think the timing was fortunate with our shift to a payout ratio. Of course, those decisions were made before we entered this volatile oil and gas price environment. But I think the new policy will be a good tool for us, and it's good timing to now have it in place because what it will enable us to do is when leverage is high, which we feel it is today, following the LLOG transaction, and that's happened after each of our major acquisitions, our priority at that point in time is to get -- is to strengthen the balance sheet. Now we've been able to, just at all 3 rating agencies, reiterate our investment-grade credit rating, which was great. But we still feel like we need to get leverage down. And so since leverage is greater than 1x, our framework says that we will pay out at the low end of the range. So that's 45%. And so as I mentioned in the presentation, at $1.4 billion of cash flow this year at $80 Brent, $13 gas, that will give us about $800 million to pay down against debt, which will make a big difference in our balance sheet. And then we've said when leverage is less than 1x, which has always been our target to have on average leverage less than 1x, that will enable us to start moving up towards the higher end of the payout range as we move beyond this year. Of course, everything will depend on continued operational delivery, which we feel confident about. And then, of course, what commodity prices do as well. And there, it's really anyone's guess probably. What will we do with the additional distribution? So at $1.4 billion and 45% payout, that's about $600 million of distributions. Our commitment is a minimum dividend of $300 million. And then what we do with the other $300 million, of course, will be a decision for the Board to make, and we'll make it after we move through the end of this year and see what actual cash flow really is. I think there's big rationale for us to use the excess distributions as buybacks. It's what we've done in the past actually beyond our base dividend. So that's been our track record. And I think the reason why it makes sense for us is we do still have at least one large investor in BASF who continues to -- it's a financial investment for them. They have the shares as a result of the Wintershall Dea transaction. They were the large partner in the selling group on the other side of that transaction, and their stated intention is to continue to exit over time. They've taken the opportunity to exit over the past few weeks a large part of their stake, but they still have quite a position. And so having the ability to have buybacks out there, I think, is helpful given that situation.

Perfect. And we have perhaps one final question here, someone asking, you talked about having 5 core business units: Norway, the U.K., Argentina, Mexico and now the U.S. Gulf of America. But really, which is your favorite or are you most excited about?

Yes, I get asked that question a lot, and it's always hard, right? And it's like asking which of your children is your favorite. It's always hard. And as I tried to explain in the presentation, they each play a different role for us. So Norway, steady production, good margins, exposure to European gas pricing, lots of running room, stable fiscal environment. So just a ton to like there. And in the U.K., in particular with the Waldorf transaction, the things we've been -- the team there has been able to do to improve our margins and reliability and operating costs, they're throwing off a lot of cash flow for us over the coming few years even though production is declining. U.S., lots of running room now with our new position in the Gulf of Mexico. Argentina, we really love our position in the Vaca Muerta and that LNG project giving us exposure to long life reserves and international gas markets. And then finally, Mexico, that's really the long-term opportunity for us with the big developments there. So really, really hard to pick one. Sorry, I'm not going to be able to answer the question.

No problem. But Linda, thank you very much indeed for answering all of those questions that came in today. And that brings us to the end of the session. So thank you very much indeed for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order for the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Harbour Energy plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.