Harbour Energy/Wintershall: minnow lands transformational deal

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Often companies seeking transformational deals must pay up. Harbour Energy has managed to transform itself on the cheap.

The UK oil and gas producer, which before Thursday had an enterprise value of £2.4bn, will buy Wintershall Dea’s much larger business from BASF and investment firm LetterOne. It will pay an enterprise value of $11.2bn. In one swoop, it will more than double its scale, diversify its business, acquire assets cheaply and retain management control.

The deal reverses Harbour out of a strategic cul-de-sac. From a 190,000 barrel a day (boe/d) minnow, it will swell into a 500,000 boe/d proper sized fish — a peer with Aker BP and the US’s Apache. It will reduce its reliance on the choppy UK North Sea to some 40 per cent, down from virtually 100 per cent today, while adding productive Norwegian assets.

Net debt does jump from very little to $7bn-$8bn, given the added scale. Yet with the added cash flow the combined entity achieves investment grade, up from Harbour’s current BB rating. 

The deal makes financial sense for Harbour shareholders. To begin with, they are not actually paying $11.2bn for Wintershall’s assets. The cash portion is only $2.15bn. Another $4.9bn is the face value of Wintershall debt, probably worth even less today given higher rates. The balance is 921.2mn newly issued shares, worth $2.7bn at Harbour’s undisturbed share price. 

In sum, BASF and LetterOne receive about $9.5bn at the market value of the securities, roughly twice current year ebitda, or $8.6 for each barrel of 2P reserves. Not much, given the quality of Wintershall’s Norwegian production. Aker BP paid more than $20 a barrel for Lundin’s, much more oily, 2P Norwegian reserves back in 2022. Harbour’s shares jumped a fifth on the news.

Yet for BASF the deal makes strategic sense. It has long sought to exit from Wintershall, of which it owned 73 per cent. LetterOne blocked a share listing in 2022. It may be happy to have found safe harbour for Wintershall. Its bidder’s shareholders will agree.