BUY Harbour Energy– Premier Bulked Up is the name to own in the sector, +120% upside

TP 50p leaving a +120% upside, Blue Sky +300%

Harbour was listed on the 1st April as part of Chrysaor Holdings reverse takeover of Premier Oil (PMO holders got around 5% of Newco effectively) and is now the largest UK listed independent oil and gas company with a strong management team behind it that can push for further growth

As part of the deal Newco will wipe out USD 2.7bn of debt held by Premier – Newco will leverage on the scale and diversification as well as further synergies

Due to the debt burden in the past creditor flow-back has been a worry within the name. We believe this along with limited analyst and index coverage creates a nice entry level. We are also bullish on cyclicals and are looking for pockets of value in oils,miners and autos. Harbour fits the bill. (See thoughts on http://monacoalpha.com/ideas/current-mkt-thoughts-the-worm-is-turning/)

Just under 20% of the shares in issue were issued to creditors, these of course have lock ups etc and we therefore estimate that of the >1bn shares that have traded so far the majority of the selling is complete

Newco is highly cash generating with USD 1bn in FCF based on spot or a >20% FCF yield given the USD 5bn market cap

Unlike the bigger integrated players, Harbour only focuses on exploration and production with one of its key strength being cash flow generation with Barclays pointing to its cash flow break even around USD 30-35 per barrel while the peers are >USD 40

We expect the strength in cash flow generation to lead to a decent dividend when Premier’s debt issue is reduced and the USD 1bn in capex is covered – also international expansion and M&A could help further growth especially given the number of oil & gas asset sellers in the market which Harbour is in a position to capitalize on

Index wise we expect Harbour to join the FTSE250 in the June review – based on current number we estimate that if they reach 30p then they stand a chance at the FTSE100

Peel Hunt has pointed out that Harbour likely to become a go to name for many investors looking for sector exposure

Valuation wise our DCF comes in at 40p which leaves a +100% upside while our comp valuation comes in around 50p which leaves a +150% upside – our Blue Sky valuation comes in at 80p