Harbour Power (LSE:HBR) is a FTSE 250 inventory that appears set to re-join the FTSE 100 in 2024. Not due to distinctive progress in its share worth however because of an impending deal that’s prone to rework the dimensions of its operations.

Though the transaction remains to be topic to shareholder and regulatory approval, each are anticipated to be forthcoming.

Scaling up

The most important vitality producer within the North Sea has agreed to accumulate the upstream belongings of Wintershall Dea. The transaction will likely be funded by a mix of money (£1.7bn), the difficulty of latest shares (£3.3bn), and the taking over of debt (£3.9bn). Excluding the mortgage notes, the corporate is valued at £5bn.

Add this to Harbour Power’s present market cap of £2.2bn and it must be sufficient to see it return to the premier league of listed firms. The corporate was beforehand relegated from the index in December 2022.

Beneath the proposed phrases, the present homeowners of Wintershall will obtain 921m new shares, bringing the entire post-transaction quantity in difficulty to roughly 1.69bn. The share worth ought to then be 426p — a premium of roughly 48% to its present worth.

The deal is predicted to extend Harbour Power’s annual manufacturing by 2.5 occasions and enhance its margin. Publish-merger reserves ought to almost quadruple.

Falling out of trend

However oil and fuel shares are out of bounds for moral buyers.

And because the world strikes in the direction of internet zero, the demand for fossil fuels will inevitably decline. Nevertheless, in line with most consultants we nonetheless haven’t reached peak demand for oil. Every day consumption of ‘black gold’ is presently round 100m barrels a day.

In 2023, BP ready a forecast for oil consumption by till 2050. It used three completely different situations to see what affect every may need on demand. Utilizing the ‘new momentum’ assumption, which is predicated on “the broad trajectory alongside which the worldwide vitality system is presently travelling”, a discount of solely 25% is predicted.

What affect that is prone to have on world warming is unsure. However in all three situations, whether or not we prefer it or not, oil remains to be going to be wanted for a while to return.

Taxing occasions

Because of extraordinary income being earned following Russia’s invasion of Ukraine, output from the North Sea is presently taxed at 75%.

The federal government has promised to finish one ingredient of this — the vitality income levy — when Brent crude falls to under $71.40 and fuel drops to 54p a therm, for a chronic interval. These are presently buying and selling at $90 and 74p, respectively.

All the belongings being acquired are in areas the place taxes are decrease.

The earnings of vitality firms might be unstable because of sudden fluctuations within the wholesale worth of oil and fuel. And it’s just about not possible to precisely predict future costs. That’s why shareholders normally demand a beneficiant dividend to compensate for the extra threat.

In respect of its 2023 monetary yr, Harbour Power declared a dividend of $0.25 (20p). This implies the share are presently yielding a wholesome 7%. And the administrators mentioned the deal ought to facilitate a 5% improve.

That’s why — though dividends are by no means assured — as a shareholder, I’m going to vote in favour of the merger.