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Even as UK shares reach record highs, there are still plenty of income stocks offering attractive yields – some even venturing in double-digit territory! Take Harbour Energy (LSE:HBR) as a perfect example. The oil & gas enterprise has been boosting shareholder payouts since 2021. And at today’s share price, investing just £500 is enough to snap up 251 shares, generating a passive income of £50.70 in the process.
So should investors be considering this business for their own portfolios? Let’s take a closer look.
Reasons to consider buying
Beyond the lucrative-looking dividend yield, there’s a lot to like about this business. Following its acquisition of the Wintershall Dea portfolio, Harbour’s oil production almost tripled in the first quarter of 2025, reaching 500,000 barrels of oil equivalents per day (boepd).
At the same time, the group’s average cost of production has dropped significantly to around $13 a barrel. That’s some of the lowest in the industry, resulting in enormous production margins that support substantial cash generation. In fact, free cash flow’s on track to reach $0.9bn by the end of 2025, supporting both dividends and management’s debt reduction programme.
Combining all this with a robust financial hedging portfolio to protect against roughly 40% of unfavourable commodity price shifts through to 2027, the group’s outlook seems to be quite positive. But if that’s the case, why are investors seemingly avoiding this income stock, resulting in such a high yield?
The bear case
While there’s a lot to like about this business, there’s also room for some justified concerns. Production margins may be substantial, but courtesy of enormous North Sea windfall taxes in the UK mean that net margins are far less impressive. For reference, the firm’s essentially exposed to the equivalent of a 78% tax rate that’s recently been extended to 2030.
Beyond the horrendous tax environment, there’s also significant execution risk relating to the previously-mentioned Wintershall Dea acquisition. This was an $11.2bn deal that sent production volumes skyrocketing while also drastically increasing operational complexity. And since this deal was financed with enormous sums of debt, the balance sheet now has over $6bn of borrowing and equivalents on its balance sheet versus only $950m of cash & equivalents.
That means if oil prices fall, even with its hedges, the adverse impact could compromise interest coverage and, in turn, dividends.
The bottom line
Harbour Energy’s an income stock that seems to offer the scale and global diversification that’s so desired when aiming for passive income. But it comes paired with significant external pressure and threats that could compromise cash flows, even if management executes perfectly. That’s why the yield’s so high.
Personally, I prefer investing in businesses that are more in control of their own destiny. As such, despite the lucrative yield, this isn’t an income stock I’m rushing to buy today, especially with other lower-risk opportunities left to explore.
