Company Review. Horizon Oil Limited (HZN) FY14 results full year China impact. Last price $0.34

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1 Ord Minnett Research 1 September (HZN) FY14 results full year China impact Valuation and Recommendation We retain our Buy recommendation and have revised our target price to $0.45/sh (prev. $0.53/sh) after incorporating FY14 results and updated project assumptions from the recent independent expert report. There was little new in the FY14 results, with key parameters disclosed in the June quarterly report and revenue up on full year contribution from the Beibu Gulf project. The main activities in FY15 involve negotiation of a gas sales agreement for the Stanley project in PNG, FID on the Elevala/Ketu condensate stripping project and progress towards monetization of Horizon s large gas resource base. We believe Horizon has a viable business model in the absence of the merger with Roc, with its PNG gas resources likely to feature in industry aggregation to support expansion of LNG capacity. Key investment points FY14 results: Production of 1.43 mmbbl, up 185% on the prior year; sales revenue of $US139m, up 188%; NPAT of $US12.8m, up 269%; cash of $US99m, debt of $US119m and convertible bond of $US80m. 2P reserves of 15.1 mmboe; 2C resources of 15.3 mmboe. Outlook: No formal production, revenue or capex guidance provided. Operating cash flow is expected to increase significantly following completion of the Maari oil growth project (Maari production expected to double to 20 kbopd gross). Revenue from the Beibu Gulf oil project in China is expected to be maintained despite field decline, due to increased share of production through cost recovery terms under the production sharing contract. A final investment decision (FID) on the Elevala/Ketu gas/condensate project in PNG is expected in early CY15. Changes to forecasts: We have incorporated FY14 actual performance and updated our modelling assumptions to reflect data available from the independent expert report associated with the (now abandoned) Roc/Horizon merger; capex and opex have increased, exceeding the contingencies we had previously assumed, reducing our NPV. We note our discount rate is higher than assumed in the IER, with our valuation broadly consistent at discount rate parity. Risks: NZ oil production rates on project completion; production reliability, Stanley project development; PNG gas commercialization. Key Financials Yearend June (A$) FY13A FY14A FY15E FY16E FY17E USD/AUD (average) Brent (US$/bbl) Production (mmboe) Revenue ($m) EBITDA ($m) Cash costs ($/boe) Normalized NPAT ($m) Reported NPAT ($m) Normalized ROE (%) Cash ($m) Debt ($m) Capex ($m) PER EV/EBITDA Source: Iress, Company, Ord Minnett estimates Last price $0.34 Target price $0.45 Recommendation Buy Risk Assessment Higher Oil and Gas John Young Senior Oil & Gas Analyst jyoung@ords.com.au ASX Code HZN 52 week range $0.28 $0.39 Market Cap (A$m) 443 Shares Outstanding (m) 1302 Av Daily Turnover (#) 3.3m ASX All Ordinaries 5,623.5 Net Debt/(Cash) FY14A (A$m) Relative price performance Aug13 Nov13 Feb14 May14 Aug14 Source: Iress Consensus earnings Cons. OML Target price $/sh FY15 earnings $m FY16 earnings $m (normalized) Source: Bloomberg HZN ASX Small Resources Ord Minnett Research 1 September Page 1

2 FY14 results Figure 1: FY14 results summary Source:, FY14 results presentation, 27th August, p 5. Figure 2: Cash flow shifts Source:, FY14 results presentation, 27th August, p 8. Ord Minnett Research 1 September Page 2

3 Figure 3: Reserves and resources Source:, FY14 results presentation, 27th August, p 9. Ord Minnett Research 1 September Page 3

4 FY15 activities As in previous years no formal production, revenue or capex guidance was provided. The production outlook (not formal guidance) includes development of both PNG condensate and gas resources. Production can grow and be sustained until the end of this decade with condensate stripping, which can occur independently of the more commercially difficult task of gas monetization. We view this outlook as a guide only, with previous experience indicating project startups are likely to occur later than shown. Our production forecasts are consistent in and slightly lower in to period. Figure 4: Production outlook Source:, Annual Financial Report, 27th August, p 6. Ord Minnett Research 1 September Page 4

5 Figure 5: FY15 activities Source:, FY14 results presentation, 27th August, p 10. Ord Minnett Research 1 September Page 5

6 Table 1: Valuation summary 12.0% WACC + country factor Net Unit Risk Risked Risked Unrisked Risked volume value factor value value value WACC value Valuation as of 30 Jun mmboe $US/boe % $A(m) $A/sh $A/sh % $A/sh Projects (DCF model valuation) Maari oil (NZ) Beibu Gulf oil (China) Stanley cond/gas (PNG) PRL 21 cond/gas (PNG) Exploration / Appraisal PPL 259 (PNG) Whio Other (corporate, cash, debt, etc) Corporate costs Hedging & Investments Franking credits (@ 0 %) 0.0 Cash Additional Equity Debt Minorities / Other Equity Valuation (diluted) as of Jun Equity spot prices $US97/b real WTI & fx Target price as of Jun Mkt current share price (and undiluted share count) Total shareholder return (%) 32.4 Number of shares (undiluted) 000,000 1,301.1 Number of shares (diluted) 000,000 1,538.3 Source: Ord Minnett analysis Oil price and forex sensitivity: $A/sh Real WTI oil price, $US/bbl Valuation analysis: $US/$A forex fx= Prod'n fx= Devel't fx= Appr'l fx= Expl'n fx= Other fx= Source: Ord Minnett analysis Source: Ord Minnett analysis Ord Minnett Research 1 September Page 6

7 Company Review Production and revenue Production mmboe Electricity LNG LPG Gas Condensate Oil Act/Target Sales revenue $m Electricity LNG LPG Gas Condensate Oil PRODUCTION units FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Production by project Maari oil (NZ) mmboe Beibu Gulf oil (China) mmboe Stanley cond/gas (PNG) mmboe PRL 21 cond/gas (PNG) mmboe Stanley gas (PNG) mmboe PRL 21 gas (PNG) mmboe Daru LNG (PNG) mmboe Bohai Bay (China) mmboe mmboe mmboe Total mmboe Total production kboed Production growth % PRICES & REVENUE nominal $ FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Price markers Forex (period average) $US/$A WTI $US/bbl Brent $US/bbl Nat Gas (Henry Hub) $US/mmBtu Nat Gas (NE Australia) $A/GJ LNG $US/mmBtu Qld average RRP $A/MWh Received prices Oil $US/bbl Condensate $US/bbl Gas $US/mmBtu LPG $US/bbl LNG $US/t Electricity $US/MWh Total Revenue Oil M$US Condensate M$US Gas M$US LPG M$US LNG M$US Electricity M$US Total modelled M$US Total reported M$US Source: company data and Ord Minnett forecasts $US currency unless otherwise noted. Nominal $ basis. Year ending June. Ord Minnett Research 1 September Page 7

8 Company Review Financial Statements Earnings $m Sales revenue EBITDA Normalized NPAT Abnormals Cash flow $m Financing Cash Flow Investing cash flow 300 Operating cash flow Free cash flow INCOME STATEMENT M$US FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Sales revenue Other revenue COGS & opex Other EBITDA Depreciation and Amortization EBIT Net Interest Expense EBT Tax expense Minorities / prefered dividends Normalized NPAT Abnormals Reported NPAT Effective tax rate % CASH FLOW STATEMENT M$US FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E EBITDA Other operating items (tax, etc) Operating cash flow PPE capex Exploration capex Development capex Other investing items Investing cash flow Inc/(Dec) in Equity Inc/(Dec) in Borrowings Dividends paid Other financing items Financing Cash Flow Net Inc/(Dec) in Cash Free cash flow BALANCE SHEET M$US FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Cash & cash equivalents Other current assets PPE, Exp & Dev Other noncurrent assets Total Assets ,078 Short term debt Other current liabilities Long term debt Other noncurrent liabilities Total Liabilities Minorities Total Funds Employed Debt Net debt Source: company data and Ord Minnett forecasts $US currency unless otherwise noted. Nominal $ basis. Year ending June. Ord Minnett Research 1 September Page 8

9 Company Review Financial Analysis Debt $m Debt Net Debt / (ND+Book Equity) Net cash EBIT Interest cover x Funding $m Dividends paid Inc/(Dec) in Equity Inc/(Dec) in Borrowings Cash & cash equivalents Cash > OPERATIONAL METRICS FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E EBITDA margin % EBIT margin % Normalized NPAT margin % Revenue growth % EBITDA growth % EBIT growth % Normalized ROA % Normalized ROE % VALUATION RATIOS FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Fully diluted shares (end of period) 000,000 1, , , , , , , , , ,538.3 Weighted fully diluted shares 000,000 1, , , , , , , , , ,538.3 Share price (end of period) $/share Market Cap M$A Less Net Debt M$A Market EV M$A EPS before abnormals c EPS growth % PER x Op Cash flow per share c Price / Op Cash flow x EV/EBITDA (n.b. future EV) x LEVERAGE FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Net Debt / Book Equity % Net Debt / (ND+Book Equity) % Net Debt / Total Assets % EBIT Interest cover x Debt / Free Cash Flow x MARGIN ANALYSIS real $ FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Revenue/boe $US/boe Opex/boe $US/boe EBITDA margin/boe $US/boe D&A/boe $US/boe Tax and financing/boe $US/boe Cash margin % EBIT margin % NPAT margin % Resource to production ratio years Product mix (liquids % of total) % Source: company data and Ord Minnett forecasts $US currency unless otherwise noted. Nominal $ basis. Year ending June. Ord Minnett Research 1 September Page 9

10 Please contact your Ord Minnett Adviser for further information on our document. Research Tim Smart Head of Institutional Research Sydney David Brennan, CFA Senior Resource Analyst Sydney Jonathan Collett Senior Research Analyst Melbourne Paresh Patel Senior Research Analyst Sydney John Young Senior Research Analyst Melbourne Brad Dunn Analyst Sydney Nicholas McGarrigle Analyst Sydney Ord Minnett Offices Adelaide Level Grenfell Street Adelaide SA 00 Tel: (08) Fax: (08) Brisbane Level Eagle St Brisbane QLD 4000 Tel: (07) Fax: (07) Buderim Sunshine Coast 1/99 Burnett Street Buderim QLD 4556 Tel: (07) Fax: (07) Caloundra, Sunshine Coast 7981 Bulcock Street Caloundra QLD 4551 Tel: (07) Fax: (07) Canberra 101 Northbourne Avenue Canberra ACT 2600 Tel: (02) Fax: (02) Coffs Harbour Suite 4 21 Park Avenue Coffs Harbour NSW 24 Tel: (02) Fax: (02) Gold Coast Level 7, Appel Street Surfers Paradise QLD 4217 Tel: (07) Fax: (07) Mackay 45 Gordon Street Mackay QLD 4740 Tel: (07) Fax: (07) Melbourne Level Collins Street Melbourne VIC 3000 Tel: (03) Fax: (03) Newcastle 426 King Street Newcastle NSW 2300 Tel: (02) Fax: (02) Tamworth Suite Peel Street Tamworth NSW 2340 Tel: (02) Fax: (02) Wollongong Level 1 17 Flinders Street Wollongong NSW 2520 Tel: (02) Fax: (02) Head Office Sydney Level 8, NAB House 255 George Street Sydney NSW 2000 Tel: (02) Fax: (02) International Hong Kong 1801 Ruttonjee House 11 Duddell Street Central, Hong Kong Tel: Fax: Ord Minnett Research 1 September Page 10

11 Guide to Ord Minnett Recommendations SPECULATIVE BUY BUY ACCUMULATE HOLD LIGHTEN SELL RISK ASSESSMENT We expect the stock s total return (nominal yield plus capital appreciation) to exceed 20% over 12 months. The investment may have a strong capital appreciation but also has high degree of risk and there is a significant risk of capital loss. The stock s total return (nominal dividend yield plus capital appreciation) is expected to exceed 15% over the next 12 months. We expect a total return of between 5% and 15%. Investors should consider adding to holdings or taking a position in the stock on share price weakness. We expect the stock to return between 0% and 5%, and believe the stock is fairly priced. We expect the stock s return to be between 0% and negative 15%. Investors should consider decreasing their holdings. We expect the total return to lose 15% or more. 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