AUSTRALIA HZN AU Price (at 09:23, 31 Aug 2012 GMT) Outperform A$0.30 Volatility index High 12-month target A$ 0.50 12-month TSR % +66.7 Valuation A$ - DCF (WACC 11.1%, beta 1.6, ERP 5.0%, RFR 6.1%) 0.70 GICS sector Energy Market cap A$m 339 30-day avg turnover A$m 0.7 Number shares on issue m 1,131 Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 50.2 125.0 258.4 251.8 EBIT m 24.6 52.3 130.0 132.2 Reported profit m 7.6 29.0 77.6 77.6 Adjusted profit m 3.6 29.0 77.6 77.6 Gross cashflow m 12.0 67.9 134.9 129.4 CFPS 1.1 6.0 11.9 11.4 CFPS growth % -54.0 467.3 98.8-4.1 PGCFPS x 29.2 5.2 2.6 2.7 PGCFPS rel x 3.39 0.71 0.39 0.42 EPS adj 0.3 2.6 6.9 6.9 EPS adj growth % -76.2 705.4 167.6 0.0 PER adj x 97.1 12.1 4.5 4.5 PER rel x 7.19 1.05 0.46 0.48 Total DPS 0.0 0.0 0.0 0.0 Total div yield % 0.0 0.0 0.0 0.0 ROA % 7.6 12.3 24.2 21.5 ROE % 2.3 16.5 33.8 25.3 EV/EBITDA x 11.1 4.1 2.0 2.0 Net debt/equity % 12.3 74.3 26.9-15.4 P/BV x 2.2 1.8 1.3 1.0 HZN AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in USD unless noted) 31 August 2012 Macquarie Securities (Australia) Limited Gas commercialisation progressing Event HZN reported FY12 financial results. Impact NPAT misses at the tax line: Reported NPAT of A$7.6m fell short of our A$11.3m forecast largely due to higher tax expense (implying a 42% effective tax rate). The result was also impacted by a A$5m adjustment in the fair value of the convertible and capitalised interest (which is expected to continue throughout the Beibu Gulf and Stanley construction period). EBITDAX of A$33.4m was largely inline with our A$34.3m forecast suggesting no operational surprises. Further developments will place pressure on the balance sheet: With ~A$19m in cash on hand and A$33m now draw down from the U$160m debt facility the pressures on the balance appear to be growing. That said, with only 32% of the Beibu Gulf budget spent, it appears CNOOC is carrying HZN s share of capex to some degree. Nonetheless we expect development capex at Beibu Gulf and Stanley to total U$150m over the next 12 months. While it now appears HZN has adequate liquidity, gearing is likely to rise to over 54% (on a ND/ND+E basis) by the end of the current financial year. PNG resource upgrades expected imminently: Following the successful Elevala-2 and Ketu-2 appraisal wells HZN's minority JV partner in PRL 21, Kina Petroleum (KPL, A$0.38/sh, Not rated) has released update resource estimates for the PRL 21 licence. KPL reported that gross mean contingent resources here has grown to 932bcf of gas and 54mmbbl of liquids, which is 128% and 106% higher than resources currently carried by HZN respectively. HZN has engaged RISC to undertake its own independent assessment of both PRL 4 and PRL 21 resources. Assuming exploration success at the low risk Tingu prospect and adopting KPL s resources estimates at PRL 21 and HZN current Stanley resources, we estimate gross resources could climb to 1.6tcf of gas and ~100mmbbls of liquids, enough gas to feed a mid-scale 1.5mtpa plant for ~20 years. Earnings and target price revision FY13 NPAT falls to A$29m from A$34m: While we have trimmed our Maari production forecasts to average ~14kbpod (gross) in the coming 6 months, this has partly been offset by capitalised interested as we enter the critical capex period for Beibu Gulf. NAV falls to A$0.70/sh from A$0.71/sh. Price catalyst 12-month price target: A$0.50 based on a DCF methodology. Catalyst: We expect HZN will release an update to PRL 21 resources imminently. Action and recommendation Maintain an Outperform rating and a A$0.50/sh target price: With production set to grow from ~1,200bopd currently to ~8,000bopd by 2014, HZN offers an attractive investment case. Furthermore with PNG gas commercialisation options progressing (including mid-scale LNG), further positive news could be forthcoming. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18 3Q19 2Q20 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 Macquarie Private Wealth Fig 1 FY12 Financial Results Summary Macquarie vs. Actual A$m Production Volume (kboe) 432.1 432.1 0.0% Production rates at Maari fell by 24% to ~12,000bopd Oil & Gas Revenue 50.2 50.4-0.4% Sales revenue declines by 15% despite oil realisations rising by 18% Other Revenue 0.2 0.7-74.1% Operating Costs -9.3-8.8 5.7% Unit opex of U$21.6/boe increased 55% on pcp Other Costs -7.6-7.9-3.8% Corporate overheads were largely flat on pcp EBITDAX 33.4 34.3-2.7% EBITDAX largely inline suggesting no operational surprises Exploration expensed -0.3-1.1-73.6% Exploration expenses were largely flat DD&A -8.1-7.9 1.6% DD&A/boe of U$18.3/boe were largely flat on pcp Other non-cash charges -0.4-0.2 nmf fx losses EBIT 24.6 25.1-1.7% EBIT largely inline with our forecasts Net Financing Costs -5.9-7.5-21.3% Interest expense was lower as HZN started to capitalise interest Income Tax -15.1-6.3 nmf Income tax (ex NZ APT) implies a 42% effective tax rate Adjusted NPAT 3.6 11.3-68.1% Significant Items 4.0 1.9 nmf One-off items relate to revaluation of the convertible note Reported Profit 7.6 13.2-42.0% Adjusted EPS 0.68 1.00-32.3% Source: Macquarie Research, August 2012 Fig 2 Production rates are expected to grow from ~1,200bopd currently to ~8,000bopd once Beibu Gulf and Stanley are commissioned Fig 3 We expect further debt drawdown through the Beibu Gulf and Stanley construction period will see ND/ND+E to rise to ~50% 9,000 boe/d 250 Total Debt - US$m ND/ND+E 70% 8,000 7,000 6,000 5,000 200 150 60% 50% 40% 4,000 3,000 2,000 1,000 100 50 30% 20% 10% - - 0% Maari/Manaia Wei Stanley Source: Company data, Macquarie Research, August 2012 ST Debt (LHS) CB (LHS) LT Debt (LHS) ND/ND+E (RHS) 31 August 2012 2
Fig 4 financials (HZN-AU) Share Price: A$0.30 Outperform Shares: 1130.8m Profit & Loss 2H12A 1H13E FY12A FY13E FY14E FY15E Price assumptions 2H12A 1H13E FY12A FY13E FY14E FY15E Sales revenue US$m 22 28 50 125 258 252 US$/A$ 1.03 1.09 1.01 1.08 1.07 1.06 add other income US$m 0 2 0 4 3 - Oil - Brent US$/bbl 114.22 101.50 112.61 102.75 109.75 117.50 Total revenue US$m 22 30 50 129 261 252 less operating costs US$m (9) (9) (17) (38) 74 68 Production 2H12A 1H13E FY12A FY13E FY14E FY15E EBITDAX US$m 14 21 33 91 187 184 Natural gas PJ - - - - - - less exploration expensed US$m (0) (8) (0) (15) (6) (2) Crude & condensate kbbls 194.1 262.5 439.3 1,232.0 2,226.3 1,758.1 EBITDA US$m 13 14 33 76 181 182 Total production kboe 194.1 262.5 439.3 1,232.0 2,545.1 2,401.0 less dep. & amort. US$m (4) (4) (8) (24) (51) (50) Production rate bopd 1,064 1,438 1,204 3,375 6,973 6,578 less other non-cash costs US$m (0) - (0) - - - EBIT US$m 10 9 25 52 130 132 less net interest US$m (1) 0 (6) (2) (7) (8) Pre-tax operating profit US$m 9 9 19 51 123 124 2500 kboe Gas Crude less tax expense (incl APT) US$m (12) (7) (15) (22) (45) (46) Net operating profit US$m (3) 3 4 29 78 78 2000 add non-recurring items US$m 2-4 - - - Reported profit US$m (1) 3 8 29 78 78 1500 Adjusted profit US$m (3) 3 4 29 78 78 1000 EPS (Adjusted) Acps (0.3) 0.2 0.3 2.4 6.4 6.5 EPS Growth % (145%) 183% (76%) 705% 168% 0% DPS USc - - - - - - 0 DPS Ac - - - - - - FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Franking % 0% 0% 100% 100% 100% 100% EFPOWA shares on issue m 1,131 1,131 1,131 1,131 1,131 1,131 Reserves FY12A FY13E FY14E FY15E Cashflow Analysis 2H12A 1H13E FY12A FY13E FY14E FY15E Natural gas Tcf - - - - Cash receipts from operations US$m 24 30 46 129 261 252 Crude & condensate mmbbl 11.0 9.8 7.3 5.2 less operating costs US$m (3) (9) (13) (38) (74) (68) Total reserves mmboe 16.4 15.1 12.6 10.2 less interest paid US$m (2) (4) (5) (10) (12) (8) less tax paid US$m (9) (7) (15) (22) (45) (46) 2P reserve life years 13.3 5.9 5.2 5.2 Gross cashflow from operation US$m 9 10 13 60 130 129 Mkt cap / 2P reserves US$/boe 21.4 24.1 28.8 35.3 less expl & devlp US$m (49) (82) (79) (182) (61) (4) EV / 2P reserves US$/boe 26.3 28.5 34.2 42.3 less acq./inv. US$m - - - - - - less dividends US$m - - - - - - Per bbl statistics 2H12A 1H13E FY12A FY13E FY14E FY15E add debt movements US$m 25 67 22 118 - - Sales Revenue / boe US$/boe 114.2 106.8 114.3 101.5 101.5 104.9 add equity/other US$m (0) - (1) - - - EBIT / boe US$/boe 49.2 34.7 56.1 42.5 51.1 55.1 Net cashflow US$m (16) (4) (45) (4) 69 125 Profit / boe US$/boe nmf 9.5 8.2 23.5 30.5 32.3 +exchange rate adjustments US$m 0 - (0) - - - Opex/boe US$/boe 26.0 19.8 21.6 14.2 11.8 11.5 Increase in cash US$m (16) (4) (45) (4) 69 125 DDA/boe US$/boe 18.1 17.0 18.3 19.4 20.2 20.7 Net debt (cash) US$m 100 171 12 136 66 (59) NPV @ WACC of 11.0% Balance sheet 2H12A 1H13E FY12A FY13E FY14E FY15E Developing assets US$m A$ps % Cash US$m 19 15 19 15 84 210 Maari 208 0.22 Other current Assets US$m 28 28 28 28 28 28 Static assets & exploration Fixed Assets US$m 304 378 304 455 463 415 Maari upside - M2A/Manaia risked valuation @ 50% 69 0.07 Total Assets US$m 351 420 351 497 575 653 Beibu Gulf risked valuation @ 80% 164 0.17 Current Liabilities US$m 54 53 54 53 53 53 Stanley liquids risked valuation @ 80% 109 0.12 Total Liabilities US$m 189 256 189 307 307 307 Elevala/Ketu Liquids risked valuation @ 40% 122 0.13 Shareholder equity US$m 162 164 162 191 268 346 Static & Exploration 111 0.12 Financial assets Ratio analysis 2H12A 1H13E FY12A FY13E FY14E FY15E Corporate (34) (0.04) ND/ND+E % 38% 51% 7% 42% 20% -21% Cash & Investments 20 0.02 Interest cover x 12.1 x 6.5 x 6.3 x 12.1 x 19.6 x 21.8 x Debt (113) (0.12) Dividend payout ratio % 0% 0% 0% 0% 0% 0% Group NPV 656 0.70 ROA % 3% 2% 8% 12% 24% 22% Shareprice prem/(disc) to NPV -57% ROE % -2% 2% 2% 16% 34% 25% - core NPV per share (A$) 0.38 ROIC % -2% 1% 4% 9% 24% 29% - risked NPV per share (A$) 0.70 Effective tax rate % 93% 30% 42% 30% 30% 30% - unrisked NPV per share (A$) 2.38 EBITDA margin % 61% 69% 66% 70% 72% 73% EBIT margin % 43% 30% 49% 40% 50% 53% Free cash flow US$m -31-67 -42-112 81 134 500 Valuation 2H12A 1H13E FY12A FY13E FY14E FY15E EV/EBITDAX ratio x 33.2 x 25.6 x 13.2 x 4.8 x 2.4 x 2.4 x P/E ratio x nmf 147.1 x 79.1 x 12.6 x 4.7 x 4.6 x P/CEPS ratio x 331.2 x 25.4 x 23.8 x 5.4 x 2.7 x 2.8 x FCF yield % -9.6% -18.3% -13.9% -30.6% 22.4% 37.2% Dividend yield % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Sensitivities (Adjusted Earnings) NPV FY12A FY13E FY14E FY15E Oil price (+US$1/bbl) US$m 655.85 4 29 79 79 delta 0.01-0 1 1 % 0% 0% 1% 1% 2% Source: Company data, Macquarie Research, August 2012 31 August 2012 3
Fig 5 NAV breakdown Production Assets Interest Unrisked Unrisked Risk Risked Risked USD/boe Aps Aps % NPV Sensitivity mmboe USD (m) mmboe USD (m) risked unrisked -$10 Base +$10 Maari 10.0% 5.5 208 100% 5.5 208 37.9 0.22 0.22 32% 0.19 0.22 0.24 Sub Total 5.5 208 5.5 208 0.22 0.22 32% 0.19 0.22 0.24 Developing Assets Maari upside - M2A/Manaia 10.0% 2.8 138 50% 1.4 69 49.4 0.07 0.15 11% 0.05 0.07 0.06 Beibu Gulf 27.0% 6.3 205 80% 5.1 164 32.3 0.17 0.22 25% 0.15 0.17 0.19 Stanley liquids 38.8% 4.4 136 80% 3.5 109 31.0 0.12 0.15 17% 0.09 0.12 0.12 Elevala/Ketu Liquids 34.9% 9.1 304 40% 3.7 122 33.3 0.13 0.32 19% 0.10 0.13 0.14 Sub Total 22.7 783 13.6 464 0.49 0.83 71% 0.39 0.49 0.51 Static assets and exploration Beibu Gulf: Wei 12-8E upside 27.0% 4.8 110 30% 1.4 33 29.1 0.04 0.12 5% 0.03 0.04 0.04 Stanley contracted gas 38.8% 23.3 169 20% 4.7 34 7.3 0.04 0.18 5% 0.04 0.04 0.03 Stanley uncontracted gas 38.8% 0.1 0 15% 0.0 0 3.0 0.00 0.00 0% 0.00 0.00 0.00 Ketu/Elevala uncontracted gas 34.9% 32.9 99 10% 3.3 10 3.0 0.01 0.11 2% 0.01 0.01 0.01 PRL 21: Tingu 34.9% 23.3 233 5% 1.2 12 10.0 0.01 0.25 2% 0.01 0.01 0.01 PEP 51313: Whio 30.0% 3.8 105 3% 0.1 3 27.7 0.00 0.11 0% 0.00 0.00 0.00 PEP 51313: Matariki 30.0% 32.9 239 2.5% 0.8 6 10.0 0.01 0.26 1% 0.01 0.01 0.01 PEP 51313: Te Wahtu 30.0% 16.8 123 2.5% 0.4 3 10.0 0.00 0.13 0% 0.00 0.00 0.00 PEP 51313: Pukeko NE 30.0% 10.0 55 2.5% 0.2 1 10.0 0.00 0.06 0% 0.00 0.00 0.00 Block 22/12: 6-12 North 53.9% 1.6 37 5% 0.1 2 26.2 0.00 0.04 0% 0.00 0.00 0.00 Block 22/12: Sliver 53.9% 1.6 37 10% 0.2 4 26.2 0.00 0.04 1% 0.00 0.00 0.00 Block 22/12: Liushagang 53.9% 6.5 164 2.5% 0.2 4 26.2 0.00 0.17 1% 0.00 0.00 0.00 Sub Total 158 1,370 12.6 111 0.12 1.46 7% 0.11 0.12 0.12 Financial & Corporate Cash 20 0.02 0.02 3% 0.02 0.02 0.02 Debt (39) (0.04) (0.04) -6% (0.04) (0.04) (0.04) Hedge Book 6 0.01 0.01 1% 0.01 0.01 0.00 Convertible Bond (80) (0.09) (0.09) -12% (0.09) (0.09) (0.09) Corporate costs (34) (0.04) (0.04) -5% (0.04) (0.04) (0.04) Sub Total (127) (0.14) (0.14) -19% (0.13) (0.14) (0.14) Overall total 186 mmboe 656 USDm 0.70 2.38 90% 0.57 0.70 0.73 - core NPV per share (A$) 5 0.38 0.30 0.38 0.41 - risked NPV per share (A$) 32 0.70 0.57 0.70 0.73 - unrisked NPV per share (A$) 186 2.38 2.06 2.38 2.37 Diluted shares outstanding (m) 1,144.2 Ordinary Shares on Issue (m) 1,130.8 New shares from options and convertible debt (m) 13.4 Exchange Rate 0.82 WACC (post tax) 11.0% Share Price 0.30 Price premium to NPV -57% Source: Macquarie Research, August 2012 31 August 2012 4
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. 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The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 31 August 2012 5