Company Overview - Horizon Oil Limited is engaged in petroleum exploration, development and production. The Company operates in five segments: New Zealand development, New Zealand exploration, China exploration and development, PNG exploration and development and other segments. New Zealand development is engaged in producing crude oil from the Maari/Manaia fields, located offshore New Zealand. New Zealand exploration is engaged in the exploration and evaluation of hydrocarbons in two offshore permit areas, PEP 51313; and PMP 38160 Maari/Manaia. China exploration and development is engaged in developing and producing of crude oil from the Block 22/12-WZ6-12 and WZ12-8W oil field development and in the exploration and evaluation of hydrocarbons within Block 22/12. PNG exploration and development is engaged in the Stanley condensate/gas development (project FID during 2012), and the exploration and evaluation of hydrocarbons in six onshore permit areas, PRL 4, PRL 21, PPL 259, PPL 372, PPL 373 and PPL 430.

Analysis – HZN’s FY14 Net Profit After Tax (NPAT) of $12.8m was up 267% on prior year. NPAT was driven by a full year’s contribution from Beibu Gulf and the $23.8m profit on sale of a 40% stake in HZN’s PNG assets to Osaka Gas. Importantly operating cash flow was $65m, up from $15.35m on the prior year. HZN exited FY14 with $98.9m cash, $119m debt and $80m convertible notes. HZN hasn’t provided production or capex guidance for FY15. HZN has 80mmboe of 2C contingent resources, with 72% of these in the undeveloped PRL21 and 81% in PNG gas volumes. The Stanley-5 development well (HZN 30% interest) flowed at 68mmscfd on test; the next well, Stanley-3 will be drilled as a future gas injector.


Stanley 5, PNG (Source - Company Reports)

Work continues at the Maari Growth Project (HZN 10%) to add 4 new production wells, 1 injection well and a workover of the existing MR2 dual lateral well. The project is expected to increase output up to 20,000 BOPD when completed in 1H15, a sizeable uplift from the 6,838 BOPD average in June Quarter. Work is progressing on the Stanley gas-condensate development in PNG (HZN 30% interest), with the project expected to be online in 2H2016. The undeveloped gas and resources in PNG provide significant upside potential for shareholders in the medium to long term in our view.



Reserves + Resources (Source - Company Reports)

In our view, Horizon’s production will increase over the coming years as increased output from the Maari Growth Project and new production from the Stanley liquids stripping project come online. The development license for the Elevala-Ketu-Tingu field liquids stripping project is expected in 2015. Material upside also exists in the potential commercialization of the company’s gas resource in PNG. Horizon has material gas resources in Papua New Guinea and progress on commercialization of the gas is ongoing. We see multiple options for commercializing this gas including domestic sales and potential for an LNG option with JV partners Talisman and Mitsubishi.


Production + Revenue (Source - Company Reports)

While HZN delivered a number of highlights for FY14, the failed merger was a disappointment given a number of potential benefits including a significantly increased production base, scale and relevance to additional investors. While disappointing the outcome does not impact HZN’s underlying existing business and it has a busy FY15 focused on executing current development projects and advancing studies and approvals for its next phase of growth.


Profit Analysis (Source - Company Reports)

The successful execution of development works at Maari is a key objective for FY15 with the program incorporating 4 new infill wells, a new injection well, a work over of the MR – 2 dual lateral; and targeting an increase in production towards 20,000bopd in early 2015. Two of the key production wells should be completed in the 2HCY14 and hence we anticipate an increase in production in the December Quarter.


Cash Position (Source - Company Reports)

Following the granting of a development license at Stanley, HZN commenced development activities, spudding the Stanley-5 well on the 16^th of June. The size and quality of the Toro and Kimu reservoirs was reportedly above expectations. This was highlighted by the recent flow test, with the well flowing at 68mmscf/d; and together with Stanley - 2 well has demonstrated productive capacity well in excess of the plant capacity. The Stanley – 3 injection well will now be drilled with the well expected to spud shortly. Award of a PDL at Stanley was also important inn demonstrating a path to market and de-risking the much larger 60mmbbls condensate resource in PRL 21. FEED studies are underway in order to refine the development plan and costs and move to an FID decision in early 2015.


Net Cash + Cash Position (Source - Company Reports)

During FY14 HZN acquired an additional 20% interest in PRL259, taking its interest to 35% (post Osaka deal) via a farm-in with Eaglewood Energy. Following the completion of Stanley – 3 the rig will be used to drill the first well in the permit, Nama – 1. Nama is located in the highly prospective gas/condensate fairway near Stanley and is thought to similar in size to Stanley (399bcf and 13mmbbbls). The drilling will be a key catalyst for HZN given the success rate to date, the potential to add condensate volumes and to firm up its net share of gas resources for a potential regional gas development.


NPAT (Source - Company Reports)

Maintaining production rates close to current levels at Beibu Gulf will be a key objective for the JV. Several of the wells remain on natural flow back and hence the completion of these wells on pump has the potential to support rates. The current water cut is reportedly below expectations, a positive indication of increased longer term recovery. The JV is also set to commence drilling 2 exploration wells, which if successful would be readily tied back to the production infrastructure.


HZN Daily Chart (Source - Company Reports)

Near term share price driver is Maari growth project completion, medium term Stanley and PRL21 progress, longer term PNG gas. CY15 will bring the Maari Growth Project online with a production estimate of 20,000 BOPD. 2016 brings the startup of the Stanley gas-condensate project (4000 bbl/day gross) as well as the progress on the EKT development. Hidden value in HZN continues to revolve around the undeveloped gas resources in PNG. Even if HZN doesn’t make progress on the gas commercialization front in the next 12-18 months we believe other companies will see value in the HZN’s PNG gas resources. This could make HZN an attractive takeover target if the share price refuses to factor in sufficient value for this resource. We reiterate our BUY on the stock at the current price of $0.325.
 
 

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