At face value I can see why this announcement would be sold in...

At face value I can see why this announcement would be sold in to. Basically, CE1 looks like a business that is making good headline profit but we're not seeing the cash as capex is so high.

What I think gets lost to the casual observer is that the growth capex investment is impacting cashflow now but will provide a large benefit in 2023. Take out the headwind that was hedging and the normalised FCF is actually pretty good... and that excludes Montney, which I think is multiples of the current SP.

One thing I do look at is how the business performs against their forecast. Obviously they can't control the oil price but the other inputs have a better element of control.

Here's how it looks. If you look at the June forecast to the 2022 actual, production was down 4.8%, which was probably the most disappointing aspect. The lower oil price impacted revenue, but that was partially offset by a lower royalty (due to lower production). G&A and hedging made some gains but capex was higher. The opex inflation was actually quite significant. If you track it on an annual basis it's very high. Looking at it QoQ hides the impact that it had - hopefully management are correct and that subsides and becomes a slight tailwind.





But if I use the high level 2022 inputs from above and look forward 12 months, on fairly conservative assumptions (i.e. AUD oil equivalent price at A$70 vs as high as $107 in 2Q22, plus more cost inflation and reasonable production numbers), it looks something like this.

Key assumptions:
* $10m in growth capex but factoring in more declines based on the January numbers of 4,550 boe/d.
* $35m maintenance capex per guidance
* AUD oil equivalent price at the 2022 quarterly low of A$70
* Opex/Revenue costs increase from 21.5% in 2022 to 23%
* Slight increase in G&A + interest costs from 4.7% of revenue to 5% despite there being no debt vs there being debt during part of 2022 - this should massively outperform btw

Overall, with those assumptions, I'm still getting a FCF yield on the current market cap of a respectable ~16%. If I put a higher oil price, lower costs and slightly higher production, that changes materially. But obviously these are assumptions.

So the key point is that while at face value the business doesn't seem to spitting out cash relative to its production profile and profit, it's actually much better.

Unlike others, I'm in the camp of paying out profits as dividends and sweating the assets. I'm a holder of HZN and that is a great example of how shareholders can benefit. Large payouts and an increasing SP.