Cash Harvesting andDistribution Strategy - Change...

Cash Harvesting andDistribution Strategy - Change Coming?

Currently HZN is throwing off lots of cash from 2 low cost oil producing assets.

Current statedcompany strategy is to search for an acquisition to secure growth for HZN, and if a suitable acquisition cannot be found in the next 12 months or so, then cash flow will be returned to shareholders. HZN has also stated that they have an aspiration to return up to 30% of free cash flow to shareholders. HZN commenced a Buyback program, which was subsequently cancelled when a $0.014 / share capital return was announced.

Samuel Terry recently acquired 300m unlisted options from HZN's largest shareholder, IMC. They exercised these options early (June 21 versus mid-Sep 21 expiry). Phil Burgess, Samuel Terry, was appointed to the board as at 1/7/21. ST had previously acquired approx 55m HZN shares when Colonial Fist State exited. ST sold 41m shares to FundX in order to stay under the 20% takeover trigger.

Start of CapitalReturn Late June 21, a $0.014 capital return was announced, and is subject to approval at an EGM late-July. Buyback was cancelled. It is likely that this initiative was sparked by the ST acquisition and early exercise of the IMC options. Clearly this is the main source of funds for the capital return, but the timing of the announcement (pre-ST director appointment versus at the Annual in August) may indicate that ST may have already made their preference clear, i.e., the board did not want it to appear that they were being pushed around by the new kid on the block.

Do Shareholders Wantto Harvest Cash, Concentrate on Developing/Milking Current Assets and Distribute All Excess Cash I believe that there is growing shareholder pressure to halt the search for an acquisition; cut costs (saving at least aud$7m p.a. = approximately $0.005 / share / annum and NPV10 of $0.03 / share.); and distribute resulting cash to shareholders. I estimate that this would be in the range of $0.05 to $0.06 in the next 14 months - 2 Annual Results.

Firstly, supporting this strategy, there is a group of high net worth/retail investors holding 8%+.

Based on Samuel Terry investments detailed on their website (Yellow Pages NZ; Spicers), I believe that Cash Harvesting would be their preferred option. ST has 19.92%. Cumulative = 27.92%+

ST sold 41m shares to FundX who are likely to be on the same page as ST. FundX has 2.59% Cumulative = 30.51%+

Spheria has been invested in HZN for a substantial period of time, and I believe that it is very likely that they would back ST in a change of strategy to Cash Harvesting. Spheria holds 9.03%. Cumulative = 39.34%+

I am not as confident regarding IMC's thinking (acquisition vs Cash Harvesting), but given they sold their 300m unlisted options to ST, it is likely that they would back a ST Cash Harvesting Strategy (if that is ST preference). IMC holds 25.53%. Cumulative = 64.87%+

Clearly a percentage of the remaining retail investors would support a cash harvesting strategy. Assuming half, that would be another 17%+. Cumulative = 80%+.

Timing If I am correct that the clear preference of the majority of shareholders (up to more than 80%?) is to Harvest and Distribute cash, then the picture should become clearer at the late-July Capital Return EGM, and if not at the EGM then it should be crystal clear at the late August AGM.

Milking ExistingAssets. Current assets have a reasonable life: China 2028 plus; NZ 2030 plus. There is modest low cost, high probability of success upside in both China and NZ; 12-8-E China will come online in early 2022, should be a reasonable earner, but there is also a possibility that it may also be the start of something very substantial (very large resource, but viscous oil, so budgeted recovery factor is very low); there is also a significant, higher cost, lower probability of success opportunity in NZ - this opportunity is less likely to be pursued.

The AcquisitionOption IMO the only way that an acquisition be made if HZN can secure a compelling deal. Given that the oil price is strong at the moment, I would assume that fire sale opportunities would no longer be available. HZN are not an operator which excludes them from many of the best deals. In a nutshell, given that HZN has been looking for more than 12 months, and have been unable to find a suitable acquisition, I believe that it is unlikely that they will pull a rabbit out of the hat in the near future.

Hence, I believe thata change to a Cash Harvesting Strategy is probably imminent.