Horizon can fund Stanley

Horizon steps from shadow of merger that wasn’t David Upton Friday, 19 September 2014

INVESTORS make life tough for most mid-caps, but for Horizon Oil there are fresh challenges after it was left standing at the altar of its planned marriage with Roc Oil. Horizon Oil CEO Brent Emmett. The Roc-Horizon merger attracted a lot of publicity because of noisy Roc shareholders. They ultimately got their way when Fosun came along with an alternative offer that allowed them to get their cash out quick. Horizon was left behind to deal with all the folklore that materialised around the failed merger. This includes the idea that higher-profile Roc was the major partner in the deal, when in fact Horizon was bringing 60% of the value. The bigger legacy issue, however, is the view that Horizon needed Roc’s near-term cash generation to fund the development of its PNG assets. Horizon managing director Brent Emmett told PNG Industry News that Horizon already had all the cash it needed to develop its first two projects in PNG – the Stanley gas field and the Elevala/Ketu condensate stripping project. Furthermore, Horizon is in a strong position to fund its share of a subsequent LNG project with Osaka Gas in PNG’s Western Province. “Our primary motivation for the merger with Roc was to overcome the chronic under-valuation of mid-caps that has persisted since the global financial crisis in 2008-09. “All the mid-cap companies are in that boat and are being valued at around about 0.6 times their net present value. “The larger companies with a capitalisation of $1 billion or more are being valued at about 0.9 times NPV [net present value], so they get a considerably better valuation because of their scale. “The main motivation for Roc and ourselves in the merger was to create a leading independent E&P company with that scale and a very clear Asian focus.” Emmett said one of the secondary benefits of the deal was the complementary strengths of Roc’s near-term cash generation and Horizon’s substantial growth projects. “Some in the market have jumped to the conclusion the deal was essential to funding the development of our PNG assets, but that’s just wrong.” He said the development costs in PNG were well defined and the funds had already been earmarked. “At the end of last financial year on June 30, we had about $100 million in cash, and remaining undrawn funds on a $150 million facility,” Emmett said. “Our share of the Stanley field development is about $75 million, so that’s not a challenging amount. Costs will be incurred in stages over the next two years during which we will be generating over $200 million of EBITDA.” Horizon recently reported a three-fold increase in net cash generation from $23 million in FY13 to $75 million in FY14. This reflected a sharp increase in annual production from 504,000 barrels to 1.4 million barrels following the commissioning of the Beibu Gulf fields in March 2013. The company has not provided guidance for FY15, but has stated that operating cashflows are expected to increase significantly. The Maari field, where Horizon has a 10% interest, is expected to double gross production to 20,000 barrels of oil per day following last year’s major upgrade of project facilities. At the Beibu Gulf project (Horizon 26.95%), natural field decline will reduce gross production, but Horizon’s revenues are expected to hold steady because of increased cost recovery. Emmett said the next project after Stanley – the condensate stripping project in PRL 21 – would be about a $1 billion development, with Horizon required to fund about $210 million for its 21% share. “Those costs are further out again and we will be able fund that almost entirely from cash, although we would sensibly use some debt,” he said. “That will be taken into account when we refinance our debt facility most likely by the end of this year.” The third PNG development project – an LNG project based on gas fields in the Western Province – is another step up again in scale and costs. Horizon’s farmout to Osaka Gas included a $130 million cash payment on the final investment decision for that project, which means the company already has a big down-payment on the equity it can sink into its share of the development. Emmett said people asked him what Plan B was for Horizon after the failed merger. “I answer that by saying Plan B was the merger,” he said. “Plan A was to do what we are back to doing now, and that’s developing our reserves, which withstood all the scrutiny of the independent experts in the merger deal. “In round figures, we have about 15 million barrels of 2P reserves, and proven and probable resources of another 15 million barrels of oil and about 400 billion cubic feet of gas. “At reasonable netback prices, there is $5 billion of future revenue in those reserves. That’s worth going for and that’s Plan A.” Emmett conceded that organic growth would take longer than a merger to build Horizon up to the $1 billion capitalisation milestone and beyond, and the hoped-for re-rating by the market. “Our shareholders are primarily looking for growth, not to get their cash out, and that’s what we’re about,” he said. Emmett said the company was still open to other deals or mergers. “We still believe very much in the idea of an Asian E&P champion, and if another corporate opportunity was to come along and provided the right kind of fit we would be open to that, but we are not actively looking for it,” he said. “That was one of the side benefits of the failed merger. People know we are out there now and we are deal-orientated.” Emmett added there was also a silver lining in that Fosun’s price for Roc provided a clear fix on the value of the Beibu Gulf fields – Horizon’s key producing asset. ‘The look-through valuation on our stake in Beibu Gulf is about $280 million,” he said. “When you compare that to our market capitalisation of just over $400 million, you can understand why we are keen to break out of the poor valuations placed on the mid-cap sector.”