HZN offers pure leverage to Brent oil on account of its 100% oil production from its Chinese and NZ offshore producing assets.
At 5,000bbls/d net effective production, HZN ranks as the 8th largest producer on the ASX and the 4th largest oil and gas producer ex-100. Notably, HZN is the 3rd largest oil producer ex-100, behind BPT and SEA.
Despite this, HZN trades at half of its peer group on an EV/flowing bbl basis
at only $53,000/bbl. Operating margins of over US$30/bbl ensure that the business will deliver over US$60m/yr in operating cash flow to at least end FY22 on existing reserves. HZN’s production supports over US$50m/yr average Free Cash Flow (ie Op Cashflow after capex).
HZN trades at 4.3x EV:EBITDA FY’18, falling to 2x FY’22. And 3.6x FY’18 FCF trending to 3.0x FCF through FY’22. This represents multiples effectively one third of its peer group. Yet the Company’s production base is 100% and fully developed ie not cum-capex. HZN is clearly cheap.
What we like about the HZN opportunity is that the operating business represents a compelling investment case on a relative basis: Peer analysis suggests that with ongoing cash generation, serving to bring the Balance Sheet into a net cash position within 2yrs (ie Jun H, FY’20 on our analysis), will see the stock track higher, to better align with the peer group. In our experience the market rewards resource companies that see its operations systematically de- gear their Balance Sheet.
Therefore, the considerable upside case for HZN is not reflected in any capacity in the current Enterprise Value on that basis. HZN’s western foreland PNG interests contain, discovered (and flow tested) gross recoverable liquids rich gas volumes in excess of 2Tcf (HZN net share – 603Bcf and 19mbbls). The Company is progressing plans for a small scale, ~+2mtpa LNG development, exporting from the port of Daru. FID would crystallise a US$130m staged (US$50m up front plus US$80m in carry) payment from Osaka Gas.
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