Spot valuation 22c

Horizon Oil Limited (HZN) - Broadening the Horizon

The Brent oil price edged above US$77/bbl on Tuesday for the first time since 2018. This is despite macroeconomic jitters from investors anticipating an acceleration of US interest rate rises, potential sell-downs of Chinese inventories across key base metals, and varying degrees of international lockdown obligations. We see oil demand tailwinds persisting through the 2H of 2021 as the IEA expects demand to exceed pre-covid levels by end-2022, with added near-term supply uncertainty stemming from failed OPEC+ discussions. HZN in our view is best placed to capitalise, culminating in a continuation of free cash flow and a potential acceleration of capital returns initiatives. Maintain BUY and update TP to A$0.17/sh (from A$0.16/sh) on revision of near-term oil forecasts (figure 1), with our valuation increasing to A$0.22/sh at spot.

Fundamental view on HZN is strong

• HZN has risen 77% YTD and is the only oil and gas stock on the ASX to outpace Brent oil (Figure 2).

• There are several reasons why we like HZN and think it will continue to outperform in a higher oil price environment. This includes:

o Producing asset mix with direct oil exposure
o Strong balance sheet and operating cash flow
o Recent capital management initiatives; and
o Low cost portfolio

• HZN intends to pay a capital return of 1.4cps (A$22.1m), subject to a shareholder vote. This equates to a 13% yield. We expect a free cash flow linked dividend to commence in FY23, post debt repayments.

• Solid progress has been made on the WZ12-8E development. First oil is expected to commence in 1Q 2022 at ~4,000bopd. HZN’s share of project development costs to completion is ~US$15m.

Sensitivity analysis – HZN best placed to capitalise

• HZN is a relatively unique proposition offering small-mid cap oil exposure. We prefer this to larger cap peers more heavily weighted toward LNG and domestic gas exposure Figures 3 & 4.

• We have performed a sensitivity analysis of key oil & gas stocks to different financial metrics at various oil price points. At current spot prices of US$77/bbl our forecast HZN 2022 EBITDA rises 16%, and our PT rises 30% (Figures 5-9).

Key Dates Ahead

• Mar. Q’22 – WZ12-8E first oil targeting 4,000bopd.