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Kalkine Daily 02/02/2015 + Horizon OIL

Feb 06, 2015

| Read Time :10 Mins

In today’s daily we have covered stock research on Horizon Oil (BUY).

The S&P 500 was down by 26.26 points or 1.30% to 1994.99. U.S. stocks closed down on Friday after a volatile session as investors worried at the end of a rough month for the market about weak U.S. growth data and whether instability in Europe could hurt corporate earnings in the United States. U.S. economic growth slowed sharply in the fourth quarter as weak business spending and a wider trade deficit offset the fastest pace of consumer spending since 2006.

For the week, the Dow and S&P were each down 2.8 percent, and the Nasdaq fell 2.6 percent. For January, the Dow was down 3.6 percent and the Nasdaq was off 2.1 percent. The end-of-week decline came as investors’ initially sanguine view of the Greek election outcome was tested by the new government’s plans to roll back economic reforms, and a pledge by the new finance minister that it will no longer co-operate with its international lenders.

S&P 500 Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was up by 18.84 points or 0.34% on Friday and closed at 5588.32 points. For the week Westpac Banking Corporation was up 3.9 per cent to $34.46, ANZ Banking Group rose 2.8 per cent to $33, and National Australia Bank jumped 6 per cent to $35.63. Macquarie Bank which upgraded its profit growth forecasts during the month leapt 6.5 per cent to reach a post global financial crisis high of $62.66 on Friday, before closing at $62.08.

Gold stocks were winners in the month of as investors flock to safe haven assets such as the precious metal. Troubled rare earths producer, Lynas Corp, suffered the heaviest losses in the month after it declared the improvement in cash flow from the December quarter would not be sustained. It fell 33.8 per cent to 4.5c. Engineering firm, Bradken also lost 42.2 per cent to $2.76 after Pacific Equity Partners and Bain Capital ditched a bid for the firm.

NAB Daily Chart (Source – Thomson Reuters)

Top Performers on the ASX 200 were :-

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Stock of the Day - Horizon Oil (BUY)

HZN has reported a December quarter production of 0.31mmbbl, 1.9% below the September Quarter. Sales volumes were a little lower at 0.27 mmbbl. Realised oil price fell 28% quarter on quarter to US$71.35/bbl (Sep qtr: US$99.17/bbl), although hedging raised this to US$89.28/bbl. HZN has over 842,500 of oil hedged at an average of US$95/bbl until mid-2016, providing significant downside protection. We estimate HZN has hedged 41% of its forecast oil production over the next 18 months.

Performance Highlights (Source – Company Reports)

Work continues at the Maari Growth Project (HZN 10%) to add 4 new production wells, 1 injection well and a workover of the existing MR2 dual lateral well. Maari was producing 8,500 BOPD at the end of the period. The JV operator has previously forecast oil production peaking at over 20,000 BOPD. HZN mentions that it is completing "Value Engineering" reviews at the Stanley gas-condensate field (HZN 30%) and Elevala/Ketu/Tingu fields (HZN 27%) to look at cost reduction initiatives.

Net Operating Income (Source – Company Reports)

The Nama-1 expl well was commercially unsuccessful, a disappointing outcome given HZN spent US$18.5m on the well in the 6 months to 31 Dec '14. The hedging program in place is providing downside protection HZN, with HZN forecasting operating income in CY15 of US$86m, even if oil prices average US$55/bbl (CY14: $91m), though debt levels remains a concern at US$190m.

HZN Daily Chart (Source - Thomson Reuters)

Horizon has material gas resources in Papua New Guinea, and progress on commercialisation of the gas is ongoing. We see multiple options for commercialising this gas including domestic sales and potential for an LNG option with JV partners Talisman and Mitsubishi. At 31 December HZN had cash of US$43.5m and debt of US$190m, implying a net debt level of US$146.5m. With the oil price falling by more than 50% since June 014 investors are increasingly focussed (and wary) of companies with high levels of debt. HZN's position is partly mitigated by its hedging strategy. We like the HZN story and pout aa BUY on the Stock at the current price of $0.125.

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