Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

Stock Of the Day  - Horizon Oil  (BUY)

Horizon Oil is engaged in the business of exploration and production of oil and gas primarily in properties in Southeast Asia. Its properties include the Maari/Manaia fields and Offshore Taranaki Basin offshore in New Zealand; the Stanley condensate/gas development and the Elevala and Ketu projects located in Papua New Guinea and the Block 22/12 in China. Horizon Oil’s working interest share of production from the Beibu Gulf fields was 1,248,190 barrels of oil and from the Maari and Manaia fields was 186,345 barrels of oil. In Papua New Guinea the company has been granted a permit for PDL 10 with principal assets in Stanley field.


Financial Highlights (Source - Company Reports)

Despite the decline of 18% in sales revenue year-on-year to US$ 53.148 million from US$ 64.769 million, both EBITDAX and EBIT grew by 33% to $ 43.731 million and 53% to US$ 15.905 million respectively. Profit before tax rose by an impressive 342% to US$ 7.932 million while profit after tax was $ 7.343 million after a small loss in the previous year. Cash on hand as of the end of the half-year was 17% higher at US$ 43.5 million though cash flow generated from operations declined 19% to US$ 21.982 million.
 

Net Operating Income + Reserves (Source - Company Reports )

The Group reported a profit of US$7.343 million for the half-year compared with a loss of US$47,000 in the previous half year. The result includes a gross profit of US$ 22.349 million (2013: US$ 15.059 million) from Block 22/12 and Maari operations as well as other income including insurance claim proceeds of US$3.8 million. Corporate general and administrative expenditure of US$ 4.2 million, exploration and development expenses of US$ 10.9 million, financing costs of US$ 8 million and income and royalty tax expense of US$0.6 million were offset against this income. In addition, a favourable movement in the mark-to-market valuation of the convertible bonds resulted in a gain of US$ 4.7 million.


Oil Price Hedge (Source - Company Reports)

Oil and gas production was down by 8% to 618,665 from 672,144 barrels.
 

China: Horizon Oil's working interest share of production from the Beibu Gulf fields was 487,883 barrels of oil and crude oil sales were 455,561 barrels executed at an average price of US$83.15/bbl ( without accounting for executed hedging). Cumulative production from the fields through 31 December 2014 was 7.1 million barrels and production for the year 2014 at 4.08 mmbo was about 5% in excess of the budget. The preliminary estimate of two successful exploration wells established a recovery potential of around 10 mmbo. These discoveries will now be integrated into the overall development plan for the oilfields.


Production + Revenue (Source - Company Reports )
 
New Zealand: The working interest share of production from Maari and Manaia fields was 130,782 barrels of oil and oil sales were 109,835 barrels at an average effective realisation of US$98.10/bbl net of hedging.Cumulative oil production from the fields through 31 December 2014 was 25.2 million barrels. Progress was made in the Maari Growth Program which is designed to increase the rate of production and discovery including new wells and the makeover of the existing wells.
 
Papua New Guinea: After receiving the Stanley development licence, the Stanley-3 and Stanley-5 development wells were drilled and completed. Activity on projects development is continuing with an emphasis on finalisation and issue of equipment fabrication and construction tender packages in coordination with key government departments and local owners of the land. Because of the recent changes in oil prices, the review process has commenced to ensure the optimum conditions in terms of design, cost and timing.


Profit & Loss Analysis (Source - Company Reports)

Despite the substantially lower prices for oil, operating cash flows are expected to be maintained at current levels because of the completion of the production related projects as well as an effective price hedging strategy. Moreover, the bottom line should be sustained with the 50% reduction in planned capital expenditure which should be less than $ 50 million. In New Zealand, the Maari growth project will be completed leading to an increase in production from current levels. Oil production in China will be optimised including the exploitation of results which have not yet been developed.
 

Oil Price Movements (Source - Company Reports )

In fact, it is worth looking more closely at the oil price scenario. Horizon’s reaction to the oil price downfall is as follows:-

-Protect operating income with the appropriate hedging strategies up to the middle of 2016
-Strict cost controls on capital expenditure as well as discretionary expenditure for the calendar year 2015
-Spending on the development of new fields will take full advantage of the deflation in costs
-Priority will be given the management of business risk.


Horizon Oil Daily Chart (Source - Thomson Reuters)

Clearly, the company has been able to control the situation resulting from the depressed oil prices and should continue to maintain its performance. The geographically balanced asset portfolio should also help in this process. The P/E ratio of around 12.50 indicates that, in view of the strong forecast performance despite the slump in the oil prices, there is still plenty of upside at the current price. We put a buy recommendation on the stock at the current price of $0.135.