Strong Growth Ahead For Horizon Oil

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This story features HORIZON OIL LIMITED, and other companies.
For more info SHARE ANALYSIS: HZN
The company is included in ALL-ORDS

– Stockbroker UBS has initiated coverage on Horizon Oil with a positive view

– Most other brokers covering the stock equally rate it positively

– Horizon is seen as offering strong growth at a lower risk profile

– Several catalysts are seen in the short to medium term

By Chris Shaw

Horizon Oil ((HZN)) is an oil and gas explorer and producer, with assets in both New Zealand and China. The company currently generates production via a 10% stake in the Maari field in New Zealand, which delivered revenues of US$50 million in FY10 and is expected to contribute US$64 million this year.

UBS has today initiated coverage on Horizon with a Buy rating and a price target of $0.48. This brings coverage on the company to four brokers according to the FNArena database, with BA Merrill Lynch, Macquarie and RBS Australia also actively researching the stock.

In terms of future growth Horizon has the Beibu Gulf project, where it has a 14.7% interest. Beibu is expected to be in production by late 2012. As well, Horizon has a 38.8% stake in the Stanley field in Papua New Guinea, where a liquids-stripping project has been proposed.

The fact Horizon has a stake in both the Beibu and Stanley projects highlights its corporate strategy, which UBS notes is to form joint ventures with strong partners who can operate projects rather than act as the operator itself. UBS points out this also means Horizon is not overly dependent on exploration success to deliver production growth, which makes its growth somewhat lower risk. 

According to UBS, the attraction of Horizon is the group has a number of potential share price catalysts in coming months. One is a Final Investment Decision on the Beibu Gulf project, which has already been achieved following an announcement yesterday by partner Roc Oil ((ROC)). 

Another potential catalyst is the granting of a Production Development Licence for the Stanley project by the PNG government, something UBS expects will come in the shorter-term. The project is shaping up to commence production either late in 2012 or early in 2013. UBS notes recent drilling has been successful and may result in a resource upgrade.

Also in PNG, Horizon's share price suffered last November when the government announced it would not renew a PRL-5 licence to the Stanley joint venture partners on the basis licence conditions were not fulfilled. 

The JV partners have appealed and UBS expects a positive resolution to the issue, something the stockbroker sees as boosting the share price given 49.5 million barrels of oil equivalent of contingent resources have been identified.

Reserves could also enjoy a boost from the Manaia-1 well, which is currently undergoing production testing. At present Horizon has booked 0.5 million barrels of 2P reserves and 1.1 million barrels of contingent resource, so success here could mean further upgrade to reserves.

The Matariki prospect also offers some exploration upside. UBS points out seismic data for this project are currently being assessed with a view to drilling commencing either late this year or early in 2012.

With Horizon offering exposure to a range of projects, earnings growth is expected for the years ahead. UBS is forecasting earnings per share (EPS) of 2c this year, 3c in FY12 and 5c in FY13. Consensus EPS estimates according to the FNArena database stand at 2.3c this year and 2.9c in FY12.

UBS's Buy rating is in line with most views in the market as the FNArena database shows Horizon scores three Buys and just one Hold rating, this courtesy of RBS Australia. RBS's view reflects the uncertainty of the PRL-5 licence appeal, as well as some negative earnings impact from a stronger Australian dollar.

UBS's price target on Horizon of $0.48 is above the consensus target according to the FNArena database of $0.42, with RBS the low mark with a target of $0.32 and UBS the highest in the market.

Over the past year the trading range in the shares has been $0.255 to $0.39. The present share price (Tuesday afternoon) implies upside of around 12% to the consensus price target in the FNArena database.

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