Australia | Mar 19 2012
– Horizon's look through valuation boosted by recent sale
– Transaction also positive for market's view on Stanley development
– Stockbrokers see other positive catalysts in coming months
– Buy ratings retained on Horizon
By Chris Shaw
Horizon Oil ((HZN)) has a number of assets in Papua New Guinea, including 50% and 45% stakes in PRL 4 and PRL 21 respectively. Macquarie had previously ascribed these stakes with a risked value of US$255 million.
This makes the recent sale of a stake in both blocks by Talisman significant. As Macquarie points out, Talisman has sold 10% and 7.5% stakes in PRL 4 and PRL 21 respectively for US$39.5 million and A$22.1 million. This gives a read-through value for Horizon's stake of US$331 million, a solid premium to Macquarie's previous estimate.
It is an even larger premium to the estimate of BA Merrill Lynch, which had valued the stakes of Horizon at around US$200 million. BA-ML estimates the sale price equates to a value for the Horizon stakes of around 30c per share.
The deal is also positive for the market's view on commercialisation of Horizon's Stanley gas project. Macquarie estimates the deal potentially values Stanley gas at US$65 million. With the Papua New Guinea cabinet approving plans for a Stanley gas-fired power station, gas commercialisation options are progressing in the broker's view.
A further positive for BA-ML is Horizon has mandated a bank consortium to provide $160 million in reserve based financing. While no deal has yet been done the broker suggests progress is being made, which significantly reduces the risk of a near-term equity raising. Macquarie agrees, expecting the reserves-based debt facility could be secured by the end of this month.
Looking forward, the next catalyst for Horizon should be drilling results from Ketu-2, which are expected by the middle of next month. Assuming the next round of results are encouraging, Macquarie see this as a positive with respect to de-risking the Tingu project.
In early 2013 Horizon expects to commence production from the Beibu development in China. This supports the market's expectation of earnings picking up from FY13, as the FNArena database shows consensus earnings per share (EPS) forecasts of 1.1c this year and 3.4c in 2013.
The database shows a consensus price target for Horizon of $0.47, with BA-ML the low mark with a target of $0.42 and Macquarie the most aggressive with a target of $0.55. Given the look through pricing indicated by the Talisman deal, Macquarie argues the market is ascribing limited value for the rest of Horizon's assets.
This appears overly harsh, as Maari has been developed and is in production and Beibu should be producing in the next year. This supports Macquarie's Outerform rating, which is matched by the other three brokers in the FNArena database to cover Horizon.
Shares in Horizon Oil today are slightly higher, trading up 0.5c at 31.5c as at 12.05pm. This compares to a range over the past 12 months of 16.5c to 42.5c. The current share price implies upside of almost 50% relative to the consensus price target in the FNArena database.
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