Acquisition Of Mereenie And New Drilling Will Diversify Production And Increase Future Earnings

Key Takeaways

• Acquisition of the Mereenie asset and strategic gas sales agreement provide a diversified production base and solidify long-term revenue streams.
  
• Infill drilling and potential license extension aim to boost production, enhancing future revenue and net income.
  
• Horizon Oil faces revenue risks due to operational challenges, regulatory uncertainties, and market volatility, with success reliant on stable oil prices and execution of strategic initiatives.

Catalysts

Engages in the exploration, development, and production of oil and gas properties in China, New Zealand, and Australia.

• The successful acquisition of the Mereenie asset adds a third production asset to Horizon Oil's portfolio, providing a diversified production base and materially increased reserves, which could enhance future revenue and earnings.
  
• The joint venture approval of a 2-well infill drilling program at Mereenie is expected to boost gas production rates, potentially increasing future revenue and cash flow.
  
• The strategic gas sales agreement with the Northern Territory government solidifies a long-term revenue stream, potentially enhancing both revenue and net margins due to stable demand.
  
• The focus on further infill drilling and water handling upgrades at Block 22/12 aims to boost oil production rates, potentially impacting future revenue and earnings positively.
  
• The potential extension of the Maari production license, alongside the successful workover operations, could sustain or increase production, impacting long-term revenue and net income.

Horizon Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Horizon Oil's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.2% today to 22.3% in 3 years time.
• Analysts expect earnings to reach $29.1 million (and earnings per share of $0.02) by about February 2028, up from $25.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 7.9x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 13.6x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Horizon Oil Future Earnings Per Share Growth

Risks

• The anticipated decline in Block 22/12 fields and lower sales volumes could negatively impact future revenue and profitability despite the diversification efforts.
  
• Horizon Oil’s heavy reliance on successful infill drilling programs and water handling upgrades to maintain and boost production poses execution risk, which could affect future revenue and cash flow if not achieved as planned.
  
• The realization of potential value from the Mereenie acquisition is heavily dependent on effective management of technical and market risks, especially in the volatile gas market, which could impact future revenue and margins.
  
• The pending approval of a license extension for the Maari field introduces regulatory risk that could affect long-term production forecasts and revenue consistency.
  
• Continued stable oil prices are crucial for maintaining the strong free cash flow and dividend strategy; any significant downturn in oil prices could adversely impact revenue, net margins, and the ability to sustain high dividend yields.

Valuation

• The analysts have a consensus price target of A$0.201 for Horizon Oil based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $130.4 million, earnings will come to $29.1 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$0.2, the analyst price target of A$0.2 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.