Maari Life Extension And Mereenie Drilling Will Strengthen Future Production Capacity

Key Takeaways

• Horizon Oil's strategic acquisitions and gas sales agreements are projected to boost revenue, cash flow, and stabilize long-term production.
  
• Focus on high-margin production and low operating costs supports strong free cash flow and consistent dividend distributions.
  
• Declining oil prices and natural production challenges may reduce revenues, while capital-intensive projects and regulatory dependencies pose risks to Horizon Oil’s financial stability.

Catalysts

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

• Horizon Oil's acquisition and successful integration of the Mereenie asset have resulted in increased production and sales volumes, offsetting declines in other fields. Expected future drilling and strategic gas sales agreements are likely to generate higher revenues and boost cash flow.
  
• The company's focus on continued high-margin production and low operating costs is expected to sustain strong free cash flow, enhancing net margins and supporting consistent dividend distributions.
  
• Expanding production capacity in Block 22/12 through infill drilling and water handling upgrades is anticipated to sustain long-term production rates, positively impacting future revenue.
  
• The potential life extension at the Maari field, pending regulatory approvals, could stabilize and extend production capacity, reducing future CapEx and increasing earnings potential.
  
• Successful development and gas sales agreements in Mereenie are forecasted to increase realized gas prices significantly, enhancing revenue and supporting stronger earnings growth in coming years.

Horizon Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Horizon Oil's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $39.7 million (and earnings per share of $0.02) by about April 2028, up from $14.2 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 6.4x on those 2028 earnings, down from 15.8x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 15.7x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Horizon Oil Future Earnings Per Share Growth

Risks

• The declining oil prices during the reported period led to reduced revenues and profitability, which could persist if market conditions do not improve, impacting Horizon Oil's future earnings and net margins.
  
• The company faces natural production declines and unplanned production disruptions, such as typhoon-related shutdowns at Block 22/12, which could continue to negatively affect sales volumes and revenue.
  
• Increased investment in projects like the water handling capacity upgrade at Block 22/12 and infill drilling, though aimed at boosting future production, require significant capital and carry operational risks that might affect net margins and financial stability.
  
• External dependencies, such as regulatory approvals for Maari's life extension and the availability of drilling rigs, introduce uncertainties and potential delays, potentially disrupting planned production increases and subsequently impacting revenue generation.
  
• Competitive and market pressures in securing favorable gas sales agreements and maintaining low-cost production are crucial to sustaining free cash flow, and any adverse changes could weaken future earning potential.

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 $151.5 million, earnings will come to $39.7 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of A$0.22, the analyst price target of A$0.2 is 9.5% lower. 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.