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After eking out two weeks of small gains the Aussie market was marginally lower for the week to Friday 9th September – and this week is shaping up for another rough one after global markets dropped sharply on Friday. For the second week in a row US markets dived on a Friday, with the Dow dropping 2.7% to finish the week lower yet again. The Dow has finished lower in five out of the last six sessions and is now just 2.5% higher than its 2011 ‘mini-crash’ lows recorded on August 10th.

The Dow is at the same level it was eleven and a half years ago, while the All Ords is up 33% over the same timeframe. Nonetheless the All Ords is flat over the past six and half years, which to be honest only looks good when compared to US markets. A flat stockmarket for six and a half years in the midst of a mining boom – and a 33% increase over more than a decade – shows just how tough things have been for investors in recent times.

Despite all this doom and gloom surrounding markets, brokers continue to place buys on a large range of stocks, with miners still featuring heavily including Fortescue, White Energy, OZ Minerals and BHP. Beaten down stocks such as Fairfax and steelmakers OneSteel and Bluescope Steel are on broker buy lists, as are blue chips ASX, NAB and Qantas.

But of particular note is up-and-coming mid-cap Horizon Oil – which is attracting the attention of brokers, fund managers and analysts across the board. Over 14 brokers have a resounding buy on this stock. So what’s all the fuss about?

Horizon Oil (HZN)

 Closing price  $0.245
 Weekly change  +$0.00
 % change  0.0%

Broker Calls

RBS Morgans: 1 Sep 11, Target Price $0.33, BUY

Perennial Investment Partners: 1 Sep 11, BUY

Wilson HTM: 29 Aug 11, Target Price $0.43, BUY

Bell Potter: 26 Aug 11, Target Price $0.54, BUY

Commonwealth Bank: 26 Aug 11, Target Price $0.50, BUY

Patersons: 26 Jul 11, Target Price $0.47, BUY

Acorn Capital Microcap Trust: 2 July 11, BUY

Stock Analysis: 8 Jun 11, Target Price $0.50, BUY

Macquarie Equities: 6 Jun 11, Target Price $0.50, BUY

Moelis & Co: 6 Jun 11, Target Price $0.70, BUY

UBS: 3 Jun 11, Target Price $0.57, BUY

Euroz: 3 Jun 11, Target Price $0.37, BUY

Morgan Stanley: 3 Jun 11, Target Price $0.45, BUY

Merrill Lynch: 2 Jun 11, Target Price $0.47, BUY

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO)

The list above of fourteen different analysts with buys on Horizon Oil (HZN) is quite a feat considering the stock trades under 25 cents and sports a market capitalisation of just 280 million. The stock closed at 24.5 cents on Friday, having tumbled 41.7% from its post-GFC peak of 42 cents set at the end of April. Price targets from analysts range from 33 cents to 70 cents, a 35%-185% premium to Friday’s closing price. And the average 49 cent target price is represents a healthy 100% premium.

So why all the fuss – and coverage – of what seems to be little more than a penny stock with a team of 12 staff based in Sydney overseeing operations?

Company

Horizon Oil hit the headlines recently for all the wrong reasons when its share price tumbled by more than 20% following rumours that the PNG government could hand over ownership of the country’s resources to landowners. Fund managers at Perennial – which has a large holding of HZN – contacted management to get its view given Horizon Oil’s significant exposure to PNG. After a discussion with HZN Perennial was confident that the rumours were just that.

PNG aside, HZN has its producing ‘Maari’ field in New Zealand as well as assets under development in China. It also has a significant exploration footprint in New Zealand, although according to the company its focus area is ‘South East Asia where there is a strong demand for oil and gas, a mature operating environment and with limited competition from big companies.’

Rather than operating projects themselves, HZN tends to form joint ventures with qualified partners so that it isn’t distracted by the details of managing the day-to-day operations. The Maari oil field is one such project, in which is has a 10% interest. According to one broker, cash operating costs are about $10/bbl and the field could run for more than 20 years.

Horizon also has a 30% interest in a field south of Maari and the company currently has a 26.95% interest in the Beibu Gulf oil fields in China, where production is slated to commence in FY13. HZN also has a 50% interest in the Stanley liquids rich gas reserves in Western PNG.

Analysts’ views

With fourteen buys on the oil minnow there is no shortage of positive commentary on HZN. CommBank’s Luke Smith believes that the company remains undervalued despite recently regaining control of the Elevala and Ketu gas-condensate fields in PNG. ‘Horizon is focused on commercialisation of its development portfolio, with cashflows from operations to largely be re-invested in existing developments, rather than high-risk exploration and acquisitions,’ he says.

Patersons’ Scott Simpson says that HZN is a standout from its peers with a pipeline of development projects, however he warns that its increased stake in China will increase funding risk and the need for its assets to perform. ‘It has suggested plans to fund its future commitments via additional debt funding, which is achievable against its reserves bank, but equity is likely also,’ he says. ‘Despite the increased funding requirements, we maintain our BUY given its solid growth portfolio.’

Patersons isn’t the only broker to say that it stands out from its peers – it is Bell Potter’s preferred mid-cap growth stock in the energy sector. ‘We regard the stock as the most certain growth stock in the mid cap energy sector at a time when most of its peer group are struggling to find any growth,’ says Johan Hedstrom. ‘The fact that this growth will come from a new oil development in China operated by CNOOC and that the Stanley project in western PNG is a liquids focused development only enhances the attraction of HZN in our view.’ While working for Southern Cross earlier in the year Hedstrom praised the company in a research report, saying that investors should buy HZN for its growth, reserves upside, low operating costs, balance sheet and management.

Wilson HTM’s John Young has increased his price target from 41 cents to 43 cents per share. ‘Progress continues on the China Block 22/12 oil project with eleven development wells planned for drilling in 2012 and 2013,’ he says, adding that preparations are well advanced for the PNG condensate project with development licence approval expected in 1HCY12. ‘HZN is well funded to progress appraisal and development across its project portfolio following the Talisman’s payment and convertible bond issue, together with its planned borrowing base facility.’

MineLife’s Gavin Wendt describes HZN as a ‘rare type of emerging oil play that actually allows you to sleep at night…unlike other stocks in the sector which have a much greater exploration exposure, Horizon presents a much lower risk opportunity.’ Wendt says that HZN is an established oil producer with strong growth potential. ‘Horizon Oil is my favourite emerging oil exposure because it’s an established producer,’ he says. ‘It has loads of potential, which is where the investment opportunity presents itself.” Wendt says the company offers substantial and tangible growth prospects, irrespective of the outcomes of individual exploration wells. “The company’s drilling program is essentially appraisal and development drilling, not wildcat drilling, but still with the very real potential to significantly add to the company’s share price and market value,” he says. “Horizon has a specific exploration and development focus in South East Asia, with advanced projects in New Zealand, China and Papua New Guinea.”

Risks

Several brokers outlined multiple risks to HZN and its share price:

Oil prices: Prices for oil are volatile, and linked to the fragile world economy. All of HZN’s current cash flow is from a single operating oil field so it has only one operating asset at this stage.

Political risks: Mostly in PNG as NZ and China are seen as relatively stable.

Operational and environmental risks: These risks are generally high in the oil and gas industry

Large debt/equity: HZN’s ultimately significantly large debt:equity position (circa 50% at current mkt cap) for a small company by the end of CY’12, serviced by a single asset with some operational performance issues, is cause for concern.

Forecasts: Euroz believes that HZN’s forecast position still looks tight for FY’12 end on its numbers.

Balance sheet: Balance sheet strength remains a key uncertainty particularly where the only cashflow asset is still underperforming.

Exchange rate: Should the Aussie dollar continue to rise, Wilson HTM points out that HZN is set to suffer. Having said that, the AUD is already sitting near record highs and conversely a drop in the Aussie dollar will benefit its share price. The chart below shows Wilson HTM’s analysis of the impact of rising/falling AUD/USD and oil prices.

#FOTO:1289:600#  

Source: Wilson HTM

Conclusion

HZN’s share price has been hit along with the rest of the market as global gyrations have spooked investors. Problems with its holdings in PNG have also negatively impacted its share price, which only serves to increase its potential as an attractive proposition now trading at bargain-basement prices. As of Friday 9th Septenber there were more than a dozen analysts backing the stock with an average price target double that of Friday’s closing price – which is now sitting at a two-year low.

Stock code: HZN

Charts: Horizon Oil Limited

More news: Horizon Oil Limited

 

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