Horizon Oil Limited (HZN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Horizon Oil Limited 2022 full year results presentation. We have with us Mr. Richard Beament, CEO and Mr. Kyle Keen, CFO. [Operator Instructions] I would now like to hand the conference over to Mr. Richard Beament. Please go ahead.

Thank you, and good morning, everyone. Before I start on the presentation, given my recent appointment as the group's CEO, I felt it appropriate, I introduced myself. As most people are probably aware, I was formerly Horizon's CFO and Company Secretary, and I recently assumed the role of CEO from Chris Hodge a few months ago. I have a long history with Horizon having held various finance and commercial roles over more than a decade. And whilst I'm an accountant by profession, I have a strong technical understanding of our assets, most importantly, I'm well supported by a strong technical team headed up by Gavin Douglas, the group's newly appointed Chief Operating Officer. I'm delighted to have such a talented team to work with to deliver on the company's strategy. Now before I dive into the financial year results, I'd also like to acknowledge the efforts and leadership of the former CEO, Chris Hodge, who guided the company through the challenges faced over the past few years, and has left me with a company in a position of financial strength. I wish him all the very best in his retirement. Now turning to the presentation. I will initially cover the key highlights for the financial year before handing over to Kyle to run through the financials. I'll then cover the operational performance of our assets and strategic outlook and direction before opening up for questions. Now Kyle will probably also mention this. But before I get into the numbers, please note that all references to dollars are U.S. dollars unless otherwise stated. Now on Page 2, we have our compliance statement and disclaimer, which relates to today's presentation, and I'd encourage you all to have a read of this. Well, what a year it's been. This time last year, oil prices were hovering around $66 a barrel before almost doubling in price earlier this calendar year and settling more recently around 50% higher than this time last year at around $100 a barrel. This higher oil price, coupled with consistent strong production from our low-cost oil-producing assets in New Zealand and China drove a 70% increase in revenues to over $108 million from over 1.2 million barrels of oil sales, over 100% increase in EBITDAX to $73 million, over a 200% increase in underlying profit after tax to $24.3 million and most importantly, drove over 100% increase in cash flow generated from operating activities to $56.9 million. This cash flow generation led to an increase in net cash to $42.8 million after having distributed approximately $35 million to shareholders in the form of a capital return completed in August last year. Pleasingly, with this strong balance sheet position, which has been enhanced by the recent extension to our debt facilities, has provided the confidence to today announce further distributions to shareholders totaling AUD 0.03 per share. This amounts to approximately $34 million or around AUD 47.4 million. The distribution is comprised of a AUD 1.65 per share unfranked conduit foreign income dividend and a AUD 1.35 per share capital return. The capital return is subject to shareholder approval with an extraordinary general meeting to be held on the 7th of October. In determining the type and split of this distribution, the company has considered the interest of all shareholders and been in discussions with the Australian Tax Office. Subject to shareholder approval, following the completion of this distribution, the company will have returned almost $70 million or over AUD 95 million in a little over a year. That represents over 40% of the company's current market capitalization. Now prioritizing such returns to shareholders is a key pillar of our strategy. Our ability to make such returns is due to the strong cash flow generation from our low-cost production assets, where cash operating costs continued to be maintained below $20 a barrel. A key milestone was achieved earlier this year when we brought on to production our first new oilfield development in over 8 years with the commissioning of the 12-8 East oil field. This development in combination with infill drilling in China and workovers at both Maari and Block 22/12 and were key to sustaining production levels during the financial year. Importantly, further investment in our producing assets is critical to continuing to sustain production levels and cash flow generation over future years, with our focus being to bring into production our pipeline of contingent and prospective resources. Pleasingly, we've continued to invest in this pipeline of opportunities following the period end. With completion of 12-8 East development drilling, the commencement of a 6-12 workover and drilling program of Block 22/12 and continuing workover activity at Maari to reinstate production. We are seeing immediate success in this strategy as subsequent to the period end and following the ramp-up in production from 12-8 East, Horizon's current working interest share of daily production is currently over 5,000 barrels of oil per day, almost 40% higher than the FY '22 average. Whilst not our primary focus, we also continue to keep an eye out for exceptional new business opportunities which might complement the existing asset portfolio with a view to further enhancing shareholder returns. Now I've touched on some of the financial highlights already. However, some additional key achievements with the execution of a $20 million extension to our senior debt facility shortly after the period end, which allows us to further optimize the group's capital structure, whilst also providing access to additional liquidity. Operationally, I've mentioned the successful completion of the 12-8 East project. Impressively, first oil from this project was achieved within approximately 18 months of making a final investment decision, notwithstanding the pandemic and the numerous global supply chain challenges. This is a testament to the quality and focus of our operators. On ESG, despite the elevated activity levels, we have continued to uphold a strong safety record significantly better than industry benchmarks. On climate change, we declared our ambition to reach net-zero emissions by 2050 and are developing a road map to achieve this. Demonstrating our commitment, we voluntarily purchased carbon offsets during the year, covering the majority of our Block 22/12 Scope 1 emissions through a community project in rural China, building methane digesters. Whilst I've already outlined our announced distributions totaling AUD 0.03 per share, we've put together the following slide to aid investors in understanding how the quantum was determined. Essentially, the Board has sought to balance the group's cash reserves, access to liquidity and CapEx commitments and future organic growth plans whilst retaining a sensible working capital balance. Importantly, the total distribution represents over 73% of the group's free cash flow generation for the financial year, clearly, a substantial return. Set out on the next slide is a summary of the group's 2022 reserves report, which was included in the annual report released earlier today. The report shows an approximate 30% 2P reserves replacement during the year, largely associated with ongoing strong production in Block 22/12 and a 50% increase in Block 22/12 contingent resources, reflecting an expanded portfolio of short to midterm opportunities identified in the asset. The increase in Block 22/12 contingent resources materially offset a revision to the Maari contingent resources where we felt it appropriate to constrain the potential for life extension out to 2032. And an extension of 5 years for some prudence. Reserves and contingent resources remain relatively evenly split between Maari and Block 22/12 with contingent resources and prospective resources, of 6.1 million and 5.9 million barrels, respectively, highlighting the remaining potential in both assets. For the first time, we've included a formal assessment of prospective resources within the Block 22/12 permit, identifying 9 independent opportunities. As I mentioned earlier, it is our objective to continue to focus on bringing into production in this pipeline of contingent and prospective resources. I will now pass over to Kyle to run through the financial year results in more detail.

Thanks, Richard. Before I go through the results, I would like to emphasize that all references to dollars are to United States dollars as this is the group's functional currency since all revenues are generated and received in United States dollars. The table on the right of the slide summarizes the financial year 2022 results with a comparison against the prior year. As Richard has mentioned, the full year results were strong with significant increases in virtually all key metrics following an 80% increase in average realized oil price and robust production and sales volumes during the financial year. Production and sales volumes were in line with the prior financial year and coupled with the realized oil price of approximately $90 a barrel, resulted in a 70% increase in revenue during the financial year to $108 million. With operational costs maintained at less than $20 a barrel produced, EBITDAX, cash flow from operating activities and statutory profit all increased over 100% during the financial year. EBITDAX increased 100% to $73 million with the company trading at an EV EBITDAX multiple of approximately [ 1.5 ]. Cash flow from operating activities increased 146% to $56.9 million or approximately 40% of the company's market capitalization. The results and strong cash generation demonstrates not only the strength of Horizon's producing assets, but also the company's leverage to the high oil price environment, which aided the extension of our debt facility. A phenomenal results given the ESG constraints placed on our sector. Dissecting cash flow. In this next slide, we can see that the strong net cash inflows from operating activities of $56.9 million were applied against the repayment of debt of $11 million, investing $10 million in our assets and in particular, the Weizhou 12-8 East development, and replenishing cash reserves following the $35 million capital return paid to shareholders in August 2021. With the closing cash balance in excess of $44 million and the recently executed a 12-month extension of our debt facility, the company is pleased to be able to balance further capital management initiatives with continued investment in our producing assets which is aimed at production enhancements and optimization. To help dissect the full year result further, the next chart shows the key elements which have driven the substantial increase in underlying profit to USD 24 million and clearly shows in the yellow bar, the significant impact of the increase in revenues due to the 80% higher realized oil price. These higher revenues were partially offset by reduced sales volumes associated with the timing of Maari liftings during the financial year. As can be seen and despite cost pressures and a higher inflationary environment, all controllable costs were largely maintained during the financial period, with the increase in operational costs driven by higher noncash amortization charge. The higher realized oil price drove substantial increases in revenues and profitability, which notably increased income taxes, royalties and levies during the financial year. Turning over to the next slide, we can take a look at the financial year results compared against the previous 4 years. As in previous presentations, we have included some detail of the impact of Beibu cost recovery revenue in earlier years, which assists in normalizing these results. As mentioned previously, this was additional revenue earned in earlier years, which reimbursed the company for historical exploration expenditure in China and was largely recouped at the end of the 2019 financial year. The first of these charts shows that production and sales volumes for 2022 year, was just shy of the 5-year average and broadly consistent with the prior financial year, noting that sales volumes were slightly lower than last year due to the timing of Maari liftings, which left greater crude oil inventory in the FPSO at the end of the year. Importantly, with production from the Weizhou 12-8 East development commencing towards the latter part of the financial year, we expect an increase in sales volumes for financial year 2023. It is important to note how consistent the Beibu production has been over the past 5 years, and it is this consistent production, together with low operational costs, which has been the predominant driver of Horizon's cash flow over recent years. And this has provided the confidence to further invest in infill drilling and further workover activities in Block 22/12. Maari production has also been a significant contributor, particularly over the last 5 years and this is owing to the successful acquisition of a further 16% interest in the fields. The chart is so clearly shows the contribution of Beibu cost recovery volumes to sales volumes in financial years '18 and '19 and this is now seized as the vast majority of historical exploration expenditure amounts has been recouped. The revenue chart also clearly shows the contribution to revenue of the Beibu cost recovery sales. Once we strip this away, we can see the significant impact of the 80% higher realized oil price during the current year. Pleasingly, oil prices continue to trade around $100 a barrel or approximately $10 a barrel higher than the average realized price for the current financial year. This notably bodes well for 2023 revenue and cash flow generation. The next slide again shows the impact of higher oil prices on the group's cash generation and profitability in the 2022 financial year. The strong EBITDAX results and strong EBITDAX and profit results were aided by the group's continued low cost operations, with costs maintained below $20 a barrel produced despite inflationary pressures and the additional Weizhou 12-8 East operating cost, which includes leasing costs associated with the new wellhead platform. We also continue our efforts to further reduce general and admin costs with the recently announced office move and the financial 2022 headcount reduction aimed at further rationalizing our cost structure. The next slide shows the continued strong free cash flow generation with the orange line in the chart on the left normalized to exclude the cost recovery cash flows. This again shows the impact of the higher oil price and robust production and free cash flow generation, and it importantly highlights the capacity of our business to sustain free cash flow generation through all price cycles with the prior downturn having impacted financial years '20 and 2021. Now the company is highly leveraged to the oil price and generates approximately $5 a barrel in additional free cash flow for every $10 barrel increase in the oil price. Now I have saved the best chart to last with the net cash net debt chart on the right. Here, we can see how the strong and sustained free cash flow generation from the group's assets has driven consistent and sustained debt reduction from a net debt position of over $88 million at the end of 2018 to a strong net cash position of $42.8 million only 4 years later. And this is after having returned approximately USD 35 million in surplus capital to shareholders. This represents free cash flow generation over the 4-year period of over USD 165 million if we adjust for the capital return. That's approximately AUD 235 million, nearing of the company's market capitalization. Our focus is to continue to drive this free cash flow generation from our assets out into the future by extracting maximum value from our assets. The resilience of the cash flow, higher oil prices and a strong production result provided the confidence to implement further capital management initiatives during the year. I will now pass over to Richard to provide an update on our asset portfolio and an outlook for the company.

Thanks, Kyle. Look, I'll start with Block 22/12 in China, Block 22/12 production currently comes from 25 wells in 8 fields shown in the green rectangles. This geographic spread of reservoirs and assets mitigates the risk of significant disruptions to our cash flow. While historical production as being dominated by the 6-12 and 12-8 West fields, the 12-8 East field in the bottom right hand of the graphic is the most recent addition to our production base, having only come into production in April this year. Since the start of production in 2013, the oil rate from the block has been maintained between 8,000 to 10,000 barrels of oil per day gross by undertaking a number of incremental activities, including new field developments, infill and near-field exploration, progressively increasing water handling and by having an operator which actively works to optimize production. Recently, we've been able to materially increase production from the asset to an average of over 15,000 barrels of oil per day gross by bringing on the 12-8 East field. With the new Block 22/12 production record achieved earlier this month, of just under 20,000 barrels of oil per day gross, which was roughly 5,000 barrels net to us. Whilst we expect production rates to naturally decline as water production from the field increases, our objective is to continue to develop the material pipeline of infill and near-field drilling opportunities to maintain oil rates well above the Beibu long-term average of 9,500 barrels of oil per day gross. In recent years, these fields have generated approximately 70% of Horizon's cash flow due in part to the very low cash operating costs, which were maintained at approximately $13 per barrel during the year. Now looking at the 12-8 East development in more detail, the 3D diagram on the right illustrates the main elements of the development. 6 producing wells in all. One deviated production well drilled into the deeper Weizhou reservoir, 5 horizontal producing wells into the shallower Jiaowei reservoir, and one water disposal well. The development includes a self-installing processing and wellhead platform and an export pipeline tied back to the existing 12-8 West platform. As mentioned, the project was successfully commissioned and brought on to production in April 2022, with Horizon share of development costs in line with the original budget of around $20 million. Whilst the field experienced a few teething issues later in the financial year, once production was restored on the 24th of July, it has since contributed over 9,000 barrels of oil per day gross. Combined production from the Jiaowei and Weizhou reservoirs is expected to average around 4,000 barrels of oil per day gross or around 1,000 barrels of oil per day net to Horizon over the first year of production. We are encouraged by initial production results from the field and continued strong production Maari result in further development. Now this map shows the locations of the various infill appraisal and exploration opportunities, which make up part of the strong portfolio of reserves, contingent and prospective resources in Block 22/12. As mentioned, our objective is to focus on bringing these opportunities into production, commencing with the drilling of 2 wells this year, one of which has been approved by the joint venture, the M3 well, and another the North well, which we anticipate will be approved shortly. As part of this program, a 5-well workover campaign will also be undertaken, which is already well advanced. This project is designed to reinstate and enhance production from existing 6-12 wells. The M3 and 6-12 North wells have been high graded from our existing portfolio of opportunities. We focus on infrastructure-led targets that can be readily drilled from 1 of the 3 platforms in the block. That way, in the event of success, the wells can be immediately turned into production wells. Looking to the history of the asset and our view of its future. This chart has recently been updated to reflect our current 2P reserves forecast in the dark green. The chart shows the indicative future production potential from the fields. With the natural decline profile or reserves profile representative of almost the current value inherent in the share price. The Blue sorted profile is the additional production potential and value to be unlocked from future activities. Also on this slide is an indication of the expected incremental CapEx spend required over the next 3 to 4 years of $10 million to $15 million per annum to unlock this value. Pleasingly, we've already successfully executed the first big production uplift with the commissioning of the 12-8 East field earlier this year. We are now embarking on workovers and further infill drilling to continue to unlock this value. So now on to our other assets. Whilst this presentation has been heavily focused on Block 22/12 due in part to the recent commissioning of the 12-8 East field, Maari continues to be a very important asset for Horizon, generating approximately 30% of Horizon's cash flow. Importantly, over the past few years, the production decline rate has been arrested through continued water injection and well optimization and production rates are expected to be sustained without the need for significant CapEx spend. Our operating costs are modest in the context of the current oil price. And as a result, the asset is highly cash generative. Maari crude attracts strong premiums with deliveries mainly into East Coast Australia. Planned workovers to restore production during FY '22 were impacted by COVID, but we expect those wells to be back online shortly. Whilst the long-awaited operatorship transition from OMV to Jadestone continues to await regulatory approval. We've been quite impressed by OMV's continued focus on costs and conducting safe operations. Similar to Block 22/12, this chart has recently been updated to reflect our current 2P reserves forecast in the dark green also. With regards to the future, the joint venture focus is to continue to optimize production, evaluate infill drilling opportunities and seek to maintain field life to at least the end of the license period in December 27, with the potential to extend being actively investigated. This chart sets out the timing of operations activity during the calendar year. Please note that some budget processes are still in progress, and we stress that the timings are indicative and remain subject to JV and regulatory approvals and indeed, rig availability. In Block 22/12, we've drilled 8 of the planned 10 wells to drill and are in the process of completing the 5 planned workovers scheduled. The 12-8 East drilling campaign successfully extended over a continuous 6-month period with first oil arriving early in 2022. We are firmly focused on developing plans for further infill drilling in 2023 with opportunities currently being high-graded. In Maari, we are reinstating wells through workovers, and planning for the next activity cycle. So in summary, FY 2022 was a strong year for Horizon, delivering significant value to shareholders. The outlook remains positive as our low production costs and material positions in high-quality assets provide significant leverage to the oil price and aids us in generating strong cash flows. We have a strong balance sheet with net cash at financial year-end of over $40 million. We've commenced FY '23 with very strong production rates and sustained high oil prices which bodes very well for continued strong cash flow generation. To put things into perspective, Horizon's current daily share of production from both assets is over 5,000 barrels of oil per day. That's almost 40% higher than the average rate achieved in FY '22 of around 3,600 barrels of oil per day, driven largely by the new 12-8 East production. At current oil prices, we are generating around $0.5 million in revenues daily, up from the FY '22 average of around $300,000 per day. Now whilst we don't expect to sustain these rates from our current well stock due to natural reservoir decline, our focus is on bringing on to production our pipeline of contingent and prospective resources in an effort to sustain production rates, commencing with the 6-12 workover and drilling program. We're determined to deliver value to shareholders, having distributed approximately $47 million in FY '22 with a further $47 million in distributions announced today. Further capital management initiatives are under constant review, and the company will consider these when prudent to do so, leading to balance shareholder returns with managing liquidity levels and future commitments. As I've mentioned, in terms of new business, our priority is to invest in organic production growth initiatives within our existing portfolio. We recently commissioned a new field development in China, which has boosted production and a further growth plans to follow in both of our assets. We keep an eye out for opportunistic inorganic growth opportunities, which could further enhance shareholder value, but they need to have very strong investment metrics and the potential to enhance our ability to make further distributions to shareholders. Whilst our business continues to face challenges, whether it be increased ESG pressures or supply chain issues, we have a focused active management approach and a high-caliber hands-on team with the expertise and the influence to navigate these challenges and deliver value for shareholders. Now that concludes our presentation today, and we'll turn to questions. We'll perhaps just take 30 seconds or so to have a look at the questions, which are flowing through.

[Operator Instructions]

Okay. So our first question we have here is, can you give us any guidance as to a dividend or capital management policy going forward? And would you look to base it on a percentage range of free cash flow?

Look, thanks for the question. Look, look, we haven't put out guidance at this stage on a capital management policy. I think at some point in the past, we did talk about at least 30% of free cash flow. You can see from the current year, we've really tried to deliver almost the biggest return we can. And we've put out 73% of our free cash flow. We might consider some guidance going forward, but we're obviously trying to balance what organic growth opportunities we have, liquidity levels and so on. So putting out specific guidance at this stage is not our intention, but we'll consider it going forward.

Next question we have is what is the position of the ATO with regard to consistent capital returns? Also, if oil prices remain elevated and Horizon continues to generate significant free cash flow, would the ATO allow a further capital return in, say, 12 months' time?

Look, I'll take this one. Look, in the business at its current state, generating significant profits, as I mentioned over there, we generated a statutory profit of approximately $24.3 million. It's unlikely that we will continue to be able to return funds as capital returns going forward.

Okay. Thanks, Kyle. So the next question we have is, given the banking credit situation, going forward, would you consider pursuing a buyback rather than a dividend policy.

Look, I'll take that one. Look, as Richard mentioned, we're constantly evaluating capital management and all forms of capital management at that. Now we look to balance our approach, recognizing that our share registry is roughly balanced 50-50 between foreign shareholders and resident shareholders. So we'll continue to evaluate all forms of capital management going forward, and as Richard mentioned, look to return funds to shareholders when prudent to do so.

The next question we have is that we mentioned net CapEx going forward of around $10 million to $15 million per annum. Would you say is a rough split between sustaining and growth expenditure on that?

Yes. Thank you for the question. Look, that's all for growth expenditure with sustaining expenditure or capital costs have been fairly modest.

Thank you, Kyle. Next question we have is if 12-8 East continues to perform well, will the JV consider an immediate Phase 2 on completion of the current workover program?

Look, as you'd appreciate, having just completed the drilling, we've got a tremendous amount of data flowing through on production rates, water cuts and so on. So we've got quite a lot to digest. And that will probably take us through this sort of second half of the year really to digest all of that. But one of our key considerations as well, I sort of flagged it earlier is rig availability is becoming perhaps more challenging given the high oil price environment. And so even if we wanted to jump into something straight away, we've got to make sure we can secure a rig and indeed get the various regulatory approvals. So look, it's not out of the question, but we do just need a bit of time to digest the information and ensure we're confident in the economic returns that are subsequent phases would deliver.