- Early debt repayment from strong cash position and operating cash flows
- Debt reduction plans on track and interest payments reduced
- 2017 production income protected with loss-of-production insurance and oil price hedging
On the current debt reduction trajectory and barring unforeseen circumstances, net debt by the end of the calendar year 2017 will be around US$100m, down from US$120.8m reported at the end of calendar year 2016. The prepayment is in recognition of the higher interest rate of the subordinated loan (LIBOR + 9%) relative to that of the bank debt facility and is made possible by the level of cash in the Company (US$20.6m at 31 March 2017).
CHIEF EXECUTIVE OFFICER'S COMMENTS
Clearly there is an advantage in preferentially prepaying the subordinated loan to the bank debt, which carries an interest rate of LIBOR + 2.9%. The amount we choose to prepay is tempered by our policy of retaining sufficient cash at hand to meet non-budgeted expenses, if and when they occur.
The recent successful periodic redetermination of the US$120m reserves-based senior lender facility has given us a better picture of the repayment schedule for the loan, which is currently drawn down to US$88.0m. As part of the redetermination process, the banks require an independent assessment of Horizon Oil's reserves and resources. This was recently completed satisfactorily by reserves auditors RISC and provides solid confirmation of our reserves and resources book. This will be evident when the proved plus probable reserves and resources as at 30 June 2017 are released.
We mitigate some uncertainties in cash generation by way of obtaining loss-of-production insurance (LOPI) on our producing properties and by oil price hedging. As previously advised, about half the forecast production for 2017 is hedged at an average price of around US$54/barrel. The LOPI and oil price hedging have been purely matters of Horizon Oil board prudential policy for several years and are not requirements of the lenders. We have flexibility in our hedging program and will continue to progressively lock-in future oil prices with hedging as opportunities arise.
On 6 September 2016, Horizon Oil advised that it had satisfied all conditions precedent under a US$50m secured subordinated debt facility. The proceeds of the debt, together with available cash, were applied to redeem the remaining US$58.8m of convertible bonds issued in 2011 to increase the Company's interest in, and provide development funding for, the Company's core production asset - Block 22/12, offshore China.
The US$50m facility is a subordinated, non-amortising loan from Horizon Oil's largest shareholder, IMC Investment Limited and carries an interest rate of LIBOR + 9%. The loan is a 5 year facility which, subject to certain conditions, IMC may require the Company to repay after 3 years. There are no penalties for prepayment of all or part of the loan.
About Horizon Oil Ltd
Horizon Oil Limited (ASX:HZN) (OTCMKTS:HZNFF) is an ASX-listed petroleum exploration and production company, with a geographic focus on the Asia-Pacific region. The company currently produces over 4,000 barrels of oil per day net from its fields in New Zealand and China, which generated over US$80 million in net operating income after operating expense for the year ended 30 June 2015. Further development candidates remain in and around these producing fields.
Horizon Oil maintains prudent policies of oil price hedging and loss of production insurance to ensure that sufficient cash flow is generated to meet the funding requirements of its growth program.
The company holds a large undeveloped reserves and contingent resource position in Western Province, onshore Papua New Guinea. These are liquids-rich gas resources and reflect Horizon Oil’s strategy to focus on Asian gas for growth. Gas constitute about 2/3 of the reserves and resource base. Commercialisation pathways for the gas are emerging.
Although Horizon Oil anticipates continuing strong cash generation over the medium term from its existing producing fields, these developed reserves account for only 10% of total reserves and resource base. The focus going forward will be on new field development, funded largely from existing production cash flow.
Horizon Oil Ltd