Annual Report 2016 to Shareholders
A financial summary and key financial and operational results are set out in the link below.
Commenting on the result, Horizon Oil's Chief Executive Officer, Brent Emmett, stated:
"The Company's strong operational performance from its core oil production assets in China and New Zealand has resulted in a sound underlying financial result, in the face of a challenging oil price environment. Despite the low average oil price through the year, the Company has continued to materially reduce its overall debt levels, complete the Maari growth project program and bring on an additional production well in Block 22/12, China. This has been achieved by way of solid operating income enhanced by oil price hedging, reduced per barrel operating costs and deep cuts in capital expenditure.
Subject to shareholder approval at the forthcoming general meeting, the redemption of the Company's convertible bonds in September 2016 with the IMC subordinated debt facility extends the maturity profile of the Company's debt, eliminating near term liquidity challenges and providing a stable platform for the continued reduction of overall gearing levels from oil production revenues.
The non-cash impairment of the carrying value of the Company's Maari production asset and its condensate-rich gas resources in Papua New Guinea reflects the current oil price and, of necessity, takes into account the independent expert's valuation, prepared for the purposes of the upcoming general meeting. Having said that, the material unrisked valuation of the Company's PNG assets, between US$274 and US$552 million, determined by the independent expert, demonstrates the substantial potential to be realised from the Company's participation in the development of an aggregate PNG 2C resource of 1.8 tcf of gas and 67 mmbbl of condensate. Horizon Oil and its partners have made good progress over the last 12 months in advancing plans to commercialise this large resource."
- The Group recorded a strong performance from its producing assets, with the net working interest share of oil production of 1,354,982 barrels (2015: 1,310,485 barrels), a 3% increase compared to the prior financial year, resulting predominately from incremental production in New Zealand following completion of the Maari Growth Project.
- Oil and gas sales revenue of US$76.0 million (2015: US$104.0 million) was generated from sales volumes of 1,376,069 barrels of oil (2015: 1,214,488 barrels), with an average realised oil price of US$41.03 per barrel (2014: US$68.90 per barrel) before hedging. The average realised price inclusive of hedging was US$55.19 per barrel (2015: US$85.59 per barrel), as 29% of oil sales were hedged at a weighted average price of US$95.48 per barrel. This led to the maintenance of strong revenues and cashflow despite the significant fall in oil prices which occurred during the year.
- The Group reported a loss of US$144.5 million for the year compared with a profit of US$18.3 million in the prior year. The full year result includes a gross profit of US$15.8 million (2015: US$44.0 million) from Block 22/12 and Maari operations coupled with other income including insurance claim proceeds of US$3.6 million offset by corporate general and administrative expenditure of US$8.1 million, exploration and development expenses of US$1.9 million, non-cash impairments of US$147.5 million, financing costs of US$17.3 million, gains of US$6.5 million recorded in connection with the early buy back of convertible bonds and the revaluation of the convertible bond conversion option at year end, and other expenses of US$0.9 million.
- Cash on hand as at 30 June 2016 was US$16.1 million (30 June 2015: US$61.3 million).
- During the year, the Company and its major shareholder, IMC Investments Limited, agreed the terms and conditions for the provision of a subordinated secured non-amortising debt facility of US$50 million. The IMC Financing Proposal loan agreement was signed on 29 July 2016. Drawdown on the facility remains subject to satisfaction of customary conditions precedent and shareholder approval, with a General Meeting to be held on 6 September 2016. The proceeds of the loan, together with the Company's available cash, will be applied to redeem the remaining US$58.8 million of convertible bonds, which were issued in 2011 to increase the Company's interest in, and provide the development funding for, the Company's core production asset - Block 22/12, offshore China. The refinancing arrangements extend the maturities of the Company's senior and subordinated debt to an average of no less than three years at a volume weighted interest rate of LIBOR plus 5% pa.
- In conjunction with Horizon Oil's refinancing arrangements, the Company's convertible bondholders unanimously approved the extension of the bond redemption date to 19 September 2016, providing adequate time to obtain shareholder approval and implement the refinancing arrangements. While having received the unanimous approval for the deferral of the principal repayment of US$58.8 million, the Company satisfied the other conditions of the convertible bonds at the original redemption date of 17 June 2016, namely the payment of the accrued yield of US$5.2 million, together with the scheduled interest payments of US$1.6 million.
- The foregoing refinancing arrangements will continue the progressive reduction of the Company's gross debt in 2014 (after completion of the Block 22/12 development) of approximately US$240 million to a forecast net debt position in Q4 calendar year 2016 of approximately US$120 million. This reduction continues to be funded by revenue generated from the Company's high margin production assets in China and New Zealand.
- Included in the result was US$147.5 million of non-cash impairment expenses associated predominately with the Group's exploration and development assets in PNG and production assets in New Zealand. The impairment assessment conducted during the period considered, amongst other things, the reserves and resources update conducted during the year, the current low oil price environment, and the recent valuation performed by the Independent Expert in relation to the IMC Financing Proposal.
- During the year, Horizon Oil's working interest share of production from the Beibu Gulf fields was 903,598 barrels of oil. Crude oil sales were 903,198 barrels at an average price of US$37.91/bbl exclusive of executed hedging. Cumulative gross oil production from the fields through 30 June 2016 was 12.3 million barrels. Gross production averaged 9,161 bopd, of which Horizon Oil's share was 2,469 bopd.
- Aggregate Block 22/12 production for the last 6 months is approximately 27% ahead of budget, with full year production approximately 8% ahead of budget. Later in the year, Horizon Oil's Block 22/12 production entitlement increased from 26.95% to over 35% of production, following the commencement of its entitlement to preferential cost recovery.
- On 18 December 2015, the WZ 12-10-2 field, located in the Weizhou 12-8 fields area of Block 22/12, Beibu Gulf, People's Republic of China, commenced production. The WZ 12-8W-A6P1 well was drilled to appraise the accumulation discovered by the WZ 12-10-2 well in 2014 and, following this appraisal, a horizontal production sidetrack (WZ 12-8W-A6H) was completed and brought on to production.
- Preparation of the Overall Development Plan for the WZ 12-8E field continued, with completion scheduled in 2017. The audited gross 2C resources for the field (including WZ 12-10-1 and WZ 12-3-1) are 11.1 mmbo.
- During the year, Horizon Oil's working interest share of production from Maari and Manaia fields was 451,384 barrels of oil. Crude oil sales were 472,871 barrels at an average effective price of US$46.98/bbl exclusive of executed hedging. Cumulative gross oil production from the fields through 30 June 2016 was 31.6 million barrels. Gross production averaged 12,333 bopd, of which Horizon Oil's share was 1,233 bopd.
- The Maari Growth Program, incorporating 4 new wells which were designed to enhance production rate and oil recovery from the Maari and Manaia fields was completed with all wells brought on production early in the financial year. Following completion of the Maari Growth Projects drilling program, gross production increased to in excess of 16,000 bopd.
Papua New Guinea
- During the year, Repsol, operator of the Stanley joint venture, continued to progress commercial and technical discussions with Ok Tedi Mining Limited and regional mining operators with respect to gas sales for power generation.
- The Stanley joint venture continued its optimisation review of project design, execution and timing prior to entering into material contracts for fabrication and construction of the project facilities. Horizon Oil anticipates the revised project configuration will entail a phasing of the ultimate development and associated capital costs, matching the gas demand for power generation with the requirements of regional mining, industrial and domestic consumers and enabling a reduced initial capital investment.
- The PRL 21 joint venture achieved a major milestone with the formal approval by the PNG Conservation and Environment Protection Authority of the Elevala Development environmental impact statement.
- The PRL 21 joint venture progressed the feasibility study for a Western Province based mid-scale LNG development concept, potentially involving aggregation of the ~2 tcf of discovered Western Province gas resources, the cornerstone volumes of which are the condensate-rich Elevala/Tingu and Ketu fields operated by Horizon Oil.
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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