Initiation.Indd

RESOURCES Horizon Oil Ltd (HZN $0.115) Buy

Analyst Date Price Target Horizon Oil Ltd Year End 30 June Share Price 0.115 A$/sh Jon Bishop 1st March 2018 $0.20/sh Price Target 0.20 A$/sh Valuation 0.19 A$/sh Initiation of Coverage Shares on issue 1602 m, diluted Market Capitalisation 150 A$m Investment case Enterprise Value 271 A$m Debt 162 A$m HZN is one of few pure oil leveraged producers on the ASX and the only pure Cash 41 A$m Brent proxy; Largest Shareholder IMC - 31.0%

The Company produces ~ 4,500bopd net (100% oil) from its NZ and China Production F/Cast 2017a 2018f 2019f offshore developments; Maari (NZ) 0.3 0.5 0.7 Wei (China) 0.8 0.9 0.6 Flowing bbl metric of A$53,000/bbl (100% oil) vs peer av. of A$111,000/boe; Western Foreland (PNG) 0.0 0.0 0.0 Total Attrib (mmboe) 1.4 1.7 1.7 Plus US$30/bbl operating margin at US$65/bbl Brent;

Forecast EBITDA of US$50m FY’18 rising to +US$60m/yr in FY’19-20; Assumptions 2017a 2018f 2019f Avg Brent Oil Price (US$/bbl) 49 65 68 EV:EBITDA FY’18 of 4.3x and FY’19 of 2.3x vs peer group average of 12.8x and AUDUSD 0.77 0.78 0.78 6.1x;

Current 2P Reserves of 10.6mmbbls (100% oil) with a further ~3mmbbls to be Key Financials 2017a 2018f 2019f booked with sanction of Wei 12-8E this CY and first production 2019; Revenue (US$m) 69 88 99 EBITDA (US$m) 44 50 59 Current 2C Contingent Resources of 153.2mmbboe (15% condensate); NPAT (US$m) 0 -13 10 Cashflow (US$m) 31 37 27 EV:2P+2C of A$1.60/boe vs a peer group average of A$8.70/boe; CFPS (Ac) 3 3 2 Significant upside via its large PNG 150mmbboe wet gas portfolio: P/CFPS (x) 1.5 3.6 4.9 yyan outstanding agreement for a US$130m payment at FID for proposed LNG EPS (Ac) 0 -1 1 development; EPS growth (%) na na na yytangible M&A in PNG regarding the LNG developments suggests HZN’s PER (x) na na 12.7

interests are material enough to attract corporate interest; EV:EBITDA (x) 6.1 5.4 4.6 EV:EBIT (x) 16.3 21.4 9.5 Systematically de-leveraging its Balance Sheet; currently US$94m net Debt vs a peak of over US$150m in 2015; DPS (Ac) 0.0 0.0 0.0 Dividend Yield (%) 0% 0% 0% HZN offers significant oil price leverage with firming oil prices; ND:Net Debt+Equity (%) 26% 41% 24% The current price trades at a ~40% discount to our $0.19/sh Valuation; Interest Cover (x) 1.8 2.8 4.0

We initiate coverage with a Buy and set a $0.20/sh Price Target reflecting a number of tangible organic and in-organic catalysts. Share Price Chart $0.12 6000

5000

$0.09 4000

3000

$0.06 2000 VOL '000 Share Price ($) 1000

$0.03 0 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18

Disclaimer Euroz Securities declares that it has been engaged by Horizon Oil Limited to provide corporate advice. Euroz Securities will receive fees for providing this advice.

Euroz Securities Limited All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document. RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Key Variables Our Share Price Sensitivity

Val/ Sh Brent Oil Vol '000 HZN 12 month price history A$/sh 0.19 -20% -15% -10% -5% 0% 5% 10% 15% 20% 16000 $0.30 14000 15% $0.159 $0.168 $0.177 $0.187 $0.198 $0.207 $0.217 $0.225 $0.233 $0.25 12000 $0.20 10% $0.156 $0.165 $0.174 $0.184 $0.194 $0.204 $0.214 $0.222 $0.231 10000 5% $0.153 $0.161 $0.171 $0.181 $0.191 $0.201 $0.211 $0.219 $0.227 8000 $0.15 S D

S D 6000

U $0.10

U 0% $0.149 $0.158 $0.167 $0.177 $0.187 $0.197 $0.207 $0.216 $0.224 / 4000 / D

D $0.05 -5% $0.145 $0.153 $0.163 $0.173 $0.183 $0.193 $0.203 $0.212 $0.220 2000 U U

A 0 $0.00 A -10% $0.140 $0.149 $0.158 $0.168 $0.179 $0.189 $0.199 $0.207 $0.216 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 -15% $0.135 $0.144 $0.153 $0.163 $0.174 $0.184 $0.194 $0.203 $0.211 Our Market Sensitivity

Val/ Sh US$ Gas - PNG Valuation - $0.19/sh Price Target - $0.20/sh 0.19 -20% -15% -10% -5% 0% 5% 10% 15% 20% 15% $0.198 $0.198 $0.198 $0.198 $0.198 $0.198 $0.198 $0.198 $0.198 Bull Scenario - $0.25/sh 10% $0.194 $0.194 $0.194 $0.194 $0.194 $0.194 $0.194 $0.194 $0.194 Oil price continue to strengthen, rising at 20% 5% $0.191 $0.191 $0.191 $0.191 $0.191 $0.191 $0.191 $0.191 $0.191 above our assumptions. Whilst M&A and/or or- 0% $0.187 $0.187 $0.187 $0.187 $0.187 $0.187 $0.187 $0.187 $0.187 ganic development momentum crystallises value S D S D for the PNG portfolio. U U -5% $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 / / D D -10% $0.179 $0.179 $0.179 $0.179 $0.179 $0.179 $0.179 $0.179 $0.179 Base Scenario - $0.20/sh U U A A -15% $0.174 $0.174 $0.174 $0.174 $0.174 $0.174 $0.174 $0.174 $0.174 Oil price rise in line with our assumptions. M&A and/or organic development momentum crystallises value for the PNG portfolio. Euroz Forecast FY’18 FY’19 FY’20 FY’21 FY’22 FY’23 Brent Oil $59 $68 $75 $75 $75 $75 Bear Scenario - $0.08/sh US$ Gas - PNG $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 Oil prices fall 20%. AUD/USD $0.78 $0.78 $0.78 $0.78 $0.78 $0.78

Company Summary

boepd Horizon Oil Ltd (HZN) is an oil & gas exploration, 5000 HZN Total Production (boepd) development and production company. HZN 4500 focusses on three main projects, producing the Maari field offshore New Zealand and Chinese 4000 Beibu Gulf. The production asset underwrite the 3500 current share price whilst PNG - on account of 3000 its size and increasingly strategic value - offers 2500 substantial blue sky potential. 2000 Liquids rich 2P/2C reserves are 10.64 and 153.18 1500 mmboe. Dec H production of 3374 boepd is anticipated to rise to 5316boepd for FY’19. 1000 Cash of $41m and $154m debt as at Dec 31, 2017. 500 0 Disclaimer FY'16a FY'17a FY'18 FY'19 FY'20 FY'21 FY'22 FY'23 The projections and information above is based on the set assumptions outlined. Due care and attention has been used in the preparation of this information. However actual results may vary from forecasts and any variation may be materially positive or negative. Forecasts by their very nature, are subject to uncertainty and con- tingencies, many of which are outside the control of Euroz.

2 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Market Statistics Year End 30 June Profit and Loss (A$m) 2017a 2018f 2019f 2020f Share Price $0.115 A$/sh Directors Oil Equivalent Sales 69 43 98 97 Issued Capital J Humphrey Chair Hedging Revenue 17 44 - - FP Ord 1,302.0 m B Emmett CEO Deferred Revenue - - - - Interest Revenue - 1 1 2 Op @ 6cps 301.5 m G Bittar NE Dir Other Revenue 0 - - - Share Rights 141.0 m S Birkensleigh NE Dir TOTAL REVENUE 69 88 99 100 Total Dil. FPOrd 1,602.0 m G de Nys NE Dir M Sheridan CFO Operating Costs 18 30 31 29 Market Capitalisation $150 m Dep/Amort 26 26 28 27 Enterprise Value $271 m Shareholders O/H + New Bus Dev 7 7 8 8 Debt $(162) m IMC 31.0% W/O & Provisions 1 11 3 3 EBITDA 44 50 59 60 Cash $41 m Colonial 7.8% EBIT 17 13 28 30 Interest Expense 13 11 6 4 NPBT 4 2 23 29 Tax 4 5 6 8 Asset Valuation A$m A$/sh NZ royalty 1 5 6 7 NZ - Maari 111 0.07 Minorities - - - - China - Wei 165 0.10 NET PROFIT (1) (7) 10 14 China - WZ 12-8E undev. - nom. risked 56 0.03 Net Abnormal Gain/(Loss) (1) - - - PNG (net 2C - 603Bcf; 19mmbbls) - nom. risked 111 0.07 NET PROFIT After Abn’l 0 (13) 10 14 Hedging (3) (0.00) Corporate (inc tax credits) (37) (0.02) Cash Flow (A$m) 2017a 2018f 2019f 2020f Unpaid Capital 18 0.01 Net Profit 0 (7) 10 14 Debt (162) (0.10) + Working Capital Adj. 4 16 - - Cash 41 0.03 + Dep/Amort 26 26 28 27 + Provisions 1 11 3 3 Total 300 0.19 + Tax Expense 4 5 6 8 - Tax Paid 0 2 6 8 Operating Cashflow 36 49 42 44 F/Cast Production (A$m) 2017a 2018f 2019f 2020f Attrib. Prod’n (mmboe) - Capex + Development 5 13 15 15 Maari (NZ) 0.3 0.5 0.7 0.6 - Exploration 3 4 5 5 Wei (China) 0.8 0.9 0.6 0.6 - Assets Purchased 0 18 - - Wei (cost recovery oil equiv) 0.3 0.3 0.4 0.4 + Asset Sales - - - - Western Foreland (PNG) - - - - + Other - - - - Investing Cashflow (8) (34) (20) (20) Total Attrib (mmboe) 1.4 1.7 1.7 1.6 boepd 3,836 4,591 4,547 4,270 + Equity Issues/Opt conv - - 17 - Assumptions + Loan D’down/Receivable 46 - 100 - Avg Brent Oil Price (US$/bbl) 48.6 65.0 67.5 75.0 +Other - - - - USD:AUD 0.77 0.78 0.78 0.78 - Loan Repayment 65 18 109 30 - Dividends - - - - Ratio Analysis (A$m) 2017a 2018f 2019f 2020f Financing Cashflow (19) (18) 8 (30)

CF (US$m) 31 37 27 29 Period Sur (Def) 8 (3) 30 (6) CF / Sh (Ac/sh) 3 3 2 2 Adj. FX effects - - - - CF Ratio (x) 1.5 3.6 4.9 4.6 Cash Balance 25 22 52 45

Earnings (US$m) (1) (7) 10 14 Balance Sheet (A$m) 2017a 2018f 2019f 2020f EPS (Ac/sh) (0) (1) 1 1 Assets EPS Growth (%) na na na 36% Cash 25 22 52 45 Earnings Ratio (x) na na 12.7 9.3 Current Receivables 6 9 9 9 Other Current Assets 4 3 3 3 E’prise Val. (A$m) 202 262 230 200 Non-Current Assets 236 224 216 208 EV : EBITDA (x) 6.1 5.4 4.6 4.5 Total Assets 271 257 278 265 EV : EBIT (x) 16.3 21.4 9.5 9.0 Liabilities Net Debt / ND+Eq (%) 26% 41% 24% 12% Borrowings 133 109 100 70 Interest Cover (x) 1.8 2.8 4.0 14.6 Current Accounts Payable 10 18 18 18 Non Current Liabilities 20 - - - EBIT Margin (%) 24% 15% 29% 31% Other Liabilities 0 4 4 4 ROE (%) 0% -6% 7% 8% Total Liabilities 164 131 122 92 ROA (%) 6% 5% 10% 11% Net Assets 304 126 157 173 Div. (Ac/sh) - - - - Div. payout ratio - - - - Reserves and Resources Div. Yield - - - - Div. Franking - - - - Oil Cond Gas Total mmbbls mmbbls Bcf mmboe 2P Reserves Beibu (China) 5.2 - - 5.2 2P Reserves Stanley (PNG) - - - - 2P Reserves Maari/Manaia (NZ) 5.4 - - 5.4 Total 10.6 - - 10.6 2C Resources Maari-Manaia (NZ) 18.0 18.0 2C Resources Beibu (China) 3.2 - - 3.2 2C Resources Stanley (PNG) - 18.6 603.0 126.3 Total 21.2 18.6 603.0 147.5 EV / 2P boe (A$) 25.5 EV / 2P+ 2C boe (A$) 1.7

3 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Executive Summary

HZN offers pure leverage to Brent oil on account of its 100% oil production from 100% oil leverage its Chinese and NZ offshore producing assets.

At 5,000bbls/d net effective production, HZN ranks as the 8th largest producer 3rd largest oil producer on the ASX and the 4th largest oil and gas producer ex-100. Notably, HZN is the 3rd largest oil producer ex-100, behind BPT and SEA.

Despite this, HZN trades at half of its peer group on an EV/flowing bbl basis at only $53,000/bbl. Operating margins of over US$30/bbl ensure that the Trades 50% of peers on $/flowing boe business will deliver over US$60m/yr in operating cash flow to at least end FY22 on existing reserves. HZN’s production supports over US$50m/yr average Free Cash Flow (ie Op Cashflow after capex).

HZN trades at 4.3x EV:EBITDA FY’18, falling to 2x FY’22. And 3.6x FY’18 FCF trending to 3.0x FCF through FY’22. This represents multiples effectively one Trades 50% of peers on cash flow multiples third of its peer group. Yet the Company’s production base is 100% and fully developed ie not cum-capex. HZN is clearly cheap.

What we like about the HZN opportunity is that the operating business De-gearing Balance Sheet represents a compelling investment case on a relative basis: Peer analysis suggests that with ongoing cash generation, serving to bring the Balance Sheet into a net cash position within 2yrs (ie Jun H, FY’20 on our analysis), will see the stock track higher, to better align with the peer group. In our experience the market rewards resource companies that see its operations systematically de- gear their Balance Sheet. Therefore, the considerable upside case for HZN is not reflected in any capacity Mkt not paying for significant Blue Sky in the current Enterprise Value on that basis. HZN’s western foreland PNG interests contain, discovered (and flow tested) gross recoverable liquids rich gas volumes in excess of 2Tcf (HZN net share – 603Bcf and 19mbbls). The Company is progressing plans for a small scale, ~+2mtpa LNG development, exporting from the port of Daru. FID would crystallise a US$130m staged (US$50m up front plus US$80m in carry) payment from Osaka Gas. However, highlighting the movement of the chess pieces around the eastern M&A values PNG at 2x our est. PNG LNG developments in recent years, we foresee that corporate machinations may crystallise value for HZN’s interests in the short to medium term. We note OSH were unsuccessful in their US$300m bid in 2014 for Talisman’s (now Repsol’s) JV interests in HZN’s PNG asset portfolio. This would imply an equivalent purchase price of over A$200m for HZN’s interests (vs our nominal A$111m valuation). The US$130m Osaka payment is further validation. Initially, we see a sell down by Repsol to underwrite an implied value for HZN’s M&A cycle in PNG looming interests. Depending upon the suitor, this may allude to higher value implied due to the strategic implications of the deal. We draw readers’ attention to the fact that STO are not party to the P’nyang Field (per the broader PNG-LNG JV structure). P’nyang represents a high cost gas development, challenged by terrain. STO, in assuming Repsol’s interest could conceivably improve its negotiating position in trying to re-align the JV. P’nyang takeaway pipeline infrastructure as proposed could conceivably be trumped by gathering transportation drawing on HZN’s western foreland interests with STO driving the JV to land gas at Hedenia-Kutubu centralized gathering infrastructure where STO has voting rights.

Clearly, corporate machinations can drive value realisation for HZN’s PNG PNG ultimately a solution for PNG-LNG portfolio in the short-medium term. Longer term, +2Tcf of discovered, recoverable liquids rich gas, in relatively benign geography of the western forelands, represents future feedstock for PNG LNG subsequent Trains. Pursuit of a standalone LNG development by HZN’s JVs will at the very least serve to drive this outcome sooner in our view.

We set a Price Target of $0.20/sh ahead of our $0.19/sh Valuation, noting that Share Price is 40% discount to Target Price the current share price is underwritten by the base production businesses. Clear leverage to the upside will occur with rising oil prices, field life extension and de-gearing of the Balance Sheet. Substantial blue sky potential rests with PNG. Buy.

4 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Valuation

Valuation: $0.19/sh

Price Target: $0.20/sh

The valuation is an NPV (10% nominal, after tax) of our forecast cash flows from HZN’s Maari (HZN 26%) and Beibu Gulf “Wei” (26.95%) production assets combined with risked values for the imminent Wei Stage 3, development (Wei 12-8E) and PNG 2C Resource interests:

ASSET VALUATION A$m A$/sh NZ - Maari 111 0.07 China - Wei 165 0.10 China - WZ 12‐8E undev. - nom. risked 56 0.03 PNG (net 2C - 603Bcf; 19mmbbls) - nom. risked 111 0.07 Hedging (3) (0.00) Corporate (inc tax credits) (37) (0.02) Unpaid Capital 18 0.01 Debt (162) (0.10) Cash 41 0.03

Total 300 0.19

We note that we do not ascribe any nominal value for exploration potential despite the portfolio offering brownfield exploration and appraisal potential, adjacent to producing infrastructure at Wei and Maari.

Our nominal risked valuations for Wei Stage 3 and PNG are outlined in detail below.

Wei Stage 3 (2C Resource: 3mmbbls) – A$56m ($0.03/sh)

US$15/bbl discovered and tested in-ground recoverable oil. No risking is applied beyond this to reflect that development is in formal approval phase, with China State sanction expected this CY. Further, the resource is adjacent and within low cost tie-back range to the existing Wei gathering and processing infrastructure.

PNG (2C Resource: 603BCF & 18.8mmbbls cond net) – A$111m ($0.07/sh)

A$5/bbl discovered & tested in-ground condensate and A$1/mscf in-ground gas, risked at 15% to reflect pre-commercialisation and access to infrastructure.

The PNG nominal value is benchmarked against peer averages for Contingent Resources. It is further validated by the +US$300m (A$400m), 2014, failed offer by OSH for Talisman’s av. ~40% interests across the Western Foreland assets (https://www.wsj.com/articles/oil-search-bids-for-talismans-papua-new- guinea-assets-1417478384 ), equating to A$200m implied for HZN.

5 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Investment Issues

HZN represents the only ASX producer with pure Brent oil leverage. High operating margins enables de-gearing of the Balance Sheet whilst substantial blue sky upside is provided via its large strategic liquids rich gas resources in western foreland, PNG.

Reserves & Resources

2P Reserves – 10.6mmbbls

2C Resources – 153.2mmboe (39.8mmbbls oil & cond; 657.6Bcf gas)

Production Forecast

EZL’s production outlook for HZNs assets is summarized in the chart below. NB: we do not make any assumptions around:

1. Future development of PNG gas resources into the potential small-scale LNG business;

2. The the proposed Wei 12-8E tie-back development in China.

We do however account for Cost Recovery barrels (per the China PSC) in these forward estimates as HZN’s financials reflect a higher effective production rate as a consequence:

boepd 5000 HZN Total Production (boepd) 4500 4000 3500 3000 2500 2000 1500 1000 500 0 FY'16a FY'17a FY'18 FY'19 FY'20 FY'21 FY'22 FY'23

Earnings and Cash Flow

By virtue of an operating margin of over US$30/bbl (current spot and FY’17 actuals), HZNs effective +4,500bbls/d production generates over US$60m/ yr in operating cash flow to at least end FY22 on existing reserves. And over US$50m/yr average Free Cash Flow (ie Op Cashflow after capex).

This sees HZN trade 5.4x EV:EBITDA FY’18, falling to 2x FY’22.

And 3.5x FY’18 FCF trending to 3x FCF through FY’22.

Peer Comparisons – HZN is cheap

We have looked at the ASX universe of Producer/near-term Producers. HZN is clearly undervalued versus its peers, particularly given that its production is fully developed.

We expect that this valuation arbitrage will close, particularly as cash builds on the Balance Sheet and the Company de-gears.

Utilising our forecasts for companies under coverage and Bloomberg consensus for non-coverage, we seek to compare HZN’s EV relating to inventories and forecast earnings to its peer group. We present averages for each of the comps inclusive and exclusive of the Top 100 producers to normalize for relative risk-size. Companies are presented left to right in descending order of Market Capitalisation.

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Horizon Oil Ltd (HZN $0.115) Buy

EV:flowing boe FY’18 – A$53,000/boe (100% oil)

EV: Flowing bbl (A$/boe) 250,000

200,000

150,000

100,000

50,000

Below peer average of A$111,000/boe Below to its ex-100 peers of A$103,000/boe

EV:2P – A$18.40/bbl (inc. of Wei Stage 3)

EV:2P (A$/boe) 90 80 70 60 50 40 30 20 10 0

In-line with peer average of A$17.60/bbl Premium to its ex-100 peers of A$15.10/bbl We attribute this to the fact that HZN’s production is fully financed (ex-capex) and 100% oil.

7 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

EV:2P+2C – A$1.60/bbl (ex. of Wei Stage 3)

EV:2P+2C (A$/boe) 60

Below peer average of A$9.10/bbl Below to its ex-100 peers of A$7.80/bbl

EV:EBITDA FY’18 – 4.3x

multiple EV:EBITDA'18 45 40 35 30 25 20 15 10 5 0

Below peer average of 12.7x Below to its ex-100 peers of 15.0x

8 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

EV:EBITDA FY’19 – 2.3x

multiple EV:EBITDA'19 14

Below peer average of 6.2x Below to its ex-100 peers of 5.5x

Oil Price & Marketability

We have forecast a Brent oil price av. of US$59.0/bbl FY’18 rising to US$67.5/ bbl for FY’19 and US$75/bbl long term beyond FY’20.

Maari – NZ

Maari crude is a waxy, medium sweet 35-38° API crude with low sulphur and good aromatics. The high pour point has been readily accommodated by the east coast Australian and NZ refineries, rendering Maari crude as a good gasoline feedstock.

The crude will likely trade off the ICP Minas benchmark at similar levels to Bach Ho ie ICP Minas +US$2/bbl which is equivalent to Dtd Brent US$+1/ bbl. Proximity to Australian east coast refineries will generally translate into beneficial freight economics. EZL assumes dd Brent flat long term price received.

Wei - China

Development of the Wei discoveries will blend the crudes from the different fields and market as WeiZhou crude. The blend will be waxy, viscous 34-39 ° API crude with 0.08% S, and will be sold to Chinese refineries. The grade will likely trade at a slight discount to the ICP Minas benchmark or a discount of around US$-1/bbl to Dated Brent. EZL assumes dd Brent minus US$2/bbl long term, price received.

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Horizon Oil Ltd (HZN $0.115) Buy

Fiscal Regime/Tax/Royalties

New Zealand

As of 2018 a 28% income tax applies. Petroleum tax comprises a hybrid of a 5% valorem royalty based upon declared or deemed sale price, and an accounting profits royalty based upon profits net of development and production costs. The accounting profits royalty is 20%.

China

A China offshore Petroleum Sharing Contract will apply to any new development, where-by the National Oil Company has (up to) a 51% back-in right on existing JV equity holdings upon development approval.

Upon commencement of production, PSC terms dictate that 5% of oil production is subject to Chinese National Industrial Tax (VAT) and an additional 0-12.5% (based upon production rate) Royalty. At the forecast development peak production rate of 25kbopd, a 4% Royalty applies.

Of the balance, 62.5% is allocated for cost recovery. The Company’s unrecovered Cost Recovery balance at 31 December 2017 was US$76.7 million (escalating at 9% pa). Recovery is sequential: Royalties; opex; exploration; and finally development costs. Where not all development costs are recovered, these may be carried forward, whilst any surplus cost recovery production is added to Profit Oil.

During the cost recovery phase, the Contractor effectively experiences an uplift to attributable production. EZL presents “Cost Recovery Production” within our Summary Financials.

Profit Oil is then shared between the State and the other participants as per the terms of the production licence negotiated upon back-in, and is subject to a Chinese Corporate Tax of 25%.

The specific terms of the PSC for each operating field are commercially sensitive. EZL has applied the standard Chinese offshore PSC flow sheet, overlaying commercial terms utilized in other operating fields in China from pre- existing and current operators under coverage (SEH.ASX, ROC.ASX). We have then reconciled our cash flow estimates with HZN reported actuals to refine our assumptions.

Papua New Guinea

A 30% income tax applies to gas fields with an Additional Profits Tax of 20% or 25% as cumulative net profits become positive. All costs incurred in the exploration and development phases of the project are accumulated and amortised over the life of the project. Gas projects are subject to a royalty which is basically equal to 2% of the gross revenue from gas sales. New gas projects are also subject to a development levy which is again basically equal to 2% of the gross revenue from gas sales. Where a project is liable for both royalty and development levy the royalty is claimable as a credit against income tax payable.

Gov’t has right to back-in to up to 22.5% on award of production license. The Gov’t will reimburse the contractor for up to 22.5% of sunk costs.

Dividends

We do not forecast dividends for HZN whilst the Company retires debt and seeks to progress its PNG portfolio.

10 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Balance Sheet (as at Dec 31, 2017)

Cash: US$32m

Debt: US$126m

On our forecast assumptions, EZL determines – per the current terms and amortization schedule assumed – that the Company will be net cash from mid- FY’20 (assuming no development commences at PNG). This is consistent with Company forecasts:

Source: HZN

Debt comprises

US$86m drawn of US$120m Revolving Cash Advance Facility (commenced 14 May 2015)

ANZ and Westpac syndicate. Current maturity date of May 2019, we expect this to be refinanced within the next 12mnths and reflect this in our financials. We assume an annual interest rate of 5%. Notes to the facility are disclosed in the 2017 Annual Report.

US$40m Subordinated Secured Debt Facility (commenced 15 September 2016)

A subordinated, secured non-amortising loan with HZN’s major shareholder, IMC Investments Limited (IMC), to replace pre-existing convertible bonds. IMC was issued 300m in $0.06/sh warrants as part of the refinancing. We dilute our equity capital structure commensurately with the proceeds representing unpaid capital (used to partially retire the facility if called by IMC after the 3rd anniversary).

Floating interest is charged at LIBOR plus a margin of 9.0%.

The facility has a term of 5 years, and is callable after 3 years at the election of the lender. EZL assumes that the US$40m will be refinanced with the Revolving Facility within the next 12mnths. This will attract a lower interest charge to maturity; we assume 5% and a 3yr amortization profile to FY22 end.

11 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Hedging

Current hedging is aligned with Revolving Cash Advance Facility: 1,033,750bbls @ US$59/bbl av. Jan-18 thru Mar-19.

We expect additional hedging will be required under the refinanced debt facilities when implemented within the next 12mnths. This is aligned with Company stated policy to protect revenues whilst gearing is in-place.

Currency

All financials are reported in US$. The final figures are converted to AUD for the valuation. Our A$/US$ forex forecast is US$0.78 long term.

Sovereign Risk

We consider that sovereign risk is low for both New Zealand and China. Whilst PNG has historically has some significant in-country operating risks, we feel that the climate has improved markedly, with the government and local population supportive for mining development and increases to energy reserves. Never- the-less, we acknowledge the broader global energy climate, where-by we are increasingly witnessing countries using various constitutional and fiscal means to secure hydrocarbon reserves from foreign entities.

Production Assets

New Zealand

Offshore Taranaki Basin, NZ

(HZN 26% with completion of the purchase of Todd Oil’s 16% interest, effective Jan 1, 2018)

Maari Field

Valuation (NPV10 DCF) - $111m ($0.07/sh)

The Maari oil field lies to the west of New Zealand’s North Island, in the offshore Taranaki Basin in 100m of water. Five kilometres to southwest of Maari lies the Manaia structure. This is to be appraised during the development drilling campaign mid this year.

The Maari Field was discovered in 1983, whilst the oil and gas bearing Manaia structure was discovered in 1970 by the Maui-4 well.

HZN announced on 06 Nov, 2017, that it entered a binding agreement with Todd Oil to purchase its subsidiary (Todd Maari Ltd) 16% interest in the Maari production license PMP 38160. A total consideration of US$17.6m will be paid at closing pending NZ Govt approvals (expected Mar Q, FY’18) subject to working capital and purchase price adjustments. This will be funded from existing cash. The Transaction will be effective from Jan 1, 2018.

Joint Venture partners are OMV NZ 69.0% (operator) and Cue 5%.

12 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

MAARI DEVELOPMENT MAP

Source: HZN

2P Gross Reserves remaining are est. at 20.8mmbbls (5.4mmbbls net to HZN);

2C Gross Resources of 69.2mmbbls (18mmbbls net HZN) are estimated to occur in the additional zones within the Maari (F-Sand) and the Manaia (F-sand; Moki Sandstone) structures

Source: HZN

13 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

The development of the Maari Field comprises a wellhead platform and Floating Production Storage and Offtake production facilities, with 11 production and 3 horizontal injection wells. Subsequent to commencement of production an extended reach lateral producer was drilled into the crest of the Mangahewa Formation within the Manaia structure.

Production commenced in early 2009 with nearly 35mmbbls produced in that time. With peak rates of over 25kbopd, the field is currently producing at around 8,000bopd. Enhancement work on the subsurface infrastructure is expected to boost production to around 9,000bodp later this year.

The production license is in effect for 25yrs (ie 2033), however we assume sub-economic rates of production occur in 2028 without additional resource development.

Abandonment costs are expected to be modest, with wellhead and subsea umbilical rehabilitation costs to be offset by sale proceeds from the FPSO, purchased outright by the JV

The Maari crude has a 35-38ºAPI and a high pour point due to its wax content. Maari crude’s low sulphur content and high aromatics ensures that is a good feedstock for gasoline production and therefore desirable by the east coast Australian refineries. Consequently, Maari should continue to trade around Dtd Brent flat depending upon freight logistics and standard crude oil trading fundamentals.

China

Beibu Gulf, Block 22/12

(HZN 26.95%)

Wei 12-8W and Wei 6-12N Fields

Valuation (NPV10 DCF) - $165m ($0.10/sh)

Wei 12-8E Development

Valuation (nominal risked) - $56m ($0.03/sh)

Block 22/12 lies in the Beibu Gulf in southern offshore China. Water depths are shallow (no greater than 40m)

Joint Venture partners are CNOOC 51.00% (Operator), Fosun 19.60% and Majuko Corp 2.45%.

The block contains the Wei 6-12S and Wei 6-12-1 discoveries drilled in 2002, as well as 4 discoveries made in the south of the block between 1982-94.

14 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

BLOCK 22/12 MAP

Source: HZN

2P Gross Reserves (as at 30/06/2017) comprise 19.4mbbls (HZN 5.2mmbbls net).

2C Gross Contingent Resources are 11.8mmbbls (HZN 3.0mmbbls net) and relate almost entirely to the proposed Wei 12-8E development (2C – 11.1mmbbls), expected to be sanctioned this CY for first production in CY’19:

Source: HZN

15 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

The operation comprises a wellhead platform with processing capacity of circa 20kbopd positioned at the Wei 6-12 location gathering from phased development of Block 22/12 A and B. The infrastructure is connected via pipeline to centralized gathering facilities at Wei 12-1 ahead of pipeline to processing at Weizhou Island Terminal:

Source: HZN

Production commenced in late 2012 with over 15mmbbls produced in that time. The development has achieved peak rates of over 15kbopd, is now producing at around 9,300bopd.

Recently completed enhancement work on the subsurface infrastructure is expected to boost production 1,500bopd in the near term.

HZN net production is currently 2,500bopd rising to 2,700bopd shortly.

16 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

However, as described in the Fiscal Term summary above, effective production rates net to HZN (on account of the Cost Recovery provisions under the PSC) are closer to 3,300-3,500bopd:

Source: HZN

We model effective economic production to 2028, before integrating the proposed Wei 12-8E tie-back development.

Any additional commercial discoveries – per 12-8E - will be considered for tie- back in the field development concept.

17 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Appraisal-Development

Papua New Guinea

Onshore PNG,

PDL 10 – Stanley discovery (HZN - 30.0%); PRL 21 – Elevala Ketu discoveries (HZN – 30.2% & Operator); PRL 28 – Ubuntu discovery (HZN 30.0% & Operator); and PRL 40 – Puk Puk & Douglas (HZN 20.0%)

Valuation (nominal risked) - $111m ($0.07/sh)

HZN’s onshore PNG interests are located in the western central highlands and contain the Stanley, Elevala, Ketu, Ubuntu and Puk Puk-Douglas discoveries.

HZN’s JV partners are:

PDL 10 – Repsol (40% & Operator); Osaka Gas (20.0%); Kumul (10.0%);

PRL 21 – Repsol (35.1%); Osaka Gas (18.0%); Kina Petroleum (16.8%);

PRL 28 – Repsol (37.5%); Kumul (20.0%); P3GE (12.5%);

PRL 40 – Repsol (60% & Operator); Kumul (20.0%).

PNG MAP

Source: HZN

18 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

2C Gross Contingent Resources are 62.1mmbbls condensate & 2.192Tcf gas (HZN 150mmbboes net).

HZN and Repsol have been advancing a standalone 1.5-2mtpa LNG development involving aggregation of existing resources via 520km pipeline to a modular liquefaction facility and export infrastructure located on Daru Island:

Source: HZN

Development is targeting an expected global LNG shortfall window from 2023 onwards.

19 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Desktop studies forecast a 20+ year plateau production for the 2C Resource with the liquids yield substantially enhancing the economics of a relatively small scale development:

Source: HZN

Pre-FEED contractors have completed packages on main project elements – upstream processing, pipelines and FLNG – with integration/optimisation underway. Offshore site investigation work to commence Q2 2018.

Our PNG valuation is based upon an assumed A$5/bbl discovered & tested in-ground condensate and A$1/mscf in-ground gas, risked at 15% to reflect pre- commercialisation and access to infrastructure.

Highlighting the movement of the chess pieces around the eastern PNG LNG developments in recent years (notably InterOil), we foresee that corporate machinations may crystallise value for HZN’s interests in the short to medium term.

Initially, we see a sell down by Repsol to underwrite an implied value for HZN’s interests. Depending upon the suitor, this may allude to higher value implied due to the strategic implications of the deal.

20 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

We draw readers’ attention to the fact that STO are not party to the P’nyang Field (per the broader PNG-LNG JV structure). P’nyang represents a high cost gas development, challenged by terrain. STO, in assuming Repsol’s interest could conceivably improve its negotiating position in trying to re-align the JV. P’nyang takeaway pipeline infrastructure as proposed could conceivably be trumped by gathering transportation drawing on HZN’s western foreland interests with STO driving the JV to land gas at Hedenia-Kutubu centralized gathering infrastructure where STO has voting rights:

Source: Horizon Oil

Alternatively, we have seen the Chinese (CERCG) looking for feedstock gas to pursue a regional SE Asian business model of small scale Compressed Natural Gas technology to provide incremental supply to China per its recent AWE approach ostensibly concerning AWE’s 50% interest in the +800Bcf Waitsia Field. The +2Tcf of wet gas 2C Resources in the western foreland JVs could represent an appropriate volume for CERCG strategy as intimated in the AWE process.

Clearly, corporate machinations can drive value realisiation for HZN’s PNG portfolio in the short-medium term. Longer term, +2Tcf of discovered, recoverable liquids rich gas, in relatively benign geography of the western forelands, represents future feedstock for PNG LNG subsequent Trains. Pursuit of a standalone LNG development by HZN’s JVs will at the very least serve to drive this outcome sooner in our view.

21 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Risks

HZN is multi asset producer with relatively stable, partially hedged high margin (by industry standards) cash flow from moderate life assets. Capex going forward is largely sustaining and workover. Therfore the key risks to our investment thesis are largely market and commodity price related.

Operational Execution – low. China and NZ are developed and settled developments. Whilst at the current market cap and EV the market ascribes no value for potential commercialization of PNG.

Commodity Price - Market sentiment and E&P interest in HZNs production assets and growth strategy will be partially a function of (particularly) oil price. Rising prices will stimulate corporate transactions in and around HZN’s PNG ground but also enhance the implied value of the PNG assets. Earnings and implied multiples will benefit from rising prices.

Funding – As discussed above, HZN generates strong operating cash flows whilst ongoing capex is forecast to be low for the short to medium term. We see that the Company’s ability to refinance existing facilities at lower rates within the next 12mnths as very high. The only risk to the Balance Sheet will result with a dramatic fall in oil prices. We view this as unlikely.

The existing agreement with Osaka Gas is large upfront source of working capital should PNG progress to FID. At which point bankability will be highly likely requiring little or no equity.

Market Risk – General Market Risk

Horizon Oil Issued Capital

Horizon Oil Limited is listed on The Australian Stock Exchange (ASX: HZN).

Capital Structure:

Fully paid ordinary shares – 1,301,981,265

IMC warrants (@ $0.06/sh) - 301,700,000

Performance Share Rights - 137,720,024

Total Fully Diluted Capital – 1,603,681,265

22 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Directors and Management

Prof. John Humphrey (LL.B., SF Fin) - Non–Executive Chairman

Director for 27 years. Executive Dean of the Faculty of Law at Queensland University of Technology. Chairman of Auswide Bank Ltd, a director of Lynas Corporation Ltd, Spotless Group Holdings Limited, and a former member of the Australian Takeovers Panel.

Former non-executive director of Downer EDI Limited.

Chairman of Board; Chairman of Remuneration, Nomination and Disclosure Committees, Member of Audit and Risk Management Committees.

Brent Emmett (B.Sc(Hons)) - Managing Director/CEO

Retiring Jun H, FY’18.

Director for 17 years. Over 40 years’ experience in petroleum exploration, E&P management and investment banking. Chief Executive Officer, member of Risk Management and Disclosure Committees.

Michael Sheridan (B.Ec, LL.M., F Fin) - CFO

Incumbent CEO

27 years experience in finance, commercial and legal areas / Ernst & Young, Ampolex, RGC Limited, Minera Alumbrera Limited, Hutchison Telecoms / Australasia, South East Asia, South America

Greg Bittar (B.Ec, LL.B (Hons), MSc., LBS) – Non-Executive Director

Mr Bittar has extensive experience in public and private markets mergers and acquisitions, capital markets and strategic advisory assignments across a range of sectors including general industrials, metals and mining, mining services and energy. He is currently Chairman of Millennium Minerals Limited and Trek Metals Limited and a non-executive director of ECM Limited.

Sandra Birkensleigh (B.Comm, ICAA, GAICD) - Non–Executive Director

Director for 2 years. Extensive experience in financial services and risk management, compliance and corporate governance. 24 years at PricewaterhouseCoopers (PwC) where she was formerly a Global Lead for Governance Risk & Compliance; a National Lead Partner Risk and Controls Solutions and a Service Team Leader for Performance Improvement. Non- executive director of Auswide Bank Limited, MLC Limited, 7-11 Holdings and its subsidiaries, National Disability Insurance Agency and the Sunshine Coast Children’s Therapy Centre, an independent member of the audit committee of the Reserve Bank of Australia, a member of the Council of University of the Sunshine Coast and Chair of its Audit and Risk Committee and Chair of the Audit and Risk committee of the Public Trustee of Queensland.

Former director of Plum Financial Services Limited.

Chairman of Audit Committee; member of Risk Management and Remuneration and Nomination Committees

Gerrit J de Nys (B.Tech, FIEAust, FAICD, CPEng) - Non – Executive Director

Director for 10 years. Over 44 years’ experience in civil engineering, construction, oil field contracting and natural resource investment management. Non-executive director of IMC Pan Asia Alliance Group subsidiaries (a related party of Austral Asia Energy Pty Ltd a substantial shareholder of Horizon Oil Limited).

Former non-executive Director of SOCAM Development Limited.

Member of Risk Management and Remuneration and Nomination Committees.

23 RESOURCES

Horizon Oil Ltd (HZN $0.115) Buy

Top 20 Shareholders

Shareholders Shares Held(%) 1 IMC Investments Ltd. 245647876 18.8455 2 Austral-Asia Energy Pty. Ltd. 148333916 11.3798 3 Colonial First State Asset Management (Australia) Limited 98640187 7.5674 4 Spheria Asset Management Pty Ltd 79938861 6.1327 5 Tribeca Investment Partners Pty Ltd. 63098953 4.8408 6 Brent Emmett 20002607 1.5346 7 Carrington Land Pty. Ltd. 20000000 1.5344 8 Norges Bank Investment Management 13450106 1.0319 9 David Peek 11315933 0.8681 10 John Svendsen 11109000 0.8523 11 Geoffrey Day 9500000 0.7288 12 Andrew Day 9500000 0.7288 13 Finot Pty Limited 8857143 0.6795 14 Grizzly Holdings Pty Ltd 8511941 0.653 15 Michael Sheridan 7968201 0.6113 16 John Porteous 7558716 0.5799 17 Dimensional Fund Advisors L.P. 7360011 0.5646 18 Eun Lee 7000000 0.537 19 Christian Haustead 6200000 0.4757 20 Douglas Nicholas 5400073 0.4143 Total 789393524 60.5604

Horizon Oil Limited

Level 6, 134 William Street Woolloomooloo NSW 2011

Telephone: +61 2 9332 5000 Facsimile: +61 2 9332 5050 www.horizonoil.com.au/contact.php

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