Horizon Oil (ASX:HZN) is an Australian upstream explorer with operations in China, Australia (Mereenie), Thailand (ex-ExxonMobil), and a major PNG gas project with 290M barrels of reserves. The stock pays 12% dividend — but the payout ratio exceeds 300%. Sustainable or dividend cut on the way?
What Does Horizon Oil Do?
Horizon Oil is a small-cap upstream player with three producing pillars and one major development asset:
1. Mereenie (Northern Territory, Australia)
25% interest in a producing oil & gas field. Stable cashflow source, low OPEX. JV with Central Petroleum (operator).
2. Beibu Gulf (China)
26.95% stake in three producing licenses offshore Guangxi province. Operator: CNOOC. Output: ~2,500 BOE/day (HZN share). License runs through 2030+ with extension options.
3. Thailand Acquisition (ex-ExxonMobil, 2025)
Closed November 2025: 50% interest in three producing onshore licenses in Thailand. Production boost: +2,000 BOE/day. Acquisition price: $42M — payback period under 3 years at current oil prices.
4. PNG Gas Project (Western Province)
The Big Asset — Undeveloped
50% stake in a gas project with 290M barrels of oil equivalent in Western Province, Papua New Guinea. JV with Osaka Gas. In negotiation for years — main issue: pipeline connection to Total's LNG facility in Port Moresby. If realized: balance-sheet game-changer. But: development costs estimated at $1.2B — HZN needs partners.
2025 Fundamentals
- Revenue: AUD 76M (FY2025, +18% YoY post-Thailand)
- Operating Cashflow: AUD 22M
- Net Income: AUD 8M
- Free Cashflow: AUD 4M after CapEx
- Net Debt: AUD 12M (solid balance sheet)
- Market Cap: AUD 86M
The Dividend Question
HZN has paid two dividends over the past 18 months: 2 cents AUD in April 2025 (semi-annual) and 2 cents AUD in October 2025. Annualized at a share price of 33 cents, that's a 12% yield.
Possible scenarios:
- Best case: Thailand boost lifts FCF to AUD 12M/year, dividend halved to 2 cents annualized, yield stays at 6% — realistic.
- Mid case: Dividend suspended for 12 months, funds redirected to PNG pre-FEED.
- Worst case: Oil below $70, Thailand integration struggles, dividend fully cut.
Valuation
- EV/EBITDA: 3.4x — below sector average of 5.1x
- P/Reserves (2P): $0.29/barrel — cheap vs. peers ($1.80+)
- P/E: 11x — not cheap given the risk
- NAV discount: ~35% (sum-of-parts including PNG optionality)
My Verdict
Horizon Oil has real optionality through the PNG project. But the 12% dividend is a yield trap: it's only sustainable because management is mining reserves. A dividend cut within 12 months is my base case. Anyone who wants to play the PNG story should wait for the dividend cut — the stock will be significantly cheaper then.
Buy threshold: < 22 cents AUD after dividend cut. Not in my portfolio. Not on my immediate watchlist.