Is Horizon Oil (ASX:HZN) Still a Buy Despite Earnings Contractions?

The question of whether Horizon Oil (ASX:HZN) remains a compelling investment hinges on reconciling its recent earnings declines with long-term revenue growth and shareholder returns. While the company's 2025 financial results revealed a 5.5% drop in revenue to US$105.3 million and a 53% plunge in net income to US$12.2 million, its five-year revenue growth of 10% annually and total shareholder returns (TSR) of 853% over the same period suggest a more nuanced picture. This analysis evaluates Horizon Oil's financial health by dissecting revenue-driven growth, earnings fundamentals, dividend sustainability, and governance dynamics to determine if the stock retains its appeal.

Revenue Growth vs. Earnings Fundamentals: A Diverging Trend

Horizon Oil's revenue has historically expanded at a 10% annualized rate over the past five years, outpacing its earnings growth of 11.2% annually. However, this trend reversed in 2025, with both revenue and net income contracting sharply. The company's net profit margin fell from 23% in FY 2024 to 12% in FY 2025, driven by rising operational expenses. This divergence between revenue and earnings highlights a critical risk: while top-line growth has historically supported profitability, recent cost pressures have eroded margins.

The Oil and Gas industry, by contrast, has seen earnings grow at 26.3% annually, far outstripping Horizon Oil's performance. This gap underscores the company's vulnerability to sector-specific challenges, such as volatile commodity prices or operational inefficiencies. Yet, its five-year revenue trajectory-despite the 2025 decline-suggests resilience in maintaining market share, which could stabilize in a more favorable pricing environment.

Total Shareholder Returns: A Silver Lining

Despite the earnings contraction, Horizon Oil's shareholders have reaped substantial returns. A 13.77% dividend yield, coupled with a 853% cumulative TSR over five years, indicates strong investor confidence. This outperformance is partly attributable to the company's consistent dividend payouts, including an inaugural AU$0.03 per share in 2021. However, the payout ratio of 261.2% raises concerns about sustainability, as dividends now exceed earnings. Such a high ratio could strain liquidity if earnings remain depressed, potentially forcing dividend cuts-a risk investors must weigh against current yield appeal.

Governance and Ownership: Confidence Amid Uncertainty

Horizon Oil's 2025 Annual General Meeting (AGM) saw all resolutions passed, reflecting shareholder endorsement of management's strategic direction. CEO Richard Beament's 0.8% insider ownership aligns with long-term value creation, though retail investors hold a larger stake (40%), which may amplify short-term volatility. The AGM's success suggests that stakeholders remain optimistic about the company's ability to navigate challenges, even as earnings falter.

Is Horizon Oil Still a Buy?

The case for Horizon Oil rests on its long-term revenue growth and robust shareholder returns, which have historically outpaced earnings declines. However, the 2025 results expose vulnerabilities: declining margins, unsustainably high dividends, and a lag behind industry peers in earnings growth. For growth-oriented investors, the company's revenue resilience and strategic governance could justify a cautious "buy" if cost controls improve and commodity prices stabilize. Conversely, income-focused investors may find the dividend risk too high, particularly with a payout ratio exceeding 200%.

In conclusion, Horizon Oil's investment thesis remains split. While its revenue trajectory and shareholder returns are compelling, the earnings contraction and dividend sustainability issues demand careful scrutiny. Investors must balance optimism about long-term growth with prudence regarding short-term risks.