03 June 2009Our note on Heritage Oil has been overtaken by events. Whilst we intended to re-iterate our BUY recommendation, events today, when the company asked for its sharesto be suspended due to discussions with a third party regarding a possible reversetakeover, have made a Buy un-actionable.
Yet there are no guarantees regarding the outcome of current discussions, as such we believe there is merit in releasing our note illustrating the value we believe resides within Heritage and which will still be of interest to potential buyers of the company in the weeks ahead as eventsunfold.
Key Financial data Year Revenue Operating Income EPS2007
$3.7m -$49.6m -$0.16
$5.1m -$37.6m -$0.37
$8.4m -$46.4m -$0.15
$153.5m $4.8m $0.02
Net debt to equity
1. Based on reserves at end of 20072. As per management in May 2009 following Oman sale and Genel back-in right in KRI3. Assumes convertible bonds are converted into shares
Heritage produced a mere 450 barrels of oil per day last year and yet the market cap stood atnearly £1.5bn prior to the suspension of shares on 3 June. As the table above suggests, this valueis not based on current operational status, rather it is the huge potential upside in Uganda and theKurdistan Region of Iraq.
On a sum of the parts valuation of the group’s asset base, we value Heritage at 890p per share.
Heritage has enjoyed exceptional success in drilling campaigns in Uganda and the Kurdistan Regionof Iraq. So much so, that we anticipate the group’s interests will yield implied recoverablereserves in excess of 2 billion barrels.In our view, these resources will prove to be too enticing for either a national oil company or aninternational oil company (IOC) to resist. While yesterday’s events have not taken the exact shape we anticipated, corporate activity involving Heritage was in our view inevitable given a litany of reasons not least of which are:
the move away from exploration to capital intensive development,
a track record of realising value through asset sales,
the large scale of its discoveries and
the need for IOCs to replace resources when access to new exploration areas is limited.
Although Heritage’s share price has been a strong performer in 2009, we believe thatthere is significant additional upside. What follows is our analysis to arrive at thisconclusion and our target sum of the parts valuation of 890p per share.
This does notinclude any premium in the event of a still possible corporate takeover, which we would expect to be significant.
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