Heritage Oil PLC HOIL
May 12, 2009 - 10:52pm EST by
2009 2010
Price: 7.92 EPS $0.00 $0.00
Shares Out. (in M): 314 P/E 0.0x 0.0x
Market Cap (in $M): 2,485 P/FCF 0.0x 0.0x
Net Debt (in $M): -97 EBIT 0 0
TEV ($): 2,387 TEV/EBIT 0.0x 0.0x

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All prices are quoted in US dollars, and are converted from British Pounds at rate of $1.5309.  Estimates and resources supplied are calculated are solely that of the author.  They will differ materially from published estimates.


Shares Outstanding (fully diluted):  313.7 million.

Net cash (assumes all options exercised and in money convertible debenture exchanged for equity):  $97.3 million


Enterprise Value:  $2.399 billion.



Oil speculators seeking to participate in the development of not one, but two, potential elephant oil fields should be aware of Heritage Oil PLC.  This land based explorco currently controls two highly prospective fields.


This paper provides for 2 possible scenarios.


  • 1. Only one concession (a 42.5% interest in Uganda) is commercialized before 2013. Should this occur, net proven reserves could exceed 255 million barrels. Net production may surpass 100,000 bpd. At $60 US for Brent crude, annual revenues could exceed $2 billion US. EBITDA could exceed $1 billion.


  • 2. A second oil field (Miran West in Iraq) is also commercialized before 2011. Heritage's current 56.25% interest is NOT voided. Rather, the production sharing split is amended, reducing HOIL's interest to 28.125%. Should this occur, 457 million barrels of additional oil reserves may be booked for Heritage Oil. When added to production from Uganda, total production could then grow to 200,000 bpd. At $60 US for Brent, aggregate annual revenue could exceed $3.8 billion. EBITDA could exceed $2 billion. Total proven reserves could exceed 712 million barrels.


Company description.   Heritage Oil PLC is a British explorco, with virtually no current production. The CEO holds more than 33% of the outstanding shares.  Heritage holds 3 current concessions with production potential.


Russia.  HOIL control 95% of the shares of a Siberian oil company.  Proven reserves are 23.1 million barrels of 42 API oil.   This oil has limited perceived value by the marketplace, due to a complex and unfriendly production taxation system in Russia. There was modest production of 389 bpd in 2008 from three wells.  The field was shut in for the early part of 2009, pending a recovery in oil prices or improved Russian taxation.  Present production is estimated at 150 bpd.


Uganda. Heritage controls a 42.5% net interest in 2 highly prospective exploration blocks in the Albert Lake region.  Tullow Oil PLC also holds 42.5% of each concession. A total of 21 exploration wells have been drilled to date in this region.  The success rate is 100%.  Both blocks have reported major oil discoveries.


     A.  Block 1 contains the Buffalo-Giraffe field.  This field is estimated to be 48 square kilometres to date.  The oil column is 140 metres and is found just 600-920 metres below the surface.  Porosity of the sandstones is estimated at 35% and the oil has an API of 30-32. All wells are in communication with one another.   Provisional estimates suggest that 350-400 million barrels of recoverable reserves exist at Buffalo Giraffe.  The discovery is fully open to the North and East.   There exists a possibility that drilling on the "Buffalo East" prospect can double the size of the field.




     B.  Block 3A contains the Kingfisher field.  This field may hold 200 million barrels of recoverable reserves.   The oil is 30-32 API with a low gas/oil ratio.   


Large scale production won't commence until 2013 at the earliest. The issue is a lack of infrastructure to transport oil.  A 1300 km, 500,000 bpd pipeline is contemplated to the region.  This would tie in the Buffalo Giraffe, Kingfisher and potential new discoveries to export markets through Kenya.   The pipeline cost is estimated to be $2 billion.


In 2010, potential exists for smaller scale test production to reach local markets via truck.




I consider Tullow to be a highly motivated partner in Uganda.  The firm is an intermediate that is is well positioned to fast track pipeline negotiations.  Tullow reports enough oil has been discovered to date; for initial production of 200,000 bpd from both concessions. 


With a 42.5% net interest, Heritage proportionate output would be 85,000 bpd initially.   Successful appraisal drilling of the Buffalo East prospect would render this forecast as being conservative.  


Iraq.   Heritage holds a 56.25% interest in the MIRAN oil concession in Kurdistan.  Armed with modern seismic, HOIL has found a resource with an estimated 1.6 billion barrels of potential producing reserves.   This resource is called the Miran West Field.  I assume that the midpoint between announced OOIP (2.3-4.2 billion barrels) to calculate potential reserves. I further assume that recovery is at the lowest end (50%-70%) of the highly porous resource. 


Under this scenario, Miran West would represent a field with recoverable reserves of 1.62 billion barrels. This reserve level, coupled with the extremely high porosity of the field, suggests Miran West may be one of the largest conventional onshore crude discoveries in years.


The oil is medium gravity (27 API).  This grade of crude should sell for about a 15% discount to Brent.


Miran East is directly adjacent to Miran West, and is separated by a fault.  3D seismic mapping suggests that Miran East may offer similar potential to Miram West.


The Miran field represents a pure wild card for shareholders.   Heritage's concession was obtained by negotiations with the provincial Kurdistan government in Iraq.  The province has offered roughly 20 production sharing contracts (PSC) with various E&P companies in the last several years. A number of intermediates, including Talisman Resources, have entered into such agreements.  The consensus view is that current agreements may ultimately be honoured, albeit in some amended form.


The central government of Iraq does not formally recognize such contracts.  However, the Iraq Central Government (ICG) does propose Production Sharing Contracts with Foreign Oil Companies (FOC).




Iraq's constitution envisions that oil production be substantially controlled by provinces, with sharing of the revenue at the central government.  The ICG can theoretically void all Kurdish PSC's entered into thus far. However, Iraq has a pressing need for revenue.  


The province of Kurdistan's oil sharing agreement with ICG allows for Iraq to retain 87% of the PSC oil revenues. Kurdistan would only keep 17%. This revenue split was arrived at, using Kurdistan's percentage of the total Iraqi population.  Such a directly negotiated split is what the ICG has considered as a framework.  




As for HOIL, the Miran West discovery is of such a size that Heritage can easily cede a further 28.125% to the government.   This would still allow HOIL to develop the field, and ultimately produce more than 100,000 bpd on a net basis.  Producing reserves could exceed 457 million barrels, net to Heritage.    


A positive resolution of the Miran concession terms should make Heritage Oil a prime takeover target.


The obvious suitor would be Tullow Oil PLC.  A friendly takeover would solidify Tullow's control over the Albert Lake development, and add blockbuster growth in Iraq.





How much capital will Heritage Oil require to fully develop both Miran and Albert Lake?


I estimate that Heritage Oil will need a further $1.5 billion to build out pipeline and tie in wells.   This implies further equity financings staggered over several years.  Debt financing might be available for a portion of the pipeline costs.


Pipeline costs may be defrayed by partners. Should Tamoil (or other operators) agree to finance and operate the line, a significant expense will be removed from Heritage.  There would be positive implications for common shareholders.





What is 100,000 bpd of 32 API crude worth in the public markets today?


If Heritage has its Iraq field confiscated, the Uganda concessions represent the only significant asset.  Resources are presently estimated at 233-255 million barrels.   100,000 bpd of net output allows for a reserve life index of 6.7 years. 


The most "oily" international explorco that comes to mind, for comparative purposes is Addax Petroleum.  Addax produces oil in Nigeria and Africa, + holds an interest in a Kurdish concession in Iraq.  Addax has a current Enterprise Value of $7.7 billion US.  Proven reserves are 169.6 million barrels.   2P reserves total 380.5 million barrels. 


Addax reserves are about 56% higher than Heritage.  However, Addax has already included 109.5 million barrels of Kurdistan reserves in its report.  In the event that Heritage assets are expropriated, Addax assets would likely suffer a similar fate.

Removing the Iraq reserves from the report brings Addax 2P reserves down to 271 million barrels.  This would be just 12% larger than what Heritage stands to book from Ugandan development.


Addax is also in a capital intensive phase.  Forecast capex exceeds forecast EBITDA at the current price of crude.   Ex Iraq, Addax fields are considerably smaller than anything found in Uganda to date. Some are offshore.  Addax lacks field economies of scale, when compared to Heritage's concentrated asset base.


If Addax type values are ultimately associated to Heritage upon commercialization of Uganda, an enterprise value of $6.7-$7.7 billion US for HOIL may await.   


Tullow Oil PLC presently produces about 65,000 bpd, 70% crude oil.  Proven reserves are estimated to be 314 million barrels of oil equivalent.  Tullow considers the assets in Uganda as contingent at present.  The current enterprise value of Tullow is about $13.2 billion.  


What is 200,000 bpd of 30 API crude worth in the public markets today? 


This level of output assumes that HOIL maintains a 28.25% interest in Miran.  In such a  scenario, producing reserves from Uganda and Iraq would be roughly 712 million barrels.  The 23.1 million barrels of Russian reserves might be also worth something in 48 months.


This range of reserve and output should clearly vault Heritage into the league of intermediates.   A more appropriate valuation would be approximately Tullow Oil's enterprise value of $13.2 billion.  With almost no gas production, arguably a premium would accrue to Heritage's EV.


I believe that Heritage Oil PLC is an exceedingly rare oportunity for long time oil investors.


Large & low cost reserve bases sometimes generate takeover offers. I would be disappointed should this occur prematurely.  Heritage offers shareholders the potential for maintaining a control interest in 2 blockbuster fields over the next 5 years.


1.  Without factoring in more development or exploration success in Uganda, commercialization could push HOIL's EV to $6.7-$7.7 billion US.   If Heritage raises an additional $1 billion for its share of development infrastructure, the total EV would be $3.4 billion.  


This suggests that the upside would be in the range of $3.2-$4.4 billion. My 48 month fair value for HOIL could be $18.48-$21.66 US per share in this scenario.


Should a third party operator agree to build and manage a pipeline for Heritage in Uganda, fair market value for the shares could increase by $3 US.  My price forecast would then range between $21.48-$24.66 per share.


2.  My more optimistic scenario assumes that Heritage maintains just a 28.125% in Miran West. Total EV would be in the range of $4 billion.   The upside from here could be in the range of $9.2 billion.


In this instance, my 48 month fair value for HOIL could be in the range of $37.24 US.


Again, providing that Ugandan pipeline capacity can be had without capital from HOIL, fair value could rise to $40.24 US per share.


I consider $70 US per barrel for Brent to be world equilibrium price. A recovery of Brent to this level could to add 20% more upside to both scenarios.   


Heritage trades on both the London Stock Exchange and the Toronto Stock exchange.


I would buy the London shares only.  Heritage shares on Toronto (HOC.to) are classified as an exchangeable share.  The exchange ratio is one share on Toronto for one common share in London.  The Toronto stock sells for a 12.6% premium to Heritage common shares in London.  There is no discernable advantage for most investors to account for the valuation difference. A handful of institutions may be unable to hold a London stock. In such instances, HOC will be the only opportunity to participate. However, those institutions that cannot trade on London, are probably also unable to access Canadian securities.


Liquidity in London is also far better than in Canada for this security. 


The corporate website may be found here.




Resolution of Iraq PSC terms without total confiscation, leading to near term production. Announcement of pipeline agreement to transport Ugandan oil production.  Continuation of successful appraisal wells in both Iraq and Uganda. 

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