Heritage Oil
For holders of Heritage Oil, the last 12 - 15 months have been painful, to say the least, with the shares falling from over 300p in Feb 2011 to plumb the recent lowly depths of 130p. The reasons put forth by numerous commentators and analysts for the collapse in value range from questions over the company’s management and strategic direction, to disappointment in the finding of gas as opposed to oil in their key Miran prospect in Kurdistan, to continued worries over when the $405m currently held up in arbitration proceedings through their dispute with Tullow Oil and the Ugandan government will be ultimately returned, through to wider concerns with the general global economic environment. Spreadbet Magazine believes that, as is always the way, the stock market has over reacted and, quite extensively so to the issues surrounding Heritage. In fact the depletion of value has been so great that within the entire mid cap Oil & Gas exploration sphere we believe they now offer the most compelling value on a risk to reward basis. At the current price of 135p (time of writing) the company has a market capitalisation of £361m and sits with cash reserves of approximately £200m. This puts a value of just £161m on the following asset base and which we will attempt to find a realistic value for each of them ((i) The prime Kurdistan asset - 75% share in the Miran block, running to over 1,015 sq/km (ii) Producing Russian fields (iii) The Tanzanian assets covering over 25,000 sq/km (iv) High-impact exploration in Malta (v) Mali field prospects (vi) Pakistan fields (vii) A 51% equity interest and control of Sahara Oil Services Holdings Limited which has the necessary long term permits and licences to provide onshore and offshore oil field services in Libya as well as the rights to own and operate oil and gas licences. (viii) Approximately 34 million Heritage shares held in Treasury (ix) Just over 15% of Petro Frontier, owning c.9.75m shares
28 | www.financial-spread-betting.com | May 2012
(x) The ‘option’ value of the return of $405m from the Tullow/Ugandan dispute. Let us look at each asset in turn -
Miran
The market seems to think that a find of up to 9.1 trillion cubic feet of gas (gross in place P50 estimate) has no value whatsoever. This is the only way one can rationalise the current share price. The company however believes that monetisation of this asset will commence in 2013 - not too far away now and sufficiently close in timescale that any large time value discount is not warranted. The early production will run in parallel to full field development and the export of gas to Turkey and/ or Europe with the full production of blended oil and condensate. Independent gas marketing studies have highlighted increasing gas demand in Kurdistan, Turkey and Europe that can potentially provide valuable markets for the gas volumes. In April 2011, Turkey’s energy regulatory authority ran a licensing process for importation of gas from Northern Iraq and Kurdistan, with first gas to be imported in 2014 starting at 700 mmcm/yr and plateauing at 3 Bcm/yr up to 2033, demonstrating real demand for the gas and in a market on the door step of the Miran Field. There is an existing transmission pipeline system in place in Turkey with only a 330 km pipeline needing to be built in Kurdistan to the Turkish border. We believe this will be a transformative event for Heritage as the market will then have to ascribe a value to the gas as it finds a natural export path. See diagram to the top right showing the existing transmission system in Turkey.