CSL Heritage Oil update_3 March 2014

Heritage Oil 

Nigeria | Oil & Gas 3 rd March 2014 

Raising target price to 400p 

Following news that the Shoreline joint venture company which 

owns 45% of OML 30 in Nigeria, has been granted Pioneer Tax 

Status we are lifting our target price for Heritage Oil from 260p to 

400p. Pioneer tax status is widely available across industries in 

Nigeria and essentially provides a five-year tax holiday from 

Petroleum Profits Tax, Corporate Income Tax and Education Tax. 

We estimate Pioneer tax status will save US$1.26bn that Heritage 

Oil would otherwise have paid in tax between 2013 and 2017. 

 

The Shoreline JV has been granted Pioneer Tax Status for five years 

for the OML 30 asset, backdated to 1 st January 2013. This is a 

tremendously valuable financial benefit. We estimate Heritage Oil 

will save US$1.26bn in tax payments over the five year period. 

Equities 

Buy 

Price: 253p Target: 400p 

Key data 

Year to December (US$m) 

2012 2013e 2014e 

Sales 9 460 626 

Net profit -182 57 295 

EPS (US$) 0.11 -1.62 1.14 

PE Ratio (x) 38.2 -2.6 3.7 

EV/DACF (x) -16.3 5.9 4.4 

Div Yield (%) n.a. 1.9 2.8 

Mkt. cap. (£m) 651 

Free float 63% 

 

 

 

In partnership with the government of Bayelsa State, we believe 

Heritage has recently submitted its bid for SPDC‟s (Shell, Total and 

Eni) 45% interest in OML 29. This is a highly attractive block which is 

understood to have drawn interest from a number of very well-placed 

bidders. The winning bid for this block is unlikely to be less than 

US$2bn in our opinion. It is also our understanding that firms are 

permitted to apply to the Government to have Pioneer Tax Status 

applied to any new asset that may be acquired; however the time 

limit would still remain at the end of 2017 on any new applications. 

In the recent operational update (26/2/14) Heritage Oil referred to 

this issue as simply “tax status”. Instead, confirmation that OML 30 

oil production is in line with guidance and that development drilling is 

on schedule for H214 was afforded far more “column inches”. 

Based on our new valuation, Heritage Oil has a Price/Core NAV of 

0.63x versus 0.96x average for the rest of the Nigerian E&P sector 

and, despite a strong share price performance since the beginning of 

the year, an EV/2P of US$3.79/boe and EV/2P+2C of US$1.83/boe 

both remain undemanding compared to the Nigeria sector averages 

of US$11.95/boe and US$4.96/boe 

Bloomberg 

HOIL LN 

Reuters 

HOIL.L 

Six-month graph 

280 

260 

240 

220 

200 

180 

160 

140 

120 

100 

Contact information 

Analyst: David Stedman 

London: +44 (0) 20 7290 6848 

Lagos: +234 (0)1 448 5436 

Sales: Temi Popoola (Lagos) 

CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised by the Prudential Regulation Authority (PRA) and 

regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in the United Kingdom.


Equities 

Heritage Oil Valuation 

12% NPV, US$90/bbl L-T 

Reserves WI¹ Unrisked Risked 

Block Field/Prospect WI mmboe US$/boe US$m US$/share CoS² US$m £/share 

Production 

OML 30 20.25%³ 347 6.01 2085 8.08 100% 2085 4.87 

Zapadno-Chumpasskoye 95% 65 1.22 79 0.31 100% 79 0.18 

PetroFrontier 20% 3 0.01 

Less Net debt -394 -0.92 

Less SG&A -44 -0.10 

Core NAV 412 5.25 2164 8.39 1729 4.04 

Appraisal 

D & A NAV 

Exploration 

Expln NAV 

TOTAL NAV 412 5.25 2164 8.39 1729 4.04 

Source: CSL estimates 

Note: ¹ Gross recoverable resources ² Chance of Success ³ Economic interest of 30.7% 

We have refreshed our valuation of Heritage Oil using our standard 

assumptions of a long-term oil price of US$90/bbl escalating at 2.5% p.a. 

starting in 2016 and a discount factor of 12%. 

The entire increase in estimated Total NAV is as a result of the five year tax 

holiday. At the same time we have taken the opportunity to revisit and 

downgrade our valuation of Zapadno-Chumpasskoye. As yet we give no 

value to the recently acquired exploration assets in Papua New Guinea but 

will re-evaluate once there is a firm timetable for drilling. 

Based on our new valuation, Heritage Oil has a Price/Core NAV of 0.63x 

versus a 0.96x average for the rest of the Nigerian E&P sector and a 

Price/Total NAV also of 0.63x. On both multiples Heritage Oil appears cheap 

relative to peers, especially on Price/Core NAV. 

Despite a strong share price performance since the beginning of the year an 

EV/2P of US$3.79/boe and EV/2P+2C of US$1.83/boe both remain 

undemanding compared to the Nigeria sector averages of US$11.95/boe 

and US$4.96/boe. 

CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised by the Prudential Regulation Authority 

(PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in 

the United Kingdom. 

Page 2


Equities 

Sector Valuations 

AFR BLVN CAK ELA HOIL JKA LEK MMT MAU MPI OER OPHR OXC TLW Average Average 

(US$m unless stated) £ £ US$ £ £ A$ £ C$ € € C$ £ C$ £ Nigeria 

Share price (LC) 1.63 0.33 0.65 1.00 2.53 0.09 0.68 1.40 11.43 3.28 1.39 3.19 12.91 7.99 

Share price YTD (%) -4 -14 7 -3 70 -6 8 14 -6 6 -12 -3 -6 -7 3 11 

Target price (LC) 2.30 - - 1.90 2.60 - 1.20 1.70 - 4.50 1.80 - 20.00 - 

Market cap 3097 160 251 226 1088 28 372 554 1822 522 201 2122 1412 12113 

EV 3586 10 218 208 1560 22 280 521 2378 271 247 1894 875 13102 

2P reserves mmboe 269 - - 29 412 - - 19 198 67 16 - 164 388 

2P reserves % gas 0 - - 6 0 - - 0 0 45 0 - 0 - 

2P+2C mmboe 1201 205 10 44 851 27 201 35 249 105 40 1220 364 1203 

2013e production mboe/d 40 - 3 0 11 - - 5 24 12 4 - - 86 

2013e production % gas 0 - 0 0 0 - - 0 4 31 0 - - 27 

2014e production mboe/d 43 - 3 3 18 - - 7 27 17 5 - 5 72 

2012 netback (US$/boe) 12.47 - - n.a. n.a. - - 31.45 15.48 19.43 11.66 - - 17.76 

EV/2P (US$/boe) 13.33 - - 7.08 3.79 - - 27.99 12.01 4.04 15.46 - 5.34 33.77 13.65 11.95 

EV/2P+2C (US$/boe) 2.99 0.05 21.85 4.72 1.83 0.81 1.39 15.04 9.55 2.58 6.18 1.55 2.40 10.89 5.85 4.96 

EV/Prod'n 2013e (US$/boe) 89,662 - 79,449 n.a. 145,771 - - 109,589 99,095 21,848 61,834 - - 152,349 94,950 70,733 

EV/Prod'n 2014e (US$/boe) 83,407 - 79,449 78,332 89,129 - - 89,129 88,085 15,660 46,667 - 181,973 181,973 81,896 61,845 

Core NAV (LC) 1.35 - - 1.29 4.00 - 0.00 1.31 - 3.71 1.14 - 15.06 - 

Total NAV (LC) 2.32 - - 1.90 4.00 - 1.20 1.70 - 4.63 1.81 - 24.79 - 

Price/Core NAV (x) 1.21 - - 0.78 0.63 - 0.00 1.07 - 0.88 1.22 - 0.86 - - 0.96 

Price/NAV (x) 0.70 - - 0.53 0.63 - 0.56 0.82 - 0.71 0.77 - 0.52 - - 0.67 

VIEW BUY N.R. N.R. BUY BUY N.R. BUY HOLD N.R. HOLD HOLD N.R. BUY N.R. 

Source: CSL estimates Note: Prices are at close 28/2/14 

Note: Average Nigeria includes Afren, Eland O&G, Heritage, Mart, MPI and Oando Energy 




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Equities 

Heritage Oil financial forecasts 

Source: Company data and CSL estimates 




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Equities 

Analyst Certification 

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Important disclosures 

Ratings and Target Price History 


Old New Old New 

Date Price (£) Target (£) Target (£) Recommendation Recommendation 

21/11/2012 1.87 - 3.35 - Hold 

31/01/2013 2.04 3.35 3.20 Hold Hold 

02/05/2013 1.52 3.20 2.00 Hold Hold 

05/09/2013 1.73 2.00 2.60 Hold Buy 

21/11/2013 1.81 2.60 2.60 Buy Buy 

24/01/2014 1.68 2.60 2.60 Buy Buy 

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Buy: 

Hold: 

Sell: 

Not Rated: 

Benchmark: 

Price targets: 

Buy Hold Sell Not Rated Total 

Coverage universe 10 12 5 0 27 

% distribution 37% 44% 19% 0% 

Investment banking clients 1 0 1 0 2 


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The analyst expects the stock to perform in line with the Benchmark over the next 12 months or the stated 

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The analyst expects the stock to underperform the Benchmark over the next 12 months or the stated 

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estimates. 




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Equities 

Asset allocation: 

Asset allocation is the responsibility of the strategy team. The recommended weight (Buy, Hold and Sell) for 

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particular size change in one variable. 

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Dangote Sugar Refinery: N/A 

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the company during the next 3 months. 

Companies from which FCMB UK or the Group’s investment banking division has received compensation in 

the last 12 months 

Buy Hold Sell Not Rated Total 

1 0 0 0 1 





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Equities 

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