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June 10, 2009

Action Notes Equity Research


1 of 5

Oil & Gas Producers Ryan Savage


403 299 8586
Recommendation: HOLD↓ ryan.savage@tdsecurities.com
Prior: SPEC. BUY
Risk: SPECULATIVE
12-Month Target Price: C$14.00↑
Heritage Oil Corp.
(HOC-T) C$12.19
Prior: C$10.50
12-Month Total Return: 14.8%
HOC Announces MOU With Kurdish Regional Player Genel
Market Data (C$)
Current Price $12.19 Enerji
52-Wk Range $1.80-$12.45
Mkt Cap (f.d.)($mm) $3,407.1 Event
EV ($mm) $3,508.0
Dividend per Share $0.00
HOC announced the signing of an MOU in which they will issue ~260 million
Dividend Yield 0.0% shares, in order to purchase Genel Enerji (a Turkish private company).
Avg. Daily Trading Vol. (3mths) 19,861
Financial Data (C$) Impact
Fiscal Y-E Dec 31
Mixed - while potentially a positive for HOC by consolidating exploration/
Shares O/S (f.d.)(mm) 279.5
Float Shares (mm) -- infrastructure interests and joining the FTSE 100, the proposed transaction has
Net Debt ($mm) ($84.0) regional implications also, as Genel is a JV partner for several licenses and a
Net Debt/Tot Cap -- refinery. The transaction does not address the financing shortfall that we
Estimates (US$) believe HOC will face during H2/09 into 2010 (including the capital required
Year 2007A 2008E 2009E 2010E to develop Uganda, as well as interests in Kurdistan).
EPS (f.d.) (0.18) (0.42) (0.33) (0.49)
CFPS (f.d.) (0.07) (0.28) (0.10) (0.14)
Oil (b/d) 283 1,881 2,500 9,000
Details
MBOE/d 0.3 2.4 2,500 9,000 • The proposed transaction would be an all share deal in which HOC
issues (~260m shares) to acquire the capital of Genel Enerji. This will
Valuations
Year 2007A 2008E 2009E 2010E
roughly double the share count.
P/NAV (futures) -- 79.0% -- -- • Genel is the JV partner for several licenses in Kurdistan, most
P/NAV (TD Deck) -- 97.0% -- -- prominently in the Taq Taq field with AXC and the Tawke field with
Supplemental Data (US$) DNO International. Both of these licenses are to reach production this
Year 2007A 2008E 2009E 2010E year. Genel's 2P reserves from these fields total 244 mmbbls, as per the
NAVPS- TD (fd) -- $10.38 -- -- HOC presentation.
NAVPS- Futures -- $12.88 -- --
Capex ($mm) $84 $93 $428 $710
• Genel also holds exploration interests in Kurdistan in the following
Notes:Net Debt is in US Dollars.
licenses: 44% in Kewa Chirmila (AXC), 25% in Miran (HOC), 20% in
Chia Surkh, 40% in Barbahar and 40% in Duhok (DNO).
All figures in US$, unless otherwise specified.
• Genel is the sole operator of the Taq Taq refinery, which will require
US$510m in funding, and will take $15/bbl on the first 158 mmbbls
produced and $7.50/bbl on the oil produced thereafter.

HOC-T: Price
Company Profile 14 14
Heritage Oil is an E&P with projects in 12 12
Russia, Oman and Uganda. Exploration 10 10
assets and licenses are located in Mali, Malta, 8 8
Pakistan, Tanzania and the Democratic 6 6
Republic of the Congo. Heritage trades under
Please see the final pages of the symbol HOC on the Toronto stock
4 4

2 2
this document for important exchange and HOIL on the London stock
0 0
disclosure information. exchange. Q2
2008
Q3 Q4 Q1 Q2
2009
June 10, 2009
Action Notes Equity Research
2 of 5

• While oil is now being exported in Kurdistan at Tawke and Taq Taq, the actual cash flow remains
unanswered. The realized pricing and funds flow to corporate accounts remains in question; as does the
time lag to payment (channel checks suggest a potential 6 month working capital trap could occur). The
greatest issue we believe facing HOC is access to capital for their Ugandan and Kurdistan interests. This
transaction does not seem to address the financing requirements for HOC, despite the revenue interests in
Tawke, Taq Taq and the refinery. We currently estimate HOC's interests in Uganda will require between
$500m - $1 billion in capital, and Genel's oil refinery would cost another $510m. This does not account
for the capital required for the exploration and development blocks.
• We do note that HOC management was asked about their capital expenditure plans for 2010 and 2011,
but responded these budgets are under review. Upon completion of this transaction we believe we will
gain clarity as to the timing and actual cash requirements for each year.
• HOC management also advised that a potential share offering of 10% of the current float (or 26 million
shares) could be made in order to help fund corporate objectives. Using today’s closing price and current
FX rate, it would represent US$253m.

Based on the information from the HOC presentation and our understanding of the proposed transaction, we
have worked through the deal mechanics and ownership levels in Exhibit 1. Upon review, it is our belief that
once the shares of HOC are distributed to Genel Enerji, there are no material further encumbrances or
commitments that HOC would be responsible for.

Exhibit 1: HOC Deal Mechanics for MOU with Genel Enerji


HOC Share Issuance
- 100% of share capital of HOC Shares 260,000,000

Current HOC Share Price (LSE) £/ share £5.97

Total Consideration Paid £ £1,552,200,000

Current Spot FX Rate (GBP/USD) $US/ GBP $1.6308

Total Consideration Paid to Genel Enerji $US $2,531,327,760

Amount Owing to KRG by Genel Enerji $US -$695,000,000


-payable on change of control of
-Genel Enerji for current obligations

Outstanding Obligation Potentially Payable to KRG $US -$495,000,000


-potentially payable to KRG by Genel Enerji,
negotations to conclude upon merger agreement
- can be mix of cash (future revenue) or shares

Minimum Potential Ownership by Genel Enerji $1,341,327,760


- @ current spot price for HOC £/ share £5.97
- using current spot FX Rate $US/ GBP $1.6308
$US/ share $9.74
Minimum Share Ownership by Genel Enerji 137,771,656
% Ownership of new float (520m shares O/S) 26%

Maximum Potential Ownership by KRG $1,190,000,000


- @ current spot price for HOC £/ share £5.97
- using current spot FX Rate $US/ GBP $1.6308
$US/ share $9.74
Maximum Potential Ownership by KRG 122,228,344
% Ownership of new float (520m shares O/S) 24%

Source: Company disclosures, TD Newcrest estimates


June 10, 2009
Action Notes Equity Research
3 of 5

Valuation
HOC trades at a P/NAV (TD Deck) of 97% and a P/NAV (Futures) of 79%, which compares to the group
average of 79% and 95% respectively.

Justification of Target Price


Our Target Price is based on the mid point of our Risked NAV – Base Case ($75/ bbl long term) and our
Risked NAV – Futures Case. We also typically include a 0 – 10% (10% in this case) subjective adjustment for
immediate exploration impact, reserve growth, NAV growth rates, management premiums/ discounts, relative
valuation level premiums/ discounts and potential positive or negative catalyst events. In Exhibit 2, we break
down the components of our NAV, which include our estimates of the value of the exploration prospects, as
well as the estimated value of the reserves.

Exhibit 2: NAV Components


Uganda Uganda
Exploration, Exploration Northern Iraq
$1.33 Northern Iraq 13% Exploration
Exploration, 43%
$4.41

2C/ 3P/ 3C NAV


2P NAV
2C/ 3P/ 3C NAV, 34%
10%
$3.55 2P NAV, $1.09

Source: Company disclosures, TD Newcrest estimates

Key Risks to Target Price


Risks associated with this target price include those business risks of the company and industry, including but
not limited to: loss of key employees, drilling success, operating/capital costs, volatile commodity prices,
product supply and demand, government regulations and taxes, exchange rates, interest rates, environmental
and weather concerns, security and geopolitical issues, capital and financing risks. Specific risks to HOC
include high risks in the Uganda/ DRC Lake Albert project, reliance on management estimates, a high
concentration of frontier stage projects within the company, the geopolitical risk associated with hydrocarbon
exploration in Kurdistan, low liquidity in Canada and high geopolitical risk/ medium PSC risk in Russia. By
our estimates, HOC is going to need between $1.0 billion and $1.5 billion to push their Kurdistan and Ugandan
interests forward.

Investment Conclusion
Upon the press release early this morning, HOC confirmed their discussions with 3rd parties have resulted in a
MOU with Genel Enerji, a Turkish energy company with regional interests in Kurdistan. While the premise of
this deal is the issuance of ~260m shares of HOC to Genel as consideration, we would highlight that there is no
break fee, the deal will have to be approved by shareholders, and is estimated to close sometime in September.
If successful, HOC will now have interests not only in the first 2 blocks to produce oil in Kurdistan (Tawke
and Taq Taq), but interests in several exploration blocks as well as a local oil refinery. While HOC could
potentially use the cash flow from these producing assets, the main 2 risks for Kurdistan still exist; pricing of
the oil and the flow of cash to corporate accounts. In our opinion, another risk exists for HOC, and that is
financing risk. By our estimates, HOC is going to need between $1.0 billion and $1.5 billion to push their
Kurdistan and Ugandan interests forward. We note the equity markets have been very active in the last 2
months, but openly we wonder if HOC can access all of the required capital to fund its projects. We have
made several changes to our modeling assumptions including a current futures strip, new FX rate and a
reduction in the discount rate of 200 basis points. On this basis we have increased our Target Price to $14.00,
but are reducing our Recommendation to HOLD.
June 10, 2009
Action Notes Equity Research
4 of 5

TD Newcrest Equity Research Disclosures


Company Ticker Disclosures
Heritage Oil Corp. HOC-T n/a

1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12
months with respect to the subject company.
2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12
months with respect to the subject company.
3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the
next three months with respect to the subject company.
4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject
company.
5. A long position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
6. A short position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
7. A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s
household, or in an account over which the research analyst has discretion or control.
8. A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s
household, or in an account over which the research analyst has discretion or control.
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subject company.
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11. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the preparation of this report has,
during the preceding 12 months, provided services to the subject company for remuneration.
12. Subordinate voting shares.
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14. Non-voting shares.
15. Common/variable voting shares.
16. Limited voting shares.

Additional Important Disclosures

Heritage Oil Corp. (HOC-T) Ryan Savage


(as of 7-Apr-09) Distribution of Research Ratings
$9 200
1: 5/14/08; SPB, $9.00 tgt; IC
2: 7/15/08; SPB, $12.50 tgt
3: 8/15/08; SPB, $10.50 tgt
$8 4: 9/15/08; SPB, $9.00 tgt 2 180
5: 10/28/08; SPB, $5.00 tgt
Distribution of Research Ratings^ Investment Banking Services Provided*
6: 12/9/08; SPB, $4.75 tgt
7: 12/16/08; SPB, $5.50 tgt
160
8: 2/10/09; SPB, $6.00 tgt
$7 1

140 REDUCE BUY 70%


$6
6% 53%
60%
4 120

$5
50% 55%
3
7 100 40%
$4
8 30% 39%
80

6 20%
$3
10% 6%
5 60
HOLD
0%
$2 41%
40 BUY HOLD REDUCE
Recommendations Notes
A LB: Action List Buy; IC: Initiated Coverage
$1
SPB: Speculative Buy; CC: Ceased Coverage Current as of June 2, 2009
BUY: Buy; HLD: Hold; AC: Analyst Change 20
TND: Tender; RDC: R: Reorganization ^ Percentage of subject companies under each rating * Percentage of subject companies within each of the
Reduce
category—BUY (covering Action List BUY, BUY and three categories (BUY, HOLD and REDUCE) for which
$0 0
Spec. BUY ratings), HOLD and REDUCE (covering TD Securities Inc. has provided investment banking
12/ 04/ 2006
08/ 05/ 2006
01/ 06/ 2006
27/ 06/ 2006
21/ 07/ 2006
16/ 08/ 2006
11/ 09/ 2006
05/ 10/ 2006
31/ 10/ 2006
24/ 11/ 2006
20/ 12/ 2006
15/ 01/ 2007
08/ 02/ 2007
06/ 03/ 2007
30/ 03/ 2007
25/ 04/ 2007
21/ 05/ 2007
14/ 06/ 2007
10/ 07/ 2007
03/ 08/ 2007
29/ 08/ 2007
24/ 09/ 2007
18/ 10/ 2007
13/ 11/ 2007
07/ 12/ 2007
02/ 01/ 2008
28/ 01/ 2008
21/ 02/ 2008
18/ 03/ 2008
11/ 04/ 2008
07/ 05/ 2008
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26/ 06/ 2008
22/ 07/ 2008
15/ 08/ 2008
10/ 09/ 2008
06/ 10/ 2008
30/ 10/ 2008
25/ 11/ 2008
19/ 12/ 2008
14/ 01/ 2009
09/ 02/ 2009
05/ 03/ 2009
31/ 03/ 2009
24/ 04/ 2009

TENDER and REDUCE ratings). services within the last 12 months.

Price Close Changes Price Relative to S&P/TSX Energy

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June 10, 2009
Action Notes Equity Research
5 of 5

Research Ratings
ACTION LIST BUY: The stock's total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months and it is a top
pick in the Analyst's sector.
BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months.
SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material event risk associated with
the investment that could result in significant loss.
HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months.
TENDER: Investors are advised to tender their shares to a specific offer for the company's securities
REDUCE: The stock’s total return is expected to be negative over the next 12 months.

Overall Risk Rating in order of increasing risk: Low (10.4% of coverage universe), Medium (28.8%), High (49.3%), Speculative (11.5%)

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