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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.
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.
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
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.
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12. Subordinate voting shares.
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16. Limited voting shares.
$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
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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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expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein
that are within the analyst’s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to
the provision of specific recommendations or views expressed by the research analyst in the research report.
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