Is caution warranted on Heritage Deal?

It seems that a number of City analysts have taken a cautious stance in relation to the Nigerian Oil deal, even though Tony Buckingham appears to have pulled of a bit of a coup (‘scuse the pun) in relation to the boe (barrel of oil equivalent) paid of just $2.70 (not $1.70 as has been reported erroneously elsewhere) vs a regional average of in excess of $5 per barrel.

With a pre deal risked NAV of over 300p per share, a positive cash flow profile going forward (to be used to develop out the Group’s other exploration portfolio assets, as surmised here yesterday), it seems that the risks of operating in Nigeria are (a) reflected in the OML acquisition price and (b) re-iterates the material undervaluation in Hoil prior to the suspension. The fact that another bidder offered 50% more for Shells assets but couldn’t get the finance adds weight to the bargain that Tony Buckingham believes he has secured.

The conf call didn’t relay the minutiae of the rights offering but I got the distinct impression it will not be heavily discounted (if at all). Bearing this in mind, the fact that the rights offering is fully underwritten by JP Morgan and Cannacord shows the faith that they have in the current value of Hoil. It was stated that Hoil in fact expect to potentially double the reserves from the Nigerian fields with deeper drills. If this is the case then the 2P reserves (ex Miran and other global fields) could be approaching 500m boe. At a very conservative weighted average of £2.50 per boe this would put a new ‘risked NAV’ on Hoil of approaching 500p per share (assuming a 3 for 4 rights issue at the current price).

The mathematics post the suspension lift and assuming a rights issue at the pre suspended price work out as follows – 

550m shares in issue + £350m of debt. Enterprise Value at the current share price re-list return = £1.01bn.

IF, repeat if, they also win the Ugandan arbitration case then the EV would fall to around £650m. A realistic value of £2.50 for 2P reserves of 500m boe = £1.25bn of value attributable and a stock price that should be trading more around the 220-230p level (£1.25bn / 550m). Ex the arbitration proceeds being returned, then a share price of 170p results (£900m / 550m). NOTE – this excludes the Miran Value (valued upto 300p per share).