Heritage Oil provided further details this morning about its planned rights issue to help fund the 850 million dollar purchase of Royal Dutch Shell PLC’s most prolific oil block in Nigeria aswell as reporting higher oil output during the first half of the year in its dual interim results release.
Shoreline which is 45%-owned Heritage, will buy a stake in Block OML 30 currently owned by Shell, France’s Total SA and Italy’s Eni SpA. The national oil company of Nigeria, Africa’s top crude producer, will retain its 55% interest in the block.
The OML 30 block, which produces around 35,000 barrels a day, had been valued at $1 billion in earlier stages of the sale process, a person close to the deal had said. Heritage plans to increase OML 30’s output to 55,000 barrels a day in the short term following completion of the deal.
The Group plans to fund the deal though a $550 million bridge finance loan from Standard Bank Group Ltd. (SBK.JO) and a subsequent $370 million rights issue. Because the proposed transaction is classified as a reverse takeover under stock exchange rules by virtue of its impact on Hoil’s operations, shareholder approval for the deal is required
The issue price for the new shares will be announced no later than Aug 28. The company plans to hold an extraordinary meeting to approve the deal on Aug 30 and expects its new shares to start trading on the London Stock Exchange on Sep 17.
Heritage said its board of directors is also contemplating a potential non pre-emptive placing of ordinary shares and potentially also a possible convertible bond issue between now and the time of the rights issue pricing. Any amount raised from the two would reduce the size of the rights issue, the company said. The interims revealed that the company, after posting $85m as a 10% deposit in relation to the OML deal, now sits with just $35m in cash and so the advance capital raisings are obviously an effort to ensure adequate liquidity ahead of the deal closing and obtaining shareholder approval.
The management of the company’s liquidity through the continued purchase of its own stock is the one principal stain on the Boards actions in recent years in our opinion. To spend over £70m on stock whilst negotiating over the Nigerian deal does not sit well with us. Of course, management were sending a signal to the wider market that they believed the company undervalued at approaching 300p but still these actions have ultimately detrimented shareholders, particularly if they lose the ability to participate pro rata in a rights issue due to a discounted placing at a pre re-list price.
The deal does however represent a significant opportunity for Heritage to boost its production and reserves. OML 30 is estimated to have gross proved and probable reserves of 1,114 million barrels of oil, and an estimated 2.5 trillion cubic feet of gas which wasn’t included in the review of the company’s assets or in the valuation, the company said.
Upon completion, Heritage’s proved and probable reserves are expected to rise more than six-fold from 61 million barrels to 408 million barrels.
The deal is expected to be cash generative immediately following completion, the company said.
Heritage’s interim results today also revealed a net loss attributable to shareholders widened to $52.2 million in the first half of the year from $11.4 million in the same period a year before.
Net average daily production rose 35% on the year to 567 barrels of oil a day in the first half 2012. Production for the month of July 2012 averaged just 711 barrels oil a day.
Tony Buckingham, Chief Executive Officer of Heritage said OML 30 deal will de-risk heritage’s financial profile.
“The recently published independent reserves report gave an economic valuation of between $3.4 billion and $4.1 billion, using a discount rate of 10%, for the current 2P reserves at OML 30 and our assets in Russia, highlighting the underlying value within the enlarged portfolio,” he said.
The rights price, being at a 40-45% of TERP (Theoretical ex rights price) will largely be determined by the Convertible bond and placing terms. As the shares start trading again tomorrow it will be interesting to see where the market prices these. Grey market indications are between 170 – 190p and so the rights terms are likely to be around 110-120p. What has perplexed me is why there is a need for a Convertible Bond if the rights issue is fully underwritten? I guess that management believe that debt funding at say 7% is a lot cheaper with a conversion price likely north of 200p, than issuing more equity at this muted valuation, certainly ahead of the Ugandan arbitration result.
We eagerly await tomorrows re-list.