The table below is pretty inreresting to us. In short, it is a measure of each company’s current Enterprise Value (market cap + debt) relative to its ‘proven and probable’ reserves.
Heritage Oil stands out (as it has done for the last 6 months and as detailed in our Conviction Buy recommendation in the May edition of our magazine. Click here – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v4_generic). You can see that pre the OML 30 deal announcement yesterday, that its EV:2P measure was the 2nd lowest in the sector. Other operators in the region have paid upto $6 per boe and the $2.70 valuation seems exceptional value. Assuming the rights issue is not massively discounted then I personally fail to see how Heritage will remain in the bottom 3 of the table above upon its re-list.
Seperately, I caught up with Paul Atherton today and must say that he seemed in extraordinarily bullish mood with regards to the acquisition he has made. The cash-flow profile of the Group will be transformed and the rights issue will be likely the last capital raising required by the Group to complete the exploration projects in Tanzania, Russia and Malta, aswell as develop out the Miran fields. He emphasised the faith that the underwriting of the rights issue by JPM & Canaccord (without any firm price being decided yet) illustrates in the deal.
The one tempering element I gleaned from the conversation was the fact that the buy-back of stock over the last 12 months was, in hindsight, ill judged; not from a value belief perspective but from a capital requirement basis. In essence, those parties that cannot afford to take up the rights issue will be detrimented through this process by way of the dilution, that will occur although if the net effect is to raise the valuation materially then I suppose this offsets this. Let’s hope TB’s pockets are full enough to stand his corner!