HOIL4 Mar 2014 07:28
March 3, 2014
Heritage Oil plc
Production and Cashflow Growth
Our view: Ahead of April's FY13 results and development update,
and greater clarity on "pioneer status" tax terms in Nigeria,
considerable uncertainty surrounds the value/potential of Heritage's
OML30 development. Nevertheless, we have taken a view on the
opportunity; and, we continue to see significant upside potential. Our
Heritage Tangible NAV and Target Price have been increased to 407p/share
and 350p, respectively.
Key points:
• Hint: In January Heritage stated that it ended 2013 with cash of $190m,
which beat our forecast. Our initial assumption was that the company
paid less tax in Nigeria than we anticipated. This view appeared to be
confirmed last week when the company stated that its tax discussions
with the Nigerian government had concluded successfully.
• Less taxing times: Heritage and its Nigeria-focused peers are trying
to secure “pioneer status”, whereby they would enjoy a five-year tax
holiday.
• Assumptions: At this stage it would be optimistic to assume that
Heritage will pay zero tax for five years; however, we do anticipate
a marked reduction from the prevailing ~66% marginal field rate. We
assume the tax deal has an effective date that coincided with the Q4/12
acquisition.
• Updates: We expect Heritage to publish an updated OML30
development plan (production and capex guidance) with its FY13 results
in April; greater clarity should increase investors' confidence in the
project. In the meanwhile views on taxation may be forthcoming from
Heritage's Nigeria-focused peers.
• OML30 Output: Production has increased to ~50,000b/d on the back
of efficiency gains - better uptime and improved maintenance. But
given a tax holiday, there is significant merit in drilling additional wells
and ramping up production. That said, we believe that the 300,000b/
d production target published at the time of the OML30 acquisition
is aspirational. We assume that the ~1bn barrel of 2P reserves are
produced at a lower, ~150,000b/d, plateau rate.
• Valuation: A lower tax charge (till 2017) more than offsets our
production revisions, and as a result our Tangible NAV has increased to
407p/share from 325p/share.
• Risks: In addition to the risks inherent in investing in a Niger Delta oil
play, we would note that management's desire to buy additional assets
from the Majors, might require it to issue equity to help underpin a debtfunded
acquisition. That said, the company does not have a track record
of issuing stock and the CEO is unlikely to look fondly on any dilution.
• Target Price: Heritage is an acquired taste and as a result we expect the
stock to trade at a discount to our Tangible NAV; our new Target Price
is 350p.
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