Analyst comment post announcement of GE deal

9th Jun '09 by Cuthbert C

37 comments 16835 reads

Please use this thread to discuss any analyst comment on today's news about the merger with GE

Evolution have published comments reflecting a positive view of the merger

...merger with Genel Energy...should ...consolidate ...position in Kurdistan ...sufficient cash flows from production to fund the Ugandan project.

...Heritage is to issue 260m new shares to Genel Energy in exchange for Genel injecting its assets in Kurdistan into Heritage. Genel’s primary producing assets are the Taq Taq (44%) and Tawke (25%) fields with a further 25% in the Miran West licence. The combined enlarged group has an estimated 300m boe of proved and probable reserves. Production from these assets is currently averaging 30,000bbl/d and should reach 43,000bbl/d by YE. The cash flow generated should enable expansion of operations both in Kurdistan and Uganda.

...Based on the CPR report for Addax and other industry sources we estimate that in Kurdistan the 2P reserves for the new company are worth around US$8.5/bbl. Applying this figure to our model and adjusting for the news shares gives a fair value of 913p. We set our new target price at 900p.

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emptyend

9th Jun '09

Seymour Pierce:

On a sum-of-the-parts basis we value Heritage at 452p/share. This comprises a core NAV of 28p/share and risked upside of 425p/share. We have not amended our NAV to reflect the impact of the possible deal to acquire Genel Enerji. Heritage has enjoyed a strong rally recently following exploration success, we also believe there is potential for a technical squeeze as many investors remain underweight in the tightly held FTSE250 stock. Heritage has become a momentum play and we expect the

stock to trade above our prevailing NAV as the market looks ahead to "what could be"........

Our 600p/share price target is derived using our current NAV plus ~150p/share of upside based on the successful appraisal of the Miran West discovery. Our use of NAV is in line with our valuations of Heritage's mid-cap peers, while the successful appraisal of Miran West would add ~150p to our NAV on a fully unrisked basis. participation in developments and/or tax hikes.

In sum they think the market is about right.....FWIW

Not analyst comment but press comment: http://www.iraqoilreport.com/the-biz/krg-firms-are-takeover-prospects/1720/

Barely a week after its oil project in Iraq’s Kurdish region began emptying into export pipelines, Turkey’s Genel Enerji will likely be acquired by Canada’s Heritage Oil and China’s Sinopec is sounding out Addax Petroleum, also of Canada.

Heritage also has signed controversial contracts with the Kurdistan Regional Government (KRG) to explore for and develop oil reserves in the semi-autonomous north of Iraq.

The joint venture between Genel and Addax, the Taq Taq Operating Co. (TTOPCO), has seen recent success, making them prime takeover prospects.

macrus

10th Jun '09

isn't it always? The market that is.

Call me an old fashioned cynic but it strikes me that the Kurdistan oil export question is only partially resolved http://www.ft.com/cms/s/0/a3823cb2-551a-11de-b5d4-00144feabdc0.html and that the opportunity for disappointment (entry at a lower price, or lower lower risk/reward price?) exists.

I have to say that to make up for the fact that I sold out in to the price rise and missed everything from 450p up.

JPGH

i see this as a major commitment by Heritage to Kurdistan, new shares for access to more Kurdistan reserves, a producing field (Taq Taq regular cash) and a bigger share of Miran (which, to me reinforces their commitment to stand behind the reserves/resources estimate for Miran). I have not analysed all of this deal (how much 2P reserves/resources they are getting and how much cash are they getting with Genel Enegji). Does anybody have a broker note on the deal?

From a previous analysis http://www.krg.org/uploads/documents/Comparative-Analysis__2008_06_30_h13m28s23.pdf (see table 9) on KRG PSA contracts (comparing these with Iraqi Oil Ministry Risk Service Contract model), the oil valuations on an NPV10 basis presented for the KRG on a $60/bbl oil price (not sure of the development cost basis) were all coming in at $7 to $9/boe (in the ground). This range kind of backs up the Evolution note comment regarding valuation of 2P reserves. Looking at the government takes ...etc in same tables of analysis, HOIL will effectively get a net 12-15% of all 2P reserves of field now to be owned by enlarged company.

What will happen though with Uganda. Cash will be needed urgently there for developement costs.

peterg

I sold about 40% of mine this week. I'm inclined to think that taking a short term view at least I should have sold the lot. However, I'm not the world's greatest seller! And I tend to the view that longer term this has the potential to return me a lot more. But I was disappointed that there was no cash influx involved in the merger, that had seemed the big attraction prior to the details emerging. Concerns about Kurdish oil exports and PSAs and cash for Uganda are enough for me to want to lower my exposure a bit. It's still 10% or so, and I'll continue to watch closely for now. But the ones I've sold had 10 bagged so it was probably time to bank a few profits!

poobear

Why does it take the market so long to realise what has already been aired within minutes of the RNS yesterday by ee?

I note there is a sudden drop in the sp by a few pence just now.

"BROKER CALL: Heritage partner a surprise, funding worries remain
10 June, 2009 08:48:47 AM

Credit Suisse seems to have been a little wrong-footed by Heritage's unveiling of Genel Enerji as its merger partner. Retains its buy, lifts its price target to 675p a share from 471p, but remains sceptical on the prospects of the enlarged group. Broker says: 'Doubts remain over the future funding position. Heritage (an exploration vehicle) is transforming itself into HeritaGE (a production and development
company). This requires funding and, past the politics, we would question the rationale of merging with a company that only has $0.1m of cash on the balance sheet. CFO Paul Atherton is open about the likelihood of a further 25m share issuance to bolster the balance sheet. Investors need to have confidence that revenues will be forthcoming from Baghdad after crude is marketed by SOMO at the border for eventual sale at Ceyhan, Turkey.' "

11th Jun '09

and is if I had been chewing the oracles leaves the opportunity appeared. Have bought in a small way - 3 terms school fees (its the latest currency.)

Gradders73

FT comment on the Iraqi political strife and impact on share price yesterday. A major word of warning - the higher the price of oil gets the worse the squabbling will get. The central Iraqi government is committed to repaying most of the Saddam era debt and there is plenty of it....

davjo

13th Jun '09

Have been away so will take a bit of time to catch up. At first look, it strikes me that the key to this deal is extending relationships where it matters. Clearly, Genel as preferred third party in so many licences, is snuggled up very close to the Kurdish authorities. Note also the Kurds appear to be on board re the MoU. If Baghdad doesn't play ball with Kurdistan PSCs/exports, the chances of Kurdistan annexing themselves from Iraq (with Turkish support) must be pretty high. Thus, HOIL's interests in the region would be protected. Ultimately, Turkey's inclusion in the EU (if it ever happens), would offer a relatively secure tap into Kurdish reserves for Europe. Indeed, the EU might eye up Kurdistan reserves as an irresistable incentive to allow EU membership for Turkey. With that in mind, European investors might well take kindly to an early capital raising on the back of this deal.

This deal is therefore driven by politics imo! It's hard to judge how it's likely to pan out if consumated but it must be a racing certainty that new money needs to be raised if Uganda isn't to be farmed down. I think it's interesting to think of the prospects from Bucker's perspective, since the stategy is clearly driven by him personally, what with his major holding. Without doubt, if he was of a mind to sell the company to the Chinese, a deal would be done now. The fact that that's not happening suggests he thinks the Genel deal provides a better return. However, I betcha any new raising of capital sees him sell some of his equity, reducing his exposure from 30% to maybe 5% to 10% of the enlarged group, so he gets the best of both worlds. What does that mean for PIs' ? A cautious stance required I think. Rather than buy, I'm inclined to top slice a few more. I do like the idea of holding a core for the longer term though.

14th Jun '09

There does appear to be an overreaction here (not here but out there) to these newswire reports of statements made by Iraq MoO on HOIL's SP. I have a medium sized buy in mind if this gets back to 470p levels as i dont see the perceived downside ever materialising and if SP gets back to my original purchase levels then I am going to add. Spoke to a mate who moves around the business sometimes atthe more shady ends in FSU/Middle East, all heresay of course, but he did express an opinion about Genel's lack of cash and this cash being used for pay offs ..etc to smooth teh wheels of industry out there. Anyway I remain bullish on HOIL.

YTHANEIDER

Presumably, with the prospect of the soon to be enlarged HOIL joining the Footsie 100 board, there will be greater scrutingy of the company and its dealings than has been the case so far. Or will it? Noted saom reasonably positive stuff in the media today re Iraq/Kurdistan that made me think that last week's hefty mark-down of HOIL stock was somewhat overdone

smilingmickey

15th Jun '09

In the short term

Addax announced last week that it has received a preliminary bid approach rumoured to be from Korea/China. When/if the identity of the bidder is released and if indeed it is a major oil company this might strengthen the view that the political differences between the Kurds and Baghdad can be resolved without major conflict in the region.

Another thing to watch for is any announcement as to whether Addax/DNO/Genel start to receive payments for oil which is being exported from Kurdistan. AIUI, payments for oil goes to the Iraqi government in Badhdad who then distribute to Kurdistan who then pay the oil companies. But will Baghdad play ball?

The word is it's Sinopec

http://online.wsj.com/article/SB124499901463513231.html

djpreston

RNs re the completion of the bookbuild funding issue.

The 25.4m new shares (9.8%) were placed at 520p to give a gross sum of £132m

That'll keep the wolf from the door.

rpcroft

Sinopec were also mentioned as an Addax bidder in the Sunday times.

Their bid is very important because they are the first of the 32 companies in the running for contracts in Iraq proper to show interest in Kurdistan. Previously all 32 of these companies has shunned the Kurds through fear of missing out on the Bagdad contracts.

Would this bid have been made without being previously cleared by Bagdad? I doubt it.

It perhaps represents further evidence of Kurdish contracts gaining acceptance and legitimacy.

Well I guess the institutions don't have too many concerns about friction between Baghdad and the Kurds. Take up very fast and at the prevailing market price.

alano20

10th Jul '09

In reply to davjo (post #9)

If Baghdad doesn't play ball with Kurdistan PSCs/exports, the chances of Kurdistan annexing themselves from Iraq (with Turkish support) must be pretty high.

They are doing just that. New York Times:

Kurds Defy Baghdad, Laying Claim to Land and Oil.

BAGHDAD — With little notice and almost no public debate, Iraq’s Kurdish leaders are pushing ahead with a new constitution for their semiautonomous region, a step that has alarmed Iraqi and American officials who fear that the move poses a new threat to the country’s unity.

The proposed constitution enshrines Kurdish claims to territories and the oil and gas beneath them. But these claims are disputed by both the federal government in Baghdad and ethnic groups on the ground, and were supposed to be resolved in talks begun quietly last month between the Iraqi and Kurdish governments, sponsored by the United Nations and backed by the United States. Instead, the Kurdish parliament pushed ahead and passed the constitution, partly as a message that it would resist pressure from the American and Iraqi governments to make concessions.

http://www.nytimes.com/2009/07/10/world/middleeast/10kurds.html?_r=1&th&emc=th

Analyst comment post announcement of GE deal

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Cuthbert C

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