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RATINGS REVISION | COMMENT 90.00 75.00 60.00 45.00 30.00 2009 2010 2011 JJ A S O N D J F M A M J J A S O N D J F M A M J J A S O N 125 WEEKS Rel. FT ALL-SHARE 26JUN09 - 10NOV11 HI-26JUN09 100.00 HI/LO DIFF -71.36% CLOSE 28.64 NOVEMBER 11, 2011 Heritage Oil plc (LSE: HOIL; TSX: HOC) Rising Tide Lifts Kurdish Plays Sector Perform (prev: Underperform) Speculative Risk Price: 200 259.8 0.00 244 171.5 Shares O/S (MM): Dividend: NAVPS: Float (MM): Strategic Ownership: Market Cap in GBP Price Targe
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  RATINGS REVISION | COMMENT NOVEMBER 11, 2011 Heritage Oil plc (LSE: HOIL; TSX: HOC) Rising Tide Lifts Kurdish Plays Sector Perform (prev: Underperform) Speculative Risk Price: 200 Shares O/S (MM): 259.8 Dividend: 0.00 NAVPS: 244 Float (MM): 171.5 Price Target: 240 ↓ 275 Implied All-In Return: 20% Market Cap (MM): 520 Yield: 0.0% P/NAVPS: 0.8x Strategic Ownership:Market Cap in GBP Upgrading Heritage to Sector Perform, 240p Target PriceSet in Line with NAV Media reports that Exxon has been allocated six blocks in Kurdistan shouldgenerate significant new interest in the region. The Major’s entry appears to be atthe grass roots level, via the allocation of exploration acreage and/or the KRG’sback-in rights. Exxon’s arrival suggests that the barriers to entry – which havekept Big Oil out – are weakening (but this new was not greeted positively byBaghdad). Late(r) arrivals may seek to establish a position by acquiring theincumbents; as a result we expect all the companies in Kurdistan to be buoyed bytoday’s story.We are upgrading Heritage Oil to Sector Perform from Underperform; for us toconsider a more positive recommendation, however, would require the companyto encounter and test liquids with its ongoing Miran West-3 appraisal well. In ouropinion, Heritage’s gas-rich portfolio puts it further down any list of potentialtargets than its oil-rich peers (note DNO's surge today). Moreover, we note thatassets in Kurdistan account for only 109p/share of our Heritage NAV. NAV and target price: At 240p our new target price is in line with our updated244p/share NAV. Our PV15% has been finessed for the company’s ongoingshare buyback programme – it has spent ~$120m buying 32.8m shares – and themark-to-market of its investments – a 14% stake in PetroFrontier and Afrenwarrants. Next Heritage news: Next week's IMS is likely to focus on the Miran West-3well in Kurdistan – management hopes to flow test the Lower Cretaceoushorizons by year-end. The update could also provide an opportunity to advertisenew ventures in Tanzania and Libya. Next Iraq news: The KRG is yet to officially announce the allocation of licencesto Exxon – its website repeats the story from today’s FT. The licence awards maybe formally announced at next week's conference in Erbil. The Kurdish PSCs donot enjoy the endorsement of Baghdad; according to media reports (Reuters),Iraq's government warned Exxon that any oil exploration contract it signed withthe KRG would be illegal and could result in the termination of its West Qurnalicence. Is there a broader strategy in play with better terms in southern Iraq apossible end-game? Priced as of prior trading day's market close, EST (unless otherwise noted). 125 WEEKS 26JUN09 - 10NOV11 200.00240.00280.00320.00360.00400.00440.00480.00560.00J J A S O N   2009D J F M A M J J A S O N2010D J F M A M J J A S O N2011 HI-14AUG09 587.00HI/LO DIFF -69.42%CLOSE 200.20LO-12AUG11179.50 100002000030000 PEAK VOL. 37480.8VOLUME 2481.7 30.0045.0060.0075.0090.00 Rel. FT ALL-SHARE HI-26JUN09 100.00HI/LO DIFF -71.36%CLOSE 28.64LO-11NOV11 28.64 RBC Europe LimitedAl Stanton (Analyst)(+44) (0)131-222-3638; al.stanton@rbccm.com FY Dec 2009A 2010A 2011E 2012E Prod. (mboe/d) 0 1 1 3P/FFO NM NM NM NMCFPS - Basic (0.09) (0.08) (0.09) (0.07)P/CFPS NM NM NM NMEPS (Op) - Basic (0.11) (0.11) (0.10) (0.15) All market data in GBp; all financial data in USD. For Required Non-U.S. Analyst and Conflicts Disclosures, see page 6.  2   Exhibit 1: Heritage NAV (discounted at 15% from January 2011) Working Interest Remaining ReservesAsset Value PV15%FieldOilGasOil Equ.InterestmmbblbcfmmboeUS$m£mp/shareProducing fields / Assets70735121979Russia707674215 Zapadno Chumpasskaye (Base case)95.0%707674215 Uganda00028317763 Cash in escrow28317763 Fields under development000000Exploration/appraisal upside (risked)43043574359128Iraq485303109 Miran West Gas56.3%47241144940525391Miran Area exploration/appraisal56.3%805018 Libya000 Sahara Oil Services51.0%000 Mali000 Block 7 and 11 Exploration75.0%000 Malta000 Areas 2 and 7100.0%000 Pakistan000 Sanjawi Block60.0%000 Russia43043895520 Zapadno Chumpasskaye (Full field)95.0%43043895520 Tanzania000 Exploration30-70%000 Financial commitments00016510337Hedging gains/(loss) relative to forecast 000 Investments (Afren, Petrofrontier) 18114 G&A costs (post tax) -126-79-28 E&A cost associated with prospects (PV) -95-59-21 Year-end 2010 (net debt)/cash adjusted for deals/buybacks 31919971 Estimated impact of options 493111 Core commercial value707515322115Risked potential/exploration43043574359128Net asset value510511089681244 Number of shares fully diluted (m) 279 Number of share options (m) 19 Number of shares (m) 260 Exchange rate assumption(s) $/£  1.60 Exchange rate assumption(s) $/C$ 1.02 Oil price forecast$109.5/bbl in 2011, $109/bbl in 2012 and $113/bbl thereafter    Source Company data and RBC Capital Markets estimates Heritage Oil plcNovember 11, 2011  3   Exhibit 2: Heritage Income and Cash flow Statements Y/Ending 31 Dec. ($MM) 2009 H1 2010 H2 2010 2010 H1 2011 H2 2011E 2011E 2012E 2013E Brent 61.96 77.72 81.55 79.65 111.05 107.97 109.50 109.00 113.00Oil Production (mbbl/d) 0.3 0.6 0.5 0.5 0.4 1.3 0.9 2.9 2.9Gas Production (MMcf/d) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Production (mboe/d) 0.3 0.6 0.5 0.5 0.4 1.3 0.9 2.9 2.9Turnover/boe 22.53 24.52 26.22 25.35 39.46 34.32 35.65 33.63 34.87Opex & Royalty $/boe 23.29 23.61 23.55 23.58 39.32 34.22 35.54 35.43 35.26Depreciation $/boe 14.24 10.28 11.07 10.67 13.75 13.75 13.81 13.00 13.00Net income $/boe (243.75) (122.86) (198.10) (159.94) (134.66) (77.53) (90.91) (36.36) (34.62)Op. cashflow $/boe (205.26) (78.59) (166.01) (121.68) (130.53) (63.78) (79.30) (16.45) (16.96)Turnover 2.7 2.5 2.6 5.0 2.9 8.4 11.3 35.0 36.3Royalties (1.3) (1.3) (1.3) (2.6) (1.5) (5.0) (6.5) (21.3) (22.1) Net revenue 1.4 1.1 1.3 2.4 1.4 3.5 4.8 13.7 14.2 Cost of Sales (3.2) (2.1) (2.1) (4.2) (2.3) (6.8) (9.2) (29.1) (28.1)Administration (18.7) (8.1) (21.7) (29.8) (8.8) (12.0) (20.8) (21.0) (22.0)Exceptional Items (10.1) (1.9) 1,256.7 1,254.8 0.0 0.0 0.0 0.0 0.0Exploration Expense (0.2) (0.9) (2.0) (2.8) (2.8) (2.0) (4.8) (2.0) (2.0) Operating Profit (30.8) (11.7) 1,232.2 1,220.5 (12.5) (17.4) (29.9) (38.4) (37.9) Net Financials (6.1) (2.4) 5.2 2.7 3.0 (1.7) 1.3 0.6 1.9Discontinued operations (2.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Profit before Tax (39.3) (14.2) 1,237.4 1,223.2 (9.6) (19.0) (28.6) (37.8) (36.0) Tax 0.0 0.0 (0.2) (0.2) (0.2) 0.0 (0.2) 0.0 0.0 Reported Net Income (39.3) (14.2) 1,237.2 1,223.0 (9.7) (19.0) (28.8) (37.8) (36.0) Exceptional Items (net) (10.1) (1.9) 1,256.5 1,254.6 0.0 0.0 0.0 0.0 0.0 Clean Net Income (29.3) (12.3) (19.3) (31.6) (9.7) (19.0) (28.8) (37.8) (36.0) Average no shares (m) 273.1 287.9 287.9 287.9 286.4 262.7 274.6 259.8 259.8EPS ($) (0.14) (0.05) 4.30 4.25 (0.03) (0.07) (0.10) (0.15) (0.14) EPS (clean) ($) (0.11) (0.04) (0.07) (0.11) (0.03) (0.07) (0.10) (0.15) (0.14) CFPS ($) (0.09) (0.03) (0.06) (0.08) (0.03) (0.06) (0.09) (0.07) (0.07)Dividend (p/share) 0.0 0.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 Y/Ending 31 Dec. ($MM) 2009 H1 2010 H2 2010 2010 H1 2011 H2 2011E 2011E 2012E 2013E Net income (39.3) (14.2) 1,237.2 1,223.0 (9.7) (19.0) (28.8) (37.8) (36.0)Depreciation 1.7 1.0 1.1 2.1 1.0 3.4 4.4 13.5 13.5Exceptionals 2.9 1.9 (1,256.7) (1,254.8) 0.0 0.0 0.0 0.0 0.0Other non-cash 10.1 3.4 2.2 5.7 (0.7) (0.0) (0.7) 7.2 4.9 Funds from operations (24.6) (7.9) (16.2) (24.1) (9.4) (15.7) (25.1) (17.1) (17.6) Development (3.9) (20.3) (26.7) (46.9) (9.1) (10.9) (20.0) (30.0) (50.0)Exploration (100.5) (27.9) (46.9) (74.8) (43.5) (36.5) (80.0) (90.0) (70.0)Other capex 0.0 0.0 0.0 0.0 (19.9) (25.6) (45.4) 0.0 0.0Capital expenditure (104.3) (48.1) (73.6) (121.8) (72.5) (72.9) (145.4) (120.0) (120.0)Equity dividends/buybacks 0.0 0.0 (494.0) (494.0) (58.1) (54.8) (112.9) 0.0 0.0Acquisitions/investments 0.0 0.0 (121.5) (121.5) 0.0 0.0 0.0 0.0 0.0 Applications (104.3) (48.1) (689.1) (737.2) (130.6) (127.7) (258.4) (120.0) (120.0) Working capital 4.2 (4.6) 10.2 5.6 8.0 0.0 8.0 0.0 0.0 Surplus/(deficit) before financing (124.8) (60.6) (695.1) (755.7) (132.1) (143.4) (275.5) (137.1) (137.6) Disposals 34.9 0.0 1,149.0 1,149.0 0.0 0.0 0.0 0.0 0.0Debt proceeds (net) (0.6) (2.8) (0.5) (3.2) (0.3) (0.3) (0.7) (127.6) (0.5)Equity proceeds (net) 206.7 0.0 0.0 0.0 0.9 0.0 0.9 0.0 0.0 Financing Sources 241.0 (2.8) 1,148.5 1,145.8 0.5 (0.3) 0.2 (127.6) (0.5) Available debt facilities 130.2 129.4 132.0 131.9 134.3 136.5 136.5 10.4 9.9Debt 127.6 129.4 132.0 131.9 134.3 136.5 136.5 10.4 9.9Free Cash 208.1 140.8 598.3 598.3 468.3 324.5 324.5 59.7 (78.4)Restricted Cash 0.0 0.0 405.1 405.1 405.3 405.1 405.1 405.1 405.1 Net debt (80.5) (11.4) (871.4) (871.5) (739.3) (593.1) (593.1) (454.4) (316.8) Shareholders' funds 389.7 377.2 1,122.8 1,122.8 1,047.9 974.0 974.0 936.2 900.2Debt/equity (%) 33% 34% 12% 12% 13% 14% 14% 1% 1%Net debt/equity (%) n/a n/a n/a n/a n/a n/a n/a n/a n/a Financing Headroom/(Deficit) 210.6 140.8 598.3 598.3 468.3 324.5 324.5 59.7-78.4  Source Company data and RBC Capital Markets estimates Heritage Oil plcNovember 11, 2011  4   Exhibit 3: Miran Cross section Source Company data Heritage Oil plcNovember 11, 2011
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