Evolution Securities analyst Richard Griffith thinks the market got it wrong after Heritage Oil (LON:HOIL) stock lost nearly a third of its value yesterday.
Yesterday, Heritage told investors that Miran West-2, in the autonous northern region of Iraq, found highly productive gas reservoir intervals that tested at a restricted cumulative flow rate of over 75 million cubic feet per day (MMscfd).
The news disappointed investors who had been expecting the new hydrocarbon discovery to be oil not gas - which is worth less and is also more difficult and expensive to bring to end-markets.The stock dropped 126 pence per share, nearly 30 percent, to 310 pence on Wednesday.
This morning the analyst said it looks like a huge over reaction, and he reckons the new gas discovery could be worth three times more that the HOIL’s current share price suggests.
According to Griffith the market is currently valuing the Miran gas discovery at around 105 pence per share, however he gives it a 301 pence per share risked valuation.
“In our model we assume: the KRG (Kurdistan Regional Government) backs into the project and dilutes Heritage to 56.25 percent from 75 percent; there is a 75 percent chance of the contingent resources being developed and a 50 percent chance of developing the prospective resource.”
“We are in the process of building a full field model and so for now we assume an NPV/boe of US$3.5. Thus our risked value for Miran is 301p per share.”
Add to that the 205 per share Griffith ascribes Heritage Oil’s Russian assets, and the analyst thinks the stock could support a 506 pence per share valuation - without giving any value to its assets in Malta or Pakistan.
The stock is showed early signs of recovery today, as it climbed just over 26 pence, 8.4 percent, and it was trading at 336 pence per share at 3:30 pm.
Heritage estimates that the Miran West structure has gross P90-P50 in-place volumes of between 6.8 (P90) - 9.1 (P50) trillion cubic feet of gas, with an upside case (P10) of 12.3 trillion cubic feet.
Consequently Heritage now estimates that Miran West and Miran East together have a mean risked contingent and prospective resource of 744 million barrels of oil equivalent (MMboe).
"The discovery of a major gas field of up to 12.3 trillion cubic feet in-place with exceptional flow rates makes this one of the largest gas fields to be discovered in Iraq,” chief executive Tony Buckingham said.
“This well has substantially de-risked the field so we have the confidence to accelerate the work programme on Miran. We are considering various development options including a tie-in to planned infrastructure that will achieve first production for both oil andgas in 2015.”
The Miran field contains two hydrocarbon systems, a shallow Upper Cretaceous section which contains oil and the deeper Lower Cretaceous and Jurassic formations which are wet gas and condensate. Previously reported oil shows, in the upper cretaceous, during drilling raised hopes of a significant oil discovery among investors.