Oil & Gas Corporate News

Heritage Oil (LON:HOIL) (BUY, £7.00) (HOIL, 414p, ? (9.52%)) announced that the Government of the Republic of Uganda has provided conditional consent for the disposal of its entire interests in Block 1 and Block 3A in Uganda to Tullow Oil. The transaction is expected to complete within five working days following finalisation with Government of a mechanism, including arbitration, for dealing with any taxes lawfully payable from the disposal of the assets, although Heritage has received advice that the disposal of the Assets is not taxable in Uganda. In accordance with the Petroleum Exploration and Production Act Cap 150, Mr.Hilary Onek, Minister of Energy & Mineral Development, has given consent to Heritage's disposal of the Assets. This consent is conditional on Heritage demonstrating to Government that it will pay any taxes on demand which may arise from the disposal of the Assets. In a separate letter Mr. Kabagambe-Kaliisa, Permanent Secretary to the Ministry of Energy & Mineral Development, advised that if Heritage was to resolve the tax matter by arbitration in London, then such arbitration would be on the basis that Heritage deposit approximately US$121.5m, representing 30% of the disputed amount of some US$400m with the Uganda Revenue Authority and provide a bank guarantee for the balance. As announced on 17 June 2010 Heritage previously proposed to Government the option of arbitration in London. Heritage's position, based on comprehensive advice from leading tax experts in Uganda, the United Kingdom and North America, is that the disposal of the Assets is not taxable in Uganda. Heritage is considering Government's response and will update the market in due course. On completion of the transaction Heritage will receive US$1.35bn in cash from Tullow Uganda Limited, with deferred consideration of up to US$150m in cash or an interest in a mutually agreed asset. Following completion of the transaction Heritage will provide an update on the proposed dividend.

Comment: Approval of the transaction is worth an additional 10p on our risked NAV versus our previous probability of success of 75%. We are taking into account a capital gain tax liability worth half of the contested amount, contributing a negative -34p to our risked NAV, hence a resolution in favour of Heritage and in-line with advice received from the Company would be worth 34p per share. We retain our Buy rating and 700p price target.

Tullow Oil…

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