Rbc Heritage

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RATINGS REVISION | COMMENTNOVEMBER 11, 2011

Heritage Oil plc (LSE: HOIL; TSX: HOC)

Rising Tide Lifts Kurdish Plays

Sector Perform (prev: Underperform)

Speculative RiskPrice: 200

Shares O/S (MM): 259.8Dividend: 0.00NAVPS: 244Float (MM): 171.5

Price Target: 240 ↓ 275Implied All-In Return: 20%Market Cap (MM): 520Yield: 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 athe 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 btoday’s story.

We are upgrading Heritage Oil to Sector Perform from Underperform; for us toconsider a more positive recommendation, however, would require the company

to encounter and test liquids with its ongoing Miran West-3 appraisal well. In ouopinion, 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 licencto Exxon – its website repeats the story from today’s FT. The licence awards mabe 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

200.00

240.00

280.00

320.00

360.00

400.00

440.00

480.00

560.00

J J A S O N2009

D J F M A M J J A S O N2010

D J F M A M J J A S O N2011

HI-14AUG09 587.00

HI/LO DIFF -69.42%

CLOSE 200.20

LO-12AUG11 179.50

10000

20000

30000

PEAK VOL. 37480.8

VOLUME 2481.7

30.00

45.00

60.00

75.00

90.00Rel. FT ALL-SHARE HI-26JUN09 100.00

HI/LO DIFF -71.36%

C LOSE 2 8. 64

LO-11NOV11 28.64

RBC Europe Limited

Al Stanton (Analyst)(+44) (0)131-222-3638; [email protected]

FY Dec 2009A 2010A 2011E 2012E

Prod. (mboe/d) 0 1 1 3

P/FFO NM NM NM NM

CFPS - Basic (0.09) (0.08) (0.09) (0.07)

P/CFPS NM NM NM NM

EPS (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.



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Exhibit 1: Heritage NAV (discounted at 15% from January 2011)

Working Interest Remaining Reserves Asset Value PV15%Field Oil Gas Oil Equ.

Interest mmbbl bcf mmboe US$m £m p/share

Producing fields / Assets 7 0 7 351 219 79Russia 7 0 7 67 42 15Zapadno Chumpasskaye (Base case) 95.0% 7 0 7 67 42 15

Uganda 0 0 0 283 177 63Cash in escrow 283 177 63

Fields under development 0 0 0 0 0 0

Exploration/appraisal upside (risked) 43 0 43 574 359 128Iraq 485 303 109Miran West Gas 56.3% 47 2411 449 405 253 91

Miran Area exploration/appraisal 56.3% 80 50 18

Libya 0 0 0Sahara Oil Services 51.0% 0 0 0

Mali 0 0 0Block 7 and 11 Exploration 75.0% 0 0 0

Malta 0 0 0Areas 2 and 7 100.0% 0 0 0

Pakistan 0 0 0Sanjawi Block 60.0% 0 0 0

Russia 43 0 43 89 55 20Zapadno Chumpasskaye (Full field) 95.0% 43 0 43 89 55 20

Tanzania 0 0 0Exploration 30-70% 0 0 0

Financial commitments 0 0 0 165 103 37Hedging gains/(loss) relative to forecast 0 0 0

Investments (Afren, Petrofrontier) 18 11 4

G&A costs (post tax) -126 -79 -28

E&A cost associated with prospects (PV) -95 -59 -21Year-end 2010 (net debt)/cash adjusted for deals/buybacks 319 199 71

Estimated impact of options 49 31 11

Core commercial value 7 0 7 515 322 115Risked potential/exploration 43 0 43 574 359 128Net asset value 51 0 51 1089 681 244

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



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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 79.65 111.05 107.97 109.50 109.00 113.00

Oil Production (mbbl/d) 0.3 0.6 0.5 0.5 0.4 1.3 0.9 2.9 2.9

Gas Production (MMcf/d) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Production (mboe/d) 0.3 0.6 0.5 0.5 0.4 1.3 0.9 2.9 2.9

Turnover/boe 22.53 24.52 26.22 25.35 39.46 34.32 35.65 33.63 34.87

Opex & Royalty $/boe 23.29 23.61 23.55 23.58 39.32 34.22 35.54 35.43 35.26

Depreciation $/boe 14.24 10.28 11.07 10.67 13.75 13.75 13.81 13.00 13.00

Net 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 36.3

Royalties (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 0.0

Exploration 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 1.9

Discontinued 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) 273.1 287.9 287.9 287.9 286.4 262.7 274.6 259.8 259.8

EPS ($) (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 13.5

Exceptionals 2.9 1.9 (1,256.7) (1,254.8) 0.0 0.0 0.0 0.0 0.0

Other 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 0.0

Capital 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 0.0

Acquisitions/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 0.0

Debt 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 9.9

Debt 127.6 129.4 132.0 131.9 134.3 136.5 136.5 10.4 9.9

Free 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 1,047.9 974.0 974.0 936.2 900.2

Debt/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




4

Exhibit 3: Miran Cross section

Source Company data




5

ValuationWe value Heritage at 244p/share; our PV15% valuation includes a core value of 115p/share and risked upside of 128p/share. Cash (inhand and restricted) comprises a significant portion of our NAV. Heritage ended 2010 with $598m of cash-in-hand and $405m of “restricted cash”, which has been set aside as collateral for a disputed CGT bill in Uganda. In our Heritage NAV we include the$283m (63p/share) held in escrow in London, but we have excluded/written off the $121m that management has paid to the UgandaRevenue Authority (URA). Heritage is currently continuing with a share buyback programme. We also include -28p/share in respectof future G&A costs. Our 240p 12-month target price is set in line with our NAV.

Price Target ImpedimentThe risks to the upside include the injection of hard-to-anticipate new ventures. A decision, one way or another, on oil exports fromKurdistan would have a significant bearing on the value of the company’s Iraqi portfolio.

The risk to the downside include a negative ruling on the tax dispute in Uganda. In the event that any arbitration goes against thecompany, Heritage would have to release the $283m held in escrow and this would cut 63p/share from our NAV. Conversely asuccessful appeal could possibly enable the company to recover the $121m paid to the URA.

Company DescriptionHeritage Oil is a mid-cap oil exploration company currently focused on Iraq - ongoing spending is focused on the appraisal of itsMiran West gas discovery in Kurdistan. The company is also maturing exploration prospects within its acreage portfolios in Malta andMali. The company's modest production comes from Russia.




6

Required Disclosures

Non-U.S. Analyst Disclosure

Al Stanton (i) is not registered/qualified as a research analyst with the NYSE and/or FINRA and (ii) may not be associated persons ofthe RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions oncommunications with a subject company, public appearances and trading securities held by a research analyst account.

Conflicts Disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

RBC Dominion Securities Inc. makes a market in the securities of Heritage Oil plc and may act as principal with regard to sales orpurchases of this security.

RBC Europe Limited makes a market in the securities of Heritage Oil plc and may act as principal with regard to sales or purchases ofthis security.

The author(s) of this report are employed by RBC Europe Limited.

Explanation of RBC Capital Markets Equity Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned toa particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst'ssector average.RatingsTop Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12months; provides best risk-reward ratio; approximately 10% of analyst's recommendations.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Qualifiers (any of the following criteria may be present):Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; nosignificant cash flow/financing concerns over coming 12-24 months; fairly liquid.Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; maynot be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.

Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.

Distribution of Ratings

For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).

Distribution of Ratings

RBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 771 52.50 234 30.35

HOLD[SP] 633 43.10 137 21.64

SELL[U] 65 4.40 5 7.69




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Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q30

150

300

450

600

750

2009 2010 2011 2012

12/15/08OP:260

03/03/09OP:300

03/26/09OP:380

04/02/09OP:370

05/06/09OP:600

09/29/09OP:650

11/23/09SP:600

01/04/10SP:500

08/11/10SP:350

02/02/11UP:260

04/05/11UP:275

Rating and Price Target History for: Heritage Oil plc as of 11-10-2011 (in GBp)

Legend:

TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperfor m; I: Initiation of Research Coverage; D: Discontinua tion of Research Coverage; NR: Not Rated; NA: Not Available;

RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was removed from a recommended list.

Created by BlueMatrix

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model

portfolios maintained by a business unit of the Wealth Management Division of RBC Capital Markets, LLC. These RecommendedLists include the Prime Opportunity List (RL 3), a former list called the Private Client Prime Portfolio (RL 4), the Guided PortfolioPrime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Dividend Growth (RL 8), and the GuidedPortfolio: Midcap 111 (RL9). The abbreviation 'RL On' means the date a security was placed on a Recommended List. Theabbreviation 'RL Off' means the date a security was removed from a Recommended List.

Conflicts Policy

RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. Toaccess our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdf or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower,Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of Research and Short-Term Trade IdeasRBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regardto local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensure eligibleclients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may bedone by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contacyour investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. RBC CapitalMarkets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color andcommentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or otherresearch reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com. A Short-Term Trade Idea reflectsthe research analyst's directional view regarding the price of the security of a subject company in the coming days or weeks, based onmarket and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our publishedresearch reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result othe differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject company that isconsidered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity as a result of temporary

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