Heritage Oil to Acquire Genel Energy International, Kurdistan Assets

Heritage Oil Ltd.

Heritage Oil has entered into a non-binding Memorandum of Understanding ("MoU") with Genel Enerji A.Ş. The MoU is subject to various conditions and execution of binding documentation to acquire Genel Energy International Limited ("Genel"), a private independent oil and gas exploration and production ("E&P") company, which holds licences in the Kurdistan Region of Iraq ("Kurdistan"). The proposed acquisition (the "Proposed Acquisition") would be paid for wholly in new shares of Heritage and would result in Genel shareholders owning approximately 50% of the enlarged ordinary share capital of Heritage. It is anticipated that following the Proposed Acquisition, the Company, as enlarged by the acquisition of Genel ("the Enlarged Group") will be re-named HeritaGE Oil plc

Heritage's management believe that the Proposed Acquisition will offer considerable shareholder value as it will create a prominent Main Market London listed production company which should have the financial capacity to bring into production its enlarged development and exploration portfolio, create the infrastructure for the development of the Taq Taq and Miran assets in Kurdistan, while also generating significant cash flow following the commencement of oil exports on June 1, 2009.


  • Proposed Acquisition will create an Anglo-Turkish integrated oil company with two core areas; Kurdistan and Uganda
  • Genel is a private, independent E&P company in Turkey, and was awarded its first license in Kurdistan in 2002
  • Genel has interests in two producing oil fields, being the joint operator of the Taq Taq field holding a 55% working interest (44% participating interest) as well as having a 25% working interest in the Tawke field
  • In addition, Genel owns 25% of the Miran license (the balance of which is owned by Heritage), 40% of the Duhok license, 40% of the Barbahar license and a 20% interest in the Chia Surkh license
  • Genel also owns the right to develop the Taq Taq Petroleum Refinery. This refinery in Kurdistan is primarily being built through the phased construction and operation of a 60,000 barrels of oil per day ("bbl/d") refinery in the vicinity of the Taq Taq and Miran oil fields. The phased construction of the refinery is expected to be completed by 2012 with 40,000 bbl/d expected to be operational in 2011
  • The Enlarged Group will own a number of key licenses in Kurdistan where exports from the Taq Taq and Tawke fields commenced on June 1, 2009. Production is transported by the main export pipeline to the Mediterranean port city of Ceyhan in Turkey and marketed by the State Oil Marketing Organization ("SOMO")
  • Net production to the Enlarged Group from Kurdistan is currently approximately 30,000 bbl/d and is estimated to be around 43,000 bbl/d by year end 2009, which should generate significant cash flow
  • Cash flow generation should provide the financial flexibility to fast-track development of other assets within the Enlarged Group's portfolio
  • The Enlarged Group will benefit from the additional expertise of Genel with its experience in developing the Taq Taq field, and local knowledge which should result in considerable costs savings and other benefits to the development of the Miran field
  • Genel recognises the advantages of Heritage's Main Market London listing, its highly prospective portfolio, a proven technical team and management with a history of finding significant oil resources
  • Based on current information, management expects the Enlarged Group to have estimated proved and probable reserves of approximately 300 million barrels of oil with multi-billion barrels of oil potential
  • Suspension in trading of Heritage shares to be lifted following the release of this announcement

Summary of Transaction

  • Heritage will issue 260 million ordinary shares, constituting 100% of the current issued share capital of Heritage, in exchange for acquiring the entire share capital of Genel. The new Heritage shares issued as consideration will rank pari passu with Heritage's existing ordinary shares
  • The proposed executive board of the Enlarged Group following completion will include: Mr Tony Buckingham, the current CEO of Heritage, who will be appointed as Executive Chairman of the Enlarged Group; Mr. Mehmet Sepil, the current CEO of Genel, who will be appointed as CEO; Mr. Mehmet Emin Karamehmet, currently Chairman of the Çukurova Group, who will be appointed as Executive Director and Mr. Paul Atherton who will remain as CFO
  • A prospectus and circular describing the proposed transaction are being prepared, including relevant Mineral Experts' Reports for the key assets of both the Company and Genel
  • The Proposed Acquisition would be classified as a reverse takeover of Heritage under the Listing Rules of the Financial Services Authority and accordingly, would be subject to the approval by a majority of Heritage's shareholders voting at an extraordinary general meeting to be called by Heritage at the appropriate time
  • The Enlarged Group will be one of the largest E&P companies listed on the Main Market of London and would be expected to become a member of the FTSE100 index
  • The eligibility of the Enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority

Transaction Details

The MoU is not legally binding in respect of its principal terms and therefore execution of binding documentation in relation to the Proposed Acquisition is subject to, among other things: (i) the respective parties conducting detailed due diligence; and (ii) the parties reaching agreement on definitive and legally binding documentation including an implementation agreement. Subject to satisfactory completion of these conditions and the ones referred to in the MoU, Heritage is targeting the third quarter of 2009 for the execution of definitive documentation. Once the legally binding documentation has been executed, completion of the Proposed Acquisition will be conditional on among other things: (i) the approval of Heritage's shareholders voting at an extraordinary general meeting to be called at the appropriate time; and (ii) admission of the ordinary shares of Heritage, as enlarged by the issue of shares in relation to the Proposed Acquisition, to the Official List of the UK Listing Authority and to trading on the London Stock Exchange. Accordingly, there can be no assurances that the Proposed Acquisition will complete or that it will complete on the terms outlined in the MoU or herein.

Should the Proposed Acquisition proceed, it will be treated as a reverse takeover under the Listing Rules of the UK Listing Authority (the "Listing Rules"). On June 3, 2009, at Heritage's request following a significant movement in its share price, Heritage's shares were suspended from trading on the London Stock Exchange and Heritage announced that it was in preliminary discussions with a third party regarding a possible merger. This announcement provides information in relation to this possible merger, together with details of where certain publicly available information on the licences in which Genel has interests can be obtained. Accordingly, the UK Listing Authority has confirmed that the suspension in the trading of Heritage's shares will be lifted following the release of this announcement.

The Enlarged Group would be an Anglo-Turkish oil company with a unique footprint in Kurdistan, producing oil for export and for the local markets, together with an exciting prospect in the Albert Basin in Uganda. The Enlarged Group should benefit from the additional expertise of Genel, with its proven track record of turning exploration into production in Kurdistan. Together with the Ugandan assets and other assets in Africa, the Middle East and Russia, the Enlarged Group would create a leading London listed international E&P company. The financial flexibility of the Enlarged Group should also facilitate the fast track development of oil production in Kurdistan and Uganda.

It was recently announced that Genel was the nominated party by the Kurdistan Regional Government ("KRG") to acquire third party back-in rights to a number of licences in Kurdistan including the Tawke and Miran licenses and there exists an associated long-term community and corporate social responsibility support liability of approximately US $1.1 billion to fund local infrastructure projects within Kurdistan which is to be funded gradually from Genel's future profits. In the event of a change of control of Genel, approximately US $605 million of such liability will become the direct responsibility of Genel's vendors to be settled on terms acceptable to the KRG. The remaining US $495 million will remain a long-term liability of Genel's acquirer and will be payable to the KRG each quarter on an asset by asset basis from a percentage of the future oil profit share of Genel. As part of the due diligence, and in consultation with the KRG, an understanding of this liability is a key part of determining the relative valuation of Genel.

As the Proposed Acquisition, if completed, will be classified as a reverse takeover of Heritage under the Listing Rules, applications will be made in due course to the UK Listing Authority and the London Stock Exchange for the Enlarged Group's ordinary shares to be admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange respectively. The eligibility of the Enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority.

Information on Genel

Genel is a private, independent E&P company. Genel is 56% owned by the Çukurova Holding Group, which itself is one of the largest industrial and commercial conglomerates in Turkey, and which has a number of investments across the automotive, telecommunications, media, textile, energy and information technology sectors.

Genel has been operating in Kurdistan since 2002, following the establishment of Kurdistan as an autonomous region of Iraq. Genel's interests are set out in the table below. Genel also has a 100% interest in a development project for an oil refinery near the Taq Taq and Miran fields.

Commenting on today's announcement, Dr. Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional Government said,
"We are very pleased that the two companies are coming together. The new Company, trading on the London Stock Exchange, will bring together an integrated plan for the development and fast track production of the Taq Taq and Miran oil fields. The financial capability and skill base of the enlarged Heritage should ensure earlier production and therefore significantly faster generation of revenues for the Government of Iraq to create substantial value as an employer, as a tax payer and as a provider of oil revenue for the benefit of the people of Iraq."

Tony Buckingham, Chief Executive Officer of Heritage, commented, "The potential combination of our two companies brings together a long held ambition to develop the assets in our core areas. We believe that shareholders will support the transaction which is anticipated to create significant shareholder value by bringing these fields to production in a timely manner and generating cash flow to explore and develop our multi-billion barrel resource potential both in Northern Iraq and Uganda. Heritage also recognises the strategic benefits of working with a partner such as Genel with a track record of turning exploration into production in the region and the positioning it will provide with respect to the rest of Iraq and the Middle East."

Mehmet Sepil, Chief Executive Officer of Genel, commented, "We are excited about the possibility of combining with Heritage to create a significant Main Board listed company with a strong financial capability and access to international capital markets, international expertise and with the aim of expanding the activities of the Enlarged Group in other countries in the Middle East. We intend to bring our world-class Taq Taq and Tawke assets into production immediately and the Miran asset subsequently. Production will be for both exports to the world market and also to serve the local market, generating significant cash flows for the benefit of all shareholders. The combination of Heritage with its worldwide experience and Genel's Turkish nationality together with its significant long experience and track record in the Kurdistan Region would help to develop our assets in an efficient and timely manner and would deliver excellent value to all stakeholders including the people of Iraq."