Share tips: This oil stock looks like a steal

Independent oil and gas explorer Heritage Oil has seen its share price fall by 75% since it peaked at £6 back in 2009. At current levels, the shares now look like a steal. Heritage operates in early-stage frontier markets where big oil often fears to tread. It owns a fledgling production operation in Russia, along with a large untapped hydrocarbon field in the Kurdistan province of Iraq. It also has exploration blocks in the Congo, Malta, Pakistan, Tanzania and Mali and a subsidiary in Libya.

But the firm's trophy asset is the Miran block in Kurdistan. Here the company has discovered a colossal gas reserve, which it hopes to exploit over the next five years. If successful this project alone could be worth more than the firm's entire market capitalisation of £400m.

Elsewhere, output from its Zapadno Chumpasskoye field in Western Siberia is ticking along nicely at 882 barrels per day. This is expected to increase and has been independently certified to be worth $298m (about 80p per share). Adding on the option value of the other licenses and around $200m of net cash, I would value the entire group on a sum-of-the-parts basis, at about 250p per share 60% above today's price.

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Heritage Oil (LSE: HOIL), rated a BUY by Fox-Davies Capital

Heritage isn't for the faint-hearted. Kurdistan has been engaged arguing with the Iraqi government over how to split the tax revenues from oil fairly. However, I think the two sides will settle their differences. If they don't, and foreign investment pulls out, neither will benefit.

Another problem is Heritage's ongoing dispute with the Ugandan tax authorities, after the firm sold a field in the country to Tullow Oil for $1.45bn. The Ugandans have already deducted $404m in capital gains tax, but Heritage claims this contravenes the parties' production-sharing agreement.

The matter has been referred to arbitration in the British courts. Other threats include project delays, drilling setbacks, oil and gas price volatility and foreign-currency fluctuations. But these concerns are more than factored into the ultra-low valuation. CEO and founder Tony Buckingham seems to agree he has a 29.4% stake.

FoxDavies Capital has a price target of 315p, with full-year results scheduled for the end of the month.

Rating: SPECULATIVE BUY at 152p

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI , or phone 020-7633 3634 for more.