I'm going to keep this write-up short because frankly, I still have only a basic understanding of the company and I have many more questions that I hope to uncover as time goes on. But based on the numbers and the story, it seems clear that Harvest represents a compelling valuation at current prices.
Harvest Natural Resources is an American company with oil production in Venezuela. Over the past few years, the stock price has been hit because of fears over the possibility of nationalization. Today however, the revised contract is very near implementation on the terms that the Venezuelan government has wanted. The terms were very stiff: 33% royalties, reduced ownership in the properties to 40%, and 50% tax rate. But if we accept this as final, then the risk reward situation as follows:
Market Cap: 460 million
At end of 2nd Quarter, 115 million in net cash.
Reimbursement payment: 60 million cash(*)
= approximately 175 million adjusted net cash.
The company also provides you with a discounted valuation of their reserves, after-tax and at 10%, as follows:
Proved reserves: 308 million
Probable reserves: 158 million
Possible Reserves: 396 million
Play around with the scenarios and you can see the range of values can be exciting, at 175 million - 1037 million. A few things to note:
*First, with regards to the reimbursement payment- this is the money the company is supposed to get reimbursed for operating their oil wells during the past year and a half without a contract. I believe the number I came up with is approximately right based on the terms in the new contract, although I will be double checking my methodology some more. See the comments below for further discussion.
Second, with regards to the valuation of the properties. These NPV's were done using a recovery rate(the amount of oil you recover out of the total in the field) of 13% on their reserves. The company showed how they have historically done much better than this, and they see their new fields having the same characteristics as their past successes. So, if you assume their 13% recovery rate is conservative, that means you would value the properties all the way to 3P (Possible), because that would be 13% recovery. Every subsequent 1% improvement in rate adds about 100-125 million in value to HNR, implying another huge upside in the stock based on exploration potential.
With regards to the fears over Venezuela, it seems like Venezuela has already "done its worst", so to speak. They have gotten the terms they have wanted, and to ask for anything stiffer would send the companies packing. Harvest and the other companies have shown how they can add plenty of value by exploring and operating these oil assets, so Venezuela doesn't want to see them go. So I think it might be fair for now to consider these terms as final.
I do have plenty of questions; (for example, what is the price of oil used in the NPV calculations?) Plus, I have also always been sort of an oil bear, thinking that most the rise in oil prices has been due to speculation rather than fundamentals. But add up the numbers for Harvest and you have a stock price backed by a lot of cash, along with a high quality oil asset with very low operating costs (Currently about $5-6 per barrel of oil). It was enough for me to buy a position today. Look forward to more on this in the future.
Update on 10/4/07