Now I'm going to conclude by throwing out one question that has been bothering me: In the reserve estimates in the valuation report, Ryder Scott attributes zero reserves for probable and possible for the original SMU fields. But if you look at the production and reserve numbers in the chart I provided here, you can see that Harvest has clearly been successful at expanding their proved reserves at their traditional SMU oil fields. So my question is, why is there no probable or possible reserves for the SMU oil fields?
The response from the company was:
In the opinion of Ryder Scott, all of the remaining reserves in the SMU fields are proved due to the extensive amount of information available regarding well control in these three fields.
So that is that. Meanwhile, some other questions that have popped into my mind:
1. Do other oil companies publish the NPV of their oil assets, and if so where do their stocks trade in relation to those numbers?
2. Venezuela's currency has a special problem- from a Bloomberg article:
The bolivar fell 0.9 percent to 5,350 bolivars per U.S. dollar in unregulated currency trading today from 5,300 yesterday, traders said. The bolivar has fallen 36 percent this year.
Venezuela pegs the bolivar at the official exchange rate of 2,150 bolivars under restrictions imposed in February 2003. People turn to unregulated markets when they can't get approval from the government's Foreign Exchange Administration Commission to buy dollars at the official exchange rate.
How is this taken into account in the Ryder Scott NPVs and should we adjust the numbers for this?
I hope the key thing readers take away from these recent posts on Harvest is that you should never just accept the number someone gives you as the value of a company (Not from the company, and not even mine!). You need to look at the assumptions yourself and challenge them, until you come up with your own number that you 1) are comfortable with, and 2) feel is fairly conservative. Keep asking questions!
3 comments:
According to the company's 10-K, "the majority of our Venezuelan receipts are denominated in USD. A large portion of our operating and capital expenditures are in USD." The question is, on a net basis, will HNR win/lose once the Bolivars devalues.
An interesting read on the Bolivars:
http://www.iht.com/articles/2007/09/02/bloomberg/bxbux.php
Quote: "Contreras called the government-set prices on many products "fantasy prices" that are below production costs. Milk, chicken, coffee and flour have disappeared from store shelves in Caracas at times this year."
Just a follow-up:
Amt in Thousands (except FX rates)
Column 2:
Pre-tax Gain (loss) on exchange rates
Column 3:
USD to VEB as of 12/29
Column 4:
USD to VEB yoy% change
12/31/2006 (121) 2150 0%
12/31/2005 2,752 2150 12%
12/31/2004 (622) 1920 20%
12/31/2003 529 1600 14%
12/31/2002 4,553 1403 85%
12/31/2001 768 758 8%
12/31/2000 326 700
Source: Mergent, Banco Central de Venezuela
According to data from Mergent, in calendar year 2002, the company recognized a 4.5 million pre-tax gain on foreign exchange rate. During that year, the Bolivars devalued significantly. How did this impact the NPV of HNR's reserves (all else equal)? I think it is reasonable to argue that it is more likely to be positive than negative. Just my 5 cents.
To add to this, the Harvest contract says:
"PPSA will make payment to the Mixed Company of each invoice by wire transfer, in United States dollars in the case of payment for crude oil and natural gas liquids delivered, and Venezuelan Bolivar in the case of payment for methane gas delivered,..."
Now, if most of their costs and capital expenditures are also in USD, then we don't really have to worry about how currency fluctuations can affect Harvest's income. And I also think we do not need to worry about Venezuela's ability to fund those US dollars, because Venezuela's economy is based on selling oil, which has readily marketable US value.
A currency devaluation will have a positive effect to the asset side of Harvest. Currently, Harvest has approximately $210 million USD in cash, of which only $9.5 million USD is denominated in Bolivars. Meanwhile, they have $95 million debt denominated in Bolivars. These numbers are on the balance sheet using the official pegged rate of 2150 -1. If the currency was devalued, then Harvest's net debt will decrease dramatically.
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