HRT Participacoes (HRTPY.PK) has a high risk/high reward profile and is not a stock for everyone. In my last article, I described the optionality of HRT's Namibian prospects that will be drilled in 2013. In this article, I will attempt to value HRT's 55% interest in its Solimoes basin blocks.
HRT and its 45% partner, TNK-Brasil, made major natural gas discoveries with the 1-HRT-2-AM, 1-HRT-5-AM, 1-HRT-8-AM, and 1-HRT-9-AM wells in the last 14 months. The 1-HRT-9-AM well was especially prolific and in the 12-Sep-2012 News Release HRT stated "This is one of the best gas wells ever drilled and tested onshore Brazil, considering the thickness and quality of the reservoir as well as the DST flow results. It not only confirms the gas trend to the south and east of the Jurua Field, showing integration with the natural gas findings of wells 1-HRT-5-AM, 1-HRT-8-AM, and 1-HRT-2-AM, but it opens a new exploration frontier to the southwest. HRT believes that this structure has a potential flow rate of up to 3.0 million cubic meters (105 million cubic feet) of natural gas per day, when it reaches its development phase." Furthermore, HRT estimated that this geological structure holds between 10 and 32 billion cubic meters (0.35 to 1.13 Tcf) of recoverable gas.
The Jurua Development Area and the Urucu Fields are owned by Petrobras. Petrobras owns a natural gas pipeline from its Urucu Fields to Manaus and is planning to extend it another 140 km to the Jurua Development Area. This extension has not been started. Notice that the Urucu-Manaus pipeline is underutilized even when Jurua Development Area production is added. Also notice in the image above that the HRT geological structure defined by wells 1-HRT-2-AM, 1-HRT-8-AM, 1-HRT-5-AM, and 1-HRT-9-AM is between Petrobras' Urucu and Jurua fields.
On October 15, 2012, HRT issued a Material Report stating that HRT, TNK-Brasil and Petrobras signed a Letter of Intent for the monetization of the natural gas in Solimoes. On December 17, 2012, HRT issued a News Release amending this LOI. Because Brazilian law requires the government to own a controlling stake in Petrobras, and because Brazil imports almost half of its natural gas consumption, it seems obvious to me that if Petrobras were to build an underutilized pipeline from Urucu to Jurua that they would tie-in HRT's natural gas discoveries.
The Urucu-Manaus pipeline had a cost of USD$2.2 billion and the main trunk line is 661 km long with 140 km of extensions to serve eight cities. So I figure that a 140 km extension to the Jurua Field, as well as to HRT's discoveries, would cost about USD$400 million. A reasonable agreement might be for Petrobras to invest USD$200 million with HRT and TNK-Brasil splitting the remaining USD$200 million. It seems more likely that Petrobras would invest 100% of the pipeline extension cost with an agreement to purchase the gas from HRT/TNK-Brasil for a negotiated price. A sale by HRT of its interest in this geological rend is another possibility.
So what is it worth? Assigning $1/mcf of value, the estimated 0.35 to 1.13 Tcf of reserves would be worth roughly USD$180 million to USD$550 million net to HRT or roughly $0.30 to $0.93 per share. This is a rough guess with lots of uncertainty. Please perform your own due diligence!
Upside in the Solimoes basin includes well 1-HRT-10-AM which has discovered hydrocarbons in another geological trend, but the production potential is still in the process of being evaluated. Further upside exists from the fact that only about ⅓ of the Solimoes basin has been explored and several more prospects will be drilled and tested in 2013.
In my last article I used the probabilities provided by the independent reserve auditor, DeGoyler and MacNaughton, to estimate the optionality of the Namibian blocks as probably greater than a 1 out of 3 three chance of making multiples on your money. In this article I tried to demonstrate that the Solimoes blocks kinda sorta provides some downside protection albeit with a large range of uncertainty. Again, I want to repeat that this stock is not for the risk adverse. There is a real chance of losing some or all of your money.
Disclosure: I am long HRTPY.PK.