Brazil's HRT Participacoes em Petroleo S.A. (OTC:HRTPY) is a high risk oil and gas exploration company with no debt, but no production either. I consider part 1 and part 3 of this series of articles to be out of date, but part 2, which is focused on HRT's Solimoes assets, is still valid.

In order to keep this article simple, I am ignoring their assets in the Solimoes Basin and their pending acquisition in the Polvo Field. Furthermore, I will assume that the Baobab, Murombe, and Moosehead prospects being drilled offshore Namibia this year are the only prospects that matter. I expect results for Baobab to be released in July, results for Murombe in August, and results for Moosehead in October.

Independent third party reserve engineers, DeGoyler & MacNoughton, have made the following assessments of HRT's Namibian prospects:

The above chart shows the chance of success for Baobab as 26%, Murombe as 23.5%, and Moosehead as 25%. Crunching the math, I calculate a 58% chance that one of these prospects will be a success. However, the chance of success does not distinguish between a gas discovery and an oil discovery. I will assume a gas discovery is worthless and below I will estimate the chance of an oil success.

The 20-May-2013 press release of the Wingat results is misleading in that it indicates that the oil generating source rocks found can charge the Murombe prospect. However, slide 27 of HRT's 5-Jun-2013 presentation, shown below, clearly shows that these source rocks can charge the Baobab prospect, but not the Murombe prospect (oil migrates up, not down).

Based on the Wingat results, I believe that the chance of success for Baobab is now greater than 26% and that the chance of finding gas is almost zero. Therefore, I believe that I am not aggressive in assuming that the chance of an oil success at Baobab is 26%. Furthermore, I will conservatively assume that if the Murombe and/or Moosehead oil prospects are successful, then the chance of a gas discovery is 50%. In other words, I am assuming that the chance of an oil success at Murombe is 11.8% and the chance of an oil success at Moosehead is 12.5%.

## Other Assumptions:

- All 3 prospects are independent
- The intrinsic value of a barrel of oil in the ground is $7/bbl
- If successful, the chance of finding at least the P50 volume is 50%
- If successful, the chance of finding at least the P10 volume is 10%
- Baobab is the same size as Wingat (I don't have specific numbers for Baobab, but it looks slightly larger on above chart)

**Probabilities**:

Chance of oil success = 1 - ((1 - .26) x (1 - .118) x (1 - .125)) = 43%

Chance of Baobab P50 oil success = 26% x 0.5 = 13%

Chance of Murombe P50 oil success = 11.8% x 0.5 = 6%

Chance of Moosehead P50 oil success = 12.5% x 0.5 = 6%

Chance of Baobab, Murombe, or Moosehead P50 oil success = 23%

Chance of Murombe P10 oil success = 11.8% x 0.1 = 1%

## Intrinsic Value:

PROSPECT | P50 | P10 |

Baobab | 772 mmbo* | 2112 mmbo* |

Murombe | 2877 mmbo** | 7818 mmbo** |

Moosehead | 1512 mmbo** | 5500 mmbo*** |

* Assumed Baobab possible volumes equal to D&M Wingat estimation

** DeGoyler & MacNoughton estimation

***HRT estimation

Baobab P50 oil success = 772 mmbo x $7/bbl x 86% ownership / 657 fully diluted shares = $7/share

Murombe P50 oil success = 2877 mmbo x $7/bbl x 86% ownership / 657 FD shares = $26/share

Murombe P10 oil success = 7818 mmbo x $7/bbl x 86% ownership / 657 FD shares = $71/share

Before DeGoyler & MacNaughton provided the P50 and P10 values, HRT claimed that the P10 volume for Murombe was 10.7 billion barrels which works out to $98/share. Since this is not impossible I decided to include it as the maximum possible intrinsic value on the graph below:

## Conclusion:

Using the assumptions in this article:

The chance of failure is higher than the chance of an oil success. There is a high chance of losing all of your investment.

There is a 23% chance of an intrinsic value of at least $7 per share before year end. The Kelly Criterion recommends wagering 17% of your bankroll based on this data point and the current share price of $0.535. But wait, there's more! When you make this Kelly Criterion wager you get the following fat tail too:

6% chance of an intrinsic value of at least $26 per share before year end.

1% chance of an intrinsic value of at least $71 per share before year end.

If HRT's estimated P10 value of 10.7 billion barrels for Murombe were to be achieved, then the intrinsic value per share would be $98 per share before year end.

Note: This article only addresses exploration risks. Other risks (i.e. political, environmental, etc.) have been ignored. A Macondo style blowout will turn this stock into a zero. Don't bet more than you are willing to lose!

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