In this article, I will focus on Harvest Natural Resources Inc (HNR) and the financial risks related to an oil company without any real revenue for the past 3 years. The Company owns or owned about 3 different oil assets that I will cover here.
1 - Venezuela asset.
HNR owns a 32% interest in Petrodelta (HNR energia, Venezuela) which is a joint venture or JV, forced by the Venezuelan Government in 2007.
The majority owner is PDVSA, the Venezuelan state-owned oil and natural gas company, which exercises most of the control over Petrodelta's operations. PDVSA has been managing very poorly the JV, providing insufficient monetary support in capital expenditures and falling behind in payments to contractors providing services to Petrodelta (HNR is considered a contractor).
HNR is still waiting on a $9.8 million dividend that was declared in November 2010, and is uncertain on when or whether this or any future dividends will be paid. This is due to Petrodelta's liquidity constraints from PDVSA's lack of monetary support. Since then, no other dividends have been declared despite the fact that PDVSA declared a constant profit from 2007 to 2013. HNR also advanced above cash to HNR energia and is still waiting to be paid back by Petrodelta.
Early January 2014, HNR sold its 32% interest in the JV to Petroandina (Pluspetrol), an Argentinean company, in 2 separate transactions.
The first part has been concluded for an amount of 125 millions dollars but to be definitive, it is subject to the second closing deal for an amount of 275 millions dollars, that should occur no later than June 30, 2014.
Here is an excerpt of the 8k filing regarding the sales.
Net after tax respectively 122M and 208M.
" Upon execution of the Share Purchase Agreement, HNR Energia and Buyer effected the First Closing for a cash purchase price of $125 million. The Second Closing, for a cash purchase price of $275 million, will be subject to, among other things, approval by the holders of a majority of the Company's common stock and approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of Venezuela (which indirectly owns the other 60% interest in Petrodelta).
As you can see, although the HNR shareholder's approval should not be a problem, the second deal needs Venezuela approval so. I remind all that the first attempt to sell Venezuela was canceled by PT after HNR and PT started to negotiate with Venezuela...
As of today, we have no idea if this approval will be given and what will be required to be done or even paid for this approval to be received by June 30, 2014?
The filing 8K 12/20/2013, is clear and if the deal cannot be done by June 30,2014 or approval is not given by the end of 2014, then this whole financial scheme will fall apart including the first deal. An extra 6 months can be given under certain conditions and by the buyer only.
" The Share Purchase Agreement may be terminated by either HNR Energia or Buyer if the Second Closing has not occurred on or before the later of June 30, 2014 or the date that is four months after the date of the special meeting of the Company's stockholders. However, if certain conditions have not been satisfied, including obtaining approval for the sale of the Venezuelan interests from the Government of Venezuela, Buyer may extend the termination date for up to six one-month periods, but in no event will the closing date or the termination date be after December 31, 2014..."
"...Petroandina and HNR Energia have certain put/call rights related to the 29% interest in Harvest Holding sold in the First Closing if the Share Purchase Agreement is terminated..."
Then, until the second deal is completed, it will be a certain risk regarding the real completion of the total deal. Also, it is not clear if HNR is obligated to act upon termination due to an eventual Venezuela refusal?
As always with this company, many questions and almost no answers.
Assuming that the 2 deals can be completed as described which is still a stretch, HNR will be debt free by June 30, 2014 and will have about 200M to 230M in cash. The exact amount is almost impossible to know right now.
It will represent a value of around 4,50 per share with a total outstanding including warrants and options at around 47,5M shares.
(For the ones who want to calculate exactly what will be the cash left by June 30,2014 they will have to estimate how much the pre-payment of the 79,8M note at 11% cost and deduct a 2M dollars monthly expense for 6 months or until the second deal is concluded.)
2 - Harvest Natural Resources other assets? Indonesia and Gabon prospects.
- HNR owns Operational activities in Indonesia onshore in West Sulawesi which are still in the exploration stage.
- Gabon: Off-shore deep-water drilling exploration. The first high-quality 3D seismic images are expected during the second quarter of 2014. In September of 2013, HNR entered into negotiations with Vitol S.A. to sell HNR's 66.67% interest in Gabon for $137 million in cash. Net proceeds were expected to be $121.8 million after transaction costs and taxes; however HNR and Vitol S.A. were unable to reach a deal and this sale has been canceled.
- China and Colombia are not of any interest.
We cannot assign any value for Indonesia at the moment and we should assume no value until proven wrong. 2 wells have been expensed there few years ago and were considered as a bust and plugged. Although there is still potential, what has been found is not worth much. If HNR is successful in selling this asset then it will be considered as a bonus.
3 - Caution.
Also, it is not clear if the "transaction costs and taxes" for Venezuela deal and Gabon eventual deal include US tax?
If we look at the last balance sheet provided by HNR, a US tax of 5,125M(4)dollars has been indicated for the first sale to Petroandina for 121.8M as income tax payable. A similar cost may occur with the second deal?
(4) Reflects the income tax expense resulting from the pro forma gain based on the sale of the 29% interest in Harvest Holding to Petroandina on September 30, 2013 and the pro forma redemption of the borrowings under the 11 percent senior unsecured notes on September 30, 2013.
The Company has been less than clear about this process and how much cash will be really received after ALL expenses have been paid off.
Good to know: HNR is being sued in a Class action lawsuit on 03/19/2013 called, John Phillips et Al v. Harvest Natural. and may suffer substantial losses if found guilty? The financial impact is unknown as we speak.
4 - Valuation
Harvest Natural Resources will be debt free by June 30, 2014 with an amount of cash hopefully around 210M dollars more or less?
This is an initial value range of 6.75 to 7.25 per share for 2014 and no revenue. But, we should be very cautious...
- If you look at the cash burning rate History we should apply a 10% discount on this valuation.
It is still uncertain what will be the strategy going forward after Venezuela exit is done? Management will have to be clear about that also. The next conference call will be interesting.
- It has been indicated that HNR may declare a "special dividend" after Venezuela sale completion and farm-out partially Gabon prospect to be able to bring the field to production under a "new spinoff" company? In this case, it is another cost for HNR shareholders who will have to pay US tax on the gain or around 15% or more?
- What will be HNR after Venezuela? If the "spin off" idea is still the strategy then it will be another cost related to the retirement account too. Perhaps as much as 10M to 20M in benefits and bonuses for Management. Read the 10K filing page 69.
- Because, HNR has no revenue and will have none for the foreseeable future, it will keep on spending cash at a rate between 2M to 8M per months (including capex) after June 30, 2014. For example, one well for the Gabon prospect will cost 20M to 30M etc.
As you can see, it is really difficult to apply a precise number right now due to many uncertainties and a final range of 2.70 to 6,50 should be adequate until further information is given. This amount decreasing every month after June 30, 2014 by 0,05 to 0,10 a shares depending on the cash burning.
5 - Conclusion
HNR is a very speculative stock that should be avoided as an investor because it presents a poor risk/profit ratio but is still a good trading tool as we speak. Historically the stock has been down and lost most of its value.
HNR seems trading at a decent trading valuation now. HNR closed at 4.27 Friday 02/07/2014.
Look at the chart:
RSI is a bit high at 41 which indicate it may further erode to 3.90 before finding some footing.
I started buying HNR around 4,26 and will accumulate more in the high 3's. I have a target between 5,25 to 5,50 assuming that Venezuela is a done deal.
Disclosure: I started accumulating HNR at 4.26 with a short time target at 5 to 5.25 only for a trading purpose. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.