Harvest Natural Surges On Asset Sale: Which Companies Could Be Next?

by: Hawkinvest

Harvest Natural Resources, Inc. (NYSE:HNR) shares surged after the oil and gas company announced a sale of energy assets located in Venezuela. The deal is worth about $725 million and it caused the stock to nearly double in value in a single day. We also recently saw shares of News Corporation (NASDAQ:NWS) jump after the company announced a break-up into two separate units. ConocoPhillips (NYSE:COP) also recently did a spin-off of the Phillips66 (NYSE:PSX) refining division, in an effort to create shareholder value.

With equity valuations in certain sectors at very compressed levels, these deals could be a sign of things to come. Since the highly negative headlines and fear have caused many investors to shun stocks, a growing number of companies are realizing that spinning off assets, selling assets, or even joint ventures can unlock hidden value in the stock price. In the recent market correction, energy stocks have been hit hardest due to the drop in oil prices, however, the long-term potential remains strong as demand from China and emerging market countries is likely to grow over the years.

With oil stocks at very depressed levels now, it could be a classic opportunity to "buy low" and more companies like Harvest Natural and ConocoPhillips could be poised to sell or spin-off assets in the coming weeks and months. With that in mind, here are some companies in the oil sector that could be poised for asset sales, spin-offs, or joint venture deals that could lead to sharp gains in the stock price:

Encana Corporation (NYSE:ECA) could be in a position to both sell and buy energy assets. This oil and natural gas company is based in Canada but it also has significant interests in the United States. In 2011, it entered the Piceance Basin, primarily in the Williams Fork Formation, which is in Colorado. This company could be looking to acquire or joint venture with other nearby companies such as Dejour Energy (DEJ), as it has the liquid rich Kokopelli and North and South Rangely projects in the same area. Dejour is another undervalued oil and gas company that is actively seeking a joint venture for at least one project, and with about 100,000 acres that remain undrilled, it could end up selling some assets or securing a joint venture deal with Encana or another company.

For its part, Encana appears to be interested in acquiring liquid rich assets and the company website has a stated goal which includes: "leveraging third-party funding through farm-outs, partnerships and joint ventures". Companies like Encana could be poised to sell dry natural gas assets and buy liquid rich projects going forward, due to the much higher prices and transportability of liquid natural gas. Encana reported earnings that beat analysts' expectations. Earnings were 33 cents per share, while analysts expected just 2 cents, for the first quarter of 2012. With a solid dividend yield of over 4%, this stock will pay you, while waiting for a higher share price.

Here are some key points for ECA:

  • Current share price: $20.58
  • The 52 week range is $17.02 to $32.23
  • Earnings estimates for 2012: 89 cents per share
  • Earnings estimates for 2013: 39 cents per share
  • Annual dividend: 80 cents per share which yields 4.3%

Chesapeake Energy Corporation (NYSE:CHK) shares are controversial due to corporate governance and other recent concerns such as a highly leveraged balance sheet. The issues at the company have led to management turnover and Aubrey McClendon (the former Chairman) has turned over that position to Archie Dunham. With the turmoil at the company and many unhappy shareholders, the most likely course of action could be asset sales. Chesapeake has about $13.3 billion in debt and just around $438 million in cash. This company has prime interests in the Barnett Shale, Marcellus Shale and the Eagle Ford Shale and other areas which could make an asset sale relatively easy.

Some analysts expect a deal soon. Plus, with activist investor Carl Icahn now invested in the company, a deal could be more likely than ever. An Icahn backed nominee recently joined the board of directors and another major shareholder also was appointed. In my view this is great news and it creates some shareholder protection from a board that formerly did not seem to care. However, even with asset sale potential, this appears to be a higher risk and higher potential reward play due to the ongoing SEC inquiries. Buying the dips and selling into rallies could be one way to play this stock.

Here are some key points for CHK:
Current share price: $19.87
The 52 week range is $13.32 to $35.75
Earnings estimates for 2012: 56 cents per share
Earnings estimates for 2013: $1.79 per share
Annual dividend: 35 cents per share which yields 2.1%

Harvest Natural Resources, Inc. shares were trading near the 52-week low, but the stock nearly doubled immediately after the company announced the Venezuelan asset sale. This company has a strong balance sheet and if the asset sale closes as expected, the $725 million deal could bring many new opportunities for Harvest to acquire and develop other high-potential projects.

Here are some key points for HNR:
Current share price: $8.58
The 52 week range is $4.85 to $14.21
Earnings estimates for 2012: $1.22 per share
Earnings estimates for 2013: 88 cents per share
Annual dividend: none

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.