Pinnacle Activity Ticker
The Most-Compelling Speculation From Vancouver…
As the 2012 Olympic Games kick off in London, you’ll hear a lot about the triumph of the human spirit over adversity.
Yet every day, we see this in the business world. Despite a gloomy big picture, leaders in every level of businesses step up, make sacrifices, overcome setbacks and make things happen in this complex global economy.
At last week’s Agora Financial Investment Symposium, in Vancouver, Canada, I saw the triumph of the human spirit on full display. The organizers and presenters delivered an excellent event, as always.
Despite all the crises haunting financial markets; despite an ever-growing burden of taxes, inflation, and regulation; and despite the ever-present threat of a global debt crisis, entrepreneurs still go about their business creating wealth. Often, this process includes large setbacks.
Here is the story of one of the companies presenting at the conference. It’s an example of pushing ahead despite adversity, and may ultimately reward investors willing to hang on…
Marcio Mello, CEO of HRT Participacoes SA (HRP: TSX-V) has lots of spirit. HRT is an aggressive oil and gas exploration company with huge leaseholds onshore Brazil and offshore Africa. Marcio is a very accomplished geologist, having been a key driver of Petrobras’ huge pre-salt oil discoveries. He left Petrobras to start his own company and apply his knowledge of pre-salt oil deposits to Africa’s untapped offshore.
Thus far, HRT’s efforts have not impressed the market. The stock is down 85% from its peak in early 2011. Marcio calls the low stock price “a matter of the market’s perception.” He remains far more optimistic about HRT’s future than the market, which is pricing the stock for continued exploration failure.
Wells in remote areas of Brazil have disappointed. HRT’s market capitalization is just $750 million (or 1.5 billion Brazilian reais). After its 2010 IPO and secondary offerings, and several disappointing onshore natural gas discoveries in the Brazilian wilderness, HRT still has $600 million (1.2 billion reais) in cash on its balance sheet. HRT’s enterprise value (which incorporates balance sheet cash) is a mere $150 million. This is below the book value of the plant and equipment on its balance sheet. All 3-D seismic data and exploration spending was funded by IPO investors, who look to have given up on the stock.
But Marcio isn’t close to giving up. He and his management team still hold a large slug of shares. Going forward, HRT is sharing the risk and reward on its Brazilian operations with TNK-BP, after having struck a deal that infused HRT with cash. Plus, Marcio has heard the message from investors to slow the company’s cash burn.
In a question-and-answer session with Byron King, Marcio and Wagner Peres, president of HRT, reviewed the exploration program. Peres highlighted the size of the oil resources HRT is targeting offshore Namibia: It’s measured in the tens of billions of barrels. Right now, the market is assigning a value of just pennies per barrel of resource, but a successful well drilled in the coming quarters could boost the stock price significantly.
HRT faces several critical catalysts over the next six-nine months. It has a Transocean deep-water rig scheduled to drill large prospects in Namibia by the end of 2012. Late in the third quarter, a consortium of operators (Chariot, Petrobras and BP) will complete an exploration well near HRT’s acreage. Success could raise excitement about the value of HRT’s prospects. Finally, HRT is currently evaluating offers to buy a 30% interest in Namibian projects after more than 20 oil companies had a look at its data room. A sale could bring in a few hundred million dollars, plus a drilling carry.
In short, HRT looks like an interesting speculation: a very cheap call option on exploration success in Namibia.
My friend Byron King, editor of Outstanding Investments and Energy & Scarcity Investor, has followed this company for years. He is Agora Financial’s resident expert on HRT. I just wanted to draw your attention to this situation, because I found it to be among the most-compelling speculations presented at this year’s conference.