Another Great Write-up on HRT
HRT mentioned in this article. See below.
Warren Buffett has called the lottery a "tax on stupidity." That might be a bit harsh, but I generally agree with him.
However, while I don't spend any money buying lottery tickets, I do really enjoy it when someone gives me one as a gift. A free crack at a few million dollars can't be a bad thing right?
As an investor, I also like to try and pick up lottery tickets for free. One way that I try and do that is to invest in shares of companies that have a market capitalization that is pretty much fully supported by the cash on their balance sheets. Therefore, I'm paying a fair price for just the cash on hand, and anything else the company has comes for free.
In addition to that cash, I want these companies to have other assets that have the potential to be worth a lot more than the current share price. These other assets are my "free lottery ticket."
I came across one opportunity like this back in 2010 when the BP oil spill resulted in the shares of Gulf of Mexico explorer Cobalt International (CIE) getting crushed.
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At one point in 2010 after the BP disaster, investors were able to acquire Cobalt shares for not much more than the billion dollars of net cash that the company had on its balance sheet. The market was pricing Cobalt as though the only value in the company was the cash on its balance sheet.
In addition to that cash, Cobalt had a deep inventory of large deepwater oil exploration prospects.
By buying Cobalt at little more than the cash on its balance sheet, all of those deepwater prospects were available for free. I had my free lottery ticket in the form of those deepwater prospects.
Since 2010, Cobalt has had several successful exploration well results and the share price has quadrupled. I sold the shares that I had owned in Cobalt in early 2011 with roughly a double from my purchase price. I should have held on longer.
I like this approach to investing, so I thought I'd try and find more "Cobalt like" opportunities.
In my search, I decided to look for companies with the following criteria:
1 - Companies that trade for little more or preferably less than the cash on their balance sheets.
2 - Companies that have in addition to their cash a "lottery-ticket" like upside and catalyst.
3 - Significant insider ownership.
4 - At least one shareholder that I am familiar with and respect to give me some comfort that someone intelligent has given the company a thorough review.
I came up with the three following companies that met my criteria:
Company #1 - HRT Participacoes
HRT Participações em Petróleo S.A. is an independent Brazilian oil and natural gas exploration and production ("E&P") holding company, formed by a group of senior geoscientists and engineers who previously held key positions at Petróleo Brasileiro S.A - Petrobras, and the ANP as senior geoscientists and engineers.
The Company's senior management possesses significant technical knowledge and operational experience in the Brazilian and Western African sedimentary basins as well as extensive environmental expertise in Brazilian onshore and offshore E&P activities and regulatory knowledge of the Brazilian oil and natural gas industry.
HRT believes it is one of the largest independent Brazilian E&P oil companies, measured by acreage, with a portfolio of exploration blocks of approximately 75,425 km² (18.6 million acres) in onshore blocks in the Solimões, Espírito Santo, Recôncavo and Rio do Peixe Basins in Brazil, and offshore blocks in the Walvis and Orange Sub-basins in Namibia.
Criteria One - Share Price Supported By Cash On the Balance Sheet
(Note that HRT's financials are in Brazilian Real)
Shares Outstanding - 295,412,000
Share Price - R$3.67
Market Capitalization - R$ - 1,084,162,000
Net Cash - R$ - 1,052,000,000
In American dollars, HRT has a market capitalization of $1,084,162,000 x .497 = $538 million
HRT's cash balance is virtually identical to its market capitalization. HRT meets criteria one.
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Criteria Two - A Lottery Ticket Upside and Catalyst
HRT has three main assets.
Asset 1 - Cash of R$1.05 billion that I referred to earlier.
Asset 2 - Onshore Brazil Solimoes Basin Assets that TNK-BP paid $1 billion to HRT for a 45% interest in. That would suggest that the remaining 55% that HRT owns could also be worth somewhere around $1 billion.
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Asset 3 - Offshore Namibia assets that reserve auditors estimate are prospective for 7 billion barrels of oil.
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Assets two and three are quite obviously my free lottery ticket upside.
The Solimoes Basin assets are actually onshore Brazil and contain a contingent resource estimate of over 500 million barrels of oil equivalent. HRT has made some significant gas discoveries here and if they can prove that the discoveries can be commercially developed it could be a significant catalyst.
The Namibian Offshore assets are prospective for over 7 billion barrels of oil and gas net to HRT. Now that is truly a lottery ticket! HRT is valued by the market at the value of its cash. Should a discovery in the hundred million barrel plus range occur, HRT is going to be a multi-bagger from here. HRT meets criteria number 2 as the size of these exploration targets are the lottery ticket and any successful exploration results the potential catalyst.
Criteria Three - Insider Ownership
HRT's founder, Chairman and CEO is Marcio Mello. He has his net worth and heart and soul tied up in this company.
He is fully aligned with shareholders and very motivated.
Criteria Four - Familiar and Respected Shareholder
I originally became interested in HRT specifically because of its largest shareholder Southeastern Asset Management. Southeastern is a well known and respected value investing firm with a track record dating back to the late eighties.