CS Broker Note-
HRT Participacoes S.A. (HRTP3, Neutral, TP R$4.3/sh)
Dry, and subcommercial
Dry, and ‘dry’. After the 11th well in the Solimoes basin and the first one in Namibia, little comfort can investors get from HRT well results. HRT-11 was a dry hole, despite being drilled with new seismic and located on a supposedly oilier region within the Solimoes. In Namibia, Wingat found oil but in no commercial quantities. HRT is ‘pleased’ with the results and says finding two well-developed source rocks bode well for its Namibian efforts, which will continue with two other wells (Murombe, the next one, will be spud end of May). Namibia is frontier exploration and requires patience to be opened, a quality which the equity markets do not possess.
Wingat vs Kabeljou. On September 10th 2012, Chariot shares fell 66% after results from the Kabeljou well. We do not think the HRT price reaction will be as extreme (Chariot shares were significantly above cash prior to the well, HRT shares are not), but we find similarities in the two releases. Both cite a less-developed reservoir than anticipated as key reason for subcommercial volumes of hydrocarbon. Both cite developed source rock as key positives. HRT has frequently mentioned the key uncertainty in Namibia is the potency of the source rocks to fill the reservoirs. It seems the source rocks are there. Let’s hope the reservoirs will be, too.
Is there a ‘floor’? HRT’s high-impact value creation proposition lies mostly outside the company’s balance sheet. If exploration does not work, the balance sheet matters as it gives investors reference of what the company would be left with in the event it does not monetise oil or gas in Namibia / Solimoes. And here, HRT not having debt is an asset. Taking a closer look at the balance sheet, we conclude that below R$2.5/sh, there would be interesting optionality to allow HRT to spend most of its cash for exploration to work-out. We see R$1.6/sh from Polvo, helicopters held for sale, guaranteed deposits, and other hard assets sold at 50% of book value, minus R$0.5/sh from working cap and Tuscany claims, and R$1.2/sh from ‘residual’ cash and monetisation of existing tax losses. Monetisation of the $1.4bn intangibles in the balance sheet via writedowns and tax-losses benefits could add R$1.6/sh, and a preliminary view of monetisation of Solimoes gas further R$1.0/sh.