So What Is HRT Worth? Below are some facts about operations and projections from the best available information. If you have more to share, I would appreciate your input.
Before the last announcement, many speculated that HRT was essentially trading at its cash equivalent. Assuming $0.45(US) to $1.00(R) and a two for one position on the stock (each Brazil share represents two US or CA shares), the cash value of HRT as of 03/31/13 was about $0.63 (US). [First Quarter report Pg 12 - $829M (R)/590M shares X $0.45(US)]
In the quarter ending 03/31/13, HRT burned $237M (R), of which $174M (R) was on drilling. [First Quarter report Pg 12] In the second quarter, HRT was completing HRT11, and we can assume they also were into the same level of seismic ($34M (R)) and corporate ($25M (R)) expenses. Since GALP is reportedly paying almost the entire Namibia load for the three well campaign (based on today’s e-mail update from BK), I would expect the second quarter burn rate to have fallen to about $150M (R), which will leave about $679M (R) as of 06/30/13. [US cash apx. value per share $0.52]
If HRT follows through on the announced austerity program (i.e. no more drilling in Brazil), cash from the Russians and cash for the air support system, the quarterly burn rate will likely fall to $50M (R). If we assume further that Polvo closes and HRT uses its $400M (R) in tax credits to offset operating Polvo profits, we can expect annual Polvo tax free earnings of $100M - $130M (R) as free cash flow annually effective 01/01/13. On that basis, HRT can continue to operate 4-5 years without material debt. These numbers yield a projected 12/31/14 cash position at about $0.49 (US) based on Polvo generating $130M (R) annually. [In my initial Polvo assessment, I estimated that it would take 2.5 to 3.0 years to pay it off. That equates to $100M-$120M (R) of free cash flow per year with no improvements.]
Assuming a five year note with Credit Suisse, the cash flow from operations work though the third or fourth quarter of 2018, and if the quarterly burn rate only falls to $200M (R), the numbers work though the third or fourth quarter of 2017.
I know that many of us were looking for BEEGGGGGG oil or a gas monetization plan yesterday. While that would be great, HRT’s BOD actually has much longer to make that happen when considering simple cash flow. If during that time frame, HRT can farm out properties (i.e. drilling with OPM), HRT may develop its 18.6 million acres without a negative cash flow burn. Additionally, gas monetization is no longer a question of will it be in place next year to keep the doors open, but rather, we can use the appropriate amount of time to develop the right plan with the right partners.
We still have at least one lottery ticket off Namibia for 2013. If it hits, each 100M BOE should be worth about $1.00(US) per share. If it doesn’t, you can either wait for operations to catch-up or sell for cash when the market recognizes that HRT is trading at less than cash.
In the end, prudent cash management means cash support through the third or fourth quarter of 2018. I believe that anyone who suggests we are going under soon is either a fool or a liar.
Hold tight, we still have one more major turn on the 2013 rollercoaster, and I am hoping it makes the entire ride worth the while. If you have friends or family who have not gotten on board, Motley Fool said today that now is the time.
GLTA