up to 1.20 from 1.10Market Overview - April 4, 2014
HRT - Raising Fair Value Due to Octopus - Keeping
Underperform
Brazil - Posted on April 3, 2014
Paula Kovarsky , NCIP - Diego Mendes , NCIP & Ricardo Paranhos , NCIP
We are updating our fair value for HRT the end of 2014 to R $ 1.20 / HRTP3 , compared to R $ 1.10 / previous HRTP3 , and maintaining our underperform recommendation ( below average performance of the market) . The increase in fair value reflects our new premises for the Polvo field , based on the D & M published on April 1 . The report indicates 1P reserves higher than expected , at 9 million boe , and lower costs. Our underperform recommendation , however , remains unchanged , despite the potential for relatively high valuation . Octopus and as a field in depletion , HRT need to drill additional wells to successfully be able to access the 2P and 3P reserves of the field , which are necessary to slow the depletion. Furthermore , we see HRT as an investment risk due to cash generation falling Company and the significant relevance of their investment decisions and movements in mergers and acquisitions ( M & A , its acronym in English ) for the survival of the thesis . Governance remains a point to monitor.
The production of the Polvo field should last until 2017, based on nine million boe of net volume of 1P reserves of HRT , number that exceeds our previous estimate of 6.4 million boe . We stress, however, that this includes 4.2 million boe in reserves not developed to be monetized , which will require drilling of at least one well (scheduled for 2014 ) . The analysis of D & M also indicates that the probable and possible reserves , net to HRT , totaling 5.6 and 3.6 million boe , respectively , adding a net 3P reserves of 18.2 million boe and providing an increase in our numbers . However , do not believe the market will price it before drilling of wells required to develop reserves 2P and 3P , 2015.
Opex and Capex came below our estimates . Our previous estimates were based on data available in the industry , which indicated an opex of $ 135 million per year liquids to HRT , while the D & M assume about $ 100 million per year. While this represents a positive sign , HRT does not provide historical data to permit comparison and sustain cost reduction that is being sought by the company. In our opinion , the D & M already priced in the current cost-cutting initiatives . The results of the 1T14 ( the first to consolidate the numbers of octopus ) will be therefore very important for the market to assess the consistency of the costs included in the report of reservations with the actual numbers . Conservatively assume one opex capex and 15 % higher than the numbers of D & M. Based on the data of D & M , our fair value would increase by $ 0.30 / HRTP3 .
HRT also released the new reports of reserves for the prospects in Namibia and Solimoes . Since the last report of D & M two years ago , the exploration campaign in Solimoes from HRT and Namibia produced no commercial discoveries . Thus , the numbers were revised downward, to reflect the campaigns of exploration so far frustrating ( Namibia by 37% to 4.6 billion boe , and Solimoes in 33 % to 647 million boe - 3C + Prospective ) . Estimates Neither of these was considered on our consolidated basis if due risk therein involved
The D & M revised its projections for Namibia based on data collected in three wells drilled in the region . HRT is still trying to unlock the supposed potential of the assets of Namibia , and is currently looking for a farm -down to fund its exploration campaign . Namibia remains a frontier exploration not proven , why should anyone pay when we believe .
The lowest estimate of the volume for the Solimoes Basin is due to writedown of prospectuses classified as economically unviable after drilling the first wells , however does not take into account the sale of a 6% stake to Rosneft . It is worth noting that only 22 % of the estimated volumes consist of oil and condensate , which is a risk , in our opinion . HRT continues to work on a possible route for gas monetization of Solimoes , however was not announced any definitive solution so far .
Furthermore , even if a route is found , we believe the HRT may not have the necessary resources to implement the project . In other words , the risks are also too high for it to be possible to assign any value to the blocks in the Solimoes Basin .