I was in on the conference call this morning and here my (generic) 2 cents on HRT: Look forward to comments.
There you have it: complete market indifference in Brazil for HTRP3 value, not much different than any other day. Probably rightfully so if you have been burned in the past by the likes of HRT, OGX and even PBR: one might have lost interest.
In my opinion HRT will only regain traction at BOVESPA (and thus in the US/Canada) if they actually have something to show for as a money generator: Polvo to the rescue!
But it will require HRT keeping their head down, spend the minimum possible and produce cash via production and not asset sales (as 2013). There is only so much you can sell.
We know roughly the revenue they could generate in 2014 from production, have a rough idea of 2013 OPEX but the big unknown for 2014 is in my opinion the FPSO leasing cost from BW Offshore. You either have to pay up ($60-90 million a year?) or sell/transfer yet some more assets. An analyst queried this and was told that this information would be available at the next conference call for 1Q14.
I don’t think there is lack of opportunity for BW’s FPSO in Brazil or anywhere else for that matter. If BW has to, I’m sure they can take their FPSO somewhere else. I think HRT will have to pay current market day rates or "give" something in exchange as planned (30% of the Polvo field.
On OPEX reduction: a comment by HRT’s CEO was to reduce personnel cost as the former BP employees had generous Corporate Benefits which HRT will not provide. I think you can up reduce these cost up to a limit as in Brazil everybody is competing for the same human resources. People do frequently change jobs because the “grass is greener” at the neighbors. If they want to keep their key know-how (Solimoes and Namibia) and maintain experienced Polvo operators, HRT most likely need to maintain what these people “make” today. Running Polvo with “cheaper” and/or “non-experienced” operators can only increases the risk of reduced output.
But I agree, if you take out the benefits and obligations in Brazil on salary (typically 100% of salary), spending R$168 million / 2 = R$ 84 million = approx. US$35 million on 197 personnel or US$177,000 avg per employee seems a lot of money.
Solimoes:
Say 5 to 7 years away for first gas? Top of my head: Petrobras Urucu to Manuas pipeline (600 km) took about 4 years from the go-ahead to first gas, not to mention a few years for planning.
Namibie:
If just one of the “majors” could find some commercial viable oil: it would certainly up the recognition for HRT and the stock value.
Today’s Value:
Since there was hardly any change on HRTP3 in Brazil (R$ 0.93) and with strengthening of the Real vs Dollar (2.26) the HRTPY value should have been closer to US$ 0.207 so being 10% off seems to be a bit off the mark.
A Buying opportunity?
Where do I think it should be after 1 year:
10,600 bpd (avg Jul 2013-Dec 2013) x 60% x US$80/barrel x 365 = approx. US$ 186 million
Opex (2013 expenses for simplicity): R$ 314 million or approx. US$ 136 million
At a lonely 10% profit margin: US$ 18 million gross profit / 298 million shares at a P/E of 10 (if and when HRT get some credibility) stock value: US$ 0.60
At the high end: US$ 50 million gross profit / 298 million shares at a P/E of 10 = US$ 1.70
Keep in mind that Polvo A platform and the FPSO were sized for larger volumes: running any installation at 30% capacity is highly inefficient. According the conference call there are plans to drill 2 wells at US$35 million cost each. If Polvo can increase output only marginal say 50%, I don’t think OPEX will follow at the same rate, improving the balance sheets considerable.
In conclusion: if you bailed out today, it possibly might have been maybe premature. I certainly have not.
Conference call on 1Q14 will give us the first insight.
BVE
