Found this on a blog for Byron King newsletter on HRT which is very informative and just strengthens my excitement on HRT hitting oil in Namibia. Enjoy reading!
November 27, 2012
HRT Petroleo: ¡Esto Es Noticias Fantasticas!
Dear Outstanding Investments Reader:
Are you sitting down? Did you take your heart meds? Are you ready for some good news? Do you speak Portuguese? Because... ¡Esto es noticias fantasticas!
Oh, yes... in English: "This is fantastic news!" Blame it on Rio! It's about HRT Petroleo (HRP: TSX-V). It's what we've been waiting for. It's like Pele taking to the soccer field and scoring another goal. ¡Pele raya otro objetivo!
A Year (and More) of Living Dangerously!
First, let's review -- because frequent OI readers know how much I like to review things. We've had HRT in the OI portfolio for not quite 18 months, since June 2011. After three months, as the leaves turned gold in the fall of 2011, I was wearing a scratchy hair shirt. That is, not long after I recommended HRT, in the summer of 2011, its share price tumbled from the $9 range to... well, low.
The bottom line is that we had a tough year with HRT, from 2011 through 2012 -- up to now. It was tough, that is, unless you're one of those short sellers who made money by betting that HRT wouldn't live up to its potential. Oh, yes, the shorts had a nice walk to the bank.
I'll own up. Full disclosure. You can handle the truth, right? HRT shares drifted down so low that last August, the share price broke a buck one day. Ugh. A "penny stock," so to speak. In OI? I'm sorry. I'm very sorry. It was bad timing for early buyers. And yes, I got your memos and emails. Many of them.
I am, of course, an adaptive newsletter writer. I'm capable of learning. Did I totally blow the call on HRT? Well, I like to think that I follow the facts. So what did I miss?
Early this year, I visited Houston and reviewed HRT at its U.S. office, from top to bottom. I met and shook the hand of every employee on the HRT team -- from the chief geologist to the front desk receptionist. I looked at everything with a critical eye.
Also, as part of my penance, I sentenced myself to read Internet chat boards for HRT. What were investor-commenters saying? Hey, some of that third-party commentary about me was, on occasion, utterly vicious. OK, I get it.
But then again... I told OI readers, from the very first day, that HRT is a pre-production, pre-operational play. That is, HRT is an exploration idea. HRT holds acreage onshore Brazil and offshore Namibia, but it doesn't have vast fields of producing wells -- not yet!
So no, HRT is not the usual OI sort of company that finds its way into the newsletter. There's no established business, ongoing production, sweet cash flow and Big Oil profits.
If, as an investor, you're not tuned into this level of pre-operational risk, then HRT is even a dangerous sort of play. Not to put too fine a point on it, but one can lose a lot of money by moving in and then panicking out. (Of course, I never recommended selling HRT shares, even during the worst of times. If you sold, it was never my idea.)
Look at it another way. With no current sales of oil and gas, the investment nature of HRT was NOT the typical question for investors -- of how badly any company's executives can waste perfectly good cash flow, as is the case with many other firms that inhabit the stock markets of the world. I always told readers that HRT was/is a risky idea, out at the edge of the risk envelope. I never said otherwise.
And what else? I told readers the full HRT story. If you followed what I wrote in this newsletter, I discussed the problems as well as the potential for HRT to find immense new oil and gas discoveries in Brazil and offshore Africa.
Of course, HRT has to drill its wells in the right places, no? Come to think of it, we all have to drill our wells -- of oil, not to mention life -- in the right places.
The Marcio Story
Speaking of telling the full story, along the way, I described the CEO of HRT, Marcio Mello, who is, quite simply, one of the world's great oil finders. That's a fact.
I told OI readers about how Marcio has a Ph.D. in geochemistry, worked for Petrobras (PBR: NYSE) for over 25 years and ran the Petrobras Research Center in Rio de Janeiro. I described how, in 2001, Marcio literally wrote the book on oil exploration in "passive" tectonic settings -- entitled Petroleum Systems of South Atlantic Margins.
I explained how Marcio's "drill deep" theories led Petrobras to spend over $240 million (no typo) on just one well (only one!) targeted at the vast "pre-salt" play offshore Brazil. And I told you how that particular well -- named "Tupi" -- found 8 billion barrels of oil and opened up an entire new energy frontier.
So I've been telling this story, about Marcio and HRT, for a long time -- about four years, actually. I first related the Marcio story in 2009 in my other newsletter, Energy & Scarcity Investor. Many ESI readers made excellent gains (and some made life-changing gains) on another company that Marcio advised, the former UNX Energy, which is now part of HRT.
Really, Marcio is impossible to keep under wraps. For example, I helped arrange getting Marcio to a major international conference on Peak Oil in Denver in 2009. He was... let's say... controversial. Certainly to that audience.
Then I brought Marcio to the Agora Financial Conference in Vancouver in 2010, where he brought down the house with his comments on the BP (BP: NYSE) well blowout in the Gulf of Mexico. And Marcio was in Vancouver in 2011 and 2012 too.
At each Vancouver session, over 1,000 Agora Financial attendees, exhibitors, newsletter writers, media and more heard Marcio give his ebullient pitch. Were you there?
Something Big Is Coming!
And needless to say -- but I'll say it anyhow -- I've written about HRT and Marcio here in OI. I’ve told you what I know. I’ve explained things as best I could.
Then last summer, as the HRT share price hit bottom, I threw my credibility chips onto the table. "What's Going on With Our Brazilian Oil Company?" I asked Aug. 15, 2012. And I answered my own question by explaining how something big was in the works with HRT.
Heck, last August, I was downright optimistic. In my Aug. 15 article, I showed you slides of some of the geophysics from offshore Namibia. I showed you outlines of immense oil-bearing structures. I discussed geology and geochemistry. I mentioned the phenomenal HRT team of geologists, geophysicists and engineers.
Last summer, I explained HRT's lease with Transocean (RIG: NYSE) for a modern, deep-water drilling rig named Transocean Marianas. I wrote about HRT's four-well program to test a group of exceptional prospects offshore Namibia. I described how drilling is scheduled for the first quarter of 2013 -- as in about six weeks hence.
A couple days later, on Aug. 17, I described HRT as "cheap risk, big reward." I explained the HRT story in the context of big-picture resource investing.
Oh, and for the past several months, in the "Five Hot Picks" section of the OI monthly newsletter, I've given honorable mention to HRT. Yes, HRT is risky. And it's risky for me -- as a newsletter writer -- to pound the table so hard over HRT.
But then again, and as I've said on more than a few occasions, I believe that the downside has been slapped out of HRT shares. Thank you, short sellers. So now there's upside. But. It's. Risky. OK?
HRT Has a Partner!
So what's the news? Why did I ask if you're sitting down? Why am I nearly ecstatic? Why am I revisiting the painful moments of the past? Because HRT just announced a deal to partner up with a key player in the international exploration biz -- Galp Energia of Portugal.
Galp will participate in drilling three of the four wells offshore Namibia, essentially covering HRT's costs (up to an as yet undisclosed cap), for a participation share of 14%. I believe that this is a FABULOUS deal, as I'll explain in a moment.
First, let me address something that may be coursing through your brain. Why Galp? Portugal-listed Galp has a market capitalization of about $12.5 billion. Galp isn't a huge oil company as oil companies go. Galp is far from oil giants like Exxon Mobil, Chevron, Shell (RDS-B: NYSE) or Total (TOT: NYSE). But don't be fooled by size.
The big guys ALL had a chance to review the HRT data. Over 30 oil companies -- including virtually all of the household names -- signed confidentiality agreements and reviewed HRT's Namibian play. Many of them offered terms to HRT for a partnership agreement. Galp offered the best deal for HRT and its shareholders. So that's why Galp is the partner.
Let's Look at Galp
Galp works in and around the Iberian peninsula -- Portugal and Spain -- as befits its home base of Lisbon. Galp also operates in what I characterize as the "gold coasts" of Southern Hemisphere energy frontiers.
Start with offshore Brazil -- not too shabby, eh? -- where Galp was a partner with Petrobras in that above-mentioned initial Tupi pre-salt discovery just a few years ago. Impressive, yes? Right place, right time, no? Then again, there are no accidents, comrades. Corporately, Galp understood how to be exactly in the right place at the right time.
Galp also operates offshore Venezuela and Uruguay, in South America. Uruguay? That's mighty intriguing, especially considering the plate tectonics that may have emplaced more of that pre-salt and oil offshore, directly across from... you guessed it... Namibia.
Right now, in Africa, Galp operates offshore Angola, Cape Verde, Guinea-Bissau, Equatorial Guinea, Gambia and -- as of late -- in the stunning new hydrocarbon province that just opened up offshore Mozambique.
Galp seems to have a knack for being where drilling rigs find oil. Funny how that works. And with the HRT tie-up, Galp is now moving into Namibia. It's meaningful.
The Portuguese Connection
What else can we make of Galp? It's fair to say that Galp is a fast-growing company with a keen eye for making success happen. Galp goes where other companies have not accomplished anything or took too long to recognize opportunity. In fact, Galp has strapped into exploration risk in new frontiers unlike just about any other company in its peer group.
In terms of exploration, Galp goes where many larger firms (aka "Big Oil") fear to tread. Actually, the big guys kind of like it when small players like Galp find that first oil with some crazy, super-risky, off-the-wall wildcat well.
The big company guys hate to explain to Wall Street and London analysts why they took a risk in some Godforsaken frontier in lower south Succotash and drilled a few dry holes. The big guys leave such things to the Galps of the world. Then later, they come in and piggyback on someone else's success.
Oh, and Galp is just now starting to see the rewards that come with its astonishing exploration success. So here are a few take-aways respecting HRT's deal with Galp:
Galp is paying a large chunk of the upfront drilling expenses for three (out of four) offshore wells. It's excellent risk sharing by the HRT team. The financial arrangement allows HRT to husband its cash for other things -- like continuing with developments in the Solimoes Basin of Brazil. All for a modest 14% share of the three Namibian concessions to Galp, which leaves 86% for HRT -- a lot still on the table
Galp is "small" enough that there's a low probability of the Portuguese company trying to overwhelm HRT -- as if Marcio & Co. can be overwhelmed. Still, the Galp relationship means that the HRT Namibia wells will receive top-level management attention at every stage. Yet Galp is also large enough to have deep pockets and lots of deep-water experience, so both the money and the bench of manpower are there
Galp has established a remarkable, respectable niche in deep-water exploration for frontier plays in the Southern Hemisphere, certainly with big boy Petrobras and in the Brazilian pre-salt. That is, Galp can work with big-time oil companies, deal with South American and African governments and generally play at the varsity level in the oil biz. So this is a deal that's already turning heads! Indeed, one of my Big Oil contacts emailed me last night, "I never saw this coming" -- which he meant as a high compliment
Galp is well acquainted with the technical challenges of deep-water exploration and development. Indeed, Galp's geological approach to deep-water exploration appears to jive to an astonishing degree with what we've seen from Marcio over the years. Maybe it's something in the Portuguese-speaking mindset?
As I said at the beginning of this note, the Galp tie-up is fantastic news! It's a key development for HRT. The Galp partnership -- and the third-party funding it brings to the table -- adds an entire layer of legitimacy (and "other peoples' money") to everything that HRT has accomplished.
Let's do some blue-sky math. Let's say that a three-well commitment obligates Galp for $200 million -- which is my raw speculation, because I do NOT have any information from HRT about exact numbers. Right now, the details of the HRT-Galp deal are proprietary.
In return for teaming with HRT, Galp is getting 14% of the play, or about one-seventh of three concessions.
So hypothetically, the "value" of this Namibian play is seven times $200 million, or $1.4 billion for the three-well program. And that doesn't include the fourth well, yet to come. Plus, it doesn't include any value for the spectacular natural gas finds that HRT has in Solimoes, in Brazil. Oh, by the way, the deal will be worth a LOT more in the event that HRT-Galp finds oil!
Meanwhile, HRT has a market cap of about $600 million, considering the Brazilian and Canadian share structure. So as of the close of business on Monday, HRT is "undervalued" by about half.
These are just speculative, arm-waving numbers, remember! But all of this ought to get you thinking about the size of that risk-reward play for HRT. Right now, the HRT Canadian-traded shares are dramatically undervalued, if you put any faith at all into the Galp deal.
And yes, HRT-Galp still must still drill wells and find oil. That's hard, not easy. So there's plenty of risk in this endeavor. Despite my evident enthusiasm, I must still offer the entire array of cautions. Consider yourself warned!
But if you're game to risk investment cash on an oil play with all the right moving parts and a huge upside? This is your chance to make a play with HRT. Take some money that you can "afford to lose," as the saying goes, and perhaps the return from HRT could change your life.
One of the Great Energy Plays of Our Time
Looking ahead, when those Namibian wells go down, we're about to witness one of the great energy plays of our time. Namibia -- with a coastline longer than that of California -- is about to test key areas of its offshore oil frontier. We're looking for a Brazil-style, pre-salt analogue. Is there oil and gas out there? Hey, we're going to find out in the first half of 2013, and it could be really, really big.
This kind of news makes my day. Heck, it makes my week! Maybe I'll just take the rest of the month off! Voy de vacaciones, eh? Actually, I have other commitments, and I'll fill you in about everything later on. 'Cuz I'm going down to Texas for a spell.
For now, thanks for subscribing to OI. Have a good week. Think about Namibian oil.
Sentiment: Strong Buy
There was a lot of positive buying last week pushing PPS to $1.40....possible another farm-in for 4th well in Namibia coming soon???? I like the probability of success here based on seismic data and CEO Mello's experience in finding oil in his past with Petrobas! Next couple of weeks should be interesting!
Sentiment: Strong Buy