Harvest Natural Resources (HNR)

[Eric50]

 

Any of you still hold some HNR? It's a business that was discussed on this board in the past. I think it's still one of the best oil play that I can see and I'm thinking about buying more on weakness:

 

- Currently trades at $4.60 with $2.36 of net cash (no debt) and almost $10 of proved PV10 (with barrel at $70);

- Management seems to be honest and reliable;

- They are diversifying away from Venezuela but the country risk is weighting heavily on the stock price (it surged in the next couple of weeks after Obama's meeting with Chavez, but has declined since)

 

I'd like to hear any contrarian opinions.

 

thanks

Eric

 

http://files.shareholder.com/downloads/HNR/665602190x0x301024/193fb825-00be-437e-ba9f-25a486ac92bd/EnerCom%20London%20HNR%20Presentation%20June%2011%20%2009%20final.pdf

 

 

[rogermunibond]

I think there are 3 ways for HNR to work as an investment:

 

1) Price of crude rises to $100 over the next few years.

2) Market rerates risk premium for Chavez/Ven. nuttiness

and fully values Ven. proven and probable reserves

3) 1 or more E&P project hits paydirt

 

#1 and #2 are very unlikely in my estimation.  Leaving #3 the most likely route.

For most of 2008 HNR mgmt was talking up Harvest Hunter

#1 well in Calcasieu Parish, Louisiana.  This turned out to be a dry hole.

 

""Harvest drilled the Harvest Hunter #1 exploratory well in Calcasieu Parish, Louisiana

in the fourth quarter of 2008 and undertook a testing program to evaluate three prospective

reservoir horizons. On January 9, 2009, the well was determined not to be commercial and was

plugged and abandoned. The cost of drilling and testing the well was $10.8 million and

was written off to dry hole costs at December 31, 2008.""

 

$10.8 million is not insubstantial.  With all Ven. cash flows going toward capex to expand

El Salto etc, HNR has only so many chances at striking paydirt before they have used up their

cash dividend from Ven.

[prevalou]

the problem is to repatriate capital. HNR value depends heavily on this simple fact.

[oldye]

extremely poor capital allocation

[Eric50]

thanks guys

[rogermunibond]

The HNR thesis has played out pretty well.  Following the company's success in Utah, they have sold out to Newfield.  Exploration plays in Indonesia, Gabon, and Oman still to play out.

 

http://www.reuters.com/article/2011/03/22/harvestnatural-newfield-idUSL3E7EM1U820110322

[Guest Dazel]

 

It was our biggest winner last year...bought at $13.50....all the way down to $3.75...sold out the last at $13.30...so we missed the latest

move but very happy for those who waited....it was long process on our part but that is investing.

 

Dazel.

[JRH]

 

It was our biggest winner last year...bought at $13.50....all the way down to $3.75...sold out the last at $13.30...so we missed the latest

move but very happy for those who waited....it was long process on our part but that is investing.

 

Dazel.

 

HNR disclosed accounting problems yesterday, after the Venezuelan asset sale fell through a month ago, as well as that their auditors will identify a "going concern" risk due to their liquidity position (they were probably counting on the sale). 

 

I owned them a few years back and my impression of the management team from that time is that they are straight shooters.  I have DD to do but the market reaction since $9/share a month ago may be overly pessimistic.

[Josh4580]

http://finance.yahoo.com/news/harvest-natural-resources-provides-operational-101300509.html

 

Harvest Natural Resources Provides an Operational Update

 

Financial Reporting and Control Issues

 

During the December 31, 2012 year end audit process, the following material weaknesses were identified.  Due to these weaknesses, the following errors were identified and adjustments will be made in current and previous SEC filings:

 

•In certain areas, the Company did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our financial reporting requirements.

•The Company did not maintain effective internal control over the accuracy, valuation and application of generally accepted accounting principles related to the capitalization, classification and impairment of certain costs related to oil and gas properties.

•The Company did not maintain effective controls to provide reasonable assurance that journal entries were appropriately recorded or that they were properly reviewed for validity, accuracy and completeness.

•The Company did not maintain effective controls over the preparation and review of the statement of cash flows.

•The Company did not maintain effective controls over significant and complex debt and equity transactions.

In connection with the preparation of our Annual Report on Form 10-K for the year ended December 31, 2012, the Company concluded that there were errors in previously filed financial statements.  These errors are outlined below:

 

•Certain warrants issued in 2010 in connection with our $60 million term loan facility (the "Warrants") were improperly valued at inception and improperly classified as equity instruments rather than liability instruments. As a result of the improper classification of the Warrants, the debt discount and associated interest expense related to the amortization of the debt discount was understated for all periods in which the associated debt was outstanding. Additionally, the consolidated statement of operations and comprehensive income (loss) for each reporting period was misstated by the omission of the changes in fair value of the Warrants as a liability instrument.

•As a result of the errors related to the Warrants described above, loss on extinguishment of debt was understated for the year ended December 31, 2011 and the quarters ended June 30, 2011, September 30, 2011 and December 31, 2011.

•Certain exploration overhead was incorrectly capitalized to unproved properties, which under the successful efforts method of accounting should have been expensed, and certain leasehold maintenance and other costs were improperly capitalized to oil and gas properties, which under the successful efforts method of accounting should have been expensed.

•In addition, advances to equity affiliate were improperly classified as an operating activity rather than an investing activity and certain costs were improperly classified as an investing activity rather than an operating activity on the consolidated statement of cash flows.

•Additionally, an error was identified in the calculation of earnings (loss) per diluted share for the year ended December 31, 2011 and the quarterly period ended June 30, 2011.

•The Company will also correct the financial statements for previously identified immaterial errors and an income statement reclassification between exploration expense and impairment of oil and gas properties for the year ended December 31, 2011 and the quarterly period ended September 30, 2011.

•An additional error was identified related to the improper expensing of costs associated with debt conversions that should have been recorded to equity for the quarters ended March 31, 2012 and September 30, 2012.

Any adjustments made related to the above issues will have a non-cash impact to the Company.

 

The Company is also evaluating the permanent reinvestment assertion related to certain tax matters.  Many of these corrections are period to period adjustments and will have a non-cash impact to the Company.

The Company intends to file amendments to its quarterly reports on Form 10-Q/A for each fiscal quarter ended March 31, 2012, June 30, 2012 and September 30, 2012, which will also include amendments to the quarters ended March 31, 2011, June 30, 2011, and September 30, 2011. The Company intends to restate its financial statements for the Restated Periods in the 2012 Form 10-K which the Company currently expects to file with the Securities and Exchange Commission as soon as reasonably practicable to correct the accounting treatment for the items discussed above.

 

On an absolute dollar basis, none of the adjustments made to date are material.   However, because our net income (loss) in some periods was close to a breakeven point, on a quantitative basis as a percentage of net income (loss), the adjustments are considered to be material.

Going Concern

 

The Company's financial statements for the year ended December 31, 2012 have been prepared under the assumption that Harvest will continue as a going concern.  Our audit report will include an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

 

 

It seems that these are all non-cash issues and not material to the company or net income

 

If so, there should still be some decent value here given Pertima wanted to buy the Petrodelta assets for $750 million.

 

Any thoughts?

[JRH]

It seems that these are all non-cash issues and not material to the company or net income

 

If so, there should still be some decent value here given Pertima wanted to buy the Petrodelta assets for $750 million.

 

Any thoughts?

 

HNR has/had two problems:

 

1) Liquidity since the asset sale was cancelled

2) Notice of accounting misstatements

 

I love situations like this because the capitulation of holders in situations with multiple issues is often much greater than the sum of capitulation that would be caused by either individual issue.  In other words, you can get extreme price overshoots to the downside if you're lucky (and if you're lucky enough to know better than the market).

 

At a glance, it looks like #2 MIGHT not be an issue (non-cash charges certainly helps, for what it's worth). 

 

I haven't done the research on #1.  You can say the book value is X based on the sales price for their assets that didn't go through, but that's not even remotely the same thing as saying equity ends up worth X in an actual bankruptcy/liquidation scenario.