Today I want to recommend that you buy a hugely exciting oil stock.
I’ve been following HRT Petroleum (TSX: HRP) for the last 18 months. It’s an oil explorer run by a charismatic Brazilian who learned his trade as a geologist both here in the UK, and later at Petrobras in his native Brazil. And when it hit the market in 2010, his company was Brazil’s largest oil and gas flotation that year.
But this has been a tough two years for oil explorers. And a stock that was valued at over $7bn, is now worth well under $1bn. In fact, it’s trading below the value of the cash on its balance sheet!
Now, I’m not a gambler. Cash, bonds, defensive stocks – that’s my mainstay. But when I see a deal like this, and the odds are right, I’ll take a punt.
Here’s why I think you should do the same…
Why HRT has been hit so hard
On Wednesday I showed you the stock chart for HRT. Here’s the chart again.... and I wouldn’t blame you if you want to run a mile!
HRT’s decline from $10 to nearer $1
Source: Google stock charts
But as I also argued, what the market is telling us is more to do with the whole exploration sector – nobody wants to fund these guys. And that’s fair enough. Drilling for oil is an incredibly costly business today. Explorers are drilling deeper than ever before, and because the market hates the sector, it’s loath to re-finance further exploration after the money’s gone.
But I’m afraid the market has thrown the baby out with the bathwater on this one….
Two great reasons to buy HRT
First, there’s the cash. I’ve already mentioned that HRT has more cash than the company is trading at. That in itself seems feels like a good reason to invest.
Secondly, it’s operating in a hugely promising region. To explain why, I need to delve into a bit of geological history…
How 'Dr Go Deep' discovered his geological twin
Brazil is a fantastic oil frontier. You may remember BG hitting oil just off the coast of Rio in 2006. It was probably the biggest find in the Western hemisphere in the last 30 years. Petrobras also found massive oil and gas deposits off Brazil. And one of the main Petrobras guys behind the offshore projects was Dr Marcio Rocha Mello – he was known in the industry as 'Dr Go Deep'.
He argued (and has literally written the book) on deep-sea oil discovery in the region. Now here’s the interesting thing: he’s absolutely convinced that offshore Africa – Namibia to be precise – has the same subsea geological aspect as Brazil.
What Petrobras found off Brazil, he reckons is up for grabs off Namibia. The geological rationale is that originally Africa and South America were joined together. And though they’re now parted, they nonetheless share the same geological DNA. And Mello has found a way to get in on the offshore Africa project...
Having left Petrobras, Mello set up HRT, as an oil exploration consultant. He worked for the big oil majors, using the latest technology to help find oil. But not content with making money for everyone else, he found a way for HRT to get in on the act itself. He floated the company and took over a Canadian quoted company with massive exploration rights off Namibia.
And later this year, HRT starts drilling. I, for one, am very excited.
An exclusive report from The Right Side
This is more than a punt on African Oil
No doubt, an oil find off Africa will fire this stock into the stratosphere. But with the stock price as it is, I reckon you can get this ‘African lottery ticket’ for free. Let me explain...
You see, as well as its African pursuits, HRT also holds considerable exploration rights in the Amazon basin. They’ve got four mobile rigs and they’re busily exploring the Solimoes basin in Brazil. Only yesterday, they announced the results of another exploratory well. And they’ve found gas. In fact, they’ve already found loads of gas!
But nobody cares. These days investors want to see oil – gas is deemed useless. But this is an unfair prejudice. You see, US and Canadian investors are the big financiers for these sorts of projects. And for the North Americans, gas discoveries are considered practically useless. Technical innovation has led to a glut of gas production. All the old oil fields are being ‘fracked’ to death, releasing gas galore. Gas prices have crashed.
But here in Europe it’s a very different situation. Wholesale gas prices are nearly up to their 2008 highs. The problem is gas isn’t very mobile. You need a pipeline, or you need to invest in expensive kit that converts gas to liquid to be transported by specialised vessels.
The point is, in Brazil (like the Europe), gas isn’t changing hands at anywhere near North America’s $2 level.
And that’s great for HRT. In fact HRT have forged a deal with oil major TNK Brasil to develop these onshore fields. TNK has agreed to buy 45% of HRTs Brazilian assets for $1bn.
Now that figure is subject to HRT meeting certain targets – this is how these deals are always structured. But just think about that. If 45% of the Brazilian fields are supposedly worth $1bn, then HRT’s 55% share should be worth over a billion. But the market is putting a value of less than a billion on the stock. Then there’s the other billion or so it’s got in cash. Now do you see what I mean about getting the offshore Africa stuff for free?
This is a gamble….but it’s a great gamble
But let me remind you, this is still a risky bet. The market expects this company to run out of cash before it can bring on enough production in Brazilian oil and gas to keep them solvent.
And we mustn’t ignore that. This is a gamble. Know that your money is at risk. So don’t pile into this stock.
I could mention currency risks and dealing in foreign climes. But frankly that’s unlikely to be your big problem here.
In fact, probably the biggest risk may lie in the fact that this company is too cheap! The risk is that management could accept a low-ball takeover from a large oil co. Somebody like TNK BP perhaps? I would think that an offer of something like $3 might be acceptable to some.
Now, if you’re putting cash in at around a dollar today, I guess you won’t be too disappointed. But personally, my hopes for this stock are greater. Later this year they start drilling off Namibia – that is another exciting prospect.
How to buy this stock
HRT is traded on Canada’s Venture Exchange under the ticket HRP. Any decent stock broker should be able to deal for you. If you have any problems, try Redmayne Bentley. Ring Rob Kilner on 0113 200 6449 to find out details of their service.
Note: Fleet Street Publications Ltd receives commissions from accounts opened with Redmayne Bentley.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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