Saturday, July 14, 2012

My current thoughts on Harvest Natural Resources

On June 21nd a deal was announced with Pertamina (controlled by the Indonesian government) which almost doubled the stock as I predicted. I sold half my shares and I am waiting for a better price to sell the rest. All that is really needed is approval from both the Venezuelan and Indonesian governments. The deal wouldn't have gotten as far as it has without support from both governments so I see a high probability that the deal will be consummated for approx $12 per share.

A couple of individuals, which I have great respect for their opinions, have argued that if the sale is consummated management will not use the proceeds wisely.  They believe that management overpays themselves; the sale of the Utah assets was too cheap; that the proceeds from that sale were wasted in Indonesia and Oman; and that the proceeds from the Venezuelan assets will likely be wasted too.  I do not agree.

When I read the proxy statement I see management that is compensated in accordance with industry averages.  I agreed with the decision to sell the Utah assets because the company was asset rich and cash poor and the proceeds received were reasonable in my opinion.  I also agreed that the risk/reward scenario was attractive in Oman and Indonesia.  No one would be complaining if any of those four wells was successful.  A particular sore point for critics was the two Indonesia wells that were well over budget and both failed to reach the primary Miocene objective.  Tately Budong Budong was the operator of those two wells for political reasons despite Harvest Natural Resources' 64.4% interest.  In a conference call, CEO James Edmiston stated that Tately Budong Budong had "massively underperformed" and I understood him to say that all future drilling in Indonesia with Tately Budong Budong as the operator would be restricted to the shallower Eocene targets.

No comments:

Post a Comment