An exciting, risky punt on energy
One of my favourite energy stocks is Brazilian explorer HRT (traded in New York, Canada, and Brazil – you can see my earlier article here). Now, before I explain HRT's merits, please be aware that this is a high risk investment. It's an explorer… as of yet, there's no production… and hence, no cash flow. But if (as I expect), things go well, this stock could provide cover on the three fronts I've just talked about.
The first point is that HRT is currently drilling one of the last great frontiers in the traditional offshore oil industry in West Africa. The world desperately needs more traditional, low environmental impact oil production.
Shareholders have waited a long time for HRT to begin the Namibian campaign. But as you read this, the drill bit is turning. HRT is in the middle of drilling the first of four wells. Right now, it's just over 2,800 metres down… and it's going to 4,600 metres. According to the independent oil certifier Degolyer & MacNaughton, there's a 24% chance of hitting 1.3 billion barrels. The next three wells have a similar chance of success, but with even more oil potential.
The second point about HRT is that it's also pursuing unconventional energy. HRT has been drilling Brazil's Amazon basin for the last couple of years. And though they haven't found any oil, they have found a lot of natural gas.
Now, gas in the middle of the jungle is of limited use. But it was interesting to see an interview with HRT's CEO, Marcio Rocha Mello, this week. He gave a little bit of detail about how he intends to get this energy to market. He's been looking into new technology which converts gas to liquids. Mello suggests that a small gas-to-liquids plant can produce about 4,000 barrels of diesel fuel per day for about $68 a barrel. And there is fantastic demand for diesel in the region.
HRT has gas practically spewing out of the ground and is recoverable for $2, or $3 per British thermal unit (BTU). Converting the gas to liquid fuel will cost something like $68 – and it currently sells for $116. Clearly, there's money to be made in this side of the unconventional oil and gas industry.
Like Mario Rocha Mello, David Stevenson is fixated on the difference between a good and a great unconventional gas play. Mention the subject to him and you're likely to get an earful on surfactants, wellbores, gelling agents and the like. He's found a way to play it that he thinks is the "trade of the decade"… and you know what, he might have point. Click here to judge for yourself.
The idea of turning jungle gas into diesel is exciting… but the third reason I like HRT is that it is, at heart, an oil exploration company. Mello revealed this week that HRT will be bidding in the first new oil auctions in Brazil for the last five years. Of course, the problem is, as yet, the company has no production… and as such, there's a cash-flow issue.
Don't worry, says Mello: "It is important to stress that we are not putting any of our cash into the auctions… We have geological experience. HRT used to be Brazil's largest service company, and that's worth something to our partners." So basically, HRT is putting in some legwork and its significant experience, while other large oil companies put in the cash!
Like I have said before, this is no fly-by-night operation. This is a serious company with serious weight in the industry. In Mello's words, Namibia could transform HRT into 'the world's most important independent oil company'.
Exciting times… but please let me reiterate. This is a high risk, high reward investment. As of today, the company has no cash-flow… but fantastic aspirations. Tread carefully!
The Right Side
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