Thoughts on Harvest Natural Resources

From the 12-Sep-2013 M&A Call Transcript:

http://seekingalpha.com/article/1691992-harvest-natural-resources-announces-exclusive-negotiations-to-sell-company-including-venezuela-spin-off-of-remaining-assets-transcript

"As disclosed in the press release the company is currently in the process of raising capital to ensure sufficient funding for this interim period to support the assets to be spun off as well as corporate expenses. We expect the size of that capital raised will be in the $40 million and ex-corporate expenses is earmarked for Gabon and Colombia. In essence the spin-off company is capitalized initially by the remainder of the proceeds from the proposed near-term capital raise. As a result the bulk of any current capital raise will remain within the spin-off assets.

We plan to limit the current capital raised to an amount that ensures that we preserve or enhance the substantial value of the spin-off assets and allow the Company to see this process through to fruition. In that context as it relates to the prior discussion regarding proceeds, any debt we incur for the interim period will be extinguished from the sale of proceeds prior to payment for the shareholders. As a reminder, current indebtedness stands at about $79 million."

My interpretation of the M&A call:

1) If capital raise is all debt:

$373 million sale - $79 million current debt - $40 million debt from capital raise / 40 million shares outstanding = $6.35 per share plus shares in SpinCo all distributed to shareholders at the completion of the sale (assuming sale is consummated).  Indebtedness of the company will be extinguished at the close, so SpinCo would have to do another capital raise.

2) If capital raise is all equity; assuming 10 million shares issued at $4.00 per share:

$373 - $79 / 50 = $5.88 per share plus shares in SpinCo.

Both scenarios assume that the transaction will not incur any U.S. taxes (HNR's stated belief).

During the call CEO James Edmiston stated "We estimate the cash payment to the shareholders alone will be in excess of the current stock price."  It appears that purchasers of shares of HNR at the current share price of $5.10 will be paid to receive shares of SpinCo (assuming sale is consummated).  SpinCo will include the Gabon contingent resources which have an expected monetary PV10% value of $550 million with $947 million risked mean exploration value.  There is a large range of uncertainty in the value of Dussafu, but I figure that the intrinsic value of Gabon is probably worth more than the current enterprise value of HNR (~$285 million).

Disclosure: No position