On October 12, 2012, Harvest Natural Resources, Inc. (ticker: HNR) announced its sale of $79.8 million aggregate principal amount of 11% senior unsecured notes due October 11, 2014, and warrants to purchase up to 686,761 shares of its common stock with an exercise price of $10.00 per share. Net cash proceeds were approximately $63.2 million. With $28.7 million of cash on the balance sheet at June 30, 2012, exclusive of the $63.2 million raise, Harvest has the financial resources to fund its projects in Indonesia, Oman and Gabon. Current capital commitments for these exploratory plays are estimated at $24.5 million.
The addition of $79.8 million principal amount of senior unsecured notes increases total debt from Q2 2012 to approximately $95.4 million, pro-forma. The previously announced Harvest-PT Pertamina (Persero) deal to sell HNR’s Venezuela assets is expected to bring net proceeds of $525 million ($478 million to be repatriated) on top of the $28.7 million of cash on hand at June 30, 2012.
With a track record of consistently paying off debt, Harvest accomplished two objectives with the most recent capital raise: (1) it provided short-term liquidity for the company to continue its oil project in Gabon and (2) increased liquidity and financial flexibility by borrowing an amount that can easily be paid down once the Venezuelan sale closes. The new debt amounts to approximately 15% of the total net proceeds expected from the Venezuela sale, which can easily be repaid at the company’s convenience once the Harvest-Pertamina transaction is closed. The new capital raise makes one thing for certain — Harvest is not going to “sit back and wait” for the Venezuelan deal to close and instead has positioned itself to continue advancing its exploration projects.
Overview and Update on Petrodelta Sale
A brief history lesson is in order to put Harvest’s most recent debt deal in perspective. On June 21, 2012, Harvest announced that its wholly-owned subsidiary, HNR Energia B.V. signed a share purchase agreement (SPA) with Pertamina, the national oil company of Indonesia, to sell all of Harvest’s interests in Venezuela, its 32% interest in Petrodelta S.A. for $725 million in an all-cash transaction (net $525 million after taxes and transaction costs). Harvest and Pertamina agreed to meet on the week of September 5, 2012 to assess the progress towards obtaining the required governmental approvals and other closing conditions.
On September 11, 2012, Harvest and Pertamina announced that after the September meeting, both parties agreed to continue pursuing the transaction and work to obtain the required approvals as stated by the SPA. As of this writing, the next step in the sale process is to secure approvals from the following three parties: the Government of the Bolivarian Republic of Venezuela, the Government of Indonesia and a majority of HNR shareholders. If all of the conditions to closing are not satisfied or not waived on or before March 21, 2013, then either the buyer or Harvest may terminate the SPA, or mutually agree to extend the deadline.
On October 8, 2012 Hugo Chavez secured a third six-year term as president of Venezuela, beating younger rival Henrique Capriles. While we don’t know if the re-election will affect the HNR-Pertamina deal, we do know that Chavez in the past has supported nationalization of Venezuelan oil, passed legislation limiting foreign investment ownerships in hydrocarbon enterprises and forced all contracts by foreign investors to be converted into joint-ventures. Some analysts, however, believe that the Chavez victory ensures a degree of stability and we speculate that if the Harvest-Pertamina deal was good before the election, then it is likely to be acceptable now.
On October 10, 2012, the Jakarta Globe spoke with Karen Agustiawan, the president director of Pertamina, in regards to the Harvest-Pertamina transaction and was quoted as saying, “Pertamina is committed to concluding the transaction.” Karen continued, “Media reports stating that the transaction depends on factors other than the written agreement are speculation.” Rumors had surfaced which increased the unlikelihood that the deal would be completed due to Hugo Chavez’s re-election. Pertamina seems on board with closing the transaction with the original conditions, and putting rumors to rest.
U.S. investors and oil companies in general haven’t found Venezuela the most attractive country in which to invest under the Chavez regime. In September 2012, the Paris-based tribunal at the International Chamber of Commerce (ICC), an international arbitration panel, awarded ConocoPhillips (ticker: COP) $66.8 million in a dispute against Venezuela’s nationalized oil company, Petroleos de Venezuela SA (PDVSA). The ICC concluded that PDVSA breached agreements when it applied production cuts mandated by the Organization of Petroleum Exporting Countries to ConocoPhillips’ Venezuelan oil operations in 2006 and 2007.
Last year, the ICC awarded $908 million to ExxonMobil (ticker: XOM) as they determined that PDVSA failed to comply with contractual provisions to compensate ExxonMobil after Venezuela’s government forced the partial nationalization of the industry in 2007.
Valuation
To evaluate the impact of Harvest’s new debt issue on valuation, we took the net proceeds from the Venezuela sale at $525 million and divided by the number of total diluted shares (inclusive of outstanding convertible debt for Q2 2012, vested options at year-end 2011 and the addition of 686,761 warrants from the latest capital raise) and calculated a fully diluted per-share value of $12.47. Assuming Harvest decides to pay off the $79.8 million debt with proceeds, inclusive of current cash as of Q2’12 and converting all remaining debt on the balance sheet to common shares at a conversion rate of $5.56 per share, the value of the Harvest-Pertamina deal would be reduced to $11.25 per share on a fully diluted basis or a 27% premium to HNR’s closing price of $8.84 on October 12, 2012.
Furthermore, we are not assigning value to the acreage positions Harvests has already amassed. In Oman, Harvest holds an 80% operating interest in 956,000 acres. In Indonesia, Harvest holds a 64.4% interest in 747,862 acres. In Gabon, Harvest holds a 66.7% operating interesting in 680,000 acres. The spud of the Tortue prospect in Gabon is expected to commence in Q4 2012.
The closing of the Harvest-Pertamina deal would bring additional liquidity to the company, eliminate the perceived Venezuelan political risk and allow for an increase in capital flexibility to accelerate exploratory or development plays. With a low debt structure and ample liquidity, the company’s capital structure is aligned with its exploration business strategy.
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