Bloomberg News

HRT Americas Cheapest as Gas Finds Dismissed: Corporate Brazil

April 14, 2013

Discovering natural gas rather than oil in Brazil’s Amazon jungle is making HRT Participacoes em Petroleo SA the cheapest energy stock in the Americas.

After a 60 percent plunge over the past year, the shares fetch 0.37 of book value, the biggest discount among the region’s 281 oil and gas companies with a market value of at least $600 million, according to data compiled by Bloomberg.

Investors are assigning no value to the Rio de Janeiro- based explorer’s licenses in the Amazon, where it has discovered commercial volumes of gas, and off the coast of Namibia, where it began drilling this year, Chief Executive Officer Marcio Mello said in an April 10 interview. The company’s market value mostly reflects cash holdings and the $75 million it will receive from the sale of its aviation unit, he said.

“That is absurd,” Mello, 59, said. “HRT is very cheap.”

QGEP Participacoes SA (QGEP3), a unit of the Quieroz Galvao engineering and construction group, leads Brazilian oil companies with a price-to-book ratio of 1.37, followed by state- controlled Petroleo Brasileiro SA (PETR4) at 0.67, and billionaire Eike Batista’s OGX Petroleo (OGXP3) e Gas Participacoes SA at 0.65. Exxon Mobil Corp., the world’s most valuable oil company, trades at 2.41 times, while Chevron Corp.’s ratio is 1.71.

More Expensive

HRT, which raised $1.5 billion in an initial share sale in 2010, has seen its market value shrink to $689 million from $1.82 billion in the past 12 months after investors were discouraged by the company’s discovery of gas instead of oil deep in the Amazon. Gas is more expensive to transport and sells for less than crude. The company continues to drill for crude in the region where Petrobras pumps 103,000 barrels a day of oil and gas and plans to make money from its gas discoveries that are low in sulfur and other impurities, making it cheaper to process, Mello said.

Petrobras, which pumps more than 90 percent of Brazil’s oil and has the only gas pipeline in the Solimoes basin, agreed in October to study a partnership with HRT to make money from the remote gas deposits.

“The consortium decided we have enough scale,” Mello said. “The monetization process is moving along great.”

The companies are looking into liquefied natural gas and gas-to-liquids projects, as well as fertilizer and power plants that would use the gas produced in the region, Mello said. Another option is using gas tankers that freeze the fuel into a liquid and transport it down the Solimoes River, he said. HRT will also study supplying gas to industrial operations in neighboring Manaus and Para states, Mello said.

Cash Levels

Partnering with Petrobras could make HRT’s Solimoes blocks profitable even if it doesn’t find oil in the area. HRT made five gas discoveries last year in Solimoes. The company owns 55 percent of its Solimoes Basin blocks and Kremlin-run OAO Rosneft (ROSN) has a 45 percent stake after it bought TNK-BP, HRT’s original partner.

Petrobras declined to comment on the status of talks with HRT, citing a confidentiality clause, its press office said in an e-mailed reply to questions.

HRT’s total current assets fell to $480 million at the end of 2012 from $1.5 billion a year earlier following exploration investments in Solimoes and off the coast of Namibia.

The company is spending more efficiently as it masters operations in the jungle where all equipment is transported by helicopter, Mello said. The company’s best gas well to date is capable of producing the equivalent of 45,000 barrels a day according to production tests, he said.

Track Record

The partnership with Rosneft, Russia’s biggest oil producer, will also reduce outlays. This month Rosneft began paying for 45 percent of costs at Solimoes, Mello said. HRT has the option to sell an additional 10 percent stake to the state- run company and it is committed to developing the deposits, he said. Rosneft’s press office didn’t reply to an e-mail seeking comments.

The track record in Solimoes, where HRT expected to find oil below existing gas reservoirs, gives the region less potential value than Namibia where HRT started its first well last month, Banco Itau SA analysts Paula Kovarsky and Diego Mendes, based in Sao Paulo, said in a March 26 note to clients. Itau puts HRT’s fair value at 7.5 reais a share for end 2013, with 3.3 reais a share for Solimoes and 3.6 reais for Namibia. The shares gained 1.1 percent to 4.55 reais on April 12.

“After all the disappointments while ’drilling deeper’ to find oil in the Solimoes, a successful well in Namibia is likely the only event that can change HRT’s story, we believe,” the Itau analysts said.

Expansion Curb

To preserve cash for existing projects, HRT is curbing its expansion plans in Brazil. The company, which is authorized to operate in Brazil’s deep waters, plans to bid for licenses in a May exploration auction by offering “intellectual capital” instead of cash to potential partners, he said.

Portugal’s Galp Energia SGPS SA (GALP) bought a 14 percent stake in HRT’s Namibia assets and the Brazilian company is seeking more partners to help cover drilling expenses, Mello said. The company is also in talks with potential partners in the Amazon, he said.

“If the project is good, there won’t be a lack of cash,” Mello said.

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net


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