Zero-for-14 Bust Sinks HRT Below Asset Value: Corporate Brazil

HRT Participacoes em Petroleo SA’s failure to find oil time after time across Brazil and Africa has produced a selloff so spectacular that the stock price doesn’t even capture the value of its tax credits and helicopters.

The Rio de Janeiro-based company founded by a geologist from Brazil’s state-run oil producer has plunged 76 percent this year, a slump only topped in the Ibovespa Small Cap Index by the collapse of former billionaire Eike Batista’s oil and ship-building units. None of the 14 wells that HRT has drilled since 2009 has produced crude, leaving its output at zero, according to the company.

In their rush to dump the stock, investors have overlooked HRT’s non-core business assets: the helicopters and tax credits as well as cash, according to analysts at GBM Brasil and Empiricus Research. The value of those holdings means HRT would be worth 4.3 reais per share in a liquidation, more than three times yesterday’s closing price of 1.15 reais, GBM estimates.

“The company’s assets mean there is a significant upside potential for the shares,” Luana Helsinger, an analyst at GBM, said in a phone interview from Rio de Janeiro. She has a recommendation equivalent to buy for the stock.

HRT declined to comment about its stock value and business plan in an e-mailed response to questions. After declaring a third dry well in Namibia, the company said in a Sept. 9 regulatory filing that it will analyze the information it obtained from the drilling campaign in Africa in order to make plans for 2014 and 2015.

Dry Wells

Since its peak at 10.1 billion reais ($4.6 billion) on March 17, 2011, HRT’s market value plunged 97 percent to 339.5 million reais, below the company’s cash position of 814 million reais as of the end of the second quarter. The market value of Batista’s OGX Petroleo e Gas Participacoes SA has slumped to

1.26 billion reais from 75.2 billion reais in October 2010.

HRT’s 76 percent plunge this year is the worst among the 100 biggest oil and gas companies in emerging markets after OGX’s 91 percent decline. HRT declined 0.9 percent to 1.14 reais at 4:06 p.m. in Sao Paulo, while OGX fell 2.6 percent to 38 centavos.

Like OGX, HRT sold shares to the public before it was producing any oil. HRT has drilled wells that were declared dry and wells where it found oil in non-commercial volume, according to an e-mailed statement from the company. Batista’s company has been missing production targets at its only active field.

Eight Choppers

OGX originally planned to pump as much as 20,000 barrels a day at each of two wells at Tubarao Azul and began scaling back estimates after production missed targets. In June, the wells produced together 23,000 barrels per day, according to a regulatory filing on July 4.

“There are similarities between them, but the main difference is that now HRT has valuable and tangible assets it can turn into money and almost no debt, the opposite of OGX’s situation,” Helsinger said.

OGX’s press office declined to comment.

Among its non-cash assets, HRT has eight helicopters worth $30 million remaining from the air logistics unit it sold to Erickson Air-Crane, as well as four drilling rigs worth $50 million, according to a Sept. 4 regulatory filing. The company also has tax credits worth about 500 million reais, according to Felipe Miranda, an analyst at Sao Paulo-based Empiricus.

Neither GBM nor Empiricus assigned any value to HRT’s exploration blocks in Brazil or Namibia when estimating a fair price for HRT’s shares. Empiricus’ target price for the stock is between 4 reais and 5 reais, Miranda said in a phone interview.

Alternative Plans

HRT was created in 2008 by geologist Marcio Mello, who left state-controlled Petroleo Brasileiro SA after more than 20 years with a strategy to drill for oil in previously unexplored areas in the developing world. The company raised $1.1 billion in an initial public offering in October 2010, according to a final prospectus posted on the company’s website.

As its adjusted net loss widened to 90.3 million reais in the second quarter from 50.5 million reais a year earlier, HRT named Milton Romeu Franke its new chief executive officer, replacing Mello, and appointed new financial and administrative directors to lead a turnaround. The plan focuses on preserving cash, cutting costs and selling assets that are not tied to exploration, according to HRT’s second-quarter earnings report.

‘Extremely Cheap’

While there is some value in HRT’s tax credits, cash position and hard assets, it’s probably not enough to attract investors, said Eric Conrads, who manages about $750 million of Latin American stocks at ING Investment Management.

“When investors put money into a stock, it’s because they believe in the business,” Conrads said by phone from New York. “If the exploration is not viable anymore, there’s no reason to buy shares.”

HRT said on Sept. 2 that it will form partnerships to develop projects to liquefy natural gas found in the Solimoes Basin or build thermal plants in the region to produce energy. Those alternatives were listed in a study completed with Petrobras and Rosneft Oil Co.

The company also intends to continue drilling in Namibia and expects to make “commercially viable discoveries” there, according to a Sept. 9 regulatory filing in which it disclosed that a third well it drilled in the African nation was dry.

“We just can’t see anything ahead on the exploration side,” Empiricus’ Miranda said in a phone interview. “But the stock is extremely cheap considering the company’s assets. HRT has attracted shareholders who entered the business to profit. So they will have to do something to defend their investment.”