This 8K confirms Harvest’s (HNR) Oil Sale to Venezuela?

Sep 03

This 8K confirms Harvest’s (HNR) Oil Sale to Venezuela?

Harvest Natural Resources (HNR, NYSE)

Will the 3rd attempt of selling its Venezuelan assets be a charm for Harvest Natural Resources?

RISK vs REWARD

HNR -- chart

Downside risk = –11.5% | HNR trading at 61 cents (U.S.); could stop-loss at 54 cents.

Upside reward = +75% | Venezuelan asset sale expected to close by the end of September. Sell the news!

THE HEADLINE…

On June 30, Harvest, an Oil and Gas company, announced an agreement to sell its assets in Venezuela. CT Energy Holding SRL, the buyer, is a Venezuelan-Italian consortium that owns +10% of HNR equity and $30 million debt.

Assuming the deal closes, net proceeds after payment of the remaining CT Energy debt, taxes and transaction-related costs from the transaction are estimated to be $63 million.

Harvest’s market cap is currently $31 million.

THE DEAL…

The deal is expected to close by the end of September.  When it does, HNR should spike higher on the news because it will have approximately $63 million ($1.24 per share) to fund projects in Gabon (or distribute back to shareholders?).

Here’s the catch…Harvest announced plans to sell its Venezuelan assets to an Indonesian company in 2012 and an Argentinean company in 2014 – both deals fell through.

Understandably, shareholders and speculators don’t have much confidence this 3rd attempt will be any different (hence the discount). Additionally, Mr. Market is inherently skeptical about anything related to Venezuela.

THE OPPORTUNITY…

There’s some indication Harvest’s 3rd time could be a charm.

Venezuelan billionaire Oswaldo Cisneros is the owner of CT Energy (the buyer) – if anyone can pull this deal off, it’s him.

GOVERNMENT SUPPORT?

I pulled the section below from an 8K Harvest filed August 18:

Authorization by Government of Venezuela

“As previously disclosed, the closing under the Share Purchase Agreement is conditioned on, among other things, the approval of the proposed sale by the Ministerio del Poder Popular de Petroleo y Mineria, representing the Government of Venezuela, which indirectly owns a 60% interest in Petrodelta. In a letter dated August 15, 2016 to Oswaldo Cisneros, the sole member of CT Energy, the Ministerio del Poder Popular de Petroleo y Mineria authorized a change of control in Harvest Holding, effective upon the acquisition by Oswaldo Cisneros in his personal capacity, or by Delta Petroleum N.V., an entity 100% owned by Mr. Cisneros, of HNR Energia’s 51% interest in Harvest Holding.”

There you have it, a confirmation (asset sale approval) from Venezuela’s government hiding in plain sight!  HNR did spike from 54 cents to 64 cents the same morning on heavy volume.

In my view HNR represents an attractive short-term trade (which I rarely recommend) with a well-defined timeline. Assuming Cisneros, the Venezuelan billionaire, closes the deal, sell HNR on the news!

CISNEROS FAMILY, THE ROCKEFELLER’S OF VENEZUELA?

Regarding Harvest Natural Resources (HNR, NYSE) as a trade opportunity, success will be dependent on the company selling its Venezuelan assets to CT Energy. Therefore, our best way to gauge the odds of a successful closing by October is to delve deeper into the character(s) behind the buyer.

In my view, Mr. Market is placing a hefty discount on HNR because of skepticism surrounding Venezuela and the fact its government blocked similar deals (at much higher prices) twice before.

Below, I aim to outline a case by which Mr. Market is overly-pessimistic about the odds of HNR selling its assets because the buyers are deeply entrenched with corporate and political interests across the world.

THE MAN BEHIND THE DEAL.

The man behind the curtain at CT Energy is 74-year old Venezuelan billionaire Oswaldo Cisneros.

Oswaldo is Gustavo Cisneros’ brother. According to Forbes, the Cisneros’ family is the 2nd wealthiest in Venezuela with a net worth of +$2 billion. Gustavo is the owner of the Cisneros Group, a conglomerate with interests in Venezuelan television stations, telecom, a brewery, a real estate company and a baseball team.

the Cisneros Family’s connections…

Gustavo is an independent director to Barrick Gold (ABX, TSX)

The brothers are sometimes-fishing companions of former president George H. W. Bush.

Gustavo has also been a member of the Chase Manhattan Bank International Advisory Committee under David Rockefeller’s chairmanship.

Venezuelan President Nicolas Maduro chose Oswaldo as part of his National Council for Productive Economy (January 2016). In the image below, Oswaldo is shaking hands with Maduro.

Cisneros y Maduro

WHAT’S the SIGNIFICANCE?

Clearly, the Cisneros brothers are wealthy and well-connected at the highest levels of business and politics. Therefore, I believe their odds of acquiring Harvest’s Venezuelan assets are better than they were for investors from Indonesia (2012 attempt) and Argentina (2014 attempt). Additionally, via an 8K filing August 18th (with no news release), we are being led to believe Oswaldo received a letter from the Venezuelan government that essentially gives their blessing on the deal.

Finally, Oswaldo and two of his associates have been on Harvest’s board of directors since June 2015, so they’ve had ample time to review Harvest’s assets from the inside and out. Given Venezuela’s dire economic state (need to increase Oil output), Harvest’s need to sell (at rock bottom prices), and the Cisneros family as natural buyers, I think the 3rd time will be a charm.

In my view HNR provides a unique trading opportunity with a defined timeline.  Assuming the deal closes as advertised, HNR could increase by +75% between now and then (late September, early October?). However, the downside appears to be limited because Harvest also has 4 discoveries offshore Gabon that could support the valuation (it’s shopping those assets too). From the outside looking in, if anyone can make this deal happen it would be the Cisneros family, the Rockefellers of Venezuela.

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