Harvest Natural Resources (ticker: HNR) announced that it had commenced drilling the Ruche Marin-A exploration well located in 380 feet of water offshore Gabon, West Africa.
The well is highly anticipated because it will test multiple stacked pre-salt targets offshore West Africa. The exploration well will be drilled with the Transocean Sedneth 701 semi-submersible drilling unit to a planned total depth is approximately 10,100 feet.
Strategic Operations: Harvest recently sold its Utah assets for $215 million to Newfield Exploration (ticker: NFX) to pay down debt and allocate additional capital to its international exploration projects. HNR’s largest asset is its 32% interest in Petrodelta, its Venezuelan affiliate, in which Harvest has 50.3 million barrels of oil (MMBO), 103.6 MMBO and 220.6 MMBO in proved, 2P and 3P reserves, respectively. As of April 12, 2010, Petrodelta was producing an average of 30,000 barrels of oil per day (BOPD).
Less well known is Harvest’s portfolio of high-impact, exploration projects in Indonesia, Gabon and Oman. During 2011, the company has taken several steps forward on its exploration projects around the world. Recently, HNR de-risked its Budong-Budong exploration project in Indonesia when the Lariang LG-1 exploration well encountered multiple hydrocarbon shows and high pressures in the Miocene formation. The well was plugged and abandoned due to encountering high pressures; however, this test well confirmed the presence of hydrocarbons and an effective trap and seal. The rig is moving to test the larger of the two targeted structures in the Budong-Budong prospect.
Venezuela Windfall Profit Taxes: Aside from Gabon and Indonesia, Venezuela’s president, Hugo Chavez, continues to make news. Just last week, the Venezuelan president decreed an increase in that nation’s windfall profit taxes. Venezuela first imposed a windfall profits tax in 2008, which established a 50% tax when the average price of the Venezuelan Export Basket (VEB) oil price exceeded $70 per barrel and a 60% tax when the average VEB exceeds $100 per barrel. The tax is paid on the difference between the threshold price and the actual average VEB price.
The new decree raises the windfall profits tax to 20% at VEB prices of $40-$70 per barrel, 80% at $70-$90 per barrel, 90% at $90-$100 per barrel and 95% when oil exceeds $100 per barrel. The price for Venezuelan oil is currently at $94.60 a barrel.
It is unclear if the decree is fully legal. In 2010 elections, the opposition party to Hugo Chavez gained more seats in the Venezuelan parliament than expected, which would have given the president more difficulty in pursuing his legislative agenda. In the wake of the election losses and before the new parliament could be sworn in, Chavez’s followers in parliament last December granted Chavez the ability to rule by decree for 18 months. The move to give Chavez near dictatorial powers has enraged the opposition by effectively turning parliament into a lame duck right up until the next 2012 presidential election.
At year-end 2010, the company’s Venezuelan reserves were based on oil prices of $70.43, which is well below current levels, implying that the volumes recoverable at the lower price deck have not been materially affected by the higher rates in the new decree.
The main impact of the increased taxes will be to reduce free cash flow available to Petrodelta for reinvesting back into growing production and reserves and the potential to repatriate dividends. Petrodelta’s operational plan is to increase oil production to 36,000 BOPD by year-end and at this time, it is unclear if the tax is completely legal and how it might impact Petrodelta’s announced capital budget of $224 million. In 2010, Harvest received a net dividend of $12.2 million from Petrodelta and it is unclear if the higher tax rates will reduce the potential for future dividends. We will have to wait and see how the decree is implemented.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication.
