Thursday, September 13, 2007

HNR Update

There may be some confusion on the value to be received by HNR once the conversion is completed. The $275 mn number is cited, but the net to HNR will be less.

Once the new agreement is finalized, HNR's subsidiary Petrodelta will receive reimbursement for oil and gas sales to PDVSA, to obtain the same economic result as if the conversion had been completed on April 1, 2006. Since April 1, 2006 through June 30, 2007, HNR delivered 8.0mn barrels of oil. The estimated price for reimbursement over this period is $47.53 per barrel. So, 8.0 x 47.53 = $380.2mn dollars. HNR also delivered 18.2bcf of gas, priced at $1.54 per mcf, for total sales of $27.7mn dollars. So total sales are $380.2mn+$27.7mn=$407.9mn. The 33% royalty must be deducted, so net sales are $273.3mn, which corresponds to Mr. Edmiston’s “approximately $275 million” comment.

During this period, costs have been about $58mn, most of which has already been reimbursed. Thus, during this period, the profit before tax for Petrodelta is $273mn-$58mn, or $215mn. Taxes are 50%, so net after tax profit is $108mn. HNR has an effective 32% interest, so its share of net income for this period will be about $34mn, or $0.97 per HNR share (after adjusting the share count to 35.4mn, reflecting the repurchase of 2.3mn shares in August).

I expect Petrodelta will dividend less than 100% of net income for this period. Petrodelta will need more cash on hand to fund (1) cost of new rigs (2) increased operating expenses as operations expand and (3) initial capitalization of Petrodelta.