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    MARKET EDGES

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HEDGEYE ANALYST:

Kevin Kaiser, Energy Analyst (@HedgeyeENERGY)

Back on March 8, we put out a hot ideas sheet on Harvest Natural Resources (HNR). At that time, the main focus of HNR was what would happen in regards to a core asset sale related to the firm’s stake in Venezuela’s state-owned Petrodelta. We had the following ideas laid out over all three of our durations:

TRADE (Duration = 3 weeks or less)

HNR is a special situation where we see value and risk differently than the market.  We have been waiting for HNR to sell its core asset in Venezuela – on March 6 the Company announced that it has entered into exclusive negotiations with a 3rd party to do just that.

TREND (Duration = 3 months or more)

HNR has for sale its 32% equity interest in Petrodelta, a state-owned oil E&P in Venezuela.  We value the asset at $10 - $12.50/share, versus the current market valuation of $4/share.  The 23% short interest will continue to get squeezed.

TAIL (Duration = 3 years or less)

The key question is can HNR sell the asset?  We think yes, here’s why: HNR has successfully monetized assets before (Utah to NFX), TNK and Rosneft have both bought into VZ recently; HNR’s resource is large enough for an NOC to be interested (3B boe in place); Chavez would rather deal with a Russian, Brazilian, or Chinese partner.

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Fast forward to present day and the stock is up over 70% in regular trading after an 80% pre-market pop. Despite the TAIL duration concerns over a definitive agreement, HNR signed one after hours yesterday to sell its 32% stake in Petrodelta to Indonesia’s Pertamina for $725 million in cash. Net proceeds from the sale are estimated to be approximately $525MM (2.9X HNR’s market cap) after deductions for transaction costs and taxes.

To those who found a solid entry point between our March note and today: congratulations.