HNR: The Venezuelan Pop


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.






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.



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

No Advantage

“It is the greatest of all advantages to enjoy no advantage at all.”

-Henry David Thoreau


Thoreau had a lot more time to think and write than many of us.  He actually went completely off the grid and lived in a little self built hut on Walden Pond for two years to focus his thoughts.  Unfortunately, going into the woods for a couple of years is not really practical for those of us who manage global macro risk daily, but as a result of Thoreau’s sojourn we have some very insightful writings from him.


A couple of days ago we made the somewhat controversial call to go to 100% cash.  In fact, Keith actually titled the Early Look just that, “100% Cash”.   To the Thoreau quote above, being in cash is not really a relative advantage as cash inherently generates no return. We get that.  In economic and market environments like the one we are in, though, sometimes the best advantage is, in fact, to have no advantage at all.


Now, obviously, most investors by mandate can’t go to all cash.  The point was that regardless of your mandate, our view was that it was time to get out of the way and take the chips off the table.


Simply, and much like what Baupost’s Seth Klarman articulated in his recently quarterly letter, we are happy to be on the sidelines when investing becomes based on speculating what the next round of government intervention will be.  Will QE3 be introduced? Will Operation Twist be extended? Will Operation Twist end?  It’s all speculation, it’s all a loser’s game and none of us have an advantage.


The original Money Honey Maria Bartiromo was kind enough to have me on for the Closing Bell to discuss our call two days ago.  As I highlighted in the interview, this is an environment that requires tactical investing.  The gentleman I appeared with, after trying to give me a hard time about us going to cash, also eventually agreed (five minutes after he disagreed) that this environment requires tactical investing versus a long term buy and hope strategy.


As many of our long term subscribers know, we have two key products that provide a clear indication of where we stand in terms of asset classes and specific stock and macro investments, these are: the Virtual Portfolio and the Hedgeye Asset Allocation model.  Over the last couple of days as prices have corrected, we’ve adjusted our stance slightly and have added the following positions:


1)      Bought a yield curve flattener via the etf FLAT – The thesis here is pretty simple.  The Federal Reserve is extending “Operation Twist”, which inherently drives down the long end of the curve.  In general we do not mind fighting the Fed, but in this instance we recommend investing with the Fed as its just math that the yield curve should revert to the mean with the Fed’s aggressive buying.  This reversion to the mean potential is highlighted below in the Chart of the Day. 


2)      Bought Target Corporation (TGT) – With oil down dramatically over the past three months, this benefits retailers such as Wal-Mart and Target, who will gain share of wallet from consumers via their reduced spend on energy.  Also with the ongoing disaster at J.C. Penney (we are hosting a lunch in New York today to discuss this short idea so email if you’d like to attend), TGT should and will take share.


3)      Bought Under Armour (UA) - Growth is hard to come by in this environment and our retail team thinks that UA will print $3 billion in revenue by 2014.  This would be a doubling of revenue from 2011.  Meanwhile, in the short term UA will be comparing against a high inventory build a year ago in the upcoming quarter, so margins should look relatively good.


In global macro news this morning, the key event over night was the much anticipated downgrade of 15 global banks.  Our Financials Sector Head Josh Steiner wrote the following on this last night:


“While there's a small aftermarket "buy the news" rally taking place, we'd caution against getting too excited. First, consider what ratings downgrades mean. At their heart, they're saying that default probabilities of 15 of the largest banks around the world are higher now. In other words, the world has become a riskier place. While this is something the market's known for a while and the ratings agencies, as usual, are just catching up, recall one of the themes from our calls with Peter Atwater regarding Hardwired Ratings Linkages Lead to Hardwired Financial Contagion. At its core is the concept that sovereign and bank ratings are increasingly interwoven with growing mutual dependency/causality while Aaa rated entities are becoming fewer and less willing to do "whatever it takes". Considering how many of these firms' long term issuer ratings are still on negative outlook, and the growing uncertainty facing the sovereign debt of countries like Italy and Spain, we wouldn't uncork the champagne just yet.”


In the short term, as in today, to Josh’s point we may see a relief rally, but over the longer term the implications of ratings downgrade do remain ominous.


In Europe today, Hollande, Merkel, Rajoy and Monti are meeting in Rome ahead of the EU Summit next week. The proposal to allow the EFSF/ESM to buy peripheral sovereign debt will remain in focus with the key question being whether Merkel will continue to resist pressure. 


The EU Summit next week will be the focus of market action and speculation around government intervention next week.  A major investment bank is out this morning saying that it has heard from participants at the recently ended G-20 meetings in Mexico that there could be a “bazooka” of sorts in the works.


We have no advantage on the next round of government intervention, but we would refer you to Einstein’s definition of insanity:


“Insanity : doing the same thing over and over again and expecting different results.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $89.92-95.58, $82.08-82.82, $1.24-1.27, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


No Advantage - Chart


No Advantage - vp 6 22


The Macau Metro Monitor, June 22, 2012




Macau visitor arrivals decreased by 6.5% YoY to 2,146,542 in May 2012.  The average length of stay of visitors decreased by 0.1 day YoY to 1.0 day.
Analyzed by place of residence, visitors from Mainland China decreased by 4.2% YoY to 1,271,540, coming mostly from Guangdong Province (616,540), Fujian Province (58,585), Hunan Province (48,807) and Zhejiang Province (48,607).  Mainland visitors traveling under the Individual Visit Scheme (IVS) fell by 0.9% to 526,279.  At the same time, visitors from Hong Kong (540,435); Taiwan (78,834); and the Republic of Korea (31,292) decreased by 11.8%, 23.2% and 2.1% respectively, while Japanese visitors (33,655) increased by 17.6%. 





WYNN won a small ruling, sending back to Nevada state court its breach of fiduciary duty lawsuit against Kazuo Okada. Okada had in March moved the case to federal court, arguing that the underlying issue was whether he had violated U.S. law by allegedly paying bribes to foreign officials.

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