Zeev's question: Why buy HEC?
Zeev, you wrote to me:
<< Since you have done a much better due dili than Bruce [hint of sarcasm?], why don't you tell us what compelling reasons there are to invest in HEC. Their valuation at $4.5/share is kind of reach [sic] relative to cash and proven reserves. An elephant field would be nice, but so far they have hit only small fields, why should they have an elephant? Anyone else there has an elephant? >>
I'm not going to detail the bullish case. You can get it from the company's investor information package. With your connections, you can get the reports by Paine Webber, Oppenheimer, Strain, and others.
What I will do is point out the obvious limitation of your analysis: This is not a valuation play. Proven reserves and PV10 valuations are beside the point. This is an exploration play. Whether HEC has hit (Bolivar) or will hit (Cambulos) an elephant field is yet to be determined. The bullish case is that the odds are high that they have and/or will.
Regarding that potential, you respond to Art: <<art, here you have me at a disadvantage, I do not know [tongue planted firmly in cheek?] what future drill bits will bring, I have only HEC's 10 K to evaluate the net worth of "goodies in the ground", and these are $90 MM as of December 31, 1997, probably much less with current crude prices. >>
But the exploration potential is evident even to you.
You have stipulated that the buyers of the floorless convertible are very shrewd investors. With your background in mathematics, Zeev, you have surely determined the implication of EnCad paying $25 MM for a 5.0% share in HEC's net profits, the Europeans paying $7 MM for a 1.4% share, the Faisal entity paying $3 MM for a 0.6% share. Each 1% of HEC's profits in these three exploration projects is worth $5 MM.
So what is HEC's remaining 93% worth? $465 MM!
I note that you did NOT include this $465 MM in your calculation of the value of the company. Why not? Why focus on "cash and proven reserves?" And what about all the rest of the company's prospects?
Joe |
