I was reviewing their most recent annual meeting with investors and was surprised to find that the Longleaf International fund had 7% of the fund invested in a wildcat exploration company called HRT Particpacoes. Not only that, but Longleaf commented that HRT could be their most exciting investment ever!
HRT is a company that I was already familiar with but did not peg as a core holding for a legendary value investor.
Early in 2010 I came across a company called Universal Power. It was a Canadian energy company engaged in oil exploration offshore the African country of Namibia. This company came to my attention via an e-mail that seemed to originate from a penny stock speculation service. Usually I would quickly delete such an e-mail but for some reason I read this one which discussed Universal Power. Universal Power at the time had a market cap of about $100 million and claimed to have unrisked exposure to over 3 billion barrels of potential oil.
I actually wrote about it for gurufocus:
Long story short, intrigued by some insider buying and the involvement of a well known geologist named Marcio Mello (who Universal had employed as a consultant of sorts) I bought a few shares of Universal Power at about $1.90 just so I could track it. Those shares I bought jumped up by about 20% in fairly short order and I sold. Bad decision. Within about 6 months Universal Power was sold to (you guessed it) HRT Participacoes for $6.17 per share.
And that gets me to Longleaf, HRT and its lead man Marcio Mello.
As of the last reporting date Longleaf International Partners had over 7% of its asset invested in HRT. At the most recent AGM the Longleaf team made the following comments (http://www.longleafpartners.com/news/article_detail.cfm?article=20110527123624pub%2Ecfm) about their investment in HRT and why they think this is a good idea:
- Longleaf believes investing in HRT is an opportunity to partner with one of the best geologists in the world
- This isn’t the opinion of Longleaf but rather the opinion of various experts within the oil and gas industry saying Marcio Mello is one of the best
- Mello was with Petrobras and was the geologist who predicted that there are billions of barrels of oil under the salt layer offshore Brazil
- The risked total resource calculated by independent reserve engineers is about 6 billion barrels
- The unrisked resource is actually 30 billion barrels
- These onshore HRT properties are near reserves that Petrobras has been producing for decades
- In addition to these onshore Brazil opportunities HRT has much larger Namibian properties where the opportunity is even larger
- The contingent resource estimate offshore Namibia for HRT is 5.6 billion BOE
- In the late 70s Longleaf was successful buying oil companies trading at a discount to their reserves so they have considerable experience. In the case of HRT they think Marcia Mello is one of the smartest guys in the business who is the single most responsible person in Brazil for finding the multi billion barrel subsalt fields.
- Longleaf thinks HRT is one of the most exciting investments Longleaf has had in its history.
- South America and Africa used to be connected and the drifted apart, meaning offshore Namibia is likely similar to offshore Brazil. Even should that not prove to be true Longleaf believes that onshore Brazil will have significantly more dollar value in reserves than the current $4 billion mkt cap of HRT
- In the past couple of months some lock up periods expired for early HRT shareholders which has hurt the share price. These early HRT shareholders have such large gains on their holdings that they need to trim their outsized positions. So the recent ticker tape is very weak but is a great long term holding.
At the time of the Longleaf AGM HRT had a market capitalization of about $4 billion. Generally a $4 billion market capitalization would be normal for an oil producer with about 200 million barrels of proved and probable reserves. That is a very rough estimate, but likely not too far out to lunch. With HRT chasing combined targets of more than 11 billion barrels of oil they don’t have to have a lot of success to create some serious upside in the share price.
I’m not sure how one considers HRT a value investment with a margin of safety. I guess Longleaf believes that their margin of safety is one Marcio Mello’s expertise. Normally I would pass on a company like HRT, but with Longleaf involved I confess to being very curious about what they might know that I don’t.