Benton Oil HNR W
February 28, 2002 - 4:24pm EST by
2002 2003
Price: 2.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 85 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Benton Oil is a highly profitable microcap oil exploration, exploitation and development corporation. Headquartered in Houston Texas, and with significant operations in Venezeuala and the Soviet Union, Benton offers investors a current opportunity to participate in the mid term recovery of oil prices based upon an economic rebound. More importantly, Benton offers significant near term capital growth potential due to rapid growth in oil revenues and a significantly improved balance sheet.

At present, Benton Oil has total proven oil reserves in excess of 130 million barrels. With a total of 34 million shares outstanding, the market price of the shares value the company for less than $.65 per proven barrel of oil reserves. This is the lowest price of any oil company that I follow.
Benton Oil also uses the highly conservative full cost method of accounting.

Benton Oil has operations in two countries.

Venezuela. Benton generates in excess of 29,000 bopd of heavy oil from the South Monogas unit. This unit holds proven reserves of approximately 98 million barrels.

Russia. Benton owns 34% of Geoilbent, a mid sized producer of oil in Siberia. Net to Benton, Geoilbent is presently producing approximately 6,000 bopd. This unit holds proven reserves of approximately 40 million bopd.

Oil production from these assets are forecast by Benton to grow by approximately 20% in 2002. Further asset growth is forecast beyond 2002.

The balance sheet was quite leveraged until very recently. At the end of the 3rd quarter of 2002, Benton had book value assets of $309 million. Net debts amounted to $279.5 million. This left shareholders equity (net of minority interests) of $15.9 million or $.46 per share.

Effective February 28th, 2002, Benton has announced the sale of a Russian oil subsidiary, Arctic Gas to Yukos Oil. This investment was held on the books of Benton with a cost of $29.5 million. The net proceeds will be $190 million. In addition, Benton will also receive the repayment of a $30 million loan extended to Arctic Gas.

The proceeds will be used to retire high coupon debts maturing in 2003, and to also retire a portion of their remaining debts due in 2007. This elimination of high interest debt will add $.47 per share to Benton's net profits in 2002.

Arctic Gas was approximately the same size in terms of proven assets as Benton's net 34% interest in Geoilbent. Benton has invested a total of $28 million in Geoilbent as of Setember 20th, 2001.

I estimate that Benton Oil has earned approximately $.40 per share in 2001 before extraordinary items. Cash flow is estimated at $1.35 per share.

After taking into account the accretive sale of assets, and assuming that oil sells for an average of $20 U.S. per barrel in 2002, Benton Oil should generate net earnings in excess of $.80 per share. Cash flow is estimated to exceed $1.80 per share in 2002.


The elimination of $150 million in high cost debt from a minority asset sale with a book value of $29.5 million will add more than $.47 per share per year to annual earnings. issue. This prices Benton at less than 4 times estimated 2002 earnings, and less than 2 times estimated 2002 cash flow.
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    Benton Oil is a highly profitable microcap oil exploration, exploitation and development corporation. Headquartered in Houston Texas, and with significant operations in Venezeuala and the Soviet Union, Benton offers investors a current opportunity to participate in the mid term recovery of oil prices based upon an economic rebound. More importantly, Benton offers significant near term capital growth potential due to rapid growth in oil revenues and a significantly improved balance sheet.

    At present, Benton Oil has total proven oil reserves in excess of 130 million barrels. With a total of 34 million shares outstanding, the market price of the shares value the company for less than $.65 per proven barrel of oil reserves. This is the lowest price of any oil company that I follow.
    Benton Oil also uses the highly conservative full cost method of accounting.

    Benton Oil has operations in two countries.

    Venezuela. Benton generates in excess of 29,000 bopd of heavy oil from the South Monogas unit. This unit holds proven reserves of approximately 98 million barrels.

    Russia. Benton owns 34% of Geoilbent, a mid sized producer of oil in Siberia. Net to Benton, Geoilbent is presently producing approximately 6,000 bopd. This unit holds proven reserves of approximately 40 million bopd.

    Oil production from these assets are forecast by Benton to grow by approximately 20% in 2002. Further asset growth is forecast beyond 2002.

    The balance sheet was quite leveraged until very recently. At the end of the 3rd quarter of 2002, Benton had book value assets of $309 million. Net debts amounted to $279.5 million. This left shareholders equity (net of minority interests) of $15.9 million or $.46 per share.

    Effective February 28th, 2002, Benton has announced the sale of a Russian oil subsidiary, Arctic Gas to Yukos Oil. This investment was held on the books of Benton with a cost of $29.5 million. The net proceeds will be $190 million. In addition, Benton will also receive the repayment of a $30 million loan extended to Arctic Gas.

    The proceeds will be used to retire high coupon debts maturing in 2003, and to also retire a portion of their remaining debts due in 2007. This elimination of high interest debt will add $.47 per share to Benton's net profits in 2002.

    Arctic Gas was approximately the same size in terms of proven assets as Benton's net 34% interest in Geoilbent. Benton has invested a total of $28 million in Geoilbent as of Setember 20th, 2001.

    I estimate that Benton Oil has earned approximately $.40 per share in 2001 before extraordinary items. Cash flow is estimated at $1.35 per share.

    After taking into account the accretive sale of assets, and assuming that oil sells for an average of $20 U.S. per barrel in 2002, Benton Oil should generate net earnings in excess of $.80 per share. Cash flow is estimated to exceed $1.80 per share in 2002.


    The elimination of $150 million in high cost debt from a minority asset sale with a book value of $29.5 million will add more than $.47 per share per year to annual earnings. issue. This prices Benton at less than 4 times estimated 2002 earnings, and less than 2 times estimated 2002 cash flow.


    Subjectmy apologies...
    Entry02/28/2002 04:39 PM
    for the typos. I was not anticipating the catalyst event on this stock so quickly, and had to type the highlights of this report in the midst of the Benton Oil Conference call.

    SubjectNice job
    Entry02/28/2002 11:25 PM

    You are on top of things, as usual. Good idea (typo's and all!). A couple of qustions.
    1. Industry average multiple for cash flow in 4.4X this year, wasn't that much higher in the past? Maybe not for exploration, heh?
    2. Now, the tuff one. What is your take on Russia and their production? It seems to me that they can offset any OPEC quotas -- how strong do you feel that prices can remain above this level?

    Entry03/01/2002 08:20 AM
    1) what is the average debt-adjusted cash flow multiple for small cap e&p companies and what is BNO trading at on a DEBT-ADJUSTED basis?

    2) did they lose any production with this sale?
    3) what oil price are you factoring in with your eps and cash flow estimates?

    Subjectanother question
    Entry03/01/2002 08:26 AM
    you mentioned 30m in debt lent to its subsidiary. are there any other pieces of debt that may not be on the b/s? that are at the subsidiary or jv level? don't want another ene here

    Subjectindustry average cash flow
    Entry03/01/2002 09:21 AM
    cash flow multiples tend to contract when oil prices are low, and expand when oil prices are high. This is due to the high fixed cost of producing oil.

    When oil prices are low, the fixed costs (relative to the revenues of an oil company) eat up most of the profits. Therefore, investors become sceptical of an oil company's ability to grow via development or exploration, as they have less money to expend. As a result, the industry multiples contract.

    Oil prices will rise, provided that the U.S. economy will come out of recession this year. My take is that the recession ended in November 2001.

    Frankly, Russia has the potential to generate much more revenue net to Benton then their Monogas operations. They are drilling a field which they have yet to define in size. Each well is producing more than 1000 barrels of oil per day. Similar fields in the general area (geologically speaking) of Russia are producing anywhere from 100,000 bopd to 500,000 bopd. Benton has the potential for an elephant with this field.

    Subjectindustry averages...
    Entry03/01/2002 09:27 AM
    the average cash flow multiples for exploration and development is between 3 times cash flow to four times cash flow.

    3 times cash flow is what the market is presently paying for companies with rapidly depleting reserves.

    4 times cash flow is what the market is presently paying for companies with long life reserves.

    Most smaller exploration and development firms tend to have $1.00 debt for each $1 of equity.

    Benton will (net of the proceeds) have roughly $1 of debt for each $2 of equity.

    Benton lost about 1,700 barrels of oil of daily production with this sale. I already stripped the production from my analysis. The Arctic Gas assets were just commencing their productive phase.

    Benton falls into the category of long life reserves.

    I am using $20 U.S. per barrel of oil in my analysis for 2002.

    Subjectno other debt...
    Entry03/01/2002 09:35 AM
    Benton runs very good books. I have been consistently pleased with the level of disclosure from this company, and I'm seldom pleased with corporate books.

    The reports are actually far more conservative than they appear. Even the text of the sale announcement was conservative. Benton states that they will receive $190 million and the repayment of the loan. The text then goes on to state that Benton will generate $100 million net after tax.

    What they do not state is that they will have eliminated thier minority interest of $13 million plus in this sale. As well, they have $100 million of loss carry forwards, so although they provide for taxes, this accrual will not actually ever have to be paid on the sale. Finally, they have overstated their equity investment in Arctic Gas when accounting for their profits. They have made an equity investment of $29.5 million and a $30 million loan to Arctic Gas. They will receive $190 million for their equity interest + the $30 million repayment of the loan.
    + the removal of the minority interest.

    The text suggests that their actual investment in Arctic Gas was $59.5 million + the minority interest.

    Finally, only a handful of companies use full cost accounting, as it tends to understate reserves, and overstate costs.

    Subjecti only see 221m in long term d
    Entry03/01/2002 10:29 AM
    i only see 221m in long term debt at 3q end-- you mentioned 279M . are you speaking about total liabilities incl payables, etc??

    Subjecttotal liabilities
    Entry03/01/2002 10:37 AM
    yes...I am including payable, lines of credit, etc. Actual long term debts are as you have stated.

    Subjectoverall, do you have a target
    Entry03/01/2002 10:59 AM
    overall, do you have a target as to what you think is fair value. roughly , it looks as if you are projecting 60m in cash flow for 02 using $20 oil. i like to look at it on a debt-adjusted basis. post receipt of the proceeds they will only have about 70M in net debt (220m-150). i am going to add back the interest exp of roughly 7m (70m at approx 10%) so, i am using debt-adjusted cash flow of 67M a 3 multiple could be fair given its overseas asset base and would seem a minimum to me. so that given you roughly 200m in enterprise value. takje out the 70m in debt. gives you 130M for the equity= $3.85/share. every 0.5 multiple you assign, adds $1 to the equity valuation, roughly. so, if you believ BNO can attract a 3.5 multiple, $4.85 would be the "fair value". any comments?

    Entry03/01/2002 11:00 AM

    What percentage of this companies reserves/cash flow is going to be from Venezuela going forward?? I am sure compared to the prices per barrel in other regions this is cheap but lets not forget what is going on in Venezuela right now and the relative price of every other Venezuelan asset (CHEAP!)

    What about Venezuela's dependence on tax revenue from the Producers and their probable need to increase that revenue as they defend their currency in a lower oil price environment? Oil and Gas comprises 85% of Venezuelan exports and the top corporate tax rate is 67.7% for most petroleum companies while only 34% for other companies. The Venezuelan's seem to view the oil in their country as their resource (not American shareholders')

    Subjectfair value
    Entry03/01/2002 11:18 AM
    my numbers are close to yours in terms of "fair value". I assign fair value as being $5.05. My numbers only differ insasmuch as Benton has now generated an additional five months of cash flow and earnings from their properties since the last report.

    Also, I would mention (this is purely subjective) that fair value at $20 U.S. per barrel becomes much more conservative if we take out $20 oil at some point in 2002.

    Entry03/01/2002 11:29 AM
    is quite interesting.

    Benton is one of only two oil companies to have their oil interested protected in a grandfathering arrangement.

    The political situation is always in flux with lesser developed nations. That has always been reflected in the share price.

    Benton is not actually a junior in terms of revenues, profits and production. The firm has been accorded microcap status largely due to their high debt load (now reduced to below industry norms) and the fact that Benton was historically known as a one asset firm.

    The sale of a fractional interest in a largely non productive asset has affirmd that the remaining Russian operations have the potential to become greater in terms of absolute size and revenue than Monogas. As Russian production accelerates, this should be reflected in the form of a declining political risk discount.

    In terms of the Monogas reserves, they presently account for 2/3 of my proven reserve estimates and 80% of last year's cash flow. Given the magnitude of the Russian discoveries, this should decline to about 50% of reserves and 50% of cash flow by the end of 2002. In 2003, Venezuela should represent less than 50% of the asset base.

    Of greater interest is the fact that the Bolivar (Venezuela's unit of currency) has been devalued by about 1/3 in the last three months. This increases the profitability of the operations greatly, and reduces political risk greatly.

    Analysis of course does have the ability to perfectly predict political events. However, from a purely mathematic standpoint, the numbers from South America look extremely good.

    Subjectbond levels
    Entry03/01/2002 11:41 AM
    i just saw levels on the BNO bonds if anyone cares -

    11.625% senior notes of 03' are $95 (ytw is 16.5%)
    9.375% senior notes of 07' are $77 (ytw is 15.6%)

    Subjectprovided they could be had...
    Entry03/01/2002 12:00 PM
    the bonds would also fit well into the profile of a high yield account.

    Entry03/01/2002 03:12 PM
    Have you calculated an NAV based on reserves rather than assigning a value based on a cash flow multiple (I'm assuming your $5 target is based on a cash flow multiple)?

    Also, I noticed they have rights to over 7 million acres of land in China. Has the company provided any insight in to the opportunities or perils of being in the oil business in this part of the world?

    Entry03/01/2002 04:06 PM
    Do you know anything about their reserve consultants and what other companies use them? It would be safe to assume they are conservative based on the recent sale but you always wonder when dealing with companies in the "wild east".

    Subjectnet equity based on reserves..
    Entry03/01/2002 06:12 PM
    I calculate to be $6.14 per share of net equity based on a 15% discounted rate for proven reserves.

    This assigns no value to probable or possible reserves. It also excludes land values and tax pools.

    As for China...I assign no value to Chinese exploration lands. China is perhaps one of the most disappointing areas of the world (geologically speaking), and oil pools are few and far between.

    As for target prices, I hope that I have not confused anyone by mentioning a $5 + fair market value based on cash flow.

    I deem fair market value on this investment in the next 12 months to be approximately $8 per share. In a takeover, an oil company would pay approximately book value for proven reserves + half of probable reserves.

    The remaining Russian assets would be worth in excess of $250 million if they were sold. The oil assets attributed to Monogas would be worth in excess of $140 million.

    Deduct the debt outstanding after the bond redemptions, and you have a value in excess of $8 per share net to common equity holders.

    SubjectRyder Scott...
    Entry03/01/2002 06:17 PM
    are the reserve consultants for Benton. They are considered to be one of the most respected of firms in this business. The client list is encyclopedic in length.

    They have a web site, should you wish to review their client list for specific names.

    Subjectfiscal year end report...
    Entry03/03/2002 01:47 PM
    is due on or about March 5th, 2002.

    SubjectOil prices
    Entry03/05/2002 05:13 PM
    I did some work and found that in 2000 Benton averaged only $15 per barrel in 2000 and, if I remember correctly, only $13.50 per barrel in 2001 for their Venezuelan oil. I know Venezuelan oil typically sells cheaper but not at that significant a discount. Do they have to sell to a government agency at a reduced price?

    Even at a $15 oil price this stock is extremely cheap. My guess is they've also spent the last few years sizing up their best/ highest percentage prospects for development and not had the capital to go after them. Now that they have a more amenable capital structure they should be able to go after the low hanging fruit.

    Subjectoil prices...
    Entry03/06/2002 10:43 AM
    Benton's Venezuelan operations sell the typical oil that is found in that country...which is considerably heavier than North American oil. It's not truly classified as heavy oil, but not far from it.

    Benton changed the way that they accounted for the receipt of their oil revenues in 2000. They ship the oil to a government agency, who remits them a cheque after deducting the appropriate royalties and taxes. Benton used to take this net cheque, divide it by the number of barrels being shipped, and called that their net price being received. From this amount, they would deduct net operating expenses to arrive at their profit margins. Benton assumed that their local staff was receiving the right cheques. The local staff assumed that the government was sending the right amounts.

    In 2001, the Benton then discovered that the Venezuelan tax department was making an actuarial error and was overbilling the taxes. The net result is that the government is now withholding a significantly lower amount of money (ie: Benton's oil receipts have gone up).

    Benton has a good working relationship with the government, and the government is very fair in their dealings with foreign businesses. The department in charge of oil revenues is just using very antiquated software. The government has admitted the problem, and is working with Benton to arrive at the appropriate amount of money that they will either refund Benton, or reduce future payments by. Benton estimates that the amount is $15 million to $17 million U.S. This is about $.44 per share of profit, net to Benton.

    Heavier grades of oil are discounted appropriately from WTI. Your price estimated for what Benton has received last year are quite on the mark. However, that is not a result of any specific pricing arrangement charged by is simply the reality that this oil is inferior to WTI.

    I use a benchmark price of $20 per barrel of West Texas Crude in my analysis, not because that is the price than Benton will receive, but because is is the benchmark price that all other benchmarks are derived from.

    You are quite right about the capital issue. Benton has a great deal of potential to increase production quite significantly from their Monogas operations, but has always been capital constrained. They can sell approximately 70 million cubic feet of natural gas per day in Venezuela, provided that they could build a 110 km pipeline to ship the gas. This gas comes from their Monogas fields, and are primarily being "flared" (burned off) at present. 70 million cubic feet of gas is equivalent to 11,600 barrels of oil per day which is just going to waste. I feel that if as and when they receive their tax refund from Venezuela, that they will use that $15 + millions towards the building of the pipeline.

    If they announce the building of a pipeline to ship this gas shortly, their Venezuelan field will be producing at the equivalent rate of 50,000 boepd by the end of 2003. That would serve to increase cash flow estimated for 2003 to over $3.20 per share.

    One other thing that I should mention. My cash flow estimates do not take into account any of their Russian production. They account for their Russian interests as an equity holding, so they do not consolidate their pro rata cash flow on Benton's balance sheet. If you were to include the appropriate percentage of cash flow from the Russian operations, this would increase Benton's cash flow in 2002 forecasts by $.65 per share, and over $1.00 per share in 2003.

    It's good to see that you are rolling up your shirt sleeves and digging into the books. I trust that you'll do very well on this recommendation.

    Entry03/06/2002 11:36 AM
    I've been trying to poke some holes in this one because it seems too good to be true but I am not finding any. I hope you win the contest because this is now by far the cheapest stock of any on VIC.

    I did a quick comp with Hurricane Hydrocarbons which suffers a "Russia discount" because their assets are in Kazakstan and found that HH's resrves are valued at $3.50 a barrel compared to Benton's $1.29 (both include debt in the calc).

    I also did a quick calc on what Yukos is paying for Arctic Gas. I prefer to use 10:1 boe for gas especially since I can't imagine that Russian gas prices are close to New York prices and found that Yukos paid $6.12 per boe for the asset. This is a very reasonable price and it goes to show exactly how cheaply Benton's other assets are being valued. I think this is an easy double and quite possibly a triple - assuming the Ruskies pay up!

    Entry03/06/2002 11:51 AM
    I've owned Hurricane for about 18 months now. It's another example of how much potential there is in Russian production. Hurricane took approximately 5,000 barrels of production and turned it into 120,000 + bopd within thirty six months.

    If you listen into the conference call tomorrow, you'll probably hear Dr. Hill discuss the potential of the Russian assets. The Geoilbent assets lie adjacent to oil fields with 1 billion barrels of proven reserves. He's a straight forward sort.

    SubjectThanks again
    Entry03/06/2002 12:57 PM
    I'll be listening tomorrow and imagine that a pretty realistic and rosy scenario will be constructed.

    Subjectquarterly numbers in...
    Entry03/06/2002 11:33 PM
    and are close to my approximations.

    As a result of the numbers posted from Venezuelan operations, I am revising my fiscal 2002 estimates as follows.

    1. Cash flow estimates for 2002 = $57.4 million. The numbers which were generated by Benton in the last quarter at Monogas are not reflective of the earnings capability of Benton in 2002. Benton's grade of 8-10 degree API oil has increased in price by over 25% in the last two months. March pricing to date continues to show strength in heavy oil pricing, and is now slightly above my model price forecasts for 2002.

    However, to be conservative, I am revising my cash flow estimates down to $1.68 per share for 2002 (from $1.80 per share)

    2. Capital expenditures budget for 2002 = $36 million.

    After deducting debt service costs estimated at $13.9 in 2002 leaves remaining cash for further debt reduction, or asset expansion in the amount of $7.5 million.

    Oil production in the Monogas unit was well within my forecast range, and exit rates for the quarter were slightly above my forecast.

    The reversal of the valuation allowance for loss carry forwards was as expected, and reaffirms that the $190 million of gross proceeds from the Arctic Gas sale will be virtually tax free.

    Geoilbent operations performed as expected in the quarter.

    Based upon the preliminary numbers, it would appear likely that Benton will have the financial ability to expand their drilling programs by about 25% over their previous guidance while continuing to maintain a very conservative financial posture.

    Subjectfull cost method
    Entry03/07/2002 01:35 AM

    Subjectsorry, wrong button!
    Entry03/07/2002 01:44 AM

    I hit enter by mistake, sorry. Can you help me on the "conservative full cost method", my textbook suggests that the successful efforts (SE) is more conservative by expensing the dry holes. With smaller companies, dry hole costs from current drilling may exceed amortization of capitalized costs of past drilling. Also,
    is the higher cash flow adjusted for?
    Thanks, bob

    SubjectThoughts on quarter and confer
    Entry03/07/2002 11:51 AM
    Just wanted to hear your thoughts on the quarter and the conference call.

    SubjectDid I hear correctly?
    Entry03/07/2002 12:13 PM
    Geoilbent has an estimated 300 million barrels of oil and 2.5 trillion cubic feet of gas?

    Venezuela has 450 billion cubic feet of gas?

    You've talked about the Venzuelan pipeline and he mentioned the gas contracts. Did I miss when they expect to get approval on the gas contracts or do you know? Timeline for completion of their gas pipeline once they have approval.

    Do you know if there is a pipeline they can tap in to in Russia for their gas?

    This is an unbelievable story! Almost too good to be true at these prices.

    Subjectyou heard correctly at the cc.
    Entry03/08/2002 11:11 AM
    with respect to the Russian must consider that Benton only owns 34% of the quoted reserves. Furthermore, you must also consider that Russian reserves take into account both proven and probable. Benton only uses proven reserves on its books. Therefore, Benton indirectly owns 100 million of proven + probable barrels of oil and 850 BCF of natural gas.

    The Venezuelan gas reserves are proven, but until a market has been established to sell the gas into, Benton will not acknowledge these reserves as proven. There is considerable debate as to whether or not these gas reserves should have been booked into the proven category. Upon completion of a gas contract with PVDSA, the 450 bcf will be acknowledged as an asset. Benton owns 80% of the 450 bcf, which would convert (at 10-1) into 36 million barrels of oil. There is so much oil in their fields that there really is not need to continue to drill just for the sake of establishing more proven reserves. Benton would prefer to drill only when they can actually get the oil to market.

    The gist of discussions with Dr. Hill (he is a CEO that you can actually talk with when he's in the country) is that discussions are quite advanced. Benton was simply too cash poor previously to build the 110 km pipeline to the nearest processing facility. My best guesstimate (not built into my spreadsheets for future revenues) is that it will not be until the end of 2003 before gas starts flowing.

    Insofar as Venezualan proven assets are concerned, you should also be aware that they consider proven assets to be anything that can economically be extracted at the year end price of oil. 8 degree to 10 degree API oil sells for about 49% of WTI, due to the high cost of refining the molasses. For every $1 that WTI rises throughout a year, it adds about 10% to Benton's proven reserve base. This is one reason that Benton stock sold for as much as $37 per share back in 1996.

    Benton's policies of underbooking reserves help them to avoid the ceiling test writedowns of oil assets when prices fall. In that respect, their balance sheet tends to never look as rosy as its peers. Yet, in reality, the balance sheet (asset wise) is very undervalued.

    If you get a little information about the geology of the area (PVDSA has an excellent website to fill you in), you'll see that Benton's fields are in the middle of 2.7 billion barrels of proven reserves.

    There are no adjacent natural gas pipelines in the Geoilbent area for Benton to access at this time.

    Entry03/08/2002 11:26 AM
    was very much as I expected.

    The exit production rates in excess of 30,200 bopd in Monogas were about 800 barrels per day higher than my forecast run rate. This, coupled with the current price of oil, bumps my 2002 cash flow estimates back up to $60 million once again. The company is extremely leveraged to rising oil prices.

    One thing that I was very pleased about was their significant lowering of the fixed costs of producing oil from Venezuela. The reduction in fixed costs largely occurred when they build an oil pipeline to transport their product. Previously, they trucked this production to the refiner. The savings amounted to $1.69 per barrel.

    Benton also acknowledged that the debt would be far lower than previously estimated.

    One thing that was perhaps missed in the Q&A was that businessweek has a reporter on the call. Perhaps she'll be writing up something and the stock will build up a bit more of a following.

    Most importantly, the cc reaffirmed that my numbers look to be conservative in light of their production.

    Although the stock has increased by about one quarter in the last week, it was probably far too cheap previously. There are many catalysts now working simultaneously on this stock. With the economy on the mend, its probably appropriate for more investors to consider an oil stock regardless. The entire sector bottomed with the December quarter based on oil prices. Therefore, you'll probably see sector rotation begin shortly.

    Subjectbob 521...
    Entry03/08/2002 11:41 AM
    successful efforts accounting is much more conservative form companies that perform a great deal of exploration drilling. As you are aware, successful efforts immediately expenses a dry hole. The successful holes then have the exploration expenses attributed to them amortized over one of several ways (unit of production, reserves booked etc).

    When you don't do much exploration drilling such as Benton (they bought a proven field in Monogas and merely rehabilitated it) they don't have any dry holes per say. Therefore, from a methodology framework, it doesn't change their books from either successful efforts to full cost.

    What I mean by conservative full cost accounting (and I guess that I did not make my point clear)is that Benton has taken the accounting practises of running an oil company to its most conservative. For example, with traditional unit of production practises, you deplete based upon the proven reserves, not just producing. Benton depletes based only on the currently producing reserves. This effectively makes their depletion numbers look much higher than they truly should be.

    When looking at the books of Benton, I see many instances where they have appeared to be overly conservative with the math, and it seems clear that they are taking the accounting practises to the a good way. However, I obviously relayed the wrong impression with an accounting analogy of full cost vs. successful efforts. I apologize for that.

    Entry03/08/2002 01:06 PM
    thanks for your thorough reply. I suspected something was behind the "conservative part" -- as I place a great deal of investment weight on that, I really do appreciate your response. Benton looks like a real winner!

    SubjectEfficient market hypothesis
    Entry03/08/2002 04:32 PM
    Assuming the deal goes through, and Benton's current stock price stays where it is, the market will value Benton at $115 million less in combined debt and equity value than it did before the deal. All this for an asset that was carried on their books at $30 million.

    So much for the efficient market hypothesis...

    Entry03/08/2002 10:31 PM
    I would agree that efficient markets would have immediately created $115 million of increased stock value for BNO shareholders, and therefore, efficient markets don't truly exist. Thus far in the last week, only about $42.5 million of additional stock value has been created.

    People who have worked in the investment world know that the efficient market hypothesis really doesn't apply in the real world. Therefore, it has been largely cast aside.

    However, you could also suggest that in semi-efficient markets, over the course of the next year, the value of the investment in Benton should rise by $115 million from the date that the transaction became public. If you believe that there is inevitably some efficiency in markets (which is the basis for value investing) then you could imply a future stock price of $3.38 ($115 million/34 million shares) + $2.00 (price the day before the transaction became public) = $5.38. To this, you would also have to add in the additional shareholders equity built up over that period of time through retained earnings. If that were to come about over a period of say one year or so, then you could certainly see some degree of efficiency to the markets.

    My own investment business is built around a very rigid investment strategy, which focuses on a specific event catalyzing a low p/e stock or out of favor investment and bringing it back to the growth mode. Benton fits well into my practise because BNO has a specific event catalyst, an industry catalyst and will soon (at the conclusion of the sale) have a much stronger balance sheet than over 80% of its peer group.

    SubjectVenuzuelan reserves
    Entry03/09/2002 12:12 PM
    I've owned BNO for quite a while, and I'm glad I held on to see the sale of Arctic Gas, and I agree with you that with the cash infusion, BNO is undervalued at $3.

    I don't men to nitpick your excellent recommendation, but for some reason I have always been under the impression that the reserves in Venuzeula aren't really owned by Benton in the way that US oil and gas companies own their reserves. Benton has a long multi-year contract, which will eventually expire, to do what they want with the Monagas oil field, which is an old oil field and in a perpetual state of declining production without expensive reworking. Furthermore, Benton doesn't get to sell the Monogas oil on the open market, but rather Venuzuela sells it and gives BNO a price equal to about half of the WTI price.

    These are the reason why no other company has reserves valued at such a low price.

    But congrats on winning the award.

    Entry03/09/2002 02:44 PM
    Hi, guys --

    I'd agree that BNO's recent price action is an embarassment to the EMH, but for different reasons: The anomaly is that the price rose at all, not that it rose so little. Why should a fair-value asset sale by a non-distressed firm lead to a re-valuation, unless the market was incorrectly valuing the asset in the first place?
    The sale of Arctic shouldn't have "created $115 million of increased stock value for BNO shareholders". It may have been carried on the books at $30 M, but I'm sure that Ran, for instance, valued it more closely to the sale price. In other words, if BNO was worth about $2/share before the announcement, it should be worth about $2/share now; if it was worth Ran's estimate of $8/share, it should still be worth about $8/share.
    So I don't see the sale as _creating_ value -- although it sure looks like a nice, big club to force the (inefficient) market to recognize the value that was already there.


    Entry03/09/2002 06:03 PM
    I would agree that the structure of the Venezuelan operations have the potential to leave some investors unable to directly compare it to U.S. producers. Because Benton does not operate in the U.S. it becomes much more appropriate to compare it to other international developers in its peer group.

    You are correct inasmuch as Benton does not actually own the fields, but merely has a long term (25 year) contract to exploit the fields. However, this is very similar to many contracts directly outside of the United States, and is in no way considered detrimental to the Benton assets. I'm presently evaluating a number of international oil exploiters who have contracts in various parts of the world which are virtually clones of the PVDSA contracts.

    The expenses in developing the Venezuelan fields are not higher than the norm. In fact, if you consider Benton's development drilling costs on a barrel of oil equivalent found they are actually very cheap. The types of geological challenges presented by heavy oil fields in the past are being addressed through technological innovation. As well, the depletion of this field that you have referred to is largely a rational decision made by the board of Benton not to spend additional monies to prove up reserves that they simply couldn't get to market. There was literally no point in spending an extra $10 million in development drilling to further expand the size of the Monogas fields, when they needed that $10 million to expand their pipeline 1st. Don't forget, the company only includes proven reserves as currently producing. Geologically speaking, there are virtually unlimited reserves in this area of the world. The wells that Benton will drill in this area of the the Monogas structures typically show reserves of about 2 million barrels per well. Benton intends to drill up at least 8 new wells this year. That should add about 16 million barrels of oil to their base. I assume that they will produce about 12.5 million barrels of oil this year, so oil reserves should remain constant or rise slightly.

    The greater cost for this company has historically been the transporting of this oil to the appropriate ports. The one time expenses incurred in building an oil pipeline have been fully paid for in the last year, and net production costs are now down to a little over $3 U.S. per barrel.

    As for the Venezuelan government selling the oil and giving Benton only a fraction of what it is worth, I must respectfully disagree. What Benton sells is a form of heavy oil. More specifically, the oil is graded as 8 degree to 10 degree API crude. What Benton receives for oil of this viscosity is very much the same throughout the world. Heavy oils sell for discounts to WTI due to the high cost or refining this into usable products. Venezuela actually ships this oil to their PVDSA refineries in Aruba, Louisiana and Texas for upgrading. There are several excellent websites run by various multinational oil companies that update the prices of various grades of oil on a weekly basis. One good site for heavy oil pricing is run by Berry Petroleum. Berry produces 13 degree API oil, which sells for about 60% of WTI. The price that Benton receives is directly comparable to other producers producing the same type of product.

    I'm glad that you own the shares, and am sure that you'll do quite well in the next 12 months or so.

    Entry03/09/2002 06:17 PM
    to my embarrassment, I had only ever priced the Arctic Gas assets at the net value that Benton had invested from an equity perspective in the company. Therefore, I had previously undervalued the potential of the Arctic Gas assets.

    The Arctic gas assets were somewhat of an enigma for Benton followers. There was certainly a great deal of potential in them. Regretfully, Benton was so cash poor and highly levered that they simply couldn't exploit them properly. It was estimated that to bring the Arctic Gas fields properly on stream would have cost about $100 million or so. That was simply too much leverage for Benton to sustain in the near term. You must remember, that when looking at the old balance sheet, Benton showed 90% debt to 10% equity. No financial institution would provide further capital Short of doing a share rollback and a rights offering, Benton may have had to wait for a decade to properly exploit their fields.

    Given their druthers, I'm of the opinion that management would have much preferred to have kept the Arctic Gas assets. However, Yugos offered a win win situation for both parties. Benton now has the appropriate capital to fund their real prize, which is the Geoilbent assets, without levering up.

    Geoilbent sells a higher quality light sweet crude, which sells for just a modest discount to WTI.

    SubjectA little help please...
    Entry03/18/2002 10:00 AM
    Sounds very promising, but not without risk...

    As a novice in the oil and gas space and someone who is relatively new to the BNO story, I was hoping you could provide me with some assistance.

    - How much of their 9.8 mm barrels in 2001 were attributable to Arctic? How does Arctic compare to what the company has left in Russia in terms of proven reserves and potential? Was Arctic a bit of a "fire-sale" to get leverage in check?

    - Will the company be paying cash taxes going forward?

    - Has the company given any guidance in terms of what kind of operating cash flow it expects in 2002? If I take $14 net revenue per barrel minus $6 of cash operating costs and multiply by .6 (to account for taxes and interest expense), I get $4.8 of cash flow per barrel x 11 million barrels = $53 million is that about a conservative estimate from OCF?

    - Same question with CapEx. And how much is going to new projects as opposed to existing projects? Are most of the new projects in Russia? Does the company have any rate of return hurdles for new projects?

    - Can you help me understand how you got to the $5+ of fair value? What are you assuming in terms of price/barrel and how did you come to this NAV? (Sorry for my oil ignorance.)

    - Any opinions on mgmt? Are they conservative or optimistic? credible?

    Thanks very much

    SubjectBear HY Analyst
    Entry03/18/2002 02:46 PM
    I called the Bear Stearns HY analyst who covers BNO. Their 2002 model assumes production decreases by 4% and EBITDA is $30 million (assuming oil at $18 barrel). This doesn't jive with what guidance was on the call. They acknowledge being the low on the street, but it would be helpful to get others opinions on these numbers. Bear also said they assume $30 of capex.

    Subjectjazz 678
    Entry03/18/2002 07:56 PM
    Of the 9.8 million barrels of production stated on their books for 2001, 0 was attributed from any Russian production.

    Benton accounts for their Russian assets as an equity investment. Therefore, not one drop of oil sales were consolidated on Benton's top line in 2001.

    The Arctic oil assets that were sold were roughly comparable in size to the 34% equity interest in Geoilbent. Arctic gas assets were overwhelmingly natural gas based, and far more remote in terms of location. Geoilbent (the remaining Russian assets) are much higher in terms of quality, netbacks etc. than was Arctic.

    As for fire sale prices...that's true to some extent. Bear in mind though, that Benton had invested a total of $29.5 million and will receive gross proceeds of $190 million, over an investment period of roughly 5 years. The sale did accomplish the result of delevering the company greatly.

    The company will still have approximately $40 million of tax loss carry forwards available after the completion of this sale. They are of course accruing taxes as though they will actually be paying.

    Benton's own guidance suggests that (prior to the sale of the Russian assets)they would have been in a position to generate about $1 of net free cash flow after debt servicing for 2002. The result of applying the proceeds against the outstanding bond issues effectively increases free cash flow estimates by $.47 per share in the 12 months following the bond redemptions.

    As for your estimates of $53 million of operating cash flow for 2002, I would suggest that your number represents a very conservative assessment.

    As for Capex, $30 million is going towards further development of the Venezuelan assets. None of this will be exploration. Approximately $7 million will be used towards Geoilbent's pro rata share of primarily development drilling in Russia. I should mention that Benton's holdings in Russia are self funding at this time. Geoilbent has a fairly large cash balance sitting on their books towards the 2002 development projects.

    Benton has two main thrusts from an operations standpoint in 2002.

    1. They intend to obtain a gas sales contract from PVDSA in Venezuela for their substantial natural gas reserves. The pipeline that would be required to ship this gas to market would cost in excess of $50 million. The rate of return on the invested capital associated with this expansion would exceed 30% at current prices.

    2. They would like to increase their equity holding in Geoilbent to a control position (50% +). I estimate that to increase their holding by 16% would require an additional investment of approximately $60 million.

    Benton does not disclose their return hurdles for new projects. My own analysis suggests that they look to earn a minimum of 35% on their invested capital.

    The $5 + of fair value is based upon a 3.1 times price to estimated 2002 cash flow. This represents the absolute bottom of the range for international developers with long lived assets.

    Fair value based on assets is a whole other story.

    I am using the 8-10 degree API grade oil pricing which equals 49% of WTI. My WTI assumption for 2002 is $20 per barrel.

    For every dollar of increase of decrease in WTI, Benton's cash flow increases or decreases by approximaely $.14 per share.

    Management of oil companies is only as good as the asset base that they have to work with. Benton's current management, by that standard,is considered to be excellent.

    By and large, I tend to only evaluate companies who have used more conservative accounting practises. Benton nicely meets my standard.

    Subjectanalyst guidance.
    Entry03/18/2002 08:12 PM
    I prefer firms who encourage their staff to actually put a pen to paper and perform actual analysis themselves...rather than wait to see what other firms put up for numbers and then then decide on what side of the fence that they'd like to sit. This greatly limits the list of sell side analysts that I have worked with.

    In light of a rapidly strengthening U.S. economy, I would comment that a call for $18 oil looks to be quite inappropriate at this time. Any oil analyst worth their salt should be looking forward, not backward.

    Entry03/19/2002 12:25 AM
    Thanks for your insight.

    A few more questions/thoughts...

    1. Given the relative strength of the balance sheet after completion of the sale, has mgmt. considered buying back some stock? They seem intent to retire the 11 5/8 bonds and keep about $50 mm on the B/S and possibly retire some of the 2007 bonds as well as fund new projects. At these prices, any buybacks would appear HIGHLY accretive and a better allocation of capital than retiring the 2007 bonds. Obviously, liquidity and mkt. cap requirements are an issue, but I'd rather own an illiquid $8 stock than a liquid $6 stock. Any thoughts on if this is a possibility?

    2. Someone mentioned it before, but theoretically (assuming Arctic was given nominal value before the sale), this deal should have created $150 mm of equity value, or about $4.40/share. Do you believe the full value of the deal is not priced into the stock?

    BNO appears to have a number of catalysts in front of it... great idea.

    Entry03/19/2002 12:07 PM
    a share buyback would certainly be highly accretive in the near term. I don't think that this represents a possibility at this point.

    Maintaining a strong balance sheet will be a priority for the near term. They probably have more drilling and capital expenditure possibilities than they need for the next several years. Now that they have obtained all the financial flexibility that is required to rapidly grow the revenues, I suggest that they will be doing just that.

    A key point regarding my thesis on the investment in Benton is that the sale of Arctic Gas is not fully reflected in the present stock price.

    I'm glad that you're looking into this stock closely.

    Subjectran -
    Entry03/19/2002 02:35 PM

    Subjectran -
    Entry03/19/2002 02:35 PM

    SubjectFollow-Up Questions....
    Entry03/20/2002 11:03 AM
    Ran - Thanks again for your help.

    Do you know how much stock mgmt. owns currently? Looks like they made some nice purchases in Oct 2001.

    Also, how did they get so levered before the new team came on board?

    There was some broad-based buying yesterday and also today. Somebody yesterday just wanted stock at any price and unfortunately (for those accumulating) drove the price up pretty dramatically. My gut tells me this is worth $8+, but I find it hard to pull the trigger after a 20% up day. Hope I didn't miss the boat.

    Subjectmanagement ownership...
    Entry03/21/2002 10:35 AM
    management of this company is quite new. A number of the top executive now working here have been on board for less than 2 years.

    Of course, the last insider filing reports are probably quite out of date. My best guess (and it is just that) suggests that management now owns about 10% all in.

    The leverage of this company came about through a number of ways. They invested heavily in the Monogas project largely with bank debt. Benton made a few significant investments offshore California and Louisiana.

    A great deal of the previous spending occurred (it appears) to finance the previous manager's lifestyle. Benton paid hefty consulting fees to Alex Benton for a number of years. He was replaced by current management a few years ago, and consequently declared bankruptcy. Benton had attempted to recover roughly $20 million of monies, but has essentially given up.

    SubjectRussian consents obtained...
    Entry03/22/2002 01:33 PM
    Benton Oil and Gas Receives Needed Russian Consents for Sale of Arctic Gas
    HOUSTON, March 22 /PRNewswire-FirstCall/ -- Benton Oil and Gas Company (NYSE: BNO - news) said today that its sale of its entire interest in Arctic Gas Company to a nominee of the Yukos Oil Company for $190 million has received the requisite consents from the Russian Ministry for Antimonopoly Policy and Entrepreneurship. Benton expects that all aspects of the transaction will be completed within three weeks.

    Benton's President and CEO, Dr. Peter J. Hill, said, ``We welcome the news that the sale of our interest in Arctic Gas can now proceed. This transaction, when closed, marks the beginning of a new era for our company. With a much strengthened balance sheet, we will be better able to exploit our remaining strategic assets in Russia and our attractive position in Venezuela.''

    Benton Oil and Gas Company, headquartered in Houston, Texas, is an independent oil and gas exploration and development company with principal operations in Venezuela and Russia.

    SubjectRAN -
    Entry03/22/2002 03:06 PM
    Saw the news. Thanks for the idea. Hopefully it will make a decent return over the next 12 months. Given your obvious knowledge about the sector, you may find POG to be interesting. It's more of a gas play and has run up a bit lately, but still think it's attractively valued.

    Good luck w/ your investing.

    SubjectSpoke to Mgmt...
    Entry03/25/2002 10:05 AM
    Spoke to management and received a few tidbits of helpful information.

    - 34 million shares outstanding doesn't include "a couple million" options the management team vested in recently at a strike of between $1.5-2.5. A more conservative number for F.D. shares is about 36 million.

    - The CFO indicated they would be full tax payers after the sale of Arctic Gas (about 34% in venezuela). This is contrary to what you mentioned... any clarification would be helpful (i threw out the $40 mm carryforward, but he didn't seem to agree, unless i'm missing something).

    SubjectNew Guidance
    Entry04/23/2002 01:21 AM
    Hi Ran:

    What is your updated target price and timeline given the guidance by the company today - which is even better than you had suggested?

    Thanks for a terrific writeup and idea.

    SubjectLetter Sent to Management
    Entry04/25/2002 01:40 PM
    Dear Peter and Steve:

    As a relatively new shareholder, it was a pleasure to hear you speak personally for the first time at yesterday's Bear Stearns High Yield Conference in New York. Over the past month, as I have familiarized myself with the BNO story, I continue to be impressed with the velocity at which you continue to improve the operations, financial strength and visibility of your business. Though we are a relatively small fund, we have continued to accumulate your shares, perhaps in larger quantities than prudent, but yet are very comfortable with our current position (at a average cost of $3.88/share).

    While we do not profess to have ANY expertise in the oil/gas industry, as equity investors in a commodity business, I believe there are several things that separate good investments from a bad one.

    - Relative valuation: BNO by any measure is inexpensive when compared to its peers.
    - Quality of assets: It appears as though BNO has narrowed its focus on two geographic areas in which it has a large amount of expertise and many opportunities to pursue growth
    - Quality of management: Very impressive

    The final area in which I believe a company can differentiate itself from its competitors is in the manner in which it allocates its capital. You have done a tremendous amount of work in getting debt/cap in check and at a very acceptable level. Additionally, there appear to be numerous opportunities (natural gas in Venezuela, increasing equity ownership in Russia) that could prove to be very attractive rate of return projects. However, despite the recent run-up in your stock price, by any sort of mathematics, I would guess that your stock is still trading at a maximum of 5-7x P/E, which would imply, on the low end of the range, a 20% AFTER-TAX equity cost of capital. You have done a outstanding job in educating the investment community about the BNO story. However, as the saying goes, you can lead a horse to water, but you can't make it drink. To the extent the markets are inefficient, slow to react, or refuse to believe (though it would be hard to remain in denial if the company plans to hedge it's exposure to oil prices), I would suggest that windows of opportunity do exist, and when they do, they should be taken advantage of. Therefore, not only would a stock repurchase be economically rational, but it would send a HUGE signal to investors that the recent appreciation in your stock is not only warranted, but also that you believe this is merely the beginning, rather than the end.

    Thank you very much for your consideration and we look forward to remaining shareholders alongside both of you for a very long time.

    Subjectguidance going forward...
    Entry05/10/2002 11:20 AM
    based upon the first quarter's numbers, the numbers that were contained in the initial thesis look to be a little more on the conservative side than some may have initially argued.

    What investors should now be focusing on is a further move upward based upon production increases, commodity price strength and a contract with PVSDA in the next 12 months for development of the extensive gas reserves.

    One thing that the conference call did not pay a great deal of emphasis on was the extensive development drilling going on in Siberia, and the lag to put the wells on stream. Because the Russian assets are essentially self funding, the large decline in booked profits did not truly appear to have been totally due to price decreases in the commodity. Rather, it appears that the company invested very heavily in development and exploration costs, and expensed much of this cost against their revenue stream.

    In the region where Geoilbent is focusing, the ground can be very swampy. Access to the exploration and development sites can only occur during the winter months. Therefore, the development expenses for Geoilbent peaked in the quarter that just ended, which coincide with the trough in delivery pricing for their product.

    The forthcoming two quarters should show the initial results of the winter drilling (based upon expenditures) inreasing the Geoilbent total production to close to 28,000 bopd.

    What one should also note is that management has repeatedly mentioned some frustration with an inability to increase development of the Geoilbent assets at a faster pace, due to the capital constraints of their Russian Partners. Benton (and this is just one take on the large cash balances that Benton wishes to maintain)seems to be attempting to negotiate a way to take control of their partner's interest.

    This would most logically be done with both cash and shares of Benton in an exchange.

    In short, catalysts still exist to increase the value of Benton (soon to be Harvest) to about $6 per share by the fall.

    SubjectRan -
    Entry05/15/2002 10:31 AM
    nice to see you're still involved in the stock. i strongly agree with your thesis on BNO taking a majority interest in Geoilbent. It would seem logical that their russian partners don't have deep pockets and therefore, BNO would be able to buy some or all of their stake either cheaply or with a commitment to continue digging new wells.

    two other things I have been discussing w/ management is 1) their willingness to hedge out some of their oil exposure at these prices and 2) the possibility of repurchasing stock.

    i also agree a gas contract in Venezuela would be beneficial and is a distinct possibility in the upcoming months.

    i may be overly-optimistic (which i usually am not), but i think $7-8.50 is not unreasonable.

    your thoughts on these matters or any other ideas you may have would be appreciated.

    Subjectshare price
    Entry05/29/2002 08:14 PM

    I'd am curious about the 1996 price of Benton being $36. Can you give a brief history of the "Fall and Rise"? Any thoughts about getting back near those levels? If HNR can sign the contract with PVSDA and the Geoibent production gets ramped up, will that bring them close? Or is the market no longer valuing HNR's reserves that are not on the books? (proven/probable)


    bob (note from a happy shareholder)

    SubjectBentons rise, fall and rise...
    Entry06/03/2002 12:53 PM
    Benton is a relatively storied company. Alex Benton (the former CEO and no longer affiliated with the company) was one of the first oil executives to realize the potential of Soviet Oil production. He entered into an agreement in 1990 to develop oil assets in Siberia.

    The rise of the stock was quite dramatic in the early to mid 1990's. Benton had a great deal of speculative appeal as an emerging oil producer.

    The stock peaked in 1996, with the purchase of the 100 million barrel (proven reserves)+ oil assets in Venezuela.

    At the time, oil assets and oil companies in general were of course very much in vogue. Benton was a much smaller company in terms of share capitalization (less than 14 million shares fully outstanding,) and carried a market cap of roughly $504 million. The purchase price for the Venezuela fields were done entirely with debt, which offered both significant potential reward as well as risk.

    The shares split shortly thereafter.

    By the late 1990's the price of oil had fallen sharply, which had a significant impact upon Benton's cash flow and debt service ratios. The stock price (which at the time would more appropriately be considered as a warrant on the future operational success of Benton) also fell sharply. Alex Benton had pledged a significant holding of his stock as collateral on a bank loan which was called in a divorce proceeding. He declared bankruptcy.

    Management was left a little thin, and shareholder confidence was of course lower as a result.

    Dr. Peter Hill, a seasoned international veteran of the Royal Dutch Shell Group was brought in to bring operational expertise to the company. One could argue at this time that he has demonstrated some success.

    In order to see Harvest shares increase to a price of $36 per share in current dollars, the company would require oil reserves on a proven basis (discounted at 15%) to exceed $1.6 billion. At present, the company is a far cry from that level.

    To investors who look for upside in an oil company, there are really three criteria to focus on.

    1. What is the future price of oil (say for the next 12 months)? Oil reserve engineers assess the value of any companies proven reserves on the basis of the economic productivity of any field. When oil prices are high, then proven reserves tend to increase, even without drilling. This is because a company can produce marginally productive wells at a profit, if oil prices justify. When oil prices decline, these marginal oil wells are often shut in (production is suspended until the price justifies a reactivation of said well).

    Provided oil prices remain above $24 U.S. per barrel (West Texas Crude index) for an entire year, Benton's proven reserves in Venezuela would literally double on an economic value basis...provided that a $24 price level could be sustained for another year thereafter.

    2. What is the reserve life index of the proven reserves? This is again tied to the future price of oil. Many oil companies have short reserve lives for their fields (less than 8 years). This means that they must spend as much money on development and exploration as they receive in revenues. The reserve life index is typically lowest when oil prices are low. Therefore, one should seek out oil companies for purchase with long reserve indexes when oil prices are under $20 per barrel. Any company with roughly 11-12 years for reserve life would be considered to have a relatively long reserve life index.

    By this benchmark, Harvest would be considered as excellent.

    3. What are the total production, development and finding costs for oil. If a company spends less than 50% or less on these total costs when oil is selling for $20 per barrel, then it would be considered excellent.

    Based upon these criteria, Harvest would certainly stack up with the best of its peers in the junior producers.

    As for the future price hitting the old price of $36, my numbers certainly don't show that as being possible in its current configuration.

    SubjectThanks again
    Entry06/05/2002 12:43 PM

    Sorry to respond so late -- I banged up my foot! Anyhow, your response has encouraged me to dig deeper into oil and gas in general, and specificaly Harvest. I am attracted to their "low cost" structure and the direction of new management, Mr. Peter Hill. As in any commodity business, it looks like we just have to keep our fingers crossed on oil prices.

    Thanks again,


    Subjectcomment on quarter ending June
    Entry06/30/2002 01:09 PM
    the recent price strength of Harvest appears to have been driven by one full quarter of higher than anticipated crude oil prices.

    Iportantly, the benchmark price of crude (West Texas Intermediate or "WTI") has increased approximately 5% on the year to date.

    Harvest's heavy crude grades sell for roughly 49% of WTI. In the quarter that ended on March 30th, Harvest received a weighted average price of roughly $10.73 per barrel. For this quarter, Harvest will likely have received an average price for its production of roughly $12.40 per barrel. The difference represents approximately $4.7 million in additional revenues. Heavier oil grades did not fully participate in the price increases this quarter.

    Since Harvest only includes the Monogas field revenues in its financial statement, one can quickly assess the impact of these higher revenues on the bottom line.

    Harvest generated revenues of $27.2 million, free cash flow of $9 million and net profits of $1.5 million in the quarter ending March 31st. For this quarter that just ended, Harvest likely posted revenues of $33.8 million.

    What will be intriguing for momentum investors in the upcoming quarter is the fact that Harvest will now show the benefit of dramatically lower interest expense. This, coupled with sustained WTI prices and roughly 1,500 bopd of additional oil production in Venezuela should pave the way for a very interesting third quarter ending September 30th. Provided that WTI remains above $25 per barrel for the next quarter, Harvest may show free cash flow of roughly $20 million in period ending September 30th.

    The value of the Russian assets (due to Harvest's conservative policies of accounting) are largely ignored on the balance sheet and income statement. However, Harvest's equity interest in Geoilbent likely showed an increase in profits of at least $3 million for the quarter that just ended.

    Despite the doubling in the share price over the last six months, Harvest still currently ranks as being the absolute cheapest stock based on all valuations in its peer group.

    As retail investors typically look at trailing numbers, expect an inflow of capital into pure oil plays this quarter. Institutional investors, which look at forward numbers, will have no reason to sell oil assets, as price strength appears likely to continue this quarter.

    There is really very little else that I have to add, as the ball on this stock seems to have been picked up by a number of the excellent minds on this board. They can do the math as quickly as I, and will reach their own independant conclusions.

    Entry08/07/2002 03:54 PM

    Hi, guys --

    Another fun conference call from the guys at Harvest. I just _love_ Hill's accent. Who would think that a little rain in Venezuela could cause such a mudslide on Wall Street?

    One interesting thing that came out is that their hurdle rate is about 25% -- 15% cost of capital + 10% country risk premium. Given that kind of ROIC, I can see why they haven't been too active in buying back stock.


    Subjectannouncement of gas contract a
    Entry09/24/2002 10:12 AM
    Harvest Natural Resources Announces Venezuelan Natural Gas Contract
    - Increases Proved Reserves 23 Percent - Adds $18 to $24 Million EBITDA Starting in 2004
    Monday September 23, 6:00 am ET

    HOUSTON, Sept. 23 /PRNewswire-FirstCall/ -- Harvest Natural Resources, Inc. (NYSE: HNR - News) today announced its 80 percent owned subsidiary, Benton- Vinccler, C.A., has signed a contract with PDVSA, Venezuela's State Oil Company, to sell natural gas from its South Monagas Unit commencing in the fourth quarter of 2003. The agreement calls for the delivery of up to 198 billion cubic feet (Bcf) of natural gas through July 2012 at a sales price of $1.03 per thousand cubic feet. As a result of this contract, Ryder-Scott, the Company's independent petroleum engineer, has added proved natural gas reserves of 198 Bcf, or 33 million barrels of oil equivalent (MMBoe), to Benton-Vinncler's proved reserves. Net to Harvest's 80 percent interest, this is an addition of 158 Bcf, or 26 MMBoe, of proved reserves which is a 23 percent increase to Harvest's 2001 year-end proved reserve base of 113 million barrels of oil.

    Harvest Natural Resources President and Chief Executive Officer, Dr. Peter J. Hill, said, "We are very pleased to finalize this agreement with PDVSA. In 1992, we were one of the first independent oil and gas companies to invest in Venezuela's oil industry and now 10 years later we are the first US independent oil and gas company to participate in the emerging Venezuela domestic natural gas market. Based on expected production levels and anticipated operating costs, natural gas sales are expected to increase the Company's annual EBITDA in the range of $18 million to $24 million, or $0.50 to $0.70 per share, beginning in 2004. The additional cash flow and earnings anticipated from this contract reduces our dependence on oil prices, increases our financial flexibility and positions us to execute a wider range of strategic growth opportunities."

    An initial capital investment of approximately $25 million will be required in 2003 to build a 54 mile pipeline to deliver the natural gas to the PDVSA sales point, modify the Uracoa Field processing plant and for other infrastructure needs. Banco Mercantil, C. A. (Banco Universal), one of Venezuela's leading commercial banks, will provide $15.5 million of financing to fund construction of the pipeline. The remaining $9.5 million capital investment is expected to be funded with internally generated funds. Natural gas sales are expected to commence at a rate of 40 to 50 million cubic feet per day (MMcfpd) in fourth quarter of 2003 and gradually increase up to 70 MMcfpd in 12 to 18 months.

    Initial gas production will come from the Company's Uracoa Field where approximately 100 wells have been drilled through the natural gas cap. Currently the field is producing about 40 MMcfpd of associated natural gas that is being injected back into the reservoir. Additional oil production will initially come from the 10 to 12 Uracoa Field oil wells presently shut-in due to their high gas-to-oil ratio. The Company expects further increases of oil production from the planned drilling of infill wells, which can now be placed in more optimal locations.

    The Company expects to invest an additional $21 million starting in 2004 for a natural gas pipeline, infrastructure and drilling in the Company's Bombal Field to sustain the gas production profile to the end of the contract.

    Hill continued, "This natural gas contract will also allow us to lower overall unit operating costs due to a higher product throughput and the elimination of expenses associated with reinjection and other natural gas handling costs. Additionally, we will be able to efficiently accelerate oil production without concern for producing excess natural gas."

    Production of the natural gas cap is projected to provide incremental oil volumes. As a result of this expected increase, the Company has agreed to sell 4.5 million barrels of oil to PDVSA over the term of the natural gas contract at a price of $7.00 per barrel. The Company will continue to sell its remaining oil production to PDVSA at a price based on five crude oil indexes, which has averaged approximately 48 percent of West Texas Intermediate since 1992.

    SubjectCongrats on this idea ; one of
    Entry09/24/2002 02:04 PM
    Congrats on this idea ; one of the best working of the year on VIC. This management team seems to really have this company on the right track. Of course good energy markets help too. Im a happy shareholder.

    Subjectthe stock has met my expectati
    Entry09/25/2002 10:02 AM
    the third quarter just ending and the fourth quarter to come look to have significant momentum for oil investors. Pricing is very strong through November futures, and this should result in many upside surprises for earnings over the sector in general.

    Specifically to Benton, their conference call indicated that oil production in South Monogas was ranging from 31,000 barrels to 32,000 barrels per day. This represents a 10% improvement in daily output vs the second quarter. This adds about 12% to overall revenues, and a much greater increased to EBITDA and free cash flow.

    I'm keeping my cash flow and earnings forecasts unchanged for now. The second quarter shortfall looks to have been made up with pricing increases in the quarter just ended. Should pricing remain firm, cash flow numbers could be adjusted upwards by almost 7% above my forecast through 2002.

    Momentum, oil pricing and market gyrations all look to be working in the favor of oil companies in general.

    SubjectRan, Any update on this co
    Entry03/04/2003 07:35 PM

    Any update on this company after the earnings? Seemed like there where some negatives beyond the issue of strike.

    Costs per barrel on rise

    On surface it seems like they are not in control of situation in Russia.


    Subjectreply to decline...
    Entry03/07/2003 11:56 AM
    The year ahead looks to be more challenging for Harvest than 2002, due to the extended oil strike in Venezuela.

    Although the strike is now over, and Harvest has stated that they will be able to resume full production relatively soon, the markets in general, and I specifically are somewhat unconvinced.

    Heavy oil requires a great deal of stimulation in order to get the product moving from a previously dormant field. This requires additional expenses and increases the producing cost on a per barrel basis. This will result in higher than anticipated costs for 2003. As well, Harvest has stated that they will be allowing the production from their existing field to decline this year in order to access their new gas fields.

    As for their Soviet production, the problems pertaining to the latter half of 2002 should only be temporary, and I see nothing untoward in their lack of compliance with some covenenants...nothing that $35 U.S. per barrel oil hasn't already fixed this quarter.

    There is still significant upside in Harvest at current prices, but for 2003, any movement will be tied to the continuing strength of oil prices, and not specifically to production increases.

    This means in short, that HNR has no more upside for the next 12 months than any other oil producer in the oil and gas universe that I follow.

    I'd recommend that any investors who still hold Harvest and didn't fully sell out their positions when it touched a $7.50 price a few months ago, do so now and reinvest in Petrobank, which has considerably more upside over the next 12 months.

    Subjectbear in mind...
    Entry03/07/2003 06:09 PM
    my switch recommendation from Harvest to Petrobank is based on the assumption that an investor wants to participate in both high oil prices as well as growing production probabilities from an oil investment.

    I'm not suggesting that Harvest doesn't have the ability to rise towards the $7.50 price range once again by late this year. Should oil prices remain well above a $25 U.S. per barrel level for WTI for most of the year, Harvest (and any oil company in general) looks to be underpriced in relation to the rest of the market.

    In about a year, once the two natural gas projects have commenced production, Harvest will once again have a great deal of growth potential. Unfortunately, in the near term, an investor who seeks growth from this stock will likely just be marking time.

    My own criteria for owning a value investment is the emergence or resumption of superior growth vs the industry that it operates in. This catalyst is no longer present with Harvest.
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