Harvest Trust Energy (HTE) – Part 3 - Outlook

Harvest’s upstream oil and gas production is weighted approximately 73% in crude oil and liquids and 27% in natural gas, and is complemented by its long-life refining and marketing business. The company’s current focus is on sustainability. Weak natural gas, high cost in western Canada upstream business, royalty framework increases in Alberta, and Canadian dollar rapid strength are the current challenges facing the company. The company’s course is to adapt through a growth strategy using very selective capex investments.

HTE’s sustainable growth strategy in its upstream business is dependent on its access to over 2B BOE of reserve. The recovery is less than 30% and the contention is that 20M will be added to its Proven and Probable (P&P) reserves for every one-percentage increase in recovery using technological advancements. Since that amounts to 10% of the existing P&P reserves the potential is huge. The execution of this strategy requires high oil prices, as its OOIP reserves are either mature properties or oil sands, both of which are capital intensive. The downstream business, is by nature highly cyclical as indicated by the crack spread.

Below is a table that shows the current valuation of their upstream assets using a variety of criteria:
















Measure Valuation
Multiple of Proven & Probable (P&P) Reserves 18.9
Multiple of per flowing barrel oil equivalent* $65545
Multiple of Original Oil In Place (OOIP) 1.8**

  • Assumes downstream asset valuation to be $1.6B, the purchase price at the time of the acquisition.
  • *Projected for 2008
  • **Less than 1 when 1B barrels of oil sands OOIP is included
The company is valued in the high end of CanRoys. This premium valuation is somewhat justified, given its oil weighting and refinery diversification. The dependency of the company’s prospects on the highly cyclical refinery crack spreads and uncertainties surrounding the royalty and tax effects should together keep the shares volatile for the foreseeable future. It should act as a good trading stock in diversified stock portfolios.

Related Posts:
  1. Harvest Trust Energy (HTE) - Part 1 - Introduction.
  2. Harvest Trust Energy (HTE) - Part 2 - Business Issues.
  3. Harvest Trust Energy (HTE) - Part 3 - Outlook.

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