The Hugo Chavez Discount
Speculation can be risky enough, but investing in Venezuela might bring it to another level. After all, hasn’t President Hugo Chavez been nationalizing businesses left and right at the expense of greedy capitalists everywhere?
As far as Cramer’s concerned, all that fear has already been priced into a lot of the companies that do business in Venezuela. Those nationalizations and partial nationalizations are in the past, he said. So a small-cap like Harvest Natural Resources could turn a tidy profit if played right.
HNR is a small oil exploration company (a $12 stock with a market cap below $500 million) that mainly focuses on three fields in Venezuela. Chavez converted the operation into a state-controlled venture, which isn’t as bad as it sounds, Cramer said. HNR gave up control of its assets, but in return it got its drilling permit extended by 14 years to 2026 and it got three new oil fields to drill on, doubling its overall proven and probable reserves.
Neither Exxon Mobile nor ConocoPhillips were willing to deal with Chavez – maybe because a refusal of the same offer Harvest accepted grants them more leverage in future negotiations – and COP ended up taking a $4.5 billion hit. Cramer thinks that Harvest’s willingness to play ball could garner them a piece of that freed-up capital.
Cramer sees Harvest as a play on high oil prices, plain and simple. About two-thirds of its reserves are probable and not proven, but once the merger with the state is complete, it should be able to prove those reserves. That could boost the price of the stock, he said.
Big oil is still in Venezuela and they’re going to want to replenish their reserves, so Harvest would make a nice target, Cramer thinks. Share price should go up if that happens as well.
Harvest trades at 11.3 times forward earnings, while larger overseas oil explorers like Talisman Energy and Noble trade at 12.9 times and 13.2 times forward earnings, respectively. That’s a Hugo Chavez discount, Cramer said, so you might want to take it. Keep in mind also that because the entire capitalist world is afraid of Chavez, stocks like Harvest are cheap anyway.
Cramer can’t recommend paying more than $15 a share for HNR. And if you do decide to buy, just remember the usual spec Friday rules apply: no after-hours buying, and be sure to use limit orders.
Bottom Line: Go out on a limb, Cramer said. Venezuela may not be the safest play out there, but it is a great place to speculate, which is why Cramer likes HNR.
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