Harken Energy Corporation

One of my favorite oil and gas plays is Harken Energy Corporation (AMEX: HEC). I have to confess that one of the attractions is the low share price (only $0.60) compared to its all-time high price of $70. Sure, it isn’t going back there, but maybe it could go back to its January 2004 peak of $1.30, which would be a nice doubling of its current share price.

Harken’s market cap is $134 million. This market cap has three components:

(1) $33.3 million net cash value.
(2) 11.9 million shares of Global Energy Development PLC (LSE: GED), which is worth $40.3 million based on Friday’s closing price.
(3) The rest of Harken’s assets, which we will call its enterprise value, is valued at $60.4 million. I believe that this stuff is worth more than $60.4 million.

Harken had $11.767 million of revenue for the first half of 2006. If we double that, we arrive at an expected $23.5 million revenue for the year, giving HEC an enterprise value/sales ratio of 2.57.

How does this compare to other oil and gas companies? Let's compare Harken Energy to Apache Corporation (NYSE: APA). I chose Apache because well known value investor David Dreman has been buying Apache. Apache has a market cap of $21.87 billion and $7.98 billion of net debt for an enterprise value of $29.85 billion. Apache reported $4.035 billion of revenue for the first six months, so we expect $8.07 billion for the year. This gives Apache an enterprise value/sales ratio of 3.7. Thus we see that Harken Energy is undervalued compared to Apache before we even look at production growth!

Harken has been rapidly increasing its production. Harken reported a 42% production growth since December, 2005. Small companies can grow a lot faster than big companies like Apache.

Comments

[Scott]

Hey Mike,
I stumbled across your blog today, and read a few of your recent posts. Thanks for the tip on HEC. I'll have to watch that stock over the coming weeks. Do you think their positive trailing EPS will hold up?

I'm going to do a short post on my blog listing a few worthy stock market blogs. I'll include a link to yours.

Take care and keep up the good work,
Scott
http://www.stockmarketplus.net

[bbartlog]

Funny looking financials - the revenue compared to cost of goods sold is huge, but their SG&A is all over the map and seems to have eaten a lot of the profits (until last quarter). Guess my question would be how you can project future financials when past ones are so up and down. Certainly the potential EPS looks nice though.

[sleepydragon]

Hay mike,
I think retail is the next favoriate of the bull market with oil coming down.
what do u think of LIZ? You wrote about it before. I am also thinking to buy ANF and LUX. do you have a view on these stocks?

[bbartlog]

Started following HEC after seeing your post and decided it looked awful cheap today at 0.55, so I bought 6000 shares. Are you still feeling good about it though with NG only a touch above $4? Even if they bump their production up 50% they're not going to equal their Q1 revenue on the basis of NG sales.
The other thing that I wonder about is all the nonoperating income (and/or loss) they report. Is that a consequence of speculation (presumably NG or other energy commodities) on their part? Certainly I'd expect someone in their position to pursue a sensible hedging strategy to even out their income, but the numbers make me suspect they decided to add some excitement to their numbers by doing more than just hedging...