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HTE AT A GLANCE

P/E ► 5.69 AVG EV/EBITDA ► 3.60 AVG ROA ► 5.8% AVG ROE ► 7.5% AVG Debt to Equity ► 1.17 AVG Current Ratio ► 1.07 AVG Interest Coverage Ratio ► 3.19 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Canadian Harvest Energy Trust (NYSE: HTE) is a petroleum company that operates in both the upstream exploration and downstream refining sectors of the oil and gas industry. The company has 192,297 MBoe in estimated reserves. Its upstream production rate is 60,336 Boe/d while it refines at a rate of 109,611 bbl/d.^[1] The company's refinery purchases its crude oil feedstock mostly from Iraq, Venezuela and Russia. The instability of these countries' oil output threatens the company's supply of refining feedstocks.

Although the majority of the company's revenue comes from its refining business, the majority of its profits come from oil exploration - a combination of rising oil and gas prices and narrowing profit margins in the refining industry, as rising crude oil prices have outpaced increases in the price of refined gasoline.^[2] Unlike many of its competitors with reserves in Alberta, Canada, Harvest Energy has not invested in oil sands, but has instead worked to improve conventional production and refinery capacity.^[3]

[edit] Business Overview

Harvest Energy Trust operates in two main sectors of the oil and gas industry: upstream and downstream.

2007 Breakdown by Upstream Production ^[4]

• Upstream (24% of revenue, 58% of net income): acquires properties with an established production history and then launches projects to enhance the the output. Its assets are located in Alberta, Saskatchewan and British Columbia.^[1] As of December 2007, Harvest's proved plus probable reserves were 192,297 MBoe (thousands of Barrel of Oil Equivalents (BOE)). Of these reserves, 44% were light or medium crude oil, 28% were heavy crude oil, 24% were natural gas, and 4% were Liquid Natural Gas (NGL). Although only 7% of Harvest's reserves are considered proved undeveloped, its proved plus probable undeveloped assets make up 37% of its net reserves. The probable reserves are deposits that have an equal chance of being less or more than the estimated number, while proved reserves are deposits that are likely to exceed expectation.^[5] Harvest's upstream services had an average daily production rate of 60,336 Boe/d.^[6]

• Downstream (76% of revenue, 42% of net income): refines petroleum and then sells the refined petroleum products. Harvest's crude oil refinery has a 115,000 barrels per day capacity.^[3] Its sales volume comprises approximately 20% of the Newfoundland market. Harvest's refinery is in Come by Chance, Newfoundland, Canada, and it is fed by tankers which come primarily from Iraq (Basra Light), Venezuela (Hamaca), and Russia (Urals Blend). The refinery has approximately 7 million barrels of tankage space to store refined and unrefined goods, and it has deep water docking facilities. The combination of both of these allow the refinery to receive and store large loads of crude oil.

10% of the refined product is sold in Newfoundland, while the remaining 90% is sold along the eastern coast of the US.^[7] The crude oil is fractionated into a series of refined products. Extremely light, non-condensable petroleum gases are burnt in the refinery. Liquid petroleum gases such as propane, butane, naphtha, kerosene, diesel, and gasoline gasoline are sold for conventional use. The residual can sometimes be processed to high sulphur fuel oil or discarded. ^[8]

[edit] Trends and Forces

[edit] Increasing gas and oil prices raise upstream profits

Crude oil futures reached a record high of $145.85 in early July.^[9] In 2000, the oil price per barrel was $20, but in 2007, it averaged at $72 a barrel.^[10][11] Industrializing economies like China, India and other emerging markets require more energy, causing the global demand for oil and gas to rise.^[12] However, the supply of fossil fuels has not kept up with the rising demand. The result is that prices have increased causing upstream margins to increase, as can be seen in Harvest's upstream production, which only rose by 1% in 2007, versus its revenues, which rose by 6%.^[13] This increase in revenue is from the 5% rise in the average oil price Harvest received, from $51.40 per barrel in 2006 to $53.78 per barrel in 2007.^[13]

[edit] Rising crude oil prices squeeze refining margins, but a shortage of world refining capacity presents an opportunity

During the last 6 months of 2007, increases in the price of refined gasoline did not keep up with the rising cost of crude oil feedstock; Harvests' refining margins fell from $13.69 per barrel during the first half of 2007 to $4.16 during the second half. ^[2] However, the majority of refineries have experienced ever shrinking spare capacity, and the average refinery in 2007 worked at over 95% of their capacity.^[14] The continued rise in global demand for refined goods will force a rise in margins.^[15] To capitalize on this, the company upgraded its refinery's equipment and enlarged necessary pipes, which improved the production levels from 35,981 bbl/d in November to 109,611 bbl/d in December.^[2]

Global Refining Capacity and Crude Demand ^[16]

[edit] Harvest Energy's upstream profits are threatened by Alberta's new royalty regime

In 2007, the government of Alberta released a new royalty regime on oil, natural gas, and bitumen. The new regime will go into effect January 1, 2009 and will cause royalty rates on conventional oil to rise up to 50%, natural gas up to 40%, and butanes and propane up to 30%.^[17] The majority of Harvest's production is in Alberta. Harvest Energy's undeveloped regions are also in the Province of Alberta.^[18]

[edit] Harvest Energy's downstream operations purchase from unstable regions

75% of Harvest's crude oil feedstock comes from Iraq. The remaining input comes primarily from Venezuela and Russia. The Iraqi oil is from Basra, which has no outside forces controlling it since the British troops pulled out in August 2007.^[19] Since that time, there has been an ongoing battle, both politically and militarily, to control the region and the oil.^[20] Harvest has waited for a final decision to be made on who controls the region before entering a long term contract.^[21] In March 2008, one of the two main pipelines in the region was severely damaged by bomb attacks.^[22] The stoppage temporarily cut oil production in the region in third and jolted prices from below $100 a barrel to $108.22.^[23] Oil production has also been stopped because of periodic electricity blackouts.^[24] The shortage of oil supply makes it difficult for Harvest Energy to purchase its input from other locations.

[edit] Harvest has not developed an extensive oil sands project

Oil sands are essentially pits filled with tar, or bitumen, a heavier, denser form of hydrocarbon than oil. Although it takes an extra step and expensive equipment, refineries can refine bitumen into crude oil.^[25] The regions of Alberta, Canada and Venezuela are particularly rich in this form of oil. There are approximately 175 billion barrels of proven oil reserves in Alberta alone, with the possibility of more buried deeper. This makes Alberta home to the second largest oil reserve after Saudi Arabia.^[26] While many competitors have invested in oil sands to ensure long term production levels, Harvest Energy has not done so.^[27] Extraction of oil from the dirt is only profitable as long as oil prices remain high. These regions in Alberta have not been used in the past since prices were not high enough. If prices fall in the future, the oil sands will once again become unprofitable. However, as long as prices remain elevated, the process is profitable, and many Alberta based oil companies predict it is the future for oil production.^[28]

[edit] Competition

Unlike many of its competitors its size, Harvest Energy controls both upstream and downstream services. Harvests' single refinery's capacity is much smaller than the capacity of multi-national companies with many refineries spread across the globe. However, its upstream services are comparable to many other oil and gas drilling and exploration companies.

• Enerplus Resources Fund (ERF): is a Canadian based onshore drilling company. Like Harvest, it is mostly based in Alberta, however it does not have any downstream refining operations. Enerplus has also invested in oil sands.^[29]
• Encana (ECA): is a Canadian drilling company with both upstream and downstream operations. It is significantly larger than Harvest, and like Enerplus, it has invested in the oil sands of Alberta throught a joint venture with ConocoPhillips (COP).^[30]
• Provident Energy Trust (PVX): is an investment trust which owns petroleum and natural gas assets. It operates mostly in Canada, and like Harvest, it has spread vertically. Provident trust also has midstream services which include pipelines, gathering and transportation services.^[31]
• Penn West Energy Trust (PWE): is a Canadian trust with oil and gas drilling, exploration, extraction, and production capabilities. It is substantially larger than Harvest Energy and it has invested in several oil sands.

[edit] References

1. ↑ ^{1.0 1.1} HTE 40-F 2007 "Overview" p.20
2. ↑ ^{2.0 2.1 2.2} HTE 40-F 2007 "Overview of Downstream Financial Performance" p.16-17
3. ↑ ^{3.0 3.1} HTE 40-F 2007 "Downstream" p.21
4. ↑ HTE 40-F 2007 "Total Sales of Production" p.38
5. ↑ HTE 40-F 2007 "Reserves Data" p.23
6. ↑ HTE 40-F 2007 "Production History" p.38
7. ↑ HTE 40-F 2007 "Downstream Business" p.48
8. ↑ HTE 40-F 2007 "Overview of Crude Oil Processing" p.49-50
9. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
10. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
11. ↑ EIA: "Short-Term Energy Outlook"
12. ↑ DO 10-K 2006, "Delving into the Deep", p.12
13. ↑ ^{13.0 13.1} HTE 40-F 2007 "UPSTREAM OPERATIONS" p.7
14. ↑ HTE 40-F 2007 "Global Refining Capacity and Crude Demand" p.57
15. ↑ BBC News "Global oil demand to rise in 2008"
16. ↑ Energy Information Administration
17. ↑ ERF 40-F 2008 "Province of Alberta" p. 68
18. ↑ HTE 40-F 2008 "Oil and Gas Wells" p.31
19. ↑ Washington Post: "As British Leave, Basra Deteriorates"
20. ↑ AlterNet "Shia Parties Battle for Control of Oil-Rich Basra Region"
21. ↑ HTE 10-K 2008 "Risks Related to Harvest's Downstream Operations" p.64
22. ↑ Guardian: "Maliki vows there will be 'no retreat' against Shia militias in Basra"
23. ↑ BBC News "Oil hits $108 on pipeline blast"
24. ↑ Iraq Dictionary "Basrah oil refinery resumed its operations"
25. ↑ Alberta Energy: "Alberta Oil Sands"
26. ↑ CBS News: "The Oil Sands Of Alberta
27. ↑ ERF 40-F 2008 "Oil Sands" p.16-19
28. ↑ ERF 40-F 2008 "Kirby Project" p.15-17
29. ↑ Google Finance: Enerplus Energy Fund (ERF)
30. ↑ ^{30.0 30.1 30.2 30.3} ECA, 40-F for 2007, consolidation financial statements, page 4
31. ↑ ^{31.0 31.1 31.2 31.3} PVX 40-F 2008 "Production" p.49
32. ↑ ^{32.0 32.1 32.2} HTE 40-F 2007 "Sales Volumes" p.9
33. ↑ ^{33.0 33.1 33.2} ERF 40-F 2008 "Quarterly Production History" p.21
34. ↑ ^{34.0 34.1} Penn West Energy Trust 40-F 2008 "Major Operating Regions" p.19