Harvest Natural Resources, Inc. (NYSE:HNR)

Definitely a risk play if i ever saw one. The good: The oil slump, bad cash flow, and disappointing earnings have combined to push the price of HNR under its book value. Current estimates put next years EPS almost doubling over this years estimate.

The Bad: HNR currently operates 6 fields in venezuela. Harvest's 1/3 stake after royalties puts its proven reserves at 61.7 million barrels of oil and 51.1 Billion cubic feet of Nat Gas. The fear is that the current trend of nationalization will continue and that on a whim, Hugo will outright take those fields and shareholders will get nothing. I have a feeling that you want to take the other side of that bet and here's why.

First we don't know how long Hugo will be able to wield absolute power. Venezuela has the highest rate of inflation in Latin America. It's capital has the highest murder rate of any city outside of a war zone on the planet. And as Hugo's health and political monopoly weakens, the coalition of opposition parties grows stronger.

Second Hugo needs HNR more than HNR needs Hugo. Three of the oil fields operated by HNR were abandoned in the 80's (most likely because they were thought to be depleted, but i can't confirm). In the past 20 years, Western drilling companies have been using their technology to breath new life into "depleted" wells (this was a big part of the energy boom in russia after the cold war ended). Venezuela's industry and workforce doesn't have the technology or the expertise to operate the technology to extract the oil and nat gas from these wells themselves. Additionally, HNR only owns a minority stake in these wells (about 1/3 after royalties). I would agree that Hugo is stupid, but even stupid has its limits.

Third, HNR owns wells in North America, Africa, and Asia. And after the recent HK buyout, HNR has been identified as a possible takeover candidate. Analyst estimates put the value of HNR at upwards of $20. This is definitely a much riskier play than HK was, but at $9.50 the upside is also much greater.