Stop-lossing out of an explorer

This is just a quick note to let you know that following HRT Participacoes’ (HRP.V HRTPY) drilling results announced this week, I’ve let my shares be stopped out at about a 25-30% loss.

The drilling results were clearly at least somewhat disappointing offshore Namibia with the assessment of “found oil although not in commercial volumes” (and disappointing in Brazil, too, a “dry hole with hydrocarbon shows” though we now expect those to pretty much always be disappointing), so even though there were some positive signs in the results (high quality oil where they did find it, and, they say, some indications that will help them target their next couple drill holes), I’m selling.

The fact that we had a management shakeup in the days around the time that drilling was completing, combined with the fact that they obviously started their exploration campaign with their highest conviction prospect and haven’t had great news so far, leads me to let the market tell me what to do. (CEO Mello, who championed the Namibian investment, either resigned or was forced out, depending on who you believe, on May 13 … the preliminary drilling results were announced May 21.) If we hadn’t seen this management shakeup and significant investor unease, I would very likely be willing to let my gamble roll over into their next drilling result — this is exploration, of course, so it’s always a gamble, and finding great news in the first hole is never all that likely. But I’m uneasy, and when I lack expertise and have substantial unease about management I will let the wisdom of the share price tell me what to do.

There’s still a chance, of course, that there is a huge and viable oil system offshore Namibia and that they’ll find a reservoir in one of the next two drill holes — the drilling results could certainly have been much worse, and you can spin the results to say that they’ve now found out more about the geology and have proof that there is or was oil somewhere in the area. But I think the odds of success have now been reduced since the first target was a disappointment. So given my lack of expertise in assessing drilling results and reservoir potential, I’ve let the shares tell me what to do — and a 15% drop on this latest news ...

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