sovereign risk

Interesting debate.

Sovereign risk is the risk associated with the actual country. Normally the term applies to the bond markets with the ability of the country being able to repay or risk of default on loans. Same term is applied when assessing the risk involved in any investment in a country.

Now just some examples of countries and the sovereign risks involved from recent times. Normally the ratings agencies will give a country a debt rating anything from AAA down to the bottom. This is an attempt to quantify the sovereign risk associated with either a country or a particular bond issue.

Depending on an investors risk appetite will determine whether he will invest in bonds from that particular country. There is for most a bottom of the low B minus grading as calling an bond of being of investment grade.

Now recent examples of either defaults on countries bonds or investment markets are numerous. Argentina is one recent example along with Brazil. One would also find the paw prints of the world bank involved with large bond default's or re scheduling.

An example of investments being held for ransom in recent times comes from our good friends in Malaysia. When the Asian financial crisis was upon up they essentially told the world bank to get nicked and then to make matters worse basically froze all foreign investments in their stock markets along with restricting the exchange rate.

Now looking at HDR and the risks and recent events.

A few points.

Mauritania had an attempt in June 2003.
122 were arrested and are still being held.
Supposedly the new ones arrested are associated with those being held from last year.
Since independence in 1978 the current leader has held power since 1984 .... 20 years.
GDP for the country is somewhere around 6 billion USD
Government budget around the 500 million USD P/A
Virtually every neighbor of the country has had similar problems.
Some even extreme.
Per capita income is in the bottom 5% of all nations


With all that said

Current problems have only highlighted the risk.
Nothing new to the region
Production facilities are offshore
Looking at some of the oil producers in the area production has continued in some countries even during almost undeclared civil wars. It must also be stressed in some cases these were with on shore production fields. Have a look at Nigeria !!

Bottom line
Fields are offshore
Production offshore.
Government budget and spending will double once production starts.
Regardless of change in government the government having twice as much money means even if their was a change at worst there would be only a delay.

For my reading all this has done is a few things.

It has taken around 15% off my top estimate even if they find what I expect.

Current events have capped the stock at $2.20 and will take an act of god or announcement of large upgrade to get us through there.

Volatility will increase and if they come up dry on the first wells expect much the same as we saw recently.

In the end it will not really matter. They find oil it will fly. Just the top will be lower than one would expect.
I was hoping for 1.25 billion to eventually be confirmed and about a $4.50 top. So for me I have made my top even if all goes well $3.75. Any surprises in size either way will adjust this of course.

Good luck