Attached files
file | filename |
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EX-31.1 - EX-31.1 - HARVEST NATURAL RESOURCES, INC. | h83723exv31w1.htm |
EX-32.2 - EX-32.2 - HARVEST NATURAL RESOURCES, INC. | h83723exv32w2.htm |
EX-32.1 - EX-32.1 - HARVEST NATURAL RESOURCES, INC. | h83723exv32w1.htm |
EX-10.2 - EX-10.2 - HARVEST NATURAL RESOURCES, INC. | h83723exv10w2.htm |
EX-10.3 - EX-10.3 - HARVEST NATURAL RESOURCES, INC. | h83723exv10w3.htm |
EX-10.1 - EX-10.1 - HARVEST NATURAL RESOURCES, INC. | h83723exv10w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - HARVEST NATURAL RESOURCES, INC. | Financial_Report.xls |
EX-31.2 - EX-31.2 - HARVEST NATURAL RESOURCES, INC. | h83723exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2011
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to |
Commission File No. 1-10762
Harvest Natural Resources, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 77-0196707 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
1177 Enclave Parkway, Suite 300 | ||
Houston, Texas | 77077 | |
(Address of Principal Executive Offices) | (Zip Code) |
(281) 899-5700
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
At July 22, 2011, 34,125,368 shares of the Registrants Common Stock were outstanding.
HARVEST NATURAL RESOURCES, INC.
FORM 10-Q
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 136,032 | $ | 58,703 | ||||
Restricted cash |
7,323 | | ||||||
Accounts and notes receivable, net: |
||||||||
Oil and gas revenue receivable |
| 1,907 | ||||||
Dividend receivable equity affiliate |
12,200 | | ||||||
Joint interest and other |
7,203 | 2,325 | ||||||
Note receivable |
3,335 | 3,420 | ||||||
Advances to equity affiliate |
2,002 | 1,706 | ||||||
Assets held for sale (See Note 3) |
| 88,774 | ||||||
Prepaid expenses and other |
1,732 | 4,793 | ||||||
TOTAL CURRENT ASSETS |
169,827 | 161,628 | ||||||
OTHER ASSETS |
2,499 | 2,477 | ||||||
INVESTMENT IN EQUITY AFFILIATES |
310,351 | 287,933 | ||||||
PROPERTY AND EQUIPMENT: |
||||||||
Oil and gas properties (successful efforts method) |
59,814 | 34,679 | ||||||
Other administrative property |
3,120 | 3,209 | ||||||
TOTAL PROPERTY AND EQUIPMENT |
62,934 | 37,888 | ||||||
Accumulated depletion, depreciation and amortization |
(1,840 | ) | (1,682 | ) | ||||
TOTAL PROPERTY AND EQUIPMENT, NET |
61,094 | 36,206 | ||||||
TOTAL ASSET |
$ | 543,771 | $ | 488,244 | ||||
LIABILITIES AND EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable, trade and other |
$ | 11,373 | $ | 3,205 | ||||
Accounts payable, carry obligation |
3,617 | 8,395 | ||||||
Accrued expenses |
14,622 | 15,087 | ||||||
Liabilities held for sale (See Note 3) |
| 663 | ||||||
Accrued interest |
880 | 896 | ||||||
Income taxes payable |
5,585 | 72 | ||||||
TOTAL CURRENT LIABILITIES |
36,077 | 28,318 | ||||||
OTHER LONG-TERM LIABILITIES |
1,133 | 1,834 | ||||||
LONG-TERM DEBT |
32,000 | 81,237 | ||||||
COMMITMENTS
AND CONTINGENCIES (See Note 5) |
| | ||||||
EQUITY |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, par value $0.01 a share; authorized 5,000 shares;
outstanding, none |
| | ||||||
Common stock, par value $0.01 a share; authorized 80,000 shares at
June 30, 2011 and December 31, 2010, respectively; issued
40,286 shares and 40,103 shares at June 30, 2011 and
December 31, 2010, respectively |
402 | 401 | ||||||
Additional paid-in capital |
230,718 | 230,362 | ||||||
Retained earnings |
232,404 | 141,584 | ||||||
Treasury stock, at cost, 6,505 shares and 6,475 shares at June 30, 2011
and December 31, 2010, respectively |
(65,925 | ) | (65,543 | ) | ||||
TOTAL HARVEST STOCKHOLDERS EQUITY |
397,599 | 306,804 | ||||||
NONCONTROLLING INTEREST |
76,962 | 70,051 | ||||||
TOTAL EQUITY |
474,561 | 376,855 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 543,771 | $ | 488,244 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
EXPENSES |
||||||||||||||||
Depreciation and amortization |
$ | 119 | $ | 142 | $ | 243 | $ | 243 | ||||||||
Exploration expense |
4,650 | 1,491 | 5,839 | 2,737 | ||||||||||||
General and administrative |
6,742 | 5,829 | 13,068 | 10,846 | ||||||||||||
Taxes other than on income |
307 | 198 | 656 | 498 | ||||||||||||
11,818 | 7,660 | 19,806 | 14,324 | |||||||||||||
LOSS FROM OPERATIONS |
(11,818 | ) | (7,660 | ) | (19,806 | ) | (14,324 | ) | ||||||||
OTHER NON-OPERATING INCOME (EXPENSE) |
||||||||||||||||
Investment earnings and other |
240 | 140 | 385 | 271 | ||||||||||||
Interest expense |
(1,704 | ) | (688 | ) | (3,916 | ) | (1,104 | ) | ||||||||
Loss on extinguishment of debt |
(9,682 | ) | | (9,682 | ) | | ||||||||||
Other non-operating expenses |
(244 | ) | | (675 | ) | | ||||||||||
Foreign currency transaction loss |
(32 | ) | (24 | ) | (43 | ) | (1,551 | ) | ||||||||
(11,422 | ) | (572 | ) | (13,931 | ) | (2,384 | ) | |||||||||
LOSS FROM CONSOLIDATED COMPANIES
CONTINUING OPERATIONS BEFORE INCOME
TAXES |
(23,240 | ) | (8,232 | ) | (33,737 | ) | (16,708 | ) | ||||||||
INCOME TAX EXPENSE |
260 | 152 | 482 | 133 | ||||||||||||
LOSS FROM CONSOLIDATED COMPANIES
CONTINUING OPERATIONS |
(23,500 | ) | (8,384 | ) | (34,219 | ) | (16,841 | ) | ||||||||
NET INCOME FROM UNCONSOLIDATED
EQUITY AFFILIATES |
17,899 | 8,915 | 36,003 | 47,282 | ||||||||||||
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS |
(5,601 | ) | 531 | 1,784 | 30,441 | |||||||||||
DISCONTINUED OPERATIONS: |
||||||||||||||||
Income (loss) from discontinued operations |
480 | 803 | (2,786 | ) | 2,818 | |||||||||||
Gain on sale of assets |
103,933 | | 103,933 | | ||||||||||||
Income tax expense on gain |
(5,200 | ) | | (5,200 | ) | | ||||||||||
Income from discontinued operations |
99,213 | 803 | 95,947 | 2,818 | ||||||||||||
NET INCOME |
93,612 | 1,334 | 97,731 | 33,259 | ||||||||||||
LESS: NET INCOME ATTRIBUTABLE TO
NONCONTROLLING INTEREST |
3,562 | 1,630 | 6,911 | 8,965 | ||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE
TO HARVEST |
$ | 90,050 | $ | (296 | ) | $ | 90,820 | $ | 24,294 | |||||||
NET INCOME (LOSS) ATTRIBUTABLE TO
HARVEST PER COMMON SHARE: |
||||||||||||||||
(See Note 2 Summary of Significant
Accounting Policies, Earnings Per Share): |
||||||||||||||||
Basic |
$ | 2.65 | $ | (0.01 | ) | $ | 2.67 | $ | 0.73 | |||||||
Diluted |
$ | 2.24 | $ | (0.01 | ) | $ | 2.28 | $ | 0.65 | |||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 97,731 | $ | 33,259 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depletion, depreciation and amortization |
1,053 | 1,825 | ||||||
Impairment of long-lived assets |
4,707 | | ||||||
Amortization of debt financing costs |
530 | 329 | ||||||
Amortization
of discount on debt |
816 | | ||||||
Gain on sale
of assets |
(103,933 | ) | | |||||
Loss on early extinguishment of debt |
7,533 | | ||||||
Net income from unconsolidated equity affiliate |
(36,003 | ) | (47,282 | ) | ||||
Share-based compensation-related charges |
2,673 | 1,844 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts and notes receivable |
(2,887 | ) | 3,115 | |||||
Advances to equity affiliate |
(296 | ) | 2,730 | |||||
Prepaid expenses and other |
3,061 | 263 | ||||||
Accounts payable |
8,168 | 2,474 | ||||||
Accrued expenses |
(2,469 | ) | 363 | |||||
Accrued interest |
(418 | ) | (3,723 | ) | ||||
Other long-term liabilities |
(701 | ) | | |||||
Income taxes payable |
5,513 | (353 | ) | |||||
NET CASH USED IN OPERATING ACTIVITIES |
(14,922 | ) | (5,156 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds
from sale of assets |
217,833 | | ||||||
Additions of property and equipment |
(28,067 | ) | (23,913 | ) | ||||
Additions to assets held for sale |
(31,742 | ) | | |||||
Proceeds from sale of equity affiliate |
1,385 | | ||||||
Increase in restricted cash |
(7,323 | ) | (1,000 | ) | ||||
Investment costs |
(62 | ) | (36 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
152,024 | (24,949 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net proceeds from issuances of common stock |
416 | 115 | ||||||
Proceeds from issuance of long-term debt |
| 32,000 | ||||||
Payments of long-term debt |
(60,000 | ) | | |||||
Financing costs |
(189 | ) | (2,818 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(59,773 | ) | 29,297 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
77,329 | (808 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
58,703 | 32,317 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 136,032 | $ | 31,509 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities:
During
the six months ended June 30, 2011, we issued 0.2 million shares of restricted stock
valued at $2.0 million. Also, some of our employees elected to pay withholding tax on restricted
stock grants on a cashless basis which resulted in 30,373 shares being added to treasury stock at
cost.
During the six months ended June 30, 2010, we issued 0.3 million shares of restricted stock
valued at $1.8 million. Also, some of our employees elected to pay withholding tax on restricted
stock grants on a cashless basis, which resulted in 26,260 shares being added to treasury stock at
cost; and 1,000 shares held in treasury that had been reissued as restricted stock were forfeited
and returned to treasury.
See accompanying notes to consolidated financial statements.
5
Table of Contents
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
Note 1 Organization
Interim Reporting
The accompanying unaudited consolidated financial statements contain all
adjustments necessary for a fair statement of the financial position as of June 30, 2011, and the
results of operations for the three and six months ended June 30, 2011 and 2010, and cash flows for
the six months ended June 30, 2011 and 2010. The unaudited consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by accounting principles generally accepted in the United States of America
(GAAP). Reference should be made to our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2010, which include
certain definitions and a summary of significant accounting policies and should be read in
conjunction with this Quarterly Report on Form 10-Q. The results of operations for any interim
period are not necessarily indicative of the results of operations for the entire year.
Organization
Harvest Natural Resources, Inc. (Harvest) is an independent energy company engaged in the
acquisition, exploration, development, production and disposition of oil and natural gas properties
since 1989, when it was incorporated under Delaware law.
We have significant interests in the Bolivarian Republic of Venezuela (Venezuela). Our
Venezuelan interests are owned through HNR Finance, B.V. (HNR Finance). Our ownership of HNR
Finance is through several corporations in all of which we have direct controlling interests.
Through these corporations, we indirectly own 80 percent of HNR Finance and our partner, Oil & Gas
Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of Venezolana de
Inversiones y Construcciones Clerico, C.A. (Vinccler), indirectly owns the remaining 20 percent
interest in HNR Finance. HNR Finance owns 40 percent of Petrodelta, S.A. (Petrodelta). As we
indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent interest in
Petrodelta, and Vinccler indirectly owns eight percent. Corporación Venezolana del Petroleo S.A.
(CVP) owns the remaining 60 percent of Petrodelta. HNR Finance also has a direct controlling
interest in Harvest Vinccler S.C.A. (Harvest Vinccler). Harvest Vincclers main business
purposes are to assist us in the management of Petrodelta and in negotiations with Petroleos de
Venezuela S.A. (PDVSA). We do not have a business relationship with Vinccler outside of
Venezuela.
In addition to our interests in Venezuela, we have exploration acreage mainly onshore in West
Sulawesi in the Republic of Indonesia (Indonesia), offshore of the Republic of Gabon (Gabon),
onshore in the Sultanate of Oman (Oman), and offshore of the Peoples Republic of China
(China). Until March 1, 2011, we had developed and undeveloped acreage in the Antelope project
in the Western United States in the Monument Butte Extension Appraisal and Development Project
(Monument Butte Extension) and Lower Green River/Upper Wasatch Oil Delineation and Development
Project (Lower Green River/Upper Wasatch) where we had established production. See Note 3
Dispositions, Note 9 United States Operations, Note 10 Indonesia, Note 11 Gabon and Note 12 Oman.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned and
majority-owned subsidiaries. All intercompany profits, transactions and balances have been
eliminated.
6
Table of Contents
Reporting and Functional Currency
The United States Dollar (U.S. Dollar) is the reporting and functional currency for all of
our controlled subsidiaries and Petrodelta. Amounts denominated in non-U.S. Dollar currencies are
re-measured in U.S. Dollars, and all currency gains or losses are recorded in the consolidated
statement of operations. We attempt to manage our operations in such a manner as to reduce our
exposure to foreign exchange losses. However, there are many factors that affect foreign exchange
rates and resulting exchange gains and losses, many of which are beyond our influence.
Harvest Vinccler does not have currency exchange risk other than the official prevailing
exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars)
(4.30 Bolivars per U.S. Dollar). However, during the three and six months ended June 30, 2011,
Harvest Vinccler exchanged approximately $0.1 million and $0.4 million, respectively through
Sistema de Transacciones con Títulos en Moneda Extranjera (SITME) and received an average
exchange rate of 5.21 Bolivars and 5.19 Bolivars, respectively, per U.S. Dollar. During the three
and six months ended June 30, 2010, no such exchanges took place. Harvest Vinccler currently does
not have any U.S. Dollars pending government approval for settlement for Bolivars at the official
exchange rate or the SITME exchange rate.
The monetary assets that are exposed to exchange rate fluctuations are cash, accounts
receivable, prepaid expenses and other current assets. The monetary liabilities that are exposed
to exchange rate fluctuations are accounts payable, accruals and other current liabilities. All
monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the
official Bolivar exchange rate. At June 30, 2011, the balances in Harvest Vincclers Bolivar
denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are
3.1 million Bolivars and 4.3 million Bolivars, respectively.
See Note 8 Investment in Equity Affiliates Petrodelta for a discussion of currency
exchange risk on Petrodeltas business.
Revenue Recognition
We record revenue for our U.S. oil and natural gas operations when we deliver our production
to the customer and collectability is reasonably assured. Revenues from the production of oil and
natural gas on properties in which we have joint ownership are recorded under the sales method.
Differences between these sales and our entitled share of production are not significant. See Note
3 Dispositions.
Cash and Cash Equivalents
Cash equivalents include money market funds and short-term certificates of deposit with
original maturity dates of less than three months.
Restricted Cash
Restricted cash is classified as current or non-current based on the terms of the agreement.
Restricted cash at June 30, 2011 represents cash held in a U.S. bank used as collateral for two
standby letters of credit issued in support of the drilling of the Dussafu Ruche Marin-1 (DRM-1) exploratory well
on the Dussafu Marin Permit (Dussafu PSC) (see Note 11 Gabon).
Financial Instruments
Our financial instruments that are exposed to concentrations of credit risk consist primarily
of cash and cash equivalents, accounts receivable, and notes payable. Cash and cash equivalents
are placed with commercial banks with high credit ratings. This diversified investment policy
limits our exposure both to credit risk and to concentrations of credit risk.
Total long-term debt at June 30, 2011 consisted of $32 million of fixed-rate unsecured senior
convertible notes maturing in 2013 unless earlier redeemed, purchased or converted. At December
31, 2010, total long-term debt consisted of $32 million of fixed-rate unsecured senior convertible
notes maturing in 2013 unless earlier redeemed, purchased or converted and $60 million of
fixed-rate unsecured term loan facility maturing in 2012. See Note 4
Long-Term Debt.
7
Table of Contents
Accounts and Notes Receivable
Notes receivable relate to prospect leasing cost financing arrangements, bear interest and can
have due dates that are less than one year or more than one year. Amounts outstanding under the
notes bear interest at a rate based on the current prime rate and are recorded at face value.
Interest is recognized over the life of the note. We may or may not require collateral for the
notes.
Each note is analyzed to determine if it is impaired pursuant to Accounting Standards Updates
(ASU) 2010-20. A note is impaired if it is probable that we will not collect all principal and
interest contractually due. We do not accrue interest when a note is considered impaired. All
cash receipts on impaired notes are applied to reduce the accrued interest on the note until the
interest is made current and, thereafter, applied to reduce the principal amount of such notes.
At June 30, 2011 and December 31, 2010, note receivable plus accrued interest was
approximately $3.3 million and $3.4 million, respectively, and was secured by a portion of the
production from the Bar F #1-20-3-2 in Utah. With the sale of our oil and gas assets in Utahs
Uinta Basin (Antelope Project) effective March 1, 2011, the note receivable plus accrued interest
will be settled upon finalization of certain terms of the Joint Exploration and Development
Agreement (JEDA) which defined the participating parties obligations over our Antelope Project.
See Note 3 Dispositions, Note 5 Commitments and Contingencies, and Note 9 United States
Operations, Western United States Antelope.
Other Assets
At June 30, 2011, other assets consist of investigative costs of $0.4 million associated with
new business development projects and deferred financing costs of $1.4 million. The investigative
costs are reclassified to oil and gas properties or expensed depending on managements assessment
of the likely outcome of the project. During the six months ended June 30, 2011, no investigative
costs related to new business development were reclassified to oil and gas properties or expensed. At December
31, 2010, other assets consisted of investigative costs of $0.3 million associated with new
business development projects and deferred financing costs of $2.2 million.
Deferred financing costs relate to specific financing and are amortized over the life of the
financing to which the costs relate. See Note 4 Long-Term Debt.
Other Assets at June 30, 2011 also includes a blocked payment of $0.7 million net to our
66.667 percent interest in accordance with the U.S. sanctions against Libya as set forth in
Executive Order 13566 of February 25, 2011, and administered by the United States Treasury
Departments Office of Foreign Assets Control (OFAC). See Note 5 Commitments and
Contingencies.
Investment in Equity Affiliates
Investments in unconsolidated companies in which we have less than a 50 percent interest and
have significant influence are accounted for under the equity method of accounting. Investment in
Equity Affiliates is increased by additional investments and earnings and decreased by dividends
and losses. We review our Investment in Equity Affiliates for impairment whenever events and
circumstances indicate a decline in the recoverability of its carrying value. There are many
factors to consider when evaluating an equity investment for possible impairment. Currency
devaluations, inflationary economies and cash flow analysis are some of the factors we consider in
our evaluation for possible impairment. At June 30, 2011 and December 31, 2010, there were no
events that caused us to evaluate our investment in equity affiliates for impairment.
Property and Equipment
We use the successful efforts method of accounting for oil and gas properties.
Suspended Exploratory Drilling Costs
Budong PSC
At June 30, 2011, oil and gas properties included capitalized suspended exploratory drilling
costs of $13.9 million related to drilling in the Budong-Budong Production Sharing Contract
(Budong PSC) of the Lariang-1
8
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(LG-1). The LG-1 targeted the Miocene and Eocene reservoirs to a planned depth of
approximately 7,200 feet. The LG-1 was drilled to a total depth of 5,311 feet and encountered
multiple oil and gas shows within the secondary Miocene objective. At a depth of 5,300 feet,
losses of heavy drilling mud into the formation were encountered which, when coupled with the very
high formation pressures, led the partners to the decision to
discontinue drilling and plug and
abandon the well for safety reasons on April 8, 2011. The primary Eocene targets had not been
reached, as the well was planned for a total measured depth of approximately 7,200 feet. While the
results to date have not definitively determined the commerciality of development of the LG-1, we
believe that the well results confirm that the Miocene formation exhibits sufficient quantities of
hydrocarbons to justify potential development pending further appraisal. See Note 10 Indonesia.
Capitalized Interest
We capitalize interest costs for qualifying oil and gas properties. The capitalization period
begins when expenditures are incurred on qualified properties, activities begin which are necessary
to prepare the property for production and interest costs have been incurred. The capitalization
period continues as long as these events occur. The average additions for the period are used in
the interest capitalization calculation. During the three and six months ended June 30, 2011, we
capitalized interest costs of $0.2 million and $1.0 million, respectively, for qualifying oil and
gas property additions. During the three and six months ended June 30, 2010, we capitalized
interest costs of $0.2 million, respectively, for qualifying oil and gas property additions.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
At June 30, 2011 and December 31, 2010, cash and cash equivalents include $128.4 million and
$51.0 million, respectively, in a money market fund comprised of high quality, short term
investments with minimal credit risk which are reported at fair value. The fair value measurement
of these securities is based on quoted prices in active markets (level 1 input) for identical
assets. The estimated fair value of our senior convertible notes based on observable market
information (level 2 input) as of June 30, 2011 and December 31, 2010 was $62.7 million and $61.7
million, respectively. The estimated fair value of our term loan facility based on internally
developed discounted cash flow model and inputs based on managements best estimates (level 3
input) for identical liabilities as of December 31, 2010 was $49.2 million.
Our current assets and liabilities accounts include financial instruments, the most
significant of which are accounts receivables and trade payables. We believe the carrying values
of our current assets and liabilities approximate fair value, with the exception of the note
receivable. Because this note receivable is not publicly-traded and not easily transferable, the
estimated fair value of our note receivable is based on the market approach and time value of money
which approximates the note receivable book value of $3.3 million and $3.4 million at June 30, 2011
and December 31, 2010, respectively. The majority of inputs used in the fair value calculation of
the note receivable are Level 3 inputs and are consistent with the information used in determining
impairment of the note receivable.
The following is a reconciliation of the net beginning and ending balances recorded for
financial assets and liabilities classified as Level 3 in the fair value hierarchy.
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June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Financial assets: |
||||||||
Beginning balance |
$ | 3,420 | $ | 3,265 | ||||
Issuances |
| 200 | ||||||
Accrued interest |
200 | 398 | ||||||
Payments |
(285 | ) | (443 | ) | ||||
Ending balance |
$ | 3,335 | $ | 3,420 | ||||
Financial liabilities: |
||||||||
Beginning balance |
$ | 49,237 | $ | | ||||
Debt issuance |
| 60,000 | ||||||
Discount on debt |
| (11,122 | ) | |||||
Amortization of discount on debt |
10,763 | 359 | ||||||
Payments |
(60,000 | ) | | |||||
Ending balance |
$ | | $ | 49,237 | ||||
Asset Retirement Liability
Accounting Standards Codification (ASC) 410,
Asset Retirement and Environmental Obligations (ASC 410), requires entities to record the fair
value of a liability for a legal obligation to retire an asset in the period in which the liability
is incurred if a reasonable estimate of fair value can be made. No wells were abandoned during the
six months ended June 30, 2011 or the year ended December 31, 2010. Changes in asset retirement
obligations during the six months ended June 30, 2011 and the year ended December 31, 2010 were as
follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Asset retirement obligations beginning of period |
$ | 663 | $ | 50 | ||||
Liabilities recorded during the period |
52 | 382 | ||||||
Liabilities settled during the period |
| | ||||||
Revisions in estimated cash flows |
(120 | ) | 197 | |||||
Accretion expense |
4 | 34 | ||||||
Reclassify
to gain on sale of assets |
(599 | ) | | |||||
Asset retirement obligations end of period |
$ | | $ | 663 | ||||
Noncontrolling Interests
Changes in noncontrolling interest during the six months ended June 30, 2011 and 2010, were as
follows:
June 30, | June 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 70,051 | $ | 57,406 | ||||
Net income attributable to noncontrolling interest |
6,911 | 8,965 | ||||||
Balance at end of period |
$ | 76,962 | $ | 66,371 | ||||
Earnings Per Share
Basic earnings per common share (EPS) are computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
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Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Loss from continuing operations(a) |
$ | (9,163 | ) | $ | (9,163 | ) | $ | (1,099 | ) | $ | (1,099 | ) | ||||
Discontinued operations |
99,213 | 99,213 | 803 | 803 | ||||||||||||
Net income (loss) attributable to Harvest |
$ | 90,050 | $ | 90,050 | $ | (296 | ) | $ | (296 | ) | ||||||
Weighted average common shares outstanding |
34,039 | 34,039 | 33,399 | 33,399 | ||||||||||||
Effect of dilutive securities |
| 6,162 | | | ||||||||||||
Weighted average common shares,
including dilutive effect |
34,039 | 40,201 | 33,399 | 33,399 | ||||||||||||
Per share: |
||||||||||||||||
Loss from continuing operations(a) |
$ | (0.27 | ) | $ | (0.23 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||
Discontinued operations |
$ | 2.92 | $ | 2.47 | $ | 0.02 | $ | 0.02 | ||||||||
Net income (loss) attributable to
Harvest |
$ | 2.65 | $ | 2.24 | $ | (0.01 | ) | $ | (0.01 | ) |
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Income (loss) from continuing operations(a) |
$ | (5,127 | ) | $ | (5,127 | ) | $ | 21,476 | $ | 21,476 | ||||||
Discontinued operations |
95,947 | 95,947 | 2,818 | 2,818 | ||||||||||||
Net income attributable to Harvest |
$ | 90,820 | $ | 90,820 | $ | 24,294 | $ | 24,294 | ||||||||
Weighted average common shares outstanding |
33,992 | 33,992 | 33,337 | 33,337 | ||||||||||||
Effect of dilutive securities |
| 5,841 | | 4,038 | ||||||||||||
Weighted average common shares,
including dilutive effect |
33,992 | 39,833 | 33,337 | 37,375 | ||||||||||||
Per share: |
||||||||||||||||
Income (loss) from continuing operations(a) |
$ | (0.15 | ) | $ | (0.13 | ) | $ | 0.64 | $ | 0.57 | ||||||
Discontinued operations |
$ | 2.82 | $ | 2.41 | $ | 0.09 | $ | 0.08 | ||||||||
Net income attributable to Harvest |
$ | 2.67 | $ | 2.28 | $ | 0.73 | $ | 0.65 |
(a) | Excludes net income attributable to noncontrolling interest. |
For the three months ended June 30, 2011 and 2010, the per share calculations above exclude
0.7 million and 3.8 million options, respectively, because their exercise price exceeded the
average stock price for the period. The per share calculations above for the three months ended
June 30, 2011 also exclude 1.6 million warrants because their exercise price exceeded the average
stock price for the period. For the three months ended June 30, 2010,
the per share calculations above exclude 5.6 million convertible
shares because they were anti-dilutive. We did not have any warrants outstanding during the three months ended
June 30, 2010.
For the six months ended June 30, 2011 and 2010, the per share calculations above exclude 0.3
million and 3.8 million options, respectively, because their exercise price exceeded the average
stock price for the period. The per share calculations above for the six months ended June 30,
2011 also exclude 1.6 million warrants because their exercise price exceeded the average stock
price for the period. For the six months ended June 30, 2010, the per
share calculations above exclude 5.6 million convertible shares
because they were anti-dilutive. We did not have any warrants outstanding during the six months ended June
30, 2010.
Stock options for 41,666 shares were exercised in the six months ended June 30, 2011 resulting
in cash proceeds of $0.4 million. Stock options for 0.1 million shares were exercised in the six
months ended June 30, 2010 resulting in cash proceeds of $0.1 million.
New Accounting Pronouncements
In April 2011, the Financial Accounting Standard Board (FASB) issued ASU No. 2011-04, which
is included in ASC 820, Fair Value Measurement (ASC
820). This update explains how to measure fair value. It does not require additional fair value
measurements and is not intended to establish valuation standards or affect valuation practices
outside of financial reporting. ASU No. 2011-04 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. Early
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adoption is not permitted. The adoption of ASU No. 2011-04 is not expected to have a material
impact on our consolidated financial position, results of operation or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, which is included in ASC 220,
Comprehensive Income (ASC 220). This update requires that all nonowner changes in
stockholders equity be presented either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. ASU No. 2011-05 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011 and will be applied
restrospectively. Early adoption is permitted. The adoption of ASU No. 2011-05 will impact the
presentation of our results of operations.
Revisions
Net
income from discontinued operations for the three months ended
March 31, 2011 and 2010 was revised
to include approximately $0.4 million and $0.3 million,
respectively, of general and administrative expense related to the sale of our Antelope
Project. These revisions did not impact consolidated net income for the three months ended March 31,
2011 and 2010, and we concluded the adjustments were not material to our Quarterly Report on Form 10-Q for the
three months ended March 31, 2011. These revisions have been reflected in the six months ended June
30, 2011.
Reclassifications
Certain items in 2010 have been reclassified to conform to the 2011 financial statement
presentation.
Note 3 Dispositions
Assets Held for Sale
On May 17, 2011, we closed the transaction to sell our Antelope Project (see Note 9 United States Operations, Western United States
Antelope). The sale has an effective date of March 1, 2011. We received cash proceeds of
approximately $217.8 million which reflects increases to the purchase price for customary
adjustments and deductions for transaction related costs. We do not have any continuing
involvement with the Antelope Project. The related gain on the sale of $103.9 million is reported
in discontinued operations in the second quarter of 2011.
The Antelope Project has been classified as discontinued operations. The Antelope Project
assets and liabilities held for sale as of December 31, 2010, are reported in the consolidated
balance sheet as follows:
December 31, | ||||
2010 | ||||
(in thousands) | ||||
Proved oil and gas properties |
$ | 31,037 | ||
Unproved oil and gas properties |
57,737 | |||
Total assets held for sale |
$ | 88,774 | ||
Asset retirement liabilities |
$ | 663 | ||
Total liabilities held for sale |
$ | 663 | ||
Discontinued Operations
Revenue and net income on these dispositions are shown in the table below:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue applicable to discontinued operations |
$ | 2,368 | $ | 2,914 | $ | 6,488 | $ | 6,038 | ||||||||
Net income from discontinued operations |
$ | 99,213 | $ | 803 | $ | 95,947 | $ | 2,818 |
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Net income from discontinued operations for the three months ended June 30, 2011 includes
$0.2 million for employee severance and special accomplishment
bonuses and $5.2 million of U.S.
income tax related to the sale of our Antelope Project. Net income from discontinued operations
for the six months ended June 30, 2011 includes
$1.4 million for impairment of inventory from cost to market,
$3.6 million for employee severance and special accomplishment
bonuses, and $5.2 million of U.S.
income tax related to the sale of our Antelope Project. See Note 2 Summary of Significant
Accounting Policies Revisions for a discussion of
adjustments to net income for the three
months ended March 31, 2011 and 2010.
Special
accomplishment bonuses of $1.2 million directly related to the sale of the Antelope
Project were paid at the closing of the sale. Employee severance costs of $0.1 million were paid
in the three months ended June 30, 2011, and $1.3 million is expected to be paid in January 2012.
Severance costs for key employees include $0.5 million of restricted stock units which was paid in
July 2011. Severance costs for key employees also include 58,000 stock appreciation rights (SAR)
granted at an exercise price of $4.595 per right. These SARs are exercisable by the key employee
for up to one year after termination.
Note 4 Long-Term Debt
Long-Term Debt
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Senior convertible notes, unsecured, with interest at 8.25% |
||||||||
See description below |
$ | 32,000 | $ | 32,000 | ||||
Term loan facility with interest at 10% |
||||||||
See description below |
| 60,000 | ||||||
32,000 | 92,000 | |||||||
Discount on term loan facility |
||||||||
See description below |
| (10,763 | ) | |||||
$ | 32,000 | $ | 81,237 | |||||
On February 17, 2010, we closed an offering of $32.0 million in aggregate principal amount of
our 8.25 percent senior convertible notes. Under the terms of the notes, interest is payable
semi-annually in arrears on March 1 and September 1 of each year, beginning September 1, 2010. The
senior convertible notes will mature on March 1, 2013, unless earlier redeemed, repurchased or
converted. The notes are convertible into shares of our common stock at a conversion rate of
175.2234 shares of common stock per $1,000 principal amount of senior convertible notes, equivalent
to a conversion price of approximately $5.71 per share of common stock. The senior convertible
notes are general unsecured obligations, ranking equally with all of our other unsecured senior
indebtedness, if any, and senior in right of payment to any of our subordinated indebtedness, if
any. The senior convertible notes are also redeemable in certain circumstances at our option and
may be repurchased by us at the purchasers option in connection with occurrence of certain events.
Financing costs associated with the senior convertible notes offering are being amortized over the
remaining life of the notes and are recorded in other assets. The balance for financing costs was
$1.4 million and $1.9 million at June 30, 2011 and December 31, 2010, respectively.
On October 29, 2010, we closed a $60.0 million term loan facility with MSD Energy Investments
Private II, LLC (MSD Energy), an affiliate of MSD Capital, L.P., as the sole lender under the
term loan facility. Under the terms of the term loan facility, interest was paid on a monthly
basis at the initial rate of 10 percent and had a maturity of October 28, 2012. The initial rate
of interest was scheduled to increase to 15 percent on July 28, 2011, the Bridge Date. Financing
costs associated with the term loan facility offering were being amortized over the remaining life
of the loan and were recorded in other assets. The balance for financing costs was $0.3 million at
December 31, 2010.
The proceeds from the sale of our Antelope Project are considered an Extraordinary Receipt
as defined in the term loan facility with MSD Energy. Pursuant to the terms of the term loan
facility, on May 17, 2011, we paid amounts outstanding under the term loan facility, including
principal, accrued and unpaid interest and a prepayment premium of 3.5 percent of the amount
outstanding, or an aggregate $62.1 million, with the net cash proceeds received from the sale of
our Antelope Project. With the payment of the term loan facility, the balance of the
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financing
costs related to the issuance of the term loan facility of $0.3 million was expensed to loss on
extinguishment of debt in the six months ended June 30, 2011.
In connection with the term loan facility, we issued to MSD Energy (1) 1.2 million warrants
exercisable at any time on or after the closing date for a period of five years from the closing
date on a cashless exercise basis at $15 per share until the Bridge Date, at which time the
exercise price per share will equal the lower of $15 or 120 percent of the average closing bid
price of Harvests common stock for the 20 trading days immediately preceding the Bridge Date
(Tranche A); (2) 0.4 million warrants exercisable at any time on or after the closing date for a
period of five years from the closing date on a cashless exercise basis at $20 per share until the
Bridge Date, at which time the exercise price per share will equal the lower of $15 or 120 percent
of the average closing bid price of Harvests common stock for the 20 trading days immediately
preceding the Bridge Date (Tranche B); and (3) 4.4 million warrants exercisable at any time on or
after the Bridge Date for a period of five years from the Bridge Date on a cashless exercise basis
at the lower of $15 per share or 120 percent of the average closing price of Harvests common stock
for the 20 trading days immediately preceding the Bridge Date (Tranche C). The Tranche C
warrants may be redeemed by Harvest for $0.01 per share at any time prior to the Bridge Date in
conjunction with the repayment of the loan prior to the Bridge Date. On May 17, 2011, in
connection with the payment of the term loan facility, we repurchased all of the Tranche C warrants
at $0.01 per share. The cost to repurchase the warrants ($44,000) was expensed to loss on extinguishment of
debt in the six months ended June 30, 2011.
On July 28, 2011, the Bridge Date, Tranche A and Tranche B warrants
were repriced to
$14.78 per warrant which is the lower of $15 or 120 percent of the average closing price
of Harvests common stock for the 20 trading days immediately preceding the Bridge
Date.
The Black-Scholes option pricing model was used in pricing Tranche A and Tranche B. Tranche A
was priced at $5.46 per warrant, and Tranche B was priced at $4.60 per warrant. The Monte Carlo
option pricing model was used in pricing Tranche C due to the pricing and vesting variables in the
agreement. Tranche C was priced at $0.62 per warrant. The value of the warrants was recorded as
discount on debt with a corresponding credit to additional paid in capital. On May 17, 2011, in
connection with the payment of the term loan facility, the balance of the discount on debt for
Tranche A and Tranche B was expensed to loss on extinguishment of debt in the six months ended June
30, 2011. The balance of the discount on debt for Tranche C ($2.7
million) was reversed out of additional paid in
capital as the warrants associated with Tranche C were unvested.
Note 5 Commitments and Contingencies
We have various contractual commitments pertaining to exploration, development and production
activities. Currently, we have a work commitment of $22.0 million which is a minimum amount to be
spent on the Al Ghubar / Qarn Alam license (Block 64 EPSA) in Oman for the drilling of two wells
over a three-year period which expires in May 2012. We began funding this commitment in the second quarter of 2011. We also have minimum work commitments
during the various phases of the exploration periods in the Budong PSC and Dussafu PSC.
In October 2007, we entered into a JEDA with a private third party with respect to the
Antelope Project. In connection with the sale of each partys interests in the Antelope Project
(see Note 3 Dispositions), on January 11, 2011, we entered into a letter agreement with the
private third party wherein the private third party agreed to reimburse us for certain expenses
related to the sale of the two parties interests in the Antelope Project. The private third party
disputes our calculation of the amount owed to us pursuant to the January 11, 2011 letter
agreement. On March 11, 2011, we entered into a letter agreement with the private third party
regarding certain obligations between the parties related to the JEDA. The private third party
disputes our calculation of the amount due pursuant to one of the items in the March 11, 2011
letter agreement. At June 30, 2011, we have a note receivable outstanding from the private third
party of $3.3 million (see Note 2 Summary of Significant Accounting Policies, Accounts and Notes
Receivable) and an account payable outstanding to the private third party of $3.6 million related
to the purchase in July 2010 of an incremental 10 percent interest in the Antelope Project. At
this time, we cannot predict the outcome of this dispute with the private third party.
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources, Inc.
(UK), initiated a wire transfer of approximately $1.1 million ($0.7 million net to our 66.667
percent interest) intending to pay Libya Oil Gabon S.A. (LOGSA) for fuel that LOGSA supplied to
our subsidiary in the Netherlands, Harvest Dussafu, B.V., for the companys drilling operations in
Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in
accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February
25, 2011, and administered by the United States Treasury Departments OFAC, because the payee,
LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not
release the funds to the payee or return the funds to us unless we obtain authorization from OFAC.
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On June 30, 2011, we filed a voluntary self-disclosure with OFAC to report that we had
possibly violated the U.S. sanctions by attempting to remit funds to LOGSA. We concurrently applied for a license with OFAC that would
authorize us to pay LOGSA for the
fuel provided. We are unable, at this time, to predict when a license may be granted, if at
all. We also intend to file an application with OFAC for return of the blocked funds to us.
Unless that application is approved, the funds will remain in the blocked account, and we
can give no assurance when, or if, OFAC will permit the funds to be released. In addition, we owe this
supplier approximately $0.7 million ($0.5 million net to our 66.667 percent interest) in additional
payments that we are unable to remit unless we are authorized to do
so. We are also investigating to what extent payments to LOGSA can be made under European Union sanctions.
If
it is found that we violated the U.S. sanctions, such violations may
be punishable by civil penalties, including fines, denial of
export privileges, injunctions, asset seizures, debarment from government contracts and revocations
or restrictions of licenses, as well as criminal fines and imprisonment. Although we are unable to
estimate the amount or range of any possible losses resulting from this matter, we do not believe
that this matter will have a material adverse effect on our consolidated financial condition, results of
operations or cash flows.
Robert C. Bonnet and Bobby Bonnet Land Services vs. Harvest (US) Holdings, Inc., Branta
Exploration & Production, LLC, Ute Energy LLC, Cameron Cuch, Paula Black, Johnna Blackhair, and
Elton Blackhair in the United States District Court for the District of Utah. This suit was
served in April 2010 on Harvest and Elton Blackhair, a Harvest employee, alleging that the
defendants, among other things, intentionally interfered with Plaintiffs employment agreement with
the Ute Indian Tribe Energy & Minerals Department and intentionally interfered with Plaintiffs
prospective economic relationships. Plaintiffs seek actual damages, punitive damages, costs and
attorneys fees. We dispute Plaintiffs claims and plan to vigorously defend against them. We are
unable to estimate the amount or range of any possible loss.
Uracoa Municipality Tax Assessments. Our Venezuelan subsidiary, Harvest Vinccler, has
received nine assessments from a tax inspector for the Uracoa municipality in which part of the
Uracoa, Tucupita and Bombal fields are located as follows:
| Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by Petroleos de Venezuela S.A. (PDVSA) under the Operating Service Agreement (OSA). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims. | ||
| Two claims were filed in July 2006 alleging a failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims. | ||
| Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim. | ||
| Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims. |
Harvest Vinccler disputes the Uracoa tax assessments and believes it has a substantial basis for
its positions. Harvest Vinccler is unable to estimate the amount or range of any possible loss.
As a result of the SENIATs, the Venezuelan income tax authority, interpretation of the tax code as
it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in
Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997.
Libertador Municipality Tax Assessments. Harvest Vinccler has received five
assessments from a tax inspector for the Libertador municipality in which part of the Uracoa,
Tucupita and Bombal fields are located as follows:
| One claim was filed in April 2005 alleging a failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayors Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayors Office to the protest. If the municipalitys response is to confirm the assessment, Harvest Vinccler will defer to the competent Tax Court to enjoin and dismiss the claim. |
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| Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. | ||
| Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
Harvest Vinccler disputes the Libertador allegations set forth in the assessments and believes it
has a substantial basis for its position. Harvest Vinccler is unable to estimate the amount or
range of any possible loss. As a result of the SENIATs interpretation of the tax code as it
applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in
Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002.
We are a defendant in or otherwise involved in other litigation incidental to our business.
In the opinion of management, there is no such litigation that will have a material adverse impact
on our consolidated financial condition, results of operations and cash flows.
Note 6 Taxes
Taxes Other Than on Income
The components of taxes other than on income were:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Franchise Taxes |
$ | 45 | $ | 45 | $ | 91 | $ | 106 | ||||||||
Payroll and Other Taxes |
262 | 153 | 565 | 392 | ||||||||||||
$ | 307 | $ | 198 | $ | 656 | $ | 498 | |||||||||
Taxes on Income
As
further disclosed in Note 3 Dispositions, we completed the sale of our Antelope Project
during the second quarter 2011, recognizing a capital gain. As a result, we expect to fully
utilize all of our available net operating losses to offset most of the gain, and to also utilize
our remaining alternative minimum tax credits against the resulting tax liability. Utilization of
these tax benefits essentially eliminates the previously accrued deferred tax asset (DTA), and,
therefore, also eliminates the valuation allowance associated with the DTA that we did not
previously expect to utilize.
Note 7 Operating Segments
We regularly allocate resources to and assess the performance of our operations by segments
that are organized by unique geographic and operating characteristics. The segments are organized
in order to manage regional business, currency and tax related risks and opportunities. Operations
included under the heading United States and other include corporate management, cash management,
business development and financing activities performed in the United States and other countries,
which do not meet the requirements for separate disclosure. All intersegment revenues, other
income and equity earnings, expenses and receivables are eliminated in order to reconcile to
consolidated totals. Corporate general and administrative and interest expenses are included in
the United States and other segment and are not allocated to other operating segments:
16
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Segment Income (Loss) |
||||||||||||||||
Venezuela |
$ | 17,300 | $ | 7,786 | $ | 33,662 | $ | 44,276 | ||||||||
Indonesia |
(1,464 | ) | (1,514 | ) | (2,877 | ) | (2,793 | ) | ||||||||
Gabon |
(417 | ) | (101 | ) | (550 | ) | (423 | ) | ||||||||
United States and other |
(24,582 | ) | (7,270 | ) | (35,362 | ) | (19,584 | ) | ||||||||
Discontinued operations
(Antelope Project) |
99,213 | 803 | 95,947 | 2,818 | ||||||||||||
Net income (loss) attributable to Harvest |
$ | 90,050 | $ | (296 | ) | $ | 90,820 | $ | 24,294 | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Operating Segment Assets |
||||||||
Venezuela |
$ | 313,855 | $ | 292,023 | ||||
Indonesia |
58,051 | 16,254 | ||||||
Gabon |
48,515 | 25,335 | ||||||
United States and other |
214,976 | 130,626 | ||||||
Net assets held for sale (Antelope Project) |
| 88,774 | ||||||
635,397 | 553,012 | |||||||
Intersegment eliminations |
(91,626 | ) | (64,768 | ) | ||||
$ | 543,771 | $ | 488,244 | |||||
Note 8 Investment in Equity Affiliates
Petrodelta
Petrodelta is governed by its own charter and bylaws and operates a portfolio of properties in
eastern Venezuela including large proven oil fields as well as properties with substantial
opportunities for both development and exploration. Petrodelta has undertaken its operations in
accordance with Petrodeltas business plan as set forth in its conversion contract. Under its
conversion contract, work programs and annual budgets adopted by Petrodelta must be consistent with
Petrodeltas business plan. Petrodeltas business plan may be modified by a favorable decision of
the shareholders owning at least 75 percent of the shares of Petrodelta. Petrodeltas 2011 capital
expenditures are expected to be approximately $200 million. Petrodeltas shareholders are still
reviewing the 2011 final capital budget for updated drilling requirements.
As
previously disclosed, PDVSA has failed to pay on a timely basis certain amounts
owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of
Petrodeltas oil production. PDVSA and its affiliates have reported shortfalls in meeting their
cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in
certain of its payment obligations to its contractors, including contractors engaged by PDVSA to
provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment
obligations to Petrodelta, which payments Petrodelta would otherwise use to pay its contractors.
As a result, Petrodelta has experienced, and is continuing to experience, difficulty in retaining
contractors who provide services for Petrodeltas operations. We cannot provide any assurance as
to whether or when PDVSA will become current on its payment obligations. Inability to retain
contractors or to pay them on a timely basis is having an adverse effect on Petrodeltas operations
and on Petrodeltas ability to carry out its business plan.
In 2008, the Venezuelan government published in the Official Gazette the Law of Special
Contribution to Extraordinary Prices at the Hydrocarbons International Market (original Windfall
Profits Tax). The original Windfall Profits Tax is calculated on the Venezuelan Export Basket
(VEB) of prices as published by the Ministry of the Peoples Power for Energy and Petroleum
(MENPET). The original Windfall Profits Tax is applied to gross oil production delivered to
PDVSA. The original Windfall Profits Tax established a special contribution to the Venezuelan
government of (1) a 50 percent tax when the average price of the VEB exceeded $70 per barrel but is
less than $100 per barrel, and (2) a 60 percent tax when the average price of the VEB exceeds $100 per
barrel. The
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original Windfall Profits Tax was repealed with the issuance on April 18, 2011 of the Law
Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International
Hydrocarbons Market (the amended Windfall Profits Tax).
The amended Windfall Profits Tax establishes a special contribution for extraordinary prices
to the Venezuelan government of 20 percent to be applied to the difference between the price fixed
by the Venezuela budget for the relevant fiscal year (set at $40 per barrel for 2011) and $70 per
barrel. The amended Windfall Profits Tax also establishes a special contribution for exorbitant
prices to the Venezuelan government of (1) 80 percent when the average price of the VEB exceeds $70
per barrel but is less than $90 per barrel; (2) of 90 percent when the average price of the VEB
exceeds $90 per barrel but is less that $100 per barrel; and (3) of 95 percent when the average
price of the VEB exceeds $100 per barrel. The amended Windfall Profits Tax caps the royalty paid on production at $70 per barrel.
It is not clear from the drafting of the amended Windfall Profits Tax
how the $70 cap on royalty barrels will be applied to
royalties paid in-kind. By placing a cap on the royalty barrels, the amended Windfall Profits Tax reduces the royalties
paid to the government and increases payments to the National
Development Fund (FONDEN).
Petrodelta
pays royalties in-kind and has not applied the $70 cap to
its royalty barrels as doing so may overstate earnings. Until
further guidance is issued, Petrodelta will continue applying the
current sales price to its royalty barrels.
Also, the amended Windfall Profits Tax considers that an exemption of this tax could be granted by MENPET for the incremental production of projects and grass root developments until the specific investments are recovered. This exemption has to be considered and approved in a case by case basis by MENPET. We believe several of the fields operated by Petrodelta may qualify for the exemption from the amended Windfall Profits Tax. We are waiting for clarification from MENPET on the definitions of incremental production and grass roots development, as well as guidance on the process for applying for the exemption. There are many sections of the amended Windfall Profits Tax which have yet to be clarified.
Also, the amended Windfall Profits Tax considers that an exemption of this tax could be granted by MENPET for the incremental production of projects and grass root developments until the specific investments are recovered. This exemption has to be considered and approved in a case by case basis by MENPET. We believe several of the fields operated by Petrodelta may qualify for the exemption from the amended Windfall Profits Tax. We are waiting for clarification from MENPET on the definitions of incremental production and grass roots development, as well as guidance on the process for applying for the exemption. There are many sections of the amended Windfall Profits Tax which have yet to be clarified.
Both the original and amended Windfall Profits Taxes
are deductible for Venezuelan income tax purposes.
Petrodelta recorded $65.3 million and $92.5 million for the combined original and amended Windfall
Profits Taxes during the three and six months ended June 30, 2011, respectively. We estimate that
the amended Windfall Profits Tax increased the expense for windfall profits tax by $15.4 million
for the six months ended June 30, 2011. Petrodelta recorded $1.7 million and $2.9 million of
expense for the original Windfall Profits Tax during the three and six months ended June 30, 2010,
respectively.
The Science and Technology Law (referred to as LOCTI in Venezuela) requires major
corporations engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law (OHL)
to contribute two percent of their gross revenue generated in Venezuela from activities specified
in the OHL on projects to promote inventions or investigate technology in areas deemed critical to
Venezuela. The contribution is based on the previous years gross revenue and is due the following
year. LOCTI requires that each company file a separate declaration stating how much has been
contributed; however, waivers have been granted in the past to allow PDVSA to file a declaration on
a consolidated basis covering all of its and its consolidating entities liabilities. Since
Petrodelta expected PDVSA to continue requesting and receiving waivers, Petrodelta did not accrue a
liability to LOCTI for the year ended December 31, 2009. For filing years 2007 and 2008, PDVSA
provided Petrodelta with a copy of the waiver acceptance letter from LOCTI. PDVSA has stated that
a waiver was granted for filing year 2009; however, LOCTI has not yet issued the acceptance letter
to PDVSA for the 2009 filing year. The potential exposure to LOCTI for the year ended December 31,
2009 after devaluation is $4.8 million, $2.4 million net of tax ($0.8 million net to our 32 percent
interest). In January 2011, PDVSA informed its consolidating entities, including Petrodelta, that
effective with the 2010 reporting year it would no longer be requesting waivers to file the LOCTI
declaration on a consolidated basis. Based on this information, Petrodelta accrued the 2010
liability to LOCTI in the fourth quarter of 2010. However, in April 2011, Petrodelta received a
copy of the waiver acceptance letter issued by LOCTI to PDVSA for the 2010 filing year. Petrodelta
reversed the 2010 LOCTI accrual of $4.6 million, $2.3 million net of tax ($0.7 million net to our
32 percent interest) in the three months ended March 31, 2011. Petrodelta is accruing the 2011
liability to LOCTI on a current basis.
In December 2010, LOCTI was modified to reduce the amount of contributions beginning January
2011 to one percent of gross revenues for companies owned by individuals or corporations and 0.5
percent for companies owned by Venezuela. Petrodeltas rate of contribution starting in 2011 will
be 0.5 percent. LOCTI was also modified to require all contributions to be paid in cash directly
to the National Fund for Science, Technology and Innovation (FONDACIT), the entity responsible
for the administration of LOCTI contributions. Self-funded programs and direct contributions to
projects performed by other institutions are no longer allowed.
In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million, $12.2
million net to HNR Finance ($9.8 million net to our 32 percent interest). Petrodelta shareholder
approval of the dividend was received on March 14, 2011. As of July 29, 2011, this dividend has
not been received, and the timing of the receipt of this dividend is uncertain.
Petrodelta does not have currency exchange risk other than the official prevailing exchange
rate that applies to its operating costs denominated in Bolivars (4.30 Bolivars per U.S. Dollar).
Petrodelta does not have, and has not had, any Bolivars pending government approval for settlement
for U.S. Dollars at the official exchange rate or the SITME rate. The monetary assets that are
exposed to exchange rate fluctuations are cash, accounts receivable, prepaid expenses and other
current assets. The monetary liabilities that are exposed to exchange rate fluctuations
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are accounts payable, accruals and other current liabilities. All monetary assets and
liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar
exchange rate. At June 30, 2011, the balances in Petrodeltas Bolivar denominated monetary assets
and liabilities accounts that are exposed to exchange rate changes are 97.3 million Bolivars and
2,542.6 million Bolivars, respectively.
Petrodeltas reporting and functional currency is the U.S. Dollar. Petrodeltas financial information is prepared in accordance with
International Financial Reporting Standards (IFRS) which we have adjusted to conform to GAAP.
All amounts through Net Income Equity Affiliate represent 100 percent of Petrodelta. Summary
financial information has been presented below at June 30, 2011 and December 31, 2010 and for the
three and six months ended June 30, 2011 and 2010:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Oil sales |
$ | 282,975 | $ | 135,964 | $ | 509,588 | $ | 277,466 | ||||||||
Gas sales |
679 | 1,022 | 1,405 | 2,040 | ||||||||||||
Royalty |
(96,214 | ) | (46,391 | ) | (173,529 | ) | (94,377 | ) | ||||||||
187,440 | 90,595 | 337,464 | 185,129 | |||||||||||||
Expenses: |
||||||||||||||||
Operating expenses |
18,684 | 10,632 | 32,966 | 20,675 | ||||||||||||
Workovers |
7,021 | | 13,496 | | ||||||||||||
Depletion, depreciation and amortization |
13,231 | 9,770 | 25,718 | 18,377 | ||||||||||||
General and administrative |
3,782 | 2,641 | 2,852 | 6,058 | ||||||||||||
Windfall profits tax |
65,345 | 1,664 | 92,471 | 2,915 | ||||||||||||
108,063 | 24,707 | 167,503 | 48,025 | |||||||||||||
Income from operations |
79,377 | 65,888 | 169,961 | 137,104 | ||||||||||||
Gain on exchange rate |
| 1,938 | | 120,654 | ||||||||||||
Investment earnings and other |
185 | (13 | ) | 352 | 2,881 | |||||||||||
Interest expense |
(3,146 | ) | (1,328 | ) | (4,418 | ) | (2,223 | ) | ||||||||
Income before income tax |
76,416 | 66,485 | 165,895 | 258,416 | ||||||||||||
Current income tax expense |
31,618 | 52,656 | 84,961 | 138,076 | ||||||||||||
Deferred income tax (benefit) expense |
(2,513 | ) | 5,118 | (28,275 | ) | 47,582 | ||||||||||
Net income |
47,311 | 8,711 | 109,209 | 72,758 | ||||||||||||
Adjustment to reconcile to reported net income
from unconsolidated equity affiliate: |
||||||||||||||||
Deferred income tax (benefit) expense |
1,176 | (14,499 | ) | 19,739 | (47,488 | ) | ||||||||||
Net income equity affiliate |
46,135 | 23,210 | 89,470 | 120,246 | ||||||||||||
Equity interest in unconsolidated equity affiliate |
40 | % | 40 | % | 40 | % | 40 | % | ||||||||
Income before amortization of excess basis
in equity affiliate |
18,454 | 9,284 | 35,788 | 48,098 | ||||||||||||
Amortization of excess basis in equity affiliate |
(452 | ) | (322 | ) | (873 | ) | (656 | ) | ||||||||
Conform depletion expense to GAAP |
(216 | ) | (47 | ) | (297 | ) | (160 | ) | ||||||||
Net income from unconsolidated equity affiliate |
$ | 17,786 | $ | 8,915 | $ | 34,618 | $ | 47,282 | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Current assets |
$ | 905,004 | $ | 535,225 | ||||
Property and equipment |
365,998 | 321,816 | ||||||
Other assets |
87,013 | 67,755 | ||||||
Current liabilities |
756,916 | 406,339 | ||||||
Other liabilities |
43,207 | 39,224 | ||||||
Net equity |
557,892 | 479,233 |
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Fusion Geophysical, LLC (Fusion)
On January 28, 2011, Fusion Geophysical, LLCs (Fusion) 69 percent owned subsidiary,
FusionGeo, Inc., was acquired by a private purchaser pursuant to an Agreement and Plan of Merger.
We received $1.4 million for our equity investment and $0.7 million for the repayment in full of
the outstanding balance of the prepaid service agreement, short term loan and accrued interest.
The Agreement and Plan of Merger includes an Earn Out provision wherein we would receive an
additional payment of up to a maximum of $2.7 million if FusionGeo, Inc.s 2011 gross profit
exceeds $5.6 million. The Earn Out payment will not be determined until early in 2012. We can
give no assurance that we will receive any Earn Out payment.
At December 31, 2009, we fully impaired the carrying value of our equity investment in Fusion.
Accordingly, we did not record net losses incurred by Fusion in the six months ended June 30, 2011
and 2010 as doing so would have caused our equity investment to go into a negative position.
However, we have recognized a $1.4 million gain on the sale of Fusion in the six months ended June
30, 2011.
Note 9 United States Operations
In 2008, we initiated a domestic exploration program in two different basins. We are the
operator of both exploration programs.
Gulf Coast
West Bay Project
We hold exploration acreage in the Gulf Coast Region of the United States through an Area of
Mutual Interest (AMI) agreement with two private third parties. During the six months ended June
30, 2011, we and our partners in the West Bay project agreed to relinquish the exploration acreage
we held to the farmor. The relinquishment is expected to be completed by August 2011. Neither we
nor our partners intend to continue any
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activity in West Bay. Based on the decision in the second quarter 2011 to relinquish the
exploration acreage, we impaired the carrying value of West Bay of $3.3 million as of June 30,
2011. The West Bay project represented $3.3 million of unproved oil and gas properties on our
December 31, 2010 balance sheet.
Western United States Antelope
On May 17, 2011, we closed the transaction to sell all of our interest in the oil and gas
assets located in our Antelope Project area in the Uinta Basin of Utah which consisted of
approximately 69,000 gross acres (47,600 net acres), and the related contracts, reserves,
production, wells, pipelines production facilities and other rights, title and interests located in
the Uintah Basin in Duchesne and Uintah Counties, Utah. The transaction included the Mesaverde
Gas Exploration and Appraisal Project (Mesaverde), the Lower Green River/Upper Wasatch and the Monument Butte Extension. We
owned an approximate working interest of 70 percent in the Mesaverde and Lower Green River/Upper
Wasatch, an approximate 60 percent working interest in one well in the Monument Butte
Extension, an approximate 43 percent working interest in the initial eight well program in the
Monument Butte Extension, and 37 percent working interest in the follow-up six well program in the
Monument Butte Extension. The initial eight well program and follow-up six well program in the
Monument Butte Extension were non-operated. The sale has an effective date of March 1, 2011 (see
Note 3 Dispositions). We received cash proceeds of approximately $217.8 million which reflects
increases to the purchase price for customary adjustments and deductions for transaction related
costs. All activities associated with the Antelope Project have been
reflected as discontinued operations on the statement of operations.
Note 10 Indonesia
On January 5, 2011, we exercised our first refusal right to a proposed transfer of interest by
the operator to a third party, which allowed us to acquire an additional 10 percent equity interest
in the Budong PSC at a cost of $3.7 million. Closing of this acquisition, which is subject to the
approval of the Government of Indonesia and BPMIGAS, increased our interest in the Budong PSC to
64.4 percent. The $3.7 million was paid on April 18, 2011.
During
the initial exploration period, the Budong PSC covered 1.35 million
acres. The Budong PSC includes a ten-year exploration period and a
20-year development phase. Pursuant to the terms of the Budong PSC,
at the end of the first three-year exploration phase, 45 percent of
the original area was to be relinquished to BPMIGAS. In January 2010,
35 percent of the original area was relinquished and ten percent of
the required relinquishment was deferred until 2011. On January 20,
2011, the deferred ten percent of the original total contract area
was relinquished to BPMIGAS. The Budong PSC now covers 0.75 million
acres.
See Note 2 Summary of Significant Accounting Policies Suspended Exploratory Drilling
Costs, Budong PSC for a status of the LG-1 exploratory drilling costs. The Budong PSC represents
$26.5 million and $10.9 million of unproved oil and gas properties on our June 30, 2011 and
December 31, 2010 balance sheets, respectively.
Note 11 Gabon
We are the operator of the Dussafu PSC offshore Gabon in West Africa with a 66.667 percent
ownership interest. The Dussafu PSC partners and the Republic of Gabon, represented by the
Ministry of Mines, Energy, Petroleum and Hydraulic Resources (Republic of Gabon), entered into
the second three-year exploration phase of the Dussafu PSC with an effective date of May 28, 2007.
In order to complete drilling activities of the first exploratory well, in March 2011, the
Direction Generale Des Hydrocarbures (DGH) approved a second one-year extension to May 27, 2012
of the second exploration phase.
A Standby Letter of Credit was issued on April 8, 2011 for the Transocean Sedneth 701
semi-submersible drilling unit. We took possession of the drilling unit mid-April 2011 on a one
well contract. A second Standby Letter of Credit was issued April 7, 2011 for the Subsea 7 Remote
Operated Vehicle.
See Note 5 Commitments and Contingencies for a discussion of legal matters related to our
Gabon operations.
The Dussafu PSC represents $24.5 million and $9.2 million of unproved oil and gas properties
on our June 30, 2011 and December 31, 2010 balance sheets, respectively.
Note 12 Oman
In April 2009, we signed an Exploration and Production Sharing Agreement (EPSA) with Oman
for the Block 64 EPSA. We have a 100 percent working interest in Block 64 EPSA during the
exploration phase. Oman Oil Company has the option to back-in to up to a 20 percent interest in
Block 64 EPSA after the discovery of gas. We have a work commitment of $22.0 million which is a minimum amount to be spent on the Block 64
EPSA for the drilling of two wells over a three-year period which
expires in May 2012. We began funding this commitment in the
second quarter of 2011.
The Block 64 EPSA represents $5.0 million and $4.2 million of unproved oil and gas properties
on our June 30, 2011 and December 31, 2010 balance sheets, respectively.
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Note 13 Related Party Transactions
Dividends declared and paid by Petrodelta are paid to HNR Finance. HNR Finance must declare a
dividend in order for the partners, Harvest and Vinccler, to receive their respective shares of
Petrodeltas dividend. Petrodelta has declared two dividends, totaling $33.0 million, which have
been received by HNR Finance and one dividend, totaling $12.2 million, which has not yet been
received by HNR Finance. HNR Finance has not distributed these dividends to the partners. At June
30, 2011, Vincclers share of the undistributed dividends is $9.0 million.
Note 14 Subsequent Event
We conducted our subsequent events review up through the date of the issuance of this
Quarterly Report on Form 10-Q.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Harvest Natural Resources, Inc. (Harvest or the Company) cautions that any forward-looking
statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, as
amended [the PSLRA]) contained in this report or made by management of the Company involve risks
and uncertainties and are subject to change based on various important factors. When used in this
report, the words budget, guidance, forecast, expect, believes, goals, projects,
plans, anticipates, estimates, should, could, assume and similar expressions are
intended to identify forward-looking statements. In accordance with the provisions of the PSLRA,
we caution you that important factors could cause actual results to differ materially from those in
the forward-looking statements. Such factors include our concentration of operations in Venezuela,
the political and economic risks associated with international operations (particularly those in
Venezuela), the anticipated future development costs for undeveloped reserves, drilling risks, the
risk that actual results may vary considerably from reserve estimates, the dependence upon the
abilities and continued participation of certain of our key employees, the risks normally incident
to the exploration, operation and development of oil and natural gas properties, risks incumbent to
being a noncontrolling interest shareholder in a corporation, the permitting and the drilling of
oil and natural gas wells, the availability of materials and supplies necessary to projects and
operations, the price for oil and natural gas and related financial derivatives, changes in
interest rates, the Companys ability to acquire oil and natural gas properties that meet its
objectives, availability and cost of drilling rigs, seismic crews, overall economic conditions,
political stability, civil unrest, acts of terrorism, currency and exchange risks, currency
controls, changes in existing or potential tariffs, duties or quotas, changes in taxes, changes in
governmental policy, availability of sufficient financing, changes in weather conditions, and
ability to hire, retain and train management and personnel. A discussion of these factors is
included in our Annual Report on Form 10-K for the year ended December 31, 2010, which includes
certain definitions and a summary of significant accounting policies and should be read in
conjunction with this Quarterly Report on Form 10-Q.
Executive Summary
Harvest Natural Resources, Inc. is a petroleum exploration and production company
incorporated under Delaware law in 1989. Our focus is on acquiring exploration, development and
producing properties in geological basins with proven active hydrocarbon systems. Our experienced
technical, business development and operating personnel have identified low entry cost exploration
opportunities in areas with large hydrocarbon resource potential. We operate from our Houston,
Texas headquarters. We also have regional/technical offices in the United Kingdom and Singapore,
and small field offices in Jakarta, Republic of Indonesia (Indonesia); Muscat, Sultanate of Oman
(Oman); and Port Gentil, Republic of Gabon (Gabon) to support field operations in those areas.
We have acquired and developed significant interests in the Bolivarian Republic of Venezuela
(Venezuela). Our Venezuelan interests are owned through HNR Finance, B.V. (HNR Finance). Our
ownership of HNR Finance is through several corporations in all of which we have direct controlling
interests. Through these corporations, we indirectly own 80 percent of HNR Finance and our
partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of
Venezolana de Inversiones y Construcciones Clerico, C.A. (Vinccler), indirectly owns the
remaining 20 percent interest of HNR Finance. HNR Finance owns 40 percent of Petrodelta, S.A.
(Petrodelta). As we indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent
interest in Petrodelta, and Vinccler indirectly owns eight percent. Corporación Venezolana del
Petroleo S.A. (CVP) owns the remaining 60 percent of Petrodelta. HNR Finance has a direct
controlling interest in Harvest Vinccler S.C.A. (Harvest Vinccler). Harvest Vincclers main
business purposes are to assist us in the management of Petrodelta and in negotiations with
Petroleos de Venezuela S.A. (PDVSA). We do not have a business relationship with Vinccler
outside of Venezuela.
Through the pursuit of technically-based strategies guided by conservative investment
philosophies, we are building a portfolio of exploration prospects to complement the low-risk
production, development and exploration prospects we hold in Venezuela. In addition to our
interests in Venezuela, we hold exploration acreage mainly onshore West Sulawesi in Indonesia;
offshore of Gabon; onshore in Oman; and offshore of the Peoples Republic of China (China).
Until March 1, 2011, we had developed and undeveloped acreage in the Antelope project in the
Western United States through a Joint Exploration and Development Agreement (JEDA) in the
Monument Butte Extension Appraisal and Development Project (Monument Butte Extension) and Lower
Green River/Upper Wasatch Oil Delineation and Development Project (Lower Green River/Upper
Wasatch) where we had established production (see Notes to Consolidated Financial Statements
Note 3 Dispositions).
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From time to time we learn of possible third party interests in acquiring ownership in certain
assets within our property portfolio. We evaluate these potential opportunities taking into
consideration our overall property mix, our operational and liquidity requirements, our strategic
focus and our commitment to long-term shareholder value. For example, we have received such
expressions of interest in acquiring some of our international producing and
exploration assets, and we are currently evaluating these potential opportunities. There can be no
assurances that our discussions will continue or that any transaction may ultimately result from
our discussions.
On May 17, 2011, we closed the transaction to sell all of our interest in the oil and gas
assets in Utahs Uinta Basin (Antelope Project). The transaction included the Mesaverde Gas Exploration and
Appraisal Project (Mesaverde),
the Lower Green River/Upper Wasatch and the Monument Butte Extension. The sale has
an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million
which reflects increases to the purchase price for customary adjustments and deductions for
transaction related costs. Bank of America Merrill Lynch served as our financial advisor in
connection with this transaction. This transaction is part of our ongoing process of exploring
strategic alternatives announced in September 2010.
Venezuela
Harvest Vinccler and Petrodelta do not have currency exchange risk other than the official
prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars
(Bolivars) (4.30 Bolivars per U.S. Dollar). However, during the three and six months ended June
30, 2011, Harvest Vinccler exchanged approximately $0.1 million and $0.4 million, respectively,
through Sistema de Transacciones con Títulos en Moneda Extranjera (SITME) and received an average
exchange rate of 5.21 Bolivars and 5.19 Bolivars, respectively, per U.S. Dollar. During the three
and six months ended June 30, 2010, no such exchanges took place. Petrodelta does not have, and
has not had, any U.S. Dollars pending government approval for settlement for Bolivars at the
official exchange rate or the SITME exchange rate. Harvest Vinccler currently does not have any
U.S. Dollars pending government approval for settlement for Bolivars at the official exchange rate
or the SITME exchange rate.
The monetary assets that are exposed to exchange rate fluctuations are cash, accounts
receivable, prepaid expenses and other current assets. The monetary liabilities that are exposed
to exchange rate fluctuations are accounts payable, accruals and other current liabilities. All
monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the
official Bolivar exchange rate. At June 30, 2011, the balances in Harvest Vincclers Bolivar
denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are
3.1 million Bolivars and 4.3 million Bolivars, respectively. At June 30, 2011, the balances in
Petrodeltas Bolivar denominated monetary assets and liabilities accounts that are exposed to
exchange rate changes are 97.3 million Bolivars and 2,542.6 million Bolivars, respectively.
Petrodelta
Petrodelta is governed by its own charter and bylaws and operates a portfolio of properties in
eastern Venezuela including large proven oil fields as well as properties with very substantial
opportunities for both development and exploration. We have seconded key technical and managerial
personnel into Petrodelta and participate on Petrodeltas board of directors.
Petrodeltas shareholders intend that the company be self-funding and rely on
internally-generated cash flow to fund operations. Petrodeltas 2011 capital expenditures are
expected to be approximately $200 million. Petrodeltas shareholders are still reviewing the 2011
final capital budget for updated drilling requirements. Petrodeltas 2011 proposed business plan
includes a planned drilling program to utilize two rigs to drill both development and appraisal
wells for maintaining production capacity, the continued appraisal of the substantial resource base
in the El Salto field and further drilling in the Isleño field. It also includes engineering work
for production facilities required for the full development of the El Salto and Temblador fields.
Since Petrodelta only executed approximately 50 percent its 2010 budget primarily due to lack of
funding by PDVSA, we do not believe that PDVSA will be able to provide the support required to
execute Petrodeltas proposed 2011 budget. During the six months ended June 30, 2011, Petrodelta
has incurred $66.5 million in capital expenditures.
As
previously disclosed, PDVSA has failed to pay on a timely basis certain amounts
owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of
Petrodeltas oil production. PDVSA and its affiliates have reported shortfalls in meeting their
cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in
certain of its payment obligations to its contractors, including contractors engaged by PDVSA to
provide services to Petrodelta. In addition, PDVSA has fallen behind
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in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise
use to pay its contractors. As a result, Petrodelta has experienced, and is continuing to
experience, difficulty in retaining contractors who provide services for Petrodeltas operations.
We cannot provide any assurance as to whether or when PDVSA will become current on its payment
obligations. Inability to retain contractors or to pay them on a timely basis is continuing to
have an adverse effect on Petrodeltas operations and on Petrodeltas ability to carry out its
business plan.
In 2008, the Venezuelan government published in the Official Gazette the Law of Special
Contribution to Extraordinary Prices at the Hydrocarbons International Market (original Windfall
Profits Tax). The original Windfall Profits Tax is calculated on the Venezuelan Export Basket
(VEB) of prices as published by the Ministry of the Peoples Power for Energy and Petroleum
(MENPET). The original Windfall Profits Tax is applied to gross oil production delivered to
PDVSA. The original Windfall Profits Tax established a special contribution to the Venezuelan
government of (1) a 50 percent tax when the average price of the VEB exceeded $70 per barrel but is
less than $100 per barrel, and (2) a 60 percent tax when the average price of the VEB exceeds $100 per
barrel. The original Windfall Profits Tax was repealed with the issuance on April 18, 2011 of the
Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the
International Hydrocarbons Market (the amended Windfall Profits Tax).
The amended Windfall Profits Tax establishes a special contribution for extraordinary prices
to the Venezuelan government of 20 percent to be applied to the difference between the price fixed
by the Venezuela budget for the relevant fiscal year (set at $40 per barrel for 2011) and $70 per
barrel. The amended Windfall Profits Tax also establishes a special contribution for exorbitant
prices to the Venezuelan government of (1) 80 percent when the average price of the VEB exceeds $70
per barrel but is less than $90 per barrel; (2) of 90 percent when the average price of the VEB
exceeds $90 per barrel but is less that $100 per barrel; and (3) of 95 percent when the average
price of the VEB exceeds $100 per barrel. The amended Windfall Profits Tax caps the royalty paid
on production at $70 per barrel. It is not clear from the drafting of the amended Windfall Profits
Tax how the $70 cap on royalty barrels will be applied to royalties
paid in-kind. By placing a cap
on the royalty barrels, the amended Windfall Profits Tax reduces the royalties paid to the
government and increases payments to the National Development Fund (FONDEN).
Petrodelta
pays royalties in-kind and has not applied the $70 cap to
its royalty barrels as doing so may overstate earnings. Until
further guidance is issued, Petrodelta will continue applying the
current sales price to its royalty barrels.
Also, the amended Windfall Profits Tax considers that an exemption of this tax could be granted by MENPET for the incremental production of projects and grass root developments until the specific investments are recovered. This exemption has to be considered and approved in a case by case basis by MENPET. We believe several of the fields operated by Petrodelta may qualify for the exemption from the amended Windfall Profits Tax. We are waiting for clarification from MENPET on the definitions of incremental production and grass roots development, as well as guidance on the process for applying for the exemption. There are many sections of the amended Windfall Profits Tax which have yet to be clarified.
Also, the amended Windfall Profits Tax considers that an exemption of this tax could be granted by MENPET for the incremental production of projects and grass root developments until the specific investments are recovered. This exemption has to be considered and approved in a case by case basis by MENPET. We believe several of the fields operated by Petrodelta may qualify for the exemption from the amended Windfall Profits Tax. We are waiting for clarification from MENPET on the definitions of incremental production and grass roots development, as well as guidance on the process for applying for the exemption. There are many sections of the amended Windfall Profits Tax which have yet to be clarified.
Both the original and amended Windfall Profits Taxes
are deductible for Venezuelan income tax purposes.
Petrodelta recorded $65.3 million and $92.5 million for the combined original and amended Windfall
Profits Taxes during the three and six months ended June 30, 2011, respectively. We estimate that
the amended Windfall Profits Tax increased the expense for windfall profits tax by $15.4 million
for the three and six months ended June 30, 2011. Petrodelta recorded $1.7 million and $2.9
million of expense for the original Windfall Profits Tax during the three and six months ended June
30, 2010, respectively.
The Science and Technology Law (referred to as LOCTI in Venezuela) requires major
corporations engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law (OHL)
to contribute two percent of their gross revenue generated in Venezuela from activities specified
in the OHL on projects to promote inventions or investigate technology in areas deemed critical to
Venezuela. The contribution is based on the previous years gross revenue and is due the following
year. LOCTI requires that each company file a separate declaration stating how much has been
contributed; however, waivers have been granted in the past to allow PDVSA to file a declaration on
a consolidated basis covering all of its and its consolidating entities liabilities. Since
Petrodelta expected PDVSA to continue requesting and receiving waivers, Petrodelta did not accrue a
liability to LOCTI for the year ended December 31, 2009. For filing years 2007 and 2008, PDVSA
provided Petrodelta with a copy of the waiver acceptance letter from LOCTI. PDVSA has stated that
a waiver was granted for filing year 2009; however, LOCTI has not yet issued the acceptance letter
to PDVSA for the 2009 filing year. The potential exposure to LOCTI for the year ended December 31,
2009 after devaluation is $4.8 million, $2.4 million net of tax ($0.8 million net to our 32 percent
interest). In January 2011, PDVSA informed its consolidating entities, including Petrodelta, that
effective with the 2010 reporting year it would no longer be requesting waivers to file the LOCTI
declaration on a consolidated basis. Based on this information, Petrodelta accrued the 2010
liability to LOCTI in the fourth quarter of 2010. However, in April 2011, Petrodelta received a
copy of the waiver acceptance letter issued by LOCTI to PDVSA for the 2010 filing year. Petrodelta
reversed the 2010 LOCTI accrual of $4.6 million, $2.3
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million net of tax ($0.7 million net to our 32 percent interest) in the three months ended
March 31, 2011. Petrodelta is accruing the 2011 liability to LOCTI on a current basis.
In December 2010, LOCTI was modified to reduce the amount of contributions beginning January
2011 to one percent of gross revenues for companies owned by individuals or corporations and 0.5
percent for companies owned by Venezuela. Petrodeltas rate of contribution starting in 2011 will
be 0.5 percent. LOCTI was also modified to require all contributions to be paid in cash directly
to the National Fund for Science, Technology and Innovation (FONDACIT), the entity responsible
for the administration of LOCTI contributions. Self-funded programs and direct contributions to
projects performed by other institutions are no longer allowed.
The recently announced reinstatement of emergency electricity conservation measures in
Venezuela are not expected to have a material impact on Petrodelta. There is no particular
language in the emergency measure that limits or imposes any restrictions to operations related to
the oil and gas industry related sectors. The regulations explicitly states that the oil and gas
sector is excluded from consumption limits and reduction directly linked to the operations.
Petrodeltas operations currently generate most of its own power either through Uracoas generator
systems, PDVSAs electrical grid, or rented portable generators. Tucupita if the only field which
has a connection to the public grid. Current regulations and shortages are focused on the
industrial, commercial and domestic sectors.
During the six months ended June 30, 2011, Petrodelta drilled and completed eight development
wells, one successful appraisal well and one water injector well compared to nine development wells
in the six months ended June 30, 2010. Petrodelta delivered approximately 5.4 million barrels
(MBls) of oil and 0.9 billion cubic feet
(Bcf) of natural gas, averaging 30,481 barrels of oil
equivalent (BOE) per day during the six months ended June 30, 2011 compared to deliveries of 3.9
MBls of oil and 1.3 Bcf of gas, averaging 22,895 BOE per day during the six months ended June 30,
2010.
During the six months ended June 30, 2011, Petrodelta completed facilities at EPM transfer
point for El Salto field. Completion of the facilities has enabled Petrodelta to increase
production from the El Salto field. Petrodelta is continuing additional infrastructure enhancement
projects in El Salto and Temblador. Currently, Petrodelta is operating drilling rigs in the El
Salto and Uracoa fields, and workover rigs in the Uracoa and Tucupita fields. Petrodelta expects
to take possession of a third drilling rig in August 2011.
Certain operating statistics for the three and six months ended June 30, 2011 and 2010 for the
Petrodelta fields operated by Petrodelta are set forth below. This information is provided at 100
percent. This information may not be representative of future results.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Thousand barrels of oil sold |
2,782 | 1,955 | 5,365 | 3,923 | ||||||||||||
Million cubic feet of gas sold |
440 | 663 | 910 | 1,323 | ||||||||||||
Total thousand barrels of oil equivalent |
2,855 | 2,066 | 5,517 | 4,144 | ||||||||||||
Average price per barrel |
$ | 101.72 | $ | 69.55 | $ | 94.98 | $ | 70.73 | ||||||||
Average price per thousand cubic feet |
$ | 1.54 | $ | 1.54 | $ | 1.54 | $ | 1.54 | ||||||||
Cash operating costs ($millions) |
$ | 18.7 | $ | 11.6 | $ | 33.0 | $ | 22.8 | ||||||||
Capital expenditures ($millions) |
$ | 32.1 | $ | 19.4 | $ | 66.5 | $ | 25.5 |
Crude oil delivered from the Petrodelta fields to PDVSA Petroleo S.A. (PPSA) is priced with
reference to Merey 16 published prices, weighted for different markets and adjusted for variations
in gravity and sulphur content, commercialization costs and distortions that may occur given the
reference price and prevailing market conditions. Merey 16 published prices are quoted and sold in
U.S. Dollars. Natural gas delivered from the Petrodelta Fields to PPSA is priced at $1.54 per
thousand cubic feet. PPSA is obligated to make payment to Petrodelta in U.S. Dollars in the case
of payment for crude oil and natural gas liquids delivered. Natural gas deliveries are paid in
Bolivars, but the pricing for natural gas is referenced to the U.S. Dollar.
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United States
Gulf Coast West Bay
We hold exploration acreage in the Gulf Coast Region of the United States through an Area of
Mutual Interest (AMI) agreement with two private third parties. During the six months ended June
30, 2011, we and our partners in the West Bay project agreed to relinquish the exploration acreage
we held to the farmor. The relinquishment is expected to be completed by August 2011. Neither we
nor our partners intend to continue any activity in West Bay. Based on the decision in the second
quarter 2011 to relinquish the exploration acreage, we impaired the carrying value of West Bay of
$3.3 million as of June 30, 2011.
Western United States Antelope
On May 17, 2011, we closed the transaction to sell all of our interest in the oil and gas
assets located in our Antelope Project area in the Uinta Basin of Utah which consisted of
approximately 69,000 gross acres (47,600 net acres), and the related contracts, reserves,
production, wells, pipelines production facilities and other rights, title and interests located in
the Uintah Basin in Duchesne and Uintah Counties, Utah. The transaction included the Mesaverde, the Lower Green River/Upper Wasatch and the Monument Butte Extension. We
owned an approximate working interest of 70 percent in the Mesaverde and Lower Green River/Upper
Wasatch, an approximate 60 percent working interest in one well in the Monument Butte
Extension, an approximate 43 percent working interest in the initial eight well program in the
Monument Butte Extension, and 37 percent working interest in the follow-up six well program in the
Monument Butte Extension. The initial eight well program and follow-up six well program in the
Monument Butte Extension are non-operated. The sale has an effective date of March 1, 2011 (see
Notes to Consolidated Financial Statements, Note 3 Dispositions). We received cash proceeds of
approximately $217.8 million which reflects increases to the purchase price for customary
adjustments and deductions for transaction related costs. We do not have any continuing
involvement with the Antelope Project.
Budong-Budong Project, Indonesia (Budong PSC)
In January 2011, we exercised our first refusal right to a proposed transfer of interest by
the operator to a third party, which has allowed us to acquire an additional 10 percent equity in
the Budong PSC at a cost of $3.7 million. On April 18, 2011, we paid the $3.7 million
consideration. Closing of this acquisition, which is subject to the approval of the Government of
Indonesia and BPMIGAS, increased our interest in the Budong PSC to 64.4 percent.
During
the initial exploration period, the Budong PSC covered 1.35 million
acres. The Budong PSC includes a ten-year exploration period and a
20-year development phase. Pursuant to the terms of the Budong PSC,
at the end of the first three-year exploration phase, 45 percent of
the original area was to be relinquished to BPMIGAS. In January 2010,
35 percent of the original area was relinquished and ten percent of
the required relinquishment was deferred until 2011. On January 20,
2011, the deferred ten percent of the original total contract area
was relinquished to BPMIGAS. The Budong PSC now covers 0.75 million
acres.
The Lariang-1 (LG-1), the first of two planned exploration wells, was spud on January
6, 2011 in the Budong-Budong Block, West Sulawesi. On April 8, 2011, the LG-1 was plugged and
abandon for safety
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reasons. The primary Eocene targets had not yet been reached, as the well was planned for a
total measured depth of approximately 7,200 feet. The costs for drilling the LG-1, $13.9 million,
have been suspended pending further evaluation and appraisal (see Notes to Consolidated Financial
Statements, Note 2 Summary of Significant Accounting Policies Suspended Exploratory Drilling
Costs, Budong PSC).
During the second quarter 2011, the drilling rig was mobilized from the LG-1 location to the
Karama-1 (KD-1) location to drill the second exploratory well on the Budong PSC. The KD-1, which
is located approximately 50 miles south of the LG-1, spud on June 20, 2011. The KD-1 will be
drilled to test a thrusted surface anticline with stacked Miocene and Eocene targets to a planned
total measured depth of approximately 10,800 feet. Drilling is anticipated to require
approximately 43 days. In the event of success, additional time may be required to test and
evaluate the well.
During
the six months ended June 30, 2011, we had cash capital expenditures of $9.4 million
for drilling and construction costs and $3.7 million for the purchase of the additional 10 percent
equity interest.
Dussafu Project Gabon
The Dussafu Marin Permit (Dussafu PSC) partners and the Republic of Gabon, represented by
the Ministry of Mines, Energy, Petroleum and Hydraulic Resources (Republic of Gabon) entered into
the second three-year exploration phase of the Dussafu PSC with an effective date of May 28, 2007.
In order to complete drilling activities of the first exploratory well, in March 2011, the
Direction Generale Des Hydrocarbures (DGH) approved a second one year extension to May 27, 2012
of the second exploration phase.
Operational activities during the three months ended June 30, 2011 included negotiation and
contracting of a drilling unit in preparation to spud the exploration well, the Dussafu Ruche
Marin-1 (DRM-1), and drilling and testing of the DRM-1, which spud on April 28, 2011. A
Standby Letter of Credit was issued on April 8, 2011 for the Transocean Sedneth 701
semi-submersible drilling unit. We took possession of the drilling unit mid-April 2011 on a one
well contract. A second Standby Letter of Credit was issued April 7, 2011 for the Subsea 7 Remote
Operated Vehicle. The DRM-1 was initially drilled in 380 feet of water.
On June 10, 2011, we
announced the DRM-1 had reached a vertical depth of 9,953 feet within the upper Dentale Formation. Log evaluation,
pressure data and samples indicated an oil discovery of approximately 55 feet of pay in a 90 foot oil column within the
Gamba Formation. We also announced plans to deepen the well to test
Middle and Lower Dentale exploration potential and sidetrack to appraise the extent of the Gamba
oil discovery.
Subsequently the DRM-1 was deepened to reach a true vertical depth subsea (TVDSS)
of 11,355 feet to test the prospectivity of the Middle and Lower Dentale Formations. Log
evaluation, pressure data and a fluid sample indicate that Harvest has discovered a second oil
accumulation with approximately 35 feet of oil pay within the secondary objective of the Middle
Dentale Formation.
The Gamba discovery has been appraised by drilling a sidetrack (DRM-1ST1) 0.75
miles to the southwest to test the lateral extent and structural elevation of the Gamba reservoir.
The sidetrack was drilled to a total depth (TD) in the Upper Dentale of 11,562 feet, (9,428 feet
TVDSS) and found 19 feet of oil pay in the Gamba reservoir. A second sidetrack (DRM-1ST2) was drilled 0.5 miles to the northwest of the original DRM-1 wellbore to a TD in the Upper Dentale of 11,562 feet, (9,428 feet TVDSS)and found 40 feet of oil pay in the Gamba reservoir. Following completion of the drilling operations in the second sidetrack, the well will be suspended for possible future use and the rig demobilized.
During the six months ended
June 30, 2011, we had cash capital expenditures of $13.9 million for well planning and drilling.
See Notes to Consolidated Financial Statements, Note 5 Commitments and Contingencies for a
discussion of legal matters related to our Gabon operations.
Block 64 EPSA Project Oman
We have a work commitment of $22.0 million which is a minimum amount to be spent on the Al
Ghubar / Qarn Alam license (Block 64 EPSA) for the drilling of two wells over a three-year period
which expires in May 2012. Operational activities during the three months ended June 30, 2011
included completion of the prospect definition phase of the project and submission of two
potential well locations to the Oman government. Well planning and procurement of long lead items
began in April 2011 in anticipation of spudding the first of the two exploratory wells in late
2011. We plan to drill the two exploration wells back-to-back. During the six months ended June
30, 2011, we incurred $0.7 million for seismic interpretation.
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Management Changes
Effective July 5, 2011, Mr. G. Michael Morgan, Vice President of Business Development,
resigned. Mr. Morgan will remain with Harvest on a retained consulting arrangement through the end
of 2011 in order to serve on the board of Petrodelta and assist in ongoing business development
opportunities.
Effective July 5, 2011, Mr. Patrick R. Oenbring, Vice President Western Operations, resigned
due to the sale of the Antelope Project.
Capital Resources and Liquidity
The oil and gas industry is a highly capital intensive and cyclical business with unique
operating and financial risks. In Item 1A Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2010, we discuss a number of variables and risks related to our
exploration projects and our minority equity investment in Petrodelta that could significantly
utilize our cash balances, affect our capital resources and liquidity. We also point out that the
total capital required to develop the fields in Venezuela may exceed Petrodeltas available cash
and financing capabilities, and that there may be operational or contractual consequences due to
this inability.
Our cash is being used to fund oil and gas exploration projects and to a lesser extent general
and administrative costs. We require capital principally to fund the exploration and development
of new oil and gas properties. We are concentrating a substantial portion of our 2011 budget on
the development of the Budong PSC and the Dussafu PSC. As is common in the oil and gas industry,
we have various contractual commitments pertaining to exploration, development and production
activities. Currently, we have a work commitment of $22.0 million which is a minimum amount to be
spent on the Block 64 EPSA in Oman for the drilling of two wells over a three-year period which
expires in May 2012. We began funding this commitment in the
second quarter of 2011. We also have minimum work
commitments during the various phases of the exploration periods in the Budong PSC and Dussafu PSC.
Our primary ongoing source of cash is still dividends from Petrodelta. In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million,
$12.2 million net to HNR Finance ($9.8 million net to our 32 percent interest). As of July 29,
2011, this dividend has not been received, and the timing of receipt
of this dividend is uncertain. We expect to receive future dividends from Petrodelta;
however, we expect that in the near term Petrodelta will reinvest most of its earnings into the
company in support of its drilling and appraisal activities. Therefore, there is uncertainty that
Petrodelta will pay additional dividends in 2011 or 2012.
Additionally, any dividend received from Petrodelta carries a liability to our non-controlling
interest holder, Vinccler, for its 20 percent share. Dividends declared and paid by Petrodelta are
paid to HNR Finance, our consolidated subsidiary. HNR Finance must declare a dividend in order for
us and our non-controlling interest holder, Vinccler, to receive our respective shares of
Petrodeltas dividends. A dividend from HNR Finance is due upon demand. As of March 31, 2011,
Vincclers share of the undistributed dividends is $9.0 million inclusive of the unpaid November
2010 dividend. See Notes to Consolidated Financial Statements, Note 13 Related Party
Transactions.
Working Capital. The net funds raised and/or used in each of the operating, investing and
financing activities are summarized in the following table and discussed in further detail below:
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Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (14,922 | ) | $ | (5,156 | ) | ||
Net cash provided by (used in) investing activities |
152,024 | (24,949 | ) | |||||
Net cash provided by (used in) financing activities |
(59,773 | ) | 29,297 | |||||
Net increase (decrease) in cash |
$ | 77,329 | $ | (808 | ) | |||
At
June 30, 2011, we had current assets of $169.8 million and current liabilities of $36.1
million, resulting in working capital of $133.7 million and a
current ratio of 4.7:1. This
compares with a working capital of $133.3 million and a current ratio of 5.7:1 at December 31,
2010. The increase in working capital of $0.4 million was primarily due to dividends declared by
an equity affiliate offset by increase in capital expenditures and administrative expenses and
completion of the sale of the Antelope Project.
Cash Flow used in Operating Activities. During the six months ended June 30, 2011 and 2010,
net cash used in operating activities was approximately $14.9 million and $5.2 million,
respectively. The $9.7 million decrease was primarily due to increases in accounts payable and
income taxes payable and the sale of our Antelope Project.
Cash Flow from Investing Activities. During the six months ended June 30, 2011, we had cash
capital expenditures for property and equipment of approximately $28.1 million. Of the 2011
expenditures, $13.1 million was attributable to activity on the Budong PSC, $13.9 million was
attributable to activity on the Dussafu PSC and $1.1 million was attributable to activity on other
projects. During the six months ended June 30, 2010, we had cash capital expenditures of
approximately $23.9 million. Of the 2010 expenditures, $15.4 million was attributable to activity
on the Antelope projects, $5.6 million was attributable to activity on the Budong PSC, $1.6 million
was attributable to activity on the Dussafu PSC and $1.3 million was attributable to other
projects.
During the six months ended June 30, 2011, we
received sales proceeds of $217.8 million for the sale of our
Antelope Project (see Notes to Consolidated Financial Statements,
Note 3 Dispositions), and we incurred $31.7 million of capital
expenditures on the Antelope Project.
During the six months ended June 30, 2011, we received $1.4 million from the sale of our
equity investment in Fusion, and we deposited $7.3 million as collateral for two standby letters of
credit issued in support of the drilling activities on the Gabon PSC. During the six months ended
June 30, 2010, we deposited with a U.S. bank $1.0 million as collateral for a standby letter of
credit issued in support of a bank guarantee required as a performance guarantee for a joint study.
During the six months ended June 30, 2011 and 2010, we incurred $0.1 million and $0.03 million,
respectively, of investigatory costs related to various international and domestic exploration
studies.
Petrodeltas capital commitments will be determined by its business plan. Petrodeltas capital
commitments are expected to be funded by internally generated cash flow. Our budgeted capital
expenditures for 2011 will be funded through sales proceeds, our existing cash balances, accessing
equity and debt markets, and cost reductions, as warranted.
Cash Flow from Financing Activities. During the six months ended June 30, 2011, we repaid
$60.0 million of our term loan facility. During the six months ended June 30, 2011 and 2010, we
incurred $0.2 million and $0.3 million, respectively, in legal fees associated with financings.
During the six months ended June 30, 2010, we closed an offering of $32.0 million in aggregate
principal amount of our 8.25 percent senior convertible notes, incurred $2.5 million in deferred
financings costs related to the $32.0 million convertible debt offering that are being amortized
over the life of the financial instrument.
Results of Operations
You should read the following discussion of the results of operations for the three and six
months ended June 30, 2011 and 2010 and the financial condition as of June 30, 2011 and December
31, 2010 in conjunction with our consolidated financial statements and related notes included in
our Annual Report on Form 10-K for the year ended December 31, 2010.
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Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
We
reported net income attributable to Harvest of $90.1 million, or
$2.24 diluted earnings per
share, for the three months ended June 30, 2011, compared with a net loss attributable to Harvest
of $0.3 million, or $(0.01) diluted earnings per share, for the three months ended June 30, 2010.
Total
expenses and other non-operating (income) expense from
continuing operations (in millions):
Three Months Ended | ||||||||||||
June 30, | Increase | |||||||||||
2011 | 2010 | (Decrease) | ||||||||||
Depreciation and amortization |
$ | 0.1 | $ | 0.1 | $ | | ||||||
Exploration expense |
4.7 | 1.5 | 3.2 | |||||||||
General and administrative |
6.7 | 5.8 | 0.9 | |||||||||
Taxes other than on income |
0.3 | 0.2 | 0.1 | |||||||||
Investment earnings and other |
(0.2 | ) | (0.1 | ) | (0.1 | ) | ||||||
Interest expense |
1.7 | 0.7 | 1.0 | |||||||||
Loss on extinguishment of debt |
9.7 | | 9.7 | |||||||||
Other non-operating expense |
0.2 | | 0.2 | |||||||||
Income tax expense |
0.3 | 0.2 | 0.1 |
During
the three months ended June 30, 2011, we incurred $1.3 million of exploration
costs related to the processing and reprocessing of seismic data
related to ongoing operations,
$0.1 million related to other general business development
activities,
and $3.3 million of impairment for the carrying value of West Bay
(see Notes to Consolidated Financial Statements, Note 10 United
States Operations, Gulf Coast). During the three months
ended June 30, 2010, we incurred $1.3 million of exploration costs related to the processing and
reprocessing of seismic data related to ongoing operations and $0.2 million related to other
general business development activities.
General and administrative costs were higher in the three months ended June 30, 2011 compared
to the three months ended June 30, 2010, primarily due to higher
employee related costs ($0.6 million), legal and other professional fees
($0.4 million), travel ($0.1 million) and other miscellaneous expenses ($0.1 million) offset by
lower employee related costs ($0.1 million), public relations ($0.1 million), and general office
and corporate overhead costs ($0.2 million). Taxes other than on income were higher in the three
months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily due to
payroll related taxes.
Investment earnings and other were higher in the three months ended June 30, 2011 compared to
the three months ended June 30, 2011 due to the receipt of payment for transition services provided
on the Antelope Project after closing of the sale. Interest expense
was higher for the three months ended June 30, 2011 compared to the
three months ended June 30, 2010 due to the interest associated with
our $32 million convertible debt offering in February 2010, our $60
million term loan facility occurring in October 2010 and amortization
of discount on the term loan facility related to the warrants issued
in connection with the $60 million term loan facility offset by
capitalized interest to oil and gas properties of $0.2 million. During the three months ended June 30, 2011, we
incurred a loss on extinguishment of debt related to the early payment of our $60 million term loan
facility. The loss on extinguishment of debt includes the write-off of the discount on debt ($7.2 million), a prepayment premium of 3.5 percent of the
amount outstanding ($2.1 million), expensing of financing costs related to the term loan facility ($0.3 million), and the cost to repurchase 4.4 million unvested warrants issued in connection
with the term loan facility (see Notes to Consolidated Financial Statements, Note 4 Long-Term
Debt).
Other non-operating expense was higher in the three months ended June
30, 2011 compared to the three months ended June 30, 2010 due to costs incurred related to our
on-going strategic alternative process and evaluation. For the three months ended June 30, 2011,
income tax expense was higher compared with that of the three months ended June 30, 2010, due to
income tax assessed in the Netherlands on an increase in interest income.
For the three months ended June 30, 2011, net income from unconsolidated equity affiliates
reflects an increase in Petrodeltas revenue from oil sales due
to higher sales volumes and prices which was partially offset by the
amended Windfall Profits Tax. Operating expense and workovers increased in the three months ended
June 30, 2011 compared to the three months ended June 30, 2010 due to increased oil production and
having a workover rig on location. Petrodelta did not have a workover rig during the three months
ended June 30, 2010. Gain on exchange rates decreased in the three months ended June 30, 2011
compared to the three months ended June 30, 2010 due to there not being any Bolivar/U.S. Dollar
currency exchange rate devaluations during the current period. There was a Bolivar/U.S. Dollar
currency exchange rate devaluation announced on January 8, 2010. Petrodeltas effective tax rate
for the three months ended June 30, 2011 decreased compared to effective tax rate for the three
months ended June 30, 2010 due to the tax effects of the currency devaluation in the three months
ended June 30, 2010.
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Discontinued Operations
On May 17, 2011, we closed the transaction to sell our
Antelope Project. (See Notes to Consolidated Financial Statements, Note 3
Dispositions and Note 9 United States Operations, Western United States Antelope.) The sale
has an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million
which reflects increases to the purchase price for customary adjustments and deductions for
transaction related costs. We do not have any continuing involvement with the Antelope Project.
The related gain on the sale of $103.9 million is reported in the second quarter of 2011.
Revenue and net income on discontinued operations for the three months ended June 30, 2011
and 2010 are shown in the table below:
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Revenue applicable to discontinued operations |
$ | 2,368 | $ | 2,914 | ||||
Net income from discontinued operations |
$ | 99,213 | $ | 803 |
Net income from discontinued operations for the three months ended June 30, 2011 includes $103.9
million gain in the sale of our Antelope Project, $0.2 million for employee severance and special
bonuses, and $5.2 million U.S. income tax related to the sale of our Antelope Project.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
We
reported net income attributable to Harvest of $90.8 million, or
$2.28 diluted earnings per
share, for the six months ended June 30, 2011, compared with net income attributable to Harvest of
$24.3 million, or $0.65 diluted earnings per share, for the six months ended June 30, 2010.
Total
expenses and other non-operating (income) expense from continuing
operations (in millions):
Six Months Ended | ||||||||||||
June 30, | Increase | |||||||||||
2011 | 2010 | (Decrease) | ||||||||||
Depreciation and amortization |
$ | 0.2 | $ | 0.2 | $ | | ||||||
Exploration expense |
5.8 | 2.7 | 3.1 | |||||||||
General and administrative |
13.1 | 10.8 | 2.3 | |||||||||
Taxes other than on income |
0.7 | 0.5 | 0.2 | |||||||||
Investment earnings and other |
(0.4 | ) | (0.3 | ) | (0.1 | ) | ||||||
Interest expense |
3.9 | 1.1 | 2.8 | |||||||||
Loss on extinguishment of debt |
9.7 | | 9.7 | |||||||||
Other non-operating expense |
0.7 | | 0.7 | |||||||||
Loss on exchange rates |
| 1.6 | (1.6 | ) | ||||||||
Income tax expense |
0.5 | 0.1 | 0.4 |
During
the six months ended June 30, 2011, we incurred $2.3 million of exploration costs
related to the processing and reprocessing of seismic data related to
ongoing operations, $0.2
million related to other general business development activities,
and $3.3 million of impairment for the carrying value of West Bay (see
Notes to Consolidated Financial Statements, Note 10 United
States Operations, Gulf Coast). During the six months ended June
30, 2010, we incurred $2.2 million of exploration costs related to the processing and reprocessing
of seismic data related to ongoing operations and $0.5 million related to other general business
development activities.
General and administrative costs were higher in the six months ended June 30, 2011 compared to
the six months ended June 30, 2010 primarily due to higher
employee related costs ($1.9 million),
general corporate overhead costs ($0.3 million) and travel expenses ($0.2 million) offset by lower
public relations costs ($0.1 million). The employee related cost increase includes $0.4 million of
special consideration bonuses related to the sale of our Antelope Project. Taxes other than on
income for the six months ended June 30, 2011 were higher compared to the six months ended June 30,
2010, primarily due to higher payroll and other taxes.
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Investment earnings and other were higher in the six months ended June 30, 2011 compared to
the six months ended June 30, 2011 due to receipt of payment for transition services provided on the
Antelope Project after closing of the sale. Interest expense was higher for the six months ended
June 30, 2011 compared to the six months ended June 30, 2010 due to the interest associated with
our $32 million convertible debt offering in February 2010, our $60 million term loan facility
occurring in October 2010 and amortization of discount on the term loan facility related to the
warrants issued in connection with the $60 million term loan facility offset by interest
capitalized to oil and gas properties of $1.0 million. During the six months ended June 30, 2011,
we incurred a loss on extinguishment of debt related to early payment of our $60 million term loan
facility. The loss on extinguishment of debt includes the write off
of the discount on debt ($7.2 million), a prepayment premium of 3.5 percent of the
amount outstanding ($2.1 million), expensing of financing costs
related to the term loan facility ($0.3 million), and the cost to repurchase 4.4 million unvested warrants issued in connection
with the term loan facility (see Notes to Consolidated Financial Statements, Note 4 Long-Term
Debt).
Loss on exchange rates is lower for the six months ended June 30, 2011 compared to the six
months ended June 30, 2010 due to the Bolivar/U.S. Dollar currency exchange rate devaluation
announced on January 8, 2010. There was no Bolivar/U.S. Dollar exchange rate devaluations in the
six months ended June 30, 2011. Other non-operating expense was higher in the six months ended
June 30, 2011 compared to the six months ended June 30, 2010 due to costs incurred related to our
on-going strategic alternative process and evaluation. For the six months ended June 30, 2011,
income tax expense was higher compared with that of the six months ended June 30, 2010, due to
income tax assessed in the Netherlands on an increase in interest income offset by a U.S. tax
refund received in the six months ended June 30, 2010.
For the six months ended June 30, 2011, net income from unconsolidated equity affiliates
reflects an increase in Petrodeltas revenue from oil sales due
to higher sales volumes and prices which was partially offset by the
amended Windfall Profits Tax. Operating expense and workovers increased in the six months ended
June 30, 2011 compared to the six months ended June 30, 2010 due to increased oil production and
having a workover rig on location. Petrodelta did not have a workover rig during the six months
ended June 30, 2010. Gain on exchange rates decreased in the six months ended June 30, 2011
compared to the six months ended June 30, 2010 due to there not being any Bolivar/U.S. Dollar
currency exchange rate devaluations during the current period. There was a Bolivar/U.S. Dollar
currency exchange rate devaluation announced on January 8, 2010. Petrodeltas effective tax rate
for the six months ended June 30, 2011 decreased compared to effective tax rate for the six months
ended June 30, 2010 due to the tax effects of the currency devaluation in the six months ended June
30, 2010.
We
recorded a $1.4 million gain on the sale of our equity affiliate, Fusion, during the six
months ended June 30, 2011.
Discontinued Operations
On
May 17, 2011, we closed the transaction to sell our Antelope
Project. (See Notes to Consolidated Financial Statements, Note 3 -
Dispositions and Note 9
United States Operations, Western United States Antelope.) The sale has an effective date of
March 1, 2011. We received cash proceeds of approximately $217.8 million which reflects increases
to the purchase price for customary adjustments and deductions for transaction related costs. We
do not have any continuing involvement with the Antelope Project. The related gain on the sale of
$103.9 million is reported in the second quarter of 2011.
Revenue
and net income on discontinued operations for the six months ended June 30, 2011
and 2010 are shown in the table below:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Revenue applicable to discontinued operations |
$ | 6,488 | $ | 6,038 | ||||
Net income from discontinued operations |
$ | 95,947 | $ | 2,818 |
Net
income from discontinued operations for the six months ended June 30, 2011 includes $1.4
million for impairment of inventory from cost to market, $3.6 million for employee severance and special
accomplishment bonuses, and $5.2 million of U.S. income tax related to the sale of our Antelope
Project. Severance costs for key employees include $0.5 million of restricted stock units which
was paid in July 2011. Severance costs for key employees also include 58,000 stock appreciation
rights (SAR) granted at an exercise price of $4.595 per right. These SARs are exercisable by the
key employee for up to one year after termination.
Net income from discontinued operations for
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the six
months ended June 30, 2011 and 2010 also includes a revision of
approximately $0.4 million and $0.3 million, respectively, of
general and administrative expense related to the sale of our Antelope Project. These revisions did not impact consolidated net income for the three months ended March
31, 2011 and 2010, and we concluded the adjustments were not material to our Quarterly Report on Form 10-Q for
the three months ended March 31, 2011.
Effects of Changing Prices, Foreign Exchange Rates and Inflation
Our results of operations and cash flow are affected by changing oil prices. Fluctuations in
oil prices may affect our total planned development activities and capital expenditure program.
Our net foreign exchange losses attributable to our international operations were minimal for
the six months ended June 30, 2011 and $1.6 million for the six months ended June 30, 2010. There are many factors affecting foreign exchange rates and resulting exchange gains and
losses, most of which are beyond our control. It is not possible for us to predict the extent to
which we may be affected by future changes in exchange rates and exchange controls.
Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official
exchange rate in February 2004, March 2005, January 2010 and again in January 2011. On January 4,
2011, the Venezuelan government published in the Official Gazette the Exchange Agreement which
eliminated the 2.60 Bolivars per U.S. Dollar exchange rate with an effective date of January 1,
2011.
Harvest Vinccler and Petrodelta do not have currency exchange risk other than the official
prevailing exchange rate that applies to their operating costs denominated in Bolivars (4.30
Bolivars per U.S. Dollar). However, during the six months ended June 30, 2011, Harvest Vinccler
exchanged approximately $0.4 million through SITME and received an average exchange rate of 5.19
Bolivars per U.S. Dollar. The monetary assets that are exposed to exchange rate fluctuations are
cash, accounts receivable, prepaid expenses and other current assets. The monetary liabilities
that are exposed to exchange rate fluctuations are accounts payable, accruals and other current
liabilities. All monetary assets and lia bilities incurred at the official Bolivar exchange rate
are settled at the official Bolivar exchange rate. Petrodelta does not have, and has not had, any
U.S. Dollars pending government approval for settlement for Bolivars at the official exchange rate
or the SITME exchange rate. Harvest Vinccler currently does not have any U.S. Dollars pending
government approval for settlement for Bolivars at the official exchange rate or the SITME exchange
rate.
Within the United States and other countries in which we conduct business, inflation has had a
minimal effect on us, but it is potentially an important factor with respect to results of
operations in Venezuela.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from adverse changes of the situation in Venezuela, our
recently initiated exploration program and adverse changes in oil prices, interest rates, foreign
exchange and political risk, as discussed in our Annual Report on Form 10-K for the year ended
December 31, 2010. The information about market risk for the six months ended June 30, 2011 does
not differ materially from that discussed in the Annual Report on Form 10-K for the year ended
December 31, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We have established disclosure
controls and procedures that are designed to ensure the information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such information
is accumulated and communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
Based on their evaluation as of June 30, 2011, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes in Internal Control over Financial Reporting. There have been no changes in our
internal control over financial reporting during our most recent quarter ended June 30, 2011, that
have materially affected, or are reasonably likely to affect, our internal control over financial
reporting.
35
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural
Resources, Inc. (UK), initiated a wire transfer of approximately $1.1 million ($0.7
million net to our 66.667 percent interest) intending to pay Libya Oil Gabon S.A.
(LOGSA) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest
Dussafu, B.V., for the companys drilling operations in Gabon. On June 1, 2011, our
bank notified us that it had been required to block the payment in accordance with the
U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011,
and administered by the United States Treasury Departments Office of Foreign Assets
Control (OFAC), because the payee, LOGSA, may be a blocked party under the sanctions.
The bank further advised us that it could not release the funds to the payee or return
the funds to us unless we obtain authorization from OFAC.
On June 30, 2011, we filed a voluntary self-disclosure with OFAC
to report that we
had possibly violated the U.S. sanctions by attempting to remit funds to LOGSA. We concurrently applied for a license with OFAC
that would authorize us to pay LOGSA for the fuel provided. We are unable, at this
time, to predict when a license may be granted, if at all. We also intend to file an
application with OFAC for return of the blocked funds to us. Unless that application is
approved, the funds will remain in the blocked account, and we can
give no assurance when,
or if, OFAC will permit the funds to be released. In addition, we owe this supplier
approximately $0.7 million ($0.5 million net to our 66.667 percent interest) in
additional payments that we are unable to remit unless we are
authorized to do so. We are also investigating to what extent
payments to LOGSA can be made under European Union sanctions.
If
it is found that we violated the U.S. sanctions, such sanctions may
be punishable by civil penalties, including fines,
denial of export privileges, injunctions, asset seizures, debarment from government
contracts and revocations or restrictions of licenses, as well as criminal fines and
imprisonment. Although we are unable to estimate the amount or range of any possible
losses resulting from this matter, we do not believe that this matter will have a
material adverse effect on our consolidated financial condition, results of operations or cash flows.
See our Annual Report on Form 10-K for the year ended December 31, 2010 for a
description of certain other legal proceedings. There have been no material
developments in such legal proceedings since the filing of such Annual Report.
Item 1A. Risk Factors
See our Annual Report on Form 10-K for the year ended December 31, 2010 under
Item 1A Risk Factors for a description of risk factors. There have been no material
developments in such risk factors since the filing of such Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 6. Exhibits
(a) | Exhibits |
3.1 | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762.) |
36
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3.2 | Restated Bylaws as of May 17, 2007. (Incorporated by
reference to Exhibit 3.1 to our Form 8-K filed on April 23, 2007, File No. 1-10762.) |
||
4.1 | Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008, File No. 1-10762.) | ||
4.2 | Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.) | ||
4.3 | Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.) | ||
4.4 | Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | ||
10.1 | Separation agreement dated July 5, 2011 between Harvest Natural Resources, Inc. and G. Michael Morgan. | ||
10.2 | Separation agreement dated July 5, 2011 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. | ||
10.3 | Consulting agreement dated July 9, 2011 between Harvest Natural Resources, Inc. and G. Michael Morgan. | ||
31.1 | Certification of the principal executive officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of the principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer. | ||
32.2 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. | ||
101.INS XBRL Instance Document | |||
101.SCH XBRL Schema Document | |||
101.CAL XBRL Calculation Linkbase Document | |||
101.LAB XBRL Label Linkbase Document | |||
101.PRE XBRL Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HARVEST NATURAL RESOURCES, INC. |
||||
Dated: August 9, 2011 | By: | /s/James A. Edmiston | ||
James A. Edmiston | ||||
President and Chief Executive Officer | ||||
Dated: August 9, 2011 | By: | /s/ Stephen C. Haynes | ||
Stephen C. Haynes | ||||
Vice President Finance, Chief Financial
Officer and Treasurer |
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Exhibit Index
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762). | |
3.2
|
Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on April 23, 2007, File No. 1-10762.) | |
4.1
|
Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008. File No. 1-10762.) | |
4.2
|
Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.) | |
4.3
|
Third Amended and Restated Rights Agreement, dated as
of August 23, 2007, between Harvest Natural Resources,
Inc. and Wells Fargo Bank, N.A. (Incorporated by
reference to Exhibit 99.3 to our Form 8-A filed on
October 23, 2007, File No. 1-10762.) |
|
4.4
|
Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | |
10.1
|
Separation agreement dated July 5, 2011 between Harvest Natural Resources, Inc. and G. Michael Morgan. | |
10.2
|
Separation agreement dated July 5, 2011 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. | |
10.3
|
Consulting agreement dated July 9, 2011 between Harvest Natural Resources, Inc. and G. Michael Morgan. | |
31.1
|
Certification of the principal executive officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer. | |
32.2
|
Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. | |
101.INS
|
XBRL Instance Document | |
101.SCH
|
XBRL Schema Document | |
101.CAL
|
XBRL Calculation Linkbase Document | |
101.LAB
|
XBRL Label Linkbase Document | |
101.PRE
|
XBRL Presentation Linkbase Document | |
39