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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended June 30, 2014

 

or

 

 

 

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

(Registrant's Telephone Number, Including Area Code) 

 

Not Applicable

(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    No   

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    No   

 

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

 

Accelerated Filer

Non-Accelerated Filer

 

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    No   

 

At August 1, 2014, the Registrant ha42,093,735 shares of its Common Stock outstanding.

 

 

 


 

HARVEST NATURAL RESOURCES, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Unaudited Consolidated Condensed Balance Sheets at June 30, 2014 and December 31, 2013

 

Unaudited Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

 

Unaudited Consolidated Condensed Statements of Cash Flows for the Three and Six Months Ended June 30, 2014 and 2013

 

Notes to Consolidated Condensed Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30 

Item 4.

Controls and Procedures

30 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

31 

Item 6.

Exhibits

31 

Signatures 

 

32 

 

 

 

 

2


 

PART I.     FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

June 30,

 

December 31,

 

 

2014

 

2013

 

  

(Unaudited)

 

 

 

ASSETS

  

 

 

 

 

 

CURRENT ASSETS:

  

 

 

 

 

 

Cash and cash equivalents

  

$

8,111 

 

$

120,897 

Restricted cash

  

 

25 

 

 

148 

Accounts receivable, net

  

 

524 

 

 

1,962 

Deferred income taxes

  

 

81 

 

 

81 

Prepaid expenses and other

  

 

1,000 

 

 

2,030 

TOTAL CURRENT ASSETS

  

 

9,741 

 

 

125,118 

LONG-TERM RECEIVABLE – EQUITY AFFILIATE

  

 

13,891 

 

 

15,097 

INVESTMENT IN EQUITY AFFILIATE

  

 

520,350 

 

 

485,401 

PROPERTY AND EQUIPMENT:

  

 

 

 

 

 

Oil and gas properties (successful efforts method)

  

 

103,873 

 

 

108,013 

Other administrative property, net

  

 

255 

 

 

378 

TOTAL PROPERTY AND EQUIPMENT, NET

  

 

104,128 

 

 

108,391 

OTHER ASSETS

  

 

881 

 

 

873 

TOTAL ASSETS

  

$

648,991 

 

$

734,880 

LIABILITIES AND EQUITY

  

 

 

 

 

 

CURRENT LIABILITIES:

  

 

 

 

 

 

Accounts payable, trade and other

  

$

1,402 

 

$

4,398 

Accrued expenses

  

 

12,647 

 

 

22,659 

Accrued interest

  

 

74 

 

 

380 

Income taxes payable

  

 

45 

 

 

2,178 

Current deferred tax liability

  

 

38,282 

 

 

43,162 

Current portion – long term debt

  

 

 —

 

 

77,480 

Note payable to noncontrolling interest owner

  

 

6,109 

 

 

6,109 

Warrant derivative liability

  

 

1,953 

 

 

 —

Other current liabilities

  

 

158 

 

 

419 

TOTAL CURRENT LIABILITIES

  

 

60,670 

 

 

156,785 

LONG-TERM DEFERRED TAX LIABILITY

  

 

33,597 

 

 

29,787 

WARRANT DERIVATIVE LIABILITY

 

 

 —

 

 

1,953 

OTHER LONG-TERM LIABILITIES

  

 

108 

 

 

558 

COMMITMENTS AND CONTINGENCIES (Note 12)

  

 

 

 

 

 

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, 2014 (December 31, 2013: 80,000 shares); issued 48,666 shares at June 30, 2014 (December 31, 2013: 48,666 shares)

  

 

487 

 

 

487 

Additional paid-in capital

  

 

277,672 

 

 

276,083 

Retained earnings

  

 

82,623 

 

 

92,282 

Treasury stock, at cost, 6,572 shares at June 30, 2014 (December 31, 2013: 6,551 shares)

  

 

(66,316)

 

 

(66,222)

TOTAL HARVEST STOCKHOLDERS’ EQUITY

  

 

294,466 

 

 

302,630 

NONCONTROLLING INTERESTS

  

 

260,150 

 

 

243,167 

TOTAL EQUITY

  

 

554,616 

 

 

545,797 

TOTAL LIABILITIES AND EQUITY

  

$

648,991 

 

$

734,880 

See accompanying notes to consolidated condensed financial statements.

3


 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

Six Months Ended

 

 

June 30,

 

June 30,

 

  

2014

 

2013

  

2014

 

2013

EXPENSES:

  

 

 

 

 

 

  

 

 

 

 

 

Depreciation and amortization

  

$

58 

  

$

87 

  

$

134 

  

$

174 

Exploration expense

  

 

1,648 

  

 

2,007 

  

 

3,481 

  

 

3,737 

Impairment expense

  

 

3,150 

  

 

 —

  

 

7,610 

  

 

 —

General and administrative

  

 

4,903 

  

 

7,559 

  

 

11,204 

  

 

10,913 

 

  

 

9,759 

  

 

9,653 

  

 

22,429 

  

 

14,824 

LOSS FROM OPERATIONS

  

 

(9,759)

 

 

(9,653)

  

 

(22,429)

 

 

(14,824)

OTHER NON-OPERATING INCOME (EXPENSE):

  

 

 

 

 

 

  

 

 

 

 

 

Investment earnings and other

  

 

 —

  

 

118 

  

 

  

 

164 

Loss on sale of interest in Harvest Holding

  

 

(391)

 

 

 —

  

 

(1,357)

 

 

 —

Unrealized gain on derivatives

  

 

 —

 

 

 —

  

 

 —

 

 

3,785 

Interest expense

  

 

(15)

 

 

(1,067)

  

 

(62)

 

 

(2,265)

Loss on extinguishment of debt

  

 

 —

 

 

 —

  

 

(4,749)

 

 

 —

Foreign currency transaction gains (losses)

  

 

259 

 

 

(183)

  

 

(210)

 

 

(91)

Other non-operating expenses

  

 

 —

 

 

(141)

  

 

(220)

 

 

(613)

 

  

 

(147)

 

 

(1,273)

  

 

(6,594)

 

 

980 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

  

 

(9,906)

 

 

(10,926)

  

 

(29,023)

 

 

(13,844)

INCOME TAX BENEFIT

  

 

(88)

 

 

(1,415)

  

 

(1,042)

 

 

(1,376)

LOSS FROM CONTINUING OPERATIONS BEFORE EARNINGS FROM EQUITY AFFILIATE

  

 

(9,818)

 

 

(9,511)

  

 

(27,981)

 

 

(12,468)

EARNINGS FROM EQUITY AFFILIATE

  

 

16,062 

 

 

7,602 

  

 

34,949 

 

 

57,073 

INCOME (LOSS) FROM CONTINUING OPERATIONS

  

 

6,244 

 

 

(1,909)

  

 

6,968 

 

 

44,605 

DISCONTINUED OPERATIONS

  

 

(230)

 

 

(1,006)

  

 

(361)

 

 

(1,491)

NET INCOME (LOSS)

  

 

6,014 

  

 

(2,915)

  

 

6,607 

  

 

43,114 

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

  

 

7,665 

  

 

1,551 

  

 

16,266 

  

 

11,483 

NET INCOME (LOSS) ATTRIBUTABLE TO HARVEST [COMPREHENSIVE INCOME (LOSS)]

  

$

(1,651)

 

$

(4,466)

  

$

(9,659)

 

$

31,631 

BASIC EARNINGS (LOSS) PER SHARE:

  

 

 

 

 

 

  

 

 

 

 

 

Income (loss) from continuing operations

  

$

(0.03)

 

$

(0.09)

  

$

(0.22)

 

$

0.85 

Discontinued operations

  

 

(0.01)

 

 

(0.03)

  

 

(0.01)

 

 

(0.04)

Basic earnings (loss) per share

  

$

(0.04)

 

$

(0.12)

  

$

(0.23)

 

$

0.81 

DILUTED EARNINGS (LOSS) PER SHARE:

  

 

 

 

 

 

  

 

 

 

 

 

Income (loss) from continuing operations

  

$

(0.03)

 

$

(0.09)

  

$

(0.22)

 

$

0.84 

Discontinued operations

  

 

(0.01)

 

 

(0.03)

  

 

(0.01)

 

 

(0.04)

Diluted earnings (loss) per share

  

$

(0.04)

 

$

(0.12)

  

$

(0.23)

 

$

0.80 

 

See accompanying notes to consolidated condensed financial statements.

 

4


 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Six Months Ended June 30,

 

  

2014

 

2013

 

  

 

CASH FLOWS FROM OPERATING ACTIVITIES:

  

 

 

 

 

 

Net income

  

$

6,607 

 

$

43,114 

Adjustments to reconcile net income to net cash used in operating activities:

  

 

 

 

 

 

Depreciation and amortization

  

 

134 

 

 

188 

Impairment expense

  

 

7,610 

 

 

 —

Amortization of debt financing costs

  

 

 —

 

 

724 

Amortization of discount on debt

  

 

 —

 

 

1,285 

Loss on sale of interest in Harvest Holding

  

 

1,357 

 

 

 —

Foreign currency transaction loss

  

 

1,468 

 

 

436 

Loss on extinguishment of debt

  

 

4,749 

 

 

 —

Earnings from equity affiliate

  

 

(34,949)

 

 

(57,073)

Share-based compensation-related charges

  

 

1,589 

 

 

1,269 

Unrealized gain on derivatives

  

 

 —

 

 

(3,785)

Changes in operating assets and liabilities:

  

 

 

 

 

 

Accounts and notes receivable

  

 

1,438 

 

 

(374)

Prepaid expenses and other

  

 

(249)

 

 

355 

Other assets

  

 

(8)

 

 

397 

Accounts payable

  

 

(2,996)

 

 

(1,279)

Accrued expenses

  

 

(11,229)

 

 

(7,175)

Accrued interest

  

 

(306)

 

 

(253)

Income taxes payable

  

 

(2,133)

 

 

(3)

Deferred tax asset and liabilities

  

 

(1,070)

 

 

 —

Other current liabilities

  

 

(261)

 

 

(1,560)

Other long-term liabilities

  

 

(450)

 

 

(705)

NET CASH USED IN OPERATING ACTIVITIES

  

 

(28,699)

 

 

(24,439)

CASH FLOWS FROM INVESTING ACTIVITIES:

  

 

 

 

 

 

Transaction costs from sale of interest in Harvest Holding

  

 

(3,540)

 

 

 —

Additions of property and equipment

  

 

(521)

 

 

(37,888)

Advances to equity affiliate

  

 

(262)

 

 

(248)

(Increase) decrease in restricted cash

  

 

123 

 

 

(212)

NET CASH USED IN INVESTING ACTIVITIES

  

 

(4,200)

 

 

(38,348)

CASH FLOWS FROM FINANCING ACTIVITIES:

  

 

 

 

 

 

Debt repayment

  

 

(79,750)

 

 

 —

Debt extinguishment costs

 

 

(760)

 

 

 —

Contributions from noncontrolling interest owners

  

 

717 

 

 

 —

Net proceeds from issuances of common stock

  

 

 —

 

 

122 

Treasury stock purchases

  

 

(94)

 

 

 —

Financing costs

  

 

 —

 

 

(195)

NET CASH USED IN FINANCING ACTIVITIES

  

 

(79,887)

 

 

(73)

NET DECREASE IN CASH AND CASH EQUIVALENTS

  

 

(112,786)

 

 

(62,860)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

  

 

120,897 

 

 

72,627 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  

$

8,111 

 

$

9,767 

 

See accompanying notes to consolidated condensed financial statements.

5


 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  (continued)

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Six Months Ended June 30,

 

 

 

 

 

 

 

 

  

2014

 

2013

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

Cash paid during the year for interest expense (net of capitalization)

 

$

 —

 

$

4,386 

Cash paid during the year for income taxes

 

$

2,203 

 

$

52 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

Increase (decrease) in current liabilities related to additions of property and equipment

  

$

(190)

 

$

(14,511)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

6


 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Three and Six Months Ended June 30,  2014 and 2013 (unaudited)

 

Note 1 – Organization

 

Interim Reporting

In our opinion, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position as of June 30, 2014, the results of operations for the three and six months ended June 30, 2014 and 2013, and the cash flows for the six months ended June 30, 2014 and 2013. The unaudited consolidated condensed 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 (“U.S. GAAP”). The consolidated condensed financial statements included in this Quarterly Report on Form 10-Q should be read with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Financial Statements”) which include certain definitions and a summary of significant accounting policies. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.

 

Share Purchase Agreement

As discussed further in the 2013 Financial Statements, on December 16, 2013, Harvest Natural Resources, Inc. (“Harvest” or the “Company”) and HNR Energia, B.V. (“HNR Energia”) entered into a Share Purchase Agreement (“Share Purchase Agreement”) with Petroandina Resources Corporation N.V. (“Petroandina”, a wholly owned subsidiary of Pluspetrol Resources Corporation B.V. (“Pluspetrol”)) and Pluspetrol to sell all of our 80 percent equity interest in Harvest-Vinccler Dutch Holding, B.V. (“Harvest Holding”) to Petroandina in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013 contemporaneously with the signing of the Share Purchase Agreement, when we sold a 29 percent equity interest in Harvest Holding for $125 million. Prior to December 16, 2013, we indirectly owned 80 percent of Harvest Holding, and we had one partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A. (“Vinccler”), which owned the remaining noncontrolling interest in Harvest Holding of 20 percent. As a result of this first sale, we indirectly own 51 percent of Harvest Holding beginning December 16, 2013 and the noncontrolling interest owners hold the remaining 49 percent with Petroandina having 29 percent and Vinccler continuing to own 20 percent. The second closing, for the sale of a 51 percent equity interest in Harvest Holding for a cash purchase price of $275 million, is subject to, among other things, approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of Venezuela (which indirectly owns the other 60 percent interest in Petrodelta). On May 7, 2014, Harvest’s stockholders voted to authorize the sale of the remaining interests in Venezuela.

Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40 percent equity interest in Petrodelta, S.A. (“Petrodelta”). Through our indirect 51 percent in Harvest Holding, we indirectly own a net 20.4 percent interest in Petrodelta for the period from December 16, 2013 to date, and prior to December 16, 2013 we indirectly owned a 32 percent interest in Petrodelta through our indirect 80 percent interest in Harvest Holding during this period.

 

Note 2 – Liquidity

 

Historically, our primary ongoing source of cash has been dividends from Petrodelta and the sale of oil and gas properties. Our primary use of cash has been to fund oil and gas exploration projects, principal payments on debt, interest, and general and administrative costs. We require capital principally to fund the exploration and development of new oil and gas properties. As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. See  the 2013 Financial Statements for our contractual commitments.

On January 11, 2014, we used $80.0 million of the $125 million in proceeds from the sale of the 29 percent interest in Harvest Holding that we received on December 16, 2013 to redeem all of our 11% Senior Notes due 2014 and the accrued unpaid interest. The remaining $45.0 million of the proceeds from the sale of the 29 percent interest in Harvest Holding have been or will be used to pay costs associated with the sale of our Venezuelan interests, to pay severance costs to employees, to make capital expenditures, to pay taxes related to the sale and for general operating expenses. Those remaining proceeds will also be used to repurchase certain outstanding warrants if a “Fundamental Change” is consummated under the terms of those warrants. As of June 30, 2014, we have cash and cash equivalents of  $8.1 million.

We are currently marketing our non-Venezuelan assets and talking to potential buyers.  In July 2014, we completed the sale of our rights under a petroleum contract with China National Offshore Oil Corporation for the WAB-21 block for $3.0 million.  This block is located in the South China Sea and is the subject of a border dispute between People’s Republic of China and Socialist

7


 

Republic of Vietnam.  We intend to continue our consideration of a possible sale for some or all of our other non-Venezuelan assets if we are able to negotiate a sale or sales in transactions that our Board of Directors believes are in the best interests of the Company and its stockholders. In the meantime, we intend to operate our business in the ordinary course and may ultimately decide to keep our other non-Venezuelan assets and acquire additional assets.

If the proposed sale of our remaining Venezuelan interests is completed and/or our other non-Venezuelan assets are sold, a significant portion of our assets will be cash from the proceeds of such transactions. However, the timing of the sale of our remaining 51 percent interest in Harvest Holding or sales of other assets is beyond our control, and we will continue to have operating and capital requirements until these sales are completed. Depending on the timing of these events, we anticipate using a portion of the proceeds from the sale of 51 percent interest in Harvest Holding to pay for expenses and other costs related to the transaction, which we estimate will be approximately $3.0 million, $1.4 million of which has been incurred as of June 30, 2014; and to pay taxes related to the transaction, which we estimate will be approximately $50.8 million. We also anticipate making a cash settlement payment related to the warrant derivative liability of $2.0 million.  We will also use these funds to pay any severance costs and obligations under stock-based compensation agreements and employment agreements related to the sale of our Venezuelan interests during 2014.  Based on outstanding stock-based compensation awards and salaries as of June 30, 2014, the cash settlement would be approximately $16.1 million.

In addition to payments resulting from the completion of the sale of our remaining Venezuelan interests, we anticipate that we will need to fund projected general operating expenses and capital expenditures which are estimated to be $19.4 million for the remainder of 2014. Some of these costs will be paid from funds remaining from the proceeds of the initial sale of the 29 percent interest in Harvest Holding and the $3.0 million from the sale of our interest in the WAB-21 area. If we sell our non-Venezuelan assets before the sale of the remaining 51 percent interest in Harvest Holding, then our requirements for projected general operating expenses and capital expenditures would be reduced. Furthermore, if our Board of Directors determines that a downsizing would be in our best interests, there would be costs associated with the possible severance of some of our personnel.

 

Although we are currently marketing our non-Venezuelan assets and talking to potential buyers, we intend to operate our business in the ordinary course and may ultimately decide to keep our non-Venezuelan assets and acquire additional assets. Since we no longer have any obligations under the 11% Senior Notes due 2014, and given that we do not currently have any operating cash inflows, we may also decide to access additional capital through equity or debt sales; however, there can be no assurance that such financing will be available to the Company or on terms that are acceptable to the Company.

 

On July 10, 2014, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission.  Under the shelf registration statement, we could offer and sell up to $300.0 million of various types of securities, including unsecured debt securities, common stock, preferred stock, warrants and units.  Additionally, the shelf registration statement will allow selling shareholders to resell up to an aggregate of 686,761 common shares upon the exercise of currently outstanding warrants.  The Company will not receive any proceeds from common shares offered by the selling shareholders.  There can be no assurances that any offerings will be conducted under the shelf registration statement, and the terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company's Board of Directors.  This disclosure shall not constitute an offer to sell or the solicitation of the offer to buy, nor shall there be any sale of these securities in any state where such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

 

Note 3 – Summary of Significant Accounting Policies

 

Investment in Equity Affiliates

 

At June 30, 2014, we reviewed our investment in Petrodelta taking into consideration the purchase price for the sale of the remaining 51 percent interest in Harvest Holding under the terms of the Share Purchase Agreement (see Note 1 – Organization – Share Purchase Agreement). For the three month period ended June 30, 2014, we determined that we should not recognize our full share of the equity in earnings from Petrodelta as to do so would have resulted in a balance in the related equity investment account which exceeded the estimated amount we would realize should the sale of the remaining 51 percent interest in Harvest Holding be completed under the terms of the Share Purchase Agreement.

 

Oil and Gas Properties

 

We follow the successful efforts method of accounting for oil and gas properties. The major components of property and equipment are as follows:

8


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of June 30,

 

As of December 31,

 

 

2014

 

2013

 

  

(in thousands)

Unproved property costs

  

$

99,907 

 

$

103,917 

Oilfield inventories

  

 

3,966 

 

 

4,096 

Other administrative property

  

 

2,696 

 

 

2,710 

Total property and equipment

  

 

106,569 

 

 

110,723 

Accumulated depreciation

  

 

(2,441)

 

 

(2,332)

Total property and equipment, net

  

$

104,128 

 

$

108,391 

 

Unproved property costs, excluding oilfield inventories, consist of: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of June 30,

  

As of December 31,

 

 

2014

 

2013

 

  

(in thousands)

Budong PSC

  

$

 —

  

$

4,470 

Dussafu PSC

  

 

99,907 

  

 

99,447 

Total unproved property costs

  

$

99,907 

  

$

103,917 

 

Other Administrative Property

 

For the three and six months ended June 30, 2014, depreciation expense was $0.1 million and $0.1 million, respectively. For the three and six months ended June 30, 2013, depreciation expense was $0.1 million and $0.2 million, respectively.

 

Other Assets

 

Other assets consist of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of June 30,

  

As of December 31,

 

 

2014

 

2013

 

  

(in thousands)

Long-term prepaid expenses

  

$

147 

  

$

139 

Gabon PSC – blocked payment (net to our 66.667% interest)

  

 

734 

  

 

734 

 

  

$

881 

  

$

873 

 

The blocked payment of $0.7 million net to our 66.667 percent interest is related to our drilling operations in Gabon and was blocked as a result of the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”). See Note 12 – Commitments and Contingencies.

 

Capitalized Interest

 

We capitalize interest costs for qualifying oil and gas properties. During the three and six months ended June 30, 2014, we capitalized interest costs for qualifying oil and gas property additions of $0 million and $0.2 million, respectively. During the three and six months ended June 30, 2013, we capitalized interest costs for qualifying oil and gas property additions of $2.1 million and $4.1 million, respectively.

 

Fair Value Measurements

The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature (Level 1). The estimated fair value of advances to equity affiliate and dividend receivable approximates their carrying value as it is the estimated amount we would receive from a third party to assume the receivables (Level 2).

 

The following tables set forth by level within the fair value hierarchy our financial liabilities that were accounted for at fair value as of June 30, 2014 and December 31, 2013. See Note 11 – Warrant Derivative Liabilities for a description of the valuation models and inputs used to calculate the fair value of these derivative liabilities.

9


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of June 30, 2014

 

  

Level 1

  

Level 2

  

Level 3

  

Total

 

  

(in thousands)

Liabilities:

  

 

 

  

 

 

  

 

 

  

 

 

Warrant derivative liability

  

$

 —

  

$

 —

  

$

1,953 

  

$

1,953 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of December 31, 2013

 

  

Level 1

  

Level 2

  

Level 3

  

Total

 

  

(in thousands)

Liabilities:

  

 

 

  

 

 

  

 

 

  

 

 

Warrant derivative liability

  

$

 —

  

$

 —

  

$

1,953 

  

$

1,953 

 

During the three and six months ended June 30, 2014, there were no changes in the fair value of the warrants, and for the three and six months ended June 30, 2013, there were $0 million unrealized gain and $3.8 million unrealized gain, respectively.

 

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

 

The following table provides a reconciliation of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

  

June 30,

  

June 30,

 

  

2014

 

2013

  

2014

 

2013

 

  

(in thousands)

Financial liabilities:

  

 

 

  

 

 

  

 

 

  

 

 

Beginning balance

  

$

1,953 

  

$

1,685 

  

$

1,953 

  

$

5,470 

Unrealized change in fair value

  

 

 —

  

 

 —

  

 

 —

  

 

(3,785)

Ending balance

  

$

1,953 

  

$

1,685 

  

$

1,953 

  

$

1,685 

 

During the three and six months ended June 30, 2014 and 2013, there were no transfers between Level 1, Level 2 and Level 3 liabilities.

 

Share-Based Compensation

 

We use a fair value based method of accounting for stock-based compensation. During the six months ended June 30, 2014, we issued stock-based compensation awards to certain employees in the form of:  options to purchase 683,000 shares of common stock at an exercise price of $4.76 per share, vesting over three years from the date of grant and 578,500 shares of restricted stock units vesting three years from the date of grant. During the three and six months ended June 30, 2013, we issued no stock-based compensation awards.

 

On July 16, 2014, we issued 107,142 shares of restricted stock units vesting one year from the date of grant to our outside directors.

 

Income Taxes

 

We recognized an income tax benefit of $0.1 million and $1.0 million during the three and six months ended June 30, 2014, respectively, as compared to income tax benefit of $1.4 million and $1.4 million during the three and six months ended June 30, 2013, respectively. Beginning in the fourth quarter of 2013, we determined that we expected to have sufficient taxable income in the U.S. related to the expected sale of the remaining equity interest in Harvest Holding. Therefore we recognized the tax benefit of losses incurred in the U.S. related to the three and six months ended June 30, 2014. This benefit was offset by expense associated with undistributed earnings from foreign subsidiaries during the three and six months ended June 30, 2014.

 

Noncontrolling Interests

 

Changes in noncontrolling interest were as follows:

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

  

June 30,

  

June 30,

 

  

2014

 

2013

  

2014

 

2013

 

  

(in thousands)

Balance at beginning of period

  

$

252,244 

  

$

107,033 

  

$

243,167 

  

$

97,101 

Contributions by noncontrolling interest owners

  

 

241 

  

 

 —

  

 

717 

  

 

 —

Net income attributable to noncontrolling interest

  

 

7,665 

  

 

1,551 

  

 

16,266 

  

 

11,483 

Balance at end of period

  

$

260,150 

  

$

108,584 

  

$

260,150 

  

$

108,584 

 

New Accounting Pronouncements

 

In February 2013, FASB issued ASU No. 2013-04, which is included in ASC 405, “Liabilities”, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”. This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation with the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within the scope to ASU No. 2013-04 include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU No. 2013-04 was effective for our fiscal years and interim periods beginning January 1, 2014. The implementation of this guidance on January 1, 2014 had no material impact on our consolidated financial position, results of operations or cash flows. See Note 12 – Commitments and Contingencies for the new recurring disclosures required under this guidance.

 

In July 2013, FASB issued ASU No. 2013-11 which is included in ASC 740 “Income Taxes”, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update provides guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforward, a similar tax loss, or a tax credit carryforward are not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. In such instances, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. As permitted under the guidance, we applied the amendment prospectively to all unrecognized tax benefits that exist at the effective date for the Company which is January 1, 2014. The implementation of this guidance on January 1, 2014 had no material impact on our consolidated financial position, results of operations or cash flows.

 

In April 2014, FASB issued ASU No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which is included in ASC 205 “Presentation of Financial Statements” and ASC 360 “Property, Plant, and Equipment.” This update changes the criteria for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under the revised standard, a discontinued operation is (1) a component of an entity or group of components that has been disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. Under current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. The new guidance eliminates these criteria. The guidance does not change the presentation requirements for discontinued operations in the statement where net income is presented. Also, the new guidance requires the reclassification of assets and liabilities of a discontinued operation in the statement of financial position for all prior periods presented. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The amendment should be applied prospectively; however, early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. The amendment is effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. This guidance will not impact disposals (or classifications as held for sale) in periods prior to the period of adoption. We are currently evaluating the impact of this guidance on disposals (or classifications as held for sale) in the period of adoption and subsequent periods.

 

 In May 2014, FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers” which is included in ASC 606, a new topic under the same name. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance supersedes the previous revenue recognition requirements and most industry-specific guidance. Additionally, the update supersedes some cost guidance related to construction type and production-type contracts.  In addition, the existing requirements for the recognition of a gain or loss on the transfer of

11


 

nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.

 

The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:  (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The new guidance also provides for additional qualitative and quantitative disclosures related to: (1) contracts with customers, including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations); (2) significant judgments and changes in judgments which impact the determination of the timing of satisfaction of performance obligations (over time or at a point in time), the transaction price and amounts allocated to performance obligations; and (3) assets recognized from the costs to obtain or fulfill a contract.

 

For public entities such as the Company, the amendments in the update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.  An entity should apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. We are currently evaluating the impact of this guidance.  During the period from May 2011, the date we disposed of our interest in the Antelope Project, to date, we have not had any revenues as our oil and gas properties have not had any production.

 

Note 4 – 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

Six Months Ended

 

 

June 30,

 

June 30,

 

  

2014

 

2013

  

2014

 

2013

 

  

(in thousands, except per share amounts)

Income (loss) from continuing operations(a)

  

$

(1,421)

 

$

(3,460)

  

$

(9,298)

 

$

33,122 

Discontinued operations

  

 

(230)

 

 

(1,006)

  

 

(361)

 

 

(1,491)

Net income (loss) attributable to Harvest

  

$

(1,651)

 

$

(4,466)

  

$

(9,659)

 

$

31,631 

Weighted average common shares outstanding

  

 

41,861 

 

 

39,238 

  

 

41,854 

 

 

39,238 

Effect of dilutive securities

  

 

 —

 

 

 —

  

 

 —

 

 

111 

Weighted average common shares, diluted

  

 

41,861 

 

 

39,238 

  

 

41,854 

 

 

39,349 

Basic earnings (loss) per share:

  

 

 

 

 

 

  

 

 

 

 

 

Income (loss) from continuing operations

  

$

(0.03)

 

$

(0.09)

  

$

(0.22)

 

$

0.85 

Discontinued operations

  

 

(0.01)

 

 

(0.03)

  

 

(0.01)

 

 

(0.04)

Basic earnings (loss) per share

  

$

(0.04)

 

$

(0.12)

  

$

(0.23)

 

$

0.81 

Diluted earnings (loss) per share:

  

 

 

 

 

 

  

 

 

 

 

 

Income (loss) from continuing operations

  

$

(0.03)

 

$

(0.09)

  

$

(0.22)

 

$

0.84 

Discontinued operations

  

 

(0.01)

 

 

(0.03)

  

 

(0.01)

 

 

(0.04)

Diluted earnings (loss) per share

  

$

(0.04)

 

$

(0.12)

  

$

(0.23)

 

$

0.80 

 

(a)

Net of net income attributable to noncontrolling interests.

 

The three months ended June 30, 2014 per share calculations above exclude 4.3 million options and 2.5 million warrants because they were anti-dilutive. The three months ended June 30,  2013 per share calculations above exclude 3.9 million options and 2.4 million warrants because they were anti-dilutive.

 

The six months ended June 30, 2014 per share calculations above exclude 4.1 million options and 2.5 million warrants because they were anti-dilutive. The six months ended June 30,  2013 per share calculations above exclude 3.4 million options and 2.4 million warrants because they were anti-dilutive.

 

12


 

Note 5Discontinued Operations

Consistent with the results reported in the 2013 Financial Statements, our Oman and Colombia operations have been classified as discontinued operations. Losses are shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

Six Months Ended

 

 

June 30,

 

June 30,

 

  

2014

 

2013

  

2014

 

2013

 

  

(in thousands)

Oman

  

$

(9)

 

$

(315)

  

$

(25)

 

$

(656)

Colombia

  

 

(221)

 

 

(691)

  

 

(336)

 

 

(835)

 

  

$

(230)

 

$

(1,006)

  

$

(361)

 

$

(1,491)

 

Note 6 – Investment in Equity Affiliate – Petrodelta

 

Harvest Holding indirectly owns a 40 percent interest in Petrodelta. As discussed further in Note 1 – Organization –  Share Purchase Agreement, on December 16, 2013, Harvest and HNR Energia entered into the Share Purchase Agreement with Petroandina and Pluspetrol, its parent, to sell all of our 80 percent equity interest in Harvest Holding to Petroandina in two closings. The first closing occurred on December 16, 2013 when we sold a 29 percent equity interest in Harvest Holding.

 

Petrodelta’s financial information is prepared in accordance with International Financial Reporting Standards (“IFRS”) which we have adjusted to conform to U.S. GAAP. All amounts through Net Income under U.S. GAAP represent 100 percent of Petrodelta. In addition to the adjustments to arrive at Petrodelta’s net income under U.S. GAAP, earnings from equity affiliate also reflect the amortization of the excess basis in equity affiliate using the unit-of-production method based on risk adjusted total current estimated reserves. Summary financial information has been presented below for the three and six months ended June 30, 2014 and 2013 and at June 30, 2014 and December 31, 2013:

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

 

  

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

  

2014

 

 

2013

 

  

2014

 

 

2013

 

 

  

(in thousands, except percentages)

 

Results under IFRS:

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Revenues:

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Oil sales

  

$

364,144 

  

 

$

314,088 

  

  

$

689,798 

  

 

$

631,412 

  

Gas sales

  

 

1,050 

  

 

 

922 

  

  

 

1,916 

  

 

 

2,123 

  

Royalty

  

 

(121,421)

 

 

 

(104,229)

 

  

 

(230,505)

 

 

 

(209,762)

 

 

  

 

243,773 

  

 

 

210,781 

  

  

 

461,209 

  

 

 

423,773 

  

Expenses:

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Operating expenses

  

 

60,542 

  

 

 

36,136 

  

  

 

105,606 

  

 

 

62,669 

  

Workovers

  

 

5,454 

  

 

 

5,389 

  

  

 

13,806 

  

 

 

8,453 

  

Depletion, depreciation and amortization

  

 

32,364 

  

 

 

20,869 

  

  

 

58,676 

  

 

 

41,334 

  

General and administrative

  

 

3,080 

  

 

 

4,703 

  

  

 

9,645 

  

 

 

13,483 

  

Windfall profits tax

  

 

52,123 

  

 

 

51,928 

  

  

 

98,425 

  

 

 

117,974 

  

Windfall profits (credit) and reversal of credit

  

 

55,168 

  

 

 

 —

 

  

 

55,168 

  

 

 

(55,168)

 

 

  

 

208,731 

  

 

 

119,025 

  

  

 

341,326 

  

 

 

188,745 

  

Income from operations

  

 

35,042 

  

 

 

91,756 

  

  

 

119,883 

  

 

 

235,028 

  

Gain (loss) on exchange rate

  

 

223 

 

 

 

(5,335)

  

  

 

168 

 

 

 

181,386 

  

Investment earnings and other

  

 

301 

  

 

 

  

  

 

614 

  

 

 

1,402 

  

Interest expense

  

 

(8,295)

 

 

 

(3,175)

 

  

 

(15,851)

 

 

 

(5,925)

 

Income before income tax

  

 

27,271 

  

 

 

83,248 

  

  

 

104,814 

  

 

 

411,891 

  

Current income tax expense (benefit)

  

 

(5,558)

  

 

 

62,925 

  

  

 

46,760 

  

 

 

200,534 

  

Deferred income tax benefit

  

 

(9,460)

 

 

 

(44,488)

  

  

 

(32,698)

 

 

 

(41,110)

  

Net income under IFRS

  

 

42,289 

 

 

 

64,811 

  

  

 

90,752 

 

 

 

252,467 

  

Adjustments to increase (decrease) net income under IFRS:

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Deferred income tax expense

  

 

(30,359)

  

 

 

(33,973)

 

  

 

(24,048)