-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VtaQ9xwLB6DSVglnVx+s1wXKrmRBnfLcpTKg/gKw9+fT1QOiE0DhMuSvzbYRynYA JFSmuQF21zcP46afJ6JJ+Q== 0000950129-05-007494.txt : 20050801 0000950129-05-007494.hdr.sgml : 20050801 20050801095614 ACCESSION NUMBER: 0000950129-05-007494 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050801 DATE AS OF CHANGE: 20050801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARVEST NATURAL RESOURCES INC CENTRAL INDEX KEY: 0000845289 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 770196707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10762 FILM NUMBER: 05986732 BUSINESS ADDRESS: STREET 1: 15835 PARK TEN PLACE DRIVE STREET 2: SUITE 115 CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 2815796700 MAIL ADDRESS: STREET 1: 15835 PARK TEN PLACE DRIVE STREET 2: SUITE 115 CITY: HOUSTON STATE: TX ZIP: 77084 FORMER COMPANY: FORMER CONFORMED NAME: BENTON OIL & GAS CO DATE OF NAME CHANGE: 19920703 10-Q 1 h27123e10vq.txt HARVEST NATURAL RESOURCES, INC. - DATED 6/30/2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2005 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 (I.R.S. Employer Identification or Organization) 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At July 29, 2005, 37,664,214 shares of the registrant's common stock were outstanding. HARVEST NATURAL RESOURCES, INC. FORM 10-Q TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheets at June 30, 2005 and December 31, 2004.......................................................... 3 Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2005 and 2004........................................................................... 4 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004......................................................... 5 Notes to Consolidated Financial Statements.......................................... 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................. 13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 19 Item 4. CONTROLS AND PROCEDURES................................................................ 19 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS...................................................................... 20 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................ 20 Item 3. DEFAULTS UPON SENIOR SECURITIES........................................................ 20 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 20 Item 5. OTHER INFORMATION...................................................................... 21 Item 6. EXHIBITS............................................................................... 21 SIGNATURES................................................................................................ 22
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31, 2005 2004 ----------- ------------ (in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................... $ 109,592 $ 84,600 Restricted cash............................................................... 12 12 Accounts and notes receivable: Accrued oil and gas sales................................................. 69,784 58,937 Joint interest and other, net............................................. 12,950 12,780 Put options................................................................... 315 14,209 Deferred income tax........................................................... 2,455 251 Prepaid expenses and other.................................................... 1,930 1,426 ----------- ------------ TOTAL CURRENT ASSETS................................................. 197,038 172,215 RESTRICTED CASH.................................................................... 16 16 OTHER ASSETS ..................................................................... 1,923 2,072 DEFERRED INCOME TAXES.............................................................. 6,034 6,034 PROPERTY AND EQUIPMENT: Oil and gas properties (full cost method - costs of $2,900 excluded from amortization in 2005 and 2004, respectively)................ 642,638 631,082 Other administrative property................................................. 12,300 10,008 ----------- ------------ 654,938 641,090 Accumulated depletion, depreciation and amortization.......................... (475,794) (453,941) ----------- ------------ 179,144 187,149 ----------- ------------ $ 384,155 $ 367,486 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade and other............................................. $ 4,256 $ 8,428 Accounts payable, related party............................................... 9,111 11,063 Accrued expenses.............................................................. 21,090 29,426 Income taxes payable.......................................................... 18,419 22,475 Current portion of long-term debt............................................. 7,358 11,833 ----------- ------------ TOTAL CURRENT LIABILITIES 60,234 83,225 LONG-TERM DEBT..................................................................... -- -- ASSET RETIREMENT LIABILITY......................................................... 1,991 1,941 COMMITMENTS AND CONTINGENCIES...................................................... -- -- MINORITY INTEREST.................................................................. 48,705 39,131 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; issued 37,663 shares at June 30, 2005 and 37,544 shares at December 31, 2004............ 377 375 Additional paid-in capital.................................................... 187,374 185,183 Retained earnings............................................................. 94,083 61,897 Accumulated other comprehensive loss.......................................... (4,765) (487) Treasury stock, at cost, 770 shares June 30, 2005 and 764 shares at December 31, 2004......................................................... (3,844) (3,779) ----------- ------------ TOTAL STOCKHOLDERS' EQUITY........................................... 273,225 243,189 ----------- ------------ $ 384,155 $ 367,486 =========== ============
See accompanying notes to consolidated financial statements. 3 HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- (in thousands, except per share data) REVENUES Oil sales $ 49,662 $ 32,977 $ 103,163 $ 63,785 Gas sales 6,780 8,420 14,265 16,409 ----------- ----------- ----------- ----------- 56,442 41,397 117,428 80,194 ----------- ----------- ----------- ----------- EXPENSES Operating expenses 8,763 7,368 17,651 14,707 Depletion, depreciation and amortization 10,245 8,198 21,914 16,359 General and administrative 5,867 4,372 10,889 8,007 Gain on sale of long-lived assets -- (578) -- (578) Taxes other than on income 1,332 1,118 3,053 2,312 ----------- ----------- ----------- ----------- 26,207 20,478 53,507 40,807 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS 30,235 20,919 63,921 39,387 OTHER NON-OPERATING INCOME (EXPENSE) Investment earnings and other 487 425 1,026 728 Interest expense (210) (2,448) (452) (4,937) Net gain (loss) on exchange rates -- (8) 2,757 (617) ----------- ----------- ----------- ----------- 277 (2,031) 3,331 (4,826) ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 30,512 18,888 67,252 34,561 INCOME TAX EXPENSE 11,959 9,902 25,492 15,502 ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTERESTS 18,553 8,986 41,760 19,059 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY COMPANIES 4,402 2,738 9,574 5,304 ----------- ----------- ----------- ----------- NET INCOME $ 14,151 $ 6,248 $ 32,186 $ 13,755 =========== =========== =========== =========== NET INCOME PER COMMON SHARE: Basic $ 0.38 $ 0.17 $ 0.87 $ 0.38 =========== =========== =========== =========== Diluted $ 0.37 $ 0.16 $ 0.84 $ 0.36 =========== =========== =========== =========== OTHER COMPREHENSIVE INCOME (LOSS): UNREALIZED MARK TO MARKET INCOME (LOSS) FROM CASH FLOW HEDGING ACTIVITIES, NET OF TAX 1,770 -- (4,278) -- ----------- ----------- ----------- ----------- COMPREHENSIVE INCOME $ 15,921 $ 6,248 $ 27,908 $ 13,755 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------------ 2005 2004 ------------- ------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 32,186 $ 13,755 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization.......................... 21,914 16,359 Amortization of financing costs................................... -- 152 Gain on disposition of assets..................................... -- (578) Deferred compensation expense..................................... (515) 261 Non-cash compensation-related charges............................. 1,826 263 Minority interest in consolidated subsidiary companies............ 9,574 5,304 Changes in operating assets and liabilities: Accounts and notes receivable................................ (11,017) (7,642) Prepaid expenses and other................................... (504) (579) Commodity hedging contract................................... 7,412 -- Accounts payable............................................. (4,172) (3,537) Accounts payable, related party.............................. (1,952) 252 Accrued expenses............................................. (7,821) 2,133 Asset retirement liability................................... 50 (709) Income taxes payable......................................... (4,056) 3,480 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................ 42,925 28,914 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of long-lived assets........................... -- 578 Additions of property and equipment................................... (13,909) (9,394) Investment costs...................................................... 149 (887) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES........................ (13,760) (9,703) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock........................... 302 2,303 Payments of notes payable............................................. (4,475) (3,183) ------------- ------------- NET CASH USED IN FINANCING ACTIVITIES........................ (4,173) (880) ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS.................... 24,992 18,331 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 84,600 138,660 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 109,592 $ 156,991 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest expense...................... $ 446 $ 4,771 ============= ============= Cash paid during the period for income taxes.......................... $ 2,782 $ 1,674 ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the six months ended June 2005, Peter Hill, our Chief Executive Officer, elected to pay withholding tax on a 2002 restricted stock grant on a cashless basis. This resulted in 5,497 shares being held as treasury stock at cost. See accompanying notes to consolidated financial statements. 5 HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM REPORTING In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals only) necessary to present fairly the financial position as of June 30, 2005, and the results of operations and cash flows for the three and six month periods ended June 30, 2005 and 2004. 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. 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 2004, 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. is engaged in the exploration, development, production and management of oil and gas properties. We conduct our business principally in Venezuela through our subsidiary Harvest Vinccler C.A. ("Harvest Vinccler"). 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. REPORTING AND FUNCTIONAL CURRENCY The U.S. Dollar is our functional and reporting currency. REVENUE RECOGNITION Oil and natural gas revenue is accrued monthly based on production and delivery. Each quarter, Harvest Vinccler invoices PDVSA Petroleo S.A., an affiliate of Petroleos de Venezuela S.A. ("PDVSA") based on barrels of oil accepted by PDVSA during the quarter, using quarterly adjusted U.S. Dollar contract service fees per barrel. The Operating Service Agreement ("OSA") provides for Harvest Vinccler to receive an operating fee for each barrel of crude oil delivered and the right to receive a capital recovery fee for certain of its capital expenditures, provided that such operating fee and capital recovery fee cannot exceed the maximum total fee per barrel set forth in the agreement. The operating fee is subject to quarterly adjustments to reflect changes in the special energy index of the U.S. Consumer Price Index. The maximum total fee is subject to quarterly adjustments to reflect changes in the average of certain world crude oil prices. Each quarter, Harvest Vinccler also invoices PDVSA for natural gas sales based on a fixed price of $1.03 per Mcf. In addition, Harvest Vinccler agreed to sell to PDVSA 4.5 million barrels of oil stipulated as additional volumes resulting from the gas production ("Incremental Crude Oil"). A portion of the Incremental Crude Oil is invoiced to PDVSA quarterly at a fixed price of $7.00 per Bbl. The invoice is prepared and submitted to PDVSA by the end of the first month following the end of each calendar quarter, and payment is due from PDVSA by the end of the second month following the end of each calendar quarter. Harvest Vinccler invoiced PDVSA for the first and second quarter of 2005 for the delivery of its crude oil and natural gas in accordance with the terms described above and recognized its revenue in a consistent manner with prior periods. For the first quarter deliveries, PDVSA remitted the amount due less $9.8 million. PDVSA did not provide an explanation to Harvest Vinccler for the underpayment, but we believe, based on public commentary, that it is attributable to a unilateral imposition of a limit on service fees paid to all companies with operating service agreements to two-thirds of the 6 market value of the crude delivered to PDVSA. This limit was announced by The Ministry of Energy and Petroleum ("MEP") in April 2005. Regardless of the appropriateness or legality of such a limitation, we also believe that PDVSA has not properly calculated the unilateral limit it is placing on Harvest Vinccler's fees because it is understating the actual market value of the crude oil. We have notified PDVSA of this matter. Harvest Vinccler estimates that the second quarter would be impacted by $9.0 million if the same limit were to be applied. We believe at this time we will collect the entire amount of fees due under the contract and, accordingly, have not recorded any allowance for either the collectibility of the receivable or adjustment to reduce reported revenues. CASH AND CASH EQUIVALENTS At June 30, 2005, Harvest Vinccler had 58.0 billion Venezuela Bolivars ("Bolivars") which are shown in the June 30, 2005 financial statements as $27.2 million in cash and cash equivalents. Harvest Vinccler has a limited need for Bolivars in the conduct of its business but expects to be able to utilize the Bolivars received to date. However, to the extent that Harvest Vinccler receives additional Bolivars in excess of its internal needs, it may not be possible, due to currency control regulations, to convert any future excess Bolivars into U.S. Dollars or other foreign currencies. MINORITY INTERESTS We record a minority interest attributable to the minority shareholder of our Venezuela subsidiaries. The minority interest in net income and losses is subtracted or added to arrive at consolidated net income. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 ("SFAS 130") requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. We reflected unrealized mark-to-market losses from cash flow hedging activities as other comprehensive loss during the second quarter 2005 and, in accordance with SFAS 130, have provided a separate line in the unaudited consolidated statement of operations to reflect such loss. DERIVATIVES AND HEDGING Statement of Financial Accounting Standards No. 133 ("SFAS 133"), as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. All derivatives are recorded on the balance sheet at fair value. To the extent that the hedge is determined to be effective, changes in the fair value of derivatives for qualifying cash flow hedges are recorded each period in other comprehensive income. Our derivatives have been designated as cash flow hedge transactions in which we hedge the variability of cash flows related to future oil prices for some or all of our forecasted oil production. The changes in the fair value of these derivative instruments have been reported in other comprehensive income because the highly effective test was met, and have been reclassified to earnings in the period in which earnings are impacted by the variability of the cash flows of the hedged item. In August 2004, Harvest Vinccler hedged a portion of its oil sales for calendar year 2005 by purchasing a West Texas Intermediate ("WTI") crude oil put for 5,000 barrels of oil per day. The put cost was $4.24 per barrel, or $7.7 million, and has a strike price of $40.00 per barrel. In September 2004, Harvest Vinccler hedged an additional portion of its calendar year 2005 oil sales by purchasing a second WTI crude oil put for 5,000 barrels of oil per day. The put cost was $3.95 per barrel, or $7.2 million, and has a strike price of $44.40 per barrel. Due to the pricing structure for our Venezuelan oil, these two puts have the economic effect of hedging approximately 20,800 barrels of oil per day for an average of $18.29 per barrel. These puts qualify under the highly effective test and the mark-to-market loss at June 30, 2005 is included in other comprehensive loss. Accumulated Other Comprehensive Loss consisted of $7.2 million and $0.7 million ($4.8 million and $0.5 million net of tax) at June 30, 2005 and December 31, 2004, respectively, of unrealized losses on our crude oil puts. Oil sales for the three and six month periods ended 2005 included losses of $3.7 million and $7.4 million, respectively, in settlement of the hedges. Deferred net losses recorded in Accumulated Other Comprehensive Loss at June 30, 2005 and December 31, 2004, is expected to be reclassified to earnings during 2005. 7 We continue to assess production levels and commodity prices in conjunction with our capital resources and liquidity requirements. ASSET RETIREMENT LIABILITY Effective January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 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 in the six months ended June 30, 2005 and nine wells were abandoned in year ended December 31, 2004. Changes in asset retirement obligations during the six months ended June 30, 2005 and year ended December 31, 2004 were as follows:
June 30, December, 31 2005 2004 ----------- ------------ Asset retirement obligations beginning of period $ 1,941 $ 1,459 Liabilities recorded during the period -- 1,454 Liabilities settled during the period -- (540) Revisions in estimated cash flows (4) (470) Accretion expense 54 38 ----------- ------------ Asset retirement obligations end of period $ 1,991 $ 1,941 =========== ============
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. The weighted average number of common shares outstanding for computing basic EPS was 36.9 million for the three and six months ended 2005, respectively, and 35.9 million for the three and six months ended 2004, respectively. 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. The weighted average number of common shares outstanding for computing diluted EPS, including dilutive stock options, was 38.5 million for the three and six months ended 2005, respectively, and 38.2 million and 38.0 million for the three and six months ended 2004, respectively. An aggregate of 2.0 million and 1.8 million options and warrants to purchase common stock were excluded from the earnings per share calculations because their exercise price exceeded the average price for the three and six months ended 2005, respectively. An aggregate of 1.0 million options and warrants to purchase common stock were excluded from the earnings per share calculations because their exercise price exceeded the average price for the three and six months ended 2004. STOCK-BASED COMPENSATION At June 30, 2005, we had several stock-based employee compensation plans, which are more fully described in Note 5 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended 2004. Prior to 2003, we accounted for those plans under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation as amended by Statement of Financial Accounting Standards No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation - Transition and Disclosure and Statement of Financial Accounting Standard 123 (revised 2004) Share-Based Payment ("SFAS 123R"), prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under our plans vest in periodic installments beginning one year after their grant and expire ten years from the grant date. Therefore, the cost related to stock-based employee compensation included in the determination of net income in the three and six months ended 2005 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123R. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period. 8
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- (in thousands, except per share data) Net income, as reported $ 14,151 $ 6,248 $ 32,186 $ 13,755 Add: Stock based employee compensation cost, net of tax 759 167 1,158 263 Less: Total stock-based employee compensation cost determined under fair value based method, net of tax (691) (317) (1,217) (568) ----------- ----------- ----------- ----------- Net income - proforma $ 14,219 $ 6,098 $ 32,127 $ 13,450 =========== =========== =========== =========== Earnings per share: Basic - as reported $ 0.38 $ 0.17 $ 0.87 $ 0.38 =========== =========== =========== =========== Basic - proforma $ 0.39 $ 0.17 $ 0.87 $ 0.38 =========== =========== =========== =========== Diluted - as reported $ 0.37 $ 0.16 $ 0.84 $ 0.36 =========== =========== =========== =========== Diluted - proforma $ 0.37 $ 0.16 $ 0.83 $ 0.35 =========== =========== =========== ===========
Stock options of 0.1 million and 0.4 million were exercised in the six months ended 2005 and 2004 with cash proceeds of $0.4 million and $2.3 million, respectively. NEW ACCOUNTING PRONOUNCEMENTS In June 2005, the Financial Accounting Standards Board ("FASB') issued Statement of Financial Accounting Standard 154 - Accounting Changes and Error Corrections ("SFAS 154"), which changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Application is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted. The adoption of SFAS 154 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows. RECLASSIFICATIONS Certain items in 2004 have been reclassified to conform to the 2005 financial statement presentation. NOTE 2 - LONG-TERM DEBT LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, DECEMBER 31, 2005 2004 ------------- ------------- (in thousands) Note payable with interest at 8.1%................................ $ 900 $ 1,500 Note payable with interest at 9.1%................................ 6,458 10,333 ------------- ------------- 7,358 11,833 Less current portion.............................................. 7,358 11,833 ------------- ------------- $ -- $ -- ============= =============
9 Our 9.375 percent senior unsecured notes due November 1, 2007 ("2007 Notes") were redeemed on November 1, 2004. We were released from all obligations related to the 2007 Notes. The redemption of the 2007 Notes triggered an obligation under the terms of Harvest Vinccler's U.S. Dollar loans from a Venezuelan commercial bank to renegotiate the terms of those loans or, if agreement on renegotiated terms could not be reached within 30 days after November 1, 2004, the loans could be declared due and payable. As a result, the entire amount has been reclassified from long term to current debt. It is possible that agreement will not be reached in negotiated terms and Harvest Vinccler will be required to repay the remaining balance of $7.4 million. We have classified all of our outstanding debt as current at June 30, 2005. NOTE 3 - COMMITMENTS AND CONTINGENCIES Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as Harvest Natural Resources, Inc., Chemex, Inc., Benton-Vinccler, C.A., Gale Campbell and Sheila Campbell in the District Court for Harris County, Texas. This suit was brought in May 2003 by Excel and alleges, among other things, breach of a consulting agreement between Excel and us, misappropriation of proprietary information and trade secrets, and fraud. Excel seeks actual and exemplary damages, injunctive relief and attorneys' fees. The Court has abated the suit pending final judgment of a case pending in Louisiana to which we are not a party. We dispute Excel's 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. In July 2004, Harvest Vinccler received three tax assessments from a tax inspector for the Uracoa municipality in which part of the South Monagas Unit is located. A protest to the assessments was filed with the municipality, and in September 2004 the tax inspector responded in part by affirming one of the assessments and issuing a payment order. Harvest Vinccler has filed a motion with the tax court in Barcelona, Venezuela, seeking to enjoin the payment order and dismiss the assessment. We dispute all of the tax assessments and believe we have a substantial basis for our positions. We are unable to estimate the amount or range of any possible loss. Libertador Municipality Tax Assessment. In April 2005, Harvest Vinccler received a tax assessment from a tax inspector for the Libertador municipality in which part of the South Monagas Unit is located. Harvest Vinccler has submitted a protest to the assessment at the Mayor's Office, and if no favorable resolution is obtained, it will file a motion with the tax court seeking to enjoin the payment order and dismiss the assessment. We dispute the allegations set forth in the assessment and believe we have a substantial basis for our position. We are unable to estimate the amount or range of any possible loss. The SENIAT Tax Assessment. On July 22, 2005, the SENIAT, the Venezuelan income tax authority, issued a preliminary tax assessment to Harvest Vinccler of 184 billion Venezuelan Bolivars related to fiscal years 2001 through 2004. At the official exchange rate of 2,150 Bolivars per U.S. Dollar, the dollar equivalent of the preliminary tax assessment is approximately $85 million. In addition, the SENIAT imposed penalties equal to 10 percent of the preliminary tax assessment claim for a total claim of 202 billion Bolivars, or approximately $94 million. We are in the process of reviewing the assessment, but believe Harvest Vinccler has met its tax obligations in all material respects. We intend to take all measures necessary to protect our rights, and will vigorously challenge all elements of the assessment that are not supported by Venezuelan law. International Arbitration. In July 2005, as a result of the actions taken by PDVSA, MEP and the SENIAT, we delivered formal notices to Venezuelan government officials of an investment dispute under Venezuelan law and investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted under the auspices of the World Bank. 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 which will have a material adverse impact on our financial condition, results of operations and cash flows. 10 NOTE 4 - TAXES TAXES OTHER THAN ON INCOME Harvest Vinccler pays municipal taxes on operating fee revenues it receives for production from the South Monagas Unit. The components of taxes other than on income were (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Venezuelan Municipal Taxes $ 1,405 $ 869 $ 2,904 $ 1,757 Franchise Taxes (130) 120 (82) 249 Payroll and Other Taxes 57 129 231 306 ----------- ----------- ----------- ----------- $ 1,332 $ 1,118 $ 3,053 $ 2,312 =========== =========== =========== ===========
NOTE 5 - 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. Revenues from the Venezuela operating segment are derived from the production and sale of oil and natural gas. Operations included under the heading "Russia" include project evaluation costs and other costs to maintain an office in Russia. Operations included under the heading "United States and other" include corporate management, cash management and financing activities performed in the United States and other countries which do not meet the requirements for separate disclosure. All intersegment revenues, 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:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- SEGMENT REVENUES Oil and gas sales: Venezuela oil and gas sales $ 56,442 $ 41,397 $ 117,428 $ 80,194 ----------- ----------- ----------- ----------- SEGMENT INCOME (LOSS) Venezuela $ 17,607 $ 10,950 $ 38,292 $ 21,213 Russia (731) (654) (1,493) (1,191) United States and other (2,725) (4,048) (4,613) (6,267) ----------- ----------- ----------- ----------- Net income $ 14,151 $ 6,248 $ 32,186 $ 13,755 =========== =========== =========== ===========
JUNE 30, DECEMBER 31, 2005 2004 ------------- ------------- OPERATING SEGMENT ASSETS Venezuela............................................................. $ 333,381 $ 309,794 Russia ............................................................. 407 385 United States and other............................................... 104,106 108,408 ------------- ------------- 437,894 418,587 Intersegment eliminations............................................. (53,739) (51,101) ------------- ------------- $ 384,155 $ 367,486 ============= =============
11 NOTE 6 - VENEZUELA Under the terms of our OSA with PDVSA, related to the reactivation and further development of the Uracoa, Tucupita and Bombal fields in Venezuela, a service fee payment to Harvest Vinccler is due by the end of the second month after the end of each calendar quarter. PDVSA did not make its first quarter payment for $64.8 million by the May 31, 2005 due date. By letter dated June 23, 2005, PDVSA stated that 50 percent of the amounts due would be paid in Bolivars, and that this amount would be subject to further adjustment based upon the amount of payments in foreign currency that Harvest Vinccler is required to make. The letter added that the OSA would be amended to fix the future percentage of payments that would be made in Bolivars. On June 28, 2005, Harvest Vinccler received payment of 59 billion Bolivars from PDVSA. On June 29, 2005, Harvest Vinccler received $27.5 million in U.S. Dollars. From our calculations, assuming (solely for explanatory purposes) that the Bolivar could be used to purchase United States Dollars at the official exchange rate (approximately 2,150 Bolivars per each U.S. Dollar), the amounts disbursed by PDVSA and deposited in Harvest Vinccler's accounts are approximately $9.8 million less than the total amount due. Harvest Vinccler has notified PDVSA in writing that the underpayment and reported payment in Bolivars is contrary to the terms of the OSA and demanded full and proper payment. Harvest Vinccler has a limited need for Bolivars in the conduct of its business but expects to be able to utilize the Bolivars received to date. However, to the extent that Harvest Vinccler receives additional Bolivars in excess of its internal needs, it may not be possible, due to currency control regulations, to convert any future excess Bolivars into U.S. Dollars or other foreign currencies. NOTE 7 - RELATED PARTY TRANSACTIONS In March 2002, we entered into construction service agreements with Venezolana International, S.A. ("Vinsa"). Vinsa is an affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A., which owns 20 percent of Harvest Vinccler. This agreement was terminated on September 19, 2004. Vinsa provided $0.2 million and $0.6 million in construction services for our Venezuelan field operations for the three and six months ended 2004, respectively. 12 ITEM 2. MANAGEMENT'S 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) 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", "anticipate", "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 Private Securities Litigation Reform Act of 1995, 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 our undeveloped proved reserves, 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 operation and development of oil and gas properties, the permitting and 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, basis risk and counterparty credit risk in executing commodity price risk management activities, the Company's ability to acquire oil and gas properties that meet its objectives, changes in operating costs, 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 2004, which includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. VENEZUELA In our Annual Report on Form 10-K for the year ended 2004, and our Quarterly Report on Form 10-Q for the period ended March 31, 2005, we described events in Venezuela affecting our oil and gas production and profitability. In January 2005, we announced that our 80 percent owned Venezuelan subsidiary, Harvest Vinccler, C.A. ("Harvest Vinccler"), was suspending its drilling program. We have stated that a continuation in the delay of our drilling program or a curtailment of our oil and gas deliveries could have a material adverse effect on our financial condition, results of operations and cash flows. We also reported that the Ministry of Energy and Petroleum ("MEP") stated that Petroleos de Venezuela S.A. ("PDVSA") wanted to renegotiate the terms of the active operating service agreements in Venezuela, including the South Monagas Unit Operating Service Agreement ("OSA") held by Harvest Vinccler. In April 2005, MEP declared that the operating service agreements lack legal validity and that within the next six months all such agreements are to be converted into mixed companies under the 2001 Venezuelan Organic Hydrocarbon Law ("OHL") in which the State will have a majority ownership. MEP also imposed a cap on the service fees paid under the operating services agreements equal to two-thirds of the market value of the crude we deliver to PDVSA. At the time of this announcement, and based upon an indirect confirmation by government officials, we did not think the fee cap would have a significant impact on us (but see below). We also reported that the Venezuelan income tax authority, the SENIAT, announced that the income tax rate paid by companies with operating service agreements would be increased from 34 percent to 50 percent and that the SENIAT had started a tax audit of Harvest Vinccler for the tax years beginning with 2001. See Item 1- Business and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the year ended 2004 and Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operation, in our Form 10-Q Quarterly Report for the period ended March 31, 2005, for a complete description of these matters. Following the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, the SENIAT announced the tax increase would be made retroactive to 2001 at a 67 percent rate and at a rate of 50 percent for all years after 2001. The SENIAT has completed its audit of Harvest Vinccler, and on July 22, 2005, the SENIAT issued a preliminary tax assessment of 184 billion Venezuelan Bolivars ("Bolivars") related to fiscal years 2001 through 2004. At the official exchange rate of 2,150 Bolivars per U.S. Dollar as of March 3, 2005, the dollar equivalent of the preliminary tax assessment is approximately $85 million. In addition, the SENIAT imposed penalties equal to 10 percent of the preliminary tax assessment for a total claim of 202 billion Bolivars, or 13 approximately $94 million. The 10 percent penalty would be payable if we pay the preliminary tax assessment. We are in the process of reviewing the assessment, but believe Harvest Vinccler has met its tax obligations in all material respects. We intend to take all measures necessary to protect our rights, and will vigorously challenge all elements of the assessment that are not supported by Venezuelan law. Harvest Vinccler has the right to challenge the assessment from the SENIAT by filing an answer. After filing the answer, the SENIAT is required to issue the final assessment within one year. A final assessment by the SENIAT may also include additional penalties between 25 percent and 200 percent of the unpaid tax. The average penalty imposed by the SENIAT is 112.5 percent of the unpaid tax unless extenuating or aggravating circumstances apply. If a final assessment is issued, Harvest Vinccler can file an administrative appeal with the SENIAT. During the period of review by the SENIAT, any payment obligation is suspended. After exhausting administrative appeals, Harvest Vinccler may either pay the tax or file a judicial appeal. If a judicial appeal is filed, the payment obligation is suspended at the discretion of the court. While there are no set rules on suspending payment, often times it is permitted only if the taxpayer posts a bond or other security equal to 210 percent of the assessment. At the current level of assessment, and considering possible penalties, a requirement to pay the taxes or post security will have a material adverse affect on our financial condition, and may exceed our cash balance. In addition, the implementation of a 50 percent tax rate in the future or other changes in the interpretation or application of the tax laws, without compensating values, will have a material adverse effect on our financial position, results of operations or cash flows. In June 2005, we announced that PDVSA failed to make payment when due of an invoice in the amount of $64.8 million for first quarter deliveries. The payment was due on May 31, 2005. By letter dated June 23, 2005, PDVSA stated that 50 percent of the amounts due would be paid in Bolivars, and that this amount would be subject to further adjustment based upon the amount of payments in foreign currency that Harvest Vinccler is required to make. The letter added that the OSA would be amended to fix the future percentage of payments that would be made in Bolivars. On June 28, 2005, Harvest Vinccler received payment of 59 billion Bolivars from PDVSA. On June 29, 2005, Harvest Vinccler received $27.5 million in U.S. Dollars. Harvest Vinccler has a limited need for Bolivars in the conduct of its business but expects to be able to utilize the Bolivars received to date. However, to the extent that Harvest Vinccler receives additional Bolivars in excess of its internal needs, it may not be possible, due to currency control regulations, to convert any future excess Bolivars into U.S. Dollars or other foreign currencies. Continued substantial payment by PDVSA in Bolivars or the inability to convert the Bolivars into U.S. dollars could have a material adverse effect on our financial position, results of operations or cash flows. From our calculations, PDVSA's June 2005 payment to Harvest Vinccler is approximately $9.8 million less than the total amount due. We believe this shortfall is attributable to the unilateral imposition of the limit on service fees previously announced by MEP. However, we also believe that PDVSA has not properly calculated the unilateral limit it is placing on Harvest Vinccler's fees because it is understating the actual market value of the crude oil we deliver to PDVSA. We have notified PDVSA of this matter. A continuation of the limit on fees as presently calculated by PDVSA would represent a significant reduction in the fees received by Harvest Vinccler. Harvest Vinccler has formally notified PDVSA that the underpayment and partial payment in Bolivars is contrary to the OSA and demanded contract compliance. Harvest Vinccler began the year with average oil production of 29,000 barrels of oil per day, and is currently averaging about 21,000 per day. This decline is due to PDVSA's curtailment of our oil deliveries and the fact that Harvest Vinccler has not been allowed to carry out its drilling program. Due to these factors, in June 2005 we announced that we were withdrawing operational and financial guidance for 2005. Production will continue to decline until drilling is resumed and PDVSA lifts restrictions on deliveries. Collectively, the actions by PDVSA, MEP and the SENIAT, both actual and threatened, are having a material adverse effect on our financial condition, results of operations and cash flows. The situation in Venezuela is also increasing the risk that we will be unable to fund and obtain financing for current operations, as well as growth opportunities. The situation in Venezuela also may have a material adverse effect on our oil and gas reserves. The income tax increase and limit on fees paid to Harvest Vinccler could cause some of the planned future investments to become uneconomic. In addition, there is uncertainty as to our ability to carry out our development program. These factors create a risk of a downward revision to our proved undeveloped reserves. As reported in our Annual Report on Form 10-K for the year ended 2004, approximately 42 percent of oil reserves and 51 percent of gas reserves were classified as proved undeveloped reserves. The situation in Venezuela also may have a material adverse effect on our proved oil and gas reserves. 14 In July 2005, as a result of the actions taken by PDVSA, MEP and the SENIAT, we delivered formal notices to Venezuelan government officials of an investment dispute under Venezuelan law and investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted through the International Centre for Settlement of Investment Disputes ("ICSID") under the auspices of the World Bank. While we remain committed to reaching mutual agreement with the government of Venezuela to preserve the value of our investment, it may be necessary to submit the matter to arbitration. If initiated, an ICSID proceeding may take a number of years to conclude, and we can provide no assurances as to the outcome. Without waiver of its rights, Harvest Vinccler has exchanged proposals and continues discussions with PDVSA and MEP to establish a path forward for converting the OSA to a mixed company under the OHL and to resolve the interim drilling, oil and gas deliveries, pricing and currency issues. It is not possible to give any assurances as to the timing or outcome of our discussions with PDVSA and MEP. CAPITAL RESOURCES AND LIQUIDITY Debt Reduction. We have quarterly principal and interest obligations of $1.3 million and $0.3 million, respectively, on the Harvest Vinccler variable rate loans. We have no other debt obligations. 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:
SIX MONTHS ENDED JUNE 30, ---------------------------- 2005 2004 ---------- ----------- (in thousands) Net cash provided by operating activities $ 42,925 $ 28,914 Net cash used in investing activities (13,760) (9,703) Net cash used in financing activities (4,173) (880) ---------- ----------- Net increase in cash $ 24,992 $ 18,331 ========== ===========
At June 30, 2005, we had current assets of $197.0 million and current liabilities of $60.2 million, resulting in working capital of $136.8 million and a current ratio of 3.3:1. This compares with a working capital of $89.0 million and a current ratio of 2.1:1 at December 31, 2004. The increase in working capital of $47.8 million was primarily due to higher sales prices and volumes in Venezuela. Accounts receivable includes $9.8 million for first quarter sales not paid by PDVSA and records second quarter PDVSA accounts receivable in the full amount due under the OSA. Cash Flow from Operating Activities. During the six months ended 2005 and 2004, net cash provided by operating activities was approximately $42.9 million and $28.9 million, respectively. The $14.0 million increase was primarily due to the increase in oil sales volumes and oil prices. Cash Flow from Investing Activities. During the six months ended 2005 and 2004, we had drilling and production-related capital expenditures of approximately $13.9 million and $9.4 million, respectively. The increase in capital expenditures is due to completion of the drilling of a natural gas well and the gathering system and facilities for the South Monagas Unit carried over from 2004. Due to PDVSA's actions, no further drilling activity has been carried out in 2005. On a year to year basis, the timing and size of capital expenditures for the South Monagas Unit are largely at our discretion, although recent actions by PDVSA have greatly limited our ability to make our planned capital expenditures in 2005 and could also limit us in the future. We suspended our drilling program in January because of continuing delays in the receipt of permits to drill new wells. We continue to expend funds for maintenance, gathering systems and facility upgrades for the existing wells. Our remaining worldwide capital commitments support our search for new acquisitions, are relatively minimal and are substantially at our discretion. We continue to assess production levels and commodity prices in conjunction with our capital resources and liquidity requirements. 15 Cash Flow from Financing Activities. During the six months ended 2005, Harvest Vinccler repaid $4.5 million of its U. S. Dollar debt (two payments of $0.3 million and three payments of $1.3 million on the variable rate loans). During the six months ended 2004, Harvest Vinccler repaid $3.2 million of its U.S. dollar debt. RESULTS OF OPERATIONS You should read the following discussion of the results of operations for the three and six months ended 2005 and 2004 and the financial condition as of June 30, 2005 and December 31, 2004 in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended 2004. THREE MONTHS ENDED JUNE 30, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2004 (IN MILLIONS) We reported net income of $14.2 million, or $0.37 diluted earnings per share, in the second quarter 2005 compared with net income of $6.2 million, or $0.16 diluted earnings per share, in the second quarter of 2004. Below is a discussion of revenues, price and volume variances.
THREE MONTHS ENDED JUNE 30, % -------------------- INCREASE INCREASE 2005 2004 (DECREASE) (DECREASE) INCREASE ------- ------- ---------- -------- -------- Revenues Crude oil $ 49.6 $ 33.0 $ 16.6 50% Natural gas 6.8 8.4 (1.6) (19) ------- ------- --------- -------- Total Revenues $ 56.4 $ 41.4 $ 15.0 36% ======= ======= ========= ======== Price and Volume Variances Crude oil price Variance (per Bbl) $ 23.34 $ 17.66 $ 5.68 32% $ 10.5 Volume Variances Crude oil volumes (MBbls) 2,127 1,867 260 14% $ 6.1 Natural gas volumes (MMcf) 6,582 8,175 (1,593) (19) (1.6) -------- Total volume variances $ 4.5 ========
Revenue, Crude Oil Price Variance and Volume Variances Revenues were higher in the second quarter 2005 compared to 2004 due to increases in world crude oil prices and volumes as a result of our second half 2004 drilling program. Price variance is net of the $4.10 per barrel ("Bbl") hedges in place during 2005. Gas delivery volumes have declined due to delays in PDVSA permitting the drilling of new wells and the natural decline of associated gas from existing oil wells. Currently, all gas deliveries are associated with the Uracoa oil wells. Total expenses and other non-operating (income) expense:
THREE MONTHS ENDED JUNE 30, % -------------------- INCREASE INCREASE 2005 2004 (DECREASE) (DECREASE) ------ ------- --------- ---------- Operating expenses $ 8.8 $ 7.4 $ 1.4 19% Depletion and amortization 9.6 7.8 1.8 23 Depreciation 0.6 0.4 0.2 50 General and administrative 5.9 4.4 1.5 34 Gain on sale of long-lived assets -- (0.6) 0.6 -- Taxes other than on income 1.3 1.1 0.2 18 Investment income and other (0.5) (0.4) (0.1) 25 Interest expense 0.2 2.4 (2.2) (9) ------ ------- --------- -- $ 25.9 $ 22.5 $ 3.4 15% ====== ======= ========= ==
16 Operating expenses increased as a result of higher oil volumes and maintenance work while the drilling program is suspended. Depletion and amortization expense per Boe produced during the second quarter 2005 was $2.98 versus $2.40 in the second quarter of 2004. The increase was primarily due to increased future development costs. General and administrative expense increased due the annual issuance of restricted stock, additional audit fees, consulting and legal fees related to our business development activities. Taxes other than on income increased due to increased Venezuelan municipal taxes which result from higher oil revenues and an increase in the municipal tax rate in Uracoa. The effective tax rate declined in the second quarter 2005 to 39 percent from 52 percent in 2004 primarily due to higher Venezuelan pre-tax revenue in the second quarter 2005 and the elimination of corporate interest expense due to the November 1, 2004 redemption of our 9.375 percent senior unsecured notes due November 1, 2007 ("2007 Notes"). Our tax calculations do not include the tax increases recently announced by the SENIAT (see Item 2. Venezuela). SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004 (IN MILLIONS) We reported net income of $32.2 million, or $0.84 diluted earnings per share, in the six months ended 2005 compared with net income of $13.8 million, or $0.36 diluted earnings per share, in the six months ended 2004. Below is a discussion of revenues, price and volume variances.
SIX MONTHS ENDED JUNE 30, % -------------------- INCREASE INCREASE 2005 2004 (DECREASE) (DECREASE) INCREASE ------- ------- -------- -------- -------- Revenues Crude oil $ 103.1 $ 63.8 $ 39.3 62% Natural gas 14.3 16.4 (2.1) (13) ------- ------- --------- -- Total Revenues $ 117.4 $ 80.2 $ 37.2 49% ======= ======= ========= == Price and Volume Variances Crude oil price Variance (per Bbl) $ 22.15 $ 16.87 $ 5.28 31% $ 19.9 Volume Variances Crude oil volumes (MBbls) 4,658 3,781 877 24% $ 19.4 Natural gas volumes (MMcf) 13,850 15,931 (2,081) (13) (2.1) -------- Total volume variances $ 17.3 ========
Revenue, Crude Oil Price Variance and Volume Variances Revenues were higher in the six months ended 2005 compared to 2004 due to increases in world crude oil prices and volumes as a result of our second half 2004 drilling program. Price variance is net of the $4.10 per Bbl hedges in place during 2005. Gas delivery volumes have declined due to delays in PDVSA permitting the drilling of new wells and the natural decline of associated gas from existing oil wells. All gas deliveries are associated with the Uracoa oil wells. Total expenses and other non-operating (income) expense:
SIX MONTHS ENDED JUNE 30, % -------------------- INCREASE INCREASE 2005 2004 (DECREASE) (DECREASE) ------ ------- --------- ---------- Operating expenses $ 17.7 $ 14.7 $ 3.0 20% Depletion and amortization 20.8 15.5 5.3 34 Depreciation 1.1 0.9 0.2 22 General and administrative 10.9 8.0 2.9 36 Gain on sale of long-lived assets -- (0.6) 0.6 -- Taxes other than on income 3.1 2.3 0.8 35 Investment income and other (1.0) (0.7) (0.3) 43 Interest expense 0.4 4.9 (4.5) (92) Net (gain) loss on exchange rates (2.8) 0.6 (3.4) -- ------ ------- --------- --- $ 50.2 $ 45.6 $ 4.6 10% ====== ======= ========= ===
17 Operating expenses increased as a result of higher oil volumes and maintenance work while the drilling program is suspended. Depletion and amortization expense per Boe produced during the second quarter 2005 was $2.99 versus $2.41 in the second quarter of 2004. The increase was primarily due to increased future development costs. General and administrative expense increased due the annual issuance of restricted stock, additional audit fees, consulting and legal fees related to our business development activities. Taxes other than on income increased due to increased Venezuelan municipal taxes which result from higher oil revenues and an increase in the municipal tax rate in Uracoa. The effective tax rate declined in the second quarter 2005 to 38 percent from 45 percent in 2004 primarily due to higher Venezuelan pre-tax revenue in the second quarter 2005 and the elimination of corporate interest expense due to the November 1, 2004 redemption of 2007 Notes. Our tax calculations do not include the tax increases recently announced by the SENIAT (see Item 2. Venezuela). 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. In August and September 2004, Harvest Vinccler hedged a portion of its oil sales for calendar year 2005 by purchasing two West Texas Intermediate ("WTI") crude oil puts. See Note 1 - Derivatives and Hedging. Venezuela imposed currency exchange restrictions in February 2003 and adjusted the official exchange rate between Bolivars and U.S. Dollars in March 2005 from 1,920 Bolivars to 2,150 Bolivars to the U.S. Dollar. There has been no change in the official exchange rate since that time. There are many factors affecting foreign exchange rates and resulting exchange gains and losses, many of which are beyond our control. We have recognized significant exchange gains and losses in the past, resulting from fluctuations in the relationship of the Venezuelan currency to the U.S. Dollar. It is not possible for us to predict the extent to which we may be affected by future changes in exchange rates and controls. PDVSA remitted 50 percent of the first quarter oil service fees in Bolivars. Due to currency control regulations, it may not be possible to convert excess Bolivars into U.S. Dollars or other foreign currencies. Continued substantial payment by PDVSA in Bolivars or the inability to convert the Bolivars into U.S. Dollars could have a material adverse effect on our financial condition. Within the United States, inflation has had a minimal effect on us, but it is potentially an important factor in results of operations in Venezuela. With respect to Harvest Vinccler, a significant majority of the sources of funds, including the proceeds from oil sales, our contributions and credit financings, are denominated in U.S. Dollars, while many local transactions in Venezuela are conducted in local currency such as local salaries, municipal and income taxes. If the rate of increase in the value of the U.S. Dollar compared with the Bolivar continues to be less than the rate of inflation in Venezuela, then inflation could be expected to have an adverse effect on Harvest Vinccler. CONCLUSION The situation in Venezuela is adversely affecting our cash flow and may affect our ability to fund execution of our business plan. Our business plan is based upon projections of prices, production levels, and our assumptions that we will be allowed to carry out our program on acceptable terms, that there will be no disruptions or limitations on our production, that PDVSA will pay our invoices timely and in U.S. Dollars and that our cash reserves are adequate. These expectations and assumptions are subject to significant current risk due to the actual and threatened actions of the Venezuelan government (see Item 2. Venezuela). Such actions could also negatively impact the carrying value of certain assets on our balance sheet. In the normal course of our business, our future cash flows are subject to a number of variables including, but not limited to, the level of production, prices, as well as various economic and political conditions that have historically affected the oil and natural gas business. Prices for oil are subject to fluctuations in response to changes in supply, market uncertainty and a variety of factors beyond our control. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from the adverse changes of the situation in Venezuela, and adverse changes in oil and natural gas prices, interest rates, foreign exchange and political risk, as discussed in our Annual Report on Form 10-K for the year ended 2004, and our Quarterly Report on Form 10-Q for the period ended March 31, 2005, as well as in Item 2. Venezuela. ITEM 4. CONTROLS AND PROCEDURES The Securities and Exchange Commission, among other things, adopted rules requiring reporting companies to maintain disclosure controls and procedures to provide reasonable assurance that a registrant is able to record, process, summarize and report the information required in the registrant's quarterly and annual reports under the Securities Exchange Act of 1934 (the "Exchange Act"). While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. Based on their evaluation as of June 30, 2005, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that 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 as specified in the Securities and Exchange Commission's rules and forms. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See our Annual Report on Form 10-K for the year ended 2004 for a description of certain legal proceedings. There have been no material developments in such legal proceedings since the filing of such Annual Report. The SENIAT Tax Assessment. On July 22, 2005, the SENIAT, the Venezuelan income tax authority, issued a preliminary tax assessment to Harvest Vinccler of 184 billion Venezuelan Bolivars related to fiscal years 2001 through 2004. At the official exchange rate of 2,150 Bolivars per U.S. Dollar, the dollar equivalent of the preliminary tax assessment is approximately $85 million. In addition, the SENIAT imposed penalties equal to 10 percent of the preliminary tax assessment claim for a total claim of 202 billion Bolivars, or approximately $94 million. We are in the process of reviewing the assessment, but believe Harvest Vinccler has met its tax obligations in all material respects. We intend to take all measures necessary to protect our rights, and will vigorously challenge all elements of the assessment that are not supported by Venezuelan law. International Arbitration. As reported under Item 2 Venezuela above, as a result of the actions taken by PDVSA, MEP and the SENIAT, in July 2005, we delivered formal notices to Venezuelan government officials of an investment dispute under Venezuelan law and investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted under the auspices of the World Bank. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Stockholders held on May 19, 2005, the following items were voted on by the Stockholders: 1. To approve the Election of Directors:
Votes in Favor Votes Against/Withheld -------------- ---------------------- Stephen D. Chesebro' 34,472,255 582,648 John U. Clarke 34,465,630 589,273 Byron A. Dunn 34,481,173 573,730 James A. Edmiston 34,730,530 324,373 H. H. Hardee 34,490,853 564,050 Peter J. Hill 34,490,873 564,030 Patrick M. Murray 34,488,727 566,176
2. To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the year ended December 31, 2005:
Votes in Favor Against/Withheld Votes Abstentions/Broker Non-Votes - -------------- ---------------------- ---------------------------- 34,981,436 51,979 21,488
20 ITEM 5. OTHER INFORMATION There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since our Schedule 14A filed on April 8, 2005. 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.) 3.2 Amended and Restated Bylaws as of May 19, 2005. (Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 29, 2005, File No. 1-10762.) 4.1 Form of Common Stock Certificate. (Incorporated by reference to the exhibits to our Registration Statement Form S-1 (Registration No. 33-26333).) 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 Second Amended and Restated Rights Agreement, dated as of April 15, 2005, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 29, 2005, File No. 1-10762). 4.4 Harvest Natural Resources, Inc. Deferred Compensation Plan for the Board of Directors, dated as of May 23, 2003, between Harvest Natural Resources, Inc. and its Board of Directors. 4.5 Amendment, Freeze and Termination Agreement to the Harvest Natural Resources, Inc. Deferred Compensation Plan for the Board of Directors, dated as of May 31, 2005, between Harvest Natural Resources, Inc. and its Board of Directors. 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 of the principal executive officer accompanying the quarter report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the principal financial officer accompanying the quarter report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21 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 1, 2005 By: /S/Peter J. Hill ------------------------------------- Peter J. Hill President and Chief Executive Officer Dated: August 1, 2005 By: /S/Steven W. Tholen -------------------------------- Steven W. Tholen Senior Vice President - Finance, Chief Financial Officer and Treasurer 22 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 Amended and Restated Bylaws as of May 19, 2005. (Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 29, 2005, File No. 1-10762.) 4.1 Form of Common Stock Certificate. (Incorporated by reference to the exhibits to our Registration Statement Form S-1 (Registration No. 33-26333).) 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 Second Amended and Restated Rights Agreement, dated as of April 15, 2005, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 29, 2005, File No. 1-10762). 4.4 Harvest Natural Resources, Inc. Deferred Compensation Plan for the Board of Directors, dated as of May 23, 2003, between Harvest Natural Resources, Inc. and its Board of Directors. 4.5 Amendment, Freeze and Termination Agreement to the Harvest Natural Resources, Inc. Deferred Compensation Plan for the Board of Directors, dated as of May 31, 2005, between Harvest Natural Resources, Inc. and its Board of Directors. 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 of the principal executive officer accompanying the quarter report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the principal financial officer accompanying the quarter report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23 EX-4.4 2 h27123exv4w4.txt DEFERRED COMPENSATION PLAN FOR THE BOARD OF DIRECTORS Exhibit 4.4 HARVEST NATURAL RESOURCES, INC. DEFERRED COMPENSATION PLAN FOR THE BOARD OF DIRECTORS 1. PURPOSE The purpose of this Plan is to 1) provide a means for deferring payment of all or a portion of regular Board retainers, and 2) encourage Board members to participate in the equity of Harvest Natural Resources, Inc. (the "Company") on a long-term basis. Board Compensation eligible for this deferral program includes all regular Board retainers, Chairman of the Board retainer and Committee Chair retainers, excluding expenses and meeting fees and business meeting fees, payable to Directors for their service on the Board of Directors (the "Board") of the Company. Such compensation eligible to be deferred is referred to herein as "Compensation". 2. EFFECTIVE DATE AND PLAN YEAR The first plan year is effective beginning June 1, 2003 and a new plan year commences as of the first day of the month which follows the Annual Meeting of Stockholders thereafter unless terminated or modified by the Board of Directors. 3. ELIGIBILITY Any individual serving as a member of the Board as of the effective date of this Plan or who subsequently becomes a member is eligible under this Plan, provided that no member who is an employee of the Company or any of its subsidiaries shall be eligible under this Plan during the time the he or she is an employee of the Company. 4. ELECTION Election to defer Compensation is to be made on or before the first day of the month which follows the Annual Meeting of Stockholders, for Compensation for services as a member of the Board for the following and later plan years; provided, however, the election to defer Compensation for the period of June 1, 2003 through the first day of the month which follows the next Annual Meeting of Stockholders is to be made within 30 days after the approval of the Plan at the May 22, 2003 Board meeting. Election to defer is a continuing election until changed by the Director on or before the end of any plan year for the then following and later plan years. However, once an election is made (and effective), subsequent elections will have no effect on the amounts, timing and manner of payment covered by the previous election. Any newly elected Director who was not a Director immediately following the preceding Annual Meeting of Stockholders may elect, within 30 days after his or her term begins, to defer Compensation for services as a member of the Board for the balance of the plan year in which such election is made. Forms shall be made available to Directors each year for the purpose of making or changing their election. 5. AMOUNT All or any portion, in multiples of 10%, of a Director's Compensation may be deferred. Compensation includes regular Board retainers, Chairman of the Board retainer and Committee Chair retainers and excludes meeting fees paid for Board or Committee meetings, business meeting fees and expenses. 6. DEFERRED ACCOUNTS Each Director shall have a Harvest Stock Unit Account and a Fixed Income Account (together, the "Accounts"). Amounts deferred pursuant to paragraph 5 may be credited to either Account, at the election the Director made at the time of the deferral election, in multiples of 10% of such Director's Compensation within each account. At no time may the Director transfer balances between Accounts. (a) HARVEST STOCK UNIT ACCOUNT (i) Amounts deferred and credited to the Harvest Stock Unit Account shall be converted into phantom shares of the Company's common stock on the basis of the average Fair Market Value of the Company's common stock during the 5 trading day period commencing on the first trading day in a plan year. . "Fair Market Value" means the average of the high and low trading prices per share on the applicable dates, as reported in The Wall Street Journal listing of consolidation trading for New York Stock Exchange issues. The Harvest Stock Unit Account will be credited on or about the first business day which follows the 5 trading day period. (ii) On the record date for each cash dividend or other cash distribution with respect to the Company's common stock, each Director's Harvest Stock Unit Account shall be credited with an amount equal to the amount of the per share dividend or distribution, multiplied by the number of phantom shares of the Company's common stock in such Account, and, if such Director is then serving as a member of the Board, shall be converted into phantom shares of the Company's common stock on the basis of the Fair Market Value of the Company's Common Stock on the payment date for such dividend or distribution. If a Director is no longer serving as a member of the Board on the record date for such dividend or distribution, the amount representing such dividend or distribution shall be credited to and paid out of the Harvest Stock Unit Account to such Director as soon as practicable after the payment date for such dividend or distribution. (iii) In the event of a subdivision or combination of shares of Company common stock, the number of phantom shares credited to the Harvest Stock Unit Accounts on the effective date of such subdivision or combination shall be proportionately subdivided or combined as the case may be. No adjustment shall be made in phantom shares in connection with the issuance by the Company of any rights or options to acquire additional shares of Company common stock or securities convertible into Company common stock. In the event of any stock dividend or reclassification of Company common stock, any merger or consolidation to which the Company is a party, or any spinoff of shares or distribution of property other than cash with respect to the Company common stock, the Human Resources Committee shall cause appropriate adjustments, if any, to be made in the phantom shares to reflect such stock dividend, reclassification, merger or consolidation, spinoff or distribution of property. (iv) The Company shall credit an additional 50 percent to the Harvest Stock Unit Account of any Director who elects to have his or her Compensation deferred and credited to the Harvest Stock Unit Account. The Company's matching contribution shall be credited to the Harvest Stock Unit Account and shall remain so credited until the Director's service as a member of the Board is terminated for any reason. The Company's matching contribution shall be forfeited by the Director if he or she terminates service (for reasons other than disability or death) prior to the first anniversary of the plan year for which the deferral is applicable. Notwithstanding the foregoing, a forfeiture shall not be imposed if the Director's termination of service occurs within two years of a change of control of the Company or if the Human Resources Committee determines that it is in the best interests of the Company not to impose the forfeiture. (b) FIXED INCOME ACCOUNT Amounts credited to the Fixed Income Account shall earn interest compounded quarterly, from the date the Compensation would otherwise have been paid until it is actually paid in full. The rate of interest shall be set at an annual rate equal to the greater of 10% or the "prime rate" for commercial loans by Citibank. 7. DISTRIBUTION All distributions from the Fixed Income Account and Harvest Stock Unit Account shall be made in cash. Cash distributions from the Harvest Stock Unit Account will be made on the basis of the Fair Market Value of the Company's common stock on the last trading day preceding the date of distribution multiplied by the number of phantom shares of the Company's common stock in such Account represented by the distribution. The Director must elect, at the same time and on the same form provided to elect a deferral of Compensation, the timing and manner of payment of such Compensation. (a) TIMING OF PAYMENT Distributions from the Fixed Income Account shall begin on the future date specified by the Director in the deferral election form, including following retirement from the Director's principal occupation. Distributions from the Harvest Stock Unit Account shall begin no sooner than six months nor later than one year following termination from the Board for any reason, as specified by the Director in the deferral election form. (b) MANNER OF PAYMENT The Director may elect to receive payment from the Accounts in a lump sum or in 3 or 5 annual installments of an aggregate amount of cash equal to the value of the accounts maintained for the Director in the Accounts at the business day preceding the installment payment divided by the remaining number of such annual installments. If the amount in a Director's Account is less than $50,000 at the time the first annual installment is to be paid, the Company may elect to pay the amount in a single lump sum. (c) CHANGES TO DISTRIBUTION ELECTION The Director may change his distribution election at any time so long as the change is made at least one year prior to the revised distribution date. In the event that the Director's service terminates less than a year from the revised distribution date, the prior distribution election will determine the date and form of the distribution. In the case of distributions from the Fixed Income Account, the lump sum or first installment is to be paid in January of the year elected by the Director. In the case of distributions from the Harvest Stock Unit Account, the lump sum or first installment will be paid no sooner than six months nor later than one year following the date of termination of service as a member of the Board, as elected by the Director, and any remaining installments in January of each succeeding year until the total balance is paid. In the event of the death of a Director then serving as a member of the Board or a terminated or retired Director entitled to a distribution under this Plan, the balance of the Accounts shall be payable to the estate or designated beneficiary in full within 90 days of such Director's, terminated Director's or retired Director's death. The Director will designate his or her beneficiary at the same time he or she elects deferral of Compensation. However, the latest designated beneficiary will be the beneficiary or beneficiaries for the total of all distributions from the Accounts. The designated beneficiary may be changed at any time on a form provided by the Secretary of the Company, provided that no designation will be effective unless it is filed with the Secretary of the Company prior to the Director's death. Directors who name a beneficiary other than their spouse will be required to provide spousal consent to the beneficiary designation. 8. UNFUNDED PLAN The plan is intended to be an unfunded plan for tax purposes and under Title I of ERISA. The liability of the Company to any Director, terminated Director, retired Director or his or her estate or designated beneficiary under the Plan shall be that of a debtor only pursuant to such contractual obligations as are created by the Plan, and no such obligation of the Company shall be deemed to be secured by any assets, pledges, or other encumbrances on any property of the Company. At the sole discretion of the Company, the Company may establish or become a signatory to a rabbi trust to accumulate assets to help fulfill its obligations under the plan. The existence of such plan shall not create a lien on any asset held by the Company, contributed to any trust created, or otherwise designated to be used for payment of any of its obligations created by this agreement. 9. INALIENABILITY OF DEFERRED COMPENSATION Except to the extent of the rights of a designated beneficiary, no distribution pursuant to, or interest in, the Plan may be transferred, assigned, pledged or otherwise alienated and no such distribution or interest shall be subject to legal process or attachment for the payment of any claims against any individual entitled to receive the same. 10. CONTROLLING STATE LAW All questions pertaining to the construction, regulation, validity and effect of the Plan shall be determined in accordance with the laws of the State of Texas. 11. AMENDMENT The Board of Directors of the Company in its sole discretion may amend, suspend or terminate the Plan at any time. However, any such amendment, suspension or termination of the Plan may not adversely affect any Director's or his or her beneficiary's rights with respect to Compensation previously deferred. 12. ADMINISTRATION Administration of the Plan will be coordinated by the Controller of the Company. Administration will include, but not be limited to, crediting of deferred compensation, dividends and accrued interest to individual Director accounts and ultimate disbursement of deferred amounts. 13. EFFECTIVE DATE This Plan shall become effective May 23, 2003 applicable only to compensation for services rendered on or after that date. APPROVED BY THE BOARD OF DIRECTORS May 22, 2003 AMENDED BY HUMAN RESOURCES COMMITTEE May 19, 2004 EX-4.5 3 h27123exv4w5.txt AMENDMENT, FREEZE AND TERMINATION AGREEMENT Exhibit 4.5 AMENDMENT, FREEZE AND TERMINATION AGREEMENT TO THE HARVEST NATURAL RESOURCES, INC. DEFERRED COMPENSATION PLAN FOR THE BOARD OF DIRECTORS THIS AMENDMENT, FREEZE AND TERMINATION AGREEMENT is made by Harvest Natural Resources, Inc. (the "Sponsor"), WITNESSETH: WHEREAS, the Sponsor previously entered into that Harvest Natural Resources, Inc. Deferred Compensation Plan for the Board of Directors (the "Plan"); WHEREAS, the Sponsor reserved the right in Section 11 of the Plan to amend and/or terminate the Plan at any time; and WHEREAS, the Sponsor has determined to amend the Plan, effective May 31, 2005 (the "Termination Date"), (1) to prohibit additional individuals from becoming participants under the Plan, (2) to cease all benefit accruals under the Plan and (3) to terminate the Plan and distribute all accrued and vested amounts payable under the Plan on December 2, 2005 (the "Distribution Date"); NOW, THEREFORE, the Sponsor hereby agrees that notwithstanding any other provisions of the Plan to the contrary, the Plan is amended, frozen and terminated as follows. 1. Effective as of the Termination Date, the Plan is amended by adding thereto the following new Section 14: 14. ELIGIBILITY, BENEFIT ACCRUALS, VESTING AND COMPUTATION AND PAYMENT OF BENEFITS INCIDENT TO FREEZING AND TERMINATION OF THE PLAN A. ELIGIBILITY. Notwithstanding any other provision of the Plan to the contrary, no individual who is not a participant under the Plan (a "Participant") on May 31, 2005 (the "Termination Date") shall become a Participant on or after the Termination Date. B. BENEFIT ACCRUAL. Notwithstanding any other provision of the Plan to the contrary, any individual who is a Participant on the Termination -1- Date and who has not already ceased accruing benefits under the Plan shall cease accruing benefits under the Plan as of the Termination Date. C. VESTING. Notwithstanding any other provision of the Plan to the contrary, each Participant participating under the Plan who was not already fully vested in his or her accrued benefit under the Plan as of the Termination Date shall become fully vested as of the Termination Date in his or her accrued benefit under the Plan. D. COMPUTATION OF BENEFITS PAYABLE UNDER THE PLAN AS OF THE TERMINATION DATE. Notwithstanding any other provision of the Plan to the contrary, including, but not limited to, any provision of Sections 6 or 7 of the Plan, as of the Termination Date each Participant (or his or her beneficiary) shall be entitled to receive, in lieu of any other benefits under the Plan, a single sum payment in cash in an amount equal to the sum of (i) the number of phantom shares of the Company's common stock credited to the Participant's Harvest Stock Unit Account multiplied by an amount equal to the Distribution Date Fair Market Value and (ii) the amount credited to the Participant's Fixed Income Account. Notwithstanding any provision of the Plan to the contrary, the term "Distribution Date Fair Market Value" means the average of the high and low trading prices per share of the Company's common stock during the five (5) trading days immediately preceding the Distribution Date as reported in The Wall Street Journal listing of consolidation trading for New York Stock Exchange issues. E. PAYMENT OF BENEFITS PAYABLE UNDER THE PLAN ON THE DISTRIBUTION DATE. Notwithstanding any other provision of the Plan to the contrary, including, but not limited to, any provision of Section 7 of the Plan, or any election previously made under the Plan by the Participant, a Participant's benefit payable to him pursuant to Section 14.D shall be distributed to the Participant (or his or her beneficiary) as soon as administratively practicable after the Distribution Date, but in no case later than December 31, 2005. 2. The Plan, as amended by this Amendment, Freeze and Termination Agreement, is frozen and terminated on the Termination Date. -2- IN WITNESS WHEREOF, the Sponsor has caused this Agreement to be executed as of the 19th day of May, 2005. HARVEST NATURAL RESOURCES, INC. ____________________________________________ By: James A. Edmiston Executive Vice President and Chief Operating Officer EX-31.1 4 h27123exv31w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 EXHIBIT 31.1 I, Peter J. Hill, certify that: 1. I have reviewed this report on Form 10-Q of Harvest Natural Resources, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 1, 2005 /s/ Peter J. Hill ------------------------------------- Peter J. Hill President and Chief Executive Officer 24 EX-31.2 5 h27123exv31w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 EXHIBIT 31.2 I, Steven W. Tholen, certify that: 1. I have reviewed this report on Form 10-Q of Harvest Natural Resources, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 1, 2005 /s/ Steven W. Tholen ------------------------------------- Steven W. Tholen Senior Vice President - Finance, Chief Financial Officer and Treasurer 25 EX-32.1 6 h27123exv32w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 EXHIBIT 32.1 ACCOMPANYING CERTIFICATE PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Not Filed Pursuant to the Securities Exchange Act of 1934 The undersigned Chief Executive Officer of Harvest Natural Resources, Inc. (the "Company") does hereby certify as follows: This report on Form 10-Q of Harvest Natural Resources, Inc. for the period ended June 30, 2005 and filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 1, 2005 By: /s/ Peter J. Hill ------------------------------------- Peter J. Hill President and Chief Executive Officer EX-32.2 7 h27123exv32w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 EXHIBIT 32.2 ACCOMPANYING CERTIFICATE PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Not Filed Pursuant to the Securities Exchange Act of 1934 The undersigned Chief Financial Officer of Harvest Natural Resources, Inc. (the "Company") does hereby certify as follows: This report on Form 10-Q of Harvest Natural Resources, Inc. for the period ended June 30, 2005 and filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 1, 2005 By: /s/ Steven W. Tholen ------------------------------------- Steven W. Tholen Senior Vice President - Finance, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----