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, 2012
or
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission File No. 1-10762
Harvest Natural Resources, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 77-0196707 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) | |
1177 Enclave Parkway, Suite 300 Houston, Texas |
77077 | |
(Address of Principal Executive Offices) | (Zip Code) |
(281) 899-5700
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-Accelerated Filer | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 27, 2012, 37,528,852 shares of the Registrants Common Stock were outstanding.
HARVEST NATURAL RESOURCES, INC.
FORM 10-Q
Page | ||||||
PART I |
FINANCIAL INFORMATION | |||||
Item 1. |
Financial Statements | |||||
Unaudited Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 |
3 | |||||
4 | ||||||
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 |
5 | |||||
6 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||||
Item 3. |
40 | |||||
Item 4. |
40 | |||||
PART II |
OTHER INFORMATION | |||||
Item 1. |
41 | |||||
Item 1A. |
42 | |||||
Item 6. |
44 | |||||
46 |
2
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2012 |
December 31, 2011 |
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(in thousands) | ||||||||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 28,746 | $ | 58,946 | ||||
Restricted cash |
| 1,200 | ||||||
Receivables, net: |
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Dividend receivable equity affiliate |
12,200 | 12,200 | ||||||
Joint interest and other |
6,315 | 14,342 | ||||||
Note receivable |
| 3,335 | ||||||
Advances to equity affiliate |
2,538 | 2,388 | ||||||
Deferred income taxes |
2,628 | 2,628 | ||||||
Prepaid expenses and other |
1,692 | 728 | ||||||
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TOTAL CURRENT ASSETS |
54,119 | 95,767 | ||||||
OTHER ASSETS |
5,555 | 5,427 | ||||||
INVESTMENT IN EQUITY AFFILIATE |
384,473 | 345,054 | ||||||
PROPERTY AND EQUIPMENT: |
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Oil and gas properties (successful efforts method) |
70,292 | 65,671 | ||||||
Other administrative property |
3,192 | 3,176 | ||||||
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TOTAL PROPERTY AND EQUIPMENT |
73,484 | 68,847 | ||||||
Accumulated depreciation and amortization |
(2,258 | ) | (2,048 | ) | ||||
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TOTAL PROPERTY AND EQUIPMENT, NET |
71,226 | 66,799 | ||||||
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TOTAL ASSETS |
$ | 515,373 | $ | 513,047 | ||||
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable, trade and other |
$ | 1,044 | $ | 7,381 | ||||
Accounts payable, carry obligation |
| 3,596 | ||||||
Accrued expenses |
8,896 | 15,247 | ||||||
Accrued interest |
1,008 | 1,372 | ||||||
Deferred tax liability |
4,835 | 4,835 | ||||||
Income taxes payable |
1,251 | 718 | ||||||
Current portion long-term debt |
15,551 | | ||||||
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TOTAL CURRENT LIABILITIES |
32,585 | 33,149 | ||||||
OTHER LONG-TERM LIABILITIES |
956 | 908 | ||||||
LONG-TERM DEBT |
| 31,535 | ||||||
COMMITMENTS AND CONTINGENCIES (See Note 6) |
| | ||||||
EQUITY |
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STOCKHOLDERS EQUITY: |
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Preferred stock, par value $0.01 a share; authorized 5,000 shares; outstanding, none |
| | ||||||
Common stock, par value $0.01 a share; authorized 80,000 shares at June 30, 2012 (December 31, 2011: 80,000 shares); issued 43,864 shares at June 30, 2012 (December 31, 2011: 40,625 shares) |
438 | 406 | ||||||
Additional paid-in capital |
256,009 | 236,192 | ||||||
Retained earnings |
200,051 | 193,283 | ||||||
Treasury stock, at cost, 6,527 shares at June 30, 2012 (December 31, 2011: 6,521 shares) |
(66,145 | ) | (66,104 | ) | ||||
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TOTAL HARVEST STOCKHOLDERS EQUITY |
390,353 | 363,777 | ||||||
NONCONTROLLING INTEREST |
91,479 | 83,678 | ||||||
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TOTAL EQUITY |
481,832 | 447,455 | ||||||
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TOTAL LIABILITIES AND EQUITY |
$ | 515,373 | $ | 513,047 | ||||
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See accompanying notes to consolidated financial statements.
3
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
EXPENSES |
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Depreciation and amortization |
$ | 105 | $ | 119 | $ | 210 | $ | 243 | ||||||||
Exploration expense |
1,282 | 4,650 | 2,725 | 5,839 | ||||||||||||
Dry hole costs |
71 | | 5,617 | | ||||||||||||
General and administrative |
6,524 | 7,049 | 12,366 | 13,724 | ||||||||||||
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7,982 | 11,818 | 20,918 | 19,806 | |||||||||||||
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LOSS FROM OPERATIONS |
(7,982 | ) | (11,818 | ) | (20,918 | ) | (19,806 | ) | ||||||||
OTHER NON-OPERATING INCOME (EXPENSE) |
||||||||||||||||
Investment earnings and other |
80 | 240 | 149 | 385 | ||||||||||||
Interest expense |
(34 | ) | (1,704 | ) | (428 | ) | (3,916 | ) | ||||||||
Debt conversion expense |
20 | | (2,402 | ) | | |||||||||||
Loss on extinguishment of debt |
| (9,682 | ) | | (9,682 | ) | ||||||||||
Other non-operating expenses |
(1,467 | ) | (244 | ) | (1,723 | ) | (675 | ) | ||||||||
Foreign currency transaction loss |
(48 | ) | (32 | ) | (70 | ) | (43 | ) | ||||||||
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(1,449 | ) | (11,422 | ) | (4,474 | ) | (13,931 | ) | |||||||||
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LOSS FROM CONSOLIDATED COMPANIES CONTINUING OPERATIONS BEFORE INCOME TAXES |
(9,431 | ) | (23,240 | ) | (25,392 | ) | (33,737 | ) | ||||||||
INCOME TAX EXPENSE (BENEFIT) |
(426 | ) | 260 | (1,646 | ) | 482 | ||||||||||
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LOSS FROM CONSOLIDATED COMPANIES CONTINUING OPERATIONS |
(9,005 | ) | (23,500 | ) | (23,746 | ) | (34,219 | ) | ||||||||
NET INCOME FROM UNCONSOLIDATED EQUITY AFFILIATES |
22,661 | 18,246 | 39,419 | 36,740 | ||||||||||||
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NET INCOME (LOSS) FROM CONTINUING OPERATIONS |
13,656 | (5,254 | ) | 15,673 | 2,521 | |||||||||||
DISCONTINUED OPERATIONS: |
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Income (loss) from discontinued operations |
(1,584 | ) | 480 | (1,699 | ) | (2,786 | ) | |||||||||
Gain on sale of assets |
| 103,933 | | 103,933 | ||||||||||||
Income tax (expense) benefit |
595 | (5,748 | ) | 595 | (5,748 | ) | ||||||||||
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Income (loss) from discontinued operations |
(989 | ) | 98,665 | (1,104 | ) | 95,399 | ||||||||||
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NET INCOME |
12,667 | 93,411 | 14,569 | 97,920 | ||||||||||||
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST |
4,507 | 3,631 | 7,801 | 7,058 | ||||||||||||
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NET INCOME ATTRIBUTABLE TO HARVEST |
$ | 8,160 | $ | 89,780 | $ | 6,768 | $ | 90,862 | ||||||||
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NET INCOME ATTRIBUTABLE TO HARVEST PER COMMON SHARE: |
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(See Note 2 Summary of Significant Accounting Policies, Earnings Per Share): |
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Basic |
$ | 0.22 | $ | 2.64 | $ | 0.19 | $ | 2.67 | ||||||||
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Diluted |
$ | 0.20 | $ | 2.23 | $ | 0.18 | $ | 2.27 | ||||||||
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COMPREHENSIVE INCOME |
$ | 8,160 | $ | 89,780 | $ | 6,768 | $ | 90,862 | ||||||||
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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, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 14,569 | $ | 97,920 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
210 | 1,053 | ||||||
Dry hole costs |
5,617 | | ||||||
Impairment of long-lived assets |
| 4,707 | ||||||
Allowance for account and note receivable |
5,180 | | ||||||
Write-off of accounts payable, carry obligation |
(3,596 | ) | | |||||
Amortization of debt financing costs |
726 | 530 | ||||||
Amortization of discount on debt |
| 816 | ||||||
Gain on sale of assets |
| (103,933 | ) | |||||
Debt conversion expense |
1,939 | | ||||||
Loss on early extinguishment of debt |
| 7,533 | ||||||
Net income from unconsolidated equity affiliate |
(39,419 | ) | (36,740 | ) | ||||
Share-based compensation-related charges |
2,124 | 2,673 | ||||||
Changes in operating assets and liabilities: |
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Receivables |
6,182 | (2,887 | ) | |||||
Advances to equity affiliate |
(150 | ) | (296 | ) | ||||
Prepaid expenses and other |
(950 | ) | 3,061 | |||||
Accounts payable |
(6,337 | ) | 8,168 | |||||
Accrued expenses |
(2,177 | ) | (2,469 | ) | ||||
Accrued interest |
(971 | ) | (418 | ) | ||||
Other long-term liabilities |
48 | (701 | ) | |||||
Income taxes payable |
533 | 6,061 | ||||||
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NET CASH USED IN OPERATING ACTIVITIES |
(16,472 | ) | (14,922 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from sale of assets |
| 217,833 | ||||||
Additions of property and equipment |
(14,205 | ) | (28,067 | ) | ||||
Additions to assets held for sale |
| (31,742 | ) | |||||
Proceeds from sale of equity affiliate |
| 1,385 | ||||||
(Increase) decrease in restricted cash |
1,200 | (7,323 | ) | |||||
Investment costs |
(829 | ) | (62 | ) | ||||
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
(13,834 | ) | 152,024 | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net proceeds from issuances of common stock |
273 | 416 | ||||||
Payments of long-term debt |
| (60,000 | ) | |||||
Financing costs |
(167 | ) | (189 | ) | ||||
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
106 | (59,773 | ) | |||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(30,200 | ) | 77,329 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
58,946 | 58,703 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 28,746 | $ | 136,032 | ||||
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Supplemental Schedule of Noncash Investing and Financing Activities:
During the six months ended June 30, 2012, we settled 70,994 restricted stock units with Harvest common stock valued at $0.4 million. Also, some of our employees elected to pay withholding tax on restricted stock grants on a cashless basis which resulted in 7,789 shares being added to treasury stock at cost.
During the six months ended June 30, 2011, we issued 0.2 million shares of restricted stock valued at $2.0 million. Also, some of our employees elected to pay withholding tax on restricted stock grants on a cashless basis which resulted in 30,373 shares being added to treasury stock at cost.
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, 2012 and 2011 (unaudited)
Note 1 Organization
Interim Reporting
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2012, and the results of operations and cash flows for the three and six months ended June 30, 2012 and 2011. 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 (USGAAP). Reference should be made to our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 which include certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.
Organization
Harvest Natural Resources, Inc. (Harvest) is an independent energy company engaged in the acquisition, exploration, development, production and disposition of oil and natural gas properties since 1989, when it was incorporated under Delaware law.
We have acquired and developed significant interests in the Bolivarian Republic of Venezuela (Venezuela). Our Venezuelan interests are owned through Harvest-Vinccler Dutch Holding, B.V., a Dutch private company with limited liability (Harvest Holding). Our ownership of Harvest Holding is through HNR Energia, B.V. (HNR Energia) in which we have a direct controlling interest. Through HNR Energia, we indirectly own 80 percent of Harvest Holding and our partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (Vinccler), indirectly owns the remaining 20 percent interest of Harvest Holding. Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40 percent of Petrodelta, S.A. (Petrodelta). As we indirectly own 80 percent of Harvest Holding, we indirectly own a net 32 percent interest in Petrodelta, and Vinccler indirectly owns eight percent. Corporación Venezolana del Petroleo S.A. (CVP) owns the remaining 60 percent of Petrodelta. Petroleos de Venezuela S.A. (PDVSA) owns 100 percent of CVP. Harvest Holding has a direct controlling interest in Harvest Vinccler S.C.A. (Harvest Vinccler). Harvest Vincclers main business purposes are to assist us in the management of Petrodelta and in negotiations with PDVSA. We do not have a business relationship with Vinccler outside of Venezuela.
In addition to our interests in Venezuela, we hold exploration acreage in four projects:
| Mainly onshore in West Sulawesi in the Republic of Indonesia (Indonesia) through a Production Sharing Contract (Budong PSC) (see Note 11 Indonesia), |
| Offshore of the Republic of Gabon (Gabon) through the Dussafu Marin Permit (Dussafu PSC) (see Note 12 Gabon), |
| Onshore in the Sultanate of Oman (Oman) through the Oman Exploration and Production Sharing Agreement Al Ghubar / Qarn Alam license (Block 64 EPSA) (see Note 13 Oman), and |
| Offshore of the Peoples Republic of China (China) through a Petroleum Contract. |
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated.
6
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Boards (FASB) issued Accounting Standards Update (ASU) No. 2011-05 (ASU 2011-05), which is included in Accounting Standards Codification (ASC) 220, Comprehensive Income (ASC 220). This update requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted ASU 2011-05 effective January 1, 2012 and have elected to utilize the single continuous statement for presentation.
Reporting and Functional Currency
The United States Dollar (U.S. Dollar) is the reporting and functional currency for all of our controlled subsidiaries and Petrodelta. Amounts denominated in non-U.S. Dollar currencies are re-measured into U.S. Dollars, and all currency gains or losses are recorded in the consolidated statement of operations. There are many factors that affect foreign exchange rates and the resulting exchange gains and losses, many of which are beyond our influence.
See Note 9 Venezuela for a discussion of currency exchange risk on Harvest Vincclers and Petrodeltas businesses.
Cash and Cash Equivalents
Cash equivalents include money market funds and short term certificates of deposit with original maturity dates of less than three months.
Restricted Cash
Restricted cash is classified as current or non-current based on the terms of the agreement. Restricted cash at December 31, 2011 represents cash held in a U.S. bank used as collateral for a standby letter of credit issued as a payment guarantee for electric wireline services to be provided during the drilling of the two exploratory wells on the Block 64 EPSA (see Note 13 Oman). Drilling of the wells was completed in the first quarter of 2012 and the restricted cash returned to us on April 18, 2012.
Financial Instruments
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and notes payable. Cash and cash equivalents are placed with commercial banks with high credit ratings. This diversified investment policy limits our exposure both to credit risk and to concentrations of credit risk.
Current portion of long-term debt at June 30, 2012 consisted of $15.6 million of fixed-rate unsecured senior convertible notes maturing on March 1, 2013 unless earlier redeemed, purchased or converted. Total long-term debt at December 31, 2011 consisted of $31.5 million of fixed-rate unsecured senior convertible notes maturing on March 1, 2013 unless earlier redeemed, purchased or converted. See Note 5 Long-Term Debt.
Notes Receivable
Notes receivable bear interest and can have due dates that are less than one year or more than one year. Amounts outstanding under the notes bear interest at a rate based on the current prime rate and are recorded at face value. Interest is recognized over the life of the note. We may or may not require collateral for the notes.
Each note is analyzed to determine if it is impaired pursuant to ASU 2010-20, which is included in ASC 310, Receivables. A note is impaired if it is probable that we will not collect all principal and interest contractually due. We do not accrue interest when a note is considered impaired. All cash receipts on impaired notes are applied to reduce the accrued interest on the note until the interest is made current and, thereafter, applied to reduce the principal amount of such notes.
7
Our note receivable relates to a prospect leasing cost financing arrangement. The note receivable plus accrued interest was approximately $3.3 million at December 31, 2011, and was secured by a portion of the production from the Bar F #1-20-3-2 in Utah. See Note 6 Commitments and Contingencies for a discussion of the settlement of the note receivable.
Other Assets
Other assets consist of investigative costs associated with new business development projects, deferred financing costs and a long-term receivable for value added tax (VAT) credits related to the Budong PSC. Investigative costs are reclassified to oil and gas properties or expensed depending on managements assessment of the likely outcome of the project. Deferred financing costs relate to specific financing and are amortized over the life of the financing to which the costs relate. See Note 5 Long-Term Debt. The VAT receivable is reimbursed through the sale of hydrocarbons (see Note 11 Indonesia for development plans for the Budong PSC).
At June 30, 2012, other assets consisted of $0.9 million of investigative costs, $0.3 million of deferred financing costs and $3.7 million of long-term VAT receivable. At December 31, 2011, other assets consisted of $0.4 million of investigative costs, $1.0 million of deferred financing costs and $3.3 million of long-term VAT receivable. During the six months ended June 30, 2012, $0.3 million of investigative costs were reclassified to expense.
Other Assets at June 30, 2012 also includes a blocked payment of $0.7 million (December 31, 2011: $0.7 million) net to our 66.667 percent interest related to our drilling operations in Gabon in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury Departments Office of Foreign Assets Control (OFAC). See Note 6 Commitments and Contingencies.
Investment in Equity Affiliates
Investments in unconsolidated companies in which we have less than a 50 percent interest and have significant influence are accounted for under the equity method of accounting. Investment in Equity Affiliates is increased by additional investments and earnings and decreased by dividends and losses. We review our Investment in Equity Affiliates for impairment whenever events and circumstances indicate a loss in investment value is other than a temporary decline.
There are many factors to consider when evaluating an equity investment for possible impairment. Currency devaluations, inflationary economies, slow pay of dividends and cash flow analysis are some of the factors we consider in our evaluation for possible impairment. At June 30, 2012, there were no events that would indicate that our equity investment in Petrodelta had sustained a loss in value that is other than temporary.
Property and Equipment
We use the successful efforts method of accounting for oil and gas properties. The major components of property and equipment are as follows:
June 30, 2012 |
December 31, 2011 |
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(in thousands) | ||||||||
Unproved property costs |
$ | 67,190 | $ | 62,842 | ||||
Oilfield inventories |
3,102 | 2,829 | ||||||
Other administrative property |
3,192 | 3,176 | ||||||
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73,484 | 68,847 | |||||||
Accumulated depreciation and amortization |
(2,258 | ) | (2,048 | ) | ||||
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$ | 71,226 | $ | 66,799 | |||||
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Capitalized Interest
We capitalize interest costs for qualifying oil and gas properties. The capitalization period begins when expenditures are incurred on qualified properties, activities begin which are necessary to prepare the property for production and interest costs have been incurred. The capitalization period continues as long as these events occur. The average additions for the period are used in the interest capitalization calculation. During the three and six
8
months ended June 30, 2012, we capitalized interest costs of $0.5 million and $1.3 million, respectively, for qualifying oil and gas property additions. During the three and six months ended June 30, 2011, we capitalized interest costs of $0.2 million and $1.0 million, respectively, for qualifying oil and gas property.
Fair Value Measurements
We measure and disclose fair values in accordance with the provisions of ASC 820 Fair Value Measurements and Disclosures (ASC 820). This guidance defines fair value in applying USGAAP, establishes a framework for measuring fair value and expands disclosures about fair-value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. ASC 820 also establishes a fair-value hierarchy.
| Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access at the measurement date. Our Level 1 fair value measurements consist of cash and cash equivalents in a money market fund comprised of high quality, short term investments with minimal credit risk. At June 30, 2012, the carrying value and fair value of our cash and cash equivalents held in money market funds was $24.6 million, respectively (December 31, 2011: $51.4 million, respectively). |
| Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Our Level 2 fair value measurements consist of our senior convertible notes. The estimated fair value of our senior convertible notes is based on the most recent market trades of the debt and weighted by the size of the trades. As of June 30, 2012, the estimated fair value of our senior convertible notes was $22.1 million (December 31, 2011: $39.2 million). |
| Level 3 inputs are unobservable inputs for the asset or liability. Valuation techniques include pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including our own assumptions. The pricing model incorporates transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants. Our Level 3 fair value measurements consist of our note receivable. The note receivable is not publicly traded and not easily transferable. The estimated fair value of our note receivable approximates the note receivable book value of $3.3 million at December 31, 2011. The note receivable was settled during the six months ended June 30, 2012. See Note 6 Commitments and Contingencies. |
Noncontrolling Interests
Changes in noncontrolling interest were as follows:
June 30, 2012 |
June 30, 2011 |
|||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 83,678 | $ | 69,501 | ||||
Net income attributable to noncontrolling interest |
7,801 | 7,058 | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | 91,479 | $ | 76,559 | ||||
|
|
|
|
Earnings Per Share
Basic earnings per common share (EPS) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.
9
Three Months Ended June 30, |
||||||||
2012 | 2011 | |||||||
(in thousands, except per share data) | ||||||||
Income (loss) from continuing operations(a) |
$ | 9,149 | $ | (8,885 | ) | |||
Discontinued operations |
(989 | ) | 98,665 | |||||
|
|
|
|
|||||
Net income attributable to Harvest |
$ | 8,160 | $ | 89,780 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding |
37,375 | 34,039 | ||||||
Effect of dilutive securities |
3,424 | 6,221 | ||||||
|
|
|
|
|||||
Weighted average common shares, diluted |
40,799 | 40,260 | ||||||
|
|
|
|
|||||
Basic Earnings (Loss) Per Share: |
||||||||
Income (loss) from continuing operations |
$ | 0.25 | $ | (0.26 | ) | |||
Income (loss) from discontinued operations |
(0.03 | ) | 2.90 | |||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.22 | $ | 2.64 | ||||
|
|
|
|
|||||
Diluted Earnings (Loss) Per Share: |
||||||||
Income (loss) from continuing operations |
$ | 0.22 | $ | (0.22 | ) | |||
Income (loss) from discontinued operations |
(0.02 | ) | 2.45 | |||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.20 | $ | 2.23 | ||||
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|
|
|
Six Months Ended June 30, |
||||||||
2012 | 2011 | |||||||
(in thousands, except per share data) | ||||||||
Income (loss) from continuing operations(a) |
$ | 7,872 | $ | (4,537 | ) | |||
Discontinued operations |
(1,104 | ) | 95,399 | |||||
|
|
|
|
|||||
Net income attributable to Harvest |
$ | 6,768 | $ | 90,862 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding |
36,130 | 33,992 | ||||||
Effect of dilutive securities |
1,469 | 6,035 | ||||||
|
|
|
|
|||||
Weighted average common shares, diluted |
37,599 | 40,027 | ||||||
|
|
|
|
|||||
Basic Earnings (Loss) Per Share: |
||||||||
Income (loss) from continuing operations |
$ | 0.22 | $ | (0.13 | ) | |||
Income (loss) from discontinued operations |
(0.03 | ) | 2.80 | |||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.19 | $ | 2.67 | ||||
|
|
|
|
|||||
Diluted Earnings (Loss) Per Share: |
||||||||
Income (loss) from continuing operations |
$ | 0.21 | $ | (0.11 | ) | |||
Income (loss) from discontinued operations |
(0.03 | ) | 2.38 | |||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.18 | $ | 2.27 | ||||
|
|
|
|
(a) | Excludes net income attributable to noncontrolling interest. |
The three months ended June 30, 2012 per share calculations above exclude 3.7 million options and 1.6 million warrants because they were anti-dilutive. The three months ended June 30, 2011 per share calculations above exclude 0.7 million options and 1.6 million warrants because they were anti-dilutive.
The six months ended June 30, 2012 per share calculations above exclude 3.7 million options and 1.6 million warrants because they were anti-dilutive. The six months ended June 30, 2011 per share calculations above exclude 0.3 million options and 1.6 million warrants because they were anti-dilutive.
10
Note 3 Risks, Uncertainties, Capital Resources and Liquidity
The oil and gas industry is a highly capital intensive and cyclical business with unique operating and financial risks. There are a number of variables and risks related to our exploration projects that could significantly utilize our cash balances, and affect our capital resources and liquidity.
The environments in which we operate are often difficult and the ability to operate successfully depends on a number of factors including our ability to control the pace of development, our ability to apply best practices in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of certain countries are not mature and their reliability can be uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control.
Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States.
There are also a number of variables and risks related to our minority equity investment in Petrodelta that could significantly utilize our cash balances, and affect our capital resources and liquidity. Petrodeltas capital commitments are determined by its business plan, and Petrodeltas capital commitments are expected to be funded by internally generated cash flow. The total capital required to develop the fields in Venezuela may exceed Petrodeltas available cash and financing capabilities, and there may be operational or contractual consequences due to this inability. Petrodeltas ability to fully develop the fields in Venezuela will require a significant investment. Due to PDVSAs liquidity constraints, PDVSA has not been providing the necessary monetary and contractual support required by Petrodelta. If we are called upon to fund our share of Petrodeltas operations, our failure to do so could be considered a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta.
Petrodelta also has a material impact on our results of operations for any quarterly or annual reporting period. See Note 10 Investment in Equity Affiliate Petrodelta. Petrodelta operates under a business plan, the success of which relies heavily on the market price of oil. To the extent that market prices of oil decline, the business plan, and thus our equity investment and/or operations and/or profitability, could be adversely affected.
Operations in Venezuela are subject to various risks inherent in foreign operations. It is possible the legal or fiscal framework for Petrodelta could change and the Venezuela government may not honor its commitments. Our ability to implement or influence Petrodeltas business plan, assure quality control and set the timing and pace of development could also be adversely impacted. No assurance can be provided that events beyond our control will not adversely affect the value of our minority investment in Petrodelta.
On June 21, 2012, we and our wholly owned subsidiary HNR Energia entered into a share purchase agreement (the SPA) with PT Pertamina (Persero), a state-owned limited liability company existing under the laws of Indonesia (Buyer) for the sale of our interest in Venezuela for a cash purchase price of $725.0 million. See Note 9 Venezuela, Share Purchase Agreement. We cannot assure you that the SPA will be consummated. The consummation of the SPA is subject to the satisfaction or waiver of a number of conditions, including, among others, the requirement that approvals are received from the Government of the Bolivarian Republic of Venezuela, the Government of the Republic of Indonesia, and the majority of our stockholders; requirements with respect to the
11
accuracy of the representations and warranties of the parties to the SPA; and requirements with respect to the satisfaction or waiver of the covenants and obligations of the parties to the SPA. In addition, the SPA may be terminated in certain circumstances under the terms of the SPA. We cannot guarantee that the parties to the SPA will be able to meet all of the closing conditions of the SPA. If we are unable to meet all of the closing conditions, the Buyer would not be obligated to close the SPA. We also cannot be sure that circumstances, such as a material adverse effect, will not arise that would also allow the Buyer to terminate the SPA prior to closing. If the SPA does not close, our Board of Directors will be forced to evaluate other alternatives, which may be less favorable to us than the SPA. There can be no assurances as to whether this transaction will close or whether we will receive any cash proceeds related to the SPA.
Our cash is being used to fund oil and gas exploration projects, debt, interest, and to a lesser extent general and administrative costs. We require capital principally to fund the exploration and development of new oil and gas properties. As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. We do not have any remaining work commitments for the current exploration phases of the Budong PSC or Block 64 EPSA. We entered the third exploration phase of the Dussafu PSC on May 28, 2012. The third exploration phase of the Dussafu PSC has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period (see Note 12 Gabon). This work commitment is non-discretionary; however, we do have the ability to control the pace of expenditures. On July 17, 2012, we signed a contract for a semi-submersible drilling rig to drill an exploration well on the Gabon PSC. In the event that we elect to terminate the contract prior to the rigs arrival on-site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages (see Note 16 Subsequent Events).
Historically, our primary ongoing source of cash has been dividends from Petrodelta and the sale of oil and gas properties. On May 17, 2011, we closed the transaction to sell the Antelope Project. The transaction had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflected increases to the purchase price for customary adjustments and deductions for transaction related costs (see Note 4 Dispositions).
Between Petrodeltas formation in October 2007 and June 2010, Petrodelta declared and paid dividends of $105.5 million to HNR Finance, B.V. (HNR Finance), a wholly owned subsidiary of Harvest Holding ($84.4 million net to our 32 percent interest). In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance ($9.8 million net to our 32 percent interest). Due to Petrodeltas liquidity constraints caused by PDVSAs insufficient monetary and contractual support, this dividend has not yet been received, although it is due and payable. There is uncertainty of the timing of receipt of the dividend receivable from Petrodelta and whether Petrodelta will declare or pay additional dividends in 2012 or 2013. See Note 14 Related Party Transactions for a discussion of our obligations to our non-controlling interest holder, Vinccler, for any dividend received from Petrodelta. Also, any receipt of dividends while the SPA is active would become a purchase price adjustment under the SPA. We have and will continue to monitor our investment in Petrodelta. Should the dividend receivable not be collected timely, or facts and circumstances surrounding our investment change, our results of operations and our investment in Petrodelta could be adversely impacted. If facts and circumstances change, it is possible we could conclude our investment in Petrodelta should be accounted for using the cost method of accounting rather than the equity method of accounting. If that were to occur, the operations of Petrodelta would no longer be included in our results of operations.
Currently, our source of cash is expected to be generated by accessing the debt and/or equity markets. On March 30, 2012, we announced that we had entered into an equity distribution agreement (the Agreement) with Knight Capital America, L.P. (KCA), a subsidiary of Knight Capital Group, Inc. relating to an at-the-market (ATM) offering of shares of our common stock having an aggregate sales price of up to $75.0 million. Under the terms of the Agreement, we may offer and sell shares of our common stock by means of transactions on the New York Stock Exchange (NYSE) or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated rates. We are unable to access the ATM during blackout periods or when we are in possession of material information which has not been made public. As of June 30, 2012, we have not accessed the ATM.
12
We incurred debt during 2010 which has imposed restrictions on us and increased our vulnerability to adverse economic and industry conditions. Our senior convertible notes impose restrictions on us that limit our ability to obtain additional financing. Our ability to meet these covenants is primarily dependent on meeting customary affirmative covenant clauses. Our inability to satisfy the covenants contained in our senior convertible notes would constitute an event of default, if not waived. An uncured default could result in the senior convertible notes becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business. As of June 30, 2012, we were in compliance with all of our long term debt covenants.
Our senior convertible notes are due March 1, 2013. As of June 30, 2012, $16.5 million of the senior convertible notes had been converted into, or exchanged for, shares of our common stock. If the remaining debt is not converted or is only partially converted, we will be required to refinance the debt. Due to our current liquidity position, any debt instrument available to us is likely to have a substantial interest rate and/or provide for additional dilution to shareholders. There can be no assurances we will be able to refinance the debt on terms that are acceptable to us. If we are unable to obtain additional debt and/or equity sources, convert or exchange the senior convertible notes, or receive the Petrodelta dividend or our cash sources and requirements are different than expected, it will have a material adverse effect on our operations.
In order to increase our liquidity to levels sufficient to meet our commitments, we continue to seek to secure additional capital to fund operations, to meet future expenditure requirements necessary to retain our rights under our PSCs and to pay remaining amounts due under our senior convertible notes to the extent the convertible notes are not subsequently exchanged for shares prior to their maturity date. We plan to secure capital by obtaining debt or project financing or refinancing or extending existing debt, or, if acceptable debt or project financing or refinancing is unavailable, by obtaining equity related financing, or exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, or sale of some or all of our assets. While we will continue to seek to secure capital, there can be no assurance that we will be able to enter any strategic relationship or transaction or that we will be successful in obtaining funds through debt, project finance or equity related financing or refinancing, or extending existing debt. Under certain circumstances, the structure of a strategic transfer of our rights under any PSC will require the approval of the governments of the countries in which we operate. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity related financing is uncertain. Raising additional funds by issuing shares or other types of equity securities would further dilute our existing stockholders. We cannot predict the timing, structure or other terms and conditions of any such arrangements or the consideration that may be paid with respect to any transaction and whether the consideration will meet or exceed our offering price. Our lack of revenues, cash inflows and the unpredictability of cash dividends from Petrodelta could make it difficult to obtain financing and, accordingly, there is no assurance adequate financing can be raised and/or on terms acceptable to us.
Our ability to continue as a going concern depends upon the success of our planned exploration and development activities and the ability to secure additional financing to secure our current operations. There can be no guarantee of future capital acquisition, fundraising or explorations success or that we will realize the value of our unevaluated exploratory well costs. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. We believe that we will continue to be successful in securing any funds necessary to continue as a going concern. However, our current cash position and our ability to access additional capital may limit our available opportunities or not provide sufficient cash for operations.
13
Note 4 Dispositions
Discontinued Operations
On May 17, 2011, we closed the transaction to sell the Antelope Project. The sale had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflects increases to the purchase price for customary adjustments and deductions for transaction related costs. We do not have any continuing involvement with the Antelope Project. The related gain on the sale was reported in discontinued operations in the second quarter of 2011.
During the six months ended June 30, 2012, we incurred $0.1 million of expense related to settlement of royalty payments to the Mineral Management Services, write-offs of $5.2 million of accounts and note receivable and $3.6 million of accounts payable, carry obligation related to the settlement of all outstanding claims with a private third party on the Antelope Project (see Note 2 Summary of Significant Accounting Policies, Notes Receivable and Note 6 Commitments and Contingencies), and a $0.6 million income tax benefit related to the recognition of the additional loss on discontinued operations.
Revenue and net loss on the disposition of the Antelope Project are shown in the table below:
Three Months Ended June 30, |
Six Months
Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue applicable to discontinued operations |
$ | | $ | 2,368 | $ | | $ | 6,488 | ||||||||
Net income (loss) from discontinued operations |
$ | (989 | ) | $ | 98,665 | $ | (1,104 | ) | $ | 95,399 |
Note 5 Long-Term Debt
Long-Term Debt
Long-term debt consists of the following:
June 30, 2012 |
December 31, 2011 |
|||||||
(in thousands) | ||||||||
Senior convertible notes, unsecured, with interest at 8.25% See description below |
$ | 15,551 | $ | 31,535 | ||||
Less current portion |
15,551 | | ||||||
|
|
|
|
|||||
Long term portion |
$ | | $ | 31,535 | ||||
|
|
|
|
On February 17, 2010, we closed an offering of $32.0 million in aggregate principal amount of our 8.25 percent senior convertible notes. Under the terms of the notes, interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning September 1, 2010. The senior convertible notes mature on March 1, 2013, unless earlier redeemed, repurchased or converted. The notes are convertible into shares of our
14
common stock at a conversion rate of 175.2234 shares of common stock per $1,000 principal amount of senior convertible notes, equivalent to a conversion price of approximately $5.71 per share of common stock. The notes are general unsecured obligations, ranking equally with all of our other unsecured senior indebtedness, if any, and senior in right of payment to any of our subordinated indebtedness, if any. The notes are also redeemable in certain circumstances at our option and may be repurchased by us at the purchasers option in connection with occurrence of certain events.
On October 12, 2011, $0.5 million of the senior convertible notes were converted into 0.1 million shares of common stock at a conversion rate of $5.71 per share. On March 14, 2012, $16.0 million of the senior convertible notes were exchanged for 2.9 million shares of common stock at an effective exchange price of $5.56 per share. In addition, the exchanging holders were issued 0.2 million shares of common stock at $8.16 per share in exchange for foregoing a one-year interest make-whole of $1.3 million.
Financing costs associated with the senior convertible notes offering are being amortized over the remaining life of the notes and are recorded in other assets. The balance for financing costs was $0.3 million at June 30, 2012 (December 31, 2011: $1.0 million).
Note 6 Commitments and Contingencies
In June 2012, the operator of the Budong PSC received notice of a claim related to the ownership of part of the land comprising the Karama-1 (KD-1) drilling site. The claim asserts that the land on which the drill site is located is partly owned by the claimant. The operator purchased the site from local landowners in January 2010, and the purchase was approved by BPMIGAS. The claimant is seeking compensation of 16 billion Indonesia Rupiah (approximately $1.7 million, $1.1 million net to our 64.51 percent cost sharing interest) for land that was purchased at a cost of $4,100 in January 2010. A formal mediation hearing to assess the conflicting claims of ownership is scheduled for August 9, 2012. We and the Budong PSC operator dispute the landowners claim and plan to vigorously defend against it.
In May 2012, Newfield Production Company (Newfield) filed notice pursuant to the Purchase and Sale Agreement between Harvest (US) Holdings, Inc. (Harvest US) and Newfield dated March 21, 2011 (the PSA) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim asserts that locations constructed by Harvest were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that to the extent of potential penalties or other obligations that might result from potential violations that Harvest US indemnifies Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any potential environmental claim related to Newfields notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfields claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.
In October 2007, we entered into a Joint Exploration and Development Agreement (JEDA) with a private third party with respect to the Antelope Project. On January 11, 2011, in connection with the sale of each partys interests in the Antelope Project (see Note 4 Dispositions), we entered into a letter agreement with the private third party wherein the private third party agreed to reimburse us for certain expenses related to the sale of the two parties interests in the Antelope Project. The private third party disputes our calculation of the amount owed to us pursuant to the January 11, 2011 letter agreement. On March 11, 2011, we entered into a letter agreement with the private third party regarding certain obligations between the parties related to the JEDA. The private third party disputes our calculation of the amount due pursuant to one of the items in the March 11, 2011 letter agreement. At March 31, 2012, we had a note receivable outstanding from the private third party of $3.3 million (see Note 2 Summary of Significant Accounting Policies, Notes Receivable), an account receivable from the private third party of $2.7 million, and an account payable outstanding to the private third party of $3.6 million related to the purchase in July 2010 of an incremental 10 percent interest in the Antelope Project. On June 13, 2012, the parties agreed to settle all outstanding claims for $0.8 million net account receivable to Harvest, which resulted in a $1.6 million loss recorded in discontinued operations.
On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources, Inc. (UK), initiated a wire transfer of approximately $1.1 million ($0.7 million net to our 66.667 percent interest) intending to pay Libya Oil Gabon S.A. (LOGSA) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest Dussafu, B.V., for the companys drilling operations in Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in accordance with the U.S. sanctions against Libya as set forth in Executive
15
Order 13566 of February 25, 2011, and administered by OFAC, because the payee, LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not release the funds to the payee or return the funds to us unless we obtain authorization from OFAC. On October 26, 2011, we filed an application with OFAC for return of the blocked funds to us. Unless that application is approved, the funds will remain in the blocked account, and we can give no assurance when, or if, OFAC will permit the funds to be released. As of August 3, 2012, our October 26, 2011 application for the return of the blocked funds remains pending with OFAC.
Robert C. Bonnet and Bobby Bonnet Land Services vs. Harvest (US) Holdings, Inc., Branta Exploration & Production, LLC, Ute Energy LLC, Cameron Cuch, Paula Black, Johnna Blackhair, and Elton Blackhair in the United States District Court for the District of Utah. This suit was served in April 2010 on Harvest and Elton Blackhair, a Harvest employee, alleging that the defendants, among other things, intentionally interfered with Plaintiffs employment agreement with the Ute Indian Tribe Energy & Minerals Department and intentionally interfered with Plaintiffs prospective economic relationships. Plaintiffs seek actual damages, punitive damages, costs and attorneys fees. We dispute Plaintiffs claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.
Uracoa Municipality Tax Assessments. Our Venezuelan subsidiary, Harvest Vinccler, has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:
| Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (OSA). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims. |
| Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims. |
| Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim. |
| Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims. |
Harvest Vinccler disputes the Uracoa tax assessments and believes it has a substantial basis for its positions. Harvest Vinccler is unable to estimate the amount or range of any possible loss. As a result of the SENIATs, the Venezuelan income tax authority, interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997.
Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a tax inspector for the Libertador municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:
| One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayors Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayors Office to the protest. If the municipalitys response is to confirm the assessment, Harvest Vinccler will defer to the competent Tax Court to enjoin and dismiss the claim. |
| Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
16
| Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims. |
Harvest Vinccler disputes the Libertador allegations set forth in the assessments and believes it has a substantial basis for its position. Harvest Vinccler is unable to estimate the amount or range of any possible loss. As a result of the SENIATs interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002.
On May 4, 2012, Harvest Vinccler learned that the Political Administrative Chamber of the Supreme Court of Justice has issued a decision dismissing one of Harvest Vincclers claims against the Libertador Municipality. Harvest Vinccler continues to believe that it has sufficient arguments to maintain its position in accordance to the Venezuelan Constitution. Harvest Vinccler plans to present a request of Constitutional Revision to the Constitutional Chamber of the Supreme Court of Justice once it is notified officially of the decision. As of August 3, 2012, Harvest Vinccler has not received official notification of the decision. Harvest Vinccler is unable to predict the impact of this decision on the remaining outstanding municipality claims and assessments.
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.
Note 7 Taxes
Taxes on Income
We have recorded a tax benefit in the second quarter of 2012 as a result of the projected U.S. tax loss from operations for the year 2012. The amount of benefit is limited to the amount of the loss that is expected to be utilized. Although we have not yet filed our 2011 U.S. corporate income tax return, we are anticipating taxable income for that year of approximately $10.3 million. Therefore, the loss carryback benefit is $3.6 million, utilizing the U.S. tax rate of 35 percent. On a worldwide basis, this resulted in an overall tax benefit of $2.2 million.
Our effective tax rate is low compared to the U.S. statutory rate due to the lower statutory tax rates in the foreign jurisdictions where we are doing business and incurring income tax expense. The effective tax rate is further diluted when the overall tax benefit resulting from the U.S. tax loss is compared to our worldwide loss.
Note 8 Operating Segments
We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. The segments are organized in order to manage regional business, currency and tax related risks and opportunities. Operations included under the heading United States include corporate management, cash management, business development and financing activities performed in the United States and other countries, which do not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses are included in the United States segment and are not allocated to other operating segments:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
Segment Income (Loss) |
||||||||||||||||
Venezuela |
$ | 17,733 | $ | 14,115 | $ | 30,448 | $ | 27,329 | ||||||||
Indonesia |
(1,225 | ) | (1,596 | ) | (3,701 | ) | (3,014 | ) | ||||||||
Gabon |
(1,670 | ) | (717 | ) | (2,985 | ) | (1,059 | ) | ||||||||
Oman |
(923 | ) | (489 | ) | (6,531 | ) | (1,045 | ) | ||||||||
United States |
(4,766 | ) | (20,198 | ) | (9,359 | ) | (26,748 | ) | ||||||||
Discontinued operations (Antelope Project) |
(989 | ) | 98,665 | (1,104 | ) | 95,399 | ||||||||||
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|
|
|
|
|
|
|||||||||
Net income attributable to Harvest |
$ | 8,160 | $ | 89,780 | $ | 6,768 | $ | 90,862 | ||||||||
|
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17
June 30, 2012 |
December 31, 2011 |
|||||||
(in thousands) | ||||||||
Operating Segment Assets |
||||||||
Venezuela |
$ | 388,311 | $ | 348,802 | ||||
Indonesia |
12,862 | 16,098 | ||||||
Gabon |
56,211 | 56,926 | ||||||
Oman |
6,535 | 7,152 | ||||||
United States |
253,594 | 262,774 | ||||||
|
|
|
|
|||||
717,513 | 691,752 | |||||||
Intersegment eliminations |
(202,140 | ) | (178,705 | ) | ||||
|
|
|
|
|||||
Total Assets |
$ | 515,373 | $ | 513,047 | ||||
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Note 9 Venezuela
Share Purchase Agreement (SPA)
On June 21, 2012, we and our wholly owned subsidiary HNR Energia entered into a share purchase agreement (the SPA) with PT Pertamina (Persero), a state-owned limited liability company existing under the laws of Indonesia (Buyer). HNR Energia is a private company with limited liability under the laws of Curacao. HNR Energia owns 80 percent of the equity interest of Harvest Holding, which owns 40 percent of the equity interest of Petrodelta. Vinccler, who owns the other 20 percent equity interest of Harvest Holding, is not a party to the transaction.
Under the SPA, HNR Energia will sell all of its 80 percent interest in Harvest Holding to Buyer or a newly formed wholly owned subsidiary of Buyer for a cash purchase price of $725.0 million, subject to adjustment as described in the SPA. The sale of Harvest Holding, including its direct and indirect subsidiaries, will constitute the sale of all of our interest in Venezuela, which consists of our indirect 32 percent interest in Petrodelta and our indirect 80 percent interest in Harvest Vinccler. The effective date of the transaction is January 1, 2012. We have also executed a guarantee in Buyers favor by which we guarantee HNR Energias obligations under the SPA.
The closing of the transaction is subject to receipt of three approvals, in addition to satisfaction of other conditions standard in transactions of this type: (a) approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of the Bolivarian Republic of Venezuela (which indirectly owns the other 60 percent interest in Petrodelta); (b) approval by the Government of the Republic of Indonesia in its capacity as Buyers sole shareholder; and (c) approval by the holders of a majority of Harvests common stock. If the approval of Buyers shareholder is not obtained within five months after the date of the SPA, we may terminate the SPA. If the approval of Harvests stockholders is not obtained within 90 days after approval of Buyers shareholder is obtained, Buyer may terminate the SPA.
Contemporaneously with signing the SPA, Buyer deposited $108.8 million, or 15 percent of the $725.0 million purchase price, in escrow. The deposit constitutes liquidated damages, and if Buyer defaults, our sole remedy is to retain the deposit and any earned interest. The deposit and any earned interest will be returned to Buyer if the SPA is terminated for any other reason, including if the approval by our stockholders, Buyers shareholder or the Government of Venezuela is not obtained. The purchase deposit was received by the escrow agent on June 22, 2012.
We have agreed not to solicit other offers to acquire Harvest as a whole or the Petrodelta assets while the SPA is in effect. If we receive an unsolicited superior proposal before our stockholders have approved the transaction, we may enter into discussions with the potential purchaser. We have the right to terminate the SPA and accept a superior proposal if we first offer Buyer the opportunity to modify the transaction so that the competing offer is no longer superior and pay Buyer a break-up fee equal to $21.8 million, or three percent of the purchase price.
Under the SPA, the parties will meet during the week of September 5, 2012, to assess progress toward obtaining the required governmental approvals and satisfaction of other conditions to closing. At that time, HNR Energia or Buyer may terminate the SPA without surrender of Buyers deposit or payment of any break-up fee.
18
The SPA includes representations and warranties, tax provisions and indemnification provisions typical in transactions of this type. Reference should be made to the SPA regarding those provisions and all other provisions pertinent to a complete understanding of the transaction.
Operations
Harvest Vincclers and Petrodeltas functional and reporting currency is the U.S. Dollar. They do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars) (4.30 Bolivars per U.S. Dollar). However, during the three months ended June 30, 2012, Harvest Vinccler exchanged approximately $0.4 million (three months ended June 30, 2011: $0.1 million) through the Sistema de Transacciones con Títulos en Moneda Extranjera (SITME) and received an average exchange rate of 5.10 Bolivars (three months ended June 30, 2011: 5.21 Bolivars) per U.S. Dollar. During the six months ended June 30, 2012, Harvest Vinccler exchanged approximately $0.6 million (six months ended June 30, 2011: $0.4 million) through SITME and received an average exchange rate of 5.13 Bolivars (six months ended June 30, 2011: 5.19 Bolivars) per U.S. Dollar. Harvest Vinccler currently does not have any Bolivars pending government approval for settlement for U.S. Dollars at the official exchange rate or the SITME exchange rate. Petrodelta does not have, and has not had, any Bolivars pending government approval for settlement for U.S. Dollars at the official exchange rate or the SITME exchange rate.
The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, and other current assets. The monetary liabilities that are exposed to exchange rate fluctuations are accounts payable, accruals and other current liabilities. All monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar exchange rate. At June 30, 2012, the balances in Harvest Vincclers Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 5.0 million Bolivars and 7.2 million Bolivars, respectively. At June 30, 2012, the balances in Petrodeltas Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 227.8 million Bolivars and 2,696.5 million Bolivars, respectively.
On May 7, 2012, the Organic Law on Employment, Male and Female Workers (Labor Law) was published in the Official Gazette, the official government publication where laws, decrees, resolutions, instructions, and other regulations of general interest issued by the central government of Venezuela are published in order to make those acts valid and official. The Labor Law has 554 Articles divided into ten Titles and heavily favors employees over employers. After much analysis, Harvest Vinccler estimates that there will be little if any financial impact on its business from the Labor Law, and Petrodelta has estimated the financial impact of the Labor Law on its business to be approximately $0.2 million ($0.1 million net to our 32 percent interest).
Note 10 Investment in Equity Affiliate Petrodelta
As discussed in previous filings, PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of Petrodeltas oil production. PDVSA and its affiliates have reported shortfalls in meeting their cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in certain of its payment obligations to its contractors, including contractors engaged by PDVSA to provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise use to pay its contractors, including Harvest Vinccler. As a result, Petrodelta has experienced, and is continuing to experience, difficulty in retaining contractors who provide services for Petrodeltas operations. We cannot provide any assurance as to whether or when PDVSA will become current on its payment obligations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodeltas operations and on Petrodeltas ability to carry out its business plan.
Harvest Vinccler has advanced certain costs on behalf of Petrodelta. These costs include consultants in engineering, drilling, operations, seismic interpretation, and employee salaries and related benefits for Harvest Vinccler employees seconded into Petrodelta. Currently, we have three employees seconded into Petrodelta. Costs advanced are invoiced on a monthly basis to Petrodelta. Harvest Vinccler is considered a contractor to Petrodelta, and as such, Harvest Vinccler is also experiencing the slow payment of invoices. During the six months ended June 30, 2012, Harvest Vinccler advanced to Petrodelta $0.2 million for continuing operations costs, and Petrodelta repaid $0.1 million of the advance. Advances to equity affiliate have increased slightly to a balance of $2.5 million as of June 30, 2012. During the year ended December 31, 2011, we advanced Petrodelta $0.8 million for continuing operations costs, and Petrodelta repaid $0.1 million of the advances. Although payment is slow and the balance is increasing, payments continue to be received.
19
In April 2011, the Venezuelan government published in the Official Gazette the Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market (Windfall Profits Tax). Windfall Profits Tax is deductible for Venezuelan income tax purposes. During the three months ended June 30, 2012, Petrodelta recorded $74.7 million for Windfall Profits Tax (three months ended June 30, 2011: $65.3 million). During the six months ended June 30, 2012, Petrodelta recorded $159.4 million for Windfall Profits Tax (six months ended June 30, 2011: $92.5 million).
One section of the Windfall Profits Tax states that royalties paid to Venezuela are capped at $70 per barrel, but the cap on royalties has not been defined as being applicable to in-cash, in-kind, or both. In October 2011, Petrodelta received instructions from PDVSA that royalties, whether paid in-cash or in-kind, should be reported at $70 per barrel (royalty barrels x $70). The difference between the $70 royalty cap and the current oil price is to be reflected on the income statement as a reduction in oil sales. For the three months ended June 30, 2012 and 2011, the reduction to oil sales due to the $70 cap applied to all royalty barrels was $28.9 million and $29.4 million ($9.2 million and $9.4 million net to our 32 percent interest), respectively. For the six months ended June 30, 2012 and 2011, the reduction to oil sales due to the $70 cap applied to all royalty barrels was $67.4 million and $44.7 million ($21.6 million and $14.3 million net to our 32 percent interest), respectively.
Per our interpretation of the amended Windfall Profits Tax, the $70 cap on royalty barrels should only be applied to the 3.33 percent royalty which Petrodelta pays in cash. We have applied the $70 cap to only the 3.33 percent royalty paid in cash and the current oil sales price to the 30 percent royalty paid in-kind for the three and six months ended June 30, 2012 and 2011. With assistance from Petrodelta, we have recalculated Petrodeltas oil sales and royalties to apply the current oil price to its total barrels produced and to the 30 percent royalty paid in-kind and applied the $70 cap to the 3.33 percent royalty paid in cash for the three and six months ended June 30, 2012 and 2011. For the three months ended June 30, 2012 and 2011, net oil sales (oil sales less royalties) are slightly higher, $2.9 million and $2.9 million ($0.9 million and $0.9 million net to our 32 percent interest), respectively, and for the six months ended June 30, 2012 and 2011, net oil sales (oil sales less royalties) are slightly higher, $6.7 million and $4.5 million ($2.1 million and $1.4 million net to our 32 percent interest), respectively, under this method than the method advised by PDVSA and the method of applying the current oil price to total barrels produced and to total royalty barrels.
In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance ($9.8 million net to our 32 percent interest). Petrodelta shareholder approval of the dividend was received on March 14, 2011. Due to Petrodeltas liquidity constraints caused by PDVSAs insufficient monetary and contractual support, as of August 3, 2012, this dividend has not been received, and the timing of the receipt of this dividend is uncertain.
The sale of oil and gas by Petrodelta to PDVSA is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PDVSA Petroleo S.A. (PPSA) (the Sales Contract). When the Sales Contract was executed, Petrodelta was producing only one type of crude, Merey 16. Therefore, the Sales Contract provides for only one crude pricing formula. This formula has been approved by the Ministry of the Peoples Power for Energy and Petroleum (MENPET). The production deliveries and factors to include in the pricing formula are certified and acknowledged by MENPET.
Beginning in October 2011, MENPET determined that certain of the crude deliveries were a heavier type of crude, Boscan. The Boscan gravity and sulphur correction factors and crude pricing formula are not included in the Sales Contract. However, under the Sales Contract, PDVSA is obligated to receive all of Petrodeltas production. All production deliveries for all of Petrodelta fields have been certified by MENPET and acknowledged by PDVSA.
The pricing factors for the Boscan crude have been provided and certified by MENPET to Petrodelta. The crude pricing formula used by Petrodelta to record the revenue from the Boscan deliveries is based on the actual Boscan pricing formula published in the Official Gazette on January 11, 2007. Because the Boscan crude pricing formula is not in the Sales Contract, Petrodelta has not yet invoiced PDVSA for the El Salto production. Contract amendment discussions are underway between Petrodelta, PPSA and CVP. PDVSA will be invoiced for the El Salto production as soon as the Sales Contract is amended. At June 30, 2012, El Salto production, net of royalties, covering the production months of October 2011 through June 2012 totaled approximately 2.0 million barrels of oil (MBls) (0.6 MBls net to our 32 percent interest). The Boscan pricing formula based upon the production deliveries and factors certified by MENPET, results in a price for this production of $193.8 million ($62.0 million net to our 32 percent interest).
20
The Organic Law on Sports, Physical Activity and Physical Education (Sports Law) was published in the Official Gazette on August 23, 2011 and is effective beginning January 1, 2012. The purpose of the Sports Law is to establish the public service nature of physical education and the promotion, organization and administration of sports and physical activity. Funding of the Sports Law is by contributions made by companies or other public or private organizations that perform economic activities for profit in Venezuela. The contribution is one percent of annual net or accounting profit and is not deductible for income tax purposes. Per the Sports Law, contributions are to be calculated on an after-tax basis. However, CVP has instructed Petrodelta to calculate the contribution on a before-tax basis contrary to the Sports Law. For the three and six months ended June 30, 2012, this method of calculation overstates the liability for the Sports Law contribution by $0.5 million and $0.8 million ($0.2 million and $0.3 million net to our 32 percent interest), respectively.
Petrodeltas reporting and functional currency is the U.S. Dollar. HNR Finance owns a 40 percent interest in Petrodelta. Petrodeltas financial information is prepared in accordance with International Financial Reporting Standards (IFRS) which we have adjusted to conform to USGAAP. The two major differences between IFRS and USGAAP, for which we adjust, are deferred taxes and depletion expense.
| Deferred tax. IFRS allows the inclusion of monetary temporary differences impacted by inflationary adjustments. USGAAP does not. Net Income Equity Affiliate has been reduced by the deferred tax benefit created by the monetary temporary differences impacted by inflationary adjustments. |
| Depletion expense. Oil and gas reserves used by Petrodelta in calculating depletion expense under IFRS are provided by MENPET. MENPET reserves are not prepared using the guidance on extractive activities for oil and gas (ASC 932). At least annually, we prepare reserve reports for Petrodelta using ASC 932. Petrodelta depletion is recalculated using the USGAAP compliant reserves. |
21
All amounts through Net Income Equity Affiliate represent 100 percent of Petrodelta. Summary financial information for Petrodelta has been presented below at June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011:
Three Months Ended June 30, |
Six Months
Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Oil sales |
$ | 318,474 | $ | 282,975 | $ | 642,971 | $ | 509,588 | ||||||||
Gas sales |
762 | 679 | 1,734 | 1,405 | ||||||||||||
Royalty |
(106,097 | ) | (96,214 | ) | (213,436 | ) | (173,529 | ) | ||||||||
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|
|||||||||
213,139 | 187,440 | 431,269 | 337,464 | |||||||||||||
Expenses: |
||||||||||||||||
Operating expenses |
20,063 | 18,684 | 41,644 | 32,966 | ||||||||||||
Workovers |
3,149 | 7,021 | 9,057 | 13,496 | ||||||||||||
Depletion, depreciation and amortization |
21,718 | 13,231 | 39,640 | 25,718 | ||||||||||||
General and administrative |
4,944 | 3,782 | 9,927 | 2,852 | ||||||||||||
Windfall profits tax |
74,687 | 65,345 | 159,425 | 92,471 | ||||||||||||
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|||||||||
124,561 | 108,063 | 259,693 | 167,503 | |||||||||||||
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|
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Income from operations |
88,578 | 79,377 | 171,576 | 169,961 | ||||||||||||
Investment earnings and other |
1 | 185 | 2 | 352 | ||||||||||||
Interest expense |
(2,690 | ) | (3,146 | ) | (4,603 | ) | (4,418 | ) | ||||||||
|
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|
|
|
|||||||||
Income before income tax |
85,889 | 76,416 | 166,975 | 165,895 | ||||||||||||
Current income tax expense |
31,268 | 31,618 | 73,338 | 84,961 | ||||||||||||
Deferred income tax benefit |
(17,394 | ) | (2,513 | ) | (30,884 | ) | (28,275 | ) | ||||||||
|
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|
|
|||||||||
Net income |
72,015 | 47,311 | 124,521 | 109,209 | ||||||||||||
Adjustment to reconcile to reported net income from unconsolidated equity affiliate: |
||||||||||||||||
Deferred income tax expense |
16,258 | 26 | 28,299 | 17,897 | ||||||||||||
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|
|||||||||
Net income equity affiliate |
55,757 | 47,285 | 96,222 | 91,312 | ||||||||||||
Equity interest in unconsolidated equity affiliate |
40 | % | 40 | % | 40 | % | 40 | % | ||||||||
|
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|
|
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|
|
|
|||||||||
Income before amortization of excess basis in equity affiliate |
22,303 | 18,914 | 38,489 | 36,525 | ||||||||||||
Conform depletion expense to USGAAP |
896 | (452 | ) | 1,957 | (873 | ) | ||||||||||
Amortization of excess basis in equity affiliate |
(538 | ) | (216 | ) | (1,027 | ) | (297 | ) | ||||||||
|
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|
|
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|
|||||||||
Net income from unconsolidated equity affiliate |
$ | 22,661 | $ | 18,246 | $ | 39,419 | $ | 35,355 | ||||||||
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|
|
|
June 30, 2012 |
December 31, 2011 |
|||||||
(in thousands) | ||||||||
Current assets |
$ | 1,158,365 | $ | 979,868 | ||||
Property and equipment |
433,137 | 409,941 | ||||||
Other assets |
175,656 | 146,499 | ||||||
Current liabilities |
910,079 | 808,955 | ||||||
Other liabilities |
58,278 | 53,073 | ||||||
Net equity |
798,801 | 674,280 |
Note 11 Indonesia
Operational activities during the six months ended June 30, 2012 included rigging down operations of the drilling rig on the KD-1 location and review of geological and geophysical data obtained from the drilling of the Lariang-1 (LG-1) and KD-1 wells. Based on the multiple oil and gas shows encountered in both LG-1 and KD-1, we are working on an exploration program targeting the Pliocene and Miocene sands encountered in the previous two wells. We have completed remapping of both the Lariang and Karama Basins with eight prospects in the Lariang Basin and five prospects in the Karama Basin having been identified in the Pliocene, Middle-Late Miocene and Eocene sands. The initial exploration term of the Budong PSC expires on January 16, 2013. We will be requesting a four year extension of the initial exploration period to enable us to complete exploration activities on the Budong PSC.
22
Drilling costs for the KD-1well incurred through December 31, 2011 of $26.0 million were expensed to dry hole costs as of December 31, 2011. The remaining costs to plug and abandon the KD-1 and KD-1ST, the first sidetrack to the KD-1, of $0.7 million have been expensed to dry hole costs as of June 30, 2012.
The remaining work commitment for the current exploration phase on the Budong PSC is for geological and geophysical work to be completed during 2012 at a minimum of $0.5 million ($0.3 million net to our 64.51 percent cost sharing interest). However, per the Budong PSC, excessive work done during any period can be offset against another period, so although there is a work commitment in the Budong PSC to perform the geological and geophysical work, we have exceeded this requirement. BPMIGAS has stated that that we have satisfied all work commitments for the current exploration phase of the Budong PSC.
The Budong PSC represents $7.6 million of unproved oil and gas properties on our June 30, 2012 balance sheet (December 31, 2011: $6.8 million).
Note 12 Gabon
The Dussafu PSC partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered into the second exploration phase of the Dussafu PSC with an effective date of May 28, 2007. In order to complete drilling activities of the Dussafu Ruche Marin-A (DRM-1) exploratory well, in March 2011, the Direction Generale Des Hydrocarbures (DGH) approved a one year extension to May 27, 2012 of the second exploration phase. We do not have any remaining work commitments for the second exploration phase. On April 27, 2012, we submitted notification to the DGH of our intent to enter the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012. The DGH has agreed to lengthen the third exploration phase to four years until May 27, 2016. The third exploration phase of the Dussafu PSC has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period. We paid a $1.0 million bonus ($0.7 million net to our 66.667 percent interest) to enter the third exploration phase.
Operational activities during the six months ended June 30, 2012 included processing of the 545 square kilometers of seismic which was acquired in the fourth quarter of 2011. The 3-D Pre-Stack Time Migration (PSTM) was completed in July 2012. Well planning is in progress to drill an exploration well in the fourth quarter of 2012 on the Tortue prospect. See Note 16 Subsequent Events.
The Dussafu PSC represents $53.3 million of unproved oil and gas properties on our June 30, 2012 balance sheet (December 31, 2011: $50.4 million).
Note 13 Oman
In 2009, we signed an EPSA with Oman for the Block 64 EPSA. The Block 64 EPSA has a minimum work obligation to reprocess seismic and drill two exploration wells. The parties to the Block 64 EPSA acknowledged that $22.0 million was indicative of the costs needed to complete the work program during the three-year initial period which expires in May 2013. As of February 29, 2012, we had expended more than $22.0 million and completed the minimum work obligations. We do not have any remaining work commitments for the current exploration phase of the Block 64 EPSA.
Operational activities during the six months ended June 30, 2012 include completion of the drilling of the Al Ghubar North-1 (AGN-1), the second exploratory well on the Block 64 EPSA which spud December 21, 2011. On February 6, 2012, the AGN-1 was plugged and abandoned with gas shows in the Permian Khuff Formation. Drilling costs incurred through December 31, 2011 of $2.8 million were expensed to dry hole costs as of December 31, 2011. The remaining costs to plug and abandon the AGN-1 of $4.9 million have been expensed to dry hole costs as of June 30, 2012. Work continues on Block 64 EPSA to determine if other drilling opportunities exist.
The Block 64 EPSA represents $6.1 million of unproved oil and gas properties on our June 30, 2012 balance sheet (December 31, 2011: $5.3 million).
23
Note 14 Related Party Transactions
Dividends declared and paid by Petrodelta are paid to HNR Finance. HNR Finance must declare a dividend in order for the partners, Harvest and Vinccler, to receive their respective shares of Petrodeltas dividend. Petrodelta has declared two dividends, totaling $33.0 million, which have been received by HNR Finance and one dividend, totaling $12.2 million, which has not yet been received by HNR Finance. HNR Finance has not distributed these dividends to the partners. At June 30, 2012, Vincclers share of the undistributed dividends is $9.0 million.
Note 15 Stock-Based Compensation
Stock options for 46,900 shares were exercised in the six months ended June 30, 2012 resulting in cash proceeds of $0.3 million. Stock options for 41,666 shares were exercised in the six months ended June 30, 2011 resulting in cash proceeds of $0.4 million.
On March 30, 2012, we announced that we had entered into the agreement with KCA relating to an ATM offering of shares of our common stock having an aggregate sales price of up to $75.0 million. Under the terms of the Agreement, we may offer and sell shares of our common stock by means of transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated rates. We are unable to access the ATM during blackout periods or when we are in possession of material information which has not been made public. No shares were sold under the ATM during the six months ended June 30, 2012.
Stock Appreciation Rights (SARs)
On May 18, 2012, we issued 0.7 million SARs to employees of Harvest at $5.12 and vest ratably over three years. The vesting of the SARs is dependent upon the employees continued service to Harvest.
Restricted Stock Units (RSUs)
On May 18, 2012, we issued 0.3 million RSUs to employees of Harvest. The RSUs vest after three years. The vesting of the RSUs is dependent upon the employees continued service to Harvest.
On May 18, 2012, we issued 0.1 million RSUs to outside directors of Harvest. The RSUs vest after one year. The vesting of the RSUs is dependent upon the directors continued service to Harvest.
Note 16 Subsequent Event
On July 17, 2012, we signed a contract for the Scarabeo 3 semi-submersible drilling rig. Mobilization of the drilling rig to the well site in Gabon is scheduled to commence the beginning of October 2012. In the event that we elect to terminate the contract prior to the rigs arrival on-site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages.
We conducted our subsequent events review up through the date of the issuance of this Quarterly Report on Form 10-Q.
24
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Harvest Natural Resources, Inc. (Harvest or the Company) cautions that any forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995, as amended (the PSLRA) contained in this report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words budget, forecast, expect, believes, goals, projects, plans, anticipates, estimates, should, could, assume and similar expressions are intended to identify forward-looking statements. In accordance with the provisions of the PSLRA, we caution you that important factors could cause actual results to differ materially from those in the forward-looking statements. Such factors include our concentration of operations in Venezuela, the political and economic risks associated with international operations (particularly those in Venezuela), the anticipated future development costs for undeveloped reserves, drilling risks, the risk that actual results may vary considerably from reserve estimates, the dependence upon the abilities and continued participation of certain of our key employees, the risks normally incident to the exploration, operation and development of oil and natural gas properties, risks incumbent to being a noncontrolling interest shareholder in a corporation, the permitting and the drilling of oil and natural gas wells, the availability of materials and supplies necessary to projects and operations, the price for oil and natural gas and related financial derivatives, changes in interest rates, the Companys ability to acquire oil and natural gas properties that meet its objectives, availability and cost of drilling rigs and seismic crews, overall economic conditions, political stability, civil unrest, acts of terrorism, currency and exchange risks, currency controls, changes in existing or potential tariffs, duties or quotas, changes in taxes, changes in governmental policy, lack of liquidity, availability of sufficient financing, estimates of amounts and timing of sales of securities, closing of the Share Purchase Agreement, changes in weather conditions, and ability to hire, retain and train management and personnel. A discussion of these factors is included in our Annual Report on Form 10-K for the year ended December 31, 2011, which includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q.
Executive Summary
Harvest Natural Resources, Inc. is a petroleum exploration and production company incorporated under Delaware law in 1989. Our focus is on acquiring exploration, development and producing properties in geological basins with proven active hydrocarbon systems. Our experienced technical, business development and operating personnel have identified low entry cost exploration opportunities in areas with large hydrocarbon resource potential. We operate from our Houston, Texas headquarters. We also have regional/technical offices in the United Kingdom and Singapore, and small field offices in Jakarta, Republic of Indonesia (Indonesia); Muscat, Sultanate of Oman (Oman); and Port Gentil, Republic of Gabon (Gabon) to support field operations in those areas.
We have acquired and developed significant interests in the Bolivarian Republic of Venezuela (Venezuela). Our Venezuelan interests are owned through Harvest-Vinccler Dutch Holding, B.V., a Dutch private company with limited liability (Harvest Holding). Our ownership of Harvest Holding is through HNR Energia, B.V. (HNR Energia) in which we have a direct controlling interest. Through HNR Energia, we indirectly own 80 percent of Harvest Holding and our partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (Vinccler), indirectly owns the remaining 20 percent interest of Harvest Holding. Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40 percent of Petrodelta, S.A. (Petrodelta). As we indirectly own 80 percent of Harvest Holding, we indirectly own a net 32 percent interest in Petrodelta, and Vinccler indirectly owns eight percent. Corporación Venezolana del Petroleo S.A. (CVP) owns the remaining 60 percent of Petrodelta. Harvest Holding has a direct controlling interest in Harvest Vinccler S.C.A. (Harvest Vinccler). Harvest Vincclers main business purposes are to assist us in the management of Petrodelta and in negotiations with Petroleos de Venezuela S.A. (PDVSA). We do not have a business relationship with Vinccler outside of Venezuela.
Through the pursuit of technically-based strategies, we are building a portfolio of exploration prospects to complement the production, development and exploration prospects we hold in Venezuela. In addition to our interests in Venezuela, we hold exploration acreage mainly onshore West Sulawesi in Indonesia; offshore of Gabon; onshore in Oman; and offshore of the Peoples Republic of China (China).
From time to time we learn of possible third party interests in acquiring ownership in certain assets within our property portfolio. We evaluate these potential opportunities taking into consideration our overall property mix, our operational and liquidity requirements, our strategic focus and our commitment to long-term shareholder value.
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During the last two years, we have been exploring a broad range of strategic alternatives for enhancing stockholder value. On September 24, 2010, we retained Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch) to provide advisory services to assist us in exploring those strategic alternatives, including, among others, a sale of assets. Since that time, we have received several indications of interest from third parties, provided due diligence materials to third parties under confidentiality agreements and had preliminary discussions with third parties regarding a sale of our interests in Venezuela, but had not determined that any of the transactions discussed were in our best interests.
On March 6, 2012, we announced that we had commenced exclusive negotiations with a third party for the possible sale of our 32 percent interest in Petrodelta.
Share Purchase Agreement (SPA)
On June 21, 2012, we and our wholly owned subsidiary HNR Energia entered into a share purchase agreement (the SPA) with PT Pertamina (Persero), a state-owned limited liability company existing under the laws of Indonesia (Buyer). HNR Energia is a private company with limited liability under the laws of Curacao. HNR Energia owns 80 percent of the equity interest of Harvest Holding, which owns 40 percent of the equity interest of Petrodelta. Vinccler, who owns the other 20 percent equity interest of Harvest Holding, is not a party to the transaction.
Under the SPA, HNR Energia will sell all of its 80 percent interest in Harvest Holding to Buyer or a newly formed wholly owned subsidiary of Buyer for a cash purchase price of $725.0 million, subject to adjustment as described in the SPA. The sale of Harvest Holding, including its direct and indirect subsidiaries, will constitute the sale of all of our interest in Venezuela, which consists of our indirect 32 percent interest in Petrodelta and our indirect 80 percent interest in Harvest Vinccler. The effective date of the transaction is January 1, 2012. We have also executed a guarantee in Buyers favor by which we guarantee HNR Energias obligations under the SPA.
The closing of the transaction is subject to receipt of three approvals, in addition to satisfaction of other conditions standard in transactions of this type: (a) approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of the Bolivarian Republic of Venezuela (which indirectly owns the other 60 percent interest in Petrodelta); (b) approval by the Government of the Republic of Indonesia in its capacity as Buyers sole shareholder; and (c) approval by the holders of a majority of Harvests common stock. If the approval of Buyers shareholder is not obtained within five months after the date of the SPA, we may terminate the SPA. If the approval of Harvests stockholders is not obtained within 90 days after approval of Buyers shareholder is obtained, Buyer may terminate the SPA.
Contemporaneously with signing the SPA, Buyer deposited $108.8 million, or 15 percent of the $725.0 million purchase price, in escrow. The deposit constitutes liquidated damages, and if Buyer defaults, our sole remedy is to retain the deposit and any earned interest. The deposit and any earned interest will be returned to Buyer if the SPA is terminated for any other reason, including if the approval by our stockholders, Buyers shareholder or the Government of Venezuela is not obtained. The purchase deposit was received by the escrow agent on June 22, 2012.
We have agreed not to solicit other offers to acquire Harvest as a whole or the Petrodelta assets while the SPA is in effect. If we receive an unsolicited superior proposal before our stockholders have approved the transaction, we may enter into discussions with the potential purchaser. We have the right to terminate the SPA and accept a superior proposal if we first offer Buyer the opportunity to modify the transaction so that the competing offer is no longer superior and pay Buyer a break-up fee equal to $21.8 million, or three percent of the purchase price.
Under the SPA, the parties will meet during the week of September 5, 2012, to assess progress toward obtaining the required governmental approvals and satisfaction of other conditions to closing. At that time, HNR Energia or Buyer may terminate the SPA without surrender of Buyers deposit or payment of any break-up fee.
The SPA includes representations and warranties, tax provisions and indemnification provisions typical in transactions of this type. Reference should be made to the SPA regarding those provisions and all other provisions pertinent to a complete understanding of the transaction.
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Venezuela
Harvest Vincclers and Petrodeltas functional and reporting currency is the United States Dollar (U.S. Dollar). They do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (Bolivars) (4.30 Bolivars per U.S. Dollar). However, during the three months ended June 30, 2012, Harvest Vinccler exchanged approximately $0.4 million (three months ended June 30, 2011: $0.1 million) through the Sistema de Transacciones con Títulos en Moneda Extranjera (SITME) and received an average exchange rate of 5.10 Bolivars (three months ended June 30, 2011: 5.21 Bolivars) per U.S. Dollar. During the six months ended June 30, 2012, Harvest Vinccler exchanged approximately $0.6 million (six months ended June 30, 2011: $0.4 million) through SITME and received an average exchange rate of 5.13 Bolivars (six months ended June 30, 2011: 5.19 Bolivars) per U.S. Dollar. Harvest Vinccler currently does not have any Bolivars pending government approval for settlement for U.S. Dollars at the official exchange rate or the SITME exchange rate. Petrodelta does not have, and has not had, any Bolivars pending government approval for settlement for U.S. Dollars at the official exchange rate or the SITME exchange rate.
The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, expenses and other current assets. The monetary liabilities that are exposed to exchange rate fluctuations are accounts payable, accruals and other current liabilities. All monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar exchange rate. At June 30, 2012, the balances in Harvest Vincclers Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 5.0 million Bolivars and 7.2 million Bolivars, respectively. At June 30, 2012, the balances in Petrodeltas Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 227.8 million Bolivars and 2,696.5 million Bolivars, respectively.
On May 7, 2012, the Organic Law on Employment, Male and Female Workers (Labor Law) was published in the Official Gazette, the official government publication where laws, decrees, resolutions, instructions, and other regulations of general interest issued by the central government of Venezuela are published in order to make those acts valid and official. The Labor Law has 554 Articles divided into ten Titles and heavily favors employees over employers. After much analysis, Harvest Vinccler estimates that there will be little if any financial impact on its business from the Labor Law, and Petrodelta has estimated the financial impact of the Labor Law on its business to be approximately $0.2 million ($0.1 million net to our 32 percent interest).
Petrodelta
Petrodeltas shareholders intend that the company be self-funding and rely on internally-generated cash flow to fund operations. Petrodeltas 2012 capital budget, which has yet to be endorsed by Petrodeltas board, is expected to be approximately $300 million with a significant portion of that total related to infrastructure costs to support the further development of the Temblador and El Salto fields.
Petrodelta began 2012 with three drilling rigs, but PDVSA relocated one rig to another operation. Currently, Petrodelta is operating two drilling rigs and one workover rig and is continuing with infrastructure enhancement projects in the El Salto and Temblador fields. Plans are underway to build a pipeline connection between the Isleño field and the main production facility at Uracoa as Isleño production is currently being trucked to Uracoa. Petrodelta has been informed by PDVSA that a new drilling rig will be arriving in the third quarter of 2012, to replace the rig that was relocated. The rig is currently rigging up in the Isleño field. It is expected that the drilling rig will be operational in August 2012. On May 1, 2012, Petrodelta was notified that it could be receiving two additional new rigs during the third quarter of 2012 which would result in an expected five working rigs by year end 2012.
During the six months ended June 30, 2012, Petrodelta drilled and completed six development wells, delivered approximately 6.3 million barrels (MBls) of oil and 1.1 billion cubic feet (Bcf) of natural gas, averaging 35,633 barrels of oil equivalent (BOE) per day. During the six months ended June 30, 2011, Petrodelta drilled and completed eight development wells, one successful appraisal well and one water injector well, delivered approximately 5.4 MBls of oil and 0.9 Bcf of natural gas, averaging 30,481 per day.
Certain operating statistics for the three and six months ended June 30, 2012 and 2011 for the Petrodelta fields operated by Petrodelta are set forth below. This information is provided at 100 percent. This information may not be representative of future results.
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Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Thousand barrels of oil sold |
3,314 | 2,782 | 6,298 | 5,365 | ||||||||||||
Million cubic feet of gas sold |
494 | 440 | 1,124 | 910 | ||||||||||||
Total thousand barrels of oil equivalent |
3,396 | 2,855 | 6,485 | 5,517 | ||||||||||||
Average price per barrel |
$ | 96.10 | $ | 101.72 | $ | 102.09 | $ | 94.98 | ||||||||
Average price per thousand cubic feet |
$ | 1.54 | $ | 1.54 | $ | 1.54 | $ | 1.54 | ||||||||
Cash operating costs ($millions) |
$ | 20.1 | $ | 18.7 | $ | 41.6 | $ | 33.0 | ||||||||
Capital expenditures ($millions) |
$ | 44.5 | $ | 32.1 | $ | 70.6 | $ | 66.5 |
Under Petrodeltas Contract for Sale and Purchase of Hydrocarbons with PDVSA Petroleo S.A. (PPSA), a wholly owned subsidiary of PDVSA, (the Sales Contract), crude oil delivered from the Petrodelta fields to PDVSA is priced with reference to Merey 16 published prices, weighted for different markets and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Merey 16 published prices are quoted and sold in U.S. Dollars. Natural gas delivered from the Petrodelta Fields to PDVSA is priced at $1.54 per thousand cubic feet. PPSA is obligated to make payment to Petrodelta in U.S. Dollars in the case of payment for crude oil and natural gas liquids delivered. Natural gas deliveries are paid in Bolivars, but the pricing for natural gas is referenced to the U.S. Dollar.
The official price formula applied to the Merey 16 by the Ministry of the Peoples Power for Energy and Petroleum (MENPET) is used for the sales of Petrodelta crude oil with quality close to 16 degrees API to represent actual quality delivered.
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, production from the Petrodelta fields, except the El Salto field, flows through Petrodeltas pipelines into PDVSAs EPT-1 storage facility. Prior to October 2011, El Salto production was trucked to the EPT-1 storage facility and combined with the other Petrodelta fields production. Beginning October 2011, production from the El Salto field flows through PDVSAs EPM-1 transfer point at PDVSA Morichal. Currently, the El Salto production flows through COMOR transfer point, a new transfer point for Petrodelta, at PDVSA Morichal.
When the Sales Contract was executed, Petrodelta was producing only one type of crude, Merey 16. Therefore, the Sales Contract provides for only one crude pricing formula. This formula has been approved by MENPET. The production deliveries and factors to include in the pricing formula are certified and acknowledged by MENPET.
Beginning in October 2011, MENPET determined that Petrodeltas production flowing through the COMOR transfer point was a heavier type of crude, Boscan. The Boscan gravity and sulphur correction factors and crude pricing formula are not included in the Sales Contract. However, under the Sales Contract, PDVSA is obligated to receive all of Petrodeltas production. All production deliveries for all of Petrodelta fields have been certified by MENPET and acknowledged by PDVSA.
The pricing factors for the Boscan crude have been provided and certified by MENPET to Petrodelta. The crude pricing formula used by Petrodelta to record the revenue from the Boscan deliveries is based on the actual Boscan pricing formula published in the Official Gazette on January 11, 2007. Because the Boscan crude pricing formula is not in the Sales Contract, Petrodelta has not yet invoiced PDVSA for the El Salto production. Contract amendment discussions are underway between Petrodelta, PPSA and CVP. PDVSA will be invoiced for the El Salto production as soon as the Sales Contract is amended. At June 30, 2012, El Salto production, net of royalties, covering the production months of October 2011 through June 2012 totaled approximately 2.0 million barrels of oil (MBls) (0.6 MBls net to our 32 percent interest). The Boscan pricing formula based upon the production deliveries and factors certified by MENPET, results in a price for this production of $193.8 million ($62.0 million net to our 32 percent interest).
Due to PDVSAs liquidity constraints, PDVSA has not been providing the necessary monetary and contractual support required by Petrodelta. Continued underinvestment in the development plan may lead to continued under-performance. As discussed in previous filings, PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of Petrodeltas oil production. PDVSA and its affiliates have reported shortfalls in meeting their cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in certain of its payment obligations to its contractors, including contractors engaged by PDVSA to provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise use to pay its contractors, including Harvest Vinccler. As a result, Petrodelta has experienced, and is continuing to experience, difficulty in retaining contractors who provide services for Petrodeltas operations. We cannot provide any assurance as to whether or when PDVSA will become current on its payment obligations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodeltas operations and on Petrodeltas ability to carry out its business plan.
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Harvest Vinccler has advanced certain costs on behalf of Petrodelta. These costs include consultants in engineering, drilling, operations, seismic interpretation, and employee salaries and related benefits for Harvest Vinccler employees seconded into Petrodelta. Currently, we have three employees seconded into Petrodelta. Costs advanced are invoiced on a monthly basis to Petrodelta. Harvest Vinccler is considered a contractor to Petrodelta, and as such, Harvest Vinccler is also experiencing the slow payment of invoices. During the six months ended June 30, 2012, Harvest Vinccler advanced to Petrodelta $0.2 million for continuing operations costs, and Petrodelta repaid $0.1 million of the advance. Advances to equity affiliate have increased slightly to a balance of $2.5 million as of June 30, 2012. During the year ended December 31, 2011, we advanced Petrodelta $0.8 million for continuing operations costs, and Petrodelta repaid $0.1 million of the advances. Although payment is slow and the balance is increasing, payments continue to be received.
In April 2011, the Venezuelan government published in the Official Gazette the Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market (Windfall Profits Tax). Windfall Profits Tax is deductible for Venezuelan income tax purposes. During the three months ended June 30, 2012, Petrodelta recorded $74.7 million for Windfall Profits Tax (three months ended June 30, 2011: $65.3 million). During the six months ended June 30, 2012, Petrodelta recorded $159.4 million for Windfall Profits Tax (six months ended June 30, 2011: $92.5 million).
One section of the Windfall Profits Tax states that royalties paid to Venezuela are capped at $70 per barrel, but the cap on royalties has not been defined as being applicable to in-cash, in-kind, or both. In October 2011, Petrodelta received instructions from PDVSA that royalties, whether paid in-cash or in-kind, should be reported at $70 per barrel (royalty barrels x $70). The difference between the $70 royalty cap and the current oil price is to be reflected on the income statement as a reduction in oil sales. For the three months ended June 30, 2012 and 2011, the reduction to oil sales due to the $70 cap applied to all royalty barrels was $28.9 million and $29.4 million ($9.2 million and $9.4 million net to our 32 percent interest), respectively. For the six months ended June 30, 2012 and 2011, the reduction to oil sales due to the $70 cap applied to all royalty barrels was $67.4 million and $44.7 million ($21.6 million and $14.3 million net to our 32 percent interest), respectively.
Per our interpretation of the amended Windfall Profits Tax, the $70 cap on royalty barrels should only be applied to the 3.33 percent royalty which Petrodelta pays in cash. We have applied the $70 cap to only the 3.33 percent royalty paid in cash and the current oil sales price to the 30 percent royalty paid in-kind for the three and six months ended June 30, 2012 and 2011. With assistance from Petrodelta, we have recalculated Petrodeltas oil sales and royalties to apply the current oil price to its total barrels produced and to the 30 percent royalty paid in-kind and applied the $70 cap to the 3.33 percent royalty paid in cash for the three and six months ended June 30, 2012 and 2011. For the three months ended June 30, 2012 and 2011, net oil sales (oil sales less royalties) are slightly higher, $2.9 million and $2.9 million ($0.9 million and $0.9 million net to our 32 percent interest), respectively, and for the six months ended June 30, 2012 and 2011, net oil sales (oil sales less royalties) are slightly higher, $6.7 million and $4.5 million ($2.1 million and $1.4 million net to our 32 percent interest), respectively, under this method than the method advised by PDVSA and the method of applying the current oil price to total barrels produced and to total royalty barrels.
In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance, B.V. (HNR Finance), a wholly owned subsidiary of Harvest Holdings, ($9.8 million net to our 32 percent interest). Petrodelta shareholder approval of the dividend was received on March 14, 2011. Due to Petrodeltas liquidity constraints caused by PDVSAs insufficient monetary and contractual support, as of August 3, 2012, this dividend has not been received, and the timing of the receipt of this dividend is uncertain.
The Organic Law on Sports, Physical Activity and Physical Education (Sports Law) was published in the Official Gazette on August 23, 2011 and is effective beginning January 1, 2012. The purpose of the Sports Law is to establish the public service nature of physical education and the promotion, organization and administration of sports and physical activity. Funding of the Sports Law is by contributions made by companies or other public or private organizations that perform economic activities for profit in Venezuela. The contribution is one percent of annual net or accounting profit and is not deductible for income tax purposes. Per the Sports Law, contributions are to be calculated on an after-tax basis. However, CVP has instructed Petrodelta to calculate the contribution on a before-tax basis contrary to the Sports Law. For the three and six months ended June 30, 2012, this method of calculation overstates the liability for the Sports Law contribution by $0.5 million and $0.8 million ($0.2 million and $0.3 million net to our 32 percent interest), respectively.
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Budong-Budong Project, Indonesia
Operational activities during the six months ended June 30, 2012 included rigging down operations of the drilling rig on the Karama-1 (KD-1) location and review of geological and geophysical data obtained from the drilling of the Lariang-1 (LG-1) and KD-1 wells. Based on the multiple oil and gas shows encountered in both LG-1 and KD-1, we are working on an exploration program targeting the Pliocene and Miocene sands encountered in the previous two wells. We have completed remapping of both the Lariang and Karama Basins with eight prospects in the Lariang Basin and five prospects in the Karama Basin having been identified in the Pliocene, Middle-Late Miocene and Eocene sands. The initial exploration term of the Budong-Budong Production Sharing Contract (Budong PSC) expires on January 16, 2013. We will be requesting a four year extension of the initial exploration period to enable us to complete exploration activities on the Budong PSC.
Drilling costs for the KD-1well incurred through December 31, 2011 of $26.0 million were expensed to dry hole costs as of December 31, 2011. The remaining costs to plug and abandon the KD-1 and KD-1ST, the first sidetrack to the KD-1, of $0.7 million have been expensed to dry hole costs as of June 30, 2012.
The remaining work commitment for the current exploration phase on the Budong PSC is for geological and geophysical work to be completed during 2012 at a minimum of $0.5 million ($0.3 million net to our 64.51 percent cost sharing interest). However, per the Budong PSC, excessive work done during any period can be offset against another period, so although there is a work commitment in the Budong PSC to perform the geological and geophysical work, we have exceeded this requirement. BPMIGAS, Indonesias oil and gas regulatory authority, has stated that that we have satisfied all work commitments for the current exploration phase of the Budong PSC.
During the six months ended June 30, 2012, we had cash capital expenditures of $6.6 million for plugging and abandonment costs.
Dussafu Project - Gabon
The Dussafu Marin Permit (Dussafu PSC) partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources, entered into the second exploration phase of the Dussafu PSC with an effective date of May 28, 2007. In order to complete drilling activities of the Dussafu Ruche Marin-A (DRM-1) exploratory well, in March 2011, the Direction Generale Des Hydrocarbures (DGH) approved a one year extension to May 27, 2012 of the second exploration phase. We do not have any remaining work commitments for the second exploration phase. On April 27, 2012, we submitted notification to the DGH of our intent to enter the third exploration phase of the Dussafu PSC with an effective date of May 28, 2012. The DGH has agreed to lengthen the third exploration phase to four years until May 27, 2016. The third exploration phase of the Dussafu PSC has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period. We paid a $1.0 million bonus ($0.7 million net to our 66.667 percent interest) to enter the third exploration phase.
Operational activities during the six months ended June 30, 2012 included processing of the 545 square kilometers of seismic which was acquired in the fourth quarter of 2011 and well planning. The 3-D Pre-Stack Time Migration (PSTM) was completed in July 2012. Pre-Stack Depth processing and reprocessing of the 2005 Inboard 3-D seismic of approximately 1,300 square kilometers commenced in June 2012. Well planning is in progress to drill an exploration well in the fourth quarter of 2012 on the Tortue prospect to target stacked pre-salt Gamba and Dentale reservoirs as well as a secondary post-salt Madiela clastic reservoir. On July 17, 2012, we signed a contract for the Scarabeo 3 semi-submersible drilling rig. Mobilization of the drilling rig to the well site in Gabon is scheduled to commence the beginning of October 2012. In the event that we elect to terminate the contract prior to the rigs arrival on - site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages.
During the six months ended June 30, 2012, we had cash capital expenditures of $1.8 million for seismic processing.
Block 64 EPSA Project - Oman
All work commitments on the Al Ghubar/Qarn Alam License (Block 64 EPSA) have been completed and post well studies are being conducted. A one year extension for the Block 64 EPSA was granted until May 2013, at which time we must decide whether to commit to the Second Phase of the Block 64 EPSA. The Second Phase exploration phase of the Block 64 EPSA has an $11.0 million work commitment over a three year period.
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Operational activities during the six months ended June 30, 2012 include completion of the drilling of the Al Ghubar North-1 (AGN-1), the second exploratory well on the Block 64 EPSA which spud December 21, 2011. On February 6, 2012, the AGN-1 was plugged and abandoned with gas shows in the Permian Khuff Formation. Drilling costs incurred through December 31, 2011 of $2.8 million were expensed to dry hole costs as of December 31, 2011. The remaining costs to plug and abandon the AGN-1 of $4.9 million have been expensed to dry hole costs as of June 30, 2012. Work continues on Block 64 EPSA to determine if other drilling opportunities exist.
During the six months ended June 30, 2012, we incurred $5.8 million for drilling and plugging and abandonment costs.
Risks, Uncertainties, Capital Resources and Liquidity
The oil and gas industry is a highly capital intensive and cyclical business with unique operating and financial risks. There are a number of variables and risks related to our exploration projects that could significantly utilize our cash balances, and affect our capital resources and liquidity.
The environments in which we operate are often difficult and the ability to operate successfully depends on a number of factors including our ability to control the pace of development, our ability to apply best practices in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of certain countries are not mature and their reliability can be uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control.
Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States.
There are also a number of variables and risks related to our minority equity investment in Petrodelta that could significantly utilize our cash balances, and affect our capital resources and liquidity. Petrodeltas capital commitments are determined by its business plan, and Petrodeltas capital commitments are expected to be funded by internally generated cash flow. The total capital required to develop the fields in Venezuela may exceed Petrodeltas available cash and financing capabilities, and there may be operational or contractual consequences due to this inability. Petrodeltas ability to fully develop the fields in Venezuela will require a significant investment. Due to PDVSAs liquidity constraints, PDVSA has not been providing the necessary monetary and contractual support required by Petrodelta. If we are called upon to fund our share of Petrodeltas operations, our failure to do so could be considered a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta.
Petrodelta also has a material impact on our results of operations for any quarterly or annual reporting period. See Note 10 Investment in Equity Affiliate Petrodelta. Petrodelta operates under a business plan, the success of which relies heavily on the market price of oil. To the extent that market prices of oil decline, the business plan, and thus our equity investment and/or operations and/or profitability, could be adversely affected.
Operations in Venezuela are subject to various risks inherent in foreign operations. It is possible the legal or fiscal framework for Petrodelta could change and the Venezuela government may not honor its commitments. Our ability to implement or influence Petrodeltas business plan, assure quality control and set the timing and pace of development could also be adversely impacted. No assurance can be provided that events beyond our control will not adversely affect the value of our minority investment in Petrodelta.
On June 21, 2012, we and our wholly owned subsidiary HNR Energia entered into a share purchase agreement (the SPA) with PT Pertamina (Persero), a state-owned limited liability company existing under the laws of Indonesia (Buyer) for the sale of our interest in Venezuela for a cash purchase price of $725.0 million. See Note 9 Venezuela, Share Purchase Agreement. We cannot assure you that the SPA will be consummated. The consummation of the SPA is subject to the satisfaction or waiver of a number of conditions, including, among others, the requirement that approvals are received from the Government of the Bolivarian Republic of Venezuela, the Government of the Republic of Indonesia, and the majority of our stockholders; requirements with respect to the
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accuracy of the representations and warranties of the parties to the SPA; and requirements with respect to the satisfaction or waiver of the covenants and obligations of the parties to the SPA. In addition, the SPA may be terminated in certain circumstances under the terms of the SPA. We cannot guarantee that the parties to the SPA will be able to meet all of the closing conditions of the SPA. If we are unable to meet all of the closing conditions, the Buyer would not be obligated to close the SPA. We also cannot be sure that circumstances, such as a material adverse effect, will not arise that would also allow the Buyer to terminate the SPA prior to closing. If the SPA does not close, our Board of Directors will be forced to evaluate other alternatives, which may be less favorable to us than the SPA. There can be no assurances as to whether this transaction will close or whether we will receive any cash proceeds related to the SPA.
Our cash is being used to fund oil and gas exploration projects, debt, interest, and to a lesser extent general and administrative costs. We require capital principally to fund the exploration and development of new oil and gas properties. As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. We do not have any remaining work commitments for the current exploration phases of the Budong PSC or Block 64 EPSA. We entered the third exploration phase of the Dussafu PSC on May 28, 2012. The third exploration phase of the Dussafu PSC has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period (see Note 12 Gabon). This work commitment is non-discretionary; however, we do have the ability to control the pace of expenditures. On July 17, 2012, we signed a contract for a semi-submersible drilling rig to drill an exploration well on the Gabon PSC. In the event that we elect to terminate the contract prior to the rigs arrival on-site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages (see Note 16 Subsequent Events).
Historically, our primary ongoing source of cash has been dividends from Petrodelta and the sale of oil and gas properties. On May 17, 2011, we closed the transaction to sell the Antelope Project. The transaction had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflected increases to the purchase price for customary adjustments and deductions for transaction related costs (see Note 4 Dispositions).
Between Petrodeltas formation in October 2007 and June 2010, Petrodelta declared and paid dividends of $105.5 million to HNR Finance, B.V. (HNR Finance), a wholly owned subsidiary of Harvest Holding ($84.4 million net to our 32 percent interest). In November 2010, Petrodeltas board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance ($9.8 million net to our 32 percent interest). Due to Petrodeltas liquidity constraints caused by PDVSAs insufficient monetary and contractual support, this dividend has not yet been received, although it is due and payable. There is uncertainty of the timing of receipt of the dividend receivable from Petrodelta and whether Petrodelta will declare or pay additional dividends in 2012 or 2013. See Note 14 Related Party Transactions for a discussion of our obligations to our non-controlling interest holder, Vinccler, for any dividend received from Petrodelta. Also, any receipt of dividends while the SPA is active would become a purchase price adjustment under the SPA. We have and will continue to monitor our investment in Petrodelta. Should the dividend receivable not be collected timely, or facts and circumstances surrounding our investment change, our results of operations and our investment in Petrodelta could be adversely impacted. If facts and circumstances change, it is possible we could conclude our investment in Petrodelta should be accounted for using the cost method of accounting rather than the equity method of accounting. If that were to occur, the operations of Petrodelta would no longer be included in our results of operations.
Currently, our source of cash is expected to be generated by accessing the debt and/or equity markets. On March 30, 2012, we announced that we had entered into an equity distribution agreement (the Agreement) with Knight Capital America, L.P. (KCA), a subsidiary of Knight Capital Group, Inc. relating to an at-the-market (ATM) offering of shares of our common stock having an aggregate sales price of up to $75.0 million. Under the terms of the Agreement, we may offer and sell shares of our common stock by means of transactions on the New York Stock Exchange (NYSE) or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated rates. We are unable to access the ATM during blackout periods or when we are in possession of material information which has not been made public. As of June 30, 2012, we have not accessed the ATM.
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We incurred debt during 2010 which has imposed restrictions on us and increased our vulnerability to adverse economic and industry conditions. Our senior convertible notes impose restrictions on us that limit our ability to obtain additional financing. Our ability to meet these covenants is primarily dependent on meeting customary affirmative covenant clauses. Our inability to satisfy the covenants contained in our senior convertible notes would constitute an event of default, if not waived. An uncured default could result in the senior convertible notes becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business. As of June 30, 2012, we were in compliance with all of our long term debt covenants.
Our senior convertible notes are due March 1, 2013. As of June 30, 2012, $16.5 million of the senior convertible notes had been converted into, or exchanged for, shares of our common stock. If the remaining debt is not converted or is only partially converted, we will be required to refinance the debt. Due to our current liquidity position, any debt instrument available to us is likely to have a substantial interest rate and/or provide for additional dilution to shareholders. There can be no assurances we will be able to refinance the debt on terms that are acceptable to us. If we are unable to obtain additional debt and/or equity sources, convert or exchange the senior convertible notes, or receive the Petrodelta dividend or our cash sources and requirements are different than expected, it will have a material adverse effect on our operations.
In order to increase our liquidity to levels sufficient to meet our commitments, we continue to seek to secure additional capital to fund operations, to meet future expenditure requirements necessary to retain our rights under our PSCs and to pay remaining amounts due under our senior convertible notes to the extent the convertible notes are not subsequently exchanged for shares prior to their maturity date. We plan to secure capital by obtaining debt or project financing or refinancing or extending existing debt, or, if acceptable debt or project financing or refinancing is unavailable, by obtaining equity related financing, or exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, or sale of some or all of our assets. While we will continue to seek to secure capital, there can be no assurance that we will be able to enter any strategic relationship or transaction or that we will be successful in obtaining funds through debt, project finance or equity related financing or refinancing, or extending existing debt. Under certain circumstances, the structure of a strategic transfer of our rights under any PSC will require the approval of the governments of the countries in which we operate. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity related financing is uncertain. Raising additional funds by issuing shares or other types of equity securities would further dilute our existing stockholders. We cannot predict the timing, structure or other terms and conditions of any such arrangements or the consideration that may be paid with respect to any transaction and whether the consideration will meet or exceed our offering price. Our lack of revenues, cash inflows and the unpredictability of cash dividends from Petrodelta could make it difficult to obtain financing and, accordingly, there is no assurance adequate financing can be raised and/or on terms acceptable to us.
Our ability to continue as a going concern depends upon the success of our planned exploration and development activities and the ability to secure additional financing to secure our current operations. There can be no guarantee of future capital acquisition, fundraising or explorations success or that we will realize the value of our unevaluated exploratory well costs. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. We believe that we will continue to be successful in securing any funds necessary to continue as a going concern. However, our current cash position and our ability to access additional capital may limit our available opportunities or not provide sufficient cash for operations.
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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, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (16,472 | ) | $ | (14,922 | ) | ||
Net cash provided by (used in) investing activities |
(13,834 | ) | 152,024 | |||||
Net cash provided by (used in) financing activities |
106 | (59,773 | ) | |||||
|
|
|
|
|||||
Net increase (decrease) in cash |
$ | (30,200 | ) | $ | 77,329 | |||
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At June 30, 2012, we had current assets of $54.1 million and current liabilities of $32.6 million, resulting in working capital of $21.5 million and a current ratio of 1.7:1. This compares with a working capital of $62.6 million and a current ratio of 2.9:1 at December 31, 2011. The decrease in working capital of $41.1 million was primarily due to decreases in receivables and increases in cash payments for capital expenditures.
Cash Flow used in Operating Activities. During the six months ended June 30, 2012 and 2011, net cash used in operating activities was approximately $16.5 million and $14.9 million, respectively. The $1.6 million increase was primarily due to decreases in accounts payable and accrued expenses offset by decreases in receivables.
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Cash Flow from Investing Activities. Our cash capital expenditures for property and equipment are summarized in the following table:
June 30, | ||||||||
2012 | 2011 | |||||||
(in millions) | ||||||||
Budong PSC |
$ | 6.6 | $ | 13.1 | ||||
Dussafu PSC |
1.8 | 13.9 | ||||||
Block 64 EPSA |
5.8 | 0.7 | ||||||
Other projects |
| 0.4 | ||||||
|
|
|
|
|||||
Total additions of property and equipment continuing operations |
14.2 | 28.1 | ||||||
Assets Held for Sale Antelope Project(1) |
| 31.7 | ||||||
|
|
|
|
|||||
Total additions of property and equipment |
$ | 14.2 | $ | 59.8 | ||||
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(1) | See Notes to Consolidated Financial Statements, Note 4 Dispositions. |
During the six months ended June 30, 2012, we:
| Had $1.2 million of restricted cash returned to us; and |
| Incurred $0.8 million of investigatory costs related to various international and domestic exploration studies. |
During the six months ended June 30, 2011, we:
| Received $217.8 million for the sale of our Antelope Project (see Notes to Consolidated Financial Statements, Note 4 Dispositions); |
| Received $1.4 million from the sale of our equity investment in Fusion; |
| Deposited $7.3 million as collateral for two standby letters of credit issued in support of the drilling activities on the Gabon PSC; and |
| Incurred $0.1 million of investigatory costs related to various international and domestic exploration studies. |
Petrodeltas capital commitments will be determined by its business plan. Petrodeltas capital commitments are expected to be funded by internally generated cash flow. Our budgeted capital expenditures of $25.5 million for 2012 for Indonesia, Gabon and Oman operations will be funded through our existing cash balances, accessing equity and debt markets, and cost reductions. In addition, we could delay the discretionary portion of our capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, as warranted.
Cash Flow from Financing Activities. During the six months ended June 30, 2012 we:
| Incurred $0.2 million in legal fees associated with financings. |
During the six months ended June 30, 2011, we:
| Repaid $60.0 million of our term loan facility; and |
| Incurred $0.2 million in legal fees associated with financings. |
Contractual Obligations
Payments (in thousands) Due by Period | ||||||||||||||||||||
Contractual Obligation |
Total | Less than 1 Year |
1-2 Years | 3-4 Years | After
4 Years |
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Debt: |
||||||||||||||||||||
8.25% Senior Convertible Note Due 2013 |
$ | 15,551 | $ | 15,551 | $ | | $ | | $ | | ||||||||||
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|
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Total Debt |
15,551 | 15,551 | | | | |||||||||||||||
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Other obligations: |
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Interest payments |
855 | 855 | | | | |||||||||||||||
Oil and gas activities |
8,000 | 8,000 | | | | |||||||||||||||
Office leases |
1,681 | 865 | 645 | 148 | 23 | |||||||||||||||
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|
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Total other obligations |
10,536 | 9,720 | 645 | 148 | 23 | |||||||||||||||
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|
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|
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|
|
|
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Total contractual obligations |
$ | 26,087 | $ | 25,271 | $ | 645 | $ | 148 | $ | 23 | ||||||||||
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We do not have any remaining work commitments for the current exploration phases of the Budong PSC or Block 64 EPSA.
As of May 28, 2012, the Dussafu PSC entered the third exploration phase. The third exploration phase has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period.
On July 17, 2012, we signed a contract for a semi-submersible drilling rig to drill an exploration well on the Gabon PSC. In the event that we elect to terminate the contract prior to the rigs arrival on-site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages.
Results of Operations
You should read the following discussion of the results of operations for the three and six months ended June 30, 2012 and 2011 and the financial condition as of June 30, 2012 and December 31, 2011 in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.
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Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011
We reported net income attributable to Harvest of $8.2 million, or $0.20 diluted earnings per share, for the three months ended June 30, 2012, compared with net income attributable to Harvest of $89.8 million, or $2.23 diluted earnings per share, for the three months ended June 30, 2011.
Total expenses and other non-operating (income) expense from continuing operations (in millions):
Three Months Ended June 30, |
Increase (Decrease) |
|||||||||||
2012 | 2011 | |||||||||||
Depreciation and amortization |
$ | 0.1 | $ | 0.1 | $ | | ||||||
Exploration expense |
1.3 | 4.7 | (3.4 | ) | ||||||||
Dry hole costs |
0.1 | | 0.1 | |||||||||
General and administrative |
6.5 | 7.0 | (0.5 | ) | ||||||||
Investment earnings and other |
(0.1 | ) | (0.2 | ) | 0.1 | |||||||
Interest expense |
| 1.7 | (1.7 | ) | ||||||||
Loss on extinguishment of debt |
| 9.7 | (9.7 | ) | ||||||||
Other non-operating expense |
1.5 | 0.2 | 1.3 | |||||||||
Income tax expense (benefit) |
(0.4 | ) | 0.3 | (0.7 | ) |
During the three months ended June 30, 2012, we incurred $1.2 million of exploration costs related to the processing and reprocessing of seismic data related to ongoing operations and $0.1 million related to other general business development activities. During the three months ended June 30, 2011, we incurred $1.3 million of exploration costs related to the processing and reprocessing of seismic data related to ongoing operations, $0.1 million related to other general business development activities, and $3.3 million of impairment for the carrying value of West Bay.
During the three months ended June 30, 2012, we expensed to dry hole costs $0.1 million related to the drilling of the AGN-1 on the Block 64 EPSA (see Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, Operations, Budong-Budong Project, Indonesia and Block 64 EPSA Project Oman). We did not record any dry hole costs in the three months ended June 30, 2011.
The decrease in general and administrative costs in the three months ended June 30, 2012 from the three months ended June 30, 2011 was primarily due to lower general office expense and overhead ($1.2 million) offset by higher employee related costs ($0.5 million) and contract services ($0.2 million).
The decrease in investment earnings and other in the three months ended June 30, 2012 from the three months ended June 30, 2011 was due to the receipt during the three months ended June 30, 2011 of payment for transition services provided on the Antelope Project after closing of the sale.
The decrease in interest expense in the three months ended June 30, 2012 from the three months ended June 30, 2011 was due to the repayment in May 2011 of our $60 million term loan facility and interest capitalized to oil and gas properties of $0.5 million.
During the three months ended June 30, 2011, we incurred a loss on extinguishment of debt related to the early payment of our $60 million term loan facility. The loss on extinguishment of debt includes the write off of the discount on debt ($7.2 million), a prepayment premium of 3.5 percent of the amount outstanding ($2.1 million), expensing of financing costs related to the term loan facility ($0.3 million), and the cost to repurchase 4.4 million unvested warrants issued in connection with the term loan facility.
The increase in other non-operating expense in the three months ended June 30, 2012 from the three months ended June 30, 2011 was due to costs incurred related to our strategic alternative process and evaluation which resulted in the SPA for the sale of our 32 percent interest in Petrodelta.
The decrease in income tax expense in the three months ended June 30, 2012 from the three months ended June 30, 2011 is due to $1.4 million of projected U.S. income tax benefits associated with the carryback to the 2011 income tax year of net operating losses projected to be incurred in the 2012 income tax year offset by a reclassification from income tax expense on continuing operations to income tax expense on discontinued operations.
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Equity in Earnings from Unconsolidated Equity Affiliates
For the three months ended June 30, 2012, net income from unconsolidated equity affiliates reflects an increase in Petrodeltas revenue from oil sales due to higher sales volumes ($51.2 million) offset by lower prices ($15.6 million). Royalties, which is a function of revenue, increased $9.9 million due to the increase in revenue (net increase in revenue of $35.6 million at 30 percent royalty). Windfall Profits Tax, which is a function of volume and price per barrel, increased $9.3 million due to an increase in volumes (2012: 3.3 MBls vs. 2011: 2.8 MBls) offset by the decrease in price received per barrel (2012: $96.10 per barrel vs. 2011: $101.72 per barrel). The increase in operating expense in the three months ended June 30, 2012 from the three months ended June 30, 2011 was due to increased oil production. The decrease in workover expense in the three months ended June 30, 2012 from the three months ended June 30, 2011 was due to fewer workovers being performed. Petrodeltas effective tax rate (inclusive of the adjustments to reconcile to reported net income from unconsolidated equity affiliate) for the three months ended June 30, 2012 was consistent with the effective tax rate for the three months ended June 30, 2011.
Discontinued Operations
On May 17, 2011, we closed the transaction to sell the Antelope Project. The sale had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflects increases to the purchase price for customary adjustments and deductions for transaction related costs. We do not have any continuing involvement with the Antelope Project. The related gain on the sale was reported in discontinued operations in the second quarter of 2011.
During the three months ended June 30, 2012, we incurred write-offs of $5.2 million of accounts and note receivable and $3.6 million of accounts payable, carry obligation related to the settlement of all outstanding claims with a private third party on the Antelope Project (see Notes to Consolidated Financial Statements, Note 2 Summary of Significant Accounting Policies, Notes Receivable and Note 6 Commitments and Contingencies) and a $0.6 million income tax benefit related to the recognition of the additional loss on discontinued operations.
Revenue and net loss on the disposition of the Antelope Project are shown in the table below:
Three Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Revenues applicable to discontinued operations |
$ | | $ | 2,368 | ||||
Net income (loss) from discontinued operations |
(989 | ) | 98,665 |
Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011
We reported net income attributable to Harvest of $6.8 million, or $0.18 diluted earnings per share, for the six months ended June 30, 2012, compared with net income attributable to Harvest of $90.9 million, or $2.27 diluted earnings per share, for the six months ended June 30, 2011.
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Total expenses and other non-operating (income) expense from continuing operations (in millions):
Six Months Ended June 30, |
Increase (Decrease) |
|||||||||||
2012 | 2011 | |||||||||||
Depreciation and amortization |
$ | 0.2 | $ | 0.2 | $ | | ||||||
Exploration expense |
2.7 | 5.8 | (3.1 | ) | ||||||||
Dry hole costs |
5.6 | | 5.6 | |||||||||
General and administrative |
12.4 | 13.7 | (1.3 | ) | ||||||||
Investment earnings and other |
(0.1 | ) | (0.4 | ) | 0.3 | |||||||
Interest expense |
0.4 | 3.9 | (3.5 | ) | ||||||||
Debt conversion expense |
2.4 | | 2.4 | |||||||||
Loss on extinguishment of debt |
| 9.7 | (9.7 | ) | ||||||||
Other non-operating expense |
1.7 | 0.7 | 1.0 | |||||||||
Income tax expense (benefit) |
(1.6 | ) | 0.5 | (2.1 | ) |
During the six months ended June 30, 2012, we incurred $2.4 million of exploration costs related to the processing and reprocessing of seismic data related to ongoing operations and $0.3 million related to other general business development activities. During the six months ended June 30, 2011, we incurred $2.3 million of exploration costs related to the processing and reprocessing of seismic data related to ongoing operations, $0.2 million related to other general business development activities, and $3.3 million of impairment for the carrying value of West Bay.
During the six months ended June 30, 2012, we expensed to dry hole costs $0.7 million related to the drilling of the KD-1 well on the Budong PSC and $4.9 million related to the drilling of the AGN-1 on the Block 64 EPSA (see Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, Operations, Budong-Budong Project, Indonesia and Block 64 EPSA Project Oman). We did not record any dry hole costs in the six months ended June 30, 2011.
The decrease in general and administrative costs in the six months ended June 30, 2012 from the six months ended June 30, 2011 was primarily due to lower general office expense and overhead ($1.6 million) and employee related costs ($0.3 million) offset by higher contract services ($0.6 million).
The decrease in investment earnings and other in the six months ended June 30, 2012 from the six months ended June 30, 2011 was due to the receipt during the six months ended June 30, 2011 of payment for transition services provided on the Antelope Project after closing of the sale.
The decrease in interest expense in the six months ended June 30, 2012 from the six months ended June 30, 2011 was due to the repayment in May 2011 of our $60 million term loan facility, conversion of $16.0 million of our 8.25 percent senior convertible notes on March 14, 2012, and interest capitalized to oil and gas properties of $1.3 million.
During the six months ended June 30, 2012, we incurred debt conversion expense related to the issuance of 0.2 million shares of our common stock in exchange for certain holders of our senior convertible notes foregoing a one-year interest make-whole of $1.3 million. The debt conversion expense consists of bond conversion expenses ($0.6 million), interest expense make-whole provision satisfied by the issuance of 0.2 million common shares ($1.3 million) and legal and other professional fees ($0.5 million).
During the six months ended June 30, 2011, we incurred a loss on extinguishment of debt related to the early payment of our $60 million term loan facility. The loss on extinguishment of debt includes the write off of the discount on debt ($7.2 million), a prepayment premium of 3.5 percent of the amount outstanding ($2.1 million), expensing of financing costs related to the term loan facility ($0.3 million), and the cost to repurchase 4.4 million unvested warrants issued in connection with the term loan facility.
The increase in other non-operating expense in the six months ended June 30, 2012 from the six months ended June 30, 2011 was due to costs incurred related to our strategic alternatives process and evaluation which resulted in the SPA for the sale of our 32 percent interest in Petrodelta.
The decrease in income tax expense in the six months ended June 30, 2012 from the six months ended June 30, 2011 is due to $3.0 million of projected U.S. income tax benefits associated with the carryback to the 2011 income tax year of net operating losses projected to be incurred in the 2012 income tax year offset by income tax expense incurred during the six months ended June 30, 2011.
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Equity in Earnings from Unconsolidated Equity Affiliates
For the six months ended June 30, 2012, net income from unconsolidated equity affiliates reflects an increase in Petrodeltas revenue from oil sales due to higher sales volumes ($95.6 million) and prices ($38.1 million). Royalties, which is a function of revenue, increased $39.9 million due to the increase in revenue (net increase in revenue of $133.7 million at 30 percent royalty). Windfall Profits Tax, which is a function of volume and price received per barrel, increased $67.0 million due to an increase in volumes (2012: 6.3 MBls vs. 2011: 5.4 MBls) and price received per barrel (2012: $102.09 per barrel vs. 2011: $94.98 per barrel). The increase in operating expense in the six months ended June 30, 2012 from the six months ended June 30, 2011 was due to increased oil production. The decrease in workover expense in the six months ended June 30, 2012 from the six months ended June 30, 2011 was due to fewer workovers being performed. Petrodeltas effective tax rate (inclusive of the adjustments to reconcile to reported net income from unconsolidated equity affiliate) for the six months ended June 30, 2012 was consistent with the effective tax rate for the six months ended June 30, 2011.
Discontinued Operations
On May 17, 2011, we closed the transaction to sell the Antelope Project. The sale had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflects increases to the purchase price for customary adjustments and deductions for transaction related costs. We do not have any continuing involvement with the Antelope Project. The related gain on the sale was reported in discontinued operations in the second quarter of 2011.
During the six months ended June 30, 2012, we incurred $0.1 million of expense related to settlement of royalty payments to the Mineral Management Services and write-offs of $5.2 million of accounts and note receivable and $3.6 million of accounts payable, carry obligation related to the settlement of all outstanding claims with a private third party on the Antelope Project (see Notes to Consolidated Financial Statements, Note 2 Summary of Significant Accounting Policies, Notes Receivable and Note 6 Commitments and Contingencies) and a $0.6 million income tax benefit related to the recognition of the additional loss on discontinued operations.
Revenue and net loss on the disposition of the Antelope Project are shown in the table below:
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Revenues applicable to discontinued operations |
$ | | $ | 6,488 | ||||
Net income (loss) from discontinued operations |
(1,104 | ) | 95,399 |
Effects of Changing Prices, Foreign Exchange Rates and Inflation
Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned development activities and capital expenditure program.
Our net foreign exchange losses attributable to our international operations were minimal for the six months ended June 30, 2012 and 2011. There are many factors affecting foreign exchange rates and resulting exchange gains and losses, most of which are beyond our control. It is not possible for us to predict the extent to which we may be affected by future changes in exchange rates and exchange controls.
Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official exchange rate in February 2004, March 2005, January 2010 and again in January 2011. On January 4, 2011, the Venezuelan government published in the Official Gazette the Exchange Agreement which eliminated the 2.60 Bolivars per U.S. Dollar exchange rate with an effective date of January 1, 2011.
Harvest Vinccler and Petrodelta do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Bolivars (4.30 Bolivars per U.S. Dollar). However, during the six months ended June 30, 2012, Harvest Vinccler exchanged approximately $0.6 million through SITME and received an average exchange rate of 5.13 Bolivars per U.S. Dollar. The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, and other current assets.
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The monetary liabilities that are exposed to exchange rate fluctuations are accounts payable, accruals and other current liabilities. All monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar exchange rate. Petrodelta does not have, and has not had, any U.S. Dollars pending government approval for settlement for Bolivars at the official exchange rate or the SITME exchange rate. Harvest Vinccler currently does not have any U.S. Dollars pending government approval for settlement for Bolivars at the official exchange rate or the SITME exchange rate.
See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, Operations, Venezuela for a more complete discussion of the exchange agreements and their effects on our Venezuelan operations.
Within the United States and other countries in which we conduct business, inflation has had a minimal effect on us, but it is potentially an important factor with respect to results of operations in Venezuela.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk from adverse changes of the situation in Venezuela, our exploration program and adverse changes in oil prices, interest rates, foreign exchange and political risk, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. The information about market risk for the six months ended June 30, 2012 does not differ materially from that discussed in the Annual Report on Form 10-K for the year ended December 31, 2011.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. We have established disclosure controls and procedures that are designed to ensure the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation as of June 30, 2012, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our most recent quarter ended June 30, 2012, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
In June 2012, the operator of the Budong PSC received notice of a claim related to the ownership of part of the land comprising the KD-1 drilling site. The claim asserts that the land upon which the drill site is located is partly owned by the claimant. The operator purchased the site from local landowners in January 2010, and the purchase was approved by BPMIGAS. The claimant is seeking compensation of 16 billion Indonesia Rupiah (approximately $1.7 million, $1.1 million net to our 64.51 percent cost sharing interest) for land that was purchased at a cost of $4,100 in January 2010. A formal mediation hearing to assess the conflicting claims of ownership is scheduled for August 9, 2012. The operator disputes the landowners claim and plans to vigorously defend against it.
In May 2012, Newfield Production Company (Newfield) filed notice pursuant to the Purchase and Sale Agreement between Harvest (US) Holdings, Inc. (Harvest US) and Newfield dated March 21, 2011 (the PSA) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim asserts that locations constructed by Harvest were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that to the extent of potential penalties or other obligations that might result from potential violations that Harvest US indemnifies Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any potential environmental claim related to Newfields notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfields claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.
In October 2007, we entered into a Joint Exploration and Development Agreement (JEDA) with a private third party with respect to the Antelope Project. On January 11, 2011, in connection with the sale of each partys interests in the Antelope Project (see Notes to Consolidated Financial Statements Note 4 Dispositions), we entered into a letter agreement with the private third party wherein the private third party agreed to reimburse us for certain expenses related to the sale of the two parties interests in the Antelope Project. The private third party disputes our calculation of the amount owed to us pursuant to the January 11, 2011 letter agreement. On March 11, 2011, we entered into a letter agreement with the private third party regarding certain obligations between the parties related to the JEDA. The private third party disputes our calculation of the amount due pursuant to one of the items in the March 11, 2011 letter agreement. At March 31, 2012, we had a note receivable outstanding from the private third party of $3.3 million (see Notes to Consolidated Financial Statements Note 2 Summary of Significant Accounting Policies, Notes Receivable), an account receivable from the private third party of $2.7 million, and an account payable outstanding to the private third party of $3.6 million related to the purchase in July 2010 of an incremental 10 percent interest in the Antelope Project. On June 13, 2012, the parties agreed to settle all outstanding claims for $0.8 million net payable to Harvest.
On May 4, 2012, Harvest Vinccler learned that the Political Administrative Chamber of the Supreme Court of Justice has issued a decision dismissing one of Harvest Vincclers claims against the Libertador Municipality. Harvest Vinccler continues to believe that it has sufficient arguments to maintain its position in accordance to the Venezuelan Constitution. Harvest Vinccler plans to present a request of Constitutional Revision to the Constitutional Chamber of the Supreme Court of Justice once it is notified officially of the decision. As of August 3, 2012, Harvest Vinccler has not received official notification of the decision. Harvest Vinccler is unable to predict the impact of this decision on the remaining outstanding municipality claims and assessments.
See our Annual Report on Form 10-K for the year ended December 31, 2011 for a description of certain other legal proceedings. There have been no material developments in such legal proceedings since the filing of such Annual Report.
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Item 1A. | Risk Factors |
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws. The U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-corruption laws, including the U.K. Bribery Act 2010, which is broader in scope than the FCPA, generally prohibit companies and their intermediaries from making improper payments to government and other officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from acts of corruption committed by our employees or agents. Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.
There is no assurance that the SPA will be completed, and our inability to consummate the SPA could harm the market price of our common stock and our business, results of operations and financial condition. If our stockholders fail to approve the proposed Transaction, or if the proposed Transaction is not completed for any other reason, the market price of our common stock may decline. In addition, failure to complete the proposed Transaction will result in a reduction in the amount of cash otherwise available to us and may substantially limit our ability to implement our business strategy.
We cannot assure you that the SPA will be consummated. The consummation of the SPA is subject to the satisfaction or waiver of a number of conditions, including, among others, the requirement that we obtain stockholder approval of the SPA, requirements with respect to the accuracy of the representations and warranties of the parties to the SPA and requirements with respect to the satisfaction or waiver of the covenants and obligations of the parties to the SPA. In addition, the SPA may be terminated in certain circumstances under the terms of the SPA.
We cannot guarantee that the parties to the SPA will be able to meet all of the closing conditions of the SPA.
If we are unable to meet all of the closing conditions, the Buyer would not be obligated to close the SPA. We also cannot be sure that circumstances, such as a material adverse effect, will not arise that would also allow the Buyer to terminate the SPA prior to closing. If the SPA is not approved by our stockholders or does not close, our Board of Directors will be forced to evaluate other alternatives, which may be less favorable to us than the SPA.
In addition, if the SPA is not consummated, our directors, executive officers and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction and we will have incurred significant transaction costs, in each case, without any commensurate benefit.
While the SPA is pending, it creates uncertainty about our future which could have a material and adverse effect on our business, financial condition and results of operations. While the SPA is pending, it creates uncertainty about our future. As a result of this uncertainty, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending completion or termination of the SPA. In addition, while the SPA is pending, we are subject to a number of risks, including:
| the diversion of management and employee attention from our day-to-day business; |
| the potential disruption to business partners and other service providers; and |
| the possible inability to respond effectively to competitive pressures, industry developments and future opportunities. |
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The occurrence of any of these events individually or in combination could have a material adverse effect on our business, financial condition and results of operation.
The SPA restricts our ability to manage the operations of Harvest Holding and its subsidiaries. The SPA contains provisions that obligate us to cause Harvest Holding and its subsidiaries to conduct their business in the ordinary course of business, and prohibit us from causing or permitting Harvest Holding and its subsidiaries from undertaking or entering into certain actions and transactions. These provisions restrict our ability to cause or permit Harvest Holding and its subsidiaries, other than Petrodelta, from, among other things, amending its governing documents, issuing securities, incurring indebtedness, and acquiring or selling assets. The SPA also prohibits us from causing or permitting Petrodelta from amending its governing document in certain respects. These prohibitions restrict us from causing or permitting Harvest Holding and its subsidiaries from taking certain actions or entering into certain transactions that we might otherwise deem to be in the best interest of those companies.
The SPA limits our ability to pursue alternatives to the SPA. The SPA contains provisions that make it more difficult for us to sell our interests in Venezuela to a party other than the Buyer or to enter into other transactions relating to our company as a whole. These provisions include a non-solicitation provision (including certain matching rights), a provision requiring that we submit the SPA to our stockholders for approval unless the SPA has been terminated in accordance with its terms, and provisions obligating us to pay the Buyer a termination fee of three percent of the purchase price under certain circumstances. These provisions could discourage a third party that might have an interest in acquiring all of or a significant part of our interests in Venezuela or our assets or company as a whole from considering or proposing such an acquisition, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by the Buyer.
If the SPA is not completed, there may not be any other offers from potential acquirers. If the SPA is not completed, we may seek another purchaser for our interests in Venezuela. There can be no assurances that we would be able to enter into meaningful discussions or to otherwise complete any transaction with any other party who may have an interest in purchasing our Venezuelan interests on terms acceptable to us.
The SPA may expose us to contingent liabilities. Under the SPA, we have agreed to indemnify the Buyer for a breach or inaccuracy of any representation, warranty or covenant made by us in the SPA, subject to certain limitations. Significant indemnification claims by the Buyer could have a material adverse effect on our financial condition.
We are not permitted to terminate the SPA except in limited circumstances, and we may be required to pay a substantial termination fee to the Buyer if the SPA is terminated. The SPA does not generally allow us to terminate it, except in certain limited circumstances. If the SPA is terminated because our Board of Directors determines to accept a superior proposal (as defined in the SPA), we would be obligated to pay the Buyer a termination fee of $21.8 million, or three percent of the purchase price. In addition, if the SPA is terminated because our stockholders fail to approve the transaction at a time when we have an outstanding acquisition proposal and we enter into an alternative acquisition agreement with the person making such acquisition proposal within 12 months following the date of such termination, we would be obligated to pay the Buyer a termination fee of $21.8 million, or three percent of the purchase price. Any payment of the termination fee would substantially increase the cost of completing any alternative transaction involving our interests in Venezuela and would effectively reduce any net proceeds available to us resulting from the consummation of such an alternative transaction. If the SPA is terminated for other reasons under its terms, we would not be required to pay the termination fee, but those circumstances are narrowly defined in the SPA.
See our Annual Report on Form 10-K for the year ended December 31, 2011 under Item 1A Risk Factors for a description of other risk factors. There have been no other material developments in such risk factors since the filing of such Annual Report.
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Item 6. | Exhibits |
(a) | Exhibits |
3.1 | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.) | |
3.2 | Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on April 23, 2007, File No. 1-10762.) | |
4.1 | Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008, File No. 1-10762.) | |
4.2 | Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.) | |
4.3 | Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.) | |
4.4 | Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | |
10.1 | Form of Stock Appreciation Right Award Agreement. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 4, 2009, File No. 1-10762.) | |
10.2 | Form of Stock Unit Award Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 4, 2009, File No. 1-10762.) | |
10.3 | Form of Director Stock Unit Award Agreement. | |
10.4 | Form of Employee Stock Unit Award Agreement. | |
10.5 | Form of Employee Stock Appreciation Right Award Agreement. | |
10.6 | Share Purchase Agreement dated June 21, 2012, by and among HNR Energia BV, Harvest Natural Resources, Inc. and PT Pertamina (Persero). (Incorporated by reference to Exhibit 2.1 to our Form 8-K filed on June 21, 2012, file No. 1-10762.) | |
10.7 | Guarantee of Harvest Natural Resources, Inc. dated June 21, 2012. (Incorporated by reference to Exhibit 2.2 to our Form 8-K filed on June 21, 2012, file No. 1-10762.) | |
31.1 | Certification of the principal executive officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer. | |
32.2 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. |
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101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HARVEST NATURAL RESOURCES, INC. | ||||||
Dated: August 9, 2012 | By: | /s/ JAMES A. EDMISTON | ||||
James A. Edmiston President and Chief Executive Officer | ||||||
Dated: August 9, 2012 | By: | /s/ STEPHEN C. HAYNES | ||||
Stephen C. Haynes Vice President - Finance, Chief Financial Officer and Treasurer |
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Exhibit Index
Exhibit |
Description | |
3.1 | Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762). | |
3.2 | Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on April 23, 2007, File No. 1-10762.) | |
4.1 | Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008. File No. 1-10762.) | |
4.2 | Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.) | |
4.3 | Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.) | |
4.4 | Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.) | |
10.1 | Form of Stock Appreciation Right Award Agreement. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 4, 2009, File No. 1-10762.) | |
10.2 | Form of Stock Unit Award Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 4, 2009, File No. 1-10762.) | |
10.3 | Form of Director Stock Unit Award Agreement. | |
10.4 | Form of Employee Stock Unit Award Agreement. | |
10.5 | Form of Employee Stock Appreciation Right Award Agreement. | |
10.6 | Share Purchase Agreement dated June 21, 2012, by and among HNR Energia BV, Harvest Natural Resources, Inc. and PT Pertamina (Persero). (Incorporated by reference to Exhibit 2.1 to our Form 8-K filed on June 21, 2012, file No. 1-10762.) | |
10.7 | Guarantee of Harvest Natural Resources, Inc. dated June 21, 2012. (Incorporated by reference to Exhibit 2.2 to our Form 8-K filed on June 21, 2012, file No. 1-10762.) | |
31.1 | Certification of the principal executive officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer. | |
32.2 | Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document |
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DIRECTOR STOCK UNIT AWARD AGREEMENT
Participant Name: | ###PARTICIPANT_NAME### | |
Employee Number: | ###EMPLOYEE_NUMBER### | |
Grant Name: | ###GRANT_NAME### | |
Issue Date: | ###ISSUE_DATE### | |
Grant Price: | ###GRANT_PRICE### | |
Total Stock Units: | ###TOTAL_AWARDS### |
###EMPLOYEE_GRANT_VEST_SCHEDULE_TABLE###
This DIRECTOR STOCK UNIT AWARD AGREEMENT (this Agreement) is made by and between Harvest Natural Resources, Inc., a Delaware corporation (the Company), and ###PARTICIPANT_NAME### (the Grantee) as of the ###ISSUE_DATE### (the Grant Date).
WHEREAS, the Company desires to grant to the Grantee, for his service as a member of the Board of Directors of the Company (a Director), the stock unit award specified herein (the Award), subject to the terms and conditions of this Agreement; and
WHEREAS, the Award is not a stock value right as that term is defined in Treasury Regulation §31.3121(v)(2)-1(b)(4)(ii) so the Award constitutes a deferral of compensation for purposes of section 3121(v)(2) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Grantee desires to have the opportunity to hold the Award, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1. | Grant of Stock Unit Award. Effective as of the Grant Date, the Company hereby awards to the Grantee ###TOTAL_AWARDS### Stock Units. A Stock Unit is a right to receive on the Payment Date, after vesting thereof, a cash amount equal to the Fair Market Value of one share of the Stock on the Payment Date. For purposes of this Agreement the Fair Market Value of one share of the Stock means the closing price per share of the Stock for |
the applicable date as reported by the New York Stock Exchange or the principal stock exchange on which the Stock is then traded. The Stock Units that are awarded hereby to the Grantee shall be subject to the prohibitions and restrictions set forth herein with respect to the sale or other disposition of such Stock Units and the obligation to forfeit and surrender such Stock Units to the Company (the Forfeiture Restrictions). In accepting the award of Stock Units set forth in this Agreement the Grantee accepts and agrees to be bound by all the terms and conditions of this Agreement. |
2. | Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: |
(a) | Affiliate means an Entity that is required to be treated as a single employer together with the Company for certain benefit plan purposes under section 414 of the Code. |
(b) | Board means the Board of Directors or other governing body of the Company or its direct or indirect parent. |
(c) | Change of Control means the occurrence of any of the following events: |
(i) | the acquisition by any individual, Entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 50 percent or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Voting Securities); provided, however, that for purposes of this subsection (i) of this Section 2(c) the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Entity controlled by the Company, or (iii) any acquisition by any Entity pursuant to a transaction which complied with clauses (A), (B) and (C) of subsection (iii) of this Section 2(c); or |
(ii) | individuals who, as of the date of this Agreement, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director after the date of this Agreement whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors; or |
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(iii) | the consummation of a reorganization, merger or consolidation or sale of the Company, or a disposition of at least 50 percent of the assets of the Company including goodwill (a Business Combination), provided, however, that for purposes of this subsection (iii), a Business Combination will not constitute a Change of Control if the following three requirements are satisfied: following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Companys Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of the ownership interests of the Entity resulting from such Business Combination (including, without limitation, an Entity which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries or other affiliated entities) in substantially the same proportions as their ownership immediately prior to such Business Combination, (B) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such Entity resulting from such Business Combination) beneficially owns, directly or indirectly, 50 percent or more of, respectively, the ownership interests in the Entity resulting from such Business Combination, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the Entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. For this purpose any individual who becomes a director after the date of this Agreement, and whose election or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors. |
(d) | Code means the Internal Revenue Code of 1986, as amended. |
(e) | Committee means the Human Resources Committee of the Board. |
(f) | Entity means any corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization or other business entity. |
(g) | Forfeiture Restrictions means any prohibitions and restrictions set forth herein with respect to the sale or other disposition of Stock Units issued to the Grantee hereunder and the obligation to forfeit and surrender such Stock Units to the Company. |
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(h) | Payment Date means the earliest of (i) May 17, 2013, (ii) the date the Company incurs a Section 409A Change of Control, or (iii) the date of the death of the Grantee. |
(i) | Section 409A means section 409A of the Code and the rules and regulations issued thereunder by the Department of Treasury and the Internal Revenue Service. |
(j) | Section 409A Change of Control means a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A. |
(k) | Stock means the Companys common stock, par value $0.01 per share. |
3. | Transfer Restrictions. The Stock Units granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of (other than by will or the applicable laws of descent and distribution). Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby. |
4. | Vesting. The Stock Units that are granted hereby shall be subject to the Forfeiture Restrictions. The Forfeiture Restrictions shall lapse as to the Stock Units that are granted hereby in accordance with the provisions of subsections (a) through (c) of this Section 4. |
(a) | General Vesting Rules. The period during which the Forfeiture Restrictions shall apply to the Stock Units will commence on the Grant Date and end on May 17, 2013 and the Forfeiture Restrictions shall lapse on May 17, 2013 provided that the Grantees service as a Director of the Company has not terminated prior to May 17, 2013. If the Grantees service as a Director of the Company terminates before May 17, 2013, except as otherwise specified in subsections (b) or (c) below, the Forfeiture Restrictions then applicable to the Stock Units shall not lapse and all the Stock Units shall be forfeited to the Company upon such termination of the Grantees service as a Director. |
(b) | Death. Notwithstanding any provisions of Section 4(a) to the contrary, upon the termination of Grantees service as a Director of the Company due to the death of the Grantee, the Forfeiture Restrictions shall lapse as to the Stock Units that are granted hereby on the date of such termination of the Grantees service as a Director due to death. |
(c) | Change of Control. Notwithstanding any provisions of Section 4(a) to the contrary, upon the occurrence of a Change of Control that constitutes a Section 409A Change of Control, the Forfeiture Restrictions shall lapse as to the then outstanding Stock Units that are granted hereby. |
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5. | Time of Payment. On the Payment Date the Company shall pay to the Grantee the amount payable with respect to the Stock Units for which the Forfeiture Restrictions have lapsed and thereafter the Grantee shall have no further rights with respect to such Stock Units. |
6. | Medium of Payment. Any payments made under this Agreement shall be in the medium of cash. Notwithstanding the foregoing or any other provision of this Agreement, if subsequent to the Grant Date the stockholders of the Company approve an equity compensation plan under which the Stock Units may be paid in the medium of Stock, the Committee may in the future, in its sole discretion, determine (by any means so determined by the Committee in its sole discretion) to cause all or any portion of the Stock Units to be paid in the medium of Stock. Any fractional shares will be paid in cash. |
7. | Capital Adjustments and Reorganizations. |
(a) | The existence of the Stock Units shall not affect in any way the right or power of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding. |
(b) | If the Company shall effect a subdivision or consolidation of the Stock or other capital readjustment, the payment of a stock dividend with respect to the Stock, or other increase or reduction of the number of shares of the Stock outstanding, without receiving compensation therefore in money, services or property, then the number of Stock Units awarded under this Agreement shall be appropriately adjusted in the same manner as if the Grantee was the holder of an equivalent number of shares of the Stock immediately prior to the event requiring the adjustment. |
8. | Not a Service Agreement. This Agreement is not a service agreement, and no provision of this Agreement shall be construed or interpreted to create a service relationship between the Grantee and the Board, the Company, its subsidiaries or any of its Affiliates or guarantee the right to remain a Director for any specified term. |
9. | Notices. Any notice, instruction, authorization, request or demand required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Companys principal business office address and to the Grantee at the Grantees residential address indicated beneath the Grantees signature on the execution page of this Agreement, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested. |
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10. | Amendment and Waiver. Except as otherwise provided herein, this Agreement may be amended, modified or superseded only by written instrument executed by the Company and the Grantee. Only a written instrument executed and delivered by the party waiving compliance hereof shall waive any of the terms or conditions of this Agreement. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than the Grantee. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition. |
11. | Governing Law and Severability. This Agreement shall be governed by the laws of the State of Texas without regard to its conflicts of law provisions. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect. |
12. | No Rights as Stockholder. Unless and until shares of Stock are issued to the Grantee under this Agreement, the Grantee shall have no rights as a stockholder as a result of this Award. |
13. | Successors and Assigns. Subject to the limitations which this Agreement imposes upon the transferability of the Stock Units granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to the Grantee, the Grantees permitted assigns and upon the Grantees death, the Grantees estate and beneficiaries thereof (whether by will or the laws of descent and distribution), executors, administrators, agents, legal and personal representatives. |
14. | Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original for all purposes but all of which taken together shall constitute but one and the same instrument. |
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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized as of the date first above written.
HARVEST NATURAL RESOURCES, INC. | ||
By: | ||
Name: | James A. Edmiston | |
Title: | President & Chief Executive Officer |
Accepted:
GRANTEE
###PARTICIPANT_NAME### |
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STOCK UNIT AWARD AGREEMENT
Participant Name: | ###PARTICIPANT_NAME### | |
Employee Number: | ###EMPLOYEE_NUMBER### | |
Grant Name: | ###GRANT_NAME### | |
Issue Date: | ###ISSUE_DATE### | |
Grant Price: | ###GRANT_PRICE### | |
Total Stock Units: | ###TOTAL_AWARDS### |
###EMPLOYEE_GRANT_VEST_SCHEDULE_TABLE###
This STOCK UNIT AWARD AGREEMENT (this Agreement) is made by and between Harvest Natural Resources, Inc., a Delaware corporation (the Company), and ###PARTICIPANT_NAME### (the Employee) as of the ###ISSUE_DATE### (the Grant Date).
WHEREAS, the Company desires to grant to the Employee the stock unit award specified herein (the Award), subject to the terms and conditions of this Agreement; and
WHEREAS, the Award is not a stock value right as that term is defined in Treasury Regulation § 31.3121(v)(2)-1(b)(4)(ii) so the Award constitutes a deferral of compensation for purposes of section 3121(v)(2) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Employee desires to have the opportunity to hold the Award, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1. | Grant of Stock Unit Award. Effective as of the Grant Date, the Company hereby awards to the Employee ###TOTAL_AWARDS### Stock Units. A Stock Unit is a right to receive on the Payment Date, after vesting thereof, a cash amount equal to the Fair Market Value of one share of the Stock on the Payment Date. For purposes of this Agreement the Fair Market Value of one share of the Stock means the means the closing price per share of the Stock for the applicable date as reported by the New York Stock Exchange or the principal stock exchange on which the Stock is then traded. The Stock Units that are awarded hereby to the Employee shall be subject to the prohibitions |
and restrictions set forth herein with respect to the sale or other disposition of such Stock Units and the obligation to forfeit and surrender such Stock Units to the Company (the Forfeiture Restrictions). In accepting the award of Stock Units set forth in this Agreement the Employee accepts and agrees to be bound by all the terms and conditions of this Agreement. |
2. | Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: |
(a) | Affiliate means an Entity that is required to be treated as a single employer together with the Company for certain benefit plan purposes under section 414 of the Code. |
(b) | Board means the Board of Directors or other governing body of the Company or its direct or indirect parent. |
(c) | Change of Control means the occurrence of any of the following events: |
(i) | the acquisition by any individual, Entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 50 percent or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Voting Securities); provided, however, that for purposes of this subsection (i) of this Section 2(c) the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Entity controlled by the Company, or (iii) any acquisition by any Entity pursuant to a transaction which complied with clauses (A), (B) and (C) of subsection (iii) of this Section 2(c); or |
(ii) | individuals who, as of the date of this Agreement, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director after the date of this Agreement whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors; or |
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(iii) | the consummation of a reorganization, merger or consolidation or sale of the Company, or a disposition of at least 50 percent of the assets of the Company including goodwill (a Business Combination), provided, however, that for purposes of this subsection (iii), a Business Combination will not constitute a change of control if the following three requirements are satisfied: following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Companys Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of the ownership interests of the Entity resulting from such Business Combination (including, without limitation, an Entity which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries or other affiliated entities) in substantially the same proportions as their ownership immediately prior to such Business Combination, (B) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such Entity resulting from such Business Combination) beneficially owns, directly or indirectly, 50 percent or more of, respectively, the ownership interests in the Entity resulting from such Business Combination, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the Entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. For this purpose any individual who becomes a director after the date of this Agreement, and whose election or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors. |
(d) | Code means the Internal Revenue Code of 1986, as amended. |
(e) | Committee means the Human Resources Committee of the Board. |
(f) | Disability means the Employee has been determined by the insurance company that insures the Companys group long-term disability program to be totally disabled. In the absence of such an insurance plan, the Committee may, in its sole discretion, determine that the Employee has a Disability if the Committee concludes that the Employee can no longer perform one or more of the essential functions of the Employees job even with reasonable accommodation. |
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(g) | Entity means any corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization or other business Entity. |
(h) | Forfeiture Restrictions means any prohibitions and restrictions set forth herein with respect to the sale or other disposition of Stock Units issued to the Employee hereunder and the obligation to forfeit and surrender such Stock Units to the Company. |
(i) | Payment Date means the earliest of (i) the applicable date on which the Forfeiture Restrictions lapse under Section 4(a) as to the specified portion of the Stock Units, (ii) the date the Company incurs a Section 409A Change of Control, or (iii) the date of the death of the Employee. |
(j) | Section 409A means section 409A of the Code and the rules and regulations issued thereunder by the Department of Treasury and the Internal Revenue Service. |
(k) | Section 409A Change of Control means a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A. |
(l) | Stock means the Companys common stock, par value $0.01 per share. |
3. | Transfer Restrictions. The Stock Units granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of (other than by will or the applicable laws of descent and distribution). Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby. |
4. | Vesting. The Stock Units that are granted hereby shall be subject to Forfeiture Restrictions. The Forfeiture Restrictions shall lapse as to the Stock Units that are granted hereby in accordance with the provisions of subsections (a) through (c) of this Section 4. |
(a) | The period during which the Forfeiture Restrictions shall apply to the Stock Units will commence on the Grant Date and end on May 17, 2015, provided that the Employees employment with the Company and all of its Affiliates has not terminated prior to the applicable lapse date. |
If the Employees employment relationship with the Company and all of its Affiliates terminates before the applicable lapse date set forth in this subsection (a), except as otherwise specified in subsections (b) or (c) below, the Forfeiture Restrictions then applicable to the Stock Units shall not lapse and all the Stock Units then subject to the Forfeiture Restrictions shall be forfeited to the Company upon such termination of the Employees employment relationship.
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(b) | Disability or Death. Notwithstanding any provisions of Section 4(a) to the contrary, upon the termination of Employees employment relationship with the Company and all of its Affiliates due to the disability or death of the Employee, the Forfeiture Restrictions shall lapse as to the then outstanding Stock Units that are granted hereby on the date of such termination of the Employees employment relationship due to disability or death. |
(c) | Change of Control. Notwithstanding any provisions of Section 4(a) to the contrary, upon the occurrence of a Change of Control that constitutes a Section 409A Change of Control, the Forfeiture Restrictions shall lapse as to the then outstanding Stock Units that are granted hereby. |
5. | Time of Payment. On the Payment Date the Company shall pay to the Employee on the Payment Date the amount payable with respect to the Stock Units for which the Forfeiture Restrictions have lapsed. |
6. | Medium of Payment. Any payments made under this Agreement shall be in the medium of cash. Notwithstanding the foregoing or any other provision of this Agreement, if subsequent to the Grant Date the stockholders of the Company approve an equity compensation plan under which the Stock Units may be paid in the medium of Stock, the Committee may in the future, in its sole discretion, determine (by any means so determined by the Committee in its sole discretion) to cause all or any portion of the Stock Units to be paid in the medium of Stock. Any fractional shares will be paid in cash. |
7. | Tax Withholding. The Company shall be entitled to deduct from the amounts payable to the Employee (or other person validly exercising the Award) under this Agreement and any other compensation payable by the Company to the Employee any sums required by federal, state or local tax law to be withheld with respect to any payment made by the Company to the Employee under this Agreement. The Company shall have no obligation with respect to payment of the Award until the Company or an Affiliate has received payment sufficient to cover all minimum tax withholding amounts due with respect to the Award. Neither the Company nor any Affiliate shall be obligated to advise the Employee of the existence of the tax or the amount which it will be required to withhold. |
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8. | Capital Adjustments and Reorganizations. |
(a) | The existence of the Stock Units shall not affect in any way the right or power of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding. |
(b) | If the Company shall effect a subdivision or consolidation of the Stock or other capital readjustment, the payment of a stock dividend with respect to the Stock, or other increase or reduction of the number of shares of the Stock outstanding, without receiving compensation therefore in money, services or property, then the number of Stock Units awarded under this Agreement shall be appropriately adjusted in the same manner as if the Employee was the holder of an equivalent number of shares of the Stock immediately prior to the event requiring the adjustment. |
9. | Employment Relationship. For purposes of this Agreement, the Employee shall be considered to be in the employment of the Company or an Affiliate as long as the Employee has an employment relationship with the Company or an Affiliate. The Committee shall determine any questions as to whether and when there has been a termination of such employment relationship, and the cause of such termination, under the Agreement and the Committees determination shall be final and binding on all persons. |
10. | Not an Employment Agreement. This Agreement is not an employment agreement, and no provision of this Agreement shall be construed or interpreted to create an employment relationship between the Employee and the Company or any of its Affiliates or guarantee the right to remain employed by the Company or any of its Affiliates for any specified term. |
11. | Notices. Any notice, instruction, authorization, request or demand required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Companys principal business office address and to the Employee at the Employees residential address indicated beneath the Employees signature on the execution page of this Agreement, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested. |
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12. | Amendment and Waiver. Except as otherwise provided herein, this Agreement may be amended, modified or superseded only by written instrument executed by the Company and the Employee. Only a written instrument executed and delivered by the party waiving compliance hereof shall waive any of the terms or conditions of this Agreement. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than the Employee. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition. |
13. | Governing Law and Severability. This Agreement shall be governed by the laws of the State of Texas without regard to its conflicts of law provisions. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect. |
14. | No Rights as Stockholder. Unless and until shares of Stock are issued to the Employee under this Agreement, the Employee shall have no rights as a stockholder as a result of this Award. |
15. | Successors and Assigns. Subject to the limitations which this Agreement imposes upon the transferability of the Stock Units granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to the Employee, the Employees permitted assigns and upon the Employees death, the Employees estate and beneficiaries thereof (whether by will or the laws of descent and distribution), executors, administrators, agents, legal and personal representatives. |
16. | Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original for all purposes but all of which taken together shall constitute but one and the same instrument. |
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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized as of the date first above written.
HARVEST NATURAL RESOURCES, INC. | ||
By: | ||
James A. Edmiston | ||
Title: | President & Chief Executive Officer |
Accepted:
EMPLOYEE
###PARTICIPANT_NAME### |
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STOCK APPRECIATION RIGHT AWARD AGREEMENT
Participant Name: | ###PARTICIPANT_NAME### | |
Employee Number: | ###EMPLOYEE_NUMBER### | |
Grant Name: | ###GRANT_NAME### | |
Issue Date: | ###ISSUE_DATE### | |
Expiry Date: | ###EMPLOYEE_GRANT_EXPIRY_DATE### | |
Grant Price: | ###GRANT_PRICE### | |
Total SARs: | ###TOTAL_AWARDS### |
###EMPLOYEE_GRANT_VEST_SCHEDULE_TABLE###
This STOCK APPRECIATION RIGHT AWARD AGREEMENT (this Agreement) is made by Harvest Natural Resources, Inc., a Delaware corporation (the Company) for the benefit of ###PARTICIPANT_NAME### (the Employee) as of the ###ISSUE_DATE### (the Grant Date).
WHEREAS, the Company desires to grant to the Employee the stock appreciation right award specified herein (the Award), subject to the terms and conditions of this Agreement; and
WHEREAS, the Award is a stock value right as that term is defined in Treasury Regulation § 31.3121(v)(2)-1(b)(4)(ii) so the Award does not constitute a deferral of compensation for purposes of section 3121(v)(2) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, it is intended that the Award is exempt from section 409A of the Internal Revenue Code of 1986, as amended pursuant to Treasury Regulation § 1.409A-1(b)(5)(i)(B); and
WHEREAS, the Employee desires to have the opportunity to hold the Award, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1. | Grant of Stock Appreciation Right Award. Effective as of the Grant Date, the Company hereby awards to the Employee a stock appreciation right with respect to ###TOTAL_AWARDS### shares of Stock (SAR). A SAR is a right to receive on the Exercise Date, after vesting thereof, for each share of Stock underlying the SAR with respect to which the SAR is exercised, an amount equal to the excess of (a) the Fair Market Value of one share of the Stock on the Exercise Date over (b) 100 percent of the Fair Market Value of one share of the Stock determined as of the Grant Date (the SAR Exercise Price). The SAR that is awarded hereby to the Employee shall be subject to the prohibitions and restrictions set forth herein with respect to the sale or other disposition of such SAR and the obligation to forfeit and surrender such SAR to the Company. In accepting the award of the SAR set forth in this Agreement the Employee accepts and agrees to be bound by all the terms and conditions of this Agreement. |
2. | Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: |
(a) | Affiliate means an Entity that is required to be treated as a single employer together with the Company for certain benefit plan purposes under section 414 of the Code. |
(b) | Board means the Board of Directors or other governing body of the Company or its direct or indirect parent. |
(c) | Change of Control means the occurrence of any of the following events: |
(i) | the acquisition by any individual, Entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 50 percent or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Voting Securities); provided, however, that for purposes of this subsection (i) of this Section 2(c) the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Entity controlled by the Company, or (iii) any acquisition by any Entity pursuant to a transaction which complied with clauses (A), (B) and (C) of subsection (iii) of this Section 2(c); or |
(ii) | individuals who, as of the date of this Agreement, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director after the date of this Agreement whose election, or nomination for election by the Companys stockholders, was approved by a vote of at |
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least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors; or |
(iii) | the consummation of a reorganization, merger or consolidation or sale of the Company, or a disposition of at least 50 percent of the assets of the Company including goodwill (a Business Combination), provided, however, that for purposes of this subsection (iii), a Business Combination will not constitute a change of control if the following three requirements are satisfied: following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Companys Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of the ownership interests of the Entity resulting from such Business Combination (including, without limitation, an Entity which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries or other affiliated entities) in substantially the same proportions as their ownership immediately prior to such Business Combination, (B) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such Entity resulting from such Business Combination) beneficially owns, directly or indirectly, 50 percent or more of, respectively, the ownership interests in the Entity resulting from such Business Combination, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the Entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. For this purpose any individual who becomes a director after the date of this Agreement, and whose election or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors. |
(d) | Code means the Internal Revenue Code of 1986, as amended. |
(e) | Committee means the Human Resources Committee of the Board. |
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(f) | Disability means the Employee has been determined by the insurance company that insures the Companys group long-term disability program to be totally disabled. In the absence of such an insurance plan, the Committee may, in its sole discretion, determine that the Employee has a Disability if the Committee concludes that the Employee can no longer perform one or more of the essential functions of the Employees job even with reasonable accommodation. |
(g) | Entity means any corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization or other business Entity. |
(h) | Exercise Date means the date on which the Employee exercises the SAR or a portion of the SAR. |
(i) | Exercise Price means the amount the Employee must pay to the Company upon exercise of the SAR. The per share SAR exercise price for each share of Stock underlying the SAR with respect to which the SAR is exercised is 100 percent of the Fair Market Value of one share of the Stock determined as of the Grant Date. |
(j) | Fair Market Value per share of Stock means the closing sale price of the Stock for the applicable date as reported by the New York Stock Exchange or the principal stock exchange on which the Stock is then traded. |
(k) | Stock means the Companys common stock, par value $0.01 per share. |
(l) | Termination of Employment means the termination of the Employees employment with the Company and all of its Affiliates. |
3. | Transfer Restrictions. The SAR granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of (other than by will or the applicable laws of descent and distribution). Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby. |
4. | Vesting. The SAR that is granted hereby shall be subject to vesting restrictions. The vesting restrictions shall lapse as to the SAR that is granted hereby in accordance with the provisions of subsections (a) through (c) of this Section 4. |
(a) | General Vesting Rules. The SAR that is granted hereby shall become vested and exercisable in accordance with the following schedule provided that the Employee has not incurred a Termination of Employment prior to the applicable lapse date: |
###EMPLOYEE_GRANT_VEST_SCHEDULE_TABLE###
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If the Employee incurs a Termination of Employment before the applicable vesting date set forth in this subsection (a), except as otherwise specified in subsections (b) or (c) below, the vesting restrictions then applicable to the SAR shall not lapse and the portion of the SAR then subject to the vesting restrictions shall be forfeited to the Company upon such termination of the Employees employment relationship.
(b) | Disability or Death. Notwithstanding any provisions of Section 4(a) to the contrary, if the Employee incurs a Termination of Employment due to the Disability or Death of the Employee prior to the expiration of the term of this Agreement, the SAR that is granted hereby, to the extent not previously forfeited or exercised, shall become fully vested and exercisable on the date of such termination of the Employees employment relationship due to Disability or Death. |
(c) | Change of Control. Notwithstanding any provisions of Section 4(a) to the contrary, upon the occurrence of a Change of Control, the SAR that is granted hereby shall become fully vested and exercisable. |
5. | Exercise of SAR. The SAR may be exercised in whole or in part (to the extent then vested and exercisable) by delivery to and receipt by the Secretary of the Company at 1177 Enclave Parkway, Suite 300, Houston, Texas 77077, of a written notice, signed by the Employee, specifying that the SAR is being exercised for the number of shares of Stock indicated in the written notice. A SAR exercise must be accompanied by payment in full of the Exercise Price (i) in cash, (ii) through the withholding of shares of Stock (that would otherwise be delivered to the Employee) with an aggregate Fair Market Value (determined as of the Exercise Date) that is at least equal to the aggregate Exercise Price of the SAR, (iii) a combination of a cash payment and such surrender of shares, (iv) by means of a broker-assisted cashless exercise to the extent then permitted under rules and regulations adopted by the Committee, or (v) in such other manner as may then be permitted under rules and regulations adopted by the Committee. Upon the exercise of the SAR and payment of the Exercise Price the Employee shall be entitled to receive an amount equal to the Fair Market Value (determined as of the Exercise Date) of the shares of Stock underlying the SAR with respect to which the SAR is exercised. Accordingly, on the Exercise Date the Company shall pay the Employee a net amount of compensation equal to the excess of (a) the Fair Market Value (determined as of the Exercise Date) of the shares of the Stock underlying the SAR with respect to which the SAR is exercised over (b) 100 percent of the Fair Market Value (determined as of the Grant Date) of shares of the Stock underlying the SAR with respect to which the SAR is exercised (the SAR Exercise Price). |
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6. | Medium of Payment. Any payments made under this Agreement shall be in the medium of cash. Notwithstanding the foregoing, if subsequent to the Grant Date the stockholders of the Company approve an equity compensation plan under which the SAR may be paid in the medium of Stock, the Committee may in the future, in its sole discretion, determine (by any means so determined by the Committee in its sole discretion) to cause all or any portion of the SAR to be paid on the Exercise Date in the medium of Stock. Any such payment in the medium of Stock shall be made on such a basis that the Fair Market Value (determined as of Exercise Date) of the shares of Stock transferred to the Employee on the Exercise Date shall not exceed the value of the cash payment that would have otherwise been made hereunder. Any fractional shares will be settled in cash. |
7. | Period of Exercisability. The SAR that is granted hereby, to the extent it has not been previously exercised, shall expire at 5:00 p.m. (Central Time) on ###EMPLOYEE_GRANT_EXPIRY_DATE### or, if earlier, at 5:00 p.m. (Central Time): |
(i) | on the date three months after the Employee incurs a Termination of Employment for any reason other than a Change of Control, or the Disability or death of the Employee; |
(ii) | on the date 12 months after the Employee incurs a Termination of Employment by reason of the Disability of the Employee; |
(iii) | on the date 12 months after the date of the Termination of the Employment of the Employee due to the death of the Employee; or |
(iv) | on the date 12 months after the death of the Employee prior to three months after the date of the Termination of the Employment of the Employee; or |
(v) | on the date 12 months after the Employees Termination of Employment service if such Termination of Employment occurs within three months after the occurrence of Change of Control. |
The SAR shall be exercisable after the date of the Employees Termination of Employment only to the extent the SAR was exercisable at the date of such Termination of Employment. The SAR shall expire, and shall not be exercisable, after 5:00 p.m. (Central Time) on ###EMPLOYEE_GRANT_EXPIRY_DATE###.
8. | No Additional Deferral Feature. The Employees right to exercise, and payments under, the SAR shall not be extended or deferred beyond 5:00 p.m. (Central Time) on ###EMPLOYEE_GRANT_EXPIRY_DATE###. |
9. | Tax Withholding. The Company shall be entitled to deduct from the amounts payable to the Employee (or other person validly exercising the Award) under this Agreement and any other compensation payable by the Company to the Employee any sums required by federal, state or local tax law to be withheld with respect to any payment made by the |
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Company to the Employee under this Agreement. The Company shall have no obligation with respect to payment of the Award until the Company or an Affiliate has received payment sufficient to cover all minimum tax withholding amounts due with respect to the Award. Neither the Company nor any Affiliate shall be obligated to advise the Employee of the existence of the tax or the amount which it will be required to withhold. |
10. | Capital Adjustments and Reorganizations. |
(a) | The existence of the SAR shall not affect in any way the right or power of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding. |
(b) | If the Company shall effect a Stock split (including a reverse Stock split) or a Stock dividend, and the only effect of the Stock split or Stock dividend is to increase (or decrease) on a pro rata basis the number of shares owned by each shareholder of Stock, then the number of shares of Stock with respect to which the SAR awarded under this Agreement is then outstanding shall be appropriately adjusted in the manner specified in Treasury Regulation § 1.409A-1(b)(5)(v)(H). |
11. | Rights to Dividends. Except for certain adjustments specified in Section 10(b), the Employee shall have no right to receive an amount equal to any part of any dividends or other distributions declared and paid on the number of shares of Stock underlying the SAR between the Grant Date and the date of exercise of the SAR. |
12. | Employment Relationship. For purposes of this Agreement, the Employee shall be considered to be in the employment of the Company or an Affiliate as long as the Employee has an employment relationship with the Company or an Affiliate. The Committee shall determine any questions as to whether and when there has been a termination of such employment relationship, and the cause of such termination, under the Agreement and the Committees determination shall be final and binding on all persons. |
13. | Not an Employment Agreement. This Agreement is not an employment agreement, and no provision of this Agreement shall be construed or interpreted to create an employment relationship between the Employee and the Company or any of its Affiliates or guarantee the right to remain employed by the Company or any of its Affiliates for any specified term. |
14. | Notices. Any notice, instruction, authorization, request or demand required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Companys |
-7-
principal business office address and to the Employee at the Employees residential address indicated beneath the Employees signature on the execution page of this Agreement, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested. |
15. | Amendment and Waiver. Except as otherwise provided herein, this Agreement may be amended, modified or superseded only by written instrument executed by the Company and the Employee. Only a written instrument executed and delivered by the party waiving compliance hereof shall waive any of the terms or conditions of this Agreement. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than the Employee. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition. |
16. | Governing Law and Severability. This Agreement shall be governed by the laws of the State of Texas without regard to its conflicts of law provisions. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect. |
17. | No Rights as Stockholder. Unless and until shares of Stock are issued to the Employee under this Agreement, the Employee shall have no rights as a stockholder as a result of this Award. |
18. | Successors and Assigns. Subject to the limitations which this Agreement imposes upon the transferability of the SAR granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to the Employee, the Employees permitted assigns and upon the Employees death, the Employees estate and beneficiaries thereof (whether by will or the laws of descent and distribution), executors, administrators, agents, legal and personal representatives. |
19. | Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original for all purposes but all of which taken together shall constitute but one and the same instrument. |
-8-
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized as of the date first above written.
HARVEST NATURAL RESOURCES, INC. | ||
By: | ||
James A. Edmiston | ||
Title: | President & Chief Executive Officer |
Accepted:
EMPLOYEE |
###PARTICIPANT_NAME### |
-9-
EXHIBIT 31.1
I, James A. Edmiston, 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 9, 2012
By: | /s/ James A. Edmiston | |
James A. Edmiston | ||
President and Chief Executive Officer |
EXHIBIT 31.2
I, Stephen C. Haynes, 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 9, 2012
By: | /s/ Stephen C. Haynes | |
Stephen C. Haynes | ||
Vice President - Finance, Chief Financial Officer and Treasurer |
EXHIBIT 32.1
Accompanying Certificate
Pursuant to Rule 13a 14(b) or Rule 15d 14(b)
and 18 U.S.C Section 1350
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, 2012 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 9, 2012 | By: | /s/ James A. Edmiston | ||||
James A. Edmiston | ||||||
President and Chief Executive Officer |
EXHIBIT 32.2
Accompanying Certificate
Pursuant to Rule 13a 14 (b) or Rule 15d 14(b)
and 18 U.S.C Section 1350
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, 2012 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 9, 2012 | By: | /s/ Stephen C. Haynes | ||||
Stephen C. Haynes | ||||||
Vice President - Finance, Chief Financial Officer and Treasurer |
Indonesia (Details Textual) (USD $)
In Millions, unless otherwise specified |
1 Months Ended | 3 Months Ended | 6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|---|
Jul. 31, 2012
|
May 31, 2011
|
Jun. 30, 2012
|
Jun. 30, 2012
|
Jun. 30, 2012
Budong PSC [Member]
|
Dec. 31, 2011
Budong PSC [Member]
|
|
Indonesia (Textual) [Abstract] | ||||||
Drilling costs expensed to dry hole costs | $ 0.7 | $ 26.0 | ||||
Remaining work commitment at cost | 0.5 | |||||
Unproved oil and gas properties | 7.6 | 6.8 | ||||
Value of Remaining Work Commitment for First Exploration Phase at Cost Sharing Interest | $ 0.3 | |||||
Percentage of cost sharing interest in work commitments | 66.667% | 66.667% | 64.51% | 66.667% | 64.51% |
Investment in Equity Affiliate - Petrodelta (Details 1) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Schedule of assets and liabilities | ||
Current assets | $ 54,119 | $ 95,767 |
Property and equipment | 71,226 | 66,799 |
Other assets | 5,555 | 5,427 |
Current liabilities | 32,585 | 33,149 |
Net equity | 390,353 | 363,777 |
Petrodelta's [Member]
|
||
Schedule of assets and liabilities | ||
Current assets | 1,158,365 | 979,868 |
Property and equipment | 433,137 | 409,941 |
Other assets | 175,656 | 146,499 |
Current liabilities | 910,079 | 808,955 |
Other liabilities | 58,278 | 53,073 |
Net equity | $ 798,801 | $ 674,280 |
Summary of Significant Accounting Policies (Details 2) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Earnings Per Share | ||||
Income (loss) from continuing operations | $ 9,149 | $ (8,885) | $ 7,872 | $ (4,537) |
Discontinued operations | (989) | 98,665 | (1,104) | 95,399 |
NET INCOME ATTRIBUTABLE TO HARVEST | $ 8,160 | $ 89,780 | $ 6,768 | $ 90,862 |
Weighted average common shares outstanding | 37,375 | 34,039 | 36,130 | 33,992 |
Effect of dilutive securities | 3,424 | 6,221 | 1,469 | 6,035 |
Weighted average common shares, diluted | 40,799 | 40,260 | 37,599 | 40,027 |
Basic Earnings (Loss) Per Share: | ||||
Income (loss) from continuing operations | $ 0.25 | $ (0.26) | $ 0.22 | $ (0.13) |
Income (loss) from discontinued operations | $ (0.03) | $ 2.9 | $ (0.03) | $ 2.80 |
Basic earnings per share | $ 0.22 | $ 2.64 | $ 0.19 | $ 2.67 |
Diluted Earnings (Loss) Per Share: | ||||
Income (loss) from continuing operations | $ 0.22 | $ (0.22) | $ 0.21 | $ (0.11) |
Income (loss) from discontinued operations | $ (0.02) | $ 2.45 | $ (0.03) | $ 2.38 |
Diluted earnings per share | $ 0.20 | $ 2.23 | $ 0.18 | $ 2.27 |
Summary of Significant Accounting Policies (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2012
|
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Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Major components of property and equipment |
|
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Changes in noncontrolling interest |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share |
|
Oman (Details Textual) (EPSA [Member], USD $)
In Millions, unless otherwise specified |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2012
|
Dec. 31, 2011
|
|
EPSA [Member]
|
||
Oman (Textual) [Abstract] | ||
First exploration phase work commitment | $ 22.0 | |
Drilling costs expensed to dry hole costs | 4.9 | 2.8 |
Unproved oil and gas properties | $ 6.1 | $ 5.3 |
Initial period of work program | 3 years | |
Work program maturity | May 2013 |
Operating Segments (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Segment Income (Loss) | ||||
Segment Income (Loss) | $ (7,982) | $ (11,818) | $ (20,918) | $ (19,806) |
Net income attributable to Harvest | 8,160 | 89,780 | 6,768 | 90,862 |
Operating Segments [Member]
|
||||
Segment Income (Loss) | ||||
Net income attributable to Harvest | 8,160 | 89,780 | 6,768 | 90,862 |
Operating Segments [Member] | Discontinued operations (Antelope Project) [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | (989) | 98,665 | (1,104) | 95,399 |
Operating Segments [Member] | Venezuela [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | 17,733 | 14,115 | 30,448 | 27,329 |
Operating Segments [Member] | Indonesia [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | (1,225) | (1,596) | (3,701) | (3,014) |
Operating Segments [Member] | Gabon [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | (1,670) | (717) | (2,985) | (1,059) |
Operating Segments [Member] | Oman [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | (923) | (489) | (6,531) | (1,045) |
Operating Segments [Member] | United States [Member]
|
||||
Segment Income (Loss) | ||||
Segment Income (Loss) | $ (4,766) | $ (20,198) | $ (9,359) | $ (26,748) |
Dispositions (Details Textual) (USD $)
|
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Dispositions (Additional Textual) [Abstract] | |||
Proceeds from sale of projects | $ 217,800,000 | ||
Expense related to settlement of royalty payments | 100,000 | ||
Income tax benefit | 2,200,000 | 600,000 | |
Antelope Project [Member]
|
|||
Dispositions (Textual) [Abstract] | |||
Closed transaction to sell | May 17, 2011 | ||
Effective date of sale | Mar. 01, 2011 | ||
Accounts payable written off | 3,600,000 | ||
Write off of notes receivable | $ 5,200,000 |
Stock-Based Compensation (Details Textual) (USD $)
In Millions, except Share data, unless otherwise specified |
6 Months Ended | 1 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Mar. 30, 2012
|
May 31, 2012
Stock Appreciation Rights (SARs) [Member]
|
May 31, 2012
Restricted Stock Units (RSUs) [Member]
Director [Member]
|
May 31, 2012
Restricted Stock Units (RSUs) [Member]
Employee [Member]
|
|
Stock Based Compensation (Textual) [Abstract] | ||||||
Number of shares issued | 700,000.00000 | 100,000.00000 | 300,000.00000 | |||
Value of SARs issued to employees | $ 5.12 | |||||
Vesting period | 3 years | 1 year | 3 years | |||
Stock Based Compensation (Additional Textual) [Abstract] | ||||||
Stock options, shares | 46,900 | 41,666 | ||||
Cash proceeds | $ 0.3 | $ 0.4 | ||||
Equity distribution agreement date | Mar. 30, 2012 | |||||
Common stock, aggregate sales price | $ 75.0 | |||||
ATM ,Shares |
Investment in Equity Affiliate - Petrodelta (Details Textual) (USD $)
|
1 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 12 Months Ended | 6 Months Ended | 1 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nov. 30, 2010
|
Jun. 30, 2012
|
Jun. 30, 2012
bbl
|
Jun. 30, 2011
|
Jun. 30, 2012
Petrodelta's [Member]
|
Jun. 30, 2011
Petrodelta's [Member]
|
Jun. 30, 2012
Petrodelta's [Member]
|
Jun. 30, 2011
Petrodelta's [Member]
|
Dec. 31, 2011
Petrodelta's [Member]
|
Aug. 23, 2011
Petrodelta's [Member]
|
Jun. 30, 2012
Petrodelta's [Member]
Venezuela [Member]
|
Nov. 30, 2010
HNR Finance [Member]
|
Jun. 30, 2012
HNR Finance [Member]
|
|
Investment in Equity Affiliates (Textual) [Abstract] | |||||||||||||
Advance payment | $ 200,000 | $ 800,000 | |||||||||||
Repayment of advance | 100,000 | 100,000 | |||||||||||
Advances to equity affiliate | (150,000) | (296,000) | 2,500,000 | ||||||||||
Windfall profits tax | 74,687,000 | 65,345,000 | 159,425,000 | 92,471,000 | |||||||||
Royalties paid to Venezuela | 70 | ||||||||||||
Reduction in royalty | 28,900,000 | 29,400,000 | 67,400,000 | 44,700,000 | |||||||||
Reduction in royalty | 9,200,000 | 9,400,000 | 21,600,000 | 14,300,000 | |||||||||
Equity interest in unconsolidated equity affiliate | 40.00% | 40.00% | 40.00% | 40.00% | |||||||||
Percentage of interest owned by parent indirectly | 32.00% | 32.00% | 32.00% | ||||||||||
Royalty paid in-cash | 3.333% | ||||||||||||
Royalty paid in-kind | 30.00% | 30.00% | 30.00% | 30.00% | |||||||||
Oil sales, net | 2,900,000 | 2,900,000 | 6,700,000 | 4,500,000 | |||||||||
Oil sales, net | 900,000 | 900,000 | 2,100,000 | 1,400,000 | |||||||||
Dividend | 30,600,000 | ||||||||||||
Dividends Received by HNR Finance | 12,200,000 | 33,000,000 | |||||||||||
Organic Law on Sports, Physical Activity and Physical Education, Publishing date | Aug. 23, 2011 | ||||||||||||
Organic Law on Sports, Physical Activity and Physical Education, Beginning date | Jan. 01, 2012 | Jan. 01, 2012 | |||||||||||
Contribution to sports law | 0.01 | ||||||||||||
Liability for Sports law contribution | 500,000 | 800,000 | |||||||||||
Liability for Sports law contribution by parent indirectly | 200,000 | 300,000 | |||||||||||
Equity Method Investee Gross | 100.00% | ||||||||||||
Investment in Equity Affiliates (Additional Textual) [Abstract] | |||||||||||||
Dividends common stock cash from equity method investee due to indirect ultimate Owner | 9,800,000 | ||||||||||||
Percentage of interest owned by parent indirectly | 32.00% | 32.00% | 32.00% | ||||||||||
Total production, barrels | 2,000,000 | ||||||||||||
No of barrels for parent indirectly | 600,000 | ||||||||||||
Total production value | 193,800,000 | ||||||||||||
Value for parent indirectly | $ 62,000,000 |
Risks, Uncertainties, Capital Resources and Liquidity
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6 Months Ended |
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Jun. 30, 2012
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Risks, Uncertainties, Capital Resources and Liquidity [Abstract] | |
Risks, Uncertainties, Capital Resources and Liquidity |
Note 3 – Risks, Uncertainties, Capital Resources and Liquidity The oil and gas industry is a highly capital intensive and cyclical business with unique operating and financial risks. There are a number of variables and risks related to our exploration projects that could significantly utilize our cash balances, and affect our capital resources and liquidity. The environments in which we operate are often difficult and the ability to operate successfully depends on a number of factors including our ability to control the pace of development, our ability to apply “best practices” in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of certain countries are not mature and their reliability can be uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control. Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States. There are also a number of variables and risks related to our minority equity investment in Petrodelta that could significantly utilize our cash balances, and affect our capital resources and liquidity. Petrodelta’s capital commitments are determined by its business plan, and Petrodelta’s capital commitments are expected to be funded by internally generated cash flow. The total capital required to develop the fields in Venezuela may exceed Petrodelta’s available cash and financing capabilities, and there may be operational or contractual consequences due to this inability. Petrodelta’s ability to fully develop the fields in Venezuela will require a significant investment. Due to PDVSA’s liquidity constraints, PDVSA has not been providing the necessary monetary and contractual support required by Petrodelta. If we are called upon to fund our share of Petrodelta’s operations, our failure to do so could be considered a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta. Petrodelta also has a material impact on our results of operations for any quarterly or annual reporting period. See Note 10 – Investment in Equity Affiliate – Petrodelta. Petrodelta operates under a business plan, the success of which relies heavily on the market price of oil. To the extent that market prices of oil decline, the business plan, and thus our equity investment and/or operations and/or profitability, could be adversely affected. Operations in Venezuela are subject to various risks inherent in foreign operations. It is possible the legal or fiscal framework for Petrodelta could change and the Venezuela government may not honor its commitments. Our ability to implement or influence Petrodelta’s business plan, assure quality control and set the timing and pace of development could also be adversely impacted. No assurance can be provided that events beyond our control will not adversely affect the value of our minority investment in Petrodelta. On June 21, 2012, we and our wholly owned subsidiary HNR Energia entered into a share purchase agreement (the “SPA”) with PT Pertamina (Persero), a state-owned limited liability company existing under the laws of Indonesia (“Buyer”) for the sale of our interest in Venezuela for a cash purchase price of $725.0 million. See Note 9 – Venezuela, Share Purchase Agreement. We cannot assure you that the SPA will be consummated. The consummation of the SPA is subject to the satisfaction or waiver of a number of conditions, including, among others, the requirement that approvals are received from the Government of the Bolivarian Republic of Venezuela, the Government of the Republic of Indonesia, and the majority of our stockholders; requirements with respect to the accuracy of the representations and warranties of the parties to the SPA; and requirements with respect to the satisfaction or waiver of the covenants and obligations of the parties to the SPA. In addition, the SPA may be terminated in certain circumstances under the terms of the SPA. We cannot guarantee that the parties to the SPA will be able to meet all of the closing conditions of the SPA. If we are unable to meet all of the closing conditions, the Buyer would not be obligated to close the SPA. We also cannot be sure that circumstances, such as a material adverse effect, will not arise that would also allow the Buyer to terminate the SPA prior to closing. If the SPA does not close, our Board of Directors will be forced to evaluate other alternatives, which may be less favorable to us than the SPA. There can be no assurances as to whether this transaction will close or whether we will receive any cash proceeds related to the SPA. Our cash is being used to fund oil and gas exploration projects, debt, interest, and to a lesser extent general and administrative costs. We require capital principally to fund the exploration and development of new oil and gas properties. As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. We do not have any remaining work commitments for the current exploration phases of the Budong PSC or Block 64 EPSA. We entered the third exploration phase of the Dussafu PSC on May 28, 2012. The third exploration phase of the Dussafu PSC has a $7.0 million ($4.7 million net to our 66.667 percent interest) work commitment over a four year period (see Note 12 – Gabon). This work commitment is non-discretionary; however, we do have the ability to control the pace of expenditures. On July 17, 2012, we signed a contract for a semi-submersible drilling rig to drill an exploration well on the Gabon PSC. In the event that we elect to terminate the contract prior to the rig’s arrival on-site, we are obligated to compensate the drilling company $5.0 million ($3.3 million net to our 66.667 percent interest) for liquidated damages (see Note 16 – Subsequent Events). Historically, our primary ongoing source of cash has been dividends from Petrodelta and the sale of oil and gas properties. On May 17, 2011, we closed the transaction to sell the Antelope Project. The transaction had an effective date of March 1, 2011. We received cash proceeds of approximately $217.8 million which reflected increases to the purchase price for customary adjustments and deductions for transaction related costs (see Note 4 – Dispositions). Between Petrodelta’s formation in October 2007 and June 2010, Petrodelta declared and paid dividends of $105.5 million to HNR Finance, B.V. (“HNR Finance”), a wholly owned subsidiary of Harvest Holding ($84.4 million net to our 32 percent interest). In November 2010, Petrodelta’s board of directors declared a dividend of $30.6 million, $12.2 million net to HNR Finance ($9.8 million net to our 32 percent interest). Due to Petrodelta’s liquidity constraints caused by PDVSA’s insufficient monetary and contractual support, this dividend has not yet been received, although it is due and payable. There is uncertainty of the timing of receipt of the dividend receivable from Petrodelta and whether Petrodelta will declare or pay additional dividends in 2012 or 2013. See Note 14 – Related Party Transactions for a discussion of our obligations to our non-controlling interest holder, Vinccler, for any dividend received from Petrodelta. Also, any receipt of dividends while the SPA is active would become a purchase price adjustment under the SPA. We have and will continue to monitor our investment in Petrodelta. Should the dividend receivable not be collected timely, or facts and circumstances surrounding our investment change, our results of operations and our investment in Petrodelta could be adversely impacted. If facts and circumstances change, it is possible we could conclude our investment in Petrodelta should be accounted for using the cost method of accounting rather than the equity method of accounting. If that were to occur, the operations of Petrodelta would no longer be included in our results of operations. Currently, our source of cash is expected to be generated by accessing the debt and/or equity markets. On March 30, 2012, we announced that we had entered into an equity distribution agreement (the “Agreement”) with Knight Capital America, L.P. (“KCA”), a subsidiary of Knight Capital Group, Inc. relating to an “at-the-market” (“ATM”) offering of shares of our common stock having an aggregate sales price of up to $75.0 million. Under the terms of the Agreement, we may offer and sell shares of our common stock by means of transactions on the New York Stock Exchange (“NYSE”) or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated rates. We are unable to access the ATM during blackout periods or when we are in possession of material information which has not been made public. As of June 30, 2012, we have not accessed the ATM.
We incurred debt during 2010 which has imposed restrictions on us and increased our vulnerability to adverse economic and industry conditions. Our senior convertible notes impose restrictions on us that limit our ability to obtain additional financing. Our ability to meet these covenants is primarily dependent on meeting customary affirmative covenant clauses. Our inability to satisfy the covenants contained in our senior convertible notes would constitute an event of default, if not waived. An uncured default could result in the senior convertible notes becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business. As of June 30, 2012, we were in compliance with all of our long term debt covenants. Our senior convertible notes are due March 1, 2013. As of June 30, 2012, $16.5 million of the senior convertible notes had been converted into, or exchanged for, shares of our common stock. If the remaining debt is not converted or is only partially converted, we will be required to refinance the debt. Due to our current liquidity position, any debt instrument available to us is likely to have a substantial interest rate and/or provide for additional dilution to shareholders. There can be no assurances we will be able to refinance the debt on terms that are acceptable to us. If we are unable to obtain additional debt and/or equity sources, convert or exchange the senior convertible notes, or receive the Petrodelta dividend or our cash sources and requirements are different than expected, it will have a material adverse effect on our operations. In order to increase our liquidity to levels sufficient to meet our commitments, we continue to seek to secure additional capital to fund operations, to meet future expenditure requirements necessary to retain our rights under our PSCs and to pay remaining amounts due under our senior convertible notes to the extent the convertible notes are not subsequently exchanged for shares prior to their maturity date. We plan to secure capital by obtaining debt or project financing or refinancing or extending existing debt, or, if acceptable debt or project financing or refinancing is unavailable, by obtaining equity related financing, or exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, or sale of some or all of our assets. While we will continue to seek to secure capital, there can be no assurance that we will be able to enter any strategic relationship or transaction or that we will be successful in obtaining funds through debt, project finance or equity related financing or refinancing, or extending existing debt. Under certain circumstances, the structure of a strategic transfer of our rights under any PSC will require the approval of the governments of the countries in which we operate. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity related financing is uncertain. Raising additional funds by issuing shares or other types of equity securities would further dilute our existing stockholders. We cannot predict the timing, structure or other terms and conditions of any such arrangements or the consideration that may be paid with respect to any transaction and whether the consideration will meet or exceed our offering price. Our lack of revenues, cash inflows and the unpredictability of cash dividends from Petrodelta could make it difficult to obtain financing and, accordingly, there is no assurance adequate financing can be raised and/or on terms acceptable to us. Our ability to continue as a going concern depends upon the success of our planned exploration and development activities and the ability to secure additional financing to secure our current operations. There can be no guarantee of future capital acquisition, fundraising or explorations success or that we will realize the value of our unevaluated exploratory well costs. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. We believe that we will continue to be successful in securing any funds necessary to continue as a going concern. However, our current cash position and our ability to access additional capital may limit our available opportunities or not provide sufficient cash for operations.
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