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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 September 30, 2003 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 (IRS Employer Identification No.)
Incorporation or Organization)
15835 PARK TEN PLACE DRIVE, SUITE 115
HOUSTON, TEXAS 77084
(Address of Principal Executive Offices) (Zip Code)
(281) 579-6700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
At November 6, 2003, 35,420,411 shares of the Registrant's Common Stock were
outstanding.
HARVEST NATURAL RESOURCES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at September 30, 2003
and December 31, 2002................................. 3
Unaudited Consolidated Statements of Operations and
Comprehensive Income for the Three and Nine Months
Ended September 30, 2003 and 2002..................... 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002.............. 5
Notes to Consolidated Financial Statements...................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................... 21
Item 4. CONTROLS AND PROCEDURES......................................... 21
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS............................................... 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 22
SIGNATURES.................................................................... 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 146,370 $ 64,501
Restricted cash............................................................... 12 1,812
Marketable securities......................................................... -- 27,388
Accounts and notes receivable:
Accrued oil sales....................................................... 29,100 27,359
Joint interest and other, net........................................... 9,757 8,002
Commodity hedging contract.................................................... 1,745 --
Prepaid expenses and other.................................................... 1,453 2,969
------------ -----------
TOTAL CURRENT ASSETS.............................................. 188,437 132,031
RESTRICTED CASH ............................................................... 16 16
OTHER ASSETS ............................................................... 1,471 2,520
DEFERRED INCOME TAXES............................................................ 4,938 4,082
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANY................................ -- 51,783
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method - costs of $2,900
excluded from amortization in 2003 and 2002, respectively).............. 584,081 576,601
Other administrative property................................................. 8,567 7,503
------------ -----------
592,648 584,104
Accumulated depletion, depreciation and amortization.......................... (412,269) (439,344)
------------ -----------
180,379 144,760
------------ -----------
$ 375,241 $ 335,192
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade and other............................................. $ 9,074 $ 3,804
Accrued expenses.............................................................. 28,694 20,644
Accrued interest payable...................................................... 3,412 1,405
Income taxes payable.......................................................... 10,368 6,880
Commodity hedging contract.................................................... -- 430
Current portion of long-term debt............................................. 5,075 1,867
------------ -----------
TOTAL CURRENT LIABILITIES......................................... 56,623 35,030
LONG-TERM DEBT ............................................................... 98,425 104,700
ASSET RETIREMENT LIABILITY....................................................... 1,766 --
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST ............................................................... 27,614 24,145
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 a share; authorized 5,000 shares;
outstanding, none....................................................... -- --
Common stock, par value $0.01 a share; authorized 80,000 shares; issued 36,146
shares at September 30, 2003 and 35,900 shares at December 31, 2002..... 361 359
Additional paid-in capital.................................................... 174,284 173,559
Retained earnings............................................................. 19,773 234
Accumulated other comprehensive loss.......................................... (366) --
Treasury stock, at cost, 730 shares at September 30, 2003 and 650 shares at
December 31, 2002....................................................... (3,239) (2,835)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY........................................ 190,813 171,317
------------ -----------
$ 375,241 $ 335,192
============ ===========
See accompanying notes to consolidated financial statements.
3
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(in thousands, except per share data)
REVENUES
Oil sales $ 27,834 $ 38,841 $ 75,800 $ 99,110
Ineffective hedge activity -- -- (565) --
-------- -------- --------- ---------
27,834 38,841 75,235 99,110
-------- -------- --------- ---------
EXPENSES
Operating expenses 7,715 8,841 23,713 24,696
Depletion, depreciation and amortization 5,610 6,177 14,835 20,951
Write-downs of oil and gas properties and impairments 165 1,076 165 14,503
General and administrative 4,605 3,929 11,576 12,532
Arbitration settlement 1,477 -- 1,477 --
Bad debt recovery (374) (3,276) (374) (3,276)
Taxes other than on income 839 1,167 2,457 2,974
-------- -------- --------- ---------
20,037 17,914 53,849 72,380
-------- -------- --------- ---------
INCOME FROM OPERATIONS 7,797 20,927 21,386 26,730
OTHER NON-OPERATING INCOME (EXPENSE)
Gain on disposition of assets 34,422 1,006 34,422 144,064
Gain on early extinguishment of debt -- -- -- 874
Investment earnings and other 285 (2) 917 1,632
Interest expense (2,579) (2,492) (7,889) (13,501)
Net gain on exchange rates 2 670 527 5,102
-------- -------- --------- ---------
32,130 (818) 27,977 138,171
-------- -------- --------- ---------
INCOME FROM CONSOLIDATED
COMPANIES BEFORE INCOME
TAXES AND MINORITY INTERESTS 39,927 20,109 49,363 164,901
INCOME TAX EXPENSE 3,603 6,612 7,763 68,105
-------- -------- --------- ---------
INCOME BEFORE MINORITY INTERESTS 36,324 13,497 41,600 96,796
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY COMPANIES 1,367 2,590 3,469 6,001
-------- -------- --------- ---------
INCOME FROM CONSOLIDATED COMPANIES 34,957 10,907 38,131 90,795
EQUITY IN NET INCOME (LOSSES)
OF AFFILIATED COMPANY (1,164) 1,209 (18,592) (876)
-------- -------- --------- ---------
NET INCOME $ 33,793 $ 12,116 $ 19,539 $ 89,919
======== ======== ========= =========
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED MARK TO MARKET GAIN/(LOSS)
FROM CASH FLOW HEDGING ACTIVITIES,
NET OF TAX 21 (658) (366) (658)
-------- -------- --------- ---------
COMPREHENSIVE INCOME $ 33,814 $ 11,458 $ 19,173 $ 89,261
======== ======== ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.96 $ 0.35 $ 0.55 $ 2.60
======== ======== ========= =========
Diluted $ 0.91 $ 0.33 $ 0.53 $ 2.50
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
4
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2003 2002
------------ ------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 19,539 $ 89,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization .................................. 14,835 20,951
Write-downs of oil and gas properties ..................................... 165 14,503
Amortization of financing costs ........................................... 421 1,558
Gain on disposition of assets ............................................. (34,422) (144,064)
Gain on early extinguishment of debt ...................................... -- (874)
Equity in losses of affiliated company .................................... 18,592 876
Allowance for employee notes and accounts receivable ...................... (219) (3,040)
Non-cash compensation-related charges ..................................... 207 882
Minority interest in undistributed earnings of subsidiaries ............... 3,469 6,001
Deferred income taxes ..................................................... (667) 52,866
Changes in operating assets and liabilities:
Accounts and notes receivable ....................................... (2,779) (12,573)
Prepaid expenses and other .......................................... 1,516 (1,029)
Commodity hedging contract .......................................... (2,300) --
Accounts payable .................................................... 5,270 (3,728)
Accrued expenses .................................................... 5,437 (7,688)
Accrued interest payable ............................................ 2,007 (488)
Asset retirement liability .......................................... 1,766 --
Commodity hedging contract payable .................................. (430) --
Income taxes payable ................................................ 3,488 13,090
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 35,895 27,162
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments ............................................... 69,500 189,841
Additions of property and equipment ............................................. (50,888) (32,860)
Investment in and advances to affiliated companies .............................. 2,328 9,226
Increase in deposits and restricted cash ........................................ -- (2,800)
Decrease in restricted cash ..................................................... 1,800 --
Purchases of marketable securities .............................................. (256,058) (119,191)
Maturities of marketable securities ............................................. 283,446 106,800
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES ........................... 50,128 151,016
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options ..................................... 520 2,436
Purchase of treasury stock ...................................................... (404) --
Payments on long-term debt ...................................................... (3,067) (131,488)
(Increase) decrease in other assets ............................................. (1,203) 81
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES ............................... (4,154) (128,971)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 81,869 49,207
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................................... 64,501 9,024
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................ $ 146,370 $ 58,231
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest expense ................................ $ 7,870 $ 14,093
============ ============
Cash paid during the period for income taxes .................................... $ 4,104 $ 2,680
============ ============
See accompanying notes to consolidated financial statements.
5
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 2003, we recorded an
allowance for doubtful accounts of $0.1 million related to the interest accrued
on the remaining amounts owed to us by our former Chief Executive Officer.
During the nine months ended September 30, 2002, we received and took in as
treasury stock 600,000 shares of common stock from A. E. Benton as a result of
the finalization of his plan of reorganization. See Note 8 - Related Party
Transactions.
See accompanying notes to consolidated financial statements.
6
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING
In our opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position as
of September 30, 2003, and the consolidated results of operations and cash flows
for the three and nine month periods ended September 30, 2003 and 2002. The
unaudited consolidated financial statements are presented in accordance with the
requirements of Form 10-Q and do not include all disclosures normally required
by accounting principles generally accepted in the United States of America.
Reference should be made to our consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2002.
The consolidated results of operations for the three and nine month
periods ended September 30, 2003 are not necessarily indicative of the results
to be expected for the full year.
ORGANIZATION
Harvest Natural Resources, Inc. is engaged in the exploration,
development, production and management of oil and gas properties. We conduct our
business principally in Venezuela (Benton-Vinccler C.A. or "Benton-Vinccler")
and, until September 25, 2003, through our equity investment in a Russian
entity. Our equity investment in the Russian entity was sold on September 25,
2003.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
wholly-owned and majority-owned subsidiaries. The equity method of accounting is
used for companies and other investments in which we have significant influence.
All intercompany profits, transactions and balances have been eliminated. We
accounted for our investment in LLC Geoilbent ("Geoilbent") and Arctic Gas
Company ("Arctic Gas"), prior to the sale of our interests, based on a fiscal
year ending September 30 (see Note 2 - Investments In and Advances to Affiliated
Companies).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates pertain to
proved oil, plant products and gas reserves, including estimated dismantlement,
restoration and abandonment costs and future development costs. Actual results
could differ from those estimates.
ACCOUNTS AND NOTES RECEIVABLE
Allowance for doubtful accounts related to an employee note was $3.3
million and $3.5 million at September 30, 2003 and December 31, 2002,
respectively. See Note 8 - Related Party Transactions.
MINORITY INTERESTS
We record a minority interest attributable to the minority shareholder
of our Venezuela subsidiary. The minority interest in net income and losses is
subtracted or added to arrive at consolidated net income.
7
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 130")
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. We reflected
unrealized mark-to-market gains/(losses) from cash flow hedging activities as
other comprehensive income/(loss) during the three and nine month periods ended
September 30, 2003 and 2002, and in accordance with SFAS 130, have presented
comprehensive income/(loss) in the unaudited consolidated statement of
operations.
DERIVATIVES AND HEDGING
Statement of Financial Accounting Standards No. 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities. All derivatives are recorded on the balance sheet at fair
value. To the extent that the hedge is determined to be effective, changes in
the fair value of derivatives for qualifying cash flow hedges are recorded each
period in other comprehensive income. Our derivatives are cash flow hedge
transactions in which we hedge the variability of cash flows related to
forecasted transactions. These derivative instruments have been designated as a
cash flow hedge and the changes in the fair value will be reported in other
comprehensive income assuming the highly effective test is met, and have been
reclassified to earnings in the period in which earnings are impacted by the
variability of the cash flows of the hedged item.
Benton-Vinccler hedged a portion of its 2003 oil sales by purchasing a
WTI crude oil "put" to protect its 2003 cash flow. The put is for 10,000 barrels
of oil per day for the period of March 1, 2003 through December 31, 2003. This
put qualified under the highly effective test, and the mark-to-market loss at
September 30, 2003 is included in other comprehensive loss. Due to the pricing
structure for our Venezuela oil, the put has the economic effect of hedging
approximately 20,800 barrels of oil per day. The put cost is $2.50 per barrel,
or $7.7 million, and has a strike price of $30.00 per barrel. Benton-Vinccler
hedged a portion of its 2002 oil sales by purchasing a commodity contract
(costless collar), which required payment to (or receipts from) counterparties
based on a WTI floor price of $23.00 and a ceiling price of $30.15 for 6,000
barrels of oil per day. This collar qualified under the highly effective test,
and the mark-to-market loss at September 30, 2002 is included in other
comprehensive loss. The notional amount of each financial instrument is based on
expected sales of crude oil production from existing and future development
wells and the related incremental oil production associated with production from
high gas-to-oil ratio wells after the installation of a gas pipeline. These
instruments protect our projected investment return and cash flow derived from
our production by reducing the impact of a downward crude oil price movement
until their expiration.
At September 30, 2003 and 2002, Accumulated Other Comprehensive Loss
consisted of $0.6 million ($0.4 million net of tax) and $1.0 million ($0.7
million net of tax), respectively, of unrealized losses on our oil sales hedge.
Oil sales for the nine months ended September 30, 2003 includes $3.7 million
loss in settlement on this hedge. The deferred net losses recorded in
Accumulated Other Comprehensive Loss are expected to be reclassified to earnings
during the next twelve months.
ASSET RETIREMENT LIABILITY
Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). As
a result of adopting this statement, Benton-Vinccler recorded under the full
cost method of accounting for oil and gas properties an increase in oil and gas
properties as well as a corresponding liability account in the amount of $4.3
million. This asset retirement obligation is associated with the plugging and
abandonment of certain wells in Venezuela. SFAS 143 requires entities to record
the fair value of a liability for a legal obligation to retire an asset in the
period in which the liability is incurred if a reasonable estimate of fair value
can be made. Historically, we determined that there would be no wells to plug
and abandon before returning the fields to PDVSA. In January 2003, one of our
wells suffered a leak in its casing allowing natural gas to flow to the surface.
The well was plugged and abandoned and a comprehensive study of all existing
wells was undertaken. This study indicated an increased likelihood that we would
have to plug and abandon certain of the wells during the term of the agreement.
No prior provision was undertaken and no cumulative adjustment was required. We
have abandoned ten wells in the first nine months of 2003. Changes in asset
retirement obligations during the nine months ended September 30, 2003 were as
follows:
8
Asset retirement obligations as of January 1, 2003....... $ --
Liabilities recorded during the first quarter............ 4,237
Liabilities settled during the nine months............... (560)
Revisions in estimated cash flows........................ (1,967)
Accretion expense........................................ 56
-------
Asset retirement obligations as of September 30, 2003....... $ 1,766
=======
The pro forma effect, as if FAS 143 had been adopted in the prior
periods, on net income and earnings per share is not material.
EARNINGS PER SHARE
Basic earnings per common share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The weighted average number of common shares
outstanding for computing basic EPS was 35.3 million for each of the three and
nine months ended September 30, 2003, and 34.7 million and 34.5 million for the
three and nine months ended September 30, 2002, respectively. Diluted EPS
reflects the potential dilution which would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The weighted average number of common shares outstanding for computing diluted
EPS, including dilutive stock options, was 37.0 million and 36.8 million for the
three and nine months ended September 30, 2003, respectively, and 36.4 million
and 35.9 million for the three and nine months ended September 30, 2002,
respectively. In September 2002, our board of directors authorized the
repurchase of up to one million shares of our common stock. For the nine months
ended September 30, 2003, we repurchased approximately 80,000 shares for an
aggregate price of $0.4 million.
An aggregate of 2.4 million and 2.7 million options and warrants to
purchase common stock were excluded from the earnings per share calculations
because their exercise price exceeded the average share price during the three
and nine months ended September 30, 2003, respectively, and 4.1 million for each
of the three and nine months ended September 30, 2002.
STOCK-BASED COMPENSATION
At September 30, 2003, we had several stock-based employee compensation
plans, which are more fully described in Note 6 - Stock Option and Stock
Purchase Plans in our Annual Report on Form 10-K for the year ended December 31,
2002. Prior to 2003, we accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Effective January 1, 2003, we adopted
the fair value recognition provisions of Statement of Financial Accounting
Standards Statement No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation, prospectively to all employee awards granted, modified, or settled
after January 1, 2003. Awards under our plans vest in periodic installments
after one year of their grant and expire ten years from grant date. Therefore,
the costs related to stock-based employee compensation included in the
determination of net income in the three and nine months ended September 30,
2003 and 2002 are less than that which would have been recognized if the fair
value based method had been applied to all awards since the original effective
date of FAS 123. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to all
outstanding and unvested awards in each period.
9
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share data)
Net income, as reported $ 33,793 $ 12,116 $ 19,539 $ 89,919
Add: Stock based employee compensation
cost, net of tax 85 379 212 882
Less: Total stock-based employee
compensation cost determined
under fair value based method, net of tax (268) (436) (797) (1,442)
--------- --------- --------- ---------
Net income - proforma $ 33,610 $ 12,059 $ 18,954 $ 89,359
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 0.96 $ 0.35 $ 0.55 $ 2.60
========= ========= ========= =========
Basic - proforma $ 0.95 $ 0.35 $ 0.54 $ 2.59
========= ========= ========= =========
Diluted - as reported $ 0.91 $ 0.33 $ 0.53 $ 2.50
========= ========= ========= =========
Diluted - proforma $ 0.91 $ 0.33 $ 0.51 $ 2.49
========= ========= ========= =========
PROPERTY AND EQUIPMENT
We follow the full cost method of accounting for oil and gas properties
with costs accumulated in cost centers on a country-by-country basis, subject to
a cost center ceiling (as defined by the Securities and Exchange Commission).
All costs associated with the acquisition, exploration, and development of oil
and natural gas reserves are capitalized as incurred. For the nine months ended
September 30, 2002 we capitalized interest of $0.5 million. Only overhead that
is directly identified with acquisition, exploration or development activities
is capitalized. No overhead has been capitalized in the nine months ended
September 30, 2003 and 2002. All costs related to production, general corporate
overhead and similar activities are expensed as incurred.
The costs of unproved properties are excluded from amortization until
the properties are evaluated. Excluded costs attributable to the China cost
center were $2.9 million at September 30, 2003 and December 31, 2002. At least
annually we evaluate our unproved properties on a country-by-country basis for
possible impairment. If we abandon all exploration efforts in a country where no
proved reserves are assigned, all exploration and acquisition costs associated
with the country are expensed. Due to the unpredictable nature of exploration
drilling activities, the amount and timing of impairment expenses are difficult
to predict with any certainty. We recognized write-downs of $0.2 million and
$14.5 million at September 30, 2003 and December 31, 2002, respectively, for
additional capitalized costs associated with former exploration prospects and
the China WAB-21 block. The ultimate timing of when the costs related to the
acquisition of Benton Offshore China Company will be included in amortizable
costs is uncertain.
Statement of Financial Accounting Standards No. 141 - Business
Combinations ("FAS 141") and No. 142 - Goodwill and Other Intangible Assets
("FAS 142") included new terminology on the disclosure of what constitutes an
intangible asset. One interpretation being considered relative to these
standards is that a mineral interest associated with proved and undeveloped oil
and gas leasehold acquisition costs should be classified separately in Oil and
Gas Properties on the Consolidated Balance Sheet as intangible assets, and the
disclosures required by FAS 141 and FAS 142 would be included in the Notes to
Financial Statements. We believe that the presentation and disclosure of the
$2.9 million excluded costs attributed to the China cost center is appropriate
pending further guidance on this matter.
All capitalized costs and estimated future development costs (including
estimated dismantlement, restoration and abandonment costs) of proved reserves
are depleted using the units of production method based on the total proved
reserves of the country cost center. Depletion expense, substantially all of
which was attributable to the Venezuelan cost center for the nine months ended
September 30, 2003 and 2002, was $13.7 million and $19.9 million ($2.57 and
$2.58 per barrel), respectively. Depreciation of furniture and fixtures is
computed using the straight-line method with depreciation rates based upon the
estimated useful life of the property, generally five years. Leasehold
improvements are depreciated over the life of the applicable lease. Depreciation
expense was $1.1 million for the nine months ended September 30, 2003 and 2002.
10
NOTE 2 - INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES
On September 25, 2003, we sold our equity investment in Geoilbent to a
nominee of the Yukos Oil Company and recognized a gain on the sale of $34.4
million (see Note 7 - Russian Operations). Prior to the sale, our 34 percent
equity investment in Geoilbent was accounted for using the equity method due to
the significant influence we exercised over their operations and management.
Investments included amounts paid to the investee company for shares of stock
and other costs incurred associated with the acquisition and evaluation of
technical data for the oil fields operated by the investee company. Equity in
earnings of Geoilbent is based on a fiscal year ending September 30. No
dividends have been paid to us from Geoilbent.
Equity in earnings and losses and investments in and advances to
Geoilbent are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
Investments
Equity in net assets ............. $ -- $ 28,056
Other costs, net of amortization . -- 263
------------ ------------
Total investments .......... -- 28,319
Advances and interest on note receivable -- 2,527
Equity in earnings ..................... -- 20,937
------------ ------------
Total $ -- $ 51,783
============ ============
NOTE 3 - LONG-TERM DEBT
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
Senior unsecured notes with interest at 9.375%.
See description below ................... $ 85,000 $ 85,000
Note payable with interest at 6.8%.
See description below ................... 3,000 3,900
Bolivar denominated note payable.
See description below ................... -- 2,167
Note payable with interest at 7.8%.
See description below ................... 15,500 15,500
------------ ------------
103,500 106,567
Less current portion .......................... 5,075 1,867
------------ ------------
$ 98,425 $ 104,700
============ ============
In November 1997, we issued $115.0 million in 9.375 percent senior
unsecured notes due November 1, 2007 ("2007 Notes"), of which we have
repurchased $30.0 million. Interest on the 2007 Notes is due May 1 and November
1 of each year.
In March 2001, Benton-Vinccler borrowed $12.3 million from a Venezuelan
commercial bank, for construction of an oil pipeline. The unpaid portion of the
loan bears interest payable monthly based on 90-day London Interbank Borrowing
Rate ("LIBOR") plus 5 percent with principal payable quarterly for five years.
In October 2002, Benton-Vinccler executed a note and borrowed $15.5
million to fund construction of a gas pipeline and related facilities to deliver
natural gas from the Uracoa Field to a Petroleos de Venezuela, S.A. ("PDVSA")
pipeline. The interest rate for this loan is LIBOR plus 6 percent determined
quarterly. The term is four years with a quarterly amortization of $1.3 million
beginning with the first quarter 2004 to coincide with the first payment from
our gas sales.
11
The notes payable ($18.5 million) provide for certain limitations on
mergers and sale of assets. We have guaranteed the repayment of these notes.
At September 30, 2003, we and Benton-Vinccler were in compliance with
all note covenants.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
We have employment contracts with four executive officers which provide
for annual base salaries, eligibility for bonus compensation and various
benefits. The contracts provide for a lump sum payment as a multiple of base
salary in the event of termination of employment without cause. In addition,
these contracts provide for payments as a multiple of base salary and bonus, tax
reimbursement and a continuation of benefits in the event of termination without
cause following a change in control. By providing one year notice, these
agreements may be terminated by either party on May 31, 2005.
In July 2001, we leased for three years office space in Houston, Texas
for approximately $11,000 per month. We lease 17,500 square feet of space in a
California building which we no longer occupy under a lease agreement that
expires in December 2004, all of which has been subleased for rents that
approximate our lease costs.
NOTE 5 - TAXES
TAXES OTHER THAN ON INCOME
Benton-Vinccler pays municipal taxes on operating fee revenues it
receives for production from the South Monagas Unit. The nine months ended
September 30, 2002 included a non-recurring foreign payroll tax adjustment of
$0.7 million. We have incurred the following Venezuelan municipal taxes and
other taxes (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Venezuelan Municipal Taxes $ 713 $ 990 $ 2,053 $ 2,937
Franchise Taxes 61 60 145 123
Payroll and Other Taxes 65 117 259 (86)
-------- -------- -------- --------
$ 839 $ 1,167 $ 2,457 $ 2,974
======== ======== ======== ========
TAXES ON INCOME
At December 31, 2002, we had, for U.S. federal income tax purposes,
operating loss carryforwards of approximately $52.1 million expiring in the
years 2018 through 2022. We expect to utilize $22.8 million in operating loss
carryforwards to offset the gain on the sale of our equity investment in
Geoilbent. Income tax expense represents foreign income taxes attributable to
our Venezuela operations.
We do not provide deferred income taxes on undistributed earnings of
international consolidated subsidiaries for possible future remittances as all
such earnings are reinvested as part of our ongoing business.
NOTE 6 - OPERATING SEGMENTS
We regularly allocate resources to and assess the performance of our
operations by segments that are organized by unique geographic and operating
characteristics. The segments are organized in order to manage regional
business, currency and tax related risks and opportunities. Revenues from the
Venezuela operating segment are derived from the production and sale of oil.
Operations included under the heading "United States and other" include
corporate management, exploration and production activities, cash management and
financing activities performed in the United States and other countries which do
not meet the requirements for separate disclosure. All intersegment revenues,
expenses and receivables are eliminated in order to reconcile to consolidated
totals. Corporate general and administrative and interest expenses are included
in the United States and other segment and are not allocated to other operating
segments:
12
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
OPERATING SEGMENT REVENUES
Oil sales:
Venezuela $ 27,834 $ 38,841 $ 75,235 $ 99,110
-------- -------- -------- --------
Total oil sales 27,834 38,841 75,235 99,110
-------- -------- -------- --------
OPERATING SEGMENT INCOME (LOSS)
Venezuela 5,464 10,357 13,873 23,963
Russia (1,577) 344 (18,945) (2,870)
United States and other 29,906 1,415 24,611 68,826
-------- -------- -------- --------
Net income $ 33,793 $ 12,116 $ 19,539 $ 89,919
======== ======== ======== ========
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
OPERATING SEGMENT ASSETS
Venezuela.................... $ 236,773 $ 209,733
Russia....................... 382 52,302
United States and other...... 189,302 122,355
------------ -----------
Subtotal..................... 426,457 384,390
Intersegment eliminations.... (51,216) (49,198)
------------ -----------
$ 375,241 $ 335,192
============ ===========
NOTE 7 - RUSSIAN OPERATIONS
GEOILBENT
On September 25, 2003, we sold our equity investment in Geoilbent to a
nominee of the Yukos Oil Company for $69.5 million plus the repayment of the
subordinated loan and certain payables owed to us by Geoilbent in the amount of
$5.5 million. Prior to the sale, we owned 34 percent of Geoilbent, a Russian
limited liability company, formed in 1991 to develop, produce and market crude
oil from the North Gubkinskoye and South Tarasovskoye Fields in the West Siberia
region of Russia. Our investment in Geoilbent was accounted for using the equity
method and was based on a fiscal year ending September 30. Sales quantities
attributable to Geoilbent for the nine months ended June 30, 2003 and 2002 were
4.3 million barrels (2.5 million domestic and 1.8 million export) and 5.3
million barrels (3.4 million domestic and 1.9 million export), respectively.
Prices for crude oil for the nine months ended June 30, 2003 and 2002 averaged
$13.57 ($7.08 domestic and $22.58 export) and $12.23 ($7.49 domestic and $20.99
export) per barrel, respectively. Depletion expense attributable to Geoilbent
for the nine months ended June 30, 2003 and 2002 was $3.62 and $3.32 per barrel,
respectively. All amounts represent 100 percent of Geoilbent. Summarized
financial information for Geoilbent follows (in thousands):
13
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
STATEMENTS OF OPERATIONS:
Revenues
Oil sales $ 18,213 $ 25,288 $ 57,845 $ 64,902
Expenses
Selling and distribution expenses 1,901 1,800 4,605 5,708
Operating expenses 4,298 3,572 12,421 11,132
Write-down of oil and gas properties -- -- 50,000 --
Depletion, depreciation and amortization 4,742 5,349 15,562 17,586
General and administrative 2,069 1,686 5,847 5,656
Taxes other than on income 8,128 7,265 24,009 19,995
-------- -------- -------- --------
21,138 19,672 112,444 60,077
-------- -------- -------- --------
Income (loss) from operations (2,925) 5,616 (54,599) 4,825
Other Non-Operating Income (Expense)
Other income 161 301 258 1,143
Interest expense (541) (863) (1,472) (3,734)
Net gain on exchange rates 344 18 862 1,637
-------- -------- -------- --------
(36) (544) (352) (954)
-------- -------- -------- --------
Income (loss) before income taxes (2,961) 5,072 (54,951) 3,871
Income tax expense (benefit) 462 69 (269) 2,123
-------- -------- -------- --------
Net income (loss) $ (3,423) $ 5,003 $(54,682) $ 1,748
======== ======== ======== ========
BALANCE SHEET DATA: JUNE 30, 2003 SEPTEMBER 30, 2002
------------- -------------------
Current Assets ............... $ 23,530 $ 18,785
Other Assets ................. 133,886 186,815
Current Liabilities .......... 66,995 54,051
Other Liabilities ............ 2,875 7,500
Net Equity.................... 87,546 144,049
Due to low Russian domestic oil prices, the net present value of
Geoilbent's proved reserves at December 31, 2002 was lower than Geoilbent's
unamortized capitalized cost of its oil and gas properties at that date. As a
result, Geoilbent recorded a $50 million full cost ceiling test write-down in
the three months ended December 31, 2002. Russian domestic oil prices
historically decline in the winter months due to export limitations and rise in
the spring and early summer.
As of September 30, 2002, the Geoilbent shareholders had provided
Geoilbent with subordinated loans totaling $7.5 million ($2.5 million from us).
These loans were unsecured, repayable in January 2004 and were recorded as a
current liability at June 30, 2003. The loan by us was repaid as part of the
sale of our equity investment in Geoilbent.
ARCTIC GAS COMPANY
On April 12, 2002, we sold our 68 percent equity interest in Arctic
Gas. The equity earnings of Arctic Gas have historically been based on a fiscal
year ended September 30. The Statements of Operations shown below are reflected
in our results for the three and nine months ended June 30, 2002.
14
We accounted for our interest in Arctic Gas using the equity method due
to the significant influence we exercised over the operating and financial
policies of Arctic Gas. Our weighted-average equity interest, for the three and
nine months ended June 30, 2002 was 68 and 40 percent, respectively. Summarized
financial information for Arctic Gas follows (in thousands). All amounts
represent 100 percent of Arctic Gas.
THREE MONTHS ENDED NINE MONTHS ENDED
STATEMENT OF OPERATIONS: JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Oil Sales.................................. $ 1,449 $ 7,880
Expenses
Selling and distribution expenses.... 582 3,170
Operating expenses................... 522 2,473
Depreciation......................... 20 333
General and administrative........... 260 2,112
Taxes other than on income........... 128 1,261
------------- -------------
1,512 9,349
------------- -------------
Loss from operations....................... (63) (1,469)
Other Non-Operating Income (Expense)
Other income (expense)............... 1 (4)
Interest expense..................... (570) (1,540)
Net loss on exchange rates........... (100) (182)
------------- -------------
(669) (1,726)
------------- -------------
Loss before income taxes................... (732) (3,195)
Income tax benefit......................... -- --
------------- -------------
Net loss................................... $ (732) $ (3,195)
============= =============
BALANCE SHEET DATA: SEPTEMBER 30, 2001
------------------
Current assets ............................. $ 1,205
Other assets ............................... 10,120
Current liabilities ........................ 23,955
Net deficit................................. (12,630)
NOTE 8 - RELATED PARTY TRANSACTIONS
We have entered into construction service agreements with Venezolana
International, S.A. ("Vinsa"). Vinsa is an affiliate of Venezolana de
Inversiones y Construcciones Clerico, C.A., which owns 20 percent of
Benton-Vinccler. Vinsa has provided $1.0 million for the nine months ended
September 30, 2003, and $0.7 million for the year ended December 31, 2002,
respectively, in construction related services on our Venezuelan gas pipeline
and field operations.
From 1996 through 1998, we made unsecured loans to our then Chief
Executive Officer, A. E. Benton, bearing interest at the rate of 6 percent per
annum. We subsequently obtained a security interest in Mr. Benton's shares of
our stock and stock options. In August 1999, Mr. Benton filed a chapter 11
(reorganization) bankruptcy petition in the U.S. Bankruptcy Court for the
Central District of California, in Santa Barbara, California. In February 2000,
we entered into a separation agreement with Mr. Benton pursuant to which we
retained Mr. Benton under a consulting agreement to perform certain services for
us. In addition, the consulting agreement provided Mr. Benton with incentive
bonuses tied to our net cash receipts from the sale of our interests in Arctic
Gas and Geoilbent. In June 2002, we made an incentive bonus payment to Mr.
Benton of $1.5 million, subject to future adjustment, in connection with the
Arctic Gas sale. We recorded the bonus payment as a reduction of the gain on the
Arctic Gas sale.
15
In May 2001, we and Mr. Benton entered into a settlement and release
agreement under which the consulting agreement was terminated as to future
services and Mr. Benton agreed to propose a plan of reorganization in his
bankruptcy case that provided for the repayment of our loans to him. In March
2002, Mr. Benton filed a plan of reorganization, and on July 31, 2002, the
bankruptcy court confirmed the plan of reorganization. At the time the plan
became final, Mr. Benton's indebtedness was about $6.7 million for which we
provided a full allowance for bad debt. On August 14, 2002, we exercised our
rights with respect to 600,000 shares of our stock pledged to us as partial
repayment of the loan and took the shares into our treasury stock. Based on a
$3.56 closing price for the stock on that date, the value of the shares was $2.1
million. Also, in September 2002 and July 2003, we received payments totaling
about $1.3 million as distributions from Mr. Benton's debtor-in-possession
account. Finally, under the terms of the settlement agreement, we have retained
about $0.2 million from the Arctic Gas bonus payment to Mr. Benton, bringing the
total recovery on Mr. Benton's debt to $3.7 million. We continue to accrue
interest and provide a bad debt allowance on the remaining amount due. In
addition, we hold the rights to direct the exercise of Mr. Benton's stock
options.
We and Mr. Benton disagreed over Mr. Benton's remaining obligations to
us under the settlement agreement and plan of reorganization. In addition, Mr.
Benton claimed that he was due significant additional amounts with respect to
the incentive bonus associated with the Arctic Gas sale. We and Mr. Benton
submitted our dispute to binding arbitration and in October 2003 the arbitrator
found in favor of Mr. Benton in all material respects. As a result, we made a
payment to Mr. Benton of $1.9 million for the balance of the incentive bonus
associated with the Artic Gas sale and released certain funds for the payment of
Mr. Benton's taxes and expenses related to the disposition of his 600,000 shares
of stock. The $1.9 million is recorded in accounts payable, trade and other at
September 30, 2003.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Harvest Natural Resources, Inc. ("Harvest" or the "Company") cautions that any
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) contained in this report or made by management of
the Company involve risks and uncertainties and are subject to change based on
various important factors. When used in this report, the words "budget",
"anticipate", "expect", "believes", "goals", "projects", "plans", "anticipates",
"estimates", "should", "could", "assume" and similar expressions are intended to
identify forward-looking statements. In accordance with the provisions of the
Private Securities Litigation Reform Act of 1995, we caution you that important
factors could cause actual results to differ materially from those in the
forward-looking statements. Such factors include our substantial concentration
of operations in Venezuela, the political and economic risks associated with
international operations, the anticipated future development costs for our
undeveloped proved reserves, the risk that actual results may vary considerably
from reserve estimates, the dependence upon the abilities and continued
participation of certain of our key employees, the risks normally incident to
the operation and development of oil and gas properties 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, basis risk and counterparty credit risk
in executing commodity price risk management activities, the Company's ability
to acquire oil and gas properties that meet its objectives, changes in operating
costs, overall economic conditions, political stability, civil unrest, acts of
terrorism, currency and exchange risks, currency controls, changes in existing
or potential tariffs, duties or quotas, availability of sufficient financing,
changes in weather conditions, and ability to hire, retain and train management
and personnel. A discussion of these factors is included in our 2002 Annual
Report on form 10-K, which includes certain definitions and a summary of
significant accounting policies and should be read in conjunction with this
Quarterly Report.
AVAILABLE INFORMATION
We file annual, quarterly, current reports, proxy statements, and other
documents with the SEC under the Securities Act of 1934. The public may read and
copy any materials that we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. The public can
obtain any documents that we file with SEC at http://www.sec.gov.
We also make available, free of charge on or through our Internet
website (http://www.harvestnr.com), our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments
to those reports filed or furnished pursuant to Section 13(a) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. In addition, we have adopted a code of ethics
that applies to all of our employees, including our chief executive officer,
principal financial officer and principal accounting officer. The text of the
code of ethics has been posted on the Governance section of our website.
MANAGEMENT, OPERATIONAL AND FINANCIAL RESTRICTIONS
On September 25, 2003, we closed the sale of our 34 percent equity
investment in Geoilbent to a nominee of the Yukos Oil Company for cash of $69.5
million, plus $5.5 million of repayment of intercompany loan and payables. We
incurred $2.5 million in fees and expenses in connection with the sale. Under
the terms of the 2007 Senior unsecured notes, we are required to repurchase
notes at face value with the net cash proceeds of the sale unless within a
twelve month period such proceeds are used for the permanent repayment of
certain debt or reinvested in the oil and gas business. We intend to reinvest
the proceeds in oil and gas growth opportunities in Russia and Venezuela, retire
debt or for other corporate purposes. The sale of our equity investment in
Geoilbent has not diminished our plans to invest in Russia. We continue to
evaluate Russian opportunities as part of our growth strategy to access large
resources of hydrocarbons, enable resource development, manage risk and harvest
value.
For a description of matters related to our former chief executive
officer, see Note 8 - Related Party Transactions.
17
CAPITAL RESOURCES AND LIQUIDITY
Debt Reduction. We currently have a significant debt principal
obligation payable in 2007 ($85 million). We intend to continue to evaluate open
market debt purchases to reduce our 2007 Senior Notes outstanding.
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:
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
(in thousands)
2003 2002
--------------- --------------
Net cash provided by operating activities.... $ 35,895 $ 27,162
Net cash provided by investing activities.... 50,128 151,016
Net cash used in financing activities........ (4,154) (128,971)
--------------- --------------
Net increase in cash......................... $ 81,869 $ 49,207
=============== ==============
At September 30, 2003, we had current assets of $188.4 million and
current liabilities of $56.6 million, resulting in working capital of $131.8
million and a current ratio of 3.3:1. This compares with a working capital of
$97.0 million and a current ratio of 3.8:1 at December 31, 2002. The increase in
working capital of $34.8 million was primarily due to the sale of our equity
investment in Geoilbent.
Cash Flow from Operating Activities. During the nine months ended
September 30, 2003 and 2002, net cash provided by operating activities was $35.9
million and $27.2 million, respectively. The increase was due to a net increase
in operating assets and liabilities offset by the decrease in gain on
disposition of assets and related deferred income taxes. The increase in
operating liabilities was primarily due to accruals of costs related to
Benton-Vinccler workovers and the gas sales project offset by a decrease in
income taxes payable.
Cash Flow from Investing Activities. A $69.5 million payment was
received on the sale of our equity investment in Geoilbent. During the nine
months ended September 30, 2003 and 2002, we had drilling, production-related
and gas pipeline capital expenditures of approximately $50.9 million and $32.9
million, respectively. Included in the $50.9 million is the cost of drilling
three wells in the Bombal Field. See Note 1 - Organization and Summary of
Significant Accounting Policies. The nine months ended September 30, 2002
included a $189.8 million payment on the sale of Arctic Gas.
Cash Flow from Financing Activities. In the second quarter 2002, we
redeemed $108.0 million senior unsecured notes due May 1, 2003, repurchased
$20.0 million of the senior unsecured notes due November 1, 2007 and paid $3.6
million related to the Benton-Vinccler bank loan. At September 30, 2003, we were
in compliance with all covenants.
RESULTS OF OPERATIONS
You should read the following discussion of the results of operations
for the three and nine months ended September 30, 2003 and 2002 and the
financial condition as of September 30, 2003 and December 31, 2002 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, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Our results of operations for the third quarter 2003 primarily
reflected the results for Benton-Vinccler, which accounted for all of our
production and oil sales revenue. Oil revenue per barrel decreased 2 percent
(from $14.31 in 2002 to $13.97 in 2003) and oil sales quantities decreased 26
percent (from 2.7 million barrels "MMBbls" of oil in 2002 to 2.0 MMBbls of oil
in 2003) during the third quarter 2003 compared with 2002.
Our revenues decreased $11.0 million, or 28 percent, during the third
quarter 2003 compared with third quarter 2002. This was due to lower production
partially offset by higher world crude oil prices. Our sales quantities for the
third quarter 2003 from Venezuela were 21,700 barrels of oil per day "BOPD"
compared with 29,500 BOPD
18
for the third quarter 2002. Volumes were lower due to natural reservoir decline
rates and the fact that some wells did not immediately return to previous
production levels following the national work stoppage. In addition, expected
production from the Bombal Field to help offset these declines was delayed until
a gas lift plan was implemented in September.
Our operating expenses decreased $1.1 million, or 13 percent, during
the third quarter 2003 compared with the third quarter 2002. This was primarily
due to lower production volumes offset by higher workover and maintenance
expenses. Depletion, depreciation and amortization decreased $0.6 million, or 9
percent, during the third quarter 2003 compared with third quarter 2002 due to
decreased production at the South Monagas Unit. Depletion expense per barrel of
oil produced from Venezuela during the third quarter 2003 was $2.60 compared
with $2.13 during the third quarter 2002. The increase was due to higher costs
being depleted over fewer volumes. We recognized write-downs of $0.2 million and
$1.1 million at September 30, 2003 and 2002, respectively, for additional
capitalized costs associated with former exploration prospects. General and
administrative expenses increased $0.7 million, or 17 percent, during the third
quarter 2003 compared with the third quarter 2002. This was, in part, due to
legal fees associated with an arbitration proceeding and costs associated with a
prior attempt to sell our equity investment in Geoilbent. An arbitration
settlement of $1.5 million was recorded in the third quarter 2003, and bad debt
recovery of $0.4 million and $3.3 million was recorded in the third quarter 2003
and 2002, respectively, related to the recovery of the allowance for
uncollectible accounts in prior years. For additional information regarding the
arbitration and the bad debt recovery, see Note 8 - Related Party Transactions.
Taxes other than on income decreased during the third quarter 2003 compared with
the third quarter 2002. This was primarily due to decreased Venezuelan municipal
taxes, which are a function of oil revenues.
Interest expense increased $0.1 million, or 3 percent, during the third
quarter 2003 compared with the third quarter 2002. This was primarily due to
normal debt service. Net gain on exchange rates decreased $0.7 million for the
third quarter 2003 compared with the third quarter 2002. This was due to Bolivar
currency controls imposed in February 2003 which fixed the exchange rate between
the Bolivar and the U.S. dollar and restricts the ability to exchange Bolivars
for dollars and vice versa. We realized income before income taxes and minority
interest of $39.9 million during the third quarter 2003 compared with income of
$20.1 million in the third quarter 2002. Income before income taxes and minority
interest for the quarter ended 2003 includes a $34.4 million gain on the sale of
our equity investment in Geoilbent. Income tax expense declined $3.0 million due
to the lower Venezuela pre-tax income. The effective tax rate decreased from 33
to 9 percent in the third quarter 2003 compared to third quarter 2002. The rate
decrease was due to foreign income taxes incurred on profitable foreign
operations and an increase in U.S. income with no corresponding U.S. taxes
because they were offset by U.S. operating loss carryforwards for which the
benefit was fully reserved in historical periods. The income before minority
interests increased $22.8 million for the third quarter 2003 compared with the
third quarter 2002. This increase was due to the sale of our equity investment
in Geoilbent offset by decreased production of Benton-Vinccler.
Equity in net losses of affiliated companies decreased $2.4 million
during the third quarter 2003 compared with the third quarter 2002. See Note 7 -
Russian Operations. The third quarter 2002 included a loss of $0.5 million on
Arctic Gas.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
Oil revenue per barrel increased 10 percent (from $12.83 in 2002 to
$14.11 in 2003) and oil sales quantities decreased 31 percent (from 7.7 MMBbls
of oil in 2002 to 5.3 MMBbls in 2003) during the first nine months of 2003
compared with the first nine months of 2002.
Our revenues decreased $23.9 million, or 24 percent, during the first
nine months of 2003 compared with the first nine months of 2002. This was
primarily due to lower production offset by higher world crude oil prices. Our
sales quantities for the first nine months of 2003 from Venezuela were 19,500
BOPD compared with 28,300 BOPD for the first nine months of 2002. Volumes were
lower due to the national work stoppage, natural reservoir decline rates and the
fact that some wells did not immediately return to previous production levels
following the national work stoppage. In addition, expected production from the
Bombal Field to help offset these declines was delayed until a gas lift plan was
implemented in September.
19
Our operating expenses decreased $1.0 million, or 4 percent, during the
first nine months of 2003 compared with the first nine months of 2002. This was
primarily due to lower production volumes partially offset by higher workover
and maintenance expenses. Depletion, depreciation and amortization decreased
$6.1 million, or 29 percent, during the first nine months of 2003 compared with
the first nine months of 2002 due to decreased production and the addition of
natural gas reserves in the third quarter 2002. Depletion expense per barrel of
oil produced from Venezuela during the first nine months of 2003 was $2.57
compared with $2.58 during the first nine months of 2002. We recognized
write-downs of $0.2 million for additional capitalized costs associated with
former exploration projects at September 30, 2003, and $14.5 million at
September 30, 2002 for the impairment of the China WAB-21 block as well as
capitalized costs associated with exploration prospects. General and
administrative expenses decreased $1.0 million, or 8 percent, during the first
nine months of 2003 compared with the first nine months of 2002. This was, in
part, due to severance payments paid in the second quarter 2002. An arbitration
settlement of $1.5 million was recorded in the third quarter 2003, and bad debt
recovery of $0.4 million and $3.3 million was recorded in the third quarter 2003
and 2002, respectively, related to the recovery of the allowance for
uncollectible accounts in prior years. For additional information regarding the
arbitration and the bad debt recovery, see Note 8 - Related Party Transactions.
Taxes other than on income decreased during the first nine months of 2003
compared with the first nine months of 2002. This was primarily due to decreased
Venezuelan municipal taxes, which are a function of oil revenues.
Interest expense decreased $5.6 million, or 42 percent, during the
first nine months of 2003 compared with the first nine months of 2002. This was
primarily due to the redemption and repurchase of debt. Net gain on exchange
rates decreased $4.6 million for the first nine months of 2003 compared with the
first nine months of 2002. This was due to Bolivar currency controls imposed in
February 2003 which fixed the exchange rate between the Bolivar and the U.S.
dollar and restricts the ability to exchange Bolivars for dollars and vice
versa. We realized income before income taxes and minority interest of $49.4
million during the first nine months of 2003 compared with income of $164.9
million in the first nine months of 2002. Income before income taxes and
minority interest for the first nine months of 2003 included a $34.4 million
gain on the sale of our equity investment in Geoilbent and the first nine months
of 2002 included a $143.1 million gain on the sale of Arctic Gas. Income tax
expense decreased $60.3 million due to lower pre-tax income. The effective tax
rate decreased from 41 to 16 percent in the first nine months of 2003 compared
with the first nine months of 2002. The rate decrease was due to foreign income
taxes incurred on profitable foreign operations and an increase in U.S. income
with no corresponding U.S. taxes because they were offset by U.S. operating loss
carryforwards for which the benefit was fully reserved in historical periods.
The income before minority interests decreased $55.2 million for the first nine
months of 2003 compared with the first nine months of 2002. This decrease was
due to the sale of our equity investment in Geoilbent partially offset by
decreased production of Benton-Vinccler.
Equity in net losses of affiliated companies decreased $17.7 million
during the first nine months of 2003 compared with the first nine months of
2002. Equity in net losses included a $17.0 million (our share) full cost
ceiling test write-down. See Note 7 - Russian Operations. The first nine months
of 2002 included a loss of $1.5 million on Arctic Gas.
EFFECTS OF FOREIGN EXCHANGE RATES
Our results of operations and cash flow are affected by changing oil
prices. However, our South Monagas Unit oil sales are based on a fee adjusted
quarterly by the percentage change of a basket of crude oil prices instead of by
absolute dollar changes. This dampens both any upward and downward effects of
changing prices on our Venezuelan oil sales and cash flows. If the price of oil
increases, there could be an increase in our cost for drilling and related
services because of increased demand, as well as an increase in oil sales.
Fluctuations in oil and natural gas prices may affect our total planned
development activities and capital expenditure program. In February 2003,
Bolivar currency controls were imposed which fixed the exchange rate between the
Bolivar and the U.S. dollar and restricts the ability to exchange Bolivars for
dollars and vice versa. Oil companies, such as Benton-Vinccler, are allowed to
receive payments for oil sales in U.S. currency and pay dollar-denominated
expenses from those payments. We are unable to predict the full impact of the
currency controls on us or Benton-Vinccler.
20
CONCLUSION
While we can give you no assurance, we believe that our cash flow from
operations and $146.4 million of cash will provide sufficient capital resources
and liquidity to fund our planned growth strategy, capital expenditures and
semiannual interest payment obligations for the foreseeable future. Our
expectation is based upon our current estimate of projected price levels,
including our current hedge program, ability to remit funds from Benton-Vinccler
and an assumption that there will be no material interruption in production or
delays in the time periods between the submission of quarterly invoices to PDVSA
by Benton-Vinccler and the subsequent payments of these invoices by PDVSA.
Future cash flows are subject to a number of variables including, but not
limited to, the level of production, prices, as well as various economic and
political conditions that have historically affected the oil and natural gas
business. Prices for oil are subject to fluctuations in response to changes in
supply, market uncertainty and a variety of factors beyond our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from adverse changes in oil and natural
gas prices, interest rates, foreign exchange and political risk, as discussed in
our Annual Report on Form 10-K for the year ended December 31, 2002. Information
about market risk for the nine months ended September 30, 2003 does not differ
materially from that discussed in the 2002 annual report.
ITEM 4. CONTROLS AND PROCEDURES
In its recent Release No. 33-8238, effective August 14, 2003, the SEC,
among other things, adopted rules requiring reporting companies to maintain
disclosure controls and procedures to provide reasonable assurance that a
registrant is able to record, process, summarize and report the information
required in the registrant's quarterly and annual reports under the Securities
Exchange Act of 1934 (the "Exchange Act"). While we believe that our existing
disclosure controls and procedures have been effective to accomplish these
objectives, we intend to continue to examine, refine and formalize our
disclosure controls and procedures and to monitor ongoing developments in this
area.
Our principal executive officer and our principal financial officer
have informed us that, based upon their evaluation, as of September 30, 2003, of
our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) under the Exchange Act), they have concluded that those disclosure
controls and procedures are effective and there were no significant changes in
internal controls or factors that could significantly alter their evaluation.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as
Harvest Natural Resources, Inc., Chemex, Inc., Benton Vinccler, C.A.,
Gale Campbell and Sheila Campbell in the District Court for Harris
County, Texas. This suit was brought in May, 2003 by Excel alleging,
inter alia, breach of a consulting agreement between Excel and us,
misappropriation of proprietary information and trade secrets, and
fraud. Excel seeks actual and exemplary damages, injunctive relief and
attorneys' fees. The Court has abated the suit pending final judgment
of a case pending in Louisiana to which we are not a party. We dispute
Excel's claims and will vigorously defend against them.
A. E. Benton Proceeding. See Note 8 - Related Party Transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation filed September 9, 1988
(incorporated by reference to Exhibit 3.1 to our Registration
Statement No. 33-26333).
3.2 Amendment to Certificate of Incorporation filed June 7, 1991
(incorporated by reference to our Registration Statement No.
33-39214).
3.3 Amendment to Certificate of Incorporation filed May 20, 2002
(incorporated by reference to our Form 10-Q for the quarter
ended June 30, 2002).
3.4 Amended and Restated Bylaws (incorporated by reference to
Exhibit 4 to Amendment No. 1 to our Registration Statement on
Form 8-A filed October 29, 2003).
4.1 Form of Common Stock Certificate (incorporated by reference to
our Registration Statement No. 33-26333).
4.2 Amended and Restated Rights Agreement, dated as of September
16, 2003, between Harvest Natural Resources, Inc. and Wells
Fargo Bank Minnesota, N.A., including the Certificate of
Designation, Rights and Preferences of the Series B Preferred
Stock, the form of Rights Certificate and forms of assignment
and election thereto as Exhibits A, B and C, respectively
(incorporated by reference to Exhibit 5 to Amendment No. 1 to
our Registration Statement on Form 8-A filed October 29,
2003).
10.1 Sale and Purchase Agreement dated September 16, 2003 between
Harvest Natural Resources, Inc. and a nominee of the YUKOS Oil
Company, regarding the sale of Harvest Natural Resources,
Inc.'s equity investment in LLC Geoilbent (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K
filed September 25, 2003).
31.1 Certifications accompanying Quarterly Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 executed by
Peter J. Hill, President and Chief Executive Officer and
Steven W. Tholen, Senior Vice President, Chief Financial
Officer and Treasurer.
32.1 Certifications accompanying Quarterly Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 executed by
Peter J. Hill, President and Chief Executive Officer and
Steven W. Tholen, Senior Vice President, Chief Financial
Officer and Treasurer.
22
(b) Reports on Form 8-K
On August 7, 2003, we furnished a Report on Form 8-K for a press
release dated August 7, 2003 announcing our second quarter 2003
results.
On September 17, 2003, we furnished a Report on Form 8-K for a press
release dated September 16, 2003 announcing the sale of our equity
interest in LLC Geoilbent.
On September 25, 2003, we filed a Report on Form 8-K announcing the
disposition of our 34 percent equity investment in LLC Geoilbent.
On September 26, 2003, we furnished a Report on Form 8-K for a press
release dated September 25, 2003 announcing the closing of the sale of
our equity investment in LLC Geoilbent.
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SIGNATURES
Pursuant to the requirements of 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: November 12, 2003 By: /s/ Peter J. Hill
-------------------------------------
Peter J. Hill
President and Chief Executive Officer
Dated: November 12, 2003 By: /s/ Steven W. Tholen
-------------------------------------
Steven W. Tholen
Senior Vice President,
Chief Financial Officer and Treasurer
24
EXHIBIT INDEX
Exhibits
3.1 Certificate of Incorporation filed September 9, 1988
(incorporated by reference to Exhibit 3.1 to our Registration
Statement No. 33-26333).
3.2 Amendment to Certificate of Incorporation filed June 7, 1991
(incorporated by reference to our Registration Statement No.
33-39214).
3.3 Amendment to Certificate of Incorporation filed May 20, 2002
(incorporated by reference to our Form 10-Q for the quarter
ended June 30, 2002).
3.4 Amended and Restated Bylaws (incorporated by reference to
Exhibit 4 to Amendment No. 1 to our Registration Statement on
Form 8-A filed October 29, 2003).
4.1 Form of Common Stock Certificate (incorporated by reference to
our Registration Statement No. 33-26333).
4.2 Amended and Restated Rights Agreement, dated as of September
16, 2003, between Harvest Natural Resources, Inc. and Wells
Fargo Bank Minnesota, N.A., including the Certificate of
Designation, Rights and Preferences of the Series B Preferred
Stock, the form of Rights Certificate and forms of assignment
and election thereto as Exhibits A, B and C, respectively
(incorporated by reference to Exhibit 5 to Amendment No. 1 to
our Registration Statement on Form 8-A filed October 29,
2003).
10.1 Sale and Purchase Agreement dated September 16, 2003 between
Harvest Natural Resources, Inc. and a nominee of the YUKOS Oil
Company, regarding the sale of Harvest Natural Resources,
Inc.'s equity investment in LLC Geoilbent (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K
filed September 25, 2003).
31.1 Certifications accompanying Quarterly Report pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 executed by
Peter J. Hill, President and Chief Executive Officer and
Steven W. Tholen, Senior Vice President, Chief Financial
Officer and Treasurer.
32.1 Certifications accompanying Quarterly Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 executed by
Peter J. Hill, President and Chief Executive Officer and
Steven W. Tholen, Senior Vice President, Chief Financial
Officer and Treasurer.