HARVEST NATURAL RESOURCES INC - 10-Q Quarterly Report

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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 March 31, 2005 or

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

For the transition period from _______ to _______

COMMISSION FILE NO. 1-10762

----------

HARVEST NATURAL RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 77-0196707
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)

1177 ENCLAVE PARKWAY, SUITE 300
HOUSTON, TEXAS 77077
(Address of Principal Executive Offices) (Zip Code)

(281) 899-5700
(Registrant's Telephone Number, Including Area Code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

At April 20, 2005, 37,638,880 shares of the Registrant's Common Stock were
outstanding.

HARVEST NATURAL RESOURCES, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

See accompanying notes to consolidated financial statements.

3

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)

See accompanying notes to consolidated financial statements.

4

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to consolidated financial statements.

5

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRST QUARTER 2005 AND 2004 (UNAUDITED)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM REPORTING

In our opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals
only) necessary to present fairly the financial position as of March 31, 2005,
and the results of operations and cash flows for the first quarter 2005 and
2004. The unaudited consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America. Reference should be made to our consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended 2004, which include certain definitions and a summary of significant
accounting policies and should be read in conjunction with this Quarterly Report
on Form 10-Q. The results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year.

ORGANIZATION

Harvest Natural Resources, Inc. is engaged in the exploration,
development, production and management of oil and gas properties. We conduct our
business principally in Venezuela through our subsidiary Harvest-Vinccler C.A.
("Harvest Vinccler").

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of all
wholly-owned and majority-owned subsidiaries. All intercompany profits,
transactions and balances have been eliminated.

MINORITY INTERESTS

We record a minority interest attributable to the minority shareholder
of our Venezuela subsidiaries. The minority interest in net income and losses is
subtracted or added to arrive at consolidated net income.

COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130 ("SFAS 130")
requires that all items required to be recognized under accounting standards as
components of comprehensive income, be reported in a financial statement that is
displayed with the same prominence as other financial statements. We reflected
unrealized mark-to-market gains from cash flow hedging activities as other
comprehensive income during the first quarter 2005 and, in accordance with SFAS
130, have provided a separate line in the unaudited consolidated statement of
operations.

DERIVATIVES AND HEDGING

Statement of Financial Accounting Standards No. 133 ("SFAS 133"), as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. All derivatives are recorded on the balance
sheet at fair value. To the extent that the hedge is determined to be effective,
changes in the fair value of derivatives for qualifying cash flow hedges are
recorded each period in other comprehensive income. Our derivatives have been
designated as cash flow hedge transactions in which we hedge the variability of
cash flows related to future oil prices for some or all of our forecasted oil
production. The changes in the fair value of these derivative instruments have
been reported in other comprehensive income because the highly effective test
was met, and have been reclassified to earnings in the period in which earnings
are impacted by the variability of the cash flows of the hedged item.

In August 2004, Harvest Vinccler hedged a portion of its oil sales for
calendar year 2005 by purchasing a West Texas Intermediate ("WTI") crude oil put
for 5,000 barrels of oil per day. The put cost was $4.24 per barrel, or $7.7
million, and has a strike price of $40.00 per barrel. In September 2004, Harvest
Vinccler hedged an additional portion of its calendar year 2005 oil sales by
purchasing a second WTI crude oil put for 5,000 barrels of oil per day. The put
cost was $3.95 per barrel, or $7.2 million, and has a strike price of $44.40 per
barrel. Due to

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the pricing structure for our Venezuelan oil, these two puts have the economic
effect of hedging approximately 20,800 barrels of oil per day for an average of
$18.29 per barrel. These puts qualify under the highly effective test and the
mark-to-market loss at March 31, 2005 is included in other comprehensive loss.

Accumulated Other Comprehensive Loss consisted of $9.9 million and $0.7
million ($6.5 million and $0.5 million net of tax) at March 31, 2005 and
December 31, 2004, respectively, of unrealized losses on our crude oil puts. Oil
sales for the quarter ended 2005 included $3.7 million loss in amortization of
the put option cost. Deferred net losses recorded in Accumulated Other
Comprehensive Loss at March 31, 2005 and December 31, 2004 are expected to be
reclassified to earnings during 2005.

We continue to assess production levels and commodity prices in
conjunction with our capital resources and liquidity requirements.

ASSET RETIREMENT LIABILITY

Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
SFAS 143 requires entities to record the fair value of a liability for a legal
obligation to retire an asset in the period in which the liability is incurred
if a reasonable estimate of fair value can be made. No wells were abandoned in
the quarter ended March 31, 2005, and nine wells were abandoned in the year
ended December 31, 2004. Changes in asset retirement obligations during the 2005
first quarter and the year ended December 31, 2004 were as follows:

EARNINGS PER SHARE

Basic earnings per common share ("EPS") are computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. The weighted average number of common shares
outstanding for computing basic EPS was 36.8 million and 35.8 million for the
first quarter 2005 and 2004, respectively. Diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The weighted average number of
common shares outstanding for computing diluted EPS, including dilutive stock
options, was 38.6 million and 37.9 million for the first quarter 2005 and 2004,
respectively.

An aggregate of 1.0 million and 1.5 million options and warrants were
excluded from the earnings per share calculations because their exercise price
exceeded the average price for the first quarter 2005 and 2004, respectively.

STOCK-BASED COMPENSATION

At March 31, 2005, we had several stock-based employee compensation
plans, which are more fully described in Note 5 in our Annual Report on Form
10-K for the year ended 2004. Prior to 2003, we accounted for those plans under
the recognition and measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Effective January 1, 2003, we adopted the fair value
recognition provisions of SFAS Statement No. 123 ("SFAS 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 cost related to stock-based employee compensation
included in the determination of net income in the first quarter 2005 and 2004
is less than that which would have been recognized if the fair value based
method had been applied to all awards since the original effective date of SFAS
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.

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Stock options of 0.1 million and 0.2 million were exercised in the
quarter ended 2005 and 2004, respectively, with cash proceeds of $0.4 million
and $1.3 million, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2005, the Financial Accounting Standards Board ("FASB') issued
Staff Interpretation No. 46(R) - 5 Consolidation of Variable Interest Entities
("FSP FIN 46(R) - 5"), which addresses the consolidation of variable interest
entities ("VIEs") by business enterprises that are the primary beneficiaries.
FSP FIN 46(R) - 5 is applicable to both nonpublic and public reporting
enterprises. Application is required in financial statements for the first
reporting period beginning after March 3, 2005 in accordance with the transition
provisions of FSP FIN 46(R) - 5. The adoption of this interpretation will not
impact our consolidated financial position, results of operations or cash flows.

In March 2005, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 107 ("SAB 107") which provides guidance on Statement
of Financial Accounting Standard 123 (revised 2004) Share-Based Payment ("SFAS
123R"). Application is required for public companies for annual periods that
begin after June 15, 2005. The guidance provided in SAB 107 is not expected to
have a material effect on our consolidated financial position, results of
operations or cash flows.

In April 2005, the FASB issued Staff Interpretation No. 19-1 ("FSP
19-1") Accounting for Suspended Well Costs, which provides guidance on the
accounting for exploratory well costs and proposes an amendment to FASB
Statement No. 19 ("FASB 19"), Financial Accounting and Reporting by Oil and Gas
Producing Companies. The guidance in FSP 19-1 applies to enterprises that use
the successful efforts method of accounting as described in FASB 19. The
guidance in FSP 19-1 will not impact our consolidated financial position,
results of operations or cash flows.

RECLASSIFICATIONS

Certain items in 2004 have been reclassified to conform to the 2005
financial statement presentation.

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NOTE 2 - LONG-TERM DEBT

LONG-TERM DEBT

Long-term debt consists of the following:

Our 9.375 percent senior unsecured notes due November 1, 2007 ("2007
Notes") were redeemed on November 1, 2004. We were released from all obligations
related to the 2007 Notes. The redemption of the 2007 Notes triggered an
obligation under the terms of Harvest Vinccler's loans from a Venezuelan
commercial bank to renegotiate the terms of those loans or, if agreement on
renegotiated terms cannot be reached within 30 days after November 1, 2004, the
loans can be declared due and payable. Harvest Vinccler is in discussions with
the Venezuelan bank on possible renegotiated terms. The entire amount has been
reclassified from long term to current in the interim. While we believe the
loans will be renegotiated, it is possible that agreement will not be reached
and Harvest Vinccler will be required to repay the remaining balance of $10.5
million.

We have classified all of our outstanding debt as current at March 31,
2005.

NOTE 3 - COMMITMENTS AND CONTINGENCIES

Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as
Harvest Natural Resources, Inc., Chemex, Inc., Harvest Vinccler, C.A., Gale
Campbell and Sheila Campbell in the District Court for Harris County, Texas.
This suit was brought in May 2003 by Excel and alleges, among other things,
breach of a consulting agreement between Excel and us, misappropriation of
proprietary information and trade secrets, and fraud. Excel seeks actual and
exemplary damages, injunctive relief and attorneys' fees. The Court has abated
the suit pending final judgment of a case pending in Louisiana to which we are
not a party. We dispute Excel's claims and plan to vigorously defend against
them. We are unable to estimate the amount or range of any possible loss.

Uracoa Municipality Tax Assessments. In July 2004, Harvest Vinccler
received three tax assessments from a tax inspector for the Uracoa municipality
in which part of the South Monagas Unit is located. A protest to the assessments
was filed with the municipality, and in September 2004 the tax inspector
responded in part by affirming one of the assessments and issuing a payment
order. Harvest Vinccler has filed a motion with the tax court in Barcelona,
Venezuela, seeking to enjoin the payment order and dismiss the assessment. We
dispute all of the tax assessments and believe we have a substantial basis for
our positions. We are unable to estimate the amount or range of any possible
loss.

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.

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NOTE 4 - TAXES

TAXES OTHER THAN ON INCOME

Harvest Vinccler pays municipal taxes on operating fee revenues it
receives for production from the South Monagas Unit. The components of taxes
other than on income were (in thousands):

NOTE 5 - OPERATING SEGMENTS

We regularly allocate resources to and assess the performance of our
operations by segments that are organized by unique geographic and operating
characteristics. The segments are organized in order to manage regional
business, currency and tax related risks and opportunities. Revenues from the
Venezuela operating segment are derived from the production and sale of oil and
natural gas. Operations included under the heading "Russia" include project
evaluation costs and other costs to maintain an office in Russia. Operations
included under the heading "United States and other" include corporate
management, cash management and financing activities performed in the United
States and other countries which do not meet the requirements for separate
disclosure. All intersegment revenues, expenses and receivables are eliminated
in order to reconcile to consolidated totals. Corporate general and
administrative and interest expenses are included in the United States and other
segment and are not allocated to other operating segments:

10

NOTE 6 - CHINA OPERATIONS

In March 2005, China National Offshore Oil Corporation ("CNOOC")
granted us an extension of Phase 1 of the Exploration Period for the WAB-21
contract area to May 2007. WAB-21 represents the $2.9 million excluded from the
full cost pool as reflected on our March 31, 2005 and December 31, 2004 balance
sheets.

NOTE 7 - RELATED PARTY TRANSACTIONS

In March 2002, we entered into construction service agreements with
Venezolana International, S.A. ("Vinsa"). Vinsa is an affiliate of Venezolana de
Inversiones y Construcciones Clerico, C.A., which owns 20 percent of Harvest
Vinccler. This agreement was terminated on September 19, 2004. Vinsa provided
$0.4 million in construction services for our Venezuelan field operations for
the first quarter 2004.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Harvest Natural Resources, Inc. ("Harvest" or the "Company") cautions that any
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) contained in this report or made by management of
the Company involve risks and uncertainties and are subject to change based on
various important factors. When used in this report, the words "budget",
"guidance", "forecast", "anticipate", "expect", "believes", "goals", "projects",
"plans", "anticipates", "estimates", "should", "could", "assume" and similar
expressions are intended to identify forward-looking statements. In accordance
with the provisions of the Private Securities Litigation Reform Act of 1995, we
caution you that important factors could cause actual results to differ
materially from those in the forward-looking statements. Such factors include
our concentration of operations in Venezuela, the political and economic risks
associated with international operations (particularly those in Venezuela), the
anticipated future development costs for our undeveloped proved reserves, the
risk that actual results may vary considerably from reserve estimates, the
dependence upon the abilities and continued participation of certain of our key
employees, the risks normally incident to the operation and development of oil
and gas properties, the permitting and drilling of oil and natural gas wells,
the availability of materials and supplies necessary to projects and operations,
the price for oil and natural gas and related financial derivatives, changes in
interest rates, basis risk and counterparty credit risk in executing commodity
price risk management activities, the Company's ability to acquire oil and gas
properties that meet its objectives, changes in operating costs, overall
economic conditions, political instability, civil unrest, acts of terrorism,
currency and exchange risks, currency controls, changes in existing or potential
tariffs, duties or quotas, changes in taxes, changes in governmental policy,
availability of sufficient financing, changes in weather conditions, and ability
to hire, retain and train management and personnel. A discussion of these
factors is included in our Annual Report on Form 10-K for the year ended 2004,
which includes certain definitions and a summary of significant accounting
policies and should be read in conjunction with this Quarterly Report.

VENEZUELA

In our Annual Report on Form 10-K for the year ended 2004, we described
recent events in Venezuela that could adversely affect our oil and gas
production. As a result of these events, on January 18, 2005 we announced that
our 80 percent owned Venezuelan subsidiary, Harvest Vinccler, C.A. ("Harvest
Vinccler"), was suspending its drilling program. We also reported that the
Ministry of Energy and Petroleum ("MEP") stated that Petroleos de Venezuela S.A.
("PDVSA") wanted to renegotiate the terms of the active operating service
agreements in Venezuela, including the South Monagas Unit Operating Service
Agreement ("OSA") held by Harvest Vinccler. The OSA represents all of our
production. See Item 1- Business and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation in our Annual Report on
Form 10-K for the year ended 2004, for a complete description of these matters.

In April 2005, the Minister of MEP and President of PDVSA held a press
conference in which he questioned the legality of all the operating service
contracts entered into by PDVSA, and imposed a cap on the crude oil production
service fees paid under those agreements equal to two-thirds of the market value
per barrel of crude. Based on our estimates, as indirectly confirmed by
Venezuelan government officials, the oil fee paid to Harvest Vinccler in 2004
was approximately two-thirds of market value. Consequently, we do not believe
the two-thirds cap on service fees will have a significant impact on us. The
Minister of MEP also stated in the press conference that in the next six months
all of the operating service agreements are to be converted to incorporated
joint ventures under the 2001 Venezuelan Organic Hydrocarbon Law ("OHL") through
negotiation with the contract holders. He also stated that no contracts would be
revoked. The OHL requires that the Venezuelan Government have a majority
ownership stake in the joint venture. The directives of the Minister of MEP in
the press conference have been confirmed in a letter from PDVSA to Harvest
Vinccler.

Government officials have also announced that the income tax rate paid
by the companies holding operating service agreements would be increased from 34
percent to 50 percent. The Venezuelan income tax authority, SENIAT, has stated
that the tax increase is effective as of April 18, 2005. However, the increase
is not the result of a legislative change in the tax laws, and SENIAT has not
indicated how this increase might be implemented or whether it might attempt to
apply it to prior tax years. The implementation of an income tax increase from
34 percent to 50 percent, without compensating values, will have a material
adverse effect on our financial condition, results of operations and cash flows.
Separately, SENIAT announced it is auditing tax payments by the companies with
operating service agreements. SENIAT has started a tax audit of Harvest Vinccler
for tax years beginning with

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2001. We believe that Harvest Vinccler has met its obligations under the
Venezuelan tax laws in all material respects.

Harvest Vinccler has exchanged proposals and is in discussions with
PDVSA and MEP to resolve our 2005 capital program and production issues under
the OSA and also to establish a longer term path forward. These discussions
include converting the OSA into an incorporated joint venture under the OHL. It
is expected that the joint venture company would also include additional assets
contributed by PDVSA. While we are hopeful of achieving a business solution with
the MEP and PDVSA, no assurance can be given as to either the outcome or the
timing of our discussions. A continuation in the delay of our drilling program
or a curtailment of our production could have a material adverse effect on our
financial condition, results of operations and cash flows.

CAPITAL RESOURCES AND LIQUIDITY

Debt Reduction. We have quarterly principal and interest obligations of
$1.3 and $0.3 million, respectively, on the Harvest Vinccler variable rate
loans. We have no other debt obligations.

Working Capital. The net funds raised and/or used in each of the
operating, investing and financing activities are summarized in the following
table and discussed in further detail below:

At March 31, 2005, we had current assets of $186.9 million and current
liabilities of $75.4 million, resulting in working capital of $111.5 million and
a current ratio of 2.5:1. This compares with a working capital of $89.0 million
and a current ratio of 2.1:1 at December 31, 2004. The increase in working
capital of $22.5 million was primarily due to the increase in oil sales volumes
and oil prices.

Cash Flow from Operating Activities. During the first quarter 2005 and
2004, net cash provided by operating activities was approximately $27.1 million
and $10.2 million, respectively. The $16.9 million increase was primarily due to
the increase in oil sales volumes and oil prices.

Cash Flow from Investing Activities. During the first quarter 2005 and
2004, we had drilling and production-related capital expenditures of
approximately $6.5 million and $0.7 million, respectively. The increase in
capital expenditures is due to approval and completion of the drilling of a
natural gas well and the gathering system and facilities for the South Monagas
Unit.

On a year to year basis, the timing and size of capital expenditures
for the South Monagas Unit are largely at our discretion. We suspended our
drilling program in January because of continuing delays in the receipt of
permits to drill new wells. We continue to expend funds for maintenance and
facility upgrades for the existing wells. Our remaining capital commitments
worldwide support our search for new acquisitions, are relatively minimal and
are substantially at our discretion. We continue to assess production levels and
commodity prices in conjunction with our capital resources and liquidity
requirements.

Cash Flow from Financing Activities. During the first quarter 2005,
Harvest Vinccler repaid $1.3 million of its U.S. dollar debt. During the first
quarter 2004, Harvest Vinccler repaid $1.6 million of its U.S. dollar debt.

RESULTS OF OPERATIONS

You should read the following discussion of the results of operations
for the first quarter 2005 and 2004 and the financial condition as of March 31,
2005 and December 31, 2004 in conjunction with our consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
year ended 2004.

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FIRST QUARTER 2005 COMPARED WITH FIRST QUARTER 2004

Net income for the first quarter 2005 was $18.0 million, or $0.47 per
diluted share, compared with $7.5 million, or $0.20 per diluted share for 2004.

Our results of operations for the first quarter 2005 primarily
reflected the results for Harvest Vinccler in Venezuela, which accounted for all
of our production and oil and gas sales revenue. Oil revenue per barrel
increased 31 percent (from $16.10 in 2004 to $21.15 in 2005) and oil sales
quantities increased 32 percent (from 1.9 million barrels ["MBbls"] of oil in
2004 to 2.5 MBbls of oil in 2005) during the first quarter 2005 compared with
2004. Natural gas sales quantities decreased 6 percent (from 7.8 billion cubic
feet ["Bcf"] of gas in 2004 to 7.3 Bcf in 2005) during the first quarter 2005
compared with 2004. Revenue for the first quarter 2005 and 2004 includes 0.2
MBbls of oil, respectively, at a $7.00 fixed price associated with the gas sales
contract.

Our revenues increased $22.2 million, or 57 percent, during the first
quarter 2005 compared with 2004. This was due to an increase in oil sales
volumes and oil prices. Our sales quantities for the first quarter 2005 from
Venezuela were 3.7 MBoe compared with 3.2 MBoe in 2004.

Our operating expenses increased $1.5 million, or 21 percent, for the
first quarter 2005 compared with 2004. This increase was primarily due to the
suspended drilling program and the fixed costs of our support facilities being
allocated to operating expense. Depletion, depreciation and amortization
increased $3.5 million, or 43 percent, during the first quarter 2005 compared
with 2004 due to increased oil production. Depletion expense per MBoe produced
during the first quarter 2005 was $2.99 compared with $2.41 during 2004. The
increase was primarily due to increased future development costs. General and
administrative expenses increased $1.4 million, or 38 percent, for the first
quarter 2005 compared with 2004. This was, in part, due to restricted stock
bonuses, additional costs associated with Sarbanes-Oxley compliance offset by a
decrease in liability under our deferred compensation plan for directors. Taxes
other than on income increased $0.5 million, or 44 percent, during the first
quarter 2005 compared with 2004. This was due to increased Venezuelan municipal
taxes which result from higher oil revenues and an increase in the municipal tax
rate in Uracoa.

Investment income and other increased $0.2 million, or 78 percent,
during the first quarter 2005 compared with 2004. This was due to higher
interest rates earned on average cash balances. Interest expense decreased $2.2
million, or 90 percent, during the first quarter 2005 compared with 2004 due to
lower average outstanding debt balances for 2005 compared to 2004. In November
2004, we redeemed all $85 million of our 2007 Notes.

Net gain on exchange rates increased $3.4 million for the first quarter
2005 compared with 2004. This was due to the devaluation of the Bolivar. Bolivar
currency controls imposed in February 2003 fix the exchange rate between the
Bolivar and the U.S. Dollar and restricts the ability to exchange Venezuelan
Bolivars for dollars and vice versa. On March 3, 2005, the official exchange
rate was adjusted from 1,920 Bolivars for each U.S. Dollar to 2,150 Bolivars for
each U.S. Dollar.

We realized income before income taxes and minority interest of $36.7
million during the first quarter 2005 compared with income of $15.7 million in
the first quarter 2004. The increase was primarily attributable to higher crude
oil volumes and an increase in crude oil prices in 2005. Income tax expense
increased $7.9 million due to higher Venezuela pre-tax income. The effective tax
rate during the first quarter 2005 was relatively consistent with that of the
first quarter 2004. The income before minority interest increased $13.1 million
for the first quarter 2005 compared with 2004. This increase was primarily due
to increased production and oil prices during the first quarter of 2005.

EFFECTS OF CHANGING PRICES, FOREIGN EXCHANGE RATES AND INFLATION

Our results of operations and cash flow are affected by changing oil
prices. Fluctuations in oil prices may affect our total planned development
activities and capital expenditure program. In August and September 2004,
Harvest Vinccler hedged a portion of its oil sales for calendar year 2005 by
purchasing two West Texas Intermediate ("WTI") crude oil puts. See Note 1 -
Derivatives and Hedging.

Venezuela imposed currency exchange restrictions in February 2003,
adjusted the official exchange rate in February 2004 and again in March 2005.
During the first quarter 2005, our net foreign exchange gain attributable to our
international operations was $2.8 million. No gains or losses were recognized
from February 2004 to February 2005. However, there are many factors affecting
foreign exchange rates and resulting exchange gains and losses,

14

many of which are beyond our control. We have recognized significant exchange
gains and losses in the past, resulting from fluctuations in the relationship of
the Venezuelan currency to the U.S. Dollar. It is not possible for us to predict
the extent to which we may be affected by future changes in exchange rates and
exchange controls. We do not expect the currency conversion restrictions or the
adjustment in the exchange rate to have a material impact on us at this time.

Within the United States, inflation has had a minimal effect on us, but
it is potentially an important factor in results of operations in Venezuela.
With respect to Harvest Vinccler, a significant majority of the sources of
funds, including the proceeds from oil sales, our contributions and credit
financings, are denominated in U.S. Dollars, while a minor amount of local
transactions in Venezuela are conducted in local currency. If the rate of
increase in the value of the U.S. Dollar compared with the Bolivar continues to
be less than the rate of inflation in Venezuela, then inflation could be
expected to have an adverse effect on Harvest Vinccler.

CONCLUSION

While we can give you no assurance, we believe that our cash flow from
operations and our existing cash balance will provide sufficient capital
resources and liquidity to fund execution of our business plan including capital
expenditures. We have protected a portion of our 2005 cash flow by purchasing
two WTI crude oil puts for an average of $42.20 a barrel floor on 10,000 BOPD.
Due to the pricing structure for our Venezuelan oil, this has the economic
effect of hedging approximately 20,800 BOPD. Our expectation is based upon our
current estimate of projected prices, production levels, and our assumptions
that we will be allowed to carry out our capital program on acceptable terms,
that there will be no disruptions or limitations on our production and that
PDVSA will pay our invoices timely. Actual results could be materially affected
if there is a significant change in our expectations or assumptions (see Item 2.
Venezuela). 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 2004. In March 2005, Venezuela
adjusted the official exchange rate. Other than this change, the information
about market risk for the first quarter 2005 does not differ materially from
that discussed in the Annual Report on Form 10-K for the year ended 2004.

ITEM 4. CONTROLS AND PROCEDURES

The Securities and Exchange Commission, among other things, adopted
rules requiring reporting companies to maintain disclosure controls and
procedures to provide reasonable assurance that a registrant is able to record,
process, summarize and report the information required in the registrant's
quarterly and annual reports under the Securities Exchange Act of 1934 (the
"Exchange Act"). While we believe that our existing disclosure controls and
procedures have been effective to accomplish these objectives, we intend to
continue to examine, refine and formalize our disclosure controls and procedures
and to monitor ongoing developments in this area. There have not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We have established
disclosure controls and procedures to ensure that material information relating
to us, including our consolidated subsidiaries, is made known to the officers
who certify our financial reports and to other members of senior management and
the Board of Directors.

15

Based on their evaluation as of March 31, 2005, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are effective to ensure that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods as
specified in the Securities and Exchange Commission's rules and forms.

16

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See our Annual Report on Form 10-K for the year ended 2004
for a description of certain legal proceedings. There have
been no material developments in such legal proceedings since
the filing of such Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

There have been no material changes to the procedures by
which security holders may recommend nominees to our board of
directors since our Schedule 14A filed on April 8, 2005.

ITEM 6. EXHIBITS

(a) Exhibits

3.1 Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1(i) to our
Form 10-Q filed on August 13, 2002, File No. 1-10762.)

3.2 Amended and Restated Bylaws as of May 19, 2005.

4.1 Form of Common Stock Certificate. (Incorporated by
reference to the exhibits to our Registration Statement
Form S-1 (Registration No. 33-26333).)

4.2 Certificate of Designation, Rights and Preferences of
the Series B. Preferred Stock of Benton Oil and Gas
Company, filed May 12, 1995. (Incorporated by reference
to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002,
File No. 1-10762.)

4.3 Second Amended and Restated Rights Agreement, dated as
of April 15, 2005, between Harvest Natural Resources,
Inc. and Wells Fargo Bank, N.A.

31.1 Certification of the principal executive officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.2 Certification of the principal financial officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

32.1 Certification of the principal executive officer
accompanying the quarter report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the principal financial officer
accompanying the quarter report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HARVEST NATURAL RESOURCES, INC.

Dated: April 29, 2005 By: /s/ Peter J. Hill
--------------------------------------
Peter J. Hill
President and Chief Executive Officer

Dated: April 29, 2005 By: /s/ Steven W. Tholen
--------------------------------------
Steven W. Tholen
Senior Vice President - Finance,
Chief Financial Officer and Treasurer

18

EXHIBIT INDEX