Attached files
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EX-32.1 - CERTIFICATE - HKN, Inc. | ex32-1.htm |
EX-32.2 - CERTIFICATE - HKN, Inc. | ex32-2.htm |
EX-31.2 - CERTIFICATION - HKN, Inc. | ex31-2.htm |
EX-31.1 - CERTIFICATION - HKN, Inc. | ex31-1.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2009
o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from to
____
Commission
file number 1-10262
HKN,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
95-2841597
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
180
State Street, Suite 200
|
76092
|
Southlake,
Texas
|
(Zip
Code)
|
(Address
of principal executive offices)
|
Registrant’s
telephone number, including area code (817) 424-2424
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 ü No
___
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Date File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the Registrant was required to submit
and post such files). Yes ___ No
ü
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer ¨ Accelerated
filer þ
Non-accelerated
filer ¨ (Do not check if a
smaller reporting
company) Smaller
reporting company ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
ü
The
number of shares of Common Stock, par value $0.01 per share, outstanding as
of
November 1, 2009 was
9,596,543.
HKN,
INC.
INDEX
TO QUARTERLY REPORT
September
30, 2009
Page
|
||
PART I. FINANCIAL
INFORMATION
|
||
Item
1.
|
Condensed
Financial Statements
|
|
Consolidated
Condensed Balance Sheets
|
4
|
|
Consolidated
Condensed Statements of Operations
|
5
|
|
Consolidated
Condensed Statement of Stockholders' Equity
|
6
|
|
Consolidated
Condensed Statements of Cash Flows
|
7
|
|
Notes
to Consolidated Condensed Financial Statements
|
8
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
Item
3.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
43
|
Item
4.
|
Controls
and Procedures
|
43
|
PART
II. OTHER INFORMATION
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
44
|
Item
6.
|
Exhibits
|
45
|
SIGNATURES
|
47
|
|
2
PART
I - FINANCIAL INFORMATION
3
ITEM
1. CONDENSED FINANCIAL STATEMENTS
HKN,
INC.
|
||||||||
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
||||||||
(in
thousands, except for share amounts)
|
||||||||
Assets
|
September
30,
|
December
31,
|
||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 11,291 | $ | 5,722 | ||||
Marketable
securities (Treasury bills)
|
- | 9,497 | ||||||
Accounts
receivable, net
|
2,090 | 3,778 | ||||||
Prepaid
expenses and other current assets
|
769 | 482 | ||||||
Total
Current Assets
|
14,150 | 19,479 | ||||||
Property
and equipment, net
|
42,594 | 35,358 | ||||||
Intangible
assets
|
1,946 | - | ||||||
Investment
in Global
|
13,066 | 11,824 | ||||||
Equity
investment in Spitfire
|
1,262 | 1,820 | ||||||
Other
assets, net
|
100 | 292 | ||||||
$ | 73,118 | $ | 68,773 | |||||
Liabilities and Stockholders'
Equity
|
||||||||
Current
Liabilities:
|
||||||||
Trade
payables
|
$ | 444 | $ | 639 | ||||
Accrued
liabilities and other
|
2,329 | 1,826 | ||||||
Income
tax contingency
|
225 | 225 | ||||||
Revenues
and royalties payable
|
617 | 687 | ||||||
Total
Current Liabilities
|
3,615 | 3,377 | ||||||
Asset
Retirement Obligation
|
5,750 | 5,472 | ||||||
Deferred
Income Taxes
|
748 | 20 | ||||||
Preferred
Stock Dividends
|
73 | - | ||||||
Total
Liabilities
|
10,186 | 8,869 | ||||||
Stockholders’
Equity:
|
||||||||
Series
G1 Preferred Stock, $1.00 par value; $160 thousand liquidation
value
|
||||||||
700,000
shares authorized; 1,600 shares outstanding
|
2 | 2 | ||||||
Series
G2 Preferred Stock, $1.00 par value; $100 thousand liquidation
value
|
||||||||
100,000
shares authorized; 1,000 shares outstanding
|
1 | 1 | ||||||
Series
M Preferred Stock, $1.00 par value; $3.4 million liquidation
value
|
||||||||
50,000
shares authorized; 34,000 shares outstanding
|
34 | 44 | ||||||
Common
stock, $0.01 par value; 24,000,000 shares authorized;
|
||||||||
9,633,267
and 9,268,253 shares issued, respectively
|
97 | 93 | ||||||
Additional
paid-in capital
|
441,511 | 442,642 | ||||||
Accumulated
deficit
|
(387,262 | ) | (385,171 | ) | ||||
Accumulated
other comprehensive income
|
3,232 | 2,312 | ||||||
Treasury
stock, at cost, 36,724 and 6,869 shares held,
respectively
|
(106 | ) | (19 | ) | ||||
Total
HKN, Inc. Stockholders' Equity
|
57,509 | 59,904 | ||||||
Noncontrolling
interest
|
5,423 | - | ||||||
Total
Stockholders’ Equity
|
62,932 | 59,904 | ||||||
$ | 73,118 | $ | 68,773 |
The
accompanying Notes to Consolidated Condensed Financial Statements are an
integral part of these Statements.
4
HKN,
INC.
|
||||||||||||||||
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
|
||||||||||||||||
(Unaudited,
in thousands except for share and per share amounts)
|
||||||||||||||||
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
and other:
|
||||||||||||||||
Oil
and gas operations
|
$ | 2,649 | $ | 5,952 | $ | 7,452 | $ | 19,205 | ||||||||
Trading
revenues, net
|
- | (849 | ) | - | (2,270 | ) | ||||||||||
Fees,
interest and other income
|
450 | 503 | 1,769 | 2,023 | ||||||||||||
Total
revenue
|
3,099 | 5,606 | 9,221 | 18,958 | ||||||||||||
Costs
and Expenses:
|
||||||||||||||||
Oil
and gas operating expenses
|
2,169 | 3,478 | 5,981 | 8,554 | ||||||||||||
General
and administrative expenses
|
834 | 1,245 | 2,023 | 3,491 | ||||||||||||
Provision
for doubtful accounts
|
(49 | ) | - | 222 | - | |||||||||||
Depreciation,
depletion, amortization and accretion
|
752 | 1,190 | 2,736 | 3,680 | ||||||||||||
Equity
in losses (earnings) of Spitfire
|
50 | (97 | ) | 173 | (68 | ) | ||||||||||
Impairment
of investment in Spitfire
|
- | 2,787 | - | 2,787 | ||||||||||||
Other
losses (gains)
|
(42 | ) | 5 | 17 | 50 | |||||||||||
Total
costs and expenses
|
3,714 | 8,608 | 11,152 | 18,494 | ||||||||||||
Income
(loss) before income taxes
|
$ | (615 | ) | $ | (3,002 | ) | $ | (1,931 | ) | $ | 464 | |||||
Income
tax expense (benefit)
|
- | 264 | (40 | ) | 271 | |||||||||||
Net
income (loss)
|
$ | (615 | ) | $ | (3,266 | ) | $ | (1,891 | ) | $ | 193 | |||||
Net
loss attributable to noncontrolling interest
|
160 | 62 | 160 | 75 | ||||||||||||
Net
income (loss) attributable to HKN, Inc.
|
(455 | ) | (3,204 | ) | (1,731 | ) | 268 | |||||||||
Dividends
related to preferred stock
|
(73 | ) | (72 | ) | (355 | ) | (235 | ) | ||||||||
Net
income (loss) attributed to common stock
|
$ | (528 | ) | $ | (3,276 | ) | $ | (2,086 | ) | $ | 33 | |||||
Basic
and diluted net income (loss) per common share:
|
||||||||||||||||
Net
income (loss) per common share
|
$ | (0.05 | ) | $ | (0.34 | ) | $ | (0.23 | ) | $ | 0.00 | |||||
Weighted
average common shares outstanding
|
9,639,077 | 9,638,039 | 9,165,322 | 9,684,609 |
The accompanying Notes to
Consolidated Condensed Financial Statements are an
integral part of these Statements.
5
HKN,
INC.
|
||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||||||
(Unaudited,
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional |
Non
|
Other | ||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common | Paid-In | Treasury | controlling | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||
G1 | G2 | M |
Stock
|
Capital
|
Stock
|
Interest
|
Deficit
|
Income
|
Total
|
|||||||||||||||||||||||||||||||
Balance, December
31, 2008
|
$ | 2 | $ | 1 | $ | 44 | $ | 93 | $ | 442,642 | $ | (19 | ) | $ | - | $ | (385,171 | ) | $ | 2,312 | $ | 59,904 | ||||||||||||||||||
Issuance
of restricted shares related to
|
||||||||||||||||||||||||||||||||||||||||
investment,
net of issuance cost
|
- | - | - | 10 | 1,307 | - | - | - | - | 1,317 | ||||||||||||||||||||||||||||||
Cumulative effect of Series M Preferred | ||||||||||||||||||||||||||||||||||||||||
conversion
feature
|
- | - | - | - | - | - | - | (4 | ) | - | (4 | ) | ||||||||||||||||||||||||||||
Adjustment of Series M Preferred | ||||||||||||||||||||||||||||||||||||||||
conversion
price
|
- | - | - | - | 76 | - | - | (76 | ) | - | - | |||||||||||||||||||||||||||||
Accrual
of preferred stock dividends
|
- | - | - | - | - | - | - | (242 | ) | - | (242 | ) | ||||||||||||||||||||||||||||
Issuance
of preferred stock dividends
|
- | - | - | - | - | - | - | (38 | ) | - | (38 | ) | ||||||||||||||||||||||||||||
Preferred
stock redemption
|
- | - | (10 | ) | - | (990 | ) | - | - | - | - | (1,000 | ) | |||||||||||||||||||||||||||
Treasury
stock repurchase
|
- | - | - | - | - | (1,719 | ) | - | - | - | (1,719 | ) | ||||||||||||||||||||||||||||
Treasury
stock retirements
|
- | - | - | (6 | ) | (1,626 | ) | 1,632 | - | - | - | - | ||||||||||||||||||||||||||||
Equity
in stock repurchases by Spitfire
|
- | - | - | - | 102 | - | - | - | - | 102 | ||||||||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||||||
Net
loss
|
(1,731 | ) | ||||||||||||||||||||||||||||||||||||||
Unrealized
holding gain on available for
|
||||||||||||||||||||||||||||||||||||||||
sale
investments
|
572 | |||||||||||||||||||||||||||||||||||||||
Unrealized
foreign currency gain
|
348 | |||||||||||||||||||||||||||||||||||||||
Total
comprehensive loss
|
(811 | ) | ||||||||||||||||||||||||||||||||||||||
Noncontrolling
interest in investment
|
- | - | - | - | - | - | 5,423 | - | - | 5,423 | ||||||||||||||||||||||||||||||
Balance, September
30, 2009
|
$ | 2 | $ | 1 | $ | 34 | $ | 97 | $ | 441,511 | $ | (106 | ) | $ | 5,423 | $ | (387,262 | ) | $ | 3,232 | $ | 62,932 |
The
accompanying Notes to Consolidated Condensed Financial Statements are an
integral part of these Statements.
6
HKN,
INC.
|
||||||||
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
|
||||||||
(Unaudited,
in thousands)
|
||||||||
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | (1,891 | ) | $ | 193 | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation,
depletion, amortization and accretion
|
2,736 | 3,680 | ||||||
Realized
loss on derivative instruments
|
- | (1,139 | ) | |||||
Realized
loss on available for sale investments
|
- | (434 | ) | |||||
Unrealized
gain on derivative instruments
|
- | (995 | ) | |||||
Impairment
recovery on land
|
- | (179 | ) | |||||
Equity
in losses (gains) of Spitfire
|
173 | (68 | ) | |||||
Impairment
of investment in Spitfire
|
- | 2,787 | ||||||
Realized
gain from sale of Spitfire shares
|
(23 | ) | - | |||||
Other,
net
|
- | (46 | ) | |||||
Change
in operating assets and liabilities:
|
||||||||
Increase
in prepaid assets and other
|
(33 | ) | (340 | ) | ||||
Decrease
in accounts receivable and other
|
1,688 | 194 | ||||||
Decrease
in marketable securities
|
9,497 | - | ||||||
Increase
in margin deposits posted with brokers
|
- | (1,321 | ) | |||||
Increase
in derivative liabilities
|
- | 3,588 | ||||||
Increase
(decrease) in trade payables and other
|
(1,457 | ) | 1,463 | |||||
Net
cash provided by operating activities
|
10,690 | 7,383 | ||||||
Cash
flows from investing activities:
|
||||||||
Net
proceeds from sales of assets
|
- | 333 | ||||||
Capital
expenditures
|
(2,382 | ) | (4,932 | ) | ||||
Acquisitions
|
- | (400 | ) | |||||
Purchase
of available for sale investments
|
- | (1,623 | ) | |||||
Proceeds
from available for sale investments
|
- | 435 | ||||||
Purchase
of Spitfire common shares
|
- | (65 | ) | |||||
Proceeds
from sale of Spitfire common shares
|
187 | - | ||||||
Net
cash used in investing activities
|
(2,195 | ) | (6,252 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payment
of preferred stock dividends
|
(207 | ) | (173 | ) | ||||
Redemption
of preferred stock
|
(1,000 | ) | - | |||||
Proceeds
from capital contributions to Canergy Growth Fund
|
- | 400 | ||||||
Proceeds
from capital contributions to Canergy Management Company
|
- | 100 | ||||||
Purchases
of treasury shares
|
(1,719 | ) | (3,841 | ) | ||||
Net
cash used in financing activities
|
(2,926 | ) | (3,514 | ) | ||||
Net
increase (decrease) in cash and temporary investments
|
5,569 | (2,383 | ) | |||||
Cash
and cash equivalents at beginning of period
|
5,722 | 25,581 | ||||||
Cash
and cash equivalents at end of period
|
$ | 11,291 | $ | 23,198 |
The
accompanying Notes to Consolidated Condensed Financial Statements are an
integral part of these Statements.
7
HKN,
INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
(1)
|
BASIS
OF PRESENTATION
|
Our
accompanying consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) have been condensed or
omitted pursuant to these rules and regulations, although we believe that the
disclosures made are adequate to prevent the information presented from being
misleading. In our opinion, these financial statements contain all adjustments
necessary to present fairly our financial position as of September 30, 2009 and
December 31, 2008 and the results of our operations and changes in our cash
flows for the three and nine months presented as of September 30, 2009 and 2008.
The December 31, 2008 consolidated condensed balance sheet information is
derived from audited financial statements. All adjustments represent normal
recurring items. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2008. Certain prior
year amounts have been reclassified to conform to the 2009
presentation.
The
preparation of financial statements in conformity with U.S. GAAP 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 reported period. Actual results could differ from
these estimates. The results of operations for the three and nine months ended
September 30, 2009 are not necessarily indicative of the results to be expected
for the full year.
Principles of Consolidation –
The consolidated condensed financial statements include the accounts of all
companies that we, through our direct or indirect ownership or shareholding,
were provided the ability to control their operating policies and procedures. We
have consolidated the assets and liabilities of UniPureEnergy Acquisition Co.,
LLC (“UniPure”) as of September 30, 2009 and the results of operations for the
three months ended September 30, 2009 in our consolidated condensed financial
statements. Please see Note 2 – Investment in OHSOL Technology (UniPure) for
additional information. All significant intercompany balances and transactions
have been eliminated.
Comprehensive Income (Loss) –
Comprehensive income (loss) includes changes in stockholders’ equity during the
periods that do not result from transactions with stockholders. Our total
comprehensive income (loss) for the period is as follows (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
income (loss) attributable to HKN
|
$ | (455 | ) | $ | (3,204 | ) | $ | (1,731 | ) | $ | 268 | |||||
Foreign
currency translation adjustment on investment
|
(562 | ) | (2,733 | ) | 348 | (2,858 | ) | |||||||||
Unrealized
(loss) gain on investments
|
1,236 | (5,671 | ) | 572 | 3,313 | |||||||||||
Total
comprehensive income (loss)
|
$ | 219 | $ | (11,608 | ) | $ | (811 | ) | $ | 723 |
8
Financial Instruments - We
carry our financial instruments including cash and our common stock investment
in Global Energy Development PLC (“Global”) at their estimated fair values. Our
investment in ordinary shares of Global has been designated as available for
sale, not as trading securities. The associated unrealized gains and losses on
our available for sale investments are recorded to other comprehensive income
until realized and are reclassified into earnings using specific
identification.
Derivative Instruments – We
have not designated any of our derivative instruments as hedges under FASB Accounting Standards Codification (“ASC”)
815, Derivatives and Hedging. All gains
and losses related to our derivative instruments are recognized in Other losses
(gains). Please see Note 5 – Derivative Instruments for additional
information.
Equity Method Investments –
For investments in which we have the ability to exercise significant influence
but do not control, we follow the equity method of
accounting. Initial investments are recorded at cost and adjusted by
the proportionate share of the investee’s earnings and capital
transactions. Our share of investee earnings and our share of their
capital transactions are recorded to our income statement. We
evaluate these investments for other-than-temporary declines in value each
quarter; any impairment found to be other than temporary is recorded through
earnings. Please see Note 4 – Equity Investment in Spitfire Energy
for additional information.
Translation of Non-U.S. Currency
Amounts - Assets and liabilities of our equity investment in Spitfire
Energy, whose functional currency is the Canadian dollar, are translated
into U.S. dollars at exchange rates in effect at each balance sheet date.
Revenue and expense items are translated at average exchange rates prevailing
during the periods. Our investment in Global is also subject to foreign currency
exchange rate risk as our ownership of Global’s ordinary shares are denominated
in British sterling pounds. Translation adjustments are included in other
comprehensive income until the investment is sold.
Consolidation of Variable Interest
Entities – Our investment in OHSOL technology (UniPure) is considered to
be a variable interest, as defined in ASC 810-10, Consolidation. ASC 810-10
requires the primary beneficiary of a variable interest entity’s (“VIE”)
activities to consolidate the VIE and defines a VIE as an entity in which the
equity investors do not have substantive voting rights and there is not
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. Under UniPure’s Operating
Agreement, effective June 30, 2009, we are the Managing Member of UniPure and,
as such, possess the legal power to direct the operating policies and procedures
of UniPure. Therefore, we have determined that our investment in
UniPure meets the requirements of ASC 810-10, and we are the primary
beneficiary, as defined. Accordingly, we have consolidated the assets and
liabilities of UniPure as of September 30, 2009 and the results of operations
for the three months ended September 30, 2009 in our consolidated condensed
financial statements. Please see Note 2 –Investment in OHSOL Technology
(UniPure) for additional information.
In May
2008, we created Canergy Growth Fund LLC (“Canergy Growth Fund”), a U.S. Virgin
Islands non-registered investment fund, to invest in the Canadian junior oil and
gas market, and Canergy Management, a U.S. Virgin Islands company, to manage the
Canergy Growth Fund as well as other future possible Canadian investment
opportunities. Our investments in the Canergy Growth Fund and Canergy
Management are variable interests. For the three and nine months ended September
30, 2009, there was no trading activity or other income and expenses related to
the Canergy Growth Fund recorded on our consolidated condensed statement of
operations.
Allowance for Doubtful
Accounts - Accounts receivable are customer obligations due under normal
trade terms. We sell our oil and gas production to companies involved in the
transportation and refining of crude oil and natural gas. We also earn
processing and handling fees for processing oil and gas volumes through both our
Main Pass 35 and Lake Raccourci facilities. Our net trade receivables
from our oil and gas production and processing and handling fees were
approximately $2.0 million and $2.3 million at September 30, 2009 and December
31, 2008, respectively. We perform periodic credit evaluations of our customers’
financial condition and although we generally do not require collateral, letters
of credit may be required from our customers in certain
circumstances.
9
Senior
management reviews accounts receivable to determine if any receivables will
potentially be uncollectible. We include provisions for any accounts receivable
balances that are determined to be uncollectible in the allowance for doubtful
accounts. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. One of our oil and gas processing and
handling customers filed for Chapter 11 bankruptcy in April 2009. We
have accrued a provision for the receivable balances associated with their
account. Based on the information available, we believe the allowance
for doubtful accounts of $265 thousand as of September 30, 2009 is adequate.
However, actual write-offs could exceed the recorded allowance.
Income Taxes – We account for
income taxes under the liability method. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. We measure and record income tax
contingency accruals in accordance with ASC 740, Income Taxes.
We
recognize liabilities for uncertain income tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we must determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis or when new information becomes available to management. These
reevaluations are based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, successfully settled issues under
audit, expirations due to statutes, and new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or
an increase to the tax accrual.
We
classify interest related to income tax liabilities as income tax expense, and
if applicable, penalties are recognized as a component of income tax expense.
The income tax liabilities and accrued interest and penalties that are
anticipated to be due within one year of the balance sheet date are presented as
current liabilities in our condensed consolidated balance sheets.
Recent Accounting
Pronouncements – In December 2007, FASB issued guidance related to Business Combinations under ASC 805, Business
Combinations, and guidance related to the accounting and reporting of
noncontrolling interest under ASC 810-10-65-1, Consolidation. This guidance significantly
changes the accounting for and reporting of business combination transactions
and noncontrolling (minority) interests in consolidated financial statements.
This guidance became effective January 1, 2009. We applied this guidance to our
OHSOL investment. Please see Note 2 –Investment in OHSOL Technology (UniPure)
for additional information.
In March
2008, the FASB issued guidance related to the disclosures about derivative
instruments and hedging activities under
FASB ASC 815-10-50, Derivatives and Hedging. This guidance requires companies to
provide enhanced disclosures about (a) how and why they use derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under applicable guidance, and (c) how derivative
instruments and related hedged items affect a company's financial position,
financial performance, and cash flows. These disclosure
requirements are effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Our adoption of ASC 815-10-50 on January 1,
2009 did not have a material impact on our consolidated condensed financial
statements. See Note 5 – Derivative Instruments for additional
information.
10
In June
2008, the FASB issued guidance to evaluate whether an instrument (or embedded
feature) is indexed to an entity’s own stock under ASC 815-40-15, Derivatives and Hedging. The guidance requires
entities to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock in order to determine if the instrument
should be accounted for as a derivative under the scope of ASC 815-10-15. This
guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. We
adopted ASC 815-40-15 beginning January 1, 2009. We applied this
guidance to the conversion feature in our Series M Convertible Preferred Stock
(“Series M Preferred”). See Note 5 – Derivative Instruments for additional
information.
In
November 2008, the FASB issued guidance related to accounting considerations for
equity method investments under ASC 323-10-35, Investments – Equity Method and Joint
Ventures. This guidance states that an equity method investor shall
account for a share issuance by an investee as if the investor had sold a
proportionate share of its investment. Any gain or loss to the investor
resulting from an investee's share issuance should be recognized in earnings.
Previous to this, changes in equity for both issuances and repurchases were
recognized in equity. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. We adopted ASC 323-10-35 beginning January 1,
2009. We applied this guidance to our equity investment in Spitfire
Energy. See Note 4 – Equity Investment in Spitfire Energy for additional
information.
In
December 2008, the Securities and Exchange Commission published a Final Rule,
“Modernization of Oil and Gas Reporting”. The new rule will permit the use of
new technologies to determine proved reserves if those technologies have been
demonstrated to lead to reliable conclusions about reserves volumes. The new
requirements also will allow companies to disclose their probable and possible
reserves to investors. In addition, the new disclosure requirements require
companies to: (a) report the independence and qualifications of its
reserves preparer or auditor; (b) file reports when a third party is relied
upon to prepare reserves estimates or conducts a reserves audit; and
(c) report oil and gas reserves using an average price based upon the prior
12-month period rather than year-end prices. The use of average prices will
affect future impairment and depletion calculations. The new disclosure
requirements are effective for annual reports on Form 10-K for fiscal years
ending on or after December 31, 2009. A company may not apply the new rules
to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. We have not yet determined the impact of
this Final Rule, which will vary depending on changes in commodity prices on our
disclosures, financial position or results of operations.
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets
forth the period after the balance sheet date during which management or a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date,
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. It requires disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, whether that date represents the date the financial statements were issued
or were available to be issued. This guidance is effective for interim and
annual periods ending after June 15, 2009. We adopted ASC 855-10 beginning June
30, 2009 and have included the required disclosures in our consolidated
condensed financial statements. See Note 14 – Subsequent Events for additional
information.
11
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance amends ASC
810-10-15 to replace the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a VIE with
a primarily qualitative approach focused on identifying which enterprise has the
power to direct the activities of a VIE that most significantly impact the
entity’s economic performance. It also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a VIE and requires additional
disclosures about an enterprise’s involvement in VIEs. This guidance is
effective as of the beginning of the reporting entity’s first annual reporting
period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting
Principles. This guidance states that the ASC will become the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Once effective, the Codification’s content will carry the same level
of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two
levels of U.S. GAAP: authoritative and non-authoritative. This is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted ASC 105 as of September 30, 2009 and
thus have incorporated the new Codification citations in place of the
corresponding references to legacy accounting pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure the fair value using one or
more of the following techniques: a valuation technique that uses the quoted
price of the identical liability or similar liabilities when traded as an asset,
which would be considered a Level 1 input, or another valuation technique that
is consistent with ASC 820. This Update is effective for the first reporting
period (including interim periods) beginning after issuance. Thus, we adopted
this guidance as of September 30, 2009, which did not have a material impact on
our consolidated condensed financial statements.
(2)
|
INVESTMENT
IN OHSOL TECHNOLOGY (UniPure)
|
Investment in OHSOL technology
(UniPure) – In June 2009, we acquired an interest in a privately-held
company, UniPure, with a patented oilfield emulsion breaking “OHSOL” technology
by entering into a Securities Exchange Agreement (the “Agreement”) pursuant to
which we issued an aggregate of 1 million restricted shares of our common stock
in exchange for 1,950 units of UniPure, which constitutes 19.5% of UniPure’s
outstanding membership units (the “OHSOL investment”). The shares are deemed to
be restricted because they were not issued in a transaction registered under the
Securities Act of 1933 and are therefore not freely transferable. Pursuant to
the terms of our OHSOL investment, HKN and the other UniPure unitholders have
granted to one another put and call options with respect to an additional 3,050
units of UniPure in exchange for an additional issuance of 725 thousand
restricted shares of our common stock. These options are exercisable
only if the following conditions are satisfied prior to June 2012:
The Call
Option may be exercised upon the occurrence of any of the following
events:
●
|
Execution
by UniPure of a material contract regarding any of the UniPure patented
technologies
|
●
|
UniPure
achieves positive Operating Margins during two consecutive
quarters
|
●
|
UniPure
achieves positive Net Income during two consecutive
quarters
|
12
●
|
UniPure
receives a qualified offer to sell substantially all of its assets or to
merge with another entity and UniPure declines such
offer
|
●
|
A
Change of Control occurs at UniPure
|
●
|
The
average closing price of HKN common stock is above $3.50 for any
consecutive 30 day trading period
|
●
|
Any
UniPure transaction that dilutes HKN’s ownership of UniPure by more than
10%
|
●
|
UniPure
consummates a securities offering under the 1933 Act that results in
aggregate net cash proceeds to UniPure of at least $10
million
|
The Put
Option may be exercised upon the occurrence of any of these events:
●
|
UniPure
incurs net losses for any four consecutive
quarters
|
●
|
A
Change of Control occurs at HKN
|
●
|
The
average closing price of HKN common stock is below $1.50 per share or
above $4.00 per share for any consecutive 30 day trading
period
|
In June
2009, we entered into a Loan Agreement with UniPure under which we may make
secured loans to UniPure up to a maximum amount of $2.5
million. These loans are secured by all assets of UniPure and are due
and payable on or before June 30, 2012. As of September 30, 2009, we have made
approximately $721 thousand in aggregate secured loans to UniPure. The Loan
Agreement earns interest at 8.0% per annum. Accrued and unpaid interest on the
outstanding principal amount of the Loan shall be due and payable on the last
day of each calendar quarter, commencing September 30, 2009. UniPure shall repay
the entire unpaid principal amount of the loan, together with all accrued and
unpaid interest, on or before June 30, 2012.
The
assets, liabilities and non-controlling interest associated with our OHSOL
investment were consolidated into our financial statements per ASC 810-10, Consolidation, using the acquisition method of
accounting in accordance with ASC 805, Business
Combinations. See Note 1 – Basis for Presentation of further
explanation for consolidating our OHSOL investment. Our
acquisition-related costs of approximately $6 thousand and $87 thousand,
respectively, are included in general and administrative expenses within our
consolidated condensed statement of operations for the three and nine months
ended September 30, 2009.
Valuation of Investment in OHSOL Technology
(UniPure) –The fair value of the total consideration paid for our OHSOL
investment which includes 1.0 million restricted shares of common stock issued
along with the put/call option to issue 725 thousand restricted shares of our
common stock was measured using a third-party Fair Market Value Restricted Stock
Study, which valued the aggregate restricted shares at the investment date at
$2.01 per share. Under the ASC 820, Fair Value
Measurements and Disclosures, we consider this valuation method for our
restricted stock to be a Level 2 classification. See Note 6 – Fair Value
Measurements for further discussion of Level 2 valuation definitions. This
valuation considered several factors, including the closing market price of our
common stock at the acquisition date of $2.55 per share and the diminished
marketability caused by the restrictive nature of the shares issued. We applied
the discounted value of $2.01 per share to the total of the 1 million restricted
shares transferred and the potential 725 thousand restricted shares to be issued
upon the exercise of the put or call options in order to calculate the fair
value of our interest in the net assets acquired.
The
following table is the preliminary calculation of the consideration paid for our
initial 19.5% ownership in the OHSOL investment, the allocation to assets and
liabilities assumed and the fair value of the noncontrolling interest in UniPure
as of the investment date. This purchase price allocation as of September 30,
2009 is subject to adjustment, pending the final valuation of the fair value of
certain assets acquired and liabilities assumed.
13
(in
thousands, except share amounts)
|
||||
Consideration
issued to UniPure:
|
||||
1.0
million shares of restricted common stock
|
$ | 1,352 | ||
Fair
value of total consideration transferred for 19.5%
ownership
|
$ | 1,352 | ||
Recognized
amounts of identifiable assets aquired and liabilities assumed, at
estimated fair values
|
||||
Cash
and cash equivalents
|
$ | 7 | ||
Equipment
|
7,000 | |||
Intangible
assets
|
1,946 | |||
Accounts
payable
|
(380 | ) | ||
Deferred
income taxes
|
(729 | ) | ||
Contingent
liability
|
(910 | ) | ||
Total
identifiable net assets
|
$ | 6,934 | ||
Noncontrolling
interest (80.5 %)
|
(5,582 | ) | ||
Fair
value of our interest in net assets aquired (19.5 %)
|
$ | 1,352 |
The
intangible assets consist of patents related to the OHSOL process. The fair
value of the acquired patents of $1.9 million was estimated based on the
historical cost of the patents; the final valuation is pending a third party
valuation in 2010. Unless renewed, the patents will expire during the
next 6-12 years. The fair value of the OHSOL plant equipment of $7 million was
estimated as the replacement cost of the equipment. The valuation of the
equipment is also pending a third party valuation to be completed in
2010. We consider these valuations for our patents and equipment to
be Level 3 classifications. See Note 6 – Fair Value Measurements for further
discussion of Level 3 valuation definitions. The contingent liability of $910
thousand consists of $800 thousand which will be contractually payable to a
vendor upon the successful completion of a performance test on the OHSOL plant
equipment and $110 thousand of shared project costs which will be refunded to a
third party if a certain agreement for the OHSOL plant equipment is not
executed. These contingent liabilities are included in other accrued liabilities
within the consolidated condensed balance sheet.
A
deferred tax liability in the amount of $729 thousand was calculated by applying
the domestic statutory tax rates to the difference between the book purchase
price and the estimated tax basis. Information and research regarding
the tax basis of the assets at the date of the acquisition is not complete at
this time and the deferred tax may be adjusted as more information becomes
available.
OHSOL (UniPure) Results of Operations – For
the three months ended September 30, 2009, we recognized losses of $197 thousand
related to the OHSOL investment in our consolidated condensed statement of
operations, of which $160 thousand was related to noncontrolling interests. We
do not consider the OHSOL investment’s pre-acquisition activity to significantly
impact our proforma results of operations.
(3)
|
OTHER
INVESTMENTS
|
Marketable Securities – We
held no marketable securities at September 30, 2009 and $9.5 million at December
31, 2008, which consisted of Treasury bills with original maturities of six
months or less. These investments were recorded at their fair value at the
balance sheet date. There were no significant gains or losses on these
securities for any period covered by this report.
Investment in Global – Our
non-current available-for-sale investment consists of our ownership of
approximately 34% of Global’s outstanding ordinary shares. At
September 30, 2009 and December 31, 2008, our investment in Global was equal to
the market value of our 11.9 million shares of Global’s ordinary shares as
follows (in thousands, except for the share amounts):
14
September
30,
2009
|
December
31,
2008
|
|||||||
Shares
of Global Stock held by HKN
|
11,893,463 | 11,893,463 | ||||||
Closing
price of Global Stock
|
£ | 0.68 | £ | 0.68 | ||||
Foreign
Currency Exchange Rate
|
1.6104 | 1.4619 | ||||||
Market
Value of Investment in Global
|
$ | 13,066 | $ | 11,824 |
The
foreign currency translation adjustment of approximately $671 thousand and the
unrealized gain on investment of $571 thousand for these changes in market value
between the two periods were recorded to other comprehensive income in
stockholders’ equity during the nine months ended September 30,
2009.
(4)
|
EQUITY
INVESTMENT IN SPITFIRE ENERGY
|
At
September 30, 2009 and December 31, 2008, we held an investment in Spitfire
through our ownership of approximately 26% and 27%, respectively, of Spitfire’s
outstanding common shares at those dates. Spitfire is an independent public
company (TSX-V; SEL) engaged in the exploration, development and production of
crude oil, natural gas and natural gas liquids in Western Canada. We
reflect our investment in Spitfire as an equity method investment. Due to timing
differences in our filing requirements and the lack of availability of financial
information for the current quarterly period, we record our share of Spitfire’s
financial activity on a three-month lag.
In
accordance with the equity method of accounting, our investment was initially
recorded at cost and adjusted to reflect our share of changes in Spitfire’s
capital. It has been subsequently adjusted to recognize our share of
their earnings as they occur, rather than as dividends or other distributions
are received. Our share of their earnings also includes any
other-than-temporary declines in fair value recognized during the period. On
January 1, 2009, we adopted guidance under ASC 323-10-35, Investments- Equity Method and Joint Ventures.
As a result, changes in our proportionate share of the underlying equity of
Spitfire which result from their issuance of additional equity securities are
also recognized in our share of their earnings in our results of
operations.
Our
investment in Spitfire is reported in our consolidated condensed balance sheet
at its adjusted carrying value as a non-current asset, and our earnings are
reported net of tax as a single line on our consolidated condensed statement of
operations. During the nine months ended September 30, 2009, we sold
approximately 1.1 million shares of Spitfire common shares for $187 thousand
using the average cost method. We recognized a foreign currency gain of $7
thousand in other comprehensive income and a realized gain on sale of assets of
$23 thousand which is included in other income in the consolidated condensed
statement of operations. At September 30, 2009 and December 31, 2008, our
carrying values of this investment were $1.3 million and $1.8 million,
respectively.
(5)
|
DERIVATIVE
INSTRUMENTS
|
At
September 30, 2009, we do not hold any derivative instruments designated as
hedging instruments under ASC 815. The fair values of our derivative instruments
not designated as hedging instruments under ASC 815 as of September 30, 2009 was
zero. These derivative instruments are described below.
15
Spitfire Warrants - In association with our
investment in Spitfire, we also hold 1.3 million warrants to acquire common
shares of Spitfire. We account for these warrants as derivatives in
accordance with ASC 815. The expiration date of the warrants is August 1,
2010. We did not assign any value to these warrants at September 30,
2009. For the three and nine months ended September 30, 2009, we have included
unrealized losses of $2 thousand and $16 thousand, respectively, within other
losses (gains) in our consolidated condensed statement of
operations. These amounts are related primarily to the change in the
underlying price of Spitfire’s common shares.
Series M Preferred Conversion Feature – Our
Series M Preferred, which was issued in 2004, has a liquidation value of $100
per share, is non-voting and is convertible at the holders’ option into common
stock at a conversion price of $11.85 per share. This conversion price is
subject to continued adjustment in the event we subsequently issue shares of our
common stock at a price lower than this conversion price or in response to
certain transactions that are in effect equity restructuring transactions. Under
ASC 815-40-15, this anti-dilution provision allowing for the conversion price to
be adjusted represents an embedded derivative that requires it to be classified
as a liability. We would only incur the liability, equal to the current stock
price times the number of additional shares that would be required to fulfill
the conversion, if we were to issue common stock at a price less than the Series
M Preferred conversion price. At January 1, 2009, we recorded a Series M
Preferred conversion liability with an initial estimated fair value of $4
thousand as a cumulative effect adjustment. As discussed in Note 6 – Fair Value
Measurements, we did not record a Series M Preferred conversion liability at
September 30, 2009. For the three and nine months ended September 30, 2009, we
have included unrealized gains of $50 thousand and $5
thousand, respectively, related primarily to the decrease in the
likelihood of a share issuance, within other losses (gains) in our consolidated
condensed statement of operations.
Any
unrealized gains or losses related to our derivative instruments are included in
the consolidated condensed statement of operations for the three and nine months
ended September 30, 2009 as follows (in thousands):
Amount
of Loss or (Gain) Recognized
|
||||||||||
Derivatives
|
Location
of Loss or
(Gain)
Recognized in
Income
on Derivatives
|
Three
Months Ended September 30, 2009
|
Nine
Months Ended September 30, 2009
|
|||||||
Spitfire
warrants
|
Other
losses
|
$ | 2 | $ | 16 | |||||
Series
M Preferred conversion feature
|
Other
gains
|
(50 | ) | (5 | ) | |||||
$ | (48 | ) | $ | 11 |
(6)
|
FAIR
VALUE MEASUREMENTS
|
Beginning
January 1, 2009, we applied ASC 820, Fair Value
Measurements and Disclosures, to nonrecurring, nonfinancial assets and
liabilities, which were previously deferred by the FASB. This adoption did not
have a material impact on our consolidated condensed statement of operations or
financial condition.
ASC 820
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 also establishes a framework for measuring fair
value and a valuation hierarchy based upon the transparency of inputs used in
the valuation of an asset or liability. Classification within the
hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. The valuation hierarchy contains three
levels:
16
·
|
Level
1 – Valuation inputs are unadjusted quoted market prices for identical
assets or liabilities in active
markets.
|
·
|
Level
2 – Valuation inputs are quoted prices for identical assets or liabilities
in markets that are not active, quoted market prices for similar assets
and liabilities in active markets and other observable inputs directly or
indirectly related to the asset or liability being
measured.
|
·
|
Level
3 – Valuation inputs are unobservable and significant to the fair value
measurement.
|
We used
the following fair value measurements for certain of our assets and liabilities
during the nine months ended September 30, 2009:
Level 1
Classification:
Investment in Global –
Global’s ordinary shares are publicly traded on the Alternative Investment
Market (“AIM”) of the London Stock Exchange with quoted prices in active
markets. Accordingly, the fair value measurements of these securities have been
classified as Level 1.
Level 2
Classification:
Valuation of Our Restricted Stock Utilized as
Consideration for OHSOL Investment – Our OHSOL purchase price allocation
utilized fair values under ASC 805, Business
Combinations, on a nonrecurring basis. Please see Note 2 –
Investment in OHSOL Technology (UniPure) for further discussion on the valuation
of this investment.
Level 3
Classification:
Asset Retirement Obligations
– Our asset retirement obligation is classified as a Level 3 liability. The
significant unobservable inputs to this fair value measurement include estimates
of plugging, abandonment and remediation costs, inflation rate and the expected
remaining life of wells. The inputs are calculated utilizing historical data,
current estimated costs and expectations for the future costs and production of
the wells. See Note 8 – Asset Retirement Obligation for additional
information of our asset retirement obligation as of September 30,
2009.
Valuation of OHSOL Equipment and
Patents – The fair value of the acquired patents of $1.9 million is
non-recurring and was estimated based on the historical cost of the patents; the
final valuation is pending a third party valuation in 2010. Unless
renewed, the patents will expire during the next 6-12 years. The fair value of
the OHSOL plant equipment of $7 million is also non-recurring and was estimated
as the replacement cost of the equipment. The valuation of the equipment is also
pending a third party valuation to be completed in 2010. We consider these
valuations for the OHSOL patents and equipment to be Level 3
classifications.
The
following table presents recurring financial assets and liabilities which are
carried at fair value as of September 30, 2009 (in thousands):
17
Level
1
|
Level
2
|
Level
3
|
||||||||||
Investment
in Global (cost method)
|
$ | 13,066 | $ | - | $ | - | ||||||
Total
assets at fair value
|
$ | 13,066 | $ | - | $ | - | ||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||
Asset
retirement obligation
|
$ | - | $ | - | $ | 5,750 | ||||||
Total
liabilities at fair value
|
$ | - | $ | - | $ | 5,750 |
The table
above does not include our equity investment in Spitfire because we are deemed
to have a significant influence and, as such, is not accounted for at fair value
under ASC 820, Fair Value Measurements and
Disclosures, at September 30, 2009.
We also
did not include our Spitfire warrants and our Series M Preferred conversion
feature in the above table for the following reasons. At September 30, 2009,
management believes the value of the 1.3 million Spitfire warrants, given
Spitfire’s current and historical common share price, to be immaterial to our
consolidated condensed balance sheet or consolidated condensed statement of
operations. Management has assigned no value to these warrants. Our
Series M Preferred conversion feature is classified as a Level 3 liability, and
its fair value is measured based on management’s estimates and assumptions
regarding the timing and probability of any new share issuances. As management
has elected to redeem the remaining shares of our Series M Preferred stock
effective November 5, 2009, the date of this filing, there is no possibility of
any stock issuances prior to the redemption date. Therefore, this liability has
been given no value as of September 30, 2009. See Note 5- Derivative Instruments
for additional information on the Spitfire warrants and Series M Preferred
conversion feature.
The
reconciliation of the fair value for our Level 3 assets and liabilities (the
Spitfire warrants and Series M Preferred conversion feature), including net
purchases and sales, realized gains and change in unrealized gains, is set out
below (in thousands):
Nine
Months Ended September 30, 2009
|
||||||||
Level
3 Asset
|
Level
3 Liability
|
|||||||
Spitfire
Warrants
|
Series
M Preferred Conversion Feature
|
|||||||
Beginning
balance
|
$ | 16 | $ | 5 | ||||
Total
realized and unrealized losses included in earnings
|
(16 | ) | (5 | ) | ||||
Net
purchases and sales
|
- | - | ||||||
Ending
balance
|
$ | - | $ | - |
(7)
|
PROPERTY
AND EQUIPMENT
|
A summary
of property and equipment follows (in thousands):
18
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Unevaluated
properties:
|
||||||||
Unevaluated
coalbed methane prospects
|
$ | 5,074 | $ | 4,874 | ||||
Evaluated
oil and gas properties
|
199,863 | 197,534 | ||||||
OHSOL
equipment
|
7,120 | - | ||||||
Facilities
and other property
|
1,632 | 1,626 | ||||||
Less
accumulated depreciation, depletion, and amortization
|
(171,095 | ) | (168,676 | ) | ||||
$ | 42,594 | $ | 35,358 |
(8)
|
ASSET
RETIREMENT OBLIGATION
|
We
recognize the present value of asset retirement obligations beginning in the
period in which they are incurred if a reasonable estimate of a fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. A summary of our asset retirement
obligations as of September 30, 2009 is as follows (in thousands):
Asset
Retirement
|
|||||
Asset
Category
|
Obligation
Liability
|
Estimated
Life
|
|||
Oil
and gas producing properties
|
$ | 4,131 |
0-19
years
|
||
Facilities
and other property
|
1,619 |
2-26
years
|
|||
$ | 5,750 |
The
following table describes all changes to our asset retirement obligation
liability during the nine months ended September 30, 2009 (in
thousands):
Asset
retirement obligation at beginning of year
|
$ | 5,472 | ||
Additions
during the year
|
- | |||
Disposals
during the year
|
(9 | ) | ||
Revisions
of estimates
|
- | |||
Accretion
expense
|
287 | |||
Asset
retirement obligation at September 30, 2009
|
$ | 5,750 |
(9)
|
SEGMENT
INFORMATION
|
HKN
engages primarily in oil and gas exploration, exploitation, development and
production activities in the onshore and offshore Gulf Coast regions of South
Texas and Louisiana as well as coalbed methane exploration and development
activities in Indiana and Ohio. Our coalbed methane and oil and gas
operations efforts in the United States are managed and evaluated by us as one
operation. We operate primarily through traditional ownership of mineral
interests in the various states in which we operate.
19
In the
second quarter 2008, we created two new operating segments to reflect the
consolidation of the Canergy Growth Fund and Canergy Management. For
the three and nine months ended September 30, 2009, there was no
activity or other income and expenses related to the Canergy Growth Fund or
Canergy Management recorded in our consolidated condensed statement of
operations.
In the
second quarter 2009, we created a new operating segment to reflect the
consolidation of our Investment in OHSOL Technology (UniPure). This entity hold
the patents and equipment for OHSOL technology can be used to purify oilfield
emulsions by breaking and separating the emulsions into oil, water and solids
and to reduce the environmental impact for disposition of residual fuels and
waste materials. Please see Note 2 –Investment in OHSOL Technology (UniPure) for
further discussion.
Our
accounting policies for each of our operating segments are the same as those for
our consolidated condensed financial statements. Intersegment interest income
and interest expense between HKN and UniPure under the UniPure Loan Agreement
has been eliminated in consolidation. There were no intersegment
sales or transfers for the periods presented. Revenues and expenses
not directly identifiable with any segment, such as certain general and
administrative expenses, are allocated by us based on various internal and
external criteria including an assessment of the relative benefit to each
segment. Our financial information, expressed in thousands, for each
of our operating segments for the three and nine months ended September 30, 2009
and 2008 is as follows:
|
||||||||||||||||||||||||
For the Three Months Ended September 30,
2009
|
||||||||||||||||||||||||
Canergy
|
Canergy
|
OHSOL
|
||||||||||||||||||||||
HKN
|
Fund
|
Management
|
Investment
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Oil
and gas revenues
|
$ | 2,649 | $ | - | $ | - | $ | - | $ | - | $ | 2,649 | ||||||||||||
Interest
and other income
|
459 | - | - | - | (9 | ) | 450 | |||||||||||||||||
Oil
and gas operating expenses
|
2,169 | - | - | - | - | 2,169 | ||||||||||||||||||
General
and administrative expenses
|
636 | - | - | 198 | - | 834 | ||||||||||||||||||
Provision
for doubtful accounts
|
(49 | ) | - | - | - | - | (49 | ) | ||||||||||||||||
Depreciation,
depletion, amortization and accretion
|
752 | - | - | - | - | 752 | ||||||||||||||||||
Other
losses (gains)
|
(42 | ) | - | - | 9 | (9 | ) | (42 | ) | |||||||||||||||
Equity
in losses of Spitfire
|
50 | - | - | - | - | 50 | ||||||||||||||||||
Income
tax expense
|
- | - | - | - | - | - | ||||||||||||||||||
Net
Loss
|
$ | (408 | ) | $ | - | $ | - | $ | (207 | ) | $ | - | $ | (615 | ) | |||||||||
Capital
Expenditures
|
$ | 582 | $ | - | $ | - | $ | 111 | $ | - | $ | 693 | ||||||||||||
Total
Assets
|
$ | 64,733 | $ | - | $ | - | $ | 9,106 | $ | (721 | ) | $ | 73,118 |
20
|
||||||||||||||||||||||||
For the Three Months Ended September 30,
2008
|
||||||||||||||||||||||||
Canergy
|
Canergy
|
OHSOL
|
||||||||||||||||||||||
HKN
|
Fund
|
Management
|
Investment
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Oil
and gas revenues
|
$ | 5,952 | $ | - | $ | - | $ | - | $ | - | $ | 5,952 | ||||||||||||
Trading
losses
|
(659 | ) | (190 | ) | - | - | - | (849 | ) | |||||||||||||||
Interest
and other income
|
514 | (11 | ) | - | - | - | 503 | |||||||||||||||||
Oil
and gas operating expenses
|
3,478 | - | - | - | - | 3,478 | ||||||||||||||||||
General
and administrative expenses
|
1,152 | - | 93 | - | - | 1,245 | ||||||||||||||||||
Depreciation,
depletion, amortization and accretion
|
1,190 | - | - | - | - | 1,190 | ||||||||||||||||||
Other
losses, net
|
5 | - | - | - | - | 5 | ||||||||||||||||||
Impairment
of investment in Spitfire
|
2,787 | - | - | - | - | 2,787 | ||||||||||||||||||
Equity
in earnings of Spitfire
|
(97 | ) | - | - | - | - | (97 | ) | ||||||||||||||||
Income
tax expense
|
264 | - | - | - | - | 264 | ||||||||||||||||||
Net
Loss
|
$ | (2,972 | ) | $ | (201 | ) | $ | (93 | ) | $ | - | $ | - | $ | (3,266 | ) | ||||||||
Capital
Expenditures
|
$ | 3,898 | $ | - | $ | - | $ | - | $ | - | $ | 3,898 | ||||||||||||
Total
Assets
|
$ | 9,075 | $ | 623 | $ | 93 | $ | - | $ | - | $ | 9,791 | ||||||||||||
|
||||||||||||||||||||||||
For the Nine Months Ended September 30,
2009
|
||||||||||||||||||||||||
Canergy
|
Canergy
|
OHSOL
|
||||||||||||||||||||||
HKN
|
Fund
|
Management
|
Investment
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Oil
and gas revenues
|
$ | 7,452 | $ | - | $ | - | $ | - | $ | - | $ | 7,452 | ||||||||||||
Interest
and other income
|
1,778 | - | - | - | (9 | ) | 1,769 | |||||||||||||||||
Oil
and gas operating expenses
|
5,981 | - | - | - | - | 5,981 | ||||||||||||||||||
General
and administrative expenses
|
1,825 | - | - | 198 | - | 2,023 | ||||||||||||||||||
Provision
for doubtful accounts
|
222 | - | - | - | - | 222 | ||||||||||||||||||
Depreciation,
depletion, amortization and accretion
|
2,736 | - | - | - | - | 2,736 | ||||||||||||||||||
Other
losses, net
|
17 | - | - | 9 | (9 | ) | 17 | |||||||||||||||||
Equity
in losses of Spitfire
|
173 | - | - | - | - | 173 | ||||||||||||||||||
Income
tax benefit
|
(40 | ) | - | - | - | - | (40 | ) | ||||||||||||||||
Net
Loss
|
$ | (1,684 | ) | $ | - | $ | - | $ | (207 | ) | $ | - | $ | (1,891 | ) | |||||||||
Capital
Expenditures
|
$ | 2,271 | $ | - | $ | - | $ | 111 | $ | - | $ | 2,382 | ||||||||||||
Total
Assets
|
$ | 64,733 | $ | - | $ | - | $ | 9,106 | $ | (721 | ) | $ | 73,118 | |||||||||||
|
||||||||||||||||||||||||
For the Nine Months Ended September 30,
2008
|
||||||||||||||||||||||||
Canergy
|
Canergy
|
OHSOL
|
||||||||||||||||||||||
HKN
|
Fund
|
Management
|
Investment
|
Eliminations
|
Consolidated
|
|||||||||||||||||||
Oil
and gas revenues
|
$ | 19,205 | $ | - | $ | - | $ | - | $ | - | $ | 19,205 | ||||||||||||
Trading
losses
|
(2,078 | ) | (192 | ) | - | - | - | (2,270 | ) | |||||||||||||||
Interest
and other income
|
2,033 | (10 | ) | - | - | - | 2,023 | |||||||||||||||||
Oil
and gas operating expenses
|
8,554 | - | - | - | - | 8,554 | ||||||||||||||||||
General
and administrative expenses
|
3,371 | 1 | 119 | - | - | 3,491 | ||||||||||||||||||
Depreciation,
depletion, amortization and accretion
|
3,680 | - | - | - | - | 3,680 | ||||||||||||||||||
Other
losses, net
|
50 | - | - | - | - | 50 | ||||||||||||||||||
Impairment
of investment in Spitfire
|
2,787 | - | - | - | - | 2,787 | ||||||||||||||||||
Equity
in earnings of Spitfire
|
(68 | ) | - | - | - | - | (68 | ) | ||||||||||||||||
Income
tax expense
|
271 | - | - | - | - | 271 | ||||||||||||||||||
Net
Income (Loss)
|
$ | 515 | $ | (203 | ) | $ | (119 | ) | $ | - | $ | - | $ | 193 | ||||||||||
Capital
Expenditures
|
$ | 4,932 | $ | - | $ | - | $ | - | $ | - | $ | 4,932 | ||||||||||||
Total
Assets
|
$ | 109,863 | $ | 1,795 | $ | 91 | $ | - | $ | - | $ | 111,749 |
21
(10)
|
STOCKHOLDERS’
EQUITY
|
Treasury Stock – At September
30, 2009 and December 31, 2008, we held 36,724 shares and 6,869 shares,
respectively, of treasury stock. In January 2009, our Board of Directors
authorized an amendment to the existing repurchase plan allowing us to
repurchase an additional 1 million shares of our common stock. During
the nine months ended September 30, 2009, we repurchased approximately 665
thousand shares of our common stock. This included a repurchase of 500 thousand
shares of our common stock for $1.3 million from a shareholder in a privately
negotiated transaction pursuant to our repurchase program. During the
nine months ended September 30, 2009, we retired approximately 635
thousand treasury shares. As of September 30, 2009, approximately 572 thousand
shares remained available for repurchase under our
repurchase program.
Redemption of Series M
Preferred – During May 2009, we redeemed 10 thousand shares of our Series
M Preferred with a liquidation value of $100 per share for $1 million in cash.
In addition, we paid approximately $23 thousand in accrued dividends on these
shares. In October 2009, we elected to redeem the remaining 34
thousand shares of our Series M Preferred for $3.4 million in cash plus accrued
interest. The redemption date for these remaining Series M Preferred
shares is November 5, 2009.
Change in the Conversion Price of
the Series M Preferred – In June 2009 upon the issuance of our shares for
the OHSOL investment, the conversion price of the Series M Preferred decreased
from $13.22 to $11.85 per share. The incremental intrinsic value of the change
in the Series M Preferred conversion price of $76 thousand is reflected as a
payment of preferred stock dividends in our consolidated condensed statement of
operations during the nine months ended September 30, 2009.
Option to Issue Common Shares
– Pursuant to the terms of our OHSOL investment and the related Agreement, HKN
and the other UniPure unitholders have granted to one another put and call
options with respect to 3,050 units of UniPure in exchange for issuance of 725
thousand restricted shares of our common stock. These options are
exercisable only if certain conditions are satisfied prior to June
2012. None of these conditions have been met as of September 30,
2009. Please see Note 2 –Investment in OHSOL Technology (UniPure) for
additional information of our investment.
Noncontrolling Interest –In
June 2009, we recorded $5.6 million attributable to noncontrolling interests in
our consolidated condensed balance sheet which represents the fair value of our
partners’ 80.5% interest in the net assets of our OHSOL investment (UniPure).
During the three months ended September 30, 2009, we recorded losses of $160
thousand related to the results of operations of UniPure to noncontrolling
interest which resulted in a noncontrolling interest of $5.4 million at
September 30, 2009. Please see Note 2 –Investment in OHSOL Technology (UniPure)
for additional information of our investment.
The
changes in the number of common and preferred shares and shares held in treasury
during the nine months ended September 30, 2009 are as follows:
22
Number
of Shares
|
||||||||||||||||||||
Description
|
Preferred
G1
|
Preferred
G2
|
Preferred
M
|
Common
|
Treasury
|
|||||||||||||||
Balance
as of December 31, 2008
|
1,600 | 1,000 | 44,000 | 9,268,253 | 6,869 | |||||||||||||||
Issuances
of preferred stock dividends
|
- | - | - | 83 | - | |||||||||||||||
Preferred
stock redemption
|
- | - | (10,000 | ) | - | - | ||||||||||||||
Issuance
of restricted shares for investment
|
- | - | - | 1,000,000 | - | |||||||||||||||
Treasury
Stock repurchase
|
- | - | - | - | 664,924 | |||||||||||||||
Treasury
Stock cancellation
|
- | - | - | (635,069 | ) | (635,069 | ) | |||||||||||||
Balance
as of September 30, 2009
|
1,600 | 1,000 | 34,000 | 9,633,267 | 36,724 |
(11)
|
EARNINGS
PER SHARE
|
Basic
earnings per share includes no dilution and is computed by dividing income or
loss attributed to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if security interests were exercised or
converted into common stock. The following table sets forth the computation of
basic and diluted income (loss) per share for the three and nine months ended
September 30, 2009 and 2008 (in thousands, except per share data):
Three
months ended September 30, 2009
|
Three
months ended September 30, 2008
|
|||||||||||||||||||||||
Net
Loss
Attributed
to
Common
Stock
|
Weighted-
Average
Shares
|
Per
Share
Loss
|
Net
Loss
Attributed
to
Common
Stock
|
Weighted-
Average
Shares
|
Per
Share
Loss
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
loss
|
$ | (528 | ) | 9,639 | $ | (0.05 | ) | $ | (3,276 | ) | 9,638 | $ | (0.34 | ) | ||||||||||
Effect
of dilutive securities
|
||||||||||||||||||||||||
Preferred
stock (A)
|
- | - | - | - | - | - | ||||||||||||||||||
Diluted
loss per share
|
$ | (528 | ) | 9,639 | $ | (0.05 | ) | $ | (3,276 | ) | 9,638 | $ | (0.34 | ) | ||||||||||
Nine
months ended September 30, 2009
|
Nine
months ended September 30, 2008
|
|||||||||||||||||||||||
Net
Loss
Attributed
to
Common
Stock
|
Weighted-
Average
Shares
|
Per
Share
Loss
|
Net
Income
Attributed
to
Common
Stock
|
Weighted-
Average
Shares
|
Per
Share
Income
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
income (loss)
|
$ | (2,086 | ) | 9,165 | $ | (0.23 | ) | $ | 33 | 9,685 | $ | 0.00 | ||||||||||||
Effect
of dilutive securities
|
||||||||||||||||||||||||
Preferred
stock (A)
|
- | - | - | - | - | - | ||||||||||||||||||
Diluted
earnings (loss) per share
|
$ | (2,086 | ) | 9,165 | $ | (0.23 | ) | $ | 33 | 9,685 | $ | 0.00 |
(A) Our
Series G1, Series G2 and Series M Preferred which were outstanding in the
periods presented were excluded from the calculation of diluted earnings per
share as their effect would have been antidilutive.
(12)
|
CONTINGENCIES
|
OHSOL (UniPure) Contingency –
Please See Note 2 – Investment in OHSOL technology (UniPure) for further
discussion on the UniPure contingencies.
IRS Examination – On August
6, 2008, we received a Revenue Agent’s Report in which the Internal Revenue
Service (“IRS”) proposed an adjustment to our federal tax liability for the
calendar year 2005. The proposed adjustment relates to the
calculation of the adjusted current earnings (“ACE”) component of the
alternative minimum tax and asserts that the Company recognized gain for ACE
purposes on the sale of the Global PLC stock in 2005. In its proposed
adjustment, the IRS alleges that the Company owes approximately $3.6 million in
tax for the year ended December 31, 2005. Penalties and interest calculated
through September 30, 2009 in the amount of $2 million could also be assessed.
In response to the proposed adjustment and corresponding tax assessment, the
Company filed a written protest and request for conference on September 5, 2008
to address the proposed adjustment with the Appeals division of the
IRS. On October 29, 2008, we received an acknowledgement of receipt
of our written protest and request for conference from the IRS Appeals Office.
In April 2009, we filed our supplement to the written protest filed with the
IRS. Pursuant to the IRS Appeals Office acknowledgement, we
anticipate that office to contact us to address this matter but have received no
response to date.
23
FIN 48
prescribes a recognition threshold of more-likely-than-not to be sustained upon
examination. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. Based on the requirements of ASC 740, Income Taxes, we
have recorded an income tax contingency, including interest and penalties, as of
September 30, 2009, of $225 thousand in our consolidated condensed financial
statements based, in part, on a preliminary indication of a probability-weighted
fair value assessment of the Global stock. We intend to vigorously defend the
proposed adjustment and strongly believe that the Company has meritorious
defenses.
Operational Contingencies
– The exploration, development and production of oil and gas assets are
subject to various, federal and state laws and regulations designed to protect
the environment. Compliance with these regulations is part of our day-to-day
operating procedures. Infrequently, accidental discharge of such materials as
oil, natural gas or drilling fluids can occur and such accidents can require
material expenditures to correct. We maintain levels of insurance we believe to
be customary in the industry to limit our financial exposure. We are currently
self-insured for wind coverage on our oil and gas properties. We are
unaware of any material capital expenditures required for environmental control
during this fiscal year.
(13)
|
RELATED
PARTY TRANSACTIONS
|
As
described in Note 2 –Investment in OHSOL Technology (UniPure), in June 2009, we
entered into an Agreement in which we issued an aggregate of 1 million
restricted shares of our common stock in exchange for 1,950 units of UniPure. In
June 2009, we entered into a Loan Agreement with UniPure under which we may make
secured loans to UniPure up to a maximum amount of $2.5
million. These loans are secured by all assets of UniPure and are due
and payable on or before June 30, 2012. As of September 30, 2009, we
have made approximately $721 thousand in aggregate secured loans to
UniPure. Two of the UniPure existing unitholders, Quadrant
Management, Inc., (“Quadrant”) and UniPureEnergy Acquisition, Ltd. (“UEA”) are
affiliates of the Quasha family. Alan G. Quasha is the Chairman of
the Board of Directors of HKN.
(14)
|
SUBSEQUENT
EVENTS
|
We have
evaluated events after the date of these financial statements, September 30,
2009, through November 5, 2009, the date that these financial statements were
issued. With the exception of the redemption of the remaining Series M Preferred
shares on November 5, 2009, as described in Note 10 – Stockholders Equity, there
were no material subsequent events as of that date.
24
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion is intended to assist you in understanding our business and
the results of our operations. It should be read in conjunction with
the Consolidated Condensed Financial Statements and the related notes that
appear elsewhere in this report as well as our Annual Report on Form 10-K for
the year ended December 31, 2008. Certain statements made in our discussion may
be forward looking. Forward-looking statements involve risks and
uncertainties and a number of factors could cause actual results or outcomes to
differ materially from our expectations. These risks, uncertainties, and other
factors include, among others, the risks described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008 filed with the Securities and
Exchange Commission, as well as other risks described in this Quarterly
Report. Unless the context requires otherwise, when we refer to “we,”
“us” and “our,” we are describing HKN, Inc. and its consolidated subsidiaries on
a consolidated basis.
BUSINESS
OVERVIEW
Our business strategy is focused on
enhancing value for our stockholders through the development of a well-balanced
portfolio of energy-based assets. Currently, the majority of the
value of our assets is derived from our ownership of Gulf Coast oil and gas
properties. During 2009, commodity pricing for both crude oil and
natural gas has continued to average well below pricing from the respective
prior year period. We believe in the long-term fundamentals of our
industry, therefore during periods of low pricing, we have focused on cutting
our operating, general and administrative costs to allow our operations to
continue to generate cash from operating activities until pricing
rebounds.
During 2009, we have focused on
enhancing the value of our Main Pass 35 field, located offshore Louisiana in the
Gulf of Mexico, by performing various process and structural upgrades and
improvements to the facility and its equipment. We believe our
Main Pass 35 asset has unique characteristics such as low-decline oil
production, behind-pipe development potential as well as third-party oil, gas
and water processing and handling services for neighboring fields in the
area. We continue to focus on improving operational efficiencies,
reducing maintenance costs and reducing the third-party dependency of our Main
Pass 35 asset.
During 2009, we acquired an interest in
a private company which holds patents to the emulsion breaking “OHSOL”
technology. This environmentally-clean process can be used to purify
oilfield emulsions by breaking and separating the emulsions into oil, water and
solids. This technology has been successfully tested with a mobile
OHSOL unit in a demonstration in Prudhoe Bay, Alaska, which demonstrated the
effectiveness of the OHSOL emulsion breaking technology to recover valuable
hydrocarbons and reduce wastes. We are currently pursuing
opportunities to commercialize the OHSOL technology by performing emulsion
testing of the OHSOL plant equipment both internationally and
domestically.
We are also seeking to identify further
investment opportunities in undervalued energy-based companies which could
provide future value for our shareholders.
Focus
on Efficient Operations
Our revenues are primarily derived from
sales from our Gulf Coast oil and gas producing properties. During
2009, our oil and gas revenue has been comprised approximately 82% from oil
sales and 18% from natural gas sales. During the nine months ended September 30,
2009, oil commodity pricing was approximately 53% lower than the prior year
period, and natural gas commodity pricing was approximately 63% lower than the
prior year period. If oil and gas commodity pricing and economic conditions
continue to decline in the future, our revenue will continue to be adversely
affected.
25
In spite of the challenging commodity
pricing markets, we continue to be in a financially-stable position. During the
nine months ended September 30, 2009, we had positive cash flow from our
operations. We have no debt outstanding, and we have a cash balance
of approximately $11.3 million at September 30, 2009. We also anticipate our
operating cash flow and other capital resources, if needed, will adequately fund
our planned capital expenditures and other capital uses. Our capital
expenditures are discretionary and can be curtailed if sufficient funds are not
available.
Gulf
Coast Oil and Gas Properties
During the third quarter 2009, our
results of operations reflect decreased oil and natural gas revenues which are
primarily the result of decreased commodity prices in 2009. Substantially all of
our production is concentrated in twelve oil and gas fields along the onshore
and offshore Texas and Louisiana Gulf Coast.
Our revenues are primarily derived from
sales from our oil and gas properties. Approximately 52% of our production comes
from our operated properties all located in the United States. These revenues
are a function of the oil and gas volumes produced and the prevailing commodity
price at the time of production, and certain quality and transportation
discounts. The commodity prices for crude oil and natural gas as well as the
timing of production volumes have a significant impact on our operating income.
For the nine months ended September 30, 2009, our net domestic production rate
averaged approximately 623 barrels of oil equivalent (“boe”) per
day.
The
following field data updates the status of our operations through September 30,
2009:
Main
Pass, Plaquemines Parish – Louisiana
We have a 90% interest in Main Pass and
are the field operator. This field contains a ten-platform facility complex
including separation, injection, compression, processing and transportation
terminals for oil, water and gas. The field also contains 66
wellbores (60 oil and 6 injection wells), of which 33 are active, and an eight
mile oil transport line with pump/metering facilities. Our Main Pass 35 facility
is located approximately six miles offshore in state waters off the Gulf Coast
of Louisiana. We currently have license to 21 square miles of 3D seismic data
covering the area held by productive leases. Gross production during the third
quarter 2009 averaged approximately 389 boe per day. In order to lower our gas
lift expense in the field, we are currently performing a recompletion project of
at least one gas zone expected to be completed in the fourth quarter
2009.
Lapeyrouse
Field, Terrebonne Parish – Louisiana
We hold an average non-operated working
interest of approximately 18% in the production from nine wells in this field.
Gross field production averaged approximately 147 boe per day for the third
quarter 2009. Evaluation efforts by the operator are still ongoing
with additional diagnostic work planned by the operator to address the field
pressure decline and to utilize all available wellbores.
26
Lake
Raccourci Field, Lafourche Parish – Louisiana
We hold an average 40% operated working
interest in each of our Lake Raccourci wells. Gross production for this field
averaged 35 boe per day for the third quarter 2009. Production decreased
significantly this quarterly period primarily due to the fact that the SL
14284-1 well ceased production in February 2009. Diagnostic work
indicated that the well ceased production due to sand build up in the
tubing. Coiled tubing work was carried out, but failed to restore
production. We are currently evaluating the economic potential of a recompletion
to the Tex 16 zone behind pipe, as well as several other zones in our two other
producing wells in the field.
Point-a-la-Hache
Field, Plaquemines Parish – Louisiana
We
maintain a 25% operated working interest in one producing well in this field.
Average gross production for the third quarter 2009 was approximately 38 boe per
day. Production remains steady from this one well field.
Creole
Field, Terrebonne Parish - Louisiana
We hold an average 15% non-operated
working interest in this offshore field. Gross daily production from the wells
(eight completions) was approximately 1,099 boe per day during the third quarter
2009. Three completions in two wells drilled in late 2008 were put on production
in 2009 after significant weather delays.
East
Lake Verret, Assumption Parish – Louisiana
We have an average 5% non-operated
working interest in this field. Gross daily production from the two development
wells on this project was approximately 501 boe per day during the third quarter
2009.
Point-au-Fer
Field, Terrebonne Parish – Louisiana
We own a
12.5% non-operated working interest in this approximate 56 square mile area.
Gross production for this field was approximately 27 boe per day for the third
quarter 2009. Several prospects have been identified in the area, but due to the
low oil and gas pricing, we expect additional drilling and work over activity
will be delayed by the operator.
Branville
Bay Field, St. Bernard Parish – Louisiana
We own a
12.5% non-operated working interest in two state leases in the Branville Bay
area of Chandeleur Sound Block 71. Gross production for this field was
approximately 192 boe per day for the third quarter 2009.
BP
2D Texas Gulf Coast Project, Various Counties - Texas
We own a 25% non-operated working
interest in the Boquillas #1 well. Gross production from this well is steady and
was approximately 193 boe per day for the third quarter 2009.
27
NW
Speaks Field, Lavaca County – Texas
We own approximately 2% to 10% in
various leases in the NW Speaks area. Current gross production for this field
averaged approximately 70 boe per day during the third quarter 2009 from two
wells.
Allen
Ranch Field, Colorado County – Texas
We own an
11.25% non-operated working interest in this area. Gross production for this
field was approximately 57 boe per day during the third quarter 2009 primarily
from the initial well, the Hancock Gas Unit #1 which is the only well currently
producing from the field. Another development location has been identified, but
future development of the field is currently on hold pending higher natural gas
pricing.
Raymondville
Field, Willacy County – Texas
We own a
27% non-operated working interest in this area. Current gross production for
this field averaged approximately 164 boe per day during the third quarter 2009.
Field production continues to decline as fewer behind pipe zones remain. Several
wells ceased production in 2009 and have no remaining recompletion
potential.
Lucky
Field, Matagorda County - Texas
We own a
7.5% non-operated working interest in this area. Current gross production for
this field averaged approximately 30 boe per day during the third quarter
2009.
Coalbed
Methane Prospects – Indiana and Ohio
We hold two exploration and
development agreements in Indiana and Ohio which provide for an area of mutual
interest of approximately 400,000 acres, respectively. The agreements provide
for a phased delineation, pilot and development program, with corresponding
staged expenditures. Contracted third parties with a long track record in
successful Coalbed Methane development provide expert advice for these
projects.
On the Indiana Posey Prospect, we are
currently in the second pilot well phase of Phase II (Exploratory Phase) of the
project. The extent of water influx from the first pilot wells is
under evaluation to enhance desorption efforts. Alternative design
stimulations are also under evaluation as pumpdown continues while the initial
fracture treatments are evaluated.
As part of the second pilot well phase,
we drilled five pilot producers and completed a water disposal well with
specialized fracture stimulation. The proprietary fracture
stimulation is currently being evaluated for continued
application. Upon completion of the fracturing program, pumpdown for
desorption of the second Posey pilot will begin. Following an evaluation period
of these two pilot areas, we will evaluate a Phase III – Development election
and funding of a development well program as contemplated by the
agreements.
On the
Ohio Cumberland Prospect, the Phase II project has been temporarily suspended
until such time as oil and gas commodity pricing increases. We are
focusing our efforts in 2009 on the Indiana Posey Contract.
With the
decline in oil and gas commodity prices, resource plays, such as coalbed methane
prospects, can become uneconomical in low price environments. Our discretionary
capital expenditures, including costs related to our coalbed methane prospects,
may be curtailed at our discretion in the future. Such expenditure curtailments
could result in us losing certain prospect acreage or reducing our interest in
future development projects.
28
INVESTMENT
IN GLOBAL
At September 30, 2009 and December 31,
2008, we owned approximately 34% of Global’s ordinary shares. Our investment in
Global was equal to the market value of our 11.9 million shares of Global’s
common stock as follows (in thousands, except for share amounts):
|
September
30, 2009
|
December 31,
2008
|
|
|||||
Shares
of Global Stock held by HKN
|
11,893,463 | 11,893,463 | ||||||
Closing price of Global Stock | £ | 0.68 | £ | 0.68 | ||||
Foreign Currency Exchange Rate | 1.6104 | 1.4619 | ||||||
Market Value of Investment in Global | $ | 13,066 | $ | 11,824 |
The
foreign currency translation adjustment of approximately $671 thousand and the
unrealized loss on investment of $571 thousand for these changes in market value
between the two periods were recorded to other comprehensive income in
stockholders’ equity during the nine months ended September 30,
2009.
INVESTMENT
IN SPITFIRE
At September 30, 2009, we owned 10
million common shares of Spitfire and 1.3 million warrants to acquire common
shares of Spitfire. Our common share holdings represent approximately 26% of the
outstanding Spitfire common shares. In 2009, we have sold approximately 1.1
million of our Spitfire shares in the market for cash proceeds of $187
thousand.
INVESTMENT
IN OHSOL TECHNOLOGY (UniPure)
Under
UniPure’s Operating Agreement, effective June 30, 2009, we are the Managing
Member of UniPure and, as such, possess the legal power to direct the operating
policies and procedures of UniPure. Therefore, we have determined
that our OHSOL investment meets the requirements of ASC 810-10, Consoldiation, and we are the
primary beneficiary, as defined. Therefore, we have consolidated the assets and
liabilities of UniPure as of the investment date. The results of
operations for the three months ended September 30, 2009 have been consolidated
in our results of operations. Please see Note 2 – Investment in OHSOL Technology
(UniPure) for additional information.
INVESTMENT
IN CANERGY FUND
HKN is currently the sole member of
both the Canergy Fund and Canergy Management. For the three and nine
months ended September 30, 2009, there was no trading activity related to the
Canergy Growth Fund recorded on our consolidated condensed statement of
operations.
29
CRITICAL
ACCOUNTING ESTIMATES AND ASSUMPTIONS
Our consolidated condensed financial
statements have been prepared in accordance with U.S. GAAP which requires us to
use estimates and make assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Our estimates and assumptions are
based on historical experience, industry conditions and various other factors
which we believe are appropriate. Actual results could vary significantly from
our estimates and assumptions as additional information becomes
known. The more significant critical accounting estimates and
assumptions are described below.
Full-Cost Ceiling Test – At
the end of each quarterly period, the unamortized cost of oil and natural gas
properties, after deducting the asset retirement obligation, net of related
deferred income taxes, is limited to the sum of the estimated future net
revenues from proved properties using period-end prices, discounted at 10%, and
the lower of cost or fair value of unproved properties adjusted for related
income tax effects.
The calculation of the ceiling test and
the provision for depletion are based on estimates of proved reserves. There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify a revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of oil and natural gas that are ultimately
recovered.
Based on the September 30, 2009
commodity pricing of $4.84 per Mmbtu for natural gas and $70.61 per barrel for
crude oil, we did not have an impairment of our oil and natural gas properties
under the full cost method of accounting. Due to the imprecision in
estimating oil and natural gas revenues as well as the potential volatility in
oil and natural gas prices and their effect on the carrying value of our proved
oil and natural gas reserves, there can be no assurance that write-downs in the
future will not be required as a result of factors that may negatively affect
the present value of proved oil and natural gas reserves and the carrying value
of oil and natural gas properties, including volatile oil and
natural gas prices, downward revisions in estimated proved oil and natural gas
reserve quantities and unsuccessful drilling activities.
Fair Value of Financial
Instruments – Financial instruments are stated at fair value as
determined in good faith by management. Factors considered in valuing individual
investments include, without limitation, available market prices, reported net
asset values, type of security, purchase price, purchases of the same or similar
securities by other investors, marketability, restrictions on disposition,
current financial position and operating results, and other pertinent
information. We carry our financial instruments including cash and our
investment in ordinary shares of Global at their estimated fair values. The fair
value of our investment in the ordinary shares of Global is based on prices
quoted in an active market.
Equity Method Investments –
For investments in which we have the ability to exercise significant influence
but do not control, we follow the equity method of
accounting. Initial investments are recorded at cost and adjusted by
the proportionate share of the investee’s earnings and capital
transactions. Our share of investee earnings are recorded to our
income statement and our share of their capital transactions are recorded in our
shareholders’ equity. We evaluate these investments for
other-than-temporary declines in value each quarter; any impairment found is
recognized through earnings. We reflect our investment in Spitfire as
an equity method investment.
30
Translation of Non-U.S. Currency
Amounts - Assets and liabilities of our equity investment in Spitfire
Energy, whose functional currency is not the U.S. dollar, are translated
into U.S. dollars at exchange rates in effect at each balance sheet date.
Revenue and expense items are translated at average exchange rates prevailing
during the periods. Our investment in Global is also subject to foreign currency
exchange rate risk as our ownership of Global’s ordinary shares are denominated
in British sterling pounds. Translation adjustments are included in other
comprehensive income until the investment is sold.
Consolidation of variable interest
entities - Our
investment in OHSOL technology (UniPure) is considered to be a variable
interest, as defined in ASC 810-10, Consolidation. ASC 810-10-25
requires the primary beneficiary of a variable interest entity’s (“VIE”)
activities to consolidate the VIE. ASC 810-10-15 defines a VIE as an entity in
which the equity investors do not have substantive voting rights and there is
not sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. We have determined that our OHSOL
investment meets the requirements of ASC 810-10, and we are the primary
beneficiary, as defined. Accordingly, we have consolidated the assets and
liabilities of UniPure as of the investment date. The results of
operations for the three months ended September 30, 2009 are consolidated in our
results of operations.
As of September 30, 2009, we owned less
than a majority of the common shares of Global and did not possess the legal
power to direct the operating policies and procedures of Global. In addition, we
have concluded that Global was not a VIE at September 30, 2009 as contemplated
by ASC 810-10.
Income Taxes – We account for income taxes
under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. We measure and record income tax contingency accruals in
accordance with ASC 740, Income Taxes.
We
recognize liabilities for uncertain income tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we must determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis or when new information becomes available to management. These
reevaluations are based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, successfully settled issues under
audit, expirations due to statutes, and new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or
an increase to the tax accrual.
We
classify interest related to income tax liabilities as income tax expense, and
if applicable, penalties are recognized as a component of income tax expense.
The income tax liabilities and accrued interest and penalties that are
anticipated to be due within one year of the balance sheet date are presented as
current liabilities in our condensed consolidated balance sheets.
31
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2007, FASB issued guidance
related to Business Combinations under ASC 805, Business Combinations, and
guidance related to the accounting and reporting of noncontrolling interest
under ASC 810-10-65-1, Consolidation. This guidance
significantly changes the accounting for and reporting of business combination
transactions and noncontrolling (minority) interests in consolidated financial
statements. This guidance became simultaneously effective January 1, 2009. We
applied this guidance to our investment in OHSOL technology (UniPure). Please
see Note 2 – Investment in OHSOL Technology for additional
information.
In March
2008, the FASB issued guidance related to the disclosures about derivative
instruments and hedging activities under ASC 815-10-50, Derivatives and Hedging. This
guidance requires companies to provide enhanced disclosures about (a) how
and why they use derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under applicable guidance, and
(c) how derivative instruments and related hedged items affect a company's
financial position, financial performance, and cash flows. These disclosure
requirements are effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Our adoption of ASC
815-10-50 on January 1, 2009 did not have a material impact on our consolidated
condensed financial statements. See Note 7 – Derivative Instruments for
additional information.
In June
2008, the FASB issued guidance to evaluate whether an instrument (or embedded
feature) is indexed to an entity’s own stock under ASC 815-40-15, Derivatives and Hedging. The
guidance requires entities to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock in order to
determine if the instrument should be accounted for as a derivative under the
scope of ASC 815-10-15. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. We adopted ASC 815-40-15 beginning January 1,
2009. We applied this guidance to the conversion feature in our
Series M Convertible Preferred Stock (“Series M Preferred”). See Note 7 –
Derivative Instruments for additional information.
In
November 2008, the FASB issued guidance related to accounting considerations for
equity method investments under ASC 323-10-35, Investments – Equity Method and
Joint Ventures. This guidance states that an equity method investor shall
account for a share issuance by an investee as if the investor had sold a
proportionate share of its investment. Any gain or loss to the investor
resulting from an investee's share issuance should be recognized in earnings.
Previous to this, changes in equity for both issuances and repurchases were
recognized in equity. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. We adopted ASC 323-10-35 beginning January 1,
2009. We applied this guidance to our equity investment in Spitfire
Energy. See Note 4 – Equity Investment in Spitfire Energy for additional
information.
In
December 2008, the Securities and Exchange Commission published a Final Rule,
“Modernization of Oil and Gas Reporting”. The new rule will permit the use of
new technologies to determine proved reserves if those technologies have been
demonstrated to lead to reliable conclusions about reserves volumes. The new
requirements also will allow companies to disclose their probable and possible
reserves to investors. In addition, the new disclosure requirements require
companies to: (a) report the independence and qualifications of its
reserves preparer or auditor; (b) file reports when a third party is relied
upon to prepare reserves estimates or conducts a reserves audit; and
(c) report oil and gas reserves using an average price based upon the prior
12-month period rather than year-end prices. The use of average prices will
affect future impairment and depletion calculations. The new disclosure
requirements are effective for annual reports on Form 10-K for fiscal years
ending on or after December 31, 2009. A company may not apply the new rules
to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. We have not yet determined the impact of
this Final Rule, which will vary depending on changes in commodity prices on our
disclosures, financial position or results of operations.
32
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We adopted FASB ASC 855-10 as of June 30, 2009 and have included the required
disclosures in our consolidated condensed financial statements. See Note 14 –
Subsequent Events for additional information.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June 2009, the FASB issued
Accounting Standards Update No. 2009-01 which amends ASC 105, Generally Accepted Accounting
Principles. This guidance states that the ASC will become the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Once effective, the Codification’s content will carry the same level
of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two
levels of U.S. GAAP: authoritative and non-authoritative. This is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted ASC 105 as of September 30, 2009 and
thus have incorporated the new Codification citations in place of the
corresponding references to legacy accounting pronouncements.
In August 2009, the FASB issued
Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value,
which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure the fair value using one or
more of the following techniques: a valuation technique that uses the quoted
price of the identical liability or similar liabilities when traded as an asset,
which would be considered a Level 1 input, or another valuation technique that
is consistent with ASC 820. This Update is effective for the first reporting
period (including interim periods) beginning after issuance. Thus, we adopted
this guidance as of September 30, 2009, which did not have a material impact on
our consolidated condensed financial statements.
33
RESULTS
OF OPERATIONS
For the purposes of discussion and
analysis, we are presenting a summary of our consolidated condensed results of
operations followed by more detailed discussion and analysis of our operating
results. The primary components of our net income (loss) for the
three and nine months ended September 30, 2009 and 2008, were as
follows (in thousands, except per-share data):
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||
Oil
and gas operating profit (1)
|
$ | 480 | $ | 2,474 | (81 | %) | $ | 1,471 | $ | 10,651 | (86 | %) | ||||||||||
Gas
sales revenues
|
$ | 280 | $ | 1,839 | (85 | %) | $ | 1,344 | $ | 5,967 | (77 | %) | ||||||||||
Gas
production (mcf)
|
67,145 | 170,520 | (61 | %) | 334,589 | 551,672 | (39 | %) | ||||||||||||||
Gas
price per mcf
|
$ | 4.18 | $ | 10.79 | (61 | %) | $ | 4.02 | $ | 10.82 | (63 | %) | ||||||||||
Oil
sales revenues
|
$ | 2,369 | $ | 4,113 | (42 | %) | $ | 6,108 | $ | 13,238 | (54 | %) | ||||||||||
Oil
production (bbls)
|
35,385 | 34,186 | 4 | % | 113,702 | 115,634 | (2 | %) | ||||||||||||||
Oil
price per bbl
|
$ | 66.94 | $ | 120.31 | (44 | %) | $ | 53.72 | $ | 114.48 | (53 | %) | ||||||||||
Trading
losses
|
$ | - | $ | (849 | ) | 100 | % | $ | - | $ | (2,270 | ) | 100 | % | ||||||||
Other
revenues, net
|
$ | 450 | $ | 503 | (11 | %) | $ | 1,769 | $ | 2,023 | (13 | %) | ||||||||||
General
and administrative expenses, net
|
$ | 834 | $ | 1,245 | (33 | %) | $ | 2,023 | $ | 3,491 | (42 | %) | ||||||||||
Provision
for doubtful accounts
|
$ | (49 | ) | $ | - | 100 | % | $ | 222 | $ | - | 100 | % | |||||||||
Depreciation,
depletion, amortization and accretion
|
$ | 752 | $ | 1,190 | (37 | %) | $ | 2,736 | $ | 3,680 | (26 | %) | ||||||||||
Other
losses (gains)
|
$ | (42 | ) | $ | 5 | (940 | %) | $ | 17 | $ | 50 | (66 | %) | |||||||||
Impairment
of investment in Spitfire
|
$ | - | $ | 2,787 | (100 | %) | $ | - | $ | 2,787 | (100 | %) | ||||||||||
Equity
in losses (earnings) in Spitfire
|
$ | 50 | $ | (97 | ) | 152 | % | $ | 173 | $ | (68 | ) | 354 | % | ||||||||
Income
tax expense (benefit)
|
$ | - | $ | 264 | (100 | %) | $ | (40 | ) | $ | 271 | (115 | %) | |||||||||
Net
income (loss)
|
$ | (615 | ) | $ | (3,266 | ) | 81 | % | $ | (1,891 | ) | $ | 193 | (1080 | %) | |||||||
Net
loss attributed to noncontrolling interests
|
$ | 160 | $ | 62 | 158 | % | $ | 160 | $ | 75 | 113 | % | ||||||||||
Net
income (loss) attributed to HKN
|
$ | (455 | ) | $ | (3,204 | ) | 86 | % | $ | (1,731 | ) | $ | 268 | (746 | %) | |||||||
Net
income (loss) attributed to common stock
|
$ | (528 | ) | $ | (3,276 | ) | 84 | % | $ | (2,086 | ) | $ | 33 | (6421 | %) | |||||||
Net
income (loss) per common share:
|
||||||||||||||||||||||
Basic
and diluted
|
$ | (0.05 | ) | $ | (0.34 | ) | 84 | % | $ | (0.23 | ) | $ | 0.00 | (6780 | %) |
|
(1)
|
Oil
and gas operating profit is calculated as oil and gas revenues less oil
and gas operating expenses
|
The following is our discussion and
analysis of significant components of our operations which have affected our
operating results and balance sheet during the periods included in the
accompanying consolidated condensed financial statements.
Oil
and Gas Revenues and Oil and Gas Expenses for the Quarterly Periods Ended
September 30, 2009 Compared to September 30, 2008
Our oil
and gas revenues are generated from operations in onshore and offshore areas of
the Texas and Louisiana Gulf Coast. In correlation with lower oil and gas
commodity pricing in the markets during the third quarter 2009, our oil and gas
revenues decreased from approximately $6 million in the prior year period to
$2.6 million for the current quarter. The majority of this decrease
was due to the significantly lower oil and gas prices received during the
period.
Our
natural gas revenues decreased from $1.8 million in the third quarter 2008 to
$280 thousand for the third quarter 2009. The prices realized for natural gas
sales decreased 61%, averaging $4.18 per mcf in third quarter 2009 compared to
$10.79 per mcf during third quarter 2008. Natural gas production
decreased 61% in third quarter 2009 as compared to the prior year period due
primarily to decreased production from the Lapeyrouse, Raymondville and Lake
Raccourci fields. While a portion of the decrease can be attributed
to normal decline in these fields, we continue to evaluate projects to address
production decline and to utilize all available wellbores.
34
Our oil
revenues decreased to approximately $2.4 million during third quarter 2009 from
approximately $4.1 million during third quarter 2008. We realized a 44% decrease
in oil prices received, decreasing from an average of $120.30 per barrel in the
third quarter 2008 to $66.94 per barrel in the current
quarter. Overall oil production was fairly steady increasing only 4%
in third quarter 2009 as compared to the prior year period due primarily to
production declines in older fields offset by two new wells at our Creole
field.
Our oil
and gas operating expense decreased 38%, decreasing from approximately $3.5
million during third quarter 2008 to $2.2 million during third quarter 2009 due
primarily to lower operating costs at our Main Pass 35 field, lower production
taxes which resulted from lower prices realized on our oil and gas sales during
the current quarter, as well as certain hurricane repair costs which were
incurred during third quarter 2008.
Trading
Losses, net
We had no trading activity during the
three months ended September 30, 2009. During the prior year period, we
recognized approximately $849 thousand in trading losses, net.
Interest
and Other Income, net
Fees,
interest and other income decreased slightly from $503 thousand during third
quarter 2008 to $450 thousand during third quarter 2009, primarily due to lower
interest rates earned from treasury securities during the current year
period.
General
and Administrative Expense
General
and administrative expenses decreased 33% from $1.2 million for the third
quarter 2008 to $834 thousand for the third quarter 2009 primarily due to
overall lower salary and personnel costs along with decreased professional
fees.
Provision
for Doubtful Accounts
We
recognized a benefit in our provision for doubtful accounts of approximately $49
thousand for the third quarter 2009 due to the collection of a previously
reserved receivable amount.
Depreciation,
Depletion, Amortization and Accretion Expense
Depreciation,
depletion, amortization and accretion (DD&A) expense decreased 37% during
third quarter 2009 when compared to the prior year period due to both lower
production volumes and lower depletion rates. The quarterly depletion
rate per boe on our properties decreased from $15.94 in third quarter 2008 to
$14.22 per boe in third quarter 2009 as a result of increased proved
reserve volumes as compared to the prior year period.
Impairment
of Investment in Spitfire
In September 2008, we recognized a $2.8
million impairment of our investment in Spitfire based on the an
other-than-temporary decline in the fair value of Spitfire’s common shares. No
such impairment was recognized in the current year period.
35
Other
Gains
During
the third quarter 2009, other gains were primarily comprised of the $50 thousand
decrease in the fair value of the Series M Preferred conversion feature dividend
liability.
Income
Tax Expense
We
recognized no income tax expense during third quarter 2009. During
third quarter 2008, we recognized income tax expense of $264 thousand related to
the IRS tax examination contingency, as described in Note 12 –
Contingencies.
Oil
and Gas Revenues and Oil and Gas Expenses for the Nine Month Period Ended
September 30, 2009 Compared to September 30, 2008
In
correlation with lower oil and gas commodity pricing in the markets during the
first nine months of 2009, our oil and gas revenues decreased from $19.2 million
in the prior year period to $7.5 million for the current year
period. This decrease was primarily due to the significantly lower
oil and gas prices received during the period.
Our
natural gas revenues decreased from approximately $6 million during the first
nine months of 2008 to $1.3 million for the same period in 2009. The prices
realized for natural gas sales decreased 63%, averaging $4.02 per mcf in the
first nine months of 2009 compared to $10.82 per mcf during the first nine
months of 2008. Natural gas production decreased 39% in the first
nine months of 2009 as compared to the prior year period due primarily to
decreased production from Lapeyrouse, Raymondville and Lake Raccourci
fields. These fields are under evaluation for diagnostic work to be
performed to address pressure decline and to utilize all available
wellbores.
Our oil
revenues decreased to approximately $6.1 million during the first nine months of
2009 from approximately $13.2 million during the same period in 2008. We
realized a 53% decrease in oil prices received, decreasing from an average of
$114.48 per barrel in the first nine months of 2008 to $53.72 per barrel in the
current year period. Overall oil production decreased 2% in the first
nine months of 2009 as compared to the prior year period due primarily to
decreased oil production at our Lake Raccourci and Raymondville fields. These
decreases were partially offset by production gains from three new wells at our
Creole field.
Our oil
and gas operating expense decreased 30%, decreasing from approximately $8.6
million during the first nine months of 2008 to $6 million during the same
period in 2009 due primarily to lower operating costs at Main Pass 35, lower
production taxes which resulted from lower prices realized on our oil and gas
sales during the current period, as well as hurricane-related repair costs
incurred during September 2008.
Trading
Losses, net
We had no trading activity during the
nine months ended September 30, 2009. During the prior year period, we
recognized approximately $2.3 million in net trading losses.
36
Interest
and Other Income, net
Fees,
interest and other income decreased from $2.0 million during the first nine
months of 2008 to $1.8 million in the 2009 period, primarily due to lower
interest rates earned from treasury securities during the current year period
along with a gain from the sale of assets recognized during 2008.
General
and Administrative Expense
General
and administrative expenses decreased 42% from $3.5 million for the first nine
months of 2008 to $2 million for the first nine months of 2009 primarily due to
overall lower salary and personnel costs along with decreased office and
consultant expenses.
Provision
for Doubtful Accounts
We
recognized a provision for doubtful accounts of approximately $222 thousand for
the first nine months of 2009 primarily due to one of our oil and gas processing
and handling customers filing Chapter 11 bankruptcy.
Depreciation,
Depletion, Amortization and Accretion Expense
Depreciation,
depletion, amortization and accretion (DD&A) expense decreased 26% during
the first nine months of 2009 when compared to prior year period due
to lower production volumes. The average depletion rate per boe on
our properties decreased from $15.39 in the first nine months of 2008 to $14.94
per boe in first nine months of 2009.
Impairment
of Investment in Spitfire
In September 2008, we recognized a $2.8
million impairment of our investment in Spitfire based on the
other-than-temporary decline in the fair value of Spitfire’s common shares. No
such impairment was recognized in the current year period.
Other
Losses
During
the first nine months of 2009, other losses were primarily comprised of the $16
thousand decrease in the fair value of our Spitfire warrants during the first
nine months of 2009.
Income
Tax Expense (Benefit)
We
recognized an income tax benefit of $40 thousand during first nine months of
2009 due primarily to an adjustment made in the current period to our 2008 state
and federal income tax liability. During the same period in 2008, we
recognized income tax expense of $271 thousand.
37
LIQUIDITY
AND CAPITAL STRUCTURE
Financial
Condition
September
30,
|
December
31,
|
|||||||
(Thousands
of dollars)
|
2009
|
2008
|
||||||
Current
ratio
|
3.91
to 1
|
5.77
to 1
|
||||||
Working
capital (1)
|
$ | 10,535 | $ | 16,102 | ||||
Total
debt
|
$ | - | $ | - | ||||
Total
cash and marketable securities less debt
|
$ | 11,291 | $ | 15,219 | ||||
Total
stockholders' equity
|
$ | 62,932 | $ | 59,904 | ||||
Total
liabilities to equity
|
0.16
to 1
|
0.15
to 1
|
||||||
(1) Working capital is the difference
between current assets and current liabilities.
The
decreases in our current ratio and our working capital as of September 30, 2009
as compared to December 31, 2008 are primarily due to the discretionary use of
cash for current year capital projects as well as repurchases of our common and
preferred shares. We used approximately $2.4 million during the 2009
period for capital projects. The majority of these capital
expenditures were used for upgrades and improvements at our Main Pass 35
facility as well as the completion of two producing wells at our Creole field,
increasing both our reserves and production from this field. We
deployed cash of $1 million to redeem 10,000 shares of our Series M Preferred
and $1.7 million to repurchase shares of our common stock during the first nine
months of 2009. We have no debt outstanding as of September 30,
2009.
During the first nine months of 2009,
oil and natural gas prices have declined sharply as compared to the prior year
period. However, we have worked to reduce our controllable costs in order to
maintain positive cash flow from operations during this low commodity pricing
environment. We have a cash balance of approximately $11.3 million at September
30, 2009. We anticipate our operating cash flow and other capital resources, if
needed, will adequately fund our planned capital expenditures and other capital
uses over the near-term. Based on industry outlook for 2009, prices
for oil and natural gas could remain reduced as compared to the prior year with
the perception of future worldwide demand being altered by turmoil in the global
financial markets.
We may
continue to deploy cash for discretionary capital expenditures, long-term
investments or seek to raise financing through the issuance of debt, equity and
convertible debt instruments, if needed, for utilization of acquisition,
development or investment opportunities as they arise. We may also continue to
reduce our ownership interest in Spitfire’s and Global’s common shares through
strategic sales under certain conditions.
38
Capital
Structure
At
September 30, 2009, if our remaining convertible preferred stock were converted,
and if the option to issue common shares associated with our investment in OHSOL
technology (UniPure) were exercised (as described below), we would be required
to issue the following amounts of our common stock:
Shares
of Common
|
||||
Stock
Issuable at
|
||||
Instrument
|
Conversion
Price (a)
|
September
30, 2009
|
||
Series
M Preferred (b)
|
$11.85
|
286,920
|
||
Series
G1 Preferred
|
$280.00
|
571
|
||
Series
G2 Preferred
|
$67.20
|
1,488
|
||
UniPure
Put / Call Option (c)
|
n/a
|
725,000
|
||
Common
Stock Potentially Issued Upon Conversion
|
1,013,979
|
(a)
Certain conversion prices are subject to adjustment under certain
circumstances.
|
(b)
As of November 5, 2009, all remaining Series M Preferred shares have been
fully redeemed.
|
(c)
See Note 2 - Investment in OHSOL Technology for additional information on
put/call option.
|
Option to Issue Common Shares –
Pursuant to the terms of our OHSOL investment, HKN and the other UniPure
unitholders granted to one another put and call options with respect to 3,050
units of UniPure in exchange for an issuance of 725 thousand restricted shares
of our common stock. These options are exercisable only if the
following conditions are satisfied prior to June 2012:
The Call
Option may be exercised upon the occurrence of any of the following
events:
|
●
|
Execution
by UniPure of a material contract regarding any of the UniPure patented
technologies
|
|
●
|
UniPure
achieves positive Operating Margins during two consecutive
quarters
|
|
●
|
UniPure
achieves positive Net Income during two consecutive
quarters
|
|
●
|
UniPure
receives a qualified offer to sell substantially all of its assets or to
merge with another entity and UniPure declines such
offer
|
|
●
|
A
Change of Control occurs at UniPure
|
|
●
|
The
average closing price of HKN common stock is above $3.50 for any
consecutive 30 day trading period
|
|
●
|
Any
UniPure transaction that dilutes HKN’s ownership of UniPure by more than
10%
|
|
●
|
UniPure
consummates a securities offering under the 1933 Act that results in
aggregate net cash proceeds to UniPure of at least $10
million
|
The Put
Option may be exercised upon the occurrence of any of these events:
|
●
|
UniPure
incurs net losses for any four consecutive
quarters
|
|
●
|
A
Change of Control occurs at HKN
|
|
●
|
The
average closing price of HKN common stock is below $1.50 per share or
above $4.00 per share for any consecutive 30 day trading
period
|
None of
these conditions have been met as of September 30, 2009.
39
Significant
Ownership of our Stock
As of September 30, 2009, Lyford
Investments Enterprises Ltd. (“Lyford”) beneficially owned approximately 33% of
the combined voting power of our common stock. Lyford is in a
position to exercise significant influence over the election of our board of
directors and other matters.
Cash
Flows
Net cash
flow provided by operating activities during the nine months ended September 30,
2009 was $10.7 million, as compared to net cash provided of $7.4 million in the
prior year period. The increase in cash flow provided by operating activities as
compared to the prior year period was primarily caused by collection of our
previously outstanding hurricane insurance receivable, a $9.5 million conversion
of marketable securities into cash, and a reduction in our operating, general
and administrative costs as a result of cost-cutting efforts. Our cash on hand
at September 30, 2009 totaled approximately $11.3 million.
Net cash used in financing activities
during the nine months ended September 30, 2009 and 2008 totaled approximately
$2.9 million and $3.5 million, respectively, due to repurchases of our preferred
and common stock. Net cash used in investing activities during the first nine
months of 2009 totaled approximately $2.2 million and was primarily comprised of
capital expenditures associated with completion costs for two wells in our
outside-operated Creole field and upgrades and improvements made at our Main
Pass 35 facility. The wells were successfully drilled during the fourth quarter
2008 and were completed and brought on production during early
2009.
Obligations,
Contingencies and Commitments
Oil, Natural Gas and Coalbed Methane
Commitments – During the first nine months of 2009, we expended
approximately $2.4 million of capital expenditures and workovers in the United
States. The majority of these capital expenditures were associated with
completion costs for the Creole field in south Texas and upgrades and
improvements made at our Main Pass 35 facility in offshore
Louisiana. During 2009, we limited our capital expenditures while oil
and natural gas prices remained low. Industry-wide drilling costs
have yet to reduce in comparison to the dramatic drop in commodity
prices. We expect to fund our capital expenditures with available
cash on hand and through projected cash flow from operations. Any
remaining capital expenditures for 2009 are discretionary and, as a result, will
be curtailed if sufficient funds are not available. Such expenditure
curtailments, however, could result in us losing certain prospect acreage or
reducing our interest in future development projects.
OHSOL Investment (UniPure)
Contingencies – As of September 30, 2009, we recorded a contingent
liability of $910 thousand related to the OHSOL investment. This
contingent liability consists of $800 thousand which will be contractually
payable to a vendor upon the successful completion of a performance test on the
OHSOL plant equipment and $110 thousand of shared project costs which will be
refunded to a third party if a certain agreement for the OHSOL plant equipment
is not executed. These contingent liabilities are included in other accrued
liabilities within our consolidated condensed balance sheet.
Also
related to the OHSOL investment, as of September 30, 2009, we recorded a
deferred tax liability in the amount of $729 thousand, calculated by applying
the domestic statutory tax rates to the difference between the book purchase
price and the estimated tax basis. Information and research regarding
the tax basis of the assets at the date of the acquisition is not complete at
this time and the deferred tax may be adjusted as more information becomes
available.
40
IRS Tax Examination – In
August 2008, we received a Revenue Agent’s Report in which the Internal Revenue
Service (“IRS”) proposed an adjustment to our federal tax liability for the
calendar year 2005. The proposed adjustment relates to the
calculation of the adjusted current earnings (“ACE”) component of the
alternative minimum tax and asserts that the Company recognized gain for ACE
purposes on the sale of the Global PLC stock in 2005. In its proposed
adjustment, the IRS alleges that the Company owes approximately $3.6 million in
tax for the year ended December 31, 2005. Penalties and interest calculated
through September 30, 2009 in the amount of $2 million could also be assessed.
In response to the proposed adjustment and corresponding tax assessment, the
Company filed a written protest and request for conference on September 5, 2008
to address the proposed adjustment with the Appeals division of the
IRS. On October 29, 2008, we received an acknowledgement of receipt
of our written protest and request for conference from the IRS Appeals Office.
In April 2009, we filed our supplement to the written protest filed with the
IRS. Pursuant to the IRS Appeals Office acknowledgement, we
anticipate that office to contact us to address this matter but have received no
response to date.
FIN 48
prescribes a recognition threshold of more-likely-than-not to be sustained upon
examination. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. Based on the requirements of FASB ASC 740, Income Taxes, we have
recorded an income tax contingency, including interest and penalties, as of
September 30, 2009, of $225 thousand in our consolidated condensed financial
statements based, in part, on a preliminary indication of a probability-weighted
fair value assessment of the Global stock. We intend to vigorously defend the
proposed adjustment and strongly believe that the Company has meritorious
defenses.
Operational Contingencies
– Our operations are
subject to stringent and complex environmental laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations are subject to changes that
may result in more restrictive or costly operations. Failure to comply with
applicable environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief.
We recognize the full amount of asset
retirement obligations beginning in the period in which they are incurred if a
reasonable estimate of a fair value can be made. At September 30, 2009, our
asset retirement obligation liability totaled approximately $5.7
million.
From time to time, we provide for
reserves related to contingencies when a loss is probable and the amount is
reasonably estimable.
In
addition to the above commitments, during 2009 and afterward, government
authorities under our Louisiana state leases and other operators may also
request us to participate in the cost of drilling additional exploratory and
development wells. We may fund these future expenditures at our discretion.
Further, the cost of drilling or participating in the drilling of any such
exploratory and development wells cannot be quantified at this time since the
cost will depend on factors out of our control, such as the timing of the
request, the depth of the wells and the location of the property. As of
September 30, 2009, we had no material purchase obligations.
Off-Balance Sheet Arrangements
- As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities ("SPEs"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of September 30, 2009, we were not involved in
any unconsolidated SPE transactions. We have no off-balance sheet
arrangements.
41
Treasury Stock – In January
2009, our Board of Directors authorized an amendment to the existing repurchase
plan allowing us to repurchase an additional 1 million shares of our common
stock. During the nine months ended September 30, 2009, we
repurchased approximately 665 thousand shares of our common stock. This included
a repurchase of 500 thousand shares of our common stock for $1.3 million from a
shareholder in a privately negotiated transaction pursuant to our repurchase
program. During the nine months ended September 30, 2009, we retired
approximately 635 thousand treasury shares. As of September 30, 2009,
approximately 572 thousand shares remained available for repurchase under our
repurchase program.
Redemption of Series M Preferred
– In May 2009, we redeemed 10 thousand shares of our Series M Preferred
with a liquidation value of $100 per share for $1 million in cash. In addition,
we paid approximately $23 thousand in accrued dividends on these
shares. In October 2009, we elected to redeem the remaining 34
thousand shares of our Series M Preferred for $3.4 million in cash plus accrued
interest. The redemption date for these remaining Series M Preferred
shares is November 5, 2009.
Adequacy
of Capital Sources and Liquidity
We believe that we have the ability to
provide for our operational needs, our planned capital expenditures and possible
investments through projected operating cash flow and cash on hand. Our
operating cash flow would be adversely affected by continued declines in oil and
natural gas prices, which can be volatile. However, we have worked to
reduce our controllable costs in order to maintain positive cash flow from
operations during this low commodity pricing environment. Should
projected operating cash flow decline, we may further reduce our capital
expenditures and possible investments and/or consider the issuance of debt,
equity and convertible debt instruments, if needed, for utilization for the
capital expenditure program or possible energy-based investment
opportunities. We may also continue to reduce our ownership interest
in Spitfire’s and Global’s common shares through strategic sales under certain
conditions.
We have
no debt outstanding at September 30, 2009. If we seek to raise equity
or debt financing to fund capital expenditures or other acquisition and
development opportunities, those transactions may be affected by the market
value of our common stock. If the price of our common stock declines,
our ability to utilize our stock either directly or indirectly through
convertible instruments for raising capital could be negatively affected.
Further, raising additional funds by issuing common stock or other types of
equity securities could dilute our existing stockholders, which dilution could
be substantial if the price of our common stock decreases. Any securities we
issue may have rights, preferences and privileges that are senior to our
existing equity securities. Borrowing money may also involve pledging some or
all of our assets.
42
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our oil
and gas operations are exposed to market risks primarily as a result of changes
in commodity prices. We currently hold no commodity pricing hedges in
order to limit the exposure to the volatility.
Foreign Currency Exchange Rate
Risk – Our investment in Global is subject to foreign currency exchange
rate risk as our ownership of Global’s ordinary shares are denominated in
British sterling pounds. Also, our investment in Spitfire is subject to foreign
currency exchange rate risk as our ownership of Spitfire’s ordinary shares are
denominated in Canadian dollars. Any substantial fluctuation in these
exchange rates as compared to the United States dollar could have a material
effect on our balance sheet.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings with the Securities and
Exchange Commission (SEC) are recorded, processed, summarized and reported
within the time period specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including our chief
executive and chief financial officers, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of “disclosure
controls and procedures” as defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As of the
end of the period covered by this report, and under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of
these disclosure controls and procedures. Based on this evaluation
and subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective.
Changes
in Internal Control over Financial Reporting
There
have been no significant changes in the Company’s internal control over
financial reporting identified in connection with the evaluation discussed above
that occurred during the period ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
43
PART II –
OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The
following table provides information about purchases by us during the three
months ended September 30, 2009, of our Common Stock.
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as part of Publicly Announced
Program
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
||||||||||||
July
1, 2009 through July 31, 2009
|
31,454 | $ | 2.38 | 618,411 | 618,869 | |||||||||||
August
1, 2009 through August 31, 2009
|
200 | $ | 2.47 | 618,611 | 618,669 | |||||||||||
September
1, 2009 through September 30, 2009
|
46,313 | $ | 2.77 | 664,924 | 572,356 | |||||||||||
Total
|
77,967 | $ | 2.61 | 664,924 | 572,356 | |||||||||||
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the third quarter of
2009.
44
ITEM
6. EXHIBITS
EXHIBIT
INDEX
Exhibit
3.1
|
Restated
Certificate of Incorporation of Harken Energy Corporation (filed as
Exhibit 3.1 to Harken’s Form 10-K dated February 28, 2006, File
No. 1-10262, and incorporated herein by reference).
|
3.2
|
Certificate
of Amendment to Restated Certificate of Incorporation of Harken Energy
Corporation dated June 4, 2007 (filed as Exhibit 3.2 to HKN’s Form 10-Q
dated August 7, 2007, File No. 1-10262, and incorporated by
reference herein).
|
3.3
|
Certificate
of Amendment to Restated Certificate of Incorporation of HKN, Inc. dated
June 24, 2008 and effective June 26, 2008. (filed as Exhibit 3.2 to HKN’s
Form 10-Q dated August 7, 2008, File No. 001-10262, and incorporated by
reference herein).
|
3.4
|
Amended
and Restated Bylaws of Harken Energy Corporation (filed as Exhibit 3.7 to
Harken’s Annual Report on Form 10-K for fiscal year ended December 31,
2002, File No. 1-10262, and incorporated by reference
herein).
|
4.1
|
Form
of certificate representing shares of HKN, Inc. common stock, par value
$.01 per share (filed as Exhibit 4.1 to HKN’s Form 10-Q dated August 7,
2007, File No. 1-10262, and incorporated by reference
herein).
|
4.2
|
Rights
Agreement, dated as of April 6, 1998, by and between Harken Energy
Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent
(filed as Exhibit 4 to Harken’s Current Report on Form 8-K dated April 7,
1998, file No. 1-10262, and incorporated by reference
herein).
|
4.3
|
Amendment
to Rights Agreement by and between Harken Energy Corporation and American
Stock Transfer and Trust Company (successor to Mellon Investor Services
LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as
Rights Agent, dated June 18, 2002 (filed as Exhibit 4.11 to Harken’s
Quarterly Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference
herein).
|
4.4
|
Amendment
to Rights Agreement by and between Harken Energy Corporation and American
Stock Transfer and Trust Company (successor to Mellon Investor Services
LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as
Rights Agent, dated August 27, 2002 (filed as Exhibit 4.12 to Harken’s
Quarterly Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference
herein).
|
4.5
|
Certificate
of Designations of Series E Junior Participating Preferred Stock (filed as
Exhibit A to Exhibit 4 to Harken’s Current Report on Form 8-K dated April
7, 1998, file No. 1-10262, and incorporated by reference
herein).
|
45
4.6
|
Certificate
of Increase of Series E Junior Participating Preferred Stock of Harken
Energy Corporation (filed as Exhibit 4.6 to Harken’s Annual Report on Form
10-K for the fiscal year ended December 31, 2002, File No. 1-10262, and
incorporated by reference herein).
|
4.7
|
Certificate
of Designations of Series G1 Convertible Preferred Stock (filed as Exhibit
3.7 to Harken’s Current Report on Form 8-K dated February 13, 2003, File
No. 1-10262, and incorporated by reference herein).
|
4.8
|
Certificate
of Increase of Series G1 Convertible Preferred Stock
of Harken Energy Corporation (filed as Exhibit 3.8
to Harken’s Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
|
4.9
|
Certificate
of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit
4.10 to Harken’s Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 2001, File No. 1-10262, and incorporated by
reference herein).
|
4.15
|
Certificate
of Designations of Series M Cumulative Convertible Preferred Stock (filed
as Exhibit 4.1 to Harken’s Current Report on Form 8-K dated October 8,
2004, File No. 1-10262, and incorporated by reference
herein).
|
4.17
|
Amendment
to Rights Agreement by and between HKN, Inc. and American Stock Transfer
and Trust Company, as Rights Agent, dated April 4, 2008 (filed as Exhibit
4.1 to HKN’s current report on Form 8-K dated April 4, 2008, file No.
1-10262, and incorporated by reference herein).
|
10.1
|
Form
of Executive Retention Agreement (filed as Exhibit 10.1 to HKN’s Current
Report on Form 8-K dated July 2, 2008, File No. 001-10262, and
incorporated by reference herein).
|
*31.1
|
Certificate
of the Chief Executive Officer of HKN, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (“S.O. Act”)
|
*31.2
|
Certificate
of the Chief Financial Officer of HKN, Inc. pursuant to section 302 of the
S.O. Act
|
*32.1
|
Certificate
of the Chief Executive Officer of HKN, Inc. pursuant to section 906 of the
S.O. Act
|
*32.2
|
Certificate
of the Chief Financial Officer of HKN, Inc. pursuant to section 906 of the
S.O. Act
|
* Filed
herewith
46
HKN,
INC.
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.
|
HKN,
Inc.
|
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(Registrant)
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Date:
November 5, 2009
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By:
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/s/ Anna M. Williams | |
Senior Vice President and | |||
Chief Financial Officer | |||
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