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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2014

or

 

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

for the transition period from                      to                     

Commission File No. 1-10762

 

 

Harvest Natural Resources, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   77-0196707

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

1177 Enclave Parkway, Suite 300  
Houston, Texas   77077
(Address of Principal Executive Offices)   (Zip Code)

(281) 899-5700

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At May 1, 2014, the Registrant had 42,103,641 shares of its Common Stock outstanding.

 

 

 


Table of Contents

HARVEST NATURAL RESOURCES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

         Page  

PART I

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Unaudited Consolidated Condensed Balance Sheets at March 31, 2014 and December 31, 2013

     3   
 

Unaudited Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2014 and 2013

     4   
 

Unaudited Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013

     5   
  Notes to Consolidated Condensed Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      26   

Item 4.

  Controls and Procedures      26   

PART II

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      27   

Item 5.

  Other Information      27   

Item 6.

  Exhibits      27   

Signatures

       29   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except per share data)

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)        

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 17,638      $ 120,897   

Restricted cash

     50        148   

Accounts receivable, net

     313        1,962   

Deferred income taxes

     81        81   

Prepaid expenses and other

     739        2,030   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     18,821        125,118   

LONG-TERM RECEIVABLE – EQUITY AFFILIATE

     13,875        15,097   

INVESTMENT IN EQUITY AFFILIATE

     504,288        485,401   

PROPERTY AND EQUIPMENT:

    

Oil and gas properties (successful efforts method)

     103,802        108,013   

Other administrative property, net

     302        378   
  

 

 

   

 

 

 

TOTAL PROPERTY AND EQUIPMENT, NET

     104,104        108,391   
  

 

 

   

 

 

 

OTHER ASSETS

     883        873   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 641,971      $ 734,880   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable, trade and other

   $ 2,767      $ 4,398   

Accrued expenses

     10,678        22,659   

Accrued interest

     62        380   

Income taxes payable

     45        2,178   

Current deferred tax liability

     38,463        43,162   

Current portion – long term debt

     0        77,480   

Note payable to noncontrolling interest owner

     6,109        6,109   

Other current liabilities

     159        419   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     58,283        156,785   

WARRANT DERIVATIVE LIABILITY

     1,953        1,953   

LONG-TERM DEFERRED TAX LIABILITY

     33,510        29,787   

OTHER LONG-TERM LIABILITIES

     524        558   

COMMITMENTS AND CONTINGENCIES (Note 12)

    

EQUITY

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, par value $0.01 a share; authorized 5,000 shares; outstanding, none

     0        0   

Common stock, par value $0.01 a share; authorized 80,000 shares at March 31, 2014 (December 31, 2013: 80,000 shares); issued 48,666 shares at March 31, 2014 (December 31, 2013: 48,666 shares)

     487        487   

Additional paid-in capital

     276,964        276,083   

Retained earnings

     84,274        92,282   

Treasury stock, at cost 6,562 shares at March 31, 2014 (December 31, 2013: 6,551 shares)

     (66,268     (66,222
  

 

 

   

 

 

 

TOTAL HARVEST STOCKHOLDERS’ EQUITY

     295,457        302,630   

NONCONTROLLING INTERESTS

     252,244        243,167   
  

 

 

   

 

 

 

TOTAL EQUITY

     547,701        545,797   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 641,971      $ 734,880   
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2014     2013  

EXPENSES:

    

Depreciation and amortization

   $ 76      $ 87   

Exploration expense

     1,833        1,730   

Impairment expense

     4,460        0   

General and administrative

     6,301        3,354   
  

 

 

   

 

 

 
     12,670        5,171   
  

 

 

   

 

 

 

LOSS FROM OPERATIONS

     (12,670     (5,171

OTHER NON-OPERATING INCOME (EXPENSE):

    

Investment earnings and other

     4        46   

Loss on sale of interest in Harvest Holding

     (966     0   

Unrealized gain on derivatives

     0        3,785   

Interest expense

     (47     (1,198

Loss on extinguishment of debt

     (4,749     0   

Foreign currency transaction gains (losses)

     (469     92   

Other non-operating expenses

     (220     (472
  

 

 

   

 

 

 
     (6,447     2,253   
  

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (19,117     (2,918

INCOME TAX EXPENSE (BENEFIT)

     (954     39   
  

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE EARNINGS FROM EQUITY AFFILIATE

     (18,163     (2,957

EARNINGS FROM EQUITY AFFILIATE

     18,887        49,471   
  

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

     724        46,514   

DISCONTINUED OPERATIONS

     (131     (485
  

 

 

   

 

 

 

NET INCOME

     593        46,029   

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     8,601        9,932   
  

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO HARVEST [COMPREHENSIVE INCOME (LOSS)]

   $ (8,008   $ 36,097   
  

 

 

   

 

 

 

BASIC EARNINGS (LOSS) PER SHARE:

    

Income (loss) from continuing operations

   $ (0.19   $ 0.93   

Discontinued operations

     0.00        (0.01
  

 

 

   

 

 

 

Basic earnings (loss) per share

   $ (0.19   $ 0.92   
  

 

 

   

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE:

    

Income (loss) from continuing operations

   $ (0.19   $ 0.92   

Discontinued operations

     0.00        (0.01
  

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (0.19   $ 0.91   
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2014     2013  
     (in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 593      $ 46,029   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     76        95   

Impairment expense

     4,460        0   

Amortization of debt financing costs

     0        357   

Amortization of discount on debt

     0        634   

Loss on sale of interest in Harvest Holding

     966        0   

Foreign currency transaction loss

     1,349        436   

Loss on extinguishment of debt

     4,749        0   

Earnings from equity affiliate

     (18,887     (49,471

Share-based compensation-related charges

     881        680   

Unrealized gain on derivatives

     0        (3,785

Changes in operating assets and liabilities:

    

Accounts and notes receivable

     1,649        (4,219

Prepaid expenses and other

     12        218   

Other assets

     (10     370   

Accounts payable

     (1,631     4,129   

Accrued expenses

     (11,404     (5,138

Accrued interest

     (318     14   

Income taxes payable

     (2,133     6   

Deferred tax asset and liabilities

     (976     0   

Other current liabilities

     (260     (122

Other long-term liabilities

     (34     (644
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (20,918     (10,411
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Transaction costs from sale of interest in Harvest Holding

     (2,494     0   

Additions of property and equipment

     (498     (30,523

Advances to equity affiliate

     (127     (117

(Increase) decrease in restricted cash

     98        (178
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (3,021     (30,818
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Debt repayment

     (79,750     0   

Contributions from noncontrolling interest owners

     476        0   

Net proceeds from issuances of common stock

     0        112   

Treasury stock purchases

     (46     0   

Financing costs

     0        (80
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (79,320     32   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (103,259     (41,197

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     120,897        72,627   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 17,638      $ 31,430   
  

 

 

   

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

    

Increase (decrease) in current liabilities related to additions of property and equipment

   $ (249   $ (11,649

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Three Months Ended March 31, 2014 and 2013 (unaudited)

Note 1 – Organization

Interim Reporting

In our opinion, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position as of March 31, 2014, the results of operations for the three months ended March 31, 2014 and 2013, and the cash flows for the three months ended March 31, 2014 and 2013. The unaudited consolidated condensed financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated condensed financial statements included in this Quarterly Report on Form 10-Q should be read with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Financial Statements”) which include certain definitions and a summary of significant accounting policies. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.

Share Purchase Agreement

As discussed further in the 2013 Financial Statements, on December 16, 2013, Harvest Natural Resources, Inc. (“Harvest” or the “Company”) and HNR Energia, B.V. (“HNR Energia”) entered into a Share Purchase Agreement (“Share Purchase Agreement”) with Petroandina Resources Corporation N.V. (“Petroandina”, a wholly owned subsidiary of Pluspetrol Resources Corporation B.V. (“Pluspetrol”)) and Pluspetrol to sell all of our 80 percent equity interest in Harvest-Vinccler Dutch Holding, B.V. (“Harvest Holding”) to Petroandina in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013 contemporaneously with the signing of the Share Purchase Agreement, when we sold a 29 percent equity interest in Harvest Holding for $125 million. Prior to December 16, 2013, we indirectly owned 80 percent of Harvest Holding, and we had one partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., (“Vinccler”), which owned the remaining noncontrolling interest in Harvest Holding of 20 percent. As a result of this first sale, we indirectly own 51 percent of Harvest Holding beginning December 16, 2013 and the noncontrolling interest owners hold the remaining 49 percent with Petroandina having 29 percent and Vinccler continuing to own 20 percent. The second closing, for the sale of a 51 percent equity interest in Harvest Holding for a cash purchase price of $275 million, will be subject to, among other things, approval by the holders of a majority of our common stock and approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of Venezuela (which indirectly owns the other 60 percent interest in Petrodelta). On May 7, 2014, Harvest’s stockholders voted to authorize the sale of the remaining interests in Venezuela.

Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40 percent equity interest in Petrodelta, S.A. (“Petrodelta”). Through our indirect 51 percent in Harvest Holding, we indirectly own a net 20.4 percent interest in Petrodelta for the period from December 16, 2013 to date, and prior to December 16, 2013 we indirectly owned a 32 percent interest in Petrodelta through our indirect 80 percent interest in Harvest Holding during this period.

Note 2 – Liquidity

Historically, our primary ongoing source of cash has been dividends from Petrodelta and the sale of oil and gas properties. Our primary use of cash has been to fund oil and gas exploration projects, principal payments on debt, interest, and general and administrative costs. We require capital principally to fund the exploration and development of new oil and gas properties. As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. See the 2013 Financial Statements for our contractual commitments.

On January 11, 2014, we used $80.0 million of the $125 million in proceeds from the sale of the 29 percent interest in Harvest Holding that we received on December 16, 2013 to redeem all of our 11% Senior Notes due 2014 and the accrued unpaid interest. The remaining $45.0 million of the proceeds from the sale of the 29 percent interest in Harvest Holding have been or will be used to pay costs associated with the sale of our Venezuelan interests, to pay severance costs, to

 

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make capital expenditures, to pay taxes related to the sale and for general operating expenses. Those remaining proceeds will also be used to repurchase certain outstanding warrants if a “Fundamental Change” is consummated under the terms of those warrants. As of March 31, 2014, we have cash and cash equivalents of $17.6 million which we expect to be adequate to meet our short-term liquidity requirements.

We are currently marketing our non-Venezuelan assets and talking to potential buyers, and we intend to continue our consideration of a possible sale for some or all of our non-Venezuelan assets if we are able to negotiate a sale or sales in transactions that our Board of Directors believes are in the best interests of the Company and its stockholders. In the meantime, we intend to operate our business in the ordinary course and may ultimately decide to keep our non-Venezuelan assets and acquire additional assets.

If the proposed sale of our remaining Venezuelan interests is completed and/or the sale of other non-Venezuelan assets are completed, a significant portion of our assets will be cash from the proceeds of such transactions. However, the timing of the sale of our remaining 51 percent interest in Harvest Holding or sales of other assets is beyond our control, and we will continue to have operating and capital requirements until these sales are completed. Depending on the timing of these events, we anticipate using a portion of the proceeds from the sale of 51 percent interest in Harvest Holding to pay for expenses and other costs related to the transaction, which we estimate will be approximately $4 million ($1.0 million of which has been incurred as of March 31, 2014); to pay taxes related to the transaction, which we estimate will be approximately $50.1 million. In addition, if we do not sell our non-Venezuelan assets before the sale of the 51 percent interest in Harvest Holding, then we estimate that we will need to retain a portion of the proceeds to fund projected general operating expenses and capital expenditures. Some of these costs will be paid from funds remaining from the proceeds of the initial sale of the 29 percent interest in Harvest Holding. If we sell our non-Venezuelan assets before the sale of the remaining 51 percent interest in Harvest Holding, then our requirements for projected general operating expenses and capital expenditures would be reduced. We will also use these funds to pay any severance or other costs during 2014 associated with the possible severance of some of our personnel in connection with a downsizing of the Company both related to the sale of our Venezuelan interests and related to any sale of our non-Venezuelan assets, if our Board of Directors determines that a downsizing would be in our best interests. We estimate these costs to be approximately $20 million.

Although we are currently marketing our non-Venezuelan assets and talking to potential buyers, we intend to operate our business in the ordinary course and may ultimately decide to keep our non-Venezuelan assets and acquire additional assets. Since we no longer have any obligations under the 11% Senior Notes due 2014, and given that we do not currently have any operating cash inflows, we may also decide to access additional capital through equity or debt sales; however, there can be no assurance that such financing will be available to the Company or on terms that are acceptable to the Company.

Note 3 – Summary of Significant Accounting Policies

Investment in Equity Affiliates

At March 31, 2014, we reviewed our investment in Petrodelta taking into consideration the terms of the Share Purchase Agreement (see Note 1 – Organization – Share Purchase Agreement). The purchase price under the Share Purchase Agreement indicates a valuation that approximates the carrying value of our equity investment in Petrodelta, the dividend receivable and the advances to this equity affiliate. As such, we concluded that there was no impairment to our equity investment as of March 31, 2014. If the sale of the remaining 51 percent interest in Harvest Holding is completed, we expect to recognize a gain on the transaction.

 

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Oil and Gas Properties

We follow the successful efforts method of accounting for oil and gas properties. The major components of property and equipment are as follows:

 

     As of March 31,
2014
    As of December 31,
2013
 
     (in thousands)  

Unproved property costs

   $ 99,836      $ 103,917   

Oilfield inventories

     3,966        4,096   

Other administrative property

     2,684        2,710   
  

 

 

   

 

 

 

Total property and equipment

     106,486        110,723   

Accumulated depreciation

     (2,382     (2,332
  

 

 

   

 

 

 

Total property and equipment, net

   $ 104,104      $ 108,391   
  

 

 

   

 

 

 

Unproved property costs, excluding oilfield inventories, consist of (in thousands):

 

     As of March 31,
2014
     As of December 31,
2013
 
     (in thousands)  

Budong PSC

   $ 0       $ 4,470   

Dussafu PSC

     99,836         99,447   
  

 

 

    

 

 

 

Total unproved property costs

   $ 99,836       $ 103,917   
  

 

 

    

 

 

 

Other Administrative Property

For the three months ended March 31, 2014 and 2013, depreciation expense was $0.1 million and $0.1 million, respectively.

Other Assets

Other assets consist of:

 

     As of March 31,
2014
     As of December 31,
2013
 
     (in thousands)  

Long-term prepaid expenses

   $ 149       $ 139   

Gabon PSC – blocked payment (net to our 66.667% interest)

     734         734   
  

 

 

    

 

 

 
   $ 883       $ 873   
  

 

 

    

 

 

 

The blocked payment of $0.7 million net to our 66.667 percent interest is related to our drilling operations in Gabon in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”). See Note 12 – Commitments and Contingencies.

Capitalized Interest

We capitalize interest costs for qualifying oil and gas properties. During the three months ended March 31, 2014 and 2013, we capitalized interest costs for qualifying oil and gas property additions of $0.2 million and $2.0 million, respectively.

Fair Value Measurements

We measure and disclose our fair values in accordance with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature (Level 1). The estimated fair value of advances to equity affiliate and dividend receivable approximates their carrying value as it is the estimated amount we would receive from a third party to assume the receivables (Level 2).

The following tables set forth by level within the fair value hierarchy our financial liabilities that were accounted for at fair value as of March 31, 2014 and December 31, 2013. See Note 11 – Warrant Derivative Liabilities for a description of the valuation models and inputs used to calculate the fair value of these derivative liabilities.

 

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     As of March 31, 2014  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Liabilities:

           

Warrant derivative liability

   $ 0       $ 0       $ 1,953       $ 1,953   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2013  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Liabilities:

           

Warrant derivative liability

   $ 0       $ 0       $ 1,953       $ 1,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended March 31, 2014, there were no changes in the fair value of the warrants ($3.8 million unrealized gain during the three months ended March 31, 2013).

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

The following table provides a reconciliation of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

 

     Three Months Ended March 31,  
     2014      2013  
     (in thousands)  

Financial liabilities:

     

Beginning balance

   $ 1,953       $ 5,470   

Additions

     0         0   

Unrealized change in fair value

     0         (3,785
  

 

 

    

 

 

 

Ending balance

   $ 1,953       $ 1,685   
  

 

 

    

 

 

 

During the three months ended March 31, 2014 and 2013, there were no transfers between Level 1, Level 2 and Level 3 liabilities.

Share-Based Compensation

We use a fair value based method of accounting for stock-based compensation. During the three months ended March 31, 2014, we issued no stock-based compensation awards.

Income Taxes

We recognized an income tax benefit of $1.0 million during the three months ended March 31, 2014 as compared to income tax expense of $0.0 million during the three months ended March 31, 2013. Beginning in the fourth quarter of 2013, we determined that we expected to have sufficient taxable income in the U.S. related to the expected sale of the remaining equity interest in Harvest Holding. Therefore we recognized the tax benefit of losses incurred in the U.S. related to the three months ended March 31, 2014. This benefit was offset by expense associated with undistributed earnings from foreign subsidiaries during the three months ended March 31, 2014.

Noncontrolling Interests

Changes in noncontrolling interest were as follows:

 

     Three Months Ended March 31,  
     2014      2013  
     (in thousands)  

Balance at beginning of period

   $ 243,167       $ 97,101   

Contributions by noncontrolling interest owners

     476         0   

Net income attributable to noncontrolling interest

     8,601         9,932   
  

 

 

    

 

 

 

Balance at end of period

   $ 252,244       $ 107,033   
  

 

 

    

 

 

 

 

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New Accounting Pronouncements

In February 2013, FASB issued ASU No. 2013-04, which is included in ASC 405, “Liabilities”, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”. This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation with the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within the scope to ASU No. 2013-04 include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU No. 2013-04 was effective for our fiscal years and interim periods beginning January 1, 2014. The implementation of this guidance on January 1, 2014 had no material impact on our consolidated financial position, results of operations or cash flows. See Note 12 – Commitments and Contingencies for the new recurring disclosures required under this guidance.

In July 2013, FASB issued ASU No. 2013-11 which is included in ASC 740 “Income Taxes”, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update provides guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforward, a similar tax loss, or a tax credit carryforward are not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. In such instances, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. As permitted under the guidance, we applied the amendment prospectively to all unrecognized tax benefits that exist at the effective date for the Company which is January 1, 2014. The implementation of this guidance on January 1, 2014 had no material impact on our consolidated financial position, results of operations or cash flows.

In April 2014, FASB issued ASU No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which is included in ASC 205 “Presentation of Financial Statements” and ASC 360 “Property, Plant, and Equipment.” This update changes the criteria for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under the revised standard, a discontinued operation is (1) a component of an entity or group of components that has been disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. Under current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. The new guidance eliminates these criteria. The guidance does not change the presentation requirements for discontinued operations in the statement where net income is presented. Also, the new guidance requires the reclassification of assets and liabilities of a discontinued operation in the statement of financial position for all prior periods presented. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The amendment should be applied prospectively; however, early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. The amendment is effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. This guidance will not impact disposals (or classifications as held for sale) in periods prior to the period of adoption. We are currently evaluating the impact of this guidance on disposals (or classifications as held for sale) in the period of adoption and subsequent periods.

Note 4 – Earnings Per Share

Basic earnings per common share (“EPS”) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

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     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands, except per share amounts)  

Income (loss) from continuing operations(a)

   $ (7,877   $ 36,582   

Discontinued operations

     (131     (485
  

 

 

   

 

 

 

Net income (loss) attributable to Harvest

   $ (8,008   $ 36,097   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     41,806        39,444   

Effect of dilutive securities

     0        191   
  

 

 

   

 

 

 

Weighted average common shares, diluted

     41,806        39,635   
  

 

 

   

 

 

 

Basic earnings (loss) per share:

    

Income (loss) from continuing operations

   $ (0.19   $ 0.93   

Discontinued operations

     0.00        (0.01
  

 

 

   

 

 

 

Basic earnings (loss) per share

   $ (0.19   $ 0.92   
  

 

 

   

 

 

 

Diluted earnings (loss) per share:

    

Income (loss) from continuing operations

   $ (0.19   $ 0.92   

Discontinued operations

     0.00        (0.01
  

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (0.19   $ 0.91   
  

 

 

   

 

 

 

 

(a)  Net of net income attributable to noncontrolling interests.

The three months ended March 31, 2014 per share calculations above exclude 4.1 million options and 2.5 million warrants because they were anti-dilutive. The three months ended March 31, 2013 per share calculations above exclude 2.9 million options and 2.4 million warrants because they were anti-dilutive.

Note 5 – Discontinued Operations

Consistent with the results reported in the 2013 Financial Statements, our Oman and Colombia operations have been classified as discontinued operations. Losses are shown in the table below:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands)  

Oman

   $ (16   $ (341

Colombia

     (115     (144
  

 

 

   

 

 

 
   $ (131   $ (485
  

 

 

   

 

 

 

Note 6 – Investment in Equity Affiliate – Petrodelta

Harvest Holding indirectly owns a 40 percent interest in Petrodelta. As discussed further in Note 1 – Organization – Share Purchase Agreement, on December 16, 2013, Harvest and HNR Energia entered into the Share Purchase Agreement with Petroandina and Pluspetrol, its parent, to sell all of our 80 percent equity interest in Harvest Holding to Petroandina in two closings. The first closing occurred on December 16, 2013 when we sold a 29 percent equity interest in Harvest Holding.

Petrodelta’s financial information is prepared in accordance with International Financial Reporting Standards (“IFRS”) which we have adjusted to conform to U.S. GAAP. All amounts through Net Income under U.S. GAAP represent 100 percent of Petrodelta. In addition to the adjustments to arrive at Petrodelta’s net income under U.S. GAAP, earnings from equity affiliate also reflect the amortization of the excess basis in equity affiliate using the unit-of-production method based on risk adjusted total current estimated reserves. Summary financial information has been presented below for the three months ended March 31, 2014 and 2013 and at March 31, 2014 and December 31, 2013:

 

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     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands, except percentages)  

Results under IRFS:

    

Revenues:

    

Oil sales

   $ 325,654      $ 317,324   

Gas sales

     866        1,201   

Royalty

     (109,084     (105,533
  

 

 

   

 

 

 
     217,436        212,992   

Expenses:

    

Operating expenses

     45,064        26,533   

Workovers

     8,352        3,064   

Depletion, depreciation and amortization

     26,312        20,465   

General and administrative

     6,565        8,780   

Windfall profits tax

     46,302        66,046   

Windfall profits tax credit

     0        (55,168
  

 

 

   

 

 

 
     132,595        69,720   
  

 

 

   

 

 

 

Income from operations

     84,841        143,272   

Gain (loss) on exchange rate

     (55     186,721   

Investment earnings and other

     313        1,400   

Interest expense

     (7,556     (2,750
  

 

 

   

 

 

 

Income before income tax

     77,543        328,643   

Current income tax expense

     52,318        137,609   

Deferred income tax expense (benefit)

     (23,238     3,378   
  

 

 

   

 

 

 

Net income under IFRS

     48,463        187,656   

Adjustments to increase (decrease) net income under IFRS:

    

Deferred income tax (expense) benefit

     6,311        (4,850

Depletion expense

     (4,870     (4,230

Reversal of windfall profits tax credit

     0        (55,168

Sports law over accrual

     51        1,651   
  

 

 

   

 

 

 

Net income under U.S. GAAP

     49,955        125,059   

Equity interest in equity affiliate

     40     40
  

 

 

   

 

 

 

Income before amortization of excess basis in equity affiliate

     19,982        50,024   

Amortization of excess basis in equity affiliate

     (1,095     (553
  

 

 

   

 

 

 

Earnings from equity affiliate included in income

   $ 18,887      $ 49,471   
  

 

 

   

 

 

 

 

     As of  
     March 31, 2014      December 31, 2013  
     (in thousands)  

Financial Position under IFRS:

     

Current assets

   $ 1,668,094       $ 1,906,595   

Property and equipment

     802,517         717,449   

Other assets

     119,751         181,116   

Current liabilities

     1,425,250         1,652,806   

Other liabilities

     100,593         136,298   

Net equity

     1,064,519         1,016,056   

 

 

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Sales Contract

The sale of oil and gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PDVSA Petroleo S.A. (“PPSA”) signed on January 17, 2008. As discussed further in the 2013 Financial Statements, the Sales Contract is in the process of being amended to include the Boscan gravity and sulphur correction factors and crude pricing formula which is applicable to production from the El Salto field. The pricing formula in the draft amendment has been used to accrue revenue for El Salto field deliveries from October 1, 2011 to date. As of March 31, 2014, revenues of $868.4 million, net of royalty, ($756.7 million, net of royalty, as of December 31, 2013) for El Salto remain uninvoiced to PPSA pending execution of the amendment.

Functional Currency

Petrodelta’s functional and reporting currency is the U.S. Dollar. PPSA is obligated to make payment to Petrodelta in U.S. Dollars in the case of payment for crude oil and natural gas liquids delivered. In addition, major contracts for capital expenditures and lease operating expenditures are denominated in U.S. Dollars. Any dividend paid by Petrodelta will be made in U.S. Dollars.

Petrodelta has currency exchange risk from fluctuations of the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (“Bolivars”). The monetary assets that are exposed to exchange rate fluctuations are cash, accounts receivable, prepaid expenses and other current assets. The monetary liabilities that are exposed to exchange rate fluctuations are accounts payable, accruals, current and deferred income tax and other tax obligations and other current liabilities. All monetary assets and liabilities incurred at the official Bolivar exchange rate are settled at the official Bolivar exchange rate. The official prevailing currency exchange rate was increased from 4.3 Bolivars per U.S. Dollar to 6.3 Bolivars per U.S. Dollar in February 2013. Petrodelta reflected a gain of approximately $169.6 million on revaluation of its non-income tax related assets and liabilities during the year ended December 31, 2013 primarily related to the February 2013 devaluation. A substantial portion of this gain was reflected in the results for the three months ended March 31, 2013.

As a result of legislation enacted in December 2013 and January and February of 2014, Venezuela now has a multiple exchange rate system. Most of Petrodelta’s transactions are subject to a fixed official exchange rate of 6.3. In addition, there is a variable official exchange rate system in which the exchange rate is determined through auctions (11.3 rate as of December 31, 2013). The third system became available on March 24, 2014. The financial information is prepared using the official fixed exchange rate (6.3 from February 2013 to date). At March 31, 2014, the balances in Petrodelta’s Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 1,292 million Bolivars and 6,208 million Bolivars, respectively.

Note 7 – Venezuela – Other

See also Note 6 – Investment in Equity Affiliates, Venezuela – Petrodelta, S.A. for further information regarding our Venezuela operations.

At March 31, 2014, the balances in Harvest Vinccler S.C.A.’s (“Harvest Vinccler”) Bolivar denominated monetary assets and liabilities accounts that are exposed to exchange rate changes are 11.2 million Bolivars and 5.7 million Bolivars, respectively. During the three months ended March 31, 2014, Harvest Vinccler exchanged approximately $0.2 million ($0.4 million during the three months ended March 31, 2013) and received an average exchange rate of 14.27 Bolivars (5.80 Bolivars during the three months ended March 31, 2013) per U.S. Dollar to fund Bolivar denominated operating expenses. A change in the exchange rate is not expected to have a material impact on results of operations or our financial position due to the small amount of exposure to Bolivars.

Note 8 – Gabon

Operational activities during the three months ended March 31, 2014 included continuation of planning for a cluster field development and preparation of a field development plan. Field development options have been evaluated and key and long lead equipment has been identified. Geoscience, reservoir engineering and economic studies have progressed, and the joint venture partners approved a resolution that the discovered fields are commercial at an operating committee meeting on March 26, 2014. Discussions have commenced with the State of Gabon over Declaration of Commerciality of the discoveries.

 

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Central/inboard 3D seismic data has been received, and geophysical and geological interpretation to review prospectivity was completed. We have begun reviewing the first high quality seismic products from the acquisition of the outboard 1,260 Sq Km of 3D seismic data during October and mid-November 2013. This survey will provide the first 3D coverage over the outboard portion of the block where significant pre-salt prospectivity has been already recognized on 2D seismic data. The new 3D seismic data should also enhance the placement of future development wells in the Ruche and Tortue development program. The Dussafu Production Sharing Contract (“PSC”) represents $103.8 million of unproved oil and gas properties including inventory on our March 31, 2014 balance sheet ($103.4 million at December 31, 2013).

See Note 12 – Commitments and Contingencies for a discussion of legal matters related to our Gabon operations.

Note 9 – Indonesia

We have satisfied all work commitments for the current exploration phase of the Budong PSC. However, the extension of the initial exploration term includes an exploration well, which if not drilled by January 2016, results in the termination of the Budong PSC.

We are actively discussing the sale of our interests in Budong, and based on indications of interest received in December 2013, we determined that it was appropriate to recognize an impairment expense of $0.6 million and a charge included in general and administrative expenses related to a valuation allowance on VAT we do not expect to recover of $2.8 million. During the three months ended March 31, 2014, we fully impaired this property resulting in a charge of $4.5 million. The Budong PSC represented $4.6 million of unproved oil and gas properties including inventory on our December 31, 2013 balance sheet.

Note 10 –Debt

Debt consists of the following:

 

     As of      As of  
     March 31,
2014
     December 31,
2013
 
     (in thousands)  

Senior notes, unsecured, with interest at 11%

   $ 0       $ 79,750   

Discount on 11% senior unsecured notes

     0         (2,270

Less current portion

     0         (77,480
  

 

 

    

 

 

 
   $ 0       $ 0   
  

 

 

    

 

 

 

As discussed in Note 2 – Liquidity, we used a portion of the $125 million in proceeds from the sale of the 29 percent interest in Harvest Holding that we received on December 16, 2013, to redeem all of our 11% Senior Notes due 2014. The notes were redeemed on January 11, 2014, for $80.0 million, including principal and accrued and unpaid interest. As a result of the redemption, we recorded a loss on extinguishment of debt of $4.8 million during the three months ended March 31, 2014. This loss includes the write off of the discount on debt ($2.3 million), the expensing of financing costs related to the term loan facility ($1.3 million) and for other costs related to the extinguishment ($1.2 million).

Note 11 – Warrant Derivative Liability

As of March 31, 2014, the Warrant Derivative Liability consisted of 1,826,001 warrants (1,826,001 at December 31, 2013) issued under the warrant agreements dated November 2010 in connection with a $60 million term loan facility. The fair value of the Warrants as of March 31, 2014 was $1.07 per warrant ($1.07 per warrant at December 31, 2013).

 

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The assumptions summarized in the following table were used to calculate the fair value of the warrant derivative liability that was outstanding as of any of the balance sheet dates presented on our consolidated balance sheets:

 

     Fair Value
Hierarchy
Level
              
      As of  
      March 31, 2014     December 31, 2013  

Significant assumptions (or ranges):

       

Stock price

     Level 1 input       $ 4.52      $ 4.52   

Term (years)

        1.58        1.83   

Volatility

     Level 2 input         94     94

Risk-free rate

     Level 1 input         0.34     0.34

Dividend yield

     Level 2 input         0.0     0.0

Scenario probability (fundamental change event/debt raise/equity raise)

     Level 3 input         60%/40%/0     60%/40%/0

All our warrant derivative contracts are recorded at fair value and are classified as warrant derivative liability on the consolidated balance sheet. The following table summarizes the effect on our income associated with changes in the fair values of our warrant derivative financial instruments:

 

     Three Months Ended
March 31,
 
     2014      2013  
     (in thousands)  

Unrealized gain on derivatives

   $ 0       $ 3,785   
  

 

 

    

 

 

 

Note 12 – Commitments and Contingencies

We have various contractual commitments pertaining to exploration, development and production activities. We entered the third exploration phase of the Dussafu PSC on May 28, 2012. In January 2013, the Budong PSC partners were granted a four year extension of the initial six year exploration term of the Budong PSC to January 15, 2017. The extension of the initial exploration term includes an exploration well, which if not drilled by January 2016, results in the termination of the Budong PSC. If we do not drill an exploration well before October 2014, our partner has the right to give us notice that the consideration for an additional 7.1 percent participating interest must be paid in cash for $3.2 million. See Note 9 – Indonesia. These work commitments are non-discretionary; however, we do have the ability to control the pace of expenditures.

Under the agreements with our partners in the Dussafu PSC and Budong PSC, we are jointly and severally liable to various third parties. As of March 31, 2014, the gross carrying amount of the fixed obligations was $4.0 million ($15.0 million as of December 31, 2013) and is related to accounts payable to vendors and withholding taxes payable to taxing authorities. As we are the operator for both the Dussafu PSC and Budong PSC, the gross carrying amount related to accounts payable and withholding taxes and the net amount related to other accrued expenses is reflected in the consolidated balance sheet in Accounts payable and Accrued expenses leaving $0.5 million in fixed obligations as of March 31, 2014 ($3.9 million as of December 31, 2013) attributable to our joint partners’ share which is not accrued in our balance sheet. Our partners have advanced $0.9 million ($1.1 million as of December 31, 2013) to satisfy their share of these obligations which was $1.3 million as of March 31, 2014 ($5.0 million as of December 31, 2013). As we expect our partners will continue to meet their obligations to fund their share of expenditures, we have not recognized any additional liability related to fixed joint interest obligations attributable to our joint interest partners.

Kensho Sone, et al. v. Harvest Natural Resources, Inc., in the United States District Court, Southern District of Texas, Houston Division. On July 24, 2013, 70 individuals, all alleged to be citizens of Taiwan, filed an original complaint and application for injunctive relief relating to the Company’s interest in the WAB-21 area of the South China Sea. The complaint alleges that the area belongs to the people of Taiwan and seeks damages in excess of $2.9 million and preliminary and permanent injunctions to prevent the Company from exploring, developing plans to extract hydrocarbons from, conducting future operations in, and extracting hydrocarbons from, the WAB-21 area. The Company has filed a motion to dismiss and intends to vigorously defend these allegations. In April 2014, the court issued an order allowing the plaintiffs to amend their complaint by May 9, 2014.

The following related class action lawsuits were filed on the dates specified in the United States District Court, Southern District of Texas: John Phillips v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (March 22, 2013) (“Phillips case”); Sang Kim v. Harvest Natural Resources, Inc., James A. Edmiston, Stephen C. Haynes, Stephen D. Chesebro’, Igor Effimoff, H. H. Hardee, Robert E. Irelan, Patrick M. Murray and J. Michael Stinson (April 3, 2013); Chris Kean v. Harvest Natural Resources, Inc., James A. Edmiston and

 

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Stephen C. Haynes (April 11, 2013); Prastitis v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 17, 2013); Alan Myers v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 22, 2013); and Edward W. Walbridge and the Edward W. Walbridge Trust v. Harvest Natural Resources, Inc., James A. Edmiston and Stephen C. Haynes (April 26, 2013). The complaints allege that the Company made certain false or misleading public statements and demand that the defendants pay unspecified damages to the class action plaintiffs based on stock price declines. All of these actions have been consolidated into the Phillips case. The Company and the other named defendants have filed a motion to dismiss and intend to vigorously defend the consolidated lawsuits.

In June 2012, the operator of the Budong PSC received notice of a claim related to the ownership of part of the land comprising the Karama-1 drilling site. The claim asserts that the land on which the drill site is located is partly owned by the claimant. The operator purchased the site from local landowners in January 2010, and the purchase was approved by BPMIGAS, Indonesia’s oil and gas regulatory authority. The claimant is seeking compensation of 16 billion Indonesia Rupiah (approximately $1.4 million, $1.0 million net to our 71.61 percent cost sharing interest) for land that was purchased at a cost of $4,100 in January 2010. On March 8, 2013, the court ruled to dismiss the claim because the claim had not been filed against the proper parties to the claim. On March 19, 2013, the claimant filed an appeal against the judgment. We dispute the claim and plan to vigorously defend against it.

In May 2012, Newfield Production Company (“Newfield”) filed notice pursuant to the Purchase and Sale Agreement between Harvest (US) Holdings, Inc. (“Harvest US”), a wholly owned subsidiary of Harvest, and Newfield dated March 21, 2011 (the “PSA”) of a potential environmental claim involving certain wells drilled on the Antelope Project. The claim asserts that locations constructed by Harvest US were built on, within, or otherwise impact or potentially impact wetlands and other water bodies. The notice asserts that, to the extent of potential penalties or other obligations that might result from potential violations, Harvest US must indemnify Newfield pursuant to the PSA. In June 2012, we provided Newfield with notice pursuant to the PSA (1) denying that Newfield has any right to indemnification from us, (2) alleging that any potential environmental claim related to Newfield’s notice would be an assumed liability under the PSA and (3) asserting that Newfield indemnify us pursuant to the PSA. We dispute Newfield’s claims and plan to vigorously defend against them.

On May 31, 2011, the United Kingdom branch of our subsidiary, Harvest Natural Resources, Inc. (UK), initiated a wire transfer of approximately $1.1 million ($0.7 million net to our 66.667 percent interest) intending to pay Libya Oil Gabon S.A. (“LOGSA”) for fuel that LOGSA supplied to our subsidiary in the Netherlands, Harvest Dussafu, B.V., for the company’s drilling operations in Gabon. On June 1, 2011, our bank notified us that it had been required to block the payment in accordance with the U.S. sanctions against Libya as set forth in Executive Order 13566 of February 25, 2011, and administered by OFAC, because the payee, LOGSA, may be a blocked party under the sanctions. The bank further advised us that it could not release the funds to the payee or return the funds to us unless we obtain authorization from OFAC. On October 26, 2011, we filed an application with OFAC for return of the blocked funds to us. Until that application is approved, the funds will remain in the blocked account, and we can give no assurance when OFAC will permit the funds to be released. On April 23, 2014, we received a notice that OFAC had denied our October 26, 2011 application for the return of the blocked funds. We intend to request that OFAC reconsider its decision, and we continue to believe that the funds will ultimately be released to the Company.

Robert C. Bonnet and Bobby Bonnet Land Services vs. Harvest (US) Holdings, Inc., Branta Exploration & Production, LLC, Ute Energy LLC, Cameron Cuch, Paula Black, Johnna Blackhair, and Elton Blackhair in the United States District Court for the District of Utah. This suit was served in April 2010 on Harvest and Elton Blackhair, a Harvest employee, alleging that the defendants, among other things, intentionally interfered with plaintiffs’ employment agreement with the Ute Indian Tribe – Energy & Minerals Department and intentionally interfered with plaintiffs’ prospective economic relationships. Plaintiffs seek actual damages, punitive damages, costs and attorney’s fees. We dispute plaintiffs’ claims and plan to vigorously defend against them. On October 29, 2013, we learned that the court administratively closed the case. The case was recently reopened as a result of the Circuit Court of Appeals’ ruling against Plaintiffs’ discovery request. We dispute Plaintiffs’ claims and plan to vigorously defend against them.

Uracoa Municipality Tax Assessments. Harvest Vinccler S.C.A., a subsidiary of Harvest Holding (“Harvest Vinccler”), has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:

 

    Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (“OSA”). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims.

 

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    Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims.

 

    Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim.

 

    Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims.

Harvest Vinccler disputes the Uracoa tax assessments and believes it has a substantial basis for its positions based on the interpretation of the tax code by SENIAT (the Venezuelan income tax authority), as it applies to operating service agreements, Harvest Holding has filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997.

Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a tax inspector for the Libertador municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:

 

    One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayor’s Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayor’s Office to the protest. If the municipality’s response is to confirm the assessment, Harvest Vinccler will defer to the Tax Court to enjoin and dismiss the claim.

 

    Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

 

    Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

Harvest Vinccler disputes the Libertador allegations set forth in the assessments and believes it has a substantial basis for its position. As a result of the SENIAT’s interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002.

On May 4, 2012, Harvest Vinccler learned that the Political Administrative Chamber of the Supreme Court of Justice issued a decision dismissing one of Harvest Vinccler’s claims against the Libertador Municipality. Harvest Vinccler continues to believe that it has sufficient arguments to maintain its position in accordance with the Venezuelan Constitution. Harvest Vinccler plans to present a request of Constitutional Revision to the Constitutional Chamber of the Supreme Court of Justice once it is notified officially of the decision. Harvest Vinccler has not received official notification of the decision. Harvest Vinccler is unable to predict the effect of this decision on the remaining outstanding municipality claims and assessments.

On February 21, 2014, Tecnica Vial and Flamingo, our partners in Colombia on Blocks VSM14 and VSM15, respectively, filed for arbitration of claims related to the farmout agreements for each block. We had received notices of default from our partners for failing to comply with certain terms of the farmout agreements, followed by notices of termination on November 27, 2013. We determined that it was appropriate to fully impair the costs associated with these interests, and we recorded an impairment charge of $3.2 million during the year ended December 31, 2013 which includes an accrual of $2.0 million related to this matter. We intend to vigorously defend the arbitration.

 

 

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We are a defendant in or otherwise involved in other litigation incidental to our business. In the opinion of management, there is no such litigation that will have a material adverse effect on our financial condition, results of operations and cash flows.

Note 13 – Operating Segments

We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. Results for our segments are:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands)  

Segment Income (Loss) Attributable to Harvest

    

Venezuela

   $ 9,135      $ 39,076   

Gabon

     (1,151     (941

Indonesia

     (5,235     (1,279

United States

     (10,626     (274
  

 

 

   

 

 

 

Income (loss) from continuing operations(a)

     (7,877     36,582   

Discontinued operations

     (131     (485
  

 

 

   

 

 

 

Net income (loss) attributable to Harvest

   $ (8,008   $ 36,097   
  

 

 

   

 

 

 

 

(a)  Net of income attributable to noncontrolling interest.

 

    As of March 31,
2014
    As of December 31,
2013
 
    (in thousands)  

Operating Segment Assets

   

Venezuela

  $ 518,617      $ 500,946   

Gabon

    106,177        107,851   

Indonesia

    546        5,004   

United States

    16,619        121,050   
 

 

 

   

 

 

 
    641,959        734,851   

Discontinued operations

    12        29   
 

 

 

   

 

 

 

Total Assets

  $ 641,971      $ 734,880   
 

 

 

   

 

 

 

Note 14 – Related Party Transactions

As of March 31, 2014 and December 31, 2013, HNR Energia had a note payable to Vinccler of $6.1 million. Principal and interest are payable upon the maturity date of June 30, 2016. We have classified the note as a current liability as we expect to settle this obligation within one year. Interest accrues at a rate of US dollar based LIBOR plus 0.5%.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Harvest Natural Resources, Inc. (“Harvest” or the “Company”) cautions that any forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) contained in this report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words “budget”, “forecast”, “expect”, “believes”, “goals”, “projects”, “plans”, “anticipates”, “estimates”, “should”, “could”, “assume” and similar expressions are intended to identify forward-looking statements. In accordance with the provisions of the Securities Act and the Exchange Act, we caution you that important factors could cause actual results to differ materially from those in any forward-looking statements. These factors include our concentration of operations in Venezuela; political and economic risks associated with international operations (particularly those in Venezuela); the risk that the sale of our remaining Venezuelan interests will not be completed; anticipated future development costs for undeveloped reserves; drilling risks; risk that actual results may vary considerably from reserve estimates; the dependence on the abilities and continued participation of our key employees; risks normally incident to the exploration, operation and development of oil and natural gas properties; risks incumbent to being a noncontrolling interest shareholder in a corporation; permitting and drilling of oil and natural gas wells; availability of materials and supplies necessary to projects and operations; prices for oil and natural gas and related financial derivatives; changes in interest rates; our ability to acquire oil and natural gas properties that meet our objectives; availability and cost of drilling rigs and seismic crews; overall economic conditions; political stability; civil unrest; acts of terrorism; currency and exchange risks; currency controls; changes in existing or potential tariffs, duties or quotas; changes in taxes; changes in governmental policy; lack of liquidity; availability of sufficient financing; estimates of amounts and timing of sales of securities; changes in weather conditions; and ability to hire, retain and train management and personnel. A discussion of these factors is included in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”), which includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q.

Executive Summary

Recent Developments

On December 16, 2013, we entered into a Share Purchase Agreement (“Share Purchase Agreement”) to sell all of our 80 percent equity interest in Harvest Holding in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013 contemporaneously with the signing of the Share Purchase Agreement, when we sold a 29 percent equity interest in Harvest Holding for $125 million. The second closing, for a cash purchase price of $275 million, will be subject to, among other things, authorization by the holders of a majority of the Company’s outstanding common stock and approval by the Ministerio del Poder Popular de Petroleo y Mineria representing the Government of Venezuela (which indirectly owns the other 60% interest in Petrodelta). As a result of the first closing, we indirectly own 51 percent of Harvest Holding beginning December 16, 2013. On May 7, 2014, Harvest’s stockholders voted to authorize the sale of the remaining interests in Venezuela. See Note 1 – Organization – Share Purchase Agreement, for further discussion of this transaction.

On January 11, 2014, we used $80.0 million of the $125 million in proceeds from the first closing that we received on December 16, 2013, to redeem all of our 11% Senior Notes due 2014 including principal and accrued and unpaid interest.

We are currently marketing our non-Venezuelan assets and talking to potential buyers, and we intend to continue our consideration of a possible sale for some or all of our non-Venezuelan assets if we are able to negotiate a sale or sales in transactions that our Board of Directors believes are in the best interests of the Company and its stockholders. In the meantime, we intend to operate our business in the ordinary course and may ultimately decide to keep our non-Venezuelan assets and acquire additional assets. See Note 2 – Liquidity, for further discussion of these and other matters related to our liquidity.

 

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Operations

Venezuela - Petrodelta, S.A.

During the three months ended March 31, 2014, Petrodelta drilled and completed three development wells (two during the three months ended March 31, 2013). Currently, Petrodelta is operating six drilling rigs and one workover rig. Infrastructure enhancement projects in the El Salto and Temblador fields continue.

Certain operating statistics for the three months ended March 31, 2014 and 2013 for the Petrodelta fields operated by Petrodelta are set forth below. This information is provided at 100 percent. This information may not be representative of future results.

 

     Three Months Ended
March 31,
 
     2014      2013  

Thousand barrels of oil sold

     3,878         3,361   

Million cubic feet of gas sold

     562         778   

Total thousand barrels of oil equivalent (“BOE”)

     3,972         3,491   

Average BOE per day

     44,132         38,786   

Average price per barrel

   $ 83.97       $ 94.41   

Average price per thousand cubic feet

   $ 1.54       $ 1.54   

Cash operating costs (thousands)

   $ 45,064       $ 26,533   

Capital expenditures (thousands)

   $ 98,764       $ 44,591   

Petrodelta’s functional and reporting currency is the U.S. Dollar; however, Petrodelta has currency exchange risk from fluctuations of the official prevailing exchange rate that applies to their operating costs denominated in Venezuela Bolivars (“Bolivars”). As a result of legislation enacted in December 2013 and January and February of 2014, Venezuela now has a multiple exchange rate system. See Note 6 – Investment in Equity Affiliate – Petrodelta, for further discussion of the impact of currency exchange risk on Petrodelta’s results. (“Note” used here and elsewhere in this document refers to the specified note contained in the Notes to the Consolidated Condensed Financial Statements in Part I. Item 1. Financial Statements.)

Dussafu Project, Gabon

We have met all funding commitments for the third exploration phase of the Dussafu PSC. Dussafu Ruche Marin-1 and sidetracks, which were drilled in 2011, Dussafu Tortue Marin-1 and sidetrack, which were drilled in 2013, are suspended pending future appraisal and development activities.

Operational activities during the three months ended March 31, 2014 included continuation of planning for a cluster field development and preparation of a field development plan. Field development options have been evaluated and key and long lead equipment has been identified. Geoscience, reservoir engineering and economic studies have progressed, and the joint venture partners approved a resolution that the discovered fields are commercial at an operating committee meeting on March 26, 2014. Discussions have commenced with the State of Gabon over Declaration of Commerciality of the discoveries.

Central/inboard 3D seismic data has been received, and geophysical and geological interpretation to review prospectivity was completed. We have begun reviewing the first high quality seismic products from the acquisition of the outboard 1,260 Sq Km of 3D seismic data during October and mid-November 2013. The survey will provide the first 3D coverage over the outboard portion of the block where significant pre-salt prospectivity has been already recognized on 2D seismic data. The pre-salt is currently the focus of deep water exploration activity offshore Gabon. The new 3D seismic data should also enhance the placement of future development wells in the Ruche and Tortue development program.

During the three months ended March 31, 2014, we had cash capital expenditures of $0.5 million for well planning and drilling.

 

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Budong-Budong Project, Indonesia

In January 2013, the Budong PSC partners were granted a four year extension of the initial six year exploration term of the Budong PSC to January 15, 2017. The extension of the initial exploration term includes an exploration well, which if not drilled by January 2016, results in the obligation of the Joint Venture to return the entire Budong PSC to the Government of Indonesia. Also, if this exploration well is not drilled within 18 months of the date of approval from the Government of Indonesia of this transaction (October 9, 2014), we will be required to pay our partner in the Budong PSC $3.2 million.

Operational activities during the three months ended March 31, 2014 included continued work on an exploration program targeting the Pliocene and Miocene targets encountered in the previous two wells. Land access and acquisition; environmental studies; permitting; and tender prequalification and procurement are on-going.

We are actively discussing the sale of our interests in Budong, and based on indications of interest received in December 2013, we determined that is it was appropriate to recognize an impairment expense of $0.6 million and a charge included in general and administrative expenses related to a valuation allowance on VAT we do not expect to recover of $2.8 million. During the three months ended March 31, 2014, we fully impaired this property resulting in a charge of $4.5 million. The Budong PSC represented $4.6 million of unproved oil and gas properties including inventory on our December 31, 2013 balance sheet.

Business Strategy

In the 2013 Form 10-K in Item 1. Business and Item 1A. Risk Factors, in Note 1 – Organization to the Consolidated Financial Statements and elsewhere , we discuss the situation in Venezuela and how the actions of the Venezuelan government have adversely affected and continue to adversely affect our operations as well as the agreement with Petroandina and Pluspetrol to sell all of our Venezuelan interests.

We are currently marketing our non-Venezuelan assets and talking to potential buyers, and we intend to continue our consideration of a possible sale for some or all of our non-Venezuelan assets if we are able to negotiate a sale or sales in transactions that our Board of Directors believes are in the best interests of the Company and its stockholders. In the meantime, we intend to operate our business in the ordinary course and may ultimately decide to keep our non-Venezuelan assets and acquire additional assets. See Item 1. Business, Business Strategy in the 2013 Form 10-K and Note 2 – Liquidity in this quarterly report on Form 10-Q for further discussion on how we plan to operate the business in the near term.

Results of Operations

You should read the following discussion of the results of operations for the three months ended March 31, 2014 and 2013, and the financial condition as of March 31, 2014 and December 31, 2013, in conjunction with our consolidated financial statements and related notes included in this Form 10-Q and the 2013 Form 10-K.

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

We reported net loss attributable to Harvest of $(8.0) million, or $(0.19) diluted earnings per share, for the three months ended March 31, 2014, compared with net income attributable to Harvest of $36.1 million, or $0.91 diluted earnings per share, for the three months ended March 31, 2013.

 

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Loss from Continuing Operations

Total expenses and other non-operating (income) expense from continuing operations (in thousands) were:

 

     Three Months Ended
March 31,
    Increase  
     2014     2013     (Decrease)  

Depreciation and amortization

   $ 76      $ 87      $ (11

Exploration expense

     1,833        1,730        103   

Impairment expense

     4,460        0        4,460   

General and administrative

     6,301        3,354        2,947   

Investment earnings and other

     (4     (46     42   

Loss on sale of interest in Harvest Holding

     966        0        966   

Unrealized (gain) on derivatives

     0        (3,785     3,785   

Interest expense

     47        1,198        (1,151

Loss on extinguishment of debt

     4,749        0        4,749   

Foreign currency transaction (gains) losses

     469        (92     561   

Other non-operating expenses

     220        472        (252

Income tax expense (benefit)

     (954     39        (993

During the three months ended March 31, 2014, we incurred $1.4 million of exploration costs related to the processing and reprocessing of seismic data and lease maintenance costs related to ongoing operations and $0.4 million related to other general business development activities. During the three months ended March 31, 2013, we incurred $1.4 million of exploration costs related to the processing and reprocessing of seismic data and lease maintenance costs related to ongoing operations and $0.3 million related to other general business development activities.

During the three months ended March 31, 2014, we impaired $4.5 million related to our Budong project in Indonesia. We incurred no impairment expense during the three months ended March 31, 2013.

The increase in general and administrative costs in the three months ended March 31, 2014 from the three months ended March 31, 2013 was primarily due to higher employee related costs ($1.5 million), professional fees and contract services ($0.1 million), general operating and overhead costs ($0.8 million), and taxes other than income ($0.5 million). Employee costs are higher between periods as costs for the three months ended March 31, 2013 included a reduction in certain stock-based compensation expense to reflect the impact of the change in the Company’s stock price.

The loss on the sale of interest in Harvest Holding in the three months ended March 31, 2014 includes costs incurred during the period related to the sale of our remaining 51 percent interest in Harvest Holding which has not yet been completed. These costs are primarily related to the preparation of the proxy statement issued in connection with the special stockholders meeting held on May 7, 2014 to vote on the proposed sale.

The decrease in unrealized gain on derivatives in the three months ended March 31, 2014 from the three months ended March 31, 2013 was because no adjustment to the fair value of the derivatives was required in the three months ended March 31, 2014 as the underlying valuation assumptions for our warrant derivative liability have not materially changed during the current quarter.

The decrease in interest expense in the three months ended March 31, 2014 from the three months ended March 31, 2013 was due to the lower average principal balance outstanding during the period ($8.9 million during the current quarter) resulting from the repayment of the 11 percent senior unsecured notes on January 11, 2014. The average principal balance outstanding for the prior period quarter was $79.8 million. Interest capitalized to oil and gas properties in the three months ended March 31, 2014 was $0.2 million (three months ended March 31, 2013: $2.0 million).

During the three months ended March 31, 2014, we incurred a loss on extinguishment of debt of $4.8 million in connection with the repayment of the 11 percent senior unsecured notes.

Other non-operating expense in the three months ended March 31, 2013 included the write-off of costs related to an equity distribution agreement which we can no longer access.

 

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We recognized an income tax benefit of $1.0 million during the three months ended March 31, 2014 as compared to income tax expense of $0.0 million during the three months ended March 31, 2013. Beginning in the fourth quarter of 2013, we determined that we expected to have sufficient taxable income in the U.S. related to the expected sale of the remaining equity interest in Harvest Holding. Therefore we recognized the tax benefit of losses incurred in the U.S. related to the three months ended March 31, 2014. This benefit was offset by expense associated with undistributed earnings from foreign subsidiaries during the three months ended March 31, 2014.

Earnings from Equity Affiliate

 

     Three Months Ended
March 31,
     Increase    

%

Increase

    Increase  
     2014      2013      (Decrease)     (Decrease)     (Decrease)  
     (dollars in thousands, except prices)        

Revenues:

            

Crude oil

   $ 325,654       $ 317,324       $ 8,330        3  

Natural gas

     866         1,201         (335     (28 )%   
  

 

 

    

 

 

    

 

 

   

 

 

   

Total revenues

   $ 326,520       $ 318,525       $ 7,995        3  
  

 

 

    

 

 

    

 

 

   

 

 

   

Price and Volume Variances:

            

Crude oil price variance (per Bbl)

   $ 83.97       $ 94.41       $ (10.44     (11 )%    $ (35,087

Volume variances:

            

Crude oil volumes (MBbls)

     3,878         3,361         517        15     43,415   

Natural gas volumes (MMcf)

     562         778         (216     (28 )%      (333
            

 

 

 

Total variance

             $ 7,995   
            

 

 

 

Revenues were higher in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to increases in sales volumes resulting from production from wells drilled since March 31, 2013 offset by a decrease in oil prices. The decrease in price primarily reflects an overall decrease in market oil prices, but also was a result of a shift in mix to El Salto production which is paid at the lower Boscan price.

Total expenses and other non-operating (income) expense, inclusive of all adjustments necessary to reconcile Net Income under IFRS from Petrodelta to Earnings from Equity Affiliate, were:

 

     Three Months Ended
March 31,
    Increase  
     2014      2013     (Decrease)  
     (in thousands)  

Royalties

   $ 109,084       $ 105,533      $ 3,551   

Operating expenses

     45,064         26,533        18,531   

Workovers

     8,352         3,064        5,288   

Depletion, depreciation and amortization (inclusive of U.S. GAAP adjustment)

     31,182         24,695        6,487   

General and administrative

     6,565         8,780        (2,215

Windfall profits tax (inclusive of U.S. GAAP adjustment)

     46,302         66,046        (19,744

Gain (loss) on exchange rate

     55         (186,721     186,776   

Interest expense

     7,556         2,750        4,806   

Income tax expense (inclusive of U.S. GAAP adjustment)

     22,769         145,837        (123,068

Adjustment stated at our 40% equity interest related to amortization of excess basis

     1,095         553        542   

For the three months ended March 31, 2014 compared to the three months ended March 31, 2013, royalties, which is a function of revenue, increased due to the increase in production (net increase in revenue of $8.0 million at 30 percent royalty). The increase in workover expense is due to running between one and two workover rigs in 2014 versus one workover rig in 2013. Windfall Profits Tax, which is a function of volume and price received per barrel as well as pricing levels set for determining Windfall Profits Tax, decreased primarily due to the decrease in prices and to a lesser extent the increase in the pricing level set for determining Windfall Profits Tax. The foreign currency transaction gain during the three months ended March 31, 2013 is due to the Bolivar devaluation in February 2013 from 4.30 Bolivars/U.S. Dollar to 6.30 Bolivars/U.S. Dollar. Income tax expense decreased between the quarters primarily due to the decrease in pre-tax income.

 

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Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests is attributable to Vinccler’s 20 percent equity interest in Harvest Holding. Beginning December 16, 2013 it is also attributable to Petroandina’s 29 percent equity interest in Harvest Holding. Earnings for Harvest Holding are primarily attributable to Petrodelta. Net income attributable to noncontrolling interests decreased from $9.9 million for the three months ended March 31, 2013 to $8.6 million for the three months ended March 31, 2014 primarily as result of lower earnings from Petrodelta offset by the impact of an increase in the noncontrolling interest from 20 percent in the 2013 period to 49 percent for the 2014 period.

Discontinued Operations

As discussed further in our 2013 Form 10-K, operations in Oman and Colombia have been classified as discontinued operations. Net income (loss) is shown in the table below:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands)  

Oman

   $ (16   $ (341

Colombia

     (115     (144
  

 

 

   

 

 

 

Net loss from discontinued operations

   $ (131   $ (485
  

 

 

   

 

 

 

Risks, Uncertainties, Capital Resources and Liquidity

The following discussion on risks, uncertainties, capital resources and liquidity should be read in conjunction with our 2013 Form 10-K and our consolidated financial statements and related notes thereto included in this Form 10-Q.

Liquidity

As discussed above under Recent Developments, on December 16, 2013, Harvest and HNR Energia entered into the Share Purchase Agreement with Petroandina and Pluspetrol, its parent, to sell all of our 80 percent equity interest in Harvest Holding to Petroandina in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013 when we sold a 29 percent equity interest in Harvest Holding for $125 million. We used $80.0 million of the proceeds to redeem all of our 11% Senior Notes due 2014 on January 11, 2014 including principal and accrued and unpaid interest. As of March 31, 2014, we had $17.6 million in cash and cash equivalents.

We expect that during 2014, our capital needs will be met either from the completion of the sale of our remaining Venezuelan interests, the sale of other non-Venezuelan assets or borrowings available under the Share Purchase Agreement during the period until the second closing. The timing of the second closing, however, is beyond the control of the Company. In addition, depending on the timing of these events, we anticipate using a portion of the proceeds from the second closing to pay for expenses and other costs related to the transaction, which we estimate will be approximately $4 million; to pay taxes related to the transaction, which we estimate will be approximately $50.1 million; and if we do not sell our non-Venezuelan assets before the second closing, then we estimate that we will need to retain approximately $30 million to fund projected general operating expenses and capital expenditures from April 1, 2014 through December 31, 2014 (to the extent that those general operating expenses are not already reserved from any possible sale of our non-Venezuelan assets).

In addition, we may be able to meet future liquidity needs through the issuance of additional equity securities and/or short or long-term debt financing, although there can be no assurance that such financing will be available to us or on terms that are acceptable to us, farm-downs or possible sales of assets.

The oil and gas industry is a highly capital intensive and cyclical business with unique operating and financial risks. In Part I. Item 1A. Risk Factors of the 2013 Form 10-K, we discuss a number of variables and risks related to our exploration projects and our minority equity investment in Petrodelta that could significantly utilize our cash balances, affect our capital resources and liquidity.

 

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Working Capital and Cash Flows

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

 

     Three Months Ended  
     March 31,  
     2014     2013  
     (in thousands, except ratios)  

Net cash used in operating activities

   $ (20,918   $ (10,411

Net cash used in investing activities

     (3,021     (30,818

Net cash provided by (used in) financing activities

     (79,320     32   
  

 

 

   

 

 

 

Net decrease in cash

   $ (103,259   $ (41,197
  

 

 

   

 

 

 
     As of  
     March 31,
2014
    December 31,
2013
 

Working Capital

   $ (39,462   $ (31,667

Current Ratio

     0.3        0.8   

Total cash, including restricted cash

   $ 17,688      $ 121,045   

Total debt

   $ 6,109      $ 83,589   

Working Capital

The decrease in working capital of $7.8 million between December 31, 2013 and March 31, 2014 was primarily due to cash used to fund the loss from operations and interest payments as well as cash payments for capital expenditures.

Cash Flow from Operating Activities

During the three months ended March 31, 2014, net cash used in operating activities was approximately $20.9 million ($10.4 million during the three months ended March 31, 2013). The $10.6 million increase in use of cash was primarily due to an increase in cash paid for exploration expenses, general and administrative costs and income taxes.

Cash Flow from Investing Activities

Our cash capital expenditures for property and equipment are summarized in the following table:

 

     March 31,  
     2014      2013  
     (in thousands)  

Budong PSC

   $ 1       $ 0   

Dussafu PSC

     497         30,454   

Other

     0         69   
  

 

 

    

 

 

 

Total additions of property and equipment

   $ 498       $ 30,523   
  

 

 

    

 

 

 

In addition to cash capital expenditures, we advanced $0.1 million to Petrodelta for continuing operating costs during the three months ended March 31, 2014 ($0.1 million during the three months ended March 31, 2013). Petrodelta’s capital commitments will be determined by its business plan. Petrodelta’s capital commitments are expected to be funded by internally generated cash flow. Our budgeted capital expenditures of $8.4 million for 2014, of which $2.2 million is non-discretionary, for U.S., Gabon and Indonesia operations will be funded through our existing cash balances, accessing equity and debt markets, and cost reductions. In addition, we could delay the discretionary portion of our capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, as warranted.

 

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Cash Flow from Financing Activities

During the three months ended March 31, 2014, we repaid $79.8 million of our 11 percent senior unsecured notes. There were no significant cash flows related to financing activities during the three months ended March 31, 2013.

Effects of Changing Prices, Foreign Exchange Rates and Inflation

Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned development activities and capital expenditure program.

Our net foreign exchange loss attributable to our international operations was $0.5 million for the three months ended March 31, 2014 and a minimal gain for the three months ended March 31, 2013. There are many factors affecting foreign exchange rates and resulting exchange gains and losses, most of which are beyond our control. It is not possible for us to predict the extent to which we may be affected by future changes in exchange rates and exchange controls.

Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official exchange rate in February 2004, March 2005, January 2010, January 2011 and February 2013.

Harvest Vinccler’s and Petrodelta’s functional and reporting currency is the U.S. Dollar. They do not have currency exchange risk other than the official prevailing exchange rate that applies to their operating costs denominated in Bolivars (6.30 Bolivars per U.S. Dollar). However, during the three months ended March 31, 2014, Harvest Vinccler exchanged approximately $0.2 million (March 31, 2013: $0.4 million) and received an average exchange rate of 14.27 Bolivars (March 31, 2013: 5.80 Bolivars) per U.S. Dollar.

Within the United States and other countries in which we conduct business, inflation has had a minimal effect on us, but it is potentially an important factor with respect to results of operations in Venezuela. The annualized inflation rate in Venezuela was 40.4 percent during the three months ended March 31, 2014 (year ended December 31, 2013: 56.2 percent).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from adverse changes in oil and natural gas prices and foreign exchange risk, as discussed in our 2013 Form 10-K. The information about market risk for the three months ended March 31, 2014 does not differ materially from that discussed in the 2013 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We have established disclosure controls and procedures that are designed to ensure the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation as of March 31, 2014, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Notes to Consolidated Condensed Financial Statements, Note 12 – Commitments and Contingencies and our Annual Report on Form 10-K for the year ended December 31, 2013 for a description of certain legal proceedings including material developments in such legal proceedings.

Item 5. Other Information

The Company received a letter from a shareholder demanding that the Company’s Board of Directors institute legal proceedings against certain of its officers and directors for alleged breaches of fiduciary duty with regard to the Company’s restatements and material weaknesses identified in its 2012 Annual Report on Form 10-K. In response to this demand letter, the Board created a Special Review Committee of independent and disinterested directors, who conducted a thorough investigation into the demand letter’s allegations with the assistance of independent outside counsel and an accounting expert. After a full investigation and report from the Committee, the Board found that no officer or director breached any fiduciary duty owed to the Company, and that no additional remedial actions should be taken by the Company. These findings were subsequently reported to the shareholder on April 7, 2014.

Item 6. Exhibits

(a) Exhibits

 

3.1    Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.)
3.2    Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on May 23, 2007, File No. 1-10762.)
4.1    Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008, File No. 1-10762.)
4.2    Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.2 to our Form 10-Q filed on November 9, 2010, File No. 1-10762.)
4.3    Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.)
4.4    Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.)
4.5    Second Amendment to Third Amended and Restated Rights Agreement, dated as of February 1, 2013, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A., as Rights Agent. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on February 4, 2013, File No. 1-10762.)  
31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by James A. Edmiston, President and Chief Executive Officer.
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.

 

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32.1    Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer.
32.2    Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.
101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.DEF    XBRL Definition Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document

 

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SIGNATURES

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

 

    HARVEST NATURAL RESOURCES, INC.
Dated: May 12, 2014     By:   

/s/ James A. Edmiston

      James A. Edmiston
      President and Chief Executive Officer
Dated: May 12, 2014     By:  

/s/ Stephen C. Haynes

      Stephen C. Haynes
     

Vice President - Finance, Chief Financial Officer

and Treasurer

 

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Exhibit Index

 

Exhibit Number

  

Description

    3.1    Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762).
    3.2    Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on May 23, 2007, File No. 1-10762.)
    4.1    Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008. File No. 1-10762.)
    4.2    Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.)
    4.3    Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.)
    4.4    Amendment to Third Amended and Restated Rights Agreement, dated as of October 28, 2010, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on October 29, 2010, File No. 1-10762.)
    4.5    Second Amendment to Third Amended and Restated Rights Agreement, dated as of February 1, 2013, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A., as Rights Agent. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on February 4, 2013, File No. 1-10762.)
  31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by James A. Edmiston, President and Chief Executive Officer.
  31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.
  32.1    Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer.
  32.2    Certification accompanying Quarterly Report on Form 10-Q pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.
101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.DEF    XBRL Definition Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document

 

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