UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

For the Quarterly Period Ended September 30, 2014

 

or

 

 

for the transition period from _____ to _____

 

Commission File No. 1-10762

______________________________

 

Harvest Natural Resources, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

(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  ☒  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  ☒  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.

 

 

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

 

At November 3, 2014, the Registrant had 42,428,298 shares of its Common Stock outstanding.

 

 

 

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HARVEST NATURAL RESOURCES, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

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PART I.     FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except per share data)

 

See accompanying notes to consolidated condensed financial statements.

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

See accompanying notes to consolidated condensed financial statements.

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  (continued)

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30,  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 September 30, 2014 and December 31, 2013, results of operations for the three and nine months ended September 30, 2014 and 2013, and the cash flows for the nine months ended September 30, 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”). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.  These reclassifications did not affect our consolidated financial results. The consolidated condensed financial statements included in this report 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 (the” SPA”) 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.  Harvest Holding owns, indirectly through wholly owned subsidiaries, a 40 percent equity interest in Petrodelta, S.A. (“Petrodelta”).  The first closing occurred on December 16, 2013 contemporaneously with the signing of the SPA, 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 the remaining 51 percent equity interest in Harvest Holding for a cash purchase price of $275 million, is subject to, among other things, 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).  

Through our indirect 51 percent ownership 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.

On May 7, 2014, Harvest’s stockholders voted to authorize the sale of the remaining interests in Harvest Holding.  Once stockholders’ approval was obtained, the SPA allowed for 120 days, or until September 7, 2014, for consummation of the sale, extension of the SPA or termination of the SPA.  Petroandina has the  right to extend the SPA beyond the termination date in increments of one month, but not beyond December 31, 2014, in exchange for our right to borrow up to $2.0 million, not to exceed $7.6 million in the aggregate, from Petroandina per each monthly extension.  Repayments of these loans are subject to certain conditions, one of which states that all outstanding loans (along with interest accrued and other amounts) shall become due upon the final closing date of the SPA, with the second tranche proceeds  being reduced by such outstanding amounts.    If the SPA is terminated by either party any outstanding loans will become due one year from the date of the termination.

On August 28, 2014 and again on September 29, 2014, Petroandina exercised its right to extend for one month the termination date of the SPA with the Company borrowing $2.0 million per occurrence. We expect that Petroandina will continue to exercise such extensions until the consummation of the transaction, or termination of the SPA, on or before December 31, 2014.    

 

Note 2 – Liquidity

 

Historically, our primary ongoing source of cash has been dividends from Petrodelta (prior to 2011), the sale of oil and gas properties and accessing debt and/or equity markets. 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

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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.

 

On July 2, 2014, we completed the sale of our rights under a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area for net proceeds of $2.9 million.  This area is located in the South China Sea and is the subject of a border dispute between People’s Republic of China and Socialist Republic of Vietnam.

 

On July 10, 2014, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission.  Under the shelf registration statement, we could offer and sell up to $300.0 million of various types of securities, including unsecured debt securities, common stock, preferred stock, warrants and units.  Additionally, the shelf registration statement will allow selling stockholders to resell up to an aggregate of 686,761 common shares upon the exercise of currently outstanding warrants.  The Company will not receive any proceeds from common shares offered by these selling stockholders.  There can be no assurances that any future offerings will be conducted under the shelf registration statement, and the terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company's Board of Directors.  This disclosure shall not constitute an offer to sell or the solicitation of the offer to buy, nor shall there be any sale of these securities in any state where such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

 

On September 4, 2014, we entered into a Distribution Agreement (the “Agreement”) with a sales agent (the “Agent”) to sell shares of the Company’s common stock (the “ATM Shares”), for up to $75.0 million aggregate gross sale proceeds, from  time to time in “at-the-market” offerings (the “ATM offering”). During the quarterly period ended September 30, 2014 we issued 334,563  shares under the ATM offering at a weighted average sale price of $4.45 per share resulting in proceeds to us of approximately $1.4 million, net of fees paid to the Agent and other costs associated with the Agreement. Under the terms of the ATM offering, sales are to be made primarily in transactions that are deemed to be “at-the-market” offerings, including sales made directly on the New York Stock Exchange at market prices or as otherwise agreed by the Company and the Agent.  The Company may also sell the ATM Shares from time to time to the Agent as principal for its own account at a price to be agreed upon at the time of the sale.  Any sale of ATM Shares to the Agent as principal would be pursuant to the terms of a separate agreement between the Company and the Agent.

 

We anticipate that we will need to fund estimated cash general operating and capital expenditures of $14.0 million for the remainder of 2014. The majority of these costs will be paid with cash on hand, with any shortfalls to be made up with funds from the anticipated second closing under the SPA, loans from Petroandina related to the monthly extensions of the closing, accessing debt markets or additional equity sales.  However, there can be no assurances that any of these events will occur or that funds will be available to the Company on terms that are acceptable.  Based upon our ongoing analysis of seismic data, we believe that it may be in the best interest of our stockholders to further develop our remaining property in Gabon which would require additional capital expenditures.  We also intend to continue our consideration of a possible sale or other transaction that our Board of Directors believes is in the best interests of the Company and of its stockholders.  Our cash balance as of September 30, 2014 was $9.0 million.

 

If the proposed sale of our remaining Harvest Holding interests is completed during the fourth quarter, a significant portion of our assets at year end will be cash from the proceeds of this transaction. However, the timing of the sale of our remaining 51 percent interest in Harvest Holding is beyond our control, and we will continue to have operating and capital requirements in the interim time period. Depending on the timing of these events, we anticipate using a portion of the proceeds from this sale to pay for expenses and other costs related to the transaction, which we estimate will be approximately $3.1 million, $1.5 million of which has been incurred as of September 30, 2014; and to pay taxes related to the transaction, which we estimate will be approximately $48.2 million.  We also anticipate making a cash settlement payment related to the warrant derivative liability of approximately $2.0 million  (see Note 11 – Warrant Derivative Liability), along with severance costs and obligations under stock-based compensation agreements and employment agreements triggered by this sale, during the fourth quarter 2014. Based on outstanding stock-based compensation awards and salaries as of September 30, 2014, the cash settlement could be up to approximately $16.1 million.

 

 

Note 3 – Summary of Significant Accounting Policies

 

Investment in Equity Affiliate

 

At September 30, 2014, we reviewed our investment in Petrodelta taking into consideration the purchase price for the sale of our remaining 51 percent interest in Harvest Holding under the terms of the SPA (see Note 1 – Organization – Share Purchase Agreement).    Beginning in the second quarter of 2014, we determined that we should not recognize any additional equity in earnings from Petrodelta, as to do so would result in a balance in the related equity investment account which would exceed the estimated

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amount we would realize should the sale of our remaining 51 percent interest in Harvest Holding be completed under the terms of the SPA. Through September 30, 2014 we have excluded $30.9 million in earnings from equity affiliates from our results of operations.

 

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:

 

 

 

Unproved property costs, excluding oilfield inventories, consist of: 

 

 

 

Other Administrative Property

 

For the three and nine months ended September 30, 2014, depreciation expense was $0.0 million and $0.2 million, respectively. For the three and nine months ended September 30, 2013, depreciation expense was $0.1 million and $0.3 million, respectively.

 

Other Assets

 

Other assets consist of:

 

 

 

The blocked payment of $0.7 million net to our 66.667 percent interest is related to our drilling operations in Gabon and was blocked as a result of 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 and nine months ended September 30, 2014, we capitalized interest costs for qualifying oil and gas property additions of $0.0 million and $0.2 million, respectively. During the three and nine months ended September 30, 2013, we capitalized interest costs for qualifying oil and gas property additions of $2.1 million and $6.2 million, respectively.

 

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Fair Value Measurements

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 September 30, 2014 and December 31, 2013. See Note 11 – Warrant Derivative Liability for a description of the valuation models and inputs used to calculate the fair value of this derivative liability.

 

 

 

 

 

During the three and nine months ended September 30, 2014, there was no change in the fair value of the warrants, and for the three and nine months ended September 30, 2013,  an unrealized loss of $6.6 million and $2.8 million, respectively, was recorded to reflect the change in the fair value of this derivative liability.

 

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).

 

 

 

During the three and nine months ended September 30, 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 nine months ended September 30, 2014, we issued stock-based compensation awards to certain employees in the form of:  options to purchase 683,000 shares of common stock at an exercise price of $4.76 per share, vesting over three years from the date of grant; 578,500 shares of restricted

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stock units vesting three years from the date of grant; and 107,142 shares of restricted stock units vesting one year from the date of grant to our outside directors.

 

During the nine months ended September 30, 2013, we issued stock-based compensation awards to certain employees and directors as follows:  920,004 stock options to purchase common shares at an exercise price of $4.80 per share, vesting over three years from date of grant; 213,996 stock appreciation rights at an exercise price of $4.80 per share, vesting over three years from date of grant; and 190,002 shares of restricted stock vesting at three years from date of grant.

 

Income Taxes

 

We have recognized an income tax expense of $2.4 million and $1.3 million for the three and nine months ended September 30, 2014, respectively, as compared to an income tax benefit of $0.8 million and $2.1 million for the three and nine months ended September 30, 2013, respectively. Beginning in the fourth quarter of 2013, we determined that we would  have sufficient taxable income in the U.S. from the expected sale of the remaining equity interest in Harvest Holding that caused us to remove the valuation allowance recorded against our net U.S. deferred tax assets. Consistent with that assumption we have recognized a current tax benefit associated with operating losses incurred in the U.S. for the three and nine months ended September 30, 2014.  However during these same periods the recognized current tax benefit was offset by deferred tax expenses associated with additional undistributed earnings from foreign subsidiaries and the removal of deferred tax assets attributable to cancelled stock options. These transactions resulted in the recognition of the income tax expense noted above for the three and nine months ended September 30, 2014.

 

Noncontrolling Interests

 

Changes in noncontrolling interest were as follows:

 

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

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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 have elected an early adoption of this guidance, which we have applied to our treatment of our Indonesia interests.  See Note 9 – Indonesia for further information.

 

In May 2014, FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers” which is included in ASC 606, a new topic under the same name. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance supersedes the previous revenue recognition requirements and most industry-specific guidance. Additionally, the update supersedes some cost guidance related to construction type and production-type contracts.  In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.

 

The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:  (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The new guidance also provides for additional qualitative and quantitative disclosures related to: (1) contracts with customers, including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations); (2) significant judgments and changes in judgments which impact the determination of the timing of satisfaction of performance obligations (over time or at a point in time), the transaction price and amounts allocated to performance obligations; and (3) assets recognized from the costs to obtain or fulfill a contract.

 

For public entities such as the Company, the amendments in the update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.  An entity should apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. We are currently evaluating the impact of this guidance.  During the period from May 2011, the date we disposed of our interest in the Antelope Project, to date, we have not had any revenues as our oil and gas properties have not had any production.

 

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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The three months ended September 30, 2014 per share calculations above exclude 4.6 million options and 2.5 million warrants as they were anti-dilutive. The three months ended September 30, 2013 per share calculations above exclude 4.6 million options and 2.4 million warrants as they were anti-dilutive.

 

The nine months ended September 30, 2014 per share calculations above exclude 4.5 million options and 2.5 million warrants as they were anti-dilutive. The nine months ended September 30, 2013 per share calculations above exclude 3.8 million options and 2.4 million warrants as 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:

 

 

 

Note 6 – Investment in Equity Affiliate – Petrodelta

 

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

 

Petrodelta’s financial information is prepared in accordance with International Financial Reporting Standards (“IFRS”) which we adjust to conform to U.S. GAAP. All amounts through “Net Income under U.S. GAAP” as shown on the financials reported below, represent 100 percent of Petrodelta’s financial results. 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 is presented below for the three and nine months ended September 30, 2014 and 2013 and at September 30, 2014 and December 31, 2013:

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