UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K10-K/A
Amendment No. 2
(Mark One)
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20062007
or
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.: 1-10762
HARVEST NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
| | 77-0196707 |
| (State or other jurisdiction of incorporation or organization) | | 77-0196707
(I.R.S. Employer Identification Number) |
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| 1177 Enclave Parkway, Suite 300 | | |
| Houston, Texas | | 77077 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:(281) 899-5700
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
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| Common Stock, $.01 Par Value | | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class | | Name of each exchange on which registered |
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| None | | None |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ
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. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer” and “large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filero Accelerated Filerþ Non-Accelerated Filer | | | | | | |
| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller Reporting Companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 200629, 2007 was: $503,574,368.$444,689,722.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date. Class: Common Stock, par value $0.01 per share, on March 2, 2007,12, 2008, shares outstanding: 37,536,523.35,050,833.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 20072008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, not later than 120 days after the close of the registrant’s fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this annual report.
Restatement
Overview
Harvest Natural Resources, Inc. (“Harvest” or the “Company”) is filing this Amendment No. 2 on Form 10-K/A (this “Second Form 10-K/A”) to amend its Annual Report of Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission (“SEC”) on March 17, 2008, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 11, 2008 (the “Original Form 10-K”). Accordingly, pursuant to rule 12b-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Second Form 10-K/A contains complete text of Part II, Items 6, 7, 8 and 9A as amended as well as certain currently dated certifications.
The Second Form 10-K/A is being filed to amend and restate the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2007 and quarterly information for the quarter ended December 31, 2007. This amendment and restatement is required to adjust the consolidated financial statements for the correction of an error in the deferred tax adjustment to reconcile our share of Petrodelta S.A.’s (“Petrodelta”) Net Income reported under International Financial Reporting Standards (“IFRS”) to that required under accounting principles generally accepted in the United States of America (“GAAP”) and recorded within our Net income from unconsolidated equity affiliates.
The adjustment to record our share of Petrodelta’s Net Income under GAAP should have been limited to deferred tax adjustments related to non-monetary temporary differences impacted by inflationary adjustments under Venezuela law. During the 2008 year end close, we determined that restatements were necessary because since October 1, 2007 both monetary and non-monetary temporary differences recorded in Petrodelta’s IFRS financial statements had been adjusted in arriving at our GAAP consolidated financial statements rather than only the non-monetary temporary differences impacted by inflationary adjustments. Accordingly, we had understated our Net income from unconsolidated equity affiliates and Investment in equity affiliates.
For information relating to the effect of the restatements, see the following items:
Part II:
Item 6 – Selected Financial Data
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8 – Financial Statements and Supplementary Data
Item 9A – Controls and Procedures
Aside from the forgoing items, no other items are amended or modified in this Second Form 10-K/A.
Other than the restatement, this Second Form 10-K/A does not reflect events occurring after the date of the Original Form 10-K or modify or update those disclosures as affected by subsequent events. Such events include, among others, the events described in the Company’s Quarterly Reports on Form 10-Q and current reports on Form 8-K. This Second Form 10-K/A should be read in conjunction with our other reports filed with the SEC subsequent to December 31, 2007 pursuant to the Exchange Act.
HARVEST NATURAL RESOURCES, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
Harvest Natural Resources, Inc. (“Harvest” or the “Company”) cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words “budget”, “guidance”, forecast”, “anticipate”, “expect”, “believes”, “goals”, “projects”, “plans”, “anticipates”, “estimates”, “should”, “could”, “assume” and similar expressions are intended to identify forward-looking statements. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, we caution you that important factors could cause actual results to differ materially from those in the forward-looking statements. Such factors include our concentration of operations in Venezuela, the political and economic risks associated with international operations (particularly those in Venezuela), the anticipated future development costs for our undeveloped reserves, successful conversion of Venezuelan assets to a mixed company,drilling risks, the risk that actual results may vary considerably from reserve estimates, the dependence upon the abilities and continued participation of certain of our key employees, the risks normally incident to the exploration, operation and development of oil and natural gas properties, risks incumbent to being a minority shareholder in a corporation, the permitting and the drilling of oil and natural gas wells, the availability of materials and supplies necessary to projects and operations, the price for oil and natural gas and related financial derivatives, changes in interest rates, basis risk and counterparty credit risk in executing commodity price risk management activities, the Company’s ability to acquire oil and natural gas properties that meet its objectives, changes in operating costs,availability and cost of drilling rigs, 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, availability of sufficient financing, changes in weather conditions, and ability to hire, retain and train management and personnel. SeeItem 1A - Risk FactorsandItem 7 –— Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.
Item 1. Business
Executive Summary
Harvest Natural Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development, production and disposition of oil and natural gas properties since 1989, when it was incorporated under Delaware law. Over our history, weWe have acquired and developed significant interests in the Bolivarian Republic of Venezuela (“Venezuela”) through our subsidiary Harvest Vinccler, S.C.A. (“Harvest Vinccler”) and the Russian Federationour equity affiliate, Petrodelta S.A. (“Russia”Petrodelta”) and have undeveloped acreage offshore of the People’s Republic of China (“China”). In 2007, we executed a sale and purchase agreement for a partial interest in the production sharing contract related to the Dussafu Marin field offshore Gabon in West Africa (“Dussafu PSC”); and a farm-in agreement for a partial interest in the production sharing contract related to the Budong-Budong field onshore Indonesia (“Budong PSC”). All conditions precedent in the agreements are complete except for governmental approvals.
Currently, our only producing assets areasset is in Venezuela. Since 1992, our subsidiary, Harvest Vinccler, S.C.A. (“Harvest Vinccler”), has been providing operating services to Petroleos de Venezuela, S.A. (“PDVSA”) for the South Monagas Unit under an Operating Service Agreement (“OSA”). However, beginning in 2005, the government of Venezuela initiated a series of actions to compel companies with operating service agreements to convert those agreements into new companies in which PDVSA would have a majority interest. On March 31, 2006, Harvest Vinccler signed a Memorandum of Understanding (the “MOU”) with two affiliates of PDVSA, Corporación Venezolana del Petroleo S.A. (“CVP”) and PDVSA Petroleo S.A. (“PPSA”), to convert the OSA into a minority interest in Empresa Mixta Petrodelta S.A. (“Petrodelta”). The MOU is subject to certain conditions, including execution of a conversion contract, and Venezuelan government approvals.Petrodelta. On August 16, 2006, the MOU was amended to provide for the addition of the Isleño, El Salto and Temblador fields (“New Fields”) to Petrodelta as additional consideration for ourthe conversion of the OSA to Petrodelta. On December 18, 2006, at our special meeting of the stockholders, the transactions contemplated by the MOU were approved. AsOn September 11, 2007, we signed the Contract of this report,Conversion (“Conversion Contract”), and on October 3, 2007, together with CVP, we have not yet obtainedformed and funded Petrodelta. On October 25, 2007, the governmental approvals necessaryVenezuelan Presidential Decree which formally transferred to completePetrodelta the conversion,rights to the Uracoa, Tucupita and Bombal fields (“SMU fields”) and the timingNew Fields, subject to the conditions of the Conversion Contract, was published in the Official Gazette. Harvest Vinccler has transferred all of its tangible assets and probability for such approvalcontracts, permits and rights related to the SMU fields in Venezuela to Petrodelta. In January 2008, a majority of Harvest Vinccler’s employees accepted positions with Petrodelta. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the SMU Fields and New Fields (collectively “Petrodelta Fields”). HNR Finance B.V. (“HNR Finance”) has a 40 percent ownership interest in Petrodelta. As we indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent interest in Petrodelta, and our partner, Oil & Gas Technology Consultants
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(Netherlands) Coöperatie U.A. (“OGTC”), a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (“Vinccler”), indirectly owns the remaining eight percent interest. CVP owns the remaining 60 percent. At our request, CVP has added HNR Finance as a party to the Conversion Contract. Petrodelta is uncertain.governed by its own board of directors, charter and bylaws.
In April 2006, the Venezuelan National Assembly passed legislation terminating all operating service agreements and
directingdirected the government to take over the operations carried out by the private companies without prejudice to the incorporation of mixed companies for that purpose. This action, coupled with the unfinished conversion to Petrodelta,
has left Harvest Vinccler without a contractual means recognized by the government of Venezuela to address revenues or costs and expenses
since March 31, 2006.from April 1, 2006 until October 25, 2007. As a result of this situation, our consolidated financial statements prepared in accordance with generally accepted accounting
principalsprinciples in the
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United States of America (“GAAP”) for the year ended December 31,from April 1, 2006 dountil September 30, 2007, did not reflect the net results of our producing operations in Venezuela forVenezuela. Since the last three quarters of the year. We will not be able to includeConversion Contract terms have been fulfilled, we have recorded the results of operations and economic benefits of our Venezuelan operationsownership in our consolidated financial statements until the conversion to Petrodelta is completed. Although the MOU provides that upon completion of the conversion, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed onfrom April 1, 2006 this adjustment will not occur untilthrough December 31, 2007 in the conversion is completed.fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates.
Since signing the MOU in March 2006, CVP has designated its board members and a General Manager and President for Petrodelta. While Petrodelta bothhas been formed, funded and is the legal owner of whom influence Harvest Vinccler’s operations and staffing.the Petrodelta Fields, Harvest Vinccler continuescontinued in the day-to-day operations of its properties in Venezuela, and during the last three quartersPetrodelta Fields until the end of 2006, it has accruedJanuary 2008. During 2007, Harvest Vinccler advanced cash advancesto Petrodelta of $36.3$47.7 million to fund operations.its operations of which $8.0 million remains to be repaid as of February 29, 2008.
At the request of PDVSA,December 31, 2007, Harvest Vinccler invoiced PDVSAhad one loan outstanding with a Venezuelan bank for these costsa total of 20 billion Venezuela Bolivars (“Bolivars”) (approximately $9.3 million). This loan is cash collateralized by $6.8 million deposited in a U. S. bank. The loan represents the remaining balance originally borrowed in 2006 to pay income tax assessments and $21.2 million, representing the second and third quarter advances, have been reimbursed. Harvest Vinccler invoiced PDVSA for fourth quarter advances of $15.1 million in February 2007. In 2006, Harvest Vinccler resolved and substantially paid all of the tax claims made byrelated interest to the SENIAT, the Venezuelan income tax authority. Harvest Vinccler paid $73.8 million additional taxes
In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. Although the full cost method of accounting for oil and gas exploration and development continues to be an accepted method of accounting for oil and gas properties, the successful efforts method of accounting as prescribed by SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies is the preferred method. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, financial information for prior periods has been restated to reflect retrospective application of the successful efforts method. We believe the successful efforts method provides a more transparent representation of our results of operations and the ability to assess our future investments in oil and gas properties for impairment based on their estimated fair values rather than being required to base valuation on prices and costs as of the balance sheet date. The significant differences between successful efforts and full cost accounting for oil and gas properties relate to the expensing of exploration activities and related interestunsuccessful exploratory drilling activities. The expensing of these costs can create volatility in the statement of operations. The change in accounting principle resulted in a cumulative, non-cash increase to retained earnings of $52.4 million, net of income tax, as of December 31, 2004. Retained earnings increased due to the reversal of ceiling test write downs in prior years required under the full cost accounting rules of the Securities and Exchange Commission (“SEC”). There were no such impairments under the successful efforts accounting rules. The effect of the accounting change on income from continuing operations for the periods of 2001 through first quarter 2006.
Atyears ended December 31, 2006 Harvest Vinccler had three loans outstanding with two Venezuelan banks forand 2005 was a totaldecrease of 225 billion Venezuelan Bolivars (“Bolivars”) (approximately $104.7 million). These loans are collateralized by $88.9$4.9 million deposited in two U. S. banks. The loans were used to meet the SENIATand $15.0 million, net of income tax, assessmentsor $0.13 and related interest, refinance a portion of one$0.39 per diluted share, respectively. The decrease in income from continuing operations was due to an increase in depletion expense. There was no effect on cash and cash equivalents. For additional information on the impact of the Bolivar loanschange to the successful efforts method of accounting seePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 — Organization and to fund operating requirements.Summary of Significant Accounting Policies — Property and Equipment and Change in Accounting Principle.
SeeItem 1 –— Business, Operations, Item 1A –— Risk Factors,andItem 7 –— Management’s Discussion and Analysis of Financial Condition and Results of Operationsfor a completemore detailed description of these and other events during 2006.2007.
As of December 31, 2007, we had total assets of $417.1 million, unrestricted cash in the amount of $120.8 million and no long-term debt. For the year ended December 31, 2007, we had total revenues of $11.2 million and
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net cash used in operating activities of $20.5 million. As of December 31, 2006, we had total assets of $422.7 million. We had$468.4 million, unrestricted cash in the amount of $148.1 million and long-term debt of $67.0 million,million. For the year ended December 31, 2006, we had total revenues of $59.5 million and net cash used in operating activities of $24.4 million. For the year ended December 31, 2005, we had total assets of $400.8 million. We had cash in the amount of $163.0 million, no long-term debt, total revenues of $236.9 million and net cash provided by operating activities of $114.7 million.
Our business strategy is to seek and develop large known resources in countries perceived as politically challenging. Our strategy is to diversify risk by adding projects in countries other than Venezuela. In executinghas broadened from our business strategy, we strive to:
| • | | maintain financial prudence and rigorous investment criteria; |
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| • | | access capital markets; |
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| • | | create a diversified portfolio of assets; |
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| • | | preserve our financial flexibility; |
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| • | | use our experience, skills and relationships to acquire new projects; and |
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| • | | keep our organizational capabilities in line with our rate of growth. |
While our strategy does notprimary focus on unexplored areas,Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems. We seek to leverage our Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of technical resources, opening of our London office, the planned 2008 opening of a Singapore office, the redeployment of resources from our Moscow office, as well as our earlier purchase of a 45 percent equity interest in Fusion Geophysical, L.L.C. (“Fusion”), we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. While exploration will become a larger part of our overall portfolio, we will consider appropriate exploration investments on an opportunistic basis.generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles.
InOur goal, with the conversion process in Venezuela our goal, post conversion,completed, is to influence the management and operations of Petrodelta while developing and producing the SMU fields and the Isleño, Temblador and El Salto fieldsPetrodelta Fields in the most efficient manner. We expect that amounts available for dividends will be distributed to Petrodelta’s ownersus on a quarterly basis.regular basis after a catch up dividend for the period of April 1, 2006 to December 31, 2007. Then Petrodelta is expected to reinvest a substantial portion of its earnings in its development and producing activities and, accordingly, we expect subsequent dividends to be minimal in the near-term.
We intend to use our available cash to pursue additional growth opportunities in Gabon, Indonesia, China and other countries other than Venezuela.that meet our strategy. However, the execution of this strategy ismay be limited by factors including access to additional capital timing for conversion and restrictions on the usereceipt of a significant portion of our cash.dividend from Petrodelta as well as the need to preserve adequate development capital in the interim.
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The ability to successfully execute our strategy is subject to significant risks including, among other things, conversion topayment of Petrodelta dividends, exploration, operating, risks, political, risks, legal risks and financial risks. SeeItem 1A –— Risk Factors,Item 7 –— Management’s Discussion and Analysis of Financial Condition and Results of Operationsand other information set forth elsewhere in this Annual Report on Form 10-K for a description of these and other risk factors.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”)SEC under the Securities Exchange Act of 1934.1934 (“Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC athttp://www.sec.gov.
We also make available, free of charge on or through our Internet website (http:(http://www.harvestnr.com)www.harvestnr.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the SecuritiesExchange Act of 1934 are also available on the website. In addition, we have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our chief executive officer, principal financial officer and principal accounting officer. The text of the Code of Business Conduct and Ethics has been posted on the Corporate Governance section of our website. We intend to post on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics applicable to our senior officers. Additionally, the Code of Business Conduct and Ethics is available in print to any person who requests the information. Individuals wishing to obtain this printed material should submit a request to Harvest Natural Resources, Inc., Attention1177 Enclave Parkway, Suite 300, Houston, Texas 77077, Attention: Investor Relations.
Operations
All of our operations are in Venezuela. Since 2005, Harvest Vinccler has been unable to execute its facilities and drilling program due to actions by the Venezuelan government, and daily production of oil and natural gas volumes have and will continue to decline. In 2006, we completed a ten-well workover program to mitigate the normal decline curve. Harvest Vinccler is currently operating the South Monagas Unit comprising the Uracoa, Tucupita and Bombal fields (the “SMU fields”) pending the completion of the conversion of the OSA to Petrodelta. We began the year with average oil deliveries of 22,000 barrels of oil per day (“Bopd”) and natural gas deliveries of 56 million cubic feet a day (“MMCFpd”). The fields currently produce approximately 17,000 Bopd and 37 MMCFpd.
The following table summarizes our Venezuela proved reserves, drilling and production activity, and financial operating data at the end of each of the years ended December 31, 2006, 2005 and 2004. The Venezuelan reserves are attributable to our OSA between Harvest Vinccler and PDVSA under which all mineral rights are owned by the Government of Venezuela. The reserve information presented below is net of a 20 percent deduction for the minority interest in Harvest Vinccler. Drilling and production activity and financial data are reflected without deduction for minority interest. For 2004 and 2005, the year-end reserves include production projected through termination of the OSA in 2012. In April 2006, the Venezuelan government unilaterally terminated the OSA.
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| | | | | | | | | | | | | |
| | | Harvest Vinccler | |
| | | Year Ended | |
| | | 12/31/06 | | | 12/31/05 | | | 12/31/04 | |
| | | (Dollars in 000’s) | |
RESERVE INFORMATION: | | | | | | | | | | | | |
| Proved Reserves (MBoe) | | | — | | | | 36,105 | | | | 84,418 | |
| Standardized measure of discounted future net cash flows | | $ | — | | | $ | 329,438 | | | $ | 544,980 | |
DRILLING AND PRODUCTION ACTIVITY: | | | | | | | | | | | | |
| Gross wells drilled | | | — | | | | 1 | | | | 16 | |
| Average daily production (Boe) | | | 29,389 | | | | 35,732 | | | | 36,418 | |
FINANCIAL DATA: | | | | | | | | | | | | |
| Oil and natural gas revenues | | $ | 59,506 | | | $ | 236,941 | | | $ | 186,066 | |
| Expenses: | | | | | | | | | | | | |
| Operating expenses and taxes other than on income | | | 9,451 | | | | 39,969 | | | | 33,297 | |
| Depletion | | | 9,904 | | | | 41,175 | | | | 34,108 | |
Income tax expense(a) | | | 20,076 | | | | 65,943 | | | | 38,968 | |
| | | | | | | | | | |
| Total expenses | | | 39,431 | | | | 147,087 | | | | 106,373 | |
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| Results of operations from oil and natural gas producing activities | | $ | 20,075 | | | $ | 89,854 | | | $ | 79,693 | |
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(a) | | Excludes taxes of $50.3 million recorded in 2006 due to the settlement of the SENIAT tax assessments. |
Until we complete the conversion to Since April 1, 2006, all of our current operations are conducted through our equity affiliate Petrodelta we will not have reserves to report under SEC guidelines and, accordingly, no reserves are reported as of December 31, 2006. The 2005 reserve information shown above has been reduced from 2004 to exclude reserves formerly classified as proved undeveloped. Under SEC standards for the reporting of oil and natural gas reserves, proved reserves are estimated quantities of crude oil and natural gas “which geological data and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirsunder existing economic and operating conditions.” (Emphasis added). The 2005 quantities of proved reserves have been reduced to remove undeveloped reserves because of the actions taken by the Venezuelan government beginning in 2005. After completion of the conversion to Petrodelta, we will report our net 32 percent of Petrodelta’s proved reserves. This will include the quantities of proved reserves attributable to the three fields to be added to Petrodelta as provided in the MOU.
South Monagas Unit
In July 1992, we and Venezolana de Inversiones y Construcciones Clerico, C.A., a Venezuelan construction and engineering company (“Vinccler”), signed a 20-year operating service agreement with Lagoven, S.A., an affiliate of PDVSA, to reactivate and further develop the SMU fields. We were the first U.S. company since 1976 to be granted such an oil field development contract in Venezuela. The OSA was one of the original 33 operating service agreementsHarvest Vinccler, HNR Finance and CVP entered into between PDVSA affiliates and private oil companies. Although it is our position that the OSA is stillConversion Contract in place and we continue in the day-to-day operations of the SMU fields, the Venezuelan government has terminated all operating services agreements effective April 2006.
Under the terms of the OSA, Harvest Vinccler is a contractor for a PDVSA affiliate. Harvest Vinccler is responsible for overall operations of the SMU fields, including all necessary investments to reactivate and develop the SMU fields. The Venezuelan government maintains full ownership of all hydrocarbons in the fields. In addition, the PDVSA affiliate maintains full ownership of equipment and capital infrastructure following its installation. The OSA provides for Harvest Vinccler to receive an operating fee for each barrel of crude oil delivered. It also provides Harvest Vinccler with the right to receive a capital recovery fee for certain of its capital expenditures, provided that such operating fee and capital recovery fee cannot exceed the maximum total fee per barrel set forth in the agreement. Historically, our maximum total fee under the OSA averaged approximately 48 percent of the price of West Texas Intermediate (“WTI”). Under an amendment we signed in August 2005 to limit our fee, the fee has historically averaged approximately 47 percent of the price of WTI. In September
2002, Harvest Vinccler and PDVSA signed an amendment to the OSA, providing for the delivery of up to 198 million cubic feet (“Bcf”) of natural gas through July 2012 at a price of $1.03 per thousand standard cubic feet (“Mcf”). The OSA stipulated that all payments for oil and natural gas were to be paid in U.S. Dollars. Despite these4
requirements, PDVSA paid the fee for first quarter 2005 deliveries 50 percent in U.S. Dollars and 50 percent in Bolivars. Subsequent quarterly payments for 2005 and the first quarter of 2006 for oil and natural gas deliveries were received 75 percent in U.S. Dollars and 25 percent in Bolivars.
Petrodelta
Upon receipt of the Venezuelan government approvals contemplated by the MOU, Harvest Vinccler and, we believe, HNR Finance B.V. (“HNR Finance”), and CVP will enter into a Contract of Conversion (the “Conversion Contract”).2007. HNR Finance is a DutchNetherlands private company with limited liability. HNR Finance owns a 99.9 percent limited partnership interest in Harvest Vinccler, and Harvest Vinccler Ltd., a Cayman Islands exempted company, owns a 0.1 percent general partnership interest in Harvest Vinccler. All of the equity interest in HNR Finance and Harvest Vinccler Ltd. is owned by Harvest VincclerHarvest-Vinccler Dutch Holding B.V., a DutchNetherlands private company with limited liability. We own an 80 percent equity interest in Harvest VincclerHarvest-Vinccler Dutch Holding B.V. The remaining 20 percent equity interest is owned by Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A. (“OGTC”). OGTC is controlled by an affiliate of Vinccler.
Upon executionOGTC. In addition, we own 100 percent of the Conversion Contract,WAB-21 petroleum contract in the South China Sea for which we are the operator. During the fourth quarter of 2007, we entered into a sale and purchase agreement for a 50 percent ownership interest in the Dussafu PSC, which we expect to operate as soon as final approvals are received; and a farm-in agreement for an initial 47 percent ownership interest, which may increase to a 54.65 percent ownership interest, in the Budong PSC, which we may operate during the production phase. SeeItem I — Business, Dussafu Marin, Offshore GabonandBudong-Budong, Onshore Indonesiafor a more detailed description.
Petrodelta
General
On October 25, 2007, the Venezuelan Presidential Decree which formally transfers to Petrodelta will be formed. Subjectthe rights to the Petrodelta Fields subject to the conditions of the Conversion Contract as of the closing date establishedwas published in the Conversion Contract, the OSA will be cancelled, Harvest Vinccler will transfer substantially all of its tangible assets and contracts, permits and rights related to the SMU fields in Venezuela to Petrodelta, andOfficial Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the SMU fields, as well as the Isleño, Temblador and El Salto fields which will have been awarded to Petrodelta. Upon completion of conversion, HNR Finance will have a 40 percent ownership interest in Petrodelta. Since we indirectly own 80 percent of HNR Finance, we will indirectly own a net 32 percent in Petrodelta and Vinccler will indirectly own the remaining eight percent. CVP will own the remaining 60 percent. We have requested CVP to add HNR Finance as a party to the Conversion Contract.
Exploration and production activities under the Conversion Contract will be conducted by PetrodeltaFields for a maximum period of 20 years.years from October 25, 2007. Petrodelta will undertake its operations in accordance with the business plan agreed to by CVP and Harvest Vinccler which will beBusiness Plan as set forth in Annex I to the Conversion Contract.Contract (“Business Plan”). Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with the business plan.Business Plan. The business planBusiness Plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. Harvest Vinccler has proposed a business plan to CVP for Petrodelta, but it has not been formally approved.The 2008 budget of Petrodelta’s Business Plan was approved by its shareholders on January 23, 2008.
Petrodelta will adopthas adopted policies and procedures governing its operations, including, among others, policies and procedures for safety, health and environment, contracting, maintenance of insurance, accounting, banking and treasury and human resources, following the guidelines established by CVP. To the extent possible, such policies and procedures will be consistent with the policies and procedures of PDVSA and the ultimate parent company of Harvest Vinccler.HNR Finance. Petrodelta will hirehas hired personnel, largely from Harvest Vinccler,Vinccler; and the shareholders will appointBoard of Directors of Petrodelta has appointed the management of Petrodelta. Harvest Vinccler will transfer or assign its employees requestedCertain of these appointments are made by the boardshareholders. Effective August 9, 2007, Mr. Karl L. Nesselrode, Vice President, Engineering and Business Development of directorsHarvest Natural Resources, Inc. (“Harvest”), accepted a long-term secondment to Petrodelta. Harvest VincclerPetrodelta as its Operations and Technical Manager. Per Petrodelta’s bylaws, the Operations and Technical Manager’s position is designated as our appointment. Mr. Nesselrode will fill its shareremain an officer of management positions with employees or secondees to Harvest Vinccler.Harvest. The General Manager of Petrodelta will be(CVP appointment) has been appointed by the Board of Directors and will beof Petrodelta. This position is in charge of the daily management of the business of Petrodelta and will havehas the power and duties customary to manage, direct and supervise the accounting of Petrodelta. CVP has the right to nominate the General Manager to Petrodelta while HNR Finance has the right to nominate the Technical and Operations Manager. CVP also has the right to nominate the Manager of Prevention and Loss Control.
Petrodelta
will beis governed
by a board of directors in accordance with the Charter and
By-lawsBylaws of Petrodelta as set forth in Annex E to the Conversion
Contract.Contract (“Charter and Bylaws”). Under the Charter and
By-Laws,Bylaws, matters requiring shareholder approval may be approved by a simple majority with the exception of certain specified matters which require the approval by the holders of at least 75 percent of the capital stock. These matters include: most changes to the Charter and
By-laws;Bylaws; changes in the capital stock of Petrodelta that would alter the percentage participation of HNR Finance or CVP; any liquidation or dissolution of Petrodelta; any merger, consolidation or business combination of Petrodelta; disposition of all or any substantial part of the assets of Petrodelta, except in the ordinary course of business; any financing agreement for an amount greater than $10 million; approval or modification of Petrodelta’s financial statements; creation of certain reserve funds; any distribution of dividends or return of paid-in surplus; changes to the policy regarding dividends and other distributions established by the Charter and
By-laws;Bylaws; changes to the
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business plan; Business Plan; changes to the contractContract for saleSale and purchasePurchase of hydrocarbonsHydrocarbons with PPSA; contracts with shareholders or affiliates that are not at market price; any social investment in excess of the amount required by the Venezuelan government; any waiver of material rights or actions with respect to litigation involving more than $1 million; selection of external auditors; appointment of any judicial representative or general agent of Petrodelta; and designation of a liquidator in the event of the liquidation of Petrodelta.
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The Board of Directors of Petrodelta will consistconsists of five directors, three of whom are appointed by CVP, including the President of the Board, and two of whom are appointed by HNR Finance. Decisions of the Board of Directors will beare taken by the favorable vote of at least three of its members, except in the case of any decision implementing a decision of the Shareholders’ Meeting relating to any of the matters where a qualified majority is required, in which case, a favorable vote of four members will be required. The Board of Directors has broad powers of administration and disposition expressly granted in the Charter and By-laws of Petrodelta.Bylaws. The powers include: proposing budget and work programs; presenting the annual report to the shareholders; appointing and dismissing personnel; making recommendations regarding financial reserves and utilization of surplus; making proposals on dividends consistent with the By-lawsCharter and Charter of Petrodelta;Bylaws; agreeing on contracts consistent with the work programs and budgets; opening and closing bank accounts; make, accept, endorsemaking, accepting, endorsing and guaranteeguaranteeing bank drafts and other commercial instruments consistent with work programs and budgets; and implementing policies and procedures of Petrodelta.procedures.
The sale of oil and gas by Petrodelta to the Venezuelan government will beis pursuant to a contractContract for saleSale and purchasePurchase of oil and gasHydrocarbons with PPSA.PPSA signed on January 17, 2008. The form of the agreement is set forth in Annex K to the Conversion Contract. Crude oil delivered from the SMU fieldsPetrodelta Fields to PDVSA will bePPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference pricedprice and prevailing market conditions. Natural gas delivered from the SMU fieldsPetrodelta Fields to PDVSA will bePPSA is priced at $1.54 per thousand cubic feet. The reference price for crude oil and the price for natural gas produced from the Temblador, El Salto and Isleño fields has not been set under the contract. PPSA willis obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced production month by wire transfer, in United States Dollars (“U.S. Dollars”) in the case of payment for crude oil and natural gas liquids delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by Petrodelta. Any dividend paid by Petrodelta will be made in U.S. Dollars.
An unofficial English versiontranslation of the Conversion Contract is attached to our proxy statementQuarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed with the SEC on November 6, 2006 in connection with our special meeting of stockholders to approve the conversion to Petrodelta.1, 2007.
Once the conversion is completed, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006. The adjustment will take into account the value of oilLocation and natural gas produced from April 1, 2006 and the costs incurred by Harvest Vinccler in relation to such production.Geology
South Monagas Unit Fields (“SMU Fields”)
Uracoa Field
There are currently 8280 oil and natural gas producing wells and five water injection wells in the field. The current production facility has capacity to handle 60 thousand barrels (“MBbls”) of oil per day, 130 MBbls of water per day, and storage of up to 75 MBbls of crude oil. All natural gas presently being delivered by Harvest VincclerPetrodelta is produced from the Uracoa field.
Tucupita Field
There are currently 1917 oil producing wells and five water injection wells at Tucupitain the field. The Tucupita production facility has capacity to process 30 MBbls of oil per day, 125 MBbls of water per day and storage for up to 60 MBbls of crude oil. The oil is transported through a 31-mile, 20 MBbls of oil per day pipeline from the Tucupita field to the Uracoa plant facilities.
Bombal Field
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The East Bombal field was drilled in 1992, and currently has onetwo producing well.wells. There are currently two oil producing wells in the West Bombal field. The fluid produced from West Bombal field flows through a six-mile pipeline and is tied into the 31-mile Tucupita oil pipeline to the Uracoa plant facilities. Development of the East Bombal field has been postponed pending completion of the conversion of the OSA to Petrodelta.incorporated into Petrodelta’s long term development plan.
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Infrastructure and Facilities
Harvest VincclerPetrodelta has constructed a 25-mile oil pipeline from its oil processing facilities at Uracoa to PDVSA’s storage facility, the custody transfer point. The operating service agreementmarketing contract specifies that the oil stream may contain no more than one percent base sediment and one percent water. Quality measurements are conducted both at Harvest Vinccler’sPetrodelta’s facilities and at PDVSA’s storage facility.
In 2003, we built and completedPetrodelta has a 64-mile pipeline with a normal capacity of 70 million cubic feet (“MMcf”) of natural gas per day and a design capacity of 90 MMcf of natural gas per day, a gas gathering system, upgrades to the UM-2 plant facilities and new gas treatment and compression facilities.day.
In August 1999,Petrodelta has assumed from Harvest Vinccler sold its power generation facilities located inas part of the Uracoa and Tucupita fields. Concurrently withconversion the sale, Harvest Vinccler entered into a long-term power purchase agreements with the purchaser of the facilities to provide for the electrical needs, of the field throughout the remaining term of the operating service agreement. Harvest Vinccler has entered into long-term agreements for the leasing of compression and the operation and maintenance of the gas treatment and compression facilities.facilities at the Uracoa and Tucupita fields through 2012.
The Isleño, Temblador and El Salto Fields (“New Fields”)
The Isleño, Temblador and El Salto fields to beNew Fields transferred to Petrodelta after conversion are located in the same geographic area and have the same geology and productive formations as the SMU fields.Fields. As with the SMU fieldsFields before Harvest Vinccler’s entry in 1992, there hadhas been minimal development activity in the three fields during the last 20 years.
Isleño Field
The Isleño fields werefield was discovered in 1953. Two-dimensional2-D seismic data is available over a portion of the Isleño fields.field. Seven oil appraisal wells have been drilled in Isleño which have confirmed the presence of commercial oil deposits. The fields arefield is located near existing infrastructure in the SMU Uracoa field.Fields. Petrodelta’s business planBusiness Plan projects full development of the Isleño fieldsfield over the next three years.
Temblador Field
The Temblador field was discovered in 1936 and developed in the 1940s and the 1950s. Temblador has produced approximately 118 million barrels of oil equivalent (“Boe”) and 6434 billion cubic feet of natural gas from 155 wells since 1936. Three-dimensional3-D seismic is available over the entire Temblador field.
El Salto Field
The El Salto field was discovered in 1936. A total of 31 appraisal wells have been drilled identifying nine productive structures and six productive formations. The field has produced less than 1 million Boe and is currently dormant. Three-dimensional3-D seismic data is available over one-third of the El Salto field. TheWe believe the El Salto field has substantial exploration upside from several fault blocks, which have been identified using 2-D seismic data but have not yet been confirmed through drilling.
Business Plan of Petrodelta
WhilePetrodelta’s Business Plan was approved as part of the business plan for Petrodelta has not yet been finalized, we envisionconversion process.
Petrodelta’s immediate focus will be the plan to call for the immediate resumption of the suspended development of the SMU fields as well as appraisal and development of the Isleño, Temblador and El Salto fields.
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Harvest Vinccler had previously identified and submitted in excess of 20 development wells for approvaldrilling in the SMU fields. These wellsUracoa field which is expected to result in a rapid increase in production. Concurrently, Petrodelta will likely beacquire and process or reprocess existing 3-D seismic over the immediate focus of the restarted development program in Petrodelta. Concurrently, we envision the timely appraisal and development of the Isleño field and further development of the Temblador field. We believe theNew Fields. Isleño field production can be integrated into the existing Uracoa field infrastructure providing for early production from the field. Temblador field production would be processed at existing field facilities. The El Salto field is believed to contain substantial undeveloped reserves. Accordingly, we expect to acquire additional three-dimensional3-D seismic and undergo significant appraisal and development in a timely manner to provide for larger scale development implementation. Overall, production is expected to peak four to six years from commencement of drilling by Petrodelta.
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Production, Prices and Lifting Cost Summary
In the following table we have set forth the net production, average sales prices and average operating expenses for the year ended December 31, 2007 and the period April 1, 2006 through December 31, 2006 for Petrodelta. The presentation for Petrodelta includes 100 percent of the production (in thousands, except per unit information).
| | | | | | | | | |
| | | Year Ended | | Nine Months Ended |
| | | December 31, 2007 | | December 31, 2006 |
Venezuela | | | | | | | | |
| Crude Oil Sales (Bbls) | | | 5,374 | | | | 5,211 | |
| Natural Gas Sales (Mcf) | | | 13,456 | | | | 11,519 | |
| Average Crude Oil Sales Price ($ per Bbl) | | $ | 58.61 | | | $ | 50.98 | |
| Average Natural Gas Sales Price ($ per Mcf) | | $ | 1.54 | | | $ | 1.54 | |
| Average Operating Expenses ($ per Boe) | | $ | 3.12 | | | $ | 3.19 | |
Royalty-in-kind paid on gas used as fuel was 3,882 Mcf and 3,285 Mcf for 2007 and 2006, respectively.
Acreage
The following table summarizes the developed and undeveloped acreage that we hold under concession as of December 31, 2007:
| | | | | | | | | | | | | | | | | |
| | | Developed | | Undeveloped |
| | | Gross | | Net | | Gross | | Net |
| Petrodelta | | | 16,432 | | | | 6,573 | | | | 230,672 | | | | 92,269 | |
| | | | | | | | | | | | | | | | | |
We have recorded the results of operations and economic benefits of our ownership in Petrodelta from April 1, 2006 through December 31, 2007 in the fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates. Petrodelta’s results and operating information is more fully described inPart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 — Venezuela Operations — Petrodelta, S.A.
Risk Factors
We face significant risks in Venezuela.our Petrodelta investment. These risks and other risk factors are discussed inItem 1A –— Risk FactorsandItem 7 –— Management’s Discussion and Analysis of Financial Condition and Results of Operations.
WAB-21, South China Sea (Benton Offshore China Company)
General
In December 1996, we acquired Crestone Energy Corporation, subsequently renamed Benton Offshore China Company. Its principal asset is a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area. The WAB-21 petroleum contract covers 6.2 million acres in the South China Sea, with an option for an additional 1.25 million acres under certain circumstances, and lies within an area which is the subject of a border dispute between the People’s Republic of China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with another company. The border dispute has lasted for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute.
Location and Geology
The WAB-21 contract area is located in the West Wan’an Basin (Nam Con Son) on the South China Sea. Its western edge lies approximately 5020 miles southeast of the Dai Hung (Big Bear) Oil Field. The block is to the east of significant natural gas discoveriesfields at Lan Tay and Lan Do, which are reported to contain two trillion cubic feet of natural gas.gas and commenced production in November 2002. WAB-21 is also adjacent to the 2005 Thien Ung discovery which tested oil and natural gas and lies east of the Dua and BlackbirdChim Sao (formerly Blackbird) discoveries thatwhich successfully tested oil and gas in 2006. The WAB-21
8
contract area covers several similar structural trends and geological formations, each with potential for hydrocarbon reserves in possible multiple pay zones similar to the known fields and discoveries.
Drilling and Development Activity
Due to the border dispute between China and Vietnam, we have been unable to pursue an exploration program during phase one of the contract. As a result, we have obtained license extensions, with the current extension in effect until May 31, 2007.2009. While no assurance can be given, we believe we will continue to receive contract extensions so long as the border disputes persist.
Activities by AreaUndeveloped Acreage
Acreage
The following table summarizes our consolidated activitiesthe undeveloped acreage that we hold under concession as of December 31, 2007:
| | | | | | | | | |
| | | Undeveloped |
| | | Gross | | Net |
| China | | | 7,470,080 | | | | 7,470,080 | |
| | | | | | | | | |
Title to Undeveloped Acreage
The WAB-21 petroleum contract lies within an area which is the subject of a border dispute between China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with a third party. The border dispute has existed for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. It is uncertain when or how this dispute will be resolved, and under what terms the various countries and parties to the agreements may participate in the resolution.
Dussafu Marin, Offshore Gabon
General
In November 2007, we executed a sale and purchase agreement for the purchase of a 50 percent interest in the Dussafu PSC. All conditions precedent to the sale and purchase agreement are complete except for final government and partner approvals. We anticipate receiving final approvals during the first half of 2008. On receipt of final partner approval, we will become the operator of the Dussafu PSC. The purchase will be recorded in the quarter in which approvals are received.
Location and Geology
The Dussafu PSC contract area is located offshore Gabon, adjacent to the border with the Republic of Congo. It contains 680,000 acres with water depths to 1,000 feet. The Dussafu PSC has two small oil discoveries in the Gamba and Dentale reservoirs and a small natural gas discovery. Production and infrastructure exists in the blocks contiguous to the Dussafu PSC.
Drilling and Development Activity
The Dussafu PSC partners and the Republic of Gabon, represented by area.the Ministry of Mines, Energy, Petroleum and Hydraulic Resources (“Republic of Gabon”), recently agreed to enter into the second exploration phase of the Dussafu PSC with an effective date of May 28, 2007. The second exploration phase is a three-year work commitment which includes the acquisition and processing of 500 kilometers of 2-D seismic, geology and geophysical interpretation, engineering studies and the drilling of a conditional well. Leads in the underexplored syn-rift potential in the M’Baya and Lucina reservoirs that are commercial in immediately adjacent fields have been identified and are expected to be the focus of the 2008 work program, which includes the acquisition and processing of 500 kilometers of 2-D seismic data. The Dussafu PSC partners anticipate prospects can be generated to test these play concepts in 2009.
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| | | | | | | | | | | | | |
| (in thousands) | | Venezuela | | United States | | Total |
Year ended December 31, 2006 | | | | | | | | | | | | |
| Oil and natural gas sales | | $ | 59,506 | | | | — | | | $ | 59,506 | |
| Total Assets | | $ | 306,289 | | | $ | 116,422 | | | $ | 422,711 | |
| | | | | | | | | | | | | |
Year ended December 31, 2005 | | | | | | | | | | | | |
| Oil and natural gas sales | | $ | 236,941 | | | | — | | | $ | 236,941 | |
| Total Assets | | $ | 258,268 | | | $ | 142,530 | | | $ | 400,798 | |
| | | | | | | | | | | | | |
Year ended December 31, 2004 | | | | | | | | | | | | |
| Oil and natural gas sales | | $ | 186,066 | | | | — | | | $ | 186,066 | |
| Total Assets | | $ | 309,794 | | | $ | 57,692 | | | $ | 367,486 | |
Production, Prices and Lifting Cost SummaryGeneral
In February 2008, Indonesia’s oil and gas regulatory authority, BP Migas, approved the following tableassignment to us of a 47 percent interest in the Budong PSC located onshore West Sulawesi, Indonesia. Final government approval from Migas is pending. The Budong PSC includes a ten-year exploration period and a 20-year development phase. In the initial three-year exploration phase, which began January 2007, we expect to acquire, process and interpret approximately 500 kilometers of 2-D seismic and drill two exploration wells. Our partner, Tately Budong-Budong N.V. (“Tately”), will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have set forth, by country, our net production, average sales pricescontrol of major decisions and average operating expensesfinancing for the period ended March 31, 2006,project with an option to operate in the development and years ended December 31, 2005production phase if approved by BP Migas.
Location and 2004.Geology
The presentation for VenezuelaBudong PSC covers 1.35 million acres and includes 100 percentthe Lariang and Karama sub-basins which are the eastern onshore extension of the production, without deductionWest Sulawesi foldbelt (“WSFB”). Exploration to date in the basin is immature due to previously difficult jungle terrain, which is now accessible with the development of palm oil plantations and their related infrastructure. Field work performed over the last 10 years, as outcrops have been more accessible, has given a new understanding to the presence of Eocene source and reservoir potential that had not previously been recognized. Recent seismic surveys have greatly improved the understanding of the geology and enhanced the prospectivity of the offshore WSFB and, by analogy, the sparsely explored onshore area.
To date, a total of eight leads have been recognized. It will be necessary to acquire a grid of seismic data to confirm the structures and give an indication of Eocene target(s) within the section and to mature these leads into drillable prospects. The two identified sub-basins (Lariang and Karama) provide an opportunity to test prospects in two sub-basins.
Farm-In Agreement Terms
We acquired the 47 percent interest in the Budong PSC by committing to fund the first phase of the exploration program including the acquisition of 2-D seismic and drilling of the first two exploration wells. This commitment is capped at $17.2 million. Prior to drilling the first exploration well, subject to the estimated cost of that well, Tately will have a one-time option to increase the level of the carried interest to $20.0 million, and as compensation for minority interest.the increase, we will increase our participation to a maximum of 54.65 percent. This equates to a total carried cost for the farm-in of $9.1 million.
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2006(a) | | 2005 | | 2004 |
Venezuela(b) | | | | | | | | | | | | |
| Crude Oil Production (Bbls) | | | 1,894,101 | | | | 8,762,687 | | | | 8,152,261 | |
| Natural Gas Production (Mcf) | | | 4,506,094 | | | | 25,677,460 | | | | 31,059,416 | |
Average Crude Oil Sales Price ($per Bbl)(c) | | $ | 28.96 | | | $ | 24.02 | | | $ | 18.90 | |
| Average Natural Gas Sales Price ($per Mcf) | | $ | 1.03 | | | $ | 1.03 | | | $ | 1.03 | |
| Average Operating Expenses ($per Boe) | | $ | 3.49 | | | $ | 3.05 | | | $ | 2.50 | |
| | |
(a) | | Reflects oil and natural gas deliveries through March 31, 2006. |
|
(b) | | Information represents 100 percent of production. |
|
(c) | | Average crude oil sales price after hedging activity. |
Regulation
General
Our operations and our ability to finance and fund our growth strategy are affected by political developments and laws and regulations in the areas in which we operate. In particular, oil and natural gas production operations and economics are affected by:
| | • | | change in governments; |
| |
| | • | | civil unrest; |
| |
| | • | | price and currency controls; |
| |
| | • | | limitations on oil and natural gas production; |
| |
| | • | | tax, environmental, safety and other laws relating to the petroleum industry; |
| |
| | • | | changes in laws relating to the petroleum industry; |
| |
| | • | | changes in administrative regulations and the interpretation and application of such rules and regulations; and |
| |
| | • | | changes in contract interpretation and policies of contract adherence. |
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In any country in which we may do business, the oil and natural gas industry legislation and agency regulation are periodically changed, sometimes retroactively, for a variety of political, economic, environmental and
9
other reasons. Numerous governmental departments and agencies issue rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and our potential for economic loss.
Venezuela
On February 5, 2003, Venezuela imposed currency controls and created the Commission for Administration of Foreign Currency with the task of establishing the detailed rules and regulations and generally administering the exchange control regime. These controls fix the exchange rate between the Bolivar and the U.S. Dollar and restrict the ability to exchange Bolivars for U.S. Dollars and vice versa. The Bolivar is not readily convertible into the U.S. Dollar. We do not expect the Venezuelan currency conversion restriction to adversely affect our ability to meet short-term loan obligations and operating requirements for the foreseeable future.
No capital expenditures to comply with environmental regulations were required in 2004, 2005 or 2006. Harvest Vinccler is also subject to income, municipal and value-added taxes, and must file certain monthly and annual compliance reports with the national tax administration and with various municipalities.
Drilling and Undeveloped Acreage
For acquisitions of leases and producing properties, development and exploratory drilling, production facilities and additional development activities such as workovers and recompletions, we spent approximately (excluding our share of capital expenditures incurred by equity affiliates) $1.5 million, $9.0 million and $39.2 million in 2006, 2005 and 2004, respectively. Included in these numbers is $8.9 million and $33.5 million for the development of proved undeveloped reserves in 2005 and 2004, respectively.
We have participated in the drilling of wells as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2006 | | 2005 | | 2004 |
| | | Gross | | Net | | Gross | | Net | | Gross | | Net |
Wells Drilled: | | | | | | | | | | | | | | | | | | | | | | | | |
| Development: | | | | | | | | | | | | | | | | | | | | | | | | |
| Crude oil | | | — | | | | — | | | | 1 | | | | 0.8 | | | | 16 | | | | 12.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Average Depth of Wells (Feet) | | | — | | | | — | | | | — | | | | 4,349 | | | | — | | | | 5,443 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Producing Wells(1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Crude Oil | | | 103 | | | | 82.4 | | | | 108 | | | | 86.4 | | | | 124 | | | | 99.2 | |
| | |
(1) | | The information related to producing wells reflects wells we drilled, wells we participated in drilling and producing wells we acquired. |
All of our drilling activities were conducted on a contract basis with independent drilling contractors. We do not directly operate any drilling equipment.
Acreage
The following table summarizes the undeveloped acreage that we hold under concession as of December 31, 2006:
| | | | | | | | | |
| | | Undeveloped |
| | | Gross | | Net |
| China | | | 7,470,080 | | | | 7,470,080 | |
| | | | | | | | | |
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Title to Undeveloped Acreage
The WAB-21 petroleum contract lies within an area which is the subject of a border dispute between China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with a third party. The border dispute has existed for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. It is uncertain when or how this dispute will be resolved, and under what terms the various countries and parties to the agreements may participate in the resolution.
Competition
We encounter substantial competition from major, national and independent oil and natural gas companies in acquiring properties and leases for the exploration and development of crude oil and natural gas. The principal competitive factors in the acquisition of such oil and natural gas properties include staff and data necessary to identify, investigate and purchase such properties, the financial resources necessary to acquire and develop such properties, and access to local partners and governmental entities. Many of our competitors have influence, financial resources, staffs, data resources and facilities substantially greater than ours.
Environmental Regulation
Various federal, state, local and international laws and regulations relating to the discharge of materials into the environment, the disposal of oil and natural gas wastes, or otherwise relating to the protection of the environment may affect our operations and costs. We are committed to the protection of the environment and believe we are in substantial compliance with the applicable laws and regulations. However, regulatory requirements may, and often do, change and become more stringent, and there can be no assurance that future regulations will not have a material adverse effect on our financial position, results of operations and cash flows.
Employees
At December 31, 2006,2007, our Houston office had 18 full-time employees. Harvest Vinccler had 240 employees and ourOur Caracas, Moscow and London offices had 14, 11 and 5 employees, respectively. We augment our staffsemployees from time to time with independent consultants, as required. On February 26, 2008, we reduced the staff of our Moscow office to three employees and will be redeploying two of these employees to London. Mr. Robert Speirs will relocate and head our new Singapore office which is planned to open in 2008. The Singapore office will coordinate our eastern operations and business development.
Item 1A. Risk Factors
In addition to the other information set forth elsewhere in thisForm 10-K, the following factors should be carefully considered when evaluating us.
While approved by our stockholders, the conversion of the OSA to PetrodeltaWe may not be completed andable to meet the requirements of the global expansion of our business strategy. We have added a global exploration component to diversify our overall portfolio. In many locations, we may not recoverbe required to post performance bonds in support of a work program. We also intend to acquire underdeveloped, undeveloped and exploration properties from time to time for which the primary risks may be technical, operational or both.
Our strategy to identify, access and integrate hydrocarbon assets in known hydrocarbon basins globally carries greater deal execution, operating, financial, legal and political risks.The environments in which we operate are often difficult and the ability to operate successfully will depend on a number of factors, including our investments or be compensatedability to control the pace of development, our ability to apply “best practices” in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our services in Venezuela,projects. In addition, often the legal systems of these countries are not mature and our interests in Venezuelatheir reliability is uncertain. This may be unlawfully confiscated by the Venezuelan government.Since April 1, 2006,affect our operations in Venezuela have continued to be conducted pursuant to the terms of the OSA, which the government no longer recognizes and which it claims is illegal. As such, our future ability to contractually recover all or part ofenforce contracts and achieve certainty in our investmentsrights to develop and be compensated for our services depends on completing the process for the conversion of the OSA and transfer of our interests to Petrodelta. If we are unable to convert to Petrodelta, we may not be paid foroperate oil and natural gas produced after March 31, 2006. Further, if weprojects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control.
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Operations in areas outside the United States are unablesubject to successfully completevarious risks inherent in foreign operations.Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal systems and the conversion to Petrodelta, we believe the Venezuelanexclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government will seizesovereignty over our assets and take over Venezuelaninternational operations. Our recourseinternational operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States.
Estimates of oil and natural gas reserves are uncertain and inherently imprecise. This Annual Report on Form 10-K contains estimates of our proved oil and natural gas reserves based on our equity investment in Petrodelta. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.
The process of estimating oil and natural gas reserves is complex requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves set forth. Actual production, revenue, taxes, development expenditures and operating expenses with respect to our reserves will likely vary from the estimates used, and these variances may be material.
You should not assume that the present value of future net revenues referred to inPart IV, Item 15, Notes to the Consolidated Financial Statements, TABLE V — Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve QuantitiesandAdditional Supplemental Information on Oil and Natural Gas Producing Activities (unaudited) for Venezuelan Equity Affiliate as of December 31, 2007 and 2006, TABLE V — Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantitiesis the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in demand, changes in our ability to produce or changes in governmental regulations, policies or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from estimated proved reserves and their present value. In addition, the 10 percent discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with the oil and natural gas industry in general will affect the accuracy of the 10 percent discount factor.
Our future operations and our investments in equity affiliates are subject to numerous risks of oil and natural gas drilling and production activities.Oil and natural gas exploration and development drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be to pursue claims in arbitration for expropriationfound. The cost of our interestsdrilling and completing wells is often uncertain. Oil and natural gas drilling and production activities may be shortened, delayed or similar claims against the Venezuelan government. An arbitration proceeding may takecanceled as a numberresult of years to conclude and we can provide no assurances as to outcome.
Certain conditions to signing the Conversion Contract may not be met.Before we sign the Conversion Contract, certain conditions must be satisfied, mosta variety of factors, many of which are beyond our control. These conditions include approval by the Venezuelan Ministry of Energy and Petroleum (“MEP”) and the Venezuelan National Assembly; obtaining or filing all necessary consents, authorizations, orders or approvals of governmental authorities; making all necessary filings or registrations with governmental authorities and giving all requisite notifications to governmental authorities; completion of the Conversion Contract and all annexes, includingfactors include:
| • | | unexpected drilling conditions; |
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| • | | pressure or irregularities in formations; |
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| • | | equipment failures or accidents; |
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| • | | weather conditions; |
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| • | | shortages in experienced labor; |
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| • | | delays in receiving necessary governmental permits; |
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| • | | shortages or delays in the delivery of equipment; |
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business plan; and the award of the Isleño, Temblador and El Salto fields to Petrodelta by the Venezuelan government. | • | | delays in receipt of permits or access to lands; and |
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| • | | government actions or changes in regulations. |
Until conversion to Petrodelta is complete,The prevailing price of oil also affects the cost of and availability for drilling rigs, production equipment and related services. We cannot assure you the new wells we drill will be productive or that we will likely continue to incur expenses without receiving revenues.Even though it is our position that the OSA is still in place, as a result of actions by the government of Venezuela, Harvest Vinccler currently has no recognized agreement setting out its rights and obligations within Venezuela. Harvest Vinccler continues in the day-to-day operations of the SMU fields and continues to incur expenses in doing so; however, there are no contractual means recognized by Venezuela to receive revenuesrecover all or be reimbursed for costs and expenses during the period prior to the conversion to Petrodelta. Although the MOU provides that upon completion of the conversion, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006, this adjustment will not occur until and unless the conversion is completed. The timing for completing the conversion to Petrodelta is uncertain. While we continue to maintain cash reserves, our operations in Venezuela represent allany portion of our revenues, and the funds available to pursue our growth strategy may be adversely affected by the financial demands of continued operations in Venezuela during the conversion process.
Until the conversion to Petrodelta is complete and drilling operations resume, our production volumes will continue to decline.Since 2005, our volumes of crudeinvestment. Drilling for oil and natural gas deliveriesmay be unprofitable. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenues after operating and other costs.
Our oil and natural gas operations are subject to various governmental regulations that materially affect our operations. Our oil and natural gas operations are subject to various governmental regulations. These regulations may be changed in response to economic or political conditions. Matters regulated may include permits for discharges of wastewaters and other substances generated in connection with drilling operations, bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs, reports concerning operations, the spacing of wells, and unitization and pooling of properties and taxation. At various times, regulatory agencies have declined significantly. The declineimposed price controls and limitations on oil and natural gas production. In order to conserve or limit supplies of oil and natural gas, these agencies have restricted the rates of flow of oil and natural gas wells below actual production capacity. We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.
Our cash position and limited ability to access additional capital may limit our growth opportunities.At December 31, 2007, we had $120.8 million of available cash and, until Petrodelta pays a dividend, there will be no additional cash available from operations. Having a Petrodelta dividend as our sole source of cash flow limits our access to additional capital and our concentration of political risk in Venezuela may limit our ability to leverage our assets. In addition, our future cash position depends upon the payment of dividends by Petrodelta, in particular for the period from April 1, 2006 through December 31, 2007. While we believe such dividends, if available, will be paid, there is dueno assurance this will be the case. These factors may limit our ability to PDVSA’s refusal to allow us to carry outgrow through the acquisition of additional oil and gas properties and projects.
Competition within the industry may adversely affect our drillingoperations. We operate in a highly competitive environment. We compete with major, national and facilities programindependent oil and natural gas companies for 2005the acquisition of desirable oil and 2006natural gas properties and the natural declineequipment and labor required to develop and operate such properties. Many of these competitors have financial and other resources substantially greater than ours.
The loss of key personnel could adversely affect our ability to successfully execute our strategy.We are a small organization and depend on the field. Until conversion is completed,skills and experience of a few individuals in key management and operating positions to execute our business strategy. Loss of one or more key individuals in the resumption of any significant drilling operations is unlikelyorganization could hamper or delay achieving our strategy.
We may not receive the required government approvals for the Dussafu PSC and/or the Budong PSC.Although all conditions precedent to the Dussafu PSC sale and purchase agreement and the SMU field’s production volumesBudong PSC farm-in agreement have been met, there is no certainty that the Republic of Gabon or Indonesia’s Migas will continue to decline.approve the respective agreements. Without the governmental approvals, we will not have an interest in either asset.
IfWe no longer directly manage operations of Petrodelta.PDVSA, through CVP, exercises substantial control over operations, making Petrodelta subject to some internal policies and procedures of PDVSA as well as being subject to constraints in skilled personnel available to Petrodelta. These issues may have an adverse effect on the efficiency and effectiveness of Petrodelta operations.
Now that the conversion to Petrodelta is completed, we will beare a minority interest owner in Petrodelta.Upon conversion of the OSA to Petrodelta and transfer of our assets to Petrodelta,Even though we will behave substantial negative control provisions as a minority interest owner and no longer have sole control over operations. Ourin Petrodelta, our control of Petrodelta will beis limited to our rights under the Conversion Contract and its annexes and the Charter and By-Laws of Petrodelta.Bylaws. As a result, our ability to implement our business plan,or influence Petrodelta’s Business Plan, assure quality control, and set the timing and pace of development may be adversely affected.
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IfNow that the conversion to Petrodelta is completed, our estimates of reserves may not be realized. Ryder Scott Company, L.P. provided an estimate of reserves attributable to HNR Finance’s interest in the properties to be operated by Petrodelta. We cannot predict whether the volumes of reserves will ultimately be recovered, and volumes of reserves actually recovered may differ significantly from estimated quantities.
If the conversion to Petrodelta is completed, our flexibility in selling or exchanginghas a direct or indirect interest in Petrodelta to diversify our assets and acquire additional properties may be limited.We continue to look at alternatives to diversify our assets. However, the alternatives are limited. If the conversion to Petrodelta is completed,new sales contract with PPSA, and we decide to enter into a sale or exchange of all or part of our Venezuelan assetshave no experience with an unrelated third party, the third party must be approved by the Venezuelan government. The number of potential buyers that will be acceptablePPSA as to the Venezuelan government may be limited,timeliness of their payment of invoices.Under the OSA between Harvest Vinccler and this numberPDVSA, PDVSA had a history of potential buyers may be further affected and limited by country risk concerns. Further, a sale or exchangemaking timely payment of all or part of our Venezuelan assets after completing the conversion to Petrodelta may be subject to U.S. federal tax consequences.
If the conversion to Petrodelta is completed, CVP and PPSA might not have the funds available to reimburse usinvoices for oil and natural gas deliveries. Even though there is no reason not to believe that PPSA won’t make timely payment of invoices for oil and natural gas deliveries, made during the period prior to conversion.Pursuant to the MOU, CVP has agreed to make an economic adjustment to compensate us so as to achieve the same economic result as if the conversion had been completed on April 1, 2006. This adjustmentthere is to occur once the conversion is completed. However, there are no assurancesguarantee that CVP and PPSA will have adequate funds to make payment to us for the period dating back to April 1, 2006.
The total capital required for development of the fields in Venezuela may exceed the ability of Harvest Vinccler and CVP to finance.Our ability to fully develop the fields in Venezuela will require a significant investment. Our and CVP’s future capital requirements for the development of the SMU fields and the Isleño, Temblador and El Salto fields may exceed the cash available from existing cash flow and cash on hand. Our ability to secure financing is currently limited and uncertain, and has been and may be affected by numerous factors beyond our control, including the risks associated with operating in Venezuela. Because of this
financial risk, we12
may not be able to secure either the equity or debt financing necessary to meet our future cash needs for investment, which may limit our ability to fully develop the properties, cause delays with their development or require early divestment of all or a portion of those projects. Failure by us to meet a capital requirement could be a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta. In addition, CVP may be unable or unwilling to fund its share of capital requirements and our ability to require them to do so is limited.
The loss of key personnel or the ability to establish and retain an experienced and competent workforce in Venezuela could adversely affect our ability to successfully execute our business plan.Our ability to successfully implement the business plan for Petrodelta depends to a large degree on the skills and experience of individuals in key management and operating positions and retaining a capable workforce. We have no assurances that key employees will remain after the conversion to Petrodelta is completed or that Petrodelta will be able to attract and retain competent employees to replace those employees who do not remain with Petrodelta. Moreover, as a minority interest owner in Petrodelta, we have a limited ability to appoint key positions or control decisions on workforce staffing.
Pending conversion to Petrodelta, the actions of CVP, through its members to the Petrodelta board and its appointed General Manager or President, may adversely affect our ability to conduct operations and retain key personnel.
Contracting policies and procedures of Petrodelta could adversely affect successful execution of the business plan.Successful implementation of the business plan of Petrodelta will require the use of skilled and competitively priced contractors for the development of the fields, including the drilling of wells, building of infrastructure and providing essential services. Due to factors such as global competition and the business climate in Venezuela, contractors, labor, and materials and equipment may not be readily available at competitive prices. Further, as a minority interest owner in Petrodelta, our influence over contracting decisions and contracting policies and procedures is limited.case.
Petrodelta’s business planBusiness Plan will be sensitive to market prices for oil.Petrodelta will be operating under a business plan, the success of which will rely heavily on the market price of oil. To the extent that market values of oil decline, the business plan of Petrodelta may not be successful.adversely affected.
A decline in the market price of crude oil could uniquely affect the financial condition of Petrodelta.Under the terms of the Conversion Contract and other governmental documents, Petrodelta is subject to a special advantage tax (“ventajas especiales”) which requires that if in any year the aggregate amount of royalties, taxes and certain other contributions is less than 50 percent of the value of the hydrocarbons produced, Petrodelta must pay the government the difference. In the event of a significant decline in crude prices, the ventajas especiales could force Petrodelta to operate at a loss. Moreover, our ability to control those losses by modifying the business planBusiness Plan or restricting the budget is limited under the Conversion Contract.
Oil price declines and volatility could adversely affect Petrodelta’s future, our revenue, cash flowsdividends and profitability.Prices for oil fluctuate widely. Prices also affect the amount of cash flow available for capital expenditures and dividends from Petrodelta. Any restrictions on future dividends from Petrodelta may impact our ability to service our Venezuelan debt. Lower prices may also reduce the amount of oil that we can produce economically and lower oil production could affect the amount of natural gas we can produce. We cannot predict future oil prices. Factors that can cause fluctuations in oil prices include:
| | • | | relatively minor changes in the global supply and demand for oil; |
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| | • | | export quotas; |
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| | • | | market uncertainty; |
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| | • | | the level of consumer product demand; |
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| | • | | weather conditions; |
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| | • | | domestic and foreign governmental regulations and policies; |
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| | • | | the price and availability of alternative fuels; |
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| | • | | political and economic conditions in oil-producing and oil consuming countries; and |
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| | • | | overall economic conditions. |
Petrodelta may not be able to pay dividends on its operations.While we continue to maintain cash reserves, our investment in Petrodelta currently represents all of our near-term cash generating capability, and the funds available to pursue our growth strategy may be adversely affected by Petrodelta’s inability to pay a dividend.
The total capital required for development of the New Fields in Venezuela may exceed the ability of Petrodelta to finance.Petrodelta’s ability to fully develop the fields in Venezuela will require a significant investment. Petrodelta’s future capital requirements for the development of the New Fields may exceed the cash available from existing cash flow. Petrodelta’s ability to secure financing is currently limited and uncertain, and has been, and may be, affected by numerous factors beyond its control, including the risks associated with operating in Venezuela. Because of this financial risk, Petrodelta may not be able to secure either the equity or debt financing necessary to meet its future cash needs for investment, which may limit its ability to fully develop the properties, cause delays with their development or require early divestment of all or a portion of those projects. This could negatively impact our investment. If we are called upon to fund Petrodelta’s operations, our failure to do so could be considered a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta. In addition, CVP may be unable or unwilling to fund its share of capital requirements and our ability to require them to do so is limited.
We may not be able to replace production from Petrodelta with new reserves. In general, production rates and remaining reserves from oil and natural gas properties decline as reserves are depleted. The decline rates depend on reservoir characteristics. Our future oil and natural gas production is highly dependent upon our level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive and uncertain. We may be unable to make the necessary capital investment to maintain or
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If the conversion to Petrodeltaexpand our oil and natural gas reserves if cash flow from operations is not completed,reduced and external sources of capital become limited or unavailable. We cannot assure you that our ability to pursue other transactionsfuture exploration, development and acquisition activities will be limited.If the conversion to Petrodelta is not completed, we will continue to assess and consider other strategic alternatives for preserving value, including a transfer of allresult in additional proved reserves or part of our Venezuelan assets to another party, and we will continue to pursue other business opportunities and investments unrelated to Venezuela. There can be no assurance that we will be able to successfully pursue any such strategic alternatives. Without completion of conversion to Petrodelta, the alternatives available to us are more limited and subject to a number of significant variables.drill productive wells at acceptable costs.
The legal or fiscal regime for Petrodelta may change and the Venezuelan government may not honor its commitments.While we believe that the Conversion Contract and Petrodelta provide a basis for a more durable arrangement in Venezuela, the value of the businessinvestment necessarily depends upon Venezuela’s maintenance of legal, tax, royalty and contractual stability. Our recent experiences in Venezuela demonstrate that such stability should notcannot be assumed because the Venezuelan government may not honor its legal and contractual commitments.assured. While we have and will continue to take measures to mitigate our risks, no assurance can be provided that we will be successful in doing so or that events beyond our control will not adversely affect the value of our businessinvestment in Venezuela.
The actions of the Venezuelan government may cause us to file for international arbitration. As a result of the actions taken by PDVSA, MEP and the SENIAT, we delivered formal notices to Venezuelan government officials of an investment dispute under Venezuelan law and bilateral investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted through the International Centre for Settlement of Investment Disputes of the World Bank. An arbitration proceeding may take a number of years to conclude and we can provide no assurances as to its outcome.
Continuing to do business in Venezuela is subject to risk.Our operations in Venezuela are subject to various risks including, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, change in laws, exchange controls, war, insurrection, civil unrest, strikes and other political risks, being subject to foreign laws, legal systems and the exclusive jurisdiction of Venezuelan courts or tribunals, unilateral renegotiation of contracts with the Venezuelan government and changes in laws and policies governing operations of mixed companies. These factors increase our exposure to production disruptions and project execution risk.
Remaining in Venezuela may limit our ability to acquire other oil and gas properties.Under our business plan, Petrodelta may not be a significant source of dividends in its early years. Moreover, our lack of asset diversification and concentration of risk limits our access to both debt and equity capital. Therefore, our near-term growth and diversification must come from unrestricted cash on hand and asset-based lending, rather than cash or debt from our Venezuelan operations. This may limit the size and type of other projects we are able to acquire.
Tax claims by municipalities in Venezuela may adversely affect Harvest Vinccler’s financial condition.The municipalities of Uracoa and Libertador have asserted numerous tax claims against Harvest Vinccler which we believe are without merit. However, the reliability of Venezuela’s judicial system is a source of concern and it can be subject to local and political influences. Accordingly, no assurance can be given that the tax claims will be overturned. Enforcement of the claims through court order requested by the municipalities, even while the claims are under review, could lead to the seizure of Harvest Vinccler’s assets.
Our strategy to focus on Russia and other countries perceived to be politically challenging carries greater deal execution, operating, financial, legal and political risks.While we believe our established presence in countries perceived to be politically challenging and our experience and skills from prior operations position us well for future projects, doing business in Russia and other countries perceived to be politically challenging also carries unique risks. The operating environment is often difficult and the ability to operate successfully will depend on a number of factors, including our ability to control the pace of development, our ability to apply “best practices” in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of these countries are not mature and their reliability is uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and14
operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have operational and financial control. Recently, the Russian government began to consider legislation to restrict certain “strategic” projects in Russia to majority-owned Russian companies. If adopted, such legislation could adversely affect our ability to acquire projects in Russia consistent with our strategy.
Operations in areas outside the United States are subject to various risks inherent in foreign operations, and our strategy to focus on countries perceived to be politically challenging limits our risk diversification.Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental royalties, being subject to foreign laws, legal systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States. Our strategy to focus on countries perceived to be politically challenging increases our exposure to operating, financial and political risks.
Our cash position and limited ability to access additional capital may limit our growth opportunities.We have used $88.9 million of our cash as collateral for debt in Venezuela, and, until conversion to Petrodelta, there will be no additional cash available from operations. The unfinished conversion to Petrodelta also significantly limits our access to additional capital, and, after conversion, the concentration of our political risk in Venezuela may limit our ability to leverage our assets. In addition, our future cash position depends upon the payment of dividends by Petrodelta, in particular for the period from April 1, 2006 through the date of conversion. While we believe such dividends, if available, will be paid, there is no assurance this will be the case. These factors may limit our ability to grow through the acquisition of additional oil and gas properties and projects.
Our foreign operations expose us to foreign currency risk.Presently, our only operations are located in Venezuela. Venezuela is considered a highly inflationary economy. There are many factors which affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence. We have recognized significant exchange gains and losses in the past, resulting from fluctuations in the relationship of the Bolivar to the U.S. Dollar. It is not possible to predict the extent to which we may be affected by future changes in exchange rates. The majority of our Venezuelan receipts are denominated in U.S. Dollars. A large portion of our operating and capital expenditures are in U.S. Dollars. For a discussion of currency controls in Venezuela, seeItem 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources.Successful acquisition of projects in any international country may also expose us to foreign currency risk in that country.
Estimates of oil and natural gas reserves are uncertain and inherently imprecise. This Annual Report on Form 10-K contains estimates of our proved oil and natural gas reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Until we complete the conversion to Petrodelta, we will not have reserves to report under SEC guidelines and, accordingly, no reserves are reported as of December 31, 2006. Moreover, our quantities of proved reserves in 2005 were reduced to remove undeveloped reserves because the actions taken by the Venezuelan government created uncertainty as to whether these reserves would be recovered under the economic and operating conditions which existed in Venezuela (“Contractually Restricted Reserves”).
The process of estimating oil and natural gas reserves is complex requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves set forth. Actual production, revenue, taxes, development expenditures and15
operating expenses with respect to our reserves will likely vary from the estimates used, and these variances may be material.
You should not assume that the present value of future net revenues referred to inNotes to the Consolidated Financial Statements, TABLE V – Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantitiesis the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in demand, our ability to produce or in governmental regulations, policies or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from estimated proved reserves and their present value. In addition, the 10 percent discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with the oil and natural gas industry in general will affect the accuracy of the 10 percent discount factor.
We may not be able to replace production with new reserves. In general, production rates and remaining reserves from oil and natural gas properties decline as reserves are depleted. The decline rates depend on reservoir characteristics. We will not have any reserves to report under SEC guidelines until we complete the conversion to Petrodelta or acquire additional properties with proved reserves or conduct successful exploration and development activities. Our future oil and natural gas production is highly dependent upon our level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive and uncertain. We may be unable to make the necessary capital investment to maintain or expand our oil and natural gas reserves if cash flow from operations is reduced and external sources of capital become limited or unavailable. We cannot assure you that our future exploration, development and acquisition activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs.
Our operations are subject to numerous risks of oil and natural gas drilling and production activities.Oil and natural gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be found. The cost of drilling and completing wells is often uncertain. Oil and natural gas drilling and production activities may be shortened, delayed or canceled as a result of a variety of factors, many of which are beyond our control. These factors include:
| • | | unexpected drilling conditions; |
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| • | | pressure or irregularities in formations; |
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| • | | equipment failures or accidents; |
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| • | | weather conditions; |
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| • | | shortages in experienced labor; |
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| • | | delays in receiving necessary governmental permits; |
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| • | | shortages or delays in the delivery of equipment; |
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| • | | delays in receipt of permits or access to lands; and |
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| • | | government actions or changes in regulations. |
The prevailing price of oil also affects the cost of and the demand for drilling rigs, production equipment and related services. We cannot assure you the new wells we drill will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenues after operating and other costs.
The oil and natural gas industry experiences numerous operating risks. These operating risks include the risk of fire, explosions, blow-outs, pump and pipe failures, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, natural gas leaks, pipeline ruptures and discharges of toxic gases. If any of these industry operating risks occur, we could have substantial losses. Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with industry practice, we maintain insurance against some, but not all, of the risks16
described above. We cannot assure you that our insurance will be adequate to cover losses or liabilities. We cannot predict the continued availability of insurance at premium levels that justify its purchase.
Competition within the industry may adversely affect our operations. We operate in a highly competitive environment. We compete with major, national and independent oil and natural gas companies for the acquisition of desirable oil and natural gas properties and the equipment and labor required to develop and operate such properties. Many of these competitors have financial and other resources substantially greater than ours.
Our oil and natural gas operations are subject to various governmental regulations that materially affect our operations. Our oil and natural gas operations are subject to various foreign governmental regulations. These regulations may be changed in response to economic or political conditions. Matters regulated may include permits for discharges of wastewaters and other substances generated in connection with drilling operations, bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs, reports concerning operations, the spacing of wells, and unitization and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls and limitations on oil and natural gas production. In order to conserve or limit supplies of oil and natural gas, these agencies have restricted the rates of flow of oil and natural gas wells below actual production capacity. We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.
The loss of key personnel could adversely affect our ability to successfully execute our strategy.We are a small organization and depend on the skills and experience of a few individuals in key management and operating positions to execute our business strategy. Loss of one or more key individuals in the organization could hamper or delay achieving our strategy.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In April 2004, we signed a ten-year lease for office space in Houston, Texas, for approximately $17,000 per month. Also during 2004, Harvest Vinccler leased office space in Maturin and Caracas, Venezuela for approximately $13,200 and $4,000 per month, respectively.month. See alsoItem 1 –— Businessfor a description of our oil and natural gas properties and reserves.properties.
Item 3. Legal Proceedings
Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as Harvest Natural Resources, Inc., Chemex, Inc., Benton-Vinccler, C.A., Gale Campbell and Sheila Campbell in the District Court for Harris County, TexasTexas.. This suit was brought in May 2003 by Excel alleging, among other things, breach of a consulting agreement between Excel and us, misappropriation of proprietary information and trade secrets, and fraud. Excel seeks actual and exemplary damages, injunctive relief and attorneys’ fees. In October 2003, the Court abated the suit pending final judgment of a case pending in Louisiana to which we are not a party. In April 2007, the Court lifted the abatement and set the case for trial. The trial date has been set for the second quarter of 2008. We dispute Excel’s claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.
Uracoa Municipality Tax Assessments. In July 2004, Harvest Vinccler has received three taxnine assessments from a tax inspector for the Uracoa municipality in which part of the SMU fieldsFields are located. Alocated 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 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. |
|
| • | | 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 |
15
| | | 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 assessments was filed with the municipality,third and in October 2004 the tax inspector responded in part by affirming onefourth quarters of the assessments and issuing a payment order.2006. Harvest Vinccler has filed a motionprotest with the tax court in Barcelona, Venezuela, seeking to enjoin the payment order and dismiss the assessment. In July 2006,municipality on these claims.
Harvest Vinccler disputes the Uracoa
Municipality issued two additional assessments seeking to impose an increase in tax rates for the last quarter of 2005 and the first quarter of 2006. In August 2006, the Uracoa Municipality issued two further assessments, including penalties, for second quarter 2006 estimated revenues based on the first quarter 2006 oil and natural gas sales and for supposed errors of Harvest Vinccler as withholding agent. We dispute all of the tax assessments and
17
believe we have believes it has a substantial basis for ourits positions. We areHarvest Vinccler is unable to estimate the amount or range of aany possible loss. 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 Uracoa Municipality for the refund of all municipal taxes paid since 1997.
Libertador Municipality Tax AssessmentAssessments. In April 2005, Harvest Vinccler has received a tax assessmentfive assessments from a tax inspector for the Libertador municipality in which part of the SMU fieldsFields are located. 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 motion with the Tax Court in Barcelona, Venezuela, 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 the 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 the claims. |
Harvest Vinccler has submitted a protest todisputes the assessment at the Mayor’s Office, and if no favorable resolution is obtained, it will file a motion with the tax court seeking to enjoin the payment order and dismiss the assessment. We dispute theLibertador allegations set forth in the assessmentassessments and believe we havebelieves it has a substantial basis for ourits position. We areHarvest Vinccler is unable to estimate the amount or range of aany possible loss.
International Arbitration. As a result of the actions taken by PDVSA,SENIAT’s interpretation of the Ministrytax 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 Energy and Petroleum (“MEP”) andall municipal taxes paid since 2002.
In June 2007, the SENIAT issued an assessment in July 2005, we delivered formal noticesthe amount of $0.4 million for Harvest Vinccler’s failure to Venezuelan government officials of an investment dispute under Venezuelan lawwithhold value added tax (“VAT”) from vendors during 2005. The SENIAT has recognized a payment made by Harvest Vinccler in 2006 for the underwithheld VAT and bilateral investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted through the International Centre for Settlement of Investment Disputeshas partially confirmed that some of the World Bank.
The SENIAT Tax Assessment. In July 2005,affected vendors have remitted the SENIAT, the Venezuelan income tax authority, issued a preliminary tax assessment tounderwithheld VAT. Harvest Vinccler of 202 billion Bolivars, or approximately $94 million, related to 2001 through 2004 tax years. We determined not to contest two elements of the claimhas received credit, less penalties and made payments totaling 11.3 billion Bolivars, or $5.3 million, in August and September, 2005. During the second quarter 2006, the SENIAT initiated an audit of 2005 tax payments, and in October 2006, Harvest Vinccler received an assessmentinterest, from the SENIAT for 2005 taxes in the amount of $15.8 million. In 2006,VAT remitted by the vendors. Harvest Vinccler resolved and substantially paid allhas filed claims against the SENIAT for the portion of the tax claims madeVAT not recognized by the SENIAT. Harvest Vinccler paid $73.8 million additional taxesSENIAT and related interestbelieves it has a substantial basis for the periods of 2001 through first quarter 2006.its position.
Item 4. Submission of Matters to a Vote of SecuritySecurities Holders
At a special meeting of stockholders held on December 18, 2006, the following items were voted on by the stockholders:None
| 1. | | Proposal to approve the proposed transaction, including the conversion contract between our subsidiary Harvest Vinccler, S.C.A. and Corporación Venezolana del Petroleo, S.A., and entailing the transfer of substantially all of our assets to Empresa Mixta Petrodelta, S.A., pursuant to the conversion contract: |
| | | | | |
| | | Against/Withheld | | Abstentions/Broker Non- |
| Votes in Favor | | Votes | | Votes |
| 30,910,607 | | 133,118 | | 114,731 |
| 2. | | Proposal to postpone or adjourn the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the transaction described in proposal 1: |
| | | | | |
| | | Against/Withheld | | Abstentions/Broker Non- |
| Votes in Favor | | Votes | | Votes |
| 27,746,888 | | 3,282,231 | | 129,337 |
| 3. | | To vote on such other matters as may properly come before the special meeting or any adjournment or postponement of the special meeting: |
| | | | | |
| | | Against/Withheld | | Abstentions/Broker Non- |
| Votes in Favor | | Votes | | Votes |
| 18,457,926 | | 10,894,377 | | 1,806,153 |
1816
PART II
| | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “HNR”. As of December 31, 2006,2007, there were 37,204,49834,793,735 shares of common stock outstanding, with approximately 589559 stockholders of record. The following table sets forth the high and low sales prices for our Common Stock reported by the NYSE.
| | | | | | | | | | | | | |
| Year | | Quarter | | High | | Low |
| | 2005 | | | First quarter | | $ | 16.92 | | | $ | 11.30 | |
| | | | | Second quarter | | | 12.48 | | | | 8.13 | |
| | | | | Third quarter | | | 11.68 | | | | 9.00 | |
| | | | | Fourth quarter | | | 10.81 | | | | 8.57 | |
| | | | | | | | | | | | | |
| | 2006 | | | First quarter | | | 10.68 | | | | 8.00 | |
| | | | | Second quarter | | | 14.35 | | | | 9.89 | |
| | | | | Third quarter | | | 14.40 | | | | 9.71 | |
| | | | | Fourth quarter | | | 11.74 | | | | 9.81 | |
| | | | | | | | | | | |
| Year | | Quarter | | High | | Low |
2006 | | First quarter | | $ | 10.68 | | | $ | 8.00 | |
| | | Second quarter | | | 14.35 | | | | 9.89 | |
| | | Third quarter | | | 14.40 | | | | 9.71 | |
| | | Fourth quarter | | | 11.74 | | | | 9.81 | |
| | | | | | | | | | | |
2007 | | First quarter | | $ | 10.46 | | | $ | 9.11 | |
| | | Second quarter | | | 13.50 | | | | 9.37 | |
| | | Third quarter | | | 12.89 | | | | 10.00 | |
| | | Fourth quarter | | | 14.00 | | | | 12.13 | |
On March 2, 2007,12, 2008, the last sales price for the common stock as reported by the NYSE was $9.26$11.78 per share.
Our policy is to retain earnings to support the growth of our business. Accordingly, our board of directors has never declared a cash dividend on our common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For securities authorized for issuance under equity compensation plans, seeNotes to the Consolidated Financial Statements Note 5 – Stock Option and Stock Purchase Plans.EQUITY COMPENSATION PLAN INFORMATION
DECEMBER 31, 2007
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of Securities |
| | | | | | | | | | | Remaining |
| | | Number of | | | | | | Available for |
| | | Securities to be | | Weighted | | Future Issuance |
| | | Issued upon | | Average | | Under Equity |
| | | Exercise of | | Exercise Price | | Compensation |
| | | Outstanding | | Of Outstanding | | Plans (Excluding |
| | | Options, Warrants | | Options, Warrants | | Securities Reflected |
| | | And Rights | | And Rights | | in Column (a)) |
| PLAN CATEGORY | | (a) | | (b) | | (c) |
| |
| Equity compensation plans approved by security holders | | | 3,702,160 | | | $ | 8.55 | | | | 620,940 | |
| Equity compensation plans not approved by security holders (1) | | | 519,650 | | | $ | 2.69 | | | | — | |
| | | |
| Total | | | 4,221,810 | | | $ | 7.83 | | | | 620,940 | |
| | | |
17
| | |
| (1) | | SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 5 — Stock Option and Stock Purchase Plansfor a description of options issued to individuals other than our officers, directors or employees. The 1999 Stock Option Plan permits the granting of stock options to purchase up to 2,500,000 shares of our common stock in the form of ISOs, NQSOs or a combination of each, with exercise prices not less than the fair market value of the common stock on the date of the grant, subject to the dollar limitations imposed by the Internal Revenue Code. In the event of a change in control, all outstanding options become immediately exercisable to the extent permitted by the plan. Options granted to employees under the 1999 Stock Option Plan vest 50 percent after the first year and 25 percent after each of the following two years, or they vest ratably over a three-year period, from their dates of grant and expire ten years from grant date or three months after retirement, if earlier. All options granted to outside directors and consultants under the 1999 Stock Option Plan vest ratably over a three-year period from their dates of grant and expire ten years from grant date. These were the only compensation plans in effect that were adopted without the approval of our stockholders. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
STOCK PERFORMANCE GRAPH
The graph below shows the cumulative total stockholder return over the five-year period ending December 31, 2006,2007, assuming an investment of $100 on December 31, 20012002 in each of Harvest’s common stock, the Dow Jones U.S. Exploration & Production Index and the S&P Composite 500 Stock Index.
This graph assumes that the value of the investment in Harvest stock and each index was $100 at December 31, 20012002 and that all dividends were reinvested.
19
PLOT POINTS
(December 31 of each year)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2001 | | 2002 | | 2003 | | 2004 | | 2005 | | 2006 |
| Harvest Natural Resources, Inc. | | $ | 100 | | | $ | 448 | | | $ | 691 | | | $ | 1,199 | | | $ | 617 | | | $ | 738 | |
| Dow Jones US E&P Index | | $ | 100 | | | $ | 101 | | | $ | 130 | | | $ | 183 | | | $ | 301 | | | $ | 315 | |
| S&P 500 Index | | $ | 100 | | | $ | 77 | | | $ | 97 | | | $ | 106 | | | $ | 109 | | | $ | 124 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | 2002 | | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | |
| | Harvest Natural Resources, Inc. | | | $ | 100 | | | | $ | 154 | | | | $ | 268 | | | | $ | 138 | | | | $ | 165 | | | | $ | 190 | | |
| | Dow Jones US E&P Index | | | $ | 100 | | | | $ | 129 | | | | $ | 182 | | | | $ | 298 | | | | $ | 312 | | | | $ | 403 | | |
| | S&P 500 Index | | | $ | 100 | | | | $ | 126 | | | | $ | 138 | | | | $ | 142 | | | | $ | 161 | | | | $ | 167 | | |
| |
18
Total Return Data provided by S&P’s Institutional Market Services, Dow Jones & Company, Inc. is composed of companies that are classified as domestic oil companies under Standard Industrial Classification codes (1300-1399, 2900-2949, 5170-5179 and 5980-5989). The Dow Jones US Exploration & Production Index is accessible athttp://www.djindexes.com/mdsidx/index.cfm?event=showTotalMarket.showTotalMarket.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2006.2007. Financial information for 2003 through 2006 has been restated to reflect the retrospective application of the successful efforts method of accounting. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 — Organization and Summary of Significant Accounting Policies — Property and Equipment and Change in Accounting Principle. Financial information for 2007 has been restated to reflect the correction of an error related to deferred tax adjustments to reconcile our share of Petrodelta’s Net Income reported under IFRS to that required under accounting principles generally accepted in the United States of America (“GAAP”) and recorded within our Net income from unconsolidated equity affiliates. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 — Organization and Summary of Significant Accounting Policies — Restatement. The selected consolidated financial data have been derived from and should be read in conjunction with our annual audited consolidated financial statements, including the notes thereto. Our year-end financial information contains results from our Russian operations through our equity affiliates based on a twelve-month period ending September 30. Accordingly, our results of operations for the years ended December 31, 2003 and 2002 reflect results from Geoilbent (until sold on September 25, 2003) for the twelve months ended September 30, 2003 and 2002.
20
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2006(1) | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | (in thousands, except per share data) | |
Statement of Operations: | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 59,506 | | | $ | 236,941 | | | $ | 186,066 | | | $ | 106,095 | | | $ | 126,731 | |
| Operating income | | | 5,499 | | | | 119,525 | | | | 90,480 | | | | 33,627 | | | | 34,585 | |
| Net income (loss) | | | (58,562 | ) | | | 50,839 | | | | 34,360 | | | | 27,303 | | | | 100,362 | |
| Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.57 | ) | | $ | 1.38 | | | $ | 0.95 | | | $ | 0.77 | | | $ | 2.90 | |
| | | | | | | | | | | | | | | | |
| Diluted | | $ | (1.57 | ) | | $ | 1.32 | | | $ | 0.90 | | | $ | 0.74 | | | $ | 2.78 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 37,225 | | | | 36,949 | | | | 36,128 | | | | 35,332 | | | | 34,637 | |
| Diluted | | | 37,225 | | | | 38,444 | | | | 38,122 | | | | 36,840 | | | | 36,130 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | |
| | | | 2007(1) | | | | | | | | | |
| | | | (restated) | | 2006(1) | | 2005 | | 2004 | | 2003 | |
| | | | (in thousands, except per share data) | |
Statement of Operations: | | |
| Total revenues | | | $ | 11,217 | | $ | 59,506 | | $ | 236,941 | | $ | 186,066 | | $ | 106,095 | |
| Operating income (loss) | | | | (19,536 | ) | | 574 | | 104,571 | | 70,547 | | 13,930 | |
| Net income from Unconsolidated Equity Affiliates | | | 55,297 | | — | | — | | — | | — | |
| Net income (loss) | | | 60,118 | | | (62,502 | ) | | 38,876 | | 18,414 | | 11,545 | |
| Net income (loss) per common share: | | |
| Basic | | | $ | 1.65 | | $ | (1.68 | ) | | $ | 1.05 | | $ | 0.51 | | $ | 0.33 | |
| | | | | | | | | | | | | |
| Diluted | | | $ | 1.59 | | $ | (1.68 | ) | | $ | 1.01 | | $ | 0.48 | | $ | 0.31 | |
| | | | | | | | | | | | | |
| | | |
| Weighted average common shares outstanding | | |
| Basic | | | 36,550 | | 37,225 | | 36,949 | | 36,128 | | 35,332 | |
| Diluted | | | 37,950 | | 37,225 | | 38,444 | | 38,122 | | 36,840 | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, |
| | | Year Ended December 31, | | 2007(1) | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | (restated) | | 2006(1) | | 2005 | | 2004 | | 2003 |
| | | (in thousands) | | (in thousands) |
Balance Sheet Data: | | |
| Total assets | | $ | 422,711 | | $ | 400,798 | | $ | 367,486 | | $ | 374,348 | | $ | 335,192 | | | $ | 417,071 | | $ | 468,365 | | $ | 451,377 | | $ | 433,019 | | $ | 459,814 | |
| Long-term debt, net of current maturities | | 66,977 | | — | | — | | 96,833 | | 104,700 | | | — | | 66,977 | | — | | — | | 96,833 | |
Stockholders’ equity(2) | | 244,886 | | 297,512 | | 243,189 | | 199,713 | | 171,317 | | |
| Stockholders’ equity | | | 316,647 | | 281,409 | | 337,975 | | 295,615 | | 268,086 | |
| | |
| (1) | | Activities under our OSA are reflected under the equity method of accounting effective April 1, 2006. Since such activities are subject to the completionThe results of the conversion to Petrodelta, we have not recorded any net earningsPetrodelta’s operations from such activities for the nine months endedApril 1, 2006 until December 31, 2006. |
|
(2) | | No cash dividends were declared or paid during the periods presented.2007 are reflected in 2007 when Petrodelta was formed. |
2119
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We had a lossearnings of $58.6$60.1 million, or $1.57$1.59 per diluted share, for the twelve months ended December 31, 20062007 compared with earningsa loss of $50.8$62.5 million, or $1.32$1.68 per diluted share, for 2005.2006. Net income for the year ended December 31, 2007 includes the net results of Petrodelta’s operations from April 1, 2006 through December 31, 2007 of $55.7 million, the reversal of deferred revenue and deferred income tax recorded by Harvest Vinccler for 2005 and first quarter of 2006 deliveries pending clarification on the calculation of crude prices under a Transitory Agreement (“Transitory Agreement”) which provided that the maximum total fee per barrel paid under the OSA could not exceed 66.67 percent of the total value of the crude oil as determined under an Annex to the Transitory Agreement of $5.6 million, net, and gains from the exchange of financial securities of $49.6 million. The loss for 2006 iswas due to the inability to recognize equity earnings for the producing operations in Venezuela since the second quarter of 2006 and charges of $73.8 million for additional taxes and related interest in Venezuela for 2001 through 2006. We will not be able to report the results of our Venezuelan operations in our consolidated financial statements until the conversion to Petrodelta is completed. Although the MOU executed by Harvest Vinccler and CVP in March 2006 provides that upon completion of the conversion there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006, this adjustment will not occur until the conversion is completed.
In 2006, the conversion to Petrodelta has progressed in a number of important areas:
| • | | In August, the MOU was amended to provide for the addition of the Isleño, Temblador and El Salto fields to Petrodelta as additional consideration for our conversion of the OSA to Petrodelta. The addition of these fields is subject to government approval. |
|
| • | | In a special meeting of the stockholders in December 2006, our stockholders approved entering into the transaction contemplated by the MOU. |
|
| • | | Harvest Vinccler has resolved and substantially paid all of the tax claims made by the SENIAT, the Venezuelan income tax authority. We continue to believe that Harvest Vinccler has properly paid all of its taxes, but we understand that resolving the income tax issues with the SENIAT is a necessary step in the transition of Harvest Vinccler’s operations to Petrodelta. |
|
| • | | At the request of PDVSA, Harvest Vinccler invoiced PDVSA for $36.3 million of advanced or accrued costs incurred during the last three quarters of 2006, and $21.2 million, representing the second and third quarter advances, have been reimbursed. The fourth quarter advances of $15.1 million were invoiced to PDVSA in February 2007. |
|
| • | | We have provided CVP with the business plan for the Petrodelta properties. Our plan calls for the immediate resumption of the suspended development of the SMU fields as well as appraisal and development of the Isleño, Temblador and El Salto fields. We are also actively working with CVP on staffing plans for Petrodelta and have reached agreement on other elements of the Conversion Contract. |
Despite this progress, the conversion is not completed, and we can give no assurance with respect to the probability or the timing of completion. The most significant matter to execution of the Conversion Contract and the formation of Petrodelta is the receipt of approvals by the Venezuelan government. Based onand moved forward with our ongoing discussions with Venezuelan officials, we believe that these approvals will be received, but we cannot provide assurance when or if that will occur. However, PDVSA has informed us thatplans to create a number of other companies have signed their conversion contractsdiversified portfolio using our existing cash and formed the mixed companies. Moreover, we understand that three companies have completed the conversion process andenhanced technical capabilities which are nowmore fully described in the positionfollowing sections.
Restatement
As discussed inPart IV, Item 15, Notes to invoice PDVSAConsolidated Financial Statements, Note 1 - Organization and Summary of Significant Accounting Policies — RestatementandExhibits and Financial Statement Schedules, Quarterly Financial Data (unaudited), we are restating our previously issued consolidated financial statements as of and for the crude oil produced since April 1, 2006. With the precedents established and issues resolved by the companies more advanced in the conversion process, we believe that companies such as Harvest Vinccler should be able to expedite the conversion process and the issuance of invoices for payment once we receive the government approvals.
Certain operating statistics for the three and nine month periodsyear ended December 31, 2006,2007 and quarterly information for the SMU fields operatedquarter ended December 31, 2007. The restatements relate to the correction of an error in the deferred tax adjustment to reconcile our share of Petrodelta’s Net Income reported under IFRS to that required under GAAP and recorded within Net income from unconsolidated equity affiliates.
The adjustment to record our share of Petrodelta’s Net Income under GAAP should have been limited to deferred tax adjustments related to non-monetary temporary differences impacted by Harvest Vinccler areinflationary adjustments under Venezuela law. During the 2008 year end close process, we determined that restatements were necessary because since October 1, 2007 both the monetary and non-monetary temporary differences recorded in Petrodelta’s IFRS financial statements had been adjusted in arriving at our GAAP consolidated financial statements rather than only the non-monetary temporary differences impacted by inflationary adjustments. Accordingly, we had understated our Net income from unconsolidated equity affiliates and Investment in equity affiliates.
The following tables set forth below. This information is provided at 100 percent, without reductionthe effect of the adjustments described above on the consolidated statement of operations for the year ended December 31, 2007 and for the consolidated balance sheet as of December 31, 2007. Although the restatement changed our interest under the OSA or our ownershipNet Income, Net income from unconsolidated equity affiliates and Minority interest in Petrodelta. While we believe this information to be accurate,consolidated subsidiary companies, there was no representation is made with respect to what will be reflectedimpact on net cash used in ouroperating activities in the consolidated financialstatements of cash flows.
2220
Consolidated Statements of Operations
statements after completing| | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | As Previously | | | | | | | As | |
| | | Reported | | | Adjustment | | | Restated | |
| | | (in thousands, except per share data) | |
| Income before income taxes and minority interest | | $ | 30,914 | | | $ | — | | | $ | 30,914 | |
| Income tax expense | | | 6,312 | | | | — | | | | 6,312 | |
| | | | | | | | | | |
| Income before minority interest | | | 24,602 | | | | — | | | | 24,602 | |
| Minority interest in consolidated subsidiary | | | 19,060 | | | | 721 | | | | 19,781 | |
| | | | | | | | | | |
| Income from consolidated companies | | | 5,542 | | | | (721 | ) | | | 4,821 | |
| Net income from unconsolidated equity affiliates | | | 51,695 | | | | 3,602 | | | | 55,297 | |
| | | | | | | | | | |
| Net income | | $ | 57,237 | | | $ | 2,881 | | | $ | 60,118 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net Income Per Common Share: | | | | | | | | | | | | |
| Basic | | $ | 1.57 | | | $ | 0.08 | | | $ | 1.65 | |
| Diluted | | $ | 1.51 | | | $ | 0.08 | | | $ | 1.59 | |
| |
Consolidated Balance Sheets |
| |
| | | December 31, 2007 |
| | | As Previously | | | | | | As |
| | | Reported | | Adjustment | | Restated |
| | | (in thousands) |
| Investment in equity affiliates | | $ | 251,173 | | | $ | 3,602 | | | $ | 254,775 | |
| Total assets | | | 413,469 | | | | 3,602 | | | | 417,071 | |
| Minority interest | | | 56,825 | | | | 721 | | | | 57,546 | |
| Retained earnings | | | 147,934 | | | | 2,881 | | | | 150,815 | |
| Total shareholders’ equity | | | 313,766 | | | | 2,881 | | | | 316,647 | |
| Total liabilities and shareholders’ equity | | | 413,469 | | | | 3,602 | | | | 417,071 | |
Formation of Petrodelta
On October 25, 2007, the conversionVenezuelan Presidential Decree, which formally transfers to Petrodelta the rights to the Petrodelta Fields subject to the conditions of the Conversion Contract, was published in the Official Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the Petrodelta Fields for a maximum of 20 years from October 25, 2007. Petrodelta will undertake its operations in accordance with the Business Plan. Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with the Business Plan. The Business Plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. This informationThe 2008 budget of Petrodelta’s Business Plan was approved by its shareholders on January 23, 2008.
Petrodelta has hired personnel, largely from Harvest Vinccler as well as seconding its technical and financial managers; and the Board of Directors of Petrodelta has appointed the management of Petrodelta. Certain of these appointments are made by the shareholders. Effective August 9, 2007, Mr. Karl L. Nesselrode, Vice President, Engineering and Business Development of Harvest, accepted a long-term secondment to Petrodelta as its Operations and Technical Manager. Per Petrodelta’s bylaws, the Operations and Technical Manager’s position is designated as our appointment. Mr. Nesselrode will remain an officer of Harvest. The General Manager of Petrodelta (CVP appointment) has been appointed by the Board of Directors of Petrodelta and is in charge of the daily management of the business of Petrodelta and has the power and duties customary to manage, direct and supervise the accounting of Petrodelta.
Petrodelta is governed by a board of directors in accordance with the Charter and Bylaws. Under the Charter and Bylaws, matters requiring shareholder approval may be approved by a simple majority with the exception of certain specified matters which require the approval by the holders of at least 75 percent of the capital stock. These matters include: most changes to the Charter and Bylaws; changes in the capital stock of Petrodelta that would alter the percentage participation of HNR Finance or CVP; any liquidation or dissolution of Petrodelta;
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any merger, consolidation or business combination of Petrodelta; disposition of all or any substantial part of the assets of Petrodelta, except in the ordinary course of business; any financing agreement for an amount greater than $10 million; approval or modification of Petrodelta’s financial statements; creation of certain reserve funds; any distribution of dividends or return of paid-in surplus; changes to the policy regarding dividends and other distributions established by the Charter and Bylaws; changes to the Business Plan; changes to the Contract for Sale and Purchase of Hydrocarbons with PPSA; contracts with shareholders or affiliates that are not at market price; any social investment in excess of the amount required by the Venezuelan government; any waiver of material rights or actions with respect to litigation involving more than $1 million; selection of external auditors; appointment of any judicial representative or general agent of Petrodelta; and designation of a liquidator in the event of the liquidation of Petrodelta.
The Board of Directors of Petrodelta consists of five directors, three of whom are appointed by CVP, including the President of the Board, and two of whom are appointed by HNR Finance. Decisions of the Board of Directors are taken by the favorable vote of at least three of its members, except in the case of any decision implementing a decision of the Shareholders’ Meeting relating to any of the matters where a qualified majority is required, in which case, a favorable vote of four members will be representativerequired. The Board of future results.Directors has broad powers of administration and disposition expressly granted in the Charter and Bylaws. The powers include: proposing budget and work programs; presenting the annual report to the shareholders; appointing and dismissing personnel; making recommendations regarding financial reserves and utilization of surplus; making proposals on dividends consistent with the Charter and Bylaws; agreeing on contracts consistent with the work programs and budgets; opening and closing bank accounts; making, accepting, endorsing and guaranteeing bank drafts and other commercial instruments consistent with work programs and budgets; and implementing policies and procedures.
| | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | December 31, 2006 | | December 31, 2006 |
| Oil production (million barrels) | | | 1.6 | | | | 5.2 | |
| Natural gas production (billion cubic feet) | | | 3.6 | | | | 11.5 | |
| Barrels of oil equivalent | | | 2.2 | | | | 7.1 | |
| Cash operating costs ($millions) | | | 11.8 | | | | 28.5 | |
| Capital expenditures ($millions) | | | 2.9 | | | | 3.4 | |
The sale of oil and gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA signed on January 17, 2008. The form of the agreement is set forth in Annex K to the Conversion Contract. Crude oil delivered from the SMU fieldsPetrodelta Fields to PDVSA will bePPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference pricedprice and prevailing market conditions. Crude oil prices that would be paid forNatural gas delivered from the oil production if the conversion contract were in place cannot yet be calculated as several elements of the pricing formula have not been set. Market prices for crude oil of the type produced in the fields operated by Harvest Vinccler averaged approximately $41.36 and $47.69 a barrel for the three and nine months ended December 31, 2006, respectively. The price for natural gas that would be paid under the conversion contractPetrodelta Fields to PPSA is priced at $1.54 per thousand cubic feet. PPSA is obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced production month by wire transfer, in U.S. Dollars in the case of payment for crude oil and natural gas liquids delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by Petrodelta. Any dividend paid by Petrodelta will be made in U.S. Dollars.
An unofficial English translation of the Conversion Contract is attached to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 1, 2007.
Petrodelta currently has a workover rig performing well maintenance. A drilling rig has been contracted and is expected to begin operations during the first quarter of 2008. Petrodelta is in the bidding and selection process to contract a second drilling rig. The second drilling rig is projected to begin operations during the second or third quarter of 2008. Petrodelta’s plan of development is focused on 1) increasing production, 2) conversion of probable and possible reserves to proved reserves in the New Fields, 3) adding reserves through exploration in El Salto by acquiring and processing 3-D seismic over the remaining two-thirds of the field and drilling identified prospects, and 4) capturing the synergies and scale at all levels of Petrodelta’s operations.
We have recorded the results of operations and economic benefits of our ownership in Petrodelta from April 1, 2006 through December 31, 2007 in the fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates. Petrodelta’s results and operating information is more fully described inPart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 — Venezuela Operations — Petrodelta, S.A.
InItem 1 –— BusinessandItem 1A –— Risk Factors,we discuss the situation in Venezuela and how the actions of the Venezuelan government have and continue to adversely affect our operations. Collectively, the events in Venezuela, both actual and threatened, are having a material adverse effect on our financial condition, results of operations and cash flows. The situation in Venezuela has also restricted our available cash and had a significant adverse effect on our ability to obtain financing to acquire and develop growth opportunities elsewhere. Until there is clarity and certainty over completion of the conversion to Petrodelta, including the receipt of payment for prior crude oil and natural gas deliveries and the resumptionpayment of drilling operations,dividends by Petrodelta, uncertainty over the future of our investment in Venezuela will continue to affect our performance and limit our growth opportunities. We continue to assess and consider alternatives for preserving value, including a possible sale or exchange of all or part of our interests in Venezuela. The alternatives available to us are limited and subject to a number of significant variables, including timing for the completion of conversion to Petrodelta, the value to us of Petrodelta’s assets, governmental approvals and any tax consequences.
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We recognize the need to diversify our asset base and that is the primary focus of our strategy. We will use our available cash and future access to capital markets to build aexpand our diversified portfolio of assetsstrategy in a number of countries that fit our strategic investment criteria. We are pursuing opportunities in a number of areas including Russia, the Commonwealth of Independent States, the Middle East and Asia.
In executing our business strategy, we will strive to:
| | • | | maintain financial prudence and rigorous investment criteria; |
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| | • | | access capital markets; |
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| | • | | create a diversified portfolio of large assets; |
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| | • | | preserve our financial flexibility; |
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| | • | | use our experience and skills to acquire new projects; and |
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| | • | | keep our organizational capabilities in line with our rate of growth. |
To accomplish our strategy, we intend to:
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| | | To accomplish our strategy, we intend to: |
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| | • | | Diversify our political risk:Acquire large oil and natural gas fields in a number of countries to diversify and reduce the overall political risk of our international investment portfolio. |
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| | • | | Seek Operational and Financial Control: We desire control of major decisions for development, production, staffing and financing for each project for a period of time sufficient for us to ensure maximum returns on investments. |
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| | • | | Establish a Presence Through Joint Venture Partners and the Use of Local Personnel:We seek to establish a presence in the countries and areas we operate through joint venture partners to facilitate stronger governmental and business relationships. In addition, we use local personnel to help us take advantage of local knowledge and experience and to minimize costs. In pursuing new opportunities, we will seek to enter at an early stage and find local partners in an effort to reduce our risk in any one venture. |
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| | • | | Commit Capital in a Phased Manner to Limit Total Commitments at Any One Time:We are willing to agree to minimum capital expenditures or development commitments at the outset of new projects, but we endeavor to structure such commitments to fulfill them over time under a prudent plan of development, allowing near-term operating cash flow to help fund further investment, thereby limiting our maximum cash exposure. We also seek to maximize available local financing capacity to develop the hydrocarbons and associated infrastructure. |
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| | • | | Provide Technical Expertise:We believe there is an advantage in being able to provide geological, geophysical and engineering expertise beyond what many companies or countries possess internally. In addition to our in-house technical capabilities, in January 2007 we acquired a minority interest in Fusion, a technical firm with significant experience in providing leading edge geophysical, geosciences and reservoir engineering services in many places in the world. Through this acquisition we have preferredstrategic access to these services. |
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| | • | | Limit Exploration Activities:While our strategy does not focus on unexplored areas, we consider appropriate exploration opportunities that have large potential scale and the ability to manage risk without significant initial cost. |
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| • | | Maintain A Prudent FinancialFinancing Plan: We intend to maintain our financial flexibility by closely monitoring spending, holding sufficient cash reserves, minimizing the use of restricted cash, actively seeking opportunities to reduce our weighted average cost of capital and increase our access to debt and equity markets. |
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| • | | Manage Exploration Risks. We seek to manage the higher risk of exploration by diversifying our prospect portfolio, applying state-of-the-art technology for analyzing targets and focusing on opportunities in proven active hydrocarbon systems with infrastructure. |
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| • | | Establish Various Sources of Production. We seek to establish new production from our exploration and development efforts in a number of diverse markets and expect to monetize production through operations or the sale of assets. |
Diversification
In 2005 and 2006, we recognized the need to diversify our asset base as part of our strategy. Our strategy has broadened from our primary focus on Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems. We seek to leverage our
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Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of technical resources, opening of our London office, the planned 2008 opening of a Singapore office, the redeployment of resources from our Moscow office as well as our earlier purchase of a 45 percent equity interest in Fusion, we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. Our organic growth is focused on undeveloped or underdeveloped fields, field redevelopments and exploration. While exploration will become a larger part of our overall portfolio, we will generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles. Exploration will be technically driven with a low entry cost and high resource potential that provides sustainable growth. We will continue to seek opportunities where perceived geopolitical risk may provide high reward opportunities in the long term. We will limit producing property acquisitions as market pricing of proved producing reserves generally translates into low returns. Our WAB-21, South China Sea asset has been in our portfolio since 1996. Gabon and Indonesia are expected to be additions to our new strategy after receipt of government approvals.
WAB-21, South China Sea
In December 1996, we acquired Crestone Energy Corporation, subsequently renamed Benton Offshore China Company. Its principal asset is a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area. The WAB-21 petroleum contract covers 6.2 million acres in the South China Sea, with an option for an additional 1.25 million acres under certain circumstances, and lies within an area which is the subject of a border dispute between the People’s Republic of China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with another company. The border dispute has lasted for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. We continue to have meetings with CNOOC to monitor this situation and explore new business opportunities.
Dussafu Marin, Offshore Gabon
In November 2007, we executed a sale and purchase agreement for the purchase of a 50 percent interest in the Dussafu PSC. All conditions precedent to the sale and purchase agreement are complete except for final government and partner approvals. We anticipate receiving final approvals during the first half of 2008. On receipt of final partner approval, we will become the operator of the Dussafu PSC. The purchase will be recorded in the quarter in which approvals are received. Located offshore Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC contains 680,000 acres with water depths to 1,000 feet. The Dussafu PSC has two small oil discoveries in the Gamba and Dentale reservoirs and a small natural gas discovery. Production and infrastructure exists in the blocks contiguous to the Dussafu PSC. The Dussafu PSC partners and the Republic of Gabon recently agreed to enter into the second exploration phase of the PSC with an effective date of May 28, 2007. The second exploration phase is a three-year work commitment which includes the acquisition and processing of 500 kilometers of 2-D seismic, geology and geophysical interpretation, engineering studies and the drilling of a conditional well. Leads in the underexplored syn-rift potential in the M’Baya and Lucina reservoirs that are commercial in immediately adjacent fields have been identified and are expected to be the focus of the planned 2008 work program which includes the acquisition and processing of 500 kilometers of 2-D seismic data. The Dussafu PSC partners anticipate prospects can be generated to test these play concepts in 2009.
Budong-Budong, Onshore Indonesia
In February 2008, Indonesia’s oil and gas regulatory authority, BP Migas, approved the assignment to us of a 47 percent interest in the Budong PSC located onshore West Sulawesi, Indonesia. Final government approval from Migas is pending. The Budong PSC includes a ten-year exploration period and a 20-year development phase. In the initial three-year exploration phase, which began January 2007, we expect to acquire, process and interpret approximately 500 kilometers of 2-D seismic and drill two exploration wells. Tately will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have control of major decisions and financing for the project with an option to operate in the development and production phase if approved by BP Migas. The Budong PSC covers 1.35 million acres and includes the Lariang and Karama sub-basins which are the eastern onshore extension of the WSFB. Exploration to date in the basin is immature due to previously difficult jungle terrain, which is now accessible with the development of palm oil plantations and their related infrastructure. Field work performed over the last 10 years, as outcrops have been more accessible, has given a new understanding to the presence of Eocene source and reservoir potential that had not previously been recognized. Recent seismic
24
surveys have greatly improved the understanding of the geology and enhanced the prospectivity of the offshore WSFB and, by analogy, the sparsely explored onshore area. To date, a total of eight leads have been recognized. It will be necessary to acquire a grid of seismic data to confirm the structures and give an indication of Eocene target(s) within the section and to mature these leads into drillable prospects. The two identified sub-basins (Lariang and Karama) provide an opportunity to test prospects in two sub-basins.
Results of Operations
We includeincluded the results of operations of Harvest Vinccler in our consolidated financial statements and reflectreflected the 20 percent ownership interest of Vinccler as a minority interest.
Effectiveinterest in 2005 and the first quarter of 2006. Since April 1, 2006, our operations haveequity investment in Petrodelta has been reflected under the equity method of accounting but our abilityaccounting. In the fourth quarter of 2007, we recorded the cumulative effect from April 1, 2006 to recognize equity earningsDecember 31, 2007. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 — Venezuela Operations — Petrodelta, S.A.for Petrodelta’s results of operations which reflect the results for the producing operations in Venezuela are subject to completion ofnine month period ending December 31, 2006 and the conversion of the OSA to Petrodelta. There will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed at that date.twelve month period ending December 31, 2007, comparatively.
The following discussion should be read with the results of operations for each of the years in the three-year period ended December 31, 20062007 and the financial condition as of December 31, 20062007 and 20052006 in conjunction with our Consolidated Financial Statements and related Notes thereto.
Years Ended December 31, 2007 and 2006
We have presented selectedreported net income of $60.1 million, or $1.59 diluted earnings per share, for 2007 compared with a net loss of $62.5 million, or $1.68 diluted earnings per share, for 2006.
Revenue recorded for the year ended December 31, 2007 reflects the reversal of deferred revenue recorded by Harvest Vinccler for 2005 and first quarter of 2006 deliveries pending clarification on the calculation of crude prices under the Transitory Agreement. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 — Organization and Summary of Significant Account Policies — Revenue Recognition. There were no sales of oil and natural gas in 2007 due to the conversion of the OSA to a minority equity interest in Petrodelta.
Total expenses and other non-operating (income) expense items from our consolidated income statement(in millions):
| | | | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, | | Increase |
| | | 2007 | | 2006 | | (Decrease) |
| General and administrative | | $ | 29.7 | | | $ | 26.4 | | | $ | 3.3 | |
| Contribution to Science and Technology Fund | | | — | | | | 3.9 | | | | (3.9 | ) |
| Taxes other than on income | | | 0.4 | | | | 3.9 | | | | (3.5 | ) |
| Gain on financing transactions | | | (49.6 | ) | | | — | | | | (49.6 | ) |
| Investment income and other | | | (9.1 | ) | | | (9.4 | ) | | | 0.3 | |
| Interest expense | | | 8.2 | | | | 23.2 | | | | (15.0 | ) |
| Net (gain) loss on exchange rates | | | — | | | | 0.1 | | | | (0.1 | ) |
General and administrative expenses increased due to employee related expenses offset by lower contract services. During the year ended December 31, 2007, we recorded a gain of $49.6 million as a percentageresult of revenuethe purchase and sale of U.S. Dollar indexed Venezuelan government bonds (seePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 12 — Gain on Financing Transaction). There were no such financing transactions entered into during the year ended December 31, 2006. Taxes other than on income decreased due to the elimination of municipal taxes which were based on oil deliveries under the OSA.
Investment earnings and other decreased due to interest earned on lower cash balances. Interest expense decreased due to the payment of Harvest Vinccler’s Bolivar denominated debt in the following table:year ended December 31, 2007.
| | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2006 | | 2005 | | 2004 |
| Operating Expenses | | | 16 | % | | | 17 | % | | | 18 | % |
| Depletion, Depreciation and Amortization | | | 18 | | | | 19 | | | | 19 | |
| General and Administrative | | | 44 | | | | 10 | | | | 12 | |
| Taxes Other Than on Income | | | 7 | | | | 3 | | | | 3 | |
| Interest Expense | | | 39 | | | | 1 | | | | 4 | |
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deferred revenue. We have utilized our current United States general and administrative expenses plus our net operating loss carryovers to offset the gains on financing transactions generated during the year ended December 31, 2007. There was no effect on our effective tax rate.
Years Ended December 31, 2006 and 2005
We reported a net loss of $58.6$62.5 million, or $1.57$1.68 diluted earnings per share, for 2006 compared with net income of $50.8$38.9 million, or $1.32$1.01 diluted earnings per share, for 2005.
Revenues were lower for the year ended December 31, 2006 compared with the year ended December 31, 2005 due to the conversion of the OSA to a minority equity interest in Petrodelta.
Total expenses and other non-operating (income) expense:expense (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | % | | | Year Ended | | |
| | | December 31, | | Increase | | Increase | | | December 31, | | Increase |
| | | 2006 | | 2005 | | (Decrease) | | (Decrease) | | | 2006 | | 2005 | | (Decrease) |
| General and administrative | | $ | 26.4 | | $ | 22.8 | | 3.6 | | | 16 | % | | $ | 26.4 | | $ | 22.8 | | 3.6 | |
| Contribution to Science and Technology Fund | | 3.9 | | — | | 3.9 | | 100 | | | 3.9 | | — | | 3.9 | |
| Account receivable write-off on retroactive oil price adjustment | | — | | 4.5 | | | (4.5 | ) | | | (100 | ) | | — | | 4.5 | | | (4.5 | ) |
| Taxes other than on income | | 3.9 | | 6.4 | | | (2.5 | ) | | | (39 | ) | | 3.9 | | 6.4 | | | (2.5 | ) |
| Investment income and other | | | (9.4 | ) | | | (4.2 | ) | | | (5.2 | ) | | 124 | | | | (9.4 | ) | | | (4.2 | ) | | | (5.2 | ) |
| Interest expense | | 23.2 | | 3.4 | | 19.8 | | 582 | | | 23.2 | | 3.4 | | 19.8 | |
| Net (gain) loss on exchange rates | | 0.1 | | | (2.8 | ) | | 2.9 | | | (104 | ) | | 0.1 | | | (2.8 | ) | | 2.9 | |
| | | | | | | | | | | |
| | | $ | 48.1 | | $ | 30.1 | | $ | 18.0 | | | 60 | % | |
| | | | | | | | | | | |
General and administrative expenses increased due to higher business development costs and employee related expenses. Taxes other than on income decreased due to the elimination of municipal taxes as a result of the conversion of the OSA to Petrodelta. Interest expense increased due to Harvest Vinccler’s estimated liability for interest of $52.9 million on the tax assessments of $52.9 million as well as increased borrowings to pay the tax assessments.
In 2005, Venezuela modified the Science and Technology Law to require companies doing business in Venezuela to invest, contribute, or spend a percentage of their gross revenue on projects to promote inventions or investigate technology in areas deemed critical to Venezuela. Harvest Vinccler was unable to estimate the corresponding percentage of the gross revenue for 2005 or the first quarter of 2006 until the regulations were released as many aspects of the law were unclear. In October 2006, the Executive Branch of the Venezuelan government issued the Regulations for the Science and Technology Law which established the methodology for determining the required investment, contribution or expenditure for the 2005 calendar year financial results. After release of the regulations, Harvest Vinccler accrued $3.9 million for the estimated liability for 2005 and the first quarter of 2006 based on its current understanding of the regulations.
Years Ended 2005 and 2004
We reported net income of $50.8 million, or $1.32 diluted earnings per share, for 2005 compared with net income of $34.4 million, or $0.90 diluted earnings per share, for 2004. Below is a discussion of revenues, price and volume variances.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | % | | | | |
| | | December 31, | | | Increase | | | Increase | | | | |
| (in millions) | | 2005 | | | 2004 | | | (Decrease) | | | (Decrease) | | | Increase | |
| Revenues | | | | | | | | | | | | | | | | | | | | |
| Crude oil | | $ | 210.5 | | | $ | 154.1 | | | $ | 56.4 | | | | 37 | % | | | | |
| Natural gas | | | 26.4 | | | | 32.0 | | | | (5.6 | ) | | | (18 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Total Revenues | | $ | 236.9 | | | $ | 186.1 | | | $ | 50.8 | | | | 27 | % | | | | |
| | | | | | | | | | | | | | | | | |
The following table reconciles the net change in revenue:
| | | | | | | | | | | | | | | | | | | | | |
| Price and Volume Variances | | | | | | | | | | | | | | | | | | | | |
| Crude oil price Variance (per Bbl) | | $ | 24.02 | | | $ | 18.90 | | | $ | 5.12 | | | | 27 | % | | $ | 41.6 | |
| Volume Variances | | | | | | | | | | | | | | | | | | | | |
| Crude oil volumes (MBbls) | | | 8,763 | | | | 8,152 | | | | 611 | | | | 7 | % | | $ | 14.7 | |
| Natural gas volumes (MMcf) | | | 25,677 | | | | 31,059 | | | | (5,382 | ) | | | (17 | ) | | | (5.5 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Total volume variances | | | | | | | | | | | | | | | | | | $ | 9.2 | |
| | | | | | | | | | | | | | | | | | | | |
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Revenue, Crude Oil Price Variance and Volume Variances
Revenues were higher in 2005 compared with 2004 due to increases in world crude oil prices and oil volumes as a result of our second half 2004 drilling program. Price variance is net of the cost of hedges in place during 2005. Natural gas delivery volumes declined due to the refusal of MEP and PDVSA to issue permits for the drilling of new oil wells and the natural decline of associated natural gas from existing oil wells. All natural gas deliveries are associated with the Uracoa oil wells.
Total expenses and other non-operating (income) expense:
| | | | | | | | | | | | | | | | | |
| | | Year Ended | | | | | | | % | |
| | | December 31, | | | Increase | | | Increase | |
| | | 2005 | | | 2004 | | | (Decrease) | | | (Decrease) | |
| Operating expenses | | $ | 39.7 | | | $ | 33.3 | | | $ | 6.4 | | | | 19 | % |
| Depletion and amortization | | | 41.2 | | | | 34.2 | | | | 7.0 | | | | 20 | |
| Depreciation | | | 2.7 | | | | 1.9 | | | | 0.8 | | | | 42 | |
| General and administrative | | | 22.8 | | | | 21.9 | | | | 0.9 | | | | 4 | |
| Account receivable write-off on retroactive oil price adjustment | | | 4.5 | | | | — | | | | 4.5 | | | | 100 | |
| Gain on sale of long-lived assets | | | — | | | | (0.6 | ) | | | 0.6 | | | | 100 | |
| Bad debt recovery | | | — | | | | (0.6 | ) | | | 0.6 | | | | 100 | |
| Taxes other than on income | | | 6.4 | | | | 5.6 | | | | 0.8 | | | | 14 | |
| Investment income and other | | | (4.2 | ) | | | (2.1 | ) | | | (2.1 | ) | | | 100 | |
| Interest expense | | | 3.4 | | | | 7.7 | | | | (4.3 | ) | | | (56 | ) |
| Net (gain) loss on exchange rates | | | (2.8 | ) | | | 0.6 | | | | (3.4 | ) | | | 566 | |
| | | | | | | | | | | | | |
| | | $ | 113.7 | | | $ | 101.9 | | | $ | 11.8 | | | | 12 | % |
| | | | | | | | | | | | | |
Operating expenses increased as a result of higher oil volumes and maintenance work. Depletion and amortization expense per Boe produced during 2005 was $3.16 versus $2.56 in 2004. The increase was due to the exclusion of Contractually Restricted Reserves in our proved reserves as well as other minor revisions. General and administrative expense increased primarily due to penalties accrued for the failure to withhold the prescribed amount of value added taxes from payments to vendors in Venezuela in 2005. Taxes other than on income increased due to increased Venezuelan municipal taxes which result from higher oil revenues.
The effective tax rate increased to 46 percent in 2005 from 41 percent in 2004 primarily due to the payment of $5.3 million related to a partial settlement of the 2001 through 2004 preliminary tax assessment.
Capital Resources and Liquidity
While we can give no assurance, we currently believe that Petrodelta will fund its own operations and pay a dividend prior to December 31, 2008, and that our cash on hand will provide sufficient capital resources and liquidity to fund our exploration and business development expenditures and semi-annual interest payment obligations for the next twelve12 months. InItem 1A –— Risk Factors, we discuss a number of variables and risks related to Venezuelaour investment in Petrodelta and exploration projects that could cause actual results to differ materially and significantly affect our capital resources and liquidity. These risk factors include, but are not limited to, the affects of continued delays in the conversion to Petrodelta, delays or inability of PDVSAPPSA to pay for past and future crude oil and natural gas deliveries, the ability to implement our business plan,Petrodelta’s Business Plan, changes in oil prices, fiscal and contractual stability, payment of a Petrodelta dividend and expropriation of our assets.the ability to obtain financing for other projects. We also point out that the total capital required to develop the fields in Venezuela may exceed Harvest Vinccler’sPetrodelta’s available cash and financing capabilities, and that there may be operational or contractual consequences to this inability. In addition, our ability to acquireexplore and develop growth opportunities outside of Venezuela is dependent upon the ability to receive dividends from Petrodelta and access debt and equity markets.
The oil and natural gas industry is a highly capital intensive and cyclical business with unique operating and financial risks (seeItem 1A — Risk Factors). We require capital principally to fund the acquisitionexploration and development of new oil and gas properties.
The amount of available capital will affect the scope of our operations and the rate of our growth. Our future rate of capital resource and liquidity growth also depends substantially upon the prevailing prices of oil. Prices also affect the amount of cash flow available for capital expenditures.
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On February 5, 2003, Venezuela imposed currency controls and created the Commission for Administration of Foreign Currency with the task of establishing the detailed rules and regulations and generally administering the exchange control regime. These controls fix the exchange rate between the Bolivar and the U.S.
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Dollar and restrict the ability to exchange Bolivars for U.S. Dollars and vice versa. The Bolivar is not readily convertible into the U.S. Dollar. We do not expect the Venezuelan currency conversion restriction to adversely affect our ability to meet short-term loan obligations and operating requirements for the foreseeable future.
In March 2007, Venezuela announced that effective January 1, 2008, the currency unit of the monetary system of Venezuela will be redenominated to the equivalent of 1,000 current Bolivars. This means that the Bolivar dropped three zeros effective January 1, 2008. From January 1, 2008, all amounts of money became denominated in a new and smaller scale of Bolivars under the temporary name of Bolívares Fuertes, which after a period of time will bear again the name of Bolivars.
The amount of available capital will affect the scope of our operations and the rate of our growth. Our future rate of capital resource and liquidity growth also depends substantially upon the prevailing prices of oil. Prices also affect the amount of cash flow available for capital expenditures. Our ability to acquire and develop growth opportunities outside of Venezuela is dependent upon the ability to receive dividends from Petrodelta and access debt and equity markets.
Debt Reduction.Debt.We have semi-annual principal obligations of $9.8 and $9.3 million on theAt December 31, 2007, Harvest Vinccler loans.has debt of 20 billion Bolivars (approximately $9.3 million) which is secured by $6.8 million in restricted cash deposited in a U.S. bank. We have no other debt obligations.
Working Capital.Our capital resources and liquidity are affected by the conversion to Petrodelta and the ability of Petrodelta to declarepay dividends.
The net funds raised and/or used in each of the operating, investing and financing activities are summarized in the following table and discussed in further detail below:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | |
| | | Year Ended December 31, | | | (in thousands except as indicated) | |
| | | (in thousands) | | | 2007 | | | | | |
| | | 2006 | | 2005 | | 2004 | | | (restated) | | 2006 | | 2005 | |
| Net cash provided by (used in) operating activities | | $ | (24,448 | ) | | $ | 114,665 | | $ | 74,140 | | | $ | (20,451 | ) | | $ | (24,448 | ) | | $ | 114,665 | |
| Net cash used in investing activities | | | (90,556 | ) | | | (15,647 | ) | | | (39,684 | ) | |
| Net cash provided by (used in) investing activities | | | 69,756 | | | (90,556 | ) | | | (15,647 | ) |
| Net cash provided by (used in) financing activities | | 100,064 | | | (20,599 | ) | | | (88,516 | ) | | | (76,543 | ) | | 100,064 | | | (20,599 | ) |
| | | | | | | | | | | | | | | |
| Net increase (decrease) in cash | | $ | (14,940 | ) | | $ | 78,419 | | $ | (54,060 | ) | | $ | (27,238 | ) | | $ | (14,940 | ) | | $ | 78,419 | |
| | | | | | | | | | | | | | | |
| | | |
| Working Capital | | | 111,534 | | 117,564 | | 178,074 | |
| Current Ratio | | | 3.6 | | 2.4 | | 3.9 | |
| Total Cash, including restricted cash | | | 127,610 | | 236,968 | | 163,019 | |
| Total Debt | | | 9,302 | | 104,651 | | 5,467 | |
| Percent of total debt to capitalization | | | | 3 | % | | | 27 | % | | | 2 | % |
At December 31, 2006, we had current assets of $199.8 million and current liabilities of $82.2 million, resulting in working capital of $117.6 million and a current ratio of 2.4:1. This compares with a working capital of $178.1 million and a current ratio of 3.9:1 at December 31, 2005. The decrease in working capital of $60.5$6.0 million was primarily due to the inability to reflect a dividend from Petrodelta or collect the net results of our producing operations in Venezuelaadvances made by Harvest Vinccler to PDVSA in our consolidated financial statements for the year ended December 31, 20062007 and the charge in the second and third quarters of 2006 of $73.8 million for additional taxes and related interest for the impact of income tax assessments by the SENIAT for 2001 through first quarter of 2006.
Cash Flow from Operating Activities. During the yearyears ended December 31, 2007 and 2006, net cash used in operating activities was approximately $20.5 million and $24.4 million. During the year ended December 31, 2005, net cash provided by operating activities was approximately $114.7 million.million, respectively. The $139.1$3.9 million decrease was primarily due to the collection of the first quarter accrued oil and gas sales receivable in the first quarter of 2006 which was offset by the charge in the second and third quarters of 2006 for the estimated tax assessments and related interest, as well as our inability to recognize equity earnings for our producing properties in Venezuelareflect a dividend from Petrodelta or collect the advances made by Harvest Vinccler to PDVSA beginning with the second quarter of 2006 under the equity method of accounting pending conversion to Petrodelta.2006.
Cash Flow from Investing Activities.During the yearyears ended December 31, 2007 and 2006, we had limited workover and production-related expenditures and we deposited cash of $94.5 million as collateral for four loans with Venezuelan banks, of which $5.6 million has been returned to us. During the year ended December 31, 2005, we had drilling workover and production-related capital expenditures of approximately $16.1 million and no restricted cash.expenditures. The decreasereduction in capital expenditures iswas due to the continued suspension of our drilling program and the fact that our producing properties are now recognized under the conversionequity method of the OSA
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accounting. We continued to Petrodelta has not been finalized. The increase in restricted cash is due to collateral for the new borrowings to pay the tax assessments received from the SENIAT and to fund operations. We continue to expendadvance funds during the period prior to the conversionformation of Petrodelta for workovers and maintenance of the existing wells. After the conversion toformation of Petrodelta, our capital commitments for Petrodelta will be determined by the business planBusiness Plan provided for in the Conversion Contract and the annual budget approved by the Petrodelta Board of Directors to implement the business plan.Business Plan. Outside of Venezuela, our capital commitments to date support our business development efforts and are substantially at our discretion. During the year ended December 31, 2007, we invested $4.1 million of investigatory costs in support of our business development.
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In January 2007, we purchased a 45 percent interest in Fusion for $4.6 million and HNR Finance funded its 40 percent share of Petrodelta for $2.8 million. During the year ended December 31, 2006, we deposited cash of $94.5 million as collateral for four loans with Venezuelan banks, of which $5.6 million had been returned to us. By December 31, 2006, the restricted cash balance was $88.9 million. During the year ended December 31, 2007, $82.1 million of the restricted cash was released and returned to us.
Cash Flow from Financing Activities.During the year ended December 31, 2007, Harvest Vinccler repaid 205 billion Bolivars (approximately $95.3 million) of its Bolivar denominated debt. Harvest Vinccler repaid the debt using a series of exchange transactions more fully described inPart IV, Item 15, Notes to the Consolidated Financial Statements, Note 12 — Gain on Financing Transactions. During the year ended December 31, 2006, Harvest Vinccler borrowed 11 billion Bolivars (approximately $5.0 million) for short term Bolivar denominated obligations, 105 billion Bolivars (approximately $48.8 million) and 20 billion Bolivars (approximately $9.3 million) for the SENIAT income tax assessments and related interest and 120 billion Bolivars (approximately $55.8 million) for the SENIAT income tax assessments and related interest, to refinance previous borrowings and for operational needs. Also during the year ended December 31, 2006, Harvest Vinccler repaid $5.5 million of its U.S. Dollar debt (one payment of $0.3 million and four payments of $1.3 million each on the variable rate loans) and 31 billion Bolivars (approximately $14.3 million) of its Bolivar debt. During
In June 2007, we announced that our Board of Directors had authorized the year endedpurchase of up to $50 million of our common stock from time to time through open market transactions. As of December 31, 2005, Harvest Vinccler repaid $6.42007, 3.0 million shares had been purchased under the program for $32.8 million, or an average cost of its U.S. Dollar denominated debt (four payments of $0.3$11.09 per share, including commissions. At December 31, 2007, we had approximately 34.8 million each and four payments of $1.3 million each on the variable rate loans).shares outstanding.
Contractual Obligations
We have a lease obligation of approximately $17,000 per month for our Houston office space. This lease runs through April 2014. In addition, Harvest Vinccler has lease obligations for office space in Maturin and Caracas, Venezuela for approximately $13,200 and $4,000 per month, respectively.month. This lease runs through December 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments (in thousands) Due by Period | | | Payments (in thousands) Due by Period | |
| | | Less than | | After 4 | | | Less than | | After 4 | |
| Contractual Obligation | | Total | | 1 Year | | 1-2 Years | | 3-4 Years | | Years | | | Total | | 1 Year | | 1-2 Years | | 3-4 Years | | Years | |
| Long-Term Debt | | $ | 104,651 | | $ | 37,674 | | $ | 38,140 | | $ | 28,837 | | $ | — | | | $ | 9,302 | | $ | 9,302 | | $ | — | | $ | — | | $ | — | |
| Building Lease | | 2,775 | | 407 | | 400 | | 412 | | 1,556 | | | 1,795 | | 342 | | 333 | | 216 | | 904 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 107,426 | | $ | 38,081 | | $ | 38,540 | | $ | 29,249 | | $ | 1,556 | | | $ | 11,097 | | $ | 9,644 | | $ | 333 | | $ | 216 | | $ | 904 | |
| | | | | | | | | | | | | | | | | | | | | | | |
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.
As noted above underCapital Resources and Liquidity, Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official exchange rate in February 2004 and again in March 2005. We do not expect the currency conversion restrictions or the adjustment in the exchange rate to have a material impact on us at this time. Dividends from Petrodelta will be denominated in U.S. Dollars when paid. Within the United States, inflation has had a minimal effect on us, but it is potentially an important factor with respect to results of operations in Venezuela.
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In March 2007, Venezuela announced that effective January 1, 2008, the currency unit of the monetary system of Venezuela will be redenominated to the equivalent of 1,000 current Bolivars. This means that the Bolivar will drop three zeros effective January 1, 2008. From January 1, 2008, all amounts of money will become denominated in a new and smaller scale of Bolivars under the temporary name of Bolívares Fuertes, which after a period of time will bear again the name of Bolivars.
During the yearyears ended December 31, 2005,2007 and 2006, our net foreign exchange gaingains attributable to our international operations was $2.8 million.were minimal. The U.S. Dollar and Bolivar exchange rates werehave not been adjusted insince March 2005. No gains or losses were recognized from February 2004 to February 2005. However, there are many factors affecting foreign exchange rates and resulting exchange gains and losses, manymost of which are beyond our control. We have recognized significant exchange gains and losses in the past, resulting from fluctuations in the relationship of the Venezuelan currency to the U.S. Dollar. It is not possible for us to predict the extent to which we may be affected by future changes in exchange rates and exchange controls.
An exemption under the Venezuelan Criminal Exchange Law for transactions in certain securities results in an indirect securities transaction market of foreign currency exchange, through which companies may obtain foreign currency legally without requesting it from the Venezuelan government. Publicly available quotes do not exist for the securities transaction exchange rate but such rates may be obtained from brokers. Securities transaction markets are used to move financial securities in and out of Venezuela.
In October 2007, the government of Venezuela announced the application of a new tax on financial transactions (the “TFT”) to private companies. The TFT does not apply to individuals. The tax was set at 1.5 percent of the value of the transaction. The TFT applies to all debits to bank accounts as well as payments of debt outside the banking system and is not tax deductible. The levy will be applied from November 1, 2007 through December 31, 2008. The TFT will not have a material effect on Harvest Vinccler’s financial position, results of operations or cash flows.
Critical Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. The equity method of accounting is used for companies and other investments in which we have significant influence. All intercompany profits, transactions and balances have been eliminated.
Investment in Equity AffiliateAffiliates
EffectiveThe equity method of accounting is used for companies and other investments in which we have significant influence. In January 2007, we purchased a 45 percent equity interest in Fusion. In October 2007, Petrodelta was formed, and the equity in earnings from April 1, 2006 our activities under our OSA are reflected under the equity method of accounting. Since such activities are subject to the completion of the conversion of the OSA to Petrodelta, our consolidated financial statements prepared in accordance with GAAP for the year ended December 31, 2006, do not reflect2007 is reflected in the
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net results fourth quarter of our producing operations2007 consolidated statement of operations. These investments are increased or decreased by earnings/losses and decreased by dividends paid. No dividends were declared or paid by Fusion or Petrodelta in Venezuela for the last three quarters of the year. We will not be able to include the results of our Venezuelan operations in our consolidated financial statements until the conversion to Petrodelta is completed.2007.
Property and Equipment
We followIn December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. Although the full cost method of accounting for oil and natural gas properties with costs accumulated in cost centers on a country-by-country basis. All costs associated with the acquisition, exploration and development continues to be an accepted method of accounting for oil and gas properties, the successful efforts method of accounting as prescribed by SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies is the preferred method. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154 Accounting Changes and Error Corrections, financial information for prior periods has been restated to reflect retrospective application of the successful efforts method. We believe the successful efforts method provides a more transparent representation of our results of operations and the ability to assess our future investments in oil and gas properties for impairment based on their estimated fair values rather than being required to base valuation on prices and costs as of the balance sheet date. The significant differences between successful efforts and full cost accounting for oil and gas properties relate to the expensing of exploration activities and related unsuccessful exploratory drilling activities. The expensing of these costs can create volatility in the statement of operations. The change in accounting principle resulted in a cumulative, non-cash increase to
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retained earnings of $52.4 million, net of income tax, as of December 31, 2004. Retained earnings increased due to the reversal of ceiling test write downs in prior years required under the full cost accounting rules of the SEC. There were no such impairments under the successful efforts accounting rules. The effect of the accounting change on income from continuing operations for the years ended December 31, 2006 and 2005 was a decrease of $4.9 million and $15.0 million, net of income tax, or $0.13 and $0.39 per diluted share, respectively. The decrease in income from continuing operations was due to an increase in depletion expense. There was no effect on cash and cash equivalents.
Oil and natural gas lease acquisition costs are capitalized when incurred. Unproved properties with individually significant acquisition costs are assessed quarterly on a property-by-property basis, and any impairment in value is recognized. Unproved properties with acquisition costs that are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized over the average holding period. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties. Lease rentals are expensed as incurred.
Oil and natural gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. Exploratory drilling costs are capitalized when drilling is complete if it is determined that there is economic producibility supported by either actual production, conclusive formation test or by certain technical data. If proved commercial reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved commercial reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the projects is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in production of natural gas and crude oil, are capitalized.
Depreciation, depletion, and amortization of the cost of proved oil and natural gas properties are calculated using the unit of production method. The reserve base used to calculate depletion, depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties. With respect to lease and well equipment costs, which include costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are taken into account. Certain other assets are depreciated on a straight-line basis.
Assets are grouped in accordance with paragraph 30 of SFAS No. 19 Financial Accounting and Reporting by Oil and Gas Producing Companies. The basis for grouping is reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.
Amortization rates are updated quarterly to reflect: 1) the addition of capital costs, 2) reserve revisions (upwards or downwards) and additions, 3) property acquisitions and/or property dispositions and 4) impairments.
We account for impairments under the provisions of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. When circumstances indicate that an asset may be impaired, we compare expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset. If the future undiscounted cash flows, based on our estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.
Inventory held for use in the exploration for and development and production of natural gas and crude oil reserves are capitalized as incurred, including exploration overhead. Only overhead that is directly identifiedcarried at cost with acquisition, exploration or development activities is capitalized. All costs relatedadjustments made from time to production, general corporate overhead and similar activities are expensed as incurred. The costs for China unproved properties are excluded from amortization until the properties are evaluated. At least annually, we evaluate our unproved property for possible impairment. If we abandon all exploration effortstime to recognize any reductions in China where no proved reserves are assigned, all exploration and acquisition costs associated with the country will be expensed. Due to the unpredictable nature of exploration drilling activities, the amount and timing of impairment expenses are difficult to predict with any certainty.value.
Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carry forwards. A valuation allowance for
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deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
Foreign Currency
Our current operations are in Venezuela. The U.S. Dollar is our functional and reporting currency. Amounts denominated in non-U.S. currencies are re-measured in U.S. Dollars, and all currency gains or losses are recorded in the statement of operations. We attempt to manage our operations in such a manner as to reduce our exposure to foreign exchange losses. However, there are many factors that affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence. We have recognized significant exchange gains and losses in the past resulting from fluctuations in the relationship of the Bolivar to the U.S. Dollar. It is not possible to predict the extent to which we may be affected by future changes in exchange rates.
New Accounting Pronouncements
In February 2006,2008, the FinancialFASB issued FASB Staff Position (“FSP”) 157-1 – Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Standards BoardPronouncements That Address Leasing Transactions (“FASB”FSP 157-1”) issued Statement of Financial Accounting Standard 155 –, which excludes SFAS 13 Accounting for Certain Hybrid Financial Instruments (“Leases, and its related interpretive accounting pronouncements from the provisions of SFAS 155”), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption157. FSP 157-1 is effective for all financial instruments acquired or issued afterwith the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. Theinitial adoption of SFAS 155157. FSP 157-1 will not have a material effect on our consolidated financial position, results of operations or cash flows.
In March 2006,February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 – Effective Date of FASB Statement of Financial Accounting Standard 156 – Accounting for Servicing of Financial AssetsNo. 157 (“SFAS 156”FSP 157-2”), which requiresdelays the effective date of SFAS 157 for all separately recognized servicingnonfinancial assets and servicingnonfinancial liabilities, be initially measuredexcept those recognized or disclosed at fair value. SFAS 156 permits, but does not require,value in the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156financial statements on a recurring basis (at least annually), until January 1, 2009. FSP 157-2 will not have a material effect on our consolidated financial position, results of operations or cash flows.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48 (“FIN 48”) – Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of Statement of Financial Accounting Standard No. 109 – Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
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to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 will not impact our consolidated financial position, results of operations and cash flows.
In September 2006,February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 157159 – The Fair Value MeasurementOption for Financial Assets and Financial Liabilities (“SFAS 157”159”), which establishes a framework for measuringpermits entities to choose to measure many financial instruments and certain other items at fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Adoptionvalue. SFAS 159 is effective for all financial statements issued foras of the beginning of an entity’s first fiscal years beginningyear that begins after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged.2007. SFAS 157159 will not have a material effect on our consolidated financial position, results of operations andor cash flows.
In September 2006,December 2007, the FASB issued SFAS 158141 (revised 2007) – Employers’ Accounting for Defined Benefit PensionBusiness Combinations (“SFAS 141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and Other Postretirement Plans (“SFAS 158”) which improves financialcomparability of the information that a reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liabilityentity provides in its statement of financial positionreports about a business combination and its effects. SFAS 141R applies prospectively to recognize changes in that funded status in the year inbusiness combinations for which the changes occur through comprehensive income. Adoptionacquisition date is effective ason or after the beginning of the first annual reporting period beginning on or after December 31, 2006, for calendar year corporations with publicly traded equity securities. Earlier application15, 2008. An entity may not apply it before that date. When adopted, SFAS 141R is encouraged. SFAS 158 will not expected to have ana material effect on our consolidated financial position, results of operations or cash flows.
In September 2006,December 2007, the SECFASB issued Staff Accounting BulletinSFAS 160 – Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 10851 (“SAB 108”SFAS 160”) regarding. The objective of SFAS 160 is to improve the processrelevance, comparability and transparency of quantifyingthe financial statement misstatements. SAB 108 addresses the diversityinformation that a reporting entity provides in practice in quantifyingits consolidated financial statement misstatementsstatements. SFAS 160 is effective for fiscal years, and the potential under current practice for the build up of improper amountsinterim periods within those fiscal years, beginning on the balance sheet. The guidance in SAB 108 didor after December 15, 2008. Early adoption is prohibited. When adopted, SFAS 160 is not expected to have a material effect on our consolidated financial position, results of operations andor cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from adverse changes in oil and natural gas prices, interest rates and foreign exchange risk, as discussed below.
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Oil Prices
As an independent oil producer, our revenue, other income and profitability, reserve values, access to capital and future rate of growth are substantially dependent upon the prevailing prices of crude oil and natural gas. Prevailing prices for such commodities are subject to wide fluctuation in response to relatively minor changes in supply and demand and a variety of additional factors beyond our control. Historically, prices received for oil production have been volatile and unpredictable, and such volatility is expected to continue. In August and September 2004, Harvest Vinccler hedged a portion of its oil sales for calendar year 2005 by purchasing two WTIWest Texas Intermediate (“WTI”) crude oil puts. Because gains or losses associated with hedging transactions are included in oil sales when the hedged production is delivered, such gains and losses are generally offset by similar changes in the realized prices of the commodities. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 – Organization and Summary of Significant Accounting Policies – Derivatives and Hedgingfor a complete discussion of our derivative activity. We had no hedging transactions in place for our 2004 or 2006 production.
Interest Rates
Total short-term debt at December 31, 20062007 of $37.7$9.3 million consisted of Harvest Vinccler’s Bolivar denominated debt, which had a fixed rate for its initial twelve months. Total short-term debt at December 31, 20052006 of $5.5$37.7 million consisted of Harvest Vinccler U.S. Dollar denominated variablefixed rate loans, which was all repaid in 2006.loans. A hypothetical 10 percent adverse change in the interest rate would not have a material affecteffect on our results of operations.
Foreign Exchange
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The Bolivar is not readily convertible into the U.S. Dollar. We have utilized no currency hedging programs to mitigate any risks associated with operations in Venezuela, and therefore our financial results are subject to favorable or unfavorable fluctuations in exchange rates and inflation in that country. Venezuela has recently imposed currency exchange controls (seeCapital Resources and Liquidityabove).
Item 8. Financial Statements and Supplementary Data
The information required by this item is included herein on pages S-1 through S-28.S-34.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures (Restated)
The SEC adopted rules requiring reporting companiesRestatement.As discussed in Item 15 of this Form 10-K/A and in Note 1 to maintain disclosure controlsthe consolidated financial statements contained in Part IV, management of the Company has amended its Annual Report on Form 10-K for the year ended December 31, 2007 to restate (1) its consolidated financial statements as of December 31, 2007 for the year then ended; (2) its selected financial data as of and procedures to provide reasonable assurance that a registrant is able to record, process, summarizefor the year ended December 31,2007; and report(3) its quarterly results of operations for the information requiredfourth quarter in the registrant’s quarterlyyear ended December 31, 2007. The determination to restate this previously issued financial information was made as a result of management’s identification of an error related to the accounting for deferred tax adjustments to reconcile net income reported by Petrodelta under IFRS to that required by GAAP. We determined that since October 1, 2007 both the monetary and annual reports undernon-monetary temporary differences recorded in Petrodelta’s IFRS financial statements had been adjusted in arriving at our GAAP consolidated financial statements rather than only the Securities Exchange Act of 1934 (the “Exchange Act”). While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area. There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.non-monetary temporary differences impacted by inflationary adjustments.
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Evaluation of Disclosure Controls and Procedures.We have established disclosure controls and procedures that are designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of December 31, 2006, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is 1) recorded, processed, summarized and reported within the time periods as specified in the SEC’s rules and forms and 2)that such information is accumulated and communicated to our management, including our principal executiveChief Executive Officer and principal financial officers,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In our Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 17, 2008 (the “Original Filing”), our Chief Executive Officer and Chief Financial Officer initially concluded that our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) promulgated under the Exchange Act) were effective as of December 31, 2007.
In connection with the restatement discussed above, management of the Company, including our Chief Executive Officer and Chief Financial Officer, reevaluated the effectiveness of our disclosure controls and procedures as of December 31, 2007 pursuant to SEC Rule 13a-15(b) under the Exchange Act. As a result of such reevaluation, our Chief Executive Officer and Chief Financial Officer have now concluded that our disclosure controls and procedures were not effective as of December 31, 2007 because of a material weakness in our internal control over financial reporting as described below.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. BasedA material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company did not maintain effective controls over period-end financial reporting process as of December 31, 2007. Specifically, effective controls did not exist to ensure that the deferred tax adjustments to reconcile net income reported by Petrodelta under IFRS to that required by GAAP were completely and accurately identified; therefore the necessary adjustments were not appropriately analyzed and recorded on a timely basis. This control deficiency resulted in the misstatement of our net income from unconsolidated equity affiliates and minority interest in consolidated subsidiary companies on our evaluation underconsolidated statement of operations, investment in equity affiliate and minority interest on our consolidated balance sheet and related financial disclosures, and the Internal Control Integrated Framework,restatement of the Company’s consolidated financial statements as of and for the year ended December 31, 2007. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. In the Original Filing, our management initially concluded that our internal control over financial reporting was effective as of December 31, 2006. PricewaterhouseCoopers LLP, an independent registered public accounting firm,2007. In connection with the restatement discussed above, management has auditedsubsequently reevaluated the effectiveness of our management’s assessmentinternal control over financial reporting and concluded that the material weakness described above existed in our internal control over financial reporting as of December 31, 2007. Because of this material weakness, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2007. Accordingly, management has restated its report on internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2006, and issued2007, has been audited by PricewaterhouseCoopers LLP, an attestationindependent registered public accounting firm, as stated in their report which appears herein.
Management’s Remediation Efforts.Subsequent to December 31, 2007, management has enhanced the controls over its equity investment to ensure that the adequate information regarding Petrodelta’s tax temporary differences is included herein.obtained and that a comprehensive analysis of such information is performed. Specifically, management has requested further information related to the nature of each tax temporary difference which enables management to determine the impact on the deferred tax adjustment to reconcile net income reported by Petrodelta under IFRS to that required under GAAP. The enhanced controls have enabled management to ensure that the deferred tax adjustment to reconcile net income reported by Petrodelta under IFRS to that required under GAAP is completely and accurately reconciled and identified. Management further enhanced the controls necessary to ensure
33
that all necessary adjustments are appropriately analyzed and recorded on a timely basis. However, the material weakness will not be considered remediated until the enhancements are in place and operating effectively for a sufficient period of time.
Changes in Internal Control over Financial Reporting.There have been no changes in our internal control over financial reporting during our most recent quarter ended December 31, 2007 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Item 9B. Other Information
None.
3134
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Please refer to the information under the captions “Election of Directors” and “Executive Officers” in our Proxy Statement for the 20072008 Annual Meeting of Stockholders.
Item 11. Executive Compensation
Please refer to the information under the caption “Executive Compensation” in our Proxy Statement for the 20072008 Annual Meeting of Stockholders.
| | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Please refer to the information under the caption “Stock Ownership” in our Proxy Statement for the 20072008 Annual Meeting of Stockholders.
| | |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence |
Please refer to the information under the caption “Certain Relationships and Related Transactions” in our Proxy Statement for the 20072008 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
Please refer to the information under the caption “Independent Registered Public Accounting Firm” in our Proxy Statement for the 20072008 Annual Meeting of Stockholders.
3235
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Index to Financial Statements:
| | | | | | |
| | | | | Page |
(a)1. | | Index to Financial Statements: | | | | |
| | | | | | |
| | | | | S-1 | |
| | | | | | | |
| | | | | S-2 | |
| | | | | | | |
| | | | | S-3 | |
| | | | | | | |
| | | | | S-4 | |
| | | | | | | |
| | | | | S-5 | |
| | | | | | | |
| | | | | S-7 | |
| | | | |
| 2. Consolidated Financial Statement Schedules and Other: | | | | |
| | | | |
| | | S-40 | |
2. Consolidated Financial Statement Schedules and Other:
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
(b) 3. Exhibits:
| | | | |
| | 3.1 | | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762.) |
| | | | | |
| | 3.2 | | Amended and Restated Bylaws as of April 6, 2006.May 17, 2007. (Incorporated by reference to Exhibit 3.23.1 to our Form 10-Q8-K filed on April 20, 2006,23, 2007, File No. 1-10762.) |
| | | | | |
| | 4.1 | | Form of Common Stock Certificate. (Incorporated by reference to the exhibitsExhibit 4.1 to our Registration Statement Form S-1 (Registration10-K filed on March 17, 2008, File No. 33-26333).1-10762.) |
| | | | | |
| | 4.2 | | Certificate of Designation, Rights and Preferences of the Series B.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 | | SecondThird Amended and Restated Rights Agreement, dated as of April 15, 2005,August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.399.3 to our Form 10-Q8-A filed on April 29, 2005,October 23, 2007, File No. 1-10762.) |
| |
| | 10.1 | | Operating Service Agreement between Benton Oil and Gas Company and Lagoven, S.A., which has been subsequently combined into PDVSA Petroleo y Gas, S.A., dated July 31, 1992, (portions have been omitted pursuant to Rule 406 promulgated under the Securities Act of 1933 and filed separately with the Securities and Exchange Commission. (Incorporated by reference to the exhibits to our Registration Statement Form S-1 (Registration No. 33-52436).) |
| |
| | 10.3 | | Alexander E. Benton Settlement and Release Agreement effective May 11, 2001 (Incorporated by reference to Exhibit 10.27 to our Form 10-Q, filed on August 13, 2001, File No. 1-10762.). |
33
| 10.510.1 | | 2001 Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 filed on April 9, 2002 (Registration Statement No. 333-85900).) |
| |
| | 10.6 | | Addendum No. 2 to Operating Service Agreement Monagas SUR dated 19th September, 2002. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) |
| |
| | 10.7† | 10.2 | | Harvest Natural Resources 2004 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on May 25, 2004 (Registration Statement No. 333-115841).) |
| | | | | |
| | 10.8 | 10.3† | | Form of Indemnification Agreement between Harvest Natural Resources, Inc. and the Directorseach Director and Executive OfficersOfficer of the Company. (Incorporated by reference to Exhibit 10.19 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
36
| | | | |
| | 10.9† | 10.4 | | Form of 2004 Long Term Stock Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.20 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
| | | | | |
| | 10.10† | 10.5 | | Form of 2004 Long Term Stock Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.21 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
| | | | | |
| | 10.11† | 10.6 | | Form of 2004 Long Term Stock Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.22 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
| |
| | 10.12 | | The Transitory Agreement between Harvest Natural Resources, Inc. and PDVSA Petroleo S.A., dated August 4, 2005. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| |
| | 10.13 | 10.7† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Steven W. Tholen. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| |
| | 10.14† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Kerry R. Brittain. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| |
| | 10.15 | 10.8† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Karl L. Nesselrode. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| | | | | |
| | 10.16 | 10.9† | | Employment Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| |
| | 10.17† | | Employment Agreement dated September 26, 2005 between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
| |
| | 10.18 | 10.10† | | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.24 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
| | | | | |
| | 10.19 | 10.11† | | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
34
| | 10.20 | | | |
| | 10.12† | | Stock Option Agreement dated September 26, 2005, between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.26 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
| | | | | |
| | 10.21 | 10.13† | | Employment Agreement dated February 10, 2006 between Harvest Natural Resources, Inc. and Kurt A. Nelson. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.) |
| |
| | 10.22 | | Memorandum of Understanding dated March 31, 2006, between Corporación Venezolana del Petroleo, S.A., PDVSA Petroleo, S.A. and Harvest Vinccler, C.A. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.) |
| |
| | 10.23 | 10.14 | | Harvest Natural Resources 2006 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on June 1, 2006 [Registration Statement No. 333-134630].) |
| | | | | |
| | 10.24 | 10.15 | | Form of 2006 Long Term Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
| | | | | |
| | 10.25 | 10.16 | | Form of 2006 Long Term Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
| | | | | |
| | 10.26 | 10.17 | | Form of 2006 Long Term Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
| | | | | |
| | 10.27 | 10.18† | | Stock Unit Award Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
37
| | | | |
| | 10.28 | 10.19† | | Stock Unit Award Agreement dated March 2, 2006 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
| |
| | 10.29 | | Note Payable agreement dated September 28, 2006 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. Banco Universal related to a principal amount of 105 billion Bolivars with interest at 10.02 percent, for financing of the SENIAT assessments. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on October 26, 2006, File No. 1-10762.) |
| |
| | 10.30 | | Note Payable agreement dated October 3, 2006 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. Banco Universal related to a principal amount of 20 billion Bolivars with interest at 10.02 percent, for financing of the SENIAT assessments. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on October 26, 2006, File No. 1-10762.) |
|
| 10.31 | | Amendment to Original Memorandum of Understanding dated August 16, 2006, between Corporación Venezolana del Petroleo, S.A. and Harvest Vinccler, C.A. (Incorporated by reference to Appendix C to our Definitive Proxy filed on November 6, 2006, File No. 1-10762.) |
|
| 10.3210.20 | | Note Payable agreement dated November 20, 2006 between Harvest Vinccler, C.A. and Banesco Banco Universal C.A. related to a principal amount of 120 billion Bolivars with interest at 10.0 percent, for refinancing of the SENIAT assessments and operating requirements. (Incorporated by reference to Exhibit 10.32 to our Form 10-K filed on March 13, 2007, File No. 1-10762.) |
| | | | |
| | 10.33 | 10.21 | | Form of 2006 Long Term Incentive Plan Stock Option Agreement – Five Year Vesting, Seven Year Term. (Incorporated by reference to Exhibit 10.33 to our Form 10-K filed on March 13, 2007, File No. 1-10762.) |
| | | | | |
| | 10.22 | | Amendment to Harvest Natural Resources 2006 Long Term Incentive Plan adopted July 19, 2006. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 3, 2007, File No. 1-10762.) |
| | | | |
| | 10.23† | | Employment Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) |
| | | | |
| | 10.24† | | Stock Option Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) |
| | | | |
| | 10.25† | | Employee Restricted Stock Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) |
| | | | |
| | 10.26† | | Consulting Agreement dated July 16, 2007 between Harvest Natural Resources, Inc. and Kerry R. Brittain. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.) |
| | | | |
| | 10.27 | | Contract for Conversion to a Mixed Company between Corporación Venezolana del Petróleo, S.A., Harvest-Vinccler, S.C.A. and HNR Finance B.V. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 1, 2007, File No. 1-10762.) |
| | | | |
| | 10.28† | | Separation Agreement dated November 16, 2007 between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.28 to our Form 10-K filed on March 17, 2008, File No. 1-10762.) |
| | | | |
| | 21.1 | | List of subsidiaries. |
35
| | | | |
| | 23.1 | | Consent of PricewaterhouseCoopers LLP – HoustonHouston. |
| | | | |
| | | 23.2 | | Consent of Espiñeira, Sheldon y Asociados. |
| | | | |
| | 23.3 | | Consent of Ryder Scott Company, LPLP. |
| | | | | |
| | 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 Steven W. Tholen, SeniorStephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. |
| | | | | |
| | 32.1 | | Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of 20021350 executed by James A. Edmiston, President and Chief Executive Officer. |
38
| | | | |
| | 32.2 | | Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of 20021350 executed by Steven W. Tholen, SeniorStephen C. Haynes, Vice President, Chief Financial Officer and Treasurer. |
| | |
| † | | Identifies management contracts or compensating plans or arrangements required to be filed as an exhibit hereto pursuant to Item 14(c)15(a) and (b) of Form 10-K. |
3639
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Harvest Natural Resources, Inc.:
We have completed integrated audits of Harvest Natural Resources, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1)1 present fairly, in all material respects, the financial position of Harvest Natural Resources, Inc. and its subsidiaries at December 31, 20062007 and December 31, 2005,2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20062007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) (2)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. TheseManagement and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. However, management has subsequently determined that a material weakness in internal control over financial reporting related to the period end reporting process existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the period-end financial reporting process existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and financial statement schedule areour opinion regarding the responsibilityeffectiveness of the Company’s management. Our responsibilityinternal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is to express an opinion onresponsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
As discussed in Note 1 to the consolidated financial statements, the Company’s totalCompany has restated its 2007 consolidated revenues relatefinancial statements to operationscorrect an error. Additionally, as discussed in Venezuela. On March 31, 2006,Note 1 to the Company’s Venezuelan subsidiary signed a Memorandum of Understanding (the “MOU”) to convertconsolidated financial statements, the Company changed its Operating Service Agreement to Empresa Mixta Petrodelta S.A. (“Petrodelta”) subject to certain conditions. As of December 31, 2006, a number of the conditions have not been met, and the conversion to Petrodelta has not been completed. Although the MOU provides that upon completion of the conversion, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006, this adjustment will not occur until the conversion is completed. Upon completion of the conversion, the equity method of accounting is expected to be followed for Petrodelta.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reportingoil and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.gas producing activities.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 17, 2008, except for the effect of the restatement discussed in Note 1 to the consolidated financial statements and the matter described in the penultimate paragraph of Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, for which the date is March 13, 20072009.
S-1
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | |
| | | | | | | | | | | December 31, | |
| | | December 31, | �� | | 2007 | | 2006* | |
| | | 2006 | | 2005 | | | (in thousands, except per share data) | |
| | | (in thousands, except per | | | (RESTATED- | |
| | | share data) | | | SEE NOTE 1) | |
| ASSETS | | |
| Current Assets: | | |
| Cash and cash equivalents | | $ | 148,079 | | $ | 163,019 | | | $ | 120,841 | | $ | 148,079 | |
| Restricted cash | | 15,888 | | — | | | 6,769 | | 15,888 | |
| Accounts and notes receivable: | | |
| Accrued oil and gas sales | | — | | 60,900 | | |
| Joint interest and other, net | | 9,811 | | 10,750 | | |
| Advances to provisional equity affiliate | | 19,146 | | — | | |
| Accounts receivable, net | | | 9,418 | | 9,811 | |
| Advances to equity affiliate | | | 16,352 | | 19,146 | |
| Deferred income tax | | 5,608 | | 3,052 | | | — | | 5,608 | |
| Prepaid expenses and other | | 1,246 | | 2,149 | | | 1,032 | | 1,246 | |
| | | | | | | | | | | |
| Total Current Assets | | 199,778 | | 239,870 | | | 154,412 | | 199,778 | |
| Restricted Cash | | 73,001 | | — | | | — | | 73,001 | |
| Other Assets | | 176 | | 1,600 | | | 4,301 | | 176 | |
| Investment in provisional equity affiliate | | 146,436 | | — | | |
| Investment in equity affiliates | | | 254,775 | | 192,090 | |
| Property and Equipment: | | |
| Oil and gas properties (full cost method-costs of $2,900 excluded from amortization in 2006 and 2005, respectively) | | 2,900 | | 641,684 | | |
| Oil and gas properties (successful efforts method) | | | 3,163 | | 2,900 | |
| Other administrative property | | 1,375 | | 9,568 | | | 1,481 | | 1,375 | |
| | | | | | | | | | | |
| | | 4,275 | | 651,252 | | | 4,644 | | 4,275 | |
| Accumulated depletion, depreciation, and amortization | | | (955 | ) | | | (491,924 | ) | |
| Accumulated depletion, depreciation and amortization | | | | (1,061 | ) | | | (955 | ) |
| | | | | | | | | | | |
| Net Property and Equipment | | 3,320 | | 159,328 | | | 3,583 | | 3,320 | |
| | | | | | | | | | | |
| | | $ | 422,711 | | $ | 400,798 | | | $ | 417,071 | | $ | 468,365 | |
| | | | | | | | | | | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| Current Liabilities: | | |
| Accounts payable, trade and other | | $ | 3,827 | | $ | 408 | | | $ | 5,949 | | $ | 3,827 | |
| Accounts payable, related party | | 9,637 | | 9,203 | | | 10,093 | | 9,637 | |
| Accrued expenses | | 12,975 | | 18,444 | | | 11,895 | | 12,975 | |
| Accrued interest | | 6,850 | | 2,637 | | | 5,136 | | 6,850 | |
| Deferred revenue | | 11,217 | | 6,728 | | | — | | 11,217 | |
| Income taxes payable | | 34 | | 18,909 | | | 503 | | 34 | |
| Current portion of long-term debt | | 37,674 | | 5,467 | | | 9,302 | | 37,674 | |
| | | | | | | | | | | |
| Total Current Liabilities | | 82,214 | | 61,796 | | | 42,878 | | 82,214 | |
| Long-Term Debt | | 66,977 | | — | | | — | | 66,977 | |
| Asset Retirement Liability | | — | | 2,129 | | |
| Commitments and Contingencies | | | — | | — | |
| Minority Interest | | 28,634 | | 39,361 | | | 57,546 | | 37,765 | |
| Stockholders’ Equity: | | |
| Preferred stock, par value $0.01 a share; Authorized 5,000 shares; outstanding, none | | |
| Common stock, par value $0.01 a share; Authorized 80,000 shares at December 31, 2006 and 2005; issued 37,974 shares and 37,757 shares at December 31, 2006 and 2005, respectively | | 380 | | 378 | | |
| Common stock, par value $0.01 a share; Authorized 80,000 shares at December 31, 2007 and 2006; issued 38,513 shares and 37,974 shares at December 31, 2007 and 2006, respectively | | | 385 | | 380 | |
| Additional paid-in capital | | 194,176 | | 188,242 | | | 201,938 | | 194,176 | |
| Retained earnings | | 54,174 | | 112,736 | | | 150,815 | | 90,697 | |
| Treasury stock, at cost, 770 shares at December 31, 2006 and 2005, respectively | | | (3,844 | ) | | | (3,844 | ) | |
| Treasury stock, at cost, 3,719 shares at December 31, 2007 and 770 shares at December 31, 2006, respectively | | | | (36,491 | ) | | | (3,844 | ) |
| | | | | | | | | | | |
| Total Stockholders’ Equity | | 244,886 | | 297,512 | | | 316,647 | | 281,409 | |
| | | | | | | | | | | |
| | | $ | 422,711 | | $ | 400,798 | | | $ | 417,071 | | $ | 468,365 | |
| | | | | | | | | | | |
| | |
| * | | Financial information for 2006 has been restated to reflect retrospective application of the successful efforts method of accounting. See Note 1 – Organization and Summary of Significant Accounting Policies – Property and Equipment and Change in Accounting Principle. |
See accompanying notes to consolidated financial statements.
S-2
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | |
| | | | Years Ended December 31, | |
| | | | | | | | | | | | | | | 2007 | | 2006* | | 2005* | |
| | | Years Ended December 31, | | | (in thousands, except per share data) | |
| | | 2006 | | 2005 | | 2004 | | | (RESTATED- | |
| | | (in thousands, except per share data) | | | SEE NOTE 1) | |
Revenues | | |
| Oil sales | | $ | 54,858 | | $ | 210,493 | | $ | 154,075 | | |
| Oil sales (a) | | | $ | 11,217 | | $ | 54,858 | | $ | 210,493 | |
| Gas sales | | 4,648 | | 26,448 | | 31,991 | | | — | | 4,648 | | 26,448 | |
| | | | | | | | | | | | | | | |
| | | 59,506 | | 236,941 | | 186,066 | | | 11,217 | | 59,506 | | 236,941 | |
| | | | | | | | | | | | | | | |
| | | |
Expenses | | |
| Operating expenses | | 9,241 | | 39,723 | | 33,324 | | | — | | 9,241 | | 39,723 | |
| Depletion, depreciation and amortization | | 10,510 | | 43,968 | | 36,020 | | | 384 | | 15,435 | | 58,922 | |
| Exploration expense | | | 204 | | — | | — | |
| General and administrative | | 26,421 | | 22,819 | | 21,857 | | | 29,742 | | 26,421 | | 22,819 | |
| Contribution to Science and Technology Fund | | 3,887 | | — | | — | | | — | | 3,887 | | — | |
| Account receivable write-off on retroactive oil price adjustments | | — | | 4,548 | | — | | | — | | — | | 4,548 | |
| Bad debt recovery | | — | | — | | | (598 | ) | |
| Gain on sale of long-lived asset | | — | | — | | | (578 | ) | |
| Taxes other than on income | | 3,948 | | 6,358 | | 5,561 | | | 423 | | 3,948 | | 6,358 | |
| | | | | | | | | | | | | | | |
| | | 54,007 | | 117,416 | | 95,586 | | | 30,753 | | 58,932 | | 132,370 | |
| | | | | | | | | | | | | | | |
| | | |
| Income from Operations | | 5,499 | | 119,525 | | 90,480 | | |
| Income (Loss) from Operations | | | | (19,536 | ) | | 574 | | 104,571 | |
| Other Non-Operating Income (Expense) | | |
| Loss on early extinguishment of debt | | — | | — | | | (2,928 | ) | |
| Gain on Financing Transactions | | | 49,623 | | — | | — | |
| Investment earnings and other | | 9,406 | | 4,205 | | 2,085 | | | 9,065 | | 9,406 | | 4,205 | |
| Interest expense | | | (23,156 | ) | | | (3,388 | ) | | | (7,749 | ) | | | (8,224 | ) | | | (23,156 | ) | | | (3,388 | ) |
| Net gain (loss) on exchange rates | | | (121 | ) | | 2,752 | | | (622 | ) | | | (14 | ) | | | (121 | ) | | 2,752 | |
| | | | | | | | | | | | | | | |
| | | | (13,871 | ) | | 3,569 | | | (9,214 | ) | | 50,450 | | | (13,871 | ) | | 3,569 | |
| | | | | | | | | | | | | | | |
| | | |
| Income (Loss) from Consolidated Companies Before Income Taxes and Minority Interest | | | (8,372 | ) | | 123,094 | | 81,266 | | | 30,914 | | | (13,297 | ) | | 108,140 | |
| Income Tax Expense | | 60,917 | | 57,025 | | 33,288 | | | 6,312 | | 60,917 | | 57,025 | |
| | | | | | | | | | | | | | | |
| Income (Loss) Before Minority Interest | | | (69,289 | ) | | 66,069 | | 47,978 | | | 24,602 | | | (74,214 | ) | | 51,115 | |
| Minority Interest in Consolidated Subsidiary Companies | | | (10,727 | ) | | 15,230 | | 13,618 | | | 19,781 | | | (11,712 | ) | | 12,239 | |
| | | | | | | | | | | | | | | |
| Income (loss) from Consolidated Companies | | | 4,821 | | | (62,502 | ) | | 38,876 | |
| Net Income from Unconsolidated Equity Affiliates | | | 55,297 | | — | | — | |
| | | | | | | | | |
| Net Income (Loss) | | $ | (58,562 | ) | | $ | 50,839 | | $ | 34,360 | | | $ | 60,118 | | $ | (62,502 | ) | | $ | 38,876 | |
| | | | | | | | | | | | | | | |
| | | |
| Net Income (Loss) Per Common Share: | | |
| Basic | | $ | (1.57 | ) | | $ | 1.38 | | $ | 0.95 | | | $ | 1.65 | | $ | (1.68 | ) | | $ | 1.05 | |
| | | | | | | | | | | | | | | |
| Diluted | | $ | (1.57 | ) | | $ | 1.32 | | $ | 0.90 | | | $ | 1.59 | | $ | (1.68 | ) | | $ | 1.01 | |
| | | | | | | | | | | | | | | |
| | | |
| Other comprehensive loss: | | |
| Unrealized mark to market loss from cash flow hedging activities, net of tax | | — | | — | | | (487 | ) | |
| | | | | | | | | |
| Comprehensive income (loss) | | $ | (58,562 | ) | | $ | 50,839 | | $ | 33,873 | | |
| | | | | | | | | |
| | |
| (a) | | Recognition of deferred revenue – See Note 1 – Organization and Summary of Significant Accounting Policies – Revenue Recognition. |
|
| * | | Financial information for 2006 and 2005 has been restated to reflect retrospective application of the successful efforts method of accounting. See Note 1 – Organization and Summary of Significant Accounting Policies – Property and Equipment and Change in Accounting Principle. |
See accompanying notes to consolidated financial statements.
S-3
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Accumulated | | | | | | | Accumulated | | | | | |
| | | Common | | Additional | | Other | | | | | | | Common | | Additional | | Other | | | | | |
| | | Shares | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | | Shares | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | |
| | | Issued | | Stock | | Capital | | Earnings | | Gain(Loss) | | Stock | | Total | | | Issued | | Stock | | Capital | | Earnings | | Gain(Loss) | | Stock | | Total | |
Balance at January 1, 2004 | | 36,405 | | $ | 364 | | $ | 175,051 | | $ | 27,537 | | $ | — | | $ | (3,239 | ) | | $ | 199,713 | | |
| | | |
| Issuance of common shares: | | |
| Exercise of warrants | | 53 | | — | | 600 | | — | | — | | — | | 600 | | |
| Exercise of stock options | | 1,001 | | 10 | | 7,381 | | — | | — | | — | | 7,391 | | |
| Employee stock-based compensation | | 85 | | 1 | | 2,151 | | — | | — | | — | | 2,152 | | |
| Treasury stock (34 shares) | | — | | — | | — | | — | | — | | | (540 | ) | | | (540 | ) | |
| Accumulated other comprehensive loss | | — | | — | | — | | — | | | (487 | ) | | — | | | (487 | ) | |
| Net Income | | — | | — | | — | | 34,360 | | — | | — | | 34,360 | | |
| | | | | | | | | | | | | | | | | |
| | | |
Balance at December 31, 2004 | | 37,544 | | 375 | | 185,183 | | 61,897 | | | (487 | ) | | | (3,779 | ) | | 243,189 | | |
Balance at January 1, 2005 | | | 37,544 | | $ | 375 | | $ | 185,183 | | $ | 114,323 | | $ | (487 | ) | | $ | (3,779 | ) | | $ | 295,615 | |
| | | |
| Issuance of common shares: | | |
| Exercise of stock options | | 240 | | 3 | | 829 | | — | | — | | — | | 832 | | | 139 | | 3 | | 829 | | — | | — | | — | | 832 | |
| Employee stock-based compensation | | 74 | | — | | 2,230 | | — | | — | | — | | 2,230 | | | 74 | | — | | 2,230 | | — | | — | | — | | 2,230 | |
| Treasury stock (5 shares) | | — | | — | | — | | — | | — | | | (65 | ) | | | (65 | ) | |
| Purchase of Treasury Shares | | | — | | — | | — | | — | | — | | | (65 | ) | | | (65 | ) |
| Accumulated other comprehensive gain | | — | | — | | — | | — | | 487 | | — | | 487 | | | — | | — | | — | | — | | 487 | | — | | 487 | |
| Net Income | | — | | — | | — | | 50,839 | | — | | — | | 50,839 | | |
| Net Income* | | | — | | — | | — | | 38,876 | | — | | — | | 38,876 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Balance at December 31, 2005 | | 37,858 | | 378 | | 188,242 | | 112,736 | | — | | | (3,844 | ) | | 297,512 | | | 37,757 | | 378 | | 188,242 | | 153,199 | | — | | | (3,844 | ) | | 337,975 | |
| | | |
| Issuance of common shares: | | |
| Exercise of stock options | | 139 | | 1 | | 879 | | — | | — | | — | | 880 | | | 137 | | 1 | | 879 | | — | | — | | — | | 880 | |
| Employee stock-based compensation | | 80 | | 1 | | 5,055 | | — | | — | | — | | 5,056 | | | 80 | | 1 | | 5,055 | | — | | — | | — | | 5,056 | |
| Net Loss | | — | | — | | — | | | (58,562 | ) | | — | | — | | | (58,562 | ) | |
| Net Loss* | | | — | | — | | — | | | (62,502 | ) | | — | | — | | | (62,502 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Balance at December 31, 2006 | | 38,077 | | $ | 380 | | $ | 194,176 | | $ | 54,174 | | $ | — | | $ | (3,844 | ) | | $ | 244,886 | | | 37,974 | | 380 | | 194,176 | | 90,697 | | — | | | (3,844 | ) | | 281,409 | |
| | | | | | | | | | | | | | | | | |
| Issuance of common shares: | | |
| Exercise of stock options | | | 402 | | 4 | | 1,934 | | — | | — | | — | | 1,938 | |
| Employee stock-based compensation | | | 137 | | 1 | | 5,828 | | — | | — | | — | | 5,829 | |
| Purchase of Treasury Shares | | | — | | — | | — | | — | | — | | | (32,647 | ) | | | (32,647 | ) |
| Net Income as restated | | | — | | — | | — | | 60,118 | | — | | — | | 60,118 | |
| | | | | | | | | | | | | | | | | |
| | | |
Balance at December 31, 2007 as restated | | | 38,513 | | $ | 385 | | $ | 201,938 | | $ | 150,815 | | $ | — | | $ | (36,491 | ) | | $ | 316,647 | |
| | | | | | | | | | | | | | | | | |
| | |
| * | | Financial information for 2006 and 2005 has been restated to reflect retrospective application of the successful efforts method of accounting. See Note 1 – Organization and Summary of Significant Accounting Policies – Property and Equipment and Change in Accounting Principle. |
See accompanying notes to consolidated financial statements.
S-4
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | |
| | | | Years Ended December 31, | |
| | | | | | | | | | | | | | | 2007 | | 2006* | | 2005* | |
| | | Years Ended December 31, | | | (in thousands) | |
| | | 2006 | | 2005 | | 2004 | | | (RESTATED- | |
| | | (in thousands) | | | SEE NOTE 1) | |
| Cash Flows From Operating Activities: | | |
| Net income (loss) | | $ | (58,562 | ) | | $ | 50,839 | | $ | 34,360 | | | $ | 60,118 | | $ | (62,502 | ) | | $ | 38,876 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | |
| Depletion, depreciation and amortization | | 10,510 | | 43,968 | | 36,020 | | | 384 | | 15,435 | | 58,922 | |
| Amortization of financing costs | | — | | — | | 228 | | |
| Gain on disposition of assets and investments | | — | | — | | | (578 | ) | |
| Write off of unamortized financing costs | | — | | — | | 936 | | |
| Exploration expense | | | 204 | | — | | — | |
| Gain on financing transactions | | | | (49,623 | ) | | — | | — | |
| Net income from unconsolidated equity affiliates | | | | (55,297 | ) | | — | | — | |
| Account receivable write-off on retroactive oil price adjustments | | — | | 4,548 | | — | | | — | | — | | 4,548 | |
| Allowance for employee notes and accounts receivable | | — | | — | | | (598 | ) | |
| Deferred compensation expense | | — | | | (745 | ) | | 1,521 | | | — | | — | | | (745 | ) |
| Non-cash compensation related charges | | 5,056 | | 2,230 | | 2,152 | | | 6,108 | | 5,056 | | 2,230 | |
| Minority interest in consolidated subsidiary companies | | | (10,727 | ) | | 15,230 | | 13,618 | | | 19,781 | | | (11,712 | ) | | 12,239 | |
| Deferred income taxes | | | (2,556 | ) | | 2,982 | | | (1,285 | ) | | 5,608 | | | (2,556 | ) | | 2,982 | |
| Changes in operating assets and liabilities: | | |
| Accounts and notes receivable | | 61,839 | | | (4,481 | ) | | | (27,156 | ) | | 393 | | 61,839 | | | (4,481 | ) |
| Advances to provisional equity affiliate | | | (19,146 | ) | | — | | — | | |
| Advances to equity affiliate | | | 2,794 | | | (19,146 | ) | | — | |
| Prepaid expenses and other | | 903 | | | (723 | ) | | | (621 | ) | | 214 | | 903 | | | (723 | ) |
| Commodity hedging contract | | — | | 14,947 | | | (14,947 | ) | | — | | — | | 14,947 | |
| Accounts payable | | 3,419 | | | (8,020 | ) | | 4,265 | | | 2,122 | | 3,419 | | | (8,020 | ) |
| Accounts payable, related party | | 434 | | | (1,860 | ) | | 506 | | | 456 | | 434 | | | (1,860 | ) |
| Accrued expenses | | | (5,469 | ) | | | (10,165 | ) | | 12,765 | | | | (1,251 | ) | | | (5,469 | ) | | | (10,165 | ) |
| Accrued interest | | 4,213 | | 2,565 | | | (1,356 | ) | | | (1,714 | ) | | 4,213 | | 2,565 | |
| Deferred revenue | | 4,489 | | 6,728 | | — | | | | (11,217 | ) | | 4,489 | | 6,728 | |
| Asset retirement liability | | 24 | | 188 | | 482 | | | — | | 24 | | 188 | |
| Income taxes payable | | | (18,875 | ) | | | (3,566 | ) | | 13,828 | | | 469 | | | (18,875 | ) | | | (3,566 | ) |
| | | | | | | | | | | | | | | |
| Net Cash Provided By (Used In) Operating Activities | | | (24,448 | ) | | 114,665 | | 74,140 | | | | (20,451 | ) | | | (24,448 | ) | | 114,665 | |
| | | | | | | | | | | | | | | |
| Cash Flows from Investing Activities: | | |
| Proceeds from sale of long-lived assets | | — | | — | | 578 | | |
| Additions of property and equipment | | | (1,657 | ) | | | (16,147 | ) | | | (39,106 | ) | | | (851 | ) | | | (1,657 | ) | | | (16,147 | ) |
| Investments in provisional equity affiliates | | | (513 | ) | | — | | — | | |
| Investments in equity affiliates | | | | (7,388 | ) | | | (513 | ) | | — | |
| (Increase) decrease in restricted cash | | | (88,889 | ) | | 28 | | — | | | 82,120 | | | (88,889 | ) | | 28 | |
| Investment costs | | 503 | | 472 | | | (1,156 | ) | | | (4,125 | ) | | 503 | | 472 | |
| | | | | | | | | | | | | | | |
| Net Cash Used In Investing Activities | | | (90,556 | ) | | | (15,647 | ) | | | (39,684 | ) | |
| Net Cash Provided By (Used In) Investing Activities | | | 69,756 | | | (90,556 | ) | | | (15,647 | ) |
| | | | | | | | | | | | | | | |
| Cash Flows from Financing Activities: | | |
| Net proceeds from issuances of common stock | | 880 | | 767 | | 7,451 | | | 1,938 | | 880 | | 767 | |
| Purchase of treasury stock | | | | (32,755 | ) | | — | | — | |
| Proceeds from issuance of notes payable | | 118,953 | | — | | — | | | — | | 118,953 | | — | |
| Payments of note payable | | | (19,769 | ) | | | (6,366 | ) | | | (91,367 | ) | | | (45,726 | ) | | | (19,769 | ) | | | (6,366 | ) |
| Dividend paid to minority interest | | — | | | (15,000 | ) | | | (4,600 | ) | | — | | — | | | (15,000 | ) |
| | | | | | | | | | | | | | | |
| Net Cash Provided By (Used In) Financing Activities | | 100,064 | | | (20,599 | ) | | | (88,516 | ) | | | (76,543 | ) | | 100,064 | | | (20,599 | ) |
| | | | | | | | | | | | | | | |
| Net Increase (Decrease) in Cash and Cash Equivalents | | | (14,940 | ) | | 78,419 | | | (54,060 | ) | | | (27,238 | ) | | | (14,940 | ) | | 78,419 | |
| Cash and Cash Equivalents at Beginning of Year | | 163,019 | | 84,600 | | 138,660 | | | 148,079 | | 163,019 | | 84,600 | |
| | | | | | | | | | | | | | | |
| Cash and Cash Equivalents at End of Year | | $ | 148,079 | | $ | 163,019 | | $ | 84,600 | | | $ | 120,841 | | $ | 148,079 | | $ | 163,019 | |
| | | | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information: | | |
| Cash paid during the year for interest expense | | $ | 23,171 | | $ | 795 | | $ | 12,541 | | | $ | 7,972 | | $ | 23,171 | | $ | 795 | |
| | | | | | | | | | | | | | | |
| Cash paid during the year for income taxes | | $ | 62,505 | | $ | 20,991 | | $ | 11,705 | | | $ | 201 | | $ | 62,505 | | $ | 20,991 | |
| | | | | | | | | | | | | | | |
| | |
| * | | Financial information for 2006 and 2005 has been restated to reflect retrospective application of the successful efforts method of accounting. See Note 1 – Organization and Summary of Significant Accounting Policies – Property and Equipment and Change in Accounting Principle. |
See accompanying notes to consolidated financial statements.
S-5
Supplemental Schedule of Noncash Investing and Financing Activities:
During the year ended December 31, 2007, we issued 0.3 million shares of restricted stock valued at $2.6 million; most of our employees elected to pay withholding tax on restricted stock grants on a cashless basis which resulted in 16,042 shares being added to treasury stock at cost; and 20,000 shares held in treasury were reissued as restricted stock.
During the year ended 2006, we issued 0.1 million shares of restricted stock valued at $1.0 million.
During the year ended 2005, we issued 0.1 million shares of restricted stock valued at $0.8 million and Dr. Peter J. Hill, our former Chief Executive Officer, elected to pay withholding tax on a 2002 restricted stock grant on a cashless basis. This resulted in 5,497 shares being held as treasury stock at cost.
During the year ended 2004, we issued 0.1 million shares of restricted stock valued at $1.2 million and we wrote-off $0.9 million of unamortized debt financing costs in connection with the redemption and discharge of the 9.375 percent senior unsecured notes due November 1, 2007 (“2007 Notes”). Also during the year ended 2004, the holders of our warrants elected to exercise 45,000 warrants on a cashless basis by delivering Company shares to us. This resulted in the issuance of 34,054 shares which are held as treasury stock at cost.
See accompanying notes to consolidated financial statements.
S-6
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 — Organization and Summary of Significant Accounting Policies
Organization
Harvest Natural Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development, production and managementdisposition of oil and natural gas properties.properties since 1989, when it was incorporated under Delaware law. We conduct our business principallyhave acquired and developed significant interests in the Bolivarian Republic of Venezuela (“Venezuela”) through our subsidiary Harvest Vinccler, S.C.A. (“Harvest Vinccler”) in which we indirectly own an 80-percent interest. Effective April 1, 2006,and our activities under our Operating Service Agreement (“OSA”) are reflected under the equity method of accounting. Since such activities are subject to the completion of the conversion of the OSA to Empresa Mixtaaffiliate, Petrodelta S. A.S.A. (“Petrodelta”), we and have not recorded any net earnings from such activities foroffshore undeveloped acreage in the nine months ended December 31, 2006.People’s Republic of China (“China”).
On March 31, 2006, Harvest Vinccler signed a Memorandum of Understanding (the “MOU”) with two affiliates of PDVSA, Corporación Venezolana del Petroleo S.A. (“CVP”) and PDVSA Petroleo S.A. (“PPSA”), to convert its Operating Service Agreement (“OSA”) into a minority interest in Petrodelta. On August 16, 2006, the MOU was amended to provide for the addition of the Isleño, El Salto and Temblador fields (“New Fields”) to Petrodelta as additional consideration for the conversion of the OSA intoto Petrodelta. Upon receiptOn December 18, 2006, at our special meeting of the Venezuelan government approvalsstockholders, the transactions contemplated by the MOU Harvest Vinccler and,were approved. On September 11, 2007, we believe, HNR Finance B.V. and CVP will enter into asigned the Contract of Conversion (the “Conversion(“Conversion Contract”). Upon execution of, and on October 3, 2007, together with CVP, we formed and funded Petrodelta. On October 25, 2007, the Conversion Contract,Presidential Decree which formally transferred to Petrodelta will be formed. Subjectthe rights to the Uracoa, Tucupita and Bombal fields (“SMU Fields”) and the New Fields, subject to the conditions of the Conversion Contract, was published in the OSA will be cancelled,Official Gazette. Harvest Vinccler will transfer substantiallyhas transferred all of its tangible assets and contracts, permits and rights related to the Uracoa, Tucupita and Bombal fields (“SMU fields”)Fields in Venezuela to Petrodelta andPetrodelta. In January 2008, a majority of Harvest Vinccler’s employees accepted positions with Petrodelta. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the SMU fields, as well as the Isleño, TembladorFields and El Salto fields which will have been awarded to Petrodelta. Upon completion of conversion,New Fields (collectively “Petrodelta Fields”). HNR Finance B.V. will have(“HNR Finance”) has a 40 percent ownership interest in Petrodelta. SinceAs we indirectly own 80 percent of HNR Finance, B.V., we will indirectly own a net 32 percent interest in Petrodelta, and Vinccler willour partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (“Vinccler”), indirectly ownowns the remaining eight percent.percent interest. CVP will own the remaining 60 percent. We have requestedAt our request, CVP to addhas added HNR Finance as a party to the Conversion Contract. Petrodelta will beis governed by its own Chartercharter and By-Laws.bylaws.
Restatement
We are restating our previously issued consolidated financial statements as of and for the year ended December 31, 2007 and quarterly information for the quarter ended December 31, 2007. The restatements relate to the correction of an error in the deferred tax adjustment to reconcile our share of Petrodelta’s net income reported under International Financial Reporting Standards (“IFRS”) to that required under accounting principles generally accepted in the United States of America (“GAAP”) and recorded within Net income from unconsolidated equity affiliates (seeExhibits and Financial Statement Schedules, Quarterly Financial Data (unaudited)).
The adjustment to record our share of Petrodelta’s net income under GAAP should have been limited to deferred tax adjustments related to non-monetary temporary differences impacted by inflationary adjustments under Venezuela law. During the 2008 year end close process, we determined that restatements were necessary because since October 1, 2007 both the monetary and non-monetary temporary differences recorded in Petrodelta’s IFRS financial statements had been adjusted in arriving at our GAAP consolidated financial statements rather than only the non-monetary temporary differences impacted by inflationary adjustments. Accordingly, we had understated our Net income from unconsolidated equity affiliates and Investment in equity affiliates.
The following tables set forth the effect of the adjustments described above on the consolidated statement of operations for the year ended December 31, 2007 and the consolidated balance sheet as of December 31, 2007. Although the restatement changed our Net Income, Net income from unconsolidated equity affiliates and Minority interest in consolidated subsidiary companies, there was no impact on net cash used in operating activities in the consolidated statements of cash flows.
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Consolidated Statements of Operations
| | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | As Previously | | | | | | | As | |
| | | Reported | | | Adjustment | | | Restated | |
| | | (in thousands, except per share data) | |
| Income before income taxes and minority interest | | $ | 30,914 | | | $ | — | | | $ | 30,914 | |
| Income tax expense | | | 6,312 | | | | — | | | | 6,312 | |
| | | | | | | | | | |
| Income before minority interest | | | 24,602 | | | | — | | | | 24,602 | |
| Minority interest in consolidated subsidiary | | | 19,060 | | | | 721 | | | | 19,781 | |
| | | | | | | | | | |
| Income from consolidated companies | | | 5,542 | | | | (721 | ) | | | 4,821 | |
| Net income from unconsolidated equity affiliates | | | 51,695 | | | | 3,602 | | | | 55,297 | |
| | | | | | | | | | |
| Net income | | $ | 57,237 | | | $ | 2,881 | | | $ | 60,118 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net Income Per Common Share: | | | | | | | | | | | | |
| Basic | | $ | 1.57 | | | $ | 0.08 | | | $ | 1.65 | |
| Diluted | | $ | 1.51 | | | $ | 0.08 | | | $ | 1.59 | |
| |
Consolidated Balance Sheets |
| |
| | | December 31, 2007 |
| | | As Previously | | | | | | As |
| | | Reported | | Adjustment | | Restated |
| | | (in thousands) |
| Investment in equity affiliates | | $ | 251,173 | | | $ | 3,602 | | | $ | 254,775 | |
| Total assets | | | 413,469 | | | | 3,602 | | | | 417,071 | |
| Minority interest | | | 56,825 | | | | 721 | | | | 57,546 | |
| Retained earnings | | | 147,934 | | | | 2,881 | | | | 150,815 | |
| Total shareholders’ equity | | | 313,766 | | | | 2,881 | | | | 316,647 | |
| Total liabilities and shareholders’ equity | | | 413,469 | | | | 3,602 | | | | 417,071 | |
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. The equity method of accounting is used for companies and other investments in which we have significant influence. All intercompany profits, transactions and balances have been eliminated.
Investment in Equity Affiliates
The equity method of accounting is used for companies and other investments in which we have significant influence. In January 2007, we purchased a 45 percent equity interest in Fusion Geophysical, L.L.C. (“Fusion”). In October 2007, Petrodelta was formed, and the equity in earnings from April 1, 2006 to December 31, 2007 is reflected in the fourth quarter of 2007 consolidated statement of operations. These investments are increased or decreased by earnings/losses and decreased by dividends paid and amortization of basis differential. No dividends were declared or paid by Fusion or Petrodelta in 2007.
Reporting and Functional Currency
The U.S. Dollar is our functional and reporting currency.
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Revenue Recognition
Oil and natural gas revenue is accrued monthly based on production and delivery. Until March 31, 2006, each quarter, Harvest Vinccler invoiced PDVSA Petroleo S.A., an affiliate of Petroleos de Venezuela S.A. (“PDVSA”), based on barrels of oil accepted by PDVSA during the quarter, using quarterly adjusted U.S. Dollar contract service fees per barrel. The related OSA with PDVSA provided for Harvest Vinccler to receive an operating fee for each barrel of crude oil delivered and the right to receive a capital recovery fee for certain of its capital expenditures, provided that such operating fee and capital recovery fee could not exceed the maximum total fee per barrel set forth in the agreement. In August 2005, Harvest Vinccler and PDVSA executed a Transitory Agreement (the “Transitory Agreement”) which provided that the maximum total fee per barrel paid under the OSA could not exceed 66.67 percent of the total value of the crude oil as determined under an Annex to the Transitory Agreement. This limitation was applied retroactively to January 1, 2005 and approximated 47 percent of West Texas Intermediate (“WTI”). The operating fee was subject to quarterly adjustments to reflect changes in the special energy index of the U.S. Consumer Price Index. Until March 31, 2006, each quarter Harvest Vinccler also invoiced PDVSA for natural gas sales based on a fixed price of $1.03 per Mcf. In addition, Harvest Vinccler agreed to sell to PDVSA 4.5 million barrels of oil
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stipulated as additional volumes resulting from the natural gas production (“Incremental Crude Oil”). A portion of the Incremental Crude Oil was invoiced to PDVSA quarterly at a fixed price of $7.00 per Bbl. The invoices were prepared and submitted to PDVSA by the end of the first month following the end of each calendar quarter, and payment was due from PDVSA by the end of the second month following the end of each calendar quarter. Harvest Vinccler invoiced PDVSA for the first quarter 2006 delivery of its crude oil and natural gas in accordance with the Transitory Agreement. However,With the formation of Petrodelta, Harvest Vinccler recordedrecognized deferred revenue of $9.0$11.2 million for 2005 and first quarter 2006 deliveries that had been deferred pending clarification on the calculation of crude prices under the Transitory Agreement.
As of December 31, 2006, the conversion to Petrodelta has not been completed due to the lack of approvals by the Venezuelan government. In April 2006, the Venezuelan National Assembly passed legislation terminating all operating service agreements and directing the government to take over the operations carried out by the private companies without prejudice to the incorporation of mixed companies for that purpose. This action, coupled with the unfinished conversion to Petrodelta, has left Harvest Vinccler without a contractual means recognized by the government of Venezuela to address revenues or costs and expenses since March 31, 2006. As a result of this situation, our consolidated financial statements prepared in accordance with generally accepted accounting principals in the United States of America (“GAAP”) for the year ended December 31, 2006 do not reflect the net results of our producing operations in Venezuela for the last three quarters of the year. We will not be able to include the results of our Venezuelan operations in our consolidated financial statements until the conversion to Petrodelta is completed. Although the MOU provides that upon completion of the conversion, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006, this adjustment will not occur until the conversion is completed. Harvest Vinccler continues in the day-to-day operations of its properties in Venezuela and continues to incur expenses in doing so. The equity method of accounting will be followed for Petrodelta to reflect our net 32 percent interest. During the last three quarters of 2006, Harvest Vinccler advanced or accrued $36.3 million to fund operations. At the request of PDVSA, Harvest Vinccler has invoiced PDVSA for these costs and $21.2 million, representing the second and third quarter advances, have been reimbursed.
Cash and Cash Equivalents
Cash equivalents include money market funds and short term certificates of deposit with original maturity dates of less than three months. At December 31, 2006,2007, Harvest Vinccler had 58.74.7 billion Venezuela Bolivars (“Bolivars”) which are shown in the December 31, 20062007 financial statements as $27.3$2.4 million in cash and cash equivalents.
Restricted Cash
Restricted cash represents cash and cash equivalents held in a U.S. banksbank used as collateral for Harvest Vinccler’s line of credit and loan agreements,agreement, and is classified as current or non-current based on the terms of the agreements.agreement. SeeNote 2 – Long-Term Debt and Liquidity.
Credit Risk and Operations
All of our total consolidated revenues relate to operations in Venezuela. During the years ended December 31, 2006 and 2005, our Venezuelan crude oil and natural gas production represented all of our total production from consolidated companies, and ourcompanies. Petrodelta’s sole source of revenues related to such Venezuelanfor its production is PDVSA,PPSA, which maintains full ownership of all hydrocarbons in its fields. BecauseThe sale of oil and gas by Petrodelta to the conversionVenezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA which was signed on January 17, 2008. As of December 31, 2007, Petrodelta has not been completed, we have not been paid by PDVSAPPSA for ourits oil and natural gas deliveries sincefrom April 1, 2006.2006 through December 31, 2007. Until payment is received for the deliveries or PPSA advances funds on crude oil and natural gas deliveries, Petrodelta will be unable to pay a dividend.
Derivatives and Hedging
Statement of Financial Accounting Standards (“SFAS”) No. 133, (“SFAS 133”), as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. All derivatives are recorded on the balance sheet at fair value. To the extent that the hedge is determined to be effective, changes in the fair value of derivatives for qualifying cash flow hedges are recorded each period in other comprehensive income. Our derivatives have been designated as cash flow hedge transactions in which we hedge the variability of cash flows related to future oil prices for some or all of our forecasted oil production. The changes in the fair value of these derivative instruments
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derivative instruments have been reported in other comprehensive income because the highly effective test was met, and have been reclassified to earnings in the period in which earnings were impacted by the variability of the cash flows of the hedged item.
We had no hedging instruments in place for our 2004 or 2006 production. In August 2004, Harvest Vinccler hedged a portion of its oil sales for calendar year 2005 by purchasing a WTI crude oil put for 5,000 barrels of oil per day. The put cost was $4.24 per barrel, or $7.7 million, and had a strike price of $40.00 per barrel. In September 2004, Harvest Vinccler hedged an additional portion of its calendar year 2005 oil sales by purchasing a second WTI crude oil put for 5,000 barrels of oil per day. The put cost was $3.95 per barrel, or $7.2 million, and had a strike price of $44.40 per barrel. Due to the amended pricing structure as revised by the Transitory Agreement for our Venezuelan oil, these two puts had the economic effect of hedging approximately 21,500 barrels of oil per day for an average of $17.72 per barrel. These puts qualified under the highly effective test and thetest. There was no mark-to-market gain/loss at December 31, 2004 was included in other comprehensive loss.2005.
At December 31, 2004, Accumulated Other Comprehensive Loss consisted of $0.7 million ($0.5 million net of tax) of unrealized losses on our crude oil puts. Oil sales for the year ended 2004 included no losses in settlement of the puts. Deferred net losses recorded in Accumulated Other Comprehensive Loss at December 31, 2004 were reclassified to earnings during 2005. There was no difference between net income and comprehensive net income for the year ended December 31, 2005. All hedging instruments expired under their own terms on December 31, 2005.
Asset Retirement Liability
Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) requires entities to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred if a reasonable estimate of fair value can be made. No wells were abandoned in the years ended December 31, 2006 or 2005. Changes in asset retirement obligations during the years ended December 31, 2006 and 2005 were as follows (in thousands):
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| Asset retirement obligations beginning of period | | $ | 2,129 | | | $ | 1,941 | |
| Liabilities recorded during the period | | | — | | | | 96 | |
| Liabilities settled during the period | | | — | | | | — | |
| Revisions in estimated cash flows | | | (7 | ) | | | (17 | ) |
| Accretion expense | | | 31 | | | | 109 | |
| Reclassified to provisional equity affiliate | | | (2,153 | ) | | | — | |
| | | | | | | |
| Asset retirement obligations end of period | | $ | — | | | $ | 2,129 | |
| | | | | | | |
Accounts and Notes Receivable
Allowance for doubtful accounts related to former employee notes at December 31, 20062007 and 20052006 was $2.8 million.
Other Assets
Other assets consist of investigative costs associated with new business development projects. New projectThese costs are reclassified to oil and natural gas properties or expensed depending on management’s assessment of the likely outcome of the project.
Property and Equipment
We followIn December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. Although the full cost method of accounting for oil and
naturalgas exploration and development continues to be an accepted method of accounting for oil and gas properties,
the successful efforts method of accounting as prescribed by SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies is the preferred method. In accordance with
SFAS No. 154 Accounting Changes and Error Corrections, financial information for prior periods has been restated to reflect retrospective application of the successful efforts method. We believe the successful efforts method provides a more transparent representation of our results of operations and the ability to assess our future investments in oil and gas properties for impairment based on their estimated fair values rather than being required to base valuation on prices and costs
accumulatedas of the balance sheet date. The significant differences between successful efforts and full cost accounting for oil and gas properties relate to the expensing of exploration activities and related unsuccessful exploratory drilling activities. The expensing of these costs can create volatility in
the statement of operations. The change in accounting principle resulted in a cumulative, non-cash increase to retained earnings of $52.4 million, net of income tax, as of December 31, 2004. Retained earnings increased due to the reversal of ceiling test write downs in prior years required under the full cost
centers on a country-by-country basis, subject to a cost center ceiling (as defined byaccounting rules of the Securities and Exchange Commission
[“(“SEC”
]).
All costs associated withThere were no such impairments under the
acquisition, exploration and development of oil and natural gas reserves are capitalized as incurred. Only overhead that is directly identified with acquisition,S-9
exploration or development activities are capitalized. All costs related to production, general corporate overhead and similar activities are expensed as incurred.
successful efforts accounting rules. The costs of unproved properties are excluded from amortization until the properties are evaluated. At least quarterly we evaluate our unproved properties on a country by country basis for possible impairment. If we abandon all exploration efforts in a country where no proved reserves are assigned, all exploration and acquisition costs associated with the country are expensed. Due to the unpredictable nature of exploration drilling activities, the amount and timing of impairment expenses are difficult to predict with any certainty.
Excluded costs at December 31, 2006 consisted of property acquisition costs in the amount of $2.9 million which were all incurred prior to 2001. Alleffect of the excluded costs at December 31, 2006 relate to the acquisition of Benton Offshore China Company and exploration related to its WAB-21 property. The ultimate timing of when the costs related to the acquisition of Benton Offshore China Company will be included in amortizable costs is uncertain.
All capitalized costs (including oilfield inventory and future abandonment costs under SFAS 143) and estimated future development costs of proved reserves are depleted using the units of production method basedaccounting change on the total proved reserves of the country cost center. Depletion expense, which was substantially all attributable to the Venezuelan cost centerincome from continuing operations for the years ended December 31, 2006 and 2005 and 2004 was $9.9 million, $41.2a decrease of $4.9 million and $34.1$15.0 million, ($3.74, $3.16net of income tax, or $0.13 and $2.56$0.39 per equivalent barrel),diluted share, respectively. The decrease in income from continuing operations was due to an increase in depletion expense. There was no effect on cash and cash equivalents.
A gainProperties and equipment are stated at cost less accumulated depreciation, depletion and amortization (“DD&A”). Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement
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or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gains or losses are recognized in Investment Earnings and Other.
Exploration costs such as exploratory geological and geophysical costs, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling exploratory wells are capitalized pending determination of whether proved reserves can be attributed to the area as a result of drilling the well. If management determines that commercial quantities of hydrocarbons have not been discovered, capitalized costs associated with exploratory wells are charged to exploration expense. Costs of drilling successful exploratory wells, all development wells, and related production equipment and facilities are capitalized and depleted or depreciated using the unit-of-production method as oil and gas is produced.
Leasehold acquisition costs are initially capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. Costs of maintaining and retaining undeveloped leaseholds, as well as amortization and impairment of unsuccessful leases, are included in exploration expense. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and gas properties.
Proved oil and gas properties are reviewed for impairment for which identifiable cash flows are independent of cash flows of other assets when facts and circumstances indicate that their carrying amounts may not be recoverable. In performing this review, future net cash flows are determined based on estimated future oil and gas sales revenues less future expenditures necessary to develop and produce the reserves. If the sum of these undiscounted estimated future net cash flows is less than the carrying amount of the property, an impairment loss is recognized for the excess, if any, of the property’s carrying amount over its estimated fair value, which is generally based on discounted future net cash flows.
Costs of drilling and equipping successful exploratory wells, development wells, asset retirement costs and costs to construct or acquire offshore platforms and other facilities, are depreciated using the sale ofunit-of-production method based on total estimated proved developed oil and natural gas reserves. Costs of acquiring proved properties, only whenincluding leasehold acquisition costs transferred from unproved leaseholds, are depleted using the sale involves a significant change inunit-of-production method based on total estimated proved developed and undeveloped reserves. All other properties are stated at historical acquisition cost, net of allowance for impairment, and depreciated using the relationship betweenstraight-line method over the useful lives of the assets.
Undeveloped property costs consist of $2.9 million for WAB-21, $0.1 million for the Dussafu Marin exploration production sharing contract (“Dussafu PSC”) and $0.2 million for the valueBudong-Budong production sharing contract (“Budong PSC”). None of proved reserves or the underlying value of unproved property.these costs are being amortized and have not been impaired.
Depreciation of furniture and fixtures is computed using the straight-line method with depreciation rates based upon the estimated useful life of the property, generally 5 years. Leasehold improvements are depreciated over the life of the applicable lease. Depreciation expense was $0.4 million, $0.6 million $2.8 million and $1.9$2.8 million for the years ended December 31, 2007, 2006 and 2005, and 2004, respectively.
The major components of property and equipment at December 31 are as follows (in thousands):
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| Proved property costs | | $ | — | | | | 630,634 | |
| Costs excluded from amortization | | | 2,900 | | | | 2,900 | |
| Oilfield inventories | | | — | | | | 8,150 | |
| Other administrative property | | | 1,375 | | | | 9,568 | |
| | | | | | | |
| | | | 4,275 | | | | 651,252 | |
| Accumulated depletion, impairment and depreciation | | | (955 | ) | | | (491,924 | ) |
| | | | | | | |
| | | $ | 3,320 | | | $ | 159,328 | |
| | | | | | | |
We perform a quarterly cost center ceiling test of our oil and natural gas properties under the full cost accounting rules of the SEC. The consolidated financial statements of the wholly-owned and majority owned subsidiaries do not include ceiling test write-downs in 2006 or 2005. We have reclassified our oil and natural gas properties to investment in provisional equity affiliate.
Stock-Based Compensation
At December 31,
20062007 and
2005,2006, we had several stock-based employee compensation plans, which are more fully described in
Note 5 – Stock Option and Stock Purchase Plans. Prior to 2003, we accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards StatementSFAS No. 123 (“FAS 123”), Accounting for Stock-Based Compensation as amended by
Statement of Financial accounting StandardsSFAS No. 148 (“SFAS 148”), prospectively to all employee awards granted, modified, or settled after January 1, 2003. Effective
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January 1, 2005, we adopted Statement of Financial Accounting StandardSFAS 123 (revised 2004) Share-Based Payment (“SFAS 123R”) to all employee awards granted, modified, or settled after October 1, 2005. The effect of the adoption of SFAS 123R was not material. Awards under our plans vest in periodic installments after one year of their grant and expire ten years from grant date. Therefore, the costs related to stock-based employee compensation included in the determination of net income in the yearsyear ended December 31, 2005 and 2004 areis less than that which would have been
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recognized if the fair value based method had been applied to all awards since the original effective date of FAS 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2005 | |
| | | (in thousands, except per share data) | | (in thousands, except per share data) | |
| Net income, as reported | | $ | 50,839 | | $ | 34,360 | | | $ | 38,876 | |
| | | |
| Add: Stock-based employee compensation cost, net of tax | | 2,635 | | 999 | | | 2,635 | |
| | | |
| Less: Total stock-based employee compensation cost determined under fair value based method, net of tax | | | (2,711 | ) | | | (1,382 | ) | | | (2,711 | ) |
| | | | | | | | | |
| | | |
| Net income – proforma | | $ | 50,763 | | $ | 33,977 | | | $ | 38,800 | |
| | | | | | | | | |
| Net income per common share: | | |
| Basic – as reported | | $ | 1.38 | | $ | 0.95 | | | $ | 1.05 | |
| | | | | | | | | |
| Basic – proforma | | $ | 1.37 | | $ | 0.94 | | | $ | 1.05 | |
| | | | | | | | | |
| | | |
| Diluted – as reported | | $ | 1.32 | | $ | 0.90 | | | $ | 1.01 | |
| | | | | | | | | |
| Diluted – proforma | | $ | 1.32 | | $ | 0.89 | | | $ | 1.01 | |
| | | | | | | | | |
Stock options of 0.4 million, 0.1 million 0.2 million and 1.10.2 million were exercised in the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively, with cash proceeds of $1.9 million, $0.9 million $0.8 million and $8.0$0.8 million, respectively.
Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. With the formation of Petrodelta, Harvest Vinccler recognized the deferred tax related to the deferred revenue discussed above.
Foreign Currency
We haveMost of our operations are outside of the United States, principally in Venezuela.States. The U.S. Dollar is our functional and reporting currency. Amounts denominated in non-U.S. currencies are re-measured in U.S. Dollars, and all currency gains or losses are recorded in the statement of operations. We attempt to manage our operations in a manner to reduce our exposure to foreign exchange losses. However, there are many factors that affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence. We have recognized significant exchange gains and losses in the past, resulting from fluctuations in the relationship of the Venezuelan currency to the U.S. Dollar. It is not possible to predict the extent to which we may be affected by future changes in exchange rates.
Financial Instruments
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are placed with commercial banks with high
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credit ratings. This diversified investment policy limits our exposure both to credit risk and to concentrations of credit risk.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 (“SFAS 130”) requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. We reflected unrealized mark-to-market losses from cash flow hedging activities as other comprehensive loss during the year ended December 31, 2004 and in accordance with SFAS 130, have provided a separate line in the audited consolidated statement of operations and comprehensive income.
Minority Interests
We record a minority interest attributable to the minority shareholder of our Netherlands, Venezuela and Barbados subsidiaries. The minority interests in net income and losses are generally subtracted from or added to arrive at consolidated net income.
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Change in Accounting Principle
In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. Although the full cost method of accounting for oil and gas exploration and development continues to be an accepted method of accounting for oil and gas properties, the successful efforts method of accounting as prescribed by SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies is the preferred method. In accordance with SFAS No. 154 Accounting Changes and Error Corrections, financial information for prior periods has been restated to reflect retrospective application of the successful efforts method. We believe the successful efforts method provides a more transparent representation of our results of operations and the ability to assess our future investments in oil and gas properties for impairment based on their estimated fair values rather than being required to base valuation on prices and costs as of the balance sheet date. The significant differences between successful efforts and full cost accounting for oil and gas properties relate to the expensing of exploration activities and related unsuccessful exploratory drilling activities. The expensing of these costs can create volatility in the statement of operations. The change in accounting principle resulted in a cumulative, non-cash increase to retained earnings of $52.4 million, net of income tax, as of December 31, 2004. Retained earnings increased due to the reversal of ceiling test write downs in prior years required under the full cost accounting rules of the SEC. There were no such impairments under the successful efforts accounting rules. The effect of the accounting change on income from continuing operations for the years ended December 31, 2006 and 2005 was a decrease of $4.9 million and $15.0 million, net of income tax, or $0.13 and $0.39 per diluted share, respectively. The decrease in income from continuing operations was due to an increase in depletion expense. There was no effect on cash and cash equivalents.
New Accounting Pronouncements
In February 2006,2008, the FinancialFASB issued FASB Staff Position (“FSP”) 157-1 – Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Standards BoardPronouncements That Address Leasing Transactions (“FASB”FSP 157-1”) issued Statement of Financial Accounting Standard 155 –, which excludes SFAS 13 Accounting for Certain Hybrid Financial Instruments (“Leases, and its related interpretive accounting pronouncements from the provisions of SFAS 155”), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption157. FSP 157-1 is effective for all financial instruments acquired or issued afterwith the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. Theinitial adoption of SFAS 155157. FSP 157-1 will not have a material effect on our consolidated financial position, results of operations or cash flows.
In March 2006,February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 – Effective Date of FASB Statement of Financial Accounting Standard 156 – Accounting for Servicing of Financial AssetsNo. 157 (“SFAS 156”FSP 157-2”), which requiresdelays the effective date of SFAS 157 for all separately recognized servicingnonfinancial assets and servicingnonfinancial liabilities, be initially measuredexcept those recognized or disclosed at fair value. SFAS 156 permits, but does not require,value in the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156financial statements on a recurring basis (at least annually), until January 1, 2009. FSP 157-2 will not have a material effect on our consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”) – Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of Statement of Financial Accounting Standard No. 109 – Accounting for Income Taxes. FIN 48 was issued to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 will impact our consolidated financial position, results of operations and cash flows.
In September 2006,February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 157159 – The Fair Value MeasurementOption for Financial Assets and Financial Liabilities (“SFAS 157”159”), which establishes a framework for measuringpermits entities to choose to measure many financial instruments and certain other items at fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Adoptionvalue. SFAS 159 is effective for all financial statements issued foras of the beginning of an entity’s first fiscal years beginningyear that begins after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged.2007. SFAS 157159 will not have a material effect on our consolidated financial position, results of operations andor cash flows.
In September 2006,December 2007, the FASB issued SFAS 158141 (revised 2007) – Employers’ Accounting for Defined Benefit PensionBusiness Combinations (“SFAS 141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and Other Postretirement Plans (“SFAS 158”) which improves financialcomparability of the information that a reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liabilityentity provides in its statement of financial positionreports about a business combination and its effects. SFAS 141R applies prospectively to recognize changes in that funded status in the year inbusiness combinations for which the changes occur
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through comprehensive income. Adoptionacquisition date is effective ason or after the beginning of the first annual reporting period beginning on or after December 31, 2006, for calendar year corporations with publicly traded equity securities. Earlier application15, 2008. An entity may not apply it before that date. When adopted, SFAS 141R is encouraged. SFAS 158 will not expected to have ana material effect on our consolidated financial position, results of operations or cash flows.
In September 2006,December 2007, the SECFASB issued Staff Accounting BulletinSFAS 160 – Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 10851 (“SAB 108”SFAS 160”) regarding. The objective of SFAS 160 is to improve the processrelevance, comparability and transparency of quantifyingthe financial statement misstatements. SAB 108 addresses the diversityinformation that a reporting entity provides in practice in quantifyingits consolidated financial statement misstatementsstatements. SFAS 160 is effective for fiscal years, and the potential under current practice for the build up of improper amounts interim periods within those fiscal years, beginning
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on the balance sheet. The guidance in SAB 108 didor after December 15, 2008. Early adoption is prohibited. When adopted, SFAS 160 is not expected to have a material effect on our consolidated financial position, results of operations andor cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil plant products and natural gas reserve volumes and the future development costs. Actual results could differ from those estimates.
Reclassifications
Certain items in 2004 and 2005 have been reclassified to conform to the 2006 financial statement presentation.
Note 2 — Long-Term Debt and Liquidity
Long-Term Debt
Long-term debt consists of the following (in thousands):
| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| Note payable with interest at 10.0% | | $ | 55,814 | | | $ | — | |
| Note payable with interest at 10.0% | | | 39,535 | | | | — | |
| Note payable with interest at 10.0% | | | 9,302 | | | | — | |
| Note payable with interest at 9.0% | | | — | | | | 300 | |
| Note payable with interest at 11.5% | | | — | | | | 5,167 | |
| | | | | | | |
| | | | 104,651 | | | | 5,467 | |
| | | | | | | | | |
| Less current portion | | | 37,674 | | | | 5,467 | |
| | | | | | | |
| | | $ | 66,977 | | | $ | — | |
| | | | | | | |
On September 15, 2006, Harvest Vinccler entered into a short term line of credit with a Venezuelan bank for 11 billion Bolivars (approximately $5.0 million). The line of credit was due March 19, 2007, and had a fixed interest rate of 10.5 percent. The line of credit was collateralized by a $5.6 million deposit in a U.S. bank to cover the line of credit and accrued interest. The line of credit was used to meet short term Bolivar denominated obligations. The line of credit was repaid on November 24, 2006.| | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| Note payable with interest at 10.0% | | $ | — | | | $ | 55,814 | |
| Note payable with interest at 10.0% | | | — | | | | 39,535 | |
| Note payable with interest at 12.5% | | | 9,302 | | | | 9,302 | |
| | | | | | | |
| | | | 9,302 | | | | 104,651 | |
| | | | | | | | | |
| Less current portion | | | 9,302 | | | | 37,674 | |
| | | | | | | |
| | | $ | — | | | $ | 66,977 | |
| | | | | | | |
On September 27, 2006, Harvest Vinccler entered into a three yearthree-year term loan with a Venezuelan bank for 105 billion Bolivars (approximately $48.8 million). The first principal payment iswas due 360 days after the funding date in the amount of 21 billion Bolivars (approximately $9.8 million), and 21 billion Bolivars (approximately $9.8 million) every 180 days thereafter. A payment in the amount of 20 billion Bolivars (approximately $9.3 million) was made on December 18, 2006. The interest rate for the first year iswas fixed at 10.0 percent and will be negotiatedwas renegotiated for the second year subject to a maximum of 95 percent of the average interest rate charged by six major Venezuelan banks. This loan is collateralized by a $40.0 million deposit in a U.S. bank.The interest rate was adjusted to 12.5 percent on October 1, 2007. The loan was used to meet the SENIAT income tax assessments and related interest.interest of the SENIAT, the Venezuelan income tax authority. The loan was repaid on October 18, 2007.
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On October 3, 2006, Harvest Vinccler entered into a term loan with a Venezuelan bank for 20 billion Bolivars (approximately $9.3 million). The original loan matures inmatured on April 2, 2007. At maturity, Harvest Vinccler and the Venezuelan bank agreed to extend the loan for an additional 180 days subject to the same terms and conditions. The extended loan matured September 28, 2007 at a fixed interest rate of 10.0 percent. The loan was used to meet the SENIAT income tax assessments and related interest. This loan is collateralized by a $7.7 million deposit in a U.S. bank.repaid on September 28, 2007.
On November 20, 2006, Harvest Vinccler entered into a three yearthree-year term loan with a Venezuelan bank for 120 billion Bolivars (approximately $55.8 million). The first principal payment iswas due 180 days after the funding date in the amount of 20 billion Bolivars (approximately $9.3 million), and 20 billion Bolivars (approximately $9.3 million) every 180 days thereafter. The interest rate for the first 180 days iswas fixed at 10.0 percent and may be adjusted from time to time thereafter within the limits set forth by the Central Bank of Venezuela or in accordance with the conditions in the financial market. The interest rate was adjusted to 12.5 percent on October 1, 2007. The loan is collateralized by a $40.4$6.8 million deposit plus interest in a U.S. bank. The loan will bewas used to meet the SENIAT income tax assessments and related interest, refinance a portion of the 105 billion Bolivar loan and to fund operating requirements.
During the ten months ended October 31, 2007, we exchanged through an intermediary, U.S. government securities for U.S. Dollar indexed Venezuelan government securities that can only be converted into Bolivars. The additional Bolivars were used to pay down Harvest Vinccler’s Bolivar denominated debt. Harvest Vinccler reduced
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its Bolivar denominated debt to 20.0 billion Bolivars (approximately $9.3 million) by October 30, 2007 using exchange transactions as more fully described inNote 12 – Gain on Financing Transactionand in advance of the effective date for the Tax on Financial Transactions described inNote 4 – Taxes.
Note 3 — Commitments and Contingencies
We have employment contracts with six executive officers which provide for annual base salaries, eligibility for bonus compensation and various benefits. The contracts provide for a lump sum payment as a multiple of base salary in the event of termination of employment without cause. In addition, these contracts provide for payments as a multiple of base salary and bonus, excise tax reimbursement and a continuation of benefits in the event of termination without cause following a change in control. By providing one year notice, these agreements may be terminated by either party on May 31, 2008.
In April 2004, we signed a ten-year lease for office space in Houston, Texas, for approximately $17,000 per month. Also during 2004, Harvest Vinccler leasedsigned a five-year lease for office space in Maturin and Caracas, Venezuela for $13,200 and $4,000 per month, respectively.month.
Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as Harvest Natural Resources, Inc., Chemex, Inc., Benton-Vinccler, C.A., Gale Campbell and Sheila Campbell in the District Court for Harris County, Texas. This suit was brought in May 2003 by Excel alleging, among other things, breach of a consulting agreement between Excel and us, misappropriation of proprietary information and trade secrets, and fraud. Excel seeks actual and exemplary damages, injunctive relief and attorneys’ fees. In October 2003, the Court abated the suit pending final judgment of a case pending in Louisiana to which we are not a party. In April 2007, the Court lifted the abatement and set the case for trial. The trial date has been set in the second quarter 2008. We dispute Excel’s claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.
Uracoa Municipality Tax Assessments. In July 2004, Harvest Vinccler has received three taxnine assessments from a tax inspector for the Uracoa municipality in which part of the SMU fieldsFields are located. A protest to the assessments was filed with the municipality, and in October 2004 the tax inspector responded in part by affirming one of the assessments and issuing a payment order. 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 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. |
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| • | | 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. |
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| • | | 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 has filed a motion withdisputes the tax court in Barcelona, Venezuela, seeking to enjoin the payment order and dismiss the assessment. In July 2006, the Uracoa Municipality issued two additional assessments seeking to impose an increase in tax rates for the last quarter of 2005 and the first quarter of 2006. In August 2006, the Uracoa Municipality issued two further assessments, including penalties, for second quarter 2006 estimated revenues based on the first quarter 2006 oil and natural gas sales and for supposed errors of Harvest Vinccler as withholding agent. We dispute all of the tax assessments and believe we havebelieves it has a substantial basis for ourits positions. We areHarvest Vinccler is unable to estimate the amount or range of aany possible loss. 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 Uracoa Municipality for the refund of all municipal taxes paid since 1997.
Libertador Municipality Tax AssessmentAssessments. In April 2005, Harvest Vinccler has received a tax assessmentfive assessments from a tax inspector for the Libertador municipality in which part of the SMU fieldsFields are located. located as follows:
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| • | | 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 motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. |
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| • | | 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 the claims. |
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| • | | 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 the claims. |
Harvest Vinccler has submitted a protest todisputes the assessment at the Mayor’s Office, and if no favorable resolution is obtained, it will file a motion with the tax court seeking to enjoin the payment order and dismiss the assessment. We dispute theLibertador allegations set forth in the assessmentassessments and believe we havebelieves it has a substantial basis for ourits position. We areHarvest Vinccler is unable to estimate the amount or range of aany possible loss.
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International Arbitration. As a result of the actions taken by PDVSA,SENIAT’s interpretation of the Ministrytax 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 Energy and Petroleum (“MEP”) andall municipal taxes paid since 2002.
In June 2007, the SENIAT issued an assessment in July 2005, we delivered formal noticesthe amount of $0.4 million for Harvest Vinccler’s failure to Venezuelan government officials of an investment dispute under Venezuelan lawwithhold value added tax (“VAT”) from vendors during 2005. The SENIAT has recognized a payment made by Harvest Vinccler in 2006 for the underwithheld VAT and bilateral investment treaties entered into by the government of Venezuela. The bilateral investment treaties and Venezuelan law provide for international arbitration of investment disputes conducted through the International Centre for Settlement of Investment Disputeshas partially confirmed that some of the World Bank.
The SENIAT Tax Assessment. In July 2005,affected vendors have remitted the SENIAT, the Venezuelan income tax authority, issued a preliminary tax assessment tounderwithheld VAT. Harvest Vinccler of 202 billion Bolivars, or approximately $94 million, related to 2001 through 2004 tax years. We determined not to contest two elements of the claimhas received credit, less penalties and made payments totaling 11.3 billion Bolivars, or $5.3 million, in August and September, 2005. During the second quarter 2006, the SENIAT initiated an audit of 2005 tax payments, and in October 2006, Harvest Vinccler received an assessmentinterest, from the SENIAT for 2005 taxes in the amount of $15.8 million. In 2006,VAT remitted by the vendors. Harvest Vinccler resolved and substantially paid allhas filed claims against the SENIAT for the portion of the tax claims madeVAT not recognized by the SENIAT. Harvest Vinccler paid $73.8 million additional taxesSENIAT and related interestbelieves it has a substantial basis for the periods of 2001 through first quarter 2006.its position.
We are a defendant in or otherwise involved in other litigation incidental to our business. In the opinion of management, there is no such litigation which will have a material adverse impact on our financial condition, results of operations and cash flows.
Note 4 — Taxes
Taxes Other Than on Income
Harvest Vinccler paid municipal taxes through the first quarter 2006 on operating fee revenues it received under the OSA for deliveries from the SMU fields.Fields. In September 2006, PDVSA remitted to the Uracoa municipality an additional $1.0 million in municipal taxes based on the new tax rates from amounts that had been withheld by PDVSA from Harvest Vinccler’s first quarter 2006 oil and natural gas sales for other purposes. The components of taxes other than on income were (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| Venezuelan municipal taxes | | $ | 3,191 | | $ | 5,788 | | $ | 4,485 | | | $ | — | | $ | 3,191 | | $ | 5,788 | |
| Franchise taxes | | 175 | | | (70 | ) | | 464 | | | 166 | | 175 | | | (70 | ) |
| Payroll and other taxes | | 582 | | 640 | | 612 | | | 257 | | 582 | | 640 | |
| | | | | | | | | | | | | | | |
| | | $ | 3,948 | | $ | 6,358 | | $ | 5,561 | | | $ | 423 | | $ | 3,948 | | $ | 6,358 | |
| | | | | | | | | | | | | | | |
Contribution to Science and Technology Fund
In 2005, Venezuela modified the Science and Technology Law to require companies doing business in Venezuela to invest, contribute, or spend a percentage of their gross revenue on projects to promote inventions or investigate technology in areas deemed critical to Venezuela.
In October 2006, the Executive Branch issued the Regulations for the Science and Technology Law which established the methodology for determining the required investment, contribution or expenditure for the 2005 calendar year financial results. Harvest Vinccler was unable to estimate the corresponding percentage of the gross revenue for 2005 or the first quarter of 2006 until the regulations were released as many aspects of the law were unclear. After release of the regulations, Harvest Vinccler accrued $3.9 million for the estimated liability for 2005 and the first quarter of 2006 based on its current understanding of
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the regulations. After March 31, 2006, Harvest Vinccler believes it willdid not have any gross revenue subject to this law.law after March 31, 2006. The regulation provides that the amount that is not invested, contributed or spent must be deposited with an official agency created to administrate the law which has yet to be formed. It is possible that thereThis liability will be paid in the first quarter of 2008.
Tax on Financial Transactions
In October 2007, the government of Venezuela announced the application of a legal challengenew tax on financial transactions (the “TFT”) to private companies. The TFT does not apply to individuals. The tax was set at 1.5 percent of the regulations.value of the transaction. The TFT applies to all debits to bank accounts as well as payments of debt outside the banking system and is not tax deductible. The levy will be applied from November 1, 2007 through December 31, 2008. The TFT will not have a material effect on Harvest Vinccler’s financial position, results of operations or cash flows.
Taxes on Income
The tax effects of significant items comprising our net deferred income taxes as of December 31, 2006 and 2005 are as follows (in thousands):
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| | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2006 | |
| Deferred tax assets: | | |
| Operating loss carryforwards | | $ | 7,466 | | $ | 2,020 | | | $ | 7,466 | |
| Difference in basis of assets | | 25,343 | | 25,343 | | | 25,343 | |
| Deferred revenue | | 5,608 | | 3,052 | | | 5,608 | |
| Valuation allowance | | | (32,809 | ) | | | (27,363 | ) | | | (32,809 | ) |
| | | | | | | | | |
| Net deferred tax asset | | 5,608 | | 3,052 | | | 5,608 | |
| Less current portion | | 5,608 | | 3,052 | | | 5,608 | |
| | | | | | | | | |
| | | $ | — | | $ | — | | | $ | — | |
| | | | | | | | | |
The valuation allowance increaseddecreased by $5.5$32.8 million as a result of the change inelimination of the U.S. deferred tax assets related to the net operating loss carryforward.carryforward and the basis difference on our Venezuelan assets prior to converting to Petrodelta. Realization of deferred tax assets associated with net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Management believesanticipates that additional losses will be generated and that it is more likely than not that they will not be realized through future taxable income. The difference in interpretation of oil pricing under the OSA has been recognized and represents our entire deferred tax asset.
The components of income before income taxes and minority interest are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| Income (loss) before income taxes | | |
| United States | | $ | (15,688 | ) | | $ | 8,178 | | $ | (16,593 | ) | | $ | (17,786 | ) | | $ | (15,688 | ) | | $ | 8,178 | |
| Foreign | | 7,316 | | 114,916 | | 97,859 | | | 48,700 | | 2,391 | | 99,962 | |
| | | | | | | | | | | | | | | |
| Total | | $ | (8,372 | ) | | $ | 123,094 | | $ | 81,266 | | | $ | 30,914 | | $ | (13,297 | ) | | $ | 108,140 | |
| | | | | | | | | | | | | | | |
The provision (benefit) for income taxes consisted of the following at December 31, (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| Current: | | |
| United States | | $ | — | | $ | 739 | | $ | (8 | ) | | $ | 400 | | $ | — | | $ | 739 | |
| Foreign | | 63,473 | | 53,304 | | 34,581 | | | 5,912 | | 63,473 | | 53,304 | |
| | | | | | | | | | | | | | | |
| | | 63,473 | | 54,043 | | 34,573 | | | 6,312 | | 63,473 | | 54,043 | |
| | | |
| Deferred: | | |
| Foreign | | | (2,556 | ) | | 2,982 | | | (1,285 | ) | | — | | | (2,556 | ) | | 2,982 | |
| | | | | | | | | | | | | | | |
| | | $ | 60,917 | | $ | 57,025 | | $ | 33,288 | | | $ | 6,312 | | $ | 60,917 | | $ | 57,025 | |
| | | | | | | | | | | | | | | |
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A comparison of the income tax expense (benefit) at the federal statutory rate to our provision for income taxes is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| Computed tax expense at the statutory rate | | $ | (2,930 | ) | | $ | 43,083 | | $ | 28,443 | | |
| State income taxes | | — | | — | | 25 | | |
| Computed tax expense (benefit) at the statutory rate | | | $ | 10,820 | | $ | (2,930 | ) | | $ | 43,083 | |
| Effect of foreign source income and rate differentials on foreign income | | 8,563 | | 16,065 | | | (2,169 | ) | | | (11,140 | ) | | 8,563 | | 16,065 | |
| Change in valuation allowance | | 5,446 | | 13,129 | | 7,020 | | | 1,085 | | 5,446 | | 13,129 | |
| Alternative minimum tax | | — | | 739 | | — | | | — | | — | | 739 | |
| Deemed income inclusion | | | 12,942 | | — | | — | |
| Venezuela tax settlement | | 49,793 | | — | | — | | | — | | 49,793 | | — | |
| Net operating loss utilization | | — | | | (15,567 | ) | | — | | | | (7,306 | ) | | — | | | (15,567 | ) |
| Other | | 45 | | | (424 | ) | | | (31 | ) | | | (89 | ) | | 45 | | | (424 | ) |
| | | | | | | | | | | | | | | |
| Total income tax expense | | $ | 60,917 | | $ | 57,025 | | $ | 33,288 | | | $ | 6,312 | | $ | 60,917 | | $ | 57,025 | |
| | | | | | | | | | | | | | | |
Rate differentials for foreign income result from tax rates different from the U.S. tax rate being applied in foreign jurisdictions.
At December 31,The net operating loss carryforwards from 2006 we had, for U.S. federal income tax purposes operating loss carryforwards of approximately $21.3 million, expiring in the years 2021 through 2026.were fully utilized at December 31, 2007.
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We do not provide deferred income taxes on undistributed earnings of international consolidated subsidiaries for possible future remittances as all such earnings are reinvested as part of our ongoing business. The amount of deferred taxes on the undistributed earnings cannot be determined at this time.
FIN 48 Disclosure
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have adopted FIN 48 as of January 1, 2007, as required.
We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. To date, the Internal Revenue Service (“IRS”) has not performed an examination of our U.S. income tax returns for 2004 through 2006.
The adoption of FIN 48 has not had a significant impact on our consolidated financial position, results of operations or cash flows. We do not have any unrecognized tax benefits.
Note 5 — Stock Option and Stock Purchase Plans
In May 2006, our shareholders approved the 2006 Long Term Incentive Plan (the “Plan”“2006 Plan”). The 2006 Plan provides for the issuance of up to 1,825,000 shares of our common stock in satisfaction of exercised stock options, stock appreciation rights (“SARs”) and restricted stock to eligible participants including employees, non-employee directors and consultants of our Companycompany or subsidiaries. Under the 2006 Plan, no more than 325,000 shares may be granted as restricted stock. No individual may be granted more than 900,000 options or SARs and no more than 175,000 shares of restricted stock during any period of three consecutive calendar years. The exercise price of stock options granted under the plan2006 Plan must be no less than the fair market value of our common stock on the date of grant. All options granted through December 31, 2006 will vest ratably over a three-yearthree to five year period from their dates of grant and expire seven to ten years from grant date. Restricted stock granted to employees or consultants to date is subject to a restriction period of not less than 36 months during which the stock will be deposited with Harvest Natural Resources, Inc. (“Harvest”) and is subject to forfeiture under certain circumstances.
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Restricted stock granted to non-employee directors will vestvests as to one-third of the shares on each anniversary of the date of grant of the award provided that he is still a director on that date. The 2006 Plan also permits the granting of performance awards to eligible employees and consultants. Performance awards are paid only in cash and are based upon achieving established indicators of performance over an established period of time of at least one year. No employee or consultant shall be granted a performance award during a calendar year that could result in a cash payment of more than $5.0 million. In the event of a change in control, any restrictions on restricted stock will lapse, the indicators of performance under a performance award will be treated as having been achieved and any outstanding options and SARs will vest and become exercisable.
In May 2004, our shareholders approved the 2004 Long Term Incentive Plan (the “Plan”“2004 Plan”). The 2004 Plan provides for the issuance of up to 1,750,000 shares of our common stock in satisfaction of exercised stock options, stock appreciation rights (“SARs”) and restricted stock to eligible participants including employees, non-employee directors and consultants of our Companycompany or subsidiaries. Under the 2004 Plan, no more than 438,000 shares may be granted as restricted stock, and no individual may be granted more than 110,000 shares of restricted stock or 438,000 in options over the life of the Plan. The exercise price of stock options granted under the plan2004 Plan must be no less than the fair market value of our common stock on the date of grant. All options granted to date will vest ratably over a three-year period from their dates of grant and expire ten years from grant date. All restricted stock granted to date is subject to a restriction period of 36 months during which the stock will be deposited with the CompanyHarvest and is subject to forfeiture under certain circumstances. The 2004 Plan also permits the granting of performance awards to eligible employees and consultants. Performance awards are paid only in cash and are based upon achieving established indicators of performance over an established period of time of at least one year. Performance awards granted under the Plan may not exceed $5.0 million in a calendar year and may not exceed $2.5 million to any one individual in a calendar year. In the event of a change in control, any restrictions on restricted stock will lapse, the indicators of performance under a performance award will be treated as having been achieved and any outstanding options and SARs will vest and become exercisable.
In January 2001, we adopted the Non-Employee Director Stock Purchase Plan (the “Stock Purchase Plan”) to encourage our directors to acquire a greater proprietary interest in us through the ownership of our common stock. Under the Stock Purchase Plan, each non-employee director could elect to receive shares of our common stock for all or a portion of their fee for serving as a director. The number of shares issuable was equal to 1.5 times the amount of cash compensation due the director divided by the fair market value of the common stock on the scheduled date of payment of the applicable director’s fee. The shares have a restriction upon their sale for one year from the date of issuance. As of December 31, 2002, 337,850 shares had been issued from the plan. The Stock Purchase Plan was terminated by the Board of Directors in September 2002.
In July 2001, our shareholders approved the 2001 Long Term Stock Incentive Plan.Plan (the “2001 Plan”). The 2001 Long Term Stock Incentive Plan provides for grants of options to purchase up to 1,697,000 shares of our common stock in the form of Incentive Stock Options and Non-Qualified Stock Options to eligible participants including employees of
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our company or subsidiaries, directors, consultants and other key persons. The exercise price of stock options granted under the plan2001 Plan must be no less than the fair market value of our common stock on the date of grant. No officer may be granted more than 500,000 options during any one fiscal year, as adjusted for any changes in capitalization, such as stock splits. In the event of a change in control, all outstanding options become immediately exercisable to the extent permitted by the plan. All options granted to date vest ratably over a three-year period from their dates of grant and expire ten years from grant date.
Since 1989 we have adopted several other stock option plans under which options to purchase shares of our common stock have been granted to employees, officers, directors, independent contractors and consultants. Options granted under these plans have been at prices equal to the fair market value of the stock on the grant dates. Options granted under the plans are generally exercisable in varying cumulative periodic installments after one year and cannot be exercised more than ten years after the grant dates. Following the adoption of the 2001 Long Term Stock Incentive Plan, no options may be granted under any of these plans.
A summary of the status of our stock option plans as of December 31, 2007, 2006 2005 and 20042005 and changes during the years ending on those dates is presented below (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | 2007 | | 2006 | | 2005 |
| | | Weighted | | Weighted | | Weighted | | Weighted | | Weighted | | Weighted |
| | | Average | | Average | | Average | | Average | | Average | | Average |
| | | Exercise | | Exercise | | Exercise | | Exercise | | Exercise | | Exercise |
| | | Price | | Shares | | Price | | Shares | | Price | | Shares | | Price | | Shares | | Price | | Shares | | Price | | Shares |
| Outstanding at beginning of the year: | | $ | 8.61 | | 4,070 | | $ | 8.18 | | 3,793 | | $ | 7.52 | | 4,523 | | | $ | 7.70 | | 4,123 | | $ | 8.61 | | 4,070 | | $ | 8.18 | | 3,793 | |
| Options granted | | 10.62 | | 558 | | 11.51 | | 922 | | 13.36 | | 378 | | | 9.63 | | 866 | | 10.62 | | 558 | | 11.51 | | 922 | |
| Options exercised | | | (5.69 | ) | | | (65 | ) | | | (3.45 | ) | | | (241 | ) | | | (7.41 | ) | | | (955 | ) | | | (4.73 | ) | | | (397 | ) | | | (5.69 | ) | | | (65 | ) | | | (3.45 | ) | | | (241 | ) |
| Options cancelled | | | (19.96 | ) | | | (440 | ) | | | (14.24 | ) | | | (404 | ) | | | (6.31 | ) | | | (153 | ) | | | (13.49 | ) | | | (420 | ) | | | (19.96 | ) | | | (440 | ) | | | (14.24 | ) | | | (404 | ) |
| | | | | | | | | | | | | | | |
| Outstanding at end of the year | | 7.70 | | 4,123 | | 8.61 | | 4,070 | | 8.18 | | 3,793 | | | 7.80 | | 4,172 | | 7.70 | | 4,123 | | 8.61 | | 4,070 | |
| | | | | | | | | | | | | | | |
| Exercisable at end of the year | | 5.91 | | 2,719 | | 7.40 | | 2,886 | | 7.71 | | 3,236 | | | 5.87 | | 2,372 | | 5.91 | | 2,719 | | 7.40 | | 2,886 | |
| | | | | | | | | | | | | | | |
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Significant option groups outstanding at December 31, 20062007 and related weighted average price and life information follow (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding | | | Exercisable | |
| | | | | | | Weighted- | | | | | | | | | | | | | | | | | | |
| | | | | | | Average | | | Weighted- | | | | | | | | | | | Weighted- | | | | |
| Range of | | Number | | | Remaining | | | Average | | | Aggregate | | | Number | | | Average | | | Aggregate | |
| Exercise | | Outstanding | | | Contractual | | | Exercise | | | Intrinsic | | | Exercisable | | | Exercise | | | Intrinsic | |
| Prices | | at 12/31/06 | | | Life | | | Price | | | Value | | | at 12/31/06 | | | Price | | | Value | |
| $ 1.55 - $ 2.75 | | | 1,486 | | | | 3.84 | | | $ | 1.97 | | | $ | 12,866 | | | | 1,486 | | | $ | 1.97 | | | $ | 12,866 | |
| $ 4.80 - $ 7.10 | | | 350 | | | | 5.61 | | | | 5.65 | | | | 1,744 | | | | 350 | | | | 5.65 | | | | 1,744 | |
| $ 8.72 - $10.91 | | | 1,121 | | | | 7.26 | | | | 10.08 | | | | 716 | | | | 159 | | | | 8.90 | | | | 275 | |
| $11.88 - $16.90 | | | 1,103 | | | | 5.40 | | | | 13.00 | | | | — | | | | 661 | | | | 12.92 | | | | — | |
| $18.25 - $19.75 | | | 63 | | | | 0.45 | | | | 19.04 | | | | — | | | | 63 | | | | 19.04 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 4,123 | | | | | | | | | | | $ | 15,326 | | | | 2,719 | | | | | | | $ | 14,885 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding | | | Exercisable | |
| | | | | | | Weighted- | | | | | | | | | | | | | | | | | | |
| | | | | | | Average | | | Weighted | | | | | | | | | | | Weighted- | | | | |
| Range of | | Number | | | Remaining | | | Average | | | Aggregate | | | Number | | | Average | | | Aggregate | |
| Exercise | | Outstanding | | | Contractual | | | Exercise | | | Intrinsic | | | Exercisable | | | Exercise | | | Intrinsic | |
| Prices | | at 12/31/07 | | | Life | | | Price | | | Value | | | at 12/31/07 | | | Price | | | Value | |
| $1.55 - $2.75 | | | 1,295 | | | | 2.29 | | | $ | 2.02 | | | $ | 13,576 | | | | 1,295 | | | $ | 2.02 | | | $ | 13,576 | |
| $4.86 - $7.10 | | | 226 | | | | 4.78 | | | | 5.82 | | | | 1,509 | | | | 226 | | | | 5.82 | | | | 1,509 | |
| $8.72 - $10.91 | | | 1,906 | | | | 7.40 | | | | 9.90 | | | | 4,958 | | | | 300 | | | | 9.32 | | | | 954 | |
| $12.50 - $13.90 | | | 745 | | | | 6.89 | | | | 13.09 | | | | — | | | | 551 | | | | 13.06 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 4,172 | | | | | | | | | | | $ | 20,043 | | | | 2,372 | | | | | | | $ | 16,039 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on our closing stock price of $10.63$12.50 as of December 31, 2006,2007, which would have been received by the option holders had all option holders exercised their options as of that date. Of the number outstanding, 608,750408,750 options are pledged to us to secure a repayment of debt.
The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
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For options granted during:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | |
| For options granted during: | | |
| | | | 2007 | | 2006 | | 2005 |
| Weighted average fair value | | $ | 5.98 | | $ | 6.35 | | $ | 10.33 | | | $ | 4.67 | | $ | 5.98 | | $ | 6.35 | |
| Weighted averaged expected life | | 7 | | 7 | | 2-10 | | | 7 | | 7 | | 7 | |
| Valuation assumptions: | | |
| Expected volatility | | | 49.9%-53.3 | % | | | 50.0%-53.4 | % | | | 69.6 | % | | | 47.7-48.7 | % | | | 49.9%-53.3 | % | | | 50.0%-53.4 | % |
| Risk-free interest rate | | | 4.6%-5.2 | % | | | 3.9%-4.6 | % | | | 2.6%-4.8 | % | | | 4.5%-4.6 | % | | | 4.6%-5.2 | % | | | 3.9%-4.6 | % |
| Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
| Expected annual forfeitures | | | 3 | % | | | 3 | % | | | 0 | % | | | 3 | % | | | 3 | % | | | 3 | % |
The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected life. The expected volatility is based on historical volatilities of our stock. Historical data is used to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options are expected to be outstanding. The risk-free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Under the Black-Scholes option pricing model, the weighted-average estimated values of stock options granted during 2006, 2005 and 2004 were $5.98, $6.35 and $10.33, respectively.
A summary of our nonvested shares as of December 31, 2006,2007, and changes during the year ended December 31, 2006,2007, is presented below (shares in thousands):
| | | | | | | | | | | | | | | | | |
| | | Weighted-Average | | Weighted-Average |
| | | Grant-Date | | Grant-Date |
| Nonvested Shares | | Shares | | Fair Value | | Shares | | Fair Value |
| Nonvested at January 1, 2006 | | 1,185 | | $ | 7.30 | | |
| Nonvested at January 1, 2007 | | | 1,404 | | $ | 6.75 | |
| Granted | | 557 | | 5.98 | | | 916 | | 4.67 | |
| Vested | | | (328 | ) | | 7.81 | | | | (420 | ) | | | (7.48 | ) |
| Forfeited | | | (10 | ) | | 11.73 | | | | (50 | ) | | | (9.63 | ) |
| | | | | | | |
| Nonvested at December 31, 2006 | | 1,404 | | $ | 6.75 | | |
| Nonvested at December 31, 2007 | | | 1,850 | | $ | 5.83 | |
| | | | | | | |
As of December 31, 2006,2007, there was $5.8$5.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our plans. That cost is expected to be recognized
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over the next three to five years. The total fair value of shares vested during the years ended December 31, 2007, 2006 and 2005 and 2004 was $4.5 million, $4.1 million $2.7 million and $1.4$2.7 million, respectively.
In addition to options issued pursuant to the plans, options have been issued to individuals other than our officers, directors or employees at $11.88$10.07 which vest over three years. At December 31, 2006,2007, a total of 10,00050,000 options issued outside of the plans were both outstanding andwith none exercisable.
Note 6 — Operating Segments
We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. The segments are organized in order to manage regional business, currency and tax related risks and opportunities. As a resultWith the formation of Petrodelta, we have recorded the results of operations and economic benefits of our ownership in Petrodelta from April 1, 2006 through December 31, 2007 in the fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates. Oil and gas sales for 2007 is the recognition of the situation in Venezuela, our GAAP consolidated financial statementsdeferred revenue recorded by Harvest Vinccler for 2005 and first quarter 2006 deliveries pending clarification on the nine months ended December 31, 2006 do not reflectcalculation of crude prices under the net results of our producing operations in Venezuela. SeeTransitory Agreement (seeNote 7 – Venezuela, Operations.1 — Organization and Summary of Significant Accounting Policies — Revenue from Venezuela is derived primarily from the delivery and sale of oil and natural gas.Recognition). Operations included under the heading “United States and Other” include corporate management, cash management, business development and financing activities performed in the United States and other countries which do not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses are included in the United States and Other segment and are not allocated to other operating segments.
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| | | | | | | | | | | | | | |
| | | | 2007 | | 2006 | | 2005 | |
| | | | | | | | | | | | | | | (in thousands) | |
| | | 2006 | | 2005 | | 2004 | | | (RESTATED- | |
| | | (in thousands) | | | SEE NOTE 1) | |
Segment Revenues | | |
| Oil and gas sales: | | |
| Venezuela | | $ | 59,506 | | $ | 236,941 | | $ | 186,066 | | | $ | 11,217 | | $ | 59,506 | | $ | 236,941 | |
| | | | | | | | | | | | | | | |
| Total oil and gas sales | | 59,506 | | 236,941 | | 186,066 | | | 11,217 | | 59,506 | | 236,941 | |
| | | | | | | | | | | | | | | |
| | | |
Segment Income (Loss) | | |
| Venezuela | | | (42,895 | ) | | 64,096 | | 54,469 | | | 79,878 | | | (46,835 | ) | | 52,133 | |
| United States and other | | | (15,667 | ) | | | (13,257 | ) | | | (20,109 | ) | | | (19,760 | ) | | | (15,667 | ) | | | (13,257 | ) |
| | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (58,562 | ) | | $ | 50,839 | | $ | 34,360 | | | $ | 60,118 | | $ | (62,502 | ) | | $ | 38,876 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | December 31, | | December 31, | |
| | | | | | | | | | | 2007 | | 2006 | |
| | | December 31, | | December 31, | | | (in thousands) | |
| | | 2006 | | 2005 | | | (RESTATED- | |
| | | (in thousands) | | | SEE NOTE 1) | |
Operating Segment Assets | | |
| Venezuela | | $ | 306,289 | | $ | 258,268 | | | $ | 306,644 | | $ | 351,943 | |
| United States and other | | 155,973 | | 161,328 | | | 126,773 | | 155,973 | |
| | | | | | | | | | | |
| | | 462,262 | | 419,596 | | | 433,417 | | 507,916 | |
| Intersegment eliminations | | | (39,551 | ) | | | (18,798 | ) | | | (16,346 | ) | | | (39,551 | ) |
| | | | | | | | | | | |
| | | $ | 422,711 | | $ | 400,798 | | | $ | 417,071 | | $ | 468,365 | |
| | | | | | | | | | | |
Note 7 — Venezuela Operations
South Monagas Unit, Venezuela (Harvest Vinccler) — Petrodelta S.A.
Currently, our only producing assets areOn October 25, 2007, the Venezuelan Presidential Decree which formally transfers to Petrodelta the rights to the Petrodelta Fields subject to the conditions of the Conversion Contract was published in Venezuela. Since 1992, Harvest Vincclerthe Official Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the Petrodelta Fields for a maximum of 20 years from October 25, 2007. Petrodelta will undertake its operations in
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accordance with the Business Plan as set forth in Annex I to the Conversion Contract (“Business Plan”). Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with the Business Plan. The Business Plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. The 2008 budget of Petrodelta’s Business Plan was approved by its shareholders on January 23, 2008.
Petrodelta has been providing operating services to PDVSAadopted policies and procedures governing its operations, including, among others, policies and procedures for safety, health and environment, contracting, maintenance of insurance, accounting, banking and treasury and human resources, following the South Monagas Unit under an OSA. However, beginning in 2005,guidelines established by CVP. To the government of Venezuela initiated a series of actions to compel companiesextent possible, such policies and procedures will be consistent with operating service agreements to convert those agreements into new companies in which PDVSA would have a majority interest. On March 31, 2006, Harvest Vinccler signed a MOU with two affiliatesthe policies and procedures of PDVSA CVP and PPSA, to convert the OSA intoultimate parent company of HNR Finance. Petrodelta has hired personnel, largely from Harvest Vinccler; and the Board of Directors of Petrodelta has appointed the management of Petrodelta. Certain of these appointments are made by the shareholders. Effective August 9, 2007, Mr. Karl L. Nesselrode, Vice President, Engineering and Business Development of Harvest, accepted a minority interest in Petrodelta. The MOU is subject to certain conditions, including execution of a conversion contract, and Venezuelan government approvals. On August 16, 2006, the MOU was amended to provide for the addition of the Isleño, El Salto and Temblador fieldslong-term secondment to Petrodelta as additional consideration forits Operations and Technical Manager. Per Petrodelta’s bylaws, the Operations and Technical Manager’s position is designated as our conversionappointment. Mr. Nesselrode will remain an officer of Harvest. The General Manager of Petrodelta (CVP appointment) has been appointed by the Board of Directors of Petrodelta. This position is in charge of the OSA to Petrodelta. On December 18, 2006, at a Special Meetingdaily management of the Stockholders,business of Petrodelta and has the transactions contemplatedpower and duties customary to manage, direct and supervise the accounting of Petrodelta.
Petrodelta is governed by the MOU were approved. Asa board of this report, the governmental approvals necessary to complete the conversion have not yet been obtained, and the timing of and probability for such approval is uncertain.
In April 2006, the Venezuelan National Assembly passed legislation terminating all operating service agreements and directing the government to take over the operations carried out by the private companies without prejudice to the incorporation of mixed companies for that purpose. This action, coupled with the unfinished conversion to Petrodelta, has left Harvest Vinccler without a contractual means recognized by the government of Venezuela to address revenues or costs and expenses since March 31, 2006. As a result of this situation, our consolidated financial statements prepareddirectors in accordance with GAAPthe Charter and Bylaws of Petrodelta as set forth in Annex E to the Conversion Contract (“Charter and Bylaws”). Under the Charter and Bylaws, matters requiring shareholder approval may be approved by a simple majority with the exception of certain specified matters which require the approval by the holders of at least 75 percent of the capital stock. These matters include: most changes to the Charter and Bylaws; changes in the capital stock of Petrodelta that would alter the percentage participation of HNR Finance or CVP; any liquidation or dissolution of Petrodelta; any merger, consolidation or business combination of Petrodelta; disposition of all or any substantial part of the assets of Petrodelta, except in the ordinary course of business; any financing agreement for an amount greater than $10 million; approval or modification of Petrodelta’s financial statements; creation of certain reserve funds; any distribution of dividends or return of paid-in surplus; changes to the policy regarding dividends and other distributions established by the Charter and Bylaws; changes to the Business Plan; changes to the Contract for Sale and Purchase of Hydrocarbons with PPSA; contracts with shareholders or affiliates that are not at market price; any social investment in excess of the amount required by the Venezuelan government; any waiver of material rights or actions with respect to litigation involving more than $1 million; selection of external auditors; appointment of any judicial representative or general agent of Petrodelta; and designation of a liquidator in the event of the liquidation of Petrodelta.
The Board of Directors of Petrodelta consists of five directors, three of whom are appointed by CVP, including the President of the Board, and two of whom are appointed by HNR Finance. Decisions of the Board of Directors are taken by the favorable vote of at least three of its members, except in the case of any decision implementing a decision of the Shareholders’ Meeting relating to any of the matters where a qualified majority is required, in which case, a favorable vote of four members will be required. The Board of Directors has broad powers of administration and disposition expressly granted in the Charter and Bylaws. The powers include: proposing budget and work programs; presenting the annual report to the shareholders; appointing and dismissing personnel; making recommendations regarding financial reserves and utilization of surplus; making proposals on dividends consistent with the Charter and Bylaws; agreeing on contracts consistent with the work programs and budgets; opening and closing bank accounts; making, accepting, endorsing and guaranteeing bank drafts and other commercial instruments consistent with work programs and budgets; and implementing policies and procedures.
The sale of oil and gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA signed on January 17, 2008. The form of the agreement is set forth in Annex K to the Conversion Contract. Crude oil delivered from the Petrodelta Fields to PPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference priced and prevailing market conditions. Natural gas delivered from the Petrodelta Fields to PPSA is priced at $1.54 per thousand cubic feet. PPSA is obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced production month by wire transfer, in U.S. Dollars in the case of payment for crude oil and natural gas liquids
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delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by Petrodelta. Any dividend paid by Petrodelta will be made in U.S. Dollars.
HNR Finance owns a 40 percent interest in Petrodelta and has recorded its share of the earnings of Petrodelta from April 1, 2006 to December 31, 2007 in the current year in accordance with the Conversion Contract. Summary historical financial information has been presented below at December 31, 2007 and 2006 and for the year ended December 31, 2007 and nine months ended December 31, 2006 do not reflect the net results of our producing operations in Venezuela for the last three quarters of the year. We will not be able to include the results of our Venezuelan operations in our consolidated financial statements until the conversion to Petrodelta is completed. Although the MOU provides that upon completion of the conversion, there will be an adjustment between the parties to obtain the same economic result as if the conversion had been completed on April 1, 2006, this adjustment will not occur until the conversion is completed.comparative purposes (in thousands, except per unit information):
Since signing the MOU, CVP has designated its board members and a General Manager and President for Petrodelta, both of whom influence Harvest Vinccler’s operations and staffing. Harvest Vinccler continues in the day-to-day operations of its properties in Venezuela, and during the last three quarters of 2006, it has accrued cash advances of $36.3 million to fund operations. At the request of PDVSA, Harvest Vinccler invoiced PDVSA for these costs and $21.2 million, representing the second and third quarter advances, have been reimbursed. Harvest Vinccler invoiced PDVSA for fourth quarter advances of $15.1 million in February 2007. In 2006, Harvest Vinccler resolved and substantially paid all of the tax claims made by the SENIAT. Harvest Vinccler paid $73.8S-20S-23
| | | | | | | | | |
| | | Year Ended | | | Nine Months Ended | |
| | | December 31, 2007 | | | December 31, 2006 | |
| | | (RESTATED- | | | | | |
| | | SEE NOTE 1) | | | | | |
| Barrels of oil sold | | | 5,374 | | | | 5,211 | |
| MCF of gas sold | | | 13,456 | | | | 11,519 | |
| Total BOE | | | 7,616 | | | | 7,131 | |
| | | | | | | | | |
| Average price per barrel | | $ | 58.61 | | | $ | 50.98 | |
| Average price per mcf | | $ | 1.54 | | | $ | 1.54 | |
| | | | | | | | | |
| Revenues: | | | | | | | | |
| Oil sales | | $ | 314,928 | | | $ | 265,625 | |
| Gas sales | | | 20,789 | | | | 17,796 | |
| Royalty | | | (114,847 | ) | | | (96,790 | ) |
| | | | | | | |
| | | | 220,870 | | | | 186,631 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Operating expenses | | | 23,752 | | | | 22,729 | |
| Depletion, depreciation and amortization | | | 18,549 | | | | 17,076 | |
| General and administrative | | | 19,880 | | | | 11,093 | |
| Taxes other than on income | | | 2,747 | | | | 2,029 | |
| | | | | | | |
| | | | 64,928 | | | | 52,927 | |
| | | | | | | |
| | | | | | | | | |
| Income from operations and before income taxes | | | 155,942 | | | | 133,704 | |
| | | | | | | | | |
| Current income tax expense | | | 85,849 | | | | 67,188 | |
| Deferred income tax benefit | | | (21,348 | ) | | | (23,415 | ) |
| | | | | | | |
| Net Income | | | 91,441 | | | | 89,931 | |
| Adjustment to reconcile to reported Net Income from Unconsolidated Equity Affiliate: | | | | | | | | |
| Deferred income tax benefit | | | 12,343 | | | | 23,415 | |
| | | | | | | |
| Net Income Equity Affiliate | | | 79,098 | | | | 66,516 | |
| Equity interest in unconsolidated equity affiliate | | | 40 | % | | | 40 | % |
| | | | | | | |
| Income before amortization of excess basis in equity affiliate | | | 31,639 | | | | 26,606 | |
| Amortization of excess basis in equity affiliate | | | (2,530 | ) | | | — | |
| | | | | | | |
| Net income from unconsolidated equity affiliate | | $ | 29,109 | | | $ | 26,606 | |
| | | | | | | |
million additional taxes and related interest for the periods of 2001 through first quarter 2006. The tax payments were largely made through borrowings by Harvest Vinccler, which are partially collateralized with restricted cash deposits.
At December 31, 2006, Harvest Vinccler has three loans outstanding with two Venezuelan banks for a total of 225 billion Bolivars (approximately $104.7 million). These loans are collateralized by $88.9 million deposited in two U.S. banks. The loans were used to meet the SENIAT income tax assessments and related interest, refinance a portion of one of the Bolivar loans and to fund operating requirements.| | | | | | | | | |
| | | December 31, | | December 31, |
| | | 2007 | | 2006 |
| Current assets | | $ | 464,904 | | | $ | 206,907 | |
| Property and equipment | | | 190,613 | | | | 200,376 | |
| Other assets | | | 38,738 | | | | 23,415 | |
| Current liabilities | | | 287,491 | | | | 122,896 | |
| Other liabilities | | | 5,964 | | | | 5,420 | |
| Net equity | | | 400,800 | | | | 302,382 | |
Note 8 — China Operations
In December 1996, we acquired Crestone Energy Corporation, subsequently renamed Benton Offshore China Company. Its principal asset is a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area. The WAB-21 petroleum contract covers 6.2 million acres in the South China Sea, with an option for an additional 1.25 million acres under certain circumstances, and lies within an area which is the subject of a border dispute between the People’s Republic of China and Vietnam. Vietnam has executed an agreement on a portion of the same offshore acreage with another company. The border dispute has lasted for many
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years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. Due to the border dispute between China and Vietnam, we have been unable to pursue an exploration program during Phase One of the contract. As a result, we have obtained license extensions, with the current extension in effect until May 31, 2007.2009. While no assurance can be given, we believe we will continue to receive contract extensions so long as the border disputes persist. WAB-21 represents the $2.9 million excluded from the full cost pool as reflectedof oil and gas properties on our December 31, 20062007 balance sheet.
Note 9 — Domestic Operations
In January 2007, we purchased a 45 percent interest in Fusion for $4.6 million. Fusion is a technical firm specializing in the areas of geophysics, geosciences and reservoir engineering. The purchase of Fusion extends our technical ability and global reach to support a more organic growth strategy. Our minority equity investment in Fusion is accounted for using the equity method of accounting. Operating revenue and total assets represent 100 percent of Fusion. Fusion acquired Renegade Geophysical L.L.C. on August 30, 2007 for 9.1 percent of one of Fusion’s subsidiaries’ stock plus $0.5 million. No dividends were declared or paid during the period. Summarized financial information for Fusion follows:
| | | | | |
| | | Year Ended | |
| | | December 31, | |
| | | 2007 | |
| | | (in thousands) | |
| Operating Revenues | | $ | 7,392 | |
| | | | |
| |
| Net Income | | $ | 527 | |
| Equity interest in unconsolidated equity affiliate | | | 45 | % |
| | | | |
| Net income from unconsolidated equity affiliate | | | 237 | |
| Amortization of fair value of intangibles | | | (656 | ) |
| | | | |
| Net loss from unconsolidated equity affiliate | | $ | (419 | ) |
| | | | |
| |
| | | December 31, |
| | | 2007 |
| Current assets | | $ | 3,995 | |
| Total assets | | | 14,846 | |
| Current liabilities | | | 2,100 | |
| Total liabilities | | | 2,100 | |
Note 10 — Related Party Transactions
In August 1997, we entered into a consulting agreement with Oil & Gas Technology Consultants Inc. (“OGTC”) to provide operational and technical assistance in Venezuela. OGTC is an affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A., which indirectly owns 20 percent of Harvest Vinccler. Payment for services is due when earnings are not reinvested in Harvest Vinccler operations.Petrodelta. The consulting agreement was cancelled January 1, 2004. At December 31, 20062007 and 2005,2006, we owed $9.6$10.1 million and $9.2$9.6 million, respectively, under the consulting agreement.
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Note 1011 — Earnings Per Share
Basic earnings per common share (“EPS”) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The weighted average number of common shares outstanding for computing basic EPS was 36.5 million, 37.2 million 36.9 million and 36.136.9 million for the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The weighted average number of common shares outstanding for computing diluted EPS, including dilutive stock options, was 37.9 million, 37.2 million 38.4 million and 38.138.4 million for the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively.
An aggregate of 1.51.1 million options were excluded from the earnings per share calculations because their exercise price exceeded the average price for the year ended December 31, 2006.2007. For the years ended December 31, 2006 and 2005, and 2004, 1.91.5 million and 0.91.9 million options and warrants, respectively, were excluded from the earnings per share calculations because their exercise price exceeded the average price.
Note 11 – Subsequent Event12 — Gain on Financing Transaction
On January 19,In 2006, Harvest Vinccler entered into two Bolivar denominated three-year loans and one Bolivar denominated term loan with Venezuelan banks. The interest and debt service obligations for these loans are denominated in Bolivars. The Bolivar debt was collateralized with U.S. Dollar deposits in banks outside of Venezuela. SeeNote 2 — Long-Term Debt and Liquidity. Since Harvest Vinccler has no source for Bolivars due to the situation in Venezuela (seeNote 7— Venezuela Operations-Petrodelta, S.A.), the consolidated Harvest group of companies evaluated its current options to convert U.S. Dollars to Bolivars and entered into a series of security exchange transactions to effectively convert U.S. Dollars to Bolivars. In these exchange transactions, one Harvest affiliate purchased U.S. government securities and exchanged them for U.S. Dollar indexed debt issued by the Venezuelan government. The U.S. Dollar indexed Venezuelan government securities can only be traded in Venezuela for Bolivars (“Southern Bonds” or “TICC’s”). The exchange was transacted through an intermediary at the securities transaction rate of Bolivars to U.S. Dollars. Harvest Vinccler at the same time purchased a like amount of U.S. government securities and exchanged those securities with the intermediary for the TICCs. Harvest Vinccler converted the TICCs to Bolivars at a local bank at the official exchange rate of 2,150 Bolivars to one U.S. Dollar and used the Bolivars to settle 205 billion Bolivars (approximately $95.4 million) of its Bolivar denominated debt. These security exchange transactions resulted in a $49.6 million gain on financing transactions for the year ended December 31, 2007. There were no such financing transactions entered into during the year ended December 31, 2006.
Note 13 — Subsequent Events
In November 2007, we purchasedexecuted a 45sale and purchase agreement for the purchase of a 50 percent interest in Fusion Geophysical, L.L.C. (“Fusion”)the Dussafu PSC. All conditions precedent to the sale and purchase agreement are complete except for $4.6 million. Fusion is a technical firm specializingfinal government and partner approvals. We anticipate receiving final approvals during the first half of 2008. On receipt of final partner approval, we will become the operator of the Dussafu PSC. The purchase will be recorded in the areasquarter in which approvals are received. Located offshore Gabon, adjacent to the border with the Republic of geophysics, geosciencesCongo, the Dussafu PSC contains 680,000 acres with water depths to 1,000 feet. The Dussafu PSC represents $0.1 million of oil and reservoir engineering.gas properties on our December 31, 2007 balance sheet.
In February 2008, Indonesia’s oil and gas regulatory authority, BP Migas, approved the assignment to us of a 47 percent interest in the Budong PSC located onshore West Sulawesi, Indonesia. Final government approval from Migas is pending. The Budong PSC includes a ten-year exploration period and a 20-year development phase. In the initial three-year exploration phase, which began January 2007, we expect to acquire, process and interpret approximately 500 kilometers of 2-D seismic and drill two exploration wells. Our partner, Tately Budong-Budong N.V. (“Tately”), will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have control of major decisions and financing for the project with an option to operate in the development and production phase if approved by BP Migas. The Budong PSC represents $0.2 million of oil and gas properties on our December 31, 2007 balance sheet.
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S-21
In February 2008, Messrs. R.E. Irelan and Igor Effimoff were elected to our Board of Directors, increasing the number of Board members to eight. Our Board is now composed of seven external and one internal members.
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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Quarter Ended | |
| | | March 31 | | June 30 | | September 30 | | December 31 | | | December 31 | |
| | | (amounts in thousands, except per share data) | | | March 31 | | June 30 | | September 30 | | (restated) | |
Year ended December 31, 2006 | | |
| | | | (amounts in thousands, except per share data) | |
Year ended December 31, 2007 | | |
| Revenues | | $ | 59,172 | | $ | 334 | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | $ | 11,217 | |
| Expenses | | | (28,143 | ) | | | (7,796 | ) | | | (7,654 | ) | | | (10,414 | ) | | | (6,951 | ) | | | (7,798 | ) | | | (6,069 | ) | | | (9,935 | ) |
| Non-operating income (expense) | | 1,940 | | | (13,419 | ) | | | (2,650 | ) | | 258 | | | | (38 | ) | | 353 | | 15,076 | | 35,059 | |
| | | | | | | | | | | | | | | | | | | |
| Income before income taxes and minority interests | | 32,969 | | | (20,881 | ) | | | (10,304 | ) | | | (10,156 | ) | |
| Income (loss) before income taxes and minority interests | | | | (6,989 | ) | | | (7,445 | ) | | 9,007 | | 36,341 | |
| Income tax expense | | 14,762 | | 40,810 | | 5,338 | | 7 | | | 114 | | 52 | | 863 | | 5,283 | |
| | | | | | | | | | | | | | | | | | | |
| Income before minority interests | | 18,207 | | | (61,691 | ) | | | (15,642 | ) | | | (10,163 | ) | |
| Income (loss) before minority interests | | | | (7,103 | ) | | | (7,497 | ) | | 8,144 | | 31,058 | |
| Minority interests | | 4,339 | | | (11,409 | ) | | | (2,044 | ) | | | (1,613 | ) | | | (637 | ) | | | (736 | ) | | 2,524 | | 18,630 | |
| | | | | | | | | | | |
| Income (loss) from consolidated companies | | | | (6,466 | ) | | | (6,761 | ) | | 5,620 | | 12,428 | |
| Net income (loss) from unconsolidated equity affiliates | | | | (39 | ) | | | (137 | ) | | | (235 | ) | | 55,708 | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 13,868 | | $ | (50,282 | ) | | $ | (13,598 | ) | | $ | (8,550 | ) | | $ | (6,505 | ) | | $ | (6,898 | ) | | $ | 5,385 | | $ | 68,136 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Net income (loss) per common share: | | |
| Basic | | $ | 0.37 | | $ | (1.35 | ) | | $ | (0.36 | ) | | $ | (0.23 | ) | | $ | (0.17 | ) | | $ | (0.18 | ) | | $ | 0.15 | | $ | 1.95 | |
| | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.36 | | $ | (1.35 | ) | | $ | (0.36 | ) | | $ | (0.23 | ) | | $ | (0.17 | ) | | $ | (0.18 | ) | | $ | 0.14 | | $ | 1.86 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Quarter Ended | |
| | | March 31 | | June 30 | | September 30 | | December 31 | | | March 31 | | June 30 | | September 30 | | December 31 | |
| | | (amounts in thousands, except per share data) | | | (amounts in thousands, except per share data) | |
Year ended December 31, 2005 | | |
Year ended December 31, 2006* | | |
| Revenues | | $ | 60,986 | | $ | 56,442 | | $ | 61,221 | | $ | 58,292 | | | $ | 59,172 | | $ | 334 | | $ | — | | $ | — | |
| Expenses | | | (27,300 | ) | | | (26,207 | ) | | | (32,245 | ) | | | (31,664 | ) | | | (33,068 | ) | | | (7,796 | ) | | | (7,654 | ) | | | (10,414 | ) |
| Non-operating income (expense) | | 3,054 | | 277 | | | (1,827 | ) | | 2,065 | | | 1,940 | | | (13,419 | ) | | | (2,650 | ) | | 258 | |
| | | | | | | | | | | | | | | | | | | |
| Income before income taxes and minority interests | | 36,740 | | 30,512 | | 27,149 | | 28,693 | | |
| Income (loss) before income taxes and minority interests | | | 28,044 | | | (20,881 | ) | | | (10,304 | ) | | | (10,156 | ) |
| Income tax expense | | 13,533 | | 11,959 | | 16,332 | | 15,201 | | | 14,762 | | 40,810 | | 5,338 | | 7 | |
| | | | | | | | | | | | | | | | | | | |
| Income before minority interests | | 23,207 | | 18,553 | | 10,817 | | 13,492 | | |
| Income (loss) before minority interests | | | 13,282 | | | (61,691 | ) | | | (15,642 | ) | | | (10,163 | ) |
| Minority interests | | 5,172 | | 4,402 | | 2,674 | | 2,982 | | | 3,354 | | | (11,409 | ) | | | (2,044 | ) | | | (1,613 | ) |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 18,035 | | $ | 14,151 | | $ | 8,143 | | $ | 10,510 | | |
| Net income (loss) | | | $ | 9,928 | | $ | (50,282 | ) | | $ | (13,598 | ) | | $ | (8,550 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Net income per common share: | | |
| Net income (loss) per common share: | | |
| Basic | | $ | 0.49 | | $ | 0.38 | | $ | 0.22 | | $ | 0.28 | | | $ | 0.27 | | $ | (1.35 | ) | | $ | (0.36 | ) | | $ | (0.23 | ) |
| | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.47 | | $ | 0.37 | | $ | 0.21 | | $ | 0.27 | | | $ | 0.26 | | $ | (1.35 | ) | | $ | (0.36 | ) | | $ | (0.23 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Other comprehensive income (loss) | | | (6,048 | ) | | 1,770 | | 2,287 | | 1,991 | | |
| | | | | | | | | | | |
| Total comprehensive income | | $ | 11,987 | | $ | 15,921 | | $ | 10,430 | | $ | 12,501 | | |
| | | | | | | | | | | |
| | |
| * | | Financial information for 2006 has been restated to reflect retrospective application of the successful efforts method of accounting. See Note 1 — Organization and Summary of Significant Accounting Policies — Property and Equipment and Change in Accounting Principle. The effect of the accounting change on net income for the three months ended March 31, 2006 was a decrease of $3.9 million, net of income tax, or $0.10 per diluted share. |
Restatement
As discussed inNote 1 — Organization and Summary of Significant Accounting Policies, we are restating our historical financial statements as of and for the year ended December 31, 2007 and quarterly information for the quarter ended December 31, 2007. The restatements relate to the correction of an error in the deferred tax adjustment to reconcile our share of Petrodelta’s net income reported under International Financial Reporting Standards (“IFRS”) to that required under accounting principles generally accepted in the United States of America (“GAAP”) and recorded within Net income from unconsolidated equity affiliates.
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The adjustment to record our share of Petrodelta’s net income under GAAP should have been limited to deferred tax adjustments related to non-monetary temporary differences impacted by inflationary adjustments under Venezuela law. During the 2008 year end close process, we determined that restatements were necessary because since October 1, 2007 both the monetary and non-monetary temporary differences recorded in Petrodelta’s IFRS financial statements had been adjusted in arriving at our GAAP consolidated financial statements rather than only the non-monetary temporary differences impacted by inflationary adjustments. Accordingly, we had understated our Net income from unconsolidated equity affiliates and Investment in equity affiliates.
The following tables set forth the effect of the adjustments described above for the fourth quarter of 2007.
Increase (Decrease) in Quarterly Net Income (Loss)
| | | | | |
| | | Quarter | |
| | | Ended | |
| | | December | |
| (in thousands) | | 31, 2007 | |
| Net income from unconsolidated equity affiliates as previously reported | | $ | 52,106 | |
| Total adjustment | | | 3,602 | |
| | | | |
| Net income from unconsolidated equity affiliates as restated | | $ | 55,708 | |
| | | | |
| | | | | |
| Net income (loss) as previously reported | | $ | 65,255 | |
| Total adjustment | | | 2,881 | |
| | | | |
| Net income (loss) as restated | | $ | 68,136 | |
| | | | |
Supplemental Information on Oil and Natural Gas Producing Activities (unaudited)
The following tables summarize our proved reserves, drilling and production activity, and financial operating data at the end of each year. The Venezuelan reserves are attributable to our OSA between Harvest Vinccler and Petroleos de Venezuela S.A. under which all mineral rights are owned byconsolidated activities prior to the governmentconversion to an equity investment in Petrodelta. Historical costs in Tables I through III provide information prior to the effective date of Venezuela. The government of Venezuela unilaterally terminated the OSA inconversion to Petrodelta on April 1, 2006.
In accordance with Statement of Financial Accounting Standards No. 69, “Disclosures About Oil and Gas Producing Activities” (“SFAS 69”), this section provides supplemental information on our oil and natural gas exploration and production activities. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present information on our estimated proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.
S-22S-29
TABLE I — Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Venezuela | | China | | Total | | | United States | | | |
Year Ended December 31, 2006 | | |
| Development costs | | $ | 501 | | $ | — | | $ | 501 | | |
| | | | Venezuela | | China | | and Other | | Total | |
Year Ended December 31, 2007 | | |
| Acquisition costs | | | $ | — | | $ | 160 | | $ | 304 | | $ | 464 | |
| Exploration costs | | — | | 35 | | 35 | | | — | | 204 | | — | | 204 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 501 | | $ | 35 | | $ | 536 | | | $ | — | | $ | 364 | | $ | 304 | | $ | 668 | |
| | | | | | | | | | | | | | | | | |
| | | |
Year Ended December 31, 2005 | | |
Year Ended December 31, 2006 | | |
| Acquisition costs | | | $ | — | | $ | 35 | | $ | — | | $ | 35 | |
| Development costs | | $ | 8,912 | | $ | — | | $ | 8,912 | | | 501 | | — | | — | | 501 | |
| Exploration costs | | — | | 42 | | 42 | | |
| | | | | | | | | | | | | | | | | |
| | | $ | 8,912 | | $ | 42 | | $ | 8,954 | | | $ | 501 | | $ | 35 | | $ | — | | $ | 536 | |
| | | | | | | | | | | | | | | | | |
| | | |
Year Ended December 31, 2004 | | |
Year Ended December 31, 2005 | | |
| Acquisition costs | | | $ | — | | $ | 42 | | $ | — | | $ | 42 | |
| Development costs | | $ | 39,161 | | $ | — | | $ | 39,161 | | | 8,912 | | — | | — | | 8,912 | |
| Exploration costs | | 10 | | 53 | | 63 | | |
| | | | | | | | | | | | | | | | | |
| | | $ | 39,171 | | $ | 53 | | $ | 39,224 | | | $ | 8,912 | | $ | 42 | | $ | — | | $ | 8,954 | |
| | | | | | | | | | | | | | | | | |
TABLE II — Capitalized costs related to oil and natural gas producing activities (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | United States | | | |
| | | | Venezuela(a) | | China(b) | | and Other | | Total | |
Year Ended December 31, 2007 | | |
| Costs excluded from amortization | | | $ | — | | $ | 2,859 | | $ | 304 | | $ | 3,163 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Venezuela(a) | | China(b) | | Total | | |
Year Ended December 31, 2006 | | |
| Proved property costs | | $ | — | | $ | 13,532 | | $ | 13,532 | | | $ | — | | $ | 13,532 | | $ | — | | $ | 13,532 | |
| Costs excluded from amortization | | — | | 2,900 | | 2,900 | | | — | | 2,900 | | — | | 2,900 | |
| Oilfield inventories | | — | | — | | — | | | — | | — | | — | | — | |
| Less accumulated depletion and impairment | | — | | | (13,532 | ) | | | (13,532 | ) | | — | | | (13,532 | ) | | — | | | (13,532 | ) |
| | | | | | | | | | | | | | | | | |
| | | $ | — | | $ | 2,900 | | $ | 2,900 | | | $ | — | | $ | 2,900 | | $ | — | | $ | 2,900 | |
| | | | | | | | | | | | | | | | | |
| | | |
Year Ended December 31, 2005 | | |
| Proved property costs | | $ | 617,137 | | $ | 13,497 | | $ | 630,634 | | | $ | 617,137 | | $ | 13,497 | | $ | — | | $ | 630,634 | |
| Costs excluded from amortization | | — | | 2,900 | | 2,900 | | | — | | 2,900 | | — | | 2,900 | |
| Oilfield inventories | | 8,150 | | — | | 8,150 | | | 8,150 | | — | | — | | 8,150 | |
| Less accumulated depletion and impairment | | | (473,496 | ) | | | (13,497 | ) | | | (486,993 | ) | | | (473,496 | ) | | | (13,497 | ) | | — | | | (486,993 | ) |
| | | | | | | | | | | | | | | | | |
| | | $ | 151,791 | | $ | 2,900 | | $ | 154,691 | | | $ | 151,791 | | $ | 2,900 | | $ | — | | $ | 154,691 | |
| | | | | | | | | | | | | | | | | |
| | | |
Year Ended December 31, 2004 | | |
| Proved property costs | | $ | 608,225 | | $ | 13,454 | | $ | 621,679 | | |
| Costs excluded from amortization | | — | | 2,900 | | 2,900 | | |
| Oilfield inventories | | 6,503 | | — | | 6,503 | | |
| Less accumulated depletion and impairment | | | (432,302 | ) | | | (13,454 | ) | | | (445,756 | ) | |
| | | | | | | | | |
| | | $ | 182,426 | | $ | 2,900 | | $ | 185,326 | | |
| | | | | | | | | |
| | |
| (a) | | Reclassified to provisionalinvestment in equity affiliateaffiliates effective April 1, 2006.
|
| |
| (b) | | SeeNotes to the Consolidated Financial Statements Note 8 –— China Operations. |
S-23S-30
TABLE III — Results of operations for oil and natural gas producing activities (in thousands):
| | | | | | | | | |
| | | Venezuela | | | Venezuela | |
Year ended December 31, 2006(a) | | |
| Oil and natural gas revenues | | $ | 59,506 | | | $ | 59,506 | |
| Expenses: | | |
| Operating, selling and distribution expenses and taxes other than on income | | 9,451 | | | 9,451 | |
| Depletion | | 9,904 | | | 9,904 | |
| Income tax expense | | 20,076 | | | 20,076 | |
| | | | | | | |
Total expenses(b) | | 39,431 | | | 39,431 | |
| | | | | | | |
| Results of operations from oil and natural gas producing activities | | $ | 20,075 | | | $ | 20,075 | |
| | | | | | | |
| | | |
Year ended December 31, 2005 | | |
| Oil and natural gas revenues | | $ | 236,941 | | | $ | 236,941 | |
| Expenses: | | |
| Operating, selling and distribution expenses and taxes other than on income | | 39,969 | | | 39,969 | |
| Depletion | | 41,175 | | | 41,175 | |
| Income tax expense | | 65,943 | | | 65,943 | |
| | | | | | | |
| Total expenses | | 147,087 | | | 147,087 | |
| | | | | | | |
| Results of operations from oil and natural gas producing activities | | $ | 89,854 | | | $ | 89,854 | |
| | | | | | | |
| | | |
Year ended December 31, 2004 | | |
| Oil and natural gas revenues | | $ | 186,066 | | |
| Expenses: | | |
| Operating, selling and distribution expenses and taxes other than on income | | 33,297 | | |
| Depletion | | 34,108 | | |
| Income tax expense | | 38,968 | | |
| | | | | |
| Total expenses | | 106,373 | | |
| | | | | |
| Results of operations from oil and natural gas producing activities | | $ | 79,693 | | |
| | | | | |
| | |
| (a) | | Reflects oil and natural gas deliveries through March 31, 2006. |
| |
| (b) | | Excludes taxes of $50.3 million recorded in 2006 due to the settlement of the SENIAT tax assessments. |
TABLE IV — Quantities of Oil and Natural Gas Reserves
Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. All Venezuelan reserves are attributable to the OSA between Harvest Vinccler and PDVSA, under which all mineral rights are owned by the government of Venezuela. The Venezuelan government unilaterally terminated the OSA in April 2006. SeeNote 1 — Organization and Summary of Significant Accounting Policies — Organization.
The SEC requires the reserve presentation to be calculated using year-end prices and costs and assuming a continuation of existing economic conditions. Proved reserves cannot be measured exactly, and the estimation of reserves involves judgmental determinations. Reserve estimates must be reviewed and adjusted periodically to reflect additional information gained from reservoir performance, new geological and geophysical data, economic changes and other relevant developments. The estimates are based on current technology and economic conditions, and we consider such estimates to be reasonable and consistent with current knowledge of the characteristics and extent of production. The estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place.
S-24
Proved developed reserves are reserves which can be expected to be recovered through existing wells with existing equipment and existing operating methods. This classification includes: a) proved developed producing reserves which are reserves expected to be recovered through existing completion intervals now open for production in existing wells; and b) proved developed nonproducing reserves which are reserves that exist behind the casing of existing wells which are expected to be produced in the predictable future, where the cost of making such oil and natural gas available for production should be relatively small compared to the cost of a new well.
Any reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing primary recovery methods are included as proved developed reserves only after
S-31
testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Proved undeveloped reserves are proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units, which are reasonably certain of production when drilled. Estimates of recoverable reserves for proved undeveloped reserves may be subject to substantial variation and actual recoveries may vary materially from estimates.
Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. No estimates for proved undeveloped reserves are attributable to or included in this table for any acreage for which an application of fluid injection or other improved recovery technique is contemplated unless proved effective by actual tests in the area and in the same reservoir.
Changes in previous estimates of proved reserves result from new information obtained from production history and changes in economic factors.
The evaluation of the oil and natural gas reserves were prepared by Ryder Scott Company L.P., independent petroleum engineers.
The evaluations of the oil and natural gas reserves as of December 31, 20052006 and 20042005 were prepared by Ryder Scott Company L.P., independent petroleum engineers. The 20052006 reserve information shown below has been reduced to exclude reserves formerly classified as proved undeveloped. Under SEC standards for the reporting of oil and natural gas reserves, proved reserves are estimated quantities of crude oil and natural gas “which geological data and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirsunder existing economic and operating conditions.” (Emphasis added). Our quantities of proved reserves were reduced to remove undeveloped reserves because the actions taken by the Venezuelan government beginning in 2005 under our OSA have created uncertainty as to whether those reserves will be recovered under the economic and operating conditions which currently exist in Venezuela. For ease of reference, the reclassified reserves are hereafter referred to as “Contractually Restricted Reserves”. In April 2006, the OSA was unilaterally terminated by the Venezuelan government and we are currently awaiting the conversion to Petrodelta.government. SeeNote 1 –— Organization and Summary of Significant Accounting Policies — Organization. Until we completeReserves for Petrodelta are reflected in the conversion to Petrodelta, we will not have reserves to report under SEC guidelinesfollowing sectionAdditional Supplemental Information on Oil and accordingly, no reserves are reportedNatural Gas Producing Activities (unaudited) for Venezuela Equity Affiliate as of December 31, 2006.2007 and 2006, TABLE IV — Quantities of Oil and Natural Gas Reserves.
The tables shown below represent our interests in Venezuela in each of the years.
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| | | | | | | | | | | | | |
| | | | | | | Minority | | |
| | | | | | | Interest in | | |
| | | Venezuela | | Venezuela | | Net Total |
| | | | | | | (in thousands) | | | | |
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls) | | | | | | | | | | | | |
| |
Year ended December 31, 2006 | | | | | | | | | | | | |
| Proved Reserves at beginning of the year | | | 35,311 | | | | (7,062 | ) | | | 28,249 | |
Revisions of previous estimates(a) | | | (33,417 | ) | | | 6,683 | | | | (26,734 | ) |
| Production | | | (1,894 | ) | | | 379 | | | | (1,515 | ) |
| | | | | | | | | | | | | |
| Proved Reserves at end of the year | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | |
| (a) | | All reserves have been removed pending conversion to Petrodelta. |
S-32
| | | | | | | | | | | | | | |
| | | | Minority | | |
| | | | Interest in | | |
| | | | Venezuela | | Venezuela | | Net Total |
| | | | | | | | | | | | | | | (in thousands) | |
Year ended December 31, 2005 | | |
| Proved Reserves at beginning of the year | | 78,142 | | | (15,628 | ) | | 62,514 | | | 78,142 | | | (15,628 | ) | | 62,514 | |
Revisions of previous estimates(a) | | | (34,068 | ) | | 6,813 | | | (27,255 | ) | | | (34,068 | ) | | 6,813 | | | (27,255 | ) |
| Production | | | (8,763 | ) | | 1,753 | | | (7,010 | ) | | | (8,763 | ) | | 1,753 | | | (7,010 | ) |
| | | | | | | | | | | | | | | |
| Proved Developed Reserves at end of the year | | 35,311 | | | (7,062 | ) | | 28,249 | | | 35,311 | | | (7,062 | ) | | 28,249 | |
| | | | | | | | | | | | | | | |
| | |
| (a) | | Includes primarily Contractually Restricted Reserves as well as other minor revisions. |
| | | | | | | | | | | | | |
Year ended December 31, 2004 | | | | | | | | | | | | |
| Proved Reserves at beginning of the year | | | 87,872 | | | | (17,574 | ) | | | 70,298 | |
| Revisions of previous estimates | | | (1,578 | ) | | | 316 | | | | (1,262 | ) |
| Production | | | (8,152 | ) | | | 1,630 | | | | (6,522 | ) |
| | | | | | | | | | | | | |
| Proved Reserves at end of the year | | | 78,142 | | | | (15,628 | ) | | | 62,514 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Proved Developed Reserves-Crude oil, condensate, and natural gas liquids (MBbls) at: | | | | | | | | | | | | |
| December 31, 2005 | | | 35,311 | | | | (7,062 | ) | | | 28,249 | |
| December 31, 2004 | | | 45,488 | | | | (9,098 | ) | | | 36,390 | |
| January 1, 2004 | | | 45,860 | | | | (9,172 | ) | | | 36,688 | |
| | | | | | | | | | | | | |
Proved Developed Reserves-Crude oil, condensate, and natural gas liquids (MBbls) at: | | | | | | | | | | | | |
| December 31, 2005 | | | 35,311 | | | | (7,062 | ) | | | 28,249 | |
| January 1, 2005 | | | 45,488 | | | | (9,098 | ) | | | 36,390 | |
Proved Reserves-Natural gas (MMcf)
| | | | | | | | | | | | | |
Year ended December 31, 2006 | | | | | | | | | | | | |
| Proved Reserves beginning of the year | | | 58,918 | | | | (11,784 | ) | | | 47,134 | |
Revisions of previous estimates(a) | | | (54,412 | ) | | | 10,883 | | | | (43,529 | ) |
| Production | | | (4,506 | ) | | | 901 | | | | (3,605 | ) |
| | | | | | | | | | | | | |
| Proved Reserves end of the year | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | |
| (a) | | All reserves have been removed pending conversion to Petrodelta. |
| | | | | | | | | | | | | |
Year ended December 31, 2005 | | | | | | | | | | | | |
| Proved Reserves beginning of the year | | | 164,282 | | | | (32,856 | ) | | | 131,426 | |
Revisions of previous estimates(a) | | | (79,687 | ) | | | 15,937 | | | | (63,750 | ) |
| Production | | | (25,677 | ) | | | 5,135 | | | | (20,542 | ) |
| | | | | | | | | | | | | |
| Proved Developed Reserves end of the year | | | 58,918 | | | | (11,784 | ) | | | 47,134 | |
| | | | | | | | | | | | | |
| | |
| (a) | | Includes primarily Contractually Restricted Reserves as well as other minor revisions. |
S-26
| | | | | | | | | | | | | |
Year ended December 31, 2004 | | | | | | | | | | | | |
| Proved Reserves beginning of the year | | | 195,500 | | | | (39,100 | ) | | | 156,400 | |
| Revisions of previous estimates | | | (159 | ) | | | 32 | | | | (127 | ) |
| Production | | | (31,059 | ) | | | 6,212 | | | | (24,847 | ) |
| | | | | | | | | | | | | |
| Proved Reserves end of the year | | | 164,282 | | | | (32,856 | ) | | | 131,426 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Proved Developed Reserves-Natural gas (MMcf) at: | | | | | | | | | | | | |
| December 31, 2006 | | | | | | | | | | | | |
| December 31, 2005 | | | 58,918 | | | | (11,784 | ) | | | 47,134 | |
| December 31, 2004 | | | 80,897 | | | | (16,179 | ) | | | 64,718 | |
| January 1, 2004 | | | 106,147 | | | | (21,229 | ) | | | 84,918 | |
| | | | | | | | | | | | | |
Proved Developed Reserves-Natural gas (MMcf) at: | | | | | | | | | | | | |
| December 31, 2005 | | | 58,918 | | | | (11,784 | ) | | | 47,134 | |
| January 1, 2005 | | | 80,897 | | | | (16,179 | ) | | | 64,718 | |
TABLE V — Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantities
The standardized measure of discounted future net cash flows is presented in accordance with the provisions of SFAS 69. In preparing this data, assumptions and estimates have been used, and we caution against viewing this information as a forecast of future economic conditions.
Future cash inflows were estimated by applying year-end prices, adjusted for fixed and determinable escalations provided by contract, to the estimated future production of year-end proved reserves. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows. Future income taxes were estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved, and adjusted for permanent differences and tax credits and allowances. The resultant future net cash inflows are discounted using a ten percent discount rate.
The tables shown below represent our net interest in Venezuela in each of the years. Until we complete the conversion to Petrodelta, we will not have reserves to report under SEC guidelines and, accordingly, no reserves are reported as of December 31, 2006.Petrodelta. We report the results of Ryder Scott Company L.P. independent engineering evaluation at December 31 to provide comparability with our Venezuelan reserves.
S-33
| | | | | | | | | | | | | | | | | �� | | | | | | | | |
| | | Minority | | | | | Minority | | | |
| | | Interest in | | | | | Interest in | | | |
| | | Venezuela | | Venezuela | | Net Total | | | Venezuela | | Venezuela | | Net Total | |
| | | (in thousands) | | | (in thousands) | |
December 31, 2005(a) | | |
| Future cash inflows from sales of oil and gas | | $ | 1,029,630 | | $ | (205,926 | ) | | $ | 823,704 | | | $ | 1,029,630 | | $ | (205,926 | ) | | $ | 823,704 | |
| Future production costs | | | (227,079 | ) | | 45,416 | | | (181,663 | ) | | | (227,079 | ) | | 45,416 | | | (181,663 | ) |
| Future development costs | | | (27,917 | ) | | 5,583 | | | (22,334 | ) | | | (27,917 | ) | | 5,583 | | | (22,334 | ) |
| Future income tax expenses | | | (239,386 | ) | | 47,877 | | | (191,509 | ) | | | (239,386 | ) | | 47,877 | | | (191,509 | ) |
| | | | | | | | | | | | | | | |
| Future net cash flows | | 535,248 | | | (107,050 | ) | | 428,198 | | | 535,248 | | | (107,050 | ) | | 428,198 | |
| Effect of discounting net cash flows at 10% | | | (123,451 | ) | | 24,691 | | | (98,760 | ) | | | (123,451 | ) | | 24,691 | | | (98,760 | ) |
| | | | | | | | | | | | | | | |
| Standardized measure of discounted future net cash flows | | $ | 411,797 | | $ | (82,359 | ) | | $ | 329,438 | | | $ | 411,797 | | $ | (82,359 | ) | | $ | 329,438 | |
| | | | | | | | | | | | | | | |
| | | |
December 31, 2004 | | |
| Future cash inflows from sales of oil and gas | | $ | 1,852,045 | | $ | (370,409 | ) | | $ | 1,481,636 | | |
| Future production costs | | | (342,373 | ) | | 68,475 | | | (273,898 | ) | |
| Future development costs | | | (141,565 | ) | | 28,313 | | | (113,252 | ) | |
| Future income tax expenses | | | (428,833 | ) | | 85,767 | | | (343,066 | ) | |
| | | | | | | | | |
| Future net cash flows | | 939,274 | | | (187,854 | ) | | 751,420 | | |
| Effect of discounting net cash flows at 10% | | | (258,049 | ) | | 51,609 | | | (206,440 | ) | |
| | | | | | | | | |
| Standardized measure of discounted future net cash flows | | $ | 681,225 | | $ | (136,245 | ) | | $ | 544,980 | | |
| | | | | | | | | |
| | |
| (a) | | Proved reserves do not include Contractually Restricted Reserves. |
S-27
TABLE VI — Changes in the Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
| | | | | | | | | | | | | | | | | | | | | |
| | | Net Venezuela | | | Net Venezuela | |
| | | 2006(a) | | 2005 | | 2004 | | | 2006(a) | | 2005 | |
| | | (in thousands) | | | (in thousands) | |
| Standardized Measure at January 1 | | $ | 329,438 | | $ | 544,980 | | $ | 366,770 | | | $ | 329,438 | | $ | 544,980 | |
| Sales of oil and natural gas, net of related costs | | | (40,361 | ) | | | (124,638 | ) | | | (122,215 | ) | | | (40,361 | ) | | | (124,638 | ) |
| Revisions to estimates of proved reserves | | |
| Net changes in prices, development and production costs | | — | | 262,852 | | 333,237 | | | — | | 262,852 | |
| Quantities | | — | | | (365,565 | ) | | | (7,597 | ) | | — | | | (365,565 | ) |
| Extensions, discoveries and improved recovery, net of future costs | | — | | — | | — | | | — | | — | |
| Accretion of discount | | — | | 80,202 | | 54,531 | | | — | | 80,202 | |
| Net change in income taxes | | — | | 109,030 | | | (78,504 | ) | | — | | 109,030 | |
| Development costs incurred | | 501 | | 7,130 | | 31,329 | | | 501 | | 7,130 | |
| Changes in timing and other | | | (289,578 | ) | | | (184,553 | ) | | | (32,571 | ) | | | (289,578 | ) | | | (184,553 | ) |
| | | | | | | | | | | | | |
| Standardized Measure at December 31 | | $ | — | | $ | 329,438 | | $ | 544,980 | | | $ | — | | $ | 329,438 | |
| | | | | | | | | | | | | |
| | |
| (a) | | All reserves have been removed pending conversion to Petrodelta. |
S-28S-34
Additional Supplemental Information on Oil and Natural Gas Producing Activities (unaudited) for Venezuela Equity Affiliate as of December 31, 2007 and 2006
In accordance with Statement of Financial Accounting Standards No. 69, “Disclosures About Oil and Gas Producing Activities” (“SFAS 69”), this section provides supplemental information on our oil and natural gas exploration and production activities. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present information on our estimated proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.
Petrodelta (32 percent ownership) is accounted for under the equity method, and has been included at its ownership interest in the consolidated financial statements and the following Tables based on a year ending December 31 and, accordingly, results of operations for oil and natural gas producing activities in Venezuela reflect the year ended December 31, 2007 and 2006.
TABLE I — Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands):
| | | | | |
| | | Petrodelta | |
Year Ended December 31, 2007 | | | | |
| Development costs | | $ | 976 | |
| Exploration costs | | | — | |
| | | | |
| | | $ | 976 | |
| | | | |
| | | | | |
Year Ended December 31, 2006 | | | | |
| Development costs | | $ | 217 | |
| Exploration costs | | | — | |
| | | | |
| | | $ | 217 | |
| | | | |
TABLE II — Capitalized costs related to oil and natural gas producing activities (in thousands):
| | | | | |
| | | Petrodelta | |
December 31, 2007 | | | | |
| Proved property costs | | $ | 59,820 | |
| Unproved property costs | | | 7,247 | |
| Costs excluded from amortization | | | (976 | ) |
| Oilfield inventories | | | 4,426 | |
| Less accumulated depletion and impairment | | | (11,063 | ) |
| | | | |
| | | $ | 59,454 | |
| | | | |
| | | | | |
December 31, 2006 | | | | |
| Proved property costs | | $ | 58,849 | |
| Unproved property costs | | | 7,247 | |
| Costs excluded from amortization | | | (217 | ) |
| Oilfield inventories | | | 2,650 | |
| Less accumulated depletion and impairment | | | (5,317 | ) |
| | | | |
| | | $ | 63,212 | |
| | | | |
S-35
TABLE III — Results of operations for oil and natural gas producing activities (in thousands):
| | | | | |
| | | Petrodelta | |
Year ended December 31, 2007 | | | | |
| Oil and natural gas revenues | | $ | 107,429 | |
| Royalty | | | (36,751 | ) |
| | | | |
| | | | 70,678 | |
| Expenses: | | | | |
| Operating, selling and distribution expenses and taxes other than on income | | | 7,601 | |
| Depletion | | | 5,746 | |
| Income tax expense | | | 23,714 | |
| | | | |
| Total expenses | | | 37,061 | |
| | | | |
| Results of operations from oil and natural gas producing activities | | $ | 33,617 | |
| | | | |
| | | | | |
Year ended December 31, 2006 | | | | |
| Oil and natural gas revenues | | $ | 90,695 | |
| Royalty | | | (30,973 | ) |
| | | | |
| | | | 59,722 | |
| Expenses: | | | | |
| Operating, selling and distribution expenses and taxes other than on income | | | 7,273 | |
| Depletion | | | 5,317 | |
| Income tax expense | | | 15,430 | |
| | | | |
| Total expenses | | | 28,020 | |
| | | | |
| Results of operations from oil and natural gas producing activities | | $ | 31,702 | |
| | | | |
TABLE IV — Quantities of Oil and Natural Gas Reserves
Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. All Venezuelan reserves are attributable to our net equity interest in Petrodelta.
The SEC requires the reserve presentation to be calculated using year-end prices and costs and assuming a continuation of existing economic conditions. Proved reserves cannot be measured exactly, and the estimation of reserves involves judgmental determinations. Reserve estimates must be reviewed and adjusted periodically to reflect additional information gained from reservoir performance, new geological and geophysical data, economic changes and other relevant developments. The estimates are based on current technology and economic conditions, and we consider such estimates to be reasonable and consistent with current knowledge of the characteristics and extent of production. The estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place.
Proved developed reserves are reserves which can be expected to be recovered through existing wells with existing equipment and existing operating methods. This classification includes: a) proved developed producing reserves which are reserves expected to be recovered through existing completion intervals now open for production in existing wells; and b) proved developed nonproducing reserves which are reserves that exist behind the casing of existing wells which are expected to be produced in the predictable future, where the cost of making such oil and natural gas available for production should be relatively small compared to the cost of a new well.
Any reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing primary recovery methods are included as proved developed reserves only after
S-36
testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Proved undeveloped reserves are proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units, which are reasonably certain of production when drilled. Estimates of recoverable reserves for proved undeveloped reserves may be subject to substantial variation and actual recoveries may vary materially from estimates.
Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. No estimates for proved undeveloped reserves are attributable to or included in this table for any acreage for which an application of fluid injection or other improved recovery technique is contemplated unless proved effective by actual tests in the area and in the same reservoir.
Changes in previous estimates of proved reserves result from new information obtained from production history and changes in economic factors.
The evaluation of the oil and natural gas reserves as of December 31, 2007 was prepared by Ryder Scott Company L.P., independent petroleum engineers.
The tables shown below represents HNR Finance’s interest, net of a 33.33 percent royalty, in Venezuela in each of the years.
| | | | | | | | | | | | | |
| | | | | | | Minority | | |
| | | | | | | Interest in | | 32% |
| | | HNR Finance | | Venezuela | | Net Total |
| | | | | | | (in thousands) | | | | |
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Year ended December 31, 2007 | | | | | | | | | | | | |
| Proved Reserves at January 1, 2007 | | | — | | | | — | | | | — | |
Additions(a) | | | 50,085 | | | | (10,017 | ) | | | 40,068 | |
| Production | | | (2,824 | ) | | | 565 | | | | (2,259 | ) |
| | | | | | | | | | | | | |
| Proved Reserves at end of the year | | | 47,261 | | | | (9,452 | ) | | | 37,809 | |
| | | | | | | | | | | | | |
|
| (a) Petrodelta was formed in 2007 |
| | | | | | | | | | | | | |
Proved Developed Reserves-Crude oil, condensate, and natural gas liquids (MBbls) at: | | | | | | | | | | | | |
| December 31, 2007 | | | 14,779 | | | | (2,956 | ) | | | 11,823 | |
| |
Proved Reserves-Natural gas (MMcf) | | | | | | | | | | | | |
| |
Year ended December 31, 2007 | | | | | | | | | | | | |
Year ended December 31, 2007 | | | | | | | | | | | | |
| Proved Reserves at January 1, 2007 | | | — | | | | — | | | | — | |
Additions(a) | | | 50,019 | | | | (10,004 | ) | | | 40,015 | |
| Production | | | (6,935 | ) | | | 1,387 | | | | (5,548 | ) |
| | | | | | | | | | | | | |
| Proved Reserves at end of the year | | | 43,084 | | | | (8,617 | ) | | | 34,467 | |
| | | | | | | | | | | | | |
| | |
| (a) | | Petrodelta was formed in 2007 |
| | | | | | | | | | | | | |
Proved Developed Reserves-Natural gas (MMcf) at: | | | | | | | | | | | | |
| December 31, 2007 | | | 7,755 | | | | (1,551 | ) | | | 6,204 | |
S-37
TABLE V — Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantities
The standardized measure of discounted future net cash flows is presented in accordance with the provisions of SFAS 69. In preparing this data, assumptions and estimates have been used, and we caution against viewing this information as a forecast of future economic conditions.
Future cash inflows were estimated by applying year-end prices, adjusted for fixed and determinable escalations provided by contract, to the estimated future production of year-end proved reserves. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows. Future income taxes were estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved, and adjusted for permanent differences and tax credits and allowances. The resultant future net cash inflows are discounted using a ten percent discount rate.
The table shown below represents HNR Finance’s net interest in Petrodelta. We report the results of Ryder Scott Company L.P. independent engineering evaluation at December 31 to provide comparability with our Venezuelan reserves.
| | | | | | | | | | | | | |
| | | | | | | Minority | | | | |
| | | | | | | Interest in | | | | |
| | | HNR Finance | | | Venezuela | | | Net Total | |
| | | | | | | (in thousands) | | | | | |
December 31, 2007 | | | | | | | | | | | | |
| Future cash inflows from sales of oil and gas | | $ | 3,650,110 | | | $ | (730,022 | ) | | $ | 2,920,088 | |
| Future production costs | | | (685,368 | ) | | | 137,074 | | | | (548,294 | ) |
| Future development costs | | | (358,759 | ) | | | 71,752 | | | | (287,007 | ) |
| Future income tax expenses | | | (1,274,005 | ) | | | 254,801 | | | | (1,019,204 | ) |
| | | | | | | | | | |
| Future net cash flows | | | 1,331,978 | | | | (266,395 | ) | | | 1,065,583 | |
| Effect of discounting net cash flows at 10% | | | (677,756 | ) | | | 135,551 | | | | (542,205 | ) |
| | | | | | | | | | |
| Standardized measure of discounted future net cash flows | | $ | 654,222 | | | $ | (130,844 | ) | | $ | 523,378 | |
| | | | | | | | | | |
TABLE VI — Changes in the Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
Not applicable.
S-38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
| |
Date: March 13, 20072009 | By: | /s/ James A. Edmiston | |
| | | James A. Edmiston | |
| | | Chief Executive Officer | |
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on the 13th13th day of March, 2007,2009, on behalf of the registrant and in the capacities indicated:
| | | | | |
| Signature | | | | Title |
| | | | |
| /s/ James A. Edmiston | | | | Director, President and Chief Executive Officer |
| | | | |
| | | | |
| | | | | |
/s/ Steven W. TholenSteven W. Tholen | | | | Senior Vice President — Finance, Chief Financial |
| | Officer and Treasurer (Principal Financial Officer and
Principal Accounting Officer) |
(Principal Financial Officer) | | |
| /s/ Stephen D. Chesebro’ | | Chairman of the Board and Director |
| | |
| | | | | |
/s/ Kurt A. NelsonIgor Effimoff | | | | Vice President-Controller, Chief Accounting OfficerDirector |
| | | | |
Kurt A. Nelson | | | | |
(Principal Accounting Officer) | | | | |
| | | | | |
/s/ Stephen D. Chesebro’Stephen D. Chesebro’ | | | | Chairman of the Board and Director |
| | | | |
/s/ John U. ClarkeJohn U. Clarke | | | | Director |
| | | | |
/s/ H. H. Hardee | | Director |
| | |
| | |
| /s/ R. E. Irelan | | Director |
| | |
| | | | | |
/s/ Patrick M. Murray | | Director |
| | | | Director |
| | | | |
/s/ J. Michael Stinson | | Director |
| | | | Director |
S-29S-39
SCHEDULE II
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | | | Additions | | | | |
| | | Balance at | | Charged | | Deductions | | Balance | | Balance at | | Charged | | Deductions | | Balance |
| | | Beginning | | Charged to | | to Other | | From | | at End of | | Beginning | | Charged to | | to Other | | From | | at End of |
| | | of Year | | Income | | Accounts | | Reserves | | Year | | of Year | | Income | | Accounts | | Reserves | | Year |
At December 31, 2007 | | |
| Amounts deducted from applicable assets | | |
| Accounts receivable | | | $ | 2,757 | | $ | — | | $ | — | | $ | — | | $ | 2,757 | |
| Deferred tax valuation allowance | | | 32,809 | | (32,809 | ) | | — | | — | | — | |
| Investment at cost | | | 1,350 | | — | | — | | — | | 1,350 | |
At December 31, 2006 | | |
| Amounts deducted from applicable assets | | |
| Accounts receivable | | $ | 2,757 | | $ | — | | $ | — | | $ | — | | $ | 2,757 | | | $ | 2,757 | | $ | — | | $ | — | | $ | — | | $ | 2,757 | |
| Deferred tax valuation allowance | | 27,363 | | 5,446 | | 32,809 | | | 27,363 | | 5,446 | | — | | — | | 32,809 | |
| Investment at cost | | 1,350 | | — | | — | | — | | 1,350 | | | 1,350 | | — | | — | | — | | 1,350 | |
At December 31, 2005 | | |
| Amounts deducted from applicable assets | | |
| Accounts receivable | | $ | 2,757 | | $ | — | | $ | — | | $ | — | | $ | 2,757 | | | $ | 2,757 | | $ | — | | $ | — | | $ | — | | $ | 2,757 | |
| Deferred tax valuation allowance | | 40,492 | | | (13,129 | ) | | — | | — | | 27,363 | | | 40,492 | | | (13,129 | ) | | — | | — | | 27,363 | |
| Investment at cost | | 1,350 | | — | | — | | — | | 1,350 | | | 1,350 | | — | | — | | — | | 1,350 | |
At December 31, 2004 | | |
| Amounts deducted from applicable assets | | |
| Accounts receivable | | $ | 3,355 | | $ | — | | $ | — | | $ | 598 | | $ | 2,757 | | |
| Deferred tax valuation allowance | | 48,365 | | | (7,873 | ) | | — | | — | | 40,492 | | |
| Investment at cost | | 1,350 | | — | | — | | — | | 1,350 | | |
S-30S-40
Index to Exhibits
Exhibits:
| 3.1 | | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762.) |
|
| 3.2 | | Amended and Restated Bylaws as of April 6, 2006. (Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.) |
|
| 4.1 | | Form of Common Stock Certificate. (Incorporated by reference to the exhibits to our Registration Statement Form S-1 (Registration No. 33-26333).) |
|
| 4.2 | | Certificate of Designation, Rights and Preferences of the Series B. Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.) |
|
| 4.3 | | Second Amended and Restated Rights Agreement, dated as of April 15, 2005, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.3 to our Form 10-Q filed on April 29, 2005, File No. 1-10762.) |
|
| 10.1 | | Operating Service Agreement between Benton Oil and Gas Company and Lagoven, S.A., which has been subsequently combined into PDVSA Petroleo y Gas, S.A., dated July 31, 1992, (portions have been omitted pursuant to Rule 406 promulgated under the Securities Act of 1933 and filed separately with the Securities and Exchange Commission. (Incorporated by reference to the exhibits to our Registration Statement Form S-1 (Registration No. 33-52436).) |
|
| 10.3 | | Alexander E. Benton Settlement and Release Agreement effective May 11, 2001 (Incorporated by reference to Exhibit 10.27 to our Form 10-Q, filed on August 13, 2001, File No. 1-10762.). |
|
| 10.5 | | 2001 Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 to our S-8 (Registration Statement No. 333-85900).) |
|
| 10.6 | | Addendum No. 2 to Operating Service Agreement Monagas SUR dated 19th September, 2002. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) |
|
| 10.7† | | Harvest Natural Resources 2004 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on May 25, 2004 (Registration Statement No. 333-115841).) |
|
| 10.8† | | Indemnification Agreement between Harvest Natural Resources, Inc. and the Directors and Executive Officers of the Company. (Incorporated by reference to Exhibit 10.19 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
|
| 10.9† | | Form of 2004 Long Term Stock Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.20 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
|
| 10.10† | | Form of 2004 Long Term Stock Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.21 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
|
| 10.11† | | Form of 2004 Long Term Stock Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.22 to our Form 10-K filed on February 23, 2005, File No. 1-10762.) |
S-31
| 10.12 | | The Transitory Agreement between Harvest Natural Resources, Inc. and PDVSA Petroleo S.A., dated August 4, 2005. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.13† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Steven W. Tholen. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.14† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Kerry R. Brittain. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.15† | | Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Karl L. Nesselrode. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.16† | | Employment Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.17† | | Employment Agreement dated September 26, 2005 between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) |
|
| 10.18† | | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.24 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
|
| 10.19† | | Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
|
| 10.20† | | Stock Option Agreement dated September 26, 2005, between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.26 to our Form 10-K filed on February 27, 2006, File No. 1-10762.) |
|
| 10.21† | | Employment Agreement dated February 10, 2006 between Harvest Natural Resources, Inc. and Kurt A. Nelson. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.) |
|
| 10.22 | | Memorandum of Understanding dated March 31, 2006, between Corporación Venezolana del Petroleo, S.A., PDVSA Petroleo, S.A. and Harvest Vinccler, C.A. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.) |
|
| 10.23 | | Harvest Natural Resources 2006 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on June 1, 2006 [Registration Statement No. 333-134630].) |
|
| 10.24 | | Form of 2006 Long Term Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
|
| 10.25 | | Form of 2006 Long Term Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
S-32
| 10.26 | | Form of 2006 Long Term Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
|
| 10.27 | | Stock Unit Award Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
|
| 10.28 | | Stock Unit Award Agreement dated March 2, 2006 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.) |
|
| 10.29 | | Note Payable agreement dated September 28, 2006 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. Banco Universal related to a principal amount of 105 billion Bolivars with interest at 10.02 percent, for financing of the SENIAT assessments. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on October 26, 2006, File No. 1-10762.) |
|
| 10.30 | | Note Payable agreement dated October 3, 2006 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. Banco Universal related to a principal amount of 20 billion Bolivars with interest at 10.02 percent, for financing of the SENIAT assessments. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on October 26, 2006, File No. 1-10762.) |
|
| 10.31 | | Amendment to Original Memorandum of Understanding dated August 16, 2006, between Corporación Venezolana del Petroleo, S.A. and Harvest Vinccler, C.A. (Incorporated by reference to Appendix C to our Definitive Proxy filed on November 6, 2006, File No. 1-10762.) |
|
| 10.32 | | Note Payable agreement dated November 20, 2006 between Harvest Vinccler, C.A. and Banesco Banco Universal C.A. related to a principal amount of 120 billion Bolivars with interest at 10.0 percent, for refinancing of the SENIAT assessments and operating requirements. |
|
| 10.33 | | Form of 2006 Long Term Incentive Plan Stock Option Agreement – Five Year Vesting, Seven Year Term. |
|
| 21.1 | | List of subsidiaries. |
|
| 23.1 | | Consent of PricewaterhouseCoopers LLP – Houston |
|
| 23.2 | | Consent of Ryder Scott Company, LP |
|
| 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 Steven W. Tholen, Senior Vice President, Chief Financial Officer and Treasurer. |
|
| 32.1 | | Certification accompanying Annual Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by James A. Edmiston, President and Chief Executive Officer. |
|
| 32.2 | | Certification accompanying Annual Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by Steven W. Tholen, Senior Vice President, Chief Financial Officer and Treasurer. |
| | |
† | | Identifies management contracts or compensating plans or arrangements required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. |
S-33
