Table of Contents
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 77-0196707 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
1177 Enclave Parkway, Suite 300 | ||
Houston, Texas | 77077 | |
(Address of principal executive offices) | (Zip Code) |
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 Par Value | NYSE |
Title of each class | Name of each exchange on which registered | |
None | None |
Table of Contents
1
Table of Contents
• | maintain financial prudence and rigorous investment criteria; | ||
• | enhance access to capital markets; | ||
• | create a diversified portfolio of large assets; | ||
• | maximize cash flows from existing operations; | ||
• | use our experience, skills to acquire new projects; and | ||
• | keep our organizational capabilities in line with our rate of growth. |
2
Table of Contents
3
Table of Contents
Harvest Vinccler | ||||||||||||
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in 000’s) | ||||||||||||
RESERVE INFORMATION: | ||||||||||||
Proved Reserves (MBoe) | 36,105 | 84,418 | 96,364 | |||||||||
Standardized measure of discounted future net cash flows | $ | 329,438 | $ | 544,980 | $ | 366,770 | ||||||
DRILLING AND PRODUCTION ACTIVITY: | ||||||||||||
Gross wells drilled | 1 | 16 | 3 | |||||||||
Average daily production (Boe) | 35,732 | 36,418 | 20,130 | |||||||||
FINANCIAL DATA: | ||||||||||||
Oil and natural gas revenues | $ | 236,941 | $ | 186,066 | $ | 106,095 | ||||||
Expenses: | ||||||||||||
Operating expenses and taxes other than on income | 39,969 | 33,297 | 31,445 | |||||||||
Depletion | 41,175 | 34,108 | 19,599 | |||||||||
Income tax expense | 65,943 | 38,968 | 12,158 | |||||||||
Total expenses | 147,087 | 106,373 | 63,202 | |||||||||
Results of operations from oil and natural gas producing activities | $ | 89,854 | $ | 79,693 | $ | 42,893 | ||||||
Proved Reserves | ||||||||||||
Total | Developed | Undeveloped | ||||||||||
(amounts in thousands) | ||||||||||||
Total MBoe (net of minority interest) | ||||||||||||
Proved Reserves beginning of the year | 84,418 | 47,176 | 37,242 | |||||||||
Revisions of previous estimates(a) | (37,880 | ) | (638 | ) | (37,242 | ) | ||||||
Production | (10,433 | ) | (10,433 | ) | — | |||||||
Proved Reserves end of the year | 36,105 | 36,105 | — | |||||||||
(a) | Includes primarily Contractually Restricted Reserves as well as other minor revisions. |
4
Table of Contents
Geoilbent | ||||
Year Ended | ||||
September 30, 2003 | ||||
(Dollars in 000’s) | ||||
RESERVE INFORMATION: | ||||
Proved Reserves | (a | ) | ||
Standardized measure of discounted future net cash flows | (a | ) | ||
DRILLING AND PRODUCTION ACTIVITY: | ||||
Gross development wells drilled | (a | ) | ||
Net development wells drilled | (a | ) | ||
Average daily production | 5,242 | |||
FINANCIAL DATA: | ||||
Oil and natural gas revenues | $ | 27,876 | ||
Expenses: | ||||
Operating, selling and distribution expenses and taxes other than on income | 16,088 | |||
Depletion | 6,215 | |||
Write-down of oil and gas properties | 32,300 | |||
Income tax expense | 2,073 | |||
Total expenses | 56,676 | |||
Results of operations from oil and natural gas producing activities | $ | (28,800 | ) | |
(a) | Geoilbent was sold on September 25, 2003. |
• | mergers; | ||
• | consolidations; | ||
• | sales of substantially all of its corporate assets; | ||
• | change of business; and | ||
• | similar major corporate events. |
5
Table of Contents
6
Table of Contents
7
Table of Contents
8
Table of Contents
Other | Total | |||||||||||||||||||
(in thousands) | Venezuela | Foreign | Foreign | United States | Total | |||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Oil and natural gas sales | $ | 236,941 | — | $ | 236,941 | — | $ | 236,941 | ||||||||||||
Total Assets | $ | 258,268 | $ | 317 | $ | 258,585 | $ | 142,213 | $ | 400,798 | ||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
Oil and natural gas sales | $ | 186,066 | — | $ | 186,066 | — | $ | 186,066 | ||||||||||||
Total Assets | $ | 309,794 | $ | 385 | $ | 310,179 | $ | 57,307 | $ | 367,486 | ||||||||||
Year ended December 31, 2003 | ||||||||||||||||||||
Oil and natural gas sales | $ | 106,095 | — | $ | 106,095 | — | $ | 106,095 | ||||||||||||
Total Assets | $ | 241,855 | $ | 237 | $ | 242,092 | $ | 132,256 | $ | 374,348 |
Venezuela | ||||
Net Crude Oil and Condensate (MBbls) – Proved | 28,249 | |||
Net Natural Gas (MMcf) – Proved | 47,134 |
• | historical production from the subject properties; | ||
• | comparison with other producing properties; | ||
• | the assumed effects of regulation by governmental agencies; | ||
• | assumptions concerning future operating costs, municipal taxes, abandonment costs, development costs, and workover and remedial costs, all of which may vary considerably from actual results; and | ||
• | assumptions concerning contractual rights to develop reserves and whether those rights will be honored. |
9
Table of Contents
• | actual production; | ||
• | oil and natural gas sales; | ||
• | supply and demand for oil and natural gas; | ||
• | availability and capacity of gathering systems and pipelines; | ||
• | changes in governmental regulations, contracting policies, taxation or other policies; | ||
• | contract sanctity; and | ||
• | the impact of inflation on costs. |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Venezuela(a) | ||||||||||||
Crude Oil Production (Bbls) | 8,762,687 | 8,152,261 | 7,347,399 | |||||||||
Natural Gas Production (Mcf) | 25,677,460 | 31,059,416 | 2,660,241 | |||||||||
Average Crude Oil Sales Price ($per Bbl)(b) | $ | 24.02 | $ | 18.90 | $ | 14.07 | ||||||
Average Natural Gas Sales Price ($ per Mcf) | $ | 1.03 | $ | 1.03 | $ | 1.03 | ||||||
Average Operating Expenses ($ per Boe) | $ | 3.05 | $ | 2.50 | $ | 4.00 | ||||||
Russia | ||||||||||||
Geoilbent(c)(d) | ||||||||||||
Net Crude Oil Production (Bbls) | (d | ) | (d | ) | 1,913,187 | |||||||
Average Crude Oil Sales price ($per Bbl) | (d | ) | (d | ) | $ | 14.52 | ||||||
Average Operating Expenses ($per Bbl) | (d | ) | (d | ) | $ | 2.83 |
(a) | Information represents 100 percent of production. | |
(b) | Average crude oil sales price after hedging activity. | |
(c) | Information represents our ownership interest. | |
(d) | Geoilbent was sold on September 25, 2003. |
10
Table of Contents
• | 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. |
11
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Wells Drilled: | ||||||||||||||||||||||||
Development: | ||||||||||||||||||||||||
Crude oil | 1 | 0.8 | 16 | 12.8 | 3 | 2.4 | ||||||||||||||||||
Average Depth of Wells (Feet) | — | 4,349 | — | 5,443 | — | 6,095 | ||||||||||||||||||
Producing Wells(1): | ||||||||||||||||||||||||
Crude Oil | 108 | 86.4 | 124 | 99.2 | 111 | 88.8 |
(1) | The information related to producing wells reflects wells we drilled, wells we participated in drilling and producing wells we acquired. |
Developed | Undeveloped | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Venezuela | 11,726 | 9,381 | 146,117 | 116,894 | ||||||||||||
China | — | — | 7,470,080 | 7,470,080 | ||||||||||||
Total | 11,726 | 9,381 | 7,616,197 | 7,586,974 | ||||||||||||
12
Table of Contents
13
Table of Contents
14
Table of Contents
15
Table of Contents
• | relatively minor changes in the global supply and demand for oil; | ||
• | market uncertainty; | ||
• | the level of consumer product demand; | ||
• | weather conditions; | ||
• | domestic and foreign governmental regulations and policies; | ||
• | the price and availability of alternative fuels; | ||
• | political and economic conditions in oil-producing and oil consuming countries; and | ||
• | overall economic conditions. |
16
Table of Contents
17
Table of Contents
• | unexpected drilling conditions; | ||
• | pressure or irregularities in formations; | ||
• | equipment failures or accidents; | ||
• | weather conditions; | ||
• | shortages in experienced labor; | ||
• | delays in receiving necessary governmental permits; | ||
• | shortages or delays in the delivery of equipment; | ||
• | delays in receipt of permits or access to lands; and | ||
• | government actions or changes in regulations. |
18
Table of Contents
19
Table of Contents
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Year | Quarter | High | Low | |||||||
2004 | First quarter | $ | 14.25 | $ | 9.48 | |||||
Second quarter | 17.00 | 12.13 | ||||||||
Third quarter | 16.60 | 11.54 | ||||||||
Fourth quarter | 18.25 | 14.67 | ||||||||
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 |
20
Table of Contents
Year Ended December 31, | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations: | ||||||||||||||||||||
Total revenues | $ | 236,941 | $ | 186,066 | $ | 106,095 | $ | 126,731 | $ | 122,386 | ||||||||||
Operating income | 119,525 | 90,480 | 33,627 | 34,585 | 28,201 | |||||||||||||||
Net income | 50,839 | 34,360 | 27,303 | 100,362 | 43,237 | |||||||||||||||
Net income per common share: | ||||||||||||||||||||
Basic | $ | 1.38 | $ | 0.95 | $ | 0.77 | $ | 2.90 | $ | 1.27 | ||||||||||
Diluted | $ | 1.32 | $ | 0.90 | $ | 0.74 | $ | 2.78 | $ | 1.27 | ||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||
Basic | 36,949 | 36,128 | 35,332 | 34,637 | 33,937 | |||||||||||||||
Diluted | 38,444 | 38,122 | 36,840 | 36,130 | 34,008 |
Year Ended December 31, | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 400,798 | $ | 367,486 | $ | 374,348 | $ | 335,192 | $ | 348,151 | ||||||||||
Long-term debt, net of current maturities | — | — | 96,833 | 104,700 | 221,583 | |||||||||||||||
Stockholders’ equity(1) | 297,512 | 243,189 | 199,713 | 171,317 | 67,623 |
(1) | No cash dividends were declared or paid during the periods presented. |
21
Table of Contents
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | maintain financial prudence and rigorous investment criteria; | ||
• | enhance access to capital markets; | ||
• | create a diversified portfolio of large assets; | ||
• | maximize cash flows from existing operations; | ||
• | use our experience, skills to acquire new projects; and | ||
• | keep our organizational capabilities in line with our rate of growth. |
• | Diversity our political risk:Acquire large oil and natural gas fields in a number of countries perceived to be politically challenging to diversify and reduce the overall political risk of our international investment portfolio. | ||
• | 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. | ||
• | Establish a Local Presence Through Joint Venture Partners and the Use of Local Personnel:We seek to establish a local presence in our areas of operation to facilitate stronger relationships with local government and labor. In addition, using local personnel helps us to 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. |
22
Table of Contents
• | Commit Capital in a Phased Manner to Limit Total Commitments at Any One Time:We are willing to agree to minimum capital expenditure or development commitments at the outset of new projects, but we endeavor to structure such commitments so that we can 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. | ||
• | Limit Exploration Activities:While our strategy does not focus on unexplored areas, we will consider appropriate exploration opportunities that have large potential scale and the ability to manage risk without significant initial cost. | ||
• | Maintain A Prudent Financial Plan: We intend to maintain our financial flexibility by closely monitoring spending, holding sufficient cash reserves, actively seeking opportunities to reduce our weighted average cost of capital and increasing our debt capacity and liquidity. |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Operating Expenses | 17 | % | 18 | % | 29 | % | ||||||
Depletion, Depreciation and Amortization | 19 | 19 | 20 | |||||||||
General and Administrative | 10 | 12 | 15 | |||||||||
Taxes Other Than on Income | 3 | 3 | 3 | |||||||||
Interest Expense | 1 | 4 | 10 |
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 | % | ||||||||||||
23
Table of Contents
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 | ||||||||||||||||||
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 | — | ||||||||||||
Gain on sale of long-lived assets | — | (0.6 | ) | 0.6 | — | |||||||||||
Bad debt recovery | — | (0.6 | ) | 0.6 | — | |||||||||||
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 | ) | — | ||||||||||
$ | 113.7 | $ | 101.9 | $ | 11.8 | 12 | % | |||||||||
24
Table of Contents
Year Ended | % | |||||||||||||||||||
December 31, | Increase | Increase | ||||||||||||||||||
(in millions) | 2004 | 2003 | (Decrease) | (Decrease) | Increase | |||||||||||||||
Revenues | ||||||||||||||||||||
Crude oil | $ | 154.1 | $ | 103.4 | $ | 50.7 | 49 | % | ||||||||||||
Natural gas | 32.0 | 2.7 | 29.3 | 100 | ||||||||||||||||
Total Revenues | $ | 186.1 | $ | 106.1 | $ | 80.0 | 75 | % | ||||||||||||
The following table reconciles the net change in revenue: | ||||||||||||||||||||
Price and Volume Variances | ||||||||||||||||||||
Crude oil price Variance (per Bbl) | $ | 18.90 | $ | 14.07 | $ | 4.83 | 34 | % | $ | 35.5 | ||||||||||
Volume Variances | ||||||||||||||||||||
Crude oil volumes (MBbls) | 8,152 | 7,347 | 805 | 11 | % | $ | 15.2 | |||||||||||||
Natural gas volumes (MMcf) | 31,059 | 2,660 | 28,399 | 100 | 29.3 | |||||||||||||||
Total volume variances | $ | 44.5 | ||||||||||||||||||
Year Ended | % | |||||||||||||||
December 31, | Increase | Increase | ||||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
Operating expenses | $ | 33.3 | $ | 30.9 | $ | 2.4 | 8 | % | ||||||||
Depletion and amortization | 34.2 | 19.6 | 14.6 | 74 | ||||||||||||
Depreciation | 1.9 | 1.6 | 0.3 | 19 | ||||||||||||
Write-downs of oil and gas properties | — | 0.2 | (0.2 | ) | (100 | ) | ||||||||||
General and administrative | 21.9 | 15.7 | 6.2 | 39 | ||||||||||||
Gain on sale of long-lived assets | (0.6 | ) | — | (0.6 | ) | — | ||||||||||
Arbitration settlement | — | 1.5 | (1.5 | ) | (100 | ) | ||||||||||
Bad debt recovery | (0.6 | ) | (0.4 | ) | (0.2 | ) | 50 | |||||||||
Taxes other than on income | 5.6 | 3.4 | 2.2 | 65 | ||||||||||||
Investment income and other | (2.1 | ) | (1.4 | ) | (0.7 | ) | 50 | |||||||||
Interest expense | 7.7 | 10.4 | (2.7 | ) | (26 | ) | ||||||||||
Net (gain) loss on exchange rates | 0.6 | (0.5 | ) | 1.1 | (220 | ) | ||||||||||
$ | 101.9 | $ | 81.0 | $ | 20.9 | 26 | % | |||||||||
25
Table of Contents
• | drilling and completion costs of wells and the cost of production, treating and transportation facilities; | ||
• | geological, geophysical and seismic costs; and | ||
• | acquisition of interests in oil and gas properties. |
26
Table of Contents
Year Ended December 31, | ||||||||||||
(in thousands) | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net cash provided by operating activities | $ | 114,665 | $ | 74,140 | $ | 38,538 | ||||||
Net cash provided by (used in) investing activities | (15,647 | ) | (39,684 | ) | 38,191 | |||||||
Net cash used in financing activities | (20,599 | ) | (88,516 | ) | (2,570 | ) | ||||||
Net increase (decrease) in cash | $ | 78,419 | $ | (54,060 | ) | $ | 74,159 | |||||
Payments (in thousands) Due by Period | ||||||||||||||||||||
Less than | After 4 | |||||||||||||||||||
Contractual Obligation | Total | 1 Year | 1-2 Years | 3-4Years | Years | |||||||||||||||
Long-Term Debt | $ | 5,467 | $ | 5,467 | $ | — | $ | — | $ | — | ||||||||||
Building Lease | 2,749 | 449 | 407 | 400 | 1,493 | |||||||||||||||
Total | $ | 8,216 | $ | 5,916 | $ | 407 | $ | 400 | $ | 1,493 | ||||||||||
27
Table of Contents
28
Table of Contents
29
Table of Contents
30
Table of Contents
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Item 9A. | Controls and Procedures |
31
Table of Contents
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
32
Table of Contents
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: | |
Schedule II — Valuation and Qualifying Accounts | ||
Financial Statements and Notes for LLC Geoilbent, a significant equity investment | ||
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. | ||
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 May 19, 2005. (Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 29, 2005, 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).) |
33
Table of Contents
10.2 | Note Payable Agreement dated March 8, 2001 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. related to a note in the principal amount of $6,000,000 with interest at LIBOR plus five percent, for financing of Tucupita Pipeline. (Incorporated by reference to Exhibit 10.24 to our Form 10-Q, filed on May 15, 2001, File No. 1-10762.) | ||
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.). | ||
10.4 | Sale and Purchase Agreement dated February 27, 2002 between Benton Oil and Gas Company and Sequential Holdings Russian Investors Limited regarding the sale of Benton Oil and Gas Company’s 68 percent interest in Arctic Gas Company. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on March 28, 2002, 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 | Bank Loan Agreement between Banco Mercantil, C.A. and Harvest Vinccler C.A. dated October 1, 2002. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | ||
10.8 | Guaranty issued by Harvest Natural Resources, Inc. dated September 26, 2002. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | ||
10.9† | Employment Agreement dated August 1, 2002 between Harvest Natural Resources, Inc. and Kurt A. Nelson. (Incorporated by reference to Exhibit 10.13 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | ||
10.10 | Sale and Purchase Agreement dated September 26, 2003, between Harvest Natural Resources, Inc. and Yukos Operational Holding Limited regarding the sale of our 34 percent minority equity investment in LLC Geoilbent. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 10, 2003, File No. 1-10762.) | ||
10.11† | 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).) | ||
10.12† | 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.) | ||
10.13† | 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.) | ||
10.14† | 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.) | ||
10.15† | 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.) | ||
10.16 | 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.) |
34
Table of Contents
10.17† | 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.) | ||
10.18† | 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.) | ||
10.19† | 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.) | ||
10.20† | 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.) | ||
10.21† | 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.) | ||
10.22† | Separation Agreement dated September 30, 2005, between Harvest Natural Resources, Inc. and Dr. Peter J. Hill. (Incorporated by reference to Exhibit 10.7 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.23† | Consulting Agreement dated October 1, 2005, between Harvest Natural Resources, Inc. and Dr. Peter J. Hill. (Incorporated by reference to Exhibit 10.8 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.24† | Stock Options Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. | ||
10.25† | Stock Options Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. | ||
10.26† | Stock Options Agreement dated September 26, 2005 between Harvest Natural Resources, Inc. and Byron A. Dunn. | ||
21.1 | List of subsidiaries. | ||
23.1 | Consent of PricewaterhouseCoopers LLP — Houston | ||
23.2 | Consent of ZAO PricewaterhouseCoopers Audit — Moscow | ||
23.3 | 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. |
35
Table of Contents
Houston, Texas
February 27, 2006
S-1
Table of Contents
December 31, | ||||||||
2005 | 2004 | |||||||
(in thousands, except per | ||||||||
share data) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 163,019 | $ | 84,600 | ||||
Restricted cash | — | 12 | ||||||
Accounts and notes receivable: | ||||||||
Accrued oil and gas sales | 60,900 | 58,937 | ||||||
Joint interest and other, net | 10,750 | 12,780 | ||||||
Put options | — | 14,209 | ||||||
Deferred income tax | 3,052 | 251 | ||||||
Prepaid expenses and other | 2,149 | 1,426 | ||||||
Total Current Assets | 239,870 | 172,215 | ||||||
Restricted Cash | — | 16 | ||||||
Other Assets | 1,600 | 2,072 | ||||||
Deferred Income Taxes | — | 6,034 | ||||||
Property and Equipment: | ||||||||
Oil and gas properties (full cost method-costs of $2,900 excluded from amortization in 2005 and 2004, respectively) | 641,684 | 631,082 | ||||||
Other administrative property | 9,568 | 10,008 | ||||||
651,252 | 641,090 | |||||||
Accumulated depletion, depreciation, and amortization | (491,924 | ) | (453,941 | ) | ||||
Net Property and Equipment | 159,328 | 187,149 | ||||||
$ | 400,798 | $ | 367,486 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable, trade and other | $ | 408 | $ | 8,428 | ||||
Accounts payable, related party | 9,203 | 11,063 | ||||||
Accrued expenses | 21,081 | 29,426 | ||||||
Deferred revenue | 6,728 | — | ||||||
Income taxes payable | 18,909 | 22,475 | ||||||
Current portion of long-term debt | 5,467 | 11,833 | ||||||
Total Current Liabilities | 61,796 | 83,225 | ||||||
Long-Term Debt | — | — | ||||||
Asset Retirement Liability | 2,129 | 1,941 | ||||||
Commitments and Contingencies | — | — | ||||||
Minority Interest | 39,361 | 39,131 | ||||||
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, 2005 and 2004; issued 37,757 shares and 37,544 shares at December 31, 2005 and 2004, respectively | 378 | 375 | ||||||
Additional paid-in capital | 188,242 | 185,183 | ||||||
Retained earnings | 112,736 | 61,897 | ||||||
Accumulated other comprehensive loss | — | (487 | ) | |||||
Treasury stock, at cost, 770 shares and 764 shares at December 31, 2005 and 2004, respectively | (3,844 | ) | (3,779 | ) | ||||
Total Stockholders’ Equity | 297,512 | 243,189 | ||||||
$ | 400,798 | $ | 367,486 | |||||
S-2
Table of Contents
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands, except per share data) | ||||||||||||
Revenues | ||||||||||||
Oil sales | $ | 210,493 | $ | 154,075 | $ | 103,920 | ||||||
Gas sales | 26,448 | 31,991 | 2,740 | |||||||||
Ineffective hedge activity | — | — | (565 | ) | ||||||||
236,941 | 186,066 | 106,095 | ||||||||||
Expenses | ||||||||||||
Operating expenses | 39,723 | 33,324 | 30,893 | |||||||||
Depletion, depreciation and amortization | 43,968 | 36,020 | 21,188 | |||||||||
Write-downs of oil and gas properties and impairments | — | — | 165 | |||||||||
General and administrative | 22,819 | 21,857 | 15,746 | |||||||||
Account receivable write-off on retroactive oil price adjustments | 4,548 | — | — | |||||||||
Arbitration settlement | — | — | 1,477 | |||||||||
Bad debt recovery | — | (598 | ) | (374 | ) | |||||||
Gain on sale of long-lived asset | — | (578 | ) | — | ||||||||
Taxes other than on income | 6,358 | 5,561 | 3,373 | |||||||||
117,416 | 95,586 | 72,468 | ||||||||||
Income from Operations | 119,525 | 90,480 | 33,627 | |||||||||
Other Non-Operating Income (Expense) | ||||||||||||
Gain on disposition of investment | — | — | 46,619 | |||||||||
Gain (loss) on early extinguishment of debt | — | (2,928 | ) | — | ||||||||
Investment earnings and other | 4,205 | 2,085 | 1,418 | |||||||||
Interest expense | (3,388 | ) | (7,749 | ) | (10,405 | ) | ||||||
Net gain (loss) on exchange rates | 2,752 | (622 | ) | 529 | ||||||||
3,569 | (9,214 | ) | 38,161 | |||||||||
Income from Consolidated Companies Before Income Taxes and Minority Interest | 123,094 | 81,266 | 71,788 | |||||||||
Income Tax Expense | 57,025 | 33,288 | 9,657 | |||||||||
Income Before Minority Interest | 66,069 | 47,978 | 62,131 | |||||||||
Minority Interest in Consolidated Subsidiary Companies | 15,230 | 13,618 | 5,968 | |||||||||
Income from Consolidated Companies | 50,839 | 34,360 | 56,163 | |||||||||
Equity in Net Losses of Affiliated Company | — | — | (28,860 | ) | ||||||||
Net Income | $ | 50,839 | $ | 34,360 | $ | 27,303 | ||||||
Net Income Per Common Share: | ||||||||||||
Basic | $ | 1.38 | $ | 0.95 | $ | 0.77 | ||||||
Diluted | $ | 1.32 | $ | 0.90 | $ | 0.74 | ||||||
Other comprehensive loss: | ||||||||||||
Unrealized mark to market loss from cash flow hedging activities, net of tax | — | (487 | ) | — | ||||||||
Comprehensive income | $ | 50,839 | $ | 33,873 | $ | 27,303 | ||||||
S-3
Table of Contents
(in thousands)
Accumulated | ||||||||||||||||||||||||||||
Common | Additional | Other | ||||||||||||||||||||||||||
Shares | Common | Paid-in | Retained | Comprehensive | Treasury | |||||||||||||||||||||||
Issued | Stock | Capital | Earnings | Gain(Loss) | Stock | Total | ||||||||||||||||||||||
Balance at January 1, 2003 | 35,900 | $ | 359 | $ | 173,559 | $ | 234 | $ | — | $ | (2,835 | ) | $ | 171,317 | ||||||||||||||
Issuance of common shares: | ||||||||||||||||||||||||||||
Exercise of stock options | 505 | 5 | 1,196 | — | — | — | 1,201 | |||||||||||||||||||||
Employee stock based compensation | — | — | 296 | — | — | — | 296 | |||||||||||||||||||||
Treasury stock (80 shares) | — | — | — | — | — | (404 | ) | (404 | ) | |||||||||||||||||||
Net Income | — | — | — | 27,303 | — | — | 27,303 | |||||||||||||||||||||
Balance at December 31, 2003 | 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 | |||||||||||||||||||
Issuance of common shares: | ||||||||||||||||||||||||||||
Exercise of stock options | 240 | 3 | 829 | — | — | — | 832 | |||||||||||||||||||||
Employee stock-based compensation | 74 | — | 2,230 | — | — | — | 2,230 | |||||||||||||||||||||
Treasury stock (5 shares) | — | — | — | — | — | (65 | ) | (65 | ) | |||||||||||||||||||
Accumulated other comprehensive gain | — | — | — | — | 487 | — | 487 | |||||||||||||||||||||
Net Income | — | — | — | 50,839 | — | — | 50,839 | |||||||||||||||||||||
Balance at December 31, 2005 | 37,858 | $ | 378 | $ | 188,242 | $ | 112,736 | $ | — | $ | (3,844 | ) | $ | 297,512 | ||||||||||||||
S-4
Table of Contents
(in thousands)
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net income | $ | 50,839 | $ | 34,360 | $ | 27,303 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depletion, depreciation and amortization | 43,968 | 36,020 | 21,188 | |||||||||
Write-down of oil and gas properties and impairment | — | — | 165 | |||||||||
Amortization of financing costs | — | 228 | 497 | |||||||||
Gain on disposition of assets and investments | — | (578 | ) | (46,619 | ) | |||||||
Write off of unamortized financing costs | — | 936 | — | |||||||||
Account receivable write-off on retroactive oil price adjustments | 4,548 | — | — | |||||||||
Equity in net losses of affiliated companies | — | — | 28,860 | |||||||||
Allowance for employee notes and accounts receivable | — | (598 | ) | (169 | ) | |||||||
Deferred compensation expense | (745 | ) | 1,521 | 306 | ||||||||
Non-cash compensation related charges | 2,230 | 2,152 | 296 | |||||||||
Minority interest in consolidated subsidiary companies | 15,230 | 13,618 | 5,968 | |||||||||
Deferred income taxes | 2,982 | (1,285 | ) | (667 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and notes receivable | (4,481 | ) | (27,156 | ) | (7,935 | ) | ||||||
Prepaid expenses and other | (723 | ) | (621 | ) | 2,164 | |||||||
Commodity hedging contract | 14,947 | (14,947 | ) | (430 | ) | |||||||
Accounts payable | (8,020 | ) | 4,265 | 359 | ||||||||
Accounts payable, related party | (1,860 | ) | 506 | 4,408 | ||||||||
Accrued expenses | (7,600 | ) | 11,409 | (382 | ) | |||||||
Deferred revenue | 6,728 | — | — | |||||||||
Asset retirement liability | 188 | 482 | 1,459 | |||||||||
Income taxes payable | (3,566 | ) | 13,828 | 1,767 | ||||||||
Net Cash Provided by Operating Activities | 114,665 | 74,140 | 38,538 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Proceeds from sale of investment | — | — | 69,500 | |||||||||
Proceeds from sale of long-lived assets | — | 578 | — | |||||||||
Additions of property and equipment | (16,147 | ) | (39,106 | ) | (60,925 | ) | ||||||
Investment in and advances to affiliated companies | — | — | 2,328 | |||||||||
Decrease in restricted cash | 28 | — | 1,800 | |||||||||
Purchases of marketable securities | — | — | (256,058 | ) | ||||||||
Maturities of marketable securities | — | — | 283,446 | |||||||||
Investment costs | 472 | (1,156 | ) | (1,900 | ) | |||||||
Net Cash Provided by (Used In) Investing Activities | (15,647 | ) | (39,684 | ) | 38,191 | |||||||
Cash Flows from Financing Activities: | ||||||||||||
Net proceeds from issuances of common stock | 767 | 7,451 | 1,201 | |||||||||
Purchase of treasury stock | — | — | (404 | ) | ||||||||
Payments of note payable | (6,366 | ) | (91,367 | ) | (3,367 | ) | ||||||
Dividend paid to minority interest | (15,000 | ) | (4,600 | ) | — | |||||||
Net Cash Used In Financing Activities | (20,599 | ) | (88,516 | ) | (2,570 | ) | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 78,419 | (54,060 | ) | 74,159 | ||||||||
Cash and Cash Equivalents at Beginning of Year | 84,600 | 138,660 | 64,501 | |||||||||
Cash and Cash Equivalents at End of Year | $ | 163,019 | $ | 84,600 | $ | 138,660 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Cash paid during the year for interest expense | $ | 795 | $ | 12,541 | $ | 13,241 | ||||||
Cash paid during the year for income taxes | $ | 20,991 | $ | 11,705 | $ | 4,254 | ||||||
S-5
Table of Contents
S-6
Table of Contents
S-7
Table of Contents
S-8
Table of Contents
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Asset retirement obligations beginning of period | $ | 1,941 | $ | 1,459 | ||||
Liabilities recorded during the period | 96 | 1,454 | ||||||
Liabilities settled during the period | — | (540 | ) | |||||
Revisions in estimated cash flows | (17 | ) | (470 | ) | ||||
Accretion expense | 109 | 38 | ||||||
Asset retirement obligations end of period | $ | 2,129 | $ | 1,941 | ||||
S-9
Table of Contents
2005 | 2004 | |||||||
Proved property costs | $ | 630,634 | $ | 621,679 | ||||
Costs excluded from amortization | 2,900 | 2,900 | ||||||
Oilfield inventories | 8,150 | 6,503 | ||||||
Other administrative property | 9,568 | 10,008 | ||||||
651,252 | 641,090 | |||||||
Accumulated depletion, impairment and depreciation | (491,924 | ) | (453,941 | ) | ||||
$ | 159,328 | $ | 187,149 | |||||
2005 | 2004 | 2003 | ||||||||||
Net income, as reported | $ | 50,839 | $ | 34,360 | $ | 27,303 | ||||||
Add: Stock-based employee compensation cost, net of tax | 2,635 | 999 | 296 | |||||||||
Less: Total stock-based employee compensation cost determined under fair value based method, net of tax | (2,711 | ) | (1,382 | ) | (1,056 | ) | ||||||
Net income – proforma | $ | 50,763 | $ | 33,977 | $ | 26,543 | ||||||
Net income per common share: | ||||||||||||
Basic – as reported | $ | 1.38 | $ | 0.95 | $ | 0.77 | ||||||
Basic – proforma | $ | 1.37 | $ | 0.94 | $ | 0.75 | ||||||
Diluted – as reported | $ | 1.32 | $ | 0.90 | $ | 0.74 | ||||||
Diluted – proforma | $ | 1.32 | $ | 0.89 | $ | 0.72 | ||||||
S-10
Table of Contents
S-11
Table of Contents
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Note payable with interest at 9.0% | ||||||||
See description below | $ | 300 | $ | 1,500 | ||||
Note payable with interest at 10.1% | 5,167 | 10,333 | ||||||
5,467 | 11,833 | |||||||
Less current portion | 5,467 | 11,833 | ||||||
$ | — | $ | — | |||||
S-12
Table of Contents
S-13
Table of Contents
2005 | 2004 | 2003 | ||||||||||
Venezuelan municipal taxes | $ | 5,788 | $ | 4,485 | $ | 2,741 | ||||||
Franchise taxes | (70 | ) | 464 | 341 | ||||||||
Payroll and other taxes | 640 | 612 | 291 | |||||||||
$ | 6,358 | $ | 5,561 | $ | 3,373 | |||||||
2005 | 2004 | |||||||
Deferred tax assets: | ||||||||
Operating loss carryforwards | $ | 2,020 | $ | 14,748 | ||||
Difference in basis of property | 25,343 | 28,753 | ||||||
Other | 3,052 | 3,276 | ||||||
Valuation allowance | (27,363 | ) | (40,492 | ) | ||||
Net deferred tax asset | 3,052 | 6,285 | ||||||
Less current portion | 3,052 | 251 | ||||||
$ | — | $ | 6,034 | |||||
2005 | 2004 | 2003 | ||||||||||
Income (loss) before income taxes | ||||||||||||
United States | $ | 8,178 | $ | (16,593 | ) | $ | 34,236 | |||||
Foreign | 114,916 | 97,859 | 37,552 | |||||||||
Total | $ | 123,094 | $ | 81,266 | $ | 71,788 | ||||||
2005 | 2004 | 2003 | ||||||||||
Current: | ||||||||||||
United States | $ | 739 | $ | (8 | ) | $ | 1,187 | |||||
Foreign | 53,304 | 34,581 | 9,137 | |||||||||
54,043 | 34,573 | 10,324 | ||||||||||
Deferred: | ||||||||||||
Foreign | 2,982 | (1,285 | ) | (667 | ) | |||||||
$ | 57,025 | $ | 33,288 | $ | 9,657 | |||||||
S-14
Table of Contents
2005 | 2004 | 2003 | ||||||||||
Computed tax expense at the statutory rate | $ | 43,083 | $ | 28,443 | $ | 15,025 | ||||||
State income taxes | — | 25 | 1,188 | |||||||||
Effect of foreign source income and rate differentials on foreign income | 16,065 | (2,169 | ) | (15,849 | ) | |||||||
Change in valuation allowance | 13,129 | 7,020 | 9,219 | |||||||||
Alternative minimum tax | 739 | — | — | |||||||||
Net operating loss utilization | (15,567 | ) | — | — | ||||||||
Other | (424 | ) | (31 | ) | 74 | |||||||
Total income tax expense | $ | 57,025 | $ | 33,288 | $ | 9,657 | ||||||
S-15
Table of Contents
2005 | 2004 | 2003 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Price | Shares | Price | Shares | Price | Shares | |||||||||||||||||||
Outstanding at beginning of the year: | $ | 8.18 | 3,793 | $ | 7.52 | 4,523 | $ | 7.42 | 5,223 | |||||||||||||||
Options granted | 11.51 | 922 | 13.36 | 378 | 6.26 | 246 | ||||||||||||||||||
Options exercised | (3.45 | ) | (241 | ) | (7.41 | ) | (955 | ) | 2.32 | (494 | ) | |||||||||||||
Options cancelled | (14.24 | ) | (404 | ) | (6.31 | ) | (153 | ) | 11.37 | (452 | ) | |||||||||||||
Outstanding at end of the year | 8.61 | 4,070 | 8.18 | 3,793 | 7.52 | 4,523 | ||||||||||||||||||
Exercisable at end of the year | 7.40 | 2,886 | 7.71 | 3,236 | 8.18 | 3,857 | ||||||||||||||||||
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 12/31/05 | Life | Price | Value | at 12/31/05 | Price | Value | |||||||||||||||||||||
$1.55 - $2.75 | 1,523 | 1.78 | $ | 1.98 | $ | 10,513 | 1,523 | $ | 1.98 | $ | 10,513 | |||||||||||||||||
$4.80 - $7.10 | 356 | 3.82 | 5.66 | 1,145 | 291 | 5.52 | 975 | |||||||||||||||||||||
$8.72 - $10.88 | 696 | 5.40 | 10.30 | 23 | 136 | 8.72 | 22 | |||||||||||||||||||||
$11.50 - $16.90 | 1,085 | 3.64 | 13.04 | — | 526 | 13.05 | — | |||||||||||||||||||||
$17.88 - $24.13 | 410 | 0.14 | 21.21 | — | 410 | 21.21 | — | |||||||||||||||||||||
4,070 | $ | 11,681 | 2,886 | $ | 11,510 | |||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||
Weighted average fair value | $ | 6.35 | $ | 10.33 | $ | 4.83 | ||||||
Weighted averaged expected life | 7 | 2-10 | 5-10 | |||||||||
Valuation assumptions: | ||||||||||||
Expected volatility | 50.0%-53.4 | % | 69.6 | % | 79.8 | % | ||||||
Risk-free interest rate | 3.9%-4.6 | % | 2.6%-4.8 | % | 2.8%-4.2 | % | ||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected annual forfeitures | 3 | % | 0 | % | 0 | % |
S-16
Table of Contents
Weighted-Average | ||||||||
Grant-Date | ||||||||
Nonvested Shares | Shares | Fair Value | ||||||
Nonvested at January 1, 2005 | 557 | $ | 8.46 | |||||
Granted | 922 | 6.73 | ||||||
Vested | (243 | ) | 7.51 | |||||
Forfeited | (51 | ) | 9.05 | |||||
Nonvested at December 31, 2005 | 1,185 | $ | 7.30 | |||||
S-17
Table of Contents
2005 | 2004 | 2003 | ||||||||||
Segment Revenues | ||||||||||||
Oil and gas sales: | ||||||||||||
Venezuela | $ | 236,941 | $ | 186,066 | $ | 106,095 | ||||||
Total oil and gas sales | 236,941 | 186,066 | 106,095 | |||||||||
Segment Income (Loss) | ||||||||||||
Venezuela | 64,096 | 54,469 | 23,874 | |||||||||
Russia | (3,471 | ) | (3,524 | ) | (29,620 | ) | ||||||
United States and other | (9,786 | ) | (16,585 | ) | 33,049 | |||||||
Net income | $ | 50,839 | $ | 34,360 | $ | 27,303 | ||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Operating Segment Assets | ||||||||
Venezuela | $ | 258,268 | $ | 309,794 | ||||
Russia | 317 | 385 | ||||||
United States and other | 161,011 | 108,408 | ||||||
419,596 | 418,587 | |||||||
Intersegment eliminations | (18,798 | ) | (51,101 | ) | ||||
$ | 400,798 | $ | 367,486 | |||||
S-18
Table of Contents
Year ended September 30: | 2003 | |||
Revenues | ||||
Oil sales | $ | 81,724 | ||
Expenses | ||||
Selling and distribution expenses | 5,893 | |||
Operating expenses | 15,897 | |||
Depletion, depreciation and amortization | 18,182 | |||
Write-downs of oil and gas properties | 95,000 | |||
General and administrative | 9,456 | |||
Taxes other than on income | 25,626 | |||
170,054 | ||||
Loss from operations | (88,330 | ) | ||
Other non-operating income (expense) | ||||
Investment earnings and other | 1,064 | |||
Interest expense | (1,992 | ) | ||
Net gain on exchange rates | 1,566 | |||
638 | ||||
Loss before income taxes | (87,692 | ) | ||
Income tax benefit | (3,117 | ) | ||
(84,575 | ) | |||
Effects of change in accounting policy | 310 | |||
Net loss | $ | (84,885 | ) | |
S-19
Table of Contents
S-20
Table of Contents
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(amounts in thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Revenues | $ | 60,986 | $ | 56,442 | $ | 61,221 | $ | 58,292 | ||||||||
Expenses | (27,300 | ) | (26,207 | ) | (32,245 | ) | (31,664 | ) | ||||||||
Non-operating income (expense) | 3,054 | 277 | (1,827 | ) | 2,065 | |||||||||||
Income before income taxes and minority interests | 36,740 | 30,512 | 27,149 | 28,693 | ||||||||||||
Income tax expense | 13,533 | 11,959 | 16,332 | 15,201 | ||||||||||||
Income before minority interests | 23,207 | 18,553 | 10,817 | 13,492 | ||||||||||||
Minority interests | 5,172 | 4,402 | 2,674 | 2,982 | ||||||||||||
Net income | $ | 18,035 | $ | 14,151 | $ | 8,143 | $ | 10,510 | ||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.49 | $ | 0.38 | $ | 0.22 | $ | 0.28 | ||||||||
Diluted | $ | 0.47 | $ | 0.37 | $ | 0.21 | $ | 0.27 | ||||||||
Other comprehensive income (loss) | (6,048 | ) | 1,770 | 2,287 | 1,991 | |||||||||||
Total comprehensive income | $ | 11,987 | $ | 15,921 | $ | 10,430 | $ | 12,501 | ||||||||
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(amounts in thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2004 | ||||||||||||||||
Revenues | $ | 38,797 | $ | 41,397 | $ | 46,053 | $ | 59,819 | ||||||||
Expenses | (20,329 | ) | (20,478 | ) | (24,697 | ) | (30,082 | ) | ||||||||
Non-operating income (expense) | (2,795 | ) | (2,031 | ) | (4,779 | ) | 391 | |||||||||
Income before income taxes and minority interests | 15,673 | 18,888 | 16,577 | 30,128 | ||||||||||||
Income tax expense | 5,600 | 9,902 | 7,617 | 10,169 | ||||||||||||
Income before minority interests | 10,073 | 8,986 | 8,960 | 19,959 | ||||||||||||
Minority interests | 2,566 | 2,738 | 3,654 | 4,660 | ||||||||||||
Net income (loss) | $ | 7,507 | $ | 6,248 | $ | 5,306 | $ | 15,299 | ||||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | 0.21 | $ | 0.17 | $ | 0.15 | $ | 0.42 | ||||||||
Diluted | $ | 0.20 | $ | 0.16 | $ | 0.14 | $ | 0.39 | ||||||||
Other comprehensive income (loss) | — | — | (2,357 | ) | 1,870 | |||||||||||
Total comprehensive income (loss) | $ | 7,507 | $ | 6,248 | $ | 2,949 | $ | 17,169 | ||||||||
S-21
Table of Contents
United States | ||||||||||||||||
Venezuela | China | and Other | Total | |||||||||||||
Year Ended December 31, 2005 | ||||||||||||||||
Development costs | $ | 8,912 | $ | — | $ | — | $ | 8,912 | ||||||||
Exploration costs | — | 42 | — | 42 | ||||||||||||
$ | 8,912 | $ | 42 | $ | — | $ | 8,954 | |||||||||
Year Ended December 31, 2004 | ||||||||||||||||
Development costs | $ | 39,161 | $ | — | $ | — | $ | 39,161 | ||||||||
Exploration costs | 10 | 53 | — | 63 | ||||||||||||
$ | 39,171 | $ | 53 | $ | — | $ | 39,224 | |||||||||
Year Ended December 31, 2003 | ||||||||||||||||
Development costs | $ | 58,079 | $ | — | $ | 2 | $ | 58,081 | ||||||||
Exploration costs | 11 | 39 | 133 | 183 | ||||||||||||
$ | 58,090 | $ | 39 | $ | 135 | $ | 58,264 | |||||||||
Venezuela | China | Total | ||||||||||
Year Ended December 31, 2005 | ||||||||||||
Proved property costs | $ | 617,137 | $ | 13,497 | $ | 630,634 | ||||||
Costs excluded from amortization | — | 2,900 | 2,900 | |||||||||
Oilfield inventories | 8,150 | — | 8,150 | |||||||||
Less accumulated depletion and impairment | (473,496 | ) | (13,497 | ) | (486,993 | ) | ||||||
$ | 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 | |||||||
December 31, 2003 | ||||||||||||
Proved property costs | $ | 569,055 | $ | 13,401 | $ | 582,456 | ||||||
Costs excluded from amortization | — | 2,900 | 2,900 | |||||||||
Oilfield inventories | 8,266 | — | 8,266 | |||||||||
Less accumulated depletion and impairment | (398,206 | ) | (13,401 | ) | (411,607 | ) | ||||||
$ | 179,115 | $ | 2,900 | $ | 182,015 | |||||||
S-22
Table of Contents
United States | ||||||||||||||||
Venezuela | China | and Other | Total | |||||||||||||
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 | $ | — | $ | — | $ | 186,066 | ||||||||
Expenses: | ||||||||||||||||
Operating, selling and distribution expenses and taxes other than on income | 33,297 | — | 214 | 33,511 | ||||||||||||
Depletion | 34,108 | — | — | 34,108 | ||||||||||||
Income tax expense | 38,968 | — | — | 38,968 | ||||||||||||
Total expenses | 106,373 | — | 214 | 106,587 | ||||||||||||
Results of operations from oil and natural gas producing activities | $ | 79,693 | $ | — | $ | (214 | ) | $ | 79,479 | |||||||
Year ended December 31, 2003 | ||||||||||||||||
Oil and natural gas revenues | $ | 106,095 | $ | — | $ | — | $ | 106,095 | ||||||||
Expenses: | ||||||||||||||||
Operating, selling and distribution expenses and taxes other than on income | 31,445 | — | 76 | 31,521 | ||||||||||||
Write-down of oil and gas properties and impairments | — | 23 | 142 | 165 | ||||||||||||
Depletion | 19,599 | — | — | 19,599 | ||||||||||||
Income tax expense | 12,158 | — | 1,187 | 13,345 | ||||||||||||
Total expenses | 63,202 | 23 | 1,405 | 64,630 | ||||||||||||
Results of operations from oil and natural gas producing activities | $ | 42,893 | $ | (23 | ) | $ | (1,405 | ) | $ | 41,465 | ||||||
S-23
Table of Contents
Minority | ||||||||||||
Interest in | ||||||||||||
Venezuela | Venezuela | Net Total | ||||||||||
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls) | ||||||||||||
Year ended December 31, 2005 | ||||||||||||
Proved Reserves at beginning of the year | 78,142 | (15,628 | ) | 62,514 | ||||||||
Revisions of previous estimates(a) | (34,068 | ) | 6,813 | (27,255 | ) | |||||||
Production | (8,763 | ) | 1,753 | (7,010 | ) | |||||||
Proved Developed Reserves at end of the year | 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 | ||||||||
Year ended December 31, 2003 | ||||||||||||
Proved Reserves beginning of the year | 95,168 | (19,033 | ) | 76,135 | ||||||||
Revisions of previous estimates | (521 | ) | 104 | (417 | ) | |||||||
Extensions, discoveries and improved recovery | 572 | (114 | ) | 458 | ||||||||
Production | (7,347 | ) | 1,469 | (5,878 | ) | |||||||
Proved Reserves at end of the year | 87,872 | (17,574 | ) | 70,298 | ||||||||
S-24
Table of Contents
Minority | ||||||||||||
Interest in | ||||||||||||
Venezuela | Venezuela | Net Total | ||||||||||
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 | ||||||||
December 31, 2003 | 45,860 | (9,172 | ) | 36,688 | ||||||||
January 1, 2003 | 53,833 | (10,767 | ) | 43,066 | ||||||||
Proved Reserves-Natural gas (MMcf) | ||||||||||||
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. | ||||||||||||
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 | ||||||||
Year ended December 31, 2003 | ||||||||||||
Proved Reserves beginning of the year | 198,000 | (39,600 | ) | 158,400 | ||||||||
Revisions of previous estimates | 160 | (32 | ) | 128 | ||||||||
Production | (2,660 | ) | 532 | (2,128 | ) | |||||||
Proved Reserves end of the year | 195,500 | (39,100 | ) | 156,400 | ||||||||
Proved Developed Reserves-Natural gas (MMcf) at: | ||||||||||||
December 31, 2005 | 58,918 | (11,784 | ) | 47,134 | ||||||||
December 31, 2004 | 80,897 | (16,179 | ) | 64,718 | ||||||||
December 31, 2003 | 106,147 | (21,229 | ) | 84,918 | ||||||||
January 1, 2003 | 105,000 | (21,000 | ) | 84,000 |
S-25
Table of Contents
Minority | ||||||||||||
Interest in | ||||||||||||
Venezuela | Venezuela | Net Total | ||||||||||
(amounts in thousands) | ||||||||||||
December 31, 2005(a) | ||||||||||||
Future cash inflows from sales of oil and gas | $ | 1,029,630 | $ | (205,926 | ) | $ | 823,704 | |||||
Future production costs | (227,079 | ) | 45,416 | (181,663 | ) | |||||||
Future development costs | (27,917 | ) | 5,583 | (22,334 | ) | |||||||
Future income tax expenses | (239,386 | ) | 47,877 | (191,509 | ) | |||||||
Future net cash flows | 535,248 | (107,050 | ) | 428,198 | ||||||||
Effect of discounting net cash flows at 10% | (123,451 | ) | 24,691 | (98,760 | ) | |||||||
Standardized measure of discounted future net cash flows | $ | 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 | |||||
December 31, 2003 | ||||||||||||
Future cash inflows from sales of oil and gas | $ | 1,513,525 | $ | (302,705 | ) | $ | 1,210,820 | |||||
Future production costs | (382,577 | ) | 76,515 | (306,062 | ) | |||||||
Future development costs | (130,160 | ) | 26,032 | (104,128 | ) | |||||||
Future income tax expenses | (317,018 | ) | 63,404 | (253,614 | ) | |||||||
Future net cash flows | 683,770 | (136,754 | ) | 547,016 | ||||||||
Effect of discounting net cash flows at 10% | (225,306 | ) | 45,060 | (180,246 | ) | |||||||
Standardized measure of discounted future net cash flows | $ | 458,464 | $ | (91,694 | ) | $ | 366,770 | |||||
(a) | Proved reserves do not include Contractually Restricted Reserves. |
Net Venezuela | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(amounts in thousands) | ||||||||||||
Standardized Measure at January 1 | $ | 544,980 | $ | 366,770 | $ | 317,799 | ||||||
Sales of oil and natural gas, net of related costs | (124,638 | ) | (122,215 | ) | (59,720 | ) | ||||||
Revisions to estimates of proved reserves | ||||||||||||
Net changes in prices, development and production costs | 262,852 | 333,237 | 76,037 | |||||||||
Quantities | (365,565 | ) | (7,597 | ) | (1,584 | ) | ||||||
Extensions, discoveries and improved recovery, net of future costs | — | — | 4,971 | |||||||||
Accretion of discount | 80,202 | 54,531 | 48,128 | |||||||||
Net change in income taxes | 109,030 | (78,504 | ) | (15,053 | ) | |||||||
Development costs incurred | 7,130 | 31,329 | 46,463 | |||||||||
Changes in timing and other | (184,553 | ) | (32,571 | ) | (50,271 | ) | ||||||
Standardized Measure at December 31 | $ | 329,438 | $ | 544,980 | $ | 366,770 | ||||||
S-26
Table of Contents
for Russia Equity Affiliate as of September 30, their fiscal year end.
Geoilbent | ||||
Year Ended September 25, 2003 | ||||
Development costs | $ | 3,474 | ||
Exploration costs | 1,034 | |||
$ | 4,508 | |||
Geoilbent | ||||
September 25, 2003 | ||||
Proved property costs | $ | 102,753 | ||
Oilfield inventories | 2,530 | |||
Less accumulated depletion and impairment | (72,333 | ) | ||
$ | 32,950 | |||
Geoilbent | ||||
Year ended September 25, 2003 | ||||
Oil sales | $ | 27,876 | ||
Expenses: | ||||
Operating, selling and distribution expenses and taxes other than on income | 16,088 | |||
Depletion | 6,215 | |||
Write-down of oil and gas properties | 32,300 | |||
Income tax expense | 2,073 | |||
Total expenses | 56,676 | |||
Results of operations from oil and natural gas producing activities | $ | (28,800 | ) | |
S-27
Table of Contents
S-28
Table of Contents
Geoilbent | ||||
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls) | ||||
Year ended September 30, 2003 | ||||
Proved reserves beginning of the year | 25,356 | |||
Revisions of previous estimates | 537 | |||
Extensions, discoveries and improved recovery | 962 | |||
Production | (1,942 | ) | ||
Sales of reserves in place | (24,913 | ) | ||
Proved reserves at end of the year | — | |||
Proved Developed Reserves at: | ||||
September 30, 2003 | — | |||
October 1, 2002 | 13,200 |
Geoilbent | ||||
(amounts in thousands) | ||||
September 30, 2003 | ||||
Future cash inflow | $ | 481,557 | ||
Future production costs | (229,982 | ) | ||
Future development costs | (36,666 | ) | ||
Future net revenue before income taxes | 214,909 | |||
10% annual discount for estimated timing of cash flows | (99,948 | ) | ||
Discounted future net cash flows before income taxes | 114,961 | |||
Future income taxes, discounted at 10% per annum | (23,163 | ) | ||
Standardized measure of discounted future net cash flows | $ | 91,798 | ||
S-29
Table of Contents
Geoilbent | ||||
2003 | ||||
(amounts in thousands) | ||||
Present Value at October 1 | $ | 92,939 | ||
Sales of oil and natural gas, net of related costs | (20,410 | ) | ||
Revisions to estimates of Proved Reserves | ||||
Net changes in prices, development and production costs | (5,522 | ) | ||
Quantities | 3,178 | |||
Sales of reserves in place | (91,798 | ) | ||
Extensions, discoveries and improved recovery, net of future costs | 1,246 | |||
Accretion of discount | 11,723 | |||
Net change in income taxes | 1,127 | |||
Development costs incurred | 4,507 | |||
Changes in timing and other | 3,010 | |||
Present Value at September 30 | $ | — | ||
S-30
Table of Contents
HARVEST NATURAL RESOURCES, INC. | ||||||
(Registrant) | ||||||
Date: February 27, 2006 | By: | /s/James A. Edmiston | ||||
James A. Edmiston | ||||||
Chief Executive Officer |
Signature | Title | |
/s/ James A. Edmiston | Director, President and Chief Executive Officer | |
/s/ Steven W. Tholen | Senior Vice President — Finance, Chief Financial Officer and Treasurer | |
(Principal Financial Officer) | ||
/s/ Kurt A. Nelson | Vice President-Controller, Chief Accounting Officer | |
(Principal Accounting Officer) | ||
/s/ Stephen D. Chesebro’ | Chairman of the Board and Director | |
/s/ John U. Clarke | Director | |
/s/ H. H. Hardee | Director | |
/s/ Peter J. Hill | Director | |
/s/ Patrick M. Murray | Director | |
/s/ J. Michael Stinson | Director |
Table of Contents
HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES
Additions | ||||||||||||||||||||
Balance at | Charged to | Deductions | Balance at | |||||||||||||||||
Beginning | Charged to | Other | From | End of | ||||||||||||||||
of Year | Income | Accounts | Reserves | Year | ||||||||||||||||
At December 31, 2005 | ||||||||||||||||||||
Amounts deducted from applicable assets | ||||||||||||||||||||
Accounts receivable | $ | 2,757 | $ | — | $ | — | $ | — | $ | 2,757 | ||||||||||
Deferred tax valuation allowance | 40,492 | (13,129 | ) | — | — | 27,363 | ||||||||||||||
Investment at cost | 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 | |||||||||||||||
At December 31, 2003 | ||||||||||||||||||||
Amounts deducted from applicable assets | ||||||||||||||||||||
Accounts receivable | $ | 3,525 | $ | 205 | $ | — | $ | 375 | $ | 3,355 | ||||||||||
Deferred tax valuation allowance | 39,146 | 9,219 | — | — | 48,365 | |||||||||||||||
Investment at cost | 1,350 | — | — | — | 1,350 |
Table of Contents
Financial Statements and Notes
for LLC Geoilbent
Table of Contents
LLC Geoilbent
Financial Statements
30 September 2003
Table of Contents
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Owners of Limited Liability Company Geoilbent
In our opinion, the accompanying balance sheets and the related statements of income, cash flows and changes in stockholders’ equity, present fairly, in all material respects, the financial position of LLC Geoilbent (the “Company”) at 30 September 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended 30 September 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 4 and 10 to the financial statements, the Company has a long-term debt facility for which it is in violation of certain loan covenants and therefore the lender may declare the loan to be in default and can accelerate the maturity. Accordingly, this long-term debt has been classified in the accompanying financial statements as a current liability resulting in a working capital deficit of approximately US$35,772,000 as at 30 September 2003 which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to this matter are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
ZAO PricewaterhouseCoopers Audit
Moscow, Russian Federation
2 March 2004
Table of Contents
LLC GEOILBENT
BALANCE SHEETS
(expressed in thousand of US Dollars)
As at | As at | |||||||||||
Notes | 30 September 2003 | 30 September 2002 | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents | 680 | 2,001 | ||||||||||
Restricted cash | 10 | 1,217 | 1,469 | |||||||||
Accounts receivable and advances to suppliers | 7 | 7,161 | 6,308 | |||||||||
Inventories | 8 | 8,018 | 7,201 | |||||||||
Deferred income tax, current | 14 | 966 | 1,806 | |||||||||
Total current assets | 18,042 | 18,785 | ||||||||||
Oil and gas producing properties, full cost method | 9 | 89,469 | 185,989 | |||||||||
Deferred income tax, non-current | 14 | — | 696 | |||||||||
Other long term assets | — | 130 | ||||||||||
Total assets | 107,511 | 205,600 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||
Current portion of long-term debt | 10 | 37,500 | 22,550 | |||||||||
Accounts payable | 6,559 | 15,244 | ||||||||||
Trade advances | 993 | 3,000 | ||||||||||
Taxes payable | 11 | 7,858 | 12,354 | |||||||||
Other payables and accrued liabilities | 904 | 903 | ||||||||||
Total current liabilities | 53,814 | 54,051 | ||||||||||
Long-term debt | 10 | — | 7,500 | |||||||||
Asset retirement obligation | 3 | 734 | — | |||||||||
Total liabilities | 54,548 | 61,551 | ||||||||||
Commitments and contingent liabilities | 16 | — | — | |||||||||
Contributed capital | 12 | 82,518 | 82,518 | |||||||||
Retained earnings (accumulated deficit) | (23,353 | ) | 61,531 | |||||||||
Accumulated other comprehensive loss | (6,202 | ) | — | |||||||||
Total stockholders’ equity | 52,963 | 144,049 | ||||||||||
Total liabilities and stockholders’ equity | 107,511 | 205,600 | ||||||||||
The accompanying notes are an integral part of these financial statements.
Table of Contents
LLC GEOILBENT
STATEMENTS OF INCOME
(expressed in thousand of US Dollars)
Year ended | Year ended | Year ended | ||||||||||||||
Notes | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||||||
Total sales and other operating revenues | 13 | 82,307 | 91,598 | 101,159 | ||||||||||||
Costs and other deductions | ||||||||||||||||
Operating expenses | 15,801 | 15,360 | 11,415 | |||||||||||||
Selling and distribution expenses | 5,893 | 6,696 | 9,876 | |||||||||||||
General and administrative expenses | 9,456 | 8,335 | 5,650 | |||||||||||||
Depletion and amortization expense | 18,278 | 27,168 | 14,918 | |||||||||||||
Impairment of property, plant and equipment | 9 | 95,000 | — | — | ||||||||||||
Taxes other than income tax | 14 | 25,625 | 27,657 | 26,011 | ||||||||||||
Total costs and other deductions | 170,053 | 85,216 | 67,870 | |||||||||||||
Other income and expense | ||||||||||||||||
Exchange gain, net | (1,566 | ) | (2,053 | ) | (781 | ) | ||||||||||
Interest expense, net | 1,992 | 4,629 | 7,547 | |||||||||||||
Other non-operating income, net | (481 | ) | (381 | ) | (648 | ) | ||||||||||
Total other expense (income) | (55 | ) | 2,195 | 6,118 | ||||||||||||
Income (loss) before income tax | (87,691 | ) | 4,187 | 27,171 | ||||||||||||
Income tax expense | 14 | |||||||||||||||
Current income tax expense | 3,542 | 2,804 | 6,751 | |||||||||||||
Deferred income tax benefit | (6,659 | ) | (2,502 | ) | — | |||||||||||
Total income tax expense (benefit) | (3,117 | ) | 302 | 6,751 | ||||||||||||
Income (loss) before cumulative effect of change in accounting principle, net of tax | (84,574 | ) | 3,885 | 20,420 | ||||||||||||
Cumulative effect of change in accounting principle, net of tax | 3 | (310 | ) | — | — | |||||||||||
Net income (loss) | (84,884 | ) | 3,885 | 20,420 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
Table of Contents
LLC GEOILBENT
STATEMENTS OF CASHFLOWS
(expressed in thousand of US Dollars)
Year ended | Year ended | Year ended | ||||||||||
30 September 2003 | 30 September 2002 | 30 September 2001 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | (84,884 | ) | 3,885 | 20,420 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depletion and amortization expense | 18,278 | 27,168 | 14,918 | |||||||||
Impairment of oil and gas properties | 95,000 | — | — | |||||||||
Amortization of financing costs | 130 | 520 | 520 | |||||||||
Exchange gain | (1,566 | ) | (2,053 | ) | (781 | ) | ||||||
Deferred tax benefit | (6,659 | ) | (2,502 | ) | — | |||||||
Decrease/(increase) in accounts receivable and advances to suppliers | (631 | ) | 403 | 85 | ||||||||
Decrease/(increase) in inventories | (544 | ) | 6,362 | (4,700 | ) | |||||||
Increase/(decrease) in accounts payable | (9,030 | ) | (3,407 | ) | 11,902 | |||||||
Increase/(decrease) in trade advances | (2,070 | ) | (5,747 | ) | 3,785 | |||||||
Increase/(decrease) in taxes payable | (4,822 | ) | 5,436 | 4,780 | ||||||||
Decrease in other payables and accrued liabilities | (28 | ) | (1,378 | ) | (2,386 | ) | ||||||
Cash provided by operating activities | 3,174 | 28,687 | 48,543 | |||||||||
Cash flow from investing activities | ||||||||||||
Capital expenditures | (13,257 | ) | (26,755 | ) | (39,874 | ) | ||||||
Proceeds on disposal of oil and gas producing properties | 1,023 | 286 | 191 | |||||||||
Disposal/(purchase) of investments | — | 367 | (129 | ) | ||||||||
Net cash used in investing activities | (12,234 | ) | (26,102 | ) | (39,812 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Payment of short-term borrowings from founders | — | — | (717 | ) | ||||||||
Payment of short-terms borrowings | — | (3,000 | ) | (3,845 | ) | |||||||
Proceeds from short-term borrowings | — | — | 6,446 | |||||||||
Proceeds from long-term borrowings from founders | — | 7,500 | — | |||||||||
Payments of long-term borrowings | (550 | ) | (18,200 | ) | (10,455 | ) | ||||||
Proceeds from long-term borrowings | 8,000 | — | — | |||||||||
Decrease in restricted cash | 252 | 8,738 | 2,153 | |||||||||
Net cash provided by (used in) financing activities | 7,702 | (4,962 | ) | (6,418 | ) | |||||||
Effect of foreign exchange on cash balances | 37 | (31 | ) | (37 | ) | |||||||
Net decrease in cash and cash equivalents | (1,321 | ) | (2,408 | ) | 2,276 | |||||||
Cash and cash equivalents, beginning of year | 2,001 | 4,409 | 2,133 | |||||||||
Cash and cash equivalents, end of year | 680 | 2,001 | 4,409 | |||||||||
Supplemental cash flow information | ||||||||||||
Interest paid | 1,977 | 4,862 | 7,609 | |||||||||
Income taxes paid | 2,388 | 2,747 | 6,906 |
The accompanying notes are an integral part of these financial statements.
Table of Contents
LLC GEOILBENT
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(expressed in thousands of US Dollars except as indicated)
Total | ||||||||||||||||
Contributed | Retained earnings | Accumulated other | stockholders' | |||||||||||||
Capital | (accumulated deficit) | comprehensive loss | equity | |||||||||||||
Balance at 30 September 2000 | 82,518 | 37,226 | — | 119,744 | ||||||||||||
Net income and total comprehensive income | — | 20,420 | — | 20,420 | ||||||||||||
Balance at 30 September 2001 | 82,518 | 57,646 | — | 140,164 | ||||||||||||
Net income and total comprehensive income | — | 3,885 | — | 3,885 | ||||||||||||
Balance at 30 September 2002 | 82,518 | 61,531 | — | 144,049 | ||||||||||||
Net loss | — | (84,884 | ) | — | (84,884 | ) | ||||||||||
Cumulative translation adjustment | — | — | (6,202 | ) | (6,202 | ) | ||||||||||
Total comprehensive loss | (91,086 | ) | ||||||||||||||
Balance at 30 September 2003 | 82,518 | (23,353 | ) | (6,202 | ) | 52,963 | ||||||||||
The accompanying notes are an integral part of these financial statements.
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 1: Organization
LLC Geoilbent (the “Company”) is engaged in the development and production of oil and gas in the North Gubkinskoye and South Tarasovskoye fields. These fields are located in the West Siberian region of the Russian Federation, approximately 2,000 miles northeast of Moscow. The Company was established in December 1991 by two Russian oil companies, OAO Purneftegas (“PNG”) and OAO Purneftegasgeologia (“PNGG”), and by Harvest Natural Resources, Inc. (“Harvest”, formerly, Benton Oil and Gas Company) of the United States, which contributed 33%, 33% and 34%, respectively, of the Company’s charter capital, in accordance with the Company’s Foundation Document. In January 2002, PNG and PNGG transferred their stakes in the Company to OAO Minley. In September 2003, Harvest sold its interests in the Company to a company affiliated with OAO YUKOS (“YUKOS”).
Note 2: Basis of Presentation
The Company maintains its accounting records and prepares its statutory financial statements in accordance with the Regulations on Accounting and Reporting of the Russian Federation (“RAR”). The accompanying financial statements have been prepared from these accounting records and adjusted as necessary to comply with accounting principles generally accepted in the United States of America (“US GAAP”). The Company has a year ending 30 September for US GAAP reporting purposes.
In preparing the financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from such estimates.
Certain previously presented amounts have been reclassified to conform to the presentation adopted during the current period. These reclassifications had no impact on previously reported net income or stockholders’ equity.
Reporting and functional currency.The Russian Rouble is the functional currency (primary currency in which business is conducted) for the Company’s operations in the Russian Federation. The Company considers the US dollar as its reporting currency.
In November 2002, the International Practices Task Force concluded that Russia ceased being a highly inflationary economy as of 1 January 2003. As a result of the Task Force conclusion, the Company applied the guidance contained in Emerging Issues Task Force (“EITF”) No. 92-4 and EITF No. 92-8 as of 1 January 2003, which address changes in accounting when an economy ceases to be considered highly inflationary. As a result of the application of the guidance in EITF No. 92-4 and No. 92-8, as of 1 January 2003, the Company recognised a deferred tax liability of USD 8.1 million for temporary differences related to its property, plant and equipment and a corresponding amount as a cumulative translation adjustment as a separate component in stockholders’ equity.
Effective 1 January 2003, the measurement currency of the Company is the Russian Rouble. The transactions and balances in the accompanying financial statements have been translated into US dollars in accordance with the relevant provisions of Statement of Financial Accounting Standards (“SFAS”) No. 52,Foreign Currency Translation(“SFAS No. 52”). Consequently, assets and liabilities are translated at closing exchange rates. The statements of income and cash flows have been translated using monthly average exchange rates. Translation differences resulting from the use of these exchange rates have been included as a component of stockholders equity. The amount of such differences for the period beginning 1 January 2003 through 30 September 2003 was approximately USD 1.9 million. The exchange rates at 30 September 2003, and 30 September 2002, were 30.61 and 31.64, respectively, Russian Roubles to the US dollar.
Prior to 1 January 2003, transactions not already measured in US dollars were remeasured into US dollars in accordance with the relevant provisions of SFAS No. 52 as applied to hyperinflationary economies. Consequently, monetary assets and liabilities were translated at closing exchange rates and non-monetary items were translated at historic exchange rates and adjusted for any impairments. The statements of income and cash flows were translated using monthly average exchange rates. Translation differences resulting from the use of these exchange rates were included in the determination of net income and were included in exchange gains/losses in the accompanying statements of income through 31 December 2002.
1
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 2: Basis of Presentation (continued)
Inflation, exchange restriction and controls.Exchange restrictions and controls exist relating to converting Russian Roubles to other currencies. At present, the Russian Rouble is not a convertible currency outside the Russian Federation. Future movements in the exchange rates between the Russian Rouble and the US dollar will affect the carrying value of the Company’s Russian Rouble denominated assets and liabilities. Such movements may also affect the Company’s ability to realise non-monetary assets represented in US dollars in the accompanying financial statements. Accordingly, any translation of Russian Rouble amounts to US dollars should not be construed as a representation that such Russian Rouble amounts have been, could be, or will in the future be converted into US dollars at the exchange rate shown or at any other exchange rate. At 30 September 2003, the Company was required to sell 25% of its foreign currency receipts within the Russian Federation to the Central Bank for Russian Roubles. Such amounts are subject to certain deductions depending on debt payments on certain hard currency denominated borrowing agreements.
Note 3: Summary of Significant Accounting Policies
Cash and cash equivalents.Cash and cash equivalents include all highly liquid securities with original maturities of three months or less when acquired.
Accounts receivable.Accounts receivable are presented at net realisable value and include value-added and excise taxes which are payable to tax authorities upon collection of such receivables.
Inventories.Crude oil and petroleum products inventories are valued at the lower of cost, using the first-in-first out method, or net realisable value. Materials and supplies inventories are recorded at the lower of average cost or net realisable value.
Property, plant and equipment.The Company follows the full cost method of accounting for oil and gas properties. Under this method, all oil and gas property acquisition, exploration, and development costs including internal costs directly attributable to such activities are capitalized as incurred in the Company’s cost center (full cost pool), which is the Russian Federation. Payroll and other internal costs capitalized include salaries and related fringe benefits paid to employees directly engaged in the acquisition, exploration and development of oil and gas properties as well as all other directly identifiable internal costs associated with these activities. Payroll and other internal costs associated with production operations and general corporate activities are expensed in the period incurred.
The full cost pool, including future development costs, estimated asset retirement obligations, net of prior accumulated depletion, is depleted using the unit-of-production method based upon actual production and estimates of proved reserve quantities. Proceeds from sales of oil and gas properties are credited to the full cost pool with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas.
Pursuant to full cost accounting rules, capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves discounted at 10 percent; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. During 2003, the Company’s capitalized costs exceeded the ceiling limit resulting in an impairment of oil and gas properties. See Note 9 for additional information.
Pension and post-employment benefits.The Company’s mandatory contributions to the governmental pension scheme are expensed when incurred.
Revenue recognition.Revenue from the sale of crude oil and gas condensate are recognized when dispatched to customers and title has transferred.
2
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 3: Summary of Significant Accounting Policies (continued)
Income taxes.Deferred income tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred income tax assets and liabilities are measured using enacted tax rates in the years in which these temporary differences are expected to reverse. Valuation allowances are provided for deferred income tax assets when management believes it is more likely than not that the assets will not be realized.
Change in accounting principle. Effective 1 October 2002, the Company adopted Statement of Financial Accounting Standards No. 143,Accounting for Assets Retirement Obligations(“SFAS No. 143”). SFAS No. 143 requires entities to record the fair value of its asset retirement obligation as a liability in the period in which they are incurred and a corresponding increase in the carrying amount of the related long-lived asset.
SFAS No. 143 differs in several respects from the previous accounting method employed by the Company. Prior to the adoption of SFAS No. 143, the Company included estimated undiscounted asset retirement costs in its calculation for determining depletion expense. Under SFAS 143, the Company recognizes a liability for the fair value of an asset retirement obligation (“ARO”) in the period in which it is incurred, and capitalizes the associated asset retirement cost. In periods subsequent to initial measurement, the Company recognizes period-to-period changes in the liability for an ARO resulting from a) the passage of time and b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Company’s asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities.
The cumulative effect of this change in accounting principle was a reduction in net income of USD 310 thousand, net of tax, which was recorded in the statement of income for the year ended 30 September 2003. The effect of adoption resulted in increases in property, plant and equipment and long-term liabilities of USD 303 thousand and USD 613 thousand as of 1 October 2002, respectively.
The following table provides pro forma information as if SFAS No. 143 has been applied in previous periods:
Year ended | Year ended | Year ended | ||||||||||
Thousands of US dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Asset retirement obligations as of the beginning of the period | 613 | 483 | 358 | |||||||||
Liabilities incurred for the period | 25 | 56 | 79 | |||||||||
Accretion expense | 96 | 75 | 45 | |||||||||
Asset retirement obligations as of the end of the period | 734 | 613 | 483 | |||||||||
Net income for the period as reported | 3,885 | 20,420 | ||||||||||
Pro-forma net income | 3,777 | 20,358 | ||||||||||
Recent accounting standards.FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities(“FIN 46R”), identifies certain off-balance sheet arrangements that meet the definition of a variable interest entity (“VIE”). FIN 46R requires consolidation of VIEs by primary beneficiaries and requires more extensive disclosures. FIN 46R is applicable to any VIE created after 1 February 2003. The Company does not expect the adoption of this interpretation will have any material effect on its financial position or results of operations.
3
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 4: Going Concern
During the years ended 30 September 2003 and 2002 the Company took steps to reduce its working capital deficit. These included the repayment of debt, the receipt of subordinated long-term loans from the Company’s stockholders and the repayment of accounts payable, primarily from additional borrowings from the European Bank for Reconstruction and Development (“EBRD”). However, as at 30 September 2003, and 30 September 2002, the current liabilities of the Company exceeded its current assets by USD 35,772 thousand and USD 35,266 thousand, respectively. Included in current liabilities, as at 30 September 2003 and 30 September 2002, are loans repayable to the EBRD of USD 30,000 thousand and USD 22,000 thousand, respectively. This debt has been reclassified as current because the Company is not in compliance with a loan facility covenant related to the required implementation of a new management information system, required by 1 May 2003. The loan facility also requires the Company to maintain a minimum working capital ratio. The Company was not in compliance with the required working capital ratio as of the interim reporting dates during the year ended 30 September 2003, however, it met the minimum required working capital ratio as of 30 September 2003 (see also Note 10). Under the terms of the loan facility the EBRD may declare the loan to be in default and can accelerate the maturity. There can be no assurance that the EBRD will not demand repayment of the loan.
During the year ended 30 September 2003, a substantial portion of the Company’s cash flow was utilised to pay accounts and taxes payable resulting in a reduction in capital expenditures for the year. In order to maintain or increase proved oil and gas reserves, the Company must make substantial capital expenditures in 2004 and subsequently. The Company’s cash flow from operations is dependent on the level of oil prices, which are historically volatile and are significantly impacted by the proportion of production that the Company can sell on the export market. Historically, the Company has supplemented its cash flow from operations with additional borrowings or equity capital and may continue to do so. Should oil prices decline for a prolonged period and should the Company not have access to additional capital, the Company would need to reduce its capital expenditures, which could limit its ability to maintain or increase production and, in turn, meet its debt service requirements. Asset sales and financing are restricted under the terms of debt agreements.
Management plans to further address the Company’s working capital deficit by resolving issues with the EBRD relating to its non compliance with the loan covenants and by reducing certain capital expenditures and funding its 2004 cash requirements with cash flows from existing producing properties and its development drilling program. Management is in the process of implementing the required management information system and expects to have implemented this system during the 2004 reporting year. The accompanying financial statements do not include any adjustments that might result if the Company were unable to continue as a going concern.
Note 5: Cash and Cash Equivalents
Included in cash and cash equivalents as at 30 September 2003, and 2002, respectively, are Russian Rouble denominated amounts totaling RR 19.7 million (USD 643 thousand) and RR 18.3 million (USD 578 thousand).
Restricted cash consists of deposits with lending institutions to pay interest and principal as discussed in Note 10. As at 30 September 2003, the amount of restricted cash was USD 1,217 thousand (2002: USD 1,469 thousand). These accounts are maintained in US Dollar denominated accounts located outside Russia.
Note 6: Financial Instruments
Fair values.The estimated fair values of financial instruments are determined with reference to various market information and other valuation methodologies as considered appropriate, however considerable judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market transaction. The methods and assumptions used to estimate fair value of each class of financial instrument are presented below.
Cash and cash equivalents, accounts receivable and accounts payable.The carrying amount of these items are a reasonable approximation of their fair value.
Short-term and long-term debt. Loan arrangements have both fixed and variable interest rates that reflect the currently available terms and conditions for similar debt. The carrying value of this debt is a reasonable approximation of its fair value.
4
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 6: Financial Instruments (continued)
Credit risk. A significant portion of the Company’s accounts receivable are from domestic and foreign customers, and advances are made to domestic suppliers. Although collection of these amounts could be influenced by economic factors affecting these entities, management believes there is no significant risk of loss to the Company beyond the provisions already recorded, provided that the economic situation in the Russian Federation does not deteriorate (Note 16).
Note 7: Accounts Receivable and Advances to Suppliers
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
Trade accounts receivable | 1,531 | 1,387 | ||||||
Recoverable value-added tax | 4,227 | 3,515 | ||||||
Advances to suppliers | 1,286 | 1,193 | ||||||
Advances to customs | 117 | 137 | ||||||
Other receivables | — | 76 | ||||||
Total accounts receivable and advances to suppliers | 7,161 | 6,308 | ||||||
Accounts receivables are presented net of an allowance for doubtful accounts of USD 147 thousand and USD 70 thousand at 30 September 2003 and 2002, respectively.
Note 8: Inventories
Thousands of US Dollars | 30 September 2003 | 30 September 2002 | ||||||
Materials and supplies | 7,442 | 6,905 | ||||||
Crude oil | 576 | 296 | ||||||
Total inventories | 8,018 | 7,201 | ||||||
Note 9: Oil and Gas Producing Properties
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
Oil and gas producing properties, cost | 302,214 | 278,459 | ||||||
Accumulated depletion and impairment | (212,745 | ) | (92,470 | ) | ||||
Oil and gas producing properties, net book value | 89,469 | 185,989 | ||||||
The Company’s oil and gas fields are situated on land belonging to the Government of the Russian Federation. The Company obtained licenses from the local authorities and pays unified production taxes to explore and produce oil and gas from these fields. Licenses will expire in September 2018 for the North Gubkinskoye field, and in March 2023 for the South Tarasovskoye field. However, under Paragraph 4 of the Russian Federal Law 20-FZ, dated 2 January 2000, the licenses may be extended over the economic life of the lease at the Company’s option. Management intends to extend such licenses for properties that are expected to produce subsequent to their expiry dates. Estimates of proved reserves extending past 2018 represent approximately 9 percent of total proved reserves.
At 31 December 2002 and at 31 March 2003, the Company’s capitalized costs for oil and gas producing properties exceeded its full cost accounting ceiling limitation. The Company’s ceiling limitation decreased primarily because of a decline in the Company’s average realized price it received for its oil at those dates. As a result the Company recorded impairments of its oil and gas producing properties in the aggregate amount of USD 95 million (excluding a deferred income tax benefit of USD 7.6 million); this impairment was recorded as an impairment expense in the statement of income for the year ended 30 September 2003.
5
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 10: Long-term Debt
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
EBRD | 30,000 | 22,000 | ||||||
IMB | — | 550 | ||||||
OAO Minley | 5,000 | 5,000 | ||||||
YUKOS | 2,500 | — | ||||||
Harvest Natural Resources | — | 2,500 | ||||||
Less: current portion | (37,500 | ) | (22,550 | ) | ||||
Total long-term debt | — | 7,500 | ||||||
EBRD loan.At 30 September 2003, the outstanding balance of loans with the EBRD totaled USD 30 million. On 23 September 2002, the Company signed an amended loan agreement with the EBRD that increased the maximum amount that could be drawn down under the facility with the EBRD to USD 50 million. Under the loan agreement, the use of loan proceeds is restricted to the repayment of accounts payable and development of oil and gas reserves. This loan facility is to be repaid such that the loan balance may not exceed set amounts at certain dates in the future. The interest rate under the loan agreement is linked to the London interbank offer rate (“LIBOR”) and an agreed upon margin. The Company must hold as restricted cash a) principal and interest to be paid at the next repayment date and b) 30 percent of the total of principal and interest to be paid at the following repayment date.
LIBOR interest rates ranged from 1.12 percent to 1.84 percent in 2003 (2002: 1.84 percent to 3.5 percent, 2001: 3.5 percent to 6.94 percent). The annual weighted average interest rates on these loans varied between 5.09 percent and 5.43 percent for the year ended 30 September 2003 (2002: 8.59 percent and 11.71 percent, 2001: 14.93 percent to 15.17 percent). The loan is collaterized by the Company’s immovable assets and crude oil export contracts.
The EBRD loan agreement includes certain covenants which include, among other things, the maintenance of financial ratios. If the Company fails to meet these requirements for two consecutive quarters it will result in an event of default whereby the EBRD may, at its option, demand payment of the outstanding principal and interest. As discussed in Note 4, as of 31 December 2002, 31 March 2003 and 30 June 2003 the Company was in violation of the minimum working capital ratio covenant. As of 30 September 2003, the minimum working capital ratio as defined in the loan facility exceeds the covenant requirements. Additionally, the Company has not completed its implementation of a management information system as required under the terms of the loan. Due to these loan convenant violations, the Company has classified the EBRD debt as a current liability.
In addition, while in default of EBRD covenants, the Company may not declare or pay any dividend, make any distribution on its charter capital, purchase, or redeem any shares of the charter capital of the Company, nor make any payment of principal or interest on subordinated shareholder loans or make any other payment or distribution to any stockholder or any affiliate of any stockholder.
As part of the sale of Harvest’s interest in the Company to YUKOS, as described in Note 1, YUKOS assumed Harvest’s stockholder loan.
Loans from OAO Minley and YUKOS are subordinated, unsecured and repayable commencing from January 2004. Interest rates are 2 percent for the Minley loan, and LIBOR for the YUKOS loan, to January 2004. Repayment of the subordinated loans are subject to approval from the EBRD. If approval is not received, the terms of the loan agreements are not considered to be violated. After January 2004, the interest rates on the YUKOS loan increases to 8 percent for the remainder of 2004, and 12 percent from 2005 onwards.
6
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 10: Long-term Debt (continued)
While the Company remains in violation of its EBRD loan convenants, further borrowings under the facility are at the sole discretion of the EBRD. The maximum loan facility available under the terms of the EBRD loan and the related aggregate maturities are as follows:
Maximum loan facility | ||||
Thousands of US dollars | outstanding | |||
30 September 2003 to 27 January 2004 | 50,000 | |||
27 January 2004 to 27 July 2004 | 41,667 | |||
27 July 2004 to 27 January 2005 | 33,333 | |||
27 January 2005 to 27 July 2005 | 25,000 | |||
27 July 2005 to 27 January 2006 | 16,667 | |||
27 January 2006 to 27 January 2007 | 8,333 | |||
Thereafter | — | |||
The aggregate maturities of long-term debt outstanding at 30 September 2003 are as follows:
Thousands of US dollars | ||||
Year ended 30 September 2004 | 7,500 | |||
Year ended 30 September 2005 | 5,000 | |||
Year ended 30 September 2006 | 8,333 | |||
Year ended 30 September 2007 | 8,333 | |||
Year ended 30 September 2008 | 8,333 | |||
Note 11: Taxes Payable
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
Value added tax | — | 1,445 | ||||||
Income tax | 3,777 | 1,176 | ||||||
Royalty | — | 896 | ||||||
Mineral restoration tax | — | 152 | ||||||
Road users tax | — | 642 | ||||||
Unified production tax | 1,552 | 6,703 | ||||||
Property taxes | 586 | 1,121 | ||||||
Penalties and interest | 1,784 | 219 | ||||||
Other taxes | 159 | — | ||||||
Total taxes payable | 7,858 | 12,354 | ||||||
7
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 12: Contributed Capital
Capital contributions are as follows:
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
OAO Minley | 54,733 | 54,733 | ||||||
YUKOS | 27,785 | — | ||||||
Harvest Natural Resources | — | 27,785 | ||||||
Total contributed capital | 82,518 | 82,518 | ||||||
All capital contributions have been made since inception in accordance with the Company’s Foundation Document.
Reserves available for distribution to shareholders are based on the statutory accounting reports of the Company, which are prepared in accordance with Regulations on Accounting and Reporting of the Russian Federation and differ from US GAAP. Russian legislation identifies the basis of distribution as net income. For 2002, the current year statutory net income for the Company as reported in the annual statutory accounting reports was RR 772 million (2001: RR 551 million). However, current legislation and other statutory laws and regulations dealing with distribution rights are open to legal interpretation and, consequently, actual distributable reserves may differ from the amount disclosed. The Company cannot distribute capital while in default of its EBRD loan facility obligations (Note 10).
Note 13: Revenues
Revenues for the years ended 30 September 2003, 2002 and 2001, consisted of the following:
Thousand of US dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Crude oil — export (Europe and CIS) | 51,949 | 47,751 | 83,889 | |||||||||
Crude oil — domestic | 28,599 | 40,778 | 10,900 | |||||||||
Gas condensate — domestic | 1,176 | — | — | |||||||||
Refined products — domestic | — | 2,764 | 6,231 | |||||||||
Other operating revenues | 583 | 305 | 139 | |||||||||
Total sales and other operating revenues | 82,307 | 91,598 | 101,159 | |||||||||
Note 14: Taxes
Presented below is a reconciliation between the provision for income taxes and taxes determined by applying the statutory tax rate as applied in the Russian Federation to income before income taxes.
Thousand of US dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Income (loss) before income taxes | (87,691 | ) | 4,187 | 27,171 | ||||||||
Theoretical income tax expense (benefit) at statutory rate (24% in 2002 and 2003; 35% in 2001) | (21,046 | ) | 1,005 | 9,509 | ||||||||
Increase (reduction) due to: | ||||||||||||
Change in valuation allowance | 17,192 | 80 | 1,810 | |||||||||
Non-deductible expenses | 1,860 | 2,894 | 2,693 | |||||||||
Investment tax credits | (593 | ) | (5,348 | ) | (6,821 | ) | ||||||
Change in statutory tax rate | — | 595 | (750 | ) | ||||||||
Tax penalties and interest | 442 | 1,135 | 517 | |||||||||
Other | (972 | ) | (59 | ) | (207 | ) | ||||||
Total income tax expense (benefit) | (3,117 | ) | 302 | 6,751 | ||||||||
8
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 14: Taxes (continued)
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for statutory tax purposes. Net deferred tax assets are comprised of the following, at 30 September 2003 and 2002:
Thousand of US dollars | 30 September 2003 | 30 September 2002 | ||||||
Inventories | (313 | ) | 93 | |||||
Accounts receivable | 121 | 258 | ||||||
Accounts payable and accrued liabilities | 1,205 | 430 | ||||||
Losses carried forward | 966 | 2,502 | ||||||
Property, plant and equipment | 4,989 | 4,810 | ||||||
Total deferred tax assets | 6,968 | 8,093 | ||||||
Less: Valuation allowance | (6,002 | ) | (5,591 | ) | ||||
Net deferred tax asset | 966 | 2,502 | ||||||
Losses carried forward represent those losses for tax purposes which, according to legislation, the Company is permitted to offset against future taxable earnings in the periods up to 2008, and is subject to limitations of no more than 30% of the Company’s tax liabilities for the tax reporting period.
As at 30 September 2003, management of the Company have assessed the recoverability of the Company’s deferred tax assets and believe that it will be able to realise the tax losses carried forward. Accordingly, the Company has provided a valuation allowance as at 30 September 2003 and 2002, of USD 6,002 thousand and USD 5,591 thousand, respectively, against the remaining deferred tax assets.
Principal movements in the valuation allowance for deferred income tax assets (“DTA”) during the year ended 30 September 2003 are as follows:
Millions of US dollars | ||||
Valuation allowance, beginning of period | 5.6 | |||
Increase related to DTA resulting from the December ceiling test writedown | 12.0 | |||
Net other increase in DTA movements during the December quarter | 1.0 | |||
Decrease due to application of EITF No. 92-4 and No. 92-8 effective 1 January 2003 | (16.8 | ) | ||
Increase relating to DTA resulting from the March ceiling test writedown | 3.2 | |||
Net other increase in DTA movements | 1.0 | |||
Valuation allowance, end of period | 6.0 | |||
As a result of the application of EITF No. 92-4 and No. 92-8, the valuation allowance related to property, plant and equipment was reduced to zero and a deferred tax liability of USD 8.1 million recorded on 1 January 2003 (Note 2), with no effect on income as the adjustment was recorded as part of the currency translation adjustment as of 1 January 2003. A subsequent ceiling test writedown in March resulted in the recognition of an additional deferred tax asset of USD 10.8 million of which USD 7.6 million and USD 3.2 million were credited as a deferred tax benefit and an increase to the DTA valuation allowance, respectively.
Deferred income tax assets are classified as follows:
Thousands of US dollars | 30 September 2003 | 30 September 2002 | ||||||
Deferred income tax, current | 966 | 1,806 | ||||||
Deferred income tax, non-current | — | 696 | ||||||
Total net deferred tax asset | 966 | 2,502 | ||||||
9
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 14: Taxes (continued)
Taxes other than income tax.The Company is subject to a number of taxes other than on income which are detailed below.
Thousands of US dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Export duties | 8,464 | 5,376 | 10,922 | |||||||||
Excise tax | — | 535 | 1,548 | |||||||||
Royalty | — | 2,254 | 4,867 | |||||||||
Mineral restoration tax | 377 | 885 | 4,596 | |||||||||
Road users tax | 203 | 860 | 1,427 | |||||||||
Unified production tax | 19,056 | 14,221 | — | |||||||||
Property taxes | 2,263 | 1,994 | 1,424 | |||||||||
Taxes recovery | (7,017 | ) | — | — | ||||||||
Other taxes | 2,279 | 1,532 | 1,227 | |||||||||
Total taxes other than income tax | 25,625 | 27,657 | 26,011 | |||||||||
Beginning 1 January 2002, mineral restoration tax, royalty tax and excise tax on crude oil production were abolished and replaced by the unified natural resources production tax. From 1 January 2004 through 31 December 2006, the base rate for the unified natural resources production tax is set at RR 347 per metric ton of crude oil produced, and is to be adjusted depending on the market price of Urals blend and the RR/USD exchange rate. The tax becomes nil if the Urals blend price falls to or below USD 8.00 per barrel. From 1 January 2007, the unified natural resources production tax rate is set by law at 16.5 percent of crude oil revenues recognized by the Company based on Tax Regulations of the Russian Federation.
During the year ended 30 September 2003, the Company pursued its claim of overpayment of mineral restoration taxes (MRT) paid during the period from 1999 to 2001 of approximately RR 211 million (USD 7.0 million), plus approximately RR 4 million (USD 0.1 million) in related penalties paid. During the year, the regional courts ruled in favour of the Company and, accordingly, the Company and the tax authorities agreed to offset the amounts awarded against the Company’s unified production taxes payable.
Note 15: Related Party Transactions
As of 30 September 2003 and 2002, the Company had the following balances with its stockholders. These balances are included in the balance sheet within accounts receivable, accounts payable and long-term debt as appropriate.
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | ||||||
Accounts receivable | ||||||||
Purneftegasgeologia and affiliated entities | 19 | 63 | ||||||
Accounts payable | ||||||||
Purneftegasgeologia and affiliated entities | 183 | 574 | ||||||
YUKOS | 2,111 | — | ||||||
Harvest Natural Resources | — | 3,354 | ||||||
Purneftegas and affiliated entities | — | 22 | ||||||
Long-term debt | ||||||||
Harvest Natural Resources | — | 2,500 | ||||||
YUKOS | 2,500 | — | ||||||
Minley | 5,000 | 5,000 |
10
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 15: Related Party Transactions (continued)
Harvest Natural Resources/YUKOS.During 2003 and 2002, Harvest provided insurance on behalf of the Company and personnel services to the Company for a total value of approximately USD 1,087 thousand (2002: USD 1,752 thousand). The remaining portion of the accounts payable balance outstanding relates to services provided in prior reporting periods. As part of the sale of Harvest’s interest in the Company to YUKOS, all balances owing by the Company to Harvest were transferred to YUKOS.
Purneftegasgeologia.During 2003, 2002 and 2001, Purneftegasgeologia and affiliated entities provided services to the Company for a total value of approximately nil, USD 2,414 thousand and USD 4,193 thousand, respectively. Services consisted of drilling, well maintenance and other related work. The Company sold crude oil for a total value of USD 19 thousand and USD 24 thousand during 2003 and 2002, respectively, and materials during 2003 and 2002 for a total value of approximately USD 726 thousand and USD 613 thousand, respectively.
Purneftegas.During 2002 and 2001, Purneftegas and affiliated companies provided well maintenance services and supplies to the Company for a total of approximately USD 312 thousand and USD 248 thousand, respectively. The Company sold materials to Purneftegas and affiliated entities during 2002 for a total value of approximately USD 260 thousand.
Minley.During 2002, the Company paid USD 4.9 million to Minley in settlement at face value of promissory notes originally issued to the Company’s suppliers and contractors.
During 2003, interest expense on shareholder loans of USD 99 thousand was incurred with respect to Minley and USD 49 thousand was incurred with respect to Harvest. At 30 September 2003 interest payable to Minley totalled USD 21 thousand (2002: USD 21 thousand) and interest payable to Harvest was USD 65 thousand (2002: USD 14 thousand).
Note 16: Commitments and Contingent Liabilities
Economic and operating environment in the Russian Federation.Whilst there have been improvements in the economic situation in the Russian Federation in recent years, the country continues to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible in most countries outside of the Russian Federation, restrictive currency controls, and relatively high inflation.
The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory, and political developments.
Taxation.Russian tax legislation is subject to varying interpretations and changes occurring frequently, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Company may not coincide with that of management. As a result, the tax authorities may challenge transactions and the Company may be assessed additional taxes, penalties and interest, which may be significant. The tax periods remain open to review by the tax and customs authorities for three years. The Company cannot predict the ultimate amount of additional assessments, if any, and the timing of their related settlements with certainty, but expects that additional liabilities, if any, arising will not have a significant effect on the accompanying financial statements.
Environmental matters.Environmental regulations and their enforcement are continually being considered by government authorities and the Company periodically evaluates its obligations related thereto. As obligations are determined, they are provided for over the estimated remaining lives of the related oil and gas reserves, or recognized immediately, depending on their nature. The existence of environmental liabilities under proposed or any future legislation, or as a result of stricter enforcement of existing legislation, cannot reasonably be estimated. Under existing legislation, management believes, there are no liabilities that would have a material adverse effect on the financial position, operating results or liquidity of the Company, and that have not been accrued in the financial statements.
11
Table of Contents
LLC GEOILBENT
NOTES TO THE FINANCIAL STATEMENTS
(expressed in US Dollars except as indicated)
Note 16: Commitments and Contingent Liabilities (continued)
Oilfield licenses.The Company is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its oilfield licenses. Management of the Company correspond with governmental authorities to agree on remedial actions necessary to resolve any findings resulting from these reviews. Failure to comply with the terms of a license could result in fines, penalties or license limitation, suspension or revocation. The Company’s management believes any issues of non-compliance will be resolved through negotiations or corrective actions without any materially adverse effect on the Company’s financial position or results of operations.
Legal contingencies.The Company is claiming additional deductions relating to the fiscal periods from 1999 to 2001 amounting to approximately RR 330 million (USD 10.8 million). Management believe these deductions are permitted for companies operating in the northern regions of the Russian Federation and also deductions for certain interest paid during that period. Although the Company was successful in the initial hearing before the courts, the tax authorities have continued to challenge the Company’s position. As at 30 September 2003, the Company has not recorded any benefit relating to the above claims.
The Company is the named defendant in a number of lawsuits as well as the named party in numerous other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a materially adverse effect on the operating results or the financial position of the Company.
Insurance.At 30 September 2003 and 2002, the Company held limited insurance policies in relation to its assets and operations, or in respect of public liability or other insurable risks. Since the absence of insurance alone does not indicate that an asset has been impaired or a liability incurred, no provision has been made in the financial statements for unspecified losses.
12
Table of Contents
LLC GEOILBENT
Supplemental Information on Oil and Natural Gas Producing Activities(unaudited)
(expressed in thousands US Dollars except as indicated)
Supplemental Information on Oil and Natural Gas Producing Activities(unaudited)
In accordance with Statement of Financial Accounting Standards No. 69, “Disclosures About Oil and Gas Producing Activities” (“SFAS No. 69”), this section provides supplemental information on the Company’s 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.
TABLE I — Total costs incurred in oil and natural gas acquisition, exploration and development activities:
Year ended | Year ended | Year ended | ||||||||||
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Development costs | 10,217 | 25,290 | 33,774 | |||||||||
Exploration costs | 3,040 | 1,465 | 6,100 | |||||||||
Total costs incurred in oil and natural gas acquisition, exploration, and development activities | 13,257 | 26,755 | 39,874 | |||||||||
TABLE II — Capitalized costs related to oil and natural gas producing activities:
As at | As at | |||||||
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | ||||||
Proved property costs | 302,214 | 277,659 | ||||||
Costs excluded from amortisation | — | 800 | ||||||
Oilfield inventories | 7,442 | 6,905 | ||||||
Less accumulated depletion and impairment | (212,745 | ) | (92,470 | ) | ||||
Total capitalised costs related to oil and natural gas producing activities | 96,911 | 192,894 | ||||||
TABLE III — Results of operations for oil and natural gas producing activities:
In accordance with SFAS 69, results of operations for oil and natural gas producing activities do not include general corporate overhead and monetary effects, nor their associated tax effects. Income tax is based on statutory rates for the year, adjusted for tax deductions, tax credits and allowances.
Year ended | Year ended | Year ended | ||||||||||
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Oil and natural gas sales | 81,987 | 91,291 | 100,768 | |||||||||
Expenses: | ||||||||||||
Operating, selling and distribution expenses and taxes other than on income | 47,319 | 49,713 | 47,302 | |||||||||
Depletion and amortization | 18,278 | 27,168 | 14,918 | |||||||||
Impairment of oil and gas properties | 95,000 | — | — | |||||||||
Income tax expense | 6,098 | 5,750 | 11,006 | |||||||||
Total expenses | 166,695 | 82,631 | 73,226 | |||||||||
Results of operations from oil and natural gas producing activities | (84,708 | ) | 8,660 | 27,542 | ||||||||
13
Table of Contents
LLC GEOILBENT
SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS PRODUCING ACTIVITIES (UNAUDITED)
(expressed in thousands US Dollars except as indicated)
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.
The Company’s oil and gas fields are situated on land belonging to the Government of the Russian Federation. The Company obtained licenses from the local authorities and pays unified production taxes to explore and produce oil and gas from these fields. Licenses will expire in September 2018 for the North Gubkinskoye field, and in March 2023 for the South Tarasovskoye field. However, under Paragraph 4 of the Russian Federal Law 20-FZ, dated 2 January 2000, the licenses may be extended over the economic life of the lease at the Company’s option. Management intends to extend such licenses for properties that are expected to produce subsequent to their expiry dates. Estimates of proved reserves extending past 2018 represent approximately 9 percent of total proved reserves.
The Securities and Exchange Commission 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 and economic changes. The estimates are based on current technology and economic conditions, and the Company considers 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 non producing 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 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 evaluations of the oil and natural gas reserves were prepared by Ryder-Scott Company, independent petroleum engineers.
14
Table of Contents
LLC GEOILBENT
SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS PRODUCING ACTIVITIES (UNAUDITED)
(expressed in thousands US Dollars except as indicated)
Proved reserves-crude oil, | ||||||||||||
condensate and natural gas | Year ended | Year ended | Year ended | |||||||||
liquids (MBbls) | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Proved reserves beginning of year | 74,575 | 87,259 | 95,924 | |||||||||
Revisions of previous estimates | 1,580 | (10,163 | ) | (16,454 | ) | |||||||
Extensions, discoveries and improved recovery | 2,829 | 4,391 | 12,974 | |||||||||
Production | (5,712 | ) | (6,912 | ) | (5,185 | ) | ||||||
Proved reserves, end of year | 73,272 | 74,575 | 87,259 | |||||||||
Proved developed reserves | 35,344 | 38,824 | 46,052 | |||||||||
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.
Year ended | Year ended | Year ended | ||||||||||
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | 30 September 20 | |||||||||
Future cash inflow | 1,416,343 | 1,381,874 | 1,277,494 | |||||||||
Future production costs | (676,419 | ) | (599,277 | ) | (739,221 | ) | ||||||
Future development costs | (107,841 | ) | (119,725 | ) | (108,882 | ) | ||||||
Future net revenue before income taxes | 632,083 | 662,872 | 429,391 | |||||||||
10% annual discount for estimated timing of cash flows | (293,965 | ) | (318,079 | ) | (190,788 | ) | ||||||
Discounted future net cash flows before income taxes | 338,118 | 344,793 | 238,603 | |||||||||
Future income taxes, discounted at 10% per annum | (68,126 | ) | (71,442 | ) | (30,815 | ) | ||||||
Standardized measure of discounted future net cash flows | 269,992 | 273,351 | 207,788 | |||||||||
15
Table of Contents
LLC GEOILBENT
SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS PRODUCING ACTIVITIES (UNAUDITED)
(expressed in thousands US Dollars except as indicated)
TABLE VI — Changes in the standardized measure of discounted future net cash flows from proved reserves
Year ended | Year ended | Year ended | ||||||||||
Thousand of US Dollars | 30 September 2003 | 30 September 2002 | 30 September 2001 | |||||||||
Present value at beginning of period | 273,351 | 207,788 | 337,426 | |||||||||
Sales of oil and natural gas, net of related costs | (60,030 | ) | (69,541 | ) | (54,015 | ) | ||||||
Revisions to estimates of proved reserves: | ||||||||||||
Net changes in prices, development and production costs | (16,242 | ) | 225,132 | (107,356 | ) | |||||||
Quantities | 9,346 | (29,432 | ) | (71,709 | ) | |||||||
Extensions, discoveries and improved recovery, net of future costs | 3,663 | 5,974 | 55,197 | |||||||||
Accretion of discount | 34,479 | 23,862 | 41,224 | |||||||||
Net change of income taxes | 3,316 | 3,367 | 43,994 | |||||||||
Development costs incurred | 13,257 | 26,468 | 37,953 | |||||||||
Changes in timing and other | 8,852 | (120,267 | ) | (74,926 | ) | |||||||
Present value at end of period | 269,992 | 273,351 | 207,788 | |||||||||
16
Table of Contents
3.1 | Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762.) | |
3.2 | Amended and Restated Bylaws as of May 19, 2005. (Incorporated by reference to Exhibit 3.2 to our Form 10-Q filed on April 29, 2005, 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).) | |
Table of Contents
10.2 | Note Payable Agreement dated March 8, 2001 between Harvest Vinccler, C.A. and Banco Mercantil, C.A. related to a note in the principal amount of $6,000,000 with interest at LIBOR plus five percent, for financing of Tucupita Pipeline. (Incorporated by reference to Exhibit 10.24 to our Form 10-Q, filed on May 15, 2001, File No. 1-10762.) | |
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.). | |
10.4 | Sale and Purchase Agreement dated February 27, 2002 between Benton Oil and Gas Company and Sequential Holdings Russian Investors Limited regarding the sale of Benton Oil and Gas Company’s 68 percent interest in Arctic Gas Company. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on March 28, 2002, 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 | Bank Loan Agreement between Banco Mercantil, C.A. and Harvest Vinccler C.A. dated October 1, 2002. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | |
10.8 | Guaranty issued by Harvest Natural Resources, Inc. dated September 26, 2002. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | |
10.9† | Employment Agreement dated August 1, 2002 between Harvest Natural Resources, Inc. and Kurt A. Nelson. (Incorporated by reference to Exhibit 10.13 to our Form 10-Q filed on November 8, 2002, File No. 1-10762.) | |
10.10 | Sale and Purchase Agreement dated September 26, 2003, between Harvest Natural Resources, Inc. and Yukos Operational Holding Limited regarding the sale of our 34 percent minority equity investment in LLC Geoilbent. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 10, 2003, File No. 1-10762.) | |
10.11† | 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).) | |
10.12† | 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.) | |
10.13† | 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.) | |
10.14† | 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.) | |
10.15† | 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.) | |
10.16 | 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.) |
Table of Contents
10.17† | 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.) | ||
10.18† | 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.) | ||
10.19† | 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.) | ||
10.20† | 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.) | ||
10.21† | 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.) | ||
10.22† | Separation Agreement dated September 30, 2005, between Harvest Natural Resources, Inc. and Dr. Peter J. Hill. (Incorporated by reference to Exhibit 10.7 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.23† | Consulting Agreement dated October 1, 2005, between Harvest Natural Resources, Inc. and Dr. Peter J. Hill. (Incorporated by reference to Exhibit 10.8 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.) | ||
10.24† | Stock Options Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. | ||
10.25† | Stock Options Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. | ||
10.26† | Stock Options Agreement dated September 26, 2005 between Harvest Natural Resources, Inc. and Byron A. Dunn. | ||
21.1 | List of subsidiaries. | ||
23.1 | Consent of PricewaterhouseCoopers LLP — Houston | ||
23.2 | Consent of ZAO PricewaterhouseCoopers Audit — Moscow | ||
23.3 | 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. |