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Executives

Keith L. Head – Vice President, General Counsel and Corporate Secretary

James A. Edmiston – President and Chief Executive Officer

Stephen C. Haynes –Vice President, Chief Financial Officer and Treasurer

Analysts

Andrew Michael Wallach – Cumberland Associates LLC

Tim Jenkins – Dolphin Investment Advisors, Inc.

Harvest Natural Resources, Inc. (HNR) Q4 2012 Earnings Call May 3, 2013 11:00 AM ET

Operator

Good day everyone, welcome to the Harvest Natural Resources Fourth Quarter and Year End 2012 Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) As a remainder this conference is being recorded.

I will now turn the call over to the Vice President and General Counsel for Harvest Natural Resources, Mr. Keith Head. Please go ahead.

Keith L. Head

Thank you. Good morning and welcome to Harvest Natural Resources 2012 fourth quarter and year end results conference call. This morning our press release was broadcasted to Company’s fax and email list. If you would like to be on one of those lists or you did not receive yours due to a technical difficulty, please call our office at 281-899-5700.

In a few hours, a replay of today’s call will be available in the Investor Relations portion of our website at www.harvestnr.com. Additionally, a telephonic replay will be available this afternoon by dialing 719-457-0820, pass code 8306810.

This conference call will contain various forward-looking statements and information including management’s expectations regarding financial, operating and other results. These statements are based on management’s beliefs, as well as assumptions made by and information currently available to the management.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Actual results may differ materially from the Company’s expectations due to changes in operating performance, project or drilling schedules, oil and gas prices, as well as other technical, political and economic factors.

Additional detailed information concerning a number of factors that could cause actual results to differ materially from today’s information is readily available in the Company’s SEC filings under the heading Risk Factors and disclosure regarding our reserves. Investors are urged to consider closely the disclosure in our Form 10-K, which is available from the SEC or on our website.

At this time, I would like to turn the call over to James Edmiston, Harvest Natural Resources’ President and Chief Executive Officer.

James A. Edmiston

Thanks Keith, and good morning everyone, thanks for joining us today. I hope you got a chance to review the earnings release this morning. I’m going through an operations and business summary, and then Steve will walk you through the financials for the fourth quarter and year and then I’ll follow up with some comments and we’ll open up for questions.

Let’s start with Petrodelta, Petrodelta delivered about 3.4 million barrels of oil or 36,600 barrels of oil per day in the fourth quarter of 2012, at about 12% above the same quarter last year, but 4% below the third quarter of 2012. First time in a long time that productions has been down albeit slightly quarter-to-quarter.

I’m going to more detail on that in a moment. For the year Petrodelta delivered 13.2 million barrels of oil versus 11.4 million barrels for the prior year, an increase of 16% year-on-year, current productions running about 38,000 barrels of oil a day. In spite of the production growth of the year Petrodelta again fail to fully execute its capital program in spite of cash from operations of about $250 million CapEx for the year was about $184 million compared with about $140 million in the prior year.

As we pointed out before the business is generating more than enough cash from operations to fully fund the much more aggressive program. However, PDVSA’s return of cash to Petrodelta has been substantially less than what has been earned as well as what is required to execute the capital program. The accounts payable rose from $127 million, at year-end 2011 to $209 million at year-end 2012. Further as this debt to contractors has risen work delays become a bit chronic and the cost for services of those contractors provide has increased as the payment delays are build into the cost structure. Clearly this type of situation is not sustainable over the long-term and we’re working actively with better ways to remedy the situation.

It’s probably clear that I am disappointed with Petrodelta’s 2012 performance at this point. However, I think we need to consider what grow the under performance and more importantly, can it be improved that’s the key question. Before I go into more detail, let me say unequivocally that the assets in the ground have never disappointed. These are world class oilfields that technically speaking continue to exceed our expectations. The oil is there. So what do we have to do to improve. First we got to restore capital efficiency to the business.

The 2012 drilling performance was disappointing in terms of both speed and cost, even though productivity at the wells have consistently exceeded expectations. Well additions are key to both our production growth and reserve growth.

In 2012, Petrodelta completed only 12 producing wells three less than in 2011. Furthermore rig days per well have risen from an average of 20 days per well in 2010 to 37 days in 2011 and 52 days in 2012. Along with that well cost have risen from an average of $2.4 million in 2010 to around $4.5 million in 2012. More than anything else rig days required to drive the cost for each of those wells. We have to get back in the range of 20 days per well and since we’ve already done that before, I know we can do it again. I am sure this is going to be an area of focus for 2013.

Secondly, we’ve got to get the infrastructure in the field to allow for higher produced volumes. As you read in the 10-K and the press release, there continues to be progress in this area although it’s slow. The biggest additions to operating cost in the last couple of years have been associated with trucking the significant quantities with crude being developed in Isleño in El Salto where no prior infrastructure existed.

El Salto by the way is up to about 20,000 barrels a day now. The pay out from improving and expanding the infrastructure is outstanding based on just the cost reductions alone. And number three, Petrodelta must be allowed to invest its cash profit in growing the business. Petrodelta significantly under spend its budget and cash from operations for the last three years. In order to execute its growth plan the business must have reliable access to fund it earns in order to plan and performance activities without delay, interruption, and in efficiency.

Petrodelta is a solid profitable business, we’ve produced almost $1.3 billion in revenue in 2012. In 2012, Petrodelta paid $423 million in royalties and $291 million in Windfall profits tax to the Venezuelan government. In addition to another $127 million in cash taxes, that totaled $841 million or about 65% of revenues not including PDVSA 60% share profit.

I would love nothing more than to see the Government of Venezuela earnings from Petrodelta double and triple. The only way to make that happen is to allow the business to fully utilize its earnings to grow the business in a planned and cost efficient manner. If Petrodelta reinvest its projected 2013 earnings and production growth and does so with the drilling cost efficiency it accomplished in 2010. I believe Venezuela share of revenues this year alone will exceed $1 billion.

So with all that said, I think we understand what drove 2012’s under performance and more importantly I think we know that Petrodelta can turn it around. They performed at a much higher level before and I’m certain that they can do it again. And in doing so Petrodelta can provide much higher and more reliable returns to its stakeholders most importantly the Government of Venezuela.

I don’t plan to go any details on the reserve report, I think the disclosures are fairly detailed as since the reserves reporting continues to confirm our bullish technical view of the volumes although at a lower recovery factor than we’ve in our own internal deal. We saw some proved undeveloped reserves move to probable due to the SEC’s five year rule. There is no technical basis for the certainty of the reserve to be reduced. Simply the five year rule, policy artifact, of the actual rules with no geoscience or engineering basis. As our disclosure says, we believe these reserves will be accessed and moved into the proved category in the near-term.

Moving on to the other assets. In Indonesia, we completed a deal with our partner whereby and we’ve increased our working interest in the block and more importantly took over as operator of the block. I’m pleased that we were finally able to accomplish that goal.

We continue to do detail well planning and we procure long lead items for well that may spread in the fourth quarter of this year early 2014. In Oman, you will have read that we decided to relinquish shareholdings in Block 64 and they were exiting the country. Block 64 continue to hold its fourth quarter promise in our view however it’s not material enough to justify our continued presence.

We spend the last year so we’re trying to build on that position, specifically we pursued an award of an unconventional block, which we believe is well suited to our skills. However in the end, we were not successful on our efforts and therefore decided to exit.

Turning to Gabon. In Gabon, I think the press release and the 10-K provide adequate detail on the history and result of the program there is especially the recent drilling at the Tortue well. The primary objective of the well was to find enough oil in the Gamba and/or Dentale to get us over the threshold to move to development. Once the infrastructure is in place most specifically in FPSO the block provides us with years of add-on prospects, which de-risk significantly by our experience today.

So where are we? First let me say that, what I said before and that’s the well results were very encouraging. Quite frankly we are very excited about the block. We found oil in both the Gamba and the Dentale in the initial vertical well. We then sidetrack to a position 1800 feet away to see, if we could find the crest of the Dentale structure, as it was indicated on our initial mapping, what we found surprised to somewhat.

First, let me remind you that this subsalt imaging, which is always bit of a challenge. We’ve been very successful as imaging Gamba structures, which are directly unique to solve and fairly so.

To make the long story short, what we found 1,800 feet away was a flat structure at the Dentale level with the Dentale 6 sand, the primary pay sand in the vertical hole looking very much the same as it did in the vertical hole. The Gamba was below the oil water contact in the sidetrack as expected. However, simply put, our mapping overall was wrong. It was wrong because the velocities in the lower Madiela and the salt and the pre-salt, pretty much confirmed our velocity model in the vertical hole. We saw large velocity variations versus the model in the sidetrack, and the Madiela sits just above the salt.

Geoscience geeks out there. We saw what we believe is a phenomenon called salt-induced stress anomaly or its [collective] effect. We do understand that. These basically occur above and below the salt well adjacent to thicker salt ridges. The original hole was under a thicker salt section in the sidetrack, penetrated the salt well to the flank.

So what does all that mean? What it means to us at this moment is we have some work to do with our seismic velocity model in depth imaging to reconcile our seismic model to what we saw on the well, both in the vertical and in the sidetrack. We then need to re-migrate the seismic and remap the section in order to reduce the range of possible oil volumes.

For instance, depending on how we view the velocity field we can come up with a P90 to P10 range of 44 million barrels to 167 million barrels in place in the Gamba and Dentale in the Tortue well. Quite frankly that’s just too large a range for us to make investment decisions today. The geoscience work we have completed prior to taking a more educated view on the Tortue structure is not insignificant, won’t take a couple of months. We are getting close now.

In addition to the geophysical modeling that I described, we also have to improve our depth migration across the block on the Dentale. Whereas the Dentale was a secondary target in our initial strategy when we began the program, quite frankly from what we’ve seen the Dentale sands are generally superior to even the well established Gamba.

You may remember in the Roosevelt, we found oil pay lower in the Dentale section. However, the upper high quality Dentale sands were 100% water wet. We think we crack the code to be able to predict where the Dentale will have oil and we tested that very successfully in Tortue. Given that Dentale results we’ve re-accessed the prospectivity across the outer half of the block and given the larger outboard Dentale structures we’ve mapped off existing 2D. We’re tendering for a possible 3D acquisition in the second half of this year.

In addition to the geoscience work we’re awaiting the results of the Gabon core analysis and recovered fluid properties in order to complete the reservoir characterization of the Tortue discovery and make better estimates of production rates and recoveries. Now I’m sure you, all may have preferred that I tell you that this thing is ready for development and it may well be, but I believe it’s prudent for us to complete this work prior to making any definitive statements about the block and its development.

We are very confident that there will be a development on this block. We’re seeing too many good things in the prospect in the Tortue is substantial and overwhelming. You may remember that we showed an inboard 3D without quote year-end 2011. We should have the debt migration completed in the second quarter and we’ll be able to find prospects near to the shore as well. From what we’ve seen so far, we’ve seen the evidence of the Cintra section we were looking for. So we’re pretty optimistic.

Anyway that’s Gabon. I’ll be happy to answer more questions on Gabon in the Q&A. Rest assure that the guys in London (inaudible) Houston are working very hard to get this work completed as soon as possible.

With that, I’m going to turn it over to Steve, to discuss the financials and then I’ll follow up with a short discussion on the termination of our sale of Petrodelta to Pertamina, an outlook going-forward, including liquidity as far as well as some strategic next steps. Steve?

Stephen C. Haynes

Thanks, James, and good morning. Form 10-K was filed yesterday afternoon after the market close and is on our website.

First of all, provide the 2012 financial results of Harvest. Harvest posted a fourth quarter net loss of $23.1 million, or $0.59 per diluted share, compared to a net loss of $44.3 million, or $1.30 per diluted share for the 2011 fourth quarter. For the year ended December 31, 2012, Harvest’s net loss was $12.2 million, or $0.33 per diluted share, compared to net income of $56.0 million, or $1.64 diluted share for 2011.

The fourth quarter results included exploration charges of $3.6 million, or $0.09 per diluted share, impairment expense relating to the Oman and China blocks of $9.3 million, or $0.24 per diluted share, unrealized gain on warrant derivatives of $400,000, or $0.01 per diluted share, debt conversion expense of $300,000, or $0.01 per diluted share and a loss on extinguishment of debt of $5.4 million, or $0.14 per diluted share. Adjusted for these non-cash items, Harvest’s fourth quarter net loss was $4.9 million, or $0.12 per diluted share.

The 2012 results include exploration charges of $9.1 million, or $0.24 per diluted share, impairment expense relating to Oman and China blocks of $9.3 million, dry hole expense related to Oman and the Indonesian wells of $5.6 million. The current year results also included an amortized loss on warrant derivatives of $600,000, or $0.02 per diluted share, debt conversion expense of $3.6 million, or $0.10 per diluted share and loss on extinguishment of debt of $5.4 million, or $0.14 per diluted share. Adjusted for these non-cash items, Harvest’s 2012 earnings would have been $24.3 million, or $0.65 per diluted share.

Now I’ll talk about the Petrodelta financial results. Petrodelta reported fourth quarter operating earnings before tax and non-operating items of $44.4 million, or $14.2 million net to Harvest’s 32% interest. Petrodelta reported a fourth quarter net loss of $84.2 million, $26.9 million net to Harvest’s 32% equity interest under IFRS. After adjustments to Petrodelta’s IFRS earnings, primarily to confirm with accounting principles related to generally accepted accounting principles, Harvest’s 32% interest of Petrodelta’s earnings were $6.2 million.

Petrodelta’s operating income before tax and non-operating items for the year was $296.1 million, or $94.8 million net to Harvest’s 32% equity interest under IFRS. Petrodelta reported net income of $86 million or $27.5 million net to Harvest’s 32% equity interest, under IFRS. After adjusting Petrodelta’s IFRS earnings, primarily to conform with U.S. GAAP, Harvest’s 32% share of Petrodelta’s earnings were $54.2 million, a 6% decrease over 2011.

Now, I’ll go over the financial control issues and the restatements. During the year in our process it was determine that certain material weakness resulted in errors, which required the restatement of our annual consolidated financial statements for the year ended December 31, 2010, 2011 and the unaudited interim consolidated financial statements for quarters 2011 and the first three quarters 2012.

Please read Form 10-K filed yesterday for the details of material weaknesses and the SEC filings that are being restated. The Company intends to file the Form 10-Q/A amendment with the SEC as soon as reasonably possible. Also I’ll direct your attention to the press release issued this morning. Under the Controls, Procedures, and Restatements section there are three tables presented, which reflect the main impact is adjustments on restatement. The cumulative net impact of these adjustments for the year ended December 31, 2010, 2011 and 2012 on basic earnings per share was additional $0.01 loss per share.

Larger adjustments for 2011 related to $3.3 million impairment of oil and gas properties that were previously presented to exploration expense, $9.8 million, which represents change in fair value of the warrants for the period. These warrants were issue with their bridge loan, which closed in October 2010, have a five-year life. These warrants were previously classified as equity and were therefore not marked to market at the end of each reporting period. Also a loss on extinguishment of debt of $3.5 million was recognized due to the misclassification of the warrants in 2010. It should be noted these adjustments were all non-cash.

Finally, to provide sufficient time to allow our equity affiliate in Venezuela, Petrodelta to close its financial records and prepare the required financial statements for the first quarter of 2013 and in the [wake] of the efforts we’ve to complete the 2012 Annual Report, the Company may be required to file a Form 12b-25 with the SEC to obtain additional time to complete Harvest’s first quarter Form 10-Q due on May 10, 2013.

This concludes my comments. I’ll turn the call back over to James.

James A. Edmiston

Thanks Steve. As always, Steve is going to be available to follow-up on any questions you might have regarding financials and I suspect he’ll busy today in that regard. I don’t have a whole lot to add to Steve’s comment on the delays in the financials in the Restatements. To say the least, it’s been very frustrating. As you can see from the press release and the table that Steve referred to restating 2010 through 2012, yields a whopping $0.01 per share incremental loss over a three year period. All as we stated before were non-cash. So again if you have any specific questions since regarding these accounting issues let us know. Steve is going to be happy to walk you through any level of detail you desire, should you give him a call.

Let’s turn to the Petrodelta’s sale, as you know we terminated the sales process of our Petrodelta business to Pertamina after being advice that the Government of Indonesia acting as a sole shareholder of Pertamina did not approve the transaction. In addition to the host of normal questions folks might have about the termination further questions have been fueled by misinformation in the media whether by misunderstanding, poor translation or just a simple lack of facts.

So let me clear what I can and as I do so, I will try to address some of the misinformation in the market. First, the price to be paid to Harvest for the Petrodelta business never changed subsequent to the signing of the share purchase agreements last June. In fact, Harvest was never requested by the buyer to modify the price or the conditions of the sale subsequent to the signing of the share purchase agreement.

Second, as has been described before the transaction require the approval of both the governments of Venezuela and Indonesia as well as Harvest’s shareholders. As condition for their approval of the sale, Venezuela required reaching an agreement with Pertamina on a business plan for Petrodelta going forward, and the financing plan whereby Pertamina will help finance this accelerated plan. This critical path was known from the beginning in both the Indonesian side and the Venezuelan side met several times over the course of the process, the last meeting coming in late January.

Harvest was not party to those meetings, so I can’t attach to the details of the discussions. However what is clear is that in the few days prior to receiving the notice from Pertamina, the Ministry of Petroleum and Energy in Venezuela gave its public support in the press for the transaction. It’s fair to say that based upon my conversations both the Venezuelan side and Harvest, we’re surprised and disappointed to receive notice from Pertamina, which was explicit in its finality and the negotiations thereby terminated.

Third thing, I’d like to say is the decision by Pertamina shareholder released Pertamina of its obligations under the agreement other than certain confidentiality causes, which core survive. As such their escrow funds were released. Some have questioned, why that is, the simple answer is that’s what the agreement stipulated. Basically pre-closing risk was on Harvest and all post closing risk, rested with the buyer. To be clear, Pertamina were well within their rights in that regard.

Hopefully that brief explanation helps in the very near future I plan to meet with my friends in Caracas, in PDVSA and we will discuss the issue more thoroughly. We continue to receive the interest in our Venezuelan assets and we will continue to work with our Venezuela partners to move forward to both grow the business in Petrodelta and to pursue a sale of the assets that benefits both the shareholders of Harvest as well as the Government of Venezuela.

I would urge you not to loose sight of the importance of having reached the stage we did in the Pertamina deal, a benchmark with established for the assets value and well I can’t guarantee that we will be able to attain that price in the end. I can say it certainly illustrates the disconnect between our share price and our asset values.

Now, let me turn my comments to liquidity, as you know our independent auditors included a going concerned comments and their audit opinion. Basically that opinion is based on the fact that we have aggregate commitments within the next 12 months, which exceed our cash on hand.

Further given that we’ve not received dividends from Petrodelta in three years, that is not considered declared dividends payable from Petrodelta nor undeclared dividends in their analysis and that total amounts to about $90 million between the declared and undeclared net to Harvest.

We’ve been here before, in 2011 prior to signing the sales and purchase agreement for the sale of our Utah properties, a similar opinion would have been rendered. Let me be clear that the Board and management of Harvest do not share the opinion that “substantial doubt” exist in our ability to continue to growing concern over the next 12 months. That’s where it seems to imply that a probability exists that we will cease to be going concern within the next 12 months.

We simply don’t see it that way. We believe that we’ve generated substantial value in our asset base outside of Venezuela especially in Gabon. With finally having attained operational control of Budong in Indonesia. We believe that its value has been enhanced as well. We’ve always processes on both these assets to form in partners in order to reduce our near-term capital commitments. The initial level of interest is very good, and we expect these efforts will conclude sometime in mid to late summer.

Finally in regards to liquidity over the next few months, I expect the company will continue to tighten its focus and in doing so we expect to reduce the run rate attributable to our G&A overall. The exit from Oman is illustrative in that regard.

We don’t like most of the idea of selling large blocks to stock at current prices. So whatever the method of capital raising we chose whether debt, equity, or asset sales it will be driven by the cost of capital and will be meticulous in our valuation of the alternatives.

Let me close by saying that company has a set of assets far more valuable than indicated by today’s stock price. We know that in light of the failed transaction that we will not be able to do everything that we may want to do in terms of growth.

I’m confident that we will find a way to continue to grow our business and meet those liquidity concerns as I said before we have a high working interest and operational control in each of our assets with the exception of Petrodelta. So there is room to lay off both risk and cost that need to be, so we plan to do it surgically and in a way that yields the best risk value for the portfolio, and of course we’ll continue to explore every opportunity for unlocking the value, not only our Venezuelan assets, but the value of the company as a whole.

So with that, I’m going to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Andrew Wallach with Cumberland Associates. Please go ahead. Your line is open.

Andrew Michael Wallach – Cumberland Associates LLC

Good morning, guys.

James A. Edmiston

Good morning, Andrew.

Andrew Michael Wallach – Cumberland Associates LLC

Could you talk in a little more detail about what you think the field dynamics might be in Venezuela going forward and what might change in order to facilitate a deal and how many potential buyers there are and what sense you're getting on valuation?

James A. Edmiston

Well, let me answer the last part first. I think that the importance of the Pertamina transaction wasn’t setting a benchmark for the assets, quite frankly my comment with regard to heading down to Caracas given the timing of our process terminating with Pertamina relative to the elections et cetera, we have not had that debrief meeting, yet we plan to have it here in the next couple of weeks. And I think both sides will better understand the path forward in that regard, but I don’t think, Andrew, the dynamics around the asset. I don’t think it’s changed. It’s a world-class asset. It has a lot of upside both in terms of growth to reserves and production, but also in terms of improvements in efficiency going forward. So until I sit down with the Venezuelan side we walk through this. I really can’t say.

Andrew Michael Wallach – Cumberland Associates LLC

Okay. Can you talk in a little more detail about the farming prospects at the other two locations?

James A. Edmiston

Yeah, I mean, we’ve started the process. I think we’re set for some time July timeframe to receive offers. It’s a very organized process. I think one at a time. On Gabon I think that’s likely to be a very active process, not only ourselves, but I think the industry is also open their eyes especially with the Dentale discovery we had at Tortue. We have several prospects outboard of Tortue and of our Central 3-D that are very large in size respective for the Dentale, and given that a) we’ve been able to predict where we would have oil and b) the petrophysics or the properties of the rock are outstanding. I think the block’s going to garner quite a bit of interest. And obviously we would like to keep a significant piece of that, but we’re going to be opened to see what the market brings us.

I know that the market now, I mean, it’s obvious that the market now gives us very little consideration for Gabon at all. Having said that, the other end of the spectrum I’ve seen a research note out of Tudor Pickering that said block worth $450 million when they were talking about [PANDORA], obviously, we own two-thirds of that. So not only I think will the process be able to help us reduce our capital commitments on something that needs to be very actively exploited, I think it will also help alleviate whatever that market disconnect is, Andrew, so it’s twofold. I think Budong as well. Budong is a block, there has been two wells drilled, hydrocarbons have been found in both wells. The next well is a little bit closer to the shore, obviously, it’s on land, it’s in a quite frankly a proven structure that actually was drilled around the turn of the last century by the Dutch. So, we know there is hydrocarbons in the structure.

And I think that block as well is going to appeal to some of the Indonesia and Far East focus companies out there. We obviously have a very large working interest in that block. So we can pare down substantially in the block, if not totally, and again that reduces our forward commitments as well as perhaps providing some liquidity going forward. So I expect the processes, I expect to be receiving bids sometime in the July timeframe and have them consummated late August, September.

Andrew Michael Wallach – Cumberland Associates LLC

And could you talk a little bit more about any prospect there might be to get a dividend payment out of PDVSA?

James A. Edmiston

I think that kind of falls into the category of the first subject we discussed, obviously, our dividend and as well as the cash surplus that sits as undeclared dividend, which in total amount to $90 million, obviously that will be a topic of discussion in any discussion we have with our Venezuelan partners and authorities. So that’s about all I can tell you at this point.

Andrew Michael Wallach – Cumberland Associates LLC

Can you just discuss what your monthly burn rate is now.

James A. Edmiston

Our quarterly burn is just shy of 5. Obviously, we’re closing the Oman office and I think you’ll see further rationalization on our part going forward especially associated with some of these processes. So I would like to believe, by end of Q3 or so, from our base G&A will be up by as much as a quarter.

Andrew Michael Wallach – Cumberland Associates LLC

I didn’t understand that. Off by as much as…

James A. Edmiston

We’re looking to reduce that run rate by about a quarter.

Andrew Michael Wallach – Cumberland Associates LLC

I see, okay, I got it.

James A. Edmiston

By end of third quarter year-end.

Andrew Michael Wallach – Cumberland Associates LLC

Okay, thanks very much.

James A. Edmiston

All right, Andrew, thanks.

Operator

And we’ll take our next question (Operator Instructions) And our next question comes from Tim Jenkins with Dolphin Investment Advisors. Please go ahead. Your line is open.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Hello, James.

James A. Edmiston

Hey, Tim

Tim Jenkins – Dolphin Investment Advisors, Inc.

Just like to know a little bit more about what's causing the lengthening of the drilling process in Venezuela. I know this has been an ongoing problem for a long time and I see you've got maybe four rigs anticipated. But the productivity has obviously almost been cut in half or more, actually, in that twice the drilling time. And I don't know about the infrastructure. You implied that that's also moving very slowly and I imagine the costs are going up there too. Can you just give us some more detail on what's going on there and, I apologize if you already have, but I was cut off on the call earlier.

James A. Edmiston

Okay, no problem, Tim. There is, I think it all comes back to without a very planned and continuous source of funding back into the company, the whole planning horizon, inter- relationships with contractors et cetera becomes bit difficult. How that translates on the ground is for one thing, in 2012, for most of the year, we were using a mud system that was not appropriate for those wells owing to the, you drill through a very thick shale and it’s in the kickoff portion of the (inaudible) it’s very reactive. It requires an inhibited mud. There is a couple of companies out there that have the mud. Due to the accounts payable with those companies, they were not able to get that product in. So that had a major impact.

Second thing is, any time you get a new rig, you have a bit of a breaking in period. Our best rig was reassigned. At the beginning of last year, we had some new iron in, as a matter of fact, it’s brand new. Those rigs have not the commissioning process on those have taken quite a bit more time than normal.

Lastly, there is simply, I think overall one of the problems that I think several people are experiencing in Venezuela are certain service commodities are scarce. In that regard, people just aren’t bringing in a whole lot of equipment if there are payment issues. And one of the problems we’ve had more recently has been the availability of directional tools. Everywhere we drill is horizontal. It obviously requires directional tools. So it’s a combination of those things. If you ask me what the biggest impact is, I’d probably say the mud because you can easily loose a hole over that section.

Now, the good news is the mud situation has been corrected. Currently all the rigs we’re using a mud that we used prior and proved very, very effective. Number two, several of the rigs have gone through the commissioning period and I think you’re going to see them improve up the curve. Third, we have been able to, or let’s say, has been able to acquire the directional tools we need for most of the rigs although we’re still a little bit short.

And I think finally, it’s getting back into a rhythm of what we’re doing. I mean, for the same amount of money, if you just look at the rig days, we should be in the, with two rigs, we should be in the 30 well a day, but we’ve got, we’ll have four to five rigs out there this year. If we can pick up efficiency, you’re going to talk about very, very substantial number of wells. And when you’re taking consideration that only 11 wells still grew production 16% last year. And you do the math. Let’s say you have four rigs running and you can get it down to 30 days. That’s a whole lot of wells, a whole lot of production growth, a whole lot of reserve growth, just for getting part way there in terms of the improvement. So, directionally, there are some good things happening. I guess, 2012 kicks a much more performance than what I did, but there are some things going on in the field today that leads me to be encouraged as regards this year.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Thanks, James. I am curious, it all seems to boil down to the business of accounts payable, which would also explain even the dividend. There's clearly, presumably the oil is sold, there's cash being generated through the sales process, but none of it, it all gets stripped out apparently because my understanding is that the money must be sitting somewhere, but it's sitting in PDVSA's account somewhere.

James A. Edmiston

Well, yeah, I mean, I don’t want get into the detail. You can pick up any paper and there is a bit of liquidity and currency issue.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Yeah.

James A. Edmiston

That Venezuela’s having to deal with. And those type of issues tend to be temporary. It will get resolved for the simple fact that it’s unsustainable. We all know that. But, yeah, we have $90 million more net to Harvest and we wouldn’t be having a lot of the conversations we’re having right now if that piece has worked. Having said that, you got a world-class asset that has the $7.25 benchmark on it, that is still experiencing growth in reserves and production. So when I put all those things together, you may not like hearing it, but I think it’s going to require some patience. It’s going to require our patience to continue to work with our partners in Venezuela knowing that things are going to get better. They should get better, because the present situation down there, it will resolve itself one way or another and we’ve got confidence in that. But we can’t loose sight of –this is a world-class asset. We’ve been down there 20 years. You give your leg with this kind of asset anywhere else. So, that’s where we are at the moment.

Tim Jenkins – Dolphin Investment Advisors, Inc.

All right, James, just as, I mean, even the Pertamina conversations presumably with the Venezuelan government, nobody, if you cannot extract any cash, why would anybody put more capital into a business? So as far as I can tell, PDVSA, the way it’s operating is, I know the government is essentially, it looks like they’re essentially stripping the cash. But it’s cutting your nose off despite your face clearly, because if you put cash back into the ground, this thing generates free cash flow unlike many other projects I look at.

And this argument needs to be put forward strongly. And there doesn’t seem to be any ability at the other end to actually listen to the argument of why paying your bills and getting production up and rigs up and working and making sure you can pay for directional tools in order to increase the cash flow, the biggest beneficiary is the government. But it seems like it’s impossible to make this argument. I’m not trying to blame anybody. I’m just wondering how does one convince, how are you trying to convince them of this, the benefit that would come from paying bills?

James A. Edmiston

I think to answer the first part of your question to a perspective buyer I think the answer is pretty simple. Nobody believes that the current situation is going to remain as is for any particular length of time. I mean, this is by it’s very nature is a long-term focus business and the kind of buyers you’re looking at, a Pertamina type buyer for instance, has the time horizon probably a little bit longer than most Harvest shareholders. So I think that the simple answer to your question is they just don’t, they see this as a transient phenomenon that’s going to resolve itself and they see the business is having a huge potential going forward.

I think, the other part of your question, I don’t think Venezuela has been deaf to our concerns over this or anything else. I think their government that has, like any government, they have competing interest and they have obviously one of competing interests or some early significant social burdens that are placed upon them in a time, at this point in time, and they’re working to resolve many competing interests. So the only thing, I have confidence. I can’t tell you how and when. But I do have confidence it will resolve itself. How and when is a bit more on their plate, but I think we and the industry in general understand that this won’t last forever. It’s going to be resolved one way or the other.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Fine. Yeah. I’ll ask more if there isn’t anyone in the queue.

James A. Edmiston

Go ahead.

Tim Jenkins – Dolphin Investment Advisors, Inc.

All right. The company has elected to diversify its assets and a couple of them so far, well, in effect none of them have generated cash flow. So at this stage, there is no source of cash flow essentially other than financing and selling interest.

I’m just wondering I know we have this discussion philosophical. But it always sort of made sense to me to attempt to make an argument for a proposal with Petrodelta to fund it, put more capital into Venezuela on a particular condition. It might be a; well whatever. And the company has thought that that it doesn’t make sense to put more money in it. But I think we’ve used up a lot of resources attempting to diversify. And I’ve always sort of have been in the mind that, if you truly have a world class asset and you can make an argument with your partner that you or anybody else would be willing to put more capital into it as long as there’s some hope of returning capital, I mean, there’s no value to something you can never get any cash flow out of. And I know you’re basically telling me that at some point this camel’s back has got a break.

And there will either be a collapse in Venezuela or their core, or they’ll get it right. But my view has always been to get more capital into it. When you were in discussions with Pertamina or anyone else, I would have thought that this would have this conversation will have to occur. Pertamina apparently, the price didn’t change. I don’t think the resource changed and the government decided they didn’t want to go into it. And presumably, that’s because they’re seeing the same thing you are. They may have a longer time horizon, but they’re like, well, in the foreseeable future, we cannot seem like coming out of here.

I’m just curious, when you were discussing things with them this must have come up. It’s not something they wouldn’t have taken into account. So, what changed their mind in your opinion and apparently you’ve had no further discussions with them. But what changed their mind about without putting more capital in it. Was it the same as you? I mean, presumably it’s everybody’s in the same boat.

James A. Edmiston

Yeah, I mean, I obviously wasn’t in the room when the appropriate ministers in Indonesia voted on this issue. My exposure was to Pertamina’s highest level and their M&A type guys and throughout that period, they remained positive on the transaction. I mean you can go back to the press, articles from the President of PDVSA. I really can’t say. But to your broader question, it was and has been from the initial point part of the key to getting the deal closed was A, agreeing a new business plan with the Venezuelan side, that substantially does what you’re talking about; put more capital an accelerate the development of the asset and we’re talking about into the 150,000 barrels a day plus range.

And clearly that’s going to take in the short-term, a bit more capital than what’s thrown off in cash from operations and it was clear that the new buyer would arrange some kind of financing to help do that disproportionally. So yeah, I agree with the premise. What anybody with this asset would like to do is accelerate it under certain conditions and put more capital into it, get it cranking and have a cash flow stream out of it. That’s not an issue for us. It’s very simple. We’ve probably, at this point given our size and given our concentration risk in Venezuela probably have the highest cost of capital in the world.

So, the issue isn’t James isn’t willing to do that. The issue is, it’s probably very inappropriate for James to do that, to be the one that does it; whereas it might be highly appropriate for others, some of which have virtually zero positive capital to go in and fill that role and there is economics for both sides on that.

So look, if had unlimited capital, I can strategically, it would be hard pressed to find a better place from the technical standpoint and from just an economic standpoint to put your money then into those fields in Venezuela. A, I don’t have unlimited cash and B, right now, Venezuela is we believe going through a transient period where things have to get back to normal before you see that investment fly back in the there; whether it’s from us or anybody else. That’s basically what it amounts to.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Yeah, I’ll follow up with one last one.

James A. Edmiston

Sure.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Where would you, I’m sure you guys have looked at other fields in Venezuela. Where would you characterize this field in terms of potential returns on capital, productivity versus other fields, other areas that are being developed, heavy oil fields, whatever?

James A. Edmiston

I think it’s top of the list.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Top of the list.

James A. Edmiston

I think it’s absolutely,, I mean, I lived in Venezuela and ran the first of those heavy oil project. So, I know those heavy oil projects pretty intimately. The nature of the economics on the very long-term project, they’re large, large investments. Their rates of return I think are probably substantially lower than this asset. Having said that when you have projects that has 30 year lives with virtually no decline because it’s more of the manufacturing and pulling the rollout running through a plan, rate of return becomes pretty poor metric to measure the economic. So, those things generate a huge amount of cash over a long period of time, but in terms of bang for your buck return on capital et cetera, I don’t think there is many that we compete with Petrodelta in a pullout for development type scenario.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Great.

James A. Edmiston

You just run through the economics in your mind, we were drilling these wells. Let’s take $2 million, $2.5 million to drill a well that comes on 3000 barrels a day that’s going to produce somewhere between 800,000 and 1.5 million barrels of oil over twice. Yeah, you did the math, there is not a single shale well in the United States to come close to that. So I mean the economics had a technical base and field bases are outstanding.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Yeah. Where is that globally now, I know that’s a very broad and tough question, but where do you think this is globally in terms of the field of comparable size in terms of return on capital?

James A. Edmiston

I think it would be the same, I mean, your hard press. I am going to take the Middle East out of it, because quite frankly the margins to international companies are so well in those situations and it’s not real comparable, but if you look at normal taxes and royalty type of development, I mean, if you can find to need something that competes with it technically and economically let me know, that’s available, don’t see it,

Tim Jenkins – Dolphin Investment Advisors, Inc.

All right.

James A. Edmiston

Obviously, don’t get me wrong, I think Gabon, the Gabon’s issue is, Gabon needs a bit more front-end work in terms of, again I’m highly confident that there is a development out there. What I am most excited about those the breakthrough in the Dentale the very large outboard structures that you’ll see as talk a lot more about in the coming months. I mean we’ve been drilling these 30 million, 40 million barrel type prospects. Now that we believe, we started to unlock the Dentale through these outboard structures on our block that you’re starting to talk about 9-figure-type prospects and we are very excited because we think substantially de-risk them especially with Tortue and Ruche. So the fiscal currency in Gabon on our block are very, very solid as well.

Tim Jenkins – Dolphin Investment Advisors, Inc.

Yeah, great. Well thanks a lot. I appreciate it.

James A. Edmiston

Okay, thanks Tim.

Operator

And we have no further questions at this time. I’d like to turn call back to our speakers for closing remarks.

James A. Edmiston

All right, well folks thank you. I know that there is a lot to digest. I am sure you have fun going through the K and the restatements. Let me just personally apologize to all the shareholders on behalf of the company. We did not foresee this happening. We don’t like being late, you don’t like restatements. As I said before, I think the number show that the net effect over a three-year period was a $0.01. All that communicates number one, its non-cash; number two, its small enough to where the nature of the financial statements, I believe are very, very solid.

Having said that, I think we did let down our shareholders by not falling on time, we plan not to make that a habit. Steve said in his comments that given this late close of fourth quarter and year end that we may slip a little bit on the first quarter. We don’t think that slippage will be very substantial. If the slippage happens at all, we’re working on that very hard. Obviously we’ve cleared the decks through the year-end. So the Q1 should be pretty simple.

So, again our phones are open here, give us a call if there is anything we can do to follow-up with any questions you might have. Thank you.

Operator

This conclude today’s program. You may disconnect at this time. Thank you and have a great day.

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