Harvest Natural Resources' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Harvest Natural (HNR)

Harvest Natural Resources, Inc. (NYSE:HNR)

Q2 2013 Earnings Call

August 9, 2013 11:00 AM ET


Keith Head – VP, General Counsel and Corporate Secretary

James Edmiston – President and CEO

Stephen Hayes – VP, CFO and Treasurer


Graham Tanaka – Tanaka Capital

Curtis Tremble – Global Hunter

Jason Wangler – Wunderlich Securities

Tony Polak – Aegis Capital


Good morning and welcome to the Harvest Natural Resources Earnings Conference for the Second Quarter 2013. As a remainder this conference is being recorded. I will now turn the call over to Vice President and General Counsel for Harvest Natural Resources, Mr. Keith Head. Please go ahead.

Keith Head

Thanks, Kim. Good morning and welcome to Harvest Natural Resources 2013 second quarter results conference call. This morning our press release was broadcasted to company’s fax and email list. 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 9175997.

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 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 Edmiston

Thanks, Keith. Good morning. Thanks for joining us today. I hope you had a chance to review the earnings release. As usual, I’ll do a brief operations update, business summary and then Steve can walk you through the financials for the quarter and then of course, we’ll be open for questions.

Starting with Petrodelta. Petrodelta delivered about 3.5 million barrels of oil or 38,211 barrels of oil per day in the second quarter 2013, that’s a 5% above the same quarter last year and 3% above the first quarter this year. Current production is running about 43,000 barrels of oil per day and the average daily production rate for July was about 41,500. Petrodelta operated five drilling rigs during the quarter and drilled and completed four development wells.

Furthermore, Petrodelta has significant works underway in the infrastructure area especially in El Salto field. The key rating and exceeding this year’s production target, aside from improvements in the drilling efficiency is having the infrastructure in place, especially treating vessels and pipelines to deliver the spec crude from El Salto and there’s been progress being made in that regard.

Petrodelta’s reported production target for the year is about 41,300 barrels per day average based on a capital budget of approximately $210 million. They expect to drill 25 oil wells and two water-injector wells this year. However, based on the first six months as year drilling efficiencies are falling wells shorter reaching the target of 25 wells and less corrective actions are taken in the very near term, especially in the area of provision of directional services, expect significant drilling under performance relative to Petrodelta’s past performance to persist.

On the other hand, thankfully from a volume standpoint. The wells are generally outperforming expectations in some cases very substantially. For example, the recent well (inaudible) TP86 [ph] completed in July, tested at maximum rate of 3,900 barrels of oil per day. Well in excess to the target rate of 500 barrels to 700 barrels per day.

So while our drilling performance has been very poor. Well performance continues to exceed expectations in (inaudible) Petrodelta to post very near as projected year-over-year production growth rate. Moving on to our other assets, in Indonesia we continue to detail well planning and have a late been focused on surface land acquisition permitting the logistic, slower progress in that area will almost certainly lead to the wells lifting into next year.

So we’re looking probably first quarter 2014. In Gabon, our program with subsurface and developmental planning studies have progressed and underpinned our belief and closer development of the contingent resource base discovery to-date.

The Tortue subsurface studies have focused on building static reservoir models and the dynamic reservoir simulation of the stacked reservoir encounter to establish few recoveries and established a development options. As you may recall, we found oil in both the pre-salt Gamba and stacked Dentale reservoirs in the Tortue wells.

The stacked Dentale reservoir comprises series of SANDS we refer to as SANDS two through six. Our reservoir development plan of Tortue involves a phase development and initially focused on the Gamba and the primary Dentale six reservoir. Sands two through five will form a second phase in that development.

The studies on the Gamba and SANDS six, have identified the use of a horizontal drainage points to maximize recovery under water drive from expected active aquifer. As has been successfully acquired (inaudible). We are however planning to use multilateral well to maximize recovery per well and reduce our drilling cost.

Our valuation in the exportation of SANDS two through five is currently focused on the use of comingle production from deviated or stacked laterals. Since the last call, we received further results of analysis of the coordinator from the Tortue well. In addition to the high proportion, a better quality channel facing SANDS in the Gamba core, which is better than expected (inaudible).

The water well displacement study show a very good recovery with residual oil saturation down to approximately 25%. These new results have been incorporated in our reservoir models and is contributed to our confidence in the result to that modeling, the key drive mechanism in the Gamba will be a water drive from a base of water to presently [ph] located horizontal drainage point.

We estimated technical recovery factor in the Gamba at a range from 27% to 42%. So with all that, our internal estimate contingent resources for Tortue range from 8 million barrels to 55 million barrels with a mean of 28 million barrels. Our estimate of total mean contingent resources for the old discoveries on the block is now marginally increased to 49 million barrels as a result of that work.

Significantly 42 million barrels, out of the 49 million barrels of mean contingent resources are associated with the Ruche and Tortue structures alone. In parallel with the subsurface studies, our engineering teams have been evaluating development options in drilling configurations to optimize development at the existing contingent resources and also to accommodate the development of as of the yet, undiscovered future potential.

We continue to evaluate options involving existing potential FPSO solutions together with conversion of other vessels. We’ve identified availability of key equipment including trees, well heads, flowlines, subsea equipment and multilateral completion technology.

Equipment is currently available and enable first production is early as March, 2015. So as I before we’re making progress and a degree of certainty around at least at least a phased cluster development is improving dramatically. On the various ongoing geophysical projects, we expect completion of the depth migration of the inboard 3D this month and the team’s is already commenced interpretation to define prospect near short.

As you recall, we are looking at Cinref [ph] type of complex in that near short portion. In the second quarter, we commence to focus 3D seismic Pre-Stack Depth Migration reprocessing projects over just the Tortue in the Ruche discoveries, to integrate our experiences at the significant velocity variations we saw in the over burden in the Tortue well and to provide and prove data sets for the development of future drilling.

The new velocity modeling is already to starting to bear fruit indicating potential improvement in the imaging. We expect this to be completed before the end of this quarter. Given the encouraging Dentale results we saw in the Tortue well. We’ve focused attention on the Dentale prospectivity across the outer half of the block, especially given the potential for very large outboard Dentale structures mapped off of the existing to the seismic.

The outboard potential has mean prospective resource of 650 million barrels in six different structures. The leads identified in the software is compared very favorably with nearby exploration activity to the north, where Tortue is currently logging the Diamond 1 exploration well that is targeted in Dental, pretty solid structure. The same is what we see in our outboard section in Dussafu.

We’re looking Tortue well results demonstrate the petroleum elements for Dentale plan now more part of the block clearly exists and it’s really survey will be required to establish and track geometries and further de-risk that potential. Our planning for acquisition is that, 3D seismic on the outboard portion of the block is progressed and documentation for environmental approval is currently being prepared to target acquisition, the end of this quarter or the fourth quarter.

In summary, we continue to move forward technically on the Dussafu block and in general, as we learn more, we integrate the new data into our models and enthusiasm for blocks potential and for instance. With that said, I’ll turn it over to Steve to discuss the financials and after Steve. We’ll discuss the status of our Dubong, Indonesia farmout processes and then we’ll open for questions.

Stephen Hayes

Thanks, James and good morning everyone. Our 10-Q will be filed today and posted on your website. Harvest reported a second quarter net loss of approximately $4.5 million or $0.12 per diluted share compared to the net income of $6.2 million or $0.15 per diluted share for the same period last year. Second quarter results included exploration charges of $2.6 million or $0.07 per diluted share, excluding exploration charges the net loss for the second quarter would have been $1.9 million or $0.05 per diluted share.

General and administrative cost for the second quarter increased to $7.7 million mainly due to an increase in non-cash stock based compensation resulted from an increase in stock price and increase in legal and external IFRS [ph] fees during the quarter. This is approximately $1.5 million higher than expected half of which is non-cash.

This decreased EPS approximately $0.04 per diluted share and now let’s talk about Petrodelta. Petrodelta had net income during the quarter of approximately $64.8 million or $20.7 million net to Harvest 32% interest under IFRS compared to $72 million or $23 million net to Harvest 32% interest for the same period last year.

After adjustments to Petrodelta’s IFRS earnings, primarily to conform to U.S. GAAP, Harvest’s 32% share of Petrodelta’s earnings was $6.1 million compared to $18.2 million for the same period 2012. The average sales price for the crude oil produced during the second quarter approximately $90.33 per barrel compared to $96.10 per barrel for the same period during 2012.

As you may recall, Petrodelta recorded a gain on exchange of $186.7 million during the first quarter 2013, due to the devaluation of Bolivar to the U.S. Dollar currency. The new exchange rate is 6.3 Bolivars to $1 effective February 8, 2013. The devaluation also impacted accrued tax assets on liabilities which ultimately will be settled in Bolivars.

Petrodelta’s tax provision for the 2013 quarter includes a $19.5 million or $6.3 million net to Harvest 32% interest and deferred tax expense to forward reflect the current quarter non-cash impact of a devaluation on a accrued tax assets and liability. Now I want to summarize, with non-recurring items that had a negative impact from Harvest earnings for the quarter.

Exploration expense of $2.6 million or $0.07 per diluted share. Second, temporary increase in G&A of approximately $1.5 million or $0.04 per diluted share approximately half of which is non-cash and finally the non-cash impact and the current period to Petrodelta’s net income of $6.3 million to net Harvest 32% interest or 16% per diluted share to fully reflected devaluation impact of the pre-tax assets from liabilities that will be sell in Bolivars.

This concludes my comments. I’ll turn the call back to James for his closing remarks.

James Edmiston

Thanks, Steve. You guys follow-up with Steve offline in Q&A to if you need any further detail on that, but I saw the earlier reports this morning of clear earnings missed from a standpoint of the models, the analyst use and I think Steve, explained it very well, but feel free to ask any questions, if you need to.

In closing, as we discussed in the last call. We engaged Tudor, Pickering & Holt to manage competitive process to farmout a portion of HNR’s interest in the Dussafu block, with the business at the end of July. As of today, all I can report is that we have not concluded the process the data room is in London and Houston were very well attended, with a number of companies involved exceeding our expectations.

But I will not be able to share results of that process with you today because quite frankly it’s not complete. We are also in the early stages of similar process. Our Indonesian block and expect the data rooms to open in this quarter.

Finally as regards to liquidity and we’ve discussed this before we continue to evaluate our options for financing as well as taking actions to discuss probably reduce our run rate and reduce our capital outflow to a minimum.

With that, I’m going to open this up for questions at this point.

Question-and-Answer Session


(Operator Instructions) our first question is from Graham Tanaka from Tanaka Capital.

Graham Tanaka – Tanaka Capital

Hi guys, I just wondering if and did you get a little more color on why – you’re having conclude because it’s at the process, there are so many bids and you want to maybe have to go two or three rounds in or is there something else going on, maybe with data or with the incoming data, you received recently? Thanks.

James Edmiston

Graham, I’m not going to get too specific on the process. We did receive bids, you can assume that we are continuing conversations around that. The other thing I would draw out there is, the block has unique interest to different parties depending on their focus. I mean there are those companies out there that were very focused on, here’s an opportunity for a very near-term development pretty short cycle time oil production and probably one of the better fiscal regime’s and certainly one of the more calm regime’s West Africa and that attracts a certain group of people.

There’s also the block that’s extraordinarily rich in exploration upside both in – somewhat conventional to step out, from what we’ve currently drilled and I’d remind you that we are two-for-two there. We’ve mapped multiple structures in the Gamba, also the inboard is slightly explored and we just shot that 3D, but I think there was also substantial interest in that outboard portion as we’ve mapped to a fairly dense 2D.

We mapped some fairly significant subsalt structures that are Dentale equivalent to basically down shelf from the Tortue discovery. Those are the type of things that we are attract a very different group of companies and in order to be quite frank. We thought we were pretty smart guys, when we had this diamond [ph], same time very well.

The diamond well that I refer to Deepwater well, that’s operated by Tortue. I believe it spud sometime in April, we thought certainly that we had the result that well, about the time data room was going on, that well is taken and a little bit longer drill, but the character of those prospects are actually very, very similar to our outboard. In fact you’re looking at the same section so, those results haven’t been published yet. Like many of you, maybe I listen some of the participant’s conference call.

What I’ve been told and what those call said is, they’re currently logging that well and they expect results to be released here in the next couple of weeks. So that clearly, is going to impact some of those players that are very, very focused on the Deepwater spud. Suffice to say that, Harvest had a very clear view of the value the block. We value it very highly and quite frankly, it’s for strategic standpoint. We thought all long, we’d receiving significant dividend on a Petrodelta and we’d be moving forward alone with this block at this point in time.

The lack of dividend and (inaudible) takes, that we form out a portion of it, we’ll sell all of it at this point because we simply don’t have the funding to move ahead certainly two-thirds interest. So we are not going to give it away, we are going to see this to the end and process is still ongoing. I can’t tell you, how long that will take because I’m confident that in the third quarter, we will give you pretty guidance as to what the results are.

Graham Tanaka – Tanaka Capital

Right and to ask at a certain different way to maybe to give us a little more color on your assessment, your clear view of the value. If you did have the sale of that PD, Petrodelta or certainly dividends on Petrodelta would you be actually engaging in this data room sale of in interest or would you try to do it all by yourself?

James Edmiston

I’d say the former, certainly I mean we were looking at substantial cash out of the Petrodelta sale. I think in general, what we were looking at or thinking at the time. I’m not going to say, we are committed to that, that’s a board decision, but we were thinking of very large distribution of that cash and funding the development that we’re underway planning right now, that development ought to have a fairly high capacity for project finance of the use of those proceeds when it is important, but we need it some of it to jump start.

So just looking at hindsight, I can tell you what our plans. Well our plan is clearly we’ll go forward with this block. We are excited about this block and I think it’s very unique, if we had to build, we bring it on some fairly low-risk production and the optionality of both just the step out structures that directly tie back to that infrastructure, but more importantly that outboard very large Dentale structures.

Now that the Dentale play has been proven, it makes it an extraordinarily attractive block especially for company of our size.

Graham Tanaka – Tanaka Capital

Right and so I guess I’m trying to get a little more granularity on the (inaudible) so this is, the answer is multifaceted answer you’re saying that the results that have come in, suggest that the outboard is even more encouraging potential than you may have thought a few months ago.

You’re waiting for this Tortue well, are the potential bidders also waiting for the Tortue well and who’s kind of delaying at both sides or more us as sellers or them as potential buyers?

James Edmiston

I’m not going to address the last part of your question, Graham but let me just kind of backup and take you where we’ve been. The conventional wisdom and why we got into the block initially which we believe, that we could take, I mean the batting average of exploration on the block was not good. I think it’s been 17 wells drilled.

We believe largely that was because of poor imaging and we took the block very inexpensively and spent our money on the size, reprocessing the seismic. We were able to do better on the images and our geoscientist. We chose two wells to drill, the first one was the Ruche, we did discover oil in the Gamba. We drilled that deeper, to take a look at the Dentale SANDS, which there had been one well tested up North of us.

And what we saw in the Dentale Sand and the Ruche somewhat blue up conventional wisdom and that was the (inaudible) and reservoir quality of the Dentale at that depth was far, far better than anyone would have suggested. Now that Ruche well was drilled off structure, so we expect it to be wet, but we were able to see what the reservoir characteristics in the Dentale looked like.

When we drilled the Tortue, the Tortue was purposely sided on a Gamba structure and close to what we felt was the apax [ph] of a Dentale structure as well. We had confidence at least in the Dentale petrophysics or reservoir characteristics at that point, but we had yet to locate a Dentale fairway where you had both the high quality sands and the shale’s that separate those sands in order to trap and potentially shorts to crude..

Though we invested at very end Tortue and we turned out to be right still, it’s a best point. What we’ve seen, what we’ve learned from those two wells. We knew those outboard structures existed, but we couldn’t tie both sand, the shale’s and the oil system to them until we had drill those two wells.

So especially the Tortue that was hugely significant. Now and subsequent to all of that, you had wells spud to the North in much deeper water, but essentially going after the same type of complex. If you were to look at the participant companies’ investor presentation on the Diamond, you’ll see a cartoon cross-section that looks remarkably like the cartoon cross-section we shared in the Dentale, as much as a year ago.

So the simple answer is, our perception to value the block is been enhanced not only by going two-for-two and drilling discoveries, but also by what we saw in the Dentale and we’re able to link to our outboard section. How that influences the perspective companies as I said, I think there is companies that are focused on large exploration targets West Africa and the Atlantic margin in general.

I think they have a probably different view of M&A in West Africa then a company that strategically is looking for early production and short cycle time development and that’s all.

Stephen Hayes

Graham, it’s Steve. If you have any more questions. let’s talk after the call.

Graham Tanaka – Tanaka Capital



Then moving on, we have a question from Curtis Tremble from Global Hunter.

Curtis Tremble – Global Hunter

Thank you, good morning everyone. Was wondering if you had a update on the South American prospect for which you’re waiting government approval?

James Edmiston

Curtis, yes I’m not going to address it today but I’ll go ahead and tip you off now and tell you that. We present at intercom on Monday and we will be taking [ph] that presentation Monday morning bright and early and that piece of business will be revealed at that time.

Curtis Tremble – Global Hunter

Excellent I appreciate it. Any update on Indonesia and potential sale there and kind of where the status of the prospect is?

James Edmiston

Well the data rooms had been placed. The date is set. I mean the way those process is taken place in Indonesia, it requires government approval and those data rooms actually have to be undertaken in Indonesia, but again we expect that process to occur in this quarter removing down the road. Presentations are part of the data rooms etc. have been prepared. So we are ready.

Curtis Tremble – Global Hunter

Good deal. One other one just, if I may Steve can you walk me through the differential in G&A again between first quarter and second quarter?

Stephen Hayes

Sure, I mean. We basically had a spike in the G&A from the last quarter due to two reasons. The stock prices in flush recovered during the second quarter and that increased the stock based compensation to the employees, that was actually the half of it and then we had additional legal fees and external RO fees that occurred during the second quarter the normal.

As we integrated before, we’re closing to masses in different locations. We’re going to have some severance cost that we’re going to continue for about another couple of months and then we’ll see our G&A rate begin to reduce to more manual state.

Curtis Tremble – Global Hunter

So maybe up $5 million pitching for third quarter, then back down at the fourth?

Stephen Hayes

I think it will be little bit more than $5 million in the third quarter, after that it should be around $5 million, third quarter.

Curtis Tremble – Global Hunter

Thank you so much. I appreciate it.


Your next question today is from Jason Wangler from Wunderlich Securities.

Jason Wangler – Wunderlich Securities

Good morning, guys. Not to be late for the bigger bone, just curiosity though I guess as you’re going through this and you talked about kind of all the parties having maybe just different ideas. Would there be a possibility or the ability to split it almost into the development and the exploration side to maybe package it for those parties?

James Edmiston

That thing is impossible, Jason?

Jason Wangler – Wunderlich Securities

I’ll take that as a yes. The second question, is Venezuela it supposed sounds like frustrated with the operations obviously wells are doing very well. Is much going on as far as trying to look, it actually in that position. Are you trying to kind of circle back or anything just maybe an update on that?

James Edmiston

Well I mean, I guess my biggest frustration is at my core, I’m an engineer starting with 30 something years and have worked all over world, including from Asia to say – I’ve got to say the fields that we work down in Petrodelta are among the best, I’ve ever been associated with and it’s heartening when that business isn’t living up to its potential in the near term.

Now that last part was kind of temper my disappointment because the business hasn’t been permanently impacted. It’s got a very, very bright future. Great, rocks [ph]. Yes we are little bit inefficient right now. I don’t think that situation will sustain itself, so there is a partner that says, just hang on. I think the more serious issue is, strategically I mean we were very clear in our strategy, when we embarked down this road really in ‘08 was that Petrodelta was the foundational asset, we were diversify off that.

Our diversification efforts would be said as far as development by revenues from Petrodelta. So I think those revenues from Petrodelta, you’ve got a business model right now that we had further large discovery in the Yuwana basin at the end of the day. The dividends weren’t there to take that further step, we sold it off.

Your two-for-two in Gabon was the extraordinarily prospective walk. We find ourselves having to farm down some of that, if not sell it out. So my frustration is that Petrodelta is a very profitable business, it’s efficiency could be increased if you read through the queue, you will see that there’s a working capital surplus of $378 million to the business. The math is fairly simple, 32% of that is applicable to Harvest Net.

So yes, at our inability to receive dividends from Petrodelta make our overall growth very, very difficult to say the least. So we continue to get interest in both Petrodelta and in the company and we continue to work that, we continue to list that, we continue to try to work with the Venezuelan authorities to move some of those things forward and it hasn’t changed. We are not going to, we can’t, we are not in a position to sit and wait for a better day, when we don’t know whether that’s five months down the road or five years down the road.

We are doing our best right now to resolve that and to unless that value for shareholders. I think it’s important to keep in mind though, that in spite of not receiving dividends. We did receive an offer, arms to length the 725, which would have netted the company, 525 in cash, which is about $13 a share. So it’s hell of a long way from there to where our stock price is now.

And that makes price discovery a lot more difficult than it otherwise would be.

Jason Wangler – Wunderlich Securities

I appreciate it and thanks for the color.


(Operator Instructions) we will move on to Tony Polak from Aegis Capital.

Tony Polak – Aegis Capital

Good morning. Can you tell us exactly what you’re owed in Venezuela in terms of money, that’s owed to you?

James Edmiston

We’re owed $12.2 million, $9.8 million of which is ours in a declared and approved dividend and that’s we’ve got heard in 2010 and that has not been dispersed. In addition to that, there is a very large working capital surplus, it can’t be justified by the running of the business. It’s a very profitable business, you would expect its size and spend out rate to probably have a working capital reserve somewhere on the order to 50 to 70.

We will continue to –we shareholders of Petrodelta will continue to request that some of that excess working capita be declared as dividends, whether or not we are successful in doing that. we’ll see whether that happens, up to now we have not been.

Tony Polak – Aegis Capital

Thanks. Could you comment on the Windfall Profits Tax going down so much, is that or is it just reflection of prices?

Stephen Hayes

Yes, if you look at the price now versus a year ago, it’s there are various tranches all sort of different price points.

Tony Polak – Aegis Capital

Fine. Okay. Thank you.


(Operator Instructions) and it does appear that’s all the time we have for questions today. Mr. Edmiston. I’ll turn the conference back to you for additional or closing remarks.

James Edmiston

Well thanks again everybody and as you know, we will be here to pick up phone. Give us a call if there’s anything we can help you with. You’ll be disappointed if you try to get a whole lot more color Gabon process. So I wouldn’t don’t waste your time on that one.

I’ll say one other thing, Karl Nesselrode, our Vice President. He’s our Vice President of Business Development and Technology. He’s been with the company actually longer than I have, he’ll be presenting (inaudible) intercom. As I said, we will cover our new piece of South American business. I hope you get a chance to meet him if you’re at intercom and follow-up with any questions at that point. Thank you.


And that does conclude our conference today. Thank you all for your participation.

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