Harvest Natural Resources' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Harvest Natural (HNR)

Harvest Natural Resources, Inc. (NYSE:HNR)

Q3 2013 Earnings Conference Call

November 12, 2013 11:00 AM ET


Keith Head - VP, General Counsel and Corporate Secretary

James Edmiston - President and CEO

Steve Haynes - Chief Financial Officer


Jason Wangler - Wunderlich Securities

Graham Tanaka - Tanaka Capital


Good morning. And welcome to the Harvest Natural Resources’ Third Quarter Earnings Release Conference Call. As a remainder this conference is being recorded.

I will now turn the call over to Mr. Keith Head. Please go ahead.

Keith Head

Thank you. Good morning and welcome to Harvest Natural Resources 2013 third quarter 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, 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, passcode 8070567.

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 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. In addition today we will discuss potential transactions involving company assets. We can give no assurances that these transactions will be completed.

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 and good morning. Thank you for joining us. Hopefully you’ve had a chance to review the earnings release this morning, I will briefly go through in operations in business summary and then Steve will walk you through the financials for the quarter.

Starting with Petrodelta, Petrodelta delivered about 3.8 million barrels of oil or 41,700 barrels oil per day in the third quarter of 2013. That’s 9% above the same quarter last year and 9% above the second quarter of this year. Current production is running about 44,000 barrels of oil per day and the average daily production rate for October was 42,100.

Petrodelta operated up to five drilling rigs during the quarter and drilled and completed four development wells. Furthermore, Petrodelta finally commissioned a new treater at the El Salto field which should expand processing capacity there to around 25,000 barrels a day. Petrodelta’s revised production target for the year is approximately 40,400 barrels per day average for the year based on capital budget of approximately $210 million.

Petrodelta is expected to drill 25 oil wells and two water-injector wells this year. However, through the first nine months of the year drilling efficiencies are falling wells shorter ones required for the target of 25 wells. Through the first nine months of the year, Petrodelata completed only 10 wells.

The drilling operations continue to suffer from efficiencies across the board with average drilling times two to three times longer than just in 2010. However, while drilling operations continued underperform well performance continues to exceed expectations and should allow Petrodelta to post very near as projected year-over-year production growth. As a result, Petrodelta is expected to maintain its profitability and net cash generation, a testament to the quality of the asset given its operational and funding challenges.

In Gabon work on the cluster development of the Tortue Ruche and Walt Whitman discoveries has progressed in the third quarter. Our economic indicator robust development and we expect to progress through steps leading to possible projects sanctioned including declaration of commerciality, certification of the reserve, submittal of an exploitation areas, license and submittal of an improved well, our development plan.

The past track plant utilizes potential existing FPSO solutions, as well as the conversion of other vessels. We’ve identified the availability of key equipment including trees, well heads, flowlines, subsea equipment and multilateral completion equipped.

In parallel with the development of the existing discoveries would progress our understanding of the exploration potential of the block. The Dentale prospectivity continues to mature and given the encouraging results from the Tortue well we're progressing the unlocking of the Dentale prospectivity across the outer half of the block through the acquisition of a 3D survey.

We have identified the potential for larger outboard Dentale structure to mapped off existing 2D mean prospective resource of about 650 million barrels of oil in fixed structures. The leads identified in the Dussafu compare favorably with nearby exploration activity to the north, where Tortue reported a discovery with Diamond 1 exploration well and with reports of license awards to various major companies including Marathon, Exxon, Shell, Total, Cobalt and others in block adjacent to and on trend with the outboard part of Dussafu.

The recent Tortue well demonstrate the petroleum elements for Dentale play in the outboard part of the license exist and we started the acquisition of 3D survey to establish track geometries and further de-risk this potential. At this point of time, we're about 80% complete with the 3D [shoot]. The acquisition of the 3D shoot commenced in October and which should be complete next week. We're acquiring a total of 1,200 square kilometers over the outboard areas of the license, which was previously covered only by vintage 2D together with a re-shoot over the existing discoveries of Ruche, Tortue and Moubenga.

This data is being acquired with the latest technology and the longer streamer that was previously used on the block, which we believe will better enable imaging of the pre-salt section. Processing the pre-salt depth is scheduled to commence immediately on completion of the acquisition. We expect the first product from this processing to be available during the second quarter of 2014.

Importantly this new seismic survey overlaps the previous 3D over the existing discoveries of Ruche and Tortue. We expect this to further enhance our placement of the development wells planned in the Ruche and Tortue cluster development.

With that I'll turn it over to Steve to discuss the financials and then I'll make some closing comments.

Steve Haynes

Thanks James and good morning everyone. Our Form 10-Q we filed today and posted on our website at www.harvestnr.com. Harvest reported third quarter net income of $2 million or $0.05 per diluted share compared to net income of $5.8 million or $0.15 per diluted share for the same period last year. The third quarter results included exploration expense of $1.5 million or $0.04 per diluted share and impairment charge on our Colombia asset of $2.3 million or $0.06 per diluted share and an unrealized loss and derivatives of $6.6 million or $0.17 per diluted share. After adding back the charges for exploration expense, impairment and unrealized losses on derivatives, net income would have been $12.4 million or $0.32 per diluted share.

During the quarter, general and administrative cost increased to $8.2 million as a result of increase in non-cash stock-based compensation resulting an increase in share price and increase in legal fees related to proposed corporate transactions and severance cost incurred for reduction staff levels. As I mentioned earlier we impaired our Colombia asset $2.2 million during the third quarter. Today we have not received approval from the government of the Republic of Colombia for our farming and coupled with receiving the default notices from our partner, to make sure he was late to impair the asset. This impairment does not indicate our withdrawal from the block or a reduction of Harvest’s interest in the acreage.

We're working with our partners to see how we may be able to cure these defaults and reform new agreements. Also during the quarter we incurred $6.6 million of unrealized loss on derivatives, of this amount approximately $3.5 million relates to increased probability that (inaudible) will repay as 11% senior notes are redeemed in the event of putting a closed transaction with Pluspetrol or Vitol. The remaining $3.1 million relates to certain outstanding warrants with anti-pollution protection features which are re-valued at the end of each quarter.

Now let’s talk about Petrodelta third quarter results. Petrodelta had net income during the quarter of $96.6 million, $30.9 million net to Harvest’s 32% interest on IFRS. After adjustments to Petrodelta’s IFRS earnings to conform US GAAP, Harvest’s 32% share of Petrodelta’s earnings was $20.6 million compared to $16.2 million for the same period last year. The average sales price for the crude oil produced during the quarter was approximately $93.43 per barrel compared to $92.43 for the same period last year.

That concludes my remarks. I’ll turn it back over to James.

James Edmiston

Thanks Steve. Let’s take potential transactions that we've outlined one at a time in Steve’s comments, first on the Pluspetrol spin-off transaction. As the press release indicates, we continue to work with the counterparty towards definitely agreements in spite of the fact the exclusivity period for such negotiations has passed. As we discussed at the outset when we announced this potential transactions, the structure of the transaction and the assets involved, make such a transaction fairly complex. As of today, while we continue be engage in discussion with Pluspetrol we can give no assurance that definitive agreement will be reached.

In Gabon on 27th September, we entered into exclusive negotiations with Vitol to sell Harvest Dussafu [BB] which holds the interest in the Dussafu PSC. As of today, we continue to negotiate exclusively with Vitol for definitive agreements for this transaction. Again I can give no assurance that we’ll reach execution of definitive agreements with Vitol in this regard.

Now that both transactions would be executed as outlined that would entail a return of proceeds unless any adjustments to our shareholders. As I have discussed before this strategic directions necessitated by the circumstances existing around our core Venezuelan holdings. We do not received dividends from the business in three years, received those dividends from Petrodelta’s internally generated operational cash surplus is critical to the company’s existence. Today including the 2009 declared, but undistributed dividend, the cash surplus attributable to Harvest’s 32% interest in Petrodelta is almost $100 million.

A much larger company with a more diversified cash producing asset base would likely weather the storm as best possible given the extraordinary quality of both Venezuela and Gabonese assets. Unfortunately and in spite of our best efforts, that doesn’t seem to be an option. In spite of demonstrated exploration success, absent to dividend stream from Petrodelta the company is at a significant competitive disadvantage given these resulting cost of capital.

So whether these two announced negotiations are successful in reaching definitive agreement or not, the company’s direction absent some unforeseen development will be to sell the asset base in whole or in part and return the cash to the shareholders. Our primary focus is to maximize the cash value of the company to our shareholders in the shortest possible timeframe.

The biggest challenge facing the company today in my opinion is not reaching definitive agreements on either of those announced transactions. There has been and continues to be external interest in our asset base in the company as a whole. Our Venezuela business under normal circumstances and over the longer term has the potential to become a world class production operation. Our block in Gabon posses an extraordinary suite of exploration plays in addition to the current discoveries as evidenced by the recent deepwater bid round activity in Gabon. So we believe we will find buyers for the company and its assets where they reach to announce transactions received pursued or not. Our biggest challenge is our near term liquidity and its effect on our ability to affectively negotiate the best terms both in price and structure for the sales of the company or the company’s assets.

This last year ongoing cost base to the minimum amount required to run our business and facilitate the process we have outlined. The debt covenants around our debt due October 2014, severely restrict our ability to bring on new debt. Further, as a result of our late filing 2012 10-K we no longer have an act to rest three shelf registration, which would allowed our usage of our past ATM facility to meet our cash needs during this period.

As such, you may have noticed we sold small amount of shares into the market in the past month in order to meet our near-term obligations. We will continue to explore every avenue to fill this funding gap with the still priority of funding the company sufficiently, so it can continue deducting these sales processes in a responsible manner on behalf of the shareholders.

And with that, I am going to take your questions and happy to hear any ideas you might have. However before doing so, understand that I will not be answering questions as to the status or nature of the negotiations ongoing. So with that lets open up for questions.

Question-and-Answer Session


(Operator Instructions) We will take our first question from Jason Wangler, Wunderlich Securities. Please go ahead.

Jason Wangler - Wunderlich Securities

Hey, good morning, James and Steve.

James Edmiston

Good morning, Jason.

Jason Wangler - Wunderlich Securities

Just curious and appreciate your comments as far as the deals. Wondering if there is any way you would at least be able to maybe give us an idea of timing in terms of if definitive agreements were made? I appreciate that the Venezuela asset obviously possibly doing also a corporate transaction would take some time across these things, but as far as development maybe to get those near term financing needs out of way. Do you have an idea, how long a deal like that would take once you got the documents in place?

James Edmiston

Well, as you say the first transaction, the first controlled transactions as we structured certainly at the time of the announcement that required shareholder approval et cetera. So, close to reaching definitive agreement, the two issues you have from there is government approval and shareholder approval which can be done concurrently, we would anticipate going after proxy pretty much directly after having signed a definitive agreement where that it takes.

So you are still probably talking minimum 4, 5 month type process, in round terms. The Gabonese sale is more straight-up asset sale, having said that it also requires government approval and you're talking several months out. That went as well. So, I don't think either of those -- closure of either of those sales solves near term cash needs.

Jason Wangler - Wunderlich Securities

Okay. I appreciate the color on that. And then just curious on Indonesia, is that still something that you would look also to monetize or maybe talked about maybe after walking through Gabon that that would something that you guys would look at. Is that still kind of the plan there too?

James Edmiston

Yeah. I think Jason what I said is everything. And so there is an active process going on in Indonesia, there is an active going on Wab-21 as well.

Jason Wangler - Wunderlich Securities

Okay, perfect. I appreciate it guys.

James Edmiston



(Operator Instructions). We’ll take our next question from Graham Tanaka from Tanaka Capital. Please go ahead.

Graham Tanaka - Tanaka Capital

Yeah, hi Jim and Steve. Just wondering if you could just give us an estimate of what the cash burn rate is for months currently? And then maybe just help us out with the kind of any requirements restrictions covenants, due dates on debt so that we get a good feel as to what need to be raised and when? Thanks.

James Edmiston

The firm is going to run about $2 million a month other than what we spend in operation. For instance we're shooting the 3D survey and in Gabon which is and continues to be very, very important to marketing that asset. Cash that we're going to run about $2 million a month I would say that we would be able get it down before the transaction and such going on to get round about $2 million a month on the G&A.

I think your second question was regarding to debt. The debt outstanding is due October 2014.

Graham Tanaka - Tanaka Capital

And payments required, in the next say six to nine months any payments set aside?

James Edmiston

We have quarterly increase I think runs 2.2, $2 million.

Graham Tanaka - Tanaka Capital

Okay. So the $2.2 million per quarter in addition to the $2 million per month burn rate and are there any other assets that can be raised, any other means that can used to raise cash other than equity sales?

James Edmiston

Well, equity, there is debt that generally includes an equity component to bridge whether it’s with potential buyers or otherwise you can appreciate that we are looking at all the above.

Graham Tanaka - Tanaka Capital

(inaudible) debt covenant restrictions prohibit, some kind of debt or bridge, would debt, but...?

James Edmiston

The covenant restrictions in the debt, they are clearly restricted as I mentioned in my comments. So you got to work around those. Clearly any debt has to be subordinated. Having said that with either of the transactions is outlined, you completely extinguished the debt which I want to close this first. So in spite of fact there would be subordinates to the senior debt converge net proceeds well in excess of what we would need to raise [debt], but there are typical restrictions in covenants in the debt that make it very restrictive on the debt side.

Graham Tanaka - Tanaka Capital

Okay. The other assets that might be selling in Asia, China, what kind of range of value could there be there and what timing will there be for those assets, so those after -- would those be after a larger deals or could they be done earlier?

James Edmiston

I really couldn’t say I can tell you that with respect to materiality they are not going to be material relative to the Venezuela deal or the Gabon deal, so you talk about a much lower amount. Obviously, we would like to see those things happens sooner rather than later and those discussions would be ongoing and the marketing of those assets were ongoing. Right now I am not going to estimate a range value or timing on either of those.

Graham Tanaka - Tanaka Capital

And you say there is interest, I hear that you say there is interest in both the larger assets Gabon and Venezuela from other parties, are there still additional interest beside beyond the two parties have indicated interest?

James Edmiston

We’ve never had a shortage of interest and I have said that several times. We've had an interesting journey in terms of price discovery at the Pertamina deal reflected the first time that we felt like the price reflected with the -- what we needed for the Venezuela asset, so there in the nature of both of those assets there always be interest.

Graham Tanaka - Tanaka Capital

And I guess, sorry for pushing for this, but I am just trying to get a feel for, is there enough interest that even if these sales through there should be potentially other interest not too far away in price, or could there be it’s hard to say?

James Edmiston

Well, I mean obviously it’s hard to say if you haven’t entered into a price discovery conversation with the third or fourth or seventh party. I assure you there is interest, I assure you that when you talk about price ranges the announced transactions, whether it’d be Pertamina but also means differently tax structure process around Pluspetrol, other things it certainly serve to inform any of those discussions. But I know what you are digging for Graham, we’re not going to get there.

Graham Tanaka - Tanaka Capital

Okay. Well, good luck, thanks.


I will turn the call back to management for closing remarks.

James Edmiston

Okay. Well, thank you for that. Sorry if I got cut a little bit short. We are around all day. If we can follow up with any questions you may have on the announcements, feel free to call. I would say, I think the Board and management has been clear in its path forward. We will continue to work these in-house transactions that we have discussed directionally, you know where we are headed. If you have any ideas regard to you want to share with us, feel free to give us call. Thank you.

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