Harvest Natural Resources, Inc. (NYSE:HNR)
Q2 2014 Earnings Conference Call
August 11, 2014 11:00 AM ET
Keith Head – VP and General Counsel
James Edmiston – President and CEO
Stephen Haynes – VP, CFO and Treasurer
Jason Wangler – Wunderlich Securities
Good morning and welcome to the Harvest Natural Resources earnings conference call for the 2014 second quarter results. As a reminder 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.
Thank you, Taylor. Good morning and welcome to Harvest Natural Resources 2014 second quarter results conference call. This morning our press release was broadcast to the 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 relation’s portion of our website at www.harvestnr.com. Additionally a telephonic replay will be available this afternoon by dialing 719-457-0820, passcode 5523692.
This conference call will contain various forward-looking statements and information, including managements’ 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. In addition, we will discuss potential transactions involving company assets. We can give no assurances that those 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.
Thanks Keith. Good morning and thanks for joining us today and I hope you’ve had a chance to review the earnings release this morning. I’ll go through a brief operations and then Steve is going to walk you through the financials for the first quarter and then we will go ahead and move into Q&A.
Starting with Petrodelta, Petrodelta delivered about 4.1 million barrels of oil or 45,000 barrels of oil per day in the second quarter. That’s 18% above the same quarter last year. Current production is average running about 41,000 barrels a day with a few wells offline and waiting to be serviced.
The discussions between Pluspetrol as pending purchaser of Harvest’s remaining interest in Petrodelta and the Venezuelan authorities continue. I have nothing further to report on the discussions at this time.
On our Dussafu Block in Gabon we continue to see very fair progress towards project sanction and first production as well as progressing our technical understanding of exciting play in the upward area of the Block. In the second quarter, the parties and the Gabonese authorities signed a declaration of commerciality covering the existing discoveries. Subsequently in July the Gabonese authorities awarded an 850 square kilometer exclusive exploitation area or EEA for the development of and exploitation resources within that boundary. That area is equivalent to about 36 offshore blocks in the Gulf of Mexico.
This key agreement will allow to develop the existing reserves as well as continue to efficiently exploit the numerous satellite structures surrounding the current discoveries. Also in July we submitted the purposed field development plan which includes the single floating production, storage and offloading vessel FPSO and sub-sea wells tied back to the FPSO. These were all key steps in moving toward project sanction and we are now ready to kick-off field work.
All of this progress has come together with the outstanding co-operation of the Gabonese Authorities at the DGH and the Ministry for which we are very appreciative and we are eager to progress the project to final project sanction this year.
Additionally, we continue in the processing stage where new 3D survey which we started in the fourth quarter over the outboard area as well as the existing discoveries. It’s already clear to us that this new data will significantly sharpen our images [inaudible] within the area of our existing discoveries and we’ve began to incorporate this new data into our development planning. We are working on the depth migration across this survey and expect to be complete in late September.
As I discussed at a recent conference, a few things are clear to us at this point. First, the leads which we identified on the old vintage 2D data, which provided the impetus for the new 3D shoot has held up very well and are in fact better than our expectations going in. As I said before the size of these outboard structures are on the order of 10 times the size of the prospects that we have targeted to-date. Second, we feel comfortable that our geological model has been validated by the data and we should be able to directly apply the knowledge gained from our prior discoveries at Ruche and Tortue to the outboard areas.
And third, as we have discussed at the most recent conference, the new 3D has uncovered another underlying play in the [thin drift] section below the Dentale which until now we have been unable to effectively image. This section, like the Dentale, provides the possibility for significantly increased resource size versus our current discoveries.
As we noted in the press release, Gabon awarded seven new licenses in the deepwater round last week including blocks adjacent to and very near our Dussafu Block. The same structures I am discussing here are the primary targets for the newly awarded blocks. The routine Tortue well results demonstrate the elements for the Dentale play in the outboard area of the license exists and with our new 3D survey we will be able to image these structures to establish cracks – and geometries and significantly de-risk the potential ahead of the rest of the pack.
As I said before, our enthusiasm toward our Dussafu block continuous to grow and we look forward to being able to share with you all full characterization of the upward opportunity in the near future.
As you should note from our press release Harvest has sold its interest in China and the Budong Budong partners in Indonesia have filed to relinquish that Block. These moves significantly simplify the Harvest’s equation. The focus is on the completion of Venezuela transaction and moving the Dussafu Block forward to first production. As I said before, on government approval of the Venezuelan transaction your Board will have a significant decision to render and it’s vital that they consider a full complement of the options in order to maximize shareholder value for all of us. Our present path ensures that a full suite of all alternatives are available for them to consider on behalf of the shareholders.
So with that, I am going to turn it over to Steve to discuss the financial and after that, I will make some closing comments.
Thanks James and good morning everyone. Our Form 10-Q was filed this morning and it’s posted on website at www.harvestnr.com. Harvest reported a second quarter net loss of approximately $1.7 million, compared to a net loss of $4.5 million for the same period last year. The second quarter results include exploration charges of $1.6 million and non-recurring charges of $3.2 million and impairment cost related to Budong Budong Block. Adjusted for exploration charges and non-recurring items, Harvest would have posted second quarter net income of approximately $2.1 million or $0.07 per diluted share before any adjustments for income taxes.
General and administrative costs for the second quarter were $4.9 million for the second quarter compared to $7.6 million for the same period in 2013. This is a result of the closure of our UK office and a reduction in office cost in Indonesia as we wind down the operations for Budong.
Now I’ll talk about Petrodelta’s results. Petrodelta, Harvest’s owned affiliated generated $243.8 million and net revenues after royalties during the second quarter compared to $210.8 million for the same period in 2013. The average price of crude oil sold by Petrodelta during the second quarter was $88.07. Petrodelta reported second quarter operating income before taxes and non-operating items of $35 million compared to $91.8 million for the second quarter of 2013.
Petrodelta posted $42.3 million in net income under IFRS for the second quarter compared to $64.8 million for the same period in 2013. After adjusting Petrodelta’s IFRS earnings, primarily to confirm with U.S. GAAP, Harvest equity interest in Petrodelta’s earnings was $8.2 million compared to $6.1 million for the same period in 2013.
With this I’m concluding my remarks and turning the call back to James.
All right. Thanks Steve. As always Steve is available to answering any questions you may have after the call. So feel free to give him a call at conclusion. I’m going to ahead and open it up for Q&A. As I said before, I can give you assurances that Venezuelan transaction will close. However, I continue to get reports on the discussions which indicate progress toward that end. So I remain optimistic. However I will not be addressing any specific questions to that. So with that, I will open it up for questions. Operator?
Thank you. (Operator Instructions). We will take our first question from Jason Wangler with Wunderlich Securities.
Jason Wangler – Wunderlich Securities
Good morning, guys. I’m curious, obviously you’re not commenting on Venezuela makes sense, but just as far as looking at Gabon a lot of obvious activity that’s going on for you and others and everything looking pretty good. Can you just kind of walk through the idea and options as far as funding and what you guys are kind of looking at, may be what type of spending you are going to have in the coming quarters in that area?
Let me kind of answer that backwards first. In the coming quarter, we are really just kicking off field work, front end engineering and design for those of you that don’t like these acronyms like [inaudible]. That’s not going take a lot of fuel and we’re fine at that point. What we are looking at though is, as we move toward the end of the year, we will be looking for projects sanction. You can appreciate that parallel to the engineering design work we will be having preliminary discussions with banks around project financing in that regard. The way the field development plan is laid out is with an FPSO and subsea wells tied back to the FPSO. The FPSO as we have envisioned will be a leased vessel and the top, including the top side et cetera.
So that’s kind of a full capital solution for development. We’ll primarily have to really drill the wells and hook them up. So I’m not going to give you an estimate beyond what I have now, what I have before, but clearly if the Venezuelan transaction closes we would have plenty of powder to get first phase done and up on production. That’s seems to be obvious. Whether or not that ends up happening that way that’s really a matter for the Board. So stay tuned. In the interim we will be doing – again continuing the processing of the 3D data to get a complete characterization of that outboard prospectivity which we are extremely excited about as well as kicking off front end engineering design to move towards project sanction on the development projects. So that’s what we have laid out.
Jason Wangler – Wunderlich Securities
That’s helpful. I appreciate it. And then just obviously you monetized China and are kind of moving out of Indonesia. Is the plan really just to pretty much focus on what you got going on at Gabon or is there anything else really that you guys are looking at or are you just kind of remaining opportunistic as far as anywhere else that would make some sense?
Well, I think we got the hand on both China and Indonesia earlier this year. So we are just executing that. We certainly think at this point it makes sense for the company to be very, very focused and that we are. That’s not to say that we don’t have our eyes on a few other things that I’m not going to get into right now. Clearly we continue to have an interest in some of the things in South America as well as leveraging our experience in Gabon along West Africa. But I think step one is to resolve strategically where this heads with and without the transaction and to fully understand and characterize the Gabon block.
I think in the interim period you won’t see us do anything or I don’t have anything in the cards right now that we are envisaging doing prior.
Jason Wangler – Wunderlich Securities
I appreciate. I’ll turn it back.
All right. Thanks.
(Operator Instructions). And we will go to [Tony Pollock with AGEIS].
Hi, there. Could you tell us what’s happening to the cash flow that’s coming through on the Venezuelan properties now?
I don’t think I understand your question, Tony.
Is the cash that’s coming out of – for Harvest, is that just going into Venezuelan banks, is it a separate account for Harvest, is it a separate account for the subsidiary?
There have been no dividends paid. So basically there is a payable or a receivable in our case that continues to accrue.
The surplus cash, obviously we have no access to that. That is part of the problem is that at year-end I think that total number was about a $100 million. Obviously we since sold some of our interest and that would apply to the buyers account at this point. But yes I mean that’s therein lies our issue we’ve not been able to repatriate profits from the business now for a couple of years.
Okay. Thank you.
And we will go next to [Badure Muddy with CDP Capital].
Good morning, Jim.
Just wondering when you look at the alternatives on the Gabon and to various permutations and if we work on the assumption that at some point in time in the future Venezuela gets concluded favorably. In the past if I am not mistaken you have indicated the opportunity there for a special dividend or maybe even an equity repurchase or those kinds of other returns of capital to shareholders. Given kind of what you are seeing with development scenarios in Gabon as-well-as the things you alluded to that you would only probably start thinking about assuming Venezuela gets closed, is there – do you still foresee a probability that some sort of return of capital to shareholders could occur as part of the mix here assuming a positive conclusion to Venezuela?
Yes. I don’t think to be blunt, I don’t think any of the alternatives are off the table at this point. So let me step back a minute and kind of pull some of this together. As you recall last call we actually had a preliminary deal to sell Gabon and I think all-in was about 145, 138 plus cost of the seismic. That would have left us with just Venezuela and at the same time we were negotiating the deal for the sale of Venezuela which we did include the first tranche of it, we’re waiting on the second tranche to close.
As far as Gabon goes that 3D shoot did come off. We walked away from that transaction, never could come to final terms and the reason I chose to do was the conditions to sell were not something that we would agree to. The difference in what’s transpired since then is we committed to shoot that 3D at that time because we felt like there was a significant chance that not only we would see something in the outboard but more importantly we knew that it would be value adding in terms of the development planning for the pre-existing reserves and therefore it could only add to the value of that asset.
What’s changed since that time is, as I’ve said what we’re seeing out of the seismic now certainly is as it regards to the outboard exceeds our expectations pretty substantially. So the simple indication there would be there is no way we would consider that type of number today for our Gabon Block. Certainly it doesn’t mean it’s off the table or anything else nor does it mean that a return of capital is in the cards. I think from an order of the way this lines up in order upon the Venezuela close were that’s to happen the Board at that point has to have some decisions to make and certainly they will weigh the prospectivity of Gabon, where we’re in the Gabon process among other things as far as a return of capital in part or in whole, whether we sell Gabon, whether we move forward with Gabon.
As far as funding Gabon entirely out of that cash package, obviously what the Board would have to believe that the highest use of value to the shareholders is investment in Gabon A and the other thing that they would have to believe is that a Gabon only company as a viable public entity, publicly traded entity. I think those are two things that they have to get past. So that’s a long way of saying there is absolutely zero alternatives that have been taken off the table. What we’re focused on is making sure those alternatives are as rich as possibly can be at the time when Board takes that decision. It’s not really appropriate for the Board to take that decision until we cross that bridge. That makes sense?
Yes. I guess the thing you mentioned I find kind of interesting is the viability of a single asset or a single jurisdiction company in West Africa as part of at least your evaluations or whatever, have you seen any other comps or anything like that or it’s way too early to even think about that?
No, you should appreciate it that we look at that’s what causes us to question it a bit some time. We know what a – we know what the market valuation is on single assets in certain South American countries by experience is – I think our experience over the last several years is that diversifying that asset base was very, very important, obviously as a result of the transactions we’re involved in right now.
We will become more focused and basically the line of [side view] as you would be a one asset company in one jurisdiction. Having said that Gabon as far as the jurisdiction is I don’t think we could pick some more outstanding one, certainly in West Africa. I think the industry activity especially recently and the large scale names that are moving back into the country bear that out. But I think it is the consideration that the Board has to take.
Okay, and just so that I understand. You kind of walked through some few steps here but what is the next I guess critical milestone for Gabon?
As we get through the feed the front end engineering design that would get us to much more accurate costing data, design data will allow us to prepare AFB quality estimates to present to our Board of Directors, to the authority, to our partners et cetera for final project sanction. All of that also bears into the financing, the financing where we could do project financing on our piece and our partner’s piece obviously, they would need that quality of numbers as well.
So it’s a really a lot of engineering, both on the sub surface and in the facilities, drilling the subsea work and getting that down to a much narrower range on the cost side.
My understanding is that, that would be – did I understand earlier that would be kind of concluded in hand around the end of the year or early next year?
We’re targeting that project sanction by year end.
Okay. Thank you very much.
And this concludes today’s question-and-answer session. I’d now like to turn the conference back over to Mr. James Edmiston for any additional or closing remarks.
All right folks thanks for joining us today. I will be in Denver, speaking at Intercom, next I think a week from today if I am not mistaken. So there will be a new presentation out there. This pretty much lays out the map toward where we’re moving on the 3D, a little better images and I think you will continue to see that over the coming months but I hope you can join us, if not, join us on webcast. And as always if you have any questions feel free to give us a call. Thanks for joining us.
And this concludes today’s conference. Thank you for your participation.
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