Harvest Natural Resources' (HNR) CEO James Edmiston on Q4 2015 Results - Earnings Call Transcript

| About: Harvest Natural (HNR)

Harvest Natural Resources, Inc. (NYSE:HNR)

Q4 2015 Earnings Conference Call

March 30, 2016, 11:00 ET


Keith Head - VP & General Counsel

James Edmiston - President & CEO

Steve Haynes - CFO



Welcome to the Harvest Natural Resources Fourth Quarter and Year-End 2015 Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Keith Head, Vice President and General Counsel. Please go ahead, sir.

Keith Head

Thank you. Good morning and welcome to Harvest Natural Resources' 2015 fourth quarter and year-end results conference call. This morning our press release was broadcast to the company's fax and e-mail 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, passcode 2160648.

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. 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'd like to turn the call over to James Edmiston, Harvest Natural Resources' President and Chief Executive Officer.

James Edmiston

Thanks Keith. Good morning and thank you for joining us today. Hope you had a chance to review the earnings release this morning. I'm going to go through a brief summary of operations and Steve is going to walk you through the financials for the fourth quarter and 2015 overall and then we will open up for some questions.

Starting with Petrodelta, Petrodelta delivered about 4.1 million barrels of oil or 44,398 barrels of oil per day in the fourth quarter of 2015. This is up 9% from the same quarter in 2014 and up 14% from the third quarter of 2015. Current production is running at about 44,800 barrels of oil a day. The year Petrodelta produce about 14.8 million barrels compared with 15.6 million barrels a year prior. So while production was down year over year more recently production has begun an uptrend. Further increases in the near term depend primarily on increasing treating capacity that was also -- which alone is producing almost 28,000 barrels of oil per day.

Currently, [indiscernible] running at Petrodelta with near term plans to release further rigs probably down to a level three or four. Last year Petrodelta completed 18 development wells inspite of [Technical Difficulty] that’s up five wells over 2014 but still well below the drilling efficiency expected. For 2015 in addition to the previously discussed operational efficiencies the business continued to suffer from serious distortion in local currency exchange which destroys dollar denominated operating profits when reporting in dollars. As a result you'll see that Harvest once again impaired the asset on a balance sheet this time to zero value.

As Steve will explain in more detail the impairment is driven by the decline in oil prices, work out for an operating cost efficiency which is greatly exacerbated by the foreign exchange distortion and a discount rate applies to the impairment calculation in excess of 25% compounded to reflect risk cost of capital in current Venezuelan market. Important to note two things here. First the business is currently profitable at current oil prices and at an exchange rate of approximately VEF200 per dollar, a rate widely used in another mixed [indiscernible] enterprise.

And second the purpose of the valuation from impairment testing is not intended to reflect the value that one might expect to receive in a sale of the business. Again I'll be happy to answer for questions in the Q&A on this subject and Steve will provide a little bit more detail on the subject during his comments.

In [indiscernible] we made progress exploring our development and exploration options as well as updating our cost estimates for those drilling and development. We've seen costs continue to fall in the slower oil price environment. As we’ve mentioned in the last call we continue to have discussions on-going with parties to farm down some of our 2/3rds interest in the block to facilitate the drilling of wells to test our prospect be a large [indiscernible] oil prospect at more of our rig discoveries.

Our new commercial dental oil production has commenced in the Valco operated block next door since we last discussed these plans. The [indiscernible] block is rich in drilling prospects both at the Gabon and Dental [ph] level. With oil prices at current levels we need only to aggregate more reserves to our adjusting discoveries to move into development. It is our opinion that a modestly successful result on Prospect B will accomplish that goal. We're well advanced in our tendering activity for rigs and services to drill that well mid-year should our formal effort to be successful.

So with that let me turn it over Steve to discuss the financials and after Steve I will make some closing down.

Steve Haynes

Thanks, James and good morning everyone. Form 10-K was filed yesterday and it's posted on our website. Harvest posted a fourth quarter 2015 net loss of 73.2 million or $1.42 per diluted share compared with a net loss of a 139.7 million or $4.23 per diluted share for the fourth quarter of 2014. For the year-ended 2015 Harvest had a net loss was 98.6 million or $2.18 per diluted share compared with a net loss of 193.5 million or $4.60 per diluted share for 2014. The fourth quarter 2015 results including expiration charges of 600,000 and several non-recurring items such as first a loss on the impairment of Gabon [indiscernible] block of 23.6 million. Second a loss on the impairment of the equity invested in Petrodelta of 84.0 million net to Harvest 51% interest Harvest incurred debt holding [indiscernible] or Harvest holding.

Third, a gain on the exchange in the fair value of warrant liabilities of 22.1 million related to the CT energy warrants. Fourth, a gain on the change in fair value of derivative assets and liabilities of 1.5 million and finally a recording of our income tax benefit of 15.8 million. Adjusted for exploration charges and these non-recurring items Harvest fourth quarter loss and adjusted for income tax effect would have been 4.4 million or $0.09 per diluted share. The year-end 2015 results include exploration charges of 3.9 million and multiple non-recurring items such as first a loss on the impairment of [indiscernible] 24.2 million. Second, a loss on the impairment of equity investment in Petrodelta or 84.0 million net of Harvest 51% interest in Harvest Holdings. Third, a gain on the change in fair value of warrant liabilities of 34.5 million related to CT Energy transaction. Fourth, a gain on the change in fair value derivative assets and liabilities of 4.8 million and finally a loss on debt conversion of 1.9 million.

By loss on issuance of debt and warrants are 20.4 million and finally an income tax benefit of 16.4 million. Adjusted for exploration charges in these recurring items, Harvest net loss on adjusted for tax effects for 2015 would have been 19.9 million or $0.44 per diluted share.

Let me spend some time on discussing the Petrodelta impairment. Oil prices have declined from June 30, 2014 through December 31, 2015 from approximately $86 of barrel to $37 per barrel based on to Venezuelan export basket of oil prices. Subsequent to December 31, 2015 prices tend to have remained volatile. A result of the continued downturn of oil prices, political and economic uncertainty in Venezuela continue the deterioration of value of the bolivar currency and inability [indiscernible] collaboration of Petrodelta, the [indiscernible] three quarter and impairment expenses in Petrodelta of 84 million, Harvest 51% in Harvest Holdings. This will now fully impair Harvest interest in the asset and financial statements of December 31, 2015 even though the book value is zero this does not reflect a value that a potential buyer [indiscernible] or Harvest interest in Petrodelta,

The company used internal and external data to arrive at a valuation acceptable under U.S. GAAP to evaluate the extent of impairment at December 31, 2015. In order to estimate the fair value of Petrodelta investment, the income approach was utilized to estimate the fair value of Petrodelta reserves. The key factors that cause the full impairment of this asset were an artificial supported exchange rate which enforced by the Venezuelan government at VEF6.3 to $1 for 2015 which grossly exaggerated cost reported in U.S. dollars. The Venezuelan government did devalue the currency on March 9, 2016 to VEF10 to $1, this will not come close to solving the exchange rate problem for Petrodelta.

Also the poor for operating and drilling performance of Petrodelta has compounded the increase and lease operating cost and drilling cost and finally the high cost of capital of approximately 25% which reflected that difficult financial environment in Venezuela. Finally we’re waiting for the Petrodelta audit for 2015 to be finished before releasing any financial performance for this year. Now briefly I will discuss impairment on the [indiscernible] blocks. In December of 2014 the company recorded a 50.3 million impairment charge related to operating cost of these two block based on a quantitative analysis which concerned Harvest current liquidity needs, the inability to attract additional capital and decrease in oil and gas prices. In December 2015 the company reassessed the carrying value of unapproved cost related to the DCP [ph] block and record an additional impairment at 23.2 million based on it's analysis of the fair value on unapproved cost which consider the value of the contingent and exploration resources of the ability of the company's to develop project given its currently liquidity situation and decrease in oil price.

The current book value of the Gabon asset is 28 million as of December 31, the company will continue to reassess the carrying value of Gabon assets on it's books each quarter going forward.

That concludes my comments. I will turn the call back over to James.

James Edmiston

Thanks, Steve. As always Steve will be available to follow-up should you need some help on the financials, so feel free to give him a call after the conclusion of this conference call. On the Venezuelan front our partnership with CT Energy continues to advance its efforts to restructure the business in Petrodelta in cooperation with our partners [indiscernible] in order for Petrodelta to someday reach it's full potential.

We have some further comments to share with you in that regard in the very near future. So with that let me open up and take your questions.

Question-and-Answer Session


James Edmiston

Thank you. If there are any questions again let me tell you feel free to give us a call if you want to follow-up on any of this especially if you’ve any questions over the impairments or other items we will be around. And with that thank you.


And that does conclude today's program. We would like to thank you for your participation. Have a wonderful day and you may disconnect at any time.

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