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Harvest Natural Resources Inc. (HNR)

Q2 2012 Earnings Call

August 9, 2012 11:00 AM ET

Executives

Keith Head – Vice President and General Counsel

James Edmiston – President and Chief Executive Officer

Stephen Haynes – Chief Financial Officer

Analysts

John Malone – Global Hunter Securities

Jason Wangler – Wunderlich Securities

Operator

Good morning and welcome to the Harvest Natural Resources Second Quarter Earnings Conference Call. As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to Vice President and General Counsel for Harvest Natural Resources, Mr. Keith Head. Please go ahead, sir.

Keith Head

Thank you. Good morning and welcome to Harvest natural Resources 2012 second quarter results conference call. This morning our press release was broadcasted 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 Relations portion of our website at www.harvestnr.com. Additionally, telephonic replay will be available this afternoon by dialing 719-457-0820, pass code 4576497.

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 assurances 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-10K 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 and thank you for joining us this morning. I trust you’ve had a chance to review our earnings release this morning and I’m going to provide a brief operation summary and then Steve is going to go over the second quarter financials.

I’ll discuss briefly that our previously announced transaction involving our Venezuela business and after that we’ll open up for questions.

So starting with Petrodelta, operationally Petrodelta delivered about 3.3 million barrels of oil or 36,418 barrels of oil per day to PDVSA during the second quarter compared with 2.8 million barrels or 30,680 barrels per day in the same period one year ago. That’s an increase of about 19% year-on-year. Current productions north of 39,000 barrels of oil per day. July averaged about 37,500 barrels of oil per day and on July 17th Petrodelta eclipse the 40,000 barrel a day mark for the first time.

Two drilling rigs are currently active in the field, one in El Salto and one in Temblador, while our third rig, a new build modular rig is currently rigging up in the Isleno field and should begin operations in September. Petrodelta is currently scheduled to receive two additional new modular rigs in the remainder of the year. So as we indicated in the previous call we expect both CapEx and production growth to be higher in the second half.

Overall, we are expecting production average in the 40,000 barrel a day range for the year. In the last call we discussed the upside and downsides of that number and at least one of those uncertainty seems to have gone our way as our productivity of the El Salto 44 and 45 wells in the Lower Morichal clearly exceeded our expectations.

I cannot overstate the importance of these results given the reserve sides associated with the Lower Morichal formation and the previous uncertainty associated with production rates from this formation. The remaining uncertainties both upside and downside remained to be associated with delivery, commissioning and performance of the new rigs and commissioning of the production facilities in Temblador and El Salto.

Moving into our exploration programs, in Gabon we are gearing up towards further drilling on the block in the fourth quarter this year having secured the Scarabeo of three drilling rig with a tentative spud date in October.

The Tortue prospect is perspective in three targets, the Gamba, the Madiela and the Dentale. Like most of that are currently mapped prospects on the block, we considered these low to moderate risk prospects.

The Tortue well is a key well for us as even a modest success will provide the reserve-base when combined with the pre-existing discoveries to move us into development in 2013.

Furthermore, the well will calibrate our 3D and the mapping sets a several other prospects will be structurally de-risked. Once we go into the development mode, we expect to continue to build up the productive capacity in the central portion of the block in a string approval fashion tied back to the initial development facilities.

Further on the block, we recently received a time migrated 3D dataset from the seismic which outlaid late last year in conjunction with (inaudible) block. We’ve begun the process of depth-migrating the data in order to image structuring depth. However, what we can say is that the data clearly indicates the structuring in the center of sequence that we were looking to confirm. These structures are near to short and in shallower water and should have somewhat larger target sizes in the present drilling program.

In summary, we’re more excited about our Gabonese business now than ever before driven by a numerous prospects and play types present on the block.

In Indonesia, all license commitments have been fulfilled and we are preparing a request for a four year extension on the block in order to further appraise the results from the previous two wells. At this point no commitments exist.

In Oman, we’re working to firm up Gabon plant prospects that was mentioned earlier and it was just a totally different place site for the block, the one which has been proven further to south. Two things come together, we expect to see some drilling in both of these blocks sometime in 2013.

So Steve go ahead and go through the financials please.

Stephen Haynes

Thanks James and good morning everyone. Our Form-10Q will be filed today and will be posted on our website at www.harvestnr.com.

First I will provide the 2012 second quarter financial results of Harvest. Harvest reported second quarter net income of approximately $8.2 million or $0.20 per diluted share, compared to net income of $89.8 million or $2.23 per diluted share for the same period last year. I would like to remind everyone that the second quarter 2011 results included net gains of $98.7 million which is related to the sale of the Utah properties.

Now back to the second quarter of 2012. The second quarter 2012 results included exploration charges of $1.3 million or $0.03 per diluted share, and $1.5 million or $0.04 per diluted share for transaction costs related to the sale of our 32% interest in Petrodelta.

Additionally Harvest incurred $1.6 million or $0.04 per diluted share in discontinued operations related to the settlement of all outstanding claims with our partner in Antelope project. Excluding exploration charges, transaction costs and settlement charges and net related tax benefits of $800,000 or $0.02 per diluted share, second quarter 2012 net income would have been $11.8 million or $0.29 per diluted share.

Now I would like to talk about Petrodelta’s financial results. Petrodelta reported second quarter income from operations of $88.6 million under IFRS, compared to $79.4 million for the second quarter of 2011.

The average market price during the quarter for the quality of proved produced well Petrodelta was $96.10 per barrel compared to $101.72 for same period one year ago.

Petrodelta reported earnings during the quarter, $72.0 million under IFRS. After adjustments to Petrodelta’s IFRS earnings, primaries confirmed to U.S. GAAP, Harvest’s 32% share of Petrodelta’s earnings of $18.1 million. Petrodelta’s cash generated from operations for the second quarter was $76.3 million compared to $58.0 million for the same period in 2011 that is a 32% increase. And finally, we had cash of $28.7 million at the end of the quarter.

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

James Edmiston

Thanks, Steve. You will notice that we’ve been purposefully brief in our comments today since we know that the Harvest story you are interested in lies in our pending sale of our interest in Petrodelta.

You’ll recall from the last earnings call in May, I’d said that we would have news prior to the end of the quarter and I don’t think we disappointed in that regard. While we cannot give assurances at the transactional close, the process toward closing (ph) is ongoing and progress is being made contrary to some of the rumors in an Opinuendo (ph) that ends up being reported.

I can – I met with our counterparts in Venezuela as the buyers and I can equivocally describe that interaction with the Venezuela side is continue, professional and helpful. So let’s be clear. The Venezuela side like any country would like to make sure that they are interested and are not subordinated in anyway by this transaction.

The process is well underway between the parties to lay out expectations in the path forward for Petrodelta and at this point I believe all sides see the transaction as beneficial.

So, the process continues and unlike the others I don’t plan on giving an ongoing play-by-play discourse on the tenure of the process. We will keep you informed on the major aspects of the prospects going forward.

I’d also like to note I will be at the intercom conference next Monday in Denver. I know that will be a webcast as well. I look forward to seeing some of you there.

So with that, I’ll open up for some of your questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). We will go to our first question from John Malone with Global Hunter Securities.

John Malone – Global Hunter Securities

Good morning gentlemen and thanks for taking the call.

James Edmiston

Good morning, John.

John Malone – Global Hunter Securities

So a broader question, can you talk a little bit about CapEx plan, just lane out a little more details and where are you going to go forward assuming that the deal does go ahead of having closures, can you give us a sense of how much of that would be going to CapEx as you currently see it?

You talked about $18 million for that start in Gabon, can you – is that still you’re thinking and is there any associated cost with future development and you can kind of constraint for us, we would have an idea of how much of that 525 million net goes to Gabon and the other assets.

James Edmiston

Yes, John I think your question is really, it’s the use of proceeds question, so we may be getting ahead of ourselves. But recall what I said in the sale conference call, we’re not going to spend CapEx really nearly, but I think that Gabon well as we said even with modest success and we’re talking about P-75, P-90 type results that will be more than enough to spur the initial development on the Gabonese block in which case we would expect capital to flow in that direction.

As you recall on that call, we mentioned that of the proceeds we could differ taxes on about 135 million of it by leaving that offshore and that obviously would be the most likely source for funding a Gabonese development in the case of success.

On the flip side, if you don’t have that success in Gabon, there is not identified CapEx it would be required to call on those proceeds and also all those things at this point are wide open. But again substantial amount of the proceeds would have to be repay created to the U.S. and taxes paid on them. And as I said before we’re wide open on the uses of those proceeds at this point and time. We have a significant business development pipeline, but we’re cognizant of the shareholders wishes many of which have been communicated. So at this point John it’s kind of open and I think the CapEx on the drilling on the Gabon well in fourth quarter is pretty firm and what that spurs, that success will obviously explore near term development.

John Malone – Global Hunter Securities

Okay. Thanks, James. A separate question, that third way and I guess subsequently fourth and fifth ways in Venezuela, was it Pertamina PDVSA’s plans, I mean can you read through and maybe they’re making more of an effort in the assets given the depending sale or is this something they planned prior to Pertamina deal?

James Edmiston

Well I think you may recall, if you read the industry rags a long time – sometime back that PDVSA had made a fairly large rig purchase order from Chinese manufacturers and so we’re finally getting a pretty good fleet of modular rigs that are great that for our drilling. So that’s a big plus. The performance of the modular rigs has been very, very superior to the conventional rigs on our block. So I think that’s part of the equipment is in country now being rigged that commission that set are ready to go.

I think secondarily it’s hard not to be impressed with the well results from Petrodelta and as I said in my comments the Lower Morichal which is heavy accrued than what we typically produced overtime was part of the uncertainty, so when you look at 2P and 3P reserves which obviously a huge junk associated with that. It’s a big, big staying down at the bottom and it’s heavier.

The first two wells we’ve drilled in and put on production have both exceeded substantially the expectations. I think the 45 well, the second well is still producing around 3,500 barrels a day. So I think Petrodelta itself and its performance, certainly the well performance has encouraged both shareholders to push on the gas a little bit harder in terms of development otherwise and I think the rigs being available now that I think is the second part of that question.

John Malone – Global Hunter Securities

Okay. And just one more, you talked – when you talked about Oman, you referenced other opportunities in the region, can you expand upon that at all? I mean obviously it’s not a location. I think the type of play you might be looking at frontier versus developed?

James Edmiston

No, I think when we certainly in Oman, the things we’re looking at Oman has analogs, so I wouldn’t call it anything frontier. I don’t think anything that we’re looking at in the Middle East region will be called frontier at all. It’s – it’d be analog, it would be as we’ve typically held to proven petroleum systems, we don’t want to have to be the ones who go out and prove up the petroleum system that’s a bit too much work for us, not the risk profile we would look.

But I will just say this, our business development pipeline is rich. We haven’t made commitments. We don’t want to make commitments at this point, because we want to see how this thing plays out and we want to keep all of our options open. We want to remain open to the full range of outcomes and use the proceeds of the sale if that – if in fact the sale closes. So no commitments at this time and I really can’t say a whole lot more about the BD pipeline than I have said.

John Malone – Global Hunter Securities

Okay. I’ll sit back. Thanks James.

James Edmiston

Thanks, John.

Operator

And we will go next to Jason Wangler with Wunderlich Securities.

Jason Wangler – Wunderlich Securities

Good morning, Jim. Question again in Gabon, just the timing of the exploration well, about how long do you think that one is going to take?

James Edmiston

I think dry hole is probably 30 to 40 days and when I say that’s just how long it will take to drill through the Dentale. On the assumption that we find and what we are expecting to find will be some testing and some sidetracking’s on the outside. You are talking 30 to 40 days on the outside, you’re probably talking 60 to 70 days in the success case.

Jason Wangler – Wunderlich Securities

Okay. And like you said and if you expect, if you see what you expect, what’s – is it just a one well contract with the rig or could you keep that one potentially to look at maybe going into the development mode later on, because I guess the timing could work out well if the Venezuela sale go through and would that kind of be maybe the timing that we would work out or which maybe you didn’t push it later in the year?

James Edmiston

We’ve got a one well slot and that’s in our schedule. We – as we talked about before, we’ve done most of the development planning. So where you would move from this stage is to actually start the development approval process, both with our board and in country and the development is most likely an FPSO type development with subsea completion. So the drilling of those wells wouldn’t occur until probably second half of next year the earliest. So it’s a one well commitment at this point. Again we’re very comfortable with the risk on this, we’re even more comfortable even though if there is three distinct targets and also that the reserve size that we need in terms of this prospect is actually quite low to make the development go.

Jason Wangler – Wunderlich Securities

Perfect, I appreciate it.

James Edmiston

You bet.

Operator

(Operator Instructions) I’m sorry for the delay. That does conclude today’s question-and-answer session. Mr. Edmiston, I will turn the call back to you for any additional or closing remarks.

James Edmiston

Well, thank you. And once again I invite you guys to join us whether in person or webcast next Monday you will see if there is more detail on Gabon which is something we’re very, very excited about.

And I’m absolutely sure you will continue following the progress of the transaction that we previously announced. Don’t believe everything you hear. I think the press releases and the communication directly from the principles via Pertamina, PDVSA, ourselves have been clear. The progress is on – is moving forward to the processes ongoing. I think the fact that the counterparty in this case is a very large state oil company and on the other side you have a state-owned oil company. I think I couldn’t think of a better situation in terms of the seriousness of the actors involved.

So we remain very hopeful. It’s obviously transformative to Harvest Natural Resources. So state tuned and if anything comes up, we will certainly announce it.

And again I hope to see you whether via webcast or in person next Monday. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference call. Thank you for your participation.

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