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Executives

Keith L. Head – Vice President, General Counsel & Corporate Secretary

James A. Edmiston – President, Chief Executive Officer & Director

Stephen C. Haynes – Chief Financial Officer, Vice President – Finance & Treasurer

Analysts

John Thomas Malone – Global Hunter Securities, LLC

Jason Wangler – Wunderlich Securities, Inc.

Anish Kapadia – Tudor, Pickering, Holt & Co.

Roger Harris – Newland Capital Management, LLC

Harvest Natural Resources (HNR) Q3 2012 Earnings Call November 9, 2012 11:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Harvest Natural Resources Third Quarter Earnings Conference Call. Today’s conference is being recorded.

Now I will turn the conference over to the Vice President and General Counsel for Harvest Natural Resources, Mr. Keith Head. Please go ahead, Mr. Head.

Keith L. Head

Thank you. Good morning and welcome to Harvest natural Resources 2012 third quarter results conference call. This morning our press release was broadcasted 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, the telephonic replay will be available this afternoon by dialing 719-457-0820, pass code 6817420.

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 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 A. Edmiston

Thanks Keith and thanks for joining us today. I hope we got a chance to review the earnings release this morning. I’ll go over a brief operations summary, and then I’ll ask Steve to discuss the third quarter financials. And as usual after that we’ll open up for questions.

Starting in Venezuela, operationally Petrodelta delivered 3.5 million barrels of oil or about 38,000 barrels of oil per day to PDVSA during the third quarter compared to 3 million barrels or 32,800 barrels of oil per day in the same period a year ago to an increase of about 16% year-on-year.

As in the press release stated, current productions around 39,000 barrels a day. Admittedly, those numbers are below our expectations for the quarter and as such, we reduced our forecast average for the year accordingly as noted in the press release.

During the quarter, Petrodelta operated two drilling rigs and that continues today. The third rig, which was expected to commence operations in September, has not yet begun operations and it still undergoing some preoperational work and testing. We’re hopeful that that rig will begin drilling later this month in the Isleno field.

Also during the quarter Petrodelta received another new build rig, which is rigging up in the El Salto field that for commissioning and testing hopefully by year end. The knock on effect the delay in operations on the additional rigs as a reduction to our projected production forecast for the year.

Furthermore, during the quarter delays and infrastructure work at Temblador and El Salto coupled with downtime in excess of forecast due to electric system and pipeline outages, all these things contributed to reducing the overall production in sales volumes during the quarter. Simply put and in spite of sequential growth, production operations fell well short of our expectations for the quarter.

Moving on to exploration programs in Gabon, we believe we are days away from beginning operations on a [Tortue] well. The rig is set to set sail from Port Noire of Congo to the site as soon the BOP test and certifications are completed, which should be in the next few days. The rig Saipem Scarabeo 3 has undergone significant refurbishment and testing over the last few months. We look forward to getting underway around mid-month.

As discussed before, the Tortue prospects respective in three targets; the Gamba, Madiela and the Dentale and is the key well for us as we seek to build critical mass and reserves requited to move forward with development and production on the block. Assuming that the rig arrives on-site by mid-month, we should have some results to report by year-end. But as I said before, we are currently in BOP testing operations. We should have that complete this week assuming the BOPs test fine and are certified. Again, we’ll set tail in a couple of days. In the event that they do not test, we’ll be forced to delay a bit longer and have some replacements brought in.

In Indonesia, our license commitments have been fulfilled and the partners have submitted a request for a four year extension on the block in order to further appraise the results from the pervious wells. The partners have re-mapped the block based on our prior drilling and agreed on the core plan, which begins with further exploration drilling in the Northern part of the block, possibly in late 2013. Steve, go ahead.

Stephen C. Haynes

Thanks, James, and good morning. Our Form 10-Q is out today and we’ll be posted on our website at www.harvestnr.com. Harvest reported third quarter net income of approximately $5.8 million or $0.15 per diluted share compared to $7.7 million or $0.20 per diluted share when the period last year. The third quarter results included exploration charges of $1.5 million, or $0.04 per diluted, and $1.1 million or $0.03 per diluted share, for transaction costs incurred related to the pending sale of Petrodelta.

Additionally, during the third quarter, Harvest incurred $1 million or $0.03 per diluted share, in debt conversion expense and $700,000 or $0.02 per diluted share in discontinued operations related to income taxes. Excluding the exploration charges, transaction costs, debt conversion expense, and discontinued operations charge third quarter earnings would have been $10.1 million, or $0.27 per diluted share.

Now let’s talk about Petrodelta’s financial results. Petrodelta reported net income during the third quarter of $45.7 million, as reported under IFRS compared to $57 million for the same period in 2011. Petrodelta’s decrease in net income for the quarter was primarily due to higher operational costs of $14.2 million resulting from a 30% increase in salaries and benefits retroactive to October 2011. Harvest’s 32% share of Petrodelta’s net income for the third quarter as reported under U.S. GAAP was $16.2 million, compared to $14.8 million for the same period one year ago. The average market price for crude oil during the third quarter for qualities produced by Petrodelta was $92.43 per barrel, compared to a $100.62 for the same period one year ago.

On October 12, 2012 we sold $79.8 million aggregate principal of 11% senior unsecured notes due October 11, 2014 and warrants to purchase up to approximately 687,000 shares of common stock with an excess price of $10 per share. The warrants can be exercised at any time, up until the three-year anniversary of the debt closing and if exercised, there would be a diluted impact of approximately 1.8% on the common shares outstanding.

The notes were issued at a price of 96% of the principal amount. The purchase price of the notes was paid in cash, except for approximately $10.5 million in principal amount, which is exchanged by a single purchaser for a combination of approximately $6 million in face value of that purchaser’s existing of 8.25 senior convertible notes issued by us in 2010, and the value agreed by Harvest and note holder. That otherwise would have been attained by the note holder, had the note holder converted into notes of 1,059,751 shares of common stock. The remaining $3 million in the face value of the convertible note was converted into shares of common stock on the terms of the indenture governing that convertible note. With this conversion we have extinguished all of these senior convertible notes issued on February 17, 2010.

The net cash of the debt offering to Harvest was $63.5 million after deducting issuance discount of the face of the note, placement fees and other transaction costs. We intend to use the net proceeds of the funding for capital expenditures planned for Gabon and other capital projects for working capital needs and general corporate purposes. We had $20.4 million in cash as the end of quarter, which does not include the proceeds of $63.5 million raised from the recent debt offering.

This concludes my remarks. I’ll hand it back over to James.

James A. Edmiston

Thanks Steve. Again, we’ve been pretty brief in our comments today. Besides our upcoming drilling in Gabon, which we obviously hope to start in the coming days and which will allow us to report some type of result on that well by year end. Our focus today remains on moving forward on the Petrodelta transaction.

As we reported prior, the process is still underway and there are no new developments really it is kept today. Pertamina’s team has met with CVP and pervasion to discuss the Petrodelta’s future business plan and those conversations are both ongoing and key to gaining the approval of both the Venezuelan government and Pertamina shareholder the Indonesian government.

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

Question-and-Answer Session

Operator

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

John Thomas Malone – Global Hunter Securities, LLC

Yes, good morning guys. I’m just curious how it is involved and it’s hard to mean that sort of the day-to-day operations, not any operated (inaudible) from the seal, but just being informed and so what’s happening, the 30% increase in plays and in benefits that you saw in Venezuela. Was that something that they learned about the same time you did I mean how much – were you able to anticipate that rate and we got some in Pertamina it was aware of?

James A. Edmiston

Yeah. First of John, I wouldn’t overstate that the largest part of that increase and overall for the deal with a retroactive payment and if you look at that increase is roughly in line with local currency inflation. So the increase in labor costs is in A, it’s in local currency and B, it’s in line with inflation. To your other question, Pertamina takes part with us every week in a conference call where we talk about what’s going on in Petrodelta. So they’re very closely tuned to day-to-day and what’s going on there, they’re not involved in the operation, however, in anyway.

John Thomas Malone – Global Hunter Securities, LLC

Okay. Thanks. And then just switching over to Gabon quickly when you think you’ll have some data that could inform kind of what you have there, and that in turn could inform the idea of a corporate sale versus just an asset sale?

James A. Edmiston

Sure. Well, I was literally on the phone last night to see where we were on these BOP tests. I hope we’d been able to say that BOPs have tested and we’re setting sail this weekend. Maybe that’s going to be the case today. On the assumption that the BOP tests, and are certified, we’ll set sail later this weekend, but around mid-month as planned and certainly the vertical hole will be completed, perhaps even prior to Christmas, but certainly before the end of the year. At that point, we would have some to report.

Now, in the case of success, as we’ve said before, we would then go and sidetrack the well, probably put a horizontal in there and try to get a production test as well, if that’s what if that’s what indicated. So in any event on the assumption the BOPs test will have some type of results to report for year-end. If the BOPs don’t test, it’s a matter of replacing those sets of [rams] that need to be replaced, and right now I couldn’t give you a timing on that. I would guess it could be on the outside. It could be weeks, but it wouldn’t be much more than that.

John Thomas Malone – Global Hunter Securities, LLC

Okay. Thanks. Just quickly on Venezuela, going back to that, just to understand that you guys think you’ll have five rigs in country by the end of the year. The way you phrase it in the call, James, makes it sound like maybe not all five of them will be drilling. Is that correct?

James A. Edmiston

I don’t think they will based on, I mean, these are new build rigs that have come from overseas. What we found so far as they get into report and taken to the field, well, they have to be assembled, then they are performance tested and modifications have to be made. So basically it’s on the first one. Yeah, I don’t think all of them would be operational before year-end. We certainly believe the two that are out in the filed now in various stages of commissioning were both be drilling by the end of the year and we suspect at least the others that are in port will be moving toward location in assembling commissioning will begin, but until we get them out there and we see its moving on, it’s hard to say.

John Thomas Malone – Global Hunter Securities, LLC

Okay and moving last one on Indonesian (inaudible) in the next year. What do you think that will cost you?

James A. Edmiston

The well we’re looking at is actually a very shallow well in the Lariang. Well probably and we are looking at about a based on what we saw last year about $8 million well gross.

John Thomas Malone – Global Hunter Securities, LLC

Okay. Thanks a lot.

James A. Edmiston

Okay.

Operator

(Operator Instructions) We’ll now hear from Jason Wangler with Wunderlich Securities.

Jason Wangler – Wunderlich Securities, Inc.

Hey guys.

James A. Edmiston

Hey, Jason.

Jason Wangler – Wunderlich Securities, Inc.

Just curious on the Gabon well, you laid out pretty good there. Just as far as the cost I think you said $20 million previously. Could you just maybe walk through what we see obviously getting the vertical hole maybe about half of that done this year and then other call (inaudible) or maybe whatever the number you think is slight into first quarter next year.

James A. Edmiston

I think the $20 million was our net dry hole. We’ll definitely get again. On the assumption we sail this weekend, we’ll get that done this year. There is another possibility the $12 million, $14 million from that point that would be associated with drilling one or more side cracks and instituting production tests.

Jason Wangler – Wunderlich Securities, Inc.

Okay. That’s helpful. And then maybe Steve, if you could you kind of give us obliviously the debt deal and where your cash was. Is there a maybe a rough number you can give us pro forma where we sit now for the cash balance?

Stephen C. Haynes

Well in the business number I can give you is take the 53 and plus the 20, we had it at the end of September that’s a rough guess, a rough statement.

Jason Wangler – Wunderlich Securities, Inc.

I appreciate it, guys.

Operator

And, Anish Kapadia has the next question.

Anish Kapadia – Tudor, Pickering, Holt & Co.

Hi, it’s Anish Kapadia here from Tudor, Pickering, Holt. Get back to Gabon again. I’m just interested in what your strategy in Gabon going forward in a success case. So in terms of development how would you see your participation going forward? And related to that, I believe your partner PANDORA was looking to monetize stake in the [straight] permit. Would that be something you are interested in, and do you have preoperational rights over that?

James A. Edmiston

Well, to answer the first part of your question, we’re pretty excited about the Gabon block. We know the market gives us next to nothing for it, but we also have a pretty good model for the potential value of the block based on our neighbors next door, a publicly traded company that block makes up. The largest part of it is at basin. Yet they have, I think, less than half the working interest in that block than we do.

So we clearly believe there is a big disconnect in what we view as potential of the block and others. So our intent would be to go forward with development. As I’ve said, a very modest success on the order of the P85 type estimates that we have internally would move us forward to development. We have a host of other prospects that could be drill ready, identified on the 3D. So again, we are quite excited about the block and whether or not we decide to pair down our interests or not in the future, that’s a question to be addressed in the future. I certainly don’t see us in a position losing control of block.

As far as PANDORA’s interest, I mean, those questions would best addressed by PANDORA. I’m not going to speculate on what we are going to do portfolio wise, but suffice to say that our interests aren’t for sale. I think it was alluded to early by John. We’ve said before and it’s always been clear that we would, if success in Gabon were to push a transaction toward a corporate transaction if the pricing is right. Clearly the company would be predisposed to take a very serious look at it.

Anish Kapadia – Tudor, Pickering, Holt & Co.

Thanks for that. And in terms of, I suppose in a scenario, where the well is unsuccessful you don’t find kind of commercial resource. When would be kind of the next window logistically and kind of financially when you could drill a follow-on exploration well in the area?

James A. Edmiston

Probably mid-year to third quarter, I mean, keep in mind that we have, we just shot a 3D that’s gone through all the time processing that’s inboard that was directed towards syn-rift plays in shallow water. What we’ve seen from the time dated so far is there is clear evidence that the syn-rift structures exist. We are moving on with depth imaging now and we ought to have those depth images in hand in kind of late spring and that would likely, were this well to be unsuccessful, that would likely spawn the next round of drilling. I know that our neighbor (inaudible) in the block next door talk some about testing that same play. We shot that 3D together. They’ve talked about testing that same play later in 2013. And so, it’s possible we could even do something with them.

Anish Kapadia – Tudor, Pickering, Holt & Co.

All right, and just one final question. In terms of your general outlook for West Africa. Just wondering all the other opportunities that you see over there. How do you see the market in general any particular countries you’ve interested in?

James A. Edmiston

There are some other opportunities over there. We’re quite found of Gabon, and I think it would suffice to say that we are looking at other opportunities there. I think most of the opportunities we’re looking at in general are organic. I think that’s the type of assets that have the potential or the scale that we would be looking for the market to bit over heated for, in terms of those it that have already come to production. So most of what we are looking for that regard would tend to be on the organic side, exploratory stage or a predevelopment stage. But we do like West Africa, but in particular I think Gabon, I think some of the other countries and I won’t name them really don’t fit our cup of tea.

Anish Kapadia – Tudor, Pickering, Holt & Co.

And I mean would you kind of stick to offshore focus or the onshore is they need to look at as well.

James A. Edmiston

We’ll be opened onshore certainly in Gabon, and that’s not to say that we’re looking at it, or not looking at this point, but certainly in Gabon. Gabon has the type of environment security and otherwise it would be quite comfortable working onshore there.

Anish Kapadia – Tudor, Pickering, Holt & Co.

Excellent, go ahead. Thanks a lot.

James A. Edmiston

Yeah.

Operator

(Operator Instructions) We’ll now hear from Roger Harris with Newland Capital.

Roger Harris – Newland Capital Management, LLC

Good James.

James A. Edmiston

Good morning, Roger.

Roger Harris – Newland Capital Management, LLC

Good question on the Indonesian assets, it appears you guys have made some technical observations based on the results of the previous wells and working through additional data. But one of the things you had spoken about before was a hesitancy to be involved there again and unless you could operate the wells yourself. Can you spend a moment on that as you look at your plan for late 2013?

James A. Edmiston

Yeah, I don’t think. Yeah, I don’t think that view is changed.

Roger Harris – Newland Capital Management, LLC

Okay.

James A. Edmiston

That would be the simple answer Roger.

Roger Harris – Newland Capital Management, LLC

Okay, terrific.

Operator

Anything else, Mr. Harris.

Roger Harris – Newland Capital Management, LLC

No, thank you.

Operator

You’re welcome. Well and ladies and gentlemen unfortunately that is all the time we have today for questions. Mr. Head, I’ll turn the conference back to you for closing or additional remarks.

Keith L. Head

I actually turn it back to Mr. Edmiston.

James A. Edmiston

All right thanks again for joining us. I mean, I know what the focus is, and the focus is waiting on news on the Petrodelta transaction, we’re working through that, as I said the meetings are going on really the main gaining issue here is to gain approval from both the Venezuelan government and the Government of Indonesia, and so shareholder of Pertamina.

Having said all that don’t loose sight of Gabon. I got said I’m hopeful to be on peace test we’ll be out there drilling in the near future and have something to report before Christmas. And furthermore we have an active business development program going and I think that over the coming months, there’ll be something to announce in that regard as well. So thank you all for your participation and feel free to give its call on the follow-up. Thanks.

Operator

Thank you. And again ladies and gentlemen that does conclude our conference for today. We thank you all for your participation.

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