Harvest Natural Resources Announces Exclusive Negotiations to Sell Company Including Venezuela; Spin-off of Remaining Assets (Transcript)

| About: Harvest Natural (HNR)

Harvest Natural Resources, Inc. (NYSE:HNR)

Merger and Acquisition Call

September 12, 2013 03:00 PM ET

Executives

Keith Head - VP and General Counsel

James Edmiston - President and CEO

Analyst

Operator

Good afternoon and welcome to the Harvest Natural Resources conference call. 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. Please go ahead.

Keith Head

Thank you. Good afternoon and welcome to Harvest Natural Resources conference call related to the company September 11, 2013 press release. As the operator mentioned, this conference call is being recorded. The telephonic replay will be available this afternoon by dialing 719-457-0820, pass code 3073565.

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 of 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 Edmiston

Thank you, Keith, and good morning to you. Thanks for joining us today. The purpose of this call is to provide a bit more color to our announcement yesterday with regard to the possible sale of the company to Pluspetrol along with the spinoff of our non-Venezuelan assets. I’ll remind you that although the parties have reached agreement on a host of issues including structure and pricing. Parties will now be focused on negotiating in the merger agreement and there can be no assurance that these negotiations will result in a proposed transaction. Our comments today are going to be fairly brief and we don’t plan to take questions afterwards.

Since the announcement yesterday, we received many questions so you can further detail, so I am going to try to address as many of those as possible in this call. However, certainly, some will remain until the points of definitive agreements were executed. At that point, the Company will release fully information about the final negotiated transaction.

The rationale behind the transaction is fairly straight forward and was laid out in the press release. Further, it’s very consistent with the rationale we discussed at the time we signed the Pertamina agreement in June 2012, which, as you know, was ultimately terminated in February of this year. So in the interest of time, I’m not going to go in great detail in that regard, rather let’s just dive into a bit more detail on what has been agreed at this preliminary stage.

As the press release stated the transaction and visions Pluspetrol’s purchase of all of the outstanding shares of Harvest Natural Resources, which will include Harvest 32% interest in Petrodelta. The remaining non-Venezuelan assets will be spun-off into a new company owned by the Harvest shareholders and into the current management team. The total consideration for the transaction is approximately $373 million and includes the assumption of the company’s debt and certain other obligations with customary adjustments for working capital changes.

To be clear, the indebtedness of the Company will be extinguished at the close should the transaction be fully completed. The net cash proceeds from such a transaction would be the total amount, the 373 million, minus the payoff of outstanding indebtedness, transaction and severance cost and adjustments for working capital differences. The entire net cash proceeds of the sale after netting those items out would then be paid directly to the shareholders of Harvest.

It’s our belief that the transaction envisage will not incur U.S. taxes to the buyer or seller. In addition to the cash proceeds, the shareholders would have shares in a new company which holds it's spun off assets and working capital. Even after yesterdays move in the stock to proposed Pluspetrol transaction values more than 30% above the current post announcement enterprise value of the entire company and afford shareholders the opportunity further -- to realize further value associated with the retained assets.

I was also asked to put the price consideration in context relative to the sales of Pertamina transaction. As you recall, the Pertamina transaction was an asset sale for 725 million. As stated at the time of the announcement that would yield after tax consideration of about 525 million if the Company deferred the maximum allowable tax by keeping 135 million of the proceeds in our overseas subs or 478 million net if all the proceeds were repatriated. So the apples and apples comparison if you will is 374 million today versus 478 million at that point in time.

As disclosed in the press release the company is currently in the process of raising capital to ensure sufficient funding for this interim period to support the assets to be spun off as well as corporate expenses. We expect the size of that capital raised will be in the $40 million and ex-corporate expenses is earmarked for Gabon and Colombia. In essence this has been our company is capitalized initially by the remainder of the proceeds from the proposed near-term capital raise. As a result the bulk of any current capital raise will remain within the spin-off assets.

We plan to limit the current capital raised to an amount that ensures that we preserve or enhance the substantial value of the spin off assets and allow the Company to see this process through to fruition. In that context as it relates to the prior discussion regarding proceeds, any debt we incur for the interim period will be extinguished from the sale of proceeds prior to payment for the shareholders. As a reminder, current indebtedness stands at about $79 million.

We received many questions yesterday regarding the steps in the process and interim restrictions on the company created by this exclusive arrangement. The transaction will be subject to final board approval of the definitive documents, after which we'll turn to the shareholders for their approval through the normal proxy process.

Concurrently the parties will seek the approvals of Venezuelan government and other governmental authorities as required. At this point the key gating item is the negotiation of definitive agreements with Pluspetrol on an exclusive basis for a specified period of time during which Harvest agrees not to solicit other potential buyers or transactions with the exception of any transactions involving a retained assets to being spun off; specifically Gabon, Indonesia, China and Columbia.

We continue to be unencumbered with respect to availing ourselves to opportunities around those assets. Furthermore nothing prohibits the company for receiving an unsolicited offer for the company in whole or in part during this interim period.

As expected, we received several questions which basically want us to handicap the probability of the transaction being consummated, especially in light with the Pertamina transaction. I can't and I won't get into that, nor will I set out a time table for traders to trade around. We say clearly that there are no guarantees with regard to transactions moving to a close. We disclosed the agreement promptly because it's clearly material and we have an ongoing presence in the capital market as I just mentioned, which required that we get the information out there. So to address that question in the only way that I can, I would say that Pluspetrol is a leading private independent oil and gas company in Latin America to my knowledge. They've been around a long time; they have strong knowledge and a strong presence in Venezuela. I believe they have operated production in excess of 400,000 barrels of oil equivalent per day and almost 1 billion barrels equivalent in proved reserves, which would rank them highly among US oil independents in that either category. We believe they're very well positioned to assist (inaudible) and Venezuela in helping realize the true potential of Petrodelta.

Finally let me just say that a key issue in the Board's deliberation over this offer was and is its view of Pluspetrol's commitment to and capability of seeing the transaction through to execution. I can assure you on all accounts, the board views Pluspetrol an outstanding counter party to this transaction.

In closing I hope that this has helped our shareholders with any questions they may have regarding the proposed transaction although I'm sure I have not answered all of your questions.

Again I cannot give any assurances at this time that the transaction will ultimately be completed, however should the deal be consummated, the Harvest shareholders will receive the entirety of the net proceeds as I explained previously and will retain a debt pre-ownership of a group of outstanding assets in Gabon, Columbia, Indonesia and China. We estimate the cash payment to the shareholders alone will be in excess of the current stock price. We also believe our Desafu asset in Gabon where we are two for two in oil discoveries and our Columbia farming blocks which are currently pending Columbian government approval in particular, hold significant promise. For clarity the company continues its previously announced discussions with regards to that Gabon asset. The board and the management team will continue to do everything in its power to maximize the value of that portfolio for its shareholders.

Again I'll not be taking any questions in today's call, we’re going to do our best to keep you informed in the interim as to progress on all fronts, but for now we trying to quietly go about our business and moving this transaction forward to the best of our ability. So thank you for joining us today.

Operator

And this does conclude today's conference; you may now disconnect at any time, thank you and have a great day.

Question-and-Answer Session

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