Houston Sep 2, 2015 (Thomson StreetEvents) -- Edited Transcript of Harvest Natural Resources Inc earnings conference call or presentation Friday, August 7, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Keith Head Harvest Natural Resources, Inc. - VP, General Counsel, Corporate Secretary * James Edmiston Harvest Natural Resources, Inc. - President and CEO * Steve Haynes Harvest Natural Resources, Inc. - VP, CFO, Treasurer ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the Harvest Natural Resources earnings conference call for the 2015 second-quarter results. 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, Sir. -------------------------------------------------------------------------------- Keith Head, Harvest Natural Resources, Inc. - VP, General Counsel, Corporate Secretary [2] -------------------------------------------------------------------------------- Thank you. Good morning, and welcome to Harvest Natural Resources' 2015 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 Relations portion of our website at www.harvestnr.com. Additionally, a telephonic replay will be available this afternoon by dialing 719-457-0820, passcode 9336519. This conference 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. Harvest will file a definitive proxy statement with the SEC to solicit stockholder approval of proposals relating to the transaction with CT Energy and other matters at the Company's 2015 Annual Meeting. Stockholders are urged to read the proxy statement when it becomes available, and relevant documents we file with the SEC, because those documents will contain important information. A free copy of the definitive proxy statement and other relevant documents may be obtained, when available, at the SEC's website at www.sec.gov. Copies of the definitive proxy statement may also be obtained, without charge, either by directing a request to Harvest Natural Resources Investor Relations, 1177 Enclave Parkway, Suite 300, Houston, TX 77077, or by going to the Investor Relations portion of our website at www.harvestnr.com. Harvest and its directors and officers, as well as CT Energy Holding SRL and its principals and employees, may be deemed to be participants in the solicitation of proxies in connection with the Annual Meeting. At this time, I would like to turn the call over to James Edmiston, Harvest Natural Resources' President and Chief Executive Officer. -------------------------------------------------------------------------------- James Edmiston, Harvest Natural Resources, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thanks, Keith, and good morning to all of you, and thank you for joining us today. Hopefully you've had a chance to review the earnings release this morning. I'm going to go through a very brief summary of operations; and then Steve is going to walk you through the financials for the second quarter, and specifically the accounting for the previously announced transaction with CT Energy. After that, I'll have some closing remarks and we can take some questions. Starting with Petrodelta, Petrodelta delivered about 3.45 million barrels of oil, or 37,929 barrels of oil per day in the second quarter. This is down about 16% from the same quarter in 2014, and down 5% from the first quarter of this year. Current production is running about 38,700 barrels of oil per day, and Petrodelta continues to add six drilling rigs in the field. In Gabon, we continue to refine our development and exploration models utilizing the new 3D data, as well as updating our cost estimates for both drilling and development as we continue to see cost for both service and equipment fall in response to the new pricing environment. Those efforts have given rise to several different development options which we believe will result in an economically robust exploration development program, even at today's prices. Further, we've begun the process of targeting available rigs for potential 2016 drilling, and are about to commence seabed tests at several drilling locations to aid in that exercise. As for our farm-out activities, we continue to engage with West Africa players and remain hopeful that these discussions will yield positive results, most likely before year-end. With that, I'll turn it over to Steve to discuss the financials. Then, after Steve, I'll make some closing remarks. -------------------------------------------------------------------------------- Steve Haynes, Harvest Natural Resources, Inc. - VP, CFO, Treasurer [4] -------------------------------------------------------------------------------- Thanks, James and good morning, everyone. Our form 10-Q will be filed today and will be posted on our website, at www.harvestnr.com. Harvest reported second-quarter net loss of approximately $25.4 million or $0.60 per diluted share compared to a net loss of $1.7 million or $0.04 per diluted share for the same period last year. The second-quarter results included a non-cash loss on issuance of debt which was related to the CT Energia transaction of $20.4 million or $0.48 per diluted share. Adjusted for loss on issuance of debt, Harvest would have posted a second-quarter net loss of approximately $5 million, or $0.12 per diluted share, before any adjustment for income taxes. The loss on issuance of debt is the result of the difference between, one, issued date value of the CT Energia warrant of $40 million, plus the net value applied to embedded derivatives related to the non-convertible note and convertible note issued to CT Energy of $10.9 million, plus transaction costs of $1.6 million; less the loan proceeds received of $32.2 million. The sum is recognized as non-cash pre-tax loss of $20.4 million during the second quarter of 2015. To explain the loss on debt issuance, I would like to discuss the derivatives identified in the transaction document in more detail. First, let's address the warrants. CT Energy acquired a warrant to purchase up to 34,070,820 shares of Harvest common stock at an initial exercise price of $1.25 per share. The warrant will become exercisable only after the 30-day volume weighted average of Harvest's common stock equals or exceeds $2.50 per share; and Harvest shareholders approve certain proposals related to the transaction under NYSE shareholder approval requirements; and to approve an amendment to Harvest's charter to authorize new shares of common stock in an amount sufficient for future needs. The warrant was valued at $40 million at the issuance date of June 19, 2015. This amount was classified as a liability as of June 30, 2015, and valued at $37.6 million. This derivative liability was measured to fair value market-to-market in each supporting period. The 9% convertible note contained a price protection and a beneficial conversion feature for the CT Energia note conversion price to be adjusted in certain events of equity issuance if they occur. The price protection and the beneficial conversion feature created a derivative liability of $13.5 million at the date of the transaction of June 19, 2015. This derivative liability also is measured fair value and will be mark-to-market at the end of each accounting period. The value at June 30, 2015, was $13 million. The 15% non-convertible note includes an interest rate re-set feature. If by June 19, 2016, the claim date -- with certain exceptions, could be extended by six months -- the volume weighted average price of the Company's common stock over any consecutive 30-day period has not equaled or exceeded $2.50 per share, the maturity debt will be extended by two years and the interest rate on the note will be adjusted 8%. This reset provision created an embedded derivatives asset value at $2.5 million at June 19, 2015. This feature applies to the $25.2 million 15% convertible standard note, and additional draw notes, if any. A derivative was also -- will also be measured fair value at the end of the reporting period. The value at June 30, 2015, was $2.6 million. Now I'd like to talk about the reporting of the warrant embedded derivatives and the notes payable on balance sheet at June 30, 2015. The accounting guidance required the value of the transaction to be allocated first at fair value instrument, which are the warrant embedded derivatives, and a remainder to the non-fair value instruments which are the non-convertible and convertible notes in the Series C preferred shares. As stated before, the fair value of the warrants at June 19, 2015, was $40 million, and reflected a warrant liability on the balance sheet. And net amount of $10.9 million was allocated at an embedded derivative asset and liability. There was no remaining value to be allocated to convertible and non-convertible notes. This is why you will not see a note payable for the convertible and non-convertible notes on the balance sheet at June 30, 2015. Now let's summarize the loss and issuance of debt of $20.4 million. The fair value of the warrant liability at issuance is $40 million. The embedded derivative liability for the price protection and beneficial conversion future is valued at $13.5 million. The embedded derivative asset for the interest rate re-set was $2.5 million. We incurred $1.6 million in transaction costs. If you subtract the proceeds received from transaction of $32.2 million, you end up a resulting loss on debt issuance of $20.4 million. Now I'll provide an overview of the second-quarter results of Petrodelta. Petrodelta generated $173.3 million in revenue during the second quarter, before deductions of royalty, compared to $365.2 million for the same period in 2014. The average price of crude oil sold by Petrodelta during the second quarter was $49.71 compared to $88.77 for the same period in 2014. Petrodelta operated a second-quarter operating loss, before taxes and non-operating items, of $98.6 million compared to operating income before taxes and other operating items of $35 million for the same quarter in 2014. Petrodelta posted a net loss of $74.8 million during the second quarter compared to net income of $42.3 million for the same period in 2014. The Petrodelta financial results are prepared and presented under IFRS. This concludes my remarks. I'll turn it back over to James. -------------------------------------------------------------------------------- James Edmiston, Harvest Natural Resources, Inc. - President and CEO [5] -------------------------------------------------------------------------------- Thanks, Steve. And, as always, Steve will be available to follow up should you need some help on the financials; which I appreciate him giving a good outline of the derivative accounting there. You will see a lot more detail in the 10-Q. And I encourage you to ask any question -- call and ask any questions you may have in that regard. So we've obviously had a very busy second quarter, and we remain so. The agreements struck with CT Energia provided the Company with the best opportunity to realize the significant value of our underlying assets in Gabon, and especially Venezuela. The shareholders will be asked to approve certain proposals relating to the transaction at the upcoming September shareholder meeting. As we previously disclosed in our July 21 8-K, we are making progress on Venezuelan front, as evidenced by the term sheet with PDVSA. The parties in the term sheet are now moving forward to construct the necessary agreements needed to turn that concept into reality. It should be noted that we are not breaking new ground here. In fact, several companies have undertaken a similar path in Venezuela over the past couple of years, including several majors. The assets underlying Petrodelta have world-class potential, and we believe the path we are on is the key to unlocking that potential. The key issues that exist at present, and which preclude the business from reaching that potential, are not insurmountable. Furthermore, each of those issues is directly addressed in the term sheet, and will be addressed definitively in the final agreement. It may take some time to get the final agreements and the financing package completed, and the outcome cannot be assured. But we take comfort in knowing that we are not plowing new ground here. We are not plowing new ground in terms of the arrangements, nor are we plowing new ground regarding operational performance improvements necessary to return the business to a high level of efficiency and profitability, even at current prices. The proxies will be mailed out early next week. And we look forward to discussing the proposals with our shareholders and answering any questions they may have regarding those proposals at that time. So, with that, I'm going to open it up for a few questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). At this time, we have no questions. I'd like to turn the call back over to Mr. James Edmiston for any additional or closing remarks. -------------------------------------------------------------------------------- James Edmiston, Harvest Natural Resources, Inc. - President and CEO [2] -------------------------------------------------------------------------------- Thank you. You let me off easy this morning. I'm sure we'll get some questions after the 10-Q comes out, or around the derivatives, et cetera. I think the headline there is the transaction will be mark-to-market every quarter. I think the beauty of this transaction is the close alignment with shareholders. The warrants and that part of the transaction that CT Energy had bought into -- they only profit when the shareholders profit. And that profit has to become very, very significant, with a $2.50 trigger feature. We are looking forward to having these conversations in much greater detail following the release of the 10-Q, and even more importantly, the release of the proxy. I will be presenting at EnerCom conference, mid-August. And that will be webcast across our website, as well. And we will give you a further update on where we are throughout this process, as well as more detail on the agreement and how it relates to our current operations. With that, thank you. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes today's conference. Again, thank you, everyone, for joining us.
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