Harvest Natural Resources Inc. CEO JAMES A EDMISTON bought 20850 shares on 5-6-2008 at $9.57
Harvest Natural Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development, production and disposition of oil and natural gas properties since 1989, when it was incorporated under Delaware law. We have acquired and developed significant interests in the Bolivarian Republic of Venezuela (â€śVenezuelaâ€ť) through our subsidiary Harvest Vinccler, S.C.A. (â€śHarvest Vincclerâ€ť) and our equity affiliate, Petrodelta S.A. (â€śPetrodeltaâ€ť) and have undeveloped acreage offshore of the Peopleâ€™s Republic of China (â€śChinaâ€ť). In 2007, we executed a sale and purchase agreement for a partial interest in the production sharing contract related to the Dussafu Marin field offshore Gabon in West Africa (â€śDussafu PSCâ€ť); and a farm-in agreement for a partial interest in the production sharing contract related to the Budong-Budong field onshore Indonesia (â€śBudong PSCâ€ť). All conditions precedent in the agreements are complete except for governmental approvals.
Currently, our only producing asset is in Venezuela. Since 1992, our subsidiary, Harvest Vinccler, has been providing operating services to Petroleos de Venezuela, S.A. (â€śPDVSAâ€ť) for the South Monagas Unit under an Operating Service Agreement (â€śOSAâ€ť). On March 31, 2006, Harvest Vinccler signed a Memorandum of Understanding (the â€śMOUâ€ť) with two affiliates of PDVSA, CorporaciĂłn Venezolana del Petroleo S.A. (â€śCVPâ€ť) and PDVSA Petroleo S.A. (â€śPPSAâ€ť), to convert the OSA into a minority interest in Petrodelta. On August 16, 2006, the MOU was amended to provide for the addition of the IsleĂ±o, El Salto and Temblador fields (â€śNew Fieldsâ€ť) to Petrodelta as additional consideration for the conversion of the OSA to Petrodelta. On December 18, 2006, at our special meeting of the stockholders, the transactions contemplated by the MOU were approved. On September 11, 2007, we signed the Contract of Conversion (â€śConversion Contractâ€ť), and on October 3, 2007, together with CVP, we formed and funded Petrodelta. On October 25, 2007, the Venezuelan Presidential Decree which formally transferred to Petrodelta the rights to the Uracoa, Tucupita and Bombal fields (â€śSMU fieldsâ€ť) and the New Fields, subject to the conditions of the Conversion Contract, was published in the Official Gazette. Harvest Vinccler has transferred all of its tangible assets and contracts, permits and rights related to the SMU fields in Venezuela to Petrodelta. In January 2008, a majority of Harvest Vincclerâ€™s employees accepted positions with Petrodelta. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the SMU Fields and New Fields (collectively â€śPetrodelta Fieldsâ€ť). HNR Finance B.V. (â€śHNR Financeâ€ť) has a 40 percent ownership interest in Petrodelta. As we indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent interest in Petrodelta, and our partner, Oil & Gas Technology Consultants (Netherlands) CoĂ¶peratie U.A. (â€śOGTCâ€ť), a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (â€śVincclerâ€ť), indirectly owns the remaining eight percent interest. CVP owns the remaining 60 percent. At our request, CVP has added HNR Finance as a party to the Conversion Contract. Petrodelta is governed by its own board of directors, charter and bylaws.
In April 2006, the Venezuelan National Assembly passed legislation terminating all operating service agreements and directed the government to take over the operations carried out by the private companies without prejudice to the incorporation of mixed companies for that purpose. This action, coupled with the unfinished conversion to Petrodelta, left Harvest Vinccler without a contractual means recognized by the government of Venezuela to address revenues or costs and expenses from April 1, 2006 until October 25, 2007. As a result of this situation, our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (â€śGAAPâ€ť) from April 1, 2006 until September 30, 2007, did not reflect the net results of our producing operations in Venezuela. Since the Conversion Contract terms have been fulfilled, we have recorded the results of operations and economic benefits of our ownership in Petrodelta from April 1, 2006 through December 31, 2007 in the fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates.
Since signing the MOU in March 2006, CVP has designated its board members and a General Manager and President for Petrodelta. While Petrodelta has been formed, funded and is the legal owner of the Petrodelta Fields, Harvest Vinccler continued in the day-to-day operations of the Petrodelta Fields until the end of January 2008. During 2007, Harvest Vinccler advanced cash to Petrodelta of $47.7 million to fund its operations of which $8.0 million remains to be repaid as of February 29, 2008.
At December 31, 2007, Harvest Vinccler had one loan outstanding with a Venezuelan bank for a total of 20 billion Venezuela Bolivars (â€śBolivarsâ€ť) (approximately $9.3 million). This loan is cash collateralized by $6.8 million deposited in a U. S. bank. The loan represents the remaining balance originally borrowed in 2006 to pay income tax assessments and related interest to the SENIAT, the Venezuelan income tax authority.
In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. Although the full cost method of accounting for oil and gas exploration and development continues to be an accepted method of accounting for oil and gas properties, the successful efforts method of accounting as prescribed by SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies is the preferred method. In accordance with Statement of Financial Accounting Standards (â€śSFASâ€ť) No. 154, Accounting Changes and Error Corrections, financial information for prior periods has been restated to reflect retrospective application of the successful efforts method. We believe the successful efforts method provides a more transparent representation of our results of operations and the ability to assess our future investments in oil and gas properties for impairment based on their estimated fair values rather than being required to base valuation on prices and costs as of the balance sheet date. The significant differences between successful efforts and full cost accounting for oil and gas properties relate to the expensing of exploration activities and related unsuccessful exploratory drilling activities. The expensing of these costs can create volatility in the statement of operations. The change in accounting principle resulted in a cumulative, non-cash increase to retained earnings of $52.4 million, net of income tax, as of December 31, 2004. Retained earnings increased due to the reversal of ceiling test write downs in prior years required under the full cost accounting rules of the Securities and Exchange Commission (â€śSECâ€ť). There were no such impairments under the successful efforts accounting rules. The effect of the accounting change on income from continuing operations for the years ended December 31, 2006 and 2005 was a decrease of $4.9 million and $15.0 million, net of income tax, or $0.13 and $0.39 per diluted share, respectively. The decrease in income from continuing operations was due to an increase in depletion expense. There was no effect on cash and cash equivalents. For additional information on the impact of the change to the successful efforts method of accounting see Part IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 â€“ Organization and Summary of Significant Accounting Policies â€“ Property and Equipment and Change in Accounting Principle .
See Item 1 â€“ Business, Operations, Item 1A â€“ Risk Factors, and Item 7 â€“ Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations for a more detailed description of these and other events during 2007.
As of December 31, 2007, we had total assets of $413.4 million, unrestricted cash in the amount of $120.8 million and no long-term debt. For the year ended December 31, 2007, we had total revenues of $11.2 million and net cash used in operating activities of $20.5 million. As of December 31, 2006, we had total assets of $468.4 million, unrestricted cash in the amount of $148.1 million and long-term debt of $67.0 million. For the year ended December 31, 2006, we had total revenues of $59.5 million and net cash used in operating activities of $24.4 million.
Our strategy has broadened from our primary focus on Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems. We seek to leverage our Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of technical resources, opening of our London office, the planned 2008 opening of a Singapore office, the redeployment of resources from our Moscow office, as well as our earlier purchase of a 45 percent equity interest in Fusion Geophysical, L.L.C. (â€śFusionâ€ť), we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. While exploration will become a larger part of our overall portfolio, we will generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles.
Our goal, with the conversion process in Venezuela completed, is to influence the management and operations of Petrodelta while developing and producing the Petrodelta Fields in the most efficient manner. We expect that amounts available for dividends will be distributed to us on a regular basis after a catch up dividend for the period of April 1, 2006 to December 31, 2007. Then Petrodelta is expected to reinvest a substantial portion of its earnings in its development and producing activities and, accordingly, we expect subsequent dividends to be minimal in the near-term.
We intend to use our available cash to pursue additional growth opportunities in Gabon, Indonesia, China and other countries that meet our strategy. However, the execution of this strategy may be limited by factors including access to additional capital and the receipt of a dividend from Petrodelta as well as the need to preserve adequate development capital in the interim.
The ability to successfully execute our strategy is subject to significant risks including, among other things, payment of Petrodelta dividends, exploration, operating, political, legal and financial risks. See Item 1A â€“ Risk Factors , Item 7 â€“ Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations and other information set forth elsewhere in this Annual Report on Form 10-K for a description of these and other risk factors.
Mr. Chesebroâ€™ serves as the Chairman of Harvest Natural Resources, Inc. From December 1998 until he retired in 1999, he served as President and Chief Executive Officer of PennzEnergy, the independent oil and gas exploration and production company that was formerly a business unit of Pennzoil Company. From February 1997 to December 1997, Mr. Chesebroâ€™ served as Group Vice President â€” Oil and Gas and from December 1997 until December 1998 he served as President and Chief Operating Officer of Pennzoil Company, an integrated oil and gas company. From 1993 to 1996, Mr. Chesebroâ€™ was Chairman and Chief Executive Officer of Tenneco Energy, a $4 billion global energy company. Tenneco Energy was part of Tenneco, Inc., a worldwide corporation that owned diversified holdings in six major industries. In 1964, Mr. Chesebroâ€™ graduated from the Colorado School of Mines. He was awarded the schoolâ€™s Distinguished Achievement Medal in 1991 and received his honorary doctorate from the institution in 1998. He currently serves on the schoolâ€™s visiting committee for petroleum engineering. In 1994, Mr. Chesebroâ€™ was the first American awarded the H. E. Jones London Medal by the Institution of Gas Engineers, a British professional association. Mr. Chesebroâ€™ is an advisory director to Preng & Associates, an executive search consulting firm.
Mr. Edmiston was elected President and Chief Executive Officer of Harvest Natural Resources, Inc. on October 1, 2005. He joined the Company as Executive Vice President and Chief Operating Officer on September 1, 2004. Prior to joining Harvest, Mr. Edmiston was with Conoco and ConocoPhillips for 22 years in various management positions including President, Dubai Petroleum Company (2002-2004), a ConocoPhillips affiliate company in the United Arab Emirates and General Manager, Petrozuata, C.A., in Puerto La Cruz, Venezuela (1999-2001). Prior to 1999, Mr. Edmiston also served as Vice President and General Manager of Conoco Russia and then as Asset Manager of Conocoâ€™s South Texas Lobo Trend gas operations. Mr. Edmiston earned a Bachelor of Science degree in Petroleum Engineering from the Texas Tech University and a Masters of Business Administration from the Fuqua School of Business at Duke University. Mr. Edmiston is a member of the Society of Petroleum Engineers. He serves as a member of the advisory boards for the Department of Petroleum Engineering at Texas Tech University and the MBA Program for the Mays College of Business at Texas A&M University.
Dr. Effimoff is founder and principal of E&P Consulting which provides upstream and midstream consulting services since 2005. From 2002 until 2005 he was Chief Operating Officer for Teton Petroleum Company. Between 1996 and 2001, he was President of Pennzoil Caspian Corporation, managing their interests in the Caspian Region. Between 1994 and 1996 he was the Chief Executive Officer of Larmag Energy, NV, a privately held Dutch oil and gas production company with its primary assets in the Caspian Sea. He has served in senior executive roles with Ashland Exploration Inc., Zilkha Energy Company and Kriti Exploration, Inc. Dr. Effimoff has authored numerous technical and business articles. He is a member of American Association of Petroleum Geology, the Society of Petroleum Engineers, the Society of Exploration Geophysicists and the Geological Society of America. He has a Doctorate in Geology from the University of Cincinnati and completed the Harvard Advanced Management Program.
Mr. Hardee is a Senior Vice Presidentâ€”Financial Consultant with RBC Wealth Management, since 1994. From 1991 through 1994, Mr. Hardee was a Senior Vice President with Kidder Peabody. From 1977 through 1991, Mr. Hardee was a Senior Vice President at Rotan Mosle/Paine Webber Inc. During his tenure at RBC Wealth Management, he was in the top 1% of his peer group and has been a member of the Chairmanâ€™s Council since joining the firm. Mr. Hardee is a licensed investment advisor and has served in various board capacities including investment policy. He was awarded designation to Reuterâ€™s Advice Point Top Advisors of 2008 and named to RBC Wealth Management Senior Portfolio Manager Group. He currently advises/manages over $400 million in assets. Mr. Hardeeâ€™s expertise is advising high net worth individuals and small to mid sized corporations. Mr. Hardee is a former director of the Bank of Almeda and Gamma Biologicals. He is also a former limited partner and advisory director of the Houston Rockets of the National Basketball Association. Mr. Hardee has a finance degree from the University of Texas McCombs School of Business. He holds an Accredited Wealth Management designation, as well as a certification of director education from the NACD Corporate Directors Institute.
Mr. Irelan has over 37 years of experience in the oil and gas industry. He retired from Occidental Petroleum as Executive Vice President of Worldwide Operations in April 2004, having started there in 1998. Prior to Occidental Petroleum, Mr. Irelan held various positions at Conoco, Inc., from 1967 until 1998. Upon his retirement he opened his own company, Naleri Investments LLC. He also partnered in several entrepreneurial ventures including Rapid Retail Solutions LLC, BISS Product Development LLC and All About Baby LLC. Mr. Irelan earned his Professional Engineering degree in Petroleum Engineering from Colorado School of Mines. He also has advanced studies in Mineral Economics. He was awarded the Distinguished Achievement Award from the school in 2000.
In 2007, Mr. Murray retired from Dresser, Inc. He had been the Chairman of the Board and Chief Executive Officer since 2004. Dresser, Inc. is an energy infrastructure and oilfield products and services company. From 2000 until becoming Chairman of the Board, Mr. Murray served as President and Chief Executive Officer of Dresser, Inc. Mr. Murray was President of Halliburton Companyâ€™s Dresser Equipment Group, Inc.; Vice President, Strategic Initiatives of Dresser Industries, Inc.; and Vice President, Operations of Dresser, Inc. from 1996 to 2000. Mr. Murray has also served as the President of Sperry-Sun Drilling Services from 1988 through 1996. Mr. Murray joined NL Industries in 1973 as a Systems Application Consultant and served in a variety of increasingly senior management positions. Mr. Murray currently serves on the board of Precision Drilling Corporation, a publicly held contract drilling company, Wellstream Holdings PLC, a manufacturer of flexible pipe, and Ranch Energy Corporation, an oil and gas company involved in enhanced recovery. Mr. Murray is also on the boards of the Valve Manufacturers Association and the World Affairs Council of Dallas Fort Worth. He is on the board of advisors for the Maguire Energy Institute at the Edwin L. Cox School of Business, Southern Methodist University, and a member of the Board of Regents of Seton Hall University. Mr. Murray holds a B.S. degree in Accounting and a Master of Business Administration from Seton Hall University. He served for two years in the U.S. Army as a commissioned officer. Mr. Murray is a member of the American Petroleum Institute and the Society of Petroleum Engineers.
Since September 2006, Mr. Stinson has been Chairman of TORP Terminal LP, a Norwegian LNG technology company. From January 2005 until November 2007, he was Chairman of the Board of Paulsson Geophysical Services, Inc., a vertical seismic profiling technology company. From February through August 2004, Mr. Stinson served with the U.S. Department of Defense and the Coalition Provisional Authority as Senior Advisor to the Iraqi Ministry of Oil. From 1965 to 2003, Mr. Stinson was with Conoco and ConocoPhillips in a number of assignments in operations and management. His last position at ConocoPhillips was as Senior Vice President, Government Affairs in which he was responsible for government relations with particular emphasis on developing and facilitating international business development opportunities in various countries. Previous positions included Senior Vice President â€” Business Development, Vice President â€” Exploration and Production, Chairman and Managing Director of Conoco (UK) Limited, Vice President/General Manager of International Production for Europe, Africa and the Far East, and President and Managing Director of Conoco Norway, Inc. Mr. Stinson is a member of the board of directors of Eventure Global Technology, Inc, an oil equipment company. Mr. Stinson earned a Bachelor of Science degree in Industrial Engineering from Texas Tech University and a Masters of Business Administration from Arizona State University. He is a fellow of the Institute of Petroleum and a member of the American Petroleum Institute, the Society of Petroleum Engineers and the American Association of Petroleum Geologists.
Executive Compensation Components
Our compensation components are designed to reward named executive officersâ€™ contributions while considering our unique operating situation, how that situation is managed and our strategy. Some of the factors we consider in compensating our executives are individual experience and skill sets that are unique from more domestically focused oil and gas companies, and are heavily focused on extensive global energy industry experience. It is essential to our business strategy that we recruit and retain executives that understand the risk and complexity of our global focus and unique business strategy. Many of our executive officers are mid-to-late career executives who have worked for larger energy companies and have come to us for the challenge and reward of working for a small, entrepreneurial organization.
The principal components of compensation for named executive officers in 2007 were:
â€˘ Base salary;
â€˘ Performance based annual incentive awards;
â€˘ Long-term incentive compensation; and
â€˘ Personal benefits.
We provide named executive officers with base salary to compensate them for services rendered during the calendar year. Base salary is paid in cash and reviewed annually by the Committee. Individual base salaries and annual increases, if any, are determined based on an evaluation of Company performance, the individualâ€™s experience and performance, and market surveys. We are smaller than many other globally focused companies, which may result in less comparability with other global companies. The Committee targets base salary that falls between the 50th and 75th percentile of named executive officers in comparable companies, with variation based on individual executive skill sets. All named executive officers received base salary increases in 2007. In August 2007, Mr. Nesselrodeâ€™s responsibilities and base salary were increased with his relocation in September 2007 to our equity affiliate in Venezuela, Petrodelta, S.A. In December 2007, Mr. Speirs was elected as an officer and appears in the Summary Compensation Table as a named executive officer. The average salary increase for the three remaining named executive officers was 6.7%. Prior to the 2007 increases, base salaries were at the 35 th to 49 th percentile of the market data. After the 2007 increases, the base salaries were at the 38 th to 68 th percentile of the market data. See Summary Compensation Table for more details.
Performance-Based Incentive Awards
The Committee has the discretion to select the particular indicators of performance used in determining cash incentive awards, and for 2007, the Committee recognized the significant accomplishments we made to provide the necessary technical foundation and global reach required to align its organic growth strategy throughout the company. We completed the Venezuelan asset conversion including the direct award of additional fields, and we ended the year with assets in four countries. We purchased a 45 percent equity interest in Fusion, a geophysical data company, and staffed our London technical office to ensure a strong growth platform. We (i) recorded a significant financial gain associated with financial securities swaps, (ii) bought back three million shares of stock at a favorable average cost, and (iii) reduced our debt by 91 percent, all without a significant net change in our net cash position.
Target award levels for annual incentives are set at 100% of base salary for the CEO and 50% of base salary for other named executive officers. Under guidelines set by the Committee, cash incentive awards may not exceed two times the established target award. The annual cash incentive for named executive officers considers market data provided by Stone Partners. The total cash compensation for our named executive officers was at the 33 rd to 49 th percentile of the market data.
Long-Term Incentive Compensation
Our long-term incentive plans approved by our stockholders in 2004 and 2006 (â€śLTIP(s)â€ť) provide incentive opportunities for named executive officers to align their personal financial interest with our stockholders. The LTIPs include provisions for stock options, SARs, restricted stock and cash awards based on achieving established indicators of performance. We offer a balanced compensation portfolio of long-term incentives with emphasis on compensation components that create the strongest link to long-term company performance. Stock options and restricted stock awards provide a significant benefit to attract and retain key employees while affording them a compelling level of participation in the future value created for the benefit of our stockholders. Our policy on stock awards is focused on determining the right mix of retention and ownership requirements to drive and motivate our executivesâ€™ behavior consistent with long-term interests of stockholders. The Committee is the administrator of our long-term incentive compensation plans and, subject to Board approval, has full power to determine the size of awards to our executives, determine the terms and conditions of grants in a manner consistent with the long-term incentive plans, and amend the terms and conditions of any outstanding award.
The LTIPs state that the price at which shares of stock may be purchased under an option shall not be less than 100% of the fair market value of the stock on the date the option is granted. The period during which an option may be exercised shall be determined by the Committee, provided that the period will not be longer than ten years from the date on which the option is granted. Also, the date on which an option vests and may be exercised during the term of the option shall be determined by the Committee and may vary from option to option, provided that no more than one-third of the shares subject to an option may vest in any one year. The 2006 LTIP provides that no employee, consultant or director shall be awarded options or SARs covering more than 900,000 shares for each type of award and no more than 175,000 shares of restricted stock during any period of three consecutive calendar years. Unless an employeeâ€™s stock option agreement provides otherwise, all options shall terminate and can no longer be exercised upon the employeeâ€™s termination for cause. Without stockholder approval, LTIPs may not be amended by the Board to increase the number of shares available, re-price or re-grant options, change exercise price requirements or make other material changes.
The CEO presents individual stock award recommendations for named executive officers to the Committee, and after review and discussion the Committee submits their recommendation to the Board for approval. The Committeeâ€™s policy is to grant options on the date the Board approves them. Ordinarily, stock options and restricted stock will be granted once each calendar year on a predetermined date or at the effective date of a new hire or promotion, but not within six months of a previous award to the same individual. In 2007, the price of options under the annual grants and the date of the annual restricted stock award were set at the first regularly scheduled board of directors meeting in February. For 2008, the price and date for the annual awards will be set at the board of directors meeting in May. The price of options and the date of a restricted stock award issued to a new employee will be set on the employeeâ€™s effective start date. The price of options and the date of a restricted stock award issued to an employee as a result of a promotion will be set on the effective date of that promotion. Under no circumstances will a grant date be set retroactively.
The Board has adopted stock retention guidelines as an additional means to promote ownership and retention of stock in us by officers and directors. The guidelines apply to any award of restricted stock or options to purchase our stock granted to executives and directors after February 2004. Under the guidelines, at least 50% of the shares of restricted stock must be retained by an officer or director for at least three years after the restriction lapses. Also, at least 50% of the net shares of stock received through the exercise of an option or stock appreciation right must be retained by an officer or director for at least three years after the option lapses.
For the 2007 long-term incentive awards, Stone Partners suggested the Committee take a more aggressive long-term incentive award structure. We face significant uncertainties and challenges over the next two to three years. Our ability to attract and retain highly skilled and experienced executives is critical to our long-term success. Consequently, we believe significant financial reward opportunities must exist in the form of long-term equity participation. An â€śin marketâ€ť base salary and annual bonus award will not be sufficient to attract and retain executives needed for in our business. As a result, the Committee, working closely with Stone Partners, made recommendations to the Board to change our approach for 2007 to awarding long-term incentives. The Board approved the following changes: 1) target above market award levels and â€śfront endâ€ť load options awards over the next two years, with these options vesting ratably over five years and an expiration term of seven years, and 2) significantly increase the use of restricted stock on an annual basis with cliff vesting after three years from the date of award.
The Committee believes this aggressive long-term incentive award structure will create wealth building opportunities by linking successes in achieving our business objectives to our stock price increases and will provide an effective attraction and retention vehicle. The 2007 awards targeted the 50 th to 75 th percentile. The actual stock option awards for 2007 resulted in total direct compensation for the named executive officers being between the 48 th and 99 th percentile of the market data.
Our named executive officers are covered under the same health and welfare plans, including our 401(k) plan, as all employees. The named executive officers also receive supplemental life insurance to cover the risks of extensive travel required in developing our global business. We pay 100% of all premiums for the following benefits for employees and their eligible dependents:
â€˘ All employees are entitled to an annual maximum medical benefit up to $1.0 million, with an annual out-of-pocket deductible of $1,000, coinsurance of 80%, and preventative insurance of 100% subject to annual limits.
â€˘ Life and accidental death and dismemberment (â€śAD&Dâ€ť) insurance equal to two times annual salary with a minimum of $200,000 and a cap of $300,000 (or $400,000 with evidence of insurability), and additional coverage equal to five times annual salary ($1.0 million maximum) while traveling outside their home country on company business.
â€˘ Long-term disability benefits of a monthly benefit of 60% of base salary up to a maximum of $10,000 per month.
â€˘ Participation in our Statutory Profit Sharing Plan 401(k). Eligibility is effective at the date of hire. We use a safe harbor matching formula for company contributions (dollar for dollar match up to 3% of pay; $0.50 for every dollar on the next 2% of pay subject to the statutory maximum). Participant and company contributions are 100% vested from the date of contribution. At termination of employment, employees are eligible to receive their account balance in a lump sum.
â€˘ All employees and their dependents are entitled to annual dental and vision care benefits of $1,500 and $250, respectively, per employee and dependent.
We do not offer a pension plan or a non-qualified deferred compensation plan for executives or employees. In 2007, we did not offer perquisites to named executive officers or other employees. We offer relocation and foreign service premiums to employees serving in an international location. The amount of the premium will vary depending upon the living conditions, political situation and general safety conditions of the international location. Expatriate employees will be provided housing and furniture allowances and payments for all utilities. They also receive a cost of living allowance to cover the differential between normal living expenses in the host and home countries, and will continue to participate in the employee benefit plans available to home country employees.
MANAGEMENT DISCUSSION FROM LATEST 10K
We had earnings of $57.2 million, or $1.51 per diluted share, for the twelve months ended December 31, 2007 compared with a loss of $62.5 million, or $1.68 per diluted share, for 2006. Net income for the year ended December 31, 2007 includes the net results of Petrodeltaâ€™s operations from April 1, 2006 through December 31, 2007 of $52.1 million, the reversal of deferred revenue and deferred income tax recorded by Harvest Vinccler for 2005 and first quarter of 2006 deliveries pending clarification on the calculation of crude prices under a Transitory Agreement (â€śTransitory Agreementâ€ť) which provided that the maximum total fee per barrel paid under the OSA could not exceed 66.67 percent of the total value of the crude oil as determined under an Annex to the Transitory Agreement of $5.6 million, net, and gains from the exchange of financial securities of $49.6 million. The loss for 2006 was due to the inability to recognize equity earnings for the producing operations in Venezuela since the second quarter of 2006 and charges of $73.8 million for additional taxes and related interest in Venezuela for 2001 through 2006. We completed the formation of Petrodelta and moved forward with our plans to create a diversified portfolio using our existing cash and enhanced technical capabilities which are more fully described in the following sections.
Formation of Petrodelta
On October 25, 2007, the Venezuelan Presidential Decree, which formally transfers to Petrodelta the rights to the Petrodelta Fields subject to the conditions of the Conversion Contract, was published in the Official Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the Petrodelta Fields for a maximum of 20 years from October 25, 2007. Petrodelta will undertake its operations in accordance with the Business Plan. Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with the Business Plan. The Business Plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. The 2008 budget of Petrodeltaâ€™s Business Plan was approved by its shareholders on January 23, 2008.
Petrodelta has hired personnel, largely from Harvest Vinccler as well as seconding its technical and financial managers; and the Board of Directors of Petrodelta has appointed the management of Petrodelta. Certain of these appointments are made by the shareholders. Effective August 9, 2007, Mr. Karl L. Nesselrode, Vice President, Engineering and Business Development of Harvest, accepted a long-term secondment to Petrodelta as its Operations and Technical Manager. Per Petrodeltaâ€™s bylaws, the Operations and Technical Managerâ€™s position is designated as our appointment. Mr. Nesselrode will remain an officer of Harvest. The General Manager of Petrodelta (CVP appointment) has been appointed by the Board of Directors of Petrodelta and is in charge of the daily management of the business of Petrodelta and has the power and duties customary to manage, direct and supervise the accounting of Petrodelta.
Petrodelta is governed by a board of directors in accordance with the Charter and Bylaws. Under the Charter and Bylaws, matters requiring shareholder approval may be approved by a simple majority with the exception of certain specified matters which require the approval by the holders of at least 75 percent of the capital stock. These matters include: most changes to the Charter and Bylaws; changes in the capital stock of Petrodelta that would alter the percentage participation of HNR Finance or CVP; any liquidation or dissolution of Petrodelta; any merger, consolidation or business combination of Petrodelta; disposition of all or any substantial part of the assets of Petrodelta, except in the ordinary course of business; any financing agreement for an amount greater than $10 million; approval or modification of Petrodeltaâ€™s financial statements; creation of certain reserve funds; any distribution of dividends or return of paid-in surplus; changes to the policy regarding dividends and other distributions established by the Charter and Bylaws; changes to the Business Plan; changes to the Contract for Sale and Purchase of Hydrocarbons with PPSA; contracts with shareholders or affiliates that are not at market price; any social investment in excess of the amount required by the Venezuelan government; any waiver of material rights or actions with respect to litigation involving more than $1 million; selection of external auditors; appointment of any judicial representative or general agent of Petrodelta; and designation of a liquidator in the event of the liquidation of Petrodelta.
The Board of Directors of Petrodelta consists of five directors, three of whom are appointed by CVP, including the President of the Board, and two of whom are appointed by HNR Finance. Decisions of the Board of Directors are taken by the favorable vote of at least three of its members, except in the case of any decision implementing a decision of the Shareholdersâ€™ Meeting relating to any of the matters where a qualified majority is required, in which case, a favorable vote of four members will be required. The Board of Directors has broad powers of administration and disposition expressly granted in the Charter and Bylaws. The powers include: proposing budget and work programs; presenting the annual report to the shareholders; appointing and dismissing personnel; making recommendations regarding financial reserves and utilization of surplus; making proposals on dividends consistent with the Charter and Bylaws; agreeing on contracts consistent with the work programs and budgets; opening and closing bank accounts; making, accepting, endorsing and guaranteeing bank drafts and other commercial instruments consistent with work programs and budgets; and implementing policies and procedures.
The sale of oil and gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA signed on January 17, 2008. The form of the agreement is set forth in Annex K to the Conversion Contract. Crude oil delivered from the Petrodelta Fields to PPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Natural gas delivered from the Petrodelta Fields to PPSA is priced at $1.54 per thousand cubic feet. PPSA is obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced production month by wire transfer, in U.S. Dollars in the case of payment for crude oil and natural gas liquids delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by Petrodelta. Any dividend paid by Petrodelta will be made in U.S. Dollars.
An unofficial English translation of the Conversion Contract is attached to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 1, 2007.
Petrodelta currently has a workover rig performing well maintenance. A drilling rig has been contracted and is expected to begin operations during the first quarter of 2008. Petrodelta is in the bidding and selection process to contract a second drilling rig. The second drilling rig is projected to begin operations during the second or third quarter of 2008. Petrodeltaâ€™s plan of development is focused on 1) increasing production, 2) conversion of probable and possible reserves to proved reserves in the New Fields, 3) adding reserves through exploration in El Salto by acquiring and processing 3-D seismic over the remaining two-thirds of the field and drilling identified prospects, and 4) capturing the synergies and scale at all levels of Petrodeltaâ€™s operations.
We have recorded the results of operations and economic benefits of our ownership in Petrodelta from April 1, 2006 through December 31, 2007 in the fourth quarter of 2007 as Net Income from Unconsolidated Equity Affiliates. Petrodeltaâ€™s results and operating information is more fully described in Part IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 â€“ Venezuela Operations â€“ Petrodelta, S.A .
In Item 1 â€“ Business and Item 1A â€“ Risk Factors, we discuss the situation in Venezuela and how the actions of the Venezuelan government have and continue to adversely affect our operations. The situation in Venezuela has also restricted our available cash and had a significant adverse effect on our ability to obtain financing to acquire and develop growth opportunities elsewhere. Until there is clarity and certainty over receipt of payment for prior crude oil and natural gas deliveries and the payment of dividends by Petrodelta, uncertainty over the future of our investment in Venezuela will continue to affect our performance and limit our growth opportunities.
We will use our available cash and future access to capital markets to expand our diversified strategy in a number of countries that fit our strategic investment criteria. In executing our business strategy, we will strive to:
â€˘ maintain financial prudence and rigorous investment criteria;
â€˘ access capital markets;
â€˘ create a diversified portfolio of assets;
â€˘ preserve our financial flexibility;
â€˘ use our experience and skills to acquire new projects; and
â€˘ keep our organizational capabilities in line with our rate of growth.
To accomplish our strategy, we intend to:
â€˘ Diversify our political risk: Acquire oil and natural gas fields in a number of countries to diversify and reduce the overall political risk of our investment portfolio.
â€˘ Seek Operational and Financial Control : We desire control of major decisions for development, production, staffing and financing for each project for a period of time sufficient for us to ensure maximum returns on investments.
â€˘ Establish a Presence Through Joint Venture Partners and the Use of Local Personnel: We seek to establish a presence in the countries and areas we operate through joint venture partners to facilitate stronger governmental and business relationships. In addition, we use local personnel to help us take advantage of local knowledge and experience and to minimize costs.
â€˘ Commit Capital in a Phased Manner to Limit Total Commitments at Any One Time: We are willing to agree to minimum capital expenditures or development commitments at the outset of new projects, but we endeavor to structure such commitments to fulfill them over time under a prudent plan of development, allowing near-term operating cash flow to help fund further investment, thereby limiting our maximum cash exposure. We also seek to maximize available local financing capacity to develop the hydrocarbons and associated infrastructure.
â€˘ Provide Technical Expertise: We believe there is an advantage in being able to provide geological, geophysical and engineering expertise beyond what many companies or countries possess internally. In addition to our in-house technical capabilities, in January 2007 we acquired a minority interest in Fusion, a technical firm with significant experience in providing leading edge geophysical, geosciences and reservoir engineering services in many places in the world. Through this acquisition we have strategic access to these services.
â€˘ Maintain A Prudent Financing Plan : We intend to maintain our financial flexibility by closely monitoring spending, holding sufficient cash reserves, minimizing the use of restricted cash, actively seeking opportunities to reduce our weighted average cost of capital and increase our access to debt and equity markets.
â€˘ Manage Exploration Risks . We seek to manage the higher risk of exploration by diversifying our prospect portfolio, applying state-of-the-art technology for analyzing targets and focusing on opportunities in proven active hydrocarbon systems with infrastructure.
â€˘ Establish Various Sources of Production . We seek to establish new production from our exploration and development efforts in a number of diverse markets and expect to monetize production through operations or the sale of assets.
In 2005 and 2006, we recognized the need to diversify our asset base as part of our strategy. Our strategy has broadened from our primary focus on Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems. We seek to leverage our Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of technical resources, opening of our London office, the planned 2008 opening of a Singapore office, the redeployment of resources from our Moscow office as well as our earlier purchase of a 45 percent equity interest in Fusion, we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. Our organic growth is focused on undeveloped or underdeveloped fields, field redevelopments and exploration. While exploration will become a larger part of our overall portfolio, we will generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles. Exploration will be technically driven with a low entry cost and high resource potential that provides sustainable growth. We will continue to seek opportunities where perceived geopolitical risk may provide high reward opportunities in the long term. We will limit producing property acquisitions as market pricing of proved producing reserves generally translates into low returns. Our WAB-21, South China Sea asset has been in our portfolio since 1996. Gabon and Indonesia are expected to be additions to our new strategy after receipt of government approvals.
Results of Operations
We included the results of operations of Harvest Vinccler in our consolidated financial statements and reflected the 20 percent ownership interest of Vinccler as a minority interest in 2005 and the first quarter of 2006. Since April 1, 2006, equity investment in Petrodelta has been reflected under the equity method of accounting. In the fourth quarter of 2007, we recorded the cumulative effect from April 1, 2006 to December 31, 2007. See Part IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 â€“ Venezuela Operations â€“ Petrodelta, S.A. for Petrodeltaâ€™s results of operations which reflect the results for the nine month period ending December 31, 2006 and the twelve month period ending December 31, 2007, comparatively.
The following discussion should be read with the results of operations for each of the years in the three-year period ended December 31, 2007 and the financial condition as of December 31, 2007 and 2006 in conjunction with our Consolidated Financial Statements and related Notes thereto.
Years Ended December 31, 2007 and 2006
We reported net income of $57.2 million, or $1.51 diluted earnings per share, for 2007 compared with a net loss of $62.5 million, or $1.68 diluted earnings per share, for 2006.
Revenue recorded for the year ended December 31, 2007 reflects the reversal of deferred revenue recorded by Harvest Vinccler for 2005 and first quarter of 2006 deliveries pending clarification on the calculation of crude prices under the Transitory Agreement. See Part IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 â€“ Organization and Summary of Significant Account Policies â€“ Revenue Recognition . There were no sales of oil and natural gas in 2007 due to the conversion of the OSA to a minority equity interest in Petrodelta.
General and administrative expenses increased due to employee related expenses offset by lower contract services. During the year ended December 31, 2007, we recorded a gain of $49.6 million as a result of the purchase and sale of U.S. Dollar indexed Venezuelan government bonds (see Part IV, Item 15, Notes to the Consolidated Financial Statements, Note 12 â€“ Gain on Financing Transaction ). There were no such financing transactions entered into during the year ended December 31, 2006. Taxes other than on income decreased due to the elimination of municipal taxes which were based on oil deliveries under the OSA.
Investment earnings and other decreased due to interest earned on lower cash balances. Interest expense decreased due to the payment of Harvest Vincclerâ€™s Bolivar denominated debt in the year ended December 31, 2007.
Income tax expense decreased due to the recording of Harvest Vincclerâ€™s prior period tax assessments in the year ended December 31, 2006 and the reversal of deferred income taxes provided on Harvest Vincclerâ€™s deferred revenue. We have utilized our current United States general and administrative expenses plus our net operating loss carryovers to offset the gains on financing transactions generated during the year ended December 31, 2007. There was no effect on our effective tax rate.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
You should read the following discussion of the results of operations for the three months ended March 31, 2008 and 2007 and the financial condition as of March 31, 2008 and December 31, 2007 in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007
We reported net income of $0.2 million, or $0.01 diluted earnings per share, for the three months ended March 31, 2008 compared with a net loss of $6.5 million, or $0.17 diluted earnings per share, for the three months ended March 31, 2007. Net income for the three months ended March 31, 2008 includes our 40 percent share of Petrodeltaâ€™s net earnings for the same period. Petrodelta was formed in October 2007, and we recorded our share of the earnings of Petrodelta from April 1, 2006 to December 31, 2007 in the three months ended December 31, 2007 consolidated statement of operations. The three months ended March 31, 2008 is the first period that we have reported the earnings of Petrodelta on a current basis.
General and administrative expenses and taxes other than on income for the three months ended March 31, 2008 were consistent with that of the three months ended March 31, 2007.
In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. During the three months ended March 31, 2008, we incurred $1.3 million of exploration costs related to the purchase of seismic related to our United States operations. There were no exploration costs incurred in the three months ended March 31, 2007.
During the three months ended March 31, 2008, we entered into an exchange transaction exchanging U.S. government securities for U.S. Dollar indexed debt issued by the Venezuelan government. This security exchange transactions resulted in a $1.3 million gain on financing transactions for the three months ended March 31, 2008. There was no gain on financing transactions for the three months ended March 31, 2007.
Investment earnings and other decreased due to lower average cash balances. Interest expense decreased due to Harvest Vincclerâ€™s reduced debt balances in the three months ended March 31, 2008 compared with March 31, 2007.
For the three months ended March 31, 2008, income tax expense, which is comprised of income tax on our foreign activities and withholding tax on interest income from Harvest Vinccler, was consistent with the three months ended March 31, 2007.
Effects of Changing Prices, Foreign Exchange Rates and Inflation
Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned development activities and capital expenditure program.
Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official exchange rate in February 2004 and again in March 2005. We do not expect the currency conversion restrictions or the adjustment in the exchange rate to have a material impact on us at this time. Dividends from Petrodelta will be denominated in U.S. Dollars when paid. Within the United States, inflation has had a minimal effect on us, but it is potentially an important factor with respect to Petrodeltaâ€™s results of operations.
On January 1, 2008, the redenomination of Venezuelaâ€™s currency to the equivalent of 1,000 pre-2008 Bolivars became effective. This means that the Bolivar dropped three zeros effective January 1, 2008. From January 1, 2008, all amounts of money are denominated in the new and smaller scale of Bolivars under the temporary name of BolĂvares Fuertes, which after a period of time will bear again the name of Bolivars.
During the three months ended March 31, 2008, our net foreign exchange gains attributable to our international operations were minimal.