On March 22, 2011, Harvest Natural Resources (ticker: HNR) announced it sold all of its Utah oil assets to an affiliate of Newfield Exploration Company (ticker: NFX) for $215 million in cash. The sale has an effective date of March 1, 2011 and is expected to close in May 2011, subject to customary adjustments at closing.
The sale includes 69,000 gross (47,600 net) acres in which Harvest owned an overall working interest of approximately 70%, proved reserves of 4.6 MMBOE and wells operated by both Harvest and Newfield that were producing an average of 650 BOPD during January and February 2011.
Harvest estimates that net proceeds from the sale are estimated to be $205.8 million after deduction for taxes and fees. Harvest will use the net proceeds to pay down debt and for general corporate purposes.
In September 2010, Harvest announced it had engaged Bank of America Merrill Lynch to advise the company on strategic alternatives for enhancing shareholder value. The $215 million sale of the company’s Utah assets to Newfield is one of the fruits of that labor.
Harvest assembled a leasehold position of 69,000 gross acres (47,600 net acres) in the Uinta Basin of Utah between the established oil fields of Altamont-Bluebell on the northern end and the Monument Butte field to the south. Monument Butte is primarily operated by Newfield. In May 2009, Harvest spud the Bar F exploration well to test the potential of the over pressured Mesaverde formation for deep gas. Although the Bar F well did find gas, the major discovery was relatively shallow oil in the Lower Green River and Upper Wasatch formations. That discovery led to further appraisal and development oil well drilling in the area. To the south, Harvest partnered with Newfield on two delineation and extension drilling projects to further test the potential for extending the Monument Butte oil field. The programs were successful, and in only two years, Harvest’s team was able to build proved oil reserves in Utah from zero to 4.6 MMBOE. Apparently, Newfield liked what they saw and acquired the assets to bolt-on to its existing operations in the area.
This transaction injects additional liquidity onto Harvest’s balance sheet, allowing the company to refocus on its international portfolio and continue executing its exploration strategy. Harvest is currently drilling ahead on its Budong-Budong oil prospect in Indonesia in the Lariang LG-1 well, the first of two planned exploration wells located on the Indonesian island of West Sulawesi. In offshore Gabon, Harvest has contracted with Transocean (ticker: RIG) for a semisubmersible drilling rig to drill its first exploration well at its Dussafu prospect targeting potential oil and gas reservoirs.
We should mention that Harvest has had meaningful exposure to Venezuela for many years, well before the nation’s government commenced its renationalization program in 2006. Since then, negative news flow and heated rhetoric from Venezuela’s president has led to a perception of high political risk, driving away some investors. Harvest was not about to abandon its Venezuelan assets or sell them at fire sale prices. Why not? Simple – according to the BP Statistical Review of World Energy (June 2010), Venezuela had 12.9% of the world’s total proved oil reserves, second only to Saudi Arabia. That makes Venezuela the largest source of proved oil reserves in the Western Hemisphere and a very rich oil province. Additionally, Harvest’s working experience and expertise in the region will provide an advantage to successfully capitalize on Venezuela’s resource potential.
Harvest has exposure to Venezuela through a 32% ownership interest in Petrodelta, its Venezuelan affiliate. In 2010, Petrodelta drilled 16 oil wells with a 100% success rate by running a two-rig drilling program that increased oil production to 23,455 BOPD, an increase of 9% over 2009 and 57% higher than 2008. Petrodelta’s drilling program has been self-funded with cash from operations and Harvest has received dividends from its Venezuelan affiliate, most recently a cash dividend of $9.8 million in October 2010. Petrodelta’s Board has approved a $224 million capital budget for 2011, which is expected to be funded out of internally-generated cash flow.
Harvest will use approximately $61.8 million of the net proceeds to pay down outstanding borrowings on the company’s $60 million term loan with MSD Capital, plus accrued interest and a penalty for early repayment. This repayment will de-leverage the company’s balance sheet by approximately 65%, leaving the only long-term debt outstanding the $32 million fixed-rate unsecured senior convertible notes. These unsecured notes bear interest of 8.25% and mature on March 1, 2013. They are convertible into shares of common stock at the rate of 175.2234 shares per $1,000 of face value for a total of approximately 5.6 million shares, or about 16.6% of current basic shares outstanding.
We estimate that Harvest’s cash as of December 31, 2010, pro forma for the debt payoff and Utah sale, to be approximately $202.7 million, or $5.15 per fully-diluted share (based on $58.7 million of cash on hand at December 31, 2011, plus net proceeds of $205.8 million and less debt pay down of $61.8 million). Although Harvest did not provide guidance for 2011 capital expenditures, we anticipate that level of cash will be sufficient to fund the company’s exploration program in 2011 as well as provide dry powder for future acquisitions, paying down additional debt and/or expanding HNR’s asset portfolio.
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