Current HNR Stock Info

Harvest Natural Resources, Inc. (HNR) recently announced two agreements to exchange common stock for outstanding senior notes and announced it is considering offering $75 million in new senior notes.

Under the terms of the exchange agreement, $4,651,000 of the principal amount of senior notes bearing an interest rate of 8.25% will be exchanged for 829,951 shares of Harvest’s common stock. Additionally, Harvest has agreed to issue the note-holders 41,215 shares of common stock in exchange for foregoing a one year interest payment by the Company totaling $383,707.50, implying $9.31 per share. The Company expects to have $10,900,000 of remaining notes outstanding after the exchange agreement is finalized.

On August 22, 2012, HNR announced a second stock-for-debt exchange, this time with a single noteholder for $1,900,000 of principal in exchange for 339,047 common shares, resulting in an effective exchange price of $5.60 per share. In addition, in lieu of cash, HNR agreed to issue to the noteholder 17,955 shares of common stock at $8.73 per share in exchange for foregoing a one year interest make-whole of $156,750.  After giving effect to the second exchange, approximately $9,000,000 principal amount of the notes remain outstanding.  The exchange is expected to close on August 27, 2012.

Harvest is also considering offering up to $75 million in new unsecured senior notes in the near future to fund the Company’s drilling program in Gabon and for general corporate purposes.

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OAG360 Comments:

Combined, the two stock-for-debt swaps are expected to reduce the Company’s long-term debt to $9.0 million, a 42% decrease from the $15.6 million of debt as of June 30, 2012 and an 89% decrease from the $81.2 million as of December 31, 2010. In March 2012, the Company executed a similar common debt-for-stock exchange and an at-the-market equity financing program.  As of August 17, 2012, Harvest had a debt-to-market capitalization of 4%, below the median of 36% for the 88 companies in EnerCom’s U.S. E&P database. At December 31, 2010, Harvest’s debt-to-market capitalization stood at 20%.

Apparently, HNR is raising capital and shoring-up its balance sheet to advance its exploratory projects, specifically in Gabon. As of June 30, 2012, working capital, inclusive of cash, stood at $21.5 million. The addition of $75 million from a possible notes offering would bring total working capital to $96.5 million.

In Gabon, the Company estimates it has discovered up to 62 million barrels of oil (MMBO) potential on top of the already discovered 23 MMBO in the 680,000 gross acre position. Spudding of the Tortue exploration well is expected to begin in October 2012 and the processing and reprocessing of 3-D seismic is underway.

Exploration well planning, design and procurement in Indonesia and Oman is also expected to be evaluated in 2012.

We believe that capital structure should be aligned with a company’s risk-reward profile and that exploratory projects are best financed with equity. However, we don’t necessarily view HNR’s move to secure an additional $75 million in debt financing as a strategic misalignment. In the past, Harvest has secured bridge debt financing, and has demonstrated both the ability and willingness to pay down debt once a milestone is achieved.

For example, in October 2009 the Company secured a $60 million term loan facility with MSD Capital L.P.  Those funds were used to fund drilling operations, as management marketed the Company’s Antelope project in Utah, which it eventually sold to Newfield Exploration (ticker: NFX) in May 2011 for $215 million. The net proceeds from the sale were used to finance the Company’s capital plan and pay off the $60 million term loan. In addition, the $15.6 million of current long-term debt (pre-exchange) is what remains of an original $32 million note offering that was closed in February 2010, after having been reduced already by a previous stock-for-debt exchange. Consequently, we view a new potential notes offering as a bridge to the future, to keep the bit turning to the right in the Company’s most promising projects while going through the process to close the sale of its Venezuelan assets.

Harvest announced its sale of its interest in its Venezuelan equity affiliate, Petrodelta, on June 21, 2012 to PT Pertamina (Persero), the national oil company of Indonesia. The transaction is valued at $525 million, net to Harvest. Both boards of Harvest and Pertamina have already approved the transaction. The next steps are to obtain approvals from the Venezuelan government, the Indonesian government and the majority of Harvest’s shareholders. If approvals are not obtained on or before March 21, 2013, the Buyer or Harvest may terminate the agreement.

We note that $75 million represents 14% of the cash expected to be generated from the Petrodelta sale. Post-closing, Harvest will have the option to pay off its debt completely and still have working capital to fund its exploratory projects without having to go to the market and raise equity.

The Company currently sits with acreage in Gabon, Indonesia and Oman and a $525 million transaction around the corner. As of August 17, 2012, Harvest’s enterprise value was $427 million. Harvest’s share price as of August 17, 2012 was $9.31 and the Venezuelan transaction alone is valued above $12 per share, fully diluted and inclusive of the additional 1,228,168 common shares to be issued from the latest two stock-for-debt exchange agreements. The discount to the Company’s enterprise value implies the market is risking the Venezuelan transaction by 19% and giving little to no value to the Company’s exploratory portfolio.

Webcast Presentation from EnerCom’s The Oil & Gas Conference:

Harvest Natural Resources presented at EnerCom’s The Oil & Gas Conference® 17 on August 13, 2012. Click here for the webcast.

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