Harvest Posts US$51mn Profit in 2005 on Higher Oil Prices

US oil company Harvest Natural Resources (NYSE: HNR) posted profits of US$50.8mn in 2005, up from US$34.4mn in the previous year due to higher prices, the company said in a statement.

Harvest's total operating income reached US$120mn compared to US$90.5mn the previous year.

Operating costs increased 19.2% to US$39.7mn.Harvest produced and sold more than 24,000 barrels a day (b/d) of oil to PDVSA in 2005, a 7.5% increase with respect to the previous year, Harvest president and CEO James Edmiston said in a conference call on Monday to discuss 2005 earnings.

Harvest received an average price of US$24.02/b for oil produced in 2005, up from US$18.90/b in 2004.

Harvest also produced and sold 25.7 billion cubic feet (Bf3) of natural gas, down from 31.1Bf3 the previous year, Edmiston said.

The company received US$1.03 per thousand cubic feet of natural gas sold, the statement said, without giving the 2004 figure.

As a result of the lower gas production, total hydrocarbons production fell 2.3% to 13 million barrels of oil equivalent (Mboe) from 13.3Mboe in 2004.

Harvest was forced to suspend its drilling program in January 2005 after PDVSA and the energy and oil ministry refused to grant the necessary permits. As a result oil production levels declined to 22,000b/d by year-end.

"Without drilling, oil and gas deliveries will continue to decline. We expect oil deliveries will average approximately 21,000b/d for the first quarter of 2006," the statement said.

The suspension of the drilling program also caused Harvest to decrease its proved reserves from 84.4Mboe at year-end 2004 to 36.1Mboe at the close of 2005, the statement said.

"We have not been granted the necessary permits to drill wells nor do we have any certainty we will be granted them. Consequently the undeveloped reserves classified as proved/undeveloped as of December 2004 no longer meet that SEC standard for proved reserves," Edmiston said.


Last year Venezuela's government ordered private companies in 32 operating agreements with PDVSA to accept the terms of new joint venture contracts controlled by PDVSA. Harvest signed a preliminary agreement to enter into such a JV in August 2005.

Venezuela's government plans to present a definitive contract model for approval to the national assembly in the coming weeks.

Following fourth quarter 2005 payments from PDVSA, Harvest has approximately US$180mn and a little more than US$25mn equivalent of Venezuelan bolívares in cash, Edmiston said. The amount "gives [Harvest] the flexibility to see the Venezuelan negotiations through to the conclusion of our choosing."

PDVSA has changed the way it pays oil companies for production in the country and now pays only 50% in US dollars and the remainder in bolivares.

Venezuela's national tax authority Seniat served Harvest with a tax claim of US$85mn last year related to a retroactive tax increase in the 2001-2004 period. Harvest paid US$5.3mn but it is contesting the remainder, and a team of Harvest representatives is meeting regularly with Seniat to resolve the outstanding issues, Edmiston said.

Harvest estimates an effective tax rate of 40%-41% in 2006, CFO Steven Tholen said during the conference call.


The company is considering the sale of its Venezuelan assets rather than accepting the terms of a new JV with PDVSA, Edmiston said.

"We have considered the possibility that these assets may be more valuable in the hands of an already diversified company. We have received inquiries from others regarding the exchange or sale of our assets," he said.

Edmiston said 2005 taught the company that its two-country focus on Venezuela and Russia is "inadequate."

The uncertainty surrounding Venezuelan assets, both from a contract migration standpoint and in terms of the retroactive tax increase, has led to a very low implied value of the business, Edmiston said.

"Our current lack of portfolio diversity dramatically increased the ill-effects of the uncertainty in Venezuela. We believe the key to weathering future geopolitical storms will be to create a quality portfolio with adequate diversity," he said. "We continue to believe that truly large transformational growth opportunities lie in countries that are challenging and we continue to focus our growth in those countries."

Harvest is pursuing opportunities in a number of areas including Russia, the Confederation of Independent States, the Middle East and Asia, Edmiston said in the statement. Harvest's assets at year-end 2005 were worth US$401mn, up 9.1% from end-2004, according to the statement.

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