Harvest Natural Resources dumps Venezuela operations

Jul 04, 2016 12:00 AM

Four years ago, Harvest agreed to sell its Venezuela operations to PT Pertamina (Persero), the national oil company of Indonesia, for $725 million, but the Venezuela government never signed off on the deal. This week Harvest accepted just $80 million.

Harvest Natural Resources, Inc. (HNR) has announced that it and its wholly-owned subsidiary, HNR Energia B.V. (HNR Energia), have entered into a Share Purchase Agreement with CT Energy Holding SRL, a private investment firm (CT Energy), to sell all of the Company’s interest in Venezuela.

Under the terms of the Share Purchase Agreement, CT Energy will acquire HNR Energia’s 51% interest in Harvest-Vinccler Dutch Holding B.V., a Netherlands company, through which all of Harvest’s Venezuelan interests are owned, and CT Energy or an affiliate will deliver to Harvest $80 million in cash, subject to certain adjustments, and a $12 million six-month 11% note payable by CT Energy or such affiliate.

At the closing, Harvest will also receive cancellation of (i) $30 million of outstanding debt held by CT Energy, (ii) CT Energy’s 8,667,597 shares of Harvest common stock, and (iii) warrants held by CT Energy to purchase 34,070,820 shares of Harvest common stock, exercisable under certain circumstances, at an exercise price of $1.25 per share. Based on the closing price of the Company’s stock on June 28, 2016, the market value of the shares of Harvest common stock held by CT Energy was $4.247 million. As of March 31, 2016, the Company carried on its books a liability of $9.564 million in connection with the warrants held by CT Energy.

After giving effect to the transaction, Harvest would cease to have a presence in Venezuela, and the existing relationship between Harvest and CT Energy, which currently owns 16.8% of Harvest’s outstanding common stock, would terminate. In addition, at the closing, the two CT Energy non-independent directors appointed in connection with CT Energy’s initial investment in Harvest would resign from the Board of Directors. Going forward, Harvest’s primary asset would be its oil and gas interests in Gabon and cash.

A special committee comprised of three independent and disinterested directors of Harvest, which did not include the three directors nominated by CT Energy (the Special Committee), with the assistance of its financial and legal advisors, carefully analyzed CT Energy’s offer, and after in-depth negotiations and thorough consideration, concluded that the agreement was in the best interests of Harvest’s stockholders and unanimously approved the Share Purchase Agreement. The Harvest Board unanimously approved the Share Purchase Agreement based on the Special Committee’s recommendation.

In addition to approval by stockholders representing a majority of outstanding shares of Harvest common stock, the closing of the transaction is subject to, among other things, approval by a majority of outstanding shares held by non-CT Energy affiliated stockholders and approvals by the Government of the Bolivarian Republic of Venezuela. Availability of financing is not a condition to the transaction. Closing of the transaction would constitute a change of control under agreements the Company has in place with Corporacion Venezolana del Petroleo S.A. (CVP), a PDVSA affiliate, and Petroandina Resources Corporation N.V. (Petroandina), as well as the Company’s incentive plans and employment agreements with its executive officers and key employees.

At closing of the transaction, Harvest will repay all remaining outstanding debt held by CT Energy in excess of the $30 million cancelled at closing. The current outstanding principal of the debt held by CT Energy stands at $31,961,241. The Company expects to issue additional debt to CT Energy of $2 million a month between now and closing. Assuming a September 30, 2016 closing, the remaining principal and accrued interest the Company would pay CT Energy at closing would be approximately $10 million. Net proceeds after payment of the remaining CT Energy debt, taxes and transaction-related costs from the transaction are estimated to be $63 million. These transaction-related costs include a reservation for potential change-of-control payments that could become payable under pre-existing agreements. Subject to determinations to be made by the Board, the remaining proceeds may be used to pay dividends, to continue to operate our business, or some combination of the two. The decision of the Board regarding how to use the remaining proceeds will be based on its determination of what is in the best interests of Harvest and its stockholders at the time a decision is made. Harvest will also continue to seek opportunities to sell its Gabon assets. To the extent the Company has not sold its Gabon assets, Harvest intends to operate and develop those assets in the ordinary course of business.

Tudor, Pickering, Holt & Co. served as financial advisor and Mayer Brown LLP acted as legal counsel to the Special Committee.

Norton Rose Fulbright acted as legal counsel to the Company.

Wachtell, Lipton, Rosen & Katz acted as legal counsel to CT Energy.

TWICE DENIED
Harvest had twice tried to sell its Venezuela assets as it had trouble getting paid. It last had a deal to sell it assets to Argentina-based PlusPetrol but the Venezuela government failed to approve it.

"The Share Purchase Agreement (SPA) between Petroandina Resources Corporation N.V. (Petroandina), Pluspetrol Resources Corporation B.V. (Pluspetrol), Harvest and HNR Energia B.V., a wholly-owned subsidiary of Harvest, for the purchase of Harvest’s remaining interests in Venezuela for a purchase price of $275.0 million in cash has been terminated as a result of the failure to obtain approval of the transaction from the Government of the Bolivarian Republic of Venezuela by December 31, 2014," Harvest said.

"Representatives of the Venezuelan Government and Corporacion Venezolana del Petroleo S.A. (CVP), a PDVSA affiliate who along with another PDVSA affiliate owns a 60% interest in Petrodelta, informed Harvest and Petroandina that any approval of the contemplated transaction would be conditioned on Petroandina guaranteeing (i) an unspecified bonus payment for access to Petrodelta’s reserves and (ii) $1.52 billion of financing for Petrodelta. Neither of these conditions exists as contractual obligations related to ownership in Petrodelta and ultimately Petroandina and the Venezuelan Government could not reach an agreement on those matters," Harvest said.

Harvest and Petroandina -- a subsidiary of PlusPetrol, an Argentine oil company with interests throughout South America which is also the largest oil and natural gas producer in Peru -- signed the agreement to sell HNR's 80% equity interest in Harvest-Vinccler Dutch Holding, B.V. to Petroandina in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013, when the Company sold a 29% equity interest to Petroandina for $125 million. The second closing under the Share Purchase Agreement, for the sale of the remaining 51% equity interest in Harvest Holding for a cash purchase price of $275 million, was subject to, among other things, approval by the Government of Venezuela and Harvest shareholders.

On May 7, 2014, Harvest’s stockholders approved the sale of the Company’s remaining interests in Venezuela to Petroandina.

As a result of the termination of the agreement, Harvest will retain its 20.4% interest in Petrodelta and Petroandina will retain its 11.6% interest in Petrodelta, which it had purchased from Harvest for $125 million in cash on December 16, 2013. Petroandina had also loaned HNR Energia $7.6 million which became due on December 31, 2015.

“After three years of our best efforts, we are both disappointed and frustrated that the sale of our interests in Petrodelta has once again been effectively denied by the Government of Venezuela and CVP," James A. Edmiston, President and CEO of Harvest, said at the time. "As a result of this development, in the near term, Harvest will focus on strengthening its balance sheet and exploring alternatives with regard to our interests in Petrodelta and Gabon. These actions may include efforts to monetize our Dussafu asset.”

$725 MILLON INDONESIA DEAL STYMIED

In 2012, Harvest Natural Resources, Inc., which is headquartered in Houston, Texas, signed a contract with PT Pertamina (Persero), the national oil company of Indonesia, to sell all of the Company's interests in Venezuela for $725 million in an all-cash transaction, but that transaction also fell through after the Venezuelan government failed to approve the sale.

Petrodelta was producing 42,920 barrels a day in 2014 and averaged approximately 41,300 barrels a day in 2013 from its oil fields in northeastern Venezuela.

Harvest has been operating in Venezuela since 1992, when it signed a 20 year operating agreement with an affiliate of PDVSA to develop the Uracoa, Tucupita and Bombal fields. These three Orinoco belt fields were developed from 1937 through 1962 but abandoned in 1987. Harvest initially took the production up to 28,000 barrels per day and after further investment, development and exploration, to over 41,000 barrels per day. But the company has had problems getting paid for its production in Venezuela as well as repatriating dividends and has had to restate earnings over the last few years. As a result, in the final quarter of 2013, the company lost $112.7 million, or $3.02 per share, despite $100 a barrel oil.

PETRODELTA PRODUCING 43,507 BPD

During the three months ended March 31, 2016, Petrodelta sold approximately 3.96 million barrels of oil for a daily average of 43,507 barrels per day, an increase of 9% over the same period in 2015 and three percent lower than the previous quarter. Petrodelta sold 0.57 billion cubic feet (BCF) of natural gas for a daily average of 6.2 million cubic feet per day (MMCFD), decreasing 41% over the same period in 2015, and decreasing 31% over the previous quarter. Petrodelta's current production rate is approximately 41,445 barrels per day.

During the first quarter of 2016, Petrodelta drilled and completed six development wells, five in the El Salto field and one in the Temblador field. Currently, Petrodelta is operating four drilling rigs and one workover rig and is continuing with infrastructure enhancement projects in the El Salto and Temblador fields.

Petrodelta's production target for 2016 is projected to be approximately 42,965 barrels per day. The 2016 Petrodelta capital expenditures are expected to be approximately $242.8 million. Petrodelta reported in May that it expects to drill 19 oil wells during 2016.

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