SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ____
Commission file number 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 WestLake Park Boulevard, Suite 600 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 504-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of May 1, 2002 was 20,996,546.
EXPLANATORY NOTE
This Form 10-Q/A for the first quarter ended March 31, 2002 is being filed in
order for Harken Energy Corporation to revise its discussion of capital
commitments as part of Management's Discussion and Analysis of Financial
Condition and Results of Operations, pursuant to a recent comment letter
received from the SEC. The item amended is within Part I., Item 2, whereby a
single sentence has been removed and does not include an updated discussion for
any events occurring after May 15, 2002. Other items, including the unaudited
consolidated condensed financial statements of Harken Energy Corporation, are
not amended and are not included in this filing.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Certain statements contained in this Quarterly Report, including statements
of Harken management's current expectations, intentions, plans and beliefs, are
"forward-looking statements", as defined in Section 21D of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995:
. statements before, after or including the words "may", "will",
"could", "should", "believe", "expect", "future", "potential",
"anticipate", "intend", "plan", "estimate", or "continue" or the
negative or other variations of these words; and
. other statements about matters that are not historical facts.
Such forward-looking statements involve known and unknown risk,
uncertainties and other factors which may cause the actual results, performance,
timing or achievements of Harken to be materially different from any results,
performance, timing or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the risks described in Harken's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed
with the Securities and Exchange Commission.
Overview
Harken's domestic operating segment has completed a period of significant
successful drilling activity over the past two years, and in light of recent
reduced prices for oil and natural gas, has reduced its exploration and
development activity at this time in favor of pursuing oil and gas reserve
growth through merger and acquisition activity. In April 2002, Harken, along
with a wholly-owned subsidiary, acquired certain producing property interests
(the "Republic Properties") in exchange for Harken common stock. Harken's
ability to make future acquisition transactions may be affected, however, by the
market value of Harken common stock. If the price of Harken common stock remains
low or decreases, Harken's ability to utilize its stock in acquisition
transactions could be negatively affected. Harken's Middle American operations
are conducted through Global Energy Development PLC ("Global", a United Kingdom
company listed on the AIM Exchange in London). Effective March 25, 2002,
Harken's ownership in Global decreased to 92.77%, as Global placed 7.23% of its
stock in a placement to investors, including certain affiliates of Harken and
Global, in exchange for approximately $1,425,000 cash. Global is seeking
additional financing and acquisition activities using shares of its newly listed
common stock. In addition, the sale, by Harken, of additional shares of Global
common stock which would reduce Harken's ownership to 90% was previously
approved by Harken's Board of Directors. As a part of Harken's business
strategy, Harken has taken steps to maximize its cash flow by decreasing its
administrative costs through reductions in personnel, reductions in salaries,
increasing efficiencies in its production operations, and by reducing its
long-term debt obligations. Harken's continued steps in these areas should
continue to increase operating efficiency and cash flow during 2002.
Harken reported a net loss for the three months ended March 31, 2002 of
$3,556,000 compared to a net loss of $1,412,000 for the prior year period due
primarily to lower commodity prices compared to the prior year. Because of lower
product prices for both natural gas and crude oil, Harken worldwide oil and gas
revenues have decreased 39% during the first quarter of 2002 compared to the
prior year period, despite increased production volumes both domestically and in
Colombia. Gross profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $3.1 million during
the three months ended March 31, 2002 compared to approximately $5.7 million for
the prior year period.
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Critical Accounting Policies
Full cost accounting method -- Harken accounts for the costs incurred in
the acquisition, exploration, development and production of oil and gas reserves
using the full cost accounting method. Under full cost accounting rules, the net
capitalized costs of evaluated oil and gas properties shall not exceed an amount
(the "cost ceiling") equal to the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating conditions, including the use of oil and gas prices as of the end
of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change in the near term. If oil and gas prices decline in the
future, even if only for a short period of time, it is possible that additional
impairments of oil and gas properties could occur. In addition, it is reasonably
possible that additional impairments could occur if costs are incurred in excess
of any increases in the cost ceiling, revisions to proved oil and gas reserves
occur, or if properties are sold for proceeds less than the discounted present
value of the related proved oil and gas reserves.
Colombia operations -- During the quarter ended March 31, 2002,
approximately 30% of Harken's consolidated revenues were generated from sales to
Ecopetrol, the state-owned Colombian oil company. The country of Colombia is
currently experiencing heightened security issues which could affect Harken's
Colombian operations as well as the strength and operations of Ecopetrol. If
Ecopetrol experiences significant adverse conditions in its operations, it may
not be able to meet its ongoing financial obligations to Harken for delivered
production or be able to purchase future production under the terms of existing
contract provisions. Harken's Colombian operations could also be directly
affected by guerilla activity or other instances or threats of violence,
preventing or interrupting Harken from producing, transporting or delivering
future production volumes.
Valuation of accounts receivable -- Harken sells its domestic oil and gas
production to a broad and diverse group of industry partners, many of which are
major oil and gas companies, and as a whole, do not represent a significant
credit risk. In addition, Harken charges certain industry partners, who
participate in Harken-operated wells, with their share of drilling costs and
operating expenses. In determining a reserve for potential losses in collection
of its accounts receivable, Harken considers, among other factors, the current
financial condition of its industry partners in light of current industry
conditions. In the event of a significant decline in oil and gas prices, many of
our industry partners may not be able to meet their ongoing financial
obligations to Harken or be able to meet the terms of existing contract
provisions.
Classification of long-term debt -- Harken's bank credit facility with Bank
One, N.A. ("Bank One") requires Harken, as well as certain of its subsidiaries
(the "Borrowers") to maintain certain financial covenant ratios and
requirements, as calculated on a quarterly basis. If Harken or the Borrowers are
not in compliance with their bank financial covenant ratios or requirements in
the future and are unable to obtain a waiver or amendment to the facility
requirements, the credit facility would be in default and callable by Bank One.
In addition, due to cross-default provisions in Harken's 5% European Note
agreement, a majority of Harken's debt obligations would become due in full if
any debt is in default. The classification of Harken's long-term debt
obligations at March 31, 2002 reflects Harken's expectations that future
operating results will result in Harken and the Borrowers being in compliance
with the bank financial covenant ratios and requirements in future quarters.
However, expectations of future operating results and continued compliance with
financial covenants cannot be assured and our lenders' actions are not
controllable by Harken. If Harken's projections of future operating results are
not achieved and its debt is placed in default, Harken could experience a
material
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adverse impact on its financial position and results of operations.
Accounting for derivatives - Harken holds commodity derivative financial
instruments designed to mitigate commodity price risk associated with a portion
of its future monthly natural gas production and related cash flows. These
commodity derivatives qualify for hedge accounting as discussed in Note 8 -
Hedging Activities in the Notes to Consolidated Condensed Financial Statements.
Harken does not participate in speculative derivatives trading. Hedge accounting
requires that commodity derivative instruments be designated as hedges and that
fluctuations in their market value are effective in mitigating the hedged
commodity price risk, and that such effectiveness be documented and monitored.
While Harken intends to continue to meet the conditions to qualify for hedge
accounting, if hedges are not highly effective, or if the forecasted hedged
production does not occur, the changes in the fair value of the commodity
derivative instruments would be reflected in earnings.
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
Three Months Ended
March 31,
---------------------------
2001 2002
----------- ------------
(unaudited)
Operating Revenues
Domestic Exploration and Production Operations
Gas sales revenues $5,552,000 $2,467,000
Gas volumes in mcf 969,000 975,000
Gas price per mcf $ 5.73 $ 2.53
Oil sales revenues $1,456,000 $1,321,000
Oil volumes in barrels 54,000 65,000
Oil price per barrel $ 26.96 $ 20.32
Colombian Exploration and Production Operations
Oil sales revenues $1,907,000 $1,638,000
Oil volumes in barrels 94,000 131,000
Oil price per barrel $ 20.29 $ 12.50
Other Revenues
Interest income $ 245,000 $ 33,000
Other income $ 32,000 $ 33,000
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For the quarter ended March 31, 2002 compared with the corresponding prior
period.
North American Operations
Domestic gross oil and gas revenues during the first quarter of 2002 relate
to the operations in the onshore and offshore areas of the Texas and Louisiana
Gulf Coast and the Western and Panhandle regions of Texas. During 2001, certain
wholly-owned subsidiaries of Harken sold certain interests in oil and gas
producing properties located in Texas, Arkansas, Louisiana and New Mexico for
approximately $13.1 million cash. In February 2002, another wholly owned
subsidiary of Harken sold interests in oil and gas producing properties located
in Texas for approximately $910,000. Subsequent to March 31, 2002, Harken sold
additional producing property interests for approximately $214,000.
Domestic gas revenues decreased 56% to $2,467,000 for the three months
ended March 31, 2002 compared to $5,552,000 for the prior year period due to the
decrease in average gas prices received during the first quarter of 2002, as
Harken received an overall average price of $2.53 per mcf of gas during the
first quarter of 2002 compared to $5.73 per mcf received during the first
quarter of 2001. Such decreases in natural gas prices offset a slight increase
in gas production volumes compared to the prior year period, as the production
during the quarter from wells drilled and / or completed during 2001 offset the
decrease in production caused by the sales of producing properties discussed
above.
Domestic oil revenues decreased 9% to $1,321,000 during the first quarter
of 2002 compared to $1,456,000 during the first quarter of 2001 primarily due to
reduced oil prices, which averaged $20.32 during the current year quarter
compared to $26.96 during the prior year. Despite the sales of producing
properties discussed above, Harken's domestic oil production volumes increased
during the quarter compared to the prior year period, as Harken's Gulf Coast oil
production was reduced by temporary operational curtailments during the first
quarter of 2001 at Harken's Main Pass area offshore Louisiana. Overall, domestic
oil production volumes increased 20% during the first quarter of 2002 compared
to the prior year period.
Domestic oil and gas operating expenses consist of lease operating expenses
and a number of production and reserve based taxes. Domestic oil and gas
operating expenses decreased 24% to $1,885,000 during the first quarter of 2001
compared to $2,491,000 during the prior year period primarily due to the above
mentioned sale of properties. Oil and gas operating expenses increased, however,
as a percentage of related oil and gas revenues due primarily to the decrease in
oil and gas prices during the first quarter of 2002 compared to the prior year
period. Oil and gas operating expenses decreased per unit of production due to
the replacement of sold producing fields with newly completed gas production.
Harken continues to seek to sell a specific domestic field operation with high
operating costs per barrel. Such efforts are intended to further reduce Harken's
overall domestic operating expenses per unit of production beginning later in
2002.
Harken expects that oil and gas production volumes generated as a result of
drilling activities in late 2001 and continuing workover activities together
with the acquisition of the Republic Properties discussed above will continue to
help to mitigate the production decreases as a result of the sales of producing
properties discussed above. Harken's oil and gas production volumes are expected
to increase beginning in April 2002 from the Republic Properties, but could
decrease if Harken sells additional producing properties. Harken continues to
pursue opportunities to acquire additional producing properties, which would
also further increase domestic production. Through May 14, 2002, average second
quarter oil and gas prices have remained lower than prices received in the prior
year period. Harken's oil and gas revenues are highly dependent upon product
prices, which Harken is unable to predict.
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Middle American Operations
Harken's Colombian oil revenues have decreased 14% from $1,907,000 during
the first quarter of 2001 to $1,638,000 during the first quarter of 2002. During
the first quarter of 2001 and 2002, Harken's Colombian operating revenues
consisted of production from Global's Bolivar and Alcaravan Association Contract
areas.
During the first quarter of 2001, sales of production from Global's Estero
#1 well on the Alcaravan Contract area were limited to approximately 1,000 gross
barrels of oil per day due to pipeline constraints and pumping capacity. During
the second quarter of 2001, Global took steps to resolve such limitations and,
though it is currently producing 1,500 gross barrels of oil per day, is now
allowed to transport up to approximately 3,000 gross barrels of oil per day from
both Estero #1 and Estero #2 wells. Estero #2 was completed during the first
quarter of 2001, and has mitigated the production declines related to Global's
Bolivar Contract area production, as the Bolivar Contract production has been
temporarily shut-in during the first quarter of 2002, pending recently completed
workover procedures. Harken's production volumes during the remainder of 2002
will continue to remain dependent on existing well production and pumping
efficiency.
Middle American operating expenses have decreased from $763,000 during the
first quarter of 2001 to $435,000 for the first quarter of 2002, as Global has
taken steps to reduce operating expenses related to its producing fields in
Colombia.
Interest and Other Income
Interest and other income decreased during the first quarter of 2002
compared to the prior year period due to Harken's usage of cash during 2001 for
capital expenditures. Harken generated approximately $245,000 of interest income
during the first quarter of 2001, compared to approximately $33,000 of interest
income during the first quarter of 2002. Additional decreases in Harken's cash
balances could be mitigated or offset by additional capital sources.
Other Costs and Expenses
General and administrative expenses decreased during the first quarter of
2002 compared to the first quarter of 2001 despite certain one time employee
severance costs during the quarter related to staff reductions. Harken has taken
additional steps to further reduce personnel costs through personnel reductions,
salary reductions and other methods and to achieve other administrative cost
reductions beginning in the second quarter of 2002.
Depreciation and amortization expense increased slightly during the first
quarter of 2002 compared to the prior year period primarily due to increased
production volumes during the quarter. Depreciation and amortization on oil and
gas properties is calculated on a unit of production basis in accordance with
the full cost method of accounting for oil and gas properties.
Interest expense and other decreased during the first quarter of 2002
compared to the prior year period primarily due to the decrease in the amount of
outstanding 5% European Notes from early 2001. In addition, during the first
quarter of 2001, Harken expensed the remaining unamortized issuance costs
related to the IFC project loan finance facility, which was terminated in May
2001.
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LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 2002 was approximately $4.2 million,
compared to approximately $3.4 million at December 31, 2001. Harken's operations
used approximately $1.9 million of cash flow during the first quarter of 2002,
primarily due to the timing of certain working capital payments and collections
during the quarter. Harken's cash resources at March 31, 2002 totaled
approximately $6.3 million. Considering its existing cash resources and the
potential additional capital sources listed below, Harken believes that it will
have sufficient cash resources to fund all of its planned capital expenditures
during 2002. Harken's ongoing exploration, development and acquisition efforts
are expected to be funded through a combination of cash on hand, cash flows from
operations, issuances or exchanges of debt or equity securities, or through cash
provided by either existing or newly established financing arrangements.
Harken's Middle American operations are conducted through Global Energy
Development PLC ("Global", a United Kingdom company listed on the AIM Exchange
in London). Effective March 25, 2002, Harken's ownership in Global decreased to
92.77%, as Global placed 7.23% of its stock in a placement to investors,
including certain affiliates of Harken and Global in exchange for approximately
$1,425,000 cash. Global is seeking additional financing and acquisition
activities using its shares of its newly listed common stock. In addition, the
sale, by Harken, of additional shares of Global common stock which would reduce
Harken's ownership to 90% was previously approved by Harken's Board of
Directors.
Capital Sources
During 2001, sales of certain domestic producing property interests
generated cash proceeds of approximately $13.1 million. In February 2002, Harken
sold certain additional domestic producing property interests for approximately
$910,000. Subsequent to March 31, 2002, Harken sold additional producing
property interests for approximately $214,000. Harken is currently considering
additional sales of producing properties that could generate additional cash
proceeds.
Harken's operating cash flows from its domestic oil and gas properties are
being strengthened by successful drilling activity in late 2001 in southern
Louisiana, which have begun to partially offset the reductions following the
sales of producing properties consummated in late 2000 and during the first half
of 2001. Recently completed wells, including the Thomas Cenac #1, the State
Lease 1480 #2, the State Lease 14589 #3 and the State Lease 1480 #3, all began
production in the last four months of 2001. In April 2002, a wholly-owned
subsidiary of Harken acquired the Republic Properties from Republic Resources,
Inc., upon receiving approval by Republic's shareholders and debenture holders.
The Republic Properties consist of 15 producing property interests located in
southern Louisiana and the Texas Gulf Coast region. The Republic Properties were
acquired by the Harken subsidiary in exchange for 2,645,500 shares of Harken
common stock. In addition, the Purchase and Sale Agreement also provides for
contingent additional consideration of cash or additional shares of Harken
common stock to be paid within 45 days after December 31, 2003, based on a
defined calculation to measure the appreciation, if any, of the reserve value of
the Republic Properties. The acquisition of the Republic Properties will
supplement Harken's domestic operating cash flows beginning in the second
quarter of 2002. Harken's domestic operating cash flows are particularly
dependent on the price of natural gas, which Harken is unable to predict.
Certain Harken subsidiaries entered into a three-year loan facility with
Bank One, N.A. ("Bank One"), which is secured by certain of those subsidiaries
domestic oil and gas properties and a guarantee from Harken. The Bank One
facility provides borrowings subject to a borrowing base (as defined by the Bank
One
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facility), which was $7,937,000 as of March 31, 2002 and as of May 14, 2002.
Such borrowing base, which is net of outstanding letters of credit will be
reduced by $225,000 per month beginning September 1, 2002 until the borrowing
base is redetermined by Bank One on November 1 and May 1 in accordance with the
facility agreement. The Bank One facility requires the Borrowers, as well as
Harken, to maintain certain financial covenant ratios and requirements. Such
borrowing base is scheduled to be re-determined by Bank One on May 1 and
November 1 of each year in accordance with the facility agreement.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan and Bolivar Contract areas in Colombia. Global anticipates
that cash flows from its Colombian assets will be adequate to fund the capital
needs, as well as the operating, administrative and management costs of its
Middle American operations.
As described above, approval of the March 2002 application by Global for
its common shares to trade on the AIM Exchange in London enables Harken, through
Global, to seek additional financing and acquisition activities using shares of
Global PLC common stock. Global PLC's ability to effectively use its common
stock will be dependent upon the market value of its shares on the AIM Exchange.
Global is also pursuing raising additional capital through potential sales of
assets. Additional capital raised by Global would be used exclusively for
Global's capital needs, as transfers to Harken would be limited or restricted.
Harken had previously received authorization from its Board of Directors to sell
Global shares held by Harken up to an amount which would reduce Harken's
ownership in Global to 90%.
In addition to the above sources, Harken has and may continue to raise
capital through the issuance of equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that provide
Harken with additional capital. Such transactions may be impacted, however, by
the market value of Harken common stock. If the price of Harken common stock
remains low or decreases, Harken's ability to utilize its common stock either
directly or indirectly through convertible instruments for raising capital could
be negatively affected.
Capital Commitments
In light of recent reduced oil and gas prices, Harken's domestic operating
strategy now includes efforts to increase its oil and gas reserves in North
America through acquisitions, with a decreased emphasis on exploration and
development drilling activities. Accordingly, Harken's domestic capital
expenditure plans have been greatly reduced compared to the prior two year
period. Certain of Harken's domestic prospects may be drilled through joint
venture arrangements, which Harken is currently pursuing in order to reduce its
capital commitment, while maintaining its exposure to the reserve potential.
Harken is actively pursuing various North American acquisition opportunities.
Harken has focused its operating strategy to acquire, explore, and produce oil
and gas properties located in the Gulf Coast region of Texas and Louisiana.
Harken's primary need for capital is to fund these planned domestic exploration
and development efforts. Harken anticipates domestic capital expenditures will
total approximately $1.5 million during 2002. A majority of Harken's planned
domestic capital expenditures are discretionary and, as a result, will be
curtailed if sufficient funds are not available. Such expenditure curtailments,
however, could result in Harken losing certain prospect acreage or reducing its
interest in future exploration and development projects.
On May 26, 1998, Harken issued to qualified purchasers certain 5% Senior
Convertible Notes (the "5% European Notes") which mature on May 26, 2003.
Interest incurred on these notes is payable semi-annually in May and November of
each year to maturity or until the 5% European Notes are converted. The 5%
European Notes may be redeemed for cash, at Harken's option, at par, in whole or
in part, at any time after May 26, 2002, upon not less than 30 days notice to
the holders. In addition, beginning November 26, 2002,
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Harken may redeem up to 50% of the 5% European Notes in exchange for shares of
Harken common stock at a defined conversion price based on an average market
price of Harken common stock. At maturity, Harken may, at its option, similarly
redeem all remaining 5% European Notes for shares of Harken common stock. The 5%
European Notes are listed on the Luxembourg Stock Exchange. Harken continues to
consider additional transactions with the 5% European Note holders whereby
Harken may retire additional 5% European Notes in exchange for shares of Harken
common stock, cash, convertible securities or other consideration.
Operational Contingencies -- Harken has accrued approximately $6.9 million
at March 31, 2002 relating to operational or regulatory liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are involved
in various lawsuits and other contingencies, which in management's opinion, will
not result in a material adverse effect upon Harken's financial condition or
operations taken as a whole.
Harken's operations are subject to stringent and complex environmental laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations are
subject to changes that may result in more restrictive or costly operations.
Failure to comply with applicable environmental laws and regulations may result
in the imposition of administrative, civil and criminal penalties or injunctive
relief. Global's international oil and gas exploration and production
operations, including well drilling and seismic activities, require specific
governmental environmental licenses and permits, the acquisition of which in the
past have been subject to extensive delays. Global may continue to experience
similar delays in the future. Failure to obtain these licenses and permits in a
timely manner may prevent or delay Harken's and Global's operational plans.
International Commitments--Terms of certain of the Association Contracts
entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol
commit Global to perform certain activities in Colombia in accordance with a
prescribed timetable. In addition, Global has certain scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama.
Failure by Global to perform these activities as required could result in Global
losing its rights under the particular contract, which could potentially have a
material adverse effect on Harken's business. As of May 14, 2002, Global was in
compliance with the requirements of each of the Association and TEA Contracts,
as amended. In light of political and regulatory developments in Costa Rica,
Global is projecting no capital expenditure plans during 2002 with regard to the
Costa Rica Contract.
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HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
-------------------------
(Registrant)
Date: May 20, 2002 By: /s/Anna M. Williams
---------------------- --------------------------
Executive Vice President-Finance and
Chief Financial Officer
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