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Drastic Decrease in Oil and Gas Pricing Led to Disappointing 2008 Results for HKN
 

Dallas, Texas – February 19, 2009 – HKN, Inc. (NYSE Alternext US: HKN) (”HKN”) today reported its annual financial results for the year ended December 31, 2008.  HKN reported a net loss of $26.7 million during 2008 as compared to net income of $3.2 million during 2007.  During the year, several adverse events, all primarily out of our control, affected our profitability, cash flow and the carrying value of our assets. Contributing to HKN’s net loss for the year were the following occurrences:    

August and September 2008 – Gulf Coast Hurricanes

During third quarter 2008, both Hurricane Gustav and Hurricane Ike (the “Hurricanes”) hit the Gulf Coast of Mexico effectively shutting in most oil & gas production in the Texas and Louisiana coastal area.  Production from our operated oil and gas properties (Main Pass 35, Lake Raccourci and Point a la Hache) along with most of our non-operated properties was shut-in during late August and September due to the Hurricanes.  A significant percentage of our production remained shut-in or curtailed during the fourth quarter 2008 while damages were repaired. As of December 31, 2008, all fields have resumed partial production and repairs have been substantially completed.

  • Gross damage costs to our operated properties were approximately $3.5 million ($2.4 million net of working interest partners’ share).
  • The estimated effect of the loss of net oil and gas revenue from the Hurricanes, due to storm interruption of production, was approximately $3.1 million.  
  • Our net loss for 2008 also includes approximately $1.1 million of hurricane damage repairs related to our insurance deductible and repair costs in excess of insured values.  


September and October 2008 – Adverse Stock Market Conditions Affect Investment Activities

During September and October 2008, unfavorable changes in economic conditions, including a dramatic decline in the U.S. and international stock markets resulted in an adverse effect on our investment trading activities.  During late 2008, we closed our entire open derivative trading portfolio resulting in net realized annual losses of approximately $5.1 million.  We had maintained an investment portfolio of various holdings, types, and maturities. These investments were subject to general credit, liquidity, and market risks, which may have continued to be exacerbated by unusual events that are currently affecting domestic and global financial markets.  Based on the 2008 trading losses and the continued volatility in the markets, we have temporarily suspended our trading activities as part of our treasury management.
We continue to believe that adverse market conditions may lead to future opportunities in 2009 to reinvest our cash into undervalued Canadian and U.S. oil and gas companies and investments as opportunities arise.

Late 2008 – Severe Decline in Oil & Gas Prices

    During 2008, based on NYMEX pricing, the price for a barrel (bbl) of oil ranged from a high of $145.29 to a low of $39.91 and the price for a Mmbtu of gas ranged from a high of $13.58 to a low of $5.29.  In late 2008, the market price of oil and natural gas declined dramatically.  During the fourth quarter of 2008, due to reduced oil and gas prices at December 31, 2008, we recorded a non-cash full cost impairment of approximately $19.9 million related to the carrying value of our oil and gas properties. Under full cost accounting rules, the net capitalized costs of evaluated oil and gas properties shall not exceed an amount 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 on the last day of the calendar year.

2008 Recap and 2009 Outlook

As we exited 2008, oil and natural gas prices had declined sharply from their recent record levels. In addition, recent problems in the credit markets, steep stock market declines, financial institution failures and government bail-outs provide evidence of a weakening United States and global economy. As a result of the market turmoil and price decreases, oil and gas companies with high debt levels and lack of liquidity have been and will continue to be negatively impacted.
     
    However, we do not expect our liquidity levels to be significantly impacted by these recent events. We continue to have access to capital, and we have a cash and marketable securities balance of approximately $15 million and have no outstanding debt at December 31, 2008. We also anticipate our operating cash flow and other capital resources, if needed, will adequately fund our planned capital expenditures and other capital uses over the near-term.  Based on industry outlook for 2009, prices for oil and natural gas are expected to remain reduced as compared to the prior year with the perception of future worldwide demand being altered by turmoil in the financial markets and diminished economic outlook.   However, due to cost-cutting measures, we have budgeted our 2009 operations to remain cash-flow positive, even at current market pricing.

HKN’s operating results for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands except for share and per share amounts).

Year End Chart


 Balance Sheet Summary (in thousands)
      
Balance Sheet   
(1)    Current ratio is calculated as current assets divided by current liabilities.
(2)    Working capital is the difference between current assets and current liabilities.


NON-GAAP FINANCIAL MEASURE


Reconciliation of Operating Margin to Net Income (in thousands)

Reconcilliation Chart

Management believes the presentation of this non-GAAP financial measure, in connection with the results for the years ended December 31, 2008, 2007 and 2006, provides useful information to investors regarding our results of operations. Management also believes that this non-GAAP financial measure provides a picture of our results that is comparable among reporting periods and provides factors that influenced performance during the period under the report.  This non-GAAP financial measure should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP.
 

HKN, Inc. is an independent energy company engaged in the development and production of crude oil, natural gas and coalbed methane assets and in the management of investments in energy industry securities traded on both domestic and international securities exchanges. Additional information may be found at the HKN Web site, www.hkninc.com. Please e-mail all investor inquiries to HKNinquiries@ctaintegrated.com.
                 
Certain statements in this announcement, such as “future opportunities,” and inferences derived therefrom may be regarded as “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on the opinions and estimates of management at the time the statements are made.   Management’s current view and plans, however, are subject to numerous known and unknown risks, uncertainties and other factors that may cause the actual results, performance, timing or achievements of HKN to be materially different from any results, performance, timing or achievements expressed or implied by such forward-looking statements. The various uncertainties, variables, and other risks include those discussed in detail in the Company’s SEC filings, including the Annual Report on Form 10-K filed on February 18, 2009. HKN undertakes no duty to update or revise any forward-looking statements.  Actual results may vary materially.

 

 

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