FOR RELEASE:  August 5, 2010

 

HKN Announces Net Income

Attributable to Company of $2.15 Million

and Positive Cash Flow from Operations

 

Dallas, Texas – August 5, 2010 – HKN, Inc. (NYSE Amex:HKN) (“HKN”) today reported its interim financial results for the three and six months ended June 30, 2010.  HKN reported net income attributable to the Company of $2.15 million for the first six months of 2010 as compared to a net loss of $1.3 million in the prior period in 2009. 

 

Sale of Investment in Canadian Oil Company (Spitfire Energy, Ltd.)

 

            During the six months ended June 30, 2010, we sold our remaining investment in Spitfire Energy, Ltd. (“Spitfire”), consisting of approximately 9.9 million shares of Spitfire common shares, for cash proceeds of $3.3 million using the average cost method. We realized a gain on sale of assets of $1.9 million, which included $351 thousand of foreign currency gains which were reclassified into earnings from other comprehensive income, in our consolidated condensed statement of operations. Therefore, at June 30, 2010, we no longer carried this investment on our consolidated condensed balance sheet. At December 31, 2009, our carrying value of this investment was $1.6 million.

 

Operating Activities and Financial Condition Update:

 

During the first six months of 2010, our oil and gas revenue was comprised of approximately 88% oil sales and 12% natural gas sales.  During this period, our results of operations reflect increased oil and natural gas revenues as compared to the prior year period, which are the result of increased commodity prices in 2010.  We had a cash balance of approximately $10.5 million at June 30, 2010, and our operations for the first half of 2010 were cash-flow positive.  Our working capital also increased from $5.9 million as of December 31, 2009 to $9.3 million as of June 30, 2010.

 

Our oil revenues increased to approximately $4.9 million during the first six months of 2010 from approximately $3.7 million during the same period in 2009. We realized a 60% increase in oil prices received, increasing from an average of $47.74 per barrel in the first half of 2009 to $76.47 per barrel in the current year period.  Overall oil production decreased 18% in the first six months of 2010 as compared to the prior year period due primarily to cold weather emulsion issues and compressor downtime at Main Pass 35.

 

Our natural gas revenues decreased from $1.1 million during the first six months of 2009 to $653 thousand for the same period in 2010. The prices realized for natural gas sales increased 43%, averaging $5.70 per mcf in the first half of 2010 compared to $3.98 per mcf during the first half of 2009.  Natural gas production decreased 57% in the first six months of 2010 as compared to the prior year period due to the sale of our interests in a non-strategic field, mentioned above.  In addition, we had decreased production at the Lake Raccourci field.  However, we expect to have increased natural gas production from our Lake Raccourci field in the third quarter 2010 due to the second quarter 2010 successful recompletion of the SL14589 #3 well.

 

Our oil and gas operating expense decreased 14%, decreasing from approximately $3.8 million during the first six months of 2009 to $3.3 million during the same period in 2010 due primarily to lower severance taxes as well as a refund received for prior periods related to the inactive well exemption on certain wells at Main Pass.

 

General and administrative expenses increased 26% from $1.2 million for the first half of 2009 to $1.5 million for the first half of 2010 primarily due to salary, consultant and travel costs associated with business development activities connected with the consolidation of BriteWater International LLC (“BWI”) which we began consolidating during the third quarter of 2009. Our remaining general and administrative costs for 2010 were slightly lower than the prior period.

 

Main Pass, Plaquemines Parish – Louisiana

 

            We have enhanced the value of our Main Pass 35 field, which is located offshore Louisiana in the Gulf of Mexico, by performing various process and structural upgrades and improvements to the facility and its equipment.  We believe our Main Pass 35 asset is in a strategic area within the Gulf of Mexico and has unique characteristics such as low-decline oil production, behind-pipe development potential as well as third-party oil, gas and water processing and handling services for neighboring fields in the area.  We consider our Main Pass 35 field to be a strategic asset. We have an average 91% interest in Main Pass 35 and are the field operator. Gross production during the second quarter 2010 averaged approximately 369 boe per day. 

 

            During the second quarter 2010, work began on pipeline modifications mandated by the Corps of Engineers to a third-party gas sales line that serves our facility. The majority of the work has been postponed due to the above average level of the Mississippi River, and completion of the project will be delayed until after hurricane season. We anticipate that the pipeline work will be finished in November and have decided to defer additional well work until that time in favor of continuing our process and structural upgrades and improvements to the facility and its equipment.

 

Creole Field, Terrebonne Parish - Louisiana

 

            We hold an average 15% non-operated working interest in this offshore field. Gross daily production from the wells was approximately 1,156 boe per day during the second quarter 2010. One major workover to replace tubing and one re-entry of an abandoned well were successfully completed in 2010. The previously abandoned SL18423 #3 well was re-entered and tested at gross rates in excess of 100 boe per day. The well was placed on production in mid-April, and has averaged 83 boepd through the second quarter. At the suggestion of the new operator which took over operations during the second quarter, a program was designed and implemented to pressure test a number of wells in the field. This data is necessary for the proper configuration of the gas lift system, as well as for diagnostic purposes to determine if a stimulation program would be beneficial in order to increase production from the field. The data gathered in this program has led to the determination that several of the wells would benefit from acid stimulation. Acid stimulation programs have been designed for four of the completions. This work should be completed in the third quarter 2010.

 

Lake Raccourci Field, Lafourche Parish – Louisiana

 

            We hold an average 55% operated working interest in our Lake Raccourci field. Gross production for this field averaged 34 boe per day for the second quarter 2010. Production from the field has significantly decreased since the SL 14284-1 well ceased production in 2009.  But in late second quarter 2010, the SL14589 #3 well was successfully recompleted in the Bol 2 for 2.0 Mscfd Gross (341 Boepd) and put on production in late June. We expect production and cash flow from operations from this field to increase in the third quarter 2010.

 

 

HKN’s operating results for the three and six months ended June 30, 2010 and 2009 are as follows (in thousands except for share and per share amounts)

 

 

Balance Sheet Summary (in thousands)

           

      

           

(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 (Loss) (in thousands)

 

 

 

 

 

 

Management believes the presentation of this non-GAAP financial measure, in connection with the results for the three and six months ended June 30, 2010 and 2009, 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 active management of investments in the energy industry. Additional information may be found at the HKN Web site, www.hkninc.com. Please e-mail all investor inquiries to Investorrelations@hkninc.com.

                                                 

Certain statements in this announcement 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, 2010. HKN undertakes no duty to update or revise any forward-looking statements.  Actual results may vary materially.