RELEASE: August 9, 2011
HKN Announces Second Quarter 2011 Results
Dallas, Texas – August 9, 2011 HKN, Inc. (NYSE
Amex: HKN) (“HKN”) today reported its interim financial results for the three and six months ended June 30, 2011.
During the second quarter of 2011, we received approximately $14.8
million in net proceeds from our rights offering, and we continued to move
forward with the marketing of our Gulf Coast properties through Burks Oil and
Gas Properties, Inc. We continue to believe
that current industry conditions may provide the opportunity to receive value for
these assets while eliminating future pricing, operating, and regulatory risks
to the company. Proceeds received from the sales of our oil and gas properties
will provide flexibility to invest into areas of the oil and gas industry we
feel may generate greater value for our shareholders while carrying
significantly lower operational and regulatory risks.
Our cash balance at June 30, 2011 was $25 million, and the Company has no
long-term debt. Our working capital
increased from $8.3 million at December 31, 2010 to $25.2 million at June 30,
2011. The increase in cash and working
capital was due to proceeds received from the Creole divestiture and rights
offering. The increase in working capital provided by the divestiture and
rights offering was partially offset by the extension of the maturity date on
our loan to Global Energy Development, PLC (AIM:GED) (“Global”) from September
2011 to September 2012, which resulted in the $5 million Global loan being reclassified
as non-current at June 30, 2011.
Investment in BriteWater International, LLC
During the quarter we increased our ownership in BriteWater
International, LLC (“BWI”) through a Securities Exchange Agreement with
Quadrant Management, Inc. (“Quadrant”), a related
party. Under the agreement, we exchanged
1,245,373 restricted shares of HKN common stock for an additional 46.08%
ownership interest in BWI, which brought our total ownership interest to up to 98.17%
at June 30, 2011. Under terms of the
same agreement, we expect to exchange an additional 40,850 restricted shares of
our common stock for the remaining 1.83% during the third quarter of 2011,
resulting in BWI becoming a wholly-owned subsidiary of HKN.
BWI continues to pursue opportunities to commercialize its patented OHSOL
emulsion-breaking technology. During
March 2011, BWI entered into a contract under which it has the right to process
and dispose of certain oilfield emulsion waste materials on the Alaskan North
Slope. A wholly-owned subsidiary of BWI,
Arctic Star Alaska, Inc. (“Arctic Star”), is currently evaluating the
construction of a processing plant on the Alaskan North Slope which will allow
for the recovery and sale of oil volumes from these emulsion waste materials
which are currently lost during the disposal process.
Investment in Global Energy Development, PLC
At June 30, 2011, HKN owned approximately 33% of Global’s
ordinary shares. Our investment in Global is carried at its market value as
follows (in thousands, except for the share amounts):
June 30, 2011
December 31, 2010
Shares of Global Stock Held by HKN
Closing price of Global Stock
Foreign Currency Exchange Rate
Market Value of Investment in Global
The foreign currency translation adjustment of approximately $739
thousand and the unrealized loss of approximately $5.7 million for the decline
in market value between the two dates shown, provide the primary components of
the $5 million loss recorded in other comprehensive income in stockholders’
equity for the six month period ended June 30, 2011.
During June 2011, we announced our obligation to make an offer for shares
of Global Energy Development, PLC (“Global”) at a price of 72 pence. The offer will be made pursuant to the City
Code on Takeovers and Mergers (the “Code”), and is required as a result of our
largest shareholder, Lyford Investments Enterprises, Ltd. (“Lyford”) entering
into an agreement to purchase approximately 10% of Global’s
We would not have elected to make this offer without the Code’s
requirement, and we do not anticipate the offer will be accepted by a
significant number of Global shareholders due to the offer price representing a
discount to the current price of Global stock.
However, if the offer were to be fully accepted, we would be required to
purchase shares not held by HKN or Lyford for approximately $18 million. The offer will be mailed to Global
shareholders once the Lyford agreement closes, which is anticipated to occur
during the third quarter of 2011. In
relation to the pending offer, we were required to place $18 million in an
escrow account during July 2011.
Operating Results Update
Our operating results continue to be significantly below 2010 results.
While oil prices received during the first six months of 2011 averaged well
above comparable prices for the 2010 period, the increased pricing was more
than offset by production decreases as a result of weather-related issues and divestitures.
We experienced record-setting cold weather at our Louisiana properties
during the first quarter, and we encountered downtime and repairs at our Main
Pass field during the second quarter as a result of the first quarter’s adverse
weather conditions. These factors resulted in disappointing production rates for
our Main Pass property during the first six months of 2011, but production
rates returned to normal levels during June following the repairs. The divestitures of our Creole field during
the first quarter of 2011 and the Allen Ranch, Point au Fer,
and NW Speaks fields in the second quarter of 2011 further reduced production
during the first six months of 2011.
Although oilfield costs of $3.8 million for the six months ended June
2011 were higher than $3.2 million recorded for the same period during 2010,
this is primarily the result of $560 thousand in refunded severance taxes
received during the 2010 period. We also
experienced decreases in oilfield costs during the 2011 period as a result of
the current year property divestitures, but these were offset by increased repair
costs during the current year. These repair costs were primarily due to projects
to restore production at Lake Raccourci and the
cold-weather related repairs at our Main Pass facility.
During the six months ended June 30, 2011, general and administrative
expenses were approximately $2.0 million as compared to approximately $1.5
million during the 2010 period. These
increases were primarily the result of increased business development
activities at our BWI subsidiary as they develop the Arctic Star project on the
North Slope of Alaska. Legal and regulatory costs related to our IRS
contingency and Global mandatory offer also contributed to the increase.
During the six months ended June 30,
2010, we sold our remaining investment in Spitfire Energy, Ltd. (“Spitfire”)
for cash proceeds of $3.3 million and realized a gain on sale of assets of $1.9
results for the three and six months ended June 30, 2011 and 2010 are as
thousands except for share and per share amounts)
Sheet Summary (in thousands of dollars)
(1) Current ratio is calculated as current assets divided
by current liabilities.
(2) Working capital is the difference between current
assets and current liabilities.
Reconciliation of Operating Margin to Net Income
believes the presentation of this non-GAAP financial measure, in connection
with the results for the three and six months ended June 30, 2011 and 2010,
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 energy-based investments. 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 17, 2011.
HKN undertakes no duty to update or revise any forward-looking statements. Actual results may vary materially.