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NEWS

 

FOR RELEASE:  November 7, 2011

 

 

HKN Announces Third Quarter 2011 Results

 

Dallas, Texas – November 7, 2011 – HKN, Inc. (NYSE Amex: HKN) (“HKN”) today reported its interim financial results for the three and nine months ended September 30, 2011. 

 

Financial Condition

 

During the third quarter of 2011, we closed our mandatory offer whereby 234,306 shares of Global Energy Development, PLC (“Global”) were tendered to HKN at a cost of approximately $261 thousand. We also continued to progress our marketing efforts for our Gulf Coast properties through Burks Oil and Gas Properties, Inc., and a decision on any potential divestiture of our remaining properties will be reached during the fourth quarter of 2011.  Industry conditions continue to indicate that divesting of these properties during 2011 may provide the greatest opportunity to receive value for these assets while eliminating future pricing, operating, and regulatory risks to the company. Any proceeds received from the sales of our oil and gas properties may enable our company to invest into areas of the oil and gas industry which could generate greater value for our shareholders while carrying significantly lower operational and regulatory risks.

 

Our cash balance at September 30, 2011 was $25.8 million, which included approximately $18.3 million in restricted cash which was held in escrow related to the Global offer.  These funds were released from escrow during October after the tendered shares were settled. Our working capital increased from $8.4 million at December 31, 2010 to $29.1 million at September 30, 2011, and we continue to hold no debt.  The increase in cash and working capital was due to proceeds received from the Creole divestiture and rights offering, discussed in previous quarterly reports.

 

Investment in BriteWater International, LLC

 

During the quarter, BriteWater continued to pursue opportunities to commercialize our patented OHSOL emulsion-breaking technology and began the planning and design of two plants which will utilize this technology. These plants will allow the recovery and sale of oil volumes from refinery and oilfield emulsion waste materials which are lost through current waste disposal methodologies in the industry.

 

Investment in Global Energy Development, PLC

 

At September 30, 2011, HKN owned approximately 34% of Global’s ordinary shares. Our investment in Global is carried at its market value as follows (in thousands, except for the share amounts):

 

 

 

September 30, 2011

December 31, 2010

Shares of Global Stock Held by HKN

12,127,768

11,893,462

Closing price of Global Stock

£                        0.855

£                        1.09

Foreign Currency Exchange Rate

1.5581

1.5524

Market Value of Investment in Global

$                      16,156

$                    20,136

 

 

 

 

The foreign currency translation adjustment of approximately $234 thousand and the unrealized loss of approximately $4.5 million for the decline in market value between the two dates shown, provide the primary components of the $4.2 million loss recorded in other comprehensive income in stockholders’ equity for the nine month period ended September 30, 2011. 

 

During June 2011, we announced our obligation to make an offer for shares of Global at a price of 72 pence. This offer closed on September 30, 2011, and 234,306 shares of Global stock were tendered to HKN at a cost of approximately $261 thousand.  As a result of the shares tendered in the offer, our ownership interest in Global increased by approximately 0.65%.

 

Operating Results Update

 

Our year-to date operating results continue to be significantly below 2010 results. Although our net income for the third quarter increased over the third quarter of 2010 by approximately 132%, commodity pricing increases during 2011 were more than offset by production decreases as a result of weather-related issues and divestitures that occurred during our first and second quarters.

 

Following record-setting cold weather at our Louisiana properties during the first quarter and downtime and repairs at our Main Pass field during the second quarter, production rates at our Main Pass field returned to normal levels during the third quarter. In addition to these factors, overall oil and gas production levels continue to be lower than our 2010 levels as a result of our Creole field divestiture during the first quarter of 2011 and the Allen Ranch, Point au Fer, and NW Speaks field divestitures in the second quarter of 2011.

 

Although oilfield costs of $5.7 million for the nine months ended September 2011 were higher than $5.3 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.  Excluding these refunds, actual oilfield costs decreased during the 2011 period as a result of the current year property divestitures, but these were partially 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 nine months ended September 30, 2011, general and administrative expenses were approximately $2.9 million as compared to approximately $2.4 million during the 2010 period.  These increases were primarily the result of increased business development activities related to our BriteWater 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 nine months ended September 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 million.

 

HKN’s operating results for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands except for share and per share amounts)

Balance 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.

 

 

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 nine months ended September 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 and natural gas 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.