Harvest Natural Resources Announces Fourth Quarter and 2005 Results

HOUSTON, Feb. 27 /PRNewswire-FirstCall/ -- Harvest Natural Resources, Inc. today announced 2005 fourth quarter earnings of $10.5 million, or $0.27 per diluted share, compared with $15.3 million, or $0.39 per diluted share, for the same period last year. Net income for 2005 was $50.8 million or $1.32 per diluted share, compared with 2004 net income of $34.4 million, or $0.90 per diluted share.

Operating cash flow (defined as cash flows from operating activities before changes in operating assets and liabilities) was $27.8 million for the 2005 fourth quarter compared with $31.1 million for the 2004 fourth quarter. Operating cash flow was $119.1 million for 2005 compared with $86.3 million for 2004. See reconciliation to Generally Accepted Accounting Principles (GAAP) in table below.

Proved reserves as of year-end 2005 were reduced to 36.1 million barrels of oil equivalent due to actions taken by the Venezuelan government during 2005.

Harvest President and Chief Executive Officer, James A. Edmiston, said, "Adjusted for prior asset sales, last year produced the best financials results in the Company's history, yet we faced continuing challenges in the pursuit of our Venezuelan strategy. Net income rose to $50.8 million and operating cash flow increased to $119.1 million, primarily as a result of attractive oil prices. Oil deliveries benefited from the successful drilling program that started during the second half of 2004 increasing production to 29,000 barrels of oil per day (Bopd) by January 2005. However, we were forced to suspend our development program in January 2005 due to actions taken by the Venezuelan government including the refusal of PDVSA and the Ministry of Energy and Petroleum to grant the necessary permits. Without the ability to drill new wells, oil production and deliveries declined throughout 2005 to a year-end level of 22,000 Bopd and our proved reserve estimates were negatively impacted. Absent drilling, oil and gas deliveries will continue to decline. We expect oil deliveries will average approximately 21,000 Bopd for the 2006 first quarter."

Under Securities and Exchange Commission (SEC) standards, reserves are classified as proved reserves if they are recoverable with reasonable certainty under existing economic and operating conditions. The economic and operating conditions which prevailed at year-end in Venezuela and which continue to prevail today effectively prohibit the Company from developing the reserves previously classified as proved undeveloped. The necessary permits to drill wells have not been granted nor does the Company have certainty the permits will be granted in the future. Consequently, the undeveloped reserves classified as proved undeveloped reserves at December 2004 no longer meet the SEC standard for proved reserves with regard to existing conditions. This has caused proved reserves to be reduced by approximately 50 percent. See Proved Reserves table below. The decline of proved reserves increased the Company's depletion rate $0.75 per Boe from $2.99 per Boe to $3.74 per Boe for the 2005 fourth quarter and is expected to continue at this level during 2006.

Proved Reserves Total Developed Undeveloped (amounts in thousands) Total MBoe (net of 80 percent minority interest) Proved Reserves beginning of the year 84,418 47,176 37,242 Revisions of previous estimates (37,880) (638) (37,242) Production (10,433) (10,433) - Proved Reserves end of the year 36,105 36,105 -

The discounted future net cash flows from proved reserves, as mandated by the SEC, at year-end 2005, net to the Company's 80 percent interest, was $329 million compared with $545 million at December 2004. The Company estimates the uncertainties caused by the actions taken by the Venezuelan government related to future development programs reduced the Company's 2005 year-end discounted future net cash flows by approximately 60 percent.

In Venezuela, the Company's 80 percent owned Venezuelan affiliate, Harvest Vinccler, C.A. (HVCA) delivered 8.8 million barrels of oil, or 24,000 barrels of oil per day, and 25.7 billion cubic feet (Bcf) of natural gas for combined total deliveries of 13.0 million barrels of oil equivalent (MMBoe), or 35,700 barrels of oil equivalent per day to PDVSA during 2005. Deliveries for 2004 were 8.2 million barrels of oil and 31.1 Bcf of natural gas for a combined deliveries total of 13.3 MMBoe.

In 2005, the Company received an average price of $24.02 per barrel of oil which included the amortized cost of puts purchased in 2004 to hedge oil prices and the delivery of 0.6 million barrels at an average price of $7.00 per barrel. The 2004 average sales price for oil was $18.90 per barrel. The Company receives $1.03 per thousand cubic feet of natural gas sold.

Edmiston continued, "HVCA continues to operate under the 2005 Transitory Agreement with PDVSA and is negotiating the conversion of our Operating Service Agreement to a Mixed Company. We believe we are making progress and continue to cooperatively work with Venezuelan officials toward that end. However, significant issues remain unresolved and the ultimate outcome remains uncertain."

Edmiston concluded, "The Company received payment for last quarter's deliveries of oil and gas and currently has cash of approximately $180 million available to fund our diversification efforts. We will use this cash to build a diversified portfolio of assets in a number of countries that fit within our strategy. We are pursuing opportunities in a number of areas including Russia, the Confederation of Independent States, Middle East and Asia."

Reconciliation of Non-GAAP measures ($millions) Three Months Ended Twelve Months Ended December 31 December 31 2005 2004 2005 2004 Net cash provided by operating activities $ 36.1 $ 36.4 $114.7 $ 74.1 Changes in operating assets & liabilities (8.3) (5.3) 4.4 12.2 Operating cash flow $ 27.8 $ 31.1 $119.1 $ 86.3

Harvest will hold an earnings conference call today at 10:00 a.m. Central Time to discuss 2005 fourth quarter results. To access the call, dial 785-832-1508, conference ID: Harvest, five to ten minutes prior to the start time. A recording of the conference call will also be available for replay at 402-220-1545. To listen to the live webcast of the call, please visit our website at http://www.harvestnr.com/ .

Harvest Natural Resources, Inc. headquartered in Houston, Texas, is an independent oil and gas exploration and development company with principal operations in Venezuela and an office in Russia. For more information visit the Company's website at http://www.harvestnr.com/ .

"This press release may contain projections and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts may constitute forward-looking statements. Although Harvest believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Actual results may differ materially from Harvest's expectations as a result of factors discussed in Harvest's 2004 Annual Report on Form 10-K and subsequent reports."

HARVEST NATURAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS ($ millions, unaudited) December 31, December 31, 2005 2004 ASSETS: CURRENT ASSETS: Cash and equivalents $163.0 $ 84.6 Accounts receivable, net 71.7 71.7 Put options - 14.2 Deferred income taxes 3.1 0.3 Prepaid expenses and other 2.1 1.4 Total current assets 239.9 172.2 OTHER ASSETS 1.6 2.1 DEFERRED INCOME TAXES - 6.0 PROPERTY AND EQUIPMENT, net 159.3 187.1 TOTAL ASSETS $400.8 $367.4 LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable, trade and other $ 0.4 $ 8.4 Accounts payable, related party 9.2 11.1 Accrued expenses 21.1 29.4 Deferred revenue 6.7 - Income taxes payable 18.9 22.5 Current portion of long-term debt 5.5 11.8 Total current liabilities 61.8 83.2 ASSET RETIREMENT LIABILITY 2.1 1.9 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST 39.4 39.1 STOCKHOLDERS' EQUITY: Common stock and paid-in capital 188.6 185.6 Retained earnings 112.7 61.9 Accumulated other comprehensive loss - (0.5) Treasury stock (3.8) (3.8) Total stockholders' equity 297.5 243.2 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $400.8 $367.4 HARVEST NATURAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per BOE and per share amounts, unaudited) THREE MONTHS ENDED: December 31, 2005 December 31, 2004 Barrels of oil sold 2,035 2,463 MMCF of gas sold 5,566 7,249 Total BOE 2,963 3,671 Average price/barrel $25.83 $21.26 Average price/mcf $ 1.03 $ 1.03 $/BOE $/BOE REVENUES: Oil sales $52,559 $52,353 Gas sales 5,733 7,466 58,292 19.67 59,819 16.29 EXPENSES: Operating expenses 12,839 4.33 10,683 2.91 Depletion and amortization 11,088 3.74 10,960 2.99 Depreciation 778 0.26 505 0.14 General and administrative 5,234 1.77 6,720 1.83 Bad debt recovery - - (598) (0.16) Taxes other than on income 1,726 0.58 1,811 0.49 31,665 10.68 30,081 8.20 INCOME FROM OPERATIONS 26,627 8.99 29,738 8.09 OTHER NON-OPERATING INCOME (EXPENSE) Investment earnings and other 2,223 0.75 759 0.21 Interest expense (155) (0.05) (365) (0.10) Net loss on exchange rates (3) - (4) - 2,065 0.70 390 0.11 INCOME FROM CONSOLIDATED COMPANIES BEFORE INCOME TAXES AND MINORITY INTERESTS 28,692 9.69 30,128 8.20 Income tax expense 15,201 5.13 10,169 2.77 INCOME BEFORE MINORITY INTERESTS 13,491 4.56 19,959 5.43 Minority interest in consolidated subsidiary companies 2,981 1.01 4,660 1.27 NET INCOME $10,510 $3.55 $15,299 $4.16 NET INCOME PER COMMON SHARE: Basic $0.28 $0.42 Diluted $0.27 $0.39 Weighted average shares outstanding: Basic 37.1 million 36.6 million Diluted 38.4 million 38.7 million HARVEST NATURAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per BOE and per share amounts, unaudited) YEAR ENDED: December 31, 2005 December 31, 2004 Barrels of oil sold 8,763 8,152 MMCF of gas sold 25,677 31,059 Total BOE 13,042 13,329 Average price/barrel $ 24.02 $ 18.90 Average price/mcf $ 1.03 $ 1.03 $/BOE $/BOE REVENUES: Oil sales $210,493 $154,075 Gas sales 26,448 31,991 236,941 18.17 186,066 13.96 EXPENSES: Operating expenses 39,723 3.05 33,324 2.50 Depletion and amortization 41,237 3.16 34,150 2.56 Depreciation 2,731 0.21 1,870 0.14 General and administrative 22,819 1.75 21,857 1.64 Bad debt recovery - - (598) (0.04) Account receivable write-off on retroactive oil price adjustment 4,548 0.35 - - Gain on sale of long-lived assets - - (578) (0.04) Taxes other than on income 6,358 0.49 5,561 0.42 117,416 9.01 95,586 7.18 INCOME FROM OPERATIONS 119,525 9.16 90,480 6.78 OTHER NON-OPERATING INCOME (EXPENSE) Loss on early extinguishment of debt - - (2,928) (0.22) Investment earnings and other 4,205 0.32 2,085 0.16 Interest expense (3,388) (0.26) (7,749) (0.58) Net gain (loss) on exchange rates 2,752 0.21 (622) (0.05) 3,569 0.27 (9,214) (0.69) INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 123,094 9.43 81,266 6.09 Income tax expense 57,025 4.37 33,288 2.50 INCOME BEFORE MINORITY INTERESTS 66,069 5.06 47,978 3.59 Minority interest in consolidated subsidiary companies 15,230 1.17 13,618 1.02 NET INCOME $ 50,839 $3.89 $ 34,360 $2.57 NET INCOME PER COMMON SHARE: Basic $1.38 $0.95 Diluted $1.32 $0.90 Weighted average shares outstanding: Basic 36.9 million 36.1 million Diluted 38.4 million 38.1 million HARVEST NATURAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Three Months Ended December 31, Year Ended December 31, 2005 2004 2005 2004 Cash Flows From Operating Activities: Net income $ 10,510 $ 15,299 $ 50,839 $ 34,360 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization 11,867 11,466 43,968 36,020 Amortization of financing costs - - - 228 Gain on disposition of assets - - - (578) Write off of unamortized financing costs - - - 936 Account receivable write-off on retroactive oil price adjustment - - 4,548 - Allowance for employee notes and accounts receivable - (598) - (598) Deferred compensation expense (210) 1,132 (745) 1,521 Non-cash compensation related charges (303) 466 2,230 2,152 Minority interest in consolidated subsidiary companies 2,982 4,660 15,230 13,618 Deferred income taxes 2,982 (1,285) 2,982 (1,285) Changes in operating assets and liabilities: Accounts and notes receivable 3,760 (15,575) (4,481) (27,156) Prepaid expenses and other (1,126) (116) (723) (621) Commodity hedging contract 3,767 - 14,947 (14,947) Accounts payable (7,771) 4,611 (8,020) 4,265 Accounts payable, related party 92 211 (1,860) 506 Accrued expenses (78) 7,517 (7,600) 11,409 Deferred revenue 6,728 - 6,728 - Provision for asset retirement liability 113 1,191 188 482 Income taxes payable 2,781 7,461 (3,566) 13,828 Net Cash Provided By Operating Activities 36,094 36,440 114,665 74,140 Cash Flows From Investing Activities: Proceeds from the sale of long-lived assets - - - 578 Additions of property and equipment (381) (19,332) (16,147) (39,106) Decrease in restricted cash 16 - 28 - Investment costs 579 (940) 472 (1,156) Net Cash Used In Investing Activities 214 (20,272) (15,647) (39,684) Cash Flows From Financing Activities: Net proceeds from issuances of common stock 6 4,089 767 7,451 Payments on long-term debt (300) (1,592) (6,366) (91,367) Dividends paid to minority interest (15,000) (2,500) (15,000) (4,600) Net Cash Used in Financing Activities (15,294) (3) (20,599) (88,516) Net Increase (Decrease) in Cash 21,014 16,165 78,419 (54,060) Cash and Cash Equivalents at Beginning of Period 142,005 68,435 84,600 138,660 Cash and Cash Equivalents at End of Period $163,019 $ 84,600 $163,019 $ 84,600