SOURCE: HKN, Inc.

August 09, 2011 16:14 ET

HKN Announces Second Quarter 2011 Results

DALLAS, TX--(Marketwire - Aug 9, 2011) - HKN, Inc. (NYSE Amex: HKN) ("HKN") today reported its interim financial results for the three and six months ended June 30, 2011.

Financial Condition

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 11,893,462 11,893,462
Closing price of Global Stock £ 0.80 £ 1.09
Foreign Currency Exchange Rate 1.6014 1.5524
Market Value of Investment in Global $ 15,141 $ 20,136

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 outstanding shares.

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 million.

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

Three Months Ended June 30,
2011 2010
Oil Revenues $ 2,639 $ 2,477
Gas Revenues $ 19 $ 241
Interest and Other Income $ 531 $ 330
Oil and Gas Operating Expenses $ 1,986 $ 1,951
General and Administrative Expenses $ 1,099 $ 697
Benefit for Doubtful Accounts $ - $ (1 )
Operating Margin (Non-GAAP; see reconciliation below) $ 104 $ 401
Depreciation, Depletion, Amortization and Accretion $ 601 $ 715
Gain on Sale of Investment $ - $ (1,878 )
Net Income (Loss) $ (509 ) $ 1,564
Net Loss Attributable to Noncontrolling Interests $ 202 $ 85
Net Income (Loss) Attributable to HKN, Inc. $ (307 ) $ 1,649
Net Income (Loss) Attributed to Common Stock $ (303 ) $ 1,653
Basic and Diluted Net Income (Loss) per Common Share $ (0.02 ) $ 0.17
Basic and Diluted Weighted Average Common Shares Outstanding 16,715,311 9,553,848
Six Months Ended June 30,
2011 2010
Oil Revenues $ 4,891 $ 4,900
Gas Revenues $ 126 $ 653
Interest and Other Income $ 1,000 $ 768
Oil and Gas Operating Expenses $ 3,879 $ 3,284
General and Administrative Expenses $ 2,058 $ 1,493
Provision (Benefit) for Doubtful Accounts $ 6 $ (21 )
Operating Margin (Non-GAAP; see reconciliation below) $ 74 $ 1,565
Depreciation, Depletion, Amortization and Accretion $ 1,239 $ 1,494
Gain on Sale of Investment $ - $ (1,887 )
Net Income (Loss) $ (1,189 ) $ 1,896
Net Loss Attributable to Noncontrolling Interests $ 319 $ 255
Net Income (Loss) Attributable to HKN, Inc. $ (870 ) $ 2,151
Net Income (Loss) Attributed to Common Stock $ (870 ) $ 2,151
Basic and Diluted Net Income (Loss) per Common Share $ (0.06 ) $ 0.23
Basic and Diluted Weighted Average Common Shares Outstanding 13,389,184 9,553,848

Balance Sheet Summary (in thousands of dollars)

June 30, December 31,
2011 2010
Current Ratio (1) 9.94 to 1 3.27 to 1
Working Capital (2) $ 25,264 $ 8,375
Cash and Cash Equivalents $ 25,387 $ 4,815
Total Debt $ - $ -
Stockholders' Equity $ 73,683 $ 65,112
Total Liabilities to Equity 0.18 to 1 0.22 to 1

(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)

Three Months Ended June 30,
2011 2010
Net Income (Loss) - GAAP $ (509 ) $ 1,564
Depreciation, Depletion, Amortization and Accretion 601 715
Interest Expense and Other Losses 12 -
Equity in Losses of Spitfire - -
Gain on Sale of Investment - (1,878 )
Operating Margin $ 104 $ 401
Six Months Ended June 30,
2011 2010
Net Income (Loss) - GAAP $ (1,189 ) $ 1,896
Depreciation, Depletion, Amortization and Accretion 1,239 1,494
Interest Expense and Other Losses 24 42
Equity in Losses of Spitfire - 20
Gain on Sale of Investment - (1,887 )
Operating Margin $ 74 $ 1,565

Management 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.