Note 6 – Investment in Affiliate

Venezuela – Petrodelta, S.A.

The following table summarizes the changes in our investment in affiliate (Petrodelta) as of September 30, 2015 and December 31, 2014. Petrodelta’s reporting and functional currency is the U.S. Dollar (“USD”).




	As of September 30,		As of December 31,
	2015		2014
	(in thousands)
Investment at beginning of year	$	164,700	$	485,401
Equity in earnings		—		34,949
Impairment		—		(355,650)
Investment at end of period	$	164,700	$	164,700

Our 40 percent investment in Petrodelta is owned through our subsidiary, Harvest Holding. We have determined that we do not have significant influence within our investment in Petrodelta and, in accordance with Accounting Standards Codification “ASC 323 – Investments – Equity Method”, we account for our investment in Petrodelta under the cost method (“ASC 325 – Investments – Other Investments Securities”), effective December 31, 2014. Under the cost method we will not recognize any equity in earnings from our investment in Petrodelta in our results of operations, but will recognize any cash dividends as income in the period they are received.

At December 31, 2014, we performed an impairment analysis of the carrying value of our investment. The impairment analysis required us to estimate the fair value of our investment in Petrodelta and compare the estimated fair value to our carrying value. The estimated fair value of our investment was determined based on the estimated fair value of Petrodelta’s oil and gas properties and other net assets at December 31, 2014, discounted by a factor for the lack of marketability and control. Based on this analysis, we recorded a pre-tax impairment charge of $355.7 million in the fourth quarter 2014. In addition to the impairment charge, we recorded an allowance of $12.2 million in the fourth quarter 2014 to fully reserve the dividend receivable due from Petrodelta relating to the dividend approved in 2011. Harvest Vinccler has advanced certain costs on behalf of Petrodelta. These costs included consultants in engineering, drilling, operations, seismic interpretation, and employee salaries and related benefits for Harvest Vinccler employees seconded into Petrodelta. We also fully reserved the outstanding receivables of $1.6 million related to these advances as of December 31, 2014.

Current oil prices are modestly lower to those that our valuation took into account at year-end. Petrodelta continues to incur high operating costs, driven mainly by exchange rate imbalances and inefficiencies of ongoing operations. The operating costs issues should be addressed through a non-binding term sheet with PDVSA. The term sheet signed with PDVSA, through our strategic relationship with CT Energia Holding Ltd., shows a path toward resolving the operating cost situation and existing production problems. It is management’s belief that these problems will be eliminated once certain agreements are completed and in place which will provide for: (i) independent cash management of Petrodelta´s crude sales that will ensure timely payment of obligations to the government, vendors, debts and dividends, (ii) a financing plan to ensure funding of the capital expenditures that will drive the production growth, (iii) autonomy in drilling, purchasing and contracting functions and (iv) a technical assistance contract through which HNR Finance will provide critical services and expertise.

With this new operating and financial framework in place, management believes that Petrodelta´s performance should improve due to structurally solving the overstated foreign exchange imbalance, obtaining control and management of drilling, procurement and contracting processes, as well having a ring fenced management of the cash generated and used by Petrodelta. If successfully completed, we have forecasted Petrodelta´s net income to improve, thereby reversing the adverse financial trend which currently exists.

While there can be no assurance that we will be able to complete and implement these new agreements with PDVSA and Petrodelta, we believe that no further impairment of our investment is warranted at September 30, 2015.

We continue to account for our investment in Petrodelta under the cost method, as we have not seen sufficient progress under our new management agreement with CT Energia that would lead us to believe that we have regained significant influence over the operations of Petrodelta. We will continue to monitor this situation in future periods.