hkn_10q-033109.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
x |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended March 31, 2009
|
o |
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the transition period from ___________ to ____________
Commission
file number 1-10262
HKN,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
95-2841597
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
180
State Street, Suite 200
|
76092
|
Southlake,
Texas
|
(Zip
Code)
|
(Address
of principal executive offices)
|
|
Registrant’s
telephone number, including area code (817) 424-2424
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ü No ___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer þ
Non-accelerated
filer ¨ (Do not check if a
smaller reporting
company) Smaller
reporting company ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No ü
The
number of shares of Common Stock, par value $0.01 per share, outstanding as
of
May 1,
2009 was 8,761,384.
HKN,
INC.
INDEX
TO QUARTERLY REPORT
March
31, 2009
|
|
Page
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Condensed
Financial Statements
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets
|
4
|
|
|
|
|
Consolidated
Condensed Statements of Operations
|
5
|
|
|
|
|
Consolidated
Condensed Statement of Stockholders' Equity
|
6
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows
|
7
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
8
|
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
20
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
34
|
|
|
|
Item
4.
|
Controls
and Procedures
|
34
|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
|
|
|
Item
6.
|
Exhibits
|
35
|
|
|
|
|
|
|
SIGNATURES
|
38
|
PART I –
FINANCIAL INFORMATION
ITEM
1. CONDENSED FINANCIAL STATEMENTS
|
|
|
|
HKN,
INC.
|
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
(in
thousands, except for share
amounts)
|
Assets
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,216 |
|
|
$ |
5,722 |
|
Marketable
securities (Treasury bills)
|
|
|
4,498 |
|
|
|
9,497 |
|
Accounts
receivable, net
|
|
|
1,699 |
|
|
|
3,778 |
|
Prepaid
expenses and other current assets
|
|
|
365 |
|
|
|
482 |
|
Total
Current Assets
|
|
|
16,778 |
|
|
|
19,479 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
35,484 |
|
|
|
35,358 |
|
|
|
|
|
|
|
|
|
|
Investment
in Global
|
|
|
7,312 |
|
|
|
11,824 |
|
Equity
investment in Spitfire
|
|
|
1,745 |
|
|
|
1,820 |
|
Other
assets, net
|
|
|
215 |
|
|
|
292 |
|
|
|
$ |
61,534 |
|
|
$ |
68,773 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
902 |
|
|
$ |
639 |
|
Accrued
liabilities and other
|
|
|
1,149 |
|
|
|
1,826 |
|
Income
tax contingency
|
|
|
225 |
|
|
|
225 |
|
Revenues
and royalties payable
|
|
|
686 |
|
|
|
687 |
|
Total
Current Liabilities
|
|
|
2,962 |
|
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
Asset
Retirement Obligation
|
|
|
5,566 |
|
|
|
5,472 |
|
Deferred
Income Taxes
|
|
|
20 |
|
|
|
20 |
|
Preferred
Stock Dividends
|
|
|
93 |
|
|
|
- |
|
Total
Liabilities
|
|
|
8,641 |
|
|
|
8,869 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Series
G1 Preferred Stock, $1.00 par value; $160 thousand liquidation
value
|
|
|
|
|
|
|
|
|
700,000
shares authorized; 1,600 shares outstanding
|
|
|
2 |
|
|
|
2 |
|
Series
G2 Preferred Stock, $1.00 par value; $100 thousand liquidation
value
|
|
|
|
|
|
|
|
|
100,000
shares authorized; 1,000 shares outstanding
|
|
|
1 |
|
|
|
1 |
|
Series
M Preferred Stock, $1.00 par value; $4.4 million liquidation
value
|
|
|
|
|
|
|
|
|
50,000
shares authorized; 44,000 shares outstanding
|
|
|
44 |
|
|
|
44 |
|
Common
stock, $0.01 par value; 24,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
8,761,384
and 9,268,253 shares issued, respectively
|
|
|
88 |
|
|
|
93 |
|
Additional
paid-in capital
|
|
|
441,343 |
|
|
|
442,642 |
|
Accumulated
deficit
|
|
|
(386,386 |
) |
|
|
(385,171 |
) |
Accumulated
other comprehensive income
|
|
|
(2,199 |
) |
|
|
2,312 |
|
Treasury
stock, at cost, 0 and 6,869 shares held, respectively
|
|
|
- |
|
|
|
(19 |
) |
Total
Stockholders’ Equity
|
|
|
52,893 |
|
|
|
59,904 |
|
|
|
$ |
61,534 |
|
|
$ |
68,773 |
|
The
accompanying Notes to Consolidated Condensed Financial Statements
are
|
an
integral part of these
Statements.
|
HKN,
INC.
|
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
|
(Unaudited,
in thousands except for share and per share
amounts)
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues
and other:
|
|
|
|
|
|
|
Oil
and gas operations
|
|
$ |
2,020 |
|
|
$ |
5,536 |
|
Trading
losses, net
|
|
|
- |
|
|
|
(134 |
) |
Fees,
interest and other income
|
|
|
708 |
|
|
|
878 |
|
Total
revenue
|
|
|
2,728 |
|
|
|
6,280 |
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
Oil
and gas operating expenses
|
|
|
1,824 |
|
|
|
2,655 |
|
General
and administrative expenses
|
|
|
551 |
|
|
|
1,189 |
|
Provision
for doubtful accounts
|
|
|
274 |
|
|
|
- |
|
Depreciation,
depletion, amortization and accretion
|
|
|
1,100 |
|
|
|
1,230 |
|
Equity
in losses of Spitfire
|
|
|
90 |
|
|
|
3 |
|
Other
losses
|
|
|
47 |
|
|
|
86 |
|
Total
costs and expenses
|
|
|
3,886 |
|
|
|
5,163 |
|
Income
(loss) before income taxes
|
|
$ |
(1,158 |
) |
|
$ |
1,117 |
|
Income
tax expense (benefit)
|
|
|
(40 |
) |
|
|
3 |
|
Net
income (loss)
|
|
$ |
(1,118 |
) |
|
$ |
1,114 |
|
Accrual
of dividends related to preferred stock
|
|
|
(93 |
) |
|
|
(71 |
) |
Payment
of dividends
|
|
|
- |
|
|
|
10 |
|
Net
income (loss) attributed to common stock
|
|
$ |
(1,211 |
) |
|
$ |
1,053 |
|
Basic
and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share
|
|
$ |
(0.13 |
) |
|
$ |
0.11 |
|
Weighted
average common shares outstanding
|
|
|
9,116,134 |
|
|
|
9,737,907 |
|
The
accompanying Notes to Consolidated Condensed Financial Statements
are
|
an
integral part of these
Statements.
|
HKN,
INC.
|
CONSOLIDATED
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
|
(Unaudited,
in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
G1 |
|
|
G2 |
|
|
M |
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2008
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
44 |
|
|
$ |
93 |
|
|
$ |
442,642 |
|
|
$ |
(19 |
) |
|
$ |
(385,171 |
) |
|
$ |
2,312 |
|
|
$ |
59,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of Series M Preferred Conversion Feature
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
(4 |
) |
Accrual
of preferred stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(93 |
) |
|
|
- |
|
|
|
(93 |
) |
Treasury
stock repurchase
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,300 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,300 |
) |
Treasury
stock retirements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
|
|
(1,314 |
) |
|
|
1,319 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity
in stock issuances by Spitfire
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,118 |
) |
|
|
|
|
|
|
|
|
Unrealized
holding loss on available
for
sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,232 |
) |
|
|
|
|
Unrealized
foreign currency loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279 |
) |
|
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,629 |
) |
Balance, March
31, 2009
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
44 |
|
|
$ |
88 |
|
|
$ |
441,343 |
|
|
$ |
- |
|
|
$ |
(386,386 |
) |
|
$ |
(2,199 |
) |
|
$ |
52,893 |
|
The
accompanying Notes to Consolidated Condensed Financial
Statements
|
are
an integral part of these
Statements.
|
HKN,
INC.
|
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
|
(Unaudited,
in
thousands)
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,118 |
) |
|
$ |
1,114 |
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
(used)
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, amortization and accretion
|
|
|
1,100 |
|
|
|
1,230 |
|
Realized
gain on derivative instruments
|
|
|
- |
|
|
|
43 |
|
Unrealized
gain on derivative insturments
|
|
|
- |
|
|
|
(177 |
) |
Impairment
recovery on land
|
|
|
- |
|
|
|
(179 |
) |
Equity
in losses of Spitfire
|
|
|
90 |
|
|
|
3 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in prepaid assets and other
|
|
|
237 |
|
|
|
(211 |
) |
Decrease
in marketable securities
|
|
|
4,999 |
|
|
|
- |
|
Decrease
(increase) in accounts receivable and other
|
|
|
2,079 |
|
|
|
(297 |
) |
Increase
in margin deposits posted with brokers
|
|
|
- |
|
|
|
(3,704 |
) |
Increase
in derivative liabilities
|
|
|
- |
|
|
|
1,101 |
|
Decrease
in trade payables and other
|
|
|
(763 |
) |
|
|
(1,608 |
) |
Net
cash (used) provided by operating activities
|
|
|
6,624 |
|
|
|
(2,685 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from sales of assets
|
|
|
- |
|
|
|
324 |
|
Capital
expenditures
|
|
|
(830 |
) |
|
|
(519 |
) |
Acquisition
costs
|
|
|
- |
|
|
|
(123 |
) |
Net
cash used in investing activities
|
|
|
(830 |
) |
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Treasury
shares purchased
|
|
|
(1,300 |
) |
|
|
(636 |
) |
Net
cash used in financing activities
|
|
|
(1,300 |
) |
|
|
(636 |
) |
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and temporary investments
|
|
|
4,494 |
|
|
|
(3,639 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
5,722 |
|
|
|
25,581 |
|
Cash
and cash equivalents at end of period
|
|
$ |
10,216 |
|
|
$ |
21,942 |
|
The
accompanying Notes to Consolidated Condensed Financial
Statements
|
are
an integral part of these
Statements.
|
HKN,
INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March
31, 2009 and 2008
(Unaudited)
(1)
|
BASIS
OF PRESENTATION
|
Our
accompanying consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S.
GAAP”) have been condensed or omitted pursuant to these rules and
regulations, although we believe that the disclosures made are adequate to
prevent the information presented from being misleading. In our opinion, these
financial statements contain all adjustments necessary to present fairly our
financial position as of March 31, 2009 and December 31, 2008 and the results of
our operations and changes in our cash flows for the three months presented as
of March 31, 2009 and 2008. The December 31, 2008 consolidated condensed balance
sheet information is derived from audited financial statements. All adjustments
represent normal recurring items. These condensed financial statements should be
read in conjunction with the financial statements and the notes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2008. Certain
prior year amounts have been reclassified to conform to the 2009
presentation.
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from
these estimates. The results of operations for the three months ended March 31,
2009 are not necessarily indicative of the results to be expected for the full
year.
Principles of Consolidation –
The consolidated condensed financial statements include the accounts of all
companies that we, through our direct or indirect ownership or shareholding,
were provided the ability to control their operating policies and procedures.
All significant intercompany balances and transactions have been
eliminated.
Comprehensive Loss –
Comprehensive loss includes changes in stockholders’ equity during the
periods that do not result from transactions with stockholders. Our total
comprehensive loss for the period is as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,118 |
) |
|
$ |
1,114 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
on
investment
|
|
|
(279 |
) |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on investments
|
|
|
(4,232 |
) |
|
|
(4,251 |
) |
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$ |
(5,629 |
) |
|
$ |
(3,073 |
) |
Financial Instruments - We
carry our financial instruments including cash, marketable securities, and our
common stock investment in Global Energy Development PLC (“Global”) at their
estimated fair values. Our investment in ordinary shares of Global has been
designated as available for sale, not as trading securities. The associated
unrealized gains and losses on our available for sale investments are recorded
to other comprehensive income until realized and are reclassified into earnings
using specific identification.
We have
not designated any of our derivative instruments as hedges under Statement of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” All gains and losses related to our
derivative instruments are recognized in earnings. Please see Note 6
– Derivative Instruments for additional information.
Equity Method Investments –
For investments in which we have the ability to exercise significant influence
but do not control, we follow the equity method of
accounting. Initial investments are recorded at cost and adjusted by
the proportionate share of the investee’s earnings and capital
transactions. Our share of investee earnings and our share of their
capital transactions are recorded to our income statement. We
evaluate these investments for other-than-temporary declines in value each
quarter; any impairment found to be other than temporary is recorded through
earnings. Please see Note 4 – Equity Investment in Spitfire Energy
for additional information.
Translation of Non-U.S. Currency
Amounts - Assets
and liabilities of non-U.S. investees whose functional currency is not the
U.S. dollar are translated into U.S. dollars at exchange rates in
effect at each balance sheet date. Revenue and expense items are translated at
average exchange rates prevailing during the periods. Translation adjustments
are included in other comprehensive income until the investment is
sold.
Consolidation of Variable Interest
Entity - In May 2008, we created Canergy Growth Fund LLC (“Canergy Growth
Fund”), a U.S. Virgin Islands non-registered investment fund, to invest in the
Canadian junior oil and gas market, and Canergy Management, a U.S. Virgin
Islands company, to manage the Canergy Growth Fund as well as other future
possible Canadian investment opportunities. For the three
months ended March 31, 2009, there was no trading activity or other income and
expenses related to the Canergy Growth Fund recorded on our consolidated
condensed statement of operations, but we intend to monitor the
market and reinvest as conditions improve and opportunities
arise.
Our
investments in the Canergy Growth Fund and Canergy Management are variable
interests, as defined in Financial Accounting Standards Board Interpretation
(“FIN”) No. 46 (Revised December 2003) “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51” (“FIN 46R”). FIN 46R requires
the consolidation of a variable interest entity (“VIE”), as defined, if a
company will absorb a majority of the VIE’s expected losses, receive a majority
of the VIE’s expected residual returns, or both. We have determined that our
investments in the Canergy Growth Fund and in Canergy Management meet the
requirements of FIN 46R, and we are the primary beneficiaries, as defined.
Therefore, we have consolidated the assets, liabilities and results of
operations of the Canergy Growth Fund and Canergy Management as of March 31,
2009 and for the period from May 14, 2008, the formation date, through December
31, 2008.
Allowance for Doubtful Accounts -
Accounts receivable are customer obligations due under normal trade
terms. We sell our oil and gas production to companies involved in the
transportation and refining of crude oil and natural gas. We also earn
processing and handling fees for processing oil and gas volumes through both our
Main Pass 35 and Lake Raccourci facilities. Our net trade receivables
from our oil and gas production and processing and handling fees were
approximately $1.7 million and $2.3 million at March 31, 2009 and December 31,
2008, respectively. We perform periodic credit evaluations of our customers’
financial condition and although we generally do not require collateral, letters
of credit may be required from our customers in certain
circumstances.
Senior
management reviews accounts receivable to determine if any receivables will
potentially be uncollectible. We include provisions for any accounts receivable
balances that are determined to be uncollectible in the allowance for doubtful
accounts. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. One of our oil and gas processing and
handling customers filed for Chapter 11 bankruptcy as of April 1,
2009. We have accrued a provision for the accounts receivable
balances associated with their account. Based on the information
available, we believe the allowance for doubtful accounts as of March 31, 2009
is adequate. However, actual write-offs could exceed the recorded allowance. At
March 31, 2009, we had recorded allowances for doubtful accounts of $345
thousand on our condensed balance sheet.
Income Taxes – We account for income taxes
under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We measure and record
income tax contingency accruals in accordance with Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”).
We
recognize liabilities for uncertain income tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we must determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis or when new information becomes available to management. These
reevaluations are based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, successfully settled issues under
audit, expirations due to statutes, and new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or
an increase to the tax accrual.
We
classify interest related to income tax liabilities as income tax expense, and
if applicable, penalties are recognized as a component of income tax expense.
The income tax liabilities and accrued interest and penalties that are
anticipated to be due within one year of the balance sheet date are presented as
current liabilities in our condensed consolidated balance sheets.
Recent Accounting
Pronouncements – In December 2007, FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141R”), and SFAS No. 160, “Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51” (“SFAS 160”). SFAS 141R and SFAS 160 will significantly change the
accounting for and reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial statements. SFAS
141R retains the fundamental requirements in Statement 141 “Business
Combinations” while providing additional definitions, such as the definition of
the acquirer in a purchase and improvements in the application of how the
acquisition method is applied. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling
interests, and classified as a component of equity. These Statements became
simultaneously effective January 1, 2009. Our adoption of these standards has
currently had no effect on our consolidated condensed financial
statements.
In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS 162 is effective sixty days following the SEC’s approval of
PCAOB amendments to AU Section 411, “The Meaning of ‘Present fairly in
conformity with generally accepted accounting principles”. We are
currently evaluating the potential impact, if any, of the adoption of SFAS 162
on our consolidated condensed financial statements.
In June
2008, the FASB issued EITF 07-5. “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). The Issue requires
entities to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock in order to determine if the instrument
should be accounted for as a derivative under the scope of FASB Statement No.
133, “Accounting for Derivative Instruments and Hedging Activities.” EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. We adopted EITF
07-5 beginning January 1, 2009. We applied this guidance to the
conversion feature in our Series M Convertible Preferred Stock (“Series M
Preferred”). See Note 6 – Derivative Instruments for additional
information.
In
November 2008, the FASB issued EITF 08-6 “Equity Method Investment Accounting
Considerations” (“EITF 08-6”). This Issue states that an equity method investor
shall account for a share issuance by an investee as if the investor had sold a
proportionate share of its investment. Any gain or loss to the investor
resulting from an investee's share issuance should be recognized in earnings.
Previous to this Issue, changes in equity for both issuances and repurchases
were recognized in equity. EITF 08-6 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. We adopted EITF 08-6 beginning January 1,
2009. We applied this guidance to our equity investment in Spitfire
Energy. See Note 4 – Equity Investment in Spitfire Energy for additional
information.
In
December 2008, the Securities and Exchange Commission published a Final
Rule, “Modernization of Oil
and Gas Reporting”. The new rule permits the use of new technologies to
determine proved reserves if those technologies have been demonstrated to lead
to reliable conclusions about reserves volumes. The new requirements also will
allow companies to disclose their probable and possible reserves to investors.
In addition, the new disclosure requirements require companies to: (a ) report the
independence and qualifications of its reserves preparer or auditor; ( b ) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and ( c
) report oil and gas reserves using an average price based upon the prior
12-month period rather than year-end prices. The use of average prices will
affect future impairment and depletion calculations. The new disclosure
requirements are effective for annual reports on Form 10-K for fiscal years
ending on or after December 31, 2009. A company may not apply the new rules
to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. We have not yet determined the impact of
this Final Rule, which will vary depending on changes in commodity prices on our
disclosures financial position or results of operations
Marketable Securities – Our
marketable securities at March 31, 2009 and December 31, 2008 consisted of $4.5
million and $9.5 million, respectively, in Treasury bills with original
maturities of six months or less. These investments were recorded at their fair
value at the balance sheet date. There were no significant gains or losses on
these securities for any period covered by this report.
Investment in Global – Our
non-current available-for-sale investment consists of our ownership of
approximately 34% of Global’s outstanding ordinary shares. At March
31, 2009 and December 31, 2008, our investment in Global was equal to the market
value of our 11.9 million shares of Global’s ordinary shares as follows (in
thousands):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Shares
of Global Stock held by HKN
|
|
|
11,893,463 |
|
|
|
11,893,463 |
|
|
|
|
|
|
|
|
|
|
Closing
price of Global Stock
|
|
£ |
0.43 |
|
|
£ |
0.68 |
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Exchange Rate
|
|
|
1.4297 |
|
|
|
1.4619 |
|
|
|
|
|
|
|
|
|
|
Market
Value of Investment in Global
|
|
$ |
7,312 |
|
|
$ |
11,824 |
|
The
foreign currency translation adjustment of $279 thousand and the unrealized loss
on investment of $4.2 million for these changes in market value between the two
periods were recorded to other comprehensive income in stockholders’ equity
during the three months ended March 31, 2009. At March 31, 2009, we
have total unrealized losses of $4.2 million included in other comprehensive
income.
(3)
|
FAIR
VALUE MEASUREMENTS
|
Beginning
January 1, 2009, we applied Statement of Financial Accounting No. 157, “Fair
Value Measurements” (“SFAS 157”) to nonrecurring, nonfinancial assets and
liabilities, which were previously deferred by the FASB issued Staff Position
157-2, “Effective Date of FASB 157” (FSP 157-2). This adoption did not have a
material impact on our consolidated condensed statement of operations or
financial condition.
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS 157 also establishes a framework for
measuring fair value and a valuation hierarchy based upon the transparency of
inputs used in the valuation of an asset or liability. Classification
within the hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. The valuation hierarchy contains three
levels:
|
·
|
Level
1 – Valuation inputs are unadjusted quoted market prices for identical
assets or liabilities in active
markets.
|
|
·
|
Level
2 – Valuation inputs are quoted prices for identical assets or liabilities
in markets that are not active, quoted market prices for similar assets
and liabilities in active markets and other observable inputs directly or
indirectly related to the asset or liability being
measured.
|
|
·
|
Level
3 – Valuation inputs are unobservable and significant to the fair value
measurement.
|
Our fair
value measurements relate to our investment in ordinary shares of Global and
marketable securities in treasury bills with quoted prices in active markets.
Accordingly, the fair value measurements of these securities have been
classified as Level 1.
Also
included in our fair value measurements are our 1.3 million warrants to acquire
common shares of Spitfire. We measure the fair value of our Spitfire warrants
using the Black-Scholes Valuation model which incorporates observable inputs
such as Spitfire’s common share price and other inputs obtained from sources
independent of us. We do however; use the historical volatility of
the Spitfire common shares, that is, the volatility for the shares derived from
the shares’ historical prices. Historical volatility typically does not
represent current market participant expectations about future
volatility. Thus, the fair value measurements of our Spitfire
warrants have been classified as Level 3.
In
addition, our fair value measurements include our Series M Preferred conversion
feature, which is classified as a Level 3 liability. The fair value of this
liability was measured using a Monte Carlo simulation technique to estimate
several factors, including the number of new shares issued, the issuance price
and the timing of the stock issuance. Many of the assumptions behind these
variables were based on managements’ estimates and historical data. Thus, the
fair value measurements of our Series M Preferred conversion feature have been
classified as Level 3. See Note 6 – Derivative Instruments for additional
information on the Series M Preferred conversion feature as of March 31,
2009.
Also
classified as a Level 3 liability is our asset retirement obligation. The
significant unobservable inputs to this fair value measurement include estimates
of plugging, abandonment and remediation costs, inflation rate and the expected
remaining life of wells. The inputs are calculated based on historical data as
well as current estimated costs. Please see Note 7 – Asset Retirement Obligation
for additional information of our asset retirement obligation as of March 31,
2009.
The
following table presents our marketable securities, investment in Global,
Spitfire warrants, asset retirement obligation and Series M Preferred conversion
feature carried at fair value as of March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities (Treasury bills)
|
|
$ |
4,498 |
|
|
$ |
- |
|
|
$ |
- |
|
Investment
in Global (cost method)
|
|
|
7,312 |
|
|
|
- |
|
|
|
- |
|
Spitfire
warrants
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at fair value
|
|
$ |
11,810 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
M Preferred conversion feature
|
|
|
- |
|
|
|
- |
|
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities at fair value
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,606 |
|
The table above does not include our
equity investment in Spitfire in which we are deemed to have a significant
influence and, as such, is not accounted for at fair value under SFAS 157 at
March 31, 2009.
The reconciliation of the fair value
for our Level 3 assets and liabilities (the Spitfire warrants and Series M
Preferred conversion feature), including net purchases and sales, realized gains
and change in unrealized gains, is set out below (in thousands):
|
|
Three
Months Ended March 31, 2009
|
|
|
|
Level
3 Asset
|
|
|
Level
3 Liability
|
|
|
|
Spitfire
Warrants
|
|
|
Series
M Preferred Conversion Feature
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
16 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
Total
realized and unrealized losses included in earnings
|
|
|
(12 |
) |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
Net
purchases and sales
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
4 |
|
|
$ |
40 |
|
(4)
|
EQUITY
INVESTMENT IN SPITFIRE ENERGY
|
At both
March 31, 2009 and December 31, 2008, we held an investment in Spitfire through
the ownership of approximately 27% of Spitfire’s currently outstanding common
shares. Spitfire is an independent public company (TSX-V; SEL) engaged in the
exploration, development and production of crude oil, natural gas and natural
gas liquids in Western Canada. We reflect our investment in Spitfire
as an equity method investment. Due to timing differences in our filing
requirements and the lack of availability of financial information for the
current quarterly period, we record our share of Spitfire’s financial activity
on a three-month lag.
In accordance with the equity method of
accounting, our investment was initially recorded at cost and adjusted to
reflect our share of changes in Spitfire’s capital. It is further
adjusted to recognize our share of their earnings as they occur, rather than as
dividends or other distributions are received. Our share of their
earnings would also include any other-than-temporary declines in fair value
recognized during the period. On January 1, 2009, we adopted EITF 08-6. As a
result, changes in our proportionate share of the underlying equity of Spitfire
which result from their issuance of additional equity securities are also
recognized in earnings in our results of operations.
Our
investment in Spitfire is reported in our balance sheet at its adjusted carrying
value as a non-current asset, and our earnings are reported net of tax as a
single line on our income statement. At March 31, 2009 and December
31, 2008, our carrying value of this investment was $1.7 million and $1.8
million, respectively.
(5)
|
PROPERTY AND
EQUIPMENT
|
|
A
summary of property and equipment follows (in
thousands):
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Unevaluated
properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unevaluated
Coal Bed Methane prospects
|
|
$ |
4,948 |
|
|
$ |
4,874 |
|
|
|
|
|
|
|
|
|
|
Evaluated
oil and gas properties
|
|
|
198,553 |
|
|
|
197,534 |
|
|
|
|
|
|
|
|
|
|
Facilities
and other property
|
|
|
1,635 |
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation, depletion, and amortization
|
|
|
(169,652 |
) |
|
|
(168,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
35,484 |
|
|
$ |
35,358 |
|
(6)
|
DERIVATIVE
INSTRUMENTS
|
Spitfire Warrants - In
association with our investment in Spitfire, we also hold 1.3 million warrants
to acquire common shares of Spitfire. We account for these warrants
as derivatives in accordance with SFAS 133. The expiration date of the warrants
is August 1, 2010. These warrants are recorded at their estimated
fair value of $4 thousand at March 31, 2009 as other assets in our consolidated
condensed balance sheet. For the three months ended March 31, 2009 and 2008, we
have included unrealized losses of $12 thousand and $37 thousand, respectively,
related primarily to the change in the underlying price of Spitfire’s common
shares, within other expenses in our consolidated condensed statement of
operations.
Series M Preferred Conversion
Feature – Our Series M Preferred, which was issued in 2004, has a
liquidation value of $100 per share, is non-voting and is convertible at the
holders’ option into common stock at a conversion price of $13.22 per share.
This conversion price is subject to continued adjustment in the event we
subsequently issue shares of our common stock at a price lower than this
conversion price or in response to certain transactions that are in effect
equity restructuring transactions. Under EITF 07-5, this anti-dilution provision
allowing for the conversion price to be adjusted represents an embedded
derivative that requires it to be classified as a liability under SFAS 133. We
would only incur the liability, equal to the current stock price times the
number of additional shares that would be required to fulfill the conversion, if
we were to issue common stock at a price less than the Series M Preferred
conversion price. As of January 1, 2009, we recorded a series M Preferred
conversion liability for the estimated fair value of $4 thousand as a cumulative
effect adjustment. The Series M Preferred conversion liability is recorded at
its estimated fair value of $40 thousand at March 31, 2009 within other
liabilities in our consolidated condensed balance sheet. For the three months
ended March 31, 2009, we have included unrealized losses of $36 thousand,
related primarily to an increase in the likelihood of a share issuance, within
other expenses in our consolidated condensed statement of
operations.
We do not hold any derivative
instruments designated as hedging instruments under SFAS 133 as of March 31,
2009. A summary of the fair values of our derivative instruments not designated
as hedging instruments under SFAS 133 as of March 31, 2009 is as follows (in
thousands):
Asset
Derivatives
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
Spitfire
warrants
|
|
Other
assets
|
|
$ |
4 |
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
Derivatives
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Series
M Preferred conversion feature
|
|
Other
liabilities
|
|
$ |
40 |
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$ |
40 |
|
The unrealized losses of our
derivative instruments not designated as hedging instruments under SFAS 133 as
recorded to other expenses in the consolidated condensed statement of
operations for the three months ended March 31, 2009 are as follows (in
thousands):
Derivatives
|
|
Location
of Loss Recognized in Income on Derivatives
|
|
Amount
of Loss Recognized in Income on Derivatives
|
|
|
|
|
|
|
|
Spitfire
warrants
|
|
Other
losses
|
|
$ |
12 |
|
|
|
|
|
|
|
|
Series
M Preferred conversion feature
|
|
Other
losses
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48 |
|
(7)
|
ASSET RETIREMENT
OBLIGATION
|
We
recognize the present value of asset retirement obligations beginning in the
period in which they are incurred if a reasonable estimate of a fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. A summary of our asset retirement
obligations as of March 31, 2009 is as follows (in thousands):
|
|
Asset
Retirement
|
|
|
Asset
Category
|
|
Obligation
Liability
|
|
Estimated
Life
|
|
|
|
|
|
Oil
and gas producing properties
|
|
$ |
4,003 |
|
0-20
years
|
|
|
|
|
|
|
Facilities
and other property
|
|
|
1,563 |
|
3-27
years
|
|
|
|
|
|
|
|
|
$ |
5,566 |
|
|
The following table describes all
changes to our asset retirement obligation liability during the three months
ended March 31, 2009 (in thousands):
Asset
retirement obligation at beginning of year
|
|
$ |
5,472 |
|
|
|
|
|
|
Additions
during the year
|
|
|
- |
|
|
|
|
|
|
Disposals
during the year
|
|
|
- |
|
|
|
|
|
|
Revisions
of estimates
|
|
|
- |
|
|
|
|
|
|
Accretion
expense
|
|
|
94 |
|
|
|
|
|
|
Asset
retirement obligation at March 31, 2009
|
|
$ |
5,566 |
|
HKN engages primarily in oil and gas
exploration, exploitation, development and production activities in the onshore
and offshore Gulf Coast regions of South Texas and Louisiana as well as coalbed
methane exploration and development activities in Indiana and
Ohio. Our coalbed methane and oil and gas operations efforts in the
United States are managed and evaluated by us as one operation. We operate
primarily through traditional ownership of mineral interests in the various
states in which we operate. For the three months ended March 31,
2008, we did not divide our operations into segments.
In the
second quarter 2008, we created two new operating segments to reflect the
consolidation of the Canergy Growth Fund and Canergy Management. For
the three months ended March 31, 2009, there was no activity or other income and
expenses related to the Canergy Growth Fund or Canergy Management recorded in
our consolidated condensed statement of operations.
Our
accounting policies for each of our operating segments are the same as those for
our consolidated condensed financial statements. There were no intersegment
sales or transfers for the periods presented. Revenues and expenses
not directly identifiable with any segment, such as certain general and
administrative expenses, are allocated by us based on various internal and
external criteria including an assessment of the relative benefit to each
segment. Our financial information, expressed in thousands, for each
of our operating segments for the period ended March 31, 2009 is as
follows:
|
|
For the Three Months Ended March 31,
2009
|
|
|
|
|
|
|
Canergy
|
|
|
Canergy
|
|
|
|
|
|
|
HKN
|
|
|
Fund
|
|
|
Management
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenues
|
|
$ |
2,020 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,020 |
|
Interest
and other income
|
|
|
708 |
|
|
|
- |
|
|
|
- |
|
|
|
708 |
|
Oil
and gas operating expenses
|
|
|
(1,824 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,824 |
) |
General
and administrative expenses
|
|
|
(551 |
) |
|
|
- |
|
|
|
- |
|
|
|
(551 |
) |
Provision
for doubtful accounts
|
|
|
(274 |
) |
|
|
- |
|
|
|
- |
|
|
|
(274 |
) |
Depreciation,
depletion, amortization and accretion
|
|
|
(1,100 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,100 |
) |
Other
losses, net
|
|
|
(47 |
) |
|
|
- |
|
|
|
- |
|
|
|
(47 |
) |
Equity
in earnings of Spitfire
|
|
|
(90 |
) |
|
|
- |
|
|
|
- |
|
|
|
(90 |
) |
Income
tax benefit
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Net
loss
|
|
$ |
(1,118 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,118 |
) |
Capital
Expenditures
|
|
|
830 |
|
|
|
- |
|
|
|
- |
|
|
|
830 |
|
Total
Assets
|
|
|
61,534 |
|
|
|
- |
|
|
|
- |
|
|
|
61,534 |
|
Treasury Stock – At March 31, 2009 and December
31, 2008, we held no shares and 6,869 shares, respectively, of treasury stock.
In January 2009, our Board of Directors authorized an amendment to the existing
repurchase plan allowing us to buyback an additional 1.0 million shares of our
common stock. During the three months ended March 31, 2009, we
repurchased 500 thousand shares of our common stock for $1.3 million from a
shareholder in a privately negotiated transaction pursuant to our repurchase
program . During the three months ended March 31, 2009, we retired approximately
507 thousand treasury shares. As of March 31, 2009, approximately 737 thousand
shares remained available for repurchase under our repurchase
program.
The changes in the number of common and
preferred shares and shares held in treasury during the three months ended March
31, 2009 are as follows:
|
|
Number
of Shares
|
|
Description
|
|
Preferred
G1
|
|
|
Preferred
G2
|
|
|
Preferred
M
|
|
|
Common
|
|
|
Treasury
|
|
Balance
as of December 31, 2008
|
|
|
1,600 |
|
|
|
1,000 |
|
|
|
44,000 |
|
|
|
9,268,253 |
|
|
|
6,869 |
|
Treasury
Stock repurchase
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
500,000 |
|
Treasury
Stock cancellation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(506,869 |
) |
|
|
(506,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2009
|
|
|
1,600 |
|
|
|
1,000 |
|
|
|
44,000 |
|
|
|
8,761,384 |
|
|
|
- |
|
Basic
earnings per share includes no dilution and is computed by dividing income or
loss attributed to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if security interests were exercised or
converted into common stock. The following table sets forth the computation of
basic and diluted income (loss) per share for the three months ended March 31,
2009 and 2008 (in thousands, except per share
data):
|
|
Three
months ended March 31, 2009
|
|
|
Three
months ended March 31, 2008
|
|
|
|
Net
Loss Attributed to Common Stock
|
|
|
Weighted-Average
Shares
|
|
|
Per
Share Loss
|
|
|
Net
Income Attributed to Common Stock
|
|
|
Weighted-Average
Shares
|
|
|
Per
Share Income
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
|
|
$ |
(1,211 |
) |
|
|
9,116 |
|
|
$ |
(0.13 |
) |
|
$ |
1,053 |
|
|
|
9,738 |
|
|
$ |
0.11 |
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and warrants (A)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
earnings per share
|
|
$ |
(1,211 |
) |
|
|
9,116 |
|
|
$ |
(0.13 |
) |
|
$ |
1,053 |
|
|
|
9,738 |
|
|
$ |
0.11 |
|
(A)
|
Our
Series G1, Series G2 and Series M Preferred which were outstanding in the
periods presented were excluded from the calculation of diluted earnings
per share as their effect would have been
antidilutive.
|
IRS Examination - On August
6, 2008, we received a Revenue Agent’s Report in which the Internal Revenue
Service (“IRS”) proposed an adjustment to our federal tax liability for the
calendar year 2005. The proposed adjustment relates to the
calculation of the adjusted current earnings (“ACE”) component of the
alternative minimum tax and asserts that the Company recognized gain for ACE
purposes on the sale of the Global PLC stock in 2005. In its proposed
adjustment, the IRS alleges that the Company owes approximately $3.6 million in
tax for the year ended December 31, 2005. Penalties and interest calculated
through March 31, 2009 in the amount of $1.9 million could also be assessed. In
response to the proposed adjustment and corresponding tax assessment, the
Company filed a written protest and request for conference on September 5, 2008
to address the proposed adjustment with the Appeals division of the
IRS. On October 29, 2008, we received an acknowledgement of receipt
of our written protest and request for conference from the IRS Appeals Office.
In April 2009, we filed our supplement to the written protest filed with the
IRS. Pursuant to the IRS Appeals Office acknowledgement, we
anticipate that office to contact us in the near term to address this
matter.
FIN 48
prescribes a recognition threshold of more-likely-than-not to be sustained upon
examination. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. Based on the requirements of FIN 48, we have recorded an
income tax contingency, including interest and penalties, as of March 31, 2009,
of $225 thousand in our consolidated condensed financial statements based, in
part, on a preliminary indication of a probability-weighted fair value
assessment of the Global stock. We intend to vigorously defend the proposed
adjustment and strongly believe that the Company has meritorious
defenses
Operational Contingencies
-- The exploration, development and production of oil and gas assets
are subject to various, federal and state laws and regulations designed to
protect the environment. Compliance with these regulations is part of our
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. We maintain levels of insurance we
believe to be customary in the industry to limit our financial exposure. We are
currently self-insured for wind coverage on our oil and gas
properties. We are unaware of any material capital expenditures
required for environmental control during this fiscal year.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion is intended to assist you in understanding our business and
the results of our operations. It should be read in conjunction with
the Consolidated Condensed Financial Statements and the related notes that
appear elsewhere in this report as well as our Annual Report on Form 10-K for
the year ended December 31, 2008. Certain statements made in our discussion may
be forward looking. Forward-looking statements involve risks and
uncertainties and a number of factors could cause actual results or outcomes to
differ materially from our expectations. These risks, uncertainties, and other
factors include, among others, the risks described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008 filed with the Securities and
Exchange Commission, as well as other risks described in this Quarterly
Report. Unless the context requires otherwise, when we refer to “we,”
“us” and “our,” we are describing HKN, Inc. and its consolidated subsidiaries on
a consolidated basis.
BUSINESS
OVERVIEW
Our
strategy is focused on enhancing value for our stockholders through the
development of a well-balanced portfolio of energy-based assets. Our
Gulf Coast oil and gas assets and our coalbed methane prospects provide an
inventory of both high and low-risk projects and long-term
opportunities.
Unfavorable
changes in economic conditions, including decreased oil and gas commodity
pricing, resulted in an adverse effect on our oil and gas revenue in the first
quarter 2009. During the three months ended March 31, 2009, oil
commodity pricing was approximately 62% lower than the prior year period,
and natural gas commodity pricing was approximately 52% lower than
the prior year period. If oil and gas commodity pricing and economic conditions
decline again in the future, our revenue will continue to be adversely
affected. While commodity pricing continues to remain low, we are
focused on cutting our operational and general costs in order to remain
cash-flow positive until pricing rebounds.
Focus
on Efficient Operations
Oil
and natural gas prices reached historically high levels in 2008. These high
prices have been a key factor in the oil and gas industry experiencing cost
increases that have exceeded general inflation trends. We are no different from
others in the industry in that we have been impacted by these cost increases.
However, we have continued to remain disciplined with regards to our operating
costs and capital expenditures. As a result of the market turmoil and price
decreases, oil and gas companies with high debt levels and lack of liquidity
have been and will continue to be negatively impacted. During the first quarter
2009, oil and natural gas prices have declined sharply as compared to the prior
year period. However, we have worked to reduce our controllable costs in order
to maintain positive cash flow from operations even during this low commodity
pricing environment.
We are in a financially-stable position
due to our past strategies. We have no debt outstanding, and we have a cash and
marketable securities balance of approximately $14.7 million at March 31, 2009.
We also anticipate our operating cash flow and other capital resources, if
needed, will adequately fund our planned capital expenditures and other capital
uses over the near-term. Due to cost-cutting measures, we have budgeted our 2009
operations to remain cash-flow positive, even at current market
pricing.
Gulf
Coast Oil and Gas Properties
During the first quarter 2009, our
results of operations reflect decreased oil and natural gas revenues due to the
decrease in commodity prices as compared to the prior year period. Substantially
all of our production is concentrated in twelve oil and gas fields along the
onshore and offshore Texas and Louisiana Gulf Coast.
Our revenues are primarily derived from
sales from our oil and gas properties. Approximately 50% of our production comes
from our operated properties all located in the United States. These revenues
are a function of the oil and gas volumes produced and the prevailing commodity
price at the time of production, and certain quality and transportation
discounts. The commodity prices for crude oil and natural gas as well as the
timing of production volumes have a significant impact on our operating income.
For the three months ended March 31, 2009, our oil and gas revenues were
comprised of approximately 69% oil sales and 31% natural gas production. As of
March 31, 2009, our net domestic production rate was approximately 737 barrels
of oil equivalent (“boe”) per day.
The
following field data updates the status of our operations through March 31,
2009:
Main
Pass, Plaquemines Parish – Louisiana
We have a
90% interest in Main Pass and are the field operator. This field contains a
seven-platform facility complex including separation, injection, compression,
processing and transportation terminals for oil, water and gas. The
field also contains 67 wellbores (60 oil and 7 injection wells), of which 33 are
active, and an eight mile oil transport line with pump/metering facilities. Our
Main Pass 35 facility is located approximately six miles offshore in state
waters off the Gulf Coast of Louisiana. During 2008, a third-party engineering
firm completed evaluation and documentation of additional recompletion targets,
a geological and geophysical study and wellbore utilization plan. We
currently have license to 21 square miles of 3D seismic data covering the area
held by productive leases. Gross production during the first quarter 2009
averaged approximately 421 boe per day. A comprehensive plan for the field is
being evaluated in order to improve field economics. We are seeking
to reduce operating costs and seek more favorable terms for our handling of
third party production. The identified recompletion well work is
currently on hold pending more favorable oil prices.
Lapeyrouse
Field, Terrebonne Parish – Louisiana
We hold
an average non-operated working interest of approximately 18% in the production
from nine wells in this field. Gross field production averaged approximately 257
boe per day for the first quarter 2009. Evaluation efforts are still
ongoing with additional diagnostic work planned by the operator to address the
field pressure decline and to utilize all available wellbores.
Lake
Raccourci Field, Lafourche Parish – Louisiana
We hold
an average 40% operated working interest in each of our Lake Raccourci wells.
Gross production for this field averaged 191 boe per day for the first quarter
2009. Production was down significantly this quarterly period, due to the fact
that the SL 14284-1 well ceased production in February. Diagnostic
work has indicated that the well ceased production due to sand build up in the
tubing. Coiled tubing work is planned for early second quarter of
2009 to restore production rates.
Point-a-la-Hache
Field, Plaquemines Parish – Louisiana
We
maintain a 25% operated working interest in one producing well in this field.
Average gross production for the first quarter 2009 was approximately 47 boe per
day. Production remains steady from this well field.
Creole
Field, Terrebonne Parish - Louisiana
We hold
an average 15% non-operated working interest in this offshore field. With
adjoining acreage and facilities which will ensure the availability of gas lift
gas and improved salt water disposal. Upgrades to surface facilities
and flowlines and the drilling of a salt water disposal well were completed in
2008. Gross daily production from the wells (six completions) was approximately
647 boe per day during the first quarter 2009. Three completions in the two
newest wells drilled in late 2008 were put on production in late March 2009
after significant weather delays.
East
Lake Verret, Assumption Parish – Louisiana
We have
an average 5% non-operated working interest in this field. Gross daily
production from the two development wells on this project was approximately 811
boe per day during the first quarter 2009.
Point-au-Fer
Field, Terrebonne Parish – Louisiana
We own a
12.5% non-operated working interest in this approximate 56 square mile area.
Gross production for this field was approximately 46 boe per day for the first
quarter 2009. Several prospects have been identified in the area, but due to the
low oil and gas pricing, we expect additional drilling and workover activity
will be delayed.
Branville
Bay Field, St. Bernard Parish – Louisiana
We own a
12.5% non-operated working interest in two state leases in the Branville Bay
area of Chandeleur Sound Block 71. Gross production for this field was
approximately 254 boe per day for the first quarter 2009. Production at
pre-storm rates was finally restored in January after the 2008 hurricane
season.
BP
2D Texas Gulf Coast Project, Various Counties - Texas
We own a 25% non-operated working
interest in the Boquillas #1 well. Gross production from this well was
approximately 184 boe per day for the first quarter 2009.
NW
Speaks Field, Lavaca County – Texas
We own
approximately 2% to 10% in various leases in the NW Speaks area. Current gross
production for this field averaged approximately 125 boe per day during the
first quarter 2009 from two wells.
Allen
Ranch Field, Colorado County – Texas
We own an
11.25% non-operated working interest in this area. Gross production for this
field was approximately 64 boe per day during the first quarter 2009 primarily
from the initial well, the Hancock Gas Unit #1 which is the only well currently
producing from the field. Another development location has been identified, but
future development of the field is currently on hold pending higher natural gas
pricing.
Raymondville
Field, Willacy County – Texas
We own a
27% non-operated working interest in this area. Current gross production for
this field averaged approximately 689 boe per day during the first quarter 2009.
No recompletion activity occurred in the first quarter 2009, but facility
upgrades are currently underway on one well in the field.
Lucky
Field, Matagorda County - Texas
We own a
7.5% non-operated working interest in this area. Current gross production for
this field averaged approximately 65 boe per day during the first quarter
2009.
Coalbed
Methane Prospects – Indiana and Ohio
We
hold two exploration and development agreements in Indiana and Ohio which
provide for an area of mutual interest of approximately 400,000 acres,
respectively. The agreements provide for a phased delineation, pilot and
development program, with corresponding staged expenditures. Contracted third
parties with a long track record in successful Coalbed Methane development
provide expert advice for these projects.
On the
Indiana Posey Prospect, we are currently in the second pilot well phase of Phase
II (Exploratory Phase) of the project. The extent of water influx
from the first pilot wells is under evaluation to enhance desorption
efforts. Alternative design stimulations are also under evaluation as
pumpdown continues as the initial fracture treatments are
evaluated.
As part
of the second pilot well phase, we drilled five pilot producers and completed a
water disposal well with specialized fracture stimulation. The
proprietary fracture stimulation is currently being evaluated for continued
application. Upon completion of the fracturing program, pumpdown for
desorption of the second Posey pilot will begin. Following an evaluation period
of these two pilot areas, we will evaluate a Phase III – Development election
and funding of a development well program as contemplated by the
agreements.
On the
Ohio Cumberland Prospect, the Phase II project has been temporarily suspended
until such time as oil and gas commodity pricing increases. We are
focusing our efforts in 2009 on the Indiana Posey Contract.
With the
decline in oil and gas commodity prices, resource plays, such as coalbed methane
prospects, can become uneconomical in low price environments. Our discretionary
capital expenditures, including costs related to our coalbed methane prospects,
may be curtailed at our discretion in the future. Such expenditure curtailments
could result in us losing certain prospect acreage or reducing our interest in
future development projects.
INVESTMENT
IN GLOBAL
At March
31, 2009 and December 31, 2008, we owned approximately 34% of Global’s ordinary
shares. Our investment in Global was equal to the market value of our 11.9
million shares of Global’s common stock as follows (in thousands, except for
share amounts):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Shares
of Global Stock held by HKN
|
|
|
11,893,463 |
|
|
|
11,893,463 |
|
|
|
|
|
|
|
|
|
|
Closing
price of Global Stock
|
|
£ |
0.43 |
|
|
£ |
0.68 |
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Exchange Rate
|
|
|
1.4297 |
|
|
|
1.4619 |
|
|
|
|
|
|
|
|
|
|
Market
Value of Investment in Global
|
|
$ |
7,312 |
|
|
$ |
11,824 |
|
The foreign currency translation
adjustment of $279 thousand and the unrealized loss on investment of $4.2
million for these changes in market value between the two periods are recorded
to other comprehensive income in stockholders’ equity at March 31,
2009.
INVESTMENT
IN SPITFIRE
At March 31, 2009, we owned 11.1
million common shares of Spitfire and 1.3 million warrants to acquire common
shares of Spitfire. Our common share holdings represent approximately 27% of the
outstanding Spitfire common shares. As a result of our 27% ownership
of Spitfire’s outstanding common shares, we are deemed to have the ability to
exert significant influence over Spitfire’s operating and financial policies.
Accordingly, we reflect our investment in Spitfire as an equity method
investment.
INVESTMENT
IN CANERGY FUND
HKN is
currently the sole participant in both the Canergy Fund and Canergy
Management. For the three months ended March 31, 2009, there was no
trading activity related to the Canergy Growth Fund recorded on our consolidated
condensed statement of operations, but we intend to monitor the
market and reinvest cash as conditions improve and opportunities
arise.
CRITICAL
ACCOUNTING ESTIMATES AND ASSUMPTIONS
Our
consolidated condensed financial statements have been prepared in accordance
with U.S. GAAP which requires us to use estimates and make assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses. Our estimates and assumptions are based on historical
experience, industry conditions and various other factors which we believe are
appropriate. Actual results could vary significantly from our estimates and
assumptions as additional information becomes known. The more
significant critical accounting estimates and assumptions are described
below.
Full-Cost Ceiling Test – At
the end of each quarter, the unamortized cost of oil and natural gas properties,
after deducting the asset retirement obligation, net of related deferred income
taxes, is limited to the sum of the estimated future net revenues from proved
properties using period-end prices, discounted at 10%, and the lower of cost or
fair value of unproved properties adjusted for related income tax
effects.
The
calculation of the ceiling test and the provision for depletion are based on
estimates of proved reserves. There are numerous uncertainties inherent in
estimating quantities of proved reserves and in projecting the future rates of
production, timing, and plan of development. The accuracy of any reserves
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. Results of drilling, testing, and
production subsequent to the date of the estimate may justify a revision of such
estimate. Accordingly, reserve estimates are often different from the quantities
of oil and natural gas that are ultimately recovered.
Fair Value of Financial
Instruments – Financial instruments are stated at fair value as
determined in good faith by management. Factors considered in valuing individual
investments include, without limitation, available market prices, reported net
asset values, type of security, purchase price, purchases of the same or similar
securities by other investors, marketability, restrictions on disposition,
current financial position and operating results, and other pertinent
information.
We carry
our financial instruments including cash, marketable securities, derivatives and
our investment in ordinary shares of Global at their estimated fair values. The
fair values of our securities are based on prices quoted in the
active market. The fair value of our warrants on common stock of
Spitfire is estimated using the Black Scholes model.
Our
investment in Global is classified as an available-for-sale non-current asset in
our accompanying balance sheets. The associated unrealized gains and losses on
our available-for-sale investments (non-trading) are recorded to other
comprehensive income until realized and are reclassified into earnings using
specific identification.
Equity Method Investments –
For investments in which we have the ability to exercise significant influence
but do not control, we follow the equity method of
accounting. Initial investments are recorded at cost and adjusted by
the proportionate share of the investee’s earnings and capital
transactions. Our share of investee earnings are recorded to our
income statement and our share of their capital transactions are recorded in our
shareholders’ equity. We evaluate these investments for
other-than-temporary declines in value each quarter; any impairment found is
recognized through earnings.
Translation of Non-U.S. Currency
Amounts - Assets
and liabilities of non-U.S. investees whose functional currency is not the
U.S. dollar are translated into U.S. dollars at exchange rates in
effect at each balance sheet date. Revenue and expense items are translated at
average exchange rates prevailing during the periods. Translation adjustments
are included in other comprehensive income until the investment is
sold.
Fair Value of Derivatives -
Our Spitfire warrants are not exchange-traded derivatives. Management estimates
the fair value of the Spitfire warrants using the Black Scholes Valuation model.
The estimated fair value of the Spitfire warrants was $4 thousand at March 31,
2009 and was recorded in other assets on our consolidated condensed balance
sheet. The Spitfire warrants are classified as Level 3 under Statement of
Financial Accounting No. 157, “Fair Value Measurements” (“SFAS 157”). We do not
consider the fair value of these Spitfire warrants to be material to our
financial statements as of March 31, 2009. Also, we do not consider the
unrealized loss of $12 thousand associated with the change in the value of these
Spitfire warrants during the three months ended March 31, 2009 to be material to
our financial statements.
The conversion feature of our Series M
Preferred is accounted for as a derivative under EITF 07-5 and SFAS 133.
Management estimates the fair value of the Series M Preferred conversion feature
using the Monte Carlo Stimulation model. The estimated liability of the
conversion feature was $40 thousand at March 31, 2009 on our consolidated
condensed balance sheet. The Series M Preferred conversion feature liability
classified as Level 3 under Statement of Financial Accounting No. 157, “Fair
Value Measurements (“SFAS 157”). We do not consider the fair value of the Series
M Preferred conversion feature to be material to our financial statements as of
March 31, 2009. Also, we do not consider the unrealized loss of $36 thousand
associated with the change in the value of this liability during the three
months ended March 31, 2009 to be material to our financial
statements.
We have
not designated any of our derivative instruments as hedges under Statement of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” All gains and losses related to these
positions are recognized in earnings.
Consolidation of variable interest
entities - In January 2003, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable
Interest Entities” (“FIN 46”) and FIN46(R), which requires the primary
beneficiary of a variable interest entity's (“VIE”) activities to consolidate
the VIE. FIN 46 defines a VIE as an entity in which the equity investors do not
have substantive voting rights and there is not sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support. The primary beneficiary is the party that absorbs a majority of the
expected losses and/or receives a majority of the expected residual returns of
the VIE’s activities.
Our
investments in the Canergy Growth Fund and Canergy Management are variable
interests, as defined in FIN 46R. We have determined that the
investments in the Canergy Growth Fund and in Canergy Management meet the
requirements of FIN 46R, and we are the primary beneficiary, as defined.
Therefore, we have consolidated the assets, liabilities and results of
operations of the Canergy Growth Fund and Canergy Management for the three
months ended March 31, 2009 and for the period from May 14, 2008, the formation
date, through December 31, 2008.
As of
March 31, 2009, we owned less than a majority of the common shares of Global and
did not possess the legal power to direct the operating policies and procedures
of Global through our direct ownership, combined with the ownership by Lyford in
Global shares. In addition, we have concluded that Global was not a VIE at March
31, 2009 as contemplated by FIN 46(R).
Income Taxes – We account for income taxes
under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We measure and record
income tax contingency accruals in accordance with Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”).
We
recognize liabilities for uncertain income tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we must determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis or when new information becomes available to management. These
reevaluations are based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, successfully settled issues under
audit, expirations due to statutes, and new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or
an increase to the tax accrual.
We
classify interest related to income tax liabilities as income tax expense, and
if applicable, penalties are recognized as a component of income tax expense.
The income tax liabilities and accrued interest and penalties that are
anticipated to be due within one year of the balance sheet date are presented as
current liabilities in our condensed consolidated balance sheets.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141R”), and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”).
SFAS 141R and SFAS 160 will significantly change the accounting for and
reporting of business combination transactions and noncontrolling (minority)
interests in consolidated financial statements. SFAS 141R retains the
fundamental requirements in Statement 141 “Business Combinations” while
providing additional definitions, such as the definition of the acquirer in a
purchase and improvements in the application of how the acquisition method is
applied. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests, and
classified as a component of equity. These Statements became simultaneously
effective January 1, 2009. Our adoption of these standards has currently had no
effect on our consolidated condensed financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS 161"). This statement
requires companies to provide enhanced disclosures about (a) how and why
they use derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect a company's financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Our adoption
of SFAS 161 on January 1, 2009 did not have a material impact on our
consolidated condensed financial statements. See note 6 – Derivative Instruments
for additional information.
In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS 162 is effective sixty days following the SEC’s approval of
PCAOB amendments to AU Section 411, “The Meaning of ‘Present fairly in
conformity with generally accepted accounting principles”. We are
currently evaluating the potential impact, if any, of the adoption of SFAS 162
on our consolidated condensed financial statements.
In June
2008, the FASB issued EITF 07-5. “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). The Issue requires
entities to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock in order to determine if the instrument
should be accounted for as a derivative under the scope of FASB Statement No.
133, “Accounting for Derivative Instruments and Hedging Activities.” EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. We adopted EITF
07-5 beginning January 1, 2009. We applied this guidance to the
conversion feature in our Series M Convertible Preferred Stock (“Series M
Preferred”). See Note 6 – Derivative Instruments for additional
information.
In
November 2008, the FASB issued EITF 08-6 “Equity Method Investment Accounting
Considerations” (“EITF 08-6”). This Issue states that an equity method investor
shall account for a share issuance by an investee as if the investor had sold a
proportionate share of its investment. Any gain or loss to the investor
resulting from an investee's share issuance should be recognized in earnings.
Previous to this Issue, changes in equity for both issuances and repurchases
were recognized in equity. EITF 08-6 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. We adopted EITF 08-6 beginning January 1,
2009. We applied this guidance to our equity investment in Spitfire
Energy. See Note 4 – Equity Investment in Spitfire Energy for additional
information.
In
December 2008, the Securities and Exchange Commission published a Final
Rule, “Modernization of Oil
and Gas Reporting”. The new rule permits the use of new technologies to
determine proved reserves if those technologies have been demonstrated to lead
to reliable conclusions about reserves volumes. The new requirements also will
allow companies to disclose their probable and possible reserves to investors.
In addition, the new disclosure requirements require companies to: (a ) report the
independence and qualifications of its reserves preparer or auditor; ( b ) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and ( c
) report oil and gas reserves using an average price based upon the prior
12-month period rather than year-end prices. The use of average prices will
affect future impairment and depletion calculations. The new disclosure
requirements are effective for annual reports on Form 10-K for fiscal years
ending on or after December 31, 2009. A company may not apply the new rules
to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. We have not yet determined the impact of
this Final Rule, which will vary depending on changes in commodity prices on our
disclosures financial position or results of operations
RESULTS
OF OPERATIONS
For the
purposes of discussion and analysis, we are presenting a summary of our
consolidated condensed results of operations followed by more detailed
discussion and analysis of our operating results. The primary
components of our net income (loss) for the three months ended March 31, 2009
and 2008, were as follows (in thousands, except per-share data):
|
|
Quarter
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Oil
and gas operating profit (1)
|
|
$ |
196 |
|
|
$ |
2,881 |
|
|
|
(93% |
) |
Gas
sales revenues
|
|
$ |
634 |
|
|
$ |
1,680 |
|
|
|
(62% |
) |
Gas
production (mcf)
|
|
|
146,605 |
|
|
|
186,683 |
|
|
|
(21% |
) |
Gas
price per mcf
|
|
$ |
4.32 |
|
|
$ |
9.00 |
|
|
|
(52% |
) |
Oil
sales revenues
|
|
$ |
1,386 |
|
|
$ |
3,856 |
|
|
|
(64% |
) |
Oil
production (bbls)
|
|
|
37,058 |
|
|
|
39,427 |
|
|
|
(6% |
) |
Oil
price per bbl
|
|
$ |
37.40 |
|
|
$ |
97.80 |
|
|
|
(62% |
) |
Trading
losses
|
|
$ |
- |
|
|
$ |
(134 |
) |
|
|
100% |
|
Other
revenues, net
|
|
$ |
708 |
|
|
$ |
878 |
|
|
|
(19% |
) |
General
and administrative expenses, net
|
|
$ |
551 |
|
|
$ |
1,189 |
|
|
|
(54% |
) |
Provision
for doubtful accounts
|
|
$ |
274 |
|
|
$ |
- |
|
|
|
100% |
|
Depreciation,
depletion, amortization and accretion
|
|
$ |
1,100 |
|
|
$ |
1,230 |
|
|
|
(11% |
) |
Other
expenses
|
|
$ |
47 |
|
|
$ |
86 |
|
|
|
(45% |
) |
Equity
in losses of Spitfire
|
|
$ |
90 |
|
|
$ |
3 |
|
|
|
2900% |
|
Income
tax expense (benefit)
|
|
$ |
(40 |
) |
|
$ |
3 |
|
|
|
(1433% |
) |
Net
income (loss)
|
|
$ |
(1,118 |
) |
|
$ |
1,114 |
|
|
|
(200% |
) |
Net
income (loss) attributed to common stock
|
|
$ |
(1,211 |
) |
|
$ |
1,053 |
|
|
|
(215% |
) |
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(0.13 |
) |
|
$ |
0.11 |
|
|
|
(224% |
) |
|
(1)
|
Oil
and gas operating profit is calculated as oil and gas revenues less oil
and gas operating expenses
|
The
following is our discussion and analysis of significant components of our
operations which have affected our operating results and balance sheet during
the periods included in the accompanying consolidated condensed financial
statements.
Oil
and Gas Revenues and Oil and Gas Expenses for the Quarterly Periods Ended March
31, 2009 Compared to March 31, 2008
Our oil
and gas revenues are generated from operations in onshore and offshore areas of
the Texas and Louisiana Gulf Coast. Along with lower oil and gas commodity
pricing during the first quarter 2009, our oil and gas revenues decreased from
$5.5 million in the prior year period to $2.0 million for the current
quarter. This decrease was due to the significantly lower oil and gas
prices received during the period.
Our
natural gas revenues decreased from $1.7 million in first quarter 2008 to $634
thousand for the first quarter 2009. The prices realized for natural gas sales
decreased 52%, averaging $4.32 per mcf in first quarter 2009 compared to $9.00
per mcf during first quarter 2008. Natural gas production decreased
21% in first quarter 2009 as compared to the prior year period due primarily to
decreased production from Lapeyrouse and Lake Raccourci fields. Both
fields are under evaluation for diagnostic work to be performed to address
pressure decline and to utilize all available wellbores.
Our oil
revenues decreased to approximately $1.4 million during first quarter 2009 from
approximately $3.9 million during first quarter 2008. We realized a 62% decrease
in oil prices received, decreasing from an average of $97.80 per barrel in the
first quarter 2008 to $37.40 per barrel in the current
quarter. Overall oil production decreased 6% in first quarter 2009 as
compared to the prior year period due primarily to cold weather emulsion issues
at Main Pass 35.
Our oil
and gas operating expense decreased 31%, decreasing from approximately $2.7
million during first quarter 2008 to $1.8 million during first quarter 2009 due
primarily to decreased equipment rentals, chemicals, and compressor work at Main
Pass 35.
Trading
Revenues, net
We had no trading activity during the
three months ended March 31, 2009. During the prior year period, we recognized
approximately $134 thousand in trading losses, net.
Interest
and Other Income, net
Fees,
interest and other income decreased from $878 thousand during first quarter 2008
to $708 thousand during first quarter 2009, primarily due to lower interest
rates earned from treasury securities during the current year period along with
a gain from the sale of assets recognized during 2008.
General
and Administrative Expense
General
and administrative expenses decreased 54% from $1.2 million for the first
quarter 2008 to $551 thousand for the
first quarter 2009 primarily due to overall lower salary and personnel costs
along with decreased rent and consultant expenses.
Provision
for Doubtful Accounts
We
recognized a provision for doubtful accounts of approximately $274 thousand for
the first quarter 2009 as compared to $0 for the first quarter 2008 primarily
due to one of our customers at Main Pass 35 declaring Chapter 11
bankruptcy.
Depreciation,
Depletion, Amortization and Accretion Expense
Depreciation,
depletion, amortization and accretion (DD&A) expense decreased 11% during
first quarter 2009 when compared to prior year period due to lower production
volumes. The quarterly depletion rate per boe on our properties
increased from $15.54 in first quarter 2008 to $17.06 per boe in first quarter
2009 as a result of
these decreased proved reserve volumes as compared to the prior year
period.
Other
Losses
During
the first quarter 2009, other losses was primarily comprised of the $36 thousand
increase in the fair value of the Series M Preferred conversion feature dividend
liability. We also recognized a loss of $12 thousand related to the decrease in
the fair value of our Spitfire warrants during the first quarter
2009. Other losses decreased in the current period as compared
to the prior year period due primarily to the more significant losses on our
Spitfire warrants taken in first quarter 2008.
Income
Tax Expense (Benefit)
We
recognized an income tax benefit of $40 thousand during first quarter 2009 due
primarily to an adjustment made the current period to our 2008 state and federal
income tax liability. During first quarter 2008, we recognized income
tax expense of $3 thousand.
LIQUIDITY
AND CAPITAL STRUCTURE
Financial
Condition
|
|
March
31,
|
|
|
December
31,
|
|
(Thousands
of dollars)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
5.66
to 1
|
|
|
5.77
to 1
|
|
|
|
|
|
|
|
|
Working
capital (1)
|
|
$ |
13,816 |
|
|
$ |
16,102 |
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Total
cash less debt
|
|
$ |
14,714 |
|
|
$ |
15,219 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$ |
52,893 |
|
|
$ |
59,904 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities to equity
|
|
0.16
to 1
|
|
|
0.15
to 1
|
|
(1) Working capital is the difference
between current assets and current liabilities.
The
decreases in our current ratio and our working capital as of March 31, 2009 as
compared to December 31, 2008 are primarily due to the decrease in our oil and
gas accounts receivable along with $1.3 million in treasury purchases of our
common stock. Our accounts receivable balances are reduced as
compared to year-end 2008 due to lower accrued revenue from decreased commodity
pricing along with an additional provision for doubtful accounts, during the
period, for one of our Main Pass 35 customers. We have no debt
outstanding as of March 31, 2009.
During
the first quarter 2009, oil and natural gas prices have declined sharply as
compared to the prior year period. However, we have worked to reduce our
controllable costs in order to maintain positive cash flow from operations even
during this low commodity pricing environment. We have a cash and marketable
securities balance of approximately $14.7 million at March 31, 2009. We
anticipate our operating cash flow and other capital resources, if needed, will
adequately fund our planned capital expenditures and other capital uses over the
near-term. Based on industry outlook for 2009, prices for oil and
natural gas could remain reduced as compared to the prior year with the
perception of future worldwide demand being altered by turmoil in the financial
markets.
We may
continue to deploy cash into long-term investments or seek to raise financing
through the issuance of debt, equity and convertible debt instruments, if
needed, for utilization of acquisition, development or investment opportunities
as they arise. We may reduce our ownership interest in Spitfire’s and Global’s
common shares through strategic sales under certain conditions.
Capital
Structure
At March
31, 2009, if our remaining convertible preferred stock were converted, we would
be required to issue the following amounts of our common stock:
|
|
|
|
|
Shares
of Common
|
|
|
|
Conversion
|
|
|
Stock
Issuable at
|
|
Instrument
|
|
Price
(a)
|
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
Series
M Preferred
|
|
$ |
13.22 |
|
|
|
332,829 |
|
|
|
|
|
|
|
|
|
|
Series
G1 Preferred
|
|
$ |
280.00 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
Series
G2 Preferred
|
|
$ |
67.20 |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
|
|
Common
Stock Potentially Issued Upon Conversion
|
|
|
|
|
|
|
334,888 |
|
|
|
|
|
|
|
|
|
|
(a)
Certain conversion prices are subject to adjustment under certain
circumstances.
|
|
Significant
Ownership of our Stock
As of March 31, 2009, Lyford
beneficially owned approximately 36% of the combined voting power of our common
stock. Lyford is in a position to exercise significant influence over
the election of our board of directors and other
matters.
Cash
Flows
Net cash
flow provided by operating activities during the first quarter 2009 was $6.6
million, as compared to net cash used of $2.7 million in the first quarter 2008.
The increase in cash flow provided by operating activities as compared to the
prior year period was primarily caused by collection of our previously
outstanding hurricane insurance receivable, a $4.9 million change in marketable
securities into cash, and reduced operating and general and administrative
costs. Our cash and marketable securities on hand at March 31, 2009 totaled
approximately $14.7 million.
Net cash
used in financing activities during the first three months of 2009 and 2008
totaled approximately $1.3 million and $636 thousand, respectively, due
primarily to treasury stock repurchases of our common stock. Net cash used in
investing activities during the first quarter 2009 totaled approximately $830
thousand and was primarily comprised of capital expenditures associated with
completion costs for two wells in our outside-operated Creole field. The wells
were successfully drilled during the fourth quarter 2008 and recently came on
production during late first quarter 2009.
Obligations
and Commitments
Oil, Natural Gas and Coalbed Methane
Commitments – During the first quarter 2009, we expended approximately
$830 thousand of capital expenditures and workovers in the United States. The
majority of these capital expenditures were associated with completion costs for
the Creole field in south Texas. During the first quarter 2009, we
limited our capital expenditures while oil and natural gas prices remained
low. Industry-wide drilling costs have yet to reduce in comparison to
the dramatic drop in commodity prices. We expect to fund our capital
expenditures with available cash on hand and through projected cash flow from
operations. Possible continued weakening commodity prices or a decline in
drilling will cause reduced projected expenditures for the remainder of
2009. However, our remaining capital expenditures for 2009 are
discretionary and, as a result, will be curtailed if sufficient funds are not
available. Such expenditure curtailments, however, could result in us losing
certain prospect acreage or reducing our interest in future development
projects.
Operational Contingencies --
Our operations are subject to stringent and complex environmental laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations are
subject to changes that may result in more restrictive or costly operations.
Failure to comply with applicable environmental laws and regulations may result
in the imposition of administrative, civil and criminal penalties or injunctive
relief.
We
recognize the full amount of asset retirement obligations beginning in the
period in which they are incurred if a reasonable estimate of a fair value can
be made. At March 31, 2009, our asset retirement obligation liability totaled
approximately $5.6 million.
From time to time, we provide for
reserves related to contingencies when a loss is probable and the amount is
reasonably estimable.
In
addition to the above commitments, during 2009 and afterward, government
authorities under our Louisiana state leases and other operators may also
request us to participate in the cost of drilling additional exploratory and
development wells. We may fund these future expenditures at our discretion.
Further, the cost of drilling or participating in the drilling of any such
exploratory and development wells cannot be quantified at this time since the
cost will depend on factors out of our control, such as the timing of the
request, the depth of the wells and the location of the property. As of March
31, 2009, we had no material purchase obligations.
Off-Balance Sheet Arrangements
-- As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities ("SPEs"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of March 31, 2009, we were not involved in any
unconsolidated SPE transactions. We have no off-balance sheet
arrangements.
Treasury
Stock – In January
2009, our Board of Directors authorized an amendment to the existing repurchase
plan allowing us to buyback an additional 1.0 million shares of our common
stock. During the three months ended March 31, 2009, we repurchased
500 thousand shares of our common stock for $1.3 million from a shareholder in a
privately negotiated transaction pursuant to our repurchase program. During the
three months ended March 31, 2009, we retired approximately 507 thousand
treasury shares. As of March 31, 2009, approximately 737 thousand shares
remained available for repurchase under our repurchase program.
Adequacy
of Capital Sources and Liquidity
We
believe that we have the ability to provide for our remaining 2009 operational
needs, our planned capital expenditures and possible investments for 2009
through projected operating cash flow, cash and marketable securities on hand,
and our ability to raise capital. Our operating cash flow would be adversely
affected by continued declines in oil and natural gas prices, which can be
volatile. Should projected operating cash flow decline, we may
further reduce our capital expenditures program and possible investments and/or
consider the issuance of debt, equity and convertible debt instruments, if
needed, for utilization for the capital expenditure program or possible
energy-based investment opportunities.
We have no debt outstanding at March
31, 2009. If we seek to raise equity or debt financing to fund
capital expenditures or other acquisition and development opportunities, those
transactions may be affected by the market value of our common stock. If the
price of our common stock declines, our ability to utilize our stock either
directly or indirectly through convertible instruments for raising capital could
be negatively affected. Further, raising additional funds by issuing common
stock or other types of equity securities could dilute our existing
stockholders, which dilution could be substantial if the price of our common
stock decreases. Any securities we issue may have rights, preferences and
privileges that are senior to our existing equity securities. Borrowing money
may also involve pledging some or all of our assets.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our oil
and gas operations are exposed to market risks primarily as a result of changes
in commodity prices. We currently hold no commodity pricing hedges in
order to limit the exposure to the volatility
Foreign Currency Exchange Rate
Risk – Our investment in Global is subject to foreign currency exchange
rate risk as our ownership of Global’s ordinary shares are denominated in
British sterling pounds. Also, our investment in Spitfire is subject to foreign
currency exchange rate risk as our ownership of Spitfire’s ordinary shares are
denominated in Canadian dollars. Any substantial fluctuation in these
exchange rates as compared to the United States dollar could have a material
effect on our balance sheet.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings with the Securities and
Exchange Commission (SEC) are recorded, processed, summarized and reported
within the time period specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including our chief
executive and chief financial officers, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of “disclosure
controls and procedures” as defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As of the
end of the period covered by this report, and under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of
these disclosure controls and procedures. Based on this evaluation
and subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective.
Changes
in Internal Control over Financial Reporting
There
have been no significant changes in the Company’s internal control over
financial reporting identified in connection with the evaluation discussed above
that occurred during the period ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II –
OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The
following table provides information about purchases by us during the three
months ended March 31, 2009, of our Common Stock.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as part of Publicly Announced
Program
|
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2009 through January 31, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,237,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1, 2009 through February 28, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,237,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1, 2009 through March 31, 2009
|
|
|
500,000 |
|
|
$ |
2.60 |
|
|
|
500,000 |
|
|
|
737,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
500,000 |
|
|
$ |
2.60 |
|
|
|
500,000 |
|
|
|
737,280 |
|
ITEM
6. EXHIBITS
EXHIBIT
INDEX
Exhibit
3.1
|
Restated
Certificate of Incorporation of Harken Energy Corporation (filed as
Exhibit 3.1 to Harken’s Form 10-K dated February 28, 2006, File
No. 1-10262, and incorporated herein by reference).
|
|
|
3.2
|
Certificate
of Amendment to Restated Certificate of Incorporation of Harken Energy
Corporation dated June 4, 2007 (filed as Exhibit 3.2 to HKN’s Form 10-Q
dated August 7, 2007, File No. 1-10262, and incorporated by
reference herein).
|
|
|
3.3
|
Certificate
of Amendment to Restated Certificate of Incorporation of HKN, Inc. dated
June 24, 2008 and effective June 26, 2008. (filed as Exhibit 3.2 to HKN’s
Form 10-Q dated August 7, 2008, File No. 001-10262, and incorporated by
reference herein).
|
|
|
3.4
|
Amended
and Restated Bylaws of Harken Energy Corporation (filed as Exhibit 3.7 to
Harken’s Annual Report on Form 10-K for fiscal year ended December 31,
2002, File No. 1-10262, and incorporated by reference
herein).
|
|
|
4.1
|
Form
of certificate representing shares of HKN, Inc. common stock, par value
$.01 per share (filed as Exhibit 4.1 to HKN’s Form 10-Q dated August 7,
2007, File No. 1-10262, and incorporated by reference
herein).
|
|
|
4.2
|
Rights
Agreement, dated as of April 6, 1998, by and between Harken Energy
Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent
(filed as Exhibit 4 to Harken’s Current Report on Form 8-K dated April 7,
1998, file No. 1-10262, and incorporated by reference
herein).
|
|
|
4.3
|
Amendment
to Rights Agreement by and between Harken Energy Corporation and American
Stock Transfer and Trust Company (successor to Mellon Investor Services
LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as
Rights Agent, dated June 18, 2002 (filed as Exhibit 4.11 to Harken’s
Quarterly Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference
herein).
|
|
|
4.4
|
Amendment
to Rights Agreement by and between Harken Energy Corporation and American
Stock Transfer and Trust Company (successor to Mellon Investor Services
LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as
Rights Agent, dated August 27, 2002 (filed as Exhibit 4.12 to Harken’s
Quarterly Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference
herein).
|
|
|
4.5
|
Certificate
of Designations of Series E Junior Participating Preferred Stock (filed as
Exhibit A to Exhibit 4 to Harken’s Current Report on Form 8-K dated April
7, 1998, file No. 1-10262, and incorporated by reference
herein).
|
|
|
4.6
|
Certificate
of Increase of Series E Junior Participating Preferred Stock of Harken
Energy Corporation (filed as Exhibit 4.6 to Harken’s Annual Report on Form
10-K for the fiscal year ended December 31, 2002, File No. 1-10262, and
incorporated by reference herein).
|
|
|
4.7
|
Certificate
of Designations of Series G1 Convertible Preferred Stock (filed as Exhibit
3.7 to Harken’s Current Report on Form 8-K dated February 13, 2003, File
No. 1-10262, and incorporated by reference herein).
|
|
|
4.8
|
Certificate
of Increase of Series G1 Convertible Preferred Stock
of Harken Energy Corporation (filed as Exhibit 3.8
to Harken’s Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
|
|
|
4.9
|
Certificate
of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit
4.10 to Harken’s Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 2001, File No. 1-10262, and incorporated by
reference herein).
|
|
|
4.15
|
Certificate
of Designations of Series M Cumulative Convertible Preferred Stock (filed
as Exhibit 4.1 to Harken’s Current Report on Form 8-K dated October 8,
2004, File No. 1-10262, and incorporated by reference
herein).
|
|
|
4.17
|
Amendment
to Rights Agreement by and between HKN, Inc. and American Stock Transfer
and Trust Company, as Rights Agent, dated April 4, 2008 (filed as Exhibit
4.1 to HKN’s current report on Form 8-K dated April 4, 2008, file No.
1-10262, and incorporated by reference
herein).
|
|
|
10.1
|
Form
of Executive Retention Agreement (filed as Exhibit 10.1 to HKN’s Current
Report on Form 8-K dated July 2, 2008, File No. 001-10262, and
incorporated by reference herein).
|
|
|
*31.1
|
Certificate
of the Chief Executive Officer of HKN, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (“S.O. Act”)
|
|
|
*31.2
|
Certificate
of the Chief Financial Officer of HKN, Inc. pursuant to section 302 of the
S.O. Act
|
|
|
*32.1
|
Certificate
of the Chief Executive Officer of HKN, Inc. pursuant to section 906 of the
S.O. Act
|
|
|
*32.2
|
Certificate
of the Chief Financial Officer of HKN, Inc. pursuant to section 906 of the
S.O. Act
|
|
|
* Filed
herewith
HKN,
INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
HKN, Inc.
(Registrant)
|
|
|
|
|
|
Date:
May 7, 2009
|
By:
|
/s/ Anna
M. Williams |
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
38