HEC Harken Energy Corp

Harken Energy Reports 24% Increase in Revenue and Substantial Increase in Operating Margin DALLAS, Aug. 12 /PRNewswire-FirstCall/ -- Harken Energy Corporation (AMEX:HEC) reports quarterly financial results for the period ended June 30, 2004. As summarized below, total revenues in the second quarter of 2004 increased to $8.1 million, an increase of 24% over the second quarter of 2003, due to increased international production and higher oil and gas prices. Non-GAAP Operating Margin increased to $3.9 million in the second quarter of 2004, representing 140% growth over the same period in the prior year, and 21% improvement as compared to the first quarter 2004. Three Months Ended Six Months Ended June 30, June 30, 2003 2004 2003 2004 (unaudited) (unaudited) (unaudited) (unaudited) Total Revenues and Other $6,604,000 $8,158,000 $13,658,000 $14,835,000 Oil and Gas Operating Expenses 2,537,000 2,178,000 4,564,000 4,055,000 General and administrative expenses 2,440,000 2,080,000 4,916,000 3,647,000 Operating Margin (Non-GAAP; see reconciliation below) 1,627,000 3,900,000 4,178,000 7,133,000 Depreciation and Amortization 2,157,000 2,948,000 4,197,000 5,583,000 Interest Expense and Other, net 1,011,000 138,000 3,323,000 350,000 Loss from Increase in Global Warrant Liability -- 12,481,000 -- 12,481,000 Gain on Extinguishment of Debt (751,000) -- (5,282,000) (325,000) Gain on Sale of Equity Securities -- -- -- (990,000) Income tax Expense (Benefit) (451,000) 231,000 (351,000) 323,000 Minority Interest in Earning of Subsidiary 61,000 127,000 30,000 225,000 Income (Loss) Before Cumulative Effect of Change in Accounting Principle (400,000) (12,025,000) 2,261,000 (10,514,000) Cumulative Effect of Change in Accounting Principle -- -- (813,000) -- Net Income (Loss) $(400,000) $(12,025,000) $1,448,000 $(10,514,000) Accrual of dividends related to preferred stock (1,010,000) (877,000) (1,996,000) (1,643,000) Exchange of preferred stock -- 337,000 -- 337,000 Payment of preferred dividends -- 1,074,000 7,044,000 3,738,000 Net Income Attributed to Common Stock $(1,410,000) $(11,491,000) $6,496,000 $(8,082,000) Basic Net Income (Loss) per Common Share $(0.01) $(0.06) $0.09 $(0.04) Basic Weighted Average Shares Outstanding 108,460,068 201,391,524 72,810,323 194,714,427 Diluted Net Income (Loss) per Common Share $(0.01) $(0.06) $0.02 $(0.04) Diluted Weighted Average Shares Outstanding 108,460,068 201,391,524 72,905,996 194,714,427 In the first six months of 2004, Harken generated $7.1 million in Operating Margin (non-GAAP; see reconciliation), a 71% increase over the comparable period in 2003, due largely to increased oil and gas prices, increased operating efficiencies, and a 26% decrease in general and administrative expenses as compared to the prior year period. Production Summary Harken continued to experience overall success in the 2004 domestic and international drilling program. Harken began 2004 with net domestic oil and gas production volumes of approximately 6,900,000 cubic feet equivalent per day, and Harken ended June 2004 producing approximately 8,800,000 net cubic feet equivalent per day. During the first six months of 2004, Harken has continued to build back its domestic oil and gas production volumes following the December 2003 sale of certain Texas Panhandle properties. During the first six months of 2004, sales of net domestic oil and gas volumes averaged over 8,500,000 cubic feet equivalent per day. At June 30, 2004, Harken had expended approximately $6.2 million of its $18 million 2004 capital expenditure budget. During the first six months of 2004, Harken's Middle America subsidiary, Global Energy Development, produced approximately 235,000 gross barrels of oil. Harken's Middle America oil volumes and revenues increased 16% and 46%, respectively, in the first six months of 2004 compared to the prior year period due to increased oil prices and crude oil production. Balance Sheet Summary As the ratios below show, Harken continued to improve its Working Capital by over 160% since year-end 2003 to approximately $21 million at June 30, 2004. Harken reduced its debt by 43% during the six months ended June 30, 2004, ended the period with over $18 million in cash less debt. Harken's balance sheet ratios, as compared to June 30, 2003 and December 31, 2003, have continued to strengthen each quarter as detailed below: June 30, December 31, March 31, June 30, 2003 2003 2004 2004 (unaudited) (audited) (unaudited) (unaudited) Current ratio (1) 0.79 to 1 1.88 to 1 2.86 to 1 3.72 to 1 Total debt to equity 1.23 to 1 0.14 to 1 0.08 to 1 0.08 to 1 Working capital/ (deficit) (2) $(3,062,000) $7,887,000 $10,449,000 $20,890,000 Cash $5,831,000 $12,173,000 $9,886,000 $22,439,000 Total debt $31,011,000 $7,360,000 $5,000,000 $4,167,000 Total cash less debt $(25,180,000) $4,813,000 $4,886,000 $18,272,000 Stockholders' equity $34,304,000 $52,761,000 $59,622,000 $51,461,000 (1) Current ratio is calculated as current assets divided by current liabilities (2) Working capital / (deficit) in the difference between current assets and current liabilities Accounting Treatment of Global Warrants During the second quarter of 2004, there was a dramatic increase in Global's common share price from approximately 50 UK pence at March 31, 2004 to 145 UK pence at June 30, 2004, following Global's announcement of year-end results and the successful drilling results of the Estero #4 well. Global's shares are traded on the Alternative Investment Market of the London Stock Exchange. Correspondingly, as measured by Global's listed shares, the fair value of the Global Warrants held by Outside Parties, issued in 2002, increased $12.4 million to approximately $13.1 million at June 30, 2004. The warrants are accounted for as a derivative liability in accordance with SFAS No. 133. The fair value of the warrants is calculated by an outside third party firm and is based on the underlying market price of the Global common stock. Although Harken owns 85% of Global and has seen its market value as reflected in the market capitalization increase from $25 million to $80 million, Harken recorded a loss related to the change in fair value of the Global Warrants of $12.4 million during the three month period ended June 30, 2004. Although not allowed as an offset by GAAP, Harken holds warrants, issued in 2002, to purchase 6,487,481 of Global shares at 60 UK pence per share. The estimated fair market value of these warrants at June 30, 2004 was approximately $10.3 million, as calculated by a third-party firm. Because Global is a consolidated subsidiary, these warrants held by Harken are not reflected in the consolidated financial statements. Alan G. Quasha, Harken's Chairman, stated, "To clarify the accounting treatment of the Global Warrants held by Outside Parties, which paradoxically causes Harken to report large losses when the market value of its subsidiary, Global, substantially increases, requires an explanation of today's accounting rules. Specifically, as Global's performance has improved substantially, the market perception of its value and future has appropriately also improved dramatically. Thus, in the second quarter of 2004, Global's stock price tripled on the London AIM market. Hence, the fair value of the Global Warrants held by Outside Parties has increased, and the non-cash market loss based on the value of the Global stock underlying these warrants needs to be recognized. In judging Harken's results and values, however, investors ought to be aware of all the facts surrounding this recognized loss. What's missing in this case is the other side of the equation. Specifically, Harken owns warrants to purchase Global shares at a slightly higher exercise price. Both the calculated value of these warrants, approximately $10.3 million at June 30, 2004, as well as the market value of Harken's ownership in Global have also correspondingly increased in value. Global's market capitalization significantly increased during the second quarter of 2004. Under current accounting guidelines, Harken cannot recognize the fair value of the warrants it holds in its majority-owned consolidated subsidiary on its balance sheet. It is our hope and belief that Global's performance will continue to increase significantly and will be recognized in the public markets, and, I believe, will be good for Harken shareholders. But until the warrants are exercised, in the positive case for Harken that the market value of Global rises substantially more, accounting rules will require that Harken report additional substantial losses." Mr. Quasha continued, "Accounting treatment of warrants aside, we believe that the second quarter of 2004 was an excellent quarter. First, in our view, the quarter continues to demonstrate the cash flow potential of our core assets, our success both domestically and internationally in our drilling programs, and the impact of a positive pricing environment. Harken's Board of Directors considers the increase in Operating Margin which has grown substantially compared to the prior year period, to be our main focus and measure of performance. Secondly, we believe that the potential of the Palo Blanco field in Colombia is beginning to be more widely recognized, and we hope that the tripling of Global's stock price is the beginning of investors' realizing the potential which exists there. We view the developments in Global as very good news for Harken shareholders." More information is available in Harken Energy Corporation's Form 10-Q for the period ended June 30, 2004 which may be accessed through the Company's website at http://www.harkenenergy.com/. NON-GAAP FINANCIAL MEASURE Reconciliation of Operating Margin to Net Income Three Months Ended Six Months Ended June 30, June 30, 2003 2004 2003 2004 (unaudited) (unaudited) (unaudited) (unaudited) Net Income (Loss) (GAAP) $(400,000) $(12,025,000) $1,448,000 $(10,514,000) Cumulative Effect of Change in Accounting Principle -- -- 813,000 -- Minority Interest in Earning of Subsidiary 61,000 127,000 30,000 225,000 Income tax Expense (Benefit) (451,000) 231,000 (351,000) 323,000 Gain on Sale of Equity Securities -- -- -- (990,000) Gain on Extinguishment of Debt (751,000) -- (5,282,000) (325,000) Loss from Increase in Global Warrant Liability -- 12,431,000 -- 12,431,000 Interest Expense and Other, net 1,011,000 188,000 3,323,000 400,000 Depreciation and Amortization 2,157,000 2,948,000 4,197,000 5,583,000 Operating Margin $1,627,000 $3,900,000 $4,178,000 $7,133,000 Management believes the presentation of this non-GAAP financial measure, in connection with the results for the three and six months ended June 30, 2004, provides useful information to investors regarding the Company's results of operations. Management also believes that this non-GAAP financial measure allows investors to better evaluate on-going business performance and the factors that influenced performance during the period under the report. This non-GAAP financial measure should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Certain statements in this news release including phrases such as "in our view", "we believe", "we consider", "we expect," "we anticipate" and "we hope" relating to Harken's revenue, profit, dividends, cash flow, securities held by Harken and earnings expectations; statements regarding future expectations and plans for oil and gas exploration, development and production; and statements regarding commodity pricing expectations may be regarded as "forward looking statements" within the meaning of the Securities Litigation Reform Act. These forward-looking statements reflect the current view of management with regard to its plans and expectations and other future events. Management's current view and plans, however, are subject to numerous known and unknown risks, uncertainties and other factors that may cause the actual results, performance, timing or achievements of Harken to be materially different from any results, performance, timing or achievements expressed or implied by such forward-looking statements. The various uncertainties, variables, and other risks include those discussed in detail in the Company's SEC filings, including the Annual Report on Form 10-K dated March 25, 2004. Although Harken believes that the expectations reflected in the forward-looking statements of this announcement are reasonable, it can give no assurance that such expectations will prove to be correct or that unforeseen developments will not occur. Harken undertakes no duty to update or revise any forward-looking statements. Actual results may vary materially. Contact: Bevo Beaven, Vice President Bill Conboy, Senior Account Executive CTA Public Relations 303-665-4200 DATASOURCE: Harken Energy Corporation CONTACT: Bevo Beaven, Vice President, or Bill Conboy, Senior Account Executive, both of CTA Public Relations, +1-303-665-4200, for Harken Energy Corporation Web site: http://www.harkenenergy.com/

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