The saga of the company formerly known as Benton Oil and Gas reflects a fate not uncommon among small-cap U.S. companies whose sole strategy is to explore and exploit abroad. In the 1990s, Benton was a Wall Street darling. Former chief executive officer Alex Benton, who is of Russian descent, became the first U.S. independent to enter Venezuela and Russia-a daring scheme at the time for a small-cap. But then the company hit the wall. High overhead, high debt and questions surrounding certain financial arrangements made by the founder, caused the stock to plummet, culminating in the New York Stock Exchange threatening to delist Benton last fall. That is all behind it now. Debt has been reduced significantly. Costs were attacked. A new management team is in place. And, the Houston-based company has a new name, Harvest Natural Resources Inc. (NYSE: HNR), to symbolize the many changes that have taken place and a recommitment to building value. Shareholders approved the new name in May. Analysts who followed Benton for years are sticking by Harvest. "A new name is appropriate for a company that has undergone a positive transformation this year," says Aliza Fan, senior equity analyst and vice president, John S. Herold Inc., Houston. "I'm hugely hopeful," says Peter J. Hill, the company's new president and chief executive officer. Hill took over the top job at Harvest in July 2000 to effect a corporate turnaround after working most of his career internationally for BP. Founder Benton left the firm in early 2000. Since taking the helm, Hill has moved headquarters to Houston from Carpenteria, California, and replaced many faces at the board and management level. He recruited Stephen D. Chesebro', the former chairman and chief executive of Tenneco Energy and later, chairman of PennzEnergy Co., as the new chairman of Harvest. "The company had a fruitful, busy year and the imprint of the new management team has put it on a new track," Chesebro' said at the recent annual meeting. Added Hill: "The strategic platform is set. The financial platform is set. We are a risk manager and a value harvester willing to take value off the table when appropriate." The transformation has been rocky at times. A bond exchange offer fell through last summer when management, as it now concedes, underestimated the bondholders' displeasure and the market's skepticism. But the company's financial health has improved dramatically since then, due to a significant deal completed this spring. Harvest sold its 68% interest in Arctic Gas Co. to Yukos Oil Co., one of the largest Russian oil companies, for $190 million in cash. It also received $30 million as repayment of an intercompany loan owed by Arctic Gas. Harvest still owns 34% of Geoilbent, its joint venture with a Russian independent partner. The sale proceeds were used to retire debt. The quarter ending March 2002 was Harvest's last to report the full heavy interest burden associated with $108 million of 11.625% senior notes due May 2003, which have now been redeemed, Hill says. "We also purchased $20 million of our 9.375% senior notes at approximately 94% par. Our annual interest rate expense will be reduced by $14.5 million, or 42 cents per share." Altogether, these moves have reduced Harvest's debt-to-capitalization ratio to about 40% from an unsustainable 90% previously, leaving the company with about $50 million in cash to pursue growth. During the last few quarters, discretionary cash flow has been inching upward as Hill's new team effected the turnaround shareholders sought. In response, the stock has moved up steadily since the Yukos deal was announced, going from about $1.60 in January to $4.82 today. The sense of relief and approval was palpable on the conference call with investors in late February. The market cap is now about $160 million. "It's a landmark transaction, a complex one that took months of work to put together," Hill said at the time. "When a Western company and a Russian one complete a major transaction, it demonstrates that value can be delivered to Western investors in the Russian upstream sector, and that capable, independent Russian energy companies are willing to invest in the acceleration of large, low-cost resources in their own country." Yukos has some 12 billion barrels of oil reserves booked, but it is now seeking more natural gas for its portfolio. "This demonstrates the underlying value in our portfolio, which to date has been largely unrecognized by the financial markets due to our heavy debt load," Hill added. In May, Harvest announced first-quarter 2002 results. Cash flow was $9 million or 26 cents per share versus $7.6 million or 22 cents per share for the quarter ended March 2001. "Both the quarterly results and the balance sheet are starting to benefit from our redefined strategy and improved financial flexibility," Hill said. "Cash flow increased in spite of lower prices, as a result of a 38% decrease in our combined operating and overhead expenses to $4.21 per barrel." What lies ahead? Now that the company's financial house is in better order-granting the firm more flexibility-enhancing the producing assets is key. At December 2001, the company had proved reserves of about 168 million barrels of oil equivalent, 50% in Venezuela. "The additional cash flow will help the company unlock the value in its projects...that was somewhat neglected under the previous debt-laden company," says Fan. "But we note that Harvest's areas of operation are focused on two countries that are generally subject to above-average business and political risks." Undaunted, Hill believes there is still tremendous untapped potential on Harvest's acreage in both Venezuela and Siberia. As for risk, he says, "In Venezuela, we have been paid in U.S. dollars every quarter for the last 10 years, and with no changes in terms-I can't think of any other country where that is true, and I include the U.S. and U.K. in that statement." "Where do we take this company, and what do we now have?" asked Hill at the annual meeting. "We will access hydrocarbons in Venezuela and Russia that we know are already there and need development. We know these areas, we know the people, we've been in both countries for a decade. We take on local partners to give us 'air cover.' "But when the time is right, we will take money off the table, rather than fall in love with the assets. This is what we mean by harvesting value." There are no plans to own assets or operations in the U.S., Hill reiterated at the annual meeting. The company became involved in Venezuela in 1992 when that nation first offered production operating contracts for marginal fields that needed attention. It operates three fields there on 158,000 acres in Monagas state. According to Ryder Scott, the engineering firm, it has 105 million barrels of proved oil reserves there. Harvest has reactivated 15 wells and drilled 147 new ones while increasing production at its Uracoa Field complex. Last year the company reported average production of 26,789 barrels a day, up slightly from the 26,674 a day it reported in 2000. Drilling was suspended for eight months in 2001 while the company completed a field simulation study. Harvest also completed a 31-mile oil pipeline with capacity of 20,000 barrels per day, from Tucupita to the central processing plant in Uracoa. Production in 2002 should increase 15% to 20%, thanks to the pipeline and the fact that by year-end, Harvest will drill seven or eight wells in Tucupita. Negotiations are also under way with Pdvsa about a gas sales contract that could add to the fields' value. "In Uracoa, we've satisfied ourselves that we can take gas off the top of the oil field. We'd have to put in a pipeline, but we might expect 50 million cubic feet per day," says Hill. Natural gas figures in the company's dreams for Siberia as well. There, Harvest is participating in feasibility studies on the economics of building a new gas plant and pipeline, along with implementing a gas sales contract, to start bringing its significant gas and condensate reserves to production there, where it already produces crude oil. Recently Geoilbent increased its quarterly oil production almost 50% to 20,801 barrels per day versus 13,914 barrels a day in the same period last year. Harvest's share of these earnings, $400,000, is reported as equity in net earnings of affiliated companies on the consolidated income statement. Hill said he remains confident that the company will reach average production of 31,000 to 33,000 barrels a day this year, as previous guidance to analysts has indicated.