This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company")
for the three months ended March 31, 2019, contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. To the
extent that there are statements that are not recitations of historical fact,
such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we
express an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will be achieved or accomplished.
The actual results or events may differ materially from those anticipated and as
reflected in forward-looking statements included herein. Factors that may cause
actual results or events to differ from those anticipated in the forward-looking
statements included herein include the Risk Factors described in Item 1A herein
and in our Form 10-K for the year ended December 31, 2018.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-Q to be accurate as of the date
hereof. Changes may occur after that date, and we will not update that
information except as required by law in the normal course of our public
Additionally, the following discussion regarding our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as
well as the Risk Factors in Item 1A and the financial statements in Item 7 of
Part II of our Form 10-K for the fiscal year ended December 31, 2018.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. We believe certain critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements. A description of our critical accounting policies is set forth in
our Form 10-K for the year ended December 31, 2018. As of, and for the three
months ended, March 31, 2019, there have been no material changes or updates to
our critical accounting policies.
Unevaluated Oil and Gas Properties
Unevaluated oil and gas properties not subject to amortization, include the
following at March 31, 2019:
March 31, 2019
Acquisition costs $ 141,318
Development and evaluation costs 2,317,574
Total $ 2,458,892
The carrying value of unevaluated oil and gas prospects above was primarily
attributable to properties in the South American country of Colombia. We are
maintaining our interest in these properties.
During the quarter ended March 31, 2019, we commenced drilling operations on the
Frost #1H well in Yoakum County, Texas, reached total depth of approximately
10,000 feet, including an approximately 4,800-foot horizontal leg, set casing on
the well and commenced construction of production facilities. Fracturing of the
well is anticipated to commence in the second quarter of 2019. Other than
operations on the Frost #1H well, no drilling operations were ongoing at March
During the quarter ended March 31, 2019, our capital investment expenditures
totaled $49,651, principally relating to Reeves County, Texas.
Our operator in Colombia is continuing discussions with federal and local
officials in order to either secure necessary permits and drill on our Serrania
concession or to secure compensation for the value of, and our investment in,
the concession. Pending resolution of such discussions, no drilling activities
are presently contemplated on our Colombian concessions.
2019 At-the-Market Offering
In May 2019, we entered into an At-the-Market Issuance Sales Agreement (the
"Sales Agreement") with WestPark Capital pursuant to which we may sell, at our
option, up to an aggregate of $5.2 million in shares of common stock through
WestPark Capital, as sales agent. Sales of shares under the Sales Agreement (the
"2019 ATM Offering") will be made, in accordance with one or more placement
notices delivered to WestPark Capital, which notices shall set parameters under
which shares may be sold. The 2019 ATM Offering was made pursuant to a shelf
registration statement by methods deemed to be "at the market," as defined in
Rule 415 promulgated under the Securities Act of 1933. We will pay WestPark a
commission in cash equal to 3% of the gross proceeds from the sale of shares in
the 2019 ATM Offering. Additionally, we reimbursed WestPark Capital for $18,000
of expenses incurred in connection with the 2019 ATM Offering.
In May 2019, through the date hereof, we sold an aggregate of 100,000 shares in
the 2019 ATM Offering and received proceeds, net of commissions, of $24,356.
Results of Operations
Oil and Gas Revenues. Total oil and gas revenues decreased 67% to $250,720 in
the three months ended March 31, 2019, compared to $754,157 in the three months
ended March 31, 2018. The decrease in revenue was due to decreased production
volumes attributable to our Reeves County wells and an adverse change in
commodity pricing, including a 28% decrease in crude oil prices realized and a
27% decrease in natural gas prices realized.
The following table sets forth the gross and net producing wells, net oil and
gas production volumes and average hydrocarbon sales prices for the quarters
ended March 31, 2019 and 2018:
Three Months Ended
Gross producing wells 10 10
Net producing wells 0.98 0.98
Net oil production (Bbl) 3,969 7,978
Net gas production (Mcf) 24,810 63,409
Average sales price - oil (per barrel) $ 43.79$ 60.85
Average sales price - natural gas (per Mcf) $ 3.08$ 4.24
The decrease in production reflects natural decline in production volumes from
our Reeves County wells.
The change in average sales prices realized reflects bottlenecks in
transportation/delivery capabilities in the Permian Basin which adversely
affected commodity pricing.
Oil and gas sales revenues by region were as follows:
Colombia U.S. Total
2019 First Quarter
Oil sales $ - $ 173,777$ 173,777
Gas sales $ - $ 27,788$ 27,788
NGL Sales $ - $ 49,155$ 49,155
2018 First Quarter
Oil sales $ - $ 485,432$ 485,432
Gas sales $ - $ 268,625$ 268,625
Lease Operating Expenses. Lease operating expenses decreased 43% to $149,227
during the three months ended March 31, 2019 from $263,285 during the three
months ended March 31, 2018. The change in total lease operating expenses was
attributable to reduced severance taxes due to lower sales. Lease operating
expenses, by region were as follows:
Colombia U.S. Total
2019 First Quarter $ - $ 149,227$ 149,227
2018 First Quarter $ - $ 263,585$ 263,585
The decrease in lease operating expenses was principally attributable to reduced
severance taxes due to lower sales. We anticipate lease operating expenses to
ramp up to levels consistent with regional costs as new wells are brought on
Depreciation and Depletion Expense. Depreciation and depletion expense was
$92,529 and $96,710 for the three months ended March 31, 2019 and 2018,
respectively. The change in depreciation and depletion was due to natural
decline in production volumes from the Reeves County wells.
General and Administrative Expenses (excluding stock-based compensation).
General and administrative expense decreased by 44% to $235,732 during the three
months ended March 31, 2019 from $421,724 during the three months ended March
31, 2018. The decrease in general and administrative expense was primarily
attributable to a reduction in compensation expense following the termination of
our chief executive officer in mid-2018.
Stock-Based Compensation. Stock-based compensation decreased by 44% to $14,219
during the three months ended March 31, 2019 from $25,349 during the three
months ended March 31, 2018. The decrease was attributable to expiration of the
Liquidity and Capital Resources. At March 31, 2019, we had a cash balance of
$446,380 and working capital of $566,321, compared to a cash balance of $755,702
and working capital of $895,366 at December 31, 2018.
Cash Flows. Operating activities used cash of $202,071 during the three months
ended March 31, 2019, compared to $110,376 used during the three months ended
March 31, 2018. The change in operating cash flow was primarily attributable to
the decline in oil and gas revenues during the 2019 period (down 67%), partially
offset by a reduction in operating expenses (down 45%).
Investing activities used $47,465 during the three months ended March 31, 2019,
compared to $7,277 used during the three months ended March 31, 2018. The change
in funds used by investing activities is attributable to infrastructure and
security upgrades made in Reeves County during the 2019 period compared to the
2018 period when capital investments were limited to routine items.
Financing activities used $57,600 during the three months ended March 31, 2019,
compared to $62,850 used during the three months ended March 31, 2018. Cash used
in financing activities for both periods was attributable to dividends on our
Long-Term Liabilities. At March 31, 2019, we had long-term liabilities of
$333,592, compared to $82,719 at December 31, 2018. Long-term liabilities at
March 31, 2019 and December 31, 2018, consisted of a reserve for plugging costs
and the long-term lease liability.
Capital and Exploration Expenditures and Commitments. Our principal capital and
exploration expenditures relate to ongoing efforts to acquire, drill and
complete prospects, in particular our Reeves County and Yoakum County acreage.
Our principal capital and exploration expenditures during 2019 are expected to
relate to drilling additional wells on our Reeves County acreage, drilling an
initial well on our Yoakum County acreage and possibly opportunistic
acquisitions of additional acreage in the Permian Basin. The actual timing and
number of wells drilled during 2019 will be principally controlled by the
operators of our Reeves County and Yoakum County acreage, based on a number of
factors, including but not limited to availability of financing, performance of
existing wells on the subject acreage, energy prices and industry condition and
outlook, costs of drilling and completion services and equipment and other
factors beyond our control or that of our operators.
During the three months ended March 31, 2019, we invested $49,651 for the
acquisition and development of oil and gas properties, consisting of one-time
security expenses in Reeves county. Of the amount invested, we capitalized
$2,393 to oil and gas properties not subject to amortization and reduced net
costs capitalized to oil and gas properties subject to amortization by $47,258.
Capital investments during the three months ended March 31, 2019 were curtailed
pending proposals of new drilling operations from the operators of our Reeves
County and Yoakum County acreage.
As our allocable share of well costs will vary depending on the timing and
number of wells drilled as well as our working interest in each such well and
the level of participation of other interest owners, we have not established a
drilling budget but will budget on a well-by-well basis as our operators propose
wells. With the completion of sales lines and other infrastructure serving our
Reeves County acreage and experience gained from drilling our initial wells, we
anticipate that costs to drill and bring future wells onto production will
decrease, and delays in bringing production on line will be minimized or
eliminated, as compared to our experience in bringing our initial wells onto
We have incurred continuing losses since 2011, including a loss of $239,620 for
the three months ended March 31, 2019 and $251,000 for the year ended December
31, 2018. However, during 2018, we raised, net of offering costs, approximately
$747,000 in our ATM offering, and substantially reduced our general and
administrative costs, increased revenues, and, during the year ended December
31, 2018, generated approximately $361,000 from our operating activities,
thereby mitigating going concern considerations. Further, as of March 31, 2019,
we have a cash balance of approximately $446,000 and working capital of
Our principal capital and exploration expenditures during 2019 are expected to
relate to drilling an additional well on our Yoakum County lease and, possibly,
on our Reeves County acreage. The operator in Yoakum County has committed to
drill a second well during 2019 at an approximate cost to us of $325,000. We
believe that we have the ability to fund our cost for such a well from cash on
hand. The new operator of our Reeves County wells has not yet communicated
definitive plans to drill an additional well on that acreage in 2019. If they
proceed with drilling plan for an additional well, we may require additional
capital to participate in the drilling of that well. We believe that we has
sufficient cash on hand to fund our expected drilling operations and our
operations for the twelve months following the issuance of these financial
Given the ongoing delays in our operator's proposing new wells in Reeves County,
we continue to actively seek opportunities to acquire additional acreage or
other strategic transactions with a view to adding scale to our operations.
In order to fund our estimated drilling and completion costs of additional wells
in Reeves County, our costs of any new acquisition or other strategic
transactions, and possibly our costs of drilling and completion of additional
Yoakum County wells, we expect that we will be required to raise additional
capital. In the event that we do require additional capital to fund our share of
costs for drilling wells during 2019, we expect that we would seek additional
capital from one or more sources of additional sales of shares in our 2019 ATM
Offering and private sales of equity and debt securities.
While we may, among other efforts, seek additional funding from "at-the-market"
sales of common stock, and private sales of equity and debt securities, we
presently have no commitments to provide additional funding, and there can be no
assurance that we can secure the necessary capital to fund our share of
drilling, acquisition or other costs on acceptable terms or at all. If, for any
reason, we are unable to fund our share of drilling and completion costs and
fail to satisfy commitments relative to our interest in our acreage, we may be
subject to penalties or to the possible loss of some of our rights and interests
in prospects with respect to which we fail to satisfy funding commitments and we
may be required to curtail operations and forego opportunities.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party
obligations at March 31, 2019.
We believe that inflation has not had a significant impact on operations since
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