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MarketScreener Homepage  >  Equities  >  Nyse MKT  >  Houston American Energy Corporation    HUSA

HOUSTON AMERICAN ENERGY CORPORATION

(HUSA)
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HOUSTON AMERICAN ENERGY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 04:09pm EDT

Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company") for the six months ended June 30, 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 disclosure practices.

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 six months ended, June 30, 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 June 30, 2019:



                                                    June 30, 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.



Recent Developments


Drilling Activity and Well Operations

During the six months ended June 30, 2019, we drilled the Frost #1H well in Yoakum County, Texas, reaching total depth of approximately 10,000 feet, including an approximately 4,800-foot horizontal leg. The well was fractured, production facilities constructed and the well came on production on June 5, 2019 at which time oil production commenced while the well commenced unloading of frac fluid.

No drilling operations were ongoing at June 30, 2019.

During the six months ended June 30, 2019, our capital investment expenditures totaled $36,456, principally relating to infrastructure/security upgrades in Reeves County, Texas.

In Louisiana, the Crown Paper well, in which we hold a royalty interest, was subject to local flooding which resulted in no royalty revenues being realized during the quarter ended June 30, 2019. The well came back on line in mid-August and royalties are expected to resume in the third quarter of 2019.

Our operator in Colombia is continuing discussions with federal and local officials in order to secure compensation for the value of, and our investment in, three 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. During the six months ended June 30, 2019, we sold an aggregate of 230,000 shares in the 2019 ATM Offering and received proceeds, net of commissions, of $56,070.



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Subsequent to June 30, 2019, through the date hereof, we sold an aggregate of 207,164 shares in the 2019 ATM Offering and received proceeds, net of commissions and expenses, of $46,596.



Results of Operations


Oil and Gas Revenues. Total oil and gas revenues decreased 64% to $209,193 in the three months ended June 30, 2019, compared to $574,580 in the three months ended June 30, 2018. Oil and gas revenues decreased 65% to $459,913 in the six months ended June 30, 2019, compared to $1,328,737 in the six months ended June 30, 2018. The decrease in revenue was due to decreased production volumes attributable to our Reeves County wells, an adverse change in commodity pricing, including a 28% decrease in crude oil prices realized and a 27% decrease in natural gas prices realized and decreased royalties from our Crown Paper well.

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and six months ended June 30, 2019 and 2018:



                                        Six Months Ended              Three Months Ended
                                             June 30                       June 30,
                                       2019           2018           2019            2018
 Gross producing wells                      10             10              10             10
 Net producing wells                      0.98           0.98            0.98           0.98
 Net oil production (Bbl)                5,621         13,950           3,478          5,972
 Net gas production (Mcf)               49,155        121,082          27,278         57,673

Average sales price - oil (per

 barrel)                                 50.76          60.77     $     47.14$    60.66

Average sales price - natural

 gas (per Mcf)                            3.08           3.97     $      3.08$     3.68

The decrease in production reflects natural decline in production volumes from our Reeves County wells, partially offset by the commencement of production from the Frost #1H well while frac water is recovered. We anticipate that production volumes from the Frost #1H well will increase during the third quarter of 2019.

The change in average sales prices realized reflects bottlenecks in transportation/delivery capabilities in the Permian Basin which adversely affected commodity pricing.

Royalties from our Crown Paper well decreased from approximately $10,400 and $31,300, respectively, in the three and six months ended June 30, 2018 to $0 and $9,411, respectively, in the three and six months ended June 30, 2019. The decrease in royalty income was attributable to local flooding. The Crown Paper well resumed production in mid-August and royalty income is expected to resume during the third quarter of 2019.

All oil and gas sales revenues are attributable to U.S. operations.

Lease Operating Expenses. Lease operating expenses decreased 12% to $194,866 during the three months ended June 30, 2019 from $222,290 during the three months ended June 30, 2018. Lease operating expenses decreased 29% to $344,096 during the six months ended June 30, 2019 from $485,575 during the six months ended June 30, 2018.

The change in total lease operating expenses was attributable to reduced severance taxes due to lower sales. We anticipate lease operating expenses will rise as production from the Frost #1H well increases and as additional wells come on line.

Depreciation and Depletion Expense. Depreciation and depletion expense was $91,617 and $81,263 for the three months ended June 20, 2019 and 2018, respectively, and $184,146 and $177,972 for the six months ended June 30, 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. General and administrative expense increased by 8% to $405,650 during the three months ended June 30, 2019 from $373,905 during the three months ended June 30, 2018 and decreased by 18% to $655,601 during the six months ended June 30, 2019, from $795,629 during the six months ended June 30, 2018. The increase in general and administrative expense was primarily attributable one-time costs related to the 2019 ATM.



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Stock-Based Compensation. Stock-based compensation decreased by 37% to $27,325 during the three months ended June 30, 2019 from $43,381 during the three months ended June 30, 2018 and decreased 40% to $41,544 during the six months ended June 30, 2019, from $68,730 during the six months ended June 30, 2018. The decrease was attributable to the expiration of stock options following the termination of our chief executive officer in mid-2018.



Financial Condition


Liquidity and Capital Resources. At June 30, 2019, we had a cash balance of $244,753 and working capital of $194,710, compared to a cash balance of $406,569 and working capital of $648,043 at December 31, 2018.

Cash Flows. Operating activities used cash of $399,852 during the six months ended June 30, 2019, compared to $42,438 provided during the six months ended June 30, 2018. The change in operating cash flow was primarily attributable to the increased loss during 2019 which reflected the decline in oil and gas revenues and lower royalty income during the 2019 period.

Investing activities used cash of $51,967 during the six months ended June 30, 2019, compared to $195,510 used during the six months ended June 30, 2018. Cash used in investing activities were primarily attributed to investments in infrastructure/security upgrades in Reeves County during 2019 and acquisition of our Yoakum County acreage during 2018.

Financing activities used cash of $59,130 during the six months ended June 30, 2019, compared to $162,579 used during the six months ended June 30, 2018. Cash used in financing activities for both periods was attributable to dividends on our preferred stock, partially offset during 2019 by proceeds received from our 2019 ATM Offering.

Long-Term Liabilities. At June 30, 2019, we had long-term liabilities of $310,509, compared to $82,719 at December 31, 2018. Long-term liabilities at June 30, 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 and 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 six months ended June 30, 2019, we invested $36,456 for the acquisition and development of oil and gas properties, consisting of one-time infrastructure/security expenses in Reeves county. Of the amount invested, we capitalized $2,186 to oil and gas properties not subject to amortization and capitalized to $34,270 oil and gas properties subject to amortization. Capital investments during the six months ended June 30, 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 production.



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We have incurred continuing losses since 2011, including a loss of $722,043 for the six months ended June 30, 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, thereby mitigating going concern considerations. As of June 30, 2019, we have a cash balance of approximately $244,753 and working capital of approximately $194,710. Subsequent to June 30, 2019, through the date of this report, we received an additional $46,596 from the sale of common stock under its ATM offering. Additionally, we anticipate that revenue and profitability will increase during the second half of 2019 with the commencement of production from our Yoakum County well and that royalty revenue will resume with the restoration of production from our Crown Paper well.

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 and anticipated increases in cash flows from the initial Yoakum County well. 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 plans are presented to proceed with drilling an additional well in Reeves County, we will require additional capital to participate in the drilling of that well. We believe that we have, or will have, sufficient cash on hand and from operations to fund our expected drilling operations and our operations for the twelve months following the issuance of these financial statements.

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, including 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 June 30, 2019.



Inflation


We believe that inflation has not had a significant impact on operations since inception.

© Edgar Online, source Glimpses

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Managers
NameTitle
James A. Schoonover Chief Executive Officer & Director
Stephen Hartzell Chairman
R. Keith Grimes Independent Director
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