Forward-Looking Information
This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company")
for the six months ended June 30, 2022, 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, 2021.
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, 2021.
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, 2021. As of, and for the six
months ended, June 30, 2022, 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, 2022:
June 30, 2022
Acquisition costs $ 143,847
Development and evaluation costs 2,199,279
Total
$ 2,343,126
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
Equity Investment
In 2019, we acquired a 2% interest in Hupecol Meta, LLC ("Hupecol Meta") (the
"Hupecol Meta Acquisition"), which interest was subsequently increased on
multiple occasions, including the acquisition, during the six months ended June
30, 2022, of an additional interest (1%) in Hupecol Meta for $100,000.
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Hupecol Meta holds a working interest in the 639,405 gross acre CPO-11 block in
the Llanos Basin in Colombia, comprised of the 69,128 acre Venus Exploration
Area and 570,277 acres, which was 50% farmed out by Hupecol Meta. As of June 30,
2022, through our ownership interest in Hupecol Meta, we held an approximately
11% interest in the Venus Exploration Area and approximately 5.5% interest in
the remainder of the block.
Drilling Activity
During the six months ended June 30, 2022, Hupecol Meta drilled the Bugalu 1, a
vertical test well in the Venus Exploration Area of the CPO-11 block in
Colombia. At June 30, 2022, drilling operations on the Bugalu 1 had been
completed, production casing was run and the well was awaiting testing. A
directional well from a second site in the Venus Exploration Area commenced
drilling in July 2022. No drilling operations were conducted on our U.S.
properties during the six months ended June 30, 2022.
During the six months ended June 30, 2022, our capital investment expenditures
totaled $262,444, principally relating to final expenses associated with the
plugging and abandonment of the Lou Brock well ($14,162) and investments in our
cost method investment in Hupecol Meta ($148,282)(excluding $100,000 investment
to increase our equity interest in Hupecol Meta).
Colombian Elections
In June 2022, Colombia elected as its President, leftist candidate, Gustavo
Petro. President-elect Petro has publicly vowed to wind down fossil fuel
production in Colombia and end fracking in Colombia as part of a plan to
transition to renewable green energy. While the President-elect's proclamations
are openly hostile to the oil and gas industry and appear to bar grants of
future oil and gas contracts, those proclamations appear to honor existing oil
and gas contracts. Moreover, the President-elect's proclamations do not appear
to be supported by the Colombian lawmakers which may make it difficult for the
President-elect to effectively carry out his proclamations. Nonetheless,
hostility from the executive branch may make the climate for drilling wells on
existing acreage more challenging than is already the case.
Results of Operations
Oil and Gas Revenues. Total oil and gas revenues increased 52% to $462,989 in
the three months ended June 30, 2022, compared to $303,999 in the three months
ended June 30, 2021. Oil and gas revenues increased 40% to $886,809 for the six
months ended June 30, 2022, compared to $632,487 in the six months ended June
30, 2021. The increase in revenue was due to (i) increased natural gas
production volumes, up 59% and 38% for the three and six-month periods,
respectively, partially offset by a decline in oil production, down 38% and 34%
for the three and six-month periods, respectively, and (ii) improved commodity
pricing, including 71% and 153% increases in crude oil prices and natural gas
prices, respectively, realized during the three-month period and 73% and 39%
increases in crude oil prices and natural gas prices, respectively, realized
during the six-month period.
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, 2022 and 2021:
Six Months Ended Three Months Ended
June 30 June 30,
2022 2021 2022 2021
Gross producing wells 4 4 4 4
Net producing wells 0.68 0.68 0.68 0.68
Net oil production (Bbl) 5,478 8,295 2,438 3,901
Net gas production (Mcf) 35,542 25,738 18,250 11,447
Average sales price - oil (per
barrel) $ 99.11 57.36 $ 108.05 $ 63.30
Average sales price - natural gas
(per Mcf) $ 5.38 3.88 $ 6.57 $ 2.60The change in production volumes was primarily attributable to our Reeves County
wells being put on gas lift during the second half of 2021, partially offset by
natural declines in production.
The change in average oil sales price realized reflects a spike in global energy
prices attributable to global supply uncertainty arising from the Russian
invasion of Ukraine.
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All oil and gas sales revenues are attributable to U.S. operations.
Lease Operating Expenses. Lease operating expenses increased 63% to $150,485
during the three months ended June 30, 2022, from $92,531 during the three
months ended June 30, 2021. Lease operating expenses increased 20% to $311,757
during the six months ended June 30, 2022, from $258,745 during the six months
ended June 30, 2021. The increase in lease operating expenses was attributable
to rework and equipment costs.
All lease operating expenses are attributable to U.S. operations.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$51,501 and $26,271 for the three months ended June 20, 2022 and 2021,
respectively, and $109,740 and $58,635 for the six months ended June 30, 2022
and 2021, respectively. The change in depreciation and depletion was due to the
increase in the depletable base.
General and Administrative Expenses (excluding stock-based compensation).
General and administrative expense increased 1% to $233,376 during the three
months ended June 30, 2022, from $231,328 during the three months ended June 30,
2021 and decreased 17% to $517,991 during the six months ended June 30, 2022,
from $624,979 during the six months ended June 30, 2021. The decrease in general
and administrative expenses was primarily attributable to higher professional
fees during the 2021 period related to the two ATM offerings and redemption of
preferred stock.
Stock-Based Compensation. Stock-based compensation increased to $25,520 during
the three months ended June 30, 2022, from $0 during the three months ended June
30, 2021 and increased 635% to $111,005 during the six months ended June 30,
2022, from $15,109 during the six months ended June 30, 2021. The increase was
attributable to the timing of option grants and vesting.
Financial Condition
Liquidity and Capital Resources. At June 30, 2022, we had a cash balance of
$4,602,772 and working capital of $4,852,063, compared to a cash balance of
$4,894,577 and working capital of $5,052,685 at December 31, 2021.
Cash Flows. Operating activities used $29,361 during the six months ended June
30, 2022, compared to $527,759 used during the six months ended June 30, 2021.
The change in operating cash flow was primarily attributable to increased
revenues and a resulting decrease in net loss during the six-months ended June
30, 2022.
Investing activities used $262,444 during the six months ended June 30, 2022,
compared to $166,949 used during the six months ended June 30, 2021. The change
in funds used by investing activities is principally attributable to higher
investments in Hupecol Meta LLC and investments in plugging and abandonment of
our Lou Brock well.
Financing activities provided $0 during the six months ended June 30, 2022,
compared to $4,570,888 provided during the six months ended June 30, 2021. Cash
provided by financing activities during the six months ended June 30, 2021 was
attributable to funds received from two at-the-market common stock offerings
($6,575,889), partially offset by cash used to pay dividends on preferred stock
($37,201) and to redeem all remaining outstanding shares of preferred stock
($1,967,800)
Long-Term Liabilities. At June 30, 2022, we had long-term liabilities of
$252,056, compared to $279,953 at December 31, 2021. Long-term liabilities at
June 30, 2022 and December 31, 2021, 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 Permian Basin acreage and our CPO-11
Colombian acreage. Hupecol Meta drilled a vertical test well in the Venus
Exploration Area on the CPO-11 block during the six months ended June 30, 2022
and, in July 2022, Hupecol Meta commenced drilling operations on a directional
well on the block. The actual timing and number of well operations undertaken
during 2022, in Colombia and the Permian Basin, will be principally controlled
by the operators of our 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, ability to secure necessary
permits and other factors beyond our control or that of our operators.
In addition to possible operations on our existing acreage holdings, we continue
to evaluate drilling prospects in which may acquire an interest and participate.
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During the six months ended June 30, 2022, we invested $262,444 for the
acquisition and development of oil and gas properties, consisting of drilling
and development operations in the U.S ($14,162), principally relating to final
expenses related to the plugging and abandonment of the Lou Brock well, and
investments in Hupecol Meta ($248,282), including $100,000 paid to increase our
ownership interest in Hupecol Meta. The $14,162 invested in U.S. operations was
capitalized to oil and gas properties subject to amortization. The $248,282
invested in Hupecol Metal was capitalized to our investment in Hupecol Meta.
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.
We believe that we have the ability, through our cash on-hand, to fund
operations and our cost for all planned wells expected to be drilled during
2022.
In the event that we pursue additional acreage acquisitions or expand our
drilling plans, we may be required to secure additional funding beyond our
resources on hand. 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 less than 1 million authorized shares of common
stock available for issuance to support equity capital raises and we 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, 2022.
Inflation
We believe that inflation has not had a significant impact on operations since
inception.
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HOUSTON AMERICAN ENERGY CORP. 