Forward-Looking Information
This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company")
for the nine months ended September 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 nine
months ended, September 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 September 30, 2022:
September 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 nine months ended
September 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
September 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 nine months ended September 30, 2022, Hupecol Meta drilled and
completed two wells, the Bugalu 1 and the Saturno ST1, in the Venus Exploration
Area of the CPO-11 block in Colombia. A third well, the Caonabo, commenced
drilling in late September 2022.
The Saturno ST1, was briefly put on production and then shut-in pending receipt
of a permit to inject produced water in an old well. A water injection permit
was issued in November 2022. With the permit issued, we anticipate bringing the
Saturno ST1 well, and the legacy Venus 2A well, on production during November
2022. The Bugalu 1 is awaiting testing. The Caonabo was determined to be a dry
hole.
No drilling operations were conducted on our U.S. properties during the nine
months ended September 30, 2022.
During the nine months ended September, 30, 2022, our capital investment
expenditures totaled $795,311, principally relating to final expenses associated
with the plugging and abandonment of the Lou Brock well ($14,160) and
investments in our cost method investment in Hupecol Meta ($681,155) (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 47% in the three
months ended September 30, 2022, compared to $290,375 in the three months ended
September 30, 2021. Oil and gas revenues increased 42% in the nine months ended
September 30, 2022, compared to $922,862 in the nine months ended September 30,
2021.
The increase in revenue was due to (i) increased natural gas production volumes,
up 150% and 34% for the three and nine-month periods, respectively, partially
offset by a change in oil production, increased by 84% and decreased 29% for the
three and nine-month periods, respectively, and (ii) improved commodity pricing,
including 33% and 47% increases in crude oil prices and natural gas prices,
respectively, realized during the three-month period and 60% and 53% increases
in crude oil prices and natural gas prices, respectively, realized during the
nine-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
nine months ended September 30, 2022 and 2021:
Nine Months Ended Three Months Ended
September 30 September 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) 8,140 11,391 5,702 3,096
Net gas production (Mcf) 53,339 39,765 35,089 14,027
Average sales price - oil
(per barrel) $ 96.88 $ 60.51 $ 91,97 $ 68.96
Average sales price -
natural gas (per Mcf) $ 5.83 $ 3.82 $ 5.44 $ 3.71The change in production volumes was primarily due to natural declines in
production, partially offset by our Reeves County wells being put on gas lift in
late 2021. With the issuance of a water injection permit relating to the CPO-11
block, well counts and production are anticipated to increase with the
resumption of production of the Saturno ST1 and Venus 2A wells in Colombia.
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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.
Oil and gas sales revenues by region for the nine months ended September 30,
2022 were as follows:
Colombia U.S. Total
2022 First Nine Months
Oil sales $ - $ 788,619 $ 788,619
Natural gas sales - 310,850 310,850
Natural gas liquid sales - 214,596 214,596
2021 First Nine Months
Oil sales $ - $ 689,296 $ 689,296
Natural gas sales - 151,808 151,808
Natural gas liquid sales - 81,758 81,758
Lease Operating Expenses. Lease operating expenses increased 0% to $184,488
during the three months ended September 30, 2022, from $184,869 during the three
months ended September 30, 2021. Lease operating expenses increased 12% to
$496,245 during the nine months ended September 30, 2022, from $443,614 during
the nine months ended September 30, 2021.
The change in lease operating expenses was principally attributable to increased
severance taxes associated with the increase in revenues, non-recurring water
disposal and operating costs incurred on the Lou Brock well during.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$50,755 and $21,045 for the three months ended September 30, 2022 and 2021,
respectively, and $160,495 and $79,680 for the nine months ended September, 30,
2022 and 2021, respectively. The change in depreciation and depletion was due to
an increase in the depletable base during 2022.
General and Administrative Expenses (excluding stock-based compensation).
General and administrative expense increased by 85% to $498,876 during the three
months ended September 30, 2022 from $269,264 during the three months ended
September 30, 2021, and increased by 14% to $1,016,867 during the nine months
ended September 30, 2022 from $894,243 during the nine months ended September
30, 2021. The increase in general and administrative expense for the three and
nine-month periods was primarily attributable to payment of a bonus to our CEO
in the amount of $200,000 during the 2022 three-month period. Future general and
administrative expenses are expected to increase to reflect an increase in the
base salary of our CEO from $120,000 to $180,000 annually.
Stock-Based Compensation. Stock-based compensation decreased to $95,205 during
the three months ended September 30, 2022 from $167,040 during the three months
ended September 30, 2021, and increased 13% to $206,210 during the nine months
ended September 30, 2022 from $182,149 during the nine months ended September
30, 2021. The change was attributable to the amortization of stock options
granted during 2022 and 2021.
Other Income (Expense). Other income/expense, net, totaled $10,788 of income
during the three months ended September 30, 2022, compared to $968 of income
during the three months ended September 30, 2021, and totaled $13,277 of income
during the nine months ended September 30, 2022, compared to $12,129 of income
during the nine months ended September 30, 2021. Other income for all periods
consisted of interest earned on cash balances.
Financial Condition
Liquidity and Capital Resources. At September 30, 2022, we had a cash balance of
$3,896,362 and working capital of $4,072,422, 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 $202,900 during the nine months ended
September 30, 2022, compared to $648,816 used during the nine months ended
September 30, 2021. The change in operating cash flow was primarily attributable
to increased revenues and a resulting decrease in net loss during the
nine-months ended September 30, 2022.
Investing activities used $795,315 during the nine months ended September 30,
2022, compared to $221,451 used during the nine months ended September 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.
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Financing activities provided $0 during the nine months ended September 30,
2022, compared to $4,570,888 provided during the nine months ended September 30,
2021. Cash provided by financing activities during the nine months ended
September 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 September 30, 2022, we had long-term liabilities of
$235,538, compared to $279,953 at December 31, 2021. Long-term liabilities at
September 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 two vertical wells in the Venus
Exploration Area on the CPO-11 block, and commenced drilling on a non-Venus
CPO-11 well, during the nine months ended September 30, 2022. 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.
During the nine months ended September 30, 2022, we invested $795,315 for the
acquisition and development of oil and gas properties, consisting of drilling
and development operations in the U.S ($14,160), principally relating to final
expenses related to the plugging and abandonment of the Lou Brock well, and
investments in Hupecol Meta ($781,155), including $100,000 paid to increase our
ownership interest in Hupecol Meta. The $14,160 invested in U.S. operations was
capitalized to oil and gas properties subject to amortization. The $781,155
invested in Hupecol Meta 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 the
twelve months following this report.
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 September 30, 2022.
Inflation
We believe that inflation has not had a significant impact on operations since
inception.
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