Forward-Looking Information
This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company")
for the three months ended March 31, 2021, 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, 2020.
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, 2020.
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, 2020. As of, and for the three
months ended, March 31, 2021, 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, 2021:
March 31, 2021
Acquisition costs $ 1,647,196
Development and evaluation costs 2,334,609
Total $ 3,981,805The 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
Leasing Activity
- Colombia. In 2019, we acquired a 2% interest in Hupecol Meta, LLC ("Hupecol
Meta") (the "Hupecol Meta Acquisition").
During the three months ended March 31, 2021, we agreed to contribute an
additional $99,716 to Hupecol Meta, increasing our ownership interest to 7.85%.
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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 a result of
Hupecol Meta's 2021 purchase of additional interest in the CPO-11 block and our
agreement to increase our ownership interest in Hupecol Meta, through our
membership interest in Hupecol Meta, we hold a 6.99% interest in the Venus
Exploration Area and a 3.495% interest in the remainder of the block.
Drilling Activity
During the three months ended March 31, 2021, no drilling activities were
conducted.
During the quarter ended March 31, 2021, our capital investment expenditures
totaled $177,028, principally relating to our Lou Brock operations ($62,995) and
investments in our cost method investment in Hupecol Meta ($114,036, including
$99,716 to increase our ownership interest to 7.85%).
Financing Activities
- 2021 At-the-Market Offering. In January 2021, we entered into a Sales
Agreement with Univest Securities, LLC ("Univest") pursuant to which we could
sell, at our option, up to an aggregate of $4,768,428 in shares of common stock
through Univest, as sales agent. Sales of shares under the Sales Agreement (the
"2021 ATM Offering") were made, in accordance with placement notices delivered
to Univest, which notices set parameters under which shares could be sold. The
2021 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 paid Univest a commission in cash equal to 3% of the
gross proceeds from the sale of shares in the 2021 ATM Offering. Additionally,
we reimbursed Univest for $18,000 of expenses incurred in connection with the
2021 ATM Offering.
During January 2021, we sold an aggregate of 2,108,520 shares in the 2021 ATM
Offering and received proceeds, net of commissions, of $4.6 million.
- 2021 Supplemental At-the-Market Offering. In February 2021, we entered into a
second Sales Agreement with Univest pursuant to which we could sell, at our
option, up to an aggregate of $2,030,000 in shares of common stock through
Univest, as sales agent. Sales of shares under the Sales Agreement (the "2021
Supplemental ATM Offering") were made, in accordance with placement notices
delivered to Univest, which notices set parameters under which shares could be
sold. The 2021 Supplemental 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 paid Univest a
commission in cash equal to 3% of the gross proceeds from the sale of shares in
the 2021 Supplemental ATM Offering. Additionally, we reimbursed Univest for
$18,000 of expenses incurred in connection with the 2021 Supplemental ATM
Offering.
During February 2021, we sold an aggregate of 813,100 shares in the 2021
Supplemental ATM Offering and received proceeds, net of commissions, of $2.0
million.
- Conversion and Redemption of Preferred Stock. In February 2021, 60 shares of
our 12% Series A Convertible Preferred Stock were converted into 24,000 shares
of our common stock, and we redeemed all remaining outstanding shares of our 12%
Series A Convertible Preferred Stock and 12% Series B Convertible Preferred
Stock for $1.97 million plus accrued dividends totaling $32,700.
COVID-19
In early 2020, global health care systems and economies began to experience
strain from the spread of the COVID-19 Coronavirus. As the virus spread, global
economic activity began to slow and future economic activity was forecast to
slow with a resulting decline in oil and gas demand and prices. Such decline in
prices adversely affected our revenues and profitability in 2020 and, if price
declines persist, will adversely affect the economics of our existing wells and
planned future wells, possibly resulting in impairment charges to existing
properties and delaying or abandoning planned drilling operations as
uneconomical.
In response to the COVID-19 pandemic, our staff has begun working remotely and
many of our key vendors, service suppliers and partners have similarly begun to
work remotely. As a result of such remote work arrangements, we anticipate that
certain operational, reporting, accounting and other processes will slow which
may result in longer time to execute critical business functions, higher
operating costs and uncertainties regarding the quality of services and
supplies, any of which could substantially adversely affect our operating
results for as long as the current pandemic persists and potentially for some
time after the pandemic subsides.
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Results of Operations
Oil and Gas Revenues. Total oil and gas revenues increased 123% to $328,488 in
the three months ended March 31, 2021, compared to $147,136 in the three months
ended March 31, 2020. The increase in revenue was due to increases in average
sales price of oil (up 28%) and natural gas (up 286%), and an increase in oil
production (up 56%).
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, 2021 and 2020:
Three Months Ended March 31,
2021 2020
Gross producing wells 4 4
Net producing wells 0.68 0.49
Net oil production (Bbl) 4,394 2,816
Net gas production (Mcf) 14,291 25,489
Average sales price - oil (per barrel) $ 52.08 $ 40.79
Average sales price - natural gas (per Mcf) $ 4.90 $ 1.27
The gross/net producing wells reflects cessation of operation, and ultimate
sale, of two uneconomical wells in Louisiana, offset by the commencement of
operations of two wells in Yoakum County, Texas. The change in production
volumes was primarily attributable to the increase in production at our Frost #1
and Frost #2 wells, partially offset by the shut-in of our O'Brien #3-H well for
repair and natural decline in production from our other Reeves County well.
The change in average sales prices realized reflects a spike in natural gas
prices attributable to increased demand accompanying the February freezing
weather in Texas and a broad recovery in energy prices following the steep
decline in global commodity prices in early 2020 associated with a decline in
energy demand associated with the COVID-19 pandemic.
Oil and gas sales revenues by region were as follows:
Colombia U.S. Total
2021 First Quarter
Oil sales $ - $ 228,843 $ 228,843
Gas sales $ - $ 70,086 $ 70,086
NGL sales $ - $ 29,559 $ 29,559
2020 First Quarter
Oil sales $ - $ 114,851 $ 114,851
Gas sales $ - $ 10,058 $ 10,058
NGL ales $ $ 22,227 $ 22,227Lease Operating Expenses. Lease operating expenses increased 105% to $166,214
during the three months ended March 31, 2021 from $81,234 during the three
months ended March 31, 2020. Lease operating expenses, by region were as
follows:
Colombia U.S. Total
2021 First Quarter $ - $ 166,214 $ 166,214
2020 First Quarter $ - $ 81,234 $ 81,234The change in lease operating expenses was principally attributable to an
increase in severance tax resulting from higher sales.
Depreciation and Depletion Expense. Depreciation and depletion expense was
$32,365 and $90,822 for the three months ended March 31, 2021 and 2020,
respectively. The change in depreciation and depletion was due to a decrease in
gas production and prior impairment charges.
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Impairment of Oil and Gas Properties. Impairment of oil and gas properties was
none and $429,116 for the three months ended March 31, 2021 and 2020,
respectively. The change in impairment of oil and gas properties was due to a
full cost ceiling test write-down in the 2020 period primarily relating to a
decline in energy prices. Depending on the timing of a recovery in energy
prices, we may experience further impairments in future periods.
General and Administrative Expenses (excluding stock-based compensation).
General and administrative expense increased by 24% to $393,651 during the three
months ended March 31, 2021 from $316,620 during the three months ended March
31, 2020. The change in general and administrative expense was primarily
attributable to professional fees related to the two ATM offerings and
redemption of preferred stock.
Stock-Based Compensation. Stock-based compensation increased to $15,109 during
the three months ended March 31, 2021 from $57,442 during the three months ended
March 31, 2020. The change was attributable to the full amortization of the fair
value of stock options during 2020.
Other Income (Expense). Other income/expense, net, totaled $10,374 of income
during the three months ended March 31, 2021, compared to $22,892 of expense
during the three months ended March 31, 2020. Other income during the three
months ended March 31, 2021 consisted of interest income and income arising from
the recovery of escrowed funds previously written-off. Other expense during the
three months ended March 31, 2020 consisted of $3,925 of interest income, offset
by interest expense of $26,817 relating to the bridge loan notes, consisting of
$3,350 interest paid in cash and $23,467 of interest attributable to
amortization of the value of warrants issued in connection with the bridge loan
notes.
Financial Condition
Liquidity and Capital Resources. At March 31, 2021, we had a cash balance of
$5,271,226 and working capital of $5,312,505, compared to a cash balance of
$1,242,560 and working capital of $1,142,513 at December 31, 2020.
Cash Flows. Operating activities used cash of $365,191 during the three months
ended March 31, 2021, compared to $378,402 used during the three months ended
March 31, 2020. The change in operating cash flow was attributable to a lower
loss incurred during the 2021 period and a decrease in cash used attributable to
changes in operating assets and liabilities, offset by higher non-cash expenses
reflected in the 2020 period.
Investing activities used $177,031 during the three months ended March 31, 2021,
compared to $552,681 during the three months ended March 31, 2020. The change in
funds used by investing activities is principally attributable to reduced
investing activities in 2021.
Financing activities provided $4,570,888 during the three months ended March 31,
2021, compared to $3,755,517 provided during the three months ended March 31,
2020. Cash provided by financing activities during the three months ended March
31, 2021 was attributable to funds received from two ATM 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). Cash
provided by financing activities during the three months ended March 31, 2020
was attributable to funds received from the sale of common stock ($4,434,169,
including $58,575 of subscriptions receivable relating to shares sold at
year-end 2019) under our 2019 ATM Offering, partially offset by repayment of our
Bride Loan Notes ($621,052) and payment of dividends on our preferred stock
($57,600).
Long-Term Liabilities. At March 31, 2021, we had long-term liabilities of
$145,197, compared to $171,791 at December 31, 2020. Long-term liabilities at
March 31, 2021 and December 31, 2020, 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 newly
acquired Colombian acreage. Based on discussions with our Colombian operator, we
anticipate that drilling operations on our CPO-11 block in Colombia will
commence in mid- to late-2021. The actual timing and number of well operations
undertaken during 2021, 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 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 three months ended March 31, 2021, we invested $177,031 for the
acquisition and development of oil and gas properties, consisting of drilling
and development operations in the U.S ($62,995), principally relating to Lou
Brock acreage, and our acquisition of an additional interest in Hupecol Meta
($114,036). Of the amount invested, we capitalized none to oil and gas
properties not subject to amortization and capitalized $62,995 to oil and gas
properties subject to amortization. During the period, we also capitalized
$114,036 to our interest in Hupecol Meta relating to drilling operations in
Colombia.
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 our receipt, during the three months ended March 31, 2021, of $6,575,889
million from sales of common stock under our ATM offerings, 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 2021.
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 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. Unless and until the depressing economic effects of the
coronavirus recede, we expect that new capital to fund projects will be
difficult, if not impossible, to secure.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party
obligations at March 31, 2021.
Inflation
We believe that inflation has not had a significant impact on operations since
inception.
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HOUSTON AMERICAN ENERGY CORP. 
