ITEM 2
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Information
This
Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the six months ended June 30, 2018,
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, 2017.
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, 2017.
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, 2017.
As of, and for the six months ended, June 30, 2018, 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, 2018:
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June 30, 2018
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Acquisition costs
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$
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276,648
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Development and evaluation costs
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2,171,534
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Total
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$
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2,448,182
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Of
the carrying value of unevaluated oil and gas prospects above, $2,312,852 was attributable to properties in the South American
country of Colombia and $135,330 was attributable to properties in the United States. We are maintaining our interest in these
properties.
Recent
Developments
Leasing
Activity
During
the six months ended June 30, 2018, we acquired, for $135,330, a 12.5% working interest (subject to a proportionate 10% back-in
after payout) in an approximately 650-acre lease block in Yoakum County, Texas.
Drilling
Activity
During
the six months ended June 30, 2018, we drilled no wells. At June 30, 2018, no drilling operations were ongoing.
During
the six months ended June 30, 2018, our capital investment expenditures for drilling operations totaled $13,839.
In
Reeves County, a new operator took control of operations in June 2018, following the acquisition of the interests of our former
operator, Founders Oil & Gas. We are awaiting the development and presentation by the new operator of plans to continue the
development of our Reeves County acreage. Our future drilling activities on our Reeves County acreage, including timing, number
of wells drilled, anticipated cost and related matters, are subject to our review and acceptance of development plans expected
to be provided by the new operator, our ability to finance our share of costs, market conditions and other factors, many of which
are beyond our control.
In
Yoakum County, we are awaiting proposals from the operator with respect to the drilling of the initial wells on our acreage.
In
Colombia, our operator is continuing to carry on discussions with federal and local officials in order to overcome opposition
to their efforts to secure necessary permits to commence drilling operations on our Serrania concession. Until a satisfactory
resolution is reached allowing the issuance of necessary permits, substituting equivalent prospects or otherwise compensating
for the value of, and investments in, our Serrania concession, our operator is continuing to defer further efforts to commence
drilling on the Serrania concession.
Our
operator has also deferred commencement of work on the Los Picachos and Macaya concessions until satisfactory resolution of the
permitting issues on the Serrania concession.
Financing
Activity
During
the six months ended June 30, 2018, we issued an aggregate of 800,000 shares sold under our At-the-Market Issuance Sales Agreement
(the “ATM Offering”) with WestPark Capital, Inc. for proceeds, net of commissions and expenses, totaled $287,679.
Subsequent
to June 30, 2018, through the date hereof, the Company sold an aggregate of 540,000 shares in the ATM Offering and received proceeds,
net of commissions and expenses, of $158,535.
Employment
Arrangements
During
the quarter ended June 30, 2018, our board determined to terminate the services of John Boylan as Chairman, CEO and President.
Our board has commenced a search for a replacement CEO and President.
Results
of Operations
Oil
and Gas Revenues.
Total oil and gas revenues increased by 1,142% to $574,580 in the three months ended June 30, 2018, compared
to $46,275 in the three months ended June 30, 2017. Oil and gas revenues increased 1,179% to $1,328,737 in the six months ended
June 30, 2018, compared to $103,908 in the six months ended June 30, 2017. The increase in revenue was due to increased production
volumes and improved commodity pricing for both the three and six-month periods.
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, 2018 and 2017:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2018
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2017
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2018
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2017
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Gross producing wells
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10
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9
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10
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9
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Net producing wells
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0.98
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0.47
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0.98
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0.47
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Net oil production (bbl)
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5,972
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702
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13,950
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1,578
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Net gas production (mcf)
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57,673
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3,439
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121,082
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8,029
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Average sales price – oil (per barrel)
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$
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60.66
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$
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50.32
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$
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60.77
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$
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48.99
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Average sales price – natural gas (per mcf)
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$
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3.68
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$
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3.18
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$
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3.97
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$
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3.31
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The
increase in production reflects production from our two initial Reeves County wells which commenced production during the fourth
quarter of 2017.
The
increase in average sales prices reflected generally rising global energy prices during the periods.
Oil
and gas sales revenues by region were as follows:
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Colombia
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U.S.
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Total
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2018 First Six Months
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Oil sales
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$
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—
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$
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847,777
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$
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847,777
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Gas sales
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—
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480,960
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480,960
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2017 First Six Months
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Oil sales
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$
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—
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$
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77,307
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$
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77,307
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Gas sales
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—
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26,601
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26,601
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Lease
Operating Expenses.
Lease operating expenses increased by 1,218% to $222,290 during the three months ended June 30, 2018,
from $16,861 during the three months ended June 30, 2017. During the six months ended June 30, 2018, lease operating expenses
increased by 1,113% to $485,575 during the six months ended June 30, 2018, from $40,015 during the six months ended June 30, 2017.
The change in total lease operating expenses was attributable to the commencement of operations of our two initial Reeves County
wells.
Following
is a summary comparison of lease operating expenses, by region, for the periods.
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Colombia
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U.S.
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Total
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Quarter ended June 30,
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- 2018
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$
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—
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$
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222,290
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$
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222,290
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- 2017
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$
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—
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$
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16,861
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$
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16,861
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Six Months ended June 30,
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- 2018
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$
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—
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$
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485,575
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$
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485,575
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- 2017
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$
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—
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$
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40,015
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$
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40,015
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Future
lease operating expenses in Reeves County are expected to be effected by the pending completion of an adjacent salt water disposal
well which, if and when completed, is expected to reduce our cost of transportation of water. We expect the disposal well to be
on line in the fourth quarter of 2018. However, there is no assurance as to when, if ever, the salt water disposal well will be
on line or as to the actual savings, if any, that will be realized when the disposal well becomes operational.
General
and Administrative Expenses.
General and administrative expense, excluding stock-based compensation, decreased by 10.8%
to $373,905 during the three months ended June 30, 2018, from $419,251 during the three months ended June 30, 2017, and decreased
8.4% to $795,629 during the six months ended June 30, 2018, from $868,595 during the six months ended June 30, 2017. The change
in general and administrative expense was primarily attributable to a reduction in legal fees compared to 2017 when we were significantly
more active in acquisition and financing activities.
Stock-Based
Compensation Expense.
Stock-based compensation expense increased by 34.1% to $43,381 during the three months ended June 30,
2018, from $65,891 during the three months ended June 30, 2017, and decreased 49.4% to $68,730 during the six months ended June
30, 2018, from $135,844 during the six months ended June 30, 2017. The change in stock-based compensation expenses was primarily
attributable to earlier high value awards being fully amortized.
Depreciation
and Depletion Expense.
Depreciation and depletion expense was $81,263 and $13,510 for the three months ended June 30, 2018
and 2017, respectively, and $177,972 and $31,206 for the six months ended June 30, 2018 and 2017, respectively. The increase was
due to an increased depletion base and higher production rates, both attributable to commencement of operations of our Reeves
County wells.
Financial
Condition
Liquidity
and Capital Resources.
At June 30, 2018, we had a cash balance of $401,569 and working capital of $648,043, compared to a
cash balance of $396,062 and working capital of $591,703 at December 31, 2017. The change in working capital during the period
was primarily attributable to the receipt of proceeds from sales of common stock under our ATM Offering, partially offset by the
operating loss for the first six months of 2018, payment of dividends on preferred stock and the purchase of an interest in the
Yoakum County acreage.
Operating
activities provided cash of $42,438 during the six months ended June 30, 2018, compared to cash used of $743,594 used during the
six months ended June 30, 2017. The change in operating cash flow was primarily attributable to a $769,504 decrease in net loss
for the 2018 six-month period, compared to the 2017 six-month period, which improvement was attributable to the commencement of
operations of our Reeves County wells.
Investing
activities used cash of $195,510 during the six months ended June 30, 2018, compared to $2,170,118 used during the six months
ended June 30, 2017. The decrease in funds used by investing activities during 2018 reflects lower investments in acreage acquisitions
(including $135,330 for Yoakum County acreage in 2018 compared to $1,041,596 in Reeves County acreage in 2017) and lower investments
in drilling operations during 2018 ($13,389 in 2018 compared to $3,433,511 in 2017).
Financing
activities provided cash of $162,579 during the six months ended June 30, 2018, compared to $2,662,318 provided during the six
months ended June 30, 2017. During 2018, cash provided by financing activities consisted of sales of common stock in the ATM Offering
($287,679), partially offset by dividend distributions on outstanding preferred stock ($125,100). During 2017, cash provided by
financing activities consisted of $2,679,600 from the sale of Series A Preferred Stock, Series B Preferred Stock and Series B
Warrants, and Bridge Loan Notes and Bridge Loan Warrants, partially offset by the payment of dividends on the Series B Preferred
Stock ($17,282).
Long-Term
Liabilities
. At June 30, 2018, we had long-term liabilities of $83,811, compared to $84,903 at December 31, 2017. Long-term
liabilities at June 30, 2018 and December 31, 2017 consisted of a reserve for plugging costs and deferred rent obligations.
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 2018 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 2018 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 Reeves County 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, 2018, we invested $152,680, net, for the acquisition and development of oil and gas properties,
consisting of (1) cost of acquisition of U.S. properties of $135,330, attributable to acreage acquired in Yoakum County, Texas;
(2) cost of development of U.S. properties of $13,839, net, principally attributable to acreage in Reeves County, Texas, and (3)
preparation and evaluation costs in Colombia of $3,511. Of the amount invested, we capitalized $138,841 to oil and gas properties
not subject to amortization and capitalized $13,839 to oil and gas properties subject to amortization. Capital investments for
the first six months of 2018 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 for 2018
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.
Our cash holdings,
including proceeds from our ATM Offering received subsequent to June 30, 2018, together with revenues from our initial Reeves
County wells, are expected to be adequate to support operations for the next twelve months following the issuance of these
financial statements, and, depending on our operator’s drilling and completion budget, may be adequate to fund our share
of costs to drill a well in Yoakum County but are not expected to be adequate to fund our share of drilling and completion costs
of any wells that may be drilled in Reeves County.
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 a Yoakum County well, we expect that we
will be required to raise additional capital.
While
we may, among other efforts, pursue an additional ATM Offering, 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 Reeves County, or other,
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, 2018.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.