Houston American Energy Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparative figures are for 2015 unless stated otherwise. The supplied filing identifies Houston American Energy Corp. as the registrant; this differs from the company name in the request metadata.
Business context
The company is a non-operating oil and gas exploration and production company with U.S. interests and Colombian concessions. It relies on third-party operators and reported no drilling in 2016. U.S. properties generated all 2016 revenue; the Colombian concessions had no wells or production and faced continuing permitting delays.
Financial and operating results
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and gas revenue | $165,910 | $429,435 |
| Operating loss | $(2,648,831) | $(3,734,771) |
| Net loss | $(2,641,625) | $(3,830,206) |
| Operating cash flow | $(1,297,153) | $(1,837,977) |
| Cash at year-end | $481,172 | $2,123,520 |
| Working capital | $423,795 | $2,384,283 |
- Revenue fell 61%, reflecting lower production and realized prices. Oil production declined to 2,933 barrels from 6,068; gas production to 20,204 Mcf from 32,146. Average realized oil and gas prices fell to $40.40 per barrel and $2.35 per Mcf, respectively.
- Operating expenses were $2.81 million, including $584,086 of property impairment, down from $4.16 million and $1.72 million of impairment in 2015. General and administrative expense rose 19% to $1.83 million, including a $262,016 escrow receivable write-off, higher insurance and strategic-initiative costs, and share-based compensation.
- Net loss improved year over year, but the company continued to lose money and consume cash. No operating margin was disclosed; the reported operating loss substantially exceeded revenue.
- Total assets were $2.95 million and shareholders’ equity $2.86 million at year-end. Total liabilities were $88,571, including $27,444 for plugging and abandonment. The company reported no debt.
- Proved reserves were 8,680 barrels of oil and 40,020 Mcf of gas, about 15,350 boe, all developed and in the United States; there were no proved undeveloped reserves. The standardized measure of discounted future net cash flows was $164,130, down from $254,380.
Material changes and outlook
- Cash declined by $1.64 million during 2016. Working capital also fell sharply, primarily amid continued operating losses and investment in properties.
- The auditor’s report and management’s discussion identify substantial doubt about the company’s ability to continue as a going concern. Management said additional financing or asset sales may be needed; no financing commitment for the remaining 2017 plans was in place.
- In February 2017, the company completed a $986,000 acquisition of a 25% working interest, subject to a proportionate 5% back-in after payout, in two Reeves County, Texas lease blocks covering about 717 gross acres. The operator anticipated an initial Wolfcamp A well around May 2017 and a second well before year-end. The company estimated its share of the initial well cost at $1.7 million.
- The company’s 2017 capital budget was approximately $4.4 million, including the acreage acquisition and planned drilling. It stated that available resources were insufficient to fund the full plan and that further financing would be required. In January 2017 it raised $1.2 million through 12% Series A convertible preferred stock, convertible at $0.20 per common share and carrying a liquidation preference.
- Colombian drilling remained on hold amid local opposition, permit disputes and security and political uncertainties. The operator had deferred Serrania drilling for the foreseeable future and postponed work on Los Picachos and Macaya pending resolution. The company had invested $170,812 in Colombian preparation and evaluation during 2016.
- Management reported ineffective disclosure controls and internal control over financial reporting, citing lack of segregation of duties because the CEO also served as principal financial officer. The company was relying on outside consultants for reporting support.
Risks, contingencies and unusual items
- Revenue and asset values are sensitive to volatile oil and gas prices; the company did not use commodity hedges. Further price weakness could constrain production economics, financing and reserve values.
- The company received notice in 2016 that it did not meet NYSE MKT continued-listing standards, including the minimum shareholders’ equity requirement, and remained listed under a compliance plan. Failure to regain compliance could result in delisting.
- Most net oil and gas property investment was associated with Colombia, which produced no revenue in 2016. Permit failure, prolonged delay or loss of the concessions could materially impair the investment.
- Property impairment charges were $584,086 in 2016 and $1,718,088 in 2015. The company also wrote off the $262,016 escrow receivable in 2016.
- The filing reports no material litigation known as of March 13, 2017 and no off-balance-sheet arrangements. Environmental, regulatory, operator-dependence and uninsured-loss risks remain relevant.
Important facts for investors to verify
- Whether the company obtained adequate financing for the Reeves County drilling program and day-to-day operations, and the resulting dilution or financing terms.
- Whether the planned Reeves County wells were drilled, their costs and results, and whether production or reserves were established.
- Whether Colombia’s permitting and concession disputes were resolved, and whether the company recorded any further impairment or loss on those assets.
- Progress on NYSE MKT listing compliance and remediation of the disclosed control weaknesses.
- Reconcile the filing’s cash-flow and other-income disclosures: the MD&A and financial-statement presentation contain apparent inconsistencies in comparative cash-flow figures and 2015 total other expense. The filing text does not provide a clear, consistent explanation for these differences.