ITEM 2 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking
Information
This
Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the three months ended March 31, 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 three months
ended, March 31, 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 March 31, 2022:
| | |
March 31, 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
Leasing
Activity
—
Colombia. 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.
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 March 31, 2022, through our ownership interest in
Hupecol Meta, we held 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, 2022, no drilling activities were conducted.
During
the quarter ended March 31, 2022, our capital investment expenditures totaled $30,893, principally relating to _ final expenses
related to the plugging and abandonment of the Lou Brock well. ($14,161) and investments in our cost method investment in Hupecol
Meta ($16,732).
Results
of Operations
Oil
and Gas Revenues. Total oil and gas revenues increased 29% to $423,820 in the three months ended March 31, 2022, compared to $328,488
in the three months ended March 31, 2021. The increase in revenue was due to increases in average sales price of oil (up 76%) and an
increase in natural gas production (up 21%), partially offset by a decline in oil production (down 31%) and a decline in average sales
price of natural gas (down 16%).
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, 2022 and 2021:
| | |
Three Months Ended March 31, | |
| | |
2022 | | |
2021 | |
| Gross producing wells | |
| 4 | | |
| 4 | |
| Net producing wells | |
| 0.68 | | |
| 0.69 | |
| Net oil production (Bbl) | |
| 3,040 | | |
| 4,394 | |
| Net gas production (Mcf) | |
| 17,292 | | |
| 14,291 | |
| Average sales price – oil (per barrel) | |
$ | 91.67 | | |
$ | 52.08 | |
| Average sales price – natural gas (per Mcf) | |
$ | 4.13 | | |
$ | 4.90 | |
The
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.
Oil
and gas sales revenues by region were as follows:
| | |
Colombia | | |
U.S. | | |
Total | |
| 2022 First Quarter | |
| | | |
| | | |
| | |
| Oil sales | |
$ | — | | |
$ | 279,478 | | |
$ | 279,478 | |
| Gas sales | |
$ | — | | |
$ | 71,382 | | |
$ | 71,382 | |
| NGL sales | |
$ | — | | |
$ | 72,960 | | |
$ | 72,960 | |
| 2021 First Quarter | |
| | | |
| | | |
| | |
| Oil sales | |
$ | — | | |
$ | 228,843 | | |
$ | 228,843 | |
| Gas sales | |
$ | — | | |
$ | 70,086 | | |
$ | 70,086 | |
| NGL ales | |
$ | | | |
$ | 29,559 | | |
$ | 29,559 | |
Lease
Operating Expenses. Lease operating expenses decreased 3% to $161,272 during the three months ended March 31, 2022 from $166,214
during the three months ended March 31, 2021. Lease operating expenses, by region were as follows:
| | |
Colombia | | |
U.S. | | |
Total | |
| 2022 First Quarter | |
$ | — | | |
$ | 161,272 | | |
$ | 161,272 | |
| 2021 First Quarter | |
$ | — | | |
$ | 166,214 | | |
$ | 166,214 | |
Depreciation
and Depletion Expense. Depreciation and depletion expense was $58,239 and $32,365 for the three months ended March 31, 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 decreased by 28% to $284,615
during the three months ended March 31, 2022 from $393,651 during the three months ended March 31, 2021. The change in general and
administrative expense 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 $85,485 during the three months ended March 31, 2022 from $15,109 during
the three months ended March 31, 2021. The change was attributable to the timing of option vesting.
Other
Income (Expense). Other income/expense, net, totaled $231 of income during the three months ended March 31, 2022, compared to $10,374
of income during the three months ended March 31, 2021. Other income consisted of interest income on cash balances during the three months
ended March 31, 2021 and March 31, 2022 and, during the three months ended March 31, 2021, recovery of escrowed funds previously written
off.
Financial
Condition
Liquidity
and Capital Resources. At March 31, 2022, we had a cash balance of $4,766,877 and working capital of $4,988,063, compared
to a cash balance of $4,894,577 and working capital of $4,988,062 at December 31, 2021.
Cash
Flows. Operating activities used cash of $96,807 during the three months ended March 31, 2022, compared to $365,191 used during
the three months ended March 31, 2021. The change in operating cash flow was attributable to a lower loss incurred during the three months
ended March 31, 2022 and a change in operating assets and liabilities that increased cash during the three months ended March 31, 2022,
compared to decreasing cash during the three months ended March 31, 2021.
Investing
activities used $30,893 during the three months ended March 31, 2022, compared to $177,031 during the three months ended March
31, 2021. The change in funds used by investing activities is principally attributable to higher investments in Hupecol Meta LLC during
the three months ended March 31, 2021 (up $97,304 compared to the three months ended March 31, 2022) and investments in our Lou Brock
well during the three months ended March 31, 2021.
Financing
activities provided $0 during the three months ended March 31, 2022, compared to $4,570,888 provided during the three months ended March
31, 2021. 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).
Long-Term
Liabilities. At March 31, 2022, we had long-term liabilities of $253,830, compared to $279,953 at December 31, 2021. Long-term
liabilities at March 31, 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 newly acquired Colombian acreage. Based on discussions
with Hupecol, we anticipate that drilling operations on our CPO-11 block in Colombia will commence in mid-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 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 three months ended March 31, 2022, we invested $30,893 for the acquisition and development of oil and gas properties, consisting
of drilling and development operations in the U.S ($14,161), principally relating to final expenses related to the plugging and
abandonment of the Lou Brock well., and investments in Hupecol Meta ($16,732). The $14,161 invested in U.S. operations was capitalized
to oil and gas properties subject to amortization. The $16,732 invested in Hupecol Metal was capitalized to our interest 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 March 31, 2022.