| 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 six months ended June 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 six months
ended, June 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 June 30, 2022:
| | |
June 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 six months ended June 30, 2022, of an
additional interest (1%) in Hupecol Meta for $100,000.
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 June 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 six months ended June 30, 2022, Hupecol Meta drilled the Bugalu 1, a vertical test well in the Venus Exploration Area of the CPO-11
block in Colombia. At June 30, 2022, drilling operations on the Bugalu 1 had been completed, production casing was run and the well was
awaiting testing. A directional well from a second site in the Venus Exploration Area commenced drilling in July 2022. No drilling operations
were conducted on our U.S. properties during the six months ended June 30, 2022.
During
the six months ended June 30, 2022, our capital investment expenditures totaled $262,444, principally relating to final expenses associated
with the plugging and abandonment of the Lou Brock well ($14,162) and investments in our cost method investment in Hupecol Meta ($148,282)(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 52% to $462,989 in the three months ended June 30, 2022, compared to $303,999
in the three months ended June 30, 2021. Oil and gas revenues increased 40% to $886,809 for the six months ended June 30, 2022, compared
to $632,487 in the six months ended June 30, 2021. The increase in revenue was due to (i) increased natural gas production volumes, up
59% and 38% for the three and six-month periods, respectively, partially offset by a decline in oil production, down 38% and 34% for
the three and six-month periods, respectively, and (ii) improved commodity pricing, including 71% and 153% increases in crude oil prices
and natural gas prices, respectively, realized during the three-month period and 73% and 39% increases in crude oil prices and natural
gas prices, respectively, realized during the six-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 six months ended June 30, 2022 and 2021:
| | |
Six Months Ended
June 30 | | |
Three Months Ended
June 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) | |
| 5,478 | | |
| 8,295 | | |
| 2,438 | | |
| 3,901 | |
| Net gas production (Mcf) | |
| 35,542 | | |
| 25,738 | | |
| 18,250 | | |
| 11,447 | |
| Average sales price – oil (per barrel) | |
$ | 99.11 | | |
| 57.36 | | |
$ | 108.05 | | |
$ | 63.30 | |
| Average sales price – natural gas (per Mcf) | |
$ | 5.38 | | |
| 3.88 | | |
$ | 6.57 | | |
$ | 2.60 | |
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.
All
oil and gas sales revenues are attributable to U.S. operations.
Lease
Operating Expenses. Lease operating expenses increased 63% to $150,485 during the three months ended June 30, 2022, from $92,531
during the three months ended June 30, 2021. Lease operating expenses increased 20% to $311,757 during the six months ended June 30,
2022, from $258,745 during the six months ended June 30, 2021. The increase in lease operating expenses was attributable to rework and
equipment costs.
All
lease operating expenses are attributable to U.S. operations.
Depreciation
and Depletion Expense. Depreciation and depletion expense was $51,501 and $26,271 for the three months ended June 20, 2022 and 2021,
respectively, and $109,740 and $58,635 for the six months ended June 30, 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 increased 1% to $233,376 during
the three months ended June 30, 2022, from $231,328 during the three months ended June 30, 2021 and decreased 17% to $517,991 during
the six months ended June 30, 2022, from $624,979 during the six months ended June 30, 2021. The decrease in general and administrative
expenses 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 $25,520 during the three months ended June 30, 2022, from $0 during the three
months ended June 30, 2021 and increased 635% to $111,005 during the six months ended June 30, 2022, from $15,109 during the six months
ended June 30, 2021. The increase was attributable to the timing of option grants and vesting.
Financial
Condition
Liquidity
and Capital Resources. At June 30, 2022, we had a cash balance of $4,602,772 and working capital of $4,852,063, 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 $29,361 during the six months ended June 30, 2022, compared to $527,759 used during the six months
ended June 30, 2021. The change in operating cash flow was primarily attributable to increased
revenues and a resulting decrease in net loss during the six-months ended June 30, 2022.
Investing
activities used $262,444 during the six months ended June 30, 2022, compared to $166,949 used during the six months ended June 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.
Financing
activities provided $0 during the six months ended June 30, 2022, compared to $4,570,888 provided during the six months ended June 30,
2021. Cash provided by financing activities during the six months ended June 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 June 30, 2022, we had long-term liabilities of $252,056, compared to $279,953 at December 31, 2021. Long-term liabilities
at June 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 a vertical
test well in the Venus Exploration Area on the CPO-11 block during the six months ended June 30, 2022 and, in July 2022, Hupecol Meta
commenced drilling operations on a directional well on the block. 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 six months ended June 30, 2022, we invested $262,444 for the acquisition and development of oil and gas properties, consisting of
drilling and development operations in the U.S ($14,162), principally relating to final expenses related to the plugging and abandonment
of the Lou Brock well, and investments in Hupecol Meta ($248,282), including $100,000 paid to increase our ownership interest in Hupecol
Meta. The $14,162 invested in U.S. operations was capitalized to oil and gas properties subject to amortization. The $248,282 invested
in Hupecol Metal 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 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 June 30, 2022.
Inflation
We
believe that inflation has not had a significant impact on operations since inception.