Thursday, March 8, 2012

If you don't have enough cash you can't fix problems with your tool and you might lose all your properties

Houston American is an oil-and-gas explorer which had enough cash for one speculative well in Columbia. Just one speculative well.

It had to work.

Alas recently their (down-hole) tool failed and their stock dropped 35 percent. The stock has since drooped a little more. But it was - as the CEO pointed out - a promising well. They had approximately 200 feet of "net resistive sands" which my readers helpfully point out means sandstone with low electrical conductivity and hence possibly saturated with hydrocarbons.

But they did not get to test those sands (yet) and tool failure meant they could not test the well at its target depth (and they had to plug the lower part of the well).

The question arises though - why didn't they fix the well? Why didn't they do what "big oil" does when it has problems (that is throw money at them). The answer is that they do not have much cash.

The 10K just came out. The first thing I looked at was cash balances. Unescrowed cash was 9.9 million compared to 26.6 million a year ago. At the end of September cash was 15.1 million. Most of the well expense has probably been incurred after year end and the cash balance is almost certainly low single digit million.

Which is not what you want when your tool breaks and it is going to cost a lot of money to fix it. Or even a fair whack of money to test the "net resistive sands".

Still the company is straight about it. The auditor did not give them a "going concern statement" which surprised me. But the company disclosed the problems anyway. Here is the disclosure from the 10K.


While our development costs were funded during 2011 with funds on hand and cash flow from our other producing properties, our funds on hand at December 31, 2011 and anticipated cash flow from operations in 2012 are not sufficient to fund our 2012 drilling budget. Accordingly, unless we are able to secure additional financing or substantially increase our operating cash flow, we may be required to curtail our drilling plans. We do not presently have any commitments to provide additional financing to support our 2012 drilling budget. If we are unable to secure additional financing, we may be unable to meet certain contractual commitments regarding the development of our properties and, as a result, may incur penalties or risk losing some or all of our interest in properties for which we fail to satisfy our funding commitments.

Bluntly if this company does not raise money it will not be able to meet its drilling commitments and may lose all of their interest in all their main properties.

Funny how they did not mention that when they talked about their "net resistive sands".

Lesson: if your tool fails, your stock droops and you have no cash you can lose all your properties. Even if you show some resistance.



John

10 comments:

D@B said...

Taking this further, companies should have to be able to show that they have the financial capacity to not only drill the well but appropriately evaluate it. Further, issues frequently arise where when drilling, and its not uncommon for a well to cost double or worse than 'expected'. Some minimum reserve should be a requirement. This is not just to protect investors from being shortchanged but also for government information. The evaluation information is just as important to them as it is to the company.

Anonymous said...

John,

what makes me wonder is that usually the drilling itself is subcontracted, so "tool failure" (or fouled up well, which I honestly think way more likely here) is not exactly owner's problems.

If these guys really drilled themselves, it means they had to hire specialists. And drilling experts are not all too abundant - good ones are long employed by rich and stable "oil service" companies like halluburton, and you won't have much luck getting them outta there to some obscure assignment with no clear future.

Which in turn increases chances of all kinds of mishaps.

Regards,
Dmitry.

Anonymous said...

Getting to the heart of the matter, Columbia or Colombia?

John Hempton said...

Dmitry - they just had no money. They did it on the cheap.

J

Alex said...

John,

I cant really tell if you are saying this is an interesting situation or not. I don't know much about it besides reading Citron a long time ago. But looking at your article from the fraud skeptic, isnt it likely they are just pretending this is a "cash issue".

http://www.citronresearch.com/index.php/2010/04/08/husa-recent-run-up-is-a-snow-job/

Anonymous said...

Speaking in entirely technical terms-

The tool was obviously not lubricated correctly.

This leads to a local build up of heat, which can then translate into cash burn(it must be kept close to the tool) and huge emissions of hot air from management.

Sometimes it can be corrected by manual release of pressure, but the net resistance to this idea by the hole in question is reason for concern.

The hole is probably dry. Further intrusive study could result in more severe equipment failure. For this tool anyway.

Fred said...

John-

You clearly have not done enough research on this company to post an intelligent comment. Your entire premise is incorrect, you have the material facts wrong and cannot even correctly spell the name of the country that this company is operating in. Bluntly, I suggest you either do your research more thoroughly or shut up.

Fred

John Hempton said...

Thank you Fred.

Edward said...

I just read this blog on HUSA and don’t know if it is supposed to be truthful or just funny, but I would say...NEITHER!! – to begin “Resistive Sands” ARE hydrocarbon bearing as any properly trained geologist would tell you… (link to Baker Hughes Logging Manual which explains... http://www.bakerhughes.com/assets/media/brochures/4d504fcd177231641a000008/file/30034-3dex_brochure-rev311.pdf.pdf&fs=6326262 )

Additionally, the company has access to plenty of capital and assets it can fairly easily monetize IF they need to. You carelessly misread the 10K. They “may” need to raise money NOT must raise money immediately. You are jumping to conclusions and seem to have little understanding of this company nor their available options. If the situation was anywhere near as dire as you imply there would of course have been a going concern statement. However in this situation it does not apply. What you fail to recognize that 10Ks are written by lawyers and are defensive, like prospectuses. You obviously have no experience with oil exploration and production or you would understand that the problem was not HUSA’s but the drill operators, and, in fact, the tool didn’t even fail – The proper answer to your question – why didn’t they fix the well is that they made a decision to extract the oil from the upper section of the well which will be easier, less expensive, and will get the cash flowing sooner. The plan is to then drill another hole to access these deeper reserves which will be more cost effective than cleaning up the mess 15,000 feet underground. The reality that you cannot grasp is that this is a smart economically sound decision by experienced oil men.

In summation, your “Blog” on HUSA is foolish, na├»ve and just plain wrong on the facts (they have cash on hand for at least another 2 wells, have plenty of financing options, have drilled hundreds of wells in Colombia for 10 years and are in the process right now of testing the net resistive sands!) thus I will depart with several quotes…. “My father once told me never to argue with an idiot because they will try to bring you down to their level and then beat you with experience”…. “Australia is where Great Britain once sent their criminals and embarrassing idiots… and it remains a country full of criminals and idiots”…… and “Don’t believe everything you read”…. Good Luck with your short position

Edward

Anonymous said...

Edward, HUSA down 71% since your post. Good luck indeed.

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