Friday, March 2, 2012

When your tool fails your stock drops 35 percent

Houston American Energy yesterday announced a problematic exploration well. They had (drilling) tool failure. The stock fell 35 percent.

I read a lot of press releases: this one is amusing.

HOUSTON, March 1, 2012 /PRNewswire/ -- As reported in Houston American Energy Corp's (NYSE Amex: HUSA) Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and in Form 8-K on December 19, 2011, drilling operations on the Company's first well on the CPO-4 block in Colombia, the Tamandua #1, with a projected target depth of 16,300 feet, commenced in July 2011 and was subsequently sidetracked to address drilling issues associated with high pressure and inflows of hydrocarbons and fluids into the well bore. As of December 19, 2011, the sidetrack well had been drilled to 13,989 feet and efforts were ongoing to control the well bore while continuing drilling to the target depth.  
Subsequently, and as of March 1, 2012, the Tamandua #1 sidetrack well had a 7 inch liner run to 13,913 feet and was drilled to total depth ("TD") at 15,562 feet.   Upon drilling the well to TD, the well encountered Paleozoics which was a clear indication that the TD had been reached.    
While the well exhibited oil shows while drilling, and other indications of hydrocarbons such as log analysis that indicate possible productive sands, hole conditions have prohibited sufficient testing on the bottom hole sections.  There have been many attempts to evaluate the well resulting in tool failures and stuck pipe, and current conditions are such that the operator has made the decision not to try to reenter the bottom hole sections.  As a result of these developments, the decision has been made that without the ability to effectively test the lower zones, the most prudent course of action is to plug back the well and to further evaluate the C-7 and C-9 Formations.  As previously reported and indicated by the Logging While Drilling data, the well encountered approximately 200 feet of net resistive sands in the C-7 formation and approximately 140 feet of net resistive sands in the C-9 formation (resistive sands do not necessarily mean pay).  
Results of the further evaluation of the C-7 and C-9 formations will be announced as soon as they are available.  After attempting to complete the well, the rig is expected to be moved to one of two locations that are currently permitted and ready to receive the rig.  In addition, the Operator has five additional locations that are in various stages of permitting, location and construction. 



John

And a follow up question: can anyone explain to me what is meant by "net resistive sands"? The phrase does not appear anywhere in the Google database not linked to this company.

Post script: There is a Bloomberg article which quotes the CEO as follows:

“I would like to make it clear to our investors that the Tamandua #1 well is not being abandoned,” John F. Terwilliger, chief executive officer of Houston American, said in an e-mailed statement today. 
“Current ongoing operations are to make a completion attempt in the C-9 and C-7 sands,” he said. “As previously reported, the Tamandua #1 well exhibited hydrocarbon shows in the C-7 and C-9 sands, and logged approximately 200 feet of net resistive sands in the C-7 formation and approximately 140 feet of net resistive sands in the C-9 formation. We are eagerly awaiting the results from these completion attempts.”
This corrects a previous article which unambiguously suggested the well was dry.

15 comments:

Tom said...

I imagine "net" resistive sands refers to "more" rather than "less" resistive sands.

ADL said...

I learned a lesson on this, though since it didn't cost me anything we'll see whether I did actually learn anything. A Post-It on my computer for the past 9 days has read: "Buy HUSA puts NOW." For no reason other than distractions in the non-investment world, I didn't. I was sure one of the incipient catalysts I saw would continue to remain incipient (of course, if I really believed that, I'd have shorted, rather than buying/not buying puts). Ah, well.

John Hempton said...

The puts would have been fun... I was short this average from 14. But it went somewhere near 20 after I shorted it.

It has been profitable - but hardly been fun!

Unknown said...

Resistive sands indicate sands that contain resistive fluids. It is measurement of electrical resistivity. Oil does not conduct electricity well while salt water does. They are trying to imply that there are hydrocarbons there with out any well test data.

Anonymous said...

Lulz.
I hadn't been there, so obviously a guess, but the story sounds much like they "sank the well" - e.g. for lack of proper drainage/cleaning they have assorted fluids coupled with sands\clays\whatever entering the well. It happens often enough, and makes further working at the well a true nightmare (imagine working drills and other stuff in highly pressurized plasticine with abrasive crumbs. It's not like you "can't drill diamond", it's merely everything gets messed and fouled up real fast, resistive forces are through the roof, and whatever you do, in a hour, the plasticine is back where it was ;)).
So what they are writing is, basically, "we're thinking on what to so with that mess".

Regards,
Dmitry.

Zimmer said...

I don't know a lot about about Houston American, but I have followed a lot of junior E&P companies over the years, and it seems like they all learn how to write press releases the same way.

If the pattern holds, there will be one or two more vague press release over the next 6-12 months which will continue to suggest the possibility of lots of oil, but techinical issues will continue to prevent them from making definitive conclusions.

At some point, they will just stop talking about this well, and they will go on to promoting the next possible homerun.

Anonymous said...

Speaking of petrochemicals, I miss the occasions Norther Oil and Gas updates--still in that position, or done with it?

Jeff said...

I was short at 18.50 and then it dropped to 15 in "short" order and I exited. Felt smart when it snapped up to $19.50 summer 2011. Oh well... This blogger said it well...

"To believe that Houston American is worth hundreds of millions of dollars - or even billions -- is to believe that an obscure company run by people with less-than-stellar track records made a truly spectacular deal, acquiring a lucrative prospect for a fraction of its true worth, from a partner rich enough to go it alone."
http://sharesleuth.com/investigations/2010/06/both-of-the-oil-companies/

That SK Energy would give up a multi-billion property for pennies just didn't make sense.

A columbian oil well is a hole in the ground with a liar on top?

Anonymous said...

John, I was short this one as well, but gave up too early. Congrats on sticking with it. What a sketchy management team.

Anonymous said...

"When your tool fails your stock drops 35 percent"

I see you've been speaking with my ex-girlfriend.

Anonymous said...

John,

Oilfield trash here. As you drill, you encounter different rock types, of which sand (actually sandstone) is the most common reservoir rock. The electrical resistance of the reservoir rock is an indicator of fluid content: oil and gas are resistive, while water will conduct electricity.

It is rare to find one big, continuous sandstone, generally they will be in different layers, separated by other, non-reservoir rock.

Net Resistive Sands is thus the sum of the thickness of the sandstone which shows higher resistivity which could be oil/gas bearing. It's a very crude measure of how much reservoir may exist, but little value without porosity/permeability and structure size.

Enjoy your blog, always interesting reading.

Professor Professorson said...

Is shorting E&P stocks a good idea? The downside must be pretty extreme!

John Haskell said...

"A third member of Houston American's five-person board, Edwin C. Broun III,
was described in court documents last year as suffering from alcohol-related
brain damage that could affect his ability to "process information and make
sound decisions." The filing, submitted in his defense, characterized him as
a recluse who slept all day, drank all night and hadn't opened his mail in
two years."

John Hempton said...

I think if you take 50bps positions in companies where the board members have alcohol related brain damage (yes literally) you will probably do alright on average.

J

Anonymous said...

you might on your assessment on alcohol but if you have narcisstic behaviour to your competitors such as yourself JH, all you have to do is short stocks you rubbish and your bound to win???
correct?

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