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The Next Major Colombian Exploration Opportunity?

 

Houston American Energy Corp.

 

 

Website: www.houstonamericanenergy.com

Listed NASDAQ: HUSA

Shares Issued: 28,000,772

Market Cap: $129 million

Debt: $0.00

Recent Price: $4.60

 

 

Why Houston American Energy?

 

Impeccable Credentials

 

We were extremely impressed with Houston’s management and their ability to participate in significant exploration projects in Colombia and the seriousness of its partners.  To give you an example, last year one of Houston American Energy’s partners, Hupecol, sold their assets in the Carancara project to Cespa for a staggering USD 920 million.  As a result Houston American which was carried for a 1.6% working interest received net proceeds of over $11.5 million.

 

Houston American’s most recent partner, SK Energy Co. LTD, the South Korean conglomerate, is one of the largest companies in the world.  Houston American recently announced a joint operating agreement with SK to earn a 25% interest in the 345,452 acre CPO 4 block.  This block is located in a highly prospective area and contains over 100 drilling prospects with extremely large reserve potential.  These are just 2 examples of the excellent management.  I will get into more detail as we go on, but as you can see, Houston American’s CEO John Terwillinger clearly has had the foresight and connections to capitalize on the huge opportunity in Colombia.  We feel the company is at the forefront of a considerable breakout.

 

Why Colombia?


To start with, Colombia is one of the few countries with significant untapped oil resources capable of supporting growth in oil production and exports.

 

Colombia is considered one of the most politically stable countries in Latin America with economic growth and a vastly improved security environment both of which are opening the door to foreign investment and renewed economic growth.

 

The Colombian government recently enacted a number of progressive fiscal changes aimed at increasing international oil company investment similar to those in the UK which spurred renewed interest in the North Sea.

 

Foreign oil companies now can own 100% stakes in oil ventures.  Also, the sliding scale royalty rates have been lowered on oil projects depending on field size, with an 8% royalty rate for most oil fields.  In addition, longer exploration licenses are now being granted to foreign oil companies.

 

With these changes in place, Colombia has seen a resurgence of interest in the oil and gas industry as foreign investment now exceeds over $3.5 billion a year.  A growing number of international companies are pursuing hydrocarbon exploration in Colombia as oil production is forecast to rise to 700M barrels per day by the end of the year and potential reserves will increase to more than 3.0 billion barrels.

 

Major players such as Royal Dutch Shell, Exxon Mobil, Chevron, BP and Total to name a few are now taking advantage of the investor friendly policies and are operating in Colombia.

 

As the majors struggle to replace dwindling reserves through success in Colombia, clearly the opportunity lies in the junior, mid and small cap entrants where the impact is much greater on their share value.  Below I will show you a few examples of how explosive the investment returns can be in Colombian exploration plays.  The three companies profiled have all had their success in the past few years.

 

 

Gran Tierra Energy (AMEX: GTE)

 

 

Gran Tierra has a 100% WI in the Costuyaco field in the Chaza block in the Putmayo Basin of Southern Colombia.  In just over 2 years the company has transformed from a $100 million company with very little production to a now $1.2 billion market cap with production of over 19,000 BPD.

 

Pacific Rubiales Energy Corp. (Toronto: PRE.TO)

 

 

 

Pacific Rubiales is a Canadian listed oil company and with their recent success in the Quifa Block, it has become the largest independent oil producer in Colombia.  Daily production has increased to over 33,000 BPD up from 12,000 BPD last year.  In the last year the company’s share price has soared from under $3.00 to over $15.00 per share giving it a $3 billion market cap.

 

Petrominerales Ltd (Toronto: PMG.TO)

 

 

Petrominerales has a very large portion of their production, 13,500 BPD, coming from their Corcel project which is just to the north and encompasses the same structure as Houston American’s CPO 4 Block.  The market cap is now $1.7 billion.

 

Spotting the next Super Stock

 

In our search for exceptional stock investments never have we seen such a fantastic risk-reward scenario as Houston American Energy.  Sure, there are bigger plays out there, but none as well rounded with a combination of a superb balance sheet, experienced management, excellent partners, simple capitalization structure and a large portfolio of high impact exploration assets.

 

Overview of Houston American’s projects in Colombia.

 

Hupecol Colombian Operations

 

Houston American has partnered with Hupecol and participated in its drilling operations in Colombia since 2002. Hupecol is a privately held company which has acquired and operated a significant number of concessions in the Llanos Basin of Colombia during the last ten years. The Llanos basin is the most prolific area in Colombia as it covers 125,000 square miles with more than 25 current operators in production.

Hupecol has drilled over 100 wells in this area to date with a 70% success rate. The Hupecol projects are where all of Houston American’s current production is derived. Houston American has current net production of over 850 boe/d. The following below are Houston Americans working interests in the Hupecol project.

La Cuerva  1.6%

Doretea      12.5%

Leona         12.5%

Cabiona      12.5%

Las Garzas 12.5%

Surimena    6.25%

 

Currently Hupecol has all of these blocks up for sale except for Surimena. Scotia Waterous is representing Hupecol in the sale which they expect to close in Q1 2010.  Third party reserve engineers Lonquist & Co., LLC have given these assets a PV-10% value of approximately $300 million.  The sale of these assets will provide Houston American with significant cash which will fund its seismic processing and drilling obligations on the CPO 4 and Serrania block next year.

 

CPO 4 Block

 

The CPO 4 Block consists of 345,452 net acres and contains over 100 identified leads or prospects which will be detailed during the first exploration phase. The Block is located along the highly productive western margin of the Llanos Basin and is adjacent to Apiay field operated by Ecopetrol, which is estimated to have in excess of 610 million barrels of 25-33 API oil in place. On the Northern edge of CPO 4 lays the Corcel Block where well rates of 2,000 to 10,000 barrels of production per day have been announced for recent discoveries. In addition, the CPO 4 Block is located nearby oil and gas pipeline infrastructure. Potentially productive reservoirs include the Mirador, Une, C-7, C-9 and Guadalupe formations.

 

Last month Houston American announced a Farmout and Joint Operating Agreement with SK Energy Co. LTD. ("SK") for the right to earn an undivided twenty five percent (25.0%) of the rights to the CPO 4 Contract for Exploration and Production which covers the CPO 4 Block located in the Western Llanos Basin in the Republic of Colombia. SK is a leading $80 Billion Korean multinational conglomerate with oil production, development and exploration projects as well as integrated gas development projects around the world and they will be the operator of the project.

Under the Farmout Agreement, Houston American has agreed to pay 25.0% of all past and future cost related to the CPO 4 block as well as an additional 12.5% of the Seismic Acquisition Costs incurred during the Phase 1 Work Program, for which Houston American will receive a 25.0% interest in the CPO 4 Block. This is the most prolific project in the pipeline for Houston American.

 

Serrania Block and Los Picachos

 

In June Houston American Energy Corp. entered into a farmout agreement with Shona Energy (Colombia) Limited pursuant to which Houston will pay 25% of designated geological and seismic costs relating to the Serrania Contract for Exploration and Production relating to the approximately 110,769 acre Serrania Block in Colombia and for which they will receive a 12.5% interest in the Serrania Contract. The block is adjacent to the recent Ombu discovery, which is estimated to contain 1 billion barrels of oil in place. Drilling is expected to commence Q1 2010. The Los Picachos encompasses an 86,235 acre region located to the west and northwest of the Serrania block. It is an extension of the Serrania block which expands the number of drilling prospects. Initial 2-D seismic has already identified several large prospects.

 

Houston American Energy Corp (NASDAQ: HUSA)

 

 

 

Houston American’s chart above shows a clear upside is ahead.  At this phase the weekly RSI stochastics and OBV have all issued buy signals.

 

After already acquiring several giant projects we wonder what John will do for an encore.  Suffice to say, Houston American appears to be well on the way to becoming a major success and as its news flow increases, so should its share price.  We are now aggressive buyers.  For more information please go to Houston American’s website at www.houstonamericanenergy.com.  Better yet, call us for the very latest information at 1-800-404-8982.  I think you will agree this is one of the oil industry’s most exciting and fascinating stories.

 

 

Very Sincerely Yours,

 

 

 

Kevin McKnight
1-800-404-8982
Undiscovered Equities, Inc.

101 Plaza Real South, Suite 212
Boca Raton, FL 33432