Item 1A. Risk Factors
Our
business activities and the value of our securities are subject to significant hazards and risks, including those described below.
If any of such events should occur, our business, financial condition, liquidity and/or results of operations could be materially
harmed, and holders and purchasers of our securities could lose part or all of their investments.
Company
and Organization Risks
We
have experienced recurring operating losses and may not attain profitability; attainment of profitability will require successful
drilling and development operations to support substantial increases in production and revenues.
We
have incurred losses from operations in each year since 2011 and, at December 31, 2020, had an accumulated deficit of $72,021,911.
While we have implemented cost control initiatives that have brought down our cash overhead in recent years, our ability to attain
profitability is substantially dependent upon increasing our production and production revenues while continuing to control costs.
In order to increase production and revenues, we will need to successfully drill new wells on our existing, or future acquired,
acreage at a pace, and with results, significantly greater than in recent years. If, for any reason, we are unable to substantially
increase our production and revenues, while controlling drilling costs and overhead, we may never attain, or sustain, profitability.
Our ability to so increase production and revenues and attain profitability is subject to all of the other risks of oil and gas
operations as well as our ability to fund our share of drilling and development operations.
Our
ability to operate profitably and our financial condition are highly dependent on energy prices. A substantial or extended decline
in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability
to meet our capital expenditure obligations and financial commitments.
The
price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future
rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response
to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These
markets will likely continue to be volatile in the future. The prices we receive for our production depend on numerous factors
beyond our control. These factors include, but are not limited to, the following:
● the actions of the Organization of Petroleum Exporting Countries, or OPEC;
● the price and quantity of imports of foreign oil and natural gas;
● the level of global oil and natural gas exploration and production activity;
● the level of global oil and natural gas inventories;
● weather conditions;
● the price and availability of alternative fuels.
Global
economic growth drives demand for energy from all sources, including fossil fuels. Should the U.S. and global economies experience
weakness, demand for energy may decline. Similarly, should growth in global energy production outstrip demand, excess supplies
may arise. Declines in demand and excess supplies may result in accompanying declines in commodity prices and deterioration of
our financial position along with our ability to operate profitably and our ability to obtain financing to support operations.
With
respect to our business, we have experienced periodic declines in demand thought to be associated with slowing economic growth
in certain markets, including the effects of the COVID-19 pandemic, coupled with new oil and gas supplies coming on line and other
circumstances beyond our control that resulted in oil and gas supply exceeding global demand which, in turn, resulted in steep
declines in prices of oil and natural gas. There can be no assurance as to how low the current price decline will persist or that
a reoccurrence of price weakness will not arise in the future.
Past
declines in prices reduced, and any declines that may occur in the future can be expected to reduce, our revenues and profitability
as well as the value of our reserves. Such declines adversely affect well and reserve economics and may reduce the amount of oil
and natural gas that we can produce economically, resulting in deferral or cancellation of planned drilling and related activities
until such time, if ever, as economic conditions improve sufficiently to support such operations. Any extended decline in oil
or natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity
or ability to finance planned capital expenditures.
The
COVID-19 pandemic materially adversely affected our operations during 2020 and may continue to adversely affect our operations
for the foreseeable future.
In
early 2020, global health care systems and economies began to experience historic strain from the spread of the COVID-19 coronavirus.
As the virus spread, global economic activity began to slow and future economic activity was forecast to, and did, slow with a
resulting forecast of a decline in oil and gas demand. As a result, global energy prices declined precipitously. The decline in
prices adversely affected our revenues and profitability in 2020 and, while energy prices have partially recovered, may adversely
affect the economics of our existing wells and planned future wells, possibly resulting in impairment charges to existing properties
and delaying or abandoning planned drilling operations as uneconomical.
In
response to the COVID-19 pandemic, our staff has begun working remotely and many of our key vendors, service suppliers and partners
have similarly begun to work remotely. As a result of such remote work arrangements, we anticipate that certain operational, reporting,
accounting and other processes will slow which may result in longer time to execute critical business functions, higher operating
costs and uncertainties regarding the quality of services and supplies, any of which could substantially adversely affect our
operating results for as long as the current pandemic persists and potentially for some time after the pandemic subsides.
Competition
in the oil and natural gas industry is intense, which may adversely affect our ability to compete.
We
operate in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel.
Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which
can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and
natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects
than our financial or personnel resources permit. Our ability to acquire additional prospects and to find and develop reserves
in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly
competitive environment. Also, there is substantial competition for capital available for investment in the oil and natural gas
industry. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing
hydrocarbons, attracting and retaining quality personnel and raising additional capital.
Our
ability to acquire additional mineral acreage and to drill and develop our existing acreage as well as other acreage that may
be acquired is subject to availability of financing on satisfactory terms.
Our
financial resources are limited and may not be adequate to fully drill and develop our acreage or to consummate any meaningful
acquisition. While our available funds as of March 29, 2021 are expected to be adequate to fund our share of well costs
on wells expected to be drilled, as of that date, during 2021, our funds on hand are not expected to be adequate to support a
long-term drilling and development plan with respect to our existing acreage holdings, should such a plan be implemented.
We
may continue to seek to access the capital markets to support planned drilling operations or acquisitions through sales of common
stock, preferred stock or other securities or may seek debt financing to support such capital requirements. We do not presently
have any commitments to provide equity or debt financing to support any future drilling operations or acquisitions and there can
be no assurance that such financing will be available if and when needed on acceptable terms or at all. If we are unable to fund
our share of drilling and completion costs of future wells, we may experience flat and declining production and revenues and decreased
profitability and may be subject to penalties with respect to our interest in acreage.
We
may be unable to make attractive acquisitions and any acquisitions may be subject to substantial risks that could adversely affects
our business.
Acquisitions
of additional mineral acreage at favorable prices is part of our strategy to increase and diversify our holdings and grow our
production and revenues. We expect to focus our acquisition efforts in the Permian Basin and in Colombia with an emphasis on partnering
with proven operators in the area to acquire positions at favorable prices. Competition for mineral acreage in the Permian Basin
is intense. Other operators, particularly large operators, have historically paid substantially higher prices for Permian Basin
acreage than we have paid. There can be no assurance that we will be able to successfully acquire additional acreage in the Permian
Basin, Colombia or elsewhere at favorable prices or at all. Even if we are successful in acquiring additional acreage on favorable
terms, it is possible that such acreage (i) will be more speculative than higher priced acreage, (ii) may face challenges or limitations
in drilling and operations such as lack of, or limited access to, critical infrastructure, or (iii) may prove uneconomical.
Our
success depends on our staff, which is small in size and limited in technical capabilities, and third party consultants, the loss
of any of whom could disrupt our business operations.
Our
success will depend on our ability to attract and retain key staff members. Our staff is extremely small in size and possesses
limited technical capabilities. We do not presently maintain any significant internal technical capabilities but rely on the engineering,
geological and other technical skills of our board and, from time to time, third party consultants. If members of our staff should
resign or we are unable to attract the necessary personnel, our business operations could be adversely affected.
Our
charter and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire our company and
also could limit the price that investors are willing to pay in the future for shares of our common stock.
Delaware
corporate law and our charter and bylaws contain provisions that could delay, deter or prevent a change in control of our Company
or our management. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect
directors and take other corporate actions without the concurrence of our management or board of directors. These provisions:
● provide that directors may be removed only for cause; and
We
are also subject to anti-takeover provisions under Delaware law, which could also delay or prevent a change of control. Taken
together, these provisions of our charter, bylaws, and Delaware law may discourage transactions that otherwise could provide for
the payment of a premium over prevailing market prices of our common stock and also could limit the price that investors are willing
to pay in the future for shares of our common stock.
Oil
and Gas Operating Risks
Drilling
for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business,
financial condition or results of operations.
Our
future success will depend on the success of our exploitation, exploration, development and production activities. Our oil and
natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling
will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise
exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses,
production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Please
read “Reserve estimates depend on many assumptions that may turn out to be inaccurate” (below) for a discussion of
the uncertainty involved in these processes. Our cost of drilling, completing and operating wells is often uncertain before drilling
commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors
may curtail, delay or cancel drilling, including the following:
● delays imposed by or resulting from compliance with regulatory requirements;
● pressure or irregularities in geological formations;
● shortages of or delays in obtaining equipment and qualified personnel;
● equipment failures or accidents;
● adverse weather conditions;
● reductions in oil and natural gas prices;
● title problems; and
● limitations in the market for oil and natural gas.
Cost
overruns, curtailments, delays and cancellations of operations as a result of the above factors and other factors common in our
industry may materially adversely affect our operating results and financial position and our ability to maintain our interests
in prospects.
We
are dependent upon third party operators of our oil and gas properties.
Under
the terms of the operating agreements related to our oil and gas properties, third parties act as the operator of each of our
oil and gas wells and control the drilling and operating activities to be conducted on our properties. Therefore, we have limited
control over certain decisions related to activities on our properties, which could affect our results of operations. Decisions
over which we have limited control include:
● the timing and amount of capital expenditures;
● the timing of initiating the drilling and recompleting of wells;
● the extent of operating costs; and
● the level of ongoing production.
Decisions
made by our operators may be different than those we would make reflecting priorities different than our priorities and may materially
adversely affect our operating results and financial position, including potential declines in production and revenues from properties,
declines in value of properties and lease expirations, among other potential consequences.
Prospects
that we decide to drill may not yield oil or natural gas in commercially viable quantities.
Our
prospects are properties on which we have identified what we believe, based on available seismic and geological information, to
be indications of oil or natural gas potential. Our prospects are in various stages of evaluation, ranging from a prospect that
is ready to drill to a prospect that will require substantial seismic data processing and interpretation. There is no way to predict
in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover
drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing
fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or,
if present, whether oil or natural gas will be present in commercial quantities. We cannot assure that the analogies we draw from
available data from other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects.
Our
operations are expected to involve use of horizontal drilling and completion techniques, which involve risks and uncertainties
in their application.
Our
operations, in most instances, are expected to involve utilizing some of the latest drilling and completion techniques as developed
by our service providers, including horizontal drilling and completion techniques. Risks that we face while drilling horizontal
wells include, but are not limited to, the following:
● landing the wellbore in the desired drilling zone;
● running casing the entire length of the wellbore; and
Risks
that we face while completing wells include, but are not limited to, the following:
● the ability to fracture stimulate the planned number of stages;
Horizontal
drilling in emerging areas with little or no history of use of such techniques is more uncertain than drilling in areas that are
more developed and have a longer history of established horizontal drilling operations. If our horizontal drilling fail to adequately
address the risks described, we may incur costs overruns, underperformance by wells or non-productive wells.
The
unavailability or high cost of drilling rigs, equipment, supplies, personnel, water disposal and oil field services could adversely
affect our ability to execute on a timely basis our exploration and development plans within our budget and operate profitably.
Shortages
or the high cost of drilling rigs, equipment, supplies or personnel, including shortages or unavailability of personnel, supplies
and equipment arising from the COVID-19 pandemic, could delay or adversely affect our development and exploration operations.
If the price of oil and natural gas increases, the demand for production equipment and personnel will likely also increase, potentially
resulting, at least in the near-term, in shortages of equipment and personnel. In addition, larger producers may be more likely
to secure access to such equipment by virtue of offering drilling companies more lucrative terms. In particular, high levels of
horizontal drilling and hydraulic fracturing operations in the Permian Basin have created increased demand, and higher costs,
for associated drilling and completion services, water supply, handling and disposal and access to production handling and transportation
infrastructure, each of which have resulted in higher than anticipated prices with respect to our initial Reeves County wells.
If we are unable to acquire access to such resources, or can obtain access only at higher prices, not only would this potentially
delay our ability to convert our reserves into cash flow but could also significantly increase the cost of producing those reserves,
thereby negatively impacting anticipated net income.
We
may not be able to obtain access on commercially reasonable terms or otherwise to pipelines and storage facilities, gathering
systems and other transportation, processing, fractionation and refining facilities to market our oil and gas production; we rely
on a limited number of purchasers of our products.
The
marketing of oil and gas production depends in large part on the availability, proximity and capacity of pipelines and storage
facilities, gathering systems and other transportation, processing, fractionation and refining facilities, as well as the existence
of adequate markets. If there were insufficient capacity available on these systems, if these systems were unavailable to us,
or if access to these systems were to become commercially unreasonable, the price offered for our production could be significantly
depressed, or we could be forced to shut in some production or delay or discontinue drilling plans and commercial production following
a discovery of hydrocarbons while we construct our own facility or await the availability of third party facilities. We rely on
facilities developed and owned by third parties in order to store, process, transport, fractionate and sell our oil and gas production.
Our plans to develop and sell our oil and gas reserves could be materially and adversely affected by the inability or unwillingness
of third parties to provide sufficient transportation, storage or processing and fractionation facilities to us, especially in
areas of planned expansion where such facilities do not currently exist.
The
amount of oil and gas that can be produced is subject to limitations in certain circumstances, such as pipeline interruptions
due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering, transportation, refining or
processing facilities, or lack of capacity on such facilities. Curtailments arising from these and similar circumstances may last
from a few days to several months, resulting in lost or curtailed production and revenues.
We
may operate in areas with limited or no access to pipelines, thereby necessitating delivery by other means, such as trucking,
or requiring compression facilities. This may be particularly true with respect to our Colombian acreage where infrastructure
is limited or, in some cases, non-existent. Such restrictions on our ability to sell our oil or natural gas could have several
adverse effects, including higher transportation costs, fewer potential purchasers (thereby potentially resulting in a lower selling
price) or, in the event we were unable to market and sustain production from a particular lease for an extended time, possibly
causing us to lose a lease due to lack of production.
To
the extent that we enter into transportation contracts with pipelines that are subject to FERC regulation, we are subject to FERC
requirements related to use of such capacity. Any failure on our part to comply with FERC’s regulations and policies or
with an interstate pipeline’s tariff could result in the imposition of civil and criminal penalties.
A
limited number of companies purchase a majority of our production. The loss of a significant purchaser could have a material adverse
effect on our ability to sell production.
Our
oil and gas holdings and operations are concentrated, and we are dependent upon the results of drilling and production operations
on a small number of prospects and wells; in particular, our Permian Basin holdings and wells. If those properties and wells perform
below expectations, we may experience production, revenues and profitability below expectations.
We
have historically been focused on development of a small number of geographically concentrated prospects. Accordingly, we lack
diversification with respect to the nature and geographic location of our holdings. As a result, we are exposed to higher dependence
on individual resource plays and may experience substantial losses should a single individual prospect prove unsuccessful. At
December 31, 2020, we owned interests in 1,543 net acres and 0.675 net wells in the United States and 56,111 net acres and no
wells in Colombia. While we have resumed activities in Colombia with the acquisition of an interest in the CPO-11 block, our production,
revenues and profitability for the foreseeable future are expected to be highly dependent upon the results of existing and future
wells we may drill in the Permian Basis. In order grow our revenues and improve profitability, we must continue to drill productive
wells. If existing wells, or future wells we may drill, in the Permian Basin perform below expectations, we may experience flat
or declining production and revenues and may be unable to attain profitability.
Unless
we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows
and income.
Unless
we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our
proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized
by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural
gas reserves and production, and, therefore our cash flow and income, are highly dependent on our success in efficiently developing
and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. If we are unable to
develop, exploit, find or acquire additional reserves to replace our current and future production, our cash flow and income will
decline as production declines, until our existing properties would be incapable of sustaining commercial production.
A
substantial percentage of our properties are unproven and undeveloped; therefore, the cost of proving and developing our properties
and risk associated with our success is greater than would be the case if the majority of our properties were categorized as proved
developed producing.
Because
a substantial percentage of our properties are unproven and/or undeveloped, we require significant capital to prove and develop
such properties before they may become productive. Because of the inherent uncertainties associated with drilling for oil and
gas, some of these properties may never be successfully drilled and developed to the extent that they result in positive cash
flow. Even if we are successful in our drilling and development efforts, it could take several years for a significant portion
of our unproven properties to be converted to positive cash flow.
We
may incur substantial uninsured losses and be subject to substantial liability claims as a result of our oil and natural gas operations.
We
are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and
adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production
activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including
the possibility of:
● abnormally pressured formations;
● fires and explosions;
● personal injuries and death; and
● natural disasters.
Any
of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company. We may
elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented.
In addition, pollution and environmental risks generally are not fully insurable. The occurrence of a significant accident or
other event that is not fully covered by insurance could have a material adverse effect on our business, results of operations
or financial condition.
If
oil and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas
properties.
Accounting
rules require that we review periodically the carrying value of our oil and natural gas properties for possible impairment. Based
on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development
plans, production data, economics and other factors, we have written down the carrying value of our oil and natural gas properties
periodically and may be required to further write down the carrying value of oil and gas properties in the future. A write-down
would constitute a non-cash charge to earnings. It is likely the cumulative effect of a write-down could also negatively impact
the trading price of our securities.
Reserve
estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates
or underlying assumptions will materially affect the quantities and present value of our reserves.
The
process of estimating oil and natural gas reserves is complex, requiring interpretations of available technical data and many
assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions
could materially affect the estimated quantities and present value of reserves reported.
In
order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze
available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary.
The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.
Actual
future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of
recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect
the estimated quantities and present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development activities, prevailing oil and natural gas prices and other factors,
many of which are beyond our control.
The
present value of future net revenues from our proved reserves, as reported from time to time, should not be assumed to be the
current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we generally base the
estimated discounted future net cash flows from our proved reserves on costs on the date of the estimate and average prices over
the preceding twelve months. Actual future prices and costs may differ materially from those used in the present value estimate.
If future prices decline or costs increase it could negatively impact our ability to finance operations, and individual properties
could cease being commercially viable, affecting our decision to continue operations on producing properties or to attempt to
develop properties. All of these factors would have a negative impact on earnings and net income, and most likely the trading
price of our securities.
Our
operations will be subject to environmental and other government laws, regulations and policies that are costly, could potentially
subject us to substantial liabilities and potentially result in decreased demand for products.
Crude
oil and natural gas exploration and production operations in the United States and in Colombia are subject to extensive federal,
state and local laws and regulations. Oil and gas companies are subject to laws and regulations addressing, among others, land
use and lease permit restrictions, bonding and other financial assurance related to drilling and production activities, spacing
of wells, unitization and pooling of properties, environmental and safety matters, plugging and abandonment of wells and associated
infrastructure after production has ceased, operational reporting and taxation. Failure to comply with such laws and regulations
can subject us to governmental sanctions, such as fines and penalties, as well as potential liability for personal injuries and
property and natural resources damages. We may be required to make significant expenditures to comply with the requirements of
these laws and regulations, and future laws or regulations, or any adverse change in the interpretation of existing laws and regulations,
could increase such compliance costs. Regulatory requirements and restrictions could also delay or curtail our operations and
could have a significant impact on our financial condition or results of operations.
Our
oil and gas operations are subject to stringent laws and regulations relating to the release or disposal of materials into the
environment or otherwise relating to environmental protection. These laws and regulations:
● require the acquisition of a permit before drilling commences;
● impose substantial liabilities for pollution resulting from operations.
Failure
to comply with these laws and regulations may result in:
● the imposition of administrative, civil and/or criminal penalties;
● incurring investigatory or remedial obligations; and
● the imposition of injunctive relief.
Changes
in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling,
storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain
compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive
position or financial condition. Although we intend to be in compliance in all material respects with all applicable environmental
laws and regulations, we cannot assure you that we will be able to comply with existing or new regulations. In addition, the risk
of accidental spills, leakages or other circumstances could expose us to extensive liability.
We
are unable to predict the effect of additional environmental laws and regulations that may be adopted in the future, including
whether any such laws or regulations would materially adversely increase our cost of doing business or affect operations in any
area.
Under
certain environmental laws that impose strict, joint and several liability, we may be required to remediate our contaminated properties
regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were
or were not in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons
or property may result from environmental and other impacts of our operations. Moreover, new or modified environmental, health
or safety laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly
increase compliance costs. Therefore, the costs to comply with environmental, health or safety laws or regulations or the liabilities
incurred in connection with them could significantly and adversely affect our business, financial condition or results of operations.
In
addition, many countries as well as several states and regions of the U.S. have agreed to regulate emissions of “greenhouse
gases” and have adopted policies to actively promote alternative energy “green energy” sources that are specifically
designed to replace fossil fuels. Methane, a primary component of natural gas, and carbon dioxide, a byproduct of burning of natural
gas and oil, are greenhouse gases. Regulation of greenhouse gases could adversely impact some of our operations and “green
energy” initiatives could substantially reduce demand for our products in the future.
Increased
regulation, or limitations on the use, of hydraulic fracturing could increase our cost of operations and reduce profitability.
Our
existing Permian Basin wells have been hydraulically fractured and future wells that we may drill in the Permian Basin are expected
to be economically viable only if hydraulic fracturing is utilized to increase flows of oil and natural gas, particularly in shale
formations. The use of hydraulic fracturing has been the subject of much scrutiny and debate in recent years with many activists
and state and federal legislators and regulators actively pushing for most stringent regulation of such operations or even the
ban of such operations.
In
the event that state or federal regulation of hydraulic fracturing is increased or hydraulic fracturing is substantially curtailed
or prohibited through law or regulation, our cost of drilling and operating wells may increase substantially. In some cases, increased
costs associated with increased regulation of hydraulic fracturing, or the prohibition of hydraulic fracturing, may result in
wells being uneconomical to drill and operate that would otherwise be economical to drill and operate in the absence of such regulations
or prohibitions. Should wells be determined to be uneconomical as a result of increasing regulation of hydraulic fracturing, we
may be required to write-down or abandon oil and gas properties that are determined to be uneconomical to drill and develop. Additionally,
potential litigation arising from alleged harm resulting from hydraulic fracturing may materially adversely affect our financial
results and position regardless of whether we prevail on the merits of such litigation.
International
Operations Risks
Our
operations in Colombia are subject to uncertainty, delays and other risks relating to political and economic instability.
We
currently have interests in multiple oil and gas concessions in Colombia and anticipate that operations in Colombia may constitute
a substantial element of our strategy going forward.
The
political climate in Colombia is unstable and could be subject to radical change over a very short period of time. While each
of our past and current oil and gas concessions in Colombia have been granted by the federal government, we have experienced multiple
extended delays in obtaining necessary permits to commence drilling operations on three of our four current concessions. The delays
in obtaining necessary permits have been attributed to numerous factors beyond our control but not uncommon in Colombia, including
strong local opposition to drilling operations based on environmental and other concerns. In the face of such opposition, our
operator has shelved any near term drilling on the three concessions in question and is pursuing discussions with the federal
government and local governments to determine if there are any viable options to drill those concessions or if acceptable arrangements
can be made to compensate for the inability to drill and develop the concessions. Unless we are able to secure necessary permits
or to secure substitute concessions, we may be forced to abandon or suspend our operations with respect to those concessions and
record a loss of our entire investment in those concessions.
Armed
conflict between government forces and anti-government insurgent groups and illegal paramilitary groups—both funded by the
drug trade—has persisted in Colombia for more than 40 years with insurgents attacking civilians and violent guerilla activity
continues in many parts of the country. During 2016, the government and the insurgents announced a peace accord to end hostilities.
The peace accord was, however, rejected in a popular referendum. While the parties have expressed a continuing commitment to the
peace process, until such process is finalized, any operations we may conduct in Colombia, and any assets we may hold in Colombia,
may continue to be subject to risk associated with guerilla activity that may disrupt operations and result in losses from operations
and of assets. There can also be no assurance that we can maintain the safety of our operations and personnel in Colombia or that
this violence will not affect our operations in the future. Continued or heightened security concerns in Colombia could also result
in a significant loss to us.
Where
the local political climate and/or guerilla activity in an area threaten our ability to secure necessary support of the local
populace or necessary permits to operate, or our ability to assure the safety of our personnel and/or assets, we have, in the
past delayed, and may in the future delay, the commencement of operations on prospects until such concerns are satisfactorily
resolved. While our operator works diligently with local and federal officials to overcome such uncertainties and obstacles, there
can be no assurance that conditions in the vicinity of our planned operations will ever support exploration and/or development
operations with respect to one or multiple prospects. Even though we have conducted successful operations on multiple prospects
in Colombia, our current prospects continue to be characterized by political risks and, in fact, our operator has on more than
one occasion delayed planned operations on prospects due to such political risks with such delays extending, in some cases, for
multiple years. In the event of continued, or future, delays in operations on prospects arising from political risks, we may experience
financial loss associated with our cost of holding prospects, the incurrence of costs associated with addressing political risks
or the loss of value associated with our inability to explore and develop potentially valuable prospects.
Additionally,
Colombia is among several nations whose eligibility to receive foreign aid from the United States is dependent on its progress
in stemming the production and transit of illegal drugs, which is subject to an annual review by the President of the United States.
Although Colombia is currently eligible for such aid, Colombia may not remain eligible in the future. A finding by the President
that Colombia has failed demonstrably to meet its obligations under international counter-narcotics agreements may result in the
loss of certain financial aid and the imposition of trade sanctions.
Each
of these consequences could result in adverse economic consequences in Colombia and could further heighten the political and economic
risks associated with our operations there. Any changes in the holders of significant government offices could have adverse consequences
on our relationship with key governmental agencies and the Colombian government’s ability to control guerrilla activities
and could exacerbate the factors relating to our foreign operations. Any sanctions imposed on Colombia by the United States government
could threaten our ability to obtain necessary financing to develop the Colombian properties or cause Colombia to retaliate against
us, including by nationalizing our Colombian assets. Accordingly, the imposition of the foregoing economic and trade sanctions
on Colombia would likely result in a substantial loss and a decrease in the price of our common stock.
Our
operations in Colombia are controlled by operators which may carry out transactions affecting our Colombian assets and operations
without our consent.
Our
operations in Colombia are subject to a substantial degree of control by the operators of the properties in which we hold indirect
interests in Colombia. We are an investor in a number of ventures operated by Hupecol and our interest in the assets and operations
of Hupecol related entities and ventures represent all of our current assets in Colombia. During 2008, 2010 and 2012, respectively,
Hupecol sold its interest in multiple concessions and entities holding multiple concessions each representing, at the time, the
largest prospect(s) in terms of reserves and revenues in which we then held an interest. In early March 2009, Hupecol determined
to temporarily shut-in production from our Colombian properties. It is possible that Hupecol will carry out similar sales or acquisitions
of prospects or make similar decisions in the future. Our management intends to closely monitor the nature and progress of future
transactions by Hupecol in order to protect our interests. However, we have no effective ability to alter or prevent a transaction
and are unable to predict whether or not any such transactions will in fact occur or the nature or timing of any such transaction.
We
may be exposed to additional expenses and losses arising from the financial position of our joint interest partners in Colombia.
Our
Colombian properties are developed under financial arrangements with various joint interest partners. If other joint interest
partners are unable, or unwilling, to satisfy their various obligations relating to prospects, we may be required to pay a proportionately
higher share of development costs on those prospects or the prospect may be inadequately capitalized to achieve optimal results.
We
may be exposed to substantial fines and penalties if we or our partners fail to comply with laws and regulations associated with
our activities in foreign countries, including Colombia, regarding U.S. laws such as the Foreign Corrupt Practices Act and local
laws prohibiting corrupt payments to governmental officials and other corrupt practices.
Third
parties act as the operator of each of our oil and gas wells and control all drilling and operating activities conducted with
respect to our Colombian properties. Therefore, we have limited control over decisions related to activities on our properties,
and we cannot provide assurance that our partners or their employees, contractors or agents will not take actions in violation
of applicable anti-corruption laws and regulations. In the course of conducting business in Colombia, we have relied primarily
on the representations and warranties made by our operating and non-operating partners in the farmout and joint operating agreements
which govern our respective project interests to the effect that:
While
we periodically inquire as to the continuing accuracy of these representations, as a minority non-operator, we are limited in
our ability to assure compliance. Consequently, we cannot provide assurance that the procedural safeguards, if any, adopted by
our partners or the representations and warranties contained in these agreements and our reliance on them will protect us from
liability should a violation occur. Any violations of the anti-bribery, accounting controls or books and records provisions of
the Foreign Corrupt Practices Act by us or our partners could subject us and, where deemed appropriate, individuals, in certain
cases, to a broad range of civil and criminal penalties, including but not limited to, imprisonment, injunctive relief, disgorgement,
substantial fines or penalties, prohibitions on our ability to offer our products in one or more countries, imposed modifications
to business practices and compliance programs, including retention of an independent monitor to oversee compliance, and could
also materially damage our reputation, our business and our operating results.
Stock
Related Risks
The
price of our common stock may fluctuate significantly, and this may make it difficult to resell common stock when, or at prices,
desired.
The
price of our common stock constantly changes. We expect that the market price of our common stock will continue to fluctuate.
Our
stock price may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
● quarterly variations in our operating results;
● changes in expectations as to our future financial performance;
● future sales of our equity or equity-related securities;
● fluctuations in oil and gas prices;
● departures of key personnel; and
● regulatory considerations.
The
stock market periodically experiences extreme price and volume fluctuations. This volatility has had a significant effect on the
market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market
fluctuations may adversely affect our stock price, regardless of our operating results.
The
sale of a substantial number of shares of our common stock may affect our stock price.
We
may require additional capital to support our future drilling plans and may issue additional shares of our common stock or equity-related
securities to secure such capital. Future sales of substantial amounts of our common stock or equity-related securities in the
public market or privately, or the perception that such sales could occur, could adversely affect prevailing trading prices of
our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities.
No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares
of common stock for future sale will have on the trading price of our common stock.
Item 1B. Unresolved Staff Comments
Not
applicable.
Item 2. Properties
We
currently lease approximately 4,739 square feet of office space in Houston, Texas as our executive offices. Management anticipates
that our space will be sufficient for the foreseeable future. The average monthly rental under the lease, which expires on October
31, 2022, is approximately $11,000. A description of our interests in oil and gas properties is included in “Item 1. Business.”
Item 3. Legal Proceedings
We
may from time to time be a party to lawsuits incidental to our business. As of March 29, 2021, we were not aware of any
current, pending or threatened litigation or proceedings that could have a material adverse effect on our results of operations,
cash flows or financial condition.
Item 4. Mine Safety Disclosures
Not
applicable.
PART
II
Market
Information
Our
common stock is listed on the NYSE American under the symbol “HUSA.”
Holders
As
of March 29, 2021, there were approximately 876 shareholders of record of our common stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of December 31, 2020 with respect to the shares of our common stock that may be issued
under our existing equity compensation plans.
Equity compensation plans approved by security holders (1) 730,973 $ 5.07 533
Item 6. Selected Financial Data
Not
applicable.
General
We
are an independent energy company focused on the development, exploration, exploitation, acquisition, and production of natural
gas and crude oil properties with principal holdings in the U.S. Permian Basin and additional holdings in the U.S. Gulf Coast
region and in the South American country of Colombia.
Our
mission is to deliver outstanding net asset value per share growth to our investors via attractive oil and gas investments. Our
strategy is to focus on early identification of, and opportunistic entrance into, existing and emerging resource plays. We do
not operate wells but typically seek to partner with larger operators in development of resources or retain interests, with or
without contribution on our part, in prospects identified, packaged and promoted to larger operators. By entering these plays
earlier, identifying stranded blocks and partnering with, or promoting to, larger operators, we believe we can capture larger
resource potential at lower cost and minimize our exposure to drilling risks and costs and ongoing operating costs.
We,
along with our partners, actively manage our resources through opportunistic acquisitions and divestitures where reserves can
be identified, developed, monetized and financial resources redeployed with the objective of growing reserves, production and
shareholder value.
Generally,
we generate nearly all our revenues and cash flows from the sale of produced natural gas and crude oil, whether through royalty
interests, working interests or other arrangements. We may also realize gains and additional cash flows from the periodic divestiture
of assets.
Recent
Developments
Lease
Activity
Permian
Basin. In 2018, we acquired a 12.5% working interest, subject to a proportionate 10% back-in after payout, in an approximately
650-acre lease block in Yoakum County, Texas. The acreage lay in the Midland Basin region of the larger Permian Basin. During
2020, we acquired a 100% working interest in 46.1 acres adjoining our Yoakum County acreage. Pursuant to an area of mutual interest
agreement among the partners in our Yoakum County acreage, we will offer to our partners the right to participate in the 46.1-acre
block.
In
2019, we acquired, for $587,100, a 20% working interest in an approximately 5,871-acre lease block in the Northern Shelf of the
Permian Basin in Texas. We were required to pay 26.667% of costs on the initial well on the block through the point at which the
well is drilled, completed, equipped and ready for operation, production or disposal. Pursuant to the agreement to acquire such
interest, we also secured the right to participate, at cost and for a period of five years, in a 20,367-acre area of mutual interest
(the “Hockley County AMI”), including the acquired lease block. During 2020, pursuant to our rights with respect to
the Hockley County AMI, we acquired a 20% working interest in two blocks totaling 820 gross acres. After giving effect to such
acquisitions and various lease expirations within the block, our acreage position in the Northern Shelf of the Permian Basin covered
approximately 5,080 gross acres at December 31, 2020.
In
2020, we experienced a lease expiration with respect to undeveloped acreage in Reeves County, Texas, reducing our acreage holdings
to 480 gross acres at December 31, 2020.