10-K 1 form10k.htm HOUSTON AMERICAN ENERGY CORP 10-K 12-31-2010 form10k.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 (Mark One)
T
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2010

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-32955

HOUSTON AMERICAN ENERGY CORP.

(Exact name of registrant specified in its charter)

Delaware
76-0675953
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

801 Travis Street, Suite 1425, Houston, Texas 77002
(Address of principal executive offices)(Zip code)

Issuer’s telephone number, including area code: (713) 222-6966
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which each is registered
Common Stock, $0.001 par value
 
NYSE AMEX

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨  No T

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes T  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ¨ Accelerated filer T Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No T

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2010, based on the closing sales price of the registrant’s common stock on that date, was approximately $153.5 million. Shares of common stock held by each current executive officer and director and by each person known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 15, 2011 was 31,112,673.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for its 2011 Annual Meeting are incorporated by reference into Part III of this Report.
 


 
 

 

TABLE OF CONTENTS

     
Page
PART I
     
 
Item 1.
3
 
 
Item 1A.
15
 
 
Item 1B.
25
 
 
Item 2.
25
 
 
Item 3.
25
 
 
Item 4.
25
 
       
PART II
     
 
Item 5.
26
 
 
Item 6.
28
 
 
Item 7.
29
 
 
Item 7A.
39
 
 
Item 8.
39
 
 
Item 9.
39
 
 
Item 9A.
40
 
 
Item 9B.
40
 
       
PART III
     
 
Item 10.
41
 
 
Item 11.
41
 
 
Item 12.
41
 
 
Item 13.
41
 
 
Item 14.
41
 
       
PART IV
     
 
Item 15.
42
 
     
43
 


FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forwarding-looking statements include without limitation statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our properties and drilling activities and results, our intentions and strategies regarding future acquisitions and sales of properties, our intentions and strategies regarding the formation of strategic relationships, our beliefs regarding the future success of our properties, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary to support operations. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. See “Item 1A. Risk Factors” for a discussion of certain risk factors. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K.

As used in this annual report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” “the Company,” and “Houston American” refer to Houston American Energy Corp., a Delaware corporation.

PART I

Item 1.
Business

General

Houston American Energy Corp. is an independent oil and gas exploration and production company. Our oil and gas exploration and production activities are focused on development of concessions in the South American country of Colombia and development of properties in the U.S. onshore Gulf Coast Region, principally Texas and Louisiana. We seek to utilize the contacts and experience of our executive officers, particularly John F. Terwilliger and James Jacobs, to identify favorable drilling opportunities, to use advanced seismic techniques to define prospects and to form partnerships and joint ventures to spread the cost and risks to us of drilling.

Sale of Interests in Hupecol Dorotea and Cabiona, LLC and Hupecol Llanos, LLC

During the fourth quarter of 2010, Hupecol Dorotea & Cabiona Holdings, LLC (“Hupecol D&C Holdings”) sold all of its interest in Hupecol Dorotea and Cabiona, LLC (“HDC, LLC”), and Hupecol Llanos Holdings, LLC (“Hupecol Llanos Holdings”) sold all of its interest in Hupecol Llanos, LLC (“HL, LLC”). We hold a 12.5% ownership interest in each of Hupecol D&C Holdings and Hupecol Llanos Holdings and, prior to the sale, held indirect interests in identical amounts in HDC, LLC and HL, LLC. HDC, LLC and HL, LLC hold interests in the Dorotea, Cabiona, Leona and Las Garzas blocks, and related assets, in Colombia.

The Dorotea, Cabiona, Leona and Las Garzas blocks cover an aggregate of approximately 310,730 gross acres. At December 31, 2009, the estimated proved reserves associated with the blocks totaled 1,178,576 barrels of oil, which represented 96.9% of our estimated proved oil and natural gas reserves.

As a result of the sale, we received net proceeds, after deduction of fees and expenses of the transaction of $29,359,463 before escrow holdbacks, realized a gain on the sale of $25,397,048 and eliminated from oil and gas properties costs subject to amortization associated with the underlying assets totaling $3,989,236. Production from the Dorotea, Cabiona, Leona and Las Garzas blocks accounted for $18,880,299, $7,936,673 and $7,206,439 of our revenues during 2010, 2009 and 2008, respectively.


Fifteen percent of the sales price was held in escrow pursuant to the Purchase and Sales Agreement to fund potential claims arising from the sale with escrowed amounts to be released over a three year period based on amounts remaining in escrow after claims. In addition to the fifteen percent escrowed, Hupecol withheld 5% of the proceeds in escrow for any contingencies that may arise, and it is expected that the Company will receive the 5% withheld by Hupecol in 2011. The Company is not aware of any claims that would reduce the escrow amounts as of December 31, 2010. Our proportionate interest in the sales proceeds deposited into escrow totaled $7,069,810. Following completion of the sale of HDC, LLC and HL, LLC, we have no continuing interest in the Dorotea, Cabiona, Leona and Las Garzas blocks.

Exploration Projects

Our exploration projects are focused on existing property interests, and future acquisition of additional property interests, in South America, particularly Colombia, and in the onshore Texas Gulf Coast region and Louisiana.

Each of our exploration projects differs in scope and character and consists of one or more types of assets, such as 3-D seismic data, leasehold positions, lease options, working interests in leases, partnership or limited liability company interests or other mineral rights. Our percentage interest in each exploration project (“Project Interest”) represents the portion of the interest in the exploration project we share with other project partners. Because each exploration project consists of a bundle of assets that may or may not include a working interest in the project, our Project Interest simply represents our proportional ownership in the bundle of assets that constitute the exploration project. Therefore, our Project Interest in an exploration project should not be confused with the working interest that we will own when a given well is drilled. Each exploration project represents a negotiated transaction between the project partners. Our working interest may be higher or lower than our Project Interest.

The following table sets forth information relating to our principal exploration projects as of December 31, 2010:

   
Net acreage
   
Average working interest %
   
Net producing wells
   
Net proved reserves
(boe)
   
2010 Net Production
 
                 
Oil (1)
(bbls)
   
Natural Gas
(mcf)
 
Oklahoma
    4       2.36 %     0.0236       378       -       727  
Louisiana
    1,776       37.00 %     0.0988       17,608       1,002       14,474  
Texas
    42       3.81 %     0.0788       1,727       538       2,597  
Total U.S.
    1,822       36.16 %     0.2011       19,713       1,540       17,798  
Colombia
    179,978       30.41 %     0.1280       61,150       206,239       -  
Total
    181,800       30.47 %     0.3291       80,863       261,779       17,798  

(1)
Net oil production reflects our total production for 2010, including production from the Dorotea, Cabiona, Leona and Las Garzas prospects that were divested during 2010. Oil production during 2010 attributable to prospects held at December 31, 2010 totaled 67,161 barrels.

- United States Properties:

In the United States, our properties and operations are principally located in the on-shore Gulf Coast region of Louisiana and Texas.

Louisiana Properties

Our principal producing and exploration properties in Louisiana consist of the following:

 
East Baton Rouge Parish — we hold a 37.55% working interest in the Profit Island and North Profit Island prospects, covering 4,670 gross acres in East Baton Rouge Parish, Louisiana. In addition, we hold a 7.29% royalty interest in 2,485 royalty acres, as well as a 5.675% royalty interest in the Crown Paper #01 well.


 
Plaquemines Parish — we hold a 1.80% working interest in the SL 180771 well and prospect which covers 300 gross acres. We have no present plans to drill additional wells on the SL 180771 Prospect.

 
Vermilion Parish — we hold a 2.25% working interest in the 830 acre La Furs, Inc. F-16 well and prospect. We have no present plans to drill additional wells on the La Furs Prospect.

In addition to the foregoing, we hold interests in the following properties in Louisiana: the 620-acre Crowley Prospect in Acadia Parish, in which we hold a 0.15% overriding royalty interest. We have no present plans to conduct drilling on the Crowley prospect.

Texas Properties

Our principal exploration properties in Texas consist of the following:

 
Jim Hogg County — we hold a 4.375% working interest in the 340 acre Hog Heaven Prospect in Jim Hogg County, Texas. At December 31, 2010, the Hog Heaven Prospect produced from a single 6,200-foot well. We have no present plans to drill additional wells on the Hog Heaven Prospect.

 
 •
Matagorda Country — we hold a 3.50% working interest in the 779 acre Harrison Prospect in Matagorda County, Texas. We have no present plans to drill additional wells on the Harrison Prospect.

Our exploration properties in Texas at December 31, 2010 reflect our sale, during 2010, of a 2.5% working interest and our 1.25% of 8/8s overriding royalty interest ("ORRI") in 6000+ gross acres in Karnes County, Texas and our right to a 1.25% overriding royalty interest in an Area of Mutual Interest ("AMI") covering approximately 50,000 gross acres in Karnes County, Texas.

- Colombian Properties:

We hold interests in multiple prospects in Colombia covering 825,657 gross acres. The majority of our holdings in Colombia are located within the Llanos and the Caguan Putumayo Basins. We identify our Colombian prospects by the prospect operator and concessions operated.

The following table sets forth information relating to our interests in prospects in Colombia at December 31, 2010:

Property
 
Operator
 
Ownership Interest
   
Total Gross Acres
   
Total Gross Developed Acres
   
Gross Productive Wells
 
La Cuerva Contract
 
Hupecol
    1.6 %     48,000       5,120       8  
LLA 62
 
Hupecol
    1.6 %     40,000              
Los Picachos TEA
 
Hupecol
    12.5 %     86,235              
Macaya TEA
 
Hupecol
    12.5 %     195,201              
CPO 4 Block
 
SK Energy
    37.5 %     345,452              
Serrania Block
 
Shona Energy
    12.5 %     110,769              
Total
                825,657       5,120       8  

Hupecol Prospects

At December 31, 2010 we held interests in two concessions and two Technical Evaluation Areas (“TEA”) operated by Hupecol. The two concessions are located in the Llanos Basin of Colombia and the TEAs are located in the Caguan Putumayo Basin of Colombia. The concessions and TEAs cover an aggregate area of 369,436 acres.


At December 31, 2010, one of the Hupecol concessions had production and we had interests in 8 gross wells (0.128 net wells) operated by Hupecol. Our net daily production during December 2010 from interests operated by Hupecol was approximately 23 barrels of oil (no natural gas) per day. Well depths range from 3,000 feet to 4,000 feet.

Our interest in each of the described concessions in Colombia is held through an interest in Hupecol, LLC and affiliated entities.

Our working interest in each of the concessions is subject to an escalating royalty ranging from 8% to 20% depending upon production volumes and pricing and an additional 6% to 10% per concession when 5,000,000 barrels of oil have been produced on that concession.

The concessions and TEAs operated by Hupecol at December 31, 2010 reflect the sale in December 2010 of Hupecol related entities that held four concessions covering 310,730 acres. See “Sale of Interests in Hupecol Dorotea and Cabiona, LLC and Hupecol Llanos, LLC.”

For 2011, Hupecol has advised us that they plan to drill 10 additional wells on the La Cuerva concession.

SK Energy Prospect

Pursuant to two Farmout Agreements and a Joint Operating Agreement, we hold an interest in the 345,452 acre CPO 4 Block located in the Western Llanos Basin and operated by SK Energy Co. LTD. Under the Joint Operating Agreement, effective retroactive to May 31, 2009, SK acts as operator of the CPO 4 Block. Under the original Farmout Agreement, entered in 2009, we 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 we received a 25.0% interest in the CPO 4 Block. Under a second Farmout Agreement, entered in 2010 and effective July 31, 2010, we acquired from SK an additional 12.5% interest in the CPO 4 Block and we agreed to pay our proportionate interest in ongoing costs plus 12.5% of certain defined costs relating to the development of the CPO 4 Block and 25% of seismic acquisition costs incurred with respect to the Phase 1 cost of the CPO 4 Block between June 18, 2009 and June 17, 2012.

As a result of the second Farmout Agreement, at December 31, 2010, we held a 37.5% interest in the CPO 4 Block.

Pursuant to the terms of, and in conjunction with, the second Farmout Agreement and the Joint Operating Agreement, we entered into a separate agreement with Gulf United Energy (“Gulf United”) whereby we waived our right of first refusal under the Joint Operating Agreement for the specific purpose of permitting Gulf United to acquire a 12.5% interest in the CPO 4 Block. SK Energy, simultaneously, entered into an agreement with Gulf United to assign a 12.5% interest in the CPO 4 Block to Gulf United conditioned upon approval, by July 31, 2011, of the assignment by the National Hydrocarbon Agency of Colombia (the “ANH”) and the Republic of Korea. Under our agreement with Gulf United, Gulf United agreed to pay us, not later than 30 days following receipt by Gulf United of ANH approval, our 12.5% share of past costs incurred through July 31, 2010 and our 25% share of seismic acquisition costs incurred through July 31, 2010 on the CPO 4 Block.

In November 2010, we paid our proportionate interest in the past costs attributable to the additional 12.5% interest acquired in the CPO 4 Block. At December 31, 2010 and through the date of this filing, approval of the assignment to Gulf United by the ANH remained pending, as did Gulf United’s obligation to reimburse us the agreed 12.5% of past costs and 25% of seismic acquisition costs.

The Phase 1 Work Program consists of reprocessing approximately 400 kilometers of existing 2-D seismic data, the acquisition, processing and interpretation of a 2-D seismic program containing approximately 620 kilometers of data and the drilling of two exploration wells. The Phase 1 Work Program was modified to allow 3-D data to be shot in place of the initial 2-D requirement. The Phase 1 seismic acquisition was completed during 2010 and the entire Phase 1 Work Program is estimated to be completed by December of 2011. During 2010, our total expenditures on the CPO 4 Phase 1 Work Program were $8.2 million.


For 2011, SK Energy has advised us that they plan to focus on the drilling of three wells on CPO 4. Our budgeted expenditures on the CPO 4 Block for 2011 are approximately $20.0 million.

Shona Energy Prospect

Pursuant to a Farmout Agreement with Shona Energy Limited we hold an interest in the 110,769 acre Serrania Block located in the Caguan Putumayo Basin. Under the Farmout Agreement we will pay 25% of designated Phase 1 geological and seismic costs in return for a 12.5% interest in the Contract for Exploration and Production covering the Block.

During 2010, Shona Energy completed seismic work on the Serrania Block. The net costs incurred by Houston American Energy for the Phase 1 geological and seismic costs were approximately $390 thousand in 2009 and $950 thousand in 2010.

During 2011, Shona Energy has advised that it plans to drill two initial wells on the Serrania Block. Houston American Energy’s estimated net cost associated with drilling the two initial wells on the Serrania Block is approximately $1.0 million.

Drilling Activity

During 2010, we participated in the drilling of a total of 12 gross wells, all of which were in Colombia. Of the 12 wells drilled, 10 were classified as exploratory and 2 were classified as development. Our 2010 drilling program achieved a 75% success rate. The following table summarizes the number of wells drilled during 2010, 2009, and 2008, excluding any wells drilled under farmout agreements, royalty interest ownership, or any other wells in which we do not have a working interest.

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Development wells, completed as:
                                   
Productive
    2       0.032       4       0.500       6       0.750  
Non-productive
                1       0.125       1       0.125  
Total development wells
    2       0.032       5       0.625       7       0.875  
Exploratory wells, completed as:
                                               
Productive
    7       0.439       5       0.407       5       0.625  
Non-productive
    3       0.204       5       0.486       4       0.475  
Total exploratory wells
    10       0.643       10       0.893       9       1.100  

Productive wells are wells that are found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

As of December 31, 2010, we had no wells in progress or awaiting completion in the United States and one gross (.016 net) well in progress in Colombia.

Seismic Activity

During 2010, our operators in Colombia acquired approximately 225 square miles of additional 3-D and 2-D seismic and geological data. The additional data relates primarily to the CPO 4, Serrania, and La Cuerva concessions where we hold 37.5%, 12.5%, and 1.6% working interests, respectively. Our share of the costs of such data acquisition was approximately $6.4 million.


Productive Wells

Productive wells consist of producing wells and wells capable of production, including shut-in wells. A well bore with multiple completions is counted as only one well. As of December 31, 2010, we owned interests in 15 gross wells containing multiple completions. As of December 31, 2010, we had ownership interests in productive wells, categorized by geographic area, as follows:

   
Oil Wells
   
Gas Wells
 
United States
           
Gross
          7  
Net
          0.201  
Colombia
               
Gross
    8        
Net
    0.128        
Total
               
Gross
    8       7  
Net
    0.128       0.201  

Productive wells at December 31, 2010 reflect our sale, during 2010, of our interest in HDC, LLC and HL, LLC which accounted for 19 gross (2.375 net) productive wells.

Volume, Prices and Production Costs

The following table sets forth certain information regarding the production volumes, average prices received and average production costs associated with our sales of gas and oil, categorized by geographic area, for each of the three years ended December 31, 2010:

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
Net Production:
                 
Gas (Mcf):
                 
United States
    17,798       15,761       24,748  
Colombia
                 
Total
    17,798       15,761       24,748  
Oil (Bbls):
                       
United States
    1,540       1,581       1,510  
Colombia
    260,239       129,782       122,415  
Total
    261,779       131,363       123,925  
Average sales price:
                       
Gas ($ per Mcf)
                       
United States
  $ 5.01     $ 4.89     $ 10.22  
Colombia
                 
Total
    5.01       4.89       10.22  
Oil ($ per Bbl)
                       
United States
    76.21       59.99       104.30  
Colombia
    74.17       61.21       83.42  
Total
    74.18       61.20       83.67  
Average production costs ($ per BOE):
                       
United States
    8.50       26.01       10.40  
Colombia
    31.08       35.95       27.03  
Total
  $ 30.70     $ 35.33     $ 26.43  


Natural Gas and Oil Reserves

Reserve Estimates

The following tables sets forth, by country and as of December 31, 2010, our estimated net proved oil and natural gas reserves, and the estimated present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes (PV-10) and after future income taxes (Standardized Measure) of our proved reserves, each prepared in accordance with assumptions prescribed by the Securities and Exchange Commission (SEC).

The PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated cash flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that our PV-10 presentation is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies because of differences in the amounts and timing of deductible basis, net operating loss carry forwards and other factors. We believe investors and creditors use our PV-10 as a basis for comparison of the relative size and value of our proved reserves to the reserve estimates of other companies. PV-10 is not a measure of financial or operating performance under GAAP and is not intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.

These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards.

   
Reserves (1)
 
   
Oil
   
Natural Gas
   
Total (2)
 
   
(bbls)
   
(mcf)
   
(boe)
 
Reserve category
                 
Proved Developed
                 
United States
    6,010       82,220       19,713  
Colombia
    17,202             17,202  
Total Proved Developed Reserves
    23,212       82,220       36,915  
Proved Undeveloped
                       
United States
                 
Colombia
    43,948             43,948  
Total Proved Undeveloped Reserves
    43,948             43,948  
Total Proved Reserves
    67,160       82,220       80,864  


   
Proved Developed
   
Proved Undeveloped
   
Total Proved
 
                   
PV-10 (1)
  $ 994,249     $ 1,063,756     $ 2,058,005  
Standardized measure (3)
  $ 752,129     $ 804,751     $ 1,556,880  

 
(1)
In accordance with applicable financial accounting and reporting standards of the SEC, the estimates of our proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions at December 31, 2010. For purposes of determining prices, we used the unweighted arithmetical average of the prices on the first day of each month within the 12-month period ended December 31, 2010. The average prices utilized for purposes of estimating our proved reserves were $77.54 per barrel of oil and $5.12 per mcf of natural gas for our US properties and $77.26 per barrel for our Colombian properties, adjusted by property for energy content, quality, transportation fees and regional price differentials. The prices should not be interpreted as a prediction of future prices. The amounts shown do not give effect to non-property related expenses, such as corporate general administrative expenses and debt service, future income taxes or to depreciation, depletion and amortization.


 
(2)
Natural gas is converted on the basis of six Mcf of gas per one barrel of oil equivalent.

 
(3)
The Standard Measure differs from PV-10 only in that the Standard Measure reflects estimated future income taxes.

Due to the inherent uncertainties and the limited nature of reservoir data, proved reserves are subject to change as additional information becomes available. The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates.

Reserve Estimation Process, Controls and Technologies

The reserve estimates, including PV-10 and Standard Measure estimates, set forth above were prepared by Lonquist & Co., LLC.

These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards.

Our year-end reserve report is prepared by Lonquist & Co. based upon a review of property interests being appraised, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, geosciences and engineering data, and other information provided to them by our management team and by the various Hupecol entities that operated all of our proved properties in Colombia at December 31, 2010. Lonquist & Co. also prepares reserve estimates for the various Hupecol entities. This information is reviewed by knowledgeable members of our Company to ensure accuracy and completeness of the data, as it pertains to our Company, prior to submission to Lonquist & Co. Upon analysis and evaluation of data provided, Lonquist & Co. issues a preliminary appraisal report of our reserves. The preliminary appraisal report and changes in our reserves are reviewed by our Senior Vice President of Exploration, a degreed geophysicist with over 25 years oil and gas industry experience, and our President for completeness of the data presented and reasonableness of the results obtained. Once any questions have been addressed, Lonquist & Co. issues the final appraisal report, reflecting their conclusions.

Lonquist & Co. is an independent professional engineering firm specializing in the technical and financial evaluation of oil and gas assets. Lonquist & Co’s report was conducted under the direction of Don E. Charbula, P.E., Vice President of Lonquist & Co. Mr. Charbula holds a BS in Petroleum Engineering from The University of Texas at Austin and is a registered professional engineer with more than 29 years of experience in production engineering, reservoir engineering, acquisitions and divestments, field operations and management. Lonquist & Co., and its employees, have no interest in our Company and were objective in determining our reserves.

The SEC’s rules with respect to technologies that a company can use to establish reserves, effective for years ending after December 31, 2008, allows use of techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

Lonquist & Co. used a combination of production and pressure performance, simulation studies, offset analogies, seismic data and interpretation, geophysical logs and core data to calculate our reserves estimates.


Proved Undeveloped Reserves

As of December 31, 2010, our proved undeveloped reserves totaled 43.9 mbbls of oil and 0 mcf of natural gas, for a total of 43.9 mbbls compared to 894.2 mbbls of oil and 0.0 mcf of natural gas, for a total of 894.2 mbbls as of December 31, 2009. The decrease in our proved undeveloped reserves during 2010 was principally attributable to the sale of our indirect interest in the Dorotea, Cabiona, Leona and Las Garzas Blocks in Colombia.

PUD Locations

All of our proved undeveloped reserves at December 31, 2010 were associated with our properties in Colombia operated by Hupecol.

Changes in Proved Undeveloped (“PUD”) Reserves

Changes in PUD Reserves that occurred during 2010 were due to:

 
Negative revisions of 883.4 mboe in PUD reserves due to the sale of Dorotea, Cabiona, Leona and Las Garzas blocks, and related assets, in Colombia

 
Positive revisions of 33.2 mboe in PUD reserves due to Hupecol’s on-going drilling program and subsequent changes in subsurface mapping

Development Cost

Estimated future development costs relating to the development of proved undeveloped reserves are projected to be $147 thousand for 2011 and $478 thousand thereafter.

Drilling Plans

All proved undeveloped locations are scheduled to be drilled or otherwise converted to proved developed reserves before the end of 2015. None of our proved undeveloped locations have been booked for longer than five years.

Developed and Undeveloped Acreage

The following table sets forth the gross and net developed and undeveloped acreage (including both leases and concessions), categorized by geographical area, which we held as of December 31, 2010:

   
Developed
   
Undeveloped
 
   
Gross
   
Net
   
Gross
   
Net
 
United States
    3,029       71       4,671       1,751  
Colombia
    5,120       82       820,537       179,896  
Total
    8,149       153       825,208       181,647  

Developed acreage is comprised of leased acres that are within an area spaced by or assignable to a productive well. Undeveloped acreage is comprised of leased acres with defined remaining terms and not within an area spaced by or assignable to a productive well.

As is customary in the oil and natural gas industry, we can generally retain our interest in undeveloped acreage by drilling activity that establishes commercial production sufficient to maintain the leases or by paying delay rentals during the remaining primary term of leases. The oil and natural gas leases in which we have an interest are for varying primary terms and, if production under a lease continues from our developed lease acreage beyond the primary term, we are entitled to hold the lease for as long as oil or natural gas is produced.


Many of the leases and concessions comprising the undeveloped acreage set forth in the table above will expire at the end of their respective primary terms unless production from the acreage has been established prior to such date, in which event the lease or concession will remain in effect until the cessation of production. The following table sets forth, as of December 31, 2010, the expiration periods of the gross and net acres that are subject to leases or concessions summarized in the above table of undeveloped acreage.

   
Undeveloped Acres Expiring
 
Twelve Months Ending:
 
Gross
   
Net
 
December 31, 2011
           
December 31, 2012
           
December 31, 2013
    4,671       1,751  
December 31, 2014
           
December 31, 2015 and later
    820,537       179,896  
Total
    825,208       181,647  

Title to Properties

Title to properties is subject to royalty, overriding royalty, carried working, net profits, working and other similar interests and contractual arrangements customary in the gas and oil industry, liens for current taxes not yet due and other encumbrances. As is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of acquisition (other than preliminary review of local records).

Investigation, including a title opinion of local counsel, generally is made before commencement of drilling operations.

Marketing

At December 31, 2010, we had no contractual agreements to sell our gas and oil production and all production was sold on spot markets.

Employees

As of March 1, 2011, we had 4 full-time employees and no part time employees. The employees are not covered by a collective bargaining agreement, and we do not anticipate that any of our future employees will be covered by such agreements.

Competition

We encounter intense competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and undeveloped acreage. Our competitors include major integrated oil and gas companies, numerous independent oil and gas companies and individuals. Many of our competitors are large, well-established companies with substantially larger operating staffs and greater capital resources and have been engaged in the oil and gas business for a much longer time than our Company. These companies may be able to pay more for productive oil and gas properties, exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.


Regulatory Matters

Regulation of Oil and Gas Production, Sales and Transportation

The oil and gas industry is subject to regulation by numerous national, state and local governmental agencies and departments. Compliance with these regulations is often difficult and costly and noncompliance could result in substantial penalties and risks. Most jurisdictions in which we operate also have statutes, rules, regulations or guidelines governing the conservation of natural resources, including the unitization or pooling of oil and gas properties, minimum well spacing, plugging and abandonment of wells and the establishment of maximum rates of production from oil and gas wells. Some jurisdictions also require the filing of drilling and operating permits, bonds and reports. The failure to comply with these statutes, rules and regulations could result in the imposition of fines and penalties and the suspension or cessation of operations in affected areas.

Environmental Regulation

Various federal, state and local laws and regulations relating to the protection of the environment, including the discharge of materials into the environment, may affect our exploration, development and production operations and the costs of those operations. These laws and regulations, among other things, govern the amounts and types of substances that may be released into the environment, the issuance of permits to conduct exploration, drilling and production operations, the discharge and disposition of generated waste materials and waste management, the reclamation and abandonment of wells, sites and facilities, financial assurance and the remediation of contaminated sites. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas.

The environmental laws and regulations applicable to our U.S. operations include, among others, the following United States federal laws and regulations:

 
Clean Air Act, and its amendments, which govern air emissions;

 
Clean Water Act, which governs discharges into waters of the United States;

 
Comprehensive Environmental Response, Compensation and Liability Act, which imposes liability where hazardous releases have occurred or are threatened to occur (commonly known as “Superfund”);

 
Resource Conservation and Recovery Act, which governs the management of solid waste;

 
Oil Pollution Act of 1990, which imposes liabilities resulting from discharges of oil into navigable waters of the United States;

 
Emergency Planning and Community Right-to-Know Act, which requires reporting of toxic chemical inventories;

 
Safe Drinking Water Act, which governs the underground injection and disposal of wastewater; and

 
U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.

Colombia has similar laws and regulations designed to protect the environment.

We routinely obtain permits for our facilities and operations in accordance with these applicable laws and regulations on an ongoing basis. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations.


The ultimate financial impact of these environmental laws and regulations is neither clearly known nor easily determined as new standards are enacted and new interpretations of existing standards are rendered. Environmental laws and regulations are expected to have an increasing impact on our operations. In addition, any non-compliance with such laws could subject us to material administrative, civil or criminal penalties, or other liabilities. Potential permitting costs are variable and directly associated with the type of facility and its geographic location. Costs, for example, may be incurred for air emission permits, spill contingency requirements, and discharge or injection permits. These costs are considered a normal, recurring cost of our ongoing operations and not an extraordinary cost of compliance with government regulations.

Although we do not operate the properties in which we hold interests, noncompliance with applicable environmental laws and regulations by the operators of our oil and gas properties could expose us, and our properties, to potential costs and liabilities associated with such environmental laws. While we exercise no oversight with respect to any of our operators, we believe that each of our operators is committed to environmental protection and compliance. However, since environmental costs and liabilities are inherent in our operations and in the operations of companies engaged in similar businesses and since regulatory requirements frequently change and may become more stringent, there can be no assurance that material costs and liabilities will not be incurred in the future. Such costs may result in increased costs of operations and acquisitions and decreased production.

Climate Change Legislation and Greenhouse Gas Regulation

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, also known as the Waxman-Markey Bill. The U.S. Senate’s version, The Clean Energy Jobs and American Power Act, or the Boxer-Kerry Bill, has been introduced, but has not passed. Although these bills include several differences that require reconciliation before becoming law, both bills contain the basic feature of establishing a “cap and trade” system for restricting greenhouse gas emissions. Under such system, certain sources of greenhouse gas emissions would be required to obtain greenhouse gas emission “allowances” corresponding to their annual emissions of greenhouse gases. The number of emission allowances issued each year would decline as necessary to meet overall emission reduction goals. As the number of greenhouse gas emission allowances declines each year, the cost or value of allowances is expected to escalate significantly. The ultimate outcome of this legislative initiative remains uncertain. In addition to the pending climate legislation, the EPA has issued greenhouse gas monitoring and reporting regulations that went into effect January 1, 2010, and require reporting by regulated facilities by March 2011 and annually thereafter. Beyond measuring and reporting, the EPA issued an “Endangerment Finding” under section 202(a) of the Clean Air Act, concluding greenhouse gas pollution threatens the public health and welfare of current and future generations. The EPA has proposed regulations that would require permits for and reductions in greenhouse gas emissions for certain facilities, and may issue final rules as early as 2011. Similarly, foreign governments, including Colombia, have begun various initiatives with respect to regulation and reduction of greenhouse gases. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur increased operating costs, and could have an adverse effect on demand for the oil and natural gas we produce, depending on the applicability to company operations and the refining, processing, and use of oil and gas.

Web Site Access to Reports

Our Web site address is www.houstonamericanenergy.com. We make available, free of charge on or through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the United States Securities and Exchange Commission.


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.

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, and the levels of our production, depend on numerous factors beyond our control. These factors include, but are not limited to, the following:

 
changes in global supply and demand for oil and natural gas;

 
the actions of the Organization of Petroleum Exporting Countries, or OPEC;

 
the price and quantity of imports of foreign oil and natural gas;

 
political conditions, including embargoes, in or affecting other oil-producing activity;

 
the level of global oil and natural gas exploration and production activity;

 
the level of global oil and natural gas inventories;

 
weather conditions;

 
technological advances affecting energy consumption; and

 
the price and availability of alternative fuels.

Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. Lower prices will also negatively impact the value of our proved reserves. A substantial or 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.

We may be affected by general economic conditions

The disruption experienced in U.S. and global financial and credit markets, and the accompanying economic contraction, during second half of 2008 and continuing through 2009 resulted in projected decreases in demand for oil and natural gas, resulting in a sharp drop in energy prices, and affected the availability and cost of capital. While the U.S. and global economies have experienced a slow recovery from the deep recessionary conditions that prevailed in late 2008 and much of 2009 and commodity prices have recovered a portion of the decline experienced over that period, uncertainty that continues to exist with respect to the pace and sustainability of the economic recovery continues to be a risk to oil and natural gas operators and other businesses. Global economic growth drives demand for energy from all sources, including fossil fuels. Should the U.S. and global economies experience further weakness, demand for energy and accompanying commodity prices may decline and our financial position may deteriorate along with our ability to operate profitably and our ability to obtain financing to support operations and the cost and terms of the same, is unclear. With respect to Houston American Energy, the crisis experienced during the 2008-2009 period resulted in a steep decline in the price of oil and natural gas, a marked decline in the value of our reserves, a determination in March 2009 to temporarily shut-in production from our Colombian wells and reduced revenues and profitability.


Our cash flows and profitability may fluctuate by large amounts as a result of our strategy of investment in drilling and exploration of unproven properties and opportunistic asset divestitures.

We have historically experienced large fluctuations in our cash flows and profitability associated with our drilling and development of properties, divestitures of interests in select properties and reinvestment in drilling and development of unproven properties. Our strategy has historically focused on early identification of, and entrance into, existing and emerging resource plays. As part of that strategy, we and our partners have participated in accumulating positions and drilling unproven acreage, that may be perceived to be higher risk, where acquisition, drilling and operation costs may be lower with a view to proving reserves, divesting selected assets on an opportunistic basis to operators willing to pay higher prices for proven prospects without early stage drilling risk and reinvesting operating cash flow and sales proceeds in accumulating, drilling and developing additional, and larger, acreage positions. As a result of such strategy, we sold acreage positions in 2008 and 2010 that both provided large one-time profits and cash proceeds and substantially reduced our proved reserves, production and operating cash flows immediately following such sales and after which we invested substantial portions of sales proceeds in the accumulation and exploratory drilling of larger acreage positions. Typically, our reserves, production, operating cash flows and operating profitability has grown as properties have been drilled and developed and fall following strategic asset divestitures when we are incurring costs to drill and develop properties. As a result of drilling and other risks, there can be no assurance that our reserve and production growth strategy will allow us to continue to grow, and replace, our acreage position, reserves, production and profitability following divestitures and we may continue to experience large fluctuations in such positions.

A substantial percentage of our properties are undeveloped; therefore the 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 or proved undeveloped, we require significant capital to prove and develop such properties before they may become productive. At December 31, 2010, approximately 99% of our net acreage was unproven and 54.1% of our proved reserves were undeveloped. Further, because of the inherent uncertainties associated with drilling for oil and gas, some of these properties may never be developed to the extent that they result in positive cash flow. Even if we are successful in our development efforts, it could take several years for a significant portion of our undeveloped properties to be converted to positive cash flow.

While our current business plan is to fund the development costs with funds on hand, including funds received from our 2010 sale of interests in certain assets, and cash flow from our other producing properties, if such funds are not sufficient, we may be forced to seek alternative sources for cash, through the issuance of additional equity or debt securities, borrowings or other means.

 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.

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, potentially negatively impacting the trading value of our securities.

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 and may be required to further write down the carrying value of our oil and natural gas properties. 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. It requires 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. During the years ended December 31, 2008 and 2009, revisions to prior estimates resulted in significant negative revisions to our proved reserves in 2008 and positive revisions in 2009. Negative revisions during fiscal year 2008 amounted to 86.2% of prior year-end proved gas reserves and 83.4% of prior year-end proved oil reserves. Positive revisions during fiscal year 2009 amounted to 46.8% of prior year-end gas reserves and 8.2% of prior year-end proved oil reserves.


You should not assume that the present value of future net revenues from our proved reserves, as reported from time to time, is 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.

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.

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. Our prospects are in various stages of evaluation, ranging from a prospect that is ready to drill to a prospect that will require substantial additional 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. This risk may be enhanced in our situation, due to the fact that approximately 54.1% of our reserves are currently proved undeveloped. 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 you 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.

We may incur substantial 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:

 
environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination;

 
abnormally pressured formations;

 
mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;

 
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. If a significant accident or other event occurs and is not fully covered by insurance, then it could adversely affect us.

We are subject to complex laws that can affect the cost, manner or feasibility of doing business.

Exploration, development, production and sale of oil and natural gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with governmental regulations. Matters subject to regulation include:

 
discharge permits for drilling operations;

 
drilling bonds;

 
reports concerning operations;

 
the spacing of wells;

 
unitization and pooling of properties; and

 
taxation.

Under these laws, we could be liable for personal injuries, property damage and other damages. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws could change in ways that substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations.

Our operations will be subject to environmental and other government laws and regulations that are costly and could potentially subject us to substantial liabilities.

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;


 
restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities;

 
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and

 
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.” 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 demand for some of our services or products in the future. See “Business — Regulatory Matters.”

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.

The Obama Administration has proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial condition and results of operations.


Our operations in Colombia are subject to 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 will 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. In the event of a significant negative change in the political or economic climate in Colombia, we may be forced to abandon or suspend our operations in Colombia.

A 40-year armed conflict between government forces and anti-government insurgent groups and illegal paramilitary groups—both funded by the drug trade—continues in Colombia. Insurgents continue to attack civilians and violent guerilla activity continues in many parts of the country. While our operators take measures to protect our assets, operations and personnel from guerilla activity, continuing attempts to reduce or prevent guerilla activity may not be successful and guerilla activity may disrupt our operations in the future. 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.

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 counternarcotics agreements may result in any of the following:

 
all bilateral aid, except anti-narcotics and humanitarian aid, would be suspended;

 
the Export-Import Bank of the United States and the Overseas Private Investment Corporation would not approve financing for new projects in Colombia;

 
United States representatives at multilateral lending institutions would be required to vote against all loan requests from Colombia, although such votes would not constitute vetoes; and

 
the President of the United States and Congress would retain the right to apply future 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 ANH and Ecopetrol 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. The United States may impose sanctions on Colombia in the future, and we cannot predict the effect in Colombia that these sanctions might cause.

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 interests in Colombia. We are an investor in Hupecol and our interest in the assets and operations of Hupecol represent a substantial portion of our assets and operations in Colombia and are our principal assets and operations. During 2008 and 2010, respectively, Hupecol sold its interest in a concession and in two 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.


In addition to Hupecol’s control of decisions regarding properties operated by Hupecol in Colombia, as minority owners, we are subject to substantial control of other properties in Colombia in which we hold interests that are operated by SK Energy and Shona Energy. Our Colombian assets consist exclusively of minority, non-operator project interests in certain Colombian assets owned and operated by Hupecol, LLC, a 37.5% non-operated working interest in certain Colombian assets owned and operated by SK Energy Co. LTD and a 12.5% non-operated working interest in certain Colombian assets owned and operated by Shona Energy Ltd. Our passive investments in such Colombian assets constitute our principal assets, and as a result, our financial results are directly affected by the independent strategies and decisions of Hupecol, SK Energy and Shona Energy.

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.

Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.

Our success will depend on our ability to attract and retain our management and non-management employees, including engineers, geoscientists and other technical and professional staff and, in particular, our President, John Terwilliger, who is principally responsible for sourcing our resource plays. We will depend, to a large extent, on the efforts, technical expertise and continued employment of such personnel and members of our management team. If members of our management team should resign or we are unable to attract the necessary personnel, our business operations could be adversely affected.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute on a timely basis our exploration and development plans within our budget.

Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our development and exploration operations. As 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. 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.

If our access to markets is restricted, it could negatively impact our production, our income and ultimately our ability to retain our leases.

Market conditions or the unavailability of satisfactory transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business.


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. Such restrictions on our ability to sell our oil or natural gas have several adverse affects, 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.

We may need additional financing to support operations and future capital commitments.

While we presently believe that our operating cash flows and funds on hand, including funds provided by our 2010 sale of certain Hupecol assets, will support our ongoing operations and anticipated future capital requirements, a number of factors could result in our needing additional financing, including reductions in oil and natural gas prices, declines in production, unexpected developments in operations that could decrease our revenues, increase our costs or require additional capital contributions and commitments to new acquisition or drilling programs. In particular, given our recent commitments to participate in additional properties operated by Hupecol and our agreements to participate in the development of additional prospects in Colombia operated by Shona Energy and SK Energy, we may be subject to substantially greater calls for commitments to provide capital to support development of our additional interests. We have no commitments to provide any additional financing, if needed, and may be limited in our ability to obtain the capital necessary to support operations, complete development, exploitation and exploration programs or carry out new acquisition or drilling programs. We have not thoroughly investigated whether this capital would be available, who would provide it, and on what terms. If we are unable, on acceptable terms, to raise the required capital, our business may be seriously harmed or even terminated.

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.

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell common stock when you want or at prices you find attractive.

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;

 
operating results that vary from the expectations of management, securities analysts and investors;

 
changes in expectations as to our future financial performance;

 
announcements by us, our partners or our competitors of leasing and drilling activities;


 
the operating and securities price performance of other companies that investors believe are comparable to us;

 
future sales of our equity or equity-related securities;

 
changes in general conditions in our industry and in the economy, the financial markets and the domestic or international political situation;

 
fluctuations in oil and gas prices;

 
departures of key personnel; and

 
regulatory considerations.

In addition, in recent years, the stock market in general has experienced 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.

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.

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:

 
authorize our board of directors to issue “blank check” preferred stock, which is preferred stock that can be created and issued by our board of directors, without stockholder approval, with rights senior to those of our common stock;

 
provide for a staggered board of directors and three-year terms for directors, so that no more than one-third of our directors could be replaced at any annual meeting;

 
provide that directors may be removed only for cause; and

 
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.

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.


Our management owns a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other shareholders.

At March 1, 2011, our directors and executive officers owned approximately 38.8% of our outstanding common stock. As a result, our current directors and executive officers are in a position to significantly influence or control the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of any amendment to our certificate of incorporation or bylaws, and the approval of mergers and other significant corporate transactions. Such level of control of the Company may delay or prevent a change of control on terms favorable to the other shareholders and may adversely affect the voting and other rights of other shareholders.

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 May 31, 2012, is $6,682.

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 1, 2011, 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.
(Removed and Reserved)


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed on the NYSE Amex (“AMEX”) under the symbol “HUSA.” Prior to July 27, 2010, our common stock traded on the Nasdaq Global Market also under the symbol “HUSA”. The following table sets forth the range of high and low closing sale prices of our common stock, and cash dividends declared, for each quarter during the past two fiscal years.

     
High
   
Low
   
Dividend
 
Calendar Year 2010
Fourth Quarter
  $ 18.52     $ 10.40     $ 0.205  
 
Third Quarter
    10.99       8.50       0.005  
 
Second Quarter
    20.35       9.30       0.005  
 
First Quarter
    18.55       6.39       0.005  
                           
Calendar Year 2009
Fourth Quarter
  $ 6.16     $ 3.38     $ 0.005  
 
Third Quarter
    3.70       1.72       0.005  
 
Second Quarter
    2.18       1.64       0.005  
 
First Quarter
    4.38       1.77       0.020  

At March 1, 2011, the closing price of the common stock on AMEX was $15.03.

Holders

As of March 1, 2011, there were approximately 898 shareholders of record of our common stock, excluding holders in street name.

Dividends

The payment of future cash dividends will depend upon, among other things, our financial condition, funds from operations, the level of our capital and development expenditures, our future business prospects, contractual restrictions and any other factors considered relevant by the Board of Directors.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.

Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
   
Weighted-average exercise price of outstanding options, warrants and rights (b)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders (1)
    1,813,998     $ 6.57       886,002  
Equity compensation plans not approved by security holders
                 
Total
    1,813,998     $ 6.57       886,002  
______________________________
(1)
Consists of 500,000 shares reserved for issuance under the Houston American Energy Corp. 2005 Stock Option Plan and 2,200,000 shares reserved for issuance under the Houston American Energy 2008 Equity Incentive Plan.


Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The following performance graph compares the change in the cumulative total return of Houston American Energy’s common stock, the Dow Jones U.S. Exploration and Production Index, and the S&P 500 Index for the five years ended December 31, 2010. The graph assumes that $100 was invested in the Company’s common stock and each index on December 31, 2005, and that dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG
HOUSTON AMERICAN ENERGY CORPORATION, THE S&P 500 INDEX
AND DJ U.S. EXPL & PROD. INDEX

Image 1
 
 
 
December 31,
 
 
 
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
Houston American Energy Corporation
  $ 100     $ 234     $ 97     $ 109     $ 198     $ 584  
S&P 500 Index
  $ 100     $ 116     $ 122     $ 77     $ 97     $ 112  
DJ U.S. Expl. & Prod. Index
  $ 100     $ 105     $ 151     $ 91     $ 127     $ 149  


Item 6.
Selected Financial Data

The following table sets forth a summary of selected historical financial information for each of the years in the five-year period ended December 31, 2010. This information is derived from our Financial Statements and the notes thereto. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

   
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
       
Statement of Operations Data:
                             
Revenue:
                             
Oil and gas revenue
  $ 19,508,894     $ 8,116,275     $ 10,622,050     $ 4,977,172     $ 3,202,731  
Total revenues
    19,508,894       8,116,275       10,622,050       4,977,172       3,202,731  
Expenses of operations:
                                       
Lease operating expense and severance tax
    8,142,444       4,746,295       3,366,740       1,841,119       1,017,440  
Joint venture expense
    156,686       172,890       183,510       149,200       167,023  
Depreciation and depletion
    3,161,366       1,900,631       5,816,691       1,099,826       887,911  
Impairment of oil and gas properties
                5,621,106       348,019        
General and administrative expense
    4,896,955       2,768,195       3,152,930       1,568,228       1,231,079  
Gain on sale of oil and gas properties
    (27,159,114 )           (7,615,236 )            
Total operating expenses
    (10,801,663 )     9,588,011       10,525,741       5,006,392       3,303,453  
Income (loss) from operations
    30,310,557       (1,471,736 )     96,309       (29,220 )     (100,722 )
Other income (expense):
                                       
Interest income
    65,155       64,882       295,375       649,742       496,490  
Interest expense
    (4,772 )                       (57,278 )
Interest expense – related party
                            (20,440 )
Interest expense – derivative
                            (37,773 )
Loss on change in fair value of derivative
                            (170,949 )
Financing costs
                            (110,787 )
Other income
    12,864                          
Total other income
    73,247       64,882       295,375       649,742       99,263  
Net income (loss) before income taxes
    30,383,804       (1,406,854 )     391,684       620,572       (1,459 )
Income tax expense (benefit)
    9,353,864       (737,406 )     (73,261 )     127,116       510,637  
Net income (loss)
  $ 21,029,940     $ (669,448 )   $ 464,945     $ 493,456     $ (512,096 )
Basic net income (loss) per share
  $ 0.68     $ (0.02 )   $ 0.02     $ 0.02     $ (0.02 )
Diluted net income (loss) per share
  $ 0.66     $ (0.02 )   $ 0.02     $ 0.02     $ (0.02 )
Cash dividends paid per share
  $ 0.22     $ 0.04     $ 0.04     $     $  
                                         
Cash Flow Data:
                                       
Cash flow from operating activities
  $ 8,290,671     $ (484,677 )   $ 1,452,054     $ 1,801,481     $ 1,239,446  
Cash flow from investing activities
    12,660,487       (9,239,263 )     8,787,853       (1,792,672 )     (17,507,371 )
Cash flow from financing activities
    (6,267,845     11,786,383       (747,031 )           14,952,833  
                                         
Balance Sheet Data (at end of period):
                                       
Working capital
  $ 34,255,206     $ 16,365,490     $ 10,536,834     $ 10,358,502     $ 14,202,160  
Property, plant and equipment, net
    10,691,421       11,356,255       5,263,131       10,017,045       5,248,272  
Total assets
    55,476,428       34,062,829       22,637,054       20,714,797       19,985,883  
Long-term debt, less current portion
    26,761       332,912       205,524       135,267       38,816  
Total stockholders’ equity
    50,364,637       33,245,312       21,048,248       20,243,447       19,414,783  


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We are an independent energy company focused on the development, exploration, exploitation, acquisition, and production of natural gas and crude oil in the U.S. Gulf Coast region and in South America. Our oil and gas reserves and operations are concentrated primarily in the South American country of Colombia and in the onshore Gulf Coast region, particularly Texas and Louisiana.

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 entrance into, existing and emerging resource plays, particularly in South America and the U.S. Gulf Coast. We 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 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

Production Levels, Commodity Prices and Revenues

Our production levels, commodity prices realized and revenues during 2010, as compared to 2009, benefited from improved market conditions during 2010 as compared to 2009 when sharply lower prices prevailed, particularly during the first half of 2009, following the global economic crisis that began in late 2008. As a result of depressed commodity prices during the first half of 2009, our operator in Colombia temporarily shut-in production from a majority of our Colombian properties and we had no sales in Colombia from February 13, 2009 through April 5, 2009.

Our December 2010 sale of our interest in entities holding four concessions in Colombia resulted in sharp declines in our production levels and revenues during the last half of December 2010, and will continue to produce lower production and revenue levels unless and until we can successfully drill wells and bring on line new and/or additional production from our other properties. See “Asset Sales – Hupecol Dorotea and Cabiona, LLC and Hupecol Llanos, LLC.”

Drilling Activity

During 2010, we drilled 12 international wells in Colombia, as follows:

 
4 wells were drilled on concessions in which we hold a 12.5% working interest, of which 3 were in production at December 31, 2010, and 1 was a dry hole.

 
One well was drilled on a concession in which we hold a 6.25% working interest and was a dry hole.

 
7 wells were drilled on a concession in which we hold a 1.6% working interest, of which 6 were in production at December 31, 2010, and 1 was a dry hole.

During 2010, no domestic wells were drilled.


At December 31, 2010, drilling operations were ongoing in Colombia on 1 well.

Leasehold Activity

During 2010, we acquired an interest in one additional block in Colombia, the LLA 62 Block, one TEA, the Macaya TEA, and increased our interest in the CPO 4 Block in Colombia.

Macaya TEA. During 2010, we elected to participate for our percentage interest (12.5%) in the Macaya Technical Evaluation Agreement (the “TEA”). The TEA was entered into in February 2010 by and between the Colombian National Hydrocarbons Agency (the “ANH”) and Hupecol Operating Co. LLC, and encompasses a 195,171 acre region located to the southeast of the Serrania block, which is located in the municipalities of Uribe and La Macarena in the Department of Meta in the Republic of Colombia. As a result of the election to participate, we agreed to pay our proportionate share, or 12.5%, of the acquisition costs and costs for the minimum work program contained in the TEA.

LLA 62 Block. During 2010, we elected to participate for our percentage interest (1.6%) in the LLA 62 Block in Colombia (the “LLA 62 Block”). The LLA 62 Block was awarded to Hupecol by the ANH during 2010. The LLA 62 Block is adjacent to the La Cuerva Block operated by Hupecol. The award of the LLA 62 Block includes a Phase I commitment to shoot 60 square kilometers of 3D seismic on the block. As a result of the election to participate, we agreed to pay our proportionate share, or 1.6%, of all costs of exploiting the block, except the 3D seismic costs, where we agreed to pay two times our proportional cost.

CPO 4 Farmout. Effective July 31, 2010, we entered into a Farmout Agreement (the “Farmout Agreement”) with SK Energy Co. LTD (“SK Energy”) pursuant to which SK Energy agreed to assign to our Company an additional 12.5% interest in the approximately 345,452 acre CPO 4 Block in the Llanos Basin of Colombia, increasing our current interest in the CPO 4 Block from 25% to 37.5%.

SK Energy serves as operator on the CPO 4 Block under a Joint Operating Agreement (the “JOA”).

Under the terms of the Farmout Agreement, we are responsible for paying our proportionate interest in all future development and operating costs (“Ongoing Costs”). In addition to payment of our proportionate interest in Ongoing Costs, as a condition of assignment of the additional 12.5% interest in the CPO 4 Block, we are responsible for reimbursement to SK Energy, or payment, of (i) 12.5% of certain defined past costs relating to development of the CPO 4 Block (the “Past Costs”), and (ii) 25% of seismic acquisition costs incurred with respect to the Phase One cost of the CPO 4 Block between June 18, 2009 and June 17, 2012 (the “Seismic Acquisition Costs”). The Phase One seismic acquisition was completed during 2010.

The assignment of the additional interest in the CPO 4 Block was conditioned upon the approval by the ANH and the Republic of Korea by July 31, 2011, and payment of our proportionate interest in Past Costs, which was due on the earlier of (i) October 29, 2010, or (ii) 30 days following ANH approval. In November 2010, we were invoiced for, and paid, $3,939,003 as our share of the Past Costs attributable to our additional 12.5% interest in CPO 4. In December 2010 the Company received ANH approval of our additional 12.5% interest in Block CPO 4 along with the assignment from SK bringing our total interest to 37.5% in the Block.

Pursuant to the terms of, and in conjunction with, the Farmout Agreement and the JOA, we entered into a separate agreement with Gulf United Energy, Inc. (“Gulf United”) whereby we waived our right of first refusal under the JOA for the specific purpose of permitting Gulf United to acquire a 12.5% interest in the CPO 4 Block. Under the agreement with Gulf United, as a condition of our agreement to waive our preferential rights, Gulf United agreed to pay to us, not later than 30 days following ANH approval, (i) our 12.5% share of Past Costs incurred through July 31, 2010, and (ii) our 25% share of Seismic Acquisition Costs incurred through July 31, 2010. ANH approval of the Gulf United assignment had not yet been received at December 31, 2010 or through the date of this filing. It is anticipated that upon Gulf United receiving ANH approval, it will reimburse us for the $3,939,003 invoiced by SK Energy for Past Costs; plus any additional cost accrued under the terms of the Farmout Agreement.


Asset Sales

During 2010, we divested our direct interest in acreage in Karnes County, Texas and our indirect interest in the Dorotea, Cabiona, Leona and Las Garzas blocks in Colombia.

Hupecol Dorotea and Cabiona, LLC and Hupecol Llanos, LLC. During the fourth quarter of 2010, Hupecol Dorotea & Cabiona Holdings, LLC (“Hupecol D&C Holdings”) sold all of its interest in Hupecol Dorotea and Cabiona, LLC (“HDC, LLC”) and Hupecol Llanos Holdings, LLC (“Hupecol Llanos Holdings”) sold all of its interest in Hupecol Llanos, LLC (“HL, LLC”). We hold a 12.5% ownership interest in each of Hupecol D&C Holdings and Hupecol Llanos Holdings and, prior to the sale, held indirect interests in identical amounts in HDC, LLC and HL, LLC. HDC, LLC and HL, LLC hold interests in the Dorotea, Cabiona, Leona and Las Garzas blocks, and related assets, in Colombia.

The Dorotea, Cabiona, Leona and Las Garzas blocks cover an aggregate of approximately 310,790 acres. At December 31, 2009, the estimated proved reserves associated with the blocks totaled 1,178,576 barrels of oil, which represented 96.9% of our estimated proved oil and natural gas reserves.

As a result of the sale, we received net proceeds, after deduction of fees and expenses of $29,359,463 before escrow holdbacks, realized a gain on the sale of $25,397,048 and eliminated from oil and gas properties costs subject to amortization associated with the underlying assets totaling $3,989,236. Production from the Dorotea, Cabiona, Leona and Las Garzas blocks accounted for $18,880,299, $7,936,673 and $7,206,439 of our revenues during 2010, 2009 and 2008.

Fifteen percent of the sales price was held in escrow pursuant to the Purchase and Sales Agreement to fund potential claims arising from the sale with escrowed amounts to be released over a three year period based on amounts remaining in escrow after claims. In addition to the fifteen percent escrowed, Hupecol withheld 5% of the proceeds in escrow for any contingencies that may arise, and it is expected that the Company will receive the 5% withheld by Hupecol in 2011. The Company is not aware of any claims that would reduce the escrow amounts as of December 31, 2010. Our proportionate interest in the sales proceeds that were withheld and deposited into escrow totaled $7,069,810 and have been recorded as escrow receivables. Following completion of the sale of HDC, LLC and HL, LLC, we have no continuing interest in the Dorotea, Cabiona, Leona and Las Garzas blocks.

Karnes County, Texas. In November 2010, we sold our 2.5% working interest and our 1.25% of 8/8s overriding royalty interest (“ORRI”) in 6,000+ gross acres in Karnes County, Texas and our right to a 1.25% ORRI in an AMI covering approximately 50,000 gross acres in Karnes County, Texas. We received gross proceeds of $4.1 million from the sale of our Karnes County, Texas holdings. Our Karnes County, Texas holdings were acquired in 2009 at a cost of $175,000 and, at the time of sale, we had no wells, no production and no reserves associated with the acreage.

Seismic Activity

During 2010, our operators in Colombia acquired approximately 225 square miles of additional 3-D and 2-D seismic and geological data. The additional data relates primarily to the CPO 4, Serrania and La Cuerva concessions where we hold 37.5%, 12.5%, and 1.6% working interests, respectively. Our share of the costs of such data acquisition was approximately $6.4 million.

Compensation Expense

In June 2010, our board of directors approved, and we paid, cash bonuses to our senior management team totaling $637,500 and, effective June 15, 2010, we increased the base salary of members of our senior management team by 10%. In August 2010, we expanded our management team with the appointment of a then-consultant to serve as Senior Vice President of Exploration.


Also in June 2010, we modified the non-cash compensation arrangements for our non-employee directors to provide for annual grants of stock options to purchase 25,000 shares of common stock. The option grants vest on the grant date, are exercisable at the fair market value on the grant date and have a term of ten years. Pursuant to such revised compensation arrangements, we granted 100,000 stock options to non-employee directors on June 15, 2010 and granted 25,000 stock options to a newly appointed non-employee director in July 2010. In August 2010, we granted 150,000 stock options to the newly appointed member of our management team. As a result of these 2010 option grants and the amortization of the cost associated with options granted in prior years that remain subject to vesting, we recognized non-cash compensation expense for 2010 totaling $2,357,230.

Dividends

During 2010, we declared and paid cash dividends to our shareholders of $0.22 per share, or an aggregate of $6,837,845.

Development and Operating Outlook

While we continually seek to identify and evaluate opportunities, both domestically and in South America, to acquire interests in early stage high potential resource plays, our focus since the beginning of 2010 has been, and continues to be, the development of our Colombian assets. In particular, we have been, and are, focused on development of our CPO 4 and Serrania prospects in Colombia where we have increased our interest in CPO 4 during 2010, conducted extensive seismic acquisition and analysis, invested in infrastructure and conducted preliminary work in preparation for drilling wells on both of our CPO 4 and Serrania prospects.

Consistent with our past operating plans, we selectively divest holdings on an opportunistic basis where we believe that favorable prices can be realized from assets and proceeds redeployed to grow our asset base and produce superior returns. To that end, during 2010, we divested our interest in undeveloped domestic acreage and four blocks in Colombia which were in various stages of development, which divestitures produced approximately $29.4 million of net proceeds (including $7.1 million held in escrow) to our company.

During 2011, we plan to invest approximately $21.4 million in the development of our Colombian prospects, including CPO 4, Serrania and four prospects operated by Hupecol. As of January 1, 2011, substantially all seismic, infrastructure and pre-drilling work had been completed on both our CPO 4 and Serrania prospects and our plans are to drill 3 test wells on the CPO 4 block and 2 test wells on the Serrania block during 2011. Subject to the results of those test wells, we expect to begin developmental drilling of those prospects.

While our 2010 asset sales provided funding that we believe will satisfy our financial commitments relating to the CPO 4 and Serrania prospects, as well as our remaining Hupecol holdings, the interests sold during 2010 accounted for approximately 97% of our net oil production and oil revenues during 2010, as well as 99% of our lease operating expenses. Accordingly, until we bring production on line from drilling and development of our CPO 4, Serrania and remaining Hupecol prospects, our future production, revenues and lease operating expenses will be substantially lower than 2010 levels. There can be no assurance as to the ultimate success of our drilling and development operations on our CPO 4, Serrania and remaining Hupecol prospects or the timing of such drilling and development operations.

Critical Accounting Policies

The following describes the critical accounting policies used in reporting our financial condition and results of operations. In some cases, accounting standards allow more than one alternative accounting method for reporting. Such is the case with accounting for oil and gas activities described below. In those cases, our reported results of operations would be different should we employ an alternative accounting method.


Full Cost Method of Accounting for Oil and Gas Activities. We follow the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Capitalized costs include lease acquisition, geological and geophysical work, delay rentals, costs of drilling, completing and equipping successful and unsuccessful oil and gas wells and related internal costs that can be directly identified with acquisition, exploration and development activities, but does not include any cost related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant amounts of oil and gas reserves are involved. No corporate overhead has been capitalized as of December 31, 2010. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves, are amortized on a units-of-production method over the estimated productive life of the reserves. Unevaluated oil and gas properties are excluded from this calculation. The capitalized oil and gas property costs, less accumulated amortization, are limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues from the projected production of proved oil and gas reserves, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) and a discount factor of 10%; (b) the cost of unproved and unevaluated properties excluded from the costs being amortized; (c) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and (d) related income tax effects. Costs in excess of this ceiling are charged to proved properties impairment expense.

Unevaluated Oil and Gas Properties. Unevaluated oil and gas properties consist principally of our cost of acquiring and evaluating undeveloped leases, net of an allowance for impairment and transfers to depletable oil and gas properties. When leases are developed, expire or are abandoned, the related costs are transferred from unevaluated oil and gas properties to oil and gas properties subject to amortization. Additionally, we review the carrying costs of unevaluated oil and gas properties for the purpose of determining probable future lease expirations and abandonments, and prospective discounted future economic benefit attributable to the leases.

Unevaluated oil and gas properties not subject to amortization include the following at December 31, 2010 and 2009:

   
At
December 31,
2010
   
At
December 31,
2009
 
Acquisition costs
  $ 2,795,439     $ 3,370,734  
Evaluation costs
    7,463,541       2,140,296  
Retention costs
    --       47,294  
Total
  $ 10,258,980     $ 5,558,324  

The carrying value of unevaluated oil and gas prospects includes $9,647,631 and $2,993,732 expended for properties in South America at December 31, 2010 and December 31, 2009, respectively. We are maintaining our interest in these properties and development has or is anticipated to commence within the next twelve months.

Stock-Based Compensation. We account for stock-based compensation in accordance with the provisions of FASB ASC Topic 718. We use the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the volatility of our common stock price over the expected life of the options, dividend yield, an appropriate risk-free interest rate and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimated fair value of stock-based compensation and consequently, the related amount recognized on the Statements of Operations.


Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Oil and Gas Revenues. Total oil and gas revenues increased 140.37%, to $19,508,894 in 2010 from $8,116,275 in 2009.

The increase in revenue is principally due to (1) higher average sales prices for oil and gas during 2010 reflecting increased commodity pricing due to improved global macroeconomic conditions compared to 2009 and (2) increased oil production due to new wells brought onto production and production from our Colombian properties for the full period in 2010 as compared to 2009, when production was temporarily shut-in for 52 days due to market conditions.
   
The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for 2010 and 2009:
 
   
2010 (1)
   
2009
 
Gross producing wells
    34       26  
Net producing wells
    2.704       2.31  
Net oil production (Bbls)
    261,779       131,363  
Net gas production (Mcf)
    17,798       15,761  
Oil—Average sales price per barrel
  $ 74.18     $ 61.20  
Gas—Average sales price per mcf
  $ 5.01     $ 4.89  

(1)
As noted elsewhere, we sold our indirect interest in four Colombian concessions in December 2010. Of the wells and production shown in 2010, the concessions sold in December 31, 2010 account for 19 gross wells, 2.375 net wells and 254,785 bbls of net oil production.

As noted, production volumes were less then what they otherwise would have been in 2009 due to the cessation of production and sales from the majority of our Colombian properties for 52 days in early 2009 as a result of unfavorable commodity prices.

Oil and gas sales revenues for 2010 and 2009 by region were as follows:
 
   
Colombia
   
U.S.
   
Total
 
2010
                 
Oil sales
  $ 19,302,303     $ 117,360     $ 19,419,663  
Gas sales
  $     $ 89,231     $ 89,231  
2009
                       
Oil sales
  $ 7,944,353     $ 94,839     $ 8,039,192  
Gas sales
  $     $ 77,083     $ 77,083  

Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, increased 71.5% to $8,142,444 in 2010 from $4,746,295 in 2009.

Following is a summary comparison of lease operating expenses for the periods.
 
   
Colombia
   
U.S.
   
Total
 
2010
  $ 8,088,230     $ 54,214     $ 8,142,444  
2009
  $ 4,665,578     $ 80,717     $ 4,746,295  

The increase in total lease operating expenses was attributable to an increase in production and the number of net wells producing. The decrease in lease operating expenses as a percentage of revenues, from 58% of revenues in 2009 to 42% of revenues in 2010, was attributable to the temporary cessation of production from the majority of our Colombian properties during the 2009 period and increased production and improved commodity prices during 2010.


Joint Venture Expenses. Joint venture expenses totaled $156,686 in 2010 compared to $172,890 in 2009. The joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by Hupecol.

Depreciation and Depletion Expense. Depreciation and depletion expense increased by 66% to $3,161,366 in 2010 from $1,900,631 in 2009. The increase in depreciation and depletion was due to an increase in production volumes during 2010.

Gain on sale of oil and gas properties. The sale of our indirect interests in Hupecol Dorotea and Cabiona, LLC and Hupecol Llanos, LLC resulted in a gain of $25,397,048, and the sale of our Karnes County, Texas interests resulted in a gain of $1,762,066 during 2010.

General and Administrative Expenses. General and administrative expense increased by 77% to $4,896,955 in 2010 from $2,768,195 in 2009. The increase in general and administrative expense was primarily attributable to increases in employee compensation, principally related to the payment of $637,500 of cash bonuses, a 10% increase in base salaries effective June 15, 2010, the hiring of an additional executive and a $1,277,100 increase in stock-based compensation in 2010 versus 2009 associated with options granted to directors and officers during 2010.

Other Income. Other income consists primarily of interest earned on cash balances. Other income totaled $65,155 in 2010 as compared to $64,882 in 2009. The increase in other income resulted primarily from an increase in larger average interest earning cash balances.

Income Tax Expense/Benefit. We reported an income tax expense of approximately $9.4 million in 2010 as compared to a benefit of $737,406 in 2009.

The income tax expense during 2010 was entirely attributable to operations in Colombia and reflects increased sales and profitability in Colombia, as well as the taxes applicable to the proceeds received on sale of oil and gas properties discussed above.

The income tax benefit during 2009 was primarily attributable to net operating losses generated in Colombia and the United States and the refund during 2009 of approximately $548,000 of Colombian taxes. The income tax benefit during 2009 was attributable $402,663 to the U.S. and $334,743 to Colombia.

At December 31, 2010, we had no foreign tax credit carryovers.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Oil and Gas Revenues. Total oil and gas revenues decreased 23.6%, to $8,116,275 in 2009 from $10,622,050 in 2008.

The decrease in oil and gas revenue was due to a decline in oil and gas prices received during 2009 (approximately $84,000 based on lower average gas prices realized during 2009 and approximately $2.8 million based on lower average oil prices).

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for 2009 and 2008:

   
2009
   
2008
 
Gross producing wells
    26       16  
Net producing wells
    2.31       1.47  
Net oil production (Bbls)
    131,363       123,925  
Net gas production (Mcf)
    15,761       24,748  
Oil—Average sales price per barrel
  $ 61.20     $ 83.67  
Gas—Average sales price per mcf
  $ 4.89     $ 10.22  


Production volumes were less then what they otherwise would have been in 2009 due to the sale of our Caracara interest during 2008 (accounting for 29,954 barrels of production and $3,005,140 of revenues during 2008) and the cessation of production and sales from the majority of our Colombian properties for 52 days in early 2009 as a result of unfavorable commodity prices, partially offset by increased production in fields in which we hold higher working interests (12.5% vs. 1.6% in Caracara). Giving pro forma effect to exclude sales revenues from the Caracara interest, which was sold in June 2008, oil and gas revenues for 2008 would have been $7,616,910.

The decline in average sales prices realized reflects the sharp worldwide economic decline, and accompanying decline in commodity prices, during the second half of 2008 continuing through 2009.

Oil and gas sales revenues for 2009 and 2008 by region were as follows:
 
 
   
Colombia
   
U.S.
   
Total
 
2009
                 
Oil sales
  $ 7,944,353     $ 94,839     $ 8,039,192  
Gas sales
  $     $ 77,083     $ 77,083  
2008
                       
Oil sales
  $ 10,211,579     $ 157,492     $ 10,369,071  
Gas sales
  $     $ 252,979     $ 252,979  

Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, increased 41% to $4,746,295 in 2009 from $3,366,740 in 2008.

The increase in lease operating expenses as a percentage of revenues, from 32% of revenues in 2008 to 58% of revenues in 2009, was primarily attributable to the temporary cessation of production from a majority of our Colombian properties during the 2009 period as discussed above, the steep decline in oil and gas prices and an increase in our average working interest following the Caracara sale, as well as increased cost in Colombia relating to personnel expenses, facilities and equipment expenses, catering expenses, road maintenance, as well environmental services expenses.

Following is a summary comparison of lease operating expenses for the periods.
 
 
   
Colombia
   
U.S.
   
Total
 
2009
  $ 4,665,578     $ 80,717     $ 4,746,295  
2008
  $ 3,232,213     $ 134,527     $ 3,366,740  

Hupecol, our operator in Colombia, implemented cost cutting measures in order to improve field economics from our Colombian operations.

Joint Venture Expenses. Joint venture expenses totaled $172,890 in 2009 compared to $183,510 in 2008. The joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by the operator of the Colombian concessions. The decrease in joint venture expenses was attributable to the decrease in the number of producing wells during 2009.

Depreciation and Depletion Expense. Depreciation and depletion expense decreased by 67% to $1,900,631 in 2009 from $5,816,691 in 2008. The decrease in depreciation and depletion was due to an increase in reserves due to exploration and development. This resulting increase in our reserves from exploration and development activities lowered our depreciation rate per barrel.

Impairment Expense. During 2008, we recorded a provision for impairment of oil and gas properties of $5,621,106, most of which was attributable to our South American properties. Impairments related to reduced commodity prices at year end and lower reserve estimates for our Colombian wells, reduced reserve estimates for our U.S. properties as a result of lower commodity prices and lower than expected production volumes, as well as the lack of commercial production on our Caddo Lake prospect.


Gain on sale of oil & gas properties. The sale of our Caracara assets resulted in a gain of $7,615,236 during 2008.

General and Administrative Expenses. General and administrative expense decreased by 12% to $2,768,195 in 2009 from $3,152,930 in 2008. The decrease in general and administrative expense was primarily attributable to decreases in employee compensation and professional fees, including a decrease of $750,000 related to cash bonuses paid in 2008 not repeated in 2009 and $400,320 related to restricted stocks grants in 2008.

Other Income. Other income consists of interest earned on cash balances and marketable securities. Other income totaled $64,882 in 2009 as compared to $295,375 in 2008. The decrease in other income resulted from the sale of the balance of our marketable securities during early 2008 and a reduction in interest rates on short-term cash investments, partially offset by interest earned on DIP Financing provided to the Creditors under the Letter Agreement related to assets the Company was considering acquiring out of a bankruptcy proceeding.

Income Tax Expense/Benefit. We reported an income tax benefit of $737,406 in 2009 as compared to an income tax benefit of $73,261 in 2008.

The income tax benefit during 2009 was primarily attributable to net operating losses generated in Colombia and the United States and the refund during 2009 of approximately $548,000 of Colombian taxes. The income tax benefit during 2009 was attributable $402,663 to the U.S. and $334,743 to Colombia.

The income tax benefit during 2008 was primarily attributable to a decrease in valuation allowance and the availability of U.S. foreign tax credits that more than offset taxes attributable to operating income in Colombia. A deferred income tax benefit in the amount of $5,273,567 was attributable to the U.S. and income tax expense in the amount of $5,200,306 was attributable to Colombia during 2008. Income tax expense during 2008 was entirely attributable to operations in Colombia.

At December 31, 2009, we had foreign tax credit carryovers of $1,684,745. Currently, we expect to be able to utilize the incremental foreign tax credit carry forward and net operating loss generated during 2009 and, therefore, no additional valuation allowance has been recorded to date.

Financial Condition

Liquidity and Capital Resources. At December 31, 2010, we had a cash balance of $26,656,450 and working capital of $34,255,206 compared to a cash balance of $11,973,137 and working capital of $16,365,490 at December 31, 2009. The increase in cash and working capital during the period was primarily attributable to the receipt of $25,942,822 (net proceeds) excluding escrowed monies from the sale of our Karnes County, Texas property and our indirect interest in four concessions in Colombia and operating cash flow, partially offset by payment of drilling costs, acquisition costs, seismic costs and other costs related to the planned drilling of prospects in Colombia and the payment of dividends.

Cash Flows. Operating activities provided cash during 2010 totaling $8,290,671 as compared to $484,677 of cash used in operating activities during 2009. The increase in cash flows from operations was primarily a result of improved profitability during 2010.

Investing activities provided cash during 2010 totaling $12,660,487 as compared to $9,239,263 used in investing activities during 2009. Funds provided by investing activities during 2010 reflect the receipt of proceeds from the sale of our Karnes County, Texas property and our indirect interest in four Colombian concessions which provided, in the aggregate, approximately $25,942,822 of net proceeds excluding escrowed amounts. The funds provided by investing activities during 2010 were partially offset by investments in oil and gas properties and assets and property plant and equipment of $8,662,516 and payments of $3,951,370 of costs associated with the CPO 4 prospect that are reimbursable by Gulf United and recorded as accounts receivable - other. Funds used by investing activities during 2009 reflect investments in oil and gas properties and assets of $8,273,545 partially offset by the receipt of $799,680 from the escrow account related to the sale of the Caracara assets and $397,102 from the sale of selected domestic prospects, including Profit Island and North Profit Island.


Financing activities used $6,267,845 of cash during 2010 as compared to $11,786,383 of cash provided by financing activities during 2009. Funds used by financing activities during 2010 consisted of cash dividends paid of $6,837,845, partially offset by warrant exercise proceeds received of $570,000. Funds provided by financing activities during 2009 consisted of proceeds from the December 2009 common stock placement of $13,525,200, partially offset by cash dividends paid of $980,057 and cost associated with our registered direct offering of $758,760.

Long-Term Liabilities. At December 31, 2010, we had long-term liabilities of $26,761 as compared to $332,912 at December 31, 2009. Long-term liabilities at December 31, 2010 and December 31, 2009 consisted of a reserve for plugging costs and deferred rent liability.

Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to our ongoing efforts to acquire, drill and complete prospects. We expect that future capital and exploration expenditures will be funded principally through funds generated from operations and funds on hand, including funds generated from our 2010 sale of certain properties and our 2009 sale of common stock.

During 2010, we invested approximately $8.6 million for the acquisition and development of oil and gas properties, which included expenses related to (1) drilling of 12 wells in Colombia ($1.3 million ), (2) seismic and geological costs in Colombia ($7.0 million), (3) delay rentals on U.S. properties ($12 thousand), and (4) leasehold costs on U.S. properties ($0.3 million).

At December 31, 2010, our only material contractual obligation requiring determinable future payments on our part was our lease relating to our executive offices.

The following table details our contractual obligations as of December 31, 2010:
 
 
   
Payments due by period
 
   
Total
   
< 1 year
   
1-3 years
   
3-5 years
   
> 5 years
 
Operating leases
  $ 123,214     $ 84,315     $ 38,899     $     $  
Total
  $ 123,124     $ 84,315     $ 38,899     $     $  

In addition to the contractual obligations requiring that we make fixed payments, in conjunction with our efforts to secure oil and gas prospects, financing and services, we have, from time to time, granted overriding royalty interests (ORRI) in various properties, and may grant ORRIs in the future, pursuant to which we will be obligated to pay a portion of our interest in revenues from various prospects to third parties.

Planned Drilling, Leasehold and Other Activities. As of December 31, 2010, our acquisition and drilling budget for 2011 totaled approximately $21.4 million and related principally to (1) drilling 10 wells in Colombia on existing Hupecol prospects; (2) drilling 2 wells on the Serrania Block operated by Shona Energy; and (3) drilling 3 wells on the CPO 4 Block operated by SK Energy. Additional wells may be drilled at locations to be determined based on the results of the planned drilling projects. Our acquisition and drilling budget has historically been subject to substantial fluctuation over the course of a year based upon successes and failures in drilling and completion of prospects and the identification of additional prospects during the course of a year.

Management anticipates that our current financial resources combined with expected operating cash flows, will meet our anticipated objectives and business operations, including investments in the CPO 4 Block and other planned property acquisitions and drilling activities, for at least the next 12 months, without the need for additional capital. Because the timing and actual costs and results associated with development of the Serrania Block and CPO 4 Block cannot be predicted with certainty and because we continually seek opportunities to acquire and develop reserves, it is possible that we may require and seek additional financing to support development of existing prospects or additional prospects that may be acquired in the future. We have no commitments to provide any additional financing should we require and seek such financing and there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, to support future acquisitions and development activities.


Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or guarantees of third party obligations at December 31, 2010.

Inflation

We believe that inflation has not had a significant impact on our operations since inception.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Crude 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 gas have been volatile, and these markets will likely continue to be volatile in the future. The prices we receive for production depends on numerous factors beyond our control.

We have not historically entered into any hedges or other derivative commodity instruments or transactions designed to manage, or limit exposure to oil and gas price volatility.

Item 8.
Financial Statements and Supplementary Data

Our financial statements appear immediately after the signature page of this report. See “Index to Financial Statements” on page 44 of this report.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.


Item 9A.
Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation as of December 31, 2010 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2010.

The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by GHB CPAs, PC, an independent registered public accounting firm who audited our consolidated financial statements as of and for the year ended December 31, 2010, as stated in their report, which is included herein.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the fourth quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.
Other Information

Not applicable


PART III

Directors, Executive Officers and Corporate Governance

The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.

Executive Officers

Our executive officers as of December 31, 2010, and their ages and positions as of that date, are as follows:
 
 
Name
 
Age
 
Position
John F. Terwilliger
 
63
 
President, Chief Executive Officer and Chairman
James J. Jacobs
 
33
 
Chief Financial Officer
Kenneth Jeffers
 
50
 
Senior Vice President of Exploration

John F. Terwilliger has served as our President, CEO and Chairman since our inception in April 2001.

James J. Jacobs has served as our Chief Financial Officer since July 2006. From April 2003 until joining the Company, Mr. Jacobs served as an Associate and as Vice President—Energy Investment Banking at Sanders Morris Harris, Inc., an investment banking firm, where he specialized in energy sector financing and transactions. Previously, Mr. Jacobs was an Energy Finance Analyst at Duke Capital Partners, LLC from June 2001 to April 2003 and a Tax Consultant at Deloitte & Touché, LLP. Mr. Jacobs holds a Masters of Professional Accounting from the University of Texas and is a Certified Public Accountant.

Kenneth Jeffers has served as our Senior Vice President of Exploration since August 2010. Prior to his appointment as an officer, Mr. Jeffers served as a consultant to Houston American for six months focused on identification of prospects on the Company’s Colombian acreage. Previously, Mr. Jeffers served as Vice President, Geophysics for Goodrich Petroleum Corporation from 2004 to 2007. Mr. Jeffers’ experience includes serving as an exploration geophysicist with Mobil Oil and later serving as a staff geophysicist and senior geophysicist with Anadarko Petroleum, Pennzoil, Hunt Oil and Goodrich Petroleum.

There are no family relationships among the executive officers and directors. Except as otherwise provided in employment agreements, each of the executive officers serves at the discretion of the Board.

Item 11.
Executive Compensation

The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.

Equity compensation plan information is set forth in Part II, Item 5 of this Form 10-K.

Item 13.
Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.

Item 14.
Principal Accountant Fees and Services

The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of our fiscal year. Such information is incorporated herein by reference.


PART IV

Item 15.
Exhibits and Financial Statement Schedules

 
1.
Financial statements. See “Index to Financial Statements” on page 44 of this report.

 
2.
Exhibits
 
 
         
Incorporated by Reference
   
Exhibit
Number
 
Exhibit Description
 
Form
 
Date
 
Number
 
Filed
Herewith
3.1
   
Certificate of Incorporation of Houston American Energy Corp. filed April 2, 2001
 
SB-2
 
8/3/01
 
3.1
   
                       
3.2
   
Amended and Restated Bylaws of Houston American Energy Corp. adopted November 26, 2007
 
8-K
 
11/29/07
 
3.1
   
                       
3.3
   
Certificate of Amendment to the Certificate of Incorporation of Houston American Energy Corp. filed September 25, 2001
 
SB-2
 
10/01/01
 
3.4
   
                       
4.1
   
Text of Common Stock Certificate of Houston American Energy Corp.
 
SB-2
 
8/3/01
 
4.1
   
                       
10.1
   
Houston American Energy Corp. 2005 Stock Option Plan*
 
8-K
 
8/16/05
 
10.1
   
                       
10.2
   
Form of Director Stock Option Agreement*
 
8-K
 
8/16/05
 
10.2
   
                       
10.3
   
Houston American Energy Corp. 2008 Equity Incentive Plan*
 
Sch 14A
 
4/28/08
 
Ex A
   
                       
10.4
   
Letter Agreement, dated February 3, 2009, between Houston American Energy Corp., Yazoo Pipeline Co., L.P., Sterling Exploration & Production Co., L.L.C., and Matagorda Operating Company.
 
8-K
 
2/05/09
 
10.1
   
                       
10.5
   
Form of Subscription Agreement, dated November 2009 relating to the sale of shares of common stock
 
8-K
 
12/03/09
 
10.1
   
                       
   
Employment Agreement of Kenneth Jeffers*
             
X
                       
14.1
   
Code of Ethics for CEO and Senior Financial Officers
 
10-KSB
 
3/26/04
 
14.1
   
                       
   
Consent of GBH CPAs, PC
             
X
                       
   
Consent of Lonquist & Co., LLC
             
X
                       
   
Section 302 Certification of CEO
             
X
                       
   
Section 302 Certification of CFO
             
X
                       
   
Section 906 Certification of CEO
             
X
                       
   
Section 906 Certification of CFO
             
X
                       
99.1
   
Code of Business Ethics
 
8-K
 
7/7/06
 
99.1
   
                       
   
Report of Lonquist & Co., LLC
             
X
_________________________________
*
Compensatory plan or arrangement.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
HOUSTON AMERICAN ENERGY CORP.
Dated: March 15, 2011
 
 
     
 
By:
/s/ John F. Terwilliger
   
John F. Terwilliger
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
/s/ John F. Terwilliger
 
Chairman, Chief Executive Officer, President and Director (Principal Executive Officer)
 
March 15, 2011
John F. Terwilliger
       
         
/s/ O. Lee Tawes III
 
Director
 
March 15, 2011
O. Lee Tawes, III
       
         
/s/ Stephen Hartzell
 
Director
 
March 15, 2011
Stephen Hartzell
       
         
/s/ John P. Boylan
 
Director
 
March 15, 2011
John P. Boylan
       
         
/s/ James J. Jacobs
 
Chief Financial Officer (Principal Accounting and Financial Officer)
 
March 15, 2011
James J. Jacobs
       


HOUSTON AMERICAN ENERGY CORP.

INDEX TO FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm
45
   
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
47
   
Consolidated Statements of Operations For the Years Ended December 31, 2010, 2009 and 2008
48
   
Consolidated Statement of Changes in Shareholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
49
   
Consolidated Statements of Cash Flows For the Years Ended December 31, 2010, 2009 and 2008
50
   
Notes to Consolidated Financial Statements
51


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Houston American Energy Corp.
Houston, Texas

We have audited Houston American Energy Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based upon our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Houston American Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based upon the COSO Criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Houston American Energy Corp. as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008, and our report dated March 15, 2011 expressed an unqualified opinion thereon.

/s/GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas

March 15, 2011


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Houston American Energy Corp.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Houston American Energy Corp. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Houston American Energy Corp. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Houston American Energy Corp.’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2011 expressed an unqualified opinion thereon.

/s/ GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas

March 15, 2010


HOUSTON AMERICAN ENERGY CORP.

CONSOLIDATED BALANCE SHEETS

   
December 31,
 
   
2010
   
2009
 
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 26,656,450     $ 11,973,137  
Restricted cash – letter of credit
    3,056,250       2,037,500  
Accounts receivable – oil and gas sales
    1,226,341       1,831,674  
Accounts receivable – other
    3,951,370        
Escrow receivable – current
    4,440,953       873,871  
Note receivable
          125,000  
Prepaid expenses and other current assets
    8,872       8,913  
TOTAL CURRENT ASSETS
    39,340,236       16,850,095  
PROPERTY, PLANT AND EQUIPMENT
               
Oil and gas properties, full cost method
               
Costs subject to amortization
    1,831,738       22,050,265  
Costs not being amortized
    10,258,980       5,558,324  
Office equipment
    90,004       11,878  
Total
    12,180,722       27,620,467  
                 
Accumulated depletion, depreciation, amortization, and impairment
    (1,489,301 )     (16,264,212 )
PROPERTY, PLANT AND EQUIPMENT, NET
    10,691,421       11,356,255  
                 
Deferred tax asset
    1,997,079       5,680,026  
Escrow receivable
    3,434,167        
Other assets
    13,525       176,453  
TOTAL ASSETS
  $ 55,476,428     $ 34,062,829  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 122,536     $ 469,528  
Accrued expenses
    11,963       14,949  
Income taxes payable
    4,950,531       128  
TOTAL CURRENT LIABILITIES
    5,085,030       484,605  
LONG-TERM DEBT
               
Reserve for plugging and abandonment costs
    15,441       316,260  
Deferred rent obligation
    11,320       16,652  
TOTAL LONG-TERM DEBT
    26,761       332,912  
                 
COMMITMENTS AND CONTINGENCIES
    -—       -—  
                 
SHAREHOLDERS’ EQUITY
               
Common stock, par value $0.001;