Houston American: How Slick Can This Oil Company Be?

by Chris Carey - 6/30/2010 1:38:39 PM

An oilfield services company headed by one of Houston American's directors, John P. Boylan, also went under, in part because he took hundreds of thousands of dollars in loans from the business without the knowledge or consent of his partners.

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

A fourth Houston American director, Orrie Lee Tawes, is a longtime friend and financier of Terwilliger's, and was involved with Terwilliger's most recent bankrupt company, Moose Oil and Gas Co.  As head of investment banking for Northeast Securities Inc., Tawes also helped raise $34 million for Xethanol Corp., a dubious biofuels company that was the subject of a previous Sharesleuth investigation.

Houston American's stock rose tenfold from July to April, climbing from less than $2 a share to more than $20. At its peak, the company had a market capitalization of nearly $633 million.

Although Houston American's stock has fallen since then, it still is trading for more than $10 a share.

A Spectacular Deal?

The gains are linked largely to Houston American's deal last October for a 25-percent interest in a Colombian oil prospect controlled by SK Energy Co., one of Asia's biggest producers, refiners and marketers.

Houston American said in an investor presentation and subsequent Securities and Exchange Commission filing that the prospect was estimated to hold anywhere from 1 billion to 4 billion barrels of "recoverable reserves."

The latter figure exceeds the official proved and probable reserves for all of Colombia, and stands as one of the most audacious claims by any of the energy companies operating in that country.

Houston American did not cite a consultant's report or any other independent study as the source of its estimate. Nor did the company offer any qualifiers, such as the percentage of those reserves it has a reasonable certainty of producing.

Houston American also said that the new Colombian prospect, known as CPO 4, was next to another field that is estimated to have 610 million barrels of recoverable oil.

But Ecopetrol, the state-controlled company that operates the field, called Apiay, told Sharesleuth that it had no knowledge of Houston American's figure. It added that it does not break down its reserves by individual site. 

Big Claims

David G. Snow, who describes himself as an independent energy analyst, has suggested that Houston American's stake in the claimed reserves at the CPO 4 prospect could be worth as much as $269 a share.

That alone would value the company at more than $8 billion. Snow said in a report in February that Houston American's 12.5-percent stake in another undeveloped Colombian tract could be worth as much as $36 a share, adding $1.1 billion in market value.

Snow, president of Energy Equities Inc. in Wayne, N.J., has a history of making lofty claims about the reserves held by small energy and mining companies. He previously faced SEC charges in connection with favorable reports on a pair of Canadian companies that were later found to have engaged in fraud.

Houston American said in an SEC filing that its financial commitment to the SK Energy venture will total just $15 million over the next three years, with $10.2 million of that amount budgeted for 2010. It plans to spend $2 million this year on seismic work and drilling at the other new prospect, called Serrania.

In other words, the company is committed to spending less than $20 million on two projects that have helped add more than $300 million to its market capitalization.

To believe that Houston American is worth hundreds of millions of dollars - or even billions -- is to believe that an obscure company run by people with less-than-stellar track records made a truly spectacular deal, acquiring a lucrative prospect for a fraction of its true worth, from a partner rich enough to go it alone.

Houston American did not respond to a list of questions submitted by Sharesleuth.

(Disclaimer: Mark Cuban, the majority owner of Sharesleuth.com LLC, has a short position in Houston American's shares. Chris Carey, the editor of Sharesleuth, does not invest in individual stocks and has no position in Houston American's shares).

A Silent Partner

Although Houston American executives have been talking up the CPO 4 prospect, their counterparts at SK Energy have said little about the site's potential. In a financial presentation in April, the South Korea-based company did not even list the 345,452-acre tract among its main exploration and development projects for 2010.

SK Energy is a multinational conglomerate with more than $28 billion in annual revenue. It has 10 oil and gas production fields around the world, as well as 23 exploration prospects, including blocks of land in Colombia, Peru, Brazil, the Ivory Coast, Madagascar, Kazakhstan, Vietnam and Australia.

According to Snow's report, Houston American acquired its stake in the CPO 4 prospect simply by cold-calling SK Energy and asking if it could invest in the venture

A second Houston-based oil company, Gulf United Energy Corp. (OTCBB: GLFE.OB) said in several recent SEC filings that it entered into a "tentative letter of intent'' with SK Energy last October for a 25-percent stake in the same prospect.

Gulf United said in its quarterly filing on April 14 that the deal was subject to the completion of a definitive agreement, which was being negotiated. That disclosure raises further questions about why SK Energy would be partnering with such small players on the Columbian venture if it held the sort of promise that Houston American and its supporters claim.

Don Wilson, Gulf United's president and chief executive, did not return several calls from Sharesleuth. SK Energy did not respond to a list of questions about the Colombian prospect, Houston American and Gulf United.

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