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NEW YORK (Dow Jones)--Houston American Energy Corp. (HUSA), a small energy company focused on Colombia , may soon reap big rewards from its well-established presence in that country. Houston American and partner South Korean energy giant SK Energy Co. (096770.SE) are expected to begin drilling at a nearly 550 square mile exploration block in Colombia called CPO 4 by the end of the year.
The block is nestled between projects that have been producing solid results for other companies, and if Houston American has similar success to what its neighbors have had, its stock, which closed Tuesday at $13.70, could easily reach $50 over the next two years, Global Hunter Securities analyst Philip McPherson said.
Colombia has become a magnet for exploration and production companies in recent years as the country has become more business friendly under President Alvaro Uribe Velez.
At a time when energy companies are increasingly relying on unconventional methods to tap into new sources of oil, in Colombia there's still a lot of oil that can be accessed with more cost-effective, conventional techniques. "Imagine going back to Texas in the 20s," Houston American Chief Financial Officer James Jacobs said.
Houston American's stock began going on a tear in mid-February when Colombia-based Petrominerales Ltd. (PMG.T, PMGLF) announced huge production rates in acreage that abuts the CPO 4. Houston American shares have risen 61% since Petrominerales announced Feb. 15 that its latest well produced at a rate of 15,800 barrels of oil per day. That came after an initial well there flowed at 12,400 barrels per day.
Currently Houston American produces about 1,000 to 1,200 barrels of oil per day via its other projects in Colombia , Jacobs said. A chunk of revenue derived from the CPO 4 block will go to partner SK Energy and the Colombian government, but if just one well there produces at rates similar to Petrominerales' wells, Houston American's revenue will at least double, McPherson said. And that's the ultra-conservative view. Based on preliminary data, Houston American potentially has access to between 250 million to 1 billion barrels of oil in the block, Jacobs said. At $15 a barrel, that equates to a market potential of about $3.75 billion to $15 billion.
Houston American is also excited about its stake in another block in Colombia called Serrania, which is in an area likely to have heavier oil, a type of oil that doesn't flow easily. It is located next to acreage estimated to contain 1 billion barrels of oil, based on recent discoveries. The company is working on that project with privately held Shona Energy Co., which is based in Houston .
Of course, it's always possible that Houston American won't find as much oil as it's hoping for. If the company finds a series of dry holes, eventually it would have to raise additional capital, Jacobs said, but he noted that the company has a strong balance sheet with no debt.
Houston American doesn't take the lead on any of its projects. Instead it works with operators who make use of the company's expertise about Colombia . There are plenty of other small exploration and production companies working in Colombia , but Houston American is established there, since it has been in the country since 2002, Jacobs said. Beyond that competitive advantage, McPherson likes that the company has huge insider ownership--42%
Another bearish argument is that even though the business environment in Colombia has improved, the country still comes with geopolitical risks, McPherson said. Also, since Houston American doesn't take the lead on its projects, it has less control over its destiny, he added. Houston American did post a loss of 3 cents a share for the first nine months of 2009, which the company attributed mainly to a temporary shutdown at the majority of the company's wells earlier in the year.
But McPherson said that even after the recent run-up in the stock price, the potential rewards still outweigh the risks. "It's not a question of if they'll find oil, it's a question of how much," he said.
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