Acquisition, ‘Wishful Thinking’ Cost Houston E&P Millions, CEO His Job

Houston American Energy Corp.’s (NYSE MKT: HUSA) John F. Terwilliger is out as chairman and CEO following an investigation that he used a Florida firm to promote inflated reserves of the company’s asset based on “wishful thinking,” the Securities and Exchange Commission (SEC) said.

Among other allegations, Terwilliger was accused by the SEC of exaggerating recoverable oil reserves to 4 billion barrels of oil (Bbbl) without disclosing that an operator thought the asset might hold between 300 MMbbl and 1 Bbbl.

In later sworn testimony, the SEC said Terwilliger acknowledged “there are no reserves” in the asset.

The SEC said April 23 it reached a final settlement barring Terwilliger from serving or acting as an officer or director of a public company for a period of five years. He must also pay a $150,000 civil monetary penalty and not violate certain portions of the Securities Act.

Terwilliger has resigned as an officer and director of the Houston-based company. The company and Terwilliger admitted no wrongdoing in making the settlement. The company operates in Texas, Louisiana and in Columbia.

The SEC case stems from a 2009 farm-out agreement in Colombia’s Llanos Basin where Houston American acquired a 25% nonoperating interest. The 345,452-acre oil and gas production area was known as the CPO-4 block.

Houston American and Terwilliger, who was its largest individual shareholder, promoted the company’s interest in the CPO-4 block with a series of fraudulent statements and omissions that exaggerated the block’s value while downplaying any associated risks, the SEC said in a 2014 complaint.

In November 2009, the company entered into a consulting agreement with Undiscovered Equities for “implementation and maintenance of an ongoing program to increase the investment community’s awareness” of Houston American. The deal paid Undiscovered $20,000 per month for at least six months.

Undiscovered began distributing promotional articles about Houston American’s Columbia E&P activity and in December 2009 named the company one of its “Top Picks for 2010.”

Beginning in November 2009, Undiscovered Equities posted to its website and distributed to its subscribers a series of promotional articles about Houston American and the company’s investment in the CPO-4 block, an oil and gas exploration and production area in Colombia’s Llanos Basin. On December 31, 2009, Undiscovered Equities posted its list of “Top Picks for 2010,” which included Houston American.

But Terwilliger was apparently detached from the Columbian operations. Of the five E&P concessions the company held interest in, he “didn’t really pay attention” to a 103,000-acre tract, “really wasn’t paying attention to” a 47,950-acre tract and was disappointed in another concession that didn’t work out.

The SEC argued in its complaint that Terwilliger put his hopes in CPO-4.

“Among other things, Houston American and Terwilliger, directly and through their agents or other third parties, fraudulently asserted that the block contained ‘estimated recoverable reserves of 1 to 4 billion barrels’ of oil, that the oil was worth between $20 and $25 per barrel,” the agency said.

The company put a $3 billion value on the find.

In sworn testimony, Terwilliger said that he knew the CPO-4 block had no reserves and that the operator’s volume estimates … ranged only from 300 MMbbl to about 1 Bbbl.

“Terwilliger further admitted that, unlike the operator’s volume estimates, which were drawn from extensive regional well data and seismic information for the CPO-4 block, Houston American’s multi-billion-barrel reserve estimates were not based on a technical evaluation at all,” the SEC said.

An investor presentation used the term “reserves,” implying that Houston American’s multi-billion-barrel estimate was supported by project-specific data and that it referred to discovered, commercially producible petroleum accumulations. The estimate was actually unsupported by data and analysis and failed to acknowledge that the volume was more than three times larger than the operator’s volume, the SEC said.

“Terwilliger and Houston American nonetheless based their multi-billion-barrel reserve estimates on, at most, Terwilliger’s recklessly wishful thinking,” the agency said.

From November 2009 through April 2010, Houston American and Terwilliger’s statements promoted the company and increased its stock from about $4 per share to $20 per share, boosting its market cap to more than $600 million from less than $150 million.

After negative publicity from blog posts, Houston American withdrew from the CPO-4 block in March 2013.