Houston American presses bet in Colombia

Houston American Energy Corp. — the subject of a recent Sharesleuth.com investigation – is boosting its stake in a Colombian oil prospect that it claims has 1 billion to 4 billion barrels of recoverable oil.

Houston American (AMEX: HUSA) said in a Securities and Exchange Commission filing that it agreed to take an additional 12.5 percent interest in the prospect, known as CPO-4, from SK Energy Group Ltd. of South Korea. That would give it 37.5 percent of the venture.

Another small, publicly traded company, Gulf United Energy Inc. (OTCBB: GLFE.OB), also announced a deal with SK Energy for a 12.5 percent stake in the Colombian venture.

The transfers would cut SK Energy’s interest in the CPO-4 prospect to 50 percent, from 75 percent.

As Sharesleuth previously reported, the numbers at the upper end of Houston American’s reserve estimate for the 345,452-acre prospect exceed the official proved and probable reserves for all of Colombia. SK Energy has never offered its own estimate of the site’s potential. 

ASSET SALE

Houston American also disclosed last week that Hupecol LLC, the majority owner of its 24 producing wells in Colombia, had agreed to sell most of them, along with the surrounding acreage, for roughly $281 million.

Houston American said it would get 12.5 percent of the proceeds, minus commissions and other expenses. Although the sales would likely bring the company a windfall of more than $30 million, they also would take away its share of the output from 19 wells, which account for the bulk of its revenue.

Houston American’s stock closed Thursday at $8.75, giving the company a market capitalization of $272 million.

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

CPO-4 DEAL

Houston American and Gulf United did not put dollar values on their new 12.5 percent interests in the CP0-4 prospect. But it is clear from their respective SEC filings (here and here) that neither agreement required the buyer to pay SK Energy a substantial premium for its stake.

That strikes us as unusual, given that Houston American’s backers have said that the reserves under the land could send the company’s revenue and market capitalization into the billions of dollars.

Both of the farmout deals are scheduled to be completed by Oct. 29.

Houston American said that its agreement called for it to pay its proportionate share of future operating costs at the site, as well as 12.5 percent of certain past costs and 25 percent of all seismic expenses incurred between June 18, 2009 and July 19, 2012.

Gulf United’s deal carried the same terms. Gulf United added that, in return for Houston American waiving its right of first refusal on the interest in CPO-4 that Gulf United is acquiring, it agreed to pay Houston American 12.5 percent of its past costs and 25 percent of its seismic costs through July 31.Houston American said in its quarterly SEC filing that the expansion of its interest would add around $1 million to its spending at CPO-4 this year. The company said that, as of June 30, its projected acquisition and drilling budget for the remainder of 2010 would be $8.16 million.

GULF UNITED

Gulf United, which has headquarters in Houston, is a development-stage company that has been acquiring interests in oil and gas properties.

SEC filings show that it had just $92,219 in cash at the end of its most recent quarter, but subsequently received an additional $550,000 through the issuance of a promissory note.  The company said it would have to raise more money to pay for its end of the CPO-4 venture, as well as several other partnership agreements.

Houston American acquired its initial 25 percent stake in the Colombian prospect in October 2009. At about that same time, Gulf United signed a letter of intent with SK Energy to acquire its own stake in the venture.

Houston American’s public comments late last year and early this year about the property’s potential contributed to a sharp rise in its stock, which went from around $4 a share in November to a high of $20.36 on April 6.

Gulf United’s deal for a piece of the same prospect has produced no such gains for its stock. The company’s shares closed Thursday at 18 cents, down more than 30 percent from the day the acquisition was announced.

Gulf United has more than 233 million shares outstanding. At the current price, it has a market capitalization of $42 million.

EARNINGS AND BONUSES

Houston American announced last week that it turned a profit of $990,134 in the second quarter, on revenue of $7.63 million. That compares with earnings of $112,107 and revenue of $1.13 million in the same period last year.

Houston American attributed the increase to higher energy prices and higher production at the existing oil wells in Columbia, which it owns in partnership with  Hupecol.

Houston American earnings said its general and administrative expenses were up $1.76 million from the same period last year, reflecting $637,500 in bonuses for executives and $1 million in expenses for options the company granted to its directors during the quarter.

Houston American also noted that it increased the base salaries of its executives by 10 percent, effective June 15. SEC filings show that John F. Terwilliger Jr., chairman and chief executive, had a base salary of $315,000 in 2009.

Terwilliger got a $675,000 bonus in 2008, after the sale of some other Hupecol-Houston American wells in Colombia. He also got stock awards and options that brought his total compensation to $1.74 million. The company later revised the figure to $5.86 million, to reflect the increase in its share price.

More disclosure questions at China Fire & Security Group

A recent Securities and Exchange Commission filing by the chief executive of China Fire & Security Group Inc. (Nasdaq: CFSG) has raised additional questions about disclosure by the company and its major shareholders.

Vyle Investment Inc., an entity headed by China Fire’s chief executive, Brian Lin, said in the filing that it transferred 1.83 million shares of its China Fire stock — worth nearly $27 million at the time — to two other parties, who in turn surrendered their 70 percent interest in Vyle.

Those shareholders were different than the ones that China Fire had previously listed as having an ownership interest in Vyle, which held a 9.2 percent stake in the company.

In addition, China Fire has never publicly announced the death of Gangjin Li, who was its founder, former chairman and biggest single shareholder. He
stepped down as chairman and CEO on March 30, citing ill health. According to a Chinese-language article posted on an industry news site, he died less than two weeks later at age 48. China Fire confirmed Li’s death to Sharesleuth.

An SEC filing earlier this year reported that Li had sole or joint ownership of more than 15.7 million China Fire shares, representing 57 percent of the total outstanding. It is unclear what became, or will become, of those holdings in the wake of his death. That could be significant for other investors if Li’s heirs decide to liquidate some or all of his shares.

China Fire said in response to written questions from Sharesleuth that stock-ownership filings by Lin, Li and another company executive were in compliance with SEC rules. It said other individuals and entities we asked about were not subject to disclosure requirements.

China Fire manufactures fire safety equipment and designs and installs detection and suppression systems for steel mills, power plants and other customers. The Beijing-based company’s shares closed Thursday at $7.18, giving it a market capitalization of $198.1 million.

China Fire’s stock has fallen by more than 50 percent since mid-May.

A HISTORY OF DISCLOSURE QUESTIONS

In March 2008, Sharesleuth published an investigation showing that some of the people listed as the beneficial owners of tens of millions of dollars worth of China Fire stock appeared to be fronts for the real holders. The company responded by releasing a revised list of the people it said held the true interests in those shares.

China Fire said at the time that Brian Lin held a 30 percent of the ownership interest in Vyle but had 100 percent of the voting power. The company said that a woman named Hui Bai, described as a “distant family member” but not a close relative of Lin’s, owned the other 70 percent.

China Fire’s annual filing with the SEC in March 2009 again said that Lin held a 30 percent ownership stake and 100 percent voting stake in Vyle, which is domiciled in the British Virgin Islands. But it listed Weishe Zhang, China Fire’s current chief technology officer, as having a 20 percent interest in Vyle. It did not identify the holder of the remaining 50 percent interest.

The most recent filing regarding the transfer of shares still listed Lin with a 30 percent interest in Vyle and Zhang with a 20 percent interest. It said that Famous Link Group Ltd. owned the remaining 50 percent.

China Fire did not identify the person or persons who control Famous Link. But SEC filings for two other Chinese companies listed on U.S. exchanges identify Ying Yueqin as having sole voting power for Famous Link Group, which like Vyle is incorporated in the British Virgin Islands.

Yueqin is Brian Lin’s brother-in-law. China Fire told Sharesleuth that because Yueqin is not a member of Lin’s immediate family and does not share a household with him, it was not required to disclose the relationship in its SEC filings.

EARLIER APPEARANCE

Yueqin once was listed as the beneficial owner of 1.32 million China Fire shares held by Linkworld Venture Inc., yet another British Virgin Islands-based entity. China Fire said in the March 2008 press release intended to clarify ownership that the real holder of Linkworld’s shares was Zhao Shuangrui. It described Shuangrui as an early-stage investor in China Fire, and as the uncle of Gangjin Li.

Similarly, Brain Lin’s sister-in-law, Huiwen Liu, was originally listed as the beneficial owner of 2.58 million China Fire shares held by Worldtime Investment Advisors Ltd. (the family ties were not mentioned in that instance, either). Prior to the company’s disclosure of the true owner of those shares, Worldtime filed to sell stock with a market value of roughly $9.6 million.

China Fire also insisted in March 2008 that Gangjin Li’s son, Ang Li, was the beneficial owner of 2.67 million shares held by an entity called China Honour Investment Ltd. The son, who at the time was a teenager living in Canada, told Sharesleuth he did not know how he came to own the stock.

Last year, China Fire said in a filing that Ang Li had signed that stock, then worth $30 million, back to his father for no financial consideration.

OWNERSHIP CHANGES

China Fire told Sharesleuth that Zhang and Famous Link acquired their stakes in Vyle in January 2009. That transaction, which would have involved a holder of more than 5 percent of the company’s shares divesting that interest, was not disclosed in any SEC filing.

China Fire said Zhang properly disclosed his stock holdings in an SEC filing in March 2009. However, Zhang’s filing made no mention of his involvement with Vyle or his partnership with Lin and Famous Link. China Fire noted that it disclosed Zhang’s ties to Vyle in its annual report that same month.

China Fire explained its lack of disclosure regarding Gangjin Li by saying that he “had not been active” at the company since 2007, and only briefly resumed his role as chief executive in early 2010. China Fire added that, after Li’s health worsened and he stepped down as both chairman and CEO, he submitted an SEC filing showing that he had transferred of all of his holdings to the LGJ Family Trust.

“At the time of his death, Mr. Li was no longer a shareholder, director, or executive member of the company” China Fire said. “As such, the Board of Directors determined that it was not necessary to submit further filings with the SEC.”

But the filing that China Fire cited did not explicitly state that Li transferred all of his shares to the LGJ Trust. In fact, it showed that he had beneficial ownership and sole voting power over more than 15.7 million shares, and that the LGJ Trust had beneficial ownership and voting power over just 9.05 million of them.

To further confuse matters, the trustee for the LGJ Trust last month submitted an amendment to the original filing, withdrawing the trustee, LGJ Trust and another entity from that original filing, stating that none of them had any obligation to make disclosures through 13D or 13G filings.

The filing listed the holdings for all three entities at zero shares.