Houston American Energy Loses Nearly 29% Of Value After Bearish Internet Postings (HUSA)

A very interesting thing happened today, which is a testament to the changing capital markets landscape as a result of the pervasiveness of the blogosphere. As best as we can tell, two internet postings on Seeking Alpha, one on April 5th and another on April 7, have served to completely devastate the market cap of a Houston, Texas based oil and gas exploration company. The validity of the conclusions that the authors of these posts came to are yet to be seen, but the damage has certainly been done. During today's trading, Houston American Energy Corporation (NASDAQ: HUSA) lost 28.70%, or $5.84, to close at $14.51. The company has a total of 28 million outstanding shares, so the total amount of value destroyed today was about $163.52 million. Only time will tell if this reaction was justified or not.

The genesis of the sell off is the really interesting part of this story. On April 5, a poster from shareholdersunite.com published an article entitled "Houston American Energy Priced For Perfection" on SeekingAlpha.com. Shareholders Unite is the pseudonym under which the author was writing, and they describe themselves as "retired university professors from Amsterdam."

The piece was a detailed analysis of Houston American Energy Corp. (HUSA) and their stock price, which (prior to today) had gained around 1,000% in the last year. The author clearly put a considerable amount of time and effort into his analysis, and his conclusion was that the stock was overpriced. Specifically, Shareholders Unite concluded the following:

"We think the indeed rather spectacular Candililla 1&2 wells have provided much of the fantasy that has obviously entered into HUSA's valuation. But as we have argued above, all possible fantasy is already priced in (unless the off-chance of finding really substantially bigger wells even than the Candililla 1&2 wells).

And even then it would need financing and dilution to act upon these. We think these shares are priced to perfection, and anything less will trigger a rather substantial implosion (which could very well happen by their own sheer weight as well) ."

It does not appear as if this initial article on Seeking Alpha caused any great concern to shareholders of HUSA. On April 5, when it was posted, the stock did decline, but the losses were fairly marginal.

Fast forward to today. Another poster published a follow up article this morning titled "Houston American Energy Corp. Set Up For Collapse". The piece was published under the pseudonym "Shareholder Watchdog." This article affirmed the negative sentiments of the previous poster, and expounded on the bearish case for HUSA. The article appeared to be well researched and its effect was obviously persuasive. Among the most incendiary accusations that the author made were that "HUSA has a history of a hyped stock (that ultimately does not deliver)," and that "The hype machine is currently in full force: momentum newsletters, small cap research shops, and chat boards (even pumpers on a chat board for a Chinese software company have helped drive the stock to irrational levels)." Equally inflammatory, Shareholder Watchdog argues that management has a history of indiscretions and may have previously been involved in fraud. The author also points out that the company only has 3 employees, and that given HUSA's current market cap, that equates to a value of around $200 million per employee.

This second post obviously got people's attention. The stock opened up marginally lower at $19.75 today. Around 11 EST it started to become apparent that there was blood in the water and the sell off had commenced. Throughout the rest of the trading session, the stock continued to move down and finished near its lows. On the day, 4.47 million shares traded hands compared to a daily average of only 323,000.

After the market had closed, Houston American Energy's CEO, John Terwilliger, addressed the activity in his company's stock. The press release said that the "jump in trading volume and decline in price...appeared to be attributable to an internet posting questioning the valuation of the company's holdings and inferring that the company is "Set Up for Collapse."

Terwilliger stated, "We have reviewed the internet postings in question and believe they mischaracterize our company, our management team and the very nature of our operations."

"Any inference that our company is set up for collapse is unwarranted and outrageous. We have no debt and operate with a lean overhead structure. This is consistent with our goal to identify attractive opportunities to profit alongside larger operators without having to carry the overhead of such operators. In addition, it should be noted that Houston American Energy is not a party to any litigation, nor is it aware of any threatened litigation."

"Regarding the allegations with respect to the integrity of management, such allegations are scurrilous at best. Regarding royalties received by myself and Lee Tawes, those royalties were established early in the company's life (2005) when no compensation was paid to officers and directors and we have consistently disclosed the royalties that have been paid. Moreover, I would note that since inception of the company neither I nor any member of our management or board has sold a single share of stock in our company. Allegations of some form of potential wrongdoing based on the receipt from third parties of fully disclosed royalties and unsubstantiated allegations relating to Moose Oil appear only to act as cover for the author's malicious efforts to smear our company."
"With regards to the valuation of our asset plays, we do not fix the value of those assets. However, we do stand behind the performance and track record of our partners in Colombia. Houston American along with its consortium partners sold their initial prospect in Colombia for roughly $1 billion and has an established record of finding and developing reserves in Colombia."

In the after hours trading session, HUSA shares have gained around 7.17% and are currently exchanging hands for $15.55, as it appears that the company's response instilled some confidence in investors. That being said, HUSA will likely be very active again tomorrow, and traders should keep an eye on this name.