Texas-headquartered Houston American Energy Corp. (NYSEAMERICAN:HUSA) was incorporated in April of 2001, “with the purpose of engaging in oil and gas exploration and production.” Consequently, HUSA stock provides pure-play exposure to the boom and bust cycles of petroleum and natural gas.
Clearly, the energy market has been in a boom cycle lately. Due to a number of factors, including dollar inflation and the Russian invasion on Ukraine, the West Texas Intermediate (WTI) oil price and other related commodity prices have skyrocketed.
The temptation to jump into the trade today with HUSA stock is undeniable. Yet, it is essential for informed investors to conduct their due diligence before hitting that “buy” button.
As they say, what goes up must come down. With such strong oil-price dependence, Houston American Energy shares could continue on their upward trajectory — or, they could make a round trip back to Penny Stock Land.
A Closer Look at HUSA Stock
Informally, we might define a penny stock as a stock that represents a small company and trades for less than $5 per share. With that in mind, $5 becomes an important technical level to watch. It was relevant until recently, though, since HUSA traded between $1 and $2 for many consecutive months.
Then, the conflict in Ukraine erupted. Suddenly, the Houston American Energy share price zoomed to $16.61 on Mar. 8, 2022. However, a 10x price move isn’t easy to sustain, and soon gravity took over.
The stock closed at $6.95 on Mar. 8, after opening at $15.91 and peaking at $16.61. That is a shocking 56% decline from open to close in one day.
So, the $5 level is important again, but not in a good way. Breaking below that level — or worse yet, returning to the previous $1 to $2 range — would be a crushing blow to Houston American Energy’s loyal shareholders.
Let’s Not Kid Ourselves
This begs the question: why would HUSA stock collapse 56% in a single trading session?
If you try to find significant company-specific news on that day, you’ll likely come up empty-handed. What you might notice, though, is that a number of similar small-energy company stocks took a haircut on the same day.
That is not just a coincidence. As the U.S. and European governments seek to phase out Russian energy imports, financial market traders are speculating that these countries may increase their domestic oil production.
However, the markets are efficient and forward-looking. With the WTI oil price spiking to $130 in early March, it is probably safe to conclude that much of the speculation about domestic oil production has already been priced in.
In other words, let’s not kid ourselves about HUSA stock’s precipitous rise. It was based on the sharp move in the oil price, plain and simple.
Mixed Results
Trading a stock that is almost entirely dependent on oil-price moves can be a risky business. For example, when WTI oil retraced from $130 to $110 recently, that didn’t help Houston American Energy’s shareholders at all.
If and when energy prices normalize, HUSA stock’s trajectory will depend more on the company’s success as a business. Do you really want exposure to Houston American Energy, then?
To answer that question properly, it is important to conduct some research on the company’s recent financial performance. This is challenging, though, since Houston American Energy’s most recently filed annual 10-K report covers 2020, but not 2021.
At least the company has been somewhat more up-to-date with its quarterly filings. Thus, we can glean some critical info from Houston American Energy’s Form 10-Q covering 2021’s third quarter.
During that quarter, the company generated $290,375 in revenue (unaudited), more than double the $126,425 from the prior-year quarter. On the other hand, Houston American Energy’s Q3 2021 net earnings loss of $350,875 was worse than the prior-year quarter’s net loss of $259,765.
The Bottom Line on HUSA Stock
The foregoing financial results don’t reflect the recent oil-price spike. Hence, Houston American Energy’s next earnings report could show improvement.
Whether you really want to wait around for the company to issue a new 10-K or 10-Q form is another matter entirely.
In the meantime, HUSA stock’s trajectory will probably continue to parallel the moves of the WTI oil price. Therefore, if you’re averse to volatility and fast-changing geopolitical event risk, an investment in Houston American Energy probably isn’t right for you.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.