CFO Blog: 11-12-2011

All,

By now I'm sure everyone has seen the press release on our recent lease acquisition. We're also making good progress on our development program, so I think an update is in order. I'll start with a drilling update.

We reached TD on the Felix Brandt #12 well last weekend. The log looks good so we cased and cemented it (the first step in the completion process). We perforated and swabbed this week and the fluid looks very good. By this I mean that the fluid that is entering the well bore from the target formations has good color and odor, indicating the presence of crude oil. I've included a picture (above right) of the fluid coming from the wellhead during one of the swab runs.

The paragraph above deserves a little more explanation. (If you're already familiar with how oil & gas is produced you can skip to the second paragraph below). When a well bore is "cased" this means that the operator has run heavy pipe (in this case 4.5" internal diameter) to the bottom of the hole. This casing maintains the structural integrity of the well during production. Cement is pumped into the space between the casing pipe and the hole to create a bond and allow us to isolate specific zones for production. The casing and cement protects groundwater from contamination and allows us to produce fluids only from the target formations.

In order to "open up" the target formations we perforate the casing and cement at the appropriate depth. This involves directional explosives and electric logging tools that I won't go into here. Once fluid begins to flow into the well bore, we "swab" the well. This means we run a tool down to the bottom of the hole that pulls residual fluids from the casing so we can get a look at what the target zones are actually producing. In most cases, the fluid is an emulsion of oil and saltwater. The percentage of oil in the emulsion is referred to as the "oil cut" and the more the better! We won't know where the oil cut will settle out on any of the wells we're currently drilling for a few weeks, but as you can see from the picture we're starting from a good base.

We spudded in the Leonard #6 well on Tuesday and should TD today (Saturday). I'll have more info on that well in the next update.

The new acreage that we recently acquired is part of the Leonard/Brandt project in southeastern Coleman County. In our original acquisition of the Brandt lease, we acquired "well bore" leases which means we only got the acreage around each well. (This is not the case with the Leonard - we acquired that entire lease). Well bore leases allow you to produce the wells and do some things to enhance production, which we have been doing for the last year; however, these leases don't allow you to drill any new wells.

As part of our development plan for the Leonard lease we did a geologic evaluation of the entire area. It became apparent that there were some good prospects on the Brandt acreage that we did not currently have under lease, so I made a deal with the mineral owner to acquire the balance of the acreage. We didn't pay any bonus, but we did commit to drilling at least one well on the new acreage within a year. The Felix Brandt #12 is that well, so we have "earned the acreage" and increased our lease position from 119 acres to 395 acres by drilling a well we wanted to drill anyway. That's an example of how we're creating value while conserving cash and avoiding dilution of our equity position in our oil & gas assets.

This has turned into a longer post than I'd intended, but I hope it you find it useful. Please feel free to leave comments or email me directly. Have a great week.

Shannon McAdams
Santa Anna, TX


PS: The article below is a good comparison of the actual costs and benefits of natural gas versus wind for electricity generation:

Gas Against Wind | Newgeography.com: