OSAGE EXPLORATION &

DEVELOPMENT, INC.

 

RESERVES AND ECONOMIC EVALUATION

YEAR END 2013

 

Effective: December 31, 2013

SEC Pricing

 

Prepared: March 4, 2014

 

By:

Richard J. Morrow, P.E.

 

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Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700      www.PinnacleEnergy.com

 

 

 

 

Table of Contents

 

Osage Exploration & Development, Inc.

Year-End 2013 Reserves & Economic Report

 

1   Report and Property Listing       Executive Summary (6 pages)       Exhibit
“A” – Well List with Interests and Well Information (7 pages)           2  
Economic and Reserve Evaluation Results – All Cases       Reserves and Economic
Details by Reserve Category (8 pages)       One-Line Reserves and Economic
Results (12 pages)           3   Economic and Reserve Evaluation Results – PDP
Detail       Reserves and Economics by Well for PDP Properties (41 pages)      
Decline Curves by Well for PDP Properties (40 pages)           4   Economic and
Reserve Evaluation Results – Undeveloped Locations       Economics and
Production Graph for Mississippian Type Well (2 pages)       Economics and
Production Graph for Woodford Type Well (2 pages)  

 

 

 

 

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    March 10, 2014       Osage Exploration & Development, Inc.     2445 Fifth
Avenue, Suite 310     San Diego, CA 92101     Attn: Mr. Kim Bradford   RE:
Reserves and Economic Evaluation     Osage Exploration & Development     As of
December 31, 2013

 

Executive Summary

 

A reserve and economic evaluation has been performed on oil and gas assets of
Osage Exploration and Development, Inc. (“Osage”) as of December 31, 2013. Well
names, owned and projected interests, and other well information are provided on
the attached Exhibit A. All properties are located in Logan County, Oklahoma.
Information used in the evaluation was provided by Osage and supplemented by
data gathered from public sources. Summary results of this analysis are located
below and details are presented in accompanying exhibits.

 

This evaluation was performed using SEC reserve standards and SEC pricing as of
December 31, 2013. The report includes forty (40) Proved Developed Producing
(PDP) properties, two (2) Proved NonProducing (PNP) properties, fifty-two (52)
Proved Undeveloped (PUD) locations, five (5) SWD properties, one hundred
sixty-nine (169) Probable Undeveloped (PROB) locations, and one hundred
thirty-four (134) Possible Undeveloped (POSS) locations.

 

As presented in the accompanying summary projections, the net reserves and
future net cash flows as of December 31, 2013 are as follows (Volumes in MBBLs
and MMcf, Values in M$):

 

      Gross Reserves   Net Reserves   Net   Net   NPV    Number of   Oil   Gas  
NGL   Oil   Gas   NGL   Capital   Cashflow   Disc @ 0%  Reserve Class 
Properties   MBBL   MMCF   MBBL   MBBL   MMCF   MBBL   MS   M$   M$  PDP   40  
 4,120    20,118    422    441    1,940    22   $0   $33,193   $19,635  PNP 
 2    266    1,707    103    19    65    11   $0   $1,688   $1,111  PUD   52  
 7,265    31,467    268    1,049    4,360    10   $35,500   $50,891   $20,139 
Total Proved   94    11,651    53,292    794    1,508    6,365    43   $35,500  
$85,773   $40,885  SWD   5    0    0    0    0    0    0   $8,000   ($8,000) 
($7,395) PROB   169    21,480    88,943    480    4,207    16,727    25  
$156,379   $189,650   $64,342  POSS   134    17,755    75,068    682    3,065  
 12,331    37   $110,478   $141,882   $43,770  Total Non-Proved   308  
 39,235    164,011    1,163    7,271    29,058    62   $274,857   $323,532  
$100,716  Grand Total   402    50,886    217,303    1,956    8,780    35,423  
 105   $310,357   $409,304   $141,601 

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700      www.PinnacleEnergy.com

 

 

 

 

The two reservoirs being developed across the Osage acreage are the
Mississippian and the Woodford. Below is a breakdown of reserves and value by
reservoir.

 

MISSISSIPPIAN

 

      Gross Reserves   Net Reserves   Net   Net   NPV    Number of   Oil   Gas  
NGL   Oil   Gas   NGL   Capital   Cashflow   Disc @ 10%  Reserve Class 
Properties   MBBL   MMCF   MBBL   MBBL   MMCF   MBBL   M$   M$   M$  PDP   34  
 3,638    18,465    422    420    1,870    22   $0   $31,869   $18,715  PNP 
 2    266    1,707    103    19    65    11   $0   $1,688   $1,111  PUD   41  
 5,945    26,166    163    924    3,893    3   $30,504   $45,531   $18,604 
Total Proved   77    9,849    46,338    689    1,363    5,828    36   $30,504  
 S79,087   $38,429  SWD   5    0    0    0    0    0    0   $8,000   ($8,000) 
($7,395) PROB   48    6,960    30,634    0    1,582    6,683    0   $51,910  
$78,481   $32,946  POSS   67    9,715    42,759    387    1,677    7,025    21  
$55,239   $83,094   $29,808  Total Non-Proved   120    16,675    73,393    387  
 3,258    13,708    21   $115,149   $153,575   $55,358  Grand Total   197  
 26,524    119,731    1,076    4,621    19,536    57   $145,653   $232,663  
$93,787                                                      WOODFORD           
                                                                            
                    Gross Reserves   Net Reserves   Net   Net   NPV   
Number of   Oil   Gas   NGL   Oil   Gas   NGL   Capital   Cashflow   Disc @ 10% 
Reserve Class  Properties   MBBL   MMCF   MBBL   MBBL   MMCF   MBBL   M$   M$  
M$  PDP   6    482    1,653    0    20    70    0   $0   $1,325   $921  PNP 
 0    0    0    0    0    0    0   $0   $0   $0  PUD   11    1,320    5,301  
 105    125    467    7   $4,996   $5,361   $1,535  Total Proved   17    1,802  
 6,953    105    145    537    7   $4,996   $6,685   $2,456  SWD   0    0    0  
 0    0    0    0   $0   $0   $0  PROB   121    14,520    58,310    480  
 2,625    10,045    25   $104,469   $111,169   $31,396  POSS   67    8,040  
 32,309    295    1,388    5.306    16   $55,239   $58,788   $13,962  Total
Non-Proved   188    22,560    90,618    775    4,013    15,350    41  
$159,708   $169,956   $45,358  Grand Total   205    24,362    97,572    880  
 4,158    15,887    48   $164,704   $176,641   $47,814 

 

Pricing

 

Per SEC rules as of January 1, 2010, the SEC pricing is calculated by averaging
the first-of-the-month oil and gas pricing for the calendar year being
evaluated. For 2013, the average oil and gas NYMEX Price is $96.94/BBL for oil
and $3.670/MMBTU for natural gas (Henry Hub). Both prices were held constant.

 

Based on an evaluation of actual prices received by Osage, differentials to
NYMEX prices were applied. The calculated oil price differential was -$0.19/BBL.
The average gas price differential was + 24%.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700      www.PinnacleEnergy.com

 

 

 

 

Based on the Lease Operating Statements, several of the leases are being
credited with NGLs. For the wells on these leases NGL yields, gas shrinkage, and
tailgate gas BTUs were calculated and applied in their evaluations.

 

Osage has hedged some of their oil production as follows:

 

January 2014 to December 2014 - 6000 bbl/month @ $85.00/bbl

January 2015 to December 2015 - 6000 bbl/month @ $80.00/bbl

 

Based on the SEC pricing these hedges have no effect.

 

Interests

 

Interest information was provided by Osage for each property and undeveloped
location. These interests are shown in the attached Exhibit A.

 

Taxes

 

As provided by statute, the Oklahoma state severance tax for all horizontal
wells is 1.095% for the first 48 months of production, and 7.095% thereafter.

 

Expenses and Capital Costs

 

Gross and net monthly lease operating expenses for each producing well were
provided by Osage. Based on analysis of this data, average per-well operating
expenses were estimated to be $5000/month fixed cost and $10.00/barrel of oil
variable cost.

 

Based on the most recent AFE supplied by Osage the future capital cost used for
all undeveloped locations is 3.745 MM$ per well.

 

Property Descriptions and Reserve Estimates

 

All properties are either horizontal Mississippian wells or horizontal Woodford
wells, and are identified with either an ‘MH’ (Mississippian Horizontal) or ‘WH’
(Woodford Horizontal) in their name.

 

Forty (40) wells were on production as of December 31, 2013. Remaining reserves
for these properties were determined by decline curve analysis. Production plots
for each well showing historical production and forecasts are included in the
attachments.

 

Two (2) wells have been drilled but not yet on production. These wells were
classified as Proved Non-Producing (PNP).

 

Fifty-two (52) Proved Undeveloped (PUD) locations were identified. These PUDs
are all direct offsets to currently producing Mississippian or Woodford
horizontal wells. Twenty-six of these PUDs are increased density Mississippian
wells, the second well in the section.

 

Gross reserves for all undeveloped Mississippian properties (PUD, PRB, and POSS)
were estimated to be 145 MBO and 638 MMCF per well.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax: 405-843-4700      www.PinnacleEnergy.com

 

 

 

  

Gross reserves for all undeveloped Woodford properties (PUD, PRB, and POSS) were
estimated to be 120 MBO and 482 MMCF per well

 

Future Development and Timing

 

The acreage position provided by Osage as of February 4, 2014 showed that Osage
had an interest in 73 sections. Nine of the sections would be operated by Osage,
twenty-nine by Slawson Exploration, eleven by Devon Energy, and the remaining
twenty-four by other operators. Four of the sections along the western side of
17N-4W were deemed to have no drilling potential at the current time. The
remaining sixty-nine (69) sections were deemed to have potential in both the
Mississippian and Woodford.

 

For all sections, the first two wells in each section were considered Probable
(PRB) taking into account the wells already in the proved categories above. A
third well in each section was considered Possible (POSS).

 

Osage plans to spud their first well in March 2014 and pick up a second rig in
June 2014, with each rig drilling one well per month. Except for two planned
Woodford wells it was assumed for this report that all Mississippian wells would
be drilled first before beginning a Woodford drilling program. This results in
all Mississippian wells on Osage-operated sections being drilled by July 2015
and all Woodford wells drilled by July 2016.

 

It was assumed that Slawson would begin drilling the Mississippian with one rig
beginning in September 2014 and adding a second rig in January 2015 to drill the
Woodford. This results in all Mississippian wells in the Slawson-operated
sections being drilled by June 2019 and all Woodford wells drilled by February
2022.

 

It was assumed that all other operators combined would run three rigs. This
results in all Mississippian wells on other-operated sections being drilled by
February 2017 and all Woodford wells drilled by February 2020.

 

It was assumed that five SWD wells would be drilled in 2014 and 2015 to handle
the produced water. The capital costs for future SWD wells is estimated to be
1.6 MM$/well.

 

Reserves

 

Remaining recoverable reserves are those quantities of petroleum that are
anticipated to be commercially recovered from known accumulations from a given
date forward. All reserve estimates involve some degree of uncertainty depending
primarily on the amount of reliable geologic and engineering data available at
the time of the estimate and the interpretation of these data. The relative
degree of uncertainty is conveyed by classifying reserves as Proved (highly
certain) or Non-Proved (less certain). The estimated reserves and revenues shown
in this report were determined for Proved Developed Producing (PDP), Proved
Non-Producing (PNP), and Proven Undeveloped (PUD) reserve categories, as well as
Probable (Prob) and Possible (Poss) Non-Proven reserve categories.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700      www.PinnacleEnergy.com

  

 

 

 

By definition, PDP generally refers to existing producing properties, while PNP
refers to the additional reserves from behind pipe (BP) intervals, activities to
increase production or reserves from existing completions, or wells which have
been tested and are awaiting sales. PUD refers to development drilling locations
with definable reserves using offset well and reservoir parameters. For PNP and
PUD, the activity or targeted zones must known to produce commercial
hydrocarbons in quantifiable volumes and rates and reserves can be reasonably
accurately estimated based on analogies and available geological and engineering
information.

 

Non-Proven Probable and Possible reserves appear to have engineering and
geologic merit and have been determined to have over 50% (Probable) or less than
50% (Possible) likelihood to be commercially productive, but lack some aspect by
definition to be considered proven, such as proximity to commercial production,
production methods not proven for a certain geological or production
application, or other geological or engineering deficiency.

 

Accuracy of production forecasts generally depends on the amount of historical
data production and pressure available and the majority the producing wells
reviewed in this evaluation had sufficient historical data to forecast future
production with confidence. Those with limited production or pressure data
history were forecasted by reviewing analogy well and test data and applying
this knowledge to the available well information.

 

Future Cashflow

 

Future cash flow being reported is after deducting state production taxes and ad
valorem taxes, but prior to deducting federal income taxes. The future net cash
flow has been discounted at an annual rate of 10 percent to determine its
present worth. The present worth is shown to indicate the effect of time on the
value of money and should not be construed as being the fair market value of the
properties.

 

General

 

The reserves and values included in this report are estimates only and should
not be construed as being exact quantities. The reserve estimates were arrived
at by using accepted engineering practices and were primarily based on
historical rate decline analysis for existing producers. As additional pressure
and production performance data becomes available, reserve estimates may
increase or decrease in the future. The revenue from such reserves and the
actual costs related may be more or less than the estimated amounts. Because of
governmental policies and uncertainties of supply and demand, the prices
actually received for the reserves included in this report and the costs
incurred in recovering such reserves may vary from the price and cost
assumptions referenced. Therefore, in all cases, estimates of reserves may
increase or decrease as a result of future operations.

 

In evaluating the information available for this analysis, items excluded from
consideration were all matters as to which legal or accounting, rather than
engineering interpretation, may be controlling. As in all aspects of oil and gas
evaluation, there are uncertainties inherent in the interpretation of
engineering data and such conclusions necessarily represent only informed
professional judgments. The titles to the properties have not been examined nor
has the actual degree or type of interest owned been independently confirmed. A
field inspection of the properties is not usually considered necessary for the
purpose of this report.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave. Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700      www.PinnacleEnergy.com

 

 

 

 

Information included in this report includes the graphical decline curves for
individual wells, projected production and cash flow economic results, one-line
economic result summaries for each well, and miscellaneous individual well
information. Additional information reviewed will be retained and is available
for review at any time. Pinnacle Energy Services, L.L.C. can take no
responsibility for the accuracy of the data used in the analysis, whether
gathered from public sources or otherwise.

  

Pinnacle Energy Services, LLC       /s/ Richard J. Morrow   Richard J. Morrow,
P.E.   Petroleum Engineer  

 

Disclaimer: Pinnacle Energy Services, L.L.C. nor any of its subsidiaries,
affiliates, officers, directors, shareholders, employees, consultants, advisors,
agents, or representatives make any representation or warranty, express or
implied, in connection with any of the information made available herein,
including, but not limited to, the past, present or future value of the
anticipated reserves, cash flows, income, costs, expense, liabilities and
profits, if any, to be derived from the properties described herein. All
statements, estimates, projections and implications as to future operations are
based upon best judgments of Pinnacle Energy Services; however, there is no
assurance that such statements, estimates, projections or implications will
prove to be accurate. Accordingly, any company, or other party receiving such
information will rely solely upon its own independent examination and assessment
of said information. Neither Pinnacle Energy Services nor any of its
subsidiaries, affiliates, officers, directors, shareholders, employees,
consultants, advisors, agents, or representatives shall have any liability to
any party receiving the information herein, nor to any affiliate, partner,
member, officer, director, shareholder, employee, consultant, advisor, agent or
representative of such party from any use of such information. The property
description and other information attached hereto are for the sole, confidential
use of the person to whom this copy has been made available. It may not be
disseminated or reproduced in any matter whatsoever, whether in full or in part,
without the prior written consent of Pinnacle Energy Services, L.L.C. This
evaluation and all descriptions and other information attached hereto are for
information purposes only and do not constitute an evaluation of or offer to
sell or a solicitation of an offer to buy any securities.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave, Oklahoma City, OK 73114

Ofc: 405-810-9151 Fax:405-843-4700       www.PinnacleEnergy.com