Exhibit 10.24.1

 

Reserve Report of Pinnacle Energy Services, LLC

 

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March 12, 2013

 

Osage Exploration & Development

100 Park Ave, Suite 1040

Oklahoma City, OK 73102

Attn: Mr. Greg Franklin

 

RE: Reserves & Economic Evaluation   Osage Exploration & Development   YE 2012 -
SEC Pricing

 

Executive Summary

 

A reserves and economic evaluation has been performed on oil and gas assets of
Osage Exploration and Development ('"Osage") as of January 1, 2013. Well names,
owned and projected interests, and other well information are provided in the
attached Exhibit A. 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 standards and 2012 SEC Pricing, and
includes five (5) Proved Developed Producing (PDP) properties, three (3) Proved
Developed NonProducing (PDNP) properties, nine (9) Proved Undeveloped (PUD)
locations, ten (10) Probable Injection (SWD) locations, two hundred forty-one
(241) Probable Undeveloped (PRB) locations, and one hundred twenty-nine (129)
Possible Undeveloped (POSS) locations.

 

As presented in the accompanying summary projections, the net reserves and
future net cash flows as of January 1, 2013 are as follows (Volumes in MBBLs and
MMcf, Values in M$):

 

   #   Gross Rem'g Rsvs   Net Rem’g Rsvs   Net   Net   NPV  Osage  Props   Oil  
Gas   Oil   Gas   Capital   Cashflow   Disc @ 10%  PDP   5    704    2,853  
 124    510    0    10,430    6,457  PDNP   3    499    2,068    71    293  
 359    5,807    3,619  PUD   9    1,485    6,104    169    696    4,605  
 10,366    4,743  Total Proved   17    2,688    11,025    364    1,499  
 4,964    26,603    14,819  SWD   10    0    0    0    0    2,118    -2,118  
 -1,959  PRB   241    39,765    163,444    2,824    11,609    76,810  
 172,933    60,647  POSS   129    21,285    87,486    1,591    6,541    43,279  
 97,447    29,395  Total Non-Proved   380    61,050    250,930    4,415  
 18,150    122,207    268,262    88,083  Grand Total   397    63,738  
 261,955    4,779    19,649    127,171    294,865    102,902 

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave. Oklahoma City, OK 73114

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

  

 

 

 

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 2012, the average oil and gas NYMEX Price is 94.71 $/BBl for oil
(WTI Spot) and 2.757 $/MMBTU for natural gas (Henry Hub). Both prices were held
constant.

 

Based on an evaluation of actual prices received by Osage, differentials to the
SEC NYMEX prices were applied. The calculated oil price differential was
-$0.14/BBL. In order to account for the NGL value, the NGL revenue was added to
the gas revenue and divided by the gas sales volume to get an equivalent gas
price. This equivalent gas price was then compared to Henry Hub NYMEX gas price.
The average price differential for this equivalent gas price was +60.4%.

 

Interests

 

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

 

Taxes

 

As provided by statute, the severance tax for all horizontal wells is 1% for the
first 48 months of production, and 7.095% thereafter.

 

Expenses

 

Operating expenses were estimated to be $4000/well per month plus $4.00/barrel
of oil produced plus $.10/barrel of water produced. These expenses were based on
experience in other Mississippian horizontal development projects and compared
to the limited LOE information provided by Osage.

 

Capital expenditures were provided by Osage. These costs were based on current
actual area drilling and completion costs. These costs were reviewed and are
considered reasonable for the work projected.

 

Property Descriptions and Reserve Estimates

 

All properties are horizontal Mississippian wells except the McPhail 1-19H,
which is a horizontal Woodford completion.

 

Five wells were on production as of December 31, 2012. 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 wells, McPhail 1-19H and McPhail 2-18H, were drilled and completed but not
yet on production as of year-end 2012. Also, the Chambers 1-5H had been drilled
but not yet completed. These three wells were classified as Proved Developed
Non-Producing.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave. Oklahoma City, OK 73114

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

 

 

 

 

Nine Proved Undeveloped (PUD) locations were identified. These PUDs are all
direct east or west offsets to currently producing Mississippian horizontal
wells.

 

Gross reserves for all non-producing properties (PDNP, PUD, PRB, and POSS) were
estimated to be 165 MBO and 678 MMCF per well. This was the average of the
current PDP wells, and also compares favorably to estimates by other operators
in the play. Type-well economics and production plot are included in the
attachments.

 

Future Development and Timing

 

The acreage map dated February 13, 2013 provided by Osage showed that Osage had
an interest in 129 sections. The drilling schedule dated February 8, 2013
provided by Osage showed that Slawson Exploration would be the operator of 70
sections, leaving 59 sections being operated by other companies.

 

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).

 

The drilling schedule provided by Osage listed specific locations and proposed
spud dates through February 2015. These specifics were used in the evaluation
with either the well name or location as the case name. The remaining additional
Slawson-operated wells were timed as if the two rigs continued drilling wells at
30-day intervals after February 2015. These cases are named OP RIG x {Well#x}.

 

One non-operated rig was assumed to begin in March 2013 with a second
non-operated rig beginning in January 2014. These cases are named NON-OP RIG x
{Well #x}.

 

It was also assumed that 10 SWD wells would be drilled in 2013 and 2014 to
handle the produced water.

 

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
Developed Non-Producing (PDNP), and Proven Undeveloped (PUD) reserve categories,
as well as Probable (Prob) and Possible (Poss) Non-Proven reserve categories.

 

By definition, PDP generally refers to existing producing properties, while PDNP
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.

 

Pinnacle Energy Services, LLC

9420 Cedar Lake Ave. Oklahoma City, OK 73114

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

 

 

 

 

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