ISSUES ENCOUNTERED IN OIL & GAS ASSET VALUATIONS Presented at SPEGCS Mergers, Acquisitions, and Divestments (MA&D) Symposium October 20, 2016 Craig Davis, President and CEO, 713 993 0676 , cdavis@Inexs.com Jeb Burleson, Engineer, 713 993 0676, jburleson@Inexs.com Interactive Exploration Solutions Inc. (INEXS) A Geoscience and Engineering Consulting Firm 2016 INEXS
ASSET LEVEL IMPLEMENTATION GUIDANCE Asset quality (geology, acreage, historic performance, upside) Characteristics to look for: conventional / unconventional (plus vs. minus) Economics (well and asset level – do assets fit company financial picture?) ACTUAL TARGETED OBJECTIVES: Gas vs. Oil, PDP vs. Undrilled, Acreage Continuity, Proximity to Current Ops ASSET QUALITY: Basin, Reservoir, Acreage HISTORIC PERFORMANCE: Type Curve Generation, Sample Selection Criteria, Pitfalls CHARACTERISTICS: Economics, Breakeven Costs, D&C, Transportation, Processing, Basis Differentials, SWD 2016 INEXS
TARGETED OBJECTIVES TARGETED OBJECTIVES: What is the company looking for and why? Gas vs. Oil Most companies have a preference on oil or gas focused reservoirs If they want gas assets, should it be wet gas or dry gas? What type of NGL yield are they looking for? Is there infrastructure in place? PDP vs. Undrilled When acquiring an asset, many focus on the upside potential How much of the acreage is undeveloped? What does the production decline look like for PDP assets? Acreage Continuity Is the acreage continuous or broken up in many different sections? Broken up acreage can result in fewer new drill opportunities Proximity to Current Ops Does the asset fit the company profile? Will they have to enter into a new basin? What are the costs of starting somewhere new? 2016 INEXS
ASSET QUALITY: BASIN BREAKEVEN ECONOMICS Source: naturalgasintel.com, ft.com (Financial Times) 2016 INEXS 4
ASSET QUALITY: BASIN, RESERVOIR, ACREAGE Stacked Reservoir Targets Tend to be Oil Rich Conventional Vertical Wells More Recent Horizontal Drilling Significant Uplift from Vert. to Horizontal Great Economics Complete Infrastructure Deep Bench of Sellers and Buyers High Level of Industry Focus High Volume Salt Water Disposal Relative Continuity of Acreage Acreage Status: HBP vs. Primary Term and Remaining Lease Term How Many Type Curves Necessary Undrilled Acreage Characteristics Source: DrillingInfo 2016 INEXS 5
HISTORIC PERFORMANCE: WOLFCAMP RESERVOIR 180 DAY IP MAPS Central Basin Platform Wolfcamp (Delaware Basin) 6 Month BOE Wolfcamp (Midland Basin) 6 Month BOE Source: (Data) DrillingInfo Source: (Work) INEXS 2016 INEXS 6
HISTORIC PERFORMANCE: WOLFCAMP HORIZONTAL WELLS – 4 STUDY AREAS Rank Area PV10 ROR (%) Payout (Years) 1 A $ 3,604,033 56.4% 1.6 2 B $ 1,180,117 19.5% 3.6 3 C $ (1,144,235) -8.0% N/A 4 D $ (1,743,757) -18.6% N/A D A B C Well selection criteria: Wolfcamp, horizontal, first production 2012-2015 2016 INEXS 7
HISTORIC PERFORMANCE: WOLFCAMP HORIZONTAL WELLS AREA D LOCATION Daily Oil 2016 INEXS 8
CHARACTERISTICS: BREAKEVEN COSTS, D&C, TRANSPORTATION, BASIS DIFFERENTIALS, SWD Assumptions: Working Interest: 100% Net Revenue Interest: 80% Gas Prices Monthly LOE: $7,500/Month PV-10 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 NGL Yield: 200 BBL/MMCF Dry Gas Left: 86% $35.00 ($3,076,912) ($2,969,861) ($2,861,373) ($2,753,843) ($2,646,073) ($2,538,303) ($2,430,534) Investment: $40.00 ($2,717,299) ($2,607,099) ($2,495,757) ($2,385,176) ($2,274,404) ($2,163,633) ($2,052,861) Drilling and Completion: $4.5 MM $45.00 ($2,350,828) ($2,238,172) ($2,124,618) ($2,011,662) ($1,898,557) ($1,785,452) ($1,672,347) Investment Life: 50 years Oil Prices $50.00 ($1,988,929) ($1,873,355) ($1,757,161) ($1,641,380) ($1,525,496) ($1,409,612) ($1,293,728) Expenses: $55.00 ($1,625,887) ($1,507,510) ($1,388,783) ($1,270,290) ($1,151,738) ($1,033,186) ($914,634) Operating Costs: $2.0/BOE Taxes: $60.00 ($1,262,845) ($1,141,665) ($1,020,406) ($899,200) ($777,980) ($656,761) ($535,541) Ad Valorem: 4.25% $65.00 ($899,803) ($775,821) ($652,028) ($528,109) ($404,222) ($280,335) ($156,448) Severance Oil: 7.5% $70.00 ($536,760) ($409,976) ($283,651) ($157,019) ($30,464) $96,090 $222,645 Severance Gas: 4.6% Price Differentials: Gas Differential/Transportation: $0.33/MCF Oil Differential/Transportation: $4.20/BBL Add Gathering: $0.50/MCF Water Hauling: $1.50/BBL Prices: Oil and Natural Gas Price is NYMEX Strip Pricing Natural Gas Liquid Sales Price: 26% of Oil Price 2016 INEXS 9
HISTORIC PERFORMANCE: WOLFCAMP AREA D TYPE CURVE Assumptions: Column1 All Wells Top Wells Wolfcamp Horizontal Wells Area D - Monthly Production Number of Wells 67 15 Working Interest: 100% All Wells Average Lateral Length (ft.) 6,797 6,239 Net Revenue Interest: 80% Oil EUR (Mbbls) 122.4 307 Fixed OPEX at $7,500/Month (Parsley) Oil b-factor 0.8 0.8 Oil Annual Effective Decline 0.89 0.92 NGL Yield: 140 BBL/MMCF (EP) Oil IP (Mbbls/Month) 9.9 23.9 Investment: Gas EUR (MMcf) 687.2 1,600 Drilling and Completion: $4.5 MM (EP Gas b-factor 0.9 0.6 Energy) Gas Annual Effective Decline 0.75 0.6 Gas IP (MMcf/Month) 22.2 52.9 Expenses: Water EUR (Mbbls) 224.2 254.5 Operating Costs: $2.0/BOE (Parsley) Water b-factor 0.6 0.5 Taxes: Water Annual Effective Decline 0.83 0.94 Water IP (Mbbls/Month) 22.1 35.3 Ad Valorem: 4.25% Column1 All Wells Top Wells Price Differentials: PV10 ($1,743,757) $3,744,057 Wolfcamp Horizontal Wells Area D Top Wells - Monthly Production ROR -18.60% 100.70% Gas Differential/Transportation: Top Wells Payout (years) n/a 1 $0.33/MCF (EIA) Project Life (years) 9.3 19 Oil Differential/Transportation: Top Producers # of Wells $4.20/BBL (COP) Laredo Petroleum 9 Add Gathering: $0.50/MCF (EIA) FDL Operating 4 Water Hauling: $1.50/BBL (EIA) Parsley Energy 1 Prices: Permian Resources 1 Oil and Natural Gas Price is NYMEX Strip Pricing Natural Gas Liquid Sales Price: 26% of Oil Price (RSP Permian) 2016 INEXS 10
HISTORIC PERFORMANCE: TARGETED SINGLE OPERATOR PERMIAN (HORIZONTAL) Oil and Gas Type Curve 2010-2011 Type Curve Improvements (2010-2016) (2010-2016) 100000 2012-2013 2014-2016 D&C¹: $5,475,000 PV 10²: $3,520,000 IRR: 40.7% 10000 68 Wells (2014-2016) Observations There is a clear trend of Production (BOE/month) improved performance YOY starting in 2010 2010-2011 2012-2013 2014-2016 1000 Production improvements # of wells drilled 3 18 68 mainly attributed to increased IP Avg. Lateral 3,994’ 7,130’ 8,691’ The number of wells drilled per Length year also increase every year IPoil (BBL/mo) 6,853 14,629 20,969 starting in 2010 Deoil (%) 97.27 95.16 99.07 Wells perform consistently in the 100 b-factoroil 1.1 1.1 1.2 three counties operated EURoil (BBL) 150,812 355,901 442,109 2014-2016 type curve represents 76% of Operator’s total active IPgas (MCF/mo) 16,407 24,473 45,436 horizontal wells in Permian Degas (%) 87.4 40.89 71.67 10 b-factorgas 1.1 0.8 1.0 Jan-00 Jun-05 Dec-10 Jun-16 Nov-21 May-27 Nov-32 Apr-38 Oct-43 Apr-49 EURgas (MCF) 551,942 1,536,354 1,907,280 Months of Production Source: DrillingInfo (1) Source: [redacted] ($630/Lateral ft.) (2) PV 10 Net Revenue, NYMEX Strip pricing, 100% WI, 80% NRI, $4.43 LOE/BOE, Taxes = 8.25%, G&T = $0.35/BOE , Water Disp. = $1.50/BBL, Oil Diff. = $4.20/bbl, ECL = 50 years 2016 INEXS 11
HISTORIC PERFORMANCE: TYPE CURVE - MARCELLUS ACREAGE 2016 INEXS 12
HISTORIC PERFORMANCE: TYPE CURVE - MARCELLUS THICKNESS 2016 INEXS 13
HISTORIC PERFORMANCE: TYPE CURVE - MARCELLUS DEPTH 2016 INEXS 14
HISTORIC PERFORMANCE: TYPE CURVE – MARCELLUS TYPE CURVE ALL WELLS D&C¹: $5,750,000 PV 10²: $4,217,000 41 Wells Observations While the type curve for all these wells is fairly decent, it is important to break out certain areas and completion techniques to understand which wells are contributing the most to the curve. Source: DrillingInfo (1) Source: EQT (2) PV 10 Net Revenue after 25 years, $35.00 oil, $2.25 gas, 100% WI, $10,000 LOE/mo, 80% NRI, economic limit of 30 BOE/D NOTE: # of wells reported will differ from data shown on bubble map and type curve due to lack of information on publicly available data 2016 INEXS 15
HISTORIC PERFORMANCE: TYPE CURVE – MARCELLUS TYPE CURVE NORTHERN WELLS D&C¹: $5,750,000 PV 10²: $1,739,000 13 Wells Observations These wells North of the acreage have lower reservoir thickness as well as lower depth compared to the wells South of the acreage. Source: DrillingInfo (1) Source: EQT (2) PV 10 Net Revenue after 25 years, $35.00 oil, $2.25 gas, 100% WI, $10,000 LOE/mo, 80% NRI, economic limit of 30 BOE/D NOTE: # of wells reported will differ from data shown on bubble map and type curve due to lack of information on publicly available data 2016 INEXS 16
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