Oil & Gas Production

On May 25, 2011, the Company entered into a Purchase and Sale Agreement and other related agreements and documents with the Tucker Family Investments, LLLP, DNR Oil & Gas, Inc. (“DNR”), and Tindall Operating Company (collectively, the “Sellers”) for the purchase of certain oil and gas operating properties in Colorado, Kansas, Wyoming, and Montana (collectively, the “Original Purchase and Sale Agreement”). DNR is principally owned by an officer and director of the Company, Charles B. Davis. The consideration for the purchase was determined by bargaining between management of the Company and Sellers, and the Company used reports of independent engineering firms to analyze the purchase price. The base purchase price for the properties was $10.0 million, of which the Company paid a nonrefundable down payment of $0.5 million and the remaining $9.5 million was financed by the Sellers pursuant to a promissory note due July 1, 2011. The Company was unable to arrange the funding to pay the $9.5 million promissory note due on July 1, 2011, and therefore, the note was not paid.

On July 29, 2011, the Company and Sellers entered into an Amended and Restated Purchase and Sale Agreement (“PSA”) regarding the purchase of (i) working interests in oil and gas properties located in Wyoming, Colorado, Kansas and Montana (the “Properties”), and (ii) vested contractual rights in the net proceeds from the future sale of certain properties located in Wyoming (the “Separate Interests”). The material terms of the PSA included an aggregate base purchase price for the Properties and the Separate Interests of $11.0 million to be paid by an initial payment of $0.9 million, comprised of (i) a credit in the amount of $0.5 million previously paid by the Company in connection with the Original Purchase and Sale Agreement; and (ii) $0.4 million in funds paid contemporaneously with the execution of the PSA. The remaining principal balance of the base purchase price in the amount of $10.1 million, together with interest at 10% per annum, was payable to Sellers in three monthly payments, with $3.7 million due August 15, 2011 (extended to August 31, 2011), and $3.2 million due on each of September 15, 2011 and October 15, 2011. By September 29, 2011, all required consideration had been paid to Sellers and closing of the PSA was completed.

The acquisition of the Properties was structured whereby the Company acquired 100% of Seller’s interest in certain geologic zones of the properties. Presented below is a summary of agreed-upon values associated with the Properties and the Separate Interests, along with a discussion of the interests in the Properties retained by the Sellers:

Properties:      
      Rex Lake/ Big Hollow (WY) $ 511,025 (b)
      Kansas   2,152,216 (a)
      Montana   98,179 (b)
      Wyoming   2,733,773 (b)
      Buff (WY)   611,211 (b)
      Colorado   2,507,678 (a)
            Total Working Interest Properties   8,614,802  
Separate Interests   2,385,918 (d)
  $ 11,000,000 (c)

 

The following table lists the oil and natural gas properties we have by state and field;

        Productive Wells   Proved Reserves
Field   County   Gross   Net (a)   (BBLe) (b)
Wyoming:                
      Rex Lake   Albany   8.0     8.0     36,230  
      Buff   Campbell   8.0     8.0     43,296  
      Shippy   Campbell   1.0     1.0     64,370  
      Bobcat Creek   Converse   2.0     1.5     14,716  
      Other   Various   21.0     15.8     64,375  
Kansas:                
      Big Bow   Stanton   2.0     0.6     62,952  
      Granger Creek   Clark   1.0     1.0     48,568  
      Walz   Trego   1.0     0.9     33,040  
      Other   Graham   1.0     0.9     15,026  
Colorado:                
      Gemini   Weld   2.0     2.0     40,278  
      Smokey Creek   Cheyenne   1.0     0.7     33,852  
      Wild Horse   Weld   1.0     1.0     6,404  
      Other   Various   4.0     4.0     43,571  
Montana:                
      Police Coulee   Toole   2.0     1.4     6,223  
        55.0     46.8     512,901