THE PHOENIX PROSPECT 2017
A Project located in Sumner County, Kansas Managed by SourceRock Energy GP, LLC
DISCLAIMER This investor presentation (the “Presentation”) is being circulated by SourceRock Oil on a confidential basis to a limited number of recipients for the purpose of providing potential investors with preliminary information on SourceRock Oil’s oil and natural gas development activities and the resulting investment opportunities. This Presentation is for informational purposes only and does not purport to be complete and does not contain all the information which a prospective investor would consider material. This Presentation does not constitute, and may not be used for or in connection with, an offer to sell or a solicitation of an offer to buy, to invest in, subscribe for, or purchase any security, share or interest of any kind whatsoever (a “Security”) in any investment or investment vehicle currently being or to be managed, advised, or sponsored by SourceRock Oil or its affiliates, including specifically, SourceRock Oil’s Phoenix Prospect Partnership. Such offer and solicitation can only be made pursuant to the relevant confidential private placement memorandum (the “Phoenix Prospect Partnership PPM”), subscription agreement and investor questionnaire, and other relevant offering materials (the “Phoenix Prospect Partnership Offering Documents”). This Presentation should not be considered as a recommendation by SourceRock Oil or the Phoenix Prospect Partnership and/or their respective representatives or affiliates in relation to any proposed investment in any securities, shares or interests in the Phoenix Prospect Partnership or any related oil and natural gas investment partnership managed by SourceRock Oil or any affiliates thereof. The information contained in this Presentation is presented as of the date on the first page hereof (unless otherwise indicated) and is subject to correction, completion, updating and amendment without notice. Neither SourceRock Oil nor any affiliates thereof have any responsibility to update any of the information provided in this Presentation. The information contained herein is subject to and qualified in its entirety by reference to the relevant Phoenix Prospect Partnership PPM. Such PPM shall contain information in particular about the terms and conditions of the relevant offering and the risks, conflicts of interest and other matters important to an investment decision. In addition, if there is any conflict or difference between the information in this Presentation and that detailed in the applicable Phoenix Prospect Partnership PPM or other Offering Documents, the information in the PPM or other Offering Documents will prevail. This Presentation shall not be distributed, disclosed or reproduced, in whole or in part, and the information it contains shall not be disclosed by its recipients to any third party. By accepting delivery of this Presentation, each recipient agrees to comply with the foregoing restrictions and undertakes to return it (as well as any copy and/or extract) to SourceRock Oil upon request. Information contained herein may include information relating to oil and gas wells developed by members of SourceRock Oil’s senior management team. Such information is for illustrative purposes only and should not be interpreted as an indication or promise of future performance or results.
Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, both known and unknown, and other factors may cause SourceRock Oil’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking information is not intended to serve as and must not be relied upon as a guarantee, an assurance, a prediction or a definitive statement of fact or probability. As such, undue reliance should not be placed on such information. All statements of opinion and/or belief contained in this Presentation and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible performance of any SourceRock Oil managed oil and natural gas investment partnership or any security or interest offered thereby represent SourceRock Oil’s own assessment and interpretation of information available to it as of the date of this Presentation. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of any offering will be achieved and no responsibility is accepted by SourceRock Oil. Although SourceRock Oil believes that the expectations reflected in the forward-looking statements are reasonable, SourceRock Oil cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither SourceRock Oil nor the Phoenix Prospect Partnership nor any affiliate thereof assumes responsibility for the accuracy and completeness of such statements. The Securities being offered by SourceRock Oil as managing general partner of the Phoenix Prospect Partnership, have not been registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or the applicable securities laws of any U.S. state or any non-U.S. jurisdiction. The Securities are being offered and sold pursuant to the applicable SourceRock Oil PPM and in reliance on exemptions from the registration requirements of the Securities Act and any other applicable securities laws, including, without limitation, Section 4(a)(2) of the Securities Act and the U.S. Securities and Exchange Commission’s (“SEC”) Rule 506(b) or (c) of Regulation D. There is no public market for the Securities and no such market is expected to develop in the future. The Securities may not be transferred or resold except as permitted under the SourceRock Oil Offering Documents and unless they are registered under the Securities Act and under any other applica-ble securities laws or an exemption from such registration is available. The Securities have not been approved or disap-proved by the SEC or by the securities regulatory authority of any state or any other relevant jurisdiction, nor has any other authority or commission passed upon the accuracy or adequacy of this Presentation. Any representation to the contrary is unlawful. Notwithstanding anything herein to the contrary, each recipient hereof (and their employees, representatives and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the U.S. federal and state income tax treatment and tax structure of the proposed investment transaction and all materials of any kind (including opinions or other tax analysis) that are provided relating to the tax treatment and tax structure. For this purpose, “tax structure” is limited to facts relevant to the U.S. federal and state income tax treatment of the proposed investment transaction and does not include information relating to the identity of the parties, their affiliates, agents or advisors.
CONTENTS 4
LET FROM THE DESK OF THE CEO
6
ABOUT THE INVESTMENT
7
OIL PRICING & MONTHLY REVENUE
8
THE PHOENIX PROSPECT
12
TAX ADVANTAGES
13
TAX DEDUCTION WORKSHEET
14
SCHEDULE K-1 EXAMPLE
4 Phoenix Prospect
SourceRock Energy GP, LLC
LETTER FROM THE DESK OF THE CEO Dear Future Partner, SourceRock Energy GP LLC (�SourceRock Energy or SRE�) is an independent oil and gas company engaged in the business of developing domestic oil and gas limited partnerships nationwide. Headquartered in New York, New York and founded by J.A. Gilbert, its distinctive business model focuses on identifying, acquiring & developing undervalued and/or distressed oil and gas leases in the country. The result: outstanding low risk, high reward opportunities for itself and its partners. The Buresh Prospect, formerly known as the Breitling Energy Arbuckle/Nighthawk, is one such pro-ject. SourceRock Energy acquired this lease when it went into default and was returned to the min-eral rights holder after the continuous production clause in the lease was violated by the previous operator. The Phoenix Prospect was initially completed and brought online three years ago at the height of the oil market and it produced more than 17,000 barrels of oil in its first four months. Unfortunately, the well was plagued with saltwater issues and even though it produced an estimat-ed 150 BOPD (barrels of oil per day), it was never able to reach its full potential, either in volume or profit, because it never ran for more than 20 hours at a time and did not achieve a full month of 24hr per day production. Having carefully review the issues and events that caused this Prospect to be taken offline, River Oil, our operator is confident that drilling a saltwater injection well and using the right extraction equipment, will not only bring Phoenix production back to its former numbers, but should also increase its daily yield substantially. In fact, with the price of oil again on the rise and disposal costs at a minimum. We invite you to carefully examine all of the material included in this package, especially the discusion on the attendant risk factors and your qualifications (as an accredited investor) to invest in this private placement offering, so that you can make an educated and informed investment decision as to whether the SourceRock Energy Phoenix Prospect is right for you.
J.A. Gilbert Founder and CEO SourceRock GP, LLC
SourceRock Energy GP, LLC
Phoenix Prospect
5
6 Phoenix Prospect
SourceRock Energy GP, LLC
ABOUT THE INVESTMENT To invest in the Phoenix Prospect and take part in the revenue stream this lease could yield, you MUST be an accredited investor. To qualify as an accredited investor, you must earn at least $200,000 per year OR have a net worth of $1,000,000 not including your primary residence. This can be verified by previous years’ tax returns, bank or trading account statements, letter from your CPA or other means determined on a case-by-case basis.The total purchase price or each General or Limited Partnership Unit in the Phoenix Prospect is $60,000 plus a $1,995 administrative and issuance fee. This administrative fee is paid to AIMCO, LLC an outside admin company that handles stock issuance, revenue disbursement, and tax related forms such as the annual Schedule K1. This is a Turnkey investment and this coversall costs to bring this well back into production. Upon receipt of the full subscription amount, each investor will become a general partner and/or limited partner in the Phoenix Prospect Partnership and will be entitled to its pro rata share (as indicated on the individual share certificate) of the oil leases’ ROI (return on investment).
PHOENIX PROSPECT INVESTMENT DATA
PHOENIX PROSPECT WELL DATA
Units of General & Limited Partnership
Location
74
Price Per Unit
$60,000
Administrative & Issuance Fee (AIMCO LLC)
$1,995
Terms (Non-Consenting Working)
1% WI
NRI (Net Revenue Interest)
0.7%
Revenue Disbursement
Quarterly
Sumner County, Kansas Lease Acreage
695
Vertical Leg
4,000 Feet Horizontal Leg
5,000 Feet
Total Measured Depth
9,000 Feet
Phoenix Prospect
SourceRock Energy GP, LLC
OIL PRICING & MONTHLY REVENUE 1 WELL LEASE
PROJECTED MONTHLY GROSS OIL INCOME CONVERSION TABLES 1 Unit $60,000
1 Unit $60,000
1 Unit $60,000
Daily Production (BOPD)
$40
$45
$50
150
$1,260
$1,417
$1,575
275
$2,310
$2,598
$2,887
400
$3,360
$3,780
$4,200
150 BOPD x 30 days x $40 x NRI 0.7% = $1,260 275 BOPD x 30 days x $40 x NRI 0.7% = $2,310 400 BOPD x 30 days x $40 x NRI 0.7% = $3,360
150 BOPD x 30 days x $45 x NRI 0.7% = $1,417 275 BOPD x 30 days x $45 x NRI 0.7% = $2,598 400 BOPD x 30 days x $45 x NRI 0.7% = $3,780
150 BOPD x 30 days x $50 x NRI 0.7% = $1,575 275 BOPD x 30 days x $50 x NRI 0.7% = $2,887 400 BOPD x 30 days x $50 x NRI 0.7% = $4,200
1 WELL LEASE
PROJECTED MONTHLY GROSS GAS INCOME CONVERSION TABLES 1 Unit $60,000
1 Unit $60,000
1 Unit $60,000
Daily Production (BOPD)
$3
$4
$5
350
$220
$294
$367
675
$425
$567
$708
1,000
$630
$708
$1,050
350 MCF x 30 days x $3 x NRI 0.7% = $220 675 MCF x 30 days x $3 x NRI 0.7% = $425 1,000 MCF x 30 days x $3 x NRI 0.7% = $630
350 MCF x 30 days x $4 x NRI 0.7% = $294 675 MCF x 30 days x $4 x NRI 0.7% = $567 1,000 MCF x 30 days x $4 x NRI 0.7% = $708
350 MCF x 30 days x $5 x NRI 0.7% = $367 675 MCF x 30 days x $5 x NRI 0.7% = $708 1,000 MCF x 30 days x $5 x NRI 0.7% = $1,050
7
8 Phoenix Prospect
SourceRock Energy GP, LLC
THE PHOENIX PROSPECT The SourceRock Energy Phoenix Prospect, formerly designated as The Buresh (Nighthawk/Arbuckle) Pros-pect, is a 695-acre oil and gas lease in Sumner County, Kansas right in the heart of what’s known as the Mid-Continent Uplift. SourceRock Energy acquired this lease in a very favorable deal when the previous owner, Breitling Energy, went into default early last year.This lease was initially completed 3 years ago when it was brought into production in August 2014. The pros-pect is a 5000’ vertical well with a 4000’ horizontal leg that penetrates deep into the Mississippian Limestone. As indicated by the BURESH-17-1HM – Historical Production Summary page 8 (see fig. a): during its first 4 months of operations, the well produced more than 17,000 barrels of oil equivalent before being shut in. BURESH 17-1HM - Historical Production Summary Most Recently Reported Monthly Production (12 Months) BURESH 17-1HM Lease SUMNER County Reservoir 0 MCF Cumulative Production
145478 Lease Kansas State Untitled Search Group Name Cumulative Production 15-191-22715(17-1HM) API (Well
Avg Oil (BBL/D)
Avg Wtr (BW/D)
0.00
12.03
---
0.00
157.13
---
0
0.00
212.90
---
1
0
0.00
120.63
---
---
1
0
0.00
25.19
---
---
5
0
---
---
---
#Wells Flowing
#Wells Other
Produced
Sold
Other
Closed
Water (BW)
0
373
0
0
0
---
1
0
0
4714
0
0
0
---
1
0
0
0
6600
0
0
0
---
1
0
0
0
3619
0
0
0
---
0
0
0
0
781
0
0
0
0
0
0
0
16087
0
0
0
Produced
Sold
Used
Other
8/2014
0
0
0
9/2014
0
0
0
10/2014
0
0
11/2014
0
12/2014 Totals
fig. a Prior to purchasing this lease, during SourceRock’s initial due diligence phase, it was discovered that the reason the well was shut in after showing such encour-aging initial promise was the excessive amount of wastewater the site was producing and the enormous financial burden it placed on the already over-lever-aged operator. As shown on page 9 of the BURESH-17-1HM – Production (see fig. b): the well was producing on average, 3,150 barrels of saltwater for every 150 barrels of oil per day, equating to a 5% oil cut.
fig. c
BREITLING OIL AND GA SUBERA NORTHWEST
16,087 BO
Oil (BBL)
Gas (MCF) Mo/Yr
Current Field Name
Avg Gas (MCF/D)
DrillingInfo Well Report, Well & Lease Descriptions,Location Maps, Historical Production Graphs
Because the oil market was booming at that time with prices at historic highs, wastewater disposal fees for that location were at a premium, ranging from $3 to $4 dollars per barrel. At $75 oil and $4 disposal this equated to a net loss on the site of approximately $1,350 per day (see fig. c). Additionally, insufficient storage space and poor site management, caused the well to be emptied. The lease was never permitted to run at 24-hour/7-day cycles resulting in even more losses.
Phoenix Prospect
SourceRock Energy GP, LLC
BURESH 17-1HM - Production
145478 Lease Kansas State Untitled Search Group Name Cumulative Production 15-191-22715(17-1HM) API (Well
BURESH 17-1HM Lease SUMNER County Reservoir 0 MCF Cumulative Production
9
Production Period in Yrs: 1
BREITLING OIL AND GA SUBERA NORTHWEST
Current Field Name 16,087 BO
Oil, Gas and Water Production Monthly Production Volume and Cumulative Production (Logarithmic) vs. Time
10000
Monthly Production
1000
100
10
Dec’14
Nov’14
Nov’14
Nov’14
Oct’14
Nov’14
Oct’14
Oct’14
Oct’14
Sep’14
Sep’14
Sep’14
Sep’14
Sep’14
Aug’14
Aug’14
Aug’14
Jul’14
Aug’14
1
Production Month GAS
WATER
OIL
GAS CUMULATIVE
WATER CUMULATIVE
OIL CUMULATIVE
fig. b
SourceRock Energy and its operator, Red Hawk, will solve the wastewater disposal issue by installing a Saltwater Disposal Well (SDW) in an existing dry well on the property. Although the installation costs can be significant, they are offset by the nearly 100% reduction in disposal fees. Once this has occurred, it is believed that with a few minor maintenance issues to handle and some possible site upgrades, The Phoenix Prospect should be operational by the end of the fourth quarter 2017.
Buresh #17-1HM MONTHLY PRODUCTION
It has been proven that there are commercially viable quantities of oil on this lease. There are 16,087 current cumulative barrels of oil and another 273,193 barrels in reserves (With the wastewater disposal issues handled and the streamlining of the operations, we expect the Phoenix Prospect to produce a return on investment (ROI) for years or even decades to come.
Current Cumulative (BBLS): 16,087 Reserves (BBLS) : 273, 193
fig. d
10 Phoenix Prospect
SourceRock Energy GP, LLC
PHOENIX PROSPECT DETAILS THE FACTS Well was drilled and completed in 2014 Estimated behind pipe reserves of 275,000 - 350,000 barrels of oil Well production 17,000 barrels of oil during its 4 months of operation Multiple pay zones including: Mississippi Lime (Primary), Cottage Grove, Layton, Cleveland, Oswego, Prue, Skinner, Red Fork, and Simpson formations (Secondary)
PHOENIX PROSPECT PRODUCTION FACILITIES
SourceRock Energy GP, LLC
Phoenix Prospect
11
The SourceRock Energy Phoenix Prospect, formerly designated as The Buresh (Nighthawk/Arbuckle) Pros-pect, is a 695-acre oil and gas lease in Sumner County, Kansas right in the heart of what’s known as the Mid-Continent Uplift.
The State of Kansas
MORE FACTS 5,000’ vertical well with 4,000’ lateral leg Many additional PUD drilling locations Site has extensive subsurface mapping Major publicly traded energy companies in neighboring leases include: Chesapeake Energy, Devon Energy, Sandridge et al.
12 Phoenix Prospect
SourceRock Energy GP, LLC
TAX ADVANTAGES Additionally, there are extremely generous tax benefits available to oil and natural gas investors. Such benefits include the deduction for Intangible Drilling Costs (”IDCs”), depreciation deductions with respect to Tangible Drilling and Completion Costs (“TDC’s”), amortization deductions with respect to Geological and geophysical Costs (G&G Costs) and depletion, if applicable.
TAX BENEFITS Investing in oil and gas can be one of the most tax-advantageous investments available today. Congressional incentives encourage domestic petroleum development. Oil and natural gas from domestic reserves helps to make our country more Oil self-sufficient by reducing our dependence on foreign sources. Congress has provided tax incentives to stimulate domestic oil and natural production financed by private sources. Drilling projects offer many tax advantages that were placed in the Tax Code by Congress. At the end of each calendar year, Aimco, LLC will provide you with a schedule K1 for your working interests(s).
ACTIVE VS. PASSIVE INCOME The Tax Reform Act of 1986 introduced into to the Internal Revenue Code the concepts of “passive” income and “active” income. The Act prohibits the offsetting of losses from passive activities against the income from active businesses. The Tax Code specifically states that a Working Interest in an oil and natural gas well (including an investment made through a general partnership interest in a limited partnership) is not a “passive” activity; therefore, deductions can be offset against income from active stock trades, business income and salaries. Limited partners in a partnership owning working interests, however, are only deemed to be passive investors and may only deduct passive losses against passive income.
DEPLETION ALLOWANCE
investor at the end of the year. For a producing well, up to 85% of the investment constitutes what The current depletion allowance is 15% of your are known as IDC’s and are written off an investor’s share of the gross income from the property based ordinary income in the first year. Typically, most of on average daily production and can be taken the investment is deductible in the same tax year every year until the well plays out. This makes and can be offset against active or ordinary income fifteen cents of every gross income dollar non(salaries, business income, stock trades, etc.). taxable, thereby producing tax-sheltered income. For every dollar of IDC invested, the investor receives one dollar of deduction. These IDC SMALL PRODUCERS deductions reduce an investor’s dollars at risk. TAX EXEMPT IDC’s can make up roughly 85% of the total investment. By way of illustration, an investment Small Producers Tax Exemption: The 1990 Tax of $100,000 made in an oil and gas partnership Act provided ome special tax advantages for could yield up to $85,000 in tax deductions for companies and individuals. This tax incentive, the year the investment is made. For an investor known as the “Percentage Depletion Allowance”, is specifically intended to encourage Participation in a 35% tax bracket, that could mean actual tax savings of up to $29,750 in the first year. in oil and gas drilling. This tax benefits is not available to large oil companies, retail petroleum marketers, or refiners that process more than TANGIBLE DRILLING COST 50,000 barrels per day. It is also not available for (TDCS) entities owning more than 1,000 barrels of oil Tangible Drilling Costs (TDCS): TDC’s can include (or 6,000,000 cubic feet of gas) average daily pipe, storage tanks, along with wellhead equipproduction. The “Small Producers Exemption” ment which are then capitalized and depreciated. allows 15% of the Gross Income (not Net Income) For a producing well, approximately 15%-30% from an oil and gas producing property to be of your investment constitutes TDCs, which are tax-free. depreciated over a seven-year period using the Accelerated Cost Recovery System (ACRS).
INTANGIBLE DRILLING COST (IDCS)
Intangible Drilling Costs (IDCS): IDC’s can include labor intensive costs such as the drilling contractor and professional services, and are reported to the
Phoenix Prospect
SourceRock Energy GP, LLC
DRY HOLE
LEASE COSTS
13
IDC
Dry Hole: In the event of a nonproducing well, Lease Costs: Leasehold costs (purchase of leases, The IDC deduction, a non-preference item, 100% of all dollars invested are written off as a loss minerals, etc.), legal expenses for title opinions, red- uces the investor’s Adjusted Gross Income against your ordinary income in the first year. etc., administrative, accounting, and lease/well and lowers the investor’s Alternative Minimum Tax. operating costs (LOC) are also 100% tax deductible through cost depletion.
TAX DEDUCTION WORKSHEET
Form
EZ (2015)
EXAMPLE TAX WORKSHEET
1 Amount of SourceRock Oil Investment 2 Approximate Amount of Intangible Drilling Cost Multiply Line 1 by 80%
$60,000 x 0.8
1
$60,000
2
$48,000
3 Tangible Equipment Deduction Pursuant to IRS sec. 179 Mulitply Line 1 by 10%
4 Total Tax Deductions Add lines 2 & 3
5 Enter your overall Tax Bracket
$60,000 x 0.1 3 $6,000 $48,000 +$6,000 4 $54,000
Include Federal, Medicare & State (if applicable)
6 ** First Year Tax Savings Multiply Lines 4 & 5
7 Net Out of Pocket Investment Subtract Line 6 from Line 1
$54,000 x 0.43 $100,000 - $38,700
5
43%
6
$23,220
7
$36,780
(The example above assumes an investor is in a 35% Tax Bracket + 1.5% Medicare + a State Income Tax of 6%)
14 Phoenix Prospect
SourceRock Energy GP, LLC
TAX ADVANTAGES SCHEDULE K-1 (FORM 1065) The Schedule K-1 is a tax document issued for an investment in partnership interests. The purpose of the Schedule K-1 is to report your share of the partnership’s income, deductions and credits. It is issued around the same time as Form 1099 and serves a similar purpose for tax reporting. As with other administrative functions, the schedule K-1 for the Mercury Prospect II, will be issued by our affiliate company, AIMCO LLC, on an annual basis to all Partners. Below is an example of last year’s K-1 issued to one of our Partners for a previous lease we control.
SourceRock Energy GP, LLC
Phoenix Prospect
LEGAL NOTICE This Presentation, and the information contained herein, is not an offer to sell securities or the solicitation of an offer to buy general or limited partnership interests (”Interests”) in the Partnership. Interests in the Partnership may only be purchased pursuant to the Partnership’s Confidential Private Placement Memorandum, (the “Offering Memorandum”), which contains a summary of the risk factors applicable to an investment in the SourceRock Energy Phoenix Prospect and well and contains other material information not included in this Presentation. Interests in the Partnership will only be offered to certain eligible accredited investors. This Presentation provides general and preliminary information about the Partnership and is intended for initial reference purposes only. It is not a summary or a compilation of all applicable information and it is not complete. It does not purport to include every item that may be relevant, nor does it purport to present full disclosure with respect to the fund within the meaning of applicable securities laws and regulations. The information contained herein is qualified by the and subject to the more detailed information in the Offering Memorandum. An investment in the Partnership is speculative and involves a high degree of risk. The Partnership will also have substantial limitations on investors’ ability to redeem or transfer their Interests, and no secondary market for the Partnership’s Interests exists or is expected to develop. All of these risks and other important risks are described in detail in the Partership’s Offering Memorandum. Prospective investors are strongly urged to review the Offering Memorandum carefully, and to consult with their own financial, legal and tax advisors before investing.
15
1301 Avenue of the Americas 21st Floor New York, NY 10019 Tel: 303.396.7177 Email: jag@sourcerockoil.com www.sourcerockoil.com
THE PHOENIX PROSPECT