Connecting projects with funding sources since 1983 The

1
Connecting projects with funding sources
since 1983
The Oldest Energy Property Clearinghouse and
the First Website in the Petroleum Industry
1
23Dec09
2
Energy Exchange Presents

• WINDOWS OF OPPORTUNITY
• IN ENERGY

3
Three Parts

• The Energy Exchange
• Opportunities in Energy
• Select Projects

4
What is the Energy Exchange?

• An energy consulting firm
• www.ERCO-EnergyResources.com
• An association of engineers, geologists, and
  financial professionals
• Not a brokerage firm

5
Our Purpose

• To connect energy projects with funding sources

6
The Energy Exchange

• Initially Modeled after Real Estates MLS
• Oldest energy clearing house (1983)
• Petroleum industry's first website (1994)
  www.enex.com

7
The Energy Exchange

• Hundreds of projects available
• From 10 thousand to 10 billion

8
The Energy Exchange

• A Technical Network (ERCO)
• A Financial Network
• We close the gap between the
• energy technical community
• and the financial community.

9
The Energy Exchange

Project A1
Rep.
Oil Company
Broker Dealer


Project A2
Rep


Energy Exchange
Rep.
Project B1

Geologist
Venture Capital

Rep
Project B2


Rep.
Project C1

Engineer
Institutional Investor

Rep
Project C2

10
Shoe Store Analogy

• XYZ Shoe Store

• EnEx Shoe Store

11
Energy Store Analogy

• One Project Store

• Energy Exchange Store

• Oil
• Natural Gas
• Geo-thermal
• Wind
• Solar
• Coal
• Nuclear
• Bio-Fuels (Bio-diesel)
• Bio-Mass Fuel Cells

12
Who are we?
13
Technical Associates

• David H. Mangum, P.E. - Petroleum Engineer,
  Geologist, MBA
• Bill Olson - Geologist, Geophysicist, MBA,
  Attorney
• Cesar Abeigne, PhD V. P. International, Geo
  scientist, Speaks 5 languages
• Belkis Fernandez Petroleum Engineer, Reservoir
  Modeling, From Venezuela
• Vladimir Ingerman, Ph.D. Geophysicist, From
  Russia
• Charles Mangum, P.E. Civil Engineer, Drilling
  Rig Designer
• Dennis McMurdie M.S., Geologist, Salt Lake City
• Bob Oberndorf, Geologist, Denver
• Edwin Tillman Computer Systems Engineer
• Daniel Mangum, Petroleum Landman
• D. Grady Mangum Information Systems
• D. B. Mangum Field Operations, Oklahoma
• Khalid Al-Ruwaili Petroleum Engineer, Saudi
  Arabia
• Jim Evans Geophysicist
• Many Others Nationwide Worldwide

14
David H. Mangum, P.E., President

• Licensed Petroleum Engineer / Geologist
• Over 35 years petroleum experience
• with five Fortune-100 energy companies
• (Mobil, Shell, Schlumberger, Tenneco, and
  Coastal)
• Geology, Mississippi State University
• B.S. in Petroleum Engineering, University of
  Texas
• M.B.A., Pepperdine University
• Real Estate and Securities License (Expired)

15
Legal Professionals

• Bob Olson, Esq. Attorney, Geologist,
  Geophysicist, MBA
• George Nama, Esq. International Law
• Darin Mangum, Esq. Securities, Former SEC

16
Financial Associates

• Janson Durney, West Point Military Academy
• Alex Westwood, Finance
• Rick Veale, Product Trading
• Alan Tomkow, Business Development
• Gerald Avery, Administration
• Hector Escamilla, Jr.
• Gwen O. Pearson, African Business Development
• Dennis Timpe, Oil and Gas Production Contracts
• Darin H. Mangum, Esq., Legal Counsel
• Many More Nationwide Worldwide

17
Part II

• WHY INVEST
• IN ENERGY?

18
WHY INVEST IN ENERGY?

• Inflation Hedge
• High Financial Rewards
• Cash Flow (Mail Box Money)
• Diversification
• Tax Benefits
• Competition
• Lease Costs
• Drilling Prospect Availability
• Demand / Consumption
• Oil Production Trend
• Price Forecasts
• Drilling Costs
• Technology
• Environment
• Government Endorsement
• Money Crunch

19
That Sinking Feeling
20
Three Boogie Men

• Inflation (As the government spends its way out
  of the current economic downturn.)
• Demand rapidly increasing
• Supply -- rapidly decreasing

21
If you think 140 oil was bad, wait until
exploding Asian demand overwhelms global markets
and America's suppliers cut us off. Weiss
Research, Inc.
22
Two Strategies - Gold or Oil
(Natural Gas
or Silver)

• Purchase gold at a retail price and sell it
  later at a wholesale price.
• (If the price remains flat you lose money.)
• Purchase oil at a wholesale price and sell it
  later at a retail price.
• (If the price remains flat you make a
  profit.)

23
HIGH FINANCIAL REWARDS

• Producing Wells 10-20 Cash-on-Cash Return
• Developmental Wells 85 success
• 25 to 100 Annualized Return on
  Investment
• Exploratory Wells (Wildcats) - 10 to 50 Success
• 100 to one Return-on-Investment

24
Purchase Proven Natural Gas (Project 9085)

• 27 Actual Cash on Cash 2008
• 11 if price remains flat for 6 years
• 16 if price is average of past 10 years
• 46 if price goes to previous high

25
RISK

• Drilling is becoming less risky.
• Several projects have a probability of success
  better than 90.
• Many projects would be economically attractive
  even if oil or gas prices would fall 50.

26
COMPETITION

• The big money has gone offshore, because there
  are too few easy-to-find big oil fields
  remaining onshore in the USA.
• Over 10,000 oil companies have left the arena
  since 1982.

27
Average Oil Well Producing Rates
Average Barrels of Oil Per Day
Producing Oil Wells
Iran
8,729
221
Saudi Arabia
8,339
592
4,709
United Kingdom
528
1,304
Nigeria
1,127
766
Mexico
3,263
243
Indonesia
5,729
Venezuela
180
9,971
China
31,875
82
40
Canada
36,955
14
United States
635,015
28
DRILLING PROSPECT QUALITY

• Because the big oil companies are pulling out
  of the USA, the quality of small drilling
  prospects are getting better.

29
(No Transcript)
30
LEASE COSTS

• Oil companies are not as anxious to renew
  leases.
• (so lease costs are low)

31
Demand / Consumption

• U.S. consumes 25 of worlds petroleum.
• Asians are taking lessons from the USA.

32

33
China is buying up world oil reserves

• Venezuela
• Angola
• USA

34
(No Transcript)
35
Oil Price Chart
36
OIL PRODUCTION TREND

• USA output is at 35 year low
• Over two-thirds of USA onshore oil wells are
  marginal. (Less than 10 barrels per day)

37
Oil Imports

• Yesterday 30 During Embargo (1970)
• Today 67 (All Time High)
• Tomorrow 73 within 20 years. The U.S.
  Office of Technology Assessment says that This
  will Bankrupt the U.S.A.

38
Americas Dangerous Addiction IMPORTED OIL. Oil
imports have exceeded 67 of U.S. consumption! We
pay over 51 a barrel just to maintain a military
presence in the Middle East
39

40
DRILLING COSTS

• Rig activity is low,
• so drilling costs are low.

41
TECHNOLOGY

• Recent advances in oil finding technology have
  reduced risk and improved recovery .
• Some companies report 85 success on wildcat
  wells.

42
ENVIRONMENT

• Sierra Club endorses natural gas, wind,
  solar, and geothermal.
• (Combustion by-products of gas are carbon
  dioxide and water).

43
GOVERNMENT

• Encourages domestic drilling with special tax
  breaks.
• Mandates natural gas usage over oil and coal.
• Natural gas is now deregulated.

44
TAX BENEFITS

• Drilling is the best tax advantaged investment
  (Newsweek)
• Congress gives tax breaks to individual investors
  that are not available to large companies.
• 100 tax deductible ... 65 to 80 can be written
  off in first year
• Up to 100 tax-free income.

45
MONEY CRUNCH

• Traditional sources of drilling money are not
  as available.
• Big Oil Companies
• Banks
• Mezzanine Financing

46
CONGRESSIONAL TAX INCENTIVES

• Domestic Oil and Natural Gas makes our country
  more energy self-sufficient by reducing our
  dependence on foreign imports.
• Congress provides tax incentives to
  stimulate domestic petroleum production financed
  by private sources.
• These incentives are not "Loop Holes" -- they
  were placed in the Tax Code by Congress to make
  participation in oil and gas ventures one of the
  best tax advantaged investments.

47
INTANGIBLE DRILLING COST TAX DEDUCTION

• The Intangible Drilling Cost (IDC - labor,
  chemicals, mud, grease, etc.) - usually about 75
  of the cost of a well.
• The IDC is 100 deductible during the first
  year.
• For example, a 100,000 investment would
  yield approximately
  75,000 reduction in taxable income during the
  first year of the venture.
• These deductions are available in the year the
  money was invested, even if the well does not
  start drilling until March 31 of the following
  year. (See Section 263 of the Tax Code.)

48
TANGIBLE DRILLING COST TAX DEDUCTION

• Tangible Drilling Costs (TDC) are also 100
  tax deductible.
• In the 100,000 example
  above, that is 25,000.
• (See Section 263 of the Tax Code.)

49
ACTIVE VS. PASSIVE INCOME

• The Tax Code prohibits the offsetting of losses
  from Passive activities against income from
  Active businesses.
• The Tax Code specifically states that a Working
  Interest in an oil and gas well is not a
  "Passive" Activity,
• therefore, deductions can be offset against
  income from active stock trades, business income,
  salaries, etc. (See Section 469(c)(3) of the Tax
  Code).

50
SMALL PRODUCERS TAX EXEMPTION

• The 1990 Tax Act provided special tax
  advantages for small companies and individuals.
  This tax incentive, known as the "Percentage
  Depletion Allowance", is specifically intended to
  encourage small company and individual
  participation in oil and gas drilling. This tax
  benefit is not available to large oil companies
  The "Small Producers Exemption" allows 15 of the
  Gross Income (not Net Income) from an oil and gas
  producing property to be tax-free.
• 
  (See Section 613A of the Tax Code.)

51
ALTERNATIVE MINIMUM TAX

• The Tax Code specifically exempts Intangible
  Drilling Cost (IDC) as a
• Tax Preference Item.
• "Alternative Minimum Taxable Income" generally
  consists of adjusted gross income, minus
  allowable Alternative Minimum Tax itemized
  deduction, plus the sum of tax preference items
  and adjustments. "Tax Preference Items" are
  preferences existing in the Code to greatly
  reduce or eliminate regular income taxation.
  Included within this group are deductions for
  excess Intangible Drilling and Development Costs
  and the deduction for depletion allowable for a
  taxable year over the adjusted basis in the
  Drilling Acreage and the wells thereon.

52
Green Tax Breaks

• 2.1 cents per kWh for first 10 years
• Full depreciation in 5 years
• Federal Cash Grants (30)
• federal cash grants avail that replace the
  capital cost tax credit with cash in the amount
  of 30 of the project's qualifying cost
• 50 Depreciation (2009)
• MACRS (Modified Accelerated Cost-Recovery
  System)
• Bonus Depreciation (2009)
• ITC (Energy Investment Tax Credit)
• (10 Geothermal, 30 for solar, fuel cells,
  small wind systems)

53
Why Invest in Oil and Gas?

• High Financial Rewards
• Risk
• Tax Benefits
• Competition
• Lease Costs
• Drilling Prospect Availability
• Demand / Consumption
• Oil Production Trend
• Price Forecasts
• Drilling Costs
• Technology
• Environment
• Government Attitude
• Money Crunch

54
Connecting projects with funding sources
since 1983
Energy Project Overviews
54
55
Sample Projects

• Purchase Proven Producing Natural Gas (9085)
• Purchase Proven Producing Crude Oil (9084)
• Gulf Coast Well Work-over Program (9022)
• Texas Over-thrust Exploration Venture (9019)
• Domestic Refinery Expansion (9048)
• Well Enhancement Drilling With Water Jets (9049)
• Cayce Drilling Venture (9028)
• Geo-thermal Electrical Generation (9020)
• Diesel Emissions Control (9098)
• Nuclear Power Plant (90xx)
• Biofuels Electrical Power Generation (9023)
• Hundreds of other projects available

56
Connecting projects with funding sources
since 1983
The Oldest Energy Property Clearinghouse and
The First Website in the Petroleum Industry.
56