Mr. Irwin Olian reports
DESERT MOUNTAIN ENERGY AMENDS TERMS AND PROVIDES UPDATE ON ACQUISITION OF THE KIGHT GILCREASE SAND UNIT OIL & GAS PROJECT IN OKLAHOMA
Desert Mountain Energy Corp. has provided the following amendment of terms and update on the status of its pending acquisition of the Kight Gilcrease sand unit oil and gas project in Seminole county, Oklahoma. The company entered into a definitive purchase agreement dated Feb. 13, 2018, with Seminole Productions LLC, an Oklahoma private company, pursuant to which Desert Energy, the company's U.S. subsidiary, will acquire the KGSU, subject to certain conditions.
Under terms of the purchase agreement, Desert Energy is acquiring all leases covering the KGSU above the base of the Gilcrease sand formation, subject to an aggregate gross overriding carried royalty on hydrocarbon production of 22 per cent payable to various royalty holders (2 per cent of which is payable directly to Seminole). Hence, Desert Energy is acquiring a 0.78-per-cent net revenue interest in the KGSU. In addition, Desert Energy is acquiring all wells and associated surface and downhole equipment on site, including pumping rigs, piping, storage tanks and supplies, as well as all rights to any additional hydrocarbon-bearing zones which may exist above the base of the Gilcrease sand formation. The underlying leases are extendible year to year by maintaining minimal prescribed production levels.
By way of amendment to the purchase agreement, the total consideration payable for the acquisition has now been adjusted as follows: (i) the cash consideration in the sum of $180,000 (U.S.) is now payable one-half on closing and one-half within one year thereafter, rather than all at once following regulatory approvals; and (ii) the company is issuing a total of 1.44 million units at a deemed price of 20 cents per unit, where each unit comprises one share of common stock of the company and one share purchase warrant, where each warrant permits the holder to purchase one share for a period of three years from the date of issuance at a price of 30 cents per share. This represents a deemed value for the units of $220,000 (U.S.) at applicable exchange rates. Said amendment does not change the overall level of consideration payable by the company to Seminole for the acquisition, but rather adjusts the payment schedule of the cash component and crystallizes the exact number of units issuable to Seminole on closing after taking into account the company's 1:4 reverse stock split earlier this year.
The company further reports that: (i) due diligence has now been completed by both parties to their satisfaction under the terms of the purchase agreement; (ii) the respective boards of directors have now approved the amendment to the purchase agreement and authorized all actions required to close the transaction; and (iii) applications are pending for approval of the transaction by the TSX Venture Exchange and the Oklahoma Corporation Commission Oil & Gas Conservation Division (OCC). The parties anticipate closing the transaction upon receipt of the foregoing regulatory approvals, which are the only remaining conditions to closing.
By way of background, the KGSU was permitted and approved by OCC by order No. 375263 dated July 19, 1993, as an enhanced recovery project primarily utilizing waterflood secondary recovery operations in an administrative proceeding, which consolidated and unitized all working and royalty interests in the project. It was subsequently acquired by its present owner/operator, Seminole, in 2003. The KGSU has had historic production estimated at 1,690,240 barrels of oil by the OCC and presently has seven wells on site, one of which is operational. The oil produced is a light sweet crude that varies from 34 API (American Petroleum Institute) to 43 API gravity.
The KGSU comprises an area of approximately 883.7 acres, which is substantially underlain by the Gilcrease sandstone common source of oil supply. The KGSU leases are located eight miles south of Wewoka directly astride State Highway 56, in a portion of the S/2 of Section 6, all of Section 7 and the NW/4 of Section 18, T6N R8E Seminole county, Oklahoma. It is not located within an environmentally sensitive area or on a known native American reservation. The oil-bearing pay zone was estimated by the OCC to be from 10 feet to 40 ft in width and to occur at a subsurface depth of approximately 2,726 ft to 2,810 ft, as reflected in geophysical logs from the Adams No. 1 Maverick well drilled in the SW/4 SE/4 SW/4 of Section 7-6N-8E, Seminole county.
The Gilcrease sands are part of the Atoka formation series which ranges from about 160 ft to 250 ft in thickness. It comprises limes, sands and sandy limes and occurs at depths of approximately 2,650 ft to 2,950 ft. Recent geological studies and particularly drill logs from two recent wells on the KGSU, 3PB's and Sears 18-H, suggest that the pay zone width may be significantly greater than estimated by the OCC. In addition, they suggest higher porosity and permeability than estimated. The overall Gilcrease sand formation, named after iconic Oklahoma oilman Tom Gilcrease, has produced in excess of 580 million BO since the early days of oil production in Oklahoma in the 1920s and 1930s. The KGSU forms a small portion of the historic area which is within a radius of about 30 miles from the KGSU. As the Gilcrease sand unit is relatively shallow at about 2,800 ft subsurface, vertical wells are the most efficient manner of drilling for oil production. Most of the primary oil has been produced by conventional means, for example first flowing, then simple down hole tubing pumps with traditional pumpjacks at surface.
The Gilcrease formation was originally characterized as a "gas drive" formation, where the gas in the formation helped force or drive the oil out of the pore spaces within the sand layer up into the wellbore. However, original low-cost production methods in the 1920s and 1930s unduly depleted this "drive" mechanism. The early depletion of this drive resulted in only a fraction of the original oil in place within the KGSU being produced and creates an opportunity for substantial new production by Desert Energy at relatively low cost using a modern secondary recovery techniques. Management believes the optimal recovery technique for the KGSU involves the injection of CO2 or nitrogen into the uppermost portion of the sand layer, whilst injecting water into the lowest part of the sand. This waterflood technique works to squeeze and drive the oil to the producing well bores in much the same manner as the old gas drive mechanism of early days. Variants of this type of technique have been developed over a period of many decades and are now highly refined and efficient. For further discussion of the company's development strategy for the KGSU, please see the AQ PR dated Feb. 19, 2018.
Irwin Olian, chief executive officer of Desert Mountain Energy, commented: "We are happy to see the KGSU acquisition advancing toward closing. Whilst the primary focus of the company's activities remains exploration and development of helium resources in Arizona's Holbrook basin, the KGSU represents an exceptional opportunity to generate potential cash flow and add value. It is an established oil field with significant untapped potential in one of America's most prolific historic oil-producing regions. We continue to believe the U.S. energy sector holds out great promise in coming years."
About Desert Mountain Energy Corp.
The company is an exploratory resource company engaged in exploration and development of helium, oil and gas, and mineral properties in the southwestern United States. Until Sept. 5, 2018, the company also owned the Yellowjacket gold project in Atlin, B.C., which it had been developing. The company has its executive offices in Vancouver, Canada. The company was incorporated under the laws of the Province of British Columbia, on April 30, 2008, and was formerly named African Queen Mines Ltd.
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