EFTA00588939.pdf

Marcellus Development Investor Proposal June 16, 2009 EFTA00588939 PRELIMINARY NOTICES THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL. OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES REFERENCED HEREIN. THIS DOCUMENT IS SOLELY INTENDED TO DETERMINE, ON A NON-BINDING BASIS, WHETHER THE RECIPIENT HAS AN INTEREST IN THE POTENTIAL FUTURE OFFERING DESCRIBED HEREIN. NO OFFERING OF SECURITIES IS INTENDED TO BE, NOR SHALL IT BE CONSTRUED AS BEING, MADE BY THIS SOLICITATION OF INTERESTS. ANY OFFERING OF INTERESTS WILL ONLY BE MADE PURSUANT TO OFFERING MATERIALS PREPARED AND DISTRIBUTED TO POTENTIAL INVESTORS. EACH OF WHICH SHALL BE AN "ACCREDITED INVESTOR" (AS SUCH TERM IS DEFINED IN RULE 501 OF THE SECURITIES AND EXCHANGE COMMISSION IN REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933). EACH ADDRESSEE THAT REVIEWS THE INFORMATION CONTAINED BEHIND THIS COVER SHALL BE DEEMED THEREBY TO CONFIRM THE ADVICE SUCH PERSON PREVIOUSLY FURNISHED TO NEWCO ENERGY. LLC THAT SUCH PERSON IS AN ACCREDITED INVESTOR. This Memorandum is confidential and has been prepared by Newco Energy, LLC solely for use in connection with the solicitation of indications of interest in a possible private placement of interests in a drilling venture involving oil and gas properties in the Marcellus shale. Newco Energy, LLC has not made any decision to proceed with the venture or the offer of interests therein, and reserves the right to determine not to proceed with any such offering, to disregard any indication of interest from any potential investor, or to reject any offer to purchase interests in an entity that may pursue oil and gas opportunities in the Marcellus shale, in whole or in part, for any reason or (or no reason. This document is personal to each offeree and does not constitute the solicitation of an indication of interest or an offer to any other person or to the public generally to subscribe for or otherwise acquire interests in any entity that Newco Energy, LLC may use to pursue potential opportunities in the Marcellus shale. Distribution of this document to any person other than the addressee and those persons, if any, retained to advise such addressee with respect thereto, is unauthorized, and any such disclosure of any of its contents without the prior written consent of NewcoEnergy, LLC is prohibited. Each person who accepts delivery of this document agrees to the foregoing and to base such person's indication of interest and any ultimate investment decision solely on this document and any offering materials that Newco Energy, LLC may provide to such person for such purpose and upon such person's own examination and the terms of any offering of interests that may be made following the indications of interest Any indication of interest by an addressee shall be non- binding; any binding commitment to be made only following the delivery to the addressee of a formal offering materials describing the terms of the offering and the submission by the addressee of a completed offer to subscribe to the interests described in such memorandum and acceptance of such offer by Newco Energy, LLC on the terms and subject to the conditions to be set forth in such offering memorandum and subscription document. No representation or warranty, express or implied, is made by or on behalf of Newco Energy, LLC as to the accuracy or completeness of the information set forth herein, and nothing contained in this document is, or shall be relied upon as, a promise or representation, whether as to the past or the future. ANY ADDRESSEE MAY ASK QUESTIONS AND RECEIVE ANSWERS CONCERNING THE TERMS AND CONDITIONS OF THIS INVESTMENT OPPORTUNITY DESCRIBED HEREIN OR REQUEST ADDITIONAL INFORMATION TO VERIFY THE INFORMATION CONTAINED HEREIN BY CALLING NEWCO ENERGY. LLC AT ANDRAY MINING. DAVID PRUSHNOK AT 814-603-3644. MIDEAST GAS. MARK THOMPSON AT 724-422-2002 OR TERRELL A DOBKINS AT 303-808-6222. ADDRESSEES SHOULD NOT CONSTRUE THE CONTENTS OF THIS DOCUMENT OR ANY SUBSEQUENT OFFERING MEMORANDUM PERTAINING TO THE INTERESTS OFFERED THEREIN AS INVESTMENT, TAX OR LEGAL ADVICE. IF NEWCO ENERGY. LLC DETERMINES TO OFFER INTERESTS FOR SALE AND PREPARES AND DISTRIBUTES TO POTENTIAL INVESTORS OFFERING MATERIALS DESCRIBING THE INVESTMENT OPPORTUNITY, SUCH OFFERING MATERIALS, AS WELL AS THE NATURE OF AN INVESTMENT IN THE INTERESTS OFFERED THEREBY, SHOULD BE REVIEWED BY EACH PROSPECTIVE INVESTOR, HIS OR HER INVESTMENT, TAX AND OTHER ADVISORS, AND HIS OR HER ACCOUNTANTS OR LEGAL COUNSEL. ANY INTERESTS THAT MAY SUBSEQUENTLY BE OFFERED WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF CERTAIN STATES AND WILL BE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. SUCH INTERESTS WILL BE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. ANY PERSON THAT ELECTS TO INVEST IN SUCH INTERESTS WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF SUCH INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY SALE MADE HEREUNDER OF THE SECURITIES DESCRIBED HEREIN SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. EFTA00588940 Why the Marcellus Shale? • The Marcellus is one of the most economic Unconventional Gas Plays in the country today for several reasons: — The play is within a few hundred miles of a large portion of the population of the United States. This results in a premium price for the gas produced of about fifty cents over NYMEX. — The play covers millions of acres and is reasonably priced due to the downturn in leasing activity. — The finding costs are reported to be well below $2/mcf based on recent press releases by the most active operators. — Initial rates of 6 to over 20 mmcfd have been reported in the play recently. See the press release below by Range. We used average rates of 3.3 mmcfd for each horizontal well in our projections, based on published public data. — The initial challenges with permitting and environmental concerns are rapidly being addressed by local regulators so drilling and production can go forward. — Pipeline and gas processing infrastructure continues to be developed to accommodate existing and future production. EFTA00588941 Excerpt from Range Resources Press Release Range Achieves 24th Consecutive Quarter of Production Growth FORT WORTH, TEXAS, JANUARY 21, 2009...RANGE RESOURCES CORPORATION (NYSE: RRC) "During the fourth quarter, the Marcellus Shale division continued to make outstanding progress. Since late October 2008, 10 new Marcellus horizontal wells have been brought online to a new gas processing plant. The 24-hour initial production rate for those 10 wells averaged 7.3 Mmcfe per day. Of those, seven had initial production rates of 3.5 Mmcfe per day or more, while three had initial rates of 9 Mmcfe per day or more. The best well had an initial rate of 24.5 Mmcfe per day. Current Marcellus production is approximately 35 Mmcfe per day net and is constrained by current processing capacity. Eight of the wells have now been online for more than 30 days, and the 30-day average of those eight wells is 4.3 Mmcfe per day, with the highest volume well averaging 9.6 Mmcfe per day. Currently there are 13 wells, including nine horizontals that have been fraced and are waiting on processing capacity expansion before they are turned to sales. In late March or early April 2009, processing capacity is expected to expand from 30 to 60 Mmcf per day. Additional expansions are planned that would bring processing capacity to 180 Mmcf per day by late 2009 or early 2010. At least 50 horizontal wells are anticipated to be drilled in 2009. The targeted production exit rate for 2009 is 80 - 100 Mmcfe per day net." EFTA00588942 Marcellus Land Acquisition Proposal Details • We propose to lease up to 80,000 acres in the Pennsylvania Marcellus in 2009 while costs are low. We have targeted buy areas with the desired Marcellus depth, thickness and thermal maturity . The focus is on blocked up acreage that is close to pipelines and areas of current testing and development. Most of this acreage has been identified, negotiated and has title work complete. Current lease bonuses range from $100 to $200 per acre per year for 5 year leases with 15% Royalties. We propose to expand leasing efforts in areas of best results. Over 80,000 acres have been identified as available to lease across the target area. Land costs of $8 million per year are built into the economic model. EFTA00588943 Marcellus Fairway Outline 4O0 Appalachian Basin Province Extent of Devonian Shale ED Minimum Petroleum System Mature Source Rock Georgia v-ry General Lease Area Selected on Gas Content, Porosity, TOC, Maturity, Pressure, Production History and Avoidance of Known Hazards. 400 Miles Modified From USGS Map EFTA00588944 The Best Well Locations Are in the Best Minimum Shale Depth for Maturity and Pressure • Our Marcellus Fairway I Limit of uplift disturbance tolerance to minimize Drilling costs Newco Energy map of generalized , prospect limits with some variables \ identified. Depth Maximum-1— EFTA00588945 Marcellus Drilling Permits Compared with Preferred Lease Fairway & Current Offerings 0 Four Current Lease Offerings, ;, C) Anadarko O Atlas • Cabot • Chesapeake O Chief • CNX • Dominion East Resources EOG Equitable Fortuna • O • • O O North Coast PGE Petroedge Range Resources Seneca Resources Southwestern Stone Turm Ultra XTO EFTA00588946 Establishment of an Operating Entity in the Marcellus Marcellus Energy Operating Company, Ltd. ("MEOC") will be formed by Mideast Oil, Andray Mining and an oil and gas operating entity through Terrell A Dobkins as a Delaware Limited Partnership. MEOC will hold title to the oil and gas leases and will be the entity that the Investor Group will invest in. The Investor Group ("IG") will initially be a general partner in MEOC in order to qualify as an active investor in the partnership for Federal income tax purposes, but will revert to limited partnership status after a period of time. Marcellx Energy Company, LLC (MEC) will also be formed by Mideast Oil, Andray Mining and an operating entity through Terrell A. Dobkins and will be a general partner. MarcellX Energy Company will be the managing general partner of MEOC and will receive a management fee for managing the partnership. MEOC will allocate profit and losses in the following manner: 100% of losses will be allocated to the IG, until equity has been consumed, since that is the funding source, in order for the IG to recognize losses for income tax purposes. Profits and subsequent losses will be allocated 25% to NEC and 75% to the IG. Since tax losses to the IG will be substantial in the early years due to the deductibility of intangible drilling costs, the after tax IRR to the IG will very likely be significantly greater than the before tax IRR. The impact on each investor will vary depending upon individual circumstances. Cash distributions will be made as cash is available. However, it is unlikely that any cash distributions will be made before the sale of the properties since all cash generated will very likely be used to fund development of the properties. Cash distributions will be made annually as required to meet tax obligations that may occur if there is taxable income in any year. EFTA00588947 Operational Plan Overview • Lease in three to four geographic areas to spread out risk and opportunity. • Drill 6 vertical wells and one horizontal well in 2009 to test and evaluate each area. • Begin a continuous drilling program, ramping up slowly, in 2010 based on testing results and economics. • Monetize the assets by 2016 through an asset sale or public offering. EFTA00588948 Economic Projection Summary • Objective: Build $1.67 billion enterprise value within 7 years. • Investor capital $210 million total, consisting of $25 million in 2009, $46 million in 2010, $102 million in 2011, $38 million in 2012 and use cash flow thereafter. • Establish gas sales in 2009 by drilling near existing pipelines with excess capacity. • Projected before tax IRR for investor estimated to be greater than 40% at current gas pricing. • Investor Distribution in 2016 of $1.46 billion EFTA00588949 Resolution of Early Marcellus Development Challenges • Pipeline and treatment capacity — actively being solved with pipeline and plant construction. • Permitting — Pennsylvania is streamlining the permitting process. Recognized by operator groups as on target for what is needed. • Waste water management — Implementation of new and existing technology , not currently in use in the area, will dramatically improve water handling in the near future. • Lease Costs — High lease costs seen in 2008 have dramatically reduced in the past 12 months. • Lack of equipment, services and personnel-Service companies are rapidly providing the rigs, services and personnel that are appropriate for the changing needs. EFTA00588950 Economic Model Assumption Marcellus Well Details Vertical Wells Horizontal Wells • $1.5 Million total cost per well — $1.0 million drilling — $0.5 million completion — Use as "pilot" wells — Collect geo-technical data • Helps with completion designs • Data provides insight to improvement going forward • EUR: 1.0 Bcf — Based on surrounding operator average performance • Operating Costs: $2,000/well/month • Separate water disposal cost of $6.00/Bbl Initial Phase: $4.0 Million per well — $2.5 Million drilling — $1.5 Million completion • Run logs to gather formation data • Use microseismic to optimize completion techniques • Development Phase: $3.5 Million per well — $2.0 Million drilling — $1.5 Million completion • Use earlier learnings to develop Marcellus without using logs or microseismic — Similar costs compared to other operators (Cabot, Range, etc.) • EUR: 3.2 Bcf — Based on surrounding operator average performance • Operating Costs: $2,000/well/month • Separate water disposal cost of $6.00/Bbl EFTA00588951 Marcellus Commodity Price Forecasting Assumptions • Gas Pricing — Henry-Hub as of 4/17/09 pricing futures • 2009 average: $4.37/MMBtu • 5-year average: $6.525/MMBtu • 1100 Btu/cf average used in projections • Gathering/Transportation Fees — Fees for gathering company are 10% of wellhead production • Offset operator fees seen in Marcellus gas gathering • Taxes — Production Taxes: 3.0% (assumed, none exist today) EFTA00588952 Marcellus Initial Phase Schedule • Second half of 2009 — Lease approximately 40,000 acres of leases in three areas. • July and August of 2009 - Begin initial phase with vertical well drilling. • October and November of 2009 - Drill first horizontal well and run science tools to optimize completions. — Flow test and evaluate data and results. - Shoot 3-D seismic over some leases to assess geo-hazards. • 3-month task to shoot and analyze prior to development of acreage. • December of 2009 — Drill vertical pilot wells in different areas of Marcellus acreage. — Complete vertical wells and begin preparations for horizontal development — Drill first horizontal well in the area of best results. EFTA00588953 Marcellus Development Phase Schedule • 2010 Schedule - First half: Move in 1st rig and begin horizontal drilling program. — Second half: Move in 2 nd rig to accelerate drilling • 2011 Schedule - Second Quarter: Add Tel rig to continue development — Third Quarter: Add 4th rig to continue development — Fourth Quarter: Add 5th rig to continue development • 2012 Schedule — Move in 6th rig to continue development • 2013 Schedule — Continue drilling acreage with 6 rigs EFTA00588954 Marcellus Capital Cost Forecast Note: these figures vary from the source and use of funds table below year to year due to well completion carry overs at year end. The overall totals match 2009 Land Acquisition Begins S8.0tyltyl Overhead S3.0tyltyl Shoot 3-D seismic over acreage to prepare for development S1.5tyltyl Drill 6 Vertical Wells S9.0tyltyl — Analysis of cores. completions. and flow tests Drill first horizontal well, test and analyze individual results 54.4MM — Using micrososmic. logs. els. 2010 2011 2012 2013 Dry Hole $2.8MM11 Aqftlysis of collected data and results SO 4WINI 2009 Total Expenditures: Continued Leasing Costs $8.0MM Overhead $3.0MM Move in and drill 6 horizontal wells with 1u rig $24.0MM Move in 2nd rig in 2O and drill 4 horizontal wells 514.0MM Dry Holes, extra testing and mechanical problems in early wells $6.6MM 2010 Total Expenditures: $29.1MM $55.6MM Continued Leasing Costs $8.0MM Overhead $3.0MM Drill 24 horizontal wells with two rigs 584MM Move in 3rd rig in 2O and drill 9 horizontal wells $31.5MM Move in 4th rig in 3O and drill 6 horizontal wells $21MM Move in 5th rig in 4O and drill 3 horizontal wells $10.5MM Dry Holes $5.6MM 2011 Total Expenditures: $163.6MM Continued Leasing Costs $8.0MM Overhead $3.0MM Continue drilling program with 6 rigs $252.0MM Dry Holes 55.6MM 2012 Total Expenditures: Continued Leasing Costs $8.0MM Overhead $3.0MM Continue developing remaining acreage with 6 rigs and 36 horizontal wells $126.0MM Dry Holes 55.6MM 2013 Total Expenditures: $268.6MM $142.6MM Project Total Expenditures: $659.5MM EFTA00588955 Projected Production and Cash Flow Year Net Gas MMCF Wells on Sales Cash Flow from Operation, $ millions Capital, $ millions Net Cumulative Cash Flow, $ millions 2009 477 5 1.3 29.1 -27.8 2010 3,567 17 19.7 66.8 -74.9 2011 13,151 59 85.1 186.0 -175.8 2012 33,681 131 231.4 268.6 -213.0 2013 48,521 203 342.8 270.1 -138.8 2014 59,379 275 422.2 270.4 23.4 2015 68,291 347 484.6 270.6 248.0 2016 76.980 419 537.4 262.6 533.4 EFTA00588956 Capitalization of Marcellus Energy Operating Company, LP Assumptions 1. It is assumed that Marcellus Energy Operating Company, LP will be initially capitalized with approximately $210 million of equity from the Investor Group. This amount will be funded over a four year period, currently estimated as follows: ♦ Year 2009 = $25 million ♦ Year 2010 = $46 million ♦ Year 2011 = $102 million ♦ Year 2012 = $37 million 2. All cash flow from operations (revenue less taxes and lease operating expenses) will be used to fund capital expense. 3. Based on the cash flow model, the project is expected to begin funding itself from cash flow in 2012. 4. The sale of the company is planned for the time when the majority of the undeveloped acreage is proven up as "PDP's" and PUD's. This maximizes the sale value potential. EFTA00588957 Source and Use of Funds (amounts in $millions) Use of Funds Year CAPEX Interest Annual Total Cumulative Source of Funds Equity Cash Flow Debt Annual Total Incremental Debt Cumulative Availability 2009 $ 29.1 $ 29.1 29.1 $ 28.0 $ 1.3 $ 29.3 29.3 2010 $ 66.8 $ 0.0 $ 67.8 96.9 $ 31.0 $ 19.7 $ 17.0 $ 67.7 97.0 17 2011 $ 186.0 $ 0.0 $ 189.1 287.0 $ 70.0 $ 85.1 $ 34.0 $ 189.0 286.0 34 2012 $ 268.6 $ 0.0 $ 274.2 562.3 $ 231.4 $ 42.9 $ 274.3 560.3 131 2013 $ 109.0 $ 0.0 $ 114.6 674.8 $ 303.2 $ 303.2 863.6 Total $ 659.5 $ 0.0 $ 674.8 $ 128.9 $ 640.7 $ 93.9 $ 853.6 Effect of Assumed Sale by 2016 for $1670 Million Millions of $ Sale Price $ 1670.0 Surplus Cash 0.0 Repayment of Equity $ (210.3) Repayment of Bank Debt 0.0 Available for Distribution $ 1459.7 Distribution to Investors 75% $ 1094.8 Distribution to MarcellX Energy Company, LP 25% $ 364.9 Total $ 1459.7 Cash Flow to Investor 2009 6/1/09 (28.0) 2010 1/1/10 (31.0) 2011 1/1/11 (70.0) 2012 2013 12/31/13 532.4 IRR to Investor 48% (Assumes no cash distributions to investor until sale of company in 2014) EFTA00588958 Forward-Looking Statements Statements concerning future capital expenditures, production volumes, reserve volumes, reserve values, resource potential, number of development and exploration projects, finding costs, operating costs, cash flow and earnings are forward-looking statements. These statements are based on assumptions concerning commodity prices, recompletions and drilling results, lease operating expenses, administrative expenses, interest and other financing costs that management believes are reasonable based on currently available information; however, management's assumptions and the Company's future performance are both subject to a wide range of business risks and there is no assurance that these results, goals and projections can or will be met. EFTA00588959