PHX MINERALS INC. - FORM 10-K - EX-99

Attached files

file	filename
10-K - FORM 10-K - PHX MINERALS INC.	d78254e10vk.htm
EX-23 - EX-23 - PHX MINERALS INC.	d78254exv23.htm
EX-21 - EX-21 - PHX MINERALS INC.	d78254exv21.htm
EX-32.2 - EX-32.2 - PHX MINERALS INC.	d78254exv32w2.htm
EX-31.1 - EX-31.1 - PHX MINERALS INC.	d78254exv31w1.htm
EX-32.1 - EX-32.1 - PHX MINERALS INC.	d78254exv32w1.htm
EX-31.2 - EX-31.2 - PHX MINERALS INC.	d78254exv31w2.htm

EXHIBIT 99

DeGolyer and MacNaughton 5001
Spring Valley Road Suite 800 East
Dallas, Texas 75244

This is a digital representation of a DeGolyer and MacNaughton report.

Each file contained herein is intended to be a manifestation of certain data in the subject report and as such is subject to the definitions, qualifications, explanations, conclusions, and other conditions thereof. The information and data contained in each file may be subject to misinterpretation; therefore, the signed and bound copy of this report should be considered the only authoritative source of such information.

(81)

DeGolyer and MacNaughton
500 I Spring Valley Road
Suite 800 East
Dallas, Texas 75244

September 30, 2010

Panhandle Oil and Gas Inc.
5400 North Grand Blvd.
Grand Centre Building, Suite 300
Oklahoma City, Oklahoma 73112

Ladies and Gentlemen:

Pursuant to your request, we have prepared estimates of the extent and value of the net proved crude oil, condensate, and natural gas reserves, as of September 30, 2010, of certain properties owned by Panhandle Oil and Gas Inc. (Panhandle) and Wood Oil Company (Wood), a wholly owned subsidiary of Panhandle. The properties appraised consist of working and royalty interests located in the states of Arkansas, Kansas, New Mexico, Oklahoma, and Texas. Panhandle and Wood have represented that these properties account for 100 percent of proved reserves.

Estimates of proved reserves presented in this report have been prepared in compliance with the regulations promulgated by the United States Securities and Exchange Commission (SEC). These reserves definitions are discussed in detail under the Definition of Reserves heading of this letter.

Reserves included herein are expressed as gross and net reserves. Gross reserves are defined as the total estimated petroleum to be produced from these properties after September 30, 2010. Net reserves are defined as that portion of the gross reserves attributable to the interests owned by Panhandle and Wood after deducting all royalties and interests owned by others. Gas quantities shown herein are sales gas quantities and are expressed at a temperature base of 60 degrees Fahrenheit and at the legal pressure base of the state in which the interest is located. Sales gas is defined as the total gas to be produced from the reservoirs, measured at the point of delivery, after reduction for fuel usage, flare, and shrinkage resulting from field separation and processing. Condensate reserves estimated herein are those to be recovered by normal field separation.

DeGolyer and MacNaughton

Values of proved reserves shown herein are expressed in terms of estimated future gross revenue, future net revenue, and present worth of future net revenue. Future gross revenue is that revenue which will accrue to the appraised interests from the production and sale of the estimated net reserves. Future net revenue is calculated by deducting estimated production taxes, ad valorem taxes, operating expenses, and investments from future gross revenue. Operating expenses include field operating expenses, transportation expenses, compression charges, and an allocation of overhead that directly relates to production activities. Future income tax expenses were not taken into account in the preparation of these estimates. Present worth is defined as future net revenue discounted at 10 percent per annum over the expected period of realization.

Estimates of oil, condensate, and natural gas reserves and future net revenue should be regarded only as estimates that may change as further production history and additional information become available. Not only are such reserves estimates based on that information which is currently available, but such estimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information.

Data used in this report were obtained from Panhandle and Wood, from records on file with the appropriate regulatory agencies, and from public sources. Additionally, this information includes data supplied by Petroleum Information/Dwights LLC; Copyright 2010 Petroleum Information/Dwights LLC. In the preparation of this report we have relied, without independent verification, upon such information furnished by Panhandle with respect to property interests appraised, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. A field examination of the properties was not considered necessary for the purposes of this report.

Methodology and Procedures

Estimates of reserves were prepared by the use of standard geological and engineering methods generally accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history.

DeGolyer and MacNaughton

When applicable, the volumetric method was used to estimate the original oil in place (OOIP) and the original gas in place (OGIP). Structure and isopach maps were constructed to estimate reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were used to prepare these maps as well as to estimate representative values for porosity and water saturation. When adequate data were available and when circumstances justified, material balance and other engineering methods were used to estimate OOIP or OGIP.

Estimates of ultimate recovery were obtained after applying recovery factors to OOIP or OGIP. These recovery factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum, the structural positions of the properties, and the production histories. When applicable, material balance and other engineering methods were used to estimate recovery factors. An analysis of reservoir performance, including production rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation of reserves.

For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses of production-decline curves, reserves were estimated only to the limits of economic production or to the limit of the production licenses as appropriate.

Definition of Reserves

Petroleum reserves included in this report are classified as proved. Only proved reserves have been evaluated for this report. Reserves classifications used in this report are in accordance with the reserves definitions of Rules 4— 10(a) (1)—(32) of Regulation S-X of the SEC. Reserves are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs consistent with the effective date of this report, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. The petroleum reserves are classified as follows:

DeGolyer and MacNaughton

Proved ail and gas reserves — Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:

DeGolyer and MacNaughton

(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall he the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

Developed oil and gas reserves — Developed oil and gas reserves are reserves of any category that can be expected to be recovered:

(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and

(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Undeveloped oil and gas reserves — Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence

DeGolyer and MacNaughton

using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.

(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in [section 210.4—10 (a) Definitions], or by other evidence using reliable technology establishing reasonable certainty.

Primary Economic Assumptions

Revenue values in this report were estimated using the initial prices and costs specified by Panhandle and Wood. Future prices were estimated using guidelines established by the SEC and the Financial Accounting Standards Board (FASB). The initial and future prices used in this report are adjusted to prices on September 30, 2010. The following economic assumptions were used for estimating existing and future prices and costs:

Oil, Condensate, and Natural Gas Prices

Oil and condensate price differentials for each property were provided by Panhandle and Wood. The prices were calculated using these differentials to a posted WTI price of $77.63 per barrel and were held constant for the lives of the properties. The WTI price of $77.63 is the 12-month average price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to September 30, 2010.

DeGolyer and MacNaughton

Gas price differentials far each property were provided by Panhandle and Wood. The prices were calculated using these differentials to a Henry Hub price of $4.49 per million British thermal units (MMBtu) and were held constant for the lives of the properties. The Henry Hub gas price of $4.49 per MMBtu is the 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to September 30, 2010.

The weighted average prices over the lives of the properties were $69.23 per barrel of oil and $4.33 per thousand cubic feet of gas.

Operating Expenses and Capital Costs

Estimates of operating expenses and capital costs based on current costs were used for the lives of the properties with no increases in the future based on inflation. In certain cases, future costs, either higher or lower than current costs, may have been used because of anticipated changes in operating conditions. Future capital costs were estimated using 2010 values and were not adjusted for inflation.

While the oil and gas industry may be subject to regulatory changes from time to time that could affect an industry participant’s ability to recover its oil and gas reserves, we are not aware of any such governmental actions which would restrict the recovery of the September 30, 2010, estimated oil and gas volumes. The reserves estimated in this report can be produced under current regulatory guidelines.

Summary Reserves and Revenues

The estimates of the combined net proved reserves attributable to Panhandle and Wood from the properties appraised, as of September 30, 2010, are summarized as follows, expressed in thousands of barrels (Mbbl) and millions of cubic feet (MMcf):

DeGolyer and MacNaughton


	Oil and		Sales
	Condensate		Gas
	(Mbbl)		(MMcf)
Proved
Developed Producing		848		56,456
Developed Non producing		14		888
Undeveloped		63		40,826


Total Proved		925		98,170

The estimated future revenue to be derived from the production and sale of the combined proved reserves, as of September 30, 2010, of the properties appraised is summarized as follows, expressed in thousands of dollars (M$):


	Proved
	Developed		Developed				Total
	Producing		Nonproducing		Undeveloped		Proved

Future Gross Revenue, M$		303,218		5,035		181,439		489,692
Production & Ad Valorem Taxes. M$		21,394		362		8,484		30,240
Operating Expenses, M$		81,090		1.131		36,267		118,488
Capital Costs, M$		0		489		52,487		52,976
Future Net Revenue, M$		200,734		3,053		84,201		287,988
Present Worth at 10 Percent, M$		103,343		685		21,960		125,988

Note: Future income taxes have not been taken into account in the preparation of these estimates.

In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present worth of estimated future net revenue from proved reserves of oil, condensate, and gas contained in this report has been prepared in accordance with Paragraphs 932-235-50-4, 932-235-50-6, 932-235-50-7, 932-235-50-9, 932-235-50-30, and 932-235-50-31(a), (b), and (e) of the Accounting Standards Update 932-235-50, Extractive Industries — Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures (January 2010) of the Financial Accounting Standards Board and Rules 4-10(a) (1)-(32) of Regulation S-X and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (8), and 1203(a) of Regulation S-K of the Securities and Exchange Commission; provided, however, future income tax expenses have not been taken into account in estimating the future net revenue and present worth values set forth herein.

DeGolyer and MacNaughton

To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature, we are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient therefor.

DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been providing petroleum consulting services throughout the world for over 70 years. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in Panhandle. Our fees were not contingent on the results of our evaluation. This letter report has been prepared at the request of Panhandle. DeGolyer and MacNaughton has used all assumptions, data, methods, and procedures that it considers necessary to prepare this report.


	Submitted,
	(DeGOLYER and MacNAUGHTON)
	DeGOLYER and MacNAUGHTON
	Texas Registered Engineering Firm F-716



	/s/ Paul J. Szatkowski, PE
	Paul J. Szatkowski, P.E. Senior Vice President DeGolyer and MacNaughton

DeGolyer and MacNaughton

CERTIFICATE of QUALIFICATION

I, Paul J. Szatkowski, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley Road, Suite 800 East, Dallas, Texas, 75244 U.S.A., hereby certify:

	1.		That I am a Senior Vice President with DeGolyer and MacNaughton, which company did prepare the letter report addressed to Panhandle Oil and Gas Inc. dated September 30, 2010, and that I, as Senior Vice President, was responsible for the preparation of this report.

	2.		That I attended Texas A&M University, and that I graduated with a Bachelor of Science degree in Petroleum Engineering in the year 1974; that I am a Registered Professional Engineer in the State of Texas; that I am a member of the International Society of Petroleum Engineers and the American Association of Petroleum Geologists; and that I have in excess of 36 years of experience in the oil and gas reservoir studies and reserves evaluations.

			Signed: September 30, 2010



	/s/ Paul J. Szatkowski, PE
	Paul J. Szatkowski, P.E. Senior Vice President DeGolyer and MacNaughton

PHX MINERALS INC. - FORM 10-K - EX-99 - December 9, 2010

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PHX MINERALS INC. Reports