Diversified Oil and Gas Holdings (DVFI)

[Imperial Whazoo]

Tyler, you asked a question and heres my answer

Sorry its so long, but please read it. I think you'll find it worth it. Oh, & I'M GUNG HO BABY!!!!

I've been puzzling over the same question as you have for many months and I'm on to an explanation, I think. Now, I'm really not sure but here my thinking.... but, first, I think layimg out a fey key links is a good plan.

http://www.royl.com/ Royale Energy's web site

http://www.royl.com/news_info/pr/pr040623.pdf --- Royale Energy aquires all the outstanding shares of Royale Petroleum

http://www.royalpetroleum.com/ --- The other Royal Petrolem web site

http://www.bignltd.com/pressreleases.html# --- Biogenerics signs on to do Grimes wells (articles from Biogeneric Press Releas page - August 23 2005, Oct 11 2005, Oct 14 2005, Oct 18 2005, & Nov 30, 2005)

http://www.aspenexploration.com/HarvestingTheSacramento.pdf --- Article that does an excellent job explaining the Royale Energy story in Grimes

http://www.bignltd.com/pressreleases.html# --- This is KEY!! It is the financing agreement PR between Royal Petroleum & BIGN - Oct 18 2005

http://www.bignltd.com/pressreleases.html# --- The last time we hear from Paul Smith, the former Exec VP

http://www.bignltd.com/pressreleases.html# --- The last time we hear from Gary Kelly, the former CEO - May 3 2006

http://www.bignltd.com/pressreleases.html# --- Lancaster, the new CEO, is quoted for the first time in a PR - May 8 2006.

http://www.tycheenergy.com/press.php?id=33 --- Tyche PRs regarding the 8 wells they purchased and they first use the phrase "land bank"


In a nutshell, I think Paul Smith & Gary Kelly were fired because the deal they cut with Royale Petroleum was not what their bosses, the venture capitalists, wanted. I can not say why this is so, but heres the picture, as I see it.

Paul & Gary cut a sweet deal with Royale Energy to rework a plugged and abandoned well for Royale that had stopped producing way back in 1989. Hydroslotting was new technology & it was highly speculative, but what did Royale have to loose? So, they tell BIGN that they can try it on the Grimes properties and the deal they cut is pretty sweet at first glance. BIGN has to fund the first rework out of its pocket but Royale agrees to give them really nice terms: 80% of the WI until costs are recovered and then, an ongoing 40% WI. Now understand that the typical split on a well is 7/8 to 1/8 where the 7/8 interest (.875) is the WI and the 1/8 (.125) is the royalty owners. So, Royale retains a majority after payout of expenses (BIGN w/40% & ROYL w/ 47.5%). ROYL will be operator.

Well, hydroslotting works like gangbusters and the next thing you know, they agree to do a total of 5 of these types of wells. Now bear in mind that nowhere in the PRs does it actually say that the deals are with Royale, but the article (http://www.aspenexploration.com/HarvestingTheSacramento.pdf ) tells a convincing story about the size of Royale's presence in Grimes and the subsequent financing deal at attractive terms (8.5% with no lending limit) is with Royale. So, I'm deducing that the deals in Grimes are with Royale.

Anyway, the next thing you know, there is a real nice financing deal that gets explained in a press release naming Royale, followed by a super optimistic 120 well forcast for a huge hydroslotting project.

Well, its as though you dropped a penny down a well and it never hit bottom. Instead of zoom zoom, its as quiet as the whistle on a funeral train.

Next, there is the spin off of the Tyche share that just shows up out of nowhere. And, the Grimes project languishes and the next thing you know, we stop hearing Paul Smith being quoted in PRs and then Gary Kelly gets replace as CEO by Lancaster and we all know about the complete change in emphasis from Grimes to East Taxas that followed. Huge mysteries, all this, if you ask me. One thing that struck me at the time was the fact that I knew from first hand experience in the East Texas oil patch that these properties Lancaster was aiming at were not even candidates for Hydroslotting. Worry sets in. We eventually get our shares, and only close scrutiny reveals that the ownership interest in Tyche has diminished without explanation from 50% to 37.5% and, after the spin off, to 27.5%.

Then, this week, the new phrase describing Tyche as a land bank shows up and it finally dawns on me what has been going on.

Smith & Kelly cut a deal that ran counter to the plan. And it wasn't even a good deal. The financing deal tied up assets as security for a bottomless purse to finance the huge visionary Grimes project throughout 2006 & 2007. But here are some real odd details. Consider for a minute that the 80%/40% structure is retained on all the wells to be done. So, why the 8.5% financing? If each well uses income from it at an 80% rate until expenses are handled, why did BIGN agree to tie up existing production (presumably elsewhere in Canada & the US) to obtain 8.5% financing? If each well paid for itself with its own cash flow, why tie up existing production elswhere? All I can figure out is that Royale was really cunning and they outsmarted Smith & Kelly. We see some of the fingerprints of this today in that it appears that Lancaster has to run every decision back to Toronto. The venture capitalists got burned once and so now they make all the decisions. Anyway, ROYL covered daily drilling expenses at an interest rate of 8.5% using a loan of their own 40% income stream and, at the same time, they obtained the existing production of BIGN as security. Effectively, didn't they thus negotiate an additional 8.5% interest return on the 40% they already owned and were loaning to BIGN until expenses got covered? So, as I see it, they loaned their own 40% until expenses got paid for 8.5% and also ended up owning BIGNs existing income stream as security. When looked at this way, it doesn't surprise me that Smth & Kelly were shown the door.

Now, one thing I've not been able to define is which Royal BIGN is working with here. There press release says Royal Petroleum and that company is not an oil producing company. It may have wells but to judge by its page it is in the filling station and oil material (gas, fuel, refining, grease... that kind of thing) business. When I read the article describing Royale Energy in Grimes, I searched and discovered that Royale Petroleum had been an affiliated subsidiary company of Royale Energy until it was absorbed. Now, on first glance, it seems that Royale Petroleum was liquidated. Actually, its assets (leases etcetera) were liquidated into Royale Energy. The article clearly states the assets are gone but it adds "The Royale Energy stock that Royale Petroleum now owns will not be exchanged in the acquisition but will remain with Royale Petroleum for administrative convenience." Now, if Royale Petroleum is completely gone after 6/24/04, how could it loan money to BIGN in 2005? Well, the article states that the Royale Energy stock that was owned by Royalr Petroleum "will remain with Royale Petroleum for administrative convenience". In effect, it appears that, Royale Petroleum remains as a shell that has no assets. So, it appears to me that the laon is doen thru the shell. The reason I'm wasting time on this detail is that the BIGN PR on the finance deal says the loan is thru Royal Petroleum, not Royale Energy, the company that has the kind of presence in Grimes to make a deal with BIGN to do 120 wells. If the filling station company were the financier, there would have to be a connection between Royal Petroleum (the filling station company) and Royale Energy. Once I figured out that Royale Petroleum was a shell within Royale Energy, I guessed that there was a typo in the Oct 18 2005 PR. It should have read Royale rather than Royal.

Anyway, right after the 120 well plan was released, the Tyche spin off shows up out of nowhere. I think Smith & Kelly had aleready been told that they were history but they were kept on until replacements could be found. The venture capitalists did not intend to tie up their existing production as security. They had in mind something else: rather than having Royale Petroleum or any other entity be their bank, they intended to become their own bank: a land bank. Tyche was the vehicle thru which this was to be done. And thats exactly what we learned from theis week's Tyche PR.

The task Lancaster was given was twofold. First, he had to patch togeher from all kinds of disperate entities, a cohesive whole. WW is part of this. Its completions were not entangled by the financing agreement that entagled BIGN if they completed the wells in Grimes. Neither was Tyche. The second task was to delay the deals in Grimes without scuttling them. So, he "mismanaged" the project. He had delays due to weather. Then, bad luck but good luck as regards effective delay tactics: he has kidney cancer. Bad pipe gets delivered at Grimes. Schlumberge fails to get equipment on time. Then the rigs break down. Again, Schlumberge's fault. During this time, he is constructing his land bank and doing deals that are not entangled. Hydroslotter, fortunately for BIGN, is 50% owned by BIGN, so I'm sure they are furious that their super cool technology was back-burnered for a year when it had looked like they were on the brink of becoming famous. But, BIGN owned them and there was nothing they could do about it.

So, now the stage is set.. Tyche reveals that it is the land bank entity. It show this, too, by mysteriously having its 50% show up as 37.5%. WW gets 30 properties to rework & there is a scent in the air that smells like a deal that is all but done to get the 3 workover rigs. And the good thing is that these rigs don't have to be transported out to California. They are in East Texas, a short drive to Oklahoma where the 30 wells are.

If you ask me, this announcement that there is a schedule for doing these 30 wells is solid. Unlike the deal in California, it is realistic and it is local to the area of the rigs. I am 100% sure this is all a done deal and that BIGN, WWNG, & Tyche are all excellent investments. I think it could be said that I'm GUNG HO, BABY!!!!

I know that is all kind of hairbrained. I told you when I responded to you this morning that I had a planned post on this subject. Fact is, as you can tell, its still kinda loosy goosy. However, I swear that I'm on the right track. I may not have all the ducks in the precise right order, but I think I'm pretty darn close.

Anyway, now youze guyze can proceed to rip me limb from limb.

Imperial Whazoo