Diversified Oil and Gas Holdings (DVFI)

[Imperial Whazoo]

Typically, the division order on a property is a 7/8 1/8 document. 7/8 is .875 and it represents the working interest. From this interest, expenses on the well are paid. The operator generally owns this interest, or more precisely, he owns the majority of this (typically). After expenses, the 1/8 gets income stream. 1/8 is .125. Royalty owners get paid their royalty checks according to the interest they own in this portion.

The deal BIGN cut to do the wells in Grimes grants them 80% WI until expenses for the workover are completed. After that, their WI reverts to 40%. From this, but not being privy to the diviasion order it it impossible to accurately say, it can be deduced that ROYL (the most likely candidate for being the entity for whom BIGN was performing this workover on these long plugged & abandoned wells) owned the .875 WI, and that what they did wat retain 7.5 and temporarily "lend" BIGN 40% above the base 40% BIGN would get if they successfully reworked the well. So ROYL starts out with .875, lends BIGN 40% to cover costs and deeds 40% permanantly to BIGN if the rework is successful. After exoenses, the WI breakdown reverts to 47.5% to ROYL and 40% to BIGN. As Hydroslotter and BIGN have a JV, BIGN's portion of this 40% is 20%.

Had the well not been successful, the existing production BIGN had elsewhere apparently is security to cover a loan from ROYL to finance the expenses. This is where the deal is muddy: in effect, ROYL gets 8.5% interest rate on the money that they loaned to BIGN for BIGN to use to rework the well. It appears to me that BIGN agreed to pay 8.5% to borrow 40% of the WI with which to repay the loan that they secured with existing production. ROYL in effect looses use of the 80% but remember that they were not getting income from any interest they had in this well because it was P&A (plugged & abandoned). They have had to continue to pay property taxes on this dead well every year, so until they cut this deal with BIGN, this P&A property was a liability to them. BIGN borrows from ROYL to rework ROYLs well and agrees to pay ROYL 8.5% for the right to do so while at the same time tying up existing income producing properties elsewhere in order to take the risk. Thats the deal as I see it. What I want to know is whether the money BIGN is using to perform the rework is borrowed (thus firmly linking ROYL to their income stream from other wells elsewhere) or whether the work was financed out of pocket. If they borrowed at the 8.5% rate way back when they began, then presumptively they have been having their income stream attached ever since. On the other hand, if the rework was financed out of pocket by BIGN, then the costs of the delays at Grimes are not as high. Until and unless we get transparency, we will never know. As of this moment, all I'm doing is thinking out loud along the fault lines of the deal.

Back to the matter of the .875/.125 interest setup that is the norm for the industry, the fact is that division orders more frequently than not contain all kinds of deals in them. It is unusual for the .875/.125 to actually be the setup. It is not unusual for there to be ORIs (Overrides) & PP (production payments) and all kinds of things. Without seeing the division order, it is not possible to know how the interest is actually split up on any given well.

Imperial Whazoo