Sharon Energy (fka sheyf)

[Bobwins]

Talked with Kip Ferguson, CEO of Sharon Energy today. He was very friendly and gave me a lot of good information about Sharon.

Here are the questions that I asked him:

1. Are the reported well production rates gross rates or after royalties have been subtracted?

The rates reported in the PR’s are typically gross rates before royalties. They typically try to subtract the CO2 that is produced which is 6 to 7%. They will use phrases like “sales production” to report the gross gas production less the CO2.

2. What will the commingling of production zones do to the production rates for Hancock #1?

He said you can’t just add up the individual zone production rates and total them to get the commingled production rates. He said #1 will likely produce at a sustained rate of 6,000mcfpd. The advantage of commingling is that the decline rate will be much slower than if only one zone was produced at a time.

The reason that Sharon has taken so long testing each zone is for reserve purposes. Sharon started out with small reserves and wants to get maximum credit for its wells. Engineers will not give you credit for reserves in a zone unless they have data backing up the potential production. The individual completions have given Sharon and the engineers data so they can give Sharon and Diaz credit for each zone’s separate reserves. The other advantage is that Sharon has been producing almost continuously all year long and earning revenues while it was completing this data. This generated income for Sharon while still maximizing reserve additions.

3. What is the completion schedule for Hancock #2. Because they now have a busy drilling schedule ahead of them, Sharon may not take the same path with #2. They may just let this fairly strong zone produce until it either declines enough to make them take action or until Sharon has more time and equipment availability.

4. What is the schedule for NW Speaks. Sharon has a high 50% WI with Diaz retaining the other 50%. Ferguson said this has always been his favorite project. He waited years for the project to come up as available. He thinks it has very high potential. However since they have multiple development projects at Hancock and Allen Ranch, they will likely pursue those first because these leases have a time frame requirement that NW Speaks does not have. If they were to somehow get another rig that was capable of the deep drilling required by their wells, he might reconsider. He said that it is likely that Sharon and Diaz(with 50% each) would use a portion of their working interest in the NW Speaks as an incentive for a driller to commit to the project. He feels as long as he has 1/3, that is enough to warrant Sharon’s involvement.

5. Is Diaz involved in all your US properties?

Yes Diaz is a partner is all of the Sharon US wells. Diaz and Humboldt Capital have been excellent partners for Sharon. They have allowed Sharon to bid and secure much bigger projects than what would have been possible by themselves.
At first, when Sharon had minimal production, they didn’t have the cash or the credit lines to finance even one well. Diaz thru Humboldt provided Sharon with a guaranteed partner who could fund the deals as necessary.

Diaz is not only their partner in well expenses but even helps pay for some of Sharon activities that don’t result in a successful lease purchase.

Overall Ferguson stated that his plan for Sharon was to pursue deeper wells that were sometimes overlooked by exploration companies in Texas who had always made a living drilling shallow, cheap wells. Some of Sharon’s leases are situations where the shallower depths are already leased out. Ferguson is a geologist and he has another geologist on staff. Together they do all the research to find the prospects and decide whether they are worth pursuing.

They also participate in some of Diaz’s Canadian projects but to a lesser percentage than Diaz participates in US drilling. Diaz recognizes the higher impact of the US wells and publicly stated in the future they will emphasize US prospects over their traditional Canadian candidates.

Ferguson also mentioned that many of their drilling operations are really development wells rather than exploration. He says that many of the older wells were drilled using old technology and may not have performed that well. However with newer fracing techniques and fracing materials, they are able to get much higher production than the original exploration well that may have been producing for quite a while. They also benefit from modern 3D seismics to help identify the prospects and the size of the target. He said that they use bauxite sand when they frac that is rated for well depths up to 20,000feet. The normal material that is used in shallower wells is collapsed by the higher pressures and can cause the formation to close and cease producing.

Ferguson feels they have several development wells at both Hancock and Hound Dog to pursue over the next 18 months. He called me after a meeting for 6 hours with the drilling company to review and plan for the drilling schedule. He feels very fortunate because they have retained the same drilling rig and crew. He said it is a high quality rig which is fairly new and has all the technical capabilities needed in their deeper wells.

Sharon ended 2005 in the 325-350boepd range. This gave Sharon approximately C$500K per month cashflow. Since then they have added Hancock #2 production of 140boepd net to Shy. They also have almost 100boepd of Canadian production at Jaslin that has been waiting for pipeline completion. The pipeline is scheduled to be completed by the end of February. He feels that 600boepd is a realistic goal for 3/31/06. The end of March is around the time that the processing facility for Hancock wells will be expanded to 15,000mcfpd. Once that expansion is done, Hancock #1 will produce from the 4 zones. As stated previously, #1 may not be produced at much higher levels even after commingling all four zones but #2 is being restricted at 5,000 so that will likely be increased some. By the end of March, Shy should know more about Hound Dog #2 and it’s prospects for production.

Ferguson said that because of the recent success and improved cashflow, they are able to fund new drilling from cashflow. He felt that they could drill 4 to 6 deep Texas wells now versus their historical 1 or 2 per year. He said when they went for financing in December 05, they had to limit the amount of the offering to $6 million. They were offered much more but felt the 6 would clean up their balance sheet and get them in a position to be self financed. Sharon used the money to payoff the Humboldt Capital 3.5 million line of credit and provide funds for the Hancock#2 drilling expenses.

He didn’t rule out future offerings but it doesn’t sound likely in the next year.