SXN Update: Part 3 (Contd)

When Rich came on board he sat down with is management team and decided they weren't going to continue in the direction the company was headed. For those of you who have been with the company for awhile you understand the reasoning for this (it wasn't working!!).

Anyways, Rich and his team decided not to continue drilling one well after another with small % ownership in wells Texas and Oklahoma. They were going to look for bigger plays that would push the production and reserves up much quicker and have greater upside potential in terms of exploration. IMO this is what investors look for (growth) and it wasn't what we were getting with these so called foundation wells. It was not the exponential growth I look for. IMO SXN (previously SCV.V) was being run like a private company and I think we still see a little bit of that today, but its getting better.

KANSAS:

Kansas History:

The Hugoton Natural Gas Area is an accumulation of large natural gas fields in Kansas of which the largest is known as the Hugoton Field. It is believed to be the largest natural gas field in North America and was first discovered in 1922. Over 10,000 wells produce gas and oil in the Kansas portion of the Hugoton area today, and thousands of miles of pipeline carry Hugoton gas to many parts of the United States. Of these 10,000 or so wells approx. 8,000 wells produce gas from the Chase Group in the Hugoton Field.

Why is the field important to SXN?:

We are in Central Kansas and so is our pipeline. The Hugoton Field is in SW Kansas? So it doesn't make much sense to acquire leases ad pipelines in central kansas and perhaps why there isn't much competition in the area? Well, apparently SXN management and others have seen some independent studies, well logs, etc that show the Chase Formation extending further east towards our pipelines and leases and does not stop at the Hugoton Field. According to these findings it actually passes right under where SXN has been acquiring and continues to acquire pipelines and lease acres to drill.

So why nobody else is on to this?:

From what I gather there are others but not many doing this, and are mostly small private companies and are not trying to control the area like SXN, and want to drill targets in the area because of their high success ratios. Also, not many have drilled for the Chase formation because it is an oil producing area which has seen a lot of oil production and deeper gas from deeper formations. Thus, companies in search of this O&G just drilled through the Chase Formation because it was lower BTU gas. However, with higher gas prices and the technology to increase the BTU gas by addition or subtraction, the opportunity exists to go after this Chase Formation (low BTU & Pressure gas). SXN is going to strip the gas and where things get intersting is with the Helium selling at over $100/mcf which will be a byproduct of this striping of the low BTU gas.

How are we to control the area and what is our strategy based on?:

It is based on the majors strategy who were in the area in better times (ie higher gas prices).Their strategy was to control the area with their pipelines and drill along their pipelines. However, gas prices went down and the majors decided to look elsewhere for value. They bascially picked up and left, leaving infrastructure and data behind. So i guess you could say SXN isn't the first to think of this strategy, but perhaps the first to do it the right way IF they are successful with their visions and strategy.

Current Area Conditions:

Right now from what I understand the area in and around our pipeline and leased acres is spread among many small (mostly private) companies. However, the potential of this formation is so big that 1,000's of wells will have to be drilled in order to realize the true potential and we will continue to acquire acres within 2 miles of our pipelines. So, even if we only acquire XX acres of land to explore and drill, as long as we are acquiring pipelines we will control the production from these 1,000 of wells in the area via 3rd party gas that needs to be refined (at our plant) to enter the main pipelines in the area because it is low BTU gas. Our own gas from the wells we drill is IMO important for cashflow in the early stages of development to avoid excessive dillution through PP etc. However, with the success ratios as high as they are on these wells, we will continue to drill these low cost wells and EVENTUALLY more and more companies will catch on and start to develop the area with us, which we will control.

Why were we able to pick up these pipelines for pennies on the $?:

We picked up our first pipeline from Enbridge which was shut-in and are acquring 2 more which will I would suspect will be announced in March sometime. From what I understand they are all shut-in because of the low BTU Gas and I am assumeing their are no plants (shut down) to send the gas to and strip nitrogen. Hence, the reason why SXN is building their position as a leader in the area. TO CONTROL IT

The costs moving forward in the area and expected production?:

Its shallow gas (1,500' - 2,000') with avgerage reserves of 150 MMcf/well and completed well costs of around $150-$200k per well. The area will cover over a 1,000 square miles and possibly 10,000 or more wells will be needed to develop the nearly 2 TCF of methane reserves and neaerly 2 Bcf of Helium. So essentially it is going to be a HUGE PLAY that will be controlled by companies that control the gas gathering systems which we are currently trying to acquire. Additionally, these types of wells are low risk with success ratios higher than 90%. So not a "sexy" story that will stir up a lot of interest, but that is why we have Italy and Kansas is the icing on the Cake the type of play that sneaks up on you.

WE HAVE DEFINETLY BEEN IN STEALTH MODE :)

More Specific on our focus in Kansas:

From what I gather the company is going to be very active in Kansas and we have some great upside potential with "company maker" assets. Currently, the majority (64% of US Reserves) of SXN's assets are in Kansas as a result of recent acqusitions in August 2007 and I think in such a short period of time it show the potential we have in Kansas. The purchase was good for many reasons, but two main reasons standout. It reduced our risk by giving us a better balance between Oil & Gas (now approx 50/50) and also provided us with an opportunity to control the entire area before interest is shown in the low BTU gas by other companies. Because as it stands right now the low BTU gas is not high enough to run it through the Transcontinental Pipelines which are nearby and we need to strip gas, which gives us the Helium upside, that gives Kansas a little "sex appeal" IMO.

SO how do we strip it, when do we do it and what does it cost?:

How: Nirtogen Rejction Units Among other ways (google it and share with us what you find)

When: We should have a plant build in the next 1-1.5 years and hope to have about 10mmcf/day going through the the plant stripping the low BTU gas and getting it ready for the transcontinental pipelines. Don't forget the Helium upside in their too.

Cost: Thats a good questions let me know if you find out :)

In summary:

In Kansas we our going to be a jack of all trades and do it all. Not just a driller for gas, but transport the gas as well. The barriers to entry are high (nobody is going to build a pipeline beside us), good infrastructure in already in place with major pipelines nearby and we should see 4-8 wells being drilled in 2008 & 2009. There not going to be sexy results, but will begin the development of the area with the high success ratios that will hopefully attract others to the area once we our positioned. We are conducting workovers, 3D seismic shoots and have acquired over 100 miles of pipeline with more acquisitions in the works and coule be announced in March or early April. These pipelines will eventually be linked together to send our gas, and 3rd party gas to our plant at a rate of 10mmcf/day and then onto the Transcontinental Pipelines of which 4 are nearby. IMO with time, we will control the area and whats good about Kansas right now is it is in Rich Greens backyard (Kansas State Alumni), not overrun with competition (YET), its low risk, and low cost, and we have Italy to give us our "sex appeal".

Cheers,

cvac01

P.S. Italy to come, but I think we might get some news on that front this week that would be a nice addition to Part 3. I am hoping to summarize Part 1-4 in a PDF format and place it in our links library shortly.