Birdwell 1H, Nov 1 Update

The completion phase of the Birdwell 1H (“the well”) began on September 12, 2011. As previously reported, the initial portion of the completion phase of the well (initial perforation and injection of acid into the hole) allowed for immediate production as the well began free flowing water, oil & gas. For the first week, after the initial portion of the completion phase, the water and oil also contained acid, which was used to clean up the well after the first round of perforating. Over the next couple of weeks, while Southlake waited for delivery and set up of oil and water tanks, a separator, a gas meter, a knockout or gun-barrel and the gas lift unit, the well was tested on a regular basis. During the testing of the well, Southlake would open up the well and allow water, oil & gas to flow at various intervals of time into 5 temporary 500 barrel frac tanks that had been set up on the pad next to the well. This testing process allowed the Company to determine well head pressure and to study the well’s free flowing performance in order to better judge the final steps to be taken during the completion phase.

During the testing of the well the natural gas being produced from the well was vented from the frac tanks that had been installed on the site, then later the gas was flared on site. After all the acid was returned by the well, the well produced oil during the various tests, that was stored on site in the temporary frac tans and then sold to Geer Tank Trucks, the gatherer and purchaser of the crude oil produced from the well.

Additional completion work has been performed on the well, namely further perforating of the well. Where the horizontal production string initially had intervals or spacing, today the horizontal production string has over 1,100 feet of perforations. More acid hole after second round perforations completed.

The gas lift unit was installed along with 6 valves that work in concert with the gas lift unit. The valves, also referred to as “mandrels”, are spaced throughout the producing string of casing from an approximate depth of 2,000 feet down to an approximate depth of 4,400 feet. These mandrels or valves open and close based on feedback from the gas lift unit and the gas lift unit responds to settings on the unit at the surface that Southlake controls to help regulate the flow of oil and gas to the surface.

The remaining completion work to be administered to the Birdwell 1H includes further refinement and adjustment to the gas lift unit and a replacement of the downhole mandrels or valves. This final phase of the completion of the Birdwell 1H began on Sunday, October 30th, and is expected to take 3 to 4 days. Once this portion of the completion of the well is finished, the well should produce without interruption for an extended period of time.

Natural Gas Hook-up

Southlake began negotiating with two primary natural gas purchasers prior to the initial completion phase of the well. The Company elected to enter into a contract with Targa Midstream Services, LLC (“Targa” is an affiliate of Targa Resources and Targa North Texas LP). The contract between Southlake and Targa was finalized allowing Targa and Southlake to put natural gas delivery lines and meters in place in order to allow the delivery and sale of natural gas being produced from the well . The natural gas being produced from the well was initially transported and sold to Targa on October 20, 2011.

Production

In the month of September, during the various tests being conducted on the well, the well produced both natural gas and oil. The natural gas produced in September had to be vented and or flared as there was no pipeline in place to deliver the gas. As mentioned above, the gas produced from the well is now being delivered and sold to Targa. Southlake has continued to refine and adjust the gas lift unit in order to get to a point where we are optimizing the production of oil and gas from the well while at the same time holding well head pressure at a level that ensures long term production from the well.

In the month of September, 2011, all of the oil produced and sold was a product of the interval testing that was conducted on the well during the month. As an example, the well would be allowed to flow for anywhere from 1 to 4 hours and a flow rate would be determined by measuring the fluid in the temporary tanks that had been set up on the site. A sample of fluids was taken during every flow test to determine what the oil cut was at the time of each flow test. This is how the flow rates that have been communicated to investors over the past month have been determined. This method is used often throughout the industry and is reliable.

Because we are continuing to refine the gas lift unit through next week, our daily production of oil from the well is subject to change. The goal again is to optimize the production of crude oil with two major factors: (1) produce the well at the highest level that will not hamper future production, this means we always keep an eye on preserving pressures as much as possible to allow for long term production from the well thus the term “choke back the well” and (2) be in a position to increase the production of the well, if possible, during periods of abnormally high crude oil prices. The latter will always take a back seat to the former in the sentence above.

Monthly Production Checks

The initial monthly production checks will be sent out to all working interest in the Birdwell 1H owners on or about November 25, 2011. This check will include both September and October production. September production was not able to be sent out on October 25th due to paperwork between the purchaser and Southlake which was not able to be completed in a timely enough fashion to allow October 25th checks to be produced and mailed. The purchaser does not mail interim checks, therefore the September and October production will be combined into one November 25, 2011 check.

Assignments

Individual assignments for all investors have been completed by an outside legal office and are in Southlake’s offices for review. Those assignments will be reviewed by Southlake for accuracy then recorded in the Jack County County Clerk’s Office within the next 5 business days. A copy of the recorded assignment will be mailed to each Birdwell 1H investor after they have been recorded.

Operating Agreements

Southlake is close to finalizing the operating agreement to be sent to each working interest owner and should be out to all owners within the next two weeks.

Conclusion

The Birdwell 1H is a significant well that will provide a nice income stream for all of the working interest owners; the well has presented a new set of challenges in that it came in at higher pressures than any other similar well in Jack County has to date. As a result of these higher pressures (which again is a good thing), Southlake, as would any other company possessing a well like the Birdwell 1H, has experienced a steep learning curve. Although Southlake would have liked to have completed the well quickly and moved on to normal production, the Company has taken a cautious approach and this cautious approach has meant sacrificing some early production in order to assure strong, long-term production. In other words, Southlake did not want to rush this well into production for the sake of getting a quick check out to investors. Southlake and its investors in the Birdwell 1H have not “lost” anything due to the extra time that the Company has been taking and we believe the measured steps currently being taken will most assuredly cause all owners to gain additional future months of productive longevity from the well.
The fact remains that the Birdwell 1H has been drilled successfully with results that look to exceed Southlake’s initial well prognosis. Over the next few days the well will be sufficiently refined and we should all expect steady income for months and years to come with minimal interruptions for routine maintenance.

Thanks to all of the Birdwell 1H working interest owners for their faith in Southlake and the project as well as their patience. A check will be headed your way from Geer at the end of this month for oil production and a separate check will be coming from Southlake for gas produced and sold from the well.