Kentucky Natural Gas & Oil - Russell

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Kentucky Natural Gas & OilInvestor Presentation

October 2015

2October 2015Charles Russell

About Kentucky Natural Gas & Oil• Kentucky Natural Gas & Oil, LLC (KyNGO) is a regional gas transmission

pipeline owner operator that delivers and sells natural gas and oil captured through well maintenance and pipeline transport. KyNGO connects 115 active wells through 98 miles of pipeline, including 22 miles of 12” pipeline, 28 miles of 6” pipeline and 48miles of feeder pipeline• KyNGO is a Kentucky Limited Liability Corporation incorporated in May

2014 and established through Sterling Energy Group’s acquisition of Gulfstar Energy Group, Kentucky Blue Gas, Viking Energy Holdings, BRP, and SKLC. • Geographic location in the Mississippian shale region of Kentucky• Pipeline connections to-

• Texas Gas Pipeline in Bowling Green KY• Real Alloy (previously Aleris) in Morgantown KY

• Objective: increase cash flow by restructuring short-term debt enabling KyNGO to invest in 2 well maintenance trucks and connect additional wells.• Reinvest in core competence. Well maintenance and pipeline transport.


KyNGO Strategy

1. Increase delivered gas volume through well maintenance2. Connect to other regional pipelines north and northeast of

Bowling Green Kentucky


Current Oil and Gas Production & Daily RevenueNatural Gas 500 MCF per day 182,500 mcf/yearOil 35 barrels per day 12,775 brls/yr

Gas well revenue $ 2.652 NYMEX $/CFM $ 1,326 per day Oil well revenue $ 45.22 WTI $/Barrel $ 1,583 per day Well revenue $ 2,909 per day prices as of 9/18/15

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Spot Henry Hub natural gas price3 year history through August 2015

current price $1 less than 3 year average


Sales Channels

• Real Alloy (previously Aleris) has right of first priority for KyNGO output and Aleris buys 100% of KyNGO’s natural gas• Bought 192,513 mcf natural gas over last 12 months, 527 mcf/day avg• http://www.realalloy.com/• Aleris accepts raw natural gas straight from the ground• Aleris has 2 inlets, KyNGO and City of Morgantown Utilities (CMU)• Sales Contract is month end NYMEX price less 20%

• Targeted buyers: Scotty’s & Purdue Farms• KyNGO’s Power Street Operations Center

• Inventory yard, mobile rig vehicle shop, & administration• Marketing plan to create “gas station” for Rolling Delivery Vehicles.

• Wholesale revenue to 3rd parties• Marketing plan to build electric generation from natural gas supply

http://www.realalloy.com/

http://www.realalloy.com/


Competitor Analysis

• Pioneer Oil (Atmos Energy) on northern region• Pioneer’s line doesn’t feed south

• For regional geographic area, there is a high entry barrier because no other pipeline exists• Any new wells in this geographic region must connect to KyNGO’s pipeline


Power Street Operations Center

• Facilities in place for line stripping• Not currently stripping because of

economic parameters• Engineering analysis required• Chemist needed

• Maybe better to acquire stripping facility

CMU


Investment ProjectShrewsbury pipeline• 24 month EBITDA target, $5.8 MM• Buy landowner rights from Pioneer Oil (Atmos Energy) Co for $350-700K

• Connect and swab wells to boost KyNGO volume • Add 2 miles of pipeline @ $100,000 per mile (2 weeks to run pipeline)• Wells have conservatively produced 600 cf/day, gross income of $581 K per

year at $2.652• Boyd Grey projected 1,000 mcf/day______

• Project pays for itself in 3 months

• Achieves objective: increase cash flow by reinvesting in core competency through well maintenance and transport

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Shrewsbury Project Plan• Buy landowner rights from Pioneer $350-650 K• Quick-connect Shrewsbury to KyNGO pipeline

• 2 miles of pipeline @ $100,000 per mile

• Rework and swab wells to stimulate production• Reposition head, drilling cost ~ $10 / foot

• Owned by: Pioneer Oil Co, Inc / Atmos Energy• 600-2,000 CF/day forward looking


Income after Shrewsbury expansion12 month forward Looking

12 Month Forecast (unaudited) $

Annualized IncomeWithout

Shrewsbury Shrewsbury

Development totalGross Revenue 705,253 2,988,000 4,678,050 Selling and Transportation Costs 127,019 321,995 1,382,168

Operating Income 578,234 2,666,005 3,295,882 Expenses

Field maintenance and operations (475,000) 425,089 General & Administrative 753,344 355,080

Core FFO Available to Common (EBITDA) 299,890 2,666,005 2,515,713 Shares Outstanding 3,421,248 Core FFO per Share 0.09 0.74 Return on investment 2.0% 16.6%


Financial action plan - alternatives

• Replace $4.5-5.0 MM short term debt with long term financing• KyNGO prefers to use Lehman Formula (5%)• 5 year term

• Sell 7,500 zero coupon bonds• Raise $5 MM (par value) • Issue at $613.91 per $1,000 bond. 10% nominal interest rate• Maturity in 5 years

• Sell Huff Road property• Eliminates debt $700 K in debt and gain of $200 – 300 K cash• Or add new wells on the site


Debt Summary

• Prairie Street• Lent $3.45 M in August 2014• Payoff balance is $3.9 M as of 15 Sept 2015

• Hancock Loan for 465 acres real property, currently listed for sale• Potential buyer for $900 K, which nets $150-200 K• Property ideally positioned for new gas or oil wells

• 3.4 M preferred shares @ $1, 5% coupon rate• Accounts Payable totals $479 K

• Itemization available


Net Asset Value and Balance Sheet adjusted value proposed (unaudited) (unaudited) $ $ / share $ $ / share

Assets w/out Shrewsbury after Shrewsbury

Property Plant & Equipment 10,775,000 3.15 10,975,000 3.21 98-mile natural gas pipeline - - - - Gulfstar & Viking Assets Real Estate 1,400,000 0.41 1,400,000 0.41 Reserves - - - Cash 8,000 0.00 8,000 0.00 Inventory 200,000 0.06 200,000 0.06 NiGen receivable 2,400,000 0.70 2,400,000 0.70 Accounts Receivable 140,385 0.04 140,385 0.04

Total Assets 14,923,385 4.36 15,123,385 4.42 Liabilities

Accounts Payable 490,000 0.14 490,000 0.14 Short Term Notes 4,617,000 1.35 4,617,000 1.35

Total Liabilities 5,107,000 1.49 5,107,000 1.49 Net Asset Value ("NAV") 9,816,385 2.87 10,016,385 2.93 Shares Outstanding Debt to Equity 0.52 0.51


KyNGO Property, Plant, & Equip. Valuation• Valuation methods

• Inventory buildup• 3rd party assessment• Gas flow

Item#

InventoryQty. Value per unit Description Total Value

1 46 $4,000 Pump Jack $184,0002 24 $3,900 Tank $93,6003 5 $800 Water Seperator $4,0004 45,000 $2 Downhole rods $90,0005 45,000 $4 Downhole Tubing $180,0006 46 $1,000 Downhole pumps $46,0007 46 $1,000 Verticle well bores $46,0008 51 $5,100 Gas Meters $260,1009 1 $150,000 Alerius meter run and gas chromatograph $150,000

10 2 $50,000 spare gas chromatographs $100,00011 1 $75,000 Portable meter/house $75,00012 1 $1,500,000 Liquids plant on power street $1,500,00013 97 $100,000 Miles of Natural gas pipeline $9,700,00014 97 $5,280 Miles of natural gas ROW $512,16015 5,000 $100 Acres of mineral rights held by production $500,00016 1 $750,000 Horizontal Well Bore $750,00017 1 $80,000 Compressor/treatment facility $80,00018 1 $52,000 Misc Shop equipment $52,00019 1 $20,000 LAND Compressor pad - 5 acres $20,00020 1 $350,000 LAND Power street site/building $350,00021 1 $50,000 LAND Miller Farm 24.73 acres $50,00022 1 $1,400,000 LAND CB Huff farm 468.77 acres $1,400,00023 1 $750,000 LAND Pipe tape + 1 acre into TGP $750,00024 1 $5,000 Nissan Pick up truck $5,00025 1 $6,500 Dodge Pick up truck $6,50026 1 $4,500 Chevrolet Service Truck $4,50027 1 $38,000 16' trailer with pipe tamer $38,000

Estimated Replacement Value: $16,946,860


KyNGO 3rd party valuationShort list of assetsKyNGO

Item Amount Estimated Value Each Value Total Replacement CostProducing Wells 110 $20,000 $2,200,000 $5,000,000 Shallow Injection Well 2 $100,000 $200,000 $400,000 Miles of Pipeline 75 $75,000 $5,625,000 $7,500,000 Oil equipment 50 wells $5,000 $250,000 $500,000 Office and Shop as is with equipment 1 $500,000 $500,000 $1,000,000

Compressor Stations and Interstate taps2 compressors with deeded land and 2

tabs with deeded land$750,000 each compressor

$250,000 Taps $1,750,000 $2,500,000

Trucks and Miscellaneous not listed above3 trucks and additional testing

equipment and tools $5,000 $250,000 $500,000 Total For KYNGO $10,775,000 $17,400,000

Shrewsburry

Item Amount Estimated Value Each Value Total Replacement CostPipeline 25 $75,000 NA $2,500,000 Interstate tap 1 $250,000 NA $250,000

Total value for Shrewsberry $1,000,000 $2,750,000


KyNGO PipelineSouth Central KY

North of Bowling Green in Warren County Kentucky


KyNGO 6” Pipeline

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45

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1 – Compressor tie-in to Real Alloy2 – Barren River Partners3 – Hayes4 – Eadens5 – Keowan Booster Pad Runner Well6 – Raymer7 – Phelps8 – Power Street / Texas Gas Transmission valve

Real AlloyCompressor

12”

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6” 2 miles

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Not shown, 70 miles of 3” feeder

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6” 6”


Taking control of KyNGO first 30 days

• Activate swab maintenance program• Procure used or leased swab truck and

vacuum truck• Well audit update (last October 2014)• Prioritize well maintenance schedule

• Audit 2015 and 2014 books• Confirm insurance coverage• Review all employment contracts• Review and document shared operator wells

• Issue RFP for vendors to frac 1 or 2 wells• Identify 3 pipeline installation vendors• Update contacts for state

• get last 2-3 years of tax return


Maintenance Plan

• Procure work over and swab rig, est $150,000-200,000 new to reduce equipment rental charges. Looking for used equipment vacuum truck• Engage 3rd party to Frac 1st of 2

horizontal wells

• Cease reliance on external maintenance vehicle services• Rework the wells

• Restores and increases production from an existing well

• Swab the wells• Immediately increases output, but

levels out after period of time• A 2 man crew can service 3 wells per

day for $1,000 and truck• Or we can lease a truck

• Recurring maintenance, each well every 3-4 months or more


Conclusion• KyNGO’s gross revenue is directly tied to commodity market prices• The Shrewsbury investment stabilizes KyNGO and enables KyNGO to

be cash positive at today’s natural gas market prices• Restructuring the debt frees cash and enables infrastructure

investment• Trucks to maintain wells and pipeline to connect stranded assets• KyNGO’s core competence is well maintenance and pipeline transport

• Thank you


Contact: Charles [email protected]

410-231-8200

mailto:[email protected]


KyNGO commercial address & phone

• Power Street• 425 Power Street Bowling Green, KY 42101 • Phone 270-842-9030 (R. Lindsey)

• Principal Office• English Lucas Priest & Owsley, LLP

(ELPO Law), Michael S. Vitale, Partner, 1116 South Main Street Suite #5, P.O. Box 631, Morgantown, KY 42261

• Phone 270-781-6500

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Sample Landowner Statement

Note: Kentucky state law changes regarding landowner tax. hyperlink

http://www.foxbusiness.com/markets/2015/08/20/kentucky-supreme-court-natural-gas-producers-solely-responsible-for-severance/


KyNGO family of companies• Gulfstar Energy Group, LLC - 2006• Gulfstar Oil & Gas, LLC - 2012

• Barren River Partners, LLC – 2009• Kentucky Blue Gas Co. - 2008• KBGC Gas Pipeline, LLC – 2011• KBGC OIL & GAS, LLC - 2011

• South Kentucky Land, LLC - 2008• Viking Energy Holdings, LLC -2008• Viking Gas Pipeline, LLC - 2008• Viking Oil & Gas, LLC - 2008


Recommended organization chart

Board of Directors

Chief Operations Officer

Well head operations

Pipeline development

Chief Financial Officer

Accounting & audit

Commercial operations


• Estimated cost $400,000• Estimated output 250-500 mcf/day• $484 K gross revenue adder @ 500 mcf/day

• Fast tracking this project creates the greatest returns• Not currently included in pro-forma

Investment ProjectFracturing horizontal well

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• Regional Gas Fields• 25 miles east• Topography issues so pipeline cost is greater than

average of $100,000 per mile

• 600 to 2500 MCF/day

• Expansion beyond Shrewsberry

Park City Gas Fields


Investment ProjectNatural Gas Power Generation• electric generation from natural gas supply• Partner with Kohler, GE or others


Bowling Green, Kentucky

Kentucky Natural Gas & Oil - Russell

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