Aeris Environmental Ltd T.AEI

RE: North Dakota Bakken

[Bobwins]

AEI.to/AEYIF.pk Talked with CFO, Jesse Meidl yesterday. Asked him a bunch of questions and came away very happy that I took a chance on Arsenal Energy. 1. What is the situation on the Tower Creek well? When will it be hooked up. Weather has been an issue and end of the month may be tough to hit. They are working on it now. If they get hooked up by 7/1/07, the actual cash will arrive late August at the earliest. Arsenal has 14% WI and expects about 400boepd. This is a long life well that should run at this level for 15-20 years. 2. What about the followup well nearby targeting the Wabamun sands? That well will be shallower at 4500 meters. It should take less time to drill and if successful can be hooked up to the infrastructure and pipeline created for the Tower Creek well. There will be a pipeline capacity constraint on the well and it will likely max out at 400-500boepd. The well is probably going to be very high pressure but will only last a few years with a rapid decline rate. However the well costs will be paid very quickly and will still be a very profitable well for Arsenal if they hit gas. The initial production could be as high as 50,000mcfpd if the facilities were not an issue. The pipeline is unlikely to increase capacity for this well due to its short lifespan. 3. I read where Arsenal has Bakken oil plays in North Dakota but may not drill right away due to the risk. Why not proceed ASAP with these wells that other companies are drilling successfully in the area at production rates of 800-1000bpd? These Bakken wells are expensive because they go down 2000 meters vertically and then another 3500 meters horizontally. The frac jobs are specially designed for the Bakken play and are the key to allowing increasing amts of oil to flow. Because of these features, the wells are expensive to drill and complete. They are typically $4 to $5 million EACH. Arsenal is not big enough to take on this kind of risk without making sure they have a good chance of success. So they are waiting for companies like EOG to perfect the methodology. EOG may use some of the same service companies that AEI will eventually employ to drill and frac their Bakken plays. By waiting, AEI benefits from their experience on the EOG wells. Recently a company called Continental has licensed a Bakken well on land that is as close to the Arsenal property as possible. They know that Continental will be drilling for the same sands Arsenal plans to go after so this will be a good test of their hypothesis about the play and how to drill it. I asked why the Bakken plays in Canada seem to have much lower production but also seem to be pretty routine and low risk. He said the difference is the depth. The North Dakota Bakken wells are much deeper, which raises the expense but possibly increases the production rates. So higher risk/reward. 4. The balance sheet appears to have a fair amount of debt. Is that a problem? Arsenal has a 23 million dollar credit line with 20 million outstanding. They are negotiating with their bank to increase the line now. The company is also looking to sell non core assets and would use any proceeds to pay down debt or finance development wells. 5. What about Egypt? 2 dry holes. Will the third well be drilled? Arsenal is disappointed that they didn't hit oil/gas on their first two wildcat wells but they did find the structure they expected and some oil shows in the shallower sands. Not ideal but encouraging. They will likely wait on the third well until they examine the seismic data and also they will wait for Centurion(or its successor/acquiror) to drill another basin across the Nile from Arsenal's land. This different basin runs under the river and onto Arsenal's land. Arsenal drilled the other basin because ALL of that basin was on Arsenal land and they were going for the deepest targets that looked the most prospective. By waiting for the Centurion drilling, Arsenal will get the value of their experience without spending any money. If they are successful, Arsenal should be able to use that information to decide how to proceed on their side of the river. 6. What about the expenses for the second dry hole in Egypt? When will they be expensed? The second well should be expensed in Q2. The cost of the well was around 1.5 million so the Depletion expense will be up by that amt over normal depletion. 7. I told him I was projecting c/f of .05 per share after Tower Creek is hooked up. I asked if that was in the ballpark and he said yes. Overall I was pleased with the information I got. The Bakken play could be huge for Arsenal. They own the land as a result of buying producing wells that are producing from shallow gas sands. So they have no time limit on their exploration. Their neighbors are averaging 800bpd but have hit wells with initial production of 2000bpd. Given Arsenal's current production of around 2000bpd, you can see the potential impact of a few 800bpd wells on their production and bottom line. Given my c/f projection of .05 for Q3, this is still an extremely cheap stock. Annualized cashflow of .20 versus the .48 price is still less than 2.5 times cashflow. The cheapest competitors are in the 3 times range and up. Most are in the 5 range. 5 X .20 = $1.00 or double the current price. I intend to liquidate the last of my TGA and buy more AEI.to. The potential of the Wabamun well plus the Bakken play gives Arsenal excellent upside to increase their production well past the current 2000boepd level. Bobwins