VIRGINIA HILLS OIL CORP VFGGF

RE:juniors and shale oil

[terroir]

The economic problem for these wells is that despite the relatively high IP rates, the decline is so steep as to drag out the return on capital to two years or considerably more.

Many juniors, faced with dragged out cash flow, and the need to build infrastructure, took on high debt to cash flow loads...sometimes too high...resulting in banker issues and consequent restrained capex. Without the ability to fund new drilling from cash flow or debt, the high declines bring down production very quickly, resulting in the worst of situations where the company can never attain a breakeven of organic cash flow and development capex.

PRY began to exhibit these characteristics as new wells did not perform as well as earlier drilling (probably drilled sweet spots, combined with infill drilling to maximize benefits of waterfloods). 

However, subject to continued success of waterflood, PRY's debt is manageable and breakeven cash flow is attainable in next year or two. I believe that this year will see debt hit a pinnicle, probably in Q3/4, after which capex will be funded from cash flow and debt slowly declines.

Pinecrest is a junior that is in a position to execute development of its shale play. Luck, timing and high net backs have helped considerably as the $60 million capital raise in March of 2012 has kept debt tolerable and the $12 million windfall from the failed Spartan deal added flexibility.

Meanwhile company management has its personal wealth tied to stock prices, and has been very judicous in keeping spend to the necessities.

Q2 results will clearly demonstrate the effect of no capital spend plus high declines...but the worst may be over. Post spring ramp-up started in early July, production will increase here on, and waterfloods should add stability and additional BPD.

Terr