Underground Energy Corp.Unlocking Shale Oil Opportunities in California & NevadaTSX-V:UGEOTCQX:UGGYFGHS Energy Conference ...
Capital Structure Snapshot    UGE                                   $0.17    Listed on the TSX Venture Exchange    June 20...
California Focused Operations                                  Discovery of new Monterey play type in                    ...
Complete California Based Team    Experienced, California-based technical and operations team assembled       •    In exc...
History of Value Creation                                                                        Discovered New Play      ...
California’s Petroleum Basins                Oil and Gas Fields in California                                             ...
Monterey Shale Formation         Significant Monterey Shale Basins                                                        ...
California: Premier Oil Price in North AmericaCalifornia (CA)                                                      MWSS be...
US Oil Play Comparison       Monterey Shale is largest shale oil formation in the US          Estimated 15.4 billion bbls...
Santa Maria Basin / Greater Zaca Area     2010 oil production of 25 million bbls                                         ...
Zaca Field Development Project       As Acquired by UGE 61 wells drilled to date at Zaca Recovery to date of 32 MMbbls  ...
Zaca Field Extension Project      Achievements to Date                                              3,943 Total Acres New...
Zaca Field Extension Project      Go-Forward Strategy                                               3,943 Total Acres 4 w...
Zaca Field Seismically Defined Structures                                                                          UGE Cha...
Zaca Field Magnetics and Anomalies                                 UGE Chamberlin 3-2, 4-2 & 5-2                          ...
Zaca Idealized Cross Sections and WellPenetrations                       1.5 Mile      Hathaway 1                         ...
Zaca / Monterey Shale Type Curves1. Source: Occidental Petroleum Corporation, Minerals Management Service, DOGGR   17
Zaca Economics & Development ProgramTypical Well                      All Wells           Infill Wells          Zaca Resou...
Zaca Sensitivity to Various Oil Prices$12,000                                                                             ...
Other California Assets – Santa Maria                                                                                     ...
Other California Assets – San Joaquin                                                                                     ...
Nevada Assets                                                            “Early mover” advantage by building a strong    ...
Initial Exploration and Development Plan                                  Activity                  1Q12   2Q12   3Q12   4...
Initial Development Profile                                                                 Zaca Project Initial Developme...
Contact InformationUnderground Energy Corp.   President & CEO – Mike Kobler3rd Floor                  mike.kobler@ugenergy...
Cautionary and Forward Looking Statements AdvisoryUnderground Energy Corp. (Underground Energy) is a British Virgin Island...
Notes to Disclosure1.   Prospective resources are those quantities of petroleum estimated, as of a given date, to be poten...
Appendix
Management TeamMike Kobler, Chairman, CEO and President       35 years international project management and engineering e...
Independent DirectorsRandy Aldridge – Independent Director       35 years international oil experience: Chairman- Koch Pi...
Key California Players Largest Monterey Shale land holder in the State         Ranked #1 in daily oil-equivalent product...
History of Monterey Shale                                 1895: 1st Monterey production in state at                       ...
Monterey Play Types     UE’s Initial Monterey Prospects are Naturally Fractured, Conventional Structures                  ...
US Shale Oil Comparison                                       Formation          Gross            Matrix              Matr...
Local Pricesbased on NYMEX Futures StripNYMEX Futures Strip Price as of May 31, 2012                                      ...
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GHS Energy Conference Corporate Presentation June 2012

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GHS Energy Conference Corporate Presentation June 2012

  1. 1. Underground Energy Corp.Unlocking Shale Oil Opportunities in California & NevadaTSX-V:UGEOTCQX:UGGYFGHS Energy Conference Corporate PresentationJune 2012
  2. 2. Capital Structure Snapshot UGE $0.17 Listed on the TSX Venture Exchange June 20, 2012 Closing Share Price 204.9 million $34.8 million Basic Shares Issued and Outstanding Market Capitalization (on Basic Shares) 339.4 million $11.2 million Fully Diluted Shares Outstanding Cash Balance at March 31, 2012 16.7% $25.6 million Insider Ownership Working Capital at March 31, 2012 24.1% $23.6 million Institutional Ownership Enterprise Value (on Basic Shares) 59.2% $39.2 million Retail Ownership Potential Proceeds from Dilutive Securities  59 million warrants at 21.7 cents – expires 09/13  52 million warrants at 40.5 - 43.4 cents – expires 08/13 2
  3. 3. California Focused Operations  Discovery of new Monterey play type in Santa Maria Basin CALIFORNIA • Basin has produced over 2 billion bbls oil  Impressive oil shows in initial wells at Zaca Extension Project – production testing underway NEVADA San Francisco  Substantial build out potential at Zaca • Over 120 well locations identified based on seismic / well control Las Vegas  Outstanding economics – Monterey has best shale oil net backs in North America  Inventory of permitted well sites continues to Los Angeles grow, > 40 permitted wells in California Zaca  Critical Mass achieved at Zaca and across core prospect areas – 73,617 net acresUnderground leases 3
  4. 4. Complete California Based Team Experienced, California-based technical and operations team assembled • In excess of 200 years combined experience in California, proven ability to grow reserves and production in California • Track record of building successful E&P companies – Management and Directors include founders of OSUM Oil SandsManagement Team Michael Kobler – Founder, Chairman, President and CEO Bruce Berwager – Chief Operating Officer Peter Ballachey – Founder, CFO and Corporate Secretary Simon Clarke – VP Corporate Development Dana Brock – VP Engineering David Hoyt – VP Exploration and Development Randy Ray – Chief Geophysicist Peter Bacon – Manager of LandBoard of Directors Michael Kobler – Chairman Randy Aldridge – Koch Oil Co., True Energy Harland Johnson – ExxonMobil Andrew Squires – OSUM Oil Sands, PetroCanada, Amoco Douglas Urch – Bankers Petroleum, Rally Energy Note: Refer to the Appendix for detailed description of the Companys management team and board of directors 4
  5. 5. History of Value Creation Discovered New Play Built land position in Santa Maria Basin to ~80,000 net Permit for initial acres in Focus on 26 wells California and Impressive oil permitting granted Nevada shows in initial wells process at Zaca Rounded out Initial Added seniorCompany Monterey California management IPO and raised Target exit ProductionInception Lease expertise team $25.5 million 450+ bbls/day 2007 2008 2009 2010 2011 2012 5
  6. 6. California’s Petroleum Basins Oil and Gas Fields in California  2nd largest onshore US oil producing state • 5 of 10 largest fields in US  2010 production 740,000 boe/d • 100% consumed in State Sacramento Basin  36 Billion BOE produced to date Total oil refining capacity in State  Fully-integrated heavy oil infrastructureSan Francisco is 2 million bopd  Very robust oil price environment San Joaquin Basin  54,000 producing wells in 2011  California’s refinery oil sources in 2011: California Bakersfield 16% Alaska Santa Maria Basin 8% 37% Saudi Arabia Ventura & Santa Barbara Zaca 11% Ecuador Channel Iraq Santa Barbara Los Angeles Basin 15% 13% Other Pacific Ocean Los Angeles Source of slide stats: California DOGGR (2001), US Department of Interior Bureau of Land Management 6
  7. 7. Monterey Shale Formation Significant Monterey Shale Basins World Class Source Rock Over 290 billion barrels of oil generated1 World Class Reservoir Rock San Joaquin Basin Produced over 2.5 billion barrels1 High organic content of 4-5% Extremely thick shale packages of 500-3,500 ft Compared to other US shale plays: Bakken: 20-150 ft, Eagle Ford: 75-300 ft, Santa Maria Basin Niobrara: >150 ft Monterey players include:Ventura & Santa Barbara Channel Los Angeles Underground Monterey prospects Los Angeles Basin 1. Source: California DOGGR and USGS 7
  8. 8. California: Premier Oil Price in North AmericaCalifornia (CA) MWSS begins $120.00 trading at a CA imports 62% of crude oil (~ 1 MM bopd) by sea premium to WTI (Alaska, Saudi Arabia, Ecuador, Iraq, Columbia, Brazil, Angola, $110.00 Russia, Oman, Venezuela, Argentina, Peru, & Australia) $102.96 CA is not connected to other US oil supply or markets $100.00 CA oil prices currently more reflective of world prices (e.g. Brent) than WTI $90.00 Rig availability with low servicing costs and year–round access to CA projects $80.00 $70.00 $60.00 $50.00 $40.00 WTI West Texas Intermediate- 39.6 API MWSS Midway Sunset- 13.0 API $30.00 WCS Western Canada Select- 20.6 API $20.00 May-09 May-10 May-11 May-12 8
  9. 9. US Oil Play Comparison Monterey Shale is largest shale oil formation in the US  Estimated 15.4 billion bbls of recoverable oil  2/3 of total US shale oil potential Technically Well Cost EUR/well IP Rate Well Cost/EUR IRR (%)Play Recoverable ($US MM) (MBbl) (BOPD) ($/BO) @$85 WTI (BBO)1California Monterey (SMV) 15.4 $2.0-2.5 375-550 200-300 $4.50-5.50 120%Louisiana Tuscaloosa N/A $12.0-14.0 400-600 700-900 $23-30 N/AColorado Niobrara N/A $4.7-5.2 200-300 250-300 $17-24 N/AOhio Utica N/A $3.0-5.0 200-300 200-250 $15-17 80%Texas Wolfberry N/A $1.8-2.0 120-170 100-125 $12-15 45%Texas Avalon/Bone Springs 1.6 $5.5-6.0 330-550 500-550 $11-16 82%N. Dakota/Montana Bakken 3.6 $7.0-9.0 500-600 500-900 $10-14 90%Texas Eagle Ford Oil 3.4 $4.0-6.5 250-350 500-600 $8-11 90%Oklahoma Mississippian Lime N/A $3.0-3.5 300-400 275-325 $8.50-10 100%1. Sources: US EIA Review of Emerging Resources: US Shale Gas and Shale Oil Plays dated July 2011, Devon’s Analyst Day Presentation dated April 4, 2012, and actual costs of Underground Energy, Inc. 9
  10. 10. Santa Maria Basin / Greater Zaca Area 2010 oil production of 25 million bbls Foxen Canyon Trend 69,000 bopd in 2010 (onshore 9,400/ offshore 59,600) 935 producing wells Approximately 2 billion bbls oil produced to date1 To Los Angeles Santa Maria Santa Barbara County Conoco Phillips 207To San Francisco Santa Maria Refinery All American Pipeline Greka/Santa Maria Asphalt Refinery All American Pipeline Cat Canyon 251 Orcutt Pacific 209 Ocean Asphaltea PXP/Lompoc 101 Oil & Gas Plant Santa Barbara Gato Ridge County 54 Barham Zaca Los Alamos Ranch To Los Angeles 35 Santa Rita Monterey Oil Field Oil and Gas separation, Treatment and Gas Lompoc 52 Processing Plant Underground Leases Pipeline Refinery 3 miles Estimated Ultimate Oil Recoveries (MMBO) 1. Source: California DOGGR, BOEMRE and GLJ Petroleum Consultants 10
  11. 11. Zaca Field Development Project As Acquired by UGE 61 wells drilled to date at Zaca Recovery to date of 32 MMbbls • 6.8% of OOIP • Primary recovery only UGE acquired 6,200 net acres at Zaca Field Extension for lower risk step out wells Initial Management Estimates1: • 6 MMbbls 2P Reserves • 20.8 MMbbls Prospective Resources GLJ Reserve Estimates2: • 1.8 MMbbls 2P / 3.6 MMbbls 3P • 2P NPV10 BT – approx. $35.4 M Increased Recovery potential from • Enhanced seismic Existing Oil Well Underground Energy Lease Boundary • Deviated/horizontal drilling Zaca Oil Field Recognized Boundary • EOR schemes Existing Zaca Field • Thermal testing (1964-1967) Existing Seismic Line circa 1986 • Waterflooding (1953-1954 1. Management estimates which also include review by an internal qualified reservoir engineer 2. GLJ reserve estimates as at 31 December, 2011 from report dated 10 April, 2012 11
  12. 12. Zaca Field Extension Project Achievements to Date 3,943 Total Acres New Fault Block discovered Seismically Defined 2,121 acres Upper and lower productive zones acquired May 2012 identified by seismic and drilling 46 acres Initial wells have encountered significant quality oil shows 159 acres • Chamberlin 3-2 had a total of 1,700 feet of quality oil shows in two Monterey sections 218 acres Land base increased to 12,183 net 935 acres acres and 96.7% WI acquired May 2012 627 acres 218 acres  Acquired minority interests in play  Added additional leases 774 acres Existing Oil Well Underground Energy Original Lease Boundary 13 drilling locations permitted Underground Energy Acreage Additions 1,901 acres Zaca Oil Field Recognized Boundary 1,213 acres acquired May Existing Zaca Field 2012 Probable Geologic Structure Identified by Seismic 385 acres acquired May Possible Geologic Structure Identified by Seismic 2012 Existing Seismic Line circa 1986 New UGE Seismic Lines Permitted Pad Locations 0 3213 UGE Well Already Drilled Permitted Well Location feet 12
  13. 13. Zaca Field Extension Project Go-Forward Strategy 3,943 Total Acres 4 wells planned to be drilled by Seismically year-end on current budget Defined Targeting 450+ bopd by year-end 46 acres Re-process / shoot new seismic on West Side of lease / new lands 159 acres Continue to permit within field and 218 acres extend field boundary (~ 1 year) • 2 new well pads / 10 additional wells in process 627 acres 218 acres Full Development of East Side: 774 acres • 60+ wells within existing field Existing Oil Well • 60+ wells outside existing field Underground Energy Lease Boundary 1,901 acres Zaca Oil Field Recognized Boundary • Currently identified structures only Existing Zaca Field Probable Geologic Structure Identified by Seismic Probable Geologic Structure Identified by Seismic Possible Geologic Structure Identified by Seismic West side / new lands offer Existing Seismic Line circa 1986 New UGE Seismic Lines significant additional potential Permitted Pad Locations Being Permitted Pad Locations UGE Well Already Drilled 0 3213 Permitted/Being Permitted Well Location Potential Well Site feet 13
  14. 14. Zaca Field Seismically Defined Structures UGE Chamberlin 3-2 UGE Chamberlin Well 3-2 Well Original Zaca Field Original Zaca Block Block Field North East StructureHathaway 1 Well North South East Structure S-11 Structure Structure S-10 Structure Oil Shows Upper Thrust Lower Thrust 14
  15. 15. Zaca Field Magnetics and Anomalies UGE Chamberlin 3-2, 4-2 & 5-2 Residual Magnetics Current UGE Well Locations Proposed UGE Wells Previous Productive Wells UGE Leaseholds UGE Chamberlin 1-2 & 2-2 State of CA Oil Field Boundary 15
  16. 16. Zaca Idealized Cross Sections and WellPenetrations 1.5 Mile Hathaway 1 Carranza 22 Chamberlin Potreros 14 Carranza 21 5-2, 3-2, 4-2 Sub-Thrust Block Basement 16
  17. 17. Zaca / Monterey Shale Type Curves1. Source: Occidental Petroleum Corporation, Minerals Management Service, DOGGR 17
  18. 18. Zaca Economics & Development ProgramTypical Well All Wells Infill Wells Zaca Resource Initial Build Extended Build Type Curve Type Curve Upside Potential Out Profile Out ProfileWell Depth (MD feet) 5,500-8,500 4,000-5,500 Locations 60 120Dry Hole Well Costs ($M) $1,500-$2,200 $1,200-$1,800 UGE WI% 96.7% 96.7%Completion Cost ($M) $300-$550 $200-$400 D,C&T Costs Per Well $2.2 $2.2 ($MM)Total Well Cost ($M) $2,400 $1,900 Base Case IP Rate 160 160UGE Interest (WI / NRI) 96.7% / 75.6% 96.7% / 75.6% (bbls/d) Reserves per Well 503.7 503.71st Month IP Rate (BOPD) 205 70 (Mbbls)Cum. Production (MBO) 537 375 NPV per Well @10% BT $12.2 $12.2 ($MM) 1NPV @10% BT ($M)1 $ 11,023 $ 4,296 UGE WI Program NPV $708.0 $708.0 @10% BT ($MM)1IRR (%) 110% 51% Added Value ($MM) $708 $1,416Payback (years) 0.8 1.8 1. Economics are internal estimates using NYMEX Futures Strip Prices as of May 31, 2012 with adjustment for location and gravity 18
  19. 19. Zaca Sensitivity to Various Oil Prices$12,000 120%$10,000 100% $8,000 80% Internal Rate of Return (%) $6,000 60% Net Present Value (BT) at 10% DCR ($M) $4,000 40% $2,000 20% $- 0% $90.00 $80.00 $70.00 $60.00 $50.00 $45.00 $40.00 WTI Oil Price at Cushing, OK 19
  20. 20. Other California Assets – Santa Maria Asphaltea San Francisco 10 0 10 20 30 40 50 miles  High impact exploration project Modesto Merced  5,850 acres (100% WI – operated) in Santa County Stanislaus Barbara County, California County San Joaquin Basin  Analog fields: Zaca (32 MMboe), Cat Canyon (251 Madera County Mmboe), Orcutt (209 Mmboe) Fresno County  Work at Zaca transferable to Asphaltea San Benito Fresno  2 potential structures identified – naturally County fractured  26 permitted wells Tulare  30+ miles of 2D swath seismic acquired 2011 KingsPacific County County currently being processedOcean  2 billion bbls OOIP / 109 MMbbls Prospective Resources1 Petroleum Basin Producing Oil Field Santa Rita Producing Gas Field San Luis Obispo  Santa Barbara County, California Underground Property Bakersfield Highlighted Property County  80% WI (Operator), 1,217 gross acres (974 net acres) Kern Santa Maria Basin County  Monterey Shale & Point Sal sand oil targets  On trend with Lompoc Field (52 MMbbls) Asphaltea Santa Rita Zaca Santa Barbara County Santa Barbara1. Source: GLJ Petroleum Consultants, effective date June 1, 2011 20
  21. 21. Other California Assets – San Joaquin Devil’s Den San Francisco 10 0 10 20 30 40 50 miles  Kern County, California Modesto Merced  98.2% WI (Operator), 5,341 gross acres (5,246 net acres) County  Shallow Monterey (Diatomite) and Tumey shale oil targets Stanislaus County San Joaquin Basin  Existing 3D sesimic Madera  Analog fields: McKittrick (350 MMboe), Cymric (543 MMboe) County Burrel Challenger Fresno  Fresno County, California County  88.2% WI, 8,973 gross acres (7,911 net acres) San Benito Fresno County  Zilch & Vaqueros sand, Monterey & Kreyenhagen oil targets  1 producing well (35 bopd) Burrel  Existing 2D seismic Kings Tulare  265,000 bbls 2P Reserves / 561,000 bbls 3P Reserves1Pacific County County  Analog fields: Helm (46 MMboe), Raisin City (47 Mmboe)Ocean Buttonwillow  Kern County, California Petroleum Basin  93.3% WI (Operator), 1,445 gross acres (1,349 net acres) Producing Oil Field Devil’s Den Buttonwillow  Monterey/McClure shale, 44X and Randolph sand oil targets Producing Gas Field  In middle of Oxy/Venoco 3D seismic survey Underground Property San Luis Obispo County Bakersfield  Offset well planned by Venoco Highlighted Property  Analog fields: North Shafter (10 MMboe), Rose (4.8 MMboe) Challenger Kern Santa Maria Basin County  Madera and Merced Counties, California Asphaltea  70.5% WI (Operator), 7,585 gross acres (5,347 net acres) Santa Rita Zaca Santa Barbara  32 miles existing 3D seismic County  Zilch, Blewett, Vaqueros/Temblor sands; and Kreyenhagen Santa Barbara & Moreno shale gas targets1. Source: GLJ Petroleum Consultants, effective date December 31, 2011 21 21
  22. 22. Nevada Assets  “Early mover” advantage by building a strong Bull Run land position ahead of the curve Deadman Winnemucca Elko Creek  Complex geology, but existing conventional discoveries have had very high production rates Blackburn West  Emerging shale oil potential (Bakken-like)Reno RAILROAD VALLEY 46.2MMBO Trap  UGE has 31,286 net acres in 6 prospective Springs Flat Top areas – history of production / oil shows Coaldale  Noble Energy recently acquired Elko county acreage for $50 per acre & began 3D seismic  Key competitors will help prove up plays - Las Cabot (COG), EOG (EOG), SM Energy (SM), Vegas Callon (CPE), PetroHunt Underground leases 22
  23. 23. Initial Exploration and Development Plan Activity 1Q12 2Q12 3Q12 4Q12 Net Cost ($MM) Acquire & Process Seismic $0.2 (30 mi 2D) Drill 4 Monterey Shale Wells $10.0 Zaca Design & Build Facilities and additional $2.0 optimization work Permit Additional Drill Sites & Increase $0.2 Acreage Acquire & Process Seismic at Devil’s $0.2 Den (50 mi 2D) & Prepare to Drill Other Acquire Seismic at Buttonwillow (16 mi $0.2 CA 3D, 30 mi 2D) & Prepare to Drill activity Continue Leasing at MVA. Reprocess $0.2 3D Seismic & Prepare to Drill $13.0Seismic Drilling Other 23
  24. 24. Initial Development Profile Zaca Project Initial Development Profile 2012 Key Assumptions 600 $3,330,861 $3,500,000  4 producing wells in 2012 (current budget only)  IP per well = 153 bopd  Primary recovery only $3,000,000 500 452 Cumulative Operating Cash Flow ($USMM) Exit production 452 bopd / annualized net cash flow of $7.04 million $2,500,000Daily Gross Production (bopd) 400 $2,000,000 300 $1,500,000 200 $1,000,000 100 $500,000 0 0 $0 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Month Bopd Cumulative Operating Cash Flow 1. Economics are based on management estimates of production post-royalty and based on May 31, 2012 NYMEX Futures strip prices 24
  25. 25. Contact InformationUnderground Energy Corp. President & CEO – Mike Kobler3rd Floor mike.kobler@ugenergy.com7 W. Figueroa Street Phone: (805) 845-4700, x18Santa Barbara, CA,93101-5109 CFO – Peter Ballachey peter.ballachey@ugenergy.comTel: 805-845-4700 Phone: (805) 845-4700, x17Fax: 805-845-1177www.ugenergy.com COO – Bruce Berwager bruce.berwager@ugenergy.com Phone: (805) 845-4700, x11 VP Corp Development – Simon Clarke simon.clarke@ugenergy.com Phone: (604) 551-9665 25
  26. 26. Cautionary and Forward Looking Statements AdvisoryUnderground Energy Corp. (Underground Energy) is a British Virgin Island holding company that owns Underground Energy, Inc., a Delaware corporation which isan exploration and production company focused on unlocking oil from shale plays, principally in the Western US. Underground Energy is traded on the TSXVenture Exchange under the trading symbol "UGE.“Statements in this presentation contain forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively,"forward-looking information"). Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate","estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur. In particular, forward-looking information in thispresentation includes, without limitation, statements with respect to: (i) the closing and closing date of the Companys proposed acquisition of oil and gas leases inCalifornia; (ii) the Companys planned seismic operations to be conducted on such oil and gas leases; and (iii) the prospectivity of such oil and gas leases for oiland gas and the anticipated drilling, completion and production results therefrom. Readers are cautioned that assumptions used in the preparation of forward-looking information may prove to be incorrect.Although we believe that the expectations and assumptions reflected in the forward-looking information are reasonable, there can be no assurance that suchexpectations or assumptions will prove to be correct. In particular, assumptions have been made that: (i) Underground will be able to obtain equipment andregulatory approvals in a timely manner to carry out exploration and development activities; (ii) Underground will have sufficient financial resources with which toconduct its planned capital expenditures; and (iii) the current tax and regulatory regime will remain substantially unchanged. Certain or all of the forgoingassumptions may prove to be untrue.Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is subject to a variety of risks anduncertainties and other factors (many of which are beyond the control of Underground) that could cause actual events or results to differ materially from thoseanticipated in the forward-looking information. Some of the risks and other factors could cause results to differ materially from those expressed in the forward-looking information include, but are not limited to: operational risks in exploration, development and production; delays or changes in plans; competition for and/orinability to retain drilling rigs and other services; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel andsupplies; risks associated to the uncertainty of reserve and resource estimates; governmental regulation of the oil and gas industry, including environmentalregulation; geological, technical, drilling and processing problems and other difficulties in producing reserves; the uncertainty of estimates and projections ofproduction, costs and expenses; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed;incorrect assessments of the value of acquisitions; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in marketprices for oil and natural gas; liabilities inherent in oil and natural gas operations; access to capital; and other factors. Readers are cautioned that this list of riskfactors should not be construed as exhaustive.The forward-looking information contained in this presentation is expressly qualified by this cautionary statement. Underground does not undertake any obligationto update or revise any forward-looking statements to conform such information to actual results or to changes in our expectations except as otherwise required byapplicable securities legislation. Readers are cautioned not to place undue reliance on forward-looking information.BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 bbl has been used and is based on an energy equivalency conversionmethod primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. 26
  27. 27. Notes to Disclosure1. Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the prospective resources will be discovered and, if discovered, there is no certainty that it will be commercially viable to produce any portion of those resources. Prospective resources are undiscovered resources that indicate exploration opportunities and development potential in the event a commercial discovery is made and should not be construed as reserves or contingent (discovered) resources. Prospective resources in this presentation are reported on an unrisked, company interest basis.2. The reserve and resource estimates in respect of the prospective resources for the Zaca Field for Underground were prepared on October 27, 2011 with an effective date of November 1, 2011 and prepared in accordance with COGE Handbook and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities ("NI 51-101") by a member of management of Underground who is a "qualified reserves evaluator" as defined under NI 51-101.3. The "best estimate" is considered to be the best estimate of the quantity that will actually be recovered. In terms of prospective resources, it is equally likely that the actual quantities recovered will be greater or less than the best estimate. In terms of discovered reserves, the “best estimate” is the combination of the proved plus probable reserves. If probabilistic methods are used, there should be at least a 50 percent probability that the quantity actually recovered will equal or exceed the best estimate.4. The significant positive factors that are relevant to the managements estimate of the reserves and prospective resources include production in close proximity to the assets and oil and gas shows in wells drilled in close proximity to the assets. A significant negative factor that is relevant to managements estimate of prospective resources is that seismic attribute mapping in the areas can be indicative but not certain in identifying resources.5. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves.6. The estimates of reserves and resources for individual properties may not reflect the same confidence level as estimates of reserves and resources for all properties, due to the effects of aggregation.7. Historical production data for both Zaca and Lompoc is based upon a report titled "California Monterey Reservoir Study Project", prepared by Spivak, Mannon, Brigham, Surdam, Coombs, and Sageev and dated September 11, 1985 and the records of the California Division of Oil and Gas and Geothermal Resources obtained by the Company on August 24, 2011. 27
  28. 28. Appendix
  29. 29. Management TeamMike Kobler, Chairman, CEO and President  35 years international project management and engineering experience  Founder of successful OSUM Oil Sands Corp., Calgary  Founder and President, UCM Civil Engineering Consulting Firm focused on large infrastructure construction projects in CaliforniaBruce Berwager, COO - Masters Petroleum Eng, P.Eng  32 years international oil and gas exploration, development, operations management and engineering roles with Chevron, Unocal, Conoco, Venoco and others  20+ years experience with Shale in California (Monterey), Texas (Barnett & Wolfcamp), Pennsylvania (Marcellus)  Former Director and COO of Venoco, SVP and GM for California Ops-Warren ResourcesPeter Ballachey, CFO and Corporate Secretary - CA, MS  35 years experience including 16 years senior financial CFO roles in Canada and USA  Former CFO of OSUM Oil Sands Corp., CalgarySimon Clarke, VP Corporate Development and Director, LLB  Over 20 years capital markets experience  Founder, Board Observer and Advisor to OSUM Oil Sands Corp  Managing Director Invico Energy II Fund, Director of Argus Metals Corp., Director of Underground Energy, Inc.David Hoyt, VP Exploration & Development – CPG, RPG  Over 35 years exploration and development geology and geophysics project management and interpretation experience with ARCO, TXO, Warren, Foothill and as an independent consultant  Extensive academic and Industry experience in California, Nevada, AlaskaRandy Ray, Chief Geophysicist – BS, MS  36 years experience in Western US and an expert in integrated seismic and geological interpretation  Professional Geologist, Texas and Wyoming 29
  30. 30. Independent DirectorsRandy Aldridge – Independent Director  35 years international oil experience: Chairman- Koch Pipelines, President- Koch Petroleum Canada, President-Koch Oil Co., Chairman-True Energy Corp.  Board Member, Energy Holdings international Inc. and Husky/BP Toledo Refinery LLCHarland Johnson – Independent Director  45 years technical and management experience in the upstream petroleum industry for Exxon Corporation and its affiliates  Formerly Presidente, Divisão de Exploração e Produção, Esso Brasileira de Petróleo Limitada; and President, Exxon Trinidad Limited  BSc (Honors) Chemistry, U of Alberta. PhD Metallurgy, U of AlbertaAndrew Squires – Independent Director  23 years experience in heavy oil and oil sands at Petro-Canada, Dome, Amoco, Paramount  Sr. Vice-President, OSUM Oil Sands Corp.Douglas Urch – Independent Director  Over 30 years oil & gas experience at RallyEnergy, Mohave Exploration, Sunshine Oilsands, Barrington Petroleum, TriGas Exploration and Ryerson Oil & Gas  EVP, Finance and CFO Bankers Petroleum Ltd.  Director and Audit Committee Chairman at Petrodorado Energy 30
  31. 31. Key California Players Largest Monterey Shale land holder in the State  Ranked #1 in daily oil-equivalent production in (LA, Ventura and San Joaquin Basins) California in 2011 10-15 exploratory wells per year planned  2011 California operated production of 183,000 through 2015 to test shale prospects, $6.3 billion BOE/D, consisting of 165,000 bpd of crude oil CAPEX forecast over next four years  Primarily operates in the San Joaquin Basin Monterey Diatomite is the key producer / target 1.2 million acres in Monterey and 520 drilling targets de-risked for oil-prone shale  74 million barrels of oil produced by operations development in the San Joaquin Valley in 2007, roughly 32% of the state’s annual oil production Spent $1.6 billion on California in 2011 and is operating 30 rigs– IPs of 300-400+  Predominately steamflood operations in heavy oil reservoirs (Kern River, Midway-Sunset, Lost Now producing approx. 139,000 boepd from Hills, Cymric, Coalinga, San Ardo) Monterey and equivalent Shales Other Players in the Santa Maria Basin 31
  32. 32. History of Monterey Shale 1895: 1st Monterey production in state at t 1 Midway Sunset field 1901: Union discovers Monterey Fractured play at Orcutt Field, several more Monterey t 2 fields developed in Santa Maria Basin from 1901 - 1942 t 4 t 5 1970’s-1990’s: Majors discover large Offshore Monterey Fractured fields-Hondo, Pt. Arguello, t 6 t 3 Pt. Pedernales, Sacate, Pescado, S. Ellwood fields t 1t2 1980’s:Shell/Chevron/Mobil develop t 4 Monterey Diatomite with vertical frac’d wells at Belridge and Lost Hills fields 1990’s: EOG develops diagenetic fractured t 5 Monterey at Rose and N. Shafter fields t 3 7 1998: Oxy begins development of Monterey t 6 matrix at Elk Hills field 2005-11: Oxy explores and develops 7 7 Monterey equivalent formations in Ventura and Los Angeles Basins 32
  33. 33. Monterey Play Types UE’s Initial Monterey Prospects are Naturally Fractured, Conventional Structures Cat Canyon-Gato Ridge South Belridge 147 MMBO Zaca Extension 540 MMBO 21 MMBO Cuyama Elk Hills North Shafter 230 MMBO 17 MMBO Pt. Pedernales Hondo Orcutt Asphaltea 86 MMBO 90 MMBO 427 MMBO 209 MMBO Closures 103 MMBO Monterey Formation San Andreas Fault OFFSHORE-ONSHORE MONTEREY OUTBOUND BASINS ONSHORE SAN JOAQUIN INBOUND BASIN Fracture Dominated Matrix Dominated 135 Miles Fracture Dominated • Outward basins – Structural traps – Hondo, Pt. Pedernales, Orcutt, Cat Canyon, Asphaltea – cleaner shales • Inward basins – Diagenetic traps – Rose, North Shafter Matrix Dominated: Mostly Diatomite – Belridge, Lost Hills, Elk Hills, Cymric, McKittrick Dual Porosity: Matrix, micro-fractures and fractures – S. Ellwood, Midway-Sunset 33
  34. 34. US Shale Oil Comparison Formation Gross Matrix Matrix Total Organic Play Depth (ft) Thickness (ft) Porosity (%) Permeability (md) Content (%) Bakken 7,000-11,000 20-150 3-12 0.005-0.2 2-18High Profile US Oil-Prone Eagle Ford 8,0000-14,000 75-300 3-15 <0.0001-0.003 4.7 Shale Plays Niobrara 2,000-8,000 >150 4-8 na 5 Monterey (SMV) 3,500-10,000 500-3,500 5-30 0.0001-2 4-5 California Monterey(SJV) 5,000-13,000 500-5,000 15-30 0.0001-2 0.1-4Resource Shale Plays Tumey 3,000-19,000 200-700 5-10 0.001 0.9-3.2 Kreyenhagen 3,000-19,000 400-2,400 5-10 <0.0001-1 4-12 Moreno (Gas) 4,000-14,000 100-11,000 na na 0.5-4 Nevada Chainman/Pilot > 8,200 400-2,400 5-10 Fracture Enhanced 1.5-11.7Emerging Shale Plays Paleozoic >8,200-15,000 2,000-3,000 Fracture Enhanced Fracture Enhanced 4.4-25 Key Attributes of Commercial Resource Plays TOC in excess of 1% T-MAX of 450⁰F Enhanced Permeability from Interbedded Sand/Carbonates or Natural Fractures 34
  35. 35. Local Pricesbased on NYMEX Futures StripNYMEX Futures Strip Price as of May 31, 2012 Crude Oil Prices Natural Gas Prices Current Current Local Gas WTI @ SMV Local Gas Differential Differential NYMEX Price Year Cushing Crude Oil Price MWSS (1) SMV (2) Henry Hub Differential Oklahoma Forecast vs WTI vs MWSS $US/bbl $US/bbl $US/bbl $US/bbl $US/mmbtu % of HH Nymex $US/mmbtu 2012 $94.14 $8.82 ($4.36) $98.60 $2.50 104% $2.60 2013 $84.90 $8.82 ($4.36) $89.36 $3.37 104% $3.50 2014 $84.60 $8.82 ($4.36) $89.06 $3.39 104% $3.53 2015 $84.66 $8.82 ($4.36) $89.12 $4.30 104% $4.47 2016 $84.86 $8.82 ($4.36) $89.32 $4.46 104% $4.64 2017 $85.19 $8.82 ($4.36) $89.65 $4.62 104% $4.80 2018 $85.64 $8.82 ($4.36) $90.10 $4.81 104% $5.00 2019 $86.02 $8.82 ($4.36) $90.48 $5.03 104% $5.23 2020 $86.44 $8.82 ($4.36) $90.90 $5.26 104% $5.47 2021+ $86.44 $8.82 ($4.36) $90.90 $5.26 104% $5.47 1. MWSS is an abbreviation for Midway Sunset, the benchmark for California heavy oil at 13˚ API 35 2. SMV is an abbreviation for Santa Maria Valley crude oil at 15˚ API

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