2. October 2015
Charles 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.
2
3. October 2015
Charles Russell
KyNGO Strategy
1. Increase delivered gas volume through well maintenance
2. Connect to other regional pipelines north and northeast of
Bowling Green Kentucky
3
4. October 2015
Charles Russell
Current Oil and Gas Production & Daily Revenue
Natural Gas 500 MCF per day 182,500 mcf/year
Oil 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
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
mcf / mo
line
flush
4
6. October 2015
Charles Russell
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
6
7. October 2015
Charles Russell
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
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8. October 2015
Charles Russell
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
8
9. October 2015
Charles Russell
Investment Project
Shrewsbury 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
9
10. 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
10
11. October 2015
Charles Russell
Income after Shrewsbury expansion
12 month forward Looking
11
12 Month Forecast
(unaudited)
$
Annualized Income
Without
Shrewsbury
Shrewsbury
Development total
Gross 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%
12. October 2015
Charles Russell
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
12
13. October 2015
Charles Russell
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
13
14. October 2015
Charles Russell
Net Asset Value and Balance Sheet
14
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
15. October 2015
Charles Russell
KyNGO Property, Plant, & Equip. Valuation
15
• Valuation methods
• Inventory buildup
• 3rd party assessment
• Gas flow
Item
#
Inventory
Qty. Value per unit Description Total Value
1 46 $4,000 Pump Jack $184,000
2 24 $3,900 Tank $93,600
3 5 $800 Water Seperator $4,000
4 45,000 $2 Downhole rods $90,000
5 45,000 $4 Downhole Tubing $180,000
6 46 $1,000 Downhole pumps $46,000
7 46 $1,000 Verticle well bores $46,000
8 51 $5,100 Gas Meters $260,100
9 1 $150,000 Alerius meter run and gas chromatograph $150,000
10 2 $50,000 spare gas chromatographs $100,000
11 1 $75,000 Portable meter/house $75,000
12 1 $1,500,000 Liquids plant on power street $1,500,000
13 97 $100,000 Miles of Natural gas pipeline $9,700,000
14 97 $5,280 Miles of natural gas ROW $512,160
15 5,000 $100 Acres of mineral rights held by production $500,000
16 1 $750,000 Horizontal Well Bore $750,000
17 1 $80,000 Compressor/treatment facility $80,000
18 1 $52,000 Misc Shop equipment $52,000
19 1 $20,000 LAND Compressor pad - 5 acres $20,000
20 1 $350,000 LAND Power street site/building $350,000
21 1 $50,000 LAND Miller Farm 24.73 acres $50,000
22 1 $1,400,000 LAND CB Huff farm 468.77 acres $1,400,000
23 1 $750,000 LAND Pipe tape + 1 acre into TGP $750,000
24 1 $5,000 Nissan Pick up truck $5,000
25 1 $6,500 Dodge Pick up truck $6,500
26 1 $4,500 Chevrolet Service Truck $4,500
27 1 $38,000 16' trailer with pipe tamer $38,000
Estimated Replacement Value: $16,946,860
16. October 2015
Charles Russell
KyNGO 3rd party valuation
16
Short list of assets
KyNGO
Item Amount Estimated Value Each Value Total Replacement Cost
Producing 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 taps
2 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 above
3 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 Cost
Pipeline 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
18. October 2015
Charles Russell
KyNGO 6” Pipeline
3
4
5
6
7
8
1 – Compressor tie-in to Real Alloy
2 – Barren River Partners
3 – Hayes
4 – Eadens
5 – Keowan Booster Pad
Runner Well
6 – Raymer
7 – Phelps
8 – Power Street / Texas Gas Transmission valve
Real Alloy
Compressor
12”line22miles
1
6”
2
Not shown,
70 miles of 3” feeder
18
6”
6” 6”
19. October 2015
Charles Russell
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
19
20. October 2015
Charles Russell
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
20
• 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
21. October 2015
Charles Russell
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
21
23. October 2015
Charles Russell
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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25. October 2015
Charles Russell
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
25
26. October 2015
Charles Russell
Recommended organization chart
Board of
Directors
Chief
Operations
Officer
Well head
operations
Pipeline
development
Chief Financial
Officer
Accounting &
audit
Commercial
operations
26
27. October 2015
Charles Russell
• 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 Project
Fracturing horizontal well
27
28. • 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
28
30. October 2015
Charles Russell
Investment Project
Natural Gas Power Generation
• electric generation from natural gas supply
• Partner with Kohler, GE or others
30
No coupons, pay no interest, and mature in 5 years.
$10 per foot
New well 1500’ down, then 90 degree turn then go anther 1000’
In short, swabbing is a form of “well control” that releases bottom hole pressure in order to “kick” the well off. When wells are first drilled, they are usually fractured by a pressurized liquid to help open up “production zones” where oil or gas can travel to. The next step is where the actual swabbing takes place.
