Introduction 

We are an independent oil and gas exploration and production company with production, appraisal, and exploration activities in Poland.  We also have modest oil production, oilfield service activities, and a shale acreage position in the United States.  Our headquarters are in Salt Lake City, Utah, and our Polish operations are headquartered in Warsaw.  

At year-end 2011, independent reserve engineers estimated our worldwide proved oil and gas reserves to be 49.6 billion cubic feet, or Bcf, of natural gas and 0.6 million barrels of oil, or a combined total of 53.5 billion cubic feet of natural gas equivalent, or Bcfe (converting oil to gas at a ratio of one barrel of oil to 6,000 cubic feet of natural gas).  This represents an increase from the 2010 year-end reserves of approximately 9.7 Bcfe, or 22%.  Of this 53.5 Bcfe, 93% was in Poland and 7% was in the United States.  The engineers estimated the PV-10 Value of our proved reserves to be approximately $170 million.

At year-end 2011, independent reserve engineers estimated our worldwide proved plus probable, or P50, oil and gas reserves to be a combined total of 94.5 Bcfe.  The engineers estimated the PV-10 Value of our P50 reserves to be approximately $243 million.

Our 2011 oil and gas production was 4.4 Bcfe (12.0 million cubic feet equivalent per day, or MMcfed), which was up 15% from 2010 production; 4.1 Bcfe (11.1 MMcfed) of our production was in Poland and 0.3 Bcfe (0.9 MMcfed) was in the United States.  All of our production in Poland consisted of natural gas, while all of our United States production consisted of crude oil.

We currently expect that our 2012 production will rise significantly from our 2011 production rates with the achievement of full production at our Kromolice-1, Sroda-4, and Kromolice-2, or KSK, wells and the commencement of production at our Winna Gora well.  As of the beginning of 2012, the Sroda-4 and Kromolice-1 wells were producing at the rate, agreed upon with PGNiG, the operator, of 9.0 MMcfd (4.4 MMcfd net to our 49% interest), bringing our net production in early 2012 to approximately 14.2 MMcfed.  We expect full resolution of a pipeline bottleneck in the KSK area during the second quarter of 2012, following which the Kromolice-2 well is expected to begin producing at a rate of 3.5 MMcfd (1.7 MMcfd net to our 49% interest).  We expect production facilities to be complete, and gas to start flowing, at our Winna Gora well in the third quarter of 2012.  Production from that well is expected to begin at a rate of approximately 3.9 MMcfd (1.9 MMcfd net to our 49% interest).  Thus, even without the benefit of any production from our recent Lisewo-1 well, we expect our 2012 production to significantly exceed our 2011 level.

Substantially all of our growth in reserves and production in recent years has come from our operations in Poland.  We expect this will continue, as most of our technical efforts and capital budget are devoted to these operations in Poland.  We believe that these operations represent the most favorable opportunities for success that are available to us.  With a view to future growth in reserves and production, we now hold 4.6 million gross acres (3.6 million net) in Poland and continually review additional acquisition opportunities.

As of December 31, 2011, we had approximately 52.8 million shares of common stock outstanding, and our market capitalization was approximately $253 million (approximately $310 million as of the date of this filing).  Our shares are listed on the Nasdaq Global Select Market under the symbol "FXEN."  So far during 2012, our average daily trading volume has been approximately 288,000 shares.  Our total assets as of December 31, 2011, were $110.2 million, and our net working capital (working capital less long-term debt) was $9.8 million.  Total debt per thousand cubic feet equivalent, or Mcfe, of proved reserves was $0.75 at year end. 

Corporate Strategy

Poland is a unique international exploration opportunity.  Over the last 50 years or so, Western companies have poured billions of dollars into exploration efforts in the British, Dutch, Norwegian, and German sectors of the offshore and onshore North European Permian Basin (generally the North Sea area).  For the industry, these efforts have resulted in the discovery of trillions of cubic feet of gas and more than a billion barrels of oil. However, until the last few years of the twentieth century, Poland was closed to exploration by foreign oil and gas companies.  To date, the exploration activities conducted in the Polish onshore portion of the Permian Basin are only a fraction of those conducted in the western part of the basin.  Consequently, we believe the Polish Permian Basin is underexplored and underexploited and, therefore, has high potential for discovery of significant amounts of oil and gas relative to the North Sea or other mature oil and gas provinces in the United States and elsewhere.  As an example, the estimated gross proved recoverable reserves per well associated with the eight conventional gas discoveries in our core Fences concession in Poland are 17.3 Bcf.  The average initial gross production rate for these eight wells is estimated to be approximately 5.7 MMcfd of natural gas with a relatively long, flat production profile.  We believe these figures are materially higher than those associated with new discoveries in most mature oil and gas provinces.

Just as important as the reserve and production potential is the fact that Poland is highly dependent upon imported natural gas, which is expensive.  There is an attractive and deep market for gas discoveries and production in-country.  For example, as of the date of this report the price we receive for natural gas at our Roszkow well, is approximately 200% higher than natural gas contracts traded on the New York Mercantile Exchange, sometimes referred to as the Henry Hub price. 

Acting on this combination of facts, we were one of the first independent oil and gas companies to acquire a large land position, to embark on a focused exploration and development program, and as a result, to begin producing hydrocarbons in Poland.  After a number of years of effort in Poland, our exploration efforts are showing significant progress. In fact, our proved oil and gas reserve volumes in Poland have increased at a compound annual growth rate of 34% since 2003.  Our production volume has increased at a compound annual growth rate of 45% from 2005 through 2011.  Though we cannot assert that future results will be similar, this success has encouraged us to continue to focus our efforts in Poland. 

More specifically, we have directed the bulk of our available funds, management, and technical resources to our core "Fences" concession area in Poland.  We expect to continue concentrating much of our capital budget to this area in an effort to lower drilling risk, shorten the time to first production from successful wells, and optimize opportunities for robust revenue growth. 

We currently hold substantial acreage in other areas of Poland that we consider underexplored and underdeveloped and, therefore, subject to greater exploration risk.  With the success that we have achieved from our Fences drilling program, we are now exploring our other exploration acreage, through both targeted seismic data acquisition and drilling of higher risk, higher reward exploration wells, where we believe we have the opportunity to find significant oil and gas reserves.  To the extent that our overall strategy results in substantial revenue growth, we plan to continue to increase our funding of exploration projects over a wide area in Poland.  

KSK Facility 2012

Current Activities and Presence in Poland

We concentrate our exploration efforts in Poland primarily on the Rotliegend sandstones of the Permian Basin.  We have identified a core area consisting of approximately 852,000 gross acres surrounding PGNiG's long-producing Radlin field.  This 390 Bcf Rotliegend gas field was discovered in the 1980s by our joint venture partner, PGNiG, which owns and produces gas from the field (we do not own an interest in this field, but see it as a geologic analog).  We have emphasized improved seismic data acquisition and processing in our exploration efforts surrounding this field, using technology developed by others for Rotliegend exploration in the Southern North Sea.

Since 2000, we have made commercially successful discoveries in eight of the 11 wells we have drilled on Rotliegend structural trap targets in our core Fences concession.  In the aggregate, these eight discoveries found gross estimated proved reserves of approximately 139 Bcf of gas.  We have acquired three-dimensional, or 3-D, seismic data over several hundred square kilometers in the Fences concession and plan to acquire 3-D seismic data over more of that concession.  Using the data acquired to date, we have identified a number of possible additional structural traps.  We believe the 3-D seismic data gives us better definition of the targets and might reduce our drilling risk.  However, this is still exploration in an underexplored area.  Thus, we expect to drill some wells that do not establish production or reserves, just as we have done in the past.  Nonetheless, the extensive production history, well data, and seismic data available for the Fences area have contributed to our success rate there.  We plan to continue to direct a significant portion of our available funds to carry out a multiyear exploration, appraisal, and development well drilling program in the Fences concession.  These operations are the focus of our strategy to increase production and reserves in our core area.

While maintaining our focus on the Rotliegend structural trap exploration model, we are also working to determine the potential for commercial gas production from tight Rotliegend sandstone in the north of our Fences concession using "unconventional" fracture technology.  The Plawce horst was discovered in the 1970s and 1980s; test wells found large gas columns in tight Rotliegend reservoirs.  Modern technology now provides better tools to exploit such resources, which have significant potential.  In 2011, we drilled a vertical well in the Plawce horst, encountering approximately 480 meters of relatively tight Rotliegend sandstone.  Log, core, and test data show gas saturation with no free water.  We plan to fracture three separate intervals in the well and test the potential for commercial production in the first half of 2012.

We have also identified a number of prospects outside the Fences concession, in our other concessions in Poland.  These prospects are generally higher risk, but drilling success may open new productive areas with significant resources.  In 2011, we drilled the Machnatka-2 well, later plugged and abandoned, in our Warsaw South block to test hydrocarbon potential in the Zechstein and Carboniferous horizons.  We did encounter a significant amount of good reservoir rock along with good background gas, so we are continuing our exploration efforts in this block.  Also in 2011, we started drilling the Kutno-2 exploration well in our Kutno concession in central Poland.  The Kutno-2 well targets a very large Rotliegend two-dimensional, or 2-D seismic, defined structure at a depth of approximately 6,500 meters and is anticipated to penetrate this formation later this year.  We reduced our financial exposure in both the Warsaw South and Kutno concessions in 2011 by farming out a portion of our 100% interest in return for a partial carry on the named wells.

In 2012, we plan to drill more than one well in one of our Warsaw South, Northwest, Edge, and Block 246 concessions.  These wells will test various horizons for hydrocarbon potential as part of a multiyear program of exploration.  We have not entered into new farmout arrangements, but do not rule out the possibility of doing so, either before or after initial drilling in order to diversify risk and benefit from the capital and technical resources of others.

We have accumulated a large land position in known productive regions or geologic trends and in selected "rank wildcat" areas in Poland located well away from previous drilling where exploration involves a high degree of risk.  We have assembled a sophisticated technical team experienced with using modern exploration tools and generated a number of attractive oil and gas prospects.  To the extent that our overall strategy results in substantial revenue growth, we plan to direct more of our own funds toward exploration of these early-stage exploration licenses.

Most of our current Polish operations are conducted in partnership with PGNiG.  PGNiG, a fully integrated oil and gas company that is largely owned by the Treasury of the Republic of Poland, is Poland's principal domestic oil and gas exploration, production, transportation, and distribution entity.  Under our existing agreements, PGNiG has provided us with access to exploration opportunities, previously collected exploration data, and technical and operational support.  We also use geophysical and drilling services provided by PGNiG, and we sell almost all of our gas production to PGNiG.

 Key Personnel for Poland 

Jerzy Maciolek is a director of the Company and heads our exploration team as Vice President of International Exploration.  He joined the Company in 1995 specifically to lead us into Poland, where he had identified the exploration opportunity that today is our core asset.  Before joining us, Mr. Maciolek had over 25 years of experience as a geophysicist with PGNiG and Gulf Oil Research and as an independent consultant.  He received an M.S. in exploration geophysics from the Mining and Metallurgical Academy in Krakow, Poland. 

Our Country Manager in Poland is Zbigniew Tatys, the former General Director of PGNiG's Upstream Exploration and Production Division.  During his 20-year career with PGNiG, he rose through the ranks as a production engineer and was serving as Vice Chairman of PGNiG at the time of his retirement.  Mr. Tatys has unique qualifications to lead us through our transition from a pure exploration company to a natural gas and oil producer in Poland.

Our chief technical advisor is Richard Hardman, CBE.  He also serves on our board of directors.  Mr. Hardman has built a career in international exploration over the past 50 years in the upstream oil and gas industry as a geologist in Libya, Kuwait, Colombia, and Norway.  In the United Kingdom, his career encompasses almost the whole of the exploration history of the North Sea - 1969 to the present.  With Amerada Hess from 1983 to 2002 as Exploration Director and later as Vice President of Exploration, he was responsible for key Amerada Hess North Sea and international discoveries, including the Valhall, Scott, and South Arne fields.  Mr. Hardman was made Commander of the British Empire in the New Year Honours, 1998, and has served as the Chairman of the Petroleum Society of Great Britain, President of the Geological Society of London, and President of the European Region of American Association of Petroleum Geologists Europe. 

Polish Exploration Rights

As of December 31, 2011, we held oil and gas exploration rights in Poland in a number of separately designated project areas encompassing approximately 4.6 million gross acres.  We are currently the operator in all areas, except our 852,000 gross-acre core Fences project area, in which we hold a 49% interest in approximately 807,000 acres and a 24.5% interest in the remaining 45,000 acres.  PGNiG is the operator in the Fences project area.  We hold interests in approximately 3.6 million net acres throughout Poland.   

As we build revenues in our core area and further explore and evaluate our acreage in Poland, we expect to increase the operational and financial efforts we expend outside our core area.  As we do so, we may add new concessions that we believe have high potential and relinquish acreage that we believe has lower potential.

Exploratory Activities in Poland

Our ongoing activities in Poland are conducted in several project areas: Fences, Blocks 287, 246 and 229 near the Fences concession, Warsaw South, Kutno, Northwest, and Edge.  Our drilling activities have been focused primarily on the core Fences area.  We have focused on this core area because substantial gas reserves have already been discovered and developed by PGNiG.  We and PGNiG have discovered proved gas reserves of over 139 Bcf gross (60 Bcf net to our interest) in eight commercial wells in the Fences area as of the date of this report.  We believe it is likely there remains substantial additional natural gas in the same geologic horizon in this area.   

We plan to continue concentrating the majority of our efforts and resources on the Fences concession, but we are also increasing our efforts in our other exploration blocks in Poland. In the Fences during 2011, we completed the Lisewo-1 well as a commercial well and drilled the Plawce-2 well in a tight sand area.  Plawce-2 will be fracked and tested in 2012. In our other concessions we drilled the Machnatka-2 well, a noncommercial Zechstein/Carboniferous test, in the Warsaw South concession, and started drilling the Kutno-2 well, a deep Rotliegend test, in the Kutno concession.  We anticipate the Kutno-2 well will reach its target depth in the third quarter of 2012. Looking forward, in 2012 we plan to drill four wells in the Fences concession and two to four wells in our other exploration concessions. Click here.

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Our U.S. Activities and Presence

Unlike our position in Poland, our U.S. operations have not been a focus of our exploration efforts until recently.  Our U.S. operations provide a modest amount of cash flow and are not capital intensive.  They consist mostly of shallow, oil-producing wells in the Southwest Cut Bank Sand Unit, or SWCBSU, of Montana.  As of December 31, 2011, our U.S. reserves (all of which were proved reserves) were estimated at 639,000 barrels of crude oil with a PV-10 Value of approximately $12.3 million.  At year-end 2011, U.S. reserves were approximately 7% of total proved reserves on a gas equivalent basis.  Our oil wells produce approximately 155 barrels of oil per day, net to our interest.  From our field office in Montana, we also provide oilfield services, which provided approximately $5.6 million in revenue during 2011.  We produce oil from approximately 10,732 gross (10,418 net) acres in Montana and 400 gross (128 net) acres in Nevada.

Alberta Bakken and Three Forks Shale Exploration

Recently, U.S. and Canadian oil and gas operators have been drilling for oil in the Bakken and Three Forks shale formations in the Williston Basin in North Dakota and Montana and in the Alberta Basin in Montana and Canada.  The Bakken (also known in Canada as the Exshaw) and related formations are the focus of a growing trend of testing oil potential with multistage fracturing of horizontal wells.  Newfield Exploration Co. (NFX) and Rosetta Resources, Inc. (ROSE), are two of the more active companies among a number operating near SWCBSU in northern Montana.  In 2011, we initiated our own exploration effort.

In 2011, we entered into a joint venture with two other companies, American Eagle Energy, Inc., and Big Sky Operating LLC, in which we pooled our approximately 10,000 net acres in our SWCBSU with their approximately 65,000 net acres, the Americana leases, along with a farmout agreement that provides the group with an ability to earn an interest in an additional 7,000 acres covered by the Somont leases. Under the joint venture, the three parties have equal interests only in the Alberta Bakken formation group and share exploration costs equally.  We maintain our original interest only in the mineral rights above the Alberta Bakken and related formations in the SWCBSU, from which we are currently producing oil.  During 2011, we drilled three vertical wells on joint venture acreage to obtain log and core data. We also drilled a 3,600-foot lateral from one of these three wells, the Anderson 14-29, and carried out a multistage fracture.  We are currently testing oil potential in the Anderson 14-29 well.  

Subsequent to year-end 2011, we entered into a new joint venture, wherein the existing partners contributed half of their interest in all formations above the base of the Alberta Bakken group in only the Americana leases in exchange for a like interest in the Americana leases in all formations below the Alberta Bakken group, including the Nisku and others that have regionally demonstrated the potential for oil production.  We now have a one-third working interest in all formations below the Cut Bank in our SWCBSU, the ability to earn a one-third interest in all formations below the top of the Alberta Bakken group in the Somont acreage, and a one-sixth working interest in the Americana acreage in all formations below the surface.  We currently plan to drill two more vertical wells and drill a lateral from one of the vertical wells drilled in 2011.  We may continue drilling wells throughout 2012 as part of the overall program of evaluating the Bakken group in our acreage to determine whether all or any part of our acreage might support commercial oil production from this horizon.

We, either directly or through our joint venture partners, contracted with industry-standard third-party specialists for both the horizontal drilling and completion phases of the well we hydraulically fractured.  To date, there have not been any environmental or safety incidents, citations, or suits related to the hydraulic fracturing operations used as part of the completion of the Anderson 14-29 well.