Company Overview
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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. At year-end 2010, independent reserve engineers estimated our worldwide proved oil and gas reserves to be 40.0 billion cubic feet, or Bcf, of natural gas and 0.6 million barrels of oil, or a combined total of 43.8 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). Of this 43.8 Bcfe, 91% was in Poland and 9% was in the United States. The engineers estimated the PV-10 Value of our proved reserves to be approximately $127.3 million. At year-end 2010, independent reserve engineers estimated our worldwide proved plus probable, or P50, oil and gas reserves to be a combined total of 87.1 Bcfe. The engineers estimated the PV-10 Value of our P50 reserves to be approximately $206.4 million. Subsequent to year-end 2010, we had a significant exploration discovery, the Lisewo-1 well in Poland. Independent engineers estimate the proved and P50 reserves for this well to be approximately 12.7 and 17.7 Bcf of gas, respectively, net to our interest. The incremental PV-10 Value of these proved and P50 reserves is estimated to be $16.0 and $19.7 million, respectively. This discovery, in combination with our 2010 year-end proved reserves, would equate to 56.5 Bcfe of proved reserves, with an estimated PV-10 Value of $143.3 million. Our year-end P50 reserves would then equate to 104.8 Bcfe, with an estimated PV-10 Value of $226.1 million. Our 2010 oil and gas production was 3.8 Bcfe (10.5 million cubic feet equivalent per day, or MMcfed), which was up 69% from 2009 production; 3.5 Bcfe (9.5 MMcfed) of our production was in Poland and 0.3 Bcfe (1.0 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 2011 production will rise significantly from our 2010 production rates. One of our wells in Poland started producing just a few days before the end of 2010, and we have two other wells in Poland scheduled to begin production during the second quarter of 2011. We expect these three new wells, with anticipated aggregate initial production of approximately 14 million cubic feet per day, or MMcfd, of gas (6.9 MMcfd net to us), will add to our 2010 base levels of production of 9.5 MMcfd of gas. Thus, even without the benefit of any production from a fourth well that is waiting on production facilities or from our recent Lisewo-1 well or other possible discoveries, we expect our 2011 production to significantly exceed our 2010 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 (4.0 million net) in Poland and continually review additional acquisition opportunities. As of December 31, 2010, we had approximately 45 million shares of common stock outstanding, and our market capitalization was approximately $280 million. Our shares are listed on the Nasdaq Global Market under the symbol "FXEN." So far during 2011, our average daily trading volume has been approximately 500,000 shares. Our total assets as of December 31, 2010, were $66.6 million, and our net debt (long-term debt less working capital) was $16.8 million. Net debt per thousand cubic feet equivalent, or Mcfe, of proved reserves was $0.38 at year end, or $0.30 including the 12.7 Bcf of gas reserves associated with the subsequent Lisewo-1 discovery. Corporate Strategy Poland is a unique international exploration opportunity. Over the last 40 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, 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 Permian Basin mature oil and gas provinces in the United States and elsewhere. As an example, the gross proved reserves per well associated with our eight discoveries in our core Fences concession in Poland have been 17.1 Bcf. The average initial production rate for these eight wells is estimated to be approximately 6.0 MMcfd of natural gas. 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. As of the date of this report, the price we receive for natural gas at our Roszkow well, for example, is approximately 69% 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 several 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 22% since 2003. Our production volume has increased at a compound annual growth rate of 52% from 2005 through 2010. 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. Over the last several years, we have drilled 11 wells in the Fences concession targeting Rotliegend structural traps, eight of which have been commercial discoveries. With the success that we have achieved from our Fences drilling program, we now plan to explore selected parts of our other exploration acreage, namely the Warsaw South and Kutno concessions, through both targeted seismic data acquisition and drilling of several higher risk, higher reward exploration wells, where we believe we have the opportunity to find significant oil and gas reserves. To reduce our financial exposure to these higher risk exploration wells, we have successfully executed several farm-out agreements, whereby we may reduce our interest in the concessions in return for a partial carry on drilling costs. We currently hold substantial acreage in other areas of Poland that we consider underexplored and underdeveloped and, therefore, subject to greater exploration risk. We plan to carry out preliminary exploration work on this acreage and then plan to continue our strategy of utilizing industry farm-outs to finance the bulk of early-stage drilling. 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 wider area in Poland
Current Activities and Assets in Poland We concentrate our exploration efforts in Poland primarily on the Rotliegend sandstones of the Permian Basin. We were attracted to the Rotliegend sandstones in Poland by two observations:
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 the aggregate, these eight discoveries, which include the early 2011 Lisewo-1 discovery, found gross estimated proved reserves of approximately 137 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 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 multi-year exploration, appraisal, and development 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 carrying out work to determine the tight gas potential in the Plawce structure located in the north of our Fences concession. The Plawce horst was discovered in the 1970s and 1980s; wells found large gas columns in tight Rotliegend reservoirs. Modern technology now allows the exploitation of these resources, which have significant potential. We plan to drill an appraisal well on the Plawce structure in 2011. We have identified several drill-ready prospects outside the Fences concession, in our Warsaw South and Kutno concessions. These wells are higher risk and cost more than our Fences wells, but they are targeting greater resources. In order to reduce our financial exposure to these high risk wells, we have recently executed farm-out agreements with industry participants. These agreements may reduce our interest on these licenses in return for a partial carry on future exploration wells. We plan to begin drilling on the Warsaw South and Kutno concessions in 2011. Outside the abovementioned licenses, we have accumulated a large land position in known productive regions or geologic trends and in selected "rank wildcat" areas in Poland. We have assembled a sophisticated technical team experienced with using modern exploration tools and generated a number of attractive oil and gas prospects. We will continue our strategy of inviting industry participation in the early-stage drilling of these prospects to reduce our financial exposure in each well. 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 is a fully integrated oil and gas company that is largely owned by the Treasury of the Republic of Poland. PGNiG 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 most of our gas production to PGNiG. We sell almost all of our gas production in Poland to PGNiG. Key Personnel for 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. 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. Mr. Maciolek has 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 U.S. Presence
Unlike our position in Poland, our U.S. operation has not been the focus of our exploration efforts. 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 Cut Bank oil field of Montana. As of December 31, 2010, 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 $9.7 million. At year-end 2010, U.S. reserves were approximately 9% of total proved reserves on a gas equivalent basis. Our oil wells produce approximately 168 barrels of oil per day, net to our interest. From our field office in Montana, we also provide oilfield services, which provided approximately $2.1 million in revenue during 2010. Recently, U.S. and Canadian oil and gas operators have been drilling for oil in the Bakken and Three Forks formations in the Williston Basin in Montana and in Alberta, 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 our Cut Bank field in northern Montana. We plan to reenter and deepen several of our existing Cut Bank field wells to take core samples from the Bakken and related formations for laboratory testing during the summer of 2011 and may drill one or more wells in the second half of this year, subject to positive laboratory results. We are also discussing the Bakken play with other companies in the area with a view to possibly investigating the Bakken potential over a broader area. Exploration, Development, and Production Activities Polish Exploration Rights As of December 31, 2010, 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 4.0 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, Block 287, Warsaw South, Kutno, Northwest, Edge, Block 229, and Block 246. 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 137 Bcf gross (59 Bcf net to our interest) in eight commercial wells in the Fences area as of the date of this report. We have concluded that there is likely to be substantial additional natural gas in the same geologic horizon in this area. We are selling gas from wells located in the Fences area and Block 287. We plan to begin drilling on the Warsaw South and Kutno concessions in 2011. These wells will be targeting greater resources, but will be higher risk than our Fences wells. To help mitigate the financial risk from drilling these wells, we have executed farm-out agreements with industry participants. We are developing longer-term exploration prospects in the remaining project areas. Click here.
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