2014 – II  

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Oil and Gas Drilling Joint Venture

This information below contains the following:

• Investment objective
• Economics
• Tax considerations
• Prospect descriptions
• Track record

Moderate risk, multi-well drilling investment assembled to provide investors with:

• 5 – 8 diversified oil and gas prospects
• Preservation of investment capital
• Significant 2014 tax benefits
• Long-term, partially sheltered cash flow
• >3:1 returns over the projected 15 – 20 years producing life

Western Oil and Gas JV works with four E & P companies, with whom we have over 50 years of combined experience.  Each of these driller/operators is a well established entity fully vetted by Western Oil and Gas on a continual basis.  Our existing portfolio of over 500 operating wells attests strongly of our drillers’ integrity and the security of our investors.

Our company believes that direct working interest ownership of producing energy reserves is an excellent investment strategy for today and the future, and should be a part of any sound diversified portfolio.

With our economy strong, energy consumption rising, and diminishing use of coal, the future of domestic oil and gas is strong, with price projections steady, or rising.

Prospect Desciptions

We have over 10 prospects on the drilling schedule that will keep us actively drilling wells into 2015. The wells are slated to be drilled in the formations listed below. The schedule of wells includes the following:

Type I – Low Risk Wells

1. Oklahoma: Marchand/Culp Melon Formation – Vertical Anadarko Basin wells, Caddo/Grady County

These oil wells will be drilled to approximately 10,000′ vertically through highly proven formations. Adjacent wells producing 50 to 80 BOPD with trace amounts of gas. Precise perforations and fracs indicated by open hole logs allow us the ability to maximize production from the formation and produce expected returns of >3:1 over a projected production life of 15-20 years.

2. Texas: Multiple Target Formations – Vertical Permian Basin wells, Sterling, Howard and Various Counties

The Permian Basin is one of the top 3 producing oil fields in the US. These 9,400’ vertical oil wells are step out wells surrounded by over 50 producing wells. These wells will target producing formations, which logs have indicated are present in a large percentage of recently drilled wells, adding proof that we are in the heart of the Permian Basin. We anticipate returns of >3:1 of the life of the wells, 15 – 20 years.

Type II – Moderate Risk Wells

1. Oklahoma: Tonkawa/Cleveland – Culp/Medrano Formation – Horizontal wells, Caddo/Grady County

These wells will be drilled 12,500 – 14,000′ horizontally through proven oil-bearing formations. Precise multi-stage fracs allow us the ability to maximize production from the formation and produce expected returns of >4:1 over a projected economic life of 15-20 years.

2. Oklahoma: Arbuckle Formation – Vertical Frederick Area Oil Play, Tillman County

These vertical wells will be drilled and completed to 6,500’. The prospect lies in an area adjacent to several multi-million barrel oil fields, in Southwest Oklahoma. Vertical Arbuckle formation wells, is the target for a majority of the drilled wells. Excellent probability exists for at least a Strawn completion with probable primary reserves over 75,000 BO per well. Secondary recovery has been demonstrated as feasible. Four zones, including the Henderson limestone, Canyon limestone, Strawn conglomerate, and the Viola limestone, are potential horizontal drilling candidates.

The above prospects and schedules are subject to change.

Economic Projection

The 2014 – II Joint Venture will drill and complete multiple oil and gas wells, using geological diversification, to enhance economic returns. The prospects to be drilled are Type I or Type II as described below:

Type I – Low Risk

Offsets likely Typical Costs – $1.5mm through $2.4mm
Initial Cash Flow 12-15 months  depending on the well
Projected returns over >3:1  
10,000 – 12,000′ depth  

Type II – Moderate Risk

 Complex projects  
 Moderate risk drilling phase, 100% completion rates  
 Proven Undeveloped Reserves • Typical Costs –
 Initial Cash Flow 12-15 months       Acreage/Geology- $450,000
 Projected returns >3:1, 12 – 18 year well life AFE wells costs – Well Specific
 5,000 – 9,000′ Vertical depth   $3,500,000 – $8,600,000 
 3,000 – 5,000′ Horizontal length Precise Multi Stage Fracs

The 2014 – II Joint Venture will become active when the first well spuds or at year end, ensuring 2014 tax benefits for initial capital invested. The wells will be drilled, in some cases logged and completed over the calendar year 2014/15, and we anticipate 100% of the capital to be invested over the next 18 months. Completion costs for all wells will be billed to investors separately as each well has been drilled and logged. Completion costs (if all wells are completed) are estimated up to 80% of initial equity. All of the completion costs will qualify for tax benefits in the year incurred.

Distributions, from the first of the Joint Venture’s wells, are projected to start within 12-15 months of the program close, and shall be paid monthly.

Investment Tax Benefits

The following general discussions are provided for background information only. This information is not intended to be individual advice. Participants should consult with their personal tax advisor concerning the applicability and their effect on the personal tax situation. Tax laws change from time to time and there can be no guarantee of the interpretation of the tax law–

Tax Advantages of Oil and Gas Drilling

Congressional Incentives – Natural gas and oil development from domestic reserves helps make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Natural gas and oil drilling projects offer many tax advantages. These tax benefits enhance the economics.

Intangible Drilling Costs Tax Deduction – Oil and gas projects are labor intensive, so a significant portion of the expenditure is considered Intangible Drilling Costs (IDC), which is 100% deductible during the first year. For example, a participation of $100,000 could result in approximately $80,000 in tax deductions for IDC even if the well does not start drilling until March 31st of the year following the contribution of capital. The remaining $20,000 of tangible costs may be deducted as depreciation over a seven-year period. (See section 263 of the Tax Code).

Active vs. Passive Income – The Tax reform Act of 1986 introduced into the Tax Code the concepts of “Passive” income and “Active” income.  The Act prohibits the offsetting of losses from Passive activities against income from Active business. The new Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” activity; therefore, deductions can be offset against income from active stock trades, business income, salaries, etc.  (See Section 469(c)(3) of the Tax Code).

Alternative Minimum Tax – Prior to the 1992 Tax Act, working interest participants in oil and gas joint ventures were subject to the Alternative Minimum Tax to the extent that this tax exceeded their regular tax. The recent Tax Act exempted Intangible Drilling Cost as a tax Preference Item. “Alternative Minimum Taxable Income” generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. “Tax preferences items” are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the well thereon.  

Tax-Example

A Joint Venture participant’s potential tax benefits

Each Joint Venture participant’s tax liabilities are different; consult with your personal tax advisor regarding the potential benefits of oil and gas joint venture investments. The below example assumes an individual in a 49% tax bracket. (NYC Taxpayer)

Initial Investment $100,000
Intangible Drilling Costs deduction 80% $80,000
Tax Savings 49% NYC Taxpayer $39,200
Net Investment $60,800
   
Completion Costs first 18 months (Est.) $80,000
Intangible Drilling Costs deduction 80% $64,000
Tax Savings 49% NYC Taxpayer $31,360

Oil and gas revenue qualifies for a depletion allowance, which effectively reduces taxes on distributions by 15 – 20% for the life of the program (15-20 years).

Anticipated distributable income projections of $10,000 in the first year of production, provides return of after tax capital in 4.5 years, and a total program return of >3:1 for the life of the program.