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#1 Posted : Tuesday, February 16, 2016 1:17:22 PM(UTC)

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Hi all,

It hit me the other day how things eventually work out in life, that in the moment something we might consider bad turns out to be for the best in the overall picture. This is not prevalent to me more than with Xun Energy. I shall explain:

Let’s go back to 2012. At this time, oil was reaching all time highs and Xun Energy just acquired the well program in Venango County. March 2013, work commenced on the sites and by June 2014 the first well was drilled and working. At this point in time, Xun Energy was working on two small business loans, each for $5 million, to fund the Venango County project and to purchase the Falls Project.

Then came the oil crash. Prices crashed from around $103 in June 2014 to around $65 in December and kept declining to today’s prices under $30. From reading articles of the industry, the break even price for drilling and production in the United States is around $58 to $60 per barrel. When prices fell below that price, unprofitable wells would cease producing and become temporarily shut in until prices recover to at least break even. Using $58 to $60 as a base, by as early as January 2015, it is possible the Texas Falls Project would have become unprofitable and temporarily shut in. In December 2015, in an update on the Xun Forum, Jerry mentioned that the Rice Well was temporarily shut in due to “the operations becoming uneconomical at the low WTI crude oil prices.”

Now let’s appreciate the two situations, one Xun is currently in and one Xun could have been in. The first is a perfect world situation: let’s say Xun Energy acquired the loans, drilled all the wells on the Venango program and acquired the falls project. Granted, in the short term it would have produced a lot of oil and made the company profitable. That would have lasted all of 6 months. In 6 months, half of operations, the Falls Project, would have gone into temporary shut-in, again just using the average $58 to $60 price for break even, and in one more year the Venango County project would have went into dormancy. At this point, Xun Energy would have $10 million in debt, no operations, way higher operating expenses, and interest accumulating. Xun Energy would have been in the same situation as other small production companies currently. Add to this the proposed tax to all oil produced in the United States at $10/barrel, thereby driving the break even level higher. At this point, an option would be for Xun to try to sell its oil and gas assets. Here is where another problem arises. Xun would currently own assets that they acquired through loans that valued the projects at around $100/barrel. Now, the oil would be worth less than 1/3 of that. If they were able to find a buyer for the properties, they would probably only be able to fetch about 1/3 of the value, leaving 2/3 of each loan value plus interest that would need to be made up in which Xun has no more assets to sell or potentially produce revenues from in the future. Second problem is at the current prices of oil and the wells being uneconomic to produce, I believe no one would buy the assets right away. Looking at it from a businessman’s perspective, if I were going to acquire oil and gas assets, I would want to do so right before the prices go up to minimize the cost of keeping those properties on my balance sheet not producing and incurring expenses. Based on the current oil market, prices might stay this way for some time. I have seen some projections of price recovery as early as the end of the year. So the problem Xun would run into is they need money for the loans, interest, and operating expenses now, but those properties will probably not sell nor produce for some time.

Now let’s look at the current situation: In June 2014, Xun Energy owned Rice Well #15 that was producing oil and cash flow. Amid discussions for the SMB loans and raising funds for the Venango project, the company moved into another aspect of the oil and gas industry—commodities. The business model set up would allow Xun Energy some cash flow from deals acting as an intermediary between buyers, sellers, and financiers. Xun Energy put up minimal capital in terms of setting the ventures up and any other expenses associated with deals. Fast forward to January 2015. At this point, Xun Energy still has one shut in well, minimal operating expenses, and is networking with other companies on setting up deals. Xun Energy’s debt is minimal, operating expenses low, and a small amount of cash flow to pay necessary expenses. Fast Forward to December 2015 and Xun has a temporarily shut in well, with infrastructure put in place to operate in the international commodities arena, and a section 3(a)10 exemption that, once shares are issued and debtors paid, will have 4 other wells waiting to be drilled. Additionally, after seeing the hit both oil and its derivative commodities have taken, Xun Energy is able to broaden is scope of services to include other commodities, such as copper. By making this move, Xun Energy removed its dependency on oil and gas and broadened its horizon to be more open to more markets thereby mitigating risk through diversification.

So comparing the two situations end game, I believe Xun ended up in a better position given where market conditions led. It is funny because while it was disappointing not see the Venango county project and Falls project go through, through no fault or efforts of Xun Energy, it ended up being a good thing in the bigger picture. Had Xun been successful, it could have led to the downfall of the company through the oil market collapsing and leaving the company with large amounts of debt and no revenues. Instead, Xun now stands in a position that they are not reliant on a collapsed industry and do not have the debt, interest payments, or operating expenses associated with an operating oil production company to worry about in these turbulent times. Instead, we have a company with minimal expenses, minimal debt, building itself to compete in a broader international commodity market. Thankfully, we have a CEO that assessed the oil and gas situation and decided to not only move into commodities when he did, but also set up infrastructure and interested parties to move out of the declining oil and gas business. In business, it is all about adapting to the market and thus far, with a combination of experience, foresight and bigger forces at play, Xun ended up in a better situation. Really is a lesson in life in general to let things happen as they may, but be aware and vigilant to accept and embrace where things are naturally headed. Funny how things work out isn’t it?

Hopefully things are going well with the deals in the works and we soon hear of a completed deal. It is going to be interesting and fun to watch how Xun Energy blooms with successful deal(s) and how they embrace the current market situation in terms of oil and gas.

I believe we are in good hands with Xun’s team and look forward to Xun’s future success.

Take care everyone.

All in my Humble Opinion.
thanks 3 users thanked fischerman1940 for this useful post.
Xun Pres on 2/17/2016(UTC), JOECROWE789 on 2/18/2016(UTC), Daddyvlo17 on 2/19/2016(UTC)
#2 Posted : Thursday, February 18, 2016 11:42:26 AM(UTC)

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Well said Fischerman1940,

We all remain very fortuitous that Jerry and the XNRG Executives had the inspiration to shift the direct focus of our company when they did.

They say HindSight is 20/20, but in this case foresight, is 20/5, more Eagle-Like.

A great post saluting the current strategies while optimistic physical commodity trades will successfully materialize.

thanks 3 users thanked JOECROWE789 for this useful post.
fischerman1940 on 2/18/2016(UTC), Daddyvlo17 on 2/19/2016(UTC), Xun Pres on 3/16/2016(UTC)
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