Supplementary Financial Information on Oil and Natural Gas Exploration, Development and Production Activities

12 Months Ended

Dec. 31, 2012

Supplementary Financial Information On Oil And Natural Gas Exploration Development And Production Activities

Supplementary Financial Information on Oil and Natural Gas Exploration, Development and Production Activities (Unaudited)

The following disclosures provide unaudited information required by ASC 932, “Extractive Activities – Oil and Gas” on oil and natural gas producing activities. These disclosures include non-controlling interests in Aurora which is managed and owned 50% by Victory.

Results of operations from oil and natural gas producing activities (Successful Efforts Method)

The Company’s oil and natural gas properties are located within the United States. The Company currently has no operations in foreign jurisdictions. Results of operations from oil and natural gas producing activities are summarized below for the years ended December 31:

	Years Ended December 31,
	2012		2011
Revenues	$	326,384	$	305,180
Costs incurred:
Dry hole costs		54,678		-
Exploration costs		266,514		559,523
Lease operating costs and production taxes		150,780		160,736
Impairment of oil and natural gas reserves		344,353		102,579
Costs incurred of asset retirement obligation		7,002		1,269
Depletion, depreciation and amortization		51,172		82,673
Totals, costs incurred		877,499		906,780
Pre-tax income (loss) from producing activities		(551,115)		(601,600	)
Results of oil and natural gas producing activities (excluding overhead, income taxes, and interest costs)	$	(551,115)	$	(601,600	)

Costs incurred in oil and natural gas property acquisition, exploration and development activities are summarized below for the years ended December 31:

	Years ended December 31,
	2012		2011
Property acquisition and developmental costs:
Development	$	337,841	$	219,700
Undrilled leaseholds		675,058		101,259
Asset retirement obligations		7,002		1,269
Totals costs incurred	$	1,019,901	$	322,228

Oil and natural gas reserves

Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods.

Proved oil and natural gas reserve quantities at December 31, 2012 and 2011 and the related discounted future net cash flows are based on estimates prepared by independent petroleum engineers. The reserves as of December 31, 2012 were derived from reserve estimates prepared by the independent reserve engineer. Such estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission. In 2009 the SEC issued guidance requiring oil and natural gas companies to calculate the value of proved reserves using prices that were calculated as the average price of the first day of the twelve months in the year. This guidance differed from the previous standard of valuing prices according to the end of year prices. The guidance does not require that prior year information be revised for the new method. As a result, this change in methods of pricing should be taken into account while reviewing the comparable information for 2012 and 2011 within this disclosure.

Standardized measure

The Company’s proved oil and natural gas reserves for the years ended December 31, 2012 and December 31, 2011 are shown below:

	Years Ended December 31,
	2012		2011
Natural gas:
Proved developed and undeveloped reserves (mcf):		-		-
Beginning of year		691,100		714,780
Purchase of natural gas properties in place		-		-
Discoveries and extensions		7,900		-
Revisions		41,992		21,002
Production		(61,582)		(44,682)
Proved reserves, at end of year		679,410		691,100

	Years Ended December 31,
	2012		2011
Oil:
Proved developed and undeveloped reserves (bbl):		-		-
Beginning of year		8,040		-
Purchase (sale) of oil producing wells in place		(480)		7,053
Discoveries and extensions		10,880		-
Revisions		7,509		1,559
Production		(1,659)		(572)
Proved reserves, at end of year		24,290		8,040

	Years Ended December 31,
	2012		2011
Future cash inflows	$	5,167,850	$	5,198,500
Future costs:
Production		(1,640,960)		(2,423,560	)
Development		(184,280)		(32,890	)
Future cash flows		3,342,610		2,742,050
10% annual discount for estimated timing of cash flow		(1,597,290)		(1,384,610	)
Standardized measure of discounted cash flow	$	1,745,320	$	1,357,440

Using the SEC adjusted guidelines in place for 2012, the gas and oil prices for this analysis were set at the average price received on the “first-day-of-the-month” for 2012, for appropriate differentials. The “benchmark” prices are $94.71 per barrel and $2.76 per MMBTU. The average quarterly product prices for natural gas revenue for 2011 were $5.73/MCF. The average quarterly product price for oil revenue for 2011 ranged from $87.30 to $95.30 per bbl (barrel).

Future income taxes are based on year-end statutory rates, adjusted for tax basis of oil and natural gas properties and availability of applicable tax assets, such as net operating losses. A discount factor of 10% was used to reflect the timing of future net cash flows.

The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair market value of the Company’s oil and natural gas properties. An estimate of fair value may also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and may require a discount factor more representative of the time value of money and the risks inherent in reserve estimates.

Changes in standardized measure

Included within standardized measure are reserves purchased in place. The purchase of reserves in place includes undeveloped reserves which were acquired at minimal value that have been estimated by independent reserve engineers to be recoverable through existing wells utilizing equipment and operating methods available to the Company and that are expected to be developed in the near term based on an approved plan of development contingent on available capital.

Changes in the standardized measure of future net cash flows relating to proved oil and natural gas reserves for the years ended December 31 is summarized below: 

	2012			2011
Increase (decrease)
Sale of gas and oil, net of operating expenses	$	(175,604	)	$	144,444
Purchase of oil and gas properties in place		-			-
Discoveries, extensions and improved recovery, net of future production and development costs		244,134			-
Accretion of discount		319,350			231,916
Net change in sales prices, net of production costs		-			-
Net increase (decrease)		387,880			376,360
Standardized measure of discounted future cash flows:
Beginning of the year		1,357,440			981,080
Before Income Taxes		1,745,320			1,357,440
Income Taxes		(601,133	)		(461,530	)
End of the year	$	1,144,187		$	895,910