Exploration & Production | Drilling / Well Results | Quarterly / Earnings Reports | First Quarter (1Q) Update

Victory Adds Fourth Well to Permian Lightnin' Project

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Victory Energy Corporation has reported financial and operating results for the three months ended March 31, 2014.

Highlights:

• Q1 2014 revenues increased 108% year-over-year to $194,983
• Successfully completed drilling in two (gross) wells in Q1 2014
• Victory's partnership (Aurora Energy Partners) closed a $25 million credit facility with Texas Capital Bank
• Secured $10 million capital line from Navitus Energy Group -- Victory's partner in Aurora
• Production increased quarter-to-quarter from 36 to 43 BOE/PD. Production as of the end of April was 61 BOE/PD
• After exiting 2013 with $4.2 million in proved reserves, the Company completed two new wells in the first quarter of 2014. The Cotter "6" #2 with an estimated net EUR of 15,000 BOE and the Chapman Ranch "4501" estimated net EUR to be determined
• Upgraded from the OTCQB to the more broker friendly OTCQX. Began trading on OTCQX on May 8, 2014

Kenny Hill, Victory's CEO, commented: "We remain focused on achieving significant rates of return by targeting predictable resource plays in favorable environments. Our newly established strong capital position and experienced management team allow us to identify, secure and exploit development assets like our Lightnin' Property in the Permian Basin. Current trajectory for the Lightnin' prospect is better than a two to one return on capital since the property was acquired two years ago. We anticipate even better returns from our recent acquisition of the Fairway project and others that we are reviewing."

Through its partnership interest in Aurora Energy Partners, the company is able to acquire needed capital when ideal projects, with specific capital return and development profiles become available. This capital focused partnership is now complimented by a $25 million credit facility acquired in February 2014. At March 31, 2014, the Company held a working interest in 23 wells and was aggressively pursuing its first large acquisition.

Operational Updates

Two New Wells Completed; Brought to Production

The company's Permian Basin Lightnin' property, located in Glasscock County, Texas added its fourth well to this 640 acres prospect. The Cotter "6" #2 well commenced production in March 2014. The well has averaged 121 BOEPD during the month of April, adding approximately 18 BOE/PD to net production. Reserves estimates are anticipated to be significantly larger than the three predecessor wells. Prior vertical wells drilled in this field have each averaged estimated ultimate recovery rates of approximately 100,000 Barrels of Oil Equivalent (BOE/PD). The company controls a 20% WI / 15% NRI in this prospect.

The Company's south Texas Chapman Ranch prospect, located in Nueces County, Texas added another successful well to the Company's portfolio. This Chapman Ranch 4501 well spud on December 22, 2013 and reached total depth of 7,800 feet on January 7, 2014. The well was perforated in several sections and was successfully flow tested from the Frio Sands on January 21, 2014 at 68 BOE per day, adding approximately 2.5 BOE/PD to net production. All surface work has now been completed and the well is in production. The company controls a 5% WI / 3.75% NRI in this prospect.

Prior Well Workover Increases Production

In addition, the McCauley "6" #3 well at Lightnin' was completed in Q4 2013. After a series of work-overs, it commenced production in February 2014. The well has average flow of 61 BOE per day through March and 84 BOE per day in the month of April. The company controls a 20% WI / 15% NRI in this prospect.

All production from these wells will be reflected in the company's mid-year reserve report.

Key acquisition in progress

On May 8, 2014 the Company agreed to purchase a 10% non-operating working interest in the Fairway Prospect from a wholly-owned subsidiary of Target Energy Limited for approximately $6 million in cash. The Fairway Prospect, with leases currently covering 4,560 gross acres in the Permian Basin, has nine wells producing 859 BOE per day (64 net to the company) and eight additional development wells scheduled for drilling and completion in 2014. Formation focus is the multi-stack pay Wolfberry and the highly sought after Fusselman. The prospect in located in Glasscock and Howard counties, Texas.

Over 100 additional well locations (40 acres spacing) are available on held acreage. Each Wolfberry well has estimated daily flow rates of 145 BOE (net 10.8), while each Fusselman well has estimated daily flow rates of 205 BOE (net 15.3). Average well costs are $1.8 million to the 100% working interest.

The sale is subject to approval by Target Energy's 2014 Convertible Notes holders and the completion of due diligence and a sale and purchase agreement by both parties. The company anticipates a closing on or before June 5, 2014. 

Outlook

Management's strategy is to grow proved reserves through new drilling and acquisitions, while growing the value of those reserves by focusing on oil and liquids rich gas. The Company leverages both internal capabilities and strategic industry relationships to acquire working interest positions in low-to-moderate risk oil and natural gas prospects.

The 2014 acquisition and development plan is as follows:

1. Develop 12 gross wells on current high-value properties
2. Acquire producing properties with significant development potential in the Midland and Central basins of the Permian Basin of Texas
3. Acquire additional development acreage with multi-year drilling opportunities when located in a proven trend

Financials

Revenues for the three months ended March 31, 2014 increased 108% year-over-year to $194,983. Revenues were up despite a decrease of approximately $39,905 caused by a loss of production from a work-over at the company's McCauley "6" #3 well at the Lightnin' prospect. Total net production was 43 BOE, up 84% from 23.4 BOE in the same period a year ago. The increase in production was primarily due to the development of the Lightnin' prospect. 

Cost of production (LOE) was $61,669 compared to $23,590 a year ago. General and administrative expenses were flat year-over-year at $481,915. Net loss attributable to Victory Energy and net loss per share for the three months ended March 31, 2014 were $435,303 and $0.02 compared to $414,378 and $0.02 in the first quarter of 2013, respectively. The weighted average diluted shares outstanding at March 31, 2014 were 27.6 million shares, unchanged from the same period a year ago.

Victory had approximately $0.2 million of cash and cash equivalents and $3.2 million of total assets at March 31, 2014. Total shareholders' equity was $1.7 million at March 31, 2014. The company cash on hand is a reflection of management's desire to only draw capital from its partner Navitus Energy Group and from the banking credit facility when needed for asset acquisitions or operations. Revenue from hydrocarbon sales are generally reinvested in the company.

On February 24, 2014, Aurora Energy Partners, as borrower, closed a $25 million revolving credit facility with Texas Capital Bank. The credit facility includes a $1.45 million operating base, with the remainder available for acquisitions. The senior facility is secured by all the assets of Aurora Energy Partners, with pricing at prime plus 1%. Total debt outstanding from its credit facility was $868,000. As of March 31, 2014, Aurora was in compliance with all of its financial covenants under this revolving credit facility.