BEFORE THE CORPORATION COMMISSION OF THE STATE OF FULCRUM EXPLORATION, L.L.C. POOLING REPORT OF THE ADMINISTRATIVE LAW JUDGE

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF O1 L E NOV APPLICANT: RELIEF SOUGHT: FULCRUM EXPLORATION, L.L.C. POOLING OURi LLLI(% ) Utt CORPORATION COw.41s OF OKLAHOMA CAUSE CD NO. CKC LEGAL DESCRIPTION: NW/4 SECTION 14, TOWNSHIP 1 NORTH, RANGE 20 WEST, JACKSON COUNTY, OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE This Cause came on for hearing before Michael Norris, Administrative Law Judge for the Corporation Commission of the State of Oklahoma, in the Commission's Courtroom, Jim Thorpe Building, Oklahoma City, Oklahoma, pursuant to notice given as required by law and the rules of the Commission for the purpose of taking testimony and reporting to the Commission. CASE SUMMARY: 1. Fulcrum Exploration, LLC (Fulcrum) filed a pooling application for lands as captioned. The Henry Family (Henry) appeared as protestant. The focal issue in this cause is fair market value. 2. Fulcrum established values based upon a survey of the surrounding area. Fulcrum is the only party that is leasing in the area and is the only one that has leased in the 9 section area since They have acquired 5 or 6 leases since the date of their proposal letter. The most recent lease was acquired August 9, All the leases were acquired at the values established by Fulcrum for this area. These values were based on their prior leases within the last 12 months. The Henry Family disputed the values and attempted to demonstrate alternative values in other parts of Jackson County and farther south into Texas. RECOMMENDATIONS: 1. That the application of Fulcrum be approved. 2. That the values established by fulcrum of $125 an acre and a 1/8 royalty and $100 an acre and a 3/16 total royalty be accepted as the fair market values. HEARING DATE(S): SEPTEMBER 11, 2013

2 APPEARANCES: John E. Lee, III, attorney, appeared on behalf of applicant, Fulcrum Exploration, L.L.C. Clayton Henry, Texas licensed attorney, appeared on behalf of the Henry Family FINDINGS AND SUMMARY OF EVIDENCE 1. The following numbered exhibits were accepted into evidence: 1. AFE dated August 22, Fulcrum Exploration well proposal letter dated June 10, Certified mail receipt addressed to Robert H. Henry 4. Certified mail receipt addressed to J. A. Henry Estate 2. Initially the application was amended to show the correct spacing order number dated July 30, The applicant called Mr. Gary Zellner, landman as its first witness. His qualifications were accepted without objection. Mr. Zeilner's testimony established the evidentiary requirements for this pooling application. The single issue in this cause is the fair market value. 4. Mr. Zellner is familiar with Fulcrum's activities in the area and this application. Fulcrum negotiated with Mr. Henry and wasn't able to reach an agreement. 5. Fulcrum sent proposal letters and offered alternatives to participation in the well in the way of a lease bonus and royalty. The proposal letter was sent June 10, Since that date Fulcrum has acquired 5 or 6 additional leases the most recent lease was acquired August 9, The earliest lease was acquired in In these proposals Fulcrum offered $125 an acre with a 1/8 royalty and $ 100 an acre and a 3/ 16 royalty. Fulcrum recommends that these two values as the established fair market value. The most recent lease in August was acquired for $ 100 and 3/ Mr. Zellner testified that they determined that Mr. Robert Henry is an heir in the 7 1/2 total acre interest. He believes there are four heirs besides Mr. Robert Henry to that 7 1/2 acres. This 7 1/2 acres was not included in the J. A. Henry estate in Jackson County. Mr. Zellner testified that Robert H Henry, individually, Francis Marie Booth, John A. Henry, IV, Ann Marie Henry and Nina Hensley Henry are the apparent heirs to this estate. The remainder of Mr. Zeilner's direct examination reiterated the criteria for this pooling application. 7. On cross-examination Mr. Zellner stated that in September, 2011 he had a one hour conversation with Mr. Henry and in December, 2011 he had another conversation with him. He also believes that they had a conversation the day that Mr. Henry filed his protest. He testified that he did not discuss the Page 2

3 development of section 14 during those conversations. The only conversation with Mr. Henry concerning section 14 was after Fulcrum filed this application. 8. Mr. Zellner stated that the Northwest Quarter of section 14 has not been drilled. There is production in section 14 but not in the Northwest Quarter. Mr. Zeliner testified that he is not familiar with production to the south in Wilbarger County, Texas. He is familiar with leasing activity in Jackson County. He is aware that the West part of Jackson County has a deeper play. He is not certain of the distance from section 14 to the deeper play in the West. He testified that this is a different play because it is at a greater depth, the geology is different, and it differs structurally. He agreed it is in the same county as this application. He is not aware of the Wilbarger play in Texas. He is aware that there was some deeper drilling in Jackson County a couple of years ago. 9. Mr. Zellner was aware of the 7 1/2 acres of J. A. Henry in 2011 when he ran title. Prior to the proposal letter of June 10, 2013, there was no lease offer or anything in writing sent to Mr. Henry for section 14. The only attachment to this letter was the AFE. Mr. Zellner stated that the proposal letter would not be a valid contract. The pre-pooling well proposals with options that include the option to participate are mailed and once they are returned an oil and gas lease is sent to the individual for review and execution. The lease is negotiable for certain provisions. He stated that by the time he sends the proposal letter the offer for royalty and bonus is pretty firm. Any negotiation of lease terms and offer are forwarded to Fulcrum for approval. Mr. Zellner has not leased other land for higher values in this area of Jackson County. This is Fulcrum's only play in the area. Mr. Zellner was not able to reach an agreement with the Henry's on other minerals they own that touch this section. Mr. Zellner did not ever get to an offer in section 14 because in his initial conversation with Mr. Henry. He was told that if his interest was developed Mr. Henry would develop it himself. 10. Mr. Zellner stated he did not spend more time trying to negotiate with Mr. Henry because of his conversation of September, Mr. Henry was adversarial about oil and gas companies. Mr. Henry was not receptive to leasing or allowing drilling on his land in section 15. Therefore, he did not attempt negotiations with Mr. Henry on section 14 because he believed he did not want to lease. Mr. Henry told him of past troubles with oil companies and he did not blame Mr. Henry for not wanting to lease. Based upon those conversations Mr. Zellner chose to handle the matter of just sending the proposal letter to Mr. Henry for section 14. Mr. Henry's main concerns in section 15 were regarding the surface and the development of oil and gas on the surface. Mr. Zellner did not discuss lease terms with Mr. Henry because he felt he was adamant about not leasing and not wanting oil and gas operations on his property. Mr. Zellner stated that if Mr. Henry had offered his own lease form Fulcrum would have reviewed it. 11. Mr. Zellner stated that he had negotiated for a lease with the Schmidt's for 2 years. They own approximately 4 quarter sections and he attempted a multiunit lease for the Schmidt interests. They were omitted from this pooling because they expected to have a lease with the Schmidt's. The Schmidt's have not accepted any offer yet. The Schmidt's do not own an interest in the northwest quarter of section 14. They own an interest in the northeast quarter of section 1 5 and that is the pooling that did not include the Schmidt's. Mr. Page 3

4 Zeliner stated he did not negotiate in the same manner with Mr. Henry because all lands are not the same geologically. Further, the West half of 15 was not as high priority because of the adamancy of Mr. Henry about not leasing and staying away from his property. 12. Upon redirect examination Mr. Zellner elicited the actions taken to index the J. A. Henry Estate and that the property in section 15 has a different chain of title than the property in section 14. He stated that the correspondence sent to Mr. Henry containing pooling applications and notice of hearing came back unclaimed. The proposal letter dated June 10, 2013, sent to Mr. Henry was not returned. This letter was sent approximately a couple of weeks before the pooling application was filed. Mr. Zellner received no response to his proposal letter. Mr. Zellner then had a conversation with Mr. Henry on July 17, 2013 trying to determine what elements of the pooling Mr. Henry was protesting. 13. From the discussions with Mr. Henry in section 15, failure to get any response to the June 10 proposal letter and the unclaimed pooling applications Mr. Zellner formed the opinion that Mr. Henry was not interested in executing an oil and gas lease. Mr. Henry never indicated that he wanted to participate with Fulcrum in the section 14 well. Mr. Zellner testified that Mr. Henry was not aware of the interest in section 14. They were aware of their interest in section 15 but had no idea about the interest in section 14. Mr. Zellner sent Mr. Henry and Mr. John A. Henry, IV letters with copies of the deeds showing the chain of title as to their interests in section 14. The applicant did rest. 14. Upon direct examination Mr. Robert H. Henry testified about his extensive education and work experience including the oil and gas industry. He stated that his other family members rely on his advice and counsel to handle this matter. Besides the minerals affected in this application there are other family mineral interests in Jackson County. He stated that his grandfather drilled and pumped the lease in this area. 15. Mr. Henry testified that he took the certified certificates to the post office and they gave him what they said was everything that was there. He believes he picked up everything that was at the post office. 16. All of the discussions he had with Mr. Zellner involved section 15. He stated he does not own any surface interest in section 14. The first correspondence regarding section 14 was the proposal letter of June 10. He was uncomfortable with the letter because he wanted to see a lease and consider the terms concerning mineral clauses, royalty clauses and operational clauses. After he filed his response to the pooling application on July 17, 2013, he received a phone call from Mr. Zellner. The details of the conversation were kind of vague to Mr. Henry. He believed Mr. Zeliner was professional but he thought he was upset. Mr. Zellner wanted to know what the problem was. Mr. Henry told him that his problem was they had never talked about section 14. He stated that Mr. Zellner told him that any revisions to the lease or the offer would have to be submitted to the person that makes those decisions at Fulcrum. He never had any discussions with anyone at Fulcrum. 17. Mr. Henry did understand that the fair market value of the minerals is what's at stake in his opinion. In his opinion it is a taking under the police power of the government. He is concerned that the way things are conducted Page 4

5 that his rights are not being considered or protected. He did not feel that there was a fair, complete and full disclosure upfront. 18. He has been involved in other lease negotiations. They have substantial mineral interests not only in Oklahoma but in Texas. This property in section 14 is 1 1 miles from the Texas Oklahoma border. Wilbarger County, Texas is the county directly south of the border. They own minerals in Wilbarger County and there is leasing activity there. He has agreed to lease his minerals in Wilbarger County, Texas for a 3 year lease at $ 175 an acre and a 20% royalty. He believes that would be a fair offer for the minerals in section 14. That would constitute a good, fair market value. Mr. Henry stated that a $175 and acre bonus with a 20% royalty or a straight 25% royalty and no bonus would be values he would accept to resolve this matter. Mr. Henry stated he offered those figures to Mr. Zellner on the July 17 telephone conversation. He did not think Mr. Zellner was interested. 19. Upon cross-examination Mr. Henry stated that he is licensed to practice law in Oklahoma and is on inactive status. He previously worked in the family business that involved drilling, completing and producing oil and gas wells. He worked in this business in the 1960s through 1964 when he graduated from Stanford University. He has not operated oil and gas wells in Texas or Oklahoma since he graduated from the University of Oklahoma school of Law in He has existing royalty interests in Texas. He does not have any producing royalty interest or working interest in Oklahoma. He is not a licensed or bonded operator in Texas or Oklahoma. He established that he is the executor of the J. A. Henry Estate and the 7 1/2 acres involved in this matter were not a part of said estate. He is the spokesperson for the family in this cause. 20. After distinct inquiry, Mr. Henry conceded that there were dates that the post office tried to deliver the certified letter to his address. He admitted that he received the proposal letter dated June 10, He knows that letter is not a binding contract. He stated that after receipt of the certified letter he did not feel any obligation to call Mr. Zellner. He did not think the letter was a valid offer and no other offers had been made. He testified that he still believes that procedures weren't correctly followed and the spirit of the law has not been followed here. He understands that anything having to do with the surface estate is without the jurisdiction of the Corporation Commission Mr. Henry testified that he does not have other lease offers or purchase offers for his minerals in section 14. The offers he has discussed are for other minerals he owns in other areas. He is asking that his rights be protected and he is hoping a fair value is established. He believes a fair value is as he stated, $175 per net mineral acre and a total royalty of 1/5 or no cash bonus and a 25% royalty. Upon further discussion Mr. Henry testified that as a former banker when he evaluated a potential oil and gas loan it was a three-pronged process. The 3 prongs were comparable sales, replacement value and income stream. For the comparable sales part he would have considered the closest other production. He stated that he understood Mr. Zellner has taken 113 leases in this section at the designated values. Mr. Henry testified that there is more than one thing that has to be taken into consideration. He understood that the Schmidt interest previously discussed does not involve section 14. Mr. Henry agreed that because he does not own any surface rights in section 14 said rights are not at issue in this particular case. Page 5

6 22. It was Mr. Henrys testimony that Wilbarger County, Texas, is the closest place where he has entered into an oil and gas lease at $175 an acre and a 1/ 5 royalty. The company involved in this play has leased up to 100,000 acres that starts south of the Red River. This is 11 miles away from his land in section 14. Land he has in Texas is 30 miles away from section 14. He has not executed an oil and gas lease for no bonus and a one quarter royalty. He believes the discussions must be just. 23. Upon redirect examination Mr. Henry stated that he knows the Corporation Commission might consider less cash and more overriding royalty as a possible value. This is an offer that Mr. Henry suggests that would resolve this matter and be acceptable to the Henrys. Mr. Henry stated that he was not aware of any other leasing activities in this area. He assumed that they would be presented if they were necessary or relevant. All parties did rest. RECOMMENDATIONS AND CONCLUSIONS 1. After taking into consideration all the facts, circumstances, evidence and testimony presented in this cause, it is my recommendation that the application of Fulcrum Exploration, LLC in this cause be granted 2. That the values described by Fulcrum of $125 an acre with a normal 18 royalty and $ 100 an acre with a 3/16 royalty be established as the fair market value in this application. These values were demonstrated by consummated leases within one year and within the contiguous 9 section area. There were no higher values within this area. 3. The protestant competently represented the Henry interests and offered alternative values they considered relevant and acceptable. These values were not established within the area. They were either values desired by Henry or paid in Texas 11 miles to the south and approximately 30 miles from Mr. Henry's land. RESPECTFULLY submitted this 2 1 St day of November, Mich I Norri 44W & L Administrative Law Judge MN:sm xc: John E. Lee, III Clayton Henry Robert H. Henry Michael L. Decker, OAP Director Oil Law Records Court Clerk - 1 Commission Files Page 6