Financial Review

The attached Form 10-K contains a complete discussion and analysis of the Company’s financial results for 2017 on pages 32-43. A brief summary is provided in the following paragraphs.

Significant Items for the Year:

• Recorded a net income of $3,531,933, $0.21 per share, compared to a net loss of $10,286,884, $0.61 per share, for fiscal 2016.
• Capital expenditures in 2017 totaled $25.8 million as compared to $4.0 million in 2016.
• Production grew approximately 40% from the second quarter of 2017 to the fourth quarter of 2017 to 35.6 Mmcfe per day as significant wells drilled in 2017 began producing. Total 2017 production was 11 Bcfe (This is a non-GAAP measure).
• Average oil, NGL and natural gas prices, on an equivalent basis, increased 32% to $3.60 in 2017 as compared to $2.73 in 2016.
• Total revenues for 2017 were $46,335,049, an increase of 19% from $39,060,783 for 2016.
• Generated cash from operating activities of $20.8 million, an 8% decrease from 2016.
• Collected lease bonus proceeds of $5.2 million in fiscal 2017.
• Generated 2017 fourth quarter and twelve-month EBITDA1 of $7,250,826 and $24,556,609, respectively.
• Increased year-end 2017 proved reserves 36% to 168.6 Bcfe as compared to year-end 2016.

The net cash provided by operating activities decrease of 8% to $20.8 million was primarily the result of decreases in net receipts on derivative contracts and lease bonus proceeds in 2017 as compared to 2016.

The 2017 total revenues increase of 19% was primarily due to oil, NGL and natural gas revenues increasing 27% in 2017 as compared to 2016. This revenue increase was a result of increased oil, NGL and natural gas prices of 26%, 58% and 41%, respectively, increased NGL volumes of 2% and was somewhat offset by decreased oil and natural gas production volumes of 15% and 1%, respectively. Overall results were a 3% decrease in Mcfe production volumes and a 32% increase in the average sales price per Mcfe to $3.60, as compared to $2.73 in 2016.

The 15% oil production decrease was primarily the result of declining production in the Eagle Ford Shale. To a lesser extent, declining production from various fi elds in western Oklahoma, the Texas Panhandle and Bakken Shale also contributed to the decrease. These decreases were partially offset by new production added in the Eagle Ford Shale on six wells in the second half of 2017.

NGL production increased 2%, largely the result of new production coming online in the Anadarko Woodford and Eagle Ford Shale. This more than offset the natural decline in the Anadarko Woodford Shale in western and central Oklahoma and the Anadarko Basin Granite Wash in western Oklahoma and the Texas Panhandle.

Natural gas production decreased 1%, principally due to declining production in the Fayetteville Shale. To a much lesser extent, declining production from the Anadarko Woodford Shale in western andcentral Oklahoma, the Anadarko Basin Granite Wash and the southeastern Oklahoma Woodford Shale also contributed to the decrease. These declines were mostly offset by new well production in the southeastern Oklahoma Woodford Shale and Anadarko Woodford Shale.

Total costs and expenses for 2017 decreased $14,944,551, or 26%, from 2016. Lease operating expenses declined $0.9 million, principally the result of decreased operating costs in several fi elds and the company selling a group of high operating cost wells in 2017. Provision for impairment decreased $11.3 million in 2017 as a result of rebounding during 2017 from severely depressed oil, NGL and natural gas prices during 2016. The Company also recorded a $0.1 million loss on asset sales in 2017, as compared to a $2.6 million gain in 2016.

Paul F. Blanchard Jr.
President
Chief Executive Officer