ReoStar Energy Corp.

What they do

ReoStar explores, develops, and acquires oil and gas properties, primarily in Texas. Its operations include drilling in the Barnett Shale (Cooke County) and running an enhanced oil recovery (EOR) project at Corsicana. The company also tests new technologies, such as a chemical foam EOR method and helium detection for reservoir mapping. ReoStar operates its leases through wholly owned subsidiary ReoStar Operating, Inc.

Revenue drivers

• Barnett Shale production — Two wells completed and producing in the oil window of the Barnett Shale in southwest Cooke County, Texas; natural gas development was suspended in December 2008 due to low prices.
• Corsicana EOR project — Phase I surfactant polymer flood analyzed; Phase II planned, but a new chemical foam technology is being evaluated as a lower-cost alternative.
• Corsicana deeper zone exploration — Two deeper exploratory wells drilled and completed in the Pecan Gap zone; continued drilling planned on Corsicana acreage.

Recent performance

The 10-K did not include specific revenue or production figures in the excerpts. The company reported a qualified going concern opinion from auditors dated June 29, 2010, citing substantial doubt about its ability to continue without additional fundraising. No latest quarterly results were provided in the excerpts, but the 10-Q noted commodity price volatility and rising operating costs.

Strategy

Control operations on all leases via affiliated operating companies. Acquire and develop leasehold in key regional plays (Barnett Shale, Corsicana) using existing infrastructure. Implement EOR programs in mature fields. Sell a portion of working interests in development wells to spread risk and drill more wells per capital budget.

Risks

• Going concern risk — Auditors expressed substantial doubt about the company's ability to continue as a going concern unless additional working capital or project financing is raised.
• Commodity price volatility — Oil and natural gas prices have been highly volatile; natural gas prices dropped more than 75% from July 2008 peaks, impacting cash flow and drilling economics.
• Cost inflation — Shortages of pipe have increased casing and tubing costs, materially raising completion costs and pressuring margins.
• Operational and exploration risks — Drilling and production are subject to mechanical failures, reserve estimation uncertainties, and risks inherent in oil and gas operations.

Outlook

Management expects to resume Barnett Shale development in the fiscal year after next, not in 2011. For Corsicana, they plan to execute Phase II of the EOR project, but are negotiating with the owner of a new chemical foam technology that may deliver similar sweep efficiency at lower cost. Continued drilling in the Pecan Gap zone is expected.