From the standpoint of other industry participants, Five States provides access to capital without the necessity of resorting to leverage or the acceptance of outside ownership of their businesses. Five States will buy fully-developed assets to permit the industry participant to redeploy its resources. Five States will buy partial interests in seller-operated properties while leaving the seller in place as operator. The issue for Five States is not the precise structure, but rather the economic result.

Five States as a Property Buyer

• Five States is in the market for properties at all times. The company acts quickly and efficiently to bring transactions to a conclusion.
• Although Five States is always ready to do a one-time transaction, its preferred structure is to establish relationships with industry participants that allow it to pursue opportunities jointly. The company will participate in purchases that require more capital than its partner has available. Five States will buy interests in existing producing properties to fund development or exploration activities. Five States is open to new structures and new ideas as long as they are consistent with its investment parameters.
• Five States prefers not to act as the operator of the interests it purchases. The company is particularly open to the establishment of relationships with skilled and responsible operators. Five States believes that its structure and access to capital can make it a valuable partner to an operating company.

Acquisition Criteria

• Five States imposes certain constraints on evaluations, in some cases hard and fast rules and in others strong preferences.
• Five States is in the market for proved reserves that may include a small deployment of upside attributable to behind pipe and development drilling.
• We have sought to buy both oil properties and natural gas properties, without preference.
• Properties have an expected life of at least 10 years. Five States' policy is to avoid fast payout/short-lived properties.
• In purchasing properties Five States will consider the operator's reputation, knowledge, and experience of managing properties in a specific field or area.
• Where the operator is selling its entire interest Five States will typically associate with a known operator in the area for the transaction.
• Properties should have lifting costs (gross expenses, including operator's overhead, at the property level) that are less than $15 per barrel of oil equivalent.
• We buy only properties that are located onshore in the lower 48 states (excluding, for tax and regulatory reasons, certain states such as California).
• Five States will not evaluate wells for purchase until they have established predictable decline performance.
• To be considered for purchase each property should provide income net of severance taxes, royalties, and operating costs of at least $2,000 per month, per producing well.
• Production, typically, will be from conventional sandstone or carbonate reservoirs. It may also include production from unconventional reservoirs such as coal beds and fractured shales if other acquisition criteria are satisfied.

Properties Considered for Purchase

• Five States strongly favors production from solution gas-drive reservoirs and does not normally purchase production from water-drive reservoirs because of the difficulty in determining productive life accurately. However, Five States does purchase interests in established waterflood properties producing on predictable declines.
• Five States prefers to acquire acreage rights rather than well-bore interests to avoid depth-limited interests.
• Five States prefers properties in fields with large recovery potential where applications of new petroleum technologies can most effectively be utilized; those which have known additional value, such as behind-pipe reserves or infill locations; those with deeper reservoirs or field extension potential; and those with waterflood or CO₂ flood possibilities. In some circumstances additional value may be assigned for such long-term potential, provided the additional value is appropriately discounted and constitutes a small percentage of the overall value of the property in question.
• Five States does not purchase oil and gas industry facilities unless they are an integral part of a package of producing properties and constitute a minor value of producing property acquisitions.

Chronology of Acquisitions

Alternative Acquisitions

Five States sees acquisition opportunities in the course of its normal activities that are not strictly producing oil and gas property purchases meeting all of the criteria we have established for our investments, but which involve some of the same analytic and economic characteristics. Examples would include a natural gas gathering system or a high value group of wells that are in a single reservoir and thus do not meet our diversification criteria.