Petro One, Goldstrike Team Up for Canada Drilling JV

Petro One Energy Corp. and Goldstrike Resources Ltd. announced plans for a joint venture to drill a series of oil wells on leases controlled by Petro One in Southwestern Manitoba and Southeastern Saskatchewan. The initial program will consist of up to three test wells to be drilled at South Reston, Kirkella and Milton, and the arrangement provides for a series of success contingent option wells thereafter.

Discussions for the proposed joint venture (JV) were initiated due to continuing poor market conditions for junior resource companies. Petro One's geological team has identified numerous highly prospective targets for oil wells on leases controlled by it, but management has been reluctant to turn to the equity markets in the current state, and has therefore focused on farm-outs and potential joint ventures as sources of non-dilutive financing to drill additional oil wells. Petro One has farmed out one property and sold another this year, and it is currently cash-flow positive (exclusive of exploration costs) due to the success of oil wells in the Milton and Bromhead areas of Saskatchewan. However, it will require additional funds to continue to explore and develop its properties, and, accordingly, is in discussions with a number of prospective partners. That business model has led to the proposed JV and a number of other opportunities which are currently the subject of ongoing discussions with third parties.

Background to the Joint Venture

Petro One has a significant investment in Goldstrike in the form of shares and warrants received as option payments on the Lucky Strike and BRC properties in Yukon. Consequently, success for Goldstrike means success for Petro One. When the concept of a JV between the companies was conceived, it quickly became clear that the potential benefit to both companies is considerable and that the downside is limited. While Petro One currently has approximately $900,000 in cash and is generating sufficient positive cash flow to pay its overhead, its available funds will not permit it to drill and complete the proposed additional wells in the near term. The proposed JV will permit Petro One and Goldstrike to drill at least two and possibly three oil wells by splitting drilling costs 50/50, sharing both the risk and potential reward.

For Goldstrike, the JV provides the potential to generate cash flow to sustain operations over the long term without resort to the equity markets. Goldstrike holds properties of significant merit in Yukon, the Plateau South property in particular, and has approximately $1,350,000 in cash. However, that amount will finance only a modest drilling program and management is concerned that if it spends its remaining cash reserves at Plateau South next summer, in the current market it will have difficulty raising the considerable funds needed to move the property to the next level without experiencing significant dilution. In the meantime, Goldstrike's cash reserves will continue to be eroded by overhead costs and it will have no news flow to attract investors. Goldstrike cannot afford to take that risk. Without access to additional funding or significant cash flow from the JV, Goldstrike almost certainly has to look at foregoing a program in 2014 and wait for the market to turn around.

The proposed JV is designed to give Goldstrike a real opportunity to become cash flow positive over the next several months, with potential for significant upside after that. If it is able to achieve financial self-sufficiency, Goldstrike will have the ability to wait out the market and finance its next program at Plateau South in the next year or so, hopefully at a much higher share price and or from potential cash flow from operations in Saskatchewan and/or Manitoba if the JV is successful. The Plateau South claims are currently in good standing with the Yukon Government until March 30, 2021 and 2022, and management is of the view that the prudent course of action is to suspend work there until market conditions improve or the JV results in significant positive cash flow. The JV does not represent a new direction for Goldstrike, but does provide it with the potential for near-term success, significant upside with 19 net drill locations, year round operations and news flow.

The Joint Venture Terms

Terms for the proposed JV are set out in a Letter of Intent ("LOI") settled between the companies on November 22, 2013, and reflect the significant investment made by Petro One in acquiring the three properties which are the subject of the JV and completing comprehensive geological programs on them. Those historic costs are in the range of $3,000,000 in the aggregate, and results of past work include two producing oil wells at Milton and the identification of highly prospective targets at South Reston and Kirkella where the National Instrument 51-101 ("NI 51-101") Report prepared for Petro One in 2010 allocated unrisked prospective resources of 233,000 barrels of oil ("bbl") to South Reston and 231,000 bbl to Kirkella (news release July 15, 2010).

The LOI provides that costs of drilling all test wells will be split 50/50 between the two companies, which reflects Petro One's confidence in the targets it has chosen. The LOI also provides that the costs of completing the first two test wells will be borne 100% by Goldstrike to bring its ultimate investment in the projects closer inline with Petro One's investment to date. The cost of each of those wells is estimated to be approximately $420,000 (drilling) and $440,000 (completion). Since the test wells will only be completed if drill stem tests and open hole core logging indicate significant potential for economic success, the majority of the risk will be shared by the two companies at the drilling stage. Drilling costs include costs of casing and cementing or abandonment, as circumstances dictate. Completion costs include cased hole logging and perforating, and production testing. Each company will have a 50% working interest in each completed well.


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