highlights during the quarter · 1/31/2014 · (a) in november 2013 the company issued 200,000...

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Talon Petroleum Limited

Level 16, 344 Queen Street, Brisbane, Qld 4000 Australia Postal Address: GPO Box 402, Brisbane, Qld 4001

Telephone: +61 (07) 3211 1122 Fax: +61 (07) 3211 0133 www.talonpetroleum.com.au

ABN 88 153 229 086

31 January 2014 ASX release

December 2013 Quarterly Report Highlights during the quarter:

Roundhouse Prospect proof of concept well (Bonner 1H) producing 750-850 bpd of frac load water and 60-70 bopd since being placed on jet pump in November 2013 following completion of fraccing. As at 27 January 2014, ±60% of the frac load has been recovered and the oil cut continues to increase.

$US0.5 million received from Talon’s insurance carrier as partial reimbursement for the costs of repair and surface damages related to the Bonner 1H incident, and additional funds anticipated in Q1 2014.

Second producing well (Hoskins Unit #1) produced 1,244 bbls of oil since being returned to production in early September 2013.

Talon Petroleum Limited (ASX: TPD and Talon) continued to progress the Company’s US-based energy projects during the quarter ended 31 December 2013, delivering further opportunities for Company growth and value creation. A summary of Talon’s three significant projects is set out in a table below, with the Company’s production profile included in Section 1 on page 2 below.

Prospect Name Location Target WI Net Leasehold Acres held

Roundhouse Navarro County, East Texas Cotton Valley Lime 24-97% Over 7,000

Mosman Rockingham Olmos

McMullen County, South Texas

Olmos 100% Over 3,800

Catfish Creek, Redfish and East Banks

Anderson, Henderson and Smith Counties, East Texas

Rodessa 97% Approximately 2,500

TOTAL: Over 13,300

Talon’s strategy is to invest in multi-well oil projects that are located within areas with good production infrastructure employing horizontal drilling and advanced fraccing technologies. The projects target oil in resource plays (shales) or in low permeability conventional reservoirs that originally produced only a small fraction of the hydrocarbons in-place (old fields with tight reservoirs) where recoveries can be improved with new technologies. Funding to drill the proof of concept tests in projects where the Company retains a large acreage position will come from selling down to industry players, with the Company retaining significant interest, and applying the best technologies as outlined in Section 2 below.

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1. Production Production for the quarter and year to date was:

Quarter 3 months

ended 31 December 2013

Year to date 12 months

ended 31 December 2013

Gross: Gas (mcf) - Oil (bbl) 3,005 8,698(3) Total (boe(2)) 3,005 8,698(3) Net (Talon share): (1) Gas (mcf) - - Oil (bbl) 1,654 5,711 Total (boe(2)) 1,654 5,711

Gross average daily production for the December quarter was 32.7 bopd and 0 mcfgpd (Talon’s share(1): 18.0 bopd (18.0 boepd) and 0 mcfgpd) from its two (2) operated producing wells and the non-operated Bonner 1H well. On 7 December 2013, the Bonner 1H started making oil during flowback testing. Test oil is included in the above data. (1) Talon’s beneficial NRI share (after royalties). (2) Gas is converted to boe on the basis that 6 mcf of gas are equivalent to 1 boe. (3) Quarter 1, 2 & 3 2013 corrected for production volume reported to regulatory agencies versus prior field reported production. Quarter 3 and YTD also reflect a volume correction for the Hoskins Unit #1 production of (-229) bbls because of a tank volume factor error in the field

reporting system.

2. Review of activities (*) Talon’s current portfolio reflects the strategy to invest in multi-well oil projects located in areas with good production infrastructure employing horizontal drilling and advanced fraccing technologies and consists of three significant projects.

(a) Roundhouse Prospect, Navarro County, East Texas

About Roundhouse Prospect The Roundhouse Prospect is located in Northeast Texas adjacent to the large Cheneyborough field (refer to Diagram 1 below). Talon has over 7,000 net acres and entered into a joint venture with a local US company and offset operator, O’Brien Energy Company, in a proof of concept well, the Bonner 1H, drilled adjacent to the Company’s leasehold. The Company retained an approximately 24% WI in the well and surrounding 600 acres leveraging at modest cost its position in this oil rich play. Based on analog production from vertical wells, each horizontal well is estimated to have a gross contingent resource potential (1C) of 440 mboe/well on 160 acre spacing and Talon has over 7,000 net acres under lease (additional information is available on Talon’s website).

The Bonner 1H well was commenced in June 2013 and reached a total measured depth of 15,260 feet (9,472 feet TVD) on 3 July 2013. In late July 2013, casing failed during the early stages of fraccing. A

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recovery and repair operation successfully re-established mechanical integrity of the well bore in September 2013 and a limited two-stage frac was successfully completed as stages 4 and 5 to assess future frac design. Activities during and since the end of the quarter The final frac design was a hybrid of the two techniques used in stages 4 and 5. Frac operations for stages 6 through 13 commenced on 4 November 2013 and were successfully completed on 6 November 2013. The Bonner 1H was placed on jet pump on 13 November 2013 and has exhibited excellent inflow performance while producing the frac load. Since the end of the quarter, as reported to ASX on 29 January 2014, after recovering 47% of the frac fluid load in early January 2014, the operator, O’Benco, increased the surface pumping capacity to facilitate additional liquid recovery. Surface modifications were completed on 22 January 2014. The preliminary result was that recovery of frac fluid has been accelerated from 700 bwpd to 850 bwpd and oil recovery has increased from approximately 45 bopd to 70 bopd. As at 27 January 2014 the Bonner 1H has recovered ±60% of the frac load and produced 1,849 bbls of oil. The Company filed a claim with its insurance carrier following the Bonner 1H well incident for reimbursement of costs of repair and surface damages. In December 2013 partial restitution in the amount of US$512,160 was received. It is anticipated that payments will be received for care, custody and control and for the additional final expenses not yet submitted by the operator to the adjuster for review. A final payment of the claim is anticipated in Q1 2014. The net result to the Company is that it expects to be fully covered for all repairs and damages.

(b) Mosman Rockingham Olmos, McMullen County, South Texas About Mosman Rockingham Olmos Project The Mosman Rockingham (MR) Olmos sand horizontal oil play is located in McMullen County, Texas. With over 3,800 acres, there is potential for 15 horizontal drill sites (refer to Diagram 2 below). The MR Olmos leases lie on the flank of the AWP field which has produced 48.9 mmbo and 490.5 bcf from the Olmos sandstone reservoir. Historically, the Olmos reservoir was developed with vertical wells, two of which are producing in the MR Olmos leases. The project fits Talon’s ongoing strategic focus being a scalable oil zone adjacent to existing fields with development optimised through horizontal drilling and hydraulic fraccing. Based on nearby analog horizontal well performance, the gross contingent resource potential (1C) is estimated to be 327 mboe/well (additional information is available on Talon’s website).

Talon is in final stages of negotiating with potential joint venture partners to participate in the proof of concept Quintanilla 1H Olmos well which is currently planned for Q2 2014, with a potential 15 well horizontal program on 120 acre spacing.

With regard to existing vertical wells on these leases, production operations on the Hoskins #2 (Wilcox) well have been suspended and the surface production equipment redeployed to the Hoskins Unit #1 (Olmos).

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Activities during and since the end of the quarter

The Hoskins Unit #1 has produced 1,244 bbls of oil gross since having been returned to production in early September 2013.

(c) East Texas (Rodessa) Prospects

About Rodessa Prospects The East Texas Rodessa Oil play located in Henderson, Anderson and Smith counties is strategically a good fit for Talon as the prospects of Catfish Creek, Redfish and East Banks are all sizable projects of approximately 5,000 acres each (refer to Diagram 3 below). Talon currently has approximately 2,500 net acres under lease and is continuing to pursue leasehold opportunities with a target position of up to 20,000 acres. These projects are in an infrastructure-rich environment in and around older producing fields. The target objective in these areas meets the criteria for tight oil or liquids rich reservoirs, thus making it a prime target for fraccing in vertical and horizontal wells. Based on analog performance for a vertical well, the estimated contingent resource potential (1C) is 142 mboe/vertical well. Talon currently holds approximately 2,500 net leasehold acres in Rodessa oil prospects and plans a proof of concept well on one of these projects after leasing additional acreage during 2014. The Company may sell down some of its interest to leverage its position on the initial drilling in this play. Activities during and since the end of the quarter There have been no exploration activities during the quarter on the East Texas (Rodessa) Prospects.

3. Corporate

(a) In November 2013 the Company issued 200,000 unlisted options to staff. The options are exercisable at $0.0675 cents each under certain conditions and the option terms are substantially the same as the options issued to Mr Foss in June 2013 in accordance with shareholder approval granted at the 30 May 2013 AGM. As at the date of this report, 5,450,000 unlisted options remain outstanding and issued fully paid ordinary shares are 102,135,433.

(b) Talon previously reported that on 7 September 2013 it received a notice from Sundance Energy Australia Limited (“SEA”) asserting claims under the Scheme Implementation Agreement (“SIA”) dated 13 November 2012 between SEA and the Company’s previous parent entity Texon and the Demerger Deed between the Company and Texon dated 14 January 2013. In October 2013 the Company has responded to SEA challenging all the claims by SEA (and continues to believe it has strong grounds to do so) and, as a result, believes that any liability in respect of the claims will be significantly less than the amount of approximately $US1.5 million provided by the Company which is currently held in escrow in respect of liabilities under the SIA. During the quarter the representatives of the Company and SEA have been trying to find a commercial resolution to the dispute and the negotiations are ongoing as at the date of this report.

4. Outlook for 2014

The management and Board are looking forward to a busy 2014 with strong news flow being driven by our planned drill programs and results coming from the proof of concept wells already in play. The Company is attracting a lot of

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interest in the US, and we have been successful in securing the support and participation of experienced and well regarded energy players in this market, which augurs well for future activities. (*) The estimates provided in Section 2 of this report are intended to describe the maximum available value of Talon’s current net lease holdings under certain reasonable assumptions and should not be accepted as absolute.

– ENDS – For further information, please contact: Mr Clifford S. Foss Chief Executive Officer, President & Managing Director Houston: +1 281 419 4976 (Houston is 15 hours behind Australian Eastern Standard time) or [email protected]

Mr Jeffrey Forbes Chairman Brisbane: +61 7 3211 1122 or [email protected] Glossary: $: Australian dollars AGM: Annual General Meeting ASX: ASX Limited (ACN 008 624 691) or, if the context requires, the securities market operated by it bbl: barrels bcf: billion cubic feet boe: barrels of oil equivalent boepd: barrels of oil equivalent per day (including gas converted to oil equivalent barrels on basis of 6 mcf to 1 boe) bopd: barrels of oil per day bpd: barrels per day bwpd: barrels of water per day Company or Talon: Talon Petroleum Limited Group: the Company and its subsidiaries mboe: thousand barrels of oil equivalent (including gas converted to oil equivalent barrels on basis of 6 mcf to 1 boe) mcf: thousand cubic feet mcfgpd: thousand cubic feet of gas per day mmbo: million barrels of oil mmboe: million barrels of oil equivalent (including gas converted to oil equivalent barrels on basis of 6 mcf to 1 boe) NRI: net revenue interest or share of production after all burdens such as royalties have been deducted from the WI O’Benco: the operational arm of O’Brien Energy Company, a private oil and gas exploration and production company

located in Shreveport, Louisiana SEA: Sundance Energy Australia Limited SIA: Scheme Implementation Agreement dated 13 November 2012 between SEA and Texon Texon: Texon Petroleum Limited TVD: True Vertical Depth US$: U.S. dollars WI: working interest, a cost bearing interest of an oil and gas project YTD: year to date F

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Diagram 1 – Location of Roundhouse Prospect, Navarro County, East Texas

Diagram 2 – Location of Mosman Rockingham Olmos leases and wells, McMullen County, South Texas

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Diagram 3 – Location of East Texas (Rodessa) Prospects

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Appendix 5B Mining exploration entity and oil and gas exploration entity quarterly report

+ See chapter 19 for defined terms. 01/05/2013 Appendix 5B Page 1

Rule 5.5

Appendix 5B

Mining exploration entity and oil and gas exploration entity quarterly report

Introduced 01/07/96 Origin Appendix 8 Amended 01/07/97, 01/07/98, 30/09/01, 01/06/10, 17/12/10, 01/05/2013

Name of entity

TALON PETROLEUM LIMITED

ABN Quarter ended (“current quarter”)

88 153 229 086 31 December 2013

Consolidated statement of cash flows

Cash flows related to operating activities

Current quarter $A’000

Year to date (12 months) $A’000

1.1 Receipts from product sales and related debtors

69 551

1.2 Payments for (a) exploration & evaluation (b) development (c) production (d) administration

(368) (95) (321)

(493)

(3,686) (305) (481)

(2,180) 1.3 Dividends received - - 1.4 Interest and other items of a similar nature

received 3 14

1.5 Interest and other costs of finance paid - - 1.6 Income taxes paid - - 1.7 Other (provide details if material) - -

Net Operating Cash Flows

(1,205) (6,087)

Cash flows related to investing activities

1.8 Payment for purchases of: (a) prospects (b) equity investments (c) other fixed assets

- - -

- -

(10) 1.9 Proceeds from sale of: (a) prospects

(b) equity investments (c) other fixed assets

- - -

- - -

1.10 Loans to other entities - - 1.11 Loans repaid by other entities - - 1.12 Other (provide details if material) - -

Net investing cash flows

-

(10)

1.13 Total operating and investing cash flows (carried forward)

(1,205)

(6,097)

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+ See chapter 19 for defined terms. Appendix 5B Page 2 01/05/2013

1.13 Total operating and investing cash flows

(brought forward)

(1,205)

(6,097)

Cash flows related to financing activities

1.14 Proceeds from issues of shares, options, etc. - - 1.15 Proceeds from sale of forfeited shares - - 1.16 Proceeds from borrowings - 7,092 1.17 Repayment of borrowings - - 1.18 Dividends paid - - 1.19 Other (provide details if material) - -

Net financing cash flows

- 7,092

Net increase (decrease) in cash held

(1,205)

995

1.20 Cash at beginning of quarter/year to date 5,293 2,526 1.21 Exchange rate adjustments to item 1.20 105 672

1.22 Cash at end of quarter 4,193 4,193

Payments to directors of the entity, associates of the directors, related entities of the entity and associates of the related entities

Current quarter $A'000

1.23

Aggregate amount of payments to the parties included in item 1.2

436

1.24

Aggregate amount of loans to the parties included in item 1.10

Nil

1.25

Explanation necessary for an understanding of the transactions

1.23 – Payment of salaries and fees to directors, secretary, advisors (Morgans Financial Limited and Minter Ellison) and related parties (i.e. Wandoo Energy LLC) under approved agreements.

Non-cash financing and investing activities

2.1 Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows

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2.2 Details of outlays made by other entities to establish or increase their share in projects in which the reporting entity has an interest

Financing facilities available Add notes as necessary for an understanding of the position.

Amount available $A’000

Amount used $A’000

3.1 Loan facilities

Nil N/A

3.2 Credit standby arrangements

Nil N/A

Estimated cash outflows for next quarter

$A’000

4.1 Exploration and evaluation

812

4.2 Development

83

4.3 Production

140

4.4 Administration (1)

547

Total

1,582

(1) Administration cash outflows includes initial periodic payments for 2013 audit and tax compliance.

Reconciliation of cash

Reconciliation of cash at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts is as follows.

Current quarter $A’000

Previous quarter $A’000

5.1 Cash on hand and at bank 2,708 3,816

5.2 Deposits at call - -

5.3 Bank overdraft - -

5.4 Other (provide details) (2) 1,485 1,477

Total: cash at end of quarter (item 1.22)

4,193 5,293

(2) Restricted funds held in escrow pursuant to the Texon Petroleum Ltd / SEA Scheme Implementation Agreement (“SIA”). The funds were due to be released to Talon in September 2013, however, legal claims were asserted by SEA on 7 September 2013. The Directors and legal advisors of Talon have reviewed the terms of the SIA and have lodged a dispute of the claims presented by SEA. As at 31 December 2013,

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Talon has $1,485 held in an escrow account pursuant to the terms of the SIA which is available to be used to meet any successful claims under the SIA.

Changes in interests in mining tenements and petroleum tenements Tenement

reference and location

Nature of interest (note (2))

Interest at beginning of quarter

Interest at end of quarter

6.1 Interests in mining tenements and petroleum tenements relinquished, reduced or lapsed

South Texas

Oil & Gas Leases 4,838 4,438

6.2 Interests in mining tenements and petroleum tenements acquired or increased

East Texas

Oil & Gas Leases 9,917 9,917

Issued and quoted securities at end of current quarter Description includes rate of interest and any redemption or conversion rights together with prices and dates.

Total number Number quoted Issue price per security (see note 3) (cents)

Amount paid up per security (see note 3) (cents)

7.1 Preference +securities (description)

None

7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs, redemptions

None

7.3 +Ordinary securities

102,135,433 102,135,433

7.4 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs

None None

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7.5 +Convertible debt securities (description)

None

7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted

None

7.7 Options (description and conversion factor)

OP1: 1,200,000 OP2: 1,100,000 OP3: 1,100,000 OP4: 1,200,000 OP5: 283,338 OP6: 283,331 OP7: 283,331

Nil Nil Nil Nil Nil Nil Nil

Exercise price $0.0675 $0.0675 $0.0675 $0.0675 $0.0675 $0.0675 $0.0675

Expiry date 07/03/2019 07/03/2020 07/03/2021 20/06/2018 07/03/2019 07/03/2020 07/03/2021

7.8 Issued during quarter

OP5: 66,668 OP6: 66,666 OP7: 66,666

Nil Nil Nil

Exercise price $0.0675 $0.0675 $0.0675

Expiry date 07/03/2019 07/03/2020 07/03/2021

7.9 Exercised during quarter

None

7.10 Expired during quarter

None

7.11 Debentures (totals only)

None

7.12 Unsecured notes (totals only)

None

Compliance statement 1 This statement has been prepared under accounting policies which comply with

accounting standards as defined in the Corporations Act or other standards acceptable to ASX (see note 5).

2 This statement does /does not* (delete one) give a true and fair view of the

matters disclosed.

Sign here: ............................................................ Date: 31 January 2014

(Director/Company secretary) Print name: Anastasia Maynes

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Notes 1 The quarterly report provides a basis for informing the market how the entity’s

activities have been financed for the past quarter and the effect on its cash position. An entity wanting to disclose additional information is encouraged to do so, in a note or notes attached to this report.

2 The “Nature of interest” (items 6.1 and 6.2) includes options in respect of

interests in mining tenements and petroleum tenements acquired, exercised or lapsed during the reporting period. If the entity is involved in a joint venture agreement and there are conditions precedent which will change its percentage interest in a mining tenement or petroleum tenement, it should disclose the change of percentage interest and conditions precedent in the list required for items 6.1 and 6.2.

3 Issued and quoted securities The issue price and amount paid up is not

required in items 7.1 and 7.3 for fully paid securities.

4 The definitions in, and provisions of, AASB 6: Exploration for and Evaluation of

Mineral Resources and AASB 107: Statement of Cash Flows apply to this report. 5 Accounting Standards ASX will accept, for example, the use of International

Financial Reporting Standards for foreign entities. If the standards used do not address a topic, the Australian standard on that topic (if any) must be complied with.

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highlights during the quarter · 1/31/2014 · (a) in november 2013 the company issued 200,000...

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