Joint Venture

A joint venture is not a partnership. It is a participation agreement among parties which have undivided leasehold interests in mineral properties. The purpose of our joint venture is three fold: (1) reduce our risk in any individual well/property, (2) obtain cash upfront for Lucas, and (3) provide Lucas with a carried (free) interest in one or more wells. Lucas Energy, Inc. has joint ventures with two different entities, at present. Below are some of the details:

LEI 2009-II JV – Lucas Energy, Inc. entered into a joint venture in July 2009 with a private partner for the re-entry, and/or development of six wells in, or near, Gonzales County, Texas. The original six wells in the joint venture program included the Ervin No.1, the Gescheidle No.1, the Kayla No.1, the Mills Oil Unit No.1, the Norris No.1, and the Tucker No.1 wells. The joint venture was, recently, adjusted to included the Ervin No.1, the Gescheidle No.1, the Mills No.1, the Norris No.1 all in Gonzales County, Texas: and the Bates No.2R and Eschenburg No.4H wells in Wilson County, Texas. The joint venture agreement called for the joint venture partner to pay Lucas upfront for its interest in the acreage, the base cost of the equipment, and the value of any producing reserves on the leases. The joint venture partner would, then, pay for 80% of the development costs through the tanks and received an 80% working interest in the wells before payout reduced to a 70% working interest after payout. Lucas would receive a 20% working interest before payout and a 30% working interest after payout. The promotion was in the upfront payment and the 10% reversionary working interest after payout.

LEI 2009-III JV – Lucas Energy, Inc. entered an agreement to do a second joint venture in October 2009 with the same private partner for the re-entry, workover, and/or new lateral drilling of several wells in three counties. The wells in this joint venture included the Ebrom No.1, the Snoga No.1, the Stobb No.1, the Stoeltje No.1, the Valcher No.1, and the Wall No.1 wells in Wilson County, Texas; and the Kainer No.1 well in Karnes County, Texas. This second joint venture agreement called for the joint venture partner to pay Lucas upfront for its interest in the acreage, the base cost of the equipment, and the value of any producing reserves on the leases. The joint venture partner would, then, pay for 80% of the development costs through the tanks and received an 70% working interest in the wells. Lucas would receive a 30% working interest in the wells. The promotion was in the upfront payment and the 10% promoted working interest. Further, the joint venture partner acquired a 50% working interest in several additional leases in Wilson County, Texas.

Hilcorp JV – During the first quarter of the 2010-11 fiscal year (April 1, 2010 through June 30, 2010), Lucas Energy, Inc. entered into a joint venture with Hilcorp Energy I, LP, a related party to Hilcorp Energy Corporation, one of the largest privately owned oil and gas companies in the United States. Under the terms of the joint venture, Hilcorp acquires 85% leasehold interest (working interest) in the deep rights (rights below the base of the Austin Chalk formation, or the top of the Eagle Ford formation and deeper) to leases only on Gonzales County, Texas for cash consideration plus carrying Lucas for 15% to the tanks for the first two Eagle Ford wells drilled (scheduled for 2010). Lucas retained all of its rights above the base of the Austin Chalk formation, all current production, all equipment and well bores, and well bore production rights to certain specific wells drilled below the Austin Chalk formation. To date, Lucas has completed two closing in which Lucas has received approximately $9 million in cash.

Hall Phoenix Joint Venture - On November 15, 2010, Lucas Energy, Inc. announced that Hall Phoenix Energy LLC has acquired the deep rights (Eagle Ford formation and below) in acreage operated by Lucas in Wilson County, Texas. Hall Phoenix Energy, Inc. acquired various working interests (from 50% up to 80%) from a third party who is currently in a joint venture with Lucas. The seller sought to raise cash and reduce its capital exposure for the future.

Hall Phoenix Energy, LLC is a privately owned oil and gas company located in the Dallas, Texas area. It is, also, a shareholder in Lucas. The sale did not affect either the shallow rights (Austin Chalk formation and above), nor any of the other interests owned by Lucas.

Lucas anticipates that it will continue to develop the Wilson County, Texas properties in accordance with its previous plans. Lucas considers Hall Phoenix to be a joint venture partner with similar financial capabilities as Hilcorp. However, Hall Phoenix is a non-operating partner and Lucas will continue to operate the Wilson County, Texas properties.

Lucas Energy, Inc. will continue to use the joint venture as a way to reduce risk involved in well restoration and to raise capital without diluting shareholder equity. In the fiscal year 2010-11, Lucas would like to raise between $10 million and $50 million in joint venture capital.

Marathon Joint Venture – Lucas has entered into a Joint Venture agreement with Marathon Oil (East Texas) LP, a subsidiary of Marathon Oil Corporation, for the development of the Eagle Ford and Buda formations in Wilson County, Texas.  The Marathon affiliate has acquired 50% of the leasehold interest rights, representing approximately 1,000 net acres  (below the base of the Austin Chalk formation) held by Lucas in a majority of Lucas’ leases in Wilson County, Texas.  Marathon Oil Corporation’s subsidiary will be the operator of the joint venture, but Lucas will still own and operate rights above the Eagle Ford, primarily the Austin Chalk formation.

The specific details of the joint venture transaction with Marathon are being withheld due to strategic and proprietary reasons.  However, the joint venture is similar in nature to the Hilcorp joint venture in  Gonzales County, Texas in that Lucas received an upfront cash payment based on negotiations with Marathon.

Lucas has a variety of working interests in Wilson County, Texas ranging from 20% up to 100%.  The Austin Chalk formation (and above), the current well bores and equipment, and the current production from the Austin Chalk and above are not included in this transaction.  Hall Phoenix Energy LLC continues to be a joint venture partner in the deep rights in Wilson County, Texas; and Lucas has another joint venture partner in the shallow rights.