Sonoran Energy Interview with President & CEO, John Punzo

After cutting petroleum dependence during the 1970's and 80's, the last decade of the 20th century and, indeed into the 21st, has seen us globally on an oil binge increasing consumption by millions of barrels per day. Whether it be measured by the abundance of gas-guzzling SUV's rolling off production lines, the boom in truck transport or the colder climates driving up the home heating bill, our intake and use of the 'liquid gold' continues to skyrocket.

The United States, with approximately 5% of the world's population, is consuming nearly one-fourth of the world's oil. In terms of importation, 60% of the crude oil utilized comes from elsewhere. Our Middle East dependence proof in the pudding lays in the public knowledge that dominant companies like Chevron and Valero Energy Corp., in 2002, imported 50% and 61% respectively of crude oil for use in its US-based refineries from the Persian Gulf.

In consideration of the geopolitical and social events of the past few months, it would stand to reason that the reliance we as a nation have on the bounty in the Middle East will be a focal point of debate, not only for those in seats—and those who hope to soon be in those seats—of power, but for the consumer as well who has to continually fork over more of his hard-earned money to keep active the livelihood to which he's become accustomed.

It's quite evident that one of the best and, indeed geographically-speaking, the easiest, alleviations to the situation is to derive more domestically…simply put, harvesting from our own backyard.

Sonoran Energy, (OTCBB: SNRN) identifies, acquires and develops working interest percentages in smaller, underdeveloped oil and gas projects. The properties, as they do not necessarily meet the minimum collection requirements of the larger refineries, may be somewhat overlooked by major oil and gas companies, as those above-mentioned, but they remain, more importantly, US-based and part of the long-term solution.

A secondary interview by Eric David and Sons, Inc. with Sonoran Energy's President and CEO, John Punzo, August 19, 2003, follows:

Eric David & Sons (EDS): It's been three and a half months since we last spoke. And in that time it would appear that Sonoran has been quite diligent in pursuing its acquisition program as well as the expansion of reserves on existing properties. We'll delve into the particulars regarding properties shortly, but, in a nutshell, what's been your crowning glory this past 90 days?

John Punzo (JP): Realistically, I'd like to extend that 90 days to that of the entirety of the past year, especially from June of 2002 onwards. We're quite pleased with what we've accomplished and have created some strong momentum forward in terms of newly found reserves and future acquisitions. This momentum is further apparent in our year-end financials, whereby it's referenced that there is a future cash flow position, which is something we've never had before. It states that we have another $15M due to us. Even taking applicable discounts into consideration, we're still left with approximately $6.5M to the bottom line. And that's a good position, for both management and shareholder alike, to be in.

EDS: You've had three announcements the past 4 months addressing new geological studies indicating under-exploited reserves and the fact that new wells are required to tap into the bounty at the Mt Poso and Deer Creek Oil Fields. Please give us a run down of numbers and corresponding potential of each reserve find.

JP:< Via commissioned 3rd party geological reports, we've found additional reserves on our existing properties. On the Emjayco Glide #33 Property holding in the Mt Poso Field, there are an additional 640,000 barrels of proven undeveloped (PUD's) reserves located (10 wells of 64,000 barrels each). We also found an additional 250,000 PUD barrels in our Deer Creek holding, bringing the total of new reserves to 890,000 barrels. Our cost to drill for and to tap into all of those reserves would be $2.4M to a maximum of $2.75M. Each well presents a different cost structure, as those at a greater depth in the Mt Poso field will present more of an expenditure than that of those wells on the Deer Creek property, hence the broader estimate of the total cost.
Based on a price of $20 per barrel of oil, if the Company is successful in drilling the 15 additional wells required to successfully extract the oil, the potential undiscounted value of the reserves is estimated to be upwards of $17.8M in additional revenue over the lifetime of the properties.

EDS: When last we spoke, you mentioned that Sonoran was entertaining a financing, incorporating some lenders from the past and a new entity. Can we get a progress report? Would any of that money raise be figured into a planned drilling/fracture stimulation program on the Mt Poso Field and Deer Creek Oil Field?

JP: When we were considering the financing a few months back, it was pertaining to a large acquistion we we're doing due diligence on. Unfortunately, and as there were other parties as well as partners involved, it was not ultimately in our full control and, by way of a series of events, that venture came to an end. Both the financing and acquisition were bundled together. To that end, we're now pursuing other financing options to proceed with the drilling program, but we're cognizant in the fact that all of the 'ducks need to be in a row' before we move forward. It has to be a winning and advantageous situation for the Company. Finding attractive opportunities is somewhat challenging at this time in the industry; that is closing on new acquisitions, and bringing in the necessary financing. Although the price of oil and natural gas is making for a tougher negotiation process and the sellers are not as motivated to part with their properties while the prices remain at this higher level (spot price of West Texas crude is $31/barrel), we're still determined to do what it takes wrap it up. Perhaps when prices dip a little and nerves become a little more frayed, it'll lend a hand in seeing that tide start to turn.

EDS: Are you still on track regarding becoming a producer of 1,000 to 1,500 BOE (barrels of oil equivalent) per day and 2,500 to 5,000 MCF of gas within 18–24 months?

JP: We're most certainly on track as we've been in a constant mode of building up our reserve inventories, the most evident of that being the 3rd party report findings of late. I'll conservatively say that we are that much closer to our goal, but as far as pinpointing an exact drilling date bringing that to full fruition, I cannot give one. We remain, however, confident that we will reach the production level as set out. I've always maintained that Sonoran is dramatically undervalued. Those reserves will well serve both our bottom line and market valuation.

EDS: Your revenues for the most recent fiscal year were $80,507. Looking 9 months down the road, what does the 2003 fiscal year end look like?

JP: We are extremely bullish on our prospects for 2003 and expect to see our revenues grow quite dramatically. Allow me to put that 2002 (April 30th) figure a little more into perspective. We only just took over the acquisitions in December of 2002. Case in point: we acquired Emjayco Glide, in the Mt Poso Field, in December, but didn't get the wells up and running until April/May 2003. We've also experienced some tank replacement problems on that property which shut it down for 6 weeks. We've had a few growing pains these past 6 to 9 months affecting the revenues in, but the times are changing, starting with the tank replacement being completed this past August 1st. It's from this point forward that we'll start to register revenues from our existing properties.
The question now is will we, prior to the 2003 year end, be successful at adding to that bottom line by tapping into some of the aforementioned new reserves. I sincerely believe that we will, but, as I like to preserve a conservative stance, I hesitate to comment on the exact amount. As mentioned, we'll also be most definitely looking at further value added acquisitions by year-end.

EDS: Do you plan to make the dividend issue - record date announced July 23rd - a permanent and annual one as a reward for shareholders' dedication? And, if so, will it increase percentage wise alongside the Company's earnings?

JP: The recent dividend announcement was intended as a reward to our loyal shareholders for their dedication and commitment to the Company, especially through the 'leaner' times. It's our intention to continue on course and be in a position to reward our shareholders every year, but, as every investor well knows, that's quite dependent on and tied to the Company's performance. At this point, it feels positive that we'll have the ability to do so, but, again, being the conservative person I am, I wouldn't want to commit 100% to that at this point in time. That said, do remember that our audited financials state that we have (after discounts) approximately $6.5M in future cash flow on the books, so, taking that into consideration, the subject of dividends issued, becomes that much more of a reality.

EDS: As the flow from Iraq has somewhat increased (but bearing in mind the potential of more local sabotage), do you see the price of oil staying put or wavering at all? Will social upheaval and like events in Nigeria play a role in that same respect?

JP: That's an excellent question and one that's asked of me, being in this industry, by most everyone I come across. In our first interview, it was my prediction that the price of oil would remain high, and it has done so throughout the summer. Since then, the war in Iraq has been proclaimed as being over…but is it really? The uncertainly in the Middle East, that so affects oil importation, will unfortunately remain primarily due to the fact that we cannot clean up terrorism totally. It's really the 'new norm.' A terrorist act of destroying an oil well or pipeline would be remarkably easy for these groups. That would send the industry into a bit of a harried situation and hype up the price per barrel most assuredly. Conceptually, an act like that is analogous to the recent power blackout in the Northeast US and Canada. How many citizens first thought that this was a terrorist act knowing that the power grids are relatively easy to access and are so unbelievably intertwined? Seems to be a soft spot for us and all too easy a target.
All of this taken into consideration, will the price of oil fluctuate? Yes. Will it drop to levels that we saw 5 years back? No way. Sadly, there's too much uncertainty in the world and it will, for a large part, be in the terms of oil supply.
Nigeria is indeed another hotspot. It all becomes a political question at this point involving US intervention which takes on many more dimensions. But, again, there will always be that bind to oil.
Here's a pertinent fact: over a year ago, the world's oil consumption was 75M barrels/day. Over the course of this past year, we consumed 2M more barrels of oil per day, bringing the total up to 77M barrels/day. And that being while the economy, for the most part, is still struggling. It stands to reason that the consumption will continue to increase. Throw the economy turning around into the mix and there'll be further increase.
Because of the free flowing nature of it, it's sometimes difficult to keep in mind that oil isn't man-made. Once the last drop is sucked up, there is no more; thereby adding to the pricing equation. It's sadly not like hydro, which does need water for its creation, but there's an abundance of that commodity.
All that said, it's my opinion that we'll get accustomed to seeing prices of light crude in the $25 - $30 range.

EDS: The world has marched to many 'energy related' drummers this past year. Being an oil man, how much of a role do you see US fossil fuel consumption playing in the upcoming 2004 elections, particularly in light of its depleting nature, sustained dependence on foreign supply and environmental debates regarding Arctic drilling?

JP: Speaking in a collective sense, there's no doubt that North America has to delicately juggle when it comes to the political animal that is the Oil Industry.
Oil is a precious commodity and one that will end some day. The world's supply is running out, forcing us to search out other viable alternatives: solar, wind, hydrogen. But the real question is how will that take to locate and bring to fruition viable sources.
It's my opinion that the years to come will see the global population—very much inclusive of us here in North America—start to actively employ those alternative energy sources, but still in tandem and alongside oil consumption. No matter what our good intentions, the economy will remain fossil fuel dependent till the day it runs out. And it's assessments like that, I think, that will bring about the likes of a drilling/extraction program in the Arctic. There seems to be no other choice. Besides, it draws on domestic supply and would lessen dependence on Middle East imports, which would, in turn, lessen some the political strife.
Again, last week's power outage was a colossal wake-up call for the Congress and the people of the United States, pin-pointing weakness in the system and the eventuality of future breakdowns. However you look at it, it's analogous and should be treated as such.
On a final note, please don't get the impression that we in the oil business don't respect the environmentalist's work and point of view. Most of us do have a great deal of respect for the earth about us and regard it as precious and in need of protection. The fact remains, however, that oil is a part of everyone's life, from the gas pumps to the formulation of the plastic containers that are on every grocery shelf. And, as such, we need to find domestic supplies and do so in a manner that's protective.
EDS: Any final words regarding Sonoran's coming year that you'd like to leave with the shareholders and your market followers?

JP: We are so very proud of what we've accomplished this past year, despite some potholes along the way. We're primed and strong and are heading full throttle into this year, anticipating that revenues and further acquisitions will be strong and in line with our forecasts. Our shareholders can happily look forward to our fundamentally strong valuation.

Jennifer Gardiner, an Investor Relations veteran and a freelance business writer, is presently consulting with Eric, David and Sons, Inc. Working primarily with micro and smallcap Companies, she has assembled and actively maintains international relationships in her roles as Marketing/Communications Strategist, and Investor/Public Relations Managerial consultant.

Please view the EDS disclaimer/disclosure on Sonoran Energy.

2003 © Eric, David & Sons, Inc. All Rights Reserved.

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