Quarterly report pursuant to Section 13 or 15(d)


6 Months Ended
Jun. 30, 2011
The value of the Company's crude oil and natural gas properties consists of all acreage acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and other associated capitalized costs.  Each of these costs contributed to the Company's approximate $158 million increase in crude oil and natural gas properties during the six months ended June 30, 2011.
For the six months ended June 30, 2011, the Company completed acreage acquisitions involving properties spanning across the following counties of North Dakota:  Billings, Burke, Divide, Dunn, McKenzie, Mountrail, Stark and Williams and Richland and Roosevelt counties of Montana.  The Company generally values acreage subject to near-term drilling activities on a lease-by-lease basis because it believes each lease's contribution to a subject spacing unit is best assessed on that basis if development timing is sufficiently clear.  Consistent with that approach, the majority of the Company's acreage acquisitions involve properties that are “hand-picked” by the Company on a lease-by-lease basis for their contribution to a well expected to be spud in the near future, and the subject leases are then aggregated to complete one single closing with the transferor.  As such, the Company generally views each acreage assignment from brokers, landmen and other parties as involving several separate acquisitions combined into one closing with the common transferor for convenience.  However, in certain instances an acquisition may involve a larger number of leases presented by the transferors as a single package without negotiation on a lease-by-lease basis.  In those instances, the Company still reviews each lease on a lease-by-lease basis to ensure that the package as a whole meets its acquisition criteria and drilling expectations.
In January, 2010, the Company's board of directors approved an arrangement whereby the Company efficiently divests minimal working interests in wells.  In March 2010, the Company entered into an agreement with a private unrelated company, whereby the Company has the option (but not the obligation) to sell minimal wellbore interests in any drilling unit where the Company's interest constitutes less than 0.0050 working interest in a well.  The Company retains the underlying leasehold interest and only assigns the wellbore interest.  Through this arrangement, the Company has divested wellbores with an average working interest of approximately 0.0025 of one net well for a total aggregate divestiture of 0.23 of one net well.  The Company believes the divestiture of these minimal working interests creates value by avoiding the administrative, reserve engineering and accounting costs that would be associated with these minimal interests.  The proceeds from sales under the agreement were applied to reduce the capitalized costs of oil and gas properties.

In November 2009, the Company agreed to participate in the exploration and development of Slawson Exploration Company, Inc.'s  ("Slawson") Anvil project in Roosevelt and Sheridan Counties, Montana and Williams County, North Dakota.  In April 2011, the Company sold its interest in the Anvil project for $4,960,784.  As of the date of sale, the Company's cost basis in the Anvil project was $1,785,007.  The Company sold its interest in the project along with Slawson, who also desired to sell its entire interest in the project.  Slawson had drilled and completed one well in the project area prior to the divestiture – the Mayhem #1-19H well – and the Company retained its interest in that wellbore in connection with the divestiture. The proceeds from the sale were applied to reduce the capitalized costs of oil and gas properties.

Unproved Properties
The Company's unproved properties not being amortized comprise of approximately 126,614 net acres of undeveloped leasehold interests.  The Company believes that the majority of its unproved costs will become subject to depletion within the next five years by proving up reserves relating to the acreage through exploration and development activities, by impairing the acreage that will expire before the Company can explore or develop it further or by determining that further exploration and development activity will not occur.  The timing by which all other properties will become subject to depletion will be dependent upon the timing of future drilling activities and delineation of its reserves.
Excluded costs for unproved properties are accumulated by year. Costs are reflected in the full cost pool as the drilling costs are incurred or as costs are evaluated and deemed impaired.  The Company anticipates these excluded costs will be included in the depletion computation over the next five years.  The Company is unable to predict the future impact on depletion rates.

The Company had 161 gross (15.02 net) wells drilling, awaiting completion or completing as of June 30, 2011.  All properties that are not classified as proven properties are considered unproved properties and, thus, the costs associated with such properties are not subject to depletion.  Once a property is classified as proven, all associated acreage and drilling costs are subject to depletion.
The Company historically has acquired its properties by purchasing individual or small groups of leases directly from mineral owners or from landmen or lease brokers, which leases historically have not been subject to specified drilling projects, and by purchasing lease packages in identified project areas controlled by specific operators.  The Company generally participates in drilling activities on a heads up basis by electing whether to participate in each well on a well-by-well basis at the time wells are proposed for drilling, with the exception of four defined drilling projects with Slawson.
As of June 30, 2011, the Company was participating in three defined drilling projects with Slawson covering an aggregate of 15,065 net acres of leasehold interests held by the Company.  The Windsor project area includes approximately 3,323 net acres held by the Company, primarily located in Mountrail and surrounding counties of North Dakota.  The South West Big Sky project includes approximately 3,380 total net acres held by the Company in Richland County of Montana.  The Lambert project includes approximately 8,362 net acres held by the Company in Richland County of Montana.