BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA HORIZONTAL WELL) REPORT OF THE ADMINISTRATIVE LAW JUDGE

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Lorraine Shaw
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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA 7 APPLICANT: RELIEF SOUGHT: NEWFIELD EXPLORATION MID- CONTINENT INC. POOLING (PART OF A MULTIUNIT HORIZONTAL WELL) CAUSE CD NO T LEGAL DESCRIPTION: SECTION 33, TOWNSHIP 17 NORTH, 'o RANGE 8 WEST, KINGFISHER COUNTY, OKLAHOMA COURT CLERK'S OFFICE - TULSA CORPORATION COMMISSION OF OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE The cause came on for hearing before Kathleen M. McKeown, Administrative Law Judge (AU), in the Oklahoma Corporation Commission (Commission) courtroom, Kerr Building, Tulsa, Oklahoma, pursuant to notice given as required by law and the rules of the Commission for the purpose of taking testimony and reporting to the Commissioners. CASE SUMMARY The only issue in this cause is the fair market value of options to participation under any order issuing from the cause. (Newfield) requested that the options to participation be: 1) a cash bonus of $2200 per acre with a 118th royalty; 2) a cash bonus of $2000 per acre with a 3/16ths royalty; 3) a cash bonus of $900 per acre with a l/s" royalty; or 4) for parties with overburdened interests, a cash payment of $10 for the entire overburdened interest with Newfield accepting the interest as burdened. Stack Production LLC (SPLLC) believes that the Commission needs to consider transactions placed during a telephonic auction that SPLLC conducted in the subject area to determine fair market value as well as a December 2015 lease covering 139+ acres. If that is done, SPLLC would recommend that the options to participation be: 1) a cash bonus of $4000 per acre with a I/8 royalty; 2) a cash bonus of $3500 per acre with a 3/16ths royalty; or 3) a cash bonus of $3250 per acre with a 115th royalty. SPLLC had no objections to the payment to parties with overburdened interests that choose not to participate. RECOMMENDATIONS The pooling application should be granted and Newfield should be named operator of the well. Options to participation in the pooling order should be: 1) a cash bonus of $4000 per acre with a 118th royalty; 2) a cash bonus of $3500 per acre with a 3/16ths royalty; 3) a cash bonus of $3250 per acre with a 115th royalty; or 4) for parties with overburdened interests, a cash payment of $10 for the entire overburdened interest delivering to Newfield the interest as burdened. HEARING DATE April 6, 2016

2 APPEARANCES Ron M. Barnes appeared for Newfield; Elizabeth Anne George and Michael D. Stack appeared for SPLLC; Eric R. King appeared for American Energy Non-Op SUMMARY OF EVIDENCE requests an order issue pooling the interests of oil and gas owners in the Mississippian and Woodford common sources of supply as they underlie Section 33, Township 17 North, Range 8 West, Kingfisher County, Oklahoma. 2. Exhibits were marked and accepted into evidence as follows (exhibit sponsor in parentheses): 1. Color-coded copy of respondent list to application (Newfield) 2. Authority for Expenditure (Newfield) 3. Multi-page exhibit consisting of executed oil and gas leases (SPLLC) 3. On behalf of Newfield expert testimony and evidence was presented through Eric Weidemann, petroleum landman. A. The subject application is part of a multi-unit pooling; Newfield owns a 91% interest in this unit and has commenced, but not completed, the multi-unit well. After proposing the well on 7/14/15, the subject pooling application was filed on 7/29/15 and subsequently amended on 1/21/16. The initial proposal for the multi-unit well contained alternatives to participation of: 1) a cash bonus of $1200 per acre with a 118th royalty; 2) a cash bonus of $1100 per acre with a 3/16ths royalty; or 3) a cash bonus of $700 per acre with a 115th royalty. Since the filing of the pooling in July 2015, Newfield has taken several leases in the 9-unit area including (in Section 4) a lease where Newfield paid a cash bonus of $2000 per acre with a 3/16ths royalty on 8/18/15; and (in Section 33) Newfield paid a cash bonus of $900 per acre with a 1/5th royalty on 1/14/16. At the hearing, Newfield recommended inclusion of these terms as alternatives to participation to be included in any final pooling order to issue in the cause; a cash bonus of $2200 per acre with a 118th royalty was also recommended by Newfield as an alternative to participation although no transactions had occurred for this amount in the 9-unit area. B. Newfield distinguished several other transactions in the 9-unit area where higher cash bonuses and royalties were involved as not indicative of fair market value: In the subject Section 33 American Energy Non-Op (AENO) took a lease for no cash bonus per acre with a 114th royalty on 9/10/15 after the pooling was filed; since AENO typically "follows" Newfield activity and will pay higher bonuses and/or royalties for small amounts of acreage to be entitled to participate in future Newfield drilling ventures, this transaction should not be considered indicative of fair market value. In Section 29 (NW offset) Newfield paid a cash bonus of $2500 per acre with a 115th royalty but this transaction involved land in multiple sections and, therefore, is not indicative of fair market value. 2

3 In Section 32 (West offset) Acitero Investments took 2 leases on 2/4/16 (after the pooling order for that section issued on 9/14/15) covering.18 acres for no cash bonus and a quarter from a party that does not own an interest in the unit (per Newfield' s title opinion); this should not be considered indicative of fair market value. There are no transactions within the past year in Section 5 (Southwest offset). In Section 4 (South offset) AENO took a lease on 6/12/15 with an unknown cash bonus and 1/4th royalty which was not considered as indicative of fair market value for previously stated reasons. Yellowjacket Resources, LLC (Yellowjacket) took a lease from Carol J. Drake, LLC on 12/8/15 covering a total of acres for a cash bonus of $4000 per acre with a 3/16ths royalty; the Newfield witness opined that this acreage may have consisted, at some point, of many small acreage amounts with different owners. Yellowjacket typically takes small interests in areas where Newfield is active so that it might have an option to participate in any drilling activity; because of this "reputation" the December transaction should not be considered by the Commission to be indicative of fair market value. Newfield also participated in a telephonic auction on 5/22/15; this covered property in Section 4 and, being the successful bidder, Newfield purchased 5 leases for a cash bonus of $6500 per acre with a 1/4th royalty. However, the transaction included land in other sections making this transaction not indicative of fair market value. Another transaction by Newfield occurred on 8/18/15 and involved land in Section 4; a cash bonus of $2000 per acre with a 3/16ths royalty was paid. This is the basis for Newfield's offer to include these terms in the subject pooling; the Section 4 pooling application was filed on 3/25/16. In Section 3 (Southeast offset) Newfield pooled the unit and had commenced drilling a well when it was discovered that there had been acreage missed in the pooling; in order to acquire the interest that had been missed, Newfield paid a cash bonus of $3500 per acre with a 115 t royalty but, due to the circumstances, this should not be considered fair market value. Yellowjacket also acquired acreage in Section 3 for an unknown cash bonus with a royalty on 11/2/15. There are no transactions within the past year in Section 34 (East offset). In Section 27 (Northeast offset) Newfield took 2 leases for $1750 cash bonus per acre with a 3/16ths royalty. In Section 28 (North offset) there was only a multi-section transaction that would not affect the fair market value in the subject unit. 4. On behalf of SFLLC expert testimony and evidence was presented through Kurt Bollenbach, an attorney at Harrison and Mecklenburg (HM), a general law firm that specializes in oil and gas matters; the witness was qualified as an expert in petroleum land matters. A. Mr. Bollenbach and his law firm routinely represent clients with oil and gas interests that wish to lease to interested oil and gas companies. Because these clients wish to have the option to choose the highest cash bonus and royalty available, HM will contact various companies, 3

4 offer their clients' interests and hold a "package bid process". This process involves the interested companies telephoning in at the same time; HM will then solicit an offer from one party and pass it on to the other parties who have the option to offer a higher amount or not; once all but one company has dropped out, the clients are given the highest cash bonuses and royalties offered from which they will make a choice to lease. Such was the case when a family contacted HM to handle their approximately 60 acre interest in Section 4 (South offset). On May 22, 2015 HM assembled several companies by telephone to make offers on the 60 acre interest in Section 4. Newfield offered a cash bonus of $1500 per acre with a 3/16ths royalty; this offer was passed on to the other participating oil and gas companies and the companies made additional offers; Newfield made the highest offer to lease the interest for: 1) a cash bonus of $8100 per acre with a 3/16ths royalty; or 2) a cash bonus of $7500 per acre with a 115th royalty; or 3) a cash bonus of $6500 per acre with a 114th royalty; HM passed these options on to its client and the third option was selected by the client. Within 30 minutes after Newfield was informed by HM that Newfield had secured the Section 4 interest for a cash bonus of $6500 per acre with a 110 ' royalty, a Newfield representative called HM back and offered the same prices for acreage owned by the same family in other sections around the county; as a result, several other interests outside Section 4 were leased by Newfield on the same day from the same family. B. The leases taken through the package bid process were purchased with high bids during the first 6 to 8 months of last year but in October through December there were also leases taken for cash bonuses of $3500 per acre with a 3/16ths royalty outside of the 9-unit area; SPLLC believes these terms would be reasonable to offer in the subject pooling order. On the lower side are Newfield poolings (outside the 9-unit area) ranging from $900 to $1750 cash bonuses with associated royalties. In Section 33, there have been no higher prices paid than that testified to by Newfield, however it was noted that the individuals with whom Newfield negotiated these prices are not sophisticated investors or other oil and gas companies. The Section 4 package bid process took place to get the most equitable price for the HM clients and to know that, once negotiated, the transaction would close. The bidding that takes place in this process does not result in a "compulsive" sale as all parties are willing buyers with a chance to enter competitive bids or stop at any time and, therefore, should be used as indicative of fair market value; only "sealed bid" processes may not be indicative of fair market value. It was emphasized that the Section 4 purchase by Newfield was not a multisection deal at the time it was bid upon. Only after Newfield called back shortly after the closing of the Section 4 transaction, did HM realize their client owned in other sections that Newfield was interested in purchasing at the same price paid in Section 4. RECOMMENDATIONS 1. After taking into consideration all of the facts, circumstances, evidence and testimony presented in the cause, it is the recommendation of the ALJ that the subject application of Newfield be granted. Under any pooling order issuing from the cause the ALJ recommends that the alternatives to participation be as follows: 1) a cash bonus of $4000 per acre with a 118th royalty; 2) a cash bonus of $3500 per acre with a 118th royalty; 3) a cash bonus of $3250 per acre with a 1/5tl royalty; or 4) ru

for parties with an overburdened interest, a cash payment of $10 for the entire overburdened interest will be paid with the interest delivered as burdened to Newfield. 2.

5 for parties with an overburdened interest, a cash payment of $10 for the entire overburdened interest will be paid with the interest delivered as burdened to Newfield. 2. Newfield presented expert testimony as to current fair market value in the subject unit and surrounding eight units. Much was made of the package bid process in Section 4 handled by HM for their clients. Initially, Newfield noted the package bid process transaction taken 5/22/15 but discounted its applicability to the subject case because it was a multi-section deal which should be excluded from fair market value consideration. Newfield also mentioned a 12/8/15 lease taken in Section 4 by Yellowjacket for a cash bonus of $4000 per acre with a 3/16ths royalty but also discounted its applicability to a determination of fair market value because the lease included several small acreages from different owners (this despite the acreage totaling just under 140 acres and the lessor being a single entity) and (more importantly) was taken by a company that "follows" Newfield leasing small interests for high prices just to get into the unit development. Once these transactions were eliminated for the noted reasons, the remaining transactions to consider for a determination of fair market value were cash bonuses of $2000 per acre with a 3/16ths royalty taken 8/18/15; and $900 per acre with a 115 t royalty taken 1/14/16; both were recommended as options to participation in any pooling order that may issue in the subject cause. 3. SPLLC presented evidence of the 5/22/15 package bid process that occurred covering Newfield's interest in Section 4 as well as the phone call from Newfield (within 30 minutes after the Section 4 transaction had closed) to offer the lessors the same terms on other interests throughout the county. It appears this is what led Newfield to discount this transaction (and its applicability to a fair market value consideration in the subject matter) because the 5/22/15 bid exclusively on lands in Section 4 had suddenly "morphed" into a multi-section deal. SPLLC also referred to the Section 4 lease between Yellowjacket and Carol Drake, LLC, the only lessor needed to sign the lease covering 139+ acres. This lease occurred on December 8, 2015 midway between the Newfield transactions in Sections 4 and 33 that were recommended as options to participation by Newfield. SPLLC went on to note transactions outside of the 9-unit area occurring in the last quarter of 2015 between sophisticated parties and/or companies where they believed a fair evaluation of oil and gas interests occurred despite the decline of oil prices. Incorporating all of these transactions, SPLLC made their recommendations for alternatives to participation of a cash bonus of $4000 with a 1/8th royalty; a cash bonus of $3500 with a 3/16ths royalty; or a cash bonus of $3250 with a 1 15 t royalty. 4. The parties have presented three different scenarios of fair market value to be applied in the subject area. At the highest end are the values offered by Newfield in the 5/22/15 "package bid process" involving Section 4 interests and managed by HM. These values were: 1) a cash bonus of $8100 per acre with a 3/16ths royalty; 2) a cash bonus of $7500 per acre with a 1/51h royalty; and 3) a cash bonus of $6500 per acre with a 1/5 th royalty. A review of lower transaction values paid in the last quarter of 2015 inside and outside the 9-unit area between/among knowledgeable professional parties resulted in the SPLLC recommendation that the following be included in any pooling order for the subject unit: 1) a cash bonus of $4000 per acre with a 1/8th royalty; 2) a cash bonus of $3500 per acre with a 3/16ths royalty; and 3) a cash bonus of $3250 per acre with a 115 th royalty. The lowest fair market values were recommended by Newfield and based on an August 2015 transaction in an offset unit as well as a January 2016 transaction in the subject unit resulting in recommended options to participation of: 1) a cash bonus of $2200 per acre with a 1/8 1h royalty; 5

2) a cash bonus of $2000 per acre with a 3/16ths royalty; and 3) a cash bonus of $900 per acre with a 115th royalty. 5. As noted in Miller v. Corporation Commission, 635 P.

6 2) a cash bonus of $2000 per acre with a 3/16ths royalty; and 3) a cash bonus of $900 per acre with a 115th royalty. 5. As noted in Miller v. Corporation Commission, 635 P. 2d 1006 (1981), the concept of fair market value used to arrive at fair compensation under force pooling orders is defined as: "...the level at which this interest can be sold, on open-market negotiations, by an owner willing, but not obliged, to sell to a buyer willing, but not obliged, to buy." (Emphasis added) The ALJ believes that the package bid process participated in by Newfield and managed by HM is reflective of fair market value as it is not a sealed bid situation, nor is it a condemnation of land by a public entity forcing the sellers to sell. Rather, this is a situation that provides a venue allowing interested parties to buy and sell knowing that no one is under a compulsion to do either. In a sealed bid situation, the buyers know that, if their bid is chosen by the seller, it must be paid to the seller regardless of how much the other parties bid. In a condemnation the owner of property is forced to take what is determined to be a fair value. Here, a buyer knows the prices being bid by the other parties and can decide at any time to withdraw from the process. Additionally, the owners of the leases are allowed to choose among the highest offers made. It is noted that the May 2015 transaction, regardless of the bidding process, was also changed quickly by Newfield into a multi-unit transaction once Newfield secured the bid. The transaction was then "dismissed" at the hearing as not being indicative of fair market value. The ALJ disagrees with this process of converting a single transaction into a multi-unit transaction and then characterizing it as something that should not be considered as fair market value. 6. The lease taken by Yellowjacket in December 2015 for $4000 and a 3/16ths royalty must be considered and not determined to be a product of a company anxious to be a part of a unit where Newfield is active. There was a sizeable amount of acreage involved (139+ acres) and both the lessor and lessee are experienced companies. While nothing else is known about the specifics of the lease, there was no proof of the lease including property owned by small interest owners. The timing of the transactions on which the various recommendations are based on is quite comparable. While the price of oil has declined dramatically, there have been higher prices paid fairly consistently in the 9-unit area since June Newfield bases its recommendation for fair market value on a transaction occurring mid-august 2015 ($2000 and a 3/16ths royalty). SPLLC recommends a cash bonus similar to a lease taken in December 2015 ($4000) with a lower royalty (1/8th) based on transactions reviewed within and without the 9-unit area; the big difference in these leases appears to be the difference when sophisticated parties/companies negotiate compared to individuals negotiating with oil company representatives. While all are legitimate transactions that have occurred, this Commission is charged with force pooling units and determining a fair market value for those interests being force pooled regardless of the experience of the various respondents. It is noted that there are always transactions utilized in poolings that may not be exactly what was negotiated for (i.e. Newfield's recommendation of $2200 with a 118th and SPLLC's recommendations of $3500 with a 3/16ths and $3250 with a 1/5th) but all parties feel these modifications in cash bonus and royalty are legitimate based on differences typically occurring in other pooling bonuses with associated royalties. Further, the change in commodity pricing over the past year is reflected by not choosing to include the highest cash bonuses and royalties offered by Newfield in May 2015 at the HM package bid process.

7 Thus, in light of the aforementioned conclusions, it is the recommendation of the ALJ that the application in be granted. Any order issuing out of the cause should contain the recommendations provided herein. Respectfully submitted this 6th day of May 2016, KA LEEN M. MCKEOWN Administrative Law Judge

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