Magnolia’s Bakken/Three Forks Sanish interests target the Bakken formation, which comprises three separate reservoirs, and the Three Forks Sanish Formation which lies below.

The interests, comprising of leases covering approximately 19,200 gross mineral acres (330 net mineral acres), are distributed across a number of sections all of which are located in Dunn, Williams and McKenzie Counties, North Dakota. Magnolia has the opportunity to produce oil on the same lease from both separate formations. The operator is entitled to drill four wells on each of the Bakken and four wells on each of the Three Forks Sanish formations in each section.

When Magnolia acquired its interests in the Bakken, it was unknown that the Three Forks Sanish formation was a separate and distinct reservoir. It is now thought that the Three Forks Sanish formation could be equally or more productive than the Bakken formation.

Based on the current pace of development, the Directors expect it to take several years to fully develop Magnolia’s Bakken/Three Forks Sanish Interest; operators in this area expect to drill four wells per unit in each of the Middle Bakken and Three Forks Sanish formations. Magnolia has experienced average stabilised production rates of 400 barrels of oil per day on its multi-stage frac wells.

Geology

The Bakken formation is a rock formation of the Late Devonian to Early Mississippian age occupying about 200,000 square miles of the subsurface of the Williston Basin, covering parts of Montana, North Dakota and Saskatchewan. The rock formation consists of three members: lower shale, middle dolomite and upper shale. Both the lower and upper shale are organic rich, brittle due to silica content, of marine origin, and are considered an important source rock in the area. Between the lower and upper shale is the Bakken reservoir target and beneath the lower shale is the Three Forks Sanish reservoir target.

Oil was first discovered there in 1951, but efforts to extract it met with difficulties until the late 1980s when horizontal drilling technology was used to drill lateral wells in the upper and lower shales. Production levels, however, were unpredictable because the oil derived mainly from fractures in the shale. The most important breakthrough occurred in 2000 in Richland County, Montana when the first horizontal well was drilled in the oil-charged middle dolomite of the Bakken Formation at what became known as the Elm Coulee Field. Since that time and as a result of improved hydraulic fracturing techniques, shale has become a significant target for oil and gas companies.