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Some Thoughts on Profits in the Oil Patch

Bob Moriarty
Archives
June 5, 2007

Investors in natural resources need to accept a few givens. As far as mining goes, failure is the norm. The average junior (and many seniors) will never operate at a profit. The average junior will never find a mineable deposit. That doesn't mean they aren't worth investing in, indeed, the opportunity for profit in trading shares of juniors is great indeed.

But in the energy sector, cash flow and profit are critical to running a good company. You simply cannot operate an energy company according to the drill and print shares; drill and print shares model so common in mining.

I've looked over our stable of advertisers and I found a company with near-term cash flow and profit. It seems to me they have not yet made it onto the radar screen of investors and I want to take this opportunity to bring them to the attention of 321energy readers. I really like the company and their business model.

I think they demonstrate a point I want all our readers to understand. There are thousands of juniors mining and energy companies out there. And hundreds of great and compelling stories.

The few companies smart enough to advertise know they have something worth owning and telling the story about. While there is a vibrant and lively gold/silver community, no such thing exists for energy. There is no core of energy "bugs" as there is with both gold and silver. There will be one day soon, peak oil is real and it's past and prices are going to go a hell of a lot higher.

The companies who chose to advertise on 321energy want to tell their stories. You owe it to yourself to visit every single sponsor and read their story; there are so many good investment stories.

Index Oil and Gas (IXOG-OTCBB) is a four-year-old London formed; Houston, Texas based; oil and natural gas company with a solid business model. They set out to invest in US properties. After all the US consumes 16% of the world's energy just to power our automobiles. They found a number of small and relatively safe properties in Kansas, Texas, Mississippi, Louisiana, and Alabama.

They began with drilling short, shallow holes in Kansas with high drilling success and used the cash flow from those operations to move into higher risk but much higher payout wells nearer to the Gulf Coast. Production has pretty much doubled every year for four years and reached 25 barrels a day in the quarter ended December 31, 2006.

25 barrels a day doesn't sound like much but when you consider a business model designed to maintain a 100% increase every year, cash flow goes up damned quick.

I participated in a conference call a few days ago and Company Chairman Dan Murphy explained that the company was at a 30 BOEPD rate and intended to manage an increase to 100 BOEPD rate in 12 months. I think they will accomplish it.

Index's activity over the last three years consisted of drilling in known production fields. It was production drilling, not exploration drilling. In the last year, the company drilled 12 wells with a success rate of 75%. Three wells were capped and abandoned. They now have revenue from 19 productive wells, up from 8 in 2004.

Index has progressed into what I call Phase II of their business plan with moves into the Gulf Coast region. It's a lot more ambitious. The oil and gas plays targeted are both deeper (more expensive) and larger. (Higher revenue per dollar of investment) The company is also taking larger positions in their share of each well. Again, it's more expensive but cash flow goes up a lot faster. The company has spent three years forming relationships and building infrastructure.

Investing today, you are not buying current production; you are buying a 100% growth rate and four years of getting ready to hit the big time. Wall Street and Bay Street factor in future production and growth rate and IXOG has a great growth rate as well as excellent current production.

Of all the energy companies I follow, IXOG has one of the best-defined models. It just happens to be a model I agree with. Energy prices are going a lot higher. The companies who will benefit the most are those with depth of management in place and infrastructure, industry relationships already created. Index has come up with a plan that is designed to scale a lot higher.

The company did two private placements in September and October of 2006 at much higher prices to raise $10.9 million. They are fully funded for 2007 and well into 2008. Index anticipates a capital-spending program of just over $4 million US in fiscal 2007 and $8 million in fiscal 2008 with a 12-14 well drilling schedule.

Everyone needs a permanent call on energy in his or her portfolio. Index is a permanent call on both oil and natural gas. They have a well-balanced and experienced management team and a business model that has been stress tested and it works. They expect to go into positive cash flow in Q3 of 2007 and should be in profit in 2008. At these prices they are cheap.

Index is an advertiser. We have not been paid to produce this piece. As energy prices go higher, IXOG should go higher faster. We are biased. If you don't do your own due diligence, you will get burned on a regular basis. If you don't have a call on oil and natural gas, get one soon while they are still cheap.

Index Oil and Gas, Inc IXOG-OTCBB $1.14 Canadian (June 4, 2007)
65.5 million shares
Index Oil website

Bob Moriarty
President: 321gold
Archives
June 5, 2007
321gold Ltd