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Frontier Oilfield Services, Inc. (OTCQB: FOSI)

Company Overview

Frontier Oilfield Services, Inc (OTCQB: FOSI) represents a ground-floor opportunity for those who may be seeking to capitalize on the “shale” boom that is sweeping across several oil and gas producing regions in the United States like the Haynesville shale in East Texas. The Haynesville Shale is one of the largest gas shale plays in the US, and is currently the primary location of Frontier’s operations.
As a result of breakthroughs in oilfield technology, the process by which shale oil and gas is extracted has resulted in a massive burden upon the E & P companies –the disposal of drilling and fracing fluids and salt water. As exploration and production (“E&P”) companies have drilled more wells and deployed more hydro-fracturing to increase production, it became imperative that something be done with the flow-back of the drilling and fracing fluids and produced water. Consequently a sizable increase in demand for saltwater disposal has left a considerable gap in the disposal market that needs to be filled.
Frontier’s business focus on wastewater recovery and disposal was selected due to the relatively high margins and a strong barrier to entry by potential competitors due to the limited supply of state permitted disposal wells. This highly fragmented industry consists mostly of “mom and pop” operations with limited to no infrastructure conducive to fostering the growth required to satisfy the needs of the major oil companies within their respective producing regions. Frontier has come to the following conclusions:

  • Advanced technology of hydro-fracturing has increased the demand for saltwater recovery and disposal.
  • Compliance, safety, and environmental practices of “mom and pop” operations are not sufficient for major E&P companies, who shoulder the liability for disposal of saltwater and therefore must seek reliable companies with proven sophistication and logistics.
  • A roll-up strategy through aggressive acquisitions of “mom and pop” disposal operations and organic growth of existing operations could substantially increase the revenue and assets of Frontier and therefore provide the potential for Frontier shareholders for increased value.
  • Drilling and production activity, for example in the Haynesville shale, is expected to continue for decades to come and 37,600 wells are projected to be in production by 2023. The total Haynesville shale saltwater disposal market is projected to reach 6.2 billion barrels.
  • Frontier plans to position itself as one of the premier companies to meet the saltwater disposal needs of oil and gas producers and operators in the Haynesville Shale and then branch out to other shale plays to increase its market share and geographic diversity.
  • Frontier has put into place experienced management with a successful track record of achieving market success in both E&P operations and oilfield services.

The services offered by the Company are necessary and essential to the large exploration and production companies already operating in Frontier’s planned service areas. Currently, Frontier manages the operations of Trinity Disposal and Trucking, LLC. (TDT) a 12 year old saltwater and drilling fluids transportation and disposal company with eight disposal wells and access to approximately 4,000 oil/gas wells operating within the Company’s target area of operations.

  • Frontier intends to complete the acquisition of Trinity Disposal and Trucking LLC through the purchase of 51% of the equity of its parent, Frontier Income and Growth, LLC, which is being made by a $5.5 million dollar preferred stock purchase by Lonestar Income and Growth, LLC (see below).
  • Once acquired Frontier will seek to expand Trinity’s operations, as 100% of their current capacity is being absorbed by major customers like Devon Energy, GMX Resources, Wagner & Brown, Ltd., Matador Oil, NFR, Vernon Faulkner, and XTO Energy.
  • Trinity Disposal and Trucking currently targets customers which are within 15 miles of one of its disposal wells due to the favorable transportation economics of such proximity. Currently, there are approximately 4,000 producing wells that are within a 15 mile radius of Trinity’s disposal wells, and as stated above, Frontier believes that number will grow.

Frontier recently announced an investment agreement with Lonestar Income and Growth, LLC. Lonestar, an unrelated third party, will receive 2,750,000 shares of Frontier’s 2011 Series A 8% preferred stock for the sum of $5,500,000.00 contingent upon Frontier using the proceeds of the stock purchase to acquire a majority (51%) interest in Frontier Income and Growth, LLC., (FIG), the parent of Trinity Disposal and Trucking, LLC.

Frontier also anticipates being able to expand its “roustabout” services which are an additional profit center and a complement to the wastewater recovery and disposal business.

The following is a more detailed explanation of the oilfield salt water disposal business.

Wastewater Disposal and Recovery

The oilfield saltwater disposal (“SWD”) business includes three basic components:

  • Transporting wastewater, which is a byproduct of drilling and ongoing production, from an oil/gas well to a disposal site for a fee.
  • Disposing of the water in a state permitted disposal well for a fee. Disposal water is continually generated in both the well drilling and completion phase (flowback water) and while the well is producing oil/gas (produced water).
  • Skim oil is the residue which is salvaged and sold from the transported wastewater.

During the completion phase of an oil/gas well, fresh water is used to fracture the shale formation. A typical multi-stage frac process uses at least 100,000 barrels of fresh water. When this water “flows back” it is salty and must be transported away from the drilling site and disposed of in a permitted disposal well. The need for disposal of flow-back water occurs only during the drilling of a new well, however flow-back water disposal is often the second-largest expense of drilling a new well and provides Frontier with higher margins.

Water that comes to the surface during the normal oil or gas production process is naturally occurring briny water that is generated from deep within the earth along with the oil and gas. The need to dispose of “produced water” is on-going and continues throughout the life of the oil/gas well. Servicing this disposal need produces recurring revenues, frequently on a daily basis. Produced water disposal is usually the largest lease operating expense of a producing well.

In addition to receiving fees for transporting and disposing of salt water, the company will also generate revenue from the sale of “skim” oil. This oil comes mixed in with the salt water that the company transports and disposes. The company salvages the oil prior to pumping the water into one of the disposal wells.

Leadership

Tim Burroughs – CEO / President

Mr. Burroughs has over twenty years of experience in financing oil and gas drilling and development projects with Dallas/Ft. Worth based energy companies. Having studied business administration at Texas Christian University in Fort Worth, Mr. Burroughs developed and implemented a low risk start-up plan for operating oil and gas projects. Since the inception of this plan, Mr. Burroughs has formed joint ventures to own and/or operate approximately 500+ wells. During Mr. Burroughs leadership and the relationships that were forged; the company was successful in developing and drilling in the Barnett Shale, East Texas, and the Anadarko Basin in Oklahoma. By establishing partnerships with key Operators such as Devon Energy Corporation, ConocoPhillips, Chesapeake, XTO, EnCana, St. Mary’s Land and Exploration, and others, Mr. Burroughs continues to strive for excellence and growth in future projects.

C. David York – President of Trinity Disposal & Trucking LLP, EVP of Field Operations for Frontier Oilfield Services

C. David York, age 53, has over twenty-five years of oilfield service experience beginning when he was 17 years old working in South Texas on drilling rigs for ARCO (Atlantic Richfield). He continued in the oil and gas industry with such companies as Poole International, Geophysical Logging and Explorations, Inc. and Hilliard Drilling Company. Mr.York oversaw the East Texas/Louisiana operations and the drilling/completing of over 42 wells in the Barnett Shale (2004-2008) for companies such as Devon Energy, Conoco Phillips, Encana, Trio Operating, Williams, XTO Energy (now Exxon-Mobil), Braden Exploration, and Burlington Resources. Mr. York oversees day to day operations for Trinity Disposal & Trucking, LLC. He studied business administration at the University of Texas at Edinburg.

Kenneth Conte – Vice President & CFO

Kenneth K. Conte, age 53, was appointed Vice President and CFO of Frontier Oilfield Services, Inc. on January 1, 2012. From June 1, 2010 until November 2011 Conte served as Executive Vice President and CFO of NYTEX Energy Holdings, Inc. Dallas, TX. For 5 years prior to joining NYTEX, Conte served as Managing Director and Head of Mergers & Acquisitions for National Securities Corporation. From 1998 thru 2005, Conte served as CEO or CFO of Windsor Technology, LLC, and Argilus Investment Banking. In addition, Conte served as Senior Vice President — Investment Banking for McDonald Investments, Inc., in Cleveland, Ohio. He has also held management positions at the Corporate Banking and Finance Group for Key Bank in Rochester, at Shawmut’s LBO fund, and at The Chase Manhattan Bank. Conte obtained his MBA in Finance at the William E. Simon Graduate School of Business Administration at the University of Rochester; and a BBA in Accounting from Niagara University.

Bernard O’Donnell – Director

Bernard R. “Dick” O’Donnell, age 68, was the President of Euro American Capital Corp, an affiliated brokerage from 2005 thru 2010. Mr. O’Donnell is also the EVP for Frontier Oilfield Services, Inc and also handles Investor Relations. He has over 33 years of diversified experience in financial sales, investment banking and brokerage operations. Mr. O’Donnell has a BS degree in Business and Industrial Management and a Masters in Business Administration from San Jose State University.

Daniel R. Robinson – Director

Daniel R. Robinson, 63, is an oil and gas executive. He is President and CEO of Placid Refining Company and Placid Holding Company, positions which he has held since 1994. He is also director of Field Point Petroleum Corporation, an AMEX traded public company, where he has served in that capacity since 2004. Mr. Robinson serves as director of the National Petrochemical and Refiners Association (NPRA), a non-profit industry advocacy organization serving the petroleum refining and petrochemical industry. He has been director of the NPRA since 2004. Mr. Robinson holds both a Bachelor of Science and Masters of Business Administration degrees from the University of Wisconsin.

Donald Ray Lawhorne – Director

Donald Ray Lawhorne, 68, is currently President, CEO and Director of Pacesetter Management, Inc.; a Director of Orchard Holdings Group, LLC; Manager of Pacesetter Investment Partners, LLC, the general partner for Pacesetter Growth Fund, LP; and Manager of Pacesetter Associates LLC. Mr. Lawhorne has held the aforementioned positions since May 1997. Mr. Lawhorne was also President, CEO and Director of Alliance Enterprise, Inc. from March 1994 to February 2010. Mr. Lawhorne has an MBA from Pepperdine University and a BBA from Southern Methodist University.

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