Target Energy : Quarterly Report 31 December 2016

Quarterly Report for the quarter ending 31 December 2016

1. Operations Texas

Fairway Project - Howard & Glasscock Counties (Target 35% ‐ 60% WI)

• Divestment Program

  In 2016 Target Energy Limited engaged global investment bank CanaccordGenuity ("Canaccord") as adviser to the divestment of the Fairway Project ("Fairway") in the Permian Basin, Texas. The Fairway properties were later included in a larger combined package, improving the overall marketability of the aggregated properties.

  There has been a high level of transactions in the Permian Basin recently and new potential bidders continue to contact Canaccord regarding the properties. A number of bids and indicative bids have been received, however no offer has been accepted by Target and its divesting partners at this stage.

• Drilling / Workovers

No new drilling operations were undertaken in the Quarter.

Louisiana

East Chalkley, Cameron Parish (Target 35% WI)

The Pine Pasture #3 well remained shut in during the reporting period.

The Operator is concluding discussions with the Louisiana Department of Natural Resources prior to commencing a work‐over program to bring the well back on‐line.

TARGET ENERGY LIMITED Address 6 Richardson St (Suite 5), West Perth WA 6005

Mailing Address PO Box 140 West Perth WA 6872 | ABN 73 119 160 360 | Ph [phone]

Fax [phone] | email [e-mail] | www.targetenergy.com.au

Quarterly Report for the quarter ending 31 December 2016

1. Production (1 October - 31 December 2016)

   Project	TEX WI	Gross Gas Prodn in Period (mmcf)	Cumulative Gross Gas Prodn (mmcf)	Net Gas Prodn in Period (mmcf)	Cumulative Net Gas Prodn (mmcf)	Gross Oil Prodn in period (BO)	Cumulative Gross Oil Prodn (BO)	Net Oil Prodn in Period (BO)	Cumulative Net Oil Prodn (BO)
   E. Chalkley	35%	‐	60.9	‐	22.0	‐	115,833	‐	40,542
   Fairway	33%‐60%	18.6	442.8	9.3	244.8	7,571	226,555	3,517	123,075
   Total		18.6	503.7	9.3	266.8	7,571	342,388	3,517	163,617

   Net Production is scaled to Target's Working Interest, before royalties; mmcf = million cubic feet; mmcfgd = million cubic feet of gas per day; BO = barrels of oil, BOPD = barrels of oil per day, BOEPD = barrels of oil equivalent per day (Target reports a thermal equivalent when combining gas and oil production, where 1BOE = 6 mcf).

2. Lease Holdings

   Target Energy Leaseholdings		County / Ph Description		Depth Limits	TEX WI	Gross acres	Net acres
   Lease Name
   Fairway
   BOA	Howard	S12 S/2 , Block 33 T‐2S, A‐1353, T&P RR Survey	None	50.00%	320.0	160.0
   BOA North #4	Howard	S12 N/2 , Block 33 T‐2S, A‐1353, T&P RR Survey	None	50.00%	160.0	80.0
   BOA North #5	Howard	S12 N/2 , Block 33 T‐2S, A‐1353, T&P RR Survey	None	55.56%	160.0	88.9
   Darwin N/2	Howard	S44 N/2, Block 33, T‐1S, A‐1292, T&P RR Survey	None	50.00%	320.0	160.0
   Darwin SW/4	Howard	S44 SE/4, Block 33, T‐1S, A‐1292, T&P RR Survey	None	60.00%	160.0	96.0
   Ballarat	Glasscock	S 184 and 185, Bl 28, A‐815 and A‐A483, W&NW Survey	None	55.56%	160.0	88.9
   Taree	Glasscock	W/2 S193, Bl 28, A‐815 and A‐A483, W&NW Survey	None	60.00%	*320.0	192.0
   Sydney #1	Glasscock	NW/4 S 188 Block 29 A‐170 W&NW Survey	None	43.13%	160.0	69.0
   Sydney #2	Glasscock	E/2 S 188 Block 29 A‐170 W&NW Survey	None	33.75%	320.0	108.0
   "Section 4"	Howard	S4, Block 32, T‐2‐S, A‐1354 T & P RR Co Survey	None	60.00%	440.0	264.0
   Wagga Wagga #1	Glasscock	NE/4 S221, Block 29, A‐496; W&NW RR Co Survey	None	35.00%	160.0	56.0
   Wagga Wagga #2	Glasscock	SE/4 S221, Block 29, A‐496; W&NW RR Co Survey	None	38.89%	160.0	62.2
   Ballarat West	Glasscock	part NW/4 of S185, Bl 29, W&NW RR Co. Survey	None	50.00%	123.9	62.0
   East Chalkley
   Unit Agreement: CK W RA SU	Cameron Ph	S11, 13, 14 &15, T12S‐R6W	8,000 ft ‐ 10,000 ft	35.00%	714.9	250.2

   *subject to completion of lease extensions Total 3678.8 1732.2

   Quarterly Report for the quarter ending 31 December 2016
3. Corporate
4. Legal

   A settlement has been reached in regard to the legal action undertaken by Target subsidiary TELA Garwood LP ("TELA Garwood") against Victory Energy Corporation and Aurora Energy Partners ("Victory", "Aurora"). TELA Garwood's suit charged that Aurora, acting by and through its general partner, Victory, breached its obligation to purchase certain of TELA Garwood's interests in the West Texas Fairway Project (Howard and Glasscock counties) pursuant to a Purchase and Sale Agreement between TELA Garwood and Aurora dated June 30, 2014.

   As previously advised, the legal action has been resolved to Target's satisfaction. Terms of the settlement are confidential.

5. Funding

   Target's major shareholder, an unrelated party and entities controlled by two of Target's directors agreed to make available a funding facility of $305,000 (New Secured Loans) whilst a sale of the Fairway project was advanced and completed.

   The New Secured Loans were secured by a first ranking security interest over Target's interest in the Fairway asset.

   Target's existing Series 1 Convertible Notes issued in 2014, with a face value of

   $5,971,100 previously held a first ranking security interest over the Fairway project. This was sub‐ordinated to a second‐ranking security interest. The Series 1 Noteholders authorised the creation of additional security interests ranking ahead of the Noteholders to secure additional funding up to $400,000 at the meeting of Noteholders held in September 2016.

   Target's existing Series 2 Convertible Notes issued in 2014, with a face value of

   $3,000,000, which are held by Wyllie Group Pty Ltd and the existing Directors' Secured Loans, with a loan value of $145,000, together previously held a joint second‐ranking security interest over Fairway. This has now been subordinated to an equal third‐ranking security interest.

   As a result of these changes, the priorities between the secured parties in relation to their respective security interests is now as set out below:

   Ranking	Security Holder	Amount (A$)
   First	New Secured Loans	$305,000
   Second	Series 1 Convertible Notes	$5,971,000
   Equal Third	Series 2 Convertible Notes (Wyllie Group)	$3,000,000
   Equal Third	Directors' Secured Loans	$145,000

   Quarterly Report for the quarter ending 31 December 2016 ASX Waiver

   The ASX has granted a waiver from ASX Listing Rule 10.1 to the extent necessary to permit the Company to:

   1. Grant security over its interest in the Fairway Project in favour of Little Breton Nominees Pty Ltd (ACN 008 813 956) as trustee for The Little Breton Superannuation Fund A/C, Gunz Pty Limited (ACN 008 935 724) as trustee for the Gunz Superannuation Fund A/C and Wyllie Group Pty Ltd (ACN 008 763 120) ("Lenders") ("Security") pursuant to security documents relating to loans from these parties totalling $295,000 ("New ASX Waiver Secured Loans") ("Security Documents"), without obtaining shareholder approval. The conditions of the waiver are set out on the Company's ASX release of 24 November 2016.

6. Financial Position

7. The Company has reduced corporate overheads to a minimum level whilst the sale process is underway. Amongst other cost reductions, the Managing Director has agreed to a 60% reduction in his fees for the time being and the other directors have agreed to defer any fees owed to them for the time being.

   The Company had cash resources at 31 December 2016 of $18,000. At this time the most likely source of additional funding remains drawdown of the balance of the existing loan facilities ($45,000), the proceeds of the settlement reached with Victory/Aurora and the sale of the Company's remaining interests in Fairway. If a favourable outcome from the sale process cannot be achieved in the short term, the Company will be required to seek additional financing and/or seek to restructure the existing convertible notes. There is no certainty that either an additional financing or a restructuring of the existing convertible notes would be successful, should they become necessary.

   The Operator of the Fairway project has generously accommodated Target during recent times. The Operator follows a process of net checking Target's share of revenues against its share of costs and applying the difference to the Joint Interest Billing.

   In the Appendix 5B "Consolidated Statement of Cash Flows", Target has previously reported revenues received and operational expenses incurred when net checked to the Joint Interest Billing statement (JIB) by the Operator of the Fairway project. The Board has taken the view that this treatment is no longer appropriate. The YTD figures previously reported in the Appendix 5B have been restated accordingly.

   In the interests of providing a more complete summary of the Company's financial position than can be provided by the Appendix 5B cashflow statement, the Company provides the following summary of movements on the JIB.