Xstate Resources : Dec 2016 Quarterly Activities and Cash Flow Report

31 January 2017

ABN 96 009 217 154

ASX Limited Electronic lodgement December 2016 Quarterly Activity Report Summary

• Xstate has agreed to acquire a working interest in two producing oil and gas fields in the Los Angeles Basin onshore California for US$13m.

• The Sansinena oil and gas field has certified NSAI Proven and Probable ("2P") reserves of 9.5mmboe net to Xstate with an estimated NPV10 valuation of US$75.6m1.

• The Company entered into Binding Subscription Agreements with four sophisticated Asian investors to raise A$25m at 3.8 cents per share.

• The operator of XST's Sacramento Basin acreage has advised that Dempsey‐1 is scheduled for drilling in April‐May 2017, and targets a 1 Tcf prospect with multiple pay potential in conventional gas reservoirs beneath a producing field.

  New Ventures - Los Angeles Basin acquisition

  During the quarter, the Company executed a Purchase and Sales Agreement ("PSA") to acquire a working interest in two producing oil and gas fields located in the prolific Los Angeles Basin.

  The Company has agreed to acquire a 24.5% working interest (20.8% net revenue interest) for US$13m as previously advised. Under the terms of the PSA, the Closing date is February 17, 2017 and the transaction Effective date is January 1, 2017.

  The Xstate Board and Management consider the proposed transaction to be a transformational event for the Company. The acquisition of the Sansinena oil field provides shareholders with immediate production, cash flow and low cost reserves that have been certified by Netherland, Sewell & Associates, Inc. ("NSAI"), one of the most respected global firms in independent reserves assessment and reporting.

  The completion of this transaction will facilitate the Company's transition from a pure explorer to a producer, and deliver the Company's first transaction in line with its low risk production acquisition strategy onshore California.

  Cash and Liquid Assets

  As at 31 December 2016 the Company held cash and cash equivalents of $1.457m. The main expenditure item during the quarter was the payment of a non‐refundable deposit of US$625,000 for the LA Basin acquisition, which has resulted in Xstate being granted exclusivity until 17 February 2017.

  The Company is committed to maintain expenditure and overheads to a minimum until it has acquired an asset and associated operating activity.

  Funding Update

  Xstate entered into binding Subscription Agreements with four unrelated sophisticated Asian investors to raise a total of A$25,000,000 at 3.8 cents per share to fund the acquisition of the Company's intended Los Angeles Basin oil fields transaction.

  Due to the delays by the investors in meeting currency transfer regulatory requirements, the Company has agreed with the investors to an extension to 10 February 2017.

  Xstate's corporate advisors to this transaction, Sanston Securities Australia Pty Ltd ("Sanston"), have advised that the completed offshore funds transfer form must be approved by the Indonesian Regulatory Authorities, as with all large overseas transfers.

  The Board have been advised that this is normal practice, however it is not possible to confirm when such approval will be granted for the transfers.

  The investors and Sanston are attempting to expedite this process to ensure the investors honour the subscription agreements in a timely manner to enable the Company to meet its purchase obligations for the purchase of the intended Los Angeles Basin Oil Transaction.

  At this stage Xstate has no reason to believe the funds will not be received, and will advise the market of any further changes.

  The Board of Xstate appreciates the support we have received from our existing shareholders and looks forward to welcoming the new investors as we deliver our first transaction in line with our low risk production acquisition strategy onshore California.

  Production - Sacramento Basin

  Rancho ‐ Capay Gas Field (XST 10% WI in 4 wells) & Los Medanos Gas Field (XST 10% WI in 3 wells)

  Xstate acquired a working interest in minor gas production rights in the Sacramento Basin onshore California in 2013. The purpose of the acquisition was to acquire the leases for further exploration and to access an extensive 3D seismic database from which to generate new exploration opportunities. Production for the quarter was as follows:

  Production	December 2016 Quarter	September 2016 Quarter
  Gross mcf ** (100%)	15,174	16,804
  Net XST mcf (after Royalty)	1,055	1,168

  **mcf - Thousand Cubic feet gas

  The operator has advised that production was down 10% quarter on quarter in line with our expectations due to continued line pressure variations.

  XSTATE RESOURCES LIMITED - TENEMENT LIST
  Project name	Location	Working Interest
  Alvares Prospect	Sacramento Basin Onshore Northern California	25%
  Dempsey Prospect	Sacramento Basin Onshore Northern California	10%
  California AMI Prospects	Sacramento Basin Onshore Northern California	30%
  Rancho‐Capay Gas Field	Sacramento Basin Onshore Northern California	10%
  Los Medanos Gas Field	Sacramento Basin Onshore Northern California	10%
  Projects are continuously reviewed for their strategic fit and are expected to be modified over time to reflect industry conditions.

  Exploration - Sacramento Basin Joint Venture - Onshore Northern California

  Exploration leases have continued to be maintained within the Sacramento Basin during the quarter. Xstate has a working interest (WI) of between 10% and 25% in lease areas, which cover conventional gas prospects.

  Dempsey Conventional Gas Prospect (XST 10% WI)

  The Dempsey prospect remains the current focus of the Joint Venture's exploration activities, primarily because of the potential for near term production given the prospect's location beneath the joint ventures existing production facilities.

  The Operator Sacgasco Limited ("Sacgasco") advises, the Dempsey Prospect is a large, 3‐way dip, fault bound closure with conventional sandstone reservoir targets mapped at multiple (seven) stacked levels. The Dempsey structure sits beneath a developed gas field from which the joint venture currently produces. The gas plant has available capacity that would be utilised for a fast track development of any gas reservoirs proved up by the Dempsey 1 well.

  Sacgasco maps seven target gas reservoir levels beginning with two small (1‐3 Bcf unrisked Best Estimate Deterministic recoverable Prospective Resource) seismic amplitude defined, extension of the shallow producing Forbes Sandstone reservoir system. The targets then extend down to total depth through a series of older Cretaceous reservoirs interpreted to be more broadly distributed.

  Individual, unrisked Deterministic Prospective Resources for these primary targets range from 116 bcf to 352 Bcf of recoverable gas. Should all the stacked reservoirs be full of gas, the cumulative unrisked recoverable Prospective Resources within the prospect could approximate 1 Tcf.

  These estimates of prospective petroleum resources must be read in conjunction with the cautionary statement that follows:

  "The estimated quantities of petroleum that may potentially be recovered by the application of a future development project(s) relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration appraisal and evaluation is required to determine the existence of a significant quantity of potentially movable hydrocarbons."

  Multi‐target conventional‐sands appraisal and exploration project located under existing gas production infrastructure. Demspey prospect interpreted to have a very high probability of flowing commercial quantities of gas. 7 interpreted stacked independent targets ranging from 1 Bcf (shallow) to 350 Bcf (older). Summed total (100%) un‐risked best Estimate recoverable Prospective Resource on a deterministic basis is 1 Tcf (~166 million BOE).

  Dempsey Prospect Structure Schematic

  Source: Sacgasco ASX Announcement 17 January 2017

  For and on behalf of the Board of Xstate Resources Limited Cosimo Damiano Managing Director Xstate Resources Limited Tel Office: [phone]

  Email: [e-mail]

  Competent Persons Statement

  The technical information provided has been reviewed by Mr Chris Hodge, Technical Director of Xstate Resources Limited. He is a qualified geologist with over 30 years technical, commercial and management experience in exploration for, appraisal and development of oil and gas. Mr Hodge consents to the inclusion of the information in the form and context in which it appears.

  Disclaimers

  Exploration in the USA is conducted on leases grant by Mineral Right owners, in Xstate's case primarily private individuals or groups. Leases can vary in size from very small parcels (part of an acre) to large landholdings (covering a few square miles). Leases generally are for 5 years and rentals are paid annually. There are no work commitments associated with the leases. Some leases are 'Held By Production' and royalties, generally less than 20% of revenues, are paid to mineral right owners in lieu of rentals. Xstate has not listed all it leases as it is impractical and not meaningful for potential project value assessment in a conventional gas play. A detailed listing of leases may also lead to a loss of competitive advantage and consequent reduced value to Xstate shareholders.

  1 Netherland Sewell and Associates - Sansinena Commodity Price assumptions

• Oil and NGL prices are based on November 21, 2016, NYMEX West Texas Intermediate prices and are adjusted by lease for quality, transportation fees, and regional price differentials.

• Gas prices are based on November 21, 2016, NYMEX Henry Hub prices and are adjusted by lease for energy content, transportation fees, and regional price differentials.

• All prices, after adjustments and (before adjustments), are shown in the following table

Period	Oil & NGL Price US$/bbl	Gas Price US$/MMbtu
2016	43.21 (47.49)	3.04 (2.95)
2017	46.73 (51.01)	3.21 (3.12)
2018	48.58 (52.86)	3.10 (3.01)
2019	49.51 (53.79)	3.03 (2.94)
2020	50.54 (54.82)	3.05 (2.96)
2021	51.56 (55.84)	3.09 (3.00)
2022	52.84 (57.12)	3.17 (3.08)
2023	53.70 (57.98)	3.31 (3.22)
2024+	54.22 (58.50)	3.47 (3.38)