Carry Agreement

3 Months Ended

Mar. 31, 2015

6.	Carry Agreement

In August 2013, the Company entered into a Carry agreement (the “Carry Agreement”) with the a third-party working interest partner (the “Carry Agreement Partner”), pursuant to which (i) that Carry Agreement Partner agreed to fund 100% of the Company’s working interest share of the drilling and completion costs of up to five new oil and gas wells to be located within the Spyglass Area, up to 120% of the original AFE amount, and (ii) the Company agreed to convey, for a limited duration, 50% of its revenue interest in the pre-payout revenues of each carried well and 50% of its working interest in the pre-payout operating costs of each carried well, to the Carry Agreement Partner. In the event that the gross drilling and completion cost of a carried well exceeds 120% of the AFE amount, the Company and the Carry Agreement Partner will share in the excess costs based on the working interests stipulated in the Carry Agreement.

Pursuant to the terms of the Carry Agreement, 50% of the Company’s net revenue interest in each well will be conveyed to the Carry Agreement Partner for a period of two years or until such a time when the working interest partner has recouped 112% of the carried drilling and completion costs of the well, whichever occurs sooner. In the event that the Carry Agreement Partner has not recouped 112% of the carried drilling and completion costs by the end of the second year of production, the Company has agreed to make cash payments to the Carry Agreement Partner in the amount of the shortfall. Once the Carry Agreement Partner has recouped 112% of the carried drilling and completion costs of a well, the conveyed working interest and net revenue interest will revert to the Company.

As of March 31, 2015, all five of the wells to be drilled pursuant to the Carry Agreement have been completed. To date, the Company has received approximately $19.2 million of funding under the Carry Agreement. This amount is net of cumulative revenues and oil and gas operating costs associated with the carried wells, which were conveyed to the Carry Agreement Partner pursuant to the terms of the Carry Agreement. As noted above, the Carry Agreement Partner is entitled to receive a 12% return on the amount of capitalized drilling and completion costs that it has funded on the Company’s behalf.

As of March 31, 2015, the cost of drilling and completing one of the five wells exceeded the 120% of AFE cost threshold. Accordingly, the Company has recorded its portion of excess drilling and completion costs associated with this well, totaling approximately $2.8 million as of March 31, 2015. None of the five wells covered by the Second Carry Agreement has achieved payout as of March 31, 2015.

AMERICAN EAGLE ENERGY Corp 10-Q