Natural Gas Systems, Inc. (NGSY-OTC)
Interview with:
Robert S. Herlin, President and CEO
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maturing U.S. oil and natural gas resources not fully exploited due to inadequate penetration and drainage.


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Natural Gas Systems is experiencing success with their approach of buying mature oil and gas companies and redeveloping those properties with a combination of capital and technology

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Natural Gas Systems, Inc.

820 Gessner, Suite 1340
Houston, TX 77024
Phone: 713-935-0122

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Robert S. Herlin
President and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
June 2, 2005

Robert S. Herlin
, President, Chief Executive Officer & Director.
Mr. Herlin has served in the roles of President, CEO and Director since the inception of the Company. He previously served as Chief Financial Officer and, subsequently, as President and Chief Executive Officer for an oil and gas exploration company. Mr. Herlin has 18 years of experience in the upstream and midstream oil and gas industry in development, mergers and acquisitions, operations and finance. Previously, he served as Vice President, Strategic Initiatives of Enron Liquids prior to 1997 and Director of Acquisitions for several independent oil and gas companies. He has also led his own consulting group focused on acquisitions and strategy. Mr. Herlin earned his B.S. and M.E. degrees from Rice University and his MBA from Harvard.

Mr. Herlin has been involved in numerous transactions totaling more than $800 million. In the course of his oil and gas acquisition work, he has evaluated properties along the Gulf Coast, mid-continent, Rocky Mountains and Pacific Coast basins and led substantial evaluation teams of professionals. Mr. Herlin created and led an operating group that initiated and successfully completed a conventional horizontal drilling program with 28 wells. He was the lead consultant for a $65 million manufacturing company leveraged buy-out and turn-around. In addition, Mr. Herlin currently serves on the Board of Directors of Boots and Coots Group.

Company Profile:
We formed NGS in 2003 to exploit specific opportunities in the maturing U.S. upstream petroleum industry. Much of the oil and gas found to date in the United States remains in place due to, among other reasons, depleted reservoir energy, well bore damage, low oil and gas prices at the time of abandonment, or inadequate reservoir penetration and drainage. NGS acquires such under-developed resources at a low cost and applies existing and leading edge technologies to identify, access and produce incremental oil and natural gas, particularly those resources not fully exploited due to inadequate penetration and drainage.

CEOCFOinterviews: Mr. Herlin, what was your vision when you started with the company and how has that played out?
Mr. Herlin: “We started in late 2003 with the concept of buying existing, typically mature oil and gas properties. Our idea is to redevelop those properties with a combination of capital and technology. We focus on properties with known resources that are generally less than 7000 feet in depth and on-shore, and we have had good success with that approach. So far we have made three acquisitions and have had success with all of the acquisitions in terms of developing the reserves.”

CEOCFOinterviews: How many have you looked at, and why did you decide on these properties?
Mr. Herlin: “We have looked at a few dozen deals in the course of the last two years. We focus on properties from $1 million to $15 million, which is the ideal range. Those are deals that are generally not attractive in the market place because they are small and out of the range of interest for the larger acquisition companies. However, these deals are a little bigger than a private company may do. We have good access to capital as a public company, and that helps us to get deals closed.”

CEOCFOinterviews: What do you know in the area of technology that would make these particular wells feasible?
Mr. Herlin: “Take the example of Delhi Field that was the first property we bought; it was discovered around 1945 by two independents - MURPHY and Sun Oil (subsequently Oryx). They developed the field in the 1940’s and 50’s and it has been a mostly mature field ever since with generally little interest or activity for the last two decades. At the last time of notable activity, the price of oil was in the mid teens, the price of gas was $1.50 - $2.00. We now have much higher prices. Current prices allow us to develop successfully oil accumulations of as little as ten thousand barrels. By bringing capital to the table and sub-surface geology, we can identify those kinds of opportunities. In addition, we are looking at applying additional technologies such as enhanced seismic and others to help identify additional accumulations of bypassed oil and gas.”

CEOCFOinterviews: You mentioned three deals that you closed; will you tell us about the others?
Mr. Herlin: “The others are more typical of the kind of property that is bypassed and of little interest to the main stream. These include stripper wells that make a lot of water and not much oil. The nice thing about them is that these wells will be producing oil for the next ten, twenty, or thirty years; there is very little decline. They make about a barrel a day each, with a hundred or more barrels a day of water. The owners previously did not put a lot of effort into maintaining or improving the properties. We are installing different pumps that are more efficient, can move higher volumes and have lower maintenance costs. We are putting wells back on production and standardizing the operations. We are installing a more efficient approach to water handling facilities. We believe that we will be very successful there.”

CEOCFOinterviews: Do you care if you are looking at oil or gas?
Mr. Herlin: “No, either one or both are of interest to us. The opportunity to add value is the driver.”

CEOCFOinterviews: Do you own 100% of your properties?
Mr. Herlin: “Yes we do. We currently own 100% of the working interest and average a revenue interest slightly less than 80%.”

CEOCFOinterviews: Is 100% of the working interest the only way you will do a deal?
Mr. Herlin: “It is not the only way, but one of our strong guidelines is to have operating control so that we do not depend on someone else’s schedules and time lines. We want to be in control of development activities that we see as adding value. We have looked at other deals with less than 100% working interest.”

CEOCFOinterviews: What are the other guidelines for natural gas?
Mr. Herlin: “It has to be an established resource. We do not do traditional exploration; we work in areas with identified resources, pipeline outlets and infrastructure. We are finding incremental ways to add to reserves and production, such as looking for bypassed oil and gas. The typical example of an interesting drilling program would include what we refer to as a “develo-cat”, which is a drilling location near a producing well and with strong probable reserves. We want to stay in areas that are relatively shallow; typically less than 7000 ft. in depth in order to keep our costs down. We like to stay out of abnormal pressure scenarios where you have to deal with higher pressures than normal, because that also increases the operating risks and costs dramatically. At this time, we do not plan to go offshore, because of higher costs and regulatory hurdles, for insurance and the cost of operations. We focus on the lower margin, lower risk and lower return type of opportunities. We would prefer 100 “singles” instead of one “homerun.”

CEOCFOinterviews: Is there much competition?
Mr. Herlin: “Yes, the oil and gas business is incredibly competitive. Everyone is looking for an edge. The competition for the larger deals is especially intense. It is difficult to get a good deal unless you have some intrinsic advantage such as in technology or knowledge of the asset or in synergy by combined operations. For that reason, we have chosen to focus on the smaller deals where that competition is not as intense.”

CEOCFOinterviews: What do you do with the oil you produce?
Mr. Herlin: “We have one purchaser for all of our crude oil in all of our fields. It is a very efficient market with quite a few purchasers. Our oil is typically trucked to a refinery point or an oil pipeline point.”

CEOCFOinterviews: Do you hedge any of it?
Mr. Herlin: “We are required to obtain, and have completed beginning in March of his year, a hedge for fifty percent of our producing reserves for a period of two years.”

CEOCFOinterviews: Why does outsourcing work for you?
Mr. Herlin: “The management team has worked previously for companies that incorporated all traditional oil and gas business functions. What we found is that you spend too much time on activities that are not essential to your core business. We decided to outsource those functions that we consider to be non-core and focus on our strengths in value creation, allowing outside groups to provide the non-core functions at a lower cost due to their efficiencies of scale. We outsource our property accounting to a group that just does property accounting and regulatory filings for some 10,000 wells. Management focuses on what we think we are good at - buying properties, developing them and in finding ways to add value.”

CEOCFOinterviews: What is ahead in the next few years for Natural Gas Systems?
Mr. Herlin: “Like all other public companies, we are under pressure to grow. We need to get bigger to justify being a public company. We have an intense need to grow internally and through acquisitions.”

CEOCFOinterviews: What should potential investors know that perhaps they do not realize when they first look at the company, and why should they be choosing to invest in Natural Gas Systems?
Mr. Herlin: “The benefit we offer as a small company is the tremendous opportunity and room to grow, whereas larger companies have to find and develop substantial reserves just to replace their current production, much less grow. I would say that our ceiling is relatively higher compared to larger companies. On the other hand, we focus on a lower risk profile; we would rather have many small successes than roll the dice on one big success. We are very much a risk/reward driven company.”

CEOCFOinterviews: In closing, what would you like people to remember about Natural Gas Systems?
Mr. Herlin: “We are pleased with our success today and have high expectations to continue to grow the company. Those of us in management are highly motivated to make that happen; our interests are fully aligned with the shareholders’ interests.”


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“We started in late 2003 with the concept of buying existing, typically mature oil and gas properties. Our idea is to redevelop those properties with a combination of capital and technology. We focus on properties with known resources that are generally less than 7000 feet in depth and on-shore, and we have had good success with that approach. So far we have made three acquisitions and have had success with all of the acquisitions in terms of developing the reserves.” - Robert S. Herlin


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