Eratz Investments, Inc. - Oil and Gas Exploration and Development - Dallas, TX

Oil & Gas Glossary

Certain terms, to the extent used herein, have special meanings which are set forth below, and other terms, which are of general use in the industry, are also defined below for your reference:

1. "ABANDONMENT COST" shall mean all costs (net of amounts recouped by salvage) related to plugging a well and, if after Completion, the removal of installations from the well upon determination that the well is not or is no longer capable of production in Commercial Quantities.

2. "ACCREDITED INVESTOR" is any person who falls within the definition of "Accredited Investor" as that term is contained in Regulation D, Section 230.501, as adopted by the Securities and Exchange Commission under the Securities Act of 1933, as amended, and as more particularly described in the "Purchaser Suitability Standards" section of this Memorandum.

3. "AFFILIATE" with respect to the Company shall mean: (a) any person directly or indirectly owning, controlling or holding, with power to vote, 10% or more of the outstanding voting securities of the Company; (b) any person, 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the Company; (c) any person directly or indirectly controlling, controlled by or under common control of the Company; (d) any officer or director of the Company; (e) any company for which the Company acts as a partner; or, (f) any company under common control with the Company or its officers and directors.

4. "AUTHORITY FOR EXPENDITURE" or "AFE" shall mean the Operator's estimate of expenses which it reasonably expects will be incurred during Operations. The AFE, which is attached to the Memorandum as part of Exhibit "B," sets forth the estimated Drilling and Testing Costs and Completion and Equipping Costs.

5. "CARRIED WORKING INTEREST" shall mean the percentage of Working Interest which is not burdened with any Expenses, Overhead and Costs. The owner of the Carried Working Interest is "carried" to the tanks, as that phrase is used in the industry, after which it shall pay its pro-rata share of Lease Operating Costs.

6. "COMMERCIAL QUANTITIES" shall mean the amount of production of Products that an ordinarily prudent person experienced in oil and gas production would, taking into consideration all pertinent surrounding facts and circumstances, deem sufficient to return a reasonable profit over and above the entire cost of drilling, completing, equipping and operating a well.

7. "COMPLETION" shall mean the installation of permanent equipment for the production of oil or gas from a well.

8. "DEVELOPMENTAL WELL" is a well which is being drilled in a field of proven production.

9. "EXPENSES, OVERHEAD AND COSTS" shall include the following items, which may be referred to collectively or singularly in this Memorandum (see Exhibit "B" for additional information):

(a) "DRILLING AND TESTING COSTS" shall mean the costs of drilling a well to the point at which either it is decided to abandon the well or an attempt is made to complete the well, estimates of which are reflected on the AFE attached as part of Exhibit "B" to this Memorandum and which will be paid by purchasers of Units on a fixed, Turnkey Basis;

(b) "COMPLETION AND EQUIPPING COSTS" shall mean all costs of attempting to put a well on production after drilling and workover activities are concluded, including the setting of casing and the costs of purchasing and installing required pumping equipment, storage tanks and other production equipment. Such costs shall also include the cost of plugging the well if completion of the well as a Commercial Well is attempted but the well is plugged prior to any sale of Products. If the well is completed, production equipment purchased and installed may, at the option of the Operator, be either new equipment or used reconditioned equipment. An estimate of the Completion and Equipping Costs reasonably expected to be incurred during Operations is reflected on the AFE attached to this Memorandum as part of Exhibit "B" and which will be paid by purchasers of Units on a fixed, Turnkey Basis;

(c) "ADMINISTRATIVE EXPENSES" shall mean that fee to be paid to the Company, on a fixed, non-accountable basis, in payment of all customary and routine accounting, travel, mail, office rent, telephone, compensation to officers and employees, and other incidental expenses of the Company necessary to the conduct of the Company's business; and

(d) "GEOLOGICAL AND GEOPHYSICAL EXPENSES" shall mean that fee to be paid to the Company on a fixed, non-accountable basis, in account of geological and geophysical expenses paid by it prior to and subsequent to the date of the Memorandum in its evaluation and generation of the Prospect.

10. "EXPLORATORY WELL" is a well which is drilled to an unexplored depth or in unproven territory, either in search of a new reservoir or to extend the known limits of a field that is already partly developed.

11. "INITIAL POTENTIAL" shall mean the rate of flow of oil or gas from a newly completed well which indicates a theoretical rate of production in barrels of oil or cubic feet of gas. Initial Potential should not be considered indicative of the amount of oil or gas a well can be expected to produce on a sustained basis because it is calculated on a mathematical formula assuming perfect conditions. Oil wells generally achieve initial production closer to the "initial potential," while gas wells do not.

12. "IDCs" shall mean all expenditures made for wages, fuel, repairs, hauling, and supplies, or any of them, which are used: (a) in the drilling of a well; (b) in such clearing of ground, draining, road making, surveying and geological works as are necessary in preparation of a well for production; and (c) in the construction of other physical structures as are necessary for the preparation of a well for production. IDCs include only those expenditures incurred in developing a well which in and of themselves do not have a "salvage value."

13. "LANDOWNER ROYALTY INTEREST" shall mean a portion of the total production from the Lease which is not subject to payment of Expenses, Overhead and Costs or Lease Operating Costs which the grantor of the Lease has retained for itself. The holder of a Landowner's Royalty Interest shall be entitled to a share of the proceeds of production free and clear of such costs.

14. "LEASE OPERATING COSTS" shall mean the customary expenses of operating and maintaining the Well after it has been completed and is producing Products in Commercial Quantities, including, but not limited to, the costs of future workovers relating to the Well, pumpers' fees, pumping equipment, expenses incurred for hauling water from the Well, costs incurred for remedial work performed on the Well or repairs to equipment located on the Well, and other similar post-production costs.

15. "LEASES" shall mean the oil and gas lease(s), or the contractual rights thereto, acquired by the Company from the Eratz Lease Bank on which the proposed Well will be drilled.

16. "MAXIMUM OFFERING" shall mean the sale of all seven (7) Units in this Offering, resulting in aggregate proceeds to the Company of $675,000.

17. "MEMORANDUM" shall mean this Confidential Private Placement Memorandum dated September 1, 2014 pursuant to which the Units are offered for sale only to Accredited Investors.

18. "NET OPERATING REVENUES" shall mean the portion of the proceeds of the sale of Products allocated to the owners of the Working Interest in the Well in accordance with their respective revenue interests, after payment of severance taxes applicable to the sale of such portion of the Products and all Lease Operating Costs.

19. "NET REVENUE INTEREST" shall mean that portion of the proceeds from the sale of Products which will be allocated to the Working Interest owners as a group.

20. "OBJECTIVE FORMATIONS" shall mean the Jennings Sandstone, the Gardner Sandstone, the Morris Sandstone and the Lower Gardner Sandstone in Coleman County, Texas.

21. "OPERATING AGREEMENT" shall mean the contract between the Company, as Operator, and the Participants governing Operations. This agreement spells out the provisions relating to the sharing of expenses and revenues and accounting methods. The authority of the Operator and restrictions imposed upon it are also contained in this agreement. The Working Interest owned by the Participants shall be governed by and subject to the Operating Agreement.

22. "OPERATIONS" shall mean any activity related to: (a) drilling, testing, and completing and equipping the Well in accordance with the proposal set for in Exhibit "A" to this Memorandum; (b) installing compression or production equipment, and processing, gathering, and/or transporting facilities to produce, process, gather, and/or transport any oil and gas; (c) conducting any secondary recovery operation on or with respect to the Well; or, (d) conducting any activity in furtherance of the Program's purposes.

23. "OPERATOR" shall mean Eratz Investments, Inc. or any successor entity or any other party selected as Operator under the Operating Agreement.

24. "OVERRIDING ROYALTY INTEREST" shall mean a portion of the total production from the Leases which is not subject to payment of Expenses, Overhead and Costs and Lease Operating Costs. An Overriding Royalty Interest is similar to a Landowner Royalty Interest, but is carved out of a lease or other operating interest rather than out of a fee mineral interest.

25. "PARTICIPANTS" shall mean purchasers of Units.

26. "PRODUCTS" shall mean all oil, gas and other mineral products produced from the Well.

27. "PROGRAM" shall mean the HODGES #2 Prospect offered pursuant to the terms of the Memorandum.

28. "PROSPECT" shall mean the leasehold acreage associated with the pro-ration unit on which the Well shall be located as more specifically identified in the Operating Agreement.

29. "SUBSCRIPTION PERIOD" shall mean that period of time beginning from the date of this Memorandum until March 31, 2015 during which the offer and sale of Units will occur. The Subscription Period may be extended until May 31, 2015 without notice to Participants.

30. "TURNKEY BASIS" shall refer to the agreement between the Company and the Participants whereby the Company, pursuant to the Turnkey Contract between it and the Participants, shall participate, for the benefit of Participants, in the drilling, testing, completion and equipping of the Well at a fixed cost to Participants, with the Company bearing the risk of cost overruns.

31. "UNIT" shall mean a unit of Working Interest and Net Revenue Interest in the Well.

32. "WELL" shall mean and refer to the HODGES #2 Well in which Participants shall acquire an interest pursuant to a purchase of a Unit(s) described in this Memorandum.

33. "WILDCAT WELL" is a well drilled into a reservoir from which no oil or gas has previously been produced in the nearby surrounding area, or unproven territory.

34. "WORKING INTEREST" shall mean the operating interest under an oil and gas lease and/or contractual working interest acquired through farmout agreements or otherwise, entitling the holder to conduct drilling and production operations on the leased property. In this Program, such interest shall be limited to that portion of the Working Interest in the Leases associated with the wellbore of the HODGES #2 Well and its associated pro-ration unit, but shall not extend to any other portion of the Leases owned by the Company. The Working Interest associated with the Units will bear all Expenses, Overhead and Costs.

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