VANCOUVER, BRITISH COLUMBIA--(Marketwire - April 14, 2011) -


Shenul Capital Inc. ("Shenul") (TSX VENTURE:SHE) is pleased to announce that it has entered into a letter of intent dated as of March 29, 2011 and amended April 8, 2011 (collectively, the "Letter Agreement") with Underground Energy, Inc. ("Underground"). The Letter Agreement indicates that Shenul will acquire all of the outstanding common shares of Underground (the "Transaction") based on a valuation of Cdn$0.35 per common share of Shenul, for deemed consideration of $40,040,803 before the Brokered Financing (as defined below) through the issuance of 114,402,294 Shenul common shares. Additionally, the Letter Agreement contemplates that all securities convertible into common shares of Underground will be exchanged or converted into, or entitle the Underground holders to acquire, an equivalent number of Shenul securities in accordance with the same valuation. The Transaction is subject to the execution of a definitive agreement between Shenul and Underground. Underground has interests in certain oil and gas properties in the Santa Maria Basin in California and in the State of Nevada, USA.

Prior to the completion of the Transaction, Underground intends to complete a brokered private placement of up to US$50,000,000 in subscription receipts ("Subscription Receipts") led by a syndicate of agents (the "Agents") at a price of US$1.35 per Subscription Receipt (the "Brokered Financing"). The Agents will receive a fee of 6% of the total gross proceeds raised pursuant to the Brokered Financing. The net proceeds from the Brokered Financing are intended to be used by Underground to delineate and drill its Asphaltea prospect in California and to delineate and drill one well in 2012 on its Nevada leases. Each Subscription Receipt will be converted into one (1) Underground common share in accordance with and subject to the terms and conditions of a subscription receipt agreement to be entered into between Underground, a subscription receipt trustee and the Agents. Further details in respect of the syndicate of Agents are expected to follow during the week of April 18, 2011.

The Transaction, when completed, is intended to be a "reverse takeover" for the purposes of the requirements of the TSX Venture Exchange (the "TSX-V") and to enable Shenul to qualify as a Tier 2 Oil & Gas Issuer on the TSX-V. None of the insiders of Shenul or their associates and affiliates is a "Non-Arm's Length Party" (as defined under the TSX-V policies) or is an insider of Underground or its direct or indirect shareholders.

The Shenul securities to be issued to the security holders of Underground in the Transaction will be issued pursuant to exemptions from the prospectus requirements of applicable securities legislation and may be subject to resale restrictions under the applicable securities legislation and / or subject to escrow conditions as required by the TSX-V.

The parties have agreed to use their best efforts to complete the Transaction by July 31, 2011, or such other mutually acceptable date. If required by applicable law, Shenul and Underground intend to hold shareholders' meetings on or before June 30, 2011 to approve the Transaction. Alternatively, and if permissible under applicable law, Shenul and / or Underground may seek shareholder approval by written consent from the holders of 50% + 1 of the common shares of each of Shenul and Underground. Trading in the common shares of Shenul was halted on March 30, 2011. As a result of an exemption obtained by Underground from the sponsorship requirements under the policies of the TSX-V, trading in the common shares of Shenul will resume on or about April 15, 2011.

Upon completion of the Transaction, Shenul will have its head office located in Santa Barbara, CA. Underground will be a wholly owned subsidiary of Shenul, and Shenul plans to change its name to that which is acceptable to the proper regulatory authorities, including the TSX-V. Following completion of the Transaction and subject to TSX-V acceptance, the common shares of Shenul are expected to be listed on the TSX-V under a new trading symbol.

Conditions to the Completion of the Transaction

The obligations of Shenul and Underground to carry out the Transaction shall be subject to, among other things: (i) the execution of a definitive agreement between Shenul and Underground; (ii) the receipt of all necessary regulatory approvals, including, without limiting the generality of the foregoing, the approval of the Transaction in accordance with the TSX-V policies; (iii) the receipt of all necessary shareholder and board of director approvals; (iv) the confirmation of the representations and warranties of each party to the Letter Agreement; (v) the absence of any material adverse effect on the financial and operational condition or the assets of each of the parties; (vi) the completion of the Brokered Financing (as set out herein); (vii) the delivery of standard closing documentation; and (viii) other conditions precedent customary for a transaction such as the Transaction. The conditions listed above are for the benefit of, and maybe waived by, Shenul and Underground as it relates to the obligations of the other party to perform or obtain the same.

Strategic Rationale for the Transaction

The board of directors of Shenul believes that the transaction provides a number of benefits to its shareholders, including:

  • Significant leverage to the Monterey shale oil resource play, which is the primary source rock for the oil fields in Central and Southern California;
  • Exposure to two Monterey shale prospects with "best" estimate undiscovered petroleum initially in place of 1,653 and 578 million barrels, respectively, and "best" estimate prospective resources of 73 and 26 million barrels, respectively (GLJ Petroleum Consultants Ltd. Resource Assessment dated April 6, 2011 and effective March 31, 2011);
  • Key rock properties of the Monterey shale may be similar to other emerging North American oil shale plays;
  • Unique to Underground's Monterey and Nevada shale prospects is that the gross pay intervals are relatively thicker than other emerging shale plays;
  • Underground's Monterey shale prospects are in a productive fairway and are located within 10 miles of assets that have realized significant historical Monterey production and the assets are within close proximity to infrastructure;
  • Underground's management team is California based and has a strong understanding of California's oil and gas permitting and regulatory approval processes, as evidenced by Underground already having permits in place for a 26 well development plan;
  • In addition to California, Underground's team also has relevant experience in conventional and unconventional resource plays through projects in the North Sea, the Arabian Peninsula, the Alberta oil sands and other North American shale plays; and
  • Underground is positioned to benefit from active exploration and development programs by other Monterey focused operators exploring and developing the Monterey formation in California.

Shenul is very pleased to be partnered with Underground and is looking forward to helping develop Underground's prospective oil shale acreage.

About Underground

Company Focus

Underground's primary business is to identify, acquire rights to, explore for, develop, and produce oil and gas reserves from shale formations in North America. Its initial focus is on proving up large, high-impact opportunities identified in the Monterey Shale formation of Central California's Santa Maria Basin and in emerging shale opportunities in the shales of Nevada's Great Basin. Underground has assembled a quality management team with extensive experience in exploring and developing the Monterey Shale and Nevada opportunities. It has aggregated over 37,000 net acres in these two plays and is actively pursuing additional prospective acreage.

History of Business Operations

Underground Energy, Inc. was formed as a private Delaware corporation on June 4, 2007. Through March 2011, the company has raised over US$11.0 million in equity through a series of private placements.

The company has built a strong management team and board of directors as well as a strong team of California based employees and consultants. Underground Energy is focused on shale oil opportunities and has demonstrated the ability to identify and acquire prime hydrocarbon resources that have been overlooked or by-passed. The company has focused its efforts on California because of the abundance of oil resources which have produced billions of barrels of oil (according to records of the California Division of Oil, Gas, and Geothermal Resources and the US Department of Interior), close proximity to infrastructure, multiple markets for heavy oil, available human resources with oil production experience, local knowledge of the industry, and, with requisite expertise, workable regulatory and permitting conditions for oil operations. In addition to California, the Company has prospective shale oil acreage in emerging opportunities in the State of Nevada.

In October 2008, Underground concluded that a petroleum lease on approximately 1,400 acres (Asphaltea Project) in California had potential for conventional oil recovery in the Monterey formation and executed a lease with the property owner. On March 24, 2011, the company expanded its land position at Asphaltea, leasing the petroleum rights on approximately 3,400 additional acres (all at 100% working interest).

In 2008, the company acquired an 18% founding ownership in EQ Energy, LLC ("EQ"), which now holds approximately 29,000 acres of petroleum leases in Nevada. Historical wells on these leases indicated the presence of hydrocarbons. The company has recently entered into a letter of intent to farm-in on the remaining interest in these leases held by EQ.

In April 2009, Underground Energy completed a farm-in on an existing lease in Santa Barbara County, and is currently evaluating its potential in conjunction with an ongoing program of aggregating additional quality prospects.

In March, 2011, the company independently acquired petroleum leases on over 2,300 acres in Nevada. In total, the company will hold oil and gas exploration and development rights on 31,300 acres in emerging shale oil plays in Nevada.

Selected Financial Information of Underground

The following table sets forth certain unaudited financial information for Underground. This information was prepared by management of Underground and has not been audited. The audit of Underground's December 31, 2010 financial statements is currently underway.

As at December 31, 2010
(unaudited) US$
As at September 30, 2010
(unaudited) US$
Current assets451,791711,030
Current liabilities(534,076)(102,974)
Office equipment (net of accumulated depreciation)39,68939,585
Investment in EQ Energy, LLC169,008161,155
Unevaluated petroleum leases416,358304,164
Net equity542,7701,112,960

Underground currently has no revenues from operations. General and administrative expenses for the year ending December 31, 2010 and the nine months ending September 30, 2010 were US$1,921,205 and US$1,115,335, respectively. The loss for the year ending December 31, 2010 and the nine months ending September 30, 2010 was US$1,916,839 and US$1,113,821, respectively. Underground currently holds approximately US$5.5 million in cash.

Assets of Underground

Asphaltea – Located in northern Santa Barbara County, California. Underground has a 100% working interest in two oil and gas leases covering 4,800 acres that contain two Monterey shale oil prospects – the North Prospect and the South Prospect. The company is planning to drill into the fractured Monterey shale formation in the North Prospect in mid-2011 and into the South Prospect in 2012. GLJ Petroleum Consultants Ltd. ("GLJ") has prepared a resource evaluation ("Resource Evaluation") in respect of the potential resources in both prospects and under each lease. The Resource Evaluation is dated April 6, 2011 and effective March 31, 2011 and was prepared in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook. GLJ is independent of Underground. GLJ's unrisked "best" estimate of the undiscovered petroleum initially in place on the two leases currently held by Underground is 1,653.2 million barrels in the South Prospect and 578.2 million barrels in the North Prospect. GLJ has provided a best estimate of the unrisked prospective oil resources of 73.2 million barrels in the South Prospect and 25.6 million barrels in the North Prospect. More detail is set out in the tables below:

Undiscovered Petroleum Initially In Place(1)
(Working Interest)
North Prospect291.0578.2919.6
Lease 143.588.0189.7
Lease 3247.5490.2729.9
South Prospect606.11653.22991.1
Lease 1496.41354.32443.4
Lease 3109.7298.9547.7
Prospective (Oil) Resources(2)
(Working Interest)
North Prospect10.025.654.4
Lease 11.53.911.2
Lease 38.521.743.2
South Prospect21.173.2170.3
Lease 117.360.0139.1
Lease 33.813.231.2

(1) Undiscovered petroleum initially in place is that quantity of petroleum that is estimated, on a given date, to be contained in accumulations yet to be discovered.
(2) Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the prospective resources will be discovered and, if discovered, there is no certainty that it will be commercially viable to produce any portion of those resources. Reported on an unrisked, company interest basis.

The exploration work program proposed for 2011 includes a 2D seismic survey, drilling and testing two wells in the North Prospect for a total of US$4.9 million and US$50,000 for 2D seismic on the South Prospect. The exploration work program proposed for 2012 includes drilling and testing two wells on the South Prospect for a total of US$4.9 million. The development work program for 2012 includes 3 horizontal wells and 2 water disposal wells along with permanent production facilities and a 3D seismic survey for a total of US$30.6 million. Combined exploration and development budget for Asphaltea North and South for 2011-2012 is US$40.45 million.

There are two existing Monterey Shale oil fields within 10 miles and on trend with the Asphaltea prospects that have produced 53 and 32 million barrels of oil from the Monterey formation (according to California Division of Oil, Gas, and Geothermal records). The Asphaltea drill site is four miles from a major oil pipeline, ten miles from the freeway and within thirty miles of two oil refineries.

The Miocene-aged Monterey shale is both a source rock and a reservoir due to the naturally occurring fractures. It has been accepted by the industry to be the primary source rock for oil and gas in the major fields in Central and Southern California. It is known to be up to 4,000 feet in thickness (according to M.E. Tennyson of the United States Geological Survey, 2003). In the Santa Maria Basin, naturally fractured Monterey shale has produced over 1 billion barrels according to State and Federal production records, and largely without the aid of newer technologies like 3D seismic, fracture identification logging and horizontal drilling. These newer technologies are unlocking significant resources in other emerging prolific North American shale plays.

Underground's North Prospect has a historical well that was drilled into the Monterey – the Union Sisquoc-6 well. Union Oil Company of California drilled this well based on surface geology and was targeting deeper, conventional formations beneath the Monterey. During drilling, the well lost circulation at a depth of approximately 4,000 feet, but based on its well log, it encountered oil shows in various Monterey pay intervals. Union completed a very short production test on the well, but only recovered water, which, in the opinion of Underground's management, is the direct result of a poor completion and the water recovered was from invading drilling fluid. Underground's South Prospect also has a historical well that was drilled into the Monterey - Laguna #1 - drilled by Tidewater Associated Oil Company in 1952, which also had oil shows and tested trace amounts of heavy oil.

Other California – Also in northern Santa Barbara County, the company has an additional 350 acres of petroleum leases with an option on an additional 830 acres with shale oil potential. Although the company's initial focus is on its Asphaltea prospects, it will fully assess the potential of this other resource as part of its corporate strategy of adding additional quality prospects in this core area of focus.

Nevada – Underground owns an 18% interest in EQ Energy, LLC which in turn holds 29,000 acres of petroleum leases with the US Bureau of Land Management in four target areas. There are historical wells on these leases that either produced or had good shows of oil and gas. The company believes that the leases have potential for producible oil and gas in both conventional and unconventional (or resource) shale oil reservoirs which has not been tested. Management of Underground believes that the shale oil reservoirs have very similar properties to those of the Monterey shale. Underground has signed a Letter of Intent with EQ to farm-in on the entire 29,000 acres of petroleum leases and plans to drill the first well in late 2011 or early 2012. In March, 2011, the company added to its Nevada holdings, acquiring over 2,300 acres in Eureka County, adjacent to existing production, through an auction of BLM leases. The emerging shale play of Nevada has recently caught the attention of larger US-based independent oil and gas companies who have been actively acquiring and evaluating prospective shale oil acreage within the state. The work program for 2011 has only a minor expenditure of $200,000 on Nevada properties for studies and purchase of existing seismic data. The work program for 2012 includes one well on the Nevada properties to be drilled at a cost of US$3 million.

Transaction Terms

The exchange ratio for the Underground common shares shall be 3.86 Shenul common shares for each Underground common share (the "Exchange Ratio"). Additionally, all securities convertible into common shares of Underground will be exchanged or converted into, or entitle the Underground holders to acquire, an equivalent number of Shenul securities in accordance with the same Exchange Ratio. The Exchange Ratio is based on the price of US$1.35 per Underground common share, which is the anticipated issue price per Underground subscription receipt pursuant to the Brokered Financing.

Underground currently has 29,637,900 common shares issued and outstanding, 20,556,900 common share purchase warrants ("Underground Warrants") and 2,733,167 stock options ("Underground Options"). The Underground Warrants entitle the holder to purchase one common share of Underground and have a weighted average exercise price of US$0.84. The Underground Options entitle the holder to purchase one common share of Underground and have a weighted average exercise price of US$0.42. No shareholder of Underground holds 10% or more of the issued common shares.

As of March 31, 2011, Underground has 52,927,967 common shares outstanding on a fully diluted basis, with directors and officers of the company holding approximately 24.9%.

Shenul currently has approximately Cdn$370,000 of working capital on hand, 9,900,000 common shares and 3,200,000 common share purchase warrants with an exercise price of Cdn$0.15 and an expiry date of May 20, 2015 plus 266,667 options with an exercise price of Cdn$0.10 and an expiry date of November 9, 2012.

Pro Forma Capitalization upon Completion of the Transaction

Based on the foregoing, upon completion of the Transaction and Brokered Financing, Shenul will have a total of 267,265,257 common shares issued, 82,549,634 common shares reserved for issuance under warrants and 10,816,692 common shares reserved for issuance under stock options. Of the issued shares and prior to the Brokered Financing, 91.8% will be held by existing Underground common shareholders and 8.2% will be held by existing Shenul common shareholders. After completion of the Brokered Financing, 41.9% will be held by existing Underground common shareholders and 3.8% will be held by existing Shenul common shareholders.

Those shares of Shenul to be issued to Underground shareholders who become principals of Shenul will be subject to TSX-V escrow requirements.

It is further intended that, subject to TSX-V approval and upon completion of the Transaction, Shenul will grant to certain directors, officers, employees or consultants of Shenul, options to purchase additional common shares of Shenul at Cdn$0.35, all as may then be determined by the Board of Directors of Shenul.

Post Transaction Board of Directors and Executive Officers

Subject to any necessary shareholder and regulatory approvals, the board of directors and officers of Shenul upon the completion of the Transaction is anticipated to be comprised as follows:

Mike Kobler – Chairman, CEO & President

Bruce Berwager – COO

Peter Ballachey – CFO & Corporate Secretary

Simon Clarke – VP Corporate Development

David Hoyt – VP & Chief Geoscientist

Randy Aldridge – Director

Harland Johnson – Director

Andrew Squires – Director

Summary Biographies of the Post Transaction Board of Directors and Executive Officers

The background of each of the aforementioned persons is as follows:

  • Mike Kobler, Chairman, CEO & President
    • BS Mining Engineering, Montana Tech.
    • 30 years international project management, construction and engineering experience
    • Founder and former CEO of two companies pursuing unconventional hydrocarbon resources in North America, including OSUM Oil Sands Corp., based in Calgary, AB
    • Founder and President, California based Civil Engineering Consulting Firm focused on large infrastructure construction projects worldwide
  • Bruce Berwager, COO
    • MS & BS degrees in Petroleum Engineering, USC & Penn State University
    • 32 years international oil and gas exploration, development, operations management and engineering roles with Chevron Corporation, Unocal Corporation, Conoco Inc., and US independents
    • 20+ years experience with Monterey Shale in Santa Barbara Co., and other shale plays in the US, including the Barnett and Wolfcamp in Texas, and the Marcellus in Pennsylvania.
    • Former Director and COO-Venoco, Inc. (NYSE: VQ), SVP & GM for Calif. Ops-Warren Resources, Inc. (NASDAQ: WRES)
    • California Licensed Professional Petroleum Engineer (PPE)
  • Peter Ballachey, CFO & Corporate Secretary
    • BS Commerce, MBA, Canadian Chartered Accountant
    • Over 34 years experience including 17 years in senior financial and CFO roles in both USA and Canada
    • Former CFO of OSUM Oil Sands Corp.
    • Past public company experience as CFO of Railpower Technologies Corp. (TSX:P) and Empower Technologies Corp (TSXV:EPT) and other private companies
  • Simon Clarke, VP Corporate Development
    • LLB, Aberdeen University, Scotland. Qualified as a corporate / securities lawyer
    • 20 years corporate finance experience
    • Founder and Advisor to OSUM Oil Sands Corp
    • Managing Director: Invico Energy II Fund. Director: Argus Metals Corp. (a Canadian gold mining company)
  • David Hoyt, Chief Geoscientist
    • MS Geosciences & BS Geology, University of Texas
    • 35 years exploration and development geological and geophysical project management and interpretation experience with Atlantic Richfield Company, Texas Oil & Gas Corp, Warren Resources, Inc., Foothill Energy LLC., and as independent consultant
    • Significant California and Nevada exploration experience
    • Licensed Professional Petroleum Geologist
  • Randolph Aldridge, Director
    • BS Chemical Engineering, Texas A&M, MS International Business, University of Texas
    • 30 years international oil experience: Chairman- Koch Pipelines, President- Koch Petroleum Canada, Chairman-True Energy Corp., President-Koch Oil Co., President-Koch Oil, Calgary
    • Board Member, Energy Holdings international Inc. and Husky/BP Toledo Refinery LLC
  • Harland Johnson, Director
    • BS (Honors) Chemistry, University of Alberta, PhD. Metallurgy, University of Alberta
    • 40 years technical and management experience in the upstream petroleum industry for Exxon Mobil Corporation
    • Formerly President, Exploration & Production Division, Esso Brazil and President, Exxon Trinidad
  • Andrew Squires Director
    • Sr. Vice-President, Saleski Technology & Business Development, OSUM Oil Sands Corp.
    • 23 years experience in heavy oil and oil sands at Petro-Canada , Dome Petroleum Limited, Amoco Corporation, Paramount Resources Limited.
    • Member, Canadian Heavy Oil Association; practicing member of the Association of Professional Engineers, Geologists and Geophysicists of Alberta

All information provided in this press release related to Underground has been provided by management of Underground and has not been independently verified by management of Shenul.

Cautionary Statements

Completion of the Transaction is be subject to a number of conditions, including but not limited to, TSX-V acceptance and if applicable pursuant to TSX-V Requirements (as such term is defined under the TSX-V policies), majority of the minority shareholder approval. Where applicable, the Transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the Transaction will be completed as proposed or at all.

Investors are cautioned that, except as disclosed in the management information circular or filing statement to be prepared in connection with the Transaction, any information released or received with respect to the Transaction may not be accurate or complete and should not be relied upon. Trading in the securities of Shenul should be considered highly speculative.

The TSX-V has in no way passed upon the merits of the proposed transaction and has neither approved nor disapproved the contents of this press release.

Certain information included in this press release constitutes forward-looking information under applicable securities legislation. Such forward-looking information is provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", "project" or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking information in this press release may include, but is not limited to, information with respect to: operational decisions and the timing thereof, and timing for completion of the Transaction and Brokered Financing and drilling and exploration plans on the properties of Underground. Forward-looking information is based on a number of factors and assumptions which have been used to develop such information but which may prove to be incorrect. Although Shenul believes that the expectations reflected in such forward-looking information is reasonable, undue reliance should not be placed on forward-looking information because Shenul can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified in this press release, assumptions have been made regarding and are implicit in, among other things: the ability of Shenul to complete the Transaction and the other transactions described in this press release and the timely receipt of any required regulatory and shareholder approvals. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. The Company undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change, unless required by law.

The reader is cautioned not to place undue reliance on this forward-looking information.

This press release contains references to estimates of resources classified as "undiscovered petroleum initially in place" and "prospective resources" which are not, and should not be confused with oil and gas reserves. There is no certainty that any portion of the prospective resources will be discovered and, if discovered, there is no certainty that it will be commercially viable to produce any portion of those resources.

Certain noted drilling and completion data provided in this document may constitute "analogous information" such as drilling and production results by other industry participants in geographical proximity to prospective exploratory lands held by Underground. Such information has been obtained from state and regulatory agencies. Underground believes the information is relevant as it helps to define the reservoir characteristics in which Underground may have an interest. Underground is unable to confirm that the analogous information was prepared by a qualified reserves evaluator or auditor or in accordance with the COGE Handbook and therefore, the reader is cautioned that the data relied upon by Underground may be in error and/or may not be analogous to Underground's land holdings.

The securities of Shenul have not been and will not be registered under the United States Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this press release.

Contact Information:

Shenul Capital Inc.
Steve Vanry

Underground Energy, Inc.
Peter Ballachey
Chief Financial Officer
Tel: 805-845-4700 x17