Texon Petroleum Limited (ASX:TXN) Provides Chairmans Letter to Shareholders with Update of Company Projects

Sydney, Aug 18, 2011 AEST (ABN Newswire) - Texon Petroleum Limited (ASX:TXN) releases the following letter to shareholders, which provides an update of the Company's projects and will be posted to shareholders on Monday 22 August 2011.

Dear Texon Shareholder,

I am writing to give you an overview of the Company's business - to bring you up to date with information on the Company's projects, to anticipate the timing of projects, and to outline some thoughts in regard to securing leveraged value from our Leighton Olmos and Eagle Ford projects.

At the end of 2010 the Proved, Probable and Possible Reserves attributable to the Company were 6.7 mmboe. Since then the second Eagle Ford well has been drilled and is in production. Our mid year 2011 reserves are likely to be significantly increased and we expect to make an announcement in the next week or so.

Currently the Company's beneficial Production is about 750boe/day. This is likely to increase when our Eagle Ford Nos. 3 and 4 wells come on-stream respectively in late August and October.

The Company's 5,900 acres of Eagle Ford leases represent a low risk portfolio of some 75 drilling locations and constitute the Company's most valuable asset. In recent months, we have directed a significant proportion of the Company's capital to our Eagle Ford project to de-risk the majority of the 75 locations and to lift the value of our Eagle Ford holding.

The Company's two producing Eagle Ford wells in its leases in McMullen County have been on-stream for eight and four months respectively. Oil production from both is well above the average oil rate for all McMullen County Eagle Ford wells. Production from Texon's Eagle Ford wells is 80% oil compared with a 40% average for all McMullen Eagle Ford wells.

Texon's first Eagle Ford well is performing in line with expectations. The second well has so far produced at a lower rate although the well had some 20 days of full or partial down-time in the first 90 days of production. By the fourth month the second well's production is tending towards the performance of the first well.

We are preparing information on the production performance of our first two Eagle Ford wells compared with a reference curve and the average production from McMullen County wells for release next week. Our first two Eagle Ford wells have confirmed 33 Proved, Probable and Possible Eagle Ford well locations.

Results from fraccing and testing the Company's third Eagle Ford well should be available in two weeks time. The fourth Eagle Ford well should reach its total depth about the same time with fraccing and testing scheduled for October. When these third and fourth wells have been drilled and are successful, we will have de-risked some 45-50 of our 75 Eagle Ford locations.

A fifth Eagle Ford well is scheduled to be drilled in the first quarter of next year and a successful well here will add to production and further de-risk our Eagle Ford project.

At the end of the fourth well, the Company will have invested US$53.9 million in the Eagle Ford. Revenue to Texon to end of July has amounted to US$7million. Subject to the success of the EFS #3 and #4 wells, the Company's 5,900 WI acres of Eagle Ford leases have a value for the Company well in excess of its investment.

Texon has eleven producing Leighton Olmos wells - including the most recent Peeler #3 which has just tested at an initial rate of 370 boe/day. The Leighton Olmos target was originally identified on Wandoo's 3D seismic. So far the Company has invested US$11.3million in developing the Leighton Olmos reservoir and revenue from production to date has amounted to US$11 million. The Company sold a 20% working interest for US$6.7 million in July 2010. Texon has a 63% WI in the Leighton Olmos where there are 24 undrilled Olmos well locations comprising 15 Proved Undeveloped, 6 Probable and 3 Potential locations.

In about 10 days time, we expect to spud a Wilcox well near our Teal well to test the oil shows seen in the Wilcox sands in several of the Company's Leighton / Mosman wells. The Wilcox targets occur between 5,600' and 6,400' deep - about 3,000' shallower than the Olmos. Log analysis by NuTech (a log analysis specialist company which analysed Texon's Eagle Ford reservoirs as well as working for numerous other companies) suggests possibly some 80' of pay in our Teal well on the Mosman lease. NuTech also indicates Wilcox pay in several of our Leighton Olmos development wells. The Wilcox test will investigate whether there is commercially producible oil in the Wilcox on our leases as there is in nearby oil producing Wilcox wells. A positive result could significantly enhance the value of the Company's Leighton and Mosman area leases.

The Company has a number of Other Potentially Valuable Projects. Coolangatta (gross upside 4 mmboe) remains technically low risk and the leasing matter should be finalised later this year. Texon has a 100% WI. Scarborough (gross upside 28 mmboe) is a large higher risk prospect. Texon has a 100%WI. Corindi (gross upside 40 bcf and 1.7 mmbbl oil) is a medium risk prospect. Leases are being sought for Texon at 100% WI. At Mosman / Rockingham, the Olmos reservoir could occur over 2,000 acres. A 3D seismic survey over this area is in progress with results expected by year's end. Potential upside for Texon's 100% WI is 4 mmboe. As we are currently fully focussed on lifting the value of the Company's Leighton Olmos and Eagle Ford holdings, these four projects will now be candidates for next year's programme.

Through the Texon - Wandoo Prospect Generation Agreement ("PGA"), Texon has first right of refusal of prospects generated by Wandoo from 180 3D seismic surveys, to which it has access, onshore in South Texas. These surveys, other than through this Agreement, would cost a few hundred million dollars to acquire. So far, 80% of the wells drilled by Texon on prospects created from these data have produced oil or gas. Texon and Wandoo are in discussions with a view to extending both the term and area that are subject to the Agreement. The PGA is a very important asset of the Company and we believe that the proposed changes will significantly benefit Texon through providing longer term certainty as to the flow of prospects for the Company. To aid the prospect mapping effort, we have begun to contract additional expert mappers who have specialist knowledge of key parts of the PGA area. Using our revised project criteria, we expect that Wandoo will generate higher quality prospects which are more material to the Company but of the same technical standard. To manage the exploratory and other investigative work, we have contracted a senior exploration manager who has a very strong track record of adding value in the petroleum industry onshore Texas.

As at 30 June, Texon had A$33 Million (approx US$35 Million) in Cash - sufficient for the third, fourth and fifth Eagle Ford wells.

Forward Plan

The life cycle of a petroleum project passes though a number of stages - idea, details of opportunity, successful drilling and so forth, leading ultimately in the success case to a development plan to realise full value through production. Full development can take several years, so the key question for Texon is to find the appropriate value versus capital investment monetization point, bearing in mind risks, rewards and downside. For a company of Texon's size and entrepreneurial opportunities, at some point earlier than full development, the incremental value per unit of investment will peak.

Our Leighton Olmos holding is probably now largely a development project and we expect there to be diminishing value uplift per future well compared with the past. The Company is considering whether it would get better upside from the value of its Leighton Olmos by re-leveraging that value into the Eagle Ford or other project.

Our Eagle Ford project will also be approaching such a consideration after we've successfully tested the fourth or perhaps the fifth well. After four or five successful Eagle Ford wells the Company will have significant value in its Eagle Ford holdings. Having established this position we will assess whether the point has been reached where the value of our Eagle Ford has been optimised for the Company.

Over the coming weeks, we will keep you informed as to progress and outcomes on all of these projects with particular emphasis on Reserves, Leighton Olmos, Eagle Ford, variations to the Texon-Wandoo Agreement and a reinvigorated prospect generation programme.

Contact

Dr. John Armstrong Chairman Email: john.armstrong@texonpetroleum.com.au Tel: +61-7-3211-1122 http://www.texonpetroleum.com.au