XSTATE RESOURCES LIMITED — Capital/Financing Update 2021

Jan 27, 2021

Announcement to ASX

28 January 2021

==> picture [160 x 72] intentionally omitted <==

XSTATE TO ACQUIRE 50 BOEPD IN REACTIVATED OIL FIELDS

• Acquiring a 10% working interest in 500 BOEPD (100%) from Reactivated Oil Fields in Alberta, Canada:

o Sweet Oil (86%) and Natural Gas (14%)

• Takes XST’s share of recently acquired production in Alberta to ~200 BOPD before further well work commences

• Purchase Price: CAD 250,000 cash (~A$255,000) and 10.9 million XST shares at an issue price of 0.64 cents each (A$70,000):

• Purchase price metric: ~US$5,000 per flowing BOEPD following initial reactivation.

• Remaining Proved Reserves of 3.7 million BOE (1005) estimated by Independent Evaluator at 31 December 2019:

• Purchase price metric: ~$US0.67 per BOE of Proved Reserves.

• Extensive Owned infrastructure

• To be Operated by efficient, low-cost private Operator which provides local synergies:

• Production is Cash Flow positive at current oil price.

• Potential to Grow Production and reduce OPEX through early operational activity.

• Acquisition fully funded from existing cash.

• Effective date of 18 January 2021 with closing date prior to 10 March 2021.

• Drilling of Borba natural gas prospect is Xstate’s key priority with preparations being finalized.

Xstate Resources Limited (ASX: XST) (“Xstate” or “the Company”) is pleased to report that it intends to acquire a 10% Working interest ( WI ) in more oil and gas producing assets (“ Assets ”) in southern Alberta, Canada. The Assets consists of oil and gas fields and associated production equipment, located between Edmonton and the USA border (Refer to Map Below).

==> picture [194 x 195] intentionally omitted <==

Location of Main Asset Properties in Alberta, Canada

Xstate Resources Limited

The principal crude oil and gas properties are located in the Little Bow, Taber and Badger areas. The acquisition by Xstate is subject to the completion of the acquisition of the assets by Blue Sky Resources Limited. Xstate’s asset Purchase Price is AUD$255,000 plus the issue of 10,937,500 Xstate Shares to the value of AUD$70,000 valued on a 5-day VWAP price (AUD$ 0.0064) prior to 22 January 2021, the date of signing of the Binding Term Sheet. A refundable deposit of AUD$51,000 has been paid. Further details about the Assets will be provided upon the Closing of the purchase which is expected by 10 March 2021.

Current production is around 100 BOPD and steps are currently being taken to bring selected wells back into production at an expected gross (100%) rate of 500 BOPD before Closing. The cost to Xstate of these restoration activities is AUD$85,000.

The majority of the oil and gas wells being acquired have been produced for many years. The average production for the last 5 years, before the Asset wells were shut-in during 2020 due to COVID-19 related low oil prices, was over 2,000 BOEPD. During 2019, the Asset wells averaged 1,400 BOEPD (Production information from official Canadian SEDAR Filings). Oil prices have recovered recently in line with international oil price improvements and estimated reactivation at a rate of 500 BOPD is less than 40% of the 2019 production rate from the Asset wells.

Gross (100%) and implied Net to XST Remaining Reserves (both reserves are Net Reserves after oil and gas lease royalty has been deducted) estimated on a Deterministic Basis by independent evaluators at December 2019 as follows:

Asset Reserves Table (31 Dec 2019)	100% Working Interest -Net of Royalties Net Entitlement to XST at 10% Working Interest (BOE) (BOE)
Proved Developed Producing (PDP) Proved Developed Not Producing (PDNP) Proved Undeveloped (PUD)	3,301,800 330,180 272,400 27,240 91,400 9,140
Total Proved(1P) Reserve	3,665,600 366,560
Probable Reserves (Prob) ------------------------------------------------------------ Total Proved plus Probable (2P) Reserves	1,355,700 135,570 -------------------- 5,021,300 --------------------- 502,130

Further ASX Listing Rule 5.31 Information (Notes to Reserves) related to these reserves is provided in Attachment 1.

The purchase price is equivalent to around US$0.67 per Barrel of Proved Oil Reserves.

At current prices the Assets are cash flow positive and are highly leveraged to increased oil prices.

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

==> picture [283 x 160] intentionally omitted <==

Representative Asset Oilfield Production Facilities

Update on Red Earth Acquisition Process

The Operator has advised that all tasks for the requisite approval by the regulator have been completed and advice from the regulator is awaited. Closing of the transaction is expected before March 2021.

As reported in the previously announced Red Earth Acquisition (Refer ASX release “ Acquisition of Oil Producing Assets in Canada ” dated 20 November 2020) the Gross (100%) and Net to XST Remaining Reserves were estimated on a Deterministic Basis by independent evaluators at 31 December 2019 as indicated in the Table below.

For convenience, the combined Alberta acquisitions , including the current planned acquisition, reserve estimates at 31 December 2019 are included in the table below.

Net reserves are after oil and gas lease royalty has been deducted.

	Red Earth and Assets Combined Reserves Table - XST (31 Dec 2019)	Net Red Earth Entitlement to XST at 15% Working Interest	Net Assets Entitlement to XST at 10% Working Interest	Total Net Canada entitlement to XST after Close
		(Barrels of Oil)	(Barrels of Oil Equivalent)	(Barrels of Oil Equivalent)
	Proved Producing (PDP)	375,900	330,180	706,080
	Proved Developed Not Producing (PDNP)	211,650	27,240	238,890
	Proved Undeveloped(PUD)	67,800	9,140	76,940
	Total Proved (1P) Reserve	655,350	366,560	1,021,910
	Probable Reserves (Prob)	345,750	135,570	481,320
	Total Proved plus Probable (2P) Reserves	1,001,100	502,130	1,503,230

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

Borba 1-7 Well Update

Preparations are on track for spudding the Borba 1-7 well in early February. The well is planned to be drilled directionally to Basement to intersect multiple stacked, 3D-seismic amplitude which are interpreted to be indicative of Natural Gas accumulations in conventional sandstone reservoirs. Natural Gas is in high demand and commands a premium price in the undersupplied California Natural Gas Market which is equivalent in size to the entire Australian domestic Natural Gas market. JV infrastructure is available nearby to enable a quick start to sales of discovered Natural Gas at Borba.

Xstate Managing Director David McArthur commented:

“This acquisition again underscores Xstate’s commitment to build a producing oil and gas business at these relatively low oil prices. Whilst much of the North American Oil Industry is in turmoil, Xstate has purchased this production with existing cash and stock. This asset will be highly complementary to our Red Earth acquisition, which is due to close in the coming month. We look forward to announcing final plans for Borba shortly.”

This release is authorised by the board of the company.

David McArthur Managing Director +61 8 9435 3200

This document contains forward looking statements that are subject to risk factors associated with the oil and gas industry. It is believed that the expectations reflected in these statements are reasonable, but they and or their timing may be affected by many variables which could cause actual results or trends to differ materially. The technical information provided has been reviewed by Mr Greg Channon, a non-executive director of the company.

Mr Channon has more than 35 years technical, commercial and management experience in exploration appraisal and development of oil and gas. Mr Channon is a member of the American Association of Petroleum Geologists and consents to the inclusion of the information in the form and context in which it appears.

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

Attachment 1 - Notes to Reserves

Additional Information Required under Chapter 5 of the ASX Listing Rules to be read as Notes to Reserves:

The Reserves were estimated by qualified Independent Reserve Evaluator, McDaniel & Associates Consultant Ltd, and have been classified in accordance with the Canadian standards set out in the Canadian Oil and Gas Evaluation Handbook (COGEH) and National Instrument 51101 (NI 51-101), which are in turn consistent with SPE-PRMS guidelines. They have been reviewed in detail by XST’s Competent Person, Mr Greg Channon.

The reserves and resources information in this Xstate Resources Limited Australian Stock Exchange (“ASX”) document are based on and fairly represent information from a report compiled by McDaniel & Associates Consultant Ltd (“McDaniel”) relating to oil and gas fields in the Asset Properties. The report was prepared effective 31 December 2019 under the supervision of Michael Verney and David Jenkinson who are qualified in accordance with ASX listing rule 5.41.

Michael Verney, P Eng. is an Executive Vice President of McDaniel, has a Bachelor of Science Degree in Civil Engineering and Bachelor of Arts degree in Economics from Queens University, and is a Registered Professional Engineer in the Province of Alberta. He is qualified in accordance with ASX listing rule 5.41.

David G Jenkinson, P.Geol. is a Vice President of McDaniel, holding a Bachelor of Science Degree in Geology from the University of Saskatchewan, and is a Registered Professional Geologist in the Province of Alberta. He is qualified in accordance with ASX listing rule 5.41

McDaniel and its named employees and associates have consented to be named in this manner in this release. McDaniel have not reviewed the Assets since January 2020 and changes may have occurred since that date.

1. The basic information employed in the preparation of the Reserve Estimates was obtained from the operator’s files, public sources and from McDaniel non-confidential files. A field inspection of the properties was not conducted in view of the generally accepted reliability of the data sources for Western Canada properties. The Reserves estimates presented herein were based on the operating and economic conditions and development status as of 31 December 2019.

2. The Reserve Estimates in this release use the average forecast price and costs of McDaniel & Associates Consultants Ltd., GLJ Petroleum Consultants Ltd. and Sproule Associates Limited as of January 1, 2020 (“Jan 2020 Consultant Avg.”) for the future crude oil, natural gas and natural gas product prices presented in Canadian dollars (Refer to Table 1 Attached).

3. The crude oil Reserves estimates presented in this release were based on a review of the volumetric data and performance characteristics of the individual wells and reservoirs in question. Volumetric estimates of the original oil in-place were based on individual well petrophysical interpretations, geological studies of pool configurations, and in some cases on published estimates. In those cases where indicative oil production decline and/or increasing gas-oil and oil cut trends were evident, the remaining reserves were determined by extrapolating these trends to economic limiting conditions. Where definitive production

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

information was not yet available, the reserves estimates were usually volumetrically determined using recovery factors based on analogy with similar wells or reservoirs or on estimates of recovery efficiencies. The cumulative production figures were taken from published sources or from records of the Operator and estimated for those recent periods where such data were not available.

4. The natural gas reserves estimates for non-associated gas and gas cap pools were based on a study of the volumetric data and performance characteristics of the individual wells and reservoirs in question. Volumetric estimates of the initial gas in-place were based on individual well petrophysical interpretations, geological studies of the pools and areas, and in some cases on published estimates. Material balance estimates of the initial gas in-place were employed where sufficient information was available for a reliable estimate. The reserves recoverable from the currently producing properties were estimated from studies of production performance characteristics and/or reservoir pressure histories. In those cases where indicative gas production decline and/or increasing oil-gas ratio and water-gas ratio trends were evident, the remaining reserves were determined by extrapolating these trends to economic limiting conditions. In cases of competitive drainage in multi-well pools the reserves were based on an analysis of the relevant factors relating to the future pool depletion by existing and possible future wells. The recovery factors for the non-producing properties were estimated from a consideration of test rates, reservoir pressures and by analogy with similar wells or reservoirs. Natural gas Reserves estimates for solution gas production from producing crude oil properties were based on an analysis of producing gas-oil ratios and existing sales gas recoveries. Solution gas reserves were assigned to nonproducing oil properties where there was a likelihood of those reserves being recovered and sold from existing facilities or facilities that are expected to be available in the near future.

1. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, conclusions necessarily represent only informed professional judgement.

2. The Reserves have been estimated using Deterministic Methods and have been summed arithmetically and have not been adjusted for risk. The reserves are estimates and may increase and decrease as a result of market conditions, future operations including reactivations and fracture stimulations, enhanced recovery through waterfloods or changes in regulations, or actual reservoir performance. Estimates are based on certain assumptions including, but not limited to, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the Operator to recover the volumes, and that projections of future production will prove consistent with actual performance. Because of governmental policies and uncertainties of supply and demand, the sales rates, prices received, and costs incurred may vary from assumptions made.

3. The reserve estimates in the Reserves Table are Gross (100% WI- Column 1) and Net to XST 10% WI (Column 2). Both columns represent after Deduction of Royalty Reserves.

4. The Producing Reservoirs are predominantly conventional sandstone reservoirs.

5. Xstate will acquire its 10% WI at Closing. XST is acquiring a Non Operated interest. The Operator will be a Blue Sky Resources Limited company.

6. Leases are Crown (Government awarded) Leases. Many leases are Held By Production (HBP); annual rentals are paid on leases that are not HBP. Royalty paid to the Government is based upon a formula where lower producing wells attract lower royalty. In the past,

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

based upon gross production of around 1,000 bopd, the production royalty averaged around 9%.

1. Based on local reservoir experience fracture stimulation, waterflooding and EOR may significantly increase reserves over time. The economic benefit and use of these techniques will be determine by economic analysis in the future.

12. No specialised processing of the oil is required.

Reserves Classifications used in this Release

1P Denotes higher confidence, lower estimate of Reserves (i.e., Proved Reserves). 2P Denotes the best estimate of Reserves and is the sum of Proved plus Probable Reserves.

RESERVES DEFINITIONS

The petroleum reserves estimates presented in this release have been based on the definitions and guidelines prepared by the Standing Committee on Reserves Definitions of the CIM (Petroleum Society) as presented in the COGE Handbook. A summary of those definitions is presented below.

Reserves Categories

Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, from a given date forward, based on:

• analysis of drilling, geological, geophysical and engineering data;

• the use of established technology; and

• specified economic conditions, which are generally accepted as being reasonable, and shall be disclosed.

Reserves are classified according to the degree of certainty associated with the estimates

• Proved reserves are those reserves that can be estimated with a high degree of certainty to berecoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.

• Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved + probable reserves.

Development and Production Status

Each of the reserves categories (proved and probable) may be divided into developed and undeveloped categories:

• Developed reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (for example, when compared to the cost of drilling a well) to put the reserves on production. The developed category may be subdivided into producing and nonproducing.

• Developed producing reserves are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.

• Developed non-producing reserves are those reserves that either have not been on production, or have previously been on production, but are shut-in, and the date of resumption of production is unknown.

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au

Xstate Resources Limited

Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable, possible) to which they are assigned.

In multi-well pools it may be appropriate to allocate total pool reserves between the developed and undeveloped categories or to subdivide the developed reserves for the pool between developed producing and developed non-producing. This allocation should be based on the estimator's assessment as to the reserves that will be recovered from specific wells, facilities and completion intervals in the pool and their respective development and production status.

Levels of Certainty for Reported Reserves

The qualitative certainty levels referred to in the definitions above are applicable to individual reserves entities (which refers to the lowest-level at which reserves calculations are performed) and to reported reserves (which refers to the highest-level sum of individual entity estimates for which reserves estimates are presented). Reported reserves should target the following levels of certainty under a specific set of economic conditions:

• at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves;

• at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved + probable reserves.

Table 1

==> picture [490 x 331] intentionally omitted <==

Level 1, 31 Cliff Street, Fremantle WA 6959 | Tel + 61 8 9435 3200 | www.xstateresources.com.au