Seymourpierceoilgasfebruary 2012

February 2012
Oil & Gas AIM Initiations
Dr. Dougie Youngson
Research Analyst +44 (0) 20 7107 8068 dougieyoungson@seymourpierce.com
Sam Wahab ACA
Research Analyst +44 (0) 20 7107 8094 samwahab@seymourpierce.com
This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Oil & Gas AIM Initiations February 2012
Table of Contents
Introduction Top picks Bayfield Borders & Southern Gulf Keystone Petroleum Xcite Energy Top regions Oil and gas price outlook for 2012 Valuation methodology Exploration Production Companies Aurelian Oil & Gas Borders & Southern Petroleum Chariot Oil & Gas Faroe Petroleum Frontera Gulf Keystone Gulfsands Petroleum Xcite Energy Bayfield Energy Gold Oil Independent Resources Glossary of terms 13 27 37 51 67 77 91 107 115 129 143 156 3
4
4 5 6 7 8 11 12 12
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Seymour Pierce equity research
Oil & Gas AIM Initiations |February 2012
Introduction
In this oil and gas sector report we are initiating on 11 AIM listed companies. The core of the note focuses on companies which we consider have interesting investment cases. We believe that key criteria investors should focus on are: Strong management teams Assets which can be commercialised A deliverable strategy which will yield shareholder value within a reasonable timeframe
AIM suffers from a great number of companies that tick none of these boxes. However, we believe that the companies covered in this report tick most if not all of these boxes and should be worth your consideration.
We have highlighted what we feel are likely to be some of the best performing stocks in 2012..
We have highlighted what we believe are likely to be some of the best performing stocks in 2012. We have also identified what we consider are likely to be the core regions for oil and gas activity in the short term.
Top pick overview Bayfield

Proposition Bayfields recent operational update provided the first opportunity post-IPO to evaluate progress across its portfolio. The company continues to make positive in Trinidad with the spudding of the East Galeota exploration well at the end of January which is expected to take 42 days to drill. A further two exploration wells will be drilled at East Galeota which could provide additional upside resource potential. At the Trintes (Trinidad) field the company successfully drilled two appraisal wells: B10 & B8. These have de-risked the managements production projections for the field and should also increase the upside potential for the field, once production has stabilised. Catalysts The company has several near-term exploration (EG8 well) and appraisal targets which could provide share price triggers during 2012 on the assumption of positive results. Despite production being pushed back (due to operational and weather reasons) it should reach our previous production target of c.4,000boepd in 2H2012. This will enhance financial performance in the latter part of this year and provide a strong production and financial basis for the company as it moves its 2013. Valuation
SOTP valuation matrix million Production Reserves Net cash* Less: G&A Core Value Contingent resources Target Market Cap 96.9 90.3 28.1 (20.0) 195.4 36.8 232.1 p/share 45.1 42.0 13.1 (9.3) 90.9 17.1 108.0
Source: Seymour Pierce Ltd *We have assumed a post placing cash balance using managements FY12E guidance of c.$55m
Our core valuation comprises a revised DCF analysis of Bayfields producing assets, the companys externally verified reserve estimates, and the FY12E net cash balance. We also attribute a discounted general & administrative (G&A) charge for field related expenditure in relation to the Trintes play. On this basis our revised valuation indicates that Bayfield is currently trading at c.50% below its core asset value alone. We reiterate our Buy recommendation and target price of 108p.
SOTP waterfall chart
140 120 100 p/share 80 60 40 20 0 -20 G&A
Source: Seymour Pierce Ltd
45
42
17 13 -9
Net Cash
Contingent resources
Reserves
Production
Borders & Southern

Proposition 2011 was the turn of the northern Falkland players (RKH & DES) and in 2012 the activity heads south with both BOR & FOGL drilling. Whilst these companies share common issues such as regional politics, BOR stands out amongst its peers in terms of the potential size of its drilling targets as well as the expertise of its management team. Catalysts Drilling at the first prospect is underway. The company forecasts that it will take 90 days to drill both Darwin and Stebbing. The key price drivers will be the well results from these two wells. We highlight that the two wells are testing two different types of play. Failure (or success) at the first well does change the risk profile of the second. Valuation
SOTP valuation matrix NAV Darwin Stebbing Net cash Core value
Source: Seymour Pierce Ltd & Company data
m 199 227 116 542
p/share 46 53 27 126
We have valued Borders in terms of a risked exploration net asset appraisal of their near term assets. The company intends to drill two wells in Q1 2012 (Darwin and Stebbing), and we feel it is appropriate to value it on this basis.
140 120 100

p/share
53
80 60 40 20 0 Net Cash
46
27
Darwin
Stebbing
Gulf Keystone Petroleum

Proposition 2011 saw substantial resource upgrades across its assets in Kurdistan. 2012 will see the company move into export production for the first time, resulting in the first significant cash inflows for GKP. The entrance of ExxonMobil and Total into the region has enhanced its credibility as a potential major future oil producing province. We feel that the persistent take over rumours are premature, but likely to be accurate in the longer term. Catalysts The company is in the process of drilled several wells across it acreage, the results will provide the key share price drivers in 2012. The company has now opened the data room for the sale of its Akri-Bijeel asset for which we have a risked valuation of c.$200m. We estimate that this process could take up to three months to complete. Short term share price drivers are: well testing results from the Shaikan-4 well (due imminently) and the well result at the Ber Bahr-1 exploration well (due end of February/early March). Valuation
SOTP valuation matrix million Production Discovered 2C Gross Value Less: G&A Net Value Net Cash Target Market Cap/ Price
p/share
268 2,708 2,975 (40) 2,936 256 3,191
31 317 348 (5) 344 30 374
We have valued Gulf Keystone in terms of its discovered resource base under the low estimate scenario stated in the most recent CPR, and have not included estimates for yet-to-find resources. In addition, we have included a discounted cash flow (DCF) valuation of GKPs current and forecast production (2012: c.10,000bopd ramping up to 2014: c.40,000bopd) from its Shaikan field in Kurdistan.
400 350 300 250 p/share 200 150 100 50 0 -50 -5 G&A Net Cash Production Discovered 2C 30 31 317
Xcite Energy
Proposition In 2010, a mis-communicated reserve report, delayed clarity on funding against a backdrop of weak market conditions resulted in Xcite losing the majority of its 2010 share price gains. The rig on site awaiting delayed DECC approval and development drilling due to start in February, are we about to see resurgence in this stock? We think so, but it may prove to be another turbulent year for investors should initial drilling results fail to deliver. Catalysts The company is awaiting overdue DECC approval for drilling to start as part of Phase 1A. Once this has been approved (which we assume in the very short term) the company can begin drilling the first batch of development wells at Bentley. This will provide the first significant share price driver for the company. The resultant well flow test results will then provide guidance as to the level of production we can expect from the field. It should also result in the conversion of contingent resources into reserves, which should also enhance valuation. Valuation
SOTP valuation matrix NAV by activity Confirmed CPR reserves/resources Plus net (debt)/cash Core NAV
million 822.4 30.78 853.2
p / share 227 15 242
We have based our valuation of Xcite solely on the company's latest Reserves Assessment Report (RAR) for the Bentley field.
300 250 200 p/share 150 100 50 15 0 Net cash Risked resources 227
Top regions
We have identified three key regions which we believe are likely to see significant positive momentum in 2012
We have identified three key regions which we feel are likely to see significant positive momentum in 2012.
Kurdistan
Activity in Kurdistan has been steadily increasing in recent years with the entrance of several small and medium independent E&Ps. However, the region finally got the seal of approval following the announcement that ExxonMobil was to acquire significant acreage in six exploration blocks in late 2011. More recently, speculation has mounted that Total were planning a similar move, although this has yet to be formally announced. Many commentators have suggested that the absence of the majors was due to fractious relationship between the Iraqi Central Government and the Kurdistan Regional Government. The absence of resolution on the new Iraqi oil laws (which were drafted in 2007) continues to hold back the region from making an impact on the export market and continues to prevent major capital investment in projects other than for licence acquisition and exploration. Outlook The USGS has estimated that Kurdistan has c.40bn bbl of oil and c.60tcf of gas with low geological exploration risk. However, this attractiveness is countered by the high (and some would say increasing) geopolitical risk as well as tangible commercial risk should the issue surrounding the oil law not being resolved in the short to medium term. The one key benefit of operating in Kurdistan versus the rest of Iraq is security. Kurdistan continues to be a much safer operating environment and has been one of the key drivers for investment in the region. We believe that the increasing influx of foreign oil companies into Kurdistan and the increasing capital expenditure they bring is the most likely driver for resolution of the oil law. Increases in production outside Kurdistan have been disappointing so far and if Iraq is to see any tangible increase in production in the short to medium term we believe that this will come from Kurdistan. Companies on our watchlist Gulf Keystone Petroleum has been a long term player in Kurdistan and has seen considerable exploration success so far. It has discovered c.15bn bbl of oil in place so far and continues to explore during 2012. The company is aiming for oil exports starting in 2013 and is seeking to develop an oil export pipeline to Kirkuk with a capacity of 440,000bopd. There has been considerable speculation that it is a takeover target ahead of moving into full scale commercial development. Price drivers in 2012 are likely to come from further resource upgrades and increases in production from Shaikan. Heritage Oil & Gas has had a mixed experience in Kurdistan. Initially positive drilling results at the Miran West field, which was identified as an oil discovery, changed when follow up drilling discovered large quantities of gas instead. Heritages share price collapsed at this point and it has struggled to recover since. The company is examining options for gas export and continues to explore at Miran and positive results from this programme could boost the share price in 2012. A recent and unexpected entrant is Afren, who made their first investment outside Africa last year. The company is targeting first oil from its assets in 2012 and this is likely to provide upside from this part of the portfolio in 2012. The company also has exploration planned in Kurdistan later this year.
The USGS has estimated that Kurdistan has c.40bn bbl of oil and c.60tcf of gas with low geological exploration risk.
East Africa
The highly competitive operating in western Africa and increasingly in central Africa has seen a migration of companies towards the east of the continent.
The highly competitive operating in western Africa and increasingly in central Africa has seen a migration of companies towards the east of the continent. As is typical for frontier regions, small E&Ps have made the initial exploration efforts to prove up resources. We have now entered the phase where successful explorers are attracting interest from larger independents as well as the majors. Outlook We believe that 2012 will continue to see exploration success from the minor companies in the shallow water and hopefully in the deeper water from the new entrant majors. M&A on a greater scale is also likely to be a prominent feature. Cove Energy, for example has already put up the for sale sign and we can expect further consolidation in the region. Exploration has tended to yield large gas discoveries in the shallow water blocks of a size which could potentially support a LNG development. However, given that the LNG market is oversupplied with more capacity due to come onstream in Australia and the Middle East, we see this a a longer term prospect than other commentators. Companies on our watchlist Afren entered east Africa via its acquisition of Black Marlin. During 2011 the company has been working up these assets with a view to start exploration in 2012 and 2013. Afrens strategy has mainly been on developing already discovered assets. It exploration exposure has been limited to date, but the company hopes to deliver 250mmbbl of 2P/2C resources over the next three years. East African exploration in 2012 will focus on Kenya and Tanzania. Cove Energy recently put the for sale sign up following a very successful exploration campaign in recent years. This company is very likely to attract interest in the majors who are keen to potentially develop domestic and export gas projects in the region. Share price performance will continue to be driven by its drilling campaign, resource upgrades and potentially its acquisition.
North Sea UK & Norway

The UK North Sea saw a record investment of 7.5bn in 2011, driven by high oil prices. This level of investment is forecast to continue until at least 2015.
The UK North Sea saw a record investment of 7.5bn in 2011, driven by high oil prices. This level of investment is forecast to continue until at least 2015. The emphasis of this investment was skewed towards development rather than exploration and appraisal which saw a decrease in activity. The sector also saw its most active period in terms of transactions since 2005, with c.$4bn of assets switching hands during the year. This is a trend which we expect to be a continuing theme as the region sees more consolidation, particularly amongst the smaller players. Following the successes of Statoil, Xcite Energy and Nautical Petroleum in heavy oil, we would expect these types of projects to become more attractive throughout the region. The fiscal terms for such projects will also improve project commerciality and hopefully reduce the decline in oil production from the UK sector. The Norway North Sea is seeing increased activity from a number of AIM listed E&Ps as they look to exploit the attractive fiscal terms offered by the Norwegian government. Currently, exploration companies will receive 78% of their drilling expenditure back the following year to facilitate further growth in the region. The state owned company, Petoro AS, is also undergoing transactions with foreign entities operating in the region to acquire previously undeveloped licences, thus stimulating future production from the region.
Companies on our watchlist Faroe Petroleum has a robust mix of production growth and high impact exploration, and continues to execute value accretive transactions on both sides of the Continental Shelf, most notably its recent asset swap with Petoro AS. The company has a strong balance sheet with sufficient cash reserves and debt facilities to fund its progressive drilling, appraisal and development activities. Xcite Energy moves into the development phase this year which should yield production in 2Q onwards. However, we do anticipate a volatile period during the initial drilling phase as we see the initial drilling and flow test results being announced. There is a huge amount of expectation relating to conversion of resources to reserves.
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Oil and gas price outlook for 2012

Geopolitics were a major price driver during 2011, as concerns driven by the Arab Spring
Geopolitics were a major price driver during 2011, as concerns driven by the Arab Spring caused concerns as to the stability of the Middle East and what this could mean for security of supply, particularly for Saudi Arabia and Iran. Despite not being a significant oil producer, Syria continues to cause instability in the region. Similarly, despite making progress Egypt has still not fully resolved its many issues and is likely to remain unstable until after the elections are concluded. Irans commitment to its nuclear programme will continue to antagonise the West and remains a cause for concern. The recent sabre-rattling on the potential closure of the Straits of Hormuz seems to have just been posturing. However, the reality is that this major (a fifth if all traded oil passes through here) oil transit route for the region could be closed within a matter of hours. Although unlikely, an escalation like this would not only result in a major increase in the oil price, but could quickly escalate to another war in the Middle East. Brent averaged $110/bbl in 2011 and we forecast the price to average $100/bbl in 2012. Now that winter has finally arrived in Europe, we have seen the spot gas price increase by 30%, driven in part by Gazproms inability to increase supplies. Gazprom currently supplies c.25% of the European market, but its pricing is the highest at c.$410/mcm. Consequently it is seeing more competition from LNG and domestic sources of gas in some countries. Such an aggressive pricing structure has resulted in demands from gas users for Gazprom to move away from long-term contracts and increase the spot market contribution to such contracts.
The success of the shale gas industry in the US is has driven the gas price to a new low of c.$2.50/mcf.
The success of the shale gas industry in the US is has driven the gas price to a new low of c.$2.50/mcf. The success has been so large that the US may move back into gas exports rather than being a net importer. We are now seeing an increase in shale gas activity throughout Europe, particularly in Poland, and so far the results have been mixed. We are therefore comfortable that the gas price will remain high and that shale gas will have little impact on the supply/demand situation in the medium term.
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Valuation methodology
Petroleum companies are valued in terms of their portfolio of exploration and production assets. Our overall target price comprises a core valuation for the producing and near term production assets and a risked net asset value (RENAV) for the exploration assets.
Exploration
Prior to drilling, a huge amount of work has been done to de-risk a prospect. We apply a simple arithmetic approach to attempt to value such prospects ahead of drilling. The calculation is:
RENAV = Gross resource estimate x Company Interest x Chance of Success x NPV/bbl
The company provides most of this data, the chance of success (CoS) is probably the most important factor and is very company and country specific. Some companies are better at exploration than others. Also, some countries have more hydrocarbons than others. The CoS tends to be higher in mature exploration than in frontier regions. The NPV per barrel varies from country to country and reflects the prevailing fiscal terms and transaction values on a per barrel basis.
Production
We write an operational model for the companys producing assets. This reflects historic data and our assumptions for the future.
We write an operational model for the companys producing assets. This reflects historic data and our assumptions for the future. We model production, prices and costs and overlay the fiscal terms of the country where the asset is located. From this model we derive a DCF which is then used to value the asset. See the valuation section for the assumptions used for this company.
Resource Classification Framework
Source: SPE
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10 February 12 | Initiation of coverage | Oil & Gas exploration and production
Aurelian Oil & Gas

BUY
Share price Target price 84% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) Dividend yield (%) PER at Target price (Y1) 12 month high/low (p) (%) Absolute FTA relative 1m -2.9 -6.9 3m -27.2 -31.9 17p 31p
(AIM:AUL)F
Let it flow
2011 was a disappointing year for Aurelian, with its key asset Siekierki representing a much larger and complex challenge than initially anticipated. Following a comprehensive review, the company has provided the market with a clear strategy to develop its entire portfolio, which we feel represents a strong buying opportunity for investors, given current trading levels.
Strategy shift Aurelian has now concluded a comprehensive review of its assets following the disappointing multi-fracced horizontal appraisal wells drilled in 2011. The data acquired during the appraisal phase has improved the companys understanding of Siekierki, and as such, a revised development plan has been designed comprising 32 wells recovering 296bcf of gas (previously 348bcf) to commence in 4Q 2012. Near-term exploration programme Aurelian plans to take advantage of the flexibility in its work programme and preserve capital by prioritising its exploration targets. In line with the strategic review, the company has deferred several exploration targets, to focus instead on near-term value play unlocking wells. The programme is budgeted to cost 25.6m net to Aurelian targeting 67.3mmboe of net unrisked prospective resources, which, while less than previously indicated, potentially offers material upside. Unlocking Siekierki The company intends to enter into negotiations for a potential farm-in to its 90% interest in Siekierki. The asset is surrounded by IOC operated acreage, most notably Connoco Phillips, Exxon Mobil, Total and Chevron, all of which have the technological knowledge base and financial backing that is required to fully develop the project. We feel that a farm-in partner of sufficient expertise and financial resource base will act as a positive share price trigger for investors in Aurelian. Valuation and recommendation Our core valuation comprises exploration and development activities, and cash; which yields a base value of 20p. Our exploration upside assessment contributes a further 10.8p. On this basis we initiate coverage with a BUY recommendation and set a price target of 31p.
1 Please see regulatory disclosure notes at the end of this document A draft of this research has been shown to the company following which minor factual amendments have been made.
82.8 80.0 82.8 494.3 3,488 0.0 147.2 92/16 12m -79.3 -78.9
Price & price relative (-2yr)

100 80 60 40 20 0 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news Operational updates
9 February 12
Business Exploration in Central Europe with licences in Poland, Slovakia, Romania and Bulgaria www.aurelianoil.com
Year end Revenue December (m)

Dr. Dougie Youngson Research Analyst +44 (0) 20 7107 8068 dougieyoungson@seymourpierce.com Sam Wahab ACA Research Analyst +44 (0) 20 7107 8094 samwahab@seymourpierce.com
EBIT* (m) (1.9) (9.0) 1.3 (5.3) (0.1)
PBT* (m) (2.3) (9.7) 2.5 (4.5) 0.4
Tax Adj. EPS* (%) (c) 0.0 0.0 0.0 0.0 0.0 (0.2) (4.9) 0.2 (0.9) 0.1
PER EV/EBIT* Div yield (x) (x) (%) (88.1) (4.0) 80.1 (21.7) 261.4 (51.8) (11.0) 76.4 (18.7) (985.9) 0.0 0.0 0.0 0.0 0.0
2009A 2010A 2011E 2012E 2013E
0.0 0.0 0.0 0.0 0.0
* excludes exceptional items and amortisation of acquired intangibles. ^ EV calculation adjusted for core cash, investments etc. Source: Seymour Pierce Ltd
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Valuation and recommendation

We value Aurelian on its core exploration and development assets in Poland, Slovakia, Romania and Bulgaria.
We value Aurelian on its core exploration and development assets in Poland, Slovakia, Romania and Bulgaria. The company has a clear development plan to bring their key asset, Siekierki, to first stage production in 2016 (delayed by three years due to technical issues experienced during flow testing in March and September 2011). However, this development plan will require additional financial and technological resources through a potential farm-out down. On this basis, we do not currently provide a valuation of future discounted cash flows arising from Siekierki in 2016, until the company has adequate resources in place to fulfil their strategy. Our valuation incorporates the following assumptions:
Valuation assumptions Metric NPV/boe - Oil NPV/boe - Gas Realised gas price Long-term $/ Long-term $/ Long-term / Discount rate Shares outstanding (million)
Assumption $5/boe $3/boe $7.5/mcf 1.65 1.39 1.16 10% 500.8
These assumptions have been implemented into our risked exploration net asset valuation as follows:
Risked net asset valuation Status Country Project Interest CoS/CoD Resources (mmboe) Gross 49.30 11.5 3.3 5.3 97 272.8 28 19 31.6 180.2 50 16 8 12 784.00 Net 44.37 10.35 2.97 2.65 43.65 68.2 22.4 11.4 31.6 90.1 16.875 7.2 2.7 3.6 358.07 NPV 10% Unrisked US$ / boe NPV $m 3 3 3 3 5 5 3 3 5 3 5 5 3 3 133.11 31.05 8.91 7.95 218.25 341.00 67.20 34.20 158.00 270.30 84.38 36.00 8.10 10.80 1,409.25 Risked NPV $m 33.28 6.21 1.78 0.80 21.83 34.10 6.72 3.42 15.80 27.03 8.44 3.60 0.81 1.08 164.89 Unrisked NPV m 81 18.82 5.40 4.82 132.27 206.67 40.73 20.73 95.76 163.82 51.14 21.82 4.91 6.55 854.09 Risked Net Risked NPV m p/share 20.17 3.76 1.08 0.48 13.23 20.67 4.07 2.07 9.58 16.38 5.11 2.18 0.49 0.65 99.93 4.0 0.8 0.2 0.1 2.6 4.1 0.8 0.4 1.9 3.3 1.0 0.4 0.1 0.1 20.0
Development Poland Siekierki 90.00% Exploration Poland Siekierki NW 90.00% Exploration Poland Siekierki SW 90.00% Exploration Poland Kalisz 50.00% Exploration Poland Cyb. & Ty. 45.00% Exploration Poland Bieszczady 25.00% Exploration Poland Karpaty East 80.00% Exploration Poland Karpaty West 60.00% Exploration Poland Wetlina 100.00% Exploration Slovakia Svidnik 50.00% Exploration Romania Brodina 33.75% Exploration Romania Cuejdiu 45.00% Exploration Romania Brodina 33.75% Exploration Bulgaria Golitza Block 30.00%
25% 20% 20% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
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SOTP valuation matrix million Siekierki (Development) Siekierki (Exploration) Other Polish exploration Slovakia exploration Romania exploration Gross Value Net Cash Target Market Cap
p/share 4.0 1.0 10.0 3.3 1.7 20.0 10.8 30.8
20.2 4.8 50.1 16.4 8.4 99.9 54.2 154.1

35 11
30
25 10 p/share 20
15 5 10 3 5 2
0 Romania & Bulgaria Slovakia exploration Siekierki (Exp & Dev.) exploration Polish exploration upside Net Cash
Recommendation and target price

Our gross valuation comprising exploration and development activities yields a base value of 20p, whilst net cash adds a further 10.8p/share. In our view, Aurelian is severely undervalued and is currently trading well below its core value.
In our view, Aurelian is severely undervalued and is currently trading well below its core value.
On this basis we initiate coverage with a Buy recommendation and set a price target of 31p.
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Strategic overview
Aurelian has now concluded a comprehensive review of its assets following the disappointing multi-fracced horizontal appraisal wells drilled in 2011. The company arrived at three key conclusions which we have analysed in detail to support our investment case: Siekierki is an attractive project and initial problems are now well understood and a clear plan forward has been developed. The cash position at the year-end 2011 was 63m which allows the company to carry out its planned exploration and appraisal activities for the next 18 months. Unlocking the full upside within the company is likely to require additional technical and financial resources. We feel that it is important to analyse these three conclusions in detail to address existing shareholder concerns, as well as to illustrate to potential shareholders the possible upside arising on successful development of Aurelians acreage in central Europe.
How attractive is Siekierki now?

The well tests on Siekierki have been completed and incorporated in a comprehensive technical and commercial review led by a group of independent consultants The well tests on Siekierki have been completed and incorporated in a comprehensive technical and commercial review led by a group of independent consultants (AGRTRACS). From this, gas initially in place of 1.1tcf is now estimated in Block 207 (company guidance prior to appraisal was 1.6tcf). However, we do highlight that this does not include gas potentially in Blocks 206 and 208 or the Krzesinki discovery.
Siekierki location map
Source: Company
Following the strategy update and conference call, we feel it is clear that the data acquired during the appraisal phase has improved the companys understanding of Siekierki, and the company has now constructed a new reservoir model. The new model now illustrates that the layered Rotliegendes sandstone sequence in Siekierki has a wide range of ambient porosity and permeability properties spanning 6-18%, with higher permeability layers dominating well performance. The company also maintains that the Krzesinki-1 well test result supports Aurelians new reservoir model, in terms of the presence of higher porosity zones within the gas
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legs of the Krzesinki and Siekierki fields, with an un-fracced well test producing 0.2mmscf/d. This represents the first successful un-stimulated gas well flow test on Block 207 to date. As such, a revised development plan (see forward plan section) has been designed, comprising 32 wells recovering 296bcf of gas (previously 348bcf), indicating an average recovery of 9.25bcf/well. To support these estimates, the company intends to release an updated CPR covering both appraisal and exploration assets in March/April 2012. Nevertheless, following the comprehensive technical and commercial review supported by AGR-TRACS and the new reservoir model, the company maintains that Siekierki is an attractive project which offers material upside to investors.
Funded exploration programme

Aurelian plans to take advantage of the flexibility in its work programme and preserve capital by prioritising its exploration targets.
Aurelian plans to take advantage of the flexibility in its work programme and preserve capital by prioritising its exploration targets. In line with the strategic review, the company has deferred several exploration targets, to focus instead on near-term value play unlocking wells. Aurelian will initially drill the Sosna-1 well within the Torzym reef oil play in March 2012 targeting up to 35mmbbls gross. In addition, the company intends to undertake further geological and geophysical surveys to de-risk the prospects identified in their 2011 seismic data including Cybinka-Torzym , Slovakia and Romania (Brodina). The high impact Carpathian well drilling campaign will now be deferred to Q4 of this year. This will include Kaparty East, which the company now believe to be gas rather than oil with internal estimates suggesting a recoverable resource of 170bcf, representing an additional 1p/share of our risked target valuation.
2012 drilling programme

Well Krzesinki-1 Niebieszczany-1 Sosna-1 Cierne-1 Bieszczady-2 Kaparty E-1 Cuejdiu-1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WI 90% 25% 45% 50% 25% 80% 45% Max Cap (m) Target mmboe n/a n/a n/a n/a 2.6 3.1 6.4 19.4 3.7 23.1 10.2 14.5 2.7 7.2 p/share n/a n/a 0.4 1.4 2.8 1.1 0.9
Rotliegendes Zechstein Reef Oil Play Carpathian Thrust fold Belt

Source: Seymour Pierce Ltd, Company
In addition to the above five wells, four contingent wells are also being considered for Aurelians 2013 drilling schedule. The programme is budgeted to cost 25.6m net to Aurelian although it aims to reduce this by bringing in partners to the Romanian, Slovakian and Karpaty East & West licences. In aggregate, the five wells are targeting 67.3mmboe of net unrisked prospective resources, which while less than previously indicated, offers material upside potential.
Unlocking the full value of the company

Analysis of Trzek-2 and Trzek-3 Aurelians share price has been severely impacted by the two multi-fracced horizontal wells drilled in 2011. The company has reviewed the data from these wells to implement a comprehensive plan to develop the asset using cost efficient and technologically advantageous methods.
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Aurelian has confirmed that the Trzek-2 horizontal well had mechanical issues with the completion which reduced fracture effectiveness; whilst the Trzek-3 well was mechanically well executed with better completion. However, the hydraulic fractures were not fully effective and the well bore did not make contact with the high permeability zone encountered in the pilot hole. As such, the combination of the reservoirs permeability to gas and water, and the poor frac effectiveness explains why the Trzek-2 and Trzek-3 flow rates of 3mmscfd and 3.2mmscfd were significantly lower than expectations. Subsequent geological and geophysical analysis of the wells have provided Aurelian with a comprehensive understanding of the geology of Siekierki. This is best illustrated through their pre and post drill knowledge conceptual knowledge of the basin. Pre and post drill understanding Aurelians pre-drill strategy understood that the multi-frac horizontal well would produce dry gas when fracced above the free water level.
Pre-drill concept
Source: Company
This was supported by the belief that Siekierki was a tight reservoir with moderate variation porosity. However, subsequent analysis has confirmed that the tight reservoir contains zones of significantly higher permeability and a much larger variation in porosity. In addition, gas is produced with water as relative permeability effects are important.
Post-drill concept
Source: Company
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From the above illustrations, we note that Siekierki is very different geologically from the companys original assumption. That assumption had only moderate variation in porosity and permeability in the tight aeolian sandstone matrix Aurelian now understands that the reservoir has streaks of higher permeability (yellow in the diagram) within that tight matrix, which will dominate well performance On this basis, managements expectations of GIIP has been reduced by c.31% to 1.1tcf (previously 1.6tcf), however, the company re-iterates that the multi-fracced horizontal wells implemented continues to be the correct technology application for the field and significant operational lessons and insights have been learnt. Forward development plan Aurelian will now seek to implement the next stage of its development plan to achieve first gas sales in 2016This will initially involve the continuation of long-term testing of Trzek-2 and Trzek-3 and commercialising gas from these two wells using a low pressure and low methane tie-in, as well as a gas to wire option as a smaller pilot development. First gas arising from this is expected to be achieve in 4Q 2013 costing in the region of 12m net to Aurelian.
Aurelian will now seek to implement the next stage of its development plan to achieve first gas sales in 2016.
Development plan to 2016
Source: Company
The above development plan will also incorporate a potential farm-in partner to the Siekierki license. The company currently holds a 90% working interest in the block, which is surrounded by IOC operated acreage, most notably Connoco Phillips, Exxon Mobil, Total and Chevron, whom all have the technological knowledge base and financial backing that is required to fully develop the Siekierki project. In our view, a substantial farm-down of Siekierki would have always been an attractive proposition for Aurelian even if the company had successfully flowed commercial volumes of gas in 2011. The key difference in undertaking one now is that the company has not proved up as much value of the asset as it would have liked and in effect, its hand is being forced through a lack of financial resources. Nevertheless, we feel that the introduction of an experienced farm-in partner in the near term would be a strong share price trigger for investors, given the improved technological understanding of the asset achieved through extensive data analysis.
19
Key assets
Core area 1
Poznan The Siekierki field was originally discovered over 40 years ago close to the city of Poznan, but the tight reservoir was found to exhibit low porosity and permeability, which meant commercial flow rates could not be achieved with the technology available at the time. Aurelian was awarded the Poznan East licence in 2003 and drilled the Trzek-1 well in 2007 to appraise the field, confirming the original findings but providing improved quality reservoir data using modern technologies. Significantly, the well flowed at an initial 7.5mmcfd before being choked back to a stable 2.5mmcfd. Aurelians latest CPR estimates 640bcf net to the company on a midcase scenario (including Siekierki SW and Siekierki NW) representing this largest asset, by confirmed resources, in the companys portfolio.
Poznan blocks
Source: Company
Cybinka and Torzym These fields are located nearby to the German border and were acquired in 2008. They link to recent oil discoveries in the north, and the basin extends from the prolific UK North Sea. Existing data is being evaluated and has been followed by 3D seismic. The combined volume of hydrocarbons net to Aurelian is 34mmbbls and the company anticipates starting drilling in Q4 2011.
Cybinka & Torzym
Source: Company
20
Core area 2
Aurelian has continued to develop its second Core Area and has executed its strategy of applying modern 2D seismic to explore thrust fold areas. During 2010, the company successfully acquired 776km of 2D seismic across its acreage here.
Bieszczady In the Polish Carpathians, the first of a three well programme in the companys Bieszczady concession, Niebieszczany-1, was spudded in October 2010. The well is being drilled to target depth of 4,800 metres targeting an oil prospect of up to 100mmbbls (gross). A number of reservoirs, all of which are proven producers in the region, are being targeted by this well and there are several other similar-sized prospects on trend, which would be de-risked in the event of a successful outcome. Using existing 2D seismic data covering approximately 20% of the concession area, prospects totaling up to 680m barrels of un-risked prospective resources have been mapped. The acquisition phase of a second 300km 2D survey covering a further 20% of the concession size was completed in March 2011. The future work programme for the concession is to complete the processing and interpretation of this second 2D survey, and then, following the drilling and testing of Niebieszczany-1 and the reprocessing of the first 2D survey, prepare a revised prospect inventory and drill two further wells. Kaparty At East Karpaty, the acquisition of 136km of 2D seismic has been completed. This survey will cover approximately 25% of the concession and the results of the survey are expected later this year. A two well, fully-funded programme is planned for the concession, with the wells being targeted for late 2011 and 2012. It is also anticipated that the company will seek further farm-outs on this acreage, after the drilling of the first or second well in the programme. Also, in the Polish Carpathians Aurelian has been awarded a 100% interest in the Poreba concession which is adjacent to the West Karpaty concession. This new concession gives the company additional scale and prospectivity to launch a new Carpathian Conventional Gas business covering 2,562km2, which will target shallow gas to potentially commercialise quickly. In addition, Aurelians Lachowice Gas project on the West Karpaty concession is its first project in this new business where it will carry out a relatively low cost work over process targeting a prospect of 20bcf (gross) and target first gas by the end of 2012.
21
Financial model
Income Statement Year end December (m) Group revenue Cost of sales Gross profit Total operating expenses EBIT Net interest/financial income/(cost) Associate and Other non-op. income/(cost) PBT Tax Effective tax rate (%) Minorities Earnings EBITDA Adjusted EBITDA* Adjusted EBIT* Adjusted PBT* Adjusted earnings* DPS (c) EPS (c) EPS [F. Dil.] (c) EPS [Adj.]* (c) EPS [Adj. F. Dil.]* (c) Weighted average no. shares (m) Fully dil. w. ave. no. shares (m) Year end no. shares (m)
* excludes exceptional items and amortisation of acquired intangibles. Source: Company data, Seymour Pierce Ltd
2009A 0.0 0.0 0.0 (1.9) (1.9) (2.3) (0.4) (2.3) 0.0 0.0 0.0 (0.4) (0.4) (0.4) (1.9) (2.3) (0.4) 0.0 (0.2) (0.2) (0.2) (0.2) 189.5 189.5 189.5
2010A 0.0 0.0 0.0 (9.0) (9.0) (9.7) (0.7) (9.7) 0.0 0.0 0.0 (16.9) (8.1) (8.1) (9.0) (9.7) (16.9) 0.0 (4.9) (4.9) (4.9) (4.9) 341.7 341.7 341.7
2011E 0.0 0.0 0.0 (5.6) (5.6) 2.5 1.2 2.5 0.0 0.0 0.0 1.2 (4.1) 2.7 1.3 2.5 1.2 0.0 0.2 0.2 0.2 0.2 490.2 500.8 490.2
22
Cashflow Statement Year end December (m) Operating income Amortisation of acquired intangibles Amortisation of other intangibles Depreciation Net change in working capital Other Operating cash flow Capital expenditure Investment in Other intangibles Net interest/financial income/(cost) Tax paid Net acqns./disposals Dividend paid Other Cash flow before financing Proceeds from shares issued Investments Other Net movement in cash/(debt) Opening net cash/(debt) Adjustments (Forex, etc.) Closing net cash/(debt)
Source: Company data, Seymour Pierce Ltd
2009A (1.9) 0.0 0.0 1.5 1.2 0.0 0.8 (8.5) 0.0 0.4 (0.0) 0.0 0.0 (0.0) (7.3) 12.8 0.0 0.0 5.5 6.0 0.0 14.0
2010A (9.0) 0.0 0.0 0.9 (5.7) 7.8 (6.0) (20.3) 0.0 0.7 (0.0) 0.0 0.0 0.2 (25.4) 132.4 0.0 0.0 107.0 14.0 0.0 114.7
2011E (5.6) 0.0 0.0 1.5 (0.6) 0.2 (4.5) (62.3) 0.0 (1.2) 0.0 0.0 0.0 0.1 (67.9) 2.5 0.0 0.0 (65.4) 114.7 0.0 63.3
Balance Sheet Year end December (m) Property plant and equipment Goodwill and Acquired intangibles Other intangibles Other fixed assets Non current assets Stocks & WIP Trade receivables Cash Other current assets Current assets Total assets Trade creditors Short term borrowings Long term borrowings Other liabilities Total liabilities Net assets Issued share capital Share premium account Retained earnings Other reserves Minority interests Total equity
2009A 5.0 0.0 0.0 40.2 45.2 0.0 4.7 14.0 0.0 18.6 63.9 3.4 0.6 1.6 0.0 5.7 58.2 15.5 65.9 (15.8) (7.4) 0.0 58.2
2010A 0.2 0.0 0.0 56.5 56.7 0.0 11.0 114.7 9.0 134.7 191.4 13.2 1.2 0.0 2.0 16.4 175.1 30.4 183.4 (32.7) (6.0) 0.0 175.1
2011E 0.0 0.0 0.0 117.0 117.0 0.0 10.1 63.3 0.0 73.5 190.5 11.9 0.0 0.0 0.0 11.9 178.6 30.7 185.2 (31.4) (5.9) 0.0 178.6
23
Target Price & Recommendation History
1 00 90 80 70 60 50 40 30 20 1 0 0 Feb 1 0 A pr 1 0 Jun 1 0 A ug 1 0 Oct 1 0 Dec 1 0 Target P rice Feb 1 1 A pr 1 1 Jun 1 1 A ug 1 1 Oct 1 1 Dec 1 1 Feb 1 2
Share P rice
Source: Datastream, Seymour Pierce Ltd
Reco mmendatio ns
24
Borders & Southern Petroleum

A natural selection BUY
Share price Target price 88% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m -5.9 -9.8 3m +18.5 +10.9 67p 126p
(LSE:BOR)5
288.4 102.3 186.1 428.8 2,060 73/44 12m +3.5 +5.2
2011 was the turn of the northern players (RKH & DES) and in 2012 the activity heads south with both BOR & FOGL drilling. Whilst these companies share common issues such as regional politics, BOR stands out amongst its peers in terms of the potential size of its drilling targets as well as the expertise of its management team.
Drilling is underway high risk, but potentially high reward The Leiv Eiriksson rig started drilling at the beginning of February and will drill the Darwin and Stebbing prospects before moving on two drill two wells for FOGL. Darwin and Stebbing will test two different play types, therefore success or failure at Darwin means nothing for Stebbing. Darwin and Stebbing have 15% and 10% chances of success respectively and each have billion barrel potential. Assets of this sort of size drive development and attract buyers. Drilling success does not equal commerciality a long way to go Rockhopper's success at Sea Lion has led the company and some commentators to discuss the fields commerciality. We acknowledge that it is a large field, which if located in many locations would be easy to develop. However, the geopolitics and absence of infrastructure may yet prove too much to overcome. Argentinas escalating use of regional and international politics has been a smart move and should not be underestimated when investors are thinking about development options and potential asset sales. Valuation and recommendation Our core valuation comprises three elements near term exploration at Darwin 46p; and at Stebbing 53p; and the pre-drill cash (c.$192m on 31/12/11) per share which contributes 27p. This cash component will obviously decrease significantly post drilling which we estimate will cost c.$150m. We initiate coverage with a Buy recommendation and set a pre-drill target price of 126p. However, given the markets reactions to both Rockhopper and Desires news flow last year, Borders looks likely to have a very volatile ride during drilling. We would therefore advise investors to have a pro-active response to their position rather than riding out the inevitable peaks and troughs.

100 90 80 70 60 50 40 30 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news FY Results
9 February 12
Business Oil exploration focusing on frontier or emerging basins where there is potential to identify and commercialise high value prospects.
A draft of this research has been shown to the company following which minor factual amendments have been made.
www.bordersandsouthern.com/ Year end Revenue December ($m) 2009A 2010A 2011E 0.0 0.0 0.0 EBIT* ($m) (1.2) (1.5) (1.9) PBT* ($m) 3.2 (0.2) 1.3 Tax Adj. EPS* (%) (c) 0.0 0.0 36.4 PER EV/EBIT* Div yield (x) (x) (%) (243.2) (195.6) (152.3) 0.0 0.0 0.0
1.5 69.1 (0.0) (2,755.4) 0.2 563.9
Borders & Southern Petroleum | 10 February 12 Valuation and recommendation

We have valued Borders in terms of a risked exploration net asset appraisal of their near term assets.
We have valued Borders in terms of a risked exploration net asset appraisal of their near term assets. The company intends to drill two wells in Q1 2012 (Darwin and Stebbing), and we feel it is appropriate to value it on this basis. We have incorporated the following assumptions into our valuation:
Valuation assumptions Metric Long term $/ exchange rate Discount rate Darwin CoS Stebbing CoS NPV/bbl ($) - Oil NPV/bbl ($) - Gas
Assumption 1.65 10% 15% 10% 7.50 2.00
We have valued Borders in terms of its confirmed resources as per the Competent Persons Report, issued in May 2005 by Scott Pickford Ltd for Darwin and Stebbing using the low case scenario.
Potential resources at Darwin Recoverable resources (mmboe) Prospect Darwin (base) Darwin (upside) Total
Source: Scott Pickford
Target Anomaly To spill point
P90 230 580 810
P50 300 760 1,060
P10 380 980 1,360
CoS 15% 15%
Potential resources at Stebbing Recoverable resources (mmboe) Prospect Stebbing (base) Stebbing (upside) Total
Source: Scott Pickford
Target Tertiary Upper Cretaceous
P90 390 410 800
P50 710 570 1,280
P10 1,120 930 2,050
CoS 10% 10%
Risked net asset valuation P90 - Low case Oil Gas P90 - High case Oil Gas P10 - High case Oil Gas
NPV/bbl 7.5 2.0 NPV/bbl 7.5 2.0 NPV/bbl 7.5 2.0
Darwin $259 $69 Darwin $653 $174 Darwin $1,103 $294
Stebbing $293 $82 Stebbing $600 $160 Stebbing $1,538 $410
Total $551 $151 Total $1,253 $334 Total $2,640 $704
NPV/shr (p) 78 21 NPV/shr (p) 177 47 NPV/shr (p) 373 100
In our view, it is prudent to assume a low case in our valuation given that this basin has not been drilled previously and exploration in the Falklands overall is still at a fairly early stage.
26
Borders & Southern Petroleum | 10 February 12
SOTP valuation matrix NAV Darwin Stebbing Net cash Core value
m 199 227 116 542
p/share 46 53 27 126
140 120 100

p/share
53
80 60 40 20 0 Net Cash
46
27
Darwin
Stebbing

Our core valuation comprises three elements near term exploration at Darwin 46p; and at Stebbing 53p; and the pre-drill cash ($194m on 31/12/11) per share which contributes 27p. This cash component will obviously decrease significantly post drilling which we estimate will cost c.$150m. We initiate coverage with a Buy recommendation and set a pre-drill target price of 126p. However, given the markets reactions to both Rockhopper and Desires news flow last year, Borders looks likely to have a very volatile ride during drilling. We would therefore advise investors to have a pro-active response to their position rather than riding out the inevitable peaks and troughs.
We would therefore advise investors to have a pro-active response to their position rather than riding out the inevitable peaks and troughs.
27
Borders & Southern Petroleum | 10 February 12 Asset overview
Asset overview
Borders has a 100% interest and is operator of five Production Licences which cover c.20,000km2 of the South Falkland Basin. The acreage is located approximately 150km south-east of the Islands and were awarded on 1 November 2004.
Southern Falklands Basin

The basin has had only one unsuccessful well test, but the geology and stratigraphy in Borders acreage is expected to be similar to the adjacent Magallanes and Malvinas sub-basins located to the west of the Falkland Islands. These sub-basins have been proven to have working petroleum systems. It is also anticipated to be similar to geology recorded in DSDP boreholes 511 and 330 drilled to the east of the Falkland Islands in the Falkland Plateau sub-basin. This regional geological data helps provide a high degree of confidence on the occurrence of a good oil prone source rock. Late Jurassic to Aptian aged organic rich shales have been well documented both to the east and west of Borders & Southerns acreage. Further afield the source rocks are noted off the coast of South Africa and the Antarctic peninsula. This indicates that the source rock is regionally extensive and therefore likely to be present within the Companys licensed area.
Falkland Islands drilling prospects
Source: Company data
Drilling strategy
Borders will test the hydrocarbon potential to the eastwest trending fold belt c.150km to the south of the Falklands. This fold belt trend contains numerous large simple structures (up to 150km2 in area), including thrust cored anticlines and tilted fault blocks. The definition of these structures has been achieved by acquiring 2,862km of 2D seismic and 1,492km2 of 3D seismic - this was in excess of the licence obligations. The 3D seismic data has identified potential reservoirs in the Tertiary, Upper Cretaceous and Lower Cretaceous as well as the presence of a working hydrocarbon system. Borders will drill the Darwin prospect first, then Stebbing. These first two prospects are geologically independent, other than they require the same source rock to be present. Therefore, success (or failure) at the first well will therefore have no impact
28
Asset overview
on the second. Depending on the outcomes, the company has multiple follow up prospects which it can drill. These include look-a-like folds and tilted fault blocks and also alternative play types such as stratigraphically trapped basin floor fans.
Cross section of the Darwin and Stebbing prospects
Rig mobilisation - Leiv Eiriksson

The Leiv Eiriksson rig will arrive in late January and is a fifth generation semisubmersible drilling rig, and can drill in water depth down to 3,000m. Given the possible weather and sea conditions, the rig remains stable due to its advanced dynamic positioning system. This should reduce the risk of weather delays. However, analysis suggests that the South East Falklands actually has less volatile conditions than comparable oil regions.
Comparison of offshore wave conditions
16 Significant wave height (metres) 14 12 10 8 6 4 2 0 Winter Spring West of Shetlands
Source: FOGL
Summer Central North Sea SE Falklands
Autumn
The rig can operate year-round in harsh weather environments (e.g. offshore Canada, northern Norway) and prior to mobilising to the Falklands had been used in Greenland for Cairn Energy. The combined two well programme is estimated to last approximately 90 days (depending on potential well tests), after which the rig will move drill two wells for Falkland Oil and Gas. Borders and FOGL are working together sharing resources where possible to reduce costs for both companies.
29
Borders & Southern Petroleum | 10 February 12 Asset overview
Fiscal regime
The Falkland Islands have Concession (i.e. tax and royalty) Fiscal Terms. These high level terms are: A variable acreage rental 9% royalty on production 26% corporation tax on profits
This results in an effective government take of c.33%, which is one of the most favourable regimes globally.
Global Government takes
Malaysia UK (PRT) Norway Angola DRC Uganda Gabon Trinidad and Tobago Indonesia Nigeria UK (Non PRT) China Mauritania Brazil Colombia Ghana US Gulf of Mexico Falkland Islands French Guiana 23% 33% 43% 62% 57% 55% 53% 52% 51%
85% 81% 78% 78% 76% 76% 74% 73% 73% 70%
0%
Source: Wood Macenzie
10%
20%
30%
40%
50%
60%
70%
80%
90%
30
Financial model
Financial model
Income Statement Year end December ($m) Group revenue Cost of sales Gross profit Total operating expenses EBIT Net interest/financial income/(cost) Associate and Other non-op. income/(cost) PBT Tax Effective tax rate (%) Minorities Earnings EBITDA Adjusted EBITDA* Adjusted EBIT* Adjusted PBT* Adjusted earnings* DPS (c) EPS (c) EPS [F. Dil.] (c) EPS [Adj.]* (c) EPS [Adj. F. Dil.]* (c) Weighted average no. shares (m) Fully dil. w. ave. no. shares (m) Year end no. shares (m)
2009A 0.0 0.0 0.0 (1.2) (1.2) 4.4 0.0 3.2 0.0 0.0 0.0 3.2 (1.2) (1.2) (1.2) 3.2 3.2 0.0 1.5 1.5 1.5 1.5 204.6 204.6 204.6
2010A 0.0 0.0 0.0 (1.5) (1.5) 1.3 0.0 (0.2) 0.0 0.0 0.0 (0.2) (1.5) (1.5) (1.5) (0.2) (0.2) 0.0 (0.0) (0.0) (0.0) (0.0) 428.6 428.6 428.6
2011E 0.0 0.0 0.0 (1.9) (1.9) 3.2 0.0 1.3 (0.5) 36.4 0.0 0.8 (1.9) (1.9) (1.9) 1.3 0.8 0.0 0.2 0.2 0.2 0.2 428.6 428.6 428.6
31
Borders & Southern Petroleum | 10 February 12 Financial model
Cashflow Statement Year end December ($m) Operating income Amortisation of acquired intangibles Amortisation of other intangibles Depreciation Net change in working capital Other Operating cash flow Capital expenditure Investment in Other intangibles Net interest/financial income/(cost) Tax paid Net acqns./disposals Dividend paid Other Cash flow before financing Proceeds from shares issued Investments Other Net movement in cash/(debt) Opening net cash/(debt) Adjustments (Forex, etc.) Closing net cash/(debt)
2009A (1.2) 0.0 0.0 0.0 0.1 0.0 (1.1) 9.4 0.0 4.4 0.0 9.7 0.0 (0.0) 22.3 183.9 0.0 0.0 206.2 9.5 (0.2) 206.3
2010A (1.5) 0.0 0.0 0.0 (1.8) 0.0 (3.3) (10.5) 0.0 1.3 0.0 (10.0) 0.0 (0.0) (22.4) 0.0 0.0 0.0 (22.4) 206.3 0.8 194.1
2011E (1.9) 0.0 0.0 0.0 4.1 0.0 2.2 (6.4) 0.0 3.2 (0.5) (6.0) 0.0 0.0 (7.5) 0.0 0.0 0.0 (7.5) 194.1 1.5 192.1
Balance Sheet Year end December ($m) Property plant and equipment Goodwill and Acquired intangibles Other intangibles Other fixed assets Non current assets Stocks & WIP Trade receivables Cash Other current assets Current assets Total assets Trade creditors Short term borrowings Long term borrowings Other liabilities Total liabilities Net assets Issued share capital Share premium account Retained earnings Other reserves Minority interests Total equity
2009A 0.0 0.0 36.6 0.0 36.6 0.0 0.1 206.3 0.0 206.4 243.1 0.2 0.0 0.0 0.0 0.2 242.8 7.7 238.0 (3.2) 0.4 0.0 242.8
2010A 0.0 0.0 37.7 0.0 37.7 0.0 11.3 194.1 0.0 205.4 243.2 0.3 0.0 0.0 0.0 0.3 242.9 7.7 238.0 (3.4) 0.6 0.0 242.9
2011E 0.0 0.0 44.1 0.0 44.2 0.0 9.9 192.1 0.0 202.0 246.1 2.4 0.0 0.0 0.1 2.6 243.6 7.7 238.0 (2.6) 0.5 0.0 243.6
32
Financial model
1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 Feb 1 0 A pr 1 0 Jun 1 0 A ug 1 0 Oct 1 0 Share P rice
Dec 1 0 Series2
Feb 1 1
A pr 1 1
Jun 1 1
A ug 1 1
Oct 1 1
Dec 1 1
Feb 1 2
Reco mmendatio ns
33
Financial model
Chariot Oil & Gas | 10 February 12
Chariot Oil & Gas

SELL
Share price Target price 41% Downside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m +21.2 +16.2 3m -6.3 -12.4 126p 75p
(AIM:CHAR)
Swing low?
2012 may prove to be a pivotal year for Chariot as the company looks to probe its substantial resource base with the first of its two well programme commencing in Q2. Namibia is under-explored and has proven to be gas prone so far. Also the company does not currently have the financial flexibility to weather the capital requirements of unsuccessful drilling.
Namibia large fan base, but few results Namibia remains hugely under-explored due to a legacy of exploration and political history. The countrys offshore blocks have recently come into focus due to surrounding geology and prospectivity, yet continued exploration and subsequent appraisal in such a frontier region will require sufficient capital that exceeds Chariots capabilities. Two year strategy Chariot maintains a strategy of drilling four to five wells through to the end of 2013 however we feel this will largely depend on successful drilling at the companys first two wells (Tapir South and Nimrod). As such, 2012 will prove to be the pivotal year for the company with an exploration well in each of their Northern and Southern blocks expected despite issues in obtaining a rig at present. It is on this basis that we feel it would be rash to provide value for the companys subsequent assets at present. Resource upgrades but not driven by drilling 2011 saw the company increase its resource base by a further 40% to 14bnbbls of gross unrisked prospective resources. Nevertheless, we feel that Chariot must now focus its efforts on exploiting these resources rather than seeking further upgrades. By comparison GKP (BUY TP 374p) has upgraded its resource base post drilling. Valuation and recommendation Our SOTP valuation is based on a risked assessment of Chariots first two exploration targets, given that at present, the company only has sufficient funds to drill these two wells. Our valuation illustrates that Chariot is currently overvalued as the market seems to be attributing value to its remaining portfolio prior to successful initial drilling. We initiate coverage with a Sell recommendation and set a pre-drill target price of 75p representing c.41% downside risk.
228.8 10.3 218.6 181.6 1,836 306/90 12m -48.1 -47.3

Source: Datastream
Relative
Share price as at close: Next news FY2012 Results
9 February 12
Business Independent oil and gas exploration company with interests in Namibia. www.chariotoilandgas.com/
Year end February 2009A 2010A 2011E
Revenue ($m) 0.0 0.0 0.0
EBIT* ($m) (10.8) (3.2) (7.3)
PBT* ($m) (28.6) (3.1) (7.3)
Tax Adj. EPS* (%) (c) 0.0 0.0 0.0
PER EV/EBIT* Div yield (x) (x) (%) (32.0) (107.3) (47.1) 0.0 0.0 0.0
(0.2) (922.6) (0.0) (9,016.9) (0.1) (3,946.0)
35

We value Chariot on a risked net asset value basis, assessing its near term exploration targets specifically.
We value Chariot on a risked net asset value basis, assessing its near term exploration targets specifically. The implicit assumptions used in our risked valuation are as follows:
Valuation assumptions Metric NPV $/mmboe Long term exchange rate $/ Number of shares outstanding (m) Chance of exploration success
Assumption 1.06 $1.65/1 340.43 Nimrod - 24%, Tapir South - 25%
When assessing an appropriate NPV/bbl to apply in our RENAV calculation, we have relied on the derived market value of Namibian prospective resources taken from the UNX/HRT transaction in February 2011. HRT offered $721m to acquire UNX Energy which had c.645mmboe of net risked resources and c.$35m of cash. The derived $/mmboe of this transaction infers $1.06/bbl ([$721m-$35m]/645mmboe) and acts as a benchmark for valuing Chariot's assets.
Risked net asset valuation Scheduled Project Interest CoS/CoD Prospective NPV 10% Unrisked Risked Unrisked Risked Net Risked Resources (mmboe) US$ / boe NPV $m NPV $m NPV m NPV m p/share Gross 451 2,524 2,975 438 438 298 188 61 23 633 149 146 423 47 186 248 120 58 100 174 587 502 157 58 58 68 74 131 107 161 225 402 312 5,696 9,109 Net 451 631 1,082 394 394 298 188 61 23 633 37 37 106 12 47 62 30 15 25 44 528 452 141 52 52 61 67 118 96 145 203 362 281 4,174 5,650 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 478.1 668.9 1,146.9 417.9 417.9 315.9 199.3 64.7 24.4 671.0 39.5 38.7 112.1 12.5 49.3 65.7 31.8 15.4 26.5 46.1 560.0 478.9 149.8 55.3 55.3 64.9 70.6 125.0 102.1 153.6 214.7 383.5 297.6 4,424.0 5,988.7 119.5 160.5 280.0 46.0 46.0 66.3 41.8 9.1 2.9 100.6 3.9 7.0 10.1 1.2 6.4 6.6 3.2 2.2 4.0 6.0 39.2 33.5 9.0 6.6 6.6 6.5 7.1 13.7 11.2 13.8 19.3 30.7 23.8 492.5 818.5 289.7 405.4 695.1 253.2 253.2 191.4 120.8 39.2 14.8 406.7 23.9 23.4 67.9 7.5 29.9 39.8 19.3 9.3 16.1 27.9 339.4 290.2 90.8 33.5 33.5 39.3 42.8 75.7 61.9 93.1 130.1 232.4 180.4 2,681.2 3,629.5 72.4 97.3 169.7 27.9 27.9 40.2 25.4 5.5 1.8 61.0 2.4 4.2 6.1 0.8 3.9 4.0 1.9 1.3 2.4 3.6 23.8 20.3 5.4 4.0 4.0 3.9 4.3 8.3 6.8 8.4 11.7 18.6 14.4 298.5 496.1 21.3 28.6 49.9 8.2 8.2 11.8 7.5 1.6 0.5 17.9 0.7 1.2 1.8 0.2 1.1 1.2 0.6 0.4 0.7 1.1 7.0 6.0 1.6 1.2 1.2 1.2 1.3 2.4 2.0 2.5 3.4 5.5 4.2 87.7 145.7
2012 2012 2013 Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified Not Specified
Tapir S Nimrod (Albian) Total 2012 Delta 1 Total 2013 Tapir N Tapir Tapir NE Zamba N Zamba A (Albian) B (Albian+Barremian) C (Albian+BDO) D (Albian) Dora North K (Syn-Rift) L (Albian) Isabel (BDO) Mary (BDO) Dora South Klipspringer Hartebeest Oryx Springbok Springbok East Eta Springbok North Delta 2 Delta 3 Reef 1 Reef 2 Lead A Lead B Total not specified Total overall
100% 25% 90% 100% 100% 100% 100% 100% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90%
25% 24% 11% 21% 21% 14% 12% 15% 10% 18% 9% 10% 13% 10% 10% 14% 15% 13% 7% 7% 6% 12% 12% 10% 10% 11% 11% 9% 9% 8% 8%
36
When valuing Chariots exploration portfolio, we have utilised the resource estimates provided in the companys Competent Persons Report undertaken by NSAI, as well as subsequent management guidance for specific lead assets. Due to the early nature of Chariots operations, we have taken a prudent approach to their resource volume estimates, and valued the portfolio at the low categorisation as specified in their resource audit.
In spite of what we feel are overly favourable recommendations from the majority of analysts covering Chariot, we will only provide a value for the companys near term exploration assets.
In spite of what we feel are overly favourable recommendations from the majority of analysts covering Chariot, we will only provide a value for the companys near term exploration assets. We feel it is worth highlighting that Chariot is a relative newcomer to the market and is yet to undertake any drilling. On this basis, to attribute value to all of its assets (some of which cannot possibly be drilled for many years) is somewhat generous especially given that Namibia remains an unproven province.
SOTP valuation matrix million Tapir S Nimrod Net cash Core value
p/share 21.3 28.6 24.9 74.7
72.4 97.3 84.6 254.3
Our pre-drill valuation of 75p consists of near term exploration targets (Tapir South and Nimrod) and the companys net cash position at 1H2011. If the company progresses to Delta 1 in 2013, we will include this in our overall valuation.
80 70 60
25
29
50
p/share
40 30
21
20 10 0 Tapir South Nimrod Net Cash

Our SOTP valuation illustrates that Chariot is, in our view, overvalued at present as the market seems to be attributing value to its assets prior to successful drilling. The company has benefited from a series of significant resource upgrades since listing on AIM. However we continue to await the implementation of its long term development plan to exploit those assets. Chariot has also experienced delays in drilling its Tapir South prospect (scheduled for Q4 2011) due to issues obtaining the necessary rig, and recent news flow suggests the market will need to wait until Q2 2012 until the company can spud its first well. On this basis, we initiate coverage with a Sell recommendation and set a pre-drill target price of 75p representing c.41% downside risk.
37
Strategy overview
Strategy overview
Current issues Chariot has communicated a clear exploration plan which covers the next two years and sets out the companys initial targets. However, the plan has had to deviate somewhat from the original strategy due to issues with suitable rig availability, which has to some extent highlighted Chariots relative inexperience in operating in the region. Originally, the rig was anticipated to be available for a 4Q2011 spud at the Tapir South prospect, but was contracted by another operator for a longer programme. Subsequently, the market for deepwater rigs offshore West Africa has tightened markedly, making it more challenging to secure an appropriate rig particularly to carry out a one-well programme in Namibia without paying a significant premium. Nevertheless, Chariot is currently in active negotiations regarding a number of other available rigs and now expects to spud the Tapir South exploration well in 4Q2012, although we are yet to receive official confirmation of this. In our view, failure to secure a rig for this expected date will again detrimentally affect market sentiment towards the company. Forward drilling Chariot's Tapir South prospect is drill ready, with all long lead items now delivered and all service contracts signed, the support base secured and the drill permit granted. If this well goes ahead as planned in 2Q, the company plans to move on to Nimrod in the Southern Block targeting over 1bnboe net (mid case). In our view, 2012 will be a pivotal year for Chariot with an exploration well in each of their Northern and Southern blocks expected. In addition, the impending results of the 3D seismic survey currently underway on the companys Central blocks (recently farmed out to BP) will go some way in identifying further structures and increasing the companys understanding of the geology at the block. Chariot aims for a strategy of drilling four to five wells through to end 2013, however we feel this will largely depend on the outcome at Tapir South and Nimrod.
Chariot's two year exploration plan
Progress farm-out discussions for Northern Blocks Spud first well at Tapir South
Spud first well at Nimrod Process data for Delta-1
Spud first well at Delta-1
Process data for Zamba
2012 Take possession of required rig
2013 Drill Zamba prospect Process data for Tapir South Process data for Nimrod Interpret 3D seismic on Central Blocks
2014
Source: Company
38
Strategy overview
As illustrated above, the companys 2013 strategy will highly depend on successful drilling at Tapir South and Nimrod. This plays an important role in how we formulate our valuation. In our view, if both of Chariots near-term prospects are dry holes, and the company decides to stay in the acreage (if it is still deemed prospective), commitments to drill do not arise until October 2014 in licenses 1811A and B in the North, and August 2015 in license 2714 in the South. This situation may see the shares languishing until drilling restarts, and in the absence of a successful farm out, may also put the company in jeopardy regarding access to financing for a second or third well. To illustrate this, the company currently has c.$140m, and expects to spend c.$72m on drilling its first exploration well at Tapir South and c.$55m at Nimrod. If drilling proves unsuccessful, which the companys reserve auditor deems likely (25% and 24% chance of success respectively), the company will only have $13m remaining insufficient to drill a third well. The companys assets will still be classed as prospective resources, and not adequate to use as collateral for debt finance; so the only options remaining in our view will be to raise funds through equity or enter into a farm out process. Both of which reduce the companys value, which would be unattractive for existing and new investors. Chariots position on any final farm out deal will have to ensure that the timing behind any drilling campaign is in the companys interest, with an element of at least one well carry (i.e. one well carried by the partner for every two wells drilled by Chariot) incorporated in order to keep drilling costs down. The company has been clear that this is an approach they intend to adopt, however they will potentially need to sacrifice a large working interest to secure this if initial drilling proves unsuccessful. Resources Chariot has positioned itself to exploit the potential of their blocks, which are situated in three geologically distinct settings:
Chariot's positioning offshore Namibia
Source: Company
The Namibe Basin forms part of the West African salt basin, bounded to the south by the Walvis ridge. Prior to the Atlantic Ocean opening, the basin lays adjacent to the Santos Basin of Brazil, in which recent substantial oil discoveries have been made. The Luderitz and Walvis Basins are virtually unexplored with only four wells drilled to date, in an area similar in size to the UK North Sea.
39
Strategy overview
Chariots acreage Volumetric pot Resources in place (bnbbls) Location Depth (m) Work performed to date Northern Block 2.8 Namibe Basin 700 2300 1500km 3D seismic (2008/9) Processing complete July 2010 4 prospects and 2 leads identified to date Central Block 4.3 Walvis Basin 500 3000 Processing and Interpretation completed March 2010. 3000km2 2D seismic (2008). 3 leads identified to date Southern Block 9 Orange Basin 100 1500 3000km 3D acquired in 2008/9. Petrobras farmed into Block 2714A for a 50% interest and BP for 25%. 11 prospects identified to date
Targets
Source: Company
Recent upgrades Chariot has also benefited from a series of resource upgrades since listing, which has generated interest from the market; as well as larger E&P players with a view to farm in to the companys acreage.
Resource upgrade waterfall chart
16.0 14.0 12.0 10.0
bnboe
3.8
0.2
1.4 2.8 1.8 4.0
8.0 6.0 4.0 2.0 0.0 Jan 08 Oct 08 Mar 10 Sep 10 Jan 11 Feb 11
Source: Company
In 2011, the company announced an increase of 4bnboe in its estimate of gross unrisked mean prospective resources in its Southern licence 2714A after it identified a mega-structure at Nimrod. In addition, continued technical work undertaken on 3D seismic data acquired across all blocks led to an improvement in the chance of success. Nevertheless, we feel that Chariot must now focus its efforts on developing these resources rather than seeking further upgrades a notion shared by the market and illustrated by the share price falling c.108% since the last upgrade, suggesting a high amount of profit taking prior to drilling.
40
Namibia Overview
Namibia Overview
Namibia is a large and sparsely populated country (2.3m) on Africa's south-west coast. It has enjoyed stability since gaining independence in 1990 after a long struggle against rule by South Africa.
Namibia is a large and sparsely populated country (2.3m) on Africa's south-west coast. It has enjoyed stability since gaining independence in 1990 after a long struggle against rule by South Africa. Namibia country map
Source: World Travels
The economy is heavily dependent on the extraction and processing of minerals for export. Mining accounts for 8% of GDP, but provides more than 50% of foreign exchange earnings. The country has firm macroeconomic policies, efficient political structures, growing financial institutions, and its corruption index is also much better when placed in comparison with other African countries. In addition, Namibias currency is directly linked to the South African Rand and is therefore not as much affected by currency fluctuations as neighboring countries. After many years of intensive data acquisition in Namibia, oil and gas exploration operations have reached a stage where information is available on the location of drillable targets.
41
Namibia Overview
Namibia does not have a significant history of oil or gas production, but is believed to hold a great deal of potential. Located immediately to the North is Angola, a major oil producer and member of OPEC.
Oil & Gas industry Namibia does not have a significant history of oil or gas production, but is believed to hold a great deal of potential. Located immediately to the North is Angola, a major oil producer and member of OPEC. The main areas of activity are all located offshore in the Atlantic Ocean to the west coast of the country. Offshore Namibia is considered largely under-explored. Only 14 exploration wells have been drilled so far in an area that covers c.500,000km2. Five of the wells are located in the Kudu Gas Field which has c.1.4tcf of proven reserves and a potential upside of 20tcf. Nevertheless, Kudu is the only commercial hydrocarbon discovery in Namibia to date. As a result, Namibia has a currently fledgling yet growing upstream industry with an estimated higher gas than oil potential. As outlined above exploration success has been intermittent with the Kudu gas field representing the only commercially viable find by Chevron in the 1970s. The field is located c.120km from Chariots Southern block, which although somewhat de-risks the companys acreage here, also provides an indication of hydrocarbon type for Chariots Southern Blocks.
Positioning of Chariot's acreage
Source: Company
Given the proximity of Chariots Nimrod prospect (to be drilled in Q2 2012) to the Kudu gas discovery in the Orange River basin, there is a risk that Nimrod and potentially others in the southern blocks are be gas-filled structures. This would reduce valuation given that the company maintains that it believes the asset is predominantly oil based, although if gas, the implied size of a discovery would represent a prime target for LNG development.
Fiscal Regime Namibia has a 35% federal tax, a flat 5% royalty, and 25% additional profits tax (with three tiers built in, with the first tier applying when the IRR of the project exceeds 15%). There are no petroleum sharing agreements or petroleum sharing commitments currently in place. We feel that this currently represents a favorable fiscal regime and somewhat acts as an incentive for continued investment into Namibias oil exploration industry.
42
Namibia Overview
West African government tax take comparison

80% 70% 60% 50% 40% 30% 20% 10% 0% Congo Brazzaville Nigeria Angola Equitorial Guinea Namibia Mauritania Ghana
Source: Company
The fiscal terms offered to Namibian oil operators are amongst the lowest of the West African countries.
As illustrated above, the fiscal terms offered to Namibian oil operators are amongst the lowest of the West African countries. As the tax is concession based, with additional profit tax (APT) on top of corporate tax, the lack of a PSC structure could leave such a system open to changes to tax laws, thus impacting Chariots valuation. This risk also extends to increased state participation, which was highlighted in the Namibian Minister of Mines 2011 speech regarding new legislation for the mining industry, which may potentially set a precedent for the oil industry in the country.
43
Asset overview
Asset overview
Namibia remains hugely under-explored due to the legacy of political history (offshore exploration did not get underway until independence in 1990) and exploration history. Oil companies traditionally focused on the salt basin whilst frontier exploration such as in Namibia was almost entirely conducted on a low investment basis without 3D seismic control.
Chariot's licence location map
Source: Company
Northern Blocks 100% The Northern Blocks are situated to the north of the Walvis ridge and are similar in geology to the Santos basin in Brazil. The existing inventory in this area consists of five prospects and two leads, with a total mean unrisked prospective resource of 2.8bnbbls. It is here where Chariots first well will be drilled at Tapir South, which has been formed by a rotated fault block. The Tapir trend contains three separate prospects where success at one will go some way in de-risking the other prospects and potentially unlock additional leads. Central Blocks 90% The Central Blocks are located within the Luderitz and Walvis Basins and cover an area of 16,801km2. Following reprocessing and reinterpretation of the existing 2D seismic data, Chariot and PGS have agreed to focus the 3D seismic acquisition programme in the north-eastern area of the blocks. The attraction of this part of the acreage is the recognition of multiple target levels and numerous leads including analogues to the "Nimrod" feature in Chariot's Southern acreage (see below) with potentially two active oil prone source intervals. Overall these elements increase the likelihood of maturing multiple drilling targets within the 3D acquisition area. To capture as many of the high-graded leads as possible the survey has been extended to cover 3,500km2 from the originally planned 2,500km2. An additional benefit for the company is that the new 3D seismic area covers water depths ranging from 750-1,750m (significantly shallower than the depths in the originally proposed acquisition area) which will potentially result in a considerable reduction in expected well costs.
44
Asset overview
Southern Blocks 25% In the Southern Blocks, located in the Orange River basin, Chariot has identified 11 prospects with a gross unrisked mean prospective resource estimated at 8.507bnbbls. Chariots second well target (Nimrod) is situated in these blocks and is the companys largest prospect with gross mean unrisked resource estimate of 4.6bnbbls. In addition, the chance of success is also the highest at 25%. Underlying the Nimrod prospect is a large basement arch which is progressively overstepped by Barremian sediments. Stratigraphic traps are formed in this position where sands are interbedded within shales or volcanics that can provide seal. This trapping configuration is believed to be the form of the nearby Kudu field which is the same reservoir age and directly along trend. The Southern licences are located in shallower water depths and as a result an older generation semi-submersible rig will be used.
45
Financial model
Financial model
2009A 0.0 0.0 0.0 (10.8) (10.8) (17.8) 0.0 (28.6) 0.0 0.0 0.0 (28.6) (10.8) (10.8) (10.8) (28.6) (28.6) 0.0 (0.2) (0.2) (0.2) (0.2) 132.3 132.3 132.3
2010A 0.0 0.0 0.0 (3.2) (3.2) 0.1 0.0 (3.1) 0.0 0.0 0.0 (3.1) (3.2) (3.2) (3.2) (3.1) (3.1) 0.0 (0.0) (4.9) (0.0) (0.0) 141.2 141.2 141.2
2011E 0.0 0.0 0.0 (7.3) (7.3) 0.1 0.0 (7.3) 0.0 0.0 0.0 (7.3) (5.0) (5.0) (7.3) (7.3) (7.3) 0.0 (0.1) 0.2 (0.1) (0.1) 144.3 144.3 144.3
46
Financial model
2009A (10.8) 0.0 0.0 0.0 (0.6) 1.8 (9.5) (31.5) 0.0 2.0 0.0 0.0 0.0 0.0 (39.0) 88.8 0.0 0.0 49.8 3.5 (19.8) 28.9
2010A (3.2) 0.0 0.0 0.0 (8.5) 0.0 (11.7) (17.3) 0.0 0.1 0.0 16.0 0.0 0.0 (12.8) 0.0 0.0 0.0 (12.8) 28.9 0.2 16.2
2011E (7.3) 0.0 0.0 2.4 (0.2) 0.1 (5.1) (4.1) 0.0 0.1 0.0 0.0 0.0 0.0 (9.1) 2.1 0.0 0.0 (7.0) 16.2 0.0 9.2
2009A 0.2 0.0 87.0 0.0 87.2 0.0 0.1 28.9 0.0 29.0 116.2 8.4 0.0 0.0 0.0 8.4 107.8 2.8 133.2 (31.4) 3.2 0.0 107.8
2010A 0.5 0.0 88.6 0.0 89.1 0.0 0.7 16.2 0.0 16.9 106.0 0.5 0.0 0.0 0.0 0.5 105.5 2.8 133.2 (34.2) 3.7 0.0 105.5
2011E 0.4 0.0 92.7 0.0 93.1 0.0 1.0 9.2 0.0 10.3 103.3 0.6 0.0 0.0 0.0 0.6 102.7 2.9 135.4 (38.3) 2.8 0.0 102.7
47
Financial model
350
300
250
200
1 50
1 00
50
0 Feb 1 0 A pr 1 0 Jun 1 0 A ug 1 0 Oct 1 0 Dec 1 0 Target P rice Feb 1 1 A pr 1 1 Jun 1 1 A ug 1 1 Oct 1 1 Dec 1 1 Feb 1 2
Share P rice
Reco mmendatio ns
48
10 February 12 | Company Note | Oil & Gas exploration and production
Faroe Petroleum
BUY
Share price Target price 81% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Free float (%) Average daily vol ('000 3m) 12 month high/low (p) (%) Absolute FTA relative 1m +5.5 +1.2 3m +9.8 +2.7 169p 306p
(AIM:FPR)1
Take on me
Faroe Petroleum has a robust mix of production growth and high impact exploration, and continues to execute value enhancing transactions on both sides of the Continental Shelf, most notably its recent asset swap with Petoro AS. The company has a strong balance sheet with sufficient cash reserves and debt facilities to fund its progressive drilling, appraisal and development activities.
Petoro assets yielding growth for 2012 Faroes transformational asset exchange with Petoro AS served to increase net production fourfold by the end of 2011. Importantly, the transaction has now been legally concluded, allowing Faroe to fully recognise cash flows from its share of production. Furthermore, the significant tax advantages arising from the deal will now also be exploited, which includes a pro et contra settlement of up to 80m receivable from the state owned company. Production - short term sacrifice for long term rewards Faroe has undergone an extensive review of its Norwegian assets post exchange, and intends to shut in a number of production wells at one of its fields (Njord) to implement a riser replacement programme, and to ultimately tie in the new Hyme field. Faroe expects this to increase long term production as well as prolonging the life of the combined fields, which will contribute c.30% of overall production net to Faroe. Fully funded strategy Faroe is fully funded to pursue their strategy of drilling at least five potentially high impact wells a year, targeting 175mmbbls, representing 21% of their current portfolio, and 39p/share of our target valuation on a risked basis. The company expects to record cash in the region of 100m on their balance sheet at year end, and has also secured a number of debt facilities which ensures that share capital dilution to fund expansion is kept to a minimum. Valuation and recommendation We have valued Faroe on a DCF basis for its forecast NPV arising from its producing assets, and with cash and tax receivable yields a core value of 119p. We have also included a risked exploration NAV for the other early stage assets which yields an additional 187p. We therefore initiate coverage with a Buy recommendation and set an overall target price of 306p.
358.4 24.3 303.3 212.4 75.0 888 205/130 12m -16.0 -14.7

240 220 200 180 160 140 120 100 80 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news FY results
9 February 12
Business Oil & Gas exploration and production www.fp.fo/

EBIT* (m) (28.6) (25.2) 18.3 15.9 22.3
PBT* (m) (11.8) (26.0) 16.4 15.1 21.5
Tax Adj. EPS* (%) (p) 41.4 21.9 28.6 25.0 24.0 (6.6) (13.3) 5.5 5.3 7.7
PER EV/EBIT* Div yield (x) (x) (%) (25.6) (12.7) 30.7 31.6 21.9 (10.6) (12.0) 16.6 19.1 13.6 0.0 0.0 0.0 0.0 0.0
2009A 2010A 2011E 2012E 2013E
7.0 15.1 159.7 141.8 153.3
* excludes exceptional items and amortisation of acquired intangibles.^ EV calculation adjusted for core cash, investments etc. Source: Seymour Pierce Ltd
Faroe Petroleum | 10 February 12

We have valued Faroe both in terms of its producing assets as well as its future risked exploration portfolio in the UK North Sea and Norwegian North Sea. We have employed the following assumptions for our discounted cash flow (DCF) analysis of the companys production profile: Oil Price: 2012: - $100/bbl, 2013+: - $90/bbl Discount rate: 10% Production decline: 10% (UK) 15% (Norway see Strategic Overview) Long term $/: 1.65/1
In addition, we have incorporated the following assumptions in determining the value per mmboe for Faroes exploration assets at both the firm and expected level:
Resource assumptions Hydrocarbon type Oil/Gas Oil/Gas
Classification Reserves Resources
$/mmboe 6.00 3.00
These assumptions have been assimilated into our risked net asset value appraisal as follows:
Risked net asset valuation Country Stage of development Resources/Reserves NPV 10%/ bbl (mmboe) Exploration/ Appraisal Exploration/ Appraisal Production Production Gross 1507.0 6384.5 175.2 181.6 Net 176.4 568.5 12.7 15.4 773.0 3 3 6 6 NPV ($m) Unrisked 529.1 1705.5 76.4 92.3 2403.3 Risked 89.4 389.4 76.4 92.3 647.5 NPV (m) Unrisked 320.7 1033.7 46.3 55.9 1456.6 Risked 54.2 239.7 46.3 55.9 396.1 Net risked p/share 26 113 22 26 187
UK Norway UK Norway
SOTP valuation matrix m UK Norway Less: G&A Add: Net cash Norway tax losses Core NAV Exploration upside Risked NAV p/share
57.1 68.8 -23.4 104.8 46.0 253.3 396.1 649.4
27 32 -11 49 22 119.3 187 306
Source: Seymour Pierce Ltd Our core valuation comprising discovered assets, cash and investments contributes 98p per share, and our risked exploration valuation adds a further 187p illustrating a large degree of potential exploration upside to investors.
50
SOTP valuation
350 187 300 250 200 p/share 150 49 100 32 50 -11 0 G&A -50 UK Norway Net Cash Exploration upside 27

We have valued Faroe on a DCF basis for its forecast NPV arising from its producing assets, and with cash and tax receivable yields a core value of 119p. We have also included a risked exploration NAV for the other early stage assets which yields an additional 187p. We therefore initiate coverage with a Buy recommendation and set an overall target price of 306p.
51
Strategic overview
Strategic overview
Faroes portfolio comprises over 47 licences located in the West of Shetlands, offshore the Faroe Islands, the UK North Sea and Norway. In addition, the company now has interests in 10 producing oil and gas fields in the UK and Norway.
Faroe's acreage
Source: Company
Exploration
Faroe has employed a progressive exploration plan which targets at least five additional wells a year. This strategy remains unchanged, and the companys 2012 exploration drilling programme will include the Kalvklumpen, Clapton, Cooper and Santana prospects in Norway and the North Uist prospect in the UK, west of Shetlands.
Targeted 2012 exploration
50 45 40 35
mmboe
12 10 8 6 4 2 0 Butch T-Rex Kalvklumpen North Uist mmboe Clapton p/share Cooper Santana
p/share
30 25 20 15 10 5 0
The above campaign illustrates that Faroe will target 175mmbbls of unrisked resources in 2012 (representing 21% of their current portfolio) and c.39p/share of our target valuation on a risked basis.
52
Strategic overview
Faroe will target 175mmbbls of unrisked resources in 2012 (representing 21% of their current portfolio) and c.39p/share of our target valuation on a risked basis.
Recent additions to Norwegian asset base

In addition to an aggressive exploration programme, Faroe continues to grow its asset portfolio in Norway. The company recently announced that it has secured seven new prospective exploration licenses on the Norwegian Continental Shelf under the 2011 Norwegian APA License round. In addition, Faroe has been awarded operatorship in three of these licenses with working interests ranging from 20% to 75%, demonstrating the companys growing ambitions for exploration in the country. The award of these licences also strengthens Faroes working relationship with Centrica (with whom they have made three discoveries in the past two years) as they continue to partner on four of the additional licences.
Additional Norwegian licences Licence Novus Aerosmith Oksen Shango Darling Epsilon Lola
Source: Company
Location Norwegian Sea, Halten Terrace Area Norwegian Sea, Halten Terrace Area Northern North Sea Northern North Sea Northern North Sea North Sea, Egersund Basin North Sea, Egersund Basin
Partners Faroe 50% (operator), Centrica 40%, Skagen 10% Faroe 20%, OMV 30% (operator), Repsol 20%, Centrica 20%, Skagen 10% Faroe 20%, Det Norske 40% (operator), Noreco 20%, Bayerngas 20% Faroe 20%, Total 40% (operator), Centrica 20%, Det Norske 20% Faroe 20%, Bridge 40% (operator), Concedo 20%, Centrica 20% Faroe 75% (operator), Noreco 25% Faroe 50% (operator), Noreco 25%, Edison 25%
We feel that Faroes focussed growth in Norwegian exploration is particularly encouraging when placed in context with the wider trend on this side of the Continental Shelf. The Norwegian Petroleum Directorate (NPD).estimates that the number of exploration and appraisal wells to be drilled off Norway in 2012 will remain flat compared with the 52 spudded last year. This compares with a 27% increase in wells drilled in 2011 from 2010. In terms of exploration success, Norway achieved a find rate of 51% last year, making a total of 22 discoveries across the North, Norwegian and Barents seas. This compares to Faroes success rate of c.80% in the country in 2011 further highlighting the companys growing operational strength.
53
Strategic overview
Field Development
Faroe has also embarked on an extensive field development programme at its Norwegian assets to stimulate further production. Although this results in a temporary reduction in production for 2012 (outlined below), the long term benefits of increased production and extended field life clearly outweigh the short term sacrifice. The company is currently in the process of drilling infill wells at Brage and Njord. Faroe has collated a comprehensive amount of data, including 4D seismic, which supports the strategy of drilling high impact infill wells to increase production, which has been proven in recent years. In addition, the company expects that continuous infill drilling at the sites will unlock additional producible reserves throughout 2012 and 2013. Faroe has also sanctioned two infill wells at Ringhorne East, operated by Exxon Mobil, throughout 2012. This comparatively low operating cost field is expected to contribute 20% (with Jotun) to Faroes net production in 2012.
Expected drilling programme
2012 Prospect Butch T-Rex Kalvklumpen N.Uist/Cardhu Clapton Cooper Rodrigues/Santana Butch Appraisal Freya Appraisal Milagro Knorke Samson Dome Grouse Field Brage infill Njord Infill Hyme development Ringhorne East infill Glitne Schooner Firm Expected Drilled Interest 15.0% 30.0% 20.0% 6.3% 40.0% 30.0% 30.0% 15.0% 50.0% 30.0% 30.0% 20.0% 37.5% 13.4% 7.5% 7.5% 7.8% 9.3% 6.9% Operator Centrica Maersk DetNor BP Faroe Centrica Wintershall Centrica Faroe North Wintershall BG Faroe Statoil Statoil Statoil Exxon Statoil Tullow 12 7 19 Q1 Q2 Q3 Q4 Q1 Q2 2013 Q3 Q4
Exploration Appraisal Development
Source: Company
Production
In 2011, Faroe negotiated a transformational asset exchange with Petoro AS to swap its 30% interest in the Maria oil discovery in Norway for non-operated interests in a number of producing oil and gas assets in Norway, namely in Brage, Njord, Ringhorne East and Jotun. This ultimately served to increase overall net production to Faroe four-fold from 2,500boepd to 10,100boepd by the end of 2011.
Faroe net forecast production profile
12,000 10,000 8,000
boepd
6,000 4,000 2,000 0 FY2009 Topaz gas field Blane oil field Njord FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
Wissey gas field Enoch oil field Brage
Schooner gas field Glitne Oil Field Ringhorn East & Jotun Field
Source: Company
54
Strategic overview
The company expects to produce in the range of 6,000 to 8,000boepd in 2012 due to reduced production primarily from the Njord field. A riser replacement programme is currently underway which will continue throughout 2012, and will tie in the new Hyme field to Njord. The Njord riser replacement programme has necessitated the shutting in of production wells on the Njord field and as the risers are replaced the wells are progressively being brought back on stream. The Hyme field development (see below) is scheduled for installation in 2012, and will necessitate the shutdown of the entire Njord field for approximately three months while the field is tied in to the Njord platform. As a consequence, average 2012 production from Njord will not reflect full field capacity; however 2013 production is expected to benefit from the Njord wells being back on stream as well as the new Hyme production wells. Njord and Hyme are expected to contribute c.30% to Faroes net production in 2012. 2013 production is expected to be significantly higher as Hyme is brought on stream, as riser replacement work ends and new infill wells (outlined above) begin to contribute to overall production.
55
Strategic overview
Hyme
In May 2011, a Field Development Plan (FDP) was submitted for the Hyme oil field, which has since been approved by the Norwegian Ministry of Petroleum and Energy. Faroe has a 7.5% net interest in the Hyme development located to the east of Njord. First oil from Hyme is expected in 2013.
Hyme location map
Source: Statoil
The field will be developed with one dual-lateral producer and a water injector sub-sea tied back to the Njord field. In addition, the Njord partnership has sanctioned a project to allow continued production at lower pressure and extended field life. These two projects are expected to add over 3mmboe of 2P reserves net to Faroe, in addition to the 14.2mmboe reported from the initial transaction outlined above. The capital requirement of the above development programme will amount to 37m net to Faroe, of which approximately 12m has been spent. The company expect the field to come on stream in 2013 at a rate of 900boepd net to the company, thus increasing production by a further 10% from current levels. In terms of the additional operating expenditure associated with the field, the company maintains this will be marginal given that it will be tied in to existing infrastructure and capacity at Njord.
56
Financial overview
Financial overview Funding the strategy

Faroe is fully funded to embark on their multi-well exploration programme, wilth internal projections estimating a 2011 year end cash position in the region of 130135m including a pro et contra settlement of c.80m (pre tax). Although Faroe historically raised funds through the equity markets, the company now benefits from a strong cash inflow position predominantly arising from its producing Norwegian assets (outlined above) as well as robust lending facilities secured in 2011. This progressive financial approach ensures that share capital dilution is kept to a minimum when financing the companys multi-well drilling campaign. Faroe undertook a refinancing of its bank facilities in July and now includes a revolving credit facility of NOK500m (c. 55m), as well as a further uncommitted facility of NOK500m. This has been set up to finance 75% of the companys Norwegian exploration costs net of Norwegian profits, such that no more than 25% of exploration expenditure in Norway is funded from equity sources. At the companys last interim results, 30.8m was outstanding on the current Norwegian exploration facility, which is drawn against the Norwegian tax rebate receivable in December 2011 and 2012. In addition, Faroe has increased its reserve based debt facility to $125 million (c.78m) and secured a further uncommitted facility of $125 million. This represents a significantly larger facility than the previous reserve based debt facility of 20m, and is currently undrawn. It is also important to note that the combined debt capacity of Faroes Blane and Petoro assets exceed the current reserve based lending facility cap of $125m (c.78m), ensuring that the company is well placed financially with excess funding headroom if necessary.
Petoro impact on financial capability

Faroe is due to undertake an active investment programme in 2012 (costing in the region of 60-80m) at its producing Norwegian assets acquired through this transaction. This will be funded entirely through cash flow and the above mentioned debt facilities. In our view, this transaction was beneficial in both financial and strategic terms to Faroe. The increased production revenues significantly enhance cash flow and debt capacity to fund further exploration and expansion of the company. In addition, the capital requirement (amounting to c.250m) due from Faroe in respect of the Maria field is now the responsibility of Petoro. The company also benefits from no capital gains tax falling due on the transaction. In addition, the transaction also transfers to Faroe pro-forma tax balances (an asset) with an undiscounted future tax value in excess of NOK 400m (c.46m) as of the effective date. The fiscal terms offered to E&P companies operating in Norway should not be understated; the benefits of the tax asset received from Petoro as well as an exploration expense rebate, creates a strong fiscal environment for the company.
57
Financial overview
Norwegian tax system

The Norwegian tax regime governing oil and gas exploration and production has become more favourable in recent years. Given the recent transition, we feel that the current system can be poorly understood by potential investors and it is therefore important to provide an outline of the terms. It is also significant given Faroes increased exposure to the country after the Petoro asset swap transaction. From 2003, the government introduced multiple initiatives to stimulate resource exploitation in the region to fuel long term investment.
Exploration
In 2004, the Norwegian government outlined the new fiscal regime for oil and gas exploration, the biggest incentive being 78% of expenses relating to exploration up to PDO are refunded year after spend. This has subsequently made it easier for smaller companies to fund their operations as exploration can be financed through bank facilities with pledge in the tax refunds. In addition to this refund, a further 30% uplift is recognised over four years (7.5% p.a) for capital expenditure on development projects. This is subsequently depreciated on a straight line basis over six years. In addition, companies not in a tax position can carry forward their losses and the uplift with interest.
Production
Norway taxes oil profits at 50%, on top of a regular business tax of 28%, so that oil companies pay 78% tax. The country recognises 30% of its tax revenues from its offshore oil. Early on after the discovery of oil, the nation made the decision to prevent the kind of private profligacy and boom and bust cycles of the other oil-rich nations.
Faroe impact
The biggest impact to Faroe arises on the acquisition of three ex-Petoro assets through last years asset swap transaction. Faroe inherited Petoros historic tax balances which have been back calculated on the basis that Petoro does not pay tax given that it is state owned. The total undiscounted tax value equates to NOK476m (c.46m), which Faroe can financially take advantage of through recognising the straight line depreciation. Capital expenditure is typically depreciated on a straight line basis over six years, with an uplift of 30% applicable against the special tax, which is taken over four years. In total, 93% of the capital expenditure is recovered through the tax system over a six year period.
58
Financial overview
Depreciation of inherited tax balances

160 140 120 100 NOK (m) 80 60 40 20 0 FY2011 FY2012 FY2013 Depreciation
Source: Company
FY2014 Uplift
FY2015
Tax is paid in six tranches, with 50% payable in the current year and 50% in the subsequent year. The 78% E&A cost is refunded in the year after it is incurred, limited to the current years net tax loss. The upshot of this is that Faroe is expected to pay between 34m-38m in 2012 relating to 2011. Faroe had a tax receivable at their last interims of 36.3m being 78% of exploration expenditure, net of production profits, in Norway for the last 18 months. The amount relating to 2010 was paid to Faroe in December 2011. Following completion of the Maria/Petoro swap, with the benefits of the Petoro assets for the full year accruing to Faroe, the company is likely to have a small 2011 Norway tax charge. Of the tax rebate for the expenditure to June 2011, a credit of 1.3m has already been recognised in the income statement, the balance being credited to deferred tax liabilities. At June 2011 Faroe had unrelieved UK tax losses of approximately 52.9m. The unrelieved tax losses are available indefinitely for offset against future taxable profits in the UK, with the potential to materially enhance ongoing net results.
59
2012 exploration programme
2012 exploration programme

As outlined above, Faroe is specifically targeting c.175mmbbls in 2012 through six exploration wells. We illustrate this on a risked basis as follows:
Risked 2012 targeted net asset valuation Prospect Working Interest 15% 30% 20% 6% 40% 30% 30% CoS% Prospective Prospective gross net (mmboe) (mmboe) 54 112 102 262 66 78 158 832 8 34 20 17 26 23 47 175 NPV 10% $/bbl 3.00 3.00 3.00 3.00 3.00 3.00 3.00 Unrisked NPV $m 24.3 100.8 61.2 49.5 79.2 70.2 142.2 527 Risked NPV $m 7.3 25.2 15.3 13.9 26.9 10.5 37.0 136 Unrisked NPV m 14.7 61.1 37.1 30.0 48.0 42.5 86.2 320 Risked NPV m 4.4 15.3 9.3 8.4 16.3 6.4 22.4 82 Net Risked p/share 2.1 7.2 4.4 4.0 7.7 3.0 10.6 39
Butch T-Rex Kalvklumpen North Uist Clapton Cooper Santana
30% 25% 25% 28% 34% 15% 26%
We also provide a breakdown of key statistics for each asset as follows:
Butch (Drilling)
Location: Norwegian Sea Working Interest: 15% Partners: Centrica 40% (operator), Suncor Norge AS 30% and Spring Energy Norway AS 15% Timing: Q4 2011 and Q1 2012 Location: Norwegian Sea Working Interest: 30% Partners: Maersk (operator) 70% Timing: Q42011, Q1 2012 Location: Norwegian Sea Working Interest: 20% Partners: DNO 40% (operator) Timing: Q1 2012 Location: UK - West of Shetland Working Interest:6.25% Partners: BP 47.5% (operator), Nexen 35%, Faroe 6.25%, Idemitsu 5%, CIECO 6.25%. Timing: Q1 and Q2 2012 Location: Norwegian Sea Working Interest: 40% Partners: Faroe Petroleum (40% and operator), DNO (10%), Norwegian Energy Company (12%), Lundin (18%) and Dana (20%). Timing: H1 2012 Location: Norwegian Sea Working Interest: 30% Partners: Centrica (operator) and Petro-Canada Timing Q2 and Q3 2012 Location: Norwegian Sea Working Interest: 30% Partners: Wintershall (operator), Centrica, Concedo and Spring Energy AS. Timing: Q4 2012 and Q1 2013
T-Rex(Drilling)
Kalvklumpen
North Uist
Clapton
Cooper
Santana
60
Financial model
Financial model
Income Statement Year end December (m) Group revenue Cost of sales Gross profit Total operating expenses EBIT Net interest/financial income/(cost) Associate and Other non-op. income/(cost) PBT Tax Effective tax rate (%) Minorities Earnings EBITDA Adjusted EBITDA* Adjusted EBIT* Adjusted PBT* Adjusted earnings* DPS (p) EPS (p) EPS [F. Dil.] (p) EPS [Adj.]* (p) EPS [Adj. F. Dil.]* (p) Weighted average no. shares (m) Fully dil. w. ave. no. shares (m) Year end no. shares (m)
2009A 7.0 (9.3) (2.3) (22.7) (25.0) (0.9) 0.0 (11.8) 4.9 41.4 0.0 (6.9) (3.5) (21.1) (28.6) (11.8) (6.9) 0.0 (6.6) (6.6) (6.6) (6.6) 104.7 104.7 104.7
2010A 15.1 (14.1) 1.0 (20.3) (19.3) (0.9) 0.0 (26.0) 5.7 21.9 0.0 (20.4) (5.6) (20.2) (25.2) (26.0) (20.4) 0.0 (13.3) (13.3) (13.3) (13.3) 152.8 152.8 152.8
2011E 159.7 (86.3) 73.4 (55.0) 18.4 (1.9) 0.0 16.4 (4.7) 28.6 0.0 11.7 82.2 51.2 18.3 16.4 11.7 0.0 5.5 5.5 5.5 5.5 212.4 212.4 212.4
2012E 141.8 (89.1) 52.7 (36.8) 15.9 (0.8) 0.0 15.1 (3.8) 25.0 0.0 11.3 90.1 76.3 15.9 15.1 11.3 0.0 5.3 5.3 5.3 5.3 212.4 212.4 212.4
2013E 153.3 (93.2) 60.1 (37.8) 22.3 (0.8) 0.0 21.5 (5.2) 24.0 0.0 16.3 91.5 79.1 22.3 21.5 16.3 0.0 7.7 7.7 7.7 7.7 212.4 212.4 212.4
61
Financial model
2009A (25.0) 14.0 0.0 7.5 1.7 1.8 0.1 (4.7) 0.0 0.9 30.2 34.0 0.0 0.0 60.4 0.0 0.0 0.0 60.4 16.7 (1.5) 43.6
2010A (19.3) 8.6 0.0 5.0 8.2 8.3 10.9 (47.2) 0.0 1.4 12.4 (46.5) 0.0 0.0 (69.0) 132.0 0.0 0.0 63.0 43.6 1.1 132.2
2011E 18.4 30.9 0.0 32.9 (19.0) 11.2 74.5 (116.1) 0.0 2.3 28.1 (115.3) 0.0 0.0 (126.6) 0.0 0.0 0.0 (126.6) 132.2 0.3 104.8
2012E 15.9 13.9 0.0 60.4 2.6 11.2 103.9 (85.0) 0.0 0.8 (2.3) (84.5) 0.0 0.0 (67.0) 0.0 0.0 0.0 (67.0) 104.8 0.0 88.0
2013E 22.3 12.4 0.0 56.8 0.0 11.2 102.7 (30.0) 0.0 0.8 0.9 (29.5) 0.0 0.0 44.9 0.0 0.0 0.0 44.9 88.0 0.0 128.1
2009A 13.7 0.0 65.0 0.0 78.8 0.5 6.0 43.6 12.7 62.7 141.5 12.5 22.7 0.0 32.1 67.3 74.2 10.5 91.6 (33.6) 5.8 0.0 74.2
2010A 9.8 0.0 102.7 0.0 112.5 0.6 7.5 132.2 28.1 168.4 280.9 20.9 17.6 0.0 61.2 99.7 181.1 21.2 205.9 (52.3) 6.3 0.0 181.1
2011E 43.8 0.0 104.5 0.0 148.2 26.3 10.0 104.8 0.0 141.1 289.3 29.9 13.2 0.0 74.7 117.8 171.5 21.2 205.9 (63.9) 8.2 0.0 171.5
2012E 50.8 0.0 107.1 0.0 157.9 15.7 6.0 88.0 0.9 110.6 268.5 17.9 13.2 0.0 72.5 103.5 164.9 21.2 205.9 (70.5) 8.2 0.0 164.9
2013E 50.8 0.0 50.3 0.0 101.0 15.7 5.9 128.1 0.0 149.7 250.8 17.8 13.2 0.0 77.7 108.7 142.1 21.2 205.9 (93.3) 8.2 0.0 142.1
62
Financial model
Key Ratios Year end December Revenue growth (%) Adj. EBITDA* growth (%) Adj. EBIT* growth (%) Gross margin (%) Adj. EBITDA* margin (%) Adj. EBIT* margin (%) Gearing (%) Interest cover (x) Net debt/Adj. EBITDA* (x) Dividend cover (x) ROE (%) ROIC (%) ROCE (%) Operating cash conversion (%) Net cash conversion (%) Net working cap / revenue (%) Cap Ex / revenue (%)
2009A n/a n/a n/a (32.5) (301.5) (408.4) n/a (32.3) (2.1) n/a (9.3) (147.6) (147.6) (2.1) (874.8) 24.4 66.9
2010A 115.4 (4.5) (12.0) 6.5 (133.7) (166.9) n/a (29.5) (6.6) n/a (11.2) (43.1) (43.1) (193.1) 339.1 54.4 312.9
2011E 958.5 (353.7) (172.5) 46.0 32.1 11.4 n/a 9.7 2.0 n/a 6.8 10.1 10.1 90.6 (1,082.8) (11.9) 72.7
2012E (11.2) 49.0 (13.0) 37.1 53.8 11.2 n/a 20.5 1.2 n/a 6.9 13.3 13.3 115.3 (590.6) 1.8 60.0
2013E 8.1 3.8 40.2 39.2 51.6 14.5 n/a 28.3 1.6 n/a 11.5 54.5 54.5 112.3 274.9 0.0 19.6
Valuation Metrics Year end December PER (x) EV / Revenue^ (x) EV / Adj. EBITDA^* (x) EV / Adj. EBIT^* (x) EV / IC^ (x) EV / Taxed Adj. EBIT^* (x) Yield (%) P / CFPS (x) NAV per share (p)
* excludes exceptional items and amortisation of acquired intangibles. ^ EV calculation adjusted for core cash, investments etc. Source: Company data, Seymour Pierce Ltd
2009A (25.6) 43.3 (14.4) (10.6) 4.1 (14.0) 0.0 2.9 70.8
2010A (12.7) 20.1 (15.0) (12.0) 1.7 (15.8) 0.0 (3.7) 118.6
2011E 30.7 1.9 5.9 16.6 1.8 21.9 0.0 (2.8) 80.8
2012E 31.6 2.1 4.0 19.1 1.8 25.1 0.0 (5.4) 77.6
2013E 21.9 2.0 3.8 13.6 2.1 17.9 0.0 8.0 66.9
63
Financial model
300
250
200
1 50
1 00
50
Share P rice
Reco mmendatio ns
64
10 February 12 | Initiation of coverage | Oil & Gas
Frontera Resources
BUY
Share price Target price 694% Upside Market cap (m) Net debt (m) Enterprise value^ (m) No. of shares (m) Free float (%) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m -20.8 -24.0 3m -25.9 -30.7 1p 8p
(AIM:FRR)1,5
On the front line

Following the successful restructuring of its balance sheet in 2011, Frontera has started its two year development plan at three fields in Georgia. Since then the company has made progress and is gearing up to start gas sales in April. We feel that the company is well placed to meet its production target of 5,000bbl/d in 18 months.
Development underway The two-year plan started in September 2011 and has already yielded a gas discovery at Mtsare Khevi. Oil production continues at 220bbl/d and the company has 300boepd of gas production shut in and due to come to market in April. Given these initially positive results, we are comfortable that the company can meet its goal of 5,000bopd within the two development timeframe. Balance sheet restructured, funding is available Last year saw the conversion of 85% ($91.1m) of the companys debt being converted into equity as well as raising $11m of new money. The company has recently drawn down a $3.1m loan using its SEDA facility to pay for its development activities. Frontera has yet to tap into the $250m cost recovery pool given that production has yet to ramp up. Again we are comfortable for now that sufficient capital is available to the company to fund its future activities. Overhangs could still be an issue With c.2.2 billion shares in issue as well as several large holding, long suffering shareholders, there remains potential for large overhanging sell orders in this stock in future. Clearly such circumstances would depress the share price again. Valuation and recommendation Fronteras share price has been very weak since the placing (at 4p) last year due to a substantial share overhang in the market, which has now been cleared out. However, the company has made good progress with its development project so far, but has yet to benefit from any increase in production so far. The share price should be driven by positive production news over the next 18 months. We therefore initiate coverage with a Buy recommendation and set an 18 month of Target Price of 8p. We have not included a valuation for the exploration assets as there is no work plan or funding for them, but these could add significantly to the valuation once they come into play.
21.3 61.1 82.5 2,070.7 75.0 17,181 8/1 12m -79.9 -79.6

20 15 10 5 0 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news Block 12 operational updates Business Oil exploration & development www.fronteraresources.com
9 February 12
Year end Revenue December ($m) 2009A 2010A 2011E 2012E 2013E 4.1 8.3 48.0 146.6 196.7
EBIT* ($m) (18.0) (52.8) 32.1 123.0 166.2
PBT* ($m) (28.5) (63.9) 16.1 108.9 154.0
Tax Adj. EPS* (%) (c) 0.0 0.0 0.0 0.0 0.0 (0.3) (0.5) 0.0 0.1 0.1
PER EV/EBIT* Div yield (x) (x) (%) (5.2) (3.4) 206.2 30.5 21.6 (7.3) (2.5) 4.1 1.1 0.8 0.0 0.0 0.0 0.0 0.0
Dr. Dougie Youngson Research Analyst +44 (0) 20 7107 8068 dougieyoungson@seymourpierce.com
Frontera Resources | 10 February 12

We value Frontera using a combination of a Discounted Cash Flow (DCF) of the companys producing assets as well as a risked approach to its exploration portfolio. We have incorporated the following assumptions into our approach:
We value Frontera using a combination of a Discounted Cash Flow (DCF) of the companys producing assets as well as a risked approach to its exploration portfolio. We have incorporated the following assumptions into our approach: Assumptions incorporated Metric Forecast oil price/bbl Forecast gas price/mcf Discount rate FRR profit oil sharing ratio NAV for resources/mmboe Long term exchange rate ($/) Post placing no. of shares
Assumption $95 flat $4 flat 10% 49% flat $5 1.65/1 2,039m
In terms of the companys exploration portfolio, we have valued Fronteras contingent and prospective resources individually. The company has an active drilling campaign over the next 18 months, which should see current prospective resources reclassified to contingent resources through continued appraisal work.
Exploration asset valuation Asset Shallow Fields Prodution Unit Basin Edge Play Taribani Field Play Other Prospective resources
Classification Contingent Resources Prospective Resources Prospective Resources Prospective Resources
Risked NPV (m) 8.2 176.1 89.5 68.0 341.8
Risked NPV (p/share) 4.0 8.5 4.3 3.3 20.1
Our target valuation does not currently recognise prospective resources given the additional work needed to classify the assets to contingent and reserves. However these will be recognised as and when Frontera successfully appraises these plays. Our sum of the parts (SOTP) matrix will encompass a DCF of Block 12 as the company continues to push forward with its development plan with the aim of reaching 5,000bbl/d by 2H 2013.
SOTP valuation matrix m Core assets 3P Reserves (Taribani) Gross Value Less: G&A Net value Less: Net debt Overall Target Price
p/share
234.6 89.5 324.2 -52.5 271.6 -104.9 166.8
11 4 16 -3 13 -5 8
66

20 12 15 10 p/share 4 -3 0 -5 -5 -10
Net debt
G&A
Contingent resources
Block 12 production

Fronteras share price has been very weak since the placing (at 4p) last year, due to a substantial share overhang in the market, which has now been cleared out. However, the company has made good progress with its development project so far, but has yet to benefit from any increase in production so far. After a prolonged period in stasis due to its poor balance sheet structure, this looks like a company on the turn for the better. Share price should be driven by positive production news over the next 18 months. We therefore initiate coverage with a Buy recommendation and set an 18 month target price of 8p. We have not included a valuation for the exploration assets as there is no work plan or funding for them, but these could add significantly to the valuation once these come into play.
We have not included a valuation for the exploration assets as there is no work plan or funding for them, but these could add significantly to the valuation once these come into play.
67
Asset overview
The company has a 100% interest in Block 12 which has an area of c.5,060km2 and is estimated to have in excess of 2bnbbl of resources.
Block 12 plays
Development
Frontera has started a two-year development programme on three fields located in Block 12, which should result in production ramping up from c.225bbl/d to c.5,000bbl/d. The company has estimated that this programme will cost c.$120m which will be funded from operating cash flow, the c.$250m cost recovery pool and potentially using their equity draw down facility.
Historic & forecast production profile
7,000
6,000
Daily production (bopd)
5,000
4,000
3,000
2,000
1,000
0 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014
The development of the Tarabani, Mirzaani and Mtsarekhevi fields will be achieved through a combination of drilling, fracturing, water injection and downhole pumps. The company has found that fracturing is crucial to ensure commercial flow rates
68
Exploration
The company does not intend to conduct any exploration during the two year development programme. It intends to fund such activity once the company is self funding after year two. The company has identified two major exploration plays: the Basin Edge Play (BEP) and shale gas. BEP This is one of the latest exploration plays in the Kura Basin and is located to the north of the block. Frontera has identified two (B and C) potentially giant prospects. 2D and 3D seismic indicates that the C prospect could contain in excess of 500mmbbl. Shale Gas In 2010, Frontera conducted an internal study which identified major liquids and gas associated with the Maykop shales. The company feels that the geology is similar to that found in Europe and North America. Their internal estimate is 1tcf of recoverable gas and up to 500mmbbl. This play would be a long term development project and may be of sufficient scale to attract a farm-in partner with the technological expertise required for such a development.
69
Financial model
Financial model
2009A 4.1 (5.2) (1.1) (20.1) (21.2) (11.5) 0.9 (28.5) 0.0 0.0 0.0 (28.5) (20.3) (17.5) (18.0) (28.5) (28.5) 0.0 (0.3) (0.3) (0.3) (0.3) 91.0 91.0 91.0
2010A 8.3 (6.1) 2.2 (16.0) (13.8) (14.8) 3.7 (63.9) 0.0 0.0 0.0 (63.9) (13.3) (52.6) (52.8) (63.9) (63.9) 0.0 (0.5) (0.5) (0.5) (0.5) 132.4 132.4 132.4
2011E 48.0 (6.5) 41.5 (15.1) 26.4 (16.6) 0.6 16.1 0.0 0.0 0.0 16.1 27.2 32.5 32.1 16.1 16.1 0.0 0.0 0.0 0.0 0.0 2,039.0 2,039.0 2,039.0
2012E 146.6 (14.4) 132.2 (23.0) 109.2 (14.1) 0.0 108.9 0.0 0.0 0.0 108.9 109.8 123.3 123.0 108.9 108.9 0.0 0.1 0.1 0.1 0.1 2,039.0 2,039.0 2,039.0
2013E 196.7 (17.6) 179.2 (26.2) 153.0 (12.2) 0.0 154.0 0.0 0.0 0.0 154.0 157.4 168.4 166.2 154.0 154.0 0.0 0.1 0.1 0.1 0.1 2,039.0 2,039.0 2,039.0
70
Financial model
2009A (21.2) 0.5 0.0 0.5 (0.6) 0.0 (20.9) (8.3) 0.0 9.8 0.0 (8.3) 0.0 1.9 (25.8) 7.1 0.0 3.0 (15.7) 7.3 0.0 0.8
2010A (13.8) 0.3 0.0 0.3 5.7 0.0 (7.6) (4.3) 0.0 12.9 0.0 (4.3) 0.0 8.1 4.9 0.0 0.0 (2.8) 2.1 0.8 0.0 0.2
2011E 26.4 0.4 0.0 0.4 151.9 0.0 179.1 (36.2) 0.0 15.9 0.0 (36.2) 0.0 0.0 122.6 0.4 0.0 2.6 125.7 0.2 0.0 152.0
2012E 109.2 0.3 0.0 0.3 206.9 0.0 316.7 (52.8) 0.0 18.8 0.0 (52.8) 0.0 0.0 229.9 0.0 0.0 1.0 230.9 152.0 0.0 435.4
2013E 153.0 2.2 0.0 2.2 105.6 0.0 262.9 (53.2) 0.0 21.9 0.0 (53.2) 0.0 0.0 178.4 0.0 0.0 (1.0) 177.4 435.4 0.0 667.1
2009A 1.6 0.0 48.0 3.7 53.3 7.4 0.6 0.8 9.0 17.8 71.1 0.8 9.5 107.4 2.2 119.8 (48.7) 0.0 170.7 (218.8) (0.6) 0.0 (48.7)
2010A 1.2 0.0 7.9 2.3 11.4 5.0 0.2 0.2 0.2 5.6 17.0 3.1 5.9 115.2 3.8 127.9 (110.9) 0.0 172.3 (282.7) (0.6) 0.0 (110.9)
2011E 1.1 0.0 43.5 1.6 46.1 89.8 15.7 152.0 9.0 266.5 312.7 44.9 97.1 40.2 224.6 406.9 (94.2) 0.0 172.9 (266.6) (0.6) 0.0 (94.2)
2012E 1.1 0.0 95.7 1.6 98.4 81.3 28.5 435.4 16.3 561.4 659.8 81.3 95.0 62.1 406.6 645.1 14.7 0.0 172.9 (157.6) (0.6) 0.0 14.7
2013E 1.1 0.0 144.5 1.6 147.2 105.0 36.8 667.1 21.0 829.9 977.1 105.0 94.0 84.0 525.2 808.3 168.8 0.0 172.9 (3.6) (0.6) 0.0 168.8
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Financial model
2009A n/a n/a n/a (26.2) (424.5) (435.5) n/a (1.6) (0.0) n/a 58.5 (343.9) (343.9) 103.1 90.3 (15.2) 201.1
2010A 100.2 200.2 194.1 26.2 (636.7) (639.8) n/a (3.6) (0.0) n/a 57.6 (1,495.1) (1,495.1) 56.9 (7.7) 69.6 51.7
2011E 481.8 (161.9) (160.8) 86.4 67.7 66.9 n/a 1.9 4.7 n/a (17.1) 44.6 44.6 658.5 759.6 316.2 75.3
2012E 205.2 279.3 283.1 90.2 84.1 83.9 n/a 8.7 3.5 n/a 738.7 206.3 206.3 288.4 211.1 141.1 36.0
2013E 34.2 36.5 35.1 91.1 85.6 84.5 n/a 13.7 4.0 n/a 91.3 289.5 289.5 167.1 115.8 53.7 27.0
Valuation Metrics Year end December PER (x) EV / Revenue^ (x) EV / Adj. EBITDA^* (x) EV / Adj. EBIT^* (x) EV / IC^ (x) EV / Taxed Adj. EBIT^* (x) Yield (%) P / CFPS (x) NAV per share (c)
2009A (5.2) 31.6 (7.4) (7.3) (2.6) (7.3) 0.0 (0.1) (53.5)
2010A (3.4) 15.8 (2.5) (2.5) (1.2) (2.5) 0.0 0.4 (83.8)
2011E 206.2 2.7 4.0 4.1 (0.5) 4.1 0.0 0.3 (4.6)
2012E 30.5 0.9 1.1 1.1 (0.3) 1.1 0.0 0.1 0.7
2013E 21.6 0.7 0.8 0.8 (0.3) 0.8 0.0 0.2 8.3
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Financial model
1 8
1 6 1 4
1 2
1 0 8
4 2
Share P rice
Reco mmendatio ns
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Financial model
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Gulf Keystone Petroleum

BUY
Share price Target price 9% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m +28.4 +23.2 3m +159.0 +142.3 343p 374p
(AIM:GKP)1
Kurds and wahey

2012 will see the company move into export production for the first time, resulting in the first significant cash inflows for GKP. The entrance of ExxonMobil and Total into the region has enhanced its credibility as a potential major future oil producing province. We feel that the persistent take over rumours are premature, but likely to be accurate in the longer term.
Production ramping up and moving into export The Shaikan field has been producing varying, modest amounts of oil during drilling and flow testing. The company is now in the final stages of installing facilities which will allow up to 20,000bopd of production under an extended flow test. Previous production has been sold into the domestic market at a substantial discount (c.$43/bbl in 2011). However, this new production will be exported and sold at international pricing, resulting in significant revenue for the first time. Exploration more upgrades to come? In parallel with the Shaikan development, GKP has several potentially high impact wells at other locations in Kurdistan. GKP has again updated its resource numbers on the back of successful drilling. On the assumption of positive results, we would anticipate resource upgrades soon after, further enhancing valuation. Outstanding issues not without risk Investors need to be aware of a number of geopolitical issues with respect to Kurdistan. Despite being well advanced, the new Iraqi oil laws have still not been passed. Consequently, the Kurdistan Regional Government (KRG) is unable to sanction oil exports without central government agreement. Following the exit of the US armed forces, tensions are high in Iraq due to sectarian violence, which some commentators have speculated may lead to civil war. In addition, tensions with Turkey are currently at a higher level due to the accidental bombing of Kurdish civilians. GKP also have legal issues with Excalibur Ventures, who claim to have ownership rights at Shaikan. Court proceedings are due to start in October 2012. Valuation and recommendation We have valued GKP on a DCF basis for its forecast production from the Shaikan field. This yields a core valuation of 31p, excluding cash. We have also included a risked exploration NAV for the other early stage assets which yields an additional 317p. We therefore initiate coverage with a Buy recommendation and set an overall target price of 374p.
2,928.0 15.4 2,912.6 854.9 10,048 343/101 12m +104.8 +108.2

400 350 300 250 200 150 100 50 0 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news Shaikan field operational update
9 February 12
Business Based in Kurdistan, Northern Iraq. Primarily focused on exploration, but has a small amount of production from the Shaikan field. www.gulfkeystone.com/
Year end Revenue December (m) 2009A 2010A 2011E 2012E 2013E 84.4 115.6 145.1 15.3 15.0
EBIT* (m) 28.6 45.5 78.3 (101.5) (115.6)
PBT* (m) 27.8 44.7 78.0 (101.3) (115.7)
Tax Adj. EPS* (%) (p) 0.0 (0.0) 0.0 0.0 0.0 23.3 36.9 48.7 (83.1) (94.9)
PER EV/EBIT* Div yield (x) (x) (%) 7.5 4.7 3.6 (2.1) (1.8) 2.9 1.8 1.1 (0.8) (0.7) 0.0 0.0 0.0 0.0 0.0
Gulf Keystone Petroleum | 10 February 12

We have valued Gulf Keystone in terms of its discovered resource base under the low estimate scenario stated in the most recent CPR
We have valued Gulf Keystone in terms of its discovered resource base under the low estimate scenario stated in the most recent CPR, and have not included estimates for yet-to-find resources. In addition, we have included a discounted cash flow (DCF) valuation of GKPs current and forecast production (2012: c.10,000bopd ramping up to 2014: c.40,000bopd) from its Shaikan field in Kurdistan. We have used the following headline assumptions in our valuation:
Valuation assumptions Metric NPV/mmboe - Oil Realised oil price (export) Realised oil price (domestic) to 2014 % production (export/domestic) from 2014 % production (export/domestic) Long-term $/ Discount rate Shares outstanding (million) Shaikan interest post KRG back in Oil recovery factor
Assumption $3.60 50% of export - 2012: $100/bbl, 2012+: $90/bbl flat $44.3/bbl flat 50%/50% 0%/100% 1.65 10% 854.12 54.4% 20%
Risked exploration net asset value Block 90% 50% 10% Mean Expected Outcome Working Interest Recovery $ NPV/bbl Net factor Unrisked $ billion Net risked Net risked $ billion billion p/shr
Bn bbl Shaikan Akri-Bijeel Sheikh-Adi Total
Low 8.0 1 9.0
Best 13.4 2.6 1.9 17.9
High 15.0 3 18.0 10.5 1.9 12.4 10.3 2.2 2.1 14.6 51.0% 12.8% 80.0% 20.0% 20.0% 20.0% 3.6 3.6 3.6 15.7 1.2 5.5 22.3 3.1 0.2 1.1 4.5 1.9 0.1 0.7 2.7 222 17 78 317
We have included Akri-Bijeel in the above valuation, even though the company intends to sell the asset (announced in September 2011) to focus on their core Shaikan activities. Our valuation indicates a risked value of $200m attributable to the play, but we would expect that the company would expect a consideration to be in excess of this amount to fund further exploration and development at Shaikan.
SOTP valuation matrix million Production Discovered 2C Gross Value Less: G&A Net Value Net Cash Target Market Cap/ Price p/share
268 2,708 2,975 (40) 2,936 256 3,191
31 317 348 (5) 344 30 374
Source: Seymour Pierce Ltd Our DCF analysis of GKPs Shaikan production assumes production starts to ramp up in 2012 at an average rate of c.10,000bopd ramping up to c.40,000bopd in 2014. Whilst revenues generated from this level of production will be large, they are unlikely
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to be sufficient to support development capex for a 400,000bopd development. Full development of Shaikan will require a multi-billion dollar investment over the life of the project. Therefore, we feel the likelihood is that GKP will exit the field once it has fully defined the asset base, to ensure the greatest possible value prior to an eventual sale to a major oil company looking to enter the region.
400 350 300 250 p/share 200 150 100 50 0 -50 -5 G&A Net Cash Production Discovered 2C 30 31 317
Other issues impacting valuation

Although GKP currently has a 75% working interest in Shaikan, under the PSC terms the company has an obligation to assign part of this interest back to the KRG once the asset enters the development stage. This will ultimately reduce GKPs stake in Shaikan to 51% (excluding the 3.4% Texas Keystone stake) and any eventual sale will be valued on this basis. We have assumed this long term interest in our valuation. In addition, GKPs ongoing litigation with Excalibur Ventures continues to weigh on the companys shares. This protracted legal dispute stems from a claim that Excalibur is entitled to 30% of the companys blocks in Kurdistan as a result of a collaboration agreement with GKP prior to entry into Iraq. The lawsuit is due to be heard in London in October 2012, and we feel a negative resoultion for GKP will have a major downward impact on the companys valuation.

We have valued GKP on a DCF basis for its forecast production from the Shaikan field. This yields a core valuation of 31p, excluding cash. We have also included a risked exploration NAV for the other early stage assets which yields an additional 317p. We therefore initiate coverage with a Buy recommendation and set an overall target price of 374p.
We therefore initiate coverage with a Buy recommendation and set an overall target price of 374p.
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Strategy Overview
Strategy Overview
GKP listed a series of objectives in their 2011 interim results for their forward strategy for the next two years. We feel it is important to analyse these in detail to determine whether they are value accretive for shareholders, and whether failure to meet them will result in any material downside. 1) Explore and appraise aggressively the Shaikan, Sheikh Adi and Ber Bahr blocks in the Kurdistan Region of Iraq to prove up the resource base with increased production to follow.
In our view, GKPs core strategy will focus on fully appraising the Shaikan field to ultimately ensure that maximum resources are re-classified to reserves, prior to any potential farm out, placing or company sale. The company has benefited from a series of upgrades since 2010 through a continued appraisal work post initial discovery.
Resource upgrade history
16 14
Gross oil-in-place (bnbbl)
12 10 8 6 4 2 0 DGA (Jan-10) Ryder Scott (Jan-11) P10 P50 DGA (Apr-11) P90 DGA (Nov-11)
Source: DGA and Ryder Scott
The company currently has sufficient funds in the short term to appraise its assets. In addition to the $134m cash position confirmed in the companys interim results, GKP undertook a $200m placing issuing 91m shares at 140p in September 2011, underlining shareholder support for the companys strategy. The funds will be specifically distributed for the following: Completing the Front End Engineering and Design for the company's pipeline capable of transporting a minimum of 440,000 bopd from the Shaikan field to the existing Kirkuk-Ceyhan export pipeline Ordering of long lead items for the construction of the company's dedicated pipeline, subject to necessary approvals Upgrading the Shaikan Extended Well Test facilities to increase existing production from Shaikan-1 and 3 to 20,000 bopd Building additional testing and production facilities for Shaikan-2 and 4 capable of producing 20,000 bopd, following successful well tests at Shaikan2 and in anticipation of positive results from Shaikan-4 Drilling of the second exploration well on the Sheikh Adi block Acquisition of 3D seismic data over the Ber Bahr block where the first exploration well was spud in October 2011.
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Strategy Overview
Nevertheless, it should be noted that Shaikan alone is potentially a multi-billion dollar field which will require a capital commitment that exceeds GKPs current, and in our view, future capabilities. As such, we feel that the asset will either be significantly farmed out or even fully sold once the company has appraised the asset to an extent where it feels it has reach an appropriate valuation. 2) Complete the preparation of the Shaikan Field Development Plan for submission and approval by the Ministry of Natural Resources of the Kurdistan Regional Government
The Shaikan appraisal programme is being completed in parallel with the ongoing work on the Shaikan field development plan. This is a procedural requirement that is necessary for the company to proceed with its operations in Kurdistan. The plan includes pre-project economics and partner support, as well as the procurement of other technical requirements to fully enable the company to carry out its activities. Given that the company has been active in the region since 2005, we do not expect any issues to arise over its approval and merely regard it as a formality. Nevertheless, failure to gain approval will limit GKPs progress and subsequently be detrimental to the companys value. 3) Implement sufficient infrastructure to ramp up production from the Shaikan field as well as improve existing facilities
GKP is in the process of upgrading its infrastructure at Shaikan to increase production under the terms of its current licence to conduct an extended well test EWT at the Shaikan 1 & 3 well. Production is forecast to ramp up to c.20,000bopd and is intended for the export market, where the company can benefit from slightly discounted (due to the oil being heavy and high in hydrogen sulphide) international price rather than the domestic price. The company has identified a route for a dedicated pipeline to connect the Shaikan Field to the Kirkuk-Ceyhan export pipeline. GKP has completed a feasibility study on a pipeline capable of transporting a minimum of 440,000bopd, which is being submitted for necessary comments and approvals. Once the necessary approvals have been obtained, Front End Engineering and Design (FEED) work and ordering of long lead items will commence. There is currently no timeline for this process and no approvals have yet been made - we assume that this will be a long term objective for the company. Due to the companys substantial cash position (outlined above) we feel GKP is fully capable of upgrading its EWT facility and building additional testing and production facilities for Shaikan-2 & 4, and are confident the company will scale up production as a result of this. However, whilst production from the EWT is substantial it is not commercial production which is the point where the KRG and GKPs interest falls to 51%. We therefore expect production to plateau at c.20,000bopd in the medium term. 4) Actively pursuing a move from AIM to a Premium Listing on the Official List of the London Stock Exchange, subject to obtaining necessary approvals
We feel this proposal serves to address two key areas of the markets view of GKP. Firstly, that the company has a view to be acquired in the short to medium term - an ongoing rumour that management have had to contend with on several occasions. Secondly, that the company does not receive the necessary market exposure on AIM, especially given the size of its operations.
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Strategy Overview
It is clearly easier and cheaper to raise capital through placings on AIM than the Main Board, and as such we were not surprised with GKPs September placing prior to a full listing. We also feel that moving to the official list will add further clout to the companys position in the market which in our view addresses the second issue. Furthermore, this strategy suggests that the company will pursue a farm-out of its Shaikan operations, as opposed to a company sale given that the acquisition of a Main Board constituent presents additional challenges for the aquiree. In addition, it further highlights managements commitment to the company, an issue that has been historically questioned. 5) Appointment to the Board of three additional high-calibre Non-Executive Directors
We feel this objective is an extension of the companys move to the official list. Since the announcement the company has appointed two NEDs - Lord Charles Guthrie and Mark Hanson two experienced and complementary candidates. In line with GKPs strategy we would expect a further appointment, although given that the company can already satisfy the UK Listing Authoritys requirements relating to NEDs on admission to premium listing, we do not feel a further appointment or even non appointment will have any impact on valuation. 6) The company has made a strategic decision to rationalize its asset portfolio and is to seek a buyer for its 20% interest in the Akri-Bijeel block
GKPs intention to sell its non-core interests so that it can focus on Shaikan has been known for some time. This strategy will yield the funds required to further appraise the field and to allow for a ramp up in production to supply the export market. We feel that this approach reduces the chance of GKP returning to the market to raise additional funds in the short term. The license currently contains one 2.6bnbbl discovery and another drilling prospect with management estimating the possibility of an 8bnbbl discovery. If we use a similar valuation to that applied to our risked net asset exploration appraisal, we would value Akri-Bijeel as follows: Therefore, using a range of valuations by flexing the recovery factor of the field, we estimate that GKPs interest in Akri-Bijeel could generate a consideration between $200m and $720m. However, other factors such as GKPs open desire to sell as well as the ongoing geo-political factors (see below) associated with the asset may impact any purchasers assessment. The company maintains that it is selling its stake not because it is relatively small, but because it is immaterial to the company compared with the exploration potential of its Ber Bahr license and the appraisal of its Shaikan discovery. GKP has just commenced the process to auction the stake and estimates that a deal could be concluded in Q1 2012. In addition the company is confident of a quick sale due to the high level of interest in the Kurdistan region from large oil companies.
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Strategy Overview
Timeline
Company milestones
Design pipeline to co nnect Shaikanto the Kirkuk-Ceyhan Wo rk o ngo ing o n the Shaikan Field expo rt pipeline Develo pment P lan Shaikan-2 testing Increase pro ductio n to 1 0,00020,000 bo pd M o ve to the P remium Listing o n the Official List o f the Lo ndo n B er B ahr-1un-co mmercial Sto ck Exchange Shaikan o il-in-place upgrade Shaikan-7 to target the P ermian B er B ahr-1unco mmercial
M o ve fro m reso urces to reserves M o ve to the Shaikan full field develo pment
2011
Shaikan-5 spudded
2012
Shaikan-6 to spud
Sheikh A di-2 to spud
2013
2014
A ppraisal and early develo pment o f explo ratio n successes o n o ther blo cks
Design additio nal pro ductio n facilities Co mplete and submit the Shaikan Field Develo pment P lan
Shaikan-4 drilling Ramp up Shaikan o il expo rts
Upgrade the Shaikan Extended Well Test pro ductio n facilities
B uild the pipeline
Further testing and drilling o n A kriB ijeel
Finalise strategic divestment o f 20% wo rking interest in A kri-B ijeel
The company has a busy period over the next two years to implement and sustain its ambitious forward strategy. However we feel that its targets are achievable given the companys financial position as well as its proven operational capabilities.
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Progression of regional politics
Progression of regional politics

Kurdistan became an autonomous state within Iraq following the first Gulf war in 1992. It has its own parliament and exerts control over all areas of policy (except for national defence and foreign affairs). Of the 325 seats in the Iraqi Parliament, the Kurdish Alliance has a sizeable presence, holding nearly 15% of the seats and was in fact crucial to the formation of the government. Prior to the formation of the current government, Kurdistan was in dispute with Iraq's central government in Baghdad on several issues: a land dispute centred on the ethnically-mixed oil-rich city of Kirkuk, the distribution of revenues from the region's energy reserves and the legality of Kurdistan awards of oil licences. These issues had created uncertainty for both investors and oil companies active in Kurdistan. Despite a growing oil export production profile, the central government prohibited oil exports from Kurdistan. However, agreement has now been given to produce 100,000bopd rising to 200-300,000bopd by the end of 2011. Of this volume, about a third could be exported according to the Kurdish Natural Resources Minister.
Discovered oil & gas fields - Kurdistan
Source: Shamaran Petroleum
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Key asset overview
Key asset overview

Shaikan Block
The Shaikan field is located 85km to the north-west of of the Kurdistan capital Erbil and covers an area of 283km. The Production PSC for the block was awarded in November 2007 to Gulf Keystone Petroleum International and became operator with 75% working interest. However, (as noted in the valuation section) under the terms of the PSC, the KRG has an option to back in to the Shaikan asset should it be deemed commercial. This would result in GKP's interest falling to 51%.
Shaikan field
Source: Company
Shaikan-1 discovery well The Shaikan discovery was announced in August 2009 with the well reaching a total depth of 2,950m through multiple target horizons in located Cretaceous, Jurassic and Triassic formations. The well encountered a 1,000m gross oil column with over 200m of net pay. The well was retesting in July 2010 and subsequently completed as a first Jurassic zone producer. Shaikan EWT facilities were completed in September 2010 with test production from Shaikan-1 commencing the following month; net entitlement sales were 54,201bbl to March 2011. GKP is waiting for a response from the KRG relating to future oil sales. Shaikan-2 appraisal well Shaikan-2 deep appraisal well was spudded in December 2010 and was successfully tested in March 2011. The test showed that rates of up to 10,000bopd were achievable. Shaikan-2 tested 26o API oil in the first Jurassic zone encountered at a stabilised rate of 8,064bopd. Shaikan-3 appraisal well Shaikan-3 shallow appraisal well was spudded in September 2010 and was completed as a second Jurassic producer in January 2011. Following acid treatment of the Shaikan-1 and Shaikan-3 wells in early 2011 a combined production rate of up to 20,000bopd was achieved. Both Shaikan-1 and Shaikan-3 are tied to the EWT facilities, which are being upgraded to meet the higher production rate and increased storage requirements. The facilities will now also process the oil to meet export specifications. The company is currently examing the potential for a 440,000bopd
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Key asset overview
pipeline. It has initiated an engineering study for a pipeline route to the main KirkukCeyhan oil export line. Shaikan-4 appraisal well Shaikan-4 deep appraisal well was spudded in May 2011 using the Discoverer 4 rig. The well is targeting the top of the Permian interval and is expected to reach a total depth of c.3,760m. Other appraisal wells The location for the Shaikan-5 appraisal well has been completed while the plans for Shaikan-6 and 7 appraisal wells have not yet been finalised.
Sheikh Adi Block

This block is 180km and located to the west and on trend with the Shaikan structure. The PSC for the Sheikh Adi block was awarded in July 2009 to GKP, who are the operator and have a pre-KRG back in working interest of 80%. The KRG has a 20% carried interest in the PSC.
Sheikh Adi location map
The initial three year exploration phase commenced in July 2009 and is due to expire in July 2012. However, we expect this to be extended. The first exploration well (Sheikh Adi-1) was spudded on 4 August 2010. Sheikh Adi-1 drilled through the Cretaceous, Jurassic and Triassic formations to total depth of approximately 3,780m. In 2010, acquisition of 215km of 3D seismic data for the Sheikh Adi block commenced and was completed in early 2011 with the data now being processed. The current resource estimate for Sheikh Adi structure is currently 1.9bn bbls (P50) or 3bn bbl (P10). Further drilling is required in the block in order to tighten up the resource estimate (in our view).
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Key asset overview
Ber Bahr Block

The block has an area of 280km and is located to the north-west, and on trend with both the Shaikan and the Sheikh Adi blocks. The PSC for the Ber Bahr block was awarded to Genel Energy International Limited (Operator with the working interest of 40%) and GKP (40%) by the KRG which has a 20% carried interest in the Ber Bahr PSC.
Ber Bahr location map
Source: Company
The Operators estimate for the Ber Bahr oil-in-place was 1.9bn bbls. However, the Ber Bahr-1 well was found to be uncommercial following drilling completed in January 2011. The company has not stated any future drilling plans for this block.
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Financial model
Financial model
2009A 0.0 0.0 0.0 (21.2) (21.2) (0.7) (0.4) (96.3) (0.0) (0.0) 0.0 (96.3) (20.8) (20.6) (21.0) (96.3) (96.3) 0.0 (22.8) (22.8) (22.8) (22.8) 422.5 422.5 422.5
2010A 0.8 (0.8) 0.0 (32.6) (32.6) (0.2) 5.9 (26.8) 0.8 3.1 0.0 (26.0) (32.1) (25.8) (26.3) (26.8) (26.0) 0.0 (4.2) (4.2) (4.2) (4.2) 622.6 622.6 622.6
2011E 101.7 (9.7) 92.0 (24.6) 67.5 2.8 6.0 76.2 (34.6) 45.4 0.0 41.6 68.0 80.2 79.7 76.2 41.6 0.0 4.9 4.9 4.9 4.9 854.1 854.1 854.1
2012E 63.1 (31.6) 31.5 (16.0) 15.5 14.1 0.0 29.6 (11.8) 40.0 0.0 17.7 16.3 44.8 44.1 29.6 17.7 0.0 2.1 2.1 2.1 2.1 854.1 854.1 854.1
2013E 118.1 (63.6) 54.5 (16.0) 38.5 13.9 0.0 52.4 (21.0) 40.0 0.0 31.5 39.3 67.5 66.8 52.4 31.5 0.0 3.7 3.7 3.7 3.7 854.1 854.1 854.1
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Financial model
2009A (21.2) 0.0 0.0 0.4 6.4 0.0 (14.4) (49.3) 0.0 0.3 0.1 (49.2) 0.0 0.0 (112.5) 35.7 0.0 0.0 (76.8) 33.6 0.4 19.2
2010A (32.6) 0.0 0.0 0.5 4.3 0.0 (27.8) (157.2) 0.0 0.2 (0.5) (157.2) 0.0 (10.2) (352.7) 359.9 0.0 0.0 7.2 19.2 0.0 201.3
2011E 67.5 0.1 0.0 0.5 (2.2) 0.0 65.8 (98.3) 0.0 3.0 (35.0) (98.3) 0.0 7.0 (155.7) 201.0 0.0 0.0 45.3 201.3 0.0 352.5
2012E 15.5 0.1 0.0 0.8 0.0 0.0 16.3 (25.9) 0.0 14.1 (11.8) (25.9) 0.0 0.0 (33.2) 0.0 0.0 0.0 (33.2) 352.5 0.0 357.5
2013E 38.5 0.1 0.0 0.8 0.0 0.0 39.3 (48.4) 0.0 13.9 (21.0) (48.4) 0.0 0.0 (64.5) 0.0 0.0 0.0 (64.5) 357.5 0.0 334.0
2009A 3.4 0.0 90.5 1.0 94.9 0.6 2.2 19.2 0.6 22.5 117.4 44.1 0.0 0.0 4.1 48.3 69.1 4.0 239.8 (186.3) 11.6 0.0 69.1
2010A 4.1 0.0 223.8 4.1 232.0 14.4 3.7 201.3 21.3 240.6 472.7 39.1 0.0 0.0 6.7 45.8 426.8 6.6 593.5 (193.4) 20.2 0.0 426.8
2011E 4.8 0.0 328.1 3.5 336.4 10.0 8.0 352.5 14.8 385.3 721.7 35.0 0.0 0.0 7.2 42.2 679.5 6.7 794.5 (151.4) 29.8 0.0 679.5
2012E 4.7 0.0 353.2 3.5 361.4 3.2 2.5 357.5 14.8 378.0 739.5 35.0 0.0 0.0 7.2 42.2 697.3 6.7 794.5 (133.7) 29.8 0.0 697.3
2013E 5.1 0.0 400.4 3.5 409.0 7.3 5.9 334.0 14.8 361.9 770.9 35.0 0.0 0.0 7.2 42.2 728.7 6.7 794.5 (102.2) 29.8 0.0 728.7
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Financial model
2009A n/a n/a n/a n/a n/a n/a n/a (29.6) (0.9) n/a (139.4) (195.5) (195.5) 69.0 116.8 n/a n/a
2010A n/a 25.1 25.2 0.0 (3,193.9) (3,251.4) n/a (168.4) (7.8) n/a (6.1) (16.5) (16.5) 86.6 1,356.8 532.3 19,453.7
2011E 12,491.7 (410.7) (403.2) 90.4 78.8 78.3 n/a n/a 4.4 n/a 6.1 42.3 42.3 96.7 (374.3) (2.2) 96.6
2012E (38.0) (44.1) (44.7) 49.9 71.0 69.8 n/a n/a 8.0 n/a 2.5 68.6 68.6 100.0 (186.8) 0.0 41.0
2013E 87.1 50.6 51.6 46.2 57.2 56.6 n/a n/a 4.9 n/a 4.3 65.0 65.0 100.0 (205.1) 0.0 41.0
Valuation Metrics Year end December PER (x) EV / Revenue^ (x) EV / Adj. EBITDA^* (x) EV / Adj. EBIT^* (x) EV / IC^ (x) EV / Taxed Adj. EBIT^* (x) Yield (%) P / CFPS (x) NAV per share (c)
2009A (23.8) n/a (223.4) (219.5) 92.2 (365.8) 0.0 (20.3) 16.4
2010A (129.9) 5,700.9 (178.5) (175.3) 20.4 (292.2) 0.0 (9.6) 68.6
2011E 111.2 45.3 57.5 57.8 14.1 96.4 0.0 (29.7) 79.6
2012E 260.7 73.0 102.8 104.6 13.6 174.3 0.0 (139.5) 81.6
2013E 147.1 39.0 68.2 69.0 11.7 115.0 0.0 (71.7) 85.3
88
Financial model
400
350
300
250
200
1 50
1 00
50
Share P rice
Reco mmendatio ns
89
Financial model
90
10 February 12 | Initiation of coverage | Oil & Gas Producers
Gulfsands Petroleum
ADD
Share price Target price range 109% Upside 17% Downside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m -5.2 -9.0 3m -15.6 -21.0 175p 366p 146p
(AIM:GPX)1,5
The S factor
The impact of the 2011 Arab Spring has culminated in huge uncertainty over Gulfsands operations in Syria. The company has now invoked the Force majeure provisions of its PSC effectively ceasing production for the foreseeable future. Nevertheless, we feel that the companys progressive exploration strategy remains unscathed, and any civil/political resolution may be transformational for its beleaguered share price. On this basis we have set a valuation scope on a scale of scenarios, and initiate coverage with a valuation range of 366-146p.
Issues in Syria January 2011 saw a surge in protests across a multitude of Arab states which culminated in an uprising against individual governments and dictatorships. Syria was amongst the countries involved and its current uprising continues. In December 2011, Gulfsands invoked the force majeure provisions of its PSC, after the EU increased its pressure on the countrys regime with additional sanctions against the oil industry in general. As such, Gulfsands will not receive revenues for production arising from Block 26 for the foreseeable future. Good assets & management. Bad timing. Ugly Politics. We take the view that Gulfsands remains a well structured, progressive company with a historically conducive mix of robust production and successful exploration. Encouragingly, the company does not hold any balance sheet debt and is currently in a strong liquidity position sufficient to weather the implications of the force majeure in the medium term. Nevertheless, the uncertainty surrounding the force majeure, and the length of time it will be imposed will continue to plague the share price until a resolution is established. Other projects We feel that any activity outside of Syria will be focussed in onshore Tunisia/Italy given recent exploration. It also has been active in Iraq where it is seeking to develop a flared gas to power project. However, liquidity could be a concern for the company due to the recent restriction on its revenues, the company has recently stated that it is now examining the acquisition of new assets to diversify its portfolio. Gulfsands exploration licence in Syria will expire in August 2012, but this is unlikely to be resolved whilst sanctions are still in place. Valuation range We feel that it is prudent at this stage to present the overall scope for investors to juxtapose their appetite for risk, and set a best case worse case range of 369p/share 146p/share. We initiate with an Add recommendation.
205.8 123.1 82.7 117.8 476 352/143 12m -50.4 -49.6

Source: Datastream
Relative
Share price as at close: Next news Political updates from Syria
9 February 12
Business Oil & Gas Exploration and Production
www.gulfsands.com
EBIT* (m) 28.6 45.5 78.3 (101.5) (115.6)
PBT* (m) 27.8 44.7 78.0 (101.3) (115.7)
Tax Adj. EPS* (%) (p) 0.0 (0.0) 0.0 0.0 0.0 23.3 36.9 48.7 (83.1) (94.9)
PER EV/EBIT* Div yield (x) (x) (%) 7.5 4.7 3.6 (2.1) (1.8) 2.9 1.8 1.1 (0.8) (0.7) 0.0 0.0 0.0 0.0 0.0
Sam Wahab ACA Research Analyst +44 (0) 20 7107 8094 samwahab@seymourpierce.com
Gulfsands Petroleum | 10 February 12
Syrian uprising overview
Syrian uprising overview Background

January 2011 saw a surge in protests across a multitude of Arab states which culminated in an uprising against individual governments and dictatorships. Syria was amongst the countries involved and its current uprising continues.
January 2011 saw a surge in protests across a multitude of Arab states which culminated in an uprising against individual governments and dictatorships. Syria was amongst the countries involved and its current uprising continues. Although initially there was no impact on any of Gulfsands assets as oil production, sales and payments continued, market sentiment towards the company declined significantly during 1H2011. However, during September 2011, Gulfsands was instructed by the Syrian Oil Ministry to reduce Block 26 production in line with reduced availability of crude storage capacity within the country. Production operations on Block 26 were subsequently curtailed such that average gross production during the month of September was 14,547bopd versus the average for the month of August of 24,112bopd. In October 2011 daily gross production had been reduced further to 6,000bopd, and lower still in November. Accordingly, gross production for the month of October averaged 6,028bopd and for November averaged 4,862bopd. Finally, in December 2011 Gulfsands invoked the force majeure provisions of its PSC in Syria, after the EU increased its pressure on the countrys regime with additional sanctions against three state-owned oil companies. As such, Gulfsands will not receive revenues for production arising from Block 26 for the foreseeable future.
Share price decline since Syrian uprising
400 350 300 Share Price 250 200 150 100 50 0 Q1
Q2
Q3
Q4
Q1
Our view
We take the view that Gulfsands remains a well structured, progressive company with a historically conducive mix of strong production combined with recent successful exploration. Encouragingly the company does not hold any balance sheet debt and is currently in a strong liquidity position sufficient to weather the implications of the Force majeure in the medium term. Nevertheless, the uncertainty surrounding the Force majeure, and the length of time it will be imposed will continue to plague the share price until a resolution is established. On this basis in terms of our valuation, we felt that it is prudent to provide a range to investors rather than the traditional specific price target approach, given the unusual circumstances surrounding the company. We feel that this approach gives investors the flexibility to base their investment decision against their own specific appetite for political risk, and timing to potential resolution. We tend to lean towards the upper end of our range given that Gulfsands, in our view, is a robust company and retains a strong asset portfolio, although situated in a currently unstable region Nevertheless, we highlight that a civil and political resolution would be a transformational event for the company, and indeed its share price.
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We have valued Gulfsands in terms of its risked exploration portfolio, as well as a discounted cash flow (DCF) appraisal of production cash flows arising from their operations in Syria on a best case/worse case scenario range. We have built in the following assumptions to our valuation:
Valuation assumptions Metric Projected oil price Discount to Brent Long-term $/ Discount rate Shares outstanding (million) Production restriction - best case Production restriction - worse case
Assumption 2012:-$100/bbl, 2013+:-$90/bbl flat 11% 1.65 10% 117.95 No restriction, all revenues projected on this basis No revenues recognised from December 2011 onwards
We have incorporated the above assumptions into Gulfsands exploration portfolio in which we have subsequently risked to take account of the inherent issues associated with successful exploration drilling.
Risked Net Asset Valuation Country Asset Gross (mmboe) 3.4 31.0 23.0 54.0 Interest CoS Unrisked (mmboe) 3.4 15.5 6.9 22.4 Risked (mmboe) 3.4 11.6 3.5 15.1 NPV Risked NPV Risked NPV Net Risked US$/bbl $m m p/share 5.00 11.00 1.30 17.0 127.9 4.5 132.4 10.3 77.5 2.7 80.2 8.7 65.7 2.3 68.0
Production USA Appraisal Syria Tunisia Total appraisal Exploration upside Syria Syria Syria Syria Syria Syria Syria Syria exploration Tunisia Tunisia Tunisia exploration Total prod+app+exp
GoM Fields Block 26 Upside Dougga
Various 50% 30%
100% 75% 50%
Abu Ghazal KHE-101 (Deep) Safa-1 Maglouga-1 South Souedieh Al Khair Wardieh Lambouka Sidi Daher
10.0 2.6 3.4 15.6 7.8 6.0 28.0 73.4 3.6 9.5 13.1 143.9
50% 50% 50% 50% 50% 50% 50% 30% 40%
20% 33% 17% 10% 13% 10% 10% 10% 10%
5.0 1.3 1.7 7.8 3.9 3.0 14.0 36.7 1.1 3.8 4.9 67.4
1.0 0.4 0.3 0.8 0.5 0.3 1.4 4.7 0.1 0.4 0.5 23.7
6.90 6.20 8.30 8.30 8.30 8.30 8.30 3.50 5.50
6.9 2.7 2.4 6.5 4.2 2.5 11.6 36.8 0.4 2.1 2.5 188.6
4.2 1.6 1.5 3.9 2.6 1.5 7.0 22.3 0.2 1.3 1.5 114.3
3.5 1.4 1.2 3.3 2.2 1.3 6.0 18.9 0.2 1.1 1.3 96.9
Due to the early stages of development, we currently do not attribute any value to Gulfsands projects in Italy and Iraq.
Due to the early stages of development, we currently do not attribute any value to Gulfsands projects in Italy and Iraq. In Iraq, the company is in the process of discussions with regards to financing and potential equity partners, although we have yet to see any traction on these discussions. At the companys offshore Tunisian operations, Gulfsands encountered issues whereby no fluid samples or gas flows were established. As such the company suspended the Lambouka well and intends to reenter at a later date.
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Target price range

Given the recent force majeure imposed on Gulfsands Syrian assets, we feel it is appropriate to provide investors with a target price range given that no guidance has been provided by the Syrian authorities as to the cessation period. We have taken a best case and worse case scenario with respect to forecast production, which we outline below.
Pre-uprising valuation
Our best case scenario outlines Gulfsands' potential risked net asset value in the event that the Syrian uprising did not take place at all, and the company continued to produce and export its resources without any restrictions in place. Prior company guidance indicated that production would plateau at 33,000bopd in 2013 which we have continued to model in this scenario.
SOTP valuation matrix million Syria (DCF) Gulf of Mexico Less G&A Plus net (debt)/cash Core value Appriasal Exploration upside Target market cap (GBp)
p / share 214 9 (60) 102 264 68 33 366
252 10 (71) 120 312 80 40 432

500 400 300 p/share 102 200 68 100 33 0 -100 -60 223
Less G&A
Exploration upside
Appriasal
Cash
Producing assets
Under this scenario, the upper end of our range is largely driven by Block 26 discounted cash flow production contributing 214p/share - some 26% above current levels. Our best case scenario sets an upper range limit of 366p/share.
Under this scenario, the upper end of our range is largely driven by Block 26 discounted cash flow production contributing 214p/share - some 26% above current levels. Our best case scenario sets an upper range limit of 366p/share.
Force majeure valuation

Conversely, our worse case scenario illustrates the potential value of Gulfsands in the event that the force majeure is implemented for the foreseeable future, thereby restricting all production from Block 26. The company estimates that gross G&A will be $12m ($6m per annum net) for the duration of the sanctions.
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SOTP valuation matrix million Syria (DCF) Gulf of Mexico Less G&A Plus net (debt)/cash Core value Appriasal Exploration upside Target market cap (GBp)
p / share (13) 9 (52) 102 45 68 33 146
(16) 10 (62) 120 53 80 40 173

250 102 200 150 68 p/share 100 50 -5 0 -52 -50 Less G&A -100 Producing assets Exploration upside Appriasal Cash 33
The above analysis sets the lower end of our target range at a price of 146p/share.
Range of valuation
The above analysis outlines the two extreme limits that could potentially be applied to the company. Importantly, it illustrates that at current levels there is a greater degree of upside potential than there is downside, and suggests that any political resolution would be transformational for the companys share price. We maintain that it is prudent at this stage to present the overall scope for investors to juxtapose their appetite for risk, and set an upper lower range of 366p/share 146p/share. We initiate with an Add recommendation.
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Asset overview Syria

Gulfsands key producing assets, Khurbet East and Yousefieh, are situated in Block 26 of which the company has a 50% working interest. The Block covers c.5,414 km2 and encompasses existing fields which currently produce over 100,000bopd, and are operated mainly by the Syrian Petroleum Company. Khurbet East was discovered in 2007 and came on stream in 2008, whilst Yousefieh commenced commercial production in 2010. Gulfsands 2P net reserves at both fields are currently c.54mmbbls. Gulfsands current exploration license expires in August 2012, we do not expect this issue to be resolved until force majeure is removed. The development and production period for the Khurbet East field does not expire until 2033 whilst the Yousefieh field expires in 2035, but each may be extended for a further 10 years at the operator's option.
Block 26 location map
Source: Company
Khurbet East
This field has been producing at an average gross production rate of approximately 21,500bopd through early production facilities during August 2011. The development and operation of the field is being undertaken by Dijla Petroleum Company, a joint operating company formed with the Syrian Petroleum Company for this purpose. The recent KHE-1 discovery well encountered oil at a depth of approximately 2,000m, with reserves arising from the Cretaceous formation only, excluding the deeper Triassic formations. Oil produced from Khurbet East has an API gravity of c.25 which is slightly lighter than that of the area benchmark "Syrian Heavy" crude oil.
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Yousefiah
Following the imposed force majeure, Gulfsands has undertaken a complete shut-in of the Yousefieh field in order to conduct a long term field pressure build-up survey. Memory pressure gauges have been placed in all Yousefieh wells prior to the shutdown of the field. This has allowed the company to determine average field reservoir pressure to a level of accuracy that would not otherwise be possible to achieve when the field is under normal production conditions. Measuring reservoir pressure in this way will enable a more accurate calculation of field in-place volumes and recoverable reserves.
Historical production prior to restriction

Gross production from Block 26 increased by 25% in 2010, from 16,511bopd in January to 20,578bopd in December. Gross oil production increased to over 24,000bopd by the end of August 2011 following the commissioning of an additional Khurbet East sub-station facility. The Yousefieh field was brought on production in April 2010 and by December was producing an average of 2,450bopd from three wells. At Khurbet East production rose from 16,511bopd from seven wells in January to 18,128bopd from ten wells in December. At the end of August 2011 KHE was producing over 21,500bopd and Yousefieh is averaging over 2,600bopd.
Historical half yearly average production
30000 25000 Gross (bopd) 20000 15000 10000 5000 0 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 Khurbet East
Source: Company
Yousefieh
Gross daily oil production at the end of August 2011 stood at approximately 24,000bopd, and was forecast to increase to 33,000bopd by 2013. In our view, this illustrates the potential long term value of the company prior to the imposed restrictions, as well as the potential upside on civil and political resolution.
Syrian Exploration
Due to force majeure there are no current or forecast exploration activities in Syria.
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Other projects
Other projects
Iraq
Although Gulfsands has had a presence in Iraq since 2003 and recently opened offices in Baghdad, the company currently holds no reserves in the country. In 2005, Gulfsands signed a Memorandum of Understanding with the Ministry of Oil for the Maysan Gas Project in the south of the country. The objective of the project is to gather, process and transmit natural gas that is currently a waste by-product of oil production. Nevertheless, although the MoU has been in place for seven years, this is very much a non-core operation and one which we do not attribute any value. We understand that this project is no longer a priority given the current situation in Syria as the company is maintaining capital.
Tunisia and Italy

Gulfsands has working interests in two exploration permits in Tunisia - Chorbane and Kerkouane, and one in Southern Italy Pantelleria.
Tunisia and Italy licence map
Source: Company
Chorbane Operations at Sidi Dhaher-1 began in October 2011 and identified a potential oil column and was suspended for future testing. A rig has now been contracted and is expected on site in the short term. Gulfsands earned a 40% interest in the Chorbane permit by meeting 80% of the well costs for the Sidi Dhaher-1 well which are capped at $5m and thereafter meeting its pro rata (40%) share of any additional costs beyond $5m. In the event of a commercial
98
Other projects
success with the Sidi Dhaher-1 well, Gulfsands will be entitled to become the operator of the Chorbane permit. Kerkouane In April 2011, 640km of 3D seismic data was acquired over the Lambouka prospect area within the Kerkouane permit area, and the Lambouka-1 well was spudded in midJuly and drilled to a depth of 2,786m. Drilling operations were concluded in early September. Wireline log interpretation indicates that gas and possibly condensate was encountered in the formation; however, as a result of ongoing fluid losses and deterioration of the well bore it was not possible to safely recover fluid samples or pressure data from the formation. The well was suspended with the intention of reentering at a later date and drilling and testing the reservoir in a sidetrack hole, probably targeting an area structurally up-dip of the existing well bore.
Lambouka location map
Source: Company
Gulfsands earned its 30% working interest in the Kerkouane permit by paying approximately 35% of the cost of the Lambouka-1 well and reimbursing the operator for a portion of various pre-drill costs that include the recently completed 3D seismic programme.
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Financial model (force majeure projection)

2009A 84.4 (38.0) 46.5 (17.8) 28.6 0.3 0.0 27.8 0.0 0.0 0.0 27.8 54.2 41.4 28.6 27.8 27.8 0.0 23.3 23.1 23.3 23.1 119.3 120.7 119.3
2010A 115.6 (38.8) 76.8 (31.2) 45.5 0.2 0.0 44.7 0.0 (0.0) 0.0 44.7 81.0 63.3 45.5 44.7 44.7 0.0 36.9 35.9 36.9 35.9 121.9 124.5 121.9
2011E 145.1 (44.0) 101.1 (22.8) 78.3 0.3 0.0 78.0 0.0 0.0 0.0 78.0 105.1 91.7 78.3 78.0 78.0 0.0 48.7 47.5 48.7 47.5 121.9 124.8 121.9
2012E 15.3 (96.8) (81.5) (20.0) (101.5) 0.2 0.0 (101.3) 0.0 0.0 0.0 (101.3) (60.3) (80.9) (101.5) (101.3) (101.3) 0.0 (83.1) (81.2) (83.1) (81.2) 121.9 124.8 121.9
2013E 15.0 (110.6) (95.6) (20.0) (115.6) (0.0) 0.0 (115.7) 0.0 0.0 0.0 (115.7) (67.5) (91.6) (115.6) (115.7) (115.7) 0.0 (94.9) (92.7) (94.9) (92.7) 121.9 124.8 121.9
100
2009A 28.6 12.8 0.0 12.8 (6.0) 27.9 76.1 (24.1) 0.0 0.3 (0.1) (26.3) 0.0 (2.2) 23.7 3.6 0.0 0.0 27.3 36.8 0.0 57.6
2010A 45.5 17.7 0.0 17.7 (6.5) 20.7 95.2 (42.9) 0.0 0.2 0.4 (48.0) 0.0 (5.1) (0.2) 3.2 0.0 (2.4) 0.6 57.6 0.0 80.6
2011E 78.3 13.4 0.0 13.4 6.5 18.1 129.7 (64.5) 0.0 0.3 0.0 (49.3) 0.0 15.2 31.4 0.9 0.0 (13.7) 18.6 80.6 0.0 126.3
2012E (101.5) 20.6 0.0 20.6 9.9 18.1 (32.3) (42.5) 0.0 0.2 0.0 (42.0) 0.0 0.5 (116.1) 0.0 0.0 0.0 (116.1) 126.3 0.0 19.5
2013E (115.6) 24.1 0.0 24.1 0.0 18.1 (49.4) (13.1) 0.0 (0.0) 0.0 (15.3) 0.0 (2.2) (80.0) 0.0 0.0 0.0 (80.0) 19.5 0.0 (81.3)
2009A 82.6 0.0 7.1 12.0 101.7 4.2 21.9 57.6 0.0 83.7 185.3 13.4 0.0 0.0 31.6 45.0 140.3 13.0 101.9 (1.8) 27.1 0.0 140.3
2010A 63.9 0.0 31.0 9.6 104.4 4.0 35.6 80.6 18.3 138.5 242.9 23.1 0.0 0.0 36.8 59.9 183.0 13.1 105.0 36.9 (6.0) 0.0 183.0
2011E 64.8 0.0 48.2 9.1 122.1 5.3 26.6 126.3 6.0 164.2 286.4 15.3 0.0 0.0 35.8 51.1 235.3 13.1 105.9 87.1 (5.9) 0.0 235.3
2012E 46.4 0.0 82.6 9.1 138.0 0.7 3.3 19.5 3.7 27.1 165.2 1.9 0.0 0.0 35.4 37.3 127.9 13.1 105.9 (20.3) (5.9) 0.0 127.9
2013E 23.4 0.0 88.6 9.1 121.1 0.6 3.2 (81.3) 6.9 (70.6) 50.5 1.9 0.0 0.0 37.3 39.1 11.3 13.1 105.9 (136.8) (5.9) 0.0 11.3
101
2009A n/a n/a n/a 55.0 49.0 33.9 n/a n/a 1.4 n/a 19.8 115.7 115.7 140.4 85.3 (7.2) 28.5
2010A 36.9 52.9 59.2 66.4 54.7 39.4 n/a n/a 1.3 n/a 24.4 104.1 104.1 117.6 (0.5) (5.6) 37.1
2011E 25.6 45.0 72.0 69.7 63.2 54.0 n/a n/a 1.4 n/a 33.2 121.0 121.0 123.4 40.2 4.5 44.4
2012E (89.5) (188.2) (229.6) (534.5) (530.4) (665.6) n/a n/a (0.2) n/a (79.3) (238.2) (238.2) 53.6 114.6 65.0 278.9
2013E (1.8) 13.1 13.9 (638.2) (610.9) (771.7) 716.7 (9,074.6) 0.9 n/a (1,019.1) (880.1) (880.1) 73.2 69.2 0.2 87.7
2009A 7.5 1.0 2.0 2.9 1.0 2.9 0.0 8.8 117.5
2010A 4.7 0.7 1.3 1.8 0.8 1.8 0.0 (1,019.3) 150.1
2011E 3.6 0.6 0.9 1.1 0.8 1.1 0.0 6.8 193.0
2012E (2.1) 5.4 (1.0) (0.8) 0.8 (0.8) 0.0 (1.8) 104.9
2013E (1.8) 5.5 (0.9) (0.7) 0.9 (0.7) 0.0 (2.7) 9.3
102
450 400 350 300 250 200 1 50 1 00 50 0 Feb 1 0 A pr 1 0 Jun 1 0 A ug 1 0 Oct 1 0 Dec 1 0 Target P rice Feb 1 1 A pr 1 1 Jun 1 1 A ug 1 1 Oct 1 1 Dec 1 1 Feb 1 2
Share P rice
Reco mmendatio ns
103
104
Xcite Energy
ADD
Share price Target price 167% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m -11.0 -14.7 3m -25.0 -29.8
(AIM:XEL)1
From zero to hero (again?)

91p 242p
190.4 30.8 159.6 209.8 2,983 386/79 12m -74.3 -73.9
In 2011, a mis-communicated reserve report, delayed clarity on funding against a backdrop of weak market conditions resulted in Xcite losing the majority of its 2010 share price gains. With the rig on site awaiting delayed DECC approval and development drilling due to start in February, are we about to see resurgence in this stock? We think so, but it may prove to be another turbulent year for investors should initial drilling results fail to deliver.
Drilling due to start still waiting for DECC approval The Rowan Norway rig is currently crewing and gearing up in Dundee, with drilling expected to start in February. This initial drilling phase is designed to optimise methods and gather data ahead of moving into full commercial production. Given the relatively low amount of drilling data, we would ideally like to see consistent data coming from these wells. We see this as the key short term risk for the company as mixed or poor results may put the commerciality of the project in doubt. Funded for initial phase of development With the recent private placing and Equity Drawdown Facility secured, Xcite moves into phase 1A from a positive funding position. Subsequent phases will be funded by production cash flow. However, investors need to remember that this funding will be dilutive to their positions particularly if drilling results are not as predicted and the share price falls. Resource base should convert into reserves A successful drilling campaign should result in a shift from contingent resources to reserves, enhancing the valuation of the asset. We would anticipate that in these circumstances the company will actively update its asset base audit reports to provide share price drivers for the company. Valuation and recommendation Given the fairly high degree of upfront risk associated with the drilling programme, investors may initially wish to proceed cautiously. In 2010, Xcite became an excellent trading stock with large swings in price, backed by good volume. We feel that this will continue in 2011 and this may be a more suitable trading strategy rather than taking a long term view for now. We have based our valuation on the May 2011 Reserve Assessment Report and initiate coverage with an Add recommendation and set a target price of 242p.

Source: Datastream
Relative
Share price as at close: Next news Drilling confirmation
9 February 12
Business XELs sole asset is a 100% interest in the Bentley viscous oil field in the UK North Sea. This project is at the pre-development stage. www.xcite-energy.com/
Year end Revenue December (m) 2009A 2010A 2011E 0.0 0.0 0.0
EBIT* (m) (0.8) (2.6) (1.3)
PBT* (m) (0.8) (2.4) (1.1)
Tax Adj. EPS* (%) (p) (12.4) 0.0 (2.5) (1.4) (1.9) (0.6)
PER EV/EBIT* Div yield (x) (x) (%) (64.8) (47.8) (140.5) (202.3) (61.8) (121.7) 0.0 0.0 0.0
Xcite Energy | 10 February 12

We have based our valuation of Xcite solely on the company's latest Reserves Assessment Report (RAR) for the Bentley field. We have incorporated the following assumptions into our model:
Valuation assumptions Metric Long term $/ exchange rate Discount rate No of shares outstanding, fully diluted (m) Bentley Chance of Success Bentley Chance of Development
Assumption 1.65 10% 228 70% 90%
Xcites reserve report was undertaken by TRACS, we have used the data from this and applied an internally generated risk factor to provide the intrinsic valuation for the Bentley field.
Bentley Field Valuation Input assumption Reserves (mmbbl) Contingent resources (mmbbl) Total (mmbbl) Bentley East (mmbbl) Other Prospects (mmbbl) Total Prospects (mmbbl) Low 22.0 72.7 94.7 14.0 10.3 24.3 $m 229 661 890 Base 27.8 87.2 115.0 18.3 17.5 35.8 $m 396 961 1,357 High 34.9 100.9 135.8 28.0 30.6 58.6 $m 558 1,315 1,873
Reserve NPV10 (m) - post tax Contingent resource NPV10 (m) - Post tax Total
Source: TRACS
TRACS has estimated that the Bentley field is worth $1,357m on a base case scenario, discounted at a 10% net present value. This is based on a reserves estimation of 27.8mmbbls and contingent resources of 87.2mmbbls. It is these externally verified data points that form the basis of our valuation.
Bentley Field valuation per share Low NPV/share (p) - Unrisked NPV/share (p) - Risked
Base 361 227
High 498 314
237 149
We risk Xcites gross valuation at 70% to reflect the implicit uncertainties associated with successful drilling. We also apply a 90% chance of development ahead of project sanction. These range from technology employed to rig maintenance, as well as unforeseen issues such as weather interruptions, delays or damage. RPS Energy & TRACS (CPR providers) also recommends this as an appropriate measure of risking the Bentley field.
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SOTP valuation matrix NAV by activity Confirmed CPR reserves/resources Plus net (debt)/cash Core NAV
million 822.4 30.78 853.2
p / share 227 15 242

300 250 200 p/share 150 100 50 15 0 Net cash Risked resources 227

Given the fairly high degree of upfront risk associated with the drilling programme, investors may initially wish to proceed cautiously. In 2010, Xcite became an excellent trading stock with large swings in price, backed by good volume. We feel that this will continue in 2011 and that this may be a more suitable trading strategy rather than taking a long term view for now. We have based our valuation on the May 2011 Reserve Assessment Report and initiate coverage with an Add recommendation and set a target price of 242p.
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Bentley field overview

The field was discovered in 1977 by Amoco who subsequently passed on operatorship to Conoco in the 1980s. During this period the field remained undeveloped due to the viscous (10-12o API) quality of the oil. The field is located in 113m of water, 160km east of the Shetland Isles.
Drilling history
Only a few wells have been drilled on the field and these have yielded very mixed results: Bentley field well summary Name 9/3-1 9/3-2, 2A 9/3-4 9/3b-5 9/3b-6z
Only a few wells have been drilled on the field and these have yielded very mixed results:
Year 1977 1983 1986 2008 2010
Operator Amoco Conoco Conoco Xcite Xcite
Oil column (ft) 81 92 84 87 Not stated
Test result Nitrogen lift, no flow ESP lifted DST. No flow due to pump failure Not tested ESP lifted flow average of 125bopd, maxing at 250bopd 2,900STB/d with 2,000bbl produced over 36h period
The most recent well (9/3b-6z) was crucial in proving that Bentley could flow at commercial rates as this had not been achieved by the previous wells. The testing programme was not ideal due to a fault with the pipe from the rig to the tanker which resulting in an ad-hoc bucket chain system using tote tanks being employed instead. This has led to speculation from some commentators as to the validity of the flow test. The relatively short flow test of c.25 hours has also raised concerns. Whilst not ideal, we are comfortable with the result gained from the well. However, we do expect that the initial development wells which are due to be drilled over the course of 2012 may require some tinkering to get right, due to the relatively low amount of information from the only successful well on the field to date.
Reserves assessment report fallout and funding

The volatility and collapse of the share price during 2011 was driven by poor communication from management ahead of the delayed publication of the reserves assessment report, as well as the mainly retail shareholder base not understanding the process and having an unrealistic view (driven by management comments) on how much of the resource base would be converted into reserves. In addition, the prevailing market conditions did not help matters. In our view, the poorly received report, in conjunction with poor market conditions prolonged the fund raising process, which was only resolved in late December. Despite the delay, the company is now funded for phase 1A which is crucial for moving this project towards production. The funding comprised 25.8m private placing (in two 50% tranches) with Socius, the second tranche has not yet been issued. Xcite also entered into a 60m Equity Credit Facility with Esousa, replacing a similar facility with Yorkville. Our view The lack of clarity over funding was one of our major concerns in 2011. However, this funding will have a significant dilution effect as not all of the new equity has yet been issued. The inclusion of warrants in what will be a highly dilutive approach is a step too far in our view. This funding only covers phase 1A, management has previously stated that funding for the other phases will come from future production cash flows. Should there be issues relating to production, then investors should expect another round of financing.
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Development plan
The original plan was to develop the field in two stages. However, this has now been split into three. 1. 2. 3. Phase 1A first oil in 2012, currently awaiting DECC approval Phase 1B - first oil in 2013 Phase 2 - first oil in 2016
The company has given high level details for each stage: Phase 1A comprises the drilling of and production from the first motherbore well and associated laterals on Bentley, prior to the final design and optimisation of Phase 1B. The produced oil will be transferred via a pipeline to a dynamically positioned shuttle tanker, in which a diluent crude oil will be present and thus enabling blending tests to be undertaken for marketing and offtake purposes. Phase 1B is planned to comprise a permanent, normally unattended, minimum facilities, lightweight wellhead tower, capable of accommodating up to 12 drilling risers and remaining throughout the rest of field life. Four additional production motherbore wells will initially be drilled with their associated laterals which, together with the well drilled in Phase 1A, will provide the basis for the remainder of Phase 1 production. Crude oil will be produced to an FPSO via a subsea pipeline, with export via a shuttle tanker. The intention is to run Phase 1B for approximately three years, with the additional riser and potential production capacity providing significant flexibility. Phase 2 remains as previously planned, with a further permanent production platform comprising full processing, drilling and accommodation facilities for the balance of life of field production. Our take The Rowan Norway jackup rig is in Dundee harbour crewing and gearing up ahead of drilling which is due to start in February. In December 2011, Xcite signed a Letter of Intent with Teekay Shipping for a shuttle tanker. From the tone of the description of Phase 1A above, it would seem that there is more to be done to fully understand the Bentley field ahead of signing off on fully developing the field. Given the mixed results from drilling on the block so far, we would feel more comfortable to see if consistent results can be obtained from the first batch of wells. We would expect Xcites share price to be volatile during the next drilling phase, especially if the early results are not favourable. We think that it is telling that the company is not giving project production guidance ahead of the initial drilling phase, something we would normally expect to happen as a project moves into the development phase.
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Financial model
Financial model
2009A 0.0 0.0 0.0 (0.8) (0.8) 0.0 0.0 (0.8) (0.1) (12.4) 0.0 (0.9) (0.8) (0.8) (0.8) (0.8) (0.9) 0.0 (1.4) (1.4) (1.4) (1.4) 63.8 63.8 63.8
2010A 0.0 0.0 0.0 (2.6) (2.6) 0.1 0.0 (2.4) 0.0 0.0 0.0 (2.4) (2.6) (2.6) (2.6) (2.4) (2.4) 0.0 (1.9) (1.9) (1.9) (1.9) 126.5 126.5 126.5
2011E 0.0 0.0 0.0 (1.3) (1.3) 0.2 0.0 (1.1) (0.0) (2.5) 0.0 (1.2) (1.3) (1.3) (1.3) (1.1) (1.2) 0.0 (0.6) (0.6) (0.6) (0.6) 198.9 198.9 198.9
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Financial model
2009A (0.8) 0.0 0.0 0.0 (0.9) 0.1 (1.5) (0.9) 0.0 0.0 0.0 (0.5) 0.0 0.4 (2.5) 1.9 0.0 0.0 (0.6) 1.8 0.0 1.7
2010A (2.6) 0.0 0.0 0.0 22.0 1.5 20.9 (39.4) 0.0 0.1 0.0 (39.3) 0.0 0.0 (57.7) 52.6 0.0 0.0 (5.0) 1.7 0.0 36.0
2011E (1.3) 0.0 0.0 0.0 (16.2) 0.4 (17.1) (12.3) 0.0 0.2 0.0 (12.1) 0.0 0.0 (41.2) 56.7 0.0 (5.0) 10.5 36.0 0.0 58.5
2009A 0.0 0.0 23.0 0.0 23.0 0.0 0.0 1.7 0.0 1.8 24.8 0.2 0.0 0.0 0.5 0.7 24.1 24.2 0.0 (2.1) 1.9 0.0 24.1
2010A 0.0 0.0 65.3 0.0 65.3 0.0 1.6 36.0 0.0 37.5 102.8 23.7 0.0 0.0 0.5 24.2 78.6 76.5 0.0 (4.2) 6.3 0.0 78.6
2011E 0.1 0.0 78.3 0.0 78.4 0.0 1.0 58.5 0.0 59.5 137.9 7.0 0.0 (5.0) 0.5 2.5 135.4 133.2 0.0 (5.4) 7.6 0.0 135.4
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Financial model
450
400 350
300
250 200
1 50
1 00 50
Share P rice
Reco mmendatio ns
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10 February 12 | Company Note | Oil & Gas exploration and production
Bayfield Energy
BUY
Share price Target price 121% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Free float (%) Average daily vol ('000, -3m) Dividend yield (%) PER at Target price (Y1) Sector PER Price/book 12 month high/low (p) (%) Absolute FTA relative 1m -7.1 -10.9 3m -12.9 -18.6 49p 108p
(FTSE:BEH.L)1,3,4,5
Calm after the storm

Bayfield has updated the market with a comprehensive evaluation of their progress in Trinidad, Russia and South Africa. Although we are encouraged by the progress being made at East Galeota and aspects of the companys appraisal campaign, near-term production downgrades and operational issues may impact market sentiment in the short-term. Nevertheless, we reiterate our BUY recommendation and set a revised target price of 108p.
Progress being made at East Galeota Bayfield has confirmed the spudding of the first of its seven-well commitment which is programmed for 42 days to completion. In our view, successful drilling at this relatively low risk site will continue to unlock existing resources, allowing the company to potentially increase their reserve base. Delays to production Production for December 2011 and January 2012 has been detrimentally impacted by adverse weather conditions, obstructing personnel movements between the shore base and the platforms. The production restriction has reduced the NPV attributable to our valuation by c.10p/share. This is due to lower than projected initial cash flows, whilst retaining c.$76.5m exploration and appraisal expenditure for FY2012. Platform change and refurbishment Recent engineering studies confirmed that it is unsafe to conduct rig operations from Bayfields Alpha platform. Although existing production from Alpha (currently 350bopd) will remain on-stream, any new wells required to access reserves from unexploited areas of the reservoirs adjacent to Alpha will, instead, be drilled from either Bravo or Charlie at an additional cost of $10-15m net to the company.
Dec Jan
104.8 29.4 75.4 215.0 53.5 211 0.0 (60.6) 0.0 5.4 76/45 12m n/a n/a

80 75 70 65 60 55 50 45 40 Jul Aug Sep Oct Nov Relative
Price
Source: Datastream
Share price as at close: Next news FY 2012 Results
9 February 12
Recommendation and target price revision Our latest target price comprises an updated discounted cash flow (DCF) analysis which reflects the additional capital expenditure requirement and near term production downgrades. On the basis of todays operational update, we reiterate our BUY recommendation and set a revised target price of 108p (previously 121p).
1,3,4,5 Please see regulatory disclosure notes at the end of this document A draft of this research has been shown to the company following which minor factual amendments have been made.
Business Oil and gas exploration and production www.bayfieldenergy.com

EBIT* (m) 6.1 5.9 7.5 9.4 10.4
PBT* (m) 5.9 5.7 7.4 9.5 10.8
Tax Adj. EPS* (%) (p) 41.4 38.4 45.8 42.0 42.0 1.0 1.0 1.2 1.6 1.8
PER EV/EBIT* Div yield (x) (x) (%) 1,506.6 1,476.7 1,289.1 934.1 819.7 8,243.6 8,586.0 6,723.5 5,403.7 4,849.2 0.0 0.0 0.0 0.0 0.0
Bayfield Energy | 10 February 12

Our valuation of Bayfield comprises an updated discounted cash flow (DCF) analysis which reflects the additional capital expenditure requirement and near term production downgrade. In addition, we include an updated risked net asset valuation of the companys reserves and resources. The assumptions implicit in our valuation are as follows:
Valuation assumptions Metric $NPV/mmboe - Reserves $NPV/mmboe - Contingent resources Realised oil price (WTI) Long-term $/ Discount rate Shares outstanding (million) Bayfield's working interest (Trinidad)
Assumption 7.48 3.74 2012:- $80.8/bbl; 2013+:- $85.6 flat 1.65 10% 214.98 65%
We use an inferred market multiple from the recent Range Resources/SOCA Petroleum transaction of $7.48/bbl for reserves and $3.74/bbl for contingent resources.
We have used an inferred market multiple from the recent Range Resources/SOCA Petroleum transaction of $7.48/bbl for reserves and $3.74/bbl for contingent resources. This transaction has provided the market with a recent tangible benchmark on which to apply a real market value to assets in Trinidad as opposed to a theoretically derived economic value. Range acquired the remaining 90% stake in SOCAs assets with an initial consideration of $64.6m ($52m cash and $12.6m in shares) for 4.32mmboe net 2P reserves onshore Southern Trinidad. Given the additional risks associated with offshore drilling and lower stage of development, we have applied a 50% hair-cut to this for reserves, and a further 50% to contingent resources. As such, our inferred $NPV/bbl is $7.48 for reserves (($64.6m/4.32) x 50%) and $3.74 for contingent resources ($7.48 x 50%).
Risked net asset valuation Classification Working Interest 65% 65% CoS Resources/Reserves (mmboe) Gross 29.7 27.5 57.2 Net 19.3 21.0 40.3 NPV 10% US$ / bbl 7.48 3.74 Unrisked NPV $m 144.5 78.4 222.9 Risked NPV $m 144.5 58.8 203.3 Unrisked NPV m 90.3 49.0 139.3 Risked NPV Net Risked m p/share 90.3 36.8 127.1 42.0 17.1 59.1
Reserves Contingent resources

100% 75%
The revision to our valuation from Novembers initiation has largely arisen from the impact to our DCF analysis. The production downgrades for December 2011 and January 2012 combined with the additional capital expenditure requirement for the refurbishment of the Charlie platform has lowered our net present value (NPV) for the Trintes field.
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SOTP valuation matrix million Production Reserves Net Cash* Less: G&A Core Value Contingent resources Target Market Cap
Source: Seymour Pierce Ltd *We have assumed a post placing cash balance using managements FY12E guidence of c.$55m
p/share 45.1 42.0 13.1 (9.3) 90.9 17.1 108.0
96.9 90.3 28.1 (20.0) 195.4 36.8 232.1
Our core valuation includes a revised DCF analysis of Bayfields producing assets, the companys externally verified reserve estimates
Our core valuation comprises a revised DCF analysis of Bayfields producing assets, the companys externally verified reserve estimates, and the FY12E net cash balance. We also attribute a discounted general & administrative (G&A) charge for field related expenditure in relation to the Trintes play. On this basis our revised valuation indicates that Bayfield is currently trading at c.80% below its core asset value alone.
140 120 100 p/share 80 60 40 20 0 -20 G&A Net Cash Contingent resources Reserves Production -9 13 17 42 45
Recommendation and target price revision

On the basis of todays operational update, we reiterate our BUY recommendation and set a revised target price of 108p
In addition to our core value outlined above, we attribute a value to Bayfields contingent resources (see appendix 1 for breakdown). Contingent resources contribute a further 17p/share. The company also has acreage in South Africa (externally verified by Gaffney, Cline and Associates (GCA)), which we do not currently recognise in our target valuation. We have provided a potential valuation for this in the South African operations section of this report. On the basis of todays operational update, we reiterate our BUY recommendation and set a revised target price of 108p (previously 121p).
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Operational review
Operational review
Bayfield has made several strategic changes on the back of todays announcement, some of which impact our valuation.
Bayfield has made several strategic changes on the back of todays announcement, some of which impact our valuation. We have analysed each update in turn to provide investors with a broad understanding of the overall effect on the companys financial and strategic outlook.
East Galeota - exploration

Strategic update In line with the markets expectations, Bayfield is due to spud the first of their seven well programme in the East Galeota licence on the 27th January. The well - designated EG8 - is currently being drilled to a total depth of c.2,650m, and is intended to appraise the shallow marine sandstone reservoirs previously encountered through the EG2 and EG5 offset wells. Previous wells indicated that the reservoirs were oil bearing, a feature also confirmed through 3D seismic interpretation. Management expects the well to take between 42 days to complete, with a potential update expected in March 2012. Following the completion of the EG8 well, it is expected that the rig will then drill the EG7 well at an adjacent site. Our interpretation We feel the timely spudding of EG8 is a positive development for the company given that the market was expecting an update in relation to the well by the end of January. In our view, successful drilling at this relatively low risk site will continue to unlock existing resources, allowing the company to potentially increase their reserve base.
We feel the timely spudding of EG8 is a positive development for the company given that the market was expecting an update in relation to the well by the end of January
Trintes Field - appraisal

Strategic update Bayfields 2011 interims outlined the initial delay in mobilising the companys new slant rig by four weeks, as a result of weather conditions encountered on the voyage from Louisiana to Trinidad. The company subsequently undertook the necessary repairs to the damage incurred in transit, and has now completed the second of their two-well programme. B10 well Bayfield successfully completed a short side track at the B10 well in November and the well is currently producing at over 160bopd including a 20% water cut. Management believes there is potential to increase production here by a further 25% by increasing the speed of the down-hole pump. B8 well Thus far, the B8 well is yielding encouraging results with current data recording strong flow rates. The well encountered c.225ft of net pay, which represents the most prolific well drilled in Trintes to date. The data also de-risks managements production projections regarding other planned long sidetracks in the field. Our interpretation B10 and B8 have, so far, yielded positive results. We feel that additional upside is reasonable to expect from B8 in particular, given the productive reservoirs already encountered. B8 is currently producing in the region of 400bopd resulting from this well alone, which if taken in isolation, would act as a positive share price trigger for the company. At this point we have not included potential upside in respect of these wells as part of our valuation until flow rates are established for an extended period.
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Operational review
Trintes Field - production

Production for December 2011 and January 2012 has been detrimentally impacted by adverse weather conditions
Strategic update Production for December 2011 and January 2012 has been detrimentally impacted by adverse weather conditions, obstructing personnel movements between the shore base and the platforms. Furthermore, additional repairs were required to the main oil export pipeline between the field and onshore tank farm. This has resulted in a curtailment of production from 15th December to 24th January and production completely shut-in between 28th December and 1st January. Average production for December yielded a gross output of 1,151boepd, whilst January was particularly disappointing at 800boepd resulting from the slow recovery from the aforementioned shut-in.
Effect on production profile
5000
4000
boepd (gross)
3000
2000
1000
0 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12
Previous forecast
Current forecast
The above graph illustrates the near term production set back which will impact Bayfield through 1H 2012. Nevertheless, following the reactivation of the hydraulic oil pumping system on the Bravo platform and the completion of B8, gross productive capacity at the field is estimated to be in the region of 1,700bopd. Our interpretation The disruption to production, whilst outside of managements control, is disappointing for Bayfield. Cash flow is imperative for the company as they progress with their extensive exploration and appraisal campaign at the East Galeota and Trintes Fields.
The production restriction has reduced the NPV attributable to our valuation by c.10p/share.
The production restriction has reduced the NPV attributable to our valuation by c.10p/share. This is due to a combination of lower initial cash flows, whilst retaining c.$76.5m exploration and appraisal expenditure for FY2012. Nevertheless, the company remains in a strong cash flow position at present with c.$55m on its balance sheet; and with production returning to pre-disruption levels in June, we are not overly concerned with the companys liquidity position.
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Operational review
Platform refurbishments
Recent engineering studies performed in 4Q 2011 indicated that it will not be safe to conduct rig operations from Alpha
Strategic update Bayfield currently owns four fixed platforms (Alpha, Bravo, Charlie and Delta) at the Trintes Field. Since inception, the company has predominantly used Alpha, Bravo and Delta to target its resources. However, recent engineering studies performed in 4Q 2011 indicated that it will not be safe to conduct rig operations from Alpha, and that the costs of remedial work cannot be economically justified. To counter this, the company maintains that reserves previously targeted through wells drilled from Alpha can also be accessed by new wells from Bravo and Charlie due to the close proximity of the platforms.
Proximity of platforms
Source: Company
Existing production from Alpha (currently 350bopd) will continue to remain onstream, however any additional production arising from these reservoirs will now need to be produced from Bravo and Charlie going forward.
Bayfield has carried out an internal assessment of the Charlie platform and determined that it can be brought to a suitable condition for rig and production operations in 2013 - at an additional cost of $10-15m
Bayfield has carried out an internal assessment of the Charlie platform and determined that it can be brought to a suitable condition for rig and production operations in 2013 - at an additional cost of $10-15m. Our interpretation We feel the market will respond negatively to this development for two key reasons. Firstly, the company's failure to fully evaluate the Alpha platform on acquisition has led to avoidable near-term strategic and financial ramifications. Furthermore, the additional capital requirement to develop the Charlie platform to sufficiently access the reservoirs previously planned from Alpha is material to Bayfield, and places further constraints on the company's liquidity position. However, management's financial prudence prior to this development does allow for the extra cost to rehabilitate the Charlie platform. In addition, current production from Alpha will be retained despite the dilapidated condition of the platform, which to an extent, stabilises Bayfields near term production cash flows.
118
Operational review
Forward exploration and appraisal drilling programme

Management have proposed revisions to their initial seven well drilling programme
Strategic update The above issues have warranted management to implement revisions to their initial seven well drilling programme. Two wells will now be drilled back to back at East Galeota (EG8 and EG7) in 1Q and 2Q this year, targeting Bayfield's largest prospects in this particular licence. After these prospects are drilled, the company expects to drill a third exploration well to the north-east of the Trintes field. These wells will have a Chance of Success (CoS) in the region of 26% - 38%, as designated per GCA's reserve report.
Resource and potential p/share target valuation
45 40 35 30 25 20 15 10 5 0 EG8 Unrisked mmboe
Source: Seymour Pierce Limited
12 10 8 6 4 2 0 EG7 Risked mmboe Risked p/share
The wells will target 55.3mmbbls of net unrisked resources, which if risked on a consistent basis post successful drilling, could yield a combined 18.2p/share to our risked target valuation. In addition, Bayfield expects to spud the third well in 2013 dependant on the success of the first two wells. The company has secured approval from the Ministry of Energy and Petrotrin (state owned oil company) to vary certain aspects of the well programmes specified in the Galeota Licence and farm-out agreements to lessen the required depths where geological data does not justify certain targets. As such, the well programmes and drilling targets are subject to continuing review and may be subject to change based on the results of the initial wells. Nevertheless, the remaining four wells are currently scheduled for 2H 2013 (previously April 2013) representing a delay of up to six months from the initial programme. Our interpretation The revision to Bayfields initial drilling programme is a consequence of the operational disruptions arising from the weather disruptions and the relocation to the Charlie platform. Although we feel this disclosure will somewhat damage market sentiment towards the company, it is imperative for Bayfield to execute their drilling campaign in the most strategically beneficial and financially efficient method. To facilitate this, the EG8 well (a vertical well targeting multiple horizons) will target reservoirs containing the highest volume of prospective resources in this location of Bayfields acreage (whilst also carrying the highest CoS).
We appreciate that uncertainty over the timing of the remaining four wells may be a cause for concern for investors.
Although we highlight that the financial impact of the delay is marginal, we do appreciate that uncertainty over the timing of the remaining four wells may be a cause for concern for investors.
Risked p/share
119
(Mmboe)
Operational review
South African operations

Bayfield has received acceptance from PASA regarding the companys application for the Pletmos inshore licence
Strategic update Bayfield has received acceptance from the Petroleum Agency of South Africa (PASA) for the companys application for the Pletmos inshore licence. Following this, Bayfield has filed all documentation required by PASA which includes a variation to the wording within the document. Following receipt of this revision, a date will be set for the signing of the licence documentation. Once the licence is approved, Bayfields initial focus will be on the reprocessing of existing 2D seismic data over the block, which is expected to be completed this year. In addition, management estimates that any acquisition of new 2D seismic data is unlikely to be undertaken prior to December 2013. Our interpretation We are encouraged by the positive steps Bayfield are taking to conclude licence negotiations for the Pletmos Basin. This play not only diversifies geographical risk in the companys portfolio, but also adds further exploration upside outside of its core operations.
The signing of the licence documentation is merely a formality at this stage given the advanced nature of the application
The signing of the licence documentation is merely a formality at this stage given the advanced nature of the application and the fact that Bayfield was named as the preferred bidder for the acreage c.2 years ago. The company will hold an effective working interest of 90% (post state back in), and the play is estimated to contain c.625mmboe of net unrisked prospective resources. Interpretation of existing 2D seismic data has identified seven prospects which have been corroborated by GCA. At present we do not attribute any value to the resources identified by GCA in our target valuation due to the limited activity to date in the Pletmos Basin. However, if risked on a consistent basis to Bayfields operations in Trinidad, there is potential for an additional c.40p/share upside once the company undergoes successful drilling and converts its current prospective resource base to the contingent classification.
Risked net asset value - Pletmos Basin Interval Working Interest 90% 90% 90% 90% 90% 90% 90% CoS Resources/Reserves NPV 10% US$ (mmboe) / bbl Gross 43.4 15.7 34.2 6.2 31.4 325.5 44.5 500.9 Net 39.1 14.2 30.8 5.6 28.3 292.9 40.0 450.8 3.74 3.74 3.74 3.74 3.74 3.74 3.74 Unrisked Risked NPV NPV $m $m 146.2 53.0 115.0 20.9 105.7 1095.6 149.7 1686.0 26.3 7.9 15.0 1.7 6.3 65.7 15.0 137.9 Unrisked Risked NPV NPV m m 91.4 33.1 71.9 13.1 66.0 684.7 93.5 1053.7 16.4 5.0 9.3 1.0 4.0 41.1 9.4 86.2 Net Risked p/share 7.6 2.3 4.3 0.5 1.8 19.1 4.4 40.1
1 2 3 5 9 10 GA-VI
18% 15% 13% 8% 6% 6% 10%
Russian operations
Management has concluded that it is in the best interests for the company to surrender the Karalatsky licence
Strategic update Bayfield has now undertaken the full interpretation of the 2D seismic data acquired over the Karalatsky licence. As a result, the company has not identified any prospects that would justify further investment in an exploration well. Therefore, management has come to the conclusion that it is in the best interests for the company to surrender the Karalatsky licence and dissolve the Astrakhanskaya Gas and Oil Company (AGOC), the local operating company in which it holds a 74% interest. At this point, management does not believe that Bayfield is exposed to any financial penalty or sanction as a result of this decision. However, the company will recognised a non-cash impairment of c.3.5m in their financial statements as a consequence of the disposal.
120
Operational review
Our interpretation We feel the companys exit from Russia is a positive development. In our view, this aspect of Bayfields portfolio has been somewhat of a distraction and the movement out of the country reduces Bayfields financial exposure to non-core high risk drilling. In terms of our valuation, there will be no impact given that we did not attribute any value to Bayfield's Russian operations, and the recognition of the impairment in 1H 2012 is a non-cash item.
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Appendix 1 RENAV breakdown Trinidad
Appendix 1 RENAV breakdown Trinidad

Risked net asset value - Trinidad Classification Activity Working Interest 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% CoS Resources/Res NPV 10% erves (mmboe) US$ / bbl Gross Net 17.4 11.3 8.1 5.3 1.4 0.9 1.8 1.2 0.9 0.6 7.2 4.7 3.2 5.2 5.4 3.5 11.0 7.2 0.7 0.5 57.2 40.3 7.48 7.48 7.48 7.48 7.48 3.74 3.74 3.74 3.74 3.74 Unrisked NPV $m 84.5 39.5 7.0 9.0 4.5 17.4 19.3 13.1 26.8 1.8 222.9 Risked NPV $m 84.5 39.5 7.0 9.0 4.5 13.1 14.5 9.9 20.1 1.3 203.3 Unrisked NPV m 52.8 24.7 4.4 5.6 2.8 10.9 12.1 8.2 16.7 1.1 139.3 Risked NPV Net Risked m p/share 52.8 24.7 4.4 5.6 2.8 8.2 9.0 6.2 12.6 0.8 127.1 24.6 11.5 2.0 2.6 1.3 3.8 4.2 2.9 5.8 0.4 59.1
Reserves Reserves Reserves Reserves Reserves Contingent Contingent Contingent Contingent Contingent
Trintes Field Main Trintes FNE extension Trintes SW extension M GAL-9 G&H Trintes Ext GAL-12 H EG-1 EG-2 EG-3 EG-4 GAL-21
100% 100% 100% 100% 100% 75% 75% 75% 75% 75%
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Financial model
Financial model
2009A 16.2 (10.0) 6.1 (0.4) 5.8 (0.2) 0.0 5.9 (2.5) 41.4 0.2 3.5 7.5 7.9 6.1 5.9 3.5 0.2 1.0 1.0 1.0 1.0 3,363.0 3,389.0 3,363.0
2010A 16.8 (308.7) (291.9) (0.3) (292.2) (0.1) 0.0 5.7 (2.2) 38.4 0.1 3.5 (290.1) 8.1 5.9 5.7 3.5 0.2 1.0 1.0 1.0 1.0 3,380.0 3,400.0 3,380.0
2011E 20.9 (384.9) (364.0) 0.0 (363.9) (0.5) 0.0 7.4 (3.4) 45.8 0.1 4.0 (361.3) 10.2 7.5 7.4 4.0 0.3 1.2 1.1 1.2 1.1 3,380.0 3,400.0 3,380.0
2012E 25.2 (337.4) (312.2) 0.0 (312.2) (0.2) 0.0 9.5 (4.0) 42.0 0.1 5.5 (308.4) 13.2 9.4 9.5 5.5 0.3 1.6 1.6 1.6 1.6 3,380.0 3,400.0 3,380.0
2013E 27.2 (343.7) (316.5) 0.0 (316.5) (0.0) 0.0 10.8 (4.6) 42.0 0.1 6.3 (312.6) 14.4 10.4 10.8 6.3 0.3 1.8 1.8 1.8 1.8 3,388.0 3,410.0 3,388.0
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Financial model
2009A 5.8 0.0 0.0 1.8 (0.7) 1.5 8.4 (6.8) 0.0 (0.2) (2.1) (7.7) (0.7) (1.5) (10.5) 0.1 1.1 2.9 (6.4) 1.5 0.0 1.1
2010A (292.2) 0.0 0.0 2.2 (0.8) 1.8 (289.0) (8.4) 0.0 (0.2) (2.0) (7.3) (0.8) (0.4) (308.1) 0.1 0.5 3.2 (304.3) (5.1) 0.0 2.5
2011E (363.9) 0.0 0.0 2.6 1.1 1.9 (358.3) (9.0) 0.0 (0.5) (3.0) (8.9) (0.9) (0.3) (380.7) 0.0 0.2 2.9 (377.6) (7.2) (0.1) 3.9
2012E (312.2) 0.0 0.0 3.8 (0.2) 1.9 (306.7) (5.0) 0.0 (0.2) (4.0) (4.9) (0.9) (0.6) (322.4) 0.0 0.0 0.0 (322.4) (2.8) 0.0 6.4
2013E (316.5) 0.0 0.0 3.9 (0.1) 1.9 (310.8) (5.0) 0.0 (0.0) (4.6) (4.9) (1.2) (1.2) (327.7) 0.0 0.0 0.0 (327.7) 0.3 0.0 9.0
2009A 20.1 0.8 9.3 3.8 34.0 0.8 4.7 1.1 2.9 8.4 42.4 4.2 1.2 5.0 8.8 19.2 23.2 0.0 0.0 0.0 0.0 0.3 23.2
2010A 28.3 0.8 7.2 3.8 40.1 0.7 6.0 2.5 3.3 10.2 50.3 4.4 1.3 8.4 9.4 23.6 26.7 0.0 0.0 0.0 0.0 0.4 26.7
2011E 33.3 0.8 7.2 4.7 46.0 0.8 5.6 3.9 4.5 11.2 57.1 5.3 2.2 4.5 9.8 21.9 35.2 0.0 0.0 0.0 0.0 0.3 35.2
2012E 34.5 0.8 7.0 5.0 47.2 1.0 6.4 6.4 7.0 14.7 61.9 6.1 2.8 3.3 9.8 22.1 39.8 0.0 0.0 0.0 0.0 0.4 39.8
2013E 35.6 0.8 6.8 5.3 48.4 1.0 7.0 9.0 9.7 17.9 66.3 6.6 1.8 3.1 9.8 21.3 44.9 0.0 0.0 0.0 0.0 0.5 44.9
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Financial model
2009A n/a n/a n/a 38.0 48.8 38.0 n/a 34.3 0.1 4.8 14.9 51.3 51.3 111.6 (283.7) (4.1) 41.8
2010A 3.7 2.0 (4.0) (1,740.3) 48.0 35.2 n/a 55.1 0.3 4.3 13.1 41.7 41.7 99.6 (8,781.2) (4.6) 50.1
2011E 24.7 26.3 27.7 (1,740.3) 48.6 36.0 n/a 16.4 0.4 4.5 11.4 44.7 44.7 99.2 (9,463.4) 5.5 42.9
2012E 20.6 29.6 24.4 (1,237.2) 52.2 37.1 n/a 39.3 0.5 5.7 13.9 110.3 110.3 99.5 (5,827.6) (0.7) 19.8
2013E 7.8 9.1 11.4 (1,163.8) 52.9 38.4 n/a 567.9 0.6 5.3 14.0 125.7 125.7 99.4 (5,195.4) (0.4) 18.4
2009A 1,506.6 3,131.7 6,415.8 8,243.6 2,324.0 14,213.0 0.0 (5,094.9) 0.7
2010A 1,476.7 3,019.3 6,288.4 8,586.0 2,128.2 14,803.4 0.0 (164.0) 0.8
2011E 1,289.1 2,421.3 4,980.7 6,723.5 1,631.8 11,592.3 0.0 (132.7) 1.0
2012E 934.1 2,006.9 3,842.6 5,403.7 1,534.6 9,316.7 0.0 (156.8) 1.2
2013E 819.7 1,861.7 3,521.5 4,849.2 1,430.7 8,360.8 0.0 (154.8) 1.3
125
Financial model
1 40
1 20
1 00
80
60
40
20
Share P rice
Reco mmendatio ns
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Gold Oil Plc

BUY
Share price Target price 195% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) Dividend yield (%) PER at Target price (Y1) Sector PER Price/book 12 month high/low (p) (%) Absolute FTA relative 1m -0.7 -4.8
(LSE:GOO.L)3,5
Always believe in your soul

3p 8p
24.3 10.5 13.9 891.5 1,172 0.0 (414.8) 0.0 1.3 5/2 3m -13.3 -18.9 12m -45.8 -44.9
Gold continues to make encouraging progress, both in terms of production upgrades and high impact exploration. We feel a successful farm down of the companys Z34 acreage in Peru; will represent a clear milestone for the company as they look to prove up the significant resource potential in the Block.
Robust increase in near term production In 2011 Gold completed a workover programme at its Nancy-Burdine-Maxine (NBM) oil field which saw production double to the current 600 bopd (gross) level versus 1HFY11 (period ending 31 October 2010). In the longer term production is forecasted to increase c.5x versus 1HFY11 levels; reaching an average of 1,400 bopd in 1HFY13. Farm out potential Gold have been very explicit in terms of their strategic outlook relating to a significant farm out of their 100% interest in Block Z34, Peru. The block holds approximately 1.4bn bbl of contingent resources, and as such represents significant upside to investors even post farm-out. We assume that Gold intends to farm down c.50% of their acreage and also include a recovery of past capital expenditure (c.$20m) and to be carried for up to three wells. We have used a mid-case (two well) scenario in our target valuation, and assess the Block Z34 value post farm down to contribute 2.9p/share to our target price. Block XXI farm down The company is due to conclude the 70% joint operating agreement with Vale S.A. Vale will pay an upfront cash consideration of $2m and will carry Gold through the remaining exploration programme capped at $10m. We feel this agreement has acted as a milestone for the company and contributes 0.8p to our target valuation.

6.0 5.0 4.0 3.0 2.0 1.0 Feb May Aug Nov Feb May Aug Nov Feb Price
Source: Datastream
Relative
Share price as at close: Next news Operational updates - Peru
9 February 12
Business Exploration, appraisal, development and production of oil and natural gas. www.goldoilplc.com
Valuation and recommendation We feel the market clearly does not attribute any value to Golds significant prospective resource base in Peru, which we believe represents a core driver for the company going forward. Gold also benefits from a robust mix of production and impending high impact exploration, which we feel represents a strong buying opportunity for investors at current levels. Our core valuation (production plus net cash) is 2.4p, whilst cash due from Vale and other exploration assets add another 5.6p. On this basis, we continue coverage with a BUY recommendation and a target price of 8p.
3,5 Please see regulatory disclosure notes at the end of this document A draft of this research has been shown to the company following which minor factual amendments have been made.
EBIT* (m) (0.8) (1.5) (0.1) 0.3 2.5
PBT* (m) (0.9) (1.6) (0.1) 0.3 2.5
Tax Adj. EPS* (%) (p) (12.2) 0.1 (50.0) (50.0) 30.0 (0.2) (0.3) (0.0) 0.1 0.2
PER EV/EBIT* Div yield (x) (x) (%) (14.0) (10.3) (140.7) 49.8 14.0 (16.3) (8.9) (95.4) 43.4 5.6 0.0 0.0 0.0 0.0 0.0
Gold Oil Plc | 10 February 12

Our valuation of Gold Oil comprises three key components: 1. 2. 3. Discounted cash flow analysis of the NBM field. Risked net asset appraisal of the companys contingent resources in Peru and Colombia. Scenario analysis post Block Z34 farm down
The implicit assumptions used in our risked valuation are as follows:

Valuation assumptions Metric NPV $/mmboe - Colombia NPV $/mmboe - Peru Long term exchange rate $/ Number of shares outstanding (m) Chance of exploration success - Colombia Chance of exploration success - Peru Discount rate
Assumption 20.00 6.00 $1.65/1 891.51 50% 10% 10%
Discounted cash flow analysis We have modelled the cash flows arising from the companys Nancy-Burdine-Maxine (NBM) oil field against the PSC terms in Peru. This yields a net present value of c.$28m when discounted at 10%, contributing 1.9p/share to our target price. Risked net asset evaluation We also provide a risked net asset valuation of Golds prospective resources in Colombia (Azar Block) and Peru (Block XXI) as follows:
Risked net asset valuation Country Project Interest CoS/CoD Prospective Rec. NPV 10% Unrisked Risked NPV Resources (mmboe) US$ / boe NPV $m $m Gross 3 3 3 25 30 64.0 Net 0.6 0.6 0.6 7.5 9 18.3 20 20 20 6 6 72.0 12.0 12.0 12.0 45.0 54.0 135.0 6.0 6.0 6.0 4.5 5.4 27.9 Unrisked NPV m 7.3 7.3 7.3 27.3 32.7 81.8 Risked NPV Net Risked m p/share 3.6 3.6 3.6 2.7 3.3 16.9 0.4 0.4 0.4 0.3 0.4 1.9
Colombia Colombia Colombia Peru Peru
La Vega East La Vega South La Vega West Prospect A Prospect B
20% 20% 20% 30% 30%
50% 50% 50% 10% 10%
We have assumed an NPV/bbl at each field based on transaction values in each country respectively. At the Azar Block we assume an NPV/bbl of US$20 in line with the Ecopetrol and Talisman Energy takeover of BPs Colombian assets in 2010, which equates to US$20.21/bbl. For Block XXI we have used the inferred market valuation from D&Ms certified volume estimates for Karoon Gas of $6/bbl. On this basis, our risked valuation of Golds prospective resources yields 1.9p/share to our target valuation. Scenario analysis of Z34 farm out Gold have been very explicit in terms of their strategic outlook incorporating a significant farm down of their 100% interest in Block Z34 Peru. The block holds approximately 1.4bn bbl of contingent resources and as such represents significant upside to investors even post farm-out.
128
We assume that Gold intends to farm-out c.50% of their acreage and also include a recovery of past capital expenditure (c.$20m) and to be carried for up to three wells. The company expects each well to cost in the region of $75m to drill, and we risk each scenario at 50% in terms of chance of success. As such we incorporate the following assumptions into our farm-out scenario analysis valuation:
Scenario analysis assumptions Metric Past capex Well cost No of wells Final interest Risking
Assumption $20 $75 Up to three 50% 50%
Using the above prudent assumptions we have valued a three well case scenario valuation:
Scenario valuation Scenario 1 well 2 well 3 well
$m $95 $170 $245
m 58 103 148
p/share 6.5 11.6 16.7
Risked p/shr 1.6 2.9 4.2
On this basis, we will incorporate a mid-case (two well) scenario in our target valuation, and assess the Block Z34 value post farm out to contribute 2.9p/share to our target price. Overall valuation Our sum-of-the-parts (SOTP) valuation will combine all of the above individual components as well as net cash. In addition, the company has successfully concluded the 70% joint operating agreement with Vale S.A. Vale will pay an upfront cash consideration of $2m and will carry Gold through the remaining exploration programme capped at $10m. We feel this agreement has acted as a milestone for the company and contributes 0.8p to our target valuation.
SOTP valuation matrix million NBM DCF Net Cash Core value Z34 (2W) Vale cash Other exploration Gross Value
p/share 1.9 0.6 2.4 2.9 0.8 1.9 8.0
16.7 5.1 21.8 11.6 7.3 16.9 57.5
129

9 2.9 8 7 6 p/share 5 4 3 2 1 0 Net Cash Vale cash NBM DCF Other exploration Z34 (2W) 0.6 0.8 1.9
1.9

We feel the market clearly does not attribute any value to Golds significant prospective resource base in Peru, which we feel represents a core driver for the company. The company also benefits from a robust mix of production and high impending high impact exploration, which we feel represents a strong buying opportunity for investors at current levels. Our core valuation (production plus net cash) is 2.4p, whilst cash due from Vale and other exploration assets add another 5.6p. On this basis, we continue coverage with a BUY recommendation and a target price of 8p.
130
Operations
Operations
Production is currently confined to Colombia where Gold operates its NBM oil field
Gold currently has exploration and production operations in Colombia and Peru. Production is currently confined to Colombia where the company operates its NancyBurdine-Maxine oil field. The company has a robust exploration and development programme planned during 2011 and 2012, which encompass its entire portfolio of assets.
Overview of key assets
Projects Working Interest Geographic focus
Block Z34
Block XXI
Nancy Burdine
Azar
100%
30%
58%
20%
Offshore Peru
Acquired/Interpreted 2D seismic. LOI with BGP for 500km2 3D programme
Onshore Peru
Farmed out to Vale. Awaiting assignment approval
Onshore Colombia
Nancy -1 producing. Workover of Burdine wells completed. Long term testing
Onshore Colombia
3D seismic acquired and interpreted. Civil works for drilling In preparation
Status
Planned Activity
Min 500 sq. kms. 3D seismic Seek partner to Drill in 2012/13
400 sq. Kms. 2D seismic Drill in 2012
Drill Nancy-2 well and renegotiate contract
Drill La Vega East well Sept/Oct 2011
Source: Company data and Seymour Pierce Limited
Peru
At Block Z34, Gold is scheduled to begin a 3D seismic survey covering 500 sq. kms. in early July
Golds Peruvian assets consist of 2 operational projects: Block XXI (30% interest) and Block Z34 (100%). In January Vale, the Brazilian mining company, farmed into Block XXI. At Block Z34, Gold is scheduled to begin a 3D seismic survey covering 500 sq. kms. (~310 sq. miles) in early July after which it intends to farmout a stake, on terms similar to Block XXI. Gold's Peruvian assets are key to the company's exploration potential and valuation with Block Z34 alone having an unrisked prospective P50 resources of c.1.4bn bbls Offshore Block Z34 (100% interest and operated) Block Z34 is located offshore western Peru at the Northern boundary with Ecuador. The block covers an area of ~3,700 sq. kms (2,300 sq. miles) and is bounded to the East by Block Z2B operated by Savia Peru and to the North by Block Z30 operated by Karoon. Gold has a 100% interest and is operator of the block. Z34 is located in the Talara Basin, next to the Talara oil fields which have produced approximately 1.6 billion barrels to date and have a current daily production of over 12,000 bopd. Although the whole block is considered highly attractive it is in relatively deep water (1002,000m) and hence the Southern part of the block (highly prospective and in shallower water) is a priority for Golds seismic acquisition and exploration drilling.
The southern part of block Z34 lies in shallower water and is hence a priority for Golds 3D seismic acquisition and exploration drilling
131
Operations
Block Z34 location
Preliminary interpretation of 2D seismic data indicates significant potential and a number of leads have been identified.
History: Gold entered into a promotion licence with Perupetro in 2005 and qualified as operator in July 2006. In March 2007 Gold was granted the licence for Block Z34 together with Plectrum Petroleum Plc (50% interest). Plectrum was subsequently purchased by a subsidiary of Cairn Energy, from whom Gold purchased the remaining 50% in 2008. Gold began acquisition of 2,013 sq. kms (1,250 sq. miles) of 2D seismic in 2009. Z34 had negligible exploration prior to this with no well drilled in the bulk of the permit. Gold completed processing of 2D seismic in 2009 with interpretation completed in 2010. Preliminary interpretation of seismic data indicates the block has significant potential and a number of leads have been identified.
Z34 Prospects and Leads
Cuy
Prospect G
Francesca
Pisco
Planned 3D Seismic area
Chilcano
In May Gold received environmental clearance and contracted the acquisition of 3D seismic 132
Recent developments: In late May Gold announced it had contracted BGP Geoexplorer PTE to acquire 500 sq. kms of 3D seismic over Block Z34 after receiving an
Operations
environmental permit (PMA) from the Peruvian Ministry of mines earlier in the month. The permit allows the company to shoot a maximum of 808 sq kms (501 sq. miles) of 3D seismic.
Gold expects to reach a farmout agreement by 1HCY12 end and drill an exploration well in 3QCY12.
Planned activity: The BGP Pioneer vessel has been mobilised and is expected to commence operations in early July. Seismic acquisition is expected to take 30 days from commencement with interpretation expected to take 3-4 months to complete. Post interpretation of seismic data, Gold intends to farmout a stake in the block, in an arrangement similar to Block XXI. Gold expects to reach a farmout agreement for Block Z34 by the end of 1HCY12 and plans to drill an exploration well in 3QCY12. Block XXI (30% interest and operated) Block XXI located in northwest Peru covers an area of 3,030 sq. kms (~1,890 sq. miles) and is ~50 miles north west of the port town of Talara which is an oilfield hub. Gold has a 30% interest in the block and is currently the operator.
Block XXI, Onshore Peru
Block XXI located in northwest Peru covers an area of 3,030 sq. kms
Gold drilled a well in 2008 which demonstrated the existence of an effective reservoir.
History: Gold entered into a promotion licence with Perupetro in October 2004 and was formally awarded the licence in December 2005 with an exploration period of seven years. In 2005 Gold completed 5,200 sq. kms (3,200 sq. miles) of aeromagnetic survey which identified six leads. In 2006 Gold drilled the San Alberto-1X well which encountered good porosity. The San Alberto-2 X well was subsequently drilled in 2008. Drilling demonstrated the existence of effective reservoirs. Gold concluded it needed to acquire seismic before progressing further on the block. Recent developments: In January Gold announced that it had signed a farm out and JV agreement for Block XXI with Vale. Under the agreement, Vale paid an US$2m upfront cash consideration and will carry Gold through the remaining exploration programme (maximum of US$10m gross; US$3m attributable to Gold) in return for a 70% interest in Block XXI. Gold retains a 30% interest in the block and Vale will take over as operator. (The agreement is subject to approval by Perupetro and Gold will remain operator until the agreement is formally approved and Vale has personnel in Peru to operate Block XXI). Gold expects Vale to take over operatorship in 3QCY11.
400 sq kms of 2D seismic data to be acquired in 4Q CY11 and drilling a well planned in 2QCY12 and 4QCY12.
Planned activity: The JV partners plan to acquire 400 sq kms of 2D seismic data in 4Q CY11 and drill a well each in 2QCY12 and 4QCY12. We note that Gold is free carried on the seismic acquisition and drilling, as per terms of its farm out agreement with Vale.
133
Operations
Colombia
Gold Oil Colombia was established in 2006. Colombia is Golds principal operating country, where it currently has 3 operational projects: The Nancy-Burdine-Maxine (NBM) oil field, Azar and Rosa Blanca blocks.
Gold has 3 operational projects in Colombia: The Nancy-Burdine-Maxine (NBM) oil field, Azar and Rosa Blanca blocks.
Nancy-Burdine-Maxine (27.4% net interest and operated) The Nancy-Burdine-Maxine (NBM) oil field is located in South West Colombia. Gold has a 58.05% working interest and is operator of the field. Termotecnica (18.05%), ISP (18.05%), Bioss (2.84%) and VHF (3%) are the other partners. As per the terms of the licence at NBM, a royalty of 20% applies to Gold and partners before Ecopetrol takes a 41% share with no contribution to capital or operating costs. Oil from the NBM fields sells at a netback price related to West Texas Intermediate but at a discount (approx. $10/bbl) resulting from pipeline transport costs and quality adjustments (API gravity of 28-30; WTI at 39.6).
Current production from the NBM field is 165 bopd net; 600 bop gross.
Production: In fiscal 2010 the Nancy-1 well had net production attributable to Gold of 26,000 bbls of oil; at an average rate of 71 bopd. In March, 2011 Gold successfully completed a workover programme on the Burdine-5 well resulting in the well coming on stream at an 82 bopd net (300 gross) rate. Current production from the NBM field is 165 bopd net (600 bopd gross). History: The NBM fields were discovered by Texaco and bought on stream in 1976. The Nancy-1 well initially produced 1,400 bopd declining to 230 bopd by 1978 subsequently increasing to 670 bopd when pumping was added. Argosy International later assumed control of NBM. In 1995 the NBM field was abandoned due to a lack of economic feasibility, at which stage Nancy-1 produced 200 bopd with no water. The fields were returned to Ecopetrol who licensed them to the Union Temporal in 2003. In April 2008 a geological and geophysical report concluded that there were additional oil zones in the Nancy and Burdine fields that had not been perforated and areas of the field were not being effectively drained. Subsequently the partners commissioned an independent reservoir engineering study. In January 2011 Gold and its partners commenced a workover programme on the Burdine field. The programme planned to re-enter the Burdine-1, 4 and 5 wells. Burdine-1 and 5 are planned as oil producing wells whilst Burdine-4 will operate as a water disposal well. Gold estimated the workover will add between 200 and 400 bopd of gross production (between 55 and 109 bopd net) to the NBM fields current production.
In mid March production from the NBM field doubled post completion of the workover programme.
Recent developments: In mid March Gold announced the workover programme at Burdine-5 had been completed and the well was bought on stream at a net rate of 82 bopd (300 bopd gross); doubling company wide net production. Planned activity: Gold plans to drill the Nancy-2 development well in 4QCY11. Nancy2 is expected to come on steam in March 2012 with production estimated at 220 bopd net (800 bopd gross). Additionally Gold plans to acquire 30 sq. kms of 2D seismic over the NBM field in 2QCY12. Azar (20% working interest and non operated) Gold has a 20% working interest in the Azar Block, located to the northeast of the NBM fields. Gran Tierra (40% and operator) and Lewis Energy (40%) are the other partners. History: Ecopetrol drilled the Palmera -1 well on the Azar Block in 1996. Subsequent logging indicated the well was not economically feasible at the time. In October 2006 Gold and its partners entered into a licence contract for the Azar block, granting them the right to explore for a 6 year period and an exploitation period of 24 year. The well was re-entered in 2QCY08 and tested 50 bopd (15 API oil) at a depth of 7,860 feet. Recent developments: 72 sq. kms (~45 sq. miles) of 3D seismic was acquired over the LA Florida structure, located in the North of the block. Based on an earlier seismic survey two prospects, have been identified: La Vega Sur and East.
134
Operations
Planned activity: The seismic data was interpreted and the JV partners decided to drill a well in 3QCY11. Additionally the partners agreed to drill two more contingent wells in 2QCY12 and 4QCY12. As a result of a prior farm-in agreement Gold only has to contribute half its stake (i.e. 10% instead of its 20% interest) to the cost of the next well drilled. Gold would have to pay its full share for any subsequent wells drilled.
In November 2010 Gold signed an agreement with Montecz to farm out 72% stake; retaining a 25.2% interest
Rosa Blanca (25.2% interest and non operated) The Rosa Blanca block is located in the upper part of the Middle Magdalena Basin, covers ~175 sq. miles (45,000 Ha) and is surrounded by oil producing fields. In November 2010 Gold signed an agreement with Montecz SA, a Colombian company, to farm out a stake at Rosa Blanca. As per the terms of the agreement Montecz would pay 100% of costs (up to US$2m gross) in exchange for a 72% stake in Rosa Blanca. Gold retained a 25.2% interest in Rosa Blanca whilst Empresa, the third partner in the JV, retained a 2.8% stake. The Rosa Blanca-2 well was spudded in January and drilled to a depth of c.2,900 feet. Drill stem tests (DST) were carried out on the Rosa Blanca and Tablazo formations. The DST on the Rosa Blanca formation failed to flow, indicating the reservoir was tight and non commercial, whilst the Tablazo formation flowed only water.
We believe the JV partners will relinquish the Rosa Blanca block.
Recent developments: The JV partners are currently evaluating results at Rosa Blanca and will decide on the future of the block. We note that Gold was free carried on the exploration well, as per terms of the farmout. Should the JV partners decide to progress on the Rosa Blanca block, Gold would have to contribute its proportional share of the cost. We believe this to be unlikely; the most probable development at Rosa Blanca would be the JV partners relinquish the block.
Other operations
Golds strategy is to selectively approach countries taking into account geological potential but being mindful of geopolitical risks.
Colombia and Peru remain central to Golds operational strategy. However, the company has indicated that it continues to pursue opportunities in Latin America and the Caribbean. Golds strategy is to selectively approach countries taking into account geological potential but being mindful of geopolitical risks. The company stated that it has identified some exciting opportunities which it seeks to acquire in the medium term.
Operations timeline
2011 Q2 Q3 Q4 Q1 2012 Q2 Q3 Q4
Peru
Block Z34
Acquire 500 sq km 3D seismic Process/Interpret 3D seismic Seek farm in partner Drill exploration well
Gold Oil WI% 100% 100% 100%
Block XXI
Acquire 400 km 2D seismic Drill exploration well(s)
30% 30%
Colombia
Nancy Burdine
Workover Burdine existing wells Drill Nancy-2 well Acquire 30 km 2D seismic 58.05% 58.05% 58.05%
Azar Block
Drill La Vega East well Additional drilling (contingent)
20% 20%
Offshore Seismic Onshore Seismic
Drilling/Workovers Partner Negotiations
135
Financial model
Financial model
2010A 1.0 (0.6) 0.4 (1.3) (0.8) (0.0) 0.0 (0.9) (0.1) (12.2) 0.0 (1.0) (0.8) (0.8) (0.8) (0.9) (1.0) 0.0 (0.2) (0.2) (0.2) (0.2) 500.7 561.0 561.0
2011A 1.2 (0.6) 0.5 (2.1) (1.5) (0.0) 0.0 (1.6) 0.0 0.1 0.0 (1.6) (1.2) (1.2) (1.5) (1.6) (1.6) 0.0 (0.3) (0.3) (0.3) (0.3) 595.3 604.8 604.8
2012E 1.6 (0.8) 0.8 (1.0) (0.1) 0.0 0.0 (0.1) (0.1) (50.0) 0.0 (0.2) 0.2 0.2 (0.1) (0.1) (0.2) 0.0 (0.0) (0.0) (0.0) (0.0) 891.5 891.5 891.5
2013E 3.6 (1.8) 1.8 (1.5) 0.3 0.0 0.0 0.3 0.2 (50.0) 0.0 0.5 0.8 0.8 0.3 0.3 0.5 0.0 0.1 0.1 0.1 0.1 891.5 891.5 891.5
2014E 9.0 (4.5) 4.5 (2.0) 2.5 0.0 0.0 2.5 (0.7) 30.0 0.0 1.7 2.9 2.9 2.5 2.5 1.7 0.0 0.2 0.2 0.2 0.2 891.5 891.5 891.5
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Financial model
2010A (0.8) 0.0 0.0 0.0 1.2 0.0 0.3 (1.1) 0.0 (0.0) 0.1 (1.1) 0.0 0.0 (1.8) 0.0 0.0 0.0 (1.7) 1.0 0.0 1.7
2011A (1.5) 0.0 0.0 0.3 1.3 0.0 0.1 (2.3) 0.0 (0.0) (0.0) (2.3) 0.0 0.0 (4.6) 11.2 0.0 0.0 6.6 1.7 0.0 10.5
2012E (0.1) 0.0 0.0 0.3 (1.9) 0.0 (1.7) (6.1) 0.0 0.0 0.1 (6.1) 0.0 0.0 (13.7) 0.0 0.0 (0.6) (14.4) 10.5 0.0 2.2
2013E 0.3 0.0 0.0 0.5 0.1 0.0 1.0 (2.6) 0.0 0.0 (0.2) (2.5) 0.0 0.0 (4.3) 0.0 0.0 0.0 (4.3) 2.2 0.0 0.6
2014E 2.5 0.0 0.0 0.5 0.2 0.0 3.2 (0.7) 0.0 0.0 0.7 (0.6) 0.0 0.0 2.6 0.0 0.0 0.0 2.6 0.6 0.0 2.9
2010A 0.2 0.0 3.1 2.2 5.5 0.1 0.5 1.7 0.0 2.3 9.0 0.4 0.6 0.0 0.2 1.1 7.8 0.1 10.8 (5.7) 2.6 0.0 7.8
2011A 1.1 0.0 4.7 2.4 8.2 0.1 1.1 10.5 0.0 240.6 21.0 1.3 0.6 0.0 0.2 2.1 18.9 0.2 25.3 (7.2) 0.6 0.0 18.9
2012E 1.8 0.0 13.6 2.3 17.7 0.1 0.6 2.2 0.0 385.3 20.6 3.0 0.0 0.0 0.0 3.0 17.6 0.2 25.3 (8.8) 0.9 0.0 17.6
2013E 1.6 0.0 15.8 2.3 19.7 0.1 0.5 0.6 0.0 378.0 20.9 3.2 0.0 0.0 0.0 3.2 17.7 0.2 25.3 (8.7) 0.9 0.0 17.7
2014E 1.4 0.0 16.2 2.2 19.8 0.1 0.5 2.9 0.0 361.9 23.3 3.3 0.0 0.0 0.5 3.9 19.4 0.2 25.3 (7.0) 0.9 0.0 19.4
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Financial model
2010A n/a n/a n/a 42.0 (85.7) (88.7) n/a (40.4) (2.1) n/a (12.4) (88.3) (88.3) (41.5) 181.0 121.2 115.5
2011A 22.0 50.0 82.4 45.4 (105.3) (132.6) n/a (48.4) (8.5) n/a (8.4) (68.2) (68.2) (5.7) 290.2 111.3 198.3
2012E 38.9 (113.7) (90.6) 51.3 10.4 (9.0) n/a n/a 12.8 n/a (1.0) (2.8) (2.8) (1,012.2) 7,929.2 (115.8) 374.6
2013E 124.2 401.3 (319.7) 50.0 23.3 8.8 n/a n/a 0.7 n/a 2.8 19.2 19.2 116.0 (870.5) 3.7 70.1
2014E 146.5 248.1 678.3 50.0 32.9 27.7 n/a n/a 1.0 n/a 9.0 268.0 268.0 107.4 151.5 2.4 7.2
2010A (14.0) 14.5 (16.9) (16.3) 2.3 (23.3) 0.0 (7.7) 1.4
2011A (10.3) 11.9 (11.3) (8.9) 1.6 (12.8) 0.0 (3.5) 3.1
2012E (140.7) 8.5 82.0 (95.4) 0.9 (136.2) 0.0 (1.8) 2.0
2013E 49.8 3.8 16.4 43.4 0.8 62.0 0.0 (5.7) 2.0
2014E 14.0 1.5 4.7 5.6 0.8 8.0 0.0 9.2 2.2
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Financial model
8 7
5 4
2 1
Share P rice
Reco mmendatio ns
139
Financial model
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10 February 12 | Initiation of coverage | Oil & Gas Producers
Independent Resources
BUY
Share price Target price 37% Upside Market cap (m) Net cash (m) Enterprise value^ (m) No. of shares (m) Average daily vol ('000, -3m) 12 month high/low (p) (%) Absolute FTA relative 1m +24.1 +19.0 3m +22.5 +14.6 49p 67p
(AIM:IRG)3,5
Gas storage potential

Independent Resources is making encouraging progress in the development of its planned major underground gas storage facility in Italy. We feel that the advancement of this process represents the long term upside for investors; whilst in the near term, a successful farm-out of the Independents shale gas play in Tuscany could be a transformational event.
Italian gas storage Independent plans to construct a large underground storage (UGS) facility by storing natural gas in a deep, naturally fractured reservoir in Italy's Po Valley. This would potentially represent the country's largest storage project, and could play a key strategic and commercial role in solving Italy's gas deliverability constraints, security of supply, and market development. In addition, we have analysed recent transaction values for similar projects to provide investors with a long term potential valuation. Ribolla shale gas play The Ribolla Basin Shale Gas project was originally proposed as a more limited coal bed methane (CBM) project within the companys Fiume Bruna license located in Tuscany. This licence forms the basis of the companys target valuation with gross prospective estimates of recoverable gas in the region of 160bcf, representing c.62p/share. In our view, a successful farm-out of a proportion of the companys 100% interest here, to include a funding element for further development, will represent a near-term share price trigger for investors. Uncertainty in Tunisia In 2010, Independent and its JV partner drilled two wells and plugged and abandoned both in what was seen as a disappointing drilling campaign. At this point, we do not attribute any value for the block in our target price. Valuation and recommendation We feel that Independent's long term value may lie in its Italian gas storage potential, and our range of potential valuations of the facility illustrates the expected premium available to investors - if the company can successfully develop this side of the business. Nevertheless, our core valuation yields a base value of 67p, and on this basis we initiate coverage with a BUY recommendation.
3,5 Please see regulatory disclosure notes at the end of this document F Forecast change A draft of this research has been shown to the company following which minor factual amendments have been made.
22.5 2.5 20.0 45.8 32 54/29 12m +4.3 +6.0

Source: Datastream
Relative
Share price as at close: Next news Updates - Ribolla shale gas play Business Integrated natural gas www.ir-plc.com
9 February 12

EBIT* (m) (2.6) (1.2) (1.0) (1.1) (1.1)
PBT* (m) (2.2) (1.2) (0.9) (1.1) (1.1)
Tax Adj. EPS* (%) (p) 2.0 0.0 0.0 0.0 0.0 (0.1) (0.0) (0.0) (0.0) (0.0)
PER EV/EBIT* Div yield (x) (x) (%) n/a n/a n/a n/a n/a (7.8) (17.0) (21.0) (18.1) (18.1) 0.0 0.0 0.0 0.0 0.0
2010A 2011A 2012E 2013E 2014E
0.0 0.0 0.0 0.0 0.0
Independent Resources | 10 February 12

We value Independent Resources on a risked expectation net asset value basis covering the company's Ribolla Basin shale gas play. We feel the company's acreage in Italy and Tunisia is too early stage to attribute any near- erm value to investors; however we provide a range of potential valuations for the Rivara gas storage project that is currently gathering pace. We incorporate the following assumptions in our valuation:
Valuation assumptions Metric Long-term $/ exchange rate NPV/boe - Gas Discount Chance of exploration Shares outstanding (m)
Assumption 1.65 3.5 10% 50% 45.84
These assumptions have been assimilated into our risked net asset value appraisal as follows:
Risked net asset valuation Prospect Name Ribolla Basin Shale Gas Play
Interest 100%
Bcf 160
Mmboe 26.67
COS 50%
NPV 10% US$ / boe 3.50
Unrisked NPV $m 93.33
Risked NPV $m 46.67
Unrisked NPV m 56.57
Risked NPV m 28.28
Net Risked p/share 61.70
Our core valuation will only comprise Independent's risked assessment of 2C resources arising from its shale gas play, as well as the companys net cash position as at last year end (30/9/11).
Valuation matrix million Ribolla Basin Shale Gas Play Net cash Target market cap/price
p/share 61.7 5.5 67.2
28.3 2.5 30.8

80 70 60 p/share 50 40 30 20 10 0 Net Cash Ribolla Basin Shale Gas Play 5.5 61.7
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Potential gas storage valuations

There have been multiple transactions involving gas storage acquisitions is the last few years, which we have collated to attribute a regional value to Independent's future underground storage (UGS) facility by storing natural gas in Italy's Po Valley. We feel it is necessary to illustrate other regions outside of Europe, due to the number of transactions for various facilities as well as the growing interest from larger players in the market.
Gas storage transactions by region Buyer Snam Rete MOL Plinacro Petronas Haddington Ventures Plinacro Inergy Buckeye Centrica Centrica Seller Country Year Asset Multiple Szoreg Okoli Waalwijk Subsidiary Okoli Tres Palacios Lodi Baird Caythorpe Bobcat Multiple Capacity (bcf) 494 60 19 15 25 5 38.4 22 42 7.5 46 174 Transaction amount 2051 844 110 110 410 95 European average 725 440 US Average 250 115 UK Average 540 1500 Canadian average Value per Bcf 4.15 14.07 5.79 7.33 16.40 19.00 11.12 18.88 20.00 19.44 5.95 15.33 10.64 11.74 8.62 10.18
Eni Italy 2009 MSZKSZ Hungary 2009-2010 PSP Croatia 2009 Northern Netherlands 2009 Continental BV Holland 2011 Croatian Government Croatia 2009 Tres Palacios ArcLight Capital Perenco Warwick Energy US US UK UK Canada Canada 2010 2007 2009 2008 2010 2006
Spectra Energy Corp Haddington Energy Carlyle/Riverstone Global Energy EnCana

The above transaction values per bcf are clearly wide ranging, however they do provide an indication as to the potential value of Independents planned UGS facility. On an overall average basis, the inferred market value of the facility could be in the region of 81m or 178p/share on the basis that the facility will have a capacity of 10.5bcf.
Application of average transaction values to Independent bcf Europe US UK Canada Overall average
$m 116.8 204.1 111.7 106.9 134.9
m 70.8 123.7 67.7 64.8 81.7
p/shr 154.4 269.9 147.7 141.3 178.3
10.5 10.5 10.5 10.5 10.5
The above also illustrates that on the European inferred multiple, the potential value to investors could be c.154p/share.
143
Potential values applied to Independent

300 250 Potential p/share 200 150 100 50 0 Canada UK Europe US

Our core valuation comprises exploration and development, activities, and cash; which yields a base value of 67p. We feel that Independent's long term value clearly lies in its Italian gas storage potential. Our range of potential valuations of the facility illustrates the expected premium available to investors if the company can successfully develop this side of the business. On this basis, we initiate coverage with a BUY recommendation and set a target price of 67p.
144
Operational overview
Rivara underground gas storage facility
Independent plans to construct a large underground storage (UGS) facility by storing natural gas in a deep, naturally fractured reservoir in Italy's Po Valley. The Rivara project has been granted a provisional long-term concession by Italy's Ministry of Economic Development (MSE) which is subject to completion of a satisfactory environmental impact assessment and final approval by MSE of the results of the appraisal work programme prior to development. MSE and Italy's gas markets regulator (AEEG) are eager to encourage new gas storage capacity in the country to alleviate the well-documented deficit in this sector of the gas supply chain which is a matter of public interest. The company has dedicated an impressive effort to navigate the onerous Italian approval process and expects to complete this process in the near term. Underground natural gas storage is a common feature of almost all gas delivery systems and has been used for many decades. It is a well-understood process that is environmentally benign and involves a low-impact physical profile. Rivara's working capacity is estimated at approximately 105bcf, which would make it one of the largest gas storage facilities in Italy and in Europe. The company anticipates that it will be developed in a commercial partnership, using long term project finance. The company currently expects to develop Rivara in two stages. The first stage starts with an 18-month appraisal and optimisation programme, leading to its bankable Final Investment Decision. A three year construction and commissioning period would follow. The project company, ERG Rivara Storage srl, includes the 15% equity participation of ERG S.p.A., a leading Italian energy business. Independent Resources has traditionally been open to Joint Ventures as a means to both unlock and add value in the short term. It would seem logical for a major integrated gas company to seek a controlling stake in such a strategic site. The key potential benefits of the Rivara storage facility are: the large capacity of the structure its unique geological features not only allow for faster injection and withdrawal than conventional gas storage facilities, but for constant peak gas deliverability throughout its annual operational cycle its potential to go a long way towards closing Italy's current storage deficit and meeting the growing demand for gas storage capacity in Italy its geographical location, in-market and close to a trunkline intersection on the transcontinental "gas highway" and likely future gas trading "hub" its strategic value as a primary storage facility bridging the European Southern Corridor, the large Italy market itself, and connected markets in South-Central Europe.
Ribolla Basin Shale Gas Play

The Ribolla Basin Shale Gas project was originally proposed as a relatively limited coal bed methane (CBM) project within the companys Fiume Bruna license located in Tuscany. The Ribolla gas-saturated coal and shale basin is currently interpreted to extend well beyond the Fiume Bruna license and into the companys Casoni license to the south. In practice these licenses now cover the entire producible basin.
145
The Fiume Bruna exploration permit consists of an area totalling 247km located in southern Tuscany, Central Italy, lying entirely onshore and the Casoni exploration permit consists of an area totalling 187km2 and is located just to the south of the Fiume Bruna block, entirely onshore. The prospective area covered by both licenses is characterised by plains and includes cultivated fields.
Ribolla shale gas play location map
IRG drilled and cored Italy's first CBM stratigraphic borehole in 2006, and measured gas content and gas adsorption characteristics in coal and carbonaceous shale. The gas was found to be thermogenic. During 2008-2009 Independent recorded a total of 66 km of 2D seismic and drilled FB 1 well in August 2009. In addition, a large number of vintage boreholes, available from the past mining activity, have been used to construct a regional depositional model of the Ribolla basin and beyond. This allowed IRG to map a thick gas-bearing carbonaceous shale sequence, consistently located immediately above and below the main coal seam. The FB 2 well was subsequently drilled to test the coals productivity in the shallow part of the basin, where the coal and the gas shale were found to be saturated with gas. A hydraulic fracture job coupled with ceramic proppant, designed to enhance productivity, was followed by a seven weeks production test. The Fiume Bruna project has heretofore been described in terms of a relatively shallow CBM play but recent analysis, a new depositional model, and well results indicate that this organic-rich basin is more extensive and likely more productive at depths averaging 1,000m
146
The Casoni and Fiume Bruna blocks cover more than 450km and contain more than 140km of potentially productive area with a coal plus gas shale sequence at an average depth of 1,000m. The measured data indicates in the entire area an interval of coal and gas shale more than 9m thick on average. Independent has upgraded its previously-announced gross prospective estimates of recoverable gas to 160bcf 2C Contingent Resources, and includes both the Fiume Bruna and Casoni blocks. This represents an improvement of the gross figures, not only due to the addition of the Casoni license area but also the use of a more appropriate average gas content of the rock based on extensive measurements. The upgrade from Prospective Resources, as it was previously reported, to Contingent Resources, arises from successfully flowing natural gas to surface.
Tunisian oil and gas acreage

Independent holds a c.19% interest in the Ksar Hadada exploration permit covering an area of 2,252 km2 onshore south-east Tunisia. Several large oil-prone prospects have been mapped; these are sourced by the Silurian Tanezzuft Shale, which is the main source rock for North Africa and the Middle East.
Tunisian acreage
Source: Company
Light oil discoveries in the Cambro-Ordovician immediately to the south of the block in the adjacent Remada Sud permit have now validated the potential of the Ksar Hadada prospects. Across the border in Libya very high oil production rates have been achieved on test from multiple Acacus wells, providing added attraction to the Acacus play on Ksar Hadada. In addition, significant shale oil prospectivity remains to be mapped and tested. In 2004, the then permit operator, Petroceltic, drilled a third well into the Sidi Toui structure, but the rig had to be released to another operator before the well could be fully tested. Subsequent analysis of the well results indicates the presence of a live hydrocarbon column. Mean gross prospective recoverable resource estimates prior to execution of the 2010 Drilling Programme, for Sidi Toui (main target, plus subsidiary blocks) are currently estimated to be 161mmbo. Oil from nearby discovery wells is light at 42 API. In 2010, the JV drilled two wells and plug and abandoned both in what was seen as a disppointing drilling campaign. The company experienced operational difficulties, however the extensive logging data collected in the wells will be used to analyse the
147
remaining prospect inventory on the Ksar Hadada block. The joint venture will review all the data collected from the ST-4 and Oryx wells before making a decision on whether to extend operations on the block. The permits Operator, PetroAsian Energy (Tunisia) Ltd, has a 78.03% Working Interest. The JV is now focusing on a new reservoir compartment of the Sidi-Toui Cambro-Ordovician prospect, as well as the very significant volume of oil-bearing Silurian Hot Shale, which is pervasive and effectively underlies the entire residual area of the permit at relatively shallow depth.
Source: xx
At the present time, we do not attribute any value for the block to our target price. Nevertheless, despite the dissapointing result in 2010, the company had and retains very limited financial exposure given the terms of the joint venture agreement and we highlight managements financial prudence on this basis.
148
Financial model
Financial model
2010A 0.0 0.0 0.0 (1.2) (1.2) 0.4 0.0 (2.2) 0.0 2.0 0.0 (2.2) (0.1) (1.4) (2.6) (2.2) (2.2) 0.0 (0.1) (0.1) (0.1) (0.1) 41.6 41.6 41.6
2011A 0.0 0.0 0.0 (1.2) (1.2) 0.0 0.0 (1.2) 0.0 0.0 0.0 (1.2) (1.1) (1.1) (1.2) (1.2) (1.2) 0.0 (0.0) (0.0) (0.0) (0.0) 45.8 45.8 45.8
2012E 0.0 0.0 0.0 (1.0) (1.0) 0.1 0.0 (0.9) 0.0 0.0 0.0 (0.9) (0.9) (0.9) (1.0) (0.9) (0.9) 0.0 (0.0) (0.0) (0.0) (0.0) 45.8 45.8 45.8
2013E 0.0 0.0 0.0 (1.1) (1.1) 0.1 0.0 (1.1) 0.0 0.0 0.0 (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) 0.0 (0.0) (0.0) (0.0) (0.0) 45.8 45.8 45.8
2014E 0.0 0.0 0.0 (1.1) (1.1) 0.1 0.0 (1.1) 0.0 0.0 0.0 (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) 0.0 (0.0) (0.0) (0.0) (0.0) 45.8 45.8 45.8
149
Financial model
2010A (1.2) 0.0 1.1 0.0 0.1 (0.5) (0.5) (2.5) 0.0 0.0 (0.1) (2.4) 0.0 0.1 (5.3) 2.6 0.0 (0.1) (2.9) 5.3 0.0 3.9
2011A (1.2) 0.0 0.0 0.0 1.1 (0.1) (0.1) (1.3) 0.0 0.0 0.1 (1.3) 0.0 0.0 (2.6) 0.0 0.0 0.0 (2.6) 3.9 0.0 2.5
2012E (1.0) 0.0 0.0 0.0 0.8 (0.2) (0.3) (1.4) 0.0 0.0 0.1 (1.4) 0.0 0.0 (2.9) 0.0 0.0 0.0 (2.9) 2.5 0.0 0.9
2013E (1.1) 0.0 0.0 0.0 (0.2) (0.1) (1.3) (1.4) 0.0 0.0 0.0 (1.4) 0.0 0.1 (4.0) 0.0 0.0 0.0 (4.0) 0.9 0.0 (1.7)
2014E (1.1) 0.0 0.0 0.0 0.1 (0.1) (1.0) (4.2) 0.0 0.0 0.0 (4.2) 0.0 0.1 (9.4) 0.0 0.0 0.0 (9.4) (1.7) 0.0 (6.8)
2010A 0.1 0.5 8.0 0.0 8.5 0.0 5.5 3.9 0.1 9.4 18.0 0.6 0.0 0.0 0.3 0.9 17.1 0.5 15.3 (1.2) 1.2 1.3 17.1
2011A 0.1 0.5 9.3 0.0 9.8 0.0 4.5 2.5 0.0 7.0 16.8 0.8 0.0 0.0 0.0 0.8 16.1 0.5 15.3 (2.0) 1.0 1.3 16.1
2012E 0.1 0.5 10.9 0.0 11.4 0.0 3.7 (0.5) 0.0 3.1 14.6 1.1 0.0 0.0 0.0 1.1 13.5 0.5 15.3 0.0 1.0 1.3 18.1
2013E 0.1 0.5 12.3 0.0 12.8 0.0 3.0 (3.2) 0.0 (0.2) 12.6 1.6 0.0 0.0 0.0 1.6 11.0 0.5 15.3 0.0 1.0 1.3 18.1
2014E 0.1 0.5 16.5 0.0 17.0 0.0 2.4 (8.3) 0.0 (5.9) 11.1 2.3 0.0 0.0 0.0 2.3 8.9 0.5 15.3 0.0 1.0 1.3 18.1
150
Financial model
2010A n/a n/a n/a n/a n/a n/a n/a n/a (2.7) n/a (12.7) (88.0) (88.0) 903.6 246.3 n/a n/a
2011A n/a (20.6) (54.0) n/a n/a n/a n/a n/a (2.2) n/a (7.2) (88.9) (88.9) 10.4 223.2 n/a n/a
2012E n/a (19.2) (19.1) n/a n/a n/a n/a n/a (1.0) n/a (5.0) (65.5) (65.5) 30.6 322.5 n/a n/a
2013E n/a 16.3 15.8 n/a n/a n/a 15.7 n/a 1.6 n/a (5.8) (74.5) (74.5) 124.4 385.5 n/a n/a
2014E n/a (0.2) 0.0 n/a n/a n/a 77.4 n/a 6.4 n/a (5.8) (24.8) (24.8) 92.3 890.7 n/a n/a
2010A (944.1) n/a (13.8) (7.8) 1.7 (7.8) 0.0 (3.8) 37.8
2011A (1,929.1) n/a (17.4) (17.0) 1.6 (17.0) 0.0 (8.6) 32.2
2012E (2,500.0) n/a (21.6) (21.0) 1.3 (21.0) 0.0 (7.7) 26.5
2013E (2,139.7) n/a (18.6) (18.1) 1.1 (18.1) 0.0 (5.5) 21.2
2014E (2,139.7) n/a (18.6) (18.1) 0.8 (18.1) 0.0 (2.4) 16.5
151
Financial model
250
200
1 50
1 00
50
Share P rice
Reco mmendatio ns
152
153
Appendix 1: Glossary of terms

Variable Admission API AVO Barremian Best Estimate bbl(s) bbls/d BCF boe boepd bopd BOP Bscf bwpd Caisson Condensate Contingent Resources Meaning Process of admission of an entity to a Stock Market American Petroleum Institute Amplitude versus offset or amplitude variation with offset is often used as a direct hydrocarbon indicator Part of the Lower Cretaceous about 130m years old Projected volumes. Often associated with a central, P50 or mean value Barrels(s) Barrels per day Billion cubic feet of gas Barrels of oil equivalent, converting gas to oil at 6 mcf to 1bbl Barrels of equivalent production per day Barrels of oil per day Blowout preventer Billions of standard cubic feet Barrels of water per day A small fixed structure used offshore for the production of oil and gas Hydrocarbon liquid that condenses out of natural gas if the temperature is reduced to below the dew point temperature of natural gas. Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by their economic status Exploration or geological or commerical chance of success. The probability, typically expressed as a percentage, that a given outcome will occur A group of rocks ranging in age from about 70 to 150m years old Measures of permeability in reservoir rocks A series of turbidities that have come to rest in a fan shape A group of rocks ranging in age from about 150 to 200m years old A project associated with a potential accumulation that is currently poorly defined and requires more data acquistion and/or evaluation in order to be classified as a Prospect Liquified Natural Gas Drilling of deviated wells further from the production platform than has been normal up to this point A group of rocks ranging in age from about 100 to 150m years old Thousand cubic feet of gas Measured depth MilliDarcies Measured Depth Rotary Kelly Bushing Measured Depth Below Rotary Table The arithmetic average of a set of values Million Million barrels of oil Million barrels of oil equivalent Million standard cubic feet per day Units
CoS Cretaceous Darcy, milliDarcies, mD Fan sequences Jurassic Lead LNG Long reach deviated drilling Lower Cretaceous mcf MD mD MDRKB MDBRT Mean MM MM bbl MM boe MMscf/d
ft or m ft or m ft or m
154
CONTD
MMstb N/G NPV NYMEX P90 Paleozoic Producing Prospect Prospective Resources
Proved or P90 or 1P
Proved plus Probable or P50 or 2P
Proved plus Probable plus Possible or 3P
Recoverable Oil or gas Reserves
Sales Gas scf Seismic amplitude response stb/d STOIIP Synrift Sw TCF TD Turbidite Unrisked recoverable oil or gas Valanginian
Millions stock tank barrels Net to Gross Net present value New York Mercantile Exchange The probability that a stated volume will be equalled or exceeded. In this example a 90 per cent. Chance that the actual volume will be greater than or equal to that stated An era of geological time ranging in age from about 250 to 550m years old Related to development projects (eg wells and platforms): Active facilities, currently involved in the extraction (production) of hydrocarbons from discovered reservoirs A project associated with a potential accumulation that is sufficiently well defined to represent a viable drilling target 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. Prospective Resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity Proved Reserves are those quantities of petroleum, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 per cent. probability that the quantities actually recovered will equal or exceed the estimate Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50 per cent. probability that the actual quantities recovered will equal or exceed the 2P estimate Possible Reserves are those additional reserves which analysis of geo-science and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P) Reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10 per cent. probability that the actual quantities recovered will equal or exceed the 3P estimate Those quantities of oil or gas that are estimated to be produceable from discovered or undiscovered accumulations Reserves are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria: they must be discovered, recoverable, commercial, and remaining (as of the evaluation date) based on the development project(s) applied. Reserves are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by development and production status Gas volume for sale after liquid stripping in the separator Cubic foot of gas at standard pressure and temperature Changes in the amplitude of events seen on seismic data that may be indicative of the presence of hydrocarbons Stock tank barrels per day Stock tank oil initially in place In context of this report, refers to formations that were formed during the rifting and early opening of the Atlantic Ocean Water saturation Trillion cubic feet of gas Total depth A rock that was deposited in deep water by long distance slumping from shallower water Those quantities of oil or gas that are estimated to be produceable from discovered or undiscovered accumulations, without factoring the probability that the given outcome will occur Part of the Lower Cretaceous about 140m years old
ratio ft or m
Source: CGA and Seymour Pierce Ltd
155
Key to material interests 1 2 3 The analyst has a personal holding of the securities issued by the company, or of derivatives related to such securities. Seymour Pierce Limited or an affiliate owns more than 5% of the issued share capital of the company. Seymour Pierce Limited or an affiliate is party to an agreement with the company relating to the provision of investment banking services, or has been party to such an agreement within the past 12 months. Our corporate broking agreements include a provision that we will prepare and publish research at such times as we consider appropriate. Seymour Pierce or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities for the company within the past 12 months. Seymour Pierce is a market maker or liquidity provider in the securities issued by the company. Seymour Pierce is party to an agreement with the company relating to the production of research recommendations.
4 5 6
Distribution of ratings Our research ratings are defined with reference to the absolute return we expect over the next 12 months:
Rating
Buy Add Hold Reduce Sell
Definition
Absolute return expected to be more than 10% Absolute return expected to be between 5% and 10% Absolute return expected to be between -5% and +5% Absolute return expected to be between -5% and -10% Absolute return expected to be less than -10%
As from 25 October 2010 the nomenclature of our recommendation was changed. Prior to that time Add
recommendations were described as Outperform and Reduce recommendations were described as Underperform. As at 31 December 2011 the distribution of all our published recommendations is as follows: Rating Buy Add Hold Reduce Sell None Proportion of recommendations 57.7% 2.5% 19.0% 4.9% 6.7% 9.2% Proportion of these provided with investment banking services 46.8% 50.0% 3.2% 0.0% 0.0% 80.0%
Important Notes
Our research recommendations are issued and approved for distribution within the United Kingdom by Seymour Pierce Limited only to eligible counterparties and professional clients as defined under the FSA rules. Our research is not directed at, may not be suitable for and should not be relied upon by any other person. The information contained in our research is compiled from a number of sources and is believed to be correct, but cannot be guaranteed. It is not to be construed as an offer, invitation or solicitation to buy or sell any securities of any of the companies referred to within it. All statements made and opinions expressed are made as at the date on the face of the material and are subject to change without notice. Where prices of securities are mentioned, these are the mid-market prices as at the close-of-business on the business day immediately preceding the date of the research. The meanings of our research ratings, together with the proportion of our recommendations issued during the previous quarter carrying each rating, is set out on our website at www.seymourpierce.com. Seymour Pierce Limited and/or its associated companies and ultimate holding company may from time-to-time provide investment or other services to, or solicit such business from, any of the companies referred to in research material. In addition, they and/or their directors and employees and/or any connected persons may have an interest in the securities of any of the companies in the report and may from time-to-time add to or dispose of such interests. Details of the significant conflicts relating to the companies that we research are set out on our website www.seymourpierce.com, together with a summary of our policies for managing conflicts of interest. Seymour Pierce does not meet all of the FSA standards for managing conflicts of interest, as a result our research should not be regarded as an impartial or objective assessment of the value or prospects of its subject matter, though of course we will always ensure that it remains clear, fair and not misleading. Seymour Pierce Limited is authorised and regulated by the Financial Services Authority, and is a member of the London Stock Exchange.
FTSE, "FT-SE", "Footsie", FTSE4Good and techMARK are trade marks jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE International Limited (FTSE) under licence. All-World, All-Share and All-Small are trade marks of FTSE. "The FTSE INDICES] are calculated by FTSE. FTSE does not sponsor, endorse or promote [this presentation] and is not in any way connected to it and does not accept any liability in relation to its issue. All copyright and database rights in the index values and constituent list vest in FTSE. Seymour Pierce Limited has obtained full licence from FTSE to use such copyright and database rights in the creation of this presentation.
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February 2012

Oil & Gas AIM Initiations

Dr. Dougie Youngson

Research Analyst +44 (0) 20 7107 8068 dougieyoungson@seymourpierce.com

Sam Wahab ACA

Research Analyst +44 (0) 20 7107 8094 samwahab@seymourpierce.com

Oil & Gas AIM Initiations February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Top pick overview Bayfield

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

Borders & Southern

m 199 227 116 542

140 120 100

Source: Seymour Pierce Ltd & Company data

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Gulf Keystone Petroleum

268 2,708 2,975 (40) 2,936 256 3,191

31 317 348 (5) 344 30 374

Source: Seymour Pierce Ltd & Company data

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

million 822.4 30.78 853.2

p / share 227 15 242

Source: Seymour Pierce Ltd & Company data

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

North Sea UK & Norway

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

Oil and gas price outlook for 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

10 February 12 | Initiation of coverage | Oil & Gas exploration and production

Aurelian Oil & Gas

Price & price relative (-2yr)

Share price as at close: Next news Operational updates

Year end Revenue December (m)

EBIT* (m) (1.9) (9.0) 1.3 (5.3) (0.1)

PBT* (m) (2.3) (9.7) 2.5 (4.5) 0.4

2009A 2010A 2011E 2012E 2013E

0.0 0.0 0.0 0.0 0.0

Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012

Valuation and recommendation

Assumption $5/boe $3/boe $7.5/mcf 1.65 1.39 1.16 10% 500.8

Source: Seymour Pierce Ltd

Seymour Pierce equity research

Oil & Gas AIM Initiations February 2012

p/share 4.0 1.0 10.0 3.3 1.7 20.0 10.8 30.8

20.2 4.8 50.1 16.4 8.4 99.9 54.2 154.1