nautical 020610 out look

Nautical Petroleum is a research client of Edison Investment Research Limited

2 June 2010

Nautical Petroleum (NPE) has three legs to its story: Kraken, Mariner and a significant

exploration and appraisal portfolio. NPE trades at a significant discount to our 326p

core NAV. Underlying this is scepticism around NPE’s ability to bring its core Kraken

and Mariner projects to fruition and the ability to finance them. For Kraken a dual

penetration well in Q310 has the potential to move it to FDP submission and in our

view NPE’s c 35% share of the £315m cap-ex required to reach the production

phase can be financed given the size of the field. With Mariner, Statoil (45% WI) is

moving towards Project Preliminary Sanction by end 2010, an internal decision gate

that will remove significant uncertainty on whether the 369mmbbl field is going to be

developed. Statoil recently sold a 40% stake in a similar field for $3bn and this

suggests strong motivation to repeat the success. With all this activity coming up,

the investor perspective on NPE has the potential to be transformed by end 2010.

Key events in 2010 for Kraken and Mariner

2010 is an important year for NPE, with key milestones expected on both Kraken and

Mariner, NPE’s two core projects. In Kraken, NPE will drill a dual penetration

appraisal and exploration well in Q310. The result of the appraisal well will be crucial

for a successful FDP submission at the end of 2010. In Mariner, partner and operator

Statoil is on track and expected to reach an internal decision gate by end 2010

(Decision Gate 2 – Project Preliminary Sanction). Project Preliminary Sanction should

be the precursor to the submission of the FDP, expected by end 2011.

Funding: Expected to raise debt to finance capex

NPE reported at H110 a cash position of £16.8m. This should allow it to fund the

Kraken drilling activity and see Mariner through to Project Preliminary Sanction. If all

goes to plan, and the appraisal well is successful, NPE is expected to ramp up capex

during 2011. The bulk of this spend in FY11 is expected to be debt financed.

Valuation: Core NAV of 326p

NPE’s core NAV of 326p is significantly ahead of its current share price. To put this in

context, NPE’s current EV of $22.8m means that its interests in Kraken and Mariner

(119mmbbls) is trading at $0.18/bbl – the lowest in the North Sea peer group.

Outlook

Price 51p

Market Cap £32m

Share price graph

Share details

Code NPE

Listing AIM

Sector Oil & Gas

Shares in issue 63.41m

Price

52 week High Low

73.5p 42.0p

Balance Sheet as at 31 December 2009

Debt/Equity (%) N/A

Core NAV (p) 326

RENAV (p) 445

Net cash (£m) 16.8

Business

Nautical Petroleum is an AIM-listed oil

and gas exploration and production

company, with assets in the UK North

Sea and France.

Valuation

2009 2010e 2011e

P/E relative N/A N/A N/A

P/CF N/A N/A N/A

EV/Sales N/A N/A N/A

ROE N/A N/A N/A

Revenues by geography

UK Europe US Other

100% 0% 0% 0%

Analysts

Neil Shah 020 3077 5715

Elaine Reynolds 020 3077 5700

Peter J Dupont 020 3077 5700

[email protected]

Nautical Petroleum

Year

End

Revenue

(£m)

PBT*

(£m)

EPS*

(p)

DPS

(p)

P/E

(x)

Yield

(%)

06/08 0.0 (1.3) (2.1) 0.0 N/A N/A

06/09 0.0 (0.1) 1.0 0.0 N/A N/A

06/10e 0.1 (3.7) (5.8) 0.0 N/A N/A

06/11e 0.1 (5.9) (9.2) 0.0 N/A N/A

Note: *PBT and EPS are normalised, excluding goodwill amortisation and exceptional items.

Investment summary: 2010 a decisive year

==2 | Edison Investment Research | Outlook | Nautical Petroleum | 2 June 2010

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Investment summary: 2010 a decisive year

Company description: Heavy oil specialist

Nautical Petroleum’s strategy is to acquire and develop heavy oil reserves in the North Sea and

Europe. Its two flagship projects, Kraken and Mariner, are progressing to the FDP stage with first oil

expected in 2012 and 2015, respectively. The company is also involved in a number of exploration

and appraisal prospects, with the Catcher exploration well spudded in May 2010, and the recent

acquisition of the Baltimore discovery offshore Ireland demonstrating Nautical’s ambition to

continue to develop heavy oil beyond Kraken and Mariner.

Heavy oil now accounts for 10% of the UK’s crude production. Although it is harder to extract oil

from these reservoirs, horizontal wells, smarter completions and longer lasting pumps are

transforming the economics of these fields. We see Nautical as well placed to take advantage of

this specialist area.

Sector positioning: Nautical has all the criteria we look for

We believe Nautical meets our criteria to optimise the risk/reward balance for shareholders.

Good subsurface understanding. In Kraken, Nautical drilled 92b-3 in 2008 on the outer flank of the

field. A successful outcome would have proved significant upside resources and maximised value.

Although the sand was absent in this well, Nautical has subsequently carried out extensive

technical work, which has given it a better understanding of the areal extent of the field and has

significantly de-risked the upcoming final appraisal well before FDP submission.

Efficient use of capital. In Mariner, Nautical only needs to spend £3m to get to Decision Gate 2

(DG2), Statoil’s internal decision point, leading to likely project sanction in 2011. For minimal spend

the company can remove significant uncertainty around whether Mariner will be developed. The

recent sale by Statoil of a 40% stake in Peregrino (a similar heavy oil field to Mariner) for $3bn

demonstrates the potential value uplift associated with progressing the Mariner project past the

FDP submission stage.

Activity in the near term. With a final appraisal well on Kraken in Q310, and DG2 on Mariner at end

2010, activity on its two main assets could transform the company this year. The recent farm-in to

Baltimore extends Nautical’s heavy oil portfolio and further establishes Nautical as a key player in

the heavy oil sector.

Key facts

• Net ‘best estimate’ contingent resources 130.1mmboe.

• Net ‘best estimate’ prospective resources 178.3mmboe.

• Debt free and net cash of £16.8m at end December 2009.

• £7.5m undrawn secured debt facility in place.

• Near-term development of Kraken and Mariner with FDP submission targets of end

2010 for Kraken and end 2011 for Mariner.

• Significant portfolio of further exploration and appraisal assets.


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Recent news flow/upcoming catalysts

• The Keddington (WI 10%) development well sidetrack to boost production from 50

barrels of oil a day (bopd) to 150-200bopd commenced on 15 April 2010.

• The Catcher exploration well (WI 15%, 20% carry), operated by Encore Oil targeting

gross prospective resources of 21mmbbl in the initial vertical well spudded on 17 May

2010. Results from the drilling are expected this month.

• Nautical has secured a rig and will drill a dual penetration well in Q310. Success should

lead to an FDP submission by the end of 2010.

• Statoil is working to a key decision point (DG2) on the Mariner development at the end

of 2010. Progression through this point will be a clear indication of Statoil’s intention to

develop Mariner.

Valuation: Core NAV of 326p

Nautical is trading at a significant discount to its core net asset value (NAV) of 326p. We attribute

this to disappointment over the last Kraken well result, shareholder doubt around the development

of Mariner and Nautical’s ability to finance its key projects. With the upcoming drilling campaign at

Kraken and Statoil moving to a key decision point on Mariner, we believe that these factors can be

put behind the company, with the potential to unlock significant value. Comparing Nautical to other

peers on a resource basis is difficult as the company only reports contingent resources, which

cannot be compared with 2P resources without making significant assumptions. However, Xcite

Energy also has contingent resources in the North Sea and, based on its current share price,

Nautical is trading at a 73% discount at a point where it is ready to drill with a rig secured and site

survey completed. There is further near-term exploration upside of a 120p with our risked

exploration net asset value (RENAV) at 445p.

Sensitivities: Pivotal decision points and funding are key

• Kraken appraisal well outcome. The appraisal well must find oil for the Kraken project to

proceed, though the risk of failure has been mitigated by the extensive technical work

carried out by Nautical.

• Mariner DG2 approval from operator Statoil. Nautical is dependent on Statoil for the

approval and timing of the project.

• Funding. Capital expenditure on Kraken and Mariner following project approval will be

substantial for Nautical, although once an FDP has been approved Nautical will have

multiple options to for these projects.

Financials: Capex spend is expected to accelerate

Nautical has two key areas of expenditure in FY11/FY12:

• Spend on bringing Kraken to production is expected to be around £315m, with £44m

falling in FY11 and £261m in FY12. Due to Nautical’s partner Canamens Energy North

Sea (Canamens) opting out of the appraisal well, Nautical is funding 70% of the initial

drilling and testing costs. If the appraisal well is successful provisions exist in the Joint

Operating Agreement that would allow Canamens to buy back into the project. This

would allow Nautical to recover 35% of the gross drilling and testing costs from

Canamens together with a further 35% due to Nautical following FDP, reducing


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Nautical’s equity funding requirements for the Phase 1 development. In the unlikely

event that Canamens does not want to participate following a successful appraisal,

Nautical is likely to farm down its effective 70% working interest.

• A further £5m is expected to be spent on Mariner following Statoil’s Decision Gate 2

process to reach the submission of an FDP. A successful FDP submission would leave

Nautical with a range of options to crystallise value in Mariner.

Company description: Heavy oil in the UKCS

Nautical Petroleum is a hydrocarbon exploration and development company focused on the

acquisition and development of heavy oil in the United Kingdom Continental Shelf and Europe.

Nautical’s key assets are the Kraken and Mariner development projects, which will both pass key

milestones in 2010. The company also holds interests in a number of offshore licences including

Catcher and Baltimore, in addition to the UK onshore producing field Keddington, and onshore

prospects in France.

Heavy oil: Technology developments transform commerciality

Heavy oils are usually defined as those oils having an API oil gravity (a measure of surface density)

less than 22°. Kraken and Mariner each have an API gravity of around 14°. The API gravity of the oil

is not necessarily an indicator of its producibility, so it is more useful to look at oil viscosity as the

key fluid property: an oil with a viscosity greater than 5cp is considered heavy. With viscosities of

110cp in Kraken and 65cp in Mariner (Maureen reservoir), the fields can be compared most closely

to the producing Captain field operated by Chevron, which has a viscosity of 88cp.

Captain came on-stream in 1997. It continues to produce at 25,000bopd and pioneered many of

the innovative horizontal drilling methods and completion technologies required to develop such a

field. The viscosity of the oil in the Heimdal reservoir in Mariner is greater at 540cp, which is more

comparable to that of Statoil’s Bressay development project, but still significantly less than the

600-1,100cp seen in Xcite Energy’s Bentley field. As a heavy oil specialist, and by working with the

major Statoil on Mariner, we see Nautical as well placed to meet the challenges of developing these

fields.

Development projects

Kraken (WI 35%, operator)

• Nautical holds a 35% working interest and is operator of Kraken. The field contains best

estimate contingent resources of 83mmbbl gross (29mmbbl net), and the company will

drill a dual penetration well in Q310, which will consist of an appraisal well and an

exploration well. The appraisal well will assess the southern extent of the existing

hydrocarbon accumulation confirmed by the 9/2-1A and 9/2b-2 wells. The key purpose

of the well will be to recover cores and fluid samples which will be used to optimise the

planned field development. The outcome of this appraisal well is crucial to Nautical’s

plan to submit an FDP, which is scheduled for submission at the end of 2010. The

exploration well, to the west of the appraisal activity, will target gross best estimate

prospective resources of 114mmbbls (net 40mmbbls).


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• In 2008, Nautical drilled appraisal well 9/2b-3 to test the upside of the fields resources,

however, the sandstone was found to be absent. While disappointing, we believe the

upside was significant enough to warrant this higher risk well.

• Following this result and in order to de-risk the upcoming drilling activity, Nautical has

carried out extensive technical work, including a Controlled Source Electromagnetic

survey (CSEM) and a depositional (sand distribution) modelling study. CSEM is a state of

the art technology that detects resistance associated with hydrocarbons. It has been

shown that wells drilled in areas with a CSEM anomaly have a discovery rate two times

above those without such an anomaly. Nautical’s CSEM work indicates an anomaly over

the 9/2b-1A and 9/2b-2 wells, which crucially extends to the south of 9/2b-1A and to

the west of the fault, where the upcoming drilling activity will occur.

Exhibit 1: Kraken field

=Source: Nautical Petroleum

Exhibit 2: Kraken operator’s development schedule

Jan-10 2010 2011 2012

Today

Jul-10 Jan-11 Jul-11 Dec-11 Jun-12 Dec-12

Prepare FDP

FEED

Facilities EPC

Production

PlanningKraken-D Well Planning

Drill Kraken-D

Analyse Kraken-D Results

Prepare FDP

FDP Approved

FEED

Facilities EPC

Drill Development wells 4xP +1xWI

Kraken Production


• Kraken will be produced via a wellhead platform and FPSO. Phase 1 of the development

anticipates that four horizontal producers and one vertical water injector will achieve a


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plateau production rate of 30,000bopd. The gross development capex for Kraken for

Phase 1 is estimated at £315m, with spend expected to be phased £44m in 2011 and

£261m in 2012. Nautical expects success in the upcoming exploration activity to the

west of the upcoming appraisal well to form the basis of Phase 2 of the development.

• Canamens, one of Nautical’s partners, will not participate in the drilling at this time. As a

consequence, Nautical will fund 70% of the upcoming drilling activity, while Celtic Oil,

Nautical’s other JV partner, will fund the remaining 30%. The Joint Operating Agreement

(JOA) has provisions to allow Canamens to buy back into the project following the

completion of drilling, subject to refunding Nautical’s additional costs and paying

Nautical an additional financial uplift upon FDP submission.

• We expect production to commence at the end of 2012.

Mariner (WI 26.67%, Statoil operator)

• Nautical holds a 26.67% interest in Mariner, which will be operated by Statoil. Statoil is a

premier heavy oil developer and operates the Grane and Heidrun fields in Norway,

Bressay in the UK and Peregrino in Brazil. Mariner contains best estimate contingent

resources of 369mmbbl gross (90.3mmbbl net) and is therefore significantly larger than

Kraken. An extended well test in 1997 achieved flow rates of 15,000bbl/d from the

Maureen reservoir. Statoil is due to reach its own internal decision point, DG2, by the

end of 2010 with a view to submitting an FDP by late 2011. It is worth noting that any

Statoil project that has gone through DG2 has always gone on to be developed.

Exhibit 3: Mariner schedule

2008 2009 20112010 2012

Production Profiles

Basis of Design

FEED

Freeze design

Concept Shortlist

Concept Selection

EIA

Mariner 3D seismic survey

Mariner OBC seismic survey

G&G/reservoir modelling – Maureen-- Heimdal

Engineering studies

Design Basisproject planning and optionsconcept screeningconcept studiesmature base case

Front End Engineering Design

Environmental Impact Assessment

Field Development Programme

Operator and JV Decision Gates 1 2 3

DECC discussions & FDP Submit FDP

Project SanctionToday

Concept Phase Definition Phase Execution Phase

key JV decision / action points subsurface studies engineering work

Production Profiles


• The field is likely to be developed with a large platform of up to 40 slots with most

processing carried out on the platform and exporting via an FSO. The wells will be multi-

lateral, with most wells targeting the larger Heimdal reservoir and the remainder

accessing the Maureen reservoir. Nautical is expected to spend £3m to bring the


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project to DG2 and a further £5m to FDP submission. We see material crystallisation of

value as each stage (DG2 and FDP submission) is reached. First oil is planned for 2015.

Exploration and appraisal portfolio: Options beyond Kraken/Mariner

Nautical has a portfolio of exploration and appraisal prospects:

• Catcher (WI 15%). The exploration well spudded in May 2010, targeting net best

estimate prospective resources of 3.3mmbo. If successful, two contingent sidetracks

will be drilled to with potential upside of 25mmbbl net.

• Baltimore. Nautical acquired a 40% interest in the Baltimore heavy oil discovery (License

Option 10/1) in April 2010. In place resources are estimated at 300mmbbl and the

company will fund a development study to assess its commercial viability.

• Merrow (WI 50%) is located on the edge of the East Irish Sea Basin and is expected to

be farmed out. It has gross prospective resources of 300bcf (net 150bcf) and an

exploration well is expected in 2011.

• Tudor Rose (WI 20%), best estimate contingent resources of 9.8mmbbl (net) in the

Outer Moray Firth.

• Spaniards (WI 30%) is operated by Encore Oil. Following seismic reprocessing a

decision to drill or drop is expected to be taken.

• St Laurent (22% WI) is located in the Aquitaine Basin, south-west France. Nautical is

currently in farm-out negotiations regarding the Audignon Ridge prospect, which has

gross prospective resources of 3.3tcf (net 660bcf).

Production: Keddington oil field

Nautical has a 10% interest in the Keddington oil field in Lincolnshire, which currently produces at

50bopd. A horizontal sidetrack to boost production to 150-200bopd was spudded on 15 April 2010.=

Key management: Steeped with experience

Steve Jenkins, CEO: Mr Jenkins has spent 27 years in the oil and gas industry. Having graduated

with an MSc in Petroleum Geology from Imperial College, he spent 11 years as business

development and HSE manager at Nimir Petroleum and has previous experience of heavy oilfields

from onshore Colombia and Kazakhstan. He is currently chairman of the Oil & Gas Independents

Association (OGIA), and a director of Oil & Gas UK.

Paul Jennings, Commercial Director, has over 30 years in the oil and gas sector in roles covering

accountant, economist and business development. He worked with BP for 17 years with

responsibility for projects in China, Russia, Mongolia, Mozambique and west Africa. After leaving

BP he established exploration and production companies in both Russia and Nigeria, before jointly

founding Nautical Petroleum with Steve Jenkins.

Will Mathers, FD: Mr Mathers spent six years as an accountant with Deloitte specialising in the

energy and mining sectors before joining Woodside Petroleum, holding financial roles in the US and

Australia. Prior to joining Nautical, he was global office controller for Shell Gas (LPG) in London.

John Conlin, Chairman: Mr Conlin has spent 34 years in the oil and gas industry, including 28 years

of extensive international experience with Royal Dutch Shell. A petroleum engineer by background,

he has worked in a variety of senior technical and management positions. Prior to joining Nautical,


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he was a non-executive director of Hardman Resources and Delphian Technology, and chairman

of Fuelture.

Sensitivities: Oil price and appraisal are the risks to

focus on

Oil price risk: Significant headroom to project break-even points

As in all oil and gas projects, commodity prices are of critical importance in determining viability. For

Nautical, the break-even oil price, including all taxes, is $35/bbl for Kraken and $50/bbl for Mariner

(these figures are provided by Nautical). With oil prices in May 2010 at $75/bbl, there is headroom

for these projects to remain economic.

Appraisal risk

The outcome of the Kraken appraisal well is critical to the continuation of the project. This risk has

been mitigated by the extensive technical work carried out by the company.

Approval risk: In the hands of Statoil for Mariner

As a non-operator on Mariner, Nautical is dependent on decisions from operator Statoil regarding

the approval, priority and timing of the project. However, again the risk is somewhat mitigated as

from here there is minimal capital spend incurred by Nautical to bring the project to DG2.

Financial risk: Significant capex spend will require funding

Development capex for Kraken and Mariner is substantial. Nautical’s end December 2009 balance

sheet was debt free with net cash of £16.8m. Based on our current financial projections, the

company is likely to have to raise additional funds in the run up to 2011 in order to meet its capex

plans, and has signalled that the bulk of this is expected to be debt financed.

Political risk: Low

With exposure in UKCS and Europe, Nautical’s political risk is very low.

Valuation: Trading below peer multiples and core NAV

Our valuation approach combines an absolute valuation with a cross check against peer and

recent transaction multiples. Exhibit 5 summarises our valuation of Nautical’s assets.

Relative positioning: Xcite and Peregrino suggest upside to shares

Exhibit 4 shows Nautical relative to a group of North Sea peers in terms of resource. The great

difficulty in an EV/boe peer comparison with this peer group is that Nautical has 2C or contingent

resources, which are strictly not comparable with 2P reserves. There is one company in the peer

group that also has contingent resources: Xcite Energy. Xcite’s Bentley field has independently

assessed contingent resources of 122.5mmbbls on a most likely basis. Management recently

upgraded their resource estimate following 3D seismic to 160mmbbls. Xcite is currently trading at

an EV of c $99m (market cap less current net cash). This would suggest it is trading at $0.57/boe

based on upgraded contingent resources. On the same basis, Nautical’s current EV of $22.8m

leaves it trading at $0.18/boe based on its contingent resources of 130mmbbls.


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The upside of developing these resources into 2P and moving to production can be seen in the

multiple recently paid by Sinochem for a 40% stake in Statoil’s Peregrino field. The Peregrino field

is a heavy oil field located 85km offshore in Brazil’s Campos basin and is estimated to contain

recoverable reserves of between 300-600mmbbls, with production due to start in 2011. The field

lies in shallow water of between 328 and 390 feet and has a heavy crude of 13° API with high

viscosity. Sinochem paid $3bn for a 40% stake or between $12.5-25/bbl. While under a different

fiscal regime, Mariner is in similar depths, has oil with a similar API (11° at Heimdal and 14.5° at

Maureen), with similar gross reserves and is also operated by Statoil.

Exhibit 4: Nautical’s reserves relative to other North Sea peers

0

100

200

300

400

500

Pre

mie

r Oil

Dana P

etrole

um

Xcite

Energ

y

Northern

Petrole

um

Ste

rling

Resourc

es

Antrim

Energ

y

Endeavo

ur

Inte

rnatio

nal

Ithaca E

nerg

y

Seric

a E

nerg

y

Valia

nt

Petrole

um

Nautic

al

Petrole

um

Faro

e

Petrole

um

2P 2C=

Source: Last reported 2P and 2C reserves from company presentations

Core NAV of 326p/share

Exhibit 5: Valuation summary

FD shares (m) 69 .3

$ /£ 1.5

Netback

Assets Country/ WI Hydroc.

Licence % Fluid

Under development

Mariner UK 27% Oil 40% 369.0 90.3 5.8 209.2 201.4

Kraken UK 35% Oil 50% 83.1 29.1 7.8 107.9 103.8

TOT TOT 305

Cash/(Net Debt) 25 24.2

G&A (4 ) (4 )

Core NAV TOT 326

Explorat ion/Appraisa l

Catcher UK 15% Oil 30% 21.8 3.3 7.9 5.7 5.5

Grenade France 22% Gas 10% 4.2 0.9 7.6 -0.3 -0.3

Tudor Rose UK 20% Oil 36% 49.0 9.8 8.7 29.7 28.5

Merrow UK 50% Oil 15% 122.8 61.4 10.8 95.0 91.5

TOT 72.1 TOT 120

RENAV TOT 445

Unris ked

Reserves /Resources

CoS

Value/sh

(p)

EMV

$m

NPV/boe

($ /boe)

Net

mmboe

Gross

mmboe


Exhibit 5 summarises our valuation of Nautical’s assets. Geological risk factors are derived from a

consideration of the probabilities of the presence of reservoir, presence of a trap and presence of a

hydrocarbon system. Appraisal and development risk factors reflect the work needed to bring the

field into production.

Our standard key assumptions are as follows:

• We apply a 10% discount rate, combined with the conservative risk factors.

• We are currently using a forward oil price of $60/bbl.

• We include in our valuation exploration subject to near-term drilling.

• We apply an exchange rate of US$1.50/£.


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Based on this, Nautical’s current share price of 51p is significantly below its core NAV. The current

share price reflects disappointment over the last dry well, shareholder impatience and doubt over

the development of Mariner and concerns as to whether Nautical can finance development of both

Kraken and Mariner. Both these have the potential to be rectified, however, with the upcoming

Kraken drilling campaign and Statoil approaching DG2 on Mariner.

Financials: Capex spend to accelerate with drilling

Gross capex for bringing Kraken to production is expected to be around £315m, of which £44m is

expected to be incurred in 2011. With Nautical’s partner Canamens Energy North Sea not

participating in the drilling, Nautical will fund 70% of the initial dual penetration well. If successful,

Canamens has an option to buy back into the well by repaying Nautical 35% of the gross drilling

and testing costs within 30 days of the well result and then contributing a further 35% of the gross

well and testing costs during the development phase. In the event that Canamens chooses not to

participate in a successful find, Nautical would have an effective 70% working interest in the

additional oil proved up, although if this was the case, we believe the company would most likely

farm down a stake.

In addition, the company is likely to incur a further £5m of cost to bring Mariner from DG2 to FDP

approval in 2011.

This suggests that the company will have to secure funding to pursue bringing these fields on

stream. Nautical did state at its last results presentation that it expects to debt finance the majority

of the expenditure.


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Exhibit 6: Financials £'000s 2006 2007 2008 2009 2010e 2011e

Year end 30 June

PROFIT & LOSS

Revenue 0 0 0 25 70 70

Cost of Sales 0 0 0 (28) (92) (92)

Gross Profit 0 0 0 (3) (22) (22)

EBITDA (2,245) 144 (1,726) (1,094) (3,700) (5,000)

Operating Profit (before GW and except.) (2,316) 0 (1,868) (1,094) (3,700) (5,000)

Impairment of exploration assets (5,077) (1,430) (3,244) (6,507) 0 0

Exceptionals 0 0 0 0 0 0

Other 0 0 0 0 0 0

Operating Profit (7,393) (1,430) (5,112) (7,601) (3,700) (5,000)

Net Interest 210 567 592 965 10 (850)

Profit Before Tax (norm) (2,106) 567 (1,276) (129) (3,690) (5,850)

Profit Before Tax (FRS 3) (7,183) (863) (4,520) (6,636) (3,690) (5,850)

Tax 0 472 0 749 0 0

Profit After Tax (norm) (2,106) 1,039 (1,276) 620 (3,690) (5,850)

Profit After Tax (FRS3) (7,183) (391) (4,520) (5,887) (3,690) (5,850)

Average Number of Shares Outstanding (m) 46.0 53.8 60.6 63.4 63.4 63.4

EPS - normalised (p) (4.6) 2.1 (2.1) 1.0 (5.8) (9.2)

EPS - FRS 3 (p) (15.7) (0.5) (7.4) (9.3) (5.8) (9.2)

Gross Margin (%) N/A N/A N/A N/A N/A N/A

EBITDA Margin (%) N/A N/A N/A N/A N/A N/A

Operating Margin (before GW and except.) (%) N/A N/A N/A N/A N/A N/A

BALANCE SHEET

Fixed Assets 52,011 75,656 58,846 50,134 56,325 93,125

Intangible Assets 49,279 49,768 56,400 48,857 56,057 84,957

Tangible Assets 2,732 25,888 2,446 277 268 8,168

Investment in associates 0 0 0 1,000 0 0

Unquoted investments 0 0 0 0 0 0

Current Assets 13,033 9,233 20,722 19,634 9,814 7,014

Stocks 0 0 0 0 0 0

Debtors 733 290 604 573 643 643

Cash 12,300 8,943 20,118 19,061 9,171 6,371

Other 0 0 0 0 0 0

Current Liabilities (1,902) (1,386) (4,658) (809) (809) (809)

Creditors (823) (490) (4,658) (809) (809) (809)

Other creditors 0 0 0 0 0 0

Short term borrowings (1,079) (896) 0 0 0 0

Minority interests 0 0 0 0 0 0

Long Term Liabilities (11,218) (10,969) (9,455) (9,148) (9,148) (48,148)

Long term borrowings (360) 0 0 0 0 (39,000)

Other long term liabilities (10,858) (10,969) (9,455) (9,148) (9,148) (9,148)

Net Assets 51,924 72,534 65,455 59,811 56,182 51,182

CASH FLOW

Operating Cash Flow (1,380) (677) (1,684) (367) (3,700) (5,000)

Net Interest 302 493 622 684 10 0

Tax 0 0 0 0 0 0

Capex (2,401) (2,695) 0 (11,804) (7,200) (36,800)

Acquisitions/disposals (1,930) 0 (13,456) 11,938 0 0

Financing 17,055 0 19,162 0 0 0

Dividends 0 0 0 (508) 0 0

Other 0 0 4,390 0 0 0

Net Cash Flow 11,646 (2,879) 9,034 (57) (10,890) (41,800)

Opening net debt/(cash) (8) (10,861) (8,047) (20,118) (20,061) (9,171)

HP finance leases initiated 0 0 0 0 0 0

Other (793) 65 3,037 0 0 0

Closing net debt/(cash) (10,861) (8,047) (20,118) (20,061) (9,171) 32,629 ==

Source: Company accounts, Edison Investment Research


=

Growth Profitability Balance sheet strength Sensitivities evaluation

N/A N/A

-40

-30

-20

-10

0

10

20

30

2007 2008 2009 2010e 2011e

Net c

ash

(£'m

s)

Litigation/regulatory

Pensions

Currency

Stock overhang

Interest rates

Oil/commodity prices

Growth metrics % Profitability metrics % Balance sheet metrics Company details

EPS CAGR 07-11e N/A ROCE 10e N/A Gearing 10e N/A Address:

EPS CAGR 09-11e N/A Avg ROCE 07-11e N/A Interest cover 10e 370 Parnell House,

25 Wilton Road,

London, SW1V 1YD EBITDA CAGR 07-11e N/A ROE 10e N/A CA/CL 10e 12.1

EBITDA CAGR 09-11e N/A Gross margin 10e N/A Stock turn 10e N/A Phone 020 7550 4890

Sales CAGR 07-11e N/A Operating margin 10e N/A Debtor days 10e N/A Fax 020 7550 4816

Sales CAGR 09-11e N/A Gr mgn / Op mgn 10e N/A Creditor days 10e N/A www.nauticalpetroleum.com

Principal shareholders % Management team

International Energy Group AG 30.9 CEO: Steve Jenkins

MHR Advisors LLC 7.9 Mr Jenkins has spent 27 years in the oil and gas industry.

Having graduated with an MSc in Petroleum Geology from

Imperial College, he spent 11 years as business development

and HSE manager at Nimir Petroleum and has previous

experience of heavy oilfields from onshore Colombia and

Kazakhstan. He is currently chair of the Oil & Gas Independents

Association (OGIA), and a director of Oil & Gas UK.

Sin Cheon Co Ltd 6.0

Drawbridge Global Macro Master Fund 5.8

Commercial Director: Paul Jennings

Mr Jennings has over 30 years in the oil and gas sector in

roles covering accountant, economist and business

development. He worked with BP for 17 years with

responsibility for projects in China, Russia, Mongolia,

Mozambique and west Africa. After leaving BP he established

exploration and production companies in both Russia and

Nigeria, before jointly founding Nautical Petroleum with Steve

Jenkins.

Forthcoming announcements/catalysts Date *

Final results November FD: Will Mathers

Interim results March Mr Mathers spent six years as an accountant with Deloitte

specialising in the energy and mining sectors before joining

Woodside Petroleum, holding financial roles in the US and

Australia. Prior to joining Nautical, he was Global Office

Controller for Shell Gas (LPG) in London.

AGM December

Note: * = estimated

Companies mentioned in this report:

Antrim Energy, Canamens Energy, Dana Petroleum, Encore Oil, Endeavour International, Faroe Petroleum, Ithaca Energy, Northern Petroleum, Premier

Oil, Serica Energy, Statoil, Sterling Resources, Valiant Petroleum, Xcite Energy

Edison Investment Research

Lincoln House, 296-302 High Holborn, London, WC1V 7JH tel: +44 (0)20 3077 5700 fax: +44 (0)20 3077 5750 www.edisoninvestmentresearch.co.uk

Registered in England, number 4794244. Edison Investment Research is authorised and regulated by the Financial Services Authority.

EDISON INVESTMENT RESEARCH LIMITED Edison is Europe’s leading investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by major institutional investors in the UK and abroad, as well as by the private client broker and international investor communities. Edison was founded in 2003 and is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584).

DISCLAIMER Copyright 2010 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Nautical Petroleum and prepared and issued by Edison Investment Research Limited for publication in the United Kingdom. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison Investment Research Limited at the time of publication. The research in this document is intended for professional advisers in the United Kingdom for use in their roles as advisers. It is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. A marketing communication under FSA Rules, this document has not been prepared in accordance with the 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. Edison Investment Research Limited has a restrictive policy relating to personal dealing. Edison Investment Research Limited is authorised and regulated by the Financial Services Authority for the conduct of investment business. The company does not hold any positions in the securities mentioned in this report. However, its directors, officers, employees and contractors may have a position in any or related securities mentioned in this report. Edison Investment Research Limited or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. This communication is intended for professional clients as defined in the FSA’s Conduct of Business rules (COBs 3.5). =

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