oil gas review - february 2012

8/2/2019 Oil Gas Review - February 2012

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February 2012

Oil & Gas AIM Initiations

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.

Dr. Dougie YoungsonResearch Analyst

+44 (0) 20 7107 [email protected]

Sam WahabResearch Analyst

+44 (0) 20 7107 [email protected]

ACA


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Seymour Pierce equity research 1

Oil & Gas AIM Initiations February 2012

Table of Contents

Introduction 3Top picks 4Bayfield 4

Borders & Southern 5Gulf Keystone Petroleum 6Xcite Energy 7

Top regions 8Oil and gas price outlook for 2012 11Valuation methodology 12Exploration 12Production 12Companies

Aurelian Oil & Gas 13Borders & Southern Petroleum 27Chariot Oil & Gas 37Faroe Petroleum 51Frontera 67Gulf Keystone 77Gulfsands Petroleum 91Xcite Energy 107Bayfield Energy 115Gold Oil 129Independent Resources 143

Glossary of terms 156


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2 Seymour Pierce equity research

Oil & Gas AIM Initiations |February 2012


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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 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 coreregions for oil and gas activity in the short term.

We have highlighted what we feel are likely to

be some of the best performing stocks in 2012..


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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 p/share

Production 96.9 45.1

Reserves 90.3 42.0

Net cash* 28.1 13.1Less: G&A (20.0) (9.3)Core Value 195.4 90.9Contingent resources 36.8 17.1Target Market Cap 232.1 108.0Source: 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

45

42

17

13

-9

-20

0

20

40

60

80

100

120

140

G&A Net Cash Contingent

resources

Reserves Production

p/share

Source: Seymour Pierce Ltd


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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


NAV m p/share

Darwin 199 46

Stebbing 227 53

Net cash 116 27Core value 542 126

Source: Seymour Pierce Ltd & Company data

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.


27

46

53

0

20

40

60

80

100

120

140

Net Cash Darwin Stebbing

p/share



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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


million p/share

Production 268 31Discovered 2C 2,708 317Gross Value 2,975 348Less: G&A (40) (5)Net Value 2,936 344Net Cash 256 30

Target Market Cap/ Price 3,191 374Source: Seymour Pierce Ltd

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.


317

31

30-5

-50

0

50

100

150

200

250

300

350

400

G&A Net Cash Production Discovered 2C

p/share


.


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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


NAV by activity million p / share

Confirmed CPR reserves/resources 822.4 227

Plus net (debt)/cash 30.78 15Core NAV 853.2 242Source: Seymour Pierce Ltd & Company data

We have based our valuation of Xcite solely on the company's latest Reserves

Assessment Report (RAR) for the Bentley field.


227

15

0

50

100

150

200

250

300

Net cash Risked resources

p/share



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Top regions

We have identified three key regions which we believe 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 seenconsiderable 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 drillingresults 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 outsideAfrica 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.

We have identified three key regions which we

feel are likely to see significant positive

momentum in 2012.

The USGS has estimated that Kurdistan has

c.40bn bbl of oil and c.60tcf of gas with low

geological exploration risk.


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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. 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.


Afren entered east Africa via its acquisition of Black Marlin. During 2011 the companyhas 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 explorationcampaign 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 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.

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 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.


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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 progressivedrilling, appraisal and development activities.

Xcite Energy moves into the development phase this year which should yieldproduction 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 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 asignificant 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 in2012.

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 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.

Geopolitics were a major price driver during

2011, as concerns driven by the Arab Spring

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.


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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/bblThe 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 arebetter 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 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

We write an operational model for the

companys producing assets. This reflects

historic data and our assumptions for the future.


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Let it flow2011 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 shiftAurelian 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 pricetarget 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.

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

Aurelian Oil & Gas(AIM:AUL)F

BUY

Share price 17pTarget price 31p

84% Upside

Market cap (m) 82.8

Net cash (m) 80.0

Enterprise value^ (m) 82.8

No. of shares (m) 494.3

Average daily vol ('000, -3m) 3,488

Dividend yield (%) 0.0

PER at Target price (Y1) 147.2

12 month high/low (p) 92/16

(%) 1m 3m 12mAbsolute -2.9 -27.2 -79.3

FTA relative -6.9 -31.9 -78.9

Price & price relative (-2yr)

0

20

40

60

80

100

Feb May Aug Nov Feb May Aug Nov Feb

Price Relative

Source: Datastream

Share price as at close: 9 February 12

Next news

Operational updates

Business

Exploration in Central Europe with licences in

Poland, Slovakia, Romania and Bulgaria

www.aurelianoil.comYear end

December

Revenue

(m)

EBIT*

(m)

PBT*

(m)

Tax

(%)

Adj. EPS*

(c)

PER

(x)

EV/EBIT*

(x)

Div yield

(%)

2009A 0.0 (1.9) (2.3) 0.0 (0.2) (88.1) (51.8) 0.0

2010A 0.0 (9.0) (9.7) 0.0 (4.9) (4.0) (11.0) 0.0

2011E 0.0 1.3 2.5 0.0 0.2 80.1 76.4 0.0

2012E 0.0 (5.3) (4.5) 0.0 (0.9) (21.7) (18.7) 0.0

2013E 0.0 (0.1) 0.4 0.0 0.1 261.4 (985.9) 0.0

* excludes exceptional items and amortisation of acquired intangibles.

^ EV calculation adjusted for core cash, investments etc.


Dr. Dougie Youngson

Research Analyst

+44 (0) 20 7107 8068

[email protected]

Sam Wahab ACAResearch Analyst

+44 (0) 20 7107 8094

[email protected]


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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 Assumption

NPV/boe - Oil $5/boe

NPV/boe - Gas $3/boe

Realised gas price $7.5/mcf

Long-term $/ 1.65

Long-term $/ 1.39

Long-term / 1.16

Discount rate 10%

Shares outstanding (million) 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)

NPV 10%

US$ / boe

Unrisked

NPV $m

Risked

NPV $m

Unrisked

NPV m

Risked

NPV m

Net Risked

p/share

Gross Net

Development Poland Siekierki 90.00% 25% 49.30 44.37 3 133.11 33.28 81 20.17 4.0

Exploration Poland Siekierki NW 90.00% 20% 11.5 10.35 3 31.05 6.21 18.82 3.76 0.8

Exploration Poland Siekierki SW 90.00% 20% 3.3 2.97 3 8.91 1.78 5.40 1.08 0.2

Exploration Poland Kalisz 50.00% 10% 5.3 2.65 3 7.95 0.80 4.82 0.48 0.1

Exploration Poland Cyb. & Ty. 45.00% 10% 97 43.65 5 218.25 21.83 132.27 13.23 2.6

Exploration Poland Bieszczady 25.00% 10% 272.8 68.2 5 341.00 34.10 206.67 20.67 4.1

Exploration Poland Karpaty East 80.00% 10% 28 22.4 3 67.20 6.72 40.73 4.07 0.8

Exploration Poland Karpaty West 60.00% 10% 19 11.4 3 34.20 3.42 20.73 2.07 0.4

Exploration Poland Wetlina 100.00% 10% 31.6 31.6 5 158.00 15.80 95.76 9.58 1.9

Exploration Slovakia Svidnik 50.00% 10% 180.2 90.1 3 270.30 27.03 163.82 16.38 3.3

Exploration Romania Brodina 33.75% 10% 50 16.875 5 84.38 8.44 51.14 5.11 1.0Exploration Romania Cuejdiu 45.00% 10% 16 7.2 5 36.00 3.60 21.82 2.18 0.4

Exploration Romania Brodina 33.75% 10% 8 2.7 3 8.10 0.81 4.91 0.49 0.1

Exploration Bulgaria Golitza Block 30.00% 10% 12 3.6 3 10.80 1.08 6.55 0.65 0.1784.00 358.07 1,409.25 164.89 854.09 99.93 20.0Source: Seymour Pierce Ltd

We value Aurelian on its core exploration and

development assets in Poland, Slovakia,

Romania and Bulgaria.


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million p/share

Siekierki (Development) 20.2 4.0

Siekierki (Exploration) 4.8 1.0

Other Polish exploration 50.1 10.0Slovakia exploration 16.4 3.3

Romania exploration 8.4 1.7Gross Value 99.9 20.0Net Cash 54.2 10.8Target Market Cap 154.1 30.8Source: Seymour Pierce Ltd


11

10

5

3

2

0

5

10

15

20

25

30

35

Romania & Bulgaria

exploration

Slovakia exploration Siekierki (Exp & Dev.) Polish exploration

upside

Net Cash

p/share


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.

On this basis we initiate coverage with a Buy recommendation and set a price target

of 31p.

In our view, Aurelian is severely undervalued and

is currently trading well below its core value.


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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 understoodand a clear plan forward has been developed.

The cash position at the year-end 2011 was 63m which allows the companyto carry out its planned exploration and appraisal activities for the next 18months.

Unlocking the full upside within the company is likely to require additionaltechnical 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 (AGR-

TRACS). 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

The well tests on Siekierki have been

completed and incorporated in a

comprehensive technical and commercial

review led by a group of independent

consultants


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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 anaverage 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. In line with the strategic review, thecompany 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 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WI Max Cap (m) Target mmboe p/share

Krzesinki-1 90% n/a n/a n/a

Niebieszczany-1 25% n/a n/a n/a

Sosna-1 45% 2.6 3.1 0.4

Cierne-1 50% 6.4 19.4 1.4

Bieszczady-2 25% 3.7 23.1 2.8

Kaparty E-1 80% 10.2 14.5 1.1

Cuejdiu-1 45% 2.7 7.2 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.

Aurelian plans to take advantage of the flexibility

in its work programme and preserve capital byprioritising its exploration targets.


19/158



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 whythe 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


20/158



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 (previously1.6tcf), 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.

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.

Aurelian will now seek to implement the next

stage of its development plan to achieve first gas

sales in 2016.


21/158



Key assets

Core area 1

PoznanThe 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 mid-

case 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


22/158



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 theconcession 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 hasbeen 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.


23/158



Financial model

Income Statement

Year endDecember (m)

2009A 2010A 2011E

Group revenue 0.0 0.0 0.0

Cost of sales 0.0 0.0 0.0

Gross profit 0.0 0.0 0.0

Total operating expenses (1.9) (9.0) (5.6)

EBIT (1.9) (9.0) (5.6)

Net interest/financial income/(cost) (2.3) (9.7) 2.5

Associate and Other non-op. income/(cost) (0.4) (0.7) 1.2

PBT (2.3) (9.7) 2.5

Tax 0.0 0.0 0.0

Effective tax rate (%) 0.0 0.0 0.0

Minorities 0.0 0.0 0.0

Earnings (0.4) (16.9) 1.2

EBITDA (0.4) (8.1) (4.1)

Adjusted EBITDA* (0.4) (8.1) 2.7

Adjusted EBIT* (1.9) (9.0) 1.3

Adjusted PBT* (2.3) (9.7) 2.5

Adjusted earnings* (0.4) (16.9) 1.2

DPS (c) 0.0 0.0 0.0

EPS (c) (0.2) (4.9) 0.2

EPS [F. Dil.] (c) (0.2) (4.9) 0.2

EPS [Adj.]* (c) (0.2) (4.9) 0.2

EPS [Adj. F. Dil.]* (c) (0.2) (4.9) 0.2

Weighted average no. shares (m) 189.5 341.7 490.2

Fully dil. w. ave. no. shares (m) 189.5 341.7 500.8

Year end no. shares (m) 189.5 341.7 490.2


Source: Company data, Seymour Pierce Ltd


24/158



Cashflow Statement

Year end

December (m)

2009A 2010A 2011E

Operating income (1.9) (9.0) (5.6)

Amortisation of acquired intangibles 0.0 0.0 0.0

Amortisation of other intangibles 0.0 0.0 0.0

Depreciation 1.5 0.9 1.5

Net change in working capital 1.2 (5.7) (0.6)

Other 0.0 7.8 0.2

Operating cash flow 0.8 (6.0) (4.5)

Capital expenditure (8.5) (20.3) (62.3)

Investment in Other intangibles 0.0 0.0 0.0

Net interest/financial income/(cost) 0.4 0.7 (1.2)

Tax paid (0.0) (0.0) 0.0

Net acqns./disposals 0.0 0.0 0.0

Dividend paid 0.0 0.0 0.0

Other (0.0) 0.2 0.1Cash flow before financing (7.3) (25.4) (67.9)

Proceeds from shares issued 12.8 132.4 2.5

Investments 0.0 0.0 0.0

Other 0.0 0.0 0.0

Net movement in cash/(debt) 5.5 107.0 (65.4)

Opening net cash/(debt) 6.0 14.0 114.7

Adjustments (Forex, etc.) 0.0 0.0 0.0

Closing net cash/(debt) 14.0 114.7 63.3Source: Company data, Seymour Pierce Ltd

Balance Sheet

Year end

December (m)

2009A 2010A 2011E

Property plant and equipment 5.0 0.2 0.0

Goodwill and Acquired intangibles 0.0 0.0 0.0

Other intangibles 0.0 0.0 0.0

Other fixed assets 40.2 56.5 117.0

Non current assets 45.2 56.7 117.0

Stocks & WIP 0.0 0.0 0.0

Trade receivables 4.7 11.0 10.1

Cash 14.0 114.7 63.3

Other current assets 0.0 9.0 0.0

Current assets 18.6 134.7 73.5

Total assets 63.9 191.4 190.5

Trade creditors 3.4 13.2 11.9

Short term borrowings 0.6 1.2 0.0

Long term borrowings 1.6 0.0 0.0

Other liabilities 0.0 2.0 0.0

Total liabilities 5.7 16.4 11.9

Net assets 58.2 175.1 178.6

Issued share capital 15.5 30.4 30.7

Share premium account 65.9 183.4 185.2

Retained earnings (15.8) (32.7) (31.4)

Other reserves (7.4) (6.0) (5.9)

Minority interests 0.0 0.0 0.0

Total equity 58.2 175.1 178.6



25/158



Target Price & Recommendation History

0

10

20

30

40

50

60

70

80

90

100

Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12

Share Price Target Price Reco mmendations

Source: Datastream, Seymour Pierce Ltd


26/158

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.

A natural selection2011 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 theDarwin 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.


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.



Borders & Southern Petroleum(LSE:BOR)5

BUY


88% Upside

Market cap (m) 288.4

Net cash (m) 102.3





(%) 1m 3m 12mAbsolute -5.9 +18.5 +3.5

FTA relative -9.8 +10.9 +5.2


304050607080

90100


Price Relative

Source: Datastream


Next news

FY Results

Business

Oil exploration focusing on frontier or emerging

basins where there is potential to identify and

commercialise high value prospects.

www.bordersandsouthern.com/

Dr. Dougie Youngson

Research Analyst

+44 (0) 20 7107 8068

[email protected]

Sam Wahab ACA

Research Analyst

+44 (0) 20 7107 8094

[email protected]

Year end

December

Revenue

($m)

EBIT*

($m)

PBT*

($m)

Tax

(%)

Adj. EPS*

(c)

PER

(x)

EV/EBIT*

(x)

Div yield

(%)

2009A 0.0 (1.2) 3.2 0.0 1.5 69.1 (243.2) 0.0

2010A 0.0 (1.5) (0.2) 0.0 (0.0) (2,755.4) (195.6) 0.0

2011E 0.0 (1.9) 1.3 36.4 0.2 563.9 (152.3) 0.0





27/158


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. 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:


Metric Assumption

Long term $/ exchange rate 1.65

Discount rate 10%

Darwin CoS 15%

Stebbing CoS 10%

NPV/bbl ($) - Oil 7.50

NPV/bbl ($) - Gas 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 Target P90 P50 P10 CoSDarwin (base) Anomaly 230 300 380 15%

Darwin (upside) To spill point 580 760 980 15%Total 810 1,060 1,360Source: Scott Pickford

Potential resources at Stebbing

Recoverable resources (mmboe)

Prospect Target P90 P50 P10 CoSStebbing (base) Tertiary 390 710 1,120 10%

Stebbing (upside) Upper Cretaceous 410 570 930 10%Total 800 1,280 2,050Source: Scott Pickford


P90 - Low case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $259 $293 $551 78

Gas 2.0 $69 $82 $151 21

P90 - High case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $653 $600 $1,253 177

Gas 2.0 $174 $160 $334 47

P10 - High case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $1,103 $1,538 $2,640 373

Gas 2.0 $294 $410 $704 100


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.

We have valued Borders in terms of a risked

exploration net asset appraisal of their near term

assets.


28/158


Valuation and recommendation Borders & Southern Petroleum | 10 February 12


NAV m p/share

Darwin 199 46

Stebbing 227 53

Net cash 116 27Core value 542 126Source: Seymour Pierce Ltd & Company data


27

46

53

0

20

40

60

80

100

120

140

Net Cash Darwin Stebbing

p/share



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


We would therefore advise investors to have a

pro-active response to their position rather than



29/158


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 richshales 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


30/158


Asset overview Borders & Southern Petroleum | 10 February 12

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

Source: Company data

Rig mobilisation - Leiv Eiriksson

The Leiv Eiriksson rig will arrive in late January and is a fifth generation semi-

submersible 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

0

2

4

6

8

10

12

14

16

Winter Spring Summer Autumn

S

ignificantwaveheight(metres)

West of Shetlands Central North Sea SE Falklands

Source: FOGL

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.


31/158


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

23%

33%

43%

51%

52%

53%

55%

57%

62%

70%

73%

73%

74%

76%

76%

78%

78%

81%

85%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

French Guiana

Falkland Islands

US Gulf of Mexico

Ghana

Colombia

Brazil

Mauritania

China

UK (Non PRT)

Nigeria

Indonesia

Trinidad and Tobago

Gabon

Uganda

DRC

Angola

Norway

UK (PRT)

Malaysia

Source: Wood Macenzie


32/158


Financial model Borders & Southern Petroleum | 10 February 12

Financial model

Income Statement

Year endDecember ($m)

2009A 2010A 2011E

Group revenue 0.0 0.0 0.0

Cost of sales 0.0 0.0 0.0

Gross profit 0.0 0.0 0.0

Total operating expenses (1.2) (1.5) (1.9)

EBIT (1.2) (1.5) (1.9)

Net interest/financial income/(cost) 4.4 1.3 3.2

Associate and Other non-op. income/(cost) 0.0 0.0 0.0

PBT 3.2 (0.2) 1.3

Tax 0.0 0.0 (0.5)

Effective tax rate (%) 0.0 0.0 36.4

Minorities 0.0 0.0 0.0

Earnings 3.2 (0.2) 0.8

EBITDA (1.2) (1.5) (1.9)

Adjusted EBITDA* (1.2) (1.5) (1.9)

Adjusted EBIT* (1.2) (1.5) (1.9)

Adjusted PBT* 3.2 (0.2) 1.3

Adjusted earnings* 3.2 (0.2) 0.8

DPS (c) 0.0 0.0 0.0

EPS (c) 1.5 (0.0) 0.2

EPS [F. Dil.] (c) 1.5 (0.0) 0.2

EPS [Adj.]* (c) 1.5 (0.0) 0.2

EPS [Adj. F. Dil.]* (c) 1.5 (0.0) 0.2

Weighted average no. shares (m) 204.6 428.6 428.6

Fully dil. w. ave. no. shares (m) 204.6 428.6 428.6

Year end no. shares (m) 204.6 428.6 428.6




33/158


Borders & Southern Petroleum | 10 February 12 Financial model

Cashflow Statement

Year end

December ($m)

2009A 2010A 2011E

Operating income (1.2) (1.5) (1.9)

Amortisation of acquired intangibles 0.0 0.0 0.0

Amortisation of other intangibles 0.0 0.0 0.0

Depreciation 0.0 0.0 0.0

Net change in working capital 0.1 (1.8) 4.1

Other 0.0 0.0 0.0

Operating cash flow (1.1) (3.3) 2.2

Capital expenditure 9.4 (10.5) (6.4)

Investment in Other intangibles 0.0 0.0 0.0

Net interest/financial income/(cost) 4.4 1.3 3.2

Tax paid 0.0 0.0 (0.5)

Net acqns./disposals 9.7 (10.0) (6.0)

Dividend paid 0.0 0.0 0.0

Other (0.0) (0.0) 0.0Cash flow before financing 22.3 (22.4) (7.5)

Proceeds from shares issued 183.9 0.0 0.0

Investments 0.0 0.0 0.0

Other 0.0 0.0 0.0

Net movement in cash/(debt) 206.2 (22.4) (7.5)

Opening net cash/(debt) 9.5 206.3 194.1

Adjustments (Forex, etc.) (0.2) 0.8 1.5

Closing net cash/(debt) 206.3 194.1 192.1Source: Company data, Seymour Pierce Ltd

Balance Sheet

Year end

December ($m)

2009A 2010A 2011E

Property plant and equipment 0.0 0.0 0.0

Goodwill and Acquired intangibles 0.0 0.0 0.0

Other intangibles 36.6 37.7 44.1

Other fixed assets 0.0 0.0 0.0

Non current assets 36.6 37.7 44.2

Stocks & WIP 0.0 0.0 0.0

Trade receivables 0.1 11.3 9.9

Cash 206.3 194.1 192.1

Other current assets 0.0 0.0 0.0

Current assets 206.4 205.4 202.0

Total assets 243.1 243.2 246.1

Trade creditors 0.2 0.3 2.4

Short term borrowings 0.0 0.0 0.0

Long term borrowings 0.0 0.0 0.0

Other liabilities 0.0 0.0 0.1

Total liabilities 0.2 0.3 2.6

Net assets 242.8 242.9 243.6

Issued share capital 7.7 7.7 7.7

Share premium account 238.0 238.0 238.0

Retained earnings (3.2) (3.4) (2.6)

Other reserves 0.4 0.6 0.5

Minority interests 0.0 0.0 0.0

Total equity 242.8 242.9 243.6



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Financial model Borders & Southern Petroleum | 10 February 12

Target Price & Recommendation History

0

200

400

600

800

1000

1200

1400

1600

1800

Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12

Share Price Series2 Recommendations

Source: Datastream, Seymour Pierce Ltd


35/158


36/158


Financial model Chariot Oil & Gas | 10 February 12

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 blocksexpected 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.


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 marketseems 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.



Chariot Oil & Gas( AIM: CHAR)

SELL


41% Downside

Market cap (m) 228.8

Net cash (m) 10.3





(%) 1m 3m 12mAbsolute +21.2 -6.3 -48.1

FTA relative +16.2 -12.4 -47.3


050

100150200250

300350


Price Relative

Source: Datastream


Next news

FY2012 Results

Business

Independent oil and gas exploration company

with interests in Namibia.

www.chariotoilandgas.com/

Dr. Dougie Youngson

Research Analyst

+44 (0) 20 7107 8068

[email protected]

Sam Wahab ACA

Research Analyst

+44 (0) 20 7107 8094

[email protected]

Year end

February

Revenue

($m)

EBIT*

($m)

PBT*

($m)

Tax

(%)

Adj. EPS*

(c)

PER

(x)

EV/EBIT*

(x)

Div yield

(%)

2009A 0.0 (10.8) (28.6) 0.0 (0.2) (922.6) (32.0) 0.0

2010A 0.0 (3.2) (3.1) 0.0 (0.0) (9,016.9) (107.3) 0.0

2011E 0.0 (7.3) (7.3) 0.0 (0.1) (3,946.0) (47.1) 0.0





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Chariot Oil & Gas | 10 February 12 Valuation and recommendation


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:


Metric Assumption

NPV $/mmboe 1.06

Long term exchange rate $/ $1.65/1

Number of shares outstanding (m) 340.43

Chance of exploration success 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 theUNX/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.


Scheduled Project Interest CoS/CoD Prospective

Resources (mmboe)

NPV 10%

US$ / boe

Unrisked

NPV $m

Risked

NPV $m

Unrisked

NPV m

Risked

NPV m

Net Risked

p/share

Gross Net

2012 Tapir S 100% 25% 451 451 1.06 478.1 119.5 289.7 72.4 21.3

2012 Nimrod (Albian) 25% 24% 2,524 631 1.06 668.9 160.5 405.4 97.3 28.6Total 2012 2,975 1,082 1,146.9 280.0 695.1 169.7 49.92013 Delta 1 90% 11% 438 394 1.06 417.9 46.0 253.2 27.9 8.2Total 2013 438 394 417.9 46.0 253.2 27.9 8.2Not Specified Tapir N 100% 21% 298 298 1.06 315.9 66.3 191.4 40.2 11.8

Not Specified Tapir 100% 21% 188 188 1.06 199.3 41.8 120.8 25.4 7.5

Not Specified Tapir NE 100% 14% 61 61 1.06 64.7 9.1 39.2 5.5 1.6

Not Specified Zamba N 100% 12% 23 23 1.06 24.4 2.9 14.8 1.8 0.5

Not Specified Zamba 100% 15% 633 633 1.06 671.0 100.6 406.7 61.0 17.9

Not Specified A (Albian) 25% 10% 149 37 1.06 39.5 3.9 23.9 2.4 0.7

Not Specified B (Albian+Barremian) 25% 18% 146 37 1.06 38.7 7.0 23.4 4.2 1.2

Not Specified C (Albian+BDO) 25% 9% 423 106 1.06 112.1 10.1 67.9 6.1 1.8

Not Specified D (Albian) 25% 10% 47 12 1.06 12.5 1.2 7.5 0.8 0.2

Not Specified Dora North 25% 13% 186 47 1.06 49.3 6.4 29.9 3.9 1.1

Not Specified K (Syn-Rift) 25% 10% 248 62 1.06 65.7 6.6 39.8 4.0 1.2

Not Specified L (Albian) 25% 10% 120 30 1.06 31.8 3.2 19.3 1.9 0.6

Not Specified Isabel (BDO) 25% 14% 58 15 1.06 15.4 2.2 9.3 1.3 0.4Not Specified Mary (BDO) 25% 15% 100 25 1.06 26.5 4.0 16.1 2.4 0.7

Not Specified Dora South 25% 13% 174 44 1.06 46.1 6.0 27.9 3.6 1.1

Not Specified Klipspringer 90% 7% 587 528 1.06 560.0 39.2 339.4 23.8 7.0

Not Specified Hartebeest 90% 7% 502 452 1.06 478.9 33.5 290.2 20.3 6.0

Not Specified Oryx 90% 6% 157 141 1.06 149.8 9.0 90.8 5.4 1.6

Not Specified Springbok 90% 12% 58 52 1.06 55.3 6.6 33.5 4.0 1.2

Not Specified Springbok East 90% 12% 58 52 1.06 55.3 6.6 33.5 4.0 1.2

Not Specified Eta 90% 10% 68 61 1.06 64.9 6.5 39.3 3.9 1.2

Not Specified Springbok North 90% 10% 74 67 1.06 70.6 7.1 42.8 4.3 1.3

Not Specified Delta 2 90% 11% 131 118 1.06 125.0 13.7 75.7 8.3 2.4

Not Specified Delta 3 90% 11% 107 96 1.06 102.1 11.2 61.9 6.8 2.0

Not Specified Reef 1 90% 9% 161 145 1.06 153.6 13.8 93.1 8.4 2.5

Not Specified Reef 2 90% 9% 225 203 1.06 214.7 19.3 130.1 11.7 3.4

Not Specified Lead A 90% 8% 402 362 1.06 383.5 30.7 232.4 18.6 5.5

Not Specified Lead B 90% 8% 312 281 1.06 297.6 23.8 180.4 14.4 4.2Total not specified 5,696 4,174 4,424.0 492.5 2,681.2 298.5 87.7Total overall 9,109 5,650 5,988.7 818.5 3,629.5 496.1 145.7


We value Chariot on a risked net asset value

basis, assessing its near term exploration targets

specifically.


38/158


Valuation and recommendation Chariot Oil & Gas | 10 February 12

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. 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.


million p/share

Tapir S 72.4 21.3

Nimrod 97.3 28.6

Net cash 84.6 24.9Core value 254.3 74.7Source: Seymour Pierce Ltd

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.


21

29

25

0

10

20

30

40

50

60

70

80

Tapir South Nimrod Net Cash

p/share



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.

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.


39/158


Chariot Oil & Gas | 10 February 12 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 (recentlyfarmed 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

Drill Zamba prospect

Process data for Delta-1

Spud first well at Delta-1

Process data for Nimrod

Process data for Tapir

South

Spud first well at

Nimrod

Spud first well at Tapir

South

Take possession of

required rig

Interpret 3D seismic on

Central Blocks

Progress farm-out

discussions for Northern

Blocks

Process data for Zamba

2012 2013 2014

Source: Company


40/158


Strategy overview Chariot Oil & Gas | 10 February 12

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 drilldo 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.


41/158


Chariot Oil & Gas | 10 February 12 Strategy overview

Chariots acreage

Volumetric pot Northern Block Central Block Southern Block

Resources in place (bnbbls) 2.8 4.3 9

Location Namibe Basin Walvis Basin Orange Basin

Depth (m) 700 2300 500 3000 100 1500Work performed to date 1500km 3D seismic (2008/9)

Processing complete July 2010

Processing and Interpretation

completed March 2010. 3000km2 2D

seismic (2008).

3000km 3D acquired in 2008/9.

Petrobras farmed into Block 2714A for

a 50% interest and BP for 25%.

Targets 4 prospects and 2 leads identified to

date

3 leads identified to date 11 prospects identified to date

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

0.2

4.0

1.8

2.8

1.4

3.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan 08 Oct 08 Mar 10 Sep 10 Jan 11 Feb 11

bnboe

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

oil gas review - february 2012

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