Goldman Sachs 50 E&P Equity Research Report


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Goldman Sachs 50 E&P Equity Research Report

  1. 1. May 8, 201250 E&Ps Equity ResearchM&A in selected assets remains an opportunityCompelling M&A targets but selection is key CGT an emerging consideration SUMMARY OF RATING CHANGESShare price weakness in the last few weeks has We believe companies with unsanctioned assets Ratings changes for companies Old rating New ratingnot fully eroded gains made in the last six in emerging market economies have the potential Genel Soco Neutral Neutral Buy Buy Global Energy Development Neutral Buymonths. Although we do not believe share prices to lose value via additional transaction taxes and Serica Neutral Buy Falkland Oil & Gas Neutral Buyare at levels to incentivize widespread M&A, we highlight those we believe are most at risk. Afren Buy Neutral Chariot Oil & Gas Buy Neutralattractive targets remain. We update our M&A Valiant Petroleum Buy Neutral Nautical Petroleum Buy Neutralscreens, which highlight value and strategic Reinstate Cairn as Neutral; Tullow to Noreco Buy Neutral Aurelian Buy Neutralassets. Conviction Buys Rockhopper, Bowleven Integrated coverage Aminex Desire Neutral Sell Sell Neutraland Panoro screen well as do Buy rated Genel, We reinstate on Cairn with a Neutral rating. We Cairn NR Neutral Source: Datastream, Goldman Sachs Research estimatesBankers Petroleum and Maurel et Prom. believe it has strong core value and that in the COVERAGE VIEW: current environment its strong cash balance is E&P – Attractive; Integrated Oils – AttractiveFocus on monetization of value attractive but see higher upside elsewhere. We With this report Ruth Brooker assumes primary coverage ofE&P companies have typically funded move Tullow into our Integrated Oils coverage the following stocks: Amerisur Resources, Chariot Oil & Gas, Global Energy Development, Petroceltic International anddevelopment through cash flows, equity markets, group from E&P, but maintain our Neutral rating. Tower Resources.debt or via asset or corporate sales. With Although we recognize the exceptional quality ofasset/corporate sales attracting CGT and banks the company’s asset base, we see better valueincreasingly reluctant to offer debt financing, elsewhere.monetization of value could become moredifficult. As a result, we believe companies with We separate large and small E&Psaccess to organic cash flows deserve valuations We split our universe into large and small E&Psthat reflect a structural advantage. We highlight at for ratings purposes with US$1 bn as the marketrisk companies and apply discounts of 15%-30% cap cut-off, although all stocks remain in the E&Pto our valuation of their unfunded discoveries, coverage group. Genel and Soco both move up toimplying increased costs of funding of 2%-5%. Buy (from Neutral) in our US$1 bn+ universe.Christophor Jost Goldman Sachs does and seeks to do business with companies+44(20)7774-0014 Goldman Sachs InternationalRuth Brooker covered in its research reports. As a result, investors should be aware+44(20)7774-6842 Goldman Sachs International that the firm may have a conflict of interest that could affect theMichele della Vigna, CFA objectivity of this report. Investors should consider this report as only a+44(20)7552-9383 Goldman Sachs International single factor in making their investment decision. For Reg ACPeter Hackworth, CFA+44(20)7774-7073 Goldman Sachs International certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.The Goldman Sachs Group, Inc. Global Investment Research
  2. 2. May 8, 2012 50 E&PsTable of ContentsRecent pullback has not eroded gains made since October 3 Recent performance makes widespread M&A less likely but selected value remains 4 Monetisation of value a risk; access to debt and CGT the key areas of focus 7 Price targets, ratings and screen changes and we introduce our new E&P universes 12 Material changes to 12-month target prices and rationale 14 Average potential upside of 100% across our universe 17 Subsector trading at discount to core value and risked discoveries at US$100/bl 18 Value versus exploration potential; Cairn Energy screens as cheap core value 19 Changes to the exploration screens 21 Changes to M&A and commodity screens 23 Cairn Energy (CNE.L): Solid core value support, but more upside elsewhere 27 Falkland Oil & Gas (FOGL.L): Cheap exposure to the South Falklands Basin, up to Buy 29 Global Energy Development (GBLE.L): Upgrade to Buy following weak performance 30 Soco International (SIA.L): Up to Buy, replenishment of exploration pipeline and TGT performance is key 31 Serica Energy (SQZ.L): Strong core value with long term rerating potential, up to Buy 32 Genel Energy (GENL.L): Pure play Kurdistan but cash offers other optionality; up to Buy 33 Aminex (AMNX.L): Near-term valuation challenging although long-term potential exists; down to Sell 34 Aurelian Oil & Gas (AUL.L): Removing from Buy List, better upside elsewhere; Neutral 35 Noreco (NOR.OL): Remove from Buy List after strong recent recovery, better upside elsewhere; Neutral 37 Chariot Oil & Gas (CHARC.L): Down to Neutral following strong performance 39 Afren (AFRE.L): Downgrading to Neutral after recent outperformance 41 Nautical Petroleum (NPE.L): Removing from Buy List, better upside elsewhere; Neutral 43 Valiant Petroleum (VPP.L): Down to Neutral following outperformance 45 Desire Petroleum (DES.L): Upgrade from Sell to Neutral following discovery 47 Disclosure Appendix 49  The prices in the body of this report are based on the market close of May 7, 2012 unless otherwise stated.Goldman Sachs Global Investment Research 2
  3. 3. May 8, 2012 50 E&PsRecent pullback has not eroded gains made since October Despite some share price weakness in recent weeks, in our view as a result of investor focus again on the Eurozone, we have seen a significant rerating in our E&P universe, with the sector up c.40% in absolute terms since October and significantly outperforming the long dated crude price (Exhibit 1). We believe this rerating has been driven by an improvement in risk appetite among investors and increasing levels of M&A activity (discussed in more detail in our February 27, 2012 publication 50 E&Ps: M&A revisited: Recent activity has led to outperformance, but compelling targets remain). While this has, rightly in our view, raised valuations from the excessive discounts at which they were trading relative to the long dated crude price during parts of 2H2011, we believe that the macro environment is not wholly positive for the stocks. We increasingly believe that with access to capital becoming more difficult and the monetization of unrisked value for unfunded companies becoming harder to achieve without some form of value erosion, owing to government taxes, investors need to differentiate companies based on their ability to monetize the value of assets. Exhibit 1: E&P sector has performed strongly in last six months despite a recent pullback E&P universe performance indexed to 100 200 180 160 140 120 100 80 60 40 20 0 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 Source: Thomson, Datastream, Bloomberg.Goldman Sachs Global Investment Research 3
  4. 4. May 8, 2012 50 E&PsRecent performance makes widespread M&A less likely but selected value remains We believe the key determinant of M&A in most cases is value – making the difference between the expected commodity price and the price of the equity of key importance. In the last 6 months, the E&P equities have significantly outperformed the long dated crude price, suggesting that, despite the recent pullback, wide-scale M&A is less likely within the sector than it was in September/October last year. We still believe attractive targets remain but believe that more selectivity is now required in picking potential bid targets. As a result we update out value and strategic based M&A screens to highlight these opportunities. Exhibit 2: E&P sector has significantly outperformed long dated crude prices, making widespread M&A less likely in our view. E&P universe performance vs. three year Brent price 20 Cove  Ithaca  approaches approaches 10 0.05 deals per day 0 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 0.08 deals per day ‐10 0.08 deals per day ‐20 0.05 deals per day ‐30 0.12 deals per day ‐40 Ophir /  Dominion Premier /  ‐50 Encore ‐60 ‐70 Source: Thomson Datastream, Bloomberg.Goldman Sachs Global Investment Research 4
  5. 5. May 8, 2012 50 E&Ps Value based M&A – potential remains in selected names We believe that companies that trade at a significant discount to the value of their core + discoveries are the most attractive non- strategic take-out candidates, especially if that value is concentrated in a single country. We update our M&A value screen, which assesses these attributes, and highlight Conviction Buys Bowleven, Panoro and Rockhopper as names that screen as particularly attractive on this metric. Exhibit 3: Value upside and concentration Upside to risked core  EV  value + discoveries  Concentration of value  Unrisked discovered  Risked discovered  GS funding discount  Capital constrained  Company (US$mn) (undiscounted) in a single country resources (mn boe) resources (mn boe) applied ramp up assumed? Panoro 172 246% 63% 123 67 ‐9% yes Igas 275 216% 100% 904 156 0% yes Global Energy Development 53 215% 82% 179 36 ‐3% yes Great Eastern Energy 642 188% 100% 273 173 0% Northern Petroleum 108 183% 65% 101 40 ‐6% Rockhopper 1281 172% 100% 423 338 0% Bowleven 247 167% 100% 189 93 -14% Bankers petroleum 902 120% 100% 1267 340 0% Gulfsands 116 116% 84% 99 40 0% Green Dragon 1115 115% 100% 433 193 0% yes Amerisur 311 89% 100% 109 61 -8% JKX 366 82% 64% 98 87 0% Maurel & Prom 2169 86% 92% 263 219 0% Petroceltic 196 71% 87% 543 312 -12% Valiant Petroleum 260 68% 95% 88 41 ‐3% Source: Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 5
  6. 6. May 8, 2012 50 E&Ps Strategic M&A – value less of a concern with Cove highlighting potential for gains In our view the strong share price performance of Cove in recent months was driven by bids for the company that were in excess of what we believe the market expected. We believe that price insensitivity in the bidding process is a characteristics of strategic assets that (in our view) are bought for reasons of supply security rather than in order to generate commercial returns at hurdle rates that the equity market would deem to be acceptable. We believe there are a number of companies within our universe that also have access to this type of asset base and screen below for winners in this category. For the purposes of this exercise we assume that oil or oil price linked assets in which a company holds a net stake in excess of 200mn net barrels is deemed to be strategic. Exhibit 4: Strategic asset M&A screen Upside to strategic  % value in asset over  valuation of risked  Unrisked  Uplift from  200mn bls (non  Upside to risked core  core value +  discovered  Risked discovered  strategic  Company strategic valuation) value + discoveries discoveries strategic resource strategic resource valuation at 8% Maurel & Prom 95% 86% 137% 177 174 19% Rockhopper 89% 172% 261% 423 338 32% Dragon Oil 78% 48% 82% 1140 1014 37% DNO 71% 34% 69% 346 346 25% Bankers Petroleum 67% 120% 178% 219 197 29% Gulf Keystone 60% 4% 73% 1643 1148 45% Petroceltic 58% 71% 193% 423 284 56% Det Norske 53% 43% 63% 260 234 12% Cove Energy 52% ‐44% 32% 354 319 118% Ophir 51% ‐78% 96% 137 116 128% Green Dragon 51% 115% 176% 211 127 31% Tullow 39% ‐36% ‐11% 1167 1074 25% Lundin Petroleum 34% ‐5% 18% 440 374 9% Genel 27% 27% 54% 285 285 17% Afren 16% 10% 39% 304 219 18% NB: Upside to strategic valuation for Ophir includes exploration upside potential. Source: Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 6
  7. 7. May 8, 2012 50 E&PsMonetisation of value a risk; access to debt and CGT the key areas of focus Historically, E&Ps monetized the value inherent in their assets either through debt financing (typically through lending based on the collateral of reserves in the ground), organic cashflows or through asset sales or sales of the company with recourse to the equity market a final fallback position. Under those circumstances, there was little need to apply discounts to the valuation of assets even if there was little clarity on the funding needed to develop them. However, we note that specific challenges to many of these routes to funding have emerged.  Reserve based lending becoming more expensive. Reserve based lending can enable companies with small capital bases to use reserves in the ground as collateral to access funds in order to bring developments online. However, with European banks finding it difficult to access dollar based funding and many leaving the space, such funding of oil assets with no current associated cashflows is likely to become more expensive. Effectively this means that some of the potential debt supply leaves the lending market. We believe that as a result, the funding market for non-productive assets will remain tight and will become more expensive than has been the case.  Asset sales/corporate sales beginning to attract tax from host governments. Historically an attractive way for small E&P companies to keep capital under construction low and to crystallize value of discovered resource was by selling assets on to better funded industry players. However, we note that in emerging market economies capital gains tax is increasingly being levied on such transactions, adding additional costs to this strategy. For example, capital gains tax was levied on recent transactions in Uganda involving Tullow and Heritage and Cairn Energy’s sale of a stake in Cairn India to Vedanta as well as on the corporate sale of Cove Energy. As a result of these developments within the industry, if a company is not organically funded to develop an asset, a discount to the asset valuation is arguably required in order to reflect either rising costs of debt, the dilutive impact of receiving equity based funding or the risk of government taxation of any transaction. We believe investors will therefore need to pay increasing attention to the viability and cost of monetizing the value of a company’s unfunded assets and believe that a simple sum of the parts approach does not capture the risks and potential costs involved.Goldman Sachs Global Investment Research 7
  8. 8. May 8, 2012 50 E&Ps We apply discounts of between 15% to 30% for unfunded discoveries In view of these potential headwinds to realizing the value of assets, we incorporate discounts to our valuations of assets that do not have full funding to first production.  Unfunded exploration: attracts a 45% discount  Unfunded appraisal: attracts a 30% discount  Unfunded development: attracts a 15% discount We apply these discounts on an asset by asset basis rather than to the equity as a whole, thereby allowing full credit for those parts of the portfolio that are organically funded. Alternatively, we view acquisitive companies with surplus cash positively, assuming that they will be able to squeeze potential sellers. Cairn and Genel benefit from having surplus cash and in both cases we apply a premium to the cash balance assuming that tight capital markets will enable them to lever balance sheets to take value from unfunded sellers. Dragon has the financial potential to benefit from this as well, but we do not apply a premium owing to concerns over whether it will be aggressive enough to execute on any potential deal. Exhibit 5: Impact of GS funding discount on stocks 50% 40% 30% 20% 10% 0% Serica Afren PA Resources Max Petroleum Melrose Resources Petroceltic Valiant Petroleum Enquest Premier Oil  Panoro San Leon BPC Regal Tullow Desire Petroleum Northern Petroleum Dragon Oil Bowleven Ophir Aurelian Genel Nautical Petroleum Faroe Petroleum Lundin Petroleum Rockhopper Noreco Coastal Energy Soco Green Dragon DNO Tower Resources Gulf Keystone Hardy Oil Heritage Oil Aminex Plc Salamander  Bankers petroleum Amerisur Great Eastern Energy Cairn Energy JKX Chariot Oil & Gas Global Energy Development Ithaca Maurel & Prom Borders and Southern Cove Energy Igas Gulfsands Sterling Energy Det Norske Falkland Oil & Gas ‐10% Source: Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 8
  9. 9. May 8, 2012 50 E&Ps Our asset discounts imply increased costs of capital of 2%-5%. High cost, long lead developments are most sensitive to increased funding costs We assess the potential impact of increased costs of debt funding by applying sensitivities to the discount rates we use to value assets – taking a selection of significant asset types through our E&P universe and increasing discount rates by 2% and 5%. The assets show a significant spread – the result of cashflow timings (with high upfront capital intensity and long-run cash inflows typically faring worse). However, the average impact of a 2% increase in funding costs would equate to an average value destruction across these assets of 17%, with a 5% increase in funding costs resulting in an average 27% of value destruction – broadly in line with our currently assumed discounts. Exhibit 6: Increase of 2%-5% in funding costs could result in value destruction broadly in line with our applied discounts Impact of higher discount rates on pre-sanction asset valuations 60% Increasing sensitivity to higher funding costs 50% Average impact at 5% increase Cove transaction tax 40% Average impact at 2% increase 30% GS  diiscount for  discovered  20% resource 10% 0% Impact of value of 2% increase in funding costs Impact on value of 5% increase in funding costs Source: Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 9
  10. 10. May 8, 2012 50 E&Ps Companies with large discoveries in non-OECD economies could be at risk of tax when monetizing value Given the trend towards taxation of corporate/asset transactions by governments, we attempt to assess those companies most at risk to this. As a result, we screen for companies with high levels of value in non-producing assets in emerging market economies. Although we note that there are many examples of developed, OECD economies changing fiscal regimes, we do not believe the risk is as high for rewriting tax laws to change capital gains status and note that all unexpected capital gains charges have so far been levied in emerging market economies. Although we note that producing assets could also be subject to similar taxation, we are not so concerned about the risk as these assets do not require funding and therefore do not need to be sold in order to monetize the value. Exhibit 7: Company exposure to non-producing emerging market assets as % of GS valuation 120% 100% 80% 60% 40% 20% 0% Genel Lundin Petroleum Nautical Petroleum Desire Petroleum Noreco Aurelian Afren Soco Serica Faroe Petroleum Rockhopper JKX Tower Resources Global Energy Development Bankers petroleum Maurel & Prom Ithaca Amerisur PA Resources Melrose Resources Max Petroleum Valiant Petroleum San Leon Enquest Borders and Southern Petroceltic Igas Cove Energy Gulfsands BPC Premier Oil  Bowleven Panoro Northern Petroleum Ophir Tullow Regal Dragon Oil Sterling Energy Falkland Oil & Gas Coastal Energy Green Dragon Aminex Plc Hardy Oil Heritage Oil Cairn Energy DNO Chariot Oil & Gas Gulf Keystone Salamander  Great Eastern Energy Det Norske % of value in non‐OECD discoveries % of value in non‐OECD exploration Source: Company data, Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 10
  11. 11. May 8, 2012 50 E&Ps Unfunded companies are at particular risk of CGT as asset/corporate sales represent the most obvious funding route While the above screen is an important indication of the risk of taxation on EM asset transactions, we believe that where companies can organically fund their development, there is less risk of CGT as an asset sale is not completely necessary since these companies should be able to realize value from the assets through organic development. As a result, we screen below for those companies with exposure to non-producing emerging market assets but exclude those assets that we believe can be funded by the company based on existing cash reserves and portfolio. We note that for CGT to be a relevant factor, significant gains must be made – as a result we note that Bowleven is partly protected owing to its sizable investment to date in its asset base. Exhibit 8: Company exposure to non-producing emerging market assets as % of GS valuation (excluding funded assets) 120% 100% 80% 60% 40% 20% 0% Genel Lundin Petroleum Desire Petroleum Noreco Nautical Petroleum Aurelian Faroe Petroleum Afren Serica Soco Rockhopper Tower Resources JKX Global Energy Development Amerisur Bankers petroleum Maurel & Prom Ithaca PA Resources Melrose Resources Max Petroleum Valiant Petroleum San Leon Enquest Borders and Southern Petroceltic Igas Cove Energy BPC Gulfsands Premier Oil  Northern Petroleum Bowleven Panoro Ophir Tullow Sterling Energy Regal Dragon Oil Falkland Oil & Gas Coastal Energy Green Dragon Aminex Plc Chariot Oil & Gas DNO Hardy Oil Heritage Oil Cairn Energy Gulf Keystone Salamander  Great Eastern Energy Det Norske % of value in unfunded non‐OECD discoveries % of value in unfunded non‐OECD exploration Source: Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 11
  12. 12. May 8, 2012 50 E&PsPrice targets, ratings and screen changes and we introduce our new E&P universes Given the breadth of our E&P coverage universe, despite applying a liquidity discount there remains a significant valuation discrepancy between small illiquid stocks and the larger names. To address this we divide our E&P coverage universe of 52 stocks into two groups based on a market capitalization threshold of US$1 bn in order to select ratings on a more comparable peer group basis. Given the division of our E&P universe on a market cap basis, we make several ratings changes (Exhibits 9 & 10). We make several adjustments to our valuations of the companies in our coverage universes, reflecting recent news flow. We also roll forward our valuations, now discounting back to 2012. As in our last subsector publication on December 6, 2011, we continue to run our valuations of stocks under our coverage using the 3-year forward Brent crude price as a reference point (we use US$100/bl). This is unchanged as the 3-year forward price remains around this level (c.US$100.7/bl as of May 2, 2012). On this basis, our 12- month price targets imply 100% average potential upside for the sector (54% excluding exploration value), hence we retain our Attractive coverage view. We also update for movements in FX and continue to apply a discount to those assets that we believe are not fully funded through to development.Exhibit 9: E&P coverage group > US$1 bn market capitalisation “big portfolio”(All price targets have a 12-month time horizon, B* denotes Conviction List membership) New  Upside /  Previous  Updated target  Target price  Updated and  Target price  12‐month  Market cap  Current  potential  downside to  New  Company Currency target  price (2011  change  new target price  change  exploration re‐ Old rating Currency (USDmn) price upside to  value of core  rating price base) (2011 base) (2012 base) (2012 base) rating potential target price + discoveriesRockhopper           1,447 GBp 3.16 7.70 7.68 0% 8.56 11% 171% 172% 2% B* B* GBpGreen Dragon           1,161 USD 8.50 20.80 19.10 ‐8% 20.39 7% 140% 115% 0% B B USDMaurel & Prom           1,912 EUR 11.99 31.30 25.98 ‐17% 26.03 0% 117% 98% 23% B B EURGenel           3,101 GBP 6.88 12.18 11.62 ‐5% 12.53 8% 82% 27% 27% N B GBPSoco           1,498 GBP 2.75 5.37 4.66 ‐13% 4.72 1% 71% 42% 0% N B GBPEnquest           1,645 GBP 1.27 1.98 1.96 ‐1% 2.10 7% 65% 65% 2% B B GBPPremier Oil           2,999 GBP 3.52 5.76 5.31 ‐8% 5.53 4% 57% 39% 31% N N GBPDet Norske           1,807 NOK 81.25 116.00 115.66 0% 126.97 10% 56% 43% 57% N N NOKAfren           2,203 GBP 1.27 1.78 1.84 4% 1.99 8% 56% 10% 130% B N GBPOphir           3,508 GBP 5.48 4.09 7.58 85% 8.50 12% 55% ‐78% 174% N N GBPDragon Oil           4,667 GBP 5.67 7.90 8.65 10% 8.78 2% 55% 48% 1% N N GBPCoastal Energy           1,904 GBP 10.35 14.94 14.17 ‐5% 15.42 9% 49% ‐5% 42% N N GBPGulf Keystone           3,023 GBP 2.14 3.01 2.74 ‐9% 3.12 14% 46% 4% 41% N N GBPDNO           1,598 NOK 8.99 11.22 12.08 8% 12.67 5% 41% 34% 10% N N NOKTullow         21,434 GBP 14.69 16.83 17.17 2% 20.20 18% 38% ‐31% 40% N N GBPCairn Energy           3,172 GBP 3.26 NA 4.20 NA 4.59 NA 41% 17% 22% NR N GBPLundin Petroleum           6,766 SEK 144.10 165.00 152.91 ‐7% 164.27 7% 14% ‐5% 45% S S SEKCove Energy           1,769 GBP 2.24 2.06 2.03 ‐1% 2.28 12% 2% ‐44% 145% N N GBPSource: Bloomberg, Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 12
  13. 13. May 8, 2012 50 E&PsExhibit 10: E&P coverage group < US$1 bn market capitalisation: “small portfolio”(All price targets have a 12-month time horizon, B* denotes Conviction List membership) New  Upside /  Previous  Updated target  Target price  Updated and  Target price  12‐month  Market cap  Current  potential  downside to  New  Company Currency target  price (2011  change  new target price  change  exploration re‐ Old rating Currency (USDmn) price upside to  value of core  rating price base) (2011 base) (2012 base) (2012 base) rating potential target price + discoveriesPanoro              161 NOK 3.94 14.93 13.24 ‐11% 14.15 7% 259% 246% 114% B* B* NOKSan Leon              182 GBP 0.10 0.25 0.31 25% 0.34 10% 244% ‐15% 823% B B GBPBowleven              396 GBp 0.84 2.53 2.34 ‐8% 2.61 12% 212% 167% 54% B* B* GBpTower Resources                  76 GBp 0.03 0.10 0.09 ‐14% 0.10 13% 206% ‐90% 0% B B GBpMax Petroleum              193 GBP 0.12 0.30 0.28 ‐7% 0.33 17% 182% ‐1% 196% B B GBPPA Resources              146 SEK 1.55 4.66 3.41 ‐27% 4.31 26% 178% 277% 21% B B SEKIgas              175 GBP 0.67 1.71 1.68 ‐2% 1.82 8% 171% 216% 0% B B GBPNorthern Petroleum              129 GBP 0.84 2.01 2.03 1% 2.20 8% 162% 183% 39% B B GBPGreat Eastern Energy              609 GBP 3.18 9.05 7.40 ‐18% 8.19 11% 158% 188% 0% B B GBPBPC              162 GBP 0.08 0.21 0.20 ‐6% 0.21 7% 158% ‐66% 0% B B GBPSerica                  84 GBP 0.30 0.33 0.65 96% 0.73 13% 149% 49% 93% N B GBPGlobal Energy Development                  59 GBP 1.03 2.21 2.14 ‐3% 2.40 12% 133% 215% 6% N B GBPFalkland Oil & Gas              483 GBP 0.94 0.94 1.92 105% 2.12 11% 126% ‐81% 1817% N B GBPSalamander              793 GBP 1.93 4.86 3.99 ‐18% 4.20 5% 118% 17% 164% B B GBPBankers petroleum              896 GBP 2.20 7.28 4.46 ‐39% 4.76 7% 116% 120% 0% B B GBPPetroceltic              274 GBP 0.07 0.14 0.13 ‐3% 0.16 15% 116% 71% 0% B B GBPJKX              359 GBP 1.30 3.32 2.04 ‐38% 2.69 32% 107% 82% 50% B B GBPDesire Petroleum              132 GBP 0.24 0.15 0.44 203% 0.49 11% 105% 153% 17% S N GBPChariot Oil & Gas              519 GBP 1.61 2.58 2.96 15% 3.29 11% 104% ‐70% 1489% B N GBPHeritage Oil              573 GBP 1.38 3.54 2.64 ‐26% 2.80 6% 103% 53% 95% N N GBPValiant Petroleum              363 GBP 5.54 9.18 10.20 11% 10.79 6% 95% 68% 54% B N GBPGulfsands              240 GBP 1.22 3.92 2.14 ‐45% 2.28 7% 87% 116% 0% N N GBPFaroe Petroleum              584 GBP 1.71 2.69 2.87 7% 3.18 11% 86% 47% 85% N N GBPRegal              145 GBP 0.28 0.58 0.46 ‐21% 0.52 14% 86% 55% 0% N N GBPBorders and Southern              663 GBP 0.85 1.57 1.41 ‐10% 1.56 11% 84% 17% 490% N N GBPMelrose Resources              227 GBP 1.23 1.97 2.03 3% 2.24 10% 82% 96% 44% N N GBPNautical Petroleum              466 GBP 3.30 6.73 5.53 ‐18% 5.99 8% 81% 63% 41% B N GBPNoreco              286 NOK 6.74 14.70 11.02 ‐25% 12.13 10% 80% ‐15% 287% B N NOKSterling Energy              137 GBP 0.39 0.60 0.62 3% 0.68 9% 74% ‐30% 0% N N GBPAmerisur              347 GBP 0.24 0.26 0.34 31% 0.38 11% 63% 89% 159% N N GBPHardy Oil              153 GBP 1.30 2.45 1.68 ‐32% 1.82 9% 40% 4% 0% N N GBPAurelian              176 GBP 0.22 0.55 0.34 ‐38% 0.29 ‐15% 30% 2% 178% B N GBPIthaca              745 GBP 1.79 1.89 2.00 6% 2.18 9% 22% 27% 0% N N GBPAminex Plc                  59 GBP 0.04 0.05 0.04 ‐23% 0.05 13% 5% ‐21% 87% N S GBPSource: Bloomberg, Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 13
  14. 14. May 8, 2012 50 E&Ps Material changes to 12-month target prices and rationale We discuss the rationale for our 12-month target price changes where they are in excess of 10% for our coverage below.  Afren: We update for the company’s drilling success at the Okoro East prospect and at its Simrit well in Kurdistan. We also update for Keta well, which was found to be water bearing.  Amerisur Resources: We raise our assumed COS for the Platanillo Block and lower the chances of success on the Fenix Block owing to the relative activity in each area. We also increase our assumption of the value of the Platanillo block on an NPV/bl basis following remodeling of the costs and expected well performance.  Aminex: Much of the reduction in our price target comes from updating our assumptions following the Ntorya well. Volumes are still uncertain but we assume 10mn boe of gas. We also reduce our assumed valuation for the company’s US assets following the print from the recent Somerset asset disposal.  Aurelian: We update the company’s exploration programme in line with guidance. The major move in this respect comes from the disappointing shrinkage of the Karpaty East project and the guidance that this is likely to be gas rather than oil – a change that significantly reduces our valuation of the company.  Bankers Petroleum – We increase our risking of the value of the company’s contingent reserves to a 10% chance of success (vs. 25% previously). This reflects the ambiguous initial results of the programme and the reduction in the volumes when a transfer between 2C and 2P was made at year-end. Although we note that the oil in place remains unchanged, the higher capital hurdles apparently being applied to 2P reserves make us more cautious as to the proportion of contingent reserves that can be translated to 2P reserves in a success case.  Borders & Southern: We reduce our target price as a result of the company’s recent equity raise (dilutive to our valuation).  Bowleven: We update for recent guidance on the oil in place on the Deep Omicron discovery, which has a positive impact on our forecasts. However, owing to the requirement to monetize gas providing an effective ceiling in terms of likely production, the discount reduces the potential impact of this change and is offset by increased risking over the assets following Vitol’s decision not to exercise its remaining option over MLHP7.  Chariot: We increase our valuation with the inclusion of some potential for pre-salt prospectivity offsetting the impact of the recent equity raise.  Coastal Energy: We update our estimates as a result of recent successful drilling activity.  Dragon Oil: We adjust our production profile and risking for gas monetization, and reduce our discount rate for Turkmenistan to 14%.  Desire: The increase in our valuation results from the inclusion of volumes from the recent drilling campaign as determined by Rockhopper’s Gaffney Cline report (rather than Desire’s Senergy report).  DNO: Preliminary success at the company’s Peshkabir prospect and success at the Tawke 16 well, which increase our assumption of recoverable reserves from the Tawke field increase our valuation.  Falkland Oil & Gas: We adjust for the company’s equity raise and update our expected drilling campaign accordingly given the greater potential for prospective resource that this additional funding provides for the company. This is partly offset byGoldman Sachs Global Investment Research 14
  15. 15. May 8, 2012 50 E&Ps the company’s recent farm-out which, while encouraging for the potential credibility of the drilling programme, we see as dilutive to valuation.  Faroe Petroleum: We update for the company’s latest exploration programme, which accounts for much of the increase in our target price, offsetting some recent disappointments in the drilling programme (i.e. Kalvklumpen, T-Rex). We also update our estimates surrounding the assets obtained from the Petoro deal following more information being given on these at the company’s final results.  Gulf Keystone: We reduce our assumptions over the recovery factor on Shaikan from 30% to 25% and reduce the chances of success on the Bekhme asset as result of the appraisal well result. This is offset by the inclusion of 2 additional exploration wells.  Great Eastern Energy: We reduce our valuation primarily as a result of the increased de-watering time being seen in the sourthern area of the licence, which delays production ramp up, thereby losing some value due to the discounting effect.  Green Dragon: Minor adjustments to risking and timing of monetization of prospective assets given revised assumptions of the likely timeline for the large scale drilling on these assets.  Gulfsands Petroleum: We further increase our political risking in Syria as a result of our view of the increasing political deterioration in the country.  Hardy Oil and Gas: We remove exploration upside from the D9 block as a result of the company’s decision to relinquish the acreage. We also adjust our assumed timeline for monetization of the D3 block.  Heritage Oil: We reduce our assumed plateau production from the company’s Russian asset, believing that the company’s focus will likely lie elsewhere. We also increase our risking on the company’s Maltese drilling campaign as a result of continuing uncertainty over the likely timing of activity.  Ithaca Energy: We make adjustments to our assumptions on first production and sanction for the Athena project owing to delays in the project upgrade works. This is more than offset by changes to tax allowances and a remodeling of the Greater Stella Area.  JKX: We reduce our share price to reflect a revision of our assumptions of the risk profiles over the Rudenkovskoye asset and the upside potential from the company’s Koshekhablskoye asset following the company’s annual results presentation and an update with management.  Lundin: We reduce our price target slightly in order to account for our estimate of lost volumes as a result of the disappointing 16/5-25 well result drilled on the Alvadsnes asset. We note that no guidance to this has been given by management to date, but assume a loss of c.200mn bls.  Maurel et Prom: The majority of our target price reduction results from the removal of Maurel & Prom Nigeria as a result of the spin out of this asset. We also reduce our target price as a result of adjustments to the Columbian reserves base following greater clarity from the final results conference call. We also account for the failure of the ETBIB-1 well in Gabon.  Max Petroleum: The reduction of our target price caused by the disappointing exploration result at the primary target of the Asanketken prospect is partly but not fully offset by the inclusion of the company’s new exploration programme.Goldman Sachs Global Investment Research 15
  16. 16. May 8, 2012 50 E&Ps  Nautical: We reduce our target price as the dilution caused by the farm out of part of its Kraken stake to Enquest is greater than the removal of the funding discount we applied to this asset. We also remove value for the Tudor Rose prospect following the disappointing appraisal well result.  Noreco: We remove value for the Kalklumpen, Luna and Eike wells due to the disappointing drilling results. Cash burn was also greater than we anticipated.  Ophir Energy: We increase volumes as a result of the company’s updated exploration programme and the company’s recent analyst trip to Tanzania and derisk the Jodari prospect following success at the asset. We also increase our strategic M&A weighting (in which we value the assets at an 8% cost of capital) to 50% of our valuation 30%, following the preliminary offers for Cove Energy. We now give risked value for 20tcf of potential resource in the tertiary slope play, 23 tcf of potential resource in the cretaceous slope play and 30tcf for the basin floor play.  PA Resources: Adjustments to the Didon and Didon North assets in Tunisia and reserves in Congo reduce our target price.  Panoro: We increase our political risking on the BS3 assets as a result of the lack of clarity over sanctioning. We make minor adjustments to our assumptions on the upside on the MKB asset, although we believe that the recent pilot programme has been encouraging for the base case on this asset.  Petroceltic: We assume better flow rates from the Ain Tsila field following the results of the AT-9 result and also update our estimates for management’s latest guidance on plateau rates estimates for the field.  Premier Oil: We make adjustments for the recent drilling results and update our capex and production profile assumptions.  Salamander Energy: We factor the dilutive impact of the rights issue into our estimates, although we note that this is significantly offset by the inclusion of additional exploration prospects in the North Kutei Basin and the Gulf of Thailand and the improvements to the Bravo platform in Thailand, which can be funded through these additional funds.  Serica: We include value for the company’s Namibian and Moroccan assets. While we appreciate that drilling activity on Namibia is likely to be medium term, the company is potentially funded for any wells on this asset through the BP farm-out and we believe that current activity in the country could still serve to act as a positive catalyst for the stock. We also believe that Morocco could be drilled sooner with our understanding being that many of the prospects are drill ready and awaiting a farm down (which we assume in our estimates).  San Leon: Following the Tarfaya oil shale update, we increase our estimate of the likelihood of success from 2% to 5% given that the reservoir appears to be in communication. As with Serica we include farmed down value for the company’s offshore Moroccan acreage, believing that a farm in to the asset could be achieved this year, with drilling not too long afterwards.  Soco: Estimate revisions of the ramp up of the TGT asset based on revised guidance and updates for drilling results in Congo.  Tower Resources: We remove value for the Mvule-1 exploration prospect in Uganda following the disappointing exploration well result. We also update our estimates for the recent equity raise and SEDA facility draw down.  Tullow: Disappointing well results in the West Africa Transform Margin are offset by the successful preliminary results from the Ngamia well in Kenya, which leads us to model basin-wide potential from the region.  Valiant Petroleum: On our estimates the impact of the Rocksource acquisition and changes to our North Sea tax assumptions more than offsets the disappointing results from Cladhan South, thereby increasing our target price.Goldman Sachs Global Investment Research 16
  17. 17. May 8, 2012 50 E&Ps Average potential upside of 100% across our universe Following recent share price movements and adjustments to our price targets we see an average 100% upside potential across our coverage universe. Since the publication of our last sector update of December 6, 2011, 50 E&Ps: Three regions and five new stocks: Spreading the net further for more E&P potential, the level of average potential upside for the sector has decreased from 104% despite the fact that, in general, our target prices have increased as a result of rolling forward our valuations so that we now discount back to 2012. This is largely a result of the recent strong E&P sector performance. Exhibit 11: Valuation at US$100/bl crude price assumption Potential upsides/downsides to target price sorted by upside/downside in production and cash 600% 500% 400% Value as % of share price 300% 200% 100% 0% ‐100% ‐200% ‐300% Serica Afren PA Resources Melrose Resources Max Petroleum Petroceltic Premier Oil  Panoro Northern Petroleum Valiant Petroleum Enquest San Leon Ophir Regal BPC Dragon Oil Desire Petroleum Bowleven Nautical Petroleum Aurelian Tullow Genel Coastal Energy Faroe Petroleum Noreco Soco Lundin Petroleum Rockhopper Green Dragon Tower Resources Aminex Plc Heritage Oil DNO Cairn Energy Hardy Oil Salamander  Gulf Keystone Maurel & Prom Bankers petroleum Amerisur JKX Chariot Oil & Gas Great Eastern Energy Global Energy Development Ithaca Borders and Southern Igas Gulfsands Cove Energy Sterling Energy Det Norske Falkland Oil & Gas Sanctioned assets,  cash and other Discoveries Short term exploration Long term exploration Strategic asset premium Liquidity / funding discount NAV / Price Source: Bloomberg, Goldman Sachs Research estimates.Goldman Sachs Global Investment Research 17