Topz Report Cohen 102010

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Topaz Resources, Inc. (OTCBB: TOPZ) today announced that Grass Roots Research and Distribution, Inc. (www.grassrootsrd.com), the Investor Awareness Industry's Research Firm of Choice, has issued its 2nd Research Report with a Buy Recommendation on Topaz Resources.

Grass Roots' report stated: "Topaz is one of the most exciting junior oil and gas exploration and production companies. The Company is transforming itself from a start-up stage to a development stage oil and gas Company.

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Topz Report Cohen 102010

  1. 1. GRASS ROOTS RESEARCH* AND DISTRIBUTION, INC. #1 Small Cap Research* Firm, Powerful Distribution * Commercial advertisement www.grassrootsrd.com Telephone: 415.454.6985 October 09, 2010 Topaz Resources, Inc. Symbol TOPZ Exchange OTC BB Current Price $0.55 52 Week High/ Low $3.95/ $0.20 Avg daily volume (3 mo.) 27,719 Shares Outstanding (in mn) 84.1 Current Market Cap (in $mn) $42.2 Float As % of Shares Out. 89.3% Cohen Price Target $1.94 INVESTMENT THESIS & RECOMMENDATIONTopaz Resources is an independent oil and gas company focusing on production, acquisitions and development of oil and gasproperties. The Company has a balanced and diversified portfolio of oil and natural gas properties located in the prolific BarnettShale Area and North Texas. Topaz is currently focused on commercializing its properties and expanding its Partner Program toleverage its experience, skills and resources. The Topaz management team has a proven track record of success in executingdrilling, reserve growth and monetizing its assets in these prolific regions. The Company’s immediate growth plan includes theacquisition and enhancement of North Texas shallow oil & gas production and acreage; drilling ten additional vertical shallow oilwells; drilling one horizontal Barnet Shale gas well and drilling two horizontal Barnett oil wells.In addition to its significant inventory of acreage and acquisition and drilling targets, the Company is likely to benefit from itsexperienced management team and proprietary technology. Topaz has assembled a management team that has the capabilities andexperience to improve its potential and prospects. Key value drivers for the Company include: balanced portfolio of assets, use ofmodern technology, favorable industry economics, higher profitability, healthy financial position and strong management.Based on these factors, we believe that Topaz Resources is an undervalued Oil and Gas investment proposition. We forecastTopaz’s top line to grow significantly from $0.3 million in 2010 to $175.9 million by FYE 2016. The Company will have to raiseover $30.0 million in capital, and close to $7.5 million in immediate funding to meet our projections. The stock is an attractiveshort term trade and long term investment provided the Company raises the capital and meets our projections. Upside potential is252.3% in the short to long term. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced.
  2. 2. Grass Roots Research and Distribution, Inc. Sales, Earnings Margin Forecast – Base Caseall figures in $ millions; unles 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 F‡˜‡—‡• % growth 199.3% 126.6% 69.7% 59.9% 40.2%
  3. 3. EBIT Margin 116.2% 99.8% 95.5% 94.6% 94.4% 95.0%‡– ”‘ˆ‹– Net Profit Margin 33.1% 54.5% 60.1% 61.4% 61.8% 54.1% ƒ”‹‰• ‡” Šƒ”‡ ‹Ž—–‡† ”‡‡ ƒ•Š Ž‘™ –‘ ‹” Cohen Price Target SummaryThe Cohen Price Target is calculated by 25% equal weighting of four different valuation methodologies. We usean industry average PE, an industry average price/capital employed (P/CE), a Cohen Performance Index, and thefundamentally driven Cohen DCF. The Cohen Price TargetTM Formula Price to Earnings (P/E) in US$ TOPZ Earnings Per Share 2011 Avg. Forecasts 0.13 Industry Average P/E Ratio 17.43 Price based on P/E Ratio 2.20 Price to Capital Employed (P/CE) in US$ TOPZ Capital Employed 0.36 Industry Average P/CE Ratio 6.47 Price based on P/CE Ratio 2.35 Cohen Discounted Cash Flow Model in US$ Cohen DCF Value Base Case 2.12 Cohen Performance Index in US$ Cohen Price Performance Index Value 98.2% TOPZ Current Stock Price 0.55 Price based on Cohen Performance Index 1.09 Cohen Price Index Target 1.94 Current Price 0.55 Upside/ (Downside) Potential 252.3% Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 2 of 38
  4. 4. Grass Roots Research and Distribution, Inc. EXECUTIVE SUMMARYx Topaz Resources Inc. (OTC BB: TOPZ), headquartered in Texas, is an independent oil and gas exploration and production company. The Company’s focus is to explore and acquire acreage in the prolific North-West-Central Texas belt, especially the Barnett Shale Play.x Topaz business strategy focuses on building its strengths to acquire acreage and production within its target locations, enhance the value of its acreage through drilling and well work-overs and expanding its network through a Partner Program to leverage its expertise in the oil gas exploration and production industry.x The Company’s objective is to increase and enhance free cash flows by maximizing its proven reserve bases through acquisitions, organic growth and strategic partnerships. Management is continuously examining exciting acquisition opportunities and is focused on monetization of its assets via individual or complete asset sales.x The Company has assembled an enviable lease position with a large resource base. The Company’s total acreage in the Barnett Shale Area is spread over 2,800 gross acres and is estimated to have a resource base equivalent to 90 billion cubic feet of natural gas.x TOPZ recently reported positive results from its drilling program at its Barnett Shale well located in the oil leg of the Barnett shale. The well was drilled to a total depth of 7,740 feet, and the logs have identified a 600 foot section of Barnett Shale which includes a solid 400 foot section in the Lower Barnett with porosity and permeability values that indicate good productive capabilities.x In addition, following completion of its acquisition of shallow oil and gas properties in North Texas and through the recently launched partner program, Topaz will hold an additional 1,000 acres with an estimated reserve base of 14 billion cubic feet of natural gas equivalent.x This exciting reserve base and lease position combined with experience in drilling wells and advancing projects in the Barnett play and North-Central Texas energy provides Topaz with a strong competitive advantage. The Company is poised to fully exploit the production potential and financial upside of its project inventory.x The Company’s immediate growth plan is to make significant investment in drilling wells at its Barnett Play, expanding its network through the partner program and acquiring additional properties. Topaz plans to drill 5 new wells in 2010, commercialize production at these properties and further expand its asset base.x Declining conventional crude discoveries, increasing dependence on foreign oil, technology advancements and higher oil prices have resulted in renewed focus on abundant but difficult to explore oil and gas reserves. One of the most credible and proven sources is natural gas from the 8,000-9,000 feet depth Barnett formations.x Continuing global economic growth led by emerging markets such as China and India along with worsening geopolitics in the key oil producing areas and other economic slowdown in developed nations are likely to keep pressure on the demand-supply equation of oil and natural gas.x Risks: Capital access and competition from larger companies. Though the Company recently received debt and equity funding, Topaz will require investing $30.0 million to achieve its long term plans out of which $7.5 million would have to be raised immediately. Inabilityof a capital raise would impact growth plans.Valuations:x We project revenues of approximately $0.3 million for fiscal year end December 31, 2010 and $175.9 million by 2016. Margins are likely to expand as the Company’s assets are concentrated in low cost producing areas. We expect the Company to be cash flow positive by 2012.x The Cohen Price Target is calculated using market-based multiple valuation, Discounted Cash Flow (DCF) and by applying the Cohen Price Performance Index approach. The multiple based valuation approach uses the expected 2011 Price-to-Earnings and Price-to-Capital Employed ratio. We also include the Cohen Price Performance Index, which is representative of the past coverage performance of all stocks evaluated by us. The last component in calculating the Cohen Price Target is the value derived using the long-term Cohen Discounted Cash Flow (DCF) valuation approach.x Based on this method, TOPZ common stock is valued at $1.94 per share, 252.3% higher than current market price of $0.55. The stock is an attractive short term trade and long term buy provided funds are raised.Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 3 of 38
  5. 5. Grass Roots Research and Distribution, Inc. INVESTMENT SUMMARYTopaz Resources, Inc. (OTCBB: TOPZ), headquartered in Denton, Texas, is an independent oil and gasexploration and production Company. The Company is currently focusing its activities in the prolific belt ofNorth-West-Central Texas. The Company’s strategy is to acquire and expand its acreages and continue theproduction and development of drilling opportunities within proven producing areas. The Company only selectsprojects that have the potential to create a secure and abundant resource base which can be profitably exploredand developed. The Company currently holds acreage in the Barnett Shale play that passes through 15 counties inNorth-West-Central Texas; with expected acreage acquisitions in other North Texas formations, including theStrawn.The Company’s management team provides it with a significant competitive advantage which should enable it toachieve its corporate objectives: increase shareholder value, enhance cash flows and grow owned proven reservevalues. The Company will achieve this by leveraging its strength and aggressively pursuing its growth strategy.The Company plans to increase and enhance cash flows through opportunistic monetization of its assets orindividual properties. Figure 1: Topaz’s Corporate Strategy Focus operations within North West Central Texas where the management team has a competitive advantage Drive organic growth through internally generated projects Maximize reserve growth through exploration and drilling of existing core properties Complement this growth strategy by strategic and timely acquisitions of assets Manage costs and development schedules through operational control to achieve higher profitability Expand its network through the Partner Program that shall enable it to leverage its rigs , work crews, and other expertise. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 4 of 38
  6. 6. Grass Roots Research and Distribution, Inc.In the current year, we expect the Company to consolidate and enhance its oil and gas properties and acquire newacreage to expand reserve base. Topaz will need to invest approximately $30.0 million to expand acreage and drillnew oil and gas wells, of which the Company will need to invest approximately $7.5 million in the next 12-months. We expect long term upside revenue opportunities from the Company’s portfolio of assets, highlyscalable business model, and new acquisition deals as natural gas discoveries increase in these prolific locations.The recent announcement regarding the agreement with RMJ, Inc. as a part of its Partners Program furtherprovides positive impetus to Company’s growth plans. Our projections are based on reserve recovery of over 90billion cubic feet of gas equivalent. However, the Company’s total probable reserve base could be much largerthan this, and any additional exploration will result in further upside. Topaz Resources is one of most excitingjunior oil and gas companies and provides an exciting short term and long term investment opportunity for riskadverse investors. EVOLUTION OF THE COMPANYThe Topaz Group is one of the most dynamic and exciting Groups working in the prolific Barnett Shale belt. TheCompany has evolved into one of the most competitive players in this area through a disciplined strategy based onfocusing only within prime producing formations of North-West-Central Texas and seeking financing partners todrill wells and generate proven reserves. This has enabled the Company to become a partner of choice for wells,which previously have been drilled and need specialized expertise in either completion, work-overs or othersupplemental work to bring them into production or to improve production. During the last decade, the TopazGroup has assembled, drilled and sold over 10,000 Barnett lease acres totaling approximately $100 millionthrough a number of separate drilling programs/ ventures. Management of Topaz Group through variouspartnerships and private entities have drilled and/or operated in over 250 wells in this region. Figure 2: Evolution of the Topaz Group 2001 03: •In 2001, the Group established its first drilling program. •Committed approximately 550acres to a privately held company that financed drilling a Krum Area, Denton total of 11 wells. •In 2003, these acres and reserves were sold to EnCana Corp. (TSX,NYSE: ECA) as part of a County larger property sale. 2002 05: •In 2002, the Topaz Group committed approximately 2,500 lease acres to another privately held company. Argyle Area, •A total of 12 Barnett wells were drilled. •In mid 2005, this production, the reserves and acreage were sold to a private company for Denton County approximately $30 million and later resold to Range Resources Corporation (NYSE:RRC). 2004 06: •In 2004, the Topaz Group acted as an operator and committed approximately 5,000 acres located to the west and southeast of the city of Denton, Texas. West and Southeast •In partnership with a private Australian finance group, a total of 16 wells were drilled •The Company sold its production, reserves and acreage to Dune Energy, Inc. for $46 of Denton City million and later sold to Pioneer Natural Resources Company (NYSE:PXD). Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 5 of 38
  7. 7. Grass Roots Research and Distribution, Inc. COMPANY STRUCTUREIn order to achieve superior growth and achieve its highest level of efficiency, Topaz has grouped its assets andprojects of interest into different operating segments. At times, these are operating segments or assets held inwholly owned individual limited partnerships. The key objective of using this structure is to provide operationaland budgetary focus for reserve development and enhancement. In addition, it also allows the Company to actswiftly to make opportune acquisitions. The Company’s current operating structure is shown below: Figure 3: Topaz Resources’ Current Operating Structure Parent Company Topaz Resources Inc Production Barnett Current Operating and Barnett Gas Segments Leasehold Oil Project Project Acquisitions Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 6 of 38
  8. 8. Grass Roots Research and Distribution, Inc. COHEN GROWTH DRIVERS Figure 4: Cohen Growth Drivers 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FBarnett Gas Project—„‡” ‘ˆ ‡ŽŽ•ƒ• ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ …ˆ‹Ž ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ „ŽBarnett Oil Project—„‡” ‘ˆ ‡ŽŽ•ƒ• ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ …ˆ‹Ž ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ „ŽNorth Taxes Oil Plays—„‡” ‘ˆ ‡ŽŽ•ƒ• ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ …ˆ‹Ž ”‘†—…–‹‘ ’‡” ‡ŽŽ ‹ „ŽTotal Productionƒ• ‹ …ˆ‹Ž ‹ †Ž•Priceƒ• ’‡” …ˆ % growth‹Ž ’‡” †Ž• % growthNet Revenues (in $ millions)ƒ•‹ŽTOTAL 0.33 6.82 20.41 46.25 78.47 125.46 175.93Annual Revenues, Margins, Assets, Turnsall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 F‡– ‡˜‡—‡’‡”ƒ–‹‰ ƒ”‰‹‡– ƒ”‰‹ ‹Ž—–‡†
  9. 9. ”‡‡ ƒ•Š Ž‘™ ƒ•Š ƒ† “—‹˜ƒŽ‡–•‘”‹‰ ƒ’‹–ƒŽ‘‰ ‡” ‡„–‘–ƒŽ ‡„–‘–ƒŽ ••‡–• Percentage Change in Annual Revenues, Margins, Assets, Turns 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 F‡˜‡—‡• ’‡”ƒ–‹‰ ƒ”‰‹ ‡– ƒ”‰‹ ‹Ž—–‡†
  10. 10. ”‡‡ ƒ•Š Ž‘™ ƒ•Š ‘”‹‰ ƒ’‹–ƒŽ ‘–ƒŽ ‡„– ‘–ƒŽ ••‡–• Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 7 of 38
  11. 11. Grass Roots Research and Distribution, Inc.The Cohen Growth Drivers Model is an intelligent road map used by many securities analysts to analyze theforecasted growth of a given company. Topaz Resources is expected to generate revenue from sale of Oil andNatural Gas. The Company expects to cater to the large and growing market for oil and natural gas to be exploredfrom the prolific Barnett Play. Topaz is likely to aggressively expand its drilling program to commercialize oiland gas production from its owned acreages. The Company is expected to continue acquiring unique assets that fitthe investment strategy of the firm. The global market for petroleum and natural gas is poised to continue with itsgrowth momentum over the next few years. Limited new discoveries, uncertainty in major producing nations,growing demand and economic recovery will result in demand supply imbalance, in favor of suppliers, resultingin high prices.We expect significant revenues as the Company continues to bring more wells into production.Commercialization of reserves in the prolific Barnett Shale gas play during the second half of the current year willresult in gross revenues of $0.3 million for FYE 2010. Going forward, the Company will not only benefit fromthe expansion of Barnett acreages and partnerships to drill additional wells will result in revenues of $6.8 millionin FYE 2011. We expect revenues to grow thereafter to $175.9 million by FYE 2016. The key driver for thisgrowth is continued demand for oil and gas. The Company’s assets are an intelligent mix of acceptable risk, highprofit and short return in historically successful and productive regions. There are a number of establishedcompanies in the industry and the available equipment and infrastructure is excellent. As a result TOPZ is likelyto ensure higher operating margins throughout our forecast period (Management Guidance).The Company plans to spend approximately $7.5 million in capital expenditures in the next 12 months and willrequire investing an additional $22.5 million to meet our projections (total funding requirement of $30.0 million).These expenditures will be directed toward developing existing proved and probable reserves and evaluating andacquiring new project areas. In addition to drilling new wells, Topaz is expected to invest additional funds indevelopment of logistics and transportation infrastructure.Revenues are expected to grow rapidly as the Company commences commercial production from its wells.Margins are positive and are expected to improve from 2010 going forward. Free cash flows are forecasted to bepositive in 2012 as significant investments are expected. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 8 of 38
  12. 12. Grass Roots Research and Distribution, Inc. VALUE PROPOSITIONTopaz expects to generate substantial growth in value from sale of natural gas once it commercializes productionfrom its Barnett projects. The Company has designed an exploration program to cost effectively evaluate theleases, using superior production technologies. The Company is positioned to seek opportunities arising from theincreased demand for natural gas due to demand supply imbalance and economic resurgence. Management’sability to raise funds, acquire new reserves and exit at the right time also provides a positive impetus to theCompany. Figure 5: Topaz’s Value Drivers Balanced and Excellent Attractive Diversified Asset Business Model Financial Position Base and Strategy Established Attractive Attractive Production Industry Current History Dynamics Valuation Partner Program Experienced Established Exit will enable Management Strategy expansion TeamNote how the value proposition integrates significant revenues and market opportunities. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 9 of 38
  13. 13. Grass Roots Research and Distribution, Inc. COMPANY ASSET DESCRIPTIONSince its inception, Topaz Resources has assembled an exciting portfolio of assets located in Texas. Currently, theCompany is actively pursuing acquisition, expansion and drilling activities in the Barnett play and North Texas. Figure 6: Overview of Company’s Assets Topaz Resources Inc. North Barnett Area Texas Barnett Gas Barnett Oil Strawn Project – Project – 950 Formation – 1,850 acres acres 1,000 acresAbout The Barnett Gas ProjectThe Company owns approximately 1,850 gross acres in the natural gas heart of the Barnett play. Located in thehistoric core area in Wise and Denton counties and surrounded by existing production and current drillingactivity, this acreage has excellent exisiting gathering systems and pipeline infrastructure. The Company plans toinvest approximatly $2.75 million per well, and Topazs strategy is to drill at least 1 horizontal well in 2010 at adepth of 8,000 to 9,000 feet and then 1 horizontal well per quarter during 2011 accelerating thereafter. Figure 7: Barnett Gas Project – Horizontal Well Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 10 of 38
  14. 14. Grass Roots Research and Distribution, Inc.It is estimated that each well holds 1.75 billion cubic feet of gas providing additional probable and possiblereserves of 61.25 billion cubic feet of gas. Management expects initial production rates of 2.0 million cubic feetper day of natural gas. Topaz’s acreage in this project area easily could accommodate drilling 35 new horizontalBarnett wells.This Barnett acreage was acquired by Topaz through the 2006 farm-out agreement under which the Topaz groupparticipated in drilling and completing sixteen wells, all of which were successful commercial wells. Six of thesewells were funded and acquired by a privately held company and ten wells have been acquired by Pioneer NaturalResources Company (NYSE:PXD).About The Barnett Oil ProjectTopaz holds approximately 950 acres located favorably in the oil area in Montague County of the Barnett play inTexas. Due to significant improvement in completion techniques, it has been possible to explore oil from theextended Barnett into the Montague County. Topaz will need to invest $2.75 million per well. The Companyplans to drill at least 2 horizontal wells in 2010 at a depth of 8,000 to 9,000 feet followed by 5 horizontal wells in2011 accelerating thereafter. Figure 8: Location of Company’s Barnett Oil ProjectManagement believes that these wells will typically have initial production rates of 150 bbls of oil and 275 Mcf ofgas per day. Topaz will target to accommodate and drill 15 new horizontal Barnett wells with expected resourcesin place of 1.875 billion cubic feet of gas equivalent, further providing additional probable and possible reservesof 28.125 billion cubic feet of gas equivalent. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 11 of 38
  15. 15. Grass Roots Research and Distribution, Inc.Management’s estimates are expected to be realistic as several new vertical wells near the Company’s acreagehave successfully drilled wells with initial production rates of 100 to 200 barrels of oil per day and 200 to 350Mcf per day. The most active player close to Company’s acreage is EOG Resources, Inc.Topaz recently reported1 the drilling and log results of its Barnett Shale oil well. The well was drilled to a totaldepth of 7,740 feet stopping at the top of the Viola formation. The electronic logs have identified a 600 footsection of Barnett Shale which includes a solid 400 foot section in the Lower Barnett with porosity andpermeability values that indicate good productive capabilities. The logs also confirm good productivecharacteristics from 6,775 feet to 6,785 feet, from 6,817 feet to 6,827 feet and from 6,881 feet to 6,888 feet in theshallower Conglomerate, supporting the good oil and gas shows that were encountered during drilling throughthese depths. In addition, oil and gas drilling and the logs indicate a potential productive Marble Falls zone at6,980 feet to 7,160 feet. Based on these results, Topaz set casing and cemented as a vertical well through theBarnett up to the shallower Conglomerate and Marble Falls zones. The Company is currently designing acompletion program and assessing the behind pipe production and reserve potential in the Marble Falls andConglomerate formations. Figure 9: Barnett Oil Project – Vertical WellAbout The North Texas Shallow Oil Gas ProjectIn addition to aggressively expanding its presence and expediting its drilling program in the Barnett play, Topaz isalso acquiring shallow oil and gas production properties with development upside in North Texas. One suchanticipated property acquisition is spread across 980 acres and consists of six leases. Currently, there are 25 wellswhich together produce 3,000 bbls of oil and 6,000 Mcf of gas per month. The wells produce from the StrawnSand from two producing horizons, at 3,000 feet and at 1700 feet. Wells have been drilled at 20 and 10 acrespacing with the possibility of further down spacing.There are 20 to 30 additional drill locations at both depths. Recent drilling has focused on the shallower sandhorizon. At these shallower depths, the cost of drilling and completing a new well ranges from $100,000 to1 Source: Company Press Release Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 12 of 38
  16. 16. Grass Roots Research and Distribution, Inc.$125,000 with an average initial production of 25 bbl and 50 Mcf per day. With oil prices at $80 per barrel thepayback on capital can be less than six months.Topaz plans to prioritize the drilling program at this site as management believes that this property will quicklyincrease its monthly cash flows thereby assisting the financing of new drill programs and further acquisiitons. TheCompany is expected to drill at least 10 vertical wells at a depth of 1,700 feet in 2010. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 13 of 38
  17. 17. Grass Roots Research and Distribution, Inc. COMPANY LOCATION DESCRIPTIONTopaz has focused its activities and resources on expanding its presence in the North-Central-West Texasproducing formations that are spread across 15 counties immediately northwest of Dallas, Texas. The BarnettShale/Newark East Play located within these counties and today is one of the largest natural gas plays and drillingbooms in the continental United States and the biggest producing gas field in Texas. Figure 10: The Barnett Shale PlayThe Barnett Shale is a geological formation located in the Bend Arch-Fort Worth Basin. It consists of sedimentaryrocks of Mississippian age (354–323 million years ago) in Texas. Improved completion techniques have allowedoperators to more than double the daily production in the Barnett since 2006 to about 4 billion cubic feet per dayfrom the currently operating 6,000 Barnett wells. The drilling activity is intense with approximately 70 rigsrunning in this area operated by small operators to larger public energy companies.Based on reports by various experts, it is estimated that Barnett Shale may have the largest producible reserves ofany onshore natural gas field in the United States. The Barnett Shale has a proven reserve base of 2.5 trillioncubic feet of natural gas, and additional probable reserves of 30 trillion cubic feet of natural gas resources. Recenttechnology developments and geological surveys have also shown reserves of oil, though in much lesserquantities, but sufficient to be commercially viable. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 14 of 38
  18. 18. Grass Roots Research and Distribution, Inc. Figure 11: The Barnett Shale – Oil and Gas Producing AreasBarnett is the productive formation that occurs at a depth of 8,000 to 9,000 feet. Until the 1990’s, most drillingwas done at formations above the Barnett, throughout Topaz’s acreages. The key hindrance that has limited theproduction from Barnett Shale is because this play is a tight gas reservoir, indicating that the gas cannot be easilyextracted. The shale is very hard, making it virtually impossible to produce gas in commercial quantities from thisformation. However, recent improvements made in hydraulic fracturing technology and horizontal drilling,coupled with the upturn in the natural gas prices have made drilling attractive in this region. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 15 of 38
  19. 19. Grass Roots Research and Distribution, Inc. Figure 12: The Barnett FormationsCopyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 16 of 38
  20. 20. Grass Roots Research and Distribution, Inc. BULL CASE x Total world demand for natural gas will continue to increase at an average annual rate of 1.5% to 2025. Liquid fuels are expected to rise 1.0% annually until 2030. x Increasing use for electricity generation and industrial applications will account for about 75% of the projected growth in natural gas demand until 2025. x Price-inelastic demand as most customers are unable to switch easily to an alternate fuel once they have committed to using gas for gas-fired equipment. x Topaz Resources has a strong base of assets in areas known for producing high quantity oil and gas. x The Company’s oil and gas properties are located in the prolific Barnett Shale Play. These assets are likely to provide assured funds to finance other projects to be undertaken in the future. x Partner programs will enable Topaz to leverage its rigs, workforce and other expertise in the region to increase revenues and cash flows. BEAR CASE x Factors that govern commodity prices are beyond the Company’s control. x The rise in global Oil and Gas supply might result in lower prices making exploration from Barnett Shale uneconomical. x The Company’s revenues and operating results are highly dependent upon the success of the exploratory and developmental drilling program at its various projects. x Access to substantial sums of capital.Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 17 of 38
  21. 21. Grass Roots Research and Distribution, Inc. GROWTH PLANSThe Company plans to invest significant capital to expedite growth. This capital will be invested in: x Acquisition and enhancement of North Texas shallow oil gas project x Sign up with additional companies to expand its Well Partner Program with a target to at least sign-up with 5 wells. x Drilling additional vertical Strawn oil wells x Drilling three additional Barnet wells, (1 gas wells and 2 oil wells)Based on its growth plans, internal management estimates and planned acquisition and drilling activities, totalproved and probable reserves could total 106 billion cubic feet of gas equivalent by year end 2010. Figure 13: Topaz Resources – Reserve Break-up Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 18 of 38
  22. 22. Grass Roots Research and Distribution, Inc. INDUSTRY OVERVIEW AND COMPETITIONEconomic slowdown, rising exploration, production costs, and the increasing imbalance between demand andsupply are the primary drivers for the volatility in oil prices. The inability of oil companies to replace theirreserves and depletion of the proven reserves are the principle reasons for ongoing supply constraints. Existingreserves are depleting due to rising energy needs of growing economies such as China, India and Brazil. OPECdoes not have spare capacity to increase supply. It is also increasingly difficult for companies to find new oilfields. Iran’s nuclear standoff, civil unrest in Nigeria, nationalization of production by Venezuela, Ecuador, andBolivia and maturing fields in the U.S. and Europe further constrain supplies. Increases in oil supply aredependent upon technological advancements or price increases in order to make undeveloped oil resourcesprofitable. Speculative market activities are increasing the demand for oil. The limited supply of drilling andexploration equipment and the growing cost of steel and other raw materials are driving costs higher. A solutionis to use previously abandoned land for profitable oil production and use new technology in order to meet thegrowing demand-supply imbalance. Exploration of oil sands is another important solution. Figure 14: Industry Overview Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 19 of 38
  23. 23. Grass Roots Research and Distribution, Inc.Value Drivers: Oil and Gas Industry Figure 15: Value Drivers: Oil Gas Industries ledOutlook: Oil and Gas IndustryDemand and Supply: Global oil demand declined in 2009 for the second consecutive year, the first time since1983 that this has occurred. The decline bottomed out in the middle of 2009, as the world economy began torecover in the last half of the year. The global market for oil and gas is expected to tighten in 2010 and 2011driven by the positive recovery in the global economy. Developing and under-developed economies and othercountries outside the OECD are expected to lead the demand recovery. Last, the demand for oil in developednations will also grow in response to improving economic conditions. China and India continue to lead worldconsumption growth.The recent cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) have weakened theglobal market for oil. This has led to global oil and gas inventories and spare production capacity. This coupledwith expectations of a continued global economic turnaround have resulted in the reinforcement of the global oilmarkets. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 20 of 38
  24. 24. Grass Roots Research and Distribution, Inc. Figure 16: Energy Demand Forecasts (Source: EIA)CompetitionThe global oil and gas industry is highly competitive. Individuals, smaller companies, and major oil and gascompanies compete for attractive assets. The primary factors differentiating major companies from smaller onesare increased technical, financial and operational resources and staff. Also, for smaller companies, competitionarises mainly from other companies operating in and around their acreage of operations. The 70+/- drilling rigsrunning in the area and over billions of dollars of investment annually into Barnett Area highlight its tremendousopportunity. Today, more than 8,000 wells have been drilled in Barnett alone within the last six years. Currently,Chesapeake Energy, Devon, EOG Resources and XTO (recently acquired by ExxonMobil) are among the majorplayers working in Topaz Resources’ focus area in Barnett Shale Area. We believe several factors differentiateTopaz from its competitors, as discussed in the Value Driver section of our report. MANAGEMENT BIOSTop management at Topaz Resources provides a competitive advantage. Their experience in the field of NaturalGas, exploration and production includes capitalizing on industry cycles, making opportunistic acquisitions,significantly ramping-up production and identifying suitable exit opportunities bodes well for the Company.Management’s capability to source funds for acquisition in current uncertain markets provides liquidity for theCompany required to stay afloat in tough commodity cycle conditions.Edward J. Munden, CEO, is a professional geological engineer with an MBA and is a co-founder of a privateboutique investment banking organization that has provided and/or arranged early and mid stage venture capitaland hands-on managerial assistance to a portfolio of energy, mining and technology software companies. From Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 21 of 38
  25. 25. Grass Roots Research and Distribution, Inc.2001 to present, Mr. Munden has focused on development and financing of oil and gas leasing and drillingprojects in the Barnett Shale play in north-central Texas with a strategy of accumulating a solid mineral leaseposition and building a strong operational capability. In 1994, Mr. Munden co-founded a Dallas basedindependent NASDAQ-traded public energy company engaged in the exploration, development and acquisition ofoil and natural gas properties and held senior level positions including Director, Chairman, President and CEOuntil it was sold for over $150 million in December 2001. Mr. Munden has held positions in the energy, mining,manufacturing and technology industries for more than 30 years.Robert P. Lindsay, COO, is a second-generation oil and gas professional with over 43 years experience in thepetroleum industry. He has planned and executed drilling and rework programs in Texas, Louisiana, Kentuckyand New Mexico. From 2001 to present, Mr. Lindsay has focused on locating, evaluating and securing mineralleases in the Barnett Shale play in north central Texas, wherein he has drilled or participated in over 250 oil gaswells in the immediate region; has assembled, drilled and sold over 10,000 acres with dollar values approaching$100 million; and has built and sold 6 Barnett Shale drilling rigs. Prior to this, Mr. Lindsay was Chief OperatingOfficer of a NASDAQ energy company responsible for all administrative and operational aspects of thecompany’s producing and development properties. From 1973 until 1995, Mr. Lindsay managed over 200employees and 10 drilling rigs concentrating on drilling oil and gas wells throughout north Texas. Prior to 1973,Mr. Lindsay held senior positions with an international oil and natural gas drilling and exploration companyheadquartered in Tulsa, Oklahoma.Rand Stinnett, VP and General Counsel, is a fourth-generation oil and gas professional, having focused full-timeon Barnett projects since 2000. Through various entities, Mr. Stinnett has executed a successful, disciplinedleasing strategy that has resulted in the acquisition and development of over 10,000 acres of quality mineral leaseswithin the Barnett in and around Wise, Denton, Montague and Tarrant Counties, Texas. Mr. Stinnett is acommercial/business attorney and petroleum landman who has represented clients in all aspects of the oil and gasbusiness, including financial institutions, mineral owners, working interest owners, operators, drillers andcontractors. Since 1982, he has engaged in a general civil legal practice involving title examination, commerciallitigation, transactional work and regulatory/corporate matters, both as a sole practitioner and in association withlaw firms, in Hurst and Austin, Texas. Mr. Stinnett is licensed to practice law in both Texas and Oklahoma andholds B.S. and J.D. degrees.Bill Williamson, VP Operations and Land, is a certified petroleum landman with over 28 years experience in theoil and gas industry including eight years experience in operating and building oil and gas drilling rigs. In 2005,Mr. Williamson co-founded a company to build and operate land drilling rigs, completing construction of threedrilling rigs. Prior to this from 2002, he worked for an independent drilling contractor located in Denton, Texas.From 1998 to 2002, Mr. Williamson was VP, Land for a NASDAQ energy company responsible for all land,acquisition and divestiture transactional contracts and agreements. Prior to 1998, Mr. Williamson providedclients with oil and gas asset management, acquisition and divestiture services from a land and legal perspective.Bruce I. Benn CFO and VP Finance, is a specialist in investment banking and international finance with over 25years experience in identifying, structuring and negotiating acquisitions and investments, particularly in theenergy, mining and technology sectors. He arranges and executes public and private offerings of debt and equityfinancing and oversees all aspects of public and investor relations and regulatory compliance. He wasinstrumental in structuring and arranging over $500 million in debt and equity financing for a NASDAQ energycompany. He is a co-founder of a private boutique investment banking organization, where he focuses onstructuring transactions and interfacing with a select core of institutional and private investors. Mr. Benn is anattorney and holds B.A., LLB and LLM degrees. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 22 of 38
  26. 26. Grass Roots Research and Distribution, Inc. VALUATION THE COHEN PRICE TARGET - $1.94The Cohen Price TargetTM is a dynamic and logical valuation approach as it combines market-based approachesand intrinsic value methodologies. Capital raising and cash are the life blood of any micro cap/small capcompany. Hence, the Cohen Price TargetTM includes four components, 25% equal weighted that together reflectand are based on the Company’s ability to raise capital for growth. The four components used in our price indexare: Price-to-Earnings ratio (P/E), Cohen Price-to-Capital Employed ratio (P/CE) (Both Market based valuationapproaches), Cohen Discounted Cash Flow (DCF) method (Theoretically an Intrinsic Value based approach) andCohen Price Performance Index. Our formula for The Cohen Price TargetTM is shown below. Figure 17: The Cohen Price TargetTM Formula Price to Earnings (P/E) in US$ TOPZ Earnings Per Share 2011 Avg. Forecasts 0.13 Industry Average P/E Ratio 17.43 Price based on P/E Ratio 2.20 Price to Capital Employed (P/CE) in US$ TOPZ Capital Employed 0.36 Industry Average P/CE Ratio 6.47 Price based on P/CE Ratio 2.35 Cohen Discounted Cash Flow Model in US$ Cohen DCF Value Base Case 2.12 Cohen Performance Index in US$ Cohen Price Performance Index Value 98.2% TOPZ Current Stock Price 0.55 Price based on Cohen Performance Index 1.09 Cohen Price Index Target 1.94 Current Price 0.55 Upside/ (Downside) Potential 252.3% Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 23 of 38
  27. 27. Grass Roots Research and Distribution, Inc. Figure 18: Cohen Discounted Cash FlowTM Range of Target Price vs. Long Term Growth Rates in US $ Range of Long Term Growth Rates ’–‹‹•–‹… ƒ•‡ ƒ•‡ ƒ•‡ ‡••‹‹•–‹… ƒ•‡ Range Target Price vs. Cost of Equity in US $ Range of Cost of Capital ’–‹‹•–‹… ƒ•‡ ƒ•‡ ƒ•‡ ‡••‹‹•–‹… ƒ•‡Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 24 of 38
  28. 28. Grass Roots Research and Distribution, Inc. LATEST PRESS RELEASESource: Topaz Resources, Inc.September 22, 2010 4:00 PM ETTopaz Resources Signs Definitive Agreement With RMJTopaz Resources, Inc. (OTCBB: TOPZ) today announced that it has signed a Definitive Agreement with RMJ,Inc. to partner in a Multi-Well Development Program. Under this Program, Topaz and RMJ are now negotiatingparticipation by RMJ in the Barnett Shale well recently drilled by Topaz in the oil leg of the Barnett Shaleformation in North Texas, which Topaz currently is preparing to complete.We are very impressed at how quickly RMJ has been able to complete their part of this transaction, commentedTed Munden, CEO of Topaz Resources, and we look forward to partnering with RMJ in our current BarnettShale well and in the next series of wells that we have planned in the near future.About RMJRMJ is a private independent oil and gas (EP) company engaged in the exploration, development andproduction of oil and gas in Texas, Oklahoma and California.About Topaz ResourcesTopaz Resources is an independent oil and gas company focusing on production, acquisitions and developmentaldrilling opportunities within proven producing areas of north, central and west Texas. The Companys website canbe found at www.topazresourcesinc.com. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 25 of 38
  29. 29. Grass Roots Research and Distribution, Inc. CONCLUSIONTopaz is one of the most exciting junior oil and gas exploration and production companies. The Company istransforming itself from a start-up stage to a development stage oil and gas Company. Topaz’s objective is toincrease and enhance shareholder value, through possible monetization via sale of Topaz assets or of individualproperties. Topaz plans to aggressively pursue its well drilling program to expedite growth and become cash flowpositive. The Company is focused on executing its strategy of leveraging its strengths to acquire additionalacreages and production within its area of operation, and to enhance this acreage through drilling and well work-overs using modern technology. Also, Company’s Partner Program whereby it utilizes its infrastructure, resourcesand expertise to to partner with asset owners shall result in positive cash flows for Topaz. Topaz’s experiencedmanagement team represents a strength and advantage necessary to execute this strategy.The Barnett Shale Belt is turning out to be America’s most attractive oil and gas drilling location. Billions ofdollars are likely to be invested in this area. We believe that continued industry growth through the developmentand exploration of conventional domestic oil and gas reserves will provide essential near-term growth drivers.The Company plans to grow organically by raising and utilizing the funding it needs to begin its welldevelopment program and acquire additional leases at its lucrative projects. The Company’s business model isscalable and is able to accommodate larger capital infusions with correspondingly larger returns in dollar terms.We expect significant growth potential from TOPZ’s prolific gas leases in the Barnett Area in the immediate tomedium term. Revenues are expected to grow from $0.3 million for Fiscal Year End (FYE) December 31, 2010 tomore than $175.9 million by FYE 2016. Note: our projections assume that the Company will be able to achieveour forecasted targets provided if raises a total of $30.0 million funding.We believe the Company’s focus in the attractive North-West-Central Texas Area together with the experienceand proven track record of its management team will provide enhanced returns on investment. The Companyintends to become an intermediate level oil and gas producer in the next few years. The stock is an attractive shortterm trade and long term buy provided funds are raised.RS/Cohen Independent Research Group Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 26 of 38
  30. 30. Grass Roots Research and Distribution, Inc. HISTORICAL HEADLINESTopaz Resources Commences Drilling Program in BarnettJun 22, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todayannounced that it has commenced its next drilling program in the Barnett shale formation in North Texas.According to Topaz Resources, Natural Gas Is Key to Reducing...Jun 21, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todaycommented that natural gas is key to reducing U.S. dependence on oil. This is the foundation of the Topazstrategy of expanding and developing its growing natural gas reserves in the Barnett shale, which has become oneof the biggest natural gas plays and drilling booms in the continental United States and the largest producing gasfield in Texas.Topaz Resources Outlines Objectives for 2010Jun 18, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todayissued a corporate update to provide its shareholders with insight into a series of fundamental developmentsoccurring at the Company in 2010. In a formal statement, Ted Munden, the Chief Executive Officer of Topaz,stated.Current Forecasted Natural Prices Reinforce Topaz StrategyJun 16, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todaycommented that current and forecasted prices of natural gas are providing significant reinforcement to the Topazacquisition and development strategy.Topaz Resources Confirms Strategic Areas of InterestJun 8, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todayconfirmed that it is targeting its operations and growth in the established, proved producing areas of north, centraland west Texas.Topaz Resources Introduces Operations CapabilityJun 2, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todayintroduced its team of 57 administrative and operations personnel.Topaz Resources Announces Appointment of General CounselJun 1, 2010 - Market WireTopaz Resources, Inc. (OTCBB: TOPZ), an independent oil and gas company (Topaz or the Company), todayannounced that the Companys Board of Directors has named Rand Stinnett, 52, as Vice President and GeneralCounsel. Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 27 of 38
  31. 31. Grass Roots Research and Distribution, Inc. APPENDIX The Cohen Price TargetThe Cohen Price TargetTM is derived using a combination of academic and market-based valuation approaches.The following four equal weighted (25%) components used in calculating our target price, include the assumptionof capital raised: 1. The first 25% equal weighted component: is the market multiple based valuation methodology. This method uses the industry average 2011E Price-to-Earnings ratio to calculate the potential stock price (and/or price to Book if an asset based company). We take the average Price-to-Earnings multiple of a given industry. This means that, on an average, stocks in this industry should currently trade at a multiple times their 2011 expected earnings. These earnings are usually only generated by a small company raising cash to meet its master budget. The index, therefore, reflects capital invested in any micro/small cap company. 2. The second 25% equal weighted component: Cohen Capital Employed based valuation. Most start-up and micro/small cap companies require significant capital to meet our projections. Our Cohen Price TargetTM reflects the Company’s ability to raise additional capital. Based on our capital projection and long-term price target from our Cohen DCFTM valuation model, we derive a Price-to-Capital Employed ratio. We then multiply this ratio with our capital employed per share assumption to derive this target price. 3. Our third 25% equal weighted component is our use of the Cohen Price Performance IndexTM, which calculates the average price increase of all the stocks covered by Grass Roots Research and Distribution Inc. and Cohen Research after their release. Currently, for the period ending September 30, 2010 the Cohen Price Performance IndexTM is up by 98.2%, meaning that we expect the stock to follow the same trend and rise by 98.2%. To date, since May 2009, 97.6% of all of our stocks post report release have traded above the price of our initiate coverage report within 26 days. The Index assumes that all of its companies had capital employed in each company. In general, almost 100% of our researched stocks went up close to 100%. 4. Our fourth 25% equal weighted component is our Cohen Discounted Cash Flow (DCF) method of valuation. Our Cohen DCFTM valuation includes a complex trademarked formula proprietary to our firm, which includes an assumed long-term sustainable growth rate, cost of capital and assumed capital invested in a given company. Our DCF price target values a company today, based on projections of how much future cash will be generated from a given company. We assume that a company is worth all of the cash it can make available to investors in the future. It is called discounted cash flow because cash in the future is worth less than cash today, and therefore must be discounted to today. We forecast various line items including assuming a given amount of capital is raised, to calculate the free cash flow we project a company to generate during our 5 year forecasted time period. If a company does not raise our estimated cash requirements, it is highly unlikely to reach our forecasts and can go out of business. After using a formula to discount free cash flow, we divide the total forecasted equity of the company by the shares of stock outstanding to calculate our Cohen DCFTM valuation, or theoretical price per share target. We believe the Cohen DCFTM formula is a more accurate measurement of operating cash than the traditional DCF used by most Wall Street research analysts. A DCF, or 5 year forecasted free cash flow projection, cannot be calculated without forecasting the three statements (IS,BS,CF) for 5 years. We are the only Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 28 of 38
  32. 32. Grass Roots Research and Distribution, Inc. firm in the investor awareness industry that forecasts all of our companies for 5 years in three assumed cases. We believe this in depth level of securities analysis is a must for all of our companies, and is a foundation of the Cohen Research MethodTM.Capital raising and cash are the life blood of any micro cap/small company. Our Cohen Price TargetTM includes 4components, 25% equal weighted, that together reflect capital is raised in our client companies. Our componentsare trademarked and proprietary to our firm, as is the Cohen Performance IndexTM.Most micro/small cap companies have difficulty raising sufficient funds to reach our theoretical forecasts; hencethere is considerable risk for any investor. While we do not give investment advice, any company that cannotraise adequate capital to finance its business model is a highly risky investment, short term or longterm. Investment awareness campaigns also affect our price targets. Do not rely on our price targets because theyare based on academic theory. Do your own research or consult with your investment professional.Price TargetsPrice targets can be heavily influenced by investor awareness campaigns. In general, we observe the more moneyspent on such campaigns, the greater the probability for short term price increases post report release. Our pricetargets normally assume capital raising and forecast 5 year Income Statement, Balance Sheet and Cash Flowstatements. In a perfect world, these assumptions may be realized. We do not give investment advice. However,in the practical/real world, it is very difficult for a small company to raise adequate capital to reach our theoretical5 year projections. We are not aware of any research firm that forecasts the three statements (IS, BS, CF) in 3cases for 5 years to reach our price targets. We believe our price targets are unique to the body of knowledge inthe field of securities analysis.The Penny Stock Market is primarily a short term trader’s market. Our reports often times recommend clientcompanies as short term trades, and long term investments only if an investor believes a company will raise therequired capital to meet our valuation and price targets. Our statistics indicate that short term price increasesregularly occur after release of our initiate coverage reports. Thereafter, we note that of the majority our stockrecommendations go down significantly due to profit taking. Our Disclaimer advises our readers to do their ownresearch outside and separate from our commercial advertisements. Do not rely on our price targets as they areacademic theory.Note: How we calculate our Price TargetsWe further explain our Cohen DCF, which is an important 25% component of The Cohen Price Target. TheCohen Discounted Cash Flow Analysis (DCF) creates a price target and values a company today, based onprojections of how much future cash will be generated from a Company. Our DCF analysis assumes that aCompany is worth all of the cash that it can make available to investors in the future. It is called discounted cashflow because cash in the future is worth less than cash today, and therefore must be discounted to today. Weforecast various line items including assuming capital is raised, to calculate the free cash flow we expect acompany to generate during our 5 year forecasted time period. After using a formula to discount free cash flow,we divide the total forecasted equity of the Company by the shares of stock outstanding to calculate our CohenDCF (Discounted Cash Flow) valuation, or theoretical price per share target. We believe our Cohen DCF is a Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 29 of 38
  33. 33. Grass Roots Research and Distribution, Inc.more accurate method of calculating operating cash. We forecast three assumed price targets because companieschange during 5 years, Base Case, Optimistic Case, and Pessimistic Case.Note: What is our formula used to calculate our DCF, the Cohen Price Target?Some line items include free cash flow to the firm, the weighted average cost of capital, assumption of capitalraised and capital spent, and the total enterprise value of the business less its debt, total equity value, total sharesoutstanding, and our projected price per share. A DCF cannot be academically calculated without projecting the 5year cash flow statement.Risks of the Cohen Price TargetOur Price Targets assume capital will be raised in our four components, or 100% of the Cohen Price Target. Themajority of micro cap/small cap companies need capital to reach our 5 year sales and cash flow projections. Inthe academic world, The Gordon Growth Model justifies an analysts decision to forecast for 5 years. Weforecast the three statements for 5 years in 3 cases. However, in the practical/real world, buying a micro cap stockbased on 5 year forecasting is highly risky.If smaller companies are able to raise capital, our theoretical price targets in a perfect world might be justified,providing the Company executes on its business model. If an investor believes that a given Company cannot raisethe necessary capital to reach our projections, then any investment becomes highly risky.The investor should consider the possibilities of a given company being able to raise capital and execute over 5years. Few micro/small cap companies are able to raise enough capital and execute over an extended period oftime, primarily due to competition, management competence, access to capital, and execution of their masterbudget. Our price targets are academic theory and should not be relied upon. Investors should do their ownresearch and consult with their financial consultants. Oil and Natural Gas Measurement Abbreviations Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 30 of 38
  34. 34. Grass Roots Research and Distribution, Inc. FINANCIAL EXHIBITS Income Statement – Base Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FNet Revenues 0.3 6.8 20.4 46.2 78.5 125.5 175.9Cost of Production 0.0 0.7 2.1 4.6 7.8 12.5 17.6Gross Profit 0.3 6.1 18.3 41.6 70.6 112.9 158.4Total Operating CostsOperating Profit/ EBITDA 0.3 5.8 17.5 39.8 67.5 107.9 151.3 ‡’”‡…‹ƒ–‹‘ ƒ† ‘”–‹œƒ–‹‘Earnings Before Interest and Tax/ EBIT (0.8) 3.6 14.7 35.4 60.7 97.4 135.5
  35. 35. –‡”‡•– š’‡•‡ ‡–Earnings Before Tax/ EBT (0.8) 2.8 13.9 34.7 60.2 96.9 135.9ƒšƒ–‹‘ š’‡•‡ ‡‡ˆ‹–Net Profit/Loss for the period (0.6) 2.3 11.1 27.8 48.2 77.5 95.2Šƒ”‡• —–•–ƒ†‹‰ ƒ•‹…Šƒ”‡• —–•–ƒ†‹‰ ‹Ž—–‡† ƒ•‹… ‹Ž—–‡† Balance Sheet – Base Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FASSETS ƒ•Š ƒ† ƒ•Š “—‹˜ƒŽ‡–• ……‘—–• ‡…‡‹˜ƒ„Ž‡
  36. 36. ˜‡–‘”›–Š‡” ••‡–•Total Current Assets 0.4 2.0 5.0 11.5 28.3 56.4 84.6”‘’‡”–› Žƒ– ƒ† “—‹’‡– ”‘•• ƒ’‹–ƒŽ š’‡†‹–—”‡ ‡’”‡…‹ƒ–‹‘ ˆ‘” –Š‡ ›‡ƒ” ……——Žƒ–‡† ‡’”‡…‹ƒ–‹‘”‘’‡”–› Žƒ– ƒ† “—‹’‡– ‡––Š‡” ••‡–•Total Assets 15.0 32.0 43.3 70.5 118.2 195.8 291.1LIABILITIES ……‘—–• ƒ›ƒ„Ž‡–Š‡” —””‡– ‹ƒ„ —””‡– ’‘”–‹‘ ‘ˆ ‡„–Total Current Liabilities 0.4 0.1 1.4 1.7 2.1 2.8 3.6‘‰ –‡” ‘ƒTotal Liabilities 0.4 7.6 7.9 7.2 6.8 6.9 7.0 ‘‘ –‘… ‘–”‹„—–‡† —”’Ž—•‡–ƒ‹‡† ƒ”‹‰•Total Shareholders Equity 14.6 24.3 35.5 63.2 111.4 188.9 284.1Total Liabilities, Shareholders Equity, M 15.0 32.0 43.3 70.5 118.2 195.8 291.1 Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 31 of 38
  37. 37. Grass Roots Research and Distribution, Inc. Cash Flow Statement – Base Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FOperating Activity‡–
  38. 38. …‘‡Adjustments to Reconcile Cash FlowsDepreciation and AmortizationOther AdjustmentsChanges in operating assets and liabilities:Accounts receivableInventoryOther assetsAccounts payableOther liabilities Šƒ‰‡ ‹ ‘”‹‰ ƒ’‹–ƒŽCash Flow from Operating Activities 0.7 2.6 11.4 30.1 50.6 81.7 104.1Investing Activity š’‡†‹–—”‡• ˆ‘” ’”‘’‡”–› ’Žƒ– ƒ† ‡“—‹’–Š‡” ‘‰ –‡” ƒ••‡–•Cash Flow from Investing Activities (15.6) (17.5) (11.2) (25.1) (37.7) (60.0) (83.0)Financing ActivityProceeds from or repayment of debtProceeds from issuance of common stockCash Flow from Financing Activities 15.2 15.0 (1.1) (0.9) (0.8) (0.7)Net Change in Cash 0.3 0.0 0.2 4.0 11.9 20.9 20.5Opening Cash Balance 0.3 0.3 0.5 4.5 16.4 37.3Ending Cash Balance 0.3 0.3 0.5 4.5 16.4 37.3 57.8 Income Statement – Optimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FNet Revenues 0.3 6.8 20.7 47.6 81.9 132.9 189.0Cost of Production 0.0 0.7 2.1 4.8 8.2 13.3 18.9Gross Profit 0.3 6.1 18.5 42.8 73.8 119.6 170.2Total Operating CostsOperating Profit/ EBITDA 0.3 5.8 17.7 40.9 70.5 114.3 162.6 ‡’”‡…‹ƒ–‹‘ ƒ† ‘”–‹œƒ–‹‘Earnings Before Interest and Tax/ EBIT (0.8) 4.4 15.6 37.2 64.3 104.1 146.7
  39. 39. –‡”‡•– š’‡•‡ ‡–Earnings Before Tax/ EBT (0.8) 3.7 14.8 36.5 63.7 103.7 147.1ƒšƒ–‹‘ š’‡•‡ ‡‡ˆ‹–Net Profit/Loss for the period (0.6) 2.9 11.8 29.2 51.0 82.9 103.0Šƒ”‡• —–•–ƒ†‹‰ ƒ•‹…Šƒ”‡• —–•–ƒ†‹‰ ‹Ž—–‡† ƒ•‹… ‹Ž—–‡† Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 32 of 38
  40. 40. Grass Roots Research and Distribution, Inc. Balance Sheet– Optimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FASSETS ƒ•Š ƒ† ƒ•Š “—‹˜ƒŽ‡–• ……‘—–• ‡…‡‹˜ƒ„Ž‡
  41. 41. ˜‡–‘”›–Š‡” ••‡–•Total Current Assets 0.4 14.5 15.3 21.8 39.2 68.8 98.7”‘’‡”–› Žƒ– ƒ† “—‹’‡– ”‘•• ƒ’‹–ƒŽ š’‡†‹–—”‡ ‡’”‡…‹ƒ–‹‘ ˆ‘” –Š‡ ›‡ƒ” ……——Žƒ–‡† ‡’”‡…‹ƒ–‹‘”‘’‡”–› Žƒ– ƒ† “—‹’‡– ‡––Š‡” ••‡–•Total Assets 15.0 32.6 44.7 73.3 124.0 207.0 310.3LIABILITIES ……‘—–• ƒ›ƒ„Ž‡–Š‡” —””‡– ‹ƒ„ —””‡– ’‘”–‹‘ ‘ˆ ‡„–Total Current Liabilities 0.4 0.1 1.4 1.7 2.2 2.9 3.8‘‰ –‡” ‘ƒTotal Liabilities 0.4 7.6 7.9 7.2 6.9 7.0 7.3 ‘‘ –‘… ‘–”‹„—–‡† —”’Ž—•‡–ƒ‹‡† ƒ”‹‰•Total Shareholders Equity 14.6 25.0 36.9 66.1 117.1 200.0 303.0Total Liabilities, Shareholders Equity, M 15.0 32.6 44.7 73.3 124.0 207.0 310.3 Cash Flow Statement– Optimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FOperating Activity‡–
  42. 42. …‘‡Adjustments to Reconcile Cash FlowsDepreciation and AmortizationOther AdjustmentsChanges in operating assets and liabilities:Accounts receivableInventoryOther assetsAccounts payableOther liabilities Šƒ‰‡ ‹ ‘”‹‰ ƒ’‹–ƒŽCash Flow from Operating Activities 0.7 2.4 11.4 30.8 52.5 86.2 111.3Investing Activity š’‡†‹–—”‡• ˆ‘” ’”‘’‡”–› ’Žƒ– ƒ† ‡“—‹’–Š‡” ‘‰ –‡” ƒ••‡–•Cash Flow from Investing Activities (15.6) (4.9) (13.4) (25.8) (39.4) (63.6) (89.3)Financing ActivityProceeds from or repayment of debtProceeds from issuance of common stockCash Flow from Financing Activities 15.2 15.0 (1.1) (0.9) (0.8) (0.7)Net Change in Cash 0.3 12.5 (2.1) 3.9 12.2 21.8 21.3Opening Cash Balance 0.3 12.7 10.7 14.6 26.8 48.6Ending Cash Balance 0.3 12.7 10.7 14.6 26.8 48.6 69.9 Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 33 of 38
  43. 43. Grass Roots Research and Distribution, Inc. Income Statement– Pessimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FNet Revenues 0.3 6.8 19.7 43.4 71.3 110.3 149.8Cost of Production 0.0 0.7 2.0 4.3 7.1 11.0 15.0Gross Profit 0.3 6.1 17.7 39.0 64.2 99.3 134.9Total Operating CostsOperating Profit/ EBITDA 0.3 5.8 16.9 37.3 61.3 94.9 128.9 ‡’”‡…‹ƒ–‹‘ ƒ† ‘”–‹œƒ–‹‘Earnings Before Interest and Tax/ EBIT (0.8) 4.4 14.8 33.7 55.6 85.9 115.3
  44. 44. –‡”‡•– š’‡•‡ ‡–Earnings Before Tax/ EBT (0.8) 3.7 14.0 33.1 55.0 85.4 115.8ƒšƒ–‹‘ š’‡•‡ ‡‡ˆ‹–Net Profit/Loss for the period (0.6) 2.9 11.2 26.5 44.0 68.3 81.0Šƒ”‡• —–•–ƒ†‹‰ ƒ•‹…Šƒ”‡• —–•–ƒ†‹‰ ‹Ž—–‡† ƒ•‹… ‹Ž—–‡† Balance Sheet– Pessimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FASSETS ƒ•Š ƒ† ƒ•Š “—‹˜ƒŽ‡–• ……‘—–• ‡…‡‹˜ƒ„Ž‡
  45. 45. ˜‡–‘”›–Š‡” ••‡–•Total Current Assets 0.4 14.5 15.2 21.2 36.3 60.9 85.1”‘’‡”–› Žƒ– ƒ† “—‹’‡– ”‘•• ƒ’‹–ƒŽ š’‡†‹–—”‡ ‡’”‡…‹ƒ–‹‘ ˆ‘” –Š‡ ›‡ƒ” ……——Žƒ–‡† ‡’”‡…‹ƒ–‹‘”‘’‡”–› Žƒ– ƒ† “—‹’‡– ‡––Š‡” ••‡–•Total Assets 15.0 32.6 44.1 69.9 113.5 181.7 262.7LIABILITIES ……‘—–• ƒ›ƒ„Ž‡–Š‡” —””‡– ‹ƒ„ —””‡– ’‘”–‹‘ ‘ˆ ‡„–Total Current Liabilities 0.4 0.1 1.4 1.7 2.0 2.5 3.1‘‰ –‡” ‘ƒTotal Liabilities 0.4 7.6 7.8 7.2 6.7 6.6 6.6 ‘‘ –‘… ‘–”‹„—–‡† —”’Ž—•‡–ƒ‹‡† ƒ”‹‰•Total Shareholders Equity 14.6 25.0 36.2 62.7 106.7 175.1 256.1Total Liabilities, Shareholders Equity, M 15.0 32.6 44.1 69.9 113.5 181.7 262.7 Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 34 of 38
  46. 46. Grass Roots Research and Distribution, Inc. Cash Flow Statement– Pessimistic Caseall figures in $ millions 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 FOperating Activity‡–
  47. 47. …‘‡Adjustments to Reconcile Cash FlowsDepreciation and AmortizationOther AdjustmentsChanges in operating assets and liabilities:Accounts receivableInventoryOther assetsAccounts payableOther liabilities Šƒ‰‡ ‹ ‘”‹‰ ƒ’‹–ƒŽCash Flow from Operating Activities 0.7 2.4 10.9 28.2 46.0 72.1 89.2Investing Activity š’‡†‹–—”‡• ˆ‘” ’”‘’‡”–› ’Žƒ– ƒ† ‡“—‹’–Š‡” ‘‰ –‡” ƒ••‡–•Cash Flow from Investing Activities (15.6) (4.9) (12.8) (23.5) (34.2) (52.6) (70.4)Financing ActivityProceeds from or repayment of debtProceeds from issuance of common stockCash Flow from Financing Activities 15.2 15.0 (1.1) (0.9) (0.8) (0.7)Net Change in Cash 0.3 12.5 (1.9) 3.7 10.9 18.7 18.2Opening Cash Balance 0.3 12.7 10.9 14.6 25.5 44.2Ending Cash Balance 0.3 12.7 10.9 14.6 25.5 44.2 62.3 Copyright © 2010 by Grass Roots Research and Distribution, Inc. All rights reserved. This report may not be reproduced. Page 35 of 38
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