Seymour Pierce Oil & Gas February 2012

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Seymour Pierce Oil & Gas February 2012

  1. 1. February 2012 Oil & Gas AIM InitiationsDr. Dougie Youngson Sam Wahab ACAResearch Analyst Research Analyst+44 (0) 20 7107 8068 +44 (0) 20 7107 8094dougieyoungson@seymourpierce.com samwahab@seymourpierce.comThis is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and isnot subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. 2. Oil & Gas AIM Initiations February 2012Table of ContentsIntroduction 3Top picks 4 Bayfield 4 Borders & Southern 5 Gulf Keystone Petroleum 6 Xcite Energy 7Top regions 8Oil and gas price outlook for 2012 11Valuation methodology 12Exploration 12Production 12Companies Aurelian Oil & Gas 13 Borders & Southern Petroleum 27 Chariot Oil & Gas 37 Faroe Petroleum 51 Frontera 67 Gulf Keystone 77 Gulfsands Petroleum 91 Xcite Energy 107 Bayfield Energy 115 Gold Oil 129 Independent Resources 143Glossary of terms 156Seymour Pierce equity research 1
  3. 3. Oil & Gas AIM Initiations |February 20122 Seymour Pierce equity research
  4. 4. Oil & Gas AIM Initiations February 2012 Introduction In this oil and gas sector report we are initiating on 11 AIM listed companies. The core of the note focuses on companies which we consider have interesting investment cases. We believe that key criteria investors should focus on are: • Strong management teams • Assets which can be commercialised • A deliverable strategy which will yield shareholder value within a reasonable timeframe AIM suffers from a great number of companies that tick none of these boxes. However, we believe that the companies covered in this report tick most if not all of these boxes and should be worth your consideration. We have highlighted what we feel are likely to We have highlighted what we believe are likely to be some of the best performingbe some of the best performing stocks in 2012.. stocks in 2012. We have also identified what we consider are likely to be the core regions for oil and gas activity in the short term. Seymour Pierce equity research 3
  5. 5. Oil & Gas AIM Initiations |February 2012 Top pick overview Bayfield Proposition Bayfield’s recent operational update provided the first opportunity post-IPO to evaluate progress across its portfolio. The company continues to make positive in Trinidad with the spudding of the East Galeota exploration well at the end of January which is expected to take 42 days to drill. A further two exploration wells will be drilled at East Galeota which could provide additional upside resource potential. At the Trintes (Trinidad) field the company successfully drilled two appraisal wells: B10 & B8. These have de-risked the management’s production projections for the field and should also increase the upside potential for the field, once production has stabilised. Catalysts The company has several near-term exploration (EG8 well) and appraisal targets which could provide share price triggers during 2012 on the assumption of positive results. Despite production being pushed back (due to operational and weather reasons) it should reach our previous production target of c.4,000boepd in 2H2012. This will enhance financial performance in the latter part of this year and provide a strong production and financial basis for the company as it moves its 2013. Valuation SOTP valuation matrix £ million p/share Production 96.9 45.1 Reserves 90.3 42.0 Net cash* 28.1 13.1 Less: G&A (20.0) (9.3) Core Value 195.4 90.9 Contingent resources 36.8 17.1 Target Market Cap 232.1 108.0 Source: Seymour Pierce Ltd *We have assumed a post placing cash balance using managements FY12E guidance of c.$55m Our core valuation comprises a revised DCF analysis of Bayfield’s producing assets, the company’s externally verified reserve estimates, and the FY12E net cash balance. We also attribute a discounted general & administrative (G&A) charge for field related expenditure in relation to the Trintes play. On this basis our revised valuation indicates that Bayfield is currently trading at c.50% below its core asset value alone. We reiterate our Buy recommendation and target price of 108p. SOTP waterfall chart 140 45 120 100 80 42 p/share 60 40 17 20 13 -9 0 -20 G&A Net Cash Contingent Reserves Production resources Source: Seymour Pierce Ltd4 Seymour Pierce equity research
  6. 6. Oil & Gas AIM Initiations February 2012Borders & SouthernProposition2011 was the turn of the northern Falkland players (RKH & DES) and in 2012 theactivity heads south with both BOR & FOGL drilling. Whilst these companies sharecommon issues such as regional politics, BOR stands out amongst its peers in terms ofthe potential size of its drilling targets as well as the expertise of its managementteam.CatalystsDrilling at the first prospect is underway. The company forecasts that it will take 90days to drill both Darwin and Stebbing. The key price drivers will be the well resultsfrom these two wells. We highlight that the two wells are testing two different typesof play. Failure (or success) at the first well does change the risk profile of the second.ValuationSOTP valuation matrixNAV £m p/shareDarwin 199 46Stebbing 227 53Net cash 116 27Core value 542 126Source: Seymour Pierce Ltd & Company dataWe have valued Borders in terms of a risked exploration net asset appraisal of theirnear term assets. The company intends to drill two wells in Q1 2012 (Darwin andStebbing), and we feel it is appropriate to value it on this basis.SOTP waterfall chart 140 53 120 100 80 46 p/share 60 40 27 20 0 Net Cash Darwin StebbingSource: Seymour Pierce Ltd & Company dataSeymour Pierce equity research 5
  7. 7. Oil & Gas AIM Initiations |February 2012 Gulf Keystone Petroleum Proposition 2011 saw substantial resource upgrades across its assets in Kurdistan. 2012 will see the company move into export production for the first time, resulting in the first significant cash inflows for GKP. The entrance of ExxonMobil and Total into the region has enhanced its credibility as a potential major future oil producing province. We feel that the persistent take over rumours are premature, but likely to be accurate in the longer term. Catalysts The company is in the process of drilled several wells across it acreage, the results will provide the key share price drivers in 2012. The company has now opened the data room for the sale of its Akri-Bijeel asset for which we have a risked valuation of c.$200m. We estimate that this process could take up to three months to complete. Short term share price drivers are: well testing results from the Shaikan-4 well (due imminently) and the well result at the Ber Bahr-1 exploration well (due end of February/early March). Valuation SOTP valuation matrix £ million p/share Production 268 31 Discovered 2C 2,708 317 Gross Value 2,975 348 Less: G&A (40) (5) Net Value 2,936 344 Net Cash 256 30 Target Market Cap/ Price 3,191 374 Source: Seymour Pierce Ltd We have valued Gulf Keystone in terms of its discovered resource base under the low estimate scenario stated in the most recent CPR, and have not included estimates for yet-to-find resources. In addition, we have included a discounted cash flow (DCF) valuation of GKP’s current and forecast production (2012: c.10,000bopd ramping up to 2014: c.40,000bopd) from its Shaikan field in Kurdistan. SOTP waterfall chart 400 317 350 300 250 p/share 200 150 100 31 50 30 -5 0 -50 G&A Net Cash Production Discovered 2C Source: Seymour Pierce Ltd & Company data .6 Seymour Pierce equity research
  8. 8. Oil & Gas AIM Initiations February 2012Xcite EnergyPropositionIn 2010, a mis-communicated reserve report, delayed clarity on funding against abackdrop of weak market conditions resulted in Xcite losing the majority of its 2010share price gains. The rig on site awaiting delayed DECC approval and developmentdrilling due to start in February, are we about to see resurgence in this stock? Wethink so, but it may prove to be another turbulent year for investors should initialdrilling results fail to deliver.CatalystsThe company is awaiting overdue DECC approval for drilling to start as part of Phase1A. Once this has been approved (which we assume in the very short term) thecompany can begin drilling the first batch of development wells at Bentley. This willprovide the first significant share price driver for the company. The resultant well flowtest results will then provide guidance as to the level of production we can expectfrom the field. It should also result in the conversion of contingent resources intoreserves, which should also enhance valuation.ValuationSOTP valuation matrixNAV by activity £ million p / shareConfirmed CPR reserves/resources 822.4 227Plus net (debt)/cash 30.78 15Core NAV 853.2 242Source: Seymour Pierce Ltd & Company dataWe have based our valuation of Xcite solely on the companys latest ReservesAssessment Report (RAR) for the Bentley field.SOTP waterfall chart 300 227 250 200 p/share 150 100 50 15 0 Net cash Risked resourcesSource: Seymour Pierce Ltd & Company dataSeymour Pierce equity research 7
  9. 9. Oil & Gas AIM Initiations |February 2012 Top regions We have identified three key regions which we believe are likely to see significant positive momentum in 2012 We have identified three key regions which we feel are likely to see significant positive Kurdistan momentum in 2012. Activity in Kurdistan has been steadily increasing in recent years with the entrance of several small and medium independent E&Ps. However, the region finally got the “seal of approval” following the announcement that ExxonMobil was to acquire significant acreage in six exploration blocks in late 2011. More recently, speculation has mounted that Total were planning a similar move, although this has yet to be formally announced. Many commentators have suggested that the absence of the majors was due to fractious relationship between the Iraqi Central Government and the Kurdistan Regional Government. The absence of resolution on the new Iraqi oil laws (which were drafted in 2007) continues to hold back the region from making an impact on the export market and continues to prevent major capital investment in projects other than for licence acquisition and exploration. Outlook The USGS has estimated that Kurdistan has The USGS has estimated that Kurdistan has c.40bn bbl of oil and c.60tcf of gas with c.40bn bbl of oil and c.60tcf of gas with low low geological exploration risk. However, this attractiveness is countered by the high geological exploration risk. (and some would say increasing) geopolitical risk as well as tangible commercial risk should the issue surrounding the oil law not being resolved in the short to medium term. The one key benefit of operating in Kurdistan versus the rest of Iraq is security. Kurdistan continues to be a much safer operating environment and has been one of the key drivers for investment in the region. We believe that the increasing influx of foreign oil companies into Kurdistan and the increasing capital expenditure they bring is the most likely driver for resolution of the oil law. Increases in production outside Kurdistan have been disappointing so far and if Iraq is to see any tangible increase in production in the short to medium term we believe that this will come from Kurdistan. Companies on our watchlist Gulf Keystone Petroleum has been a long term player in Kurdistan and has seen considerable exploration success so far. It has discovered c.15bn bbl of oil in place so far and continues to explore during 2012. The company is aiming for oil exports starting in 2013 and is seeking to develop an oil export pipeline to Kirkuk with a capacity of 440,000bopd. There has been considerable speculation that it is a takeover target ahead of moving into full scale commercial development. Price drivers in 2012 are likely to come from further resource upgrades and increases in production from Shaikan. Heritage Oil & Gas has had a mixed experience in Kurdistan. Initially positive drilling results at the Miran West field, which was identified as an oil discovery, changed when follow up drilling discovered large quantities of gas instead. Heritage’s share price collapsed at this point and it has struggled to recover since. The company is examining options for gas export and continues to explore at Miran and positive results from this programme could boost the share price in 2012. A recent and unexpected entrant is Afren, who made their first investment outside Africa last year. The company is targeting first oil from its assets in 2012 and this is likely to provide upside from this part of the portfolio in 2012. The company also has exploration planned in Kurdistan later this year.8 Seymour Pierce equity research
  10. 10. Oil & Gas AIM Initiations February 2012 East Africa The highly competitive operating in western The highly competitive operating in western Africa and increasingly in central AfricaAfrica and increasingly in central Africa has seen has seen a migration of companies towards the east of the continent. As is typical for a migration of companies towards the east of frontier regions, small E&Ps have made the initial exploration efforts to prove up the continent. resources. We have now entered the phase where successful explorers are attracting interest from larger independents as well as the majors. Outlook We believe that 2012 will continue to see exploration success from the minor companies in the shallow water and hopefully in the deeper water from the new entrant majors. M&A on a greater scale is also likely to be a prominent feature. Cove Energy, for example has already put up the “for sale” sign and we can expect further consolidation in the region. Exploration has tended to yield large gas discoveries in the shallow water blocks of a size which could potentially support a LNG development. However, given that the LNG market is oversupplied with more capacity due to come onstream in Australia and the Middle East, we see this a a longer term prospect than other commentators. Companies on our watchlist Afren entered east Africa via its acquisition of Black Marlin. During 2011 the company has been working up these assets with a view to start exploration in 2012 and 2013. Afren’s strategy has mainly been on developing already discovered assets. It exploration exposure has been limited to date, but the company hopes to deliver 250mmbbl of 2P/2C resources over the next three years. East African exploration in 2012 will focus on Kenya and Tanzania. Cove Energy recently put the for sale sign up following a very successful exploration campaign in recent years. This company is very likely to attract interest in the majors who are keen to potentially develop domestic and export gas projects in the region. Share price performance will continue to be driven by its drilling campaign, resource upgrades and potentially its acquisition. North Sea – UK & Norway The UK North Sea saw a record investment of The UK North Sea saw a record investment of £7.5bn in 2011, driven by high oil prices. £7.5bn in 2011, driven by high oil prices. This This level of investment is forecast to continue until at least 2015. The emphasis of this level of investment is forecast to continue until investment was skewed towards development rather than exploration and appraisal at least 2015. which saw a decrease in activity. The sector also saw its most active period in terms of transactions since 2005, with c.$4bn of assets switching hands during the year. This is a trend which we expect to be a continuing theme as the region sees more consolidation, particularly amongst the smaller players. Following the successes of Statoil, Xcite Energy and Nautical Petroleum in heavy oil, we would expect these types of projects to become more attractive throughout the region. The fiscal terms for such projects will also improve project commerciality and hopefully reduce the decline in oil production from the UK sector. The Norway North Sea is seeing increased activity from a number of AIM listed E&P’s as they look to exploit the attractive fiscal terms offered by the Norwegian government. Currently, exploration companies will receive 78% of their drilling expenditure back the following year to facilitate further growth in the region. The state owned company, Petoro AS, is also undergoing transactions with foreign entities operating in the region to acquire previously undeveloped licences, thus stimulating future production from the region. Seymour Pierce equity research 9
  11. 11. Oil & Gas AIM Initiations |February 2012 Companies on our watchlist Faroe Petroleum has a robust mix of production growth and high impact exploration, and continues to execute value accretive transactions on both sides of the Continental Shelf, most notably its recent asset swap with Petoro AS. The company has a strong balance sheet with sufficient cash reserves and debt facilities to fund its progressive drilling, appraisal and development activities. Xcite Energy moves into the development phase this year which should yield production in 2Q onwards. However, we do anticipate a volatile period during the initial drilling phase as we see the initial drilling and flow test results being announced. There is a huge amount of expectation relating to conversion of resources to reserves.10 Seymour Pierce equity research
  12. 12. Oil & Gas AIM Initiations February 2012 Oil and gas price outlook for 2012 Geopolitics were a major price driver during Geopolitics were a major price driver during 2011, as concerns driven by the Arab 2011, as concerns driven by the Arab Spring Spring caused concerns as to the stability of the Middle East and what this could mean for security of supply, particularly for Saudi Arabia and Iran. Despite not being a significant oil producer, Syria continues to cause instability in the region. Similarly, despite making progress Egypt has still not fully resolved its many issues and is likely to remain unstable until after the elections are concluded. Iran’s commitment to its nuclear programme will continue to antagonise the West and remains a cause for concern. The recent sabre-rattling on the potential closure of the Straits of Hormuz seems to have just been posturing. However, the reality is that this major (a fifth if all traded oil passes through here) oil transit route for the region could be closed within a matter of hours. Although unlikely, an escalation like this would not only result in a major increase in the oil price, but could quickly escalate to another war in the Middle East. Brent averaged $110/bbl in 2011 and we forecast the price to average $100/bbl in 2012. Now that winter has finally arrived in Europe, we have seen the spot gas price increase by 30%, driven in part by Gazprom’s inability to increase supplies. Gazprom currently supplies c.25% of the European market, but its pricing is the highest at c.$410/mcm. Consequently it is seeing more competition from LNG and domestic sources of gas in some countries. Such an aggressive pricing structure has resulted in demands from gas users for Gazprom to move away from long-term contracts and increase the spot market contribution to such contracts.The success of the shale gas industry in the US is The success of the shale gas industry in the US is has driven the gas price to a new low has driven the gas price to a new low of of c.$2.50/mcf. The success has been so large that the US may move back into gas c.$2.50/mcf. exports rather than being a net importer. We are now seeing an increase in shale gas activity throughout Europe, particularly in Poland, and so far the results have been mixed. We are therefore comfortable that the gas price will remain high and that shale gas will have little impact on the supply/demand situation in the medium term. Seymour Pierce equity research 11
  13. 13. Oil & Gas AIM Initiations |February 2012 Valuation methodology Petroleum companies are valued in terms of their portfolio of exploration and production assets. Our overall target price comprises a core valuation for the producing and near term production assets and a risked net asset value (RENAV) for the exploration assets. Exploration Prior to drilling, a huge amount of work has been done to de-risk a prospect. We apply a simple arithmetic approach to attempt to value such prospects ahead of drilling. The calculation is: RENAV = Gross resource estimate x Company Interest x Chance of Success x NPV/bbl The company provides most of this data, the chance of success (CoS) is probably the most important factor and is very company and country specific. Some companies are better at exploration than others. Also, some countries have more hydrocarbons than others. The CoS tends to be higher in mature exploration than in frontier regions. The NPV per barrel varies from country to country and reflects the prevailing fiscal terms and transaction values on a per barrel basis. Production We write an operational model for the We write an operational model for the company’s producing assets. This reflects company’s producing assets. This reflects historic data and our assumptions for the future. We model production, prices andhistoric data and our assumptions for the future. costs and overlay the fiscal terms of the country where the asset is located. From this model we derive a DCF which is then used to value the asset. See the valuation section for the assumptions used for this company. Resource Classification Framework Source: SPE12 Seymour Pierce equity research
  14. 14. Oil & Gas AIM Initiations February 201210 February 12 | Initiation of coverage | Oil & Gas exploration and productionAurelian Oil & Gas (AIM:AUL)F Let it flowBUY 2011 was a disappointing year for Aurelian, with its key asset SiekierkiShare price 17p representing a much larger and complex challenge than initiallyTarget price 31p anticipated. Following a comprehensive review, the company has84% Upside provided the market with a clear strategy to develop its entire portfolio, which we feel represents a strong buying opportunity for investors, givenMarket cap (£m) 82.8 current trading levels.Net cash (£m) 80.0Enterprise value^ (£m) 82.8 Strategy shiftNo. of shares (m) 494.3 Aurelian has now concluded a comprehensive review of its assets following theAverage daily vol (000, -3m) 3,488 disappointing multi-fracced horizontal appraisal wells drilled in 2011. The data acquired during the appraisal phase has improved the company’s understanding ofDividend yield (%) 0.0 Siekierki, and as such, a revised development plan has been designed comprising 32PER at Target price (Y1) 147.2 wells recovering 296bcf of gas (previously 348bcf) to commence in 4Q 2012.12 month high/low (p) 92/16 Near-term exploration programme Aurelian plans to take advantage of the flexibility in its work programme and preserve(%) 1m 3m 12m capital by prioritising its exploration targets. In line with the strategic review, theAbsolute -2.9 -27.2 -79.3 company has deferred several exploration targets, to focus instead on near-term valueFTA relative -6.9 -31.9 -78.9 play unlocking wells. The programme is budgeted to cost €25.6m net to Aurelian targeting 67.3mmboe of net unrisked prospective resources, which, while less thanPrice & price relative (-2yr) previously indicated, potentially offers material upside. 100 80 Unlocking Siekierki 60 The company intends to enter into negotiations for a potential farm-in to its 90% 40 interest in Siekierki. The asset is surrounded by IOC operated acreage, most notably 20 Connoco Phillips, Exxon Mobil, Total and Chevron, all of which have the technological 0 knowledge base and financial backing that is required to fully develop the project. We Feb May Aug Nov Feb May Aug Nov Feb feel that a farm-in partner of sufficient expertise and financial resource base will act as Price Relative a positive share price trigger for investors in Aurelian.Source: Datastream Valuation and recommendationShare price as at close: 9 February 12 Our core valuation comprises exploration and development activities, and cash; whichNext news yields a base value of 20p. Our exploration upside assessment contributes a furtherOperational updates 10.8p. On this basis we initiate coverage with a BUY recommendation and set a price target of 31p.BusinessExploration in Central Europe with licences in 1 Please see regulatory disclosure notes at the end of this documentPoland, Slovakia, Romania and Bulgaria A draft of this research has been shown to the company following which minor factual amendments have been made.www.aurelianoil.com Year end Revenue EBIT* PBT* Tax Adj. EPS* PER EV/EBIT* Div yield December (€m) (€m) (€m) (%) (c) (x) (x) (%)Dr. Dougie Youngson 2009A 0.0 (1.9) (2.3) 0.0 (0.2) (88.1) (51.8) 0.0Research Analyst 2010A 0.0 (9.0) (9.7) 0.0 (4.9) (4.0) (11.0) 0.0+44 (0) 20 7107 8068 2011E 0.0 1.3 2.5 0.0 0.2 80.1 76.4 0.0dougieyoungson@seymourpierce.com 2012E 0.0 (5.3) (4.5) 0.0 (0.9) (21.7) (18.7) 0.0 2013E 0.0 (0.1) 0.4 0.0 0.1 261.4 (985.9) 0.0Sam Wahab ACAResearch Analyst * excludes exceptional items and amortisation of acquired intangibles.+44 (0) 20 7107 8094 ^ EV calculation adjusted for core cash, investments etc.samwahab@seymourpierce.com Source: Seymour Pierce Ltd Seymour Pierce equity research 13
  15. 15. Oil & Gas AIM Initiations |February 2012 Valuation and recommendation We value Aurelian on its core exploration and We value Aurelian on its core exploration and development assets in Poland, Slovakia, development assets in Poland, Slovakia, Romania and Bulgaria. The company has a clear development plan to bring their key Romania and Bulgaria. asset, Siekierki, to first stage production in 2016 (delayed by three years due to technical issues experienced during flow testing in March and September 2011). However, this development plan will require additional financial and technological resources through a potential farm-out down. On this basis, we do not currently provide a valuation of future discounted cash flows arising from Siekierki in 2016, until the company has adequate resources in place to fulfil their strategy. Our valuation incorporates the following assumptions: Valuation assumptions Metric Assumption NPV/boe - Oil $5/boe NPV/boe - Gas $3/boe Realised gas price $7.5/mcf Long-term $/£ 1.65 Long-term $/€ 1.39 Long-term £/€ 1.16 Discount rate 10% Shares outstanding (million) 500.8 Source: Seymour Pierce Ltd These assumptions have been implemented into our risked exploration net asset valuation as follows:Risked net asset valuation Status Country Project Interest CoS/CoD Resources NPV 10% Unrisked Risked Unrisked Risked Net Risked (mmboe) US$ / boe NPV $m NPV $m NPV £m NPV £m p/share Gross Net Development Poland Siekierki 90.00% 25% 49.30 44.37 3 133.11 33.28 81 20.17 4.0 Exploration Poland Siekierki NW 90.00% 20% 11.5 10.35 3 31.05 6.21 18.82 3.76 0.8 Exploration Poland Siekierki SW 90.00% 20% 3.3 2.97 3 8.91 1.78 5.40 1.08 0.2 Exploration Poland Kalisz 50.00% 10% 5.3 2.65 3 7.95 0.80 4.82 0.48 0.1 Exploration Poland Cyb. & Ty. 45.00% 10% 97 43.65 5 218.25 21.83 132.27 13.23 2.6 Exploration Poland Bieszczady 25.00% 10% 272.8 68.2 5 341.00 34.10 206.67 20.67 4.1 Exploration Poland Karpaty East 80.00% 10% 28 22.4 3 67.20 6.72 40.73 4.07 0.8 Exploration Poland Karpaty West 60.00% 10% 19 11.4 3 34.20 3.42 20.73 2.07 0.4 Exploration Poland Wetlina 100.00% 10% 31.6 31.6 5 158.00 15.80 95.76 9.58 1.9 Exploration Slovakia Svidnik 50.00% 10% 180.2 90.1 3 270.30 27.03 163.82 16.38 3.3 Exploration Romania Brodina 33.75% 10% 50 16.875 5 84.38 8.44 51.14 5.11 1.0 Exploration Romania Cuejdiu 45.00% 10% 16 7.2 5 36.00 3.60 21.82 2.18 0.4 Exploration Romania Brodina 33.75% 10% 8 2.7 3 8.10 0.81 4.91 0.49 0.1 Exploration Bulgaria Golitza Block 30.00% 10% 12 3.6 3 10.80 1.08 6.55 0.65 0.1 784.00 358.07 1,409.25 164.89 854.09 99.93 20.0Source: Seymour Pierce Ltd14 Seymour Pierce equity research
  16. 16. Oil & Gas AIM Initiations February 2012 SOTP valuation matrix £ million p/share Siekierki (Development) 20.2 4.0 Siekierki (Exploration) 4.8 1.0 Other Polish exploration 50.1 10.0 Slovakia exploration 16.4 3.3 Romania exploration 8.4 1.7 Gross Value 99.9 20.0 Net Cash 54.2 10.8 Target Market Cap 154.1 30.8 Source: Seymour Pierce Ltd SOTP waterfall chart 35 11 30 25 10 20 p/share 15 5 10 3 5 2 0 Romania & Bulgaria Slovakia exploration Siekierki (Exp & Dev.) Polish exploration Net Cash exploration upside Source: Seymour Pierce Ltd Recommendation and target price Our gross valuation comprising exploration and development activities yields a base value of 20p, whilst net cash adds a further 10.8p/share. In our view, Aurelian is severely undervalued and is currently trading well below its core value.In our view, Aurelian is severely undervalued and On this basis we initiate coverage with a Buy recommendation and set a price target is currently trading well below its core value. of 31p. Seymour Pierce equity research 15
  17. 17. Oil & Gas AIM Initiations |February 2012 Strategic overview Aurelian has now concluded a comprehensive review of its assets following the disappointing multi-fracced horizontal appraisal wells drilled in 2011. The company arrived at three key conclusions which we have analysed in detail to support our investment case: Siekierki is an attractive project and initial problems are now well understood and a clear plan forward has been developed. The cash position at the year-end 2011 was €63m which allows the company to carry out its planned exploration and appraisal activities for the next 18 months. Unlocking the full upside within the company is likely to require additional technical and financial resources. We feel that it is important to analyse these three conclusions in detail to address existing shareholder concerns, as well as to illustrate to potential shareholders the possible upside arising on successful development of Aurelian’s acreage in central Europe. How attractive is Siekierki now?The well tests on Siekierki have been The well tests on Siekierki have been completed and incorporated in a comprehensivecompleted and incorporated in a technical and commercial review led by a group of independent consultants (AGR-comprehensive technical and commercial TRACS). From this, gas initially in place of 1.1tcf is now estimated in Block 207review led by a group of independent (company guidance prior to appraisal was 1.6tcf). However, we do highlight that thisconsultants does not include gas potentially in Blocks 206 and 208 or the Krzesinki discovery. Siekierki location map Source: Company Following the strategy update and conference call, we feel it is clear that the data acquired during the appraisal phase has improved the company’s understanding of Siekierki, and the company has now constructed a new reservoir model. The new model now illustrates that the layered Rotliegendes sandstone sequence in Siekierki has a wide range of ambient porosity and permeability properties spanning 6-18%, with higher permeability layers dominating well performance. The company also maintains that the Krzesinki-1 well test result supports Aurelian’s new reservoir model, in terms of the presence of higher porosity zones within the gas16 Seymour Pierce equity research
  18. 18. Oil & Gas AIM Initiations February 2012 legs of the Krzesinki and Siekierki fields, with an un-fracced well test producing 0.2mmscf/d. This represents the first successful un-stimulated gas well flow test on Block 207 to date. As such, a revised development plan (see forward plan section) has been designed, comprising 32 wells recovering 296bcf of gas (previously 348bcf), indicating an average recovery of 9.25bcf/well. To support these estimates, the company intends to release an updated CPR covering both appraisal and exploration assets in March/April 2012. Nevertheless, following the comprehensive technical and commercial review supported by AGR-TRACS and the new reservoir model, the company maintains that Siekierki is an attractive project which offers material upside to investors. Funded exploration programmeAurelian plans to take advantage of the flexibility Aurelian plans to take advantage of the flexibility in its work programme and preserve in its work programme and preserve capital by capital by prioritising its exploration targets. In line with the strategic review, the prioritising its exploration targets. company has deferred several exploration targets, to focus instead on near-term value play unlocking wells. Aurelian will initially drill the Sosna-1 well within the Torzym reef oil play in March 2012 targeting up to 35mmbbls gross. In addition, the company intends to undertake further geological and geophysical surveys to de-risk the prospects identified in their 2011 seismic data including Cybinka-Torzym , Slovakia and Romania (Brodina). The high impact Carpathian well drilling campaign will now be deferred to Q4 of this year. This will include Kaparty East, which the company now believe to be gas rather than oil with internal estimates suggesting a recoverable resource of 170bcf, representing an additional 1p/share of our risked target valuation.2012 drilling programme Well Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WI Max Cap (€m) Target mmboe p/shareKrzesinki-1 90% n/a n/a n/aNiebieszczany-1 25% n/a n/a n/aSosna-1 45% 2.6 3.1 0.4Cierne-1 50% 6.4 19.4 1.4Bieszczady-2 25% 3.7 23.1 2.8Kaparty E-1 80% 10.2 14.5 1.1Cuejdiu-1 45% 2.7 7.2 0.9 Rotliegendes Zechstein Reef Oil Play Carpathian Thrust fold BeltSource: Seymour Pierce Ltd, Company In addition to the above five wells, four contingent wells are also being considered for Aurelian’s 2013 drilling schedule. The programme is budgeted to cost €25.6m net to Aurelian although it aims to reduce this by bringing in partners to the Romanian, Slovakian and Karpaty East & West licences. In aggregate, the five wells are targeting 67.3mmboe of net unrisked prospective resources, which while less than previously indicated, offers material upside potential. Unlocking the full value of the company Analysis of Trzek-2 and Trzek-3 Aurelian’s share price has been severely impacted by the two multi-fracced horizontal wells drilled in 2011. The company has reviewed the data from these wells to implement a comprehensive plan to develop the asset using cost efficient and technologically advantageous methods. Seymour Pierce equity research 17
  19. 19. Oil & Gas AIM Initiations |February 2012 Aurelian has confirmed that the Trzek-2 horizontal well had mechanical issues with the completion which reduced fracture effectiveness; whilst the Trzek-3 well was mechanically well executed with better completion. However, the hydraulic fractures were not fully effective and the well bore did not make contact with the high permeability zone encountered in the pilot hole. As such, the combination of the reservoir’s permeability to gas and water, and the poor frac effectiveness explains why the Trzek-2 and Trzek-3 flow rates of 3mmscfd and 3.2mmscfd were significantly lower than expectations. Subsequent geological and geophysical analysis of the wells have provided Aurelian with a comprehensive understanding of the geology of Siekierki. This is best illustrated through their pre and post drill knowledge conceptual knowledge of the basin. Pre and post drill understanding Aurelian’s pre-drill strategy understood that the multi-frac horizontal well would produce dry gas when fracced above the free water level. Pre-drill concept Source: Company This was supported by the belief that Siekierki was a tight reservoir with moderate variation porosity. However, subsequent analysis has confirmed that the tight reservoir contains zones of significantly higher permeability and a much larger variation in porosity. In addition, gas is produced with water as relative permeability effects are important. Post-drill concept Source: Company18 Seymour Pierce equity research
  20. 20. Oil & Gas AIM Initiations February 2012 From the above illustrations, we note that Siekierki is very different geologically from the company’s original assumption. That assumption had only moderate variation in porosity and permeability in the tight aeolian sandstone matrix Aurelian now understands that the reservoir has streaks of higher permeability (yellow in the diagram) within that tight matrix, which will dominate well performance On this basis, management’s expectations of GIIP has been reduced by c.31% to 1.1tcf (previously 1.6tcf), however, the company re-iterates that the multi-fracced horizontal wells implemented continues to be the correct technology application for the field and significant operational lessons and insights have been learnt. Forward development plan Aurelian will now seek to implement the next Aurelian will now seek to implement the next stage of its development plan to achievestage of its development plan to achieve first gas first gas sales in 2016This will initially involve the continuation of long-term testing of sales in 2016. Trzek-2 and Trzek-3 and commercialising gas from these two wells using a low pressure and low methane tie-in, as well as a gas to wire option as a smaller pilot development. First gas arising from this is expected to be achieve in 4Q 2013 costing in the region of €12m net to Aurelian.Development plan to 2016Source: Company The above development plan will also incorporate a potential farm-in partner to the Siekierki license. The company currently holds a 90% working interest in the block, which is surrounded by IOC operated acreage, most notably Connoco Phillips, Exxon Mobil, Total and Chevron, whom all have the technological knowledge base and financial backing that is required to fully develop the Siekierki project. In our view, a substantial farm-down of Siekierki would have always been an attractive proposition for Aurelian even if the company had successfully flowed commercial volumes of gas in 2011. The key difference in undertaking one now is that the company has not proved up as much value of the asset as it would have liked and in effect, its hand is being forced through a lack of financial resources. Nevertheless, we feel that the introduction of an experienced farm-in partner in the near term would be a strong share price trigger for investors, given the improved technological understanding of the asset achieved through extensive data analysis. Seymour Pierce equity research 19
  21. 21. Oil & Gas AIM Initiations |February 2012 Key assets Core area 1 Poznan The Siekierki field was originally discovered over 40 years ago close to the city of Poznan, but the tight reservoir was found to exhibit low porosity and permeability, which meant commercial flow rates could not be achieved with the technology available at the time. Aurelian was awarded the Poznan East licence in 2003 and drilled the Trzek-1 well in 2007 to appraise the field, confirming the original findings but providing improved quality reservoir data using modern technologies. Significantly, the well flowed at an initial 7.5mmcfd before being choked back to a stable 2.5mmcfd. Aurelian’s latest CPR estimates 640bcf net to the company on a mid- case scenario (including Siekierki SW and Siekierki NW) representing this largest asset, by confirmed resources, in the company’s portfolio. Poznan blocks Source: Company Cybinka and Torzym These fields are located nearby to the German border and were acquired in 2008. They link to recent oil discoveries in the north, and the basin extends from the prolific UK North Sea. Existing data is being evaluated and has been followed by 3D seismic. The combined volume of hydrocarbons net to Aurelian is 34mmbbls and the company anticipates starting drilling in Q4 2011. Cybinka & Torzym Source: Company20 Seymour Pierce equity research
  22. 22. Oil & Gas AIM Initiations February 2012Core area 2Aurelian has continued to develop its second Core Area and has executed its strategyof applying modern 2D seismic to explore thrust fold areas. During 2010, the companysuccessfully acquired 776km of 2D seismic across its acreage here.BieszczadyIn the Polish Carpathians, the first of a three well programme in the company’sBieszczady concession, Niebieszczany-1, was spudded in October 2010. The well isbeing drilled to target depth of 4,800 metres targeting an oil prospect of up to100mmbbls (gross). A number of reservoirs, all of which are proven producers in theregion, are being targeted by this well and there are several other similar-sizedprospects on trend, which would be de-risked in the event of a successful outcome.Using existing 2D seismic data covering approximately 20% of the concession area,prospects totaling up to 680m barrels of un-risked prospective resources have beenmapped. The acquisition phase of a second 300km 2D survey covering a further 20% ofthe concession size was completed in March 2011. The future work programme for theconcession is to complete the processing and interpretation of this second 2D survey,and then, following the drilling and testing of Niebieszczany-1 and the reprocessing ofthe first 2D survey, prepare a revised prospect inventory and drill two further wells.KapartyAt East Karpaty, the acquisition of 136km of 2D seismic has been completed. Thissurvey will cover approximately 25% of the concession and the results of the surveyare expected later this year. A two well, fully-funded programme is planned for theconcession, with the wells being targeted for late 2011 and 2012. It is also anticipatedthat the company will seek further farm-outs on this acreage, after the drilling of thefirst or second well in the programme. Also, in the Polish Carpathians Aurelian hasbeen awarded a 100% interest in the Poreba concession which is adjacent to the WestKarpaty concession. This new concession gives the company additional scale andprospectivity to launch a new Carpathian Conventional Gas business covering2,562km2, which will target shallow gas to potentially commercialise quickly. Inaddition, Aurelian’s Lachowice Gas project on the West Karpaty concession is its firstproject in this new business where it will carry out a relatively low cost “work over”process targeting a prospect of 20bcf (gross) and target first gas by the end of 2012.Seymour Pierce equity research 21
  23. 23. Oil & Gas AIM Initiations |February 2012 Financial modelIncome StatementYear end 2009A 2010A 2011EDecember (€m)Group revenue 0.0 0.0 0.0Cost of sales 0.0 0.0 0.0Gross profit 0.0 0.0 0.0Total operating expenses (1.9) (9.0) (5.6)EBIT (1.9) (9.0) (5.6)Net interest/financial income/(cost) (2.3) (9.7) 2.5Associate and Other non-op. income/(cost) (0.4) (0.7) 1.2PBT (2.3) (9.7) 2.5Tax 0.0 0.0 0.0Effective tax rate (%) 0.0 0.0 0.0Minorities 0.0 0.0 0.0Earnings (0.4) (16.9) 1.2EBITDA (0.4) (8.1) (4.1)Adjusted EBITDA* (0.4) (8.1) 2.7Adjusted EBIT* (1.9) (9.0) 1.3Adjusted PBT* (2.3) (9.7) 2.5Adjusted earnings* (0.4) (16.9) 1.2DPS (c) 0.0 0.0 0.0EPS (c) (0.2) (4.9) 0.2EPS [F. Dil.] (c) (0.2) (4.9) 0.2EPS [Adj.]* (c) (0.2) (4.9) 0.2EPS [Adj. F. Dil.]* (c) (0.2) (4.9) 0.2Weighted average no. shares (m) 189.5 341.7 490.2Fully dil. w. ave. no. shares (m) 189.5 341.7 500.8Year end no. shares (m) 189.5 341.7 490.2* excludes exceptional items and amortisation of acquired intangibles.Source: Company data, Seymour Pierce Ltd22 Seymour Pierce equity research
  24. 24. Oil & Gas AIM Initiations February 2012Cashflow StatementYear end 2009A 2010A 2011EDecember (€m)Operating income (1.9) (9.0) (5.6)Amortisation of acquired intangibles 0.0 0.0 0.0Amortisation of other intangibles 0.0 0.0 0.0Depreciation 1.5 0.9 1.5Net change in working capital 1.2 (5.7) (0.6)Other 0.0 7.8 0.2Operating cash flow 0.8 (6.0) (4.5)Capital expenditure (8.5) (20.3) (62.3)Investment in Other intangibles 0.0 0.0 0.0Net interest/financial income/(cost) 0.4 0.7 (1.2)Tax paid (0.0) (0.0) 0.0Net acqns./disposals 0.0 0.0 0.0Dividend paid 0.0 0.0 0.0Other (0.0) 0.2 0.1Cash flow before financing (7.3) (25.4) (67.9)Proceeds from shares issued 12.8 132.4 2.5Investments 0.0 0.0 0.0Other 0.0 0.0 0.0Net movement in cash/(debt) 5.5 107.0 (65.4)Opening net cash/(debt) 6.0 14.0 114.7Adjustments (Forex, etc.) 0.0 0.0 0.0Closing net cash/(debt) 14.0 114.7 63.3Source: Company data, Seymour Pierce LtdBalance SheetYear end 2009A 2010A 2011EDecember (€m)Property plant and equipment 5.0 0.2 0.0Goodwill and Acquired intangibles 0.0 0.0 0.0Other intangibles 0.0 0.0 0.0Other fixed assets 40.2 56.5 117.0Non current assets 45.2 56.7 117.0Stocks & WIP 0.0 0.0 0.0Trade receivables 4.7 11.0 10.1Cash 14.0 114.7 63.3Other current assets 0.0 9.0 0.0Current assets 18.6 134.7 73.5Total assets 63.9 191.4 190.5Trade creditors 3.4 13.2 11.9Short term borrowings 0.6 1.2 0.0Long term borrowings 1.6 0.0 0.0Other liabilities 0.0 2.0 0.0Total liabilities 5.7 16.4 11.9Net assets 58.2 175.1 178.6Issued share capital 15.5 30.4 30.7Share premium account 65.9 183.4 185.2Retained earnings (15.8) (32.7) (31.4)Other reserves (7.4) (6.0) (5.9)Minority interests 0.0 0.0 0.0Total equity 58.2 175.1 178.6Source: Company data, Seymour Pierce Ltd Seymour Pierce equity research 23
  25. 25. Oil & Gas AIM Initiations |February 2012Target Price & Recommendation History 100 90 80 70 60 50 40 30 20 10 0 Feb 10 A pr 10 Jun 10 A ug 10 Oct 10 Dec 10 Feb 11 A pr 11 Jun 11 A ug 11 Oct 11 Dec 11 Feb 12 Share P rice Target P rice Reco mmendatio nsSource: Datastream, Seymour Pierce Ltd24 Seymour Pierce equity research
  26. 26. 10 February 12 | Initiation of coverage | Oil & Gas exploration and productionBorders & Southern Petroleum (LSE:BOR)5 A natural selectionBUY 2011 was the turn of the northern players (RKH & DES) and in 2012 theShare price 67p activity heads south with both BOR & FOGL drilling. Whilst theseTarget price 126p88% Upside companies share common issues such as regional politics, BOR stands out amongst its peers in terms of the potential size of its drilling targets asMarket cap (£m) 288.4 well as the expertise of its management team.Net cash (£m) 102.3Enterprise value^ (£m) 186.1 Drilling is underway – high risk, but potentially high reward The Leiv Eiriksson rig started drilling at the beginning of February and will drill theNo. of shares (m) 428.8 Darwin and Stebbing prospects before moving on two drill two wells for FOGL. DarwinAverage daily vol (000, -3m) 2,060 and Stebbing will test two different play types, therefore success or failure at Darwin means nothing for Stebbing. Darwin and Stebbing have 15% and 10% chances of12 month high/low (p) 73/44 success respectively and each have billion barrel potential. Assets of this sort of size drive development and attract buyers.(%) 1m 3m 12mAbsolute -5.9 +18.5 +3.5 Drilling success does not equal commerciality – a long way to goFTA relative -9.8 +10.9 +5.2 Rockhoppers success at Sea Lion has led the company and some commentators to discuss the field’s commerciality. We acknowledge that it is a large field, which ifPrice & price relative (-2yr) located in many locations would be easy to develop. However, the geopolitics and 100 absence of infrastructure may yet prove too much to overcome. Argentina’s escalating 90 80 use of regional and international politics has been a smart move and should not be 70 underestimated when investors are thinking about development options and potential 60 50 asset sales. 40 30 Valuation and recommendation Feb May Aug Nov Feb May Aug Nov Feb Our core valuation comprises three elements – near term exploration at Darwin 46p; Price Relative and at Stebbing 53p; and the pre-drill cash (c.$192m on 31/12/11) per share whichSource: Datastream contributes 27p. This cash component will obviously decrease significantly postShare price as at close: 9 February 12 drilling which we estimate will cost c.$150m. We initiate coverage with a Buy recommendation and set a pre-drill target price of 126p.Next newsFY Results However, given the market’s reactions to both Rockhopper and Desire’s news flow last year, Borders looks likely to have a very volatile ride during drilling. We wouldBusiness therefore advise investors to have a pro-active response to their position rather thanOil exploration focusing on frontier or emerging riding out the inevitable peaks and troughs.basins where there is potential to identify andcommercialise high value prospects. A draft of this research has been shown to the company following which minor factual amendments have been made.www.bordersandsouthern.com/ Year end Revenue EBIT* PBT* Tax Adj. EPS* PER EV/EBIT* Div yieldDr. Dougie Youngson December ($m) ($m) ($m) (%) (c) (x) (x) (%)Research Analyst+44 (0) 20 7107 8068 2009A 0.0 (1.2) 3.2 0.0 1.5 69.1 (243.2) 0.0dougieyoungson@seymourpierce.com 2010A 0.0 (1.5) (0.2) 0.0 (0.0) (2,755.4) (195.6) 0.0 2011E 0.0 (1.9) 1.3 36.4 0.2 563.9 (152.3) 0.0Sam Wahab ACAResearch Analyst * excludes exceptional items and amortisation of acquired intangibles.+44 (0) 20 7107 8094 ^ EV calculation adjusted for core cash, investments etc.samwahab@seymourpierce.com Source: Seymour Pierce LtdThis is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and isnot subject to any prohibition on dealing ahead of the dissemination of investment research.

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