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February 2012
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This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is
not subject to any prohibition on dealing ahead of the dissemination of investment research.
Dr. Dougie YoungsonResearch Analyst
+44 (0) 20 7107 [email protected]
Sam WahabResearch Analyst
+44 (0) 20 7107 [email protected]
ACA
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Table of Contents
Introduction 3Top picks 4Bayfield 4
Borders & Southern 5Gulf Keystone Petroleum 6Xcite Energy 7
Top regions 8Oil and gas price outlook for 2012 11Valuation methodology 12Exploration 12Production 12Companies
Aurelian Oil & Gas 13Borders & Southern Petroleum 27Chariot Oil & Gas 37Faroe Petroleum 51Frontera 67Gulf Keystone 77Gulfsands Petroleum 91Xcite Energy 107Bayfield Energy 115Gold Oil 129Independent Resources 143
Glossary of terms 156
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Introduction
In this oil and gas sector report we are initiating on 11 AIM listed companies. The core
of the note focuses on companies which we consider have interesting investment
cases. We believe that key criteria investors should focus on are:
Strong management teams
Assets which can be commercialised
A deliverable strategy which will yield shareholder value within a reasonable
timeframe
AIM suffers from a great number of companies that tick none of these boxes.
However, we believe that the companies covered in this report tick most if not all of
these boxes and should be worth your consideration.
We have highlighted what we believe are likely to be some of the best performing
stocks in 2012. We have also identified what we consider are likely to be the coreregions for oil and gas activity in the short term.
We have highlighted what we feel are likely to
be some of the best performing stocks in 2012..
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Top pick overview
Bayfield
Proposition
Bayfields recent operational update provided the first opportunity post-IPO to
evaluate progress across its portfolio. The company continues to make positive in
Trinidad with the spudding of the East Galeota exploration well at the end of January
which is expected to take 42 days to drill. A further two exploration wells will be
drilled at East Galeota which could provide additional upside resource potential.
At the Trintes (Trinidad) field the company successfully drilled two appraisal wells:
B10 & B8. These have de-risked the managements production projections for the field
and should also increase the upside potential for the field, once production has
stabilised.
Catalysts
The company has several near-term exploration (EG8 well) and appraisal targets
which could provide share price triggers during 2012 on the assumption of positive
results. Despite production being pushed back (due to operational and weather
reasons) it should reach our previous production target of c.4,000boepd in 2H2012.
This will enhance financial performance in the latter part of this year and provide a
strong production and financial basis for the company as it moves its 2013.
Valuation
SOTP valuation matrix
million p/share
Production 96.9 45.1
Reserves 90.3 42.0
Net cash* 28.1 13.1Less: G&A (20.0) (9.3)Core Value 195.4 90.9Contingent resources 36.8 17.1Target Market Cap 232.1 108.0Source: Seymour Pierce Ltd
*We have assumed a post placing cash balance using managements FY12E guidance of c.$55m
Our core valuation comprises a revised DCF analysis of Bayfields producing assets,
the companys externally verified reserve estimates, and the FY12E net cash balance.
We also attribute a discounted general & administrative (G&A) charge for field related
expenditure in relation to the Trintes play. On this basis our revised valuation indicates
that Bayfield is currently trading at c.50% below its core asset value alone. We
reiterate our Buy recommendation and target price of 108p.
SOTP waterfall chart
45
42
17
13
-9
-20
0
20
40
60
80
100
120
140
G&A Net Cash Contingent
resources
Reserves Production
p/share
Source: Seymour Pierce Ltd
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Borders & Southern
Proposition
2011 was the turn of the northern Falkland players (RKH & DES) and in 2012 the
activity heads south with both BOR & FOGL drilling. Whilst these companies share
common issues such as regional politics, BOR stands out amongst its peers in terms of
the potential size of its drilling targets as well as the expertise of its management
team.
Catalysts
Drilling at the first prospect is underway. The company forecasts that it will take 90
days to drill both Darwin and Stebbing. The key price drivers will be the well results
from these two wells. We highlight that the two wells are testing two different types
of play. Failure (or success) at the first well does change the risk profile of the second.
Valuation
SOTP valuation matrix
NAV m p/share
Darwin 199 46
Stebbing 227 53
Net cash 116 27Core value 542 126
Source: Seymour Pierce Ltd & Company data
We have valued Borders in terms of a risked exploration net asset appraisal of their
near term assets. The company intends to drill two wells in Q1 2012 (Darwin and
Stebbing), and we feel it is appropriate to value it on this basis.
SOTP waterfall chart
27
46
53
0
20
40
60
80
100
120
140
Net Cash Darwin Stebbing
p/share
Source: Seymour Pierce Ltd & Company data
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Gulf Keystone Petroleum
Proposition
2011 saw substantial resource upgrades across its assets in Kurdistan. 2012 will see
the company move into export production for the first time, resulting in the first
significant cash inflows for GKP. The entrance of ExxonMobil and Total into the region
has enhanced its credibility as a potential major future oil producing province. We feel
that the persistent take over rumours are premature, but likely to be accurate in the
longer term.
Catalysts
The company is in the process of drilled several wells across it acreage, the results will
provide the key share price drivers in 2012. The company has now opened the data
room for the sale of its Akri-Bijeel asset for which we have a risked valuation of
c.$200m. We estimate that this process could take up to three months to complete.
Short term share price drivers are: well testing results from the Shaikan-4 well (due
imminently) and the well result at the Ber Bahr-1 exploration well (due end of
February/early March).
Valuation
SOTP valuation matrix
million p/share
Production 268 31Discovered 2C 2,708 317Gross Value 2,975 348Less: G&A (40) (5)Net Value 2,936 344Net Cash 256 30
Target Market Cap/ Price 3,191 374Source: Seymour Pierce Ltd
We have valued Gulf Keystone in terms of its discovered resource base under the low
estimate scenario stated in the most recent CPR, and have not included estimates for
yet-to-find resources. In addition, we have included a discounted cash flow (DCF)
valuation of GKPs current and forecast production (2012: c.10,000bopd ramping up
to 2014: c.40,000bopd) from its Shaikan field in Kurdistan.
SOTP waterfall chart
317
31
30-5
-50
0
50
100
150
200
250
300
350
400
G&A Net Cash Production Discovered 2C
p/share
Source: Seymour Pierce Ltd & Company data
.
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Xcite Energy
Proposition
In 2010, a mis-communicated reserve report, delayed clarity on funding against a
backdrop of weak market conditions resulted in Xcite losing the majority of its 2010
share price gains. The rig on site awaiting delayed DECC approval and development
drilling due to start in February, are we about to see resurgence in this stock? We
think so, but it may prove to be another turbulent year for investors should initial
drilling results fail to deliver.
Catalysts
The company is awaiting overdue DECC approval for drilling to start as part of Phase
1A. Once this has been approved (which we assume in the very short term) the
company can begin drilling the first batch of development wells at Bentley. This will
provide the first significant share price driver for the company. The resultant well flow
test results will then provide guidance as to the level of production we can expect
from the field. It should also result in the conversion of contingent resources into
reserves, which should also enhance valuation.
Valuation
SOTP valuation matrix
NAV by activity million p / share
Confirmed CPR reserves/resources 822.4 227
Plus net (debt)/cash 30.78 15Core NAV 853.2 242Source: Seymour Pierce Ltd & Company data
We have based our valuation of Xcite solely on the company's latest Reserves
Assessment Report (RAR) for the Bentley field.
SOTP waterfall chart
227
15
0
50
100
150
200
250
300
Net cash Risked resources
p/share
Source: Seymour Pierce Ltd & Company data
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Top regions
We have identified three key regions which we believe are likely to see significant
positive momentum in 2012
Kurdistan
Activity in Kurdistan has been steadily increasing in recent years with the entrance of
several small and medium independent E&Ps. However, the region finally got the seal
of approval following the announcement that ExxonMobil was to acquire significant
acreage in six exploration blocks in late 2011. More recently, speculation has mounted
that Total were planning a similar move, although this has yet to be formally
announced.
Many commentators have suggested that the absence of the majors was due to
fractious relationship between the Iraqi Central Government and the Kurdistan
Regional Government. The absence of resolution on the new Iraqi oil laws (which were
drafted in 2007) continues to hold back the region from making an impact on the
export market and continues to prevent major capital investment in projects other
than for licence acquisition and exploration.
Outlook
The USGS has estimated that Kurdistan has c.40bn bbl of oil and c.60tcf of gas with
low geological exploration risk. However, this attractiveness is countered by the high
(and some would say increasing) geopolitical risk as well as tangible commercial risk
should the issue surrounding the oil law not being resolved in the short to medium
term.
The one key benefit of operating in Kurdistan versus the rest of Iraq is security.
Kurdistan continues to be a much safer operating environment and has been one of
the key drivers for investment in the region.
We believe that the increasing influx of foreign oil companies into Kurdistan and the
increasing capital expenditure they bring is the most likely driver for resolution of the
oil law. Increases in production outside Kurdistan have been disappointing so far and if
Iraq is to see any tangible increase in production in the short to medium term we
believe that this will come from Kurdistan.
Companies on our watchlist
Gulf Keystone Petroleum has been a long term player in Kurdistan and has seenconsiderable exploration success so far. It has discovered c.15bn bbl of oil in place so
far and continues to explore during 2012. The company is aiming for oil exports
starting in 2013 and is seeking to develop an oil export pipeline to Kirkuk with a
capacity of 440,000bopd. There has been considerable speculation that it is a takeover
target ahead of moving into full scale commercial development. Price drivers in 2012
are likely to come from further resource upgrades and increases in production from
Shaikan.
Heritage Oil & Gas has had a mixed experience in Kurdistan. Initially positive drillingresults at the Miran West field, which was identified as an oil discovery, changed when
follow up drilling discovered large quantities of gas instead. Heritages share price
collapsed at this point and it has struggled to recover since. The company is
examining options for gas export and continues to explore at Miran and positive
results from this programme could boost the share price in 2012.
A recent and unexpected entrant is Afren, who made their first investment outsideAfrica last year. The company is targeting first oil from its assets in 2012 and this is
likely to provide upside from this part of the portfolio in 2012. The company also has
exploration planned in Kurdistan later this year.
We have identified three key regions which we
feel are likely to see significant positive
momentum in 2012.
The USGS has estimated that Kurdistan has
c.40bn bbl of oil and c.60tcf of gas with low
geological exploration risk.
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East Africa
The highly competitive operating in western Africa and increasingly in central Africa
has seen a migration of companies towards the east of the continent. As is typical for
frontier regions, small E&Ps have made the initial exploration efforts to prove up
resources. We have now entered the phase where successful explorers are attracting
interest from larger independents as well as the majors.
Outlook
We believe that 2012 will continue to see exploration success from the minor
companies in the shallow water and hopefully in the deeper water from the new
entrant majors. M&A on a greater scale is also likely to be a prominent feature. Cove
Energy, for example has already put up the for sale sign and we can expect further
consolidation in the region.
Exploration has tended to yield large gas discoveries in the shallow water blocks of a
size which could potentially support a LNG development. However, given that the LNG
market is oversupplied with more capacity due to come onstream in Australia and the
Middle East, we see this a a longer term prospect than other commentators.
Companies on our watchlist
Afren entered east Africa via its acquisition of Black Marlin. During 2011 the companyhas been working up these assets with a view to start exploration in 2012 and 2013.
Afrens strategy has mainly been on developing already discovered assets. It
exploration exposure has been limited to date, but the company hopes to deliver
250mmbbl of 2P/2C resources over the next three years. East African exploration in
2012 will focus on Kenya and Tanzania.
Cove Energy recently put the for sale sign up following a very successful explorationcampaign in recent years. This company is very likely to attract interest in the majors
who are keen to potentially develop domestic and export gas projects in the region.
Share price performance will continue to be driven by its drilling campaign, resource
upgrades and potentially its acquisition.
North Sea UK & Norway
The UK North Sea saw a record investment of 7.5bn in 2011, driven by high oil prices.
This level of investment is forecast to continue until at least 2015. The emphasis of this
investment was skewed towards development rather than exploration and appraisal
which saw a decrease in activity. The sector also saw its most active period in terms of
transactions since 2005, with c.$4bn of assets switching hands during the year. This is
a trend which we expect to be a continuing theme as the region sees more
consolidation, particularly amongst the smaller players.
Following the successes of Statoil, Xcite Energy and Nautical Petroleum in heavy oil,
we would expect these types of projects to become more attractive throughout the
region. The fiscal terms for such projects will also improve project commerciality and
hopefully reduce the decline in oil production from the UK sector.
The Norway North Sea is seeing increased activity from a number of AIM listed E&Ps
as they look to exploit the attractive fiscal terms offered by the Norwegian
government. Currently, exploration companies will receive 78% of their drilling
expenditure back the following year to facilitate further growth in the region. The
state owned company, Petoro AS, is also undergoing transactions with foreign entities
operating in the region to acquire previously undeveloped licences, thus stimulating
future production from the region.
The highly competitive operating in western
Africa and increasingly in central Africa has seen
a migration of companies towards the east of
the continent.
The UK North Sea saw a record investment of
7.5bn in 2011, driven by high oil prices. This
level of investment is forecast to continue until
at least 2015.
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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 progressivedrilling, appraisal and development activities.
Xcite Energy moves into the development phase this year which should yieldproduction in 2Q onwards. However, we do anticipate a volatile period during the
initial drilling phase as we see the initial drilling and flow test results being announced.
There is a huge amount of expectation relating to conversion of resources to reserves.
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Oil and gas price outlook for 2012
Geopolitics were a major price driver during 2011, as concerns driven by the Arab
Spring caused concerns as to the stability of the Middle East and what this could mean
for security of supply, particularly for Saudi Arabia and Iran. Despite not being asignificant oil producer, Syria continues to cause instability in the region. Similarly,
despite making progress Egypt has still not fully resolved its many issues and is likely
to remain unstable until after the elections are concluded.
Irans commitment to its nuclear programme will continue to antagonise the West and
remains a cause for concern. The recent sabre-rattling on the potential closure of the
Straits of Hormuz seems to have just been posturing. However, the reality is that this
major (a fifth if all traded oil passes through here) oil transit route for the region could
be closed within a matter of hours. Although unlikely, an escalation like this would not
only result in a major increase in the oil price, but could quickly escalate to another
war in the Middle East.
Brent averaged $110/bbl in 2011 and we forecast the price to average $100/bbl in2012.
Now that winter has finally arrived in Europe, we have seen the spot gas price increase
by 30%, driven in part by Gazproms inability to increase supplies. Gazprom currently
supplies c.25% of the European market, but its pricing is the highest at c.$410/mcm.
Consequently it is seeing more competition from LNG and domestic sources of gas in
some countries. Such an aggressive pricing structure has resulted in demands from
gas users for Gazprom to move away from long-term contracts and increase the spot
market contribution to such contracts.
The success of the shale gas industry in the US is has driven the gas price to a new low
of c.$2.50/mcf. The success has been so large that the US may move back into gas
exports rather than being a net importer. We are now seeing an increase in shale gas
activity throughout Europe, particularly in Poland, and so far the results have been
mixed. We are therefore comfortable that the gas price will remain high and that shale
gas will have little impact on the supply/demand situation in the medium term.
Geopolitics were a major price driver during
2011, as concerns driven by the Arab Spring
The success of the shale gas industry in the US is
has driven the gas price to a new low of
c.$2.50/mcf.
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Valuation methodology
Petroleum companies are valued in terms of their portfolio of exploration and
production assets. Our overall target price comprises a core valuation for the
producing and near term production assets and a risked net asset value (RENAV) for
the exploration assets.
Exploration
Prior to drilling, a huge amount of work has been done to de-risk a prospect. We
apply a simple arithmetic approach to attempt to value such prospects ahead of
drilling. The calculation is:
RENAV = Gross resource estimate x Company Interest x Chance of Success x NPV/bblThe company provides most of this data, the chance of success (CoS) is probably the
most important factor and is very company and country specific. Some companies arebetter at exploration than others. Also, some countries have more hydrocarbons than
others. The CoS tends to be higher in mature exploration than in frontier regions. The
NPV per barrel varies from country to country and reflects the prevailing fiscal terms
and transaction values on a per barrel basis.
Production
We write an operational model for the companys producing assets. This reflects
historic data and our assumptions for the future. We model production, prices and
costs and overlay the fiscal terms of the country where the asset is located. From this
model we derive a DCF which is then used to value the asset. See the valuation
section for the assumptions used for this company.
Resource Classification Framework
Source: SPE
We write an operational model for the
companys producing assets. This reflects
historic data and our assumptions for the future.
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Let it flow2011 was a disappointing year for Aurelian, with its key asset Siekierki
representing a much larger and complex challenge than initially
anticipated. Following a comprehensive review, the company has
provided the market with a clear strategy to develop its entire portfolio,
which we feel represents a strong buying opportunity for investors, given
current trading levels.
Strategy shiftAurelian has now concluded a comprehensive review of its assets following the
disappointing multi-fracced horizontal appraisal wells drilled in 2011. The data
acquired during the appraisal phase has improved the companys understanding of
Siekierki, and as such, a revised development plan has been designed comprising 32
wells recovering 296bcf of gas (previously 348bcf) to commence in 4Q 2012.
Near-term exploration programme
Aurelian plans to take advantage of the flexibility in its work programme and preserve
capital by prioritising its exploration targets. In line with the strategic review, the
company has deferred several exploration targets, to focus instead on near-term value
play unlocking wells. The programme is budgeted to cost 25.6m net to Aurelian
targeting 67.3mmboe of net unrisked prospective resources, which, while less than
previously indicated, potentially offers material upside.
Unlocking Siekierki
The company intends to enter into negotiations for a potential farm-in to its 90%
interest in Siekierki. The asset is surrounded by IOC operated acreage, most notably
Connoco Phillips, Exxon Mobil, Total and Chevron, all of which have the technological
knowledge base and financial backing that is required to fully develop the project. We
feel that a farm-in partner of sufficient expertise and financial resource base will act as
a positive share price trigger for investors in Aurelian.
Valuation and recommendation
Our core valuation comprises exploration and development activities, and cash; which
yields a base value of 20p. Our exploration upside assessment contributes a further
10.8p. On this basis we initiate coverage with a BUY recommendation and set a pricetarget of 31p.
1 Please see regulatory disclosure notes at the end of this document
A draft of this research has been shown to the company following which minor factual amendments have been made.
10 February 12 | Initiation of coverage | Oil & Gas exploration and production
Aurelian Oil & Gas(AIM:AUL)F
BUY
Share price 17pTarget price 31p
84% Upside
Market cap (m) 82.8
Net cash (m) 80.0
Enterprise value^ (m) 82.8
No. of shares (m) 494.3
Average daily vol ('000, -3m) 3,488
Dividend yield (%) 0.0
PER at Target price (Y1) 147.2
12 month high/low (p) 92/16
(%) 1m 3m 12mAbsolute -2.9 -27.2 -79.3
FTA relative -6.9 -31.9 -78.9
Price & price relative (-2yr)
0
20
40
60
80
100
Feb May Aug Nov Feb May Aug Nov Feb
Price Relative
Source: Datastream
Share price as at close: 9 February 12
Next news
Operational updates
Business
Exploration in Central Europe with licences in
Poland, Slovakia, Romania and Bulgaria
www.aurelianoil.comYear end
December
Revenue
(m)
EBIT*
(m)
PBT*
(m)
Tax
(%)
Adj. EPS*
(c)
PER
(x)
EV/EBIT*
(x)
Div yield
(%)
2009A 0.0 (1.9) (2.3) 0.0 (0.2) (88.1) (51.8) 0.0
2010A 0.0 (9.0) (9.7) 0.0 (4.9) (4.0) (11.0) 0.0
2011E 0.0 1.3 2.5 0.0 0.2 80.1 76.4 0.0
2012E 0.0 (5.3) (4.5) 0.0 (0.9) (21.7) (18.7) 0.0
2013E 0.0 (0.1) 0.4 0.0 0.1 261.4 (985.9) 0.0
* excludes exceptional items and amortisation of acquired intangibles.
^ EV calculation adjusted for core cash, investments etc.
Source: Seymour Pierce Ltd
Dr. Dougie Youngson
Research Analyst
+44 (0) 20 7107 8068
Sam Wahab ACAResearch Analyst
+44 (0) 20 7107 8094
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Valuation and recommendation
We value Aurelian on its core exploration and development assets in Poland, Slovakia,
Romania and Bulgaria. The company has a clear development plan to bring their key
asset, Siekierki, to first stage production in 2016 (delayed by three years due to
technical issues experienced during flow testing in March and September 2011).
However, this development plan will require additional financial and technological
resources through a potential farm-out down. On this basis, we do not currently
provide a valuation of future discounted cash flows arising from Siekierki in 2016, until
the company has adequate resources in place to fulfil their strategy.
Our valuation incorporates the following assumptions:
Valuation assumptions
Metric Assumption
NPV/boe - Oil $5/boe
NPV/boe - Gas $3/boe
Realised gas price $7.5/mcf
Long-term $/ 1.65
Long-term $/ 1.39
Long-term / 1.16
Discount rate 10%
Shares outstanding (million) 500.8
Source: Seymour Pierce Ltd
These assumptions have been implemented into our risked exploration net asset
valuation as follows:
Risked net asset valuation
Status Country Project Interest CoS/CoD Resources
(mmboe)
NPV 10%
US$ / boe
Unrisked
NPV $m
Risked
NPV $m
Unrisked
NPV m
Risked
NPV m
Net Risked
p/share
Gross Net
Development Poland Siekierki 90.00% 25% 49.30 44.37 3 133.11 33.28 81 20.17 4.0
Exploration Poland Siekierki NW 90.00% 20% 11.5 10.35 3 31.05 6.21 18.82 3.76 0.8
Exploration Poland Siekierki SW 90.00% 20% 3.3 2.97 3 8.91 1.78 5.40 1.08 0.2
Exploration Poland Kalisz 50.00% 10% 5.3 2.65 3 7.95 0.80 4.82 0.48 0.1
Exploration Poland Cyb. & Ty. 45.00% 10% 97 43.65 5 218.25 21.83 132.27 13.23 2.6
Exploration Poland Bieszczady 25.00% 10% 272.8 68.2 5 341.00 34.10 206.67 20.67 4.1
Exploration Poland Karpaty East 80.00% 10% 28 22.4 3 67.20 6.72 40.73 4.07 0.8
Exploration Poland Karpaty West 60.00% 10% 19 11.4 3 34.20 3.42 20.73 2.07 0.4
Exploration Poland Wetlina 100.00% 10% 31.6 31.6 5 158.00 15.80 95.76 9.58 1.9
Exploration Slovakia Svidnik 50.00% 10% 180.2 90.1 3 270.30 27.03 163.82 16.38 3.3
Exploration Romania Brodina 33.75% 10% 50 16.875 5 84.38 8.44 51.14 5.11 1.0Exploration Romania Cuejdiu 45.00% 10% 16 7.2 5 36.00 3.60 21.82 2.18 0.4
Exploration Romania Brodina 33.75% 10% 8 2.7 3 8.10 0.81 4.91 0.49 0.1
Exploration Bulgaria Golitza Block 30.00% 10% 12 3.6 3 10.80 1.08 6.55 0.65 0.1784.00 358.07 1,409.25 164.89 854.09 99.93 20.0Source: Seymour Pierce Ltd
We value Aurelian on its core exploration and
development assets in Poland, Slovakia,
Romania and Bulgaria.
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SOTP valuation matrix
million p/share
Siekierki (Development) 20.2 4.0
Siekierki (Exploration) 4.8 1.0
Other Polish exploration 50.1 10.0Slovakia exploration 16.4 3.3
Romania exploration 8.4 1.7Gross Value 99.9 20.0Net Cash 54.2 10.8Target Market Cap 154.1 30.8Source: Seymour Pierce Ltd
SOTP waterfall chart
11
10
5
3
2
0
5
10
15
20
25
30
35
Romania & Bulgaria
exploration
Slovakia exploration Siekierki (Exp & Dev.) Polish exploration
upside
Net Cash
p/share
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.
On this basis we initiate coverage with a Buy recommendation and set a price target
of 31p.
In our view, Aurelian is severely undervalued and
is currently trading well below its core value.
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Strategic overview
Aurelian has now concluded a comprehensive review of its assets following the
disappointing multi-fracced horizontal appraisal wells drilled in 2011. The company
arrived at three key conclusions which we have analysed in detail to support our
investment case:
Siekierki is an attractive project and initial problems are now well understoodand a clear plan forward has been developed.
The cash position at the year-end 2011 was 63m which allows the companyto carry out its planned exploration and appraisal activities for the next 18months.
Unlocking the full upside within the company is likely to require additionaltechnical and financial resources.
We feel that it is important to analyse these three conclusions in detail to address
existing shareholder concerns, as well as to illustrate to potential shareholders the
possible upside arising on successful development of Aurelians acreage in central
Europe.
How attractive is Siekierki now?
The well tests on Siekierki have been completed and incorporated in a comprehensive
technical and commercial review led by a group of independent consultants (AGR-
TRACS). From this, gas initially in place of 1.1tcf is now estimated in Block 207
(company guidance prior to appraisal was 1.6tcf). However, we do highlight that this
does not include gas potentially in Blocks 206 and 208 or the Krzesinki discovery.
Siekierki location map
Source: Company
Following the strategy update and conference call, we feel it is clear that the data
acquired during the appraisal phase has improved the companys understanding of
Siekierki, and the company has now constructed a new reservoir model. The new
model now illustrates that the layered Rotliegendes sandstone sequence in Siekierki
has a wide range of ambient porosity and permeability properties spanning 6-18%,with higher permeability layers dominating well performance.
The company also maintains that the Krzesinki-1 well test result supports Aurelians
new reservoir model, in terms of the presence of higher porosity zones within the gas
The well tests on Siekierki have been
completed and incorporated in a
comprehensive technical and commercial
review led by a group of independent
consultants
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legs of the Krzesinki and Siekierki fields, with an un-fracced well test producing
0.2mmscf/d. This represents the first successful un-stimulated gas well flow test on
Block 207 to date.
As such, a revised development plan (see forward plan section) has been designed,
comprising 32 wells recovering 296bcf of gas (previously 348bcf), indicating anaverage recovery of 9.25bcf/well. To support these estimates, the company intends to
release an updated CPR covering both appraisal and exploration assets in March/April
2012.
Nevertheless, following the comprehensive technical and commercial review
supported by AGR-TRACS and the new reservoir model, the company maintains that
Siekierki is an attractive project which offers material upside to investors.
Funded exploration programme
Aurelian plans to take advantage of the flexibility in its work programme and preserve
capital by prioritising its exploration targets. In line with the strategic review, thecompany has deferred several exploration targets, to focus instead on near-term value
play unlocking wells.
Aurelian will initially drill the Sosna-1 well within the Torzym reef oil play in March
2012 targeting up to 35mmbbls gross. In addition, the company intends to undertake
further geological and geophysical surveys to de-risk the prospects identified in their
2011 seismic data including Cybinka-Torzym , Slovakia and Romania (Brodina).
The high impact Carpathian well drilling campaign will now be deferred to Q4 of this
year. This will include Kaparty East, which the company now believe to be gas rather
than oil with internal estimates suggesting a recoverable resource of 170bcf,
representing an additional 1p/share of our risked target valuation.
2012 drilling programme
Well Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WI Max Cap (m) Target mmboe p/share
Krzesinki-1 90% n/a n/a n/a
Niebieszczany-1 25% n/a n/a n/a
Sosna-1 45% 2.6 3.1 0.4
Cierne-1 50% 6.4 19.4 1.4
Bieszczady-2 25% 3.7 23.1 2.8
Kaparty E-1 80% 10.2 14.5 1.1
Cuejdiu-1 45% 2.7 7.2 0.9
Rotliegendes
Zechstein Reef Oil Play
Carpathian Thrust fold Belt
Source: Seymour Pierce Ltd, Company
In addition to the above five wells, four contingent wells are also being considered for
Aurelians 2013 drilling schedule.
The programme is budgeted to cost 25.6m net to Aurelian although it aims to reduce
this by bringing in partners to the Romanian, Slovakian and Karpaty East & West
licences. In aggregate, the five wells are targeting 67.3mmboe of net unrisked
prospective resources, which while less than previously indicated, offers material
upside potential.
Unlocking the full value of the company
Analysis of Trzek-2 and Trzek-3
Aurelians share price has been severely impacted by the two multi-fracced horizontal
wells drilled in 2011. The company has reviewed the data from these wells to
implement a comprehensive plan to develop the asset using cost efficient and
technologically advantageous methods.
Aurelian plans to take advantage of the flexibility
in its work programme and preserve capital byprioritising its exploration targets.
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Aurelian has confirmed that the Trzek-2 horizontal well had mechanical issues with the
completion which reduced fracture effectiveness; whilst the Trzek-3 well was
mechanically well executed with better completion. However, the hydraulic fractures
were not fully effective and the well bore did not make contact with the high
permeability zone encountered in the pilot hole. As such, the combination of the
reservoirs permeability to gas and water, and the poor frac effectiveness explains whythe Trzek-2 and Trzek-3 flow rates of 3mmscfd and 3.2mmscfd were significantly
lower than expectations.
Subsequent geological and geophysical analysis of the wells have provided Aurelian
with a comprehensive understanding of the geology of Siekierki. This is best illustrated
through their pre and post drill knowledge conceptual knowledge of the basin.
Pre and post drill understanding
Aurelians pre-drill strategy understood that the multi-frac horizontal well would
produce dry gas when fracced above the free water level.
Pre-drill concept
Source: Company
This was supported by the belief that Siekierki was a tight reservoir with moderate
variation porosity. However, subsequent analysis has confirmed that the tight
reservoir contains zones of significantly higher permeability and a much larger
variation in porosity. In addition, gas is produced with water as relative permeability
effects are important.
Post-drill concept
Source: Company
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From the above illustrations, we note that Siekierki is very different geologically from
the companys original assumption. That assumption had only moderate variation in
porosity and permeability in the tight aeolian sandstone matrix Aurelian now
understands that the reservoir has streaks of higher permeability (yellow in the
diagram) within that tight matrix, which will dominate well performance On this basis,
managements expectations of GIIP has been reduced by c.31% to 1.1tcf (previously1.6tcf), however, the company re-iterates that the multi-fracced horizontal wells
implemented continues to be the correct technology application for the field and
significant operational lessons and insights have been learnt.
Forward development plan
Aurelian will now seek to implement the next stage of its development plan to achieve
first gas sales in 2016This will initially involve the continuation of long-term testing of
Trzek-2 and Trzek-3 and commercialising gas from these two wells using a low
pressure and low methane tie-in, as well as a gas to wire option as a smaller pilot
development. First gas arising from this is expected to be achieve in 4Q 2013 costing
in the region of 12m net to Aurelian.
Development plan to 2016
Source: Company
The above development plan will also incorporate a potential farm-in partner to the
Siekierki license. The company currently holds a 90% working interest in the block,which is surrounded by IOC operated acreage, most notably Connoco Phillips, Exxon
Mobil, Total and Chevron, whom all have the technological knowledge base and
financial backing that is required to fully develop the Siekierki project.
In our view, a substantial farm-down of Siekierki would have always been an attractive
proposition for Aurelian even if the company had successfully flowed commercial
volumes of gas in 2011. The key difference in undertaking one now is that the
company has not proved up as much value of the asset as it would have liked and in
effect, its hand is being forced through a lack of financial resources.
Nevertheless, we feel that the introduction of an experienced farm-in partner in the
near term would be a strong share price trigger for investors, given the improved
technological understanding of the asset achieved through extensive data analysis.
Aurelian will now seek to implement the next
stage of its development plan to achieve first gas
sales in 2016.
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Key assets
Core area 1
PoznanThe Siekierki field was originally discovered over 40 years ago close to the city of
Poznan, but the tight reservoir was found to exhibit low porosity and permeability,
which meant commercial flow rates could not be achieved with the technology
available at the time. Aurelian was awarded the Poznan East licence in 2003 and
drilled the Trzek-1 well in 2007 to appraise the field, confirming the original findings
but providing improved quality reservoir data using modern technologies.
Significantly, the well flowed at an initial 7.5mmcfd before being choked back to a
stable 2.5mmcfd. Aurelians latest CPR estimates 640bcf net to the company on a mid-
case scenario (including Siekierki SW and Siekierki NW) representing this largest
asset, by confirmed resources, in the companys portfolio.
Poznan blocks
Source: Company
Cybinka and Torzym
These fields are located nearby to the German border and were acquired in 2008. They
link to recent oil discoveries in the north, and the basin extends from the prolific UK
North Sea. Existing data is being evaluated and has been followed by 3D seismic. The
combined volume of hydrocarbons net to Aurelian is 34mmbbls and the company
anticipates starting drilling in Q4 2011.
Cybinka & Torzym
Source: Company
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Core area 2
Aurelian has continued to develop its second Core Area and has executed its strategy
of applying modern 2D seismic to explore thrust fold areas. During 2010, the company
successfully acquired 776km of 2D seismic across its acreage here.
Bieszczady
In the Polish Carpathians, the first of a three well programme in the companys
Bieszczady concession, Niebieszczany-1, was spudded in October 2010. The well is
being drilled to target depth of 4,800 metres targeting an oil prospect of up to
100mmbbls (gross). A number of reservoirs, all of which are proven producers in the
region, are being targeted by this well and there are several other similar-sized
prospects on trend, which would be de-risked in the event of a successful outcome.
Using existing 2D seismic data covering approximately 20% of the concession area,
prospects totaling up to 680m barrels of un-risked prospective resources have been
mapped. The acquisition phase of a second 300km 2D survey covering a further 20% of
the concession size was completed in March 2011. The future work programme for theconcession is to complete the processing and interpretation of this second 2D survey,
and then, following the drilling and testing of Niebieszczany-1 and the reprocessing of
the first 2D survey, prepare a revised prospect inventory and drill two further wells.
Kaparty
At East Karpaty, the acquisition of 136km of 2D seismic has been completed. This
survey will cover approximately 25% of the concession and the results of the survey
are expected later this year. A two well, fully-funded programme is planned for the
concession, with the wells being targeted for late 2011 and 2012. It is also anticipated
that the company will seek further farm-outs on this acreage, after the drilling of the
first or second well in the programme. Also, in the Polish Carpathians Aurelian hasbeen awarded a 100% interest in the Poreba concession which is adjacent to the West
Karpaty concession. This new concession gives the company additional scale and
prospectivity to launch a new Carpathian Conventional Gas business covering
2,562km2, which will target shallow gas to potentially commercialise quickly. In
addition, Aurelians Lachowice Gas project on the West Karpaty concession is its first
project in this new business where it will carry out a relatively low cost work over
process targeting a prospect of 20bcf (gross) and target first gas by the end of 2012.
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Financial model
Income Statement
Year endDecember (m)
2009A 2010A 2011E
Group revenue 0.0 0.0 0.0
Cost of sales 0.0 0.0 0.0
Gross profit 0.0 0.0 0.0
Total operating expenses (1.9) (9.0) (5.6)
EBIT (1.9) (9.0) (5.6)
Net interest/financial income/(cost) (2.3) (9.7) 2.5
Associate and Other non-op. income/(cost) (0.4) (0.7) 1.2
PBT (2.3) (9.7) 2.5
Tax 0.0 0.0 0.0
Effective tax rate (%) 0.0 0.0 0.0
Minorities 0.0 0.0 0.0
Earnings (0.4) (16.9) 1.2
EBITDA (0.4) (8.1) (4.1)
Adjusted EBITDA* (0.4) (8.1) 2.7
Adjusted EBIT* (1.9) (9.0) 1.3
Adjusted PBT* (2.3) (9.7) 2.5
Adjusted earnings* (0.4) (16.9) 1.2
DPS (c) 0.0 0.0 0.0
EPS (c) (0.2) (4.9) 0.2
EPS [F. Dil.] (c) (0.2) (4.9) 0.2
EPS [Adj.]* (c) (0.2) (4.9) 0.2
EPS [Adj. F. Dil.]* (c) (0.2) (4.9) 0.2
Weighted average no. shares (m) 189.5 341.7 490.2
Fully dil. w. ave. no. shares (m) 189.5 341.7 500.8
Year end no. shares (m) 189.5 341.7 490.2
* excludes exceptional items and amortisation of acquired intangibles.
Source: Company data, Seymour Pierce Ltd
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Cashflow Statement
Year end
December (m)
2009A 2010A 2011E
Operating income (1.9) (9.0) (5.6)
Amortisation of acquired intangibles 0.0 0.0 0.0
Amortisation of other intangibles 0.0 0.0 0.0
Depreciation 1.5 0.9 1.5
Net change in working capital 1.2 (5.7) (0.6)
Other 0.0 7.8 0.2
Operating cash flow 0.8 (6.0) (4.5)
Capital expenditure (8.5) (20.3) (62.3)
Investment in Other intangibles 0.0 0.0 0.0
Net interest/financial income/(cost) 0.4 0.7 (1.2)
Tax paid (0.0) (0.0) 0.0
Net acqns./disposals 0.0 0.0 0.0
Dividend paid 0.0 0.0 0.0
Other (0.0) 0.2 0.1Cash flow before financing (7.3) (25.4) (67.9)
Proceeds from shares issued 12.8 132.4 2.5
Investments 0.0 0.0 0.0
Other 0.0 0.0 0.0
Net movement in cash/(debt) 5.5 107.0 (65.4)
Opening net cash/(debt) 6.0 14.0 114.7
Adjustments (Forex, etc.) 0.0 0.0 0.0
Closing net cash/(debt) 14.0 114.7 63.3Source: Company data, Seymour Pierce Ltd
Balance Sheet
Year end
December (m)
2009A 2010A 2011E
Property plant and equipment 5.0 0.2 0.0
Goodwill and Acquired intangibles 0.0 0.0 0.0
Other intangibles 0.0 0.0 0.0
Other fixed assets 40.2 56.5 117.0
Non current assets 45.2 56.7 117.0
Stocks & WIP 0.0 0.0 0.0
Trade receivables 4.7 11.0 10.1
Cash 14.0 114.7 63.3
Other current assets 0.0 9.0 0.0
Current assets 18.6 134.7 73.5
Total assets 63.9 191.4 190.5
Trade creditors 3.4 13.2 11.9
Short term borrowings 0.6 1.2 0.0
Long term borrowings 1.6 0.0 0.0
Other liabilities 0.0 2.0 0.0
Total liabilities 5.7 16.4 11.9
Net assets 58.2 175.1 178.6
Issued share capital 15.5 30.4 30.7
Share premium account 65.9 183.4 185.2
Retained earnings (15.8) (32.7) (31.4)
Other reserves (7.4) (6.0) (5.9)
Minority interests 0.0 0.0 0.0
Total equity 58.2 175.1 178.6
Source: Company data, Seymour Pierce Ltd
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Target Price & Recommendation History
0
10
20
30
40
50
60
70
80
90
100
Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12
Share Price Target Price Reco mmendations
Source: Datastream, Seymour Pierce Ltd
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This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is
not subject to any prohibition on dealing ahead of the dissemination of investment research.
A natural selection2011 was the turn of the northern players (RKH & DES) and in 2012 the
activity heads south with both BOR & FOGL drilling. Whilst these
companies share common issues such as regional politics, BOR stands out
amongst its peers in terms of the potential size of its drilling targets as
well as the expertise of its management team.
Drilling is underway high risk, but potentially high reward
The Leiv Eiriksson rig started drilling at the beginning of February and will drill theDarwin and Stebbing prospects before moving on two drill two wells for FOGL. Darwin
and Stebbing will test two different play types, therefore success or failure at Darwin
means nothing for Stebbing. Darwin and Stebbing have 15% and 10% chances of
success respectively and each have billion barrel potential. Assets of this sort of size
drive development and attract buyers.
Drilling success does not equal commerciality a long way to go
Rockhopper's success at Sea Lion has led the company and some commentators to
discuss the fields commerciality. We acknowledge that it is a large field, which if
located in many locations would be easy to develop. However, the geopolitics and
absence of infrastructure may yet prove too much to overcome. Argentinas escalating
use of regional and international politics has been a smart move and should not be
underestimated when investors are thinking about development options and potential
asset sales.
Valuation and recommendation
Our core valuation comprises three elements near term exploration at Darwin 46p;
and at Stebbing 53p; and the pre-drill cash (c.$192m on 31/12/11) per share which
contributes 27p. This cash component will obviously decrease significantly post
drilling which we estimate will cost c.$150m. We initiate coverage with a Buy
recommendation and set a pre-drill target price of 126p.
However, given the markets reactions to both Rockhopper and Desires news flow last
year, Borders looks likely to have a very volatile ride during drilling. We would
therefore advise investors to have a pro-active response to their position rather than
riding out the inevitable peaks and troughs.
A draft of this research has been shown to the company following which minor factual amendments have been made.
10 February 12 | Initiation of coverage | Oil & Gas exploration and production
Borders & Southern Petroleum(LSE:BOR)5
BUY
Share price 67pTarget price 126p
88% Upside
Market cap (m) 288.4
Net cash (m) 102.3
Enterprise value^ (m) 186.1
No. of shares (m) 428.8
Average daily vol ('000, -3m) 2,060
12 month high/low (p) 73/44
(%) 1m 3m 12mAbsolute -5.9 +18.5 +3.5
FTA relative -9.8 +10.9 +5.2
Price & price relative (-2yr)
304050607080
90100
Feb May Aug Nov Feb May Aug Nov Feb
Price Relative
Source: Datastream
Share price as at close: 9 February 12
Next news
FY Results
Business
Oil exploration focusing on frontier or emerging
basins where there is potential to identify and
commercialise high value prospects.
www.bordersandsouthern.com/
Dr. Dougie Youngson
Research Analyst
+44 (0) 20 7107 8068
Sam Wahab ACA
Research Analyst
+44 (0) 20 7107 8094
Year end
December
Revenue
($m)
EBIT*
($m)
PBT*
($m)
Tax
(%)
Adj. EPS*
(c)
PER
(x)
EV/EBIT*
(x)
Div yield
(%)
2009A 0.0 (1.2) 3.2 0.0 1.5 69.1 (243.2) 0.0
2010A 0.0 (1.5) (0.2) 0.0 (0.0) (2,755.4) (195.6) 0.0
2011E 0.0 (1.9) 1.3 36.4 0.2 563.9 (152.3) 0.0
* excludes exceptional items and amortisation of acquired intangibles.
^ EV calculation adjusted for core cash, investments etc.
Source: Seymour Pierce Ltd
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Borders & Southern Petroleum | 10 February 12 Valuation and recommendation
Valuation and recommendation
We have valued Borders in terms of a risked exploration net asset appraisal of their
near term assets. The company intends to drill two wells in Q1 2012 (Darwin and
Stebbing), and we feel it is appropriate to value it on this basis. We have incorporated
the following assumptions into our valuation:
Valuation assumptions
Metric Assumption
Long term $/ exchange rate 1.65
Discount rate 10%
Darwin CoS 15%
Stebbing CoS 10%
NPV/bbl ($) - Oil 7.50
NPV/bbl ($) - Gas 2.00
Source: Seymour Pierce Ltd
We have valued Borders in terms of its confirmed resources as per the Competent
Persons Report, issued in May 2005 by Scott Pickford Ltd for Darwin and Stebbing
using the low case scenario.
Potential resources at Darwin
Recoverable resources (mmboe)
Prospect Target P90 P50 P10 CoSDarwin (base) Anomaly 230 300 380 15%
Darwin (upside) To spill point 580 760 980 15%Total 810 1,060 1,360Source: Scott Pickford
Potential resources at Stebbing
Recoverable resources (mmboe)
Prospect Target P90 P50 P10 CoSStebbing (base) Tertiary 390 710 1,120 10%
Stebbing (upside) Upper Cretaceous 410 570 930 10%Total 800 1,280 2,050Source: Scott Pickford
Risked net asset valuation
P90 - Low case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $259 $293 $551 78
Gas 2.0 $69 $82 $151 21
P90 - High case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $653 $600 $1,253 177
Gas 2.0 $174 $160 $334 47
P10 - High case NPV/bbl Darwin Stebbing Total NPV/shr (p)Oil 7.5 $1,103 $1,538 $2,640 373
Gas 2.0 $294 $410 $704 100
Source: Seymour Pierce Ltd
In our view, it is prudent to assume a low case in our valuation given that this basin
has not been drilled previously and exploration in the Falklands overall is still at a fairly
early stage.
We have valued Borders in terms of a risked
exploration net asset appraisal of their near term
assets.
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Valuation and recommendation Borders & Southern Petroleum | 10 February 12
SOTP valuation matrix
NAV m p/share
Darwin 199 46
Stebbing 227 53
Net cash 116 27Core value 542 126Source: Seymour Pierce Ltd & Company data
SOTP waterfall chart
27
46
53
0
20
40
60
80
100
120
140
Net Cash Darwin Stebbing
p/share
Source: Seymour Pierce Ltd & Company data
Recommendation and target price
Our core valuation comprises three elements near term exploration at Darwin 46p;
and at Stebbing 53p; and the pre-drill cash ($194m on 31/12/11) per share which
contributes 27p. This cash component will obviously decrease significantly post
drilling which we estimate will cost c.$150m. We initiate coverage with a Buy
recommendation and set a pre-drill target price of 126p.
However, given the markets reactions to both Rockhopper and Desires news flow last
year, Borders looks likely to have a very volatile ride during drilling. We would
therefore advise investors to have a pro-active response to their position rather than
riding out the inevitable peaks and troughs.
We would therefore advise investors to have a
pro-active response to their position rather than
riding out the inevitable peaks and troughs.
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Borders & Southern Petroleum | 10 February 12 Asset overview
Asset overview
Borders has a 100% interest and is operator of five Production Licences which cover
c.20,000km2 of the South Falkland Basin. The acreage is located approximately 150km
south-east of the Islands and were awarded on 1 November 2004.
Southern Falklands Basin
The basin has had only one unsuccessful well test, but the geology and stratigraphy in
Borders acreage is expected to be similar to the adjacent Magallanes and Malvinas
sub-basins located to the west of the Falkland Islands. These sub-basins have been
proven to have working petroleum systems. It is also anticipated to be similar to
geology recorded in DSDP boreholes 511 and 330 drilled to the east of the Falkland
Islands in the Falkland Plateau sub-basin.
This regional geological data helps provide a high degree of confidence on the
occurrence of a good oil prone source rock. Late Jurassic to Aptian aged organic richshales have been well documented both to the east and west of Borders & Southerns
acreage. Further afield the source rocks are noted off the coast of South Africa and
the Antarctic peninsula. This indicates that the source rock is regionally extensive and
therefore likely to be present within the Companys licensed area.
Falkland Islands drilling prospects
Source: Company data
Drilling strategy
Borders will test the hydrocarbon potential to the eastwest trending fold belt
c.150km to the south of the Falklands. This fold belt trend contains numerous large
simple structures (up to 150km2 in area), including thrust cored anticlines and tilted
fault blocks. The definition of these structures has been achieved by acquiring
2,862km of 2D seismic and 1,492km2 of 3D seismic - this was in excess of the licence
obligations.
The 3D seismic data has identified potential reservoirs in the Tertiary, Upper
Cretaceous and Lower Cretaceous as well as the presence of a working hydrocarbon
system.
Borders will drill the Darwin prospect first, then Stebbing. These first two prospects
are geologically independent, other than they require the same source rock to be
present. Therefore, success (or failure) at the first well will therefore have no impact
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Asset overview Borders & Southern Petroleum | 10 February 12
on the second. Depending on the outcomes, the company has multiple follow up
prospects which it can drill. These include look-a-like folds and tilted fault blocks and
also alternative play types such as stratigraphically trapped basin floor fans.
Cross section of the Darwin and Stebbing prospects
Source: Company data
Rig mobilisation - Leiv Eiriksson
The Leiv Eiriksson rig will arrive in late January and is a fifth generation semi-
submersible drilling rig, and can drill in water depth down to 3,000m. Given the
possible weather and sea conditions, the rig remains stable due to its advanced
dynamic positioning system. This should reduce the risk of weather delays. However,
analysis suggests that the South East Falklands actually has less volatile conditions
than comparable oil regions.
Comparison of offshore wave conditions
0
2
4
6
8
10
12
14
16
Winter Spring Summer Autumn
S
ignificantwaveheight(metres)
West of Shetlands Central North Sea SE Falklands
Source: FOGL
The rig can operate year-round in harsh weather environments (e.g. offshore Canada,
northern Norway) and prior to mobilising to the Falklands had been used in Greenland
for Cairn Energy. The combined two well programme is estimated to last
approximately 90 days (depending on potential well tests), after which the rig will
move drill two wells for Falkland Oil and Gas. Borders and FOGL are working together
sharing resources where possible to reduce costs for both companies.
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Borders & Southern Petroleum | 10 February 12 Asset overview
Fiscal regime
The Falkland Islands have Concession (i.e. tax and royalty) Fiscal Terms. These high
level terms are:
A variable acreage rental
9% royalty on production
26% corporation tax on profits
This results in an effective government take of c.33%, which is one of the most
favourable regimes globally.
Global Government takes
23%
33%
43%
51%
52%
53%
55%
57%
62%
70%
73%
73%
74%
76%
76%
78%
78%
81%
85%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
French Guiana
Falkland Islands
US Gulf of Mexico
Ghana
Colombia
Brazil
Mauritania
China
UK (Non PRT)
Nigeria
Indonesia
Trinidad and Tobago
Gabon
Uganda
DRC
Angola
Norway
UK (PRT)
Malaysia
Source: Wood Macenzie
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Financial model Borders & Southern Petroleum | 10 February 12
Financial model
Income Statement
Year endDecember ($m)
2009A 2010A 2011E
Group revenue 0.0 0.0 0.0
Cost of sales 0.0 0.0 0.0
Gross profit 0.0 0.0 0.0
Total operating expenses (1.2) (1.5) (1.9)
EBIT (1.2) (1.5) (1.9)
Net interest/financial income/(cost) 4.4 1.3 3.2
Associate and Other non-op. income/(cost) 0.0 0.0 0.0
PBT 3.2 (0.2) 1.3
Tax 0.0 0.0 (0.5)
Effective tax rate (%) 0.0 0.0 36.4
Minorities 0.0 0.0 0.0
Earnings 3.2 (0.2) 0.8
EBITDA (1.2) (1.5) (1.9)
Adjusted EBITDA* (1.2) (1.5) (1.9)
Adjusted EBIT* (1.2) (1.5) (1.9)
Adjusted PBT* 3.2 (0.2) 1.3
Adjusted earnings* 3.2 (0.2) 0.8
DPS (c) 0.0 0.0 0.0
EPS (c) 1.5 (0.0) 0.2
EPS [F. Dil.] (c) 1.5 (0.0) 0.2
EPS [Adj.]* (c) 1.5 (0.0) 0.2
EPS [Adj. F. Dil.]* (c) 1.5 (0.0) 0.2
Weighted average no. shares (m) 204.6 428.6 428.6
Fully dil. w. ave. no. shares (m) 204.6 428.6 428.6
Year end no. shares (m) 204.6 428.6 428.6
* excludes exceptional items and amortisation of acquired intangibles.
Source: Company data, Seymour Pierce Ltd
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Borders & Southern Petroleum | 10 February 12 Financial model
Cashflow Statement
Year end
December ($m)
2009A 2010A 2011E
Operating income (1.2) (1.5) (1.9)
Amortisation of acquired intangibles 0.0 0.0 0.0
Amortisation of other intangibles 0.0 0.0 0.0
Depreciation 0.0 0.0 0.0
Net change in working capital 0.1 (1.8) 4.1
Other 0.0 0.0 0.0
Operating cash flow (1.1) (3.3) 2.2
Capital expenditure 9.4 (10.5) (6.4)
Investment in Other intangibles 0.0 0.0 0.0
Net interest/financial income/(cost) 4.4 1.3 3.2
Tax paid 0.0 0.0 (0.5)
Net acqns./disposals 9.7 (10.0) (6.0)
Dividend paid 0.0 0.0 0.0
Other (0.0) (0.0) 0.0Cash flow before financing 22.3 (22.4) (7.5)
Proceeds from shares issued 183.9 0.0 0.0
Investments 0.0 0.0 0.0
Other 0.0 0.0 0.0
Net movement in cash/(debt) 206.2 (22.4) (7.5)
Opening net cash/(debt) 9.5 206.3 194.1
Adjustments (Forex, etc.) (0.2) 0.8 1.5
Closing net cash/(debt) 206.3 194.1 192.1Source: Company data, Seymour Pierce Ltd
Balance Sheet
Year end
December ($m)
2009A 2010A 2011E
Property plant and equipment 0.0 0.0 0.0
Goodwill and Acquired intangibles 0.0 0.0 0.0
Other intangibles 36.6 37.7 44.1
Other fixed assets 0.0 0.0 0.0
Non current assets 36.6 37.7 44.2
Stocks & WIP 0.0 0.0 0.0
Trade receivables 0.1 11.3 9.9
Cash 206.3 194.1 192.1
Other current assets 0.0 0.0 0.0
Current assets 206.4 205.4 202.0
Total assets 243.1 243.2 246.1
Trade creditors 0.2 0.3 2.4
Short term borrowings 0.0 0.0 0.0
Long term borrowings 0.0 0.0 0.0
Other liabilities 0.0 0.0 0.1
Total liabilities 0.2 0.3 2.6
Net assets 242.8 242.9 243.6
Issued share capital 7.7 7.7 7.7
Share premium account 238.0 238.0 238.0
Retained earnings (3.2) (3.4) (2.6)
Other reserves 0.4 0.6 0.5
Minority interests 0.0 0.0 0.0
Total equity 242.8 242.9 243.6
Source: Company data, Seymour Pierce Ltd
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Financial model Borders & Southern Petroleum | 10 February 12
Target Price & Recommendation History
0
200
400
600
800
1000
1200
1400
1600
1800
Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12
Share Price Series2 Recommendations
Source: Datastream, Seymour Pierce Ltd
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Financial model Chariot Oil & Gas | 10 February 12
Swing low?2012 may prove to be a pivotal year for Chariot as the company looks to
probe its substantial resource base with the first of its two well
programme commencing in Q2. Namibia is under-explored and has
proven to be gas prone so far. Also the company does not currently have
the financial flexibility to weather the capital requirements of unsuccessful
drilling.
Namibia large fan base, but few results
Namibia remains hugely under-explored due to a legacy of exploration and political
history. The countrys offshore blocks have recently come into focus due to
surrounding geology and prospectivity, yet continued exploration and subsequent
appraisal in such a frontier region will require sufficient capital that exceeds Chariots
capabilities.
Two year strategy
Chariot maintains a strategy of drilling four to five wells through to the end of 2013 -
however we feel this will largely depend on successful drilling at the companys first
two wells (Tapir South and Nimrod). As such, 2012 will prove to be the pivotal year for
the company with an exploration well in each of their Northern and Southern blocksexpected despite issues in obtaining a rig at present. It is on this basis that we feel it
would be rash to provide value for the companys subsequent assets at present.
Resource upgrades but not driven by drilling
2011 saw the company increase its resource base by a further 40% to 14bnbbls of
gross unrisked prospective resources. Nevertheless, we feel that Chariot must now
focus its efforts on exploiting these resources rather than seeking further upgrades. By
comparison GKP (BUY TP 374p) has upgraded its resource base post drilling.
Valuation and recommendation
Our SOTP valuation is based on a risked assessment of Chariots first two exploration
targets, given that at present, the company only has sufficient funds to drill these two
wells. Our valuation illustrates that Chariot is currently overvalued as the marketseems to be attributing value to its remaining portfolio prior to successful initial
drilling. We initiate coverage with a Sell recommendation and set a pre-drill target
price of 75p representing c.41% downside risk.
A draft of this research has been shown to the company following which minor factual amendments have been made.
10 February 12 | Initiation of coverage | Oil & Gas exploration and production
Chariot Oil & Gas( AIM: CHAR)
SELL
Share price 126pTarget price 75p
41% Downside
Market cap (m) 228.8
Net cash (m) 10.3
Enterprise value^ (m) 218.6
No. of shares (m) 181.6
Average daily vol ('000, -3m) 1,836
12 month high/low (p) 306/90
(%) 1m 3m 12mAbsolute +21.2 -6.3 -48.1
FTA relative +16.2 -12.4 -47.3
Price & price relative (-2yr)
050
100150200250
300350
Feb May Aug Nov Feb May Aug Nov Feb
Price Relative
Source: Datastream
Share price as at close: 9 February 12
Next news
FY2012 Results
Business
Independent oil and gas exploration company
with interests in Namibia.
www.chariotoilandgas.com/
Dr. Dougie Youngson
Research Analyst
+44 (0) 20 7107 8068
Sam Wahab ACA
Research Analyst
+44 (0) 20 7107 8094
Year end
February
Revenue
($m)
EBIT*
($m)
PBT*
($m)
Tax
(%)
Adj. EPS*
(c)
PER
(x)
EV/EBIT*
(x)
Div yield
(%)
2009A 0.0 (10.8) (28.6) 0.0 (0.2) (922.6) (32.0) 0.0
2010A 0.0 (3.2) (3.1) 0.0 (0.0) (9,016.9) (107.3) 0.0
2011E 0.0 (7.3) (7.3) 0.0 (0.1) (3,946.0) (47.1) 0.0
* excludes exceptional items and amortisation of acquired intangibles.
^ EV calculation adjusted for core cash, investments etc.
Source: Seymour Pierce Ltd
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Chariot Oil & Gas | 10 February 12 Valuation and recommendation
Valuation and recommendation
We value Chariot on a risked net asset value basis, assessing its near term exploration
targets specifically. The implicit assumptions used in our risked valuation are as
follows:
Valuation assumptions
Metric Assumption
NPV $/mmboe 1.06
Long term exchange rate $/ $1.65/1
Number of shares outstanding (m) 340.43
Chance of exploration success Nimrod - 24%, Tapir South - 25%
Source: Seymour Pierce Ltd
When assessing an appropriate NPV/bbl to apply in our RENAV calculation, we have
relied on the derived market value of Namibian prospective resources taken from theUNX/HRT transaction in February 2011. HRT offered $721m to acquire UNX Energy
which had c.645mmboe of net risked resources and c.$35m of cash. The derived
$/mmboe of this transaction infers $1.06/bbl ([$721m-$35m]/645mmboe) and acts
as a benchmark for valuing Chariot's assets.
Risked net asset valuation
Scheduled Project Interest CoS/CoD Prospective
Resources (mmboe)
NPV 10%
US$ / boe
Unrisked
NPV $m
Risked
NPV $m
Unrisked
NPV m
Risked
NPV m
Net Risked
p/share
Gross Net
2012 Tapir S 100% 25% 451 451 1.06 478.1 119.5 289.7 72.4 21.3
2012 Nimrod (Albian) 25% 24% 2,524 631 1.06 668.9 160.5 405.4 97.3 28.6Total 2012 2,975 1,082 1,146.9 280.0 695.1 169.7 49.92013 Delta 1 90% 11% 438 394 1.06 417.9 46.0 253.2 27.9 8.2Total 2013 438 394 417.9 46.0 253.2 27.9 8.2Not Specified Tapir N 100% 21% 298 298 1.06 315.9 66.3 191.4 40.2 11.8
Not Specified Tapir 100% 21% 188 188 1.06 199.3 41.8 120.8 25.4 7.5
Not Specified Tapir NE 100% 14% 61 61 1.06 64.7 9.1 39.2 5.5 1.6
Not Specified Zamba N 100% 12% 23 23 1.06 24.4 2.9 14.8 1.8 0.5
Not Specified Zamba 100% 15% 633 633 1.06 671.0 100.6 406.7 61.0 17.9
Not Specified A (Albian) 25% 10% 149 37 1.06 39.5 3.9 23.9 2.4 0.7
Not Specified B (Albian+Barremian) 25% 18% 146 37 1.06 38.7 7.0 23.4 4.2 1.2
Not Specified C (Albian+BDO) 25% 9% 423 106 1.06 112.1 10.1 67.9 6.1 1.8
Not Specified D (Albian) 25% 10% 47 12 1.06 12.5 1.2 7.5 0.8 0.2
Not Specified Dora North 25% 13% 186 47 1.06 49.3 6.4 29.9 3.9 1.1
Not Specified K (Syn-Rift) 25% 10% 248 62 1.06 65.7 6.6 39.8 4.0 1.2
Not Specified L (Albian) 25% 10% 120 30 1.06 31.8 3.2 19.3 1.9 0.6
Not Specified Isabel (BDO) 25% 14% 58 15 1.06 15.4 2.2 9.3 1.3 0.4Not Specified Mary (BDO) 25% 15% 100 25 1.06 26.5 4.0 16.1 2.4 0.7
Not Specified Dora South 25% 13% 174 44 1.06 46.1 6.0 27.9 3.6 1.1
Not Specified Klipspringer 90% 7% 587 528 1.06 560.0 39.2 339.4 23.8 7.0
Not Specified Hartebeest 90% 7% 502 452 1.06 478.9 33.5 290.2 20.3 6.0
Not Specified Oryx 90% 6% 157 141 1.06 149.8 9.0 90.8 5.4 1.6
Not Specified Springbok 90% 12% 58 52 1.06 55.3 6.6 33.5 4.0 1.2
Not Specified Springbok East 90% 12% 58 52 1.06 55.3 6.6 33.5 4.0 1.2
Not Specified Eta 90% 10% 68 61 1.06 64.9 6.5 39.3 3.9 1.2
Not Specified Springbok North 90% 10% 74 67 1.06 70.6 7.1 42.8 4.3 1.3
Not Specified Delta 2 90% 11% 131 118 1.06 125.0 13.7 75.7 8.3 2.4
Not Specified Delta 3 90% 11% 107 96 1.06 102.1 11.2 61.9 6.8 2.0
Not Specified Reef 1 90% 9% 161 145 1.06 153.6 13.8 93.1 8.4 2.5
Not Specified Reef 2 90% 9% 225 203 1.06 214.7 19.3 130.1 11.7 3.4
Not Specified Lead A 90% 8% 402 362 1.06 383.5 30.7 232.4 18.6 5.5
Not Specified Lead B 90% 8% 312 281 1.06 297.6 23.8 180.4 14.4 4.2Total not specified 5,696 4,174 4,424.0 492.5 2,681.2 298.5 87.7Total overall 9,109 5,650 5,988.7 818.5 3,629.5 496.1 145.7
Source: Seymour Pierce Ltd
We value Chariot on a risked net asset value
basis, assessing its near term exploration targets
specifically.
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Valuation and recommendation Chariot Oil & Gas | 10 February 12
When valuing Chariots exploration portfolio, we have utilised the resource estimates
provided in the companys Competent Persons Report undertaken by NSAI, as well as
subsequent management guidance for specific lead assets. Due to the early nature of
Chariots operations, we have taken a prudent approach to their resource volume
estimates, and valued the portfolio at the low categorisation as specified in their
resource audit.
In spite of what we feel are overly favourable recommendations from the majority of
analysts covering Chariot, we will only provide a value for the companys near term
exploration assets. We feel it is worth highlighting that Chariot is a relative newcomer
to the market and is yet to undertake any drilling. On this basis, to attribute value to
all of its assets (some of which cannot possibly be drilled for many years) is somewhat
generous especially given that Namibia remains an unproven province.
SOTP valuation matrix
million p/share
Tapir S 72.4 21.3
Nimrod 97.3 28.6
Net cash 84.6 24.9Core value 254.3 74.7Source: Seymour Pierce Ltd
Our pre-drill valuation of 75p consists of near term exploration targets (Tapir South
and Nimrod) and the companys net cash position at 1H2011. If the company
progresses to Delta 1 in 2013, we will include this in our overall valuation.
SOTP waterfall chart
21
29
25
0
10
20
30
40
50
60
70
80
Tapir South Nimrod Net Cash
p/share
Source: Seymour Pierce Ltd
Recommendation and target price
Our SOTP valuation illustrates that Chariot is, in our view, overvalued at present as the
market seems to be attributing value to its assets prior to successful drilling. The
company has benefited from a series of significant resource upgrades since listing on
AIM. However we continue to await the implementation of its long term development
plan to exploit those assets.
Chariot has also experienced delays in drilling its Tapir South prospect (scheduled for
Q4 2011) due to issues obtaining the necessary rig, and recent news flow suggests the
market will need to wait until Q2 2012 until the company can spud its first well. On this
basis, we initiate coverage with a Sell recommendation and set a pre-drill target price
of 75p representing c.41% downside risk.
In spite of what we feel are overly favourable
recommendations from the majority of analysts
covering Chariot, we will only provide a value for
the companys near term exploration assets.
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Chariot Oil & Gas | 10 February 12 Strategy overview
Strategy overview
Current issues
Chariot has communicated a clear exploration plan which covers the next two years
and sets out the companys initial targets. However, the plan has had to deviate
somewhat from the original strategy due to issues with suitable rig availability, which
has to some extent highlighted Chariots relative inexperience in operating in the
region.
Originally, the rig was anticipated to be available for a 4Q2011 spud at the Tapir South
prospect, but was contracted by another operator for a longer programme.
Subsequently, the market for deepwater rigs offshore West Africa has tightened
markedly, making it more challenging to secure an appropriate rig particularly to carry
out a one-well programme in Namibia without paying a significant premium.
Nevertheless, Chariot is currently in active negotiations regarding a number of other
available rigs and now expects to spud the Tapir South exploration well in 4Q2012,
although we are yet to receive official confirmation of this. In our view, failure to
secure a rig for this expected date will again detrimentally affect market sentiment
towards the company.
Forward drilling
Chariot's Tapir South prospect is drill ready, with all long lead items now delivered and
all service contracts signed, the support base secured and the drill permit granted. If
this well goes ahead as planned in 2Q, the company plans to move on to Nimrod in
the Southern Block targeting over 1bnboe net (mid case).
In our view, 2012 will be a pivotal year for Chariot with an exploration well in each of
their Northern and Southern blocks expected. In addition, the impending results of the
3D seismic survey currently underway on the companys Central blocks (recentlyfarmed out to BP) will go some way in identifying further structures and increasing the
companys understanding of the geology at the block.
Chariot aims for a strategy of drilling four to five wells through to end 2013, however
we feel this will largely depend on the outcome at Tapir South and Nimrod.
Chariot's two year exploration plan
Drill Zamba prospect
Process data for Delta-1
Spud first well at Delta-1
Process data for Nimrod
Process data for Tapir
South
Spud first well at
Nimrod
Spud first well at Tapir
South
Take possession of
required rig
Interpret 3D seismic on
Central Blocks
Progress farm-out
discussions for Northern
Blocks
Process data for Zamba
2012 2013 2014
Source: Company
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Strategy overview Chariot Oil & Gas | 10 February 12
As illustrated above, the companys 2013 strategy will highly depend on successful
drilling at Tapir South and Nimrod. This plays an important role in how we formulate
our valuation.
In our view, if both of Chariots near-term prospects are dry holes, and the company
decides to stay in the acreage (if it is still deemed prospective), commitments to drilldo not arise until October 2014 in licenses 1811A and B in the North, and August 2015
in license 2714 in the South. This situation may see the shares languishing until drilling
restarts, and in the absence of a successful farm out, may also put the company in
jeopardy regarding access to financing for a second or third well.
To illustrate this, the company currently has c.$140m, and expects to spend c.$72m on
drilling its first exploration well at Tapir South and c.$55m at Nimrod. If drilling proves
unsuccessful, which the companys reserve auditor deems likely (25% and 24% chance
of success respectively), the company will only have $13m remaining insufficient to
drill a third well. The companys assets will still be classed as prospective resources,
and not adequate to use as collateral for debt finance; so the only options remaining in
our view will be to raise funds through equity or enter into a farm out process. Both of
which reduce the companys value, which would be unattractive for existing and new
investors.
Chariots position on any final farm out deal will have to ensure that the timing behind
any drilling campaign is in the companys interest, with an element of at least one well
carry (i.e. one well carried by the partner for every two wells drilled by Chariot)
incorporated in order to keep drilling costs down. The company has been clear that
this is an approach they intend to adopt, however they will potentially need to
sacrifice a large working interest to secure this if initial drilling proves unsuccessful.
Resources
Chariot has positioned itself to exploit the potential of their blocks, which are situated
in three geologically distinct settings:
Chariot's positioning offshore Namibia
Source: Company
The Namibe Basin forms part of the West African salt basin, bounded to the south
by the Walvis ridge. Prior to the Atlantic Ocean opening, the basin lays adjacent to the
Santos Basin of Brazil, in which recent substantial oil discoveries have been made. The
Luderitz and Walvis Basins are virtually unexplored with only four wells drilled to date,
in an area similar in size to the UK North Sea.
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Chariot Oil & Gas | 10 February 12 Strategy overview
Chariots acreage
Volumetric pot Northern Block Central Block Southern Block
Resources in place (bnbbls) 2.8 4.3 9
Location Namibe Basin Walvis Basin Orange Basin
Depth (m) 700 2300 500 3000 100 1500Work performed to date 1500km 3D seismic (2008/9)
Processing complete July 2010
Processing and Interpretation
completed March 2010. 3000km2 2D
seismic (2008).
3000km 3D acquired in 2008/9.
Petrobras farmed into Block 2714A for
a 50% interest and BP for 25%.
Targets 4 prospects and 2 leads identified to
date
3 leads identified to date 11 prospects identified to date
Source: Company
Recent upgrades
Chariot has also benefited from a series of resource upgrades since listing, which has
generated interest from the market; as well as larger E&P players with a view to farm
in to the companys acreage.
Resource upgrade waterfall chart
0.2
4.0
1.8
2.8
1.4
3.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jan 08 Oct 08 Mar 10 Sep 10 Jan 11 Feb 11
bnboe
Source: Company
In 2011, the company announced an increase of 4bnboe in its estimate of gross
unrisked mean prospective resources in its Southern licence 2714A after it identified a
mega-structure at Nimrod. In addition, continued technical work undertaken on 3D
seismic data acquired across all blocks led to an improvement in the chance of
success.
Nevertheless, we feel that Chariot must now focus its efforts