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Editors Remarks

Drillers and Dealers ::: ::: February 2012 Edition

2012, Latin America, Members' Socials and the New D&D

Time fliesseems as good a clichas any to begin the first issue ofDrillers of Dealers in 2012 it was

either that or the perennial Whatwill 2012 hold?. I will leave the answer to that toour contributors this month (who most certainly donot speak in clichs) and instead include a sketch ofour first activity in 2012.

A few weeks ago, we were in Bogot, Colombia tohost our first ever Assembly there on the businessof oil and gas in Latin America. We were excited todo so, there being no shortage of intriguing playsemerging on the continent, each with its own set ofrisks, rewards and business models. Here are sometakeaways from the Assembly.

Colombia:There is something altogether Canadianabout Colombia in terms of the makeup of thecompanies and nature of the market there over ahundred independent companies drill to find smallto medium resource pools in prolific basins. For allthe small companies, business is good, but withonly six years of proven resources in place in thewhole country and with the Government turningaway from the smaller independents in favour ofcourting the supermajors how much long-termvalue can be counted on?

Per: Per is widely thought to possess superiorgeology to Colombia, but also a more exhaustingpermitting process and more challenging social and

operational challenges. Company bosses canspend years reassuring their investors about theprospectivity of their giant blocs while they obtainthe necessary permits to begin to drill in Per.When the head of Perpetro, Dr Ochoa, announcedthat a task force had been set up by theGovernment and promised to slash the waiting time,the audience broke into a spontaneous applause.

Argentina:Although no one doubts the theoreticalpotential of Argentinas shale play, which hasattracted the big boys in 2011 ExxonMobil forexample and which has been estimated assecond only to the United States in terms of shale

gas potential, there is the perennial question thatrefuses to go away: will the Government find a wayof (how to put it) destroying value for its investors?Companies have rushed into Argentina, but onewonders how big the gold rush might be if theGovernment didnt have a track record of burningthe fingers of its foreign direct investors.Nevertheless, the panel of CEOs discussing theissue predicted an improving fiscal regime and acontinuation of M&A activity from NOCs andSupermajors.

Equatorial Margin: Tullows Zaedyus discovery,whose partners CGX Energy spoke at theAssembly, was not just one of the biggest E&P

stories of 2011 in Latin America, but in the world.

Industry observers are familiar with the unzippingof Africa and South America and the analoguesbetween the massive pre-salt basins in Brazil and

West Africa. But while the hydrocarbons are mostcertainly in place, opportunities for new entrantsoffshore Guyana are not currently present and it isexpensive to get involved in Brazils pre-saltdevelopment these days. Companies like GranTierra and Panoro (whos VP and CEO addressedthe Assembly) have managed to get a foot in thedoor in Brazil and CGX Energy are a pure-playcompany offshore Guyana, surrounded by somevery big neighbours. There was general agreementfrom the panel on New Frontiers that its only amatter of time before a company-making Jubilee-like field is discovered in the offshore SouthAmerican Equitorial margin. When that happens, itllbe one of the most exciting news stories of the year.

Cocktail Receptions: Canadian law firm and OilCouncil Partners McCarthy Ttrault and PacificRubiales on consecutive nights of the Assemblyhosted cocktail receptions where much of the realbusiness of networking takes place. Around theswimming pool of the outdoor bar at the Hilton,Bogot, fund managers, private equity investors,and American and European E&P firms scouted outlocal O&G companies to forge new businesscontacts. These drinks receptions are always agreat success. Weve added a few more into ourcalendar of events, which means that there is acocktail reception coming soon to a city near you in

2012! Starting in Houston in February during NAPEweek (fully booked), we will be hosting some high-quality networking receptions we call MembersSocials in April in London, New York in May, andCalgary in June. For more info on this and all ourother activities, including a new African-focusedAssembly in June in Paris.

Finally a notice about Drillers and Dealers;Youll have gathered that this is by far the biggestDrillers and Dealers weve ever produced. In 2012we will publish Drillers and Dealers bi-monthly buttriple the content in each issue. And, starting fromnext month, we will have a brand new look to the

magazine and a new website to boot as wecontinue to transform D&D from little more than apdf of assorted market commentary one year ago,to a fully-fledged industry-insider magazine for theglobal O&G industry with a growing circulation thatnow stands over 55,000 people.

I welcome feedback and comments on either theform or the content of the magazine as well assuggestions for features and articles. It is, after all,forthe industry, bythe industry. We hope you enjoythe current issue, and we look forward to seeingyou this year in Houston, London, NYC, Calgary,Paris, Bogot, or any combination of the above.

By Drake Lawhead, Editor

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Welcome to Drillers and Dealers February 2012


Contents

2012 Global Oil & Gas Survey Results

Dragon Rising While West Waivers

By Hugh Ebbutt, Senior Consultant CRA Marakon

SPECIAL FOCUS: INDEPENDENT OIL & GAS

The Case for E&Ps Combining HistoricalOutperformance and Attractive Valuations

By Tracy Mackenzie (Director, Research) and Jack

Allardyce (Analyst, Research), N+1 Brewin

EXECUTIVE Q&A: AARON DESTE, AZIMUTH

Stock Market View Lessons for 2012By Simon Hawkins, MD, Omni Investment Research

EXECUTIVE Q&A: TIM HEELEY, NIGHTHAWK ENERGY

2012 Independent Oil & Gas Outlook

By Ian McLelland, Head, O&G, Edison Investment Research

EXECUTIVE Q&A: ALEC ROBINSON, LION PETROLEUM

Trends, Analysis and Outlook of AIM E&P & Oil Prices

By Andrew Matharu, Head, Oil & Gas, Westhouse Securities

Meet The Members (Part One)

EXECUTIVE Q&A: ANDREW BENITZ, LONGREACH OIL& GAS

ON THE SPOT: What issues are your Independent

O&G Clients most concerned with in 2012; how can

they overcome the challenges these issues present?

By Partners and Members from across the world

6

10

13

19

22

26

29

30

33

38

41

43

U.S. Natural Gas: A Buyers Market For How MuchLonger?

By Terry Newendorp, Chairman and CEO, Taylor-DeJongh

Alberta: The Rising Global Energy Provider

By Jeffrey Sundquist, Government of Alberta (UK Office)

53

54

Oil Spikes, Iran and Sanctions

By Nigel Kushner, CEO, Whale Rock Legal

Overcoming Impediments to Shale Gas Development

By James Green, Partner, K&L Gates LLP

56

58

Meet The Members (Part Two) 59

Copyright, Commentary and IP Disclaimer: *** Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respectivecontributing authors. Permission can be sought by contacting the authors directly or bycontacting Iain Pitt at the above contact details. All comments within this magazine are the

views of the authors themselves unless otherwise attributed to their company /organisation. They are not associated with, or reflective of, any official capacity, or any otherperson in their company / organisation unless so attributed ***

Drillers & Dealers

Official Publication of The Oil Council(As of 1st March)Fulham Green, Bedford House,69-79 Fulham High St,

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2012 Global Oil & Gas Survey Results


2012 Global Oil & Gas Survey Summary

1836 responses to our 2012 Survey

Over 100 O&G companies participated

Uncertainty and bearishness over World Economy and Eurozone

World Economy is the major influence over industry in 2012

Very positive outlook for Majors and Oilfield Services Companies

Positive outlook for increased M&A and A&D activity

More bearish outlook for availability of debt finance

Availability of capital, volatility of world economy and human talent

crunch named as three biggest challenges facing companies in 2012

East Africa, Kurdistan, West Africa, Argentina and Offshore Australia

named as the most exciting oil and gas provinces for 2012

Bearishness and uncertainty on the future of The Falklands

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OILCOUNCIL 2012 Survey Oil Council

www.oilcouncil.com [email protected]

2012GlobalOil&GasSurveyResults

Progressive weakening / deterioration

Slow, steady growth

Stagnant performance with little movement up or down

Volatility and uncertainty

Other (please specify)

Whatdoyouexpecttoseehappentotheoilmarketsin2012?

Progressive weakening / deterioration

Slow, steady growth

Stagnant performance with little movement up or down

Volatility and uncertainty

Other

Whatdoyouexpecttoseehappentothegasmarketsin2012?

Bullish Bearish Uncertain

The World Economy 16.9% 42.3% 40.8%

The Eurozone 3.4% 77.6% 19.0%

Chinese NOCs 61.0% 11.1% 27.9%

Major Oil & Gas Cos. 71.3% 12.3% 16.4%

Natural Gas Focussed US Independents 38.3% 37.7% 23.9%

North Sea Focussed Independents 45.7% 22.0% 32.3%

North African Focussed Independents 47.5% 22.2% 30.2%

East African Focussed Independents 65.4% 13.0% 21.6%

Oileld Services Companies 73.2% 10.8% 16.0%

European Shale Gale 23.2% 41.6% 35.2%

Argentinian Shale Gale 30.4% 22.0% 47.5%

Arctic Circle becoming a major O&G province 16.5% 42.9% 40.7%

Falklands becoming a major O&G province 11.3% 46.0% 42.6%

Libya recoverying to be a major O&G province 51.2% 20.2% 28.5%

Kurdistan becoming a major O&G province 46.9% 19.8% 33.3%

In2012areyoubullish,bearishoruncertainabout:

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Ability to acquire / nd attractive prospects / assets

Ability to access to new capital and investment

Ability to attract, retain and incentivise their human capital (workforce)

Good risk management: geopolitical, regulatory, environmental, nancial, legislative

Strong leadership and management team

Exploration / Drill-bit success

Ability to utilise new technologies and innovative operational practices

Increasing the efciency and development of existing producing assets

Ability to manage weak gas prices and volatile energy demand

Cost control (internal, service costs, exploration)

Successfully managing their corporate image and industry / investor reputation

Sound corporate governance and boardroom practices

WhichthreeofthefollowingqualitieswillbemostimportantindeterminingthesuccessofanOil&Gascompanyin2012?

Ability to attract, retain and incentivise their human capital (workforce)

Ability to win business in new markets

Ability to cope with increasing demand for their services

Strategic technology alliances with NOCs & IOCs

Strong leadership and management team

Good risk management: geopolitical, regulatory, environmental, nancial, legislative

Ability to access to new capital and investment

Successfully managing their client relationships and delivering excellent service

Value creation through acquisition of new products and services

Sound corporate governance and boardroom practices

Other

Successfully managing their corporate image and industry / investor reputation

WhichthreeofthefollowingqualitieswillbemostimportantindeterminingthesuccessofanOileldServices/Engineeringcompanyin2012?

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Whattypeofcompany/organisationdoyourepresent?

More Less TheSame Unsure

Asset-level (A&D) deals 57.0% 9.3% 26.3% 7.4%

Corporate-level (M&A) deals 59.9% 11.1% 24.4% 4.6%

World-class exploration successes 19.8% 31.2% 37.7% 11.4%

Consolidation amongst US independents 42.6% 8.0% 29.0% 20.4%

Consolidation amongst non-US independents 47.2% 6.2% 30.1% 16.5%

Disposing by majors and large-caps of non-core assets 57.7% 11.4% 25.6% 5.2%

PE capital deployment 24.5% 21.0% 30.4% 24.1%

NOCs and SWFs acquiring foreign assets 59.6% 6.8% 27.3% 6.2%

Reserve Based Lending / Finance 17.8% 34.0% 31.5% 16.8%

Debt defaults 36.5% 18.6% 23.8% 21.1%

IPOs 23.8% 33.2% 27.9% 15.0%

Secondary capital raisings 35.2% 20.6% 27.1% 17.1%

Dual-listings 21.6% 15.0% 26.6% 36.9%

De-listings 23.8% 11.9% 27.5% 36.9%

Incomparisonto2011willtheindustryin2012seemore,less,orthesamevolume,of:

The World Economy

The Eurozone

Governments, Policymakers and Regulators

Investors

Banks and Financiers

Major Oil & Gas Companies

National Oil & Gas Companies

Independent Oil & Gas Companies

Oileld Services, Engineering and Technology Companies

Chinese, Indian and Korean NOCs and SWFs

WhowillbemostinuentialindeterminingthelandscapeoftheOil&Gasindustryin2012?

Energy Consultancy / Management Consultancy

Equipment, IT / Technology Provider

Financial Service Provider (Banker / Advisor / Broker / Insurance /

Accountant)

Government or Academia

Law Firm

Oileld Services or Engineering Company

Oil & Gas Company

Other

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Guest Article


Dragon Rising While West WaiversWritten by Hugh Ebbutt, Senior Consultant, CRA Marakon

Welcome to the Year of the Dragon! As its name suggests, the twelve months from Chinese New Year (on 23 rdJanuary) are likely to be volatile and unpredictable, with plenty of challenges and risks, and probably somedramatic flare-ups. Already some key energy trends are emerging. As 2012 progresses, imbalances andemerging stresses, events and new ideas will make many things turn out quite otherwise than most now expect.

Uncertain Demand and Risky Supplies

The developed worlds enormous debts sovereign, bank and private threaten a second recession. Withconfidence low and enforced austerity the prescription of choice, credit, investment and consumer spending, andso economic activity all remain stalled. Jobs are being cut. Structural disparities and national political pressuresare constraining decisive action, particularly in the Eurozone. The US now looks better, but political initiatives willbe all but paralysed for the rest of 2012, by polarised politics and a drawn out election. Despite rising stockmarkets, the situation seems likely to get worse before better . . .

So energy demand is likely to stay flat or even fall, especially as energy efficiency improves with high fuel prices.Falls in the OECD will offset growth, at slightly lower rates, in developing regions. Refining margins once againlook thin depending critically on location. Renewed or new oil supply, coming from Libya (initially faster thanexpected), Iraq, Brazil, Canadian oil sands, plus NGLs and increasingly oil from North American shales, and soonGoM, is likely to depress oil prices, and WTI rather more than Brent. This differential - already almost $18 - mayrise more as new US and Canadian oil production grows (and can get to key markets). North American energyself-sufficiency may after all be on the cards perhaps in 8-10 years, if helped by more efficient use.

But, rather sooner, oil may spike if Iran and the West fall out further (as the former has set its sights on goingnuclear). This would impact supplies to southern Europe and potentially threaten the 15 mmb a day and keyEurope and Asia-bound LNG cargoes from Qatar passing through the Straits of Hormuz. Other geopoliticalevents from the now partly sprung Arab world to Pakistan, Korea and perhaps Russia, China or Venezuela, andothers, are likely to keep risk and volatility high. The Arab spring is turning stormy.

Power Shifting East

While much of the West is preoccupied with its own difficulties, Asian and other developing economies - and theirpopulations - continue to grow, even if a little more slowly. Enormous flows of money continue to move fromconsumers to producers. With these, goes economic power. After 20 years of booming exports, China is now theworlds second largest economy and still growing at an astonishing rate over 8% a year. Chinese and othersavers, funding others debts, may soon find better uses for their hard earned cash improving life at home.Chinese companies are likely to continue their resource mop-up, using their low cost capital to buy from thoseshort of funds and credit. Other investors, such as Abu Dhabi or a newly assertive Qatar, enriched by the flood ofpetrodollars, may too look to buy more high profile western assets, gold or more useful scarce raw materials.

Gas Galore

With gas everywhere, prices in North America are likely to stay low. Under the enormous momentum of US gas

shale drilling and production, they hit $2.3/mcf in January more than seven times cheaper than oil on an energybasis, and probably well below cash costs for many dry gas producers. US gas storage utilization is 20% higherthan normal and demand is down, with several months of warmer weather in both the US and Europe (2011 wasthe second warmest year on record after 2006). Despite recent signals of cut-backs, over 700 rigs remainactive with many E&Ps still committed to drilling natural gas; while 1200 rigs are now committed to oil plays. Richgas and liquids wells can generate cash, but their associated gas adds to the surplus. This gas glut offers lowcost feedstock for US industries. Perhaps we need more power from gas and real incentives for CNG vehiclesand gas stations.

In contrast, gas demand in Asia and other growing economies, is still growing strongly. Tight LNG supply in thenear term - impacting particularly Japan (as it moves away from nuclear) means high prices look set to stay fornow in the Far East (currently near the equivalent of $90/boe).

But more gas in three or four years from the current wave of Australian LNG projects underway is likely to change

this. US LNG exports and shale potential in places like China and Argentina, when realised, could have animpact on some of those big LNG projects. Chinas ability to throw human and financial resources at industrialchallenges has been extraordinary and should not be underestimated.

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Guest Article


In Europe, pipeline investment uncertainties may lead to renewed security of supply concerns. The UK looksrather dependent on spot LNG from Qatar, some of which could get diverted, given the wide regional gas pricedivergence. Germany seems headed firmly in the direction of the Russian bears embrace. But Gazprom has apropensity to cut exports in cold snaps to meet higher domestic demand. Gas shale production in Europe offersnew supply, but may progress slower than some expect and, for now, material volumes look some way off.

Green concerns are now clearly playing second fiddle to near term economic worries. Many renewables are

wobbling - as capital outlay and subsidies get too expensive and carbon targets are allowed to slide. Relativelycheap gas is also hurting investment in both wind and solar. But perhaps lower subsidies will stimulate a realfall in costs and the strongest technologies will before long rise from the ashes. Improved, safer nuclear reactors(perhaps not sited quite so near major tectonic fault lines) may also slowly come back into favour. Overall moreeffective, less wasteful use of energy makes both economic and environmental good sense.

Struggle to Grow Value

Oil production growth by some of the IOC group looks to remain rather sluggish, despite raised capital spending.Large legacy positions in declining mature production do not help. What growth there is - is in gas, often addingless value. More costs and delays of increasingly more difficult projects (such as the Arctic) require more fundingand usually have lower margins. Exploration spending is also rising for most, but the largest finds remainconcentrated in 5 or 6 key countries, mostly controlled by their NOCs. This suggests more dependence onupstream growth by M&A, just as the Chinese are already doing rather effectively, but at high cost.

Those that do well will be those ready for the unexpected, able to recognise and respond fast and decisively toearly signals and still able to deliver their major projects as planned. Well positioned, proactive and increasinglycapable E&P independents look likely to do best. Some energy players need to develop and communicate morecompelling strategies to attract the investment they need.

Making Choices

Well see elections, selections and referendums - of various sorts - in Russia, France, Egypt, Palestine, Pakistan,Kenya, Mexico, Venezuela, China and the US. These, with likely changes of leadership elsewhere, make forpolicy uncertainty. In the UK, apparently more English think Scotland should be independent than Scots dothemselves. When and if that happens, Scottish legislators may be tempted to tax the still significant remaining oila wee bit more at least until they, like their counterparts to the south, see how sensitive investment can be touncertain returns. More broadly, as China, India and other growing economies stretch the worlds resources, we

in the West need to decide how best to develop our own strengths to prosper as the world evolves and grows.

We are in for a year full of energy, passion and surprises. Therell be lots of sport to watch in the UK and,perhaps a stronger incentive to get fitter and leaner: the costs of Greek holidays and retsina are likely to bedistinctly lower by summer! As you progress your own plans in 2012, have an enjoyable, productive andrewarding year ahead.

Hugh is a London-based Senior Consultant with CRA Marakon, a distinctive corporatestrategy firm with a strong track record of helping leadership teams add real value.Before becoming a VP with CRA International, he worked as a Partner in Arthur D.Littles Global Energy Practice, based originally in London and then in Houston, wherehe led and grew ADLs upstream business for six years. Hugh has over 30 years ofglobal experience in the energy business. His main areas of expertise are upstream

strategy, competitive analysis and portfolio growth options in oil and gas.

Originally an explorer with BP in the UK, Egypt and San Francisco, his experienceincludes five years with Chevron, working in business planning, exploration anddevelopment, and with Hess, as it rapidly grew its upstream position in the North Sea.Hugh holds an M.B.A. from LBS and has published a number of articles on the outlookfor energy companies, resources, and supply and demand drivers.

CRA Marakon is a high-end strategy and organisation management consulting boutique.Marakon, now part of CRA, brings uniquely tailored and integrated advice to its clients, backed byrigorous analysis, holistic thinking and strong industry experience. Our practice has evolved over30 years and maintains a high degree of integrity, objectivity and focus.

Marakon has been described by Fortune magazine as the best kept secret in consulting. Wework with senior management teams of highly ambitious multinationals and mid-sized companiesto help them deliver superior results and accelerated value growth. Many of our long-standing

http://www.crai.com/clients rank amongst the world's most respected companies. Please visit us:
http://www.crai.com/http://www.crai.com/http://www.crai.com/http://www.crai.com/

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Special Focus on Independent Oil & Gas


The Case for E&Ps

Combining Historical Outperformance and Attractive Valuations

Written by Tracy Mackenzie (Director, Research) and Jack Allardyce (Analyst, Research), N+1 Brewin

As uncertainty continues to grip the financial markets and macroeconomic environment, shareholder registersand ratings have exhibited a flight to safety, with moves away from frontier explorers and inadequately financedcompanies (unsurprising given ongoing tightness in the debt markets). This has seen our selected listed E&Psunderperform the wider market across the last 12 months (-15% vs -2% for the FTSE All Share (ex. IT)), despiteongoing strength in the oil price. Does this then represent a buying opportunity, given historical sectoroutperformance (particularly in the wake of an economic recovery) and current ratings? We believe this to be thecase, but first let us expand our view and look to the past for lessons.

Historical Outperformance

Across a reasonable time horizon, listed E&Ps have typically outperformed the wider market. The absoluteperformance of our basket of selected companies (which includes our coverage constituents along with four

larger mid-caps)1

is represented by the red line below. The constituents largely comprise established FTSE 250E&Ps that have cash generative portfolios and a few more romantic constituents, which have more emphasis onexploration and appraisal (Borders, Bowleven and Nautical). The combination of more established producers (stillwith growth acreage) and the spice of the frontier explorers offers the potential for significant outperformance.

The chart below quite clearly demonstrates how the FTSE O&G Index (which is dominated by Shell, BP & BG)tracks the broader FTSE All-share. In stark contrast our basket of E&Ps has diverged significantly. Over a 12month period, on a relative basis, our E&P basket has underperformed the FTSE All-share by 13%. However,over a five year period the basket has outperformed by 124%, rising to 983% over ten years.

Comparative 10 Year Absolute Performance

Source: Thomson Reuters

We believe this evidences that identifying a sensible range of small and mid-cap. E&Ps and retaining holdings insuccessful players in the space can lead to very significant outperformance. However, we would caveat that ourselected constituents largely comprise the winners and exclude some of the less successful constituents, as wellthose no longer listed due to take-overs or ultimate failure.

1Afren, Borders & Southern, Bowleven, Cairn Energy*, EnQuest*, Heritage, JKX Oil & Gas, Melrose Resources, Nautical Petroleum, PremierOil*, Salamander Energy, Soco International, Tullow Oil* and Valiant Petroleum. * = consensus NAV estimates.

0

200

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1000

1200

1400

1600

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Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

E&P Basket Brent FTSE All Share (ex. IT) FTSE O&G Producers

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The More Recent Past: Changing Fortunes

The aftermath of 2008s financial crisis proved somewhat of a renaissance for E&Ps, as the oil price graduallymade up the ground it had so dramatically lost, and an appetite for frontier exploration gripped the market anddrove ratings skyward. Indeed, with the long line of successes which included Rockhoppers Seal Lion discovery,the Catcher discovery re-invigorating interest in the North Sea and each new appraisal well in Kurdistan, pricesand excitement surged past the expectations of analysts and fundamentals. Retail investors flooded bulletinboards with news of mobilisations, and scolded derampers.

Whilst company specifics ought to tell the story of individual performance, the chart below does evidence thebroad outperformance of the more exploration focused constituents in the aftermath of the crisis with the sectorin vogue and risk appetites abound.

Absolute Performance: 01/01/09-31/12/10

Source: Thomson Reuters

The subsequent slowing of growth and Eurozone debt crises have been unkind to the sector. The grim reality ofprogressing discoveries to developments or even staying afloat against a backdrop of difficult equity markets andcautious debt providers has largely pulled back valuations.

Unsystematic issues have compounded poor performance, with the deepwater Macondo disaster almostseeming to set off a conveyor belt of negative news flow. Drilling successes in the Falklands turned to failures,Cairn kept missing in Greenland, EnCore Oils fortunes flipped after a single well and negotiations between theKRG and Baghdad seemed to go into reverse. In Heritages case, oil even turned into gas.

Not all news was bad, with Anadarko, Eni and partners enjoying huge successes off East Africa. However, this

merely broadened the divide between top and bottom, as those with recent failures at the drill-bit/poorer balancesheets (typically smaller players) were increasingly punished by investors. This has led to increased M&A activity,as larger players have used stronger equity to take over their smaller brethren. This is only likely to increase inthe shorter term if a lack of liquidity in the markets and sovereign debt concerns continue to compress valuations.

The absolute performance of our constituents from 2011 onwards (see chart below) betrays the disappointmentsand the markets aversion to risk, underperforming Brent and (largely) a broadly flat market. The exceptions havebeen Tullow, where the market affords significant goodwill given its exploration track record, and Borders, withfirst results imminent from its potentially transformational two well drilling programme.

Oil Prices Still Out Of Kilter With Everything Else

Both Brent and WTI have proven remarkably robust, with WTI currently trading around $97 and Brent at $116,despite economic concerns potentially placing downward pressure on demand. Brent in particular remains

stubbornly high, possibly reflecting a European shortage of light sweet crude, which yields more middle

0% 200% 400% 600% 800% 1000% 1200% 1400% 1600%

Nautical (A)

Bow leven (A)

Afren

Borders (A)

Heritage

Brent

Premier

Salamander

Cairn

Valiant (A)

Tullow

JKX (B)

FTSE All Share (ex. IT)

Soco

Melrose (B)

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However, there are new supply concerns from tensions in Iran and the possible blockade of the Strait of Hormuz.The US also (uncommonly) avoided hurricane outages last year, meaning a reversal of fortunes and thecombination of continued supply disruption from Libya, the aforementioned Iranian unrest and any prolongednon-OPEC supply disruptions could result in upward price pressure in the shorter term.

Whilst we have recently revised our 2012 Brent price assumption up from $90/bbl to $100/bbl we have retained a2013+ average of $90/bbl. Our rationale is that market ratings/valuations are not discounting the forward curve.

In our view M&A activity within the industry has not supported net asset valuations on a $/bbl basis generatedfrom $100+/bbl. Uncertainty remains over the ability of companies to finance and monetise reserves, whilelending banks are issuing debt on more conservative price decks.

Wide Range Of Valuations, But Broadly At Lower Levels

Our valuations are based on a net asset valuation (NAV) methodology. This incorporates a companys fullportfolio, from producing assets and balance sheet items (Core NAV or CNAV), to appraisal/development (TotalNAV or TNAV) through to exploration prospects (Risked NAV or RNAV). Our subsequent price targets are set ona price-to-risked NAV (P/RNAV) basis, which attempts to provide a realistic 12-month view based on abenchmark of current market ratings within the peer group.

Historically, trading ranges for more established E&Ps (outwith market shocks) have tended towards 0.71.1x ona P/RNAV basis. Despite ongoing strength in the oil price ratings largely remain close to historical trading lows,

with share prices currently factoring in a more conservative range of 0.21.0x. The more liquid/larger constituentsare now trading at an average FY12 P/RNAV of 0.7x, with Tullow, Cairn, EnQuest and Premier on the highestratings at 0.81.0x (evidencing the attraction of a strong balance sheet).

With a view to the historical outperformance of our constituent E&Ps, the current ratings would appear torepresent an attractive value opportunity across the sector.

In our view, those most likely to outperform in the short to medium term will have some or all of the followingcharacteristics: be trading at a discount to or only a modest premium to the more conservative metric of TNAV(CNAV + Appraisal/Development) versus RNAV (on a sensible price deck), have a pipeline of catalysts(appraisal, development or exploration), have or be able to secure financing (longer dated maturities on debt ornet cash positions), and/or own strategic assets which make them a potential bid target. We also expect thebetter capitalised mid-cap players to continue to acquire assets or corporates at attractive prices.

The chart below benchmarks the current share prices against the breakdown of our NAV estimates by category(i.e. core/producing, + development, + exploration).

Current Price against NAV category

Source: N+1 Brewin

In conclusion, with history providing a strong motivation for owning a balanced E&P portfolio andcurrent ratings at the less aggressive end of the historical range, we see value in the sector for those

with a reasonable time horizon, who are able to hold their nerve. Its never a one way trajectory in theE&P world!

BOR

BLVN

JKX

MRS

VPP

SMDR

NPE

HOIL

SIA

PMO

AFR

TLW

ENQ

CNE

Exploration

Development

Core

Current Price

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About the Authors:

Tracy MackenzieDirector, Equity ResearchT: +44 (0) 131 529 0376M: +44 (0) 7748 593 920E:[email protected]

Following a degree in Economics Tracy went on to do a Masters in Financial Economics, where she specialisedin Financial Modelling and Research Methods in Economics and Finance. Tracy joined Bell Lawrie in March 2001where she specialised in the small cap Oil & Gas Sector. She subsequently worked as an Oil & Gas researchanalyst at Arbuthnot Securities before joining Brewin Dolphin in January 2009. Tracy has been a consistentlyrated oil and gas analyst by the Extel survey.

Jack AllardyceAnalyst, Equity ResearchT.: +44 (0) 131 529 0267M: +44 (0) 7500 794 509E:[email protected]

Jack joined Brewin Dolphin in 2009 as an analyst focused on the Oil & Gas Sector. Following a degree inChemical Engineering at Heriot-Watt University, he gained engineering experience in the upstream sector withtwo consultancies before moving to energy research house Wood Mackenzie. There he specialised in UK andpan-European assets and fiscal systems, cash flow modelling, upstream costs and unconventionals.

About N+1 Brewin

N+1 Brewin is a leading corporate and institutional stockbroking and advisory business focusing on listed UKsmall and mid-cap companies. We are part of the N+1 Group, an established pan European investment bankingand asset management group focusing on mid-market clients.

On 01/02/12 the whole of Brewin Dolphin Corporate Advisory and Broking became Nplus1 Brewin.

We have a strong track record built over a period of over 20 years, underpinned by our focus on developing longterm relationships with clients, a reputation for integrity, and offering independent advice. These core principleshelp us to sustain effective business relationships with our clients and are consistent with our aim - to be theadvisor of choice in our specialist sectors. Applying these values helps our research recommendations andcorporate propositions deliver the returns sought by City institutions, whi ch in turn enables N+1 Brewins

corporate clients to access the capital they require.

The information contained in this report represents an impartial assessment of the value or prospects of the subject matter.Performance data and the other information contained in this report has been taken from sources disclosed in the report and isbelieved to be reliable and accurate but, without further investigation, cannot be warranted as to accuracy or completeness.The opinions expressed in this document are not the views held throughout N+1 Brewin. No partner, representative oremployee of N+1 Brewin accepts liability for any direct or consequential loss arising from the use of this document or itscontents. The value of your investment or any income from it may fall and you may get back less than you invested. Pastperformance is not a guide to future performance. If you are in any doubt concerning the suitability of these investments thenyou should seek the advice of a qualified investment adviser. N+1 Brewin is the trading name of Nplus1Brewin LLP, a limitedliability partnership, registered in England and Wales with registered number OC364131. Registered office: 150 AldersgateStreet, London EC1A 4AB. Nplus1Brewin LLP is a member of the London Stock Exchange and is authorised and regulated by

the Financial Services Authority, registered number 568323.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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Executive Q&A Independent Oil & Gas Focus


Executive Q&A withAaron DEste, CEO, Azimuth

By Drake Lawhead

Azimuth is a new E&P firm founded by Aaron DEste who stopped by for an exclusive interview with Drake Lawhead.

For those of us who dont know how would you describe Azimuth in a sentence or two to the market?

Azimuth is a well-funded, rapidly-growing E&P firm with the technical capabilities of a mid-cap oil company. Weacquire prospective exploration acreage worldwide and advance our assets without delay to produce drill-readytargets underpinned by robust analysis.

Tell us a little about the genesis of Azimuth where did the idea come from to form the new E&P ventureand what was is the thesis based on?

Elements in PGS wholeheartedly believe that proper application of the industrys leading seismic technology

(such as GeoStreamerGS, Prospect Scanner, etc) can significantly improve drilling success rates worldwide.Together, we established Azimuth, and its predecessor PGS Ventures, to invest in prospective oil and gas assets(and companies) worldwide using insight gleaned from PGS multi-client seismic data library.

What is the competitive advantage Azimuth brings to the table?

I believe that Azimuths competitive advantage is threefold.

1. Our ability to leverage PGS multi-client library and the 85 subsurface experts in PGS Reservoir gives usan un-matched, uniquely competitive advantage to identify and analyze exploration acreage quickly. Acapability that we believe only the major independents can match.

2. Our majority-owner, Seacrest Capital, is an active and supportive investor that understands the industryand the Azimuth business model and shares our objectives, providing us with the ability to draw capital

rapidly. This leaves Azimuth very well positioned to take advantage of industry volatility and executeacquisitions without delay.

3. Thirdly, we have a strong team, unburdened by obsolete methodologies and ready to deploy newbusiness models and novel deal structures, essential for achieving a stellar performance.

Being a private, fully-funded company obviously brings advantages in a period of volatile capitalmarkets. What would you say the major constraints of being private are, and could your business modelchange in the future?

As long as the key shareholders in a private company continue to strongly support the business, there are veryfew downsides to remaining private. Spreading the word and attracting deal flow can be more difficult, sincefewer analysts and investment banks track your performance, but this is a manageable challenge.

Your asset base so far consists of acreage offshore Italy, Benin, Ghana and Namibia. Is Azimuth to be an

offshore specialist or do you have other areas of interest? Which parts of the globe do you see value infor a start-up E&P firm like yourself?

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Staying true to our business model, Azimuth will predominantly targetareas of the world where PGS multi-client seismic library is at its mostdense. North Sea, Mediterranean and Africa are our highest priorities,but we are also looking to expand into South America, Gulf of Mexicoand Asia Pacific over time.

Success in certain regions requires a local presence and a level of

understanding that few small companies can achieve. To help unlockvalue we have entered into strategic partnerships with Sahara Energy inAfrica and Edgo in the Mediterranean. Both are leading indigenouscompanies with exceptional capabilities and relationships. With the righttechnical insight and the right partnerships, we believe that small E&Pfirms can get traction across the globe.

Can you talk a bit more about the importance you place onpossessing quality seismic to your company and to the explorationindustry as a whole?

Acquiring high-quality 3D seismic over a discrete prospect or block isessential for illuminating and understanding the reservoir(s) beneath.Utilisation of 3D seismic has grown year-on-year and it is now viewed as

a pre-requisite to drilling by many oil companies. Access to high-qualityregional seismic is arguably even more valuable for explorers.Interpreting a regional database helps identify trends and play types, itfacilitates the latest reservoir characterization techniques, and helpsexplorers put discrete blocks into perspective. Acquiring oil acreagewithout regional seismic is like hiking in a minefield without a map.

What are the companys goals over the next 2-5 years both financial and in exploration?

Azimuth acquires exploration assets and then drives the de-risking program required to produce drillableprospects. Our goal for the next two years is to develop a robust portfolio of acreage packed with well-defined,exciting targets, ready for drilling in 2013-2014. Further funding and rapid growth to follow

Which other E&P companies do you admire and why?

I admire Cove Energy. From zero to hero in just over two years is a fantastic result. They eschewed thetraditional model and immediately took a stake in frontier exploration assets where drilling was imminent.

Eco Atlantic is another interesting company. They won Namibian assets in the middle of 2011 and havealready taken material steps towards advancing their acreage. Their dynamism and ability to overcomemarket hesitation is impressive.

San Leon Energy is another one to watch. The optionality in their portfolio is immense and their team had theinsight to commit to several of the industry trends (oil shale, shale gas, etc) that have captivated the oilmajors.

I also admire the firm Cenkos. Their ability to understand E&P companies and ability to raise funds isunparallel in the UK market. Jon Fitzpatrick runs an excellent ship.

Finally, three questions we always ask: First, when youre away from work, how do you enjoy spendingyour spare time?

I enjoy driving any available vehicle over any and all available terrain. Trying new activities from sushi makingto fencing to bootcamps, its all good.And writing novels (under a pseudonym).

Second, what do you enjoy most about working in the oil and gas industry?

The oil industry, quite li terally, underpins the worlds economy. Why work anywhere else?

Finally, I cant let you go without asking our standard question. Youre on a desert island what threeluxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportationdevice etc., not allowed)

A Trident missile, the relevant arming codes, and a map pointing to the bloke who left me there

Before Azimuth, Aaron was a Managing Director of PGS Ventures; Segment President in Schlumberger;a Senior Manager in Booz Allen Hamilton and Co-Founder of the Simmons & Company PE Fund.

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Stock Market View: Lessons for 2012

Written by Simon Hawkins, Managing Director, Omni Investment Research

2011 saw significant volatility in both commodity and stock markets resulting in a major dislocation between capital markets andfundamental drivers of the O&G industry. In this article Simon Hawkins, former Head of Energy Equity Research at MF Global,looks back at what happened in 2011 from a stock market viewpoint and draws out a number of practical lessons for 2012.

2011: Dislocated Markets

Last year AIM Oil & Gas stocks overall lost c30% of their value. At the same time Brent crude prices rose 5%.This dislocation of stock prices from industry fundamentals made 2011 an extraordinary year for equity analysts.

We started the year with a degree of post-credit crunch relief before it quickly turned into a false dawn, afterwhich sluggish markets slid increasingly fast. By summer all hell had broken loose. Trouble in Eurozone sparkedextreme volatility, step-change stock prices and a sudden realization by traders and equity sales that mostinvestors had virtually finished trading for the year by the middle of July. The drought in equity trading volumescontinues to inflict damage today on both large and small investment banks resulting in the exit of weaker

players, over-reliant on commissions as a revenue stream.

From my perspective life was pretty difficult: me and my colleagues were launching coverage on companies witha combined market capitalization of around $800 billion with industry fundamentals suddenly ceasing to drivestocks, the notion of investing for the long-term was exchanged for short-term trading, every day my Bloombergwas painted red (thats a bad thing) and ultimately my employer, MF Global, wen t up in flames spectacularly onthe back of ill-judged bets on Southern European sovereign debt.

Oil Prices

Although the key driver of the sector, crude oil prices, were volatile - especially over the summer Brent crudegenerally stayed strong within a band around $95-120/bbl. I see this as one of the most significant events of 2011(alongside Tullows Zaedyus success) since there is now lot more confidence across the industry that oil pricesare likely to stay strong for the medium term. I would suggest the way Big Oil has renewed its focus on frontierexploration and its strategic shift towards upstream is evidence that even these oil-tanker-like entities are buyinginto it.

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Stock Prices

While AIM stocks sank alongside the broader market it was interesting that companies in our sector (AIM Oil &Gas) suffered more: AIM fell around 25% by the end of 2011 and Oil and Gas stocks hit a low in Septemberhaving lost c40% of their value. Was this justified? At the time I rationalized this on the back of three factors:

1. The summer season is always characterized by thin trading as investment managers exchange tradingscreens in the Square Mile for iPads on the beaches of the Caribbean, Mediterranean or, maybe lastyear, Cornwall.

2. In declining markets investors generally shy away from risk. AIM Oil & Gas not only had exploration riskbut funding risk as the threat of a return to tight equity markets loomed. Debt markets wouldnt helpsince exploration and debt are always a tricky combination.

3. Between April and June, it seemed equity investors were starting to price in a fall in crude prices thateventually came through in August and September. Just the threat of falling oil prices can be enough tospook the markets.

2012 Two Tiers

On the face of it 2012 appears to have started out well, with AIM up 13% and AIM O&G up nearly 23% as I write.

While Oil and Gas fundamentals are arguably the best they have been for many years the world around us stillseems to be falling apart.

Behind this two-tier economy there are a number of positives out there for the sector:

After the declines in 2011 the sector is looking cheap with many companies trading at a significantdiscount to risker Net Asset Value.

The increased realization that oil prices are more likely to stay north of $100/bbl has helped stabilize thesector.

With Big Oil looking to focus on upstream you could argue that small-mid cap companies are lookingvulnerable as potential M&A targets, especially companies with acreage or assets in the Far East(where a number of majors are under-represented), West Africa, East Africa and the Gulf of Mexico.

Around 80% of companies in the sector now have net cash on their balance sheets, great news in theevent of a credit re-crunch.

Strong fundamentals are allowing companies to raise capital with several already having tapped themarkets in 2012.

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However, I believe its too early to get excited, since:

Macro uncertainties in Eurozone continue to weigh heavily on capital markets and, just as in 2011, theoil and gas sector is not immune.

With the US economy appearing to show signs of green shoots, there is every reason for investors inthe sector to take money out of UK/European oil and gas stocks and put them into their US or Canadiancounterparts to avoid Euro exposure. I have already seen signs of this at some institutions.

Even though industry fundamentals are strong for the oil and gas sector, this is a stark contrast to whatsplaying out in the rest of the economy, which is already showing signs of double dip recession.

Capital markets are still struggling with significant (tectonic) changes taking place among small-mid capbrokers and investment banks. At some point this could have an impact on the ability of companies inthe sector to raise cash.

Id be surprised to see the kind of declines we saw in 2011 repeated in 2012. However until problems in Greece(and probably Italy and Portugal) are resolved I expect a fairly muted stock performance in the sector andcontinued volatility. But at that point the value in the sector should be in the spotlight.

What Does This Mean For Management?

The two-tier oil/non-oil economy creates a number of practical risks that I believe management teams shouldprepare for:

1. Be smart if your broker looks vulnerable dont wait too long to engage with another one but choosecarefully. I have seen first-hand how a multi-billion dollar investment bank can go from solvent toinsolvent in the space of just a week. Its shocking and a stark contrast to companies in our sector withhard assets producing a commodity product. But in financial services it is happening. Look for a brokerwith robust/defensive business model and a strong client base as there is generally safety in numbers.

2. Protect your liquiditydont wait until you need capital before you raise it. When the markets werepricing in Armageddon towards the end of 2011 even the majors were raising money (mostly bonds)because they could, not because they needed it. This should be particularly relevant for smallercompanies with capital-intensive funding needs coming up over the next 12-18 months.

3. Be patient about your 2012 share price performanceit is likely to take some time for the dislocationbetween fundamentals and share prices to work its way out of the system. Your broker will only be ableto do so much for your share price. This has implications on how far you might want to use shares ascurrency to do deals versus cash.

4. Be braveas long as you are not running your business as a lifestyle company the market will start torecognize the value you are now creating when conditions get back to normal.

5. Be happy life outside the oil and gas industry is a lot tougher than life inside it. Oil & gas industryfundamentals have arguably never been stronger. This, together with new technology reducing risksassociated with exploration and priority access to capital, we have much to be grateful for.

Simon Hawkins is Managing Director of OmniInvestment Research, an independent research housefocusing exclusively on the global Oil and Gas sector.Previously, Simon held senior positions at UBS andDresdner Kleinwort, having been ranked number oneby Thomson Extel for his coverage of the EuropeanGas sector, number two in European Oils and three inEuropean Utilities. He is also former Head of O&G atAmbrian and Head of Energy Equity Research at MFGlobal. Prior to joining the City, Simon had eight yearsinternational experience with the Royal Dutch ShellGroup of companies, working in economics andfinance in Nigeria, The Netherlands, the Far East andthe US. During his time with Shell he was recipient ofthe UK's 'Young Accountant of the Year' award.

Omni Investment Research: With over 70% of the UK E&P sector now under coverage Omni InvestmentResearch is the only independent research house that focuses exclusively on the global Oil and Gas sector,providing stock, company and asset research to investors, corporatesand other asset holders. Omnis coverageextends from large cap stocks like Tullow Oil and Cairn Energy to quality smaller cap juniors. Omnis staff are oil

and gas specialists, with senior management experience at top-tier companies together with access to a largenetwork of technical and other professionals to support their research. Omnis corporate research service istailored to guarantee the highest return on investment for clients.

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Winning new oil and gasfrom established US basins

Nostra Terra Oil and Gas Company plc is a fast-growing exploration and production company focused

on emerging plays within established hydrocarbon regions of the United States.

During the last two years, Nostra Terra has acquired interests in Kansas, Texas, Colorado and

Oklahoma. It is now looking to expand and upgrade its portfolio rapidly by identifying, screening and

acquiring a diverse pipeline of upstream assets. Working interests in new acquisitions will vary, ranging

up to 100% in some cases, and include both operated and non-operated projects.

The key to Nostra Terras growth strategy is the use of state-of-the-art drilling technology, including

horizontal drilling, combined with 3D seismic mapping, sophisticated log suites and multi-stage well

completions to target and exploit compartmentalised reservoirs that were under-produced when the

original vertical wells were drilled in these mature fields.

Nostra Terra is publicly listed on the London Stock Exchanges AIM market. The company is debt-free

and fully funded on its current projects, and has also entered into a standby equity distributionagreement (SEDA) that further enhances its financial resources and flexibility.

For more information and contact details, please visit www.ntog.co.uk.

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Executive Q&A with Tim Heeley, Chairman, Nighthawk Production

By Drake Lawhead

Tim, Nighthawk is a closely-watch stock on the AIM, but for our international audience, explain to us in afew sentences what your company is about.

Nighthawk Energy is now the 75% working interest owner and operator of 410,000 gross acreswe are engagedin developing an early stage but proven and producing shale oil play in the South Eastern DJ basin in Colorado.We are targeting the Cherokee Shales, these are Pennsylvanian age (Upper Carboniferous) formations around6,500 7,000 ft in depth and have shown to produce not only on our acreage but on other licenses around us.We have established a number of key facts about the play to date and we now need to close the gap betweenour current valuation and the valuation seen in many transactions in the space currently.

What kind of upside do you see the Jolly Ranch prospect possessing? Would its success haveimplications for other emerging shale oil plays?

The upside in the project is very exciting and unlocking the potential is a process of demonstrating consistencyand repeatability in the production from the existing wells plus drilling new ones to prove up the core area and thewider acreage. Undertaking this should close the value gap between us and other shale oil transactions thatfrequently are in the multiple thousand dollars per acre. New shale plays, especially oil, continue to be discoveredin the United States, there is a mix in transactions at the minute of large majors acquiring proven and producingplays but also recently we are also seeing these large companies committing to largely undrilled unproven playslike the Tuscaloosa and Utica shale plays. All this serves to enhance the value of shale plays in general butincreasingly oil and liquids rich plays.

2011 was a difficult one for the Jolly Ranch prospect, but youve managed to wrest operatorship of theasset from your partnerswhats the game plan now?

We had a very clear game plan to acquire the operatorship and drive the development of the project, we had toappoint to certain key positions such as CFO and COO and we got excellent seasoned professionals for both in

2011. However the markets were the real issue and whilst we had a clear strategy the timing was not ideal. Thatbeing said we start 2012 as the operator and 75% working interest holder in the project and this means we cancontrol the pace but also the development strategy. With a focused team being built in Denver we will have atremendous amount of experienced field operations and scientific skills to call upon to turn around the perceptionand performance of the asset. In the first instance we are going to focus on what has been drilled already namelymaximise the knowledge, and more importantly, the production from the existing wells. We will in parallelundertake new seismic reinterpretation and look to build some geological models to assist well placement andwider understanding of the Cherokee shale play. Off the back of this work later in the year we will commence thedrilling of new wells; four vertical and one lateral step out.

Where do you see Nighthawk in 3-5 years time? Will Jolly Ranch be enough to digest or do you have halfan eye on other prospects?

The key thing about the Jolly Ranch project is that there has been a huge amount of leasing around our land

position in the last 12 months; Devon, Chesapeake and Newfield, amongst others, all have varying landpositions. This has led to the take up of most of the available land and thus almost impossible for new entrants toreplicate large, contiguous land packages.

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The land position alone at Jolly, 410,000 gross an acre, which is similar tothe area within the M25, and is more than adequate to keep the Companybusy for the foreseeable future as there are many opportunities in thestratigraphy at Jolly Ranch and whilst the Cherokee is our primary focusthere are multiple objectives to explore.

For instance, our acreage has Niobrara present across it and this younger

formation, which has not been tested to date in this part of the basin, isreally heating up the Denver Basin to the North and West of our landposition with both drilling activity and land acquisition, and.

Is shale oil understood well enough by the market in your opinion? Isit an advantage for you or a disadvantage to be working on a play typethat is still relatively new compared with shale gas and conventionaloil and gas?

Shale Oil began serious development around the turn of the 2000s, theBakken, focused on North Dakota, being the key play. The relatively newfocus on shale oil was clearly an advantage in accessing cheaper land for

initial leasing however, in the early stages of the assets development, it was harder to communicate the potentialin an emerging area of the oil industry. However the success of shale gas and the subsequent drop in gas prices

has led many focused on that area to refocus their expertise and equipment on shale oil. This has led to furtheracreage building in new and established plays and also periods of intense M&A activity. With gas looking morethan likely to drop below $2/mcf, coupled with a rise in oil prices; shale oil in the United States, where already in2012 transactions dont seem to be letting up, is looking increasingly unconventional.

What were the lessons of 2011 that you would incorporate into 2012s business planning, and that youwould internalize as an O&G CEO in general?

Have a plan Ba plan C wouldnt go amiss either. As the Operator of the project now we have been designingoperating and financial plans well ahead of the actual appointment and our focus on the business is now todeliver the value for the most optimal cost possible.

What next bit of news flow should we look out for from Nighthawk?

Were now focused on gearing up operationally and we will communicate our work over program in the next fewweeks. The results of these will form part of our regular quarterly updates, which are a natural way of informingthe market given the way shale assets are developed.


Ive always had great admiration for Faroe Petroleum. The business has been built with a very clear focus and ina very clever way. Excellent exploration focus but growing production base obtained through clever asset tradesin the early days building an excellent asset base. Above all the executive teams always seem to enjoy what theyare doing and communicate their objectives very clearly. I also have an eye on FOGL at present to see if themuch more structurally defined Southern Falklands basin can replicate some of the success seen in the north.

When youre away from work, how do you enjoy spending your spare time?

Ive a young family so spending time with them is always rewarding, I enjoy spending time on boats and this is

always relaxing, it also requires 100% attention so work does get forgotten about. Although the boots were hungup years ago I am an avid rugby fan and am eagerly awaiting the 6 Nations this year (albeit probably watchingfrom behind the sofa).

What do you enjoy most about working in the oil and gas industry?

It is a hugely diverse industry and has implications from what microbes were doing millions of years ago totodays geopolitics a truly global industry and a very misconceived one. The people you meet in it are generallyvery good, friendly people which makes working all that easier.

Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building forDummies, satellite phone, teleportation device etc., not allowed)

I spend too much time away from my family as it is so theyd have to be deserted too (it would be worth Hobbs

and Joules opening a branch there however!) In addition I would like ownership of the continental shelf resources there would bound to be an oil company along in the near future and rescue may as well have some kind ofroyalty interest attached.oh and some decent malt whisky.

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2012 Independent Oil & Gas Outlook

Written by Ian McLelland, Director, Sector Head Oil & Gas, Edison Investment Research

2011 was undoubtedly a difficult year for independent oil and gas companies, with the junior sector in particularsuffering in the wake of tough economic conditions. In hindsight, this was partly a necessary correction from theeuphoria of 2010 when equities clearly disconnected from fundamentals, while uncertainty over commodityprices and access to capital heaped further pressure on the sector. However, moving into 2012 there are clearsigns of renewed interest, with three key issues in play that we see pointing to a more promising year ahead.

Fundamental Disconnects Will Act As M&A Catalysts

Oil and gas stocks experienced almost continuous downward pressure during 2011, despite the robustness ofcrude prices. This was most in evidence in the junior sector, where high beta stocks were pilloried as risk-averseinvestors took flight from the sector, citing access to capital and an uncertain oil price outlook as key issues. As aresult of this, when adjusted for crude prices, the AIM O&G Index at the end of 2011 traded at near-record lows.Asset values have never been cheaper. Entering 2012, this creates an interesting and healthy tension. Manycompanies that have struggled to get high-quality projects away are now looking over their shoulders at potentialM&A vultures. Oil and gas resources do not just disappear into thin air, so when equity markets discountcompany values well below fundamentals it is only natural for more cash- rich third parties to move in. Premiersacquisition of Encore and Ophirs acquisition of Dominion were probably the two stand-out deals in the UK during2011, and Ithaca may be next, having recently announced an acquisition discussions. However, we do not seeM&A as the only reason for some upward share prices over the next 12 months.

More Stable Oil Outlook Easing Access To Capital

Oil prices remained resolutely high in 2011, as OECD demand concerns contrasted with supply issues in thewake of the Arab Spring. During 2012 we had expected a softening outlook as an anticipated supply surplus builton rapidly slowing demand growth coupled with firming production more likely to push down prices; however, EUsanctions on Iran and the knock-on threat to the Strait of Hormuz could well now flip things the other way.However, most critical for equities is a growing recognition from both lending banks and investors alike that aprecipitous collapse in prices is unlikely in the near term and that price deck assumptions for investment andfunding are significantly up on recent years.

A recent survey of investment bank WTI price forecasts, excluding the Goldman Sachs hyper-bulls, indicated aconsensus around $80-100/bbl in 2012, increasing to $90-120/bbl in 2013. Reserve-based lending price decksare also up as banks re-evaluate what they will lend on, although the halcyon days of 80-90% debt fordevelopments are clearly behind us. Further out, BPs recently published Energy Outlook 2030 continues topredict growing oil demand as part of its primary energy demand growth forecast of 1.6% pa. Overall, thecommodity price outlook is more stable and this can only be good news for oil and gas independents struggling toget their prized projects off the ground.

Temporary Delays Mean No Shortage Of Excellent Projects

While perhaps not quite the hedge that gold is, oil and gas assets in the ground do not simply lose their valuewhen times are tough. Good projects will always be revisited and we expect this to be very much the case in2012 as funding becomes more accessible.

There are good news stories across the planet to look forward to. Elephant-hunting explorers are set to providehealthy newsflow, with drilling campaigns in the Falklands, Guyane and offshore Namibia all in the spotlight. TheNorth Sea continues to confound sceptics with a surge of drilling and development activity that includes morewells in the Greater Catcher Area, the biggest discovery in the UKCS in the last 10 years. Sub-Saharan Africaprobably remains the hottest ticket in town, with licence rounds likely to introduce us to new players in WestAfrica, ready to supplement the successful pioneers such as Tullow and Afren.

Meanwhile, gas volume estimates offshore East Africa keep growing at an incredible rate making this area theglobal development story for the coming years. And the undoubted resource potential in Kurdistan also madesignificant strides towards commerciality in the wake of some high-profile corporate deals. Finally in this section,the rise of unconventional exploration and development activity is set to continue, with yet more shale gas, shaleoil, oil shale and GTL projects set to make us rethink our estimates of global hydrocarbon resources. It remainsearly days, but 2012 appears set to offer up many interesting stories for both small and large players in the

independent oil and gas sector. Coupled with a potentially M&A-fuelled equities market and encouraging noisesaround finance availability, the catalysts are certainly in place for companies to unlock the inherent value thatundoubtedly exists within their portfolios. Contact Ian directly at:[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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Executive Q&A with Alec Robinson, CEO, Lion Petroleum Corp.

By Drake Lawhead

Lion Petroleum is a privately owned company based in London with 9.7m acres in two blocks onshore Kenya.Alec Robinson, the CEO, talks to Drake Lawhead of The Oil Council.

There was a time not long ago where I might have started by asking why Kenya? But its no secret thatEast Africa is undergoing a boom in E&P. However, can you briefly describe for us the theory behindyour focus on Kenya and what kind of opportunity youre pursuing there?

As you say, the East African region has become an international hot spot for oil and gas exploration and therecent major gas discoveries offshore Mozambique and Tanzania have led to a significant increase in explorationactivity. Kenya is clearly under-explored with only 28 exploration wells drilled onshore Kenya to date, one every20,000 sq km on average, and only one well since 1992. Our team has long been involved in Kenya with our keysuccess being the identification of the potential of Block 10BA in our Centric days which saw us, at the time,attracting Tullow as a partner. Now through Lion, we are currently engaged in moving our assets, Block 1 andBlock 2B to the next exploration phase and evaluating other opportunities we have in the pipeline. Our blocks are

in basins where there have been encouraging oil and gas shows, oil seeps, and where there are untested plays.We are very excited by the opportunities that we have.

Can you briefly describe for us the business model Lion is based on? Is this Centric Energy - part two?

Lions business model is to build and create shareholder value through leading exploration in Africa by leveragingour relationships and our first-mover advantage. The sale of Centric was a very good deal for our shareholders.We like to think that as a team, we draw on our networks and experience gained through Centric and aim todeliver the same success for our investors in the region. We already knew Lion Petroleum and its assets so whenwe were offered the opportunity to manage Lion and take it public, and grow the company, we were very pleasedto accept. The intention is to complete the listing and then grow the company focusing on sub-Saharan Africa.

How would you describe the risk environment of operating in Kenya is it mainly political, operational,environmental, or something else? How significant is risk planning in your business?

Over the past few years, political risk in Kenya has seemed low. At the present time, however, with an electioncoming up sometime in the next 12 months, political sensitivities are increasing. As political parties seek to gainadvantage over each other, the high profile of the oil exploration industry means that it is at risk of being a target.With regards to security, there is natural concern about the situation in light of the recent incursion of Kenyanarmed forces into neighbouring areas of Somalia. Companies active in north-eastern Kenya are monitoring thesecurity situation very closely. A number of countries, including the UK, USA and Canada, have posted warningsregarding the risks of travel in north-eastern Kenya.

There are a lot of big companies in East Africa such as Shell, Total, ENI, Anadarko, Tullow, but also a lotof smaller players like Lion. Weve seen some M&A activity in 2011, what are your expectations for 2012?

French multinational Total joined the jostle for opportunities recently in Kenya; that signals entrance of super-majors into the region. This is very exciting for companies like Lion, smaller players that can benefit from buildingrewarding partnerships with larger companies who have the operational resources to move things forward. Iexpect consolidation to continue driven by the need to access funds, the increasing rarity of prospective newacreage, and of course by successful exploration results.

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Would you consider an acquisition in the near future, whetherasset-level or company-level, and if so, where do you currently seevalue?

We are very keen to work with other companies on either level asset-based or at the corporate level. Firstly, however, we need to completeour listing.

Whats the advantage of being a private company operating in EastAfrica, and are there any constraints? How will your move onto theToronto Stock Exchange change business for you?

There are pros and cons of each corporate structure. Being privatemeans that there is less of the administrative paperwork, with itsassociated expense, that the stock exchange requires. For example,TSXV requires quarterly financial reporting. Also, the company is notsubject to the vagaries of the equities markets, and can take a longer-term view of opportunities. Being listed, however, provides investorswith increased liquidity and the ability to trade shares, and can provideimproved access to the capital markets.

What will be said about East African E&P at the end of 2012, will it be a story of M&A or drill-bit success?

Therell likely be some exciting news from the onshore drilling, in Kenya and neighbouring countries. Of theupcoming onshore wells, Im particularly excited about the drilling in the Tertiary rift, where a well has just startedon a play that is similar to the Tertiary play in our Block 2B; the planned well offsetting the 1972 El Kuran wells inEthiopia just over the border from our Kenyan Block 1 which is in the same basin; and the planned well in Block10A in the Anza Graben. Each of these is offsetting wells with very good indications of oil and are very exciting.Itlltake additional drilling to define the sizes of any discoveries, and thatlllikely not happen until 2013. Offshore,Ive no doubt that there will be further gas discoveries - the intrigue now is whether there will be an oil discovery.

What next bit of news flow should we look out for from Lion?

The seismic that is currently underway in Block 1 will almost certainly lead to drilling in that Block in 2013.Seismic will start in Block 2B once we have completed the listing. And also, once the listing is completed, wehave some deals we are working on that we will then be able to complete.


Cove Energy has done very well as a result of acquiring an excellent portfolio of assets. Tullow over the yearshas successfully made the transition from a start-up E&P company to being a very strong mid-cap; that transitionis difficult to do successfully. Afren is making the same transition now and from what I see is doing a very goodjob of it. Ophir had a risky strategy which has played-out well, culminating in their recent IPO.

When youre away from work, how do you enjoy spending your spare time?

Because I travel a lot, when I have spare time in the UK I greatly enjoy being with my wife. Together, we enjoygardening, and we try to get to the gym five to six times a week, if my schedule allows; the hard exercise is de-stressing, and I consider that remaining physically fit is very important and greatly improves quality of life. Ofcourse, we also take advantage of the cultural benefits of living near London and enjoy the opera when we can.

What do you enjoy most about working in the oil and gas industry?

The challenges, whether technical, political, legal or whatever, and the effort to overcome them, makes thisindustry really exciting. The intellectual effort to solve the exploration puzzle is un

Documents

D&D Feb 2012