Seymour Pierce Oil & Gas February 2012

February 2012

Oil & Gas AIM Initiations

Dr. Dougie Youngson Sam Wahab ACA
Research Analyst Research Analyst
+44 (0) 20 7107 8068 +44 (0) 20 7107 8094
dougieyoungson@seymourpierce.com samwahab@seymourpierce.com

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.

Oil & Gas AIM Initiations February 2012

Table of Contents

Introduction 3
Top picks 4
Bayfield 4
Borders & Southern 5
Gulf Keystone Petroleum 6
Xcite Energy 7

Top regions 8
Oil and gas price outlook for 2012 11
Valuation methodology 12
Exploration 12
Production 12

Companies

Aurelian Oil & Gas 13
Borders & Southern Petroleum 27
Chariot Oil & Gas 37
Faroe Petroleum 51
Frontera 67
Gulf Keystone 77
Gulfsands Petroleum 91
Xcite Energy 107
Bayfield Energy 115
Gold Oil 129
Independent Resources 143

Glossary of terms 156

Seymour Pierce equity research 1

Oil & Gas AIM Initiations |February 2012

2 Seymour Pierce equity research


Introduction
In this oil and gas sector report we are initiating on 11 AIM listed companies. The core
of the note focuses on companies which we consider have interesting investment
cases. We believe that key criteria investors should focus on are:

• Strong management teams

• Assets which can be commercialised

• A deliverable strategy which will yield shareholder value within a reasonable
timeframe

AIM suffers from a great number of companies that tick none of these boxes.
However, we believe that the companies covered in this report tick most if not all of
these boxes and should be worth your consideration.

We have highlighted what we feel are likely to We have highlighted what we believe are likely to be some of the best performing
be some of the best performing stocks in 2012.. stocks in 2012. We have also identified what we consider are likely to be the core
regions for oil and gas activity in the short term.



Top pick overview
Bayfield
Proposition
Bayfield’s recent operational update provided the first opportunity post-IPO to
evaluate progress across its portfolio. The company continues to make positive in
Trinidad with the spudding of the East Galeota exploration well at the end of January
which is expected to take 42 days to drill. A further two exploration wells will be
drilled at East Galeota which could provide additional upside resource potential.
At the Trintes (Trinidad) field the company successfully drilled two appraisal wells:
B10 & B8. These have de-risked the management’s production projections for the field
and should also increase the upside potential for the field, once production has
stabilised.

Catalysts
The company has several near-term exploration (EG8 well) and appraisal targets
which could provide share price triggers during 2012 on the assumption of positive
results. Despite production being pushed back (due to operational and weather
reasons) it should reach our previous production target of c.4,000boepd in 2H2012.
This will enhance financial performance in the latter part of this year and provide a
strong production and financial basis for the company as it moves its 2013.
Valuation
SOTP valuation matrix

£ million p/share

Production 96.9 45.1
Reserves 90.3 42.0
Net cash* 28.1 13.1
Less: G&A (20.0) (9.3)
Core Value 195.4 90.9
Contingent resources 36.8 17.1
Target Market Cap 232.1 108.0
Source: Seymour Pierce Ltd
*We have assumed a post placing cash balance using managements FY12E guidance of c.$55m

Our core valuation comprises a revised DCF analysis of Bayfield’s producing assets,
the company’s externally verified reserve estimates, and the FY12E net cash balance.
We also attribute a discounted general & administrative (G&A) charge for field related
expenditure in relation to the Trintes play. On this basis our revised valuation indicates
that Bayfield is currently trading at c.50% below its core asset value alone. We
reiterate our Buy recommendation and target price of 108p.
SOTP waterfall chart
140
45
120

100

80 42
p/share

60
40 17

20 13
-9
0

-20
G&A Net Cash Contingent Reserves Production
resources



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

NAV £m p/share

Darwin 199 46
Stebbing 227 53
Net cash 116 27
Core 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.


140
53

120

100

80 46
p/share

60

40
27
20

0
Net Cash Darwin Stebbing




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

£ million p/share

Production 268 31
Discovered 2C 2,708 317
Gross Value 2,975 348
Less: G&A (40) (5)
Net Value 2,936 344
Net Cash 256 30
Target Market Cap/ Price 3,191 374

We have valued Gulf Keystone in terms of its discovered resource base under the low
estimate scenario stated in the most recent CPR, and have not included estimates for
yet-to-find resources. In addition, we have included a discounted cash flow (DCF)
valuation of GKP’s current and forecast production (2012: c.10,000bopd ramping up
to 2014: c.40,000bopd) from its Shaikan field in Kurdistan.


400 317

350
300
250
p/share

200
150
100
31
50 30
-5
0
-50 G&A Net Cash Production Discovered 2C

.



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

NAV by activity £ million p / share

Confirmed CPR reserves/resources 822.4 227
Plus net (debt)/cash 30.78 15
Core NAV 853.2 242


We have based our valuation of Xcite solely on the company's latest Reserves
Assessment Report (RAR) for the Bentley field.


300

227
250

200
p/share

150

100

50
15
0
Net cash Risked resources




Top regions

We have identified three key regions which we believe are likely to see significant
positive momentum in 2012

We have identified three key regions which we
feel are likely to see significant positive Kurdistan
momentum in 2012.
Activity in Kurdistan has been steadily increasing in recent years with the entrance of
several small and medium independent E&Ps. However, the region finally got the “seal
of approval” following the announcement that ExxonMobil was to acquire significant
acreage in six exploration blocks in late 2011. More recently, speculation has mounted
that Total were planning a similar move, although this has yet to be formally
announced.

Many commentators have suggested that the absence of the majors was due to
fractious relationship between the Iraqi Central Government and the Kurdistan
Regional Government. The absence of resolution on the new Iraqi oil laws (which were
drafted in 2007) continues to hold back the region from making an impact on the
export market and continues to prevent major capital investment in projects other
than for licence acquisition and exploration.

Outlook
The USGS has estimated that Kurdistan has The USGS has estimated that Kurdistan has c.40bn bbl of oil and c.60tcf of gas with
c.40bn bbl of oil and c.60tcf of gas with low low geological exploration risk. However, this attractiveness is countered by the high
geological exploration risk. (and some would say increasing) geopolitical risk as well as tangible commercial risk
should the issue surrounding the oil law not being resolved in the short to medium
term.

The one key benefit of operating in Kurdistan versus the rest of Iraq is security.
Kurdistan continues to be a much safer operating environment and has been one of
the key drivers for investment in the region.

We believe that the increasing influx of foreign oil companies into Kurdistan and the
increasing capital expenditure they bring is the most likely driver for resolution of the
oil law. Increases in production outside Kurdistan have been disappointing so far and if
Iraq is to see any tangible increase in production in the short to medium term we
believe that this will come from Kurdistan.

Companies on our watchlist
Gulf Keystone Petroleum has been a long term player in Kurdistan and has seen
considerable exploration success so far. It has discovered c.15bn bbl of oil in place so
far and continues to explore during 2012. The company is aiming for oil exports
starting in 2013 and is seeking to develop an oil export pipeline to Kirkuk with a
capacity of 440,000bopd. There has been considerable speculation that it is a takeover
target ahead of moving into full scale commercial development. Price drivers in 2012
are likely to come from further resource upgrades and increases in production from
Shaikan.

Heritage Oil & Gas has had a mixed experience in Kurdistan. Initially positive drilling
results at the Miran West field, which was identified as an oil discovery, changed when
follow up drilling discovered large quantities of gas instead. Heritage’s share price
collapsed at this point and it has struggled to recover since. The company is
examining options for gas export and continues to explore at Miran and positive
results from this programme could boost the share price in 2012.

A recent and unexpected entrant is Afren, who made their first investment outside
Africa last year. The company is targeting first oil from its assets in 2012 and this is
likely to provide upside from this part of the portfolio in 2012. The company also has
exploration planned in Kurdistan later this year.



East Africa
The highly competitive operating in western The highly competitive operating in western Africa and increasingly in central Africa
Africa and increasingly in central Africa has seen has seen a migration of companies towards the east of the continent. As is typical for
a migration of companies towards the east of frontier regions, small E&Ps have made the initial exploration efforts to prove up
the continent. resources. We have now entered the phase where successful explorers are attracting
interest from larger independents as well as the majors.

Outlook
We believe that 2012 will continue to see exploration success from the minor
companies in the shallow water and hopefully in the deeper water from the new
entrant majors. M&A on a greater scale is also likely to be a prominent feature. Cove
Energy, for example has already put up the “for sale” sign and we can expect further
consolidation in the region.

Exploration has tended to yield large gas discoveries in the shallow water blocks of a
size which could potentially support a LNG development. However, given that the LNG
market is oversupplied with more capacity due to come onstream in Australia and the
Middle East, we see this a a longer term prospect than other commentators.

Afren entered east Africa via its acquisition of Black Marlin. During 2011 the company
has been working up these assets with a view to start exploration in 2012 and 2013.
Afren’s strategy has mainly been on developing already discovered assets. It
exploration exposure has been limited to date, but the company hopes to deliver
250mmbbl of 2P/2C resources over the next three years. East African exploration in
2012 will focus on Kenya and Tanzania.

Cove Energy recently put the for sale sign up following a very successful exploration
campaign in recent years. This company is very likely to attract interest in the majors
who are keen to potentially develop domestic and export gas projects in the region.
Share price performance will continue to be driven by its drilling campaign, resource
upgrades and potentially its acquisition.

North Sea – UK & Norway
The UK North Sea saw a record investment of The UK North Sea saw a record investment of £7.5bn in 2011, driven by high oil prices.
£7.5bn in 2011, driven by high oil prices. This This level of investment is forecast to continue until at least 2015. The emphasis of this
level of investment is forecast to continue until investment was skewed towards development rather than exploration and appraisal
at least 2015. which saw a decrease in activity. The sector also saw its most active period in terms of
transactions since 2005, with c.$4bn of assets switching hands during the year. This is
a trend which we expect to be a continuing theme as the region sees more
consolidation, particularly amongst the smaller players.

Following the successes of Statoil, Xcite Energy and Nautical Petroleum in heavy oil,
we would expect these types of projects to become more attractive throughout the
region. The fiscal terms for such projects will also improve project commerciality and
hopefully reduce the decline in oil production from the UK sector.

The Norway North Sea is seeing increased activity from a number of AIM listed E&P’s
as they look to exploit the attractive fiscal terms offered by the Norwegian
government. Currently, exploration companies will receive 78% of their drilling
expenditure back the following year to facilitate further growth in the region. The
state owned company, Petoro AS, is also undergoing transactions with foreign entities
operating in the region to acquire previously undeveloped licences, thus stimulating
future production from the region.



Faroe Petroleum has a robust mix of production growth and high impact exploration,
and continues to execute value accretive transactions on both sides of the Continental
Shelf, most notably its recent asset swap with Petoro AS. The company has a strong
balance sheet with sufficient cash reserves and debt facilities to fund its progressive
drilling, appraisal and development activities.

Xcite Energy moves into the development phase this year which should yield
production in 2Q onwards. However, we do anticipate a volatile period during the
initial drilling phase as we see the initial drilling and flow test results being announced.
There is a huge amount of expectation relating to conversion of resources to reserves.



Oil and gas price outlook for 2012
Geopolitics were a major price driver during Geopolitics were a major price driver during 2011, as concerns driven by the Arab
2011, as concerns driven by the Arab Spring Spring caused concerns as to the stability of the Middle East and what this could mean
for security of supply, particularly for Saudi Arabia and Iran. Despite not being a
significant oil producer, Syria continues to cause instability in the region. Similarly,
despite making progress Egypt has still not fully resolved its many issues and is likely
to remain unstable until after the elections are concluded.

Iran’s commitment to its nuclear programme will continue to antagonise the West and
remains a cause for concern. The recent sabre-rattling on the potential closure of the
Straits of Hormuz seems to have just been posturing. However, the reality is that this
major (a fifth if all traded oil passes through here) oil transit route for the region could
be closed within a matter of hours. Although unlikely, an escalation like this would not
only result in a major increase in the oil price, but could quickly escalate to another
war in the Middle East.

Brent averaged $110/bbl in 2011 and we forecast the price to average $100/bbl in
2012.

Now that winter has finally arrived in Europe, we have seen the spot gas price increase
by 30%, driven in part by Gazprom’s inability to increase supplies. Gazprom currently
supplies c.25% of the European market, but its pricing is the highest at c.$410/mcm.
Consequently it is seeing more competition from LNG and domestic sources of gas in
some countries. Such an aggressive pricing structure has resulted in demands from
gas users for Gazprom to move away from long-term contracts and increase the spot
market contribution to such contracts.

The success of the shale gas industry in the US is The success of the shale gas industry in the US is has driven the gas price to a new low
has driven the gas price to a new low of of c.$2.50/mcf. The success has been so large that the US may move back into gas
c.$2.50/mcf. exports rather than being a net importer. We are now seeing an increase in shale gas
activity throughout Europe, particularly in Poland, and so far the results have been
mixed. We are therefore comfortable that the gas price will remain high and that shale
gas will have little impact on the supply/demand situation in the medium term.



Valuation methodology

Petroleum companies are valued in terms of their portfolio of exploration and
production assets. Our overall target price comprises a core valuation for the
producing and near term production assets and a risked net asset value (RENAV) for
the exploration assets.

Exploration
Prior to drilling, a huge amount of work has been done to de-risk a prospect. We
apply a simple arithmetic approach to attempt to value such prospects ahead of
drilling. The calculation is:

RENAV = Gross resource estimate x Company Interest x Chance of Success x NPV/bbl

The company provides most of this data, the chance of success (CoS) is probably the
most important factor and is very company and country specific. Some companies are
better at exploration than others. Also, some countries have more hydrocarbons than
others. The CoS tends to be higher in mature exploration than in frontier regions. The
NPV per barrel varies from country to country and reflects the prevailing fiscal terms
and transaction values on a per barrel basis.

Production
We write an operational model for the We write an operational model for the company’s producing assets. This reflects
company’s producing assets. This reflects historic data and our assumptions for the future. We model production, prices and
historic data and our assumptions for the future. costs and overlay the fiscal terms of the country where the asset is located. From this
model we derive a DCF which is then used to value the asset. See the valuation
section for the assumptions used for this company.

Resource Classification Framework

Source: SPE



10 February 12 | Initiation of coverage | Oil & Gas exploration and production

Aurelian Oil & Gas
(AIM:AUL)F

Let it flow
BUY 2011 was a disappointing year for Aurelian, with its key asset Siekierki
Share price 17p representing a much larger and complex challenge than initially
Target price 31p anticipated. Following a comprehensive review, the company has
84% Upside provided the market with a clear strategy to develop its entire portfolio,
which we feel represents a strong buying opportunity for investors, given
Market cap (£m) 82.8
current trading levels.
Net cash (£m) 80.0
Enterprise value^ (£m) 82.8
Strategy shift
No. of shares (m) 494.3 Aurelian has now concluded a comprehensive review of its assets following the
Average daily vol ('000, -3m) 3,488 disappointing multi-fracced horizontal appraisal wells drilled in 2011. The data
acquired during the appraisal phase has improved the company’s understanding of
Dividend yield (%) 0.0 Siekierki, and as such, a revised development plan has been designed comprising 32
PER at Target price (Y1) 147.2 wells recovering 296bcf of gas (previously 348bcf) to commence in 4Q 2012.

12 month high/low (p) 92/16 Near-term exploration programme
Aurelian plans to take advantage of the flexibility in its work programme and preserve
(%) 1m 3m 12m
capital by prioritising its exploration targets. In line with the strategic review, the
Absolute -2.9 -27.2 -79.3
company has deferred several exploration targets, to focus instead on near-term value
FTA relative -6.9 -31.9 -78.9
play unlocking wells. The programme is budgeted to cost €25.6m net to Aurelian
targeting 67.3mmboe of net unrisked prospective resources, which, while less than
Price & price relative (-2yr)
previously indicated, potentially offers material upside.
100
80 Unlocking Siekierki
60 The company intends to enter into negotiations for a potential farm-in to its 90%
40 interest in Siekierki. The asset is surrounded by IOC operated acreage, most notably
20 Connoco Phillips, Exxon Mobil, Total and Chevron, all of which have the technological
0 knowledge base and financial backing that is required to fully develop the project. We
Feb May Aug Nov Feb May Aug Nov Feb feel that a farm-in partner of sufficient expertise and financial resource base will act as
Price Relative a positive share price trigger for investors in Aurelian.
Source: Datastream
Valuation and recommendation
Share price as at close: 9 February 12
Our core valuation comprises exploration and development activities, and cash; which
Next news yields a base value of 20p. Our exploration upside assessment contributes a further
Operational updates 10.8p. On this basis we initiate coverage with a BUY recommendation and set a price
target of 31p.
Business
Exploration in Central Europe with licences in 1 Please see regulatory disclosure notes at the end of this document
Poland, Slovakia, Romania and Bulgaria A draft of this research has been shown to the company following which minor factual amendments have been made.

www.aurelianoil.com
Year end Revenue EBIT* PBT* Tax Adj. EPS* PER EV/EBIT* Div yield
December (€m) (€m) (€m) (%) (c) (x) (x) (%)

Dr. Dougie Youngson 2009A 0.0 (1.9) (2.3) 0.0 (0.2) (88.1) (51.8) 0.0
Research Analyst 2010A 0.0 (9.0) (9.7) 0.0 (4.9) (4.0) (11.0) 0.0
+44 (0) 20 7107 8068 2011E 0.0 1.3 2.5 0.0 0.2 80.1 76.4 0.0
dougieyoungson@seymourpierce.com 2012E 0.0 (5.3) (4.5) 0.0 (0.9) (21.7) (18.7) 0.0
2013E 0.0 (0.1) 0.4 0.0 0.1 261.4 (985.9) 0.0
Sam Wahab ACA
Research Analyst * excludes exceptional items and amortisation of acquired intangibles.
+44 (0) 20 7107 8094 ^ EV calculation adjusted for core cash, investments etc.
samwahab@seymourpierce.com Source: Seymour Pierce Ltd



Valuation and recommendation

We value Aurelian on its core exploration and We value Aurelian on its core exploration and development assets in Poland, Slovakia,
development assets in Poland, Slovakia, Romania and Bulgaria. The company has a clear development plan to bring their key
Romania and Bulgaria. asset, Siekierki, to first stage production in 2016 (delayed by three years due to
technical issues experienced during flow testing in March and September 2011).
However, this development plan will require additional financial and technological
resources through a potential farm-out down. On this basis, we do not currently
provide a valuation of future discounted cash flows arising from Siekierki in 2016, until
the company has adequate resources in place to fulfil their strategy.

Our valuation incorporates the following assumptions:

Valuation assumptions

Metric Assumption

NPV/boe - Oil $5/boe
NPV/boe - Gas $3/boe
Realised gas price $7.5/mcf
Long-term $/£ 1.65
Long-term $/€ 1.39
Long-term £/€ 1.16
Discount rate 10%
Shares outstanding (million) 500.8


These assumptions have been implemented into our risked exploration net asset
valuation as follows:

Risked net asset valuation

Status Country Project Interest CoS/CoD Resources NPV 10% Unrisked Risked Unrisked Risked Net Risked
(mmboe) US$ / boe NPV $m NPV $m NPV £m NPV £m p/share

Gross Net
Development Poland Siekierki 90.00% 25% 49.30 44.37 3 133.11 33.28 81 20.17 4.0
Exploration Poland Siekierki NW 90.00% 20% 11.5 10.35 3 31.05 6.21 18.82 3.76 0.8
Exploration Poland Siekierki SW 90.00% 20% 3.3 2.97 3 8.91 1.78 5.40 1.08 0.2
Exploration Poland Kalisz 50.00% 10% 5.3 2.65 3 7.95 0.80 4.82 0.48 0.1
Exploration Poland Cyb. & Ty. 45.00% 10% 97 43.65 5 218.25 21.83 132.27 13.23 2.6
Exploration Poland Bieszczady 25.00% 10% 272.8 68.2 5 341.00 34.10 206.67 20.67 4.1
Exploration Poland Karpaty East 80.00% 10% 28 22.4 3 67.20 6.72 40.73 4.07 0.8
Exploration Poland Karpaty West 60.00% 10% 19 11.4 3 34.20 3.42 20.73 2.07 0.4
Exploration Poland Wetlina 100.00% 10% 31.6 31.6 5 158.00 15.80 95.76 9.58 1.9
Exploration Slovakia Svidnik 50.00% 10% 180.2 90.1 3 270.30 27.03 163.82 16.38 3.3
Exploration Romania Brodina 33.75% 10% 50 16.875 5 84.38 8.44 51.14 5.11 1.0
Exploration Romania Cuejdiu 45.00% 10% 16 7.2 5 36.00 3.60 21.82 2.18 0.4
Exploration Romania Brodina 33.75% 10% 8 2.7 3 8.10 0.81 4.91 0.49 0.1
Exploration Bulgaria Golitza Block 30.00% 10% 12 3.6 3 10.80 1.08 6.55 0.65 0.1
784.00 358.07 1,409.25 164.89 854.09 99.93 20.0





£ million p/share

Siekierki (Development) 20.2 4.0
Siekierki (Exploration) 4.8 1.0
Other Polish exploration 50.1 10.0
Slovakia exploration 16.4 3.3
Romania exploration 8.4 1.7
Gross Value 99.9 20.0
Net Cash 54.2 10.8
Target Market Cap 154.1 30.8



35 11

30

25

10
20
p/share

15
5
10

3
5
2

0
Romania & Bulgaria Slovakia exploration Siekierki (Exp & Dev.) Polish exploration Net Cash
exploration upside


Recommendation and target price
Our gross valuation comprising exploration and development activities yields a base
value of 20p, whilst net cash adds a further 10.8p/share. In our view, Aurelian is
severely undervalued and is currently trading well below its core value.

In our view, Aurelian is severely undervalued and On this basis we initiate coverage with a Buy recommendation and set a price target
is currently trading well below its core value. of 31p.



Strategic overview

Aurelian has now concluded a comprehensive review of its assets following the
disappointing multi-fracced horizontal appraisal wells drilled in 2011. The company
arrived at three key conclusions which we have analysed in detail to support our
investment case:

Siekierki is an attractive project and initial problems are now well understood
and a clear plan forward has been developed.
The cash position at the year-end 2011 was €63m which allows the company
to carry out its planned exploration and appraisal activities for the next 18
months.
Unlocking the full upside within the company is likely to require additional
technical and financial resources.

We feel that it is important to analyse these three conclusions in detail to address
existing shareholder concerns, as well as to illustrate to potential shareholders the
possible upside arising on successful development of Aurelian’s acreage in central
Europe.

How attractive is Siekierki now?
The well tests on Siekierki have been The well tests on Siekierki have been completed and incorporated in a comprehensive
completed and incorporated in a technical and commercial review led by a group of independent consultants (AGR-
comprehensive technical and commercial TRACS). From this, gas initially in place of 1.1tcf is now estimated in Block 207
review led by a group of independent (company guidance prior to appraisal was 1.6tcf). However, we do highlight that this
consultants does not include gas potentially in Blocks 206 and 208 or the Krzesinki discovery.

Siekierki location map

Source: Company

Following the strategy update and conference call, we feel it is clear that the data
acquired during the appraisal phase has improved the company’s understanding of
Siekierki, and the company has now constructed a new reservoir model. The new
model now illustrates that the layered Rotliegendes sandstone sequence in Siekierki
has a wide range of ambient porosity and permeability properties spanning 6-18%,
with higher permeability layers dominating well performance.

The company also maintains that the Krzesinki-1 well test result supports Aurelian’s
new reservoir model, in terms of the presence of higher porosity zones within the gas



legs of the Krzesinki and Siekierki fields, with an un-fracced well test producing
0.2mmscf/d. This represents the first successful un-stimulated gas well flow test on
Block 207 to date.

As such, a revised development plan (see forward plan section) has been designed,
comprising 32 wells recovering 296bcf of gas (previously 348bcf), indicating an
average recovery of 9.25bcf/well. To support these estimates, the company intends to
release an updated CPR covering both appraisal and exploration assets in March/April
2012.

Nevertheless, following the comprehensive technical and commercial review
supported by AGR-TRACS and the new reservoir model, the company maintains that
Siekierki is an attractive project which offers material upside to investors.

Funded exploration programme
Aurelian plans to take advantage of the flexibility Aurelian plans to take advantage of the flexibility in its work programme and preserve
in its work programme and preserve capital by capital by prioritising its exploration targets. In line with the strategic review, the
prioritising its exploration targets. company has deferred several exploration targets, to focus instead on near-term value
play unlocking wells.

Aurelian will initially drill the Sosna-1 well within the Torzym reef oil play in March
2012 targeting up to 35mmbbls gross. In addition, the company intends to undertake
further geological and geophysical surveys to de-risk the prospects identified in their
2011 seismic data including Cybinka-Torzym , Slovakia and Romania (Brodina).

The high impact Carpathian well drilling campaign will now be deferred to Q4 of this
year. This will include Kaparty East, which the company now believe to be gas rather
than oil with internal estimates suggesting a recoverable resource of 170bcf,
representing an additional 1p/share of our risked target valuation.

2012 drilling programme
Well Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WI Max Cap (€m) Target mmboe p/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
Aurelian’s 2013 drilling schedule.

The programme is budgeted to cost €25.6m net to Aurelian although it aims to reduce
this by bringing in partners to the Romanian, Slovakian and Karpaty East & West
licences. In aggregate, the five wells are targeting 67.3mmboe of net unrisked
prospective resources, which while less than previously indicated, offers material
upside potential.

Unlocking the full value of the company
Analysis of Trzek-2 and Trzek-3
Aurelian’s share price has been severely impacted by the two multi-fracced horizontal
wells drilled in 2011. The company has reviewed the data from these wells to
implement a comprehensive plan to develop the asset using cost efficient and
technologically advantageous methods.



Aurelian has confirmed that the Trzek-2 horizontal well had mechanical issues with the
completion which reduced fracture effectiveness; whilst the Trzek-3 well was
mechanically well executed with better completion. However, the hydraulic fractures
were not fully effective and the well bore did not make contact with the high
permeability zone encountered in the pilot hole. As such, the combination of the
reservoir’s permeability to gas and water, and the poor frac effectiveness explains why
the Trzek-2 and Trzek-3 flow rates of 3mmscfd and 3.2mmscfd were significantly
lower than expectations.

Subsequent geological and geophysical analysis of the wells have provided Aurelian
with a comprehensive understanding of the geology of Siekierki. This is best illustrated
through their pre and post drill knowledge conceptual knowledge of the basin.

Pre and post drill understanding
Aurelian’s pre-drill strategy understood that the multi-frac horizontal well would
produce dry gas when fracced above the free water level.

Pre-drill concept

Source: Company

This was supported by the belief that Siekierki was a tight reservoir with moderate
variation porosity. However, subsequent analysis has confirmed that the tight
reservoir contains zones of significantly higher permeability and a much larger
variation in porosity. In addition, gas is produced with water as relative permeability
effects are important.

Post-drill concept

Source: Company



From the above illustrations, we note that Siekierki is very different geologically from
the company’s original assumption. That assumption had only moderate variation in
porosity and permeability in the tight aeolian sandstone matrix Aurelian now
understands that the reservoir has streaks of higher permeability (yellow in the
diagram) within that tight matrix, which will dominate well performance On this basis,
management’s expectations of GIIP has been reduced by c.31% to 1.1tcf (previously
1.6tcf), however, the company re-iterates that the multi-fracced horizontal wells
implemented continues to be the correct technology application for the field and
significant operational lessons and insights have been learnt.

Forward development plan
Aurelian will now seek to implement the next Aurelian will now seek to implement the next stage of its development plan to achieve
stage of its development plan to achieve first gas first gas sales in 2016This will initially involve the continuation of long-term testing of
sales in 2016. Trzek-2 and Trzek-3 and commercialising gas from these two wells using a low
pressure and low methane tie-in, as well as a gas to wire option as a smaller pilot
development. First gas arising from this is expected to be achieve in 4Q 2013 costing
in the region of €12m net to Aurelian.
Development plan to 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.



Key assets

Core area 1
Poznan
The Siekierki field was originally discovered over 40 years ago close to the city of
Poznan, but the tight reservoir was found to exhibit low porosity and permeability,
which meant commercial flow rates could not be achieved with the technology
available at the time. Aurelian was awarded the Poznan East licence in 2003 and
drilled the Trzek-1 well in 2007 to appraise the field, confirming the original findings
but providing improved quality reservoir data using modern technologies.
Significantly, the well flowed at an initial 7.5mmcfd before being choked back to a
stable 2.5mmcfd. Aurelian’s latest CPR estimates 640bcf net to the company on a mid-
case scenario (including Siekierki SW and Siekierki NW) representing this largest
asset, by confirmed resources, in the company’s portfolio.

Poznan blocks

Source: Company

Cybinka and Torzym
These fields are located nearby to the German border and were acquired in 2008. They
link to recent oil discoveries in the north, and the basin extends from the prolific UK
North Sea. Existing data is being evaluated and has been followed by 3D seismic. The
combined volume of hydrocarbons net to Aurelian is 34mmbbls and the company
anticipates starting drilling in Q4 2011.

Cybinka & Torzym

Source: Company



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 company’s
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 the
concession 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 has
been 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, Aurelian’s 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.



Financial model

Income Statement

Year end 2009A 2010A 2011E
December (€m)

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



Cashflow Statement

Year end 2009A 2010A 2011E
December (€m)

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 0.1
Cash 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 63.3


Balance Sheet

Year end 2009A 2010A 2011E
December (€m)

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




Target Price & Recommendation History

100

90

80

70

60

50

40

30

20

10

0
Feb 10 A pr 10 Jun 10 A ug 10 Oct 10 Dec 10 Feb 11 A pr 11 Jun 11 A ug 11 Oct 11 Dec 11 Feb 12

Share P rice Target P rice Reco mmendatio ns

Source: Datastream, Seymour Pierce Ltd


10 February 12 | Initiation of coverage | Oil & Gas exploration and production

Borders & Southern Petroleum
(LSE:BOR)5

A natural selection
BUY
2011 was the turn of the northern players (RKH & DES) and in 2012 the
Share price 67p
activity heads south with both BOR & FOGL drilling. Whilst these
Target price 126p
88% Upside
companies share common issues such as regional politics, BOR stands out
amongst its peers in terms of the potential size of its drilling targets as
Market cap (£m) 288.4 well as the expertise of its management team.
Net cash (£m) 102.3
Enterprise value^ (£m) 186.1 Drilling is underway – high risk, but potentially high reward
The Leiv Eiriksson rig started drilling at the beginning of February and will drill the
No. of shares (m) 428.8
Darwin and Stebbing prospects before moving on two drill two wells for FOGL. Darwin
Average daily vol ('000, -3m) 2,060
and Stebbing will test two different play types, therefore success or failure at Darwin
means nothing for Stebbing. Darwin and Stebbing have 15% and 10% chances of
12 month high/low (p) 73/44 success respectively and each have billion barrel potential. Assets of this sort of size
drive development and attract buyers.
(%) 1m 3m 12m
Absolute -5.9 +18.5 +3.5
Drilling success does not equal commerciality – a long way to go
FTA relative -9.8 +10.9 +5.2
Rockhopper's success at Sea Lion has led the company and some commentators to
discuss the field’s commerciality. We acknowledge that it is a large field, which if
Price & price relative (-2yr)
located in many locations would be easy to develop. However, the geopolitics and
100 absence of infrastructure may yet prove too much to overcome. Argentina’s escalating
90
80 use of regional and international politics has been a smart move and should not be
70 underestimated when investors are thinking about development options and potential
60
50 asset sales.
40
30 Valuation and recommendation
Feb May Aug Nov Feb May Aug Nov Feb Our core valuation comprises three elements – near term exploration at Darwin 46p;
Price Relative and at Stebbing 53p; and the pre-drill cash (c.$192m on 31/12/11) per share which
Source: Datastream contributes 27p. This cash component will obviously decrease significantly post
Share price as at close: 9 February 12 drilling which we estimate will cost c.$150m. We initiate coverage with a Buy
recommendation and set a pre-drill target price of 126p.
Next news
FY Results However, given the market’s reactions to both Rockhopper and Desire’s news flow last
year, Borders looks likely to have a very volatile ride during drilling. We would
Business therefore advise investors to have a pro-active response to their position rather than
Oil exploration focusing on frontier or emerging riding out the inevitable peaks and troughs.
basins where there is potential to identify and
commercialise high value prospects.
A draft of this research has been shown to the company following which minor factual amendments have been made.

www.bordersandsouthern.com/

Year end Revenue EBIT* PBT* Tax Adj. EPS* PER EV/EBIT* Div yield
Dr. Dougie Youngson December ($m) ($m) ($m) (%) (c) (x) (x) (%)
Research Analyst
+44 (0) 20 7107 8068 2009A 0.0 (1.2) 3.2 0.0 1.5 69.1 (243.2) 0.0
dougieyoungson@seymourpierce.com 2010A 0.0 (1.5) (0.2) 0.0 (0.0) (2,755.4) (195.6) 0.0
2011E 0.0 (1.9) 1.3 36.4 0.2 563.9 (152.3) 0.0
Sam Wahab ACA
Research Analyst * excludes exceptional items and amortisation of acquired intangibles.
+44 (0) 20 7107 8094 ^ EV calculation adjusted for core cash, investments etc.
samwahab@seymourpierce.com Source: Seymour Pierce Ltd

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.

Seymour Pierce Oil & Gas February 2012

Seymour Pierce Oil & Gas February 2012

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