Unconventional Gas in Poland

Unconventional gas in Poland
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Special focus - 22 November 2010
Could Poland become another Norway?
Aurelian: Drilling for tight gas in Poland started
BNK Petroleum: Pure shale gas, early E&P

in Europe
FX Energy: Conventional gas play, with large

E&P area
San Leon: Immense resources, what next?
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Sector Report – Unconventional gas in Poland
Table of contents
Executive summary ......................................................................................................................................................3

Investment case............................................................................................................................................................5
Potential triggers/risks ..................................................................................................................................................8
Peers.............................................................................................................................................................................8
Market overview............................................................................................................................................................9
Company profiles
Aurelian Oil & Gas ......................................................................................................................................................21
BNK Petroleum ...........................................................................................................................................................27
FX Energy ...................................................................................................................................................................35
San Leon Energy ........................................................................................................................................................47
Contacts......................................................................................................................................................................53
Disclosures .................................................................................................................................................................54
Analyst: Radim Kramule +420 224 995 213

rkramule@csas.cz
Erste Group Research – Sector Report November 22, 2010 Page 2
Executive summary
The energy position of Europe could change thanks to unconventional gas. The
search for this gas is relatively new in Europe and many skeptics forecast various
risks or uneconomical geology. However, similar skepticism was seen in the US,
while the country managed to increase its NG reserves by 46% since 1999 to the
current 6.93 Tcm and unconventional gas resource estimates are said to be as high
as 200 Tcm. Shell and NPC put European unconventional gas reserves at 29 – 34
Tcm (some 60 years of consumption), while Poland itself could be sitting on as
much as 1.36 Tcm of this gas type, while some estimates go as far as 3 Tcm. With
annual consumption of approx. 14 billion cm (Bcm) p.a., this would represent 100
years of consumption for Poland (or more than 200 years in the upper case).
Why is it worth looking at unconventional gas prospects in Poland (Europe)?
- Poland is a net NG importer, with a 70% share in total consumption, while
demand is likely to grow (low per capita gas consumption).
- The EU has a restrictive CO2 emission plan, while gas-fired PPs emit only
ca. 50% of CO2 of coal-fired. Poland has ca. 90% coal-fired PPs and plans
to build 4-5 GW of installed gas-fired PPs. This could increase demand for
gas by 12-15%.
- Polish gas prices are set by the local regulator and seem to be quite
inelastic in the downward direction (PGNiG has recently applied for a 10%
price hike).
- Attractive E&P fiscal terms (low corporate taxes, low royalties).
- Can benefit from US technological advancement (know-how transfer).
- Environmental concerns could be counterbalanced by Poland’s aim for
energy security independent of Russia.
- Large estimated resources and similar geology (Permian base).
Fiscal terms
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Corporate income tax 19% 35%
Acreage costs/acre USD 0.55 USD 250-30tsd
Royalties 1%-2.5% 12.5-20% non-proven areas
Source: BNK Petroleum, PKN Orlen
Polish gas = PGNiG? Not totally correct, but the market is dominated by the
majority state-owned PGNiG, which produces, imports, explores for and distributes
NG in Poland. It also has the biggest number of oil & gas exploration licenses in
Poland (89 out of 221). However, other interesting small E&P companies operate in
Poland. The interesting prospects for Polish unconventional gas were recently
demonstrated by Marathon, ExxonMobil and ConocoPhillips, which acquired several
E&P licenses in Poland.
How then to play the unconventional gas story in Poland (Europe)?
- PGNiG is definitely an option, with a large number of E&P licenses. Lotos
and PKN also plan to focus more on the E&P segment.
- Interesting small-cap publicly traded E&P companies operate in the country,
e.g. Aurelian, BNK, FX Energy and San Leon.
- Small-cap E&Ps have the advantage of large upside potential (unlike big-
caps) if their exploration proves successful (however, risks are high as well).
Moreover, they can benefit from potential M&A (even from local players like
PKN/PGNiG) and farm-out agreements.
- We quite like Aurelian (tight gas) and FX Energy (conventional gas) to
spread out the risks, as the companies should come up with strong news
flow, fast production ramp-up and large exploration acreage (note that we
do not run a full model and valuation on Aurelian, suggestions are based
more on the interesting prospects of Polish unconventional gas than any
specific valuation).
Aurelian (AUL LN) is a London-based publicly traded company. It has several E&P
assets across the CEE region with Poland its biggest one. Aurelian focuses on tight
gas development in the Rotliegendes basin, while the Siekierki project (near
Poznan) is currently the most promising project. The company has third party
certified 10.5 Bcm of contingent resources, prospective NG resources of 34 Bcm
and 326 MMbbls of prospective oil reserves. Reasonably sized production is
scheduled to begin in 2012. The history of the company dates back to 2002.
BNK Petroleum (BKX CN) is a Toronto-listed company with producing &
exploration assets in the USA and several E&P licenses in Poland and Germany.
The company predominantly concentrates on shale gas plays. BNK had 37.9
MMboe of 2P reserves with NG comprising 38%, oil 15% and NG condensates the
rest. The company does not disclose potential resources. BNK currently holds
almost 3.5mn acres in Europe (Poland 31% share), so the exploration potential
seems to be promising.
FX Energy (FXEN US) is based in the USA with most of its operations based in
Poland. The exploration acreage amounts to 4.25mn acres. 2P reserves stand at 2.6
Bcm (15.3MMboe, while the company estimates that more than 80 Bcm of NG could
be in its potential resources. FX predominantly focuses on conventional gas
production & exploration. Its history dates back to 1995. The company would like to
significantly ramp up production in the next couple of years.
San Leon (SLE LN) is a London-based E&P company with a diversified exploration
portfolio (Morocco, Poland, Italy, the Netherlands). Its history dates back to 1995,
but the first E&P license was awarded in 2007. The company does not give clear
guidance, but the 2P reserves could be around 15.2 MMboe and almost 3 Bboe of
potential resources, while Poland could make up around 20% of these estimated
resources.
2H 2010 1H 2011 2H 2011
Up to 9 spud wells until end 2 wells appraisal, First gas end 2011,
Aurelian 2011, seismic, Rom. Siekierki (seismic) & Siekierki (facility constr.,
Divestment? partner announc. well tests)
Continues drilling and Continues drilling and
Continues drilling and
BNK Petr. fraccing, new acreage, fraccing, new acreage,
fraccing, new acreage
potential farm-outs potential farm-outs
KSK wells to push rate over 2 Rigs through 2012, 3D Winna Gora production
FX Energy
18 Mmcfe/d, Lisewo well seismic southeast start
Poland (seismic & drilling), Poland, Italy, Morocco Poland, Italy, Morocco
San Leon
Morocco & Italy (seismic) (drilling) (drilling)
Source: Company data
It is fair to say that all four companies are relatively small-cap plays. While San Leon
is clearly the least “advanced” in exploring its assets and BNK has the highest level
of reserves. In terms of prospects, we like Aurelian and FX, given their
tight/conventional gas focus and large acreage. Valuation is the key concern,
thanks to the lack of significant reserves and production (note that we do not run a
full model and valuation on Aurelian, suggestions are based more on the interesting
prospects of Polish unconventional gas than any specific valuation).
Mcap EV Reserves Contingent Potential Resources Key Mcap/ Mcap/ Explor.

Company name EURmn EURmn MMboe MMboe MMboe CEE source 2P+50%2C Poten. Res. Acreage
Aurelian 240.1 149.0 0.4 62 526 100% Tight gas 7.6 0.5 3.1mn
BNK Petroleum 290.1 209.6 37.9 n.a. 1365-7215* 28%* Shale gas 7.7 0.04-0.2 3.5mn
FX Energy 184.7 145.5 15.3 n.a. 479 98% Conv. Gas 12.1 0.4 4.3mn
San Leon 87.1 69.4 15.5 n.a. 2833 11% Gas/oil 5.6 0.03 11.6mn
* BNK does not provide an estimate; the potential resources are likely far higher, given the large acreage
Source: Bloomberg, company data, Erste Group
Investment case
European There are hundreds of E&P companies around the globe that are seeking hydrocarbons,
unconventional typically with relatively large exploration acreage and huge estimated potential resources. At the
gas same time, CAPEX requirements are immense, with no sure outcome (drilling success). In
development addition, without a significant production flow, such companies issue fresh capital, farm-out their
should benefit acreage or are forced to take on debt. The companies in our focus are no exception to the above
from US know- and we do not think that they would be “special” within their industries. The reason why we have
how analyzed Aurelian, BNK, FX and San Leon and their prospects is more connected to the fact that
they are active in Poland (which has great potential, in our view) and were able to acquire
relatively interesting assets under favorable terms. We are also fond of the “unconventional” gas
story, as we believe that Europe could (with estimated reserves of 29-34 Tcf) follow the US
development (albeit on a smaller scale), as the region can benefit from US technological know-
how.
Source: E-On
FX Energy The key differences among the companies are probably in the stage of development, regional
should have focus and primary exploration target. The summary of the most important facts is in the table
advantage over below. In terms of regional focus, Aurelian is a pure CEE player, while FX has the majority of its
its peers, potential resources in Poland (some 98%+ estimated). San Leon has the largest exploration
thanks to acreage, with more than 10mn acres, but we find the company currently unable to develop all of
conventional its projects (farm-out agreements are the “only” solution). Moreover, it might be quite difficult for
gas San Leon to coordinate various projects efficiently (geographically distant; some on-shore, some
off-shore). In terms of exploration and production costs, conventional gas development is the
most economical one, followed by tight gas, shale gas and coalbed methane (FX Energy should
therefore have a clear economic advantage over Aurelian, and Aurelian over BNK).
Exploration area allocation and primary exploration focus
Acreage allocation Hydrocarbons aim Polish focus Production?
Poland 54%; SKK. 10%; Permian & Carpathian
Aurelian yes
Bulg. 8%; Rom. 28% Primarily tight gas basins
Pol. 28%; Germ. 62%; US Shale gas; cur. prod. Silurian, Ordovician &
BNK Petr. yes
10% (100% of reserves) Gas & oil Cambrian shales
Poland 98%; USA 2% (6% of Primarily conventional
FX Energy yes
reserves) gas Permian (Rotliegend)
Poland 11%; Morroc. 85%; Permian basin (shale
San Leon no
Italy 3%, USA 1% Primarily oil; Shale gas gas)
Source: Company data & Erste Group calculations
Production The production ramp-up seems to be most advanced for FX Energy, which should more than
ramping up is double production of NG in 2010. BNK did well in oil in 2009 and its current production level of
the most ca. 1100 boe/d would mean a y/y increase of 17% (from 342 Mboes to 401 Mboes). Aurelian
promising for predicts a significant production boost in 2012, while in 2010 it plans to finish some appraisal
FX work to boost its reserves (2C resources at 62 MMboe). San Leon had no production in 2009
and the company does not provide an outlook. In our judgment, the development of their assets
could take 3-5 years before stable production is in place. News flow from all of the companies
should be strong in 2010, with Aurelian focusing on boosting its reserves, while FX should ramp
up production (boosting revenues and profits) and BNK should see improving financials.
Production profiles
Production profiles
16000 300
14000
250
12000
200
10000
in MM cf p.a.
in Mboe p.a.
8000 150
6000
100
4000
50
2000
0 0
2007 2008 2009 2010e 2011e 2012e 2013e
Aurelian gas BNK gas FX gas BNK oil FX oil

Source: Company data, Erste Group estimates (for FX Energy & BNK)
Local NG Drilling success and production ramp-up remain key risks for the companies, but similarly
producers can important factors include the external environment. Poland (CEE region) has a clear advantage
benefit from in developed infrastructure and fiscal terms (see table below). Gas pipelines generally run
stable gas through the countryside, while most of the countries are clear importers of energy (Poland
prices imports 10 Bcm p.a., out of 14 Bcm consumed). On top of that, European wholesale gas prices
are still above those in the US, as long-term gas contracts are the rule and prices have been, so
far, based on a basket of commodities (oil, coal, electricity). Should the US and spot prices
remain at the relatively low levels seen recently (for 1H10 at USD 4.7/Mcf), European prices
would also converge.
* Net proceeds
Income tax Royalty
$/mcf @ 5
Poland 19% PLN 5.63/mcm $4.06
Romania 16% 3.3%-13.5% $3.63-4.06
Bulgaria 10% 2.5%-30% $3.15-4.39
Slovakia 19% 5% of rev. (net of $4.09
capital; opex)
USA 35% 19% $3.38
Source: Aurelian, FX Energy & Erste Group calculations
* Net proceeds are calculated at wellhead price of USD 5/mcf, not taking into account any costs, depreciation,
amortization
CO2 curbs in European plans to curb CO2 emissions and the fact that gas-fired plants emit ca. 50% less CO2
Europe should than coal-fired plants gas should support the European premium to the US prices, in our view
further support (local utilities plan quite extensive CAPEX for gas-fired PPs). The shale gas boom and relatively
European gas vast resources in the US could be partly blamed for the stagnation in gas prices (risks remain for
prices Europe as well), but subdued industrial production across the OECD countries is definitely an
important factor as well. However, we believe that gas prices should recover to levels above
USD 5/mcf in the medium term (the energy equivalent oil to gas is approximately 6 Mcf to 1bbl of
oil, while the current price is ca. USD 82/bbl of oil and USD 4/ 6Mcf for gas). European gas
prices remain above those in the US and there currently seems to be little reason to for this gap
to narrow, as the only other potential source for gas currently stems from more expensive LNG.
The potential European shale gas ‘boom’ could change this, but this is a question of five or more
years.
Natural gas price comparison

11.0
10.0
9.0
8.0
in USD/mcf
7.0
6.0
5.0
4.0
3.0
2.0
1H 2005 3Q 4Q 1Q 2Q-4Q 2007- 2Q-4Q 1H 2009 2H 2H
2005 2005 2006 2006 1Q 2008 2009- 2010?
2008 1H2010
Polish wholesale avg Henry Hub avg Belgium Zeebrugge avg
Source: PGNiG, EIA & Bloomberg
Unconventional gas development entails vertical and horizontal drilling with the need to fracture
the source rock. Environmental concerns with regards to underground water and water usage
(for fracturing purposes) are rising and could hamper some projects. Some geologists in Poland
expect the commercial development of shale gas to take 5-10 years and see a lack of sufficient
technologies and oil & gas servicing companies. This is naturally hard to judge, but - for example
- Aurelian forecasts tight gas production already as of 2012, FX wants to start drilling horizontal
wells targeting tight gas already in 2010 and, supposedly, Lane Energy already started drilling in
June this year. In terms of the economic viability of unconventional gas projects, it should be
noted that technological advancement in the US makes unconventional gas production more
and more economical. Looking at reports from 2007, the average break-even price of gas on
NYMEX for 10% IRR was at USD 6.86/mcf (OGJ), while some projects required “only” a
wellhead price of USD 3/mcf (coalbed methane in the Powder River basin), or USD 4.5/mcf in
the case of tight gas sands (S. Piceance Basin) to reach the break-even point. For instance,
Chesapeake (one of the largest US NG producers, including shale gas) managed to cut costs
(production, G&A, depreciation/amortiz. ≈ F&D, production tax) per Mcf from USD 4.32 in 2007
to USD 3.25/Mcf in 2009. In contrast, in a recent report from PKN on shale gas, quoting third-
party research, the break-even point for shale gas production was said to range within USD
0.12-0.37/Mcm (USD 4.24-13.4/Mcf), but this referred only to shale gas.
Valuation of Assigning a fair value to any E&P company is the key concern, given the many assumptions and
E&P uncertainties (drilling success, production profile, F&D costs, lifting costs and other
companies is complications). It is best to look at the value of reserves and resources, but again the potential
always tricky resources are typically estimated by the company itself. We have applied, for the time being, a
since they DCF valuation for FX Energy, which has a relatively detailed production profile outlook. We have
typically lack used three case scenarios with regard to the possible production curve, with a mid-case DCF fair
decent enterprise value of USD 248mn and a 12M target price of USD 6.0/share. For the remaining
production three companies, we have primarily looked at the relative value of reserves to market cap.
Generally speaking, the companies are currently traded with a premium to their peer group
median. FX is traded with the highest premium to its peers, but this should be justified by the fact
that it has primarily conventional gas reserves (less expensive to develop and produce). The
larger the exposure to CEE, the larger the premium to peers (esp. US ones), in our view, as the
companies should clearly benefit from better fiscal terms and higher European gas prices.
Investors that want to bet on Polish gas development and this interesting investment case would
probably do well in diversifying their portfolio, which should include FX Energy, Aurelian and, to
a lesser extent, BNK Petroleum. It should be well noted that we have no formal valuation on
Aurelian or BNK so these suggestions are based more on the interesting prospects of Polish
unconventional gas than any specific valuation. We see too much risk in San Leon, as we find
the company over-exposed to large acreage with no clear development strategy.
Mcap Net debt Key Mcap/ Mcap/ Explor. 2010

Company name EURmn EURmn source reserves Poten. Acreage Capex
Aurelian 240.1 -43 Tight gas 7.6 0.46 3.1mn € 20-30mn
BNK Petroleum 290.1 11.1 Shale gas 7.7 0.04-0.2 3.5mn n.a.
FX Energy 184.7 -23.6 Gas/oil 12.1 0.39 4.3mn $ 24mn
San Leon 87.1 13.9 Conv. Gas 5.6 0.03 11.6mn n.a.
Calculated Median (17 companies) 5.6 0.42
Source: Company data, Bloomberg and Erste Group calculations
Potential triggers/risks
We have identified several triggers for the companies, which include primarily:
Successful drilling and the build-up of reserves/resources

Hydrocarbon prices
Takeover or favorable farm-out agreements
Growth in the price of exploration acreage
Among the key risks are:
Standard E&P risks (dry holes, production failures, external prices, etc.)
Changes in legislation (taxes, extraction fees)
Financing issues (dilution of existing shares at a discounted share price)
Environmental and operational concerns in Europe (water population and usage,
population density, depth of drilling)
Peers
Peers are The peer group selection is a very tricky issue. However, we tried to concentrate on similarly
difficult to large E&P companies in the US and UK. The selection was inspired by names mentioned in
compile, as reports presented by the analyzed companies. For reference purposes, we have also included
each company Chesapeake and PGNiG. All of the data in the table regarding reserves and resources was
faces different taken from the respective companies’ presentations. The comparison is made simply on the
risks Mcap and EV to reserves/resources basis, as we find it the most straightforward. Moreover, only
FX and BNK are comparable on other relative ratios, but we have not opted for such a
comparison.
Peer comparison
Mcap EV Reserves Contingent Potential Resources Key Mcap/ Mcap/
Company name EURmn EURmn MMboe MMboe MMboe CEE source 2P+50%2C Poten. Res.
Aurelian 240.1 149.0 0.4 62 526 100% Tight gas 7.6 0.5
BNK Petroleum 290.1 209.6 37.9 n.a. 1365-7215* 28%* Shale gas 7.7 0.04-0.2
FX Energy 184.7 145.5 15.3 n.a. 479 98% Conv. Gas 12.1 0.4
San Leon 87.1 69.4 15.5 n.a. 2833 11% Gas/oil 5.6 0.03
Abraxas Petr. 224.1 259.0 24.9 n.a. n.a. USA Shale gas 9.0
Approach Res. 293.2 207.9 36.5 n.a. n.a. USA Shale gas 8.0
Credo Petr. 59.0 49.1 4.8 n.a. n.a. USA Oil 12.4
Double Eagle Petr. 39.8 85.9 25.6 n.a. n.a. USA Shale gas 1.6
Gasco Ener. 28.7 39.0 8.8 n.a. n.a. USA Shale gas 3.3
Warren Res. 211.9 256.3 22.6 n.a. 100 USA Gas/oil 9.4 2.1
Matra Petr. 28.1 10.8 n.a. 65.0 n.a. Russia Oil 0.9
Afren Petr. 1445.3 1344.3 189.0 n.a. 940 Africa Oil 7.6 1.5
Northern Petr. 117.6 74.2 102.9 n.a. 8400 W. Europe Gas/oil 1.1 0.0
Desire Petr. 439.7 263.5 229.0 n.a. 5187 Falklands Gas/oil 1.9 0.1
Roxi Petr. 21.6 127.1 2.4 74.6 n.a. Kazach. Oil 0.5
Regal Petr. 54.2 74.1 169.0 n.a. n.a. Ukraine Gas 0.3
KOV 168.5 147.0 4.4 54.5 301 Brun./Ukr. Gas 5.3 0.6
PGNiG 5619.62 5458.8 768.8 n.a. n.a. Poland Gas 7.3
Chesapeake 10616.3 20956.2 2633.3 n.a. 13333 USA Gas 4.0 0.8
Median (excl. PGNiG) 5.6 0.4
Source: Bloomberg, company data & Erste Group calculations
Analyzed The companies are currently traded with a decent premium to the median on the Mcap to
companies reserves (including 50% 2C resources) and in line according to prospective resources. FX
appear to be Energy has the highest relative Mcap to reserves ratio, which can be explained by its more
no bargain at advanced production profile (near-term production ramping up). We think that the companies
present vis-à- exposed to CEE should be traded with a premium on Mcap to reserves, compared to those
vis their peers operating in the US, as anticipated net cash proceeds from the CEE region are calculated to be
generally
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the same time, none of
the four companies is really a “bargain” within our peer group universe. Moreover, Chesapeake,
which is a large-cap developed key US gas and shale gas player, trades at only 4.0 times its
reserves and 0.8 times its prospective resources. Poland’s PGNiG also seems to be an
interesting stock, given the facts that the Mcap of 7.3 times its reserves is still a reasonable
value (prospective resources are unavailable) and the firm is also engaged in gas distribution
and storage. We acknowledge that none of the companies has a bargain price. What should
definitely attract investor attention are the large and inexpensive exploration areas (which can be
sold in the future at a profit), operations in CEE (advantageous fiscal terms) and the anticipated
strong news flow concerning drilling and production (FX and Aurelian).
Market overview
Long-term The European gas market is somewhat specific, as it is characterized by LT contracts and a very
contracts dense pipeline network. There are currently three key sources supplying the region with gas –
dominate the North Sea (Norway, the Netherlands, the UK), Russia and Middle East/Africa. Historically,
European gas Russian gas was mainly fuelled to the CEE region, while WE had to rely on the other two
market sources. Despite many comments concerning European dependence on Russia, the EU
produced 269 Bcm (-4.9% y/y) of gas in 2009, or 58% of its consumption (total 464 Bcm in
2009), according to BP.
EU NG production & consumption (Bcm)
490 498 490 494
500 475 485
454 464
443 454
450
400
350
290 298 290
300 279 285 282 283
274 271 269
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
production consumption
Source: BP annual oil & gas review (6/2010)
Russia is Clearly, Russia sells the most NG in Europe, with 113 Bcm in 2009 (24% of annual
biggest consumption). Algeria, Qatar and Libya follow suit, with combined deliveries of 75 Bcm. For
exporter of gas more details, see below.
to Europe
2009 Gastrade to Europe in Bcm
2009 Gas trade to Europe in Bcm
120 112.7
100 95.7
80
60
49.7
40
30.0
18.5 16.5
20 12.8 12.2
9.9 9.6 7.5 6.6
4.0 2.6 2.3 1.5 1.8
1.3 1.0
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EU has The European Union (including EFTA members) is currently estimated (as of end-2009) to be
currently only sitting on 4.4 Tcm of proved NG reserves, with the largest share belonging to Norway (ca. 10
2.3% of global years of consumption and 17 years of production). On the global scale, EU reserves represent a
known NG negligible amount, as the majority of currently known reserves are in Russia (CIS) and the
reserves Middle East. Russia sits on 24% of known global NG reserves.
NG proved reserves distribution (187.5 Tcm)
9% 4% 1%
4%
8%
USA
Rest of NA
Total S. & Cent. America
Russia + CIS
EU
31%
Middle East
Africa
Asia-Pacific
41%
2%
Source: BP & own calculations
Volumes of NG However, things could change with unconventional gas exploration. Europe has every incentive
reserves could to boost its gas resources, as it is likely to run out soon, while it also wants to curb CO2
grow by factor emissions (gas emits half the CO2 of coal) and increase its energy security. Europe is years
of 8 in Europe behind the US in terms of exploration and development (seismic, licensing, technology), but it
can definitely benefit from the accumulated know-how in the US, which can be applied locally.
The estimated volumes of unconventional gas range from 34 to 36 Tcm (E.On), eight times
current reserves. The distribution of resources seems to be concentrated in the northern parts of
Europe – the North Sea, Sweden, the UK, Germany, France, Poland and the Baltics, but also in
the Carpathians (Romania). Poland’s share of resources is expected to be 29-34 Tcf (ca. 1 Tcm
or 3% of the European figure), while Advance Resources estimates the figure to be as high as 3
Tcm for Poland.
LNG poses The majority of the gas is transported via a relatively dense pipeline network (see below),
little whereas LNG imports are relatively minor. There are several projects underway (Nabucco, North
competition to Stream and South Stream) to increase the capacity of pipelines, as well as LNG re-gasification
the pipeline terminals. In 2009, there were 13 terminals operating, nine under construction and 25 planned.
network With gas prices down significantly at the moment, many plans are likely to be postponed, but
LNG will continue to play an ever-more important role (Ukraine plans a 10Bcm LNG terminal,
while Poland and the Baltic states would also like to build terminals). However, LNG will always
be more expensive than local production and conventional gas export via pipelines.
European pipeline network
Source: Gazprom
Natural gas The European (global) gas price recovery is probably the most questionable factor for gas E&P
price recovery players. According to IEA, global gas demand fell by 3% in 2009 and the agency expects
remains an European gas demand to recover to 2007 levels only in 2013 (to still below the 2008 level). On
issue for E&Ps top of that, IEA estimates 200 Bcm of spare production capacity for NG, while LNG supply
capacity is to rise by 50% by 2013. IEA also mentions US shale gas as a key supply source, with
some shale gas plays already profitable at USD 2.5/MMbtu (≈ Mcf). Furthermore, recent studies
show that some unconventional gas fields can be more profitable than conventional ones,
depending on the quantity of resources in place (technology advancement, greater length of
horizontal drilling). Gas-fired power generation should be the key driver for gas demand for
OECD countries, but most of the projects are only being prepared with commissioning starting in
2012 and beyond.
Prior Perception New Understanding
Source: Advanced Resources (3/2010)
European NG Gas pricing formulas in Europe are generally based on long-term contracts. In the above text,
pricing is we have shown the price gap between US and European (Polish) gas prices. Typically, Russian
based on supplies are agreed for decades, with booked quantities and specific pricing formulas, which are
several factors based on a basket of inputs (spot oil prices, spot gas, FX, production costs, transit costs). The
graph below depicts US gas prices (Henry Hub spot) and HH forwards until 2018. The US is not
comparable to the European market (shale gas boom), but has the most comprehensive and
longest data available (good for global gas price indications). Clearly, gas prices dropped
significantly between 2008 and 2010 and, unlike crude oil, have not recovered yet (note the drop
in demand and bearish demand outlook).
Natural gas Futures nicely depict seasonality in prices and are heading slowly upwards (USD 5.3/MMbtu in
price is 2012). What should be pointed out is the price comparison for a barrel of WTI crude and an
strongly MMbtu of oil. This ratio fluctuated around 8-10 times until 2008, while not long ago it peaked
undervalued in close to 22 times. Futures (WTI & HH) multiples slightly favor higher prices for NG than for
comparison to crude, which should slowly bring the ratio below 16 in 2018. However, the energetic equivalent
crude oil price of 1bbl of crude is ca. 6 Mcfe (≈ 6 MMbtu) of gas. Therefore, the price ratio between crude and
gas should be more or less close to 6. From this perspective, NG is definitely strongly
undervalued in comparison to crude oil and we are inclined to believe that, with a greater
number of gas-fired PPs, NG could outperform crude in the medium term.
Gas prices and gas vs. crude oil
11.0 22
10.0 20
9.0
18
8.0
in USD/MMbtu
16
multiples
7.0
14
6.0
12
5.0
10
4.0
3.0 8
2.0 6
Jun11
Jun12
Jun13
Jun14
Jun15
30.6.06
29.12.06
29.6.07
31.12.07
30.6.08
31.12.08
30.6.09
31.12.09
30.6.10
Dec10
Dec11
Dec12
Dec13
Dec14
Dec15
Dec18
Forwards (LME) WTI/HH NG Henry Hub NG (left axe)
Source: Bloomberg & Erste Group calculations
NG is To sum up, there seems to be a relatively abundant amount of gas (unconventional) around that
currently an is quite fairly distributed. The drop in demand, increasing LNG supply (with gas transforming into
abundant a tradable commodity) and shale gas developments lead to NG price pressures (with the
commodity, crude/NG price multiple at record levels). On the other hand, CO2 emissions curbs in Europe
but will be induce electricity producers to switch from coal to alternatives, while gas-fired plants are the
more and fastest available alternatives (ca. three years to construct, half the CO2 emissions). Naturally,
more desired energy demand in Asia should also help balance the supply/demand of NG. We therefore
one remain fairly optimistic about the NG price prospects in the medium term, with a calculated
wellhead price of USD 5.5-6.5/Mcf in Europe.
Focus on Poland
Natural gas Thus far, we have been describing the general market overview in Europe and the US, while
consumption Poland was touched on only marginally. Poland is the sixth largest EU country, with a population
in Poland of almost 40mn. Its 2009 nominal GDP arrived at PLN 1,342bn (EUR 335.5bn), while GDP per
lags behind capita stood at EUR 8.8tsd (EUR 22.9tsd in the EU). Poland is an agricultural state, with a 3.7pp
its neighbors share of GDP, but is also doing well industry-wise (32pp, vs. Germany’s 29.8pp). The country
has no nuclear power plant, with the majority of electricity generation coming from coal (above
90%). Total consumption of NG in Poland is around 14 Bcm (367.5 MMcm/capita; see below). In
comparison to its neighbors, Poland is lagging behind, as Germany saw NG consumption of 951
MMcm/capita and the Czech Republic 796 MMcm/capita in 2009. There is definitely a strong
convergence story for Polish NG consumption growth.
NG market in Poland NG market in Poland
16000
14008.7 14305.5 14347.6
14000 13562.1 13241.1
12000
10000
in MMcm
8000
6000
4318.1 4277.1 4276.1 4083.4 4105.2
4000
2000
0
2005 2006 2007 2008 2009
Domestic production Imports Russian imports Total NG

Source: PGNiG
There are many Among the key triggers for Polish NG demand should be its energy sector. Poland is currently
gas-fired PPs planning 4-5 GWs of installed gas-fired PP capacity by 2015. More realistic estimates calculate
planned to be with 1.5-2 GWs by 2015. There are currently two projects soon to be finished, with installed
built in Poland capacity of 630 MW. Assuming some 50% efficiency, six hours of daily operation and energy
conversion of 1 MWh = 3.413 MMbtu, we would see extra NG consumption of 270-280 MMcm
p.a. (2% of Poland’s annual consumption). Assuming an additional 1.5-2 GWs installed, the
demand for NG could rise by ca. 650-860 MMcm p.a. (4.6-6% p.a.). Naturally, the longer the
daily working hours, the more NG consumed. For the time being, though, we assume only peak
load would be served.
Poland has The dominant Polish gas distributor, importer and producer is clearly PGNiG. It sold 13.28 Bcm
signed new LT of NG in 2009 and produced some 4.1 Bcm of NG in 2009 (including foreign assets). PGNiG
contract for gas would like to boost NG production to above 6 Bcm by 2015, but at the same time it recently
deliveries with signed a new contract with Gazprom with 38% higher volumes (currently approx. 7.5 Bcm, newly
Russia 10.2 Bcm p.a.). What is also interesting is the length of the contract, which was originally to have
lasted until 2030+ and was signed only until 2022 (speculation about an unconventional gas
boom?). As mentioned earlier, the Polish pricing mechanism is based on long-term contracts
with Russia and local industries/consumers are offered prices based on wholesale tariffs agreed
with the local regulator (PGNiG recently succeeded with a 6.1% hike) and in turn the wholesale
prices calculated by PGNiG are based on Russian price contracts, crude oil prices, FX, cost of
local production and transit fees.
Natural gas prices in Poland – wholesale tariffs
Natural gas prices in Poland - wholesale tariffs
1100 30
998
1000 966
898 910
900 25
779
800
709
20
700 651
582
600 541
493 15
500
10.6
400 9.8
9.1 10
8.0 8.0
300
5.9 6.5
4.7 5.1
200 4.3 5
100
0 0
1H 2005 3Q 2005 4Q 2005 1Q 2006 2Q-4Q 2007-1Q 2Q-4Q 1H 2009 2H 2009- 2H 2010?
2006 2008 2008 1H2010
in PLN/Mcm in USD/Mcm in USD/Mcf (right axe)
Source: PGNiG
FX Energy has Clearly, wholesale prices in Poland seem favorable for local producers (even though wholesale
reached USD prices can differ substantially from wellhead prices). The proposed hike in wholesale tariffs
5.3/Mcf realized would bring the price of gas above USD 9/Mcf, which is an 80% premium to the US spot market.
NG price for 3Q Note that the realized Polish NG prices of FX Energy in 3Q 2010 reached USD 5.3/Mcf (up 14%
2010 y/y).
The key conclusions regarding the Polish gas market can be summarized as follows:
Relatively inelastic gas prices in the downward direction (since 2005)

Large share of imports in total consumption (70%); therefore, almost unlimited demand
for local production (if economical)
Low per capita gas consumption (48% of Czech NG consumption and 38% of German),
convergence story
Current NG reserves estimated at ca. 110 Bcm (or eight years of consumption, acc. to
BP), while unconventional gas reserves could increase it more than ten-fold to an
estimated 1.36 Tcm (100 years of consumption) while Advanced Resources put the
figure at 3 Tcm.
Energy mix favors coal (90%+ of capacities). New capacities outside coal will be needed
(gas, nuclear, renewable). Gas-fired plants could boost local NG demand.
Unconventional gas in Poland
Some 25 There are 221 E&P licenses granted in Poland, according to figures from June 2010 (PKN).
international Clearly, the biggest player on the Polish E&P scene is PGNiG, with 89 licenses. More than 20
and local entities hold the remaining licenses (thanks to farm-in/-out agreements, the situation changes
names hold quite often). Companies bearing the licenses naturally concentrate primarily on crude oil and
currently 221 conventional gas exploration. However, recently, the rush for unconventional gas led several
E&P licenses in companies that already held licenses to consider its exploration (some hold purely
Poland unconventional E&P licenses, e.g. Exxon and Mazovia Energy). Among the biggest global
names recently active in Poland are ExxonMobil (five licenses), Chevron (four licenses) or
Marathon oil (seven licenses). For the differences between conventional and unconventional
gas, please see the special section below. It should be noted that no unconventional gas
production is yet in place (according to the available information, not even in Europe).
Licenses in Poland
Source: FX Energy
Exxon holds 3 In the table below, there is a list of E&P companies holding licenses in Poland. FX Energy has
pure the second largest number of licenses. The big global names among the exploring companies
unconventional suggest that the unconventional gas prospects in Poland are interesting (note that 158 licenses
hydrocarbon are for conventional sources exploration, 52 for both unconventional and conventional and 11 for
exploration unconventional only, with Exxon holding 3 out of the 11). Naturally, current licenses owners can
licenses benefit from potential farm-out/-in agreements.
Exploration licenses in Poland (6/2010), Total 221

PGNiG 89 PKN Orlen 5
FX Energy 21 ExxonMobil 5
DPV Service 21 CalEnergy 4
Aurelian 12 Chevron 4
Conoco (3 Legs) 9 Avista 3
Petrobaltic (Lotos) 8 Realm Energy 3
EurEnergy (Mazovia) 7 Cuadrilla Polska 2
Marathon 7 PL Energia 2
San Leon 6 Gas Plus 1
BNK Petr. 6 Strzelecki Eneria 1
RWE Dea 5
Source: PKN Orlen
Several issues Probably the biggest question marks with regards to unconventional gas development in Poland
could seriously (Europe) are the speed of exploration/production, environmental concerns and economic
hamper viability. Key issues are as follows:
unconventional
gas Unconventional gas production requires fracturing (pumping highly pressured water,
development sand and chemicals in a well) and findings in the US show that water pollution does
occur. On the other hand, producers argue that standards have improved and potable
water does not typically lie below a depth of 1.5km, where fracturing takes place.
The fluid requirements are immense. The average amount of fluid used in one well
fracturing amounts to 7.5-11.3 mn liters, while 450-680 tons of sand is needed (PKN
data). Some counterbalancing can be achieved with new recycling techniques.
A drilling campaign is more extensive for unconventional gas, as it requires several
independent drills to tap a reservoir (negative implications for land requirements).
There are only about 100 land-based drilling rigs in Europe, compared to 949 in the US
(according to The Times). This could hamper fast production take-off in Europe,
according to some skeptics.
Costs of unconventional gas wells (horizontal) are likely to be higher in Poland (USD 5-
12mn), as the depth of reservoirs is greater than in the US.
Commercial production may take 4-5 years to develop, according to Poland’s chief
geologist. The institute has issued 56 licenses to drill (April figure) and was said to be
receiving new applications (PGNiG was to start drilling within a month).
The IEA said in November 2009 that European unconventional gas production is
forecast to take off in the second half of the period to 2030, but should nonetheless
remain a relatively small part of overall output.
On the other hand, the Polish authorities seem to be in favor of E&P development. The fiscal
terms were already touched on, but we can recap the highlights as follows:
Corporate income tax at 19% (compared to 35% in the US)

Acreage costs per acre at ca. USD 0.55, compared to USD 250-30,000 in the US
Royalties almost non-existent at 1-2% (US 12.5-20% in non-proven areas)
Permian and There are two major geological areas in Poland that bear potential resources of natural gas – the
Carpathians Permian basin (northern and central parts) and the Carpathians in southeast Poland. The
basins are Permian basin (Rotliegend) in Poland is an extension of geology that stretches from the UK to
holding NG the Netherlands and Germany. The European Permian basin (formed 299-251mn years ago) is
reservoirs a thick sequence of sedimentary rocks deposited in a large sedimentary basin. The Rotliegend is
the lower portion of the Permian sequence and consists of over 600 meters (2,000 ft) of
sandstone and evaporites. It is overlaid by a 1,000-meter (3,300 ft) thick sequence of evaporites
known as the Zechstein Formation. BNK Petroleum estimates the shale depth of Baltic Poland
reservoirs at 7,000 to 12,500 ft (2.1-3.8km). Other countries have been producing gas from
these geologies for several decades, while Poland is simply under-explored. It should be noted
that the 5 Tcf (142 Bcm) mentioned on the map below is the current estimated NG reserves
figure from conventional reservoirs.
Source: FX Energy (yellow acreage belongs to FX)
Depth of shale The shale basin in Poland extends from the coast (between Slupsk and Gdansk) towards
basin in Poland Warsaw and continues towards Lublin and Zamosc. The northern part of the basin should have
is greater than potential shale gas reserves at a depth of 1,200-2,500 meters and the southern one at 2,500-
in US 4,500 meters, while the eastern part should range within 2,500-3,000m and the western part
from 4,000-4,500m (PKN data). For a comparison, the most developed shale gas area in the US
(Barnett shale in Texas) has deposits from 1,900 to 2,600m. Naturally, deeper reservoirs are
more expensive than shallower ones, as every meter of drilling costs extra money (from USD
0.8-2mn for a 1,500m well, but USD 6-8mn for 3km wells). Aurelian and FX Energy have their
licenses concentrated somewhere in the middle, while FX looks to be closer to the coast (north).
The Carpathian basin stretches across several CEE countries, with Romania and Bulgaria likely
to bear the biggest share of potential resources. However, it extends quite nicely to southeastern
parts of Poland as well (see below). Currently, the belt is said to bear ca. 7 Bbbl of liquids and
roughly 20 Tcf of gas (HIS).
Carpathian basin
Source: Aurelian (yellow acreage belongs to Aurelian)
Poland is To sum up, Poland seems to be well positioned for interesting E&P activity for unconventional
attractive for gas. The companies involved can benefit from attractive fiscal terms, promising geology, a
hydrocarbon history of hydrocarbon production (significant amounts date back to the 1970s), an inviting
exploration landscape (flat terrain), a stable gas pricing mechanism (regulated) and a favorable demand-
domestic supply balance (ca. 70% of NG is imported). Probably the most promising issue with
regards to Poland is the estimated figure of potential resources, which currently stands at ca. 1-
3Tcm (71-200+ years of annual consumption). The biggest concerns that could halt the
development are definitely environmental issues (water pollution), population density (heavy
drilling required) and the depth of reservoir rocks (sometimes twice as deep as in the US).
What is unconventional gas?

Unconventio First of all, it should be well noted that what is now considered unconventional might soon
nal gas needs become conventional, thanks to technological progress. The key difference is the relative levels
to be of difficulty of extracting NG economically. Unconventional gas does not typically flow freely from
stimulated to a reservoir rock and needs to be stimulated by pumping water, sand and chemicals into the
flow to reservoir, fracturing it and freeing the gas to flow to the surface. What is also typical is the
surface horizontal drilling technique applied for unconventional gas development. There are six main
categories of unconventional gas – deep gas, tight gas, shale gas, coalbed methane,
geopressurized zones and Arctic (sub-sea) hydrates.
Source: E.On
Deep gas – typically lies 15,000 feet (4.6km) or further below ground. Lately becoming more
conventional.
Tight gas – gas that is stuck in a very tight formation underground (unusually impermeable), like
sandstone or limestone. Extraction requires various techniques, including fracturing and
acidizing.
Shale gas – gas deposited in a very fine-grained sedimentary rock, which is easily breakable in
thin, parallel layers. However, gas extraction requires fracturing.
Coalbed methane – located in coal seams, often near surface. Methane used to be a by-
product in coal mining, while nowadays it is becoming increasingly important. Key challenge is
removal of water.
Geopressurized zones – underground formations that are under unusually high pressure for
their depth. Formed by clay layers and absorbent materials, such as sand or silt. Probably hold
the largest deposits of NG in the world, but their commercial extraction is the most challenging.
Methane (Arctic) hydrates – formations made up of a lattice of frozen water, which creates a
“cage” around molecules of methane. Complicated to extract, economically and environmentally
questionable.
It should be noted that each type of rock formation requires a different drilling technique. The
common factor is the horizontal drilling. The hydraulic fracturing technique creates fractures that
extend from a borehole into rock formations. A hydraulic fracture results after pumping a fluid
into the well bore at a rate sufficient to increase the pressure down the borehole, cracking the
surrounding rock formation. In order to keep this fracture open after the injection stops, they add
in a solid proppant to the fracture fluid. The proppant, which is commonly sieved-round sand,
pumps into the fracture. This sand is higher in permeability than the surrounding formation and
the propped hydraulic fracture then becomes a conduit through which the fluids flow back to the
well. The technology is evolving, with advances coming in terms of horizontal drilling length (from
1,500 feet up to 5,000) and intensity of stimulation (increasing the number of stimulation stages
for one horizontal well). Also some horizontal drilling techniques enable drilling in a ray (up to 8
directions) to maximize the drilled well.
An example of number of stages on a single horizontal well
Source: Advanced Resources
General summary
Energy Europe’s long-term dependence on foreign hydrocarbon supplies, the ageing of the North Sea
dependence of fields and the determination to curb CO2 emissions will pose major challenges in the years to
Europe on come. The relatively new and under-explored unconventional gas reservoirs create an
external interesting opportunity to 213.227.88.2
deal with someonof2011-02-08
the outlined03:42:56
problems. WeDownloadPDF.
believe that the EU
ISIEmergingMarketsPDF pl-aek-user10 from EST.
sources will should be open to unconventional gas exploration and production. Moreover, European pricing
help mechanisms create a very stable environment for producers, which can benefit from
unconventional technological know-how from the US. The number of drilling rigs, environmental concerns and
gas the economic viability of unconventional gas projects could prolong the commercial production
take-off. However, we remain optimists, as several companies in Poland are already drilling and
commercial production could start within 2-3 years.
Company Report – Oil & Gas – UK – November 22, 2010
Aurelian Oil & Gas Not rated

Aur elian Oil & Gas
Radim Kramule, (Analyst) +420 224995213 RKramule@csas.cz Aur elian Oil & Gas
EUR mn 2006 2007 2008 2009 52 w eeks

65
Net sales 0.4 2.8 1.9 3.0 60
EBITDA -3.2 -7.4 -0.8 0.5 55
50
EBIT -3.3 -7.7 -4.9 -0.0 45
Net result after min. -1.4 -9.6 -11.6 -1.0 40
35
EPS (EUR) -0.04 -0.26 -0.09 -0.00 30
CEPS (EUR) -0.03 -0.25 -0.06 -0.00 25
20
BVPS (EUR) 1.86 1.54 0.34 0.25 15
Div./share (EUR) 0.00 0.00 0.00 0.00 Aurelian Oil & Gas DJ EURO STOXX Oil & Gas
EV/EBITDA (x) nm nm -22.7 163.1
P/E (x) nm nm nm nm
P/CE (x) -19.6 -2.0 -2.9 -225.8 Performance 12M 6M 3M 1M
Dividend Yield 0.0% 0.0% 0.0% 0.0% in EUR 227.3% 49.3% 27.8% 13.7%
Share price (GBP) 60.00 Reuters AU L.L Free float 37.5%

Number of shares (mn) 339.5 Bloomberg AUL LN Shareholders Lord Sainsbury (12.9%)
Market capitalization (EUR mn) 239.5 Div. Ex-date Kulczyk Investments (10.1%)
Enterprise value (EUR mn) 227.7 Target price Homepage: www.aurelianoil.com
Will investors feel hydrocarbon aura soon?

- Aurelian has vast potential resources and large acreage (3.1mn) in the CEE region. It enjoys a sound
balance sheet and a good position for potential farm-outs (financing capital-intensive E&P). Its tight gas
focus seems like a viable strategy, given technological advancements. The risks for Aurelian involve the
still relatively long time before it can start producing at interesting rates, with uncertain success for its
drilling rate (50%, for the time being) and the need for additional finance (farm-outs, capital increases,
new debt). Should all go well, the company could multiply its current production of 2.6 MMcf/d by a
factor of 38x. The current Mcap to 2C resources stands at EUR 7.6/boe.
- Aurelian is a London-based company with exploration assets spread throughout the CEE region. It
currently has 372 Bcf of 2C resources (62 MMboe) and more than 500 MMboe of prospective resources.
The company managed to successfully raise EUR 39mn (106.4mn new shares @ 37 euro cents) in
February and the company is currently sitting on almost EUR 50mn in cash. The expected monetary
value (EMV) of Aurelian’s current estimated resources stands at EUR 1.35bn (CPR report 12/2009), or
almost 6 times its current MCap.
- The company currently has five producing wells (out of 14 drilled) with relatively small output (2.6
MMcf/d in 2009, total 159 kboe), primarily in Romania. The indicative production profile of the company
puts 2010 and 2011 average daily rates at “only” 2.6 and 1.8 MMcf/d, respectively. Nevertheless, at the
beginning of 2012, the company would like to achieve 15 MMcf/d and then 100 MMcf/d by 2015. The
massive increase in production rates entails an extensive drilling campaign and news flow.
- Poland is currently the key area of focus for Aurelian. The company has been active in Poland since
2003, when it acquired its Poznan license. The company is a 90% license owner of the Siekierki area
(near Poznan), where 93% of its 2C resources lie, with a mid-case EMV of EUR 478mn. Aurelian is
already drilling and first production from Siekierki could start as early as 2011. In total, Aurelian plans
nine Exploration & Appraisal wells within the next 24 months, with the majority of investments flowing
into the Siekierki development. Currently, the biggest upside is the ability of the company to move 2C
resources into reserves (successful drilling campaign).
Investment case
Aurelian sits Aurelian is a London-based company with exploration assets spread throughout the CEE region
on 62 MMboe (Poland, Bulgaria, Romania and Slovakia). It currently has 372 Bcf of third party certified 2C
of 2C resources (62 MMboe) and more than 500 MMboe of prospective resources. The company
resources managed to successfully raise EUR 39mn (106.4mn new shares @ 37 euro cents) in February
and 500+ and is currently sitting on almost EUR 50mn in cash. On top of that, Aurelian has signed a EUR
MMboe of 75mn credit facility to develop its assets. The expected monetary value (EMV) of Aurelian’s
potential current estimated resources stands at EUR 1.35bn (CPR report 12/2009), or almost 6 times
resources current MCap. The upside potential is huge, but one cannot expect Aurelian to tap these
resources immediately. The focus area of the group is currently the Permian basin in central
Poland and the Carpathian belt in southern Poland/Slovakia.
Source: Aurelian
PGNiG and The table below provides a summary of Aurelian’s exploration/production blocks in respective
Aurelian - countries with EMV where applicable. Aurelian also divided its activities between core and non-
partners in core, as it would like to sell its Romanian and Bulgarian assets to finance its E&P activities in
Carpathian Poland and Slovakia. Aurelian is producing from the Bilca license in Romania and has three
exploration appraisal areas (Poznan and two in Romania). All other areas are in the exploration phase, for
the time being. An example of a hopefully successful farm-out agreement signed recently by
Aurelian (Dec. 2009) is the partnership with PGNiG in the Polish Western Carpathians (PGNiG
received a 40% interest in Karpaty West and a 20% interest in Karpaty East). In exchange for
the interests, Aurelian received ca. 2 tsd km2 of seismic data, access to an extensive database
and wells drilled to be reprocessed. Aurelian CEO Bainbridge estimated that the data received
would cost ca. USD 40mn today to replicate all the work. Implicitly, PGNiG “bought” the licenses
at a 68% discount to Aurelian’s EMV (EUR 99.2mn combined EMV value of the two interests).
Applying the same logic to the total EMV, we would arrive at EUR 406.4mn (32% of EUR
1270mn), almost two times the current Mcap.
EMV Net to Working
Country License Operator
(CPR) Aurelian interest
Poznan
Poland (permian)
(Siekierki) € 478mn 346 Bcf 90% Aurelian
Poland (permian) Kalisz (Exp.) - - 50% Aurelian
Poland (permian) Cybinka (Exp.) - - 35% Aurelian
Core area
Poland (permian) Torzym (Exp.) - - 35% Aurelian
Poland (carp.) Karpaty West € 33mn 193 Bcf 60% Aurelian
Poland (carp.) Karpaty East € 430mn 237 MMbbl 80% Aurelian
Poland (carp.) Bieszczady € 158mn 89 MMbbl 25% PGNiG
Slovakia (carp.) Medzilaborce - - 50% Aurelian
Slovakia (carp.) Snina - - 50% Aurelian
Slovakia (carp.) Svidnik € 136mn 408 Bcf 50% Aurelian
Bulgaria (carp.) Golitza Block B € 6mn 9 Bcf 30% JKX
Non-core area
Bulgaria (carp.) Golitza Block B1 € 5mn 76 Bcf 30% JKX

Romania (carp.) Brodina Block € 9mn 15 Bcf 34% Aurelian
Romania (carp.) Bilca Production € 5mn 2 Bcf 63% Aurelian
Romania (carp.) Cuejdiu Block € 6mn - 45% Aurelian
Romania (carp.) Bacau Block € 1mn - 41% Aurelian
Romania (carp.) Suceava € 3mn - 50% Aurelian
Source: Aurelian
Jump in The company currently has five producing wells (out of 14 drilled) with relatively small output (2.6
production MMcf/d in 2009, total of 159 kboe) in Romania. The indicative production profile of the company
rate should puts 2010 and 2011 average daily rates at “only” 2.6 and 1.8 MMcf/d, respectively.
come at the Nevertheless, at the beginning of 2012, the company would like to achieve 15 MMcf/d and then
end of 2011 100 MMcf/d by 2015. The massive increase in production rates entails an extensive drilling
campaign and news flow. There is a good chance that Aurelian could start production earlier,
thanks to the ongoing spudding at Siekierki. The majority of the production increase should
come from Siekierki, as Aurelian calculates with 93% of 2015 production coming from this field.
The key risks to the anticipated production profile are definitely in the success drilling rates.
What should also be pointed out is that Aurelian already “forecasted” the first production from its
Poznan license to come on-stream in 2009 (2007 Annual Report). Investors should note that
new management was appointed in 2009, including new exploration manager Christopher
Brown.
Production profile Aurelianan

40000
36500
35000
30000 28470
25000
in MM cf p.a.
20000
14600
15000
10000
5475
5000
1022 516.5 956.5 949 657
0
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
Source: Aurelian
Siekierki field is Poland is currently the key area of focus for Aurelian. The company has been active in Poland
the key focus since 2003, when it acquired its Poznan license. The company is a 90% license owner of the
area of the
company
Siekierki area (near Poznan), where 93% of its 2C resources lie, with a mid-case EMV of EUR
478mn. The field is planned to start producing in 2012, with peak production in 2014-2015, while
a strategic partner entry into the project is likely (financing exploration/appraisal costs). In total,
Aurelian plans 8-9 Exploration & Appraisal wells within the next 24 months, with the majority of
investments flowing into the Siekierki development (the company holds EUR 49mn to finance
this project plus the credit facility). Currently, the biggest upside is the ability of the company to
move 2C resources into reserves (successful drilling campaign). If fully successful, the value of
Aurelian could increase by 40-60%, in our view. The Mcap to 50% of 2C resources is close to
EUR 7.5/bbl, while moving the majority of 2C resources into reserves would basically mean that
the Mcap to reserves would fall to approx. EUR 4/bbl (clearly an attractive level).
Aurelian is Aurelian, according to the latest news, has successfully drilled the Trzek-2 well by using MFHW
already drilling (multi-frac horizontal well) technology. The first results showed approx. 100m of gas column (on
MFHW the lower range of expectations) and good geological structure. The company is now drilling
targeting tight horizontally up to 1,500m. The MFHW technology has been widely used across Europe
gas in Trzek 2 (Germany, Holland) and in North America. The Siekierki project calculates with 3,760m of
vertical drilling to reach Rotliegendes reservoirs, which are estimated to be 100-200m wide. The
company plans to use up to a 7-stage frac for each well. Key entries to the project are as
follows:
Initial estimated rate between 8.6 and 15.3 MMcf/d for 18 months
Production rate declines to 60% in year two and to 80% of previous years’ as of year
three
Recoverable reserves of 16-28 Bcf per well (12-22 total wells required to be drilled for
mid-case 346 Bcf resources)
EUR 18mn for each of the first two wells and EUR 14mn thereafter
Well location close to Trzek-1 (a well that was supposed to start producing in 2009)
Construction of gas processing plant is scheduled to begin in early 2011, first gas to be
processed at YE11.
Aurelian has Siekierki is definitely the number one project for Aurelian. The company holds a 90% interest
ISIEmergingMarketsPDF
several other pl-aek-user10
with a farm-out planfrom 213.227.88.2
to finance on 2011-02-08
its development, 03:42:56
which we EST. DownloadPDF.
find logical, given the required
promising CAPEX. The other most promising area lies in the Carpathians (Poland, Slovakia).
projects
Source: Aurelian
Strong recent Recently, the company updated its operations highlights and outlook for the next 12-24 months.
news flow and Financially, the results were flat, with EUR 355tsd gross profit for 1H10 (up 3.8% y/y). Apart
heavy program from the successful drilling at Siekierki, the company has moved forward with the Bieszczady
for coming
months
Block (together with PGNiG, Aurelian has a 25% share), with first well spudding starting in
October and targeting 100MMbbls gross of oil. The company continued to interpret seismic data
in Slovakia and Romania (Cuejdiu Thrust) and a two-well Bulgarian exploration program
targeting 60 Bcf commenced in September 2010. In Romania, the company had a successful
discovery of 2 Bcf (Climauti-1) and six seismic surveys have been finished (leads of 147 Bcf
have been identified so far in Romania). The news flow from the company is very strong and it
keeps adding interesting prospects to its portfolio. The table below summarizes the key projects
for the next couple of months.
Description of the anticipated events

2010
December Flow test results of Trzek-2 (Siekierkie, 1st MFHW)
4Q Results of 2 wells drilled in Bulgaria (targeting 60 Bcf)
& Update on strategic decision concerning Romania
2011
January 2nd MFHW spudding with results in 2Q
1Q Gas processing plant construction start
& Results of Bieszczady well drilled (100 MMbbls)
2Q Results of 2nd MFHW
2H Results of 3 wells in Carpathian Thrust Fold
Not specified Completion of 8 seismic surveys interpretation
Source: company data
External Aurelian has vast potential resources and large acreage (3.1mn) in the CEE region. It enjoys a
environment is sound balance sheet and a good position for potential farm-outs (financing capital-intensive
attractive in E&P). The external environment for Aurelian was discussed in the general part. The company
CEE will mainly produce gas, if successful. We do not expect a fast recovery in gas prices, but,
thanks to new gas-fired PPs and LT contracts with Russia, European prices should stay above
USD 5.5/Mcf. Its tight gas focus seems like a viable strategy, given technological advancement
(US), but naturally it is a more expensive technique than conventional drilling (while drilling
success
ISIEmergingMarketsPDF rates are said
pl-aek-user10 fromto 213.227.88.2
be higher). The
onrisks for Aurelian
2011-02-08 are definitely
03:42:56 the still relatively long
EST. DownloadPDF.
time before it can start producing at interesting rates (2012+), with an unclear success drilling
rate (50% for the time being) and the need for additional finance (farm-outs, capital increases,
new debt).
The key factors that could influence the share price development of Aurelian are summarized as
follows:
Positive:
Successful drilling campaign and ability to move 2C resources into reserves
Faster than expected production ramp-up
Attractive farm-out agreements
Take-over target for large players
Negative:
Unnecessary farm-outs, which dilute the acreage and net resources for Aurelian
Financing issues and dilution (Aurelian has 340mn shares out, with authorized share
capital of up to 600mn shares)
Prolonged appraisal/exploration (environmental issues, access to drilling rigs)
Changes in legislation (higher taxes, royalties)
Hydrocarbon prices
Income Statement 2004 2005 2006 2007 2008 2009

(IFRS, EUR mn, 31/12) 31/12/2004 31/12/2005 31/12/2006 31/12/2007 31/12/2008 31/12/2009
Net sales 0.00 0.00 0.38 2.81 1.85 2.98
Cost of goods sold -0.14 -0.43 -0.16 -1.90 -4.14 -0.78
Gross profit -0.14 -0.43 0.22 0.91 -2.29 2.20
SG&A -0.00 -0.90 -2.09 -2.35 -2.84 -1.79
Other operating revenues 0.00 0.00 0.00 0.03 0.19 -0.46
Other operating expenses 0.00 0.00 -1.48 -6.31 0.01 0.04
EBITDA -0.14 -1.32 -3.15 -7.44 -0.82 0.52
Depreciation/amortization -0.00 -0.01 -0.19 -0.29 -4.12 -0.53
EBIT -0.14 -1.32 -3.34 -7.72 -4.94 -0.01
Financial result 0.03 -0.05 1.07 0.89 0.53 -0.41
Extraordinary result 0.00 0.00 0.86 -2.67 -7.23 -0.52
EBT -0.11 -1.38 -1.42 -9.50 -11.64 -0.95
Income taxes 0.00 0.00 0.00 -0.09 0.00 -0.01
Result from discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00
Minorities and cost of hybrid capital 0.00 -0.00 0.00 0.00 0.00 0.00
Net result after minorities -0.11 -1.38 -1.42 -9.59 -11.64 -0.95
Balance Sheet 2004 2005 2006 2007 2008 2009

(IFRS, EUR mn, 31/12)
Intangible assets 3.54 3.54 9.05 24.33 34.59 40.23
Tangible assets 0.00 4.01 5.85 7.79 5.45 5.00
Financial assets 0.00 0.00 0.00 0.00 0.00 0.00
Total fixed assets 3.54 7.55 14.90 32.12 40.04 45.23
Inventories 0.00 0.00 0.00 0.01 0.01 0.00
Receivables and other current assets 0.52 1.43 1.44 3.88 7.27 4.65
Other assets 0.00 0.00 0.00 0.00 0.00 0.00
Cash and cash equivalents 1.40 4.61 56.49 29.30 6.02 13.99
Total current assets 1.92 6.04 57.94 33.19 13.29 18.64
TOTAL ASSETS 5.46 13.59 72.84 65.31 53.33 63.87
Shareholders'equity 5.22 3.93 65.48 56.36 45.95 58.22
Minorities 0.00 0.00 0.00 0.00 0.00 0.00
Hybrid capital and other reserves 0.00 0.00 0.00 0.00 0.00 0.00
Pension and other LT personnel accruals 0.00 0.00 0.00 0.00 0.00 0.00
LT provisions 0.00 0.00 0.00 0.00 0.00 0.00
Interest-bearing LT debts 0.00 8.44 5.85 3.09 1.98 1.62
Other LT liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total long-term liabilities 0.00 8.44 5.85 3.09 1.98 1.62
Interest-bearing ST debts 0.00 0.00 0.00 0.00 0.61 0.64
Other ST liabilities 0.25 1.23 1.52 5.86 4.79 3.40
Total short-term liabilities 0.25 1.23 1.51 5.85 5.40 4.04
TOTAL LIAB. , EQUITY 5.46 13.59 72.84 65.31 53.33 63.87
Cash Flow Statement 2004 2005 2006 2007 2008 2009

(IFRS,EUR mn, 31/12)
Cash flow from operating activities -0.33 -0.86 -0.81 2.49 -5.02 1.05
Cash flow from investing activities -1.88 -1.63 -8.26 -28.66 -17.74 -5.97
Cash flow from financing activities 2.26 5.70 60.31 0.09 -0.14 12.58
CHANGE IN CASH , CASH EQU. 0.05 3.21 51.89 -27.19 -23.28 7.97
Margins & Ratios 2004 2005 2006 2007 2008 2009

Sales growth nm 638.2% -34.0% 60.9%
EBITDA margin nm nm -829.5% -265.1% -44.4% 17.3%
EBIT margin nm nm -879.5% -275.3% -267.0% -0.5%
Net profit margin nm nm -372.4% -342.0% -629.2% -32.0%
ROE -4.3% -30.2% -4.1% -15.7% -22.8% -1.8%
ROCE -7.4% -22.9% -22.0% -46.7% -33.5% -1.2%
Equity ratio 95.4% 28.9% 89.9% 86.3% 86.2% 91.1%
Net debt -1.4 3.8 -50.6 -26.2 -3.4 -11.7
Working capital 1.7 4.8 56.4 27.3 7.9 14.6
Capital employed 3.8 7.8 14.8 30.2 42.5 46.5
Inventory turnover nm nm nm 631.7 690.5 173.3
Source: Company data, Erste Group estimates
Company Report – OIL & GAS – USA – November 22, 2010
BNK Petroleum Not rated

BNK Petroleum
Radim Kramule, (Analyst) +420 224995213 RKramule@csas.cz

BNK Petrol eum
USD mn 2006 2007 2008 2009

52 w eeks
Net sales 0.0 1.0 7.9 8.0 3.5
EBITDA 0.0 -0.7 -0.2 -3.0 3
EBIT 0.0 -1.2 -4.5 -9.4
2.5
Net result after min. 0.0 -1.2 -5.1 -12.6
2
EPS (USD) -12.08 -0.08 -0.12
1.5
CEPS (USD) -3.09 -0.00 -0.06
BVPS (USD) 550.07 1.71 1.28
1
Div./share (USD) 0.00 0.00 0.00 0.00 0.5
EV/EBITDA
EV/EBIT DA(x) (x) 0.5 -2.2 -12.5 0
BNK Petroleum
P/E (X) -0.1 -1.1 -9.1
P/CE (X) -0.1 -16.1 12.9 Perform ance 12M 6M 3M 1M
Dividend Yield 0 0 0 in USD 137.3% 23.9% 50.5% 10.2%
Share price (CAD) 2.80 Reuters BKX.TO Free float 68.6%

Number of shares (mn) 143.5 Bloomberg BKX CN Shareholders Quantum Partners (19.5%)
Market capitalization (USD mn / EUR mn) 394 / 290 Div. Ex-date Nicholson Ford (6.29%)
Enterprise value (USD mn / EUR mn) 415 / 305 Target price Homepage: www.bnkpetroleum.com
Stable US production with large acreage in Europe

- BNK Petroleum is a shale gas-focused E&P company with production and know-how in the US (Polish
assets are at very early stage). It was spun off from Bankers Petroleum in July 2008 together with its US
assets. The company is listed in Toronto. BNK has a strong track record of adding 2P reserves, which
grew from 7.8 MMboe in 2007 to 37.9 MMboe in 2009, with a BNK-assigned value of USD 241.2mn (USD
6.4/boe). BNK is currently
ISIEmergingMarketsPDF traded at
pl-aek-user10 a premium
from to itsonreserves,
213.227.88.2 with03:42:56
2011-02-08 its reserves
EST. estimated NPV (pre-tax).
DownloadPDF.
BNK is also sitting on 3.5mn acres (net) of exploration area, which is at an early stage of development.
The company does not disclose its potential resources, but, based on its Oklahoma project, the number
could be anywhere between 1.4 and 7.2 Bboe. The current Mcap to reserves stands at EUR 7.7/boe.
- Financing of exploration projects looks to be partly secured, as BNK successfully raised USD 43.3mn in
May through a capital increase, with 15.8mn new shares and additional capital in October/November.
This should leave BNK with enough cash for E&P for the next 12 months. Among its core strategies is
the farming out of acquired licenses to finance the initial exploration costs (USD 20-50mn/project). BNK
plans to retain 25-50% of the licenses and remain an operator where attractive. Farming-out seems like
the best option, given its current financial position.
- The 1H10 results showed an improvement, with revenues reaching USD 8.5mn, up 78% y/y, on higher
production (+21% y/y) and hydrocarbon prices (+61% y/y). The net result stayed in red territory at USD -
0.6mn, compared to a USD 6.7mn loss a year ago. BNK was producing at 1162 boe/d in 2Q (up 7.1%
compared to 1Q, +47% y/y). The company does not give any production targets or outlook, but one
cannot expect fast additions without new assets or additional extensive drilling.
- BNK Petroleum clearly focuses on shale gas plays. It has drilled 39 wells (30 horizontal) since 2006 in its
principal production property (Tishomingo Field in Oklahoma), with first production in the fall of 2007.
The same focus is on its remaining assets in the US (Texas, NY, Mississippi & Alabama) and in Europe
(Poland and Germany). The advantage of BNK is definitely in its know-how and proved production rates,
while its downside seems to be its very early stages of exploration (it can take years to develop
additional assets, especially the European ones). Thanks to the recent dilution, the company is traded
with a premium on Mcap to reserves in comparison to its peers. One positive aspect is the firm’s ability
to subscribe fresh capital and secure finances for exploration.
Investment case
BNK has BNK Petroleum was spun off from Bankers Petroleum in July 2008 together with its US assets.
strong track Since then, it has been adding exploration assets, primarily in Europe. The company is listed in
record of Toronto. BNK has a strong track record of adding 2P reserves, which grew from 7.8 MMboe in
adding 2007 to 37.9 MMboe in 2009, with a BNK-assigned value of USD 241.2mn (USD 6.4/boe). The
reserves company is currently traded with a premium, with its reserves estimated NPV (10% discount
rate). BNK is also sitting on 3.5mn acres (net) exploration area, which is in the early stage of
development. The company does not disclose its potential resources, but, based on its
Oklahoma project, the number could be anywhere between 1.4 and 7.2 Bboe (taking into
account the size of the Oklahoma acreage of 13.5 tsd acres net to BNK). Naturally, not all of the
projects will work, so the calculations could be somewhat misleading. However, the potential
resources could definitely match those of BNK’s peers after farm-outs.
2P reserves BNK
2P reserves BNK
40000
35000
30000
25000
in Mboe
20000
15000
10000
5000
0
2007 2008 2009
Proved Probable
Source: BNK Petroleum (3rd party certified by MHA Petroleum Cons.)
Value of 2P The calculation of the NPV of 2P reserves by MHA Petroleum was based on the December 2009
reserves is reserves figures (USD 241.2mn). Future net revenue is calculated after the deduction of forecast
based on set of royalties, operating expenses, capital expenditures and abandonment costs, but before
assumptions corporate overheads and other indirect costs (interest, taxes, etc.). MHA uses a standard 10%
discount rate to arrive at the NPV, while it used the following set of hydrocarbon price
assumptions in its calculation (see graph below).
Model NPV imputs vs. Futures
120 20
18
100 2.4% 3.7%
-1.9% -0.3% 1.0% 16
-3.7%
-7.9% -7.0%
-5.4% 14
80
in USD/MMbtu
12
in USD/bbl
60 42.5% 41.8% 10
46.3% 44.5% 43.4%
39.4% 8
51% 34.9%
40 15.1%
6
4
20
2
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
WTI WTI futures NG (Henry Hub) NG (Henry Hub) futures
Source: BNK Petroleum (Sproule forecast 1/2010) & Bloomberg
NG prices in We have compared the assumptions in the NPV calculations with the current WTI (crude) and
the NPV Henry Hub (NG) futures. The WTI projections vs. futures differ only marginally (discount until
calculations 2015, premium afterwards); nevertheless, the difference for NG is rather striking (more than
were too high 40%, as of 2014). Unfortunately, we do not know the production function that the MHA used and
cannot run the calculation. We would estimate the NPV of current reserves at somewhere
around USD 210-230mn, given the most recent production split (see below). The share of gas
reached a similar figure in 2009 (i.e. 38% on boe produced). All said, the NPV is an indicator of
value, but BNK will incur costs down the road. The corporate and other costs amounted to more
than pl-aek-user10
ISIEmergingMarketsPDF USD 10mn in 2009; however, excluding
from 213.227.88.2 special items,
on 2011-02-08 we would
03:42:56 EST. estimate the amount at
DownloadPDF.
USD 5mn+. This would lead to an undiscounted value of USD 50 in a 10-year period and NPV
net to shareholders of ca. USD 160-210mn.
1H 2010 Production split
19%
44%
37%
Oil Gas NGL´s
Source: BNK Petroleum
BNK has The financing of BNK’s exploration projects received a significant boost recently with fresh
successfully capital being issued. The company successfully raised USD 43mn in May through a capital
raised more increase, with 15.8mn new shares (USD 2.74/share) and an additional share capital issue in
than USD October/November, which brought an additional approx. USD 65mn (additional approx. 24.5mn
100mn in 2010 new shares). This should leave the company with proceeds to carry on with the planned
exploration and drilling for the next 12 months. The underwriters of the first issue were primarily
financial institutions with the aim of additional public re-sale, while the second issue was
primarily a private placement to Quantum Partners L.P (now holding approx. 19.5% of the
shares outstanding). BNK used USD 12mn to buy out its overriding royalty interest and net profit
interests in its Tishomingo Field from Wells Fargo (part of its USD 26mn credit agreement) and
USD 2.8mn of outstanding debt. This should allow BNK to free its cash flow to finance additional
projects. Investors should expect an additional share issue and farm-outs for E&P.
Farming out Among BNK’s core strategies is the farming out of acquired licenses to finance the initial
licenses exploration costs (USD 20-50mn/project). BNK plans to retain 25-50% of the licenses and
belongs to core remain an operator where attractive. Farming-out seems like the best option, given its current
strategy of BNK financial position, despite the potential negative implications for future net proceeds. For
for growth instance, the company sold a 27% interest in its 375tsd acres in the Palo Duro basin in Texas for
USD 19.5mn (some USD 195/acre) and USD 10mn for acreage in Oklahoma, Mississippi and
Alabama (USD 112/acre). Applying the same logic to the European acreage, BNK would
theoretically be able to cash in USD 392mn for 3.5mn acres. However, the European acreage is
nowhere near the US land, given the early stage of exploration (note that BNK farmed out
535tsd acres in 2009 for USD 15/acre, including additional exploration costs).
Production The 1H10 results showed an improvement, with revenues reaching USD 8.4mn, up 78% y/y, on
ramp-up will higher production (+21% y/y) and hydrocarbon prices (+61% y/y). The net result improved
depend on significantly, arriving at USD -0.6mn, compared to a USD 6.7mn loss a year ago. BNK is said to
development of be currently producing approx. 1160 boe/d (up 7% compared to 1Q) from 50% of frac stages
new fields available, which is below the YE09 figure of 1200boe/d. The historical production is depicted
below, with our calculated outlook for 2010. Without new additions, the production typically
peaks in the first or second year. Nevertheless, shale gas drilling requires several wells and
ISIEmergingMarketsPDF pl-aek-user10
stages stimulation andfrom 213.227.88.2
BNK on 2011-02-08
is keen to continue 03:42:56
in the drilling EST. DownloadPDF.
campaign. However, a production
ramp-up of a significant magnitude can only be attained through successful development of new
acreage, in our view.
Annual production in boe

Annual production in boe
450.0
400.0
350.0
300.0
+23.2%
in Mboe p.a.
250.0
+100.2%
200.0
150.0
+1112.5%
100.0
50.0
0.0
2007 2008 2009 2010e
BNK gas BNK oil
Source: BNK Petroleum & Erste Group estimates
Fracture BNK Petroleum clearly focuses on shale gas plays. It has drilled 39 wells (30 horizontal) since
stimulation is 2006 in its principal production property (Tishomingo Field in Oklahoma), with first production in
ongoing the fall of 2007. It continues with fracture stimulation in the Tishomingo Field, with 33 gross
process stages in 1H10 (86 planned for the remainder of 2010, net to BNK 56). Production should
therefore continue to grow incrementally. BNK also successfully tested its Black Warrior field,
with one out of four zones showing interesting figures (evaluating logs); the field awaits fracture
stimulation.
Drilling in In Poland, BNK added new acreage in 2010 of 880tsd acres in the Baltic basin (three
Poland to start concessions through Indiana Investments), which brings the local acreage to approx. 1.1mn (it
by end of 2010 already
ISIEmergingMarketsPDF has a 26.67%
pl-aek-user10 stake
from in Saponis,on
213.227.88.2 which holds the
2011-02-08 licenses).
03:42:56 All DownloadPDF.
EST. the acreage is in one area,
which is depicted below (close to the seaside). BNK is required to drill one well per each
concession (total six) within 18 months of the granting. BNK has not specified the exact date yet,
but the geological and analytical work is ongoing, with potential drilling already in 4Q10 in the
Saponis acreage (Wytowno-1 well). The cost of one well exploration well is expected to reach
USD 7-8.5mn (note the difference compared to the Aurelian costs of EUR 18mn at Siekierki), but
BNK is paying only 6.67% of the first USD 25mn spent. The depth of shale gas in Baltic Poland
should lie between 7tsd and 12.5tsd feet (2.1-3.8km), which is similar to US shale. The net
thickness of the reservoir is on the upper end, with 500-1800 feet (150-550m).
BNK applied for The remaining European acreage lies in Germany, with 2.4mn acres in three different basins
additional (see the map below). BNK intends to carry out geological and geophysical work on these
licenses in concessions, while it also applied for additional licenses. In total, the company would like to have
Europe concessions in six or more different basins in Europe.
European For illustration, we include a table with the total acreage of BNK and respective key fiscal terms
projects offer for the respective region. Clearly, Polish terms are the most advantageous, compared to the US
much better and Germany. The total net acreage of BNK amounts to 3.5mn acres, based on available data.
fiscal terms
Acreage Acreage Royalties Corporate
Country Region
net (≈) costs/acre (*) (*) tax
Poland Baltic Basin 1 075 000 ≈ 0.55 $ ≈ 1% 19%
Germany N.Rhine - Westph. 500 000 0.1-0.25$/p.a. 10% ≈ 30%
Germany Lower Saxony 300 000 0.1-0.25$/p.a. 10% ≈ 30%
Germany Thuringia 770 000 0.1-0.25$/p.a. 10% ≈ 30%
Germany Saxony Anhalt 840 000 0.1-0.25$/p.a. 10% ≈ 30%
USA Oklahoma 12 800 25 - 500$ 12.5-20% 35%
USA NY 18 200 26 - 500$ 12.5-20% 35%
USA Mississ/Alabama 40 000 27 - 500$ 12.5-20% 35%
USA Texas 70 000 27 - 500$ 12.5-20% 35%
(*) Non-proven areas in the case of the USA
Source: BNK Petroleum and Erste Group calculations
News flow from the company should continue to come at a brisk rate, as it continues to develop
its assets:
First exploratory drilling in Poland by end of 2010 (Wytown-1 well)
Continues spudding and fracture stimulation in US (86 gross frac stages for 2H10)
Continuous expansion abroad (adding more licenses) with attempt to find industry
partners to fund exploration phase of each project. Company wants to retain 100-500tsd
acres in each basin after farm-outs.
BNK has The advantage of BNK is definitely in its know-how, proved production rates and (recently)
interesting financing capability, while its downside is the very early stages of exploration (it can take years
strategy in to develop additional assets, especially European ones). The current price seems like the fair
spreading out value of its US operations (NPV of reserves). Applying the recently attained farm-out agreement
exploration prices for acres and potential discounts to the NPV reserve calculation, we would arrive at ca.
risks to third USD 66.6mn for acreage and USD 160-210mn for NPV, which would yield USD 227-277mn
parties (below the current Mcap). We would not draw any strong conclusions with regards to BNK, as
we do not take into account potential resources (an estimate at the lower end of 1.4Bboe would
yield at least USD 140mn with USD 0.1/boe of risk-discounted value). BNK would definitely offer
ISIEmergingMarketsPDF pl-aek-user10
an interesting value from
from 213.227.88.2 on 2011-02-08
its current production 03:42:56
in the US EST. DownloadPDF.
if it continues to ramp up production.
On top of that, its large acreage should yield interesting potential resources and, with its strategy
to retain only minor stakes in the licenses, it can spread risks to other parties (although it loses
control of development and higher upside if successful). One should not forget that BNK
specializes in shale gas development, which seems to be the most drilling-demanding among
unconventional gases and could also face problems in Europe with rigs. We therefore believe
that there are other companies in the region that currently offer a more “imminent” upside case
with a clear focus on the CEE region, while acknowledging the strong balance sheet and
exploration “risk management” of BNK. Definitely not an uninteresting company.
The key factors that could influence the share price development of BNK are summarized as
follows:
Positively:
Successful drilling campaign, with continuous production ramp-up (up 100% y/y in 2009)
Solid prospects for geological exploration in Europe and clarification of potential
resources
Reserves additions
Farm-outs in Europe at attractive terms (exploration financing)
Negatively:
Standard E&P risks (drilling, dry holes, etc.)
Financing issues and dilution or poor farm-out terms
Little or no advancement in European exploration
Changes in legislation (higher taxes, royalties)
Hydrocarbon prices

(IFRS, USD mn, 31/12) 31/12/2004 31/12/2005 31/12/2006 31/12/2007 31/12/2008 31/12/2009
Net sales 0.00 0.00 0.00 0.99 7.85 7.96
Cost of goods sold 0.00 0.00 0.00 -0.29 -1.89 -3.62
Gross profit 0.00 0.00 0.00 0.70 5.96 4.35
SG&A 0.00 0.00 0.00 -0.92 -2.36 -3.90
Other operating revenues 0.00 0.00 0.00 -0.52 -2.53 -3.49
Other operating expenses 0.00 0.00 0.00 0.00 -1.24 0.00
EBITDA 0.00 0.00 0.00 -0.74 -0.17 -3.04
Depreciation/amortization 0.00 0.00 0.00 -0.47 -4.34 -6.33
EBIT 0.00 0.00 0.00 -1.21 -4.51 -9.38
Financial result 0.00 0.00 0.00 0.00 -0.45 -3.15
Extraordinary result 0.00 0.00 0.00 0.00 -0.17 -0.07
EBT 0.00 0.00 0.00 -1.21 -5.14 -12.59
Income taxes 0.00 0.00 0.00 0.00 0.00 0.00
Minorities and cost of hybrid capital 0.00 0.00 0.00 0.00 0.00 0.00
Net result after minorities 0.00 0.00 0.00 -1.21 -5.14 -12.59
Balance Sheet 2004 2005 2006 2007 2008 2009

(IFRS, USD mn, 31/12)
Tangible assets 0.00 0.00 0.00 81.79 156.27 165.35
Inventories 0.00 0.00 0.00 0.00 1.46 1.35
Other assets 0.00 0.00 0.00 0.00 0.00 0.51
TOTAL ASSETS 0.00 0.00 0.00 89.26 180.49 187.99
Minorities 0.00 0.00 0.00 0.00 0.00 0.00
LT provisions 0.00 0.00 0.00 0.00 0.00 0.00

(IFRS,USD mn, 31/12)
Cash flow from operating activities 0.00 0.00 0.00 -1.23 -0.36 8.94
Cash flow from investing activities 0.00 0.00 0.00 -21.58 -49.90 -41.36
Cash flow from financing activities 0.00 0.00 0.00 23.27 57.57 32.53
CHANGE IN CASH , CASH EQU. 0.00 0.00 0.00 0.46 7.31 0.11
Margins & Ratios 2004 2005 2006 2007 2008 2009

Sales growth nm 695.7% 1.4%
EBITDA margin nm nm nm -73.9% -1.9% -29.5%
EBIT margin nm nm nm -120.3% -50.8% -90.9%
Net profit margin nm nm nm -120.3% -57.8% -122.0%
ROE nm nm nm -4.4% -6.0% -10.2%
ROCE -3.0% -4.4% -6.6%
Equity ratio nm nm nm 61.6% 64.6% 69.3%
Net debt 0.0 0.0 0.0 -0.5 -0.0 21.1
Working capital 0.0 0.0 0.0 0.1 -25.1 -11.3
Inventory turnover nm nm nm nm 2.6 2.6
Company Report – Oil & Gas – USA – November 22, 2010
FX Energy Initiated with Hold

FX Ener g y
Radim Kramule, (Analyst) +420 224995213 RKramule@csas.cz FX Energy
USD mn 2009 2010e 2011e 2012e 52 w eeks

6.0
Net sales 14.7 28.2 42.6 51.4 5.5
EBITDA -5.4 7.7 17.3 24.7 5.0
EBIT -7.0 5.0 11.5 17.5 4.5
Net result after min. -0.5 -1.7 12.0 11.0 4.0
3.5
EPS (USD) -0.01 -0.04 0.27 0.25
3.0
CEPS (USD) 0.01 0.02 0.41 0.41 2.5
BVPS (USD) 0.25 0.21 0.45 0.82 2.0
Div./share (USD) 0.00 0.00 0.00 0.00 FX Energy DJ STOXX Oil & Gas
EV/EBITDA (x) -26.6 37.0 16.7 11.7
P/E (x) nm nm 21.3 23.4 Performance 12M 6M 3M 1M
P/CE (x) 444.0 239.9 14.3 14.1 in USD 126.0% 48.7% 81.9% 20.5%
Dividend Yield 0.0% 0.0% 0.0% 0.0% in EUR 148.7% 35.3% 71.9% 23.7%
Share price (USD ) 5.83 Reuters FXEN.O Free float 83.7%

Number of shares (mn) 43.3 Bloomberg FXEN US Shareholders Management (6.0%)
Market capitalization (USD mn / EUR mn) 252 / 185 Div. Ex-date Blackrock Inst. Trust (3.78%)
Enterprise value (USD mn / EUR mn) 284 / 209 Target price 6.0 Homepage: www.fxenergy.com
Strong production ramp-up in progress

- FX Energy is a US-based E&P company that is traded on NASDAQ. The biggest differences between FX
and its peers are the former’s ongoing production, strong ramp-up and focus on Polish conventional
gas. The core assets are in Poland, where it has been active since the mid-1990s and holds 4.25mn
acres of exploration area. FX also owns a small oil production site in Montana (US). The 2P reserves
stood at 15.5 MMboe pl-aek-user10 from
at YE09 (MCap of213.227.88.2 on while
EUR 12.1/boe), 2011-02-08 03:42:56
estimated EST. DownloadPDF.
potential resources are said to be
479 MMboe (PL). We expect gas production to more than double in 2010 and continue growing by a
CAGR (2009-15) of 19%. We applied DCF model to value the company with three production profile
scenarios. The base case scenario yields a 12M target price of USD 6.0. Initiated with Hold.
- Polish E&P assets should finally start adding interesting production rates after years of exploration and
drilling. The company focuses on conventional gas plays (one location could target tight gas), which
require less drilling. FX is focused on the Polish Permian basin. Since 2004, it has drilled 10 wells in
Poland, out of which seven were commercially successful. FX is keen to carry out a multi-year
exploration, appraisal and development drilling program (potential partners will also be sought for non-
rotliegend structures).
- From the financial perspective, FX Energy managed to fund its operations through capital increases and
credit facilities. However, as of 2010, quite interesting discretionary cash flow is expected to be
generated, which can be devoted to growth (FX estimates USD 15mn in 2010 and USD 30mn+ from 2012).
FX also recently re-financed its USD 25mn credit line with a new facility of USD 55mn. The 9M results
showed good dynamics, with revenues at USD 18.9mn, up more than twice y/y, and operating income of
USD 4.4mn, compared to a loss of USD 9.0mn in 2009. Operating cash flow arrived at USD 6.2mn in
9M10.
- It is well positioned to benefit from all of advantages Poland offers. The biggest risk is not reaching
production targets. What is also somewhat alarming is the time it took FX to get to its current hopefully
successfully growing production profile, given the amount of time it has been active in Poland (since the
mid 1990s). In any case, FX is one of the best positioned firms among its peers, featuring a production
ramp-up, appraisal and vast exploration assets. However, the recent rally in the share price does not
allow, in our view, for much of an upside case at the moment.
Investment case
We estimate FX Energy is a US-based E&P company that is traded on NASDAQ. The core assets of the
production company are in Poland, where it has been active since the mid 1990s and holds 4.25mn acres
growth of of exploration area. FX also owns a small oil production site in Montana (US), with estimated
CAGR (2009-15) reserves of 463 Mbbl, and an oilfield services subsidiary. The 2P reserves stood at 15.5 MMboe
19% at YE09, while estimated potential resources were said to be 479 MMboe (coming from Poland).
The company is currently ramping up production in its Polish gas fields. We expect the gas
production to more than double in 2010 and continue growing by a CAGR (2009-15) of 19%. We
have applied a standard DCF model to value the company, with three production profile
scenarios. The base case scenario yields a 12M target price of USD 6.0 (thanks to the recent
rally), prompting us to initiate coverage of FX with a Hold recommendation.
FX potential Net Risking Net risked Estimated net Risking Net risked Estimated net
BCFE Interest
resources unrisked (FX) (Bcfe) value (2.7/mcf) (Erste) (Bcfe) value (1.5/mcf)
Zakowo 100 100% 100 50% 50.0 135.0 (*) 0% 0.0 0.0
Lisewo 219 49% 107.31 20% 21.5 $57.9 5% 5.4 $8.0
Komorze 3 27 49% 13.23 50% 6.6 $17.9 25% 3.3 $5.0
Machnatka Ca1 155 100% 155 15% 23.3 $62.8 6% 9.3 $14.0
Machnatka Carb. 840 100% 840 15% 126.0 $340.2 6% 50.4 $75.6
Plawce (tight) 250 49% 122.5 35% 42.9 $115.8 15% 18.4 $27.6
Plawce East 881 49% 431.69 20% 86.3 $233.1 5% 21.6 $32.4
Miloslaw 52 49% 25.48 25% 6.4 $17.2 6% 1.5 $2.3
Kutno 9500 20% 1900 7% 133.0 $359.1 2% 38.0 $57.0
in Bcfe (when not in USD) 3595.2 445.9 $1 204.0 147.9 $221.8
(*) Zakowo is excluded from all calculations of resources or NPVs (just for illustration)
Source: FX Energy & Erste Group calculations
We have valued In the table above, we have presented the current portfolio of the companies’ exploration assets
potential in Poland. The update was taken from an FX presentation (July 2010) and it should be noted
resources at that some changes have occurred (Zakowo was no longer included and FX added Machnatka
USD 221.8mn Carboniferous to the table). The first part of the table is based on FX’s own figures, calculating
the “NPV” of its potential resources at USD 1.2bn (USD 2.7/Mcfe and risking). We tried to be
morepl-aek-user10
ISIEmergingMarketsPDF conservative and
fromhave applied much
213.227.88.2 more stringent
on 2011-02-08 riskingEST.
03:42:56 in estimating a net value (USD
DownloadPDF.
1.5/Mcfe). The Zakowo drilling turned out to be uneconomic, while FX attributed 50% risking to
this project at the beginning of 2010. This shows that the potential resources need to be risked
at more prudent percentages. The lower estimated value per Mcf should also entail a much
longer time for FX to develop (as seen in the past), as well as corporate, exploration, interest
and other costs (plus discounting and the lower estimated wellhead price). Note that FX
estimates its cash proceeds in Poland from 1 Mcf at more than USD 4 (wellhead price USD
5.55/Mcfe; see below). Even when taking into account our very harsh risking, the NPV for FX
would come to USD 222mn. Adding the current 2P reserves (15.5 MMboe @ USD 6/boe) would
yield an asset value of USD 315mn or USD 7/fully diluted share (more than 20% upside over the
current share price).
Production economies
$7.00
$6.00
$5.00 $2.04
$4.00
$4.02 $1.16
$3.00
$2.00 $1.56
$0.04
$0.55
$1.00
$1.36
$0.94
$0.00
Poland (wellhead $ 5.55/Mcfe) USA (wellhead $ 6.12/Mcfe)
Taxes Lifting cost Royalties Cash margin
Source: FX Energy
There are three Polish E&P assets should finally start adding interesting production rates after years of
production exploration and drilling. The company focuses on conventional gas plays (one location close to
scenarios Siekierki could target tight gas), which require less drilling and usually lower depths. FX is
outlined focused on the Polish Permian basin (rotliegend sandstones). Since 2004, it has drilled 10 wells
in Poland, out of which seven were commercially successful. FX is keen to carry out a multi-year
exploration, appraisal and development drilling program (potential partners will also be sought
for non-rotliegend structures). In the table below, we have presented our three scenarios for
FX’s pl-aek-user10
ISIEmergingMarketsPDF production profile.
from2010-12 are based
213.227.88.2 on FX estimates
on 2011-02-08 (base
03:42:56 andDownloadPDF.
EST. lower cases), while 2013
and beyond are our calculated rates. We leave the US production profile unchanged.
Production curves for NG and crude

16000 200
180
14000
160
12000
140
10000
in MMcf p.a.
in Mboe p.a.
120
8000 100
80
6000
60
4000
40
2000
20
0 -
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e
Crude US* (Mboe) Base case NG Upper case NG Lower case NG

Source: Company data & Erste Group estimates (*) crude includes all liquids
Costs per well The CAPEX requirements per well are estimated by FX to be around USD 8.5mn/well (“typical”
are estimated Fences well) and USD 6.5mn for facility. The company plans to run one rig through 2010 and
to be around two rigs in 2011/12, while it plans to acquire more seismic. The core area in focus is the Fences
USD 8.5mn area, where the production additions should come from in 2010 (KSK wells, i.e. Kromolice-1/2
and Sroda-4) and in 2010/11 (Winna Gora). FX holds a 49% stake in the license, while POGC
owns 51% and operates. It is also the area where most of its production comes from (Zaniemysl,
Kleka-11, Rozskow-1). The Fences exploration license is neighboring with Aurelian’s (Plawce –
tight gas), where the most promising Siekierki field lies. Should Aurelian be successful in its
development, the structure is likely to extend to Plawce and FX could benefit from the data and
experience accumulated by Aurelian.
The key production info provided by the company is as follows:

2009 exit rate 11.9 MMcfe/d net (this would imply 4,344 MMcfe p.a. vs. our est. 4,106 for
2010 or 11.3 MMcfe/d). The 9M average has reached 2,632 MMcfe in Poland or 9.6
MMcf/d. For 4Q10, we predict production ramping up and no maintenance shutdowns.
2010 to reach 18+ MMcfe/d net at year-end, thanks to the KSK wells addition (which
implies “at least” 6,570 MMcfe/p.a. for 2011, vs. our base case estimate of 6,682
MMcfe).
Lisewo drilling results should be known in 4Q10.
FX would like to drill most of its NAV table prospects (“8”); details are to be announced
soon.
Source: FX Energy
Majority of There are a variety of structures (Permian, Carboniferous and Devonian) that FX targets for
future free CF potential future growth. The company acknowledges that farm-outs (industrial partners) will be
to be re- required to develop some of its big plays. Nevertheless, FX is keen to use its free cash flow to
invested in re-invest in new areas. The biggest prospective field for FX currently lies in the Kutno
Poland concession, where 9,500 Bcfe (1,900 net to FX) is said to potentially lie. The highlights of the
concessions are summarized below:
Warsaw South (880tsd acres; 100% interest; Machnatka 3.3km dual target prospects;
potential up to 150 Bcfe recoverable)
Kutno (35tsd acre structure; 6km deep; up to 19 Tcf in place)
Northwest (940tsd acres; 100% interest; Rotliegend potential)
Edge (880tsd acres; 100% interest; Devonian & Rotliegend leads)
Zakowo drilling The company is well positioned to benefit from all of the advantages that Poland offers (fiscal
failure only terms, royalties, demand for gas, stable gas tariffs). The biggest risk is its failing to reach
proves risk of production targets (recently, FX announced unsuccessful drilling in Zakowo). Zakowo belonged
E&P business to the core area of FX (block 246), which lies southwest of the Fences concession. FX did a
workover project (drilled in the 1970s) and production tested Zakowo-1, which proved
uneconomic. FX will do some new seismic in block 246, but management is keen to concentrate
on the Lisewo well in Fences (some 15 Bcfe net to FX). Zakowo was estimated to hold ca. 100
Bcfe net to FX. Overall, FX seems to have done quite well in adding reserves for the past
several years (CAGR of 39.7% 2003-09). It is now time to take them out and continue adding
new ones.
2P Reserves in Bcfe
2P Reserves in Bcfe
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2003 2004 2005 2006 2007 2008 2009
Poland US
Source: FX Energy & Erste Group estimates
FX has been The time it took FX to get to its current hopefully successfully growing production profile, given
relatively slow the years FX has been active in Poland (since the mid 1990s), is somewhat worrisome. This can
in past in be attributed to the E&P nature of its business, but management could also have been
developing its somewhat more active, in our view. Nevertheless, FX is one of the best positioned firms among
assets its peers, featuring a production ramp-up, appraisal and vast exploration assets. Should the
production profile come close to current plans, we see our base case scenario as realistic,
setting our 12M target price at USD 6.0. We thus have a Hold recommendation on FX.
Risks and triggers
Production profile and ramp-up

Hydrocarbon prices (below, we include the wellhead realized NG prices that we use in
our model, vs. Henry Hub futures)
Farm-out terms
Potential takeover target
Drilling success rate and core area development
Dilution & financing issues
Management drive
Wellhead NG price assumptions for FX
10.0
9.0 8.7
8.0 7.7
7.0
5.9 6.0 5.8 5.7 5.9 5.9
6.0 5.6 5.3 5.7 5.5
5.4 5.5
5.0 5.2
5.0 5.0 5.0
5.0
4.3
4.0
3.0
2.0
1.0
0.0
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e
Wellhead $/Mcf HH $/Mcf
Source: FX Energy, Erste Group Research & Bloomberg
Valuation
Effective tax We have used a standard DCF model to value FX Energy, which we based on three case
rate of FX scenarios with different levels of production profiles. In our calculations, we have used the same
should be low, wellhead prices in all three scenarios. Basic parameters of our models were left stable. Given
thanks to the exposure to Poland, we have used discount rates comparable to Polish firms’. The key data
accumulated is summarized in the table below. The risk-free rate is based on LT Polish government bonds,
losses with beta
ISIEmergingMarketsPDF at 1.6 (Bloomberg)
pl-aek-user10 for the detailed
from 213.227.88.2 period and03:42:56
on 2011-02-08 an effective
EST.tax rate of 0-15%
DownloadPDF.
(accumulated net losses should shield the company from taxes).
WACC calculation
2011e 2012e 2013e 2014e 2015e 2016e 2017e (TV)
Risk free rate 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% 5.5%
Equity risk premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 5.8%
Beta 1.6 1.6 1.6 1.6 1.6 1.6 1.0
Cost of equity 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 11.3%
Cost of debt 5.0% 5.0% 5.0% 6.6% 6.6% 6.6% 6.3%
Effective tax rate 0.0% 0.0% 0.0% 4.0% 8.0% 15.0% 19.0%
After-tax cost of debt 5.0% 5.0% 5.0% 6.3% 6.1% 5.6% 5.1%
Equity weight 26% 20% 25% 39% 52% 63% 68%
WACC 7.7% 7.1% 7.6% 9.9% 10.9% 11.7% 9.3%
DCF valuation
(USD mn) 2011e 2012e 2013e 2014e 2015e 2016e 2017e (TV)
Sales growth 51.2% 20.7% 14.4% 8.9% 11.2% 7.7% 4.0%
EBIT 11.5 17.5 23.1 27.6 32.4 35.4 34.7
EBIT margin 27.1% 34.1% 39.2% 43.1% 45.4% 46.1% 43.0%
Tax rate 0.0% 0.0% 0.0% 4.0% 8.0% 15.0% 19.0%
Taxes on EBIT 0.0 0.0 0.0 -1.1 -2.6 -5.3 -6.6
NOPLAT 11.5 17.5 23.1 26.5 29.8 30.1 28.1
+ Depreciation 2.6 5.7 7.1 8.6 9.6 10.4 11.2
Capital expenditures / Depreciation 656.3% 338.2% 288.8% 255.1% 243.8% 246.2% 100.0%
+/- Change in working capital 1.1 -1.8 -2.8 -1.8 -0.5 -0.7 -0.8
Chg. working capital / chg. Sales 7.4% -20.7% -38.1% -33.5% -7.2% -12.9% -20.0%
- Capital expenditures -17.2 -19.4 -20.6 -21.9 -23.3 -25.7 -15.7
Free cash flow to the firm -2.0 2.0 6.8 11.4 15.5 14.1 22.8
Terminal value grow th 3.0%
Terminal value 374.1
Discounted free cash flow - Dec 31 2010 -1.9 1.8 5.5 8.4 10.3 8.4 215.1
Enterprise value - Dec 31 2010 247.5
Minorities 0.0
Non-operating assets 0.0
Net debt 30.0
Other adjustments 0.0
Equity value - Dec 31 2010 217.5
Number of shares outstanding (mn) 43.3
Cost of equity 15.4%
12M target price per share (USD) 6.0
Current share price (USD) 5.8
Up/Downside 3.1%
Enterprise value breakdown Sensitivity (per share)

PV of
detailed Terminal value EBIT m argin
period
10% 6 42.0% 42.5% 43.0% 43.5% 44.0%
8.3% 6.9 7.0 7.1 7.2 7.3
WACC
8.8% 6.3 6.4 6.5 6.6 6.7

9.3% 5.8 5.9 6.0 6.1 6.2
9.8% 5.4 5.5 5.6 5.7 5.7
10.3% 5.0 5.1 5.2 5.3 5.3
Terminal value growth
PV of 6 2.0% 2.5% 3.0% 3.5% 4.0%
terminal 8.3% 6.0 6.5 7.1 7.9 8.8
value
WACC
8.8% 5.6 6.0 6.5 7.1 7.9

90%
9.3% 5.2 5.6 6.0 6.5 7.1
9.8% 4.9 5.2 5.6 6.0 6.5
10.3% 4.6 4.9 5.2 5.6 6.0
Source: Erste Group Research
Value of FX The other two scenarios – upper and lower – yielded 12M target prices of USD 8.6 and USD 3.1,
Energy will respectively. The details of the DCF models are included below for reference. The wide range of
totally depend prices illustrates the sensitivity to the production profile. The value of FX will therefore totally
on production depend on its production ramp-up. FX Energy is definitely a risky bet, which is supported by the
curve enterprise value breakdown, where 90% arises from TV (near-term cash flows will be negatively
influenced by the extensive CAPEX program to develop exploration assets).
Upper case scenario DCF

DCF valuation
(USD mn) 2011e 2012e 2013e 2014e 2015e 2016e 2017e (TV)
Sales growth 51.2% 20.7% 14.4% 8.9% 11.2% 7.7% 4.0%
EBIT 13.3 22.1 25.6 36.6 47.3 45.9 43.5
EBIT margin 31.3% 43.0% 43.5% 57.1% 66.3% 59.8% 53.9%
Tax rate 0.0% 0.0% 0.0% 4.0% 8.0% 15.0% 19.0%
Taxes on EBIT 0.0 0.0 0.0 -1.5 -3.8 -6.9 -8.3
NOPLAT 13.3 22.1 25.6 35.1 43.5 39.0 35.2
+ Depreciation 7.5 9.9 12.4 14.6 16.6 18.4 13.2
+/- Change in working capital -1.8 -2.8 -1.8 -0.5 -0.7 -0.5 -0.8
Chg. working capital / chg. Sales -12.7% -32.0% -23.7% -9.9% -9.9% -9.9% -20.0%
Free cash flow to the firm 4.7 10.5 16.4 27.2 36.8 33.5 27.6
Terminal value growth 3.0%
Discounted free cash flow - Dec 31 2010 4.3 9.1 13.3 20.0 24.3 19.9 259.8
Minorities 0.0
Net debt 30.0
Up/Downside 46.7%
Lower case scenario
DCF valuation
(USD mn) 2011e 2012e 2013e 2014e 2015e 2016e 2017e (TV)
Sales growth 53.4% 21.0% 8.7% -1.2% -2.9% -6.5% 4.0%
EBIT 5.0 9.3 15.7 19.1 18.0 14.1 16.6
EBIT margin 11.6% 17.8% 27.6% 33.9% 33.0% 27.5% 31.0%
Tax rate 0.0% 0.0% 0.0% 4.0% 8.0% 15.0% 19.0%
Taxes on EBIT 0.0 0.0 0.0 -0.8 -1.4 -2.1 -3.2
NOPLAT 5.0 9.3 15.7 18.3 16.6 11.9 13.5
+ Depreciation 5.7 7.1 8.6 9.6 10.4 11.2 11.5
+/- Change in working capital 1.1 -1.8 -2.8 -1.8 -0.5 -0.7 0.0
Chg. working capital / chg. Sales 7.1% -20.1% -61.9% 266.6% 31.7% 20.2% 0.0%
Free cash flow to the firm -1.9 2.5 11.3 14.1 13.7 8.7 12.0
Terminal value growth 3.0%
Discounted free cash flow - Dec 31 2010 -1.8 2.2 9.1 10.4 9.1 5.2 112.7
Minorities 0.0
Net debt 30.0
Up/Downside -46.6%

FX Energy is no In selecting our peer group members, we have taken Bloomberg for inspiration in terms of
bargain within names; however, it should be well noted that the majority of the stocks are already producing
selected peer players and relatively big companies (like Apache). Even when taking into consideration these
group mature companies, FX Energy’s relative ratios can be comparable. The premium of FX Energy
on all lines to the median is quite logical, as the growth dynamics of FX are predicted to be
above its mature peers’. On top of that, its Polish exposure should mean much higher
profitability (fiscal regime) when compared to its US peers. FX Energy definitely does not look
cheap at current levels, but, thanks to its prospects, we do not find a Sell recommendation
appropriate. We think that Hold suits the company well, as it should prove now that it is capable
of ramping up its production in the coming quarters.
Peer group comparison

Price Mcap P/Sales EV/EBITDA P/E
(USD) (USDmn) 2010e 2011e 2012e 2010e 2011e 2012e 2010e 2011e 2012e
Noble Energy 82.8 14494.4 4.7 4.3 3.5 7.3 6.7 5.3 18.8 18.4 13.1
Carrizo Oil&Gas 27.1 945.9 5.4 3.2 n.a. 10.5 6.8 n.a. 21.3 11.5 n.a.
Ultra Petroleum 47.2 7200.2 6.5 5.0 4.1 10.4 8.0 6.2 18.5 15.0 12.3
Apache corp. 108.2 39456.0 3.2 2.6 2.3 5.7 4.4 3.8 12.0 9.4 8.3
Bankers Petroleum 7.0 1698.9 10.2 5.3 3.3 22.6 9.9 5.4 82.9 22.3 14.8
BNK Petroleum 2.8 323.3 18.1 14.8 12.4 43.0 37.0 28.7 -364.1 356.5 1 719.8
Peer group median 5.4 4.3 3.4 10.4 6.8 5.3 18.8 15.0 12.7
FX Energy (EG estimates) 5.8 252.2 9.0 5.9 4.9 36.9 16.5 11.5 -151.4 21.1 23.0
Premium/discount 66.2% 37.5% 45.4% 253.3% 143.8% 115.1% n.a. 40.6% 81.0%
Implied value 3.5 4.2 4.0 1.7 2.4 2.7 n.a. 4.1 3.2
Source: Bloomberg & Erste Group Research
Financials and 9M10 results
More and more From the financial perspective, FX Energy managed to fund its operations through capital
investments increases and credit facilities. However, as of 2010, quite interesting discretionary cash flow is
should be expected to be generated, which can be devoted to growth (FX estimates USD 15mn in 2010
financed and USD 30mn+ from 2012). FX also recently re-financed its USD 25mn credit line with a new
through facility of USD 55mn (to help finance exploration). The rapidly increasing net debt to equity ratio
discretionary between 2007 and 2008 was a result of net losses, which accumulated on the equity balance.
CF The peak is predicted for 2010, as the company is likely to post a net loss on negative non-cash
FX. Revenues and profits are predicted to help push net debt to equity further, while we do not
take into consideration any fresh capital issue (which is possible and quite likely). The leverage
of the group looks pretty risky, but we do not find it exceptional for an E&P company.
Financial position of FX Energy

Financial position of FX Energy
10 350%
5 307% 300%
0
250%
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
-5
203% 200%
in USDmn
-10
152% 150%
-15
100%
-20 88%
77%
50%
-25 35%
9%
-30 -2% -6% 0%
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pl-aek-user10 from 213.227.88.2 on 2011-02-08 03:42:56 EST. DownloadPDF.
-50%
Net debt (left axis) Net debt to equity (right axis)
Source: Company data & Erste Group Research
Non-cash FX The 9M results showed good dynamics, with revenues at USD 18.9mn, up more than twice, and
gains and operating income of USD 4.4mn, compared to a loss of USD 9.0mn in 2009. The almost USD
losses mean 3mn non-cash FX loss (financial income) means net income close to zero. As the USD seems to
difficult be strengthening again vis-à-vis the EUR, the year-end net figure is likely to stay close to zero or
comparison of might even fall into the red. For more details, see the table below.
the net level
9M results
in USDmn 9M 2010 9M 2009 y/y
Revenues 18.91 8.06 134.7%
Costs 14.54 17.07 -14.8%
EBIT 4.38 -9.01 n.a.
Net income 1.00 -3.87 n.a.
Operating CF 6.22 -8.74 n.a.
Investing CF -3.23 -2.83 n.a.
Financing CF 0.00 -2.68 n.a.
Cash EOP 7.25 2.51 189.2%
Source: Company data
Cost We believe that the production ramp-up in 4Q and somewhat higher gas prices should enable
development in FX to post a positive operating result of USD 5.0mn. The question is whether the company will
4Q10 could book any “significant” exploration costs in 4Q10, but we expect the costs to grow in 4Q10,
differ from together with the new projects being launched.
9M10
Management
FX Energy has stable management, with key personnel staying in the company for many years.
Mr. David Pierce (President and CEO). Attorney with over 25 years experience in natural
resources, securities and international business law. Graduate of Princeton and Stanford Law
School.
Mr. Tom Lovejoy - Executive Vice President and Chairman. Over 30 years energy investment
banking experience with Dillon Read, Blyth, Eastman Dillon, Paine Webber and Prudential.
Graduate of MIT-BS and Harvard-MBA.
Mr. Jerzy Maciolek - Director of the company, heads exploration team as Vice President of
International Exploration (key for Polish development). Over 25 years experience as a
geophysicist with POGC, Gulf Oil Research and as a consultant. He joined the company in 1995
specifically to lead it into Poland, where he had identified the exploration opportunities.
Mr. Zbigniew Tatys – Country manager in Poland, the former General Director of POGC's
Upstream Exploration and Production Division. During his 20-year career with POGC, he rose
through the ranks as a production engineer and was serving as Vice Chairman of POGC at the
time of his retirement.
Shareholder structure
FX Energy is There is no single investor that holds more than a 5% stake in FX Energy. Only the combined
practically share of management currently makes up 6% of shares outstanding (with the largest chunk held
100% free by Mr. Lovejoy, a 1.7% stake). In the graph below, we have named the five biggest
floated shareholders, which are typically mutual funds. The list of shareholders contains dozens of
investors. The free float is practically 100% (94%, excluding management).
Shareholer structure – practically 100% FF

6.00%
3.78%
2.50%
2.07% Management
1.94%
Blackrock Inst. Trust
H G Wellington
State Street
Dimensional Fund
Other minority
shareholders
83.71%
Source: Bloomberg
ne
Income Statement 2007 2008 2009 2010e 2011e 2012e

(IAS, USD mn, 31/12) 31/12/2007 31/12/2008 31/12/2009 31/12/2010 31/12/2011 31/12/2012
Net sales 18.00 17.84 14.66 28.17 42.60 51.43
Invent. changes + capitalized costs 18.00 17.84 14.66 28.17 42.60 51.43
Total revenues 18.00 17.84 14.66 28.17 42.60 51.43
Other operating revenues 0.00 0.00 0.00 0.00 0.00 0.00
Material costs -7.84 -20.94 -6.23 -5.94 -6.49 -6.84
Personnel costs -7.14 -7.11 -7.30 -7.97 -8.37 -8.78
Other operating expenses -13.23 -18.22 -6.52 -6.60 -10.47 -11.15
EBITDA -10.21 -28.43 -5.38 7.66 17.27 24.66
Depreciation/amortization -2.06 -1.72 -1.60 -2.62 -5.74 -7.13
EBIT -12.27 -30.15 -6.98 5.03 11.53 17.53
Financial result 0.58 -24.56 6.45 -6.70 0.44 -6.55
Extraordinary result 0.00 0.00 0.00 0.00 0.00 0.00
EBT -11.69 -54.70 -0.53 -1.67 11.97 10.98
Income taxes 0.00 0.00 0.00 0.00 0.00 0.00
Net result after minorities -11.69 -54.70 -0.53 -1.67 11.97 10.98
Balance Sheet 2007 2008 2009 2010e 2011e 2012e

(IAS, USD mn, 31/12)
Tangible assets 21.89 26.87 32.29 33.50 44.22 55.66
Inventories 0.18 0.21 0.23 0.24 0.37 0.45
Other assets 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL ASSETS 46.37 54.80 42.07 45.55 78.72 91.85
Minorities 0.00 0.00 0.00 0.00 0.00 0.00
LT provisions 0.00 0.00 0.00 0.00 0.00 0.00
Cash Flow Statement 2007 2008 2009 2010e 2011e 2012e

(IAS,USD mn, 31/12)
Cash flow from operating activities -1.58 -14.25 -5.83 8.97 15.06 21.42
Cash flow from investing activities -14.12 -12.85 -4.98 -15.58 -18.75 -21.34
Cash flow from financing activities 14.35 40.12 -2.68 2.53 20.00 -5.00
CHANGE IN CASH , CASH EQU. -0.34 12.32 -12.37 -2.84 17.85 -3.00
Margins & Ratios 2007 2008 2009 2010e 2011e 2012e

Sales growth 118.7% -0.9% -17.8% 92.1% 51.2% 20.7%
EBITDA margin -56.7% -159.3% -36.7% 27.2% 40.5% 48.0%
EBIT margin -68.2% -169.0% -47.6% 17.9% 27.1% 34.1%
Net profit margin -65.0% -306.6% -3.6% -5.9% 28.1% 21.3%
ROE -20.4% -207.5% -4.1% -16.8% 83.3% 39.5%
ROCE -8.9% -160.6% -1.7% -4.5% 25.4% 17.9%
Equity ratio 81.0% 27.7% 25.5% 20.1% 24.9% 39.2%
Net debt -0.9 13.3 21.8 30.0 32.9 31.3
Working capital 15.4 14.0 3.5 -0.8 18.3 17.7
Inventory turnover 1.0 90.0 12.4 10.3 9.0 6.9
Company Report – Oil & Gas – Ireland – November 22, 2010
San Leon Energy Not Rated

San Leo n En erg y
Radim Kramule, (Analyst) +420 224995213 RKramule@csas.cz

San Leon Energy
EUR mn 2006 2007 2008 2009

52 w eeks
Net sales 0.0 0.0 0.0 0.0 26
EBITDA 0.0 -0.3 -2.2 -4.2 24
EBIT 0.0 -0.3 -2.2 -4.3 22
Net result after min. 0.0 0.2 -3.2 -5.5 20
EPS (EUR) 0.00 -0.01 -0.02 18
CEPS (EUR) 0.00 -0.01 -0.02 16
BVPS (EUR) 0.11 0.11 0.10 14
Div./share (EUR) 0.00 0.00 0.00 0.00 12
EV/EBITDA (x) -14.8 -16.0 San Leon Energy DJ EURO STOXX Oil & Gas
P/E (x) nm nm
P/CE (x) -10.2 -12.7
Dividend Yield 0.0% 0.0%
Performance 12M 6M 3M 1M
in EUR -16.3% -20.6% 8.2% 11.6%
Share price (GBP) 16.75 Reuters SLEN.L Free float 57.7%

Number of shares (mn) 436.7 Bloomberg SLE LN Shareholders Management (40.9%)
Market capitalization (EUR mn) 86.0 Div. Ex-date Standard Life Inv. (1.42%)
Enterprise value (EUR mn) 83.9 Target price Homepage: www.sanleonenergy.com
Immense acreage, potential resources…what next?

- San Leon (SLE) is a London-traded E&P company, which groups projects in Poland, Ireland, Italy,
Morocco, the Netherlands and North America. Total exploration acreage is huge, with ca. 11.9mn acres;
however, it lacks financial resources to develop them; any capital increase means dilution and
practically no share premium. Established in 1995, its first exploration assets were acquired only in
October 2007. SLE focuses
ISIEmergingMarketsPDF on oilfrom
pl-aek-user10 and gas in different
213.227.88.2 on geological
2011-02-08 structures on-shore
03:42:56 EST. and off-shore. The
DownloadPDF.
potential resources could reach over 3.5 Bboe. Using a very conservative estimate of USD 0.1/boe for
potential resources, their value would be USD 350mn (more than 3x current EV). SLE appears to be
inexpensive, given its large asset base and potential resources.
- There is “no production” for SLE at the moment (it holds a tiny royalty interest in three Dutch producing
wells), but it plans to start a small Morocco plant in early 2011. Most of its concessions are in the early
stage of the E&P phase, with several seismic programs carried out. The key focus of management is to
be active, explore effectively and produce fast. The company seems to be committed to its strategy, as
several exploration drilling campaigns should be carried out already in 4Q10 and 2011 (Poland,
Morocco, Italy). The company has also secured 50% of required 2D/3D seismic from PGS as a USD 50mn
facility, while work is being carried out in the Atlantic Margin.
- Financing of any E&P business is always an issue. SLE managed to recently place 22.5mn new shares at
14 pence each to raise GBP 3.15mn (EUR 2.6mn) and an additional GBP 17.2mn of combined capital
increase/credit line with Yorkville. The recent capital increase should secure finances for the next couple
of months, even though the company has a current net debt of approx. EUR 12.5mn. Clearly, farm-outs
of outstanding licenses or paying with its own stock are the most likely move for the company. Recent
agreements (like the one with Talisman in Poland) prove the ability of management to strike interesting
deals.
- The company is currently focused on three key areas (Morocco, Poland, Italy), while drilling in Poland
seems like the most imminent. The shareholder structure could give investors some comfort, as
management holds 47.4% of the company. However, SLE is probably the riskiest company mentioned in
this report. It is also extremely difficult to value its assets, given the many risks and uncertainties (and
large CAPEX). Only investors with very little risk aversion should consider it as an investment.
Investment case
SLE looks San Leon (SLE) is a London-traded E&P company that groups internationally active subsidiaries
inexpensive but with projects in Poland, Ireland, Italy, Morocco, the Netherlands and North America. The firm’s
is very risky history dates back to 1995. However, its first exploration assets were acquired only in October
2007. The company focuses on oil and gas in different geological structures on-shore and off-
shore. The total acreage is huge with ca. 11.9mn acres. The potential resources could reach
over 3.5 Bboe, but easily much more (see the Moroccan prospects). Using a very conservative
estimate of USD 0.1/boe for potential resources, their value would be USD 350mn (more than 3x
current EV). The potential resources risking at the current stage of development could be
anywhere in the single-digit percents (more advanced projects 10-20%). Applying the 5% risking
factor for all, SLE would be sitting on 175.7 MMboe. It is up to all investors to assign a risk level
and monetary value to the potential resources. Looking at some peers and EV to potential
resources ratios, we find USD 0.1/boe to be an adequate figure (given the early stage of SLE’s
development, additional discounts can be applied). SLE appears to be inexpensive, given its
large asset base and potential resources. For a better illustration, we include a table with
licenses and projects held by SLE.
SLE Potential SLE Potential

Country Region Country Region
interest resources interest resources
Poland W Gdansk, Morocco Tarfaya 52.5% 13.7 Bbbl
60% (*) 4-6 Tcfe
Braniwo, Szczaw. Tarfaya Oil Shale 75% 50Bbbl (#)
Szczecinek 50% 11.3MMbbl ZAG 52.5% 10Tcf, 0.5Bboe
Nowa Sol, Wscho. 100% 0.5MMbbl Foum Draa 42.5%
0.5Bbbl
Nida 100% 12.4Bcfe Sidi Moussa 42.5%
Ireland Seven Head 12.5% Italy Sicily 100% 7 MMbbl

Old Head Kinsale 65% Po Valley 100% n.a.
Schull 62.5%
Barryroe 30% 150 MMboe + Albania Durresi Block 75% n.a.
Slyne 50% 1Bboe
Rockall 50% Netherlands Amstel 2.5% 10.9 Mmboe
Connemara pl-aek-user10
41.5% from 213.227.88.2 on 2011-02-08 03:42:56 EST. DownloadPDF.
South Porcupine 50% USA Denver Basin 100% 0.22 Mmboe
(*) Subject to Talisman option; ( #) The source could hold 50 Bboe, not clear how much net to SLE
Source: San Leon
Sometimes it is The number of concessions that San Leon holds is large and spread over different countries
unclear to what (good management skills). What we miss, however, is more specificity in terms of potential
management is resources to respective resources (i.e. for Ireland, the company states 150 MMboe in proven
referring resources of one field and over a 1Bboe total estimate; in the case of Tarfaya Oil Shale, SLE
states the “source” could bear 50 Bbbl, which is an immense figure that could supply global
demand for almost 1.5 years). Taking into account all of the figures mentioned by SLE, the
potential resources would swell to an unthinkable 112Bboe (3.7 years of global crude oil
consumption). But, as we pointed out earlier, we believe that SLE is likely referring to the whole
area/basin’s potential resources in some cases (esp. Morocco). The key concessions are
depicted in the map below.
San Leon licenses
Source: San Leon
Practically no There
ISIEmergingMarketsPDF is “no production”
pl-aek-user10 from for SLE at the moment
213.227.88.2 (it holds
on 2011-02-08 a tiny royalty
03:42:56 EST. interest in three
DownloadPDF. Dutch
production for producing wells), but it plans to start a small Morocco plant in early 2011 (Tarfaya). Most of its
SLE at the concessions are in the early stage of the E&P phase, with several seismic programs carried out.
moment The key focus of management is to be active, explore effectively and produce fast. The company
seems to be committed to its strategy, as several exploration drilling campaigns should be
carried out already in 4Q10 and 2011 (Poland, Morocco, Italy). The company has also secured
50% of required 2D/3D seismic from PGS Ventures as a USD 50mn facility, while ongoing work
is being carried out in the Atlantic Margin (300km2 over the Slyne Basin, results to be known in
December). SLE agreed to pay for the work conducted in stock (USD 50mn would represent ca.
GBP 32mn, or 213mn shares and 50% dilution).
Poland is Even though Poland is not the biggest area in terms of acreage or potential resources, local
reaching the development could have a near-term monetary impact on SLE’s value. We are therefore
top of the including a closer look at recent deals and the upcoming working schedule.
priority list at
SLE SLE currently holds six licenses in Poland (Baltic Basin, Permian South and Permian North),
with estimated net resources to SLE of 400+ MMboe. SLE cut an interesting deal with Talisman
Energy for the Baltic Basin (three concessions), according to which the following set of work
should be carried out:
Cash consideration of EUR 1.5mn to SLE

Paying 100% for 2D seismic (450km)
Drilling one well per concession to earn 30% interest
Drilling at least one horizontal well (1km) with two 500m horizontals proposed
Having an option for additional 30% interest for extra well per concession
The company Such a deal basically means that SLE does not need to pay any extra cash for most of the
farms out exploration parts and benefits from potentially successfully drilling (the upside from these
licenses so that concessions is estimated to be around 400MMboe). The initial drilling should take place in 2-3Q
exploration part 11. The additional licenses are being evaluated, while Nowa Sol could be targeted with a 3-4Q
is paid for seismic in 2010. The Permian Basin North concession requires at least 60km2 3D (to start in
3Q10), with planned drilling of the Sylvia prospect in 2011.
Activities in Poland
Source: San Leon
Seismic works The upcoming working schedule should entail seismic in Morocco (500km of 2D by the end of
are also being 2010), drilling in 2011 and 3D seismic interpretation of off-shore licenses. SLE is also currently
carried out in conducting a 3D seismic over its off-shore Ireland licenses. SLE plans additionally 20km2 of 3D
other regions over Italian off-shore (Narciso) and drilling an appraisal well of estimated 7 MMboe. However,
delays are likely, as off-shore drilling is currently under scrutiny after the recent Gulf of Mexico
spill.
Heavy dilution Financing of any E&P business is always an issue. SLE managed to recently place 22.5mn new
lies ahead of shares at 14 pence each to raise GBP 3.15mn (EUR 2.6mn). On top of that, it has signed a new
current facility with Yorkville for a GBP 15mn equity line of credit (to be drawn under special conditions)
shareholders and an additional GBP 2.2mn in credit line (9% p.a. interest rate). The company is also paying
for its projects with its own shares and future dilution could be quite substantial. At the current
share price, any capital increase means substantial dilution and a relatively small share
premium. Clearly, farm-outs of outstanding licenses are the most likely move. Recent
agreements (like the one with Talisman in Poland) prove the ability of management to strike
interesting deals. On the other hand, the PGS seismic deal will clearly dilute current
shareholders, but hopefully this can bring useful data to precise potential targets (leads, plays)
and move some resources to contingent ones or even reserves (after drilling).
Management is The company lacks financial resources for its activities, but recent farm-outs seem like a viable
main option. The shareholder structure could give investors some comfort, as management holds
shareholder in 40.9% of the company (chairman, CEO and commercial director 13.5% each). The biggest
the company single non-related party currently has only a 1.4% stake in the company (Standard Life),
according to Bloomberg data and our calculations. Naturally, such big commitments and own
money invested in SLE should mean the highest possible motivation to bring the best results,
quickly. However, SLE is probably the riskiest company mentioned in this report. It is also
extremely difficult to value its assets, given the many risks and uncertainties (and large CAPEX)
ahead. Only investors with extremely low risk aversion should consider it as an investment
(hoping for good results from the upcoming drilling campaign). Investors should also be
prepared for dilution.
Shareholder structure – almost half owned by related persons
Management
Standard Life
40.88%
Capita Financial
57.60%
Other minority
shareholders
1.42%
0.10%
Source: Bloomberg, company data & Erste Group Research

(IFRS, EUR mn, 31/12) 31/12/2004 31/12/2005 31/12/2006 31/12/2007 31/12/2008 31/12/2009
Net sales 0.00 0.00 0.00 0.00 0.00 0.00
Cost of goods sold 0.00 0.00 0.00 -0.00 -0.00 -0.00
Gross profit 0.00 0.00 0.00 -0.00 -0.00 -0.00
SG&A 0.00 0.00 0.00 -0.27 -2.17 -4.27
Other operating revenues 0.00 0.00 0.00 0.00 0.00 0.00
Other operating expenses 0.00 0.00 0.00 0.00 0.00 0.00
EBITDA 0.00 0.00 0.00 -0.27 -2.16 -4.17
Depreciation/amortization 0.00 0.00 0.00 -0.00 -0.00 -0.10
EBIT 0.00 0.00 0.00 -0.27 -2.17 -4.27
Financial result 0.00 0.00 0.00 0.44 -1.01 -1.25
Extraordinary result 0.00 0.00 0.00 0.00 0.00 0.00
EBT 0.00 0.00 0.00 0.17 -3.18 -5.52
Income taxes 0.00 0.00 0.00 0.00 0.00 -0.00
Net result after minorities 0.00 0.00 0.00 0.17 -3.18 -5.52
Balance Sheet 2004 2005 2006 2007 2008 2009

(IFRS, EUR mn, 31/12)
Tangible assets 0.00 0.00 0.00 0.01 0.02 0.12
Inventories 0.00 0.00 0.00 0.00 0.00 0.00
Other assets 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL ASSETS 0.00 0.00 0.00 26.36 36.81 39.29
Minorities 0.00 0.00 0.00 0.00 0.00 0.00
LT provisions 0.00 0.00 0.00 0.00 0.00 0.00

(IFRS,EUR mn, 31/12)
Cash flow from operating activities 0.00 0.00 0.00 0.27 -1.01 0.03
Cash flow from investing activities 0.00 0.00 0.00 -0.90 -4.42 -6.10
Cash flow from financing activities 0.00 0.00 0.00 0.64 5.58 8.04
CHANGE IN CASH , CASH EQU. 0.00 0.00 0.00 0.01 0.16 1.97
Margins & Ratios 2004 2005 2006 2007 2008 2009

Sales growth
EBITDA margin nm nm nm nm nm nm
EBIT margin nm nm nm nm nm nm
Net profit margin nm nm nm nm nm nm
ROE nm nm nm 1.3% -11.5% -17.6%
ROCE -2.1% -10.2% -14.9%
Equity ratio nm nm nm 97.8% 80.7% 84.1%
Net debt 0.0 0.0 0.0 -0.0 -0.2 -2.1
Working capital 0.0 0.0 0.0 -0.4 4.1 -0.8
Inventory turnover nm nm nm nm nm nm
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Dumitru Dulgheru (Fixed income) +40 21 312 6773 1028 Head Germany: Ingo Lusch +43 (0)5 0100 - 84111
Eugen Sinca (Fixed income) +40 21312 6773 1028 Fixed Income International & High End Sales Vienna
Raluca Ungureanu (Equity) +40 21311 2754 Jaromir Malak/ Zach Carvell +43 (0)5 100 - 84254
Research Slovakia U. Inhofner/ P. Zagan/ C. Mitu +43 (0)5 100 - 84254
Head: Juraj Barta, CFA (Fixed income) +421 2 4862 4166 Fixed Income International Sales London
Michal Musak (Fixed income) +421 2 4862 4512 Antony Brown +44 20 7623 4159
Maria Valachyova (Fixed income) +421 2 4862 4185
Research Ukraine
Victor Stefanyshyn (Equity) +38 044 593 - 1784
Maryan Zablotskyy (Fixed income) +38 044 593 - 9188
Research Turkey
Head: Erkin Sahinoz (Fixed Income) +90 212 371 2540
Ali Cakiroglu (Fixed Income) +90 212 371 2536
Sadrettin Bagci (Equity) +90 212 371 2537
Can Oztoprak (Equity) +90 212 371 2539
Duygu Kalfaoglu (Equity) +90 212 371 2534
Aurelian Oil & Gas Rating history
Date Rating Price Target Price
65
60
55
50
45
40
35
30
25
20
15
10
Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10
Target price 12 m fwd
Company Disclosure
Aurelian Oil & Gas
BNK Petroleum Rating history

2.830
2.820
2.810
2.800
2.790
2.780
2.770 pl-aek-user10 from 213.227.88.2 on 2011-02-08 03:42:56 EST. DownloadPDF.
2.760
Company Disclosure
BNK Petroleum
FX Energy Rating history

6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
Company Disclosure
FX Energy
San Leon Energy Rating history
28
26
24
22
20
18
16
14
12
Company Disclosure
San Leon Energy
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Buy > +20% to target price

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Distribution of ratings
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Inv. banking-relationship
Recommendation No. in % No. in %
Buy 42 26.6 10 66.7
Accumulate 41 25.9 3 20.0
Hold 47 29.7 2 13.3
Reduce 9 5.7 0 0.0
Sell 9 5.7 0 0.0
N.R./UND.REV./RESTR. 10 6.3 0 0.0
Total 158 100.0 15 100.0
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Unconventional gas in Poland

ISIEmergingMarketsPDF pl-aek-user10 from 213.227.88.2 on 2011-02-08 03:42:56 EST. DownloadPDF.

Could Poland become another Norway?

Aurelian: Drilling for tight gas in Poland started

BNK Petroleum: Pure shale gas, early E&P

FX Energy: Conventional gas play, with large

San Leon: Immense resources, what next?

Executive summary ......................................................................................................................................................3

Analyst: Radim Kramule +420 224 995 213

Erste Group Research – Sector Report November 22, 2010 Page 2

Erste Group Research – Sector Report November 22, 2010 Page 3

Mcap EV Reserves Contingent Potential Resources Key Mcap/ Mcap/ Explor.

Erste Group Research – Sector Report November 22, 2010 Page 4

ISIEmergingMarketsPDF pl-aek-user10 from 213.227.88.2 on 2011-02-08 03:42:56 EST. DownloadPDF.

Erste Group Research – Sector Report November 22, 2010 Page 5

Aurelian gas BNK gas FX gas BNK oil FX oil

Erste Group Research – Sector Report November 22, 2010 Page 6

Natural gas price comparison

Erste Group Research – Sector Report November 22, 2010 Page 7

Mcap Net debt Key Mcap/ Mcap/ Explor. 2010

Successful drilling and the build-up of reserves/resources

Among the key risks are:

Erste Group Research – Sector Report November 22, 2010 Page 9

Source: BP annual oil & gas review (6/2010)

Source: BP annual oil & gas review (6/2010)

Erste Group Research – Sector Report November 22, 2010 Page 10

Source: BP & own calculations

European pipeline network

Erste Group Research – Sector Report November 22, 2010 Page 11

Prior Perception New Understanding

Source: Advanced Resources (3/2010)

Erste Group Research – Sector Report November 22, 2010 Page 12

Source: Bloomberg & Erste Group calculations

Erste Group Research – Sector Report November 22, 2010 Page 13

Domestic production Imports Russian imports Total NG

Erste Group Research – Sector Report November 22, 2010 Page 14

Relatively inelastic gas prices in the downward direction (since 2005)