RBC Europe Limited Al Stanton (Analyst) (+44) (0)131-222-3638; al.stanton@rbccm.com Nathan Piper (Analyst) (+44) (0)131-222-3649; nathan.piper@rbccm.

com James Hosie, CFA (Analyst) (+44) (0)131-222-3695; james.hosie@rbccm.com Theresa Pfab, CA (Associate) (+44) (0) 131 222 3696; theresa.pfab@rbccm.com

INDUSTRY | COMMENT
JANUARY 9, 2012

International E&P - An Early Spring Clean

Macro Update: Continued Strong Oil Price Focuses Attention On Stock Specifics
Todays small changes to our macro assumptions have been overshadowed by the roll forward of our discount date, to January 2012, and a early spring cleaning we have taken the opportunity to review all our NAVs and Target Prices, including a first stab at modelling Cairn Energys earnings without Cairn India, DNO Internationals earnings (cash flow) with Rak Petroleum and Gulfsands Petroleum post EU sanctions in Syria. Discount rate assumptions: Our new sum-of-the-parts valuations are discounted from the start of 2012, which has benefited the companies with near-term developments, and we have widened the range of applicable discount rates from eight to 20% to reflect the increase breadth of our peer group. Macro Changes: We have revised our earnings and cash flows forecasts for the 2011 actuals, but our 2012+ Brent oil price forecasts are unchanged $109/bbl in 2012, $113/bbl in 2013 and $102/bbl long-term real, thereafter. Our long-term exchange rate assumptions, including dollar/sterling at $1.60/, are also unchanged. As a result of our "Spring Cleaning" we have today made a series of recommendation changes: Upgrades: Tullow Oil to Outperform (Above Average Risk) from Sector Perform - the "quality" name in the sector, with an enviable opportunity set. Downgrades: Bankers Petroleum to Sector Perform (Above Average Risk) from Outperform, without a rising oil price the market awaits the delivery of production growth. Heritage Oil to Underperform (Speculative Risk) from Sector Perform appears strategically challenged. Valiant Petroleum to Sector Perform (Speculative Risk) from Outperform lacks catalysts in a competitive North Sea-focused subgroup.

Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Required Non-U.S. Analyst and Conflicts Disclosures, see page 16.

January 9, 2012

International E&P - An Early Spring Clean

Oil Price Outlook World oil prices underwent a roller-coaster ride during 2011, lifted by the Arab spring and Japanese nuclear crisis and besieged by the European sovereign debt crisis and renewed risk of a double-dip recession. In our eyes, the global oil price equation in 2012 is as much supply as it is demand driven, revolving around the pace at which Libya's oil production regains ground and the potential for firmer demand conditions to take shape. Against the backdrop of moderate demand growth and recovering Libyan production, global oil fundamentals are poised for a much needed breather following a year in which the supply/demand landscape tightened. Barring unforeseen outages, principally in Iran, OPEC-11 usable spare capacity levels should remain relatively stable in the 3.6 - 3.8 mmb/d range as OECD stocks recover. These factors have been reflected in our unchanged Brent outlook of $109/bbl in 2012 and $113/bbl in 2013. Five key points: US Dollar Stability. Amongst other factors outlined below, our Brent outlook of $109/bbl in 2012 and US$113/bbl in 2013 reflects a relatively stable US dollar on a trade weighted basis. Brent-WTI Spread. Our outlook reflects a WTI discount to Brent of $9/bbl in 2012 and $7/bbl in 2013. Over the long haul, we anticipate that WTI will trade at a $2/bbl discount to Brent. Global Oil Demand. Amid moderate global GDP growth of 3.25% in 2012, we anticipate global oil demand growth of 1.0mmb/d (to 90.0mmb/d) and a further 1.3mmb/d (to 91.3mmb/d) in 2013 as economies regain momentum. We anticipate further regression in oil demand in the industrialized economies - principally the United States and Europe, while the Middle East (0.27mmb/d of demand growth) and China (0.47mmb/d of demand growth) remain the twin engines of global oil demand growth. Global Oil Supply. Our global oil supply growth outlook of 2.5% (2.2mmb/d) in 2012 and 1.5% (1.3mmb/d) in 2013 is reflective of a partial return of Libyan oil production and an improving non-OPEC supply picture. Iranian oil production of 3.7mmb/d remains intact throughout our forecast period.
Exhibit 1 - Market appears to be waiting for an oil price correction while we see good value
75% Average prem/disc to NAV (LHS) Brent Oil price (RHS) 50% 125 150

Premium/discount to NAV

25%

100
Oil price ($/bbl)

0%

75

-25%

50

-50%

25

-75% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0 2012

Source RBC Capital Markets estimates and Reuters

January 9, 2012
Exhibit 2 - Sector appears to be discounting $70/bbl oil
120

International E&P - An Early Spring Clean

100

80
Brent ($/bbl)

60

40

20

DNO NKO OPHR HOIL LUPE SMDR CHAR AMER WZR TLW PMG ENQ FPM PMD AEN HDY PXT BNK SLG EC GPX KOS GTE JKX NPE KEA VPP SQZ PRE RIA IAE SIA

Source RBC Capital Markets estimates

Exhibit 3 - Premium/discount to NAV

60% 50% 40% 30%

Premium/(Discount) to NAV

20% 10%

SMDR

OPHR

PMD

GPX

PXT

ENQ

IAE

HDY

FPM

(20%) (30%) (40%) (50%) (60%) (70%) (80%) (90%) (100%)

LUPE

HOIL

0% (10%)

ROZ

SQZ

CNE

TLW

AEN

DNO

PRE

SIA

VPP

NPE

GTE

BNK

SLG

NKO

KEA

PMG

AMER

JKX

WZR

RIA

CHAR

Source RBC Capital Markets estimates

PEH

January 9, 2012
Exhibit 4 - Changes to Valuations and estimates
Rating Changes Company Int E&P Large Cap Ecopetrol S.A. Int E&P Mid Cap Bankers Petroleum Cairn Energy DNO International EnQuest Gran Tierra Energy Heritage Oil JKX Oil & Gas Kosmos Energy Lundin Petroleum Niko Resources Ophir Energy Pacific Rubiales Energy Petrominerales Premier Oil Salamander Energy SOCO International Tullow Oil Average - Mid Cap Int E&P Small Cap Amerisur Resources Antrim Energy Chariot Oil & Gas Encore Oil Faroe Petroleum Gulfsands Petroleum Hardy Oil & Gas Ithaca Energy Kea Petroleum Nautical Petroleum Parex Resources PetroMagdalena Energy Primeline Energy Rialto Energy Rodinia Oil Corp. Serica Energy Sterling Resources Valiant Petroleum WesternZagros Average - Small Cap Int E&P Group Average 1 Niko Resources reports to a 31 March year-end. 2011 year presented is year ending 31 March 2012. Source: RBC Capital Markets Estimates & Company Reports AMER AEN CHAR EO FPM GPX HDY IAE KEA NPE PXT PMD PEH RIA ROZ SQZ SLG VPP WZR 17p C$1.16 109p 77p 156p 183p 162p C$2.17 5p 266p C$7.76 C$1.17 C$0.24 A$0.26 C$0.10 21p C$1.75 437p C$0.63 O SP SP O SP O O SP O O U SP O SP SP O SP SP O SP O O SP O O U SP O O SP S S S AA S S S S S S S S S S S 0.6x 0.7x 0.6x 0.6x 0.5x 0.5x 0.7x 0.7x 0.2x 0.3x 1.4x 0.8x 0.5x 0.5x 0.4x 260p 220p 260p C$3.50 9p 500p C$11.00 C$1.65 C$0.75 A$0.70 C$0.10 26p C$3.50 600p C$1.00 0.0% (38.9%) 0.0% 7.7% 0.0% (16.7%) 0.0% 3.1% 0.0% (46.2%) 0.0% (13.3%) 0.0% (25.0%) 11.1% (6.1%) (4.6%) 67% 21% 60% 61% 100% 88% 42% 41% 213% 175% 0% 27% 100% 37% 59% 22.9p $0.53 $0.02 $0.32 (0.7p) (3.0p) $0.68 $0.11 ($0.01) (A$0.00) (C$0.02) $0.04 (C$0.13) $5.47 ($0.02) 3.1% (30.6%) 8.3% (0.6%) NM NM 3.8% 23.7% NM NM NM 1.5% NM (0.2%) NM 1.0% 1.0% O O O O O O S S S 0.4x 0.6x 0.3x 43p C$2.00 350p (6.5%) 0.0% 9.4% 157% 72% 220% $0.01 $0.01 ($0.02) 2.3% 0.2% NM $0.04 $0.08 ($0.02) 43.3p ($0.24) $0.03 $0.99 (0.6p) (3.6p) $1.69 $0.23 $0.08 (A$0.02) (C$0.03) $0.03 C$0.15 $5.95 $0.08 0.0% (25.7%) NM 7.4% (120.7%) 0.1% (8.8%) NM NM (0.9%) (8.6%) 0.0% NM NM 0.0% (6.4%) (11.7%) 0.0% (12.5%) (12.6%) $0.11 $0.35 ($0.03) 39.4p ($0.26) $0.03 $1.36 (0.6p) (4.4p) $1.65 $0.39 $0.29 (A$0.03) (C$0.03) $0.00 C$0.67 $5.99 $0.08 0.0% 4.4% NM (4.3%) (119.5%) 0.1% 47.9% NM NM (2.5%) (6.4%) 0.0% NM NM 0.0% (0.0%) 3.1% 0.0% BNK CNE DNO ENQ GTE HOIL JKX KOS LUPE NKO OPHR PRE PMG PMO SMDR SIA TLW C$4.85 267p Nk7.80 98p C$5.02 197p 140p $13.21 Sk175.30 C$49.16 299p C$19.41 C$17.58 377p 215p 298p 1408p SP O O SP O SP AA S AA 0.7x 0.5x 0.8x 290p 450p 1700p (6.5%) (10.0%) 13.3% (3.1%) 35% 51% 21% $1.08 $0.41 $1.67 1.7% (3.5%) (0.1%) 1.0% SP SP SP SP O U SP O SP O O SP O O SP SP SP O SP SP O SP O O SP O AA AA AA AA AA S AA AA AA AA S AA AA 0.5x 0.8x 0.5x 0.6x 0.5x 1.0x 0.4x 0.8x 0.5x 0.7x 0.5x 0.4x C$7.00 320p Nk10.00 135p C$10.00 200p 350p $17.00 C$100 400p C$36.00 C$40.00 (22.2%) (17.9%) 0.0% (15.6%) (9.1%) (16.7%) 0.0% 6.3% 11.1% 0.0% 11.1% 9.1% (7.0%) 44% 20% 28% 37% 99% 2% 151% 29% 14% 103% 34% 85% 128% $0.67 $0.89 Nk0.81 $0.76 $1.28 ($0.09) $0.49 $1.18 $3.06 $6.46 ($0.04) $4.16 $7.87 2.8% 7.0% (4.8%) (0.8%) 1.4% NM 0.4% 0.5% 2.9% 0.0% NM 3.4% 1.8% $1.07 $0.01 Nk1.11 $0.82 $1.49 ($0.06) $0.54 $1.49 $3.09 $4.59 ($0.04) $6.68 $8.71 $1.37 $1.68 $2.16 (2.9%) (99.4%) (65.7%) (0.0%) (0.3%) NM (0.0%) (10.3%) 0.3% 0.2% NM 0.0% 0.0% 0.0% (4.9%) (8.0%) (12.7%) $1.52 ($0.00) Nk4.10 $0.85 $2.25 ($0.07) $0.63 $1.96 $2.85 $4.36 ($0.05) $7.61 $9.43 $1.77 $1.05 $2.50 (6.1%) (100.1%) 77.5% (0.0%) (0.1%) NM (0.1%) (0.7%) 9.1% (0.1%) NM 0.0% 0.0% 0.0% (0.0%) 1.3% EC $46.02 SP SP A 1.1x $43.00 (2.3%) (7%) $5.41 1.7% $5.88 (0.0%) $6.70 (0.0%) Ticker Price Current Prior Risk P/NAV Target Valuation Price Target Change Implied Return 2011E New Change Cash Flow per Share 2012E New Change 2013E New Change

International E&P - An Early Spring Clean

Recurring Earnings 2011E New $4.19 Change 2.1% 2012E New $4.69 Change 0.0% 2013E New $5.52 Change 0.0%

NAV per Share RBC New $43.14 Change (0.1%)

$0.21 $0.10 Nk0.31 $0.07 $0.47 ($0.10) $0.25 ($0.02) $0.58 $2.60 ($0.12) $2.53 $3.34 $0.31 $0.36 $0.72

6.3% (71.6%) NM (0.3%) 3.9% NM 0.8% NM (12.5%) 0.0% NM 5.9% 4.5% 6.2% (3.3%) (0.4%) (4.5%)

$0.41 ($0.01) Nk0.52 $0.17 $0.66 ($0.13) $0.34 $0.73 $0.59 ($1.03) ($0.21) $3.62 $5.19 $0.65 $1.39 $0.86

(3.2%) (101.1%) (81.4%) (0.0%) (0.6%) NM (0.1%) (13.9%) 1.2% NM NM 0.0% 0.0% 0.0% (4.9%) (11.8%) (15.4%)

$0.62 ($0.01) Nk3.52 $0.21 $1.20 ($0.14) $0.39 $1.08 $0.61 $1.69 ($0.14) $4.43 $5.86 $1.00 $0.84 $1.21

(7.0%) (102.2%) 78.8% (0.0%) (0.3%) NM (0.2%) (1.2%) 12.4% (0.1%) NM 0.0% 0.0% 0.0% (0.1%) 4.4%

C$9.65 320p Nk14.23 156p C$9.86 203p 370p $16.84 Sk181.51

C$101.20

6.7% (17.4%) 4.0% (2.5%) (7.8%) (16.6%) (0.3%) 10.3% 10.7% 2.7% 13.2% 2.6% (8.7%) (13.6%) (2.3%) 10.1% (0.5%)

1.0x Sk200.00

414p C$36.10 C$39.63 287p 545p 1732p

*****Restricted*****

$0.00 ($0.03) ($0.02) (6.9p) $0.20 ($0.00) $0.18 (0.7p) (4.3p) $0.50 ($0.28) ($0.01) (A$0.03) (C$0.06) ($0.05) (C$0.17) $1.46 ($0.02)

2.6% NM NM NM (52.5%) NM (1.0%) NM NM 11.0% NM NM NM NM NM NM 0.3% NM (7.9%) (5.5%)

$0.03 ($0.03) ($0.02) 5.5p ($0.32) $0.01 $0.39 (0.6p) (5.1p) $1.78 ($0.03) ($0.01) (A$0.02) (C$0.03) ($0.05) C$0.08 $1.40 $0.07

0.0% NM NM 10.1% (136.9%) 0.2% (9.3%) NM NM (0.4%) NM NM NM NM NM (13.1%) (14.3%) 0.0% (16.4%) (15.8%)

$0.09 $0.07 ($0.03) 6.1p ($0.34) $0.01 $0.52 (0.5p) (5.9p) $1.72 $0.04 $0.07 (A$0.03) (C$0.03) ($0.05) C$0.19 $1.84 $0.07

0.0% (8.6%) NM 0.0% (131.3%) 0.2% 41.1% NM NM (1.2%) (34.0%) 0.0% NM NM NM 5.9% 3.3% 0.0%

43p C$1.99 387p 258p 262p 269p C$3.51 9p 502p C$11.59 C$1.67 C$1.10 A$0.82 C$0.07 26p C$3.51 832p C$1.75

(6.3%) 2.4% 11.7% 0.1% (36.9%) 1.1% 9.6% 0.2% (14.9%) 2.7% 2.8% (3.6%) (42.1%) (22.8%) (16.5%) (0.0%) (8.4%) 19.8% (5.3%) (3.0%)

*****Restricted*****

Priced as of close 4/1/12

January 9, 2012
Exhibit 5 - International E&P Valuation Table
Ratings and Targets Current Capitalistion Net Debt Price Company Int E&P - London Listed Amerisur Resources Antrim Energy Bankers Petroleum Cairn Energy Chariot Oil & Gas Encore Oil EnQuest Faroe Petroleum Gulfsands Petroleum Hardy Oil & Gas Heritage Oil Ithaca Energy JKX Oil & Gas Kea Petroleum Nautical Petroleum Ophir Energy Premier Oil Salamander Energy Serica Energy Soco International Tullow Oil Valiant Petroleum Average - London Listed Int E&P - Toronto Listed Antrim Energy Bankers Petroleum Gran Tierra Energy Ithaca Energy Niko Resources Pacific Rubiales Energy Parex Resources PetroMagdalena Energy Petrominerales Primeline Energy Rodinia Oil Corp Serica Energy Sterling Resources WesternZagros Average - Toronto Listed Int E&P - Sydney Listed Rialto Energy Average - Sydney Listed Int E&P - New York Listed Ecopetrol S.A. Kosmos Energy Average - New York Listed Int E&P - Oslo Listed DNO International Int E&P - Stockholm Listed Lundin Petroleum Int E&P Group Average
1

International E&P - An Early Spring Clean

2011E Prod. EV US$m $219m $148m $1,153m $5,456m $171m $966m $478m $266m $148m $204m $462m $313m $16m $254m $1,351m $709m $43m $1,423m $21,833m $285m mboe/d 2011 0.4 1.6 13.2 99.8 0.0 23.8 3.3 8.5 0.4 0.9 3.7 9.3 0.0 0.0 0.0 18.0 2.1 5.1 80.5 7.5 CFPS $0.01 $0.01 $0.67 $0.89 ($0.02) $0.76 22.9p $0.53 $0.02 ($0.09) $0.32 $0.49 (0.7p) (3.0p) ($0.04) $1.08 $0.04 $0.41 $1.67 $5.47 EPS $0.00 ($0.03) $0.21 $0.10 ($0.02) $0.07 (6.9p) $0.20 ($0.00) ($0.10) $0.18 $0.25 (0.7p) (4.3p) ($0.12) $0.31 ($0.05) $0.36 $0.72 $1.46 2011E 2012E Prod. mboe/d 2012E 1.8 2.2 18.0 0.0 0.0 23.0 7.5 0.3 0.4 1.9 9.0 14.5 0.0 0.0 0.0 16.9 1.3 15.6 97.2 7.7 CFPS $0.04 $0.08 $1.07 $0.01 ($0.02) $0.82 43.3p ($0.24) $0.03 ($0.06) $0.99 $0.54 (0.6p) (3.6p) ($0.04) $1.37 $0.03 $1.68 $2.16 $5.95 EPS $0.03 ($0.03) $0.41 ($0.01) ($0.02) $0.17 5.5p ($0.32) $0.01 ($0.13) $0.39 $0.34 (0.6p) (5.1p) ($0.21) $0.65 ($0.05) $1.39 $0.86 $1.40 2012E 2013E Prod. mboe/d 2013E 5.1 3.5 21.5 0.0 0.0 24.0 8.9 0.3 0.4 2.9 12.4 18.5 0.0 0.0 0.0 20.9 1.0 20.3 106.6 9.0 CFPS $0.11 $0.35 $1.52 ($0.00) ($0.03) $0.85 39.4p ($0.26) $0.03 ($0.07) $1.36 $0.63 (0.6p) (4.4p) ($0.05) $1.77 $0.00 $1.05 $2.50 $5.99 EPS $0.09 $0.07 $0.62 ($0.01) ($0.03) $0.21 6.1p ($0.34) $0.01 ($0.14) $0.52 $0.39 (0.5p) (5.9p) ($0.14) $1.00 ($0.05) $0.84 $1.21 $1.84 NAV /share 43p 127p 615p 320p 387p 156p 258p 262p 269p 203p 223p 370p 9p 502p 414p 287p 26p 545p 1,732p 832p 2013E Net Asset Value Prem / (Disc) to NAV (61%) (41%) (51%) (17%) (72%) (37%) (39%) (30%) (40%) (3%) (38%) (62%) (52%) (47%) (28%) (25%) (20%) (45%) (19%) (47%) (39%) 2011E P/CFPS 39.7x 89.1x 7.2x 4.8x n/a 2.1x 6.8x 5.6x 129.7x n/a 6.9x 4.5x n/a n/a n/a 3.2x 7.8x 11.7x 13.5x 1.3x 22.3x 2012E P/CFPS 7.2x 14.0x 4.4x 711.7x n/a 1.9x 3.6x n/a 98.9x n/a 2.2x 4.1x n/a n/a n/a 2.5x 12.4x 2.8x 10.2x 1.1x 62.6x 2013E P/CFPS 2.4x 3.4x 3.2x n/a n/a 1.8x 4.0x n/a 98.0x n/a 1.6x 3.6x n/a n/a n/a 1.9x 121.7x 4.5x 9.0x 1.2x 19.7x Cash Flow Multiples

Target Price 43p 125p 443p 320p 350p 135p 260p 220p 260p 200p 225p 350p 9p 500p 400p 290p 26p 450p 1,700p 600p

Implied Return 157% 67% 48% 20% 220% 37% 67% 21% 60% 2% 62% 151% 100% 88% 34% 35% 27% 51% 21% 37% 65%

Shrs O/S MM 916.0 184.1 247.5 1,406.3 182.1 802.7 212.4 121.4 72.8 259.3 259.2 172.1 509.4 87.7 365.6 154.5 176.6 340.3 904.6 40.5

Mkt Cap US$m $240m $216m $1,160m $5,859m $311m $1,232m $517m $346m $184m $797m $561m $375m $36m $364m $1,704m $519m $57m $1,585m $19,889m $276m

(Cash) US$m ($21m) ($68m) ($6m) ($403m) ($140m) ($266m) ($39m) ($80m) ($37m) ($592m) ($99m) ($62m) ($20m) ($110m) ($353m) $190m ($18m) ($162m) $1,944m $8m

Ticker AMER AEY BNK CNE CHAR EO ENQ FPM GPX HDY HOIL IAE JKX KEA NPE OPHR PMO SMDR SQZ SIA TLW VPP

Exch AIM AIM AIM LSE AIM AIM LSE AIM AIM LSE LSE AIM LSE AIM AIM LSE LSE LSE AIM LSE LSE AIM

Analyst NP JH AS NP AS JH JH JH AS NP AS JH NP NP JH AS NP NP JH AS AS JH

Rec O O SP SP O SP O SP SP U O SP SP O O SP SP O O SP

Risk S S AA AA S AA S S S S AA AA S S S AA S S AA S

04-Jan 17p 75p 300p 267p 109p 77p 98p 156p 183p 162p 197p 139p 140p 5p 266p 299p 377p 215p 21p 298p 1,408p 437p

***** Restricted ****

***** Restricted ****

AEN BNK GTE IAE NKO PRE PXT PMD PMG PEH ROZ SQZ SLG WZR

TSX TSX-V TSX TSX-V TSX TSX TSX TSX-V TSX TSX-V TSX-V TSX TSX-V TSX-V

JH AS NP JH NP NP NP NP NP NP NP JH JH AS

O SP O O O SP O SP O O U SP O SP

S AA AA AA AA AA S S AA S S S S S

C$1.16 C$4.85 C$5.02 C$2.17 C$49.16 C$19.41 C$7.76 C$1.17 C$17.58 C$0.24 C$0.10 C$0.35 C$1.75 C$0.63

C$2.00 C$7.00 C$10.00 C$3.50 C$100.00 C$36.00 C$11.00 C$1.65 C$40.00 C$0.75 C$0.10 C$0.42 C$3.50 C$1.00

72% 44% 99% 61% 103% 85% 42% 41% 128% 213% 0% 20% 100% 59% 76%

184.1 247.5 261.1 259.2 51.6 271.6 77.2 142.3 100.6 94.0 105.1 176.6 222.6 371.2

$211m $1,186m $1,295m $556m $2,506m $5,208m $592m $164m $1,748m $22m $10m $61m $385m $231m

($68m) ($6m) ($355m) ($99m) $205m $103m ($81m) $32m ($285m) ($2m) ($51m) ($18m) ($22m) ($46m)

$143m $1,179m $939m $457m $2,711m $5,311m $511m $196m $1,462m $20m -$41m $43m $363m $185m

1.6 13.2 24.3 3.7 49.1 100.9 5.3 2.5 38.6 0.0 0.0 2.1 0.1 0.2

$0.01 $0.67 $1.28 $0.32 $6.46 $4.16 $0.68 $0.11 $7.87 (C$0.01) (C$0.02) $0.04 ($0.13) ($0.02)

($0.03) $0.21 $0.47 $0.18 $2.60 $2.53 $0.50 ($0.28) $3.34 (C$0.01) (C$0.06) ($0.05) ($0.17) ($0.02)

2.2 18.0 28.1 9.0 39.4 116.4 17.0 3.2 42.7 0.0 0.0 1.3 2.6 2.5

$0.08 $1.07 $1.49 $0.99 $4.59 $6.68 $1.69 $0.23 $8.71 C$0.08 (C$0.03) $0.03 $0.15 $0.08

($0.03) $0.41 $0.66 $0.39 ($1.03) $3.62 $1.78 ($0.03) $5.19 (C$0.01) (C$0.03) ($0.05) $0.08 $0.07

3.5 21.5 37.5 12.4 36.8 120.6 17.0 3.8 43.6 1.2 0.0 1.0 8.9 6.0

$0.35 $1.52 $2.25 $1.36 $4.36 $7.61 $1.65 $0.39 $9.43 C$0.29 (C$0.03) $0.00 $0.67 $0.08

$0.07 $0.62 $1.20 $0.52 $1.69 $4.43 $1.72 $0.04 $5.86 C$0.07 (C$0.03) ($0.05) $0.19 $0.07

C$1.99 C$9.65 C$9.86 C$3.51

C$101.20 C$36.10

(42%) (50%) (49%) (38%) (51%) (46%) (33%) (30%) (56%) (78%) 40% (16%) (50%) (64%) (40%)

87.0x 7.3x 4.0x 6.8x 7.7x 4.7x 11.5x 10.3x 2.3x n/a n/a 8.4x n/a n/a 15.0x

13.9x 4.5x 3.4x 2.2x 10.7x 2.9x 4.6x 5.2x 2.0x 3.1x n/a 13.5x 11.5x 8.3x 6.6x

3.4x 3.3x 2.3x 1.7x 11.7x 2.7x 4.9x 3.1x 1.9x 0.9x n/a 135.0x 2.7x 8.2x 14.0x

C$11.59 C$1.67 C$39.63 C$1.10 C$0.07 C$0.42 C$3.51 C$1.75

RIA

ASX

AS

A$0.26

A$0.70

175% 175%

375.0

$99m

($59m)

$40m

0.0

(A$0.00)

(A$0.03)

0.0

(A$0.02)

(A$0.02)

0.0

(A$0.03)

(A$0.03)

A$0.82

(69%)

n/a

n/a

n/a

EC KOS

NYSE LSE

NP AS

SP O

A AA

$46.02 $13.21

$43.00 $17.00

(7%) 29% 11%

2.1 375.7

$95m $4,963m

$2m $375m

$96m $5,338m

681.2 16.3

$5.41 $1.18

$4.19 ($0.02)

736.5 23.2

$5.88 $1.49

$4.69 $0.73

852.4 28.9

$6.70 $1.96

$5.52 $1.08

$43.14 $16.84

7% (22%) (7%)

8.5x 11.2x 8.5x

7.8x 8.9x 7.8x

6.9x 6.7x 6.9x

DNO

OSLO

AS

SP

AA

Nk7.80

Nk10.00

28%

1,023.3

$1,344m

$22m

$1,366m

25.9

Nk0.81

Nk0.31

36.1

Nk1.11

Nk0.52

43.0

Nk4.10

Nk3.52

Nk14.23

(45%)

9.6x

7.0x

1.9x

LUPE

OMX

JH

SP

AA

Sk175.30

Sk200.00

14% 62%

311.0

$7,979m

$124m

$8,103m

33.1

$3.06

$0.58

38.2

$3.09

$0.59

37.4

$2.85

$2.85

Sk181.51

(3%) (34%)

8.9x 10.7x

8.2x 15.4x

9.5x 8.7x

Niko Resources reports to a 31 March year-end. 2011 year presented is year ending 31 March 2012. Assumptions Brent Crude 2011A $110.97 56.3p/therm US$1.60/ C$0.99/US$ Nk5.55/US$ A$1.05/US$ 2012E $109.00 60.0p/therm US$1.56/ C$1.00/US$ Nk5.78/US$ A$1.02/US$ 2013E $113.00 60.0p/therm US$1.60/ C$0.96/US$ Nk6.00/US$ A$1.00/US$ Long Term $102.00 61.3p/therm US$1.60/ C$0.98/US$ Nk6.00/US$ A$1.00/US$

*Covered by Royal Bank of Canada - U.S. Branch analyst Scott Hanold +1 (512) 708-6354 scott.hanold@rbccm.com **Covered by Royal Bank of Canada - Sydney Branch analyst Andrew Williams (+61) 3 8688-6578 andrew.williams@rbccm.com Source: Reuters, RBC Capital Markets Estimates & Company Reports

UK Natural Gas US$/ Forex C$/US$ Forex NOK/US$ Forex A$/$ Forex

January 9, 2012

International E&P - An Early Spring Clean

Price Target Impediments

Amerisur Resources (LSE: AMER; Outperform, Speculative Risk, 43p/share Price Target)
Valuation

We value Amerisur Resources on a sum-of-the-parts basis at a risked post-tax NAV of 43p/share. Our NAV comprises a core value of 7p/share and risked upside of 36p/share. Core value includes the companys producing assets, fields under development, and financial assets and liabilities, minus its near-term exploration commitments. Risked upside consists of the undeveloped discoveries plus the companys 2011 exploration drilling program. Through the next 12 months, successful drilling should grow the core value of Amerisur rapidly. Our 12-month price target of 43p/share is based on our risked NAV, which is consistent with its International E&P peers with the potential for clear near-term catalysts. In 2012 we expect exploration/appraisal newsflow from the Putumayo Basin (Colombia) and later in Paraguay to generate further investor interest.
Price Target Impediment

Security Risk: Amerisur has its principal assets in Colombia and Paraguay, so investors are exposed to the security risks of these countries. In particular, the Putumayo Basin in southern Colombia remains an area of low-level but consistent unrest. 100% Crude Oil Weighted: As production is entirely crude weighting, Amerisur's earnings and cashflows are sensitive to changes in WTI benchmark oil prices. Political Risks: Amerisur is exposed to political risks that could include oil and gas fiscal regime changes in the areas where it operates. These could include changes in taxes, royalties, or license tenure. Exploration/Appraisal Risk: A significant portion of the capital budget is devoted to exploration and appraisal drilling, exposing investors to exploration risks such as dry holes where money is invested and no value is created Bankers Petroleum (TSX: BNK, LSE: BNK; Sector Perform, Above Average Risk, C$7.00 Price Target)
Valuation

On a sum-of-the-parts basis we now value Bankers at C$9.65/share (615p). Our PV10% comprises a core value of C$6.35/share (405p) and risked upside of C$3.30/share (211p/share). Our target price is now set at a discount to our NAV, as investors take a show me attitude to production growth management trimmed its production targets through 2011, and the market remains concerned by slow growth in 2012-2013 guidance, in our view. Our target price is set broadly in line with our value of the companys 2P reserves, our PV10% of the companys producing Patos Marinza oilfield.
Price Target Impediment

The risks to the upside and downside include the pace of production growth. The company is scheduled to operate five rigs in Albania from year-end 2011; however, it is unclear how the drilling slots will be allocated (between production growth and appraisal drilling activity). Bankers' leverage to the oil price is significant, so any fluctuations in the oil price will have a significant impact on investor sentiment. We calculate that a $10/bbl change in our long-term oil price could generate a 20% swing in our NAV. Cairn Energy (LSE: CNE; Sector Perform, Above Average Risk, 320p Price Target)
Valuation

On a sum-of-the-parts basis we now value Cairn Energy at 320p/share. Our PV10% comprises a core value of 320p/share with no risked upside. Our target price reflects the remaining value of the companys 22% stake in Cairn India on a market to market basis and its cash position.
Price Target Impediment

As Cairn has no confirmed 2012 drilling plans, the risks the company faces are focused on complete a deal to rejuvenate the portfolio and also the value of Cairn India, listed on the Bombay Stock Exchange. The company has limited leverage to the oil price or exploration drilling.

January 9, 2012
Valuation

International E&P - An Early Spring Clean

Chariot Oil & Gas (LSE: CHAR; Outperform, Speculative Risk, 350p Price Target) We value Chariot at 387p/share. Our PV15% consists of a core value of 23p/share, which includes cash-in-hand of ~$155m minus exploration spending commitments (excluding those that will be funded by farm-in partners) and G&A costs, and upside potential of 364p/share, which includes an EMV of multi-well exploration drilling campaign offshore Namibia. We assume that Chariot continues to bring in additional partners ahead of any drilling, and as a result our valuations and costs are based on post farm-out equity stakes. Our 350p price target is set broadly in line with our NAV; our best valuation of the company today; however, the results of any exploration drilling campaigns would results in our valuation shifting marketing. In the meanwhile, we will continue to review our valuation after the company announces farm-out deals.
Price Target Impediment

Following a successful placing in Q1/11, Chariots risk profile swung away from funding to newsflow and exploration risk. Drilling delays have undermined interest in the stock, and we do not expect investor interest to pick-up until management confirm it has secured a rig to drill (in the near-term). BPs farm-in deal provided a significant endorsement of Namibia potential; but Chariot is exploring in a frontier exploration province and the proposed two-well campaign should be considered as high-risk. Ecopetrol (NYSE: EC; Sector Perform, Average Risk, $43 Price Target)
Valuation

We value Ecopetrol US$43/share based on a 80% weighting toward 1.0x our risked NAV and 20% toward our 10x average mid-cycle cash flow multiple. We set our price target in-line with this valuation.
Price Target Impediment

Risks to our target price specific to Ecopetrol include the following: 1) Delays in increasing pipeline capacity in Colombia hampering production growth; 2) Security risks in Colombia where the majority of the company's assets are located; 3) Lack of success in increasing the recovery factor from some of their large oil field onshore Colombia could impair critical reserves replacement EnQuest (LSE: ENQ; Sector Perform, Above Average Risk, 135p Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value EnQuest at 156p/share. Our NAV includes a core NAV of 134p/share, which consists of assets currently producing or approved for development and corporate adjustments including cash-in-hand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling 22p/share is included as risked upside. Our 12-month price target of 135p is set at 0.85x our NAV and in line with our valuation of our core NAV. EnQuest operates five producing North Sea oilfields that generate significant operating cash flow, the company intends to reinvest this cash flow in further development activity and business development opportunities. However, in our view, a lack of material exploration and appraisal catalysts is likely to see the stock continue to trade at a discount to our full NAV and move in line with oil price sentiment during periods of limited newsflow.
Price Target Impediment

Consistent with other international E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk, and project execution risk. EnQuests portfolio is heavily weighted toward unhedged oil production, exposing the companys cash flow and valuation to a high level of commodity price risk. The company is exposed to input cost inflation and field underperformance. Finally, with limited internal reinvestment opportunities, EnQuest must attempt to acquire new assets at an attractive price, which may be challenging in a high commodity price environment.

January 9, 2012

International E&P - An Early Spring Clean

Gran Tierra Energy (TSX: GTE; Outperform, Above Average Risk, C$10/share Price Target)
Valuation

On a sum-of-the-parts basis, we value Gran Tierra at a post-tax NAV of $9.87/share. The NAV comprises a core value of $5.57/share, which includes producing/near production assets and net financial position, and a risked upside of $4.30/share based on risked development and exploration upside. Exploration upside potential is based on drilling in the next 12 months, where prospects have been identified and where drilling is funded. Our 12-month target price of $10.00/share is based on our NAV, which is consistent with Gran Tierras international E&P peers that have the potential for clear near-term catalysts. We expect high-impact drilling newsflow from the Putumayo Basin, Colombia and Peru to continue to generate investor interest.
Price Target Impediment

Security Risk: Gran Tierra has its principal assets in Colombia, Argentina and Peru, so investors are exposed to the security risks of these countries. 100% Crude Oil Weighted: As production has significant crude weighting, Gran Tierra's earnings and cash flows are sensitive to changes in WTI benchmark oil prices. Political Risks: Gran Tierra is exposed to political risks which could include oil and gas fiscal regime changes in the areas it operates. These could include changes in taxes, royalties or license tenure. Exploration Risk: A significant portion of the capital budget is devoted to exploration drilling, exposing investors to exploration risks such as dry holes where money is invested and no value is created.

Gulfsands Petroleum (LSE: GPX; Sector Perform, Speculative Risk, 220p Price Target)
Valuation

We value Gulfsands at 262p/share. Our PV20%, which reflects continued unrest in Syria, comprises a core value of 220p/share and risked upside of 42p/share. Due to EU Sanctions the company has ceased production from Block 26 in Syria and in our NAV we assume that the company does not recommence any activities in Syria until 2014. The outlook for Syria is not positive in the shortterm; but we do not believe that Gulfsands title to the assets is being questioned and this stage; and despite assuming an extended period of inactivity, we have calculated a valuation well above the current share price. Our 220p target price is set in line with our core NAV. Our target price is set well above the current share price, but due to the current unrest in Syria we do not expect the stocks discount to NAV to unwind without an improving political situation in Syria, and as a result we remain neutral on the stock at this stage.
Price Target Impediment

Risks to the downside are dominated by the political uncertainty in Syria, which may cause further delays recommencing production from the Khurbet East field. Damage to the oilfield is also a possibility if the situation in Syrian worsens. Risks to the upside include exploration successes in Tunisia and potential new ventures.

January 9, 2012

International E&P - An Early Spring Clean

Heritage Oil (LSE: HOIL; Underperform, Speculative Risk, 200p Price Target)
Valuation

We value Heritage at 203p/share; our PV15% valuation includes a core value of 100p/share and risked upside of 103p/share. Cash (in hand and restricted) comprises a significant portion of our NAV. We forecast that Heritage will end 2011 with ~$325m of cash-inhand and $405m of restricted cash, which has been set aside as collateral for a disputed CGT bill in Uganda. In our Heritage NAV we include $283m (64p/share) held in escrow in London, but we have excluded/written off the $121m that management has paid to the Uganda Revenue Authority (URA). In addition to this tax dispute woe would add that considerable uncertainty surrounds the value of the companys Miran West gas discovery in Iraq. Our 200p target price is set in line with our NAV.
Price Target Impediment

Risks to the upside include the injection of hard-to-anticipate new ventures and positive news from Kurdistan, Iraq. News from Iraq could include a decision on oil exports from Kurdistan, which would have a significant bearing on investor sentiment towards all companies active in the region. However, in early 2012 the political scene in Baghdad was becoming increasingly complex and any decisions appear someway off. The outlook for Heritage is compounded by its gas-rich portfolio; if drilling at Miran West or Miran East encounters light-oil-bearing reservoirs the outlook for the company would improve markedly. The risk to the downside include a negative ruling on the tax dispute in Uganda. In the event that any arbitration goes against the company, Heritage would have to release the $283m held in escrow and this would cut 64p/share from our NAV. Conversely a successful appeal could possibly enable the company to recover the $121m paid to the URA. Ithaca Energy (TSX: IAE; Outperform, Above Average Risk, C$3.50 Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value Ithaca Energy at C$3.51/share (or 223p). Our NAV includes a Core NAV of C$3.11/share (or 198p), which consists of assets currently producing or approved for development and corporate adjustments including cash-inhand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling C$0.40/share (or 25p) is included as risked upside. Our 12-month price target of C$3.50 (or 225p) is set at a multiple of 1.0x our NAV, which is consistent with the company's International E&P peers with the potential for clear near-term catalysts. Ithaca is due to complete the Athena development in March, drill the Hurricane appraisal well in H1/12 and should also submit a development plan for the larger Stella development shortly.
Price Target Impediment

Consistent with other International E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk, and project execution risk. The current portfolios weighting toward ongoing and future development activity means that Ithaca has above average levels of execution risk: development delays or cost increases could have a material negative impact on the stock price and our valuation. With a significant proportion of its development activity focused on U.K. gas assets, Ithaca is exposed to the outlook for U.K. gas prices.

January 9, 2012

International E&P - An Early Spring Clean

Kosmos Energy (NYSE: KOS; Outperform, Above Average Risk, $17.00 Price Target)
Valuation

On a sum-of-the-parts basis we value Kosmos at $16.84/share; this PV10% comprises of a $6.87/share core valuation, which we define as fields onstream and under development plus financials, plus risked upside of $9.96/share, which encompasses longer-term development candidates and its near-term exploration drilling prospects. Our pay-for-what-you-want NAV, which is effectively the companys tangible assets, is $13.27/share. Our $17.00 Price Target is set in line with our NAV; we expect positive newsflow from the ongoing appraisal of the companys discoveries, including Enyenra, Tweneboa, Teak and Mahogany East to help unwind the current share price discount.
Price Target Impediment

Consistent with other International E&P companies, our price target is exposed to material levels of oil price, inflation, project execution and exploration risk. As a producer and oilfield developer, Kosmos leverage to the oil price is significant; we estimate that a $10/bbl swing in the Brent oil price would result in a 13% change in our NAV. In Ghana, Kosmos has four discoveries which we expect to be brought onstream in the period from 2014-17. Delays to these fields would negatively impact our production and cashflow forecasts and therefore our asset valuations. Kosmos Boujdour Offshore license lies offshore SADR, and is currently subject to a sovereignty dispute between SADR and Morocco. We currently include no value for its Moroccan assets in our PV10%. Lundin Petroleum (OMX: LUPE; Sector Perform, Above Average Risk, SEK200 Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value Lundin Petroleum at SEK181.49/share (C$27.36). Our NAV includes a Core NAV of SEK55.52/share, which consists of assets currently producing or scheduled for development and corporate adjustments including cash-in-hand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling SEK125.97/share is included as risked upside. Our price target of SEK200 is set at a multiple of 1.1x our NAV, a premium which reflects our view of the upside potential from the upcoming Avaldsnes appraisal campaign that could substantially de-risk the P10 resource estimate of 3.3bnboe. In addition, planned development activity has the potential to more than double net production to around 75,000b/d in 2017 from 33,100b/d in 2011. Meanwhile, active multi-year exploration campaigns in Norway and Southeast Asia provide the potential for further material growth through the drill-bit.
Price Target Impediment

Consistent with other international E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk, and project execution risk. The current portfolios weighting toward ongoing and future development activity means Lundin has above-average levels of execution risk: development delays or cost increases could have a materially negative effect on the stock price and our valuation. An active driller, exploration risk is also significant for the company. Disappointing well results can have a material and rapidly negative effect on the stock price and our valuation.

10

January 9, 2012

International E&P - An Early Spring Clean

Nautical Petroleum (AIM: NPE; Outperform, Speculative Risk, 500p Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value Nautical Petroleum at 502p/share. Our NAV includes a Core NAV of 48p/share, which consists of assets currently producing or approved for development and corporate adjustments including cash-in-hand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling 454p/share is included as risked upside. Our 12-month price target of 500p is set at a multiple of ~1.0x our NAV, which is consistent with our base methodology for International E&P companies with an established asset base and clear potential catalysts. Nautical is expected to make significant progress toward commercialising its heavy oil discoveries during 2012 and is expected to resume high profile exploration activity in the Catcher Area during H1/12.
Price Target Impediment

Consistent with other International E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk and project execution risk. More specifically to Nautical, the company is faced with significant funding risk: both Nautical and its existing partners in the Kraken discovery will require further funding or a partial divestment to develop the field. The companys participation in high impact drilling activity in the Catcher Area also exposes Nautical to significant exploration risk. Disappointing well results can have a material and rapid negative impact on the stock price and our valuation. Ophir Energy (LSE: OPHR; Outperform, Speculative Risk, 400p Price Target)
Valuation

On a sum-of-the-parts basis we value Ophir at 414p/share; this PV12.5% is dominated by risked upside, which encompasses Ophirs five gas discoveries offshore Equatorial Guinea and Tanzania, and its near-term exploration drilling prospects. Our 400p Price Target is set in line with our NAV, which is our best estimate of the companys current worth; we see the potential for an unwinding of the share price discount and steady value accretion on the back of repeatable drilling success.
Price Target Impediment

Ophir currently has no producing assets, and therefore does not have operating cash flows to sustain investment levels; management therefore needs access to capital in the medium term. We believe that the company has the resources to finance drilling into 2013; a farm-out deal in Equatorial Guinea could further improve its finances. Competition for exploration acreage across Africa is strong and includes a number of competitors with access to significant funding, posing a risk to chances of success in licensing rounds. Pacific Rubiales Energy (TSX: PRE; Sector Perform, Above Average Risk, $36/share Price Target)
Valuation

On a sum-of-the-parts basis, we value Pacific Rubiales Energy at a post-tax NAV of $36.10/share. The NAV comprises a core value of $19.88/share, which includes producing, near production assets and a net financial position and a risked upside of $16.22/share, which we based on risked development and exploration upside potential. We base exploration upside on drilling in the next 12 months, where prospects have been identified and drilling has been funded. Our 12-month target price of $36.00/share is based on our risked NAV which is consistent with Pacific Rubiales' international E&P peers with the potential for clear near-term catalysts. We expect production and reserves growth from Block CPE6 and Quifa to generate further investor interest.
Price Target Impediment

Security risk: Pacific Rubiales has its principal asset in Colombia, so investors are exposed to the security risks of this country. 82% crude oil weighted: Because production has significant crude weighting, Pacific Rubiales' earnings and cash flows are sensitive to changes in WTI/Brent benchmark oil prices. Political risks: Pacific Rubiales is exposed to political risks, which could include oil and gas fiscal regime changes in areas where it operates. These could include changes in taxes, royalties or license tenure. Exploration risk: A significant portion of the capital budget is devoted to exploration drilling, which could expose investors to exploration risks, such as dry holes where money is invested but no value is created.

11

January 9, 2012
Valuation

International E&P - An Early Spring Clean

PetroMagdalena (TSX-V: PMD; Sector Perform, Speculative Risk, $1.65/share Price Target) Our 12-month target price of C$1.65 is based on our NAV which is consistent with PetroMagdalena's international E&P peers with the potential for clear near-term potential catalysts. Our post-tax NAV of C$1.67/share comprises a core value of C$0.74/share, which includes producing/near production assets and net financial position and a risked upside of C$0.93/share based on risked development and exploration upside. Exploration upside potential is based on drilling in the next 12 months where prospects have been identified and a rig is secured. We use a 12.5% discount rate in line with other small-cap international E&P companies
Price Target Impediment

Production growth from exploration: PetroMagdalena's production growth is partly based on exploration success. Although relatively low risk, discoveries are not guaranteed. If exploration drilling is unsuccessful it will impact the production targets. Colombian Risk: PetroMagdalena has its principal assets in Colombia, so investors are exposed to the security risks of this country. Debt Commitments: PetroMagdalenas previous management team burdened the modest producer with high debt levels, the focus in 2011 is meeting debt commitments, thus limiting exploration activity. Petrominerales (TSX: PMG; Outperform, Above Average Risk, $40.00 Price Target)
Valuation

On a sum-of-the-parts basis, we value Petrominerales at a post-tax NAV of $39.63/share. Our NAV comprises a core value of $16.70, which includes producing and near production assets and is net financials with a risked upside of $22.93/share, which is based on risked development and exploration upside. Exploration upside potential is based on drilling in the next 12 months where prospects have been identified and where drilling is funded. Our 12-month target price of $40/share is based on our risked NAV, which is consistent with the company's international E&P peers with the potential for clear near-term catalysts. We expect production and reserves growth from the Llanos Basin onshore Colombia along with extensive exploration news flow throughout 2012 to generate investor interest.
Price Target Impediment

Security Risk: Petrominerales has its principal assets in Colombia and Peru, so investors are exposed to the security risks of these countries. 100% crude oil weighted: Because production has a significant crude weighting, Petrominerales' earnings and cash flows are sensitive to changes in WTI benchmark oil prices. Political Risks: Petrominerales is exposed to political risks, which could include oil and gas fiscal regime changes in the areas where it operates. These could include changes in taxes, royalties or license tenure. Exploration Risk: A significant portion of the capital budget is devoted to exploration drilling that exposes investors to exploration risks such as dry holes where money is invested but no value is created. Risk of High Decline: Production from the Corcel and Candelilla fields is characterised by high declines due to active water drive, however the increasing well stock should mitigate this issue.

12

January 9, 2012

International E&P - An Early Spring Clean

Rialto Energy (ASX: RIA; Outperform, Speculative Risk, A$0.70 Price Target)
Valuation

We value Rialto at A$0.82/share. The company is cash constrained and our PV15% is limited to our assessment of those projects that can be financed from cash-in-hand and via a deal or a limited funded raising; at this stage we include no value for the companys exploration assets in Ghana and Australia. Our target price of A$0.70 is set well above the current share price because we believe Rialtos gas and oil accumulations on Block CI-202 have significant potential. However, dilution remains a short-term key risk a deal with a third-party may prove to be more beneficial; nevertheless we anticipate our NAV to evolve materially in H1/12, probably falling before responding to any positive organic newsflow and as a result we have set our target price at A$0.70, which is below our current NAV.
Price Target Impediment

The company will also need additional capital to deliver its projects, so future equity fund raising are a possibility. New field developments are inherently risky, and the resource estimates, development costs, timescales, production profiles, etc. could vary markedly from our assumptions. Looking further ahead the Cote dIvoires attractive gas sales terms may be renegotiated by the government, however, we have already assumed some weakness in our NAV. Salamander Energy (LSE: SMDR; Sector Perform, Above Average Risk, 290p Price Target)
Valuation

On a sum-of-the-parts basis, we value Salamander Energy at a post-tax NAV of 287p/share. The NAV comprises a core value of 82p/share and upside of 204p/share based on risked development and exploration upside potential. Our 12-month target price of 290p is based on our NAV, which is consistent with Salamander's international E&P peers.
Price Target Impediment

Exploration failure: The investment case for Salamander is weighted towards exploration so drilling failure would impact the value of the company. Production delays/interruptions: Salamander's production comes mostly from two small fields, so any interruptions to production would have an impact on the company. Serica Energy (AIM: SQZ; Sector Perform, Speculative Risk, 26p Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value Serica Energy at 26p/share (or C$0.42). Our NAV includes a core NAV of 15p/share (or C$0.26), which consists of assets currently producing or approved for development and corporate adjustments including cash-in-hand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling 17p/share (or C$0.27) is included as risked upside. Our 12-month price target of 26p (or C$0.42) is set in line with our NAV, which includes only tangible assets and funded exploration activity . The target reflects our valuation of the companys assets in the North Sea and Indonesia plus net financials.
Price Target Impediment

Consistent with other International E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk, and project execution risk. More specific to Serica, the company faces significant divestment risk: management is actively seeking to divest the companys Southeast Asian portfolio. It is also seeking to farm out exploration opportunities offshore Ireland before committing to drilling a well. The timing and price of any deals will impact our valuation and the outlook for future activity.

13

January 9, 2012

International E&P - An Early Spring Clean

SOCO International (LSE: SIA; Outperform, Speculative Risk, 450p Price Target)
Valuation

On a sum-of-the-parts basis we value SOCO at 545p/share. Our PV10% comprises a core value of 442p/share, and risked upside of 103p/share. We expect progress with the TGT development offshore Vietnam to drive step change production and cash flow growth. Clear progress should help unwind the current discount to our core NAV and subsequent growth and/or exploration success could help unwind the discount to our total NAV. Therefore we have set our target price in line with our core NAV at 450p/share.
Price Target Impediment

Production from TGT in Q4/11 increased more slower than the participants anticipated and further underperformance remains a risk for SOCO - the performance of TGT significantly impacts SOCOs value and cash flow. Although a developer and producer, SOCOs leverage to the oil price is relatively limited; this is due to the PSC terms in Vietnam; we calculate that a $10bbl swing in the long-term oil price could generate a 9% swing in our NAV. Tullow Oil (LSE: TLW; Outperform, Above Average Risk, 1700p Price Target)
Valuation

On a sum-of-the-parts basis we value Tullow at 1732p/share; our PV8% comprises a 532p/share core NAV (defined as fields onstream and under development plus financials), and risked upside of 1200p/share. Tullow is arguably the quality name in our sector - its portfolio encompasses world-class oil exploration and development opportunities. In 2012 we expect the company to submit field development plans for the large Enyenra and Tweneboa fields, in Ghana, and undertake high-impact exploration drilling campaigns in French Guinea, Guyana and onshore Kenya. We believe that drilling in Kenya (and Ethiopia) offers long-term potential, similar to Uganda, where the conclusion, finally, of Tullows ~$2.7billion divestment could help rewrite the companys balance sheet. In our opinion Tullow warrants a premium rating relative to its peers and this is reflected in the use of an 8% WACC; we have set our 12-month target price at 1700p, which is in line with our PV8%.
Price Target Impediment

The delayed sale of Tullows Ugandan assets reverberates through the companys investment and business cases; but the strongest impact is felt on its balance sheet. A ~$2.7billion cash injection would rewrite Tullows balance sheet net debt would fall to zero and enable management to embark with confidence on substantial exploration and development campaigns in the period to 2015. The companys exposure to geographical/political risk is significant assets in Ghana and Uganda account for ~75% of our gross asset value (GAV). We would also note that future developments and exploration/appraisal drilling account for 70% of our GAV; which indicates that the companys exposure to execution risk remains substantial. Valiant Petroleum (AIM: VPP; Sector Perform, Speculative Risk, 600p Price Target)
Valuation

On a sum-of-the-parts NAV basis, we value Valiant Petroleum at 832p/share. Our NAV includes a Core NAV of 475p/share, which consists of assets currently producing or approved for development and corporate adjustments including cash-in-hand and debt. A risked valuation of the companys undeveloped discoveries and exploration portfolio totalling 357p/share is included as Risked Upside. Our 12-month price target of 600p is set at a multiple of ~0.7x, reflecting our view that Valiant needs to achieve another commercial exploration success before the stock price will reflect the potential of its exploration inventory.
Price Target Impediment

Consistent with other international E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk and project execution risk. More specifically to Valiant, the company is faced with significant exploration risk: the company is scheduled to drill a high impact well on its Handcross prospect in 2012-13. Disappointing well results can have a material and rapid negative impact on the stock price and our valuation. We also believe the company faces divestment risk as it seeks a farm in partner to reduce its costs in the deepwater well.

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WesternZagros Resources (TSX-V: WZR; Sector Perform, Speculative Risk, C$1.00 Price Target) Our WesternZagros NAV is C$1.75/share. Our PV15% valuation is dominated by risked upside of C$1.65/share, which includes our valuation of the Kurdamir and Sarqala discoveries and an ongoing well on the Mil Qasim prospect, plus a core commercial value of C$0.09/share (cash minus commitments). Considerable uncertainty surrounds oil exports from Kurdistan, and we have tried to reflect this risk through field models that assume a slower pace of development. Our 12-month target price is, however, set at a discount to our NAV at C$1.00/share to reflect the risks faced ahead of the Mil Qasim well test result.
Price Target Impediment

The result of the Mil Qasim production test could determine the near-term outlook for WesternZagros. In addition to the direct benefit a positive result would open up a new play and could accelerate the arrival of a new partner. In our view, the allocation of the Garmian Blocks, 40%, Third-Party Participating Interest (PTTI) would result in a cash injection and a reduction in WesternZagros' commitments on a go-forward basis; the company currently shoulders all the costs. The arrival of a credible partner should also be seen as an endorsement. The outcome of the current (licensing and oil export) disputes between the federal government in Baghdad and the Kurdistan Regional Government in Erbil could have a marked impact on oil exploration and production activity in Kurdistan, including WesternZagros' claim to the PSC and its ability to export crude from any future developments.

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Required Disclosures Non-U.S. Analyst Disclosure

Al Stanton, Nathan Piper, James Hosie and Theresa Pfab (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

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and RBC Capital Markets generally does not intend, nor undertakes any obligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any Short-Term Trade Ideas discussed therein.

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Copyright Royal Bank of Canada 2012 All rights reserved

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