MontneyInitiation 04-16-14 GMP RPT

Oil & Gas

Prepared by GMP Securities L.P. Please see important disclosures on the last page of this report. April 16, 2014

Aaron Swanson, CFA (403) 543-3563 [email protected] Jordan McNiven (403) 695-1401 [email protected]

Jason Konzuk, CA, CFA (403) 543-3587 [email protected] Gabriel Chow (403) 543-3035 [email protected]

April 16, 2014

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Launching coverage on 5 Montney producers

Source: Company reports, geoSCOUT, GMP

Delphi Bigstone

AdvantageGlacier

StormUmbach

Alberta B.C.

Painted PonyBlair/Townsend/Cypress

DonnycreekKakwa/Wapiti

2015E Valuation2015E Production Risked NAV EV/DACF EV/Prod'n Total D/CF

Company (boe/d) (% Gas) ($/sh) (P/NAV) (x) ($/boe/d) (x)Advantage Oil & Gas 27,134 97% $8.51 0.7x 6.9x $52,123 1.7xDelphi Energy 12,116 69% $6.53 0.5x 7.1x $53,885 1.6xDonnycreek Energy 3,726 48% $4.37 0.5x 3.1x $37,988 0.5xPainted Pony Petroleum 18,363 85% $17.65 0.6x 9.9x $72,671 1.9xStorm Resources 8,526 80% $8.42 0.6x 10.3x $79,754 1.1x

A Montney Cre

Report synopsis: The Montney gas resource play, which expands across northwestern Alberta into northeastern B.C., continues to see an increase in drilling activity, an improvement in type curves and a resulting step change in economics. Within this report, we look at five small to mid-cap Montney producers with the assets, upside and valuations, which justify our bullish stance on this play. Why Montney matters Horizontal wells in the Montney continue to

dominate gas targeted drilling in Western Canada.

Completions continue to improve resulting in a step change in well economics.

Advantage Oil & Gas (BUY, $8.00 TP) Upper and lower Montney provide an inventory of

low risk development while the middle Montney has the potential to double inventory.

Three-year development plan should grow production at a 21% CAGR.

Delphi Energy (BUY, $4.25 TP) Some of the most economic Montney gas wells in

Western Canada. Debt levels have peaked, the company is

undergoing significant transformation. Donnycreek Energy (BUY, $3.00 TP) Small cap, cheap way to play the Montney at

Kakwa in Alberta. Expanding resource upside with Upper Montney

wells. Painted Pony Petroleum (BUY, $14.75 TP) 7 TCFe of discovered gas in place across

northeastern B.C. acreage. Well positioned to be either an LNG supplier or

take-out candidate. Storm Resources (BUY, $6.75 TP) Top tier management team leads 4th iteration. Company is entering significant growth phase and

looking to further consolidate the Umbach area of northeast B.C.

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TABLE OF CONTENTS Why the Montney matters 4 Whats driving the activity? 7 Adding five names to our Montney portfolio 9 How they stack up 13 Advantage Oil & Gas Ltd. 16 Delphi Energy Corp. 29 Donnycreek Energy Inc. 43 Painted Pony Petroleum Ltd. 59 Storm Resources Ltd. 75

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WHY THE MONTNEY MATTERS Spanning an area of roughly 150,000 km2 from west central Alberta into northeastern B.C., the Montney formation is currently the most dominant gas play in Western Canada. Early production from the Montney dates back to the 1950s, but focused drilling did not pick up until 2005 when producers began using horizontal wells to target Montney siltstones and tight sandstones. From a geological standpoint, the formation thickens from the eastern and northeastern erosional edge towards the west-southwest where the formation is up to 300 meters thick with three distinct intervals (lower, middle, upper). Vertical depths range from 500m 4,500m. It is important to understand that the Montney is not one play but many plays targeting various rock types from siltstone to very fine-grained sandstone to relatively high permeability Coquina shell beds. The Montney formation was deposited over 10 million years in an arid climate similar to modern west coast Africa. It was deposited over many settings from offshore turbidite to distal and proximal shoreface environments, which is reflected in the numerous rock types and complexity of the reservoir. Generally speaking, as depth (and reservoir thickness) increases to the southwest, reservoir pressure increases and oil and liquid content decreases. Location of Montney Rock Types

Source: National Energy Board (NEB) Montney report published November 6, 2013

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Alberta Montney cross-section thickens and deepens to the southwest

Source: ERCB/AGS Open File Report 2012-06 (October 2012), GMP

Based on a somewhat dated ultimate recovery potential study released on the Montney in 2012, between B.C. and Alberta, there is nearly 450 TCF of marketable gas from the Montney, enough to meet over 100 years of current Canadian gas demand. When we factor in the associated NGLs and oil, based on the expected case, there is nearly 80 billion barrels of equivalent marketable resource from the formation, making the Montney one of the largest hydrocarbon deposits in the world.

Montney unconventional potential in B.C. and Alberta (as of 2012)

Source: National Energy Board (NEB) Montney report published November 6, 2013

Low Expected High Low Expected HighNatural gas (tcf) 3,197 4,274 5,405 316 449 645NGL's (mmbbls) 87,360 126,931 176,783 1,540 2,308 3,344Oil (mmbbls) 80,949 141,469 227,221 452 1,125 2,430Barrel Equivalent (mmboe) 701,142 980,733 1,304,837 54,659 78,266 113,274

In Place MarketableHydrocarbon

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Follow the money Montney drilling continues to attract majority of gas directed investment dollars In terms of producer capital allocation, the Montney formation is seeing by far the most capital allocation of all the natural gas resource plays in Western Canada. Assuming an average well cost of $6 million, we estimate 2013 saw over $4 billion in producer capital. From a pure licensing perspective, we estimate 2013 saw over 1,000 Montney gas wells licensed across Western Canada, nearly ten-times the amount of the next closest formation. In fact, licensing activity in the Montney was greater than the next nine formations combined. As a result of the increased drilling activity in the formation, we have witnessed a corresponding exponential increase in production from the formation. In the production exhibits below, we highlight hydrocarbon production exclusively from the Montney horizontal well bores. It is interesting to see how free condensate volumes have increased more recently, which we believe reflects the fact producer dollars are focused on the areas providing the highest liquids content.

2013 Western Canadian gas licensing activity Montney dominates

Source: geoSCOUT, GMP

Montney horizontal production history


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WHATS DRIVING THE ACTIVITY? We see a number of factors behind the Montney formations dominance in Western Canadas gas drilling game. It is our belief that much of the success surrounding the Montney relates to, like most things, time and money. Producers have had nearly a decade of active horizontal drilling in the formation to establish areas that work and those that dont. Billions have been spent through the learning process to establish what we have today - more concentrated areas of activity and some of the most robust well economics in Western Canada. Key areas have been de-risked as producers are now focusing on improving type curves and well economics through various changes in drilling and completion techniques. Given where we see the Montney in the play life cycle we feel this is an opportune time to get exposure as an investor. Factors driving Montney development 1) Zeroing in on areas that work Activity is more focused on areas with higher liquids content

In the exhibit below (left) we show a chronological map of Montney horizontal licensing activity across B.C. and Alberta (this includes both oil and gas wells). What is clearly evident is how the play has become concentrated in a handful of areas as opposed to the early days when drilling activity was much more dispersed. The figure on the right hand side displays free condensate yields from Montney horizontal gas locations (we omitted the oil wells to provide a better indication of true free liquids yields), with the point being there is a clear correlation between licensing activity and liquids yields in the formation.

Montney oil and gas licensing activity more concentrated Montney gas producers and free condensate yields (IP60)


2014201320122011201020092008pre-2008

> 100 bbl/mmcf50-100 bbl/mmcf30-50 bbl/mmcf20-30 bbl/mmcf10-20 bbl/mmcf< 10 bbl/mmcf

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2) Economics are undergoing a major transformation Now that producers have de-risked the most prospective Montney areas, the focus has shifted to improving the type curves and economics. Generally speaking, a number of producers are moving to a ball-drop completion technique, which has not only reduced completion costs, it has resulted in a material improvement to production type curves and ultimately economics. In the table below we display the impacts of four different Montney plays where the producers have recently shifted to a new completion method. The new completions are significantly increasing production rates, which is transferring to an improvement in well economics, with the average payout cut by more than half. Delphis Montney wells at Bigstone have undergone the most significant transformation as the old wells (gelled oil fracs) were marginally profitable and took over 4 years to pay out, compared to the new wells (hybrid slickwater fracs), which are massively economic, with an estimated payout of 6 months.

Impact of new completion techniques on well performance and economics

Source: geoSCOUT, company reports, GMP 3) Montney is seen as the leading formation for LNG feedstock

To date, the National Energy Board has received eleven applications for west coast LNG export licenses, for a total capacity of 21.2 bcf/d. Of the eleven, eight have been approved, with combined export capacity of 15.1 bcf/d, while the remaining four, which are still in the regulatory process, could add an incremental 5.1 bcf/d. While many of the project proponents already possess the upstream assets required for their facilities, four projects with a combined capacity of 4.0 Bcf/d (Woodfibre LNG Export Pte. Ltd., Jordan cove LNG L.P., Triton LNG L.P., and Kitsault Energy Ltd) lack the dedicated resources to supply their LNG projects, hinting these companies will be in the market for supply.

LNG export license applications

Source: National Energy Board, GMP

Old New % change Old New % change Old New % change Old New % changeWell Perfromance

IP 30 (mcf/d) 4,689 5,581 19% 4,381 7,024 60% 2,678 4,244 58% 3,176 5,147 62%Liquids yield (bbl/mmcf) 73 108 48% 14 14 0% 35 36 3% 0 0 N/A

EconomicsBT NPV (10) ($mm) $1.6 $16.6 956% $4.5 $9.7 116% $3.0 $5.9 100% $3.1 $4.0 28%

Well Payout (months) 53 6 -89% 38 14 -63% 32 15 -53% 43 23 -47%

AAV- GlacierDEE - Bigstone PPY - Townsend SRX- Umbach

Project Company/Ownership Export License Capacity (BCF/D)KM LNG Operating General Partnership Apache/Chevron Approved 1.3BC LNG Export Co-operative LLC Haisla Nation/LNG Partners LLC Approved 0.2LNG Canada Development Inc Shell/PetroChina/Mitsubishi Corp/Korea Gas Corp Approved 3.2Pacific Northwest LNG Ltd Petronas - Progress/JAPEX/PetroluemBRUNEI Approved 2.6WCC LNG Ltd Imperial Oil Resources Ltd/ExxonMobil Canada Ltd Approved 3.9Prince Rupert LNG Exports Ltd British Gas Group (BG) Approved 2.8Woodfibre LNG Export Pte. Ltd. Pacific Oil & Gas Ltd Approved 0.3Jordan Cove LNG L.P. Veresen Inc Approved 0.8Triton LNG L.P. Altagas Pacific Partnership/Indemiitsu Kosan Co Ltd Under Review 0.3Kitsault Energy Ltd. Kitsault Energy Ltd. Under Review 2.6Aurora Liquefied Natural Gas Ltd. CNOOC/INPEX Gas BC Ltd Under Review 3.2

21.2

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ADDING FIVE NAMES TO OUR MONTNEY PORTFOLIO In addition to the seven producers with material Montney gas exposure currently under coverage (ARX, BIR, CR, CQE, NVA, POU, RTK), we are increasing our Montney coverage portfolio to include an additional five names, each operating within a distinct area along the greater Montney fairway. The new names include: Advantage Oil and Gas, (AAV-T), Delphi Energy (DEE-T), Donnycreek Energy (DCK-V), Painted Pony Petroleum (PPY-T) and Storm Resources (SRX-V). We see the addition of these five names as key to rounding out our Montney gas coverage list and believe each name carries a unique characteristic, appealing to a wide breadth of investor demand. As we established early in this report, the roughly 150,000 km2 of Montney prospective land extending from west central Alberta to northeastern B.C. is extremely diverse and offers a number of different play types. We do not believe it is accurate to group all Montney producers in one basket, as economics are varied and producers are in different stages of the de-risk to exploitation lifecycle. There is no question surrounding the momentum of Montney producers year-to-date, with the group returning an average of 33%.

Montney producers year to date share performance

Source: Bloomberg

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MONTNEY SCORECARD Breakdown of covered companies Montney plays

Source: geoSCOUT, Company reports, GMP Ranking Montney plays

Source: geoSCOUT, Company reports, GMP

AAV AAV AAV DEE DCK PPY SRX ARX BIR CR CQE NVA NVA POU POU

Montney Play / Area Glacier - Upper

Montney

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Bigstone - Upper/ Middle

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Kakwa - Middle

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Lower Montney

Pouce Coupe - Lower

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Septimus - Upper,

Middle and Lower

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Simonette Upper

MontneyBilbo South

Montney Bilbo North

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Karr / Gold Creek

Montney

Musereau / Kakwa

100 bbls/mmcf Montney

Well costs ($mm) $5.50 $6.60 $5.80 $9.20 $10.00 $7.20 $5.00 $5.25 $6.00 $4.70 $7.50 $9.00 $9.00 $8.00 $8.00NPV ($mm) $3.65 $4.56 $4.92 $13.73 $9.88 $6.59 $5.91 $5.65 $4.06 $3.91 $5.34 $9.51 $7.00 $5.37 $12.25PIR (ratio) 0.7x 0.7x 0.8x 1.5x 1.0x 0.9x 1.2x 1.1x 0.7x 0.8x 0.7x 1.1x 0.8x 0.7x 1.5xPayout (months) 26 26 24 9 19 22 15 10 32 11 28 14 21 23 8

IP (30) (boe/d) 858 704 704 1,090 855 893 860 767 597 906 921 1,270 1,318 1,083 1,333IP (30) liquids content (bbls/mmcf) 0 39 10 108 150 14 36 25 6 30 30 105 73 50 100IP (30) liquids content (% ) 0% 19% 6% 39% 47% 8% 18% 13% 3% 15% 15% 39% 30% 23% 38%EUR (mmboe) 0.82 0.78 0.90 1.23 0.88 1.21 0.88 1.04 0.90 0.90 0.98 0.89 0.93 0.74 0.91

denotes new coverage

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New names offer a taste for every palate All the companies covered in this report have primary assets producing natural gas out of the Montney formation, however, in many ways this is where the similarities both start and end. Of the five companies, 2014 production estimates range from over 20,000 boe/d, down to the 1,500 boe/d range and cover various stages of the company (and play) lifecycle. Additionally, production varies from 100% gas to a 50/50 mix of gas and NGLs. Forecast production and gas weighting

Source: Company reports, GMP Securities

NEW NAMESFROM 30,000FT Advantage Oil & Gas What we like: Well-delineated Montney resource, with 83 wells drilled in upper Montney and 21 wells

into the lower Montney. Recent middle Montney success offers potential to double resource on the play and add a

liquids component. Fully funded development plan should result in a 21% production CAGR over next three

years. Cautionary notes: Significant delineation of middle Montney remains, with only nine wells drilled to date into two of three potential layers. Delphi Energy What we like:

New completion techniques appear to be a game changer with wells showing $16 million NPV potential.

Already up the learning curve investors are now paying for execution and face less reservoir risk.

2013 was a year for operational improvements, we see 2014 as the year Delphi significantly improves its financial position.

Cautionary notes: New corporate type curve appears to be reflective of some of the companys best performing Bigstone Montney wells.

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Donnycreek Energy What we like: Appear to have a top quality land position in one of the most liquids-rich areas of the

Montney gas fairway. Majority of drilling activity has focused on the Middle Montney interval, while the most

recent well successfully tested the Upper Montney, resulting in a potential doubling of the companys drilling inventory.

Has the largest contiguous land base in the Montney prospective Wapiti area. Early well results suggest there is much more work to be done here but, if successful, we believe this is the ticket to the company being acquired.

Cautionary notes: Small cap producer in a capital-intense play (wells cost upwards of $10 million), meaning until the company reaches a higher critical mass, access to capital will be important to play development.

Painted Pony Petroleum What we like:

LNG upside: 7.0 tcfe of contingent resource and a clear line of sight to the West Coast. Type curves have seen a material improvement with the recent switch to ball-drop

completion technology. Operational momentum clearly in Painted Ponys favour as the company recently

increased 2014 average production guidance by nearly 15% on the back of initial production rates from four new wells.

Cautionary notes: LNG projects and timelines are uncertain and 5-year growth plan may be scaled back if the company does not have required capital.

Storm Resources What we like: Proven management team with a history of value creation over the previous 3 iterations

of Storm. Potential to be a consolidator in the Umbach area; acquired Montney assets from Yoho

in January 2014. Conservative reserve bookings leave considerable unbooked upside reserve bookings

are currently based on 8% of Storms Umbach land position. Cautionary notes: Well economics are driven by liquids yields, which exhibit significant variability. Good news is liquids rates are trending in the right direction.

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HOW THEY STACK UP Within this section of the report, we compare the five new companies to their gas-weighted peers on four metrics: 1) Growth Both production and cash flow per share 2) Operating measures Cash flow netbacks and cost structure 3) Valuation Cash flow, production and NAV-based 4) Balance sheet Debt relative to cash flow and debt relative to production

Growth: Our comparative metrics for growth include production per share and cash flow per share. Our average projected production per share growth for the gas-weighted small to mid-cap names sits just over 20% (2014). Ignoring Donnycreeks over threefold projected increase, amongst the new names, we are forecasting production per share to increase by an average of 25%, with Painted Pony leading the way. Given the continued improvements in Montney type curves, we foresee growth rates expanding from our current estimates. Given the recent increase in natural gas prices (when compared to 2013 levels) cash flow per share growth is much more pronounced. On average, we are forecasting the groups cash flow to rise 80% in 2014, with our new names increasing by an average of 85%.

Comparative growth metrics production and cash flow

Source: Company disclosures, GMP

Netbacks and cost structure: Low-cost structure and strong realised pricing help drive asset profitability. Therefore, it should come as no surprise those companies with a higher weighting to liquids and low-cost structure are forecast to have the strongest cash flow netbacks. The average forecast 2014 cash flow netback for the group is $23.15/boe, with our new names falling right in line. Given the relatively low finding costs in the Montney, we believe these producers will continue to deliver strong recycle ratios.

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Comparative netbacks and cash costs


Valuations: When comparing the relative valuations of the five companies with the larger peer group, we note that on average the Montney producers tend to trade at higher multiples. Painted Pony and Storm have of the three highest EV/DACF multiples in the group. The same can be said when looking at the valuation multiple from a production metric standpoint. Given the Monteny resource potential, operational momentum, and recent type curve improvements seen in the play, we do feel any sort of premium valuation multiple is justified. On average, our junior-intermediate gassy names trade at a 2014 EV/DACF multiple of 9.2x; this falls to 7.5x in 2015 on the back of a strong group growth profile. On average, our new Montney names trade at a slight premium in 2014 (9.8x), but given the better than average projected growth profiles, they trade at a slight discount in 2015 (7.4x).

Comparative valuation metrics


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What are you paying for from a NAV basis? From a standpoint of resource upside potential, our new Montney producers are trading at a premium to their Base NAV (outside of DCK, but we believe this discount is due to the recent results from their Wapiti Montney play), meaning the market is giving these names value for their unbooked upside. In terms of relative value to Risked NAV, Delphi appears most attractive as the stock is trading at a slight premium to its Base NAV, which only includes 21 non-producing East Bigstone locations (representing roughly 2.5 years of drilling activity), signifying the reserve report is not aggressive by any means.

Current share price relative to their NAVs


Balance sheet: Generally speaking, balance sheet strength amongst our gas-weighted juniors and intermediates is pretty healthy, thanks to strong first quarter pricing. On average, the group is carrying a trailing 2014 D/CF ratio of 1.2x, with our new names falling in line with this average. On a utilization basis, the new Montney names have drawn roughly 70% of their bank line, although we suspect lending lines will be expanded given the fact reserve reports have recently been updated.

Comparative balance sheet metrics


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R. Jason Konzuk, CA, CFA Associate: Gabriel Chow [email protected] [email protected] (403) 543-3587 (403) 543-3035 April 16, 2014

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BUY AAV-T $6.00 Target $8.00

Advantage Oil and Gas Ltd Peeling back the layers of Montney

Rating NC BUYTarget NC $8.00Production 2014E (boe/d) 6:1 NC 22,065Production 2015E (boe/d) 6:1 27,134 27,134CFPS 2014E (f.d.) $1.03 $1.03CFPS 2015E (f.d.) $1.15 $1.15

SHARE DATAShares o/s (mm, basic/f.d.) 168.4/181.452-week high/low $6.00/$3.60Market Capitalization (mm) $1,089Enterprise value (mm) $1,378Net Debt (mm) 2013A $290Projected Return 33%Dividend Yield N/A

FINANCIAL DATA2013A 2014E 2015E

Oil and NGLs (b/d) 507 198 688Natural Gas (mmcf/d) 113.9 131.2 158.7Total (mboe/d) 6:1 21,678.5 19,498 22,065 27,134Equivalent growth -10% 13% 23%WTI (US$/b) $97.99 $95.90 $95.00HHUB (US$/mmbtu) $3.73 $4.50 $4.25FX rate (USD/CAD) $0.97 $0.90 $0.90

EPS (f.d.) -$0.05 $0.42 $0.42CFPS (f.d.) $0.50 $1.03 $1.15Net debt (mm) $290 $250 $326Net Debt/CF 3.4x 1.4x 1.7x

VALUATIONP/CF 11.9x 5.8x 5.2xEV/DACF 14.7x 7.7x 7.1xEV/boe/d $73,254 $62,929 $53,966EV/2P reserves (YE13) $4.88P/(2P) NAV 1.7xP/Risked Upside NAV 0.7x

May -13 Jul-13 Sep-13 Nov -13 Jan-14 Mar-14$3.00

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AAV-T

Three-year plan to grow production at a 21% CAGR

Advantage is a Montney-focused producer that has been operating at Glacier since 2008. This asset has become the sole focus of the company after years of divesting its remaining properties in order to concentrate on Montney development. The last step in Advantages Montney-focused evolution came recently when the company concluded its strategic review, divested of its 45% interest in Longview Oil Corp. and embarked on a fully funded three-year plan targeting strong production and cash flow per share growth. Advantages three-year development plan will see the company spending $735 Mm over that period to drill an average of 33 wells in each year. The company expects to grow production from 135 Mmcf/d in Q114 to 245 Mmcf/d in Q217, which represents a 21% compounded annual growth rate. In addition, Advantage expects to grow its liquids production to 1,500 bbls/d during the same time frame by targeting the middle Montney while maintaining its standing as a leading low-cost producer. This plan is fully funded, with debt to forward cash flow remaining below 1.3 times, according to our forecast.

Low-risk development with resource upside

The companys upper and lower Montney layers offer a well-defined inventory of low-risk development while we believe the middle Montney has the potential to more than double the companys drilling inventory and appears capable of demonstrating rates of return comparable to the upper and lower Montney layers. Advantages current phase of development (Phase VII) will concentrate on initial development of the middle Montney, proving up the liquids content in the third layer of the middle Montney. In addition, Advantage continues to advance completion techniques and recent results provide encouragement that EURs and rates of return will improve from already attractive levels. Initiating coverage with a BUY rating and $8.00 target price

Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV designed to assess the value of unbooked resource and a cash flow multiple approach. Our $8.00 target price is based on a Risked NAV of $8.51/share and a 2015E EV/DAC multiple of 8.0 times.

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WHAT YOU NEED TO KNOW 1) Three-year Montney development plan 2) Newly acquired Montney lands 3) Valuation and target price

1) Three-year Montney development plan

Advantage is a Montney-focused producer that has been operating at Glacier since 2008. This asset has become the sole focus of the company after years of divesting of its remaining properties in order to concentrate on Montney development. The last step in Advantages Montney-focused evolution came recently when Advantage disposed of 21.2 Mm shares in Longview Oil Corp. at $4.45 per share for $94.1 Mm, which will support its Montney development growth plan. Advantage has a $300 Mm credit facility and will be $78 Mm drawn on the facility post the disposition of its Longview shares. The company intends to maintain a conservative balance sheet which targets a debt to forward cash flow ratio of 1.5 times. Advantages three-year development plan will see the company spend approximately $735 Mm over that period and will drill an average of 33 wells in each year. The company expects to grow production from 135 Mmcf/d in Q114 to 245 Mmcf/d in Q217, which represents a 21% compounded annual growth rate. In addition, Advantage expects to grow its liquids production to 1,500 bbls/d during the same time frame by targeting the middle Montney. The company has driven operating costs to $0.28 per mcfe. Its focus for the Phase VII (Q214Q115) development at Glacier will be proving up its middle Montney resource. As for the underlying economics, the key assumption underpinning our forecast model is that Advantage is able to add production at a full cycle cost of $20,000 per boepd, which would be keeping with the companys historical performance at Glacier.

2) New Montney lands

Advantage recently acquired 43.25 net sections southeast of its Glacier lands in late 2013 (see map on pg. 20). The company undertook a comprehensive core and completion study in 2012 and believes that the stronger liquids content on the eastern side of Glacier extends liquids potential to its newly acquired lands. As well, the technical work indicates a thick Montney formation and multiple layer potential on the newly acquired lands.

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3) Valuation and target price

Relative performance of AAV to gas weighted peers

Source: Bloomberg, GMP Securities

Since the natural gas equity rally began in November 2013, Advantage shares have only returned 34% while its junior gas-weighted peers have returned 41%. When compared against its peers, Advantage trades at a discount on most valuation metrics. On a 2014 production basis, Advantage trades at a 17% discount, while on a cash flow and debt adjusted cash flow basis Advantage trades at 17% and 11% discount respectively.

Comparable valuations

Source: Company disclosures, GMP Securities

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CQE Equity BIR Equity PPY Equity KEL Equity CTA Equity PNE Equity SRX EquityRTK Equity DEE Equity NVA Equity CR Equity AAV Equity Average

Production % Gas PPS Growth D/CF2014E 2014E 2014E 2014E 2014E 2015E 2014E 2015E 2014E 2015E

Company Name Ticker (boe/d) (%) (%) (x) (x) (x) $/boe/d $/boe/d (x) (x)Artek Exploration Ltd. RTK 4,708 63% 15% 2.1x 8.5x 6.5x $80,261 $69,045 6.7x 5.0xBirchcliff Energy Ltd BIR 33,567 82% 26% 1.2x 7.3x 6.6x $72,665 $60,394 5.7x 5.1xCequence Energy Ltd. CQE 13,500 86% 31% 1.4x 7.5x 6.4x $57,248 $50,044 6.1x 5.0xCrew Energy Inc. CR 25,581 52% -7% 1.6x 7.7x 5.9x $72,137 $53,270 6.9x 5.5xCrocotta Energy Inc. CTA 9,600 73% 6% 1.4x 5.4x 4.7x $54,395 $47,134 3.9x 3.3xDelphi Energy Corp. DEE 10,330 71% 25% 2.0x 8.4x 7.1x $63,310 $53,885 7.0x 5.9xKelt Exploration Ltd. KEL 10,908 72% 48% 0.0x 16.0x 11.4x $92,902 $109,693 15.5x 10.9xNuVista Energy Ltd. NVA 18,194 69% -12% 0.8x 10.0x 7.7x $91,005 $70,244 9.4x 7.2xPainted Pony Petroleum Ltd. PPY 12,926 85% 47% 0.8x 11.8x 9.9x $90,859 $72,671 11.2x 8.5xPine Cliff Energy PNE 6,354 95% 14% -1.0x 6.4x 7.5x $43,378 $43,245 7.3x 8.6xStorm Resources SRX 5,988 79% 14% 0.9x 13.7x 10.3x $109,053 $79,754 12.9x 9.7xAdvantage Oil & Gas Ltd AAV 22,065 99% 13% 1.4x 7.5x 6.9x $60,663 $52,123 5.8x 5.2xMedian 10,908 73% 15% 1.2x 8.4x 7.1x $72,665 $60,394 7.0x 5.9xAAV vs Median 102% 36% -15% 24% -11% -2% -17% -14% -17% -11%

ValuationEV/DACF EV/boe/d P/CF

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Risked NAV discussion Advantages reported 2013 reserves showed a total proved plus probable

reserves of 282 mmboe and are weighted 95% to natural gas. With increased middle Montney activity in 2013, Advantage grew its natural gas liquids 2P reserves by five times (2.6 mmbbl to 13.0 mmbbl). Of the 172 Mmboe of total proved reserves, proved producing reserves represent 20%. Based on our GMP price deck, we estimate Advantages base 2P NAV to be $3.62 share (details below).

Risked upside o The company will be allocating its capital budget evenly among the

three layers of the Montney for its three-year plan. The upper Montney and the lower Montney have a significant amount of well performance history and we have included the two layers in our risked NAV. Most of the upper Montney has already been booked into 2P reserves, while the lower Montney contains significant unbooked potential.

o For the middle Montney, the company has received reserve recognition for the upper two of the three layers within the middle Montney. As such, we have ascribed value to those two middle Montney layers. Given the early nature of middle Montney 1 and middle Montney 2, we could see more upside with both layers as Advantage is focused on proving up the middle Montney while continuing to adjust its completions techniques to improve overall well performance and EURs.

When we combine our Base NAV and Risked upside development scenario, we calculate a Risked NAV for Advantage of $8.51 per share. Details of both our Base and Risked NAV can be found in Exhibit 3.

Base and Risked NAV breakdown


2013 YE Assigned Reserves Reserves BT PV@10% $NAV/(mmboe) ($mm) Share

Proven 172.3 $642.4 $3.54Probable 110.3 $368.4 $2.03

2P Reserves 282.6 $1,010.8 $5.57Value $NAV/

Other Assets/Liabilities ($mm) ShareLand Value (256,000 acres @ $200 per acre) $25.1 $0.14Net Debt ($289.7) ($1.60)Option Proceeds & Other ($88.6) ($0.49)

Total ($353.1) ($1.95)2013 YE 2P Net Asset Value $657.7 $3.62

Net Net RiskedUnbooked Upside Potential Locations Resource BT PV@10% $NAV/

(mmboe) ($mm) ShareUpper Montney 60 49.4 $106.1 $0.58Middle Montney - 1 286 222.9 $289.9 $1.60Middle Montney - 2 280 218.2 $91.9 $0.51Lower Montney 234 211.2 $398.3 $2.19Total 1140 919.8 $886.2 $4.882P NAV + Risked Upside Value $1,543.9 $8.51

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Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Advantage, our $8.00 target price is based on a Risked NAV of $8.51/share and a 2015E EV/DACF multiple of 8.0 times.

CORE AREA OVERVIEW Glacier Advantage has assembled 120.35 net sections of land with Montney exposure. Glacier currently represents the companys sole operating area and due to its contiguous land base and dedicated gas processing and gathering systems, Advantage has been able to demonstrate industry-leading operating costs. Multi-layered Montney development coupled with the low sulphur content and limited liquids-handling has contributed to the low operating cost profile at Glacier and the attractive economics of the play. Advantage recently acquired 43.25 net sections southeast of its Glacier lands in late 2013 (see Exhibit 4). The company has performed a core and completion study and believes that the stronger liquids content on the eastern side of Glacier extends liquids potential to its newly acquired lands. As well, the technical work indicates a thick Montney formation and multiple layer potential on the new lands. The company owns 100% of a 160 Mmcf/d gas plant at Glacier and is expanding the facility by installing a compressor and refrigeration unit that will bring total capacity to 245 mmcf/d. This will allow Advantage to extract NGLs from the middle Montney and lower Montney layers.

Advantage Oil and Gas core area map

Source: geoSCOUT, GMP Securities

Glacier

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CORPORATE DECLINES A benchmark used to determine whether or not a company is capable of delivering on production targets is its production decline rate. While we estimate that 62% of its production is declining at ~14% per year, the impact of the initial declines of newly drilled wells are characteristic of multi-stage fracture stimulated wells and pulls the overall corporate decline rate to ~35%. We expect this decline rate to moderate over time as the production base matures. Growth targets should be achievable when the low on-stream costs of the Montney are considered.

Production profile and decline rates by vintage year

Source: geoSCOUT, company disclosures, GMP Securities

EVALUATING SUSTAINABILITY INVENTORY Advantage believes the optimal recovery scheme for the various Montney layers at Glacier is to develop them both laterally and vertically, offsetting each other. Based on four wells per section within the four Montney layers that currently enjoy reserve recognition, we believe Advantage has an inventory of approximately 1,140 future drilling locations.

RISKS TO OUR THESIS Natural gas price volatility: Advantage has hedged 66.8 Mmcf/d or 52% of its 2014 production at $3.83 per mcf from Q214 to Q115, which serves to protect its capital program. In addition, Advantage has further mitigated exposure to the risk of natural gas price volatility by maintaining balance sheet flexibility and its low cost structure. Asset concentration: Effectively all of Advantages corporate production comes from its Glacier core area, which creates asset concentration risk. It is worth pointing out the takeaway capacity risk is somewhat mitigated as Advantage could deliver its liquids-rich natural gas into the Alliance pipeline (Aux Sable pipeline) as well as accessing a third-party extraction facility (Wembley Deep Cut Plant) through an existing pipeline interconnection.

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RESOURCE Sproules resource assessment as of March 31, 2013, featured Discovered Petroleum in Place (DPIIP) of 13.9 Tcf and a best estimate of Economic Contingent Resource (ECR) of 4.2 Tcfe (810.2 mamboed) on its 77.1 net sections at Glacier. NGLs represented 110.3 Mmboe, which translates into a NGL yield of 31 bbls/mmcf. The company has 298 net locations booked to reserves on the play for a total of 1.6 Tcfe. Rates of return offered by the Montney at Glacier continue to improve. In 2009, the companys F&D cost (incl FDC) was $9.82 per boe and has trended downward, coinciding with the changes in completion techniques and subsequently improving well results. This can be seen in its 2013 reserve update which saw positive technical revisions representing 25% of 2P reserve additions. In its 2013 reserve update, the company added 53.5 mboe at a cost of $7.99/boe or $1.33/mcfe (F&D incl FDC). Using Advantages 2013 cash flow netback of $11.99/boe the company posted a 1.5 times recycle ratio. Using a three-year average F&D cost of $6.36/boe, this drives a 1.9 times recycle ratio. The Montney thickness averages 290 meters over Advantages land block. Based on delineation, core and completion studies, Advantage believes five Montney layers are commercial. The company has determined of the five Montney layers, the three middle Montney layers are liquids-rich, with liquids contents improving toward the eastern margin of its lands. Upper Montney Advantage has drilled a total of 83 horizontal wells into the upper Montney at Glacier and has seen improving well performance and EURs as it has continued to refine completion techniques. Wells drilled in 2009 saw an average IP(90) rate of 2.9 Mmcf/d, which improved to 3.5 Mmcf/d in 2011. In 2013, Advantage moved from 13-stage poly CO2 fracs to 17-stage slickwater fracs, and wells completed with the modified techniques saw IP (90) rates of 4.5 mmcf/d, which is approximately a 1.5 times improvement from its wells drilled in 2009. The increased rates were reaffirmed with its 2013 reserve update, as upper Montney wells received a positive technical revision of 14% which saw EUR assignment increase from 4.7 bcf per well to 5.4 bcf per well.

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Well performance by vintage


Our upper Montney type cure reflects an EUR of 4.9 Bcf and delivers a NPV of $3.6 Mm assuming a $5.5 Mm well cost. The type curve implies a half cycle on-stream efficiency of $7,300/boepd, an IRR of 38% and a 26-month payout. Advantage has booked 252 total wells into the upper Montney and we believe the company has a remaining unbooked inventory of 60 drilling locations.

Upper Montney type curve


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Well Costs ($mm) $5,500 BT NPV (10%) $3,644IP 30 (Mcf/d) 5,147 ROR (%) 38%EUR (Mmcf) 4,942 Well Pay outs (months) 26 % Liquids 0% Half Cy cle F&D ($/boe) $6.68Year 1 Decline (%) 63% PIR (times) 1.7 Year 2 Decline (%) 36% Recy cle Ratio (times) 2.9

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Middle Montney Advantage believes that its middle Montney contains three productive zones which are all liquids-bearing. The company has drilled a total of nine horizontal wells into the middle Montney, of which six wells have been drilled into layer one of middle Montney (middle Montney 1) and three wells have been drilled into layer two of the middle Montney (middle Montney 2). No wells have been drilled yet into layer three of the middle Montney (middle Montney 3), which is why no reserves have been awarded to that interval. In Advantages 2013 reported reserves, the company received recognition in two of the three layers within the middle Montney. The middle Montney 1 saw the total wells booked double from 21 wells to 46 wells and the middle Montney 2 total wells booked increase to 23 wells from one well. Liquids are pervasive through the entire Glacier land block and wells drilled in Phase VI (Q213Q114) confirmed Advantages geological model that liquids yield increase up-dip (west to east) across its Glacier lands. Advantages 2013 reserve report saw the middle Montney wells receive an average yield of 39 bbls/mmcf of NGLs reserves and it is worth noting that the company believes the liquids yields are stronger on the eastern side of Glacier. The company has transitioned from cluster frac and lower pump rates to open hole packer design with higher pump rates and we continue to expect the completion design to change, which would trend towards more frac stages and high frac rates. Middle Montney 1 type curve


Well Costs ($mm) $6,600 BT NPV (10%) $4,560IP 30 (boe/d) 704 ROR (%) 40%EUR (mboe) 779 Well Pay outs (months) 26 % Liquids 19% Half Cy cle F&D ($/boe) $8.47Year 1 Decline (%) 58% PIR (times) 1.7 Year 2 Decline (%) 27% Recy cle Ratio (times) 2.7

Risked EconomicsAssumptions

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Our middle Montney 1 type cure reflects an EUR of 779 mboe and delivers a NPV of $4.5 Mm assuming a $6.6 Mm well cost. The type curve implies a half cycle on stream efficiency of $8,800/boepd, an IRR of 40% and a 26 month payout (see Exhibit 8). The company has booked 46 locations in its 2013 reserve report and we believe Advantage has another 286 drilling locations. Lower Montney A total of 21 horizontal wells have been drilled into the lower Montney at Glacier. The companys 2013 reserve report saw future undeveloped lower Montney wells assigned 5.1 Bcf per well (was 5.0 Bcf per well). The lower Montney offers a modest liquids content, as when lower Montney production is run through a refrigeration unit Advantage is able to extract approximately 10 bbls/mmcf of NGLs. Our lower Montney type curve reflects an EUR of 5.1 Bcf (902 mboe) and delivers a NPV of $4.9 Mm assuming a $5.8 Mm well cost. The type curve implies a half cycle on-stream efficiency of ~$9,300/boepd, an IRR of 46% and a 24 month payout (see Exhibit 9). In Advantages 2013 reserve report, 94 locations were booked and we believe the company has an additional 234 drilling locations remaining. Lower Montney type curve


Well Costs ($mm) $5,800 BT NPV (10%) $4,919IP 30 (boe/d) 3,892 ROR (%) 46%EUR (mboe) 779 Well Pay outs (months) 24 % Liquids 6% Half Cy cle F&D ($/boe) $6.43Year 1 Decline (%) 47% PIR (times) 0.8 Year 2 Decline (%) 31% Recy cle Ratio (times) 2.9


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CONCLUSION We are initiating coverage of Advantage Oil and Gas Ltd with a BUY rating and $8.00 target price. The companys upper and lower Montney layers offer an inventory of low-risk development. While delineation of the middle Montney layer is still in the early stages, recent results appear to demonstrate rates of return at least similar to the upper and lower Montney, with potential upside provided by its liquids-rich nature. In addition, the companys land acquisition southeast of Glacier in late 2013 is still unproven but may provide additional upside when the company decides to begin exploration activities on the acquired lands. We also do not believe Advantages discount to the Montney peer group is warranted. Its projected 21% production growth CAGR over its three-year development plan appears low risk, funded and consistent with past results. In addition, Advantages land base has been under development since 2008 and has been largely delineated. While the stock has performed very well since the conclusion of its strategic plan, we believe the re-rating currently underway can go further.

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APPENDIX A: ADVANTAGE OIL & GAS OPERATING AND FINANCIAL INFORMATION

Source: GMP, company disclosures

Rating BUY Jason Konzuk - 403.543.3587Price Target $8.00 [email protected] Return 33%

Gabriel Chow - [email protected]

Company Overview Key Valuation Ratios 2013A 2014E 2015EPrice as of 04/15/14 ($/share) $6.00 Net Asset Value ($/share) $3.28 --- ---52 week High - Low ($/share) $6.00 $3.60 P/NAV (%) 183% --- ---

P/CF (x) 11.9x 5.8x 5.2xFully Diluted Shares Outstanding (MM) 184.4 EV/DACF (x) 14.7x 7.7x 7.1x

EV/Production ($/boe/d) $73,254 $62,929 $53,966Market Capitalization ($MM) $1,106 EV/1P Reserves ($/boe) $8.07 --- ---Net Debt ($MM) $283 EV/2P Reserves ($/boe) $4.92 --- ---Preferred Shares ($MM) $0 PDP RLI (years) 4.1 --- ---Enterprise Value ($MM) $1,390 1P RLI (years) 20.4 --- ---

2P RLI (years) 34.0 --- ---Commodity Price Assumptions 2013A 2014E 2015E DA Production per Share (boe/d) 0.09 0.10 0.13WTI (US$/bbl) $97.99 $95.90 $95.00 DA 2P Reserves per Share --- --- ---Edmonton Par (C$/bbl) $93.44 $99.02 $97.78WCS (C$/bbl) $78.01 $85.60 $87.78 Cash Flow Statement ($Mm) 2013A 2014E 2015ENymex (US$/mcf) $3.73 $4.53 $4.25 Operating ActivitiesAECO (C$/mcf) $3.17 $4.67 $4.06 Net Income ($8) $71 $71Exchange Rate (US$/C$) $0.97 $0.90 $0.90 Non-Cash Items $108 $104 $123

CF from Operations (Adj.) $99 $175 $194Realized Prices 2013A 2014E 2015E CFPS (basic) $0.51 $1.04 $1.15Crude Oil & Liquids (C$/bbl) $85.87 $97.03 $95.78 CFPS (diluted) $0.50 $1.03 $1.15Natural Gas (C$/mcf) $3.03 $4.77 $4.16 Investing ActivitiesProduction Hedged (%) --- 55% 36% Exploration and Development ($155) ($225) ($270)

Net Acquisitions $0 $0 $0Daily Production 2013A 2014E 2015E Reclamation Fund/Other $0 $0 $0Crude Oil & Liquids (bbls/d) 249 178 665 CF from Investing ($155) ($225) ($270)NGL (bbl/d) 258 19 23Heavy (bbl/d) 0 0 0 Financing ActivitiesTotal Liquids (bbls/d) 507 198 688 Change in Total Debt $56 ($40) $76Natural Gas (mmcf/day) 113.9 131.2 158.7 Shares Issued $0 $0 $0Total Production (boe/d) 19,498 22,065 27,134 Dividends/Other $0 $90 $0

CF from Financing Activity $56 $50 $76YoY Production Change -10% 13% 23%% Natural Gas 97% 99% 97% Leverage 2013A 2014E 2015E% Crude Oil & Liquids 3% 1% 3% Net Debt $290 $250 $326

Bank Debt $154 $115 $190Income Statement ($MM) 2013A 2014E 2015E Net Debt-CF (Trailing) 3.4x 1.4x 1.7xOil & Gas Revenue $137 $235 $265 Net Debt-CF (Forward) 1.7x 1.3x 1.4xHedging Gains/(Losses) $3 ($20) ($15) Credit Facility $300 $300 $300Gross revenue $140 $215 $250 % Unutilized 49% 62% 37%

Royalties ($8) ($12) ($16) Shares Outstanding ($Mm) 2013A 2014E 2015EOperating ($21) ($14) ($18) WA Outstanding Shares (basic) 168.4 168.4 168.4Transportation $0 $0 $0 WA Outstanding Shares (diluted) 169.1 169.1 169.1Net Operating Income $112 $188 $216

GMP Net Asset ValueExpenses 2013 YE Assigned Reserves Reserves BT PV@10% $NAV/G&A ($19) ($9) ($11) (mmboe) ($mm) ShareInterest ($12) ($5) ($11) Proven 172.3 $642.4 $3.54DD&A ($72) ($81) ($99) Probable 110.3 $368.4 $2.03Other ($18) $0 $0 2P Reserves 282.6 $1,010.8 $5.57Total Expenses ($122) ($94) ($121) Value $NAV/

Other Assets/Liabilities ($mm) ShareEarnings Before Tax ($10) $94 $95 Land Value (256,000 acres @ $200 per acre) $25.1 $0.14

Net Debt ($289.7) ($1.60)Income Tax (Recovery) $2 ($24) ($24) Option Proceeds & Other ($88.6) ($0.49)Net Income ($8) $71 $71 Total ($353.1) ($1.95)EPS (basic) ($0.05) $0.42 $0.42 2013 YE 2P Net Asset Value $657.7 $3.62EPS (diluted) ($0.05) $0.42 $0.42 Net Risked

Unbooked Upside Potential Resource BT PV@10% $NAV/Corporate Netback ($/boe) 2013A 2014E 2015E (mmboe) ($mm) ShareRevenue $19.68 $26.71 $25.23 Upper Montney 49 106 $0.58Hedging $0.00 $0.00 $0.00 Middle Montney - 1 223 290 $1.60Royalties $1.06 $1.55 $1.58 Middle Montney - 2 218 92 $0.51Opex $2.88 $1.80 $1.80 Lower Montney 211 398 $2.19Operating Netback $15.74 $23.37 $21.85 Total 920 $886 $4.88G&A $2.70 $1.10 $1.10 2P NAV + Risked Upside Value $1,543.9 $8.51Interest Expense $1.70 $0.56 $1.14Cash Taxes and Other $0.00 $0.00 $0.00Cash Flow Netback $11.34 $21.70 $19.61

Advantage Oil & Gas Ltd

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MANAGEMENT AND DIRECTORS Advantage is led by Andy Mah, President and CEO. The company currently has 25 employees and management believes it can carry out its three Montney development programs without significantly adding additional employees. A summary of the management team is provided below and full biographies can be found in Appendix B. Senior Management Team

Source: Company disclosures

APPENDIX B: MANAGEMENT BIOGRAPHIES

Source: company disclosures

Andy J. Mah President & CEO Ronald A. McIntoshCraig Blackwood VP, Finance & CFO Stephen E BalogNeil Bokenfohr Senior VP Paul G. Haggis

Andy J. Mah

Andy J. MahPresident & CEO

Craig BlackwoodVP, Finance & CFO

Neil BokenfohrSenior VP

Mr. Mah has over 30 years of experience in the oil and gas industry. Prior to joining Advantage, Mr. Mah served as President of Ketch Resources Trust from September 2005 until June 2006 and was Chief Operating Officer from January to September 2005 . From August 1996 to January 2005, Mr. Mah was the Executive Officer and Vice President, Engineering and Operations of Northrock Resources Ltd. which became a wholly owned subsidiary of Unocal in 2002. Prior thereto, Mr. Mah had increasing managerial and technical positions with Sceptre Resources Ltd., and BP Canada. Mr. Mah has significant experience in the western Canadian Basin in all facets of the upstream oil and gas industry and worked on U.S. and international projects during his time with Unocal and BP Canada.

Mr. Blackwood has been with Advantage since November 2004 and has been involved with capital markets, financial reporting and management, business processes and controls, oil and gas acquisitions, and taxation. Mr. Blackwood has over 20 years of experience and has worked in various financial roles with diverse experience throughout the resource sector including oil and gas producers, power producers and energy trading. Mr. Blackwood has a Bachelor of Commerce degree and is a Chartered Accountant.

From January 2005 to June 2006, Mr. Bokenfohr was the Vice President, Exploitation and Operations of Ketch Resources Trust. Prior thereto, Mr. Bokenfohr served as Vice President, Engineering of Bear Creek (and Crossfield Gas Corp.) from March 2002 to January 2005. Mr. Bokenfohr has over 20 years of oil and gas experience in petroleum exploration, development and operations.

Management Directors

Aaron Swanson, CFA Jordan McNiven [email protected] [email protected] (403) 543-3563 (403) 695-1401 April 16, 2014

29

BUY DEE-T $3.05 Target $4.25

Delphi Energy Corp The Oracle of Bigstone

Rating BUYTarget $4.25Production 2014E (boe/d) 6:1 10,330Production 2015E (boe/d) 6:1 12,116CFPS 2014E (f.d.) $0.44CFPS 2015E (f.d.) $0.52

SHARE DATAShares o/s (mm, basic/f.d) 153.3/167.652-week high/low $1.22/$3.05Market Capitalization (mm) $511Enterprise value (mm) $654Net debt (mm) - 2014E $143Projected Return 39%Dividend Yield N/A

FINANCIAL DATA2013A 2014E 2015E

Oil and NGLs (b/d) 2,223 3,043 3,698Natural Gas (mmcf/d) 36.1 43.7 50.5Total (boe/d) 6:1 8,241 10,330 12,116Equivalent growth 0% 25% 17%WTI (US$/b) $97.99 $95.90 $95.00HHUB (US$/mmbtu) $3.73 $4.50 $4.25FX rate (USD/CAD) $0.97 $0.90 $0.90

EPS (f.d.) ($0.07) $0.03 $0.04CFPS (f.d.) $0.22 $0.44 $0.52Net debt (mm) $137.9 $142.8 $141.7Net Debt/CF 3.7x 2.0x 1.6x

VALUATIONP/CF 6.2x 7.0x 5.9xEV/DACF 8.4x 8.4x 7.1xEV/boe/d $45,096 $63,310 $53,885EV/2P reserves (YE13) $10.61P/(2P) NAV 1.1xP/Risked Upside NAV 0.5x

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New completion method changes everything The move to a slickwater hybrid completion method and extended reach horizontal legs has been a game-changer for Delphis Montney project at East Bigstone. This has taken a marginally economic resource play and converted it into one of the most profitable liquids-rich Montney gas plays in Western Canada. Not only are the wells exhibiting much lower declines and higher initial volumes, but the higher associated gas production is resulting in condensate yields upwards of 100 bbls/mmcf. From an economic standpoint, the new wells pay out in ten percent of the time and carry an NPV in excess of $15 million. With these game-changing well results, we believe Delphis debt has peaked, netbacks are on the rise, and growth is accelerating. As a result, we wouldnt be surprised to see another upward revision to the companys 2014 production guidance.

Focus on execution, not de-risking Delphis pointed focus at Bigstone has allowed the company to accelerate up the learning curve, perfecting its drilling and completion techniques while de-risking its land base. Over the past two years, the company has refined its completion method, extended its horizontal legs and de-risked a large portion of its 60+ sections of East Bigstone land. As a result, we see the East Bigstone asset as largely de-risked, meaning the company carries a much more attractive risk/return profile, as investors are now paying for execution, while carrying less reservoir risk.

Guidance poised to increase on drilling efficiencies and well results Despite the company increasing guidance once already this year, we see room for it to move higher still. We believe the current guidance does not fully reflect the improved drilling efficiencies and recent well results. If the company can maintain performance throughout 2014, we see exit production exceeding 12,500 boe/d, up nearly 40% from exit 2013.

Initiating coverage with a BUY rating and $4.25 target price We are initiating coverage of Delphi with a BUY rating and $4.25 target price as we feel the recent well results will drive a stronger production growth profile, a reduction in leverage, and increase in resource value. Our target is based on a combination of our $6.43 Risked NAV and a 7.5x times 2015 EV/DACF multiple.

April 16, 2014

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WHAT YOU NEED TO KNOW 1) New drilling and completion technique a game-changer for well economics

2) The five year plan: monetizing the Montney

3) Improved drilling efficiency and recent well performance could drive further guidance increases

1) New completion technique a game-changer for well economics Early in 2013, Delphi switched the completion method on its Bigstone Montney wells, a change which was met with remarkable results. Data are available for eight Montney wells; the first 3 were completed with 20-stage gelled oil fracs, the fourth utilized a 20-stage slickwater frac and wells 5 to 8 used a 30-stage slickwater frac. Slickwater fracs have increased the condensate yield by 2 to 3 times compared to the gelled fracs and, in addition, longer horizontal legs on recent wells have further increased production rates while adding royalty credits. Along with game-changing gas and condensate rates, the improved completions have come at a lower cost. At an average completion cost of $4.35 million, the 30-stage slickwater completions have come at a 5% discount to the gelled fracs at $4.58 million. Ultimately, its the economics were concerned about and the $15 million increase in NPV should turn some heads. The figures below compare cumulative production levels (both on a boe basis and a free condensate basis) for the 30-stage slickwater wells (blue lines), compared to the earlier wells (red lines). We also highlight our base type curve (green line), which falls in the middle of the old wells and new wells, along with our upside case, which utilizes a type curve based over the average of the new wells (also similar to the companys type curve). Its clear the new completion method is driving better production rates and more economic well results.

30-stage slickwater fracs vs. prior completion techniques and current type curve

Source: Company disclosures, GeoScout, GMP Securities

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Comparing Type curves (Old, Base case and Upside case)


2) The five-year plan: monetizing the Montney The path forward for Delphi is crystal clear Montney, Montney, Montney. Since discovering the zones potential at Bigstone, the other core areas have become sideshows, with the cash flow funding Montney development. With a clear focus and plenty of running room, the company has laid out a 5-year East Bigstone Montney development plan, calling for 51 wells from 2013 to 2017, for a capital outlay nearing $500 million. To test the economics of the plan and assess the value it may provide for shareholders, we have constructed a five year model mirroring the capital plans laid forth by the company, combined with our own type curve and pricing assumptions. For our analysis, we assume future wells produce in line with our base type curve, which lies roughly at the mid-point between the old wells and new wells. While this type curve appears conservative, given the production to date on the 30-stage slickwater wells, we believe this is a prudent approach until additional wells further validate a new type curve. However, to provide a glimpse of what the future may look like, should future wells continue to perform in line with the most recent ones, we also run a scenario using our upside case, which utilizes a type curve similar to the companys, representing the average of new wells drilled to date. Under our base type curve scenario, we estimate 2017 average Montney production of 15,000 boe/d, equal to a 52% compound annual growth rate with peak production of just under 20,000 boe/d. However, switching over to the upside type curve, we see Montney 2017 exit production of 25,000 boe/d and 2017 average production of 21,000 boe/d. Bigstone Montney GMP base case growth profile


Old (gelled frac) Base Case

Upside Case

Well PerfromanceIP 30 (boe/d) 1,124 1,090 1,533IP 30 (bbl/d) 342 429 603EUR (mboe) 1,080 987 1,110

EconomicsBT NPV (10) $1.6 $13.7 $16.6

ROR (% ) 17% 166% 347%Well Payout (months) 53 9 6

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Bigstone Montney growth projections


While the upside type curve results in a significantly accelerated growth profile, the impact on economics is more striking and more important. According to our estimates, the upside type curve has a remarkable payout period of ~6 months and produces an NPV of 1.2x the base type curve. Transferring these results into the five-year plan, we find the upside type curve has the potential to deliver over $610 million in NPV and be self-funding by mid-2014.

Montney development plan cash flow positive in 2015


East Bigstone development plan is fully funded Late in 2013, Delphi announced a funding plan that will enable the company to execute its five-year, 51 well, East Bigstone drilling plan, without the need for external equity. As part of the arrangement Delphi entered into a Gross Overriding Royalty (GOR) arrangement, which will partially fund the drilling of ten Montney wells through the middle of 2015.

Under the agreement, the parties will contribute up to $25 million ($2.5 million per well) with a commitment for 7 wells through 2014 and an option on the first three wells in 2015, at which time the Montney project is expected to be cash flow positive and fully self-funded.

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3) Improved drilling efficiency and recent well performance could drive further guidance increases

In mid-March, Delphi increased average 2014 production guidance by 500 boe/d, to 10,00010,500 boe/d, and boosted its exit guidance by 1,000 boe/d to 11,50012,000 boe/d. Despite the increases, we continue to see further upside and potential for another guidance increase. Our conviction is primarily driven by improved drilling efficiencies and well timing, as Delphi continues to reduce drilling days and cycle times on its Montney wells. The companys current plans call for the completion of 6 wells prior to year-end, with drilling on the seventh beginning in 2014 and rolling over into 2015. We believe drilling efficiencies are improving to the point where the company should be in a position to bring all seven wells on-stream before the calendar turns over. Obviously bringing a well on at year-end will have a minimal impact to average production, but it should result in a significant increase to 2014 exit volumes and position the company even better for 2015. We also believe average production guidance does not fully reflect the new type curve, leaving room for a possible bump here as well.

VALUATION AND TARGET PRICE Since the beginning of 2014, Delphi shares have significantly outperformed their peers, returning 57% versus the peer group at 33%, resulting in their relative valuation falling in line with their junior gas-weighted peers. Based on our 2014 estimates, Delphi trails the peer group by 21% on an EV/boe/d metric but trades in line on a P/CF and EV/DACF basis. We argue that despite a valuation that falls roughly in line with the peers, given its recent well results and current production levels, we see material upside to our 2014 estimates. Comparable valuations


Production % Gas PPS Growth D/CF2014E 2014E 2014E 2014E 2014E 2015E 2014E 2015E 2014E 2015E

Company Name Ticker (boe/d) (%) (%) (x) (x) (x) $/boe/d $/boe/d (x) (x)Advantage Oil & Gas Ltd AAV 22,065 99% 13% 1.4x 7.5x 6.9x $60,663 $52,123 5.8x 5.2xCequence Energy Ltd. CQE 13,500 86% 31% 1.4x 7.5x 6.4x $57,248 $50,044 6.1x 5.0xCrocotta Energy Inc. CTA 9,600 73% 6% 1.4x 5.4x 4.7x $54,395 $47,134 3.9x 3.3xDonnycreek Energy Corp DCK 1,429 52% 336% 0.6x 7.9x 3.1x $91,047 $37,988 7.2x 2.7xKelt Exploration Ltd. KEL 10,908 72% 48% 0.0x 16.0x 11.4x $92,902 $109,693 15.5x 10.9xNuVista Energy Ltd. NVA 18,194 69% -12% 0.8x 10.0x 7.7x $91,005 $70,244 9.4x 7.2xPine Cliff Energy PNE 6,354 95% 14% -1.0x 6.4x 7.5x $43,378 $43,245 7.3x 8.6xPainted Pony Petroleum PPY 12,926 85% 47% 0.8x 11.8x 9.9x $90,859 $72,671 11.2x 8.5xArtek Exploration Ltd. RTK 4,708 63% 15% 2.1x 8.5x 6.5x $80,261 $69,045 6.7x 5.0xStorm Resources SRX 5,988 79% 14% 0.9x 13.7x 10.3x $109,053 $79,754 12.9x 9.7xSantonia Energy Ltd. STE 3,837 81% -10% 1.2x 8.8x 9.9x $52,579 $55,960 8.0x 9.1xDelphi Energy Corp. DEE 10,330 71% 25% 2.0x 8.4x 7.1x $63,310 $53,885 7.0x 5.9xMedian 9,600 73% 15% 0.9x 8.5x 7.5x 80,261 55,960 7.3x 7.2xDEE vs Median 8% -3% 59% 113% -2% -6% -21% -4% -4% -19%

ValuationEV/DACF EV/boe/d P/CF

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Risked NAV discussion Delphi recently released its 2013 reserve report showing total booked (2P) reserves

of 61.7 mmboe weighted 73% to natural gas and representing 43% growth from 2012 levels. Of the 36.1 mmboe of total proved reserves on the books, over 40% are proved producing. Reflecting the increase in drilling and production from its liquids-rich Montney play at Bigstone, Delphis crude and NGL reserve weighting increased over 60% from 2012 levels and now sits at 16.8 mmboe. When looking at Future Development Capital (FDC), we estimate Delphi has 4.5x our estimated 2014 cash flow booked to its reserves with the 2P FDC roughly matching the companys five year Montney drilling plans. Based on our internally generated price deck, we estimate Delphis current 2P NAV is $2.57/share, backstopped by a 1P NAV of $1.62/share. Details of our Base NAV can be found in the Exhibit on the following page.

Risked upside o Given Delphi is planning to direct the majority of its capital spending

to its East Bigstone Montney play, this is the only asset we include as part of our Risked NAV. It is worth noting that we see potential upside on its Bigstone west acreage (over 100 locations identified and one well currently producing) but have not included it as part of our evaluation at this point. Before we get into respective risked upside value, it is worth reiterating our calculation methodology. The risked portion of the NAV utilizes our per well economics for Delphis unbooked inventory at East Bigstone, and develops this inventory under a capitally constrained scenario.

o On the current reserve report, Delphi has a total of 21 net Montney horizontals booked to its East Bigstone land position. Based on the 100-location inventory, we see 79 net locations falling into the unbooked category and thus being captured by our Risked NAV. Based on our analysis, we see an additional $647 million in unbooked value representing $3.86/share.

When we combine our Base NAV and Risked upside we calculate a Risked NAV for Delphi of $6.43 per share. Details of both our Base and Risked NAV can be found on the following page. Further to this, based on current trading levels, we believe roughly $80 million of unbooked value is captured in the current share price, representing five of the 79 unbooked locations.

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Base and Risked NAV breakdown


Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Delphi, our $4.25 target price is based on a Risked NAV of $6.43 and a 2015 EV/DACF multiple of 7.5 times.

RISKS TO OUR THESIS Reservoir variability: A key assumption of our five-year, 51-well plan is that the company will achieve similar production rates and condensate yields from each of the wells across its acreage. It is unlikely the reservoir is homogenous over such a large portion of land but we take faith in the fact that Delphi successfully drilled a southern Bigstone step-out location (13 kilometers south of its East Bigstone development) late in 2013, which showed similar test gas rates and a condensate yield of ~ 40 bbls/mmcf. While each individual well result is likely to vary around our type curve assumptions, we feel given the recent test rates and condensate yields, our type curve assumptions are conservative.

Assigned Reserves Reserves BT PV@10% $NAV/(mmboe) ($mm) Share

Proven 36.1 $289 $1.72Probable 25.5 $158 $0.94

2P Reserves 61.7 $447 $2.67Value $NAV/

Other Assets/Liabilities ($mm) ShareLand Value (220,000 acres @ $450 per acre) $99 $0.59Net Debt ($138) ($0.82)Option Proceeds & Other $22 $0.13

Total ($17) ($0.10)2P Net Asset Value $430 $2.57

Net Net RiskedUnbooked Upside Potential Locations Resource BT PV@10% $NAV/

(mmboe) ($mm) ShareEast Bigstone Gas (HZ) 79 131.7 $647 $3.86Total 79 131.7 $647 $3.862P NAV + Risked Upside Value $1,077 $6.43

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Asset concentration: Based on our 5-year plan we estimate roughly 70% of corporate production will come from the companys East Bigstone core area by mid-2015, suggesting the company does have a higher degree of production concentration risk. It is worth pointing out that the takeaway capacity risk is somewhat mitigated by the fact that Delphi has a number of large processing facilities in the area (KA SemCams, K3 SemCams, Saturn deep cut plant and the Talisman Edson facility) which provide the company with some optionality should one of the offsetting facilities run into some downtime issues (planned or otherwise). Delphi is also evaluating construction of its own major gas facility but this is not likely to happen until late 2015 or 2016. Commodity pricing: Despite our belief that Delphis East Bigstone wells remain economic in a much lower commodity price environment, we have to be aware that commodity pricing remains a key component in the development of its East Bigstone acreage. By our assumptions, the 5-year plan becomes self-funding by mid-2015, but should commodity prices significantly weaken (particularly condensate prices) this will have a negative impact on Delphis ability to develop the property without some form of additional external financing (or an additional GOR agreement).

COMPANY HISTORY AND OUTLOOK Delphi came into existence through a June 2003 merger of DT Energy Ltd. and Rise Energy Ltd., with the merged company continuing under the name Delphi Energy Corp. The companys early focus was on natural gas in the Bigfoot area of northeastern B.C., with the Bigfoot assets later being swapped for light oil assets at Hythe, which the company continues to operate. The Hythe oil assets became an integral piece for Delphi, as the company began to put more emphasis on the pursuit of oil, following the natural gas price collapse in 2009; this also resulted in additional emphasis on Cardium oil development at its Bigstone property. In late 2009, the company acquired what would become its third core area at Wapiti, a liquids-rich gas play. While the Wapiti and Hythe assets continue to be core areas for the company today, it is the Bigstone assets which have become the hallmark of the company just not for the originally targeted Cardium potential. In 2012, Delphi underwent a fundamental change, with the Montney assets at Bigstone becoming the primary focus, with Hythe and Wapiti providing cash flow to further Montney development. In 2013, Montney production from Bigstone accounted for approximately 31% of production, with this share expected to increase to 60% in 2014. Delphi has grown production from ~6,300 boe/d in 2008 to ~8,200 boe/d in 2013, and is guiding 10,000 to 10,500 boe/d in 2014, representing 24% growth, year-on-year (based on the guidance mid-point). The company plans to drill 7 horizontal wells at Bigstone East in 2014, based on a capital spending program budget of $67 to $72 million, and is projecting cash flow of $60 to $65 million. We estimate the company will exit 2014 with net debt of $144 million, representing a trailing debt to cash flow ratio of 2.0x.

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CORE AREA OVERVIEW Delphis operations are concentrated in west central Alberta, with core areas at Bigstone, Hythe, and Wapiti. With the companys focus squarely on Bigstone, all future development is expected to take place there, with the other two core areas providing cash flow to expedite the Montney development. As an aside, we would not be surprised to see the company divest Hythe or Wapiti, in order to fund an accelerated Bigstone development program.

Delphi Energy core area map


Bigstone the Montney growth driver The Bigstone assets were assembled through a combination of Crown land sales, acquisitions and farm-in agreements. The company held four legacy sections at Bigstone but took a larger entry into Bigstone West, acquiring 27 sections of land through provincial land sales in 2010 and 2011. After securing a toehold at Bigstone West, Delphi added 64.5 sections at Bigstone East through a series of acquisitions and farm-in agreements, the largest piece being a 30-section (26.7 net) acquisition in March of 2013. Bigstone South was added to the Delphi portfolio through a 32.5-section farm-in completed in December, 2012. In 2013, 31% of corporate production came from Bigstone; this figure is expected to increase to 60% in 2014.

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DEE Bigstone map


East Bigstone development to date Since 2012, Delphi has placed ten wells on production at its East Bigstone play (three wells in 2012, six wells in 2013 and one thus far in 2014). As previously discussed, the drilling and completion methods have significantly changed over the life cycle of the play. The company has gone from 20-stage conventional gelled oil fracs to a new 30-stage slickwater hybrid frac, which has been met with significantly better results. To date, we estimate the company has de-risked over 20 net sections of land in the area.

East Bigstone chronological development


East Bigstone - focus area of 5 year development plan

South Bigstone

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Exploration well tested at 957 boe/d with 42

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West Bigstone well - cumm production of 97 mmcf and

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A tale of two completion methods The best comparison of the positive impact of Delphis new completion technique vs. the old one can be found in the two offsetting wells in section 19, in the northeast portion of the Bigstone land base. The 16-30 well was completed with the old method (gelled oil, 20 stages), while the offsetting 15-30 was completed with the new method (slickwater hybrid, 30 stages). What can be seen from the production profile (below) is the new completion method has yielded twice the amount of condensate on the back of a higher gas production rate. This essentially isolates the impact of the completion method on the well results. Comparing gelled oil and the slickwater completed production profiles

Source: geoSCOUT, GMP Securities Economics comparing our base case and upside case While we have not based our East Bigstone development value on the upside case type curve, given the recent well results have trended towards this upside curve, we feel its prudent to highlight the economics.

Base case and Upside case comparative economics

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As shown above, our East Bigstone base case type curve has a risked IP 30 of 1,090 boe/d and pays out in nine months. It is this base case well that we use for our Risked NAV and five-year plan development scenario. This base case well sits roughly in the middle of Delphis original completion method wells and the new completion wells; as such, we feel it represents a very conservative estimate of go-forward economics. Over time, as the company completes more wells under the new completion method, we are likely to see our base case type curve scenario move towards the upside case, which will result in a significant improvement in NPV, rate of return, and payout.

CONCLUSION We are initiating coverage of Delphi Energy with a BUY rating and $4.25 target price as we believe the recent well results from the companys East Bigstone Montney play are, and will continue to be, a game-changer for the company. Not only do we see material long-term resource upside potential on the property, we see short-term upside in the form of balance sheet improvements, better capital efficiencies, and a potentially higher exit rate. We like the fact that Delphi has captured the resource, has moved up the learning curve on well completion methodology and is now focused on execution.

Base Case Upside Case ChangeWell Perfromance

IP 30 (boe/d) 1,090 1,533 41%IP 30 (bbl/d) 429 603 41%EUR (mboe) 987 1,110 13%

EconomicsBT NPV (10) $13.7 $16.6 21%

ROR (% ) 166% 347% 109%Well Payout (months) 9 6 -33%

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APPENDIX A: DELPHI ENERGY OPERATING AND FINANCIAL INFORMATION

Source: GMP, company disclosures

Rating BUY Aaron Swanson, CFA - (403) 543-3563Price Target $4.25 [email protected]

DEE-TSX Total Return 39%Jordan McNiven - (403) 695-1401

[email protected]

Company Overview Key Valuation Ratios 2013A 2014E 2015EPrice as of 04/14/14 ($/share) $3.05 Base Net Asset Value ($/share) $2.57 --- ---52 week High - Low ($/share) $3.14 - $1.17 Risked Net Asset Value ($/share) $6.43 --- ---

P/CF (x) 6.2x 7.0x 5.9xFully Diluted Shares Outstanding (MM) 167.6 EV/DACF (x) 8.4x 8.4x 7.1x

EV/Production ($/boe/d) $45,096 $63,310 $53,885Market Capitalization ($MM) $511.2 EV/1P Reserves ($/bo

Documents

MontneyInitiation 04-16-14 GMP RPT