NPE Peel Hunt Initiation 17-07-07

Corporate # Nautical Petroleum 17 July 2007 NPE

Nautical has six discovered fields on it books with combined net unrisked contingent resources of close to 120 million barrels, valued at less than 83p per barrel. It has, in addition, a material portfolio of exploration prospects with the potential to double the current resource base. A drilling programme starting late in 2007 and running through 2008 will test some of the material prospects in the portfolio.

Late in 2006, Nautical entered into a farm-out agreement with SK Corporation, a leading South Korean oil refining, energy and industrial group. Under this arrangement, Nautical will drill at least four exploration and appraisal wells on its licences, starting in 3Q 2007, while SK will be paying a two-for-one promote on these wells. It would be reasonable to expect this not to be the last farm-in deal between Nautical and SK, which is likely to become a strategic partner for Nautical for further ventures in the North Sea.

The recent decision of Nautical’s partner in the Mariner field, Chevron, to sell its interest creates short term timing uncertainty but once the sale process is concluded, the incoming operator should clearly be aligned with Nautical and the third partner ENI to progress development on a timely basis.

Nautical’s present exploration and appraisal commitments are covered by farm-outs and the current cash position. In the longer term, debt finance is expected to play a significant role in funding the developments. As the issues keeping the share price down are progressively addressed, the stock should start to reflect the strong fundamentals. Core NAV is 13.1p/share, Total NAV is 18.8p/share.

Data

Price (p) 7.7

Market cap (£m) 85

Index AIM

Sector Oil & Gas

Next News September – Finals

Description

Nautical Petroleum is an oil development and

exploration company with a primary focus on

heavy oil accumulations in the UK North Sea.

Performance

Source: KBC Peel Hunt

0

2

4

6

8

10

12

14

16

18

2004 2005 2006 2007

Nautical Petroleum Rel to All Share

Analyst

Tony Alves +44 (0) 20 7418 8813

[email protected] # KBC Peel Hunt Ltd is committed to providing objective investment research, however KBC Peel Hunt Ltd is broker and/or nominated adviser to, or is retained by, this company and is therefore unlikely to be perceived as objective. This research should therefore be considered as non-objective research.

Stats

Source: Company (historic), KBC Peel Hunt (estimates)

2006A 2007E 2008E

Sales (£m) 0.0 0.0 0.0

PBT (£m) -7.2 -1.7 -1.7

DACF (£m) 0.0 0.0 0.0

EPS (p) -0.7 -0.2 -0.2

DPS (p) 0.0 0.0 0.0

PER (x) n.a. n.a. n.a.

Div Yield (%) n.a. n.a. n.a.

FCF Yield (%) n.a. n.a. n.a.

EV/DACF (x) n.a. n.a. n.a.

Initiation of Coverage

Nautical is focused primarily on heavy oil in the UK North Sea, a resource that to date has been only sparsely exploited although it is acknowledged to be available in abundance relative to light oil. With oil prices set to remain high, the economics of heavy oil are now very favourable. Unlike conventional North Sea oil and gas, the resource risk is relatively low and although on a unit basis, the NPV of heavy oil is less than light oil, the returns on exploration for heavy oil are currently very attractive. The shares are at a discount relative to our 13p/share Core NAV estimate, which itself has potential to grow strongly on successful drilling over the next 12 to18 months.

KBC Peel Hunt 2 Nautical Petroleum 17 July 2007

Background and strategy

Nautical Petroleum is an oil development and exploration company with a primary focus on heavy oil accumulations in the UK North Sea. This is widely recognised as one of the larger unexploited resources of the North Sea. The company’s aim is to bring its substantial resource base into development and to extend its reserves by appraisal and exploration drilling. Three firm wells are to be drilled in 2007, with a further three or four wells planned for 2008. In parallel, the achievement of development approval for the Mariner field is a key strategic objective.

In essence heaviness relates to the density relative to water. Normal light crude with an API of 30o has a specific gravity of 0.83, water with a specific gravity of 1.0 has an API of 13o while crude oils with API density of 20o or less is classed as heavy in the context of North Sea oil. Of greater relevance to the production economics, is that heavy oils typically also have higher viscosity than light oils (there being a higher proportion of larger hydrocarbon molecules in the fluid). This again is relative. Nautical’s resource base has a viscosity of 65-150 cp (centipoise), 150 cp is roughly equivalent to the viscosity of olive oil.

Principally it is about the economics. The pipeline infrastructure carries light, sweet crude while heavy oil needs to be transported to market by offshore loading. As a consequence the development and lifting costs are higher than for light oil. Finally, the sales price attracts a significant discount (10-20% off Brent). On the other hand, in a high oil price environment, heavy oil projects are now capable of providing more than adequate returns.

Nautical was established in 2003 as an autonomous operation of Masefield, a Swiss based oil trading and investment group. In 2005 the company was listed on AIM following a reverse takeover of Bullion Resources. Masefield’s investment arm, International Energy Holdings, is still a 44% shareholder in Nautical and currently provides administrative support for the company. Two of the licences were acquired prior to the takeover but the Mariner field interest was acquired in a corporate transaction and the other 11 licences acquired after the takeover.

Nautical is run by a very slim permanent staff at present, but retains access to a high quality and experienced team of independent technical consultants. The executive management team is highly experienced in heavy oil production operations and includes geological skills as well as commercial and business development capabilities.

The ongoing relationship with an oil trading group is very helpful in handling and marketing a product that is regarded as more difficult than light oil.

Nautical’s Proven and Probable reserves as at the end of 2006 were 21.9mmbbl, all attributable to the Mariner field’s “Maureen” reservoir. In addition to this, discovered net reserves (classified as Contingent Resources) were an additional 48.8mmbbl, giving a total resource base of 70.7mmbbl. Subsequent to the year end, the company added a further 49.2mmbbl of additional resources, taking the discovered resource base close to 120mmbbl.

What is North Sea heavy oil?

Why has heavy oil been neglected?

Origins of Nautical

Management

120mmbbl discovered resources


There are seven “drill ready” prospects in Nautical’s exploration inventory with combined unrisked net prospective resources (based on current equity) of 128mmbbl addition, there are a further five less advanced leads with indicative net potential of over 70mmbbl.

Figure 1: Map of Nautical's principal properties Source: Company

Exploration up to 200mmbbl unrisked


Management and board In its current position, Nautical is run with a suitably slim permanent management team, although it is supplemented with outside technical support as necessary. As it develops further, especially if it retains operatorship of developments such as Kraken, Skelpie and Kelpie, the company infrastructure will need to expand. However, the likelihood is that Nautical will enter into an operational contracting model with the likes of Petrofac on the same lines as Venture Production.

The key members of the management team are:

Steve Jenkins, Chief Executive. A geologist by background, Steve had an early career with Ultramar followed by 11 years with Nimir Petroleum where he led multidisciplinary teams to evaluate opportunities in the Americas, the Middle East, North Africa and operated successful production ventures in Russia (Sakhalin) and Kazakhstan. He joined Masefield Group in 2003 within which he founded Nautical Petroleum.

Paul Jennings, Commercial Director. Paul joined Masefield in 2000, assuming responsibility for exploration and production finance and business development. His experience in the oil and gas sector exceeds 25 years and spans the roles of accountant, economist and commercial and business development director. He has worked with BP and acted as adviser to the Russian and Chinese governments.

Ian Williams, Chairman joined Masefield Group in 1999 and is responsible for the development and management of business ventures. Ian's wide-ranging industry experience encompasses 27 years with the Royal Dutch/Shell Group with senior roles in the downstream oil segment of the group in a variety of locations.

Hemant Thanawala, Finance Director. Hemant is an accountant and, as well as Finance Director of Nautical, is active in parts of the Masefield Group.


Overview of financial position and valuation

At present, Nautical has no production base and therefore no revenues. Its development and exploration projects however should lead to material cash generative production in the medium term. The production profile illustrated below reflects only Mariner and Kraken. In practice, we would expect the production to be maintained well beyond 2014 as satellites and other nearby discoveries are brought across these two hubs. There may also be other hubs (such as Kelpie/Skelpie).

Chart 1: Production profile (calendar years) Source: KBC Peel Hunt

At this point, it is not certain that the optimal return for shareholders would be achieved by bringing all of the development projects into production and harvesting the cash flow or whether a sale of the business as a package would be desirable. In either case, the funding model would most likely be identical. Current requirements will be to meet forward exploration expenditures and pre-development costs for the Mariner field. We expect that much of the development expenditure on Mariner could be debt financed.

Once the Mariner field is in production, free cash generation should enable Nautical to fund continuing exploration and appraisal which in turn should lead to additional field being brought into the company’s borrowing base – enabling additional debt to be raised against production and developments if necessary.

We estimate that £20m of additional equity capital will be sufficient for Nautical to reach a self-funding state based on existing interests in the current portfolio, as illustrated in the analysis is the table below:

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Kraken

Mariner


Table 1: Analysis of fund flows Source: KBC Peel Hunt estimates

Year end 30 June 2007 2008 2009 2010

Cash at Year Start 12.3 7.9 15.9 2.2

CFFO (1.4) (1.7) (2.0) (4.6)

Exploration (3.0) (8.0) (5.0) (5.0)

Development 0.0 (2.3) (6.8) (33.8)

funded by:

Equity 20.0

Debt 0.0 0.0 45.0

Cash at Year End 7.9 15.9 2.2 3.9

In terms of the valuation, the NPV of North Sea heavy oil is driven by the following key factors:

• Price realisation, which is very specific to the particular crude and market conditions. We have assumed that Nautical’s heavy oil sells at a 15% discount to prevailing Brent oil prices.

• Development and production costs. As the initial fields need to be developed as stand-alone projects with offshore loading, overall costs are higher per barrel than equivalent light oil fields. On the other hand, light oil field discoveries are relatively rare these days.

• Lead times are typically longer for heavy oil developments.

Consequently, we have estimated the NPV of Nautical’s reserves to be in the region of £3.15/$6.30 per barrel, compared with a typical £4.00-5.00 per barrel for light oil.


Table 2: NAV Summary Source: KBC Peel Hunt

Nautical Interest

Net Risked Resources

(mmbbls)

NPV 10% (£m)

p per share

Mariner (Maureen) 26.6% 21.8 69.4 4.8

Kraken 45.0% 11.9 24.5 1.7

Mariner (Heimdal) 26.6% 4.5 12.9 0.9

Skipper - risked 98.5% 16.3 36.8 2.6

Seahorse 50.0% 2.8 6.3 0.4

Bluebeard 98.5% 8.3 12.5 0.9

Grenade (St. Laurent) 22.0% 1.4 3.5 0.2

Discovered Resources 67.0 165.9 11.5

Cash 10.0 0.7

Two years G&A cash burn -10.0 -0.7

Warrants & options 3.0 0.2

Future equity issue 20.2 1.4

Net Asset Value 67.0 189.1 13.1

Risked Exploration Value 39.2 81.9 5.7 Asset review: development projects Mariner field (26.67% interest) Mariner holds the record of being the most heavily appraised undeveloped field in the North Sea. There have been a total of seven different appraisal wells and in flow tests over 650,000 barrels of oil have been produced. The field comprises two principal oil accumulations in the Maureen and Heimdal sandstones. Initial development plans are focused primarily on development of the higher quality Maureen reservoir which contains oil of relatively low viscosity.

Nautical acquired its interest along with a number of its other licences by the acquisition in 2005 of Alba Resources. The partners in the field are Chevron (operator) with 44.4% and ENI with 28.9%. Nautical’s interest benefits from an historic hive-down agreement under which Nautical’s predecessors agreed to carry part of ENI’s pre-development costs. Under this arrangement, ENI has the option to repay the amounts funded plus accumulated interest or to transfer an additional 6.67% interest to Nautical. The sum in question is approximately £8.5m. We assume that ENI will pay rather than transfer the additional interest.

While Chevron had been progressing the development planning and, earlier in the year, was intending to submit a final development plan for DTI approval, the decision was made to dispose of the Mariner interest along with a variety of other North Sea assets. While in the short term this is unhelpful to Nautical, the company is aware of significant interest among other companies. A change of operator and entry of a new partner ought to lead to an aligned partnership intent on pursuing the development in a timely manner. It is understood that ENI is keen to pursue the development of Mariner.

Material development ready to go


Field economics The Maureen reservoir in Mariner has estimated oil in place of 450mmbbl and the current 2P reserve estimate is 82mmbbl. The development scheme would comprise a small wellhead platform tied back to a floating production and storage facility with a dedicated tanker for offloading. We estimate the gross capital cost for this scheme to be £325m, while the annual operating cost we estimate to be £65m being primarily the rental costs for an FPSO and tanker.

In our field model, we have assumed an eight year field life with a plateau production rate of 50,000 b/d but with an average downtime of 10% built in to allow for weather disruption and routine maintenance operations. We have assumed that the field reaches project sanction in mid 2008, development commences in 2009 and first oil is achieved early in 2011. This may be a pessimistic assumption.

We have assumed, in addition that the Mariner oil is sold at a 15% discount to Brent. Thus with our long term assumption of a $55 Brent oil price, the realised price in real terms is $46.75 per barrel.

Based on these assumptions, the Mariner project seems to be very economically robust: the IRR is over 75%, project payback is achieved within two years of first oil. As is typical for offshore heavy oil, the NPV per barrel of reserves is significantly lower than for light oil – in this case the figure is $6.30 per barrel, rather than the more typical $8-10 per barrel for short-life light oil developments.

Heimdal reservoir. Within the Mariner field, there is an additional 850mmbbl of oil in place in the Heimdal formation. The crude in this is higher viscosity and the reservoir is of lesser quality than the Maureen. Nevertheless, it is currently estimated that over 50mmbbl of reserves can be recovered from this reservoir. We have included this resource in Core NAV with a 33% risking factor.

There are additional prospects and discoveries in the immediate vicinity of Mariner that would ideally be exploited jointly.

Mermaid prospect (60%) is a potential stratigraphic accumulation in Maureen sands lying due south of Mariner. It appears a robust prospect clearly defined by seismic data. An exploration well is planned to be drilled on the prospect during 4Q 2007. SK Corporation has farmed into this licence for a 40% interest, for which it is paying 80% of the exploration costs up to but not including testing. This is at present the most material prospect in Nautical’s inventory and has the potential to transform the reserve base and value of the company.

Bluebeard discovery (98.5%) is a small accumulation lying northeast of the Mariner field. Potential recoverable reserves are estimated to be in the region of 17mmbbl. It is likely to be developed as a satellite to Mariner. We anticipate appraisal drilling will be deferred until the Mariner development is well advanced.

Kraken area (45% interest) The Kraken field was discovered in 1985 and tested 15o API oil from a 33 metre column of very high quality reservoir. There is quite a wide range (167mmbbl to 395mmbbl) of oil in place estimates as the discovery well did not find the oil:water contact. At present Nautical recognises Contingent Resources of a gross 52mmbbl on the field (net 23mmbbl). Should the drilling confirm resources towards the upper end of the range, the reserve upside could be in excess of 100mmbbl.

Robust stand-alone economics

Material additional resource

Potential for Mariner to become a significant production hub.

Second and third development hubs in prospect


Appraisal drilling is planned for 3Q 2007. This will be drilled on the crest of the structure with the aim of establishing a full reservoir section. In addition, the plan is to sidetrack the well to the east to attempt to locate an oil:water contact.

Assuming the results are as good as or better than anticipated, development planning will commence in 2008. At present the most likely development scenario would be via an FPSO.

Nautical farmed down from its original 75% interest to 45%, with SK Corporation farming in for a 30% interest, paying 60% of the costs of this programme.

Nautical has three exploration block contiguous to the Kraken field: 3/27a directly to the north and blocks 8/5 and 9/1 due west of Kraken. The SK farm-in deal includes a well in 3/27a which contains a lead with unrisked potential for 25 mmbbl. A well is planned on this for 2008, with the current work programme focused on 2-D seismic acquisition and interpretation. The other blocks are of more recent vintage and is currently held 100% by Nautical.


Skipper, Selkie and Kelpie These three structures lie within a cluster in blocks 8/25a and 9/21. These are all Palaeocene sand plays. While each of these could be made into an economic development, it would clearly be preferable to develop two or three fields as a cluster.

Skipper (NPE 98.5%) is a discovery made in 1990 with a 16 metre column of high quality reservoir. Gross recoverable oil is estimated in the region of 33mmbbl. It will require an appraisal well before a development plan can be firmed up.

Selkie and Kelpie (NPE 60%) have been farmed out to SK, which is paying 80% of the costs up to and including the first exploration well for a 40% interest. A well is planed on this licence in 2008.

Table 3: Contingent and Prospective Resources Source: KBC Peel Hunt

Discovered Resources

Nautical Working Interest

Gross STOOIP (mmbbl)

Gross Recoverable

Reserves (mmbbl)

Net Recoverable

Reserves (mmbbl)

Risk Factor

Capital Expenditure Net

($m)

Plateau Production (net, kb/d)

Development

Mariner (Maureen) 27% 451 82 21.8 100% 176 12

Appraisal

Kraken 45% 167-394 53 23.9 50% 185 24

Mariner (Heimdal) 27% 390-710 51 13.6 33% n.a. n.a.

Skipper 99% 219 33 32.6 50% n.a. n.a.

Seahorse 50% 146 17 8.5 33% n.a. n.a.

Bluebeard 99% 60 17 16.6 33% n.a. n.a.

Grenade 22% 100-500 13 2.8 50% n.a. n.a.

Prospects Interest (post

farm-out)

Unrisked Gross STOIIP

(mmbbl)

Unrisked Reserves (mmbbl)

Net Recoverable

Reserves (mmbbl)

Risk Factor

Net Risked Reserves (mmbbl)

Exploration Expenditure

Net (£m)

9/11c (Mermaid) 60% 562 112.4 67.4 33% 22.3 1.5

8/25a (Selpie) 60% 219 26.28 15.8 20% 3.2 1.5

8/25a (Kelpie) 60% 131 15.72 9.4 20% 1.9 6.0

113/29 (Merrow) 50% n.a. 100 50.0 15% 7.5 4.0

14/30 (Tudor Rose) 20% 211 38 7.6 33% 2.5 2.0

28/9 (Catcher) 15% n.a. 50 7.5 25% 1.9 1.0

Total 157.7 39.2 16.0

Leads

8/5, 9/1 100% 200 24 24.0 20% 4.8 10.0

8/5, 9/1 100% 200 24 24.0 20% 4.8 10.0

3/27a 45% 170 25.5 11.5 20% 2.3 1.5

2/3 (Dragon) 50% 64 16 8.0 15% 1.2 3.0

2/4 (Unicorn) 50% 76 19 9.5 11% 1.0 3.0

Total 77.0 14.1 27.5


Other assets Nautical currently has six further exploration and appraisal projects, four in the UK North Sea, one in Morecambe Bay and on in the south of France.

15/7 Seahorse (NPE 50%) Nautical acquired this as a promote block in the 23rd Round, in partnership with Egdon Resources. Located in the outer Moray Firth, the block contains the Seahorse heavy oil discovery with potential reserves of 17 mmbbl. Nautical is currently reprocessing existing 2-D and 3-D seismic data before firming up further work.

Catcher prospect (NPE 15%) blocks 28/9 & 28/10b. The blocks contain a well defined moderate-sized (c 30mmbbl) Palaeocene prospect and numerous other leads in Eocene and Jurassic horizons. A well has been committed to be drilled within 12 months of licence award. The licence is operated by Oilexco.

Tudor Rose (NPE 20%) block 14/30a. A previous well on the block was drilled in which logs and pressure readings indicated the presence of 21o API oil in a Palaeocene reservoir although a bituminous residue was recovered to surface. The partnership is to conduct technical evaluation before deciding firmly to drill a well.

Dragon/Unicorn (NPE 33.3%) blocks 2/3a & 2/4b. These are the two best defined structures in the block. A well on the Unicorn structure discovered heavy oil of 16.6o API. This licence is currently held on promote terms.

Merrow (NPE 50%) blocks 113/29c & 113/30. The prospect is located in coastal waters off Barrow-in-Furness and contains potential reservoirs in Triassic and Permian aged rocks. The presence of hydrocarbons is evidenced in numerous onshore wells nearby. The prospect could contain either 123mmbbl of oil or 393 BCF of gas and anything in between. It would be possible to locate a rig on the nearby Walney Island and drill directionally to test the prospect.

Grenade discovery, St. Laurent Permit, Aquitaine. Located in the Aquitaine basin in south western France, Grenade is a heavy oil discovery originally made in 1975. While the structure is large and the block contains several hundred millions of barrels, recoverable reserves have been estimated at around 12.5mmbbl. Forward operations planned include a directionally drilled appraisal well expected to start operations late in 2007. In addition to Grenade, there are a number of exploration leads, most likely prospective for gas. Nautical has a 22% interest in the permit.

Numerous additional exploration plays to be tested.

Onshore development prospect: an opportunity for early revenue.


Valuation model While it is still some time from generating sustainable profits and free cash flow, Nautical, in common with most of its peers, is geared towards capital value growth. Clearly, development of the current resources and successful exploration drilling will be the main drivers of this value growth. An important dimension to this will also be the ability of the management team to identify, secure and execute value creating asset acquisitions. There is clearly no rational basis of either forecasting the impact of such activities or of placing a tangible value on them.

Consequently, in common with most of its peers, an investment in Nautical needs to be judged on the basis of the potential of the management and asset portfolio to add value. We apply our standard valuation procedure, segmenting the asset on the following basis:

• Producing assets : none of the assets qualify for this segment at present. • Developments : In theory, the Mariner field interest would qualify for inclusion as

the technical evaluation has been thorough although strictly speaking it has yet to reach final investment decision.

• Potentially commercial fields : We have included the other discovered fields in this asset segment and have for now put significant risk factors against them given the appraisal risk and uncertainty on timing.

• Net working capital : we deduct from the net cash position as of 1 January 2007 the budgeted exploration spend and two years of overheads.

• Exploration/reserve upside : we include in here the Expected Monetary Value (ie potential NPV multiplied by probability of success) for each of the prospects that we expect to be tested by drilling within the next two years.

Table 4: NAV estimate Source: KBC Peel Hunt

Nautical Interest

Net Recoverable

Reserves

Risk Factor

Net Risked Resources

(mmbbls)

NPV 10% (£m)

p per share

Mariner (Maureen) 26.6% 21.8 100% 21.8 69.4 4.8

Kraken 45.0% 23.9 50% 11.9 24.5 1.7

Mariner (Heimdal) 26.6% 13.6 33% 4.5 12.9 0.9

Skipper - risked 98.5% 32.6 50% 16.3 36.8 2.6

Seahorse 50.0% 8.5 33% 2.8 6.3 0.4

Bluebeard 98.5% 16.6 33% 8.3 12.5 0.9

Grenade (St. Laurent) 22.0% 2.8 50% 1.4 3.5 0.2

Discovered Resources 119.7 67.0 165.9 11.5

Cash 10.0 0.7

Two years G&A cash burn -10.0 -0.7

warrants & options 3.0 0.2

Future equity issue 20.2 1.4

Net Asset Value 67.0 189.1 13.1

Risked Exploration Value 39.2 81.9 5.7


Unlike almost all AIM quoted oil stocks, Nautical has a Core NAV in excess of its share price. Indeed, it is trading at a 45% discount to Core NAV and if we were to factor in a more aggressive long-term oil pricing, assuming a $70 Brent oil price our Core NAV would rise to.18p/share.

The two following charts illustrate nicely Nautical’s discounted value relative to its peers and also the upside value based on higher oil price assumptions.

Figure 2: Peer group segmented NAV relative to shar e price Source: KBC Peel Hunt

Figure 3: Peer group Core NAV relative to share pri ce Source: KBC Peel Hunt

Nautical is on the largest discount to Core NAV of the sector.

Oil price sensitivity – but the shares are now at the level of the $40 Brent based NPV.

0%

50%

100%

150%

200%

250%

Bur

ren

Cai

rn

Dan

a

Dra

gon

Impe

rial E

nerg

y

JKX

Oile

xco

Pre

mie

r

Sal

aman

der

Soc

o

Tul

low

Oil

Ven

ture

Nau

tical

Afr

en

Coa

stal

Firs

t Cal

gary

Ste

rling

$40 NAV $55 NAV $70 NAV

0%

50%

100%

150%

200%

250%

300%

Bur

ren

Cai

rn

Dan

a

Dra

gon

Oil

Impe

rial E

nerg

y

JKX

Oile

xco

Pre

mie

r

Sal

aman

der

Soc

o

Tul

low

Oil

Ven

ture

Ant

rim

Enc

ore

Oil

Gra

nby

Ithac

a E

nerg

y

Nau

tical

Afr

en

Coa

stal

Ste

rling

Production NAV & Net Cash Developments Discoveries Exploration/risked reserve upside


Table 5: Income Statement Source: Company (historic), KBC Peel Hunt (estimates)

Year end 30 June (£m) 2006A 2007F 2008F 2009F 2010F 2011F 2012F

Mariner 0.0 70.5 107.9

Kraken 0.0 75.2

Oil & Gas Sales 0.0 70.5 183.0

Operating Costs (0.1) (0.1) 0.0 (20.7) (53.7)

DD&A 0.0 (17.7) (46.3)

Gross Profit (0.1) (0.1) 0.0 0.0 0.0 32.1 83.0

G&A Expense (2.2) (1.8) (2.0) (2.2) (2.4) (3.6) (5.4)

Exceptional Expense (5.1)

Net Interest 0.2 0.2 0.3 0.2 (2.2) (6.6) (5.1)

Pre Tax Profit (7.2) (1.7) (1.7) (2.0) (4.6) 21.8 72.5

Taxation (0.0) (6.0) (36.2)

Net Income (7.2) (1.7) (1.7) (2.0) (4.6) 15.9 36.2

Earnings per share (0.7p) (0.2p) (0.2p) (0.1p) (0.3p) 1.2p 2.7p

Cash Flow per Share (0.4p) (0.3p) (0.3p) (0.3p) (0.5p) 6.0p 15.4p

Table 6: Balance Sheet Source: Company (historic), KBC Peel Hunt (estimates)


Intangible Assets 49.3 52.3 60.3 65.3 70.3 75.3 80.3

Tangible Assets 2.7 2.7 5.0 11.7 45.5 102.0 105.2

Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Fixed Assets 52.0 55.0 65.3 77.0 115.8 177.3 185.5

Debtors 0.7 0.9 0.9 0.9 0.9 0.9 0.9

Cash 12.3 7.9 15.9 2.2 3.9 4.2 48.5

Other Creditors (1.9) (2.3) (2.3) (2.3) (2.3) (2.3) (2.3)

Net Current Assets 11.1 6.5 14.5 0.8 2.5 2.8 47.1

Term Debt 0.0 (45.0) (85.0) (65.0)

Other Term Creditors (3.4) (3.3) (3.3) (3.3) (3.3) (3.3) (3.3)

Provisions (7.8) (8.0) (8.0) (8.0) (8.0) (13.9) (50.2)

Net Assets 51.9 50.3 68.6 66.6 62.0 77.9 114.1

Shareholders Funds 51.9 50.3 68.6 66.6 62.0 77.9 114.1

Net Debt Analysis

Cash 12.3 7.9 15.9 2.2 3.9 4.2 48.5

ST Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0

LT Debt 0.0 0.0 0.0 0.0 -45.0 -85.0 -65.0

Net Cash (Debt) 12.3 7.9 15.9 2.2 (41.1) (80.8) (16.5)


Table 7: Cash Flow Source: Company (historic), KBC Peel Hunt (estimates)


Operating Profit (2.3) (1.9) (2.0) (2.2) (2.4) 28.4 77.6

DD&A & Exploration 0.0 0.0 0.0 0.0 0.0 17.7 46.3

Working Capital Adjustment (0.3) 0.2 0.0 0.0 0.0 0.0 0.0

Other 1.2

Net Interest 0.3 0.2 0.3 0.2 (2.2) (6.6) (5.1)

Tax Paid

Operating Cash Flow (1.1) (1.4) (1.7) (2.0) (4.6) 39.6 118.8

Investing Activities:

Exploration (2.3) (3.0) (8.0) (5.0) (5.0) (5.0) (5.0)

Development (2.3) (6.8) (33.8) (74.3) (49.5)

Asset Acquisitions (3.5)

Other 1.4

Capex & Exploration (4.3) (3.0) (10.3) (11.8) (38.8) (79.3) (54.5)

Acquisition/Disposals

Equity Dividends

Cash Flow Before Financing (5.4) (4.4) (11.9) (13.7) (43.4) (39.7) 64.3

Loan Facilities 0.6 45.0 40.0 (20.0)

Equity Issues 17.1 20.0

Net Change in cash 12.3 (4.4) 8.1 (13.7) 1.6 0.3 44.3

KBC Peel Hunt Ltd 111 Old Broad Street London EC2N 1PH T: +44 (0) 20 7418 8900 F: +44 (0) 20 7417 4646


A Member of The KBC Group, the London Stock Exchange and PLUS Markets Group. Authorised and Regulated by the Financial Services Authority, 25 North Colonnade, Canary Wharf, London E14 5HS.

Registered in England and Wales No: 2320252. Registered office as above.

Recommendation structure and distribution 1 April 2007 to 30 June 2007. No %

Buy > +20% expected absolute price performance over 12 months 61 28.6

Add +10% to +20% expected absolute price performance over 12 months 13 6.1

Hold +/-10% range expected absolute price performance over 12 months 38 17.8

Reduce -10% to -20% expected absolute price performance over 12 months 8 3.8

Sell > -20% expected absolute price performance over 12 months 10 4.7

Corporate# 61 28.6

# KBC Peel Hunt Ltd is committed to providing objective investment research, however KBC Peel Hunt Ltd is broker and/or nominated adviser to, or is retained by, this company and is therefore unlikely to be perceived as objective. This research should therefore be considered as non-objective research.

KBC Peel Hunt…

Shareholding (%) held by during the last 12 months

Company Analyst

Company in KBCPH

(>3%)

KBCPH in Company

(>3%)

makes a market in

this company

is broker to this

company

has received compensation

from this company for the

provision of investment banking

services

has acted as a

sponsor/broker/NOMAD/financial

advisor for an offer of securities

from this company

has other

significant

conflicts

Nautical Petroleum

– – – X X – – –

Recommendation history (last 12 months)

Company Date Rec

Nautical Petroleum

This note is initiation of coverage

This document is issued by KBC Peel Hunt Ltd, which is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA) and is a member of the London Stock Exchange; KBC Peel Hunt Ltd is subsidiary of KBC Bank NV. This document is for the use of the addressees only. It may not be copied or distributed to any other person without the written consent of KBC Peel Hunt Ltd and may not be distributed or passed on, directly or indirectly, to any other class of persons, although KBC Peel Hunt Ltd may in its discretion distribute this document to any other person to whom it could lawfully be distributed by an unauthorised person and without its content being approved by an authorised person. This document has been prepared using sources believed to be reliable, however we do not represent it is accurate or complete. Neither KBC Peel Hunt Ltd, nor any of its directors, employees or any affiliated company accepts liability for any loss arising from the use of this document or its contents. This research does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Analysts are paid in part based on the profitability of KBC Peel Hunt Ltd, which includes remuneration received from investment banking transactions. KBC Peel Hunt Ltd, its directors, employees or any affiliated company may have a position or holding in any of the securities mentioned herein or in a related instrument. This document is for distribution in or from the United Kingdom only to persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom or any order made thereunder or to investment professionals as defined in Section 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This research is not for distribution to persons in the United States except that KBC Peel Hunt Ltd may distribute this research in reliance on Rule 15a-6(a)(2) of the Securities Exchange Act 1934 to persons that are major US institutional investors. Orders in any securities referred to Where this research is deemed to be objective, KBC Peel Hunt Ltd has published a Conflicts of Interest Policy that is available at http://www.kbcpeelhunt.com/PublicConflictsPolicy.pdf which summarises how KBC Peel Hunt meets the FSA's requirements in this respect. Unless it has been specified otherwise, the author of the research is to be deemed to be employed by KBC Peel Hunt Ltd as a Research Analyst. Please note that the share price used in this note was the mid-market price at 1pm on 17July 2007

Documents

NPE Peel Hunt Initiation 17-07-07