Corporate# Nautical Petroleum

17 July 2007 NPE

Data
Initiation of Coverage
Price (p) 7.7
Market cap (£m) 85
Nautical is focused primarily on heavy oil in the UK North Sea, a
Index AIM
resource that to date has been only sparsely exploited although
Sector Oil & Gas
Next News September – Finals
it is acknowledged to be available in abundance relative to light
oil. With oil prices set to remain high, the economics of heavy oil
Description are now very favourable. Unlike conventional North Sea oil and
Nautical Petroleum is an oil development and
gas, the resource risk is relatively low and although on a unit
exploration company with a primary focus on basis, the NPV of heavy oil is less than light oil, the returns on
heavy oil accumulations in the UK North Sea. exploration for heavy oil are currently very attractive. The
shares are at a discount relative to our 13p/share Core NAV
Performance
estimate, which itself has potential to grow strongly on
Source: KBC Peel Hunt
successful drilling over the next 12 to18 months.
18

16

14

12
Nautical has six discovered fields on it books with combined net unrisked
10

8 contingent resources of close to 120 million barrels, valued at less than 83p per
6
barrel. It has, in addition, a material portfolio of exploration prospects with the
4

2 potential to double the current resource base. A drilling programme starting late in
0
2004 2005 2006 2007
2007 and running through 2008 will test some of the material prospects in the
Nautical Petroleum Rel to All Share
portfolio.

Analyst 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
Tony Alves +44 (0) 20 7418 8813
arrangement, Nautical will drill at least four exploration and appraisal wells on its
tony.alves@kbcpeelhunt.com
licences, starting in 3Q 2007, while SK will be paying a two-for-one promote on
# KBC Peel Hunt Ltd is committed to providing objective
these wells. It would be reasonable to expect this not to be the last farm-in deal
investment research, however KBC Peel Hunt Ltd is broker between Nautical and SK, which is likely to become a strategic partner for Nautical
and/or nominated adviser to, or is retained by, this company
and is therefore unlikely to be perceived as objective. This for further ventures in the North Sea.
research should therefore be considered as non-objective
research.

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
Stats concluded, the incoming operator should clearly be aligned with Nautical and the
Source: Company (historic), KBC Peel Hunt (estimates) third partner ENI to progress development on a timely basis.
2006A 2007E 2008E
Sales (£m) 0.0 0.0 0.0 Nautical’s present exploration and appraisal commitments are covered by farm-
PBT (£m) -7.2 -1.7 -1.7 outs and the current cash position. In the longer term, debt finance is expected to
DACF (£m) 0.0 0.0 0.0 play a significant role in funding the developments. As the issues keeping the share
EPS (p) -0.7 -0.2 -0.2 price down are progressively addressed, the stock should start to reflect the strong
DPS (p) 0.0 0.0 0.0 fundamentals. Core NAV is 13.1p/share, Total NAV is 18.8p/share.
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.
KBC Peel Hunt
Nautical Petroleum
17 July 2007
What is North Sea heavy oil?
Why has heavy oil been neglected?
Origins of Nautical
Management
120mmbbl discovered resources
2
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.
KBC Peel Hunt 3
Nautical Petroleum
17 July 2007

Exploration up to 200mmbbl unrisked 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
KBC Peel Hunt 4
Nautical Petroleum
17 July 2007

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.
KBC Peel Hunt 5
Nautical Petroleum
17 July 2007

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

30.0

Kraken
25.0
Mariner

20.0

15.0

10.0

5.0

0.0
2010 2011 2012 2013 2014 2015 2016 2017 2018

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:
KBC Peel Hunt 6
Nautical Petroleum
17 July 2007

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.
KBC Peel Hunt 7
Nautical Petroleum
17 July 2007

Table 2: NAV Summary

Source: KBC Peel Hunt

Nautical Net Risked NPV 10% p per

Interest Resources (£m) share
(mmbbls)

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

Material development ready to go
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.
KBC Peel Hunt
Nautical Petroleum
17 July 2007
Robust stand-alone economics
Material additional resource
Potential for Mariner to become a
significant production hub.
Second and third development hubs in
prospect
8
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.
KBC Peel Hunt 9
Nautical Petroleum
17 July 2007

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.
KBC Peel Hunt 10
Nautical Petroleum
17 July 2007

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

Gross Net
Nautical Gross Recoverable Recoverable Capital Plateau
Working STOOIP Reserves Reserves Risk Expenditure Net Production
Discovered Resources Interest (mmbbl) (mmbbl) (mmbbl) Factor ($m) (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.

Net
Unrisked Gross Unrisked Recoverable Net Risked Exploration
Interest (post STOIIP Reserves Reserves Risk Reserves Expenditure
Prospects farm-out) (mmbbl) (mmbbl) (mmbbl) Factor (mmbbl) 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
KBC Peel Hunt 11
Nautical Petroleum
17 July 2007

Other assets
Numerous additional exploration plays Nautical currently has six further exploration and appraisal projects, four in the UK
to be tested. 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.

Onshore development prospect: an
opportunity for early revenue.
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.
KBC Peel Hunt 12
Nautical Petroleum
17 July 2007

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 Net Risk Net Risked NPV p per

Interest Recoverable Factor Resources 10% share
Reserves (mmbbls) (£m)
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

KBC Peel Hunt 13
Nautical Petroleum
17 July 2007

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.

Nautical is on the largest discount to Figure 2: Peer group segmented NAV relative to share price
Core NAV of the sector. Source: KBC Peel Hunt

300%

250%

200%

150%

100%

50%

0%
Dragon O il

Enc ore O il
Im perial Energy

N autic al

C oas tal
Prem ier

Ithac a Energy
J KX
C airn

D ana

O ilex c o

Salam ander

T ullow O il

G ranby
Burren

Soc o

Sterling
Antrim
Venture

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

Oil price sensitivity – but the shares

are now at the level of the $40 Brent Figure 3: Peer group Core NAV relative to share price
Source: KBC Peel Hunt
based NPV.
250%

200%

150%

100%

50%

0%
Imperial Energy

JKX

First Calgary
Premier
Cairn

Dana

Dragon

Oilexco

Nautical

Coastal
Salamander
Burren

Soco

Sterling
Tullow Oil

Venture

Afren

$40 NAV $55 NAV $70 NAV

KBC Peel Hunt 14
Nautical Petroleum
17 July 2007

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)

Year end 30 June (£m) 2006A 2007F 2008F 2009F 2010F 2011F 2012F
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)
KBC Peel Hunt 15
Nautical Petroleum
17 July 2007

Table 7: Cash Flow

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

Year end 30 June (£m) 2006A 2007F 2008F 2009F 2010F 2011F 2012F
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 16
Nautical Petroleum
17 July 2007

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

has received compensation has acted as a

from this company for the sponsor/broker/NOMAD/financial has other
Company in KBCPH KBCPH in Company makes a market in is broker to this provision of investment banking advisor for an offer of securities significant
Company Analyst (>3%) (>3%) this company company services from this company conflicts

Nautical – – – X X – – –
Petroleum

Recommendation history (last 12 months)

Company Date Rec

Nautical This note is initiation of coverage

Petroleum

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