OGIB BULLETIN #60 UPDATED MARCH 5, 2013 COMPANY ANALYSIS DEETHREE EXPLORATION (DTX-TSX; DTHRF-PINK)

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1 OGIB BULLETIN #60 UPDATED MARCH 5, 2013 COMPANY ANALYSIS DEETHREE EXPLORATION (DTX-TSX; DTHRF-PINK) DeeThree was one of, if not THE top performer in the Canadian junior oil sector in 2012, going from $ $7.25. But what will it do in 2013? Fundamentals continue to look very strong, but there are both stock market and economic headwinds. Production will grow to 9000 boepd (barrels of oil equivalent per day) by YE 2013 though the market thought they would do more. Both the Alberta Bakken and Belly River plays continue to give results above market expectations. The Alberta Bakken type curve has almost doubled, with some wells coming in 3x over early play estimates. The Belly River just had a well hit almost 1200 boepd, with 40% oil. And both plays are barely more than 10% drilled so there is years of production growth to go. For all the negative talk on low Canadian oil prices, here in early March light oil producers are realizing over $80/barrel. The market is looking for management to keep costs down their $150 million capex to produce $100 million cash flow was a slight negative to the market. Fundamentally, it is still the best organic growth story I see in western Canada for 2013.

2 QUICK FACTS Trading Symbol: DTX-TSX; DTHRF-OTCQX Share Price: $6.30 Current Production: 6,500 boe/d (>75% oil & NGLs) Shares Outstanding: 75.5 million Fully Diluted: 76.9 million Market Cap: $475.6 million Net DEBT: $20 million (my guess as of today) Enterprise value: $495.6 million Price per flowing barrel $76,246 POSITIVES My perfect scenario junior with THREE large land positions (Belly River, Alberta Bakken and Sunburst) each with discovery wells Belly River is now a low risk, highly repeatable play with low declines Low cost wells with high profitability at Belly River and Sunburst plays Alberta Bakken is now a proven play for investors Enough debt capacity and cash flow it may get them to be self sustaining--not need to finance LEVERAGE small share float and big production increases (and big land positions) can mean big increase in share price upon success NEGATIVES High underlying royalty rate to Encana on Alberta Bakken and Sunburst plays Market expectations could be too high now Everybody s favourite story in 2012 who is left to own it?

3 PROPERTIES THE ALBERTA BAKKEN First off, the Alberta Bakken is a marketing name, not a geological name. There are four potentially productive zones in the "Alberta Bakken" The Banff, the Exshaw, the Big Valley and the Stettler. The Exshaw is considered the cousin of the Bakken formation in eastern Montana/North Dakota/Saskatchewan, and the Big Valley is the cousin of the Three Forks formation in the original Bakken. It s confusing. The Exshaw and Big Valley are expected to be the productive zones. It helps the play a lot with investor recognition that it's called The Alberta Bakken. It s found at metres deep where DeeThree is.

4 Deethree purchased their southern Alberta lands from Encana in 2008 for $19 million, which included 550 boe/d (all gas) and all existing infrastructure. That ended up being a very cheap entry point - for the raw Alberta Bakken land value alone, which of course they didn t know existed at the time, was roughly $100 per acre ($19 million/ Bakken acres) The Alberta Bakken will likely never be as big, in terms of # of acres, as the original Bakken because the Rocky Mountains cut it off to the west, and to the east there is what's called a "thief zone", a highly porous formation that draws oil away from the field. And almost all the land is staked now; certainly no large or even medium sized packages are left so if anybody wants part of this play, they'll have to buy their way in via one of the juniors in the play. When this play started, everyone thought it was the regular kind of tight oil formation that the market has become used to called a sheet sand. The productive oil and gas formations are laid down in simple sedimentary layers, and they stretch out for miles in all directions, just like a sheet lying on a bed. And lots of companies, big and small, blew their budget trying different ways to crack the geological code of the Alberta Bakken. DeeThree was able to attract two joint venture partners, who each drilled two wells and walked in late 2011 after hitting either nothing or getting mediocre results. DeeThree thought their partners had drilled it incorrectly they saw it as a meandering channel sand, an old river bed. On the first well they operated themselves, just four months later (January 2012), their very young geologist (28 at the time) made a major oil pool discovery that now has an estimated 480 million barrels of original oil in place. This was a game changer for the company. By the end of 2012, DeeThree had 17 net Alberta Bakken wells drilled on its acreage with 100% success. Flow rates went from bopd of 30 API oil and confirmed the pool covered 40 sections of land. The stock was on its way.

5 The test rates prove the company figured out the optimal way to frack the tight sandstone, and how to get the most oil possible out of the wells. The original type curve called for an initial production rate of 300 bopd with a 65% first year decline rate. However, DTX currently has 8 wells with IP30 rates of 424 bopd, well above the type curve. Their big oil pool discovery Ferguson covers about 40 net sections providing them with a total inventory of 150 locations for now. However, Ferguson s boundaries to the east and west have not been found yet. DTX expects the total size of the pool to be in the section range. This bumps the Alberta Bakken drilling inventory to locations. DTX currently produces about 3,700 boed from the Alberta Bakken with plans to drill a total of 20 wells in BRAZEAU/BELLY RIVER OIL PLAY 97% WI on 50 sections, 100% on another 34 sections (with 15% royalty) All the real investor attention on DeeThree has been on the Alberta Bakken and it is a great play. But their Belly River play is the one that I think will surprise the market (positively) in DeeThree bought the Belly River play in Feb 2011, the top of the post crash market for juniors, with 1830 boe/d of production and 32,000 acres (or 50 sections) of undeveloped land for $125 million in west central Alberta. But they also bought it at the height of the hype around the Alberta Bakken, when their stock was $5.

6 The market thought it was expensive at the time, but it has turned out to be a genius move. Production was 740 bopd of oil and condensate (also called pentane, or C5 and it is worth as much or more than oil) and gas was roughly 1100 boe/d. The Belly River has 6-7 separate sands, each metres thick, over a 200 metre gross payzone. It has a very large OOIP rate Original Oil in Place. Their total Belly River acreage is estimated to hold 600 million barrels of OOIP and 60 million barrels of recoverable oil using a 10% recovery factor.

7 And decline rates are low. Management says one of their Belly River wells that IP'd (Initial Production) at 585 boepd about 6 months ago is still producing over 250 boepd. In 2012, DTX drilled a total of 8 (7.5 net) wells proving commercial productivity from 4 different zones. Last December, the company reported results for its 3 most recently drilled wells in the Upper Belly River sands. The wells exceeded expectations testing at an average rate of 585, 237 and 590 boed respectively with oil and liquids ranging from 72% to 97%. But the best Belly River result to date came in its 2013 guidance release. The well drilled into a new zone, the fifth to be targeted, tested at ~1,190 boed (45% oil & liquids) over 44 hours. Decline rates have obviously yet to be determined. Investors should remember that DeeThree s 2013 EXIT guidance of 9000 boepd is based on Belly River wells producing at 300 bopd. This is where management could surprise the market in So far, DeeThree has successfully tested five sands intervals in the Belly River formation showing they have a lot of running room on its acreage. Results were so good, DeeThree farmed in on some adjacent acreage from a major. In exchange of 3 HZ wells and a 15% non-convertible overriding royalty on the lands, DTX will earn 100% interest in up to 34 sections of land offsetting its existing acreage. The royalty essentially means the seller gets 15% of net revenues generated from farm-in wells without having to pay for the operating costs. The farm-in brings the company s acreage to sections with up to 400 locations to be drilled at Belly River. In 2013, DTX plans to drill a total of 11 Belly River wells and have the remaining intervals in the Belly River formation tested by the end of Q1/13. They own the infrastructure in the area which can support 4000 bopd. Belly River production currently accounts for 2,800 boepd with netbacks running at $65 on $85 oil.

8 On average the wells are 75% oil, 15-20% gas and 5% condensate however this changes by area and zone slightly. They're running 55 barrels per million cubic feet of gas (expressed as 55 bbl/mmcf/d) and their basket price for this NGL basket (Natural Gas Liquids) is over $100 per barrel, which means they must have a lot of condensate. Condensate is more valuable than oil right now in Canada, trading $8 above WTI vs. $3-$8 below for light Canadian oil. At 250 bopd, management was hoping that this will give them an EUR (Estimated Ultimate Recovery) of 130, ,000 barrels per well of very light 42 API oil. At 600 boepd, they think the wells could see 225,000 barrels EUR. While they haven't talked about secondary recovery, the formation is porous enough that a waterflood should be very efficient here and increase that EUR. That s actually VERY important in M&A considerations. SUNBURST The Sunburst trend is a series of conventional pools tending north-south located east of the Alberta Bakken that have been produced from for decades. (Unconventional=tight oil--the new shale plays and tight sandstone/mudstone/silt; conventional=pools of oil as have been produced for 150 years.) The company has 100 net sections with at least 50 locations, and the entire land base has 3D seismic. The lone Sunburst well reported by DeeThree was 309 boe/d with 72% oil. While not as prolific as the Belly River, the Sunburst play is shallower and therefore cheaper to drill about $1.2 million. You won t see maps of Sunburst as I think they re still buying land. Management is modeling a $55 netback, or profit per barrel, and Finding and Development Costs (F&D it's a line in their financial statements that is used to determine how much it cost to get that oil out of the ground) of only $12 so that's a Recycle Ratio of 4.5, before the underlying royalty to Encana. After that, it works out to roughly 3.0 still VERY good. I'm happy

9 with anything over 2 and the worldwide average is about 1.7 according to BP Annual Review. Recycle Ratio=profit per barrel over the costs of producing it. FINANCES & VALUATION The company held an estimated $50 million in debt at the end of 2012, but then raised $30 million in February DTX expects exit 2013 with $100 million debt, giving it a debt to cash flow ratio of 1:1. That s based on budgeting an average realized price of $80 per barrel of oil Canadian oil prices have averaged above $88 per barrel so far this year. Netbacks are improving as the percentage of oil increases. They re up to $33 per barrel in Q3 12, 72% higher than Q3 11, as their oil & liquids weighting improved from 35% to 68%. For Q1 2013, I expect netbacks to be over $40 per barrel now that they are cresting through 6,500 bopd with most of that extra 2000 bopd being oil and natural gas liquids. The stock now trades at roughly $77,000 per flowing barrel based on current production of 6,500 boepd. DTX clearly enjoys a premium given the quick growth exhibited so far. According to Canadian brokerage Altacorp Capital, the average junior producer in their coverage universe is trading at a $48,000 flowing barrel. By YE 13, DeeThree will be producing 9,000 bopd at 81% oil & liquids according to guidance. That s a 50% increase in Year over Year exit production. I will use the same valuation at $77,000 per flowing barrel, which IMO is deserved, for 2013 s exit production to identify the capital gains potential here: 9,000 x 77,000=$693 million + $100 million debt = $793 million Enterprise Value (market cap + debt or cash).

10 Divide that by 75.5 million shares=$10.50 per share for a 66% upside from here at $6.30. Management is looking at rail options for their crude that in the near term could mean an extra $2-$4/barrel, and later in 2013 as much as $8/bbl. STOCK CHART

11 WHAT THE ANALYSTS SAY FIRM TARGET PRICE Casimir Capital Ltd. $11.00 Cormark Securities Inc. $ 9.00 Dundee Securities Ltd. $ 8.50 Macquarie Capital Markets Canada Ltd. $ 8.50 CONCLUSION DeeThree was THE story in the Canadian junior oilpatch in Fundamentals continue to impress me; I still think it s the best organic growth story in By fine tuning drilling and completion techniques, management figured out how to get over 1,000 bopd IP rates out of their Belly River play and Alberta Bakken plays. The economics on both plays are great taking corporate netbacks over $40 per barrel at current oil prices. The Belly River has low decline rates, and it has lots of running room with drill locations plus waterflooding. A successful well into the 6 th Belly River interval will add more locations to the inventory. DTX is the only junior producer to have conquered the Alberta Bakken. They have one of the biggest land packages in the play and the best wells so far. The oil pool boundaries could extend to 60 net sections pushing their drilling inventory to over 200 locations. Potential catalysts include: 1) The Ferguson oil pool expansion in the Alberta Bakken, both east and west 2) New AB pools being discovered later this year 3) A sixth productive sand at Belly River

12 4) Improving Belly River results I own 20,000 shares of DeeThree at March