U.S.Oil & Gas Research Note June 2014

Transcription

1 U.S.Oil & Gas Research Note June 2014 ` U.S. Oil & Gas Plc Year End 30 Sept Revenue (US$000s) Net Income (US$000s) EPS Fully diluted (US$) DPS (US$) 2013a 0.00 (1,799.00) n/a 0.00 PE (x) Yield (%) Price ( ) 41p Market Cap fully diluted ( m): 18.0 Share price graph JUN JUL AUG SEP OCT NOV DEC FEB MAR APR MAY 2014e 0.00 (2,223.11) (0.05) 0.00 n/a e 24, , e 42, , Company Review Investment Summary: A bright prospect beckons U.S. Oil & Gas plc (USOG) is a GXG and OTC listed company with a number of Federal hydrocarbon leases in the Hot Creek Valley of Nevada, USA. USOG, unlike many foreign oil companies that enter the American crude oil and gas industry, has taken a 100 % stake in the Federal leases. USOG has used its considerable technical expertise to appraise and explore its acreage. The Company holds a Net Revenue Interest (NRI) of 87.5 %, in its leases in Nevada. USOG drilled its first well, Eblana #1, in 2012, which produced small amounts of high quality API crude oil. USOG is preparing to embark on a three-well appraisal programme to translate its large prospective resources base into the proven reserves category. If the drilling programme is successful, it is likely that USOG could book P90 reserves of just under 9m barrels (bbls) and P50 reserves of just over 19m bbls. In a matter of months USOG could move away from being a speculative exploration and appraisal play on the stock market to being a crude oil and gas producer. Financials In 2013, the Company reported a net loss of US$1.6m. The Company is expected to report a net loss of US$2.2m in 2014 largely due to costs incurred in preparation for for its forthcoming drilling programme ahead of generating revenues. If the planned drilling programme is successful, the Company can be expected to report a net income of US$16.7m in Funding The Company intends raising further funding to strengthen its balance sheet and finance its forthcoming drilling programme in Nevada. Valuation Part of the Company s prospective oil resources in Nevada has been modelled and risked. The net cash flow figures have been discounted by between 10 % - 25 %, assuming constant and declining crude oil prices. From the model, the Company s assets, on a risked discounted cash flow basis, could be valued at between US$60.0m to US$17.3m on an NPV10, an average of US$38.7m, compared to the current market value of US$30.1m. The risked hypothetical resources implies a market capitalisation 16.5x larger than current and the hypothetical risked reserves per share implies a 24x to 33x larger company than the current one. Share details Ticker Listing USOP (GXG) USOPY (OTC)) GXG/OTC Sector Oil & Gas Producers Shares in issue 41.7m Fully diluted shares 43.1m Price (p) 52 week High Low Balance Sheet Debt/Equity (%) 0.0 NAV (US$m) 38.7 (Net borrowings)/cash 929 (US$000s) Business U.S. Oil & Gas is a GXG and OTC listed company, with assets in Nevada, USA. It holds a NRI of 87.5 % over leases covering 88.1 km², and could be in production within the next six months, creating significant upside value to shareholders. Geography based on future revenues (%) US Ireland UK Other Sales James Dewhurst +44 (0) Alexander David Securities Ltd Analyst Brian McBeth +44 (0) The Oxford Consultancy Group Management (CEO) Brian McDonnell +353 (0) US Oil & Gas Plc web: [1]

2 Investment Summary: A new American Star USOG to start drilling in the last quarter of USOG is a GXG and OTC listed Irish company with an extremely exciting exploration play in the Hot Creek Valley of Nye County, Nevada. USOG owns a number of leases, with a very high prospective resources base. USOG, unlike most foreign companies that enter the mature US oil and gas industry, owns a 100 % Working Interest (WI) (a Net Revenue Interest of 87.5%) over a number of leases that cover 88.1 km². USOG applied its considerable technical expertise in choosing the Federal leases it acquired and hence can be considered as a pure exploration play. Its first well, Eblana #1, drilled by its wholly owned subsidiary, Major Oil as the operator, in 2012 confirmed the existence of high quality crude oil (API ). USOG, after an intensive and rigorous technical assessment, has identified five major potential reservoir structures and it is preparing to drill a 3- well appraisal programme updip from the Eblana #1 well in the last quarter of Valuation: significant exploration upside The main driver in the oil industry is the crude oil price, which is currently just above US$100/bbl for WTI crude. Oil prices have remained at relatively high levels for the last 24 months, mainly because of demand, the decline in OPEC production and political instability in the Middle East. Forrest A Garb, an independent technical adviser, has assigned to USOG proven and probable contingent resources of 8.7m bbls 19.3m bbls. There are also 87m bbls of prospective resources for the Paleozoics, which were not tested in the Eblana #1 well. In the model, it is assumed that the next three wells are successful and hence are placed in long term production as soon as drilling is completed. The Eblana #1 well will probably be used as a water disposal well. The hypothetical production profile gives an initial production rate of 736 barrels of crude oil per day (bpod), peaking at 1,158 bopd in It is clear from these figures that the reserves produced during the life of the field of 2.6m bbls of crude oil equivalent (boe) are far short from the hypothetical contingent resources of 8.7m bbls. The main reason for this is that in order to deplete these reserves, it is estimated that an additional wells will need to be drilled. The model shows the financial impact on USOG with only three wells if the forthcoming drilling programme is successful. The results have been risked by a further 25 % and incorporate discount factors between 10 % - 25 %, as well as constant crude oil prices of US$100/bbl and declining crude oil prices to US$31/bbl. The matrix gives a conservative risked NPV10 of US$60.0m to US$17.3m, an average of US$38.7m, compared to the equivalent current market value of US$30.2m.. Sensitivities: four main challenges The Company faces four main challenges: 1. To convert its prospective contingent hydrocarbon resource base in Nye County, Nevada into proven, probable and possible reserves. 2. To find hydrocarbon reserves in the Eocene-age Sheep Pass formation that USOG was unable to test when it drilled the Eblana #1 well owing to technical problems. 3. To manage efficiently its forthcoming drilling programme. 4. To start crude oil production from its forthcoming 3-well appraisal programme. Financials In 2013, USOG reported a net loss of US$1.6m. It is likely that the Company will also report an estimated net loss of US$2.2m in 2014 because by its year-end of September 30 it will not be receiving any revenues from its hydrocarbon base and will incur relatively high expenditure preparing for its forthcoming drilling programme. In the financial modelling it is assumed that the next three wells drilled (see below) are successful. It is clear that there is no guarantee that this will occur but the Company has undertaken an immense amount of technical work that includes 3-D modelling. Assuming, that the hypothetical production profile given in this Note is achieved then USOG is expected to report revenue from its hydrocarbon production base of US$24.7m in 2015 rising to US$42.3m in 2016, with net income of US$16.7m in 2015 rising to US$23.7m in It also follows from these estimated earnings that the Company s balance sheet will strengthen as hydrocarbon production increases, with closing net cash rising to US$13.6m in the first 12 months of production, increasing to US$40.4m in [2]

3 The road to Nevada On 15 June, 2009 USOG was incorporated in the Republic of Ireland as a public limited company under the name of U.S. Oil and Gas plc to focus on the exploration and production of the hydrocarbon resources in the State of Nevada, USA. USOG s wholly-owned operating subsidiary in the USA is Major Oil International LLC, which was registered and incorporated on 17 July 2008 in Houston, Texas. USOG holds nine Federal leases that cover 88.1 km², equivalent to 21,760 acres. USOG s short term objective is to complete its appraisal programme in its Hot Creek Valley acreage in Nevada. USOG expects that the appraisal programme will confirm that its potentially large contingent resources base will be converted very soon into the category of proven crude oil reserves. USA Nevada Nevada s production of crude oil is small compared with the major US oil states of Texas and California. Crude oil production in Nevada peaked in 1990 at 4m bbls declining to under 500,000 bbls in An interesting aspect of Nevada s petroleum production is that some of the oil is associated with hot water, although at a lower temperature but otherwise much like the geothermal fluids that formed gold and silver deposits. Another curiosity is that some of the oil is trapped in fractured volcanic rocks, although the ultimate source of petroleum is from organic matter in sedimentary rocks. In Eastern Nevada, the important source rock is the Chainman formation, which was deposited in the Mississippian era, approximately 325 million years ago. In the Hot Creek Range, to the west of Hot Creek Valley, the Eleana formation can be found, which is the Chainman s stratigraphic equivalent. Another potential source rock is the Eocene-age Sheep Pass. Thrust belts and associated foreland basins provide a quarter of the world s known oil reserves and are found where the western North American Cordillera coincides with organicrich hydrocarbon source rocks, including the Mississippian Antler foreland basin of western Utah and central Nevada. As with most thrust belts worldwide, some crude oil is trapped in giant thrust structures. Typically, oil seeps occur above the giant structures, except in Nevada where a blanket of Oligocene volcanic rocks and detritus buried and sealed the oil seeps. Some of these concealed Nevada oil seeps, including the most prolific North American onshore flowing oil well found in ten years, are unconformity-related commercial grade oil accumulations. Conventional 2-D and 3-D seismology has not been able to identify oil bearing forms. However, the Antler Foreland basin contains enough organics to generate huge quantities of oil. Geologists believe there are at least 30 geologic structures each containing in excess of 1 billion barrels of oil. Identifying the anticlines becomes a real possibility with state-of-the-art seismology, three dimensional models, well information and high quality surface geologic maps. The use of 2-D and 3-D IPDS promise to revolutionise exploration in this previously difficult area. This is what USOG s highly experienced technical team, led by Karim Akrawi, Exploration Director, has been doing for the past three years. First Oil Well drilled in 1907 The first exploratory well drilled in Nevada was in The well was drilled in Washoe County, near Reno, but did not encounter hydrocarbons in commercial quantities. Several more dry wells were drilled until 1954 when Shell Oil Co. drilled the State s first commercial crude oil well of Eagle Springs #1-35, in the Railroad Valley in Nye County. The Eagle Springs field included 14 wells with an average production of almost 55 barrels of oil per day (bopd) per well by The field was estimated in 1954 to contain 4 million bbls of proven recoverable reserves, of which 3.8m bbls were produced by It took a further 22 years and 145 dry wells before Northwest Exploration Co. drilled in 1976 the second crude oil discovery with its Trap Springs #1 well located only 5 miles west of the Eagle Springs field. Recoverable reserves were estimated at the time of discovery at 10m bbls of which 6.8m bbls were produced by In 1985, there were 27 producing wells in the Trap Springs fields producing an average of 51 bopd per well. Later discoveries in the Railroad Valley include the Bacon, Flat and Grant Springs fields. The latter field at the time of discovery had recoverable reserves of 13m bbls of which 5.3m bbls were recovered by For a time, the Grant Canyon #3 well, producing crude oil from the Tertiary Volcanics in the Railroad Valley, was the most prolific onshore oil well in continental USA, flowing at up to 4,300 bopd. Crude oil production outside the Railroad Valley was established in 1982 when the Amoco Production Co. discovered the Blackburn field in Pine Valley, Eureka County, when it drilled the Amoco Blackburn #3 well, which flowed initially at 345 bopd. Crude oil production averaged around 300 to 450 bopd. In 1986, Marathon Oil Co. drilled the Kate Spring #1 well discovery in the Railroad Valley, less than one mile away from the Eagle Springs field. [3]

4 USOG s Eblana #1 Well. Hot Creek Valley Drilling in Hot Creek Valley [4]

5 USOG s Eblana #1 Well USOG s main asset is located in Nye County, Nevada where it holds nine exploration and development Federal leases over 88.1 km² in the Hot Creek Valley. The acreage is adjacent to the hydrocarbon basin known as the Railroad Valley area of Nevada, both of which are part of the Sevier Thrust of central Nevada and western Utah. The most recent indication of crude oil in Nevada was USOG s Eblana #1 well drilled in the Hot Creek Valley, approximately 35 miles east of the nearest crude oil production in the Railroad Valley. The Eblana #1 well was drilled in 2012 to 8,550 ft and encountered the same Tertiary Volcanic formations present in the producing fields of the Railroad Valley, with gas shows and non-commercial high quality crude oil of between API The Eblana #1 well had oil shows in the welded volcanic tuffs and conglomerates present in the discoveries made in the Railroad Valley but the well did not reach the Palaeozoic-age dolomites, which are also productive. Table 1 shows that the major crude oil discoveries in Nevada have been made at roughly the target depth of the Eblana #1 well but the API gravity at of the crude oil encountered at Eblana#1 was significantly lighter than in most other fields in the Railroad Valley, which is a very positive sign. The quality of the crude oil discovered is so good that it does not require any processing before transportation. Additionally, there were no indications in the crude oil tested of sulphur or carbon monoxide and does not require the removal of wax or asphaltine elements prior to transportation. Table 1: Railroad Valley Reservoir Data. Railroad Valley Field Year Disc. Depth (feet) Bacon Flat ,400 Producing Formation brecciated Devonian carbonate (landslide deposit) Initial Production (bopd) API (degree) Cumulative Production to 2012 (bbls). Hydrocarbon Column (feet) ,039, Eagle Springs ,800 to 6800 Tertiary volcanic: welded tuff; Eocene Sheep Pass; Pennsylvanian Ely limestone ,549, Grant Canyon ,500 brecciated Devonian carbonate (landslide deposit) 1, ,322, Kate Spring ,200 Brecciated Paleozoic (landslide deposit) ,467, Trap Spring ,800 to 5,000 Tertiary volcanic: welded tuff ,142,949 1,700 1,800 Source: Forrest A Garb & Associates, Inc. & [5]

6 The Eblana #1 well did not find any evidence of the Eocene-age Sheep Pass formation owing to drilling problems caused by the formation encountered that prevented open hole logs being run and cores collected. It is understood that USOG perforated many intervals of the Tertiary Volcanics encountered by the Eblana #1 well and flowed each one separately to determine the productivity and content of the reservoir. The flow tests were run on four separate formations, producing around 250 bbls of liquids for three zones with an average crude oil cut of 2 percent. The fourth formation was tested for an extended period producing 250 bbls of liquids with an average oil cut of 3 percent, but at times surging to 22 % and 60 %. Natural gas was found in small quantities of 120 cubic feet of natural gas to one barrel of crude oil. The interpretation of the large amounts of water produced is that the well perforated an oil-water transition zone. Although the Eblana #1 well is considered noncommercial it did establish the presence of high quality crude oil. Crude Oil and Gas Production Profile In the hypothetical crude oil production profile an average production of 199 bopd per well between has been assumed, with a peak production of 386 bopd in It is unlikely that the small amount of natural gas production (120 cubic feet per barrel of crude oil produced) would justify building a pipeline to the nearest processing plant 90 miles away and will probably be re-injected into the reservoir to maintain pressure. However, a hypothetical production profile for the associated natural gas produced with the crude oil has been provided because it is expected that natural gas will be produced if the appraisal drilling proves- up the large reserves referred to above because then the number of wells needed to deplete the reservoir is estimated at between and hence natural gas production could possibly justify building a small gas pipeline. Table 2: Contingent Resources Primary Zones in Eblana #1 Gross Contingent Resources Net Contingent Resources (W.I. 100 %) (N.R.I. (87.5 %) (000s bbls) (000s bbls) Target Best Low Best High Low Estimate High Estimate Horizon Estimate Estimate Estimate Estimate Tertiary OOIP 51, , ,898 45, , ,286 Volcanics Recoverable 9,927 22,007 38,301 8,686 19,256 33,513 Source: Forrest A Garb & Associates, Inc. Estimated Crude Oil & Gas Resources USOG s independent technical consultants used the Petroleum Resources Management System (SPE-PRMS), developed by the Society of Petroleum Engineers/World Petroleum Congresses/American Association of Petroleum Geologists/ Society of Petroleum Evaluation Engineers, to determine the range of contingent resources present on the Company s leases. The SPE-PRMS definition of contingent resources is the volume of hydrocarbon reserves that are potentially recoverable in known accumulations by developing reservoirs but which cannot be considered to be commercially recoverable because of one or more contingencies. One of these contingencies is when the accumulation after a discovery needs further appraisal to justify commercial development. USOG is currently preparing to undertake a three-well appraisal programme updip from the Eblana #1 well to convert part of these contingent resources into proven reserves and to start monetizing its potentially large crude oil reserves. It is understood that a new well design will be used featuring altered casing that will allow drilling into the Palaeozoic zone. The estimated original oil in place (OOIP) and recoverable reserves are given in Table 2 below. It should be noted that these estimated contingent resources only cover 50 % of Parcels and (original 21 km²) of USOG s total leases in the Hot Creek Valley. Additionally, the contingent resources only refer to the Tertiary Volcanics formation because the deeper potential reserves in the Eocene-age Sheep Pass formation are not included in the estimates as they were not tested by the Eblana #1 Risk It should be noted that there is the possibility that the three-well appraisal programme will not lead to a commercial discovery and future development. In addition, there is also the possibility that the target horizons are found to be primarily natural gas bearing or are just a small column of crude oil with a gas cap. The estimate of USOG s crude oil and gas production of the field is given below: Graph 1: USOG: Hypothetical Crude Oil Production, (bopd) bopd Crude Oil Production per day (bopd) Natural Gas Production (mcf/d) Natural Gas Prod (mcf/d) [6]

7 Valuation The main driver in the oil industry is the crude oil price, which is currently around US$100/bbl for WTI crude. Crude Oil prices have remained at relatively high levels for the last 36 months, mainly because of demand driven by the pick-up in economic growth, the decline in OPEC production and political instability in the Middle East. It is likely that crude oil prices may strengthen during the second half of 2014 because of political problems associated with OPEC countries. According to the International Energy Agency (IEA), OPEC needs to boost its current production by 800,000 bopd to a total of 30.7m bopd during the second half of 2014 in order to cover the anticipated increase in world demand. However, such a large increase in crude oil production could be difficult to achieve because members such as Libya, Nigeria, and Venezuela may Table 3: Assumptions used in compiling the Hypothetical Net Present Value of the Contingent Resources in Eblana #1 Area. Item Assumption Working Interest (%) Net Revenue Interest (%) Crude Oil Price WTI (US$) find it difficult to increase production. In the case of Iran, the international sanctions against country will impact on its ability to increase production in the shortterm, especially as its crude oil exports fell by 180,000 bopd in April this year to 1.11m bopd. Moreover, over the past 24 months crude oil production in Iran declined by 20 %, while Algeria s production also fell by 12 % during the same time frame. Moreover, Mexico, which is not part of OPEC, also experienced a 25 % decline in its output since Natural Gas Price (Henry Hub) ($mcf) Contingent Resources (000s boe) ,436 The valuation is a hypothetical one that assumes three producing wells with one water disposal well. The total Royalty (%) contingent resources produced in our hypothetical valuation is 2.6m boe. In order to deplete the estimated Capex (US$/boe) m bbls of contingent resources we would need at Opex (US$/boe) 0.80 least producing wells. The purpose of using a three-well programme in the hypothetical valuation is to indicate the robustness of the assets if the appraisal wells confirm the presence of commercial reserves. The hypothetical production profile for the Eblana #1 contingency resources as detailed above has been used together with the assumptions given in Table 3. In addition, the results for success have been risked in the following manner: for the best estimate (P90) 67.5 %, and for the low estimate (P50) 37.5 %. The net cashflow figures have been discounted by 10 % to 25 %, and an initial constant crude oil price of US$100/bbl and US$4.49 per thousand cubic feet (mcf) of natural gas. Thereafter crude oil prices are modelled to decline to US$34.9/bbl and natural gas prices to US$1.6/mcf. Costs have been escalated by between 2 % 5 % per annum. From the Table 4 given below, it can be seen that the Company, on a discounted cash flow basis, could be valued at between US$60.0m to US$17.3m, an average of US$38.7m, compared to the current market value of US$30.1m. It should be noted that the discounted cash flows are positive with constant and declining hydrocarbon prices. In addition, the net return on investment is between 29.2 % and 25.0 % depending on crude oil assumptions proven and probable reserves. Table 4: Valuation of Nevada Hot Creek Contingent Resources risked by 25 %. Constant Crude Oil Prices: Contingent Resources P90 risked by 25 % US$100/bbl Contingent Resources P50 risked by 25 % Declining Crude Oil Prices: US$100/bbl to US$23.9/bbl Contingent Resources P90 risked by 25 % Contingent Resources P50 risked by 25 % Unrisked Gross Reserve Potential (000s Bbls) 2, , , ,642.5 Assumed Success % Potential Gross Reserves at assumed Success Rate (000s Bbls) 1, , Gross Value of Potential Reserves (US$) 175,084, ,269, ,410, ,894,910.3 Gross Costs (US$) 123,929, ,873, ,968, ,349,999.0 USOG Net Return on Investment (US$) 51,154, ,395, ,441, ,455,088.6 USOG Net Return on Investment ( %) USOG Risked NPV Value (10 % Discount) (US$) 59,991, ,328, ,423, ,568,350.0 USOG Risked NPV Value (15 % Discount) (US$) 51,822, ,790, ,789, ,994,287.5 USOG Risked NPV Value (20 % Discount) (US$) 45,588, ,326, ,115, ,953,050.6 USOG Risked NPV Value (25 % Discount) (US$) 40,711, ,617, ,140, ,300,090.0 [7]

8 Table 5 below suggests that the market is undervaluing the Company based on the hypothetical value of the Company s assets,. The hypothetical value, on a severe risked basis and with various crude oil price assumptions and discount factors of between 10% and 25%, gives an NPV per share range of between US$0.76 per share to US$0.39 per share, compared to the current share price of US$0.69 per share. Table 5: NPV per share - Premium/Discount to Market Capitalisation (fully discounted) at various assumptions Fully diluted Share Capital (m) 43.9 Share price ( ) 0.41 Share price US$( ) 0.69 Market Capitalisation ( m) 18.0 US$ per share Market value m Constant Crude Oil Price Premium/ Discount to Mkt Cap (%) Risked NPV (10 % disc.) Risked NPV (15 % disc.) Risked NPV (20 % disc.) Risked NPV (25 % disc.) Declining Crude Oil Price Risked NPV (10 % disc.) Risked NPV (15 % disc.) Risked NPV (20 % disc.) Risked NPV (25 % disc.) Comparison with peer group Table 6 below compares USOG with a number of crude oil companies listed on the London Stock Exchange s Alternative Investment Market (AIM). The table shows the calculated proven and probable resources per US$100 fully diluted market capitalisation, as well as the number of reserves per share for each of the companies. It can be seen from Table 6 that the risked contingent resources base for USOG is around 60 % of Xxcite Energy, a company with a market capitalisation 10.9x larger than the Company under review. In addition, USOG holds a larger number of hypothetical reserves per share than Amerisur Resources and Ithaca Energy, companies that are 33.4x and 24x respectively larger than the Company under review. The conclusion from this comparison is that once the contingent resources are re-categorised as crude oil reserves, the market will adjust for this resulting in probably a valuation much larger than the NPV suggested by the resource valuations. Company Table 6: Comparison of USOG's Hypothetical Contingent Resources with certain AIM Listed Companies Market Capitalisation (US$m) Fully Diluted shares (m) Reserve base (m boe) Production (boepd) Reserves per $100 market cap (boe) Reserves per share Amerisur Resources 1, , , Xcite Energy Global Energy Development Ithaca Energy , Sterling Energy , USOG* * Hypothetical figures. [8]

9 2013(a) 2014(e) 2015(e) 2016(e) 2017(e) 2018(e) Financials Table 7 shows, a hypothetical breakdown of the profitability of crude oil production from the Eblana #1 well, with estimated pre-tax income at US$70.34/boe, and net income of US$40.74/boe. 25,000,000.0 Graph 3: USOG - Hypothetical Net Income Forecast, (US$) Table 7: Hypothetical Profitability of the Eblana #1 Area US$/bbl Contingent Resources of boe Crude Oil Price 98.2 Royalty Operating Expenses 0.80 Transport costs 1.30 DDA 6.40 Interest & Capital 0.50 repayment G&A 6.56 Pre-Tax Tax 29.6 Net Income ,000, ,000, ,000, ,000, In the financial model, it is assumed that the 3-well appraisal programme is successful and that crude oil and natural gas production will start at the end of October this year. On this assumption, USOG will have crude oil and natural gas production for its 2015 fiscal year of 335 days. It is expected that USOG will generate earnings before interest, taxes, depreciation and amortization (EBITDA) in 2015 of US$20m rising to US$38m in 2016, as can be seen from Graph 2. Graph 2: USOG - EBITDA, (US$) -5,000,000.0 The Company s balance sheet will also strengthen considerably, reaching net cash balances of US$40.4m in 2016, as illustrated in Graph 4 below. Graph 4: USOG - Hypothetical Net Cash Balances, (US$) 40,000, ,000, ,000,000.0 Year 45,000, ,000, ,000, ,000, ,000,000.0 US$ 20,000, ,000, ,000, ,000, Net Cash Balances (US$) USOG is expected to report net losses of just over US$2m in By its year-end of September 30, it will not have started producing crude oil. However, with the start of production later this year, it is expected that the Company will report net profits of US$16.8m in 2015, rising to US$23.7m in 2016, as can be seen from Graph 3. [9]

10 The hypothetical detailed estimates of USOG s Profit & Loss, Balance Sheet and Cash flow for are given below in Tables Table 8: USOG - Profit & Loss Forecast, (a) 2014(e) 2015(e) 2016(e) 2017(e) 2018(e) PROFIT & LOSS ACCOUNT US$ US$ US$ US$ US$ US$ Turnover ,656, ,285, ,942, ,551,257.7 Selling, Opex & Transp Costs , ,290, ,132, ,760.6 Administrative expenses 1,600, ,000, ,850, ,775, ,162, ,786,875.0 Production royalty ,082, ,285, ,492, ,818,907.2 Operating Income -1,600, ,000, ,035, ,219, ,648, ,768,622.2 Interest receivable 1, , , ,022, ,614, ,306,745.0 Interest payable 0.0-2, , , , ,419.0 DDA ,608, ,758, ,344, ,992,897.9 Profit/(loss) Loss on Ordinary Activities -1,599, ,993, ,154, ,756, ,381, ,537,050.2 Taxation -199, , ,406, ,088, ,087, ,943,481.7 Net Income/(Net Loss) -1,799, ,223, ,748, ,667, ,294, ,593,568.6 Opening Accumulated surplus (deficit) brought forward Closing Accumulated surplus (deficit) brought forward -2,344, ,943, ,166, ,582, ,085, ,208, ,943, ,166, ,582, ,085, ,208, ,385,092.2 EPS 41,398,337 shares (US$) EPS p fully diluted 43,853,337 shares (US$) [10]

11 Table 9: USOG - Balance Sheet Forecast, BALANCE SHEET 2013(a) 2014(e) 2015(e) 2016(e) 2017(e) 2018(e) US$ US$ US$ US$ US$ US$ Fixed Assets 5,089, ,344, ,861, ,142, ,686, ,996,117.4 Tangible assets 0 0 8,250, ,250, ,500, ,500,000.0 Intangible assets 5,089, ,344, ,611, ,892, ,186, ,496,117.4 Current Assets Stock , , , ,000.0 Debtors 187, , , , , ,948.2 Cash at bank 985, ,685, ,619, ,440, ,299, ,134,900.2 Total 1,173, ,919, ,162, ,306, ,256, ,206,848.4 Total Current Assets Net Current Assets 6,263, ,263, ,024, ,448, ,943, ,202,965.9 Creditors: Amounts falling due within one year 290, , ,080, ,120, ,120, ,120,000.0 Long term debt Current Liabilities 290, , ,080, ,120, ,120, ,120,000.0 Total Liabilities 290, , ,080, ,120, ,120, ,120,000.0 Net Current Assets 6,263, ,263, ,024, ,448, ,943, ,202,965.9 Total assets less current liabilities 5,973, ,913, ,944, ,328, ,823, ,082,965.9 Capital & Reserves Called up share capital 5, , , , , ,758.0 Share premium ` 9,742, ,067, ,349, ,559, ,428, ,533,157.6 Issue of loan stock ,000, Share based payment reserve 168, Profit & Loss Account -3,943, ,166, ,582, ,756, ,381, ,537,050.2 Shareholders' equity funds 5,973, ,913, ,944, ,328, ,823, ,082,965.8 [11]

12 Table 10: USOG - Cash Flow Forecast, CASH FLOW ACCOUNT 2013(a) 2014(e) 2015(e) 2016(e) 2017(e) 2018(e) US$ US$ US$ US$ US$ US$ Net Cash (outflow)/inflow from operating activities -1,600, ,000, ,035, ,219, ,648, ,768,622.2 Movement in Working Capital Share based payments 168, Movement in trade and other receivables 106, , , , ,125, ,687,500.0 Movement in trade and other payables -65, , , , , ,375.0 Cash used in operations 210, , , , ,068, ,603,125.0 Returns on investments & servicing of finance Interest received 1, , ,229, ,893, ,514, ,220,859.0 Interest paid 0.0-2, , , , ,419.0 Net Cash Flow for returns on investments & servicing of finance 1, , ,183, ,620, ,051, ,766,278.0 Capital Expenditure & Financial Investment Capital Expenditure & Financial Investment -1,142, ,599, ,600, , , ,000.0 Cash outflow before use of liquid resources and financing FINANCING Proceeds of share issue 168, ,000, Redemption of Loan Advance of debenture loans Advance of other loans Net cash inflow for financing 168, ,000, Increase/(decrease) in cash 985, ,406, ,619, ,440, ,299, ,134,900.2 Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in year 985, ,406, ,619, ,440, ,299, ,134,900.2 Net cash (inflow) from debentures Net cash (inflow) from other loans Movement in (debt) in year resulting from cash flows 985, ,406, ,619, ,440, ,299, ,134,900.2 Movement in funds/ (debt) in year 4,503, ,392, ,026, ,060, ,739, ,433,951.6 Opening net funds/(debt) 3,517, , ,406, ,619, ,440, ,299,051.4 Closing net funds/(debt) 985, ,406, ,619, ,440, ,299, ,134,900.2 Cash per share fully diluted Reconciliation of Movement in Shareholders' Funds Profit (Loss) for the year -1,799, ,223, ,748, ,667, ,294, ,593,568.6 New shares issued ,000, Premium on new share capital subscribed 9,742, Opening shareholders' funds 0.0 7,943, ,720, ,468, ,136, ,430,641.5 Closing shareholders' funds 7,943, ,720, ,468, ,136, ,430, ,024,210.1 [12]

13 Funding The Company expects to raise additional working capital mainly to finance the drilling of three appraisal wells updip from the Eblana #1 well in Nye County, Nevada. Prior to drilling the wells, technical work will be carried out, including limited-area surveys local to the poposed targets in order to choose the best drilling locations. The first of the wells is due to spud in Q4 2014, with completion of the drilling programme slated to finish several months later. Dividend Policy The Company will consider its dividend policy once a positive and stable cashflow position has been attained. Directors Shareholding and Major Shareholders The Directors hold 10.4 % of the Company s equity with a further 41.4 % of the equity held by nominees. The holdings held by the Directors and major shareholders of the Company are given below: Table 11: Directors Shareholding Direct and indirect & Significant Shareholders Director's Issued Shares % of Issued Shares Brian McDonnell 3,913, Peter Whelan 564, Karim Akrawi 100, Total 4,577, Significant Shareholders JIM Nominees Ltd 5,680, Daveycrest Nominees Ltd 4,995, Aurum Nominees Ltd 2,350, Directors Brian McDonnell, Chief Executive Officer and Chairman, graduated from Dublin City University with a business studies degree setting up and successfully running his own training company after working in manufacturing for a number of years. Brian has extensive experience of bringing large and complex projects to fruition, and has been CEO of USOG since it was founded in Paul O'Callaghan, Chief Financial Officer, is a chartered accountant who was Company Secretary of James Crean, and more recently Financial Director and CEO of FBD Holdings plc. Peter Whelan, Audit/Remuneration/Contracts, has held various roles in the enforcement of criminal, public health, environmental and sea fisheries law. Mr. Whelan has had responsibility for developing, managing, reviewing and renegotiation of service contracts across the public service. Karim Akrawi, Exploration Director, is currently General Director for Geodynamics Worldwide, the company responsible for developing and implementing the Infrasonic Passive Differential Spectroscopy (IPDS or Passive Seismic) survey technology. Karim has presented and published numerous papers and reports on the application of IPDS and has made a significant contribution to the development of the technology as used today in oil exploration around the world. Karim has vast experience of the oil and gas industry worldwide, including the United States. He was Senior Exploration Geologist with Abu Dhabi Company (ADCO) for Onshore Oil Operations from 1980 to 2008, an enterprise currently producing 1.8 million barrels of oil per day. He has also been involved in major discoveries and field development in the United Arab Emirates (UAE) and elsewhere in the Gulf exploration area. His expertise includes formulating well proposals, planning and supervising drilling operations, carrying out geological and feasibility studies, preparing conceptual field development plans, evaluating the economics of well development, estimating probable oil and gas reserves, and risk analysis. SVS (Nominees) Ltd 1,765, Pershing Nominees Ltd 1,699, Goodbody Stockbrokers Nominees 1,677, Total 18,169, [13]

14 SWOT Analysis Strengths Experienced technical management team, with extensive knowledge of the oil industry. Holds 100 % W.I. leases over 88.1 km² in Nevada with prospective contingent reserves of 8.7m bbls 19.9m bbls First well had oil shows of high quality crude oil with an API , higher that most other fields in the State, with no H2S & no wax contents. Potentially large hydrocarbon reserves. Strong oil market. Opportunities High oil prices expected to remain for some time leading to continued interest in the Oils sector. Large contingent resources of hydrocarbon resources converted to proven reserves. Further hydrocarbon opportunities in the Company s Nevada leases. Weaknesses No crude oil reserves found in the forthcoming 3-well appraisal drilling programme. Hence prospective contingent resources not converted to proven reserves. Listed on GXG & OTC, neither of which are established markets for institutional investors. However, the Company has a large private investor base which can provide high levels of liquidity Threats Decline in oil prices. First appraisal well is unsuccessful in finding commercial reserves of hydrocarbons. Finding natural gas reserves rather than crude oil. Growth metrics % Profitability metrics % Balance sheet metrics Company details EPS CAGR e ROCE 2015e Gearing 2015e 0 % EBITDA CAGR e 7.31 Avg ROCE 05-09e 80.2 Sales CAGR e 7.4 ROE 2015e Interest cover 2015e Debtor days 2008e Address: USOG Oil & Gas plc Alexandria House, The Sweepstakes Ballsbridge,Dublin 4 Ireland Gross margin 2015e Operating margin 2015e Gross mgm/op margin Forthcoming announcements/catalysts Date Creditor days 2008e 0 Phone +353 ( 0) website Management team Annual Report 20/03/14 Chief Executive Officer & Chairman: Brian McDonnell Interim results 23/05/14 Chief Financial Officer: Paul O Callagham AGM 30/0614 Exploration Director: Karim Akrawi Full Results Audit, Remuneration & Contracts Director: Peter Whelan [14]

15 DISCLAIMER Apart from the responsibilities and liabilities, if any, which may be imposed on Alexander David Securities Limited ( ADS ) by the Financial Services and Markets Act 2000, ADS accept no responsibility whatsoever for the contents of this Document, including its accuracy, completeness or verification or for any other statement made or purported to be made by it, or on behalf, in connection with the Company. ADS accordingly disclaim all any liability (whether arising in tort, delict, under contract or otherwise) (save as referred to above), which it might otherwise have in respect of this document or such statement. RELIANCE ON COMPANY INFORMATION The information in this document which does not purport to be comprehensive, has been provided by US Oil & Gas PLC ( USOG or the Company ).This is being delivered for information purposes only to assist the recipient in assessing whether or not they wish to invest in or provide financing for the Company. 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ADS, the directors and employees thereof and/or any connected persons may have or previously held a material interest in the company which is the subject matter of this communication and may from time-to-time add to or dispose of such interest. This report has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the report. It is based on publicly available information and sources that we believe to be reliable but we have not independently verified such information and we do not guarantee that it is accurate and complete. [15]

16 RISK WARNING NOTICE All investments are speculative and prices may change quickly and go down as well as up. Past performance will not necessarily be repeated and is no guarantee of future success. There is an extra risk of losing money when shares are bought in some smaller companies including penny shares. There can be a big difference between the buying price and the selling price of these shares and if they have to be sold immediately, you may get back much less than you paid for them or in some circumstances, it may be difficult to sell at any price. It may also be difficult for you to obtain reliable information about the value of this investment or the extent of the risks to which it is exposed. Where a company has chosen to borrow money (gearing) as part of its business strategy its share price may become more volatile and subject to sudden and large falls. This investment may not be suitable for all investors, and clients should carefully consider their own personal financial circumstances before dealing in the stock market, particularly those on fixed incomes or approaching retirement age. If you have any doubts you should seek advice from your investment adviser or your broker at this firm. The success of the Company is highly dependent on the development of the Hot Creek acreage and in raising suffient funds for this development. At the date of this document the Company has no producing well. Oil exploration and drilling is a high risk venture. GXG GXG Main Quote MTF is an SME dedicated exchange run by GXG Markets A/S providing full public market quote and trading facility. It is a market designed primarily for emerging or smaller companies. The rules of this market are less demanding than those of the official List of the London Stock Exchange and therefore companies quoted on GXG Main Quote carry a greater risk than a company with a full listing. For further information on ADS s policies and procedures, including our conflicts of interest policy, please visit our website at [16]