EQUITY RESEARCH Energy Oil & Gas. Petrel Energy Ltd (PRL.ASX) Big oil aspirations. 12 June 2013

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1 Jun 12 Jul 12 Sep 12 Oct 12 Nov 12 Jan 13 Feb 13 Apr 13 May 13 EQUITY RESEARCH Energy Oil & Gas 12 June 2013 Petrel Energy Ltd (PRL.ASX) Big oil aspirations Event: We initiate on Petrel Energy Ltd (PRL.ASX) with a SPEC BUY recommendation and a price target of $0.16/sh Investment Highlights: Big company aspirations through a balanced portfolio. Focused on the development of a diversified portfolio of unconventional and conventional energy assets balanced by risk, scale and geographic region. The company s portfolio comprises four projects located in Uruguay, Canada, Spain and the USA. First mover Uruguay, company making asset. Initial 25% in two large scale concessions in the Norte Basin (3.5m acres), targeting both conventional and unconventional oil targets. Subject to a successful three stage work program PRL s interest will increase to 60% for a total of $14m. Ready market exists with Uruguay importing 40,000 bopd into the la Teja refinery at Montevideo and potential export markets include neighbouring Argentina and Brazil. Big Oil moves on Uruguay. Uruguay provides a rare transformational opportunity for a small cap explorer to confirm the potential of a new onshore petroleum system of materiality in size and likely attract interest from BP, BG, Tullow, Petrobas and Total who are committing to significant offshore exploration programs. Funding in place for 12mth work program. Core hole drilling program scheduled for late June will target a Devonian-age shale source rock identified in previous core holes and surveys highlighting the potential for an overlooked rift basin. Preliminary analysis of the shale rocks highlights similar characteristics to the prolific unconventional oil fields in the US, including Eagle Ford and Bakken. Subject to confirmation of commercial reservoir characteristics, seismic will follow late CY13 to delineate a prospective resource early CY14. Cardium production asset provides low risk monetisation option. Acquisition of 40% interest in 5,120 gross acres in the Lochend area of the greater Cardium play includes a completed horizontal well delivering first production and cashflow. While the project provides substantial scope to develop low risk production and reserves, the corporate strategy is clearly aimed at monetising the asset through either a trade sale to fund the ongoing Uruguay program or borrow against future reserves to develop production cash flows. Proven management with skin in the game. The Board and Management team includes a leadership group with extensive experience in asset identification, corporate structuring, exploration, development and monetisation of both conventional and large-scale unconventional petroleum projects. Importantly, board and management represent ~28% of the share register. Catalysts for CY13 include: Core hole program at Uruguay commences June with interpretation of results Q3CY13; Seismic survey in Uruguay Q4CY13 and prospective resource Q1CY14. Farm-out to drill Spanish asset Q4CY13; and Ongoing production flow rates for Cardium. Rating SPEC Buy Previous n/a Price Target $0.16 Previous n/a Capital Structure Share price $0.09 Shares on issue (m) Options on issue (m) 8.9 Fully diluted shares on issue (m) Market Cap ($m) 36.1 Fully diluted market cap ($m 38.0 Cash ($m) 8.5 EV (US$m) 27.6 Fully diluted EV ($m) 29.5 Board/Management Stephen Mitchell David Casey Russell Langusch Alexander Sundich Dr. David Hobday Shareholding structure David Casey 8.6% Stephen Mitchell 6.8% Alexander Sundich 5.4% Cameron Richard Pty Ltd 6.5% Top % Catalysts Drilling of 2 core holes Interpretation and analysis of core hole Farm-out Spainish asset Follow up seismic Prospective Resource Share Price Share Price ($) Analyst Haris Khaliqi Executive Chairman Managing Director Executive Director Non Executive Director Non Executive Director Q2 CY13 Q3 CY13 Q4 CY13 Q4 CY13 H1 CY14 Volume ('000) 35,000 30,000 25,000 20,000 15,000 10,000 5, haris.khaliqi@fostock.com.au Recommendation: We initiate on PRL with a SPEC BUY recommendation and a price target of $0.16/sh. Disclosure: Foster Stockbroking has been engaged by Petrel Energy Ltd for the provision of equity capital market services, for which it receives fees. As part of the engagement, Foster Stockbroking provides research coverage. Full disclosures are listed at the end of this report.

2 PRL is focused on the development of a diversified portfolio of conventional and unconventional energy assets balanced by risk, scale and geographic region. COMPANY OVERVIEW BIG COMPANY ASPIRATIONS THROUGH A BALANCED PORTFOLIO Petrel Energy Ltd (PRL) is focused on the development of a diversified portfolio of unconventional and conventional energy assets balanced by risk, scale and geographic region. The company s portfolio comprises four projects located in Uruguay, Canada, Spain and the USA. Figure 1: PRL portfolio of project Location Concession Acreage Interest Partner Uruguay - Norte Basin Piedra Sola and Salto 14,000sq km (3.5 million acres) 25% Schuepbach Energy International concessions LLC (SEI) Spain Tesorillo and Ruedalabola 82,700 ha (204,000 acres) 21% Schuepbach Energy International LLC (SEI) Canada - Cardium Cochrane/Springbank 5,120 (gross), 2,048 (net) 40% Bernum Petroleum USA - Fort Worth Basin Erath County 8,210 (gross acres), 3,710 (net acres) 25% Cumming. Co. Inc. Source: FSB Research, PRL Importantly for an Australian based junior, PRL has established partnerships with a number of credible technical advisors in the regions it operates to ensure the identification, acquisition, permitting, exploration and development of its portfolio can continue efficiently move forward. Figure 2: Location of Asset Portfolio In late 2012, PRL entered into a potential company making deal to acquire an initial 25% interest in a major onshore unconventional shale oil project in Uruguay covering 14,000 sq kms In late 2012, PRL entered into a potential company making deal to acquire an initial 25% interest in a major onshore unconventional shale oil project in Uruguay covering 14,000 sq kms and a 21% interest in two conventional gas-prospective licenses in Spain. Subject to a successful three stage work program in Uruguay PRL s interest will increase to 60% and 51% for Uruguay and Spain respectively for a total additional investment of $11.5m. 12/06/2013 Level 21, 25 Bligh Street, Sydney

3 The Board and Management team includes a leadership group with extensive experience in asset identification, corporate structuring, exploration and development of both conventional and large unconventional petroleum projects. Success over the next 12-24mths from Uruguay s staged work program will be transformational for a company of PRL s size given we believe it will have confirmed the potential of a new onshore petroleum system of materiality in size. This could likely attract the interest of one or more of the majors currently drilling offshore Uruguay, including: BP; BG Group; Petrobras; Tullow and Total. More recently PRL completed a $10.6 million capital raising to bolster its cash reserves and diversify the risk profile of the portfolio through a ground floor acquisition of 40% interest in 5,120 gross acres in the Lochend Cardium, west of Calgary. We view management s strategy to pursue the low risk production potential via the Cardium project as a sound decision given it will grow production, reserves and cashflow in the short term as well as deliver a project that can be monetised. It can fund the company making potential Uruguay project which will be the long-term focus and value driver for shareholders. The Board and Management team includes a leadership group with extensive experience in asset identification, corporate structuring, exploration and development of both conventional and large unconventional petroleum projects. Key members of the Board include: David Casey (Managing Director): formerly the MD of Eastern Star Gas when acquired by Santos (ASX.STO) in a transaction valued at +$1 billion after joining the company with a market cap of sub-$50m. Mr Casey s shareholding in PRL currently stands at 8.6% post the recent capital raising. Stephen Mitchell (Chairman): ex-molopo Energy (ASX.MPO) MD who was integral to the identification and acquisition of MPO s North American unconventional portfolio and in the process took it to an ASX 200 company. Mr Mitchell s shareholding in PRL currently stands at 6.8% post the recent capital raising. Alex Sundich (Non-executive): Alex is a former investment banker and corporate finance executive and has served on the boards of a number of junior ASX companies, including as a Non-Executive Director of Eastern Star Gas. Mr Sundich s shareholding in PRL currently stands at 5.4% post the recent capital raising. We view the substantial shareholding by the Board as an important foundation and provides alignment with all shareholders when executing on its strategy to build a major diversified energy company. Share price performance of PRL has delivered an impressive 100% return inside the last 12mths driven by the appointment of the board and management team and the acquisition of the Uruguay and Canada projects. We view the stock can double again over the next 12mths on the basis of confirmation of the presence of new and large prospective petroleum system in Uruguay and steady production and reserves growth in Canada. 12/06/2013 Level 21, 25 Bligh Street, Sydney

4 FIRST MOVER ONSHORE URUGUAY, POTENTIAL COMPANY MAKING ASSET Piedra Sola and Salto Concession (PRL 25%, option to earn 60%) The Uruguay project represents a potential company making project for PRL with management identifying and amassing a significant foothold in a region that is now attracting the interest of the oil and gas majors. The Uruguay project represents a potential company making project for PRL with management securing a significant foothold in a region that is now attracting the interest of the oil and gas majors. In October 2012 PRL entered into an agreement with Schuepbach Energy International LLC ( SEI ), a US private oil and gas company, to progressively acquire up to 60% in SEI which holds 100% of the Piedra Sola and Salto concession areas in the Norte Basin, Uruguay and 85% of two gas-prospective licenses in Spain. PRL is targeting conventional and unconventional oil in the Cordobes Shale. While largely underexplored in Uruguay, the Norte Basin is the same producing basin system which extends into neighbouring Brazil, and also productive in Bolivia and Argentina. Consideration for the transaction is $14m via 3-staged payments ($2.5m already paid) and completion of work programs to progressively earn up to 60% of SEI over 18 months. Importantly for shareholders, the staged investment allows PRL the opportunity to assess the results of each stage, with further investment predicated on success. Details of the staged payments and work programs are outlined in figure 3 below. Importantly, PRL will gain effective control of SEI at stage 2 with 51% of SEI. Figure 3: Payment terms to SEI URUGUAY, BUSINESS FRIENDLY, ATTRACTING THE MAJORS Given the limited universe of companies with exposure to Uruguay, it is worthwhile highlighting a few salient points demonstrating the merits of investing in Uruguay. Rated 20 th out of 150 countries analysed in the Transparency International corruption perceptions index in This places it broadly in line with United Kingdom and United States. Uruguay is a politically stable democracy. Government actively encouraging foreign investment, providing favourable fiscal terms for the exploration and development of hydrocarbons. Refer to Appendix 1 for Uruguay fiscal terms. ANCAP is the National Oil Company ( NOC ) of Uruguay. Consumes 40,000 bbl/d currently being imported into La Teja refinery in Montevideo. 12/06/2013 Level 21, 25 Bligh Street, Sydney

5 Attractive fiscal terms governed by Production Sharing Contracts (refer Appendix 1 for details on PSC terms). Increasing international attention is turning to Uruguay with a recent successful government offshore licensing round attracting companies such as BP, BG, Tullow and Total committing to significant offshore exploration programs. It is not only the offshore but also the unconventional potential of onshore Uruguay s Norte Basin, which is attracting the interest of the majors. French O&G giant Total and Argentina s newly nationalised YPF have recently acquired extensive licenses to the North of PRL s concessions. Figure 4: Big oil companies commit to Uruguay (onshore) Figure 5: Big oil companies commit to Uruguay (offshore) UNCONVENTIONAL POTENTIAL OF THE NORTE BASIN The Uruguay project consists of two large scale concessions (Piedra Sola and Salto) covering 14,000sq km (3.5 million acres), located in the Norte Basin, Uruguay, ~450km North of the capital Montevideo. The concessions are held under separate production sharing contracts by SEI. The combined size of the concessions is considerable in size covering ~8% of Uruguay s land area. The concession areas are amenable to multiple cost effective infrastructure solutions to bring the oil to market. Distance from the southern border of the Piedra Sola concession to the La Teja refinery is ~200 miles which can be accessed by truck, rail or pipeline. 12/06/2013 Level 21, 25 Bligh Street, Sydney

6 Figure 6: Uruguay concessions The Norte Basin forms part of the same oil-producing Devonian basin system which extends into neighbouring Brazil and is also productive in Bolivia and Argentina, The Devonian formation is interpreted to be the principal petroleum source rock in the Norte Basin and possible reservoir for shale gas and shale oil accumulations. Reports by US Geological Survey ( USGS ) estimate the Devonian Cordobes formation, in Uruguay's Norte basin, could hold recoverable reserves of 508mm bbl of oil. (Refer to Appendix 2 for an overview on the Norte basin geology). No modern exploration has taken place onshore with only 2D seismic (1,600 km), gravimetric (24,600 km2) and magnetometric surveys performed in the Norte Basin. Between the 1950s and 1980s ten exploratory drills were made (16,900 m in total). Although all were declared dry wells, some levels with interesting source rock potential were encountered. PRL is targeting unconventional reservoirs and if exploration proves to be successful the rewards could be substantial for PRL shareholders. Well results from water wells and core holes drilled in and around the Piedra Sola concession area confirm a Devonian source rock. Early exploration results are highly encouraging with oil encountered in both the sands (conventional target) and shale (unconventional target) from the first core hole drilled by SEI. What makes PRL s project particularly attractive is the preliminary analysis of the shale rocks highlight similar characteristics to the prolific unconventional oil fields in the US. Characteristics of the Cordobes shale include; - Thickness ranges up to 160m; - Including as much as 60 m of organic-rich shale; and 12/06/2013 Level 21, 25 Bligh Street, Sydney

7 - Total Organic Carbon ( TOC ) concentration ranges from 0.7 to 3.6 weight percent. Recently 4 Magnetotelluric lines ( MT ) were acquired and interpreted by PRL/SEI in Q2CY13. The MT survey is a cost effective approach in imaging the subsurface over a large area, providing basin delineation and guidance for the location of the proposed core holes. Results of the survey highlight the existence of a northwest trending rift basin identifying thick Devonian shale targets that will be the focus of the upcoming core hole program. The use of MT as a precursor to drilling coreholes has been particular clever and successful in this instance due to the density contrast of the surface basalt relative to the underlying sedimentary sequence and basement. Figure 7: Location of the MT lines 4 Magnetotelluric lines ( ML ) acquired and interpreted in Q2CY13, highlighting the existence of a northwest trending rift basin and identified thick Devonian shale targets will be the focus of the upcoming core hole program. DEVONIAN AGED SOURCE ANALOGUE TO PROLIFIC OIL FIELDS The Devonian aged rocks serve both as source and reservoir in some of the most prolific oil regions in the world including the Bakken, Marcellus and Saudi Arabia. The scale and potential of the project is exemplified by Figure 8 and 9, which overlay the aerial extent of the Eagle Ford and Bakken plays relative to PRL s concessions. These are arguably North America s most prolific unconventional basins that have seen production collectively increase from zero to ~700,000 bbl/pd in the space of 10 years. PRL believes the Norte Basin has many similarities to both the Eagle Ford and the Bakken including: Same Devonian-age shales; Similar geological environments; Both have condensed organic rich sections; and Kerogen are mainly amorphous and hydrogen rich more oil and liquids prone. 12/06/2013 Level 21, 25 Bligh Street, Sydney

8 Figure 8: Eagle ford analogue Figure 9: Bakken analogue CORE HOLE PROGRAM TO COMMENCE IMMINENTLY The immediate work program comprises 2 core holes to determine basic reservoir parameters, resource extent, and potential resource size. PRL is targeting both conventional and unconventional targets as part of its exploration program. Mapping of the MT data has enabled the identification of 2 core hole locations with estimated depths of 700m and 1,300m respectively. Core hole locations are outline in figure 10 below. Earlier core hole exploration results undertaken by SEI were highly encouraging with oil found in sands and shale. Analysis of existing data indicates a mature, Devonian source rock, proven hydrocarbon generation, high-quality reservoir sands and a basin with large areal extent. All requisite permits are in place and drilling is expected to commence by late June. The wells are expected to take ~30 days to drill with the interpretation and analysis expected by Q3CY13. Costs for the MT and core hole program have already been paid for under Stage 1 of the farm-in. It is expected that the combination of MT data and the results from 2 core holes should provide sufficient data for the company to volumetrically assess the potential of the basin and potentially publish internal prospective resource estimates. Subject to favourable interpretation of the core hole program, a seismic program will commence in Q4CY13 to guide follow up exploration drilling and enable an independently certified Prospective Resource to be defined. Estimated cost for the seismic program is $US5.5m and will result in PRL interest in the concession increasing to 51% 12/06/2013 Level 21, 25 Bligh Street, Sydney

9 Figure 10: Location of core holes Figure 11: Magnetotelluric cross section Summary and indicative timing of the key catalysts for Uruguay include: Drilling and interpretation of 2 core holes (Q3CY13) Payment of US$5.5m to move to 51% (Q4CY13-Q1CY14) Follow-on Seismic (Q4CY13-Q1CY14) Independently certified Prospective Resource (H1CY14) 12/06/2013 Level 21, 25 Bligh Street, Sydney

10 LOCHEND CARDIUM PROVIDES NEAR-TERM LOW RISK MONETISATION OPTIONS TO FUND URUGUAY WORK PROGRAM Lochend, Cardium (PRL 40%) The Cardium transaction provides immediate cashflow from the 1st horizontal well which is in production and the low-risk potential to grow production, reserves and cashflow. In March 2013 PRL entered into an agreement with a private equity backed Canadian group, Bernum Petroleum, to acquire a 40% interest in a portfolio of up to 5,120 gross acres in the Lochend area of the greater Cardium play, located immediately west of Calgary. The Cardium play is recognised as one of Canada s most successful, emerging unconventional oil plays. Notable players proximal to the acreage include North American listed Lightstream Resources formerly PetroBakken Energy (Toronto, US$1.6B market cap); Pengrowth Energy (NYSE, US$2.7B mkt cap) and TriOil Resources (Toronto, $US170m market cap). Consideration for the transaction comprised C$3.3m, of which C$2.8m is for a 40% interest in up to 8 gross sections including a completed well on production and a further C$0.5m associated with subsequent well costs. We view the transaction favourable given the ground floor no promote entry, immediate cashflow from the 1 st horizontal well which is in production and the low-risk potential to grow production, reserves and cashflow. The results of PRL s first well were encouraging and broadly in-line with the play average of ~150 boep/d, we see scope for further improvements as drilling and completion methodologies are optimised. While the project provides substantial scope to develop and grow, the corporate strategy is clearly aimed at monetising the asset through either a trade sale or borrowing against future reserves within a 12 month period. Decision will also be made in the coming months for the option to drill further wells. Based on our analysis there is clearly an appetite for trade sales in the Cardium with the average transaction metric of implying a value of US$18 per boe of 2P reserves. Figure 11 below highlights the recent transactions. Figure 12: Recent Lochend Cardium Transactions Value Production 2P Reserves 2P reserves Production Date Acquirer Seller (US$m) Gross acerage $/acre (boe/d) (mmboe) ($/boe) ($/boepd) 11/12/2012 Bonterra Energy Spartan Oil ,563 10, ,750 12/11/2012 Bellatrix Exploration Marquee Energy 21 4,644 4, ,339 6/11/2012 Pengrowth Energy Equal Energy 62 5,970 10, ,095 13/09/2012 TORC oil and Gas Vero Energy ,256 2, ,818 4/08/2012 Anglo Canadian Compton Petroleum 17 6,560 2, ,778 28/02/2012 Whitecap resources Midway Energy ,149 5, ,852 1/04/2011 Penn West Spartan Exploration ,490 8, ,880 Cardium project provides near term monetisation options to fund the Uruguay program without the need to dilute the capital structure. Source: FSB Research 5/03/2011 Hyerion Exploration Private 22 1,189 18, ,857 Average Conceivably, the JV could achieve a sales metric of $18/boe of 2P reserves, which based on the company s goal of potentially booking up to 3mm boe 2P reserves could generate gross proceeds of US$54m or US$21.6m net to PRL s 40% interest. Management reserve targets are 2mm boe and upto 3mm boe with acquisition of additional acreage. While drilling a few additional wells will be required to build reserves, should management achieve their stated goal it would prove to be a very astute way to generate value and fund the potential company making project in Uruguay and minimise further dilution to the capital structure. 12/06/2013 Level 21, 25 Bligh Street, Sydney

11 boe per month P E T R E L E N E R G Y L T D CARDIUM UNCONVENTIONAL PROVIDES ATTRACTIVE ECONOMICS The Cardium formation covers much of western Alberta and is estimated to host around 10 billion barrels (Bbbls) oil-in-place of which 1.8 Bbbls have been produced to date. It hosts Canada s largest oil field, the giant Pembina oil field discovered in 1953 which was originally exploited by vertical wells. Cardium type well demonstrate attractive economics which result in pretax tax NPV of $1.6m based on our conceptual modelling. Like most of the oil fields in North America the application of horizontal drilling and hydraulic fracturing has brought the field roaring back to life. Development of the previous un-economic tight sands has seen production increase in the play from 40,000 boep/d to 100,000 boepd/d within 2 years. It is a tight oil play targeting the lower siltstone and sandstone, with depth ranges between 1,300-2,400m and oil cuts in the range of 60-80%. For a detailed overview of the geology please refer to Appendix-3. Figure 13: Lochend, Cardium location Typical of unconventional plays there is a high degree of variability in well performance and results. Our analysis indicates 30 day IP s in the range of 100-1,000 boe/d, four well per section down spacing will likely be the norm (160 acre spacing), achieving recoverable reserves of 100,000 boe to 275,000 boe per well. The Cardium is primarily an oil play (oil cuts ~80%) with only minimal associated gas and very little water produced and has relatively low capex in the range of A$3.5-4m per well, due to the shallow reservoir depth. The oil produced is a light, sweet 38 API crude which typically sells at a US$3.5 discount to WTI. Our Cardium well economic assumptions are outlined below, with the estimated average well type yielding a pre-tax NPV ofa $1.6m and BT IRR of 28.2%. Figure 14: Cardium well economics Figure 15: Cardium Type curve Single Well assumptions and outputs Description Metric Value Capex $m 3.8 Opex $/boe day IP boe boe day IP condensate bbl EUR boe Kboe Condensate % % 80% Net back +/- to WTI $ 3.0 BT NPV $m 1.6 BT NPV/boe $/boe 8.8 IRR % 28.2% Source: FSB Research 200 Cardium type curve Source: FSB Research 12/06/2013 Level 21, 25 Bligh Street, Sydney

12 SPAINISH ASSETS COULD BE THE SLEEPER IN THE PORTFOLIO P E T R E L E N E R G Y L T D Tesorillo and Ruedalabola concession, Spain (PRL 21%, option to increase to 51% ) Spanish project has attractive characteristics including location proximal to existing pipeline infrastructure, interpreted net pay of 540m in a historic well, gas flows to surface and exposure to a high priced European gas market, it could be the sleeper asset in PRL s portfolio. PRL management believe the project could be large enough in its own right and have recently commenced a farm out process seeking a JV partner to fund the work program. As part of the Uruguay farm-in deal, PRL have also acquired an initial 21% interest in a prospective gas project in the Betic Alps in Spain covering an area of 94,000 acres. We believe the market is currently ascribing no value to the Spanish assets given little was communicated at the time of the deal being announced. However, given the project has some very attractive characteristics including location proximal to existing pipeline infrastructure, interpreted net gas pay of 540m in a historic well that has previously flowed gas to surface and exposure to the high priced European gas market, we view any farm-out deal as a free option to the current market price and to PRL s portfolio. The project is comprised of two contiguous license areas (Tesorillo and Ruedalabola) totalling ~94,000 acres in the Cadiz province in Southern Spain. The license has a large seismically defined structure, with multi TCF potential, with one well (Almarchal-1) drilled in 1956 which encountered a gross reservoir interval of ~1188m with interpreted net pay of 540m. 25 successful Drill Stem Tests ( DST ) were conducted, 2 flowing gas to surface and the remainder recovering gas-cut mud with little to no water. Refer to appendix 4 for detailed results of the historic well. The results were very encouraging, especially when taking into consideration that the well took over 12 months to drill, encountering numerous operational problems impacting the gas flow rates. No further appraisal drilling has been carried out and while the well didn t flow at commercial rates, it does provide evidence of a working hydrocarbon system and good quality reservoir. Subject to commercial reserves being defined the economics would be extremely attractive, given the proximity to the Maghreb pipeline, which runs through the permit and is 3km from the well. Simplicity in which to sell gas into the European market (currently fetches ~$13/Mcf) should make the license an opportunistic farm-in opportunity for an explorer focused on the European region. SEI have recently commenced a farm out process seeking a JV partner to fund an initial appraisal work program. The objective is to twin the existing well using modern drilling techniques to ensure best quality flow rates and assess the potential of the permit. Figure 16: Betic Alps Spain 12/06/2013 Level 21, 25 Bligh Street, Sydney

13 BARNETT SHALE, TEXAS, USA (PRL 25-73%) PRL continue to review the forward program at Erath to resolve current production issues. We do not foresee any major development funding for this program during PRL have a 25-73% interest in 8,210 acres (3,710 net) in a JV with an established local company, The Cumming Co. Inc., who are operators of the project. The Erath county project is located to the west of Fort Worth in the Barnett Shale. PRL has a 25% stake in this initial acreage package, but has signed an Area of Mutual Interest agreement covering a further 10,000 acres in which Petrel can take a 73% interest. The Barnett shale is the oldest and best known of the US shale gas plays having seen more than 15,000 wells drilled since about Starting from a core area of three Texas counties where the shale is about 400 (120m) thick and lying at a depth of around 8,000 (2,400m), activity has gradually spread to cover 25 counties. In Erath County the Barnett shale is only about 120 (37m) thick but located no deeper than 4,000 (1,220m) leading to much cheaper well costs. Moreover, Erath gas has a higher liquids and energy content than the core Barnett counties which tend to produce primarily dry gas. Three gas development wells and a saltwater disposal well were drilled in late 2011 and progressed to completion during the first half of 2012, allowing modest gas sales into the nearby Enbridge wet sales gas pipeline. Despite these wells having the necessary gas in place, reservoir thickness and quality for a commercial shale play and early signs of encouragement following some initial teething issues, the wells have not produced consistently or at levels in line with initial operator expectations. Remedial work has successful been completed on the GW Stewart #1, which resulted in a material improvement and further improvements are expected to be achieved on the remaining two wells. PRL continue to review the forward program at Erath to resolve current production issues. We do not foresee any major development funding for this program during Figure 17: Fort Worth basin 12/06/2013 Level 21, 25 Bligh Street, Sydney

14 CATALYSTS AND WORK PROGRAM TIMETABLE PRL has a number of catalysts over the next 18 months to market busy with news flow and events to re-rate the market valuation. PRL has a number of catalysts over the next 18 months to market busy with news flow and events to re-rate the market valuation. The work program at Uruguay will provide the next significant news flow item with drilling of two core holes expected to commence in late June with analysis and results of the holes to be completed by Q3CY13. Subject to favourable results a seismic survey is expected to commence in Q4CY13 followed by a maiden resource estimate expected H1CY14. We expect a second well could be drilled at the Lochend Cardium project by the end of CY13, though no firm commitment to timing has been announced by the company. Results of wells drilled by proximal operators should provide a stream of ongoing news flow and with TriOil undertaking a market evaluation process for its Cardium acreage which, if successful, would provide an updated valuation proxy for PRL s acreage. Also anticipated is the farm-out of the Spanish project later in CY13, with a free-carried well drilled early in CY14, subject to satisfactory farm out terms being agreed. Figure 18: Catalysts and indicative work program timeline Activity Norte Basin - Core hole program Norte Basin - Core hole results Norte Basin - Seismic Survey Norte Basin - Prospective Resource Lochend, Cardium - 2nd well Spain - Farm-out Spain - First well Regional drilling - Cardium CY13 CY14 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: FSB Research 12/06/2013 Level 21, 25 Bligh Street, Sydney

15 CAPITAL STRUCTURE AND FUNDING The fully diluted capital structure for PRL is 418m shares and consists of 396.2m quoted ordinary shares. There are 13m unlisted full paid employee shares, issued under Employee Incentive Plan and 8.9m unlisted options with an exercise price of 4.6c expiring on 31 December In April/May 2013, PRL successfully completed a placement and SPP raising $10.65m (before costs) at an issue price of $0.085/sh, an impressive effort for a junior oiler in challenging equity markets. An additional $1.05m was recently received from the divestment of the company s NSW CSG assets. We estimate the company s current cash position is $8.5m and note the June corehole program already paid for. The next major capital spend will be the US$5.5m stage-2 payment to fund a seismic program and move to 51% of Uruguay. No immediate expenditure is due on the Cardium project until a decision is made with the JV operator to undertake additional production drilling. Should Uruguay s core hole and follow-on seismic program deliver results in line with expectations we believe there will be various funding options which do not involve dilutionary equity raisings to fund the future work program. Figure 19: Capital structure Security Type Quantity (m) Ordinary Fully Paid Ord Fully paid employee 13.0 Opt exp 31-Dec-2013 ex 4.6x 8.9 Fully diluted Source: FSB Research 12/06/2013 Level 21, 25 Bligh Street, Sydney

16 WE VALUE PRL AT $63.6M, $0.16/SH With a suite of assets of across production, exploration and operating regions we have applied a blend of methodologies across the portfolio to derive an equity valuation of $63.6m for PRL, or $0.16/sh. Figure 20: PRL Valuation Production - Asset Value ($m) Value $/sh Lochend - Production Exploration - Asset Gross acreage WI Net acreage $/acre Value ($m) Value $/sh Uruguay - Norte Basin 3,500,000 25% 875,000 n/a Spain 232,278 21% 48,778 n/a Lochend Cardium 5,120 40% 2,048 3, Erath County - USA 8,210 25% 2,053 1, Enterprise value Net Cash Corporate Equity valuation Source: FSB Research Our assumptions include: Production: Cardium #1 well is PRL s only producing asset. Applying the well economics outlined in page 11 we derive a NPV 10 $5m, providing a valuation of $2.0m net to PRL (40%). Uruguay Acreage: $45m or $0.11/sh, is attributed to the exploration potential in the Norte Basin, given the material upside in a success case. Our valuation is predicated on a successful core hole program and interpretation of results confirming the presence of the Cordobes shale across the acreage and confirmation of commercial reservoir characteristics. We will revisit our valuation once PRL commit to stage 2 (US$5.5m) and move to 51% of the Uruguay project where we expect results at hand will support an estimate for a prospective resource in place. Spain Acreage: We have attributed a nominal and subjective value of $5m for exploration upside. Cardium Acreage: We attribute $6.1m in value based on our estimates on a nominal $/acre multiple of $3,000 to PRL 2,048 net acres. Erath County: We attribute a valuation of $2.5m based on our estimates on a nominal $/acre multiple of $1,200 to PRL s 2,052 net acres. RECOMMENDATION We initiate on PRL with a SPEC BUY recommendation and a price target of $0.16/sh. 12/06/2013 Level 21, 25 Bligh Street, Sydney

17 BOARD AND KEY MANAGEMENT PERSONNEL Mr. Stephen Mitchell (Executive Chairman) Mr Mitchell has a Masters Degree in International Economics and Foreign Policy from John Hopkins University in Washington DC. After completing his studies he spent much of the next 10 years as a natural resources specialist at investment banks and advisory firms in New York, London, Hamburg, Sydney and Melbourne. From he was Managing Director of Molopo Energy Ltd, an ASX-listed oil and gas company holding assets in Australia, Canada, USA, China, India and South Africa. Under his stewardship, Molopo expanded its market capitalisation from $1 million to at times in excess of $400 million. Mr. David Casey (Managing Director) Mr Casey was Executive Director and Chief Operating Officer at Molopo Energy from 2001 to 2005 where he worked closely with Stephen Mitchell in developing a very successful unconventional energy company with assets in Australia, the US, Canada, China and South Africa. His most recent executive role was Managing Director of Eastern Star Gas Limited, recently the subject of a $924m takeover by Santos Limited. David Casey graduated with an Honours degree in Geology from the University of Sydney in a founder of Multiphase Technologies Pty Ltd., a provider of coal seam testing services. He has 20 years experience in the management and evaluation of all aspects of CSG exploration and appraisal, from initial reservoir characterisation and fairway identification through to drilling, testing and production operations. Mr. Russell Langusch (Executive Director) During the period 2004 to early 2008 he was the founding Managing Director of Elixir Petroleum, a dual ASX and AIM-listed E&P company based in London with assets in the UK North Sea, Gulf of Mexico and West Africa. He is a member of the Society of Petroleum Engineers and the Australasian Institute of Mining & Metallurgy. Mr Langusch holds the degrees of Bachelor of Engineering (Electrical First Class Honours) and Master of Engineering Science from the University of Queensland, Brisbane. Mr. Alexander Sundich (Non-Executive Director) Mr Sundich has over 20 years' experience in the financial services industry and is a Fellow of the Financial Services Institute of Australia, a Member of the Institute of Chartered Accountants in Australia and a Member of the Australian Institute of Company Directors. He is a Non Executive Director of Eastern Star Gas Limited and Executive Director of Harvest Capital Partners, an investment firm that he co-founded in Mr Sundich has extensive financial services experience having worked in funds management industry and investment banking with some of the most reputable firms including Goldman Sachs and Credit Suisse First Boston. he is also a Non-Executive Director of Ellex Medical Lasers Limited, an ASX listed manufacturer of medical equipment. Dr. David Hobday (Non-Executive Director) Mr Hobday holds a PhD in Geology from Louisiana State University and worked at the Texas Bureau of Economic Geology before spending time with Sydney Oil Company, Bridge Oil and serving on the boards of several listed Australian and overseas companies. He has gained experience in international oil and gas exploration in Argentina, Russia, Turkmenistan, Azerbaijan, China, India, Namibia, Angola and the Congo Basin. He was the recipient of the Wallace Pratt Memorial Award from the American Association of Petroleum Geologists for significant contributions to petroleum geology. Mr Hobday has also worked in corporate finance and funds management. 12/06/2013 Level 21, 25 Bligh Street, Sydney

18 INVESTMENT RISKS Exploration Exploration and production of oil and natural gas requires high levels of capital expenditure and entails particular economic risks. It is subject to natural hazards and other uncertainties including those relating to the physical characteristics of oil or natural gas fields. Exploratory activity involves numerous risks including the risk of dry holes or failure to find commercial quantities of hydrocarbons. Funding Oil and gas exploration is an expensive business and in the case of PRL we believe funding is in place to support its CY13 work forward work program. Funding for any further acquisitions or a follow up drill program on success would most likely be sourced from the equity markets or a strategic partner in our view given the early stage nature of the asset and as such is dependent upon general equity market conditions. Management have highlighted that monetisation of the Cardium project in some form could provide funding for follow up exploration and drilling activities in Uruguay. Commodity Prices Despite the long term supply/dynamics for oil and gas appearing robust any impact to the commodity prices would impact negatively on PRL ability to secure a farm in partner. Commodity prices are influenced by numerous external factors such as supply/demand economics, interest rates, global consumption expectations and speculative investors. Sovereign PRL operates in 4 jurisdictions which we deem stable and low risk for exploration of oil and gas. 12/06/2013 Level 21, 25 Bligh Street, Sydney

19 APPENDIX 1: URUGUAY FISCAL TERMS Uruguay s oil and gas industry is governed by Production sharing Contracts ( PSC ). In a PSC the mineral resource remains the property of the state. As such, the PSC agreement lays down the terms under which the barrels produced from a development project will be allocated between the resource holder and contractor i.e. the contractor s entitlement to the resource produced. Amongst others, these terms will typically indicate how the oil produced will be allocated to cover the capital and operating costs of the project (so called cost oil ) and in what proportions the remaining profit oil will be allocated between contractor and state. The key terms of the PSA with SEI include: Uruguay has no royalties, production bonuses, surface rentals or provincial taxes; PRL keeps 60-80% of Net Profit Oil ANCAP has the right to backin for 50% on heads-up basis; and ANCAP has right to purchase hydrocarbons for domestic market at international prices. Given the country imports 40,000 bo/pd, attractive fiscal terms have been provided to attract foreign investment. Uruguay s fiscal terms are amongst the top quarter globally, with respect of contractor share. Figure 21: Fiscal Scheme In Uruguay Figure 22: Comparison of Fiscal terms 12/06/2013 Level 21, 25 Bligh Street, Sydney

20 APPENDIX 2: NORTE BASIN GEOLOGY OVERVIEW The Paraná Basin is a large intracratonic basin which extends over km 2 in several South American countries. In Uruguay, it is known as the Norte Basin, and crops out in an area of more than 90,000 km2. The Early Devonian to Late Cretaceous sedimentary fill has a maximum drilled thickness of 2,500 m. Early Cretaceous basic dykes and sills of the Cuaró Fm. cut units of all but the later secuence, being in the Brazilian portion of the Paraná Basin an essential component of nonconvential pretroleum systems, contributing to the maturity of the organic matter, the migration and trapping of the generated hydrocarbons The Devonian Cordobes Formation is interpreted to be the principal petroleum source rock in the Norte Basin and possible reservoir for shale gas and shale oil accumulations. Key attributes of the Cordobes formation include Thickness of the Cordobes ranges up to 160 metres (m); including as much as 60 m of organic-rich shale; and Total organic carbon concentration ranges from 0.7 to 3.6 weight percent. Figure 23: Norte Basin, Uruguay Source: ANCAP 12/06/2013 Level 21, 25 Bligh Street, Sydney

21 APPENDIX 3: CARDIUM GEOLOGY OVERVIEW The Cardium is a Late Cretaceous age formation comprising of a wedge of clastic sediments (primarily sandstone) laid down ~88 million years ago. The formation thins from a total gross thickness of ~150 m in the foothills (on the west side) to ~50 m in the central Alberta plains until it disappears into the large mudstone formations that encase it. The environment that the formation was laid down in varies from shallow marine shelf, shoreface complexes, and tidal environments (i.e. shallow water) to estuarine and fluvial coastal plains (i.e. river mouths). As a result of these diverse conditions, the Cardium is quite complicated and the rock character varies from mudstone and siltstone to sandstone and small intervals of conglomerate. The source for the oil and gas is thought to be the underlying shale members that neighbour the Cardium within the Cretaceous Colorado group, outlined in figure 23 below. Broadly speaking the play is broken up in two sedimentary sequences defined as Cardium A Cardium B. The Cardium A and Cardium B are separated by a shale/mudstone interval. In general, the Cardium A is a separate silty sandstone sequence that lies above the Cardium B and tends to be more continuous and had been the focus of extensive vertical drilling. It is the lower tight silty sandstones of the Cardium A that are best targeted with horizontal multi-fracs, as the hydrocarbon storage potential of these layers is high, while the permeability is lower. Cardium A is present through PRL acreage and is the focus of their exploration and development program. In terms of a hydrocarbon system, trapping in the Cardium is primarily stratigraphic in nature. This allows for the collection of vast pools, such as those at Pembina, as well as blanketing layers with resource style rock more amenable to horizontal development. The play is characterised by low water cuts and high oil saturation with the associated gas being the main source of reservoir drive energy. Figure 24: Cardium, Canada Figure 25: Cardium stratigraphy Source: Alberta Geological Survey 12/06/2013 Level 21, 25 Bligh Street, Sydney

22 APPENDIX 4: ALMARCHAL -1 HISTORIC WELL RESULTS P E T R E L E N E R G Y L T D Almarchal-1 was drilled 1956/57 by Valdebro, 12 months to drill, many hole problems due to swelling shales, 4 sidetracks, gas flared from leaky surface casing for most of well duration. Almarchal-1 well location selected on basis of field geology and gravimetry, no seismic. Three proximal wells, outside of the Tesorillo concession, were drilled by the operator Valdebro with good gas shows, though could not be tested due to mechanical issues. Minimal seismic is available across the block with one poor quality 2D regional line completed in 1978 and 4 lines covering 61km completed by Repsol in Despite difficulties in drilling the well which took 12 months to drill, including 4 sidetracks and damage to the reservoir, thick reservoir intersections were encountered and gas flowed to the surface. 25 successful Drill Stem Tests ( DST ) were conducted, 2 flowing gas to surface and the remainder recovering gas-cut mud with little to no water. 61 cores, 41 good quality porosity permeability measurements by IFP (Paris), good reservoir quality indicated. Figure 26: Almarchal-1 well results 12/06/2013 Level 21, 25 Bligh Street, Sydney

23 FOSTER STOCKBROKING DIRECTORY Name Department Phone Stuart Foster Equities Dealing stuart.foster@fostock.com.au Kevin Massey Equities Dealing kevin.massey@fostock.com.au Martin Carolan Equities Dealing martin.carolan@fostock.com.au Tolga Dokumcu Trade Execution & Dealing tolga.dokumco@fostock.com.au George Mourtzouhos Trade Execution & Dealing george.mourtzouhos@fostock.com.au Mark Hinsley Equity Research Sales mark.hinsley@fostock.com.au Mark Fichera Equities Research mark.fichera@fostock.com.au Haris Khaliqi Equities Research haris.khaliqi@fostock.com.au FOSTER STOCKBROKING Pty Limited A.B.N FSR Licence No Level 21, 25 Bligh Street, SYDNEY, NSW 2000 Australia Tel: Dealing: Fax: contact@fostock.com.au PARTICIPANT OF ASX GROUP Important Notice: Disclaimer & Disclosure of Interests. Foster Stockbroking Pty Limited has prepared this report. This document contains general securities advice only. In preparing the report, Foster Stockbroking did not take into account the specific investment objectives, financial situation or particular needs of any specific recipient. The report is published only for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Foster Stockbroking is not aware that a recipient intends to rely on this report and is not aware of the manner in which it will be used by the recipient. Investors must obtain personal financial advice from their investment advisor to determine whether the information contained in this report is appropriate to the investor s financial circumstances. Recipients should not regard the report as a substitute for the exercise of their own judgment. The views expressed in this report are that of the analyst named on the cover page, and no part of compensation of the analyst is directly related to inclusion of specific recommendations or views in this report. The analyst receives compensation partly based on Foster Stockbroking revenues, including any investment banking and proprietary trading revenues, as well as performance measures such as accuracy and efficacy of both recommendations and research reports. Foster Stockbroking believes that the information contained in this document is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of its compilation in an honest and fair manner that is not compromised. However, no representation or warranty is made as to the accuracy, completeness or reliability of any estimates, opinions, conclusions or recommendations (which may change without notice) or other information contained in this document and, to the maximum extent permitted by law, Foster Stockbroking disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this document. Foster Stockbroking is under no obligation to update or keep current the information contained herein and has no obligation to tell you when opinions or information in this report change. Foster Stockbroking, and its directors, officers and employees or clients may have or had interests in the securities of the instruments referred to herein, and may make purchases or sales in them as principal or agent at any time and may affect transactions which may not be consistent with the opinion set out in this report. Foster Stockbroking and its Associates state that they may earn brokerage, fees or other benefits from securities referred to in this report. Furthermore, Foster Stockbroking may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other financial services to the relevant Company. Specific disclosure: The analyst, Foster Stockbroking and/or associated parties have beneficial ownership or other interests in securities issued by PRL at the time of this report. Diligent care has been taken by the analyst to maintain an honest and fair objectivity in writing the report and making the recommendation. Specific disclosure: Foster Stockbroking has provided corporate advice within the past 12 months, for which it has earned fees. Foster Stockbroking acted as placement agent and received fees for services provided to PRL in respect of the April 2013 equity capital raising. 12/06/2013 Level 21, 25 Bligh Street, Sydney