Oil & Gas: Explorer PANCONTINENTAL OIL & GAS NL (PCL) Namibia Back in Focus. PCL.asx Speculative Buy

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1 Oil & Gas: Explorer PCL.asx Speculative Buy Pancontinental Oil and Gas NL (PCL) PANCONTINENTAL OIL & GAS NL (PCL) Namibia Back in Focus Exploration in Namibia is back in focus. At the recent Africa E&P Summit in London ( the spotlight was on exploration opportunities in Guinea, Cameroon and Namibia. As we have highlighted before offshore Namibia generally looked like becoming one of the next hot spots for offshore exploration worldwide just before the oil price collapse in 2014, with PEL 37 being one of the more prospective licences in Namibia. With the recovery in oil prices, it is therefore no surprise that the industry is refocusing back on Namibia and its obvious potential. Lower drilling costs have added to the appeal with presenters highlighting that offshore African drilling costs are at historic lows, down by 65-75% from the 2014 peak. Recent Positive News from Namibia Recent positive news includes; Chariot Oil & Gas (CHAR.lse) recently raised US$16.5m to fund the drilling of Prospect S offshore Namibia and have contracted a rig for drilling in 4Q18. Industry leader ExxonMobil (XOM.nys) recently farmed into acreage in close proximity to PCL s licences. A move that given its reputation rubber stamps the prospectivity of offshore Namibia. Tullow Oil (TLW.lse) announced the contracting of the Ocean Rig Poseidon to drill the Cormorant-1 prospect in September Namibia the Key Focus but Other Projects also Maturing With the drilling of Cormorant-1 now imminent, it is natural that investor interest in PCL will focus on this very exciting well. However, the Company does continue to mature other projects both in California and the Perth Basin. After an extensive period of testing the Dempsey JV has announced that the Dempsey project will soon commence production at circa 1.2mmcf/d. While it is good to see sales gas being produced, the overall flow rate is disappointing in our opinion relative to the capital spent on this individual well. Despite this the JV does envisage further drilling along this trend. Tulainyo unfortunately did not flow at commercial rates and the Company is evaluating whether this was due to naturally tight reservoir conditions and/or damage caused during drilling. PCL has recently announced an updated Resource estimate for the Walyering field in the Perth Basin (mean 70Bcf net to PCL). We currently (pre- Seismic approval) do not include any value for Walyering in our 12-month forward valuation. However, recent gas focused deals in Australia (including the acquisition of AWE and its Waitsia Perth Basin discovery) has valued undeveloped reserves in the ground in excess of A$1/GJ. Maintain Speculative Buy Recommendation PCL s exposure to Namibia alone (just PEL 37, with PEL 87 offering further potential upside as more technical information becomes available) we value at 0.62c per share (simply a transaction value not a risked outcome) and hence continue to view the exposure to California and the Perth Basin as free options at a price at or below that level. We therefore at current levels rate PCL a Speculative Buy with a base case value of 0.7c per share (downgraded from 0.9c per share on the back of recent California updates). Very material upside exists from this target price, upon exploration success in any one of the two (or more) wells it is participating in over the coming 12 months. Share Price: 12mth Price Target: 14 Jun 2018 $ $0.007 Hartleys Brief Investment Conclusion In Namibia, the PEL 37 JV recently voted to drill the Cormorant prospect in September This should mean that PCL participates in a very high impact offshore exploration well in In California, testing continues at both the Dempsey and Tulainyo prospects. Key Personnel David Kennedy Non-Executive Chairman John Begg Executive Director & CEO Ernest Myers Non-Executive Director Barry Rushworth Non-Executive Director Marie Malaxos Non-Executive Director Top Shareholders Sundowner International 7.8% Company Address: Level One, 10 Ord Street West Perth, WA, 6005 Target Price: $0.007 Issued Capital: m - fully diluted m Market Cap: $18.4m - fully diluted $20.4m Current Cash (end June est.) $0.7m Current Debt (Con Notes) Source: Hartleys Research Authors: Aiden Bradley Energy Analyst Ph: E: aiden.bradley@hartleys.com.au $1.6m A$ M Jun-17 Pancontinental Oil Oct-17 Feb-18. May-18 Hartleys has assisted in the completion of a capital raising in the past 12 months for Pancontinental Oil & Gas NL ("Pancontinental") for w hich it has earned fees. Hartleys has provided corporate advice w ithin the past 12 months and continues to provide corporate advice to Pancontinental Oil & Gas NL, for w hich it has earned fees and continues to earn fees. Hartleys (and associates) has a beneficial interest in million unlisted Pancontinental options and million shares Volume - RHS Source: IRESS PCL Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 15 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SUMMARY MODEL Pancontinental Oil & Gas Share Price 14 Jun 18 PCL $ Speculative Buy Key Market Information Directors Company Details Share Price $0.004 David Kennedy Non-Executive Chairman Market Capitalisation $18m John Begg Executive Director & CEO Net Cash (End June: Cash - Con Notes) -$0.9m Ernest Myers Non-Executive Director Issued Capital m Barry Rushw orth Non-Executive Director ITM options 0.0m Marie Malaxos Non-Executive Director Options 567.1m Issued Capital (fully diluted ITM options) m Top Shareholders m shs % Issued Capital (fully diluted all options) m EV $19.3m Sundow ner International % Valuation* $ Mth Price Target $0.007 Unpaid Capital No (m) $ (m) Ave P r % Ord * Valuation is based on farm out value for Namibia only and current implied value for US opportunities based on ASX listed peers Valuation Summary Asset A$m Valuation cps PEL 0037 (20%) California Total Apr % Various % Investment Summary In Namibia, the PEL 37 JV recently voted to drill the Cormorant prospect in September This should mean that PCL participates in a very high impact offshore exploration w ell in In California, testing continues at both the Dempsey and Tulainyo prospects. Key Permits / Prospects Expected News flow Project Unrisked Sacramento Basin Net Interest NPV10** 2H CY17 Bombora Acquisition Completed Dempsey 10% A$1m 2H17-1H18 Dempsey-1 Well California Tulainyo 4% A$5m 1H CY18 Tulainyo-2 Well Testing California Alvares 15% A$7m 2H CY18 Namibia Drilling Namibia 2H18 Alvares Appraisal California Namibia CY18 Walyering 3D Seismic Perth Basin PEL 37 20% A$840m PEL 87 75% ** Full success case based on Company/Hartleys prospective resource estimates' Analyst: Aiden Bradley Phone: Last Updated: 14/06/2018 Sources: IRESS, Company Information, Hartleys Research Page 2 of 15

3 HIGHLIGHTS Fig. 1: Namibia Regional Topography Exploration in Namibia is back in focus. At the recent Africa E&P Summit in London ( the conference spotlight was on exploration opportunities in Guinea, Cameroon and Namibia. Speakers on Namibia included Maggy Shino, Petroleum Commissioner, Ministry of Mines and Energy (presenting Namibia: Africa s Next Exploration Frontier ), Azinam ( Walvis Bay, The Next Frontier ), Chariot Oil & Gas ( Morocco & Namibian Assets ) and Eco Atlantic Oil & Gas ( Building an Atlantic Margin Focused Company ). Source: Azinam, PCL, Hartleys Page 3 of 15

4 As we have highlighted before offshore Namibia generally looked like becoming one of the next hot spots for offshore exploration worldwide just before the oil price collapse in 2014, with PEL 37 being one of the more prospective licenses in Namibia. Fig. 2: African Discovered Resources and Well Numbers Source: Chariot Oil & Gas With the recovery in oil prices, it is therefore no surprise that the industry is refocusing back on Namibia and its obvious potential. Lower drilling costs are also adding to the appeal with presenters highlighting that offshore African drilling costs are at historic lows, down currently by 65-75% from the 2014 peak. Rig day rates are down from >$650k/day to < $200k/day, with the Ayame-1X ultra-deepwater well offshore Cote d Ivoire as an example, drilled for <$20m with a similar design and target depth to wells offshore Namibia. Recent positive news includes; Chariot Oil & Gas (CHAR.lse) recently raised US$16.5m to fund drilling of the Prospect S offshore Namibia. Ocean Rig have announced that Chariot have also contracted the Drillship Ocean Rig Poseidon (same rig as will drill Cormorant-1) for a one firm well plus one option contract. Drilling is expected in the 4 th quarter of 2018 post the drilling of Cormorant-1. Industry leader ExxonMobil (XOM.nys) farming into acreage in close proximity to PCL s licenses. A move that given Exxon s industry reputation rubber stamps the prospectivity offshore Namibia. Tullow Oil (TLW.lse) and Ocean Rig (ORIG.nas) announced the contracting of the Ocean Rig Poseidon to drill the Cormorant-1 prospect in September Chariot Oil & Gas raise US$16.5m to drill Prospect S. Chariot Oil & Gas (CHAR.aim) recently raised US$16.5m to fund drilling of Prospect S offshore Namibia. Drilling is expected in the 4th quarter of Page 4 of 15

5 Fig. 3: Chariot Oil & Gas Timetable of Events Source: Chariot Oil & Gas Prospect S is located in Chariot s Central Blocks (Chariot 65% (and Operator); AziNam 20%; NAMCOR 10%; BEE 5%) and directly to the south of PCL s Northern Blocks with Tullow. Fig. 4: Location of Prospect S Source: Chariot Oil & Gas, PCL, Hartleys Page 5 of 15

6 Prospect S is one of a number of targets identified by Chariot in the Central Blocks and they view it as having a Best Estimate of 401mmbbls and a Probability of Geologic Success of 29%. Fig. 5: Central Block Prospects Source: Chariot Oil & Gas Fig. 6: Cross Section of the Central Blocks It is an Upper Cretaceous, draped fan and channel prospect with an identified 4-way dip closure. Chariot in their recent Corporate Presentation outlined that in their view all petroleum play elements have been proven by nearby drilling. Wells adjacent to Chariot acreage encountered excellent quality, oil-prone source rocks. Light oil (41 o API) was recovered adjacent to the Central Blocks in reservoirs of the same age as Chariot s target prospects. Excellent quality Upper Cretaceous turbidite reservoir rocks have been encountered in Namibian deepwater wells, with a nearby well having good porosity and permeability at a similar depth as Chariot s targets. Source: Chariot Oil & Gas ExxonMobil farm-in verifies Namibian potential ExxonMobil is widely considered an/the industry leader in offshore exploration. Therefore, its recent entry into offshore Namibia (ExxonMobil has taken a 40% interest in PEL 82, located immediately south of PCL s PEL 37) is likely to be viewed as validation of the plays potential. The Exxon deal was part of a broader trend of increasing activity with other recent farm-in activity involving Tullow, Repsol, ONGC, Total, Africa Energy, and Galp. Page 6 of 15

7 Fig. 7: ExxonMobil Farm in and 2018 Activity Source: ECO Atlantic Oil & Gas, PCL, Hartleys Ocean Rig and Tullow sign Rig Contract Tullow Oil (TLW.lse) and Ocean Rig (ORIG.ndaq) announced the contracting of the Ocean Rig Poseidon to drill the Cormorant-1 prospect in September The drilling contract with Tullow Namibia Ltd., is for a one-well drilling program plus options for drilling offshore West Africa. The vessel is currently located in Walvis Bay on the Namibian coast. The Ocean Rig Poseidon was previously contracted to Statoil at a day rate of US$170,000/day. Tullow have awarded almost 70% of the key service contracts (more than 50% of the estimated well cost) for the Cormorant- 1 well. So, the timing of spud (September) looks to be locked in. si: /vessel:ocean%20rig%20poseidon Page 7 of 15

8 Fig. 8: Ocean Rig Order Book Source: Ocean Rig, PCL, Hartleys Cormorant-1 is one of the most hotly anticipated exploration wells to be drilled anywhere in the Oil & Gas Industry in 2018, as identified by the Wood Mackenzie Exploration Service. At the spud of Cormorant-1, PCL is also due to receive a cash payment of US$5.5 million (circa A$7 million) from Africa Energy Corp. to settle its investment into the project. Fig. 9: WM Top 20 exploration wells to watch in 2018* Source: Wood Mackenzie Exploration Service. * New plays and large prospects Page 8 of 15

9 Namibia the main game but other Portfolio Options also maturing With the drilling of Cormorant-1 now looking imminent, it is natural that investor interest in PCL will focus on this very exciting well. However, the Company does continue to mature other projects both in California and the Perth Basin. California disappointing production from Dempsey and no commercial flow rate from Tulainyo After an extensive period of testing the Dempsey JV have announced that the Dempsey project will soon commence production at circa 1.2mmcf/d. This overall rate is from a co-mingling of production from the Field Level Kione Sandstone and the combined Zones 2, 3 and 4. While it is good to see sales gas being produced, the overall flow rate is disappointing in our opinion relative to the capital spent on this individual well. However, the Dempsey well did encounter a number of heavily gas saturated zones and as a result further follow up opportunities are being studied (both within the well and surrounding acreage). Raven Energy (REL.asx) have additionally announced that they have agreed to acquire Xstate s (XST.asx) 10% stake in the Dempsey project for U$500,000 in cash and A$500,000 in cash or shares. As a result, the Dempsey JV will become: SGC 50%, PCL 10%, EME.lse 30% and REL (ex-xst) 10%. Results from Tulainyo (PCL 4% net interest currently with an agreement in place to go to 13.33%) have also been disappointing. Testing of the shallower levels has been suspended without achieving commercial flow of gas. The results are being analysed to determine possible formation damage and evaluate reservoir quality. Looking forward there are plans to test additional deeper, stacked reservoir targets. This may include deepening of the Tulainyo 2-7 well once evaluation of the current test zones is complete and or additional appraisal drilling in due course. Permitting has also commenced for the re-entry of the Alvares-1 gas discovery in which PCL is earning a 15% interest. Overall, we feel that results to date in California have been disappointing and based on the market values of PCL s JV partners we have downgraded our valuation of PCL s Californian assets to A$3m. Fig. 10: Tulainyo Regional Seismic Line Source: PCL. Courtesy of Cirque Resources. Page 9 of 15

10 Fig. 11: Dempsey and Tulainyo Trends Source: PCL Perth Basin Progressing towards seismic on Walyering As background, UIL Energy (UIL.asx) and PCL signed a Farmin Agreement and Joint Operating Agreement where PCL agreed to fund up to $2.5m for a 3D seismic survey and earn a 70% working interest in four graticular blocks within EP447. PCL have recently announced an updated Resource estimate for the field. Fig. 12: Walyering Resource Estimate Source: PCL PCL have progressed environmental government approvals and land access arrangements for circa a 90km 2 3D survey scheduled for late In the event that the 3D data supports the size of the gas field compartments consistent with the current mapping, the parties will consider drilling of at least one appraisal /development well in Page 10 of 15

11 We currently (pre-seismic approval) do not include any value for Walyering in our 12-month forward valuation. However, recent gas focused deals in Australia (including the acquisition of AWE and their Waitsia Perth Basin discovery) have valued undeveloped reserves in the ground in excess of A$1/GJ. Therefore, a successful outcome at Walyering would likely be worth close to A$90m net to PCL in line with the current Mean Resource Estimate. Fig. 13: EV/Resources for Select Australian Gas Companies Source: Leigh Creek Energy Fig. 14: Walyering Conventional Gas Field Source: PCL and UIL Page 11 of 15

12 RECOMMENDATION & RISKS INVESTMENT THESIS & RECOMMENDATION In the coming months attention will naturally turn to focus on the drilling of the Cormorant prospect offshore Namibia. We rate this well among the most prospective (if not the most prospective) for 2018 (relative to market capitalisation) in any portfolio across the whole ASX Junior Oil & Gas sector. We continue to view PCL s Namibian exposure as worth more than the Group s total market capitalisation by itself. PCL with 20% has a very high quality joint venture (Tullow, ONGC and Africa Energy) and the recent farm in by ExxonMobil directly to the south of PEL 37 again highlights its potential. We value PCL s 20% stake now at A$36m / 0.62cps (from A$40m on the back of lower expected drilling costs), which remains simply a transaction value (not a risked outcome). Fig. 15: PEL 37 Source: PCL Our current valuation for PCL s US exposure is simply the implied value calculated based on the respective market values of the ASX listed peers participating in these wells (until we get more positive flow test results). We have downgraded our US valuation from A$13m to A$3m. Despite the relatively disappointing drill results in the US to date, we continue to view California (and WA) as a free option at the current share price. Page 12 of 15

13 Fig. 16: Projects and Prospects* Net Prospective Unrisked Region Project or Prospect Type Interest Resource NPV10 (A$m) Method of estimation USA ASX Peer Group Implied Value 3 Hartleys / IRESS California Dempsey Gas field exploration 10% 77 Bcf 1 Hartleys California Tulainyo Gas discovery appraisal 4% 5 Hartleys California Alvares Gas discovery appraisal 15% 7 Hartleys Namibia Farm in Value Transaction Comparable 36 Hartleys (PEL 37) Albatross Oil exploration 20% 66.3 mmbbl 321 Deterministic Best Estimate Seagull & Gannet Sth Oil exploration 20% 64.2 mmbbl 310 Deterministic Best Estimate Seagull & Gannet Nth Oil exploration 20% 19.7 mmbbl 95 Deterministic Best Estimate Cormorant Oil exploration 20% 23.5 mmbbl 114 Deterministic Best Estimate Source: PCL and Hartleys.. * Net Prospective Resources are PCL Estimates excluding Dempsey. NPV10 (unrisked) are Hartleys estimates for the Net Prospective Resource case based on field modelling and comparable comps. Namibia exposure still undervalued Offshore Namibia generally looked like becoming one of the next hot spots for offshore exploration worldwide just before the oil price collapse with PEL 37 being one of the more prospective licenses in Namibia. We therefore continue to see high potential in PCL s remaining 20% stake in PEL 37. Fig. 17: EL 0037 Leads and Prospects Source: PCL PCL s free carry has real value and this was evidenced by the deal with Africa Energy. Tullow has already spent US$34m on the license (mainly high quality seismic) and a well is likely to cost in the region of US$30-40m (relatively cheap as moderate water depth). So, the value of PCL s 20% carried stake in the well could now (post the JV voting on a drilling date and ExxonMobil s entry into the neighbouring license) be worth circa A$36m or 0.62c per share. We see this as the base value for PCL ex the US. It is also worth noting that we have not yet included any value for PCL s 75% and operatorship of PEL 87. We await further releases and details from the Company on the likely prospectivity of this block. It could provide further upside in the medium term as it seems to be ideally located at the Northern end of a prospective fairway inhabited by Galp, Total and Shell. We rate PCL a Speculative Buy While acknowledging there are exploration and timing risks regarding Namibia, the share price upside potential is large from a relatively low base. Namibia alone we value at 0.62c per share and view the exposure to California still as free option at a price at or below that level. We therefore at current levels rate PCL a Speculative Page 13 of 15

14 Buy with a base case value of 0.7c per share (downgraded from 0.9c per share on back of recent California updates). Very material upside exists from this target price, as outlined in Figure 16, upon exploration success in any one of the two (or more) wells they will likely participate in over the coming 12 months. RISKS The key risks for PCL (like most oil & gas exploration and development companies) is making an economic discovery and obtaining the funding for ongoing exploration. Other risks include delays, key person risk, country/sovereign risk, weather, JV partner obligations and cost inflation. Investing in explorers is very risky given the exploration value of the company in essence assumes that the market will recognise a portion of potential value before the results of an exploration program are known, conscious that the ultimate chance of success is low (typically 1%-20%) and that failure is much more likely, in most cases. Other risks are earnings and cash flow disappointments given the industry is volatile and cash flow expectations can disappoint due to cost overruns, project delays, cost inflation, environmental regulations, resource estimate errors and management performance and contract negotiation skills. High financial leverage (if it exists at that time) would add to the problem. SIMPLE S.W.O.T. TABLE Strengths Weaknesses Opportunities Threats Source: Hartleys Research Experienced management team. Fully funded offshore well in Namibia. Further near-term Sacramento Basin testing. Frontier Exploration risks. Non-Operated interests. Limited Balance Sheet Capacity. Relying on partners to secure their own funding requirements on an ongoing basis. Further farm in opportunities in US and Australia. Additional opportunities in Africa. M&A potential. Oil and US and WA Gas prices. License expiry / not fulfilling license commitments. Potential further share dilution. The AUD/USD Exchange rate. Page 14 of 15

15 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Oliver Stevens Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Director Stephen Kite Director Scott Weir Director Scott Stephens Associate Director Rhys Simpson Associate Director Registered Office Level 6, 141 St Georges Tce Postal Address: Perth WA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner: firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Digby Gilmour Jayme Walsh Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has assisted in the completion of a capital raising in the past 12 months for Pancontinental Oil & Gas NL ("Pancontinental") for which it has earned fees. Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Pancontinental Oil & Gas NL, for which it has earned fees and continues to earn fees. Hartleys (and associates) has a beneficial interest in million unlisted Pancontinental options and million shares. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 15 of 15