NOK Bond… 3 December 2015

The name is Bond…NOK Bond… 3 December 2015

“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem” J. Paul Getty

Nick Ingrassia Summary Principal The recent dramatic fall in share prices of independent exploration & production (E&P) +44 7891 814 398 oil companies on the back of plummeting oil prices has been well documented leaving [email protected] shareholders nursing billions of pounds of losses. www.6pointenergy.com While investment in these companies has traditionally been limited to owning shares – especially for retail investors – this has changed over the past three-to-five years as this universe of E&P companies have increasingly issued publically traded debt to fuel growth rather than issue new equity at seemingly languishing prices.

Unique to this cycle, many of the bonds that have been issued by independent E&P companies over the past few years have been on markets where retail investors can not only track bond movements, but also invest in these securities which have traditionally be the preserve of institutional investors.

But leverage can enhance returns in both directions – with at least some of the sharp declines in independent E&P share prices due to the impact of high gearing levels at a cyclical low-point. Value destruction has not been limited to share prices with bond prices also having declined in many cases as investors become increasingly worried about the independent E&P companies’ ability to repay large debt loads.

The following discussion attempts to shed some light on how the independent E&P sector got into this position and ask “has the market got it right?” with regard to the pricing of these bonds. The analysis has deliberately refrained from making any recommendations but instead point out situations where potential pricing ‘anomalies’ may exist in the current cyclical downturn.

Company Bond Price Interest Rate Final Maturity Yield "Norwegian Bonds" Genel Energy GENEL01 PRO 73 7.50% 14-May-19 18.5% IGas Energy IGAS01 71 10.00% 22-Mar-18 27.6% IGas Energy IGAS02 PRO 76 10.00% 11-Dec-18 21.1% Iona Energy IEC01 PRO 17 9.50% 27-Sep-18 105.0% Noreco NOR06 64 6.50% 6-Mar-18 29.4% Noreco NOR10 65 6.00% 8-Dec-16 56.7% Ophir Energy SMDR01 PRO 104 9.75% 6-Jan-20 8.6% Shamaran Petroleum GEP01 52 11.50% 13-Nov-18 41.5% Sterling Resources STRE01 PRO 104 9.00% 30-Apr-19 7.8% UK "Retail" Bonds EnQuest ENQ1 38 5.50% 15-Feb-20 34.4% Premier Oil PMO1 66 5.00% 11-Dec-20 14.9%

PLEASE SEE PAGE 12 FOR IMPORTANT DISCLOSURES

Background

One of the features in this cyclical downturn in the independent E&P sector that has gone most under-reported is the role that leverage has played in accelerating (and at times amplifying) share price declines. Facing diminishing returns from an increasing cost base and equity issues ruled out due to “low” share-price-to-NAV values, over the past three years E&P companies have increasingly turned to debt to both plug gaps and boost returns. But while leverage can have a positive impact on returns – this effect works both ways and can dramatically enhance losses.

Figure 1: Example leverage impact on returns All Equity Case Leveraged Case Entry Value 100 100 100 100 Exit Value 200 75 200 75 Equity 100% 100% 25% 25% Debt 0% 0% 75% 75% Equity Return (%) 100% -25% 400% -100%

The increase in gearing of the London-listed independent E&P universe has been truly staggering during the period from 2010 to present.

Using a selected universe of six key, London-listed, production-orientated companies1 active for the entirety of this period (2010-2014) we see the overall gearing2 of the group roughly doubled from 22.5% to 44.8%. Worthy of a special mention during this period is Afren which saw its gearing balloon from 23.8% to a whopping 84.0% shortly before a series of events saw the company enter into administration during 2015 wiping out nearly £2 billion in shareholder value.

Figure 2: Example E&P gearing increase 2010-2014 FY 2010 FY 2014 Gross Borrowings 3,226 8,938 Shareholder Equity 11,141 11,010 Gearing 22.5% 44.8%

Perhaps a better overall measure of how indebted these companies had become during the same period was the increase in net debt levels on a per barrel of 2P reserves basis. Again, using the same universe and measurement, this figure roughly tripled from just under $2/bbl to just over $6/bbl3.

Figure 3: Net debt per 2P reserves Total Sample Group net debt to 2P reserves ($/bbl) FY 2010 FY 2014 2P Reserves 1,081 1,096 Net Debt 2,024 7,018 Net Debt/bbl $1.9 $6.4

1 Tullow Oil, Premier Oil, Cairn Energy, Afren, EnQuest, Ithaca Energy 2 Gearing is defined as gross borrowings over gross borrowings plus shareholder equity 3 Interestingly, the totals reserves for this group only grew by 1% during the period of 2010-2014

Debt is debt, right?

One of the most interesting features of this period was the shift in lenders from primarily the commercial bank market towards the bond markets.

Historically, UK-listed independent E&P companies have relied on commercial banks to provide them with a majority of their debt capital. Most often the banks have used ‘reserve based loan’ (RBL) structures which generate loan-to-value amounts (LTV) based on the present value of a companies producing assets utilising a forward oil price deck substantially below (~33%) the actual forward curve. The result of this is a reasonably conservative amount of leverage – which is then revisited twice a year through a ‘redetermination’ process which reviews how the underlying assets have been producing and updates any (significant) movement in oil prices.

RBL loans tend to rank “senior” to the rest of the company’s indebtedness – meaning it gets repaid first ahead of any other creditors. To ensure this senior position is protected, the banks usually take security over a company’s assets – technically allowing the banks to seize and sell assets to repay debt in a default situation (similar to a mortgage).

One of the key features of the RBL structure is that it repays during the life of the loan as the company’s reserves are turned into production (and the present value of the asset reduces). Banks also tend to own the loans for their entire tenor, creating a strong relationship between the company and its lenders who both have a vested interest in seeing through the good times and bad.

Bonds, on the other hand, are a different animal altogether. In general, institutional bonds tend to be reasonably uniform in their structure, non-amortising (ie repaid in full on final maturity), unsecured and reasonably liquid (ie investors can trade in/out).

The problem is that for many independent E&P companies, their asset portfolios have high year-on-year production decline rates and a history of delays in bring new developments into production. This has tended to result in poor credit ratings by the agencies which don’t use metrics such as ‘faith-in-management’ to forecast a company’s ability to repay a non-amortising bond in 5-7 years’ time!

Enter the ‘Norwegian Bond’ market (or ‘NOK bonds’ for short).

With a petro-dollar economy flush with cash to invest, Norwegian banks began to market so called ‘private placements’ which are essentially bonds without formal credit ratings. The twist was that these bonds were listed and tradable on the Oslo Bors – allowing for a transparent market in these securities (rather than historically where unrated debt would be traded directly by holders or via specialist brokers).

Not only did these bonds carry no formal credit rating (though the lead bank on the transaction would publish research), they vary widely in structure and could be put anywhere in the capital structure to replace traditional bank debt or supplement existin debt (i.e. subordinated or ‘second ranking’ to the senior debt).

Luckily, this quirky NOK bond market (along with its close-relation the UK retail bond) is wonderfully transparent to private individuals with pricing and structural details widely and freely available on the websites of the Oslo Børs (http://www.oslobors.no/ob_eng/) and London Stock Exchange (http://www.londonstockexchange.com).

Company Analysis

Unsurprisingly, given the uniqueness, the pricing of a number of these bonds issued by independent E&P companies have behaved in an manner which may have created some pricing ‘anomalies’ in the current cyclical downturn.

The following is a brief (and in no way comprehensive) attempt to ask “has the market got it right?” for a number of these NOK/retail bonds currently in issue. The analysis is based solely on public market information widely available to private investors. A summary of the bonds is provided below with all prices accurate as at 3 December 2015. For a more detailed information table, please see Appendix I.

Figure 4: Bond universe summary Interest Final Yield to Company Bond Price Rate % Maturity Maturity "Norwegian Bonds" Genel Energy GENEL01 PRO 73 7.50% 14-May-19 18.5% IGas Energy IGAS01 71 10.00% 22-Mar-18 27.6% IGas Energy IGAS02 PRO 76 10.00% 11-Dec-18 21.1% Iona Energy IEC01 PRO 17 9.50% 27-Sep-18 105.0% Noreco NOR06 64 6.50% 6-Mar-18 29.4% Noreco NOR10 65 6.00% 8-Dec-16 56.7% Ophir Energy SMDR01 PRO 104 9.75% 6-Jan-20 8.6% Shamaran Petroleum GEP01 52 11.50% 13-Nov-18 41.5% Sterling Resources STRE01 PRO 104 9.00% 30-Apr-19 7.8% UK "Retail" Bonds EnQuest ENQ1 38 5.50% 15-Feb-20 34.4% Premier Oil PMO1 66 5.00% 11-Dec-20 14.9%

Genel Energy

Launched with much fanfare in mid-2014, the Genel Norwegian bond was upsized from $400 to 500 million on the back of strong investor demand against a backdrop of $100/bbl oil, positive outlook on KRG payments to international oil producers and a strong balance sheet with cash of ~$475 million and net debt of ~$215 million as at 30 June 20154.

Performance of the bond has been mixed since issue with volatility largely tied to regional politics and the market assessment of the future regularity and quantum of payments from the KRG will play out. Between annual EBITDAX5 of $200-300 million (even at $50/bbl based on most recent financials) and a receivable from the Kurdish Regional Government of ~$380 million – in theory, Genel should have no problem repaying its bond when due in May 2019. But payments from the KRG will need to speed up having only amounted to $20-30 million a month for the past few months.

Recent arbitration in London by the Pearl Petroleum consortium may cast further uncertainty over KRG payments – but Genel benefits from having some of the original

4 Genel unaudited interim results to 30 June 2015 5 Profit before interest, tax, depreciation, amortisation and exploration expense

PSCs signed in the region (always informally understood to benefit from additional protections).

With no cash flow outside of Kurdistan to meet its repayments this bond is an interesting way to play Kurdish-risk given the KRG shelved its own plans during 2015 to issue a sovereign bond.

While Genel’s bond is unsecured, it has a number of specific protections for investors to ensure future debt remains subordinated to the bond issue, minimum liquidity levels and prohibition on certain asset sales. It is also worth noting that on takeover of Genel (a Change of Control Event) Bondholders also have the right to force a purchaser to buy all of the outstanding debt at a price of 101% of par value (a common feature in Norwegian Bonds). This would imply upside on takeover of over 30% - only slightly less than the sort of premiums paid in UK-takeover situations.

Bottom line: Genel remains one of the largest London-listed independent E&P companies with world class assets, a top-flite management/board and reasonably robust balance sheet. For those who can stomach the political risk, the yield looks attractive with additional upside from any potential takeover.

IGas Energy

IGas, the sole UK-listed entity focused largely on shale gas in the UK, issued its Norwegian bonds in the first and second half of 2013 in order to refinance an acquisition loan along with providing the company with long term capital suited to its long-dated onshore production.

In addition to suffering from the recent fall in commodity prices, during the past two years the company has also had to endure the strong local opposition to the pursuit of shale gas (and associated fraccing) in the UK despite the governments’ best efforts to support the fledgling industry. Even against this backdrop, IGas has been successful in achieving a series of farm-outs of its acreage – including most recently to INEOS for both a cash consideration along with a £65 million dollar cost carry. In the meantime, IGas has sought to diversify itself across conventional onshore production in the UK providing current cash flow at a very low operating cost of ~$31/bbl6.

IGas has two bonds outstanding – one for $165 million (secured) and one for $30 million (unsecured). The secured bond (IGAS01) is highly ‘structured’ and includes amortisation payments and a Debt Service Retention Account in which is held £11.2 million (~$17 million) which can be used for debt repayments/purchases7. The secured bond has a charge over the company’s producing assets which had a net book value of £91 million ($141 million) according to the company’s half-year financial statements for the period to 30 September 2015 imply some element of repayment risk. That said, clearly the company thinks it’s a good investment – buying back some of the bonds below par earlier in the year.

One other strange anomaly exists insofar as IGas’ unsecured (and longer dated) bond appears to be priced better than its secured counterpart. Logically, this should never be the case – but likely due to the relative liquidity in the two bonds given their total size.

6 IGas unaudited results for the period ended 30 September 2015 7 Notes 15, 16 of IGas unaudited results for the period ended 30 September 2015

Bottom line: At a yield of nearly 28% for its secured bond, it would appear that the market has a very negative view on both IGas’ existing production and its ability to transform its large cost-carry on its shale assets into tangible value. This seems unduly pessimistic given gearing levels in-line with its peer group together with low operating costs and substantial portfolio. Investors should show a preference for the secured bonds over the unsecured bonds which would need to reduce further in price before being attractive on a relative basis.

Iona Energy

On 24 November 2015, Iona updated the market on its long-running restructuring stating that it was commencing insolvency procedures and given the level of debt owed under its bonds, it was “highly unlikely that there will be any residual value for shareholders of Iona following any such process.”8. The result has been a suspension from trading of both the company’s equity and bonds on their respective exchanges.

The last quoted price on the Iona Norwegian bonds was 17.25 – implying a recovery of under $50 million on outstanding bond amount of $275 million (though this may be higher now with some of the interest being ‘paid-in-kind’ or PIK essentially increasing the debt load). This is more-or-less the restricted cash on Iona’s balance sheet of $55 million as at its Q2 2015 financials which was restricted prior to the completion of any restructuring. Given the company had ring fenced UK tax losses of ~$350 million and a ~19% stake in the producing Huntington field, this would seem perhaps unduly pessimistic. That said, it was recently announced that Noreco, a partner in the Huntington field, had defaulted on its 20% interest in the Huntington licence and was handing it over to the field partners rather than clearing its bills resulting in a “further” NOK 60 million loss ($7 million)9.

Bottom line: while likely a moot point given it has stopped trading and is in insolvency, the pricing of the Iona bonds (secured against the company’s assets) may have been unduly pessimistic providing some upside at this entry price. But it is hard to assess the risk/return metrics and insolvency processes are not for the faint-hearted.

Norwegian Energy Company ASA (Noreco)

The longwinded and well document problems at Noreco are outside of the limited scope of this analysis. Suffice to say that after a series of restructurings and recapitalisations by more than a few new management teams, Noreco remains indebted and in-trouble.

However, its two secured bonds continue to trade at levels which would only indicate ‘stress’ rather than ‘distress’. This is likely due to recent repayment of ~40% of its NOR10 bond at par and pending repayment of NOK 175 million of its NOR06 bond from proceeds of its Oselvar asset sale. This leaves around NOK 640 million outstanding between the two bonds and unrestricted cash on Noreco’s balance sheet of ~NOK 360 million.

While Noreco does have a small amount of current production (~3,300 boepd) according to its Q3 2015 results the business has been running at a negative EBITDA since 2014. This leaves bondholders either hoping for a reversal in oil prices or reliant on insurance

8 Iona Energy press release 24 Nov 2015 9 Noreco Energy press release 2 Nov 2015

claims for NOK 3,500 million (~$400 million) relating to periods of prolonged production outages from its Danish Siri field following the discovery of cracks in its superstructure.

Interestingly, Noreco has a book value for the insurance claim of $59 million (or NOK 515 million)10 being the minimum they expect to receive – which should imply a price on its bonds of ~80 (rather than mid-60s) (assuming that the bonds are repaid equally with the proceeds and excluding its current cash and other debt). A true Norske saga which has practically bankrupted the company – so its not surprising the market seems to have some scepticism around this number. A final court hearing is scheduled for Q4 2016.

Another thing that is not clear is to what extent, if any, the pricing of Noreco’s bonds are impacted by it being a well-known and closely followed story in Norway (its home market).

Bottom line: Noreco is an extremely complicated situation worthy of further investigation – but with ultimate repayment levels likely to be directly linked to a long running and contentious insurance claim, the results may be binary in nature which perhaps is not currently priced into the bond.

Ophir Energy

Following completion of its acquisition of Salamander Energy plc in March 2015, Ophir took over responsibility for servicing the Salamander NOK bonds. This Change of Control Event triggered the PUT option by the Salamander bond investors – resulting in roughly 1/3 of the $150 million issue being retired by the company at a price of 101%.

The Ophir bonds are the only ones in the current universe trading at a premium to par with one of the lowest yields available (a touch under 9%). This pricing is likely to represent the well-capitalised nature of Ophir Energy which recently announced that it anticipates ending 2016 year end net cash position of between $250-300 million11.

With the company widely expected to refinance its overall debt position during the next 12 months, the bonds are likely pricing in some element of a tender/call option by the company which would be force to pay a significant premium to redeem any of its bonds prior to 31 Dec 2016 (and then at 104.875% thereafter until end 2017). As a perennial takeover target, investors would also get the option to PUT their bonds at 101% to any acquirer.

Bottom line: as one of the best-capitalised, UK-listed independent E&P companies around, it is no wonder Ophir’s bonds trade at a premium to par and (relatively) low yield. If, for whatever reason, Ophir’s projected net cash balances were to be lower than expectations, there is potential for the bonds to surprise to the downside.

Shamaran Petroleum

Another Kurdish-focused company – Shamaran has, to date, been solely focused on exploration and appraisal activities and has recently begun its first phase development on its Atrush block which it holds alongside Abu Dhabi National Energy Company PJSC (TAQA) and US-based Marathon Oil. Shamaran is closely associated with the Lundin

10 Noreco Q3 2015 interim results 11 Ophir Energy press release 11 Nov 2015

family (a well-known natural resource investing family) who own a significant stake (~20%) in both the equity and bonds of the company.

Following a rights issue earlier in 2015 and shake-up of the management team and board to include a number of executives closely associated with the hugely successful Lundin Petroleum, the business looks to finally be on good footing after a long period of uncertainty and a number of false starts on now-relinquished Production Sharing Contracts in Kurdistan.

Regardless, it is unusual for a non-cash generating business to issue debt – especially when it pays a current interest coupon (effectively debiting the proceeds from the bond at each payment date). This situation is reflected in the current yield on the Shamaran Norwegian bond at over 40%.

Bottom line: For those that stomach the unique combination of risks associated with Shamaran (project development, Kurdish, regional political) – the yield offers equity- like upside to secured lenders. Once Shamaran begins production on the Atrush block, given the similarity to its risk profile to that of Genel, one would anticipate the spread between the bonds to narrow which could offer an interesting investment.

Sterling Resources

Similar to the situation in which Noreco finds itself, the long running series of problems and subsequent restructurings at Sterling Resources are outside the scope of this limited analysis.

The most recent management team would appear to have done a good job to extract the maximum value for any remaining stakeholders and the extensive information available is worth a read – if only to gain an understanding on how ‘workouts’ are executed alongside bondholders when everything goes wrong.

Despite all of the problems and threats of default, the Sterling bonds actually trade at a better yield than those of Ophir Energy (see above). This is as a direct result of the bond restructuring which means that bondholders will receive a (potentially large) premium to par depending on the outcome of the sale of either Sterling or its main asset (the Breagh gas field). Sterling has been at pains to point out that INEOS (private) has recently purchased the UK Southern Gas Basin portfolio of L1 Energy (previously RWE-Dea) which includes the operated stake in the Breagh gas field and it would be unsurprising to see a deal done there.

Bottom line: the Sterling bond trades at one of the lowest yields in the analysed universe due to its current ‘special situation’ showing that even in a workout situation, bondholders who are secured against assets can hold a strong bargaining position.

EnQuest

EnQuest, the predominately UK North Sea focused developer, has been on the sharp end of the relentless cost increases inflicted on the industry over the past few years. Alongside a number of its peers, major capital projects such as Alma/Galia and Kraken have suffered large cost increases and delays – culminating with production from new projects coming on-stream at multi-year oil price lows.

A historically well-capitalised business with significant cash flow from its legacy asset base (Northern North Sea oil), the drop in oil prices and high cost structure of the North Sea has forced EnQuest to take on increasing levels of leverage, and some innovative financing-like deals, in order to bring its projects to completion. A significant hedge position has also help break the fall of recent oil prices.

Notwithstanding managements’ best efforts, the business still has a significant net debt burden of just under $1.3 billion as at 30 June 201512. While on a gearing basis this puts EnQuest at the high end of peers – its doesn’t fully explain why its “retail” bonds are trading at close to distressed levels giving an implied yield of just over 30%. But part of the explanation might be the interplay between EnQuest’s overall capital structure and the high cost environment in which it operates.

In addition to its “retail” bond, EnQuest also has in issue a $650 million institutional bond13 along with a $1.2 billion revolving credit line from a commercial banking syndicate. As fully disclosed in its retail bond prospectus, EnQuest’s bank debt is fully secured against its assets – meaning that the bank lenders (so-called ‘senior’ lenders) have a priority of repayment ahead of any bonds. This means the ~$350 million increase in net borrowing during H1 2015 has all been drawn on the secured bank debt facility – leaving the bond holders in a much worse credit position.

EnQuest’s relatively high operating costs also reduce the amount of free cash flow available to repay debt in a low oil price environment. A bit of simple math using the company’s most recent disclosures demonstrate why bond holders are worried (bear with me…). EnQuest has stated that it has current operating costs of ~$38/bbl – reducing down to ~$30/bbl in 2016. Assuming the company continues production around current levels (~30,000 barrels of oil equivalent per day) for the next five years (ie the tenor of the bonds) this equates to roughly 55 million barrels of oil produced. Assuming an average oil price during that period of $60/bbl – this leaves ~$30/bbl of free cash (assuming no tax) to service debt and any ongoing capital costs. EnQuest’s most recent H1 2015 unaudited accounts state it has current future capital commitments of ~$450 million plus ~$60 million a year of interest costs (total $300 million) – which would equate to or roughly $14/bbl of costs during the period in question. This leaves EnQuest with ~$16/bbl to service debt ($900 million) – in other words, enough to repay the secured senior lenders but with a significant ‘haircut’ to the bondholders.

While there is no doubt that this calculation is overly simplistic – it does demonstrate why there may be cause for some concern among bondholders and why the EnQuest management team is working hard to reduce its debt load (see recent comments around sale/leaseback of FPSO etc).

Bottom line: the EnQuest retail bonds have dropped to a level which implies that the company’s balance sheet is under heavy stress and may require recapitalisation and/or restructuring. While the yield looks attractive for a significant production/development focused company in a low-risk jurisdiction, assessing the “right” price for its retail bonds is challenging due to the significant amount of senior secured bank debt having first priority ahead of the bondholders.

12 Enquest unaudited half-year results, 19 Aug 2015 13 It is worth noting that Enquest issued both its institutional and retail bonds in 2014 with a similar maturity profile. Despite these similarities and unsecured nature, institutions demanded a 7.0% interest rate vs the retail bond of only 5.5% demonstrating the how different markets price credit risk.

Premier Oil

Premier Oil, the “Old Gray Lady” of the independent E&P sector, has been around in one form-or-another since the mid-1930s and has long pursued a home-and-away strategy balancing its portfolio between the UK North Sea and overseas (Asia and now Falklands).

The company has always prided itself on its conservative and measured approach to growth helping it to maintain a solid balance sheet and weather the periodic cyclical downturns. This positioning has served Premier well allowing it to use the last downturn in 2008/2009 to make value enhancing acquisitions such as that of Oilexco Inc (which, in stark contrast, was not so conservatively financed).

Premier was so well capitalised that it even began to act like a bank – using its balance sheet to “lend” into projects as a way of gaining an equity stake on advantageous terms. The deal with privately held Chrysaor to get into the Solan development in the UK West of Shetlands was a prime example of this structure which was quickly replicated to farm- in to Rockhopper’s Sea Lion discovery in the Falklands.

The only issue with the transactions done by Premier during this period is that they were all largely development focused with cash flow out in the future rather than the present. Add this together with ballooning industry costs and various project delays – and suddenly a company known for its conservative balance sheet saw its gearing grow from ~38% in 2010 to 63% at the end of H1 201514. Even more surprisingly, Premier’s net debt has increased nearly six-fold on a per barrel basis to ~$8.5/bbl during the same period.

This balance sheet leveraging has been achieved by using a wide array financing tools including a convertible bond, term and revolving bank loans, loan notes and a retail bond resulting in a total gross debt of just shy of $2.5 billion – impressive for a company with a current market capitalisation of just over $500 million.

Unsurprisingly, this high gearing and future capital commitments against a poor macro backdrop has translated into downward pressure on Premier’s retail bonds. Despite having one of the highest gearing levels of its peer group its bonds trade at a yield of around half of that of its North Sea compatriot, EnQuest. But why?

Premier’s debt has two interesting features; first, it has a reasonably long-dated maturity profile with the bulk of its debt not due until 2019 or later meaning there are no debt repayments for a number of years allowing the company to weather the current storm and bring its developments to the point where they begin to flow cash. Second, it appears that all of Premier’s debt is unsecured and ranks equal in-and-amongst itself (pari passu in lending parlance). In other words, even in the unlikely situation there was a default, all of the debt holders would be treated equally (ie repaid) out of whatever proceeds were raised. This puts the retail bondholders in a much better position than those of the EnQuest retail bondholders who are ‘structurally subordinated’ to the bank debt (ie 100% of the bank debt needs to be repaid before any bonds are repaid).

Bottom line: despite a dramatic increase in gearing since 2010, Premier’s retail bondholders are in reasonably strong position from a credit risk perspective due to the maturity profile and structural nature of the company’s debt. With a number of pending developments (Solan, Catcher) starting production in the next 12-18 months the company is well positioned to persevere through the current downturn.

14 Premier Oil unaudited interim results to 30 June 2015

APPENDIX I: DETAILED BOND SUMMARY15

COMPANY Enquest Genel IGas IGas Iona Energy Noreco Noreco Ophir Premier Shamaran Sterling Energy Energy Energy Energy Oil Petroleum Resources BOND ENQ1 GENEL01 IGAS01 IGAS02 IEC01 NOR06 NOR10 SMDR01 PMO1 GEP01 STRE01 PRO EXCHANGE LSE Nordic ABM Oslo Bors Nordic ABM Nordic ABM Oslo Bors Oslo Bors Nordic ABM LSE Oslo Bors Nordic ABM ORIGINAL ISSUE (MILLION) £145 MM $500 MM $165 MM $30 MM $275 MM NOK 600 MM NOK 600 MM $150 MM £150 MM $150 MM $225 MM DENOMINATION £100 $200,000 $1 $200,000 $1 NOK 1 NOK 1 $200,000 £100 $100,000 $100,000 LAST TRADE 03-Dec 01-Dec 19-Nov 07-May-15 25-Nov 23-Nov 26-Nov 04-Nov 25-Nov 12-Nov 26-Jun-15 PRICE 38.08 72.75 71.25 76 17.25 64 64.5 104 65.95 51.5 103.5 INTEREST RATE % 5.50% 7.50% 10.00% 10.00% 9.50% 6.50% 6.00% 9.75% 5.00% 11.50% 9.00% FINAL MATURITY 15-Feb-20 14-May-19 22-Mar-18 11-Dec-18 27-Sep-18 06-Mar-18 08-Dec-16 06-Jan-20 11-Dec-20 13-Nov-18 30-Apr-19 SECURED? No No Yes No Yes Yes Yes No No No Yes COUPON FREQUENCY P.A. 2 2 2 2 2 2 2 2 2 2 2 COUPON 1 15-Feb 14-May 22-Mar 11-Jun 27-Sep 06-Mar 06-Mar 30-Jun 11-Jun 13-May 30-Oct COUPON 2 15-Aug 14-Nov 22-Sep 11-Dec 27-Mar 06-Sep 06-Sep 31-Dec 11-Dec 13-Nov 30-Apr YIELD TO MATURITY 34.4% 18.5% 27.6% 21.1% 105.0% 29.4% 56.7% 8.6% 14.9% 41.5% 7.8% CHANGE OF CONTROL PUT? Yes Yes Yes Yes Yes No No Yes Yes Yes Yes CHANGE OF CONTROL PRICE 100 101 100 100 101 NA NA 101 100 101 NA

15 Prices as at 3 December 2015. All pricing and information company disclosures and documents on www.londonstockexchange.com and www.oslobors.no/ob_eng/

APPENDIX II: CORPORATE DEBT SUMMARY

Enquest Genel IGas Iona Noreco16 Ophir Premier Shamaran Sterling Energy Energy Energy Energy Oil Petroleum17 Resources18 CORPORATE CREDIT FACILITY X X RESERVE BASED LOAN X TERM LOAN X X INSTITUTIONAL BOND X X NOK/RETAIL BOND X X X X X X X X X CONVERTIBLE BOND X NORWEGIAN EXPLORATION LOAN 1.00

CURRENCY (MILLIONS) USD USD GBP USD NOK USD USD USD USD GROSS DEBT 1,600 690 101 289 846 316 2,465 155 196 CASH 306 474 37 64 680 708 372 58 19 NET DEBT 1,294 216 64 226 166 -392 2,093 97 177 BALANCE SHEET DATE 30-Jun-15 30-Jun-15 30-Sep-15 30-Jun-15 30-Sep-15 30-Jun-15 30-Jun-15 30-Sep-15 30-Sep-15

16 Noreco cash excludes restricted cash for abandonment liabilities in Denmark and includes Norwegian tax cash refund due December 2015. Noreco gross debt reduced by NOK 175 MM following Olsevar sale per press release 25 Nov 2015 17 Shamaran gross debt includes accrued interest expense 18 Sterling gross debt includes accrued interest expense

IMPORTANT DISCLOSURES

This report has been prepared and issued by 6 Point Energy. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document and is provided for information purposes only.

The content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. To the maximum extent permitted by law, 6 Point Energy, its directors, affiliates, contractors, and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

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