08 May 2013 Asia Pacific/Japan Equity Research Oil & Gas Exploration & Production

Japan Petroleum Exploration

(1662 / 1662 JP) Rating OUTPERFORM* INITIATION

Price (07 May 13, ¥) 3,890 Target price (¥) 5,000¹

Chg to TP (%) 28.5 Resurgent reserves Market cap. (¥ bn) 222.32 (US$ 2.24) ■ Initiating at OUTPERFORM with ¥5,000 target price (potential return Enterprise value (¥ bn) 226.38 Number of shares (mn) 57.15 28.5%): Japan Petroleum Exploration (Japex) is undervalued on various Free float (%) 45.0 fundamental metrics, and we believe the market is overlooking its international 52-week price range 4,175 - 2,755 production growth and strategy. We calculate that the booking of the oil sands *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. expansion at Hangingstone (Canada) this year will cut the company’s ¹Target price is for 12 months. EV/proved reserve to $8/boe—half the global average and second-lowest

Research Analysts among global peers, behind only Inpex (1605, OUTPERFORM, ¥690,000). David Hewitt ■ Stand-out reserves bookings ahead: A near-term catalyst could be the 65 6212 3064 [email protected] booking of the Hangingstone project, which is expected to be confirmed in the Horace Tse FY3/13 annual report in August and which we estimate will increase proved 852 2101 7379 reserves 17% that fiscal year—more than making up for the weak domestic [email protected] growth and the reserves reversal expected from the Hokkaido field. This would be by far the largest booking in Japex’s recent history. The Garraf oil project in Iraq in FY3/14 would add another 15% to proved reserves, though this would be only marginally accretive to earnings, in our view. ■ Connecting the dots, up, down and across: We also view positively Japex’s announcement in March to farm-in to an upstream Canadian LNG project (Montney), as this secures supply across the Pacific and is a link to the company’s downstream plans to build an LNG re-gas facility in Fukushima. The main overhang/risk for the stock is funding for these projects which, we argue later in the report, is manageable. ■ Valuation: We use a DCF-based sum-of-the-parts valuation to arrive at our ¥5,000 TP. We use conservative assumptions for the production of remaining domestic reserves (5% decline), account for potential deferred-tax liabilities, and apply a 20% NPV discount to reflect domestic production challenges.

Share price performance Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Price (LHS) Rebased Rel (RHS) Revenue (¥ mn) 230,638.0 213,154.0 257,624.9 268,937.6 6000 120 5000 100 Operating profit (¥ mn) 15,048.0 11,455.0 17,487.3 14,507.3 4000 3000 80 Net income (¥ mn) 17,029.0 -6,660.6 16,171.0 14,160.3 2000 60 EPS (¥) 297.7 -116.4 282.7 247.6 Change from previous EPS (%) n.a. n.m IBES Consensus EPS (¥) n.a. -131.5 288.2 290.4 The price relative chart measures performance against the EPS growth (%) 70.1 n.m. n.m. -12.4 TOPIX which closed at 1188.57 on 07/05/13 P/E (x) 12.9 -33.4 13.8 15.7 On 07/05/13 the spot exchange rate was ¥99.33/US$1 Dividend yield (%) — — — —

EV/EBITDA(x) 9.5 12.1 9.5 11.3 Performance Over 1M 3M 12M P/B (x) 0.71 0.74 0.70 0.67 Absolute (%) 10.2 15.3 13.6 ROE(%) 5.7 -2.2 5.2 4.4

Relative (%) -1.3 -7.4 -40.4 Net debt/equity (%) net cash 1.3 7.5 21.4

Source: Company data, Thomson Reuters, Credit Suisse estimates.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse 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.

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08 May 2013 Table of contents

Focus charts 3 Resurgent reserves 4 Production: Domestic doldrums, international growth 4 Reserves: Good news brewing 4 Strategy: Killing two birds with one stone? 4 Valuation: Cheap on any valuation metrics 4 Summary financials 5 Production: Domestic doldrums, international growth 6 Reserves: Good news brewing 9 Strategy: Killing two birds with one stone? 10 Company and industry overview 17 Valuation: Materially mis-priced 19 HOLT analysis 23 Company financials 24

Japan Petroleum Exploration (1662 / 1662 JP) 2 08 May 2013 Focus charts

Figure 1: Japex – Consolidated & Consolidated + equity Figure 2: Japex – possible proved reserves bookings production growth

35% 350(mm boe) 30% 300 25% 250 20% 200 15% 150 10% 100 5% 0% 50 -5% -

-10%

Iraq?

FY12 FY11 FY13 FY14

-15%

Production Production

FY14E FY15E FY16E FY17E Production Hanginigstone

Consolidated growth Consolidated + Kangean / Sak I reversal Hokkaido standard Evaluation Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 3: Credit Suisse forecast production vs. medium Figure 4: Japex – domestic gas production (Credit Suisse term FY3/16 target forecast) vs. domestic gas sales aspiration (kboe/d) (mn m3) 80 2,500

70 2,000 60

50 1,500 40

30 1,000

20 500 10

- - FY14E FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E CS forecast Japex - Medium-term plan Domestic gas production Domestic sales aspiration Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: EV / proved reserves– Japex vs. peers Figure 6: Premium (discount) to NAV – Japex vs. peers (US$/boe) 5% 25 22.5 23.0 23.5 23.6 20.7 0% 20 Average EV/boe = $15.9 14.2 14.6 -5% 15 12.5 9.3 9.8 10.1 -10% 10 8.0 6.6 -15% 5 -20%

- -25%

BG

Inpex

Japex Statoil

Santos -30%

PTTEP

Apache

Conoco

CNOOC

Talisman

Anadarko Woodside -35%

-40% Hokkaido

-45% Santos PTTEP Woodside Oil Search CNOOC Inpex Japex

Japex - adj for Hangingstone & Hangingstone for - adj Japex Source: Bloomberg, Credit Suisse estimates Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 3 08 May 2013 Resurgent reserves Production: Domestic doldrums, international growth In the near term two major projects are driving production growth: the Garraf oil project in Iraq and gas projects in Indonesia: namely, North Sumatra Block A (FY3/15) and expansion at the Kangean PSC (recorded as an equity affiliate). Given low expectations regarding domestic oil or gas production growth, the net effect will likely be a reduction in normalized gross profit / boe. Reserves: Good news brewing Despite a likely reserves reversal from the Hokkaido field this year, the effect of booking the Hangingstone oil sands (Canada) expansion in FY3/13 should leave total proved reserves up 17%, and if Iraq’s Garraf reserves can be booked in FY3/14 it would increase reserves a further 15%. The FY3/12 annual report comments that there is a disparity in the reserve forecast between some of the external auditors and Japex; we hope to get some clarity in the FY3/13 annual report due in late summer. As long as no major reversals result from the review, the ability to book two material reserves additions should be positive, although the Iraq reserves are of low value per barrel given the fiscal terms in that country. Strategy: Killing two birds with one stone? In its medium-term plan, Japex calls for both an increase in overseas production and to support its domestic gas business. This is why we view positively its announcement in March to farm-in to a shale-gas-to-LNG project in Canada (Montney, British Colombia) as it would have an upstream project which would connect to its planned LNG re-gas facility in Fukushima. If it sanctions its proposed LNG re-gas facility in Fukushima and concludes the deal with Petronas in Canada (and if that project then takes sanction) then the capex burden would be >50% on a net D/E basis. However the Canadian LNG project may look for project financing, and Japex has the added firepower of selling long-held investment securities to manage its balance sheet. Valuation: Cheap on many valuation metrics Viewed against a range of fundamental valuation metrics, Japex appears materially mispriced. Proved reserves / boe is very low, at US$10 / boe, and is poised to go lower as the company books the oil sands expansion. Our DCF-based SoTP, which uses conservative assumptions for the production of its remaining domestic reserves, takes account of the potential deferred tax liability and then applies a 20% NPV discount, still leaves us at ¥5,000 / share. The reserve booking should provide a catalyst, the major risk is long-dated funding (if all projects under consideration go forward).

Japan Petroleum Exploration (1662 / 1662 JP) 4 08 May 2013 Summary financials

Figure 7: Japex – key assumptions & financials Year-end 31 March FY11 FY12 FY13E FY14E FY15E FY16E FY17E ¥/US$ 79.8 79.8 81.0 95.0 95.0 95.0 95.0 Brent – US$/bbl 86.7 114.4 109.7 116.3 103.8 95.0 96.9

Production Total O&G prod’n – consolidated 38.6 38.2 33.4 32.7 42.4 38.3 43.7 YoY growth – consolidated -2% -1% -13% -2% 30% -10% 14% Total O&G prod’n – consol+equity 45.2 48.3 58.7 52.9 58.5 YoY growth – consol + equity - - - 7% 22% -10% 11%

Realised prices Natural gas – US$/mmbtu 17.6 19.4 19.7 20.7 18.5 16.9 17.3 Correlation to Brent (%) 114% 95% 101% 100% 100% 100% 100% LNG – US$/mmbtu 17.1 18.7 18.9 20.7 18.5 16.9 17.3 Correlation to Brent (%) 110% 92% 97% 100% 100% 100% 100% Domestic production 93.8 114.4 116.1 121.7 108.6 99.5 101.5

Income statement (¥ mn) Net sales 199,651 230,638 213,154 257,625 268,938 236,304 250,484 Cost of sales 144,919 174,359 155,602 195,795 204,393 179,591 190,368 Iraq additional CoS - - - - 6,116 2,635 3,562 Gross Profit 54,732 56,279 57,552 61,830 58,429 54,078 56,555

Exploration expense 9,798 7,805 13,000 8,000 8,000 8,000 8,000 EBITDAX 44,934 48,474 44,552 53,830 50,429 46,078 48,555

SG&A 23,108 25,552 25,898 27,823 24,540 22,713 23,753 EBITDA 21,826 22,922 18,653 26,006 25,889 23,365 24,802

DD&A 7,976 7,874 7,198 8,519 11,382 10,581 12,449 Operating Income 13,850 15,048 11,455 17,487 14,507 12,784 12,353

Profit before tax 12,955 22,471 (11,121) 22,142 19,564 17,471 16,464 Income tax (2,161) (4,746) 5,561 (4,871) (4,304) (3,844) (3,622) Effective tax rate (%) 17% 21% 50% 22% 22% 22% 22% Minority interest (783) (696) (1,100) (1,100) (1,100) (1,100) (1,100) Net Income 10,010 17,027 (6,661) 16,171 14,160 12,528 11,742

EPS (¥/share) 175 298 (116) 283 248 219 205

Shares outstanding (mn) 57.2 57.2 57.2 57.2 57.2 57.2 57.2 Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 5 08 May 2013 Production: Domestic doldrums, international growth Oil: domestic decline; ‘hollow’ foreign barrels coming later: Domestic oil production has averaged a 2% annual decline over the last few years, and FY3/13 appears on track for a 12% YoY decline following production challenges resulting from over-production at a producing field in Hokkaido. Japex’s domestic producing areas are mature so have little potential for strong near-term production growth. We assume a 5% domestic oil production decline. Internationally, the focus will likely be on Iraq and a Canadian oil sands play (Hangingstone), both of which will provide lower returns per barrel produced vs. Japex’s domestic production. Japex entered Iraq in 2010 as a 30% partner in the Garraf technical service contract (TSC), where Petronas is the operator. We assume first entitlement production to occur in FY3/15 (at 8.5kb/d net to Japex). The TSC, despite paying US$1.49/bbl through cost recovery (pre-tax, which reduces the fee by 35% and trims the return per overall barrel produced for Japex) to Japex, provides some production and potentially reserves growth for the company. Japex is also the operator of an oil sands project in Hangingstone, Alberta (75% stake; CNOOC/Nexen holds the remaining 25%). Production has been achieved via a long-term pilot program, producing circa 6,000 barrels per day (kb/d), but Japex has taken a final investment decision (FID) on an expansion project in 3Q FY3/13, which Nexen also sanctioned in 4Q FY3/13. The expansion will increase volume from FY3/17 and will also likely reduce Japex’s net profit per barrel. Overall we expect oil production to increase by 60% in FY3/15 as the Iraq production is recorded but the earnings contribution will likely be marginal.

Figure 8: Japex – Oil production Figure 9: Japex – Oil production plus purchase for resale (kb/d) (kb/d) 40 40

35 35

30 30

25 25

20 20

15 15

10 10

5 5

- - FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E

Domestic production International - ex Oil Sands Oil Sands Iraq Production Purchased

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Japex trades as much oil as it produces: The company often buys and resells crude to meet client requirements rather than selling only what it can produce. We assume that the trade is FX-neutral (i.e., the customer takes FX risk), and that it generates a US$1/bbl profit before administrative costs. We also assume a similar level of ‘purchased oil sales’ will continue, presuming that entitlement barrels from the Iraq production are sold in the local market rather than transported back to Japan (thereby reducing the requirement for the purchased oil).

Japan Petroleum Exploration (1662 / 1662 JP) 6 08 May 2013

Domestic gas production dominates; growth coming from International: Production issues in Hokkaido this year have hampered local production. We assume domestic gas production falls by 1% per annum. International production (primarily from the Sanga Sanga PSC in Indonesia) has been less than 10% of total gas production historically, but with North Sumatra Block A starting up in FY3/15 we forecast international gas production will grow to 18% of total production by FY3/17.

Figure 10: Japex – Natural gas production FY09–17E (mn m3) 1,400

1,200

1,000

800

600

400

200

- FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E Domestic International

Source: Credit Suisse estimates International gas growth significantly higher if we include Kangean in Indonesia: Japex holds a 25% stake in the Kangean PSC offshore Java. The block started up production at the Terang gas field in 2012, which ramps to a net production in 2013 of 50mn standard cubic feet / day (mmscf/d), or 520mn cubic metres per annum. This is a significant addition to the company’s total production profile, but Japex records earnings from Kangean as an equity affiliate as a 25% participant in the SPV Japex. We include assumed earnings from the Kangean investment at the dividend income level (as we do with the Sakhalin I investment).

Figure 11: Japex – Consolidated & Kangean (equity affiliate) gas production (mn m3) 1,800

1,600

1,400

1,200

1,000

800

600

400

200

- FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E Consolidated production Kangean (equity affiliate)

Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 7 08 May 2013

Oil and Gas: 40,000 barrels oil equivalent per day (kboe/d): 8% CAGR growth to FY17E: Combining the consolidated oil and gas production suggests a relatively stable production level around 40kboe/d with an average growth CAGR of 8%, with Iraq production providing the majority of the stimulus.

Figure 12: Japex – Consolidated Oil & Gas production (kb/d) 50

45

40

35

30

25

20

15

10

5

- FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E Gas Oil

Source: Company data, Credit Suisse estimates

Consideration of equity affiliate production softens the FY3/15 production growth effect: In Figure 13 we show the growth effect for consolidated and consolidated plus equity affiliate booked production (Sakhalin I and Kangean). The major effect is to provide some growth in FY3/14 (+7% vs. −2%) and attenuate FY3/15’s number (+30 to +22%).

Figure 13: Consolidated & Consolidated + equity production growth 35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15% FY14E FY15E FY16E FY17E

Consolidated growth Consolidated + Kangean / Sak I

Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 8 08 May 2013 Reserves: Good news brewing FY3/12 was not a good year from a reserves-replacement perspective: The company booked less than 1mn barrels of oil equivalent (mmboe) of reserve additions but reversed 13 mmboe due a change in evaluation standard (it changed the conversion rate for natural gas), and recorded 12 mmboe of total production. Hangingstone should provide a significant booking for FY3/13: Japex announced in December 2012 that it had taken its internal board decision (FID) to go forward with the Hangingstone oil sands development in Canada. Phase 1 production is slated for 20,000 b/d (gross; Japex holds a 75% stake) and is due to start production in 2016. We understand that the directors of Nexen (now owned by CNOOC) similarly approved the development on the 28 March 2013, and hence we expect Japex to record circa 70 mmbbl in FY3/13 (total entitlement reserves Japex level are circa 100 mmbbl). We would also expect a reserves reversal following the production issue in Hokkaido, and use 20mmboe as a placeholder for this reversal (a ¥37bn impairment charge where we assume US$20 / boe NPV) – hence with 12 mmboe of production in FY3/13 Japex has the potential to record a 400% reserves replacement ratio (i.e. (70 – 20) /12) for FY3/13.

Figure 14: Japex – possible Proved reserves bookings (mm boe) 350

300

250

200

150

100

50

-

Iraq?

FY11 FY12 FY13 FY14

reversal

Hokkaido

standard

Evaluation

Production Production Production

Hanginigstone Source: Credit Suisse estimates And again in FY3/14 if Iraq is recorded: In its FY3/12 annual report the company reported that it has 8,000 thousand kilolitres (50 mmboe) of evaluated reserves associated with its 30% in the technical service agreement (term: 20 years plus an option for a five- year extension), and that those reserves are not currently recorded as proved because a final development plan had not been filed or approved but that that application is scheduled for 2013. Hence if the FDP is both filed and approved by 31 March 2014, and if Japex choose to record the reserves mentioned in its FY3/12 annual report it would suggest a further 50 mmboe reserves booking in FY3/14 and—all other things being equal—another 400% potential reserves replacement ratio (RRR; where reserve additions are compared to depletion / other reserve reductions). Seventy-seven percent of Japex’s proved reserve pool independently audited, but a note of caution: The FY3/12 Annual Report states that 77% of Japex’s quoted reserves have been audited by a trio of International reserves auditors namely Ryder Scott (Primary consolidated reserves), GLJ Petroleum Consultants (Canadian Oil Sands) and Gaffney Cline (Kangean). In page 20 of the FY3/12 annual report the commentary mentions that there is a disparity between some externally audited reserve forecast and the companies own estimates. The company advised us that it are still discussing the issue with its auditors, so we would note that our reserves growth forecast carries an element of risk in this regard.

Japan Petroleum Exploration (1662 / 1662 JP) 9 08 May 2013 Strategy: Killing two birds with one stone? Japex’s strategy has three major components: The first is to grow the company’s upstream E&P business, with a shift to a greater focus on international opportunities both exploration and producing. The target is to lift total production (presumably including equity affiliate production) from 40kboe/d in FY3/11 to 70kboe/d in FY3/16. Japex also aims to increase proved reserves to 450mn boe by FY2021 (from 223mn boe as at FY3/12). The second strategy is to continue to participate in the domestic natural gas business with the original strategy quoting a target of 2bn cubic meters (bn m3) of sales by FY3/14 and a go forward sales growth rate of “around 7%”. The third is to commercialize environmental technology and other innovations, with methane hydrate targeted for FY2019.

Figure 15: Japex’s medium-term plan – Three key policies for Japex expansion

Source: Company data

E&P: Credit Suisse forecast circa 60kboe/d by FY3/17, with the Kangean ramp-up, production in Iraq (starting in CY2013) and the oil sands project in Canada ramping up in FY3/17, suggesting that if Japex is determined to hit its target production in the next three years it may have to consider a production farm-in, for approx. 10kboe/d.

Japan Petroleum Exploration (1662 / 1662 JP) 10 08 May 2013

Figure 16: Credit Suisse forecast production vs. Japex medium-term target (kboe/d) 80

70

60

50

40

30

20

10

- FY14E FY15E FY16E FY17E CS forecast Japex - Medium-term plan

Source: Company data, Credit Suisse estimates

Growing domestic gas sales with flat domestic production = increased imports: In the original medium-term plan document Japex mentioned a target to sell 2bn m3 of gas domestically in Japan, with a sales growth rate of 7% from FY3/10. In reality FY3/13 will be far lower, partially driven by domestic production problems (the latest FY3/13 gas sales forecast is for 1.46bn m3, including marginal sales in foreign countries). The FY3/12 annual report makes mention of the strategy but didn’t elaborate the earlier stated target. If we assume the target is still in place as an aspiration then Figure 17 suggests the possible gap in production versus sales aspiration under the medium-term plan.

Figure 17: Japex – domestic gas production (Credit Suisse forecast) vs. domestic gas sales aspiration (mn m3) 2,500

2,000

1,500

1,000

500

- FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E

Domestic gas production Domestic sales aspiration

Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 11 08 May 2013

New LNG re-gasification facility in Fukushima planned: In November 2012 Japex announced its plan to construct an LNG receiving facility in the port of Soma, Fukushima Prefecture. The final investment decision (FID) has not yet been taken, but the press release states a front end engineering and design (FEED) project has started for both the re-gas facility and a 40km connecting pipeline to Japex’s gas distribution pipeline system. The company advises that 1 large storage tank will be installed, and the anticipated cost to construct will be ¥50bn (US$500mn). The capacity has not been announced, but if we assume it is around 1.0MTpa (million tonnes per annum) this would equal 0.74bn m3 – a significant proportion of the shortfall from the business plan sales aspiration and possible production. If the FEED takes 12–14 months to complete, we would expect the company to target FID in 3–4Q FY3/14—with a target first gas date of 2018.

Figure 18: Japex’s LNG receiving terminal in Fukushima and connecting pipeline

Source: Company data

Inpex also building an LNG receiving terminal, in Niigata: On the surface Japex’s Fukushima project would seem akin to Inpex, which is in the middle of constructing an LNG facility in Niigata Prefecture. The difference, however, is that Inpex’s re-gas facility will receive, once in production, equity LNG molecules from its flagship upstream LNG development – Ichthys. Hence the link in the value chain will create a value accretive proposition for Inpex. Japex advise that around one-third of its current domestic gas sales are linked to landed LNG prices in Japan, and we expect this share of the total to gradually rise as the older annually set price contracts are converted to import LNG price linkage, however this simply suggests that even if Japex can sell 100% of the LNG imported at a price linked to LNG import prices it would still be a break-even type proposition – unlike the Inpex terminal in Niigata. The company guide that the terminal, if sanctioned would be ready for initial cargoes circa 2018.

Japan Petroleum Exploration (1662 / 1662 JP) 12 08 May 2013

Figure 19: Cost of integrated value chain to supply Japan vs. open market LNG price (US$/mcf) 16

14

12

10

8

6

4

2

- Well-head cost Pipeline to Liquefaction cost Shipping to All-up cost to CS APAC LNG liquefaction Japan Japan price forecast

Source: Credit Suisse estimates

Next, Japex announces an upstream deal for shale gas in Canada: In March this year Japex signed a heads of agreement with Petronas (its partner in Iraq). Japex will take a 10% stake in certain shale blocks in the Montney, along with a 10% stake in a proposed liquefaction facility in Prince Rupert Port and a commitment to off-take 1.2MTpa, in effect its 10% stake in the proposed 12MTpa facility. If executed this would validate the decision to build the LNG re-gas facility in Fukushima.

Figure 20: Petronas / Japex proposed Canadian LNG project – Cost estimate (US$ bn) 25

20

15

10

5

- Upstream cost Pipeline cost Liquefaction cost Japex 10% stake

Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 13 08 May 2013

If we assume well-head gas is produced in the Montney for US$4.5 per thousand cubic feet (mcf), piped to Prince Rupert Port for US$1.5/mcf; liquefied for $4/mcf and then shipped to Fukushima for US$1.5/mcf the total supply cost of $11.5/mmbtu is significantly lower than Credit Suisse’s end of decade LNG price estimate of US$14.5/mn British thermal units (mmbtu, where the conversion factor is 1.01). For more details on Credit Suisse’s view on LNG pricing please refer to the global shale report Shale Revolution published on 13 December 2012. If we assume the 12Mtpa liquefaction facility costs US$14.4bn, and that 12 trillion cubic feet (Tcf) feedgas costs US$3.5/mcf to produce (US$7bn), and the pipeline costs US$4bn then the combined cost to the Free On Board (FOB) point would be (if we assume 50% of the total upstream cost is incurred up to first gas) US$21.9bn, on a 100% basis. The deal has not yet closed; we would expect Japex to look to complete the transaction close to the likely target for the re-gas terminal FID. The next major hurdle would be whether the project itself took a final investment decision, which Japex advise is targeted for 2014.

Figure 21: Supply economics – equity LNG from Canada vs. open market LNG

Progress Prince Rupert LNG US$6 / mcf liquefaction gate +$US4.0 / mcf liquefaction Russian Federation = FOB US$10.0/ mcf Canada

$11.5 mmbtu EQUITY LNG Mongolia China United States Vs. +$1.5 / mcf shipping $14.5 mmbtu ‘open mkt’ LNG Japan Korea

Hong Taiwan Kong India Philippines Panama Canal

Indonesia Brazil

Malaysia

+US$1.0 / mcf shipping

Australia

$13.5/mcf FOB

Source: Industry data, Credit Suisse estimates

Funding challenges ahead? Japex advertises that Hangingstone will cost CAD$1.1bn to construct (net) over the next three-and-a-half years. If we assume the LNG re-gas terminal is sanctioned on 1 April 2014 and takes three years to build that would add a further ¥50bn over FY3/15–18. If Japex then closes the heads of agreement with Petronas / Progress, paying US$3 / barrel of oil equivalent (boe) for a 10% stake in 8Tcf of Montney shale resources this would require US$400mn gross to Japex Montney. JOGMEC (the Japan Oil, Gas and Metals National Corporation) will participate with Japex in the Japex Canadian entity (Japex Montney Ltd), providing ‘approximately ¥22bn’. However, the participation is only at the upstream; Japex will pay its full proportional cash call for the midstream if the project is sanctioned. Hence, Japex Listco would pay roughly US$200mn for the acquisition in FY3/14; 5% of upstream costs going forward; and 10% of the midstream / pipeline elements of the project, which we estimate would create a capex requirement of ¥28bn in FY3/17 then ¥67bn in both FY3/18–19 and ¥28bn in FY20 for Japex. (We assume construction starts in FY3/17 and completes in FY3/20.)

Japan Petroleum Exploration (1662 / 1662 JP) 14 08 May 2013

Figure 22: Japex – Credit Suisse ‘firm’ capex estimate Figure 23: Japex – Credit Suisse firm + likely capex (¥ bn) (¥ bn) 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 - - FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY14E FY15E FY16E FY17E FY18E FY19E FY20E Base capex Iraq Hangingstone Fukushima regas Canadian shale to LNG Base capex Iraq Hangingstone Source: Credit Suisse estimates Source: Credit Suisse estimates

Oil Sands & Iraq suggests 30% Net D/E by FY3/16: We assume a ‘base’ capex of ¥8bn (i.e., for normal operations), added to which we assume Iraq requires ¥10–15bn p.a. over the next few years, and then Hangingstone follows the outline capex guided by the company (circa ¥15bn in FY3/14 then ¥47bn and ¥29bn in FY3/15–16, respectively). In our model, if no other assets are sold to raise cash, this would lift net debt / equity to 21% in FY3/15, 29% in FY3/16 and 30% in FY3/17. Japex have not advised the market that they have a net D/E target ceiling.

Figure 24: Japex – Net debt/equity with & without Fukushima re-gas, Canada shale capex 70%

60%

50%

40%

30%

20%

10%

0% FY13E FY14E FY15E FY16E FY17E

Net D/E - CS base case Net D/E - With Fukushima regas & Canada shale capex

Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 15 08 May 2013

Fukushima re-gas & Canadian shale to LNG would significantly lift the debt burden – Japex could consider the sale of some or all of its investment securities: Adding the capex outlined in an earlier paragraph (assuming both the Fukushima re-gas and Canadian LNG projects are sanctioned) would lift the net D/E to 33% by FY3/15, 46% in FY3/16 and 59% by FY3/17. To compensate for this one option that Japex could consider would be the liquidation of some of its investment security holdings—specifically its 7.3% holding in Inpex. Credit Suisse ran a scenario in which we included capex associated with the Fukushima LNG re-gas project and the participation cost of the Petronas LNG play in Canada (all Credit Suisse assumptions); the scenario suggested Japex could sell ¥10bn, ¥40bn and ¥50bn in FY15–17, respectively, to meet a 30% net-debt-to-equity ceiling. With the potential capital gains effect of the sale this would require the sale of almost all of Japex’s holding in Inpex. To be clear, we are not suggesting Japex will take this course of action; we are simply demonstrating how those investment securities could be used to manage a debt to equity target in a period of high capex requirement. Another route could be project financing for the Canadian LNG project, which could reduce the balance sheet leverage requirement for Japex.

Japan Petroleum Exploration (1662 / 1662 JP) 16 08 May 2013 Company and industry overview Japex – a brief history: Japex was established in 1955 as a special-purpose company through a government initiative with its primary role to enhance Japan’s self-sufficiency ratio for oil and gas. As such, it is an upstream oil and gas producer/seller that also buys oil for re-sale to domestic customers as oil production declines. In 1967, it was integrated into the Japanese government’s newly established Japan Petroleum Development Corp. (JPDC), but the company was spun off from JPDC to resume operations under the ‘Japex’ name. In its most recent incarnation Japex was listed in December 2003, with the government as a 34% holder of issued shares. Currently Japex produces 15,000 barrels of oil per day (kb/d), 6,000 kb/d of which from its oil sands trial in Canada; 1,000 kb/d from overseas production and the remainder produced in Japan. It produces 18,000 barrels of oil equivalent (kboe/d) of gas domestically. Natural gas represents 75% of proved reserves.

Figure 25: Japex – revenue breakdown by segment Figure 26: Japex – revenue breakdown by region

Domestic North America production 4% Others 13% Overseas 23% production 1%

Purchased 20% LNG 8%

Bitumen 4% Natural gas Japan 31% 96%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Inpex and Japex overlap in certain areas: Both have oil sands investments in Canada (Inpex in Joslyn, Japex in Hangingstone), and now both have shale gas plays in the same country – both of which are targeting LNG exports (Inpex via CNOOC / Nexen, Japex via Petronas / Progress). Both are building or, in Japex’s case, planning to build LNG re-gas facilities in Japan—measures clearly linked to receiving equity LNG molecules but also supporting the stated goal at both entities: a focus on the domestic natural gas supply chain. Both are invested in the Japanese SPV that holds a 30% stake in Sakhalin I in Russia (Japex holding 15% and Inpex 5% of the vehicle). In terms of resources, Japex has as many technical staff as Inpex despite its being a much smaller producer. (Historically, Japex has been the operator of its production while Inpex has not operated most of its production but is nevertheless now working toward increasing its role as operator— specifically in Ichthys and Abadi LNG projects.) We would argue there is a reasonably strong overlap in both asset distribution and skill-set drivers. ‘Take-over Defense Measures’ – always an interesting topic for a press release: On 29 March 2013 Japex released a press statement titled ‘Notice of Partial Change of Members of Independent Committee for Measures to Prevent Large-Scale Acquisition of Our Company Shares (Takeover Defense Measures). It went on to announce a replacement to the Independent Committee members. The plan is designed to avoid acquisition of more than 20% of the total share capital by any group without the board’s concurrence. Japex advise that there is no ‘golden share’ provision (as there is with Inpex).

Japan Petroleum Exploration (1662 / 1662 JP) 17 08 May 2013

Japan Inc vs. China vs. India, Korea etc. – a question of scale? Prime Minister Shinzo Abe’s reinvigorated approach to the primary issues facing Japan may extend to a fresh look at energy security. Japan had previously used a government agency to drive its oil and gas holdings (JNOC) but disbanded that in the early 2000s when massive debts built up. Inpex and Japex became listed entities charged with both meeting shareholder expectations and support for national aims with regards to energy security. When we consider the model in China, there are three major oil and gas players, who are also listed, but with a much greater government share (60% plus) and a parent/listco structure that allows the parent to enter activities that may not be immediately palatable to listco shareholders. Scale is also clearly different in China, where at the listco level alone CNOOC is now a 1.1mn boe/d producer (with its acquisition of Nexen), Sinopec at 1.2 mboe/d and PetroChina at 3.6 mboe/d. With greater government control of the Chinese super-majors and a more flexible ownership structure Japan may be tempted to revisit its oil and gas model, rethinking how best to compete with its larger neighbour to the West.

Figure 27: Japan – 2012 production by player Figure 28: Japan / Korea / China – key players oil and gas production 2012 (CNOOC 2013 – includes Nexen) (kboe/d) (kboe/d) 1,200 4,000

3,500 1,000 3,000

800 2,500

2,000 600

1,500 400 1,000

200 500

- - Total PetroChina Sinopec CNOOC Korea Inc Inpex Mitsui Mitsubishi JX JOGMECMarubeni Japex Total Japan Japan

Source: Wood Mackenzie, company data, Credit Suisse estimates Source: Wood Mackenzie, company data, Credit Suisse estimates

Methane hydrate’s ‘fire and Ice’: Some Japanese experts believe there may be enough methane hydrate reserves to meet Japanese demand for 100 years, if demonstrated to be commercially and technically viable. The major challenges appear to be methane release and cost to produce, with a recent (and first) offshore production-flow test in Japanese waters demonstrating the capacity for an extended production test. Not yet demonstrated are commerciality and the competence to rigorously avoid methane escape. The project owner for the trial is METI, with JOGMEC as the implementing body and Japex as operator. We spoke to Japex, who confirmed that it does not fund the current experimental phase of the national quest for commercial production of methane hydrate. Credit Suisse does not expect this to become commercial in the investable future, but it will be interesting to see the speed of potential commercialization, and the point at which Japex, and potentially other Japanese oil and gas commercial entities chose to allocate exploration and development capex to the theme.

Japan Petroleum Exploration (1662 / 1662 JP) 18 08 May 2013 Valuation: Materially mispriced Let’s start with P/E: Japex is trading at 13x one-year forward consensus earnings, below its five-year average of 15x. The current P/E weakness likely reflects the fact the FY3/13 will record a significant loss, driven by an asset write-down in 3Q. We forecast FY3/14 returns to NP of ¥16.2bn, which suggests a FY3/14 P/E of 13.1x. Japex continues to trade in a higher P/E range than Inpex.

Figure 29: Japex vs. peers –12-month P/E trading range Figure 30: Forward P/E on consensus estimates – Japex vs. Inpex (x) (x) 30 23

21 25 19 20 17

15 15

10 13

11 5 9 - 7

BG Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

Inpex

Japex

Statoil

Santos

PTTEP

Apache

Conoco

CNOOC Anadarko Woodside Japex Inpex

Source: Bloomberg, Credit Suisse estimates Source: Datastream, Credit Suisse estimates Reserves: Japex moving into Inpex territory (i.e., material bookings to total) if it books Hangingstone expansion in FY3/13: Japex is currently recording US$9.8 per proved BoE—slightly higher than Inpex but still well below a peer set at US$15.9/boe. With the Hangingstone expansion now confirmed then even after removing 20mn boe for a reserves reversal in Hokkaido suggests a 400% reserve replacement for this year and would reduce its EV/1P to $8.0/boe.

Figure 31: EV / Proved Reserves comp – Japex vs. peers (US$/boe) 25 23.5 23.6 22.5 23.0 Average EV/boe = $15.9 20.7 20

14.6 15 14.2 12.5

9.3 9.8 10.1 10 8.0 6.6

5

-

BG

Inpex

Japex

Statoil

Santos

PTTEP

Apache

Conoco

CNOOC

Talisman

Anadarko

Woodside

& Hokkaido & Hangingstone Japex - for - adj Japex Source: Bloomberg, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 19 08 May 2013

Business is domestically focused, unlike the majority of global peers: Unlike Inpex, and its global peers, Japex’s production and sales are far more concentrated in Japan, with producing centres in Hokkaido, Akita and Niigata. In this way, its nearest regional peers may be PTTEP and CNOOC, where both have significant domestic production as a percentage of total production and are driven partially to maximize domestic production from an energy security perspective. In that regard Japex is expensive on a P/E basis vs. CNNOC & PTTEP but significantly cheaper from a discount-to-core-NAV perspective. It would be fair to say that both CNOOC and PTTEP are further developed than Japex in terms of moving to ‘internationalize’ their business.

Figure 32: Twelve-month P/E trading range – Japex vs. Figure 33: Premium/(discount) to core NAV – Japex vs. CNOOC vs. PTTEP CNOOC vs. PTTEP (x) 10% 18

16 0% 14 -10% 12

10 -20% 8

6 -30%

4 -40% 2

- -50% Japex CNOOC PTTEP PTTEP CNOOC Japex

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Japex, like Inpex, trading at a circa 40% discount to core NAV: Figure 27 shows Inpex and Japex significantly lagging their regional peers from a core NAV discount perspective – with Japex currently over 40% discounted to our core NAV.

Figure 34: Premium (discount) to core NAV – Japex vs. regional E&Ps 10%

0%

-10%

-20%

-30%

-40%

-50% Santos PTTEP Woodside Oil Search CNOOC Inpex Japex

Source: Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 20 08 May 2013

DCF SoTP derived TP of ¥5,000 / share – with a 20% NAV discount: We produce a run-out DCF for Japex’s Japanese proved reserves using very conservative assumptions to arrive at ¥1,650 / share for those reserves. This does not include any value for the pipeline network or associated current domestic infrastructure. Adding this to its other producing assets valued on a run out DCF basis suggests a total producing asset value of ¥4,000 / share. We then add the Hangingstone oil sands expansion project which lifts the valuation to ¥4,500 / share. We then add its 7% stake in Inpex (valuing Inpex at ¥500,000 / share) and other investment securities to arrive at a total asset value of ¥7,000 / share. We then reflect the net debt position arriving at a NAV of ¥6,300 / share. We then apply a 20% NAV discount, primarily to reflect the recent production challenges in Hokkaido, arriving at our target price of ¥5,000 / share.

Figure 35: Japex – Credit Suisse SoTP valuation US$ mn ¥ bn ¥/share Operating projects Japan 993 94 1,651 Russia – Sakhalin I 842 80 1,399 Indonesia – Kangean 173 16 288 Canada – oil sands pilot 166 16 276 Iraq – Garraf TSC 158 15 263 Indonesia – others 78 7 130 Subtotal 2,411 229 4,007

Projects under development Canada oil sands expansion 298 28 496 Canada BC shale gas (Montney) - - - Subtotal 298 28 496

Investment assets Inpex shares @ ¥500,000 1,406 134 2,338 Other investment securities 84 8 140 Subtotal 1,491 142 2,478

Total Asset Value 4,200 399 6,981

Cash on hand 314 30 521 Total loans (276) (26) (458) Tax defer (cap gain Inpex) (448) (43) (745) Net cash/(debt) (410) (39) (682) Net Asset Value 3,789 360 6,299

NAV discount – 20% (758) (72) (1,260) Adjusted NAV 3,031 288 5,039

NAV (10% disc) without tax defer 4,065 386 6,340 Source: Credit Suisse estimates ¥6,300 if the deferred tax was Not Applicable: We reflect the tax deferment in the net debt calculation, as this is related to a possible capital gain in Japex’s long-term holding of Inpex shares. If a merger between the entities resulted in those shares being absorbed then Japex, according to our SoTP, would be worth ¥6,300. Inpex and Japex trade in a range: Looking back 24 months Japex has outperformed Inpex by 25% in March 2013 and under-performed by 8% in October 2011. Currently Japex is outperforming Inpex by 20%. Cross-holding between the two entities is thus: Japex holds 7.3% of Inpex and Inpex hold 5% in Japex and, specifically, the value of Japex’s holding in Inpex as a percentage of its core NAV (37% in our current SoTP).

Japan Petroleum Exploration (1662 / 1662 JP) 21 08 May 2013

Figure 36: Japex vs. Inpex performance over the past 24 Figure 37: Price performance since 1 April 2011 – Japex, months Inpex & TOPIX 30% (Apr-11 = 100) 140 25% 130

20% 120 Japex outperform 15% 110

10% 100 90 5% 80 0% 70 -5% Japex underperform 60 -10% 50 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 -15% Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Japex Inpex TOPIX

Source: Datastream, Credit Suisse estimates Source: Datastream, Credit Suisse estimates

Like Inpex, Japex has not yet participated in the ‘Abe rebound’: TOPIX has risen around 57% since 1 October 2012, but Japex has only risen around 22%. The degree to which Japex could meet incremental domestic gas demand from domestic supply rather than gas imports should be seen as a positive.

Japan Petroleum Exploration (1662 / 1662 JP) 22 08 May 2013 HOLT analysis HOLT – 12-month forward valuation at ¥9,090: Feeding our estimates through Credit Suisse HOLT suggests Japex’s expected CFROI® will trend down to the 3.5-4% level by 2016. This valuation scenario, outlined in the table below, suggests a twelve-month forward warranted price of ¥9,090, or 140% potential upside. This is in line with the research team’s view that the stock appears undervalued.

Figure 38: Japex – Credit Suisse HOLT view

JAPAN PETROLEUM EXPLORATION CO., LTD.(C) (1662) Current Price: JPY 3780.00 Warranted Price: JPY 9090.31 Valuation date: 26-Apr-13 Sales Growth (parallel % point change to forecasts) Mar-11A Mar-12A Mar-13E Mar-14E Mar-15E -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 11.1 15.5 -7.6 20.9 4.4 EBITDA Mgn, % 19.3 16.9 16.7 16.9 16.5 -2.0% 119% 121% 124% 127% 130% Asset Turns, x 0.26 0.29 0.27 0.30 0.29

-1.0% 126% 129% 132% 136% 139% CFROI®, % 5.3 5.2 5.3 4.6 3.9

(parallel %point Disc Rate, % 7.0 7.5 6.0 6.0 6.0 0.0% 134% 137% 140% 144% 149% Asset Grth, % 6.0 7.1 2.1 7.4 7.6

changeto forecasts) 1.0% 141% 145% 149% 153% 158% Value/Cost, x 0.4 0.4 0.4 0.4 0.4 Economic PE, x 6.8 6.9 8.0 8.7 9.5 EBITDA Margin EBITDA 2.0% 148% 152% 157% 162% 167% Leverage, % 14.8 20.1 19.7 19.5 18.7

More than Sales Growth (in %) More than 40.00 10% Within 10% 10% upside downside 30.00

CFROI & Discount Rate (in %) 20.00

8.00 10.00

7.00 0.00

Historical CFROI 6.00 -10.00

-20.00 5.00 Historical Transaction CFROI 2001 2003 2005 2007 2009 2011 2013 2015 4.00

Forecast CFROI 3.00 Operating Margin and EBITDA (in %) - see note* 40.00 2.00 Forecast Transaction CFROI 35.00 1.00 30.00 Discount Rate 0.00 25.00 2001 2003 2005 2007 2009 2011 2013 2015 20.00 15.00 10.00

HOLT - Credit Suisse Analyst Scenario Data Scenario Analyst Suisse Credit - HOLT Asset Growth (in %) 5.00 50.00 0.00

Historical Asset 2001 2003 2005 2007 2009 2011 2013 2015 40.00 Growth Rate

30.00 Historical Growth Asset Turns (x) Incl Intang 0.35 20.00 Forecast Growth 0.30 10.00 0.25

Forecast Growth Incl Intang 0.20 0.00 0.15 Normalised Growth -10.00 Rate 0.10

-20.00 0.05 2001 2003 2005 2007 2009 2011 2013 2015 0.00 2001 2003 2005 2007 2009 2011 2013 2015

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. * Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

Source: HOLT ValueSearch

Japan Petroleum Exploration (1662 / 1662 JP) 23 08 May 2013 Company financials

Figure 39: Japex – key assumptions Year-end 31 March FY11 FY12 FY13E FY14E FY15E FY16E FY17E ¥/US$ 79.8 79.8 81.0 95.0 95.0 95.0 95.0

Production Natural gas (mn m3) Domestic 1,198 1,237 1,023 1,013 1,003 993 983 Overseas 37 34 35 35 116 159 213 Total 1,235 1,271 1,058 1,048 1,119 1,152 1,196 LNG – mn m3 33.3 17.0 0.7 0.7 0.8 0.8 0.8 Total gas production 1,268 1,288 1,059 1,049 1,119 1,152 1,196 YoY% 1% 2% -18% -1% 7% 3% 4%

Crude oil (kb/d) Domestic 9.4 9.1 8.0 7.6 7.3 6.9 6.6 Overseas (ex oil sands & Iraq) 0.5 0.8 1.1 1.0 1.2 1.3 1.1 Iraq - - - - 8.5 4.0 5.3 Canadian Oil Sands 6.8 6.1 6 6 6.2 6.2 10.2 Total liquids production 16.7 16.0 15.1 14.6 23.1 18.4 23.1

Total O&G prod’n – consolidated 38.6 38.2 33.4 32.7 42.4 38.3 43.7 YoY growth – consolidated -2% -1% -13% -2% 30% -10% 14% Total O&G prod’n – consol+equity 45.2 48.3 58.7 52.9 58.5 YoY growth – consol + equity - - - 7% 22% -10% 11% Sales Natural gas (mn m3) 1185 1194 1023 1048 1119 1152 1196 3rd party 368 536 429 400 400 400 400 LNG (‘000 tonnes) 209 216 216 216 216 216 216

Total crude oil 32.9 30.9 29 29.6 38.1 33.4 38.1 Domestic production 9.4 9.1 8.0 7.6 7.3 6.9 6.6 Overseas production – ex Iraq 0.5 0.8 1.1 1.0 1.2 1.3 1.1 Iraq 0.0 0.0 0.0 0.0 8.5 4.0 5.3 Purchased 16.2 14.9 13.9 15.0 15.0 15.0 15.0 Bitumen 6.8 6.1 6.0 6.0 6.2 6.2 10.2

Total Oil & Gas sales 66.1 67.5 60.6 61.1 70.9 66.8 72.3 Realised prices Natural gas – ¥/ m3 39.3 43.3 44.79 55.1 49.2 45.1 46.0 Natural gas – US$/mmbtu 17.6 19.4 19.7 20.7 18.5 16.9 17.3 Correlation to Brent (%) 114% 95% 101% 100% 100% 100% 100% LNG – ¥/tonne 66,192 72,554 74,561 95,673 85,386 78,184 79,748 LNG – US$/mmbtu 17.1 18.7 18.9 20.7 18.5 16.9 17.3 Correlation to Brent (%) 110% 92% 97% 100% 100% 100% 100%

Brent – US$/bbl 86.7 114.4 109.7 116.3 103.8 95.0 96.9 Domestic production 93.8 114.4 116.1 121.7 108.6 99.5 101.5 Correlation to Brent (%) 108% 100% 106% 105% 105% 105% 105% Oversean production 74.5 127.6 91.9 116.3 103.8 95.0 96.9 Correlation to Brent (%) 86% 112% 84% 100% 100% 100% 100% Iraq - - - 116.3 103.8 95.0 96.9 Correlation to Brent (%) - - - 100% 100% 100% 100% Purchased 88.3 115.9 103.4 115.3 102.9 94.2 96.1 Correlation to Brent (%) 102% 101% 94% 99% 99% 99% 99% Bitumen 49.4 47.7 51.0 52.3 46.7 42.8 43.6 Correlation to Brent (%) 57% 42% 47% 45% 45% 45% 45% Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 24 08 May 2013

Figure 40: Japex – income statement Year-end 31 March (¥ mn) FY11 FY12 FY13E FY14E FY15E FY16E FY17E Sales Domestic production 25,777 30,351 27,630 32,265 27,356 23,797 23,059 Overseas production 1,085 2,971 2,990 4,031 34,896 17,459 21,504 Purchased 41,594 50,290 42,347 59,946 53,500 48,988 49,968 Bitumen 9,784 8,467 9,047 10,884 10,005 9,253 15,383 Natural gas 61,033 74,909 65,035 79,833 74,737 69,920 73,344 LNG 13,834 15,672 16,105 20,665 18,443 16,888 17,226 Subtotal 153,108 182,660 163,154 207,625 218,938 186,304 200,484 Contract services 7,000 8,400 10,000 10,000 10,000 10,000 10,000 Other businesses 39,800 41,500 40,000 40,000 40,000 40,000 40,000 Variance (257) (1,922) - - - - - Net sales 199,651 230,638 213,154 257,625 268,938 236,304 250,484

Cost of sales 144,919 174,359 155,602 195,795 204,393 179,591 190,368 % of sales 73% 76% 73% 76% 76% 76% 76% Iraq additional CoS - - - - 6,116 2,635 3,562 Gross Profit 54,732 56,279 57,552 61,830 58,429 54,078 56,555

Exploration expense 9,798 7,805 13,000 8,000 8,000 8,000 8,000 EBITDAX 44,934 48,474 44,552 53,830 50,429 46,078 48,555

SG&A 23,108 25,552 25,898 27,823 24,540 22,713 23,753 SG&A as % to GP 42% 45% 45% 45% 42% 42% 42% EBITDA 21,826 22,922 18,653 26,006 25,889 23,365 24,802

DD&A 7,976 7,874 7,198 8,519 11,382 10,581 12,449 DD&A per bbl 7.1 7.1 7.3 7.5 7.7 8.0 8.2 Operating Income 13,850 15,048 11,455 17,487 14,507 12,784 12,353

Non-operated income 5,572 7,349 12,886 5,605 6,557 6,438 5,911 Interest income 520 1,368 886 839 1,159 1,039 862 Dividend income 3,074 5,507 5,000 3,766 4,398 4,398 4,049 Other income 1,978 474 7,000 1,000 1,000 1,000 1,000 Non-operated expense (2,101) (19) (500) (500) (500) (500) (500) Interest expense (199) (219) (262) (450) (1,000) (1,250) (1,300)

Ordinary Income 17,122 22,159 23,579 22,142 19,564 17,471 16,464 Extraordinary gain/(loss) (4,167) 312 (34,700) - - - -

Profit before tax 12,955 22,471 (11,121) 22,142 19,564 17,471 16,464 Income tax (2,161) (4,746) 5,561 (4,871) (4,304) (3,844) (3,622) Effective tax rate (%) 17% 21% 50% 22% 22% 22% 22% Minority interest (783) (696) (1,100) (1,100) (1,100) (1,100) (1,100) Net Income 10,010 17,027 (6,661) 16,171 14,160 12,528 11,742

EPS (¥/share) 175 298 (116) 283 248 219 205

Shares outstanding (mn) 57.2 57.2 57.2 57.2 57.2 57.2 57.2 Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 25 08 May 2013

Figure 41: Japex – Balance sheet Year-end 31 March (¥ mn) FY11 FY12 FY13E FY14E FY15E FY16E FY17E Current assets Cash & deposits 32,042 29,805 22,144 20,984 28,976 25,987 21,552 Notes & account receivables 21,235 27,392 25,315 30,597 31,941 28,065 29,749 ST investment securities 28,186 51,870 51,870 51,870 51,870 51,870 51,870 ST loans receivables 24,087 39,295 39,295 39,295 39,295 39,295 39,295 Deferred tax assets 2,150 1,722 1,550 1,472 1,472 1,472 1,472 Other current assets 14,900 14,968 15,118 15,269 15,422 15,576 15,732 Total current assets 122,600 165,052 155,292 159,488 168,975 162,265 159,670

Non-current assets Property, plant & equipment 140,642 132,859 125,661 149,271 203,270 240,969 255,710 Intangible assets 7,296 7,156 7,013 6,873 6,735 6,600 6,468 Investment securities 221,971 192,726 192,726 192,726 192,726 192,726 192,726 LT loans receivables 18,791 23,407 23,407 23,407 23,407 23,407 23,407 Deferred tax assets 1,101 878 746 634 571 514 462 Other non-current assets 9,024 15,439 15,902 16,379 16,871 17,377 17,898 Less: allowance for doubtful a/c (42) (38) (34) (31) (28) (25) (22) Less: allowance for overseas investment loss (5,291) (4,593) (4,134) (3,720) (3,348) (3,013) (2,712) Total non-current assets 393,492 367,834 361,287 385,540 440,204 478,554 493,937

Total assets 516,092 532,886 516,579 545,027 609,179 640,819 653,607

Current liabilities Notes & account payables 5,057 7,251 6,701 8,099 8,455 7,429 7,875 Other current liabilities 14,894 25,725 25,982 26,242 26,504 26,770 27,037 Total current liabilities 19,951 32,976 32,684 34,342 34,960 34,199 34,912

Non-current liabilities LT loans 26,898 26,198 26,198 45,000 100,000 125,000 130,000 Deferred tax liabilities 56,531 42,601 36,211 30,779 27,701 24,931 22,438 Provision for retirement benefits 7,766 7,874 7,874 7,874 7,874 7,874 7,874 Asset retirement obligations 9,524 9,670 9,670 9,670 9,670 9,670 9,670 Other non-current liabilities 1,734 6,795 6,931 7,070 7,211 7,355 7,502 Total non-current liabilities 102,453 93,138 86,884 100,393 152,456 174,830 177,484

Equity Shareholders’ equity 293,861 308,601 301,940 318,111 332,272 344,799 356,541 Accumulated other comprehensive inc 91,566 83,995 79,795 75,805 72,015 68,414 64,994 Minority interest 8,261 14,176 15,276 16,376 17,476 18,576 19,676 Total equity 393,688 406,772 397,012 410,293 421,763 431,790 441,211

Total liabilities & equity 516,092 532,886 516,579 545,027 609,179 640,819 653,607 Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 26 08 May 2013

Figure 42: Japex – Cash flow statement Year-end 31 March (¥ mn) FY11 FY12 FY13E FY14E FY15E FY16E FY17E EBIT 13,850 15,048 11,455 17,487 14,507 12,784 12,353 DD&A 7,976 7,874 7,198 8,519 11,382 10,581 12,449 Dryhole expenses 9,798 7,805 13,000 8,000 8,000 8,000 8,000 Working capital 2,547 (23,078) 8,027 (3,384) (488) 3,350 (738) Minorities Others (7,090) 6,418 (683) (647) (615) (589) (566) Cash generated from operations 27,081 14,067 38,997 29,976 32,786 34,126 31,497 Interest received 520 1,368 886 839 1,159 1,039 862 Interest paid (199) (219) (262) (450) (1,000) (1,250) (1,300) Income taxes paid (7,599) (18,025) (526) (10,114) (7,319) (6,557) (6,064) Dividends received 3,074 5,507 5,000 3,766 4,398 4,398 4,049 Others (4,167) 312 (34,700) - - - - Operating cash flow 18,710 3,010 9,396 24,018 30,024 31,757 29,044

Capital expenditure (13,651) (7,896) (13,000) (40,130) (73,380) (56,280) (35,190) Acquisitions Net disposals Net investments 13,807 5,701 143 140 137 135 132 Others Investing cash flow 156 (2,195) (12,857) (39,990) (73,243) (56,145) (35,058)

Dividends paid Equity raised Minorities (398) 5,219 - - - - - Adjustment on comprehensive inc (13,167) (7,571) (4,200) (3,990) (3,790) (3,601) (3,421) Financing cash flow (13,565) (2,352) (4,200) (3,990) (3,790) (3,601) (3,421)

Change in cash/(net debt) 5,301 (1,537) (7,661) (19,962) (47,009) (27,989) (9,435) Opening cash/(net debt) (157) 5,144 3,607 (4,054) (24,016) (71,024) (99,013) Closing cash/(net debt) 5,144 3,607 (4,054) (24,016) (71,024) (99,013) (108,448) Source: Company data, Credit Suisse estimates

Japan Petroleum Exploration (1662 / 1662 JP) 27 08 May 2013

Companies Mentioned (Price as of 07-May-2013) Anadarko Petroleum Corp. (APC.N, $86.74) Apache Corp. (APA.N, $76.7) BG Group plc (BG.L, 1157.0p) CNOOC Ltd (0883.HK, HK$14.58) ConocoPhillips (COP.N, $62.84) INPEX Corporation (1605.T, ¥471,000, OUTPERFORM, TP ¥690,000) Japan Petroleum Exploration (1662.T, ¥3,890, OUTPERFORM, TP ¥5,000) Progress Energy Resources Corp. (unlisted) Santos Ltd (STO.AX, A$12.53) Statoil (STL.OL, Nkr137.9) Talisman Energy Inc. (TLM.N, $11.63) Woodside Petroleum (WPL.AX, A$37.08) PTTEP (unlisted) Petronas (unlisted)

Disclosure Appendix

Important Global Disclosures David Hewitt and Horace Tse, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for CNOOC Ltd (0883.HK)

0883.HK Closing Price Target Price Date (HK$) (HK$) Rating 20-Aug-10 13.26 11.77 U 22-Sep-10 14.50 11.70 21-Oct-10 16.08 13.41 14-Dec-10 18.48 14.00 18-Mar-11 17.24 15.90 03-Oct-11 12.16 20.28 O 04-Oct-11 11.34 * 19-Oct-11 13.18 16.60 O 26-Oct-11 14.54 16.15

07-Nov-11 14.92 15.95 UNDERPERFORM 08-Jan-12 15.08 17.60 OUTPERFORM NEUTRAL 23-Feb-12 17.38 17.60 N 13-Apr-12 15.82 18.30 O 11-Jul-12 15.38 17.80 15-Oct-12 15.78 18.60 05-Nov-12 16.28 20.00 04-Apr-13 14.94 20.20 * Asterisk signifies initiation or assumption of coverage.

Japan Petroleum Exploration (1662 / 1662 JP) 28 08 May 2013

Price and Rating History for INPEX Corporation (1605.T)

1605.T Closing Price Target Price Date (¥) (¥) Rating 25-Jun-10 520,000 750,000 O 08-Jul-10 476,000 R 07-Sep-10 407,500 750,000 O 09-Sep-10 404,000 480,000 17-Sep-10 399,500 465,000 15-Dec-10 473,500 631,000 18-Mar-11 580,000 765,000 17-Nov-11 492,500 580,000 19-Dec-11 471,500 700,000

13-Apr-12 523,000 840,000 OUTPERFORM 12-Jul-12 436,000 780,000 REST RICT ED N O T RAT ED 07-Aug-12 455,500 790,000 12-Oct-12 466,500 780,000 16-Nov-12 447,000 NR 25-Jan-13 481,500 705,000 O * 03-Apr-13 485,000 690,000 * Asterisk signifies initiation or assumption of coverage.

Price and Rating History for Japan Petroleum Exploration (1662.T)

1662.T Closing Price Target Price Date (¥) (¥) Rating 25-Jun-10 3,850 4,800 O 17-Sep-10 3,210 4,600 15-Dec-10 3,130 3,100 N 24-Feb-11 3,975 4,500 O 14-Nov-11 3,070 3,800 19-Dec-11 2,932 5,000 13-Apr-12 3,615 5,600 12-Jul-12 2,961 4,800 07-Aug-12 2,993 5,200

12-Oct-12 3,285 5,100 OUTPERFORM 16-Nov-12 2,828 NR NEUTRAL N O T RAT ED * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rati ngs are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand ar e, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its curre nt share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Japan Petroleum Exploration (1662 / 1662 JP) 29 08 May 2013

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (39% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Japan Petroleum Exploration (1662.T) Method: Our ¥5,000 target price for Japan Petroleum Exploration (JAPEX) is based on a DCF-based SoTP NAV valuing the company's oil & gas assets. We apply a long-term oil price of US$90/bbl (Brent) and an exchange rate of ¥95/$. After including the effect of INPEX shares valuation at ¥500,000/share and net cash/debt, we arrive at our core NAV of ¥6,300 - to which we apply a 20% NAV discount and arrive at our target price of ¥5,000. Risk: Risks to our ¥5,000 target price for Japan Petroleum Exploration (JAPEX) are: (1) volatility in crude oil and natural gas; (2) fluctuation in the yen against the US dollar; (3) fluctuation in margins in the oil sands business; (4) a rise (decline) in imported LNG prices could result in a reverse (positive) spread; (5) exhaustion (finding) of domestic oil and gas fields; 6) a major increase (decrease) in materials and equipment prices or materials costs could lead to a reduction (increase) in earnings stemming from a rise in the overall investment burden; (7) in terms of country risk, Japex is involved in oilfield development in Iraq. Price Target: (12 months) for INPEX Corporation (1605.T)

Method: Our ¥690,000 target price for Inpex Corporation is based on a Sum of the Parts (SoTP) valuation for the company's oil & gas assets. Using a run-out discounted cashflow (DCF) with a long-term oil price (Brent) assumption of US$90/bbl for Inpex's individual assets, we arrive at a core net asset value (NAV) of ¥766,670. We then apply a 10% discount to the core NAV, arriving at our target price of ¥690,000. The 10% to reflect general risks (e.g., cost overruns, overly aggressive M&A activity) as well as the current core discount for peers in Asia and a reduction in risk due to project financing arrangements for Ichthys having been arranged. Risk: Risks to our ¥690,000 target price for Inpex Corporation are: (1) Changes in oil prices and/or forex rates. (2) INPEX has two major LNG development projects, Ichthys and Abadi. The primary risk is capex overruns at Ichthys, although we have pointed out that we think the project has a comfortable cushion in its capex estimate. Fluctuations in the prices of capital goods and materials could impact on the amount of investment required, affecting profitability and cash flow. (3) Political uncertainty in the Middle East, concerns on Europe debt crisis and global economic recovery poses risks to our oil price assumption and overall equity market.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

Japan Petroleum Exploration (1662 / 1662 JP) 30 08 May 2013

The subject company (0883.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (0883.HK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (0883.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (0883.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0883.HK) within the next 3 months. Credit Suisse has a material conflict of interest with the subject company (0883.HK). Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola. 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Japan Petroleum Exploration (1662 / 1662 JP) 31 08 May 2013

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Japan Petroleum Exploration 1662_050713_JAPEX (1662 / 1662 JP) initiation_E.doc32