TomCo Energy (TOM LN) Shale Oil's New Dawn Fox-Davies Capital June 13 TomCo Energy – Shale Oil's New Dawn June 2013 Contents Valuation 4 Summary 4 Discount Rate 5 Sensitivity analysis 6 Fox-Davies Company Scorecard 11 Fox-Davies Snapshot Summary 12 Directors & Officers 13 Sir Nicholas Bonsor Director and Non-Executive Chairman 13 Paul Rankine Director and CEO 13 Miikka Haromo Finance Director 13 Oil Shales 14 Classification & Geology 14 Reserves, Resources and Economics 15 Production from Oil Shales 17 The Holliday Block 20 Location & Access 20 Geology 21 EcoShale Capsule Technology 27 Shale Mining, Capsule Construction & Operation 28 Pilot Test and Simplified Process Description 29 Appendix 34 Basis Conditions for valuation 34 General Approach to Valuation 35 Brent/WTI Price Comparison 36 Oil & Gas in the United States 36 Summary of Alternative Oil Shale Technologies 42 Heritage Foundation’s Measurement of Economic Freedom 47 SPE Petroleum Resources Classification Framework 50 Glossary 53 Index of Figures and Tables 58 Research Disclosures 60 Zac Phillips 60 Investment analyst certification 60 Research Recommendations 60 Research Disclaimers 61 Fox-Davies Capital Coverage 62 Oil & Gas 62 Metals & Mining 63 Notes 64 Disclaimer: Important Information 67 Fox-Davies Contact List 68 Fox-Davies Capital 2 TomCo Energy – Shale Oil's New Dawn June 2013 TomCo Energy Shale Oil's New Dawn The Company is awaiting Red Leaf and Total to complete their EPS trial and commercialisation evaluation before proceeding with heavy expenditures. This places the Company in the most advantageous position, one in which it is best able to NAV: maximise returns. Overall $184mm £118mm Per share 6p EcoShale Technology From The EcoShale process is a hybrid in-situ and ex-situ technology, where the shale is mined and Current Price 456% restored in ground bound capsule, combining the best of both in-situ and ex-situ, resulting in a relatively cheap cost effective solution to accessing the resources. A successful EPS test will de- risk the process and expedite the next stage of TomCo’s development. However, if it is not successful, there are other retorting options available to management. Stock Data Oil Shale Oil shale is not the same as shale or tight oil. Oil Shales require pyrolysis to liberate the oil. Oil Share Price (p): 1.1p Shale is widespread and where accessible, its principal use traditionally was as a solid fuel. The Market Cap (£mm): 20.2 recent high oil price environment has made oil extraction economic and as such has reignited EV (£mm): 20.5 interest in the pyrolysis of the oil shale for use as a feed stock. Oil Shale in Uinta The Mahogany shale contains one of the most significant oil bearing series in the Green River Price Chart formation, due mostly to its high organic content. The Green River Formation is pervasive in the Uinta basin which is where TomCo’s Holliday block is located. While there is 1.3trn bbl of 2.00 reserves in the Uinta basin, substantial work is required before a full assessment of the recoverable reserves; work conducted by TomCo identifies 126mm bbl of 2P reserves. 1.75 Current Valuation The current valuation (1.1p per share, £20.2mm - $31.4mm) is not a fair reflection of the value of 1.50 the underlying assets, or the progress that the Company has made in developing its assets but of the fact that there is a hiatus in activity ahead of the announcement of commercialisation by 1.25 Red Leaf (2014) and the start of the Company’s development programme (2015). 1.00 Valuation $184mm (£118mm – 6p) Jun-12 Sep-12 Dec-12 Mar-13 We have valued TomCo’s assets at $184mm (6p), using risk adjusted EMV analysis to account 52 Week Range for the commercialisation risks associated with the EcoShale process; this is some 456% above TomCo’s current price. Should Red Leaf declare commerciality with respect to the EcoShale 0.9p 1.1p 2.0p technology, the valuation should trade towards its un-risked valuation of $321mm (11p). YE Sep (£mm unless stated) 2012 2013E 2014E 2015E TomCo Energy is an oil shale production company focused Production (m boepd) - - - - on the Holliday block in Utah Revenues 0.01 0.01 0.01 0.01 (United States), where it is targeting the Green River Operating costs (1.00) (0.45) (0.45) (15.44) Formation in the Unita basin, which has resources of 1.3trn EBITDA (1.00) (0.45) (0.45) (7.94) bbl. The Company was PBT (1.57) (0.42) (0.41) (16.04) founded in 1987 and is headquartered in London. Net Income (1.57) (0.42) (0.41) (16.04) EPS (p) (0.13) (0.03) (0.02) (0.96) CFPS (p) (0.09) (0.04) (0.03) (10.64) Source: Company & Fox-Davies Fox-Davies Capital 3 TomCo Energy – Shale Oil's New Dawn June 2013 Valuation We have valued TomCo’s assets at $184mm (6p) using risk adjusted EMV analysis. The upside potential from Red Leaf’s declaration of commerciality on its EcoShale amounts to $321mm (11p). Summary In valuing TomCo Energy we have used a similar approach to that which we use to value conventional exploration assets, namely the EMV approach; we discuss our valuation methodology in the Appendix (General Approach to Valuation – Page 35). However, unlike the valuation of exploration assets, we consider the key risk to be the ability of Red Leaf to be able to convert the relative success of its EcoShale pilot, we discuss the pilot results in the Pilot Test and Simplified Process Description section (Page 29), into a commercial application; the valuation of the Company’s asset is summarised in Figure 1 and Table 1 is broken down further in Table 2; the basis for our valuation is provided in Table 14. Figure 1 – Breakdown of FDC’s NAV Breakdown Risked NAV (%) Contribution ($mm) -1.9% 200 150 187 100 50 - (4) 98.1% Core Development Exploration (50) & Appraisal Core Development Exploration & Appraisal Source: Company & Fox-Davies Data Table 1 – NAV Valuation Summary Holliday Block Value Un-risked NAV ($mm) 324.4 Risk Capital ($mm) 2.1 Chance of Success (%) 58% Risked NAV ($mm) 187.2 Source: Company & Fox-Davies Data Fox-Davies Capital 4 TomCo Energy – Shale Oil's New Dawn June 2013 Table 2 – NAV(D) Un-risked and/Risked Valuation Summary Net Reserves NAV(D) Block (mm bbl) ($mm) ($/boe) (p/share) Un-risked Risked Un-risked Risked Un-risked Risked Un-risked Risked Core Balance Sheet Items - - (4) (4) - - (0.1) (0.1) Core NAV - - (4) (4) - - (0.1) (0.1) Development & Appraisal Utah Holliday Block 126 73 324 187 2.6 2.6 11.0 6.3 Development & Appraisal NAV 126 73 324 187 2.6 2.6 11.0 6.3 Exploration - - -- - - - -- Exploration NAV - ----- -- Total NAV 126 73 321 184 2.5 2.5 10.9 6.2 Source: Company & Fox-Davies Data Discount Rate In assessing the value of an oil company’s asset we start with a basic discount rate of 10% (“Base Rate”), thereby allowing us to value the oil in the ground, preferring to use sensitivity factors such as production rates, costs and fiscal regimes. In providing our overall Company risk adjusted NAV(D), however, we account for two additional risk premiums by adding to the discount rate; the two additional premiums are: (i) Geopolitical Risk; and (ii) Business Execution Risk. The assessment of Geopolitical and Business Execution Risks are difficult to quantify as it is subjective and varies from person to person and at what point in time you ask. It is a subjective assessment of a management’s ability to execute its business plan effectively and other operational considerations. For example, an experienced management with a solid track record in benign onshore location near infrastructure will have a higher CoS than an identical asset operated by a less experienced management, in a country with a hostile government in an offshore setting where there is no infrastructure. The overall discount rate is a product of the Base Rate, Geopolitical Risk and Business Execution Risk. Consequently, we have provided a ready reckoner (Table 3) which details the impact of the variation in the contribution that Geopolitical Risk and Business Execution Risk premiums has on the overall discount rate; to the numbers below the Base Rate must be added to arrive at the overall Discount Rate. This summarises the impact that assigning various levels of geopolitical risk has on TomCo’s valuation; we are currently carrying no geopolitical risk for the United States. Table 3 – Impact of Variation in Geopolitical Risk and Business Execution Risk Premium on NAV(D) Business Risk Premium NAV(D) ($mm) (3.0%) (2.0%) (1.0%) - 1.0% 2.0% 3.0% (3.0%) 488 413 351 298 254 216 184 (2.0%) 413 351 298 254 216 184 156 (1.0%) 351 298 254 216 184 156 132 - 298 254 216 184 156 132 112 1.0% 254 216 184 156 132 112 94 2.0% 216 184 156 132 112 94 79 Geopolitical Risk Premium 3.0% 184 156 132 112 94 79 66 Source: Fox-Davies estimates Fox-Davies Capital 5 TomCo Energy – Shale Oil's New Dawn June 2013 Sensitivity analysis In assessing the value of the Company, we have recognised all of the key parameters that we believe impact the valuation, not only the oil price and capital costs but others such as: (i) timing of development; (ii) Fischer Assay Yield; and (iii) technology risks. Oil Price We base our oil price deck on Brent, and apply a discount or premium to it, to arrive at a local price; for WTI prices, we have assumed that ~$10/bbl is appropriate, and in line with the recent average discount.