Global Energy Initiating Coverage – North Sea Investment Research June 7th, 2006 North Sea, Hype or Hydrocarbons? We are initiating coverage on 11 companies. We rate Antrim Energy (AEN CN, AEY LN) a Speculative Outperform and Bow Valley (BVX CN), Oilexco (OIL CN, OIL LN), Revus Energy (REVUS NO), Faroe Petroleum (FPM LN) and Granby Oil and Gas (GOIL LN) all as Outperform. We believe that these companies each have sustainable business models, which significantly increases the probability that investors will participate in the theoretical upside. AEN, BVX, OIL and REVUS all have current production to fund exploration. GOIL has production assets due onstream in 2007, while FPM has an extensive portfolio of material exploration to allow it to run the risks of exploration. Despite the growing maturity across the North Sea, the United Kingdom Continental Shelf (UKCS), the Norwegian Continental Shelf (NCS) and Dutch North Sea (DNS) continue to attract a wide range of industry participants. In Norway, the KonKraft initiative has led to changes in the tax system to enable smaller companies and new entrants to explore on an equal fiscal footing similar to larger and established players. In the Netherlands, the long standing small fields policy is encouraging a new generation of companies to search for gas. In the UK a number of new initiatives – Promote Licences, Frontier Licences and the Fallow Acreage policy have reduced the upfront financial burden and encouraged a raft of new entrants. The aim of this report is to review the different business models being adopted by the companies regardless of where they are listed. We have reviewed and outlined the activities of 28 companies (including 5 of the new breed of private equity financed companies (one of which went public as we completed the report) and carried out a detailed valuation and initiated coverage on 11 of the companies. A number of pure exploration companies listed on the UK’s AIM market in 2005 and attracted investors with the potential upside of drilling success. However after a number of high profile disappointments, there is a question mark over the market’s willingness to continue to fund such companies. Our recommendations are biased towards companies with existing or near-term production, which will enable the companies to continue to finance their exploration and development programmes, or at the very least have some control Please see the back two pages for important over the timing of when they seek additional funding from the market place. disclosure information Peter Nicol, 44 20 7399 2478 Toby Pierce, 44 20 7399 2490 Imraan Mohammed, 44 20 7399 2476 David Mirzai, 44 20 7399 2491 North Sea Initiating Coverage Table of Contents Summary & Recommendations 4 Introduction 10 Background – UKCS 11 North Sea Challenges 16 DTI Initiatives 18 Norway 20 Netherlands 23 Faroe Islands 26 Acquisition and Divestiture Activity 27 A Review of the North Sea Players 31 Additional Junior Players 44 Private Companies 53 Initiating Coverage on 11 North Sea Players 58 Initiating Coverage 2 Pagers 75 Appendices 100 Tristone Capital 2 June 7, 2006 North Sea Initiating Coverage Exhibit 1 : North Sea Research Report – Summary Valuation Matrix Company Endeavour Nautical Antrim Energy Bow Valley Cirrus Elixir EnCore International Faroe Petroleum Granby Oil & Gas Petroleum Oilexco Revus Energy Wham Area of North Sea UKCS UKCS NNS UKCS UKCS All All UKCS UKCS UKCS NCS UKCS General Production Status Y Y Y N N Y N N N Y Y N Mkt Cap US$ mm 130.1 399.4 36.4 22.1 95.4 214.8 182.6 42.0 234.3 888.1 295.1 26.8 Market Information Enterprise Value US$ mm 94.0 422.2 na 12.1 57.8 184.6 94.6 25.1 207.1 1,128.6 268.1 10.5 Local Ccy C$C$C$ppUS$pppC$NOKp Pricing Current Price local/sh 2.07 6.40 1.17 18.3 24.5 2.71 130.5 86.0 11.5 5.05 55.0 44.5 information Dual Listing Price local/sh 101.5p AU$0.44 241.5p P+P Reserves local/sh 0.60 4.34 na - 3 5.69 - 39 11 3.68 23 - Core Cash local/sh 0.64 0.02 na 7 10 - 5.51 60 35 1 0.47 5 25 Valuation Core NAV local/sh 1.24 4.36 - 7 13 0.18 60 73 12 4.14 28 25 RENAV 2006-07 local/sh 1.13 2.33 - 59 15 1.08 57 59 1 1.76 54 16 Future Drilling local/sh - - na 21 5 0.05 105 82 - - - 59 Upside Other local/sh - 0.24 - - - - - 91 1 0.74 - - Valuation Option Proceeds local/sh 0.37 0.15 na 6 - - 5 - 0.23 - 4 RENAV local/sh 2.74 7.08 - 93 33 1.31 227 305 15 6.88 81 103 Unrisked RENAV local/sh 4.04 15.83 na 852 174 6.46 2,929 1,863 41 16.25 148 710 Based on RENAV local/sh 2.74 7.08 - 170 43 1.51 391 323 17 6.88 82 184 original equities Unrisked RENAV local/sh 4.04 15.83 na 1,024 250 10.57 7,257 2,184 63 16.25 152 1,684 Price to Core Value % 167% 147% na 262% 190% 1523% 217% 117% 92% 122% 198% 179% Value Metrics Price to RENAV % 76% 90% na 20% 74% 208% 57% 28% 77% 73% 68% 43% Core mmboe 6.38 17.34 1.64 - 1.45 25.16 - 1.53 64.00 36.82 17.06 - Reserves as Risked Exploration mmboe 6.32 27.00 na 20.21 12.13 12.16 44.85 16.34 6.00 33.64 61.23 6.96 at June 2006 Total mmboe 12.70 44.34 1.64 20.21 13.57 37.31 44.85 17.86 70.00 70.46 78.29 6.96 2006e mboe/d 1.4 3.8 na - - 11.3 - - - 3.2 2.4 - Production 2007e mboe/d 2.3 8.1 na - 0.2 10.3 - 0.6 - 32.5 8.4 - Cash/(Net Debt) US$ mm 46.88 1.39 na 9.97 37.56 (444.19) 88.07 16.90 27.17 89.09 27.06 16.34 06 / 07 CF US$ mm 8.2 / 15.0 49.3 / 113.4 na 0 / 0 0 / 0 19.4 / 32.1 0 / 0 0 / 2.6 0 / 0 27.2 / 365 32.1 / 80.8 0 / 0 Additional Drilling program cost US$ mm 19.75 / 0 15 / 30 na 0 / 1.1 2.5 / 25.1 22.2 / 100.0 4.5 / 4.4 0.7 / 0 0.8 / 34.3 75.0 / 150.0 24.0 / 54.7 0 / 0 info Track record 2005/061 0 / 3 na na 0 / 3 0 / 0 1 / 5 0 / 1 0 / 2 0 / 0 3 / 7 1 / 2 0 / 1 Adjusting Factor na na na Farmed out & Farm down of Incl. purchase of Farmed out Farmed out & Farmed out na production at Farmed out & risked heavily Golden Eagle to Talisman assets - prospects risked heavily prospects Blåmannen Q4 risked heavily 15% WI. May 2006 Wells Booked for H2 1 1 na no rig 1 several 1 no rig 1 several several no rig Comments 2006 Current Activity To drill Causeway Two operated na Nexen plan to drill Driling Golden First production drill Brugdan in Nexen plan to drill Submit FDP for Drilling Nicol field, Looking to trade No commitment, in June 2006 exploration wells Guinea propect in Eagle in Q4 2006 from Enoch July 2006 Guinea propect in Mariner by 2007, then moving to its Fram B investigating farm- in late Summer block 15/13b in expected 4Q 2006 block 15/13b in drill Grenade in appraise Disraeli discovery out oportunities 2007 Q4 2006 Q4 2006 Dec 2006 1 successful wells / total drilled in 2005/2006 Source: Tristone Tristone Capital 3 June 7, 2006 North Sea Initiating Coverage Summary and Recommendations Based on our review of the North Sea we are initiating coverage on 11 companies. We rate Antrim Energy (AEY CN, AEY LN) a Speculative Outperform and Bow Valley (BVX CN), Oilexco (OIL CN, OIL LN), Revus Energy (REVUS NO), Faroe Petroleum (FPM LN) and Granby Oil and Gas (GOIL LN) all as Market Outperform. In our view all of these companies offer sustainable business models for the medium term and considerable potential for share price appreciation through their exploration and development programs. Despite the growing maturity in all areas of the North Sea, the United Kingdom Continental Shelf (UKCS), the Norwegian Continental Shelf (NCS) and Dutch North Sea (DNS), the region continues to attract a wide range of industry participants. The “prize” in terms of the remaining recoverable resources remains large with an estimated 22-28 bn boe yet to be found. While these discoveries will be in smaller deposits, the extensive infrastructure in place facilitates development. In a world of increasing political and economic nationalism, the relatively stable political, fiscal and regulatory regimes and ready access to markets are all attractive features of the North Sea, provided oil prices remain high and the UK tax system remains flexible. Governments and industry have recognised the challenges that increasing maturity brings and accordingly, a number of new initiatives have been introduced in each region. There is recognition that the size of some of the future discoveries and developments are no longer material enough to compete for capital with opportunities that are more attractive to the larger industry players and International Oil Companies (IOCs).