Quest Petroleum NL New Management Team Drills Oil/Gas in South Sumatra

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1 C Capital Structure Code QPN Shares * 2,462 m. Options & p/paid 437 m. Total 2,899 m. Share Price $ Option Price $ Market C ap $ 15.8 m. Cash (est) $ 5.0 m. * Post issue Valuation Metric Board Quest Petroleum NL New Management Team Drills Oil/Gas in South Sumatra Quest Valuation $m. $/share Cash 5 $ Unissued Equity 12 $ Corporate (8) -$ $ Risked Exploration 38 $ Total Risked 47 $ Source: Strachan Corporate Gus Simpson Dr Moch Thamrin Anthony Milewski Brett Mitchell Greg Lee Opinion* Chairman Deputy Chairman Managing Director Non Executive Non Executive Quest s technical evaluation points to possible oil or gas accumulation within sub-basins on the Ranau PSC. In December 12, drilling at Kayumanis, the first of three high priority prospects in South Sumatra, will provide an opportunity to test an exploration concept developed by the company s senior technical advisor. Strachan Corporate estimates that success at the mean level of estimated Reserves would be worth over 4.5 cps to the company, presenting a possible sevenfold increase from its current market rating. AFSL: Investment Drivers Quest has a strong, science based position in a lightly explored frontier area of the South Sumatran Basin. Results from nearby drilling show the presence of petroleum systems in several sub-basins capable of producing oil and gas. The company has identified up to 16 leads with potential to recover several tens of millions of barrels of oil and over 1 Tcf of gas and it is well placed to leverage off success to expand operations within Sumatra. Quest is funded for drilling its first of three, test of concept wells targeting the Kayumanis Lead in the Jaya Sub-basin. This sub basin covers approximately 550km 2 and is prospective for both oil and gas, with an estimated gas-in-place potential of up to 3 Tcf in a location with relatively simple access to market for both oil and gas. Strachan Corporate estimates that recovery of 14 mmbbls of oil in the permit would be worth over 4.5 cents per share to the company. Strachan Corporate risks all four initial prospects to estimate a total risked value of 1.4 cps on a fully diluted basis. Additional prospects are combined to show a target of 35 mmbbls of oil plus 86 Bcf of gas, for which a 12% POS is applied. Success at each of the prospects in the configuration outlined would suggest an estimated target value of over 19 cps for Quest. Quest has attracted skilled corporate and technical executives to guide it through early stages of exploration and evaluation, which would move to project development in the event of success. Ranau Project Location - Sumatra \ Page 1

2 Extending South Sumatra Basin into back reef, sub-basins Fron er fiscal terms almost match Australian condi ons Solid economics for discovery in energy hungry market Background The South Sumatra Basin covers an area of approximately 119,000 km 2 and sediments within the area range up to a thickness of 3,500 metres in the deepest regions. In 2011 Quest subsidiary Prabu Energy, the Trisakti University and BPMIGAS completed a joint study that identified four new prospective sub-basins and 16 hydrocarbon leads within the Ranua PSC. INDONESIAN BUSINESS ENVIRONMENT Fiscal terms at the Ranau PSC are relatively favourable for Indonesia, reflecting the frontier nature of this project. Terms see Quest retain 62% of pre-tax revenue for both natural gas and oil while 38% goes to Indonesian oil and gas regulatory authority BPMIGAS. The post tax split is about 35% of profit on gas and 25% for oil profits. South Sumatran gas feeds into an energy hungry market which sees a rising gas price achievable from levels that now average around US$6 per thousand cubic feet (Mcf), while oil refineries are connected via pipeline. The Ranau PSC is located within 110 kilometres of an existing Pertamina oil pipeline and is about 55 kilometres southwest of the South Sumatra West Java ( SSWJ ) natural gas pipeline, which allows previously stranded gas to be delivered to market in Java and Singapore. This pipeline is estimated to have capacity to transport an additional 120 mmcuft per day of gas, offering ample capacity for gas that Quest might discover. Higher risk/reward explora on pipeline Indonesia has long ago left OPEC and its oil production is in terminal decline while its consumption continues to rise. Gas exports from Indonesia have reached a plateau as production struggles to keep pace with expanding demand. Indonesian authorities have begun to relax their previously usurious fiscal terms and have lifted domestic gas prices to encourage more investment. Pipeline networks into neighbouring countries and the likely advent of imported LNG into Indonesia by the end of the decade, should lead to even higher gas prices domestically. Ranau PSC Sumatra 80% The Ranau permit covers 2,191 km 2 of prospective sediments in South Sumatra, close to existing oil & gas fields and marketing infrastructure, but in an under-explored part of the extended basin. The South Sumatran Basin has 189 known oil & gas fields containing discovered reserves of over 12 billion barrels of oil equivalent. South Sumatran oil and gas fields occur in and around discrete sub-basins in which oil and gas formed. The Komering sub-basin is a possible extension of the South Sumatra Basin and contains the same play types as are seen further north in the Basin. Quest s project team in Sumatra has been led by a former exploration manager and portfolio manager with BHP Billiton, Saxon Palmer. The project is now guided by the company s Deputy Chairman, senior technical advisor Page 2

3 New concept in gassy Basin led by local geological experts and leading Indonesian petroleum geologist Mochamad Thamrin, who has deep experience of Sumatran petroleum Basins. Mr Thamrin, who was previously Dean of Geology at the Trisakti University in Jakarta, Indonesia, is one of the leading educators of petroleum geologists and engineers in SE Asia and was also formally Head of Geology and Research at Pertamina, Indonesia s national oil company. During a long career with Pertamina, Mr Thamrin was a leader in developing regional petroleum plays and was directly responsible for the discovery and development of many of the oil and gas fields in South Sumatra. The company acquired gravity survey data over its newly identified sub-basin province. This work, in conjunction with some vintage seismic data of mixed quality over nearby sediments, along with drill and log data from three nearby wells, has highlighted that grabens within the Ranau PSC are likely petroleum source kitchens with several play types and prospects within the company s PSC. Regional mapping of the basement configuration has identified two sub-basins, namely Lematang Sub-Basin and Muara Enim Sub-Basin. Geological studies combined with nearby well data show reasonable potential for the presence of source, seal and reservoir formations, as well as possible trap structures. Source rocks containing organic materials associated with sea algae include shales from the Lahat, Talang Akar and Gumai Formations, show type II kerogen and a maturity profile that is capable of producing oil. Potential reservoir units are also expected within the Talang Akar and Muara Enim Formations, while hydrocarbon traps are principally structural but a stratigraphic component is present as sediments drape over basement. Migration pathways are expected to be found Gravity Map of Ranau PSC both laterally along permeable beds in the Lemat and Talang Akar Formations and vertical along faults. These pathways should allow migration of hydrocarbons into traps in structures along the flanks of the grabens. Ranau Project Location A gas column found in the Ruas-1 well drilled to the north of Ranau proves the existence of a working petroleum system in the Sekunyir graben which could feed into the Tabat lead. Gas and minor oil shows occur in the Imus-1 well. Together with oil seeps at surface there is good evidence of a working petroleum system within the Imus graben. Sub-basins identified by Quest contain sediments in the order of 200 to 500 km2 and up to 3,000 metres in depth and likely to hold attractive environments for petroleum generation. Page 3

4 Reasonable fiscal terms Likely trading opportuni es for share speculators in oily subbasin Valuation Under the Ranau PSC terms, Quest and its partner will be entitled to 62% of revenue and will pay 40% corporate tax on profits. The company estimates that its net, post-tax cash flow from operations would be 25% of revenue from oil and 35% of revenue from gas. Risked Initial Prospects Target Well Equity oil gas POS NPV Cost Disc'y Risked % mmbbls Bcf % /BOE US$m $/shr $/shr Kayumanis 80% % $ 12.7 $ 2 $ $ Sewat 80% % $ 12.7 $ 2 $ $ Upside 80% % $ 10.2 $ 42 $ $ Source: Strachan Corporate The company estimates a 12% probability of success (POS) for oil discovery and a 20% POS for gas. Strachan Corporate assesses the two priority targets for oil discovery, acknowledging that gas discovery would be less attractive. Oil is ascribed an NPV of US$12.7 per barrel and gas has an NPV of 50 cents per Mcf under the fiscal terms achieved. For example, discovery of 37 Bcf of gas at Kayumanis may underpin the company s current market capitalisation but in all likelihood, a larger gas pool would be required to support construction of a delivery pipeline. Additional prospects are combined to show a target of 35 mmbbls of oil plus 86 Bcf of gas, for which a 12% POS is applied. Success at each of the prospects in the configuration outlined would suggest an estimated value of over 19 cps for Quest. Valuation Matrix Quest Valuation $m. $/share Cash 5 $ Unissued Equity 12 $ Corporate (8) -$ $ Cash of about $2 million will be applied to Risked Exploration 38 $ drilling of Kayumanis. For the sake of this Total Risked 47 $ valuation, Strachan Corporate assumes Source: Strachan Corporate that in the event of success, options will be exercised and additional equity raised at 1.5 cents per share. Strachan Corporate believes that Quest s drilling programme is likely to encounter hydrocarbons of some form and that there is thus likely to be significant trading in the stock as drilling progresses. In the event that the first two drill tests prove non-commercial, the stock is likely to retreat to shell value of 0.2 to 0.3 cents per share, representing market capitalisation of around $5 million. Page 4

5 Management Gus Simpson Chairman Gus is also Executive Chairman of Peninsula Energy Limited an ASX listed uranium development company. He has over 20 years experience in managing international natural resource companies and has conducted business in Indonesia for many years. Dr Moch Thamrin Deputy Chairman Mr Thamrin is one of Indonesia s leading experts in the oil and gas industry. He has over 45 years of experience and has authored over 30 publications and text books on Indonesian geology and related topics. He served in several senior executive roles at Pertamina, and as Chairman of the Geology Department and Dean of the Mineral Technology Faculty at Trisakti University in Jakarta. Anthony Milewski Managing Director Anthony is a lawyer with significant experience in energy related business and funds management. He has operational experience in US, Canadian and UK financial markets and as a CEO and board member with operational, financial and regulatory management. Brett Mitchell Non Executive Director Brett has worked for both private and publicly listed entities over the past 19 years as a corporate finance executive. He holds a Bachelor of Economics degree from the University of Western Australia and worked in the financial markets and resources sectors. He is a Director of Transerv Energy Limited, Wildhorse Energy Limited and Tamaska Oil and Gas. Greg Lee Non Executive Director Greg is a petroleum engineer with 28 years experience in oil and gas field development and management, petroleum/production engineering and drilling operations. He operates as an independent consultant and petroleum engineer to several major oil and gas companies. Kenneth Bull Chief Operating Officer Ken has over 30 years international experience in the oil and gas sector, primarily in the management and operation of onshore and offshore drilling, well completion and production operations. Most recently he worked for Entek Energy in the USA where he was responsible for all drilling, work-over, completion and safety at its operations. He speaks fluent Indonesian and was previously employed by Indonesian based Kufpec and Kalrez Petroleum where he managed the drilling and production operations of the Seram Island Oil and Gas Project. He has also had a combined five years of direct operating experience in South Sumatra, working with Stanvac, Asameria Petroleum and ARCO. Disclaimer The information herein is believed to be reliable but the author, Strachan Corporate Pty Ltd, ABN ; AFSL ( Strachan ), does not warrant its completeness or accuracy. Strachan has relied on information which is in the public domain and has held discussions with management. Opinions and estimates constitute Strachan s judgment and do not necessarily reflect those of the Board and management of Quest Petroleum NL and are subject to change without notice. Strachan believes that any information contained in this document is accurate when issued however, Strachan does not warrant its accuracy or reliability. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors. The advice in StockAnalysis has been prepared without taking account of any particular person s investment objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Strachan, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors. If you have any doubts you should contact your investment advisor. The investments discussed may fluctuate in price and changes in commodity prices and exchange rates may have adverse effects on the value of investments. This work was commissioned by Quest Petroleum NL and Strachan will receive a fee for its preparation. Page 5