fastnet oil & gas initiation of coverage€¦ · fastnet oil & gas is a research client of...

22 July 2013

Fastnet Oil & Gas is a research client of Edison Investment Research Limited

Fastnet is a very different company to most E&Ps. While the early in/farm-down and drill model is tried and tested, no other company has as aggressive a monetisation strategy to exit through asset sales within three years of IPO. Fastnet shares a number of directors and advisers with Cove Energy and this has clearly influenced the approach. Whether it works will ultimately depend on drill success, but for now Fastnet certainly represents an exciting ride for high-risk investors.

Year end Revenue (£m)

EBITDA (£m)

PBT* (£m)

Debt (£m)

Net cash (£m)

Capex (£m)

03/12 N/A N/A N/A 0.0 0.6 N/A 03/13e 0.0 (2.2) (1.0) 0.0 23.9 (0.2) 03/14e 0.0 (1.4) (1.7) 0.0 10.7 (11.8)

Note: *PBT is normalised, excluding intangible amortisation, exceptional items and share-based payments.

Morocco to the fore for the next 12 months One year on from AIM IPO and the asset portfolio is already complete. Top of the tree is Foum Assaka, where, with Atlantic Margin specialist Kosmos, the partners are leading the chase for Jubilee-type deepwater fans offshore Morocco. Fastnet is the only company partnering with Kosmos in Morocco, a testament to the credentials of the team. Strong in-country links have more recently brought the Tendrara onshore block, which could be the first well to drill for Fastnet in late-2013 or early-2014.

Irish assets in a resurgent Celtic Sea Celtic Sea offshore Ireland is the other area of focus. The recent deal with Petronas to farm in to Deep Kinsale is a major move for what could be something of a Barryroe lookalike. Licensing elsewhere in the basin has allowed Fastnet to build the largest position of any company, with results of a major 3D shoot awaited with interest.

Funded for now but farm-outs critical Management has made the commitment that there will be no further equity raises following a December 2012 £15m top up. To deliver, the company now needs to secure farm-outs for both the Celtic Sea and offshore Morocco to fund drilling of Foum Assaka and possibly Deep Kinsale in 2014.

Valuation: Neither farm-outs nor wells priced in Ascribing a valuation remains speculative until farm-outs are in place and drill targets have been selected. However, given the momentum to date and industry appetite for quality assets, a valuation of 41p per share would seem appropriate assuming deals can be struck. In saying this, equities significantly trail industry deals, although given the speed of progress with Fastnet, this is possibly one company that could buck this trend in style.

Fastnet Oil & Gas Initiation of coverage

Replicating the Cove model

Price 18.63p Market cap £51m

US$1.6/£ Net cash (£m) end March (e) 24

Shares in issue 273.9m

Free float 90%

Code FAST

Primary exchange AIM

Secondary exchange ESM

Share price performance

% 1m 3m 12m

Abs (5.1) (15.34) 63.74

Rel (local) (9.28) (20.1) 38..29

52-week high/low €31.13 €12.00

Business description

Fastnet Oil & Gas is an E&P company focused on Morocco and offshore Ireland. The company differentiates itself from peers by following an aggressive deal-flow driven strategy with an objective to return all future gains to shareholders.

Next events

Foum Assaka CPR Q313

Celtic Sea farm out Q313

TE-5 rig announcement Q313

Foum Assaka farm out Q313

Analysts

Ian McLelland +44 (0)20 3077 5756

Elaine Reynolds +44 (0)20 3077 5713

Will Forbes +44 (0)20 3077 5749

[email protected]

Edison profile page

Oil & gas

http://www.edisoninvestmentresearch.com/research/company/Fastnet%20Oil%20&%20Gas

Fastnet Oil & Gas | 22 July 2013 2

Investment summary: A unique E&P proposition

Company description: Trying to repeat the Cove model Fastnet only came to the AIM market in May 2012, but with a management team and asset base that would be the envy of many an established E&P company. The near-term focus is on Morocco, where the company expects to be drilling both onshore and offshore, the latter with Atlantic Margin specialist Kosmos Energy. Meanwhile, offshore Ireland in the Celtic Sea, Fastnet has built the largest portfolio of any player in the region. However, what really sets the company apart is its early-entry/early-exit corporate strategy designed to follow the Cove Energy model, with which it shares a number of directors and advisers. If all goes to plan, Fastnet will not exist beyond 2015 such is the aggressive timetable management is following to monetise its portfolio.

Sensitivities: Need to maintain momentum Fastnet’s M&A-driven model is largely insulated from the typical macroeconomic risks. However, investors should be wary of:

Commercial risks: Even before Fastnet can participate in offshore drilling, it needs to secure farm-outs for its offshore interests in both the Celtic Sea and Morocco. We understand that discussions in both cases are at an advanced stage, with an announcement on the Celtic Sea terms expected in the coming weeks. However, in the event these discussions stall, Fastnet will be left with little room to manoeuvre given its mantra of not raising further funds through equity.

Political risks: Permitting can be slow in Morocco. However, environmental consents for offshore activities in both Morocco and Ireland appear to be relatively simple and Fastnet management certainly has experience of operating closely with authorities in both regions.

Valuation: Neither farm-outs nor wells currently priced in With drill targets (other than Tendrara) still to be identified and a need for farm-downs to fund wells both offshore Morocco and Ireland, putting a full valuation on Fastnet is somewhat speculative. However, the company has delivered sustained newsflow since IPO, and with a clear intention to drill in both regions within six to18 months (and potentially exit within 24 months), we need to consider all possible value drivers available to investors.

As a take-out candidate (ie excluding dilution risk), we value the initial drill targets on a risked basis at 54p per share. However, a more realistic valuation can be derived from expected farm-in terms, which, based on company guidance, would suggest an industry valuation of 41p per share. As drilling approaches and the potential for multi-billion barrel discoveries moves closer, we would expect investors to start factoring in post-discovery economics that could drive up our valuation to 87p based on M&A netback valuations.

Financials: Funded for now but farm-outs critical Following a £15m placing in November 2012, we forecast £24m ($37m) of cash at year-end 2013 (30 March 2013). This is sufficient to fund the near-term activities, which include the ongoing Celtic Sea 3D seismic programme ($18m), the Tendrara well ($7-8m) and general working capital. The balance sheet will clearly not fund Fastnet’s equity share of offshore drilling costs in either Morocco or Ireland, although we expect these to be funded through farm-outs.

Fastnet has constructed its legal structure with all key assets (onshore Morocco, offshore Morocco, Deep Kinsale and other Celtic Sea assets) in separate subsidiaries such that asset sales can be completed in a tax-efficient manner.


Company description: Repeating the Cove model?

Fastnet Oil & Gas is a new kid on the block, but has experienced management with a track record of delivery in its two main areas of geographic focus, Morocco and the Celtic Sea offshore Ireland. The company was only formed in name in May 2012, when, as Terra Energy, it reversed into AIM-listed shell Sterling Green, raising £10m to pursue offshore Ireland exploration opportunities. The acquisition of Pathfinder Hydrocarbon Ventures in July 2012 added the offshore Morocco angle and since this time further assets have been added in both regions. Fastnet management is unashamedly aggressive in its early-entry/early-exit strategy with a stated objective to exit all investments and return gains to shareholders over a three-year timeframe from IPO. This alone makes it a unique investment opportunity in the London market, one that has been designed around the success of Cove Energy, with which Fastnet shares a number of directors and advisors.

Morocco to the fore for the next 12 months

Fastnet offers investors exploration and appraisal potential, both offshore and onshore Morocco. Company management has a long track record of working with authorities in the country, which has enabled it to acquire acreage ahead of the pack. The region, in particular the offshore acreage, has seen a groundswell of interest in 2012 and 2013, with the arrival of a string of mid-caps and majors, including Genel, Cairn, Plains, Galp, Repsol, Chevron and Total among others. This puts Fastnet at the centre of one of the hottest E&P stories around at the moment.

Exhibit 1: Morocco main players

Source: Fastnet Oil & Gas

Foum Assaka – a mid-Cretaceous Jubilee-type play Fastnet management (as Pathfinder Hydrocarbon Ventures) was the first group in recent years to secure a permit in the prospective North Agadir Basin, Morocco, when it was awarded the 6.5m


acre Foum Assaka offshore block in 2011. Initially partnering 50/50 with Atlantic Margin specialist Kosmos Energy, the company has since farmed down a further 25% to Kosmos in return for a $16.2m gross carry that included the 2012 3D seismic programme, leaving it with a 25% gross interest (18.75% net). Kosmos is now the operator of the block, with a 75% gross interest (56.25% net) with state firm ONHYM enjoying a 25% carried interest. Kosmos is well known in West Africa, having pioneered the Atlantic Margin play with its Jubilee discovery in 2007, and Fastnet is the only company currently partnering with Kosmos offshore Morocco.

While many of the neighbouring companies are targeting Jurassic source rock, at Foum Assaka, Fastnet/Kosmos are targeting deeply buried Cretaceous source rock and mid- and lower-Cretaceous reservoirs, which are most closely analogous to Jubilee. Like Jubilee, the Foum Assaka targets in the sweet spot (Exhibit 2) are deepwater turbidite fans that have been deposited from the only river delta system in the region off Agadir. These targets have never previously been tested in Morocco, as most of the deepwater wells in the region have only been drilled down to the Upper-Cretaceous.

Exhibit 2: Foum Assaka detail


We continue to await news from Kosmos and Fastnet on the first drill target at Foum Assaka, with drilling expected to begin in early-2014 subject to rig availability. This is likely to be the second or third well of the current campaign to be drilled in the Agadir Basin, with Cairn already having secured a rig to begin drilling at Foum Draa in H213, most likely Q413.

Resource volumes at Foum Assaka are still being worked up. A 2012 CPR commissioned by Fastnet indicated net attributable best estimate resources of 185mmbbls for shallower Tertiary prospects on the Foum Assaka block. However, the main interests for the partners are in the mid-Cretaceous turbidite fans, for which 2,577km2 of additional 3D seismic was acquired in 2012. Processing the seismic is ongoing and Kosmos indicated in May that pre-stack time and depth processing is going well, with the results indicating significant play diversity. Fastnet has indicated there are already 15 prospects identified in the primary mid-Cretaceous deepwater fan target as part of this work (excluding additional upside from Tertiary and Basal Cretaceous deepwater channel and fan plays), with a geological chance of success (GCoS) reported to be in the range of


20-33%. Fastnet has commissioned a CPR to reflect the new 3D findings, which is expected to be released to the market shortly.

Fastnet was carried for a gross budget cap of $16.2m to fund this seismic work as part of its most recent 25% gross farm-down to Kosmos. Significantly more seismic was acquired than the work commitment of 500km2. However, with seismic costs thought to be well below normal levels due to the availability of an idle ship, we understand Fastnet was still fully carried for the expanded seismic programme.

Kosmos is in the middle of a procurement programme for a long-term rig (or rigs) contract. The company announced in June that it had signed an agreement for a new drillship, the Atwood Achiever, although this will not be available until H214. Kosmos remains in the market for additional rig capacity to drill offshore Morocco in early-2014.

Given scoping well costs are expected to be around $100m gross, both Kosmos and Fastnet are seeking farm-outs ahead of any drilling. Fastnet is likely to be looking for a multi-well carry in return for a reduction in its 18.75% net interest to give it running room on a drill campaign, and we would expect there to be some linkage with the farm-out of its Celtic Sea assets that is currently ongoing (see later). Based on recent transactions, a multi-well carry is not unreasonable if the latest seismic proves encouraging. For example, Pura Vida secured a two-well carry plus cash from Plains E&P in January 2013 valued at up to $230m for its farm-out of a 52% interest (39% net) of the Mazagan permit. We reiterate that, at this juncture, it is too early to predict what sort of terms Fastnet could secure, but a multi-well carry is not out of the question if the forthcoming CPR is promising.

Onshore Morocco offers a different risk proposition Fastnet has had an option for an interest in a licence application onshore Morocco since its acquisition of Pathfinder in July 2012. In November 2012, it exercised an option to participate with Pathfinder on a 50/50 basis subject to government approvals in the Merada licence application. The Merada target is a Miocene biogenic gas play similar to the one being successfully developed by Circle Oil in the Rharb Basin.

While Merada remains a viable exploration target, Fastnet has been encouraged to seek additional onshore targets that can be monetised within its self-imposed two- to three-year timeframe. Driven by the latter, Fastnet announced in May 2013 that it had executed an exclusive option to farm into and take 50% of the Tendrara Lakbir permit (Exhibit 3) operated by Moroccan E&P company Oil and Gas Investments Funds (OGIF) for an entrance fee of $300k and a one-well carry in the Initial Exploration Period. This block has strategic importance to Morocco as it seeks to develop more indigenous gas resources, which will allow it to take advantage of increasing capacity rights for the Maghreb-Europe Pipeline, and to feed existing and planned power plants in the north and west of the country (Exhibit 4).

Exhibit 3: Tendrara permit location Exhibit 4: Morocco infrastructure

Source: Fastnet Oil & Gas Source: Fastnet Oil & Gas, ONHYM


Unlike Foum Assaka, Tendrara is considered by Fastnet as a significantly de-risked play. The reservoirs are thought to be a geological analogue of the Meskala field in Morocco. Six gas discoveries have been made to date on the permit, including a well on the TE-5 structure, which flowed at 1.4mmscf/d with no pressure depletion during long-term testing. Fastnet believes that higher rates of up to 4-5mmscf/d can be achieved from TE-5 using an inclined well to target thicker sands and by reducing formation damage. Based on a 15-well development, we expect a success case could lead to gross flow rates of initially c 60mmscf/d and 460bcf of production and a 20-year field life.

Fastnet is in the market for a drilling rig (for which it has indicated there are currently candidates) with a single appraisal well expected to be drilled at the beginning of 2014. Fastnet will fully carry OGIF through this single well at an expected cost of $7-8m, on which it will earn its 50% gross interest (37.5% net) in the permit.

Irish assets in a resurgent Celtic Sea

Fastnet holds five licensing options in the Celtic Sea Basin offshore Ireland, together with an exclusive option to farm in to the Deep Kinsale petroleum lease. This gives it the largest area under licence in the basin. Although the region contains the largest producing field offshore Ireland at Kinsale Head, the area has been neglected for many years, with interest switching to the Atlantic Basin in the wake of the Corrib gas field discovery in 1996. The basin has therefore remained relatively underexplored until recently, when Providence Resources was successful with its 2012 Barryroe oil appraisal well. This has renewed interest in the Celtic Sea, leaving Fastnet well placed to benefit.

Exhibit 5: Celtic Sea acreage


Exhibit 5 shows how Fastnet’s assets sit on trend with the commercial Lower Cretaceous sands seen in Barryroe, with further potential in the Jurassic and Triassic. The licences cover a diversity of prospects, from frontier exploration in Mizzen/Mizzen East, through the Barryroe analogue at Deep Kinsale, to the more technically challenging heavy oil in Block 49/13 and tight gas in Shanagarry.

The company has moved quickly to progress work on its flagship Deep Kinsale option, having completed a 3D seismic survey in May 2013 only three months after agreeing to farm in to the licence with Petronas subsidiary Kinsale Energy. A further 1,200km2 3D survey is ongoing across


Mizzen/Mizzen East and will be the greatest area surveyed by 3D seismic in the basin to date. In line with its strategy of bringing in major partners to drill de-risked assets, a farm-out process was kicked off in March 2013 with a view to farming down all the Celtic Sea licences. The company hopes to complete the process in the coming weeks and before the end of summer 2013. In contrast to the Atlantic Basin, the Celtic Sea sits in shallow water with existing infrastructure, making any commercial discovery here easier and quicker to develop.

Deep Kinsale Fastnet agreed an option to farm in to the Deep Kinsale prospect with Kinsale Energy (a wholly owned subsidiary of Malaysian state oil company Petronas) in February 2013. Deep Kinsale is defined as those geological formations deeper than 4,000ft subsea beneath the producing Kinsale Head gas field, which covers parts of blocks 48/20, 48/25, 49/16 and 49/21. The terms include a commitment to acquire 500km2 of 3D seismic in 2013 and the potential to drill in 2014 or 2015 in exchange for a 60% working interest and operatorship of the prospect. Petronas has 10% back-in rights and ultimately we would expect these to be exercised in the event of exploration success.

Deep Kinsale is located around 15km to the north-east of Barryroe, which also sits below a producing gas field, Seven Heads. The Kinsale Head discovery well, 48/25-1, drilled by Marathon in 1970, logged oil in the deeper Basal Cretaceous reservoir, which the company believes is analogous to the commercial oil-producing target in Barryroe. A CPR completed by SLR in May 2013 estimates unrisked gross P50 best-case prospective resources of 2.365bnbbls of oil in place and risked potential resources of 335mmbbls of oil in place based on a GCoS of between 13% and 17% across four reservoirs. The GCoS of up to 17% is currently the highest of all Fastnet’s Irish assets, reflecting the company’s view that structurally it is the most likely to succeed. These estimates are based on 2D seismic data, although Fastnet has already completed the acquisition of 500km2 of 3D seismic targeting the deeper structure and hopes to be able to increase the GCoS once this is processed and interpreted. The Lower Cretaceous is characterised by thin sands of around 25ft, so that reservoir thickness and its variation across the reservoir is a key issue. Fastnet plans to use the 3D results to identify better-quality sands and their distribution. This would allow the resource estimates to be refined more accurately and an optimum well location to be selected.

Thirty five years of production from Kinsale Head has produced no evidence to suggest compartmentalisation at shallower levels, while the nearby Seven Heads field produces from five separate structures and has seen a rapid decline in production in relation to pre-drill estimates. In the CPR, SLR states there is evidence of deeper faulting in Barryroe, although Fastnet points out that this is indicative of the faulting seen in Seven Heads and is not applicable to Deep Kinsale. The 3D seismic results should give a more accurate idea of the risk of reservoir continuity, with preliminary interpretation results expected in October 2013. Fastnet will now focus on identifying an optimum well location with a view to drilling here in late-2014/early-2015.

Mizzen and Mizzen East Fastnet holds a 100% WI in the Mizzen licensing option, which sits in the Mizzen Basin at the south-west tip of the North Celtic Sea Basin. Located 120km south-west of Barryroe, it sits in an area of 4,000km2 penetrated by only one well and with poor-quality 2D seismic coverage. As such it offers exposure to frontier exploration. The 56/12-1 well was drilled by Esso in 1975 in what is now Mizzen East. It encountered oil shows throughout the Lower Cretaceous interval of a similar waxy nature to the crude seen in Barryroe, but the well was drilled off structure. Notably, the reservoir encountered here was twice as thick as that seen in Barryroe. A CPR by SLR published in July 2012 estimates that the Lower Wealden or Cretaceous interval holds P50 prospective resources of 1.8bnbbls in two large structures, but with a 4% GCoS. Gas may be present in the shallower Lower Cretaceous and also in the deeper Sherwood Sandstone target, which has yet to be properly tested


in the basin. The company is currently carrying out a 1,200km2 3D seismic survey across Mizzen and Mizzen East, making it the largest survey acquired to date in the Celtic Sea. This survey, together with the 500km2 acquired at Deep Kinsale, is expected to cost $18m net to Fastnet. The survey is expected to be completed by the end of June 2013, with fast-track initial results in October 2013. The data will be used to de-risk and mature the structural and stratigraphic closures identified on 2D seismic.

Shanagarry Fastnet holds 82.35% WI in the Shanagarry licensing option, located at the north-eastern end of the North Celtic Sea Basin and surrounded by several uncommercial oil and gas fields. 49/19-1 was drilled by Marathon (and members of the Fastnet management team) in 1984 and encountered hydrocarbons across several levels, despite being drilled on the flank of the structure. The Shanagarry structure is one of the largest in the basin, similar in size to Deep Kinsale and larger than Barryroe. The asset is complex, with a combination of oil and gas targets in the Middle and Upper Jurassic and in the Lower Cretaceous Basal Wealden. The Upper Jurassic contains tight gas, which would need fracking to recover. The total P50 resources across all these reservoirs is estimated to be 1.3bnbbls and 1.34tcf, with the GCoS varying between 5% and 14%. As in the other licence areas, only 2D seismic is available across Shanagarry, but under the terms of the licence Fastnet must acquire 200km2 of 3D seismic by the end of 2014, and this should allow for the prospect to be de-risked.

Molly Malone The Molly Malone licensing option is located in the South Celtic Sea Basin some 65km south-east of the Kinsale gas field and partly covering blocks 49/25, 49/30, 50/21, 22 and 26. The primary target in this area is the Triassic Sherwood Sandstone.

Exhibit 6: Celtic Sea well locations and seismic details


Marathon drilled three wells to the west of the licence in the early-1970s: 49/29-1, 49/30-1 and 58/3-1. 49/29-1 encountered poor reservoir quality, but also oil staining at the base of the Lower Jurassic. Fastnet believes that none of these wells proved a valid structural test on the Triassic, although the Sherwood Sandstone is thickly developed and has good reservoir properties in the


93/2-2 and 93/2-3 wells in the UK sector of the basin. The sands are interpreted as fluvial sheet sands and are therefore expected to have good lateral continuity. Similar sands form the reservoir in the Wytch Farm oil field in Southern England and this is considered to be analogous. Analogues for the gas case are the Morecambe and Corrib gas fields. The licence is covered by good-quality but sparse 2D seismic. The prospect is estimated to contain over 12bnbbls in the oil case, although the GCoS is 5% to 9%.

Block 49/13 Fastnet holds an 85% WI in Block 49/13. The presence of oil and gas is proven here from tests carried out on wells 49/13-1 and 49/13-2. 49/13-1 was drilled in the 1970s by Marathon, with tests producing a heavy oil and flowing gas over separate intervals in the Cretaceous. Well 49/13-2 was drilled in 1986 by Marathon, including members of the Fastnet management team. The well tested heavy oil in the Upper Jurassic, with an API of 13.8-14.6°. A CPR for the block is pending.

Management and strategy

Fastnet has come to AIM with a radically different proposition to other E&P companies. Management has set out some clear milestones designed to drive near-term shareholder growth, including:

Building out the asset portfolio during year one following IPO – this period is now closed and management has committed to no further equity issues with all activities self-funded through farmout and/or sale going forward.

Concluding the sale of at least one key asset in year two, returning gains to shareholders – at present, this is most likely to be the Tendara block onshore Morocco.

Concluding the sale of all remaining assets (and by inference the company) in year three, returning all gains to the shareholders.

This means Fastnet management expects to be in a position to wind up the company by mid-2015, an ambitious target largely modelled on the Cove Energy story, which saw its share price grow from 20p to 240p over 30 months to 2012 on the back of exploration success offshore East Africa. Fastnet shares a number of directors and advisers with Cove, including non-executive directors Michael Nolan and Dr Steve Staley, and advisers John Craven (former CEO of Cove) and Paul Griggs.

Unlike Cove, Fastnet’s exploration targets are expected to be mainly oil bearing, meaning it could more easily sell on discoveries at an earlier stage than with gas discoveries like those made by Cove and partner Anadarko. However, for the business model to work and shareholders to make significant gains, the company will need to enjoy clear exploration success in at least some of its activities.

Fastnet has built its legal structure with all key assets (onshore Morocco, offshore Morocco, Deep Kinsale and other Celtic Sea assets) in separate subsidiaries such that asset sales can be completed in a tax-efficient manner.

While we await confirmation in the 2013 annual report, management has indicated that directors’ remuneration in terms of salary and options has been severely capped. In particular, Executive Chairman Cathal Friel and MD Paul Griffiths are the largest shareholders at 7% and 15% respectively, meaning that management is largely influenced through capital growth.

For a relatively small AIM-listed E&P company, the extended executive and non-executive management teams bring substantial experience. In particular, we highlight the following:


Cathal Friel, executive chairman, is MD and one of the founders of Raglan Road Capital, a Dublin- and London-based corporate finance and merchant banking group. He has over 25 years of managerial, entrepreneurial and corporate finance experience, as well as successfully advising major UK and Irish companies on domestic and international transactions.

Paul Griffiths, managing director, is a petroleum geologist with over 35 years’ experience in early-stage oil and gas prospecting. He was a founder and former CEO of Island Oil and Gas, which drilled the first successful exploration well offshore south-east Ireland in 16 years and was subsequently acquired by San Leon Energy.

Carol Law, executive director, is a geologist by training and has over 28 years’ experience in the petroleum industry in exploration management, exploration geology, research and consulting in a variety of geological settings worldwide. Most recently, she was exploration manager, East Africa and Caribbean for Anadarko Petroleum Corporation, responsible for the play finding Prosperidade gas complex in Rovuma Area 1, offshore Mozambique.

John Craven, adviser, is a petroleum geologist with 35 years’ experience in senior technical and commercial roles in upstream oil and gas exploration and production companies. He was a director and CEO of Cove Energy for more than three years. Before joining Cove, he was founder and chief executive of the AIM- and ESM-quoted African and Mediterranean-focused exploration company Petroceltic International.

Catalysts and outlook

With a self-imposed three-year life cycle, Fastnet needs to deliver regular newsflow to support share price growth. Progress to date has been very impressive in terms of corporate and operational activity, with an acquisition, three farm-ins, three CPRs and a fundraise all announced since IPO in June 2012. Over the next 12 months, we can see sufficient catalysts to maintain this momentum, with farm-outs of Celtic Sea/Foum Assaka and rig announcements for Foum Assaka/ Tendrara as the main events before drilling begins in late-2013 or early-2014. Fastnet’s view of forthcoming catalysts is presented in Exhibit 7.

Exhibit 7: Fastnet’s planned activities



Sensitivities: Need to maintain momentum

Many oil and gas companies are exposed to macroeconomic pressures such as prevailing commodity prices and interest rates. However, Fastnet’s M&A-driven model is largely insulated from these. Instead, we highlight the following as the key sensitivities of which investors should be wary when making an investment in Fastnet:

Commercial risks: Even before Fastnet can participate in offshore drilling, it needs to secure farm-outs for its interests in both the Celtic Sea and Foum Assaka. We understand that discussions in both cases are at an advanced stage, with an announcement on the Celtic Sea terms expected in the coming weeks. Ultimately the terms will determine the running room Fastnet will have in drilling activities in both its offshore areas of focus. However, in the event these discussions stall, the company will be left with little room to manoeuvre given its mantra not to raise further funds through equity.

Political risks: Permitting can be slow in Morocco, as evidenced by the delays with the Merada licence. However, environmental consents for offshore activities in both Morocco and Ireland appear to be relatively simple and Fastnet management certainly has experience of operating closely with authorities in both regions. We would highlight the importance of alignment with Moroccan authorities if the Tendrara TE-5 well is successful and the field is to be developed (while Fastnet seeks to exit its position).

Valuation: Neither farm-outs nor wells currently priced in

With drill targets (other than Tendrara) still to be identified and a need for farm-downs to fund wells both offshore Morocco and Ireland, putting a full valuation on Fastnet remains somewhat speculative at this time. However, the company has delivered sustained newsflow since IPO, and with a clear intention to drill in both regions within six to 18 months (and potentially exit within 24 months), we want to consider all possible value drivers available to investors.

We therefore approach our valuation from three perspectives:

We calculate how fundamental economics would look for discoveries in each of its main three operating areas (offshore Morocco, onshore Morocco and Deep Kinsale). This gives rise to a risked but undiluted valuation for the company offering investors a view as to the relative value a well-funded acquisitor could ascribe to the company before it embarks on any farm-out or drilling activities;

We consider the valuation potential that can be ascribed to Fastnet based on a range of farm-out scenarios both offshore Morocco and the Celtic Sea – we would expect the market to start to price in value on these terms once Fastnet announces farm-outs in the coming months; and

Finally, we consider on a risked basis what Fastnet would be able to achieve if it was to sell its assets post-discovery – if management is successful with its three-year exit strategy, this approach is the most realistic in the medium term.

Fundamental DCF economics In terms of economics, both Morocco and Ireland offer attractive fiscal terms. Morocco in particular is currently very attractive with a 7-10% royalty (3.5-5% for gas), while developers are protected from 30% corporation tax for a period of 10 years on each discovery. Based on DCF models for an assumed 200mmbbl oil discovery at Foum Assaka (Jubilee Phase 1 mid-case reserves pre- development were 370mmbbl), we estimate this would be worth c $7.8/bbl. This is based on $80/bbl Brent, a 12.5% discount rate and first oil in 2019. At current interests, this would suggest a valuation of $293m unrisked or 69p per share.


Offshore Ireland, we consider the main target currently is Deep Kinsale, although the recent 3D survey over Mizzen/Mizzen East may add optionality to this. Based on the same assumptions as for Morocco, we estimate the mid-case resource estimate for the Middle Wealden and Basal Wealden horizons (assuming a 16% and 31% recovery factor respectively) of 220mmbbls would be worth c $4.8/bbl. This equates to $530m unrisked or 125p per share.

Including the assumed development of Tendrara (first gas 2015), we suggest a risked but undiluted valuation for Fastnet could be 54.4p per share (Exhibit 8).

Exhibit 8: Fastnet undiluted DCF valuation – how an acquirer would look at the company Asset Recoverable reserves Net risked Value per share

Country Diluted WI CoS Gross Net NPV/boe value Risked Unrisked % % mboe mboe $/boe $m p/share p/share

Net (debt) cash 100% 100% 15 3.6 3.6 SG&A 100% 100% -2 -0.5 -0.5 Production + cash 0.0 13.3 3.1 3.1 Development Tendrara Morocco 38% 20% 79.4 29.8 16.7 99.3 23.4 117.0 Development 29.8 99.3 23.4 117.0 Cash + production + development 29.8 112.6 26.5 120.1 Exploration (2013 + 2014) Foum Assaka Morocco 19% 13% 200.0 37.5 7.8 38.8 9.1 69.0 Deep Kinsale Ireland 50% 15% 220.0 110.0 4.831 79.7 18.8 125.2 Exploration NAV (2013 + 2014) 147.5 118.6 27.9 194.2 RENAV 231.2 54.4 314.3 Source: Edison Investment Research

However, in reality Fastnet is not a development company and has no intention of raising the capital required to develop any of these fields in the case of exploration and appraisal success. Instead, we suggest a valuation centred around potential farm-out values would be more applicable.

Farm-out economics As interest in Morocco has grown over the last two years, there has been a clear trend towards improving farm-out terms as larger independents compete to pick up increasingly scarce offshore acreage. To date, the pinnacle has been the January 2013 farm-out of 52% of Pura Vida’s interest in the Mazagan block to Plains E&P. With a two-well carry (up to $215m) and $15m of back costs, this has seen Plains more than quadruple the terms paid by Kosmos to Fastnet (Pathfinder) for the first farm-out in the region back in November 2011. If replicated, this would value Fastnet’s Foum Assaka 18.75% net interest at $66m, or 15p per share.

Exhibit 9: Offshore Morocco farm-in details Date Farming

out Farming in

Block Acreage (km2)

Back costs/ consideration

($m net)

Carry ($m gross)

Gross interest farming out

No wells

Implied gross value

($m)

Implied value $/km2

Nov 11 Fastnet Kosmos Foum Assaka 6,473,100 0 16.2 25% 0 64.8 10,011 Aug-12 San Leon* Cairn Foum Draa 3,349,800 1.5 60 50% 1 123.0 36,719 Aug-12 San Leon* Genel Sidi Moussa 5,018,000 1.3 50 60% 1 85.5 17,039 Dec-12 Tangiers Galp Tarfaya Offshore 7,244,400 7.5 33.5 50% 1 82.0 11,319 Jan-13 Pura Vida Plains Mazagan 10,897,400 15 215 52% 2 442.3 40,588 Source: Company announcements, Edison Investment Research

Given the growing interest in the region and lack of available acreage, we do not think it is unreasonable for Fastnet to at least match the two-well carry achieved by Pura Vida in the event the forthcoming CPR is positive. In fact, given that Fastnet/Kosmos have the prized mid-Cretaceous sweet spot at Foum Assaka, it is possible on a per km2 basis that it could secure even more attractive terms.

In the Celtic Sea, terms are not likely to be as favourable. However, Fastnet has indicated it is confident it will be able to recover its seismic back costs ($18m) and possibly a small consideration,


in return for a c 40% dilution in its Celtic Sea interests. This would value its Celtic Sea assets at c $38m or 8.9p per share.

Including a nominal $2/boe for Tendrara for illustrative purposes (no farm-out expected here), we arrive at a sensitivity range of 36-58p per share, centred around 41.2p per share if the company achieves the farm-outs described above (Exhibit 10). This is a very realistic valuation in the short term if Fastnet can secure farm-out terms for Foum Assaka and the Celtic Sea in the coming months.

Exhibit 10: Valuation based on varying farm-out scenarios Foum Assaka farm-in block value ($k/km2) Celtic Sea share to give up 30 40 50 60 50% 35.7 39.5 43.3 47.1 40% 37.4 41.2 45.0 48.9 30% 40.4 44.2 48.0 51.8 20% 46.3 50.1 53.9 57.7 Source: Edison Investment Research

While we are comfortable indicating the potential value industry can ascribe to Fastnet’s assets based on farm-ins, we also note that equity markets do not at present recognise these in the share price. Our analysis of African E&P farm-in deals per barrel of unrisked prospective resource when compared with EV/resource data clearly shows the disconnect that currently exists in the market (Exhibit 11). However, given Fastnet’s very immediate deal-driven strategy, the company could well buck this trend and realise equity values that much more closely replicate industry terms.

An interesting observation will be to assess Fastnet’s net resources once the forthcoming Foum Assaka CPR is published. The current EV (c $40-50m) would correspond to an unrisked resource inventory of around 500mmbbls based on farm-in values, so assuming larger net volumes are announced, we could expect to see support to the share price.

Exhibit 11: Africa farm-in deals vs market valuations

Source: Edison Investment Research

Play opening post-discovery sale economics Ultimately, the end game for Fastnet management in the success case is to sell individual assets and potentially the company after drilling only one or two wells on each of its blocks. Putting a price on what the company could achieve if either of its high-impact targets, ie Foum Assaka or Kinsale Deep, were successful is something of a finger-in-the-air exercise. However, deals ranging from sub-$10/boe to more than $50/boe have been struck for frontier acreage where a discovery has been made to open up the play fairway (Exhibit 12). This is clearly what Fastnet is seeking to replicate.

0

50

100

150

200

250

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

EV ($

m)

Unrisked net resources, mmboe

Peers Farm-out values Linear (Peers) Linear (Farm-out values)

Farm-in value

Implied market valuation


Exhibit 12: Post-discovery/pre-development asset deals Date Seller Buyer Field/

block Est. value

($m) Resources (gross) at time of sale (mmboe)

% WI $/boe Notes

2010 Kosmos Energy

Exxon Jubilee 4,000 700 24.10% 23.7 Rumoured deal only – late development.

2012 Cove Energy PTTEP Rovuma Basin

1,900 2,833 8.50% 7.9 17tcf resource estimate quotes by Cove management shortly before takeover.

2012 Wessex Exploration

Total Guyane Maritime

115 175 1.25% 52.6 In-house P50 resource estimate for Zaedyus based on TLW 700mmboe P10 estimate pre-drill.

Source: Regulatory announcements, press reports, Edison Investment Research

Working on a read-across value for the Plains/Pura Vida farm-in, we envisage Fastnet will have a 4.5% to 11.6% net working interest depending on the terms of the deal (Exhibit 13). This will translate into a wide valuation range of 32p to 145p depending on the terms under which any discovery is sold (on a risked basis). However, based on a median netback of $30/bbl, which is not unreasonable for frontier discoveries with significant follow-up potential, we suggest a valuation of 87p (Exhibit 14).

Exhibit 13: Morocco post farm-out interest analysis Exhibit 14: RENAV analysis based on M&A netbacks Number of Morocco wells to carry Offshore oil discovery ($/bbl) Cash consideration ($m)

1 1.5 2 Onshore gas discovery ($/boe)

10 20 30 40 50

0 11.6% 8.0% 4.5% 2 32.0 58.2 84.3 110.4 136.5 4 10.5% 6.9% 3.3% 4 34.8 61.0 87.1 113.2 139.3 8 9.3% 5.8% 2.2% 6 37.6 63.8 89.9 116.0 142.1 12 8.2% 4.6% 1.1% 8 40.5 66.6 92.7 118.8 144.9 Source: Edison Investment Research. Note: Block value based on Pura Vida/Plains terms.

Source: Edison Investment Research. Note: Based on post-farm-out interests and resource volumes as per Exhibit 8.

Valuation summary In summary, we see that in expectation of farm-out deals, we would expect to place an industry value on the company of 41p, although equity markets are still likely to discount this somewhat. However, as drilling approaches and the market prices in the potential for discoveries, we would expect this to move nearer to double this mark. Ultimately, the success of the company will depend on drilling results, but in the near term we continue to see considerable running room in the share price ahead of drilling.

Financials: Funded for now but farm-outs critical

Following a £15m placing in November 2012, we forecast £24m ($37m) of cash at year-end 2013 (30 March 2013). This is sufficient to fund the near-term activities, which include the ongoing Celtic Sea 3D seismic programme ($18m), the Tendrara well ($7-8m) and general working capital. The balance sheet will clearly not fund Fastnet’s equity share of drilling costs either for Foum Assaka or Deep Kinsale, although we would expect these to be funded through farm-outs.

As previously mentioned, Fastnet has constructed its legal structure with all key assets (onshore Morocco, offshore Morocco, Deep Kinsale and other Celtic Sea assets) in separate subsidiaries such that asset sales can be completed in a tax-efficient manner.


Exhibit 15: Financial summary £'000s 2012 2013e 2014e March IFRS IFRS IFRS PROFIT & LOSS Revenue N/A 0 0 Cost of Sales N/A 0 0 Gross Profit N/A 0 0 EBITDA N/A (2,154) (1,383) Operating Profit (before amort. and except.) N/A (2,154) (1,383) Intangible Amortisation N/A 0 0 Exceptionals N/A 0 0 Other N/A 0 0 Operating Profit N/A (2,154) (1,383) Net Interest N/A 1,145 (290) Profit Before Tax (norm) N/A (1,009) (1,673) Profit Before Tax (FRS 3) N/A (1,009) (1,673) Tax N/A 0 0 Profit After Tax (norm) N/A (1,009) (1,673) Profit After Tax (FRS 3) N/A (1,009) (1,673) Average Number of Shares Outstanding (m) 55 226 274 EPS - normalised (c) 0.0 (0.4) (0.6) EPS - normalised fully diluted (c) 0.0 (0.4) (0.6) EPS - (IFRS) (c) 0.0 (0.4) (0.6) Dividend per share (p) 0.0 0.0 0.0 Gross Margin (%) N/A N/A N/A EBITDA Margin (%) N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A BALANCE SHEET * Fixed Assets 1 5,687 17,493 Intangible Assets 0 5,685 19,685 Tangible Assets 1 2 (2,192) Investments 0 0 0 Current Assets 731 24,691 11,462 Stocks 0 0 0 Debtors 85 748 748 Cash 646 23,944 10,715 Other 0 0 0 Current Liabilities (95) (873) (873) Creditors (95) (873) (873) Short term borrowings 0 0 0 Long Term Liabilities 0 0 0 Long term borrowings 0 0 0 Other long term liabilities 0 0 0 Net Assets 637 29,505 28,083 CASH FLOW Operating Cash Flow N/A (138) (1,422) Net Interest N/A 0 0 Tax N/A 0 0 Capex N/A (217) (11,806) Acquisitions/disposals N/A 0 0 Financing N/A 24,337 0 Dividends N/A 0 0 Net Cash Flow N/A 23,981 (13,229) Opening net debt/(cash) N/A (646) (23,944) HP finance leases initiated N/A 0 0 Other N/A (684) 0 Closing net debt/(cash) N/A (23,944) (10,715) Source: Company accounts, Edison Investment Research. Note: 2012 balance sheet represents Sterling Green shell.


Contact details Revenue by geography Number 14 The Embankment Vale Road, Heaton Mersey Stockport, Cheshire SK4 3GN United Kingdom (44) 2034 115730 www.fastnetoilandgas.com

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ROCE YY N/A ##% Avg ROCE YY-YYe N/A ##% ROE YY N/A ##% Gross margin YY N/A ##% Operating margin YY N/A ##% Gr mgn / Op mgn YY N/A ##x

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Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

Management team Executive chairman: Cathal Friel Managing director: Paul Griffiths Mr Friel is MD and one of the founders of Raglan Road Capital, a Dublin- and London-based corporate finance and merchant banking group. He has over 25 years’ managerial, entrepreneurial and corporate finance experience, as well as successfully advising major UK and Irish companies on domestic and international transactions.

Mr Griffiths is a petroleum geologist with over 35 years’ experience in early-stage oil and gas prospecting. He was a founder and former CEO of Island Oil and Gas, which drilled the first successful exploration well offshore south-east Ireland in 16 years, and was subsequently acquired by San Leon Energy.

Executive director: Carol Law Adviser: John Craven Ms Law is a geologist by training and has over 28 years’ experience in the petroleum industry in exploration management, exploration geology, research, and consulting in a variety of geological settings worldwide. Most recently, she was exploration manager, East Africa and Caribbean for Anadarko Petroleum Corporation, responsible for the play finding Prosperidade gas complex in Rovuma Area 1, offshore Mozambique.

Mr Craven is a petroleum geologist with 35 years’ experience in senior technical and commercial roles in upstream oil and gas exploration and production companies. He was a director and CEO of Cove Energy for over three years. Before joining Cove, he was founder and chief executive of the AIM- and ESM-quoted African and Mediterranean focused exploration company Petroceltic International.

Principal shareholders (%) Pathfinder Energy Maghreb (Paul Griffiths) 14.85% Cathal Friel/ Raglan Road Capital 6.89% Standard Life Investments 4.09% New City Investment Managers 3.2%

Companies named in this report Kosmos Energy, Genel Energy, Cairn Energy, Plains E&P, Galp Energia, Repsol, Chevron, Total, Pura Vida, Petronas, San Leon, Tangiers Petroleum, Wessex Exploration.

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