PCL.asx

Speculative Buy

PANCONTINENTAL OIL AND GAS NL (PCL)

Share Price:

12mth Price Target:

17 Dec 2013

$0.058

$0.23

East not being outdone by West

Not to be outdone by the drilling activity offshore West Africa in 2014, PCL
has announced that its drilling campaign will start offshore Kenya in January
2014. PCL and its joint venture partners in the L10A block offshore Kenya have approved the Sunbird-1 well with drilling expected to commence in mid-January 2014. This is a significant catalyst for PCL's share price and therefore investors should position themselves well before drilling begins. We maintain our Speculative Buy recommendation on the stock with a 12- month target price of 23c.

Hartleys Brief Investment Conclusion

PCL holds a large acreage position offshore Kenya and Namibia. PCL is participating in up to three wells offshore Kenya over the next 12 to 18

months. Plenty of activity in Kenya and Namibia to provide catalysts for PCL.

Key Personnel

David Kennedy Chairman

Barry Rushworth CEO

Ernest Myers Finance Director

Top Shareholders:

Sundowner International Limited 11.6%

The Sunbird-1 target

PCL and its joint venture partners have not released an estimate of the prospective resource contained in the Sunbird-1 target however our rough

Company Address:

Ground Floor, 288 Stirling St

Perth, WA, 6000

Valuation:

$0.91

calculation estimates gross un-risked oil in place of approximately 830m bbls. Put differently, a company with the production and reserve base of BG would not be testing this target if it did not think it had the potential to be a significant commercial discovery. Numerous examples exist around the world, especially in South-East Asia, of significant Miocene reef discoveries containing both oil and gas. The drill ship "Deepsea Metro" will drill the Sunbird-1 well after it completes its current assignment offshore Tanzania.

Well timing and cost

According to the announcement the well will be drilled to a depth of 3,000m below sea level in a water depth of 721m, with an option to drill to a depth of
3,700m. We assume a dry hole cost of US$80 -100m of which PCL will pay
18.75% (US$15-19m). It should be noted that PCL's interest in the 10A block has increased to 18.75% because Premier Oil has withdrawn from the block. In our view the withdrawal is more to do with Premier conserving cash
rather than being concerned with the geology because they have not

Issued Capital: 1151.0m

- fully diluted 1156.0m

Market Cap: $66.8m

- fully diluted $67.0m Cash Equiv Sep '13): $30.0m Debt (Sep '13): $0.0m

Valuation Summary

Asset Value Risked Unrisked

A$m cps cps

Exploration

L8 (30%) 174.5 0.15 0.89

L6 (40%) 512.8 0.44 7.39

L10A (18.75%) 163.8 0.14 1.42

L10B (15%) 23.7 0.02 0.68

EL 0037 (30%) 177.8 0.15 1.54

Total 1,052.6 0.91 11.92

Source: Hartleys Research

Pancontinental Oil

withdrawn from L10B. A discovery in 10A would significantly de-risk many of the targets identified in L10B. It is worth noting the well will be "plugged and abandoned", as per industry best practice, because the rig is not equipped

0.14

0.12

0.10

0.08

25.

20.

15.

A$ M

for production testing, however PCL will receive full well log and sampling
data.

Beyond Sunbird-1 - multiple other targets

0.06

0.04

0.02

0.00

Dec-12

Apr-13

Aug-13

10.

5.

. Dec-13

Should the Sunbird-1 drilling confirm a working hydrocarbon system it opens

Volume - RHS

PCL Shareprice - LHS

Source: IRESS

up the potential of similar targets within the L10A block but also a play
fairway running north into the Block L6 and L8. PCL and operator FAR are

Authors:

Sector (S&P/ASX SMALL RESOURCES) - LHS

in the process of farming down their respective interests in L6.

Valuation and target price

In valuing PCL we place a significant discount on the risked prospective reserves valuation (75%) to derive our target price. We maintain our Speculative Buy recommendation. We increase our target price from 21c to
23c primarily because we have assumed a larger prospective resource for
L10A. Other near term catalysts for the stock include a farm down of PCL's
40% stake in the L6, possible farm down of L8 and a second well in L10B. We expect PCL to have approximately A$15m cash post Sunbird-1.

Simon Andrew

Energy Analyst

Ph: +618 9268 3020

E: [email protected]

Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Pancontinental Oil & Gas NL, for which it has earned fees and continues to earn fees. The Analyst is a director of a private company that owns

23,553,334 shares in PCL. Whilst the Analyst does not own any shares in this private company he

does have a beneficial interest in unlisted company options

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys 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. Further information concerning Hartleys' regulatory disclosures can be found on Hartleys website www.hartleys.com.au

Hartleys Limited Pancontinental Oil and Gas NL (PCL) 20 December 2013

SUMMARY MODEL

Pancontinental Oil and Gas

PCL

Share Price

$0.058

17 Dee 13

Speculative Buy

Key Market Informatian

Directors Company Details

Share Price

Market Capitalisation Net Debt (cash) lssued Capitai

ITM options

Options

$0.058

$67m

$30.0m

1151.0m

O.Om

5.0m @A$0.13

David Kennedy

8arry Rushworth

Ernest Myers

Chairman

CEO Finance Director

lssued Capitai (fully diluted ITM options) lssued Capitai (fully diluted ali options) EV

Valuation

12Mth Price Target

1156.0m

1156.0m

$36.8m

$0.91

$0.23

Top Shareholders m shs o/o

Sundowner lnternational Limited 134.1 11.6%

Projects lnterest Location Commodity

lnvestment Summary

L6 40% Kenya Oii/Gas Pancontinental has a large acreage position offshore Kenya LS 30% Kenya Oii/Gas and Namibia. The Company has managed to partner with the L10A 18.75% Kenya Oii/Gas likes of Apache, 8G and Tullow to explore far large scale,

commerciai oil and gas reservoirs.

L10B 15% Kenya Oii/Gas

EL0037 30% Namibia Oii/Gas

Valuation Summary

Asset Value Risked Unrisked

A$m cps cps

Expected News flow Project

Exploration 1Q 14 8G well in L1OA Kenya L8(30%) 174 0.15 0.89 1Q 14 Seismic program (Tullow) Namibia L6(40%) 513 0.44 7.39 1Q 14 Farm-down of L6 Kenya L10A (18.75%) 164 0.14 1.42 2Q 14 Announcement regarding L8 Kenya L108 (15%) 24 0.02 0.68 3Q 14 2nd well in L10A or 108 Kenya EL 0037 (30%) 178 0.15 1.54

Total 1,053 0.91 11.92

Unpaid Capitai No (mi $(mi Ave Pr % Ord

30-Jun-15

30-Jun-16

2.3 0.3 0.13

0.00

0.2%

0.0%

30-Jun-17

2.8

0.3 0.12

0.2%

Comments

We believe there are several catalysts that could provide further positive impetus far the PCL share price aver the next

6 months. These most signficant ofthese will be 8G drilling an

exploration wellin L1OA offshore Kenya in January 2014. Other catalysts include the farm down of an interest in the L6 concession offshore Kenya, expected early in 2014.

Analyst Simon Andrew

Phone: 08 9268 3020

Sources: IRESS, Company lnformation, Hattleys Research

Page 2 of 6

Last Updated: 17/12/2013

Hartleys Limited Pancontinental Oil and Gas NL (PCL) 20 December 2013

T h e S u n b i r d - 1 t a r g e t w i l l b e t h e f i r s t o f i t s t y p e t o b e d r i l l e d

o f f s h o r e E a s t A f r i c a

SUNBIRD-1

Target: The Sunbird-1 target is a Miocene reef build up and will be the first target of its type to be drilled offshore East Africa. The prospect has an area of 73sq km and a gross vertical relief of 700m. PCL believe the target may be oil prone. Using some very basic calculations we calculate the gross un-risked recoverable oil in place of 830m bbls. Some of our key assumptions include 150m of net pay, 20% porosity and recovery factor of 20%.

Wilson et al (Tectonic Influences of SE Asian Carbonate Systems and their Reservoir Development, 2010) highlight the prolific nature of carbonate reservoirs in South East Asia. The report also highlights that dry carbonate build ups are often caused by poor seal integrity caused by faulting on the crest of the build-up.
Sunbird-1 is located 50km from Mombasa which does reduce the hurdle to achieve a commercial gas discovery. It is unlikely that an LNG development would be considered unless the discovery was 4tcf or higher. Should a discovery be in the 1-3 tcf range it may be considered for domestic power generation (the Kenyan
Government has expressed a desire to convert existing power plants to gas).

Fig. 1: B l ock L10A / L10B T ar gets and Leads

Source: Company Presentation

Cost: We estimate the cost of the Sunbird-1 well to be US$80m based on 60 days of drilling and a rig day rate of approximately US$1.3m /day. Should the JV choose to drill the well to the deeper target the cost may increase to US$100m. PCL's contribution to the well will therefore range from US$15-19m. This will leave PCL with a cash balance of approximately US$15m post the well. The Company's cash balance could be bolstered by receipt of back costs associated with a farm-out of L6 and reimbursement associated with Apache's withdrawal from the L8 block.

Timing: Once the "Deepsea Metro" has completed its current drilling campaign

offshore Tanzania it will move directly to Kenya to drilling the Sunbird-1 target. At this stage we believe the well will spud in mid-January. It is expected to take 50-60
Page 3 of 6
Hartleys Limited Pancontinental Oil and Gas NL (PCL) 20 December 2013

days to reach the target depth of 3,000m and longer should a decision is made to drill to 3,700m.

Fig. 2: S ei smi c - S unbi rd -1

A r e m i n d e r t h a t P C L

e x e c u t e d a s i g n i f i c a n t f a r m - o u t d e a l w i t h

T u l l o w o n i t s a c r e a g e o f f s h o r e N a m i b i a

Source: Company Presentation

Namibia: Tullow recently farmed into 65% in exchange for US$130m in spend

This is not new news but the market needs to be reminded that this deal is significant. The basic details require Tullow to free carry PCL through an extensive 2D (1000km) and 3D (3000sq km) seismic program and an optional exploration well to earn a 65% interest in EL0037. The value of the work is assumed by PCL to be in the range of US$110m-130m. PCL will retain a 30% interest in EL0037. Tullow will reimburse PCL to 65% of back costs (approximately US$500k). The seismic program must begin by December 2014 (PCL expect the seismic acquisition to begin by early 2014). Paragon Oil and Gas retain the remaining 5% interest in EL0037.
There are some unique aspects to this agreement that should be highlighted. Should Tullow choose not to proceed with the exploration well after completion of the 2D and 3D seismic program then the 65% interest will be re-assigned to PCL at no cost. To withdraw Tullow must inform PCL in writing no later than 16 months after capture of the 3D seismic data or 13 months prior to the expiry of the First Renewal Exploration Period, whichever is earliest. If we assume the seismic program is complete by end 1QCY14 then the first withdrawal deadline will be July 2015. This clause is unique to recent farm out agreements that usually include an "optional well".

No spending cap

An important aspect of the agreement with Tullow is that there is no spending cap on the work program. In other farm out agreements a spending cap is usually set which means that when costs exceed a certain amount the junior partner (or farmor) is on the hook for cost overruns.

RISKS

The key risks for PCL (like most oil & gas exploration companies) is making an economic discovery and obtaining the funding for ongoing exploration. Other risks include delays, key person risk, country/sovereign risk, weather, JV partner obligations, cost inflation. Investing in explorers is very risky given the exploration
value of the company in essence assumes that the market will recognise a portion
Page 4 of 6

Hartleys Limited Pancontinental Oil and Gas NL (PCL) 20 December 2013

ol potential value belare the results ol an exploration program are known, conscious that the ultimate chance olsuccess is low (typically 1%-20%) and that lailure is much more likely, in most cases. other risks are earnings disappointments given the industry is volatile and earnings can disappoint due lo cast overruns, project delays, cast inllation, environmental regulations, resource estimate errors and management performance and contraet negotiation skills. High linancialleverage (ililexists althat lime) would add lo the problem.

Page 5 ol6

Research

HARTLEYS CORPORATE DIRECTORY

Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

Scott Williamson Resources Analyst +61 8 9268 3045

Simon Andrew EnergyAnalyst +61 8 9268 3020

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance

Institutional Sales

Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

Simon van den Berg +61 8 9268 2867

Chris Chong +61 8 9268 2817

Veronika Tkacova +61 8 9268 3053

Wealth Management

Grey Egerton-

Warburton

Head of Corp Fin. +61 8 9268 2851

Nicola Bond +61 8 9268 2840

Bradley Booth +61 8 9268 2873

Richard Simpson Director -Corp. Fin. +61 8 9268 2824

Paul Fryer Director-Corp. Fin. +61 8 9268 2819

Dale Bryan Director-Corp. Fin. +61 8 9268 2829

Ben Wale Snr Mgr-Corp. Fin. +61 8 9268 3055

Ben Crossing Snr Mgr - Corp.Fin. +61 8 9268 3047

Stephen Kite Snr Mgr- Corp. Fin. +61 8 9268 3050

Scott Weir Snr Mgr- Corp. Fin. +61 8 9268 2821

Registered Office

Level 6, 141 St Georges TcePostal Address:

PerthWA 6000 GPO Box 2777

Australia Perth WA 6001

PH:+61 8 9268 2888 FX: +61 8 9268 2800 www.hartleys.com.au [email protected]

Note: personal email addresses of company employees are

structured in the following manner:[email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is not as attractive as a "Buy". Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a "Buy".

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Adrian Brant +61 8 9268 3065

Nathan Bray +61 8 9268 2874

Sven Burrell +61 8 9268 2847

Simon Casey +61 8 9268 2875

Tony Chien +61 8 9268 2850

Travis Clark +61 8 9268 2876

Tim Cottee +61 8 9268 3064

David Cross +61 8 9268 2860

Nicholas Draper +61 8 9268 2883

John Featherby +61 8 9268 2811

Ben Fleay +61 8 9268 2844

James Gatti +61 8 9268 3025

John Georgiades +61 8 9268 2887

John Goodlad +61 8 9268 2890

Andrew Gribble +61 8 9268 2842

David Hainsworth +61 8 9268 3040

Neil Inglis +61 8 9268 2894

Murray Jacob +61 8 9268 2892

Bradley Knight +61 8 9268 2823

Gavin Lehmann +61 8 9268 2895

Shane Lehmann +61 8 9268 2897

Steven Loxley +61 8 9268 2857

Andrew Macnaughtan +61 8 9268 2898

Scott Metcalf +61 8 9268 2807

David Michael +61 8 9268 2835

Damir Mikulic +61 8 9268 3027

Jamie Moullin +61 8 9268 2856

Chris Munro +61 8 9268 2858

Michael Munro +61 8 9268 2820

Reduce / Take profits

It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period.

Ian Parker +61 8 9268 2810

Charlie Ransom +61 8 9268 2868

Brenton Reynolds +61 8 9268 2866

Conlie Salvemini +61 8 9268 2833

Sell Significant price depreciation anticipated.

No Rating No recommendation.

David Smyth +61 8 9268 2839

Greg Soudure +61 8 9268 2834

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the

investment is considered high risk.

Sonya Soudure +61 8 9268 2865

Dirk Vanderstruyf +61 8 9268 2855

Jayme Walsh +61 8 9268 2828

Samuel Williams +61 8 9268 3041

Disclaimer/Disclosure

The author of this publication, Hartleys Limited ABN 33 104 195 057 ("Hartleys"), its Directors and their Associates from tim e to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the pric e of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients.

Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Pancontinental Oil & Gas NL, for which it has earned fees and continues to earn fees.

Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, 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.

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