a jewel amongst the giants, page-4

A friend of mine is a KPL shareholder, he passed me this note from a BBY analyst regarding the recent Pandora award. Cott also rates a mention, worthwhile taking note of the numbers being thrown around (note they have applied a fairly heavy discount....

Subject: KPL -- Awarded 25% of PRL 38 (Pandora Discovery) -- KPL
Expands Contingent Resource Base -- Strategic Gas Resource

Stock: KPL (Kina Petroleum Limited)
Analyst: Scott Ashton
Recommendation: BUY
DCF Valuation: A$1.48ps
Market Capitalisation: A$101m
Share Price: A$0.43ps
Reason for report: PRL 38 Gazettal - Pandora Discovery

i) Over the Christmas break, offshore Gulf of Papua permit, PRL 1 was
re-gazzetted as PRL 38 for five years, with KPL acquiring a 25% interest
in the block. Other JV participants are Cott Oil and Gas or CMT 40%, STO
10% and Talisman 25% as operator. KPL's share of the first 3 years of the
work program is ~US$0.75m. A firm well is due in Year 5.

ii) In our view, KPL (along with CMT) have secured a strategic gas
resource which could be developed either as a standalone option or
integrated into a regional gas aggregation strategy in the Western
Province in PNG, potentially driven by Talisman / Mitsubishi. KPL's and
CMT's combined interests (i.e 65%) mean they have a greater interest than
the operator (i.e TLM at 25%). Under the PNG Government's policy of "use
it or lose it" (i.e. no land banking of gas resources), given the new
aligned JV structure, the onus will be on KPL and CMT to demonstrate a
pathway to commercialising the gas and therefore a profitable development.

iii) In our view, we don't see much downside from this asset, because KPL
and CMT are well positioned to harvest some value from Pandora from a
potential future partial sell down of their respective interests in PRL 38
once further work has been done and if the economics stack up. If KPL and
CMT can successfully demonstrate commerciality, then a potential scenario
could see KPL and CMT either potentially "costed out" or "taken out" by
Talisman or Santos. As an aside, we would not discount TOTAL potentially
being interested in this resource at some point (given their sour gas
experience), and may want to see Pandora "tail gas" potentially be
integrated into a Gulf strategy with InterOil.

iv) A commercialisation pathway has not yet been clearly defined, but we
feel that some value for the resource should be inputed. Based on the
latest TOTAL / InterOil transaction for the Elk-Antelope deal announced on
6 December 2013, and assuming a price of US$0.35/mcf to US$0.60mcf, then
KPL's 25% interest in 792bcf (2C contingent resource) could be worth
A$0.33ps to A$0.56ps. Risked adjusted at say 50%, it could be worth
approximately A$0.16 to A$0.28ps. We feel that the market is mispricing
KPL given KPL has just added ~33mmboe of additional contingent resource to
that already established from the Elevala-Ketu wet gas discoveries in
onshore permit PRL 21.

v) PRL 38 contains the Pandora gas discoveries (1988), Miocene pinnacle
reef structures called "A" & "B". The Pandora A gas field is in water
depths of ~110 metres and was discovered by the Pandora-1X well in July
1988 and was tested over three intervals. Test 3 flowed at rates of
12-57mmcf/d on various choke sizes. The field is estimated to contain
around 800-1,000bcf of biogenic gas (dry) with minor CO2, nitrogen and
about ~6% (or 2,300ppm) H2S (hydrogen sulphide) or sour gas. We note that
recent PNG country entrant TOTAL has experience with sour gas fields such
as the Lacq field in France (15.3% H2S and 9.3% CO2) and Ram River field
in Canada (35% H2S). The previous owners of PRL 1 (OSH and TLM) have a 3D
seismic data set which should be open file and assist the new PRL 38 JV to
refine Contingent Resource range (i.e. 1C, 2C, 3C), so upside of perhaps a
900bcf to 1.0tcf of gas might be possible