Morgans Coverage Initiated with A$0.59/Share Price Target, page-6

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IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS
CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
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Byron Energy Ltd
Riding the waves at Byron
BYE’s board and management ■ team have collectively over 150 years of operating
experience in the Gulf of Mexico.
■ The company is using advancements in seismic processing to identify low risk
hydrocarbons up-dip of existing production, generally around salt domes.
■ Funding for the upcoming drilling program is required and the company will either
need to raise additional equity or bring in a farm-in partner.
■ Initiate with an Add recommendation and an A$0.59 SOTP valuation.
An experienced team utilising advancements in technology
BYE’s board and management team have collectively over 150 years of operating
experience in the Gulf of Mexico. The team has been involved in the drilling of 141 wells
at a strike rate of greater than 80% and the company intends to use advances in
technology to undertake drilling up-dip of existing hydrocarbon production.
Funding is the issue…
BYE had cash reserves of US$3.7m at the end of 1QCY16 and has signed a contract for
the drilling of one well with the option for a second well. We estimate it will cost
~US$12m to drill the two wells on a 100% basis and consequently BYE either needs to
raise equity or attract a farm-in partner. The company confirmed at the recent AGM that
it is currently in discussions with potential farm-in partners in relation to SMI-6 and SMI-
71 as well as Bivouac Peak. It remains hopeful that an appropriate funding structure can
be put in place soon for drilling in 1QCY16.
…but having attractive high returning assets helps
Given the significant infrastructure in the region and the substantial reduction in drilling
rig rates, BYE’s projects generate healthy returns in the current low oil price
environment. Because of this we believe that BYE may be able to bring in a partner to
fund the drilling of the two planned wells, thereby removing the need for an equity
raising. At the company’s recent AGM it was noted that discussions are ongoing with
farm-in partners.
Initiate coverage with Add recommendation and A$0.59 target price
We initiate coverage on BYE with an Add recommendation and A$0.59 target price. Our
target price offers investors substantial upside potential from the current share price
even after diluting for an equity raising (or farming out SMI-6 and SMI-71) to fund the
upcoming exploration program. Key risks to our price target include exploration/farm-out​

success as well as currency and commodity prices.

Riding the waves at Byron
Key strengths
A team looking to replicate past success
BYE has an experienced board and management team that have collectively
over 150 years operating in the Gulf of Mexico (GoM). The team have been
involved in the drilling of 141 wells at a strike rate of greater than 80%. The
company is targeting hydrocarbons up-dip of previous wells which still hold
recoverable reserves. There are existing processing facilities nearby which
BYE could tie into in the event of a successful well.
Looking for a farm-in partner
We view the potential for a farm-in partner to fund the drilling of the SMI-6 and
SMI-71 wells as a key value driver for BYE. The company confirmed at the
recent AGM that it is currently in discussions with potential farm-in partners in
relation to SMI-6 and SMI-71 as well as Bivouac Peak. This may alleviate the
need for BYE to raise equity to fund the drilling and there is also additional
potential for some of the prior exploration costs to be repaid to BYE. The
company has locked in a rig on a 1+1 contract.
Strong cash generators in the current low price environment
Our analysis suggests that both SMI-6 and SMI-71 would generate attractive
returns in the current oil environment. Production costs (Opex + capex) of
~US$19/boe and ~US$29/boe would result in IRR’s of ~65% and ~30%
respectively at spot prices (WTI of US$43.00 and gas of US$2.35).
Plenty of reserves and resources to get after
Collarini, BYE’s independent certifier has undertaken a review of the
company’s oil and gas reserves and resources and these are outlined below.
Importantly they exclude the recently acquired Bivouac Peak Leases which
BYE believe to contain substantial oil and gas resources. BYE has internally
estimated prospective resources of 6.2mmbo and 69.2bcf of gas (17.8mmboe).
Importantly given the productivity of a number of the sands located in BYE’s
permits, and the success achieved utilising new seismic processing techniques,
the company is not undertaking what we deem to be high risk exploration​

activities.