Research Note RBS MorgansAmbassador Oil and Gas (AQO)Market Cap:...

Research Note RBS Morgans

Ambassador Oil and Gas (AQO)Market Cap: A$6m
(listed shares) / A$10m (including escrowed shares)

Share price: A$0.075

Subject: AQO Kruger-1 deemed non commercial - main story is PEL 570 which is highly prospective for unconventional gas and liquids



Key points:
* AQO has finished testing the second well in its two well oil drilling campaign, Kruger-1. The well had 7m of oil shows and the oil water contact was found close to where AQO had anticipated. However, the reservoir was not well developed and therefore the well was deemed non-commercial and will be plugged and abandoned. AQO will likely drill a follow up well to Kruger-1 in the southern part of the block that may have a better developed reservoir. The first well in the campaign, Shocking-1, was also plugged and abandoned.

* AQO has $10m cash in the bank (~$0.07ps) and does not have any required well commitments for approximately the next 12 months.

* The main story is the PEL570 block which AQO has 100% interest in, and which is located in the Patchawarra trough in the northern Cooper Basin. We would expect partnering discussions to be ongoing for the exploration of this block and anticipate that a JV will be announced sometime in 2013 prior to any commitments which AQO has in the block. PEL570 is highly prospective for unconventional gas and associated liquids. AQO is a way to get exposure to the earliest stage of unconventional gas in the Cooper Basin, pre-partnering and pre-exploration but with some historical data available.

* AQO has commissioned a report from AWT International regarding the gas resource potential in its PEL570 block. In the quarterly announcement, AQO indicated study will potentially be an upgrade to current estimates, as tight and deep basin gas will be included for the first time in the study as well as the results of lab studies on deep coal gas. We expect the announcement of the study results to be a near term share price catalyst.