what does it take?, page-24

Hartleys Update:

http://www.adelphienergy.com.au/file...rch%202010.pdf

ADELPHI ENERGY LTD

What happened?

Adelphi Energy has reported sustained average 30 day flow rates from its first two wells at its Sugarloaf project onshore USA. The Kennedy #1H well has averaged 11.7 million cubic feet of gas equivalent per day* (mmcfe/d) and the Weston #1H well has recorded average 30 day production of 11.4mmcfe/d. These results have been achieved without the benefit of installation of production tubing, which has been indicated in nearby wells to result in a decrease in initial decline.

The Company has also reported that it now has three additional wells in the process of being drilled or fracture stimulated.

ADI is free carried through the current work program.

What does it mean?

At these rates, we estimate that each well is making US$50k-US$65k in revenue per day, with combined revenue from both wells grossing estimated US$3-4m in the first 30 days. We calculate that the average gas / condensate production per well is 3.75 million cubic feet of gas per day with 615 barrels of condensate per day (flow rates will decline significantly in the first year). With well costs estimated at US$6-8m, payback should be achieved within 5-8 months.

It is still early days; however, each piece of new information received to date has increased the potential of the play and estimated ultimate recovery per well is now likely to be significantly greater than 5 billion cubic feet of gas equivalent.

To give an indication of potential value, there could be over 200 well locations on the Sugarloaf acreage, resulting in over 1 trillion cubic feet of gas equivalent. We estimate that Adelphis share of this at current spot
prices (US$80 oil, US$4 gas) is worth ~150cps (using US$2 per mcfe calculated net present value and 10% working interest post farmout).

At US$100 oil, the valuation potential increases to over 200cps.

Strong newsflow is expected over the next 2-3 months as the additional 3 wells are completed, fracture stimulated and flow tested. Now that the technical risk has been decreased due to a substantial number of successful
wells being drilled in the play, we view these wells as very low risk (90% chance of success).

Hartleys Initial View

We recently upgraded ADI to a Buy based on the initial flow rates received from its first two wells and consistent information from wells in the surrounding acreage. This new information has increased our confidence in the potential of the resource and we re-iterate our Buy recommendation and short term price target of 45cps.

If initial results from the next three wells (expected over the next 2-3 months) continue to be strong, there is substantial room in our valuation for further large upgrades in price target and valuation, as indicated by
our unrisked valuation of 188cps.

*mcfe is calculated using a 12:1 conversion ratio for gas / condensate
and a 25% uplift in gas equivalent volume due to high calorific value
of the produced gas