Fastnet Oil & Gas. Game on at Foum Assaka. Continuing to deliver on schedule in Morocco. FA-1 breaking new ground

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1 Fastnet Oil & Gas Game on at Foum Assaka Drilling underway Oil & gas Having secured the most valuable farm-out terms of all the junior explorers offshore Morocco, Fastnet is now drilling its first well, FA-1, targeting the 360mmboe Eagle prospect. The company has secured a two-well carry from SK Innovations that follows its partner Kosmos s deal with BP, announced in late With investor focus firmly on Morocco, we expect the valuation gap to our NAV of 24-37p/share could narrow before TD is reached in a couple of months. Meanwhile, beyond FA-1 investors can also look forward to drilling onshore Morocco later in the year. 10 April 2014 Price 10.75p Market cap 37m US$1.6/ Net cash at end September Shares in issue 345.4m Free float 81% Code FAST Year end Revenue EBITDA PBT* Debt Net cash/ (debt) Capex 03/12 N/A N/A N/A N/A 03/ (3.5) (3.2) (3.5) 03/14e 0.0 (2.4) (2.6) (19.9) 03/15e 0.0 (2.9) (3.5) (7.0) Note: *PBT is normalised, excluding intangible amortisation, exceptional items and sharebased payments. Primary exchange Secondary exchange Share price performance AIM ESM Continuing to deliver on schedule in Morocco Only six months ago, Fastnet had much to do to participate in drilling offshore Morocco. However, in this time both the company and its partner, Kosmos, have delivered separate multi-well farm-in deals, a rig has been secured and, on 17 March 2014, it was announced that drilling had begun on the FA-1 well targeting the 360mmboe Eagle prospect. In a market where slippage of timeframes is commonplace, getting to this point on schedule is a commendable achievement. FA-1 breaking new ground FA-1 is a first for Morocco, representing the first modern test in the region of the salt diapir play using exploration techniques built from Gulf of Mexico experience. The well is the closest yet to drill in Morocco of the mid-cretaceous fan plays that have proved to be so successful to Kosmos and Tullow in Ghana. Having Kosmos and now BP as partners cannot be underestimated and confidence among the partners is high, albeit recognising this is still wildcat exploration. With a drill estimate of three months to reach total depth (TD), we expect results in June, with reservoir presence and hydrocarbon charge the main risks to consider. Valuation: Gap could close during drilling To reflect both the farm-out terms and a 10m equity raise in late 2013, our RENAV moves to 37p/share (from 50p), while an industry-derived valuation sits at 24p/share (from 40p). Obviously success of FA-1 will be a key factor in share price performance; however, Fastnet is still far more than a binary play. We expect drilling onshore Morocco in 2014 as Fastnet earns its 50% interest in Tendrara, while the Celtic Sea acreage remains highly prospective, albeit a farm-out here is taking longer than expected. % 1m 3m 12m Abs (9.3) (16.2) (56.2) Rel (local) (8.0) (15.8) (59.2) 52-week high/low 25.6p 9.6p Business description Fastnet Oil & Gas is an E&P company focused on Morocco and offshore Ireland. The company differentiates itself from peers by following an aggressive deal flow-driven strategy with an objective to return all future gains to shareholders. Next events FA-1 TD May/June 2014 Tendrara drilling 2014 Final results Analysts Q314 Ian McLelland +44 (0) Will Forbes +44 (0) oilandgas@edisongroup.com Edison profile page Fastnet Oil & Gas is a research client of Edison Investment Research Limited

2 Company description: Drillbit spinning Fastnet is still a young company but has achieved much already since listing on AIM in mid Highly accretive asset deals in both Morocco and Ireland over the first 18 months are now behind the company and the next 18 months are all about drilling. The first of three planned wells in Morocco (including one onshore) has already kicked off and we can now expect consistent newsflow over the coming months. What sets Fastnet apart from its peers are its plans to fast-track the exploration cycle of securing acreage, proving up, farming down, drilling and exiting as quickly as possible. Having already delivered the first three of these objectives offshore Morocco, all eyes are now on the FA-1 well. FA-1 targeting the Eagle prospect As announced by Kosmos in late 2013, the FA-1 well will target the 360mmbbl Pmean Eagle prospect in the north-east of the Foum Assaka block (Exhibit 1). Unlike the majority of historic wells drilled offshore Morocco that focused on the Carbonate Shelf, this will be the first modern test in the region of the discontinuous salt diapir play, using exploration techniques built from Gulf of Mexico (GoM) experience. Various trap types are possible on the structure and the initial well is targeting the flanks of a salt diapir (Exhibit 2), although Kosmos has indicated there is also the potential for other trap types on the fairway, including four-way closures. Being a true wildcat well the focus at this stage is on developing an understanding of the hydrocarbon system, especially around reservoir and charge. Investors should also be heartened by the fact that BP has farmed in to Kosmos s Foum Assaka acreage. With a wealth of experience in successfully testing salt structures, including in GoM, we consider this a strong endorsement of Kosmos s and Fastnet s work to date on Foum Assaka. Exhibit 1: Offshore Morocco play fairway analysis Exhibit 2: FA-1 seismic line Source: Fastnet Oil & Gas Source: Fastnet Oil & Gas The Eagle prospect is located in 600m of water and is being drilled with the Maersk Discoverer sixth-generation semi-subdrilling rig on contract to Kosmos. The well is expected to be drilled to a TD of 4,000m and will take up to three months to drill and test. As such we are expecting results in June 2014, although there may be interim announcements when the well reaches TD in what is likely to be late May or early June. Fastnet Oil & Gas 10 April

3 Fastnet is carried up to a gross cost of $100m for the FA-1 well and, barring any unforeseen problems, this should be sufficient to cover all costs (no DST will be carried out at this time). Its farm-in partner, SK Innovation from South Korea, will also carry Fastnet on a second Foum Assaka well and this will either be an appraisal well (capped at $100m per well) in the event of success with FA-1 or, at SK Innovation's discretion, a carry in a second exploration well (capped at $100m) should the Foum Assaka partners elect to drill a second exploration well. Foum Assaka block has significant running room Foum Assaka offers a range of prospects across the block. To the north-east is the sweet spot of Cretaceous deepwater turbidite fans that originated from a legacy river system of the Sous River Delta and include the Eagle-1 prospect currently drilling. Success with the FA-1 well clearly would open up an array of follow-on Cretaceous fan/salt diapir prospects, although as explained earlier the starting point is to try to define a working hydrocarbon system with particular focus on reservoir and charge. Fastnet would be carried (up to $100m) for any follow-on well in this region, be this either an appraisal well on the Eagle complex or a further exploration well. Exhibit 3: Foum Assaka leads and prospects Source: Fastnet Oil & Gas In addition to the mid-cretaceous deepwater turbidite fan plays, Fastnet and its partners also have the potential to target other play types over the Foum Assaka block including both Tertiary and early Cretaceous deepwater channels and fans. The early Cretaceous/late Jurassic play was unsuccessfully tested recently by Cairn Energy at Foum Draa, failing to identify clastic reservoir, and hence may now be of lower priority to the company. However, the well did confirm gas shows and gas composition ratios confirming an active thermogenic petroleum system. Cairn Energy, along with Genel Energy, also announced recently results of the JM-1 well on the Juby Maritime block to the south of Foum Draa; although targeting Upper Jurassic and Middle Jurassic objectives there is little read-across here to Fastnet s Foum Assaka activities. Fastnet Oil & Gas 10 April

4 Farm-out deals ensure strategy remains intact With spiralling costs associated with deepwater exploration, junior E&Ps are coming under increasing scrutiny to justify their strategies. The most visible indicator of this is probably Tullow Oil, which is signalling a (probably temporary) shift in strategy to lower cost onshore/near shore exploration rather than deepwater where the company has made its name. However, Fastnet and Kosmos play a different game of early mover advantage to amass significant acreage positions with secure favourable commercial terms before others farm-in. The success of both Kosmos, attracting deepwater specialists BP, and Fastnet, securing a two well carry from SK Innovations, means the early mover strategy remains healthy. Not all junior E&Ps are as successful at protecting balance sheets and we would refer investors to our recent sector report on African exploration drilling for more details on this. Valuation: Likely to firm during FA-1 drilling In previous notes we have considered a valuation based on both market transactions (ie farm-out terms) and fundamental economics (ie DCF). Having now secured its own farm-out with SK Innovations we can continue to look at the company valuation using both methods. Farm-out economics We expand our list of Moroccan offshore farm-in terms to include the deals secured by both Kosmos and Fastnet. This shows us that Fastnet has secured terms that on a $/km 2 basis are more attractive than any of the other preceding deals in the region. This in itself should give investors confidence that even if they are not well informed about Fastnet s prospects, industry is willing to pay a premium for the Foum Assaka acreage. Exhibit 4: Offshore Morocco farm-out terms Date Farming out Farming in Block Acreage (km 2 ) Back costs/ consideration (net) Carry Number of wells Gross interest farming out Implied value Implied value $/km 2 Nov-11 Fastnet Kosmos Foum Assaka 6, % ,011 Aug-12 San Leon* Cairn Foum Draa 3, % ,719 Aug-12 San Leon* Genel Sidi Moussa 5, % ,039 Dec-12 Tangiers Galp Tarfaya Offshore 7, % ,319 Jan-13 Pura Vida Plains Mazagan 10, % ,588 Oct-13 Kosmos BP Foum Assaka 6, % ,612 Oct-13 Kosmos BP Essaouira 11, % ,208 Oct-13 Kosmos BP Tarhazoute 7, % ,496 Dec-13 Fastnet SKI Foum Assaka 6, % ,749 Source: Edison Investment Research Fastnet s farm-out to SKI values the block at $426m and in turn Fastnet s diluted working interest of 9.375% at $39.9m or 7.2p per share. Along with an estimated $25.5m in cash at the end of financial year 2014 (31 March 2014) these two items alone cover the current share price. However, in keeping with our previous notes we can also ascribe value to the funded Tendrara TE-5/Lakbir appraisal well that is due to drill in 2014, as well as Fastnet s Celtic Sea acreage. Maintaining the same assumptions for these assets as in our previous notes we arrive at an industry derived valuation of 24.2p per share. Fundamental DCF economics Having secured a two well carry from its farm-out deal with SKI we can now update our DCF derived fundamental valuation for the terms of the deal. This includes the following: A reduction in the working interest in the Foum Assaka licence from 18.75% to 9.375%; Fastnet Oil & Gas 10 April

5 An element of financial de-risking as a result of the farm-out that we reflect in an increase in our CoS from 13% to 20%; Inclusion of a second nominal exploration prospect on Foum Assaka that Fastnet can drill at no cost courtesy of its two-well farm-out agreement with SKI; Reduction in Deep Kinsale CoS to reflect more challenging current farm-out conditions; and For the first time the impact of a 10m fund-raise in November 2013 that resulted in an additional 71.4m shares being placed. The net result of these changes is a modest reduction to our RENAV from 50.4p/share to 37p/share. However, our valuation continues to confirm significant upside to the current share price and with Foum Assaka drilling underway and Tendrara due to drill in 2014 we would expect investors to price in some of this upside ahead of drill results being announced. Exhibit 5: Fastnet undiluted DCF valuation how an acquirer would look at the company Asset Recoverable reserves Net risked Value per share Country Diluted WI CoS Gross Net NPV/boe value Risked Unrisked % % mboe mboe $/boe $m p/share p/share Net (Debt) Cash end FY13 100% 100% SG&A 100% 100% Production + Cash Development Tendrara TE-5/ Lakbir Morocco 38% 22% Development Cash + Production + Development Exploration ( ) FA-1 Morocco 9% 20% FA-2 (follow up well) Morocco 9% 20% Deep Kinsale Ireland 50% 10% Exploration NAV ( ) RENAV Source: Edison Investment Research In keeping with our previous notes on Fastnet we should stress that our RENAV reflects an undiluted valuation of the company as an acquirer would view the company s assets. In the event of success at Foum Assaka we would expect Fastnet to try to exit its position rather than be on the hook for what would be considerable appraisal and development capex. With a clear exit strategy in mind Fastnet has created its legal structure with all key assets (onshore Morocco, offshore Morocco, Deep Kinsale and other Celtic Sea assets) in separate subsidiaries such that asset sales can be completed in a tax-efficient manner. Financials: Fully funded for next 12 months We update our financials to reflect interim results ended 30 September In keeping with these results we also convert our financials to US dollars (previously they were in UK pounds). We estimate that Fastnet will exit its 2014 financial year (30 March 2014) with c $25m. Having already invested an estimated $18m in a Celtic Sea 3D seismic survey earlier in the financial year (H114 capex came in at $19.9m), the company can now look forward to drilling two wells offshore Morocco at no additional cost. We include in financial year 2015 the cost of one well at Tendrara (drilling of which will earn Fastnet a 50% interest in the block). We do not expect any capital expenditure associated with the Celtic Sea during the financial year to 30 March Fastnet Oil & Gas 10 April

6 Exhibit 6: Financial summary $000s e 2015e March IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue N/A Cost of Sales N/A Gross Profit N/A EBITDA N/A (3,509) (2,407) (2,912) Operating Profit (before amort. and except.) N/A (3,513) (2,407) (2,912) Intangible Amortisation N/A Exceptionals N/A Other N/A 1, Operating Profit N/A (2,440) (2,242) (2,912) Net Interest N/A 319 (209) (566) Profit Before Tax (norm) N/A (3,194) (2,616) (3,478) Profit Before Tax (FRS 3) N/A (2,120) (2,451) (3,478) Tax N/A Profit After Tax (norm) N/A (2,120) (2,451) (3,478) Profit After Tax (FRS 3) N/A (2,120) (2,451) (3,478) Average Number of Shares Outstanding (m) EPS - normalised (p) 0.0 (1.1) (0.8) (1.0) EPS - normalised fully diluted (p) 0.0 (1.1) (0.8) (1.0) EPS - (IFRS) (p) 0.0 (1.1) (0.8) (1.0) Dividend per share (p) Gross Margin (%) N/A N/A N/A N/A EBITDA Margin (%) N/A N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A N/A BALANCE SHEET Fixed Assets 2 12,053 32,345 39,345 Intangible Assets 0 12,041 32,325 36,525 Tangible Assets ,820 Investments Current Assets 1,112 31,649 25,626 15,741 Stocks Debtors Cash ,538 25,518 15,633 Other Current Liabilities (145) (674) (849) (849) Creditors (145) (674) (849) (849) Short term borrowings Long Term Liabilities 0 (169) (166) (166) Long term borrowings Other long term liabilities 0 (169) (166) (166) Net Assets ,859 56,956 54,071 CASH FLOW Operating Cash Flow N/A (757) (2,241) (2,886) Net Interest N/A Tax N/A Capex N/A (3,532) (19,944) (7,000) Acquisitions/disposals N/A Financing N/A 34,802 16,000 0 Dividends N/A Net Cash Flow N/A 30,513 (6,185) (9,886) Opening net debt/(cash) N/A (983) (31,538) (25,518) HP finance leases initiated N/A Other N/A Closing net debt/(cash) N/A (31,538) (25,518) (15,633) Source: Company accounts, Edison Investment Research Fastnet Oil & Gas 10 April

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