Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.

Transcription

1 INITIATION OF COVERAGE 23 September 2014 Summary Interfox Resources (IFOX.ST) Oil exploration in Siberia with potential Interfox Resources is an oil and gas explorer with operations in the Tomsk region, Russia. Their main asset is block 71-1, where hydrocarbons already have been confirmed. The CPR available indicates mid-case prospective resource of 32 mmboe. Subsequent independent analysis performed by Geoprime and IOGT indicate significantly higher volumes. The company aims to sell the license to a larger operator by the end of The work going forward is drilling to determine the size, production characteristics and to transfer resources to reserves. Our fair value estimate for Interfox is SEK per share (5.3 after reversed split). Our Bull-case indicates a value of SEK a share and our Bear-case SEK. The stakes are high but also the possible rewards. List: Market Cap: Industry: CEO: Chairman: Jan Aktietorget 75.5 MSEK Exploration - Oil & Gas Jens Bruno Max Renard Interfox Resources OMXS Apr Redeye Rating (0 10 points) Management Ownership Growth prospect Profitability Financial strength 6.5 points 5.5 points 1.0 points 0.0 points 0.0 points Key Financials E 2015E 2016E Revenue, MSEK Growth 0% 0% 0% 0% 0% EBITDA EBITDA margin 0% 0% 0% 0% 0% EBIT EBIT margin 0% 0% 0% 0% 0% Pre-tax earnings Net earnings Net margin 0% 0% 0% 0% 0% Dividend/share E E E 0.00 EPS adj. neg neg neg neg neg P/E adj. n.m n.m n.m n.m n.m EV/S n.m n.m n.m n.m n.m EV/EBITDA n.m n.m n.m n.m n.m Share information Share price (SEK) Number of shares (m) 2159 Market Cap (MSEK) 75.5 Net cash (MSEK) 15 Free float (%) 66 % Daily turnover ( 000) Analysts: Kristoffer Lindstrom kristoffer.lindstrom@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, Stockholm. Tel E-post: info@redeye.se

2 Redeye Rating: Background and definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Growth Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Growth Outlook Our Growth Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth Outlook are: 1 Strategies and business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. Initiation of coverage 2

3 Table of contents Index: Investment summary... 3 Searching for oil in Tomsk... 6 Company Description... 6 Key employees and shareholders...7 The oil industry Resources to reserves Exploration Portfolio Valuation Valuation Methodology Estimated fair value Redeye Rating

4 Investment summary Background Interfox Resources is an oil and gas exploration company with operations in Russia, Tomsk region. The license that Interfox indirectly owns 74% of is called Block The company intends to develop the license through exploration and appraisal work and then sell it to a large oil company. Recent drilling activities indicates a much higher resource volumes than the stated CPR report Potential reserves much larger then stated in CPR During the Soviet era two wells were drilled, both encountering hydrocarbons. The available Competent Person Report (CPR) made before conducting the first phase of exploration and re-entry of one of the old wells estimates that there could be 32 mmboe of resources in a mid-case scenario. Subsequent independent analysis made after the stated CPR report both confirms hydrocarbons on the license and indicates significantly higher volumes of resources. Works done by independent company Geoprime (a Schlumberger company) have given a Russian standard C3 resource that is under registration with government authorities of 134 mmboe. The company IOGT made a complex analysis of the reentered well before perforation works were started whereby their technology confirmed a number of intervals that are of interest to explore further and confirmed hydrocarbons present. Even though the new data support a higher volume assessment, to be conservative we will be using the CPR resource levels in our valuation. Resource assesment (mmboe) New analysis indicates much larger possible reserves CPR P90 CPR P50 CPR P90 Geoprime - C3 C3 resource under registration Source: Interfox Resources Confirmed reserves on neighboring licenses Neighboring block have confirmed reserves of 145 2P The overall geological characteristics of the area are also in favor for Interfox. Neighboring license Block 70, owned by ONGC, has three confirmed structures with a total of 145 2P reserves. 4

5 A strong management team with extensive business experience in Russia and the Far East Competent management team a great asset The company has a management team with considerable experience of entrepreneurship in the Russian and Asian region and one of the most experienced Russian geologists available. We believe that they are a great asset for the company and crucial for the future progress. Underlying need of reserves There is always a need for oil and gas companies to increase their reserves so they can sustain the production levels. This is positive for Interfox since several large producing companies are present in the region and there is a large underlying need to replace produced reserves. Another positive factor for Interfox is that China has recently signed an oil and gas treaty with Russia which should enhance the chances of a sale of the license. Our estimated fair value in a Base-case amounts to 5.3 SEK per share after the reversed split Conservative resource assessment justifies current share price Based on recent transaction valuations, relative valuation multiples and our estimated future reserves for the license (which uses the conservative CPR resource assessment) we have estimated a fair value of 5.3 SEK per share (0.053 before reversed split). We estimate that today s valuation is justified by a conservative estimate of future possible reserves. If the ongoing drilling activities improve the assumed resources or are transferred to reserves this will enhance the share price significantly. Drilling activities the main value driver The main value driver going forward will be related to different activities to enhance, prove and improve the likely reserves of The activities can be of different sorts. But most likely different drill results and new reserve updates. This can impact the stock price both negatively and positively. Interfox shares sky rocked when the company published the IOGT report that confirmed that there are hydrocarbons on the license. Activities such as this will have the largest impact on the share price going forward. Also, as Interfox is not a self-financing company the way that the company will finance itself will also affect the valuation of the company. If the financing can be made at attractive terms this will most likely create a higher valuation. Great potentials but of course not without risks Great potential and conservative valuation An investment in Interfox is not without risk. There is always a risk that the oil and gas resources on the license block will not contain large enough amounts of producible oil. On the contrary the potential reward could be very large given today s relatively conservative valuation of the company. We find that the share is attractively priced. 5

6 Searching for oil in Tomsk Interfox Resources Operational in the Tomsk Region, Russia Recent estimates from Geoprime and IOGT indicates much higher volumes of possible reserves Aims to sell the license after reserves have been confirmed Company Description Interfox Resources is an oil and gas exploration company with operations in the Tomsk region of Siberia. The company is the continuing operations of Archelon Mineral. The company's first license is called Block 71-1 or "Ellej- Igajskoje. The company has through a rights issue and a directed share issue raised the first capital needed to begin the re-entry of the now existing wells on the license. When these wells were drilled during the Soviet era, elevated carbonates could be identified. The question is thus not, whether there are hydrocarbons in place, but how much there is and how producible it is. The UK consulting firm Oil Production Consultants (OPC) performed a CPR in connection with a prospectus registered by the company for the rights issue. The CPR was performed before any on-field works, that is, before starting the re-entry, and based their analysis on historic well logs, newer seismic data and the initial analysis from Geoprime. OPC estimates in a mid-case scenario the prospective resource to about 32 mmboe (million barrels of oil equivalent). The goal is to sell this license and give out a large portion of this sale amount to the shareholders of the company. Exploration works and analysis from Geoprime have given a Russian standard C3 resource of 134 mmboe, under registration, and the company IOGT has confirmed with their new technology that hydrocarbons are in place. Business model Interfox goal is that during a 16 month period conduct drill activates to establish an estimate of the proven and probable resource on the license. After this the license will be sold to larger company that has the possibility to take the license to production. Therefore it is not Interfox intention to become an oil production company or operator of the field. 6

7 Value creation process of E&P companies The diagram exemplifies the value creation process, investment need and risk for E&P (Exploration and Production) companies during different phases. Interfox are in the final stages of the exploration phase and will begin the evaluation of the resources. This is a "sweet spot" when the value often in increases significantly, if the evaluation is favorable. The need for investments remains quite low and the risk decreases when the likely reserves take shape. The company thus aims to dismantle the license to a production company before the development begins. Value creation process for oil companies Exploration Phase Evaluation Phase Development Phase Production Phase Source: Redeye Research Value creation Need of capital Risk Key employees and shareholders Interfox Resources has successful recruited people with solid entrepreneurial-, Russian culture-, capital markets and exploration experience to senior positions in the company. Above all, the company's CEO Jens Brown with extensive experience in Russia, chairman Max Renard and chief geologist Mikhail Malyarenko are assets that are crucial for the company to succeed in their undertakings. Both CEO, Jens and chairman Max have large business network in Russia and Far East Management: Jens Bruno, CEO Jens Bruno is the CEO of the company. He has a long and extensive experience in managing, controlling and commercializing investments in Russia and the former Soviet Union. Jens has previously acted as an advisor to the Russian Government and worked as accompanying financial officer at the Swedish Embassy in Moscow. In the past he also worked at East Capital Explorer with Russian investments. In the recent years, Jens worked to develop the Ukrainian agricultural company Grain Alliance, which started in Jens contributes primarily with investment expertise in Russia, extensive knowledge of the Russian business culture and broad financial and political 7

8 networks. Jens speaks and writes fluent Russian, which facilitates the operation of the company. Jens is currently not a shareholder of the company but he has a bonus related contract where a quick and large sell of the license will benefit him. We find this as positive as the bonus setup is in line with shareholder interest. Number of shares: 0 Max Renard is the company s largest shareholder, as such the board is highly shareholder friendly Max Renard, chairman The Chairman, Max Renard, recently moved back to Sweden to be able to pay full attention to Interfox Resources and his responsibilities as Chairman. He has successfully operated abroad, mainly in China, for more than 30 years, and was most of this time based in Hong Kong. During this period he developed strategic business relationships and a network of very senior Asian contacts. These contacts were initially developed in the 1990s, in order to promote sales and contracts in the Asian telecommunications business. Large contracts involving were successfully concluded by Renard around year As the telecom market matured, Renard shifted focus to the energy and natural resources sector, just as the Asian major companies began to acquire substantial natural resources reserves around the globe in order to meet its ever-growing demand. Number of shares: Jan Lundström, vice chairman Jan has extensive experience in capital markets including positions as investment manager and deputy director in private equity firms. Jan is the chairman of a forestry company with its assets in Karlia, Russia and has substantial experience in entrepreneurship. He has also taken large part in starting and developing several companies in the Life Science industry since the mid-90s and has taken a big part in restructuring IT companies after the crash in year His experience also includes investments in Ukraine, Germany and Brasil. Number of shares: Jan and Anders primarily contributes with extensive capital market experience Anders Thorsell, Board member Anders has extensive experience in capital markets in particular regarding Corporate Finance transactions, having raised substantial funds for various companies and in particular natural resources companies. Aside from this experience, he has successfully started and/or developed different companies. These companies include an asset management and corporate finance boutique that was sold to an Investment Bank. Anders also started and developed other companies within the financial sphere in Sweden and in Russia, natural resources companies in Russia and Ukraine and an agriculture company in Ukraine. He has also been in charge of Interfox Invest AB and FEPI with a particular focus on Russia, having worked with Russian and Ukrainian projects for the last 9 years. Anders has together 8

9 with Mr Renard for the last two years created the project that became Interfox Resources AB. Number of shares: Mikhail is a highly renowned Russian geologist Geologists: Mikhail Malyarenko, General Director, subsidiary OOO Bakcharneftegaz Mikhail is a Russian geologist with extensive experience of exploration in Russia. The Malka licenses are probably the best earlier known licenses that Mikhail has worked on. The work surrounding the project got negative press in Sweden as Malka in connection with the financial crisis in ended up in financial trouble and had to perform an unofficial reconstruction and Mikhail lost his influence and place in Malka. The Malka oil license was nevertheless a great success and is now one of the state company Gazprom Neft s key holdings in the area, producing 17-20,000 bopd. Mikhals knowledge of exploration is central for a successful outcome for Interfox Resources. Mikhael will own 26% of the license after the investment program finished. If the exploration is highly successfully sold, Mikhail s economical stake in the sales price will be increased. The structure of the commitment is designed so that Interfox Resources will still benefit greatly of the expanded reserves, which leads to no conflicts of interest. In addition to Mikhail, an operational unit with selected experts in geology and economics has been recruited. Worth mentioning is the head geologist, Mr. Alexander Kokunov, who has many years of experience from the area, working in senior positions in larger as well as smaller companies. 9

10 Shareholders The largest shareholder of Interfox is Far East and Pacific Investment Inc, this is a company owned and operated by Interfoxs chairman Max Renard. We find it positive to have Max as Chairman of the board and also the largest shareholder of the company. Stated shareholders list recently updated. Shareholders Holder Number of shares Percentage THE FAR EAST & PACIFIC INVESTMENT INC % AVANZA BANK % SEB % SWEDBANK % NORDNET % HANDELSBANKEN % ERIKSSON, PETER % AFSNEE AB % OTHER % Total % Source: Interfox Resources (by ) Interfox is a pure upstream company Constant need to replace produced reserves drive the need of exploration assets The oil industry The modern oil industry is divided into three main segments, "upstream", midstream and "downstream". Upstream refers to companies active in exploration and production, the midstream sector involves transportation and wholesale marketing of crude or refined products, while downstream companies focus on refining and distribution. Interfox Resources is thus a pure upstream oil company with a strong focus on exploration. Oil demand is economic growth around the world. The need for energy per capita is steadily increasing even though there are new technologies that improve the efficiency of energy use. U.S. Energy Information Administration (EIA) estimates that the world s energy consumption will increase by about 56% between 2010 and Above all increased demand will come from the emerging countries. EIA believes that the need of natural gas will be the fastest growing of the fossil fuels, with a projected increase of 1.7% per year. Interfox license is believed to contain both natural gas and crude oil. The need for exploration Since there is an underlying future need of oil and gas, there is obviously a need for oil producers to increase their reserves in line with increased production and even with sustained production due to the natural depletion in the reserve base. The relationship between the reserves and production, or the R/P ratio, cannot decline too much or else it in the end will hamper the production rate. Due to the substantial future demand for fossil fuels, there is clear need to perform substantial exploration in order to expand or even maintain the existing reserves for producing oil companies in Russia. The R/P ratio for oil production and reserves has been relatively stable the last ten years. This means that the amount added to the reserves have been in line with the production rate. As the production is estimated to increase going forward 10

11 there is still a large demand for reserves. For gas the relationship between produced gas and reserves has been more volatile but overall the R/P ratio has increased somewhat. Russian oil prodcution and proved reserves, million barrels of oil Growth in production will lead to a larges need of reserves Proved reserves (mmbo) Production per year (mmbo) R/P ratio Source: BP Statistical Review of World Energy 2014 Russian gas prodcution and proved reserves, billion cubic feet Proved reserves (bcf) Production per year (bcf) R/P ratio Source: BP Statistical Review of World Energy 2014 The large Russian and Chinese treaty can enhance the demand for Russian oil assets Chinese oil and gas trade The expansion of the ESPO (Eastern Siberia-Pacific Ocean) pipeline is one of the most important projects in Russia today. This expansion enables exports of oil and gas to the Asian markets. This project is already on its way and the pipeline is being supplied with oil from the Tomsk region among others. China has been a large buyer of Russian oil and gas ever since Mao Zedong in 1950 travelled to Moscow to sign the Sino-Soviet Treaty of Friendship, Alliance, and Mutual Assistance. On May 23rd 2014 Russia and China signed a new far reaching agreement between the countries. The highlight of the agreement is Russian exports of USD 400 billion worth of natural gas to China over 30 years. The agreement also paves the way for Chinese 11

12 investment in Russia, in the area of aviation, transportation and infrastructure. It also would give the China National Petroleum Corporation an opportunity to acquire a 19 percent stake in Rosneft. The recent agreement between China and Russia opens up large opportunities for Russian oil and gas producer and explorations companies as the demand and interest for Russian oil and gas assets is likely to increase. The stressed political climate should have small impact on Interfox chances of selling their license Politics The political climate in Russia, as in any country, affects companies that are operating within its borders. The current unrest in Ukraine is likely to affect mainly the investment willingness of Western investors. On other hand, the interest of Russian oil projects has grown substantially in Asia. A future buyer of the license 71-1 will probably be one of the major production companies in the Tomsk region or from Asia. The demand for reserves could be hampered if there is a large sanction made against Russian oil export Tomsk The Tomsk region is one of the ten leading oil regions of Russia and almost every major Russian market player is operating in the region. Oil production in the Tomsk began in the 1960s, and production of gas in the mid-1990s. Interfoxs license 71-1 is located in the southwestern parts of the region. Overall the infrastructure in Tomsk is well developed as the region is already a large producer of oil and gas. The Tomsk region - Siberia Tomsk is one of the leading oil regions in Russia with welldeveloped infrastructure Source: Interfox Resources Infrastructure The goal for Interfox Resources is as mentioned earlier to sell their license when a reserves registration or at least a reserves and resources assessment has been done or possibly to enter into a partnership. Central to such a situation is the amount of investments that is needed for a buyer of the 12

13 license to create an operationally functional activity. In addition to investments in drilling equipment and geophysical and geological analysis work there is often a need of investment in infrastructure such as roads and pipeline. There are already winter roads constructed to the license area which is positive. These roads are dependent on the weather conditions as warm weather makes them impassable and unexpected closure of the winter roads may delay the delivery of various equipment. The nearby pipeline is owned by ONGC (Imperial Energy) and is close to the license block, which is also positive. Furthermore, the resource itself is high and narrower than usual which makes likely it feasible to produce from fewer wells than usual, providing better production economics. The investment requirement for an operational actor is relatively small which of course is good in a negotiating situation for Interfox. Different buyers will have different investment needs and thus will be willing to pay different prices. Resources to reserves In the E&P industry a classification system is used for evaluating petroleum reserves and resources. The most widely used system outside Russia is the Petroleum Resource Management System (PRMS). Russia have since the Soviet times developed a slightly different standard system, which is used. In general they follow the same principles. Oil and gas reserves and resources are defined as volumes that will be commercially recovered in the future. The reserves and resources for E&P companies unlike the inventory for a manufacturing company cannot be inspected and counted as they are located in reservoirs underground. The amount of reserves and resources must be estimated, thus reserve estimates involve some degree of uncertainty. Oil and gas reserves and resources are defined as volumes that will be commercially recovered in the future, according to international standards Prospective resource represents quantities of petroleum that are estimated to be potentially recoverable based on indirect evidence. These resources have not yet been drilled. This class represents a high degree of risk since there is also a risk of non-discovery. Basically for prospective resources to be classified as contingent resources, hydrocarbons need to be discovered. Contingent resources are less certain than reserves but more than prospective resources. These resources are recoverable but not yet considered mature enough for commercial development due to either technological or economic factors. For the contingent resource to be classified as a reserve, environmental and government approvals should be in place. Also the company must show evidence of intention to proceed with development within a reasonable time frame. Reserves are the part of the total resource that are commercially recoverable and have been justified for development. These are the highest form and possess the highest likelihood of extraction from the ground. The reserves are divided in 1P, 2P and 3P. With 1P as the category with highest certainty of extraction 13

14 Within every resource class there are different categories, the resources are divided into different categories based on their probability of eventually coming out of the ground. In the reserve class the categories proved, probable and possible are used, with proved having the highest chance of extraction. In the resources classes a measurement of low, best/mid and high is used. Where high is the high estimate of resources in the ground. The reserves are divided in 1P, 2P and 3P. With 1P as the category with highest certainty of extraction Source: SPE The Russian reserves system differs somewhat from the Western standards, specifically how and the extent to which commercial factors are considered in calculating reserves Difference between Russian and international classifications. The Russian reserves system differs somewhat from the PRMS, specifically how and the extent to which commercial factors are considered in calculating reserves. Reserves that are calculated using different methods cannot be accurately compared or converted. The Russian reserves system is based on the analysis of geological attributes. Explored reserves are expressed by categories A, B, and C1; preliminary estimated reserves are classified as category C2; potential resources are classified as category C3; and forecasted resources are represented by categories D1 and D2. Gas reserves in categories A, B and C1 are considered to be fully extractable. For reserves of oil and gas condensate, a predicated coefficient of extraction is calculated based on geological and technical factors. Category A reserves are calculated on the part of a deposit drilled in accordance with approved development project for an oil or gas field. This category represent reserves that have been analyzed in sufficient detail to define exactly the type, size and shape of the deposit; hydrocarbon saturation level; reservoir type; nature of changes in the reservoir characteristics; content and characteristics of the hydrocarbons. In addition to this all major features of the deposit; type of operations, well productivity, pressure, gas, gas condensate and oil balance, are also well known. 14

15 Explored reserves are expressed by categories A, B, and C1 Category B represents the reserves of a deposit (or portion thereof), the oil or natural gas content of which has been determined on the basis of commercial flows of oil or natural gas obtained in wells at various hypsometric depths. The type, shape and size of the deposit; the effective oil and natural gas saturation depth and type of the reservoir; the nature of changes in the reservoir characteristics; the oil and natural gas saturation of the productive strata of the deposit; the composition and characteristics of crude oil, natural gas and gas condensate under in-situ and standard conditions and other parameters; and the major features of the deposit that determine the conditions of its development have been studied in sufficient detail to draw up a project to develop the deposit. Category B reserves are computed for a deposit (or a portion thereof) that has been drilled in accordance with either a trial industrial development project in the case of a natural gas field or an approved technological development scheme in the case of an oil field. Category C1 represents the reserves of a deposit (or of a portion thereof) whose oil or natural gas content has been determined on the basis of commercial flows of oil or natural gas obtained in wells (with some of the wells having been probed by a formation tester) and positive results of geological and geophysical exploration of non-probed wells. C1 is the determined amount of reserves that have been determined based on commercial flows The type, shape and size of the deposit and the formation structure of the oil- and gas-bearing reservoirs have been determined from the results of drilling exploration and production wells and by those geological and geophysical exploration techniques that have been field-tested for the applicable area. The lithological content, reservoir type and characteristics, oil and natural gas saturation, oil displacement ratio and effective oil and natural gas saturation depth of the productive strata have been studied based on drill cores and geophysical well exploration materials. The composition and characteristics of crude oil, natural gas and gas condensate under in-situ and standard conditions have been studied on the basis of well testing data. In the case of an oil and natural gas deposit, the commercial potential of its oil-bearing fringe has been determined. Well productivity, hydro- and piezo-conductivity of the stratum, stratum pressures and crude oil, natural gas and gas condensate temperatures and yields have been studied on the basis of well testing and well exploration results. The hydro-geological and geocryological conditions have been determined on the basis of well drilling results and comparisons with neighbouring explored fields. Category C1 reserves are computed on the basis of results of geological exploration work and production drilling and must have been studied in sufficient detail to yield data from which to draw up either a trial industrial development project in the case of a natural gas field or a technological development scheme in the case of an oil field. 15

16 C2 reserves are preliminary estimated reserves The C3 resources are prospective reserves Category C2 reserves are preliminary estimated reserves of a deposit calculated on the basis of geological and geophysical research of unexplored sections of deposits adjoining sections of a field containing reserves of higher categories and of untested deposits of explored fields. The shape, size, structure, level, reservoir types, content and characteristics of the hydrocarbon deposit are determined in general terms based on the results of the geological and geophysical exploration and information on the more fully explored portions of a deposit. Category C2 reserves are used to determine the development potential of a field and to plan geological, exploration and production activities. Category C3 resources are prospective reserves prepared for the drilling of (i) traps within the oil-and-gas bearing area, delineated by geological and geophysical exploration methods tested for such area and (ii) the formation of explored fields which have not yet been exposed by drilling. The form, size and stratification conditions of the assumed deposit are estimated from the results of geological and geophysical research. The thickness, reservoir characteristics of the formations, the composition and the characteristics of hydrocarbons are assumed to be analogous to those for explored fields. Category C3 resources are used in the planning of prospecting and exploration work in areas known to contain other reserve bearing fields. Category D1 resources are calculated based on the results the region s geological, geophysical and geochemical research and by analogy with explored fields within the region being evaluated. Category D1 resources are reserves in lithological and stratigraphic series that are evaluated within the boundaries of large regional structures confirmed to contain commercial reserves of oil and natural gas. Category D2 resources are calculated using assumed parameters on the basis of general geological concepts and by analogy with other, better studied regions with explored oil and natural gas fields. Category D2 resources are reserves in lithological and stratigraphic series that are evaluated within the boundaries of large regional structures not yet confirmed to contain commercial reserves of oil and natural gas. The prospects for these series to prove to be oil-and gas-bearing are evaluated based on geological, geophysical and geochemical research. 16

17 The evaluation of natural gas reserves in newly discovered natural gas or oil-and-gas deposits is carried out under the Russian reserves system using the volume method. Comparision of Russian and SPE classification of reserves* SPE Proven Recoverable Probable + Possible Sub-commercial *This comparision is only approximate Source: Interfox Resources & Redeye Research Sub-commercial Russia A+B+C1 C2 C3 D1 D2 Resources close by - Imperials block 70 Block 70, which Interfox block 71-1 is close to, had in the year 2008 estimated 2P resources of mmboe in total. On the block there were 3 known structures with a median 2P reserve of 46 mmboe. This formation shows that the area is resource rich and there should be good chances for Interfox to find oil. We will use this information as a possible outcome for Interfox license with the median reserve amount in our Base-case. The high and low reserve amount will be used in our Bull- and Bear-case On the neighboring block 70, there is an average 2P reserve of 46.5 mmboe per structure 2008 year reserve report Block 70 Block 1P 2P 3P North Chertalinskoye Glukhovskoye Maiskaya High Median Low Source: Imperial Energy Exploration Portfolio Block Interfox currently hold a license for exploration and production. The license is for Block 71-1 and is as mentioned earlier in the Tomsk region of Russia. The license extends to an area of 34 square kilometers and is located on the only known geological structure on the license block of 71. The license is owned by the Company, BNG, that Mikhail Malyarenko operates, which is owned by Mezhlisa Cyprys Resources Ltd that Interfox acquired. Interfox license is located on the only known structure on Block 71 It is estimated that the hydrocarbons in the block are mainly located at three different depths. In the layers of the Jura, the weathered zone and in Devon. Devon sights are at a depth of about m. Historically in Russia there have been little exploration activities in the Devon layer. But recently the interest has increased as the need for new resources is increasingly growing. Nearby license areas with similar geology exhibited significant flow of hydrocarbons from individual wells. 17

18 During the Soviet era there were drilling activities on the license block. Two wells were drilled to a depth of about 4300 m. These wells were not drilled with the intention of finding oil, but to investigate the geology of the area. The two wells have been evaluated according to the current seismic interpretation, old well logs and drilling protocols and are located around 4 km from the center of the structure. Both wells reportedly had uncontrolled outflows of hydrocarbons. Since the two wells where not drilled in the exploration purpose, it is likely that modern methods will provide a better estimate resources available in the block. Geoprime estimate C3 resources of 130 mmboe OPC estimates in a midcase scenario that the likely resources to amount to 32 mmboe Resource Assessments Both OPC and Geoprime have both performed independent analyzes of the seismic data available. Geoprime conducted its analysis in 2013 and it was commissioned by BNG. Geoprime based its analysis on seismic data and logs from wells in the Soviet period. They estimate that the license block can contain as much as 134 mmboe and categorizes them in C3, which simply means potentially recoverable. This is not an assessment of the reserves but a resource assessment. Currently there are 134 mmboe of C3 resources under registration to the Federal Subsoil Resources Management Agency. The CPR currently available was performed by OPC for the purpose of being included in a prospectus for the rights issue. The report was published on the 14:th of January. OPC:s report is performed before the re-entry or any on-field works were done and is based on the Geoprime report, old well data and the some of the seismic data available. The block is estimated to contain both oil and gas, but with a larger part of oil. This is in line with the neighboring license block of 86 that is owned by Imperial Energy. OPC estimates that there is in a mid-case scenario about 32 mmboe. We have used these estimates as our likely future 2P reserve. The recovery factor for the oil in place is estimated to %, which OPC states is in line with oil fields in the region. OPC- CRP Prospective Oil-in-place (mmbo) Prospective Gas-in-place (bcf) Reservoir P90 P50 P10 GOR (scf/bbl) P90 P50 P10 Jurassic 10,6 18,1 29, ,4 19,5 31,6 Weathering Crust 0,7 2,1 4, ,9 2,8 6,1 Devonian Limestone 2,1 7,8 28, ,1 3,9 14,2 Total 13, ,2 Total 13,4 26,2 51,9 Estimated mmboe 2,2 4,4 8,7 Prospective Recoverable Resources (mmbo) Prospective Recoverable Resources (bcf) Reservoir P90 P50 P10 GOR (scf/bbl) P90 P50 P10 Jurassic 2, ,3 4,3 7,6 Weathering Crust 0,2 0,5 1, ,3 0,7 1,5 Devonian Limestone 0,4 1,7 6, ,2 0,9 3,2 Total 2,7 6,2 14,5 Total 2,8 5,9 12,3 Estimated mmboe 0,5 1,0 2,1 Source: Interfox Resources 18

19 The amount of reserves we will use in our valuation and final estimates of likely barrels of oil is 16 mmboe 1P and 32 mmboe 2P. This will change if there is an updated CPR report or other new information indicating other reserve levels. The new data will also affect our probability weight to different outcomes in our reserve estimate. OPC report estimates total Case mmboe P90 16 P50 32 P10 71 Source: Interfox Resources Newer analysis indicates much larger reserves To be conservative we have used the stated CPR report as a base in our valuation, despite that recent analysis done by both Geoprime and IOGT indicates volumes much larger than the CPR. Newly conducted analysis by IOGT confirms hydrocarbons on the license IOGT confirms large volumes of hydrocarbons Just recently IOGT, part of Gazprom bank group, used a new technology to evaluate well number four on The analysis started at the 15:th of July and the analysis confirms that there is hydrocarbons on the license. Through a set of spectrometric methods, IOGT analyzed the reservoir s properties and determined the current oil, water and gas saturation levels. The analysis done by IOGT confirmed the previous conclusions of large reserves of oil and gas on the license block from independent CPR and the historical data from the original works during soviet times. Based on Geoprimes analaysis, 134 mmboe C3 resources are under registration Geoprime identified three interesting formations in the deeper Devonian layers. This data was correlated with information from the logs of the two existing wells. The result is that Geoprime sees four potential hydrocarbonsaturated intervals. Geoprime estimates in a mineral resource estimate according to Russian standard that the license block in total contains 130 mmboe in category C mmboe C3 resources under registration Interfox are conducting a reversed stock split of 1:100 Based on Geoprimes resource assessment 134 mmboe of C3 resources have been reported to the Federal Subsoil Resources Management Agency. As such the company has 134 mmboe of C3 resources under registration. Reverse stock split Interfox recently decided to make a reverse stock split at a 100:1. Due to technicalities the company will also issue about shares before the reversed split. The number of shares after the adjustment will amount to 25.3 million shares inclusive of the shares the Board has suggested to issue to FEPI as part of the original acquisition of the project. In our valuation we will use the number of split adjusted shares, the estimated enterprise value will of course not be any different. 19

20 Valuation Sector Overview Our valuation of Interfox will be based on a relative EV/2P sales multiple and EV/1P sales multiple and recent market transactions. To perform this multiple valuation we need to look at some E&P companies that are operational in the region. We have also included companies from Ukraine and other parts of Asia to get a larger sample of companies. In retrospect the Imperial Energy acquisition was expensive Transactions in the region Imperial Energy - Imperial owns neighboring licenses to 71-1, Block 70. The company was acquired by the Indian state oil company (ONGC) in During the takeover, Imperial had 2P resources of 920 mmboe. The price tag for Imperial landed at 2.58 billion USD. Imperial unlike Interfox is a producing company. EV/ 2P multiple for the transaction was thus 16.2X in SEK. SN Gazdobycha - The company was bought by Alliance Oil in 2012 for 128 million USD. Admitted 2P resources at purchase were 112 mmboe. SNGD had two gas licenses in an area of km2 and was about 55 km west of the city Kargasok. Kargosok is located in the Tomsk region's middle and which is about 400 km from Interfoxs license. EV / 2P multiple for the transaction was thus 7.4x in SEK. The marketable transactions indicate an EV/2P multiple of 9.8 SEK, in the lower spectrum of the sample Tomskneft In late 2007 Gazpromneft bought a stake of 50% in Tomskneft, the largest producer in the Tomsk region. The price tag was around 3.7 billion USD for the stake. This implies an EV/2P for the transaction in the region of 4.4x in USD as Tomskneft had a total 2P reserve at the time around mmboe. In SEK at the time the transaction was valued at around 22.2 billion which corresponds to an EV/2P multiple of 13.6X SEK. Petroneft Is a Russian company with operations in the Tomsk region. It is listed both on London AIM and Dublin ESM markets. Petronefts main assets are Block 61 and 67. Petroneft recently farmed out 50% of its main block 61, with an estimated 2P resource of 117 mmboe, to Oil India Limited for 85 million USD. The transaction valued the license at around EV/2P of 9.6X SEK. The company is currently traded at an EV/2P multiple of 9X SEK. Marketable transactions Target Buyer EV Buy price (msek) 2P reserves (mmboe) EV/2P Tomskneft Gazprom Neft Petroneft Block 61 Oil India SN-Gazdobycha Alliance Oil Imperial Energy ONGC :e Percentil :e Percentil :e Percentil 9.8 Source: Companies and Redeye Research 20