Cap Energy — Update 14 February 2016

Cap Energy has continued to mature its prospect inventory offshore Guinea Bissau and Senegal where it holds three blocks in key locations in the Mauritania-Senegal-Gambia-Bissau-Conakry (MSGBC) Basin. This basin has been highly successful both for Cairn Energy in Senegal and for Kosmos Energy in Mauritania/Senegal, where each have made the largest global oil and gas discoveries in 2014 and 2015 respectively.

In Guinea-Bissau, the final report on the 2,980km2 of 3D seismic data acquired in 2014 is expected imminently. Meanwhile, in Senegal, a 3D survey was completed across the western area of Cap’s Djiffere block in Q415, and covered an area that sits on the same shelf trend as Cairn’s SNE-1 and SNE-2 wells. The seismic was carried out at no cost to Cap as a result of a farm-out option agreement with FAR and takes the total 3D seismic across the block to over 430km2.

Positive newsflow continues to come out of the region. In 2016 to date, Cairn has demonstrated a commercial production rate in Senegal with its SNE-2 appraisal well delivering a constrained test rate of 8,000bopd. This has been followed by a resource update commissioned by FAR, increasing the estimated 2C resources across SNE to 468mmbbls (a 42% increase from the previous estimate of 330mmbbls). Kosmos has also been in on the act, increasing its gross resource estimate for the Greater Tortue Complex across Mauritania and Senegal to 17tcf after its Guembeul-1 exploration well discovered gas. We note that the SNE wells and Guembeul-1 all appeared to be drilled on plan and on budget, which suggests that drilling conditions are at least predictable.

Cap’s Block 5B lies on the north-western flank of the Guinea Marginal Plateau in water depths ranging from 240m to 4,000m. The 5,635km2 block sits around 150-200km south of Cairn’s discoveries in Senegal; however, existing 2D seismic has highlighted strong analogies here with the SNE-1and FAN-1 discoveries.

Based on previously announced results of the 2D seismic, the block has been independently assessed to contain 5.9bnbbl of recoverable prospective P50 resources including two prospects in the 400-500mmboe recoverable prospective resources range. One of these targets (Exhibit 2) is similar to SNE-1 (Exhibit 3), and the other (Exhibit 4) similar to FAN-1 (Exhibit 5).

Following up on the legacy 2D, a 2,980km2 3D seismic survey was acquired by Polarcus across the block in 2014. We expect a final report from independent consultant Beagle Geoscience based on the interpretation of these 3D data imminently. Preliminary results from Beagle suggest that the structures previously identified on 2D have been confirmed, but with better definition. These results could de-risk the existing portfolio and allow the selection of a drilling target for H117, subject to funding.

Cap’s Djiffere block sits adjacent to the Rufisque, Sangomar and Sangomar Deep (RSSD) blocks that contain the Cairn/FAR FAN-1 and SNE-1 and 2 oil discoveries. In particular, the western part of Djiffere is on trend with the shelf play types proven by the SNE-1 well. The block sits in shallow water up to 250m, but predominantly less than 100m, allowing low-cost drilling and the potential for near-term development.

From existing 2D seismic (Exhibit 6), Cap has identified 11 structural leads and prospects in its block totalling 587mmboe of Pmean recoverable resources. The biggest prospect is Antelope, estimated to contain 220mmboe of Pmean recoverable prospective resources with a 25% GCoS for the main Campanian level (Exhibit 7).

Cairn’s partner in the RSSD block, FAR, has identified 765mmbbl gross prospective resources along the shelf trend, and that further prospects would extend into Djiffere. Based on this assessment, in September 2015 Cap entered into a farm-out option agreement with FAR for the Djiffere block. FAR has the option to earn a 75% working interest in the block by drilling an exploration well before 31 July 2018, in exchange for a $1.1m 3D survey across Djiffere.

The survey, shown in red in Exhibit 8, was carried out in October 2015 as part of a larger 3D survey across the RSSD blocks being carried out by FAR and its partners. Fast-track data are expected to be delivered in Q216, with the full prospect interpretation due in Q416. The total 3D across Djiffere is now 438km2.

Cairn has followed up its world-class SNE-1 discovery in 2014 with a firm drilling campaign of two appraisal wells and one exploration well (Exhibit 9). Separately, FAR recently increased its resource estimate for SNE from 330mmbbls to 468mmbbls (a 42% increase).

The first appraisal well on SNE, SNE-2, was drilled in late 2015 approximately 3km north of the discovery well and targeted a crestal location in the centre of the field. The well established a constrained production rate of 8,000bopd from a high-quality pay zone and 1,000bopd from a relatively low-quality zone, demonstrating the reservoir's ability to flow at commercially viable rates. Importantly, SNE-2 was drilled on budget and schedule, suggesting that the drilling conditions were well understood; this bodes well for future drilling campaigns in the region.

Drilling has now started on the SNE-3 appraisal well, designed to test the south of the field and due to be completed at the end of Q116. This will be followed by the Bellatrix exploration well, which will also appraise the northern extension of SNE. Depending on the results of these wells, there is potential for three further wells to be included in the programme.

To the north of Cap’s acreage and in Mauritanian waters, Kosmos made a play-opening discovery with its Tortue-1 (now renamed Ahmeyim) well in April 2015. It has followed this up with a drilling programme of three further wells, the last of which Ahmeyim-2, is currently drilling. The Marsouin-1 exploration well, around 60km north of Tortue-1 discovered gas at the end of 2015. This was followed by the company’s first well offshore Senegal, Guembeul-1, 5km south of Tortue-1. This well encountered gas in excellent quality reservoir, which the company has assessed as being in pressure communication and reservoir continuity with Tortue, suggesting one large gas accumulation.

To date Kosmos estimates that the Greater Tortue Complex contains 17tcf of gas. The Ahmeyim-2 well is expected to complete the appraisal of Tortue West and will test the down-dip limits of the field.

Since the field has been found to straddle the border between Mauritania and Senegal, Kosmos has entered into a Memorandum of Understanding (MOU) with the national oil companies of Senegal and Mauritania, which sets out the principles for an intergovernmental cooperation agreement to develop the cross-border Greater Tortue resource.

Since Cap delisted from ISDX in October 2015, we no longer have up-to-date information on the company's finances. We estimated in our most recent note (September 2015) that the company would require c $3-4m in additional funding to the end of 2015 to complete the work programme for the year. We had assumed this funding would come from shareholder loans.

We have not included any costs in our financial models for 3D acquisition in Senegal, hence the farm-out agreement with FAR has no impact on our financial forecasts in 2015/16.

Turning to valuation, we propose for the first time a tentative risked exploration NAV (RENAV) for Cap, subject to FAR exercising its option to drill a well on Djiffere by 2018. Technically, we do not consider this a RENAV until funding has been secured and an identified well is planned within the next 12-18 months; however, we include this here for Djiffere on the basis that an exploration well can be funded through the farm-out option, and subject to an identified drill target.

In our NAV calculation we reflect the post farm-out working interest for Cap assuming FAR exercises its farm-in option; post farm-out Cap will have a 7.4% equity interest with an 8.2% cost interest until first oil, when state partner Petrosen starts to pay costs. Our NAV model is based on a long-term oil price assumption of $70/bbl and 12.5% discount rate.

Based on the above assumptions and working off the preliminary data we have for the Antelope prospect (165mmbbl oil plus an assumed 330bcf of associated gas), we calculate a RENAV of $11m, increasing to $96m on an unrisked basis. It is important to note that this only represents a valuation for Cap’s residual interest in the Djiffere block post the FAR farm-out, and does not include any valuation for the company’s extensive interests in Guinea Bissau (Blocks 5B and 1).