Leaders in Corporate Research

Nautical Petroleum 5.5p 18 August 2008

Drilling Rig Secured for Hydra, Strong Cash
Position After Farmouts

Share Price: 5.5p Nautical is in a strong cash position as a result of the

oversubscribed placing last year and its astute farm-in strategies.

We estimate that cash receivables from farm-in partners will come

to £6.7m which will leave Nautical with cash resources of around
£13m at the end of FY09 sufficient to support Nautical’s program
up to the submission of field development plans for both Kraken
and Mariner. These FDP submissions (and acceptances) will in-
turn trigger further cash payments to Nautical including the £10m
carry from ENI which will become recoverable.
Source – Reuters
• Statoil/Hydro’s experience with Heimdal reservoir at the
Grane Field the Norwegian sector implies that there is
12m High: 15.5p likely to be far more recoverable reserves in the Heimdal
12m Low: 5.0p at Mariner than Chevron previously estimated. We are
doubling our hydrocarbon estimates for the Heimdal
Market Cap: £70m
reservoir on the back of this new data.
Shares in Issue: 1,336m fully diluted
• The Mariner partners shot a new 3D seismic survey over
Core Risked Post- Tax NPV/Share: 37p the field in June and an ‘ocean bottom cable survey’ has
Gearing: Nil (GBP £17m net cash) also been carried out to image the Heimdal in the
highest resolution possible.
Interest Cover: N/A
• A second appraisal well is set to be drilled on Kraken
EPIC Code: NPE.L
this autumn – at no cost to Nautical
Sector: Oil an Gas
Market: London AIM • Nautical has secured a drilling rig slot from Senergy in
October 2008 to drill a well on the Hydra prospect in
Broker: KBC Peel Hunt
Block 3/27a The recent farm-out of Hydra and West
PR: Buchanan Communications Hydra to Canamens reduce Nautical’s costs to below
Redleaf Communications £1m
Website: www.nauticalpetroleum.com Our cashflow models indicate a risked, discounted core value of
£473 million (37p/share) for Nautical, with risked exploration
Description: An independent exploration
upside of an additional 103m 8p/share – which totals to 45p/share
and development company with a focus on
acquiring, developing and adding value to in aggregate. This compares to a current equity valuation of
heavy oil prospects. around £70million (5.5p/share) with, we estimate around £17to
18m of cash in the bank at the end of FY08.
Analyst: Mark Parfitt
Tel: +44(0)20 7929 3399
Email: mark@hardmanandco.com

FY Sales Earnings Before Tax Adjusted Profit Eps.

£ 000 £ 000 £ 000 p
2006 A* 0 (7,183) (7,172) (0.78)
*18 month period
2007 A 0 (863) (490) (0.05)
2008 E 0 (4,580) (4,580) (0.38)
2009 E 0 (1,592) (1,592) (0.13)

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Successful results from the first Kraken appraisal well drilled late last year have cemented
Nautical’s position at the centre of the UK’s emergent ‘heavy oil’ industry. Exploration has
proved a little more challenging but the Mariner and Kraken continue to look more
attractive and are getting ever closer to field development.

Mariner: Block 9/11a (Licence P 0335)

Figure 1 location and closure outline Mariner Field (Source Company)

Mariner Field is located in Block 9/11a in shallow waters of some 107m (350ft) depth close
to the eastern edge of the East Shetland Platform in the UK sector of the North Sea.

Discovered by Union Oil in 1981 and continues to be the largest undeveloped, appraised
field in UK waters- and it looks like it is going to get bigger too. Statoil/Hydro’s experience
with Heimdal reservoirs in the Norwegian sector implies that there is likely to be far more
recoverable reserves in the Heimdal at Mariner than Chevron previously estimated. The
Mariner partners shot a new 3D seismic survey over the field in June. A leading edge
technology – an ‘ocean bottom cable survey’ has also been carried out in an effort to
image the Heimdal in the highest resolution possible.

Discussions lead us to double our recoverable estimates for the Heimdal reservoir at this
time with the expectation of further data becoming available when the new surveys have
been fully interpreted.

As things stand, we would anticipate a field development plan will be submitted towards
the end of 2009

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Kraken: Block 9/2b (Licence P1077)

The Kraken appraisal well data has been integrated with the geological model to reassess
the hydrocarbons in place at Kraken with results positive enough for the Kraken partners
to advance the timing of the next appraisal well into this autumn although we await an
independent reserve evaluation of the data.

Nautical’s deal with Canamens farming out a 10% interest in Block 9/2b will see Nautical’s
full share of the costs of this second Kraken appraisal well carried by Canamens with
Canamens paying Nautical an additional $6 million cash when BERR approve the
transaction. A further $5m cash payment to Nautical upon DBERR approval of the Kraken
FDP

In discussions with the company although we maintain that over the field life of Kraken
there is likely to be recovery of greater than 20% of STOIP (we recon it will come out to be
closer to 30%), nautical are remaining as conservative as always and are basing their
plans around a 20% recovery so we are adjusting our estimates accordingly.

Figure 2 location and closure outline Kraken Discovery (source Company)

Tudor Rose Discovery: Block 14/30a

14/30a is a traditional licence awarded in the 23rd Licence Round, located in the outer
Moray Firth adjacent to the producing Ivanhoe, Rob Roy, Goldeneye and Hannay fields.
Nautical has a 20% equity interest in the block with its partners Endeavour Energy UK Ltd,
Lundin Heather Ltd and EnCore plc (acting as operator).

The block contains one undeveloped discovery, known as the Tudor Rose Prospect drilled
by Texaco in 1977. Found by well 14/30a-2 at around 1,000 metres, the prospect lies in
o
Tertiary Dornoch Formation Sands expressed as a 24m column of 21 API oil beneath a 3
metre gas cap. 3D seismic over the structure has been reprocessed and is being
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interpreted, geochemical studies are ongoing. Best estimate contingent resources are put
at 34.6mmno with stratigraphic upside.

Figure 3 location and closure outline Tudor Rose Discovery (source Company)

Three additional prospects have been identified within the Lower Cretaceous (the
Kopervik sand) and the Jurassic (the Sgiath sands). The current work programme for the
block includes the reprocessing of 3D seismic data and a contingent well on the 14/30a-2
discovery (Q4 calendar 2008) as although logs and pressure readings returned indications
o
of 21 API oil from the discovery well, only a bituminous dead-oil residue was recovered to
the surface.

Unicorn and Dragon Blocks 2/3a & 2/4b

Figure 4 location and closure outlines blocks 2/3a and 2/4b (source Company)

Located on the East Shetland Platform, directly west of Heather and Broom Fields, these
sub-blocks contain two oil bearing discoveries Unicorn and Dragon. Nautical has a 33.33
% interest in blocks 2/3a and 2/4b awarded as a Promote Licensing Round.

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Well 2/4-1 on the ‘Unicorn’ structure encountered 16.6° API oil in the Triassic on a bald
Brent high. Interpretation of the 2D seismic indicates that the Brent sand thickens downdip
of the crest forming the prospect.

The second prospect, Dragon, was mapped to the North. Further 2D and 3D seismic is
planned and the reprocessing of the data has been contracted to define these shallow
prospects

St Laurent Permit (Grenade Discovery)

An unsuccessful appraisal well was drilled in January 2008. Further gas prospectivity is
present on the permit. Nautical and their partners are investigating both this gas potential
and the future possibility of producing from the oil reservoir.

Exploration Portfolio

The Hydra Prospect Block 3/27a (Licence 1203)

Figure 5 location and closure outline Hydra and Hydra West Prospects (source
Company)

Nautical has secured a drilling rig slot from Senergy in October 2008 to drill a well on the
Hydra prospect in Block 3/27a targeting a best estimate (P50) prospective resource in-
place of 600 million barrels.

The recent farm-out of Hydra and West Hydra to Canamens Nautical's costs on the well
have been reduced to below £1m funding ongoing licence costs with an additional
contribution to past expenses.

A site survey for the well has been acquired. The results from this well are expected in late
November 2008

Block 3/27a on the East Shetland Platform was part of the multi block farm out to Celtic Oil
and Canamens concluded in July 2008. Nautical retains a 35% equity interest while

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remaining Operator. Originally acquired on promote terms the licence was converted to a
traditional licence in December 2006.

The new high-density high-resolution 2D seismic acquired in 2007 has been used to
define one of the Hydra prospects for drilling. This data has been processed and is being
interpreted, adding to the legacy 476 km of 2-D seismic which was re-interpreted to
generate the leads.

The targeted prospect has structural closure, which in the base case has a potentially
large stratigraphic upside which, if successful, could contain a best estimate (P50)
prospective resource in-place of 600 million barrels.

Scylla Blocks 8/5 & 9/1 (Licence P1277)

Nautical was awarded a 100% interest in 23rd Seaward Licensing Round in 2005 of
Blocks 8/5 and 9/1, contiguous to block 9/2b (which contains the Kraken discovery).

Mapping of an extensive database of 2D seismic data highlighted two culminations on a

north west, south east trending channel-like feature at both the Heimdal and Maureen
levels, with a similar seismic signature to sand rich channels elsewhere on the platform.
Nautical reprocessed and reinterpreted around 250km of 2D seismic data to better
delineate these leads. Shooting 484km of new 2D seismic lines cross Blocks 9/1 and 8/5.
These new lines have now been reprocessed leading delineating of two leads in the
Tertiary and the licence converted to a Traditional Licence. Nautical plan to carry out a
high resolution seismic survey to be acquired by Fugro.

Figure 6 location and closure outline Scylla Prospects (source Company)

The Catcher Prospect: Blocks 28/9 & 28/10b

Nautical has a 15% interest in Blocks 28/9 and 28/10b (split) located on the West Central
Platform, west of the Central Graben with an operatorship held by Oilexco. Awarded in the
24th Licensing Round, the participating group has a firm commitment well to drill
tothePaleocene Forties Formation to test the Catcher Prospect. On the terms of the
licence, Nautical is carried for 20% of the cost of the well.

The main prospect, Catcher, is a moderately sized (30mmbo) structural trap with an
observed direct hydrocarbon indicator (DHI).Catcher is a four-way dip closure at the
Forties level within an undrilled Forties/Tay Formation deep water turbidite feeder system.
Block 28/9 and Block 28/10a are part of the same turbidite feeder system which contains
120 million barrels of oil and 120 Bcf of gas from the Bittern Field downdip from Catcher.

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The blocks contain numerous leads and prospects at both Eocene (Tay Sandstone) and
Paleocene (Cromarty Sandstone) levels together with two large Jurassic leads. Traps are
defined on recent 3D seismic which will be reprocessed with a well planned for 2009.

Figure 7 location and closure outline of Catcher and a number of other prospect
(source Company)

Merrow Prospect: Block 113/29c & 113/30

Figure 8 location and closure outline of Merrow Prospect (source Company)

Nautical was awarded an equal 50% interest and operatorship of this Traditional licence
covering 113/29c and 113/30/. Its partner is Encore Oil plc

The blocks are located in the East Irish Basin adjacent to Walney Island on the Cumbrian
coast. There are numerous oil and gas shows in the surrounding wells which indicate
proven hydrocarbon migration into the area.

A large prospect (Merrow) has been mapped at both Triassic (Ormskirk sandstone) and
the Permian (Collyhurst Sandstone) levels. Both reservoirs are proven in the basins. The

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Ormskirk sands have been prolific gas producers in numerous fields (including
Morecambe).

Expected hydrocarbons could be either heavy oil 123mmbl or gas 393BCF. The close
proximity to Walney Island should enable directional offshore drilling to test the prospect.
Nautical has committed to purchase and process 2D seismic leading to a drill or drop
decision within 4 years of the award.

Block 9/11C Mermaid (Licence P979)

After an unsuccessful well was drilled on the Mermaid prospect in November 2007, the
block is being assessed for further potential in the Heimdal (see figure 1).

Kelpie and Selkie Prospects: Block 8/25a (Licence P976)

Well 8/25a-1 which drilled the Selkie Prospect was drilled to 4692ft and encountered a
Tertiary Dornoch Formation more sandy than predicted. Despite all depths being very
close to prognosis, the reservoir target was dry, probably due to lack of top seal. The well
was drilled below budget at no cost to Nautical with the rig in May 2008.

Nautical and its partners continue to evaluate 8/25a which, to the east of the Selkie,
contains the Kelpie prospect.

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Financial Models
Once again we have revised our forecasts and are presenting new discounted cashflow
models and new financial estimates, all of which take into account up to date/ current cost
estimates and up-to-date timings for planned appraisal, exploration and development
works.

In the light of increased price volatility in the markets, we have chosen to use flat USD$90
oil as a benchmark without discount for gravimetric adjustment. Spreads between say
Captain oil and the Brent blend benchmark have recently been minimal with refineries
looking to stable heavy oil supplies to maximise their margins. A discount rate of 10% was
used (NPV10), which is consistent with industry practice when evaluating oil reserves. We
have used a flat, approximately current exchange rate of GBP£1=USD $1.86 for sterling-
dollar conversion. All figures are presented post-tax with the appropriate ‘government
take’ calculated according to current North Sea or French tax schedules (as appropriate).
We have broken down our estimates to categorise assets as either part of the ‘discovery
portfolio’ or the ‘exploration portfolio’ reflecting the exploration maturity of Nautical’s
portfolio. Finally, we have used the current issue of 1,268 million shares in all per share
calculations

The Discovery Portfolio

With the increase in oil prices and the re-evaluation of the Heimdall reservoirs in both
Mariner and Kraken there has been a significant increase in Nautical’s core portfolio with
net reserves estimated at 107mmbo up from 84mmbo. This we estimate has overall
discounted, risked post-tax value of £473m or 37p/share

This rise seems large – but when you remember that these prospects were targeted by
the company with economics based on USD$40-USD$45/bbl oil and when heavy oils
were being steeply discounted the money-on-the-table is more easily seen. Yes costs
have risen too we have accommodated for the changes in our economics. The numbers
speak for themselves.

Risk factors of course remain with Mariner being the least risky (80% probability of
success), followed by Kraken 70% then Grenade 60% (it was a step-out well that failed)
and probabilities of 20% at Unicorn/Dragon and Tudor Rose where significant work
remains to be undertaken.

The Exploration Portfolio

Nautical’s more heavily risked exploration portfolio which is thinned down to Hydra
Catcher, Scylla and the substantial but risk-weighted Merrow has, we estimate some 102
million barrels of oil in these active prospects, excluding other leads.

Risked and discounted this adds 8.1pence per share with exploration drilling on Hydra
spudding in the autumn.

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Profit and Loss

Pre-tax losses in the six months to 31 December 2007 widened to £4.45m from £0.73m in
the corresponding previous period in 2006, after the company took a £3.24m hit on
exploration write-offs, from the unsuccessful Mermaid well. Administrative costs also rose
from £0.78m to £1.53m, partly from foreign exchange moves but also from increased
company activity.

We expect the company to report a loss for the current financial year of GBP£4.6 million
including non-cash write-offs for unsuccessful exploration activities. This equates to a loss
per share of 0.38p with 1,268 million shares in issue.

We expect to see continued but smaller losses next year as the company prepares field
development plans for Mariner and Kraken.

Cashflow

Nautical is in a strong cash position as a result of the oversubscribed placing last year and
its astute farm-in strategies. We estimate that cash receivables from farm-in partners will
come to £6.7m which will leave Nautical with cash resources of around £13m at the end of
FY09 sufficient to support Nautical’s program up to the submission of field development
plans for both Kraken and Mariner. These FDP submissions (and acceptances) will in-turn
trigger further cash payments to Nautical including the £10m carry from ENI which will
become recoverable.

The farm-in deals Nautical has recently competed together with those previously put in
place underpin the company’s capital program beyond our current estimates to the end of
FY2009.

During FY2009 we expect Nautical to maintain capital investment levels of around £10m
roughly equivalent to the investment levels expected in FY2008. This will fund continuing
work on Mariner, Tudor Rose, Catcher and 8/5 – 9.1, drilling on Kraken and Hydra of
course will be fully carried to Nautical’s benefit.

Overall Valuation

Our cashflow models indicate a risked, discounted core value of £473 million (37p/share)
for Nautical, with risked exploration upside of an additional £103m 8p/share – which totals
to 45p/share in aggregate. This compares to a current equity valuation of around
£70million (5.5p/share) with, we estimate around £17to 18m of cash in the bank at the end
of FY08.

So, okay the market has been volatile recently and frankly indiscriminate. Small-cap AIM
oil and gas has been hit as oil prices have slipped from recent highs but quite frankly
valuations are becoming ridiculous.

As we said last year – we repeat that that risk aversion should be directed towards credit
and counterparty risk – not towards exploration and engineering risk. Yes the recent
exploration program has not met with complete success but the appraisal work at Mariner
and Kraken has more than surpassed expectations. The geological and other data we
have seen give us reasonable confidence that the risk factors applied are appropriate
across the portfolio. This draws us to conclude that the market is substantially
undervaluing the prospects for the company. With Nautical fully funded to complete field
development plans on two substantial oil discoveries and exploration upside we expect
Nautical to come on the radar for a bid – as the price is simply too opportune to miss.

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Nautical Petroleum Post Tax Net Present Valuation (NPV10)

Field Equity NPV10 NPV10 Net NPV10 Probability of NPV10 Risked Risked NPV10 Unrisked NPV10
USD$/bbl GBP/bbl Reserves GBP million Success % GBP million Pence per Share Pence per Share
mmbbl
Discoveries

Mariner (9/11a) 26.7% 11.5 6.2 48.5 299.9 80% 239.2 18.9 23.5
Kraken (9/2b) 35.0% 14.8 8.0 34.9 261.1 70% 182.8 14.4 20.6
Grenade (France) 22.0% 21.2 11.4 2.8 31.8 60% 19.1 1.5 2.5
Tudor Rose (14/30a) 20.0% 15.4 8.3 7.6 63.0 20% 12.6 1.0 5.0
Unicorn/Dragon (2/3 2/4b) 33.0% 14.0 7.5 13.2 99.2 20% 19.8 1.6 7.8
Subtotal 107.1 754.1 473.5 37.3 59.5

Exploration Portfolio

Hydra 3/27a 35.0% 16.5 8.9 18.6 165.3 20% 33.1 2.6 13.0
Scylla 8/5 & 9/1 100.0% 11.4 6.1 17.0 104.0 20% 20.8 1.6 8.1
#
Catcher (28/9 28/10b) 15.0% 13.5 7.3 4.5 32.7 20% 6.5 0.5 2.6
Merrow 50.0% 12.9 6.9 61.4 425.1 10% 42.5 3.4 33.5
Subtotal 101.5 302.0 102.9 8.1 57.3

Nautical Group plc 209 1,481 576 45p/share 117p/share

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P &L Forecasts
Y/E 30th June GBP 000 FY06A* FY07A FY08E FY09E

Oil Production Revenues 0 0 0 0

Cost of Sales 0 (17) (30) (30)
DD & A (79) (144) (140) (140)
Gross Profit (79) (161) (170) (170)
Gross Margin 0% 0% 0% 0%
Administrative Expenses (1,077) (1,145) (1,500) (1,800)
Exploration and Appraisal Write Offs 0 0 (3,250) 0
Share-based Payments (1,215) (391) (450) (540)
Forex 55 267 0 0
Goodwill On Reverse Acquisition (5,077) 0 0 0
Operating Profit/Loss EBIT (7,393) (1,430) (5,370) (2,510)
Interest Receivable 432 493 790 918
Interest Payable (222) 0 0 0
Net Interest 210 493 790 918
Exceptional Items 0 74 0 0
Earnings Before Tax (7,183) (863) (4,580) (1,592)

Tax Charge/Rebate 0 472 0 0

Tax Charge % 30% 30% 30% 30%
Earnings After Tax (7,183) (391) (4,580) (1,592)
Effective Tax Rate % 0% 0% 0% 0%
Dividends 0 0 0 0
Minority Interests (11) 99 0) 0
Equity Shareholders Retained Earnings (7,172) (490) (4,580) (1,592)

Weighted av. number of shares million 918 1,075 1,205 1,268

Actual number of shares in issue million 1,078 1,078 1,268 1,268
Number of shares fully diluted million 1,145 1,145 1,336 1,336

Earnings Data

Basic FRS3 EPS p (0.78) (0.05) (0.38) (0.13)

Adj. FRS3 EPS p (0.78) (0.05) (0.38) (0.13)
Adj. EPS FRS 14 diluted p (0.78) (0.05) (0.38) (0.13)

Depreciation & Depletion 0 0 0 0

Amortisation (79) (144) (140) (140)
Net DD & A (79) (144) (140) (140)
EBITDA (7,104) (346) (4,440) (1,452)

*18 month period

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Cashflow Forecasts
Y/E 30 June GBP 000 FY06A* FY07A FY08E FY09E
Operating profit/loss (7,393) (1,430) (5,370) (2,510)
DD & A 79 144 140 140
Net Interest (210) 493 790 918
Goodwill 5,077 0 0 0
Exploration and Appraisal Write-Off 0 0 3,250 0
Share Based Payment Charges 1,215 391 450 540
FOREX (55) (267) 0 0
Change in Working Capital 511 485 0 0
Finance Income (302) 0 0 0
Tax 0 0 0 0
Operating cash flow (1,078) (184) (740) (912)

Capital expenditure (2,401) (2,695) (10,000) (10,000)

Acquisitions (3,475) 0 0 0
Cash received from farm-in agreements 0 0 0 6,700
Cash received via acquisitions 1,545 0 0 0

Net cashflow before financing (4,331) (2,879) (10,530) (4,212)

Share capital issues (net) 18,002 0 20,000 0

Cost of Share Issue (947) 0 (800) 0
Issue of debt 0 0 0 0
Repayment of loans 0 (360) 0 0
Repayment of debt 646 (118)0 0 0
Net Financing 17,701 (478) 19,200 0

Movement in net cash/(net debt) in period 12,292 (3,357) 8,460 (4,212)

Opening net cash (net debt) 8 12,300 8,943 17,403
Closing net cash (net debt) 12,300 8,943 17,403 13,191

*18 month period

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Management Major Shareholders

Chairman: Ian Williams International Energy Group AG 32.51%

CEO: Stephen Jenkins Shin Cheon Co Limited 6.02%

Finance Director: Hemant Thanawala OMX Securities Nominees (UK) Limited 3.20%

Commercial Director: Paul Jennings

Non-executive Director: Philip Dimmock

Non-executive Director: Patrick Kennedy

Key Dates Key Milestones

Next Full Year Results: September/October 2005 Acquired 26.67% interest in Mariner Field.
2008
2007 Funding for exploration activities up to Mariner and
AGM: November 2008 Kraken FDP submission secured

Next Interim Results: March 2009 2007 Successful Kraken Appraisal completed

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