Canadian Overseas Petroleum Ltd. - Stockhouse

Garett Ursu, CFA, (403) 750-7221 [email protected]

OIL & GAS

Canadian Overseas Petroleum Ltd.

March 13, 2014

High Impact Drilling Offshore Liberia Promises Big Rewards With Little Risk Unless otherwise denoted, all figures shown in US$ Recommendation: Buy (S) Target Price: C$0.50

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Initiating coverage with a Buy (S) rating and C$0.50 target price

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Joint Venture With Exxon Mobil Offshore Liberia Provides Significant Carried Costs While Retaining Meaningful Interest: The company has secured an attractive agreement for the PSC (PSC) on Block LB-13 offshore Liberia with ExxonMobil, whereby Canadian Overseas (“COPL”) will be carried for the first $120 MM of its drilling costs while retaining a 17% working interest. The joint venture provides considerable exploration upside and partners COPL with one of the largest and most experienced global operators with no nearterm associated capital outlay. COPL expects to drill the first highimpact exploration well on Block LB-13 in Q2/14.

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Enormous Prospective Recoverable Resource Identified; Liberian Prospects Analogous To Prolific Jubilee Discovery: Third-party reserve engineers have estimated over 2.6 BB barrels of gross prospective undiscovered resource (P50) on Block LB-13 providing substantial resource upside for COPL. Tullow Oil’s mammoth Jubilee discovery (>2.0 BB barrels) located offshore Ghana has been identified as having analogous geological characteristics to COPL’s Liberian prospects.

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Offshore West Africa Emerging As An International High-Impact Exploration Frontier: With over 5.0 BB barrels discovered offshore West Africa in recent years (Ghana, Sierra Leone, Liberia and Cote d’Ivoire), the region has emerged as a global hotspot for offshore highimpact exploration activity. It is anchored by several super-major and large independents which have active near-term exploration drilling programs including upcoming wells by Anadarko and Chevron.

Company Statistics: Stock Symbol: XOP - TSXV Price: C$0.31 Share Outstanding: Basic: 333.7 MM Fully Diluted: 484.2 MM Management: 1.5 MM Market Cap: C$103 MM Market Float: C$103 MM Net Debt (2014E): $1.1 MM Average Daily Trading Volume: 510,000 High – Low (52-Week): C$0.40 - $0.10

Company Description: Canadian Overseas Petroleum Ltd. is an international oil and gas exploration and development

company

focused

on

exploration offshore Liberia and onshore in New Zealand.

Fiscal YE Dec 31

Disclosure statements located on pages 28-30 of this report

2013E

2014E

2015E

CFPS (diluted)

NMF

NMF

NMF

Production (BOE/d)

NMF

NMF

NMF

$(2.1)

$1.1

$4.4

$98.01

$95.00

$97.00

Net Debt ($ MM) Brent Oil ($/B)

MARCH 13, 2014

GARETT URSU 403·750·7221

Investment Highlights Thesis

Canadian Overseas Petroleum Ltd. is a small-cap, international E&P company focused on exploration activity offshore West Africa and onshore New Zealand. Having secured $120 MM in carried costs through a joint venture with Exxon Mobil on the LB-13 block offshore Liberia, the company offers investors high-impact exploration upside with an exploration well expected to spud by the end of H1/14. Under terms of the PSC, COPL retains a meaningful 17% working interest while remaining sheltered from near-term capital commitments. Independent reserve engineers have estimated over 2.6 BB barrels of prospective recoverable resource on Block LB-13 underscoring the block’s potential materiality for COPL. COPL also holds an operating interest in PEP 53806 (50% WI) onshore New Zealand where it is targeting an unconventional tight oil play. Although at an early stage with geological studies and seismic acquisition planned, the New Zealand asset offers potential longer-term upside. Finally, with operations in Liberia, offshore exploration and development experience and an enviable network of African contacts, we also believe that entry into Nigeria is possible near term, providing the company with low-risk opportunities in a profitable jurisdiction currently out of favor in the Canadian market. We are initiating coverage on Canadian Overseas Petroleum Ltd. with a Buy (S) rating and C$0.50 target price.

Catalysts

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The following is a summary of the expected news flow on Canadian Overseas Petroleum: •

First exploration well on Block LB-13 (17% WI) offshore Liberia expected to spud in Q2/14.

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Near-term offshore exploration drilling activity by Anadarko and Chevron on offsetting Liberian Blocks 10 & 12.

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Seismic acquisition and reprocessing on PEP 53806 in New Zealand.

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Offsetting drilling activity in the East Coast Basin of New Zealand by TAG Oil (TAO-T, Buy rating, $5.00 target, covered by Garett Ursu) and New Zealand Energy Corp. (NZ-T, not rated) targeting the Waipawa and Whangai oil shales in New Zealand.

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Potential entry into Nigeria given the company’s offshore expertise and experience, operations in the area and contacts in Africa.

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities for TAG Oil Ltd.

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Figure 1


Price Chart

Source: BigCharts (March 12, 2014) (Chart C$)

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Company Outline Highlights

Background And Key Events

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Canadian Overseas Petroleum Ltd. has secured an attractive agreement for the PSC on Block LB-13 offshore Liberia with ExxonMobil, whereby it holds a 17% working interest and is carried by Exxon for the first $120 MM of its share of drilling costs. The first exploration well is expected to be drilled in Q1/14. The joint venture provides considerable exploration upside and partners COPL with one of the largest and most experienced global operators with no near-term associated capital outlay for the company.

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Third-party reserve engineers (DeGolyer & MacNaughton) have estimated over 2.6 BB barrels of gross prospective recoverable resource (P50) across 13 prospects identified on Block LB-13 offshore Liberia. Tullow Oil’s mammoth Jubilee discovery (>2.0 BB barrels) located offshore Ghana has been identified as having analogous geological characteristics to COPL’s Liberian prospects.

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Near-term exploration drilling offshore Liberia by Anadarko and Chevron on offshore Blocks LB-10 and LB-12, respectively, will provide offsetting drilling catalysts and potential read-through for COPL’s upcoming exploration well on Block LB-13 expected to spud in Q2/14.

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COPL’s PEP 53806 (50% WI) in the East Coast Basin of New Zealand provides longer-term unconventional upside where independent engineers (DeGolyer & MacNaughton) have estimated over 142 MMB of gross prospective resource (P50). PEP 53806 lies adjacent to permits of two core New Zealand operators, TAG Oil Ltd. and New Zealand Energy Corp. which are undertaking near-term exploration programs targeting the unconventional horizons that could provide meaningful catalysts for COPL.

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COPL’s recent $8.5 MM financing provides financial flexibility for the company which has limited near-term capital commitments. COPL currently has $5.5 MM in positive working capital and we forecast the company will exit Q1/14 with $1.3 MM of positive net working capital.

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With operations in Liberia, offshore exploration and development experience and an enviable network of African contacts, we also believe that entry into Nigeria is possible near term, providing the company with low-risk opportunities in a profitable jurisdiction currently out of favor in the market and the potential for contrarian value creation for shareholders.

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On June 16, 2010, Velo Energy shareholders formally approved a name change to Canadian Overseas Petroleum Ltd. and with a one-for-four share consolidation, COPL began trading under the ticker “XOP” on the TSX Venture Exchange.

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On August 16, 2010, COPL entered into a Letter of Intent with a third party that allowed the company to earn a 50% equity interest in two blocks in the UK North Sea. Under the terms of the Letter of Intent, the company participated in the farm-in by paying a portion of the drilling costs, expected to be under $15 MM.

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On October 29, 2010, COPL filed a preliminary prospectus offering 260 MM subscription receipts at $0.50 per receipt, for a total offering of $130 MM. Each subscription receipt entitled the holder to one common share and a half warrant.

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On January 24, 2011, COPL received from Faroe Petroleum Plc the transfer of 50% 4

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of License P.1161 (Blocks 206/5a and 206/10a) in the UK, which included the Fulla exploration prospect and the Freya discovery. •

On February 22, 2011, COPL signed an Earn-In Agreement with BG International Ltd. for certain prospects in Block 23/21, License P.101 and Block 22/15 License P.089 in the UK. Block 23/21 contained the Upper Toad discovery and the Lower Toad, Newt and West Columbus exploration prospects and Block 22/15 contained the Bankers discovery and the Esperanza exploration prospect.

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On May 18, 2011, COPL signed a Purchase and Sale Agreement (“P&S”) to acquire a 100% interest in Block LB-13 offshore Liberia from Peppercoast Petroleum Plc for $85 MM comprising $45-50 MM in cash and the remainder in common shares of Canadian Overseas priced at $0.5473 per share.

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On August 24, 2011, COPL made an oil discovery at its Fulla exploration prospect in Block 206/5a in the UK Central North Sea with the company’s first of six planned exploration wells. The well encountered a gross oil column of 133’ including a net oil column estimated at 45’.

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On November 9, 2011, COPL announced another oil discovery at its Esperanza exploration prospect located in Block 22/15 of the UK Central North Sea. The well encountered a 45’ section of net pay in the Paleocene Forties sands.

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On November 16, 2011, COPL signed an agreement with ExxonMobil for Block LB13 offshore Liberia. Under the terms of the sale, ExxonMobil acquired a 70% interest in the PSC in exchange for $55 MM and paying COPL’s portion of the first well to be drilled on Block LB-13 to a maximum amount of $36 MM.

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On November 30, 2011, COPL announced that a drill-stem test was successfully completed in the Esperanza discovery in Block 22/15 of the UK North Sea and produced 1,784 B/d through a restricted 36/64” choke.

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On February 16, 2012, COPL announced that the P&S with BG International Ltd. for Block 22/15 and Block 23/21 had been terminated as a result of a dispute over additional funds required to be deposited by Canadian Overseas into an escrow fund. Due to the termination notice, Canadian Overseas elected to not participate in any further drilling in Block 23/31; however, the company retained its rights in Block 22/15.

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On February 27, 2012, COPL announced it had commenced drilling the Bluebell exploration prospect on Blocks 15/24c and 15/25f in the UK Central North Sea. The Bluebell exploration well was subsequently plugged and abandoned on March 8, 2012, after failing to encounter hydrocarbons.

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On April 18, 2012, COPL announced that the National Oil Company of Liberia (“NOCAL”) accepted its joint venture proposal relating to Block LB-13 offshore Liberia, with ExxonMobil holding operatorship and 70% working interest and Canadian Overseas holding the remaining 30% working interest.

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On October 17, 2012, it was announced that the High Court of Justice in England ruled in favour of BG in the dispute between BG and the company relating to Blocks 22/15 and 23/21 in the UK Central North Sea, resulting in the release of approximately $16.1 MM of escrowed funds.

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On November 2, 2012, COPL announced that its partner, Marauder Resources East Coast Inc., had been awarded PEP 53806 in the East Coast Basin onshore New Zealand. The agreement between COPL New Zealand and Marauder provides for each company to hold a 50% working interest in the license. The permit covers 965 km² and has an initial term of five years. The East Coast Basin onshore New Zealand 5

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contains a number of large oil and gas targets within the unconventional Paleocene to Cretaceous aged Whangai and Waipawa shales. These formations exhibit characteristics similar to the productive Bakken Formation in Saskatchewan and North Dakota. •

On March 8, 2013, COPL announced that it had amended the PSC relating to Block LB-13 offshore Liberia whereby Canadian Overseas would retain a 20% working interest while partner ExxonMobil would acquire an 80% working interest and pay $120 MM of Canadian Overseas’ working interest portion of drilling expenses. This was ratified in the Liberian legislature later that month.

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The company was obligated to repay $7.2 MM to ExxonMobil within 75 days of closing of the PSC for closing payments made by ExxonMobil to the Liberian government on behalf of the Company. When COPL did not reimburse ExxonMobil the company’s working interest in Block LB-13 decreased to 17% from 20%.

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In July, 2013, COPL raised $5.7 MM (C$6.0 MM) issuing 30.0 MM common shares at C$0.20 per share.

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In August, 2013, COPL raised $2.3 MM (C$2.4 MM) issuing 12.3 MM common shares at C$0.20 per share.

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On November 1, 2013, COPL announced a share for debt agreement whereby the company issued 7.4 MM common shares at a deemed price of $0.245 per share to settle $1.8 MM of outstanding debt.

History Of Oilexco Ltd.

Arthur Millholland (COPL President & CEO) was the founder, former CEO and director of Oilexco Inc. an oil and gas exploration and production company focused in the UK Central North Sea. Mr. Millholland oversaw the growth of Oilexco’s market capitalization from $4 MM to $4 BB from 2003 to 2008; however, the company filed for insolvency in early 2009 following a refusal by the Royal Bank of Scotland to refinance $1.0 BB of debt due to the impact of the global financial crisis and depressed commodity prices. Oilexco was listed on the TSX and LSE until its eventual acquisition by Premier Oil plc in early 2009.

Capitalization

COPL currently has 333.7 MM common shares outstanding, which at a recent stock price of C$0.31, results in a market capitalization of C$103 MM. Incorporating $1.3 MM in net positive working capital, COPL has an enterprise value of ~C$102 MM. Common share equivalents currently include 22.0 MM options (C$0.59 strike) and 130.0 MM warrants (C$0.65 strike) for a total of 484.2 MM shares (f.d.). Officers and directors own 1.5 MM shares or 0.5% of the total outstanding.

Financial Flexibility

Following an $8.5 MM financing and shares for debt deal, the company is in solid financial condition and based on our estimates, we expect it to exit 2014 with $1.1 MM and 2015 with $4.4 MM in net debt. We note that with the amended PSC for Block LB-13, Canadian Overseas is fully carried for the first $120 MM of its share of drilling costs, resulting in very limited capital outlay for the company in the near future. We forecast a quarterly run rate of $2.0 MM for general and administrative expenses.

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Management Team/Board/Advisors Management Team

Arthur Millholland (President & CEO): Mr. Millholland has been the President and CEO of COPL since August 2009. Prior thereto, he was the founder, a director, President and CEO of Oilexco (operated from 1994 until 2009) and oversaw the company growing its market capitalization from $4 MM to over $4 BB from 2003 to 2008. Mr. Millholland has been a professional geologist for 30 years. Chris McLean (Chief Financial Officer): Mr. McLean has served as the CFO of COPL since April 2013 and also serves as the CEO of Stonechair Capital, an advisory firm based in Calgary, focused on international oil and gas. His efforts are focused on Africa, Europe and the Middle East. Mr. McLean is also the chairman of Octant Energy Corp. Rod Christensen (VP Exploration and Exploitation): Mr. Christensen has served as the Vice President of Exploration and Exploitation of COPL since December 2011 and prior thereto served as Manager of Exploration from August 2009. Mr. Christensen previously served as the Senior Vice President Exploration and Development at Oilexco. Norman Deans (VP Operations): Mr. Deans has served as VP Operations at COPL since April 2011 and previously held positions with major international oil companies such as Chevron as well as independents including Oilexco Inc. Mr. Deans is a qualified drilling engineer with over 20 years in the industry and has spent the last four as a drilling manager. Ken Halward (Manager, Reservoir Development): Mr. Halward has served as the Manager of Reservoir Development at COPL since August 2009 and previously served as VP of Reservoir Development for Oilexco and played a key role in the development of the Brenda and Nicol fields. Mr. Halward has over 30 years of diversified experience in Canada, the UK North Sea and other international oil fields. Prior to joining Oilexco in 2005, Mr. Halward held a variety of technical and supervisory positions at Imperial Oil, Wascana Energy, Alberta Energy Company and the Arabian Gulf Oil Company. Nick Pillar (Manager, Geophysics): Mr. Pillar has served as Manager of Geophysics at COPL since July 2011. He previously worked for Enterprise Oil in 1990 and became Chief Geophysicist prior to the takeover by Shell. Mr. Pillar then went onto Petronas Carigali in Malaysia as a senior technical advisor and returned in 2005 when joining Ikonscience, a niche rock physics software and service company as operations director. Mr. Pillar left Ikonscience in 2009 and had been pursuing a consulting career prior to joining COPL in 2011.

Board Of Directors

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Harald Ludwig (Chairman) – President of Macluan Capital Corporation, a diversified private equity investment company and director of Lions Gate Entertainment Corp, Seaspan, West Fraser Timber and West Africa Iron Ore.

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Massimo Carello – Director of Orsu Metals Corp and Canaccord Financial Inc.

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Rick Schmitt – Currently CEO and Director of Octant Energy is also a Director of Wentworth Resources Ltd.

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Viscount William Astor – Director of Networkers Pslc and SocialGo Plc, Silvergate Media Ltd and also an elected hereditary peer in the UK House of Lords.

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities for Canaccord Financial Inc.

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Advisors


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Arthur Millholland – President and CEO of COPL.

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Chris McLean – CFO of COPL.

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Reservoir Engineers – DeGolyer and MacNaughton Canada Ltd. & Sproule International Ltd.

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Lawyers – McCarthy Tetrault LLP

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Auditors – Deloitte LLP

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Transfer Agent – Computershare Trust Company

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Country Overview: Liberia Liberia is situated in West Africa, bordered by Sierra Leone to its west, Guinea to its north and Cote d’Ivoire to its east. It covers an area of 111,369 km² and is home to 3.7 MM people. English is the official language and both the Liberian dollar and American dollar are legal tender. Liberia is the only country in Africa founded by the US as a colony. Figure 2

Liberia

Source: Wikimedia, U of Texas Public Library

Modeled on the government of the US, Liberia is a constitutional republic and representative democracy. Liberia has a recent history of political turmoil, most notably the Liberian civil war which lasted from 1989 to 1996. Since the end of the civil war, the country has been politically stable and undergone substantial economic reform, establishing itself as one of the largest destinations of foreign direct investment in West Africa. Despite this, the country remains drastically underdeveloped with an 85% unemployment rate and 80% of the population living below the poverty line. Liberia currently has no production or proven oil and gas reserves and consumes approximately 4 MB/d of oil. Despite this, the increasing interest in hydrocarbon potential offshore Liberia has attracted best-in-class international oil companies such as Anadarko, ENI, Chevron, Tullow, Repsol, ExxonMobil and CNOOC Ltd.

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Figure 3


Liberia Oil Consumption 1980-2012

Source: Energy Information Agency

While very early days for the oil and gas industry with no commercial discoveries announced to date, the Liberian government is cautiously optimistic as initial positive indications from recent technical discoveries have increased investor interest. The government has stated its commitment to being highly supportive of oil and gas activity in-country and implemented sector reform initiatives to prepare the country’s policies, laws, regulations and PSC frameworks to promote and regulate oil and gas activity. Figure 4 Year 1958 1968 1969 1969-1972 1969 1971 1972 1976-1981 1982 1983 1983-1984 1984 1985 1986 1989 1997-1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Timeline of Major Events in Liberia’s Oil Sector Major Events Exploration License to Liberian American Exploration Corporation Chevron & Conoco acquired reconnaissance magnetic & seismic data Establishment of Liberia's Petroleum Code Liberian Government divided the continental shelf into 4 concessions blocks (A,B,C and D) Union Carbide, Chevron, Frontier Oil were awarded blocks A,B,and C respectively. Block D was not released Wells A1-1 and A2-1 were drilled by Union Carbide, well 11B-1 by Chevron and well Cestos-1 by Frontier ~13,000 km of offshore geophysical data acquired by USGS ~5,900 km of seismic data acquired by Ministry of Lands, Mines and Energy New Liberian Petroleum Code and creation of 5 shelf area blocks & 4 Deepwater blocks Amoco was granted 4 offshore blocks, 2 on the continental shelf and 2 in deepwater 7,800 km of seismic acquired Amoco obtained 2 additional blocks Amoco drilled 3 wells, A/1-1, S/3-1, and H3-1 Amoco relinquished most of its acreage Amoco pulled out of Liberia, program laid dormant GOL divided the unlicensed offshore into 8 blocks (A-H) National Oil Company of Liberia ("NOCAL") formed through NOCAL Act Demarcation of 8 Blocks to 17 Blocks New Petroleum Law enacted by Legislature, Model Production Sharing Contract ("PSC") created Acquired Amoco Well Logs (prior ownership dispute) 8 Blocks awarded from bid round (LB-8,9,10,11,12,13,15,16), Block 17 PSC signed African Petroleum, Oranto, Broadway, Woodside, Repsol receive Block awards Block-13 PSC amended Block 11 & 12 PSC amended, ratified. 2nd Bid Round launched PSCs for Blocks 8,19,15,16,17 amended and ratified Block 14 PSC signed, Block 10 PSC signed, 3rd Bid Round launched Chevron enters Blocks 11,12 and 14 as major operator Anadarko drills unsuccessful Montserrado-1 well on Block 15, Third Bid Round for Block 1-5 cancelled African Petroleum oil discovery in Narina-1 well on Block 9, Chevron Nighthawk-1 and Carmine Deep-1 drilled African Petroleum oil discovery in Bee Eater-1 well on Block 9

Source: NOCAL

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Liberia-Sierra Leone Basin History of The LiberiaSierra Leone Basin

The Liberia-Sierra Leone Basin (LSLB) forms part of the West African Transform Margin that extends from Sierra Leone to Benin. Hydrocarbon exploration has been active in this area since the 1970s when offshore seismic was acquired and shelfal wells were first drilled. Early exploration was concentrated on Albian-Aptian structural traps in shallow water above the continental shelf. While seismic from the 1970s was short cable and processed through unsophisticated sequences, the data was adequate enough to define structural traps in shallow water. Despite oil shows, good quality sandstones and potential source rock, the shelfal wells did not result in commercial discoveries. A hiatus in exploration activity followed from 1985 to 2000 due to disappointing well results, a loss of confidence in shelfal plays, lack of technology, and political instability in the region.

Figure 5

Liberia-Sierra Leone Basin

Source: TGS

After licensing rounds in Liberia and Sierra Leone in 2002-04, a number of oil companies commissioned 3D seismic surveys over the deepwater plays to better delineate the Upper Cretaceous fan systems and identify prospects. The Venus-B1 well drilled in 2009 on Block SL-6 and Mercury-1 drilled in Block SL-7 were hydrocarbon discoveries. The advance of seismic acquisition and processing technology has allowed the definition of a new regional play in the Liberia- Sierra Leone Basin, the Upper Cretaceous Turbidite channel and fan system. The presence of a working hydrocarbon system has been established in the basin through the Mercury (Sierra Leone), Jupiter (Sierra Leone), Venus (Sierra Leone) and Narina (Liberia) discoveries in recent years. These discoveries are evidence of good quality oil in Turonian and Albian reservoirs; however, they are yet to be declared commercial. Work is ongoing by the operators to further evaluate the results. Liberia has divided its offshore area into thirty concessionary blocks. Seventeen of these blocks are from the continental shelf to water depths of 2,500-4,000 m while thirteen of the blocks are considered “ultra deep” with water depths of up to 4,500 m.

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Of the 17 deep-water blocks, 10 blocks have been awarded (LB8-LB17), while 2 blocks are currently under negotiations (LB6, LB7) and 5 blocks have not been awarded (LB1LB5). Figure 6

Liberian Offshore Block Map

Source: NOCAL

Figure 7

Liberian Offshore Block Status

Block

Block Contractor

LB-6

Hong Kong Tong Tai CNOOC Ltd.

Work. Int.

Block Status

Wells Drilled

Contract Under Review

N/A

African Petroleum Ltd.

100.0%

2nd exploration phase; 3D seismic acquired

N/A

LB-9

African Petroleum Ltd.

100.0% 2nd exploration phase; 3 exploration wells drilled

CESTOS-1 (1972), Apalis-1 (2011), Narina-1 (2012)

LB-10

Anadarko Petroleum Corp. Mitsubishi Corp. Repsol YPF S.A.

80.0% 10.0% 10.0%

2nd exploration phase; no exploration wells drilled

N/A

LB-11

Chevron Corp. Oranto Petroleum Ltd. ENI S.A.

45.0% 30.0% 25.0%

2nd exploration phase; one exploration well drilled

Nighthawk-1 (2012)

LB-12


45.0% 30.0% 25.0%


Carmine Deep-1 (2012)

LB-13

ExxonMobil Corp COPL

83.0% 17.0%

1st exploration phase; one well expected to drill Q2/14

LB-14


45.0% 30.0% 25.0%

1st exploration phase; one well expected to drill 2014

LB-15

Anadarko Petroleum Corp. Mitsubishi Corp. Repsol YPF S.A.

47.5% 27.5% 25.0%


LB-8

Source: NOCAL

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N/A N/A

Montserrado-1 (2012)

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Oil Exploration In Liberia


Prior to the creation of the National Oil Company of Liberia (“NOCAL”) in 2000, three core phases of exploration activity in Liberia occurred offshore in: (1) the early 1970s, (2) the mid-to-late 1980s and (3) from 2011 to present, respectively. During the first phase from 1970 to 1972, four wells were drilled by Union Carbide Petroleum Corp., Frontier International Petroleum Inc., and Chevron Corp. In the second phase from 1983 to 1989, three wells were drilled by Amoco Corp. All of the wells drilled by Union Carbide, Frontier, Chevron and Amoco penetrated a significant thickness of reservoir quality sandstone, ranging in age from late Jurassic to late Cretaceous with five of the wells encountering ‘oil prone’ and ‘mixed oil and gas prone’ source beds with Total Organic Content (“TOC”) exceeding 2%. Despite all wells drilled in these two exploration phases encountering the presence of hydrocarbons, deep-water economics during the time period resulted in all the wells being abandoned. With no declaration of commercial discoveries from this activity, investor interest in Liberian deepwater exploration activity abated for an extended period. Exploration activity recommenced in 2000 after over a decade of dormancy with the shooting of several 2D and 3D seismic surveys. Between 2000 and 2010, 24,773 km of 2D seismic data, 24,408 km of 2D Gravity and Magnetic Data and 18,345 km² of 3D seismic data were acquired. The surveys established the presence of critical components of petroleum generation, including multiple oil prone source rocks, reservoir quality sandstones, adequate seals and abundant and large traps. In 2004, NOCAL launched the first bid round for all offshore blocks awarding six from the bid round including Blocks 8 & 9 (African Petroleum), Blocks 11 & 12 (Oranto), Block 13 (Broadway, later Peppercorn and later COPL), Block 15 (Woodside) and Block 16 (Repsol). In July 2011, Anadarko completed the drilling of the Montserrado-1 well on Block LB15. Following completion of the well in November, the company announced a noncommercial oil discovery and plugged and abandoned the well. In August 2011, African Petroleum Ltd. drilled the first ever deepwater well in Liberia, Apalis-1 on Block 9. Apalis-1 did not encounter commercial quality reservoir with hydrocarbons; however, it did confirm the presence of organic oil prone source rocks and the overall prospectivity of the basin. In February 2012, African Petroleum Corp. announced its Narina-1 exploration well on Block LB-9 resulted in an oil discovery that encountered 21 m of net oil pay in the Turonian sandstones and 11 m of net pay in the Albian sandstones, confirming the prospectivity of the play. The company identified no water contact in Narina-1 with significant updip and downdip potential in the Turonian sands. In April 2012, Chevron drilled its first well (Nighthawk-1) on Block LB-11 that resulted in a non-commercial oil discovery but indicated an active working petroleum system in the region. Chevron then spud its second well (Carmine Deep-1) on Block LB-12 with results currently being evaluated and integrated into other studies in the basin to determine other prospects. In February 2013, African Petroleum Corp. announced its Bee Eater-1 step-out appraisal well located 9.5 km west of the Narina discovery on Block LB-9 resulted in a Turonian oil discovery. The Bee Eater-1 well encountered 48 m of net oil pay in the Turonian sandstones and 14 m of net oil pay in the Albian sandstones with low permeability. Since making the discovery, African Petroleum Corp. has reprocessed seismic data and has identified additional well locations and remains encouraged by the well’s results so far. The Narina and Bee Eater discoveries by African Petroleum indicate the Turonian play extends over a large area on Block LB-9 currently under appraisal. African Petroleum

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anticipates further drilling this year. Following the results by African Petroleum interest in the region intensified, with accelerated exploration programs by Chevron (offshore Blocks LB-11,12 & 14), Anadarko (offshore Blocks LB-10 & 15) and Repsol (offshore Block LB-16 & 17). Anadarko’s two well program planned for 2014 will commence with the Iroko-1 well testing a Cretaceous fan complex near the Bee Eater discovery while the second well (Timbo-1) will test a shallower Cretaceous fan sequence in a different portion of the LB10 block. Liberia Resource And PSC Terms

In Liberia, PSCs are split into two phases with the first phase governing how long the contractors have to interpret the data (usually 3 years) and the second phase governing how long the contractors have to explore (usually 2 years). In the case of Block LB-13 a five-year exploration period was granted in March 2013 that consisted of two consecutive periods (three years and two years, respectively). At the end of the first three-year period, at least 33% of the surface area of the block will be surrendered with the area to be surrendered comprising itself a single block. If during the first exploration period the company has fulfilled all exploration work commitments, a third exploration period of two years may be awarded. Work commitments for LB-13 include $10 MM of seismic work (as well as $10 MM of analysis) and the drilling of one well to a minimum depth of 2,000 m. In the event that COPL discovers petroleum, a two-year appraisal period is granted with further extensions possible upon government approval. If a field is deemed to be commercial, an Exploitation Perimeter will be awarded over the field for a 25-year period with the potential for an additional period of up to 10 years following the expiry of the original exploitation permit. Multiple fields on a block may each qualify for individual Exploitation Perimeter awards. At the end of the third exploration period, the whole remaining surface area of the block will be surrendered, with the company then only retaining any Appraisal Perimeters or Exploitation Perimeters granted to that point. PSCs in Liberia typically allow 70% of produced volumes (less royalties) to go to cost oil (recovered by the contractor) with the remainder being shared between the government and the contractor on a sliding scale. Royalties and other fees also apply (see below for specifics relating to LB-13).

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Canadian Overseas Operations: Liberia Canadian Overseas has operated in Liberia since 2011 when it signed an agreement to acquire the offshore LB-13 block. It currently holds a 17% working interest in the block with partner ExxonMobil holding operatorship and the remaining 80% working interest. Block LB-13 covers an area of approximately 2,540 km² and is located off the coast of Margibi and Grand Bassa. Block LB-13 has no production and currently holds no proven, probable or possible reserves. Figure 8

Canadian Overseas Liberian Block LB-13 (17% WI)

Source: Company Reports

The company has a license to 2,023 km² of long offset 3D seismic that was shot in 2010 to evaluate the oil potential of the deep-water Cretaceous turbidite sands analogous to the recent deep-water oil discoveries made offshore Ghana and Sierra Leone. Reviews of the seismic data were conducted internally by the company and externally by independent reserve evaluators DeGolyer and MacNaughton, identifying the potential for several Cretaceous turbidite sand stratigraphic traps on the block. Only one historical well has been drilled on Block LB-13. Chevron drilled IIB-1 in 1970 in shallow water with immature oil shows exhibited in the early to middle Albian formation. IIB-1 resulted in a dry hole.

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MARCH 13, 2014

Block LB-13 PSC


Canadian Overseas originally acquired Block LB-13 on May 18, 2011, when it signed a Sale and Purchase Agreement to acquire a 100% interest in the block from Peppercoast Petroleum Plc for $85 MM comprising $45-50 MM in cash and the remainder in common shares of Canadian Overseas priced at $0.5473 per share. On November 16, 2011, COPL announced it had signed an agreement with ExxonMobil for Block LB-13 where ExxonMobil would acquire a 70% interest in the PSC for $55 MM and pay Canadian Overseas’ portion of the first well to be drilled on Block LB-13, to a maximum amount of $36 MM. Under the terms of an amended PSC announced in March 2013, Canadian Overseas retained a 20% working interest in the block and ExxonMobil acquired operatorship and the remaining 80% working interest. Consideration for the (ultimately) 83% working interest and operatorship acquired by ExxonMobil consisted of the following: •

$70 MM to NOCAL through a combination of taxes, transfer fees and signing bonuses;

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$7.2 MM of closing payments forwarded on behalf of the company;

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$50 MM to Peppercoast Petroleum plc; and

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$120 MM commitment to pay the COPL’s share of gross drilling costs as well as $1.0 MM of associated joint venture costs until drilling has been completed.

ExxonMobil therefore effectively spent $247 MM to acquire its 83% interest in the block. We would note that Exxon is responsible for $120 MM of drilling costs which would likely equate to two exploration wells or one well with a sidetrack and flow test. Such a flow test would be sufficient to book reserves. The PSC on COPL’s Block LB-13 establishes a 10% royalty on oil produced from wells drilled in 0-1,500 m of water and a 5% royalty for oil produced from wells drilled in water more than 1,501 m deep. The PSC also includes the right for Liberia to receive a 10% carried interest in Block 13 at the start of commercial production. The PSC governing Block LB-13 also includes a 5% “Citizen Participation Share” which entails the transfer by the contractor of a 5% interest in the block upon the beginning of commercial production. Up to the first 70% of both oil and natural gas volumes produced on a monthly basis (less royalty) go to cost oil and are allocated to the contractor with the remainder (for crude oil) allocated to the government and the contractor on the following scale: Figure 9

Block LB-13 PSC Framework Oil Production Rate (B/d) 0-100,000 100,000-150,000 150,001