A Casey Research Special Report

The Best Way to Profit

from Europe’s Coming
Shale Gas Boom

by Marin Katusa,
Editor of Casey’s Energy Report

Casey Research
The Best Way to Profit from Europe’s Coming Shale Gas Boom Casey Research

Welcome to Casey’s Energy Report

Thanks for joining us in what the entire Casey energy team believes will be one of the
hottest energy sectors of the decade – European shale gas.

This report covers everything you need to know about this up-and-coming profit
opportunity, as well as the best place to invest for spectacular energy returns. A tide
of change is headed for the European continent – one that until today was not possible.
And that’s why we believe that now is the time to...

Get Positioned in Europe’s Hotbed

There’s a new staking frenzy in the works for gas shale, and it’s moved across the Atlantic.
Shale, shale, everyone’s talking about shale. It’s true that gas shale is causing a paradigm
shift in the markets. Unconventional gas is rapidly growing and is slated to exceed the
conventional production of natural gas over the next decade. New techniques in drilling and
well completion have transformed this formerly uneconomic source into some eye-popping
numbers. (For a discussion of these figures, click here.)

In North America, the stampede to staking at basins such as Haynesville, Utica,

Marcellus, and Barnett has waned, and already we’re seeing signs of a more mature
phase, consolidation. On March 15, for example, U.S. antitrust regulators cleared
the way for ExxonMobil (XOM) to purchase one of the top shale players in the gas
industry, XTO Energy (XTO), for a whopping US$31 billion plus assumption of US$10
billion of XTO’s debt. ExxonMobil is not only the world’s largest publicly traded energy
company but often a harbinger of trends. In short, unconventional gas has gone
mainstream.

Where does this leave investors? After all, we’re not going to buy the ExxonMobils of
the industry, those so big that major strikes trigger, at best, a blip in share price. Are
there still opportunities in this “shale gas revolution,” as some have dubbed it?

The answer is yes, of course. We’ve written before about North American prospects,
such as the Utica Shale, which straddles New York and Quebec, and an overview of
several others just as unconventional gas was taking off. Now we focus on what we
believe may be an even more profitable opportunity: shale gas in Europe.

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European Shale Gas: The Advantages

European shale gas intrigues companies and investors alike because of several
advantages:

1. Government support due to a broad national urge to loosen the bonds of Russia’s
gas giant, Gazprom. Most European countries depend on state-controlled Gazprom
for the majority of their gas supply. Gazprom’s tap-twisting over prices with Ukraine,
through which flows some 80% of Russia’s gas to Europe, has lit up the message that
Russia carries a big stick and isn’t afraid to use it. The chart below suggests how big
a stick. We calculated the data from Gazprom’s export numbers for 2008, the latest
available, and consumption figures from the Energy Information Administration (EIA),
part of the U.S. Department of Energy.

Reliance on Gazprom as Reliance on Gazprom as

a percentage of consumption a percentage of consumption

Finland 100% Bulgaria 62.32%

Macedonia 100% Austria 61.47%

Slovakia 98.72% Poland 56.98%

Czech Republic 90.80% Slovenia 54.55%

Serbia 86.60% Germany 45.98%

Bosnia and Herzegovina 77.50% Crotia 42.98%

Hungary 74.17% Italy 28.87%

Greece 67.86% Romania 24.83%

Turkey 66.11% France 23.53%

A new pro-Moscow president arriving in Kiev has only encouraged the rest of Europe’s
interest in non-Russian sources for gas. Should a U.S.-style shale phenomenon turn
up in Europe, the energy landscape could drastically change. Many countries that were
former importers could begin to become self-sufficient.

2. The potential for shale gas in Europe is relatively unexplored, and the rewards could
be very large. Shale resources in the United States were ignored for most of the 20th
century before prices and technology finally met in the last decade, but hundreds of
shallow shale wells were drilled near Lake Erie from 1820 to 1900. In contrast, the first

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exploratory well for European shale gas was drilled only in 2008, in Germany. Thus the
possibilities are wide open.

The American Association of Petroleum Geologists has come up with an estimated

total resource of 510 trillion cubic feet (TCF) of unconventional gas for Western Europe
alone. This number compares favorably with North America, suggested at 2,000 TCF,
or about 100 years of supply, say the energy-data analysts of IHS/CERA (Cambridge
Energy Research Associates). It’s important to emphasize that hard data haven’t been
developed yet, including how much of these estimated totals are actually recoverable.

3. Europe’s mix of large and small companies means consolidation and large potential
rewards for early investors of small companies with good land position in shale. In
the United States, as shale became more popular and the economics became clearer,
major gas companies started snatching up more of the land and the smaller companies
that held them. At this point, the U.S. shale story is occupied mostly by large-cap
companies with much less upside, at least where basins have proven reserves and
production.

But in Europe, where the shale market is still in its infancy, juniors and smaller
companies are on the same playing field as the majors. If a junior were able to prove
commercial amounts of gas on its properties, it’s not hard to imagine a 10-fold spike in
share price… or even more.

European Shale Gas: The Challenges

Of course, it’s not all unicorns and rainbows in the Old World despite the opportunities
there. Here are some difficulties that companies will have to hurdle to seize the brass ring
in Europe:

1. Significantly less drilling equipment and experienced personnel to operate the

equipment. In North America, close to 2,000 hydraulic pumps, to fracture shale and
release natural gas, are in circulation on the backs of big diesel trucks. In Europe,
the number is about 20. Even though energy service companies are waking up to
Europe and providing more rigs and other specialized shale equipment, even the best
companies may face significant delays in exploration when companies begin to drill.
And at tens of millions of dollars, the collection of equipment that comprises fracturing
sets doesn’t exactly pop off the production line.

So as investors, we need to have the antennae tuned more than ever for “me too”
companies in this play. It’s the companies with access to equipment that will be at the
front of the line in testing their projects, and that will be the top acquisition targets
when the majors come knocking.

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2. Unknown productivity and economics. No two shales are exactly the same, and
techniques that work on one may not always translate to the other. This means
companies looking for shale gas in largely unexplored Europe face significant risks.
The initial production, the decline rate (how much the production drops after initial
production), and the costs of the well are all unknowns that could make or break a
project.

3. Potential title issues. We see potential for overstaking, in which one company stakes
a land position and is granted its land, but another company does the same, and the
coordinates or boundaries overlap. This situation often leads to dispute, sometimes
lawsuits, and virtually always delay. The chances for overstaking go up when a rush
catches on, and it can be a mess for all parties, including shareholders, until it’s
resolved.

Putting It Together: The Countries

With both pros and cons on the table, let’s now take a look at the countries creating the
most buzz in Europe’s shale-gas field. There are more than we describe below, but the “hot
money” countries are Poland, the United Kingdom, and the Netherlands.

1. Poland is currently catching much interest from “shale hunters,” with 10 of 20

companies in our database staking acreage there. Currently almost half of the country
has been staked with exploration claims to look for shale. As with the rest of Europe, it
is difficult to gauge just how much recoverable natural gas is under Poland. But where
there’s smoke, there should be fire, and Poland is the smokiest place at the moment.

Poland is on the Royalty-Tax (R-T) system, charging companies approximately US$1

per Mcf in royalties on top of a 19% corporate income tax. Compared with the United
States, its government take is much less. Moreover, the fact that Moscow-Warsaw
relations are tepid at best means that Poland is eager to produce its own natural
gas. It’s possible Warsaw will decide that easing regulations more or even offering
incentives are the best path to energy independence. Finally, major pipelines already in
Poland will decrease transportation costs for companies operating there and lead to a
premium for their natural gas.

Companies exploring Poland: ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP),

Marathon Oil and Gas (MRO), 3Legs Resources, BNK Petroleum (V.BKX), EurEnergy
Resources (private), RAG (private), San Leon Energy (LSE.SLE), Sorgenia E&P (BIT.
CIR).

2. The United Kingdom is more known for its offshore resources in the North Sea.
Nonetheless, the Bowland Shale area, in particular, is garnering attention for gas
exploration. Using its North Sea fiscal terms as a guide, we’d consider UK onshore

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royalty rates as a good structure that’s very simple to understand. We’d rank the Brits
between Poland and the Netherlands in terms of government take.

Companies exploring Britain: EurEnergy Resources and Cuadrilla Resources.

3. The Netherlands, unlike Poland, is already a net exporter of natural gas. This
country thus has less incentive to lure exploration companies with improvements to
its fiscal terms, and companies will be operating there at a financial disadvantage –
one of roughly 10% in comparison with the Brits. Offsetting this drawback is the good
oil and gas infrastructure in the Netherlands, along with a number of energy service
companies in the region.

Another positive note about exploring for Dutch natural gas is the country’s pricing
structure. Its gas price is based on an index tied to Brent crude oil prices, which is
usually a premium compared to the usual Henry Hub price or even the London price.
Overall, resources in the Netherlands show enough potential such that GASH, an
interdisciplinary gas shale research group, has chosen the Netherlands as a first-tier
research target.

Companies exploring the Netherlands: Cuadrilla Resources.

Other countries being explored for gas-bearing shale include Denmark, Sweden,
France, Germany, Switzerland, Austria, Greece, Romania, Hungary, and Spain.

As you can see in the market capitalization chart below, many companies are large
multinationals, with a few notable exceptions:

Next we’ll look at two

of the companies lower
on the scale, since we
are interested in large
discoveries that will give
us a significant win in our
portfolio. For risky plays like
these, it truly is “go big or
go home.”

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Putting It Together: The Companies

Watch List Winner #1: High Risk

Realm Energy International Corp. V.RLM,

With big-name backers and the potential for attractive land positions in European gas
shale, we’re keeping a close eye on Realm Energy (V.RLM).

PUT ON THE WATCH LIST – Realm Energy International is currently negotiating for
European shale gas plays, talks that the company is keeping close to the chest. So
while we like RLM for its big-name management and its potential to acquire large and
attractive land positions, we’re holding off on an actual buy recommendation until
we get specifics. Also, there’s stock that will come free trading shortly from a private
placement – a situation that often gives us a better entry price. So keep Realm on your
radar, and we’ll keep you updated.

In general, Realm is a company focused on consulting for companies looking to develop

unconventional gas opportunities outside of North America. It started off as a shell
called SBI Skin Biology, held by Ian Telfer, now a significant shareholder. Originally,
the company was acquiring a gold/copper project in Ecuador from Dynasty Metals and
Mining. However, that deal ended up falling apart, and the shell instead made a reverse
takeover of Realm.

People

Ian Telfer (significant shareholder) is a big name in mining, as he is chairman at

Goldcorp Inc. (T.G), one of the largest gold companies in Canada. He’s also a director
at Silver Wheaton (SLW), Gold Wheaton (T.GLW) and Uranium One (T.UUU).
All are multinational, multibillion-dollar companies that carry significant weight in the
Canadian mining industry. His participation in Realm Energy gives the company a
tremendous amount of legitimacy, as well as financing power.

James Elston (CEO) has worked almost 20 years in the oil and gas sector, primarily in
the banking, consulting, and analysis subsectors. He is familiar with unconventional gas
technologies, costs, and economics due to his work with many other unconventional
gas players on AIM, London’s junior market. In 2008, he also helped launch what
has become a major international gathering, now the annual SMi Unconventional Gas
conference, demonstrating his ability and knowledge of the shale gas story. He holds
450,000 shares and 1,645,000 options, according to insider filings.

Craig Steinke (chairman) has founded and developed several unconventional resource
companies with specific focus on shale gas in North America. He has over 20 years
of experience in the oil and gas business, specializing in acquisitions, property
development, and corporate finance. Some of his experience includes time in the

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Fayetteville, Marcellus, and the Montney shale in the United States. He currently
holds 7.1 million shares, according to insider filings, which shows his dedication to the
success of this company.

Projects

Realm Energy management has stated they are aggressively pursuing shale gas
deposits throughout Europe in tandem with Halliburton Consulting (HAL), one of
the world’s largest energy service companies. As we mentioned above, they haven’t
released details as yet. Realm is keeping its acquisitions quiet, lest its competitors find
out their plans and take the licenses out from under them.

What we do know is that RLM has submitted applications that in total extend to over
2 million acres of land. That’s encouraging, as land is one of the most important
determinants of a shale gas play. All of the applications are under consideration, and
no final approval has been given. The company right now is awaiting approval before
designing any exploration programs.

Politics

We’ll update this section when we glean more concrete knowledge of RLM’s land
positions and locations.

Paper/Price/Phinancing

Realm Energy has only

recently begun trading on
the TSX Venture Exchange
(TSXV), and the price
has slid from the initial
C$0.50 high down to the
C$0.30 mark (still resulting
in a 160% gain since
inception). This trend isn’t
surprising, given how little
information management
is letting out before the
company establishes
itself. There may also be
some unloading of stock
going on by investors who
participated in the shell. All good news for us in our quest for a lower entry price.

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Promotion/Push

When Realm confirms its land position and the prospectivity, the market will
undoubtedly be more interested in the company. Another potential push is likely to
come once the market fully understands the true potential of shale gas in Europe.
Shale gas exploration is slow, and the company might have a while to go before
production, but the partnership with Halliburton means that RLM already has a great
head start against the other juniors vying for a slice of the pie.

So even though currently there is very little information on the company and we
can regard it as only a very high-risk play, Ian Telfer’s involvement and the rapidly
emerging gas shale market make an impressive combination of strengths. We’re in
wait-and-watch mode, and will keep you posted on developments.

Watch List Winner #2: High Risk

BNK Petroleum Inc. V.BKX

TBNK Petroleum Inc (V.BKX) is carrying its U.S. experience in gas shales over to one of
Europe’s most promising basins.

PUT ON WATCHLIST – First off, our analysis of BKX’s financials suggests the
company will likely need to raise money in the future, so we believe an opportunity is
coming to buy this international energy company at a significant discount to its current
price. So don’t call your broker yet!

Now to particulars. BNK Petroleum Inc. was formed in 2008 when Bankers Petroleum
Ltd (T.BNK) spun out all its U.S. assets. BKX now specializes in the exploration and
development in shale and tight sand gas. Headquartered in Camarillo, Calif., BKX
has offices in Calgary, The Hague, Warsaw, and projects in the United States and
Poland. Government support is strong for European countries to be independent from
the Russian gas monopoly, Gazprom. Poland leads the field at Casey Research for
investment potential in gas shale. We’ll keep you posted on BKX developments and
when to buy. Meanwhile, let’s dig into the Casey 8Ps.

People

Wolf E. Regener (president and CEO) has over 20 years of oil and gas experience and
has held senior management positions with four independent companies. Over his
career, he has handled an array of responsibilities from front-line sales to corporate
financings. Mr. Regener knows the industry firsthand, as he has dabbled in pretty much
all departments of oil and gas.

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C.S. (Juneyt) Tirmandi (CFO) brings some 27 years of experience in oil and gas and
corporate finance. Prior to his tenure at BKX, Mr. Tirmandi was a corporate finance
partner at Meyers Norris Penny, LLP.

As a Bankers spin-off, BKX shares three directors. Robert Cross (Bankers co-founder
and chairman) has worked for 15 years in the natural resource equity markets. Retired
U.S. Army Gen. Wesley K. Clark, formerly NATO’s Supreme Allied Commander, now
manages his own consulting firm, participating in the energy, banking, and business-
services fields. Eric Brown has many years of experience in publicly traded company
governance and is currently the regional managing partner for the Meyers Norris
Penny, LLP, Alberta Advisory Services practice.

Insiders hold a fairly good portion of outstanding shares, about 17%. We like
management with good skin in the game, as it means they have a vested interest in
the long-term performance of the company.

Properties

BNK Petroleum Inc has five current projects, four in the United States and one in
Poland.

Ardmore Basins, Oklahoma. BNK Petroleum’s only producing asset in this basin is the
Tishomingo gas field. On February 2, 2010, BKX increased 2009 Tishomingo reserves
by 182%, resulting in proved and probable reserves of 37.9M barrels of oil. This project
has additional potential for future recovery, and 29 wells that BKX has interest in are
currently being drilled for shale gas.

Black Warrior Basin, MS/AL. This project has significant potential for tight gas reserves.
Similar to conventional gas, the natural gas of tight gas sands is stored in porosity
in the compressed state. The area has proven wells operated by other companies,
and BKX currently has the right to earn in approximately 40,000 acres by drilling test
wells. On October 24, 2009, BKX announced it successfully drilled and ran casing in the
Hickman Farms 30-15 wells.

Appalachian Basin, New York. The target for this basin is Trenton Black River and the
famous Utica Shale. BKX has a 2D seismic program in place.

Palo Duro Basin, Texas. Targeting the Bend & Wolfcamp Shale, BKX has commenced
fracture stimulate shale for testing in well Black 4#1.

Poland Basin, Europe. Here’s where we really get interested. BKX currently has
three concessions in Poland and announced it was awarded five more in an unnamed
European Union country, bringing its total of gross land in Europe to 2.1 million acres.
BKX’s three concessions in Poland are Slawno, Slupsk, and Starogard, and cover

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approximately 720,000 acres. The cost to BKX was around C$500,000, and gave it an
80% working interest.

Politics

For us investors, Poland strikes a happy three-way intersection. First, it’s now reliant
on Russia’s Gazprom to supply 57% of its natural gas consumption. Given the tepid
relations between Warsaw and Moscow, that’s a strong incentive to loosen the grip of
the Russian bear.

Second, Poland ranks high for a business-friendly royalty structure. Using current gas
prices, Poland is at about 25% royalty and 19% corporate income tax. That translates
to a lower government take than certain parts in the United States.

Third, Poland is leading the European pack currently in terms of gas-shale potential.
The data haven’t yet risen above pretty speculative estimates, but so far they’re
ranging from 1.5 to 3 trillion cubic meters. That’s the equivalent of 100 to 200 years of
meeting its own demand, or three to six of all Europe’s demand. While the geology of
Poland’s basins appears particularly promising, the major caveat to remember is how
much of this gas is recoverable, of course.

Finally, according to Fraser Institute’s Geopolitical Risk Index, Poland actually ranks
better than many states in America and provinces in Canada. That means Poland is a
very safe country in which to invest.

Paper/Phinancing

BKX has a reasonable share structure, with no warrants and approximately 6.9 million
options outstanding, relative to their 101.3M shares outstanding. BKX’s most recent
financing, a C$20 million equity financing completed on November 13, 2009, added
16 million common shares of the company at C$1.25 per common share. BKX has
indicated that C$9.2 million of the net proceeds will go toward paying down debt, with
the remainder channeled to exploration in Europe.

Using simple estimations and BKX’s September 2009 financials, including the recent
equity financing, we calculate that BKX currently has approximately C$28.7M in cash
and receivables. Compared with its current liabilities of C$25.4 million, it looks as
though BKX may need another financing in the future if it’s to continue with drilling and
exploration.

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Price

Looking at the past year,

BKX has had reasonable
growth and a strong
upward trend.

Promotion/Push

Gas shale in Europe

seems to be the new buzz
words circulating in the
investment community.
There’s been no shortage
of media attention, and
we foresee this level of
interest continuing for some time. There are too many positives to disregard what gas
shale can bring to the table.

On March 5, Toronto-based The Globe and Mail highlighted BKX in an article that
described European natural gas-shale deposits as having “the potential to change
the balance of energy power on the continent.” It noted BKX had risen 70% so far
this year, yet insiders are still buying, not selling. Most recently, board chairman Ford
Nicholson purchased 600,200 shares in the market at C$2.03, and CEO Wolf Regener
purchased 20,000 shares at C$2.25. When insiders are buying their own shares, they
know the company is either undervalued or a great investment.

BKX has quite diversified operations. Its U.S. operations are running rather smoothly,
with projects in producing territories. Nevertheless, it’s as a play in European gas shale
that makes us like BKX – one of the first companies to set claim on the continent.

As we said above, we think we can get in at a better price point. The company looks
very promising, but we want to wait for the expected financing and drills turning in
Europe first. So keep an eye on this one until we update our analysis.

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What to Do Now
The entire Casey energy team believes that both Realm Energy and BNK Petroleum Inc. will
be great investments all the way to the top of Europe’s shale gas boom.

Now that we’ve found the right companies, for maximum profits we need to make sure the
timing is perfect. The success of “buy low, sell high” depends very much on the entry point
we choose.

So keep your powder dry and be ready to move quickly... the time is just about right.

Casey Research
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