International Oil Gas Report 061608

JUNE 16, 2008
INTERNATIONAL OIL & GAS PRODUCERS

Rafi Khouri, B.Sc., MBA
rafi.khouri@raymondjames.ca
403.509.0560
Braden Purkis (Associate)
International Oil & Gas braden.purkis@raymondjames.ca

403.509.0534
Initiating Coverage: A World of Opportunity SECTOR SUMMARY

COMPANY RATING
Investment Road Map TICKER CUR PRICE RETURN TARGET

Addax Petroleum OUTPERFORM 2
Our international oil & gas investment guide focuses on identifying companies AXC-TSX C $52.45 32% $69.00
Bankers Petroleum STRONG BUY 1
offering a well thought investment risk‐reward proposition. It is our view that
BNK-TSX C $2.12 65% $3.50
this is normally found through companies built around current or near term Gran Tierra Energy MARKET PERFORM 3
production assets, a technically sound management team that understands GTE-T/GTE-A C $6.62 6% $7.00
Pacific Rubiales Energy STRONG BUY 1
regional geopolitics, and solid long term reserves and production growth PEG-TSX C $10.71 59% $17.00
potential. Solana Resources OUTPERFORM 2
SOR-TSX C $4.42 24% $5.50
Assets Define the Underlying Value WesternZagros Resources OUTPERFORM 2
WZR-TSX C $3.05 48% $4.50
We believe the core value of international petroleum companies is defined by
their assets. Determining the intrinsic value is more challenging. Closing prices as of June 9, 2008
All figures in C$, unless otherwise noted.
Geopolitics and Geology can Modify Asset Based Sources: Raymond James Ltd.,ThomsonOne, CapIQ
Valuations
International investments carry higher geopolitical risk than Canadian and US
petroleum assets. The key lies in understanding and managing the risks.
Calculating exploration value is also critical in defining risk/reward.
Geological risking can be more of an art than science.
Near Term Frothiness
We are very bullish, in the longer term, on oil as a commodity, and oil & gas
companies as an equity investment. We do, however, believe that fundamental
supply and demand equations only partially account for the recent highs and
volatility in commodity pricing.
Long Term Value will be Recognized
Majors, and even nations, increasingly struggling to replenish reserves
through the drill bit, are increasingly doing so via acquisition. We expect, for
the rest of this decade, that any potential capital markets valuation gaps on oil
& gas equity will be seized upon by majors, as well as economically growing
countries looking to replace production and reserves. With this view, we are
initiating on the following international oil & gas companies:

Addax Petroleum (AXC‐TSX, OUTPERFORM), Bankers Petroleum (BNK‐TSX,
STRONG BUY), Gran Tierra Energy (GTE‐TSX/GTE‐AMEX, MARKET
PERFORM), Pacific Rubiales Energy (PEG‐TSX, STRONG BUY), Solana
Resources (SOR‐TSXV, OUTPERFORM), WesternZagros (WZR‐TSXV,
OUTPERFORM).
Published by Raymond James Ltd., a Canadian investment dealer.
Please see end of INsight for important disclosures. www.raymondjames.ca
RJ Equity Research │ Page 2 of 23
Table of Contents
International Oil & Gas
Why Invest in International Oil & Gas? ......................................................................... 8

The Canadian Advantage ..........................................................................................10
Mature Basin Experience ...........................................................................................10
Valuing the Assets .....................................................................................................12
Net Asset Valuations .................................................................................................15
Geopolitical Risks ......................................................................................................16
Bullish Long Term Oil View Further Supports Sector Activity ......................................19
Initiating Research Coverage .....................................................................................22
Risks .........................................................................................................................23
Addax Petroleum Corp. (AXC-TSX; OUTPERFORM)
Investment Highlights ......................................................................................... AXC-4

Stock Valuation and Recommendation ............................................................... AXC-5
Reserves Growth................................................................................................ AXC-8
Production Growth ........................................................................................... AXC-10
Company Profile............................................................................................... AXC-11
Operations ....................................................................................................... AXC-14
Cameroon ........................................................................................................ AXC-26
Kurdistan Region of Iraq ................................................................................... AXC-27
Appendix.......................................................................................................... AXC-32
Risks ................................................................................................................ AXC-38
Bankers Petroleum Ltd. (BNK-TSX; STRONG BUY)
Investment Highlights ......................................................................................... BNK-4

Stock Valuation and Recommendation ............................................................... BNK-6
Reserves Growth................................................................................................ BNK-8
Production Growth ........................................................................................... BNK-10
Company Profile............................................................................................... BNK-11
Operations ....................................................................................................... BNK-13
Risks ................................................................................................................ BNK-19
Gran Tierra Energy Inc. (GTE-TSX | GTE-AMEX; MARKET PERFORM)
Investment Highlights ......................................................................................... GTE-4

Stock Valuation and Recommendation ............................................................... GTE-5
Reserves Growth................................................................................................ GTE-7
Production Growth ............................................................................................. GTE-8
Company Profile................................................................................................. GTE-9
Operations ....................................................................................................... GTE-12
Colombia.......................................................................................................... GTE-13
Argentina.......................................................................................................... GTE-22
Peru ................................................................................................................. GTE-24
Appendix.......................................................................................................... GTE-29
Fiscal Regimes ................................................................................................. GTE-31
Risks ................................................................................................................ GTE-32
Pacific Rubiales Energy Corp. (PEG-TSX; STRONG BUY)
Investment Highlights ......................................................................................... PEG-4

Stock Valuation and Recommendation ............................................................... PEG-5
Reserves Growth................................................................................................ PEG-8
Production Growth ............................................................................................. PEG-9
Company Profile............................................................................................... PEG-10
Operations ....................................................................................................... PEG-13
Colombia.......................................................................................................... PEG-13
Peru ................................................................................................................. PEG-30
Appendix.......................................................................................................... PEG-33
Fiscal Regimes ................................................................................................. PEG-35
Risks ................................................................................................................ PEG-36
Solana Resources Ltd. SOR-TSXV; OUTPERFORM)
Investment Highlights ......................................................................................... SOR-4

Stock Valuation and Recommendation ............................................................... SOR-5
Reserves Growth................................................................................................ SOR-7
Production Growth ............................................................................................. SOR-8
Company Profile................................................................................................. SOR-9
Operations ....................................................................................................... SOR-11
Colombia.......................................................................................................... SOR-11
Appendix.......................................................................................................... SOR-21
Fiscal Regimes ................................................................................................. SOR-23
Risks ................................................................................................................ SOR-24
WesternZagros Resources Ltd. (WZR-TSXV; OUTPERFORM)
Investment Highlights .........................................................................................WZR-4

Stock Valuation and Recommendation ...............................................................WZR-5
Company Profile.................................................................................................WZR-8
Operations .......................................................................................................WZR-10
Kurdistan Region of Iraq ...................................................................................WZR-11
Appendix..........................................................................................................WZR-18
Fiscal Regimes .................................................................................................WZR-20
Risks ................................................................................................................WZR-22
Note: Cover photos courtesy of Addax Petroleum

Exhibit 1: Comparative Table
Rafi Khouri, B.Sc., MBA (403)‐509‐0560
Braden Purkis (403)‐509‐0534 (Associate)
2P
Price (C$) 52 wk 52 wk AT Netback ($/boe) Net Asset Value Production (boe/d) Reserves RJ 1‐Yr Total
Company Ticker 9 Jun 08 High Low 2008E 2009E RJ NAV P/NAV 2008E 2009E (MM BOE) Rating Target Return
Addax AXC.T $52.45 $55.21 $29.22 35.88 27.95 $68.55 77% 144,500 164,890 447 OP‐2 $69.00 32%
Bankers BNK.T $2.12 $2.24 $0.35 35.74 48.79 $3.57 59% 6,850 12,670 156 SB‐1 $3.50 65%
Gran Tierra GTE.T $6.62 $6.85 $3.15 69.02 92.31 $6.96 95% 4,015 6,234 15 MP‐3 $7.00 6%
Pacific Rubiales PEG.T $10.71 $12.51 $5.40 54.32 74.25 $17.00 63% 28,567 38,181 208 SB‐1 $17.00 59%
Solana SOR.V $4.42 $4.60 $1.07 70.90 71.29 $5.48 81% 3,182 5,773 14 OP‐2 $5.50 24%
WesternZagros* WZR.V $3.05 $4.25 $1.90 nm nm $4.56 67% nm nm nm OP‐2 $4.50 48%
Average 53.17 62.92 74% 39%

O/S Mkt Ent. EV
Shares Cap Value CFPS (basic) EPS (basic) EV / Prod* Reserves P/CF 08 Net Debt/(Cash)
Company Ticker ($Mln) ($Mln) ($Mln) 2008E 2009E 2008E 2009E ($/boe/d) ($/boe) 2008E 2009E Debt $MM D/CF
Addax AXC.T 155.6 8,163.4 9,282 $13.97 $16.46 $7.99 $9.04 $64,238 $20.78 3.8x 3.2x $734.0 0.3x
Bankers BNK.T 519.3 1,100.9 1,072 $0.18 $0.45 $0.11 $0.36 $156,542 $6.87 12.0x 4.7x ($49.9) (0.5x)
Gran Tierra GTE.T 100.0 661.9 637 $0.80 $1.76 $0.50 $1.35 $158,623 $42.58 8.3x 3.8x ($54.3) (0.7x)
Pacific Rubiales PEG.T 201.3 2,156.4 2,034 $1.73 $3.53 $0.22 $1.83 $71,214 $9.77 6.2x 3.0x ($154.2) (0.4x)
Solana SOR.V 123.2 544.4 472 $0.72 $1.52 $0.39 $0.89 $148,376 $33.16 6.2x 2.9x ($84.6) (1.0x)
WesternZagros WZR.V 207.5 632.8 494 nm nm nm nm nm nm nm nm ($63.1) nm
Average $119,799 $22.63 7.3x 3.5x

Commodity Price Assumptions 2007A 2008E 2009E Long‐Term Notes: Ratings:
WTI Crude Oil (US$/bbl) $72 $113 $130 $130 SB-1: Strong Buy
Dated Brent Differential (US$/bbl) ‐$0.29 $0.00 $0.00 $0.00 OP-2: Outperform
MP-3: Market Perform
Dated Brent (US$/bbl) $72.66 $112.84 $130.00 $130.00
UP-4: Underperform.
Foreign Exchange Rate (US$/C$) $0.94 $1.00 $1.00 $1.00

*EMV is used in lieu of NAV

Source: Raymond James Ltd., Capital IQ, Company reports

With continued strong hydrocarbon pricing driving interest in oil & gas assets
both in and outside of North America, we believe the coming years will
provide investors with a growing number of opportunities in the international
oil & gas arena. With this report, we aim to provide investors with our
thoughts and analysis on the sector, while also offering a road map aimed at
identifying value creating opportunities.

It is our view that a good international oil & gas investment is mainly offered
by companies built around current or near term producing assets, a technically
sound management team that understands regional geopolitics, and solid long
term reserves and production growth potential. We also believe that certain
well managed, engineered and executed exploration stories should be
included as part of an international oil & gas portfolio.

Our view, however, is a fundamental valuation driven, long term focus one.
For the shorter term investor, while our targets are all for a 6‐12 month period,
we suspect that current oil commodity frothiness could create some near term
opportunistic investing windows within our coverage universe. Borrowing
from Mr. Andrew Bradford et al (Raymond James Oilfield Services Report
dated January 23, 2008), “being fundamentally right is cold comfort when the
market is driven to push stocks to either extreme.”

Given this schism between longer term fundamentals and short term
commodity runs, as well as the rapid recent share price appreciation on all our
coverage universe, try as we might, we struggle with using the ʺtop picksʺ
phraseology in describing the companies listed below. Having made this
point, we highlight the companies below as the “preferred ones”, given our six
to twelve month time horizon, in our current coverage universe.

Addax Petroleum Corp. (AXC‐TSX, OUTPERFORM). From a
mathematical standpoint, the potential 32% return to our target price
clearly places this African and Middle Eastern company in this
category. A second, and more subjective reason, is that we view
Addax as a cornerstone holding in any international oil & gas
portfolio. We remain unaware, after extensive investigation, of any
other, similar sized, international oil & gas companies offering
investors the same compelling risk/reward strategy. Mainly, a reserve
base capable of sustaining production rates of 140,000 to 150,000
barrels of oil per day over the next four to five years; a geopolitically
savvy and technically proven management team; exploration
exposure to a potential 2,200 million barrels of oil; and over 2.4 trillion
cubic feet of contingent gas present on the company’s Nigerian blocks.
Given that valuations might pull back on commodity weakening, we
believe that “timing the market” on an Addax investment might yield
the “lucky” a couple additional percentage return points. Then again,
a couple of percentage points, in our view, are paled by the potential
return to our target price, as well as the potential fivefold return based
on our unrisked NAV of over C$300 per share on the company.

Bankers Petroleum Ltd. (BNK‐TSX, STRONG BUY). Borrowing
phraseology from Mr. Dennis Gartman, we consider the ideal
investment as one with valuations growing “from the bottom left to
the top right.” Having adhered to this rule since late 2007, we strongly
believe Bankers will continue to be such an investment. Bankers is
currently focused on monetizing the two billion barrels of Original Oil
In Place (OOIP) estimated to be contained in Albania’s Patos Marinza
heavy oil field. Operationally Bankers is guiding towards Albanian
production of 20,000 bopd by 2010. While at first glance this fourfold
production increase from current levels might be considered

aggressive, Mr. Badwi and his team have an established track record
of under promising and over delivering. We would not be surprised
were the company to exceed this production target by the end of 2010.
Furthermore, it is our view that a doubling, or even tripling, of the
current 147 million barrels of booked oil reserves in Albania could be
achieved over the next 36 months. Having identified several visible,
potentially value adding, catalysts over the next six months, we rate
Bankers as a STRONG BUY.

Pacific Rubiales Energy Corp. (PEG‐TSX, STRONG BUY). We are
recommending Pacific Rubiales as an investment in an extremely well
managed, and connected, growth oriented South American
independent E&P Company. On the heels of its recent merger with
Pacific Stratus, the company has transformed into Colombia’s largest
independent oil & gas company. Going forward, we expect Pacific
Rubiales to continue on this growth path, potentially becoming one of
South America’s largest independent oil & gas companies. In addition
to current market valuations reflecting the C$10.65 per share (fd) in
reserve backed NAV, Pacific Rubiales offers investors exposure to
over C$107 per share (fd) in potential upside. The reserve base NAV is
underpinned by 208 million barrels of oil equivalent (working interest)
Colombian reserves, and backed by a ‘proven’ management team,
with a depth of regional technical and geopolitical experience. While
the bulk of the potential upside is based on the company’s vast
exploration potential in Peru, C$7 per share (Rubiales and La
Creciente pipelines and extensions) only require management to
deliver on project execution, and contract ‘negotiations’. Having
identified several visible, potentially value adding, catalysts over the
next six months, we rate Pacific Rubiales as a STRONG BUY.

We also like the following names as well, though there are mitigating factors
keeping them off our top‐pick list:

Gran Tierra Energy Inc. (GTE‐TSX/GTE‐AMEX, MARKET
PERFORM). While current valuations reflect a discount to our
calculated risked NAV on Gran Tierra, market is offering close to a
60% premium to the company’s reserve backed core NAV (under our
commodity assumptions). Our concern is that markets could adjust to
a potential short term commodity pullback by re‐pricing Gran Tierra
closer to reserve NAV. We are, however, recommending that longer
term investors seeking a growth oriented, well managed, South
American focused international oil & gas junior keep Gran Tierra on
their radar screens. With an asset base in Colombia, Peru, and
Argentina, a ‘blue chip style’ management team, growing production,
and extensive exploration acreage, we believe Gran Tierra offers long
term upside associated with investing in international oil & gas, with
potentially lower risk than some of its peers. Growing cash flow from
Gran Tierra’s production combined with medium to low risk
exploration potential offers the platform for building a substantial oil
& gas company. Gran Tierra’s high impact exploration lands have the
potential to transform the company, with the associated returns for
current shareholders.

Solana Resources Inc. (SOR‐TSXV, OUTPERFORM). Having
established an impressive Colombian land position, Solana’s board, in
October 2006, engaged a new management team to focus on reserves,
and production growth. By focusing on transforming land into
reserves, and reserves into production, this team has been able to
deliver tangible value add in under 18 months. Specifically, for 2007,
year‐over‐year production grew by 40%, while year‐over‐year reserves
increased threefold. In the longer term, we believe Solana’s three
pronged strategy will yield continued shareholder value growth.
While markets are valuing Solana on the basis of its core reserve
backed NAV, the company’s non‐operatorship of its core areas
prevents us from including it in our preferred list. We are
recommending the company to investors who want exposure to the
growth oriented Costayaco field in Colombia, without owning the
Argentinean and Peruvian assets of the field’s operator, mainly Gran
Tierra (GTE‐TSX/GTE‐AMEX, MARKET PERFORM). We also view
Solana as a potential M&A candidate in the longer term.

WesternZagros Resources Ltd. (WZR‐TSXV, OUTPERFORM). We are
recommending WesternZagros to investors looking for exposure to a
pure play; high‐impact; exploration portfolio in one of the world’s
most prolific hydrocarbon basins. It is only the company’s pure
exploration stage, and thus higher inherent risk, that prevents us from
including it in our top picks. WesternZagros’ is a junior international
oil & gas company, currently focused on exploration in the Kurdistan
region of Northern Iraq. The company has a 40% interest in a 2,120
km2 production sharing contract (PSC) in the Kalar‐Bawanoor area of
Kurdistan. WesternZagros has currently identified eight prospects and
leads on the block, as well as three conceptual stratigraphic plays. We
believe current market valuations offer investors a very attractive
risk/reward proposition. Specifically, markets appear to be valuing
WesternZagros on the basis of a 300‐350 million barrels of recoverable
oil discovery, less than 3% of the 12 billion barrels of potential OOIP
on the block.
Why Invest in International Oil & Gas?

While, given the advances in Liquefied Natural Gas (LNG) and other similar
technologies, gas is moving towards becoming a truly global commodity; it
remains priced as a local commodity. Oil on the other hand, is global
commodity in every sense of the word. This in turn, in our view, leads most
international petroleum companies to focus the bulk of their efforts on oil
exploration and production. We have therefore opted to focus our attention,
both in our investment guide, as well as our company selections, on oil
weighted activities.
Trillion barrels and counting
First, and foremost, oil is mainly found outside of North America. With close
to 95% of the 1.2 trillion barrels of global proved oil reserves1, and over 80% of
current global2 production, we believe the International Oil & Gas sector will
continue to offer investors a very attractive risk/reward proposition well into
the next decade.

Exhibit 2: Global Oil Reserves

800
700
600

ʹ000 Mmbbls
500

400

300

200
100
0
Middle Europe Africa Latin North Far East
East America America

Source: BP, Raymond James Ltd.

Note that over 70% of the Middle East reserves are currently ‘owned’ by the
various states in the region, via their National Oil Companies, and thus not
open to investment via publicly traded E&P companies. This still leaves close
to 500 billion barrels of international oil reserves open to investment that we
have broken down into three play types.

1
BP Statistical Review of World Energy 2007
2
Oil & Gas Journal
Frontier Basins, such as the deep offshore waters of Brazil, Western and
Eastern Africa.

Mature Basins, such as parts of Colombia, West Africa, and Europe.

Under explored/under developed basins, such as the Maranon Basin in Peru,
the Kurdistan region of Iraq, and large fields in Iraq/Iran.

We view the frontier basin as the playground of the “majors”, or intermediate
to large oil companies, as exploration and development activities tend to
require extensive technical expertise, and are very capital; human and
financial; intense. As an example, a ‘typical’ deep water exploration well could
cost in excess of US$100 million. Addax (AXC‐TSX, OUTPERFORM), at over
C$9 billion in Enterprise Value, would be one of the smaller players in these
basins. Note, however, that small cap public companies have been able to
obtain minority interest positions in some very prospective African deep water
acreage. While this is one way to invest in this play type, we prefer equity
positions in companies with a larger interest, and ideally operatorship, of
these blocks.

Mature and under explored/under developed basins are, in our view, where
the junior to intermediate Canadian international oil & gas companies can
generate the best risk/return values. Mature basins are characterized by
“smaller” fields, typically ranging from a few million barrels to tens of
millions barrels. In addition to exploration value creation, these basins present
shareholder return opportunities via production improvements, such as
workovers, directional drilling field development, and other enhance oil
recovery methods.

Under explored/under developed basins are ones we define as having had
limited historical activity due to political and/or security issues, or due to their
remoteness and limited infrastructure presence.
The Canadian Advantage

We view management as a critical component, if not the most important, in
determining the success of an international oil & gas company. In addition to
depth in technical expertise and experience, we also look for management
teams able to manage geopolitical risks inherent in international operations.
Some of the advantages we believe Canadian management teams, or
international teams with a Canadian flavour, offer are:

Extensive experience in exploring, developing, and producing oil from
mature basins gained by working in Canada’s mature basins.

The ability to tap into a wide pool of technically experienced, outside
the box thinking, oilfield service companies based in Canada.

A “spirit of adventure” and acquired tolerance for hardship working
conditions, forged by working in remote North American oil & gas
provinces for over 100 years.

The political advantage of flying the Canadian flag.
Mature Basin Experience

“Necessity is the mother of ʺtaking chances” – Mark Twain

The majority of North American basins, including the Western Canadian
Sedimentary Basin (WCSB), by most metrics, have been mature basins for
anywhere from 5 to 15 years. Adapting to this, Canadian oil & gas teams, be it
E&P companies or oilfield service providers, have developed new or
improved on existing, technologies to maximize production from existing
fields, or commercially discover new ones. A typical example of this is the
growth of directional drilling in North American basins to improve drainage
from ‘smaller’ and ‘harder to produce’ fields.
Exhibit 3: Directional Drilling

0.6

0.5

0.4

% total drilling

0.3

0.2

0.1

0

04
04
05
06
06
07
07
99
99
00
01
01
02
02
03
08
03
98
98
93
93
94
94
95
96
96
97
97
91
91
92
92
20
20
20
20
19
20
20
20
20
20
20
20
20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19

Directional/Horizontal

Source: Baker Hughes, Raymond James Ltd.

The next logical step was to apply this ‘home grown’ technology in other
global mature basins. Bankers Petroleum (BNK‐TSX, STRONG BUY), by
working on deploying horizontal, as well as vertical, infill drilling to increase
recovery and production from a ‘mature field’ is just one example of many.
Pacific Rubiales (PEG‐TSX, STRONG BUY) is another.
The spirit of adventure
“Adventures are to the adventurous” – Benjamin Disraeli

A side effect of the maturing of most North American basins, especially in
Canada, has been to drive Canadian oil & gas exploration and production
further north. Having worked for close to five years in Alberta’s Oil Sands, we
are able to convey first hand information on the acquired tolerance, and even
‘love’ for adventurous working conditions. While the extreme cold of
Northern Alberta is the antipode of North African heat waves, operational
skills and required adaptations for either extreme tend to be similar.
Infrastructure, or rather lack of, and associated challenges in Canada’s north
are very similar to some of the under explored/under developed basins
Canadian international oil companies are successfully tackling. Peru’s remote
Marañon Basin is a typical example of where companies such as Gran Tierra
(GTE‐TSX/GTE‐AMEX, MARKET PERFORM) and Pacific Rubiales (PEG‐TSX,
STRONG BUY) are faced with the same infrastructure and access constraints
as those in Northern Alberta.
The Maple Leaf
“A good head and a good heart are always a formidable combination” –
Nelson Mandela

Based on the latest Washington‐based Program for International Policy
Attitudes (PIPA), BBC World and Globescan data, Canada, along with Japan,
tops the list of countries ‘viewed positively’ by the rest of the world. This, in
our view, gives oil & gas companies flying the maple leaf a tangible advantage
in operating internationally. While not easily quantifiable in an excel
spreadsheet, the ability to fly the maple leaf above an oil & gas lease appears
to help operations, and oil, flow better. We draw on personal experience to
‘make our point’: a Canadian passport continues to draw warm welcomes in
various global oil & gas airports, ports, and other entry points.
Valuing the Assets

We believe the core value of international petroleum companies is defined by
their assets.
A guide to fiscal terms
Royalty/tax regimes are relatively straightforward. A contractually agreed
percentage of total production is typically paid to the host government as
royalties. In addition, the corporation’s income, normally net of costs, is then
taxed at a pre‐set corporation tax rate. Note that royalty/tax regimes can also
include a nominal ‘rental’ fee, or block license cost. The balance of the oil
‘belongs’ to the oil company, and can be booked as reserves. In addition to
North America, South America and Europe are mainly royalty/tax based
jurisdictions.

Production sharing contracts (PSC), in addition to the above royalties, taxes,
and rent, allocate a portion of production revenues to the host government;
adding a layer of complexity in comparing assets, or companies, to each other.
The balance of the oil ‘belongs’ to the oil company, and can be booked as
reserves. Most of Africa, parts of the Middle East, and parts of the Far East
tend to operate in PSC mode. Note that PSC terms can also include post
discovery back‐in rights for the host government.

Exhibit 4: PSC Example

Total Oil Produced

Royalty Oil
Host Government

Net Available Oil

Cost Recovery Oil Profit Oil
Oil Company (varying %) remaining net available oil
sharing based on varying
fac tors

Operating Costs

Exploration Costs

Development Costs Oil Company Host Government

Source: Raymond James Ltd.

Technical services contracts (TSC), as the name implies, tend to be a ‘pay for
service’ type agreement, where the oil company is paid a ‘pre‐agreed’
production fee. Under these contracts, all of the oil typically remains the
property of the host nation, preventing oil companies from booking any of it
as reserves. Parts of the Middle East tend to operate under TSC models.

In addition to the above contract, various international jurisdictions have
introduced ‘withholding taxes’, aimed at capping the realized price oil & gas
companies can sell their production at, further muddying the valuation
waters. The net result of all these fiscal terms is that international oil & gas
companies ‘collect’, at best, 55% of the total hydrocarbon resource on their
blocks.

Exhibit 5: Oil & Gas Company Percentage Take

60
50
Oil Company Take (%) c
40
30
20
10
0
Venezuela
Indonesia
Ecuador*
Argentina*
Trinidad & Tobago
Russia
Angola
Nigeria
Kurdistan
Malaysia
India
Colombia
Peru
Kazakhstan
Brazil
UK
Thailand
Libya
China
Albania
Gabon

*excluding recent withholding taxes

Source: BP, Wood Mackenzie, Daniel Johnston, Raymond James Ltd.

If host governments believe they are not getting their fair share of the resource,
there is a higher risk of their revising contracts, such as Nigeria’s recent ‘change’
to its older PSCs. Similarly, if oil companies believe they are not achieving ‘fair’
rewards for the undertaken risks, they might opt to invest their capital in other
locals. Ecuador and Venezuela come to mind as examples of this. Colombia, on
the other hand, has shown that changing fiscal regimes to better contractor
terms is a good tool in increasing oil production and reserves. While it is not our
place to argue what is a ‘fair share’, there seems to be a mutually acceptable
balance around 30% to 40% of the resource allocated to the oil company. We also
note that increasing the oil company’s share, such as with Colombia’s
introduction of the ANH contracts in 2003, shows direct correlation to
production growth. Specifically, Colombia’s production changed from a drastic
decline on a yoy pre‐ANH to a plateau, and slight increase post‐ANH.
Net Asset Valuations

We believe that NAV calculations are a more representative valuation metric
for international oil & gas companies than cash flow multiples. One reason is
that PSC artificially inflate cash flows during the cost recovery years (front
end) of a project. In addition, by valuing the actual resource base, NAV
calculations allow for an easier comparison of the core values for companies
under various fiscal regimes. As Canadian listed public companies are
required to book their reserves under NI‐51‐101 criterion; which we consider
as one of the more stringent methodologies used globally; we attribute full
value for booked reserves (proven and probable) in our NAVs. In certain
instances, where we believe that this is justified, we might also allocate partial
value to possible reserves. Note that under NI‐51‐101, each reserve P (proven,
probable and possible) reflects a statistical chance of recovering, at minimum,
a set number of barrels.

Calculating exploration value is also critical in defining risk/reward. We also
include a geologically risked net present value (NPV) for seismically identified
prospective resources to our risked sum‐of‐the‐parts NAVs. While actual
geological, or exploration, chance of success (COS) is always prospect and lead
dependent, we use Otis and Schneidermann’s work as a rough guide in
assigning our COS estimates.

Exhibit 6: Geological Risk Classification

75% COS 37.5% COS 18.3% COS 9.2% COS 5% COS
Same Play Same Play New Play, Same Trend New Play, New Basin

Adjacent Structure Nearby Structure Old Play, New Trend Play with Negative Data
Very Low Risk Low Risk Moderate Risk High Risk Very High Risk

Source: Otis and Schneidermann, Raymond James Ltd.

COS captures the risk in having, or not, the typical elements required to find
hydrocarbons in any sedimentary system. Mainly, the chance of having an oil
charge (source and migration path for the oil), the odds of having reservoir
rocks present, and the probability that oil was actually trapped in these rocks.
As each of these factors is independent of the others, total COS is the product
of each individual one.

COS = Chance of charge x chance of trap x chance of reservoir

As an added layer of conservatism, we tend to move one COS down (to right
of scale) in our evaluations. Given the very subjective nature of chances of
success (COS) estimates for a same play, we believe this extra step is justified
in our valuations.

For pure exploration stage companies, such as WesternZagros (WZR‐TSXV,
OUTPERFORM) we believe Expected Monetary Valuations (EMV) to be a
better value gauge than NAV calculations. An EMV reflects the exploration
geological risk (chance of success (COS)), the value of exploration success
(NPV), as well as the cost of failure (COF). Specifically, we calculate our EMV
as follows:

EMV = (NPV x COS) – (COF x {1‐COS})

Geopolitical Risks
While calculating asset values is a fairly straightforward exercise, determining
the intrinsic value of the oil & gas company is more challenging. Specifically,
as international investments are perceived as carrying higher geopolitical risks
than Canadian and US petroleum assets, the key lies in understanding and
managing the risks.

The first, and in our view, most critical aspect of risk management is people.
We search for management teams that understand regional geopolitics, and
who can manage risk rather than merely avoid it. In addition, specific regions
within a given country can carry higher, or lower, risks than the national
average. We point to Addax (AXC‐TSX, OUTPERFORM) as an example in
point. While Nigeria is regularly making headlines due to militant activities in
the Niger Delta, none of the company’s assets have had any material militant
related production disruption since the company entered the country.
Similarly for Colombia, while parts of the country, such as the borders with
Ecuador and Venezuela, witness regular guerrilla activities, other areas tend to
be much safer. In analyzing our companies’ operations and management
teams, we have opted not to ascribe any political risking to our valuations, as
we are confident that each one of them is well equipped to manage and
mitigate specific risks in its areas of operations. We do, however, address any
regional higher risk areas by adjusting our long term production forecast to
reflect potential disruptions.

We are, in addition, for investors wishing to assign an additional political risk
factor to valuations, providing geopolitical risking information for the
countries in which our coverage universe companies currently operate.
The RJ oil risking factor is on a scale of 0 to 100%, with 100% being no risk, in
our view, to oil & gas operations. For reference, we would list Canada at 90%,
as the government has shown, on two recent occasions, that it is willing to
change oil & gas fiscal regimes to the detriment of oil companies.

Exhibit 7: Global Political Risk
Country S&P Moodyʹs Fitch RJ Oil

Risking
Albania NR Ba1 NR 85%
Argentina B+ B3 B 65%
Cameroon B+ NR B 80%
Colombia BBB‐ Ba2 BB+ 80%
Gabon NR BB‐ BB‐ 80%
Kurdistan NR NR NR 75%
Nigeria BB‐ NR BB‐ 75%
Peru BB+ Ba2 BBB‐ 80%

Source: Bloomberg, Raymond James Ltd.

The second aspect to risk management is that rewards have to outclass risks.
With the international oil & gas companies in our coverage universe offering
blue sky returns ranging from 150% to 500%, we believe that potential rewards
do outclass any geopolitical risks.
Value will be recognized
While we accept that capital markets will tend to attribute a higher ‘risk’
premium to the more volatile regions of the world, it is our view that as oil
resources continue to get scarce, core values will be recognized; if not by
capital markets, then by major oil companies looking to replace reserves and
production, or by sovereign nations looking for energy supply security.

Specifically, since 2005, corporate oil & gas acquisitions have been done at an
average 35% premium to capital market valuations, with some transactions
ranging as high as a 67% premium (Tullow Oil’s 2006 acquisition of Hardman
Resources). The lowest reported transaction premium was also in 2006, mainly
Lundin Petroleum’s acquisition of Valkyries Petroleum at an 8% premium to
market.

Exhibit 8: M&A Premium to Market Range
80%
M&A transaction premium to market
70%
60%
50%
40%
30%
20%
10%
0%
2005
2006
2007
2008

Source: Capital IQ, Raymond James Ltd., Company reports

As an aside, we note that the top four oil & gas majors – ExxonMobil (XOM‐
NYSE), BP (BP‐NYSE), Shell (RDSA‐LSE) and Total (TOT‐NYSE) – reported
combined cash holdings in excess of US$70 billion at the end of 1Q08, more
than enough to acquire, five times over, all the international oil & gas
companies in our coverage universe.
Bullish Long Term Oil View Further Supports Sector

Activity
Crude oil remains one of the primary global sources of energy, and we believe
will likely remain the primary energy source for years to come. We also,
however, believe that fundamental supply and demand equations only
partially account for current commodity pricing, and volatility in commodity
pricing. While we should pay heed to Mr. Voltaire telling us: “Once the people
begin to reason, all is lost”, our analysis indicates that we could expect
commodity prices to pull back from recent highs, during or even after
summer; before continuing to rise in the longer term. This could partially
impact equity pricing in the short term, creating opportunistic investing
windows.

Exhibit 9: WTI Oil Price

140 140

120 120

100 100

EURO per Barrel
US$ per Barrel

80 80

60 60

40 40

20 20

0 0

Jan‐99 Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08

US$ EURO


We currently calculate US$70 per WTI barrel as the cost, after tax, to produce a
significant marginal barrel, such as Alberta’s oil sands or West Africa’s deep
water oil, with a 15% to 20% IRR. This still leaves, compared to current spot
pricing, close to US$70 per WTI barrel in “premiums”, including changes in
weather forecasts, issues in the Middle East and Nigeria, political instability in
parts of the Former Soviet Union, the use of oil as a financial instrument, and
so forth. A 5% daily change in crude oil pricing is almost accepted as the norm
in the current environment.
Exhibit 10: Cost to Produce Marginal Barrel of Oil

80

70
60
50

US$
40

30
20
10

0
Global marginal barrel Standalone SAGD
F&D Opex Diluent Discount to WTI Tax/Royalties Net Income

Source: Raymond James Ltd., Herold, Oil & Gas Journal

As such, predicting the short term price of crude oil has become more of a
guessing game than actual economics, and we do not claim an ability to
predict day to day crude oil pricing. We do, however, note that falling OECD
oil demand could drive, in our view, a short term pullback in oil prices.
Longer term, we still believe that price trends remain driven by the supply and
demand equation.

Exhibit 11: Commodity Forecasts
RJ Crude Oil Price Estimates
Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $97.86 $117.68 $126.21 $126.45 $117.05
RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88
Q1 09E Q2 09E Q3 09E Q4 09E 2009E

Current Strip $126.81 $126.47 $126.33 $125.60 $126.30

RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00

RJ Natural Gas Price Estimates

Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $8.64 $10.92 $12.34 $12.70 $11.15
RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $13.08 $10.75 $10.81 $11.22 $11.46
RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50
* Current Strip Prices are as of May 16, 2008
** Actual Strip is the average of futures prices on the expiration days
*** Actual RJ is our estimate of average spot prices

Source: Raymond James Ltd., Bloomberg
Please refer to the Raymond James Energy Stat of the Week dated June 2, 2008
for additional details on our current commodity pricing assumptions.

Long term demand growth

We expect global energy demand to continue to rise over the next decade. We
also view oil as being the most polyvalent source of energy available. In its
latest ‘World Energy and Economic Outlook’, the U.S. Energy Information
Administration (EIA) estimates that global liquid energy consumption is
expected to increase to 118 million barrels per day in 2030, with most of the
growth coming from the non‐OECD region. Non‐OECD oil consumption,
reflected by China and India as proxies, is five to ten times lower, per capita,
than OECD countries such as the USA, the UK and Japan. Assuming
continued economic development by these nations, it is easy to foresee a
situation where the per capita oil demand could double, or even triple from
current levels, as was demonstrated by South Korea as it underwent economic
growth. Two and a half billion people (India and China alone) doubling their
oil annual oil consumption, would, in our view, more than account for a
potential reduction by the OECD nations.

Exhibit 12: Oil Consumption Per Capita

30

25

20

Bbls/y per capita

15

10

5

0

80
82
84
86
88
90
92
94
96
98
00
02
04
06

19
19
19
19
19
19
19
19
19
19
20
20
20
20

China India Japan South Korea UK US

Source: BP, United Nations, Raymond James Ltd.
Oil is getting harder to find
In addition to growth in demand, oil, on the supply side, is getting harder to
find and harder to produce. From the early 1990s to early 2000, approximately
2,000 to 2,200 active rigs, on an annual basis, were able to grow global reserves
by an average 1.2% per year, and production by approximately 2.5% per
annum. Since 2003, the average annual global reserve and production growth
have dropped to 0.5%, although rig count during that same period has
increased by over 50%.

Exhibit 13: Reserve Additions

16% 3500

14% 3000

12%
2500

Number of Rigs
% YOY Change
10%
2000
8%
1500
6%

1000
4%
500
2%

0% 0

02
04
90
92
96
94
98
00
06
20
19
19
19
19
19
20
20
20

Reserves Production Rig Count

Source: Baker Hughes, BP, Raymond James Ltd.

So in summary, while we are using significantly more drilling days (a 50%
increase in active rig over four years), yoy reserve growth is a third of what it
was in 2003, while production increases per rig are also lower.

Initiating Research Coverage

We are initiating on the following international oil & gas companies:

Addax Petroleum (AXC‐TSX, OUTPERFORM), Bankers Petroleum (BNK‐TSX,
STRONG BUY), Gran Tierra Energy (GTE‐TSX/GTE/AMEX, MARKET
PERFORM), Pacific Rubiales Energy (PEG‐TSX, STRONG BUY), Solana
Resources (SOR‐TSXV, OUTPERFORM), WesternZagros (WZR‐TSXV,
OUTPERFORM).
Risks
International oil & gas companies within our research universe are subject to a
range of risks, including, but not limited to: environmental risk, political risk,
operational risk, financial risk, hedging risk, commodity price fluctuation risk,
and currency risk. Any difference between our oil & gas price forecasts and
realized commodity prices will likely have an impact on our earnings and
valuation estimates for the international oil & gas companies in our research
coverage universe. Oil & Gas operations are inherently complex and exposed
to a number of risks, most of which are beyond the company’s control. These
include: environmental compliance issues; personal accidents; production
problems; availability of labour and equipment, and interruption due to
inclement weather conditions, road closures, and/or local protests. Other risks
include, but are not limited to: uncertainties surrounding capital and operating
costs; aging equipment and facilities which could lead to increased costs;
actions taken by host governments; and changes in fiscal regimes.

JUNE 16, 2008
403.509.0560
Addax Petroleum Corp.

braden.purkis@raymondjames.ca
403.509.0534
RATING & TARGET

AXC-TSX
RATING OUTPERFORM 2
Target Price (6-12 mths) 69.00
Initiating Coverage: Perfection Achieved: Striving for Closing Price 52.45
Excellence Total Return to Target 32%
MARKET DATA
Market Capitalization ($mln) 8163
Current Net Debt ($mln) 1119
Event Enterprise Value ($mln) 9282
Shares Outstanding (mln, f.d.) 157
We are initiating research coverage on Addax Petroleum Corp. (Addax) with Avg Daily Dollar Volume (3mo, mln) 0.43
an OUTPERFORM rating and a C$69.00 per share target price. 52 Week Range $55.21 / $29.22
KEY FINANCIAL METRICS

Action FY-Dec 31 2007A 2008E 2009E
CFPS $8.49 $13.97 $16.46
We are recommending Addax as a core holding for international oil & gas P/CFPS 6.2x 3.8x 3.2x
CFPS - 1Q $1.70 $3.01 $4.04
portfolios. CFPS - 2Q $1.85 $3.59 $4.12
CFPS - 3Q $2.15 $3.54 $4.20
Analysis CFPS - 4Q $2.72 $3.82 $4.09
NAVPS $68.55
Addax is a very well established international oil & gas company, currently P/NAV 77%
Revenue ($mln) $3,412 $5,941 $7,810
strategically focused on West Africa, as well as the Middle East. We believe an Yield (%) 1%
OUTPERFORM rating is warranted on Addax for two compelling reasons. Commodity Assumptions
First, from a mathematical standpoint, the potential return to our target price WTI (US$/bbl) $72 $113 $130
HHub (US$/mmbtu) $7.12 $10.00 $7.50
offered by current valuations clearly places the stock in this category. A Exchng Rate (US$/C$) $0.94 $1.00 $1.00
second, and more subjective reason, is that we view Addax as a cornerstone Production
Oil (kbbl/d) 126 145 165
holding in any international oil & gas portfolio. We remain unaware, after Nat. Gas (mmcf/d) 0 0 0
extensive investigation, of any other international oil & gas companies offering Total (boe/d) 126 145 165
investors the same compelling risk/reward strategy. Mainly, a reserve base
EBITDA ($mln) 2,412 4,633 5,708
capable of sustaining production rates of 140,000 to 150,000 barrels of oil per Net Debt/ CF 0.9x 0.3x -0.1x
day over the next four to five years; a geopolitically savvy and technically * All Figures in C$
proven management team; exploration exposure to a potential 2,200 million COMPANY DESCRIPTION
Addax is an international oil & gas company with operations in
barrels of oil; and over 2.4 trillion cubic feet of contingent gas present on the Africa and the Middle East. The company is currently producing
company’s Nigerian blocks. in excess of 140,000 bopd, from 447 million barrels of 2P
reserves. Addax operates the majority of its blocks. In addition,
the company has exposure to 2.2 billion barrels of prospective oil
resources, and 2.4 Tcf of contingent gas
Valuation
We currently value Addax on the basis of a risked sum‐of‐the‐parts NAV,
which includes an NPV (DCF, 10% after tax) of booked reserves, as well as a
geological risk adjusted NPV (DCF, 10% after tax) of the company’s
exploration portfolio. We calculate a risked sum‐of‐the‐parts NAV of C$68.55
per share on Addax. On an un‐risked basis, we currently calculate a NAV in
excess of C$300 per share. In addition, we point out the proverbial maraschino
cherry on the sundae, mainly the 2.4 Tcf of gas on the company’s Nigerian
blocks, not captured in any of our above NAV calculations. Closing prices as of June 9, 2008
Sources: Raymond James Ltd.,ThomsonOne, CapIQ
Table of Contents
Investment Highlights......................................................................................4
Stock Valuation and Recommendation ...........................................................5
Reserves Growth ............................................................................................8
Production Growth........................................................................................10
Company Profile ...........................................................................................11
Operations ....................................................................................................14
Cameroon.....................................................................................................26
Kurdistan Region of Iraq................................................................................27
Appendix ......................................................................................................32
Risks.............................................................................................................38
Exhibit 1: Addax Petroleum Corporate Summary
Addax Petroleum Corporation (AXC‐TSX, L)
Company Summary Shares & Listing Information
Overview: Shares & capitalization:
Company name Addax Petroleum Corporation Shares outstanding ‐ basic (M) 155.6
Ticker AXC Shares outstanding ‐ fully diluted (M) 156.5
Exchange TSX, LSE Market capitalization (C$M) $8,163.4
Rating OUTPERFORM Enterprise value 2007E ($M) $9,282.4
Current share price* C$52.45 Key shareholders*:
12‐month target price C$69.00 AOG Holdings BV 41%
Total projected return (incl. dividends payable) 32% Management & Directors 4.1%
Goodman & Company, Investment Counsel Ltd. 1.1%
* as at Jun 09, 2008 Blackrock Group Limited 1.4%
Properties Resources (Dec 31, 2007) (MM Bbl)
Area Other/Details Reserves (WI) Proved Probable 2P 3P
Nigeria Nigeria 154 109 263 349
OML 123 ‐‐> Current production Gabon 79 30 109 128
OML 126 ‐‐> Current production Kurdistan 0 75 75 103
OML 124 ‐‐> Current production Total 233 213 447 580
Okwok ‐‐> Development play Risked Potential Resources Low Best High
OML 137 & OPL 291 ‐‐> Exploration/Dev plays Nigeria 155 178 202
Gabon Gabon 37 51 68
Panthere NZE ‐‐> Current production Cameroon 28 32 37
Maghena ‐‐> Current production Deep Water 414 476 541
Etame ‐‐> Current production Total 738
Remboue ‐‐> Current production F&D costs ($/boe) $11.29 $8.23
Awoun ‐‐> Development play Recycle ratio 4.8x 6.6x
Epaemeno, Iris & Themis Marin, Ibekelia, Kiarsseny ‐‐> Exploration plays RLI (Yrs) 4.4 4.0 8.5 11.0
Cameroon
Ngosso, Iroko ‐‐> Exploration plays Key Operating and Financial Data
Kurdistan Year end: Dec. 31 2006A 2007A 2008E 2009E
Taq Taq ‐‐> Exploration/Dev plays PRODUCTION:
Valuation Crude oil (kb/d) 90 126 145 165
Year end: Dec. 31 2006A 2007A 2008E 2009E Natural gas (mmcf/d) 0.0 0.0 0.0 0.0
P/CF 9.0x 6.2x 3.8x 3.2x Total prod. (kboe/d) 90 126 145 165
EV/CF 11.2x 7.0x 4.3x 3.6x % Natural gas 0% 0% 0% 0%
P/E 30.8x 16.9x 6.6x 5.8x Y/Y growth per share 4% 39% 15% 14%
Target P/CF 11.9x 8.1x 4.9x 4.2x
Other Parameters FINANCIAL STATEMENTS:
EV/BOED $64,238 Revenues ($mln) $2,029 $3,412 $5,941 $7,810
EV/BOE (2P) $20.78 Royalty ($mln) $389 $586 $934 $1,717
EV/BOE (Reserves + Resources) $7.04 Operating Expenses ($mln) $204 $314 $323 $340
Raymond James NAVPS (C$/Sh) $68.55 Income Tax ($mln) $784 $1,251 $2,799 $3,671
Commodity Price Assumptions 2007 2008E 2009E LT Net Income ($mln) $243 $482 $1,243 $1,407
Brent oil (US$/b) $72.66 $112.84 $130.00 $130.00 Operating Cash Flow ($mln) $829 $1,319 $2,174 $2,562
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50
Operating Net Back estimates CFPS ‐ basic $5.80 $8.49 $13.97 $16.46
2006A 2007A 2008E 2009E CFPS ‐ fd $5.80 $8.46 $13.38 $15.77
Sale price $63.40 $72.94 $113.56 $123.12 EPS ‐basic $1.70 $3.10 $7.99 $9.04
Royalties $11.84 $12.71 $17.89 $28.53 EPS ‐ fd $1.70 $3.09 $7.65 $8.66
Opex $6.20 $6.81 $6.19 $5.64 Capex ($mln) $953 $1,225 $1,615 $1,500
Pre Tax Net Back $45.35 $53.42 $89.47 $88.95 Net Debt (surplus) ($mln) $826 $1,224 $734 ($328)
Net debt/cash flow 1.0x 0.9x 0.3x (0.1x)
Tax $23.85 $27.14 $53.59 $60.99
Post Tax Net Back $21.50 $26.28 $35.88 $27.95
Production profile (WI, Reserve Blowdown) Management & Directors
Name Position
Kurdistan Executive Management
180
Gabon Jean Claude Gandur CEO Ex AOG exec, Philipp, Sigmoil
160 James Pearce COO Ex 30 yrs Chevron
Nigeria
Barrels per day (000s)
140 Michael Ebsary CFO Ex Total, BMO, Scotia

120 Board representatives:
100 Peter Dey Chairman Ex Morgan Stanley
80 Jean Claude Gandur CEO Ex. AOG exec, Philipp, Sigmoil
60 Brian Anderson Non‐exec Ex Shell, Chairman Anderson
40 James Davie Non‐exec Ex RBC
20 Stephen P de Heinrich Non‐exec AOG Exec, ex Samax, Carpathian
0 Gerry Macey Non‐exec Ex EnCana, PanCanadian
Afolabi Oladele Non‐exec Ex NNPC
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
All values are in US$ unless otherwise stated.
Source: Company Reports, Raymond James Ltd., Bloomberg, Capital IQ
Investment Highlights

“Pleasure in the job puts perfection in the work.” – Aristotle

Addax is an established international oil & gas company, currently focused on
West Africa and the Middle East. Consistently delivering impressive yoy
production, reserves and cash flow growth, we view Addax’s management
team as continuing to, very successfully, create value from the company’s
assets.

A decade of 35% annual growth translated into 140,000 bopd production. Annual production growth
Since inception a decade ago, Addax has delivered over 35% in annual of 35% for past decade
leading to 140,000 bopd+
production growth, one of the most impressive, in our view, growth stories of of current production
the Canadian international oil & gas sector. For 2008, we are expecting the
company to produce 145,000 bopd, a 15% increase over last year’s 126,000
bopd. Note that our above estimate does not include potential production
from the Taq Taq field in Kurdistan, which could add another 3,000 bopd to
our annual average forecast.

447 million barrels of oil reserves. Addax’s reserve growth story reads very 447 million barrels of
similar to its production increases. For 2007, the company reported a 26% yoy reserves
organic reserve increase, most of which came via drill bit additions. While we
currently model annual production increases for each of the next five years,
we note that Addax’s 447 million barrels of oil reserves reflect 8.5 years of
reserve life at current production levels. We, in addition, believe that the
company has the ability to, at a minimum, sustain its current production levels
as a plateau into mid 2011.

Managed by a technically proven, geopolitically savvy team. We like Managed by a top tier
team
Addax’s management team. With their extensive international oil and gas
experience, combined with a solid understanding of local politics in the
company’s areas of operations, we view this team as the perfect complement
to the company’s asset base.

C$2.2 billion in technically ‘low risk’ cash flow estimated for 2008. Addax’s C$2.2 billion in 2008E
current production is from technically ‘easy to produce’ fields, translating into cash flow
a low risk (technical) 2008E cash flow from operations of C$2.2 billion. In the
longer term, we estimate that the company could sustain and increase this
cash flow just by blowing down current 2P reserves. As such, under Addax’s
current enterprise valuation of C$9 billion, and assuming a long term oil
forecast of US$130 per barrel of WTI oil, we believe, for the longer term
investor, that there is limited downside in investing in Addax at current levels,
with significant upside to be had through potential reserve and/or production
increases.
2.2 billon barrels of exploration potential in prolific basins. Addax has 2.2 billion barrels of
exploration potential
identified in excess of 2.2 billion barrels of exploration potential it intends to
target over the next three years. While we currently model an average
geological chance of success (COS) of 5% for this exploration in our NAV
calculations, Netherland Swell and Associates (NSAI) estimate it at 33%, and
Addax delivered 77% in 2007. A repeat of the company’s 2007 exploration and
appraisal drilling success rate could thus translate into 1.7 billion additional
barrels of discovered oil by 2010. This would equate to a potential fourfold
increase in the company’s booked reserves.

Near term catalysts. We believe the following near term catalysts could create With a 77% discovery
rate in 2007
additional value for current Addax shareholders:

Results from Nigeria, Cameroon, Gabon and Kurdistan exploration
wells during all of 2008;
Potential spudding of a JDZ well in 4Q08, with results in 1Q09;
Debottlenecking of Gabon production, via “new” export line;
Potential for gas monetization agreements in Nigeria;
Potential production from Kurdistan in 2H08;
Opportunity drilling of JDZ well in 3Q08;
Potential growth by acquisition.

Risks to investment thesis and target price are listed in the Risks section.
Stock Valuation and Recommendation

We have prepared an NPV (DCF, 10% after tax) summary for Addax’s assets A core, reserved backed
in West Africa and the Middle East, based on blowing down the company’s NAV of C$56.19 per share
booked reserves. As part of our NAV calculation on Addax, we also provide
NPV (DCF, 10% after tax) calculations on the company’s exploration potential
of 2.2 billion barrels of oil.

We calculate a risked sum‐of‐the‐parts NAV of C$10,670 million, or C$68.55 With an additional C$247
per share in longer term
per share (fd) for Addax. exploration potential

Exhibit 2: Risked Contingent Net Asset Value Summary
WI Reserves/Resources Unrisked NPV Unrisked NPV Risking Risked NPV Risked NPV
mm Barrels US$ million Per share US$ million Per share
OML 123 and OML 124 185 US$3,670 US$23.58 100% US$3,670 US$23.58
OML 126 and OML 137 70 2,089 13.42 100% 2,089 13.42
Okwok 8 264 1.70 100% 264 1.70
Maghena 39 767 4.93 100% 767 4.93
Panthere NZE 37 989 6.36 100% 989 6.36
Rmboue 2 39 0.25 100% 39 0.25
Etame Marin 13 145 0.93 100% 145 0.93
Awoun 19 474 3.05 100% 474 3.05
Taq Taq 75 1,042 6.70 100% 1,042 6.70
Reserve based NAV 447 9,480 60.91 9,480 60.91
2008E net cash/(debt) (US$734) (US$4.72) 100% (US$734) (US$4.72)
Reserves net asset value US$8,745 US$56.19 100% US$8,745 US$56.19

Reserves net asset value (C$) C$8,745 C$56.19 100% C$8,745 C$56.19
Taq Taq upside US$1,042 US$6.70 5% US$52 US$0.33

Nigeria Exploration upside 807 18,500 118.86 5% 925 5.94
Gabon Exploration upside 136 2,975 19.12 5% 149 0.96
Cameroon Exploration upside 100 2,172 13.95 5% 109 0.70
Deep Water Exploration upside 1204 13,801 88.67 5% 690 4.43
Exploration upside 2246 38,490 247.30 1,925 12.37
Net asset value US$47,236 US$303.49 US$10,670 US$68.55

Net asset value (C$) C$47,236 C$303.49 C$10,670 C$68.55

Source: Company Reports, Raymond James Ltd.

Given the continued volatility in commodity pricing, we are providing
investors with valuation sensitivities for our risked NAV per share (fd) on
Addax under different long term oil prices and different discount rates.

Exhibit 3: NAV Sensitivity
Brent oil price (long‐term) US$ per barrel
$90 $110 $130 $150 $170
5% C$65.31 C$76.13 C$86.95 C$97.76 C$108.58
Discount
10% C$52.10 C$60.33 C$68.55 C$76.78 C$85.01

rate
12% C$47.94 C$55.38 C$62.81 C$70.24 C$77.68

15% C$42.60 C$49.03 C$55.47 C$61.90 C$68.33


Note that current market valuations appear to be pricing Addax on the basis of
the company’s booked reserves under US$120 per barrel long term WTI (10%
DCF, blowdown case). In addition to this reserve value, current valuations
offer investors a free option on 2.2 billion barrels of potential oil, 2.4 TCF of
contingent gas resources, and a history of accretive growth. We consider
Addax a must own core holding in an International Oil and Gas portfolio.

Exhibit 4: Addax Value Creation

C$350

C$300

C$250

C$ per Share
C$200

C$150

C$100

C$50

C$0

Reserves Taq Taq upside Nigeria Gabon Cameroon Deep Water
Exploration Exploration Exploration Exploration
upside upside upside upside

Reserves Growth
Addax continues to deliver year‐over‐year reserve growth from its expanding
asset base.

Exhibit 5: Addax Property Breakdown
Country Asset 2007 Oil 2007 YE Addax Operator Contingent Resources Prospective Oil

Production 2P Reserves Working Gas Associated Liquids Resources
Mbbld/d MMbbl Interest Bcf MMbbl (Unrisked)
MMbbl
Nigeria
OML 123 55.9 161.4 100% AXC 1000 28 401
OML 124 7.4 23.4 100% AXC 381 22 82
OML 126 41.3 52.4 100% AXC 106 2 250
OML 137 ‐ 17.1 100% AXC 926 25 74
Okwok ‐ 8.4 40% AXC 2 ‐ ‐
Sub‐total 104.5 262.7 2415 77 807
Cameroon
Ngosso ‐ ‐ 60% AXC ‐ ‐ 100
Sub‐total ‐ ‐ ‐ ‐ 100
Gabon
Onshore 15 96.3 Various Various ‐ ‐ 34.9
Offshore 6.4 13.4 Various Various ‐ ‐ 100.7
Sub‐total 21.4 109.6 ‐ ‐ 135.6
Kurdistan Region of Iraq
Taq Taq* ‐ 74.6 45% TTOPCO ‐ ‐ ‐
Sub‐total ‐ 74.6 ‐ ‐ ‐
Deep Water Gulf of Guinea
OPL 291 ‐ ‐ 73% AXC ‐ ‐ 477.4
JDZ (Blocks 1, 2, 3 & 4) ‐ ‐ Various AXC/Various ‐ ‐ 726.6
Sub‐total ‐ ‐ ‐ ‐ 1,204
TOTAL 125.9 446.9 2,415 77 2,246
Notes: * Assumes government back‐in exercised


Going forward, Addax aims to substantially grow its discovered reserves
through exploration activities, which it considers a core business activity.
Having reviewed the company’s growth strategy, we describe it as a “three
pronged cyclical approach.” Cyclical, as each component feeds into the next.
The strategy involves the acquisition of new prospective exploration acreage,
followed by the identification of prospective resources through seismic
studies, culminating with drilling prospects to potentially prove up reserves.
For 2008, Addax plans on drilling 14 currently identified prospects, targeting
420 million barrels (120 million on a risked basis) of potential resources.
Although exploration outcome is binary, Addax’s extensive range of

exploration targets is statistically significant, allowing for the potential
discovery of 120 million barrels in 2008. As such, and accounting for depletion
from our 2008E production forecast of 145,000 bopd, we anticipate that organic
exploration success could increase Addax’s reserves by 15 to 20% at year end.
By 2010, the company intends to have drilled the majority of its current
inventory of 80 prospects, potentially adding in excess of 2,200 billion barrels
to its current 447 million barrels of reserves. Addax is also budgeting for the
acquisition of 600 km of 2D, and 2,000 km2 of 3D seismic data this year, aimed
at increasing its prospective resource base from the current 2,246 million
barrels of oil.

In the longer term, management plans on carrying out two to three seismic
surveys per year, aimed at adding to its prospect inventory. In addition to this
organic growth focus, Addax’s CEO has expressed the possibility of future
accretive acquisitions, but only at the ‘right’ price point. While specific details
of potential expansions have not been provided, we expect the company
would maintain its current modus operandi through any new ventures. It is
our view that any future expansion could take the form of corporate
transactions, such as Pan Ocean in 2006, asset acquisitions/farm‐ins, such as
the JDZ block 1 deal, or asset awards, such as the recent Iroko exploration
license in Cameron. Given this team’s successful track record in value
generation from all three types of transactions, we would expect any future
growth to be accretive to investors in Addax. In the longer term, areas that
come to mind are parts of the Former Soviet Union (FSU) such as Azerbaijan
and Turkmenistan; still offering ‘open market’ type petroleum contracts, as
well as relatively under‐developed and under‐explored acreage. In addition,
we also believe significant growth potential is achievable from the company’s
extensive exploration acreage. Management has also expressed the potential
for near term (2008) potential corporate acquisitions, indicating ongoing
discussions.
Production Growth
For 2008, we are expecting the company to produce 145,000 bopd, a 15%
increase over last year’s 126,000 bopd. Note that our above estimate does not
include potential production from the Taq Taq field in Kurdistan, which could
add another 3,000 bopd to our annual average forecast. While we expect
relatively minor production growth from Nigeria in 2008 and 2009, we are
forecasting significant growth from Gabon over this period. For 2009, we are
currently forecasting total company production of 165,000 bopd. In the longer
term, we believe Addax is positioned to deliver close to 200,000 bopd
production by 2010/2011. In addition, pending resolution of the petroleum
export situation in Kurdistan, analysis of the Taq Taq field indicates potential
production of 150,000 bopd (gross) by 2011. Combining all this, we believe that
Addax’s stars are aligned for exposure to potential production (working
interest) of almost 300,000 bopd in four to five years.

Exhibit 6: Addax Production Profile

180
Kurdistan

Gabon
160
Nigeria

140

120

Barrels per day (000s)
100

80

60

40

20

0
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E


Company Profile
“In a harsh desert, not even jackals can survive;
only addax and fennecs are found there
these animals were created by God
to remind man of his own limits.” – Sidati Ag Scheik

Addax is a successful international oil and gas company, focused on
leveraging management’s technical expertise and extensive network of
contacts into value generation from its assets. Addax shares currently trade on
both the Toronto Stock Exchange and the London Stock Exchange under the
symbol AXC. The corporate and capital structures of the company are
illustrated below. We have also included a list of Addax’s top ten institutional
shareholders.

Exhibit 7: Addax Corporate Structure
Addax Petroleum
Corporation

Addax Petroleum

Corporation Holdings

Addax Petroleum Addax Petroleum Services Addax Petroleum Overeseas Addax Petroleum (Nigeria

International Ltd. Ltd. (Isle of Man) Ltd. (BVI) Offshore Ltd. (Nigeria)
(Isle of Man)

100%, indirect

45% Taq Taq Operating Addax Petroleum Addax Petroleum Mauritius Addax Petroleum
Company Limited (BVI) Exploration (Nigeria) Ltd. Limited (Mauritius) Development (Nigeria) Ltd.

(Nigeria) (Nigeria)

Addax Petroleum NZE Inc. Addax Petroleum Maghena Addax Petroleum Etame Inc.
(Gabon) Inc. (Gabon) (BVI)


Exhibit 8: Market Capitalization and Top 10 Holders

(M)
Common Shares Outstanding 155.6
Share based comp 0.9
Shares O/S ‐ fully diluted 156.5
Market Capitalization 8,163

Holders Shares
BLACKROCK GROUP LIMITED 1.4%
GOODMAN & CO INVESTMENT 1.1%
MCLEAN BUDDEN LIMITED 0.9%
JPMORGAN ASSET MANAGEMENT 0.6%
FIDELITY MANAGEMENT & RESEARCH 0.5%
OPPENHEIMERFUNDS INCORPORATED 0.5%
FIRST CANADIAN MUTUAL FUNDS 0.5%
CARMIGNAC GESTION 0.4%
LORD ABBETT & COMPANY 0.4%

DWS INVESTMENT SA 0.4%


History
In 1994, the Addax and Oryx Group (AOG), a private petroleum and mining
company, founded the predecessor to Addax to focus on oil and gas
opportunities in West Africa. In 1998 the company acquired a 100% interest in
Oil Mining Licenses (OML) 123 and 124, as well as OML 126/137 in Nigeria. In
2002, the company expanded its West African operations by acquiring a 60%
interest and operatorship in Cameroon’s Ngosso offshore block. A third West
African country was added in early 2004, via a 42.5% interest in the Tullow
operated offshore Gabon Kiarsseny block. By farming into the Taq Taq block
in Kurdistan (Northern Iraq), Addax entered the Middle East in 2005. Addax
Petroleum Corporation was also incorporated under the Canada Business
Corporations that same year. It listed it shares on the Toronto Stock Exchange
the following year. In 2006, Addax significantly expanded its asset base
through the following acquisitions: a 72.5% interest in OPL 291 (high impact
Nigerian deep water exploration block), a 40% interest in Nigeria’s Okwok
shallow water discovery, interests in JDZ blocks 2, 3 and 4 (high impact deep
water exploration), and expansion for the Gabon assets via the corporate
acquisition of Pan‐Ocean Energy. In 2007, the company acquired a 50% interest
and operatorship of the Epaemeno block onshore Gabon, as well as a 40%
interest in JDZ block 1. Addax has also recently signed a PSC for the Iroko
exploration license offshore Cameroon.
Leadership team
We like the management at Addax; the team has a proven international oil and
gas track record. Management has an extensive history of successfully
operating in the company’s major project areas in West Africa and the Middle
East. The management team at Addax includes the following:

Jean Claude Gandur, President, CEO and Director, has been active in the oil
& gas industry for over 33 years, including tenure with Phillip Brothers. Prior
to founding Addax through the Addax and Oryx Group, he was the Managing
Director for Sigmoil Resources N.V., and Kaines SA. Mr. Gandur also served
as the Republic of Congo’s Honourary consul in Geneva for 10 years. We view
Mr. Gandur’s close ties with several African nations as a key to Addax’s
continued success in the region. Mr. Gandur is a graduate of the University of
Lausanne (Law).

James Pearce, COO, has held various managerial as well as technical roles
with Chevron over the past 30 years, including responsibility for the
company’s Nigerian deep‐water operations. Mr. Pearce is a graduate of the
California Institute of Technology (Ph.D in Mechanical Engineering). He also
holds two US patents.

Michael Ebsary, CFO, joined Addax from Elf (now Total), where he was the
Senior Manager, Project Finance responsible for financings in emerging
markets, particularly in Nigeria, Chad and Cameroon. Prior to Elf, Mr. Ebsary
held finance positions with the Bank of Nova Scotia and the Bank of Montreal.

Jeff Schrull, Corporate GM Exploration Addax Petroleum, has been with
Addax for over 2 years, leading the company’s exploration operations. Prior to
Addax, he held various domestic and international oil & gas engineering,
operations and senior management positions for close to 20 years, including
Chevron’s Exploration and New Ventures Manager for Nigeria Mid Africa.
Mr. Schrull is a graduate of Texas A&M (M.Sc. in Geophysics).

Henry Legarre, Technical Manager ‐ Middle East, has over 20 years of oil &
gas experience. The majority of his career was with Chevron, in various global
leadership and technical roles. Academically, Mr. Legarre has extensive
publications in geologic modeling, production geology, carbonate and clastic
stratigraphy, geochemistry, and reservoir characterization.
Operations
The company is currently focused on two main operational areas: The West
Coast of Africa, and the Kurdistan region of Northern Iraq. The Middle East
focus is on developing and monetizing significant exploration success on the
Taq Taq field, as well as exploration activities on the Kewa Chermila block.
The African projects encompass cash flow from current production and
continued development of existing oil fields, as well as a mix of low risk and
high impact exploration plays.

Exhibit 9: Addax Area of Operations

Source: Company Reports
Nigeria and JDZ
Nigeria, a West African country, is bordered by Benin to the west, Chad and
Cameroon to the east, the Gulf of Guinea (Atlantic) to the south, and Niger to
the north. With a population of almost 140 million people, reportedly the most
populous country in Africa, and a GDP (2007) of US$126.7 billion (US$2,200
per capita) the country remains one of the richest in Western sub Saharan
Africa. Following almost three decades of military rule, Nigeria transitioned to
a multiparty democracy in 1999. President YarʹAdua, in power since 2007,
follows two terms (1999‐2006) by president Obasanjo. Nigeria continues to face
longstanding ethnic and religious tensions, including militants fighting along
ethnic and religious lines. This violence has led to 900,000 barrels of oil, close
to a third of Nigeria’s total production capacity, to be shut in during early
2008, mainly from the western Niger delta.
The Nigeria‐São Tomé and Príncipe Joint Development Zone (JDZ) was agreed
to in 2001. It is offshore Nigeria and São Tomé and Príncipe, and is jointly
administered by the two countries. Any revenue generated from the area
would be shared between the two countries. São Tomé and Príncipe, one of
Africa’s smallest nations, is a series of islands that lay offshore Western Africa.
Following independence in 1975, the country transitioned to free elections in
1991. The award of the first JDZ licenses in 2004, as well as the recent oil
discovery in the area has translated into some economic recovery for the
country. Real GDP growth exceeded 6% in 2007, as a result of increases in
public expenditures and oil‐related capital investment.

Addax’s current Nigerian/JDZ portfolio consists of a 100% interest in OML123,
124, 126 and 137, a 72.5% interest in OPL 291, a 38.3% interest in the Okwok
field, a 40% interest in JDZ block 1, a 14.33% interest in JDZ block 2, a 15%
interest in JDZ block 3, and a 33.3% interest in JDZ block 4.

Exhibit 10: Nigeria Properties


Geologically, Addax’s Nigerian properties are located in the prolific Niger
Delta Basin, part of one of the most prospective petroleum provinces in the
world. Situated in the Gulf of Guinea (Atlantic), the basin extends over
approximately 75,000 km2, with up to 10 km of sedimentary thickness. Shales
in the Akata and the Agbada formations are considered to be the most likely
source rocks, or “kitchen”, for the basin. These formations, in addition to the
Benin, were deposited during the opening of the South Atlantic (separation of
Africa from South America).

Several geological factors have contributed to the prolific nature of this basin.
As with any petroleum basin, three key components need to act in concert to
deliver good prospectivity. The presence of source rock, good reservoir, and
some type of trapping mechanism all have to be present. With over 50 billion
barrels of oil reported as discovered to date, the presence of a kitchen in the
Niger Delta is hard to dispute. In addition to excellent reservoir properties,
Niger Delta producing zones tend to be stacked, increasing the potential to
add reserves through the discovery of new fields, or new reservoirs on
previous discoveries. As for trap, this Delta complex contains extensive
structures, including several four‐way closure anticlines, creating a very
efficient trapping mechanism for regional oil and gas fields. We do, however,
note that while extensive in number, these traps – or structures – are limited in
areal extent and thus, size. While this limits the potential to discover elephant
fields, it does increase the chances of finding new fields in previously explored
blocks.

While the basin is mainly oil prone, gas reservoirs are also present, including
high levels of associated gas.

Exhibit 11: Niger Delta Geology

Source: Ministry of Energy – Equatorial Guinea
OML 123
OML 123, initially awarded to Ashland (Marathon) in 1973, was acquired by
Addax in 1998. This block remains Addax’s main producing area in Nigeria.
Covering 367 km2, OML 123 is located in shallow waters off the coast of
Nigeria. Following the transition from Ashland, Addax upgraded production
facilities, installed a new FPSO (Knock Adoon) in 2006, and developed new
fields on the block, leading to substantial increases in production from the
block. Specifically, OML 123’s production was increased from under 8,000
bopd in 1998 to a 2007 average rate of 56,000 bopd. Production from the block,
averaging 29° API, is sold as Antan crude and is priced at a slight discount to
Brent.

For 2008, we currently model production from the block at 67,000 bopd, at the
mid point of the company’s guidance of 64,000 to 69,000 bopd. In the longer
term, and excluding any potential discoveries from the block, we expect
production levels to remain flat into mid 2010, with production reducing at
25% per annum thereafter. Enter the company’s exploration prospects. With at
least 10 targets identified to date, the company has the potential to maintain
the current 65,000 bopd production plateau well into the next decade.
Specifically, in addition to the 161 million barrels of reserves (2P) booked at
the end of 2007, Netherland Swell & Associates Inc. (NSAI), a third‐party
engineering firm, has evaluated OML 123 as potentially containing
undiscovered (un‐risked) resources of 401 million barrels of oil (110 million
barrels, risked) net to Addax (best estimate case). As an aside, while NSAI,
based on the geo‐scientific work carried out on OML 123 to date, assigns a one
in four COS to this potential resource base, we note that Addax’s historical
exploration success is closer to 80% on this block.

In addition to the oil resources, NSAI has identified one trillion cubic feet of
gas (best case estimate) on OML123. While this estimate reflects discovered
gas, the resource is classified as contingent pending award of a PSC covering
rights to the gas, as well as identification of a commercial market for the
resource. Note that Addax is currently negotiating with the Nigerian
government for PSC gas rights, and is also investigating the commercialization
of this resource.
OML 126
While OML 126 was also acquired from Ashland in 1998, production from this
offshore Niger Delta 722 km2 block is from greenfield developments. In
addition to developing the legacy Okwok discovery, Addax has discovered
and developed the Nda field on the block. OML 126’s production is currently
processed via a 50,000 bopd capacity FPSO (Sendje Berge) and sold as Okwori
Blend (35° to 38°API), at a slight premium to Brent.

upper end of the company’s current guidance of 32,000 to 37,000 bopd. Given
that OML126’s potential has historically been under‐estimated – 2007 average
production came in 5% higher than Addax’s upper guidance number – we
would not be surprised were the company to beat its guidance, as well as our
production estimates, for 2008. In the longer term, and excluding any potential
discoveries from the block, we expect production to decline by 12% per annum
as of 2009. Note, however, that similar to production, reserves from OML126
have been under‐booked in the past. Specifically, significantly better than
expected reservoir performance at Nda led to significant upwards revision of
the field’s reserves at year end 2007. In addition, NSAI estimates potential un‐
risked prospective resources of 250 million barrels of oil (37 million risked) on
the southern half of the block. We currently calculate that each additional four
million barrels of oil discovery could extend plateau production by an extra
year. Addax is also currently planning to acquire 3D seismic on the northern
half of block later this year, with exploration drilling currently planned for
2009. Given the company’s general, as well as block specific, track record, we
do expect to see additional reserve upside from OML126 over the next couple
of years. In addition to associated gas present on the block, NSAI has also
identified over 100 billion cubic feet of contingent gas on OML126.
OML 124
Covering 300 km2, OML124 is unique in two ways. It is Addax’s smallest
producing property, as well as the company’s only onshore Nigerian asset.
The block is covered under the same PSC as OML123. OML 124’s production
(23° to 48°API) is currently processed via Addax’s Izombe Flow Station. The
crude is then sold via the coastal Brass River terminal at a slight premium to
Brent.

lower end of the company’s guidance of 7,000 to 10,000 bopd. While we
believe the field is capable of producing 10,000 bopd, we believe our lower
production forecast is warranted given the potential for export disruptions
from the Brass River Terminal due to potential militant activity in the area. In
the longer term, and excluding any potential discoveries from the block, we
expect production to decline by 15% per annum as of 2009. NSAI has
identified 82 million barrels of prospective resources (16 million risked basis)
from several mapped prospects on the block. Addax currently plans on
drilling two of these later this year. In the event of discoveries, our calculations
indicate the potential to increase the block’s production to 12,000 bopd by
2010. In addition to OML124’s associated gas, NSAI has also identified over
380 billion cubic feet of contingent gas on the block. As part of potential plans
to monetize this gas, Addax is currently investigating the construction of an
LPG facility adjacent to the Izombe flow station.
OML 137
Acquired in 1998, this 849 km2 exploration and appraisal stage block lies
adjacent to OML126, in shallow to intermediate Nigerian waters. The block is
also covered under the same PSC as OML126. Having booked its first reserves,
17 million barrels of oil (2P) on the block in 2007, Addax currently plans on
establishing a new offshore production hub on OML137. Specifically, the
company is currently targeting first oil from the Ofrima north discovery by
late 2009/early 2010. We currently model first oil production in 2010, with an
average rate of 14,000 bopd.
In addition to the booked 2P reserves, NSAI currently assigns 925 billion cubic
feet in contingent gas (best estimate case) to the block, and a potential 74
million barrels of undiscovered oil resources (14.6 million risked). We do not,
pending official government award of rights to the gas, model gas production
from this block. Based on the recent Nigeria LNG proposal for two additional
LNG trains for the Bonny facility, we do view OML137 gas as an excellent
feedstock for these trains, given its location, in close proximity to the GTS‐3
pipeline, also known as the Offshore Gas Gathering System, feeding the Bonny
plan.
Okwok field
Awarded to Oriental Energy, an indigenous Nigerian firm, as part of the
Nigerian marginal field program earlier this decade, the Okwok field has 8.4
million barrels of oil reserves (2P). Under an agreement with Oriental, Addax
currently owns a 40% working interest in the field. As part of this agreement,
Addax, as technical advisor, will operate the field. Two recent appraisal wells
produced medium to light oil (23° to 48°API), at flow rates of up to 1,220 bopd
per well. While the field remains at the engineering stage, the close proximity
of this field to OML 123 could lead to potential production being processed on
the Knock Adoon FPSO. We are currently forecasting first oil from this field
for 2009, with peak production of 9,000 bopd (gross), declining at 15% per
annum.
Deep water blocks
Addax currently has over 1,743 net km2 highly prospective deep water
exploration acreage offshore Western Africa. In Nigeria, Addax currently has
a 72.5% interest in the 1,287 km2 (gross) OPL 291 block. Based on 2D seismic
acquired to date over the majority of the block, Addax has identified two
prospects estimated by NSAI as potentially containing 477 million barrels of
undiscovered oil (163 million risked). Following 3D seismic acquisition
scheduled for this year, the company plans on drilling an exploration well next
year. While the 34% geological COS assigned by NSAI to this resource could
be interpreted as aggressive, we note that the prospects lie on trend with the
Agbami field, one of the largest single discoveries in deepwater West Africa.
Note that we currently model a very conservative 5% COS, in line with new
play exploration COS numbers, for this block in calculating our risked NAV
on Addax.

In the JDZ, Addax currently has the following working interests: 40% in block
1, 14.33% in block 2, 15% in block 3 and 38.305% in block 4. It also has
operatorship of block 4. Combined, the blocks add 527 km2 (net) to Addax’s
deep water exploration portfolio. Including the Obo discovery on block 1, and
based on extensive 2D and 3D seismic coverage, NSAI currently estimates un‐
risked potential prospective resources of 727 million barrels (313 million
risked) of oil net to Addax’s interest from prospects on the blocks. While the
average 43% COS attributed by NSAI to this potential resource can be
considered as aggressive for exploration plays, it can easily be supported by
current geo‐scientific information on the blocks. Specifically, Addax has
seismically identified a meandering channel system running ENE to WSW
along the four blocks, with the Obo‐1 discovery confirming the presence of a
working hydrocarbon system (source and migration) along this channel. While
trap and seal for each prospect can only be fully confirmed through drilling,
analysis of public information provided by Addax indicates good closure on
most of the blocks prospects, including the potential for four‐way dip closure
on some. In addition, reservoir sands targeted by the partners are proven as
being very productive in the basin, limiting reservoir risks.

Exhibit 12: Potential Meandering Channel in Deep Water, Nigeria


As further support for the NSAI COS, RPS Group (RPS‐LSE, not rated), in a
separate and independent competent person’s report executed for Afren (AFR‐
AIM, not rated) assigned a 56% COS for the three main prospects in block 1.

Exhibit 13: Joint Development Zone (JDZ)


With the current economics of developing deep water projects requiring
proven reserves of 150 million to 200 million barrels or more per producing
facility (typically an FPSO), and given the ‘small’ average prospect size (38
million barrels of potential recoverable oil) on the blocks, we believe Addax
and its partners will have to develop any discoveries in clusters. With most of
the block 1 prospects, including the Obo discovery, within a 20‐25 km radius
of each other, ‘cluster type’ development would be feasible in the event oil is
discovered in several of the mapped structures. Similarly, each of blocks 2, 3
and 4 contain prospect clusters that could potentially be developed from a
single FPSO. Addax has contracted the deep water drill ship Aban Abraham to
drill up to 10 wells on the blocks. While the first target, Kina prospect on block
4 is expected to spud in late 2008, note that the Aban Abraham’s time of arrival
on location could be delayed to mid‐2009. To address this, as well as accelerate
exploration on the blocks, Addax and its partners are actively trying to secure
a drilling slot on a ‘rig of opportunity’ passing through the region later this
year.
Gabon
Gabon, a West African country, is bordered by Gulf of Guinea (Atlantic) to the
west, Congo (Republic) to the east and south, and Cameroon and Equatorial
Guinea to the north. With a population of almost 1.5 million people and a GDP
(2007) of US$10.3 billion (US$13,800 per capita), the country is one of the most
prosperous, per inhabitant, of Western sub Saharan Africa. Following
independence in 1960, Gabon has only had two presidents including current
president Bongo, in power for four decades. Natural resources, combined
with strong French military and monetary support, have made Gabon one of
the richest (per capita), and more stable countries, in the region.

Exhibit 14: Gabon Properties


Geologically, Addax’s Gabonese properties, with one exception, are located in
the Gabon Basin, which covers most of the country’s coast/near coast areas.
While the Etame Marin offshore block lies within the Congo Basin, this basin is
geologically very similar to the Gabon Basin. Similar to the Niger Delta, the
Gabon and Congo Basins were formed during the opening of the South
Atlantic (separation of Africa from South America). A striking difference
though is the presence of a salt layer, creating the pre‐salt and post‐salt
sedimentary sequences. Shales in the Kissenda and Melania formations are
considered to be the most likely source rocks, or “kitchen”, for the pre‐salt
section. Source rocks for the post‐salt are more widespread, and tend to be
localized. These include the Madiela, Cap Lopez, Azile and Anguille
formations.
Addax’s current Gabon portfolio consists of a 92.5% interest in the Maghena
and Panthere NZE licenses, a 90% interest in the Remboué license, a 40%
interest in the Awoun license, a 31.4% interest in the Etame Marin license, a
40% interest in the Ibekelia block, a 51.33% interest in the Iris Marin, a 42.5%
interest in the Kiarsseny license and a 50% interest in the Epaemeno license.
Etame Marin
Addax currently has a 31.4% interest in the Vaalco Energy (EGY‐NYSE, not
rated) operated Etame Marin offshore PSC. Covering 3,074 km2, the block is
located in shallow to medium depth waters off the coast of Gabon, and
contains two producing fields (Etame and Avouma). The block also contains
an undeveloped discovery (Ebouri). Etame Marin’s production (36°API) is
currently processed on a central FPSO, the Petróleo Nautipa, and sold as
Etame Crude, at a slight discount to Brent.

We currently model production from the block at 6,500 bopd for 2008 and
2009, in‐line with Addax’s current guidance. Note that production declines
from the Etame and Avouma fields should be compensated by production
start‐up on Ebouri later this year. Excluding any potential discoveries from the
block, we expect production to decline by 15% per annum as of 2009. Note,
however, that Vaalco and Addax intend to drill three identified prospects on
the block by the end of 2009. We currently calculate that each additional 1.5
million barrels of oil discovery could extend plateau production by an extra
year. NSAI estimates potential un‐risked prospective resources of 42 million
barrels of oil net to Addax (18 million risked) on Etame Marin.
Maghena
Maghena, initially awarded to Pan Ocean in 1997, was acquired by Addax via
the corporate acquisition of Pan Ocean. With current production rates of
approximately 20,000 bopd (gross), this block remains Addax’s main
producing area in Gabon. Covering 657 km2, Maghena is located onshore
Gabon. Addax currently runs Maghena, as well as neighbouring Panthere
NZE, production via a 30,000 bopd central processing facility (CPF).
Production from the block is sold via the Total (FP‐Fr, not rated) operated
Coucal facility at a slight discount to Brent. While the current 30,000 bbl/d
export capacity is adequate for current production, Addax is in the process of
expanding it to 50,000 bopd to allow for future planned production increase.
We currently expect completion of this expansion by the end of 2008.

For 2008, we currently model production from the block at 18,000 bopd. For
2009, we expect a slight production increase to 19,000 bopd. In the longer term,
while NSAI does not currently attribute any potential resources, other than
booked reserves, to the block, the planned 2008 infill 2D seismic program on
the block has the potential to identify new prospective resources.

Panthere NZE
The 657 km2 Panthere block, located onshore Gabon, includes the Obangue (on
production) and Autour (under appraisal) fields. We currently model 2008E
production of 9,500 bopd from the block and 16,000 bopd for 2009.
Remboue
The 130 km2 Remboué block is currently Addax’s smallest asset in Gabon. The
block currently produces 700 bopd (gross) from the Remboué field. For 2009, we
currently model production of 700 bopd, with the lack of yoy decline attributed
to well workovers currently planned on the field. In the longer term, we expect
the company to blow down the remaining 1.8 million barrels of 2P reserves,
while limiting capital expenditures on this field.
Awoun
Covering 1,112 km2 , the Shell operated Awoun block contains the Tsiengui
West, Koula and Damier oil fields. Located onshore Gabon, the block is
adjacent to Addax’s Maghena area. The block is at the development stage. For
2009, we are modeling production of 6,000 bopd from the field, net to Addax’s
working interest.

In addition to the 19 million barrels (2P) of booked reserves on the block, NSAI
estimates a potential 31 million barrels of undiscovered resources net to
Addax’s working interest.
Exploration blocks
Addax currently has a 50% interest, along with operatorship, in the Epaemeno
block onshore Gabon. Having reprocessed legacy 2D seismic data on this 1,340
km2 block, Addax currently plans to carry out a 2D infill seismic program
during 2008. Pending results of this work, any prospective structures could be
drilled as early as 2009.

Kiarsseny was farmed into during 2004. While the 5,443 km2 block contains
three oil discoveries, two appraisal wells drilled to date indicate sub‐
commercial reservoirs. Tullow (TLW‐LSE, not rated), as part of the minimum
exploration commitment on the block, is planning to drill a well in 2009. With
the current exploration term expiring in March 2010, failing a discovery on the
2009 exploration well, we anticipate that Addax could relinquish part, or even
all, of the block. NSAI currently estimates a potential of 24 million barrels of
undiscovered oil net to Addax’s interest from the block.

The Iris Marin and Ibekelia shallow water blocks respectively cover 611 km2
and 678 km2. These two blocks are operated by Sterling Energy (SEY‐AIM, not
rated), although Addax is in the process of obtaining operatorship of the Iris
Marin block.

On Iris Marin, Addax plans to spud the Charlie prospect in 3Q08. Sterling
currently estimates potential recoverable reserves of 21 million bbls from this
prospect. In addition, the block partners, pending interpretation of the recently
acquired high resolution 2D seismic, could potentially drill a second prospect
on Iris in 2008. NSAI currently estimates 15 million barrels of risked
prospective resources net to Addax’s interest.

Sterling is currently negotiating the conversion of the Ibekelia TEA into a PSC.
Addax does not currently expect any activity on this block for 2008.
Cameroon
Cameroon is bordered by Gulf of Guinea (Atlantic) to the west, Nigeria to the
north, Chad and the Central African Republic to the east and south, and
Equatorial Guinea, Gabon and the DRC to the south. Cameroon has a
population of 18 million people and a GDP (2007) of US$20.9 billion (US$2,300
per capita). Following its creation in 1961, Cameroon has enjoyed stability
under both presidents Ahidjo (1961‐1981) and Biya (1981 to date). We do note
the territorial dispute with Nigeria in the 1990s over the oil‐rich Bakassi
peninsula was resolved in 2006 when Nigeria ceded sovereignty of Bakassi to
Cameroon.

Exhibit 15: Cameroon Properties


Addax’s two blocks are located in the Rio Del Rey Basin, the eastern extension
of the Niger Delta Basin. The main difference with the Nigerian Basin is
sedimentation thickness, which thins as the basin extends towards its eastern
edge on the Cameroon volcanic line. Shales in the Akata and the Agbada
formations are considered to be the most likely source rocks, or “kitchen”, for
the basin. These formations were deposited during the opening of the South
Atlantic (separation of Africa from South America). All of the current
producing fields in the basin are from Agbada formation sands.

Addax’s current Cameroon portfolio consists of a 100% interest (subject to a
30% government back‐in right) in the Iroko license, as well as a 60% interest in
the Ngosso license.
Ngosso
Addax currently has a 60% interest and operatorship in the Ngosso block,
located offshore Cameroon. Covering 474 km2, the block has several legacy
hydrocarbon discoveries. NSAI estimates the block to contain a potential 100
million barrels of undiscovered resources (32 million risked).

Addax currently plans on drilling two explorations wells in 2008, followed by
a minimum of one well in 2009. As an aside, we note that currently identified
prospects on the block lie on trend with several other regional fields, including
Addax’s own on OML123 in Nigeria. While this does not preclude
unsuccessful exploration wells, it does add a level of certainty to the program,
reflected in the one in three COS assigned by NSAI to the prospective
resources.
Iroko
Addax recently acquired a 100% interest in Cameroon’s offshore Iroko block.
Covering 15.75 km2, this shallow water block lies adjacent to Addax’s OML123
in Nigeria. Addax expects to drill the first exploration well on the block later
this year.

Iraq is bordered by Iran to the west, Saudi Arabia and Kuwait to the south,
Turkey to the north, and Syria and Jordan to the east. Having gained
independence in 1932, Iraq was a Hashemite monarchy until 1958, followed by
a decade of military coups which culminated in the ‘reign’ of Saddam Hussein
from 1979‐2003. In 2005, following the 2003 invasion by a US‐led coalition, Iraq
was divided into federal regions. Kurdistan, governed by the Kurdistan
Regional Government (KRG) is one of the federally recognized1 autonomous
regions within Iraq, and includes the areas of Suleimaniah, Erbil and Dohuk.
While the rest of Iraq remains prone to sectarian and anti‐US violence,
Kurdistan continues to witness relative peace, leading to economic prosperity
and growth.

Exhibit 16: Kurdistan Properties


The Taq Taq and Kewa Chirmila blocks lie in the hydrocarbon rich Kirkuk
Basin. This basin extends across the Zagros fold belt ranges from Iran,
through Iraq, and into parts of Northern Syria. The Kirkuk Basin was formed
during the Late Permian to Paleocene times, covering parts of what used to be
the Tethys Ocean. Jurassic and Cretaceous ages shales and carbonates are
considered the most likely hydrocarbon source rock, or “kitchen”, for this
petroleum province. The Shiranish, the Jaddala, and the Fars formations,
Cretaceous and Tertiary carbonates, represent the main hydrocarbon‐bearing
reservoirs of the basin. Note that the wide range of reservoir porosities adds a
layer of complexity to field developments as well as reservoir modeling. As for

_____________________________
1 Iraq constitution, article 113
trap, the basin contains some giant, but simple, faulted anticlines, typically
identified via surface expressions, creating a very efficient trapping
mechanism for regional oil and gas fields. In addition to the above structural
traps, stratigraphic components are also present in some regional fields. In
addition to oil, the basin is also home to several gas fields.

Exhibit 17: Kurdistan Geology

Source: WesternZagros

Taq Taq
Covering 951 km2, the block includes the Taq Taq oil discovery, as well as the
Kewa Chirmila prospect. Addax currently has, through the revised Taq Taq
PSC signed with the KRG in February 2008, a 45% working interest (subject to
a 9% back in right by the government) on the block. As we except the KRG to
exercise this option, all our forecasting and models are based on a 36% interest
in the field.

The Taq Taq oil field is a surface visible anticline, 60 km northeast of one of the
world’s largest oilfields, mainly the Kirkuk field. In addition to three legacy
wells, including the 1958 discovery well, Addax and its partner (Genel Eenrji)
have drilled and tested six appraisal wells targeting the Shiranish, Kometan
and Qamchuga formations on the structure. With flow rates ranging between
16,170 and 37,560 bopd, these wells confirm the potential for excellent
productivity from the Taq Taq reservoir sands. Addax has also acquired close
to 300 km2 of 3D seismic on the field, as well as 170 Km of 2D lines, allowing
Addax’s reservoir engineering team to estimate the field’s OOIP at between
550 million to 1,200 million barrels of oil. Note that this wide OOIP range is
mainly due to the extensive variations in reservoir porosity (a regional theme),
in addition to variability in the oil water contact across the field. In order to
narrow the OOIP range, Addax, through ongoing interpretation of the 3D
seismic, reservoir modeling work, and other studies, aims to address current
uncertainties in porosity estimations as well as oil water contacts. Note that the
field’s 75 million barrels (net) 2P reserves, as estimated by NSAI at year end
2007, reflect the low end of Addax’s OOIP range. It is our understanding that
NSAI has modeled the reservoirs under a fracture porosity only assumption
(0.3% porosity), while the Addax team estimates also account for up to 8%
matrix porosity in parts of the field, as assessed through log and core data, as
well as production tests. As such, while we currently use the company’s
booked 2P reserves in our core NAV calculations, we note that the ongoing
reservoir work allows for a potential doubling of booked reserves on the field.
Going forward, Addax plans to drill a minimum of two additional wells on
Taq Taq this year. TT‐10, the next well to be drilled, in addition to appraising
the Shiranish, Kometan and Qamchuga formations, is also aimed at testing the
shallower Pilaspi and deeper Jurassic and Triassic formations. In parallel,
Addax plans to commence implementation of a full field development plan in
2008, including potential production and sale of 10,000 bopd (gross) from the
field in 2H08. For 2009, plans include the potential sale of an additional 20,000
bopd from the field. In the longer term, pending final approval by the KRG
and Iraq’s federal government, it is our understanding that two export
scenarios are being considered. A 60km pipeline to Kirkuk, tying into the
Kirkuk‐Silopi‐Ceyhan and the Kirkuk‐Basra export lines, as well as a
Kurdistan Region 241km pipeline directly to Silopi in Turkey, where it would
tie into the Silopi‐Ceyhan pipeline. The first line, with a potential completion
date of year end 2009, is an Addax specific route, and would allow potential
export by 2010. Note that this route would traverse parts of Sunni controlled
Iraq, home to continued insurgent violence. The second route, while running
through politically stable Kurdistan, if sanctioned by year end, would take
longer. It could be completed by early 2012. Note that this route is a KRG
regional initiative, rather than a Taq Taq specific line.

The Kewa Chermila structure, identified via surface expression and 2D
seismic, covers 15 km2 in areal extent at the south east edge of the block, the
Koya lead, and deeper untested horizons on the Taq Taq field, all form the
company’s near term exploration potential in Kurdistan. For 2008, the
company plans on drilling Kewa Chirmila, as well as the deep Taq Taq
horizons.
Appendix

Fiscal Regimes

Addax’s Nigerian assets are currently governed by Production Sharing
Contracts, under which produced oil is allocated to royalty oil, cost oil and
profit oil. Note that the contractors are required to bear all upfront capital
costs, which would then be recouped via the ‘Capital Cost Oil’ category.
Similarly, the company’s Gabon assets are also subject to Production Sharing
Contracts. In Kurdistan, the Taq Taq Revised Production Sharing Contract is
based on a similar mechanism, where the contractors bear the exploration and
development costs, and risks, for the fields. Production oil is then split into
Royalty Oil, Cost Oil, Profit Oil and Tax Oil.

Exhibit 18: Nigeria PSC Oil Allocation

Oil Revenue
Royalty Oil
Non‐Capital Cost Oil
Tax Oil NNPC
Addax Petroleum
Capital Cost Oil
Profit Oil


Exhibit 19: Gabon PSC Oil Allocation

Oil Revenue
Royalty Oil
Non‐Capital Cost Oil
State
Addax Petroleum Capital Cost Oil
Profit Oil


Exhibit 20: Kurdistan PSC Oil Allocation

Total Oil Produced
Operations Oil
Royalty Oil
10% of total crude oil
Net Available Oil
up to 80% of Net Availabe Oil remaining net available oil
Operating Costs Total Profit Oil
sharing based on ʺRʺ factor
slide range of 35%/65% to
16%/84%
Exploration Costs
Contractor KRG
Development Costs
Addax Genel Energi
(45%) (55*%)


Financial Statements

Exhibit 21: Balance Sheet
US$ (mln) 2004 2005 2006 2007 2008E 2009E
ASSETS
Current
Cash and cash equivalents 4 7 36 32 492 1554
Accounts receivable 66 134 179 312 460 460

Inventories 17 63 121 129 159 159

Prepaid expenses 14 16 26 39 39 39
100 219 361 512 1150 2212

Partner loan receivable 0 0 21 21 21 21
Future loan receivable 16 156 16 7 0 0
Other assets 3 5 5 20 20 20
Property, plant and equipment 498 487 2083 2706 3792 4746
Goodwill 0 0 493 493 493 493
516 648 2618 3247 4326 5280

617 867 2979 3759 5476 7492

LIABILITIES AND SHAREHOLDERSʹ EQUITY
Current
Accounts payable and accrued liabilities 143 160 364 545 519 519
Income taxes and royalties payable 121 204 510 33 351 954
Deferred revenue 3 1 3 10 8 8
267 365 878 588 878 1481

Asset retirement obligations 12 25 47 130 132 132

Future income taxes 89 93 44 125 175 175

Other long‐term liablilities 7 5 11 7 6 6
Long‐term debt 65 80 830 950 1125 1125
Convertible bonds 0 0 0 245 247 247
173 203 932 1457 1685 1685

Shareholdersʹ equity
Share capital 20 20 739 758 759 759
Convertible bonds 0 0 0 56 56 56
Contributed surplus 0 0 20 38 54 59

Retained earnings 157 278 410 862 2044 3452

177 298 1168 1714 2913 4326
617 867 2978 3759 5476 7492


Exhibit 22: Income & Cash Flow Statements
US$ (mln) 2004 2005 2006 2007 2008E 2009E
REVENUE

Petroleum sales 524 1219 2029 3412 5941 7810
Royalties 103 211 389 586 934 1717
Net sales 421 1008 1640 2826 5007 6093
Other income 2 5 12 4 1 0
Total net revenue 422 1013 1652 2830 5008 6093

EXPENSES

Operating 88 153 204 314 323 340
General and administrative 18 33 27 31 33 32
Depletion, depreciation and accretion 81 173 316 581 498 542
Pre‐acquisition and other expenses 0 0 32 31 6 4
Share‐based compensation 0 0 25 36 16 8
Interest on long‐term debt 2 4 22 85 79 79
Interest on convertible bonds 0 0 0 13 14 9
Other Interest 1 1 0 0 0 0
Foreign exchange (gain)/loss 0 0 ‐1 6 ‐4 1
Total expenses 189 364 625 1097 966 1014

Income before provision for income taxes

Provision for income taxes
Current 140 349 541 1045 2384 3067
Future 30 94 242 206 415 604
Net income 63 206 243 482 1243 1407
Cash Flow Statement
US$ (mln) 2004 2005 2006 2007 2008E 2009E
CASH FLOWS FROM OPERATING ACTIVITIES
Items not requiring outly of cash:
Net Income 63 206 243 482 1243 1407
Future income taxes 30 94 242 206 415 604
Depletion and depreciation 81 173 316 581 498 542

Share‐based compensation 0 0 25 36 16 8
Foreign exchange 0 0 ‐1 6 ‐4 1
Other items ‐3 ‐5 4 8 6 0
171 468 829 1319 2174 2562
Changes in non‐cash working capital 56 ‐10 256 ‐450 ‐222 0
227 458 1085 869 1952 2562
CASH FLOWS USED IN INVESTING ACTIVITIES
Expenditures on property, plant and equipment ‐314 ‐381 ‐953 ‐1225 ‐1615 ‐1500
Other/Change in non‐cash working capital 0 0 ‐1448 ‐12 9 0
‐314 ‐381 ‐2401 ‐1237 ‐1606 ‐1500
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long‐term debt 62 122 830 1325 200 0
Repayment of long‐term debt 0 ‐110 ‐80 ‐1205 ‐25 0
Issue costs on long‐term debt 0 0 ‐8 ‐19 0 0

Proceeds from issuance of converts (net of fees) 0 0 0 294 0 0
Proceeds from share issue 0 0 713 0 0 0
Distribution of earnings 0 0 ‐48 0 0 0
Dividends paid ‐27 ‐85 ‐64 ‐29 ‐61 0
35 ‐74 1343 366 114 0

Net increase in cash and cash equivalents ‐52 3 28 ‐2 460 1062

Cash and cash equivalents, beginning o f period 56 4 7 34 32 492
Cash and cash equivalents, end of period 4 7 35 32 492 1554

Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $97.86 $117.68 $122.42 $122.78 $115.19

RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $122.85 $122.61 $121.97 $121.85 $122.32
RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00

Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $8.64 $10.92 $12.45 $12.74 $11.19
RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $13.06 $10.67 $10.78 $11.15 $11.42

RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50


Risks
Competition
The oil & gas industry is highly competitive and the corporation competes
with a substantial number of companies. There can be no assurance that such
competitors will not substantially increase the resources devoted to the
development and marketing of products and services that compete with those
of Addax or enter markets that Addax is active in. In certain aspects of its
business, Addax also competes with a number of small and medium‐sized
companies, which may have certain competitive advantages.
Commodity Price Volatility
The corporation is subject to the fluctuations in oil, natural gas and other
commodity energy prices. It is anticipated that the international oil & gas
industry has an inherently high capital cost due to large construction projects.
Nevertheless, changes in commodity prices could result in a decision by
Addax to suspend or reduce operations because such operations are no longer
economically viable. If production is not suspended or reduced during such
period, the low differential between the price of the corporation’s end
products and the cost of production could lower Addax’s revenues.
Reserve and resource risks
Addax currently provides third‐party reserves evaluation on its producing
assets, and calculations remain dependent on long‐term oil pricing, geological
assumptions made, and the companyʹs ability to produce said reserves.
Regulatory and Political
Addax’s operations are subject to a variety international laws, regulations and
guidelines, including laws and regulations relating to health and safety, the
conduct of operations, the protection of the environment and the manufacture,
management, transportation, storage and disposal of certain materials used in
operations. Changes to laws, regulations and guidelines due to environmental
changes, unforeseen environmental effects, general economic conditions and
other matters may cause adverse effects to operations. The companyʹs
exploration, producing and potential properties are located in Nigeria,
Cameroon, Gabon, the JDZ and Kurdistan. The companyʹs operations,
financial results, and valuation could be adversely affected by events beyond
its control taken by the current or future governments in those countries with
respect to policy changes regarding taxation, regulation, and other business
environment changes. While currently semi‐autonomous, Kurdistan remains
part of Iraq, existing oil exploration and agreements potentially being
impacted by political changes in that country. Similarly, some of the joint
venture partners on the JDZ Blocks 2, 3 and 4, as well as Nigeria’s OPL 291
have been the subject of official investigations regarding the award of said
blocks. Note that we are unaware of any investigation of Addax on said
blocks.
Environmental Liability
Addax is subject to various environmental laws and regulations enacted in the
jurisdictions in which it operates. Including the governance of the
manufacturing, processing, importation, transportation, handling and disposal
of certain materials used in operations. Addax may become liable for damages
against which it cannot adequately insure or against which it may elect not to
insure because of high costs or other reasons. Addax may be required to
increase operating expenses or capital expenditures in order to comply with
any possible new restrictions or regulations.
Operating Risk and Insurance
Operational risks and hazards could expose Addax to substantial liability for
personal injury, loss of life, business interruption, property damage or
destruction, pollution and other environmental damages. While insurance
coverage is expected to address all material risks to which it is exposed and is
adequate and customary in its current state of operations, such insurance is
subject to coverage limits and exclusions and may not be available for the risks
and hazards to which Addax is exposed.
Additional Financing
In order to execute our discussed plans, the corporation may require a
combination of additional debt and/or equity financing to support ongoing
operations, to undertake capital expenditures or to undertake acquisitions or
other business combination transactions. There can be no assurance that
additional financing will be available to Addax when needed or on terms
acceptable to Addax. Inability to raise financing to support ongoing operations
or to fund capital expenditures or acquisitions could limit growth.
Currency Exchange Rate Risk
The revenue generated from the operations of Addax may be denominated in
US dollars, or other international currencies so that fluctuations in the
currency exchange rates may have an impact on the results of Addax.

JUNE 16, 2008
403.509.0560
Bankers Petroleum Ltd. braden.purkis@raymondjames.ca

403.509.0534
BNK-TSX RATING & TARGET

RATING STRONG BUY 1
Initiating Coverage: Mediterranean Blue Skies, Target Price (6-12 mths) 3.50
Closing Price 2.12
Albanian Heavy Oil Total Return to Target 65%
MARKET DATA
Event Current Net Debt ($mln) (29)
Enterprise Value ($mln) 1072
We are initiating research coverage on Bankers Petroleum Ltd. (Bankers) with Shares Outstanding (mln, f.d.) 600
a STRONG BUY rating and a C$3.50 per share target price. Avg Daily Dollar Volume (3mo, mln) 3.62
52 Week Range $2.24 / $0.35
Action KEY FINANCIAL METRICS

FY-Dec 31 2007A 2008E 2009E
With our STRONG BUY rating, we are recommending Bankers to investors CFPS (C$) $0.05 $0.18 $0.45
P/CFPS nm 12.0x 4.7x
looking for international oil and gas assets with long term production and
CFPS - 1Q 0.01 0.02 0.10
reserve growth potential, managed by a proven technical team; well versed in CFPS - 2Q 0.01 0.04 0.10
operating in the international arena. We are also recommending a yes vote to CFPS - 3Q 0.01 0.05 0.11
CFPS - 4Q 0.02 0.07 0.14
the proposed spin off of Bankers US. NAVPS $3.57
P/NAV 59%
Analysis Revenue ($mln) $62 $158 $320
Yield (%) 0%
Bankers is an international oil and gas company geared towards creating value Commodity Assumptions
from long life petroleum assets. It is currently focused on monetizing the two WTI (US$/bbl) $72 $113 $130
HHub (US$/mmbtu) $7.12 $10.00 $7.50
billion barrels of Original Oil In Place (OOIP) estimated to be contained in
Exchng Rate (US$/C$) $0.94 $1.00 $1.00
Albania’s Patos Marinza heavy oil field. While the company also offers Production
investors exposure to US shale gas plays, the company’s Board of Directors Oil (bbl/d) 4,724 6,600 11,670
Nat. Gas (mmcf/d) 0 2 6
has recommended, pending shareholder approval, a proposal to spin off Total (boe/d) 4,763 6,850 12,670
Bankers U.S. into a separate entity. It is our view that this spin‐off; by allowing
EBITDA ($mln) 23 90 231
Mr. Badwi (CEO) and his team to leverage their core heavy oil expertise into
Net Debt/ CF 0.9x -0.5x -0.6x
reserves and production value creation in Albania; will prove to be positive to * All Figures in C$
Bankers shareholders in the long run. Operationally Bankers is guiding COMPANY DESCRIPTION
towards Albanian production of 20,000 bopd by 2010. While at first glance this Bankers is an international oil & gas company with operations in
Europe. The company is currently developing the Patos Marinza
fourfold production increase from current levels might be considered Albanian heavy oil field, reported as containing two billion barrels
aggressive, Mr. Badwi and his team have an established track record of under of OOIP.
promising and over delivering. We would not be surprised were the company
to exceed this production target by the end of 2010. Furthermore, it is our view
that a doubling, or even tripling, of the current 147 million barrels of booked
oil reserves in Albania could be achieved over the next 36 months.
Valuation
Our target price on Bankers is based on a risked sum‐of‐the‐parts NAV
calculation of C$3.57 per share inclusive of C$0.30 for the US. Our longer term
analysis indicates a potential value of C$5.76 per share for the company.
Closing prices as of June 9, 2008
Published by Raymond James Ltd., a Canadian investment dealer. Sources: Raymond James Ltd.,ThomsonOne, CapIQ
Table of Contents
Reserves Growth ............................................................................................8
Production Growth........................................................................................10
Company Profile ...........................................................................................11
Operations ....................................................................................................13
Risks.............................................................................................................19
Exhibit 1: Bankers Petroleum Corporate Summary
Bankers Petroleum Ltd. (BNK: T, L)
Company summary Shares & listing information
Overview:
Company name Bankers Petroleum Ltd. Shares & capitalization:
Ticker BNK Shares outstanding ‐ basic (M) 519
Exchange TSX, AIM Shares outstanding ‐ fully diluted (M) 600
Rating STRONG BUY Market capitalization (C$mln) $1,101
Current share price* C$2.12 Enterprise value 2007E ($mln) $1,072
12‐month target price C$3.50 Key shareholders*:
Total projected return (incl. dividends payable) 65% Sprott Asset Management Inc. 15.7%
BlackRock Investment Management (UK) Limited 11.7%
* as at Jun 09, 2008 Management & Directors 9.2%
Properties Resources (Dec 31, 2007) (Mln Boe)
Area Other/Details Reserves Proved Probable 2P 3P
Albania Albania 51 96 147 241
Patos Marinza ‐‐> Production US 3 6 9 12
Kucova ‐‐> Development Total 54 102 156 253
US RLI (Yrs) 21.5 40.9 62.5
Ardmore/Arkoma Basin ‐‐> 24,000 acres (net) Raymond James NAVPS C$3.57
Palo Duro ‐‐> 260,000 acres (net)
Black Warrior ‐‐> 95,000 acres (net) Key Operating and Financial Data
Appalachian ‐‐> 19,000 acres (net) Year end: Dec. 31 2006A 2007A 2008E 2009E
PRODUCTION:
Valuation Crude oil (b/d) 3,490 4,724 6,600 11,670
Year end: Dec. 31 2006A 2007A 2008E 2009E Natural gas (mcf/d) 0 232 1,500 6,000
P/CF nm nm 12.0x 4.7x Total prod. (boe/d) 3,490 4,763 6,850 12,670
EV/CF nm nm 11.7x 4.6x % Natural gas 0% 1% 4% 8%
P/E nm nm 19.1x 6.0x Y/Y growth 107% 36% 44% 85%
Target P/CF nm nm 19.9x 7.8x
Other Parameters FINANCIAL STATEMENTS:
EV/BOED $156,542 Revenues ($mln) $32 $62 $158 $320
EV/BOE (2P) $6.87 Royalty ($mln) $4 $7 $20 $37
Commodity Price Assumptions 2007 2008 2009 LT Operating Expenses ($mln) $12 $18 $28 $33
Brent oil (US$/b) $73 $113 $130 $130 Income Tax ($mln) $3 $10 $14 $16
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50 Net Income ($mln) ‐$2 ‐$2 $58 $185
Ops Cash Flow ($mln) $9 $24 $91 $232
Albania Operating Net Back Estimates
2006A 2007A 2008E 2009E CFPS ‐ basic $0.02 $0.05 $0.18 $0.45
Sale price $25.51 $35.73 $63.22 $69.10 CFPS ‐ fd $0.02 $0.05 $0.15 $0.39
Royalties $3.02 $4.17 $7.93 $7.90 EPS ‐basic $0.00 ‐$0.01 $0.11 $0.36
Opex $9.80 $10.46 $11.27 $7.06 EPS ‐ fd $0.00 ‐$0.01 $0.10 $0.31
Sales & Transport $1.82 $2.41 $2.76 $1.89 Capex ($mln) $68 $66 $80 $150
Pre Tax Net Back $10.87 $18.69 $41.26 $52.25 Net Debt (surplus) ($mln) $3 $21 ($50) ($132)
Net debt/cash flow 0.3x 0.9x (0.5x) (0.6x)
Tax $2.30 $5.91 $5.52 $3.46
Post Tax Net Back $8.58 $12.78 $35.74 $48.79
Management & Directors
Albania Production Profile Name Position
Executive Management
25,000
Abdel (Abby) Badwi CEO Ex Rally Energy
Richard Wadsworth President Ex Premier Oil, Koch Petroleum
20,000
Douglas Urch CFO Ex Rally Energy
Board representatives:
15,000
BOPD
Robert Cross Chairman Ex Northern Orion Resources

Abdel (Abby) Badwi CEO Ex Rally Energy
10,000
Victor Redekop Non‐exec Simmons Energy Services
Jonathan Harris Non‐exec Ex Tribeka
5,000
John Zaozirny Non‐exec Ex Canaccord Capital
Eric Brown Non‐exec Meyers Norris Penny
0
Ford Nicholson Non‐exec Ex‐Nations Energy
2005 2008E 2011E 2014E 2017E 2020E 2023E 2026E 2029E
Source: Company Reports, Raymond James Ltd., Capital IQ.

Borrowing phraseology from Mr. Dennis Gartman, we consider the ideal
investment as one with valuations growing “from the bottom left to the top
right.” Having adhered to this rule since late 2007, we strongly believe Bankers
will continue to be such an investment.

We are initiating coverage of Bankers Petroleum Ltd. with a STRONG BUY
rating and a target price of C$3.50 per share, which reflects our calculated
risked sum‐of‐the‐parts NAV of C$3.57 per share for the company. Note that
this includes a NAV of C$0.30 per share for the company’s US operations. We
believe a STRONG BUY rating is justified given the upside potential our target
price offers from current level. For longer term investors, our current analysis
indicates a potential value of C$5.76 per share by 2010, further adding support
to our strongly bullish view on this name.

A very well suited, multi‐faceted management team. Bankers’ management Well suited management
team, strong with heavy oil engineering and development expertise –
provided by the likes of Mr. Wadsworth (President) and Mr. Christensen (VP
Development) – recently gained, through the addition of Mr. Badwi (CEO),
Mr. McMurtie (VP Exploration), and Mr. Urch (CFO), additional heavy oil
geological depth, as well as strong geopolitical experience. Prior to joining
Bankers in 2007, Mr. Badwi et co were credited with transforming Rally
Energy Corp; an Egyptian heavy oil story; into the proverbial “five bagger
investment.” Specifically, following the implementation of a three year plan
similar to the one recently proposed for Bankers, capital markets valuation on
Rally Energy increased from C$1.50 per share in 2004 to a C$7.30 per share sale
of the company in 2007.

Executing a low risk development plan. Bankers recently unveiled a three Executing a low risk
year strategic development plan for Albania, the main focus of which is development plan
continuing to grow production through recompletion and re‐activation of
legacy wells on Patos Marinza. The plan is also aimed at booking additional
reserves, as well as growing production, from the fields through the
application of infill vertical and horizontal drilling, as well as waterflood and
thermal recovery techniques. Given the historical success achieved in re‐
completing legacy wells, the widespread use of infill drilling in various global
heavy oil basins, and management’s previous success with secondary and
tertiary recovery techniques from heavy oil reservoirs (waterflood and thermal
production), we believe this three year plan presents limited technological
risks. This in turn should provide investors with the ability to continue
monetizing this heavy oil asset.

Creating value through heavy oil production and reserves growth. With over Creating value through

147 million barrels in 2P reserves (gross) booked on Patos Marinza at year end heavy oil production and
reserves growth
2007, Bankers has a good foundation to achieve its forecast production growth.
In addition, with two billion barrels of Original Oil In Place (OOIP) on this
asset, the company has significant room to improve on its current reserve base.
It is our view that infill drilling, combined with waterflood and thermal
production, could increase recovery factors, and thus ‘bookable’ reserves, from
7‐8% of Original Oil In Place (OOIP) currently. Using other global heavy oil
fields as analogs, we note that recovery rates – thus booked reserves – of 20%
or more have been achieved, including at Rally Energy’s fields in Egypt. While
6% of the Patos Marinza field is reported as having been previously produced, Two billion barrels of
Original Oil In Place on
a 20% ultimate recovery rate still leaves room for doubling the current 2P Patos Marinza, allows
booked reserves. In addition, Bankers also recently acquired 50% of the significant room for
bookable reserves
Kucova heavy oil field, with an option to acquire the remaining 50% by June
increases
30, 2008. With an estimated 490 million barrels of OOIP, 6% of which is
reported as previously produced, the Kucova field has the potential to add
another 25 million to 75 million barrels (gross) in reserves. The company also
has 45.8 Bcf of 2P gas reserves in the US.

Refocusing the US shale gas play. Bankers’ management recently reaffirmed Restructuring the US
its strategic objective to remain focused on exploration and development shale plays into a
separate entity
activities in Albania. The company’s board has approved a proposal to
restructure the US operations into a separate entity. It is our view that such a
restructuring will prove to be positive to Bankers shareholders in the long run,
as it would allow Mr. Badwi (CEO) and his team to leverage their core
expertise of increasing reserves and production from heavy oil fields into
value creation from the Albania assets. We are recommending that
shareholders vote yes to this proposal.

Near term catalysts. We believe the following near term catalysts could create
additional value for current Bankers shareholders:

Announcement of the Kucova reserve base, as well as capital plans for
the field by the end of 2008;
Continued production growth on a qoq and yoy basis;
Preliminary results from a pilot cyclical steam injection project by
early 2009;
Vote on proposed segregation of the US shale gas plays into a separate
entity by the end of June 2008.


We have prepared an NPV (DCF, 10% after tax) summary for Bankers’ We calculate a reserve
based NAV of C$2.98
reserves in Albania and the US. per share for Bankers

In addition, based on our assessment of the company’s three year plan, as well
as review of the actual assets, we provide investors with NPV calculations on
potential incremental reserves from the Patos Marinza fields, as well as the
Kucova field recently acquired by the company. We also provide a land based
value for the US assets not associated with any third‐party certified resources,
based on recent land transactions on those plays.


mm Barrels US$ million Per Share US$ million US$/Share
Patos Marinza 147 US$1,446 US$2.41 100% US$1,446 US$2.41
Kucova 13 155 0.26 100% 155 0.26
Tishomingo 8 157 0.26 100% 157 0.26
Reserves NPV 167 1,758 2.93 1,758 2.93

Cash / (Net Debt) US$29 US$0.05 100% US$29 US$0.05

Reserves net asset value US$1,786 US$2.98 US$1,786 US$2.98

Reserves net asset value (C$) C$1,786 C$2.98 C$1,786 C$2.98

Patos Marinza additional upside 98 US$1,175 US$1.96 20% 235 0.39
Kucova additional upside 13 464 0.77 20% 93 0.15
Palo Duro land* N.A 26 0.04 100% 26 0.04
Arkoma land* N.A 1 0.00 100% 1 0.00

Unrisked net asset value US$3,453 US$5.76 $2,141 US$3.57
Unrisked net asset value (C$) C$3,453 C$5.76 C$2,141 C$3.57

*land at US$100 per acre


Given the continued volatility in commodity pricing, we are providing With an additional C$2.62
per share in longer term
optionality
Bankers under different long term oil prices and different discount rates.



$90 $110 $130 $150 $170

5% C$3.74 C$4.69 C$5.64 C$6.59 C$7.54
Discount

10% C$2.42 C$2.99 C$3.57 C$4.15 C$4.72
rate

12% C$2.09 C$2.58 C$3.06 C$3.55 C$4.03
15% C$1.73 C$2.11 C$2.50 C$2.88 C$3.26


We calculate a risked sum‐of‐the‐parts NAV of C$2,141 million, or C$3.57 per
share (fd) for Bankers.

Exhibit 4: Bankers Value Creation
4
C $ per Share
0
Reserves Patos Marinza Kucova additional Palo Duro
additional upside upside
Reserves Growth
Since the acquisition of the Albanian assets in 2004, the company has been
successful at adding shareholder value through production and reserve
growth. The company has consistently added reserves on a year‐on‐year basis
to its asset base in Albania. By year end 2007, the company’s 2P reserves from
Patos Marinza were reported by RPS Energy, a third party reserves
engineering firm, at 147 million barrels, up from 102 million barrels at the end
of 2006. As such, in addition to the 6% of Original Oil in Place (OOIP)
previously recovered from the field, the 2P reserves reflect recovery of
additional 7‐8% of OOIP, for a total recovery rate of 13‐14% of OOIP. Note that
the current reserves are based on continued re‐activations of legacy wells, as
well as the recently announced infill drilling on the field. Specifically, the
company plans on 84 successful new reactivations for each of 2008, 2009 and
2010, as well as drilling 68 vertical and 42 horizontal infill wells during this
same timeframe.

Exhibit 5: Potential Recovery Methods


Recovery rates of 20% or higher have been booked using steam injection on
heavy oil reservoirs, with Rally Energy being the ultimate case in point. We
even note that there is discussion, and evidence, that thermal EOR methods
can lead to as high as 50‐ 60% recovery rates on OOIPi. Given the size of the
prize; two billion barrels of OOIP on Patos Marinza and an additional 490
million barrels of OOIP on Kucova; Bankers recently started implementing a
steam injection pilot project in Albania; geared towards increasing recovery
rates from the Paros Marinza field.

Exhibit 6: Production Growth Assumptions

2008 2009 2010

New Reactivations 84 84 84

Waterflood Reactivations 3 19 16

Total Reactivation 87 103 100

Vertical Infill Drills 13 30 25
Waterflood Drills 0 7 8
Horizontal Drills 2 20 20
Thermal Drills 8 0 32
Total New Drills 23 57 85


As part of this project, the company injected steam on a legacy well in late
2007, achieving an estimated oil production of over 150 bopd during the first
few days of production, compared to prior production of seven bopd. Given
that legacy wells on the field were not engineered for the high temperature
required for thermal operations, and following on the encouraging results
from this initial test well, eight new thermal wells are scheduled to be drilled
in 2008. Allowing for an observation year, an additional 32 thermal wells
could then be drilled in 2010.

Using our base case of a 20% ultimate recovery rate, and accounting for the 6%
of OOIP previously produced from the field, we estimate a potential
remaining bookable reserve of 273 million barrels from the field – a potential
80% increase from the 147 million barrels currently booked. Similarly,
assuming an ultimate recovery rate range of 15% to 20% on the Kucova field;
and accounting for the previous production of 23.2 million barrels of oil, we
estimate that potential remaining bookable reserves on that property could
range up to 75 million barrels.

i
Dr. Ali Suat Bagci, Institute of Petroleum Engineering, Herriot-Watt University
In the US, Bankers reported 45.8 Bcfe of booked reserves at the end of 2007.
Production Growth
In conjunction with growing reserves, Bankers has increased Albanian
production from 600 bopd in 2004 to over 5,200 bopd currently. Based on our
review of the company’s assets and development plans, we are currently
forecasting an average production of 6,600 bopd from Albania for 2008,
slightly lower than the RPS Energy estimate of 7,230 bopd. We also forecast a
2008 production exit of 2,500 mcf/d from the Ardmore basin shale gas play in
the US.

Exhibit 7: Bankers Production Profile
25000
20000
Barrels per day
15000
10000
5000
0
2007 2009E 2011E 2013E 2015E 2017E 2019E 2021E 2023E 2025E 2027E 2029E
Prod from old wells Reactivations Waterflood New Vertical New Horizontal Thermal


In the US, the company is currently focused on a development program for its
Tishomingo shale gas field in the Ardmore Basin. A 2008 capital program of
$45.0 million has been established to drill, complete and tie in 30 wells in the
Tishomingo gas field. In the Palo Duro shale play, we believe that additional
consistent production has to be demonstrated before this shale gas play can be
declared commercial on a more regional scale.
Company Profile
Bankers shares currently trade on both the Toronto Stock Exchange, and the
AIM board under the symbol BNK.

The corporate and capital structures of the company are illustrated below.

Exhibit 8: Bankers Corporate Structure

Bankers Petroleum Ltd.
(British Columbia)
100% 50% 100%
Bankers Petroleum Albania Ltd. Privatco BNK Petroleum Holdings Inc.

(Cayman Islands) (Alberta) (USA)
100%, indirect
Bankers Petroleum (US) Inc.
(USA)


(M)
Common Shares Outstanding 519

Warrants 39
Stock options 41
Shares O/S ‐ fully diluted 600


Holders Shares
SPROTT ASSET MANAGEMENT INC. 15.7%

BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED 11.7%

CROSS ROBERT* 4.9%
CAPITAL RESEARCH AND MANAGEMENT COMPANY 4.0%

NICHOLSON, FORD GRANT** 3.1%

REDEKOP, VICTOR*** 1.0%
CIBC ASSET MANAGEMENT INC. 0.8%

FRONT STREET CAPITAL 0.8%
U.S. GLOBAL INVESTORS, INC. 0.3%
SENTRY SELECT CAPITAL CORP. 0.2%

Notes: * Non‐Executive Chairman, Member of Audit Committee and

Member of Corporate Governance Committee, ** Director,
*** Director and Member of Compensation Committee

The company was initially incorporated in Canada as Errington Gold
Exploration in 1983. Following a name change to Bankers Petroleum Ltd. in
June 2004, the company acquired the Patos Marinza assets in Albania.
Specifically, Bankers was provided with a 24 month period to evaluate the
Patos Marinza field and propose a plan of development to the Albanian
government and state oil company. The evaluation plan was completed in
2005, and a plan of development (PoD) for re‐completing and/or re‐activating
legacy wells on the fields was approved in 2006. Under the agreement, the
company has the right to produce and sell oil for a period of 25 years with an
option to extend for further five year increments. In March 2008, an
Addendum to the PoD was presented to the Albanian government, focused on
accessing additional reserves from the field through infill vertical and
horizontal drilling, and waterflood and thermal recovery techniques.

In 2005, Bankers expanded its geographic focus to the US, acquiring
approximately 190,000 net acres of undeveloped leases in the Palo Duro Basin
in Texas. By 2006, the company had increased its US shale gas land position to
approximately 260,000 acres (net) in that basin. Subsequently, the company
added 250,000 acres (net) of Shale Gas potential land in Texas, Oklahoma, New
York, Mississippi and Alabama, bringing its total US land position to
approximately 500,000 acres (net). In 1Q07 Bankers sold a 27% interest in part
of its Palo Duro acreage to Palo Duro Energy.
Leadership Team
Having spent extensive time with the Bankers’ management team, including
on location in Albania, we believe they are very well equipped to transform
sustainable development success into production growth. In addition to a
strong geological expertise with heavy oil reservoirs, the management team
has extensive previous experience working on the Patos Marinza fields in
Albania. We also consider this team to be one of the better equipped ones to
manage geopolitical issues in their operational areas. The management team
includes the following:

Abby Badwi, CEO and Director, has 35 years of oil and gas exploration,
development and production experience. Prior to Bankers, he held various
technical and managerial positions in oil and gas operations in North America,
South America, Asia and the Middle East, including the role of CEO at Rally
Energy. Mr. Badwi is a registered professional geologist.

Richard Wadsworth, President, has over 14 years of international as well as
Canadian oil and gas experience. Prior to Bankers, he served as the Business
Unit Manager for Premier Oil Plc in Albania. He has also led several heavy oil
and shallow gas development for Koch Exploration Canada. Mr. Wadsworth
is a graduate of the University of Calgary (Chemical Engineering).
Ian McMurtrie, VP Exploration, joined Bankers from Rally Energy, where he
was the VP exploration from 2004 to 2008. Prior to Rally, he was directly
involved in discovering and developing several petroleum fields throughout
North America. Mr. McMurtrie is a registered professional geologist.

Bob Petryk, VP Operations, has over 28 years of oil and gas industry
experience in both international, as well as Canadian operations. Prior to
Bankers, he held various engineering, operational and senior management
positions including President and COO of a junior public oil company, as well
as Senior Vice President for a large public oilfield services company. He is a
registered professional engineer.

Douglas C. Urch, CFO, has over 25 years of oil and gas experience. Prior to
joining Bankers, he spent 7 years as the CFO of Rally Energy. Mr. Urch is a
Certified Management Accountant (CMA) and holds a B.COM from the
University of Calgary

Operations
The company is currently focused on two main operational areas: Heavy oil in
Albania and Shale Gas in the US.
Albania
Albania, a Mediterranean rim European country, is bordered by Montenegro
to the north, Greece, Serbia and Macedonia to the east, the Adriatic Sea to the
west, and Greece to the south. With a population of approximately 3.6 million,
and a GDP (2007) of US$11.2 billion (US$5,500 per capita) the country remains
one of the poorest in Europe. Following 46 years of communism, Albania
transitioned to a multiparty democracy during 1990‐1992. While this transition
remains a work in progress, the Democratic Party’s victory in the 2005 general
elections has led to renewed economic growth and reduction of crime and
corruption. Specifically, Albania’s GDP grew by 5% in 2007, with inflation
reported as low and stable.

Bankers currently has a 100% working interest in the Patos Marinza heavy oil
field, as well as 50% working interest in the Kucova heavy oil field, with an
option to acquire the remaining 50% by the end of June 2008. Both fields are
located in the Dures Basin in southern central Albania.

Exhibit 10: Bankers Petroleum Operations in Albania


Patos Marinza
The Patos Marinza oilfield, discovered in 1928, is located approximately 10 km
from the city of Fier in Albania, and is estimated to contain two billion barrels
of Original Oil In Place (OOIP). The main producing zones in the field are the
Gorani, Driza and Marinza unconsolidated sandstone reservoirs, containing
heavy oil at depths up to 2,000 metres. Assuming the application of western
heavy oil production technology such as Progressive Cavity Pumps (PCP),
engineered down spacing, and EOR methods, we strongly believe that
ultimate recovery rates of 20% or higher are achievable from the majority of
these sands.
Kucova
In January 2008, Bankers announced the acquisition of a 50% interest in
Albania’s Kucova heavy oil field, via the acquisition of 50% of a private
company (Privatco). Similar to the agreement on Patos Marinza, Privatco has
the right, through the Kucova Agreement with AKBN and Albpetrol, to
evaluate and redevelop the Kucova oilfield.

Discovered in 1926, the Kucova field was initially developed in 1935, and is
estimated to have produced close to 23.2 million barrels since then. Based on
legacy reservoir modeling by DeGolyer and MacNaughton, done under
Canadian NI 51‐101 standards, Kucova is estimated to contain in excess of 490
million barrels of OOIP, including approximately six percent of which has
been recovered to date. Located within the same petroleum basin as Patos
Marinza, the Kucova heavy oilfield presents similar geological characteristics,
including multiple stacked sandstone reservoirs. As part of the acquisition,
Bankers has the option to acquire the remaining 50% interest in the Kucova
oilfield by June 30, 2008. While we currently expect Bankers to exercise this
option, we do not yet model 100% of the field into our NAV calculations.
Going forward, the company plans on completing a technical evaluation of the
field, results of which, including details of planned capital program and
reserves assessment are expected by the end of 2008.

US

Bankers currently has exposure to four emerging US shale gas plays, mainly
the Palo Duro, the Ardmore and Arkoma, the Appalachian and the Black
Warrior Basins.

Exhibit 11: Bankers Petroleum Operations in the U.S.


In addition to the Tishomingo field, Bankers US holds 350,000 net acres of
shale gas prospective land in three other plays. For the balance of 2008, the
company expects to focus on developing the Oklahoma Woodford shale
Tishomingo field. Note that we currently calculate an NPV (10% DCF) of
approximately US$1.5 million per Bcf of shale gas resource.

US$ ($000) 2004 2005 2006 2007 2008E 2009E
ASSETS
Current Assets
Cash and cash equivalents 15,665 13,529 6,329 3,560 72,983 155,434
Investments 831 ‐ ‐ 1,120 1,428 1,428
Accounts receivable 1,192 3,846 7,214 21,128 24,177 24,177
Crude oil Inventory 72 336 713 985 1,265 1,265
Deposits and prepaid expenses 486 1,016 1,121 1,601 1,116 1,116
18,245 18,726 15,377 28,394 100,969 183,420

Property, plant and equipment 4,827 38,120 122,653 175,901 240,737 362,989
23,072 56,846 138,030 204,295 341,706 546,409

Current Liabilities
Operating loans ‐ ‐ 4,772 15,805 16,780 16,780
Accounts payable and accrued liabilities 2,345 5,766 11,369 18,444 20,840 20,840
Current portion of term loan ‐ ‐ 125 3,750 3,750 3,750
2,345 5,766 16,266 37,999 41,370 41,370

Term loan ‐ ‐ 1,875 11,250 9,688 9,688
Asset retirement obligations ‐ ‐ 1,593 2,610 3,227 3,227
Future income tax liability 101 282 3,126 13,400 27,240 43,240
Share capital 20,956 53,204 116,696 136,513 194,807 194,807

Warrants ‐ ‐ ‐ 2,539 2,794 2,794
Contributed surplus 593 2,014 4,456 8,308 13,053 17,053
Deficit ‐ 923 ‐ 4,421 ‐ 5,982 ‐ 8,324 49,527 234,230
20,626 50,798 115,170 139,036 260,181 448,884

23,072 56,846 138,030 204,295 341,706 546,409


Exhibit 13: Income and Cash Flow Statements
US$ ($000) 2004 2005 2006 2007 2008E 2009E
Revenue
Oil and gas revenue 4,033 13,709 31,586 62,105 158,490 319,576
Royalties 688 1,498 3,743 7,251 19,878 36,547

Interest 43 556 569 574 1,895 3,823
3,388 12,767 28,412 55,428 140,507 286,852
Expenses
Operating 1,870 7,643 12,481 18,189 28,265 32,630
Sales and transportation 155 647 2,251 4,182 6,914 8,750
General and administrative 2,003 4,078 5,760 8,311 9,922 10,000
Interest and bank charges 182 ‐689 n.a. 4,096 280 n.a.
Interest on term loan n.a. n.a. 68 1,244 2,601 3,022
Foreign exchange loss (gain) ‐127 570 ‐660 ‐1,300 1,048 n.a.
Stock‐based compensation 329 1,823 2,327 3,405 4,397 4,000
Depletion, depreciation and accretion 93 2,011 4,902 9,369 15,696 27,747
4,505 16,083 27,129 47,496 69,124 86,149
Earnings (loss) before income taxes ‐1,116 ‐3,316 1,283 7,932 71,383 200,703
Future income tax expense 101 181 2,844 10,274 13,840 16,000

Net income (loss) for the period ‐1,217 ‐3,497 ‐1,561 ‐2,342 57,543 184,703
Cash provided by (used in)
Operating activities
Net income (loss) for the period ‐1,217 ‐3,497 ‐1,561 ‐2,342 57,543 184,703
Items not involving cash
Depletion, depreciation and accretion 93 2,011 4,902 9,369 15,696 27,747
Future income tax expense 101 181 2,844 10,274 13,840 16,000
Stock‐based compensation 329 1,823 2,327 3,405 4,397 4,000
Other 182 ‐689 n.a. 3,430 n.a. n.a.
‐512 ‐171 8,512 24,136 91,476 232,450
Change in non‐cash working capital 708 ‐3,859 ‐338 ‐6,480 ‐316 ‐

196 ‐4,030 8,174 17,656 91,160 232,450
Investing activities
Additions to property, plant and equipment ‐4,914 ‐31,216 ‐67,727 ‐65,703 ‐79,567 ‐ 150,000
Purchase of Investments ‐831 1,520 n.a. n.a. n.a. n.a.
Restricted Cash ‐1,144 1,144 n.a. n.a. n.a. n.a.
Change in non‐cash working capital ‐774 n.a. 2,090 ‐1,111 ‐132 n.a.
‐7,663 ‐28,551 ‐65,637 ‐66,814 ‐79,699 ‐150,000
Financing activities
Issue of common shares and warrants, net of
share issue costs 19,275 31,590 43,491 22,356 58,549 n.a.
Operating loans ‐65 n.a. 4,772 11,033 975 n.a.
Term loan n.a. n.a. 2,000 13,000 ‐1,562 n.a.
19,210 31,590 50,263 46,389 57,962 n.a.
Increase in cash and cash equivalents 11,742 ‐992 ‐7,200 ‐2,769 69,423 82,450

Cash and cash equivalents, beginning of period 2,778 14,521 13,529 6,329 3,560 72,983
Cash and cash equivalents, end of period 14,521 13,529 6,328 3,560 72,983 155,434
Fiscal terms

The fiscal terms of Bankers Albanian block include a 1% government royalty,
increasing to 5% (incremental sliding scale) following expenditure recovery.
The company is also subject to a 70% over riding royalty, declining at 15% per
annum, on taken over production. A 50% income tax (following depletion of
the cost recovery pool) is also payable on net income.


Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $97.86 $117.68 $122.42 $122.78 $115.19
RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88
Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $122.85 $122.61 $121.97 $121.85 $122.32
RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00


Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $8.64 $10.92 $12.45 $12.74 $11.19

RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $13.06 $10.67 $10.78 $11.15 $11.42

RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50


Risks

Competition
of Bankers or enter markets that Bankers is active in.

Bankers to suspend or reduce operations because such operations are no
longer economically viable. If production is not suspended or reduced during
such period, the low differential between the price of the corporation’s end
products and the cost of production could lower Bankers’ revenues.

Bankers currently provides third‐party reserves evaluation on its producing

Bankers’s operations are subject to a variety international laws, regulations
and guidelines, including laws and regulations relating to health and safety,
the conduct of operations, the protection of the environment and the
manufacture, management, transportation, storage and disposal of certain
materials used in operations. Changes to laws, regulations and guidelines due
to environmental changes, unforeseen environmental effects, general economic
conditions and other matters may cause adverse effects to operations. The
companyʹs exploration, producing and potential properties are located in
Albania and the USA. The companyʹs operations, financial results, and
valuation could be adversely affected by events beyond its control taken by
the current or future governments in those countries with respect to policy
changes regarding taxation, regulation, and other business environment
changes.
Bankers is subject to various environmental laws and regulations enacted in
the jurisdictions in which it operates. Including the governance of the
of certain materials used in operations. Bankers may become liable for
damages against which it cannot adequately insure or against which it may
elect not to insure because of high costs or other reasons. Bankers may be
required to increase operating expenses or capital expenditures in order to
comply with any possible new restrictions or regulations.

Operational risks and hazards could expose Bankers to substantial liability for
and hazards to which Bankers is exposed.

additional financing will be available to Bankers when needed or on terms
acceptable to Bankers. Inability to raise financing to support ongoing
operations or to fund capital expenditures or acquisitions could limit growth.
The revenue generated from the operations of Bankers may be denominated in
US dollars or other international currencies so that fluctuations in the currency
exchange rates may have an impact on the results of Bankers.
JUNE 16, 2008
403.509.0560
Gran Tierra Energy Inc. 403.509.0534
RATING & TARGET

GTE-TSX | GTE-AMEX RATING MARKET PERFORM 3
Initiating Coverage: A Substantial South American Oil Closing Price 6.62
Total Return to Target 6%
Company in the Making
MARKET DATA
Current Net Debt ($mln) (25)
Event Shares Outstanding (mln, f.d.) 122
Avg Daily Dollar Volume (3mo, mln) 1.41
We are initiating research coverage on Gran Tierra Energy Inc. (Gran Tierra) 52 Week Range $6.85 / $3.15
with a MARKET PERFORM rating and a C$7.00 per share target price. KEY FINANCIAL METRICS
FY-Dec 31 2007A 2008E 2009E
CFPS (C$) $0.10 $0.80 $1.76
Action P/CFPS nm 8.3x 3.8x
CFPS - 1Q -0.02 0.11 0.45
We are recommending that investors seeking a growth oriented, well CFPS - 2Q 0.05 0.15 0.45
managed, South American focused international oil & gas junior keep Gran CFPS - 3Q 0.04 0.25 0.44
CFPS - 4Q 0.03 0.30 0.43
Tierra on their radar screen. NAVPS $6.96
P/NAV 95%
Revenue ($mln) $32 $125 $229
Analysis Yield (%) 0%
With an asset base in Colombia, Peru, and Argentina, a ‘blue chip style’ Commodity Assumptions
WTI (US$/bbl) $72 $113 $130
management team, growing production, and extensive exploration acreage, HHub (US$/mmbtu) $7.12 $10.00 $7.50
we believe Gran Tierra offers long term upside associated with investing in Exchng Rate (US$/C$) $0.94 $1.00 $1.00
Production
international oil & gas, with potentially lower risk than some of its peers. Total (boe/d) 1,672 4,015 6,234
Growing cash flow from Gran Tierra’s production combined with medium to
low risk exploration potential offers the platform for building a substantial oil
& gas company. Gran Tierra’s high impact exploration lands have the EBITDA ($mln) 19 105 204
Net Debt/ CF -1.3x -0.7x -1.1x
potential to transform the company, with the associated returns for current
shareholders. While current valuations reflect a discount to our calculated COMPANY DESCRIPTION
Gran Tierra is an international oil & gas company with operations
risked NAV on Gran Tierra, market is offering close to a 60% premium to the in South America. The company currently has production stage
company’s reserve based NAV (under our commodity assumptions), while it blocks in Colombia and Argentina, as well as exploration areas in
Colombia, Argentina and Peru.
is valuing other international plays on the basis of par, or a slight premium, to
reserves NAV. Our concern is that markets could adjust to a potential short
term commodity pullback by re‐pricing Gran Tierra closer to reserve NAV.
This in turn, leads to our MARKET PERFORM rating.
Valuation
We currently value Gran Tierra on the basis of a risked sum‐of‐the‐parts NAV,
which includes an NPV (DCF, 10% after tax) of booked reserves, as well as a Closing prices as of June 9, 2008
geological risk adjusted NPV (DCF, 10% after tax) of the company’s Sources: Raymond James Ltd.,ThomsonOne, CapIQ
per share on Gran Tierra. On an un‐risked basis, we currently calculate a NAV
in excess of C$60.00 per share.
Table of Contents
Reserves Growth ............................................................................................7
Production Growth..........................................................................................8
Company Profile .............................................................................................9
Operations ....................................................................................................12
Colombia ......................................................................................................13
Argentina ......................................................................................................22
Peru ..............................................................................................................24
Appendix ......................................................................................................29
Fiscal Regimes..............................................................................................31
Risks.............................................................................................................32
Exhibit 1: Gran Tierra Corporate Summary
Gran Tierra Energy Inc.
Overview:
Company name Gram Tierra Energy Inc. Shares & capitalization:
Ticker GTE Shares outstanding ‐ basic (M) 100.0
Exchange TSX Shares outstanding ‐ fully diluted (M) 122.3
Rating
Current share price*
MARKET PERFORM
C$6.62
Market capitalization (C$mln)
Enterprise value 2007E ($mln)
$662
$637
Total projected return 6% U.S. Global Investors, Inc. 4.5%

Greywolf Capital Management LP 2.1%

Properties Resources (Dec 31, 2007) (Mln Boe)
Area Other/Details Reserves Proved Probable 2P
Columbia Argentina 2 1 4
Chaza ‐‐> Production Columbia 6 6 11
Guayuyaco ‐‐> Production Total 8 7 15
Santana ‐‐> Production
Argentina ‐‐> Production RLI (Yrs) 5.4 4.8 10.2
Peru
Blocks 122 & 128 ‐‐> Exploration Key Operating and Financial Data
Year end: Dec. 31 2006A 2007A 2008E 2009E
Valuation PRODUCTION (WI):
Year end: Dec. 31 2006A 2007A 2008E 2008E Columbia (b/d) 752 1,002 3,375 5,677
P/CF nm nm 8.3x 3.8x Argentina (b/d) 535 669 639 556
EV/CF nm nm 8.0x 3.6x Total prod. (boe/d) 1,287 1,672 4,015 6,234
P/E nm nm 13.2x 4.9x
Target P/CF nm nm 8.8x 4.0x Y/Y growth 270% 30% 140% 55%
Other Parameters
EV/BOED $158,623 FINANCIAL STATEMENTS:
EV/BOE (2P)
NAVPS
$42.58
C$6.96
Revenues ($mln)
Operating Expenses ($mln)
$12
$4
$32
$10
$125
$14
$229
$18
Commodity Price Assumptions 2007 2008 2009 LT Income Tax ($mln) $1 $0 $20 $20
Brent oil (US$/b) $73 $113 $130 $130 Net Income ($mln) ‐$6 ‐$8 $50 $135
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50 Ops Cash Flow ($mln) ‐$1 $10 $80 $176

Operating Net Back estimates CFPS ‐ basic ‐$0.01 $0.10 $0.80 $1.76
2006A 2007A 2008E 2009E CFPS ‐ fd ‐$0.01 $0.07 $0.65 $1.44
Sale price EPS ‐basic ‐$0.08 ‐$0.09 $0.50 $1.35
(net of royalties) $28.84 $59.31 $94.46 $110.55 EPS ‐ fd ‐$0.05 ‐$0.06 $0.41 $1.11
Opex $10.11 $19.25 $10.22 $8.58 Capex ($mln) $18 $13 $47 $40
Pre Tax Net Back $18.73 $40.06 $84.24 $101.97 Net Debt (surplus) ($mln) ($17) ($13) ($54) ($191)
Net debt/cash flow nm (1.3x) (0.7x) (1.1x)
Tax $1.62 $0.54 $15.23 $9.66
Post Tax Net Back $17.11 $39.52 $69.02 $92.31
Production Profile Name Position
Dana Coffield President & CEO Ex EnCana (Middle East)
6000 Martin Eden CFO Ex Artumas Group Inc.
Colombia Argentina
Max Wei VP Operations Ex Shell Canada
5000
Barrels per day
4000 Jeffrey Scott Chairman Postell Energy

Dana Coffield President & CEO Ex EnCana (Middle East)
3000
Walter Dawson Non‐exec Ex Saxon Energy Services
2000 Verne Johnson Non‐exec Ex Imperial Oil
Nick Kirkton Non‐exec Ex KPMG
1000

0
2005 2008E 2011E 2014E 2017E 2020E 2022E 2025E 2028E

Source: Company Reports, Raymond James Ltd., Capital IQ

“Success is dependent on effort” – Sophocles

Tenfold reserve increase over two years. At year end 2007, Gran Tierra Tenfold reserve
increase in two years
booked 11.4 million barrels of net 2P oil reserves (16.5 million barrels 3P), up
from 0.7 million barrels at the end of 2005. Note that the 2007 year end
reserves do not include the successful results from the Costayaco 2 and 3
appraisal wells. Based on our analysis of these results, we currently estimate
the potential for an additional 15 to 30 million barrels on the Costayaco field in
gross 2P reserves.

Targeting significant production increase in 2008/2009. Following the above 145% production growth
exploration value add, the company is focused on monetizing its assets over
the next few years. Specifically, we currently model 2008E production of 4,015
bopd, a potential 145% increase over 2007. For 2009, we anticipate an
additional yoy 55% production increase.

Management team: “Been there, done that.” We believe in the team’s ability An experienced
management team…
to deliver continued success. Each of Gran Tierra’s key technical team
members has several decades of international oil & gas exposure. Having
spent time with Gran Tierra’s management and technical teams as we
reviewed the company’s operations, we were impressed by their depth of
experience, as well as solid grasp of regional geology.

A vision to grow into a “substantial international E&P company.” The …with a clear vision
company’s growth strategy involves growing production from current

reserves, followed by identification of prospective resources – from existing or
new – exploration acreage, drilling prospects to potentially prove up reserves,
closing the cycle through the development of these new reserves.

Low to medium risk exploration. Gran Tierra’s medium to low risk Growth foundation via
low risk exploration
exploration assets in Colombian and Argentinean proven basins provide a
steady growth foundation.

High impact – game changing – exploration in Peru. The company has Exposure to game
changing high impact
exposure to some very exciting, high impact, exploration acreage in Peru. plays
While still a couple of years away from drilling, a discovery could transform
Gran Tierra into a substantially larger organization than today.

additional value for current Gran Tierra shareholders:

Costayaco field reserves update in 2H08;
Exploration drilling in Colombia and Argentina in 2H08;
Potential resource estimates in Peru in late 2008 or 2009.

We do, however, note that the recent share price appreciation on Gran Tierra
could partially be pricing some of the above catalysts into the company’s
current market value.


We have prepared an NPV (DCF, 10% after tax) summary for Gran Tierra’s
assets in South America, based on blowing down the company’s reserves. As
part of our NAV calculation on Gran Tierra, we also provide NPV (DCF, 10%
after tax) calculations on the company’s exploration potential.
Gran Tierra WI Reserves/Resources Unrisked NPV Unrisked NPV Risking Risked NPV Risked NPV
Interest mm Barrels US$ million Per share US$ million Per share
Chaza 50% 9 $340 $2.78 100% $340 $2.78
Guayuyaco 35% 1 42 0.34 100% 42 0.34
Santana 35% 1 25 0.21 100% 25 0.21
Palmar Largo 14% 1 5 0.04 100% 5 0.04
Vinalar 50% 1 12 0.10 100% 12 0.10
El Chivil 50% 1 10 0.08 100% 10 0.08
Other Argentina 1 5 0.04 100% 5 0.04
Reserve based NAV 15 440 3.59 100% 440 3.59
2008E net cash/(debt) US$54 US$0.44 100% US$54 US$0.44
Reserves net asset value US$494 US$3.87 US$494 US$3.87

Reserves net asset value (C$) C$494 C$3.87 C$494 C$3.87
Chaza upside 14 $445 $3.63 5% $22 $0.18

Azar upside 10 366 2.99 5% 18 0.15
Putumayo A/B TEA upside 30 1,098 8.98 5% 55 0.45
Argentina Exploration upside 15 143 1.16 5% 7 0.06
Peru Exploration upside 300 5,100 42 5% 255 2.08
Exploration upside 7,151 58 358 2.92
Net asset value US$7,645 US$62.49 US$851 US$6.96

Net asset value (C$) C$7,645 C$62.49 C$851 C$6.96

Gran Tierra under different long term oil prices and different discount rates.

$90 $110 $130 $150 $170
5% C$6.81 C$7.44 C$8.08 C$8.71 C$9.34
Discount
10% C$6.02 C$6.49 C$6.96 C$7.43 C$7.89

rate
12% C$5.79 C$6.21 C$6.63 C$7.05 C$7.47

15% C$5.50 C$5.86 C$6.22 C$6.58 C$6.95


We calculate a risked sum‐of‐the‐parts NAV of C$851 million, or C$6.96 per We calculate a core,
reserve backed NAV of
share (fd) for Gran Tierra. C$3.87 per share

Exhibit 4: Gran Tierra Value Creation

$80

$70

$60

$50
C$ per Share

$40

$30

$20

$10

$0

Reserves Argentina Chaza upside Azar upside Putumayo Peru
Exploration A/B TEA Exploration
upside upside upside

Reserves Growth
Gran Tierra continues to deliver year‐over‐year reserve growth from its
expanding asset base. Having acquired its initial assets with 0.7 million barrels
of booked oil reserves (net) in 2005, the company exited 2007 with 11.4 million
barrels of oil in net 2P reserves. This increase reflects a combination of
acquisitions, as well as organic, reserve growth.
Exhibit 5: Reserves Growth

18

16

14

12

MMBO
10
8
6
4
2
0
2005 2006 2007

Proved Probable Possible


For 2008, in addition to potential exploration success, we currently anticipate
an increase in booked reserves from the Costayaco field in Colombia.
Specifically, we estimate that the incorporation of results from the two recent
successful appraisal wells on the field could potentially add 15 to 30 million
barrels in gross oil reserves.

Going forward, Gran Tierra aims to substantially grow its discovered reserves
through exploration activities. For 2008, the company plans on drilling a
minimum of 3 of its 61 identified prospects and leads. Although exploration
outcome is binary, Gran Tierra’s extensive range of exploration targets (61
currently identified) is statistically significant, allowing for the potential
discovery of the company’s risked potential estimate, or 16 million barrels of
oil, and 96 Bcf of gas. On an un‐risked basis, the company has seismically
identified potential resources of 79 million barrels of oil and 336 BCF of gas.
The company also holds close to a million net acres of land in Colombia, over
1.3 million net acres in Argentina, and over 3.4 million net acres in Peru. Note
that the company’s total land position (6.1 million acres), covers an area half
the size of Switzerland, or a fifth that of Alberta’s Athabasca Oil Sands.
Gran Tierra has; in our view; created a well balanced exploration portfolio.
Low to medium risk exploration acreage in proven basins offers investors a
long term growth platform. In addition, exposure to significant high impact
exploration lands exponentially increases the exploration value adding
potential. Having reviewed the limited available data on the company’s high
impact lands in Peru; including ‘trendology’ with existing fields; the proposed
geological model, as well as regional geologies, we believe that these blocks
have the potential to add several hundreds of million barrels of oil resources
from exploration activities. We currently model 300 million barrels of
exploration potential from the company’s exploration assets in Peru, and
assign these blocks a 5% COS. As an aside, we note that our 300 million barrels
estimate is in line with the third party estimate of the potential oil on Pacific
Rubiales’ (PEG‐TSX, STRONG BUY) neighbouring, and similar sized, blocks in
Peru’s Marañon basin.
Production Growth
For 2008, we are expecting the company to produce 4,015 boed (wi), while for
2009, we are currently forecasting production of 6,234 boed (wi) from the
company’s existing assets.

Exhibit 6: Gran Tierra Production Profile
6,000
Colombia Argentina
5,000
4,000
Barrels per day
3,000
2,000
1,000
0
2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E


While production, under current booked reserves, suggest a 5,750 boed
production peak in 2010, we believe Gran Tierra is positioned to deliver over
10,000 bopd (net) production by 2010/2011 from its ongoing exploration and
development work, including the recent Costayaco 2 and 3 wells.
Company Profile
Gran Tierra is a production and development stage international oil and gas
company, currently focused on South America. The company has assets in
Colombia, Peru and Argentina. The company’s shares trade on the Toronto
Stock exchange, as well as the American Stock Exchange under the symbol
GTE. The corporate and capital structures of the company are illustrated
below.

Exhibit 7: Gran Tierra Corporate Structure
(Nevada)
1203647 Alberta Inc Peru Branch Gran Tierra Energy

Colombia Ltd
Gran Tierra Goldstrike Inc. Colombia Branch
(Alberta)
PCESA
(Ecuador)
Gran Tierra Argentina SA
(Argentina)



(M)
Warrants 17
Stock options 6

Holders Shares

DAWSON, WALTER 2.5%
GREYWOLF CAPITAL MANAGEMENT LP 2.1%
SCOTT, JEFFREY 6.6%
COLLFIELD DANA 5.3%
ORUNESU, RAFAEL 5.3%
WEI, MAX 5.1%
HART, JAMES 5.1%

SMITH, NADINE 5.0%
JOHNSON, VERNE 4.5%

Source: Capital IQ, Raymond James Ltd.

Leadership team
We believe in the team’s ability to deliver continued success. Each of Gran
Tierra’s key technical team members has several decades of international oil &
gas exposure.

Dana Coffield, President, CEO, and Director, came to Gran Tierra with a
proven track record in international oil & gas operations. His last position
prior to Gran Tierra was VP Middle East Business Unit for EnCana. He has
also held various managerial as well as technical roles with Alberta Energy
Company, and Arco International. Mr. Coffield is a graduate of the University
of South Carolina (M.Sc. and PhD in Geology), as well as the Colorado School
of Mines (B.Sc. in Geological Engineering).

Max Wei, VP Operations, joined Gran Tierra in May 2005. Prior to that, he
was EnCana’s Team Leader for Qatar and Bahrain operations. In addition, he
has held positions with Shell, Imperial Oil, Bechtel, Occidental Petroleum and
Marathon in far reaching corners of the globe, including South America. Mr.
Wei is a graduate of the University of Alberta (B.Sc. in Petroleum
Engineering).
Martin Eden – CFO, joined the company from Artumas Group, where he was
also the CFO. Mr. Eden has over 26 years of accounting and finance experience
in the domestic and international energy industry, including as CFO of
Chariot Energy, Assure Energy, Kyrgoil Corporation and Geodyne Energy.
Mr. Eden was also Finance Manager of Nexen’s Yemen operations. He is a
graduate of Birmingham University (B.Sc. in Economics) as well as Brunel
University (MBA).

Edgar Dyes – President, Gran Tierra Energy Colombia, was previously the
COO of Argosy Energy’s general partner. He has over 20 years of hands‐on
Colombian oil & gas experience. Prior to that, Mr. Dyes held various technical
and managerial positions with Union Texas Petroleum, Quintana Energy
Corporation, Jackson Exploration, CSX Oil and Gas, and Garnet Resources. In
addition to Colombia, he has worked in the United Kingdom, Germany,
Indonesia, Oman, Brunei, Egypt, Somalia, and Ecuador. Mr. Dyes is a graduate
of the Stephen F. Austin State University (Business).
Operations
Gran Tierra currently has interests in 19 E&P contracts; nine in Colombia,
eight in Argentina, and two in Peru.

Exhibit 9: Gran Tierra Property Breakdown

Country
Asset Gran Area Status
Tierra Gross

Interest 000ʹs acres

Colombia
Santana 35% 1.1 Producing
Guayuyaco 35% 52.4 Producing
Chaza 50% 80.2 Producing
Talora 20% 108.3 Exploration
Rio Magdalena 100% 144.7 Exploration
Mecaya 15% 74.1 Exploration
Azar 40% 51.6 Exploration
Putumayo West A 100% 570.0 Exploration
Putumayo West B 100% 109.0 Exploration
Sub‐total 1,191.4

Argentina

Palmar Largo 14% 341.5 Producing

El Vinalar 50% 248.3 Producing
Chivil 100% 62.5 Producing
Ipaguazu 100% 43.2 Non‐producing
Nacatimbay 100% 36.6 Non‐producing
Valle Morado 93% 49.9 Non‐producing
Surubi 100% 90.7 Exploration
Santa Victoria 100% 1,033.6 Exploration
Sub‐total 1,906.3
Peru

Block 122 100% 1,217.7 Exploration
Block 128 100% 2,218.4 Exploration

Sub‐total 3,436.1

TOTAL 6,533.8


Exhibit 10: Gran Tierra Operations

Colombia

Exploration and Produc tion

Peru

Exploration

Argentina

Exploration and Produc tion


Colombia
Colombia, the only South American country with both a Pacific and a
Caribbean coastline, is bordered by Venezuela to the northeast, Brazil to the
southeast, Ecuador and Peru to the south, and Panama to the northwest. With
almost 45 million people, it is one of the most populous countries in South
America. Colombia has substantial oil reserves and is a major producer of
gold, silver, emeralds, platinum and coal. Its 2007 GDP (PPP) was
approximately US$ 320.4 billion (US$ 7,200 per capita). The Colombian
economy has experienced positive growth over the past five years, with a 6.5%
GDP real growth rate in 2007. A 40‐year conflict between the government and
insurgent and paramilitary groups fueled by drug‐related crime remains one
of the country’s major problems, impacting parts of the country’s hydrocarbon
producing basins. Some of the ongoing issues also include high
unemployment and funding new exploration to offset the country’s declining
oil production. Colombia’s president, Alvaro Uribe, elected in 2002, is in his
second term in the office. He is credited for reducing the activities of anti‐
government armed groups.

Exhibit 11: Colombian Basins

Source: ANH

Gran Tierra’s Colombian blocks lie in the Putumayo and Magdalena Basins.

The Magdalena Basin, comprised of the Lower, Middle and Upper
Magdalena Basins, runs along the Andean mountain range (Cordillera
Occidental, Cordillera Central, and Cordillera Oriental), extending from the
Caribbean Sea in the north, to the Ecuadorian border in the south. The basin
was formed during the Cretaceous to Oligocene (Tertiary) times. Stacked
Paleogene sands (Paleocene, Eocene, Oligocene, and Miocene), such as the
Lisama, Esmeraldas‐La Paz, Cienaga de Oro, and Colorado‐Mugrosa
formations represent the main hydrocarbon‐bearing reservoirs of the basin.
These reservoirs have good porosity (15‐20%) and permeability (20‐600

millidarcies). Cretaceous age shales (Umir and La Luna formations) , as well as
Miocene shales (Lower Porquero formation), are the most likely hydrocarbon
source rock, or kitchen, for this petroleum province. As for trap, the basin’s
association with the Las Monas Fault (NE‐SW compressional wrenched thrust)
has created several anticlines, including the La Cira/Infantas field (close to one
billion barrels of oil produced to date). The basin also contains stratigraphic
traps. Magdalena oil is of good quality, between 30° to 52° API, and very low
sulfur content.

The Caguán ‐ Putumayo Basin runs from the Ecuadorian/Peruvian border in
the south, to the Eastern Cordillera foothills in the north. Similar to the other
Colombian Basins, the Putumayo was formed during the Cretaceous to
Oligocene (Tertiary) times. Primary reservoir is the Caballos formation
(Cretaceous), with average to good porosity (10‐16%) and low permeability (50
millidarcies). The Cretaceous Villeta shales provide excellent seal across the
basin, while traps tend to be structural in nature, including fault‐related folds,
and anticlines. Putumayo oil is light to medium (30° API).

Exhibit 12: Colombia Properties

Gran Tierra’s current Colombian portfolio consists of a 50% interest in the
Chaza block (subject to up to a 10% Net Profits Interest overriding royalty) , a
35% interest in the Santana and Guayuyaco blocks (subject to a 2% overriding
royalty, and a 2.5% conditional overriding royalty), a 40% interest in the Azar
block (subject to up to a 10% Net Profits Interest overriding royalty), a 15%
interest in the Mecaya (subject to up to a 10% Net Profits Interest overriding
royalty), a 100% interest in the Putumayo A and B technical evaluation areas
(TEA), a 100% interest in the Rio Magdalena block (subject to a 30%
government back‐in right), and a 20% interest in the Talora block.

Exhibit 13: Putumayo


Chaza
Located in the Putumayo Basin, the Chaza block was awarded under an ANH
contract, with the exploration phase due to expire in 2011, and the production
phase lasting until 2032. Gran Tierra has a 50% working interest, as well as
operatorship of the 80,242 acres block, with Solana Resources (SOR:TSX,
OUTPERFORM) holding the other 50% interest. Following the successful
Costayaco 1 exploration well in 2Q07, the partners drilled and tested two
additional appraisal wells on the field (Costayaco 2 and Costayaco 3). Having
flow tested up to 5,906 bopd from separate formations; the Costayaco‐1 well is
currently producing 3,500 bopd (gross). The Costayaco 2 well tested in excess
of 6,000 bopd from several formations, while Costayaco 3 flowed at up to 2,543
bopd. The company is in the process of preparing Costayaco 2 for long term
production and testing. Note that field production remains constrained by oil
trucking capacity limitation. Specifically, production is currently trucked to a
production battery at Uchupayaco, with road conditions limiting trucking to
3,500 bopd. To debottleneck this, the partners are in the process of building a
25,000 bopd pipeline from Costayaco to Uchupayaco to replace trucking
operations. While this line is scheduled for completion by 3Q08, production
from the field will remain constrained by the Santana‐Orito pipeline capacity
allocation for Costayaco, limited to 6,000 bopd (gross) downstream of
Uchupayaco. To address this, the partners are currently investigating the
twinning of the Santana‐Orito line. We currently expect a final decision
regarding capacity to be reached following determination of the actual field
size, potentially by the end of 2008. This would allow a possible in service date
for the line by the end of 2009. In the short term, there exists the possibility to
truck 3,000 to 4,000 bopd of production from Santana to Orito, potentially
increasing production from the field to 10,000 bopd (gross) in 2H08.

For our reserves blowdown assumption, we currently model production from
the block at 4,750 bopd (gross) for 2008, including potential production from
Costayaco 2 later this year. In the longer term, and excluding potential
production from the ongoing Costayaco 4, and the planned Costayaco 5, 6 and
7 wells, we currently model 9,500 bopd for 2009, with production reducing at
15% per annum thereafter.

Exhibit 14: Putumayo Infrastructure

Source: Solana Resources

The company’s reservoir engineering firm, Gaffney, Cline & Associates (CGA),
estimates the field’s 2P reserves at 9 million barrels of oil net to Gran Tierra’s
working interest (post government royalty, excluding third party overriding
royalty), mainly based on results from Costayaco‐1. DeGolyer and
MacNaughton, the third party reservoir engineering firm used by Solana
(SOR‐TSXV, OUTPERFORM), currently estimates 9.3 million barrels of oil for
a 50% working interest on the field (net of government royalty), in line with
the CGA estimates. As with all geological data, reservoir modeling, we
believe, will always be a mix of pure science, and some art. As such, given that
neither numbers account for the Costayaco 2 and Costayaco 3 test results, we
believe using the higher reserves of 9.3 million barrels of oil in our calculations
can easily be supported. Specifically, based on our analysis of the Costayaco 2
and Costayaco 3 test results, mainly confirming the oil/water contact in the
lower Caballos formation we currently estimate potential additions of 15 to 30
million barrels (gross) to the field in the next engineering reserve reports. In
addition, no evidence of an oil/water contact has yet been identified in the
shallower T Sandstone zone. To date, the only certainty is that the oil/water
contact in this shallower zone is further out than the Costayaco 1, 2 and 3
radius. As such, while unable to estimate ultimate potential reserves from this
zone, we expect them to be significantly higher than reported at year end 2007,
with ultimate size depending on the location of the oil/water contact.

Exhibit 15: Costayaco Field

Source: Solana Resources

In addition to the ongoing Costayaco 4, the partners currently plan on drilling
Costayaco 5, 6 and 7 later this year.
Santana and Guayuyaco
Located in the Putumayo Basin, the Santana and Guayuyaco blocks fall under
older Ecopetrol contracts. The 1,119 areas Santana block has production from
four fields (Linda, Mary, Miraflor and Toroyaco), with a production contract
due to expire in 2015, at which time the area will revert to Ecopetrol. We
currently view the block at the mature/decline stage. We currently model
production at 350 bopd (net) from the block, declining by 10% per annum. We
don’t anticipate the company to dedicate development capex to this field,
although we do factor in regular maintenance capex in our NAV calculations.

The 52,366 acres Guayuyaco block is currently covered by an Ecopetrol
production contract, expiring in 2027. Gran Tierra currently has a 35% interest,
along with operatorship, in the block. The block currently contains two oil
discoveries, the Guayuyaco and the Juanambu fields. The Guayuyaco field,
discovered in 2005, currently has two wells on production while the Juanambu
field, discovered in 2007, is producing from one well. We currently are
forecasting 550 bopd (net) from the block in 2008 production to the company’s
interest. Note that the partners are planning on drilling at least one additional
producer on Juanambu in 2008. The Juanambu field is connected, via a spur
line to the adjacent Toroyaco facility, from where crude is exported via
existing infrastructure.

In the longer term, the partners could drill two prospects currently identified
on the block, mainly the Verdeyaco and the Floresta.
Exploration
In addition to the above producing assets, Gran Tierra currently has an interest
in six Colombian exploratory stage blocks. In the Putumayo Basin, the
company has 100% interest in the Putumayo A and B, TEAs, a 40% interest in
the Azar block, and a 15% interest in the Mecaya block. In the Magdalena
basin, Gran Tierra currently has a 100% interest (subject to a 60% farmout and
30% Ecopetrol back in) in the Rio Magdalena block, as well as a 20% interest in
the Talora block.

Putumayo A and B TEAs were awarded to Gran Tierra in July 2007. The
Putumayo A TEA includes a commitment to 400 Km of seismic reprocessing
on the 570,000 acres block, and expires in August 2008. Under the agreement,
the company has the preferential right to apply for an ANH exploration and
exploitation contract on the area. The Putumayo B TEA includes a
commitment for 100 Km of seismic reprocessing on the 109,000 acres block.
The company is in negotiations with ANH to convert this TEA into an
Exploration and Exploitation contract. Given the company’s farm‐out history
in Colombia, we would not be surprised were Gran Tierra to farm out a
portion of one, or both, of these blocks in the event of a successful conversion
into an AHN contract.

Azar – Gran Tierra currently has a 40% interest, and operatorship, of the Azar
block in the Putumayo Basin. The company farmed into 80% of the 51,639
acres Azar block in 2006. Subsequently, 50% of its interest was farmed out to a
third party. The exploration phase on this contract expires in 2012, although
the partners have the right to sign a 24 year exploitation contract on any
commercial discoveries. The block contains the Palmera‐1 discovery well,
previously declared non‐commercial. The partners have budgeted for re‐entry
of this well in 2Q08, in addition to one new exploration well in 4Q08. Note that
40 km2 of 3D seismic was recently acquired on the block.

Mecaya – Gran Tierra currently has a 15% interest, as well as operatorship, in
the Mecaya block in Colombia’s Putumayo Basin. The block covers 74,128
acres, and contains a legacy oil discovery, mainly the Mecaya‐1 well (flow
tested 665 bopd in 1989). The company is in the process of divesting its interest
in this block to a third party oil & gas company.

Rio Magdalena – The company currently has a 100% interest in the 144,670
acres Rio Magdalena block. This block, governed by an Ecopetrol contract, has
a non commercial oil discovery (Popa‐1, 60 bopd). The company recently
entered into a farm‐in agreement on the block, where it intends to farm out
60% of the block. The Farm‐in partner has agreed to fund 100% of the last
commitment exploration well on the block. In addition, Ecopetrol has the right
to back into 30% of the license, potentially reducing Gran Tierra’s interest to
28%. Note that the production license on this block expires in 2030.

Talora – The 108,334 acres Talora block is covered by an ANH exploration and
exploitation contract, with the production phase due to expire in 2028. While
the company currently has a 20% interest in the block, it has indicated its
intent to apply to the government to have this interest assigned to a third
party.

Argentina
Argentina, the second largest country in South America, borders Bolivia and
Paraguay to the north, Brazil and Uruguay to the northeast, the Atlantic Ocean
to the east and Chile to the west. The country was dominated by internal
political conflicts and tensions between civilian and military groups until the
mid‐1950s. Following the Peronist authoritarian rule after World War II and
the military takeover in 1976, the country became a democracy in 1983.
Argentina faced a severe economic crisis in 2001 culminating with the largest
in history default on its foreign debt. Currency devaluation also followed the
end of peso’s 1‐to‐1 peg to the US dollar. The economy is recovering since 2002
with approximately 9% average annual GDP growth, although high inflation
remains a concern. Price freezes on electricity and natural gas rates have also
led to restrictions on industrial use and blackouts in 2007. Argentina had a
population of almost 40 million people in 2007. Its GDP (PPP) for the same
year was US$ 523.7 billion (US$ 13,000 per capita).

Exhibit 16: Argentina Properties

Gran Tierra’s current Argentinean portfolio consists of a 100% interest in the
Surubi, Santa Victoria, Valle Morado, Ipaguazu, Ñacatimbay and Chivil
blocks, a 50% interest in the Vinalar block, and a 14% interest in the Palmar
Largo block. Given the currently onerous fiscal terms, mainly a withholding
tax regime currently limiting realized oil sale prices to US$38 per barrel in
Argentina, we do not expect the company to spend extensive near term capex
in developing these assets.

Exhibit 17: Surubi Block Potential

Vinalar, Chivil and Palmar Largo
Gran Tierra currently has three production stage blocks in Argentina’s
Noroeste Basin. For 2008, the company has budgeted for 14 oil well
workovers. For 1Q08, the Palmar Largo, Chivil, and Vinalar blocks produced
476 bopd of light oil (39 to 42 API), net to Gran Tierra. Note that this
production was partially constrained due to poor road conditions in the
region. For 2008, we currently model 545 bopd from Argentina net the
company. Gaffney, Cline, and associates, Gran Tierra’s third party reservoir
engineering firm, estimated the blocks to contain 3.1 million barrels of oil in 2P
reserves (net) at the end of 2007.
Exploraton and development
In addition to the above producing assets, Gran Tierra currently has an interest
in five exploration and development stage blocks in the Noroeste Basin. Gran
Tierra intends on drilling the Proa‐1 prospect on the Surubi block by year end.
Based on the structure’s close proximity to the Palmar Largo field, along with
pronounced seismic amplitude anomalies, we consider this as a medium
geological risk exploration well. For 2008, the company is also investigating
the possibility of re‐establishing the gas production from the Valle Morado
block. Gran Tierra is also budgeting for technical evaluations, along with
potential prospect generation, on the Santa Victoria block.
Peru
Peru is bordered by Ecuador and Colombia to the north, Brazil and Bolivia to
the east, Chile to the south and Pacific Ocean to the west. Its population of
approximately 28 million people has seen the political system alternate
between democracy and military dictatorship in the past. Although the
country returned to a democratic leadership in 1980, it remains economically
and politically divided. Between 2002 and 2006 the Peruvian economy grew by
more than 4% per year, with a stable exchange rate and low inflation. With a
2007 GDP (PPP) of US$ 217.5 billion (US$ 7,600 per capita) and the GDP
growth rate of 7.5%, underemployment and poverty remain high despite
strong macroeconomic performance. With a small, elite group controlling
most of the wealth and political power, almost 45% of the population lives
below the poverty line.

Exhibit 18: Marañon Basin

Source: Perupetro
Gran Tierra’s Peru blocks lie in the frontier region of the Marañon Basin. The
basin is located in Peru’s northeast, part of a larger 37 million acres regional
basin extending from Peru to Colombia and Ecuador (Putumayo – Oriente –
Marañon Basin). The basin was formed over a period of time ranging from the
Late Permian/Early Triassic to the Tertiary (Eocene). While historical
geological work shows approximately one billion barrels of Estimated
Ultimate Recoverable (EUR) oil in the basin, recent joint studies by the
governments of Canada and Peru indicate that “significant reserves may
remain in [unexplored] parts of the basin.” Specifically, following a two year
study earlier this decade, the basin was divided into two distinct regions (east
and west), with a major “hinge” zone separating the two. The billion barrels of
EUR identified to date are mainly located in the western region, while the new
exploration activity, including Gran Tierra’s two blocks is focused on the
eastern region. Cretaceous age formations (Chonta and Raya), as well as
Triassic/Jurassic Pucará formations, are the most likely hydrocarbon source
rock, or kitchen, for this petroleum province. Upper Cretaceous sands, such as
Vivian, Chonta and Agua Caliente Formations, represent the main
hydrocarbon‐bearing reservoirs of the basin, while Cretaceous shales provide
most of the basin’s seals.
Exhibit 19: Marañon Basin Stratigraphy

Source: Oil and Gas Journal

In addition, the basin contains structures too small to account for the amount
of trapped oil, as well as well‐developed dry paleostructures. Given these
findings, inconsistent with the historical geological basinal theories, the
Peruvo‐Canadian study investigated other oil migration/trapping mechanisms
in the basin, leading to a possibility that oil could have re‐migrated from older
(breached or tilted) structures in the west to younger fields (structural or
stratigraphic traps) in the eastern basin during Tertiary (Miocene) to the
Quechua (Miocene to Recent) Orogeny (mountain building) tectonic events.

Exhibit 20: Marañon Geological Model


From an exploration standpoint, we note the basin’s historical 42% COS is a
good indicator for future prospectively.
Gran Tierra currently has a 100% Interest in blocks 122 and 128 in the Marañon
Basin, covered by four exploration phases, with the last expiring in 2014. The
blocks cover a combined 3.4 million acres, and are located in the eastern part
of the basin, on the crest of the Iquitos Arch. Gran Tierra’s minimum work
commitments include spending US$5 million per block on geo‐scientific work
(aero magnetic‐gravity data, seismic, and exploratory drilling). Gran Tierra
intends to carry out aero magnetic‐gravity campaigns in 2008, followed by
seismic acquisition in 2009. As such, we do not anticipate any drilling on the
blocks prior to 2010.

Exhibit 21: Peru Blocks


Given the neighbourhood of Gran Tierra’s leases, adjacent to ConocoPhillips,
Occidental and Petrobras lands, we can safely state that the company
continues to demonstrate its ability to “punch above its weight.” We view the
‘majors’ involvement in the basin as an indicator for potential fields in the
hundred millions, or even billion, barrels range.

Appendix
$mln 2005 2006 2007 2008E 2009E
ASSETS
Current assets
Cash and cash equivalents 2.22 24.10 18.19 55.20 191.61
Restricted cash 0.40 ‐ ‐ ‐ ‐
Accounts receivable 0.81 7.38 10.69 22.88 22.88
Inventory 0.45 0.81 0.79 0.57 0.57
Taxes receivable ‐ 0.40 1.18 1.43 1.43
Prepaids 0.04 0.68 0.44 0.53 0.53
Deferred tax asset ‐ ‐ 0.22 0.99 0.99
Total Current Assets 3.92 33.37 31.51 81.60 218.01

Oil and gas properties
Proved 8.31 37.76 44.29 68.01 68.01
Unproved ‐ 18.33 18.91 25.24 25.24
Total Oil and Gas Properties 8.31 56.09 63.20 93.26 93.26
Other assets ‐ 0.99 0.72 0.81 0.81
Total Property, Plant and Equipment 8.31 57.09 63.92 94.07 94.07
Long term assets
Deferred tax asset 0.03 0.44 1.84 0.98 0.98
Taxes receivable 0.11 ‐ 0.53 0.53 0.53
Other long‐term assets
Goodwill ‐ 15.01 15.01 15.01 15.01
Total Long Term Assets 8.45 72.54 81.29 110.58 110.58

Total Assets 12.37 105.91 112.80 192.18 328.59

Current liabilities
Accounts payable 1.14 6.73 11.33 18.02 18.02
Accrued liabilities 0.12 9.20 6.14 7.86 7.86
Derivative financial instruments ‐ ‐ 1.59 2.04 2.04
Current taxes payable
‐ 1.64 3.28 9.31 9.31
Deferred tax liability ‐ ‐ 1.11 0.74 0.74
Other ‐ 1.53 ‐ ‐ ‐

Total Current Liabilities 1.26 19.10 23.45 37.97 37.97
Long term liabilities ‐ 0.41 0.13 0.13 0.13
Deferred tax liability ‐ 7.15 9.23 15.99 16.00
Deferred remittance tax ‐ 2.72 1.33 1.48 1.48
Asset retirement obligation 0.07 0.33 0.80 0.90 0.90
Total Long Term Liabilities 0.07 10.62 12.55 19.80 19.81
Common shares 0.04 0.10 0.10 0.11 0.11
Additional paid in capital 11.81 71.31 72.46 81.21 81.21

Warrants 1.41 12.83 20.75 17.80 17.80
Contributed Surplus ‐ 0.00 ‐ 1.48 2.49
Accumulated deficit (2.22) (8.04) (16.51) 33.82 169.20
Total Shareholdersʹ Equity 11.04 76.19 76.79 134.41 270.81
Total Liabilities and Shareholdersʹ Equity 12.37 105.91 112.80 192.18 328.59
$mln 2005 2006 2007 2008E 2009E

REVENUE AND OTHER INCOME
Petroleum sales 1.06 11.72 32.09 125.18 228.61
Interest ‐ 0.35 0.19 0.28 0.28

1.06 12.07 32.28 125.46 228.89
EXPENSES
Operating 0.40 4.23 10.47 13.57 17.76
Depletion, depreciation and accretion 0.46 4.09 9.41 19.11 31.06
General and administrative 2.48 7.00 10.23 17.43 19.90
Liquidated damages ‐ 1.53 7.37 ‐ ‐

Foreign exchange (gain) loss (0.03) 0.37 (0.08) 0.06 0.06
3.31 17.22 40.45 54.90 73.51

GAIN BEFORE INCOME TAX (2.25) (5.15) (8.17) 70.55 155.38
Income tax (0.03) 0.68 0.29 20.22 20.00
NET GAIN (2.22) (5.82) (8.47) 50.33 135.38

Operating Activities
Net gain (2.22) (5.82) (8.47) 50.33 135.38
Non‐cash items
Depletion, depreciation and accretion 0.46 4.09 9.41 19.11 31.06
Deferred tax (0.03) 2.54 (0.70) 7.76 8.00
Stock based compensation 0.05 0.26 0.81 1.95 2.00
Unrealized loss on financial instruments ‐ ‐ 2.65 0.69 ‐

Other Items (0.11) (1.64) 5.84 ‐ ‐

Net changes in non‐cash working capital (0.03) (0.25) (3.33) (1.49) ‐

Net cash provided by (used in) operating activities (1.88) (0.83) 6.21 78.35 176.44

Investing Activities
Oil and gas property expenditures (8.71) (18.30) (13.43) (46.53) (40.00)
Long term assets and liabilities ‐ ‐ (0.43) (0.03) (0.03)
Other (0.40) (28.37) 1.01 ‐ ‐

Net cash used in investing activities (9.11) (46.67) (12.85) (46.56) (40.03)

Financing Activities
Restricted cash ‐ (1.28) ‐ ‐ ‐
Proceeds from issuance of common stock 13.21 70.66 0.72 5.22 ‐

Net cash provided by financing activities 13.21 69.38 0.72 5.22 ‐

Net (decrease) increase in cash and cash equivalents 2.22 21.88 (5.91) 37.01 136.41
Cash and cash equivalents, beginning of period ‐ 2.22 24.10 18.19 55.20
Cash and cash equivalents, end of period 2.22 24.10 18.19 55.20 191.61

Fiscal Regimes
Colombian fiscal terms are divided into two contract styles. The older
Ecopetrol association contracts, and the more recent ANH contracts.

Under the association contracts, Ecopetrol, Colombia’s state oil company, has a
back‐in right post discovery on all blocks. In addition, production is subject to
up to a 20% government royalty. The newer ANH contracts eliminated the
Ecopetrol back‐in right. Royalties under ANH contracts are based on a sliding
scale, from 8% for production up to 5,000 bopd, up to 25% for production
exceeding 600,000 bopd. In addition, a 30% windfall tax applies for fields
producing in excess of 5 million barrels (total production). This tax is based on
production in excess of the 5 million barrels threshold, and is referenced to
WTI pricing. Under the RJ long term WTI assumption of US$130 per barrel,
this equates to 24%. Income is also subject to a 33% corporate tax rate, as well
as a 3.3% war tax for both contract types.

Argentinean fiscal regimes include a 12% federal and a 1.5% provincial royalty
on production, as well as a 35% income tax. In addition, the government
recently introduced a new withholding tax, effectively limiting oil revenue at
US$38 per barrel for Gran Tierra’s operations.

In Peru, the company’s potential production would be subject to a 5‐20%,
sliding scale royalty. Peruvian companies are also subject to a 30% income tax.


Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $97.86 $117.68 $122.42 $122.78 $115.19

RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $122.85 $122.61 $121.97 $121.85 $122.32

RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00

Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $8.64 $10.92 $12.45 $12.74 $11.19
RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15
Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $13.06 $10.67 $10.78 $11.15 $11.42
RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50
Source: Raymond James Ltd., Bloomberg
Risks

Competition
of Gran Tierra or enter markets that Gran Tierra is active in.

Nevertheless, changes in commodity prices could result in a decision by Gran
Tierra to suspend or reduce operations because such operations are no longer
products and the cost of production could lower Gran Tierra’ revenues.

Gran Tierra currently provides third‐party reserves evaluation on its
producing assets, and calculations remain dependent on long‐term oil pricing,
geological assumptions made, and the companyʹs ability to produce said
reserves.

Gran Tierra’s operations are subject to a variety international laws, regulations
and guidelines, including laws and regulations relating to health and safety,
the conduct of operations, the protection of the environment and the
manufacture, management, transportation, storage and disposal of certain
Colombia, Argentina and Peru. The companyʹs operations, financial results,
and valuation could be adversely affected by events beyond its control taken
by the current or future governments in those countries with respect to policy
changes.
Gran Tierra is subject to various environmental laws and regulations enacted
in the jurisdictions in which it operates. Including the governance of the
of certain materials used in operations. Gran Tierra may become liable for
damages against which it cannot adequately insure or against which it may
elect not to insure because of high costs or other reasons. Gran Tierra may be
required to increase operating expenses or capital expenditures in order to
comply with any possible new restrictions or regulations.

Operational risks and hazards could expose Gran Tierra to substantial liability
for personal injury, loss of life, business interruption, property damage or
and hazards to which Gran Tierra is exposed.

additional financing will be available to Gran Tierra when needed or on terms
acceptable to Gran Tierra. Inability to raise financing to support ongoing
operations or to fund capital expenditures or acquisitions could limit growth.

The revenue generated from the operations of Gran Tierra may be
denominated in US dollars or other international currencies so that
fluctuations in the currency exchange rates may have an impact on the results
of Gran Tierra.

JUNE 16, 2008
403.509.0560
Pacific Rubiales Energy braden.purkis@raymondjames.ca

403.509.0534
RATING & TARGET

Corp. RATING
Target Price (6-12 mths)
STRONG BUY 1
17.00
PEG-TSX Closing Price 10.71
Initiating Coverage: El Maestro Colombiano
MARKET DATA
Event
We are initiating research coverage on Pacific Rubiales Energy Corp. (Pacific
52 Week Range $12.51 / $5.40
Rubiales) with a STRONG BUY rating and a C$17.00 per share target price.
FY-Dec 31 2007A 2008E 2009E
Action CFPS (C$) $0.13 $1.73 $3.53
P/CFPS nm 6.2x 3.0x
We are recommending Pacific Rubiales as an investment in an extremely well CFPS - 1Q nm 0.18 0.72
managed, and connected, growth oriented South American independent E&P CFPS - 2Q 0.02 0.45 0.79
CFPS - 3Q 0.03 0.54 0.87
company. CFPS - 4Q 0.09 0.56 1.15
NAVPS $17.00
Analysis P/NAV 63%
Revenue ($mln) $84 $635 $1,167
On the heels of its recent merger with Pacific Stratus, the company has Yield (%) 0%
transformed into Colombia’s largest independent oil and gas company. Going Commodity Assumptions

WTI (US$/bbl) $72 $113 $130
forward, we expect Pacific Rubiales to continue on this growth path,
HHub (US$/mmbtu) $7.12 $10.00 $7.50
potentially becoming one of South America’s largest independent oil & gas Exchng Rate (US$/C$) $0.94 $1.00 $1.00
firms. In addition to C$10.65 per share (fd) in reserve backed NAV, Pacific Production (WI)
Oil (bbl/d) 9,905 20,525 28,181
Rubiales currently offers investors exposure to over C$107 per share (fd) in Nat. Gas (mmcf/d) 0 48 60
potential upside. The reserve base NAV is underpinned by 208 million barrels Total (boe/d) 9,905 28,567 38,181
of oil equivalent (working interest) reserves, and backed by a ‘proven’
EBITDA ($mln) 41 352 886
management team, with a depth of regional technical and geopolitical Net Debt/ CF -2.9x -0.4x -0.7x
experience. While the bulk of the potential upside is based on the company’s * All Figures in C$
vast exploration potential in Peru, C$7 per share (Rubiales and La Creciente COMPANY DESCRIPTION
pipelines and extensions) only require management to deliver on project Pacific Rubiales is an international oil & gas company with
operations in South America. The company currently has
execution, and contract ‘negotiations’. production stage blocks in Colombia, as well exploration areas in
Peru.
Valuation
We currently value Pacific Rubiales on the basis of a risked sum‐of‐the‐parts
NAV, which includes an NPV (DCF, 10% after tax) of booked reserves, as well
as a geological risk adjusted NPV (DCF, 10% after tax) of the company’s
per share on Pacific Rubiales.

Closing prices as of June 9, 2008

Published by Raymond James Ltd., a Canadian investment dealer. Sources: Raymond James Ltd.,ThomsonOne, CapIQ
Table of Contents
Reserves Growth ............................................................................................8
Company Profile ...........................................................................................10
Operations ....................................................................................................13
Colombia ......................................................................................................13
Peru ..............................................................................................................30
Appendix ......................................................................................................33
Fiscal Regimes..............................................................................................35
Risks.............................................................................................................36
Exhibit 1: Pacific Rubiales Corporate Summary
Pacific Rubiales (PEG: TSX)
Overview:
Company name Pacific Rubiales Energy Corp. Shares & capitalization:
Ticker PEG Shares outstanding ‐ basic (M) 201.3
Exchange TSX Shares outstanding ‐ fully diluted (M) 270.4
Rating STRONG BUY Market capitalization (C$M) $2,156
Current share price* C$10.71 Enterprise value 2007E ($M) $2,034
Total projected return (incl. dividends payable) 59% Goodman & Company, Investment Counsel Ltd. 6.7%
Columbia Wanger Asset Management, L.P. 6.0%
* as at Jun 9, 2008 Management & directors 1%
Columbia
Rubiales ‐‐> Production Total 136 72 208
La Creciente ‐‐> Production
Guama ‐‐> Production RLI (Yrs) 13.1 6.9 20.0
Queifa ‐‐> Exploration
Arauca ‐‐> Exploration Key Operating and Financial Data
Peru ‐‐> Exploration Year end: Dec. 31 2006A 2007A 2008E 2009E
PRODUCTION (WI):
Valuation Crude oil (b/d) 9,905 20,525 28,181
Year end: Dec. 31 2007A 2008E 2009E Natural gas (mmcf/d) 0 48 60
P/CF nm 6.2x 3.0x Total prod. (boe/d) 9,905 28,567 38,181
EV/CF nm 5.8x 2.8x % Natural gas 0% 28% 26%
P/E nm nm 5.8x Y/Y growth 188% 34%
Target P/CF nm 9.8x 4.8x
Other Parameters
EV/BOED $71,214 FINANCIAL STATEMENTS:
EV/BOE (2P) $9.77 Revenues ($mln) $84 $635 $1,167
Raymond James NAVPS (C$/Sh) C$17.00 Operating Expenses ($mln) $33 $228 $272
Income Tax ($mln) $5 $32 $160
Commodity Price Assumptions 2007 2008 2009 LT Net Income ($mln) $18 $0 $281
Brent oil (US$/b) $73 $113 $130 $130 Ops Cash Flow ($ln) $44 $349 $715
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50
CFPS ‐ basic $0.13 $1.73 $3.53
Operating Net Back Estimates CFPS ‐ fd $0.13 $1.29 $2.64
2007A 2008E 2009E EPS ‐basic $0.05 $0.22 $1.83
Sale price (net of royalties) $62.38 $70.32 $98.64 EPS ‐ fd $0.05 $0.16 $1.37
Opex $8.90 $12.50 $10.87 Capex ($mln) $36 $305 $344
Pre Tax Net Back $53.48 $57.82 $87.76 Net Debt (surplus) ($mln) ‐$126 ‐$154 ‐$525
Net debt/cash flow (2.9x) (0.4x) (0.7x)
Tax $3.42 $3.50 $13.51
Post Tax Net Back $50.06 $54.32 $74.25
Blowdown Production Profile (net) Management & Directors
Name Position
60,000
Ronald Pantin CEO Ex PDVSA Services
Jose Francicso Arata President Ex Coalcorp Mining Inc.
50,000
Carlos Perez CFO Ex Petrolago, S.A.
40,000 Serafino Iacono Co Chairman Ex Coalcorp Mining Inc.
BOED
Miguel de la Campa Co Chairman Ex Coalcorp Mining Inc.

30,000 Ronald Pantin CEO Ex PDVSA Services
Jose Francicso Arata President Ex Coalcorp Mining Inc.
20,000 Neil Woodyer Non‐exec Endeavour Financial
German Efomovich Non‐exec South American businessman
Augusto Lopez Non‐exec Ex Bavaria, S.A.
10,000
Miguel Rodrigues Non‐exec Ex. Astra Fund and Incofin, Inc.
Jose Efromovich Non‐exec South American businessman
0
John Zaozirny Non‐exec McCarthy Tetrault LLP
2008 2009 2010 2011 2012 2013 2014 2015 2016 All values are in US$ unless otherwise stated.
Source: Company Reports, Bloomberg, Capital IQ, Raymond James Ltd.

“A good decision is based on knowledge and not [just] on numbers”
–Plato

Pacific Rubiales, an intermediate, mainly Colombian focused, South American
oil and gas company, offers investors growing cash flow from both oil and gas
fields, and a substantial exploration base, all managed by one of the most
experienced and connected teams in the region.

2008E net production of 25,000 boed. We are expecting Pacific Rubiales to 25,000 net boed for
deliver close to 25,000 boed, on average, of net production this year. For 2009, 2008E
we currently model net production in excess of 32,000 from the company’s
existing blocks. In the longer term, Pacific Rubiales’ current asset base has the
potential to deliver over 70,000 boed in net production by late 2010.

208 million barrels of reserves. Pacific Rubiales reserves reflect 20 years of 208 million barrels of
reserve life at current production levels. We, in addition, believe that the reserves
company has the ability to; at a minimum; sustain 45,000 boed production into
mid 2011.

Managed by a technically proven, geopolitically savvy team. We like Pacific Managed by a top
Rubiales’ management team. With their extensive South American oil and gas tier team
experience, combined with a solid understanding of local politics in the
company’s areas of operations, we view this team as the perfect complement
to the company’s asset base.

Current market valuation backed by company’s reserves. Pacific Rubiales’ Valuation backed by
reserves
current market valuation reflects the company’s booked reserves under
current commodity pricing.

C$7 per share in low technical risk upside. In addition to the reserve backed
valuation, we calculate C$7.13 per share in potential upside from a potential
extension of the Rubiales contract post 2016, as well as construction of an
export line on La Creciente. This additional value is based on management
continuing to deliver on their project execution and ‘negotiations’ abilities.

1.8 billon barrels of exploration potential in prolific basins. Pacific Rubiales 1.8 billion barrels of
has identified in excess of 1.8 billion barrels of exploration potential it intends exploration potential
to target over the next few years.

additional value for current Pacific Rubiales shareholders:

La Creciente A‐2, B‐1 and C‐1 exploration well results (2Q, 3Q and
4Q08);
Guama exploration results in 4Q08 or 1Q09;
Quifa 1 and 2 exploration results in 1H09;
MN‐2 exploration results in 2H08;
Arauca 1 and 2 exploration results in 1H09;
Potential award of new Colombian blocks in 2008/2009;
Potential approval of higher production rates on Rubiales;
Completion of Rubiales export line expected for 3Q09;
Decision on La Creciente export expected by end of 2008.


We have prepared an NPV (DCF, 10% after tax) summary for Pacific Rubiales’
We calculate a NAV of
assets. As part of our NAV calculation on the company, we also provide NPV C$10.65 per share for
(DCF, 10% after tax) calculations on the company’s exploration potential in Pacific Rubiales’
Colombia and Peru. We currently assign US$50 per acre in land value for reserves
blocks without prospective resource estimates. As the company progresses in
geotechnical evaluation on said blocks, our intent is to replace the land based
With an additional
value by a resource NAV estimate. While recent Colombian land farm‐out
C$107.61 per share in
deals have been in excess of US$100 per acre, we have opted to use a more potential upside
conservative US$50 per acre in our models.


mm Barrels US$ million Per Share US$ million Per Share

Rubiales 121 US$2,138 US$7.91 100% US$2,138 US$7.91
La Creciente* 84 502 1.86 100% 502 1.86
Guaduas/Mauritia Norte /Rio Ceibas/Puli 3 116 0.43 100% 116 0.43

Reserves NPV 208 2,757 9.77 2,757 10.19

Cash / (Net Debt) US$122 0.45 100% US$122 US$0.45

Reserves net asset value US$2,879 US$10.65 US$2,879 US$10.65
Reserves net asset value (C$) C$2,879 C$10.65 C$2,879 C$10.65

Rubiales upside (170,000 bopd) 21 US$357 1.32 10% US$36 US$0.13
Rubiales upside (contract extention) 105 1,203 4.45 10% 120 US$0.45
La Creciente A + D pipeline upside* 608 367 1.36 10% 37 US$0.14

La Creciente exploration upside* 80 477 1.76 10% 48 US$0.18

Quifa exploration upside 89 1,581 5.85 10% 158 US$0.58
Arauca exploration upside 69 1,220 4.51 10% 122 US$0.45
Moriche land value** N.A 1 0.00 100% 1 US$0.00
Jagüeyes land value** N.A 3 0.01 100% 3 US$0.01
Peru Exploration upside 1405 23,890 88.35 5% 1,195 US$4.42

Net asset value US$31,979 US$118.26 US$4,598 US$17.00
Net asset value (C$) C$31,979 C$118.26 C$4,598 C$17.00

*6:1 mcf per boe

** land value, $50 per acre


We calculate a risked sum‐of‐the‐parts NAV of C$4,598 million, or C$17.00 per
share (fd) for Pacific Rubiales.


$90 $110 $130 $150 $170
5% C$17.29 C$19.11 C$20.93 C$22.74 C$24.56
Discount
10% C$14.20 C$15.60 C$17.00 C$18.40 C$19.80

rate
12% C$13.32 C$14.59 C$15.86 C$17.12 C$18.39

15% C$12.24 C$13.34 C$14.44 C$15.54 C$16.64

Pacific Rubiales under different long term oil prices and different discount
rates.

Exhibit 4: Pacific Rubiales Value Creation

140

120

100
C$ per Share
80
60

40

20

0

Reserves Rubiales Rubiales La Creciente La Creciente Quifa Arauca Peru
upside upside A + D exploration exploration exploration Exploration
(170,000 (contract pipeline upside* upside upside upside
bopd) extention) upside*

* 6:1 mcf per boe
Reserves Growth
Pacific Rubiales continues to deliver year‐over‐year reserve growth from its
expanding asset base. Going forward, in addition to potential exploration
success, we anticipate the potential for an increase in booked reserves from the
Rubiales and La Creciente fields in Colombia. On Rubiales, a successful
contract prolongation past the current 2016 expiry date, combined with an
extension of the areal field extent (based on ongoing appraisal drilling), has
the potential to double Pacific Rubiales’ reserves from this field. Based on data
provided by the company’s third party reservoir engineer, Petrotech, the
Rubiales field is estimated to contain close to 3 billion barrels of Original Oil In
Place (OOIP), 120.9 million barrels of which were booked as 2P reserves to the
company’s working interest (217 million gross) at the end of 2007. Given the
excellent productivity of the Rubiales reservoir (good permeability and
porosity), and using other regional, and global, heavy oil fields as analogs, we
estimate that this field has the potential to ultimately produce significantly
more than the currently booked reserves. At this stage, assuming the
successful application of western heavy oil production technology, we
strongly believe that ultimate recovery rates of 20% or higher are achievable
from the majority of the Rubiales field, potentially giving the field an
Estimated Ultimate Recovery of close to 550 million barrels. In addition, we
believe in the potential for the field’s areal extend to be larger than currently
mapped. The company is in the process of drilling several delineation wells on
Rubiales. Results from the latest of these wells, RB‐53 and RB‐14, indicate the
potential for converting Possible reserves from parts of the field into Proven
and Probable.

Exhibit 5: Rubiales Field Potential Extensions

On La Creciente, Petrotech reports the La Creciente A field’s 2P reserves at 506
Bcf of gas. The block also contains the La Creciente D gas field, estimated to
contain 52 Bcf of gas on a 2P basis. While the La Creciente A field is estimated
to contain 640 Bcf of gas on a 2P basis, only 506 Bcf are “bookable” as reserves
given the current export pipeline constraints. As such, development approval
of a resolution to this issue (new export line) could lead to an “immediate”
20% increase in booked reserves from the field. Pacific Rubiales also has
exposure to 2 billion boe of seismically identified exploration potential on its
Colombian and Peruvian exploration blocks.

Pacific Rubiales has also indicated its intent to bid in ongoing 2008 Colombian
bid rounds, targeting heavy oil, as well as conventional blocks. While we do
not include any value from potential acquisitions into our NAV calculations,
we anticipate that the company will be successful in obtaining one or more
new blocks this year. Specifically, the recently completed merger with Pacific
Stratus has given the company the required size, and operational depth, to, in
our view, successfully bid in these Colombian rounds.
Production Growth
Since entering Colombia in 2007, Pacific Rubiales’ management team has
delivered significant production increases, both organically as well as via
acquisitions. For 2008, we are expecting the company to produce 25,000 boed
(net of royalties), more than doubling last year’s average production. For 2009,
we are currently forecasting net production of 32,000 boed from the company’s
existing assets.

Exhibit 6: Pacific Rubiales Production Profile

60,000

50,000

40,000

BOED

30,000

20,000

10,000

0

2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

While we currently model a production peak of 55,000 bopd (net) under our
reserve blowdown scenario, we believe Pacific Rubiales is positioned to
deliver close to 80,000 bopd in net production by 2011, in the event it can
negotiate a production increase/extention on Rubiales, as well as construct an
export pipe for La Creciente.
Company Profile
Pacific Rubiales is an intermediate international oil and gas company, currently
focused on South America. The company has assets in Colombia’s Llanos,
Putumayo, and Magdalena Basins, as well as in Peru’s Marañon and Ucayalí
Basins. The company’s shares trade on the Toronto Stock exchange (symbol
PEG). The corporate and capital structures of the company are illustrated below.
We have also included a list of the company’s top ten institutional shareholders.

Exhibit 7: Pacific Rubiales Corporate Structure
Pacific Rubiales Energy
Corp.
(British Columbia)

100% 100% 100% 100%

Petro Major Rubiales Pacific Stratus
Lenar Corp. Rubiales International Holdings Ltd. International Energy
(Panama) Corp. Oil, (Cayman Ltd.

(Panama) S.A. (Panama) Islands) (British Columbia)

100%

** Oleoducto de los
Llanos Orientales 100% 100% 100% 100% 100% 100%

S.A.
(Panama) Pacific Meta Quifa Pacific Pacific
Stratus Petroleum Petroleum Solaris Stratus Stratus
Off‐Shore Energy Peru Ltd. Company Ltd. AVV Energy Energy Peru
Ltd. (Cayman (Cayman (Aruba) Colombia Ltd.

34% (Panama) Islands) Islands) Ltd. (Panama)

Pacific &
Oil 33%
Rubiales
Trading Energy

Export Trading
Sales 33%
Corp.

Panama

100% 100% 100% 100% 100% 100% 100% 100% 100%
Pacific
Oleoducto de Petro Major Tethys Meta Quifa Pacific
Colombia los Llanos Petroleum
Pacific Stratus
Rubiales Internationa Petroleum Petroleum Stratus
Venezuela Orientales S.A. Corp. l Oil, S.A. Ltd. Ltd. Company Ltd.
Ventures Energy
Energy
Peru (Colombian (Colombian (Colombian (Colombian (Colombian (Colombian
C.A. Colombia
Sucursal del
Branch) (Venezuela) Ltd. Sucursal
Branch) Branch) Branch) Branch) Branch) Peru
(Colombia)
** Currently owned 100%, but a 65% interest will be issued to Ecopetrol

(M)
Warrants 51
Stock options 18
Market Capitalization 2156

Holders Shares
GOODMAN & COMPANY, INVESTMENT COUNSEL LTD. 6.7%

COLUMBIA WANGER ASSET MANAGEMENT, L.P. 6.0%

OPPENHEIMERFUNDS, INC. 4.5%

JPMORGAN ASSET MANAGEMENT U.K. LIMITED 2.3%

TD ASSET MANAGEMENT, INC. 1.6%
ACUITY INVESTMENT MANAGEMENT INC. 1.2%
MFC GLOBAL INVESTMENT MANAGEMENT 1.8%

DRIEHAUS CAPITAL MANAGEMENT LLC 1.1%
FIDELITY MANAGEMENT & RESEARCH COMPANY 0.6%


Pacific Rubiales’ predecessor was initially established as a mining company. In
2007, the company entered Colombia via a series of acquisitions, including the
Rubiales field, and changed its name to Petro Rubiales Energy Corp. In 2008,
the company acquired; or more realistically merged with, Pacific Stratus,
renaming itself Pacific Rubiales Energy Corp.

Leadership Team

The management team at Pacific Rubiales is unique in that all team members
are South American nationals, firmly entrenched in the region’s petroleum
industry. This team’s solid grasp of regional geology, extensive development
experience, and understanding of local geopolitics form a required precursor
to transform Pacific Rubiales into a significant Colombian, and Latin
American, oil & gas player.

Ronald Pantin, CEO and Director, has over 20 years of South American oil &
gas experience, including as President of Petróleos de Venezuela (PDVSA)
Services. He has also served as President of Enron Venezuela, as well as in
various technical and managerial roles with Maraven, a PDVSAʹs affiliate.

Jose Francisco Arata, President and Director, has over 25 years of South
American mineral and oil exploration experience, including the founding of
Pacific Stratus, Coalcorp Mining, and Bolivar Gold Corp.

Carlos Perez, CFO, has close to 30 years of oil & gas industry experience. Prior
to joining Pacific Rubiales, he held various executive and senior positions with
Venezuelan energy firms, including Petrolago, Venegas, and PDVSA. Mr.
Perez is a Certified Public Accountant.

Luis Andres Rojas, Sr. VP Production, has close to 30 years of South
American oil & gas experience. Prior to joining Pacific Rubiales, he held
various technical and managerial positions with PDVESA, including President
of PDVESA Intevep (R&D) and VP of PDVSA. Mr. Rojas is a Petroleum
Engineer.

Marino Ostos, Sr. VP New Areas, has over 30 years of oil & gas experience,
mainly focused on exploration in fold and thrust belts, which are commonly
found in South America. In addition to founding Litos, a Venezuelan oilfield
services company, Dr. Ostos was also on the board of directors of Fairfield
Industries in Venezuela. Dr. Ostos is a graduate of the Central University of
Venezuela (B.Sc. in Geological Engineering) and of Rice University, Texas
(PhD).

Jairo Lugo, Sr. VP Exploration, has 25 years of experience in the South
American oil & gas industry. Dr. Lugo’s strategic expertise lies in Basin
analysis, as well as prospect evaluation.
Operations
Pacific Rubiales currently has interests in 12 oil & gas blocks in Colombia, and
three in Peru. The company operates all but two of its blocks, a key attribute in
a ‘good’ international oil & gas player.

Exhibit 9: Pacific Rubiales Operations

Country Asset Pacific Status
Rubiales
Interest
Colombia
Rubiales 40.00% Producing
Piriri 50.00% Producing
Guaduas 90.60% Producing
Rio Ceibas 27.27% Producing
Puli‐B 50.00% Producing
La Creciente 100.00% Producing
Jagüeyes 3433‐A 100.00% Exploration
Moriche 80.00% Exploration
Guama 100.00% Exploration
Quifa 60.00% Exploration
Arauca 95.00% TEA
Tacacho 100.00% TEA
Peru
Block 135 100.00% Exploration
Doima 50.00% Exploration
Ortega 50.00% Exploration

Colombia


Exhibit 10: Colombian Basins

Source: ANH
Pacific Rubiales’ blocks lie in the Putumayo, Llanos, and Magdalena Basins.

Magdalena Basins, runs along the Andean mountain range (cordillera
occidental, cordillera central, and cordillera oriental), extending from the
Caribbean sea in the north, to the Ecuadorian border in the south. The basin
Lisama, Esmeraldas‐La Paz, Cienaga de Oro Formation, and Colorado‐
Mugrosa formations represent the main hydrocarbon‐bearing reservoirs of the
basin. These reservoirs have good porosity (15‐20%) and permeability (20‐600
millidarcies). Cretaceous age shales (Umir and La Luna formations) , as well as
sulfur content.


The Llanos Basin runs from the Colombian‐Venezuelan border in the
northeast, to Eastern Cordillera in the southwest. The basin was formed
during Triassic to Cretaceous times. The Carbonera and Mirador sandstones
(Paleogene) are known to be excellent reservoirs in the basin. In addition,
certain Cretaceous sands have also shown good reservoir quality in the Llanos.
These reservoirs have good porosity in the east of the basin (30%), decreasing
to average porosities in the west (10%). The majority of the basin’s oil is heavy
(10° to 12° API), although much lighter oil is also found (42° API). Most
discovered fields in the basin have been found in structural traps (Fault
related), although stratigraphic traps (pinchouts, paleohighs, and channels) are
considered prospective.

Exhibit 11: Pacific Rubiales Fields


Pacific Rubiales’ Colombian portfolio consists of a 40% interest in the Rubiales,
a 50% interest in the Piriri and the Puli, a 90.6% interest in the Guaduas, a
27.27% interest in the Rio Ceibas, an 80% interest in the Moriche, a 60%
interest in the Quifa, a 95% interest in the Arauca, a 100% in interest in the
Jagues, and a 100% interest in the La Creciente, the Guama, and the Tacacho.
Rubiales

With current production (gross) of over 30,000 bopd, we view the Rubiales
field as the ‘backbone’ of Pacific Rubiales growth strategy. Located in
Colombia’s Llanos Basin, this heavy oil field lies over two separate blocks,
mainly the Rubiales and the Piriri, covering a combined 140,603 acres. The
blocks are covered by an association contract, set to expire in 2016, at which
time the field would revert to Ecopetrol. While the company currently has a
40% interest in the Rubiales, and a 50% interest in the Piriri, Pacific Rubiales
net “take” from the field is 36%. This accounts for a 20% royalty (from gross
field production) payable to Ecopetrol, as well as the field’s 55:45 production
split between the Rubiales and the Piriri blocks. Petrotech, estimates the field
to contain 270 million barrels in gross 2P oil reserves (121 million barrels to
Pacific Rubiales’ working interest).

Initially discovered in 1982, the Rubiales field was declared non‐commercial
given prevailing oil prices at the time. The field was taken over by Meta
Petroleum in 2002 and was producing 18,500 bopd (gross) when Petro
Rubiales acquired Meta in 2007. The main producing zone in the field is the
Carbonera formation, a Lower Tertiary Sandstone, containing heavy oil (12.5°
API) at depths of 730 to 900 metres. Given the field’s very active bottom
aquifer drive, well productivity can range as high as 10,000 barrels of fluid per
day, although the bottom water does lead to high water cuts; exceeding 80%
for some mature wells. Similar to Canada’s oil sands, we describe this field as
a “water plant, with oil as the byproduct.”

For 2008, given the local pipeline infrastructure limitation, we model gross
production from the field at 38,500 bopd. Field production is currently
constrained by two limiting factors, the unavailability of an export pipeline,
and limited water handling capacity at the Central Processing Facility (CPF).
Pacific Rubiales currently trucks its production to its owned and operated
plant at Guaduas. Production is then blended, using light oil or Naphtha into
Rubiales blend for export.

Exhibit 12: Rubiales Export Route


The company expects, by 3Q08, to start building an export pipeline to Cusiana,
with an estimated in service date of 3Q09. This pipeline would tie into existing
infrastructure (OCENSA pipeline that transports oil to the Covenas export
terminal), allowing the company to export all of its Rubiales production. The
OCENSA pipeline currently has over 250,000 bbl/d of spare capacity. As part
of this project, the company expects to build a diluent blending facility at
Rubiales, where purchased diluent (Naphtha) will be blended with the
Rubiales crude into Rubiales blend.
This proposed pipeline is a 65:35 JV between Ecopetrol and Pacific Rubiales.
Estimated to cost up to US$450 million, this 230 KM pipeline will have an
initial capacity of 160,000 bopd, although this could be expanded to 260,000
bopd via additional pumping stations. We expect the pipeline to reduce
transportation costs significantly from close to US$20 per barrel currently. The
company expects to fund 75% of the pipeline costs from debt, and its share of
the balance from working capital.

In addition, while not included in any of our above valuations, we believe this
pipeline, when completed, could give the company some leverage in
negotiating an extension to the Rubiales contract, an interest in other regional
heavy oil blocks, or both.

We currently model Rubiales blend (18.5° API) pricing at an 18% discount to
WTI on the global market. Note that the company is currently selling all of its
crude production on the open market. As Rubiales production ramps up, the
company’s export capacity will be limited to 18,000 bopd net (50,000 gross) of
Rubiales crude between 3Q08, until completion of the Rubiales export line.
The balance could be sold locally as bunker fuel or equivalent. We model local
sales of Rubiales heavy oil at a 45% discount to WTI. For 2009, we currently
forecast production of 55,000 bopd from the field. In the longer term, we
currently model peak production of 126,000 bopd (gross) from the field in
2010, declining until contract expiry in 2016. Note that our assumptions are
based on blowing down the company’s current reserves from the field.
Exhibit 13: Rubiales Production Profile

180,000

160,000

140,000

120,000
BOED

100,000

80,000

60,000

40,000

20,000

0

2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Rubiales base case Rubiales upside case


Although current plans and approvals are for 126,000 bopd plateau
production, up to 170,000 bopd (gross) could potentially be achieved from the
field as of 2011. While this is management’s preferred scenario, this remains
subject to negotiations with Ecopetrol. Note that both cases would include
developing the field using well clusters, including four horizontal and one
vertical well per “pad.” The company would, for both scenarios, have to
increase both oil and water handling capacities on the field. Given the limited
contract length (2016 expiry), the company is in the process of securing a third,
in addition to two currently under contract, drilling rig for the proposed
development plan. While the Colombian rig market remains tight, we believe
that management’s strong regional relationships will allow them to secure a
third drilling rig.
Exhibit 14: Rubiales Development Plan
Phase Completion Added Water Cummulative Added Oil Cummulative Added Cummulative

Date Capacity Water Capacity Capacity Oil Capacity Total Cost Total Cost
(KBWPD) (KBWPD) (KBOPD) (KBOPD) (M$ US) (M$ US)

1 May‐08 200 340 8 40 110.0 110.0
2 Oct‐08 100 440 10 50 44.7 154.7
3 Jan‐09 100 540 10 60 44.7 199.3
4 Oct‐09 800 1,340 70 130 219.7 419.0

In addition to facilities and pipeline expansion, the Rubiales master plan calls
for drilling up to 348 wells to increase production to 170,000 bopd (300 wells in
case of 126,000 bopd production). All in, inclusive of pipeline costs, the
Rubiales cost requirement is estimated at US$ 1.5 billion until contract expiry
in 2016.
La Creciente
Pacific Rubiales currently has a 100% interest in the La Creciente block. The
68,094 acres block, located in the Magdalena Basin, was awarded to the
company, by ANH, in 2004. The exploration phase of the agreement runs for
65 months, while the production phase is for 24+10 years. Following award,
the first exploration well, LCA‐1, drilled in 2006, discovered the La Creciente
A field. Three additional appraisal wells (LCA‐2, LCA‐3 and LCA‐4) were
drilled on this structure. Current production from the block, at 40 mmcf/d, is
limited by export infrastructure availability on the Guapaje–Corozal regional
pipeline. For 2008, we currently model average production of 47.5 mmcf/d
from the block. Specifically, we expect production to reach 60 mmcf/d by 3Q,
and remain flat thereafter.
Exhibit 15: La Creciente Production Forecast

160

140

120

100

Mmcf/d

80

60

40

20

0
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
La Creciente base case La Creciente upside


In the longer term, and pending full evaluation of the 2008 appraisal, and
exploration, activities on the block, we believe production from the La
Creciente discoveries could be ramped up to at least 150 to 200 mmcf/d. Based
on published information on the La Creciente wells drilled to date, we
calculate the potential for close to 150 mmcf/d of production from current
wells. Additional gas discoveries on the block could further increase our
estimated production plateau. While the company has initiated front end work
on a potential 35 Km gas export pipeline to the Caribbean, final details remain
pending the company’s 2008 exploration, appraisal and testing program on the
block. Given that the company has initiated front end work on this pipe, we
would not be surprised by a potential in service date as early as 3Q09.

Gas sales in Colombia are semi‐regulated. As such, while the company is able
to sell its La Creciente gas at a premium to market, this is still substantially
lower than global prices. Pacific Rubiales currently sells 35 mmcf/d at US$4.95
per mmbtu (versus the regulated price of US$3.99 per mmbtu), although this
sales contract expires at the end of July 2008. Based on our evaluation of the
local gas market, we expect that the company could sell any additional gas for
a minimum of US$4.30 per mmbtu under the current environment. In the
event of gas export, the company believes gas could replace fuel oil or diesel in
regional power generation. Note that these fuels are currently selling, on the
global market, at US$85 per barrel for fuel oil (equating to US$14 per mmcf)
and US$145 per barrel of diesel (equating to US$24 per mmcf). We do,
however, anticipate that the company will continue domestic sales of some
form, potentially as high as current levels into the future. While this might not
make perfect sense from a purely financial standpoint, we believe it would
help maintain the excellent geo‐social and geopolitical relationships the
company’s management currently enjoys in Colombia. This in turn, in our
view, would definitely be value adding for Pacific Rubiales shareholders in the
longer term.
Guaduas
Pacific Rubiales has a 90.6% interest in the Guaduas block, located in the
Magdalena Basin. This 30,665 acres block contains the Guaduas field,
discovered in 1996. The field, at year end 2007, was estimated to contain 3.05
million barrels of oil in 2P reserves. The field currently produces from highly
fractured Cretaceous Limestone (Cimarrona Formation). While this leads to
productive wells, it also adds a layer of complexity to reservoir modeling and
field development. Going forward, we currently model production of 1,100
bopd from the field for 2008. Following the completion of the two
development wells scheduled for 2009, we expect production to increase to
1,500 bopd. The 18.5° API crude produced from the field is currently exported,
along with the Rubiales crude currently blended at the Guaduas facilities.
Following the expected completion of the Rubiales pipeline in 2009, the
Guaduas production facility will have close to 20,000 bopd of excess
processing capacity, which could potentially be leased out, to a third party
crude producer. Based on historical regional averages, we anticipate that the
company could charge a US$2 to US$2.50 per barrel processing fee for the use
of this facility. While we do not, pending official confirmation of such
contracts, model any potential revenues from such operations (post 3Q09), this
potential revenue would equate to an additional US$14 million per year.

Mauritia Norte /Rio Ceibas/Puli

Pacific Rubiales, respectively, has an 80%, a 27.27%, and a 50% interest in the
Mauritia Norte, Rio Ceibas and Puli fields. The first lies in the Llanos Basin,
while the later two are located in the Magdalena Basin. At the end of 2007, the
fields were estimated to contain reserves of, net to Pacific Rubiales, 1.1 million
barrels of oil. For 2008, we model production of 2,200 bopd from these fields.
In the longer term, we anticipate the potential for one to two years of plateau
production at current rates, followed by 10 to 15% annual production declines
thereafter.

Exploration
In addition to the above producing assets, Pacific Rubiales currently has an
interest in several Colombian and Peruvian exploratory stage blocks. In
Colombia, it has an 80% interest in the Moriche, a 100% interest in the
Jagueyes, a 60% interest in the Quifa a 100% interest in the La Creciente, and a
100% interest in the Guama blocks. The company also has a 100% interest in
the Arauca and Tacacho Technical Evaluation Areas (TEA).

La Creciente. In addition to the La Creciente A and D gas discoveries, Pacific
Rubiales has identified seven exploration prospects at the La Creciente block.
These structures are mainly faulted blocks, defined on seismic (2D, 3D or
both), and estimated to contain a potential total of 800 Bcf of recoverable gas
on an un‐risked basis. On a risked basis, this equates to 271 Bcf of gas. While
the average COS for the block is 27%, we do note the company’s recent
exploration success rate on the block of 66% (two discoveries on three
exploration wells). As such, a repeat of recent performances in future La
Creciente exploration could increase Pacific Rubiales total booked gas reserves
by 500 Bcf. We do, however, note, given the current pipeline limitation on the
block, that any future discoveries would be deemed non‐commercial, thus non
bookable as reserves, pending completion of a larger export system.

Exhibit 16: La Creciente Exploration Prospects

Recoverable Chance of Risked
Gas Resources Success Gas Resources

Prospects (Bcf) (Bcf)

B 160 35% 56

C 125 45% 56.25
F 180 28% 50.4
G 101 40% 40.4
H 47.5 24% 11.4
I 83 29% 24.07
J 103 22% 22.66
Total 799.5 261.18


For 2008, in addition to the La Creciente A‐2 and E‐1 wells drilled earlier this
year, the company plans to drill three additional exploration wells on the
block by year end. Specifically, LCB‐1, LCG‐1, and LCC‐1 in 3Q08.

Exhibit 17: La Creciente


Quifa – The 377,419 acres Quifa TEA lies in Colombia’s Llanos Basin,
surrounding the Rubiales field. Following the company’s last two exploration
wells, Quifa‐3 and Quifa‐4, which did not encounter any commercially viable
hydrocarbon accumulations, the company re‐interpreted existing 2D seismic
on the block, in addition to acquiring 200 Km of new 2D lines. Based on this
information, two prospects and three leads were identified, with the prospects
mapped as containing a potential resource up to 149 million barrels of
recoverable oil net to the company’s interest on the block. With an exploration
well costing approximately US$1.1 million, we view this block as a low cost,
high impact exploration play. We therefore expect to see one, or both of these
structures drilled by 2009.

Exhibit 18: Prospects in the Quifa Block


Moriche – Pacific Rubiales has an 80% interest in the 30,797 acres Moriche
block, located in Colombia’s Llanos Basin. In addition to the Mauritia Norte
field, discovered in early 2007, Pacific Rubiales has identified five additional
prospects on the block, based on the initial interpretation of recent 3D seismic
data. As with most Llanos structures, these prospects appear to be faulted
blocks, of relatively small areal extent. While Petrotech expects to release
prospective resource estimates on the block by the end of July 2008, we do not
anticipate large resources to be mapped. Based on regional geology, as well as
available data, we do not expect total oil potential from these structures to
exceed 5 million barrels each of recoverable oil. Pacific Rubiales plans on
drilling two exploration wells on this block later this year.

Exhibit 19: Moriche Block Prospects


Guama – Pacific Rubiales has a 100% interest in the 216,130 acres Guama
block, located in Colombia’s Magdalena Basin. Located next to the company’s
La Creciente block, we view the Guama block as prospective, mainly as it
contains the legacy Ligia‐1 discovery, which tested gas, and light oil, during a
short test almost two decades ago. The block also lies on trend with several
regional oil & gas fields. Following the acquisition of 255 Km of new 2D
seismic, and the reprocessing of 300 Km of legacy 2D data; which fulfilled
exploration commitments on the block until October 2008; Pacific Rubiales has
identified four exploration prospects on the block. We currently expect the
company to drill two exploration wells on the block in 2008 (2Q08 and 3Q08),
fulfilling the commitments for the second exploration phase on this contract.
Petrotech, the company’s third part reservoir engineering firm expects to
release prospective resource estimates on the block by the end of July 2008.

Exhibit 20: Guama Block Prospects


Arauca – Pacific Rubiales has a 100% interest, subject to a 5% overriding
royalty on production to Free Traders Group, in the 726,470 acres Arauca TEA,
located in Colombia’s Llanos Basin, on the border with Venezuela. Given its
location, adjacent to one of Colombia’s largest oil fields (Caño Limón), and
neighbouring Venezuela’s Guafita and Victoria fields we consider this block as
highly prospective. As an aside, the Caño Limón field, discovered in 1983, has
been reported to contain close to 1.5 billion barrels of recoverable oil, with
individual wells flowing as high as 20,000 bopd. Awarded in March 2007, the
first exploration phase on the TEA runs until September 2008. To date, the
company has reprocessed 2,000 Km of 2D seismic on the block, fulfilling part
of its minimum phase one exploration commitments. Based on this work, the
company has mapped eight exploration prospects. Petrotech currently
estimates that these structures could contain a total of 112 million barrels of
prospective resources on an un‐risked basis (gross).

Exhibit 21: Arauca Prospectivity
Unrisked Undiscovered Oil Resources COS
Prospect Type P90 P50 P10 Mean
MMbbl MMbbl MMbbl MMbbl
T‐A Antithetic Faulted Block 5.5 12.1 25.7 14.4 33.6%
Pz‐A Paleozoic Inverted Structure 4.6 29.8 170.7 68.4 9.7%
Pz‐B Paleozoic Inverted Structure 2.3 15.4 86.2 34.6 2.5%
Pz‐C Paleozoic Inverted Structure 0.8 4.9 25.6 10.4 9.7%
Pz‐D Paleozoic Inverted Structure 0.7 4.1 22.4 9.1 9.7%
Pz‐E Paleozoic Inverted Structure 0.3 2.1 12.1 4.8 9.7%
Pz‐F Paleozoic Inverted Structure 1.4 11.1 72.8 28.4 9.7%
Pz‐G Paleozoic Inverted Structure 5.0 32 179 72.0 9.7%
Total 20.6 111.5 594.5 242.2

Pacific Rubiales currently plans on drilling two exploratory wells, at a cost of
US$3 to US$4 million each, on this block in 4Q08. We expect that at least one of
these will target the shallower tertiary structure, given that the bulk of the
Caño Limón oil is contained in the Tertiary Mirador formation. Given the
proximity of the Caño Limón‐Covenas export pipeline to the block, we
anticipate that potential discoveries on Arauca could easily be booked as
reserves. While the block is very prospective, its location, along the border
with Venezuela, adds a layer of security risks to the company’s operation.
Although we don’t expect this to preclude the company from continuing to
engage in exploration, and potentially production, operations, militant
activities could delay said operations. We also note that the Caño Limón to
Covenas export pipeline, which could potentially be used to export discoveries
from the Arauca block, has been breached numerous times.
Tacacho – In January 2008, Pacific Rubiales was awarded a 100% interest in the
1,480,060 acres Tacacho TEA, located in Colombia’s Putumayo Basin, on the
border with Ecuador. The block lies approximately 100 Km from several oil
and gas fields in the Putumayo, as well as on trend with Ecuadorian oil fields.
The company is currently committed to the acquisition of 100 Km of new 2D
seismic, along with the reprocessing of 640 Km of legacy 2D data, and a 4,400
km aero‐magneto‐gravimetric survey. Petrotech expects to release prospective
resource estimates on the block by the end of July 2008. While the block is very
prospective, its location, along the border for Ecuador, adds a layer of security
risks to the company’s operations. Although we don’t expect this to preclude
the company from continuing to engage in exploration, and potentially
production, operations, militant activities could delay said operations.

Jagüeyes – In February 2008, Pacific Rubiales was awarded a 100% interest in
the 53,128 acres Jagüeyes TEA, located in Colombia’s Llanos basin. The block
is surrounded by oil and gas discoveries. The company is currently committed
to the acquisition of 112 km2 of new 3D seismic for the first 8 month
exploration phase. In the event Pacific Rubiales opts to extend the exploration
phase on this block (10+12+12 months options), commitments are for one
exploratory well to be drilled per exploration phase, at an estimated cost of
US$5 million per well. Petrotech expects to release prospective resource
estimates on the block by the end of July 2008
Pipelines
In addition to the above production and exploration stage blocks, Pacific
Rubiales has a 100% interest in the Guaduas‐La Dorada pipeline (“OGD”) and
minority interests in two trunk oil pipelines, Oleoducto de Colombia (“ODC”)
and Oleoducto Alto Magdalena (“OAM”).
Peru
Peru is bordered by Ecuador and Colombia to the north, Brazil and Bolivia to
the east, Chile to the south and Pacific Ocean to the west. Its population of
approximately 28 million people has seen the political system alternate
between democracy and military dictatorship in the past. Although the
country returned to a democratic leadership in 1980, it remains economically
and politically divided. Between 2002 and 2006 the Peruvian economy grew by
more than 4% per year, with a stable exchange rate and low inflation. With a
2007 GDP (PPP) of US$ 217.5 billion (US$ 7,600 per capita) and the GDP
growth rate of 7.5%, underemployment and poverty remain high despite
strong macroeconomic performance. With a small elite controlling most of
wealth and political power, almost 45% of the population lives below the
poverty line.
Exhibit 22: Marañon Basin

Source: Perupetro

Pacific Rubiales’ Peru blocks lie in the frontier region of the Marañon and
Ucauali basins. The basins are located in Peru’s northeast, part of a larger 37
million acres regional basin extending from Peru to Colombia and Ecuador
(Putumayo – Oriente ‐‐ Marañon basin). They were formed over a period of
time ranging from the Late Permian/Early Triassic to the Tertiary (Eocene).
While historical geological work shows approximately one billion barrels of
Estimated Ultimate Recoverable (EUR) oil in the Marañon basin, recent joint
studies by the governments of Canada and Peru indicate that “significant
reserves may remain in unexplored parts of the basin.” Specifically, following
a two year study earlier this decade, this basin was divided into two distinct
regions (east and west), with a major “hinge” zone separating the two. The
billion barrels of EUR identified to date are mainly located in the western
region, while the new exploration activity, including Pacific Rubiales’ blocks is
focused on the eastern region. Cretaceous age formations (Chonta and Raya),
as well as Triassic/Jurassic Pucará formations, are the most likely hydrocarbon
source rock, or kitchen, for this petroleum province. Upper Cretaceous sands,
such as Vivian, Chonta and Agua Caliente Formations, represent the main
hydrocarbon‐bearing reservoirs of the basin, while Cretaceous shales provide
most of the basin’s seals.
In addition, the basin contains structures too small to account for the amount
of trapped oil, as well as well‐developed dry paleostructures. Given these
findings, inconsistent with the historical geological basinal theories, the
Peruvo‐Canadian study investigated other oil migration/trapping mechanisms
in the basin, leading to the possibility that oil could have re‐migrated from
older (breached or tilted) structures in the west to younger fields (structural or
stratigraphic traps) in the eastern basin during Tertiary (Miocene) to the
Quechua (Miocene to Recent) Orogeny (mountain building) tectonic events.
From an exploration standpoint, we note the basin’s historical 42% COS is a
good indicator for future prospectivity.

Pacific Rubiales currently has a 100% interest in blocks 135 and 137 in the
Marañon Basin, and block 138 in the Ucayali Basin. The blocks are covered by
four exploration phases, and the option to convert oil discoveries into 30 years
agreements (40 years for gas). The blocks cover a combined 4.7 million acres,
and are estimated to contain a potential 1,405 million barrels of prospective oil
resources (mean basis).

Pacific Rubiales’ minimum work commitments on block 135 include
aeromagnetic and gravimetric surveys, remote (satellite) sensing, as well as
interpretation of legacy data. In the event the company opts to enter into a
second phase on the block, work commitments would include 400 km of new
2D seismic and the drilling of an exploratory well. Phases three and four
would require one exploratory well each. On block 137, phase one
commitments include a report on the remote sensing and 200 km of new 2D
seismic. Each of phases two, three and four would require the company to
commit to drilling one exploratory well per phase. For block 138, the
compilation of a technical report of all the existing data covers commitments
for Phase one. Phase two would include 300 km of new 2D seismic, while each
of Phases three and four would require the drilling of one exploratory well per
phase.

Appendix

$mln 2007 2008E 2009E
ASSETS
Current assets
Cash and cash equivalents 141 154 524
Accounts receivable 24 58 58
Inventories 2 19 19
Prepaid expenses 6 5 5
Future Income tax 0 8 8
Other 0 0 0
173 244 614

Property, plant and equipment 611 1,695 1,775
Restricted cash 0 14 14
Investments and other assets 0 11 11

Other 6 0 0

617 1,720 1,800

790 1,964 2,414

Current
Accounts payable and accrued liabilities 24 74 74
Current portion of long‐term debt 15 1 0
Other 0 0 0
39 76 75

Long‐term debt 8 7 7
Future income tax 167 425 0
Asset retirement obligation 1 11 11
Minority interest 0 0 0
Other 0 0 0
176 442 17


Share capital 453 1,118 1,118
Contributed surplus 107 186 186
Accumulated other comprehensive income 0 0 0
Retained earnings 14 87 683
Other 0 54 335
575 1,446 2,322
790 1,964 2,414
Exhibit 24: Income and Cash Flow Statements
$mln 2007 2008E 2009E
REVENUE
Total net revenue (net of royalities) 84 635 1,167

EXPENSES
Operating 33 228 272

Depletion, depreciation and accretion 19 150 264
General and administrative 4 27 27

Share‐based compensation 5 33 2
Interest 2 3 14
Foreign exchange (gain)/loss (8) 168 168
Interest Income 0 (5) (20)
Other Income 1 (1) (1)

Total expenses 56 604 727

Current 5 32 160
Future 0 0 0
Non‐controlling interest 5 0 0

Net income 18 0 281

Cash Flow Statement
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Items not requiring outly of cash:

Net Income 18 0 281
Depletion, depreciation and accretion 19 150 264
Asset retirement obligation accretion 0 0 0
Stock based compensation 5 33 2
Future Income tax recovery ‐4 ‐1 0

Foreign exchange loss 0 168 168
Other Items 6 0 0

44 349 715
Changes in non‐cash working capital ‐17 ‐38 0

27 311 715


Expenditures on property, plant and equipment ‐36 ‐305 ‐344
Pacific Stratus acquisition ‐ cash acquired less acquisition cost ‐244 19 0
Purchase of investments 0 ‐2 0
Other ‐5 0 0
‐285 ‐287 ‐344

Repayment of debt ‐19 ‐16 ‐1

Proceeds from exercise of warrants and options 1 6 0
Proceeds from issuance of debt 23 0 0
Due to related parties 0 0 0
Issuance of shares for cash 394 0 0
Subscriptions received in advance 0 0 0

Other 0 0 0
399 ‐10 ‐1
Net increase in cash and cash equivalents 141 14 370

Cash and cash equivalents, beginning o f period 0 141 154
Cash and cash equivalents, end of period 141 154 524
Fiscal Regimes


In Peru, the company’s potential production would be subject to a 5‐20%,
sliding scale royalty. Peruvian companies are also subject to a 30% income tax.


Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $97.86 $117.68 $122.42 $122.78 $115.19

RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip
$122.85 $122.61 $121.97 $121.85 $122.32
RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00


Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $8.64 $10.92 $12.45 $12.74 $11.19

RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E

Current Strip $13.06 $10.67 $10.78 $11.15 $11.42

RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50





Risks

Competition
of Pacific Rubiales or enter markets that Pacific Rubiales is active in.

Pacific Rubiales to suspend or reduce operations because such operations are
no longer economically viable. If production is not suspended or reduced
during such period, the low differential between the price of the corporation’s
end products and the cost of production could lower Pacific Rubiales’
revenues.

Pacific Rubiales currently provides third‐party reserves evaluation on its
producing assets, and calculations remain dependent on long‐term oil pricing,
geological assumptions made, and the companyʹs ability to produce said
reserves.

Pacific Rubiales’s operations are subject to a variety international laws,
regulations and guidelines, including laws and regulations relating to health
and safety, the conduct of operations, the protection of the environment and
the manufacture, management, transportation, storage and disposal of certain
Colombia, and Peru. The companyʹs operations, financial results, and
valuation could be adversely affected by events beyond its control taken by
the current or future governments in those countries with respect to policy
changes.
Pacific Rubiales is subject to various environmental laws and regulations
enacted in the jurisdictions in which it operates. Including the governance of
the manufacturing, processing, importation, transportation, handling and
disposal of certain materials used in operations. Pacific Rubiales may become
liable for damages against which it cannot adequately insure or against which
it may elect not to insure because of high costs or other reasons. Pacific
Rubiales may be required to increase operating expenses or capital
expenditures in order to comply with any possible new restrictions or
regulations.

Operational risks and hazards could expose Pacific Rubiales to substantial
liability for personal injury, loss of life, business interruption, property
damage or destruction, pollution and other environmental damages. While
insurance coverage is expected to address all material risks to which it is
exposed and is adequate and customary in its current state of operations, such
insurance is subject to coverage limits and exclusions and may not be available
for the risks and hazards to which Pacific Rubiales is exposed.

additional financing will be available to Pacific Rubiales when needed or on
terms acceptable to Pacific Rubiales. Inability to raise financing to support
ongoing operations or to fund capital expenditures or acquisitions could limit
growth.

The revenue generated from the operations of Pacific Rubiales may be
of Pacific Rubiales.

JUNE 16, 2008
403.509.0560
Solana Resources Ltd. 403.509.0534
RATING & TARGET

SOR-TSXV RATING OUTPERFORM 2
Initiating Coverage: An Undervalued Colombian Closing Price 4.42
Turnaround Story
MARKET DATA
Event Enterprise Value ($mln) 472
We are initiating research coverage on Solana Resources Ltd. (Solana) with an Avg Daily Dollar Volume (3mo, mln) 2.80
52 Week Range $4.60 / $1.07
OUTPERFORM rating and a C$5.50 per share target price.
FY-Dec 31 2007A 2008E 2009E
Action CFPS (C$) $0.10 $0.72 $1.52
P/CFPS nm 6.2x 2.9x
In addition to an investment in an undervalued Colombian turnaround story, CFPS - 1Q 0.00 0.10 0.37
we are recommending the company to investors who want exposure to the CFPS - 2Q -0.01 0.13 0.38
CFPS - 3Q 0.01 0.22 0.39
growth oriented Costayaco field in Colombia, without owning the CFPS - 4Q 0.10 0.27 0.39
Argentinean and Peruvian assets of the field’s operator. NAVPS $5.48
P/NAV 81%
Revenue ($mln) $19 $111 $218
Analysis Yield (%) 0%
Commodity Assumptions
Having established an impressive Colombian land position, Solana’s board, in
WTI (US$/bbl) $72 $113 $130
October 2006, engaged a new management team to focus on reserves, and HHub (US$/mmbtu) $7.12 $10.00 $7.50
Exchng Rate (US$/C$) $0.94 $1.00 $1.00
production, growth. By focusing on transforming land into reserves, and
Production
reserves into production, this team has been able to deliver tangible value add Oil (bbl/d) 3,112 5,639
Nat. Gas (mmcf/d) 0 1
in under 18 months. Specifically, for 2007, year‐over‐year production grew by
Total (boe/d) 3,182 5,773
40%, while year‐over‐year reserves increased threefold. In the longer term, we
EBITDA ($mln) 2 96 203
believe Solana’s three pronged strategy will yield continued shareholder value
Net Debt/ CF -7.0x -1.0x -1.3x
growth. We expect the company’s low risk development of existing fields and
discoveries to provide growing cash flow from operations. Medium risk COMPANY DESCRIPTION
Solana is an international oil & gas company with operations in
exploration in Colombia’s Llanos Basin provides the potential for sustainable Colombia.
growth. Solana also offers investors access to high impact exploration in the
Catatumbo Basin. In addition, management’s track record indicates the
possibility of an “exit via sale” strategy for the company, potentially at a
premium to market valuations.
Valuation
We currently value Solana on the basis of a risked sum‐of‐the‐parts NAV,
which includes an NPV (DCF, 10% after tax) of booked reserves. We also Closing prices as of June 9, 2008
provide investors with our estimate of geological risk adjusted NPV (DCF, Sources: Raymond James Ltd.,ThomsonOne, CapIQ
10% after tax) of the company’s exploration portfolio. We calculate a risked‐
sum‐of‐the‐parts NAV of C$5.48 per share for Solana. On an un‐risked basis,
we calculate a NAV of C$16.48 for the company’s reserves, potential resources,
and land.

Table of Contents
Reserves Growth ............................................................................................7
Company Profile .............................................................................................9
Operations ....................................................................................................11
Colombia ......................................................................................................11
Appendix ......................................................................................................21
Fiscal Regimes..............................................................................................23
Risks.............................................................................................................24
Exhibit 1: Solana Corporate Summary
Solana Resources (SOR: V)

Overview:
Company name Solana Resources Limited Shares & capitalization:

Ticker SOR Shares outstanding ‐ basic (M) 123

Exchange TSX Venture Shares outstanding ‐ fully diluted (M) 128
Rating OUTPERFORM Market capitalization (C$M) $544

Current share price* C$4.42 Enterprise value 2007E ($M) $472

Total projected return (incl. dividends payable) 24% Touradji Capital Management, L.P. 8.4%
Acuity Investment Management Inc. 1.6%



Colombia

Chaza ‐‐> Production Colombia 7 6 14
Guayuyaco ‐‐> Production

Magangue ‐‐> Production Total 7 6 14

Guachiria ‐‐> Production
RLI (Yrs) 6.3 5.5 11.9

Valuation

Year end: Dec. 31 2006A 2007A 2008E 2009E Key Operating and Financial Data
P/CF nm nm 6.2x 2.9x Year end: Dec. 31 2006A 2007A 2008E 2009E
EV/CF nm nm 9.8x 2.5x

P/E nm nm 11.4x 5.0x PRODUCTION (WI):
Target P/CF nm nm 7.7x 3.6x Crude Oil (b/d) 3,112 5,639
Other Parameters Natural gas (mcf/d) 419 805

EV/BOED $148,376 Total prod. (boe/d) 3,182 5,773
EV/BOE (2P) $33.16 % Natural gas 2% 2%

Raymond James NAVPS C$5.48 Y/Y growth 81%

Commodity Price Assumptions 2007 2008 2009 LT
Brent oil (US$/b) $73 $113 $130 $130 FINANCIAL STATEMENTS:
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50 Revenues ($mln) $11 $19 $111 $218
Operating Expenses ($mln) $3 $4 $9 $13
Operating Net Back Estimates Income Tax ($mln) ‐$5 $0 $6 $8
2008E 2009E Net Income ($mln) ‐$28 ‐$9 $48 $110

Sale price (net of royalties) $101.23 $110.41 Ops Cash Flow ($mln) $6 $10 $88 $187
Opex $8.11 $6.74

Pre Tax Net Back $93.12 $103.68
CFPS ‐ basic $0.07 $0.10 $0.72 $1.52

Tax $22.22 $32.38 CFPS ‐ fd $0.06 $0.09 $0.69 $1.47

Post Tax Net Back $70.90 $71.29 EPS ‐basic ‐$0.34 ‐$0.09 $0.39 $0.89
EPS ‐ fd ‐$0.29 ‐$0.08 $0.38 $0.86
Capex ($mln) $25.53 $33.29 $92.26 $50.00
Reserve Blowdown Production Profile
Net Debt (surplus) ($MM) ($37) ($71) ($85) ($243)
6,000 Net debt/cash flow (6.5x) (7.0x) (1.0x) (1.3x)

5,000
4,000 Name Position
BOPD
3,000
Scott Price President & CEO Ex Breakaway Energy Inc.
Glenn Van Doorne COO Ex Breakaway Energy Inc.
2,000
Ricardo Montes CFO Ex Shell
1,000
Ray Antony Non‐exec Chairman Ex Breakside Energy Ltd.
Stan Grad Co Chairman Soderglen Ranches Ltd.
0
2008E 2010E 2012E 2014E 2016E 2018E 2020E
Grant Howard Non‐exec The Howard Group Inc.
Roy Hudson Non‐exec Davis & Company LLP
Keith Jackson Non‐exec Ex Anglo American plc
Joaquin Moreno‐Uribe Non‐exec Ex. Shell Venezuela
Scott Price President & CEO Ex Breakaway Energy Inc.

Source: Company Reports, Raymond James Ltd., Capital IQ

“Price is what you pay. Value is what you get” – Warren Buffett

Tenfold reserve increase over two years. At year end 2007, Solana booked 11 Tenfold reserve increase in
two years
million barrels of 2P oil reserves (15 million barrels 3P), up from 1 million
barrels at the end of 2005. Note that the 2007 year end reserves do not include
the successful results from the Costayaco 2 and Costayaco 3 appraisal wells.
Based on our analysis of these results, we currently estimate the potential for
an additional 15 to 30 million barrels (gross) on the Costayaco field in 2P
reserves, potentially doubling the company’s current reserves.

Targeting significant production increase in 2008/2009. Having grown Year over year
production growth
production to 869 boed in 2007 (average, net), a 40% increase over 2006, we
anticipate continued production growth from the company in 2008 and 2009.
We currently model 2008E net production of 3,182 boed, while for 2009; we
anticipate average production of 5,773 boed.

A turnaround story. We view the company as an investment in a turnaround
story that is in the process of getting upwards reevaluated by markets. Having
joined the company in October 2006, the management team continues to
demonstrate success. As such, while we believe that Solana is still
undervalued by capital markets, this ‘discount’ has contracted with each new
success delivered by this team.

A history of value creation. The company’s management team has a proven History of creating value
history of oil & gas value creation. Specifically, both the CEO and COO were
involved, at the senior executive level, in building junior international oil &
gas companies from the “ground up”, following which these companies were
acquired, at a significant premium to market valuations. While we do not
exclude the potential for a “history repeats itself” scenario; i.e. a potential
acquisition of the company at a significant premium; we like Solana on the
basis of the inherent value of the company’s assets and its management team’s
expertise.

additional value for current Solana shareholders:

Costayaco field reserves update in 2H08;
Exploration drilling in the Catguas block in 3Q08;
Exploration drilling in Guachiría Norte by 1Q09;
Results from the Guachiría Sur Palmitas‐2 well in 2Q or 3Q08;


We have prepared an NPV (DCF, 10% after tax) summary for Solana’s assets We calculate a core
in Colombia, based on blowing down the company’s booked reserves. As part NAV of C$4.18 per
share for Solana’s
of our NAV calculation on Solana, we also provide NPV (DCF, 10% after tax) reserves
calculations on the company’s exploration potential of 50 million barrels of oil,
as well as land value for the company’s Colonia and San Pablo blocks. We
currently assign US$50 per acre in land value for blocks without prospective
resource estimates. As the company progresses in geotechnical evaluation on
said blocks, our intent is to replace the land based value by a resource NAV
estimate. While recent Colombian land farm‐out deals have been in excess of
US$100 per acre, we have opted to use a more conservative US$50 per acre in
our models.


Solana WI Reserves/Resources Unrisked NPV Unrisked NPV Risking Risked NPV Risked NPV

Interest mm Barrels US$ million Per share US$ million Per share
Chaza 50% 10 $378 $2.96 100% $378 $2.96
Guayuyaco 35% 1 $42 $0.33 100% $42 $0.33
Magangué* 38% 0 $14 $0.11 100% $14 $0.11
Guachiría 70% 1 $27 $0.21 100% $27 $0.21
Reserve based NAV 12 $461 $3.61 100% $461 $3.61

Cash (Net debt) $72 $0.57 100% $72 $0.57

Reserves net asset value $533 $4.18 $533 $4.18
Reserves net asset value (C$) $533 $4.18 $533 $4.18

Chaza upside 50% 15 $561 $4.39 10% $56 $0.44
Guachiría Sur/Norte Upside 70% 4 $102 $0.79 10% $10 $0.08

Catguas A&B Upside 85%/50% 29 $827 $6.47 10% $83 $0.65
Garibay Upside 50% 3 $73 $0.57 10% $7 $0.06
Colonia Upside** 100% N.A $5 $0.04 100% $5 $0.04
San Pablo Upside** 100% N.A $5 $0.04 100% $5 $0.04
Exploration upside 49.5 1,572 $12.31 $167 $1.31

Net asset value US$2,106 US$16.48 US$700 US$5.48
Net asset value (C$) C$2,106 C$16.48 C$700 C$5.48

* 6:1 mcf:boe conversion
** $50 per acre land value

Solana under different long term oil prices and different discount rates.

$90 $110 $130 $150 $170
5% C$5.39 C$5.97 C$6.55 C$7.12 C$7.70
Discount
10% C$4.64 C$5.06 C$5.48 C$5.90 C$6.32

rate
12% C$4.42 C$4.79 C$5.17 C$5.54 C$5.92

15% C$4.14 C$4.46 C$4.78 C$5.10 C$5.42


We calculate a risked NAV of C$700 million, or C$5.48 per share (fd) for the
company.

Exhibit 4: Solana Value Creation

18.0

16.0
14.0

12.0
US$ per Share

10.0
8.0

6.0

4.0
2.0

0.0

Re se rve s Chaza Guachiría Catguas Garibay Colonia San Pablo

upside Sur/Norte A&B Upside land land

Upside Upside


Reserves Growth
The company exited 2007 with 10 million barrels of oil in net 2P reserves, a
tenfold increase over 2005.

Exhibit 5: Solana Net Reserves Growth

16
14
12
Proved Probable Possible
10
MMBOE
0
2005 2006 2007


For 2008, in addition to potential exploration success, we currently anticipate
an increase in booked reserves from the Costayaco field in Colombia.
Specifically, we estimate that the incorporation of results from the two recent
successful appraisal wells on the field could potentially add 15 to 30 million
barrels in gross oil reserves.

Going forward, Solana has the potential to continue growing reserves through
exploration activities. For 2008, the company has budgeted to drill five firm, as
well as three contingent, exploration wells, with the potential to add an
additional 5 to 10 million barrels in oil reserves to the company.
Production Growth
Since joining the company in October 2006, Solana’s management has
delivered significant organic production increases.

Exhibit 6: Solana Production Profile

6,000

5,000

4,000

BOPD
3,000

2,000

1,000

0
2008E 2010E 2012E 2014E 2016E 2018E 2020E


While our reserve blowdown scenario has production declining post 2010, we
believe Solana is positioned, assuming our above scenario on the Costayaco
reserves is confirmed, to deliver in excess of 10,000 boed production by 2011.
Company Profile
Solana is a junior international oil and gas company, currently focused on
Colombia. The company’s shares trade on the Toronto Venture stock exchange
(symbol SOR), as well as the Alternative Investment Market of the London
stock exchange (symbol SORL). The corporate and capital structures of the
company are illustrated below.

Exhibit 7: Solana Corporate Structure

Solana Resources Limited
(Alberta)
100% 100%
Solana Petroleum Expolaration
Bayford Investments Ltd.
(Colombia) Limited
(Barbados)
(Cayman Islands)



(M)


Stock options 5


Market Capitalization 544

Holders
Shares
TOURADJI CAPITAL MANAGEMENT, L.P.
8.4%
PRICE, J. SCOTT*
3.1%
GRAD, STANWILL GEORGE PETER**
2.1%
ACUITY INVESTMENT MANAGEMENT INC.
1.6%
CRESTSTREET ASSET MANAGEMENT LIMITED
1.0%
AEGON CAPITAL MANAGEMENT, INC. 0.4%

ANTONY, RAY*** 0.3%

SPROTT ASSET MANAGEMENT INC. 0.2%

BLUMONT CAPITAL CORPORATION 0.2%

AGF MANAGEMENT LTD. 0.1%

Notes: * Chief Executive Officer, ** Former Director, *** Chairman
Leadership Team
The company’s management team has a proven history of oil & gas value
creation. Specifically, both the CEO and COO were involved, at the senior
executive level, in building junior international oil & gas companies from the
“ground up.” In addition, each of the company’s key technical team members
has several decades of international oil & gas exposure, which we believe will
be critical in continuing to deliver production and exploration success.

Scott Price, President, CEO, and Director, came to Solana via the acquisition
of Breakaway Energy. In addition to a proven technical track record in
international oil & gas operations, his role as CEO of Aventura equipped him
with the skills required to develop a successful international oil & gas
company. Specifically, under Mr. Price’s watch, Aventura grew from a $12
million market cap to close to $200 million, following which it was acquired by
British Gas (BG‐LSE, not rated) for $228 million. He has over 20 years of
international oil and gas experience. Mr. Price is a graduate of the University
of Calgary (B.Sc. in Chemical Engineering, MBA). He is a registered engineer
in the province of Alberta.

Glenn Van Doorne, VP Operations, joined Solana in October 2006, via the
acquisition of Breakaway. He brings over 30 years of international oil and gas
experience, including a stint with the International Energy Agency (IEA). He
was also VP, Exploration and Production for Hurricane Hydrocarbons
(PetroKazakhstan), increasing that company’s production (50 bopd to 70,000
bopd), and reserves (one million barrels to 400 million barrels). Note that
PetroKazakhstan was sold to CNPC in 2005 for $4.18 billion. In addition, Mr.
Van Doorne was the founder of IbrizOil, a Kazakh oil company later sold to
Big Sky Energy. Mr. Van Doorne is a graduate of the Belgium (B.Sc. and M.Sc.
in Geological and Mineralogical Sciences).

Ricardo Montes, CFO, joined the company from Shell in July 2006, where he
was a Financial and Accounting Manager. Prior to that, Mr. Montes was VP
Finance for Shell in Venezuela. He has close to 25 years of international oil &
gas experience. Mr. Montes is a graduate of Universidad de la Sabana in
Colombia (MBA).

Operations
Solana currently has interests in 10 oil & gas blocks in Colombia, seven of
which it operates.

Exhibit 9: Solana Property Breakdown

Country Asset Solana Operator Area Status
Interest Gross
2
km

Colombia

Magangue 37.8% SOR 84.0 Producing
Catguas 100% SOR 1,591.0 Exploration
Guachiria Norte 100% SOR 412.0 Exploration
Colonia 100% SOR 439.0 Exploration
San Pablo 100% SOR 423.0 Exploration
Guachiria 100% SOR 68.0 Exploration
Guachiria Sur 100% SOR 366.0 Exploration
Garibay 100% SOR 307.0 Exploration

Guayuyaco 35% GTE 212.0 Producing

Chaza 50% GTE 325.0 Producing
Total 4,227.0


Colombia

Exhibit 10: Colombia Hydrocarbon Basins

Source: ANH

Solana’s blocks lie in the Putumayo, Llanos, Catatumbo and Magdalena
Basins.

Magdalena Basins, runs along the Andean mountain range (Cordillera
Occidental, Cordillera Central, and Cordillera Oriental), extending from the
Caribbean Sea in the north, to the Ecuadorian border in the south. The basin
Lisama, Esmeraldas‐La Paz, Cienaga de Oro, and Colorado‐Mugrosa
formations represent the main hydrocarbon‐bearing reservoirs of the basin.
These reservoirs have good porosity (15‐20%) and permeability (20‐600
millidarcies). Cretaceous age shales (Umir and La Luna formations), as well as
sulfur content.


The Llanos Basin runs from the Colombian‐Venezuelan border in the
northeast, to Eastern Cordillera in the southwest. The Carbonera and Mirador
sandstones (Paleogene) are known to be excellent reservoirs in the basin. In
addition, certain Cretaceous sands have also shown good reservoir quality in
the Llanos. These reservoirs have good porosity in the east of the basin (30%),
decreasing to average porosities in the west (10%). The majority of the basin’s
oil is heavy (10° to 12° API), although much lighter oil is also found (42° API).
Most discovered fields in the basin have been found in structural traps (fault
related), although stratigraphic traps (pinchouts, paleohighs, and channels) are
considered prospective.

The Catatumbo Basin forms the southwest flank of Venezuela’s prolific
Maracaibo Basin. The basin was formed during the Cretaceous and Tertiary
periods times. The La Luna formation is considered the major source rock in
the basin. Cretaceous limestone and sandstone (Uribante Group, Capacho and
La Luna formations), as well as Paleogene sandstone (Catatumbo, Barco,
Mirador and Carbonera formations) form the basin’s main reservoirs.
Fractured basement rocks are also considered to be potential reservoirs. Most
discovered fields in the basin have been found in structural traps. Note that
the Catatumbo Basin is considered one of Colombia’s most prolific basins.

Exhibit 11: Operations Map


Solana’s portfolio consists of a 50% interest in the Chaza, a 35% interest in the
Guayuyaco, a 70% interest in the Guachiría, Guachiría Norte, and Guachiría
Sur, a 50% interest in the Garibay, a 100% interest in the Colonia and San
Pablo, a 37.8% in the Magangué, an 85% interest in Area A of Catguas, and a
50% interest in area B of the Catguas.

Chaza
Located in the Putumayo Basin, the Chaza block was awarded under an ANH
contract, with the exploration phase due to expire in 2011, and the production
phase lasting until 2032. Solana has a 50%, non operated, working interest, of
the 80,242 acres block, with Gran Tierra (GTE‐TSX, MARKET PERFORM)
holding operatorship and the other 50% interest. Following the successful
Costayaco 1 exploration well in 2Q07, the partners drilled and tested two
additional appraisal wells on the field (Costayaco 2 and Costayaco 3). Having
flow tested up to 5,906 bopd from separate formations; the Costayaco 1 well is
currently producing 3,500 bopd (gross), due to local infrastructure limitations.
The Costayaco 2 well tested in excess of 6,000 bopd from several formations,
while Costayaco 3 flowed at up to 2,543 bopd. The partners are in the process
of preparing Costayaco 2 for long term production and testing. Note that field
production remains constrained by oil trucking capacity limitation.
Specifically, production is currently trucked to a production battery at
Uchupayaco, with road conditions limiting trucking to 3,500 bopd. To
debottleneck this, the partners are in the process of building a 25,000 bopd
(upgradable) pipeline from Costayaco to Uchupayaco to replace trucking
operations. While this line is scheduled for completion during 2H08,
production from the field will remain constrained by the Santana‐Orito
pipeline capacity allocation for Costayaco, limited to 6,000 bopd (gross)
downstream of Uchupayaco. To address this, the partners are currently
investigating the twinning of the Santana‐Orito line. We currently expect a
final decision regarding capacity to be reached following determination of the
actual field size, potentially by the end of 2008. This would allow a possible in
service date for the line by the end of 2009. In the short term, there exists the
possibility to truck 3,000 to 4,000 bopd of production from Santana to Orito,
potentially increasing production from the field to 10,000 bopd (gross) in
2H08.

For our reserves blow down assumption, we currently model production from
the block at 4,750 bopd (gross) for 2008, including potential production from
Costayaco 2 later this year. In the longer term, and excluding potential
production from the ongoing Costayaco 4, and the planned Costayaco 5, 6 and
7 wells, we currently model 9,500 bopd for 2009, with production reducing at
15% per annum thereafter.

Exhibit 12: Putumayo Infrastructure


The company’s reservoir engineering firm, Degolyer and MacNaughton,
estimates the field’s 2P reserves at 9.3 million barrels of oil net to Solana’s
working interest (post royalty), mainly based on results from Costayaco 1.
Gaffney, Cline & Associates, the third party reservoir engineering firm used by
Gran Tierra, currently estimate a more conservative 9 million barrels of oil for
a 50% working interest on the field (net of government royalty). As with all
geological data, reservoir modeling, we believe, will always be a mix of pure
science, and some art. As such, given that neither numbers account for the
Costayaco 2 and Costayaco 3 test results, we believe using the higher reserves
in our calculations can easily be supported. Specifically, based on our analysis
of the Costayaco 2 and Costayaco 3 test results, mainly confirming the
oil/water contact in the lower Caballos formation we currently estimate
potential additions of 15 to 30 million barrels (gross) to the field in the next
engineering reserve reports. Note that no evidence of an oil/water contact has
yet been identified in the shallower T Sandstone zone. To date, the only
certainty is that the oil/water contact in this shallower zone is further out that
the Costayaco 1, 2 and 3 radius. As such, while unable to estimate ultimate
potential reserves from this zone, we expect them to be significantly higher
than reported at year end 2007, with ultimate size depending on the location of
the oil/water contact.

Exhibit 13: Costayaco Field


In addition to the ongoing Costayaco 4, the partners currently plan on drilling
Costayaco 5, 6 and 7 later this year.
Guayuyaco
Located in the Putumayo Basin, the 52,366 acres Guayuyaco block is currently
covered by an Ecopetrol production contract, expiring in 2027. Solana
currently has a 35% non operated interest in the block. The block currently
contains two oil discoveries, the Guayuyaco and the Juanambu fields. The
Guayuyaco field, discovered in 2005 currently has two wells on production,
while the Juanambu field, discovered in 2007, is producing from one well. We
currently are forecasting 550 bopd (net) from the block in 2008 production to
the company’s 35% interest. Note that the partners are planning on drilling at
least one additional producer on Juanambu in 2008. The Juanambu filed is
connected, via a spur line to the adjacent Toroyaco facility, from where crude
is exported via existing infrastructure.

In the longer term, the partners could drill two prospects currently identified
on the block, mainly the Verdeyaco and the Floresta.
Magangué
Solana currently has a 37.8% working interest, and operatorship, of the 20,757
acres Magangué block in the Lower Magdalena Basin. The block contains the
Güepajé gas field, reported to contain 7.5 Bcf of 2P gas reserves. Production
from this field is currently shut in, pending installation of a new compressor.
The field’s last reported production (4Q07) was 2.6 mmcf/d (785 mcfd net to
Solana). Note that gas production from the field was sold locally at
$2.55/MMbtu. Given the block’s neighbourhood; adjacent to the prolific Pacific
Rubiales (PEG‐TSX, STRONG BUY) La Creciente block, the company is in the
process of re‐evaluating available geological information (including seismic) to
identify potential exploration.
Guachiría
Solana has a 70% interest and operatorship of the 16,903 acres Guachiría block
in the Llanos Basin. While this block is governed by an ANH exploration and
exploitation contract, it is subject to an additional 13% royalty payable to
Ecopetrol. Guachiría is home to the Yalea‐1 production well, with latest
production reported at 30 bopd (gross). In addition, Solana recently drilled the
Primavera‐1 well, an oil discovery that flow tested at 650 bopd (gross). The
company expects to place this well on long term production as of June 2008.
Exploration
In addition to the above producing assets, Solana currently has an interest in
seven Colombian exploratory stage blocks. In the Putumayo Basin, the
company has a 70% interest in the Guachiría, Guachiría Norte, Guachiría Sur,
a 50% interest in the Garibay, and a 100% interest in the Colonia and San
Pablo. In the Catatumbo Basin, the company has an 85% interest in Area A of
Catguas, and a 50% interest in area B of the Catguas.

Guachiría Norte – The 101,807 acres Guachiría Norte block was awarded to
Solana under an ANH exploration and Exploitation contract, with exploration
Phase 4 due to expire on March 21, 2009. As part of the agreement, Solana has
committed to drilling two exploration wells, as well as acquire 25 km2 of 3D
seismic on the block. The company is reprocessing legacy seismic on the block,
aimed at identifying future drill locations. Note that the block is believed to
contain a significant Carbonera C5 channel.

Guachiría Sur – The 90,441 acres Guachiría Sur Block is subject to an ANH
exploration and exploitation contract. In addition to recently acquiring 120
km2 of 3D seismic on the block, Solana spud the Palmitas‐2 exploration well in
1Q08. Initial results indicate a potential oil discovery on the Carbonera
structural play, although confirmation remains pending test results, expected
by 3Q08 at the latest.

Colonia – The Llanos basin Colonia block is one of two blocks acquired by
Solana’s ‘new’ management team. These 108,479 acres is covered by an ANH
contract. The company’s minimum work commitments on the block include
the acquisition of 55 km2 of 3D seismic, as well as drilling one exploration well
per year between June 2008 and June 2013.

San Pablo – This 104,526 acres Llanos Basin block was acquired in conjunction
with the Colonia block on June 25, 2007. Remaining minimum work
commitments on the block include drilling one exploration well per year from
June 2008 until June 2013. This block is subject to an ANH contract. 50 km2 3‐
D seismic data was acquired in December 2007.

Garibay – Solana currently has a 100% interest in the 75,861 acres Garibay
block. Under the ANH contract for this block, Solana is required to drill one
exploration well by October 25, 2008. Late last year, the company announced
farming out 50% of the block to a CEPSA (CEP‐MC, not rated) subsidiary. As
per the farm‐in agreement with Solana, CEPCOLSA will bear 100% of cost on
this exploration well (Topocho‐1) in order to earn its 50% interest.

Catguas – Covering 393,145 acres of the Catatumbo Basin, the Catguas block is
Solana’s largest in areal extent. Laying on trend, as well as adjacent to several
oil fields (including the 250+ million barrels Tibu oil field), we consider this
block as highly prospective. In addition to the drill ready Ñatubay structure
(estimated to contain a potential 19 million barrels of oil), Solana has identified
four leads on the block, potentially containing 30 million barrels of oil.

The company has an 85% working interest in the southern 70% of the block
(area B), and a 50% interest in the northern 30% of the block (area A). The
block contains the Tres Curvas‐1 oil discovery, which flow tested at 180 bopd
(gross) from two formations. Note that this well is currently on extended test
using a progressive cavity pump, aimed at identifying potential benefits of this
technology in the basin. The company is also committed to a minimum of two
wells by November 2008 (one new and one re‐completion, or two new). These
wells are scheduled for 3Q08, targeting a deeper formation than Tres Curvas‐1,
in addition to the same shallower ones. 15% of the block will have to be
relinquished in November 2008. Solana, as part of its work commitments, is in
the process of acquiring 132 Km of 2D and 50 km2 of 3D seismic on the block.
While the Catatumbo basin, including Solana’s block, is very prospective, its
location, along the border for Venezuela, adds a layer of security risks to the
company’s operation. Although we don’t expect this to preclude the company
from engaging in exploration, and potentially production, operations, militant
activities could delay said operations.

Appendix

$mln 2005 2006 2007 2008E 2009E
ASSETS
Current
Cash and cash equivalents 24 30 72 75 233
Cash in trust 0 3 0 0 0
Accounts receivable 8 6 8 18 18
Prepaid expenses 3 1 1 1 1

Other 0 0 0 0 0
35 41 80 94 252

Deposits 2 3 3 50 50
Petroleum and natural gas properties 74 54 82 157 157
Other capital assets 1 1 1 1 1
Investment 0 0 0 0 0

Other capital assets 0 0 0 0 0
76 58 86 208 208

112 99 167 302 460

Current
Accounts payable 7 3 9 9 9
Other 0 0 0 0 0
7 3 9 9 9

Asset retirement obligations 1 2 2 2 2

Income tax liability 6 0 0 18 109

Other 0 0 0 0 0
7 2 2 20 111


Share capital 111 123 187 194 194

Contributed surplus 4 5 12 13 13

Cumulative other comprehensive income 0 6 6 109 109
Deficit ‐17 ‐40 ‐49 ‐43 ‐86
Other 0 0 0 0 110
98 94 155 273 340
112 99 167 302 460

$mln 2005 2006 2007 2008E 2009E

REVENUE

Petroleum sales, net of royalties 8 9 18 108 213

Interest income 1 2 1 3 5
Total net revenue
9 11 19 111 218

EXPENSES

Operating 2 3 4 9 13

General and administrative 3 5 5 7 10
Share‐based compensation
2 3 14 6 2
Depletion, depreciation and accretion 6 35 6 17 21

Interest on term loan 0 0 0 0 0

Foreign Exchange Loss (Gain) 0 ‐2 0 1 0

Other 0 0 0 0 0
13 44 29 39 46


Current 0 ‐5 0 6 8

Future 0 0 0 18 54

Net income ‐4 ‐28 ‐9 48 110

Cash Flow Statement

CASH FLOWS FROM OPERATING ACTIVITIES

Items not requiring outlay of cash:

Net Income ‐4 ‐28 ‐9 48 110

Depletion and depreciation 6 35 6 17 21

Future income taxes 0 ‐5 0 18 54
Share‐based compensation
2 3 14 6 2
Unrealized loss on derivative financial instruments 0 0 0 0 0

Other items 0 0 0 0 0
4 6 10 88 187

Changes in non‐cash working capital 2 1 3 ‐2 0

6 7 13 86 187


Expenditures on property, plant and equipment ‐34 ‐26 ‐33 ‐92 ‐50

Change in working capital ‐ Investing ‐3 2 2 ‐8 0

Additions to other capital assets 0 0 ‐1 0 0

Other receivables 0 0 0 0 0

Deposits ‐2 ‐1 0 2 0
Investment 0 0 0 0 0

Other 0 ‐4 0 0 0
‐39 ‐29 ‐32 ‐99 ‐50
Proceeds from exercise of options 1 0 0 0 0
Proceeds from issuance of common stock 0 34 57 16 21
Sale of capital assets 0 0 0 0 0
Repayment of demand loan 0 0 0 0 0
Other 0 0 0 0 0
1 34 57 16 21
Net increase in cash and cash equivalents ‐32 12 38 3 158

Cash and cash equivalents, beginning o f period 56 21 33 72 75
Cash and cash equivalents, end of period 24 33 72 75 233
Fiscal Regimes


Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $97.86 $117.68 $122.42 $122.78 $115.19
RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88
Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $122.85 $122.61 $121.97 $121.85 $122.32
RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00
Q1 08A Q2 08E Q3 08E Q4 08E 2008E

Current Strip $8.64 $10.92 $12.45 $12.74 $11.19

RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E
Current Strip $13.06 $10.67 $10.78 $11.15 $11.42
RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50

Risks

Competition
of Solana or enter markets that Solana is active in.

Solana to suspend or reduce operations because such operations are no longer
products and the cost of production could lower Solana’ revenues.

Solana currently provides third‐party reserves evaluation on its producing

Solana’s operations are subject to a variety international laws, regulations and
guidelines, including laws and regulations relating to health and safety, the
changes, unforeseen environmental effects, general economic conditions and
other matters may cause adverse effects to operations. The companyʹs
exploration, producing and potential properties are located in Colombia. The
companyʹs operations, financial results, and valuation could be adversely
affected by events beyond its control taken by the current or future
governments in those countries with respect to policy changes regarding
taxation, regulation, and other business environment changes.

Solana is subject to various environmental laws and regulations enacted in the
jurisdictions in which it operates. Including the governance of the
of certain materials used in operations. Solana may become liable for damages
against which it cannot adequately insure or against which it may elect not to
insure because of high costs or other reasons. Solana may be required to
increase operating expenses or capital expenditures in order to comply with
any possible new restrictions or regulations.

Operational risks and hazards could expose Solana to substantial liability for
and hazards to which Solana is exposed.

additional financing will be available to Solana when needed or on terms
acceptable to Solana. Inability to raise financing to support ongoing operations
or to fund capital expenditures or acquisitions could limit growth.

The revenue generated from the operations of Solana may be denominated in
US dollars or other international currencies so that fluctuations in the currency
exchange rates may have an impact on the results of Solana.

JUNE 16, 2008
403.509.0560
WesternZagros 403.509.0534
RATING & TARGET

RATING OUTPERFORM 2
Resources Ltd. Target Price (6-12 mths)
Closing Price
Total Return to Target
4.50
3.05
48%
WZR-TSXV
MARKET DATA
Initiating Coverage: Modern Exploration on History Market Capitalization ($mln) 633
Rich Lands Enterprise Value ($mln) 494
52 Week Range $4.25 / $1.90
Event
We are initiating research coverage on WesternZagros Resources Ltd. FY-Dec 31 2007A 2008E 2009E
CFPs (C$) nm nm nm
(WesternZagros) with an OUTPERFORM rating and a C$4.50 per share target P/CFPS nm nm nm
price. CFPS - 1Q nm nm nm
CFPS - 2Q nm nm nm
Action CFPS - 3Q nm nm nm
CFPS - 4Q nm nm nm
NAVPS nm
We are recommending WesternZagros to investors looking for exposure to a P/NAV nm
pure play; high‐impact; exploration portfolio in one of the world’s most Revenue ($mln) nm nm nm
Yield (%) 0%
prolific hydrocarbon basins.
Commodity Assumptions
WTI (US$/bbl) $72 $113 $130
Analysis HHub (US$/mmbtu) $7.12 $10.00 $7.50
Exchng Rate (US$/C$) $0.94 $1.00 $1.00
WesternZagros is a junior international oil & gas company, currently focused Production
on exploration in the Kurdistan region of Northern Iraq. The company has a Oil (kbbl/d) 0 0 0
Nat. Gas (mmcf/d) 0 0 0
40% interest in a 2,120 km2 production sharing contract (PSC) in the Kalar‐ Total (boe/d) 0 0 0
Bawanoor area of Kurdistan. We believe current market valuations offer
EBITDA ($mln) 0 2 -1
investors a very attractive risk/reward proposition. Specifically, markets Net Debt/ CF nm nm nm
appear to be valuing WesternZagros on the basis of a 300‐350 million barrels of
COMPANY DESCRIPTION
recoverable oil discovery, less than 3% of the 12 billion barrels of potential WesternZagros is an exploration stage international oil & gas
OOIP on the block. While the pure exploration stage of the company currently company. The company's main asset is an exploration block in
the Kurdistan region of Northern Iraq.
prevents us from assigning a STRONG BUY rating, we do consider
WesternZagros a must own for investors looking for a high impact exploration
oil & gas play.
Valuation
We currently value WesternZagros on the basis of a risked Expected Monetary
Value (EMV), which includes a geological chance of success adjusted NPV (DCF,
10% after tax) of the company’s exploration prospects, as well as a monetary cost Closing prices as of June 9, 2008
of failure. We calculate an EMV of C$4.56 per share on WesternZagros. On an Sources: Raymond James Ltd.,ThomsonOne, CapIQ
un‐risked basis, reflecting a potential discovery of 7 billion barrels of OOIP, we
calculate a NAV of C$20 per share, a potential sevenfold return on investment
from current trading levels. Note that the company’s last reported data
estimated the block to contain up to 12 billion barrels of OOIP, close to double
the 7 billion barrels estimate we use in our NAV.
Table of Contents
Company Profile .............................................................................................8
Operations ....................................................................................................10
Kurdistan Region of Iraq................................................................................11
Appendix ......................................................................................................18
Fiscal Regimes..............................................................................................20
Risks.............................................................................................................22
Exhibit 1: Western Zagros Corporate Summary
WesternZagros Resources Ltd. (WZR: V)
Overview:
Company name WesternZagros Resources Shares & capitalization:
Ticker WZR Shares outstanding ‐ basic (M) 207.5
Exchange TSXV Shares outstanding ‐ fd (M) 214.4
Rating OUTPERFORM Market capitalization (C$mln) $632.8
Current share price* C$3.05 Enterprise value 2007E ($mln) $493.6
Total projected return (incl. dividends payable) 48% Paulson & Co. Inc. 13.4%
OppenheimerFunds, Inc. 7.6%
* as at Jun 9, 2008 Vertex One Asset Management Inc. 6.0%
Properties
Area
Kurdistan
Other/Details Prospective Resources (July 31, 2007) (MM Bbl)
Oil Initially In Place (undiscovered) Mean
Kalar ‐ Bawanoor PSC ‐‐> Exploration Kalar 1,640
Bawanoor 1,427
Sarqala 1,177
East Kalar Deep 670
East Kalar 503
Valuation N. Structures 1 833
Year end: Dec. 31 2006A 2007A 2008E 2009E North Bawanoor 833
P/CF nm nm nm nm Miocene Pinch‐Out 833
EV/CF nm nm nm nm Oligocene Pinch‐Out 333
P/E nm nm nm nm Oligocene Reef 3,500
Target P/CF nm nm nm nm Total 11,749
Other Parameters *seismically defined structures
EV/BOED nm Key Operating and Financial Data
EV/BOE (2P) nm Year end: Dec. 31 2007A 2008E 2009E
EV/BOE (Reserves + Resources) $0.04 PRODUCTION (Net):
Crude oil (b/d) 0 0 0
Commodity Price Assumptions 2007 2008E 2009E LT Natural gas (mmcf/d) 0.0 0.0 0.0
Brent oil (US$/b) $73 $113 $130 $130 Total prod. (boe/d) 0 0 0
NYMEX gas (US$/mmbtu) $7.12 $10.00 $7.50 $7.50 % Natural gas 0% 0% 0%

FINANCIAL STATEMENTS:

EMV Estimate Sensitivity* Revenues ($mln) nm nm nm
Operating Expenses ($mln) nm nm nm
COS Potential Reserves
millon bbls oil
EMV ($mm) EMVPS Income Tax ($mln)
Net Income ($mln)
nm
nm
nm
nm
nm
nm
10% 283 $325 $1.52 Operating Cash Flow ($mln) nm nm nm
20% 567 $760 $3.54
25% 708 $978 $4.56 CFPS ‐ basic nm nm nm
30% 850 $1,195 $5.57 CFPS ‐ fd nm nm nm
40% 1,133 $1,630 $7.60 EPS ‐basic nm nm nm
50% 1,417 $2,065 $9.63 EPS ‐ fd nm nm nm
2,833 $19.78
100% $4,240 Capex ($M)
Net Debt (surplus) ($mln)
$35
($96)
$102
($63)
$100
$42
*Source: Raymond James Ltd. estimates Net debt/cash flow nm nm nm
Potential Production Profile (2,833 million bbls) (Gross) Management & Directors
Name Position
900 Frred Dyment Executive Chairman Ex Ranger Oil, Maxx Petroleum, CAPP
800 Simon Hatfield President Ex Exxon, Petro‐Canada, Talisman

Barrels per day (000ʹs)
700 Robert Theriault VP Engineering and Ops Ex Husky, Cairn, CSR Petroleum

600 Greg Stevenson VP Finance Ex Western Oil Sands
500 Board representatives:
400 Frred Dyment Executive Chairman Ex Ranger Oil, Maxx Petroleum, CAPP
300 Simon Hatfield President Ex Exxon, Petro‐Canada, Talisman
200 David Boon Non‐exec Ex Pan Canadian, EnCana
100 John Frangos Non‐exec Ex BHP, Western Oil Sands
Jim Houck Non‐exec Ex Western Oil Sands, ChevronTexaco
0
2006 2008E 2010E 2013E 2015E 2017E 2019E 2021E 2023E 2025E Randall Oliphant Non‐exec Ex Barrick Gold


Source: Company Reports, Raymond James Ltd., Bloomberg, Capital IQ

“Qui audet adipiscitur (Who Dares Wins)” – Special Air Service

WesternZagros is an exploration stage junior international oil & gas company,
currently focused on the Kurdistan Region of Northern Iraq.

High impact exploration ‐ 12 billion barrels of potential OOIP. In its 12 billion barrels of
potential OOIP
September 14, 2007 information circular, WesternZagros indicates the potential
for over 11.7 billion barrels of OOIP on the Kalar‐Bawanoor block. In addition,
5.4 billion barrels of this potential were, at the time, based on five seismically
defined structures, and believed to be a reasonable estimate by the company’s
independent reserves engineering firm (Sproule). Both figures are based on
potential discoveries being oil, and not gas and gas condensate, fields. As with
all exploration, note that drilling results are expected to be binary; proving the
presence of commercial quantities of oil; or not.

Targeting two exploration wells in 2008. In addition to the recently spudded 2 exploration wells in
2008
Sarqala‐1 exploration well, WesternZagros’ 2008 plans include drilling a
minimum of one additional exploration wells on the block. Based on the latest
public information, the Sarqala structure (previously East Shakal) is estimated
to contain a potential 1,177 barrels of oil (mean basis).

Managed by an experienced team. Each of WesternZagros’ key technical An experienced
team members has, on average, 30 years of oil & gas exposure. This includes management team
extensive international oil & gas exposure with established oil & gas
companies, including ExxonMobil, Petro‐Canada, Talisman, Cairn, and
Husky.

An attractive risk/reward exploration proposition. Markets appear to be Attractive risk reward
valuing WesternZagros on the basis of a 300‐350 million barrels of recoverable
oil discovery, less than 3% of management’s last reported estimate of 12 billion
barrels of potential OOIP on the block.

Charting pre‐exploration value build. Assuming that past events predict the
future, WesternZagros’ market valuation could experience some near term
appreciation. Specifically, we note the historical tendency of market valuations
on pure exploration plays to build‐up, or ‘run‐up’ during the drilling of
exploratory wells. As such, we note the potential for WesternZagros to follow
this trend during the 120 days of drilling time on Sarqala‐1.

additional value for current WesternZagros shareholders:

Results on the Sarqala‐1 well expected in 3Q08;
Drilling of the company’s second exploration well later this year;
Potential resolution of the Kurdistan oil export situation.


Given the company’s exploration stage nature, we believe EMV to be a better We believe EMV to
be a better gauge
value gauge than NAV calculations. An EMV reflects the exploration for explorcos than
geological risk (chance of success (COS)), the value of exploration success NAV
(NPV), as well as the cost of failure (COF). Specifically, we calculate our EMV
as follows:

EMV = (NPV x COS) – (COF x {1‐COS})

Given the very subjective nature of chances of success (COS) estimates for a
same play, we provide investors with a range of EMV calculations under
varying COS cases.

For the value of success, we account for 7,083 million barrels of potential We calculate an EMV
C$4.56 share for
OOIP, as this reflects the company’s current prospects and leads. While WesternZagros
WesternZagros’ last published resource estimate indicated up to 12 billion
barrels of potential OOIP, to remain true to our valuation methodology, we
only include seismically identified potential barrels into our NPV calculations.
We view any additional OOIP potential as a free option included in our
risk/reward based target price. Note that the prospectivity of the basin is such
that our estimates may prove to be overly conservative in the event the
company chooses to drill all currently identified structures.

We have prepared an NPV (DCF, 10% after tax) summary for the following
WesternZagros prospects and leads – Kalar, Sarqala, Bawanoor, East Kalar,
East Kalar deep, North Bawanoor and N. Structures 1 – based on a potential
2,833 million barrels of recoverable oil. Note that our recoverable oil scenario
is based on a recovery factor of 40% of OOIP. Given the lack of reservoir data
from potential fields on the block; precluding the accurate calculation of a field
recovery factor, we have opted to use regional analogs in setting our COS and
recovery factor assumptions. Specifically, we note that investigations and data
from 6 recent wells, suggest recovery factors between 30% and 50% of OOIP
on Addax’s (AXC‐TSX, OUTPERFORM) neighbouing Taq Taq field. As an
aside, Kirkuk basin reservoirs tend to be highly fractured, with wells achieving
flow rates as high as 100,000 bopd, and good localized drainage.
Exhibit 2: Risked Contingent EMV Summary

Potential recoverable resouces Geological Risk Potential Reserves NPV EMV EMV per share
mmbbls COS mmbbls C$ Million C$ Million C$
2,833 10% 283 $4,240 $325 $1.52
2,833 20% 567 4,240 760 3.54
2,833 25% 708 4,240 978 4.56
2,833 30% 850 4,240 1,195 5.57
2,833 40% 1,133 4,240 1,630 7.60
2,833 50% 1,417 4,240 2,065 9.63

2,833 100% 2,833 4,240 4,240 19.78


We currently model a 25% COS on the company’s seismically identified leads
and prospects in determining our valuation of the company. We also assume a
$110 million cost of failure, accounting for drilling three exploration wells.

Exhibit 3: Geological Chance of Success
75% COS 37.5% COS 18.3% COS 9.2% COS 5% COS

Same Play Same Play New Play, Same Trend New Play, New Basin
Adjacent Structure Nearby Structure Old Play, New Trend Play with Negative Data

Very Low Risk Low Risk Moderate Risk High Risk Very High Risk

Source: Otis and Schneidermann, Raymond James Ltd.

Specifically, we refer to the work of Otis and Schneidermann, noting that a
rule of thumb for “Same Play, Nearby Structure” is to assign a 37.5%
geological COS, while COS is typically 18.3% for an “Old Play New Trend.”
While we believe the WesternZagros structures/block lie between these two,
we model the lower end of the range, partially to compensate for our
somewhat aggressive recovery factor assumption. Further justification for our
COS lies in the historical regional exploration success rate of 47%; significantly
higher than our 25% assumption. In addition, the presence of several oil seeps
on the block confirms a working Hydrocarbon system, and narrows
exploration risk to the presence of reservoir and seal on identified structures.
Our estimates are based on the case of oil discoveries on the company’s block.

Given the limited regional gas market, we expect that a gas discovery could
take up to ten years to be commercially developed. Specifically, given limited
local market demand, the gas infrastructure in Iraq; including the four natural
gas fields earmarked for near term exploitation; remains at an early stage.
While we would consider a gas discovery on the block as value adding, we
believe short term investors would be better served by an oil discovery.
investors with valuation sensitivities for our risked EMV per share (fd) on
WesternZagros under different long term oil prices and different discount
rates.

Exhibit 4: EMV Sensitivity

$90 $110 $130 $150 $170
5% C$4.94 C$6.46 C$7.47 C$8.89 C$9.37
Discount
10% C$2.77 C$3.84 C$4.56 C$5.54 C$5.82

rate
12% C$2.18 C$3.12 C$3.76 C$4.62 C$4.86

15% C$1.48 C$2.28 C$2.83 C$3.54 C$3.73


Note that current market valuations appear to be pricing WesternZagros on
the basis of a 300‐350 million barrels of oil discovery, a 95% discount to the
company’s estimated prospective OOIP of 12 billion barrels of oil.

Exhibit 5: WesternZagros Value Creation

25

20

C$ per Share
15

10

5

0
East Kalar East Kalar N. North Sarqala Bawanoor Kalar
Deep Structures 1 Bawanoor

Company Profile
WesternZagros is an exploration stage junior successful international oil and
gas company, focused on creating value from its assets in Kurdistan. The
company’s shares trade on the TSX Venture Exchange under the symbol WZR.
The corporate and capital structures of the company are illustrated below. We
have also included a list of the company’s top ten institutional shareholders.

Exhibit 6: WesternZagros Corporate Structure

WesternZagros Resources Ltd.
(Alberta)
WesternZagros Resources Inc.
(Alberta)
Western Oil International Holdings Limited
(Cyprus)
WesternZagros Limited.
(Cyprus)



(M)
Stock options 7

Holders Shares

PAULSON & CO. INC. 13.4%

OPPENHEIMERFUNDS, INC. 7.6%
VERTEX ONE ASSET MANAGEMENT 6.0%
FIDELITY MANAGEMENT & RESEARCH COMPANY 4.1%
MACKENZIE FINANCIAL CORPORATION 3.1%
HORIZON ASSET MANAGEMENT, INC. 1.7%
JET CAPITAL INVESTORS LP 0.9%
PYRAMIS GLOBAL ADVISORS, LLC 0.5%
WELLINGTON MANAGEMENT COMPANY LLP 0.3%
AIM FUNDS MANAGEMENT INC. 0.2%


History
“Aux âmes bien nées, la valeur nʹattend point le nombre des années
(To well born souls, value does not await number of years)” –
Pierre Corneille

In 2006, the predecessor to WesternZagros was awarded a PSC by the regional
government of Kurdistan for the Kalar‐Bawanoor block. Following its
incorporation; as part of a Plan of Arrangement between Marathon Oil and
Western Oil Sands; in 2007, WesternZagros signed an amended PSC with the
KRG for this block in early 2008.
Leadership tam
Each of WesternZagros’ key technical team members has, on average, 30 years
of oil & gas exposure. This includes extensive international oil & gas exposure
with established oil & gas companies, including ExxonMobil, Petro‐Canada,
Talisman, Cairn, and Husky.

Fred Dyment, Executive Chairman and Director, has been active in the oil &
gas industry for over 30 years, including the position of Governor of the
Canadian Association of Petroleum Producers (CAPP) from 1995 to 1997. Prior
to WesternZagros, he was the CEO of Maxx Petroleum. Prior to that, Mr.
Dyment held various roles at Ranger Oil, including that of CEO. Mr. Dyment
holds a Chartered Accountant designation.

Simon Hatfield, President and Director, has held various managerial as well
as technical roles with Imperial Oil, Exxon, Talisman, Chauvco and Petro‐
Canada. In addition, he has been involved in Iraq’s oil & gas industry for over
a decade, including initiating the Kurdistan opportunity for WesternZagros.
Mr. Hatfield is a graduate of the University of Calgary (Executive
Development Program). He also holds a B.Sc. and a M.Sc. in Geology.

Greg Stevenson, Vice President, Finance, joined the company from Western
Oil Sands where he was the Controller. Prior to that, Mr. Stevenson was with a
major accounting firm.

Robert Theriault, Sr. VP Engineering & Operations, joined WesternZagros in
August 2007. Prior to this, he was the Director of Midstream and Producing
Assets for Cairn India. Part of his 30+ years of international oil & gas expertise
were gained as Husky’s Manager of International Development. Mr. Theriault
has also held various engineering and management positions with Pertamina‐
Husky, CSR Petroleum, and Suncor. He is a graduate of the University of
Calgary (B.Sc. in Mechanical Engineering). Mr. Theriault is a registered
engineer in the province of Alberta.

Dr. George Pinckney, VP Exploration, has over 30 years of oil & gas
experience. The majority of his career was with Exxon, in various global
leadership and technical roles. Academically, Mr. Pinckney holds a PhD
(Geology) from the United Kingdom. He is also a registered geologist in
Alberta.
Operations
The company is currently focused on an exploration play in the Kurdistan
region of Northern Iraq. Specifically, WesternZagros has a 40% interest, and
operatorship, of a 2,120 km2 block in the Kalar‐Bawanoor region of Kurdistan.

Iraq is bordered by Iran to the west, Saudi Arabia and Kuwait to the south,
Turkey to the north, and Syria and Jordan to the east. Having gained
independence in 1932, Iraq was a Hashemite monarchy until 1958, followed by
a decade of military coups which culminated in the ‘reign’ of Saddam Hussein
from 1979‐2003. In 2005, following the 2003 invasion by a US‐led coalition, Iraq
was divided into federal regions. Kurdistan, governed by the Kurdistan
Regional Government (KRG) is one of the federally recognized1 autonomous
regions within Iraq, and includes the areas of Suleimaniah, Erbil and Dohuk.
While the rest of Iraq remains prone to sectarian, and anti‐US, violence,
Kurdistan continues to witness relative peace, leading to economic prosperity
and growth.

Exhibit 8: WesternZagros Operations in Kurdistan


1
Iraqi constitution, article 113
The WesternZagros block lies in the hydrocarbon rich Kirkuk Basin. This
basin extends across the Zagros fold belt ranges from Iran, through Iraq, and
into parts of Northern Syria. The Kirkuk Basin was formed during the Late
Permian to Paleocene times, covering parts of what used to be the Tethys
Ocean. Jurassic and Cretaceous ages shales and carbonates are considered the
most likely hydrocarbon source rock, or kitchen, for this petroleum province.
The Shiranish, the Jaddala, and the Fars formations, Cretaceous and Tertiary
carbonates, represent the main hydrocarbon‐bearing reservoirs of the basin.
Note that the wide range of reservoir porosities adds a layer of complexity to
field developments as well as reservoir modeling. As for trap, the basin
contains some giant but simple faulted anticlines, typically identified via
surface expressions, creating a very efficient trapping mechanism for regional
oil and gas fields. In addition to the above structural traps, stratigraphic
components are also present in some regional fields. In addition to oil, the
basin is also home to several gas fields.

Exhibit 9: Kurdistan Stratigraphy


Kalar‐Bawanoor
Covering 2,120 km2, this exploration stage block lies adjacent to the prolific
Kirkuk, Kor Mor and Chia Surkh fields. WesternZagros currently has, through
the revised PSC signed with the KRG in February 2008, a 40% working interest
and operatorship on the block. Note that the KRG currently has a 20% carried
working interest in the block. The KRG also has the right to assign the
remaining 40% interest to a third party company of its choosing by the end of
August 2008. The PSC currently covers a three‐year exploration sub‐period,
ending on December 31, 2010. In addition, WesternZagros has the option to
extend this term by a two‐year exploration sub‐period, as well as two one‐year
extensions. As per the revised terms, initial exploration commitments include
a minimum of 1,150km seismic surveys (1,070 km of which has been acquired
to date). The PSC terms also include drilling a minimum of three exploration
wells by the end of 2010. Financially, the partners have committed to spending
no less than US$75 million (US$30 million net to WesternZagros’ interest) in
exploration on the block (aggregate seismic, geologic studies and drilling).
Note that the PSC terms also include payment of an undisclosed capacity
building bonus, payable over a 15 month period. Based on our analysis of
other regional PSCs, as well as company specific information, we currently
estimate this bonus to range between US$25 million to US$50 million.

For the optional second term, commitments include an additional 575km of
seismic lines, drilling a minimum of two additional wells, and aggregate
spend of no less than US$35 million. The partners would also need to commit
to drill a minimum of one exploration well per extension period. In the event
of a discovery, the agreement includes an appraisal for commerciality
obligation. The partners would then have to develop any commercial
discoveries over a 20+5+5 year development and production period.

Exhibit 10: Prospects, Leads and Plays on the EPSA Area


Based on the seismic acquired to date, WesternZagros has identified eight
prospects and leads, estimated to contain 7,083 million barrels of potential
OOIP.

Exhibit 11: Estimate of Undiscovered Resources

Mean Undiscovered
Resources*
MMbbls
Seismically Identified Structures
Kalar 1,640
Bawanoor 1,427
Sarqala 1,177
East Kalar Deep 670
East Kalar 503
N. Structures 1 833
North Bawanoor 833
7,083

Stratigraphic Plays
Miocene Pinch‐Out 833
Oligocene Pinch‐Out 333
Oligocene Reef 3,500

Total 11,749

* Mean reflects an average confidence level with respect to the
undiscovered resource estimates.

Visual interpretation of Exhibit 10 compared with previous versions indicate a
smaller aerial extent to the Kalar prospect, potentially impacting our above
OOIP estimates for this prospect.

The Sarqala structure, previously East Shakal, unlike most regional structures
presents limited surface expressions. Covering an areal extent of
approximately 25 to 30 km2, it lies between the towns of Shakal and Kalar. An
analysis of seismic lines over the structure indicates the possibility of a four‐
way dip closure over several potential reservoir sands. Specifically, the
structure appears to contain Miocene carbonates, such as the Upper Fars, as
well as Cretaceous carbonates, such as the Shiranish and Qamchuga, known to
be productive in the region. WesternZagros’ first exploration well, Sarqala‐1, is
targeting all of the above formations. With an estimated drilling time of 120
days, we expect final results from this well by 3Q08. In the event of an oil
discovery, we currently model a total of 1,177 million barrels of OOIP from all
formations. In the event of a gas discovery, we estimate a potential 2.83 Tcf of
OGIP.
The Kalar prospect, visible via surface expressions, lies 16km from the town of
Kalar. The structure appears to lie against a potentially sealing northwest‐
southeast thrust fault, and is associated with the Tukin surface oil seep. Note
that a secondary anticline structure, including the Shiranish and Qamchuga
cretaceous carbonate formations, is visible on seismic. In the event of an oil
OGIP. Based on information made available to date, we consider this to be a
low risk exploration opportunity. We anticipate the company to drill Kalar as
part of its three exploration well commitments on the block.

Bawanoor, similarly to Kalar, is a surface visible anticline, located in the
middle of the company’s block. Seismic data on the structure indicates the
potential for highly fractured reservoirs. While regional fracturing typically
indicates highly productive wells, this does add a layer of complexity to
reservoir modeling, and thus resource evaluation. In the event of an oil
OGIP. In addition, pending disclosure of additional seismic information, we
view this structure as carrying a higher exploration risk than the other two
prospects. We anticipate the company to drill Kalar as part of its three
exploration well commitments on the block.

Appendix
$mln 2007 2008E 2009E
Assets
Current Assets
Cash and Cash Equivalents 100 82 ‐23
Accounts Receivable 0 0 0
Prepaid Expenses 0 0 0
101 82 ‐23
Long‐term Assets
Oil & gas interests 0 75 175
Property, Pland and Equipment 56 158 263
Deposits Held in Trust 4 10 10
60 243 449
161 326 426
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities 5 19 19
Shareholdersʹ Equity
Share Capital 175 254 254
Warrants 5 0 0
Contributed Surplus 0 81 189
Deficit ‐24 ‐28 ‐36
156 306 406
161 326 426



$mln 2007 2008E 2009E
Revenues
Interest Income 0.82 4.80 1.69
Expenses
Charges Under Service Agreement 9.07 ‐ ‐
General and Administrative 1.64 6.55 6.00
Depreciation 0.04 ‐ ‐
Foreign Exchange Loss 0.49 0.72 1.00
11.24 7.27 7.00
Net Income (10.43) (2.47) (5.31)
Cash Provided By (Used In)
Cash From Operating Activities
Net Loss (10.43) (4.36) (7.31)
Non‐cash Items
Depreciation 0.04 ‐ ‐
Stock‐based Compensation ‐ 1.82 2.00
(10.39) (2.53) (5.31)
Increase in Non‐Cash Working Capital (0.11) ‐ ‐
(10.49) (2.53) (5.31)
Cash From Financing Activities
Share Issuance Under Private Placement 97.77 71.44 ‐
Exercise of Warrants 4.20 6.05 ‐
Increase in Due to Related Party 42.83 ‐ ‐
144.80 77.48 ‐
Cash From Investing Activities
Capital Expenditures (34.56) (101.58) (100.00)
Deposits Held in Trust (4.15) (6.08) ‐
Decrease in Non‐cash Working Capital 4.66 14.37 ‐
(34.05) (93.30) (100.00)
Increase (Decrease) in Cash and Cash Equivalents 100.26 (18.29) (105.31)
Cash and Cash Equivalents at Beginning of Period 0.10 100.37 82.08
Cash and Cash Equivalents at End of Period 100.37 82.08 (23.23)

Fiscal Regimes
WesternZagros’ assets are currently governed by Production Sharing
Contracts, under which produced oil is allocated to royalty oil, cost oil and
profit oil. Note that the contractors are required to bear all upfront capital
costs, which would then be recouped via the ‘Capital Cost Oil’ category.

Exhibit 14: Kurdistan PSC Oil Allocation

Total Oil Produced

Operations Oil

Royalty Oil
10% of total crude oil

Net Available Oil

up to 45% of Net Availabe Oil remaining net available oil

Operating Costs Total Profit Oil
sharing based on ʺRʺ factor
slide range of 35%/65% to 16%/84%

Exploration Costs

Contractor KRG

Development Costs

WesternZagros Third Party KRG

(40%) (40%) (20*%)

Note: * Interest carried by WesternZagros

Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $97.86 $117.68 $122.42 $122.78 $115.19
RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88
Q1 09E Q2 09E Q3 09E Q4 09E 2009E

Current Strip $122.85 $122.61 $121.97 $121.85 $122.32
RJ Oil $130.00 $130.00 $130.00 $130.00 $130.00


Q1 08A Q2 08E Q3 08E Q4 08E 2008E
Current Strip $8.64 $10.92 $12.45 $12.74 $11.19

RJ Gas $8.64 $10.95 $11.00 $10.00 $10.15

Q1 09E Q2 09E Q3 09E Q4 09E 2009E

Current Strip $13.06 $10.67 $10.78 $11.15 $11.42
RJ Gas $7.50 $7.50 $7.50 $7.50 $7.50



Risks

Competition
of WesternZagros or enter markets that WesternZagros is active in.

WesternZagros to suspend or reduce operations because such operations are no
longer economically viable. If production is not suspended or reduced during
such period, the low differential between the price of the corporation’s end
products and the cost of production could lower WesternZagros’ revenues.

WesternZagros is an exploration stage company with no known oil and/or gas
discoveries. There is a risk that the company may not discover any material
hydrocarbon accumulations on its lands. WesternZagros currently provides
third‐party resource evaluation on its assets, and calculations remain
dependent on long‐term oil pricing, geological assumptions made, and the
companyʹs ability to produce said reserves.

WesternZagros’s operations are subject to a variety international laws, regulations
and guidelines, including laws and regulations relating to health and safety, the
changes, unforeseen environmental effects, general economic conditions and other
matters may cause adverse effects to operations. The companyʹs exploration,
producing and potential properties are located in the Kurdistan Region of Iraq.
While currently semi‐autonomous, Kurdistan remains part of Iraq, existing oil
exploration and agreements potentially being impacted by political changes in
that country. The companyʹs operations, financial results, and valuation could be
adversely affected by events beyond its control taken by the current or future
governments in those countries with respect to policy changes regarding taxation,
regulation, and other business environment changes.
WesternZagros is subject to various environmental laws and regulations
enacted in the jurisdictions in which it operates. Including the governance of
the manufacturing, processing, importation, transportation, handling and
disposal of certain materials used in operations. WesternZagros may become
liable for damages against which it cannot adequately insure or against which
it may elect not to insure because of high costs or other reasons.
WesternZagros may be required to increase operating expenses or capital
expenditures in order to comply with any possible new restrictions or
regulations.

Operational risks and hazards could expose WesternZagros to substantial
liability for personal injury, loss of life, business interruption, property
damage or destruction, pollution and other environmental damages. While
insurance coverage is expected to address all material risks to which it is
exposed and is adequate and customary in its current state of operations, such
insurance is subject to coverage limits and exclusions and may not be available
for the risks and hazards to which WesternZagros is exposed.

additional financing will be available to WesternZagros when needed or on
terms acceptable to WesternZagros. Inability to raise financing to support
ongoing operations or to fund capital expenditures or acquisitions could limit
growth.

The revenue generated from the operations of WesternZagros may be
of WesternZagros.

RJ Disclosures
Analyst Certification
The views expressed in this report (which include the actual rating assigned to the company as well as the analytical
substance and tone of the report) accurately reflect the personal views of the analyst(s) covering the subject
securities. No part of said personʹs compensation was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this research report.
Stock Ratings
STRONG BUY 1: the stock is expected to appreciate and produce a total return of at least 15% and outperform the
S&P/TSX Composite Index over the next six months. OUTPERFORM 2: the stock is expected to appreciate and
outperform the S&P/TSX Composite Index over the next twelve months. MARKET PERFORM 3: the stock is
expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is
potentially a source of funds for more highly rated securities. UNDERPERFORM 4: the stock is expected to
underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.
Distribution of Ratings
Out of 191 stocks in the Raymond James Ltd. (Canada) coverage universe, the ratings distribution is as follows:
Strong Buy and Outperform (Buy, 65%); Market Perform (Hold, 33%); Underperform (Sell, 2%). Within those rating
categories, the percentage of rated companies that currently are or have been investment‐banking clients of
Raymond James Ltd. or its affiliates over the past 12 months is as follows: Strong Buy and Outperform (Buy, 52%);
Market Perform (Hold, 24%); Underperform, (Sell, 25%). Note: Data updated monthly.
Risk Factors
Some of the general risk factors that pertain to the projected 6‐12 month stock price targets included with our
research are as follows: i) changes in industry fundamentals with respect to customer demand or product/service
pricing could adversely impact expected revenues and earnings, ii) issues relating to major competitors, customers,
suppliers and new product expectations could change investor attitudes toward the sector or this stock, iii)
unforeseen developments with respect to the management, financial condition or accounting policies or practices
could alter the prospective valuation, or iv) external factors that affect global and/or regional economies, interest
rates, exchange rates or major segments of the economy could alter investor confidence and investment prospects.
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Company Symbol Exchange Disclosures

Addax Petroleum AXC TSX 7
Bankers Petroleum BNK TSX 7
Gran Tierra Energy GTE TSX, AMEX 7
Pacific Rubiales Energy PEG TSX 7
Solana Resources SOR TSXV 6
WesternZagros Resources WZR TSXV 7
RAYMOND JAMES LTD. CANADIAN INSTITUTIONAL EQUITY TEAM WWW.RAYMONDJAMES.CA
EQUITY RESEARCH INSTITUTIONAL EQUITY SALES

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Patricia Hernandez, PhD, CFA 604.659.8236
T O R O N T O (CAN 1.888.601.6105 | USA 1.800.290.4847)
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Bill Stait (Associate) 403.509.0511 Dave MacLennan 416.777.4934
INTERNATIONAL OIL & GAS Robert Mills 416.777.4945
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OIL & GAS PRODUCERS Neil Weber 416.777.4931
Stephen Calderwood, P.Eng. 403.509.0521 Carmela Avella (Assistant) 416.777.4915
Jia Liu (Associate) 403.509.0562 Ornella Burns (Assistant) 416.777.4928
OIL & GAS ROYALTY TRUSTS V A N C O U V E R (1.800.667.2899)
Kristopher Zack, CA, CFA 403.221.0414
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Paula Thomson (Associate) 604.659.8261 Andrew Foote 416.777.4924
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MINING Pam Banks 416.777.4923
Anthony Cox 416.777.4922
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Miroslav Vukomanovic (Associate) 416.777.7144 Brennan Howard 416.777.4983
GOLDS Rebecca Joseph 416.777.4938
Ehsan Dana 416.777.4913 James Shields 416.777.4941
GOLDS Helen Spasopoulos 416.777.4932
Brad Humphrey 416.777.4917 Bob Standing 416.777.4921
Afjal Mohammad (Associate) 416.777.7084 Peter Mason (Assistant) 416.777.7195
Forbes Gemmell (Associate) 416.777.4948
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Bart Jaworski, P.Geo. 604.659.8282
Nav Cheema 604.659.8224
PAPER & FOREST PRODUCTS Fraser Jefferson 604.659.8218
Derek Oram 604.659.8223
PAPER & FOREST PRODUCTS
Daryl Swetlishoff, CFA 604.659.8246 M O N T R E A L (514.350.4450 | 1.866.350.4455)
Patrick Yung, CFA 604.659.8258
Sebastien Benoit 514.350.4466
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JUNE 16, 2008

INTERNATIONAL OIL & GAS PRODUCERS

Braden Purkis (Associate)

International Oil & Gas braden.purkis@raymondjames.ca

Initiating Coverage: A World of Opportunity SECTOR SUMMARY

Investment Road Map TICKER CUR PRICE RETURN TARGET

International Oil & Gas

Why Invest in International Oil & Gas? ......................................................................... 8

Addax Petroleum Corp. (AXC-TSX; OUTPERFORM)

Investment Highlights ......................................................................................... AXC-4

Bankers Petroleum Ltd. (BNK-TSX; STRONG BUY)

Investment Highlights ......................................................................................... BNK-4

Gran Tierra Energy Inc. (GTE-TSX | GTE-AMEX; MARKET PERFORM)

Investment Highlights ......................................................................................... GTE-4

Pacific Rubiales Energy Corp. (PEG-TSX; STRONG BUY)

Investment Highlights ......................................................................................... PEG-4

Solana Resources Ltd. SOR-TSXV; OUTPERFORM)

Investment Highlights ......................................................................................... SOR-4

WesternZagros Resources Ltd. (WZR-TSXV; OUTPERFORM)

Investment Highlights .........................................................................................WZR-4

Note: Cover photos courtesy of Addax Petroleum

production increase from current levels might be considered

Why Invest in International Oil & Gas?

The Canadian Advantage

Mature Basin Experience

Valuing the Assets

Net Asset Valuations

Same Play Same Play New Play, Same Trend New Play, New Basin

Very Low Risk Low Risk Moderate Risk High Risk Very High Risk

Country S&P Moodyʹs Fitch RJ Oil

Bullish Long Term Oil View Further Supports Sector

Q1 08A Q2 08E Q3 08E Q4 08E 2008E

RJ Oil $97.86 $117.65 $120.00 $120.00 $113.88

Q1 09E Q2 09E Q3 09E Q4 09E 2009E

Initiating Research Coverage

Addax Petroleum Corp.

RATING & TARGET

KEY FINANCIAL METRICS

Stock Valuation and Recommendation ...........................................................5

Reserves Growth ............................................................................................8

Company Profile ...........................................................................................11

Kurdistan Region of Iraq................................................................................27

140 Michael Ebsary CFO Ex Total, BMO, Scotia

Stock Valuation and Recommendation

2008E net cash/(debt) (US$734) (US$4.72) 100% (US$734) (US$4.72)

Reserves net asset value US$8,745 US$56.19 100% US$8,745 US$56.19

Taq Taq upside US$1,042 US$6.70 5% US$52 US$0.33

Net asset value US$47,236 US$303.49 US$10,670 US$68.55

Exhibit 3: NAV Sensitivity

10% C$52.10 C$60.33 C$68.55 C$76.78 C$85.01

12% C$47.94 C$55.38 C$62.81 C$70.24 C$77.68

Country Asset 2007 Oil 2007 YE Addax Operator Contingent Resources Prospective Oil

Although exploration outcome is binary, Addax’s extensive range of

Kurdistan Region of Iraq

Changes in non‐cash working capital 56 ‐10 256 ‐450 ‐222 0

227 458 1085 869 1952 2562

Bankers Petroleum Ltd. braden.purkis@raymondjames.ca

BNK-TSX RATING & TARGET

Action KEY FINANCIAL METRICS

Stock Valuation and Recommendation ...........................................................6

Reserves Growth ............................................................................................8

Company Profile ...........................................................................................11

Robert Cross Chairman Ex Northern Orion Resources