Analyse Fra Car Sept06

Aladdin Oil & Gas Company AS Buy

September 4th, 2006

Price: NOK 22 Ticker: AOGC Listing: Oslo SE, OTC

Corporate Advice Research AS Cort Adelersgate 17, 0254 Oslo

We initiate our coverage of Aladdin Oil & Gas Company (AOGC) with a BUY recommendation and a 6 month target of 40 NOK. AOGC is a Norwegian company with a 71,5% ownership in OOO Geoteknologia, a Russian oil company with two leases in the Timan Pechora region in northwestern Russia. Seismic surveys and well data indicate that the leases contain 83,5 mill bbls probable- and 3,2 mill bbls proven reserves. We see few hurdles in setting up a highly aggressive drilling program, and we believe this would result in an outstanding production growth and high cash flows from the company.

& DCF indicates an upside of 173% Discounting the cash-flows from our estimated drilling program generates a value of 60 NOK/share. As far as we can see, we have added reasonable margins to all input variables.

Analysts: Gunnar Holen [email protected] Tor Klaveness [email protected]

Our estimated WTI oil prices are $ 70/bbl for 2nd half of 2006, $65/bbl for 2007, $60/bbl for 2008 and $55/bbl for 2009 and onwards. As we expect relatively stable flows from the wells, we have forecasted cash-flows till the end of 2016. We have furthermore assumed a cost-inflation of 12,7% till 2012 and 8,7% from 2012 till 2016. The company will experience a high tax pressure. There is however a chance that the central government reduces the “production tax” (in addition there is “export tax” and corporate tax). A reduction in the tax rate would lift the DCF estimate considerably.

AOGC’s estimated reserves are traded at a large discount AOGC’s estimated proven and probable reserves are currently priced at only $0,7/bbl (market capitalization/estimated reserves). This is extraordinarily low, even compared to competitors in Russia. We believe an external audit of the reserves will boost the share price to ensure consistency between the implicit value of AOGC’s reserves and the implicit value of competitors’ reserves. When an audited reserve report is present we believe the company will become an attractive takeover target.

AOGC still has much to prove, but the potential is outstanding There is high risk associated with investing in the company. This is partly due to the company’s short track record, but also due to the political and fiscal climate. The potential is however in our opinion outstanding. We start coverage with a target of NOK 40/share, and will adjust this as we see the company’s drilling progress on its two licenses.

Share price (NOK)

22

Range since listing

16-25

Dividend yield

0%

Capitalisation (NOK) Marketcap Net debt 31.12.05 Free float Outstanding shares

Share performance Absolute Relative to OSEBX Estimates/valuation

281m -14,9m 91,4% 12,775m

Adjusted EPS (NOK)

1M

3M

12M

-1,9

n.m.

n.m.

-9,4%

n.m.

n.m.

2006E 2007E

2008E

0,0

1,3

5,5

P/E

n.m.

16,9

4,0

EV/EBITDA

n.m.

9,4

2,1

227

13,6

3,6

P/CE

Aladdin Oil & Gas Company AS

Oil & Gas

Company Description Background AOGC was founded in January 2006 by Mr. Arild Nilsen, Mr. Hans-Axel Jahren and Mr. Espen Glende. The company was founded as an investment company with the purpose of investing in the Russian exploration and production company OOO Geotechnologia (GT). In February 2006 the company raised 24 million NOK that was used to acquire a 30% in GT. One month later, additional 15 million NOK was raised to acquire further 10% of GT. Finally, in May 2006, AOGC acquired additional 30% of GT from Norwegian Petroleum Group ASA. The transaction was financed by issuing 5,475 million new shares at a share price of 17 NOK/share. As of today AOGC has 71,5% of the shares in GT. AOGC’s shares were listed in the Norwegian OTC market in June this year, and are now traded under the ticker AOGC. The company plans a listing on the Oslo Stock Exchange during the first half of 2007. The company currently has 12,775 million shares outstanding. This number is about to increase as AOGC currently if offering 750,000 new shares to existing shareholders. The offer is at 20 NOK/share, and full subscription has been guaranteed. The proceeds will be used to finance the purchase of a second drilling rig.

Corporate Structure AOGC owns its shares in GT through Cyprus registered Larchbay Ltd. AOGC’s stake in Larchbay is 71,5% and Larchbay Ltd. is the sole owner of GT. The remaining investors in Larchbay Ltd. are GT’s CEO Mr. Vermund Aarflot (18,6%), Havreholm AS (8,1%) and Mr. Knut Fordal (1,8%). Corporate structure

AOGC 71,5%

Larchbay Ltd. 100%

OOO Geotechnologia

Source: Company information

Business Model and Strategy As mentioned, AOGC’s sole purpose is to function as an investment vehicle to invest in GT. The following sections of this report (until “Financials”) will therefore focus on GT. GT saw its inception in 1995 when its founders identified the opportunity of acquiring drilling licences from the local authorities of the Komi Republic in Russia. Two licences were obtained, 2

CAR Research

Oil & Gas

Aladdin Oil & Gas Company AS

the West Ukhtinskoya (WU) licence and the Middle Sedoylskaya (MS) licence. The licences will be described more in depth in the following sections. Although the licences were obtained more than 10 years ago, the company has still not been able to produce oil due to financial difficulties following the collapse of the Russian Ruble in 1997, and limited financial resources later. GT’s focus now is to develop the two licences, and to start production by the end of the year. To do this the financial strength of GT’s main investor, AOGC, is highly beneficial. In order to reach its ambitious production targets GT is focussing on a few key areas: People: GT has put considerable resources in staffing management and middle management with candidates having good track records from western companies. This has created a company where delivering financial- and operational results is a key element of the organizational culture. GT also has an advantage in that the licenses are close to Ukhta. The rigs crews can hence, in most cases, stay at home with their families. This should make GT a popular employer. Equipment: the company has decided to purchase rigs. Although this implies considerable upfront costs, we believe it soon pays off in substantial cost-savings. It is also an important strategic decision as it gives the company more control of its operations, and removes some of the uncertainty related to the development of the drilling program. GT has decided to use Russian rigs, and a mix of Russian and Western equipment. The performance of Russian rigs is fully satisfactory, and the rigs are cheap. And as important; it is also far easier to obtain spare parts for Russian rigs. Seismic and geological analysis: to ensure top seismic surveys, the final seismic analysis is being taken care of by experts in Norway and the UK. However, local staff also performs much seismic and geological analysis, and local suppliers are utilized when shooting seismic.

Operations GT’s two licenses are south of Ukhta in the Republic of Komi: The Republic of Komi and Ukhta

Source: Company information

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Aladdin Oil & Gas Company AS

Oil & Gas

The licenses are in the southern part of the vast Timan Pechora basin that stretches all the way up to the Pechora Sea. The basin’s estimated reserves add up to 20 bn bbls1, and more than 170 oil- and gas fields have been discovered. Although oil has been produced since the 1930s, the region is still under-explored. The dominant player in the region is the Russian oil giant Lukoil. In addition, a number of independent exploration and production companies such as Lundin Petroleum, Urals Energy and West Siberian Resources operate in the area. GT is located in Ukhta, which is the capital of the Republic of Komi. GT staffs a total of 15 people. In addition, the company has recently secured a crew for its first rig, and is working on staffing the second rig.

The West Ukhtinskoya licence and the Middle Sedoylskaya license The WU license covers an area of around 200 km2 and is the smaller of the two licenses. The reserves are shallow, between 300 and 500 meters. GT has previously drilled two wells on the license, which both indicated oil. However, due to the drilling operator’s poor equipment and lack of technical skills the wells could not be brought into commercial production. Based on well-data from these two wells and a number of other previously drilled wells, AOGC’s management believes future wells on this license should produce in the range of 50-100 bbls/day/well. Total drilling costs are expected to be in the range of 125,000 USD/well. The estimated proven and probable reserves on the license are 3,2 mill bbls and 13,2 mill bbls respectively (2,3 mill bbls and 9,4 mill bbls to AOGC). The far larger MS license covers and area of as much as 1000 km2. The reserves are deeper, between 500 and 900 meters. Deeper reserves imply somewhat higher drilling costs, about 165,000 USD/well (the same rigs can be used as on the WU license, but the drilling process will take more time). The expected flow is however higher, between 100 and 200 bbls/day/well. A 2D seismic survey was recently conducted on the MS license. The survey covers 85% of the license, and was conducted on the areas where there had already been shot some 2D seismic. The new and the old data has recently been analyzed by experts in Norway and the UK. According to AOGC the seismic indicates more than 70 mill bbls of probable reserves (50,3 mill bbls to AOGC). The 15% not covered by the survey is the area that lies closest to the neighboring Yarega oil-field (see map). The Yarega field has been in production since the 1950s, and has produced a total of 350 mill bbls. The field’s current production is 12,000 bbls/day. Due to its proximity to the Yarega field, the management has great belief in the remaining part of the MS license. A second 2D survey to map the rest of the license will be started the coming winter. GT was recently granted permission to start a 40-well drilling program covering the MS license, and expects receiving permission to make adjustments to the program to be unproblematic. The company also believes that acquiring permission to start additional drilling programs will be largely a formality.

1

4

According to USGS. This gives the region a 23rd place on the world ranking

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Oil & Gas

Aladdin Oil & Gas Company AS

The West Ukhtinskoya licence and the Middle Sedoylskaya license

Source: Company information

Infrastructure, logistics and practical considerations The licenses are covered with forests (pine trees) and wetlands. The last makes the rigs less mobile during the summer, and seeking out drilling locations during this part of the year can therefore be a challenge. During the long winter the ground is frozen, and the rigs are fully mobile. Drilled wells can produce oil the whole year. The oil can either be sold locally or be sold for export. The local price is lower, but at the same time export duties are not paid (the issue of taxes is covered in the later section “Risks”). This makes the (net) received price of the two alternatives relatively similar. GT is guaranteed to be able to export 30% of its production via the Transneft export pipeline, where the nearest loading point is in Ukhta. The remaining 70% of the production will probably be sold to Lukoil, and delivered at its refinery in Ukhta. GT also considers exporting the oil with rail, should this give higher prices than selling to Lukoil. The export price is about WTI less $5/bbl. The oil ranges from medium-heavy to relatively light, and is of good quality. The first few years GT expects to transport the oil with trucks to Ukhta. As production increases trucking oil will no longer be a viable solution. GT then needs to construct pipelines to Ukhta (and/or to the nearest point of the export pipeline). GT is still in the process of estimating at what production levels transportation needs to be changed to pipelines (current estimate lies between 5,000 bbls/day and 12,000 bbls/day). It is not clear whether costbenefits or logistical bottlenecks will be the factor triggering the shift. The costs associated with a pipeline have still not been estimated.

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Aladdin Oil & Gas Company AS

Oil & Gas

Other Business Opportunities As mentioned, the Timan Pechora basin is under-explored. There is furthermore still limited competition as surprisingly few small- and midsized companies are present. This gives GT a good chance to acquire additional assets in the region. Although this is a process that will require substantial management time, we believe it can be combined with the important task of increasing production. We are also confident that GT will be able to raise the funds needed, should the offered leases be promising enough.

Management, Board & Shareholders Einar Askvig, Chairman of the Board of AOGC: Mr. Askvig has a law degree from the University of Oslo, and is founder and partner of Vogt Advokatfirma Lawfirm S.L. in Marbella, Spain. As a lawyer, Mr. Askvig focuses on real estate and maritime industries. He is on the boards of several companies in Norway, Spain, the Netherlands and Belgium. Idar Vollvik, Board Member of AOGC: Mr. Vollvik is the founder of Chess Communications, which was sold to Netcom (Telia) in 2005. He has since been an active investor in energy- and technology related companies. He is on the boards of numerous companies. Robert Monsen, Deputy Board member of AOGC: Mr. Monsen is Mr. Volvik’s deputy on the board. He is CEO of the investment company Vollvik Invest AS. He has several years of senior management experience from a number of industries, and is also present on a number of boards. Hans Axel Jahren, Board member of AOGC: Mr. Jahren has a BSc from Norwegian School of Management and has the last 9 years worked as an investor and entrepreneur in real estate- and technology related companies. Espen Glende, Board member and CEO of AOGC: Mr. Glende has an MSc from The Norwegian University of Life Sciences and has the last five years worked as an entrepreneur and investor focussing on real estate and commodities. Geir Ytreland, Board member and exploration manager in AOGC: Mr. Ytreland is a geologist, with more than 30 years experience in the international petroleum industry. He holds a MSc in geology from the University of Bergen, and has worked as a geoscientist and explorationist for Unocal (13 years) and Norsk Hydro (7 years) in SE Asia, Africa, Europe, the USA, the Middle East and Latin America. Since 2000 he has been an independent consultant and continues this work also today. Vermund Aarflot (61), CEO GT Mr. Aarflot has 36 years of experience in the oil and gas industry, and has been engaged in engineering, operations and management. He spent the first 20 years in Alberta, Canada, working for both major and junior oil and gas companies. He then moved to the UK and worked as Production Manager and Technical Director of EMOG, a subsidiary of Fortune Oil. He later got involved in Russian operations through directors of Fortune Oil, and spent 7 years in Russia as Project Manager and General Director for Aminex’ Russian subsidiary OOO AmKomi. Throughout the last 16 years he also maintained a role as an independent consultant and adviser, and has worked for a number of Canadian and UK companies in that capacity. He recently acquired and built up OOO Geotechnologia together with Norwegian partners, while working as a consultant and part time as Operations Manager in Turkmenistan for Burren Energy. Mr. Aarflot lives and has family in Ukhta.

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Oil & Gas

Aladdin Oil & Gas Company AS

Vasiliy Tereshchenko (58), Chief Geologist GT: Mr. Tereshchenko has extensive experience from working as an exploration geologist and geophysicist in the Komi Republic. He spent 20 years on various projects with PechoraGeoFizika and KomiNefteGeoFizika, large geological and seismic organisations where he held different positions, also at senior level. Prior to joining GT, Vasiliy was the CEO of OOO CNPSEI, a company recently taken over by Urals Energy group. In OOO CNPSEI he also worked as Chief Geologist and Chief Engineer since 1995. He has good contacts in both federal and local ministries and agencies. Mr. Tereshchenko joined Geotechnologia in 2006. Sergei Sorokin (34), VP/ Finance Director GT: Mr. Sorokin has spent 11 years in the oil and gas industry, mostly in accounting and financing of development activities and upstream operations. He has a comprehensive experience in financial management in western companies operating in Russia. He has been with GT since 2002. Teplykh Pavel (40), Production Engineer GT: Mr. Pavel worked 10 years for OOO AmKomi, a project operated by Aminex PLC in Komi. With AmKomi Mr. Pavel held various positions, including production engineer, maintenance engineer and field supervisor. After leaving AmKomi, he worked for KomiBur Drilling Company and SeverNIPIGaz, an engineering and consultancy subsidiary of Gazprom. Mr. Pavel has been with GT since 2005. Nikolai Tarasov (32), Drilling Engineer GT: Mr. Tarasov has spent 5 years with Lukoil Burenie Perm drilling company in Usinsk as a drilling engineer and drilling supervisor. He has worked on various types of rigs and has been responsible for operational management, drilling processes and procedures, compliance with environment and safety regulations and work towards suppliers. He started in GT in 2006.

Estimated shareholder structure* Shareholders

Shares

% of votes

Vollvik Invest AS

1 833 333

14,4 %

Paal Hveem

1 800 000

14,1 %

Vestmo AS

862 334

6,8 %

Eding Holding AS**

570 151

4,5 %

Glendegården AS***

530 000

4,1 %

Haadem Invest AS

213 333

1,7 %

Marcur Aurelius AS

200 000

1,6 %

Jan Ø Lorgen

128 000

1,0 %

Jo Torsmyr

100 000

0,8 %

Hans Øivind Berg

100 000

0,8 %

Sum

6 337 151

49,6 %

Remainder Total

6 437 849

50,4 % 100,0 %

Source: Company information, CAR Research * Based on shareholder structure as of 1. May. Shares issued later have been placed under ”Remainder”. The list is thus not fully accurate ** owned by Hans Axel Jahren *** owned by Espen Glende

CAR Research

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Aladdin Oil & Gas Company AS

Oil & Gas

Risks Below follows a list of key risks associated with an investment in AOGC. Some of the risks are explored further in the later section “Sensitivity analysis” Political: there is considerable risk associated with investing in Russia, although this has fallen the recent years. Oxford Analytica and AON recently rated Russia as “medium risk”, which is the same rating as that of China, India, Mexico and South Africa. The central government received much negative publicity as a result of the way it dealt with Yukos and Mr. Khodorkovsky, but we very much doubt that other companies risk running into similar difficulties. Furthermore, Putin’s position is stronger than ever, and there is little doubt that Russia has become a far more stable regime since he came into power. The growing economy where the middle- and lower class finally seem to reap benefits from many years of growth reduces risk further. Fiscal: Oil companies operating in Russia have experienced an increasing tax-pressure the recent years. Particularly the increase in the export tax a few years ago introduced a heavy burden on the oil companies. The tax is currently 65% on the share of the oil price exceeding $25/bbl. In addition, the producers are charged with a “production tax”, which is around $11/bbl with today’s price levels. As if these two taxes are not enough, the government also charges corporate tax, which currently is 24%. The central government is however realizing that the high tax-pressure is reducing investments, particularly in development of new fields. This recently resulted in a reduced production tax for the Siberian region, but unfortunately not for the Timan Pechora region. Some market participants do however believe that also this region will experience similar tax relieves. With the track record of the central government, increased taxes clearly represent a risk. However, reduced taxes represent a great upside, and this scenario is probably more realistic than the first. Geological: there is uncertainty associated with the size of the company’s estimated reserves. After the first few wells have been drilled, we expect the company to use an external resource auditor to evaluate the reserves. This would remove much of this risk. Operational: there are numerous operational risks associated with drilling and producing oil. Time delays are common and the production may be volatile due to operational reasons. At the WU license the low pressure introduces additional challenges. To reduce operational risk GT plans to use foam and air when drilling. The company recently sent off an application for a permission to use foam and air, and expects the permission to be granted. Oilprice: the oil price is volatile, and today’s high prices are no guarantee for high prices in the future. AOGC is however not heavily exposed to changes in the oil price as the export taxes increase with higher oil prices (and vice versa). Currency exposure and Russian inflation: With income in USD and expenses in Rubles GT and AOGC have substantial currency exposure. Particularly the Ruble represents a substantial element of risk as it recently has appreciated considerably and probably will continue to do so in the nearest future. This may put a high pressure on the company’s margins.

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Oil & Gas

Aladdin Oil & Gas Company AS

Personnel: GT heavily relies on a few key persons, particularly its CEO, and would suffer a great loss should he leave the company. The company also needs to hire a high number of employees for drilling and maintenance. However, as pointed out, GT has a solid advantage in the licenses proximity to Ukhta, and as the company plans to pay competitive salaries on time (not common amongst its Russian competitors) we believe finding staff should not represent a problem. Equipment: There is a risk that GT does not get hold of the rigs needed for its drilling program. Current waiting time for rigs is estimated to be 50 days, and the waiting time is increasing. This risk can however be managed well by ordering rigs well in advance. The first rig is furthermore secured.

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Aladdin Oil & Gas Company AS

Oil & Gas

Financials Assumptions We have constructed a drilling program to estimate the company’s production profile and forecast its financial performance. All estimates are AOGC’s share of GT’s expected results, which is consolidated into AOGC’s statements. The estimates have the following key assumptions: Forecasting period: we have considered the period stretching from today till end of 2016. According to the company, the wells are expected to have stable flows of 7 to 12 years. We therefore felt comfortable forecasting for this relatively long time period. We have however included a reduction in the flow rates of 7% p.a. from the fourth year and onwards (at well level). Flow: the wells in the MS license are assumed to have initial flows of 150/bbls day. The shallower wells on the WU license we expect to have lower flows of 75 bbls/day. Number of rigs and drilling progress: we assume that the company will purchase a total of 8 rigs. We expect the last two to be in operation by the end of 2008. The gradual increase in the rig-fleet creates an exponential production profile the first couple of years, but as production per well declines after three years, the gradient of the production curve will decline. This is illustrated in the production curve on the following page. In our calculations we expect each rig to drill 8 wells per year. This is less than what most oil companies in the region achieve. We should therefore have a good buffer in case the company experiences operational or technical difficulties or slowdowns during the summer months. We expect the 8 rigs to be able to drill close to 600 wells until the end of the forecasting period. Oil price: we assume a WTI oil price of $70/bbl for 2nd half 2006, $65/bbl for 2007, $60/bbl for 2008 and $55/bbl for 2009 and onwards. Cost inflation (in USD terms): The Russian ruble is expected to appreciate 5-10% the next 6-12 months, but forecasts indicate far less (if any) appreciation the following years. Inflation is currently high at 9%, but the Russian government is aiming for levels of 4-5% by the end of 2008. The price for a lower inflation may however be further appreciation of the Ruble according to some market participants. As we expect high cost pressure in the industry, we have added a buffer in our estimated cost inflation. Our assumed cost inflation has been set to 12,7% (1%/month) till the end of 2011 and 8,7% (0,7%/month) the remaining years. Beta: we assume a Beta of 2. This gives us a WACC of 14,2% Terminal value: as AOGC during our forecasting period produces slightly more than its currently indicated reserves, we have not included a terminal value in our estimates. In practice however, AOGC will probably increase its reserves during the forecasting period. This upside is however not included in our valuation.

Based on our assumptions AOGC should deliver a strong increase in production over the forecasting period:

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Oil & Gas

Aladdin Oil & Gas Company AS

Estimated production development 40 000 35 000

bbls/day

30 000 25 000 20 000

Production

15 000 10 000 5 000

se

p.

16

15

14

p.

p. se

se

12 se

p.

13

11

p. se

10

p.

p. se

se

08

09 p.

se

se

p.

p. se

se

p.

07

06

0

Source: Company information, CAR Research

The net revenues increase correspondingly, but the EBIT figures peak in 2014 due to cost inflation: Net revenues and EBIT development Sales (NOKm)

EBIT (NOKm)

1 800

Sales

600

EBIT

1 600

500

1 400 400

1 200 1 000

300

800

200

600

100

400 0

200 0

-100 2006e 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e

Source: Company information, CAR Research

The graph below shows capital expenditures during the period. The first three years investments in rigs comprise a large part of capital expenditures. Later, capitalized drilling expenses is the sole component: Capital expenditures

C apex (NO Km) 140 120 100 80 60 40 20 0 2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

Source: Company information, CAR Research

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Aladdin Oil & Gas Company AS

Oil & Gas

Valuation and triggers Discounting Cash Flows Our valuation of AOGC indicates values of NOK 60/share: Valuation Output (in mNOK)

PV of forecasting period 2006 - 2012e PV of Residual Enterprise value Other financial assets Minority interests Value of operations Interest bearing debt Value of equity Value per share

798 798 798 (14) 812 60

Explicit forecasts 2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

482

Cash flow from operations EBIT

(2)

20

94

190

304

388

460

504

524

514

EBIT Margin Adjustments (%)

-

-

-

-

-

-

-

-

-

-

EBIT Adjustment Value

-

-

-

-

Net interest Depreciation/amortisation Taxes paid Cash earnings Change in WC Operating cash flow

2

3

1

4

(0)

(6)

1 (12)

22 (1)

3 9 (23) 82 (4)

(11)

21

79

5

-

-

-

-

-

-

19

30

44

58

76

93

13

17

22

(47)

(75)

(98)

161 (5) 156

-

11

256

332

(6) 250

(6) 326

28

35

41

49

55

(118)

(131)

(140)

(142)

(138)

401

450

483

497

492

(6) 395

(5) 445

(5) 478

(5) 493

(5) 488

Cash flow from investments (16)

(47)

(66)

(61)

(71)

(77)

(88)

(93)

(104)

Acquisitions

Investments in operations

-

-

-

-

-

-

-

-

-

-

-

Disposals

-

-

-

-

-

-

-

-

-

-

-

Others Cash flow from investments Free cash flow Adjustments to Free Cash Flow Adjusted free cash flow

-

-

-

-

-

-

-

(47)

(66)

(61)

(71)

(77)

(88)

(92)

-

-

-

-

-

-

-

-

-

-

-

(27)

(25)

12

95

179

249

307

353

376

489

368

-

-

-

-

-

-

-

-

-

-

(27)

(25)

12

95

249

307

353

2 (102)

376

3

(123)

(16)

179

1

(6)

(3)

489

4 (119)

368

Source: Company information, CAR Research

Note that a residual value is not included as a result of the high production during the forecasting period compared to the currently estimated reserves.

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Aladdin Oil & Gas Company AS

Price/Earnings multiple development The development in AGOC’s P/E ratio is highly favorable: P/E multiple development

16,9

4,0 2,0

2007e

2008e

2009e

1,2

1,0

0,8

2010e

2011e

2012e

Source: Company information, CAR Research

As can be seen, the multiple is not favorable until 2008 when it falls to 4. However, from then onwards, the ratio is highly attractive due to constantly increasing production.

Peers and recent transactions The table below shows reserve-related ratios of three oil companies active in Russia: Peers Market capitalization (mill $)

Market Enterprisen capitalization / Enterprise value reserves / reserver value (mill $)

Company

2P reserves (mill bbls)

Urals Energy

225,9

998,2

1047

4,4

4,6

West Siberian Resources

176

1186,1

1206

6,7

6,9

Saga Oil

35

40,4

70,4

1,2

2,0

AOGC

62

44,4

42

0,7

0,7

Source: www.sagaoil.no, www.uralsenergy.com, www.westsiberian.se , CAR Research

The two first companies, Urals Energy and West Siberian Resources, have reserves valued far higher by the market. These companies have however large organizations and the reserves have been validated by external sources. This explains the large premium compared to AOGC and Saga Oil. The ratios of West Siberian Resources and Urals Energy are however not totally irrelevant as they give an indication of the potential in the AOGC share price (and Saga Oil for that matter) should the company perform well the coming years. Saga Oil on the other hand is a more relevant peer as it also is in its infancy. Saga Oil is, however, some months ahead of GT in developing its assets, and has already started drilling. The company also has a “preliminary reserve classification” confirming a large part of its reserves. This, in addition to its “lead” in ramping up production, certainly justifies a premium. Still we believe the premium should be smaller than what we see from the table, particularly the EV/reserves ratios deviate too much in our opinion.

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Aladdin Oil & Gas Company AS

Oil & Gas

A transaction that can be used as input when valuing GT is Valkyries Petroleum Corp.’s2 recent acquisition of a 50% stake in the North Ireal Field, also in the Timan Pechora region. The stake was purchased for $18 mill, implying a price of $5,7/bbl 2P reserves (total proven reserves are 1,5 mill bbls and probable reserves are 4,8 mill bbls). Although these reserves have been validated by reserve auditors, the premium compared to the implicit valuation of GT’s reserves is in our opinion out of proportion. We also believe the transaction shows that AOGC is a clear takeover candidate.

Sensitivity analysis The table below shows the effect changes in key risk components has on the DCF estimate (the base case is as shown NOK 60,1): Key risk components

Input factor Oil price Cost inflation Number of rigs Beta Production flow Changed production tax USD/NOK exchange rate

"low case"

DCF estimate

"high case"

DCF estimate

- $5/bbl

54,3

+ $5/bbl

67,4

+ 2 percentage pt.

33,6

- 2 percentage pt.

73,6

- 3 (i.e. 5 rigs)

44,8

Not applied

2,5

51,5

1,5

MS: 125 bbls/well/day, WU: 50 bbls/well/day

43,3

MS: 200 bbls/well/day, WU: 100 bbls/well/day

88,5

+ $5/bbl

16,4

- $5/bbl

100,9

5,67 (-10%)

51,5

6,93 (+10%)

68,6

70,3

Source: Company information, CAR Research

Oil price: Changes in the oil price has low effects on the DCF estimate as the export tax is related to the oil price. Cost Inflation (in USD terms): this has a large impact due to GT’s relatively slim margins. The low margins are solely a result of the high tax pressure. Rigs: There is also a chance that GT does not manage to operate as many rigs as we assume. A reduction of 3 rigs reduces the DCF estimate substantially. The possible scenario of more than 8 rigs has not been explored. Beta:. In our calculations we have applied a Beta of 2. Utilizing a higher or lower Beta does however, as the table shows, not influence the DCF estimate substantially. Production flow: There is furthermore uncertainty related to the flow from the wells. As the table above shows, a change in the flow levels has a major impact on the DCF estimate. Taxes: A reduction in the production tax would boost the DCF estimate. Likewise, an increase in the tax rate could be life threatening to the company. Exchange rate: changes in the USD/NOK exchange rate has a considerable impact on the

2

14

The company was shortly after the transaction taken over by Lundin Petroleum

CAR Research

Oil & Gas

Aladdin Oil & Gas Company AS

DCF estimate. This is however the case for all oil companies, and it is also a risk that can be hedged quite well. This sensitivity analysis on the previous page only deals with one input factor at the time. The following two tables show how the DCF estimate changes with variations in two input variables:

DCF outputs at combinations of production flows and number of rigs RIGS\FLOW

MS license: 100 bbls/day/well; WU license: 50 bbls/day/well

MS license: 150 bbls/day/well; WU license: 75 bbls/day/well

MS license: 200 bbls/day/well; WU license: 100 bbls/day/well

23,7

44,8

65,8

26,8

50,7

74,5

29,7 31,6

55,9 60,1

82 88,5

5 rigs 6 rigs 7 rigs 8 rigs

Source: Company information, CAR Research

DCF outputs at combinations of cost inflation and exchange rates COST INFLATION\ EXCHANGE USD/NOK: RATE 5,67 (-10%)

Base case: USD/NOK: 6,3

USD/NOK: 6,93 (+10%)

+ 2 percentage points

33,6

40,4

47,2

base case (12,7% and 8,7%)

51,5

60,1

68,6

- 2 percentage points

63,9

73,6

83,3

Source: Company information, CAR Research

As can be seen, combinations of input variables gives larger variations in the DCF estimate. This illustrates the risk as well as the large upside potential associated with an investment in AOGC.

Discussion and summary As shown, our DCF analysis indicates a value of about 60 NOK/share. It is our belief that the input variables in the DCF calculations are conservative, although some of them may seem ambitious at first sight. The sensitivity analysis furthermore indicates that the input variables must change substantially should the DCF fall down to the current share price. The sensitivity analysis did also give an indication of the potential of the AOGC share. It is however difficult, if not impossible, to predict which are the key risks that GT faces, and how much the corresponding input variables actually may change. Looking at how competitors’ reserves are priced was also a useful exercise, although the companies are not directly comparable. Valkyries Petroleum Corp.’s acquisition furthermore indicates that AOGC may be a takeover target. However, AOGC still has much to prove, both with regards to production capabilities and reserves. We therefore start our coverage of AOGC with a target of 40 NOK/share. As operations progresses, we will adjust our target. CAR Research

15

Aladdin Oil & Gas Company AS

Oil & Gas

News-flow and triggers The key trigger for the AOGC share will be results from the drilling program. The company expects to spud the first well later this fall, and the same well should start producing the month after (assuming the drilling is successful). When the first well is up and running the management will contact reservoir auditors and get the estimated reserves audited. As pointed out earlier, we believe an externally audited reserve report would lift the share price substantially. Furthermore, this winter GT will start a second 2D seismic survey on the part of the MS license close to the Yarega field. The results from this survey could also serve as a considerable trigger, and the management believes this exploration area has a great potential. The results from the second seismic survey should be ready early spring next year. GT is also exploring other business opportunities, and we would not be surprised should GT report new acquisitions. Also this could have a large impact on the AOGC share price.

16

CAR Research

Oil & Gas

Aladdin Oil & Gas Company AS

Key Financial Data Operating data (NOKm)

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

Sales

3

36

151

315

531

736

937

1 120

1 295

1 453

1 605

Gross profit (1)

1

27

107

208

327

417

495

1 120

1 295

1 453

1 605

EBITA (1)

(2)

20

94

190

304

388

460

504

524

514

482

EBITDA (1)

(1)

24

103

203

321

411

488

538

565

563

537

EBIT (1)

(2)

20

94

190

304

388

460

504

524

514

482

Reported pre-tax profit

0

23

97

195

315

408

490

547

582

590

575

Adjusted pre-tax profit (2)

0

23

97

195

315

408

490

547

582

590

575

Cash earnings (5)

1

22

82

161

256

332

401

450

483

497

492

Free cash flow I (3)

(27)

(25)

12

95

179

249

307

352

374

486

364

Free cash flow II (4)

(12)

17

70

143

233

304

367

410

437

444

433

Gross capital investments

16

47

66

61

71

77

88

93

104

6

123

- Of which acquisitions

-

-

-

-

-

-

-

-

-

Capex (organic investments)

16

47

66

61

71

77

88

93

104

- Investments as % of sales

-

-

6

123

625

129

44

19

13

10

9

8

8

0

8

- Investments as % of depreciation 1 414

1 114

769

479

410

345

310

269

252

13

224

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

52,7

75,1

70,9

65,8

61,5

56,6

52,8

100,0

100,0

100,0

100,0

EBITA (1)

(76,5)

55,1

62,4

60,3

57,2

52,7

49,1

45,0

40,4

35,4

30,0

EBITDA (1)

(32,3)

66,8

68,1

64,3

60,5

55,8

52,1

48,1

43,6

38,8

33,5

EBIT (1)

(76,5)

55,1

62,4

60,3

57,2

52,7

49,1

45,0

40,4

35,4

30,0

8,7

64,3

64,4

61,9

59,2

55,3

52,3

48,9

44,9

40,6

35,8

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

0,2

11,4

36,7

47,5

47,3

39,7

33,2

27,4

22,7

18,8

15,4

(5,3)

27,5

75,4

104,4

127,4

129,8

126,9

118,2

107,0

103,0

94,6

Margins (%) Gross profit margin (1)

Adjusted pre-tax profit (2) Return on capital (%) Adjusted ROE (6) ROCE (7) ROA (8)

0,2

14,8

46,7

59,4

58,7

49,4

41,5

34,5

28,6

23,2

18,8

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

Shareholders' equity

147

164

238

1 308

Net debt

(16)

(70)

(83)

Net financial gearing (%) (9)

(65)

(43)

(35)

(46)

(57)

(65)

(70)

(73)

(76)

(82)

(82)

51

94

155

209

269

330

395

457

521

477

542

147

167

249

408

663

987

1 373

1 804

2 262

2 831

3 287

3

2

3

3

3

3

3

3

3

3

3

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

EPS (11)

0,0

1,3

5,5

11,0

17,7

22,9

27,5

30,8

32,7

33,1

32,3

Adjusted EPS (12)

0,0

1,3

5,5

11,0

17,7

22,9

27,5

30,8

32,7

33,1

32,3

Adjusted EPS (full dilution) (13)

0,0

1,3

5,5

11,0

17,7

22,9

27,5

30,8

32,7

33,1

32,3

Balance sheet (NOKm)

Capital employed (10) Total assets Net working capital/sales (%) Per share data (NOK)

Dividend Book value Cash earnings (full dilution)

386

625

935

(178)

(357)

(606)

(912)

1 724

2 166

2 614

3 051

(1 266)

(1 644)

(2 137)

(2 509)

-

-

-

-

-

-

-

10,8

12,1

17,6

28,6

46,2

69,1

96,7

127,4

-

160,1

-

193,3

-

225,6

-

0,1

1,6

6,1

11,9

19,0

24,6

29,7

33,3

35,7

36,8

36,4

Free cash flow I (full dilution)

(2,0)

(1,9)

0,9

7,0

13,2

18,4

22,7

26,0

27,6

36,0

26,9

Free cash flow II (full dilution)

(0,9)

1,3

5,2

10,6

17,2

22,4

27,1

30,4

32,3

32,8

32,0

Number of shares (year-end) (m)

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

Average number of shares (m)

10,0

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

Number of shares (full dilution) (m)13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

13,5

Growth data (%)

2006e

2007e

2008e

2009e

2010e

2011e

2012e

2013e

2014e

2015e

2016e

Sales

n.m.

1 295

318

109

68

39

27

20

16

12

10

Adjusted EPS (full dilution)

n.m.

nm

nm

101

61

30

20

12

6

1

-

-

-

-

-

-

-

-

-

-

12

45

62

62

50

40

32

26

21

17

Dividend per share Book value per share

n.m.

(3)

1. Excluding associated income and non-recurring items. 2. Excluding non-recurring items. 3. Defined as EBIT + depreciation/amortisation - net financial items +/- change in working capital - taxes paid - investments in operations. 4. Defined as EBIT - net financial Items +/- change in working capital - taxes paid. This cash flow calculation is built on the assumption that depreciation is a good proxy for the ongoing reinvestment requirement in the company; in other words, this free cash flow measure is concerned with sustainable cash flow generation. 5. Defined as EBIT + depreciation/amortisation - net financial items - taxes paid. 6. Defined as net profit adjusted for non-recurring items net of taxes divided by average shareholders' equity. 7. Defined as EBIT including associated income divided by average capital employed. 8. EBIT including associated income and financial income divided by average total balance. 9. Defined as net debt (including pension liabilities) divided by shareholders' equity and minority interests. 10. Defined as the sum of shareholders' equity, minority interests and net debt. 11. Defined as net profit divided by average number of shares outstanding. 12. Defined as net profit adjusted for non-recurring items divided by average number of shares outstanding. 13. Defined as (12) divided by the fully diluted number of shares.

Source: Company information, CAR Research

CAR Research

17

Aladdin Oil & Gas Company AS

Oil & Gas

General Information This report is based on information believed to be reliable. Corporate Advice & Research AS (CAR) can, however, not guarantee the accuracy of its content. Forward-looking statements must not be perceived as promises or guarantees made by CAR. No liability is accepted for any loss, direct or indirect, arising from the use of this report. CAR is organized with Chinese Walls between the corporate department and research & broking, however overall profitability, including investment banking, impacts analyst compensation. CAR is regulated by The Financial Supervisory Authority of Norway (Kredittilsynet). Statement of Analyst Independence We, Gunnar Holen and Tor Klaveness, hereby confirm that the views in this report accurately reflect our personal view about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing a specific view or recommendation. Definition of ratings Buy

– Attractive valuation based on estimates and perceived risks. Expected investment return > 15%.

Trading Buy – News flow or other short-term effects are expected to trigger short-term share appraisal. Trading Sell – News flow or other short term effects are expected to trigger negative short-term share movement. Sell

– Demanding valuation based on estimates and perceived risks. Expected investment return < 15%.

The market price of the security in question is the price at close the business day before the research report is published. Recommendation distribution as of 31/08 - 2006

Buy Trading Buy Trading Sell Sell Total

Share ownership, Analyst Employees CAR CAR Total

All recommendations # % 71 61 1 1 3 3 42 36 117 100

Buy Trading Buy Trading Sell Sell Total

Inv. banking clients prev. 12 months # % 19 95 0 0 0 0 1 5 20 100

Aladdin Oil & Gas Company AS -

Information regarding coverage of Aladdin Oil & Gas Company AS Date Recomendation 04.09.2006 Buy

Target 40,0

Share Price 22,0

CAR intends to publish research updates on a quarterly basis, or when news with a major impact on the share price is known. Updates will be published in company reports or as part of CAR Morgenanalyse. CAR has corporate relations with Aladdin Oil & Gas Company AS. The report was presented to the issuer before proliferation in order to avoid factual errors.

18

CAR Research