Vast Exploration Research Note

Daily Letter | 1 13 February 2009

Vast Exploration Inc. SPECULATIVE BUY

VST : TSX-V : C$0.16

COMPANY STATISTICS: Shares Out basic: Market Cap (M): Ent Value (M): 52-week Range:

Target: C$0.25

110.9 C$17.2 C$5.7 C$0.10 - 1.40

EARNINGS SUMMARY: FYE Jan Production (boe/d): Revenue (M): Income (M): EPS basic: CFPS basic:

2007A 2008A 2009E 0 33 43 C$0.285 C$0.484 C$0.855 C$(2.583) C$(5.965) C$(8.306) C$(0.15) C$(0.14) C$(0.09) C$(0.08) C$(0.05) C$(0.02)

SHARE PRICE PERFORMANCE:

Terry Peters, MBA 1.416.869.6597 [email protected] Cynthia Yee 1.416.869.7291 [email protected] Zainuddin Ahmed 1.416.869.7285 [email protected]

Energy -- Oil and Gas, Exploration and Production

INITIATION OF COVERAGE - THE VAST POTENTIAL OF KURDISTAN We are initiating coverage on Vast Exploration Inc. with a SPECULATIVE BUY rating and a 12-month target price of C$0.25.

The Asset Vast Exploration completed a Production Sharing Contract (PSC) with the Kurdistan Regional Government (KRG) in May 2008 for exploration, development, and production of the 846 square kilometre Qara Dagh block with consortium partner Niko Resources as operator on the block. This PSC allocates 27% net interest to both Vast and Niko Resources, 6% net interest to Groundstar.

What could it all be worth? We have looked at several valuation benchmarks that we believe provide relevant comparisons for the valuation of Vast Exploration. This includes 1) cash plus invested capital; 2) comparable Talisman Energy transaction for Block 44; 3) the economics of the PSC under various scenarios. COMPANY SUMMARY:

Vast Exploration is a junior international E&P, part of the Forbes & Manhattan Inc. companies, that is engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas. Vast holds marginal producing oil and gas assets in Alberta (~45 boe/d) and also holds a 27% interest in a Production Sharing Contract ("PSC") with the Kurdistan Regional Government in the Kurdistan Region of Iraq. All amounts in C$ unless otherwise noted.

Valuation Our target price represents our estimate of the company’s working capital and investment in its Kurdistan block and falls in the range of valuation scenarios reviewed. We have noted that Vast is in need of additional capital for its initial commitments and for any future development. While the upside scenarios are significant, they are dependent on the success and availability of this future funding on a favourable basis. Our SPECULATIVE rating is meant to flag the real risk that in the event of a lack of additional capital in the coming year, or no exploration success, the implied value of Vast Exploration will be significantly impaired, including being worth nothing at all.

Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit http://www.canaccordadams.com/research/Disclosure.htm.

Daily Letter | 2 13 February 2009

COMPANY OVERVIEW Vast Exploration is a Canadian-based, small cap international E&P. The company is managed by Forbes & Manhattan Inc. (a private merchant bank operating in the U.S., Canada and Western Europe). Vast trades on the TSX-V under the symbol “VST”. The company has a small production base of approximately 45 boe/d (60% natural gas) from the Boyer area of Alberta. But Vast’s prime area of focus has shifted to Kurdistan, Iraq. Vast entered into a Production Sharing Contract (PSC) in Kurdistan in May 2008, following a competitive eight-month bidding process. The company is partnered with Niko Resources (operator) and Groundstar Resources on the Qara Dagh Block. Niko is the company’s largest single shareholder, holding approximately 19% of Vast’s shares outstanding.

KURDISTAN Vast Exploration completed a Production Sharing Contract (PSC) with the Kurdistan Regional Government (KRG) in May 2008 for exploration, development, and production of the 846 square kilometre Qara Dagh block with consortium partner Niko Resources as operator on the block. This PSC allocates 27% net interest to both Vast and Niko Resources, 6% net interest to Groundstar. The remaining 40% is broken into 20% direct investment for the KRG and 20% interest reserved by the KRG to assign a third party by January 14, 2009; however, with this deadline passed, the government is now into a 90day extension period upon which it still has the right to assign the remaining 20% interest. The Qara Dagh block includes a 390 square kilometre region with existing oil seeps, is located on tread with existing discoveries and in near proximity to the prolific Zagros Fold Belt (which contains the significant Kirkuk field in Northern Iraq). Figure 1: Iraq Pipelines and Major Fields

Source: Company reports

Daily Letter | 3 13 February 2009

Figure 2: KRG Petroleum Blocks

Source: Company reports

Commitments under the PSC are divided into an exploration period and a development period. The exploration is sub-divided into two periods, which will be referenced to as sub-period 1 and sub-period 2. Sub-period 1 is three years in length (set to expire on May 14, 2011) and contains the following commitments: a.

carry out geological and geophysical studies;

b.

field work comprising structural, stratigraphic and lithologic mapping and sampling;

c.

acquire, process and interpret 300 line km of 2D seismic data for a minimum of US$6 million;

d.

drill one exploration well for a minimum of US$10 million.

After sub-period 1, the consortium can notify the government if it does not intend to proceed. However, if it chooses to go ahead, at the end of sub-period 1, the consortium must surrender 25% of the net area (determined by subtracting any production areas from the initial contract area) to the Government. Sub-period 2 is two years in length (set to expire on May 14, 2013) and has the following commitments: a.

acquire, process and interpret further seismic data, if required;

b.

drill one exploration well for a minimum of US$10 million.

Daily Letter | 4 13 February 2009

Any excess work committed above the requirements of sub-period 1 can be applied to meet the minimum commitments of sub-period 2. Following the completion of subperiod 2, the consortium must surrender an additional 25% of the net area (determined by subtracting any production areas from the initial contract area) to the Government again. If there has been no commercial discovery made on the block during the five-year exploration period, then the PSC will terminate. The caveat being that if a discovery (not commercial) is made, an extension to the original agreement may be granted in order for the consortium to determine if the discovery is commercial or not. Moreover, the consortium must surrender all areas that are not deemed a production area at the end of the exploration period. The development period is set for 20 years following the date of announcement of commercial discovery, with an automatic five-year extension period. This can be extended a further five years upon the request of the consortium. Terms of the PSC include a 10% royalty payable immediately to the KRG on oil production in the Qara Dagh block, with the remaining net available oil subject to a division into cost recovery oil and profit oil. The cost recovery limit of net available oil for the consortium is 43% for expenditures incurred by the consortium including capital expenditures, abandonment costs, operating costs as well as production and signature bonuses. The total profit oil is then apportioned between consortium and the KRG based on the sliding scale of 32-15% as cumulative production increases over time. Presently, a letter of intent has been executed with Niko Resources for the acquisition of 350 kilometres of 2D seismic, with seismic surveying for the Qara Dagh block expected to begin in early 2009. Vast is also in discussions with neighbouring operators and service companies on potential rig availability for Q3/09.

VALUATION POTENTIAL Vast Exploration shares are currently trading at a premium to our estimate of year-end 2008 working capital of $7.1 million or $0.06 per share. The company has no long-term debt. The current share price premium over its working capital position represents the option value of the reserve potential on the Qara Dagh exploration block in Kurdistan. At its current share price, the value of this option is approximately $12.3 million. We estimate that expenditures to-date for Vast to be approximately $27 million. Figure 3: Vast Exploration Valuation Benchmarks Cash and Invested Capital Value

(1)

Cash Value

F2009e working capital

F2010e working capital*

*assumes additional financing of $15 million

(2)

Cash Value plus invested capital

F2009e invested capital F2009e working capital

F2009e cash plus invested capital

F2010e invested capital

F2010e working capital*

F2010e cash plus invested capital

*assumes additional financing of $15 million

Source: Canaccord Adams

( mm$ )

(mmShrs)

($/share)

$4.5

200.8

$0.02

$7.1

$23.7 $7.1

$30.8

$45.5 $4.5

$50.0

125.8

125.8

125.8

200.8

200.8

$0.06

$0.19

$0.06

$0.24

$0.23

$0.02

$0.25

Daily Letter | 5 13 February 2009

Figure 4: Vast Exploration – Implied value from Talisman transaction Talisman transaction for 40% of Block 44 and Block 39

Range of Bonus Allocation

( mm$ )

Repayment of prior Blk44 costs carried by WesternZagros

50.7

Bonus and other community support paid by Talisman

220

Assumed Allocation to Blk 44

Attributed to Talisman's acquired Block 44 interest

220

90%

160.7

248.7

Vast Implied value - simple ratio of relative working interest in an exploration Block

Vast's 27% relative to Talisman's 40% - USD

50.7

50%

110

Total Implied value of Talisman's 40% acquisition in Blk 44

( mm$ )

198

108.5

167.9

$0.68

$1.04

833.3

$0.25

$0.32

416.7

$0.42

$0.54

Vast's 27% relative to Talisman's 40% - Cdn$

135.6

Per Vast share - excluding future funding requirements

209.8

Dilutive impact of notional Vast future funding - US$100 million Price of additional shares issued ( $/share) $0.15 $0.20 $0.30 $0.50

mmshrs

625.0 250.0

$0.32 $0.58

$0.41 $0.74

Source: Canaccord Adams

We have looked at several valuation benchmarks that we believe provide relevant comparisons for the valuation of Vast Exploration. Figure 3 on the previous page highlights the expected cash working capital and the combined working capital and invested capital at year-end F2009 and F2010. The assumption for the latter is that Vast Exploration would be worth what it had expended on the play to-date plus its working capital. We would note that we have assumed that Vast will also require approximately $15 million in F2010, which we have diluted for by assuming a financing is placed during the year at a price of $0.20 per share. Should Vast be unable to raise additional funds, we would assume that it could be carried by its partners and go into penalty on its working interest share. We would note that Niko is a significant shareholder (19%) of Vast and, depending on the circumstances, may be in a position to be supportive of a financing. Figure 4 above illustrates what the Talisman transaction implies for a “block” value and takes the ratio of Vast’s 27% working interest to our calculation of Talisman’s implied acquisition price for its 40% of Block 44. This approach results in a valuation range of $0.68 to $1.04 per share (undiluted). We understand, and would caution that the prospectivity of the two blocks may not be comparable, nor might be the chance of success. At the time of Talisman’s working interest acquisition, the Sarqala-1 well had been drilling for approximately six weeks. In addition to the straight up comparable valuation, we have also indicated what a pro-forma diluted value for Vast might be, assuming that an additional $100 million would need to be raised to successfully exploit a success. The values range from $0.25 to $0.74 fully diluted.

Daily Letter | 6 13 February 2009

Figure 5: Vast Exploration - Valuation potential under Generic PSC scenarios and - $40/b and $60/b flat oil price scenario Canaccord's - Generic PSC Valuation (US$ million )

Lower Reserve Case

At 10% A-tax

$60/b flat

$40/b flat

$60/b flat

612

1,026

2,515

3,280

422

765

1,954

2,504

693

At 12% A-tax

At 15% A-tax

509

At 20% A-tax

372

At 18% A-tax

Higher Reserve Case

$40/b flat

1,136 884

696

Lower Reserve Case

2,757

3,617

2,208

2,854

1,808

2,304

Higher Reserve Case

Urisked Vast @27%WI (C$/share)

$40/b flat

$60/b flat

$40/b flat

$60/b flat

At 12% A-tax

$1.03

$1.72

$4.23

$5.51

At 10% A-tax

$1.16

At 15% A-tax

$0.86

At 18% A-tax

$0.15 $0.20 $0.30 $0.50

Unrisked Diluted Value at 18% A-tax

Price of additional shares issued ( $/share) $0.15 $0.20 $0.30 $0.50

Unrisked Diluted Value at 20% A-tax

Price of additional shares issued ( $/share) $0.15 $0.20 $0.30 $0.50

$1.29

$0.63

Dilutive impact of notional Vast future funding - US$100 million Price of additional shares issued ( $/share)

$1.49

$0.71

At 20% A-tax

Unrisked Diluted Value at 15% A-tax

$1.91

$1.17

Lower Reserve Case

$4.63

$6.08

$3.71

$4.80

$3.28

$4.21

$3.04

$3.87

Higher Reserve Case

mmshrs

$40/b flat

$60/b flat

$40/b flat

$60/b flat

625.0

$0.21

$0.36

$0.90

$1.17

833.3 416.7 250.0

$0.17

$0.29

$0.28

$0.48

$0.38

$0.66

Lower Reserve Case

$0.72

$0.93

$1.21

$1.56

$1.65

$2.14

Higher Reserve Case

mmshrs

$40/b flat

$60/b flat

$40/b flat

$60/b flat

625.0

$0.17

$0.31

$0.80

$1.02

833.3 416.7 250.0

$0.14

$0.25

$0.23

$0.42

$0.32

$0.57

Lower Reserve Case

$0.64

$0.82

$1.07

$1.37

$1.46

$1.87

Higher Reserve Case

mmshrs

$40/b flat

$60/b flat

$40/b flat

$60/b flat

625.0

$0.15

$0.28

$0.74

$0.94

833.3 416.7 250.0

$0.12 $0.20 $0.28

$0.23 $0.38 $0.52

$0.59 $0.99 $1.35

$0.75 $1.26 $1.72

Source: Canaccord Adams estimates

Figure 5 illustrates the results of our lower and higher case reserve scenarios from our generic PSC valuation model under flat oil prices of $40/b and $60/b. We would note that under the assumptions in Figure 5, the unrisked reserve value to Vast Exploration, excluding its working capital, ranges from $0.63 to $1.91/share under our lower reserve case to a range between $3.04 to $6.08/share under a higher reserve scenario. To account for the fact that additional financing would be required, we have provided what the diluted impact would be on this unrisked valuation under a range of assumed share issue prices and discount rates of 15%, 18%, and 20%. While significant upside exists, it rests more with the higher reserve case than the lower reserve case. In addition, the potential dilutive effect is equally significant. Our analysis is not to suggest a more likely reserves outcome than the other, and is unrisked. It is also not meant to indicate the range of expected values. The expected values would also include various degrees of success as well as 100% failure. In the event of a failure to fund its current obligations, we would caution that Vast’s participating interest in the Qara Dagh block may be subject to penalty provisions as is common in other agreements.

Daily Letter | 7 13 February 2009

CAPITAL REQUIREMENTS Capital expenditures for the first nine months of Vast’s fiscal 2009 year totalled $19.0 million. The company incurs negative cash flow as revenue from its marginal production in Alberta is not sufficient to support its current foray into Kurdistan. Vast funds its capital program primarily through equity raised. Most recently, Vast issued a $35 million bought-deal financing connected to its PSC in the Qara Dagh block in June 2008. The company issued 58.3 million units, with each unit comprising of one common share and one-half of a share purchase warrant, exercisable at $0.90 per share. At the end of October 2008, the company had a cash balance of $11.2 million. In November 2008, Vast projected an 18-month capital program of US$85 million for the block, which will include: signature, capacity building and community support bonuses; training, technological and environmental fund contributions; its planned seismic program; and drilling of one exploration well. Vast’s share of capital cost (interest plus government carry) works out to approximately $26.6 million. Based on the aforementioned information and assuming the KRG assigns the remaining 20% interest in the block, we estimate Vast will require $15 million of additional capital to complete its committed Kurdistan program. Clearly, the ability of Vast Exploration to sustain its asset position in Kurdistan is predicated on its ability to secure additional funding on a reasonable and timely basis.

CONCLUSION AND RECOMMENDATION We are initiating coverage on Vast Exploration with a SPECULATIVE BUY rating and a target price of C$0.25 per share. Our target price represents our estimate of the company’s working capital and investment in its Kurdistan block and falls in the range of valuation scenarios reviewed. We have noted that Vast is in need of additional capital for its initial commitments and for any future development. While the upside scenarios are significant, they are dependent on the success and availability of this future funding on a favourable basis. Our SPECULATIVE rating is meant to flag the real risk that in the event of a lack of additional capital in the coming year, or no exploration success, the implied value of Vast Exploration will be significantly impaired, including being worth nothing at all.

MANAGEMENT AND DIRECTORS Many members of the executive management team also concurrently hold positions at either Longford Energy Inc. and/or Stetson Oil & Gas Ltd., both of which are Forbes & Manhattan companies. Ahmed Said – President and Chief Executive Officer Fari Goodarzi – Vice President, Exploration Gary Lobb – Vice President, Finance and Chief Financial Officer Richard Naab – Vice President, Kurdistan Operations Patrick Gleeson – Corporate Secretary

Daily Letter | 8 13 February 2009

Investment risks Risks to our investment thesis include, but are not limited to operating risks inherent in oil and gas exploration and production activities. Oil and natural gas price realizations and production may be lower or higher than our forecast. Without limitation, other risks include: Reserve and resource risks The long-term commercial success of the company is its ability to find, acquire and develop resources and reserves. There is no assurance the company will be able to locate satisfactory properties and resources. We also note that with any company's petroleum reserves, any such calculations remain dependent on long-term oil pricing, geological assumptions made, and the company's ability to produce said reserves. There is no resource estimate associated with the Kurdistan properties available at this time, given the exploratory nature of these assets. Therefore, we note that the values used carry a higher risk level than an independent third-party engineering evaluation. There are also risks associated with replacement of reserves required to sustain the long-term growth of the company. Development risk The company's value lies predominantly in the development and production of oil and gas projects that carry completion risk. Delays in the development schedule or increases in capital requirements, for example, may negatively impact our suggested valuation. Country risk Some or all of the company's exploration, producing and potential producing properties are located in Kurdistan, Iraq. The company's operations and financial results, and hence our valuation of the resource and company, could be adversely, or positively, affected by events beyond its control taken by the current or future governments in that country. These events could include, but are not exclusive to: changes in government policies, adverse legislation in Iraq and/or the Kurdistan Region, social instability, risks of war, terrorism, expropriation, nationalization and renegotiation or nullification of existing concessions and contracts. Economic risk Our suggested valuation is impacted by our long-term price assumptions for oil. Volatility in crude oil and natural gas prices could materially affect the company's financial performance and, therefore, the accuracy of our estimates. Our discount rate assumptions are intended to reflect recent increases in the equity risk premium for the market; however, different discount rate assumptions could materially change our net present value calculation. Funding Risk Vast's primary assets are the cash on its balance sheet and their rights to their exploration block, and thus face the additional risk that upon success and during appraisal and ultimate development, additional funding will be required. In the current environment, such funding may or may not be available or may only be available at a price that is substantially dilutive to existing shareholders.

Daily Letter | 9 13 February 2009

APPENDIX: IMPORTANT DISCLOSURES Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment Analyst Certification: research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research.

Site Visit:

An analyst has not visited the company's assets or operations.

Distribution of Ratings: Global Stock Ratings (as of 4 February 2009)

Rating Buy Speculative Buy Hold Sell

Canaccord Ratings System:

Coverage Universe # % 339 60% 68 12% 135 24% 23 4% 565 100%

IB Clients % 31% 53% 24% 26%

BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Adams does not provide research coverage of the relevant issuer. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.

Risk Qualifier:

SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.

Canaccord Adams Research Disclosures as of 13 February 2009 Company Vast Exploration Inc.

1

2 3 4 5 6 7 8

Disclosure 1A, 2, 3, 7

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Daily Letter | 10 13 February 2009

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Daily Letter | 11 13 February 2009

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