Wh Ireland Research Note 16-02-06

Ascent Resources

Strong Buy Onward and Upward

16 February 2006 AIM Code AST AIM Sector Oil Target Price 20p Share Price 10p Issued Capital: 276m (inc 19m in-money options) Market Capitalisation £27.6m Key Shareholders RAB Energy Fund 16.3% Framlington 13.9% Analyst Philip Morgan 01227 264310

After its initial flurry of deals and acquisitions last year, Ascent has been progressing its exploration acreage through new seismic, old seismic reinterpretation and applying for drilling permits. Six wells are planned for later this year, with Spain, Italy and Hungary likely targets. More wells are on the horizon for 2007. The array of projects is impressive. The jewels in the exploration crown appear to be the Italian Po Valley acreage and the intriguing Swiss prospects. However, Hungary also has plenty of potential and Spain also looks attractive. All of the exploration acreage is prospective and the drilling programme promises to be an exciting ride – even one hit would transform Ascent.

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Ascent has made a low cost entry into production in Spain through a string of deals. The Ayoluengo field may well be capable of significantly higher production and reserves. Already, the cashflow more than pays the company’s overheads. Together with cash from conversion of most of the outstanding warrants, Ascent appears well-funded for its drilling programme.

Philip Haydn-Slater 020 7220 1690 [email protected] Raj Karia 020 7220 1693 [email protected]

Further acquisitions in Europe are planned, as the company still sees overlooked opportunities. The steady stream of announcements illustrates the dynamism of the company.

* WH Ireland act as broker to Ascent and any research on this company should not be relied on to be independent or objective. Intended for institutional investors only, not private clients.

The board has been strengthened with two significant appointments. Both John Kenny, the new Chairman, and Patrick Heren, are well known and highly regarded in the industry.

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Recommendation / Comment Ascent is a new company and has come a long way since getting going in March last year. Announcements have kept flowing and will clearly continue to do so. We are getting closer to the kickoff of the drilling campaign and it is likely that the shares will start another run ahead of this. The market cap. of the company is still modest and offers excellent gearing to any success with the drill bit. Although it would be extremely fortunate if all the wells came in, it is more likely that there will be one or two hits in the early drilling - even one would transform Ascent at a stroke. The MD, Jeremy Eng, has identified an overlooked niche in Europe and the company is well-placed and well-financed to exploit it. As yet, Ascent is not known to many investors and so offers the opportunity for canny early birds to gain exposure to a potentially lucrative little exploration play. W H Ireland Limited, 11 St James's Square, Manchester M2 6WH. Telephone: (+44) 161 832 2174/6644 Member of the London Stock Exchange. Authorised and regulated by the Financial Services Authority. A wholly owned subsidiary of W H Ireland Group plc This is a regulated publication under the rules of the Financial Services Authority and contains investment advice of both a general and specific nature. This research is intended for institutional investors only and is not for distribution to private clients. It has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot be guaranteed. The opinions and conclusions given herein are those of WH Ireland Ltd. and are subject to change without notice. Clients are advised that WH Ireland Ltd. and/or its directors and employees may have already acted upon the recommendations contained herein or made use of all information on which they are based. WH Ireland is or may be providing, or has or may have provided within the previous 12 months, significant advice or investment services in relation to some of the investments concerned or related investments. Recommendations may or may not be suitable for individual clients and some securities carry a greater risk than others. Clients are advised to contact their investment advisor as to the suitability of each recommendation for their own circumstances before taking any action. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by clients acting upon such recommendations. The value of securities and the income from them may fluctuate. It should be remembered that past performance is not necessarily a guide to future performance. For our mutual protection, telephone calls may be recorded and such recordings may be used in the event of a dispute.

Since our initial report of September last year, Ascent has made progress on all fronts. Production has been acquired in Spain. New seismic has been shot in Hungary. The first wells of the drilling campaign are now shaping up. Drilling permits have been applied for in Spain and Italy and rig options are being considered. It seems likely that drilling could commence maybe in Q3 this year and continue using the same rig for at least six wells. The rig will be able to be moved piecemeal on trucks so it can be shuffled around between countries without difficulty. The wells will be relatively shallow and quick to drill. Spain Since our last report, Ascent has moved into Spain with four separate deals. The first was the acquisition from Northern Petroleum of a 50% stake in three exploration permits in the north of the country. The cost was a 2.5% overriding royalty in the permits. The acreage (556 sq. km.) is in the Sedano Basin and surrounds the Ayoluengo field. There are three discoveries on the acreage, but all need appraisal. The company is planning wells on Hontomin, discovered by Chevron in 1968, and Tozo, another Chevron find, this one dating from 1965. At the time, the modest flow rates were clearly uncommercial but times have changed. The Hontomin field flowed at 113 b/d but Ascent believes that the discovery well penetrated the flank of the structure and is planning to drill up-dip to see what that holds. It may be possible to re-enter the Tozo discovery well, which flowed a few hundred barrels over an extended period but also contained an untested gas zone. Both fields are likely candidates for drilling later this year. Hot on the heels of this deal came the news that the company had bought a 50% interest in Northern Petroleum Exploration from Gold Oil for 0.37m shares and cash. This gave an 11.25% interest in the Ayoluengo field itself. A further 52.5% in Ayoluengo then came through the acquisition of Teredo Oils for 1.5m new Ascent shares plus some cash. The stake in the field has now been raised to 88.75% with a further acquisition from POGE. Ascent’s average purchase price of just over $6 per barrel of proven reserves appears highly attractive. (Nippon Oil has recently paid over $13 per barrel for BP’s stake in the higher cost Statfjord field). Ayoluengo is a rather tired old field which has already produced 17 million barrels (mb), with further recoverable reserves of 200,000 barrels proven. Its production has dwindled to around 115 b/d. However, the field is a suitable candidate for rejuvenation and the partners aim to increase output “at the earliest opportunity.” Only six of the original 36 wells are now producing. Recompletions are possible near term and horizontal drilling could also increase output in due course. This would increase the proven reserves and decrease the cost – the previous operator, Northern, assessed potential extra reserves at 2mb. If this is close, Ascent will have obtained an excellent deal. We welcome the move into production as it pays the overheads and ensures that the company can fund its initial exploration programme. Switzerland The company has two exploration permits in the Berne Canton, awarded in August. Both have unappraised gas discoveries on them. We are still awaiting approval of the application for a third permit, in the Vaud Canton, which contains a 1962 oil discovery. All three permits had old seismic surveys. These are currently being reprocessed in Hungary to determine whether more seismic is needed or whether a well can be sited and drilled without. Netherlands Ascent has a 90% interest in a joint venture with GTO, who are technical specialists. After seismic reprocessing and geological work, the JV applied for three full and three part blocks in September. The two areas applied for are old government land and under-explored – it is likely that other companies will be interested in taking a share of the action. The award of permits is due shortly.

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Hungary Ascent’s operations in Hungary are carried out through its 90% interest in Petro Hungaria, a joint venture with Geomega, a local geological and geophysical company. The major exploration interest lies in the two Nyirseg permits in the northeast of the country. Old seismic has been reinterpreted, 270 km of new seismic has been shot and data has been exchanged with another company. The company now plans to identify sites for two wells and drill when permits are granted, possibly as early as the third quarter. The abandoned Peneszlek gas field looks a candidate for redevelopment. The company has a Memorandum of Understanding with state firm, MOL, to redevelop tight gas fields using state-of-the-art stimulation techniques. Although around 20% of US domestic gas production stems from such sources, tight gas is largely neglected in Europe. There are a number of suitable fields throughout Hungary and the first two fields are currently being selected. The company hopes that stimulation equipment from Germany may be available for a pilot project around mid year. The mooted coal bed methane venture with local operator Rotaqua remains a possibility. Italy Italy is becoming a key country for Ascent and it seems that more projects are “under review.” The most exciting acreage is two large exploration contracts in the central part of the prolific gas-producing Po Valley. The interest here derives from a new play, namely the drilling of stratigraphic traps. Hitherto, the fields were found in structural traps, now all drilled, but advanced seismic techniques have been locating smaller fields in the new play. Ascent has identified twelve leads from an initial review of its purchased seismic data, but is reprocessing the data to identify drilling locations. When this is done the company will need to apply for drilling permits, which takes at least ten months, so drilling will probably not kick off until next year. Drilling will take place sooner in the Latina Valley, as the permitting process for the shallow Anagni well is complete. However, we would caution that this well is primarily aimed at obtaining parameters for a seismic programme rather than looking for oil and gas. The acreage surrounds a shallow producing field, Ripi. Ascent believes that the Ripi oil is characteristic of older, deeper oil as is the case elsewhere in Italy and will be targeting the larger deep prospects. In December, Ascent announced the acquisition of a new Italian exploration permit, a 40% stake in the Fiume Arrone permit west of Rome (partnering Italmin and JKX). Two wells were drilled in the ‘50s, one reporting gas shows. A well is to be drilled this year, aimed at a gas target identified by seismic. Gabon Ascent was awarded a 20% interest in the Ibekelia permit, adjacent to the Olowi Marin oilfield and between the two previous blocks, where the company retains a 1.75% interest. Ascent promptly sold a 10% stake in Ibekelia to Afren and retains a 10% interest in this one year technical evaluation agreement. New Projects The 2005 Annual Report, published in December, says that Ascent “is currently assessing new projects in Hungary, Spain and Italy as well as in three new countries where the company is not currently operating. It is likely that some new projects will be added to the portfolio in the coming months.” Since that time there has been only the Fiume Arrone acquisition in Italy so there are probably more to come. The company has indicated that there are still low cost entry opportunities, some including inexpensive production.

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Financial Position The company currently has just under £4m cash and appears to be adequately funded for its existing plans into 2007. Finances were boosted by £2.2m by the conversion of 43m 5p warrants into shares with an incentive warrant of 1 for 4 with the right to subscribe for new shares at 12p up to end 2007. Management Changes The company has recently replaced the last two directors from the company’s original incarnation, Hugh Warner and David Steinepreis. The new Chairman is John Kenny, a co-founder of JP Kenny Group, one of whose companies has become JKX Oil & Gas. John is currently Head of Commercial Activities at JKX. JKX has since become a partner with Ascent in its latest Italian block and one wonders if there is scope for wider co-operation between the companies. JKX is a £536m market capitalisation company and could be a useful partner for Ascent. At the same time, Jonathan Legg was moved from non-exec to be an executive director. The second new appointment is Patrick Heren, a renowned gas expert for 30 years. Patrick founded World Gas Intelligence, which was the first international gas journal and the Heren Index has become the most widely used price index for European gas and power prices. His advice and contacts should prove extremely valuable to Ascent. Shareholding Structure The seven largest shareholders hold 68% of the shares in issue. The free float is thus rather limited and the shares are likely to be sensitive to good news. The conversion of the warrants resulted in some selling of the shares – this process is likely to be close to being over.

VALUATION AND APPRAISAL Our model is little changed from our last note and will not be included in full. The risk-discounted figure for the company has risen slightly to €302m, equivalent to £204m or 75p per share. This suggests that there is little in the share price for any drilling success. As the company has a portfolio of around sixteen licenses, many of them with unappraised finds and several with oil seeps, it is quite clear that Ascent’s potential is still largely unrecognised by the market. We have been impressed by the calibre of directors that the company has managed to recruit and this should lend confidence to new investors. Ascent continues to be well-managed by Mr. Eng, whose dynamicism shows no sign of flagging. The recent presentation at an Oilbarrel Conference was well received by delegates. In our view, the drilling campaign due to begin around mid year will attract attention and the shares could start to move ahead of that time – maybe quite soon. On top of that, it seems likely that new deals will be signed, which will keep the company’s name to the fore. The bigger prospects to be drilled next year when the permitting process is completed will ensure that the company will continue to be noticed. Ascent is not likely to become a large company with its current interests. However, if it achieves success in a few of its prospects, it should be able to move up a league or two. In due course, Ascent plans to take stakes in bigger projects in order to ratchet it further up the scale. We think that Ascent has put all the building blocks in place to become a medium-sized European oil and gas exploration and production company over the next 2-3 years. Getting in at this stage looks highly attractive to those prepared to wait for an investment to outperform steadily over that time. Of course, any substantial success from drilling would produce a much faster return. 4