Sector: Oil & Gas

Irvine Energy plc

09 January 2008 Speculative Buy
Irvine Energy plc (“Irvine”) is an Aim listed company that engages in the Price 2.375p
identification, acquisition and evaluation of both onshore conventional and
unconventional oil and gas projects in North America. The Company currently Ticker IVE
has exploration and production projects in Kansas and Oklahoma, which it is
operating and developing in conjunction with its joint venture partner Metro Index AIM
Energy Group. Irvine’s objective is to become a significant player in both the
Market cap (£m) 16.7
conventional and unconventional USA oil and gas markets by building a solid
portfolio of assets within the highly prospective Kansas/Oklahoma region. Share in issue (m) 704.7
Executive Summary 52 wk high (p) 4.125
In December, Irvine announced that it received share placing commitments
52 wk low (p) 2.125
to raise £4,689,000 through the issue of 234,450,000 new ordinary shares
at 2p per share. These funds will be used to complete the acquisition of Cash (£m) 0.71
producing and prospective oil and gas acreage in Oklahoma, and for
additional working capital. Broker No
Irvine signed an agreement with Metro in July to purchase up to 50% p
Major Shareholders %
working interests in both producing and prospective oil and gas acreage in
Oklahoma and Kansas, subject to due diligence and arrangement of Pershing Keen Noms Ltd 11.00
necessary funding. Subsequently the Company completed the acquisition
of the Niobrara project in September, which comprises 4,490 acres of oil Euroclear Nominees Ltd 5.90
and gas licences in north-west Kansas. Moreover, the Company has
completed the acquisition of a 50% working interest in 17,016 acres of high Cascade Royalty Holdings
5.00
prospective oil and gas leases in Oklahoma for a cash consideration of LLC
US$2,552,026 with the acquisition of remaining Oklahoma assets expected
to take place in early January 2008. Golden West Holdings Ltd 5.00

In July, Irvine disclosed that it was considering various fundraising options Brewin Nominees Ltd 4.80
for working capital and received indicative terms for a US$50 million
mezzanine finance facility from GasRock Capital LLC, which is a specialist Fitel Nominees Ltd 4.50
oil and gas finance provider. This agreement is based on extensive Source: Proquote International, Hemscott,
Company accounts. Shareholers at 12.07.07
technical due diligence and asset portfolio.
Irvine currently has unaudited net reserves (post completion of Oklahoma):
1P (proven – at least 90% chance being recovered) of 3 billion cubic feet
equivalent (Bcfe), 2P (probable – at least 50% confidence) of 49 Bcfe, 3P
(possible – at least 10% of confidence) of 149 Bcfe. Management’s
objective is to treble its 2P reserves within 18 months.
In addition, the Company currently has net production of 750,000 cubic feet
of gas per day (cfd) with 20 wells ready to put on line for the production of
50,000 cfd each (25,000 cfd net to Irvine), and has an 18 month production
target of 450 barrels of oil per day (Bopd) and 6,000,000 cfd which would
generate net revenue of US$1.7 million per month.
Unrisked Risked NPV Source: Bloomberg
Lease Area Bcf MMbbl* Bcfe MMboe* NPV US$m (10%) US$m
Niobrara Total 8.8 - 8.8 1.5 4.9 4.0
118.1 3.750 140.6 23.5 81.6 24.1
SVS Research
Kansas Total
research@svssecurities.com
Oklahoma Total 213.5 1.255 221.0 36.9 106.6 64.6
+44 (0) 20 7638 5600
Total Irvine Energy plc 340.40 5.005 370.40 61.90 193.10 92.70
Source: Irvine Energy plc, Hardman & Co Corporate Research
*MMbbl: million barrels of oil. MMboe: million barrels of oil equivalent.

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Company Overview
£000s H1 2007 2006
Irvine was founded in 2005 and is headquartered in London. It is an emerging Year Ended 31 Dec
on-shore USA oil & gas producer targeting both conventional and PROFIT & LOSS
unconventional oil and gas projects in North America. Up to date, the Company Revenue - -
Cost of sales - -
has established a large acreage position in areas with multiple oil and gas
Gross profit - -
reservoirs including 112,000 gross acres in Kansas (84,000 net), 50,000 gross Admin Expenses (317) (339)
acres in Oklahoma (post completion of acquisition of Oklahoma project), and Other Expenses (120) (45)
4,490 acres in the Niobrara project. Operating profit/(loss) (437) (384)
Interest Receivable 47 138
Irvine has an aggressive growth strategy in place with a work programme to Profit/(loss) Before Tax (390) (246)
advance its production projects and upgrade its P3 (possible) resources to P1 Tax - -
(proven) status. Profit/(loss) After Tax (390) (246)
Basic EPS (p) (0.10)p (0.12)p
Diluted EPS (p) (0.10)p (0.12)p
The Company has a current net production of 750,000 cfd with an 18 BALANCE SHEET
month production target of 450 Bopd and 6,000,000 cfd, which would then Non-Current Assets 8,196 6,581
generate net revenue of US$1.7 million per month. Current Assets 742 2,828
Irvine estimated its net reserves of 3 Bcfe 1P, 49 Bcfe of 2P and 149 Bcfe Current Liabilities (50) (132)
of 3P. The Company has an objective to treble its 2P reserves within 18 Long Term Liabilities - -
Net Assets 8,888 9,277
months.
CASH FLOW
Operating Cash Flow (418) (587)
Management believe by assembling a combination of conventional and Investing activities (1,571) (3,632)
unconventional plays, it provides the Company with a balanced low risk, high Financing activities - 6,916
capital efficient development programme. Net Cash Flow (1,989) 2,697
Source: Company accounts
Kansas project – Irvine has 75% working interest in the project covering
112,000 acres spanning over the Barber, Butler and Cowley counties in Kansas.

Niobrara project – the Company has acquired 50% working interest in the
project comprising 4,490 acres in the low cost Niobrara shallow oil and gas
development in north-west Kansas.

Oklahoma project – the Oklahoma project includes leases that cover the
Woodford and Caney Shale, as well as multiple conventional reservoirs with an
area of 50,000 acres. Generally, the Company has 50% working interest in the
project in Okmulgee, Okfuskee, McIntosh and Hughes counties. However,
approximately 10% of the acreage is subject to an option granted by Metro to a
third party whereby if that option is exercised, the Company’s working interest
will be 25% of that 10% acreage and the acquisition price will be adjusted.

Source: Irvine Energy plc

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Kansas Project
The Kansas project has an area of mutual interest (“AMI”) covering
approximately seven million acres in eleven contiguous counties in Kansas. The
AMI has a prolific oil and gas production history, with one county producing as
much as 500 million barrels of oil. Importantly, the AMI also houses the highly
prospective relatively shallow Chattanooga Shale formation, which is an
extension of the proven Woodford shale and has successfully been drilled
across state lines in Arkansas. Up to date, as many as 12 conventional
production intervals have produced in the area at depths of 1,500 – 5,000 ft
(500 – 1,525m) with three, Arbuckle, Mississippian and Pennsylvanian being
prolific.

This area has many operating advantages including low cost drilling primarily
due to shallow reservoir depth, extensive infrastructure and locally available
services and rigs, as well as favourable lease terms.

Irvine aims to exploit the conventional oil and gas reservoirs, to reduce overall
project risk and generate early cash-flow from conventional sources while at the
same time test the Chattanooga Shale gas potential. First stage 2D and 3D
seismic programme has commenced in May for approximately 50 square miles
in south central Kansas with the first 8 square mile 3D seismic survey already
completed which has identified multiple drill targets adjacent to the historically
high productive Blood and Cooley fields. Initial drilling targets are being finalized
by Irvine’s partner Metro that are planned to commence in December/January.

Management believe with a land position of over 112,000 acres plus excellent
rig aces, technical services and pipeline infrastructure, Irvine has the first
mover-advantage in an area that has good upside potential.

Niobrara Project
Niobrara project has 20 well bores completed in Niobrara formation that is
primarily focused on the exploration of conventional oil and gas.

Local service companies and consultants have been contracted for the initiation
of the Niobrara project in September. The results of the fluid levels on 6 of the
20 existing wells showed higher than expected static bottom hole pressures
throughout the prospect area and thus Irvine has increased its estimated
resource base for the area by 35%.

The Company has successfully finished testing 13 well bores at a production of

50,000 cfd each; and all 20 wells are ready to put online at minimal cost of
approximately US$0.5 million that would generate total production of 1,000,000
cfd (500,000 cfd net to Irvine).

A further 80 well locations have been delineated for expansion and it is

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estimated that 24 will be completed by year end 2008, with an additional 56
wells to be drilled in 2009. These wells are shallow, circa 1,500 ft (500m), and
can be drilled and completed in less than one week at low cost.

According to Irvine’s announcement in July, unaudited estimate of the net

attributable reserves of the Niobrara project has 1P of 2 Bcfe, 2P of 9 Bcfe and
3P of 9 Bcfe. Further work of the Company is to focus on upgrading the
reserves to the proven category.

Oklahoma Project
The Oklahoma project covers the proven Woodford and Caney shales, as well
as multiple stacked conventional reservoirs and 18 producing oil and gas wells
that are situated in an area with prolific oil and gas production history where
14.7 billion barrels of oil and 94 Tcf (trillion cubic feet) gas have been produced.
The project has the potential to provide up to 400 unconventional drilling
locations in the proven Caney/Woodford gas shales and up to 150 conventional
drilling locations.

The project includes:

Current net production to Irvine of 750,000 cfd.

Estimated unaudited net P2 reserves of 46 Bcfe.

54 square miles of processed 3D seismic that has generated a large

prospect inventory.

3 initial drilled prospect wells to date from 3D seismic programme with

100% success which indicate collective gross production of 1,200,000 cfd.

1 horizontal and 5 vertical well bores in the Caney/Woodford gas shales

that are being completed with the initial tests of one of the verticals and the
horizontal yield encouraging results.

Irvine has designed a drilling programme to exploit the low risk stacked
conventional oil and gas targets, as well as prove up the Caney/Woodford gas
shale potential with 33 wells being planned to be drilled in the next 18 months.
In addition, similar to the Company’s other projects, the Oklahoma project has
shallow low cost drilling depths of approximately 2,000 – 5,000 ft with excellent
drilling rig access, technical services and pipeline infrastructure in place.

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Unconventional Shale Gas
Although production of gas from shale is not new, development on a large scale
is relatively recent.

Unlike conventional gas production, shale gas potential is not confined to limited
traps or structures, and may exist across large geographic areas. Gas is held in
the shale not only in tiny pores, but also in a solid solution bound onto the rock
grains. The key to producing these shales is connecting the pores through the
introduction of an artificial fracture system, and lowering the pressure in the rock
to allow the gas in solid solution to become gaseous and flow.

At first, commercial production of this shale gas were not economically viable
due to technical difficulties. However, the ability to undertake large scale shale
gas development developed significantly following improvements in hydraulic
fracturing and horizontal drilling which allows delivery of the massive fracture
treatments necessary to obtain gas flows at commercial rates.

Shale gas now is the fastest growing energy sector in onshore USA. The United
States Geological Survey (USGS) estimates that shale gas resources that are
technically recoverable may be as much as twice the estimated undiscovered
conventional gas resources.

Partners
As mentioned above, Metro Group Inc is a joint venture partner of Irvine, which
is a private oil and gas company, whose directors have experience and
expertise in geology, prospect generation, field operations, and oil and gas
marketing.

Metro is a specialist in conventional and shale gas and has a number of leases
that it operates in the conventional and shale gas formations in the USA. It was
amongst the first operators in the Woodford Shale formation in Oklahoma and
has worked closely with major corporations involved with gas shale including
Devon Energy Inc, the largest shale gas producer in the Barnett shale and in the
USA and Newfield. Metro has been involved in drilling over 28 vertical wells to
identify the best fracture stimulation techniques.

Irvine believes it is key to acquire acreage positions ahead of competition in

order to unlock value in conventional and shale gas. However, under the USA
system this requires teams of experts and takes time, Metro has a team of
attorneys and experienced oil and gas professionals and is therefore ideally
positioned to aid Irvine in the acquisition of additional acreage.

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The Oil and Gas Market
The world crude oil price recently surged to a nominal all-time high of US$99.29
a barrel, driven by lower crude stocks, constrained supplies and new
geopolitical tensions. In addition, the fact that non-Opec production has not
increased as much as expected has also contributed to higher oil prices.
Particularly, despite an economic slowdown in the US, global oil demand would
still grow much faster than non-Opec supply (FT, 2007). This will leave Opec
supplies and stocks to offset the resulting upward pressure on prices. Thus,
relatively high oil prices are expected to remain as the US Department of
Energy forecasted that oil will average $87 a barrel in the first quarter of 2008
and $84.8 over next year, whereas Wall Street’s consensus of about $74.5 for
2008.

In respect to gas market, natural gas prices have been climbing from late 1990s
with increased demand, limited domestic supply, tight global LNG markets and
rising infrastructure costs. However, current natural gas prices are sufficiently
high to reduce growth in consumption. The Energy Information Administration
forecasted that the combination of increased natural gas supply nowadays and
slower growth in demand may lead to a decline in natural gas prices through
2013. Nevertheless, it is expected that unconventional production is a growing
source of US gas supply since discoveries of new conventional natural gas
reservoirs are expected to be smaller and deeper, and thus more expensive and
riskier to develop and produce.

Source: Annual Energy Outlook 2007

Valuation
Unrisked Risked NPV
Lease Area Bcf MMbbl Bcfe MMboe NPV US$m (10%) US$m
Niobrara Total 8.8 - 8.8 1.5 4.9 4.0

Kansas Total 118.1 3.750 140.6 23.5 81.6 24.1

Oklahoma Total 213.5 1.255 221.0 36.9 106.6 64.6

Total Irvine Energy plc 340.40 5.005 370.40 61.90 193.10 92.70
Source: Irvine Energy plc, Hardman & Co Corporate Research

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Key Personnel
Doug Manner – Chairman

Doug Manner has over 25 years engineering experience in the oil and gas
industry, principally in the North American region as well as extensive corporate
experience serving on the Boards of numerous oil and gas exploration firms. He
is currently CEO of Westside Energy Corporation, an American Stock Exchange
listed shale gas energy company with 65,000 acres in the Barnett Shale area in
Northern Texas and production of 3 million cubic feet gas per day. He is also a
Director of Cordero Energy, Inc and Rio Vista Energy Partners LP, energy
companies based in North America.

Previously, Mr Manner has held senior positions in oil & gas companies
including, COO of Kosmos Energy LLC, a private company exploring for oil and
gas in offshore West Africa, COO of White Stone Energy, a Houston based oil
and gas advisory firm, Chairman and CEO of Mission Resources and COO of
Gulf Canada Resources Ltd responsible for both international and domestic
activities. He spent 16 years with Ryder Scott Petroleum engineers having
started his career at Amoco Production Company.

Aaron Close – Managing Director

Aaron Close has over nine years experience as a geoscientist in the North
American oil and gas sector, having graduated from the Colorado School of
Mines Golden with a Bachelor of Science, Mathematics and Computer Science
Engineering and Geophysics in 1997. Mr. Close has extensive knowledge and
experience of shale gas exploration including mineralogical, petrophysical,
stratigraphic, geomechanical, and geochemical analysis. Until recently he was a
Gas Shale Supervisor and Geoscientist for Kerogen Resources Inc, which
specialises in identifying unconventional gas shale formations in North American
Basins. He worked on the initial geologic and engineering evaluation of the
Barnett Shale, where he led a team in the acquisition of over 12,000 acres of
land and then undertook 3D seismic. He also handled most aspects of corporate
technology development with Kerogen Resources Inc. He also gained vast
experience as a Geoscientist at EnCana Corporation, an industry leader in
unconventional natural gas and integrated oil sands development. Here he
primarily worked in unconventional plays, exploration and development focusing
primarily on gas shales, as well as tight sand, cherts, tight carbonates and basin
centre accumulations. Mr. Close is a proven oil finder having discovered new oil
and gas accumulations for EnCana Corporation in the Comanche Ranch Field,
Texas. Additionally he has gained experience in the exploration and production
of crude oil and natural gas as a geophysicist at Marathon Oil Company, where
he undertook seismic interpretation and mapping of exploration sites, and
producing fields.

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Charles Bingle – Technical & Operations Manager

Mr. Bingle has over 28 years experience in the conventional and unconventional
oil and gas arena. He was a founding member and engineering manager at
Houston based shale gas specialist, Kerogen Resources Inc, and was part of
the start-up team at PetroSolutions Ltd, a dedicated energy consulting firm
aimed at evaluating conventional oil and gas reservoirs globally. Previously, Mr.
Bingle has held other engineering positions in oil and gas companies including
Frontera Resources, where he was responsible for the evaluation and
improvement of production in Azerbaijan and Georgian oil fields. He also
worked as a consultant for ResTech Houston, a multi-discipline reservoir
evaluation services company, working on many domestic and international
projects to increase production through drilling and improved operations. Mr.
Bingle was awarded the DeepStar contract in 1999 to evaluate all deepwater
Gulf of Mexico projects for a consortium of 20 major and large independent oil
companies. This work led to his appointment as President of ResTech Houston.
Additionally, he gained vast experience as an oil and gas engineer through
working at Schlumberger Well Services and Exxon Company U.S.A. as a
reservoir engineer in the 1980s.

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Weaknesses
There is a risk that Irvine’s unaudited reserve estimates may not be proved-
up.

The Company is yet to generate revenue.

Shale gas projects are more expensive to drill than conventional gas
deposits.

Strengths
The Company has a diversified portfolio combining both conventional and
unconventional plays.

Irvine’s projects are supported by solid infrastructure, including rig access,

technical services and pipeline infrastructure.

The Company possesses an experienced management team.

SVS View
Irvine has made significant progress in the last 6 months expanding its activities
in both producing and prospective oil and gas acreage in Oklahoma and
Kansas. Management are looking to advance its production projects with a 18
month target of 450 Bopd and 6,000,000 cfd that would generate net revenue of
US$1.7 million per month; and upgrade its P3 (possible) resources to P1
(proven) status by further 3D seismic programme, exploration and drilling. We
consider Irvine’s shares to be a worthwhile investment, with potential upside
from further resource definition. Speculative buy

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 Disclosure list
Author: Yang Yifeng, Associate Analyst (under the supervision of Michael Sawh).

Material sources: Any facts historical or present relating to the Company, its senior management team or market
conditions contained within this report have been obtained from public sources, the supporting
acquisition document or sources of information that are made available to market professionals
such as SVS Securities. The price quoted on page 1 on this report represents the closing mid-price
on 08 January 2008.

Publication date: 09 January 2008

Nature of transaction: SVS Securities is acting on a principal basis.

Recommendation During the 3 month period ended 31 December 2007, 4 of SVS Securities’ principal
disclosure: recommendations has been on a hold basis, 18 of SVS Securities’ principal recommendations have
been on a speculative buy basis and 4 of SVS Securities’ principal recommendations have been on
a buy basis.

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