10 February 2011 Oil & Gas Exploration Flash Note 10 February 2011 Gindara exploration well -- Drilling planned for ~May 2011 Event Summary A speculative situation exists in two ASX listed junior oil and gas companies ahead of the drilling of the Gindara-1 exploration well in offshore Philippines. We regard Gindara-1 as one of the select few major exploration wells this year capable of attracting significant ASX investor and industry interest. It is targeting a very large structure in a proven hydrocarbon basin with oil heavyweight Shell as partner. We note investors are often rewarded for getting set early in such speculative plays but the success of such a strategy also depends on no unforeseen delays and share market conditions remaining supportive of speculative investment. The well is currently anticipated to spud in ~May 2011. ASX Participants: Nido Petroleum (NDO) 33% and Kariki Energy (KIK) 22%. Gindara prospect The Gindara prospect is located in Service Contract 54 Block B (SC 54B) in the NW Palawan Basin, Philippines. The NW Palawan Basin is considered to be the Philippines premier producing basin.

It contains the giant Shell operated Malampaya gas/liquids field (est.

3.8 TCF gas reserves), the largest discovery made in the Philippines to date.

The Gindara prospect is situated about 50km south and along trend from Malampaya. The Gindara prospect is a very large, 3D seismically defined, simple four-way closure at the Top Nido Limestone reservoir objective with an areal extent of 28 km2, a vertical closure of over 300m and is well located to receive hydrocarbon charge from the Palawan Trough (a proven hydrocarbon source rock kitchen). The Gindara prospect has estimated mean potential of 634 mmbo (in place) at the Nido Limestone level (same reservoir as Malampaya) making it a substantial exploration target.

A large oil discovery could potentially justify standalone development. A gas discovery could potentially be monetized through the Malampaya production facilities, subject to commercial agreement. The Gindara-1 exploration well should take approximately 30 days to reach total depth of around 3,200m.

If the well is successful, and depending on the size and type of discovery, a future appraisal program prior to a decision to develop would be necessary and could comprise several wells including production testing.

Such results would then enable the booking of reserves, an important component in demonstrating project value to potential buyers. Shell Farm-in Agreement In October 2010, NDO and KIK entered into an agreement with Shell Philippines Exploration B.V.

(a subsidiary of the Royal Dutch Shell Group) for Shell to earn a 45% interest in Service Contract 54 Block B (SC 54B) by: Contributing 75% of the Gindara-1 exploration well cost up to a maximum well cost of US$24m; Paying US$2.5m towards past seismic costs; and Paying its pro-rata share of the 2010 and 2011 Work Programme and Budget from the date of signing. Under the terms of the deal, NDO will remain Operator of SC 54B for the drilling of the Gindara-1 exploration well. On completion of Shells farm-in NDO and KIK will have respective 33% and 22% participating interests in SC 54B. Analysis & Discussion We make the following assumptions to assist us with quantifying the potential impact a commercial oil discovery may have on NDO and KIKs share prices: 1.

Mean Target Size: 634 mmbo in place (Nido Limestone target only) 2.

Oil Recovery Factor: 40% 3.

In-situ oil value: US$10/bbl 4.

No changes to the capital structure of NDO and KIK. 5.

Capital structures are fully diluted for expected in-the-money options (upon success). Our unrisked values (ie.

the theoretical discovery value per share based on the outlined assumptions) supports the view that both companies offer excellent leverage to exploration success at Gindara (NDO ~6x current share price and KIK ~9-10x current share price at time of this publication). In the event of a wet gas discovery, we estimate a hypothetical 1 TCF + liquids discovery could be worth approximately half of the above oil case unrisked values (note the actual value would depend on how wet the gas is). We understand Operator NDO rates the Gindara prospect has having a ~40% chance of containing hydrocarbons which is very high for an exploration well.

Shells farm-in and technical endorsement adds further credibility, in that it views Gindara as being a material opportunity for itself (ie. potential size and associated risk). We do however remind investors that oil and gas exploration is a high risk activity and many more dry wells are drilled than commercial discoveries made.

Therefore while the drilling of Gindara-1 is clearly a very exciting event for NDO and KIK that has the potential to add significant shareholder value and transform the outlook for both companies, investors are reminded to consider their risk tolerance as the well approaches and may choose to lighten their shareholding (partially or fully). Investment Risks NDO and KIK are considered to be speculative companies.

Our speculative interest in these companies is based on their exposure to the upcoming high profile Gindara-1 exploration well and not with their other assets or other activities. Risks to investing in these companies include but are not limited to: exploration risk; normal share market risk; oil price; ongoing funding; drilling rig delays and possible drilling cost over runs. We note that NDO and KIK have both recently raised significant amounts of capital to cover the costs associated with the evaluation and subsequent abandonment of the Tindalo oil production operation in adjoining, Service Contract 54A (unrelated to the upcoming drilling of the Gindara-1 exploration well).

In addition, both companies have outstanding convertible notes (debt) which need to be repaid, converted to equity or restructured which may require the support of note holders.

The possibility of future capital raisings cannot be ruled out. Analyst: Adam Conigliaro Email: Tel: + 61 8 9225 0000 DISCLAIMER Sentinel Financial Group Pty Ltd (ABN 26 104 456 288) is an Australian Financial Services Licensee holder (ASFL No.

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Advice included in this document is general advice, based solely on consideration of the investment or trading merits of the securities alone without taking into account the investment objectives, financial situation and particular needs (i.e.

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You should not act on any recommendation issued by Sentinel Financial Group without first consulting your investment advisor in order to ascertain whether the recommendation (if any) is appropriate having regard to your investment objectives, financial situation and particular needs. DISCLOSURE Sentinel Financial Group Pty Ltd (ABN 26 104 456 288), its directors, officers, representatives, authorised representatives, members and agents declares that they deal in financial products as part of their business and consequently they may have a relevant interest in the financial products recommended.

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The author of this report holds securities in Kariki Energy Ltd. COPYRIGHT & DISTRIBUTION This document and any information included within is Copyright and the property of Sentinel Financial Group Pty Ltd.

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