Energy: Oil & Gas - Bahamas Petroleum Company Plc

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November 5, 2010 Europe: Energy: Oil & Gas - E&P E&P valuation methodology We use a standard NAV approach to value the E&P stocks in our coverage universe: � Net cash/debt and producing assets – typically given 100% of value. � Discoveries/developments – based on NPV/bl and risked for technical complexity and likelihood of commercialization. � Exploration – based on NPV/bl and risked according to likelihood of ultimate commercial success. We have typically given value only for exploration catalysts within the next 12 months, but now give value (with a 50% discount) for exploration catalysts falling between 12 and 24 months and for exploration up to three years out in de-risked strategic basins in certain cases. For exploration programmes in new, unproved basins, we only give value for the first 1-2 prospects (dependent on drilling plans). � Liquidity discount – we apply a discount of up to 20% to our valuations for stocks whose most recent three-month average daily trading volumes have been lower than US$1.5 mn. � Equity raises and farm-outs – where appropriate we make adjustments for anticipated equity raises or assumed farm-outs to fund drilling. � Assets determined to be strategic are given an M&A premium in which they are valued at an 8% discount rate. Assets in capital constrained companies are only given the value of higher NPVs implied by fast ramp-ups as an M&A premium. Exhibit 21: Valuation methodology of E&Ps in our coverage universe Generic assumptions 3000 2500 2000 1500 1000 500 0 Core value cash Producing assets Source: Goldman Sachs Research. Risked Discoveries 0‐12 month catalyst Risked Short Term Exploration 12‐24 month catalyst. Additional 50% discount applied Risked Medium Term Exploration Value given to 36 months Risked Play Opening Exploration From < US$1.5mn traded / day. Up to max of 20% Goldman Sachs Global Investment Research 20 Liquidity discount TARGET PRICE Upside from de‐risking discoveries "Blue‐sky" upside Upside from de‐risking exploration
November 5, 2010 Europe: Energy: Oil & Gas - E&P Smaller companies can offer greater re-rating potential… Our expanded coverage universe encompasses a wide range of companies with substantially different market caps and free floats. We have tracked the performance of this universe of stocks over the last four years to determine whether market cap is a major determinant in performance. While we recognize that high levels of liquidity are attractive in allowing significant positions to be built, we note that the companies that have outperformed the most over the last four years are those in the US$100-500 mn band. Exhibit 22 shows the performance of stocks by market cap since the beginning of 2007, with companies being reclassified into different categories as and when they cross category boundaries. This indicates that it is the companies in the US$100-500 mn band that have outperformed most since the trough of the sector in late 2008, followed by those in the US$500mn to US$1 bn range. We believe that smaller companies typically offer greater potential to re-rate as catalysts tend to have more impact on a smaller capital base and as market inefficiencies in pricing tend to be greater at the smaller end of the spectrum. We note that the worst performers, however, are companies below US$100 mn – a significant underperformance driven by lack of liquidity and focus, and an “antisurvivor bias” (in which small companies will tend to be small as a result of their underperformance) will tend to keep underperformers more concentrated in this group. We believe that there are some compelling investment opportunities at this end of the investment scale. Exhibit 22: Small size no barrier to strong performance although very small companies have lagged Performance (indexed to 100) 500 450 400 350 300 250 200 150 100 50 0 01/01/2007 01/02/2007 01/03/2007 01/04/2007 01/05/2007 01/06/2007 01/07/2007 01/08/2007 01/09/2007 01/10/2007 01/11/2007 01/12/2007 01/01/2008 01/02/2008 01/03/2008 01/04/2008 01/05/2008 01/06/2008 01/07/2008 01/08/2008 01/09/2008 01/10/2008 01/11/2008 01/12/2008 01/01/2009 01/02/2009 01/03/2009 01/04/2009 01/05/2009 01/06/2009 01/07/2009 01/08/2009 01/09/2009 01/10/2009 01/11/2009 01/12/2009 01/01/2010 01/02/2010 01/03/2010 01/04/2010 01/05/2010 01/06/2010 01/07/2010 01/08/2010 01/09/2010 Source: Datastream.
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