Daily Letter | 1

13 February 2009

Vast Exploration Inc. Terry Peters, MBA

terry.peters@canaccordadams.com
1.416.869.6597

Cynthia Yee 1.416.869.7291

SPECULATIVE BUY cynthia.yee@canaccordadams.com
VST : TSX-V : C$0.16
Target: C$0.25 Zainuddin Ahmed 1.416.869.7285
zainuddin.ahmed@canaccordadams.com

COMPANY STATISTICS:
Shares Out basic: 110.9
Energy -- Oil and Gas, Exploration and Production
Market Cap (M):
Ent Value (M):
C$17.2
C$5.7
INITIATION OF COVERAGE - THE VAST
52-week Range: C$0.10 - 1.40
POTENTIAL OF KURDISTAN
EARNINGS SUMMARY: We are initiating coverage on Vast Exploration Inc. with a
FYE Jan 2007A 2008A 2009E SPECULATIVE BUY rating and a 12-month target price of C$0.25.
Production (boe/d): 0 33 43
Revenue (M): C$0.285 C$0.484 C$0.855 The Asset
Income (M): C$(2.583) C$(5.965) C$(8.306)
EPS basic: C$(0.15) C$(0.14) C$(0.09) Vast Exploration completed a Production Sharing Contract (PSC) with
CFPS basic: C$(0.08) C$(0.05) C$(0.02) the Kurdistan Regional Government (KRG) in May 2008 for exploration,

SHARE PRICE PERFORMANCE:

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: Valuation

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.
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 90-
day 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 sub-
period 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 ( mm$ ) (mmShrs) ($/share)
F2009e working capital $7.1 125.8 $0.06
F2010e working capital* $4.5 200.8 $0.02
*assumes additional financing of $15 million

(2) Cash Value plus invested capital

F2009e invested capital $23.7 125.8 $0.19
F2009e working capital $7.1 125.8 $0.06
F2009e cash plus invested capital $30.8 $0.24

F2010e invested capital $45.5 200.8 $0.23

F2010e working capital* $4.5 200.8 $0.02
F2010e cash plus invested capital $50.0 $0.25
*assumes additional financing of $15 million

Source: Canaccord Adams

 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$ ) ( mm$ )
Repayment of prior Blk44 costs carried by WesternZagros 50.7 50.7

Bonus and other community support paid by Talisman 220 220

Assumed Allocation to Blk 44 50% 90%
Attributed to Talisman's acquired Block 44 interest 110 198

Total Implied value of Talisman's 40% acquisition in Blk 44 160.7 248.7

Vast Implied value - simple ratio of relative working interest in an exploration Block
Vast's 27% relative to Talisman's 40% - USD 108.5 167.9
Vast's 27% relative to Talisman's 40% - Cdn$ 135.6 209.8

Per Vast share - excluding future funding requirements $0.68 $1.04

Dilutive impact of notional Vast future funding - US$100 million

Price of additional shares issued ( $/share) mmshrs

$0.15 833.3 $0.25 $0.32
$0.20 625.0 $0.32 $0.41
$0.30 416.7 $0.42 $0.54
$0.50 250.0 $0.58 $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 Higher Reserve Case
$40/b flat $60/b flat $40/b flat $60/b flat
At 10% A-tax 693 1,136 2,757 3,617
At 12% A-tax 612 1,026 2,515 3,280
At 15% A-tax 509 884 2,208 2,854
At 18% A-tax 422 765 1,954 2,504
At 20% A-tax 372 696 1,808 2,304

Lower Reserve Case Higher Reserve Case

Urisked Vast @27%WI (C$/share) $40/b flat $60/b flat $40/b flat $60/b flat
At 10% A-tax $1.16 $1.91 $4.63 $6.08
At 12% A-tax $1.03 $1.72 $4.23 $5.51
At 15% A-tax $0.86 $1.49 $3.71 $4.80
At 18% A-tax $0.71 $1.29 $3.28 $4.21
At 20% A-tax $0.63 $1.17 $3.04 $3.87

Dilutive impact of notional Vast future funding - US$100 million

Unrisked Diluted Value at 15% A-tax Lower Reserve Case Higher Reserve Case
Price of additional shares issued ( $/share) mmshrs $40/b flat $60/b flat $40/b flat $60/b flat
$0.15 833.3 $0.17 $0.29 $0.72 $0.93
$0.20 625.0 $0.21 $0.36 $0.90 $1.17
$0.30 416.7 $0.28 $0.48 $1.21 $1.56
$0.50 250.0 $0.38 $0.66 $1.65 $2.14

Unrisked Diluted Value at 18% A-tax Lower Reserve Case Higher Reserve Case
Price of additional shares issued ( $/share) mmshrs $40/b flat $60/b flat $40/b flat $60/b flat
$0.15 833.3 $0.14 $0.25 $0.64 $0.82
$0.20 625.0 $0.17 $0.31 $0.80 $1.02
$0.30 416.7 $0.23 $0.42 $1.07 $1.37
$0.50 250.0 $0.32 $0.57 $1.46 $1.87

Unrisked Diluted Value at 20% A-tax Lower Reserve Case Higher Reserve Case
Price of additional shares issued ( $/share) mmshrs $40/b flat $60/b flat $40/b flat $60/b flat
$0.15 833.3 $0.12 $0.23 $0.59 $0.75
$0.20 625.0 $0.15 $0.28 $0.74 $0.94
$0.30 416.7 $0.20 $0.38 $0.99 $1.26
$0.50 250.0 $0.28 $0.52 $1.35 $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.
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13 February 2009

APPENDIX: IMPORTANT DISCLOSURES

Analyst Certification: Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment
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: Coverage Universe IB Clients

Global Stock Ratings Rating # % %
(as of 4 February 2009) Buy 339 60% 31%
Speculative Buy 68 12% 53%
Hold 135 24% 24%
Sell 23 4% 26%
565 100%

Canaccord Ratings BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
System: 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 Disclosure
Vast Exploration Inc. 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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