Po Valley Energy Quarterly update

Production back on track Oil & gas

7 November 2013
Production is back on track following the installation of a new separator at
Sillaro in July. This is driving cash flow to fund both near-term Price A$0.12
development and exploration, with the offshore Teodorico development Market cap A$15m
the most significant project. The jury is still out on Gradizza commerciality US$1.35/€, US$1.03/A$
pending flow testing in November, while Selva Stratigraphic is now looking Net debt (€m) end September 2013 2.3
like a key target in 2014 following recent G&G work. Our RENAV of A$0.51
Shares in issue 122.4m
suggests considerable upside, with Teodorico still the main value driver.
Free float 45%
Code PVE
Year end Revenue EBITDA PBT* Debt Net debt Capex
(€m) (€m) (€m) (€m) (€m) (€m)
Primary exchange ASX
12/11 9.1 4.4 1.0 (5.8) (3.9) (2.3)
Secondary exchange N/A
12/12 8.2 4.5 0.2 (4.0) (2.8) (3.7)
12/13e 7.9 3.9 (1.2) (5.0) (0.9) (0.8) Share price performance
12/14e 10.5 6.1 0.5 (15.0) (11.3) (12.4)
Note: *PBT is normalised, excluding intangible amortisation, exceptional items and share-
based payments.

Production: Sillaro supports strong cash flow

Production from PVE’s Sillaro and Castello facilities dipped in H113 to 51,000scm/d
(1.8mmscf/d). However, with the installation of a new three-phase separator in July
this has increased Sillaro production to 71,000scm/d (2.5mmscf/d) during Q3 and
should more than offset the potential impact of ongoing reduced volumes at % 1m 3m 12m
Castello, which has been affected by high water production. Abs (17.2) 14.3 (4.0)
Rel (local) (20.6) 7.2 (20.3)
Exploration: Gradizza testing in Q413
52-week high/low A$0.16 A$0.09
PVE continues to test and interpret results from its Gradizza-1 discovery in August.
However, with lower than expected net pay (in part offset by better porosity and Business description
lower water saturation) we expect lower recoverable volumes with the pre-drill low Po Valley Energy is an ASX-listed oil and gas
estimate of 4.5bcf now looking more likely than the original 9bcf. Knowing whether company with an operational focus on Italy and in
these can be produced commercially will require further well clean-up and testing particular the Po Valley region in the north of the
country.
during November. Broadening the portfolio we now include the relatively low-risk
Selva Stratigraphic prospects that PVE considers as a high priority 2014 target.

Next events
Development: Portfolio remains healthy
Gradizza-1 testing Q413
We consider development projects as the main value drivers for PVE. Pre-FEED
Teodorico seismic interpretation Q114
studies for its offshore AR94PY project (now renamed Teodorico) are ongoing in
parallel with 3D seismic reprocessing. We look for concept select for Teodorico in Bezzecca EIA approval Q114

Q114 ahead of detailed FEED studies. Meanwhile, the production concession for Analysts
Bezzecca is in the last stage of the regulatory approval process, with approval
Ian McLelland +44 (0)20 3077 5756
expected in Q114 and production potentially within two to three months of approval.
Will Forbes +44 (0)20 3077 5749
Angus McPhail +44 (0)20 3077 5731
Valuation: Continuing to trade below core NAV
oilandgas@edisongroup.com
Reflecting lower Castello production our core NAV drops slightly to A$0.16, but is still
Edison profile page
ahead of the current share price. However, we continue to steer investors to our
RENAV, which has now increased to A$0.51 with the inclusion of Selva Stratigraphic.
Realising this as always requires successfully negotiating Italian regulations.

Po Valley Energy is a research client of Edison Investment Research Limited

 Substantial progress on multiple fronts
Following a relatively stagnant 2012, PVE has been making substantial progress during 2013 and
in particular during Q313 across its portfolio of production, exploration and development assets.

Production: Arresting the decline

Production fell 24% during H113 (over FY12) to 51,000scm/d (1.8mmscf/d) as PVE was forced to
reduce rates at Sillaro due to excess condensate production and more recently when rates at
Castello were throttled back following greater than expected water production. Given that FY12
rates were already 15% down on 2011 we saw it as critical that the company was able to arrest
these declines and get production back on track.

Following installation and commissioning of a new three-phase separator at Sillaro in July 2013, we
have seen a marked improvement in the company’s production (Exhibit 1). In Q313, PVE has
reported total production of 69,000scm/d (2.4mmscf/d), with current rates now at c 76,000scm/d
(2.6mmscf/d). The one negative point in this is the continued low production rates at Castello, which
is now restricted to c 5,000scm/d due to higher than anticipated water-cut. However, water
production has stabilised at Castello in recent months and PVE expects to be able to continue to
produce at current rates for the foreseeable future. PVE’s most recent financials indicated a €5.0m
impairment loss in H113, the majority we expect to be charged to Castello.

Exhibit 1: PVE production June 2011 to date

Source: Po Valley Energy

Exploration: Gradizza-1 volumes still to be determined

Gradizza represented PVE’s first exploration well since 2005/06 as it focused its efforts on bringing
its Sillaro and Castello developments into production. The well was spudded on 14 August and
reached total depth of 1,030m in 10 days, identifying nine metres of net gas bearing sand pay in the
primary target area of the quaternary sand level. While the net pay was lower than the pre-drill
expectation, we understand that both porosity and water saturation are better than previously
assumed. However, PVE has been clear in its market updates that based on testing to date,
estimated daily production rates are expected to be well below the targeted prospective resource
estimate.

Po Valley Energy | 7 November 2013 2

 Pre-drill prospective resource estimates for Gradizza were 4.5bcf (low), 9.0bcf (best) and 16.0
(high), and we expect that even if deemed commercial it is likely now that recoverable volumes will
be closer to the low estimate than the previous best estimate. To confirm volumes and
commerciality, PVE is planning to clean-up and test the Gradizza well and has indicated results of
this should be available within the year end. In the event of commerciality we would expect a
development plan to be drawn up in early 2014 and first gas in 2015. A development would require
a c €1.2m 20mscm/d gas plant.

Selva Stratigraphic

Moving into 2014, PVE has a number of potential exploration targets. The most likely candidate
based on recent releases is the Selva Stratigraphic prospect within PVE’s Podere Gallina licence,
which previously formed part of the ENI-operated Selva field (Exhibit 2 and Exhibit 3). This field
produced 83bcf from 15 wells over a 35-year period before being abandoned.

Exhibit 2: Selva Stratigraphic contour map Exhibit 3: Podere Gallina licence area

Source: Po Valley Energy Source: Po Valley Energy

PVE is targeting an updip volume of the Selva field based upon new interpretation of the position of
the lapout edge towards the Selva-3 well. Independent consultant Robertson CGG has estimated
2C contingent resources of 17bcf for the Pliocene target and PVE has already selected a drill
location for a well, named Podere Maiar-1d. A drilling application was submitted in Q213 and,
subject to consents, we expect this to be a key exploration priority for PVE during 2014.

Development: Teodorico pre-FEED activities ongoing

In keeping with previous notes we consider PVE’s AR94PY offshore project as the clearest value
driver for investors. At an estimated 7.9mmboe of contingent resource, this important project (now
called Teodorico) brings both scale and diversity to the portfolio and is currently at the pre-FEED
(Front End Engineering and Design) stage as PVE prepares for a detailed feasibility study of the
development in 2014.
2 2
In parallel with this, PVE has purchased an additional 40km of 3D seismic to complement 80km of
seismic purchased in November 2012. The company has commissioned TEEC Geophysics to
reprocess the entire seismic dataset to help refine interpretation of the Teodorico discovery, update
resource estimates and help with development well location selection. PVE has indicated that the
results of this work should be available in February 2014.

The first draft of the pre-FEED study has been finalised and is currently being reviewed by PVE.
The company intends to present a preliminary development plan based on the pre-FEED work as

Po Valley Energy | 7 November 2013 3

 well as geological work already completed to Italian authorities in order to pursue its previously
stated objective of moving quickly to a production concession for the development.

Bezzecca and Sant’Alberto

The production concession for the Bezzecca gas field is in the final stages of the regulatory
approval process (EIA approval). This included a final meeting with the Lombardy Region
Commission in late September with no major issues noted. PVE is steering towards production
concession award in Q114. If secured, we would expect the company to press on with bringing the
existing Bezzecca-1 well into production within two to three months after receiving the authorisation
to install surface facilities. This will involve a 7km pipeline tie-back to the nearby Castello gas plant.
Bezzecca is particularly attractive to PVE as it intends to develop the field (subject to EIA approval)
via a phased approach with a tie-in to the nearby Castello gas plant, limiting capital costs in the first
year of production to primarily pipeline capex (which we estimate at €1.8m).

Following Bezzecca, the next most advanced onshore development programme is Sant’Alberto.
PVE has begun a pre-feasibility study for this project as part of the EIA process. This EIA is in the
final stages of the initial regional regulatory process after which a preliminary production concession
can be awarded.

Corporate: Management changes

In August 2013 PVE’s CEO and MD, Giovanni Catalano, stepped down. The position is currently
being filled by the company’s CFO, Sara Edmonson, on a temporary basis. While PVE is
understandably guarded about its management announcements, we understand that the departure
is unlikely to affect the company’s Italian-focused strategy, where it already has a strong Rome-
based operations team.

Po Valley Energy | 7 November 2013 4

 Valuation and financials: Still on track
We have updated our valuation to reflect lower than previously assumed production at Castello.
This reduces our core NAV from A$0.20 to A$0.16. However, the promotion of Selva Stratigraphic
as a likely 2014 (low risk) exploration target has increased our risked exploration NAV (RENAV)
from A$0.40 to A$0.51 (Exhibit 4), even when taking into account a c 1c reduction due to lower
expected volumes at Gradizza.
3
Our valuation reflects current gas prices (c €0.26-0.27/Nm ) as per PVE’s new off-take gas
agreement with Shell Italia, which commenced in July 2013.

Exhibit 4: PVE valuation

Recoverable reserves Net risked Value per share
Asset Country Diluted WI CoS Gross Net NPV/boe value Risked Unrisked
% % mboe mboe US$/boe US$m Ac/share Ac/share
Sillaro Italy 100% 100% 1.08 1.08 25.5 27.6 22.0 22.0
Castello Italy 100% 50% 0.08 0.08 7.7 0.3 0.2 0.5
Sant'Alberto Italy 100% 50% 0.35 0.35 23.4 4.1 3.3 6.5
Bezzecca Italy 100% 60% 0.70 0.70 21.0 8.8 7.0 11.7
Net (debt)/cash Italy (3.7) (3.0) (3.0)
SG&A Italy (16.7) (13.3) (13.3)
Core NAV 20.5 16.3 24.5
Canolo & Zini Italy 85% 40% 1.2 1.0 18.5 6.6 5.3 14.5
Gradizza Italy 75% 50% 0.8 0.6 17.2 4.6 3.7 8.0
Teodorico Italy 100% 30% 7.9 7.9 7.8 18.4 14.6 48.4
Selva Stratigraphic Italy 100% 30% 2.8 2.8 16.9 14.4 11.4 38.1
RENAV 64.4 51.2 133.8
Source: Edison Investment Research

Turning to financials we expect PVE to post a modest loss (c €1m) in 2013 at the normalised PBT
level. However, with a €5.0m impairment charge for Castello booked in H113 the company will be
facing a significant PBT loss of c €6m for 2013.

PVE exited Q313 with €2.7m of cash and net debt of €2.3m. The company has currently drawn
€5m of its €20m RBL facility with Nedbank. We anticipate that this facility will accommodate the
required capital expenditure to fund the development of both Bezzecca and Sant’Alberto, assuming
sufficient reserves are booked against these assets once development approvals have been
secured.

As discussed in our previous note this facility will not cover development of the offshore Teodorico
field, for which we would expect PVE to seek an offshore specialist as partner in return for a
development carry. Including development of Selva Stratigraphic we estimate that at current
working interests the company would require an additional €35m in addition to its existing RBL
facilities. However, the extent of any funding gap will only become clear in 2014 once pre-FEED
activities for Teodorico have been completed and PVE has confirmed its funding route for this
development, given the increased debt capacity it will have available and any farm-out it has
secured.

Po Valley Energy | 7 November 2013 5

Exhibit 5: Financial summary
€'000s 2009 2010 2011 2012 2013e 2014e 2015e
Year end 31 December IFRS IFRS IFRS IFRS IFRS IFRS IFRS
PROFIT & LOSS
Revenue 0 7,157 9,115 8,208 7,877 10,497 31,358
Cost of Sales 0 (1,727) (1,634) (1,225) (1,268) (1,413) (4,393)
Gross Profit 0 5,430 7,481 6,983 6,608 9,085 26,965
EBITDA (2,855) 2,178 4,406 4,473 3,926 6,077 23,599
Operating Profit (before amort. and except.) (2,868) (662) 1,845 1,001 (806) 910 13,950
Intangible Amortisation (5,109) (1,075) (5,932) (46) (5,039) 0 0
Exceptionals 0 0 0 0 0 0 0
Other 0 0 0 0 0 0 0
Operating Profit (7,977) (1,737) (4,087) 955 (5,845) 910 13,950
Net Interest 774 (519) (805) (753) (374) (419) (1,427)
Profit Before Tax (norm) (2,094) (1,182) 1,040 248 (1,180) 491 12,523
Profit Before Tax (FRS 3) (7,203) (2,257) (4,892) 202 (6,219) 491 12,523
Tax 0 (67) (179) 2,171 (1,271) (2,123) (8,090)
Profit After Tax (norm) (2,094) (1,248) 861 2,419 (2,452) (1,631) 4,433
Profit After Tax (FRS 3) (7,203) (2,324) (5,071) 2,373 (7,491) (1,631) 4,433
Average Number of Shares Outstanding (m) 103.0 110.2 111.0 111.7 122.1 122.1 122.1
EPS - normalised (c) (6.8) (1.1) 0.8 2.2 (2.0) (1.3) 3.6
EPS - normalised and fully diluted (c) (6.8) (1.1) 0.8 2.2 (2.0) (1.3) 3.6
EPS - (IFRS) (c) (7.0) (2.1) (4.6) 2.1 (6.1) (1.3) 3.6
Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Gross Margin (%) N/A 76% 82% 85% 84% 86.5 86.0
EBITDA Margin (%) N/A 30% 48% 54% 50% 57.9 75.3
Operating Margin (before GW and except.) (%) N/A N/A 20% 12% -10% 8.7 44.5
BALANCE SHEET
Fixed Assets 36,720 34,529 31,516 31,913 23,117 31,206 70,444
Intangible Assets 28,912 25,995 23,306 22,018 15,157 22,704 55,361
Tangible Assets 5,832 7,016 6,548 5,637 3,099 2,779 2,502
Investments 1,976 1,518 1,662 4,258 4,861 5,723 12,581
Current Assets 9,781 4,310 5,924 3,807 6,643 7,120 16,397
Stocks 811 897 701 0 0 0 0
Debtors 2,348 2,444 3,332 2,581 2,590 3,451 10,310
Cash 6,622 969 1,890 1,226 4,053 3,669 6,088
Other 0 0 0 0 0 0 0
Current Liabilities (4,116) (2,282) (5,705) (5,817) (2,033) (2,231) (6,313)
Creditors (4,116) (2,282) (5,705) (1,832) (2,033) (2,231) (6,313)
Short term borrowings 0 0 0 (3,985) 0 0 0
Long Term Liabilities (11,999) (8,366) (8,520) (3,608) (8,563) (18,563) (58,563)
Long term borrowings (9,637) (5,519) (5,772) 0 (5,000) (15,000) (55,000)
Other long term liabilities (2,362) (2,846) (2,748) (3,608) (3,563) (3,563) (3,563)
Net Assets 30,386 28,192 23,215 26,295 19,164 17,533 21,966
CASH FLOW
Operating Cash Flow (2,292) 1,066 3,012 4,124 2,547 2,010 4,448
Net Interest 0 0 0 0 0 0 0
Tax 0 0 0 0 0 0 0
Capex (12,044) (2,679) (2,328) (3,672) (815) (12,394) (42,029)
Acquisitions/disposals 0 0 0 0 0 0 0
Financing 12,903 (213) (16) 672 80 0 0
Dividends 0 0 0 0 0 0 0
Net Cash Flow (1,433) (1,825) 668 1,123 1,812 (10,384) (37,581)
Opening net debt/(cash) 2,372 3,015 4,550 3,882 2,759 947 11,331
HP finance leases initiated 963 51 (0) 0 0 0 0
Other (173) 240 0 0 0 0 0
Closing net debt/(cash) 3,015 4,550 3,882 2,759 947 11,331 48,912
Source: Po Valley Energy accounts, Edison Investment Research

Po Valley Energy | 7 November 2013 6

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